Guidewire Software, Inc.
Q4 2013 Earnings Call Transcript

Published: 4 Sep 2013

[Operator:]

Good day, everyone, and welcome to the Guidewire Fourth Quarter and Full Year Fiscal 2013 Earnings Call. Today's conference is being recorded. And At this time, I'd like to turn the conference over to Karen Blasing, Chief Financial Officer. Please go ahead.

[Karen Blasing:]

Good afternoon, and welcome to Guidewire Software's earnings conference call for the fourth quarter and full year fiscal 2013, which ended on July 31. This is Karen Blasing, 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 Form 8-K furnished to the SEC. To access the press release and the financial details, please see the Investor Relations section of our website at www.guidewire.com. As a reminder, today's call is being recorded and a replay will be available following the conclusion of the call. During today's call, we will make statements related to our business that may be considered forward-looking under federal securities laws. These statements reflect our views only as of today and should not be reflected upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. These risks are summarized in the press release that we issued today. For a further discussion of the material risks and other important factors that could affect our actual results, please refer to our annual report on Form 10-K for the period ended July 31, 2012, and our quarterly report on Form 10-Q for the period ended April 30, 2013, both of which are on file with the SEC. Also, during the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation schedule showing GAAP versus non-GAAP results has been provided in our press release issued after the close of market today. Additionally, we are providing historical reconciliation data, as well as recurring revenue calculations in the supplemental posted on our IR website available at ir.guidewire.com. Finally, at times in our prepared comments or responses to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that this additional detail may be onetime in nature, and we may or may not provide an update in the future. With that, let me turn the call over to Marcus for his prepared remarks, and then I will provide details regarding our financial results and our fiscal 2014 outlook.

[Marcus S. Ryu:]

Thanks, Karen. We ended fiscal 2013 with both revenue and profitability exceeding our expectations. Total revenue in the fourth quarter of $96.9 million represents growth of 43% from a year ago. Sales execution was important to this result, but more fundamentally, we believe it reflects the trend of P&C insurers confronting the structural limitations of their decades-old legacy systems and undertaking a core technology replacement cycle. Expense wise, we continue to make substantial investments across all company functions, especially in sales and delivery, but our revenue upside in the quarter contributed to non-GAAP operating income of $26.5 million, representing a 27% non-GAAP operating margin that was well above our expectations. We focus on recurring term license and maintenance revenue, measured on a rolling 4-quarter basis, as a key metric to evaluate our progress. For fiscal '13, this metric totaled $150.4 million, an increase of 44% from the $104.4 million at the end of fiscal '12. This growth reflects overall sales momentum, returns on the investments I just referenced and the benefit of a couple large transactions with Tier 1 insurers in 2013 and at the end of fiscal 2012 that we have previously discussed. We are in dialogue with additional Tier 1 insurers around the world and we aspire to count a disproportionate share of them as customers over time. But by their nature, sales cycles with the Tier 1 are especially prolonged and hard to pin down to a specific quarter or even year. Strategically, our goals in fiscal 2013 were

[Karen Blasing:]

Thank you, Marcus. We are pleased to report that our results for the fourth quarter exceeded our revenue and earnings expectations. Total revenue was $96.9 million, a 43% increase from the fourth quarter of fiscal 2012. Within revenue, license revenue was $49.1 million, up 70% from a year ago. Fourth quarter revenue included $4.2 million in perpetual license revenue, up from $1.6 million in the fourth quarter 2012. Excluding the impact of perpetual licenses and the last catch-up license revenue of $3.2 million recorded in the first quarter of 2013, license revenue was up 48% from a year ago. Maintenance revenue, which is recognized ratably through the year, was $9.9 million for the fourth quarter, up 26% from a year ago, reflecting overall license growth trends. Services revenue was $38 million, up 23% from a year ago, reflecting the increase in numbers scale and complexity of projects we are engaged in. Our high annual revenue visibility is driven by the recurring nature of our multi-year term licenses and ongoing maintenance agreements, both of which are typically billed annually. Recurring term license and maintenance revenue totaled $150.4 million in fiscal 2013, up 44% from $104.4 million for fiscal 2012. With respect to geographic mix, the U.S. represented 57% of revenue in the fourth quarter, with 43% of revenue coming from outside the U.S. For the full fiscal year, our U.S. revenue was also 57% of total revenue, while international was 43% compared to 45% of revenue from outside the U.S. in fiscal 2012. Though we are being successful in expanding our geographic reach, a couple of large domestic Tier 1 deals increased the overall contribution from customers based in the U.S. compared to a year ago. We will discuss our profitability measures on both a GAAP and non-GAAP basis and we have provided a reconciliation of GAAP to non-GAAP measures in our earnings press release issued today, with the primary difference being stock-based compensation expenses. Non-GAAP gross profit in the fourth quarter was $64 million, an increase of 54% on a year-over-year basis and producing a 66.1% non-GAAP gross margin. Breaking that down, non-GAAP gross margin for license was 99.7%, maintenance was 81% and 18% -- 18.7% for services. Overall, non-GAAP gross margin increased from 61.5% in the year-ago quarter, largely due to an increase in high-margin license revenue as a percentage of total revenue compared to a year ago. Turning to operating expenses. Total non-GAAP operating expenses were $37.5 million in the fourth quarter, an increase of 18% compared to a year ago. This resulted in non-GAAP operating income of $26.5 million, which was up 174% on a year-over-year basis and represented a non-GAAP operating margin of 27.3%. As in the third quarter, operating income was higher than our guidance, due to revenue that was above our expectations and hiring that was slightly lower than the levels we had assumed in our guidance. For the fourth quarter, we generated $27.8 million in adjusted EBITDA, an increase of 167% compared to a year ago and represented adjusted EBITDA margin of 29%. Adjusted EBITDA was above expectations and reflected our strong license activity in the fourth quarter. Non-GAAP net income was $0.25 per share, which was well above our guidance of $0.13 to $0.14. Looking at our results on a full year basis, revenue of $300.6 million in fiscal 2013 was up 30% from the prior year. For the full year, license and maintenance revenue represented 54% of revenue compared to 55% in 2012. And as Marcus indicated, we expect that in fiscal 2014, we will see the revenue mix shifts more towards license and maintenance from services. Full year non-GAAP gross margin was 60.8% compared to 62.4% in 2012. A portion of the decrease in non-GAAP gross margin is related to costs associated with the operation of Guidewire Live, which is still in its very early days from a revenue perspective. We expect Guidewire Live to continue to be a modest drag on gross margins in fiscal 2014. Non-GAAP operating income was $55.6 million, and adjusted EBITDA was $60.1 million for the full year, up 34% from a year ago and represented an adjusted EBITDA margin of approximately 20%. Turning now to our balance sheet. We ended the fourth quarter with $207.7 million in cash, cash equivalents and investments, up from $203.6 million at the end of the third quarter, due to cash flow generated during the fourth quarter. This was largely offset by the Millbrook acquisition, which we completed during the quarter. We generated operating cash flow of $24.4 million for the fourth quarter and $32.5 million for the full fiscal year. Our current deferred revenue was $37.4 million and total deferred revenue was $41.2 million at the end of the fourth quarter, a decrease from $51.5 million at the end of the third quarter. This was primarily from the -- the decrease was primarily due to the recognition of a license invoice from an existing customer that was billed in the third quarter, but recognized in the fourth quarter. As we have shared in the past, we do not believe that deferred revenue is a meaningful indicator of business activity during the quarter since we typically bill term license contracts annually and recognize the full annual payment upon the due date. Further, our multiyear contracts, combined with annual payment terms, mean that a significant amount of our contractually committed fees are not visible on our balance sheet. We believe that the combination of this contracted business and our best-in-class renewal rates provides us with a high level of visibility toward 2014 revenue today. Now I'd like to turn to our outlook for the first quarter and fiscal year 2014. Our plan in 2014 is to continue following the strategy that drove much of our success in 2013, particularly as it relates to continued investments in sales and marketing. We believe we are well staffed to continue enhancing existing products and bringing new technology to market. As such, we will moderate R&D headcount growth substantially in 2014. We will still see an increase in R&D expenses during fiscal 2014 as we absorb the full year cost of the growth in headcount in fiscal 2013. As it relates to services, we plan to pull back on additional investments in fiscal 2014, as the capabilities and credentials of our SI partners allow us to deploy a fewer number of Guidewire personnel on implementations. In terms of headcount, we will be making a relatively small adjustment to our consulting team size. However, since we have an increased investment in our Dublin-based distributed consulting center, which provides a lower cost model for some of our customers. These measures will lead to a lower services mix, and we expect them to have a positive impact on gross margin over time. We anticipate total revenue for fiscal 2014 to be in the range of $328.5 million to $340.5 million, an increase of 11% at the mid-point. Within revenue, we believe that license revenue will increase approximately 19% and that maintenance will grow approximately 12%. Most importantly, we expect term licenses to grow above 20%, which would be a strong performance to get to -- against a difficult comparison caused by the incremental revenue contribution from new Tier 1 customers in 2013. We expect perpetual license revenue to be similar to 2013 levels. As a reminder, we do not include unusually large transactions in our outlook, even when there are such opportunities in our pipeline. We anticipate service revenues growth to flow to approximately 5%, as system integrator partners take on more of the implementation effort. We entered 2013 with expectations to deliver operating margins of approximately 9% for the year, representing a balance of profitability and increased investments to stake out a clear market leadership position. While we achieved a fiscal 2013 non-GAAP operating margin that was doubled this level, largely due to a couple of large sales transactions, we believe our increased level investments in sales and marketing capacity continues to be the right call during 2014. We expect full year non-GAAP operating income in the range of $18.2 million to $22.2 million, representing non-GAAP operating margin of 6% at the mid-points of our revenue and operating income guidance. We expect to achieve better margins beyond fiscal 2014 as we grow the contribution of license revenues, as a percentage of total revenue, achieving results with our expanded sales team and gaining scale from R&D products. We anticipate adjusted EBITDA in the range of $25.5 million to $29.5 million in fiscal 2014. And we anticipate non-GAAP net income in the range of $12.6 million to $15.3 million, or $0.20 to $0.24 per share, based on a fully diluted share count of 64.3 million shares. We anticipate an effective non-GAAP tax rate of approximately 31% for the full year. On a GAAP basis, which includes $64.2 million of stock-based comp expense and $1.4 million in amortization of intangible assets, we anticipate a fiscal 2014 operating loss of between $47.4 million and $43.4 million, a net loss of $31.3 million to $28.6 million, or an EPS loss of $0.53 to $0.48, based on an estimated weighted average basic share count to 59.6 million shares. We anticipate an effective GAAP tax rate of approximately 34% for the full year. From a seasonal perspective, we expect quarterly revenue, as a percentage of annual revenue, to be similar to what we experienced in fiscal 2013, with the fourth quarter being the period that we naturally have a significant portion of our annual billings based on timing of customer invoices and contracting activities. This is generally the basis for the recording of license revenue. Looking at the first quarter of fiscal 2014, we anticipate total revenue to be in the range of $61.4 million to $63.4 million. For the first quarter, we anticipate non-GAAP operating loss of between $15 million and $13 million for the first fiscal quarter, and non-GAAP net loss of between $10.3 million and $9 million, or $0.18 to $0.15 lost cents per share, based on an estimated weighted average basic share count of 58.3 million shares. Our non-GAAP operating income and net income expectations exclude approximately $13.2 million in stock-based comp expense and a $0.4 million in amortization of intangible assets in the first fiscal quarter. Including these noncash expenses, we anticipate a GAAP operating loss between $28.5 million and $26.5 million. We anticipate a GAAP net loss between $18.8 million to $17.5 million, or an EPS loss of $0.32 to $0.30 per share. We anticipate an effective non-GAAP tax rate of approximately 31% and a GAAP tax rate of approximately 34% in the first quarter. We expect to use cash during our first quarter as we typically use cash in the first half of the year and rebuild cash balances from operations during the second half of the fiscal year. In summary, while we are pleased to report quarter and full year results ahead of expectations, we remain focused on the investments and execution necessary to build our emerging leadership position in the large market we serve. We believe this leadership position will enable us to drive strong recurring revenue growth and expanding profitability in the years ahead. Operator, can you now open the call for questions?

[Operator:]

[Operator Instructions] I will move first to Nandan Amladi with Deutsche Bank.

[Nandan Amladi:]

My first question is on the Millbrook. Marcus, you cited the number of customers, which were organic and also some that came from via Millbrook. Are any of the Millbrook customers candidates for selling your core product? And how is your progress in that front?

[Marcus S. Ryu:]

Definitely the case. They are all P&C carriers, and therefore, targets for our software. And it's a very logical conversation for us to have with them. That was not a primary motivator in the acquisition, of course. We were primarily motivated by expanding our product volume proposition and that's to encompass the SI and data warehouse and ODS and domains. But the fact that they have some good customer relationships was a nice thought.

[Nandan Amladi:]

And a quick follow-up, if I might. Obviously, your DWP at 234 billion is pretty impressive, but given that, that number doesn't grow linearly with the number of customers. What are some of the other metrics that people can -- investors can track, particularly as your product portfolio has grown?

[Marcus S. Ryu:]

Well, we -- that's a trailing metric, just like a number of other metrics we share, like the recurring 4-quarter license and maintenance growth. During the Analyst Day, we will -- we'll continue to update a metric that we've shared in the past, which is what portion of wallet, if you will, of that -- of the premiums that are represented by our customers have licensed our software. And that's a little bit more intricate calculation now since we have more products to sell to our customers. But we think that from a large portion of the total available market opportunity within our existing customer base is still ahead of us.

[Operator:]

We'll move next to Sterling Auty with JPMorgan.

[Sterling P. Auty:]

So I wanted to start with what changed from last quarter's call where you'd kind of talked about fiscal '14 preliminary comfort with kind of, I think, strict consensus within the mid-340 range to now making the change primarily here on Professional Services? Did something change in just the SI base? Did something change in your customer buying behavior? What's the driving force behind the strategic shift that you're undergoing?

[Marcus S. Ryu:]

First off, Sterling, you're absolutely right that the change in outlook and plan is really concentrated on the way we see Professional Services demand. As we've been forthright from the very beginning, as a public company, our emphasis is on recurring license and maintenance revenue, not on Professional Services, which is an enabler to the former. What's happened in the last couple of months, I think, has been the mostly very encouraging in that our partners have really built up the credentials and the credibility to do the large majority or even the entirety of implementations of PolicyCenter and InsuranceSuite. We -- in previous calls, we've talked about how we had to bring our SI partners up the enablement curve on those -- for PolicyCenter and the full suite as we did with ClaimCenter. And the evidence is that it's happening faster than expected. And that was reflected in the decisions of a number of our customers just in this last quarter to really rely heavily on SIs, kind of ahead of our pattern in -- earlier in the year and before. So that's actually quite encouraging because that's exactly what we have always wanted our business model to steer towards. It's happening a little bit faster than we had planned, even compared to a quarter ago, and we want to make the right adjustments mindful of that likely trend -- the trend continuing and possibly even accelerating.

[Sterling P. Auty:]

Then, when you look at the comment about the increased investment, how much of that investment is headcount related versus other infrastructure that you may be putting in place to scale the business? And the reason I asked is relative to [indiscernible], for example, sales and marketing was the biggest driver of margin upside. And if that was all headcount, it would seem like you missed hiring plan by several dozen. So why should we now look at 6% non-GAAP as the right operating margin? What would make us believe that you'll be able to hit your hiring targets in 2014 to get down to that level?

[Marcus S. Ryu:]

I'll have a few comments on that, and then Karen should weigh in as well. Overall, for '14, we have much more moderated headcount growth across all functions, and we talked about services. But that's definitely the case for product and for sales as well. We had a huge year of hiring. That was incidentally very much second half loaded, or even Q4 tilted, on really across every function. And of course, we now -- we bear the full year cost of that into '14, which is the main driver of increased expense and therefore, margin -- the change in margin. Karen, do you want to comment?

[Karen Blasing:]

Yes, the other thing, Sterling, is it is sales and marketing. And quite frankly, we spent less in marketing than we were anticipating. We had a reasonable budget included for Q4 with a number of activities. And I think we were just a little over ambitious in thinking that we would spend as much as those marketing that -- those marketing dollars as well. So we ask [indiscernible] to the headcount and growth.

[Sterling P. Auty:]

So can you give us what the change in headcount was quarter-over-quarter, so we can get a sense of what that incrementals expense would look like that carries through for the full 2014?

[Karen Blasing:]

Sure. So sales and marketing ended at 177. So we had a net addition of about 55 people during fiscal year 2013.

[Sterling P. Auty:]

Okay. And maybe if -- you may want to do it off-line, but total headcount was?

[Karen Blasing:]

I'm happy that -- happy to do it here. Total headcount was 1,149, which was a net addition of 312 people.

[Sterling P. Auty:]

And last question and I'll turn it over. If I look at the Q1 guide and the idea of a loss, should what we be interpreting here is you had several go-lives in the fourth quarter, where the associated Professional Services revenue is not going to be contributing in the first quarter? But of course, you're probably not going to get rid of those heads so you've got the burden on the expense side in addition to the hiring that you saw in the fourth quarter, and that's why we're getting the first quarter impact that we are?

[Karen Blasing:]

So we have talked about Professional Services. And -- but there's a larger factor that's there. So we do have an annual services meeting. This year, it happened to fall in the first quarter of August, which takes the consulting team out of the field for a number of days. So they're not actually at our customer sites and billing. So that leads to a natural dropoff in the number of available days for these guys to work in Q1 compared to what they did in Q4. And in Q1 this year compared to what they did in Q1 last year. The biggest reason for the loss really is they -- is the pattern of our license revenue. As you'll note, we had a large increase in license revenue recorded in the fourth quarter. The expectation for license revenue in the first quarter goes back down again to kind of more seasonal -- their expected seasonal pattern there. Most of our license contracts are kind of clustered around the fourth quarter. And that's -- that license revenue is what drives profit and margins.

[Operator:]

[Operator Instructions] We'll move to Brent Thill with UBS.

[Brent Thill:]

Marcus, just to drill into this -- the services strategy. It's fairly rare for customers to pull back as quickly as perhaps you're guiding to on the services side that's going from you as the main contractor to the third parties. I guess, what -- what's flipping the switch? And I would assume it's just the big SIs are finally up to speed, they've got their practices. But we've rarely seen this. So help us understand why, why you think this happened so quickly. And if you could just also fill in, from an SI perspective, who do you see as the most staffed up where you feel very comfortable to the practice as it were, where you put them on par with your internal services capability?

[Marcus S. Ryu:]

Sure. Let me answer the second part first. The -- we've grown our services relationships with a number of the top SIs, that would be Ernst & Young, PwC, Capgemini, IBM and then also, Cognizant and a few others that are more regionally specific in Europe and Asia. And we've seen growth in really every one of those services -- every one of those strategic relationships, where they have trained more consultants and gotten them more than staff, shadowed them on our projects and so forth. I neglected to mention Deloitte as well. So it's actually not a discontinuous process. It's been fairly smooth. And that's really reflected in the metric of total number of trained consultants in Guidewire practices at these partners. And that's been a steady ascent that we've -- we monitor pretty closely as one of our operational metrics. Of course, the way the demand comes in, in these projects isn't quite as smooth, right? There are large projects that after a prolonged sales cycle and evaluation, then gets decided and committed. And then those resources are kind of dialed in for what might be a multiyear horizon through multiple phases of a project, right? And so that -- even though the underlying phenomenon is sort of smooth and continuous, the way that it manifests itself in commitments for new services can actually be kind of lumpy. And that's the characteristics of our business overall. A lot of continuous effort that then culminates in a big transaction, which happens, in our case, tends to be clustered around Q4. So that's the main dynamic that you see there. All that said, it is happening a bit faster than we expected. And really, it's not a question of capability or it's only partially a question of capability, it's also a question of credential. Partners have to prove that they've done it before and had projects that went live, that they had customers that they got successfully to that key milestone. And we've had a lot of go-lives this year that gave our partners some key credentials that they can take to new prospects. And that's, I think, pretty compelling.

[Brent Thill:]

Okay, great. And Karen, just a quick follow-up on sales. You hired, I believe, roughly 45% growth in sales this last fiscal year. Is there a similar trajectory that you're anticipating for this fiscal year or maybe can you give us a range of how you think about that?

[Karen Blasing:]

So -- the -- I don't expect sales to grow -- sales and sales capacity to grow quite as fast as they did this year. But it's still going to be a very strong increasing capacity. Sales reps, sales consultants, inside sales and then probably a little bit of management out there as well.

[Operator:]

We'll move next to Walter Pritchard with Citi.

[Kenneth Wong:]

It's Ken Wong for Walter. On this whole services strategy, I mean, it seems like it makes sense to kind of go up to the recurring revenue. But just in terms of the ramp from your partners, I mean, any sense for what the mix in terms of the revenue from services are, from partners versus your own internal staff? Or if not that metric, maybe you can give us a sense for just kind of how that trained consultant headcount has kind of moved from last year versus this year?

[Marcus S. Ryu:]

So on the last point, trained consultant headcount went from 2,700 to about 3,700 in the present. We -- one metric I think you asked for, Ken, is a little bit hard for us to track, which is what is the total -- of the total demand for services in the whole market, what portion of it goes to our consultants versus partners? It's a little difficult to track that and we have some guesses at it, but we're not privy to that full calculation on the part of our customers, how they end. We've -- there's also a substantial kind of penumbra of additional services that always surround our projects that -- the kind of work that we would never do, that we don't really measure or have clear visibility into. We do look very closely at the level of staffing and the percentage of the projects that we are doing consistently around the world. And our ideal target is to do something like 10% to 15% of the work. There are cases where we do less than that, cases where we do more. And I would say, qualitatively speaking, we are seeing that number trend downward, which is, of course, what we've always wanted to steer towards long-term.

[Kenneth Wong:]

Got it, got it. And Karen, I mean, it seems like the tax rate was a little high this quarter. Or is it just purely because you guys exceeded on profitably so much or is there anything else kind of pushing that number up?

[Karen Blasing:]

Today, in fiscal '14?

[Kenneth Wong:]

I think specific to Q4. I mean, it looks like it was -- kind of look at the model here. It looks like it was pushing -- well, it's definitely above the 30% that I guess we had in our model. I'm just wondering if that's specific just because the quarter was -- that you guys had so much upside in the quarter on the net income basis or if there was -- if there's anything else under the surface there that was bumping that up?

[Karen Blasing:]

So fiscal '13, if you look at the full year tax effect, it was a little less than 11% for the full year. And you do -- you always do a series of kind of like true-ups in the fourth quarter. Some of the biggest benefits that we actually get is R&D tax credits and then, foreign tax credits that we can -- that we apply against the U.S. Federal rate as well. So that really benefited us in fiscal year '13. Looking forward in FY '14, the R&D tax credits go away at the end of December. So you actually can't project past those next few months that Congress will reenact. I think Congress will reenact those -- the R&D tax credits. So that's really what our projections based on.

[Operator:]

Next, we'll take Brendan Barnicle with Pacific Crest Securities.

[Brendan Barnicle:]

Marcus, you noted the strength you guys have seen in the acceleration around suites. And as we sort of think about next year, are we fundamentally going to see sort of a shift in that mix that we have between the suite and the individual product sales going forward? And are you -- have you changed sort of the go-to market strategy, any, as you had more adoption suites?

[Marcus S. Ryu:]

No change in market strategy. We've always wanted to have every -- ensure adopt the entire platform, the entire InsuranceSuite. The -- a little bit of shading on that approach is that next year, we, of course, we want them to buy some of the new product offerings that we have in data management. We want them to start sending data to us through Guidewire Live and then, of course, become a paying customer for that. We have a new set of offerings, which I didn't mention in the main script in the mobile -- in the mobility area that we want them to license. And these are all offerings that really -- you can only license after you've gone through the hard work of implementing one of the core transactional systems that are in the suites. So we wanted -- we have every rep who's trained and equipped to go and position the entire suite. We don't have a product-specific sales force in that sense. And our overall message and value proposition is transformational at the level of the whole operating platform. We were really pleased this year with the degree to which we were persuasive with that and have developed the proof points to make customers go from a platform they've had for 30 years and basically, commit to doing all of their core transactional on operational systems on the suite. And that was really encouraging and we want a lot more of that to happen in this year as well.

[Brendan Barnicle:]

Great. And Karen, you had talked about sort of the R&D spending moderating. Would we expect to see that down sequentially in Q1 from Q4? It looks like in the past, we've seen that. And obviously, in the marketing, we typically see that, so should we expect that again?

[Karen Blasing:]

I wouldn't -- there's nothing internally that we focus -- that we put our attention to having R&D decline in the first quarter over the fourth quarter. We had an awful lot of people in R&D last year, and we'll see the full effect of those going into fiscal '14. As a matter of fact, I would expect actually increases almost kind of across the board going into first quarter compared to Q4.

[Brendan Barnicle:]

Across the board, you mean, in sales and marketing as well and G&A as well?

[Karen Blasing:]

Yes, so a couple of things. So well, let's talk about the 3 biggest categories. G&A is pretty moderated. So that's a small percentage of it. It might go up a little bit because we actually do the audit for the first -- for the fiscal year in the first quarter. So we get a little bit of extra additional audit fees there. But if I go across the board, so cost and services is higher in the first quarter because we have the service -- the annual service meeting. This year, it happened to fall into August. In sales and marketing, we have our big connections users conference coming up in the first part of October. It's a relatively expensive event. And we expect attendance to be up about 25% to 30% this year over the prior year. So that will be a one-time expense hit in that first quarter. And R&D -- many of the R&D team actually tend to attend that as well and help put on that conference. So there will be some incremental costs associated for them as well.

[Brendan Barnicle:]

Great. And then just lastly, on the last call, you talked about seasonality through the year where revenue would be low 40% first half for the year then the remainder in the second half. Is that still the same or are we going to be more 40%, 60%? Sort of any change there as it relates to the change in services?

[Karen Blasing:]

The biggest -- so services, I think, will be fairly moderate throughout the year, changes quarter-to-quarter outside of Q1 where we have pulled people out of the field for the service meeting. So I expect that to be a little bit lower. We get a little seasonal adjustments for professional services because they tend not to work during Thanksgiving or Christmas or New Year's. So again, there's just less days to build -- to bill our customers and work our customer sites. So that's the biggest difference in the services. On the license side, we just have -- if you look at the results this year, license revenue was heavily skewed toward the fourth quarter. And that's because our initial contract periods and the anniversary dates of those term license contracts are really heavily clustered around the fourth quarter. So it's -- it appears as a very back-end loaded. And it's back-end loaded just from the existing customer base, not -- without consideration for new sales that will undoubtedly come more toward the back end of the year as well.

[Operator:]

And we'll move next to Tom Roderick with Stifel.

[Tom M. Roderick:]

Maybe kind of turning to the idea of guidance where you don't include Tier 1 deals within the context of your guidance. Can you speak at least qualitatively to the pipeline of opportunities you're seeing in the Tier 1 front? Last year was a big year, maybe, maybe not the expectation you want to set that you're going to kind of redo that year. But in general, can you talk about what the pipeline looks like and maybe adding on top of that Marcus, as you've been wearing the sales hat for a while now, is that a hat you want to keep wearing? Or is there a process of transition where you would like to bring in some outside talent to help you with the sales organization?

[Marcus S. Ryu:]

Thanks, Tom. To your first question, I think you captured the spirit of our remarks perfectly in that we just want to set expectations with our characteristic conservatism with respect to these big transactions. It's just the nature of the decision that we are -- that a company has to make, especially a large one, to make a very large capital investment on a big transformational project that they only do every couple of decades. And by its very nature, it's just very hard to pin that down exactly to -- into a given quarter, and in some cases, even over multiple quarters. So we actually enter this year with a lot more conversations going on with that -- at that Tier 1 level than we've ever had before. All kinds of good things have happened to support that, the momentum we had with big decisions that were made last year, we had some huge go-lives that happened that really helped. Our largest customer, Tokio Marine, went live a couple of months ago. American Family, a major Tier 1 personalized insurer, went live with PolicyCenter a couple of months ago. So these things are extremely helpful for the large Tier 1 conversations. But translating those into a consummated transaction is just an inherently, and this will always be the case, an inherently trickier task. And we want to -- we don't want to increase the level of optimism that we bring to that forecasting challenge and then where we were, than we were 12 months ago, right? Even though a lot of the fundamentals in the business continue to improve. To your second question, about my own role, I think it's inherent in our business that the companies, when they make this decision, want to have a principal-to-principal relationship with us. We're in a very strategic dialogue. There's always a very strategic dialogue before a company makes this kind of choice. And no matter what happens, even with the most brilliant sales team, I'm going to have a role, as long as I'm in this position, to make it clear that the company is really committed to their success. And that's been our kind of signature in the market that we commit as a leadership team and as a whole company to the success of these programs and we live up to every promise. That said, the team is a lot larger than it was even just a year ago or 2 years ago, and more professional sales management would be a great thing. We've continued to add to that. We have a great new leader in Europe, for example. And added a management level to North America, which I think really helped that team's results this year. And there's probably more recruiting of that sort ahead.

[Tom M. Roderick:]

Great. Maybe one last question from me. Let me shift back to the idea of the big deal pipeline. Undoubtedly, these things are discussions that go on over a long period of time. I would imagine that you have a handful of larger deals that you're in deep discussions on. As you look at those, are those customers, have they made the move to select various systems integrator partners? Hence, perhaps that's part of the guidance when you look at the big deals that are about to close, there's already been an SI selected, and therefore, there's not the need for your services? Or is this truly just a proactive maneuver to say, "We frame more SIs, we have more consultants out in the field that understand our products and now, we can start to deemphasize our own." I'm just trying to get a feel for how much of this is 2 steps ahead of the curve versus just the customer selection process being a leading indicator of what's to come on the systems integrators' side.

[Marcus S. Ryu:]

Yes, that latter set of themes is definitely true. But yes, and even in the big deal conversations that we're currently engaged in, it's a foregone conclusion that a system integrator is going to do the large majority of the work. I mean, we've proven that paradigm out now a number of times. And even when the exact partner is not finalized yet, they're down to a handful of credible choices, and it's just a foregone conclusion that one of them is going to do the large preponderance of the work and even for a huge project that the Guidewire involvement and that is going to be low single-digit headcount participation. Very important, sometimes it'll be over a period of years even until as the whole program rolls out. But in -- but the quantum of involvement will be really modest even for the very large projects. And that's been kind of validated now to a degree that we feel confident it's the paradigm by which these transactions will happen.

[Operator:]

Ladies and gentlemen, that concludes our question-and-answer session at this time. I will turn the call back over to Marcus Ryu for final closing comments.

[Marcus S. Ryu:]

No further comments. Thank you all for participating and look forward to our next conversation with each of you. Goodbye.

[Operator:]

That does conclude our conference call for today, everyone. Thank you all for your participation.