GWRE 2023Q1

Greetings. Welcome to the Guidewire First Quarter and Fiscal 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Alex Hughes. You may begin.

Thank you, operator. I'm Alex Hughes, Vice President of Investor Relations. And with me today is Mike Rosenbaum, Chief Executive Officer; and Jeff Cooper, Chief Financial Officer. A complete disclosure of our results can be found in our press release issued today as well as in our related Form 8-K furnished to the SEC, both of which are available on our Investor Relations section of our website. Today's call is being recorded, and a replay will be available following the call. Statements made on the call today include forward-looking ones regarding our financial results, products, customer demand, operations, the impact of local, national and geopolitical events and our business and other matters. These statements are subject to risks, uncertainties and assumptions that are based on management's current expectations as of today, which should not be relied upon as representing our views as of any subsequent date. Please refer to the press release and the risk factors and documents we file with the SEC, including our most recent annual report on Form 10-K in our quarterly report on Form 10-Q to be filed with the SEC for information on risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements. We also will refer to certain non-GAAP financial measures to provide additional information to investors. All commentary on margins, profitability and expenses are on a non-GAAP basis, unless stated otherwise. A reconciliation of non-GAAP to GAAP measures is provided in our press release. Reconciliations and additional data are also posted to the supplement on our IR website. And with that, I'll now turn the call over to Mike.

Thank you, Alex. Good afternoon, everyone, and thanks very much for joining us today. We're off to a solid start in the fiscal year with steady and consistent execution towards our goal to modernize the technology platforms supporting the global property and casualty insurance industry. ARR and subscription revenue both finished ahead of our expectations and notably, subscription and support gross margin came in better than our expectations. You have heard me say before that we feel privileged to serve a critical and essential industry, one that helps families and businesses manage risks so that they can better plan and grow. Insurers need an agile core platform that effectively engages consumers, supports faster innovation with new products and distribution channels, and enables them to grow efficiently. Guidewire Cloud Platform delivers this agility, and I'm pleased to share the progress we continue to make in expanding its depth, adoption and deployment. The momentum around Guidewire, our ecosystem, and our cloud platform was on full display at our recent connections conference held in October in Las Vegas. With nearly 2,800 people attending in person, we saw record attendance more than doubling from the prior year and representing broad participation across customer segments, partners, and regions of the world. At Connections, we announced Flaine, our sixth platform release. Flaine built on our previous releases to deliver improved self-service tooling for faster production deployments and introduces a new approach to release updates. Cloud customers can now update their implementations to new releases far more easily, which will structurally change how customers approach upgrades, allowing them to stay on the latest Guidewire version and take advantage of platform and application innovation more continuously. We also released our digital framework Jutro which enables customers to launch new digital experiences built on InsuranceSuite quickly and easily. Together, these product capabilities provide much greater speed and agility to our customers and help us manage our customers' cloud deployments far more efficiently. But the real highlight of Connections was hearing customers share their cloud visions, journeys and outcomes with Guidewire. USAA, which has served U.S. veterans and their families for 100 years and has over 13 million members, is halfway through a multiyear modernization journey to increase engagement, innovation, and efficient growth. Guidewire Cloud Platform is a key foundation of this journey, and already USAA has been able to introduce a touchless claims experience for members and launched its new small business insurance line of business in less than nine months. Tryg, the largest property and casualty insurer in Scandinavia with over 5 million customers, moved to Guidewire Cloud platform with the goal of fully automating the claims process to further drive efficiency and customer satisfaction. Tryg has already been able to reduce the amount of time spent per claim by 26% and the percentage of claims leakage by 58%, while also significantly increasing customer satisfaction. Aioi Insurance, part of the Nissay Dowa Insurance, the eighth largest insurer in the world, was able to replace its core system with Guidewire Cloud platform in 12 months, and through greater flexibility, security, and optimization, they were able to double their new business capacity by reducing manual steps and cutting claims acceptance time in half. As we continue to increase platform maturity with each release, we are driving healthy adoption across existing and new customers. Over 20% of our core InsuranceSuite customer base has already adopted Guidewire Cloud Platform, and we added another four cloud wins in the first quarter. Boda Group, a Swiss Tier 2 insurer, founded over 125 years ago, chose to upgrade to InsuranceSuite on Guidewire Cloud Platform for a major part of its book of business to achieve greater operational excellence. Boda Group initially adopted InsuranceSuite self-managed, but before deploying, elected to upgrade to Guidewire Cloud. Santa Lucia SA, a Tier 2 insurer in Spain, selected InsuranceSuite on Guidewire Cloud Platform for their largest line of business, funeral insurance and end-of-life support. Santa Lucia decided to modernize policy, claims, and billing on GWCP because of our market-leading presence, combined with our platform adaptability and flexibility. This is our first InsuranceSuite cloud customer in Spain, and we're excited about the future potential in this market. Builders, a midsized mutual insurer specializing in workers' compensation and construction operating in 22 states, selected full InsuranceSuite on Guidewire Cloud platform to replace their legacy mainframe-based system and establish a new technology framework that improves their customers' experience, increases productivity and supports future growth. Finally, RVOS Farm Mutual Insurance based in Texas adopted InsuranceNow for its functionality, configuration, upgradability, and self-service capabilities. In addition to these cloud decisions, we also saw three insurers, including one in Japan and one in South Africa, opt to begin a modernization with Guidewire on-prem. While the vast majority of sales activity over the past few years has been cloud, we do see cases where an insurer decides it makes sense to begin on-prem. Our technical approach facilitates this path, and our perspective is that as long as the customers understand the strategic direction we are following and acknowledge that an eventual transition to cloud will come, we can support this approach. In one of the deals, an existing Tier 1 on-prem ClaimCenter customer selected PolicyCenter for a new modernization project to support specialty lines. In another, the selection was based on the native integration of data and analytics into ClaimCenter, which will enable the creation of a better claims experience through real-time modeling and targeted straight-through processing. This example supports our strategy to deliver a fully modernized core platform with data and analytics embedded throughout the insurance life cycle. We also saw HazardHub continue to accelerate in the quarter. This was highlighted by a meaningful deal at Frontline Insurance Company, a large home and commercial property insurer operating in Florida, Alabama, Georgia, and the Carolinas. Frontline will use HazardHub's granular risk scoring for their direct-to-consumer business, Open House, to inform customer acquisition and core underwriting strategies. We are very pleased with the continued success of this product as it offers us a new faster sales cycle and a more flow-based business that might in the future complement our core system sales dynamic. Turning to operations. At Analyst Day, we talked about our focus on driving improved platform efficiency as we expand breadth and adoption. In the first quarter, this translated into progress in subscription and support gross margins. This is an area we will continue to stay focused on and expect to improve steadily as we deploy more customers in the cloud, roll out new self-service capabilities, and generally improve the efficiency of our cloud platform while at the same time, always continuing to ensure that our customer implementations are resource managed to ensure that the greatest possible degree of success. In the first quarter, we executed a number of new InsuranceSuite production deployments on Guidewire Cloud Platform, including DEFINITY Insurance, a Tier 2 insurer in Canada known for industry-leading innovation, a two-time winner of Guidewire's Innovation Awards, migrated to Guidewire Cloud platform with over $2.5 billion in personal lines and production. Already, it is seeing 40% faster consumer transactions, 12% faster broker transactions, and an 8% increase in quote volume. We also saw a Tier 2 insurer with over 90 years of history, offering auto, homeowners, and other personal lines to members in 23 states go live with ClaimCenter on Guidewire Cloud Platform. This deployment lays a strong foundation to build on as this customer embarks on further transformation. In addition, a large farm mutual insurer in Texas went live with InsuranceSuite on Guidewire Cloud Platform. This is a company with over 100 years in operation, and Guidewire Cloud platform will help them maximize operational efficiency as they pursue further growth. And finally, let me just close by discussing our partner community and ecosystem. Our system integrator community has been and will remain critical to our differentiation and long-term success. SIs are currently involved in over 60 Guidewire Cloud projects and growing this total will remain a strategic focus for us. The number of Guidewire consultants at systems integrators grew to over 20,000 at the end of Q1, up by 28% year-over-year. We also continue to see cloud momentum build in this community with a number of cloud certified consultants, sustaining growth of over 100% year-over-year and passing 5,800 at the end of Q1. This gives our customers a valuable bench of cloud-trained professionals to draw on as they start down the path of modernization or embark on cloud upgrades. We are also seeing momentum in our solution partner community. In the first quarter, 19 more solution partners joined Guidewire's Marketplace, bringing the total to nearly 180. We also announced a few important new strategic partnerships at Connections. We partnered with One Inc., a digital payment solution for P&C insurers that offers comprehensive digital payment options and automated inbound and outbound payments. Our collaboration will make it possible for our cloud customers to deploy these solutions significantly faster than they were able to in the past. We've also partnered with Appian, a leading workflow automation platform, to enable our cloud customers to rapidly create and manage cloud-based digital experiences and business process automation. And we partnered with Ernix, a leading dynamic pricing engine, to accelerate insurers' speed to market in defining, updating, and optimizing insurance products that are already in market. In summary, Q1 was a great quarter and a solid start to the fiscal year. We continue to expand our platform in critical areas, sell new modernizations and cloud upgrades, expand our ecosystem, deliver successful production go-lives, and make steady progress on cloud operating efficiency. All of these critical elements of our plan reinforce each other and demonstrate steady progress towards strategic cloud leadership in our market. With that, I'll turn it over to Jeff.

Thanks, Mike. First quarter ARR ended at $673 million, ahead of our expectations. Q1 is always our slowest quarter, but we are pleased to see some exciting cloud wins, most notably meaningful progress in EMEA. Total revenue was $195.3 million, just above the high end of our outlook. Cloud strength continues to be visible on subscription revenue, which was $79 million, up 38% year-over-year. Subscription and support revenue was $99.1 million, up 25% year-over-year. License revenue was $41 million, up 2% when compared to Q1 last year. Services revenue was $55.3 million, up 18%. Services revenue benefited from ongoing increases in the number of cloud implementation programs. Turning to profitability for the first quarter, which we will discuss on a non-GAAP basis, gross profit was $83 million. Overall gross margin was 42%. All of our margin disclosure for the quarter and for the comparison periods reflect our updated allocation methodology for headcount-related costs for IT, payroll, and procurement. As a reminder, and as we discussed on our Q4 earnings call in September, we moved headcount-related costs of IT payroll procurement to G&A expense. Previously, we allocated these headcount costs out to other expense lines. Subscription and support gross margin was 49% compared to 45% a year ago. This was ahead of our expectations due to increased cloud infrastructure efficiency and slower-than-expected hiring. Services gross margin was negative 9% compared to positive 10% a year ago. As discussed in prior quarters, we are working through some complex early cloud projects and have been leveraging subcontractors at higher than normal levels. We are making steady progress through these programs and expect services to return to positive margin in the second half of the fiscal year. Operating loss was $35.9 million. This included $2.9 million of severance expense, half of which impacted sales and marketing expense. Also, as previously mentioned, G&A expenses were negatively impacted by the reallocation adjustment. This had an $11.3 million impact on G&A expenses in the quarter. Overall stock-based compensation was $35.1 million, up 9% from Q1 of last year, which is generally in line with our growth in overall compensation expense. We ended the year with $868.5 million in cash, cash equivalents, and investments. In Q1, our Board authorized a $400 million share repurchase program. And as part of that, we initiated a $200 million accelerated share repurchase program that we expect to complete in Q3. Turning to our outlook for fiscal year 2023, we are maintaining our ARR outlook of $745 million to $760 million. Per our usual approach, our ARR outlook assumes foreign currency exchange rates as of the end of our last fiscal year. We are adjusting our outlook, and now expect total revenue to be between $886 million and $896 million. The only change is that we now expect subscription revenue to be $342 million, an adjustment of $2 million. All other components of revenue are largely unchanged. Turning to margins and profitability, which we will discuss on a non-GAAP basis, we expect subscription and support gross margins to be 49% for the year, an increase of 3 percentage points when compared to our outlook last quarter. We now anticipate lower cloud infrastructure costs, and we redeployed some headcount from COGS to R&D, as their work transitioned from supporting specific customers to building platform capabilities that will benefit all of our customers. This adjustment reflects increasing confidence in our margin trajectory as we execute toward our mid- and longer-term margin targets. We expect services margins in the mid-single digits for the year with significantly better services margins in the second half of the year. This improvement reflects the successful completion of ongoing arrangements with investments from Guidewire, the ramp of new services hires replacing subcontractors, and the redeployment of some Guidewire services resources from non-billable to billable roles. As a result, we now expect overall gross margins to be just under 52% for the full-year. With respect to operating income, we expect an operating loss of between $28 million and $18 million for the fiscal year. We now expect stock-based compensation to be approximately $138 million, representing a 1% growth rate year-over-year. We expect stock-based compensation expense growth to slow as we temper overall hiring. There is no change to our cash flow from operations expectations. Turning to our outlook for Q2, we expect ARR to finish between $695 million and $700 million, which represents 16% growth at the midpoint on a constant currency basis. We expect total revenue of between $221 million and $226 million. We expect subscription revenue of approximately $83 million and services revenue of approximately $52 million. We expect subscription and support gross margins of approximately 50%, and we expect services margins of approximately negative 2%. We expect an operating income of between negative $4 million and breakeven in Q2.

At this time, we'll be conducting a question-and-answer session. And our first question comes from the line of Dylan Becker with William Blair. Please proceed with your question.

Hey, guys. Thanks for taking the question. Maybe Mike, double-clicking on the Connections conference about a month or so ago. The cloud messaging there was very apparent and you guys emphasized the plans of getting 100% of that customer base to the cloud over time. So I guess how is the initial feedback been from a customer perspective following that event? And how important are those conferences being in person as you think about building out that pipeline progression with some of those initial reference points?

Yes, Dylan, thanks for the question. First, in-person events are vital for us. There's no substitute for connecting with customers and facilitating their interactions with one another to hear their experiences, including what to do and what not to do. These events are invaluable for us and the community. Additionally, connecting with various partners and emerging innovations in the ecosystem makes it even more rewarding to gather people in person, and we're thrilled about it. As I mentioned in the prepared remarks, we set a record for in-person attendance, which is fantastic to see. Regarding our goal to transition 100% of our customer base to the cloud, initially, some perceived that as a direct expression of our strategy. However, as time has passed and we've engaged with customers post-event, I believe there's a greater understanding of why clarity about our direction is crucial. Implementations and projects must endure for 20-30 years, and decision-making in this context extends beyond months to years. It's important to clarify that we don't intend to abandon anyone. I felt it was essential to emphasize that our innovation, creativity, and investment are heavily focused on cloud solutions, encouraging all our customers to consider how to align with this direction moving forward. The initial feedback was generally positive, with some surprise at my straightforwardness. For instance, one customer who had previously engaged in an on-premise deal expressed their intention, following our discussions at the conference, to develop a concrete plan to transition to the cloud. Overall, the reception has been very constructive, which I hope answers your question. Thanks again for bringing it up.

Yes. No, absolutely. Great to hear. And maybe piggybacking off of that as well, too. I think there was an important implementation in the quarter at Massif, and maybe one of the largest ones you guys have done to date, particularly in Europe. And some where you guys called out strength from an ARR perspective, so I guess wondering, first, how important is that implementation relative to kind of a market validation perspective and then also driving kind of some nice initial margin leverage here. Maybe how are you thinking about some learnings of moving that complex book of business as some of those other customers are kind of thinking about their own migration road maps.

Our view is that every customer implementation holds equal importance. I am fully dedicated to ensuring each one is successful. When I first spoke with the board and Marcus about joining Guidewire, their emphasis on the necessity of committing to the success of these projects left a lasting impression on me. While it may sound emotional, it's truly a strategic decision. As a core system vendor, it is essential to demonstrate a complete commitment to the success of these projects. If our implementations endure for 20 to 30 years, it will ultimately benefit both parties. We are determined to see everyone succeed. Regarding Massif, that project is progressing well. Achieving success in Europe at scale, particularly in France, is critical for us. We are focused on that, as we are with many other customers. While I can't single out anything specific, it's a significant and complex program that demands our attention.

Got it. Super helpful. Thanks, guys.

Our next question comes from the line of Ken Wong with Oppenheimer & Company. Please proceed with your question.

Great. Thank you very much. Mike, I wanted to maybe just check in with you on what you're hearing from customers in terms of how they're thinking about macro last quarter? Obviously, how deal composition maybe changed a little bit. Any sense from your conversations with customers on any incremental caution? Or what were you hearing from them as far as how they're thinking about core systems and IT budgets?

I would say the answer to that question has not changed over the past few quarters. I'd say that the insurance industry is a very stable industry relative to maybe the other buying behavior you see from other tech companies that are more horizontally focused. We consider that to be a sort of lucky characteristic of Guidewire's focus. That said, there still are concerns associated with tracking inflation closely and making sure that the system, the rate changes, the claims expense, all those tons of things are balanced. There's a deal that we're working on in the pipeline right now, where there's some changes to the operating model associated with inflation that's having an impact on when exactly the Guidewire deal will flow through the system. But I wouldn't characterize these things as macro headwinds, but more just normal course of business and selling core systems to the insurance industry. So summary is things don't seem to be helping but it isn't hurting us. And I really feel like our destiny is in our own hands if we execute effectively and provide the value that we think we need to provide, we're going to be able to hit the targets and grow the company based on the forecast that we've laid out.

Got it. Fantastic. Thank you for the context there. And Jeff, just one quick one for you. Really nice uptake on that subscription and support gross margin line. How much of that is kind of seasonal? I think typically, Q1 does see kind of a bit of an uptick versus actually getting some solid progress on the efficiency front.

Yes, that's one of the highlights for me from the quarter. I wouldn't describe it as seasonal. There can be some quarterly changes, but that was due to the hard work we've put in over the past year, along with the finance team, the cloud operations team, and the product development team, to improve efficiency in managing our cloud infrastructure. This is a significant positive aspect that we've been focusing on for a while. We're still learning about customer usage of our products and what that means moving forward, but there are encouraging signs that give us confidence. Looking ahead, we've adjusted our target for subscription and support gross margins upward by a few percentage points, which is also a positive development. Part of that benefit came from our improved platform efficiencies, allowing us to reassign some staff back to product development for more platform-related tasks instead of customer-related ones. This, too, contributes to our guidance as we consider the full year.

Great. Fantastic. Great work, guys.

Thank you.

Our next question comes from the line of William McNamara with BTIG. Please proceed with your question.

Hi. Thank you for taking my question. Wanted to just follow up. You mentioned hiring plans and how they've slowed down a bit. Just curious to know if there are certain areas you're aggressively trying to hire in to fill potential like implementation needs, things of that nature?

There isn't a specific area of focus. The hiring pace has definitely decreased. Over the past year or so, we had concerns about turnover. When turnover is a concern, we prioritize filling essential roles and ramp up our hiring and recruiting efforts to offset any expected attrition. However, the attrition we anticipated didn't occur as significantly as we expected. Currently, we aren't experiencing any gaps or strategic issues. We're taking a slow and steady approach to manage the company and ensuring, as Jeff and I have mentioned, that we are steadily improving our margins. Everything is proceeding normally.

Okay, great. Thank you.

Thank you.

And our next question comes from the line of Rishi Jaluria with RBC. Please proceed with your question.

Wonderful. Thanks so much for taking my questions. I wanted to maybe start out with coming out of Guidewire Connections. One of the pieces of feedback we got from the partners is cloud demand is definitely really strong and customers are very much interested in migrating to the cloud. But one of the things that some partners told me that is maybe holding them back is that they've built so much customization and custom apps on-premise, and that makes it harder to kind of migrate to the cloud version. Can you talk to what kind of steps you can take to make that migration path a little bit more painless? And then I've got a follow-up.

Super question. So this is something we spend a lot of time thinking about, obviously. These things end up being super complicated. And so somewhat the answer to your question is 1,000 little details. But I'll give you some examples. Number one, I think when we started the journey, we had a sort of view for the types of customizations, types of configurations, characteristics of the implementation that we thought were acceptable and not acceptable when those implementations landed on our cloud platform. As we've gained experience, we've been able to hone those requirements. And so maybe a lot more of those things that we thought at first were inappropriate or not something we could support, maybe they could be things that we could support them in certain ways. And sort of that experience enables us to really hone what the requirements are for things like integrations or customizations that are running on the platform. The other thing that we could do is facilitate the conversion of those customizations to something that will work more effectively on cloud. An example here is we have something called Advanced Product Designer, which is sort of a new way to build out an insurance product on our platform. When you use advanced product designer to build out that product on our platform, you just get a whole bunch of features for free, right? We're able to build APIs to be able to integrate that product into different applications. We're able to make a digital interface for that product much more efficiently. But for a customer that's already built their products in the on-prem version of Guidewire, they were looking at having to rebuild that product using Advanced Product Designer, so we built something called APD retrofit, which is a mechanism for us to take most of the product definition that exists on-prem and convert it efficiently to an APD-based product, which enables that customer to more smoothly transition to the cloud and take advantage more of the benefits of the cloud version of the product. That’s one example that is relatively important and strategic, but you want to think about lots and lots of these things that relate to the various components of an implementation. Those things will just build and build over time as we get more and more experience and do more and more of these migration projects. So hopefully, that helps give you a little bit of color. But to what the partners are telling you is real. There is a difference between the on-prem implementations and what we really want to see and what the customers want to get out of the cloud implementation. And that, I would say, is just something that needs to be accounted for in the planning through each one of these migrations.

Got it. No, that's super helpful. I appreciate that example. And then, Jeff, just a quick follow-up to continue on the margin question. So we saw a continued improvement on the subscription gross margin side, right? If we did the kind of backing out math above 40% for the first time in a while. Anything just onetime to call out? I know you said not seasonality, but accounting or anything like that? Or is there any reason we can't kind of straight-line the sort of margin improvement we've been seeing for the past couple of quarters and kind of get it from that glide path from 40% to, call it, 60% over the next several years? Thanks.

There isn't anything specifically one-time in nature. Sometimes it takes a bit longer for our largest Q4 deals to get set up, allowing customers to start utilizing product infrastructure resources. Our guidance for the year aligns with what we presented in Q1, and there is nothing particular to highlight as one-time items; we have made significant progress over the past year. You'll recall that about a year ago, in Q1 last year, we encountered some unexpected cloud infrastructure costs, but we have since worked hard to improve that situation. Overall, looking at the long term and our long-term models, it's expected that we will see steady progress toward our targets.

Awesome. Really helpful. Thank you so much, guys.

Thank you.

Our next question comes from the line of Parker Lane with Stifel. Please proceed with your question.

Yes, hi, guys. Thanks for taking the question. Mike, I was hoping you could dive in a little bit more on using Guidewire on-prem as a stepping stone of the cloud. I think it was three insurers that opted for that during the quarter. Why is that the right approach today? And then two, when they talk about the modernization side of it and the eventual migration to cloud, when a customer has made that decision today, are they still thinking about this as maybe multiple years down the road? Or does it accelerate the timeline to perhaps the next 12 to 18 months?

Thank you for the question. First, I want to highlight that our technical architecture choices are a positive aspect. Ideally, we would prefer all customers to transition directly to the cloud. However, each customer is unique, with different enterprise environments and various factors influencing their decisions. For instance, a customer might have their entire enterprise on-prem, including Guidewire, and they may choose to modernize just a core component of their insurance suite without fully migrating to the cloud. This decision could align with their overall cloud strategy. Additionally, there are regional variations in how comfortable customers feel about using the cloud as a secure option, and we’re actively addressing this while making progress. As I've mentioned before, these decisions tend to have long-term implications, often spanning 20 to 30 years. If we can establish ourselves and ensure customers clearly understand our strategic direction—acknowledging that these implementations will eventually shift to our cloud—this becomes a positive aspect of our approach. I also want to point out Boda, a customer that initially chose to go on-prem but then decided to move to the cloud during their implementation. Such transitions are happening. While it might seem puzzling at times, there’s solid reasoning behind this, and I believe it reflects well on our company's architecture and strategy. When considering Guidewire over a 10 or 20-year horizon, this approach becomes clearer.

Got it. Very helpful feedback. Thanks, again.

Our next question comes from the line of Michael Turrin with Wells Fargo Securities. Please proceed with your question.

Hey, thanks for taking the question. Just in terms of capital allocation, I mean you announced the buyback. You've clearly been active around. Can you just provide us with an update on how you're assessing the trade-offs and uses of cash in the current environment? And then just the second part, I'll ask upfront. On the free cash flow side, negative for Q1, but you're holding on to the cash flow from operations guide for the fiscal year. Can you just remind us anything we should be mindful of in updating models around seasonality on the free cash flow side? Thank you.

Yes. We are currently executing our $200 million accelerated share repurchase program, which we expect to complete in the third quarter. After that, we will reconsider the authorization for the additional $200 million. We believe that given Guidewire's current trading position, repurchasing shares is the best use of our cash at this time. However, it's also essential for us to retain flexibility for potential inorganic opportunities that may arise in this environment. Therefore, we feel that our authorized $400 million share repurchase program allows us to balance both objectives effectively. Regarding cash flow, we provide annual guidance, but there can be significant fluctuations from quarter to quarter. Our results in the first quarter aligned closely with our internal expectations for the year. We made slight adjustments to our operating income expectations, which affects our cash flow projections, making us a bit more confident about the range. There can be substantial variability in collections towards the year's end, prompting us to maintain a somewhat wide range, but we have not changed our outlook for the full year.

And our next question comes from the line of Joseph Vruwink with Baird. Please proceed with your question.

Hi, great. Going back to the subscription gross margin topic. Given the updated guidance for the year and again, the backlog back of the envelope, as just on the subscription line. I think it implies an incremental margin pretty close to 60%, and last year was also pretty close to 60%. So obviously, you just hold proven over time, but I also think the midterm framework implies reaching a next higher level. What are some of the elements that are going to inflect that? Or is it not even necessarily discrete elements, but maybe just more a function of how your business evolves over time, given some of the installed base and kind of vintage dynamics you highlighted at the Investor Day.

Yes. I'm not sure I followed completely your analysis. I'm not sure that I've looked at it the exact same way. But in terms of the key levers that we're focused on, you've heard us talk repeatedly about building our cloud operations team in advance of the demand to ensure that every one of these early cloud programs are ultimately successful. This is critical to our long-term strategy. And as we think about the build-out of that particular function, we've indicated at Analyst Day that largely, we've built out the team to support $1 billion of ARR, and now we need to grow into that profile without necessarily expanding significantly the existing cloud operations team. But we saw in this quarter towards the end of this quarter, we were able to repurpose or reallocate heads and employees that were working on customer-specific things, thus impacting cost of goods sold. Now they are focused where they should have where they were originally focused on building more platform capabilities that will address all of our customers. There are other things like that that we can do, specifically as we continue to march through migrating the customers, that went live on Guidewire Cloud Classic to GWCP and recognizing the efficiency uplift associated with that. So those are the things we're focused on. And we think we have all the levers in place to execute to the margin targets that we set forth at the Analyst Day.

Okay. Great, thank you.

And our next question comes from the line of Michael Funk with Bank of America. Please proceed with your question.

Hey, guys. Thank you for the questions tonight. So I appreciate the comments about the resiliency of your customer base in terms of spending in earlier comments about the efficiencies that your customers see when they adopt your platform. Maybe just stepping back and trying to quantify the value proposition that you sell to your clients. And how you quantify that for them in terms of payback? And maybe where there are differences in that conversation when talking about new deployments versus some of the customers that are electing to remain on-prem because they have substantial investments in legacy bespoke systems. That would be helpful if you could walk us through that math, how you talk to customers about the payback and the value proposition.

Sure. I won't delve into the specific math, but I'll provide an objective explanation. We can discuss the math in more detail later. When we engage in a new deal, like replacing an outdated mainframe system, the value is often tied to the risks a company faces from operating such an old system. Many times, it's more about a risk calculation than strict math. Insurance companies realize they can gain significant value by creating engaging digital experiences that connect effectively with customers, whether for personal or commercial lines. This is essential for competing in today's insurance market. You can calculate the potential growth from implementing Guidewire and creating a digital experience, but the downside is clear too; if we don't upgrade from the mainframe and don't implement digital experiences or APIs, we risk losing business. It’s crucial to connect with modern channels. On the claims side, efficiently managing claims operations can greatly reduce operating expenses for insurance companies. Trade serves as an excellent example within our customer base of the benefits from automating claims processes. These costs are substantial for insurers, and legacy systems can't address them. Regarding Guidewire's installed base, some customers find it challenging to manage and run the system. Most companies are focused on reducing data center and IT operations expenses, which can complicate system management. These operational burdens do not contribute strategically to an organization. Moving to the cloud alleviates these pressures, allowing us to manage IT burdens effortlessly and provide an economy of scale for our customers. Some Guidewire customers operate extremely efficiently, so for them, we focus on the incremental benefits we can add to the application and platform that aren’t achievable on-premises, but are possible as a cloud service. This enhances both agility and operational efficiency for those carriers. Without getting into specific numbers, which vary by company and business line, that's how we perceive the overall value proposition of Guidewire Cloud. Does that clarify things for you?

It did. I think that's a good overview of thinking about the kind of consistency of the transition of the growth and the drivers relative to other software companies. And one more quickly, if I could. As we think about growth this year versus the last couple of years, if you have it top of head, how should we think about the contribution from NRR versus net new? Are you seeing any shift there?

Yes. I mean I'd say we've, over time, built up a pipeline of ARR that flows in from what we call our backlog from ramp deals. That's a pretty meaningful part. We are starting to see a bit more new RFPs or new modernization programs for a little while. That was sitting on the sidelines because those folks were making the decision to kick the can down the road while they sat on the sidelines and waited for a bit more cloud maturity. We're starting to see that come back to market, which is exciting for us. But no material shift in terms of the overall model. I mean I think we're still going to get a lot coming from our installed base and our customers. A significant amount coming from deals that we sold in prior periods as those ramps flow through the model. And then we're always very focused on new modernization programs.

Okay. Thank you for the time. I appreciate it.

Thank you.

And our next question comes from the line of Alexei Gogolev with JPMorgan. Please proceed with your question.

I had a quick question on cybersecurity. The standardized multi-tenant nature of Guidewire Cloud allows you to invest more into security compared to some of your peers. And I was wondering if you disclosed any of those investments in the past? Or maybe you can give us some examples that highlight your security superiority versus peers.

Yes. I think the way we think about this is that the centralization of the management of a system facilitates a greater degree of security for that system. That's simply because we can patch Guidewire and the various implementations that are running on Guidewire Cloud more efficiently than we are able to patch and maintain the systems that each of our customers are individually running. Your comment about multi-tenancy is sort of exactly right. It's like the changes that we can make once can be applied to many customers. And so therefore, the effort that we put into securing that system can be leveraged by a greater number of customers, the greater number of tenants. The system overall can be more secure than what any of the individual customers are able to achieve on their own. There have been a few conditions that have come up and examples of this where we were able to ensure that the Guidewire Cloud implementations were quickly patched for vulnerabilities in a way that it was just a lot more cumbersome for us to get those patches, those updates pushed out to all of the on-prem customers that were impacted by this. In the end, you see this throughout enterprise software; centralized systems just get this benefit of a central focus on security, a sort of idea of a limited number of code lines in order to patch and secure. Over time, you create something that's a lot more secure than the variability that exists within all of the individual implementations. This is certainly something that we talk about with our customers as a benefit of the cloud model, and they understand that. I think there's also a degree of risk that they're thinking about in terms of making sure that we are at least as secure in our approach to managing the system as they are with their individual implementations. Depending on the size and scope of the customer that we're talking about, that conversation will either be quick and easy for a small insurance company where what we can apply with the resources of Guidewire far outstrips what they're able to do on their own. But we have some of the largest, most sophisticated customers in the world from an enterprise software perspective. Those conversations are pretty in-depth, and we work very, very closely with those customers to ensure we're creating the most secure, reliable services we possibly can. So I hope that gives you a flavor for how we think about this and why I think it's certainly a benefit of the model here at Guidewire.

It does. Thank you, both here.

Okay, great. Thanks a lot.

And we have reached the end of our question-and-answer session. And I'll now turn the call back over to Mike Rosenbaum for closing remarks.

I just wanted to say thanks, everybody, for participating on the call today. We're thrilled with the continued momentum in the cloud and new and existing customers. We see that as a great validation of the strategy, and it's given us increasing confidence in the long-term opportunity at Guidewire. I look forward to catching up with everybody throughout the quarter. So thanks very much.

And this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.