Good day, and welcome to the Guidewire Second Quarter 2012 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Karen Blasing. Please go ahead.

Good afternoon, and welcome to Guidewire Software's earnings conference call for the second quarter of fiscal 2012, which ended on January 31. I'm Karen Blasing, Chief Financial Officer of Guidewire; and with me on the call is Marcus Ryu, Guidewire's Chief Executive Officer. A more complete disclosure of our results can be found in our press release issued about an hour ago, as well as in our related Form 8-K furnished to the SEC earlier today. To access the press release and the financial details, please see the Investor Relations section of our website. As a reminder, today's call is being recorded and a replay will be available following the conclusion of the call. During the call, we will make statements related to our business that may be considered forward-looking under federal securities laws. These statements reflect our views only as of today and should not be reflected upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. These risks are summarized in the press release that we issued today. For a further discussion of the material risks and other important factors that could affect our actual results, please refer to those contained in the final perspective for our IPO, which is on file with the Securities and Exchange Commission. Also, during the course of today's call, we will refer to certain non-GAAP financial measures. There is a reconciliation schedule showing GAAP versus non-GAAP results currently available in our press release issued after the close of market today. Finally, at times, in our prepared comments or responses to your questions, we may offer incremental metrics to provide greater insights into the dynamics of our business or our quarterly results. Please be advised that this additional detail may be one-time in nature and we may or may not provide an update in the future. With that, let me turn the call over to Marcus for his prepared remarks, and then I will provide details regarding our second quarter results and our outlook for the rest of fiscal 2012.

Thanks, Karen, and welcome to all of you joining us on our first earnings call as a public company. We are pleased with our second quarter financial results, which were better than we expected in both revenue and profitability. We believe our results reflect the strength of secular market demand as well as the leadership position derived from Guidewire's differentiated technology and our track record of customer success. For those of you new to the Guidewire story, we are an enterprise software company focused exclusively on primary insurance companies in the Property/Casualty, or P&C insurance industry. P&C insurance is ubiquitous and mostly mandatory, providing for a resilient global industry with $1.2 trillion in annual revenues globally. The landscape is highly competitive with most insurers operating on thin profit margins that motivate them to find new ways to improve productivity and efficiency. Guidewire offers a next-generation software suite that fully replaces the legacy green-screen systems, on which the P&C industry runs its most important functions today: underwriting and policy management, billing and claims. These legacy systems tend to be over 30 years old, are written in obsolete languages like COBOL and today lock insurance companies into old ways of doing business. Our thesis is that the global insurance industry will need to redirect an increasing portion of the $14.5 billion it spends each year on its legacy core system environments to a new generation of technology. We believe this transition is inevitable, and that Guidewire is emerging today as the technology leader enabling it. P&C insurers using our core system software are now able to pursue new growth opportunities, reduce their costs and improve customer service in ways that are simply not possible with hard-coded legacy systems and business logic from the 1980s. The transition is in its early days, and…

Thanks, Marcus. As previously highlighted, our second quarter revenue and profitability were ahead of our expectations for the quarter. It is important for investors to understand our business model in order to put our results in proper perspective as well as for thinking about our future performance. Starting with our revenue model, we generate license and maintenance revenue from annual billings on multi-year contracts. Our term license revenue for annual payments is generally recognized on the invoice due date. Though in rare situations, it can also occur on cash payment if that this to occur before an invoice is due. We also generate services revenue that relates to customer implementations of our products. It is important to appreciate that while Guidewire has excellent long-term revenue visibility from our existing customers as a result of our multi-year contracts and best-in-class renewal rates, there can be a level of variability on a quarter-to-quarter basis based on the size of our transactions combined with the timing of revenue recognition. With that as background, let me review our second quarter results. Total revenue was $55.1 million, a 30% increase from the second quarter of fiscal 2011. As Marcus mentioned, our strong top line Q2 results benefited from shortened sales cycles on certain transactions and early payment of a term license invoice that was actually due in the third quarter and strong overall business momentum. Within revenue, license revenue was $25.7 million, up 29% from a year ago. $19.8 million, or 77% of our second quarter license revenue, was from renewable, term-based contracts, while the remaining $5.9 million, or 23%, was from perpetual license contracts. Maintenance revenue was $6.8 million for the second quarter, up 31%; and services revenue was $22.6 million, up 32% from a year ago. Due to the potential for quarter-to-quarter variability,…

[Operator Instructions] And we'll take our first question from Sterling Auty with JPMorgan.

I got a couple of questions, and then I'll get back in the queue. The first one is housekeeping. You mentioned the term payment that came a little bit earlier than you would have expected. It was characterized as a couple of million. Can you give us the exact amount? Or are you just going to leave it as the high-level couple of million?

It was a couple of million, and it was a couple of weeks early.

Okay. And then, Marcus, during your prepared remarks, it sounded like you went through a couple of new customer wins. I think you might just be updating this whole customer account once a year. But can you just give us a flavor? Did you have -- was it more than just the ones that you mentioned that were new customer wins in the quarter?

Yes. We were just highlighting a couple that exemplify the trend that we're very encouraged by, which is adoption both of the PolicyCenter product and of our full InsuranceSuite. But that was just a sampling from multiple other transactions that happened in the quarter.

Okay. And last question, I'll jump back in the queue. We've talked about in the past the idea of possibly seeing a hardening in the P&C market. You mentioned the shorter sales cycle that you started to see. You're not quite ready to call it a trend. But are those 2 correlated? Are you starting to see improvement in your customers' end markets, and that's why you're starting to see some shorter decision-making? Or is there something else that might be driving the shorter sales cycles?

Well, it's premature to speculate on the trend. But there's no question that times are beginning to look up cautiously for the global P&C industry, especially here in North America. It's actually been a very rough few years leading up to this point. And most of the industry that we talk to is -- are cautiously optimistic in seeing premium growth, whereas things have been pretty flat for the last couple of years. The way we see it, that can only be a positive. However, whether that was a relevant factor or our continuing emerging leadership in the market was a factor or just good luck in the specific transactions in question, it's kind of hard to separate those threads, but we like the fact that the industry is feeling optimistic about the future.

And we'll take our next question from Tom Ernst with Deutsche Bank.

Just a couple of questions here as well, I'll let others ask. The suite wins are particularly encouraging. So you're still executing on your first couple of dozen suite-type customers. How are the deployments going for those customers you've already won? Are you discovering that on policy, in particular, one of the more complex products, are your customers successful there, or are you finding any that are having any problems, anything to call out in terms of the go-lives?

Absolutely nothing to call out in terms of a difference in our trends of making every single customer successful, every project successful. We do have quite a few policy customers already either in implementation or in live production, including some very -- some fairly substantial ones in total volume that are definitely in the upper deciles of the total industry. So we feel just as confident as ever. The 1 point that we took pains to underscore in the prepared remarks is that with this faster adoption of PolicyCenter, which is exactly what we want to see, there is greater demand for our services involvement because, as you noted, Tom, these are very substantial projects that are about -- those that have touched the most important system that exists in an insurance company. So there's a lot more effort involved, and that's exactly what we expect.

Any changes in behavior out of either your customers or competitors because of your public offering? Good or bad, what did you observe?

Well, it's definitely been very well received by our customers who -- again, because these are mission-critical systems, they like anything that speaks to -- that substantiates our longevity as a partner. They're seeing these as multi-year, multi-decade kinds of relationships and so our longevity and a strong balance sheet and the transparency that comes with being public are all very positive. Again, too early to say, we've only been public a number of weeks here whether it's going to have a hugely positive impact on our sales efforts, but it's definitely a positive. Competitively speaking, the industry has taken note there has been a number of articles in various industry publications that some of which expressed some surprise of just how much larger we were than most of the vendors that have served this industry traditionally and in the present. So I think that's also conducive to our ongoing success.

Okay. Final question for me. We saw an uptick in the growth rate of your normalized recurring revenue. So if I normalize for the small amount of catch-up revenue that -- in comparing period in this period, it showed a several point uptick. But I guess most or all of that will be the early recognition from a term contract you would've expected next quarter. The question for you is, the high 30s, kind of, 40% growth rate we've seen here in the recent few quarters in term business, do you feel like you're whole pipeline and business lead opportunity to developing that rate?

Well, I don't think we're ready to assign a percentage to the growth in the pipeline. Though it's certainly the strongest it's ever been. And the pipeline, like our sales results this quarter, were -- are also exactly what we want to see in terms of being representative across the whole industry that we want to serve. And by representative, I mean by size of customer from the smaller-end of $100 million to $300 million in premium to some really large names at the upper-end Tier 1 level across lines of business and of course by product and geography. So our pipeline has been growing pretty uniformly in all of those areas, which is exactly what we want to see. And quantitatively, it supports the growth aspirations that we've had that are embedded in our guidance going forward.

I guess, a better way to word that qualitatively, is your pipeline development natural ex that one kind of early term recognition that you got this quarter from next quarter?

Oh, certainly.

And we'll take our next question from Walter Pritchard with Citi.

Karen, I'm wondering if you could talk about the license services mix that you're expecting for the second half. It does sound like you're ramping up investment in that area, and I'm just wondering how we should expect that to trend going forward.

Yes. We do expect actually that the service mix is going to be a slightly higher percentage of the total revenue in Q3 and Q4 than maybe we're anticipating earlier. It's one of the reasons that we overachieved in our second quarter results is our service revenue came in very strong as our team was completely at capacity and fully utilized for that. So it's given us confidence actually to increase the number of consultants to service that demand.

Got it. And then understanding your comments on deferred revenue and not being an indicator, but looking at what we expected especially on the long-term side, which I think would be sort of more stable, that number came in $3 million or $4 million lower than we're expecting. I'm just wondering, was that -- did that have something to do with early recognition, or was that driven by license or services?

It's really -- it did not have anything to do with the early recognition. And quite frankly that would have been actually considered in short-term deferred revenue from the moment it was invoiced until it was actually paid. And we invoiced it in the second quarter. It was due in the third quarter, but the customer went ahead and paid it in the second quarter anyway. They -- our customers pay on time. And in this one case, they actually paid a little bit earlier. So on the deferred revenue, on the long-term basis, one of the reasons that have we've been cautious about spending a lot of time on our deferred revenue as it's not really a good indicator of how much revenue is expected in the future period simply because a lot more reflects on when the billing cycle is of our annual license fees charged to those customers. So if we invoice in one quarter, it sits in deferred revenue for that time period until it's recognized when the invoice is due.

So I guess another way of asking that, if long-term deferred would have been sort of $18 million, $19 million as we expected instead of $14 million, $15 million, where would that have ended out -- or where would that have come out, would that have been license or service?

In this case, it would have been a small component of both, probably license and service.

Okay, got it. And then just last housekeeping question. I think you guys are in the process of moving headquarters. Your CapEx, I think, we thought, would be impacted by that. It looks like it's a little bit lower. Did you defer the move or was there something -- some moving part there related to CapEx being a little lower than we were expecting?

We haven't started to spend the capital yet on the move. So we are relocating our headquarters at the end of July of this current year. We aren't [ph] expecting to incur move expenses as well as paying a little bit of double rent on our current facility as well as the new facility over the next -- in Q3 and Q4. The capital expenditure will really start to happen here in the next couple of months as we do a modest amount of tenant improvements in that new facility.

[Operator Instructions] We'll go next to Brendan Barnicle with Pacific Crest Securities.

A couple of things. Marcus, you noted the strength that you saw in PolicyCenter in the quarter. Anything in particular that's accounting for that acceleration right now? And is that an acceleration we should look towards as we model the remainder of the year?

There are multiple factors, I mean, and here I'm venturing a little bit into speculation because -- or into generalization, I should say, because the circumstances of each individual company can vary. But there are number of factors that have been supportive of additional PolicyCenter demand in our view: Number one is the increasing maturation of our product and how it plays in the sales cycle. Number two is the testimony of customers that are now live or much deeper into their implementation over time, so that is exactly the pattern that we saw with ClaimCenter and it's being replicated again here in policy. And then third, there's the secular factors that have made investments by insurance companies in their policy system just a strategic imperative. And that's -- part of that is competitive and part of that is just optimism about being able to -- about what now technology enables in terms of offering insurance in the superior fashion than it's been -- than the status quo has been for the last few decades.

Great. That's helpful. And, Marcus, any change in pricing that you noticed at all in any of the products during the quarter?

That's interesting. We do measure pricing, but -- it's a metric that we're very circumspect about -- not only about sharing but about drawing any conclusions about internally, and that's because there's a wide variation in the size of our customers and target customers and therefore in our transactions. And so pricing can bounce around a bit just depending on the scale of the transactions that we happen to get done in a given quarter. On the whole though, I will say that we fully expect that -- we aspire to have the same experience of every successful enterprise software company, which is having more of a say in how their products get priced in the market. It's quite different today than when we started 10 years ago.

Great. And then given the amount of data that you guys now are amassing in your systems, what's the prospect for you to use something like big data to leverage that a little more fully?

Definitely an area we're thinking about. We're not in a position to get specific and -- today. But it's certainly an area that we are intensely interested in.

And then lastly, Karen, any additional ways to think about interest income for the remaining quarters. I mean, this quarter is the first quarter you benefited from the IPO proceeds. Is that about the rate that we should model going forward? And also any additional color on how to think about cash taxes for the remainder of the year?

So interest income, we are in very safe investments, and those safe investments are not paying very good interest income today. So even though we have $170 million in cash in the bank, it's -- quite honestly, almost peanuts as to what we're earning as interest income. So I think you could expect a little more than we had in our second quarter because the IPO proceeds didn't come in until the end of January. But don't get carried away on it. The second question you had?

It was related to tax. Cash taxes, you might say?

Yes, cash taxes, exactly. Cash taxes, so we are a cash taxpayer in foreign jurisdictions as well as in some states. So I think the kind of cash tax rates kind of on an expected income right now, it's probably less than 20% on the amount of cash that we'll actually spend.

And we'll take our next question from Tom Roderick with Stifel, Nicolaus.

So maybe I can start with a question on just on the R&D side. I guess, it's sort of a rare software company that we see growing your pace that's spending more in R&D than sales and marketing. So it seems like that's an area that you're customers are probably pretty pleased to see you spending on. Can you give us a little bit of help in terms of how we think about that R&D line evolving over the next few quarters and into the next few years where you get leverage on it. And then in the near term, from a product perspective, now that you've got the full suite out and have for almost a year now, what other releases should we look for -- functionality enhancements should we look for in the product as we get into the summer months and in the fall?

Sure, Tom. So first, on the question of R&D. We are a product-based company in the -- and our core assets that we bring to the market is a superior software offering to anything else out there. We've -- we are continuing to invest, but that investment was really initiated -- or that heightened level of investment was really initiated some quarters ago. And we're still in the midst of it but kind of approaching the tail-end of that acceleration in R&D investment and the impact of that, of course, is now being kind of fully realized as we have all of those people on board. And that was really motivated by the imperative that we have for product leadership and to win in this land grab, particularly in the policy domain. The -- I want to underscore that we also have investment in the sales and distribution. And, if anything, we are sort of gradually turning the dial more in terms of accelerated investments on the sales side from R&D, not -- these aren't to [ph] extremes, but that's the -- directionally, that's what we're doing. And I think that reflects the confidence in the maturity and the competitive position that we're in now with our products in our overall value proposition. The other question you asked was about investment in further product. We will always be investing further in the current products that we offer because that's the expectation that the market has of us, and it's just essential to stay abreast of current advances in technology and so forth as well as to continue to deepen our value proposition and the value that our products create. But we are definitely exploring other license-generating product areas. We are in the last -- really in the last year or so, we've begun to sell sort of add-on modules to the 3 big core applications. Those includes the areas like reinsurance and customer data management, which do carry some additional license above and beyond just a base PolicyCenter, ClaimCenter and BillingCenter products. And there are more of those certainly possible out there in the full solution space. But we're also considering other vectors of product growth that are adjacent to what we have today.

That's helpful. And, Karen, maybe just to be more specific, should we ought to think about this R&D spend kind of staying in the 20%-plus range as a percentage of revenue for the next few quarters? Or should that go up or pull in a little bit? Just any guidance on that specific figure.

Yes. So I think you will see it go up a little bit in Q3 and Q4. We're not really giving much fresh guidance into 2013 yet. And that is because we hired quite a number of additional engineers in our second quarter. We'll see the full cost of those engineers in Q3 and Q4. So you'll see the absolute dollar amounts go up a little bit in research and development.

Okay, okay. And, Karen, maybe one last quick follow-up for you. Can you actually repeat the term license trailing 12-months figure? And do you have the recent, kind of, 3- or 4-quarter trend line on that figure?

I do. Hang on, a quick moment. Sorry, you're hearing me flipping papers. I apologize for the extra noise here.

And maybe while you're looking for that, Karen, I could slip in one last one to Marcus here. Just in terms of the suite sale markets and thinking about the pipeline on the suite sale, I'm curious for what the generation of that pipeline is looking like. You had a big attendance and big attendance increase at your user conferences this year. How well was the message getting out as far as the full suite sale? Was it being driven by policy? I'm just kind of curious for how well these policy decisions are coming to the forefront in the marketplace.

I would say that the PolicyCenter demand has heated ClaimCenter demand at least in the recent period -- over the last 6 months or so, and that interest has never been higher. In fact, it's been -- it was faster than we've expected it to be a bit. As for the entire suite, there's been significant demand for thinking more strategically about the products or about the whole core system replacement problem as one that's best delivered through a complete suite or with a full platform that enables all of the core transactional functions. And we've in fact seen some of our competitors start to mimic our fundamental market positioning about the best solution design being an integrated suite of applications that can be implemented individually. And it's been partially gratifying, partially annoying to see our competitors essentially repackage their offerings in that same model.

So, Tom, I have those numbers now. So starting in January 31, 2011, the 4-quarter recurring revenue was $72.8 million; on April 30, 2011, $75 million; July of 2011, $81.9 million; October 31, 2011, $88 million; and in the most recent quarter ended January 31, 2012, was $96.3 million.

And we'll take a follow-up question from Sterling Auty with JPMorgan.

A couple of quick follow-ups. Karen, what was the total headcount at the end of the quarter?

700 and -- roughly 730 employees.

Okay. Is there a target for the end of the year? I can't remember if you quoted one or not.

We haven't quoted one. No, we haven't gone that far. We -- roughly, we've been adding about 50 people a quarter.

Okay. And, Marcus, I think both you and Karen commented that [indiscernible] just because you're hiring services, it’s not that you're not trying to, again, make your partner successful and have them become a bigger part. Along those lines, can you give us an update in terms of where the Capgemini and others are in their uptake in terms of training of consultants and where they are in the whole process of moving more the business to them?

Yes, we're seeing the same level of intense interest by the ecosystem to get enabled on Guidewire's technology and those across all 4 of the major systems integrators to our partners as well as the few other opportunistic ones. There's -- one of the ways we measure that are the number of consultants that -- consultants outside of Guidewire that are certified on our technology as well as involved in surrounding practices. And that number has been steadily increasing pretty much every month. So the increased involvement of our services folks on projects is additive to the demand that we see for those business integrator resources at the same time. And there's no -- there isn't any change of strategy whatsoever in the desire to have a very healthy ecosystem that really is highly incented to see us succeed and have a large install base.

And that concludes our question-and-answer session. I'd like to turn the conference back to Marcus Ryu for any closing remarks.

We're very excited about the opportunity ahead of us. We believe we are emerging as a leader in our market, and we believe we're in the right place at the right time to address a major underserved technology need and to build a very successful company in the process over the long term. We are approaching this opportunity with the same values that have brought us thus far. Thank you, all, for joining us in our first conference call as a public company.

Thank you, everyone. That does conclude today's conference. We thank you for your participation.