Guidewire Software, Inc. (GWRE) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. Let's go ahead and get started. My name is Rishi Jaluria. I cover software here at D.A. Davidson. I'm delighted to have with me from Guidewire, our CFO, Jeff Cooper; and the brand-new VP of Investor Relations, Alex Hughes. Any investors that would like to ask questions to Jeff and Alex, please submit it through the chat function, I'm going to continue to monitor that, or feel free to e-mail me directly at rjaluria@dadco.com, that's rjaluria@dadco.com. So with that, Jeff and Alex, thank you so much for joining us today.

Yes, happy to be here.

All right. Let's maybe just start with an overview of Guidewire for all the generalists in the room, and I think we can start talking through the cloud transition and COVID and all that fun stuff.

Sure, sure. So Guidewire is a vertically focused enterprise software company. Since our founding in 2001, we have served exclusively one industry, that would be the global property and casualty insurance industry, which is a roughly $2 trillion industry that sells a wide variety of products that are indispensable for indemnifying people and businesses against all sorts of risks. We sell a suite of core systems that manage an insurer's policies, claims process, underwriting process and billings. We also sell systems of engagement and systems of intelligence, which we refer to as our digital and data products that surround our core systems. We've always monetized our software in a recurring revenue model, primarily selling term licenses and are now starting to migrate our customers in this industry to the cloud by selling subscriptions to our cloud-delivered products. Our core systems touch about $500 billion in direct written premiums in our customer base in some way, shape or form. And we have customers in over 30 countries globally. So that's a quick overview of who Guidewire is and what we do.

Sounds great. All right. Let's kind of jump into what's top of mind for investors, which is of course COVID, right? But how do we think about the headwinds and tailwinds that you're seeing in this environment? And maybe given that you're in a cloud transition, you can talk a little bit more about that in detail as well. But has the pandemic maybe impacted your ability to migrate on-premise customers to cloud? Has it accelerated it? What's the right way to think about that?

Yes. Yes, so we just ended our fiscal year at the end of July. And so our fiscal third quarter encompasses March and April, and those were impacted months, I would say, from a COVID perspective. We sell large strategic IT projects for an insurer who may be looking to modernize a system that may have been in place for, in some cases, 30 or 40 years, and make a shift to a more modern core system framework. Those are large 18- to 24-month implementation projects. And we did see a pretty significant slowdown in initiation of new projects like that in Q3. I think insurers were distracted a bit with kind of what is going on here and now on the ground, more urgent needs that were timely as a result of COVID with respect to IT investments in Q3. We were very pleased in Q4 to see what felt like a return to normalcy and insurers wanting to get back to work and starting to reengage on some of these strategic initiatives. So we're very pleased to see that. Long term, COVID is pretty interesting. We're selling modernization that should help insurers react to situations and make them more agile. And in many cases, their legacy systems are holding them back from being able to kind of meet the moment, and COVID was a real moment for people. And I think folks that had previously modernized their core systems with Guidewire's suite, we're very pleased that they had a modern system in place. And I do think that there are reasons why this could help further the urgency around modernizing our core system. It's just those are long decisions. So that will take quarters and years to play out. That's not kind of something we would see manifest itself in our pipeline right away, coming out of the environment. But we do think it just increases the overall sense of urgency around. If you have problems in your IT stack that are making you unable to meet some of the demands or needs that are going on, on the ground, then that's a problem for insurers. So we'll see. We're optimistic that over the longer term, this will further drive the incentive to shift to more agile systems such as our cloud-based products.

Yes. That's a great start. So let's go turn to the cloud transition. I guess: a, why the decision to go down a cloud transition, given you were at least on a -- forget putting aside a 605 already on kind of a recurring payment arrangement. And for us on the outside, what's really just the best way for us to gauge the underlying success of that cloud transition, knowing things will somewhat normalize in a few years?

Yes. Yes. I think our view is, over time, our ability to service and meet the needs of our customers is -- will be best delivered via the cloud and via cloud-delivered products. And so -- and it's always a hard -- I think that we had been wrestling with that for not an insignificant amount of time. And then we had to be thoughtful and strategic about what is the right time for us to go after that. And once you make that decision, you kind of need to go all in, right? So the phrase that I heard -- I get it here and used a lot is burning the boats, but we have to -- you have to kind of make that strategic commitment to the shift. And our -- where we reside in the market and the customers we serve, which are some of the largest insurers in the world with somewhat complex core system frameworks, it's a unique challenge, right? So we feel really good about kind of when we decided to meet that moment and start meaningfully move our emphasis to the cloud, and we think it's the right time for us to do that. Anytime you do that, it creates some ripples and some challenges in terms of what the installed base thinks and how they react to that decision, what new customer prospects, how they react to that decision. There may have been insurers that were contemplating a modernization on-premise. But now they kind of just hear us talk about the focus of our investment are on our cloud products and what does that mean for them. And so we're working through that with our customer base and with our prospects on a very -- kind of one-by-one basis. We have a large group of folks working at Guidewire that are doing cloud readiness assessments with our customer base to help them understand kind of the blocking and tackling that needs to take place in order to go to the cloud. But we feel strongly that over the longer term, in order to kind of maintain and extend our leadership position, we needed to reinvent ourselves in the cloud and so we're in the early stages of doing that.

All right. On kind of going down the cloud path, you recently came out with the first cloud-native version with Aspen and there's a bunch of others skiing mountain-related news coming out after this. But maybe talk a little bit about what does it bring that's more than just InsuranceSuite that you're hosting for customers? And just how do we think about the size -- the opportunity set that maybe this unlocks?

Yes. So one of the things that is really exciting about Aspen and one of the challenges that our customers struggle with is maintaining and supporting these core systems is a burden on our customer base, right? And so we want to unburden them of needing to maintain and support these systems. And in an on-premise modality, we would release a major release every 2 years. And the complexity associated with taking that release was such that our customers would typically skip a major release or 2. So they would gain access to the efforts of our R&D team every 4 to 6 years. And just the overall kind of challenges associated with that model was one -- was a pain point that our customers have. And so Aspen is, first, an important step that makes it visible and transparent and helps our customers understand what the cloud world will look like. And that's a world where we will own the infrastructure on behalf of our customers. We will own running it and updating it behind the scenes in a seamless fashion with minimal disruption. And we will start doing that on a 6-month release cadence, so that customers gain very rapid access to our innovation efforts. So that's what gets me excited about Aspen is some of the early cloud customers were really critical in our ability to start blazing this trail and understanding kind of what this transition will look like. And now with Aspen, I think, that there is a much broader visibility into kind of how we will actually architect and implement this promise of getting our customers on a 6-month release cadence where everybody is on the same version of our software, which is really exciting.

Yes. I've already got 2 investor questions, I'm going to turn to those. The first being, how should we be thinking about the competitive environment? And how should we be thinking about you versus Duck Creek, which just went public?

Yes, yes, sure. So we operate in a very competitive market. I think that there are some attractive elements of the particular market that we serve, where it is pretty difficult to penetrate. So we don't have -- my prior company was a data and analytics company. There tend to be a lot more competitors there. But we have a handful of real competitors. Duck Creek has been a competitor of ours that we've seen quite actively in North America for 10 years, and continue to see them in addition to others. And then as you think broadly as you go overseas, there tends to be in each geography, oftentimes, there is a particular vendor that has specific country and regulatory know-how that makes them competitive in a specific geography. And we haven't seen any shift in the competitive landscape too dramatically. We do recognize that some of our competitors may have started the cloud transition a little bit earlier than we have. We feel really good about the timing of our efforts in shifting the industry to cloud, especially within the customer base and the part of the market that we serve. So yes, we expect it to continue to be an active and competitive market as it has been over the last 10 years.

Got it. And then as we think about the market itself going after P&C insurers, does the kind of rise of these so-called insurtech players like Lemonade and Hippo, is that a headwind? Is that a threat? Or is that -- is there a better way to think about how that impacts you?

Yes. I mean we view that as a helpful backdrop to help instigate core system modernization. One of the key drivers of core system modernization is digital disruption and insurers' recognition that they need to be able to engage and interact with their customers in a much more digitally native modality. And so as we start to see kind of digital-first disruptors come to market, that can -- I think that can be an impetus for some of the industry to move and make sure they're investing in their core systems to be able to address being -- having a more digital stance with their customers. So digital disruption has been a key driver of core system modernization over the last 5 years, and we expect that to continue to be.

Got it. Another investor question I got is, you mentioned insurance now as an area that's made a lot of progress since Mike joined. Can you be a little bit more specific where has the progress been? Has it been on the go-to-market side? Has it been on product? Has it been on a market fit? What drivers can you talk about there?