Guidewire(GWRE) - 2020 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Total revenue for Q2 2020 was $173.5 million, exceeding the high end of guidance, with license and subscription revenue at $105 million, a 21% increase year-over-year, driven by a 94% growth in subscription revenue to $28.6 million [36][10] - Annual Recurring Revenue (ARR) ended at $474 million, up 13% from the previous year [11][40] - Gross profit was $102.4 million, with a gross margin of 59%, slightly down from 60% a year ago [41][42] - Operating income was $15.4 million, exceeding guidance, with net income at $17.6 million or $0.21 per diluted share [43] Business Line Data and Key Metrics Changes - Subscription revenue growth was a significant driver, with 63% of new software sales in Q2 being subscriptions, up from 53% a year ago [38] - Services revenue for Q2 was $47.4 million, slightly below guidance due to investments in customer projects [40] - Maintenance revenue was $21.1 million, relatively flat compared to the previous year [39] Market Data and Key Metrics Changes - The company is experiencing a shift in customer preferences from self-managed core systems to cloud-based solutions, particularly in North America, with expectations for similar trends in Europe and Asia [27][73] - The company secured significant cloud deals, including a project with USAA covering $22 billion of Direct Written Premium (DWP) [12] Company Strategy and Development Direction - The company is focused on transitioning to a cloud-based subscription model, with a strategic emphasis on enhancing cloud product offerings [25][26] - Investments in the InsuranceNow product line are yielding positive results, with a notable win at Warrior Invictus Holding Company [13][15] - The company aims to leverage its market-leading position in the $2.4 trillion Property and Casualty (P&C) industry as it transitions to cloud solutions [29] Management's Comments on Operating Environment and Future Outlook - Management acknowledges the rapid shift to cloud solutions, which is expected to impact short-term financial projections but is viewed positively for long-term growth [30][59] - The company anticipates ARR growth for fiscal year 2020 to be between 11% and 12%, revised down from 14% to 16% due to lower-term license sales expectations [50] - Management is confident in the long-term strategy and the underlying business opportunity in modernizing core systems for the P&C industry [71][72] Other Important Information - The company is monitoring the impacts of COVID-19 but does not anticipate a material financial impact for the year [32] - A leadership transition is occurring, with Jeff Cooper stepping in as interim CFO [34] Q&A Session Summary Question: Impact of ARR Calculation - Management explained that the shift to cloud deals is not fully compensating for the slowdown in on-premise term deals, leading to lower ARR growth expectations [62][66] Question: Professional Services Organizations' Role - Management clarified that professional services organizations are crucial for successful implementations and that their involvement is essential for future growth [80][82] Question: Customer Retention Rates - Management confirmed negligible customer churn and that the current slowdown in term deals is not indicative of underlying retention issues [88] Question: Fiscal 2023 Trajectory - Management indicated that the impact of term license activity on the near-term outlook is significant, with further clarity expected at Analyst Day [90] Question: In-housing of Services - Management noted that some customers are taking on more in-house work, which is seen as a healthy trend and not related to ARR attrition [89] Question: Migration to Cloud Pricing Dynamics - Management reported no significant changes in customer conversations regarding pricing or deal structures, focusing instead on justifying the long-term value of cloud migrations [102][104] Question: Margin Trajectory - Management indicated that margin compression in Q3 is more related to revenue fluctuations rather than expense increases [115] Question: Implementation of Cloud Solutions - Management expressed confidence in the repeatability of cloud implementations based on experiences with existing customers [126]