Good day, everyone. Welcome to the Guidewire Second Quarter 2013 Earnings Conference. Today's call is being recorded. At this time, I'd like to turn things over to Ms. Karen Blasing, Chief Financial Officer. Please go ahead, ma'am.

Good afternoon and welcome to Guidewire Software's earnings conference call for the second quarter of fiscal 2013 which ended on January 31. This is Karen Blasing, Chief Financial Officer of Guidewire. And with me on the call is Marcus Ryu, Guidewire's Chief Executive 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. To access the press release and the financial details, please see the Investor Relations section of our website at www.guidewire.com. As a reminder, today's call is being recorded and a replay will be available following the conclusion of the call. During today's 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 our Annual Report on Form 10-K for the period ended July 31, 2012 and our quarterly report on Form 10-Q for the period ended October 31, 2012, both of which are on file with the SEC. Also, during the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation scheduling GAAP versus non-GAAP results has been provided 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 insight 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 and our outlook for the rest of fiscal 2013.

Thanks, Karen. I'm pleased to report that our second quarter exceeded our expectations with revenue and profitability that were again above the high end of our guidance ranges. Demand for our next-generation core system software remains strong, and we continue to strengthen our leadership position as the industry we serve replaces the decade-old legacy systems which it largely runs today. Revenue in the second quarter was 72.2 million, an increase of 31% from a year ago and 7 million above the top end of our revenue guidance. In addition to strong execution during the quarter, approximately 4.5 million of this overachievement came from new and existing customers who paid earlier than their payment due dates in the third quarter. This included 1.7 million in anniversary payments from existing customer. On the expense side, we continued our program of investment in global sales and services expansion as well as enhancing our offerings with distinctive new capabilities. Hiring in the second quarter was roughly on track with nearly 70 new employees. Despite this, expenses were lower than anticipated and thus combined with a revenue upside, we report non-GAAP operating income of 15.5 million, which is well above the high end of our guidance. A key metric of our progress is the recurring term license and maintenance revenue that we have recognized on a rolling four-quarter basis. At the end of the second quarter, this metric was 127 million, a 32% increase from the end of the same period a year ago. Even though 4.5 million of our revenue upside in the second quarter was revenue brought forward from the third quarter, we are increasing our revenue guidance for the year based on two factors. First; momentum from the first half of the year and second, high visibility into revenue because of the…

Thank you, Marcus. We're pleased to report results that exceeded our revenue and earnings expectations for the second quarter of fiscal 2013. Total revenue was $72.2 million, a 31% increase from the second quarter of fiscal 2012. Within revenue, license revenue was $30.8 million, a 20% increase from the second quarter of fiscal 2012. It is important to understand that the composition of this license revenue reflects our intentional emphasis on recurring term licenses as opposed to perpetual licenses. Term license revenue increased 49% year-over-year to $29.5 million, while perpetual license revenue was approximately $1.3 million, down from $5.9 million in the second quarter of fiscal 2012. Maintenance revenue, which is recognized ratably through the year, was $9.2 million for the second quarter, up 35% from a year ago and reflecting overall license growth trends. Services revenue was $32.2 million, up 43% from a year ago, reflecting the increase in the quantity and scale of projects we are engaged in. Notably, there was no catch-up revenue coming from the balance sheet in the second quarter. Strong bookings in the first half of the year helped drive total revenue that was above the high end of our guidance. Adding to revenue upside in the quarter was approximately 4.5 million in payments from new and existing customers that were received and recognized ahead of their payment due dates in the third quarter. Because of the quarter-to-quarter revenue variability arising from factors such as this, we plan and evaluate our business on an annual basis. Our high annual revenue visibility is driven by the recurring nature of our multiyear term licenses and ongoing [Technical Difficulty] both of which are predominately built annually. Rolling fourth quarter term license and maintenance revenue for the period ending January 31 totaled 127 million and was up 32%…

Certainly. (Operator Instructions). We'll go first to Sterling Auty with JPMorgan.

Hi, guys. It's Saket here for Sterling. A quick question on the early customer payments this quarter. A similar situation happened last January as well. Can you comment on whether these were some of the same customers? And perhaps if you expect them to continue this payment schedule going forward?

Hi, Saket. It's interesting to know it was not the same customers. I believe that whatever happens in the insurance industry is that they -- once they have got a legitimate claim from a customer that they go ahead and advance those payments as quickly as possible. What it looks like happens is actually they did that for their suppliers as well, because we had a number of customers that did pay us just a few days early but happened to fall into the January quarter.

Got it. And then of the 29.5 in term license revenue, can you maybe comment on how much of that is now ratably recognized (inaudible) arrangements to what you have with Nationwide, for example?

So a relatively small percentage of that is still in quarterly payment terms. So, overall, when I look across the year, it's probably close to 20% of our payments on a quarterly basis as opposed to annual in advance.

Great. And then lastly, if I could sneak one last one in. You said about 140 net employees so far in the first half. What's sort of the goal as you look towards the end of 2013, where do you think that number should be?

I expect the headcount increases to ramp slightly in Q3 and Q4. We seemed to be quite successful over the last couple of quarters kind of hiring in net new 70. I would expect those numbers to go up, maybe 10, 15 to 20 employees in each of the next quarters.

Got it, very helpful. Great quarter, guys. Thanks.

We'll hear next from Brent Thill with UBS.

Thanks. Marcus, can you just bring us up to speed in terms of some of the conversations you're having with some of the tier 1 insurance providers given the success that you've been building on? If you could just tie that maybe, I think there was an echo of a very global tone of some of the customers you mentioned, maybe add on that? And I had a quick follow-up for Karen.

Yeah. Thanks, Brent. No major qualitative change to signal with respect to the tier 1. I can tell you that we are in more conversations that we've ever been before that the recent go-lives and of course wins and I would count not just Nationwide which we had a lot of discussion about in the last couple of quarters, but also the Hartford is actually equally significant because of their stature in the industry. That, I think, establish our bonafides into upper tier of the market in a very useful way, even though we've had some longstanding customer relationships with huge names like GEICO and Liberty Mutual. And it's not just that they made new selection decisions, it's also or equally important is their stories about going live and their experiences sometimes, a couple of years after they've been implemented. The Liberty Mutual, for example, was one of our first live customers but for a variety of reasons the sheer size and complexity of their operation, by the time they get to a full enterprise rollout across their many subsidiaries, the ClaimCenter has taken a long time and that in itself is a very significant milestone even though it's not a major new license win. So in short, we're having a lot of -- we're basically relevant, we believe, to all insurers in the world of any size in our industry and we're in more of those conversations than ever before with more stories to tell.

Okay. And just a quick follow-up for Karen on the, I believe, 3 million to 4 million in perpetual that you're looking for, for Q3. Is that license revenue that you have visibility from existing clients or is that new license? Can you just help us understand the components of that?

Yes, Brent. So we are expecting kind of before 3 million to 4 million in each of Q3 and Q4 of perpetual license. And the visibility that we have on it, it is all from existing customers and it's either increase licensing fees which those customers will owe us or other arrangements set up within their contracts. So we have a lot of visibility on those.

Great. Thank you.

Next, we'll hear from Tom Ernst with Deutsche Bank.

Hi, guys. Good afternoon. It's Stan Zlotsky sitting in for Tom. Just a very quick question to follow-up on what Saket was saying earlier. On the investments, are you thinking of accelerating your pace of investments to capture more growth possibly when you're starting to look at fiscal '14?

I think it's fair to say, Stan, that our pace of investments is pegged more by the rate at which we can recruit rationally and comfortably assimilate new professionals onto the team than it is by any kind of budget consideration at this stage. So, I think we have the throttle fully open pretty much for every function in the company but the main constraint is finding people to meet our standard and ensuring that they're on boarded successfully. As Karen mentioned, I think we can continue to get better at that. And so we expect to on board more per quarter than we did each previous quarter, but there's sort of a maximum speed at which that can happen.

So if the opportunities present themselves and there is appropriate content that's available, would you be willing to take down margins slightly in '14 in order to grab that talent?

At a high level, I'd say yes, definitely.

All right, perfect. Thank you.

Walter Pritchard with Citigroup has our next question.

Hi, guys. This is Tim Long for Walter. Marcus, a quick question on just deal cycles. I mean now that you guys have established yourselves in the upper tier, you guys have a full suite offering, have you seen deal cycles shorten at all?

I wouldn't say that was true with any kind of global sense of any kind of pattern that we could hang our head on. There have been some outlier cases where deals even significant ones have closed faster than we expected. But there are cases even we have an existing customer that's already a licensed ClaimCenter and is now evaluating PolicyCenter and you would think that all the factors point in the same direction and yet, we are put through our paces for a full 12-month evaluation cycle just because of the scale of the capital investment and the gravity of what's been contemplated. So, not yet a pattern. On top of that even though competitively I think we continue to widen the lead in all the respects that matter, we haven't had any competitors go away in the recent period and they're determined to continue fighting and they're using the tools that they have at their disposal to do so including price. It means that we still face a tough competitive situation on many opportunities and even when it's not competitive, we have a lot of things to prove before we can the selection and the contract.

Got you. And Karen, just – I took a look at, sales and marketing look flat q-over-q and given the big top line and even the strong billings, I would have thought this number would have been higher. Could you perhaps maybe remind us kind of how you guys pay your reps? And if there's anything specific we should look into in terms of the sales and marketing?

So I don't think there's anything particular to call out in that vein. All the commissions expense that is earned by the sales reps and the sales consultants is booked in the quarter and contracts are signed. So, when you look at any individual quarters, I think there is some -- just like we have seasonal variations in our revenue, sometimes there are seasonal variations when contracts actually gets completed and the commission expense is booked as well. That's probably the predominant piece of it.

Okay, great. That's it for me. Thanks guys.

We'll hear now from Brendan Barnicle with Pacific Crest Securities.

Thanks so much. Karen, in the 4.5 million that was accelerated payments, was that all license revenue or was there any other mix of revenue in there?

All license.

Perfect. And then can you remind us on implementation because you had several during the quarter. What does implementation do to revenue recognition?

Nothing any longer. It's simply a matter of a completion actually of the -- nearly completion for the services projects that's there, though there is always some of our service personnel who say around after that initial implementation to kind of do some additional tweaks for it. So, sometimes you'll see a switch in large service projects from those implementation ones. There's no effect on licenses and no effect on maintenance.

Perfect. And then just following up on Tim's question, was there anything that changed in the competitive landscape at all? I mean it didn't sound like there was any change in deal terms or deal cycles, but anything competitive whether you noticed one way or the other, Marcus.

No, nothing that I call out. It's the same primary competitor that we've faced for essentially the whole company's history which is [Accenture] and they remain a formidable competitor.

Great. Thanks, guys.

Our last question will come from Tom Roderick with Stifel Nicolaus.

Hi, guys. This is Chris Growe for Tom. Good job on the quarter. So just to clarify in terms of the bookings comment that you guys called out, I think for the first time really that explicitly in the press release, is it safe to say that the bookings environment accelerated in Q2 relative to Q1 or would you say it was relatively steady between the two quarters? Thanks.

No acceleration to call out. I think the reason for mentioning it explicitly in the release was to make it very clear that early -- some of the accelerated payments notwithstanding, we would still have been above the high end of our guidance range. And we just wanted to be very explicit about that and not have -- and not engender any confusion that we're just talking about an acceleration. We feel great about how the quarter went on its own merits with that timing issue aside.

Yeah, we definitely appreciate it. And thank you, Karen, for breaking out the quarters as well. So if I look at the kind of implied term guidance for the year, I think it's -- if you get 8 million for perpetual, it does seem like kind of a net organic 7 million increase for the year relative to what you did before and that kind of with, if you adjust Q2 not necessarily a huge amount of [beat]. So I guess is there something out there that you're seeing that's giving you that confidence? And that's why I guess maybe I was asking the bookings question, because it does seem like the tone of business definitely has picked up at some point within those two quarters. I'm just trying to figure out whether that was the case throughout the whole period or whether there was some activity late there?

Chris, just one thing I'd say is our view on guidance is always conditioned by our degree of confidence in the pipeline and the visibility we have on transactions that are coming. So, that's a major input into deciding how we guide for the coming period. It's just a coincidence that we happen to use the word bookings in the press release, but that primarily began to differentiate between -- bookings performance in the quarter versus this earlier acceleration of some of the payments.

Okay, great. And then last question for me. I think in the past you've mentioned the policy approach the customers have been doing. Do you still see that or has that maybe abated a little bit? Have you seen any of that pickup that you would expect from the initial successes?

No change in that pattern. What gates customers ability to implement is not confidence in the solution, it's often the complexity or the diversity of their different business units as well as just the amount of inherent risks, which is not necessarily technology risks. It's business transformation risks. They're willing to digest the case probably years into the future that as companies adopt PolicyCenter, they will do so one business unit at a time some more at least. Smaller companies, they have it all in one system, they'll probably go full enterprise. The big ones, I think it will continue to be the case. And again, not through any shortcoming in the technology to go piece by piece.

I know and I wasn't trying to imply there was any shortcoming in technology. I just wanted to understand if -- because that might sound like something that might have been unexpected earlier but it doesn't sound like there was much of a change there, so I appreciate it. Thanks, guys.

Okay.

At this time, I'd turn the conference back to you all for closing remarks.

No other remark beyond just thank everyone for participating in our call today. We look forward to speaking with you soon.

That will conclude today's conference. Thank you all for your participation.