Greetings, and welcome to today's conference call. Welcome to Guidewire's Fourth Quarter Fiscal Year 2020 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] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jeff Cooper, CFO. Thank you. You may begin.

Good afternoon, and welcome to Guidewire Software’s earnings conference call for the fourth quarter of fiscal year 2020, which ended on July 31st. My name is Jeff Cooper. I am the Chief Financial Officer, and with me on the call is Mike Rosenbaum, 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, 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 statements regarding our financial results, products, customer demand, operations, 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 and documents we file with the SEC, including our most recent quarterly report on Form 10-Q and our annual report on Form 10-K 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 will also 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. Additionally, reconciliations and additional data are also posted in the supplement on our IR website. With that, let me turn the call over to Mike.

Thanks, Jeff, and thanks everyone for jointing us today. It has now been a little over a year since I joined Guidewire and this call marks the assessment of my first fiscal year as the leader of this incredible company. People say a leader should expect the unexpected and I can say without a doubt we exercised that principle pretty thoroughly this year. When I joined we talked a lot about the cloud transformation we are embarked on and now a year later, when I assess the progress we have made, I can say I have absolutely no doubt that we are on the right path. We continue to build proof points and momentum across product, services and our ecosystem, and most importantly, with our customers. Each of those proof points builds confidence, credibility and trust, and helps us continue to build cloud momentum. Regarding COVID and our operating model, things are a little changed since last quarter. We have opened a few of our international offices in accordance with local guidelines, but the vast majority of our employees are still working from home and not traveling. The company continues to operate effectively as you will see in our product and sales momentum in Q4. One of the positives I have personally experienced is that social norms now allow me to connect with customers virtually, a lot more than I might have before using airplanes and hotels. This has given me an opportunity to do almost 50 checkpoints with insurance technologies executives across our customer base and around the world. These conversations even more than the objective measures of our progress in Q4, have validated to me that we are on the right path. As we execute on our product vision for Guidewire as a cloud service, I believe it's…

Thanks, Mike. As Mike noted, we had a very strong Q4 highlighted by 10 new InsuranceSuite Cloud we cloud deals. ARR ended the fiscal year at $514 million, up 12% from a year ago. We measure ARR on a constant currency basis during the fiscal year and revalue ARR at year end for current FX rates. Rate changes between July 2019 and July 2020 resulted in a $5 million benefit to ARR. As a result ARR grew 11% on a constant currency basis. A little more than half of new ARR added in the fiscal year came from new deals sold to new and existing customers and a little less than half came from ARR step ups from ramp deals sold in prior years. Fully ramped ARR which is defined as the annualized recurring value of all active term licenses, subscription and maintenance agreements at the fully ramped annual price outlined in the customer contract ended the year at over $600 million representing 13% year-over-year growth and 12% growth on a constant currency basis. We will continue to discuss fully ramped ARR on an annual basis as we work through this cloud transition. Turning to the income statement, I wanted to remind you all that we have adjusted our income statement presentation and we will address this new presentation on the call today. Between our press release and the financial supplement, which can be found on our IR website, you should have all the details to reconcile to our prior presentation. Total revenue in fiscal 2020 was $742.3 million, ahead of the expectations we discussed last quarter. Subscription revenue for the year was $119.7 million, up 84% year-over-year due to ongoing InsuranceSuite Cloud activity. Subscription new sales ended the year at just under 70% of total new sales. Subscription and…

[Operator Instructions] The first question comes from the line of Ken Wong with Guggenheim Securities. You may proceed with your question.

Thank you for taking my question, and great quarter guys. Let me first talk to you, Mike. We would love to get a sense of what you're hearing from customers in regard to Aspen. Obviously, a very strong quarter from a cloud deal perspective, but just wondering how they're thinking about adopting Aspen with all the new features, potentially dragging out sales cycles or has that shortened the sales cycles?

Yes, thanks for the question. I wouldn't say at all that it's dragging on sale cycles. I think the biggest thing customers are excited about with respect to Aspen is just this philosophy of making the upgrades easier and easier and easier for them to take and the proof points that I talked about, which are early. You know, we've had a couple customers begin the process but those proof points are positive. And I think, you know, what I'm hearing from people is just real, real excitement about the shift in the strategy, the product strategy that we've taken from a two-year cycle to a six-month cycle, and a shift in the design approach to the idea that we expect these to be just easier, and easier and easier to adopt. You add on top of that sort of the idea that you can take these cloud native services and you can use them to add to the approach, that they're taking to building out new lines of business on a Guidewire core platform, and it just offers them more flexible in terms of how they use the system to attack business problems. And so I wouldn't say it slows it down at all. It's been really, really positive, the feedback that I've gotten from customers in terms of our strategic project direction.

Got it, fantastic. And then this could be either for you or Jeff, but as you look at ARR growth, you guys in the past have obviously thrown out a number of 20% longer term. Just wondering as we look at this trajectory, is it fair to assume that fiscal 2021 is the trough and any color you can provide there?

Yes, I think I'll let Jeff chime in, and I think, we know, we intend to provide a little bit more longer term visibility on the Analyst Day presentation that we will provide. Certainly we see the potential for that when you look at the installed base and the potential that we see, but the guidance we provided this year is just based on what we see in the pipeline and what we feel very confident in our ability to go execute on this year. Jeff, anything to add?

Yes, and I think that's, you hit it Mike. The only thing that we've talked about in the past Ken is just the pace of this migration activity is a big driver of growth and you know we're trying to be thoughtful about how we approach that, and you know this industry moves at its own pace. So as Mike said, we have, I would say better visibility to our guide for this year than we did in prior years. And, you know, we want to be conservative as we think though the next year.

Right. Thanks Jeff, thanks, Mike.

Our next question comes from line of Chris Merwin from Goldman Sachs. You may proceed with your questions.

Thanks so much for taking my question. I wanted to ask you about ARR. I think in fiscal 2019 ARR grew at 11% and your full year ramp is over 20%. In this year if I've got the numbers right ARR was 12% and full year ramp was 13%. So it looks like the gap between those two metrics has come in quite a bit. I just was curious like what in particular is driving that, is there anything changing with the way that you're pricing these deals, and anything you could say about what fully ramps ARR might look like next year relative to your guidance? Thanks.

Yes, it is a good question. I think there are a couple of things driving it, one is as we exited FY2019, the year-over-year growth in what we would call an ARR backlog number was -- actually is like over 300%, because that was a relatively -- we had always sold ramps, but the way we engage with customers in a cloud context, and especially in a migration context, really accelerated the slope of these ramps. And so that drove the very significant year-over-year growth. They are now coming out of fiscal 2021 or fiscal 2019, we had a fairly significant amount of customers that we signed in Q4 that were larger customers with steeper ramps, and so that created a more difficult compare year-over-year. We said in expectation last quarter that we expect the fully ramped ARR to come in, roughly in line with ARR growth this year. But we're pleased with some of the cloud activity to see that come in at just a little bit higher than ARR growth.

Got it. Thank you, and then maybe just a follow up on-premise demand. In the last quarter, I think there was a headwind there from a slowdown in on-premise demand, not just, I guess it wasn't in isolation in the sense that it seemed like more customers were thinking about a cloud migration. This quarter sounded like you saw a pickup in activity and on-prem. I think you called out a few deals there, so maybe Mike can you just talk a bit about the state of demand for on-premise? And I mean, in particular for customers that either are considering either going on-premise or cloud, I mean, what is their mindset today and what have you factored into the outlook for next year as it relates to the health of the on-prem and cloud business? Thanks.

Well, so first thing I'd say is that we are in a particularly good position technically, to be able to support both customer choices right. The fact that we're starting from a core application, that's really market leading in its feature and functionally complete as anything in the market, puts us in a great position to be able to provide customers the sort of operating model of choice. As we discussed previously, I think North America is ahead of the curve relative to Europe and Asia, and how they're thinking about cloud deployments and cloud implementations. I expect in the long run that everybody will make this switch to the cloud just because the characteristics or the upgrades and the functionality that we can provide in a cloud modality are just significantly better. But that said, different customers have different approaches and different mindsets about when that's going to make sense. Like I said, I've had a lot of conversations with customers and some of them start off by saying, we've already made the decision strategically to start moving assets to the cloud, and we are already underway, others are just saying, we're going to wait maybe until the next cycle, maybe even five years, that they're just not ready and that's sort of customer, by customer, by customer. And so projecting that and making an estimate for how much demand we'll see quarter-to-quarter, we work with them, and we try to predict it, but my sense is that as we're able to show more and more functional value, and more and more agility, that customers that make the decision to go with our cloud approach, we're going to see that shift. But like I said, we're in a great position to be able to offer both, and that's why it is exciting to be able to call those out, call out those wins, because for those customers who are trying to drive a digital transformation, but they haven't made the decision to go with a cloud strategy in their IT shop. It's great to be able to support and serve those customers as well.

That's great. Thanks so much.

Our next question comes from the line of Bhavan Suri with William Blair. You may proceed with your question.

Hey, guys, congrats and thanks for taking my question. I guess I wanted to touch a little bit on competitive environment. You've obviously seen one of your competitors go public, and that's one I would love to hear, if you are seeing more or less of? The other one, Mike you obviously Salesforce got Velocity. And they've got an insurance offering, and they sort of if you read the marketing materials talk like the advertising engine and policy engine everything else, but I look to understand sort of as you think about the space and the insure tech space getting quite a bit of investments, how you view the competitive environment, have there been any changes?

Yes, and so I think the headline answer to your question is, we haven't seen any changes in the competitive dynamic. We obviously have seen a lot of activity in our market, and a lot of success in our market. You know, that I think is not unexpected. We're not the only company in the world to recognize the very significant opportunity that I call it the digital transformation or the digitization of insurance presents to the world. We like our position very much, coming at this from a position is strength with, hundreds and hundreds of customers across all tiers. I really feel good about our competitive position. And we haven't seen it seen a change in the dynamic of the competition. But like I've said on previous calls, we compete for these deals. We have our strengths and we lead with our strengths and we aspire to win every deal, but we don't win every deal. It's a competitive market. I really do appreciate the sort of, the part of your question related to insuretech investment. It's one of the reasons I'm so excited about our marketplace and our approach to having an open API and sort of the philosophy that we can plug these innovatives, startup technologies into our core systems. I can't tell you the number of times I hear customers sort of saying, we're so thankful that we executed on the Guidewire core program a few years ago, because now we're in a position to with a modern system, with the ability to open the system up and connect in these insurtechs and really start to innovate in terms of how they're able to engage with their customers and so, that part of it is really, really exciting. Insurance is -- it's a unique, it's…

Yes, that was very helpful. Thank you and then one quick one for Jeff. Obviously, historically, Q4 has been sort of seasonally your strongest quarter. And I know, you just commented about how difficult deals are in terms of how hard it is sort of to predict sort of the deal timing. But as we think about next year, should we expect the same seasonality on a quarterly basis? Or is there some sense of the demand partially pent up and also interested on Aspen sort of help support growth earlier throughout the year that maybe weren't expected, any deals maybe pushed out due to the current environment, might close early in fiscal 21, anything like that that would change seasonality in the coming year? Thank you.

Yes, I don't think anything significant changing seasonality in the coming year, and we did have a very strong Q4. Steve handed the reins over to Frank as a new sales leader now. I mean he did a good job of running the table on the deals that he had in his pipeline. So, that was embedded in our guide for Q1 a bit that we're not expecting a lot of new sales activity in Q1 and the pipeline will build. We are thinking about ways to increase the linearity and we have a couple initiatives in place that we think we can do that better. And then as we get into more of the six-month release cadence and the cloud demand becomes more pervasive rather than where we are today is still with the early adopters. I think we can we can lessen some of this backend weightiness, but I don't expect to see that in this fiscal year.

Great, thank you, and really nice job in the quarter. Thanks again, guys.

Hey, thanks.

Our next question comes from the line of Sterling Auty with JP Morgan. You may proceed with your question.

Great, thanks for taking our questions. This is Jackson Ader on for Sterling tonight. Our question actually is a clarification just on the mechanics. I mean, when we think about closing 10 InsuranceSuite deals and three InsuranceNow deals in the fourth quarter, when should we actually expect that to hit ARR and is that different from when we would expect those deals to actually hit subscription revenue?

Yes, it's a good question. So as soon as the deals are executed they will hit ARR. Now a lot of the migration activity we've noted in the past can tend to have a relatively muted year one ARR impact as that customer is already paying a full term license fee. And then we expect to see the incremental ARR ramp over a five-year period. So that is one of the dynamics that exists for a migration agreement. The other thing, revenue occurs on the subscription side once we've delivered the software, and we can usually do that within 30 days in most instances, so the revenue wouldn't hit until Q1. On a migration deal, because the customer continues to need to use their on-premise software through a migration period, we do have to allocate some of that revenue for that cloud deal towards the term license component of the deal. And as a result, migration revenues can actually contribute to term license, migration deals can actually contribute to term license revenue in the quarter and we did see that a bit in Q4.

Okay, that's helpful and interesting. Our follow-up question on the Direct Written Premiums the 518 for the core, but do you have any sense for maybe what kind of DWP you have under the hood for non-core products that maybe aren't linked to the core platform?

It's a good question. The DWP that we report is always tied to the core. And we think about, our core systems will manage that DWP. And then the ancillary products are typically tied to a core. Obviously things like science can be purchased independently, but that's not a metric that we've broken out in the past.

Okay, all right. Thank you.

Thank you.

Our next question comes from the line of Mayank Tandon with Needham and Co. You may proceed with your question.

Thank you. Good evening. I just wanted to piggyback off of Bhavan’s question on the competitive landscape? Could you share maybe some qualitative data around win rates across the various tiers of the market? And then sort of tied to that would be any noticeable shift within the tiers that you're competing in today?

Yes, let me comment on it. I think we will provide a little bit more detail at Analyst Day, but like, I just want to repeat what I said is like, we have not seen a change in the competitive dynamic in the market that's based on tier, based on, field type, whatever, it just basically looks pretty stable to us, relative to what we've seen over the past couple years. I would say, the turnaround in the InsuranceNow business has been a real, real positive for us. It was one of the things that when I joined the company a year ago, when markets and I were talking about what's important to really focus on and help ensure that we're getting traction, sort of month after, month after, month. That was one of the major, major objectives, so that we are really able to compete in all the tiers. And so, seeing the turnaround in that part of the business is a real positive for me, and like I said, in sort of the prepared remarks, I think that the momentum that we've established there should do well to help carry us forward into next fiscal year and beyond. I'm really excited about this company being able to put the best foot forward in terms of core systems for every tier in this market. So hopefully that makes sense.

Yes, that's helpful. And then Mike, you mentioned the international expansion. I just wanted to get a sense given how localized the insurance industry is and how regulated it is by region. Are you thinking more on the lines of M&A as an expansion driver or do you think you can go about it organically and still be competitive with some of your peers out there that are maybe more European centric?

I don't want to comment on acquisitions, but I will say this. Our philosophy is, we have a common core platform that provides all the mechanisms that are necessary worldwide and then we have a very significant investment in providing the specific integrations and the specific functionality on top of that core platform for each region where we want to compete. I believe very, very strongly that when you think about a long-term cloud platform, that's going to exist for let's hope, 100 years. That is exactly the type of architecture that you want to bring to bear in solving a problem like this. So when you sort of piece together, different technologies that are suited to a particular market, you don't end up with the economies of scale and you don't end up with being able to deliver as much value to each and every customer, regardless of where they're located. With the Guidewire model, we're able to make an enhancement to the cloud data platform, that works in Japan, and it works in Germany, and it works in Luxembourg, and it works in every single state in the United States when we make an enhancement to our API, that that becomes true. That's the philosophy of this company. I think that's why this company has been so successful for 18 years. Now we're bringing that to the cloud and I think it's going to, I think it's really going to help us win in the long run. Now, it's, you got to have a very determined, steady approach to taking that sort of strategy. But I think it served us really, really well to this point, and I am excited about our ability to sort of continue that investment internationally and continue to make progress internationally, because I think that's what's, allows us to serve this industry most effectively.

That's very helpful. Thank you so much.

Our next question comes from the line of Tom Roderick with Stifel. You may proceed with your question.

Yes, hi gentlemen. Thank you for taking my questions. I'll echo the earlier sentiments you're getting 10 cloud deals across the goal line when everyone's working remotely is quite significant. So congratulations on that. Mike, first question for you. Just we've heard this concept of data gravity. It's something that's a real driver of cloud adoption for years now. And I'd love to hear how your customers are thinking about the role of predictive analytics, AI and machine learning, broader insights, that’s having or catalyzing their desire to move to the cloud and perhaps you could talk a little bit more about science, with some success there more recently, and how that is linking up with the cloud strategy. That'd be great. Thank you.

Yes, thanks for the question. There's no doubt that analytics, and basically taking advantage of the data asset that is produced by running a core system in a modern way, is one of the key drivers behind a lot of these projects and that's what's behind the strategy. We've taken an Aspen around more completely integrating the predictive analytics assets as well as the science asset into our core system. Because, we really think that you know, what you think of, maybe previously as an insurance core system will change that the necessity to have easy access to the data, easy access to the insights that you are deriving from that data, and then pushing that information back to the -- each individual user so that they're intelligent in the moment that they're using the system. Right? That's the real key, I think, to transforming this industry. And that's what some of the more forward thinking customers are doing already with Guidewire and other innovative insurance assets. Making all of that easier and easier and easier, every single release, as we make progress on our cloud platform, is what's going to drive the incremental value and the incremental differentiation that our customers are after. I really, really just love the question because science and predictive analytics and our cloud data platform all sort of coming together on a cloud platform that makes it easier for insurers to be able to deliver these innovative use cases, it's very, very exciting. Now, I think we all sort of sometimes tend to get bogged down and how difficult and hard work it is to do one of these modern transformations, and migrate off that legacy mainframe platform and instantiate Guidewire across a set of lines of business. But once it's done, and once you start to see that value, you start to see the customer's eyes light up with the exciting things that they're able to do now. All these ideas people have about, how you can use machine learning and AI to provide that insight to the agents and the adjusters and the underwriters. It's really exciting. And so anyway, I really appreciate the question and I think it's, sort of central to the product strategy that we have here at Guidewire

And I'm glad you brought up the context of Aspen in that answer Mike, that's sort of where I wanted to go next. As you've already started to move and migrate some of your customers, I think you mentioned USAA and American Family, earlier on the call. Have you started those migrations? I'd love to hear you talk a little bit about some of the challenges and some of the sort of inputs from a capacity standpoint, whether that services heads, implementation heads, just talk about the challenges and how you're managing through those challenges, getting those customers in the beginnings of their migration to Aspen that seems important to have some early, successful use cases there? Thank you for all this. This is great.

Hey, no problem. And thanks again for a great question. Right? And because it points to what I think is a very philosophical, very fundamental change in Guidewire’s position as it relates to our customers' technology strategies, and that is to stay current. Okay? Instead of thinking about Guidewire as this thing that does this thing, and we're going to use it, we're going to install it, and then we're going to test it, we're going to roll it out, and it's going to be live and we're going to forget about it for five years. Instead, we are partnering with each and every one of these cloud customers to change their approach to thinking about every time we provide an upgrade, to slot that upgrade into the cycle, to slot that upgrade into the testing cycle, to slot that upgrade into the development cycle. This is what is sort of behind the scenes going on. When I say the word transformation, it's that we need to teach our teams how to execute on that change effectively. We need to work with our customers very directly to trust us and to work with us in lockstep as we evolve the product, and to make plans about their implementations that enable them to dovetail those upgrades into their plans. That's what's really exciting about the partnership that we have established with USAA, because they are committed and we are committed to doing this in this sort of completely in sync lockstep approach, that enables them to be completely in line with all the innovation that we're providing in each release and to be just perfectly direct. This is not the norm in the insurance industry. We intend, I intend this whole company isn't -- we intend to change that. But it's going to take a while, right? It's going to take a couple releases. It's going to take maybe a couple of years. It's going to take us being committed to working with each and every single one of our customers about establishing that new approach. But, I've seen firsthand based on my previous experience, the difference in the amount of value that a software company can provide to its customer base once you're following an approach like that, and so that's why I'm so excited about it. Like I keep saying the path we're on, because when I talk to these customers, and we go through this, and we talk about it, we both recognize that it's a lot of change, but it's very clear that there's a significant amount of value, incremental value that we can provide to them. So thanks for the question.

Really helpful, thanks again, I Appreciate it.

Our next question comes from the line of Matt VanVliet with BTIG. You may proceed with your question.

Yes, hi guys, thanks for taking my question. I guess thinking about the numbers you talked about, you have over 600 consultants now on the more advanced cloud implementation certification here, but as we think about what the demand looks like, when you get a partner involved, especially one of the big global SIs are you seeing them also pushing harder on cloud projects as part of maybe bigger digital transformations that they're engaged with that these customers, are they skewing the mix even maybe more towards the cloud? Or is it pretty consistent around a lot of those partnerships right now?

Yes, I wouldn't differentiate one versus the other, but I would say we're getting very, very good alignment with them. And, that number is just the most objective way for us to assess that is that, we're asking those partners to really step up and get trained and certified on a whole bunch of new technology and a whole bunch of new approaches that are better aligned to delivering value, and they're stepping up. So, we're very thankful that they are stepping into that, because it's a significant investment on their part. I think it aligns to the value that they see and being able to drive those implementations, but I think they, they also recognize that this is just a better model. It's a better approach. I think, it's hard to find a technology and IT executives in the world these days, who doesn't admit that the cloud model logically is a better approach, that having a vendor responsible for upgrading the service and keeping the service up-to-date is a better approach, because the R&D investment that you're making centrally can be more easily sort of spread out and enjoyed by the customer base. The question is sort of, what's the timing? What, when does it make sense for that particular customer in some of the other projects that they have? And so, kind of just like I said before, we're in a very, very good position and being able to deliver an on-prem core platform and a cloud core platform and depending on the timeline, a particular customer has for their overall IT landscape that's going to more derive what the SIs and what Guidewire suggests. But make no mistake, that they're pushing it, and we're pushing it because, over time, we're just, it's just going to be more and more valuable, and the flexibility and the agility that they're going to be able to enjoy, from running projects on a cloud platform from Guidwire’s just going to be greater. And so, you know, I would say, that's kind of my summary of the situation is, just like us, we're basically making sure that the customers are educated about what we think the future is, but they're -- we're open to working with the customers based on the timelines that makes sense for their business.

And then maybe following up a little bit on Tom's question before, but also some of the earlier comments around the expansion of the marketplace, and some of these new -- newer kind of digital and data driven functionality. How much or when do you think about sort of exclusively providing that type of add-on feature to cloud only customers. I know in the past, you've talked about supporting the self managed customers for as long as, you know, for the foreseeable future I suppose. But, at what point do you feel like you start developing some that can only leverage the deployment model offered by the cloud, and use that as more of a pull tactic to get customers to not only migrate, but then buy new in the cloud?

Yes, the way I've been phrasing this is that, I want these decisions to be care driven, not stick driven. I want to create such a compelling value proposition for the cloud that customers willingly and excitingly make that decision. We will -- that decision ultimately ends up being very technical and ends up being very, very much based on how expensive is it? How much investment does it take for us to be able to take some capability or feature and make it available in the on-prem modality? Sometimes it's really straightforward and easy. I mean, to the extent that we deliver a cloud native service for ratings, that's just a cloud native service, right? It doesn't really even make sense for us to even contemplate the concept of that being run on-prem. But other times there's going to be a debate and we're going to talk to our customers, and we're going to assess, and we're going to make that decision. But I really am trying -- the concept of the service is a big part of the culture here. And I think it's a big part of the reason that this company has been so successful, that we really, our customers are maybe the primary stakeholder of Guidewire and I think it makes sense for us to do all we can to enable those customers to make this decision, make this upgrade decision on their timeline and how it makes sense for their business. These projects are incredibly complicated. Like, it's sometimes it's hard to imagine when you're on a phone call talking about it in the abstract, how complicated and how detailed and how much of a commitment is necessary for an insurer to take on one of these projects. And in just -- that's been a big part of the learning curve for me this year, is really fully understanding that and being able to empathize with the decision makers, that these insurers. And so that's why I just feel like, you know, we owe them our best effort to continue to provide that service and make -- just make the cloud better and better and better, such that when it makes sense, they're going to make that move. So, hopefully that helps you understand how I'm thinking about it.

That's very helpful. Thanks for taking my questions and great job on the quarter.

Hey, thanks a lot.

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

Hey there, thanks. Good afternoon. Just one from me on the marginal outlook, you commented on the impacts from revrac [ph] and think it certainly makes sense from the point of cash flow as a better metric during the transition, but given you had services coming down here and the increasing involvement on the partner side, seemed like you should also see some offsets. So just helping to revisit the impacts driving that expected compression, is it primarily a function of cloud and are your expectations for cloud margins still holding given, what you've observed at these initial cohorts of customers thus far? Thank you.

Yes, it's, the big investments we're making right now are on the cloud operations side and then the product development side. As we invest in our products to make it more efficient, our cloud operations functions should also get more efficient over time. These are big investments that we're making and we're in the early days of this replatforming, so that's the driver. There are some other kind of smaller drivers on the fringes. We did have a very strong collections year this year and including working on some past due payments that flowed into this year that won't recur. But the primary driver of the year-over-year decline and cash flow from operations is that -- are those investments.

Got it, thank you.

Our next question comes from the line of Joe Vruwink with Baird. You may proceed with your question.

Great, hi, everyone. Thanks for squeezing me in. I'll keep it to one as well. But I want to go back to the conversation on just the feedback related to Aspen since the release of that, and I'm curious if there were any use cases for segments of the broader customer audience that, I don't know, maybe surprised you, now that there's finally a cloud optimized insurance re-released in market. And a few things Mike, you brought up like the digital first Greenfield efforts, that's not new to Guidewire of course, or even this new crop of all digital insurers targeting home owners or renters lines. Are there things about the product itself, where there's suddenly a broader set of new opportunities, which may be inject a new element for Guidewire as opposed to what might have been the case before the Aspen release was out there?

Yes, thanks for the question. So yes, for sure sort of two-part answer. One, we're -- one part of Aspen is something we're calling advanced product designer, and it's designed to enable insurers to be able to design and release new lines of business much more efficiently and effectively, just really much more quickly than they could before. And we're, I was talking to one of our Tier 1 customers who said, look, we're basically managing many lines of business with Guidewire. And some of those lines of business are driving the majority of our DWP and the majority of our revenue, and those get the most attention from our IT organization and the projects that are running Guidewire and the smaller lines of business, they get neglected somewhat, and so the pace of change and the priorities there sort of frustrate those businesses. But with APD, and with Aspen, they're able to sort of balance that a little more effectively, such that the business line users of those smaller lines of business can SAP something much more flexible, much more real time. And it was surprising to hear that right because, we weren't necessarily thinking about that sort of value proposition, but it reminds you, again of the complexity of the implementations that we are driving here. And, it also, it just speaks to, the business benefits, the business impact of adding agility to an IT organization, especially one that's digitally driven. And so, just in terms of answering the second kind of part of your or your question, what was exciting to me about Q4 was that there was just a variety of compelling events driving those deals, that you didn't just see one situation causing the deal to transpire that, there's upgrades, driving some of them and there's digital transformations and digital interfaces, driving others, and that there's new lines of business being launched. When we were in the middle of Q3, and we were questioning what's going on in the macroeconomic environment, and how that can impact the insurance industry and how that's going to impact Guidewire, I would be lying to say that, I wasn't a little bit nervous about what the future was going to look like, but Q4 it just reminded us that, this is a very solid industry. There's a whole bunch of really interesting dynamics driving this industry. And, if we do what, we're supposed to do, we deliver this platform, we're going to be able to continue to really grow this company, and serve these customers more effectively. And that was one of the parts of Q4 that was really motivating for me and hopefully that helps, answer your question.

It does, thank you very much.

Yes, thanks a lot.

Our next question comes from the line of Rishi Jaluria with D.A. Davidson. You may proceed with your question.

Hi guys, this is Rishi Jaluria. I'll just one, one that I would want to squeeze in, and thank you for squeezing me in. But on the cloud gross margin side, if I do kind of the quick math between the new presentation and the old presentation, you're sitting around 35%, give or take non-GAAP subscription gross margins, which I think feels a little lower than I would have expected at this point. Maybe, can you, walk us through a) is that even directionally correct or is my math entirely off and b) is that a function of just the ramps and all the investments that you're making right now and there's going to be natural leverage coming from here to get towards that 65% cloud gross margin target in FY24? Or is there, a lot of kind of more multi tenancy on services and things that need to happen to get from here to there? Thanks

Yes, Rishi, so there's a lot of investment going on in the product to build more multi tenancy into our platform that we expect to realize over time. And, those investments will take time to kind of work their way through our product, and then into our customers and how we support and maintain those customers, making big investments in building out our cloud operations team. And I think we've commented on this in the past that to some extent, these are really critical initial implementations and we have to get these right. And we need to make sure that we invest the time and resources to bring every customer along that chooses to go on this path, assess them and make them successful. And so, there may be a little bit of over investment in terms of making sure we get this right. And then we can leverage those investments over time as we continue to migrate our customer base over. There's one other small dynamic that, we'll get into a bit more on the accounting and how cloud migrations in particular, we end up allocating a pretty significant part of the overall contract value to term license revenue, which depresses the subscription value over the, over the initial contract duration, even though we're fully investing and building out cloud operations to support those customers. So that is a small dynamic. I think that my team estimated that that is a 3 percentage point to 4 percentage point in tax in this fiscal year and we expect that to grow a little bit into the future and we can talk about that a little bit more on Analyst Day.

Okay, wonderful. Thank you.

Our next question comes from the line of Pat Walravens with JMP Security. You may proceed with your question.

Hi, this is John for Pat. Thank you so much for taking our questions. Just a quick one, on the Aspen, the actual product architecture, can you just talked about how if and how that architecture is differentiated from some of the other cloud offerings in the space of your competitors? Thank you.

Sure, that's a tough one to answer quickly. But, I would say this is what's important to understand about Guidewire's approach, okay? As we have 18 years invested in developing the world's leading claims policy, and billing systems and insurance we very, very complete offerings, what we've done with Aspen is we've invested in a cloud layer that enables us to run those instances of ClaimCenter, PolicyCenter, BillingCenter, efficiently across many, many instances and across all of the non production instances, necessary to manage a complex implementation of a core system like Guidewire. What you want to picture in your head is maybe one of the most complex IT environments in the world, at some of our Tier 1 insurers, with many, many instances of Guidewire that support development and testing and performance testing, and then UAT testing and finally, production. And so we've invested a very significant amount of time and effort into building a layer on top of AWS that facilitates our ability to run, what will ultimately be tens of thousands of these Guidewire instances. Additionally, we have developed what we're calling cloud native services, to support and augment the functionality in those core systems. Rating is a very, very good simple example. Now we have a rating engine inside a PolicyCenter, each customer that runs PolicyCenter can use that rating engine. We've added now, a cloud native service for rating that can be used alongside the PolicyCenter implementation. That's a very flexible approach to doing it. We don't replace it. We don't force a customer to move to that cloud native rating engine, but they can, over time, start to leverage, that cloud native rating engine. And then what that does is, it enables a customer to have more flexibility in terms of how they architect and how they manage the system. Like I said, in the call, we expect more and more of these cloud native services to be built and delivered on top of Aspen, Banff, our cloud platforms and those services, whether they be rating related or rules related or claims related or data related, those will support the overall ecosystem of the Guidewire implementations. So, hopefully that helps.

It does. Thank you.

Okay, thanks a lot.

Our next question comes from the line of Brad Sills with Bank of America. You may proceed with your question.

Hey, guys, thanks for fitting me in here. I just wanted to ask one on the term licensed customers that you had a good quarter here on customers adding more term, I guess for those customers, are they thinking about kind of a hybrid deployment here? We're going to add more term. But, think about migrating over to the cloud over time as in the roadmap, any commentary on just, customers that are kind of adding more term license and kind of their roadmap? Thank you.

Yes, it's a good question, because it's one that Jeff and I ask every single time we talk to our customers or our sales organization about these deals. These customers are perfectly aware of our long-term roadmap and I would say, for the most part, they all have a plan in the forefront of their minds or the back of their minds about when it makes sense for them to go to the cloud. It's one of the nice things about our approach. Like I said, is that they're able to -- if cloud doesn't make sense for their organization, they can purchase on-prem. They can deploy on-prem with the intention of moving to the cloud in the future. And so it's something that we've discussed with discuss, excuse me, with each and every one of our customers. And, each one will have a plan that makes sense for them and for their overall corporate strategy.

Great, thanks so much.

Hi, no problem. Okay, I think that is, yes I think that's the last call, right?

Yes, please. Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Mr. Mike Rosenbaum for closing remarks.

Okay, thanks, everybody for participating in the call today. Just wanted to say, this was a really phenomenal quarter at a really critical time for the world really and especially for Guidewire. We're excited about the continued demand we see for our platform and the advancement of the cloud strategy and more as optimistic as ever about the long-term vision and opportunity for all of our stakeholders. So I really appreciate everybody joining today and thanks very much.

Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time. Thank you for participation. Have a great day.