Yahoo Finance Guidewire Software, Inc. (NYSE:GWRE) Q3 2024 Earnings Call Transcript
Guidewire Software, Inc. (NYSE:GWRE) Q3 2024 Earnings Call Transcript June 4, 2024
Guidewire Software, Inc. beats earnings expectations. Reported EPS is $0.26, expectations were $0.1329.
Operator: Greetings. Welcome to the Guidewire Third Quarter Fiscal 2024 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. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Alex Hughes. You may begin.
Alex Hughes: Thank you, Shamali. 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 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, the impact of local, national and geopolitical events on our business and other matters. These statements are subject to risks, uncertainties and assumptions 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 and documents we file with the SEC, including our most recent annual report on Form 10-K and our prior and forthcoming quarterly reports on Form 10-Q filed and 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 in the supplement on our IR website.
And with that, I'll now turn the call over to Mike.
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Mike Rosenbaum: Thank you, Alex. Good afternoon, and thanks everyone for joining today. I'm incredibly excited to share the results of our third quarter and discuss the momentum we are seeing in our business. Q3 was another very strong quarter and puts us in great shape heading into the final stretch of our fiscal year. We have all worked very hard to establish Guidewire Cloud Platform and our InsuranceSuite applications as the trusted worldwide standard for P&C insurers and I think our Q3 results and year-to-date results clearly show that we're paying off. In April, we released Jasper, our 10th release in under four years, which delivers increased agility in commercial lines, while also expanding HazardHub data for Canada. This release and our continued innovation across our platform and applications improve customer agility, speed and business intelligence.
We are helping our cloud customers innovate faster and make better data-driven decisions across the insurance lifecycle. I'm now more confident than ever that the continual iterative improvements we have demonstrated to customers through our cloud platform's consistent release schedule are helping to align more of the industry around our platform and this general confidence is resulting in our improved business momentum. In the third quarter, we closed eight InsuranceSuite cloud deals, bringing our total InsuranceSuite cloud deals year-to-date to 24, which is a 33% increase year-over-year. We also saw sustained strength with Tier-1 insurers, including four Tier-1 deals in the quarter. Our continued deal momentum speaks to the tremendous progress we have made establishing the reputation of Guidewire Cloud Platform, but also the much improved fiscal year linearity our sales teams are driving.
We have been working for the past few years to establish a more linear quarter-to-quarter approach to sales, and I'm very happy with the more balanced year-to-date outcome. It was also a strong quarter for cloud migration activity with a total of five InsuranceSuite cloud migrations. Our customer base is our most valuable asset and a significant part of our cloud strategy has been anchored around the objective to successfully migrate every single one of our on-prem customers to our cloud platform. Continuing to drive these cloud transitions ensures that we remain the industry leader. It sets us up for further cloud expansion activity down the line and demonstrates the feasibility of Guidewire Cloud to new insurers. Deal activity in the quarter was particularly strong in our Asia Pacific region where we had four cloud migration deals in Australia.
We are building on our established cloud position in North America with higher engagement and momentum internationally, and it's great to see this pay off in the quarter. Last month, we conducted three highly-successful Guidewire insurance forums, with one in London, one in Sydney, and one in Tokyo. These events serve as important customer touchpoints and an opportunity for the broader Guidewire ecosystem to come together and share ideas and feedback. They are a powerful vehicle we use to influence our existing pipeline, generate new opportunities and help ensure that existing customers are up to speed on all the product innovation we have planned. Each event brings together insurance professionals from leading customers and partners to discuss the future of the P&C industry.
In Sydney, over 135 insurance professionals heard Simone Labady, CEO of Aioi Nissay Dowa, New Zealand, discuss her goals for rapid growth on the cloud, how new Guidewire products and features including APD, data platform and Jutro are helping them launch new products quickly and increase customer convenience. In Tokyo, nearly 150 people heard Nakagawa-san, President and CEO of Saison Automobile & Fire Insurance, part of Sompo Group, which was the first insurance company in Japan to deploy Guidewire Cloud, discussed their strategic journey, progress to date and experience with Guidewire Cloud. In addition, Eric Marcoux, VP of IT at Beneva, shared how Guidewire helped the company accomplish an increase in sales and a decrease in time required to train new team members from three to six months to less than a month.
Since upgrading to Guidewire Cloud, Beneva has completed three updates, which is in stark contrast to the 12 to 18 month upgrade duration that they were used to when on-prem. Last month, we emphasized our commitment and aspirations for the Asia Pacific region with the hire of Shaji Sethu as our Asia Pacific Managing Director. Shaji has lived in Sydney, Australia for over 30 years and he brings an extensive track record of driving strategic IT programs and insurance outcomes in the region. This leadership addition will further strengthen the connection between Guidewire's global capabilities and the local needs of our customers. We made a similar leadership addition to the EMEA region two years ago when we named Will McAllister as Managing Director and have been very pleased with the progress we are making and he is leading in Europe.
In April, we were in London for Guidewire's Europe Insurance Forum. It was also an incredible event with over 250 attending across 70 insurers and 44 customers. Leading insurers such as AXA and Beazley attended and spoke to the importance of agility and the objectives that they have ahead with Guidewire. I'm especially pleased with the progress we're making -- with the London market, where we are bridging our global capabilities with its specialized content needs. We are seeing a high level of market engagement worldwide and combined with the increasing maturity of our platform, we continue to grow our pipeline both in size and quality of engagement. This momentum and general confidence help position us very well for this fiscal year and more importantly our longer-term outlook.
Turning to our ecosystem, another key element of our strategy is to expand the partner community surrounding Guidewire, which helps to accelerate customer adoption, deployments and time to market. We are seeing the SI community increasingly engage in Guidewire projects. There are over 38 SIs working with us today, and in the third quarter, the number of cloud certified partner professionals from these firms increased 27% year-over-year to 8,900. Similarly, our solution partner community continues to expand. Guidewire Marketplace now has over 210 solution partners. As our marketplace expands with each release and as adoption of these applications increases, we reduce customer costs and accelerate their time to value on our platform. But maybe the most notable and impressive example of our growing global momentum and ecosystem came in May when we held our inaugural Developer Summit in Bangalore, India.
Nearly 500 people attended this event, with participation from our leading partners such as EY and PwC. It was a great opportunity to introduce Mohammed Anzy, the new leader of our India operations to the community. Anzy joins us from SAP, where he led the largest R&D center outside of Germany. We're excited for him to join us and help drive our strategy, execution and growth in India. We also ran a hackathon, which attracted over 125 entries and made me extremely proud of the progress that we've made in our cloud platform. This event marks a commitment to India as a source of innovation through Guidewire employees, but also connects us more closely to a community of technology professionals who have dedicated their careers to improving the insurance industry by leveraging Guidewire Software.
Finally, let me turn to the continued progress we are making driving platform scale and efficiency. As you know, we've been focused on expanding platform efficiency and gross margin and it's great to see the team's progress reflected in third quarter subscription and support gross margins increasing 10 percentage points year-over-year. This puts us now ahead of plan and we are confident that we will continue to drive improvements here as we continue to execute new approaches to cloud operations and drive more automation and self-service tooling across our platform. This quarter is another validation of the investments we have made and further proof that these investments have produced and will continue to produce long-term profitable growth.
Our software is mission critical and a core system of record for our customers. We price our software as a percentage of an insurer's direct written premium and are, therefore, tied directly to the value our customers create underwriting and insuring against risk and the associated premiums they charge. This structure creates a durability to our software business at a time when companies across industries are working to gain efficiency and in many cases reduce workforces. This stability combined with our success in instantiating our market-leading cloud platform gives me confidence in our model and our ability to invest in further innovation to create new growth opportunities in the future. With that, I'll now turn the call over to Jeff.
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Jeff Cooper: Thanks, Mike. Q3 surpassed our expectations across the board. ARR finished at $828 million and benefited from durable cloud demand. As we have discussed in recent quarters, we continue to see improved bookings linearity and strength in the first three quarters sets us up well for the year. Total revenue was $241 million. We saw better-than-expected results in all areas of revenue. Subscription revenue grew 35%, and subscription and support revenue grew 28%, as we benefited from deal momentum. License revenue grew 11% as a result of continued DWP true-up activity and expansions upon renewal of term license arrangements. We price our software on basis points of our customers' direct written premiums and we have seen customers' DWP grow as insurers increase rates to accommodate rising claims costs due to inflation and the risk environment.
Services revenue was better than expectations and was up off of the low point last quarter as utilization rates improve. We are thrilled that our partners are investing to help us modernize this industry and we expect them to continue to lead the majority of the cloud programs. We are working hard with our partners to find the right equilibrium to ensure we are supporting their growth while also ensuring that cloud standards are adopted and that our professional services portfolio mix and volume are healthy. Turning to profitability for the third quarter, which we will discuss on a non-GAAP basis, gross profit was $151 million. Overall gross margin was 63% compared with 52% a year ago. Subscription and support gross margin was 65%, which compares favorably to 55% a year ago.
This continues to track ahead of our expectations due to increased cloud infrastructure efficiency. Services gross profit was $5 million, and services gross margin was 10%. We expect the cost basis to be relatively stable in the services organization and our ability to drive profit margin will be dependent on growing the top-line. Overall operating profit was $21 million in the third quarter. This was better than expected due to revenue outperformance and lower operating expenses. We continue to be thrilled with the operating profit and operating margin momentum. Stock-based compensation was $37 million, up 5% from Q3 of last year. We ended the quarter with $934 million in cash, cash equivalents and investments. Operating cash flow was $5 million for the quarter.
Turning to our outlook for the full fiscal year 2024, we are adjusting our ARR outlook to $856 million to $864 million. Strong activity in Q3 at a healthy pipeline reinforces our confidence in the full year targets and allows us to raise our outlook. We expect deal momentum in Q4 to manifest itself more in fully ramped ARR as customers and prospects are comfortable making significant long-term commitments to Guidewire Cloud. I expect fully ramped ARR to grow at or above 16% for the fiscal year 2024, which is a great result when you consider it is on top of 17% fully ramped ARR growth we delivered in fiscal '23. We are building a strong foundation for delivering on our longer-term growth targets. We will provide more detail on fully ramped ARR at year-end as this is a metric we disclose on an annual basis.
As a reminder, our ARR outlook assumes foreign currency exchange rates as of the end of our last fiscal year and we update ARR exchange rates at year-end. If we updated ARR today based on current exchange rates, then we would see a $7 million negative adjustment. We will certainly discuss this and quantify this at year-end. With respect to revenue, we are increasing our expectations for subscription revenue and subscription and support revenue. We are adjusting subscription revenue to approximately $474 million, and subscription and support revenue to approximately $546 million, representing a positive adjustment of $5 million in both instances. We expect license revenue of approximately $247 million, and services revenue of approximately $179 million.
As a result, our outlook for total revenue is $968 million to $976 million, a $10 million positive adjustment at the midpoint. Turning to margins and profitability, which we will discuss on a non-GAAP basis, subscription and support gross margins continue to exceed expectations and we now expect between 65% and 66% for the year. We still expect services gross margins to be between 5% and 8%. As a result, we now expect overall gross margins of approximately 63% for the full year. With respect to operating income, we expect between $94 million and $102 million in operating profit for the fiscal year. This represents an $11 million positive adjustment at the midpoint. We still expect stock-based compensation to be approximately $147 million, representing 3% growth year-over-year.
We are also increasing our cash flow from operation expectations to between $130 million and $150 million for the fiscal year. We are proud of our progress. As we look ahead to fiscal '25 targets we discussed at Analyst Day, we remain confident in our ability to achieve our $1 billion ARR goal. We are clearly tracking a bit ahead of our gross margin targets and this is creating an opportunity to accelerate some product investment while still achieving our operating margin targets. With that, operator, you can open the call for questions.
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