GWRE 2022Q1

Greetings, and welcome to the Guidewire First Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alex Hughes, Vice President of Investor Relations. Thank you, Alex. You may begin.

Thank you, operator. Good afternoon, and welcome to Guidewire earnings conference call for the first quarter of fiscal year 2022, which ended on October 31st. My name is Alex Hughes, I’m Vice President of Investor Relations and with me on the call is Mike Rosenbaum, Guidewire’s Chief Executive Officer; and Jeff Cooper, Guidewire’s 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 the Investor Relations section of our website. Today’s call is being recorded, and a replay will be available following the conclusion of the call. Statements made on this call include forward-looking ones regarding our financial results, products, customer demand, operations and the impact of COVID-19 on our business and other matters. These statements are subject to risks, uncertainties and assumptions and are based on management’s current expectations as of today and should not be relied upon as representing our views as of any subsequent date. Please refer to the press release and the risk factors included within the documents we file with the SEC, including our most recent annual report on Form 10-K as 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. A reconciliation of non-GAAP to GAAP measures is provided in our press release. Reconciliations and additional data are also posted in 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. On the heels of a strong finish to last fiscal year we had a record Q1 sales activity and continue to build momentum for Guidewire Cloud. Cloud bookings were over 90% of deal activity for the first time ever, and helped drive Q1 ARR above the high end of our guidance range. It was a great start to our fiscal year and points to continued strength in our cloud business and strategy. In the quarter, we signed 5 more InsuranceSuite cloud deals on top of 17 last quarter, and saw another 6 successful cloud customer deployments. This is a great illustration of success leading to success. As we close more deals and demonstrate more go lives, we will see increasing confidence and demand from our customer base. With a growing number of commitments and successful deployments, more insurers will decide that the time to move to the cloud is now. Interest in Guidewire in the overall Insurtech market was on full display at our recent Connections Customer Conference which was held as a hybrid event in Las Vegas last month. We had over 1,300 people in physical attendance, which I think is phenomenal considering the current environment and international travel restrictions. We saw a broad participation from across our customer base and partner community and it was great to see a heightened focus on cloud and insurance innovation from everyone in our ecosystem. Connections was a great platform to show the Guidewire community the exciting new developments and innovations in Dobson, our fourth release of the Guidewire Cloud platform. I'll talk more about Dobson in a minute. But I think it’s getting clearer to our customers that the six-month release cycle of Guidewire Cloud platform offers a superior track to the faster and continuous innovation needed to advance their objectives. As I mentioned, cloud deal activity in the quarter was phenomenal with five new InsuranceSuite Cloud upgrades in the first quarter spanning both Americas and EMEA. In the Americas, I was pleased to see a deal with a Tier 1 insurer and activity across both commercial and personal lines. A Tier 1 insurer elected to upgrade ClaimCenter to the cloud as part of its strategic vision to provide industry-leading claims services, while balancing superior satisfaction, indemnity accuracy, and cost of service management. Franklin Mutual, based in New Jersey and dating back to 1879, elected to migrate to the Guidewire Cloud platform to take advantage of our Autopilot roadmap, data strategy, and the combination of our deep R&D and innovation cadence delivered to the cloud through our fast six-month release cycle. Franklin Mutual came to Guidewire through our acquisition of ISCS decided to migrate to InsuranceSuite V10 from InsuranceNow in 2018, and we are now excited to take them to our cloud as they look to further expand. A Tier 2 insurer based in Canada chose to migrate ClaimCenter in order to simplify its technical ecosystem and to accelerate speed to market. This builds on their adoption earlier in the year of PolicyCenter and BillingCenter for the Guidewire Cloud. In EMEA, it was great to see two exciting cloud deals. Tryg, the largest non-life insurance company in Scandinavia with significant market share across Denmark, Sweden and Norway adopted ClaimCenter on Guidewire Cloud for its platform sophistication, Autopilot and analytics technologies. P&V Assurances, founded in 1907 and now one of Belgium's largest insurers, elected to migrate InsuranceSuite to the cloud, because of our platform's strong fit with its strategic imperatives. We also saw continued success in analytics in the first quarter. S&P, as I briefly mentioned last earnings call, expanded their relationship with us in a very significant and strategic way. We will work with S&P to use Cyence to develop the first cyber risk impact quantification of credit and financial health. This is an outstanding validation of what we already know that cyber risk is an important consideration when evaluating credit risks. And it's exciting to partner with S&P on this initiative. Additionally, Markel Corporation, a global insurance and reinsurance carrier based in Virginia selected Cyence. In addition to geo activity, we continue to drive strong cloud deployments with six more cloud go-lives in the quarter. These deployments are a critical element of our cloud strategy because they enable us to show the industry that customers just like them are successfully executing cloud strategies on the Guidewire Cloud platform. A large Tier 1 insurer went live with ClaimCenter on Guidewire Cloud and began its business rollout. It speaks to our ability to support an important Tier 1 customer in the cloud and we look forward to continuing our work together. Amica, the oldest mutual insurer of automobiles in the United States, achieved the second of its three major cloud milestones with the launch of PolicyCenter on Guidewire Cloud, this joins BillingCenter and will next be joined by ClaimCenter, and speaks to our ability to successfully transition a large, longstanding and highly configured customer to Guidewire Cloud. We also saw a private mutual insurer with over 120 years of experience serving individuals, families and businesses in multiple states throughout the United States deploy PolicyCenter, BillingCenter, ProducerEngage and Cloud Data Access in Guidewire Cloud. This sets the foundation for multi-state expansion and additional lines of business on Guidewire Cloud. In addition, a fast-moving commercial insurer targeting the evolving mobility market successfully launched ClaimCenter on Guidewire Cloud in less than 10 weeks, which speaks to the fast time to market advantage that Guidewire Cloud brings to greenfield initiatives. This follows the PolicyCenter and BillingCenter go-lives a year ago, meaning they are now in production with all three core InsuranceSuite Cloud products. At the same time, we also deployed InsuranceNow at two more insurers, both of which have specialty and innovative holdings. Customers adopting and deploying Guidewire Cloud are doing so in large part to take advantage of the superior speed and innovation it delivers every release. The release adopts in the last month demonstrate these advantages and deliver exciting new enhancements that accelerate innovation, integration, design, and insights. Innovations made faster by enabling customers to launch and deliver products more quickly with Guidewire Go. Innovation is also amplified and accelerated by making it easier for developers to integrate external applications with their core systems through our cloud integration framework. It's also now much faster and easier to design front-end digital experiences with Jutro, which delivers an expanding library of pre-configured building blocks, reusable components and metadata-driven UI configurations for our customers’ digital experiences. At Connections, we also launched Guidewire Live a suite of analytics applications designed to allow insurers to be brilliant in every stage of the insurance life cycle. This all makes me very proud of our team and excited for our future. I'm equally excited about the excellent progress we continue to make with our expanding partner community, which is a critical component to our strategy and an important element of our success. Our SI partners remain a force multiplier for us since they play a critical role in helping customers plan and execute their deployment on Guidewire Cloud. We continue to see strong growth in this area. We now have 15,800 Guidewire consultants from 32 SI partners, up 38% year-over-year and we now have 14 SI partners involved across 35 cloud projects. With Guidewire Cloud momentum increasing, we are seeing this community move quickly to become Guidewire Cloud certified. Guidewire Cloud certified consultants grew 287% year-over-year to over 2,800. At the same time, our solution partners and the Guidewire Marketplace continue to be important drivers powering P&C insurance innovation for our customers. We continue to see strong growth in our Marketplace, and I'm even more excited about the long-term potential here as cloud deployments make it easier to integrate and deploy on Guidewire. This ecosystem will unlock tremendous value on top of and alongside Guidewire and developments such as our new cloud integration framework and Jutro are important components facilitating this. We finished the first quarter with over 140 solution partners, up 50% year-over-year. We understand the strategic importance of the Insurtech ecosystem to our customers looking to build competitive advantage. So, we're investing in this area further to identify and incubate the next generation of Insurtech’s potential solution partners through our new Insurtech Vanguard program. We are also investing directly in leading Insurtech solutions, and last month, we invested in two exciting innovators, FRISS an AI powered end-to-end fraud prevention and detection solution for global P&C insurers; and Shift, a provider of AI driven automation and optimization solutions for the global insurance industry. In summary, we had a fantastic first quarter on the heels of a strong finish to last year. I feel good about how the fiscal year is shaping up with our strategy and execution coming along nicely. We are optimizing and investing for product velocity, and more importantly, customer success in the cloud. These projects are very challenging and complicated, and we'll continue to invest to help insurers achieve successful outcomes. It's hard but rewarding work that we're proud to tackle as we work arm in arm with our customers and partners to transform. With that, I'll turn it over to Jeff to talk about our financial results and our full year outlook.

Thanks, Mike. Let me jump right into our Q1 results, our strongest first quarter ever from a bookings perspective, which fueled our ARR outperformance. Over 90% of our bookings activity came from our cloud products. ARR ended the quarter at $594 million, ahead of our expectations and up 16% year-over-year. We were thrilled with the activity we experienced, which continues to be highlighted by InsuranceSuite Cloud momentum. Our ongoing cloud strength is also visible in our subscription revenue, which was $57.1 million, up 53% year-over-year. Subscription and support revenue was $79 million, up 36% year-over-year. License revenue was $40.2 million, down $25 million or 38% when compared to Q1 last year. While we expect term license to decline as we successfully upgrade on-premise customers to our cloud, the decline in Q1 was also due to $15 million of incremental revenue from term license deals that deviated from our standard contract terms in Q1 last year. We discussed this at length last year, and much of this incremental revenue was due to a multiyear contract consolidation at one of our largest customers. As a reminder, term license revenue is recognized upfront for multiyear contracts. Services revenue was $46.8 million. This was lower than our expectations due to three complex customer engagements, two of which are cloud migrations where revenue recognition is tied to project percent complete assumptions rather than our typical time and materials arrangements. Given project complexities, we adjusted our percent complete assessment, which impacts the timing of revenue recognition. Even with this adjustment, total revenue in the quarter was $165.9 million, at the high end of our guidance as strength in subscription revenue largely offset lower-than-expected services revenue. Turning to profitability, which we will discuss on a non-GAAP basis. Gross profit was $73.9 million. Overall gross margin and support gross margin was 43%, down from 48% a year ago. This decline was due to large investments we have made to support our current and future cloud customers. Additionally, accelerating cloud activity in Q1 led to higher-than-expected cloud infrastructure costs. Services gross margin was 4%, up from 2% a year ago. Operating loss was $28.7 million. This was below our guidance range due to a few factors. First, moving into fiscal 2022, we updated our employee attrition assumptions. During the pandemic, our overall employee attrition was at historically low levels. And looking ahead, we modeled in higher employee turnover to reflect what is commonly being referred to as the Great Resignation. Thankfully, we have not seen a spike in attrition at this point, and we are recalibrating our models. Over the long term, retaining our existing outstanding employees is a much better outcome for Guidewire, but this does have an impact on our assumptions for the year. Second, as I previously mentioned, cloud infrastructure costs in Q1 were a bit higher than expectations. This impacted both our cost of subscription and support revenue, but also operating expenses as our engineering teams are utilizing public cloud services more on product development, and our presales teams are building out demos and POCs utilizing public cloud services. Finally, we did see a bit higher commission expense as well in Q1 as we had strong bookings activity and much of this activity occurred early in the quarter. We ended the quarter with $1.1 billion in cash, cash equivalents and investments. The combination of bonus payout, vacation accrual payouts as we moved to an unlimited vacation policy in the U.S., our acquisition of HazardHub, and our investments in FRISS and Shift all had an impact on cash balances. Additionally, we invested $26 million on the repurchase of 226,000 shares in the quarter. Now turning to our outlook for the fiscal year and the second quarter. For the year, we are increasing our ARR guidance to $659 million to $669 million, representing 14% constant currency growth at the midpoint. There is no change in our total revenue expectations. We now expect our subscription revenue to be a couple of million higher than our prior expectations and services revenue to be a couple of million lower than our prior expectations. We now expect total gross margin for the year to be closer to 50%, but this gross margin percentage will ultimately depend on our final revenue mix. Overall subscription and support gross margins for the year should be flat to up 1 point, as the subscription margin improvement to approximately 30% is offset by the mix shift between subscription and support revenue. We expect services margins to be in the low single-digits. With respect to operating income, we expect an operating loss of between $58 million and $48 million for the fiscal year. This adjustment to our operating loss is due to the recalibration of our employee attrition assumption built into our forecast model and due to higher public cloud infrastructure costs. On the cloud infrastructure side, we have been optimizing for speed and customer success as we build and deliver cloud-first products, which include new capabilities such as Cloud Data Access and Data Studio. We are building out more controls and constantly optimizing our architecture to ensure efficient management of our public cloud spend. We still feel confident that improved controls and cloud maturity will support our long-term margin expectations. But higher-than-expected Q1 costs, combined with accelerating demand and adoption of our cloud products, resulted in a revision of our expectations for fiscal 2022. Cash flow is expected to be impacted by these factors as well. As such, we now expect cash flow from operations in fiscal 2022 to be between $10 million and $20 million. Turning to our outlook for Q2, we expect ARR to finish between $613 million and $616 million, which represents 18% growth at the midpoint or just under 17% on a constant currency basis. We are managing the much better linearity in bookings activity this year, which is really positive. And Q2 benefits from the realization of ramps sold in prior periods. We expect total revenue of between $195 million and $199 million. We expect subscription revenue of approximately $60.5 million and services revenue of approximately $49 million. We expect an operating loss of between $15 million and $11 million in Q2. In summary, we are thrilled to see strong momentum in Q4 continue into Q1. ARR and subscription revenue continues to track nicely to our near-term and longer-term targets. This validates our investment thesis as we bring insurer core systems to the cloud. While we are now seeing a bit higher expense in fiscal 2022, we do not think these increased costs pose a challenge to our longer-term margin expectations.

Our first question is from Jackson Ader with JPMorgan.

My first question is about expenses. Can we explore this further? I would have assumed that improved growth in Annual Recurring Revenue and additional cloud deals would have positively impacted operating income. What led to the current situation? Also, regarding the growth in ARR, is any strength in the first or second quarter related to bringing forward the pipeline from the third and fourth quarters?

Yes. First, I want to clarify something I misstated during the call. I mentioned an ARR guidance of 559 million to 569 million. It should actually be 659 million to 669 million. I wanted to correct that. Regarding expenses, during our transition to the cloud, we are dealing with a few complex projects in close collaboration with our customers. Some of these engagements require extra effort to reach our goals, and we are dedicated to ensuring customer success. This phase is crucial for the industry's shift towards cloud systems, and these early customers are vital to us. Therefore, we are investing more in services to support these projects, which affects our overall expenses. Additionally, as we moved out of the pandemic, we noticed historically low employee attrition rates. Given the discussions around the Great Resignation, we adjusted our forecasts to include a bit more attrition and authorized aggressive hiring, as this is a critical period for us. We want to maintain project momentum and product development velocity. Although we anticipated higher employee turnover, we haven't observed it yet, which has influenced our cost estimates. We also noticed a spike in public cloud spending and are assessing that to optimize our expenditures. Some architectural decisions were made to ensure quicker development cycles and meet customer needs, but these choices surprised us in the last quarter, as reflected in our guidance. On the topic of deals, we are experiencing better consistency this year compared to previous years, which is encouraging. While prior years were heavily back-end weighted, we aim for improved linearity, so I wouldn't say we're pushing deals into Q2. Instead, we are observing what should ultimately lead to steadier linearity moving forward, with the past couple of years providing easier comparisons in Q2.

Okay. Great. And then a quick follow-up, you mentioned employee attrition, which reminds me. So Frank, your Chief Sales Officer's departure I guess early last month. Any update on that search? And yes, just any additional color you can give on Frank's departure would be great.

I want to express how pleased I am with the team's response and how Priscilla has taken the lead to keep the organization moving towards success. We miss Frank, but the company is making progress. We're really excited about the results from this quarter and our outlook for Q2, as well as our pipeline and expectations for the year. We are actively discussing candidates for the role, but I don’t feel the need to hurry this process. I believe we have an excellent team, and I am confident in the leadership that Priscilla is providing right now. This confidence is evident in our positive outlook for the company’s top line performance.

Our next question comes from Bhavan Suri with William Blair.

This is Dylan representing Bhavan. First, could you discuss the potential benefits of hosting the Connections Conference in person? Given that these systems are mission-critical, how has this impacted pipeline activity and interactions, as well as your ability to demonstrate value? This is particularly relevant since the rollout of GCP has predominantly taken place in a virtual setting. Any insights or commentary on how this in-person event might enhance your reference selling efforts would be appreciated.

I'm really happy we decided to have the event in person. The feedback we received from customers and partners was overwhelmingly positive. Being able to engage with customers about their projects and the advancements we've made in our cloud product over the past 18 months was valuable. The event had a positive impact on the deals we can influence and the pipeline we can connect with. It also motivated us to create presentations that will help our teams execute programs more effectively. The main takeaway for me was the consistent feedback regarding how well our Guidewire Cloud product story is being communicated, the successful delivery of releases, and our ability to follow through on our roadmap. While it was frustrating that COVID limited attendance for international audiences, being able to conduct a hybrid event and make it available for asynchronous viewing was a significant positive. I hope this provides more insight into the outcome of the event.

Yes, that's really helpful. And then I guess maybe one other one too. So you've announced some recent Marketplace partnerships here around kind of digital claims payments. So I would like to kind of get a sense of how you're thinking about the broader opportunity around digital payments? Kind of where maybe this sits with adoption within kind of insurance carriers and their end customers today? And how this also kind of ties into the broader claims automation initiative that we're seeing with carriers?

Absolutely. Let me begin with the latter part of your question. As I mentioned earlier, we've discussed Autopilot in relation to the various implementations and transactions we've undertaken. We believe that there is a significant efficiency opportunity in claims automation that many of our customers also recognize. There's considerable enthusiasm surrounding the Autopilot roadmap, which plays a crucial role in the cloud upgrades and new sales related to ClaimCenter. We're particularly pleased to highlight our recent partnership with Tryg, which showcases their bold and innovative approach to automating the interaction process with claimants and customers. We're thrilled to collaborate with them as they push us and the industry forward. Regarding payments, I see it as an opportunity not only to enhance the efficiency of insurance organizations but also to improve customer convenience and satisfaction when it comes to claims and payments. I would refer you to the work we've done on our integration gateway, cloud APIs, and Marketplace, which simplifies the connection between partners and the Guidewire core system. By lowering the barriers to implementing these solutions, we believe they will naturally appeal to most insurance companies. Making this process increasingly easier will foster innovation in the industry and heighten demand for our cloud platform. We are excited about several Marketplace solutions in this area and anticipate that, like many other Marketplace initiatives, they will contribute to our growth.

Our next question comes from Matt VanVliet with BTIG.

Maybe following up a little bit Jeff, on the comment you made to one of the questions earlier about continuing to be very focused on the execution of deployments and having a very customer-centric approach. How is that pressuring the capacity of the services staff that you have now? Do you need to add headcount there? Or should we think about the rapid growth in Guidewire Cloud certified systems integrator partners, that you can now start offloading more and more of those deals? Especially as you've built up some sort of muscle memory, I think, in the best way to roll out the Guidewire Cloud deals.

Let me address that. Your question captures how we're approaching this situation. We monitor it closely because the manpower needed to execute these programs is something we are very attentive to. As we grow and take on more of these initiatives, it could limit our growth potential. Therefore, engaging our partners, either directly or indirectly, and ensuring that our teams have the necessary training and experience for successful implementation and cloud upgrades is crucial and a major focus for us. While I wouldn’t classify it as a limiting factor at this moment, it is something we are diligently monitoring and managing. We are working hard to keep up with demand and ensure projects are completed successfully. As I mentioned earlier, these are complex programs we navigate with our customers, involving not just system upgrades but also downstream integrations, data analytics services, and accompanying digital interfaces. Each successful upgrade teaches us and makes us more efficient for the next. We also strive to share this knowledge across our broader ecosystem, enhancing our capacity to meet incoming demands. You posed an excellent question, and it aligns well with how we are managing the situation.

Great. And then I guess as you continue to have the discussions with a number of especially your largest Tier 1 customers about their path to the cloud, what it might take and when it might happen, are you still getting any pushback of, 'Oh, I don't see any reference customers that sort of look like us or operate in the markets we operate in.' Or do you feel like you're kind of over the hump now where you've gotten enough of a sample across your entire customer base that that's no longer a limiter? And instead you really are on the when, not if for virtually every customer in your portfolio?

I think we are definitely at a point where it's more about when rather than if. That said, customers are still looking for additional proof points, experience, and examples as part of their evaluation process. As we successfully implement more projects and go-lives on the Guidewire Cloud platform, we become increasingly equipped to support them. This ongoing experience helps to alleviate their questions and concerns. Notably, the tone of our discussions with our top customers has evolved to focus on when they plan to move forward and when they feel prepared, rather than whether this is the right approach. I am very confident that we are on the correct technical path. These decisions and implementations are complex and can take several years to unfold logically. The trend is promising, but there’s nothing particularly magical about any specific moment. It’s all about effectively managing these implementations, learning from them, and consistently working on our roadmap while improving our readiness. I hope this addresses your question.

Our next question is from Ken Wong with Guggenheim Securities.

Mike, I wanted to maybe build on that Tier 1 theme. It sounds like you guys had pretty good traction this quarter. I think a peer of yours indicated some uncertainty with Tier 1 deal activity. Just wanted to check to see if anything you're seeing as far as sales cycles have changed, or just customer interest from some of your largest customers.

I wouldn't say anything's changed quarter to quarter. We continue to see interest build. The innovation agenda, the automation agenda, the efficiency agenda at customers continues to build I would say over the course of the last six months or so. And I think we touched on this a bit in Q4 is the COVID concerns about the economy, et cetera, seem to be past. The working model associated with work from home or hybrid project work is past. And so people feel comfortable about taking on these programs now. And that, we see that across the board. So I wouldn't call out anything with respect to Tier 1s. Like I said, we had some good activity in the quarter and we continue to make positive progress, especially in our customer base about building that confidence.

Got it, perfect. And Jeff, just one for you on the ARR increase. Looks like Q1, Q2, you guys are getting better than what we're used to seeing from a sequential increase. And you mentioned some of the ramp deals starting to flow through. How should we think about the contribution from ramp deals versus maybe net new ARR as far as keeping those ARR numbers elevated? Yes, we have discussed this before, but we don't usually provide detailed breakdowns. I would point out that Q2 has seen significant activity from previous deals, which is encouraging. This serves as a positive factor for Q2. Looking at the entire year, we have indicated in the past that we anticipate more contributions from our backlog, particularly from ramp deals, compared to what we need to secure in net new business.

Our next question comes from Peter Heckmann with D.A. Davidson.

After reviewing the Gartner reports for both North America and Europe, it seems as if a number of marginal players continue to get squeezed out, as more and more carriers decide to upgrade their technology with one of a handful of leaders. Do you feel that's the case? And do you see there's an opportunity for either yourself or someone else to consolidate with some of those smaller players over time?

That's an interesting question. I believe that establishing a cloud platform to support core systems in property and casualty insurance requires a substantial investment. Thus, the notion that there won't be around 25 vendors successfully competing in this space over the next decade seems reasonable. While I may have a biased perspective as the leader, I see this trend based on my experience and understanding of what it takes to succeed in this market. The long-term investment and specific expertise needed to cater to this customer base are crucial. Size will likely be a significant factor contributing to the success of these companies. As for the potential for consolidation, I'm uncertain. The systems in question tend to be implemented for extended periods, and customers have high expectations regarding the longevity of their investments. Unlike other SaaS industries where implementations can change every year or two, in this case, it may only happen once a decade at best. Therefore, we need to be cautious about assumptions related to consolidation. However, I am confident in our position and the investments we've made over the last 20 years, particularly in developing a winning cloud platform in the past three years. I hope this provides some insight into my perspective.

Yes. No, thank you for the thoughtful answer. And just as a follow-up, Jeff, did you say about $49 million of services revenue in the second quarter? And if so, could you just review that issue around time and materials versus the other accounting method that you mentioned?

Yes. We are projecting approximately $49 million in services revenue for Q2. We typically engage in services arrangements on a time and materials basis. Some of our customers have made significant investments to implement the on-premises system, and we are now collaborating with them to transition to the cloud. We have also undertaken some projects using a fixed bid model. With fixed bid arrangements, it requires constant assessment of the progress, including how much work has been completed and what percentage of the overall project that represents. In Q1, there were several reassessments regarding the effort needed to complete these projects, which affected our results, as you saw compared to the expectations we set last quarter.

Our next question comes from Joe Vruwink with Baird.

I wanted to revisit the topic of claims automation, which was a significant focus at Connections last year. In that release, claims have generated considerable deal momentum. Is it reasonable to connect these two and consider the 12-month period between the biannual release and the beginning of pipeline conversion? The clear implication is that you are now on four releases, and this will only increase over time, broadening potential opportunities. Does this connection and the 12-month period make sense?

Yes, I believe that's a valuable observation. There's a significant amount of positive feedback and interest from our customers regarding the Autopilot product. It does take time to launch something and share our vision with everyone. We are becoming accustomed to launching products using an early access approach, which allows us to work closely with a few customers to gather insights and feedback that we can incorporate into future versions. This process helps us create better software. It's fair to say that we launched the product about a year ago, went through a cycle of interest, and now it is actively contributing to deals. Moreover, we are increasingly distinguishing our service and the value we provide to customers through the cloud with each release. This goes beyond just the logistics of where the software runs and how it’s maintained; it includes the functionality of the product and the speed at which new products can be developed using tools like Advanced Product Designer or a digital interface with Jutro. The capabilities for operating a core system and innovating within an insurance company are being enhanced and expedited through Guidewire Cloud, and we expect this growth to continue. As we continue to add more features with each release, I anticipate seeing this narrative develop across our various product lines. Thank you for the question.

Okay. Good. And then just one more on the SI partners. One thing we heard at Connections was this idea that, 'Actually I'd like to grow my Guidewire practice faster, but I need to hire, and then I need to get that hire cloud certified.' And that becomes the inhibitor. Since partners seem to be handling a decent amount of your cloud activity, do you think this factors in at all on kind of your forward outlook for cloud deal signings?

I can't say for sure if it influences the cloud deal signings. However, I believe this is a broader issue, common across many industries. The number of technical experts available to implement and manage these systems affects the costs associated with those implementations. When there’s a shortage of skilled professionals, the expense tends to rise. Thus, the more we can bring individuals into our ecosystem, train them, and get them certified, the more opportunities arise for them to contribute to projects that bring innovation to our customers. There’s immense potential for technology-driven innovation in the property and casualty insurance industry, particularly in enhancing convenience, improving digital interactions with customers, and automating claims processes. We've discussed several examples, such as proactively detecting fraud and using analytics for better predictions. The effectiveness and speed of these advancements are closely tied to the number of technical experts available to execute these projects. Therefore, education and resource enablement within our ecosystem and at Guidewire play a critical role in our strategy. The more we focus on this, the more rapidly the system can evolve. While there may be limitations, it’s clear that many are entering the field, learning, and growing in response to the considerable demand.

Our next question comes from Parker Lane with Stifel.

This is Matt Kikkert on for Parker. My question revolves around Dobson and some of its new functionality. And first building off a previous question on Tier 1s, are you seeing more interest with the platform from those tier 1s, kind of the higher end of the market? Or instead from the lower end of the market? Or is the interest about equally distributed between the two? And then secondly, when these customers do choose to expand their deployment, what are the most common tools you're seeing that they're adopting on Dobson?

Great question. Let me discuss demand. There is significant interest in Guidewire Cloud among our customer base, with many wanting updates on the latest developments, regardless of their current cloud status. This interest is crucial for both existing cloud customers and those considering the transition. The topics of interest vary depending on the size and complexity of each customer's implementation. For instance, customers with a complex ClaimCenter setup and numerous integrations focus on the integration framework, while PolicyCenter customers launching new lines or entering new states are interested in Advanced Product Designer. Their specific interests align with their departmental innovation objectives and broader corporate strategies. Regarding Dobson, it’s still early as we've just launched it and are beginning to engage with customers. The feedback so far suggests that the integration of our Advanced Product Designer with the Jutro digital platform has sparked interest, as this collaboration allows for more seamless and quicker implementations. I noticed this particularly during Connections. Additionally, the integration framework remains a key focus for many customers, enabling them to extract logic from the core system and accelerate the rollout of integrations to other cloud services. This represents a significant shift in Guidewire implementation that customers find appealing. I hope this clarifies your questions.

Our next question comes from Michael Turrin with Wells Fargo.

This is David on for Michael Turrin. Just one from us. Can you just talk about the appetite you're seeing for purchases that include data and analytics? And perhaps any flexibility you may have on pricing when you sell into that customer base?

Certainly. One of the things we have achieved with our cloud services is the integration of data and analytics into our implementations, which has garnered significant interest. Recently, we've focused on the business plans that support investments in Guidewire Cloud, particularly how often the data and analytics elements enhance the overall value proposition through more informed decision-making. Additionally, our analytics segment at Guidewire remains robust on its own, not solely dependent on our core customers, but also generating independent sales. Notably, we secured deals in the first quarter with S&P and Markel for Cyence and cyber solutions. We've also received very positive feedback about HazardHub and its acquisition, indicating strong momentum there. So far, most of the demand has come from our existing customer base as they are the first to learn about the advantages of incorporating these offerings into Guidewire. Overall, the reception has been very strong since the acquisition, illustrating our success in both cloud deals and independent sales.

Our next question comes from Tyler Radke with Citi.

I wanted to ask you just about the on-premise customers. I think in years past, you talked about a fair amount of customers still on older versions, Version 8 and 9. How have those kind of migrations progressed? And to what extent is the significant partner growth kind of helping in accelerating those migrations from some of the older on-prem versions?

I can provide some insight on that. The upgrade cycle, as we've mentioned before, continues to play a significant role in prompting discussions with our customers about their plans and which version they intend to adopt, as well as the viability of moving to the cloud. This process remains robust and is ongoing. Some customers are still opting for Version 10 of Guidewire on-premise for various reasons, and the ecosystem, along with the consultants, effectively supports these types of programs. However, I wouldn't classify it as either a benefit or a drawback; it's simply part of the standard operational dynamics of the Guidewire ecosystem. Overall, the opportunities driven by the upgrade cycle remain crucial for facilitating transitions to the cloud. Many decisions to move to the cloud are influenced by the need to upgrade from their current version to the latest one, thus making the cloud transition. This trend continues among our customer base and is a vital factor in our cloud growth.

Great. And then if I could sneak in a follow-up, maybe this one is for Jeff. But can you just give us an update on how you're thinking about kind of the moving pieces in cloud or subscription gross margins? I know with some of the new cloud releases you have here with Dobson and one coming up in the first part of 2022 and some of the automation you're building. Just help us understand kind of what your baseline assumptions are around the factors that's underpinning your gross margin outlook for cloud.

Yes, sure. We talked briefly in the call that if you think about the subscription margin that underpins the subscription and support margin, that that kind of should grow from around 23% last year into around 30% this year. So we are starting to see a little bit of leverage on that line. We feel very confident in how durable the overall subscription revenue growth will be as we execute against this opportunity in front of us and start moving our on-prem customers to the cloud, in addition to seeing more modernization activities in general in the industry as the industry gets more comfortable with buying cloud. So those are driving the top line. And then as we think about the margins, we've invested a lot to ensure that we have the right cloud operations team in place today to allow us to successfully execute the current customers that we have and the future customers that we expect to add. So we've invested quite a bit in building out that team. It is our expectation that we can start to leverage that investment quite significantly moving forward. We obviously in Q1 saw a little bit more cloud infrastructure expense than we were expecting. I noted that we've been optimizing for speed and customer success in that particular area. But we certainly have our eye on the ball in terms of how we can optimize and make that much more efficient moving forward. And as we inspected our forward-looking plans, we still feel confident with the longer-term margin profile that we put out there. What's driving that is these investments that we're making in products that will allow us to deliver the product in a much more efficient way, both from a head count attach perspective but also just in terms of how it's architected. And as we add more customers to the platform and gain that scale, that's where we get confidence that we'll see that margin expansion.

There are no further questions at this time. I would like to turn the floor back over to Mike Rosenbaum for any closing comments.

I just wanted to say we felt it was a very solid start to the year, and we look forward to continuing to execute effectively throughout the rest of the fiscal year. I want to thank everybody for joining us today, and have a great day.

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