Guidewire Software, Inc.
Q3 2019 Earnings Call Transcript

Published: 4 Jun 2019

[Operator:]

Good day, ladies and gentlemen and welcome to the Guidewire’s Third Quarter Fiscal 2019 Financial Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Curtis Smith, Chief Financial Officer. Please go ahead.

[Curtis Smith:]

Good afternoon and welcome to Guidewire Software’s earnings conference call for the third quarter of fiscal year 2019, which ended on April 30, 2019. I’m Curtis Smith, Chief Financial Officer of Guidewire and with me on the call is Marcus Ryu, Guidewire’s Chief Executive Officer. A complete disclosure of our results can be found in our press release issued today as well as in our related 8-K furnished to the SEC, both of which are available on the Investor Relations section of our website at ir.guidewire.com. As a reminder, today’s call is being recorded and a replay will be available following the conclusion of the call.

[Marcus Ryu:]

Thank you, Curtis. Our third quarter financial results exceeded our revenue and profitability guidance ranges with total revenue of 162.9 million and non-GAAP earnings of $0.18 per share. We had a very active bookings quarter, contributing to a strong year-to-date sales performance that is under represented in our reported financial for several reasons. Most significant among these is the faster shift to cloud that we are both driving and responding to, reflected in third quarter subscription sales that were 60% of the quarter’s bookings, which was at the upper end of our anticipated full year range. While this is positive, both for the lifetime value of our customer relationships and for our industry platform strategy, it dampens near term results, since the revenue from subscriptions is recognized over multiple quarters, unlike term licenses whose revenue was recognized upfront. Notably, we signed two new InsuranceSuite cloud deals in the quarter. The first is with Amica Mutual, the oldest mutual auto insurer in the US, and one ranked at the very top of customer satisfaction measures by Consumer Reports, JD Power and others. Amica, a tier 2 insurer and a Guidewire customer since 2005 will look to us to upgrade, migrate and manage their existing InsuranceSuite core data and digital implementations to Guidewire cloud, encompassing their entire DWP. Amica also selected our digital products, integrating to Salesforce’s financial services cloud, representing one of two additional wins for our strategic partnership with Salesforce for the quarter, the other being in Scandinavia.

[Curtis Smith:]

Thank you, Marcus. Please note that the year-over-year comparisons that will be discussed are based on our amended 10-Ka for the fiscal year ended July 31, 2018, which was filed on June 3. Total revenue for the third quarter was 162.9 million, an increase of 15% from a year ago and above the high end of our guidance range. License and subscription revenue was 76.2 million. A portion of our better-than-expected performance was due to the ClaimCenter term license deal with a large Japanese customer that Marcus mentioned, which we previously expected to close in Q4. Year-over-year license and subscription revenue growth was 45%. As we noted in our Q1 earnings call, year-over-year license and subscription revenue comparisons are impacted by the adoption of ASC 606, which affects the timing of revenue recognition of our term license contracts. Subscription revenue was 14.7 million, compared to 8.6 million a year ago, representing a year-over-year growth rate of 71%. Perpetual license revenue in the quarter was 1.3 million.

[Operator:]

We'll take our first question from Tom Roderick with Stifel.

[Matt VanVliet:]

Matt VanVliet on for Tom. I guess, from a high level, Marcus, obviously great, great job here getting customers, both existing and new to shift to the cloud. Curious in terms of, how much you think the investments around a lot of the data and digital products as well as partnerships, like the one you highlighted with Salesforce are really influencing customers to make this shift now versus their own sort of internal digital transformations driving that.

[Marcus Ryu:]

I appreciate the question, Matt. Well, digital transfer, if you had to pick a single theme is the most important catalyst for the IT investment overall in the industry that we serve. So it's very, very prominent in the investments that we've made in digital over the last number of years, has been absolutely essential, on top of the other operational kind of core operational improvements that the platform has always been about. And you can see that from the very robust tax rates that we've had for our digital products, for several years now. I think that's distinct, though not as competitive with the motivations for our customers to think about the cloud. Today, the primary motivation for the cloud is about a transfer of risk and complexity from an internal IT organization to a trusted partner in Guidewire, and that's with respect to everything that they want the core system to do. Some of that is digital or a large portion of that ambition is digital, but it also includes the development of new products, core operational efficiencies, better customer service, basically everything on the strategic agenda that requires IT involvement becomes transformed and potentially accelerated if the core functioning of that platform in production is now the responsibility of a reliable partner.

[Matt VanVliet:]

[Curtis Smith:]

I'm sorry that we couldn't understand the question.

[Operator:]

You are still connected. Could you try reposing that, please?

[Matt VanVliet:]

Yes. So Curtis, following up on the early 2020 outlook, if we see a pretty significant uptick, even from where you're expecting now, in terms of subscription bookings mix, are there still additional, pretty incremental investments in that cloud infrastructure that you need to make? Or are we on more of a steady state now with the step function investments that you made this year?

[Curtis Smith:]

Yes. So when we put together the five year model, we assumed a more steady pace of IS cloud adoption, we didn't assume an inflection point. But the current trend continues. And we see accelerated IS cloud adoption, and then we could see more pressure on margins in the short term, due to the revenue recognition. In fact, we talked about and also the earlier hiring of resources that we’ll need to make in order to meet that cloud demand. Q4 is always a big quarter for us, and in fact, the following year and so we'll look forward to gathering more data in Q4 on the go to market side of things and operational data and we'll be in a better position to potentially attract the longer term impact of the model at Analysts Day.

[Operator:]

We'll take our next question from Ken Wong with Guggenheim.

[Ken Wong:]

In terms of, we'll touch on cloud again. You mentioned closing seven to eight deals in ‘19 and obviously that pacing to be accelerating, how should we think about that pipeline next year? What are the – do you have the rough capacity to be able to get that number higher than where it is now and any sense of what that looks like?

[Marcus Ryu:]

It's a little premature Ken for us to pick a number, let alone communicate one for next year that we have a view. I think we are, don't feel, demand constrained with respect, which is an interesting and exciting position to be in. But we have to make sure that we have the capacity to deliver, there is an attach of internal operational personnel that go with everyone, every cloud relationship. There's a higher, dramatically higher attach than what you would have in a term license arrangement where it's really just a license of software. And so we have to be mindful of that. And that's all being baked into the budgets and operational plans for next year. I think that we expect to stay on a similar trajectory to what we have now. And we have, as I mentioned in my prepared remarks, somewhat of a compression in the back half of this year of cloud demand because we were not really assertive and aggressive in our pursuit of the opportunities until our connections event, which is really -- just gave us a half year of kind of full throated sales that yielded the deals that we have and expect to close this year and of course, a pipeline that much of which will be converting next year.

[Ken Wong:]

And then maybe a follow up in terms of the higher revenue attrition commentary, you mentioned, obviously a little more accelerated because of the remediation of deals. But in terms of the magnitude relative to kind of typical attrition, would you say it's similar or kind of higher than typical.

[Marcus Ryu:]

So it was multiples of the usual revenue attrition and to be direct, we were caught off guard a bit by that, but the primary cause was the dramatically higher volume of renewals that we had to process in the year and just to quantify that for you, in fiscal ’17, we had 50 customer renewals. In fiscal ’19, we will have done over 350, so a 7 fold increase in the number of renewals and that's overwhelmingly the reason that we had the problem. That, of course, these are annual renewals, and so we think that we've borne the brunt of it this year, we also made some operational changes to be equipped to fully anticipate, but also manage the issue. And, all of that we think is, where the vast majority of that should have surfaced this year. And so we think we're going to have a convergence back to the historical rate, next year and beyond.

[Operator:]

We'll take our next question from Michael Turrin with Deutsche Bank.

[Michael Turrin:]

Just, you mentioned impacts from subscription revenues. It sounded like that number came in at 60% of bookings, which is at the high end of the prior range, but I think it's been roughly 50% for the first half. So we're still in that 40% to 60% range. So I'm just looking for more detail on what's changing here that's lowering the full year guide, given Q3 came in ahead. And we have just one quarter left, is it -- is the attrition you're articulating something new that you're seeing more pronounced now, is it some of the ramp deal impacts you talked about last quarter? Or are you expecting Q4 could actually bring that 40% to 60% number up above 60% for the year?

[Curtis Smith:]

Yeah, so a few things on that. First, the increased demand for subscriptions, as you pointed out and we talked about, subscription sales with ratable revenue recognition pushes into future quarters revenue that we would have recognized upfront in the term arrangement. So as we see, our percent of new sales come in in the quarter at 60%. And then we noted for the year, we expect it to be up at the top end of that range, you'll see more subscription than it has an impact on having less term license revenue and given 606, you don't have that two plus one accounting for the term license revenue or you do have that for the term license revenue, you obviously don't have for the subscription revenue. The other thing we talked about that’s impacting that was the revenue of attrition that was concentrated in fiscal ‘19, as Marcus pointed out, due to the first year of annual renewals related to the remediation program we’ve discussed, and so that was having an impact on the latter half of the year that we forecast into the Q4 results. Our expectation is that that will be largely contained in fiscal ‘19 and we'll see lower revenue attrition rates going forward.

[Michael Turrin:]

And then just on the services piece, it sounds like you're transitioning more over to Sis than previously expected. We expected that to play out with scale. But given three cloud deals year-to-date, we're maybe somewhat earlier than expected on that transition. So I was hoping maybe you could share some of the lessons you're learning that might be making that handoff happens sooner than expected.

[Marcus Ryu:]

Sure. So part of that is our own intentional efforts, we know that we're strategically motivated to have our SI partners be capable. I think we were a little slow in getting that or that lagged some of our cloud messaging to the market, but we've caught that up aggressively over the last, let’s say, a quarter or few quarters. And, our partners are really mobilizing now to embrace cloud as a catalyst for demand for their services. And that's been holding positive. Now, there's quite a bit of swing depending on what each cloud deal or each cloud customer opts to do. And the -- one of the two wins that I mentioned, with MACIF in France, was a little bit surprising that they decided to go entirely with an SI led program. We were enthusiastic for that as well as our partner, of course. But that was not something that was originally expected in our modeling and resourcing for the year. But it's very positive. And that's what we want to have happened with more deals. So -- but it has a kind of an outsized impact, because now, these are large transformation programs, it’s multi billion dollars in scope across many products. So, it has a lot of Guidewire services attached that was originally anticipated that's not going to a partner. I think, as the law, as we have more deals and also more visibility, and more, I think kind of conviction about partners attaching to those deals, we’ll be able to model this more precisely. But what do you see reflected in our go forward guidance is an expectation that we're going to have a higher attach of partner’s services rather than Guidewire services next year than what we might have thought let’s say 12 months ago.

[Operator:]

We’ll take our next question from Chris Merwin with Goldman Sachs.

[Chris Merwin:]

Just a couple questions for me, I guess, first on margins, I think, again, the initial outlook for next year, you talked about a little compression, again, kind of given the accelerated pace of the cloud transition, but when we think about the mix shift towards partners, taking on the implementation, presumably that should be a tailwind to margin. So just curious how you're thinking about that countervailing effect next year and then I have a quick follow up.

[Curtis Smith:]

Yeah. So what we talked about the margin expectation for next year and it's early, and once we finish out Q4, we’ll be able to provide a more detailed update on it, but we indicated our initial view of it is to expect a operating margin of approximately 14% next year, and the reasons that we pointed to are the same themes that we see impacting our Q4 guide, and one is more subscription sales, which has a – then term sales, which has a lower margin associated with it. Second, continued investment in the cloud operations, as we want to get in front of the demand that we're now seeing, for those implementations that we hope to get in place by the end of Q4 and have up and running in 2020. And then, as you noted too, so we do expect to see more attach from our partners going forward here. I think some of the things we were encouraged by coming into Q4 as we look at the IS cloud opportunities is there are more and more partners currently attached to some of those opportunities we see coming out of Q4.

[Chris Merwin:]

Okay, great. And just the second question was on some of the pricing, it sounds like you had a similar ramp deal pricing structure for the new deals you signed in the quarter, similar to I think the CD deal last quarter. So, should we think about that structure being applied to most of the new cloud deal business you're signing in the coming quarters and years and if so, how do we think about that in the context of your long term targets for cloud revenue mix five years out? Or is that still sort of the right number and just a more accelerated ramp in the coming years, just curious how we think about that.

[Curtis Smith:]

I think we do expect most deals to have some element of ramp, because it's natural for customers to want to -- or expect to scale their subscription payments to their actual production usage of the software and the service. And that's -- that relationship is a little bit more explicit and pronounced in a cloud context than it is in a software license, pure software license context. So I think that phenomenon is likely one to repeat. And that's reflected, of course, in our own modeling and the way that we think about converting bookings into revenue and how it plays out over future periods. With respect to pricing, as I said in the prepared remarks, I think we continue to be encouraged that it's -- that we're in alignment with our -- with the expectations that we started out on this journey. But we think very much in terms of the fully ramped number, that's the steady state number that, if we do our jobs correctly, will persist indefinitely with each customer, and optimizing for that being as robust as possible has been how we've organized sales incentive plans, and how we think about the customer relationship really over that over a long term. Now, of course, we're not insensitive to the early years of the relationship. And so we don't want that to get too unbalanced. But it's really the total lifetime value of the customer, the total area under the curve, if you will, that we're optimizing for.

[Operator:]

We'll take our next question from Justin Furby with William Blair.

[Justin Furby:]

Hey guys, couple of questions. Just going back to the retention, I guess what -- I was hoping for a little more color Marcus, around, are these InsuranceSuite customers, where are you seeing pricing changes? Are they actually taking their books of business off altogether? Is it insurance now, like any more color there? And I guess what I also kind of trying to get a sense for is don't all those customers also renew again this year and next year and actually like are all 350 up every year. And so I'm just trying to get a sense for why do you think it gets better from here and I've got a quick follow up?

[Marcus Ryu:]

Sure. Let me answer the second part of your question first, Justin. Yes, that's right. That's – and now, these are annual renewals as opposed to every three years, five years or sometimes eight or 10 years. And that's actually a pretty meaningful change operationally for us in managing the customer relationship, and it's why we've made additional investments, and team changes to ensure that we have a focused renewal team that's going to marry the customer success and thinking about that annual cadence. And that's a new discipline that we've kind of put in place this year. The – to answer the first part of your question about the color, a lot of it isn't -- it's primarily InsuranceSuite and these are not cases of customers, I think in any, I don't think we have a single example of customers actually turning off or discontinuing their use of the software, but it's about an adjustment to the economic terms of the relationship. Now why would that be? One big driver is M&A, which is kind of the background constants that happens in P&C, just like every other industry, and occasionally and we had a couple of these happen in the year, you'll have one of our customers will acquire another customer and sometimes the acquirer, which is obviously usually the larger entity, might have historical or more favorable pricing terms, or they have an ability to consolidate that premium. And that results in an adjustment, downward adjustment in the amount paid by the acquired entity. Now, normally, these kinds of adjustments only happen at renewal time. And if renewal time is every five years and staggered out over multiple periods like that, it effects both that we can anticipate better, and then also is not going to concentrated, whereas we had all of that happen from pretty much all of it happened in the single year, every one of those conversations, not only M&A, sometimes, it could be a change in strategy or a decision to prioritize the rollout of some other products, some other enterprise projects, as opposed to whatever Guidewire project they're on. And so there was nothing qualitatively that changed. It was just the share of quantity that went from 50 renewals happening in the year to 350 that led to higher revenue attrition and it’s something perhaps we could have modeled better. But it was also the first time in our history that we had such a dramatic change. So going forward, these are the same customers that we’ll be renewing, but now they've kind of taken their bite of the apple where it applied and it only again applies in a small minority of cases. And I think we have much clearer visibility across the entirety of our customer base and the renewals ahead of us. So that's the basis for our belief that despite it was kind of a one-time phenomenon.

[Justin Furby:]

Okay, that's helpful. And then if you look at the moving pieces with the ramp deals, the attrition a bit heightens. And it sounds like your perpetual assumptions are effectively 0 or 2 million this year, like where's gross bookings looking or shaking out you think for the full year, relative to what you thought. And I guess, in terms of the clouds deals this year, just curious like have any closed here through June for Q4 to give you more confidence in that number, and any color around the mix of conversions versus net new in terms of your pipeline and what you expect and so typical for me a lot of questions in one, but commentary there would be helpful.

[Marcus Ryu:]

Sure. So, in general, we don't want to comment on sales activity in the quarter and progress. Obviously, we have a very consequential seven weeks or so here remaining in Q4, which is a norm for us. It's even more than norm. I mean, even more the case for us this year, because the deals are larger, because they're the most consequential ones, the cloud deals. And as we know, those are multiples of a typical term deal in terms of bookings. So we have a lot ahead of us that we have to convert, still in the weeks to come. But obviously, we've also made progress in the quarter to date. Your question was also about new versus existing. I think that mix is pretty much as it has been. Historically, we see demand for all of our products as well as for cloud, both from new and existing customers, which is both encouraging, but also not terribly surprising, it's the same set of business motivations in both cases. And we care equally about net new logos as well as expanding existing relationships which we continue to do, I think, very successfully this year, not just with cloud but also expansions of data and digital and the Salesforce relationship, et cetera.

[Justin Furby:]

Okay. And then just –

[Marcus Ryu:]

Sorry, you also asked about aggregate bookings for the quarter and the year. Again, I can't be too quantitative about it. But you can hear from our commentary that we actually feel we had -- we've had a very good sales year and expect to complete very strong relative to our targets. It's just that the accounting complexity, not so much complexity, just the accounting treatment of ratable deals that are closing in the latter half or in the closing days of the year combined with a bit of the negative surprise on revenue attrition that has led to what we talked about in the prepared remarks.

[Operator:]

We'll take our next question from Sterling Auty with JP Morgan.

[Sterling Auty:]

Yeah, thanks. Just want to follow up on the crowd line of questioning, you gave some of the preliminary commentary as we think about the 7 to 8 deal target for this year that carries into next year. I think you had given us just some idea of what the mix of cloud subscription would be for this year. Any preliminary thoughts around where that should go for next year?

[Marcus Ryu:]

I don't think we're ready to quantify that yet, Sterling. But I would say if it goes, if there's a change, that’s going to be further in the direction of subscription. And it would just be premature to put a pin in a number right now. But we expected it'll continue in that direction, it will not be a night and day switch. We still have meaningful discussions with prospects that for any number of reasons, believe that the traditional self managed approach is better for them. And we also continue to have upsells to the vast majority of our customer base that are self managed that will want the next application self managed. But I think the wind is blowing in one direction. And, we'll look forward to quantifying that after we get Q4 behind us.

[Sterling Auty:]

And then the one follow-up question is, I want to make sure because there's a lot of buzz that feel like they're in the air in terms of what's impacting the business. You talked about the InsuranceSuite attrition, but I thought in the prepared remarks, you talked about stance and a $20 million hit, is that the right number and can you again walk us through what specifically is happening in that business to cause that type of impact?

[Marcus Ryu:]

Well, in Q2, you may recall, we had some actual customer attrition. The revenue attrition we referred to in this call was not customer attrition, that was not, but we actually had some science, customer attrition post acquisition that were customers discontinue they used to the software, by the way, we believe that many of them or almost all of them are recoverable, and that the motivation for the change was not anything to do with the product or their service. It was because of their changing outlook about the underlying business, the new cyber lines of insurance that they wanted to roll out. But we did have a negative surprise on that with respect to science. That was a big chunk of the aggregate $20 million number that Curtis referenced with the rest of it being primarily InsuranceSuite revenue attrition that we've just been discussing.

[Operator:]

We'll take our next question from Rishi Jaluria with D.A. Davidson.

[Unidentified Analyst:]

This is actually Hanna on for Rishi. Thank you for taking my questions. First, I was wondering if you could just talk about, if there's anything that surprised you or anything significant you learned this quarter around go to market with InsuranceSuite cloud, you're not limited before?

[Marcus Ryu:]

Well, there is a huge manifold of learnings in every customer relationship. I mean, it's important to understand that the switch from self managed to cloud is a very fundamental transition for Guidewire, it has us taking on a much broader array of responsibilities. It also makes us a much -- even more strategic partner to our customers. But there are all kinds of new competencies that we've had to recruit for and develop within the company, related to data and infrastructure management, relationship with AWS, core cloud operations, customer success, many other things that we've been investing like crazy in over the last two years, but, really intensely in this year. So I can't point to any specific surprise, but we are being very attentive to what this first wave of cloud customers are telling us and making sure that -- and in each of their cases, they are making a very fundamental mission critical strategic board level decision, to work with Guidewire in this way. And we're making very solemn promises about ensuring their success high water every time. And so getting it right every time is essential. And we're continually hardening our capabilities to do that, not just for the customers we have, which are now in multiple different countries and in all different sizes, but to be prepared for the vast majority, if not the totality of our customer base working with us in this way, over the coming years.

[Unidentified Analyst:]

And then could you just comment on what contributed to the operating cash flow coming in a little bit lighter than consensus expected?

[Curtis Smith:]

Yeah, sure. So the things that we noticed and we noted, our first, the services billings are down year-over-year, is almost 20 million due to the revenue being down year-over-year. So that was a part of it. We also noted that the attrition impacted our free cash flow as well. So we quantified it for the year of approximately 20 million that we're not invoicing and collecting against this year. And then the third piece that contributed to it, were the steeper ramps for our migration deals from existing customers to IS cloud customers, and that initial ramp being steeper means lower invoiced amount and lower cash associated with it.

[Operator:]

We’ll go next to Tyler Radke with Citi.

[Tyler Radke:]

Hey, thank you and I appreciate all the color as usual. You talked about a 7x fold increase in the number of renewals processed this year. I'm just curious, I wanted to clarify that, overall renewal rates hadn't changed meaningfully, you just saw an uptick in the churn, given the high growth in the number of renewals processed. I guess quick clarification there, first.

[Marcus Ryu:]

Yeah, that's correct. And we -- just to be super explicit about it, it's about adjusting the economics of ongoing relationships where there is no intention to discontinue the relationship. But sometimes, there's a case or a claim to be made that the numbers should be different in the customer’s favor for a variety of reasons, M&A being one of the clearest cases.

[Tyler Radke:]

And then as we think about the margin progression as you work your way through the cloud transition, and I know you gave some initial comments on next year, but just how should we think about the trajectory of operating margins going forward is, should we think of next year as a trough as you kind of reach those targets that you set out at Analyst Day, just help us understand that because sounds like the subscription and cloud mix is coming in higher than you expected. Thanks.

[Marcus Ryu:]

I think that's one of the key drivers for next year that we talked about, right, having downward pressure on the margin. So ultimately, a good thing if we see more subscription than initially expected, but there's lower margin associated with it versus our term licenses where there's going to be higher margin. So that was one of them that we pointed to as impacting our gross margin, operating margin in 2020. We also noted, given the increased demand that we're seeing that we're trying to hire in front of that to be able to support the needs, and absolutely guarantee customer success of our initial cloud customers here. And so from a cloud operation standpoint, share and services standpoint, or trying to hire in front of that increased demand that we're seeing now, which is showing up in the operating margin in 2020. And then, the last thing we talked about is Q4 is always a big quarter for us. We get a lot of data on the go to market side of things on, in this case, in the cloud operations side of things. And so, coming out of Q4, we should have a better indicator of where we think the impact on the five year plan will be. And to your specific question, is 2020 going to be the low point in how we think about profitability going forward here.

[Operator:]

We'll go next to Brad Sills with Bank of America Merrill Lynch.

[Brad Sills:]

The comments earlier you made on getting to profit and getting to scale in your cloud operation and gross margin, what would the shape of that look like? What would be the drivers for that getting to scale? And what might margin look like longer term for your cloud business?

[Marcus Ryu:]

Long-term we aspire Brad to have the best in class margins of what the example has been set by other cloud companies. There's no reason not to aspire to that. And we're recruiting accordingly. And we're -- that's the aspiration. I think, we're a long ways off from that. We're still talking about a single digit number of total cloud customers right now and we're long ways off from what we would call, like full operational scale or full customer adoption scale. I think what's kind of interesting about our position, however, is that we have, I hesitate to use the term captive, but we have a large, kind of, let's say, primed set of prospective customers, where we have long standing trust relationship, that for whom we are, I think, an advantaged position to be their partner in this mode, right. And the acceleration that we're seeing now, if it continues over multiple years, leads to a pretty rapid on-boarding of very large enterprises into a cloud operations and our primary focus now, while we, of course care about the financial harness that we have to operate within, though, is to make sure that we deliver successfully against that promise so we can really be a platform to the entire industry when we have a large portion, maybe eventually even the majority of the total global industry's premium running through our cloud based platform. And that's the kind of fixed point on the horizon that we're aiming for. And if we get there, I think there would be no excuse not to be at the kind of operational efficiency and therefore margins that other successful cloud companies have gotten to.

[Brad Sills:]

And then one more if I may please, it looked like some nice results out of digital and data. Any update on perhaps some trends you're seeing, some common use cases there, any color on kind of what customers are deploying digital and data for? Thank you so much.

[Marcus Ryu:]

Sure. Yeah, as I said earlier, I think digital is the overwhelm -- the primary catalyst that ensures with size for why they're making IT investment of any sort. It's to support a direct intuitive consumer grade interaction modality with how they sell insurance products, how they service them, how they deal with claims. Everything that they do with any other kind of enterprise or customer, they want to happen digitally. And there's a long ways off from the status quo to that ideal future state. So there's going to be robust demand for digital enablement across every insurance process for many years to come. And the current portfolio of digital products we have, I think it's just the start of what our customers will want us to do in the digital arena. The main things -- focus right now to your question are about the sales process, about quoting and in transacting that initial sale, but there are many other use cases and variations that go beyond that. I think we're just scratching the surface of what data will represent for the industry. There are the kind of core use cases of operational and operational reporting, and the like, but because insurance is so data driven, we're just at the cusp, I think of many other use cases where large Internet scale data, data collection and sophisticated machine learning AI based approaches to finding signal beyond just conventional actuarial approaches to make a very big difference in the industry. So we're investing accordingly for that as well. Our efforts there are loss making today for Guidewire, but that's just how it is, if you're trying to develop a fundamentally new approach for an industry. And that's hence the science acquisition and our sustained commitment to that despite the fact that it has not been a positive and probably will not be a very meaningfully positive contributor to our financials for a while.

[Operator:]

We’ll take our next question from Sterling Auty with JP Morgan.

[Sterling Auty:]

Just a follow up on the ramp deals. So if you hypothetically take a customer that's currently a self managed customer on InsuranceSuite and they decided to do the migration to the cloud option, is that one of the ramp deals? And does the dollar amount that they pay you, go from a steady state under what they had done previously, and then ramp up to a new level or is there maybe a step down before it steps higher?

[Marcus Ryu:]

every negotiation, but in general, it's the former of the two options that you describe – of the two scenarios you described. A customer is using our software in a self managed mode, they're going to transition to the cloud. And that number, the annual amount to us now coming in subscription form is going to ramp up to a materially higher number over a couple of years, that's the nature of what we call a conversion deal. And even in the net new customer relationship, there's still some element of ramp because again, there is an intuitive expectation that they will -- the customer pays more as they get more of their premium into production use on the platform, whether or not, it's cloud. So that ramp is true for existing and net new customers. But generally, we are increasing from an existing term amount in the case of a conversion.

[Operator:]

Ladies and gentlemen, this concludes today's question-and-answer session. I will now turn the conference back to Marcus Ryu, CEO, for closing remarks.

[Marcus Ryu:]

No further remarks. We look forward to seeing and speaking with you soon and thank you for participating on the call today. Bye.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation.