Guidewire Software, Inc. (GWRE) Q3 2024 Earnings Report, Transcript and Summary

Greetings. Welcome to the Guidewire Third Quarter Fiscal 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Alex Hughes. You may begin.

Thank you, Shamali. I'm Alex Hughes, Vice President of Investor Relations, and with me today is Mike Rosenbaum, Chief Executive Officer, and Jeff Cooper, Chief Financial Officer. A complete disclosure of our results can be found in our press release issued today as well as in our related Form 8-K furnished to the SEC, both of which are available on the Investor Relations section of our website. Today's call is being recorded and a replay will be available following the conclusion of the call. Statements made on this call include forward-looking ones regarding our financial results, products, customer demand, operations, the impact of local, national and geopolitical events on our business and other matters. These statements are subject to risks, uncertainties and assumptions are based on management's current expectations as of today and should not be relied upon as representing our views as of any subsequent date. Please refer to the press release and the risk factors and documents we file with the SEC, including our most recent annual report on Form 10-K and our prior and forthcoming quarterly reports on Form 10-Q filed and to be filed with the SEC for information on risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements. We also will refer to certain non-GAAP financial measures to provide additional information to investors. All commentary on margins, profitability and expenses are on a non-GAAP basis unless stated otherwise. A reconciliation of non-GAAP to GAAP measures is provided in our press release. Reconciliations and additional data are also posted in the supplement on our IR website. And with that, I'll now turn the call over to Mike.

Thank you, Alex. Good afternoon, and thanks everyone for joining today. I'm incredibly excited to share the results of our third quarter and discuss the momentum we are seeing in our business. Q3 was another very strong quarter and puts us in great shape heading into the final stretch of our fiscal year. We have all worked very hard to establish Guidewire Cloud Platform and our InsuranceSuite applications as the trusted worldwide standard for P&C insurers and I think our Q3 results and year-to-date results clearly show that we're paying off. In April, we released Jasper, our 10th release in under four years, which delivers increased agility in commercial lines, while also expanding HazardHub data for Canada. This release and our continued innovation across our platform and applications improve customer agility, speed and business intelligence. We are helping our cloud customers innovate faster and make better data-driven decisions across the insurance lifecycle. I'm now more confident than ever that the continual iterative improvements we have demonstrated to customers through our cloud platform's consistent release schedule are helping to align more of the industry around our platform and this general confidence is resulting in our improved business momentum. In the third quarter, we closed eight InsuranceSuite cloud deals, bringing our total InsuranceSuite cloud deals year-to-date to 24, which is a 33% increase year-over-year. We also saw sustained strength with Tier-1 insurers, including four Tier-1 deals in the quarter. Our continued deal momentum speaks to the tremendous progress we have made establishing the reputation of Guidewire Cloud Platform, but also the much improved fiscal year linearity our sales teams are driving. We have been working for the past few years to establish a more linear quarter-to-quarter approach to sales, and I'm very happy with the more balanced year-to-date outcome. It was also a strong quarter for cloud migration activity with a total of five InsuranceSuite cloud migrations. Our customer base is our most valuable asset and a significant part of our cloud strategy has been anchored around the objective to successfully migrate every single one of our on-prem customers to our cloud platform. Continuing to drive these cloud transitions ensures that we remain the industry leader. It sets us up for further cloud expansion activity down the line and demonstrates the feasibility of Guidewire Cloud to new insurers. Deal activity in the quarter was particularly strong in our Asia Pacific region where we had four cloud migration deals in Australia. We are building on our established cloud position in North America with higher engagement and momentum internationally, and it's great to see this pay off in the quarter. Last month, we conducted three highly-successful Guidewire insurance forums, with one in London, one in Sydney, and one in Tokyo. These events serve as important customer touchpoints and an opportunity for the broader Guidewire ecosystem to come together and share ideas and feedback. They are a powerful vehicle we use to influence our existing pipeline, generate new opportunities and help ensure that existing customers are up to speed on all the product innovation we have planned. Each event brings together insurance professionals from leading customers and partners to discuss the future of the P&C industry. In Sydney, over 135 insurance professionals heard Simone Labady, CEO of Aioi Nissay Dowa, New Zealand, discuss her goals for rapid growth on the cloud, how new Guidewire products and features including APD, data platform and Jutro are helping them launch new products quickly and increase customer convenience. In Tokyo, nearly 150 people heard Nakagawa-san, President and CEO of Saison Automobile & Fire Insurance, part of Sompo Group, which was the first insurance company in Japan to deploy Guidewire Cloud, discussed their strategic journey, progress to date and experience with Guidewire Cloud. In addition, Eric Marcoux, VP of IT at Beneva, shared how Guidewire helped the company accomplish an increase in sales and a decrease in time required to train new team members from three to six months to less than a month. Since upgrading to Guidewire Cloud, Beneva has completed three updates, which is in stark contrast to the 12 to 18 month upgrade duration that they were used to when on-prem. Last month, we emphasized our commitment and aspirations for the Asia Pacific region with the hire of Shaji Sethu as our Asia Pacific Managing Director. Shaji has lived in Sydney, Australia for over 30 years and he brings an extensive track record of driving strategic IT programs and insurance outcomes in the region. This leadership addition will further strengthen the connection between Guidewire's global capabilities and the local needs of our customers. We made a similar leadership addition to the EMEA region two years ago when we named Will McAllister as Managing Director and have been very pleased with the progress we are making and he is leading in Europe. In April, we were in London for Guidewire's Europe Insurance Forum. It was also an incredible event with over 250 attending across 70 insurers and 44 customers. Leading insurers such as AXA and Beazley attended and spoke to the importance of agility and the objectives that they have ahead with Guidewire. I'm especially pleased with the progress we're making -- with the London market, where we are bridging our global capabilities with its specialized content needs. We are seeing a high level of market engagement worldwide and combined with the increasing maturity of our platform, we continue to grow our pipeline both in size and quality of engagement. This momentum and general confidence help position us very well for this fiscal year and more importantly our longer-term outlook. Turning to our ecosystem, another key element of our strategy is to expand the partner community surrounding Guidewire, which helps to accelerate customer adoption, deployments and time to market. We are seeing the SI community increasingly engage in Guidewire projects. There are over 38 SIs working with us today, and in the third quarter, the number of cloud certified partner professionals from these firms increased 27% year-over-year to 8,900. Similarly, our solution partner community continues to expand. Guidewire Marketplace now has over 210 solution partners. As our marketplace expands with each release and as adoption of these applications increases, we reduce customer costs and accelerate their time to value on our platform. But maybe the most notable and impressive example of our growing global momentum and ecosystem came in May when we held our inaugural Developer Summit in Bangalore, India. Nearly 500 people attended this event, with participation from our leading partners such as EY and PwC. It was a great opportunity to introduce Mohammed Anzy, the new leader of our India operations to the community. Anzy joins us from SAP, where he led the largest R&D center outside of Germany. We're excited for him to join us and help drive our strategy, execution and growth in India. We also ran a hackathon, which attracted over 125 entries and made me extremely proud of the progress that we've made in our cloud platform. This event marks a commitment to India as a source of innovation through Guidewire employees, but also connects us more closely to a community of technology professionals who have dedicated their careers to improving the insurance industry by leveraging Guidewire Software. Finally, let me turn to the continued progress we are making driving platform scale and efficiency. As you know, we've been focused on expanding platform efficiency and gross margin and it's great to see the team's progress reflected in third quarter subscription and support gross margins increasing 10 percentage points year-over-year. This puts us now ahead of plan and we are confident that we will continue to drive improvements here as we continue to execute new approaches to cloud operations and drive more automation and self-service tooling across our platform. This quarter is another validation of the investments we have made and further proof that these investments have produced and will continue to produce long-term profitable growth. Our software is mission critical and a core system of record for our customers. We price our software as a percentage of an insurer's direct written premium and are, therefore, tied directly to the value our customers create underwriting and insuring against risk and the associated premiums they charge. This structure creates a durability to our software business at a time when companies across industries are working to gain efficiency and in many cases reduce workforces. This stability combined with our success in instantiating our market-leading cloud platform gives me confidence in our model and our ability to invest in further innovation to create new growth opportunities in the future. With that, I'll now turn the call over to Jeff.

Thanks, Mike. Q3 surpassed our expectations across the board. ARR finished at $828 million and benefited from durable cloud demand. As we have discussed in recent quarters, we continue to see improved bookings linearity and strength in the first three quarters sets us up well for the year. Total revenue was $241 million. We saw better-than-expected results in all areas of revenue. Subscription revenue grew 35%, and subscription and support revenue grew 28%, as we benefited from deal momentum. License revenue grew 11% as a result of continued DWP true-up activity and expansions upon renewal of term license arrangements. We price our software on basis points of our customers' direct written premiums and we have seen customers' DWP grow as insurers increase rates to accommodate rising claims costs due to inflation and the risk environment. Services revenue was better than expectations and was up off of the low point last quarter as utilization rates improve. We are thrilled that our partners are investing to help us modernize this industry and we expect them to continue to lead the majority of the cloud programs. We are working hard with our partners to find the right equilibrium to ensure we are supporting their growth while also ensuring that cloud standards are adopted and that our professional services portfolio mix and volume are healthy. Turning to profitability for the third quarter, which we will discuss on a non-GAAP basis, gross profit was $151 million. Overall gross margin was 63% compared with 52% a year ago. Subscription and support gross margin was 65%, which compares favorably to 55% a year ago. This continues to track ahead of our expectations due to increased cloud infrastructure efficiency. Services gross profit was $5 million, and services gross margin was 10%. We expect the cost basis to be relatively stable in the services organization and our ability to drive profit margin will be dependent on growing the top-line. Overall operating profit was $21 million in the third quarter. This was better than expected due to revenue outperformance and lower operating expenses. We continue to be thrilled with the operating profit and operating margin momentum. Stock-based compensation was $37 million, up 5% from Q3 of last year. We ended the quarter with $934 million in cash, cash equivalents and investments. Operating cash flow was $5 million for the quarter. Turning to our outlook for the full fiscal year 2024, we are adjusting our ARR outlook to $856 million to $864 million. Strong activity in Q3 at a healthy pipeline reinforces our confidence in the full year targets and allows us to raise our outlook. We expect deal momentum in Q4 to manifest itself more in fully ramped ARR as customers and prospects are comfortable making significant long-term commitments to Guidewire Cloud. I expect fully ramped ARR to grow at or above 16% for the fiscal year 2024, which is a great result when you consider it is on top of 17% fully ramped ARR growth we delivered in fiscal '23. We are building a strong foundation for delivering on our longer-term growth targets. We will provide more detail on fully ramped ARR at year-end as this is a metric we disclose on an annual basis. As a reminder, our ARR outlook assumes foreign currency exchange rates as of the end of our last fiscal year and we update ARR exchange rates at year-end. If we updated ARR today based on current exchange rates, then we would see a $7 million negative adjustment. We will certainly discuss this and quantify this at year-end. With respect to revenue, we are increasing our expectations for subscription revenue and subscription and support revenue. We are adjusting subscription revenue to approximately $474 million, and subscription and support revenue to approximately $546 million, representing a positive adjustment of $5 million in both instances. We expect license revenue of approximately $247 million, and services revenue of approximately $179 million. As a result, our outlook for total revenue is $968 million to $976 million, a $10 million positive adjustment at the midpoint. Turning to margins and profitability, which we will discuss on a non-GAAP basis, subscription and support gross margins continue to exceed expectations and we now expect between 65% and 66% for the year. We still expect services gross margins to be between 5% and 8%. As a result, we now expect overall gross margins of approximately 63% for the full year. With respect to operating income, we expect between $94 million and $102 million in operating profit for the fiscal year. This represents an $11 million positive adjustment at the midpoint. We still expect stock-based compensation to be approximately $147 million, representing 3% growth year-over-year. We are also increasing our cash flow from operation expectations to between $130 million and $150 million for the fiscal year. We are proud of our progress. As we look ahead to fiscal '25 targets we discussed at Analyst Day, we remain confident in our ability to achieve our $1 billion ARR goal. We are clearly tracking a bit ahead of our gross margin targets and this is creating an opportunity to accelerate some product investment while still achieving our operating margin targets. With that, operator, you can open the call for questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Kevin Kumar with Goldman Sachs. Please proceed with your question.

Hi, thanks for taking my question. I wanted to ask a question around the demand environment. Guidewire obviously is seeing some really strong deal activity and that's perhaps in contrast to some softness with other software vendors, where customers are perhaps delaying large purchases. So, Mike, can you just talk a bit about what you're seeing in the P&C market? And in general, how carriers today are thinking about prioritizing these large kind of core system modernizations?

Sure. Kevin, thanks for the question. Very much appreciated. So, I would say, we continue to see demand and pipeline steadily build, and I would describe that sort of as -- two things relate to that. Number one is growing confidence around our ability to be successful with the platform in terms of meeting their business objectives. That certainly helps. We've talked about that for years about how the more success we have, the bigger -- the longer the track record we have around these successful implementations is going to build confidence with these customers, both on the migration side, but also the net news side. But I also think that there is somewhat of a disconnect between the decision making process these insurance companies go through in thinking about these implementations and these modernizations as it relates to the sort of general broader enterprise software market. These are decade, if not multi-decade decisions that these companies are making, these partnerships that they're establishing with us. And so, I think that there's a bit of a disconnect between what we see with other software purchases in the decision-making process. We really see these companies recognizing that agility very much matters, that a modern core platform that's going to enable them to make better analytical data-driven decisions is something that's going to help them be successful and profitable and grow out, like I said, for over a decade. And so that decision-making process can be done sort of outside the quarter-to-quarter stresses that maybe other folks and other industries and other sectors are seeing. And so, you add those two things up and we just see momentum and confidence continue to build for us. And it led to a great Q3, and it gives us confidence in Q4 and the rest of the fiscal year.

Thanks. That's helpful. And then maybe one for Jeff on margins. I think gross margins for subscription and support have been relatively stable the last couple of quarters. So, maybe how should we think about the next inflection point that pushes cloud margins closer to that kind of 70%-plus figure that you and the team have talked about in the past?

Yeah. I mean, we've made tremendous progress this year in finding an inflection point and delivering higher margins. We're thrilled with that progress. The two drivers as how we drive long-term margin is we think the demand environment is strong and we can see sustained subscription growth. That's a big part of how we've invested in the opportunity and the cloud operations function that supports our cloud delivery. And I think the platform as it gains scale, we continue to recognize some benefits of increasing that scale over time. And third, the engineering team has done a tremendous job thinking through all the architecture decision to drive more efficiency into the platform. And they are not done. I mean, I think there is more efficiency that we can continue to work on and drive into the platform. We probably won't see the types of gains that we saw this fiscal year, which was tremendous, but kind of continue to see more linear margin progression as we go towards those long-term targets.

Great. Thank you both.

Hey, thanks a lot.

Thank you. Our next question comes from the line of Dylan Becker with William Blair. Please proceed with your question.

Hey, gentlemen. Really nice job here. Maybe Mike for you. We've seen some interesting data from carriers that are more innovative, gaining share, improving decisioning and [indiscernible] in auto. I wonder how that conversation you're having with customers shifts more to business enablement versus outright IT alignment fueling some of that momentum and maybe how customers are thinking about those similar dynamics of share gains carrying over to additional P&C lines over time?

Yeah, appreciate the question. It's hard to sort of describe sometimes the complexity of the use case that we support with Guidewire when you think about all the regions and all the lines of business and all the tiers that we support. I think the one common theme that is very consistently coming up in terms of a carrier's ability to compete effectively is the agility around what you might call product operations, being able to set price, adjust rates, being able to adapt to the changing risk circumstances, let's say, that carriers are seeing. Certainly, there was a shock to the system as it relates to inflation and specifically the auto line of business and the expense of claims kind of jumping up. And it's the carriers that were able to adjust to this most quickly that were able to continue to operate successfully, continue to adjust prices as was appropriate to compete effectively in the markets where they're competing. And it's systems like Guidewire that facilitate that. And so, this is a big part of what we're effectively selling when we do these transformations is that the carrier -- the insurance carrier ends up with a platform that they can use to compete most effectively in -- as you say, in auto. But I would extend that to commercial lines insurance. We're seeing a lot of interest from international carriers around being more agile around commercial lines and having a system like Guidewire to support their aspirations around adjusting to the markets quickly and being able to just be more agile and be more competitive in market. It's a big part of the value proposition that we're selling with these transformations.

That's great. And actually it's a good segue into the second question, too, Mike. I think Jasper, the most recent release calls out commercial agility within that as well. And you've had some success on the commercial content side. I think you called out London there as well. But if you could elaborate maybe on your efforts here on the commercial side of the market and the right way of thinking about that opportunity?

Yes, happy to. So, I think that there was a phase of modernization in the industry that was focused on high volume, highly repetitive, where efficiency is -- these personal lines, where efficiency is the order of the day. There was a component of this around digital interactions and customer convenience driving the business requirements for the core systems. And this is one of the interesting things about the insurance industry is that the core system is almost directly exposed to consumers in terms of getting quotes for commercial lines. And so, there was this phase of modernization in the industry driven by those shifts. But what we're seeing now is this is -- we're transitioning into a phase in the broader industry where this modernization effort is now more focused on commercial lines. And so, commercial lines maybe were sort of left to the side a little bit as the focus was more on the personal lines side. The commercial lines business somewhat is getting more attention. And so, modern systems like Guidewire, where we can deliver a degree of product agility, enabling customers to create new products as fast as they can think of them or adjust products that they have based on what feedback they're seeing from the market and what's going to win the day, this really, really matters. Westfield Specialty is a great customer of ours that we've talked to -- that we've talked about previously, where they're really taking advantage of an opportunity they see in the commercial line/specialty line space and using Guidewire to create products very, very quickly and being able to be in market and effectively take share and establish themselves very, very effectively in partnership with Guidewire. So, yeah, I think it's one of the interesting things about the company right now is that we're able to take this common cloud platform, this common policy center architecture and apply it to a collection of these use cases across lines of business that puts us in a very positive place right now.

That's great. Thanks, Mike. Congrats again.

Yeah, thank you.

Thank you. Our next question comes from the line of Ken Wong with Oppenheimer. Please proceed with your question.

Great. Thanks for taking my question. I wanted to circle up on the fully ramped ARR comment. It seems like you guys are set up really well to wrap up the year. Any color on kind of what's causing that step-up off of a tough comp? Is it just your customers have higher confidence in the business? Is it kind of cloud migration, the premium step ups, the true-ups? Like what are some of the factors we should be thinking about that's driving that?

Well, I would somewhat answer the question as like a little bit of all of the above, right? Generally, we're seeing healthy demand, healthy pipeline. We're confident in the coverage ratios. And then, when we look at the detail, the makeup of the deals and the opportunities, in addition to these deals just generally being very long term in nature, the ramp activity associated with the demand that we see for Q4 just shows us that a lot of the value that we're going to -- that we do expect to close in the quarter will flow into the fully ramped number. So, as you are hopefully aware, some percentage of the booking activity flows into ARR and shows up in the ARR number. But a lot of this is ramped over time and shows up in a long-term agreement with that customer. And so, this is just an inspection of the deals and a signal in terms of the quality of the engagements that we have and the strength that we see in the company long term.

Okay. Perfect. Thanks, Mike. And then, Jeff, maybe building off of that, as we think about the guide, obviously, very strong Q3, maybe a little lighter Q4. Should we kind of marry the Q4 -- the full year '24 guide with that fully ramped commentary, which is obviously still strength coming off of Q3, but the actual ARR realization is coming down the line?

Yeah. Ken, that's the right way to think about it. And as we look at the pipeline for the year, we're obviously thrilled with where we are, as we tend to think about the business on annual terms much more than quarter-to-quarter. We did raise the ARR guide by $3 million at the midpoint. That followed a $5 million raise that we did last quarter. So that's pretty healthy progression for us. And as we look ahead at the Q4, we're very excited about the demand profile that exists and that excitement is leaning a little bit more towards those fully ramped outcomes as customers are clearly feeling confident in the maturity of the platform and there's a willingness to make long-term commitments.

Okay. Perfect. Thanks a lot, guys.

Thank you. Our next question comes from the line of Peter Heckmann with D.A. Davidson. Please proceed with your question.

Hey, good afternoon. Can you just remind us about the frequency with which the pricing is adjusted relative to DWP? And as regards to that, how do you think about the effect of some personal lines, insurance company or even commercial like exiting certain markets, just given the need to really raise premiums in the face of higher catastrophe risks? I mean, I guess, how does that trade-off work?

I'll let Jeff touch on the approach to pricing and resetting price with respect to DWP and then I'll give you a context on carriers exiting markets.

Yeah, sure. Yeah, so, foundationally, our contracts are built around a direct written premium baseline that's embedded into our customer contracts. We have the ability to inspect the direct written premium on an annual basis. Typically at renewal, there are instances where a longer-term initial contract that it may take a couple of years before we see that sort of inspection into what the direct written premium is. And it's not uncommon for customers to purchase a slight, slightly higher direct written premium than they're running today to give them a little bit of room to grow, but typically we have the ability to look at that on an annual basis.

Yeah. And I'll give you a perspective on carriers in the headlines and the news about carriers exiting markets and exiting specific lines of business within specific markets. We have quite a lot of conversations with carriers who are excited to enter those markets as well, right? And so, I think about this as the broad-based necessity you could think of -- it's more than just demand, but the broad-based necessity for P&C insurance does not really change. The approach carriers -- different carriers take to servicing that demand in any particular region can change and does change. And so, our ability to provide a platform to carriers who are interested in entering those markets can serve as a growth driver for Guidewire. And so, that kind of counterbalances the concern, let's say, for one of our customers actually shrinking because they're deciding to leave a market. So that's how I see it. It's like -- we've had some very interesting conversations about this dynamic and how the agility we can provide with our platform facilitates entry -- effective entry into these markets with creative approaches to servicing what really is a necessity, especially if you think about California and the homeowners market, the need for everybody here in California to have effective P&C coverage. So, it is something we track very closely, but that dynamic is something that kind of balances out for us if you really zoom out.

Okay. That's helpful. And then, just can you remind me of the number of net new logos in the last year? And if my tracking is right, it looks like about nine net new logos so far this year. But number one, is nine right? And then, what was the number for last year? It looks like I missed the fourth quarter.

I am hesitant to throw out a number that we can look up and give you if we think of it in time because I don't want to get it wrong on the call. I would say that we're very comfortable with the growth in the mix of business that I would say that we are achieving as our sales -- as we sort of proceed through the fiscal year. It's tough sometimes to classify something as a new logo specifically. It's like the relationships that we have with a lot of our customers are complex multinational kind of agreements sometimes where different countries might be or might not be considered a new logo. I would just say we're very comfortable with the iterative year-over-year growth that we're seeing in this regard.

And Pete, we often talk about new modernization activity, so workloads that are currently running on legacy systems that are new to being modernized and cloud migrations and then expansions. There's a lot of new modernization activity that we do at existing customers. And to Mike's point, how you count a logo in this industry can get quite complex with the hierarchies of our customers.

Okay, that makes sense. I appreciate it.

Thank you. Our next question comes from the line of Rishi Jaluria with RBC. Please proceed with your question.

Wonderful. Thanks so much for taking my questions. I want to start with the comment you made about managing to less linearity. Can you maybe walk us through kind of the steps that you took to get there outside of just the shift to a more ratable model? And as we think about our own models beyond this year, is this year's numbers inclusive of your Q4 guide the right proxy to use for future years or how should we think about seasonality? And I've got a quick follow-up.

Yeah. So, a lot of this has to do with just more rigorously approaching our sales processes. What are we doing every single week, every single month around creation of pipeline, maturation of deals, setting targets every month, tracking to those targets, setting tough objectives for us internally about -- around Q1 and Q2, so that we can get ahead of the curve. And just generally thinking about running the business in a very continuous way as opposed to a one year and then reset and have another year. We're really trying to be almost monthly in the cadence around which we're running the company. And by pulling forward those internal objectives for sales and for pipeline generation, maturation and bookings activity, that creates the linearity that we're seeing. And it enables -- it just enables us to run the business far more effectively. And it's taken a while to kind of steer the ship and adjust everybody's approach and train the market for what we really want to -- what the outcomes we want to achieve, but it's just great to see us at this point through Q3 with this sort of booking success. It makes Q4 a lot more manageable for us.

Yeah, the only thing I would add is obviously as the platform has matured, the breadth and depth of the pipeline is just in a different place than it was two or three years ago that allows us to kind of inspect that in a much more material way and not -- we recognize that we can't have the linearity we had previously. We need to get in front of it. But certainly the breadth and depth of the pipeline has allowed us to kind of drive some of those behaviors.

Okay. That's...

Rishi, what was the second part of your question?

He wants to know -- I expect we'll continue to drive this sort of approach to linear bookings progression next year. And so, the seasonality, I'm hopeful, will continue to smooth out.

Yeah, I think that's right. I mean, as I look at how I think about modeling bookings, for a number of years we would -- we had a track record of falling a little bit behind in the first half and catching up in the back half. And this year, we've changed that dynamic a little bit, which is great to see and that's certainly our expectation as we look forward.

Okay, wonderful. That's really helpful. And then, I just wanted to ask a question about Jutro. Since you announced that at the Connections last year, picking up a lot of interest. Can you maybe walk us through what is adoption and use cases look like so far with Jutro? And as we think about, it's a developer kit. Is there an opportunity for you to leverage generative AI just given that GenAI has been really helpful from a coding perspective to maybe even speed up time to value even faster than what we've seen before? Thanks.

Yeah, for sure. Great question. So, just for everybody's benefit, Jutro is our technology platform for supporting our customers' ability to create digital experiences directly on top of our core systems, typically that's ClaimCenter, PolicyCenter. And so, the type of experiences that we'll have customers create is first notice of loss for claims flow or a quoting experience or some sort of like account management update experiences. And these are things carriers could push directly to customers or agents in order to create a better, more convenient and more efficient business process and general operation. It's kind of good for the consumer, good for the agent, also good for the carrier. And with Jutro, we can make this -- the delivery of this just so much more efficient, right? Instead of creating a separate standalone digital application that has to be synchronized and integrated into the core system, we can build these experiences directly on our core system and we can make it just far more efficient, far faster and cheaper for our customers, specifically our cloud customers to be able to achieve. Adoption has been very good. We have -- the products now GA, and so we're working with a number of projects across the cloud customer base to get these programs built on Jutro out into the wild, out into the real world in terms of GA projects. Just actually in Australia, we were talking with one of our top customers, Hollard, about their experience being -- they were actually the first customer to work through this with us and get one of these Jutro-driven experiences launched for a claims flow that they're supporting with us. And that program went very, very well. They were a great partner with us in sort of working through the project with us over time and getting that to a generally available state. But we're very, very happy with the progress to date, the adoption in the customer base. We're also excited about where this is going. We see a big opportunity to create more packaged content around Jutro to just further accelerate the creation of these experiences. Think of these as these like little micro digital applications that carriers can use to get more efficient. Your question about generative AI is great. We certainly think that this will -- just like any software development program, this will be enhanced, improved with generative AI and the various copilots that this is offered that are available today. This technology is based on React, which is a standard web programming language, which digital teams all over the world are very familiar with. And so, they can interact with this Jutro application and think of this as just a head start in terms of connecting those React-based applications to Guidewire. So, yeah, we think generative AI and these kind of mechanisms for enhancing and improving coding efficiency can certainly help going forward. So anyway, thanks for the question.

Thank you.

Thank you. Our next question comes from the line of Matt VanVliet with BTIG. Please proceed with your question.

Hey, good afternoon. Thanks for taking the question. Maybe I wanted to dig in a little bit on maybe what some of the specific drivers were that got some of the APAC deals in particular over the line, and sort of improving performance that you called out there on the cloud side of the business. How much of that is sort of product maturation and other things you're doing versus John and his team continuing to sort of knock on doors and get deals done? Anything you can do -- provide us with a little more details on what's working there that maybe wasn't just as a few quarters ago?

Yeah. So, a lot came together in the quarter in Australia and this was the result of John and the sales organization in Australia, in Asia Pacific, but also supported generally worldwide. A lot came together based on a lot of years' worth of hard work. We had sort of planted the seeds in Australia over the past few years with a number of smaller deals and a number of early cloud success stories, but there was a number of big Australian insurance companies that we've had long relationships with that we've just been working very, very hard to build their trust and align to their program objectives about what makes sense from -- on their modernization roadmap and their business objectives. And these things all came together in the quarter and resulted in just really, really strong demand. And I think just kind of touching back to or kind of relating back to what I was talking about a few minutes ago, there is a direct connection between the success stories that we've been able to achieve in North America, the track record that we've been able to establish, the fact that we have now over 60 live cloud customers, and this thing is more and more proven, that creates the confidence there that we can make sure that these programs will be successful. And so, these things all added up to a really phenomenal quarter in Australia. But we're very excited about, I mentioned in the prepared remarks, Shaji joining. He's an incredible leader that we're excited to bring into the Guidewire family and continue to drive our momentum in Asia Pacific. I think we've got a lot more room to grow there and build on the success.

All right, helpful. And then, just two quick follow ups, Jeff. One, it looks like a pretty big perpetual deal came through on the quarter. Any additional details you can sort of help us with there? And then, from a more strategic standpoint, on the gross margin reinvestments you talked about, anything specifically that you're targeting there? Is it just sort of an acceleration of things on the roadmap already?

So, on the perpetual deal, it wasn't any sort of new perpetual deal, that was just expansion orders at an existing customer. So, it was a little bit of a blip, but nothing I would highlight as a trend or anything along the lines. And then, what was the second question?

You mentioned the upside to gross margins that maybe are going to accelerate some investments in the platform. Just curious if that was pulling things forward or...

Look, we're clearly tracking ahead of our gross margin targets for this year. We're already tracking ahead of the targets that we established for next year. So, that creates -- that's been very exciting for us to watch to see that expansion occur. We think that there's a lot of opportunity out there for us to invest in. And so, I think as we look at early looks into FY '25, clearly tracking a bit ahead on gross margin, but we see healthy investment areas to take advantage of this momentum that we have. And so, still think our overall operating margin targets are the right targets to think about.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from the line of Alex Sklar with Raymond James. Please proceed with your question.

Great. Thank you. Mike, a lot of comments today around the maturity of your cloud solution kind of helping drive faster demands. Can you just talk about your cloud customers staying closer to the latest release and where that stands today versus a year or two ago? And is there any kind of way to characterize how that piece of it is factoring in broader demand and cloud adoption? Thanks.

Sure. Thanks for the question. I appreciate it because it's been a real focus for us this year. There's been a series of phases that we went through in terms of establishing the cloud, establishing the cloud infrastructure and then our ability to scale and reliably and securely run these InsuranceSuite applications. Like, the change that we made in the release cadence was a big part of the cloud value proposition and the promise that we had for the future. And at some point, we even shifted from a twice a year release cadence to a 3 times a year release cadence. But alongside that has been a whole bunch of just really incredible engineering and focus around making sure that these -- that the update process in the cloud was just a completely different experience for customers relative to what they were doing on prem. And this has really improved in the last year in terms of -- we measure very closely the release version that our customers are running in their non-production and production environments relative to what the current state is. We measure that and talk about that as like N minus 1 or N minus 2 or N minus 3, and we track this weekly, we track this with our Board, and we've run a number of programs technically and also in terms of how we work with each of our cloud customers around ensuring we're building enough trust with them such that they feel comfortable that they can take these updates. And as you can imagine for a customer that's used to a 12 to 18 month update, the first time they do this on our cloud, they're a little bit apprehensive and they're taking it very carefully and being prudent. But once they do it once, once they do it twice, once they do it three times and they see that they can do these things in days, and really the impact to their teams and their operations is very, very minimal, we earn their trust and we enable them to stay current on the either N, the current release or maybe N minus 1, the one release behind. And so, this is going really well. It's part of my -- I was talking about in the prepared remarks these events that we ran all over the world. This is one of the slides we talk about with customers. This is one of the slides we talk about with prospects as well, because it's so important to the whole value proposition of cloud. Like this would all be for naught if we weren't able to keep customers current and being able to deliver the really groundbreaking product agility functionality or workflow functionality or Jutro digital functionality or generative AI functionality, it's all the update process that makes that possible. And so that's gone really, really well and it's been a big achievement this year for the company. So, thanks for the question.

All right. I appreciate all the color, Mike. Jeff, maybe just a quick follow-up for you on Rishi's question around linearity. We obviously have the fourth quarter ARR guide. I think you also implied that Q4 might not reflect the strength of fully ramped bookings just given ramp schedule. So I just wanted to clarify, is the smoother linearity comment and kind of less reliance in Q4, is that a phenomenon you're seeing on the fully ramped side, too, or is there an added aspect in terms of the mix of ramp deals that you're looking at in fourth quarter versus the rest of the year? Thanks.

Yeah, I think what I was trying to communicate there is as we look at the upside and as we look at Q4 and where we think some of the upside may exist, we're seeing some really interesting deal momentum and longer-term commitments that come across us some ramps. So, on the ARR side, as we look at the overall momentum there, we're thrilled with the deal activity, but a lot of that kind of more interesting upside is coming in those ramped outcomes. So that's an exciting fact pattern for us.

All right. Thanks for that.

Thank you. Our next question comes from the line of Alexei Gogolev with JPMorgan. Please proceed with your question.

Hello, everyone. Mike, I was wondering if you could give us some insight into the customers that are still on the old prem software versions. When do you think these customers would be ready to migrate to the cloud? I'm assuming that they haven't received any upgrades since you guys moved and started to introduce cloud products. So, do you think 2026 or 2027 would be a pivotal year when many of these customers will begin to consider cloud migration?

Yeah. Thanks very much for the question. I would say that every single one of them is in the consideration process. We engage with these customers closely. We work with them to make plans and understand their objectives and align their objectives to our ability to support them either with upgrades to cloud or as you say continued updates to the on-prem implementations. We continue to support the on-prem implementations with security fixes. We support customers when they need it. It's still a big component of our revenue. It's just from a sort of innovation -- product innovation perspective, there's just very minimal to no new investment going into those releases. And so, the customers can still reliably and safely operate those systems on prem and we support them, but the real benefit of the relationship with Guidewire has to do also with product innovation. We just can do so much more in the cloud, so much more efficiently and more effectively and we try to be very clear with all the on-prem customers that that's where our focus is. And so, in terms of projecting when exactly these migrations will occur, it's challenging, because it's not just Guidewire and the Guidewire program that factors into a customer's decision-making process. There's very often other objectives that they are dealing with inside their environment, other IT objectives. And so, the upgrade to Guidewire cloud is something that they have to sequence in with all of their other IT objectives. And like I said, we work with every single one of them and have a discussion with them frequently about where they are and where that plan is and what our commitments are in terms of timing around support. But I would say as we proceed towards our fiscal '26, fiscal '27, fiscal '28, I think all of those on-prem implementations, those plans to Guidewire Cloud will have been firmed up. But that's projecting out three years. It's a long time. There's a lot that can occur and happen and change in the world. But we're working with them and we do see that demand. And like I said in the prepared remarks, this customer base is the most valuable asset at Guidewire and I think culturally -- and just our company's kind of ethos is that we're committed to supporting those customers and getting 100% of them moved over to the cloud when it makes sense for them.

Perfect. Thank you, Mike. And Jeff, very quick question for you. Does this strategy of passing on low-margin service revenue to partners mean that you would not need to add significant amount of additional talent and labor capacity in the midterm, which would potentially help improve your margins going forward?

Yeah. I mean, I think the way we look at it is that there's a massive amount of work to modernize this industry. And if we were to try to tackle that with all Guidewire resources, we would have to staff up quite significantly and that's not our strategy. We want to work with the best partners in the world to help us tackle that opportunity. We need to have a highly strategic skilled services organization, and we think that we have the right size and scale in that organization today to allow us to partner with the global SIs to get this work done. So, kind of as we look ahead, we think we have the right cost basis. And I think as we go through this process of dividing up the labor to tackle this opportunity, finding that right equilibrium point where our resources and our highly skilled people are appropriately utilized and our partners have an exciting opportunity to execute against as well. So, that's what we're tackling.

Appreciate the answers. Thank you, Jeff. Thank you, Mike.

Hey, thank you.

Thank you. Our next question comes from the line of Michael Turrin with Wells Fargo. Please proceed with your question.

Hey, it's David Unger on for Michael Turrin. Thanks for taking the question. Just one from us. Can you guys just talk through the trends you're seeing in terms of the sales cycle and any differences to note by either geography or tier? Thank you.

Yeah, I don't know whether or not I'd call out any particular difference and change in the sales cycle. Our sales cycles are still very long. We close deals that are very often open in our system for multiple years and that hasn't changed. We feel like we've got a great connection to customers, a very deep connection often, whereas like Guidewire is running in some component of their enterprise, and so we have a relationship and that enables us to have an opportunity for a sort of large enterprise kind of open and working for a long time. I wouldn't say we've seen much of a change in that cycle. It's just generally we're able to pull the deals in and get them closed based on the confidence and the momentum that we've established in the market today.

Thanks, Mike.

Thank you. Our next question comes from the line of Tyler Radke with Citibank. Please proceed with your question.

Hey, this is Peter on the line for Tyler Radke. Congrats on the quarter, Mike and Jeff. I just have one question here. Curious if AI is having any impact on recent deal activity and if customers are wanting to modernize their systems sooner rather than later to invest in AI projects down the line as you start to introduce more of those applications onto your platform? Thanks.

It is a great question and I think certainly AI -- and I'm going to kind of answer the question -- I'll give you a long answer to this question. If you say AI broadly, data very much matters for machine learning and using AI and machine learning techniques to make better predictions, to make to operate an insurance company more efficiently and more effectively. And getting better access to data is a big part of Guidewire modernization programs and decisions to deploy Guidewire at an insurance company. That is a big deal. If you broaden this to generative AI, I think there absolutely is a sense that getting to a system like Guidewire modernizing your core application suite around claims flows and policy flows, this is the right platform to apply generative AI features to a modern system. Trying to do this on top of a mainframe legacy system, I think, is like virtually impossible. And so, when -- in the conversations I'm having with customers, we see this future where a significant amount of the sort of tedious tasks that people operate -- that I think people have to do in order to effectively run an insurance company could be facilitated and improved with generative AI and Guidewire as a platform for doing that is a logical step, right? So, it is certainly helping us in terms of thinking about like what's the steps towards being prepared for taking advantage of generative AI as it's applied to insurance. Guidewire is a logical step. And then, we are now starting to talk to customers about generative AI products and functionality and features that we will embed within ClaimCenter and PolicyCenter to facilitate better efficiency for the team members that are using Guidewire. And so that's helpful, and that's a boost to their thinking about whether the benefits associated with the Guidewire decision. So, it's generally very, very helpful and aligned, but still like kind of has to relate to a general transformation -- excuse me, transformation program that's going to drive a Guidewire decision.

All right. Thanks.

Thank you. Our next question comes from the line of Aaron Kimson with Citizens JMP. Please proceed with your question.

Thanks for the question. Can you provide any color on the specific areas in accelerated product investments that Jeff mentioned at the end of his prepared remarks?

Sure. We see a lot of opportunity to continue to, number one, just enhance PolicyCenter, ClaimCenter, InsuranceNow applications to just make them more effective. Like I said during one of the questions, we're thinking about better digital applications and digital components that we can continue to invest in. We talked about London markets and the content strategy that we have for applying Guidewire to London markets. You think about further enhancements to different countries and different regions, there's localization requirements. There's just things that we can invest in the product to accelerate our growth across the landscape of -- the product landscape that we have today. I think there's a lot of excitement and interest right now in the industry around underwriting and using generative AI to facilitate better underwriting processes and approaches and like analytics, AI, better approaches to using analytics and AI for pricing and for rating. There's just a -- there's a wealth of opportunity for us. And now that we have really established ourselves and kind of created a modern cloud platform that we have this high degree of confidence is going to scale and work for us and work for our customers over the next decade, we can start to broaden our perspective about where else can we apply product investment to enhance better outcomes for insurance companies to make them more agile and make them more efficient. And you see that just across the insurance lifecycle. And so, that's what he's talking about is that it's like this kind of period of time for our company where we needed to be so focused on cloud infrastructure and making sure that, that was going to work. We're getting past that phase where we can now think about more strategically where can we apply product investment, innovation investment and enhance our ability to grow and support the industry more effectively.

Very helpful. Thank you. And then, stepping back...

Sorry, could you repeat it?

And then maybe -- yeah, stepping back, one of your cofounders, former CEO, current Board member of Marcus Ryu talked last month about how he believes the future software's vertical and verticals are going to become more and more specific over time. One better case and factor on vertical software is that LLMs are going to accelerate engineering productivity and allow nimble upstarts to capture a lot of the value that many vertical software applications provide at a fraction of the cost. Mike, where on the spectrum between those two trains of thought do you see things playing out in the insurance market?

Yeah. I will tell you, when LLMs and specifically cogeneration sort of launched on the world a year or so ago, we spent a lot of time thinking about this. And my conclusion about Guidewire and specifically the P&C industry is that the necessity to have a core system of record that supports the rigorous, highly regulated financial obligations of insurance companies is going to remain a very complicated enterprise software package that's going to have a long, long life. I feel very, very good about that. I feel very strong about our position, about our track record and the amount of investment that we have put in to creating this platform that works all over the world for every size carrier and every line of business that we support. I feel really very good about that position. I think these insurance companies that we partner with are making decisions for the next 10 or 20 years, and we are the right company for them to partner with. And I think generative AI will serve a different purpose in the insurance vertical. It will facilitate the creation of digital applications like we talked about on top of Guidewire core systems. It will facilitate generative AI features within PolicyCenter and ClaimCenter that will make people more efficient. It will facilitate different submission processes for commercial lines insurance, where today maybe the very structured database driven approaches that we've had -- in the toolset that we've had to date don't quite solve the problem, but generative AI now gives us this ability to solve those sort of more complex less data -- less database-oriented problems can now be solved more effectively with computer systems powered by generative AI. So, I think that the position we're in, in terms of vertical software is very, very strong and generative AI will only help us going forward. So that's my position specifically on P&C. I can't speak to -- I could probably, but it's not appropriate for me to speak to the vertical category in general. But I'm very confident about Guidewire's position relative to the P&C insurance industry.

Thank you.

And thanks for the question.

Thank you. Our next question comes from the line of Mike Funk with Bank of America. Please proceed with your question.

Great. Thanks. Hi, this is Matt on for Mike. Just a quick one for me. You called out that DWPs are growing because of rising claim costs and inflation. Understanding that there isn't a one-to-one link between DWP growth and because of tiered pricing, can you help us quantify the contribution to growth this year and remind us how we should be thinking about factoring in DWP growth overall in our models going forward?

Yeah, sure. I mean, so this is a pretty consistent part of our model and we see DWP true-up and CPI elements to renewals on an annual basis. Certainly, we've seen that accelerate over the last couple of years. Given how it works, like some of the contracts are longer, some of the customers have bought more DWP than they are currently running, so it'll take some time in order for a true-up to manifest itself. But it's probably contributed an incremental percentage or a percentage and a half of growth this year over -- and then last year as well was a little bit elevated versus what we've seen historically.

Really helpful. Thank you.

Thanks for the question.

Thank you. And we have reached the end of the question-and-answer session. I'll now turn the call back over to Mike Rosenbaum for closing remarks.

I just wanted to thank everybody for joining. We're incredibly excited about the results of Q3 and the momentum that we see in the business and look forward to seeing everybody and talking about what we hope will be a great Q4. So, thanks very much for joining today and we'll see you later.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.