U.S. Markets closed

Edited Transcript of GWRE earnings conference call or presentation 5-Sep-18 9:00pm GMT

Q4 2018 Guidewire Software Inc Earnings Call

San Mateo Sep 13, 2018 (Thomson StreetEvents) -- Edited Transcript of Guidewire Software Inc earnings conference call or presentation Wednesday, September 5, 2018 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Curtis H. Smith

Guidewire Software, Inc. - CFO

* Marcus S. Ryu

Guidewire Software, Inc. - Co-Founder, President, CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Aleksandr J. Zukin

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Hoi-Fung Wong

Guggenheim Securities, LLC, Research Division - Senior Analyst

* Jackson Edmund Ader

JP Morgan Chase & Co, Research Division - Analyst

* Jesse Wade Hulsing

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Justin Allen Furby

William Blair & Company L.L.C., Research Division - Research Analyst

* Matthew David Van Vliet

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Monika Garg

KeyBanc Capital Markets Inc., Research Division - Research Analyst

* Tyler Maverick Radke

Citigroup Inc, Research Division - Senior Associate

* William Fitzsimmons

Morningstar Inc., Research Division - Equity Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, and welcome to the Guidewire Fourth Quarter and Fiscal Year 2018 Financial Results Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Curtis Smith, Chief Financial Officer. Please go ahead, sir.

--------------------------------------------------------------------------------

Curtis H. Smith, Guidewire Software, Inc. - CFO [2]

--------------------------------------------------------------------------------

Thank you. Good afternoon, and welcome to Guidewire Software's earnings conference call for the fourth quarter and fiscal year 2018, which ended on July 31, 2018. My name is Curtis Smith. I am the 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.

During the call, we will make forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding trends, strategies and anticipated performance of the business. These forward-looking statements are based on management's current views and expectations as of today and should not be relied upon as representing our views as any -- as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. Actual results may differ materially. Please refer to the risk factors in our most recent Form 10-K and 10-Qs filed with the SEC.

We will also refer to certain non-GAAP financial measures to provide additional information to investors. A reconciliation of non-GAAP to GAAP measures is provided in our press release. Reconciliations and additional data are also posted in a supplement on our IR website.

During the call, we may offer incremental metrics to provide greater insight into the dynamics of our business. These details may be onetime in nature, and we may or may not provide updates in the future.

With that, let me turn the call over to Marcus for his prepared remarks, and then I will provide details on our results before providing our outlook for Q1 and fiscal 2019. Marcus and I will then take your questions.

--------------------------------------------------------------------------------

Marcus S. Ryu, Guidewire Software, Inc. - Co-Founder, President, CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Curtis. At the start of fiscal 2018, our goals were to continue winning a leading share of transformational mandate from insurers, particularly in Europe, and to advance our industry platform strategy, in which we unify core data and digital capabilities in a standardized core cloud platform for the global P&C industry. Our fourth quarter completed the year in which we succeeded on both counts.

I will begin with a summary of our Q4 and fiscal '18 results. Revenue was $248.6 million for the quarter and $661.1 million for the year while non-GAAP net income was $0.81 and $1.14 per share for the quarter and year, respectively. These results, both above the high end of our guidance ranges, were driven by a record number of transactions in new licenses in our Q4.

During the quarter, we added 15 new customers across the Americas, Europe and Asia Pacific, including 4 selecting full InsuranceSuite and 1 selecting InsuranceNow. On top of these, 45 customers expanded their relationships with Guidewire with new licenses for additional products during the quarter, including 4 that licensed additional core applications to complete their adoption of InsuranceSuite.

Especially consequential among our customers are those with over $5 billion in annual premiums, a segment that we, following industry convention, call Tier 1 insurers. During the year, 3 new and 6 existing Tier 1 customers selected 25 Guidewire products, bringing the total to 28 at the end of 2018.

Overall, we ended fiscal '18 with 380 total customers, up from 328 last year. The record in premium penetration of our customers licensing at least one of our core applications grew from $423 billion to $454 billion, measuring from the end of fiscal '17 to the end of fiscal '18. Despite these gains, the global market for modern P&C technology systems is still quite underpenetrated, with the large majority of the $2 trillion in global premiums still managed on legacy core systems. This is especially true of Tier 1, where we now have relationships with about half of the insurers comprising the segment, but where the calculation of what we call wallet share shows us barely penetrated into the opportunity for customers to license our full platform for all their business lines. We look forward to providing more market sizing and penetration data at our Analyst Day in 2 weeks to help quantify the opportunity we see in the years ahead to build upon our market leadership position with additional offerings and deeper adoption by those hundreds of insurers with whom we have successful relationships.

As an example of this from Q4, we further broadened our relationships with multinational insurers like Aviva Italia selecting InsuranceSuite and Guidewire Digital; and AXA Assistance France selecting ClaimCenter; Tier 1 multinational MAPFRE España being the largest domestic insurer, selected ClaimCenter and Guidewire Digital; as did Royal & Sun Alliance, a Tier 1 insurer in the U.K.; and Basler Versicherungen in Germany selected all of InsuranceSuite as well as data and digital products.

These wins were part of a year of significant progress in the largest and most underpenetrated of our geographic markets, namely Europe. We had our strongest year-to-date for new sales in Europe, with 22 customers licensing 64 products during the fiscal year, 10 of whom were new customers, including the 5 I just mentioned.

We believe this traction reflects the demand environment coming to mirror the U.S. in its appetite for core applications, data and digital products and cloud deployment as well as our strengthening brand on the continent.

As one indicator of the latter, in the fourth quarter, Celent named Guidewire a winner of 2 of their top awards for policy administration systems in EMEA, with PolicyCenter earning the sole top position among 38 vendors in the breadth of functionality and depth of service categories. Additionally, our Cyence Risk Analytics team was voted Risk Modeller of the Year in Europe at the recent Reactions London Market Re/insurance Awards.

Returning to our home market in North America, here, we closed a diverse set of wins during the fourth quarter, including Tennessee Farmers Insurance, a Tier 2 insurer who selected the breadth of InsuranceSuite and Guidewire Data and Digital products. Fred Loya Insurance, a Tier 3 insurer based in Texas, selected ClaimCenter and Business Intelligence. And Workmen's Auto Insurance, a division of Mercury General, a long-standing and broadly adopted Tier 2 customer, was our fourth InsuranceNow selection for the year.

While InsuranceNow has proven value in serving its target market of smaller U.S. insurers writing smaller -- writing standard lines, total new customer sales fell short of our aspirations for the fiscal year, and we are confident that we will do better in fiscal 2019 and beyond.

Our noncore products continue to post strong attach rates that we have enjoyed for the last few years, validating our thesis that digital engagement and predictive analytics are catalyzing technology investment in the P&C industry.

During the fourth quarter, 29 new and existing customers chose Guidewire Digital, and we ended the year with 127 customers having licensed at least one of our digital products.

Cyence, the data listening and machine learning company whose acquisition we closed earlier in the year, closed an important deal with the U.S. subsidiary of one of the leaders in cyber insurance, Beazley. Also, Zurich Insurance Group, our largest multinational customer, will use Cyence to strengthen their cyber risk capabilities. Cyence finished the year ahead of expectations with 5 wins post acquisition. And our Predictive Analytics product was selected by Society Insurance, finishing a strong year, including the 2 largest deals for that product to date, reflecting a long-awaited boost from integrating our analytics more natively into InsuranceSuite.

In light of this traction, we are expanding our investment in new data sources and analytic techniques by forming a new division called Guidewire Analytics and Data Services, or ADS, that combines our Cyence Predictive Analytics and Guidewire Live teams. This division is already being led by a new executive on the executive team, Paul Mang, who brings a wealth of experience as the former Global CEO of Analytics at Aon, one of the leading global insurance brokerage firms. Paul and the ADS team's mission will be to build world-class analytics solutions that can leverage data from our core platform, but stand on their own right as well, and enable insurers to bring new products to market, price them more accurately and to drive better outcomes across distribution, service and claims. This is another strategic theme that we look forward to elaborating upon at our Analyst Day.

Turning now to the cloud. Demand continues to grow across all segments of our market for Guidewire to take full post production responsibility for solutions delivered on public infrastructure. Consequently, throughout fiscal 2018, we intensified both our go-to-market activity and our internal preparations for what we expect to be a long-term trend. All products comprising Guidewire insurance platform either can or must be deployed via Guidewire cloud. And to date, we have 157 customers that have licensed one or more of our products this way, up from 103 customers last year. Most important and challenging among these are those insurers who have opted to implement all of InsuranceSuite cloud. We added one to this number during the fourth quarter, fewer than we anticipated, as the greater evaluative scope and complexity of these deals caused 2 of them to move into fiscal 2019. Hence, while our FY '18 results of 36% of new sales being sold as subscriptions was up from only 6% last year and was within our communicated range of 30% to 40%, it was lower than our expectations to be at the high end of this range. As we gain credentials from the progress of our 3 early cloud customers, all of whom are now in live production, we expect to improve our timing and forecasting.

We will also become more practiced in implementation and production services, with experience being the best teacher. As we have described in prior calls, our first InsuranceSuite cloud project was a particularly demanding one to start our InsuranceSuite cloud journey, as its scope included a completely new operational core, a new digital brand and market strategy and new machine learning-based approaches to customer segmentation and pricing.

With its initial go-live a year ago and next major go-live expected in our second quarter, the customer is enthusiastic with progress and committed to the full cloud journey with us where project effort has been greater than expected, a fact that is visible in our Q4 service margin that Curtis will discuss. We are working to internalize these learnings and transfer them to our SI partners in order to service up to twice as many InsuranceSuite cloud deals in fiscal 2019, with the steepest part of this adoption ramp potentially in 2020 and beyond.

Much of the investment required to ascend this ramp was undertaken in fiscal 2018, including significant hirings spanning R&D, sales and cloud operations, particularly in the latter part of the year. Consequently, we expect our headcount growth to slow in fiscal 2019 as we leverage last year's investments.

Key to translating this into improving margins over time will be achieving scale in our InsuranceSuite cloud and InsuranceNow install base, which in turn requires continued excellence in sales and fulfillment of the promises that we make to customers. As key indices of the latter, we also posted a strong quarter and year for implementations, with 6 customers going live with 13 products in the quarter, contributing to a total of 38 customer go-lives on 85 products for the year, along with negligible customer churn.

In summary, our fourth quarter and fiscal year advanced our mission of enabling insurers to adapt and succeed in a time of accelerating change. Our value proposition is a platform that unifies the core data and digital function that an insurer needs to compete today. And our strategy, simply put, is to drive our product set and our customer base to greater standardization and lower TCO in the cloud.

We have the team, track record and capital to execute on this strategy, growth -- grow both new customer relationships and our existing ones, and become the platform of choice for the $2 trillion global P&C industry.

I'll now turn the call over to Curtis to elaborate on our results and financial outlook for Q1 and FY '19.

--------------------------------------------------------------------------------

Curtis H. Smith, Guidewire Software, Inc. - CFO [4]

--------------------------------------------------------------------------------

Thank you, Marcus. We had a busy Q4 with, as Marcus mentioned, a record number of transactions and a lot to get to on this call, so let's get right to it.

We exceeded our revenue guidance ranges for all components of revenue. Total revenue was $661.1 million for fiscal year 2018 and $248.6 million for Q4, representing a 29% and 37% year-over-year increase, respectively. Fiscal 2018 license and other revenue finished at $315.8 million, representing a 16% increase year-over-year, and did not benefit from any material early payments.

If you normalize for impacts of early payments in fiscal 2018, our year-over-year growth rate would have been 20%. Additionally, perpetual revenue in the fourth quarter and full year was $3.2 million and $11.8 million, respectively, compared with $6.8 million and $13.1 million last year. Perpetual revenue came in higher than the top end of our previously discussed range of $8 million to $10 million due to long-standing customer adding DWP to an existing perpetual license.

License and other revenue was $151.1 million in Q4, representing an increase of 38% from a year ago. As discussed last quarter, Q4 benefits from the very sizable recurring payment from one of our Tier 1 customers, which was recognized in Q3 last year, but recognized in Q4 in this and subsequent years.

Maintenance revenue for the year and quarter was $77.3 million and $20.5 million, respectively, representing a 13% and 10% year-over-year increase. As discussed previously, we expect maintenance revenue growth to continue to slow as we sell more subscription contracts, which include ongoing maintenance activities as part of the subscription fees and are reported under our license and other revenue line.

Our rolling 4-quarter recurring revenue, consisting of term license, subscription and maintenance revenue, totaled $381.3 million in the fourth quarter, up 17% from a year ago. As mentioned previously, our ongoing transition to subscription revenue and the adoption of ASC 606 in fiscal year 2019 make this metric less relevant to our business. As a result, we will be replacing this metric at our Analyst Day with other more characteristic of a subscription model.

Services revenue for the year and the quarter was $268 million and $77 million, respectively, representing a 54% and 46% increase from a year ago. Services growth for the year has been driven by increased sales activity, including cloud and European projects, and 2 nonrecurring elements: the impact of ISCS full year services revenue compared to partial year benefit in fiscal 2017 and recognition in fiscal 2018 of deferred services revenue for work completed in fiscal 2017 at a large InsuranceSuite cloud customer.

In addition, Q4 services revenue growth benefited from implementation work done for a large German insurer announced in Q2 where we needed to delay services revenue recognition and the majority of associated costs until Q4. All this work was delivered in fiscal '18, but we were unable to recognize revenue until Q4 due to some particulars of this customer's contract.

Turning to profitability. We will discuss these metrics on a non-GAAP basis, and we have provided the comparable GAAP metrics and a reconciliation of GAAP to non-GAAP measures in our earnings press release issued today with the primary differences being stock-based compensation expenses, amortization of intangibles, the amortization of debt discount and issuance costs from our convertible note and the related tax effects of these adjustments.

Non-GAAP gross profit was $408.6 million and $168.6 million for the year and the quarter, respectively, which represents a 16% and 27% increase from a year ago. Non-GAAP gross margin for the year was 62% compared to 69% a year ago. The decrease in fiscal 2018 margin was due to the increase in services revenue as a percent of total revenue, the decrease in license and other margin due to the shift to subscription revenue and the incremental costs associated with supporting cloud customers, and an unanticipated $7 million onetime charge we took in Q4, which is related to services investments to ensure a successful outcome at a large cloud customer.

Non-GAAP gross margin for the quarter was 68% compared to 73% a year ago. Notably, services gross margin for the quarter was 6%, due to the charge I just referenced. Total non-GAAP operating expenses were $290.8 million and $84.8 million in the fiscal year and fourth quarter, respectively, an increase of 23% for both the year and the quarter. This increase was primarily driven by: continued investments in R&D; sales; costs from the Cyence acquisition; and several large internal systems projects that we have discussed, including new ERP, Configure, Price, Quote; and revenue management systems.

For the year, this resulted in non-GAAP operating income of $109.7 million and non-GAAP net income of $90.9 million or $1.14 per diluted share. For the quarter, non-GAAP operating income was $83.7 million and non-GAAP net income was $66.3 million or $0.81 per diluted share.

Turning to our balance sheet. We ended the year with $1.3 billion in cash, cash equivalents and investments, up from $1.2 billion at the end of the third quarter, primarily due to operating cash flow of $102.1 million and free cash flow of $98.4 million in the fourth quarter. In addition, operating cash flow in the year was $140.5 million and free cash flow was $128.4 million.

Now turning to guidance. I first want to address our expectations for the full year. I will then speak to Q1.

We are pleased that we successfully modified 100% of the greater than 300 multiyear term licenses we targeted so that they now will renew annually in 2019 and beyond. This was a tremendous internal effort, and I am very thankful to our team and for our customers' willingness to work with us. As we have mentioned in the past, this effort was intended to minimize revenue lost to retained earnings and ease comparison of fiscal year '18 and ASC 606 fiscal year '19 financials. However, as a consequence, our modified contracts received ratable revenue recognition treatment under ASC 605 in fiscal year '19, rendering them incommensurable to fiscal year '18 605 financials. Therefore, our forward-looking commentary will consider ASC 606 financials only.

For the full year fiscal 2019, we anticipate total revenue to be in the range of $740.5 million to $752.5 million, an increase of 12% to 14% from fiscal 2018. We expect annual license and other revenue, including subscription revenues, to be in the range of $365 million to $377 million, an increase of 16% to 19% from fiscal 2018. Our fiscal 2019 license and other revenue outlook is informed by 2 factors.

First, the adoption of ASC 606 will result in a transition adjustment to retained earnings for revenue that would have been recognized in future periods under 605. A large majority of this transition adjustment is related to new 2-year contracts signed in fiscal 2018, where the second year of the contract will be lost to retained earnings in 2019. Offsetting this impact, the adoption of ASC 606 allows us to recognize the full committed term of our primarily 2-year term licenses that start in fiscal 2019. While this new revenue recognition pattern will increase the volatility of term license revenue going forward, we expect that -- these 2 factors to largely neutralize each other in fiscal 2019.

Second, our ongoing transition to cloud-based subscription sales, which we expect to be approximately 40% to 60% of new sales. We also expect to add 4 to 8 new InsuranceSuite cloud deals, which received ratable revenue recognition treatment. We expect to report subscription revenue in fiscal 2019 and currently expect that we will end fiscal 2019 with $48 million to $54 million in subscription revenue, representing a year-over-year growth rate of over 75% at the midpoint.

We expect perpetual license revenue to be less than $10 million for the year, a decrease from $11.8 million in fiscal 2018. Our fiscal 2019 outlook for maintenance revenue is $79.5 million to $81.5 million. As discussed previously, we expect maintenance revenue growth to continue to slow as we sell more subscription contracts, which include ongoing maintenance activities, as part of the subscription fees.

Our outlook for services revenue is $290 million to $300 million, representing a 10% growth rate at the midpoint. While this is lower than expectations that informed our commentary last quarter, services revenue mix continues to be elevated compared to recent history. This moderated outlook reflects: first, delays in the start of services work at 2 InsuranceSuite cloud prospects, as mentioned by Marcus; and two, our increased efforts to enable our strong SI partner ecosystem to deliver cloud implementation services.

With respect to gross margin. We expect overall non-GAAP gross margin to decline by 1 to 3 points to 59% to 61% because of investments in cloud operations and the shift to ratable revenue recognition. We expect services non-GAAP gross margin to be between 17% and 18% this fiscal year.

Our outlook for non-GAAP operating income for fiscal 2019 is $104.5 million to $116.5 million, representing a non-GAAP operating margin of 15% at the midpoint, as we continue to execute on our investments that were initiated in fiscal '18.

Cloud operations and R&D continued to be key investment areas. In addition, as Marcus mentioned, we are making important investments in our analytics and data services capabilities. Both growth and operating margin are sensitized to the percentage of new sales sold as subscription and decrease as subscription sales increase.

Finally, as a result of adopting ASC 606, we will start capitalizing commission expenses in fiscal 2019 and expect to see a net benefit to operating margin of a little over 1 percentage point. We're assuming a 5-year customer life for these calculations.

With respect to cash flow. We expect free cash flow to be between $115 million and $130 million before the onetime impacts associated with the buildout of our new headquarters, which is expected to be approximately $35 million to $40 million and completed in fiscal 2019. In addition, our outlook for non-GAAP net income is $94.8 million to $104.3 million, or $1.15 to $1.26 per diluted share, based on approximately 82.7 million diluted shares and an assumed non-GAAP tax rate of 21% for fiscal 2019.

Now turning to Q1. We anticipate total revenue to be in the range of $159 million to $163 million. Within revenue, we expect license and other revenue to be in the range of $73 million to $77 million, representing 149% growth at the midpoint.

Two unique factors are contributing to the outsized year-over-year increase. First, due to ASC 606, a number of our term contracts that we've previously recognized on a quarterly basis due to quarterly invoicing terms will now be recognized upon the annual renewal. This effect moved revenue from later periods in fiscal 2019 into Q1, and it was -- as a result, does not impact annual revenue expectations.

Two, in Q4, we signed a multiyear term license deal with a large European insurer that was delivered in Q1. In this instance, we expect to recognize approximately $8 million more in Q1 than we would have recognized had this been a standard contract. This deviation from our standard 2-year initial term license contract was driven by unusual customer requirements. We intend to avoid similar arrangements in the future.

We expect Q1 maintenance revenue of $19 million to $20 million and Q1 services revenue of $65 million to $68 million. For the first quarter, we anticipate a non-GAAP operating income of between $14.5 million and $18.5 million and non-GAAP net income of between $14.5 million and $17.6 million, or $0.18 per share to $0.22 per share, based on approximately 82.1 million diluted shares.

In summary, it was a strong quarter, and we were very pleased with our execution. While we know the transition to 606 in cloud creates complexities in understanding our financials, the underlying trends remain positive, and we are excited about the path forward. We are committed to helping investors see through these accounting complexities, and we look forward to providing more detail at our Analyst Day scheduled for September 20 in New York.

Thank you. Operator, can you now open the call for questions?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question will come from Sterling Auty with JPMorgan.

--------------------------------------------------------------------------------

Jackson Edmund Ader, JP Morgan Chase & Co, Research Division - Analyst [2]

--------------------------------------------------------------------------------

This is Jackson Ader, on for Sterling tonight. First one, Marcus, if we could just start with you, any additional color that we could get on why those 2 InsuranceSuite in the cloud customers pushed out of the fourth quarter of 2018 and into 2019?

--------------------------------------------------------------------------------

Marcus S. Ryu, Guidewire Software, Inc. - Co-Founder, President, CEO & Director [3]

--------------------------------------------------------------------------------

Sure. Well, every deal that we ever do, and this has been true throughout our history, has its idiosyncrasies and its evaluative quirks. That's been true whether or not we're talking about the cloud. These 2 deals, in particular, we had pretty high hopes of getting them done by the end of the year, but it was a broader [surface] area of evaluation. I think we alluded to that being generally true of this new category of deal for us in our last earnings call and we kind of just ran out of time on the clock getting them done. That's not normally something that you'll hear us talk about in the context of our other deals, but it did happen in 2 rather consequential ones, which is why we thought it was most forthright to call that out here. In both cases, there is no competitive issue. We've been decisively selected. It's just a matter of final contract execution and approvals, et cetera. It -- and it had a kind of outsized impact on one of the metrics that we had talked about, namely the percentage of bookings in the year that were coming in subscription form because these are, of course, large transactions, which is another reason we wanted to mention it. But there's really no change in our outlook or the complexion of where we see the demand or what we're doing strategically.

--------------------------------------------------------------------------------

Jackson Edmund Ader, JP Morgan Chase & Co, Research Division - Analyst [4]

--------------------------------------------------------------------------------

Okay, great, and then a quick follow-up. You had also mentioned that InsuranceNow was a little bit of a disappointment. Any color there?

--------------------------------------------------------------------------------

Marcus S. Ryu, Guidewire Software, Inc. - Co-Founder, President, CEO & Director [5]

--------------------------------------------------------------------------------

None in particular. I think we had hoped for a few more transactions to happen within the year. It really wasn't a question of underlying demand. I think we've learned over the last year or so that it's a different sales motion than what we've been accustomed to with InsuranceSuite all these years. And it's a more standardized product. There's less emphasis on flexibility and kind of showing and telling how flexible the application is. It's more about a straight line to getting live as quickly as possible on a standard solution. There's also -- these are also cloud-based products, we'll be taking full postproduction responsibility for everything that happens once the customer implements with InsuranceNow. And it's been a great set of lessons for the competencies and customer expectations that we have to meet with InsuranceSuite cloud, which, of course, is a much larger economic significance to us. And so there were a few humbling lessons through the year that I think brought us a few below the target that we had set, but we remain really confident about the underlying demand for that product set as well and its importance in the whole platform since there are a set of customers for whom it's really the right solution, as opposed to the full InsuranceSuite cloud.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question will come from Jesse Hulsing with Goldman Sachs.

--------------------------------------------------------------------------------

Jesse Wade Hulsing, Goldman Sachs Group Inc., Research Division - Equity Analyst [7]

--------------------------------------------------------------------------------

Marcus, I guess, taking a bigger picture view. How are cloud discussions for InsuranceSuite going in general? And are you seeing the same level of interest that you saw, I guess, in the middle of last year? And how are pricing discussions going? Are you still seeing that 2 to 3x hold up as you get more data points?

--------------------------------------------------------------------------------

Marcus S. Ryu, Guidewire Software, Inc. - Co-Founder, President, CEO & Director [8]

--------------------------------------------------------------------------------

Sure. The most important thing to emphasize is that the demand picture, if anything, is stronger now than where we would have assessed it, call it 9 to 12 months ago. The wind is blowing only in one direction. Our customers and prospects want the same thing that pretty much all enterprises seem to want these days. They want IT simplification. They want to divert their scarce attention and bandwidth onto differentiating their brand in a new digital economy. They want to focus on differentiation through new predictive analytic techniques and the like, and they want to spend less time, less management focus on keeping the lights on with core operations. That trend isn't going away. It's just getting stronger and it applies in a very significant way to our market because what our -- what all insurers want now is to rethink the division of labor that they have with their trusted IT partners, and we think we have a huge role to play there. So that -- there's no change in the demand picture at all. If anything, it continues to strengthen, and we have more discussions with basically every segment of the market that we serve, including internationally. But both we and our market are kind of feeling our way through what does evaluation look like, what are the questions to ask, what are the credentials they need to see, what do they want to have documented, what should a contract look like, what kind of protections do they need, what's reasonable to ask for, what's the standard. All these kinds of questions are a little bit less mature for both us and our market, our customers, and they take a little more dialogue to figure out than other areas. And I think it's, accounted for, just a bit more sales complexity, more training on our side, more involvement of the executive team here in the sales cycle and the like. All that, by the way, is very standard for us. That's what it was like when we went from just being a single-product company to being a full suite company, to talking about products outside the core. It is what is always involved in bringing a new offering to market and really getting practiced in the sales motion.

--------------------------------------------------------------------------------

Jesse Wade Hulsing, Goldman Sachs Group Inc., Research Division - Equity Analyst [9]

--------------------------------------------------------------------------------

That's it. And Curtis, I guess, when you look to guidance this year, how much of that did you factor in? And '18 was a learning year, undoubtedly, but I'm wondering how much of, I guess, that continued complexity in contract negotiations was factored in to how you thought about setting the guidance for '19?

--------------------------------------------------------------------------------

Curtis H. Smith, Guidewire Software, Inc. - CFO [10]

--------------------------------------------------------------------------------

Yes. We certainly used '18 and took the learnings out of '18 when we were putting our guidance together for '19. So that was definitely part of our analysis and our thinking when we put together our guidance for '19. The other thing I'd note, too, is that we noted that the -- and provided this in our guidance that our services revenue due to these cloud customers moving into '19 would delay the ability for us to recognize service revenue. So that was also part of our thinking when we put together our guidance on the services side going forward here, too. So it definitely factored into how we thought about that, thought about our guidance, thought about our forecast. I think the other thing I would add to what Marcus noted there, when I look at where we are now from where we were 6 months ago, there's just a higher level of confidence in our ability to go-to-market than where we were 6 to 9 months ago.

--------------------------------------------------------------------------------

Jesse Wade Hulsing, Goldman Sachs Group Inc., Research Division - Equity Analyst [11]

--------------------------------------------------------------------------------

And quick clarification, Curtis. That $8 million that was pushed into the first quarter, would that have been recognized in the fourth quarter? Or was it -- I guess, is it going to be recognized in both?

--------------------------------------------------------------------------------

Curtis H. Smith, Guidewire Software, Inc. - CFO [12]

--------------------------------------------------------------------------------

No, it would not be recognized in the fourth quarter. It was a deal that we signed in the fourth quarter, but delivered or provisioned in Q1, so the revenue would be recognized in Q1. Under 606, though, because it was a multiyear deal, we get this outsized impact of that taking place in Q1 that wouldn't happen in a 605 world.

--------------------------------------------------------------------------------

Jesse Wade Hulsing, Goldman Sachs Group Inc., Research Division - Equity Analyst [13]

--------------------------------------------------------------------------------

Got you. So it would have been normally recognized in the fourth quarter, except for this contract that has an arrangement for the customer?

--------------------------------------------------------------------------------

Curtis H. Smith, Guidewire Software, Inc. - CFO [14]

--------------------------------------------------------------------------------

No. We signed the deal in Q4, but it wasn't delivered or provisioned until Q1 of 2019. So it would not have been recognized in Q4, it was always intended to be recognized in Q1 of this year.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

Our next question will come from Monika Garg with KeyBanc.

--------------------------------------------------------------------------------

Monika Garg, KeyBanc Capital Markets Inc., Research Division - Research Analyst [16]

--------------------------------------------------------------------------------

First, just clarification, Curtis. The service gross margin, 6.5%, I think you talked about an unanticipated charge of $7 million. Could you just provide more color around that?

--------------------------------------------------------------------------------

Curtis H. Smith, Guidewire Software, Inc. - CFO [17]

--------------------------------------------------------------------------------

Sure. So I think you're referring to the unanticipated $7 million onetime charge that we took in Q4 that I referenced earlier. I have a little more color around that. After a successful initial release and go live with this customer, we entered into the follow-on release and realized that additional efforts would be required. And midway through the Q4, agreed with the customer that we would make additional investments in the form of our services to assure customer success. These investments increased in future periods and hit an accounting threshold that required us to take the $7 million charge in Q4. Marcus noted, customer is enthusiastic with our progress and committed to the cloud journey. If we take that onetime charge out, we noted that the services gross margin in Q4 was 6%. It would have been 16% without that. And then for the whole year, our services margin came in at 6% -- 16%, and it would have been 19% without that onetime unanticipated charge.

--------------------------------------------------------------------------------

Monika Garg, KeyBanc Capital Markets Inc., Research Division - Research Analyst [18]

--------------------------------------------------------------------------------

Got it. Then on the last earnings call, I think you talked about flattish operating margins year-over-year. You were guiding about 150 bps lower in the op margins. Maybe, could you walk through the moving parts of that?

--------------------------------------------------------------------------------

Curtis H. Smith, Guidewire Software, Inc. - CFO [19]

--------------------------------------------------------------------------------

Sure. So I think when we gave our preliminary commentary in Q3 with respect to our fiscal '19 forecast, we expected that our operating margin would be no better than where we had guided, which was to 16% to 17% operating margin for the year. As we noted in my earlier remarks, a few things are impacting that operating margin. Notably, as we said before, a lot of the investment that we made in '18, particularly on the R&D side, it was back-end loaded and would realize a sort of full impact of that or the annualized impact of that in 2018. We also had some of those headcounts that weren't hired in '18 and are now being hired in '19. So that's one variable. Another one that we talked about is that our absolute commitment to being cloud ready and our investment that we are making in cloud operations, that's continuing into '19 as we prepare to continue to ramp up our ability to service more and more cloud customers. So that's a piece of it. And I think the third variable that we talked about earlier is our investment in the data and analytics services business that we recently formed. We see there's a big opportunity there and are adding headcount into that business that we believe makes a lot of sense, given the opportunity in front of it.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

Our next question comes from Alex Zukin from Piper Jaffray.

--------------------------------------------------------------------------------

Aleksandr J. Zukin, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [21]

--------------------------------------------------------------------------------

So I guess, maybe the first one for Marcus. You talked on the call or on the prepared remarks about a lot of Tier 1 deals that you closed internationally. And I'm curious, domestically, how should we be thinking about the Tier 1 deal landscape? We didn't hear any mention. And is that due to the greater complexity of the sales cycles that some of these Tier 1 deals were -- the cloud deals that you referenced? And -- or is there some other dynamic? And I have a quick follow-up.

--------------------------------------------------------------------------------

Marcus S. Ryu, Guidewire Software, Inc. - Co-Founder, President, CEO & Director [22]

--------------------------------------------------------------------------------

No. I would distinguish between the Tier 1 market or the submarket in our customer base and prospect base and then the general phenomenon of cloud. They're related, but they're distinct as well. We have cloud discussions with Tier 1 insurers. But for the most part, with respect to the big core operations, their large books of business, those are really on-premise discussions, and we expect that will continue hopefully for a good while to come. Even though we may end up with cloud-based core system relationships with them, it will be more in ancillary lines or potentially new growth initiatives and the like. I don't think there's any particular pattern to be read into which deals close other than we had more traction -- significantly more traction in Europe than we've had in previous periods, which is very welcome. There was actually, hoped at one point, to even get more closed within the year, but those opportunities remain for us to get done in the first half of the year that we're in now. But there's no particular pattern domestic versus international to call out there or fundamental differences in buying behavior or our competitiveness even.

--------------------------------------------------------------------------------

Aleksandr J. Zukin, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [23]

--------------------------------------------------------------------------------

Got it. And then as a follow-up, maybe to Curtis or Marcus. Yes, the onetime charge that you referenced with this InsuranceSuite cloud customer, I guess, what is the -- if there's any more color that we can get in terms of is this a potential recurring issue on some of these other larger InsuranceSuite cloud transactions? And then from an operational standpoint, how are you thinking of -- what changes are you thinking of making to the InsuranceNow, either go-to-market motion or any other motion that you think could get that back to kind of where you want it to be?

--------------------------------------------------------------------------------

Marcus S. Ryu, Guidewire Software, Inc. - Co-Founder, President, CEO & Director [24]

--------------------------------------------------------------------------------

Sure. Two distinct questions. So first, with respect to the large InsuranceSuite cloud project, we talked about that customer relationship extensively in the past. There were a lot of things that were first time for us where we leaned in on taking risks and on doing some new things differently with staffing it with a very large Guidewire contingent and embracing a transformational scope that was -- it was really substantially larger than maybe we've ever undertaken before, and that was, of course, arm in arm with the customer themselves. So it was -- it's been a big and demanding a transformational project. There's a lot of success to point to. We've gotten through the most -- the critical first milestone, which happened last year, and then there's another set of key milestones ahead of us. But that the entire scope of the project as can happen on these programs, on any large-scale transformation program was larger than estimated. Here, we, as part of the arrangement, we shouldered more of the financial risk that went along with the program than is typical for us. We thought that was appropriate, given the bet that this customer was taking on Guidewire, and this is part of our share of the burden that's come up, like as Curtis described. But it's fundamentally -- it's very successful program. It's one that the customer has committed to. And a lot of the lessons from it have been internalized. And to your point, Alex, it's really vital that we don't -- that our programs stay contained, well-estimable, completed on time. There's nothing more strategic for Guidewire than that, even more than winning new customers. And so we have probably the most intense focus and management scrutiny on this program on every dimension than we've ever had on a project before. Now with respect to InsuranceNow, I'd say there's no -- there were lots of individual lessons from this or that sales cycle that we've internalized. There were few sales execution issues, I guess, that always happens, or you have to always question that when you come in lower than the number that you'd like. But when we look at from a bottoms-up basis, the opportunity is ahead of us. And even first half of the year kind of forecast that we're considering, our confidence there is fundamentally sound, and we think we have an offering that's really well suited for the market segment that we're serving and much better so than full InsuranceSuite. And it's just getting more practiced in that with a dedicated team that they can go-to-market effectively with the company behind them. So it's an important component of our bookings plan for the year that we're in now.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

Our next question will come from Tom Roderick from Stifel.

--------------------------------------------------------------------------------

Matthew David Van Vliet, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [26]

--------------------------------------------------------------------------------

Yes. Matt Van Vliet, on for Tom. I guess, Marcus, just a little more on the success that you had in Europe. Do you think that's really primarily demand-driven? And if so, is there anything in the market that's sort of driving that, whether it's something on the GDPR side or just broader adoption of new technology? Or do you feel like some of the management changes and go-to-market strategies that you put in place are the bigger driver there?

--------------------------------------------------------------------------------

Marcus S. Ryu, Guidewire Software, Inc. - Co-Founder, President, CEO & Director [27]

--------------------------------------------------------------------------------

If I had to make a qualitative guess, I would say it's 70-30 demand versus sales execution. The demand environment has shifted for reasons that I could not exactly pinpoint other than the same kind of trends that we always talk about here in the states changing end market behavior with the demand for digital transformation, digital engagement, digital distribution. And I think it perhaps could also relate to incrementally improving economic conditions and performance for the industry in Europe. That's my own speculation. But it's hard to point to any single catalyst. There's certainly not one of them like GDPR, Y2K kind of thing that has changed the appetite for investment. What we do know, and I think we've been forecasting this or foreshadowing this in previous calls, is that there was substantially more activity -- demand activity in Europe than there had been in previous years. We're now starting to harvest some of that, and we don't see that trend changing in the near to medium term, which is very good. We've also made a lot of investments in the territory. We've embraced, for example, the need to build, really country-specific content that conforms to local regulations in the major European countries, in France, in Germany, in Spain and other countries soon to be. And that was -- that's been extremely well received by the market. It shows that we're really there to stay and are investing in those countries, as opposed to trying to apply an America or just generic solution to their markets. And that's made a big difference as well.

--------------------------------------------------------------------------------

Matthew David Van Vliet, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [28]

--------------------------------------------------------------------------------

And then looking at the sort of newly branded Analytics and Data Services group, is this just a change in sort of go-to-market and having a more cohesive strategy around sort of all things not InsuranceSuite? Or is this really a different or a changing strategic outlook of maybe potentially offering another sort of portfolio of solutions that don't necessarily need or require InsuranceSuite in the background to be running?

--------------------------------------------------------------------------------

Marcus S. Ryu, Guidewire Software, Inc. - Co-Founder, President, CEO & Director [29]

--------------------------------------------------------------------------------

Yes. It's really a combination of the latter, the ability -- well, the mandate for the team to build world-class analytics solutions for the P&C industry full-stop, not necessarily ones that leverage or require Guidewire InsuranceSuite to be implemented at the customer. That's the primary motivation. And then, I guess, secondary to that, giving the team the necessary autonomy and strategic independence so that they can recruit, form partnerships, maybe recommend acquisitions, and just generally go to market with an analytics-first kind of value proposition. What we've learned over the last year with Cyence is that the constituency within the industry that we've become very well-known to and very practiced in talking to is kind of very IT-focused. There's certainly business principles that are important in the claims operation or the underwriting operation, but has a heavy IT element. There's a constituency, often very executive, in the industry that doesn't think about IT a lot, that's very focused on markets, on data, on new customer segments, and often comes from an actuarial or modeling background. And to that kind of audience, it's very helpful to go in with the kind of data and market first kind of message as opposed to a systems and application kind of proposition. So that also enters into our -- into the organizational plan.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Next, we'll take a question from Ken Wong from Guggenheim Securities.

--------------------------------------------------------------------------------

Hoi-Fung Wong, Guggenheim Securities, LLC, Research Division - Senior Analyst [31]

--------------------------------------------------------------------------------

Marcus, maybe for you first. Based on your recent conversations with customers, I guess, any change in your thinking that cloud is more of a new license opportunity versus moving over some of the kind of the on-premise base? Or has that dialogue started to shift?

--------------------------------------------------------------------------------

Marcus S. Ryu, Guidewire Software, Inc. - Co-Founder, President, CEO & Director [32]

--------------------------------------------------------------------------------

I wouldn't say we have a finely calibrated sense of what portion of InsuranceSuite cloud customers will come from existing Guidewire relationships and existing implementations and which will be net new greenfield opportunities. It's hard to tell. We certainly have examples of both -- or actually there are really 3 flavors because there are net new customers that are not doing a greenfield project, but they want their first Guidewire implementation to be cloud-based, even though it's for existing premiums, existing book -- existing business. So there are really 3 flavors. We have examples among those in the customers we've already had and have brought live and certainly examples in each of those categories in our forecast and outlook. I think a year from now, we'll have more data and perspective on where the demand will come and in what proportion. But at this point, we're enthusiastically pursuing all 3 categories.

--------------------------------------------------------------------------------

Hoi-Fung Wong, Guggenheim Securities, LLC, Research Division - Senior Analyst [33]

--------------------------------------------------------------------------------

Got it. And then a quick one for Curtis. In terms of the 2 cloud customers that slipped, any rough sense of what that revenue impact might have been? And then as far as the services element, you mentioned how, I guess, service is a little lighter than expected this year. I guess, why would the services element kind of push out to next year or beyond if the deals are still closed in this year, and I guess, any rough sense of what that impact might be?

--------------------------------------------------------------------------------

Curtis H. Smith, Guidewire Software, Inc. - CFO [34]

--------------------------------------------------------------------------------

Sure. So on the first point, no, we're not providing revenue forecast on those 2 potential opportunities that moved into fiscal '19. On the second part of it, we did talk to how the timing of those potential opportunities would affect our services revenue in 2019, and it has to do with the start time of when we begin the implementations, right? So if we begin them in Q4 this year, we'll get a full year of potential services revenue from that versus if we were to begin those services revenues in Q2 of this year. Then we'd only get 3 quarters of that instead of 4. And so that's what we factored in when we talked about the delays in the start of services work at 2 InsuranceSuite cloud prospects that moved out of Q4 of 2018 into our fiscal year 2019.

--------------------------------------------------------------------------------

Marcus S. Ryu, Guidewire Software, Inc. - Co-Founder, President, CEO & Director [35]

--------------------------------------------------------------------------------

Ken, I think you were also asking what were we expecting in terms of revenue contribution in '18 from the 2 deals. And I think, as you know, with ratable recognition and closing in the fourth quarter of the year, the contribution, even for fairly large transactions, was modest, right, because -- so it wasn't -- they weren't a huge factor with respect to the revenue guidance, but they were consequential with respect to this other metric that we introduced in the year, which is percentage of bookings coming in subscription form. And there, they were significantly more consequential.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

Our next question will come from Justin Furby with William Blair & Company.

--------------------------------------------------------------------------------

Justin Allen Furby, William Blair & Company L.L.C., Research Division - Research Analyst [37]

--------------------------------------------------------------------------------

A couple, maybe first for Marcus. Marcus, I think -- I joined late, so apologies if you covered this. But your overall license number looked pretty good. And I think it sounds like you missed the benefit of some $4 million or so from a deal that moves into Q1 and you get 2x the license impacts. So I guess, you obviously I think have a couple of cloud deals that slipped. And -- but can you just speak sort of more generally on how you felt about Q4 and where you saw outperformance and just sort of how you feel about the business today versus sort of this time last year? And then I've got a quick follow-up.

--------------------------------------------------------------------------------

Marcus S. Ryu, Guidewire Software, Inc. - Co-Founder, President, CEO & Director [38]

--------------------------------------------------------------------------------

Yes. I -- if it was sufficiently -- if we were too circumspect in the way we would put it in our prepared remarks, let me underscore now that we have the best demand environments that we've ever had in the company and we've closed more deals in the last few months than we ever have in a comparable period in our history and we have more product to sell that we are winning at a higher rate than we ever have in the market. At the same time, we're trying to do a couple of very difficult things, most importantly, sell our offerings with a very different division of labor proposition to customers than we ever had before and investing hard to build those capabilities to the satisfaction of a very conservative -- rationally conservative customer base and learning the sales motion that go along with that. That's what's happening right now, but we're doing so in a very positive demand environment and competitive environment for us. And I would underscore again that a huge portion of our TAM namely Europe that had felt present, but still kind of inert for many years, now feels dramatically more active, and that's also very encouraging to us. So it was a period in which we closed many more transactions than we ever have before, but absent 2 that we worked very hard on, put a lot of energy into, but couldn't wrestle to the ground before we ran out of time in the quarter. And there's no excuse for that. That's just -- that's -- we're in an enterprise software company with large deals and they're always important. But that's what happened this last period. Despite that, we were pleased with the results we were able to post and the other metrics as well.

--------------------------------------------------------------------------------

Justin Allen Furby, William Blair & Company L.L.C., Research Division - Research Analyst [39]

--------------------------------------------------------------------------------

That's helpful. And then maybe just a follow-up. Can you give a little bit of color on sort of the discussions you're having with your systems integrator partners around how you think they fit in this cloud process and evolution you guys are going through? Do you feel like it's really more about the implementation work and getting those customers live and then you guys will manage postproduction support? Or could they have a role in that as well? And if the latter is the case, then what does that do -- does that 2x to 3x number become something smaller? Or how -- just curious how all that fits together. And then, Curtis, I know you can't give the numbers, but just rough sense. I mean, is the services [reduction] versus kind of what you communicated last quarter. Is most of that coming from the SI? Is there a big chunk coming from both the outsourcing of services as well as the 2 cloud deals? Any kind of rough sense there would be helpful.

--------------------------------------------------------------------------------

Marcus S. Ryu, Guidewire Software, Inc. - Co-Founder, President, CEO & Director [40]

--------------------------------------------------------------------------------

Yes. Thanks for the question, Justin. It's insightful and also timely because one of the things we're doing literally this week is a very systematic education and outreach to all of our core SI partners. The COO of the company has deployed a set of meetings to discuss just this topic, to make sure that there's absolute clarity of how essential they are to the journey we're on and how we -- how complementary we believe our offering is to their capabilities and how essential they are to us being able to scale to our ambitions here. Specifically, we need their help in order to implement these core system programs, whether they're in the cloud or not. The cloud does not magically make them simpler. It changes the division of labor that happens once they go into production and -- but it does not simplify the core tasks of making a decision about what the core operating environment looks like and all of the implementation, the integration decisions that have to go along with that. And so there's a ton of work involved every time. We don't have the services organization nor are interested in building the services organization it would take to meet that demand, so we rely very heavily, and we will rely even more heavily, on our SI partners going forward to make that happen. We had a very high attach rate on a couple of these earlier programs, especially the first. And that's because we had to ensure program success. And even despite that, as you've heard us talk about, those programs have been challenging and they'd taken more effort than initially estimated. But we have every intention and are -- to have the same kind of complementary arm-in-arm proposition to customers that we always have, which is that we focus on the great software and they assist with the program management and implementation that it takes to get live. And then after that, of course, now, with the help of another key partner, namely Amazon, we need to support those customers on an ongoing production mode. But that's something that we're going to do with our cloud operations team.

--------------------------------------------------------------------------------

Curtis H. Smith, Guidewire Software, Inc. - CFO [41]

--------------------------------------------------------------------------------

And to your question on the services outlook going forward here. We know that there were a couple of variables affecting the outlook. One of them being, as Marcus just talked about, our increased efforts to enable our strong SI partner ecosystem, and we're encouraged by what we're seeing early in the quarter in their ability to be able to take on some of those services this year and have modeled that into our forecast. The second one, as we noted earlier, was the delays in the start of services work for 2 of these cloud customers that moved out of '18 and into '19. If we were to talk right now very early, early view on how we see that split roughly, roughly 50-50 right now, which we can update as we get more data through Q1.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

Our next question will come from Tyler Radke with Citi.

--------------------------------------------------------------------------------

Tyler Maverick Radke, Citigroup Inc, Research Division - Senior Associate [43]

--------------------------------------------------------------------------------

I apologize if my question has been asked already. I've been jumping around earnings calls today. I wanted to ask, so it sounds like there's a lot of moving pieces in the quarter in the guide with the accounting standard as well as some of the slipped cloud deals. But I was wondering if, Curtis, maybe if you could either directionally -- or just help us understand kind of what either a revenue growth rate would be in FY '19 under 605, just so we can kind of compare apples-to-apples, understanding the moving pieces with ASC 606.

--------------------------------------------------------------------------------

Curtis H. Smith, Guidewire Software, Inc. - CFO [44]

--------------------------------------------------------------------------------

Tyler, so what we talked about in our commentary, and we've referenced that in earlier calls, too, is given all the remediation efforts that we've done over the last 2 years to our business that it will render a 605 financials in 2019 non-comparable. And so we've guided people to not to look to our 605-based financials. We'll be reporting in '19 as a metric to use to compare to a prior period. But that our 605 -- or 606 '19 financials have been set up to be more comparable with our '18 numbers. And so 605 in '19 won't offer a comparable metric for prior periods.

--------------------------------------------------------------------------------

Tyler Maverick Radke, Citigroup Inc, Research Division - Senior Associate [45]

--------------------------------------------------------------------------------

Okay, maybe asked another way. If we were to look at 606 numbers under both FY '19 and FY '18, what would we -- what ballpark would just kind of revenue growth be if we're looking at either 606 to 606 or 605 to 605?

--------------------------------------------------------------------------------

Curtis H. Smith, Guidewire Software, Inc. - CFO [46]

--------------------------------------------------------------------------------

The guidance we gave, and I'll start with the most important one for us, which is the license and other, right, we noted in the guidance ranges that we provided that, that would be between 16% and 19% growth rate over our license and other revenue in 2018. And so that's how we're thinking about that. Our 605 license -- sorry, 606 license and other revenue in '19 compared to our 605 license and other revenue in 2018. And that's, I think, the best way to look at and given all the remediation efforts we did and that we discussed in the call.

--------------------------------------------------------------------------------

Tyler Maverick Radke, Citigroup Inc, Research Division - Senior Associate [47]

--------------------------------------------------------------------------------

Okay, I appreciate that. And then just a follow-up for Marcus. On Data and Digital, I guess, Digital, you sounded like you kind of created a specific business unit around it. Can you just talk what you're assuming in terms of contribution from Data and digital Into your forecast for FY '19?

--------------------------------------------------------------------------------

Marcus S. Ryu, Guidewire Software, Inc. - Co-Founder, President, CEO & Director [48]

--------------------------------------------------------------------------------

I don't think we have that broken out. We certainly have a bookings planned by product and by customer segment. I don't think we have a specific revenue contribution intended or -- we don't have a specific translation of that bookings into a revenue contribution, certainly not in a form that we're prepared to share on the spot here. We will give a lot of metrics about attach rates that go with each of the new product areas and the kind of pricing experience that we've had and the kind of demand outlook and penetration that we have in our customer base, share of wallet, et cetera. So we want to be as transparent as possible about where these products are and how much more of them we have to sell into our own customer base and beyond. But we don't have a specific number to share now about what fraction of our revenues in '19 that they will contribute. Another thing that we'll share, that we've just done our own computation on, is a view on TAM or what I call the ADS division, for Analytics and Data Services, that we have thought of for most of our history as a kind of ancillary offering that enhances the proposition and contribute to the value proposition of the core. We now have a more expansive notion of that as being a category in its own right, which relates to the core, but can be thought of as separate from it and is a substantially larger TAM because now we're including a lot of other solutions and investments that insurers make in that area that where we think we can bring really distinctive improvement to. So we'll share a bit about that in 2 weeks at Analyst Day as well.

--------------------------------------------------------------------------------

Operator [49]

--------------------------------------------------------------------------------

Next, we'll take a question from William Fitzsimmons from Morningstar.

--------------------------------------------------------------------------------

William Fitzsimmons, Morningstar Inc., Research Division - Equity Analyst [50]

--------------------------------------------------------------------------------

For Marcus, I know we've talked about InsuranceNow a little bit. And last I checked, you had maybe one Tier 1 customer and maybe 30 Tier 3 or below customers. Can you maybe talk about where's that tracking and what percentage of revenue InsuranceNow makes up of the overall business?

--------------------------------------------------------------------------------

Marcus S. Ryu, Guidewire Software, Inc. - Co-Founder, President, CEO & Director [51]

--------------------------------------------------------------------------------

Sure. Well, as for composition by customer segment, InsuranceNow is focused generally on smaller insurers. Currently, it's only in the U.S., and probably for fiscal '19, it will continue to be only U.S. We think we have plenty of market here in insurers that are generally $300 million or less in premiums, which is relatively small insurer, right, compared to the Tier 1 where -- that are $5 billion and significantly larger. Of course, some of the largest insurers have multiple subsidiaries and divisions and so forth, some of which are appropriate customers for InsuranceNow. And you mentioned or alluded to one example of that and they will be -- there are and will be others as well where that makes sense. So in general, there are a lot of -- there's a lot of benefit to platform consolidation. Insurers are already grappling with too many different core system environments in their legacy world. And part of our proposition is that you can unify them all in one platform, namely InsuranceSuite, and that's usually the direction that we'll go. In terms of contribution to next year's revenue, again, I don't -- I certainly don't have that ready to share, I would say. In general, InsuranceNow has been -- some fraction of our total bookings were planned for InsuranceSuite. And we think that, that proportion will remain probably roughly consistent going next year. As you could sense from the prepared remarks, we were -- we kind of underperformed in the contribution from InsuranceNow in the year, but that doesn't change our resolve to make sure that we meet the target for the next year, which we think we can.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

And ladies and gentlemen, that does conclude our question-and-answer session for today. I'd like to turn the conference back over to Marcus Ryu for any additional or closing remarks.

--------------------------------------------------------------------------------

Marcus S. Ryu, Guidewire Software, Inc. - Co-Founder, President, CEO & Director [53]

--------------------------------------------------------------------------------

No other commentary. Thank you all for participating on our call today. Goodbye.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

That does conclude our conference for today. Thank you for your participation.