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

Thanks, everyone, for joining us. My name is Sterling Auty. I'm the small mid-cap and enterprise software analyst here at JPMorgan. I'm very happy to be a moderator for our next session here at ICR 2021. We have Jeff Cooper, who's the CFO of Guidewire. Jeff, thank you very much for joining us.

Thanks so much, Sterling. It's great to do this with you. I know, unfortunately, the JPMorgan conference is always during our quiet period, so we don't get these opportunities as much. So this is great.

Yes. No, I really appreciate you giving us the opportunity as well. Maybe for those that are connected that are not as familiar with Guidewire, maybe spend the first minute or so, just giving just a brief overview exactly who is Guidewire. What do you do? And how do you actually make money?

Sure. So Guidewire is a vertically focused enterprise software company. Since the company's founding in 2001, we have served exclusively one industry, and that would be the 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 of record that manage insurance policies, claims process, underwriting process, billings process. And then we also sell systems of engagement and systems of intelligence that sit on top of those core systems that we sell into the insurers, and we refer to those as our digital and data products. We've always monetized our software in a recurring term license model. And we are now in the process of migrating our customers and this industry to the cloud by selling subscriptions to our cloud-delivered products. So today, still the vast majority of our installed base is accessing our software on-premises via a term license model, and very much in the midst of starting to move our customer base and the industry to the cloud. Our core systems touch over $500 billion of direct written premium, which is a key measure in the industry. So $500 billion of that approximately $2 trillion is what we touch in some capacity, and we have insurance customers in over 30 countries globally. So that's just a real quick overview. Always been very focused on this vertical and one that we feel really strongly has a lot of potential to continue to grow.

That's great. Before I actually jump in and start asking questions, I just want to remind the attendees that you do have the ability to click and submit a question to me. It will be delivered to me electronically and I'll incorporate it through our session as we go.

But maybe to get started, you mentioned the $500 billion of direct written premium out of the $2 trillion, are you fully monetizing that $500 billion? Meaning are you getting every dollar possible subscription out of it that you could? And if not, what is that opportunity just within that set of customers look like?

Yes, it's a great question. So when we think about that $500 million that we disclosed on an annual basis -- $500 billion number that we disclosed on an annual basis, that is what we touch in some capacity with maybe one of our modules. We have kind of 3 primary core modules of our software: ClaimCenter, which helps manage the claims process; PolicyCenter, which helps manages all the policies to ensure we'll have; and then BillingCenter. And so as long as one of our core systems is touching an insurer's direct written premium, that would go into that $500 billion number that we touch in some capacity. So that's a view into how much have we touched in some capacity. Then we often will talk about the share of wallet that we have or how penetrated we are into our existing customer base. And it's not uncommon for our customers to purchase 1 module, and then over time, buy the full suite. So there is still a lot of room for us to grow and expand within our existing customer base by selling, a, additional modules; and then b, leveraging more of the products that sit on top of the core, those data and digital products that we have. So we've looked at this a variety of ways, but when we look at the amount of room there is within our existing customer base, there is easily an ability to double or triple our ARR without selling new customers. And that is even almost before you really get into the cloud opportunity, which is as we shift to delivering just software to delivering core systems as a service, there's a lot more that we're providing and ensure that's a whole division of labor changes where we take on a much bigger role in delivering these products as a service. And so there is a pricing uplift associated with going to the cloud as well.

Well, everybody seems to be on this path to shift to the cloud. So maybe talk to us, when did the cloud journey for Guidewire really start? And kind of where are you in that journey?

Yes. So Guidewire -- this industry has always been an industry that is conservative, very measured in how they think about these things. Most of the systems that we are replacing are 30-, 40-year-old legacy systems that have been in place just for a really long period of time. The risk-adverse nature of this industry is part of the reason why still such a very small part of the core system frameworks that exist today are being delivered via the cloud. When we started this journey, we had 1 kind of really critical customer that really kicked this journey off for us, that was back in around fiscal '17 where that journey really started, and that was very bespoke at that point in time. This was a foundational customer that helped -- was helping us kind of learn how we would migrate and move to this -- to the future, which would be the cloud. There was a long -- there was a lot of confidence that this industry would eventually go to the cloud is always a question of kind of what's the right time to focus our efforts on it. So kind of in around fiscal '17 is where we were very early days just getting the process started. And then as you saw us move through fiscal '18, '19 and '20, what you saw is pretty meaningful steps of the percentage of our bookings, or what we call new sales, come in the form of cloud. And that is now the vast majority of our bookings. We'll now -- are now coming due to the sale of cloud products for new customers. And that's been the journey over the last 3 or 4 years. A couple of things that have been really important were also the hiring of Mike Rosenbaum as our new CEO, that was a little over a year ago now that he came and took over the role for Marcus, which started -- who started us on this journey. Marcus was founder, CEO, who really separated the company through a lot of really challenging and interesting times and had tremendous success. But one of the things that I really appreciate about Marcus is he kind of took a step back and realize that to get this company to the kind of the next leg of this journey, he needed to have some real strong cloud expertise and someone from the outside to help us get there. So we brought on Mike Rosenbaum from Salesforce. And that has been a shift in terms of how we think internally that has resulted in what we are talking about today, which is our Guidewire Cloud Platform. We had our Aspen and Banff release as part of our cloud journey. We're going to be on a 6-month release cadence, really shifting kind of how we think about developing product internally and optimizing for the cloud. So it's been an interesting journey. We're still in this market. We are still very much in what I like to say the early days of this demand curve. We have a handful of customers that are kind of up and running and live on our products. We have in the 20s or a little over 20 customers that have purchased the InsuranceSuite product, which is our flagship product to be delivered via the cloud. And so it's still very much early days in how we think about this opportunity, and we're very excited. And the other thing that's interesting about Guidewire and how we approached addressing the cloud opportunity is our customers often skew towards the larger insurer, and that tends to be very complicated IT environments that we're operating in. And so I think that part of the market has been the most measured with respect to how they think about transitioning to the cloud. And so for Guidewire, it was -- it's a very consequential decision for us as to when we make this decision to transition from primarily an on-premise software vendor to having kind of both options available to really putting the thrust of our focus on the cloud. And we're now very much where the thrust of our focus is in the cloud. Customers understand that that's where we're going, and that's where we're headed. And any time you do that, it does create some disruption and challenges into the sales cycles and other things, especially customers that may not be there yet with respect to going to the cloud and can cause some delay. So we're in the midst of that right now as this industry rocks what this shift means. And I view this as really once-in-a-generation re-platforming. And so it's been an interesting time to be a guidewire and help the company manage through this transition.

So you put it very nice. I would say that you kind of passed that point of no return. I think you're fully committed on this one. And in 2017, I think the customer you're referring to is MetLife, which you've talked about publicly. But with Mike coming in as CEO, was there any sense that perhaps going with MetLife in the way that, that bespoke project was done, did it actually cause you to kind of reinvent the wheel at all in terms of building out the cloud platform that you have today? And just maybe just a high-level commentary around the technology and where you think it sits relative to customer needs moving forward.

Yes. MetLife has been a very important learning experience for Guidewire, and it's great to have partners like MetLife who are willing to be the early adopter to help us blaze this trail. Certainly, there are a ton of things that we've learned along the way. And some of the early cloud customers were more of what we call internally a lift-and-shift style projects. They went on to -- our software -- the first step for us is really architecting our releases. And I would say our version 9 and version 10, which are our most recent on-premise releases were very much architected to be able to be delivered via the cloud, like that was step 1. And we talked about version 9 was really the first one that where we could get 100% of the components cloud -- delivered via the cloud, version 10 was really optimized to be cloud delivered. And that was a really important first step. The thing that has happened more recently, which is really important is Guidewire standardizing the architecture layer on what we call Guidewire Cloud Platform, which will be the destination for all of our cloud customers going forward. And by standardizing that, that's really critical to our ability to enable these rapid delivery of upgrades on a 6-month cadence, which is very rapid for this industry. And so that is critical. Some of those are early customers. We kind of took over a lot of the legacy components of their architecture. And then over time, we will work to pull that over onto our Guidewire Cloud Platform architecture there to get everybody on a standardized version of the architecture. But early customers like MetLife were absolutely critical to our ability to scope the problems that exist as you kind of tackle these projects, to understand kind of what are the critical needs and maybe ancillary needs with the large insurers. And so we have a number of customers like that. MetLife, TD is one in Canada that was an early cloud customer of ours that we just took live on ClaimCenter and now are working on the PolicyCenter, BillingCenter component of that particular implementation. Ton of learnings through those projects that have flowed through to how we think about designing our cloud product. One of the things that is a real challenge when you move to cloud, is you do have to make some trade-off decisions. And if you're bringing it over in a very bespoke single instance, lift-and-shift kind of arrangement, it's easier to do some customizations around the edges that you can then host and manage in a bespoke fashion. But as you start to build this for scalability, you have to tackle those difficult problems. And that's kind of what we're seeing right now in how we architect the Guidewire Cloud Platform.

So in doing so, I think one of the things that investors are still wondering is, we go back to 2 predecessors ago: Richard Hart, the new CFO during that 2017 time frame, when the cloud was just being introduced, talked about some unit economics, like, hey, once you get to 20 customers, you expect the gross margins to be like 60%. But that's under a very different technology footprint than what you're looking at today. How should investors think about what the unit economics in that cloud business look like, given that it's in its infancy? And where does that evolve to? And what are kind of the key milestones along the way?

Yes. We touched on this a bit at our Analyst Day. But you're right. I mean I think the way that Richard was thinking about it is kind of at the customer level, and where do we start to see some of those efficiency gains. Now I think as we've changed how we approach the building of the software, the maintaining of the software, there are some pretty significant kind of upfront costs that we're taking or tackling as part of this. And they will be variabilized kind of in the future as we gain more customers and have built out, especially what we call as cloud operations function that is a critical function that we're building out right now. So a lot of the investments we're seeing today are on building out the cloud operations capabilities. We recognize that a lot of the investments that we're making today will help us scale our ability to run and manage the software in a much more efficient way. We started this journey thinking about how many headcount are attached to a new customer, and what is the cloud operations and support headcount attach that we need for every new customer. We've now kind of built our cloud operations in a manner where there's different pods in our cloud operations function. And maybe a pod today is supporting 1 customer because they're still not kind of at the point where we've been able to scale those pods. But over time, a pod in our cloud operations team should be able to support 5 customers and then 10 customers, and then you just build that efficiency point out. We are investing heavily right now in both on the product side and the cloud operations side because we recognize that we are in a very critical point of this demand curve. The very early part of this demand curve, these are challenging projects. Guidewire has built its reputation on tackling that most challenging projects and getting insurers up and running in live. And we know that it's absolutely critical that we maintain that leadership in this early part of this demand curve. And so you're seeing us focus on that. As we exit this year, there's been a real hiring push on cloud operations over the last kind of 18 months and through the end of this year. And my sense is, as we exit this year on the cloud operations side, specifically, we should start to see that slow down and start to see us leverage those investments much more meaningfully. And then as we thought through where we can get to in the future, over the longer term, we talked about at Analyst Day, getting our margins back into 70-plus, 75% gross margin on the subscription side, but it's clearly going to take a while for us to get there where we are in this investment cycle.

You talked about that obviously, the sales cycles as you're moving this direction change, especially in the higher end of the market. It appears that most of the cloud decisions that have been made thus far are for either smaller ancillary parts of business or new books of insurance bettors being started to adopt by the various carriers. Is that what you're experiencing? And what do you think is going to be the catalyst to see that shift towards getting more of the big legacy books of business to finally come into the cloud?

Yes. It's a really good question. And I think one of the areas that we are focused on is that -- those large books, those books that kind of we have run on-premise, and those customers are thinking about a major upgrade or thinking about how they want to manage those systems in the future and starting to evaluate the Guidewire Cloud. We're early in that. My sense is as we think about the cloud opportunity in front of us, and we've talked about this quite a bit, a lot of the opportunity that we expect this year will come in the form of migrations, and migrations come in the form of, hey, these are our customers migrating their books of business to our cloud. So that's a huge part of our opportunity that we're really excited about. We think that's clearly also a differentiated opportunity that we have given the amount of success we've had in the on-premise world in terms of managing what I like to call the meat and potatoes of the business, these kind of big books of business that exist at our customers. So we see that happening right now. If you look at some of our customers that have decided to go with Guidewire Cloud, whether it's folks like American Family or USAA, TD, these are all folks that are moving the vast majority of their DWP to our cloud. So that's a really exciting opportunity for us. At the same time, we do see those who may not be ready to take that step. We are seeing folks do, kind of what you mentioned, greenfield lines, early lines, dipping their toe in the water, getting comfortable with the cloud products, trying to understand the cloud products. And that's a trend that we're seeing as well. And that's pretty -- it is pretty significant. And the other trend that we've talked about more on the negative side, just as we kind of work through this early part of the cloud transition, there are a number of customers that just aren't there yet. They recognize the inevitability of the cloud and realize that they will likely go to the cloud at some point in time, but they may not be there yet. And so that -- and that even impacts folks who are still on legacy, right? So if you're on a legacy system and you were thinking about modernizing, but you're not quite ready to go to the cloud yet, you probably are going to decide to sweat your system 1 more year while you evaluate what the cloud means rather than going on-premise, because I do think that there is a general recognition that's kicking off a very large and expensive on-premise campaign right now is probably not the best course of action, especially in the U.S. So there's a lot of different things going on right now in our demand curve. And we have noticed, because the one thing as I came in into this industry about 3 years ago and inspected the data on modernizations, it was very interesting to see that it's not perfectly consistent, but there's just kind of like blocking and tackling every year. There is a certain number of significant modernization campaigns that came up for bid, and Guidewire was lucky to win a pretty significant percentage of those. In the last couple of years, we have seen that slow down as this industry rocks what the shift to the cloud means to them. But we also now have this really new growth driver for us, which is migrating our existing customers to the cloud.

And in the on-premise world, it took a lighthouse account, like nationwide, to finally make the decision and go live to be that lynchpin that suddenly not -- then the snowball was rolling downhill after they went. Is there a need for a similar type of occurrence in the cloud version? And is USAA or somebody else that potential lighthouse account to really drive that inflection?

Yes. I mean we obviously think USAA is a critical account in that capacity, especially here in the U.S. market. Interestingly enough, USAA is also going to be one of the early adopters, I think, especially at scale of Guidewire Cloud Platform and on the ski slope release cycle, which is very exciting for us. So absolutely. We think there are a lot of eyes on that particular account and that particular implementation. On a bit of a smaller scale, TD in Canada has been a really important account for us. And if you go back and look at our cloud wins, you'll notice that a fair amount of them have been in Canada. And so I almost -- I think TD has acted a little bit like a lighthouse account in that particular country. And we do see that. It is interesting to see insurers want to see success in their geo, in their particular line. They want to look at customers who have adopted that look like them. And so that has an impact.

Where -- so if that's the case, where are we in the kind of the full rollout for USAA?

Yes, yes. I would say that Mike Rosenbaum has been very cautious to let USAA talk about where they are in the rollout, but there was some really good content on our Connections event that is available on our website that you all can walk to get some sense. But the spirit of partnership at USAA has been outstanding, working hand-in-hand with them. We feel very good about kind of the progress we have there. I think the way that account evolved is we initially sold them a ClaimCenter deal, and then 6 months later, we sold the PolicyCenter and BillingCenter component. That did change some of the implementation timing as there was some resequencing of how they thought about the implementation as a result of that. And I think they've pulled forward some of the work on the PolicyCenter side and slowed down some on the ClaimCenter. But so -- but it's going very well. There's just high levels of engagement, and we're really excited, obviously, to get that one out there and live because we know it's an important event for the industry.

When you talk about the tremendous opportunity of the existing customers on-premise shifting to the cloud platform, how much of that are customers that are full InsuranceSuite customers? How much of that is large carriers that might be using Guidewire perhaps just for claims?

Yes, it's a good question. So when we think about the opportunity, it obviously is across -- and I think maybe part of your question is this: as the industry moves to the cloud, will they move more on a full suite manner?

Exactly. So where I'm heading with this is, are your claims only one going to shift and still do Guidewire claims only and maybe Duck Creek for policy and you get what's affectionately called Duck-Wire for the implementation? Or do you think there's an opportunity to actually get a bigger chunk of the wallet?

Yes. Okay. Yes. No, I think it's -- if you look at the early success, people will -- people have bought in a modular fashion some cloud products. So we have seen USAA, for example, bought ClaimCenter first and then rounded out the full suite. But we also are seeing a bit more of a suite mentality with respect to purchasing in the cloud. If you go and you look at all of our cloud wins, more of them bought the suite than not. And so -- and that's a little bit different. Now some of that is related to people buying a product for kind of a new line of business, and they just want a full suite to service a new line of business. And so I think it's very natural that you'll see that with some of these greenfield lines. The question is, is really kind of on those big books of business that you're talking about, where they may have already modernized all of their core with different components. And it's still early to tell. I do think in the cloud, there will be a bit more of an inclination to going for the whole suite. But if you've already gone through the pain and suffering of modernizing your core, we know how difficult it is once you've done that. And even kind of this shift from on-premise to the cloud, it really depends. I mean I think one thing Guidewire did, and this was one of the things that I really appreciated out of our Analyst Day, where we had our leader who's in charge of our upgrade business, Sandia, speak. But talking about how Guidewire from the early days was architected in a manner where you could upgrade the software, right? And that was actually a really important innovation delivered to the industry because before that, you built these things once and then you patch them, right? You never did a major upgrade. And that was an innovation that Guidewire brought to the industry is to deliver software that even could be upgraded. And because we've always had that mentality, I do think we are in a strong position to take people, especially those that have remained relatively current on-premise. And that decision to upgrade to the cloud -- well, it's not an insignificant decision from a cost-and-upgrade cost perspective, it is one that we can tackle with our customers. And that's a big advantage. So it depends on how you've architected your software if you've been modernized with one of our competitors, but done so in a way where as you think about upgrading a policy system, and you think that it's going to almost be like a reimplementation, then an RFP for -- do you want to go with a full suite from Guidewire rather than doing a reimplementation of that in the cloud? Those are the types of questions that I think customers are grappling with. As we think about those that have invested in Guidewire and what that hop looks to get to the cloud, we feel very good that it would be very unlikely that those customers would revisit that decision as they think about moving to the cloud.

Two important announcements that I felt came out of the Analyst Day was: number one, having the ability of an existing customer to move from version 8, 9 or 10 into the cloud; and second, you talked a bit about the timing of end-of-life of version 8. So maybe on that second part, can you give us a sense of how many customers, or how big is that book of business that's on InsuranceSuite 8? And when's kind of the almost the stick and the carrot and sticks in terms of end-of-life to have the move to the cloud?

Yes. So version 8 is a fairly significant part of overall installed base and we didn't give exact numbers, but we did provide a little pie chart in our Analyst Day that kind of helps you get a sense. Version 9 is our biggest cohort at this point in time, and version 8 is the second biggest cohort, if you look at kind of the customers that are on different products. So it's a meaningful amount of the installed base. And those customers, there's a variety of different decisions that they can make. One of the decisions they can make is to upgrade to the version 10 product on-premise, and that's -- we will likely see a fair amount of our customers do that. But it's also a natural point for them to consider the cloud. Any time you're doing a major upgrade, you're going to be asking yourself, okay, is this the right time to go to the cloud? And we're going to invest in this business disruption and this cost right now, should we just go directly to the cloud? So the fact that we have a more rational and well-understood path for those version 8 customers to go to the cloud, because previously, what we were saying was, hey, the first step is going to version 10, and then that version is very cloud deployable, and then we'll take that version to the cloud. It's much easier to just stop at version 10 when you have to do that, right? And so giving a much cleaner path to go directly to the cloud is an important thing. And it's more -- it's a reflection of one, now we have a very clear destination in Guidewire Cloud Platform and we have a lot of people that have been working on this problem and tackling this problem to think about kind of how can we standardize the steps? How can we bring more efficiency into this upgrade factory to getting our customers to the cloud? Those customers who are still on version 7 or below, that's often an indication that -- and those can be some pretty old customers, an indication that they implemented in such a bespoke fashion that it almost might be considered a reimplementation at that point. Luckily, that's a pretty small cohort that are still on version 7 or below.

So what does it look like in terms of the cost and total cost of ownership for a customer that's on version 8 to move to the cloud? And on the other end of the spectrum, what does it actually look like in terms of the revenue that Guidewire generates from that customer when they move to the cloud versus version 8?

Yes. So -- and we price our software on basis points of DWP. And whether you're on version 8, 9 or 10, it's -- there's not a significant difference between kind of the amount of basis points we capture. And usually, when you upgrade to the newer version of the software, there's no changing your software pricing, but there is some services work and other kind of time and materials work in order to get to the latest destination. So as we think about the software uplift associated with moving to the cloud, we've talked about for, going back to Richard and kind of pretty consistently talked about the 2 to 3x uplift, we look at that data very closely on a regular basis. And in general, we feel very confident that, that is still the right benchmark that we should be working towards, and that we -- that's how we think about it. As we look at the deals -- it's interesting, some of the early deals that we did we're even -- we're actually above that range. And because we were pricing with a margin mindset, and we were thinking about margin in a very bespoke customer-by-customer perspective, and as we've gained comfort in our ability to standardize the architecture layer, understand the costs associated with that, that has also then allowed us to feel comfortable pricing at what we always said would be the right endpoint, which would be this 2 to 3x range. With respect to the implementation costs and how that impacts the total cost of ownership of the systems, it is -- those are really hard to talk about at general levels because it varies so significantly customer to customer. And it really depends on the number of integrations that they have, what the environment of their overall IT framework is, how many one-of-a-kind systems exist in their infrastructure that we've never seen before that we have to build integration points to, how they implemented the software, where do they deviate from kind of the standard Guidewire path. There are a lot of variables that go into how we think about what those costs look like. Clearly, the more work we can do to standardize that upgrade path and bring down those costs, we know that, that is such a big hurdle for customers in terms of making this decision to go to the cloud. And so that is something we're very actively working on. But it's still -- these are still big projects, right? Even taking a Guidewire version 8 and bringing it to the cloud, it can be a pretty expensive services engagement in order to get there. And as a company, we've recognized that and said, hey, we're in the early part of this journey. We're learning as well as our customers. And so we have been making some investments in the form of kind of helping our customers tackle the services burden. And you see that a bit in our services margin as we've been kind of making some investments on helping our customers -- some of these early customers that are willing to blaze this trail with us to help lessen some of the services burden.

But is there an economic incentive for customers to move to the cloud at the end of the day?

I strongly believe that -- and I've looked at a lot of the business cases that we do with our customers, and it's challenging to get all the appropriate endpoints -- data points to go into those models. But the amount of cost associated with managing these systems in a bespoke fashion, because if you think about it, the industry in general is managing these systems in a very bespoke fashion. And so the ability to standardize that should drive efficiencies. Most of -- the business cases we have vary. Some of them will show a meaningful ROI on just -- on the cost side, just on the cost of ownership side. It will usually take 3 to 5 years before you start really seeing that kind of ROI impact. But by the time you get to those years, the annual cost, even with the uplifted subscription fees should be lower than what the annual cost was in managing the legacy world and all the patches and the team and all the investment required to do that. But yes, so I mean it varies customer to customer, and we've seen a pretty wide disparity of outcomes on just the clear cost ROI within our customers. But my strong belief and as I've looked at these is most of them do show a pretty strong positive ROI. Sometimes you need to take the model out a couple more years in order to really capture it, but most of them do show that.

Because I think one of the things that we've heard most on the timing of those big legacy books of business is especially if they did a system modernization project sometime in the last 7 or 8 years is, they spend a lot of money to do that. For those companies, they look at it and see, we just did a modernization project. Now for those of us that are intact, we look at it like at 7, 8 years ago. That's a lifetime ago. But in the context of a carrier that, like you said, the last time they get it was 30 years prior to that, it feels very fresh in their minds. So that's why I didn't know if there is kind of a way to think about -- if you had a, let's say, a $1 billion DWP company that's on-premise, what type of project size are we looking at to get their 3 core systems into the cloud? Just conceptualize how big of a financial hurdle is it for these customers to get over to make that decision.

Yes, I'm very cautious of trying to give specific numbers in a general fashion because it's just really difficult. And if we had a customer that just recently went live, you're probably right, the example of recently in their mind and our minds are very different. So 7 years ago, maybe they went live on version 8, and they're thinking about that first major upgrade. And so then they're doing the math is, just how much it cost me to go to version 10? And what would be the incremental cost to getting to the cloud? And I think that, that's the right time that you see people have those meaningful conversations. There are others who maybe would live on version 9 and are realizing just because they modernize, it doesn't mean they've alleviated the complexity of managing and running these core systems with their own IT departments. In general, I think you're seeing CIOs and IT investments wanting to really move the needle in terms of touching the customer and those digital investments are where you really want to spend your time and effort and trying to innovate and seeing a lot of your IT budget going towards the core systems is a bit of a challenge. And so what the cloud can do is to forward your -- some of your existing IT people to reship their resources towards initiatives that touch the customer and allow Guidewire to manage that complexity on the back end. But yes, it's really hard. It's really hard to kind of put down numbers. And so much of the numbers don't even really flow through our books, right? We have some sense into what they're doing because we know we have good relationships with the SI communities who are managing a lot of this work. But a lot of that work is going to the SI partners as well, which is something that we're very supportive of.

That makes a ton of sense. Where does this leave the down market opportunities? So in other words, a number of years ago, Guidewire made an acquisition of a cloud platform that really geared towards that Tier 4, 5 and below. How are you thinking about the bifurcation of the cloud market?

Yes. And there's some interesting dynamics there. So one, we obviously acquired ISCS that has formed the basis of our InsuranceNow product. That is our product that is designed to service the needs of the smaller insurers in North America. And we've made investments there. We are very committed to that as a platform, and excited about some of the progress we've made there. There's still work to be done on that part of the market. And that part of the market also tends to be much more competitive. There's just a lot more competitors that we see in that part of the market. But a critical product for us in terms of, one, protecting a flank, right, and making sure that we don't see a core system vendor gain a lot of success at the low end and then start to move upstream. And also InsuranceNow is also really helpful for us in learnings around cloud architecture and how you build out a cloud service to service this industry. The other part of it that is kind of interesting is these things that we're working on with our InsuranceSuite product to service kind of some of the needs at a lower price point. And that can help us attack this test-and-learn market, these greenfield lines of insurance where we can -- so it's almost like -- if a greenfield line was just going to stay at $50 million of DWP, and that was the goal, you could sell them InsuranceNow, and we do have some Tier 1 customers that have bought InsuranceNow for smaller lines of insurance. But then there's also those that have aspirations of aggressively growing these greenfield lines and want to be able to scale with their core system. And so we have a version, a package of our InsuranceSuite that is a little bit more streamlined and slimmed down, call it, quick start, and that's something that we have to service some of these kind of smaller lines that have aspirations to grow quite significantly.

So putting all that into context, at the Analyst Day, you also talked about some longer-term goals and achievements, including what the growth in ARR would look like. And one of the questions I get from investors is, "Jeez, this cloud opportunity is really that large." Granted, timing is very uncertain in terms of a lot of the discussions, but why wouldn't the ARR growth be faster than kind of what you outlined?

Yes. Yes. It's a -- we feel very strongly that we have a unique opportunity in front of us that we call this migration opportunity. And that plays a critical role in how we think about the near-term ARR growth. The 3 real drivers of ARR growth that are embedded in our model and some capacity is: that migration opportunity; the existing customers we have; how compressed or elongated will that decision matrix look like; and when will they start to migrate in a meaningful fashion. Then we have what is -- what I call our blocking and tackling, but just continuing to modernize this industry that has still yet to be modernized, right? So just new modernizations that we've seen that slow down a little bit, and we expect that to kind of return to more normalized levels once the industry feels confident and comfortable that, okay, this -- we're past the early days of this cloud transition, and I can start making meaningful plans to modernize again. And then you have the data and digital opportunity. And just -- I would call it ancillary opportunities that sit on top of our cloud products. And so the way I think about this will play out is, in the early days, this migration opportunity has the opportunity to really drive growth. But the blocking and tackling is slowed down until we get to some critical mass in the cloud. Then kind of the middle stages, I think you'll start to see that return to more normalized levels, there'll still be this migration opportunity because it's going to take us a while to play through this whole entire migrating of our installed base. And then if you start to see also on top of it, the data and digital accelerate as we get more and more meaningful critical mass on our cloud, that's where you can start to see really exciting ARR growth levels. We clearly have models that get us back into the 20% and beyond, but our view is that this is a conservative industry. It's going to move at a measured pace, so we're not assuming a really compressed migration opportunity. If that happens, I think that would be the thing that would get us to kind of over 20% in the near term. That also could pull forward some of the data and digital opportunity that I think is really exciting, but getting to a critical mass on a common cloud architecture is an important backdrop for that opportunity as that opportunity presents itself in a more meaningful way. So there's lots of different things going on. We -- the other thing is these contracts that we sign, as you know, they often have a multiyear ramp component to them, and so -- especially in the cloud. So as we sell these deals with a multiyear ramp, we are building up kind of cohorts that will build on top of each other, where there's less selling activity that is required in order to capture growth. And that will become a more meaningful tailwind. And all of those things together give us confidence that we can grow in the kind of mid- to high-teens for a fairly long period of time, and we have to kind of work our way back up to those levels. But that -- and that's kind of how we thought about the guidance and how we thought about setting the top line opportunity.

How does the -- that ramp feature play out in terms of the income statement, given ASC 606?

Yes. And that's where -- so in ASC 606, there's a lot of complexity, especially around migration contracts, and I can get into the weeds really fast on this topic. But basically, there's -- ASC 606 allows us to -- if we have a ramped contract and a subscription arrangement, we take the total committed amount and recognize that ratably. So it will actually pull forward some subscription revenue in that context away from the ARR. So the ARR that we report is aligned to invoicing activity. And revenue can be pulled forward a bit in a ratable way, right? Now the migration agreements, because the customer continues to need to use the on-premise software, we will take some of that total contract value and determine that, okay, they're going to need the on-prem software for 2 years, so we have to allocate a portion of that total contract value to term license revenue and maintenance revenue. And so you end up depressing the overall subscription amount that is attached to that arrangement, and then you recognize it ratably. So there's a lot of like puts and takes that ASC 606 creates, and it flows through the subscription line, unfortunately. So we've been trying to help people understand all of this movement by focusing on ARR, and we feel strongly that's the metric we focus on internally, it's the right metric to measure us on.

So I can't leave the discussion without talking about the competition. So -- and especially some of the win rate metrics that have been put out there. Can you at least explain from your perspective how you define your win rates? And what do you think your opportunity set looks like, especially in the cloud on a competitive basis?

Yes. So we disclosed some win rate data on an annual basis in our Analyst Day. The way we define that is we have a team that's out there that it works on hand-in-hand with our sales organization and looking at all core system decisions that happen and where we were competitive and where we saw -- even if we weren't competitive, where we saw a competitor make a major win. And we try to capture all that data. We believe, given our market presence, that we have pretty good global insight. These things are always imperfect, but we feel pretty confident that we have pretty good insight into all the core system decisions that exist out there. The one thing that I would note in our competitive win-loss data. We do, if we see a migration, we view that as a core system decision as a decision to go from an on-prem to a new system. So that is in our data, and we did kind of highlight that with a different color. As we know, we do expect to win the vast majority of those migrations. So that's how we measure the data. We inspect it quite closely. It's a competitive market. There are a number of competitors out there. There are some competitors that were much more focused on the cloud a bit earlier than we are. We think some of that is a reflection of the parts of the market that they serve and the readiness of those parts of the market to adopt the cloud. I feel really good about the timing. I don't think we were late. We service a different part of the market. And as soon as you go all-in on the cloud, it does have an impact in terms of how people think about buying and transacting. And so it's a really important timing decision. And I think we made it the right way. I'm very pleased with where we are. We haven't seen -- people always ask us, we haven't seen -- there are always kind of shifts in the competitive market. We've always had very credible competitors. We haven't seen any sort of major shift in the data that -- the one thing I would say is maybe kind of 2 or 3 years ago, we were earlier days in the cloud, and so it's possible that 2, 3 years ago, we opened ourselves up to a bit more competition, I think we've closed those doors, and our messaging around the cloud is resonating much more meaningfully with the marketplace today than it was kind of 2 years ago. So that's -- we haven't seen a major shift in terms of our win rates or what -- I think the big shift we've seen is how this industry is tackling the shift to the cloud.

That makes sense. How about geographically? We talked -- specifically, you called out U.S. and Canada. But Europe and Asia, is the mentality of the timing there different than what you're seeing domestically in terms of cloud adoption?

It is. It is, especially Europe. I would say Asia, Australia, New Zealand areas are more aligned with the U.S. In Europe, we have seen just a slower adoption of cloud, although I think that's starting to shift as well, I expect, and even some of the cloud -- the on-prem customers that we're actively engaged with today, all of them have seemed like they shifted to that where they want to understand the cloud pricing before they transact on-prem. And so they're starting to think about that eventuality. But I expect it to be kind of 1 to 2 years, maybe 2 years behind the U.S. in terms of meaningful adoption of the cloud.

Last area that I want to touch on is analytics. Analytics has been something that's been, let's say, on the come or developing since circa 2013. Where is that business? And what's needed to make it a more meaningful contributor to the growth of Guidewire?

Yes. It's a really exciting area for us and one that we know has the potential to be a real and meaningful part of our business. I'm very pleased with some of the progress we're seeing out of science, as we broaden the science platform beyond just cyber, and then there's also a fair amount of activity going on in the broader cyber landscape right now, right? And so we think that could have a positive impact in terms of how that business evolves over the next 12 months. So we're starting to see some more meaningful velocity in terms of the deal flow, which is positive to see. I still think that for us to really capitalize on the analytics opportunity that exists when we think about how we presented at Analyst Day and some of those numbers that we talk about -- okay, our ability to get traction with -- on the installed base and really solidify our position in the core and have that core on a common infrastructure layer, we'll open up so many doors with respect to analytics. So we want to continue to build that product, but also make sure that we're winning in the, what we call our strategic high ground in the core, because I think that will make for a meaningful opportunity in analytics in the future.

All right. Makes sense. Well, it looks like we're just basically up against our time. I did want to leave just a couple of seconds to say thank you both to ICR; Jeff, to you and to Guidewire, and wish everybody a, let's say, a safe, healthy and hopefully a prosperous 2021. Jeff, thank you very much for joining us. I appreciate it.

Thank you so much, Sterling. I appreciate it.