Guidewire Software, Inc. ($GWRE)

Greetings, and welcome to the Guidewire's Third Quarter of Fiscal 2026 Financial Results Conference Call. As a reminder, this call is being recorded and will be posted on our Investor Relations page later today. I would now like to turn the call over to Alex Hughes, Vice President of Investor Relations. Thank you, Alex. You may begin.

Thank you, Grace. Hello, everyone. With me today is Mike Rosenbaum, Chief Executive Officer; Jeff Cooper, Chief Financial Officer; as well as John Mullen, President, who will be available for the Q&A portion of today's call. 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. We have also posted this quarter's earnings deck on the IR section of the site. Today's call is being recorded, and a replay will be available following its conclusion. Statements today 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 and are based on management's current expectations as of today and should not be relied upon as representing our views as of any subsequent date. Please refer to the press release and the risk factors and documents we file with the SEC, including our most recent 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. Please note that starting this quarter, we have updated our non-GAAP methodology to exclude the impact of unrealized foreign currency exchange rate gains and losses. To ensure an accurate comparison, we have recast all our non-GAAP schedules back to the first quarter of fiscal 2025. A reconciliation of non-GAAP to GAAP measures is provided in our press release. Reconciliations and additional data are also posted at the end of our quarterly earnings deck on our IR website. And with that, I'll now turn the call over to Mike.

Good afternoon, and thank you for joining us today. We delivered another great quarter in Q3 and continue to build momentum across the business. The quarter was highlighted by 11 cloud wins, strong progression in key pipeline deals and growing customer interest in PricingCenter and our AI platform tooling and ProNavigator offerings. Together, these dynamics continue to strengthen our position as we head into our fourth quarter and provide a solid foundation for the remainder of this fiscal year and next. From a financial perspective, revenue, profitability and cash flow all finished ahead of expectations, continuing to demonstrate the strength and durability of our model. ARR in Q3 came in within our guidance range, growing 19% year-over-year and fully ramped ARR continues to grow faster than ARR. The bookings results in the quarter were solid and 19% ARR growth is a great achievement. We anticipated a couple of more deals to close in the quarter, but one of the things about Guidewire is that there are a relatively small number of discrete deals each quarter and sometimes timing doesn't align perfectly with quarterly boundaries. That said, the progress we made in Q3 with respect to pipeline momentum gives me a lot of confidence as we head into Q4, which is one of our largest and most important quarter of the year. As I think about the quarter and the progress we have made so far in our fiscal year, I'm very happy with the momentum and trust we have built in the industry. What stands out is the degree to which insurers are aligning around Guidewire as their long-term core platform partner. Customers increasingly want a complete platform they can trust, something that combines IT agility, an open approach to integration and amplifies their ability to innovate rapidly. This position has become even more valuable as insurers modernize core systems and look to operationalize the latent benefits AI creates for the insurance industry. During the quarter, we closed 11 cloud deals, including 2 net new core system wins and 5 ProNavigator deals. One notable transaction was a 7-year extension and DWP expansion with Auto Club of Southern California for InsuranceSuite on Guidewire Cloud Platform, alongside a significant new sale of ProNavigator. This carrier is investing in Guidewire to support long-term growth while incorporating greater AI-driven capabilities into its operations. We also saw continued momentum from insurers modernizing legacy core systems globally. In Europe, a U.K. insurer, part of a global insurance group, selected ClaimCenter on Guidewire Cloud Platform as part of a broader modernization initiative designed to simplify and accelerate its technology road map. In Brazil, we closed a large strategic net new win with Bradesco Seguros, which selected Guidewire Cloud Platform as part of an effort to consolidate and modernize a significant legacy footprint. This insurer is focused on improving product velocity and accelerating speed to market. And in North America, a large U.S. insurer selected PolicyCenter on Guidewire Cloud Platform within a commercial insurance entity. We continue to believe these types of transformational core system modernizations represent a durable long-term opportunity for Guidewire, and we were encouraged by the progress we made during the quarter. Beyond core system modernization, we are also seeing increasing traction across newer offerings on the platform. We had three great PricingCenter wins in the quarter, including one with a Swedish insurer, an insurer in Poland as well as our first U.S. win for PricingCenter at Oklahoma Farm Bureau, which selected the platform to become more nimble in pricing and rating, reduce IT and operational friction costs and accelerate speed to market. As I previously stated, we also saw continued and building momentum for ProNavigator, which was adopted in the quarter by 5 insurers spanning multiple sizes and lines of business as each increasingly looks to embed AI-driven knowledge and workflow automation directly into core insurance operations. In addition to Auto Club of Southern California, ProNavigator was chosen by 2 regional mutual insurers as well as a farm and ranch focused P&C carrier and a workers' compensation insurer. Additionally, our data and analytics offerings continue to gain traction as customers seek to embed more real-time insight throughout the insurance life cycle. Overall, we're seeing increasing platform gravity around Guidewire, and that's translating into healthy adoption of new offerings across our portfolio. These trends and the broader momentum in the business were reinforced at recent insurance forums we hosted in Europe, Australia, Japan and Canada. In each of these events, insurers consistently emphasize the same priorities: modernizing core systems, increasing operational agility and positioning themselves to take advantage of AI in practical and scalable ways. As we've said before, Guidewire sits at the center of the insurance enterprise. Our platform manages the core systems of record for policy billing and claims, and we continue to expand that foundation into critical business functions like pricing and underwriting through a continuously improving cloud platform. Our platform provides the context insurance companies need to apply AI to real workflows. AI in insurance or any other regulated industry use case depends on trusted data, well-defined workflows and systems capable of executing decisions reliably at scale, which is exactly what Guidewire provides. With ProNavigator, we have embedded AI decision support directly into the applications and workflows insurers use every day. We help underwriters, claims adjusters and customer service teams to make better decisions through contextual insights, recommendations and increasingly Agentic capabilities integrated into the flow of work. Underpinning all of this is our cloud platform and developer ecosystem, which was the focus of our recent Developer Summit in Bangalore, India. This event was a real highlight for me for 2 reasons. First, because of its scale. We had 3,000 people attend, which was double our prior year. And we had people come to Bangalore from all over the world. When we began this event, we just had no idea it would be so popular. And I never imagined that we would have customer development teams from the United States traveling halfway around the world to engage with us in this way. Second was the breadth of AI capabilities we are unlocking on the platform. Connecting these frontier models and tools like Claude Code to our platform and our MCP servers is unlocking a staggering amount of productivity in our ecosystem. Walking around the event and speaking to the real on-the-ground engineers who are every day translating the requirements of the industry to real solutions was just motivating for me. We are unleashing a productivity tsunami and the same excitement that people are experiencing with Claude-code-driven software development is now very real on the Guidewire platform. Making it possible to build workflows faster, integrations faster, new insurance products faster, new digital experiences faster, and it was just incredible and everyone in our ecosystem is excited about it. We're also seeing significant and measurable productivity gains internally and across our partner ecosystem through the use of these Agentic development tools, which is helping accelerate delivery and implementation timelines. This improvement will accelerate migration and modernization efforts across the industry. We are almost a decade into our efforts to bring the industry a modern cloud platform and still much of the insurance industry still operates on legacy technology. The insurance companies not operating on modernized core systems will struggle to take full advantage of AI to support the agility and intelligence insurers increasingly require to remain competitive. This reality creates a growing opportunity for Guidewire. By reducing the time, cost and complexity associated with this modernization, adding AI capabilities, agents and automation into an open platform, we believe we will expand our addressable market and continue to accelerate our business. And finally, before I turn the call over to Jeff, I wanted to quickly mention an important leadership transition in our sales org. After an incredible career as an enterprise sales leader in the software industry, David Laker has decided to step away from his role as Chief Commercial Officer and transitioned into a new position focused on strategic partners and initiatives. David will continue his current role through the end of the fiscal year. And to ensure a smooth transition, I'm excited to announce that Shane Cassidy is joining Guidewire starting today and will formally assume Chief Commercial Officer responsibilities after the end of our fourth quarter. Shane is a proven insurance industry leader and has been instrumental in partnering with Guidewire and helping grow our business over his 20-year career at Capgemini, where most recently, he was the Executive Vice President of the Global Insurance practice. The Chief Commercial Officer role will continue to report to John Mullen, and we anticipate that Shane will build on the strong sales discipline and execution that David's established. We're pleased to have Shane on board, and I'm excited to work with David in his new capacity next year. And with that, I'll turn it over to Jeff.

Thanks, Mike. We are pleased about the progress we made in Q3 as we shift our focus to our important fourth quarter. In Q3, we executed on healthy cloud demand. We made exciting progress moving key deals through our sales pipeline. We saw strong services demand and execution, and we really demonstrated the power of our financial model with revenue growing 27% combined with strong margin and cash flow dynamics. And I was pleased with the progress we delivered in Q3 to set ourselves up to achieve a fantastic fiscal 2026. ARR finished Q3 within the range at $1.147 billion, up over 19% year-over-year. Fully ramped ARR growth rates continue to outpace ARR growth, which is a strong indication into the growth environment we are experiencing. Total revenue was $373 million, up 27% year-over-year and above the high end of our outlook. Subscription and support revenue finished Q3 at $245 million, reflecting 35% year-over-year growth. Services revenue finished at $72 million, up 32% year-over-year, well ahead of our expectations on continued strong demand for Guidewire-led services programs and field engineering activities. Now let me turn to profitability for the third quarter, which we will discuss on a non-GAAP basis. Gross profit was $247 million, representing 29% year-over-year growth. Overall gross margin was 66%. Subscription and support gross margin was 74% compared to 71% a year ago. The scalability of the cloud platform continues to deliver strong margins. Services gross margin was 14% compared to 13% a year ago. This margin benefited from strong utilization rates, which was partially offset by higher subcontractor expenses to ensure we had sufficient capacity for the demand we are experiencing. We finished Q3 with operating profit of $78 million. This finished ahead of our outlook due to higher-than-expected revenue and gross profit and lower-than-expected operating expenses. In general, operating expenses have benefited from some slow hiring and some expense timing. We ended the quarter with $1.15 billion in cash, cash equivalents and investments. Operating cash flow ended the quarter at $61 million. We repurchased 1.7 million shares at an average price of $147.07 per share. We have $241 million remaining on our share repurchase authorization that we put in place towards the end of Q2. Now let me go through our updated outlook for fiscal year 2026. Starting with the top line, we are maintaining our ARR outlook of $1.229 billion to $1.237 billion, which reflects growth of 18% to 19% year-over-year. As we mentioned last quarter, we continue to see fully ramped ARR growth rates above ARR growth rates, and we expect that trend to continue for the full year fiscal 2026. This is important because it sets a solid foundation for durable growth as we look ahead to FY '27 and beyond. For total revenue, we now expect between $1.46 billion and $1.47 billion. The midpoint of our revenue growth outlook is 22%, up from 16% growth assumed at the beginning of the year and 20% growth as of the end of last quarter. We expect between $963 million and $969 million in subscription and support revenue. This is a modest increase but reflects a $20 million increase in our guide over the first 3 quarters of the year. This outlook takes into account the continued healthy DWP true-up activity strong attach of new products and a robust pipeline in Q4. Additionally, we were thrilled with the progress of ProNavigator and PricingCenter in the quarter. These new product areas have already surpassed my expectations for the year. We now expect services revenue to be approximately $270 million, given strong cloud demand and, in particular, demand for Guidewire services expertise. Additionally, as we noted last quarter, we are leaning into some field engineering programs where our services personnel are helping customers utilize Guidewire Cloud Platform and leverage newer Agentic capabilities to solve business problems. Turning to margins. We still expect our subscription and support gross margins to be approximately 74% for the year. We expect services gross margins to be approximately 14%. Overall gross margins are still expected to be 67% for the full year. We are also lifting our outlook for operating income. We expect GAAP operating income of between $124 million and $134 million and non-GAAP operating income of between $314 million and $324 million for the fiscal year. This updated outlook reflects higher revenue and gross profit expectations and lower operating expenses than originally anticipated. This is partially offset by a larger services revenue mix and an upward adjustment to our company bonus accrual given strong growth and profitability expectations. We expect stock-based compensation to be approximately $182 million, representing 13% year-over-year growth. We are raising our expectations for cash flow from operations for the year to be between $365 million and $380 million. Our CapEx expectations for the year are between $30 million and $35 million, including approximately $18 million in capitalized software development costs. Alex, you can now open the call for questions.

Great. Thanks, Jeff. Our first question comes from Adam Hotchkiss at Goldman Sachs.

I just wanted to start on ARR for the quarter. Mike, I know you called out deal timing, but it would be great if you could share any additional details on, what drove that and how broad it was? It felt like historically, you've had a pretty good handle on the quarterly cadence of backlog and deal velocity. So I'd just be curious what was different this time around and how we should think about whether you expect the same dynamic to impact Q4?

First, thanks very much for the question. I'll answer the last part of the question first. No, we have a tremendous amount of pipeline and expect -- we have to execute, but we expect a very strong Q4. The situation in Q3 with respect to deal timing, honestly, isn't that unusual. It's just there's a discrete number of deals that we have to close every quarter. And sometimes things are in our control and sometimes they're not. I actually think 19% ARR growth was a very, very solid quarter. And so I think when you kind of zoom out and look at the long history of the company, I think you have to say, well, everything is fine here, and there's really nothing to read into this other than a company like us that does big, large discrete deals is going to occasionally have a situation in which some things fall on the wrong side of that line. I think you really -- like when I think about what's going on, we see really pipeline building and we see demand building, and we see a tremendous amount of confidence in the sales organization and then really also the customer base and the demand for not just core modernizations, but these new products. Jeff mentioned this, like we're creating alternative ways to get to the number and alternative products to sell in PricingCenter and ProNavigator and our analytics product offerings that are really increasing our confidence looking into Q4 and next fiscal year. So hopefully, that gives you just a little bit of color about how confident I am in the company right now and how pipeline is shaping up into Q4.

Yes. And the only thing that I would add is we've been talking for some period of time around what the impact of ARR backlog is into the net new ARR numbers. And we've known for some -- as we entered into this year that Q3 faced a pretty meaningful headwind with respect to that particular metric. As we look at Q4, given the pipeline that we have, which is incredibly strong, in addition to the visibility that we have into the backlog that will flow out of backlog and into the ARR number in Q4, it gives us a lot more visibility into that number and informs our confidence into how we think about the guide.

Great. That's really helpful. And then, Mike, just a follow-up on something you said on ProNav and PricingCenter. It feels like you're getting some really good early traction there. Maybe for you or Jeff, how should we start to think about when these products and Underwriting Center as well? I know that's moving along into next year, will start to materially benefit ARR growth.

Well, those products are building in terms of the overall portfolio at the company. And they also strengthen the overall message and the value we can create for our customer by making sure we deliver a completely integrated suite across the full insurance life cycle. So obviously, as those product lines grow faster than the overall product -- the collection of product lines, they'll become a more and more meaningful part of the overall bookings number. We called it out just because it was an objective this year to get those product lines established. And as Jeff said, we're very, very pleased with the momentum. And so it will definitely happen that they'll grow as a percentage of the overall book, and we're very pleased with how much momentum we've been able to create in a short amount of time.

Our next question comes from Alexei Gogolev from JPMorgan.

As insurance partner with major LLM vendors, what's the practical integration posture with Guidewire in terms of enablement points or governance or security? And where do you expect Guidewire to build versus partner?

Great question. So -- and it's a super complicated, multifaceted answer. So forgive me, I'll do my best. And I don't know how long I allocate to answers of questions on earnings calls, but let's say, 3 minutes. Most important thing for us right now is the work that we've done on what people are calling a development harness to make sure that these LLM Agentic development tools work effectively with the Guidewire stack. This is actually like real software engineering that has to be put in when you point these tools at a platform and a code base like Guidewire, you don't necessarily get good results. But after doing the work to make sure that the system knows how to interact with Guidewire, we've been extraordinarily pleased with the results. I think this is what I was referring to at our Dev Summit in Bangalore is showing people how to get this thing deployed, how to get Claude code running on top of Guidewire, how to create the code, the integrations, the digital experiences, all of that stuff through prompt engineering. It -- really it is phenomenal. And so I would describe that as a partnership, right? Like we don't necessarily need like an official PR from these companies. They've done an incredibly good job publishing their APIs and how to build these things to work together. We've done a great job working with their technical teams to make sure that these things deploy well, and the results have been phenomenal. Now obviously, we also have LLMs that are sitting inside of products like ProNavigator and the agents that we build to run on our Agentic layer inside of our platform. And so there's like this like good symbiosis, if that's a word that in how these things are working together and being practically deployed right now that I am very, very excited about. I think if you say like what's the world going to look like in 5 years and how much of the solution is going to be delivered by Guidewire and how much of the solution is going to be delivered by a large language model and the various layers of the prompts, who knows? I tell you one thing -- that I am absolutely sure of, though, is the industry is going to run on a modern relational database like Guidewire. Claims, policy, billing, product modeling, these things are going to run on a modern cloud infrastructure that we provide. And we will remain open to working with these large language models and honestly, also other application providers that have incorporated these capabilities. This is what our customers want, and that's what's working right now. That's the message, and that's the architecture, and that's the reality that's working really well for us right now. So hopefully, that gives you a sense of where things are and where I think they'll go. But I would say, generally, I couldn't be more pleased with how this is evolving in the ecosystem.

Thank you Mike. And one follow-up in terms of monetization. How are you thinking about it for embedded Gen AI features over time? And what guardrails are you likely to implement to protect unit economics?

It's a good -- so generally speaking, I would like to build product that aligns to insurance value. And we tend to almost universally sell our products based on direct written premium. Based on a percentage of the direct written premium that runs on the service. And that enables us to describe the value we create in relationship to the size of the insurance company and therefore, the size of the value that we're creating for that insurance company. So if there's an LLM that's incorporated into that story in the same -- in the way that it is very directly with ProNavigator, we want to have a basis points-based pricing structure that will include whatever amount of, let's say, tokens that are necessary to deliver the value that we've been able to describe in selling that product. Now obviously, there are guardrails that we will build technical and contractual that will protect us from a use case that goes beyond what we expect. But nothing that we've seen causes me to worry that, that's going to become something that slows us down. We think we're going to be able to create DWP-based pricing structures for the products that align to the insurance workflow, and that's going incredibly well for us right now. Hopefully, that makes sense. It's slightly a technical question, but that's the philosophy around pricing and guardrails right now at Guidewire.

Thanks, Alexei. Next question is from Parker Lane at Stifel.

Mike, really nice to see the ProNavigator momentum here that you called out in the quarter. I think you acquired that back in October, maybe formally announced a release in April. Can you just give us a sense of how long those deals are in the pipeline? And generally speaking, when you look out to 4Q and the coming fiscal year, how you're feeling about the pipeline in the early stages of having ProNavigator on the platform?

Yes. Thanks a lot, Parker. It's a great question. I appreciate it. We probably should have woven that into our script. It's exciting for us actually to have a product that we can materialize demand for and close business around in a sort of reasonable amount of time. It's a very different sales motion than we have with core system modernizations that I think you know can sometimes last multiple years. So certainly, there was a bit of that pipeline that was already sort of -- it was already part of the company when we did the acquisition. But since acquisition, and hopefully, everybody gets this is like there's this like prompt shift in the perspective of the customer base around the trust that they are able to put into a service. It just shifts from a small company to a large company. And a lot of the things that we can do to build trust around the products we sell can be applied to the new products that we add to the mix here at Guidewire. And that's certainly true with ProNavigator. And so deal cycles are shorter. The conversations are quicker and especially relative to a modernization or a cloud upgrade. And that's very, very exciting. And that's one of the things that's driving the excitement in our sales organization, but also our customer base is there's this like this real demand to be able to actively operationalize AI in a way that allows a company to get started very quickly and ProNavigator meets that need.

I'll add one quick comment there, Mike. With regard to both ProNavigator and PricingCenter, the pathway to the business strategy conversation and business value outcome conversation as we continue to enrich our conversations with customers has been really powerful. So the gestation period of these deals stand-alone, Mike mentioned a different selling cycle. But it's also -- it is also proving to be a really rich engagement with Chief Claims Officers and heads of underwriting, heads of product and pricing inside of companies to connect the dots between the core modern platform to the business value that can be derived over the top of that. That's not just about cost dislocation and operational savings, but really about growth and indemnity management. And that's becoming a really powerful enrichment of the core modernization of core message.

Got it. Maybe one quick one for you, Jeff. You talked about slower hiring. You also talked about a surge in services demand. Was the slower hiring across the board? Or is that -- should I weave that in with the commentary about services demand and what you said about subcontracting and a need to invest more there and particularly like SBU type roles?

Yes. slower hiring was mostly outside of services, I would say. Services has been hiring to meet the demand threshold. And on the slower hiring side, there's a bit of -- sometimes it just takes a little bit longer to get the heads in the door that we want to get in. And there's also a bit of us coming to terms with some of the productivity gains that we're seeing with some of the AI tooling that we're rolling out throughout the company and being a bit more measured about how we think about future headcount growth. So those 2 things are playing into some of the hiring practices right now.

Great. Next up is Ken Wong at Oppenheimer.

Mike, maybe circling back on the slipped deals. I feel like you guys have been executing so well. So any time there's a little bit of hiccup, I think investors just wonder, potentially, is it maybe macro given some of the geopolitical stuff that happened in the quarter? Is it maybe kind of AI causing customers to kind of think through their deployment timelines? Any -- I guess, any reason why it wouldn't be some of those external factors and you guys feel comfortable that it is just kind of some deal timing? And then any update on whether or not those have closed in fiscal Q4?

Yes. So it's a good question, and I would say just generally, no, right? Like this is just simply a matter of us looking at the end of Q2 and saying, what do we project is going to occur in Q3 and then you could say, getting it wrong or seeing things move -- just things didn't go exactly the way we wanted. That said, I want to reiterate like the pipeline is actually building and the ARR growth rate ended up at 19%, which is pretty phenomenal. So I think that like more so, I would say this is a headline associated with us hitting the target that we set in Q2. It is not related to anything macroeconomic or a general condition that we see in the overall demand environment. Like I said, pipeline is building. Demand is building. We're looking at a -- potentially -- I have to qualify this is like we need to execute, and we're going to execute, but it could be a record Q4. And the demand that we see, the pipeline that we see is very, very significant. And so yes, I wouldn't connect the dots to anything related to macro or AI or anything like that.

Yes. And I agree, Ken, there's nothing like that at all. I mean we have a ton of confidence into the market position, the demand environment. I don't want to comment on any specific deals. But as we look at the linearity at the start of Q4, it's off to a good start. So there's -- Guidewire is a business that has a small number of very large deals that can be quite impactful. This is just a dynamic of our business. And part of the reason why we always coach people to focus more on the annual results as the true measure of our success. And we feel very confident that anything that we didn't quite get in Q3, we'll manage to get over the finish line in Q4 and the pipeline is really strong.

Understood. And Jeff, I appreciate the color on the fully ramped lining up with ARR this quarter and likely similar in Q4. I don't suppose any directional color in terms of whether or not fiscal Q3 was kind of tracking like at or above below what Q2 levels were?

Yes. Here's what I can say. I mean, our fully ramp continues to be very, very healthy. I think it's a helpful reminder that when we approach a deal negotiation, we really focus on making sure we're being thoughtful around driving customer lifetime value. So this means optimizing the ARR dynamics for the out years more so than optimizing them for the year 1 in-quarter ARR that's delivered. And that's a dynamic of our model that we have to manage and measure, but we will always optimize for that customer lifetime value. Last year, we saw ARR growth -- a fully ramped ARR growth at 22%, which was very strong. And as we kind of move through this year and as we look ahead to next year, we're confident that we can deliver those levels or potentially higher. So that's how we're thinking about kind of where we've been throughout this year and how we're thinking about the remainder of this year.

Great. Our next question goes to Allan Verkhovski at BTIG.

Awesome. Mike, I just want to pull on that earlier thread and the productivity tsunami you mentioned in the prepared remarks. There are a lot of product updates in the Palisades release. I want to just go a bit deeper on the developer assistant. That's an early access. Can you unpack the level of demand there there is from Tier 1 insurers? What the most in demand like use cases are based on your conversations? And how is this further driving incremental tailwinds and pressure on insurers that haven't moved to the cloud to do so sooner?

Yes. Great question. Yes, it's interesting. There's a variety of things that involve development that relate to either the implementation of Guidewire or the ongoing, let's call it, maintenance or evolution related to like IT projects that drive the initiatives at an insurance company, and it really is across the board. Probably the most tangible thing you can point to is product creation. So we've done a lot of work over the years around what we call Advanced Product Designer and creating a better system for creating new products on the PolicyCenter platform. But using AI to do that is a phenomenal step-up in productivity associated with the work to make that happen. Building integrations, again, is a big part of an implementation project, and it's something that just takes up a lot of time, and that can also be accelerated. And oftentimes associated with the new product introduction will be the digital interface, the customer-facing, web-facing screens associated with quoting those products or engaging with agents around those products, that also can be accelerated. And so there's demand for all of these developer assistant. It's really across the board because that's -- I mean, it's kind of what's so amazing about these tools is like the intelligence is general, right? It's kind of -- that's -- and we can build the harness, we can apply the harness to our dev platform, and we can kind of tweak this thing and train this thing to work against our specific type of technology platform. And so regardless of what the development project is, it's accelerated, and that is awesome. And with respect to demand and what kind of tailwinds this creates, you should think about this like in 2 ways. One is, there's just a tremendous amount of work involved in migration. And so I've got a legacy mainframe system that needs to be modernized or I've got to Guidewire Cloud implementation that hasn't been maintained quite as much as we would have liked over the years. And now that needs to be modernized that needs to be moved into Guidewire Cloud. These tools can also be applied to all that work. And so we're seeing the estimates and the timelines associated with professional services to do that work come down in very significant ways. That's what creates more demand. People often say like what's the meter on Guidewire, like what can cause Guidewire to grow faster, grow slower? Well, it's -- of course, you have to pay money for Guidewire licenses. I talked about that in an earlier question. But it's much more the implementation project that stretches out over years that like really costs a lot of money. And if we can make that faster and accelerate that, that is creating the tailwind and the extra demand for people saying, "Oh, that project that I was putting off, maybe if it's faster, cheaper, maybe this is the time to go tackle that project. That's just as exciting as this sort of like ongoing maintenance and the productivity boost in the IT departments post implementation. That's very, very real, and I think it's absolutely creating a tailwind for the company.

Perfect. That's really helpful, Mike. And Jeff, maybe just a quick follow-up for you. It's impressive that fully ramped ARR growth is still expected to outpace ARR growth next quarter despite seeing some of the deals pushed this quarter. Can you just walk through your confidence, your visibility and assumptions behind that?

Yes. I mean we do a very detailed bottoms-up review of our pipeline, the deals that are coming in. We're seeing kind of -- we are seeing very healthy demand for larger commits. So insurers expanding their work with Guidewire when they're modernizing 1 module to the cloud kind of consuming another module in addition to that activity. So there is -- all of that kind of flows through the model. And we have very good visibility, obviously, into the first 3 quarters of the year that also inform our guide. So a very meaningful amount of that work is already in the rearview mirror as we look ahead to the end of this fiscal year. So all of these themes are really playing into the environment that we're seeing, kind of the larger commitments that insurers are making to the cloud platform that inform that guide. Now there are certainly work that has to be done and completed in Q4 to realize that, but we have good visibility into the corpus of deals that we expect to see in Q4.

Thanks, Allan. Our next question is from Tyler Radke at Citi.

Obviously, you hit on the slip deals a bit already. But I guess, just bigger picture, 1 of the dynamics that investors are asking about is just sort of the AI crowding out effect. I'm curious as you talk to your insurance customers and they're presumably ramping up coding projects. How much is that budget an issue as it relates to your deals? And as you think about sort of Q4, if you could just sort of provide sort of the underlying assumptions on close rates and whatnot. Like have you introduced more conservatism given sort of the timing issues you saw in the quarter?

No. We're obviously being very careful in going through everything in Q4, let's say, with the fine tooth comb to ensure that we're confident in reaffirming the guide and the confidence that we have in the execution. And so that's being done. In terms of AI crowding out, like I certainly hear this narrative from people, let's say, I don't hear it from customers that I think the reality is that the insurance industry is recognizing what a profound impact AI can have on, a, development velocity and IT agility; b, underwriting and the efficiency of underwriting departments; and c, claims departments and the efficiency of customer service and claims automation in the industry. And the productivity improvements that are potentially possible in insurance -- in any insurance company are so significant relative to what these companies spend on these IT programs, that it really -- it doesn't make sense to compare these 2 things against 1 another. You look at this and you say, well, if this works, which I think more and more people expect that it will, then there is just in order to remain competitive going forward, you're going to have to have a modern core system that is capable of supporting these sort of Agentic capabilities. Otherwise, you're not going to be able to remain competitive. You're going to lose ground. And so like -- it's like a first order question to say, well, could I code this in a different way? It's like the wrong way to look at it. And the customers are seeing -- especially the big Tier 1 customers are, like, see this, they recognize this. They take a look and they assess where they are and where they want to be and where they want to be with AI. And you come to the conclusion that being on a modernized platform with an open approach to APIs and MCP servers and integration to these Agentic tools and large language models, integration to an ecosystem of partners that are building on top of these LLMs and building integrated into Guidewire, this is the logical answer, and that creates the lift that we're talking about. And so I want to acknowledge that, yes, the narrative that you describe exists, but the counter narrative specifically in insurance and the use cases we unlock for IT underwriting and claims, so overwhelm this logic that that's what's driving the business positively for us at Guidewire.

Mike, I think in the prepared remarks you talked about how you're seeing measurable and significant productivity in accelerated migration timelines. I'm just wondering if you could double-click on that. Like any metrics you could put around that? Like is it happening 30% faster? How should we think about that just in terms of when that starts to show up for you guys in terms of getting that maybe faster ramp on -- from time to booking to active ARR?

Yes. So great question. I appreciate it. So I'll give a little bit of a preamble, and then I'll prep John, and I appreciate John already took himself off mute. So he's going to chime in here on this because he owns and is driving this directly. We obviously -- we started off a little bit conservatively and said, okay, like let's get these tools in people's hands. Let's get these -- like start to assess what we can do. Let's start to apply these tools and these techniques to a couple of programs with a couple of customers, let's be very careful and open with customers about what we're doing and how we're doing it and let's see what happens and see if it really produces the acceleration that we think it will. And the amazing answer is, it is accelerating. We are seeing the results, and we're starting to expand it to more and more projects and it's just on its way. So I don't know, John, if you want to like throw out a couple of the numbers that we are talking to customers about. But feel free to chime in.

Yes. The investment pace right now has unlocked about 35% improvement in migration, so on-prem to cloud migration. That's a great use case because there's some control parameters around the database conversion that allow us to move really fast. So we're starting now to see -- we've redirected some of the investment towards the migration off of either legacy estate or some other asset towards Guidewire. So we're starting to get to that 35% improvement on the, we'll call them, net new deals. If I look forward, I'd say we don't start to see it leveling off. That return on -- the return on investment on that, we see that maintaining the same pace, the same curve probably until we get to that 55%. And then we'll start to see continuing cost savings, but probably less so on the duration savings just because of the gestation period of just the change management principles of doing these programs. But we still have a promising pathway ahead of us and some really great success stories behind us that we're really confident in.

Our next question comes from Aaron Kimson of Citizens Bank.

Mike, do you see any high-level differences in the appetite and relative budgets for adopting AI products amongst P&C insurers geographically in the Americas versus EMEA versus APAC?

Yes, that's a good question. It's interesting. Yes. Summary is, yes, we do. I don't want to call out any particular countries, but yes, we do. It's like -- the other way to think about it is like everybody wants to -- I think everybody wants to use AI for development. No question. Like you can very clearly see that you can use AI for development. I think there's different perspectives in different countries but also in different carriers, different customers about the degree to which you will expose these agents to consumers or whether or not you will use sort of more human in the loop use cases where you're exposing these tools to employees and using it to boost productivity through employees. But the common factor is everybody wants to get on the learning curve. Everybody wants to get it deployed and start to figure out how it makes sense for their business. But certainly you do see differences in country and also company about how aggressively they want to target the more efficiency -- more aggressive efficiency agendas.

Got it. And then as a follow-up, Jeff, can you talk about the shape of the ramp of token spend at Guidewire, your level of visibility and how that will evolve going forward? And if there could be any potential gross margin effects?

Yes, we're pretty early in terms of how we're kind of monitoring and measuring this. Obviously, we're starting to see it pick up on the development side. We're starting to get it into the hands of customers with respect to the Agentic framework and how they're adopting AI within the platform. So it's pretty early for us right now. We've kind of built the mechanisms to start measuring that. And as we engage with customers, I would say right now, we're in a place where we're focused on adoption, but kind of adoption with some controls to ensure that we can make sure that there's not any sort of usage that goes out of the scope of what was intended by our contracts. And so that's where we are. No numbers, no metrics to report at this point in time, that's how we're measuring it today, though.

Next question is from Jessica Wang at Raymond James.

Just to touch on based on Underwriting Center. I know it's still early, it's still in development. But what have you been hearing from customers that are interested in there? Like how should we think about the product maturity so far in potential pipeline into next year? Just considering the success you've had so far with ProNavigator and PricingCenter already?

Yes. Thanks for the question. So the -- it's going very, very well. We have a handful of customers that we're working on this product with and in plans to get it into their hands in the next couple of weeks/months. We -- there is a tremendous amount of interest, I would say, in commercial lines underwriting around the potential for these LLMs and agents specifically tuned to the underwriting use case to be able to very significantly improve the efficiency of underwriting teams, reduce the time it takes for companies to respond to submissions and then also do a better job focusing on the risk analysis of the submissions that they choose to quote. The other part of this that's very interesting is we're being able to establish a better connection to the actual policy system and the quoting system and the pricing systems that these companies are using. That's also part of the equation. And so the use case, there's a tremendous amount of demand for, I would say, universally across the customer base. And the project has gone according to schedule and we're excited about the work we're doing with these sort of carefully chosen design partners that we're working with.

That's great to hear. Also just touching on PricingCenter again, with the success of pipeline, so far, how should we think about the demand drivers here now came from your existing customers versus new -- like new logos? How do we think about potential attach rates that are involved in these different cohorts?

Yes, it's a great question. It's -- technically, the PricingCenter to PolicyCenter to product model, integration is so much an important part of the value proposition. That honestly drove the thesis behind the acquisition in the first place. What you're seeing in general in the insurance industry is this need to not only launch new products more quickly, but actually adjust the pricing -- adjust pricing and adjust rate routines more fluidly to keep pace with competition and keep their products a competitive but also profitable. And so like the friction associated with doing that relates to how the components of that solution all integrate. And so like I said, the thesis behind bringing -- making PricingCenter part of the suite at Guidewire is that we can do a really good job integrating the product model, integrating into our quoting service, integrating it into PolicyCenter. And so that connects logically to selling this to existing PolicyCenter customers and selling this alongside new PolicyCenter implementations. That go-to-market dynamic is playing out exactly as we expected it to, and that's where we're seeing the demand. You could also say it's like that's where we're focused because our value proposition is strongest there. But it's very much working according to plan.

And our last question comes from Faith Brunner at William Blair.

Just building on those last couple of questions I wanted to ask about PricingCenter. I guess, you saw the 1 in Sweden, Poland, the first 1 in the U.S. How is this maybe building on referenceability of these newer products? And then maybe as you touched on the different appetite that may vary region to region. How are these kind of serving as proof points and maybe getting people a little bit more comfortable saying, hey, we might have to actually get into something we didn't think we want to, to stay competitive?

Yes. Let me -- I'll touch on the last thing. I don't know that I've heard so often that people are saying that they're surprised that they need to do it. I think everybody -- most of the companies that we're working with have like recognized that this is on a strategic agenda. And that also that this being on the strategic agenda factored into our interest in adding this to the portfolio and building out this well-integrated solution at Guidewire. That was a factor. I think referenceability is very, very important. I also just think like us doing the work to get this into our infrastructure and being able to run it alongside the rest of the insurance suite, application suite, like this is really important. This is a -- it's an incredibly good actuarial engineering team that we acquired. But there's some things we need to do to mature it in terms of how it runs and how it's supported and running it at the scale and reliability and the security expectations that Tier 1 insurance companies expect and that's a big part of the work that we've been focused on since the acquisition, and I think that's helping to drive the demand. It's like, hey, can you do all of these things you say you can do? And can you do them with the same level of trust and integration expectations that we see from the rest of the product suite at Guidewire and that kind of checks all these boxes and creates the demand uptick that we're seeing with the product. The teams, both on the PricingCenter team, but also the general infrastructure and platform teams at Guidewire have done a really, really good job executing on this and earning the trust of these customers. And that helps build the pipeline that we're executing against and giving us confidence that this is going to continue. So I don't know, hopefully, that helps you. Let me add, the other thing I'd say is like we're also -- we don't tend to like oversell much of Guidewire. We try to make sure we have a stellar track record in terms of selling things that we know we can do in executing on those things effectively and making sure that no programs ever fail. And I think that, that philosophy is factoring into the way we're approaching PricingCenter rollout. Anyway, thanks for the question. Okay. Well, everybody, thank you very much for participating in the call today. As you've heard, we're incredibly excited about the momentum in the business in Q4, and we look forward to seeing everybody talking to everybody after we conclude the fourth quarter and our fiscal year. Thanks very much.