Guidewire Software : Q2 2025 Earnings Call Transcript

Published: 2025-03-06 23:50:03 ET GWRE

Corrected Transcript

06-Mar-2025

Guidewire Software, Inc. (GW RE)

Q2 2025 Earnings Call

Total Pages: 23

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Guidewire Software, Inc. (GWRE)

Corrected Transcript

Q2 2025 Earnings Call

06-Mar-2025

CORPORATE PARTICIPANTS

Alex Hughes

Jeff Cooper

Vice President-Investor Relations, Guidewire Software, Inc.

Chief Financial Officer, Guidewire Software, Inc.

Mike Rosenbaum

Chief Executive Officer & Director, Guidewire Software, Inc.

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OTHER PARTICIPANTS

Dylan Becker

Jeffrey Parker Lane

Analyst, William Blair & Co. LLC

Analyst, Stifel, Nicolaus & Co., Inc.

Ken Wong

Aaron Kimson

Analyst, Oppenheimer & Co., Inc.

Analyst, Citizens JMP Securities LLC

Alexei Gogolev

Joe Vruwink

Analyst, JPMorgan Bank International LLC (Moscow)

Analyst, Robert W. Baird & Co., Inc.

Rishi Jaluria

Richard Poland

Analyst, RBC Capital Markets LLC

Analyst, Wells Fargo Securities LLC

Alexander Sklar

Michael J. Funk

Analyst, Raymond James & Associates, Inc.

Analyst, BofA Securities, Inc.

Adam Hotchkiss

Analyst, Goldman Sachs & Co. LLC

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Guidewire Software, Inc. (GWRE)

Corrected Transcript

Q2 2025 Earnings Call

06-Mar-2025

MANAGEMENT DISCUSSION SECTION

Operator: Greetings and welcome to the Guidewire Second Quarter of Fiscal 2025 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 now begin.

Alex Hughes

Vice President-Investor Relations, Guidewire Software, Inc.

Thank you, Grace. Hello, everyone. With me today is Mike Rosenbaum, Chief Executive Officer; and Jeff Cooper, Chief Financial Officer. A complete disclosure of our results can be found in our press release issued today, as well as in our related Form 8-K furnished to the SEC, both of which are available on the Investor Relations section of our website. Today's call is being recorded and a replay will be available following 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 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 report on Form 10-K and our prior and forthcoming quarterly reports on Form 10-Q filed and to be filed with the SEC for information on risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements.

We also will refer to certain non-GAAP financial measures to provide additional information to investors. All commentary on margins, profitability and expenses are on a non-GAAP basis unless stated otherwise. A reconciliation of non-GAAP to GAAP measures is provided in our press release. Reconciliations and additional data are also posted in the supplement on our IR website.

Finally, similar to last quarter, Investor Relations is conducting this earnings call via Zoom audio rather than at Telebridge. This means we will manage the Q&A portion of today's call internally with the help of Grace moderating you just heard from and myself managing Q&A. Please be patient if we encounter any short pause in any of the handoffs during Q&A.

And with that, I'll hand it off to Mike.

Mike Rosenbaum

Chief Executive Officer & Director, Guidewire Software, Inc.

Thank you, Alex. Good afternoon and thanks, everyone, for joining us today. I want to start by extending my sympathy to those affected by the Los Angeles wildfires and the more recent floods in Kentucky. In 2023, there were 28 events in the United States that each caused at least $1 billion of loss and in 2024, there were 27. In Europe, flooding and convective storms caused $14 billion in insured losses in 2024 and the recent fires in L.A. are estimated to have caused an insured loss of $30 billion. The P&C industry acts as a financial backstop for families and businesses impacted by these catastrophes. More than ever, a well-functioning P&C market is critical

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Guidewire Software, Inc. (GWRE)

Corrected Transcript

Q2 2025 Earnings Call

06-Mar-2025

to providing consumers, businesses and communities the peace of mind and the confidence they need to invest and live with the risks associated with catastrophic weather events.

This critical function is one of the reasons why everyone at Guidewire is proud to play a role in the insurance industry. Our mission is to provide a technology platform that powers agility in the P&C industry, which helps support a more vibrant and effective insurance market, one that helps people, businesses and governments understand risk in economic terms and make rational decisions about these risks and how to prepare for, mitigate and avoid them. This mission was established when Guidewire was founded. It has since motivated us to build our market-defining software category, supporting insurance core systems, and to ensure that through our cloud- based evolution, we will play a critical role in the industry for decades to come.

Turning to the second quarter and the current state of our business, I could not be more pleased with our progress and the quality of engagement we have with the market. This includes steady progression in engagement with some of our largest on-prem customers. It is becoming more and more clear that the industry's transition to the cloud is steadily accelerating. Regarding the detail of the second quarter, we produced solid sales activity with ARR finishing above the high end of our projected range. We closed 12 cloud deals. This included four for full InsuranceSuite deals, one InsuranceNow deal and the remainder for one or two core X Center applications. As a reminder, full InsuranceSuite deals include all three applications or X Centers, as we sometimes refer to them, PolicyCenter, ClaimCenter and BillingCenter.

Since launching Guidewire Cloud Platform, our thesis has been that we will see growing demand from new customers replacing legacy systems as we prove out our cloud capability with our customer base. In Q2, we welcomed five new customers, including one in Brazil and one in Belgium. We had a large global specialty insurer start their Guidewire journey with BillingCenter and look forward to the opportunity to expand to PolicyCenter and ClaimCenter in the future. Finally, with respect to new customers, we closed a full-suite competitive takeaway at a Tier 3 insurer that is a subsidiary of a larger entity where we see meaningful future growth potential. We also closed six cloud migrations in the quarter, which is critical for our ongoing intention and commitment to migrate 100% of our on-prem customer base to our cloud platform and two of the six included expansion into new business lines or new core modules.

Looking at our deals by geography, this quarter was led by North America and Europe, with about a third of the deals in Europe. Competing effectively outside the United States often requires us to invest in country and market-specific functionality and I was particularly pleased to see this investment translate into three Tier 1 deals, including with two large London market insurers. Across the board, our sales activity in Q2 was concentrated at Tier 1 and Tier 2 insurers, where customer requirements are focused on the ability to handle significant complexity and scale.

With respect to the industry overall, I've been asked regularly about the potential short-term impact of the California wildfires on Guidewire. Overall, I would say that the property and casualty insurance industry is incredibly resilient and is designed to absorb these types of catastrophes. The one silver lining from these recent events is that they have increased awareness in the importance of maintaining a high-functioning insurance market where insurers are enabled to evaluate and price risks responsibly.

Turning to operations, we are seeing strong growth in cloud deployments and customers are more efficiently taking updates, keeping them current with recent innovations and functionality. Instrumental to our success driving adoption and deployments is our growing cloud ecosystem of partners. There are now 26,000 Guidewire- focused practitioners across 38 system integrators and the number of Guidewire Cloud-certified professionals has passed 10,500. Another dimension of our partner ecosystem that is equally important to our long-term vision is

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Guidewire Software, Inc. (GWRE)

Corrected Transcript

Q2 2025 Earnings Call

06-Mar-2025

our technology partners. As we've grown cloud, we've accelerated the number of cloud apps from both Guidewire and our technology partners. Guidewire Marketplace now has over 500 applications, including over 270 from technology partners, and there have been over 6,000 app downloads in just the first half of this year.

In summary, it was a great quarter with continued momentum across the business. We feel great about how the year is shaping up and couldn't be happier with everyone in the company helping us to continue to deliver reliable ARR and revenue growth, while simultaneously improving margins. All of this is based on an unwavering commitment to the success of every single customer program our company supports, which is ultimately what positions us well for the future.

I'll finish with a personal note about one of the customers, which really exemplifies our mission and the impact our platform can have in critical times. During the L.A. fires, California Casualty leveraged Guidewire to proactively identify and rapidly contact over 400 at-risk policyholders, ensuring their safety and offering immediate aid, included needed housing.

By overlaying fire map layers on address policies in Guidewire, they were able to identify total loss homes, often preempting customer assessments. This swift action enabled them to provide over 90% of total loss homeowners with full coverage payments within two months, so customers could move forward with Plan C to rebuild or purchase a new home. We're proud to play our small role in this effort and industry.

And with that, I'll turn it over to Jeff to discuss the financials.

Jeff Cooper

Chief Financial Officer, Guidewire Software, Inc.

Thanks, Mike. We had a great Q2 and the full year is tracking ahead of our expectations. ARR finished at $918 million, which reflected strong sequential ARR additions in the quarter. This was driven by healthy new sales activity and new ARR sold from deals in prior periods with ramps, which we sometimes refer to as ARR from ARR backlog.

As a result, we added $45 million of net new ARR, which is roughly what we added in Q4 last year, which is always our largest seasonal quarter. So, it is exciting to see the model play out in this manner.

Total revenue was $289 million (sic) [$289.5 million] (00:09:26) up 20% year-over-year and above the high end of our outlook. Subscription and support revenue finished Q2 at $178 million, reflecting 35% year-over-year growth and our continued InsuranceSuite Cloud momentum. Services revenue finished at $48 million, which was in line with our expectations.

Now, let me turn to profitability for the second quarter, which we will discuss on a non-GAAP basis. Gross profit was $189 million, representing 25% year-over-year growth. Overall gross margin was 65%. Subscription and support gross margin was 69% compared to 65% a year ago, and continues to track a bit ahead of our expectations.

Services gross margin was 6% compared to negative 11% a year ago. The services business finished the quarter in line with our expectations. As a reminder, Q2 services revenue is usually lower as a result of the impact of the holidays on services deliveries.

We finished Q2 with operating profit of $54 million. This finished ahead of our outlook as both gross profit was higher than expectations and operating expenses finished lower than expectations. We have been more

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Guidewire Software, Inc. (GWRE)

Corrected Transcript

Q2 2025 Earnings Call

06-Mar-2025

measured in our hiring in the first half, but we do expect to see increased hiring in the back half of the year, and this hiring will be focused on product development teams.

We ended the quarter with $1.4 billion in cash, cash equivalents and investments. Operating cash flow ended the quarter at $86 million, which is ahead of our expectations due to strong collections in the quarter.

Before turning to our outlook, I want to quickly touch on some actions we have taken related to our 2025 convertible notes, which are set to mature later this month. In Q2, we retired an additional $100 million at face value of our 2025 convertible notes. The real cost associated with this was $153 million, and this resulted in a $53 million charge to other income on a GAAP basis.

We did this when our share price was between $170 per share and $177 per share, with the intent to limit share dilution risk associated with the converts that are coming due. We will repay the $179 million left outstanding in Q3, utilizing net share settlement.

Based on current share price levels and when you factor in the impact of the call spread that we purchased in conjunction with issuing the 2025 converts, we now expect share dilution of less than 10,000 shares as we close things out, although this number will be impacted by the share price over the next couple of weeks. Had we not bought back the converts that we've retired in the last couple of quarters, then the share dilution would have been over 700,000 shares, so I'm pleased that we got in front of this.

Now, let me go through our updated outlook for fiscal year 2025. Starting with the top line, given our performance in the first half and our strong visibility into the second half, we are raising our ARR outlook to $1 billion to $1.01 billion, which reflects growth of 16% to 17% year-over-year.

Confidence in our ARR outlook is informed by; one, strong growth in our ARR from ramping deals in the back half with a notable jump in Q4; two, our view into the pipeline for the back half of the year; and three, our continued high win rates.

I also want to comment quickly on ARR visibility and the quarterly seasonality dynamics as we expect higher seasonality in Q4 this year due to the timing of ARR ramps. The key dynamic of net new ARR additions in a period is the amount of ARR coming from the backlog or from ramping deals sold in prior periods.

And since these ramps are clearly outlined in customer contracts, we have clear visibility into these increases. This year, we will see stronger growth in new ARR from ramps in the back half and this is due to the realization of ramps of strong sales activity we experienced last year and in fiscal 2023.

With respect to seasonality, this year, we expect nearly three times more ARR from backlog to come in Q4 when compared to Q3. This is a significantly larger quarter-over-quarter step-up when compared to last year. To some extent, this is just how the ramps are landing this year and these dynamics can shift a bit year-to-year. But we thought it would be helpful to call out this dynamic to help you all better understand the expected net new ARR increase in Q4.

As a reminder, our ARR outlook assumes foreign currency exchange rates as of the end of our last fiscal year, and we update ARR exchange rates at year-end. If we update ARR today based on current exchange rates, then we would see an approximately $9 million negative adjustment. We will certainly quantify this at year-end, and we will continue to monitor FX rates throughout the remainder of the fiscal year.

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Guidewire Software, Inc. (GWRE)

Corrected Transcript

Q2 2025 Earnings Call

06-Mar-2025

For total revenue in fiscal 2025, we now expect between $1.164 and $1.174 billion. We expect approximately $653 million in subscription revenue and $718 million in subscription and support revenue. Given higher than expected services bookings in the first half of the year, we now expect services revenue to be approximately $210 million.

Turning to margins and profitability, which we'll discuss on a non-GAAP basis, we still expect subscription and support gross margins to be approximately 69% for the year. Our expectation for services margins and total gross margins also remain unchanged at 12% and 65%, respectively.

As a result of raising our revenue outlook and a bit slower hiring than we originally expected, we are lifting our outlook for operating income. We expect GAAP operating income of between $10 million and $20 million and non- GAAP operating income of between $175 million and $185 million for the fiscal year.

We expect stock-based compensation to be approximately $160 million, representing 9% growth year-over-year. We are also increasing our cash flow from operations for the year to be between $230 million and $260 million.

Turning to our outlook for Q3, we expect ARR to finish between $942 million and $947 million. Our outlook for total revenue is between $283 million and $289 million. We expect subscription and support revenue of approximately $178 million. Subscription and support revenue is tracking around $2 million per day and Q3 has three fewer days than Q2, which explains the modest sequential growth.

We expect services revenue of approximately $52 million in Q3. We expect subscription and support margins of between 68% and 69%, services margins to be around 10%, and total gross margins around 64%. Our outlook for non-GAAP operating income is between $36 million and $42 million.

Alex, you can now open the call for questions.

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Guidewire Software, Inc. (GWRE)

Corrected Transcript

Q2 2025 Earnings Call

06-Mar-2025

QUESTION AND ANSWER SECTION

Alex Hughes

Vice President-Investor Relations, Guidewire Software, Inc.

Please raise your hand if you're ready to ask a question and we'll get to you.

Dylan Becker

Analyst, William Blair & Co. LLC

Hey, thanks, guys. Mike, maybe starting for you. You called out and it's very clear the resiliency and gravity around kind of the data cloud opportunity today. There's a lot of uncertainty in the world, but carriers clearly need agility here. Wondering on the decisioning angle from carriers, how much adaptability and interoperability comes into play in those conversations?

And now that you have kind of that tipping point of 50%, maybe how you're thinking about leading into some of those conversations with legacy on-prem customers around what that end of life journey looks like based on kind of prior comments around 100% getting to the cloud over time?

Mike Rosenbaum

Chief Executive Officer & Director, Guidewire Software, Inc.

Yeah. Thanks, Dylan. Yeah, for sure, I would say there is a growing recognition that operating core systems both claims and policy/underwriting rating and pricing systems on modern platforms with modern capabilities brings a level of agility to an operation and insurance operation that enables them to be more competitive.

They need to be able to manage indemnity more effectively. They need to be able to manage down cycle times, which increases their expense ratios and profitability. They need to be able to set prices and define rates as effectively as they possibly can.

And they don't want to be burdened by these legacy systems either because the IT execution expense, let's say for making changes is high or because they don't have access to the data they need to be able to make the decisions that they need.

And so, all of that adds up, to they need modern systems and they got to figure out a way to get there and that is absolutely helping us kind of across the board, every insurance company in the world is thinking about this.

Now, doing these programs, as you're aware, it's pretty significant. These are multi-year programs and they've got to kind of slot them in into their plans over the course of a decade in some cases, that's just the unfortunate reality. But the pace around which we're having these conversations is really improving and the quality of the conversations is improving.

You can just get a feel of a sense of I can't claim it to actually be inevitable, but it kind of feels that way. It's like we recognize that Guidewire is distinguishing itself and it's probably the right place. And so, that just makes us - that just gives us confidence in what we've built and how it's going to positively impact the market.

I think that the end-of-life conversations that we have about our ability to support our on-prem customer base, that's sometimes difficult. But I think we're taking a very mature and careful approach and talking to every single

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Guidewire Software, Inc. (GWRE)

Corrected Transcript

Q2 2025 Earnings Call

06-Mar-2025

one of our customers about what they expect to need from us, and what they can expect from us and what we're prepared to do and trying to give everybody as much time to make these decisions as possible.

And so far, we've been very - we've received a lot of positive feedback, actually, about the approach that we're taking to giving them time to plan and working with them on what the approach is going to be. So, I don't know, you add all that up and Guidewire - it was a good quarter and that adds up into a lot of positive visibility for us into the second half and into next fiscal year.

Dylan Becker

Analyst, William Blair & Co. LLC

That's great. No. Very helpful and very clear, the momentum that you guys are seeing. Maybe, Jeff, for you. As a function of that, it's given you a lot of kind of incremental levers to play with across the model I would think of, and nice to see kind of the upside flowing through.

You called out kind of the uptick in hiring in the second half, but how do you think about that balance of kind of margin outperformance with the opportunity to reinvest and kind of double down given this opportunity tends to be or seems to be kind of slightly accelerating here as well? Thanks.

Jeff Cooper

Chief Financial Officer, Guidewire Software, Inc.

Yeah. I mean, we're thrilled with the opportunity to continue to sell into our install base and add new customers. That is our number one focus. And we're not going to focus - we have a strong focus on driving continual margin expansion, but we can do that while also continuing to grow into our market.

We see some really interesting investment areas and that's part of the reason why we accelerated some R&D investment this year. It's taken us a little bit longer to get some of that hiring going, but we have line of sight into some accelerated hiring in the back half of the year that will be targeted at some of these interesting investment areas that we're focused on. So, we think we're doing, we've got a healthy balance there between making sure we're focusing on the growth opportunity in front of us.

Alex Hughes

Vice President-Investor Relations, Guidewire Software, Inc.

Great. Thanks, Dylan. Our next question comes from Ken Wong of Oppenheimer.

Ken Wong

Analyst, Oppenheimer & Co., Inc.

Great. Thanks for taking my question. Mike, you touched on kind of the California situation and one of the kind of the concerning issues kind of leading up to that was large insurers leaving because of price caps.

I mean, it seems like maybe some of that is starting to shift back. I saw Allstate is coming back after getting some price caps lifted. Would you characterize this as a tailwind for Guidewire since you guys disproportionately skew higher tier versus the lower tiers that might have backfilled those large guys that left the state?

Mike Rosenbaum

Chief Executive Officer & Director, Guidewire Software, Inc.

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Guidewire Software, Inc. (GWRE)

Corrected Transcript

Q2 2025 Earnings Call

06-Mar-2025

Well, I don't know whether overall it's a headwind or a tailwind. Generally, I would say there is recognition that a lot of the insurance policies in the state of California probably need to be repriced. And the state of California is working through that with our insurance customers in my point of view, in a proactive way.

I think it's obviously catastrophic what happened in L.A., and incredibly unfortunate. But everybody recognizes that because of that, that insurance is very important for the state of California. And I think there's a lot of insurance companies who are excited to find a way to participate in that market and help provide that service to consumers like me, honestly, who live in the state of California.

That dynamic in general, I would say is helpful for Guidewire. I don't know it's like we're better suited or worse suited, but it's just well-suited to what I'd say, like bringing modern technology to the insurance industry, so that we can price risk effectively, so that we can manage claims effectively, that we can manage catastrophes when and if they occur as efficiently as possible, and all of that tends to support our core value proposition. So, that's how I would frame it.

Ken Wong

Analyst, Oppenheimer & Co., Inc.

Got it. Very thoughtful. Appreciate that, Mike. And then Jeff, just subscription and support gross margin kind of ticked up, again, ticked higher than we anticipated. I recall last quarter, you're kind of signaling again, we shouldn't always assume things will kind of track up and I think kind of steered us down sequentially. How should we be thinking about it as we go into kind of Q3 back half?

Jeff Cooper

Chief Financial Officer, Guidewire Software, Inc.

Yeah. I mean, look, embedded in our guide is, it is relatively modest margin expansion in the back half of the year off of the first half of the year or kind of relatively like - remaining relatively the same. We really manage and measure our progress on this metric on an annual basis.

And quarter-to-quarter, there may be some small fluctuations based on kind of certain customer go-live events where usage patterns tick up or when AWS credits get realized. But we generally think about this on kind of how we manage to the full year, and we're pleased with the amount of expansion we're expecting to see this year, and we expect to see that to continue to steadily march towards our near-term, mid-term and longer term targets as we look out in the future.

Ken Wong

Analyst, Oppenheimer & Co., Inc.

Got it. Thanks a lot, Jeff.

Alex Hughes

Vice President-Investor Relations, Guidewire Software, Inc.

Thanks, Ken. Great. Our next question comes from Alexei Gogolev of JPMorgan. Go ahead, Alexei.

Alexei Gogolev

Analyst, JPMorgan Bank International LLC (Moscow)

Hello, everyone. Mike, initially, we call you being skeptical about the application of AI. What are you seeing today that makes you feel that AI could be a game changer? Is it just about modernizing core systems and streamlining workflows, or do you think there is opportunity to leverage your extensive data to create value for your

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Disclaimer

Guidewire Software Inc. published this content on March 07, 2025, and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on March 07, 2025 at 04:49:07.869.