Earnings Call
Guidewire Software, Inc. (GWRE)
Earnings Call Transcript - GWRE Q2 2026
Operator, Operator
Greetings, and welcome to the Guidewire Second Quarter Fiscal 2026 Financial Results Conference Call. As a reminder, this call is being recorded and will be posted on our Investor Relations page later today. I would now like to turn the call over to Alex Hughes, Vice President of Investor Relations. Thank you, Alex. You may begin.
Alex Hughes, Vice President of Investor Relations
Thank you, Grace. Hello, everyone. With me today is Mike Rosenbaum, Chief Executive Officer; Jeff Cooper, Chief Financial Officer; as well as John Mullen, President, who will be available for the Q&A portion of today's call. Complete disclosure of our results can be found in our press release issued today as well as in our related Form 8-K furnished to the SEC, both of which are available on the Investor Relations section of our website. Starting this quarter and moving forward, we have also posted a quarterly earnings deck on the IR section of our website. Today's call is being recorded, and a replay will be available following its conclusion. Statements today include forward-looking ones regarding our financial results, products, customer demand, operations, the impact of local, national and geopolitical events on our business and other matters. These statements are subject to risks, uncertainties, and assumptions are based on management's current expectations as of today and should not be relied upon as representing our views as of any subsequent date. Please refer to the press release and the risk factors and documents we file with the SEC, including our most recent annual report on Form 10-K and our prior and forthcoming quarterly reports on Form 10-Q filed and to be filed with the SEC for information on risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements. We will also refer to certain non-GAAP financial measures to provide additional information to investors. All commentary on margins, profitability and expenses are on a non-GAAP basis, unless stated otherwise. A reconciliation of non-GAAP to GAAP measures is provided in our press release. Reconciliations and additional data are also posted at the end of the quarterly earnings deck on our IR website. And with that, I'll now turn the call over to Mike.
Mike Rosenbaum, CEO
Good afternoon, and thanks, everyone, for joining us today. Q2 was another strong quarter with ARR growing 22%. We continue to see momentum and demand increasing and the results across the board this quarter reflect what we believe makes Guidewire a uniquely durable business. Before I go into the details, I want to take a step back and provide my perspective on the position Guidewire occupies in our industry, the role we play inside an insurance company and why that combination creates long-term durability even in periods of technology disruption and change. Guidewire is the stand-alone leader in delivering mission-critical core systems for the P&C insurance industry. We are now a SaaS company, but understanding what our solutions actually do inside an insurance company is essential to understanding our durability. Insurance is a highly regulated trust-based industry that evolves deliberately and depends on precision, resilience, compliance and accuracy at scale. Guidewire sits at the center of that environment as the operational backbone of the insurer, embedded across the core operating functions of underwriting, claims, finance and regulatory reporting. Our platform supports the complex financial and regulatory framework that underpins the industry, establishing reserves, tracking premiums collected and claims paid and enabling a highly regulated structure that spans hundreds of integrated systems, millions of insured and trillions of dollars in transactions. At the transactional level, we serve as the system of record for risk when a policy is written, when a loss occurs, when a claim is filed and paid. Those commitments and outcomes are executed through Guidewire. And today, we don't simply provide that software. We operate it as a continuously improving secure, reliable and scalable cloud platform that strengthens over time. The complexity of replacing a core system in the insurance industry means deal cycles and implementation projects are almost always measured in years and require deep partnership. Success on a Guidewire project is the single most important KPI in our company. You will often hear me say that there is nothing we won't do to ensure a customer is successful with Guidewire. That culture of customer success has produced gross ARR retention rates of over 99% for our InsuranceSuite and InsuranceNow customers. The trust we have earned serving some of the largest and most trusted insurance companies such as State Farm, Liberty Mutual, Zurich, AXA, Aviva, Travelers and USAA reflects decades of deep domain expertise, best-in-class enterprise security and deep productization of complex regulatory requirements. While we focus on serving this Tier 1 and Tier 2 segment of the market, we can also support smaller insurers. In Q2, for example, we had wins at customers that reflected over $15 billion in direct written premium and under $50 million in direct written premium. It is also important to understand how we price our service. We sell recurring subscriptions to our cloud products and price them as a percentage of the direct written premium managed on Guidewire. We have never been a seat-based model. We align our pricing to the economic value we deliver to an insurer, the premium flowing through their business and not the number of users accessing the system. As insurers grow premium, expand lines of business and modernize their operations and become more efficient, our growth aligns directly with that value creation. There has obviously been a significant discussion across the market about the pace of generative AI advancement and its implications for the overall software category. What we are seeing in practice at Guidewire is increased demand for InsuranceSuite and InsuranceNow. The potential for generative AI in insurance is clear, and this is increasing the urgency for insurers to modernize legacy systems. Legacy mainframes were not designed for real-time data access, automation or AI-driven workflows. AI depends on clean data, trusted transactions and reliable systems of record. Generative AI will help us accelerate the value we deliver to our customers. We'll help our customers deploy agents that improve the service they provide to their customers, and it will also help us deploy and configure Guidewire faster and more efficiently. All of this AI-driven potential is increasing the momentum in our business. Q2 results illustrate this clearly. We closed another 15 InsuranceSuite Cloud deals and 2 InsuranceNow deals. Importantly, we are seeing insurers increase their commitment to Guidewire, both in terms of larger, fully ramped ARR outcomes and longer-duration contracts. The deal activity in the quarter included 3 new customer wins and healthy migrations and expansions. On the net new side, we signed one of Canada's largest private insurers who will be modernizing their legacy claims administration system to ClaimCenter. Our dialogue with this insurer dates back to 2008, so we are thrilled to start this program. This deal reflects a little over $8 billion in direct written premium, representing our largest new customer win in the quarter. Large customers are also choosing to expand and consolidate on our platform. Two of these customers will see their ARR grow to over $20 million during the committed period. Some notable deals in the quarter include Aviva U.K., the largest insurer in the United Kingdom, which has entered into a long-term agreement with us, committing to move all of its Guidewire estate, including business acquired from DLG in 2025 to the Guidewire Cloud Platform. Aviva recognized that to focus on innovating, serving their customers well and driving material future growth for their business, they needed a modern cloud-based core platform. Similarly, Tokio Marine North America is preparing to migrate major elements of 3 U.S. carrier businesses and has expanded significantly above its previous baseline as it commits to more growth on Guidewire. Donegal Insurance Group has selected Guidewire Cloud as the next step in its core system modernization strategy, migrating from on-premise InsuranceSuite to the Guidewire Cloud Platform. In addition, Donegal has aligned its strategic AI initiatives with Guidewire's rapidly evolving AI roadmap. Initial collaboration efforts focus on advancing claims capabilities, including intelligent first notice of loss and AI-powered agentic claims handling, which will be seamlessly integrated into ClaimCenter. Large customers are building on their successful cloud deployments to add other lines of business and significantly step up their direct written premium commitments. For example, a top 20 commercial insurer extended ClaimCenter to more commercial and specialty lines for greater scale and efficiency, significantly increasing its DWP commitment as it works to consolidate the collection of legacy core systems that they currently support. In Q2, we had another win at Zurich Germany, which is a direct result of the partnership and strategic framework agreement we have with Zurich. We have also worked hard to widen the breadth of our core offerings to address more of the insurance life cycle. With the addition of PricingCenter, we have the ability to uniquely address the growing demand for pricing and rating agility in insurance markets. I am encouraged by the high customer engagement for this new integrated offering and pleased to have closed our first PricingCenter deal in the second quarter. We have worked over a long period of time to embed intelligence into our Guidewire Cloud Platform and InsuranceSuite applications, and it's great to see strong adoption momentum in our data and analytics portfolio. In the second quarter, we closed 25 deals that included one or more of our data and analytics offerings. Our new embedded AI solution, ProNavigator, also got off to an incredible start with 9 deals in the second quarter. Notable deals included Aviva Canada and Gore Mutual who want to leverage this agentic assistant to deliver answers, suggestions and ultimately, actions embedded right in our core UI. ProNavigator leverages InsuranceSuite data and insurance standard operating procedures to increase employee efficiency and minimize claims leakage. These results reflect demand not only for core modernization, but for the expanding application portfolio that surrounds it. Momentum in the quarter was phenomenal, leading to ARR growth of 22%. Growth in fully ramped ARR continues to outpace reported ARR growth as it has over the past 3 fiscal years, and we expect that to continue this year. We have seen larger deals and longer deal terms, reinforcing the durability of our platform and the strategic commitments customers are making. Broadly speaking, AI for us is immensely beneficial and is driving an acceleration in our business. It's helping create demand for core system modernization, accelerating our development velocity, implementation velocity, and will accelerate everything that customers and partners do with Guidewire. We will incorporate AI-powered agents powered by ProNavigator into our applications and continue to support an open approach to the incredible ecosystem of partners building solutions in and around Guidewire. Guidewire is an indispensable part of a highly regulated global industry. We operate a mission-critical infrastructure with premium-aligned pricing, core renewal rates above 99% and a culture built around customer success. This combination has produced 25 years of durability and predictability, and we believe it positions us well for decades to come. With that, I'll turn it over to Jeff to walk through the financial details and our updated outlook.
Jeffrey Cooper, CFO
Thanks, Mike. Q2 was another tremendous quarter. We surpassed the high end of all of our financial outlook targets, and we are raising our full-year targets across the board. Given the market backdrop, we thought it would be helpful to give a few incremental one-time disclosures to help investors understand the durability of our model. First, ARR ended at $1.121 billion and grew 22% year-over-year or 21% on a constant currency basis. Additionally, fully ramped ARR ended Q2 at $1.42 billion, and fully ramped ARR growth continues to outpace ARR growth. Our market experience has taught us that we can maximize customer alignment and lifetime value by negotiating ramped subscription fees over a multiyear period. We quantify the impact of these ramps in our metric fully ramped ARR, which only quantifies the first 5 years of a contract. We typically disclose this metric annually but thought it would be helpful to remind investors of the power of this dynamic this quarter. Second, we continue to see customers lean into longer-duration contracts and larger commitments. This shows up in a number of metrics. For example, the average contract term over the last 12 months for new InsuranceSuite deals is over 6 years if you look at the weighted average duration weighted by fully ramped ARR. We have seen this metric increase over the last 18 months as larger customers push for longer contractual commitments. As a reminder, our standard contract duration for new cloud arrangements is 5 years. This dynamic is further evidenced by RPO growth. RPO finished the quarter at $3.5 billion, representing 63% year-over-year growth. We generally do not talk too much about RPO because we tend to focus on the powerful recurring elements of our model, such as ARR and fully ramped ARR. But in the current environment, we do think RPO is a helpful reminder of the durability of the business. Third, large customers are one of our fastest-growing cohorts. We have seen customers with more than $5 million in fully ramped ARR grow from 35 in 2021 to 96 at the end of Q2. It is gratifying to see the largest insurers trust Guidewire to manage their mission-critical operations at an accelerating pace. Finally, as Mike noted, we see renewal rates at all-time highs. On a trailing 12-month basis, InsuranceSuite ARR retention, including all downsell activity was over 99%. More interestingly, I went back 5 years and reviewed every customer churn event involving more than $1 million of ARR. It was easy to do because there's a very small number of these. Those churn events fall into three categories: First, customers that experienced financial distress or exited the line of business where they use Guidewire; second, a single instance where an acquisition drove churn; and third, a contract we terminated following our decision to exit Russia after the invasion of Ukraine. Importantly, over the last 5 years, we have not seen a single InsuranceSuite customer with more than $1 million of ARR choose to replace Guidewire with another system, except where that change was effectively mandated by an acquirer. Again, we thought it would be helpful to provide some of these incremental disclosures this quarter given the backdrop. Now let me turn to the results. Total revenue was $359 million, up 24% year-over-year and above the high end of our outlook. Subscription and support revenue finished Q2 at $237 million, reflecting 33% year-over-year growth and our continued InsuranceSuite Cloud momentum. Services revenue finished at $62 million, up 30% year-over-year and ahead of our expectations on strong demand for Guidewire-led services programs. This number includes an increase in field engineering activities delivered through our professional services organization. Now let me turn to profitability for the second quarter, which we will discuss on a non-GAAP basis. Gross profit was $243 million, representing 28% year-over-year growth. Overall gross margin was 68%. Subscription and support gross margin was 75% compared to 69% a year ago and continues to track well ahead of our expectations. Services gross margin was 9% compared to 6% a year ago. We finished Q2 with operating profit of $87 million. This finished ahead of our outlook as both gross profit was higher than expectations and operating expenses finished lower than expectations. We ended the quarter with over $1.35 billion in cash, cash equivalents and investments. Operating cash flow ended the quarter at $112 million. We repurchased $148 million of Guidewire shares in the quarter, and we obtained a new $500 million share repurchase authorization a few days before moving into our quiet period. We have $490 million remaining on this authorization, and we currently expect to complete this repurchase program before the end of our fiscal year. Now let me go through our updated outlook for fiscal year 2026. Starting with top line, given our performance in the first half and our continued healthy pipeline, we are raising our ARR outlook to $1.229 billion to $1.237 billion, which reflects growth of 18% to 19% year-over-year. For total revenue, we now expect between $1.438 billion and $1.448 billion. The midpoint of our revenue growth outlook is 20%, up from 17% growth assumed in our prior outlook. We expect between $962 million and $966 million in subscription and support revenue. This $16 million increase in our guide at its midpoint is attributed to the subscription line and is due to stronger-than-expected first half bookings, healthy direct written premium true-up activity, strong attach of new products, and a robust pipeline in the back half of the year. We now expect services revenue to be approximately $255 million given the better-than-expected services revenue in the first half, our higher utilization rate, and an uptick in demand for Guidewire-led key programs. Additionally, we are leaning into some field engineering programs where our services personnel are helping customers utilize Guidewire Cloud Platform and leverage newer agentic capabilities to solve business problems. This is an important motion as proximity to the customer has always been a strategic asset for us. Turning to margins, we are increasing our expectations for subscription and support gross margin to be approximately 74% for the year. We expect services gross margins to be approximately 13%. Overall gross margins are now expected to be 67% for the full year as higher subscription and support gross margins improve the overall gross margin. We are also lifting our outlook for operating income. We expect GAAP operating income of between $100 million and $110 million and non-GAAP operating income of between $293 million and $303 million for the fiscal year. This updated profitability outlook recognizes the higher revenue outlook and is partially offset by higher expenses as a result of increasing our annual bonus accrual due to expected outperformance on key financial metrics. We expect stock-based compensation to be approximately $185 million, representing 15% year-over-year growth. We are adjusting our expectations for cash flow from operations for the year to be between $360 million and $375 million. Our CapEx expectations for the year are between $30 million and $35 million, including approximately $18 million in capitalized software development costs. Turning to our outlook for Q3, we expect ARR to finish between $1.144 billion and $1.150 billion. As a reminder, the timing of ARR landing from backlog is more heavily weighted towards Q4 than Q3 this year. Our outlook for total revenue is between $352 million and $358 million. We expect subscription and support revenue to be between $239 million and $243 million and services revenue of approximately $60 million. We expect subscription and support margins of approximately 74%, services margins to be around 12%, and total gross margins around 67%. Our outlook for non-GAAP operating income is between $59 million and $65 million. In summary, we had a tremendous Q2. Alex, you can now open the call for questions.
Alex Hughes, Vice President of Investor Relations
Our first question is going to come from Adam Hotchkiss at Goldman Sachs.
Adam Hotchkiss, Analyst
I guess to start, Mike, I appreciate all the clarity on the core continuing to accelerate, but it would be great to understand how you think about what Guidewire's position in the broader AI stack looks like over the medium term. We hear a lot about competition outside of the core from forward-deployed engineer models and disruptors deploying LLMs on insured data. So just maybe clear up for folks Guidewire's strategy as it relates to owning AI versus enabling AI and then how that impacts your revenue opportunity.
Mike Rosenbaum, CEO
Great question. I appreciate it. I would definitely say that it would be quite a bold statement for us to say we're going to own AI in the insurance industry. What we're going to own in the insurance industry is core systems that I am very confident in. We see that momentum, and we see that insurance companies need to modernize. They need these core stacks to work effectively. There's plenty of insurance companies that need Guidewire to own the outcome with respect to AI capabilities. But running an open model where we see other companies that are going to use other components from other AI technologies in and with Guidewire, it's absolutely part of the medium-term outlook. I think this is really very important to understand. I have had numerous conversations with Tier 1 CTOs and CIOs in our customer base over the past couple of months. Every single one of them stresses to me that they expect there to be a mix of how they deploy these solutions in their environments. At the smaller companies and at the smaller divisions, more of this will come from Guidewire; at the larger companies, some of it will come from Guidewire and some will come from partners. This is an incredible time in technology. I absolutely want to stress that where we are one of one, I think, is in the perspective that we're going to be the most trusted, scalable, reliable core system that you can do anything you want with respect to AI and Guidewire. How we want to own AI or what parts of this do we want to do very well and maybe someday own will be more detailed. We are super excited about the momentum we have achieved with ProNavigator in the very first quarter that it's really been part of the company. We highlighted the deal activity. We highlighted the deal activity at pretty significant real customers that are deploying ProNavigator as a mechanism to deploy artificial intelligence-powered solutions directly to the place where people are using the systems. We can provide this context from what they're accessing inside of Guidewire. We compare it with standard operating procedures and the recommendations that they would make to those end users, and we can use an LLM to serve that to the end user in a helpful way, making that person an expert, and we love the momentum we've achieved there. As we said in the prepared remarks, we see demand for and are doing a lot of forward-deployed services where we are working with our core customers to look at what's possible with respect to Guidewire technologies and the large language models that are available now and can be applied to insurance outcomes. We are super excited about this. But I would definitely stress the characteristics of my answer: number one, we're the right choice for core systems; number two, we will do more with AI, and ProNavigator is a great example; we will do more with our services organization and technologies that come from Guidewire, but we will definitely be part of what I think will ultimately be a relatively complicated enterprise architecture that will be established at each insurance company based on their strategies and goals. No matter what, we will be open and we will provide a platform that gives our customers choice. Hopefully, that gives you a sense, Adam, of how we're thinking about this.
Adam Hotchkiss, Analyst
Okay. That's great, Mike. Really, really helpful. I wanted to then pivot to the core. I know we've talked about 25% or so of premium flowing through Guidewire today. It feels like AI is moving customers into the cloud more quickly if your fully ramped ARR is accelerating off of the 22% in fiscal '25. So what's your updated view on the pace that premium moves into cloud and where Guidewire's penetration ultimately gets to over the medium term?
Mike Rosenbaum, CEO
Thanks for the question. I would say it's definitely improving. The results in the quarter, the visibility that we see into the back half of the year for new business and expansions, and specifically larger deals at large Tier 1 and Tier 2 insurance companies is extremely positive for our business. That's what gives us the confidence to be able to update our outlook. How that relates exactly to the percentage points of global DWP that flow through Guidewire is very difficult for us to say or project that. I don't really run the business that way. We look at it more from a net new ARR and net new fully ramped ARR perspective and the specific workloads, the specific lines of business that exist at each of our customers in each of the geographies that we support. We look at it at the end of the year and report that out, obviously, on a yearly basis, how we've done. But certainly, it's increasing. We see demand increasing, and I think demand is increasing because of the potential that everyone sees in generative AI. They see what they can do. We can all touch it, we can feel it, we can ask it questions. You can see, wow, I can use this in my company. But you can only use it in your company if you're running on a modernized core system. If you're running on a core system from Guidewire with APIs you need, with the MCP servers you need, with the partnerships that you need, that's what really unlocks this, and that's what's driving the momentum in the business. That's what created the quarter that we saw. That's what gives us the confidence to raise the guidance for the year.
Alex Hughes, Vice President of Investor Relations
Our next question comes from Ken Wong of Oppenheimer.
Hoi-Fung Wong, Analyst
Fantastic. Very clear, very assertive statements on the AI front today, Mike. I think those were fantastic. I won't belabor the point too much since I'm sure my peers will. I wanted to maybe focus on new products. You mentioned good customer feedback on PricingCenter. You signed your first deal. Would love to get some early comments in terms of what you’re seeing in those engagements, in those conversations. And then any update on whether or not there's some traction on the underwriting side?
Mike Rosenbaum, CEO
Yes. Thank you for the question. PricingCenter is super interesting because what we're seeing is people really leaning in and wanting to engage with us to talk about what's the vision and specifically how it will be integrated into PolicyCenter. For a Guidewire customer running PolicyCenter, there is an obvious connection between the product model, the way we define the product model, and how that relates to what the actuaries need to create the products they require, how it connects to our data platform to provide the data needed to create models, stay current, compete, and adjust to what's going on in the market. There's a lot of engagement there. This is a deal cycle that is kind of long, though. This is a thoroughly researched and studied process. Sometimes a POC is associated with these deals. It is kind of similar to our core sales process where, hopefully, as we said, we closed one deal that took more than 10 years. Hopefully, these won’t take that long. We're excited to get that first deal done, but we're also excited about the amount of pipeline and engagement we’re creating for PricingCenter and for us to start participating in this segment of the market. It's very exciting. On the underwriting side, we're still working with a small subset of customers that have expressed interest in developing a solution that maps to a fast-evolving approach to agentic underwriting. This includes receiving submissions from brokers, mapping that to risk appetites, and then ultimately mapping that to PolicyCenter. There’s a lot of excitement and engagement around this product. I expect that over the next couple of quarters, we’ll be able to start getting this into production with a couple of customers and learning fast and evolving from there.
Hoi-Fung Wong, Analyst
Fantastic. Really appreciate the color. And then, Jeff, just a quick question on the true-up comment. I think you mentioned still seeing some tailwinds from true-up activity. I think we, on the outside, probably worried a little too much that as DWP normalizes, you really wouldn't see any of that activity anymore. Help us kind of walk through the mechanics of how that continues to be a tailwind for the business.
Jeffrey Cooper, CFO
Yes. Thanks, Ken. We did see healthier true-up activity than we initially expected going into the quarter. That was a little bit of a tailwind in Q2. I think as we think about the remainder of this year, it’s generally aligned with how we've talked about this over the last few quarters. We saw a very healthy backdrop coming out of the high inflationary period that is tempering a bit, but we continue to see this activity. The way it works is customers have premium baselines in their contracts. It’s always been part of our model that as customers grow, they pass those baselines, and then we have the right to effect a true-up order. It’s not uncommon for some customers to buy a bit more premium than they initially need, so it may take a few years to see a true-up order after an initial purchase. We see pretty regular volume of this, and we have enough of this in our model now that we can make pretty precise predictions. While we expect it to temper a little bit off the highs we experienced a few years ago, we did see a bit of a tailwind in Q2, and the back half of the year looks pretty much aligned with what we expected.
Alex Hughes, Vice President of Investor Relations
Our next question comes from Rishi Jaluria from RBC.
Rishi Jaluria, Analyst
All right. Wonderful. Maybe I want to first start by following up on the earlier question around perceived competition from AI. We've obviously seen both OpenAI and Anthropic announce kind of deals with some of the leading insurers. But at least on first glance, it seems like it’s very much complementary and maybe even potentially additive to what Guidewire core and even some of the add-ons are doing. So I want to maybe understand how you are thinking about your ability to partner and work with the large LLM vendors and ultimately just drive greater customer success within the insurance industry. And then I’ve got a follow-up.
Mike Rosenbaum, CEO
Super, super question. We absolutely see this as additive and helpful for Guidewire overall and the acceleration in the company. We have always run a very open approach to our products and to our ecosystem. We’ve always invited multiple parties to the ecosystem because we cannot and do not imagine that we are going to do everything for every insurance company everywhere in the world. Anthropic and OpenAI have this access to incredible technology that has obviously changed and will continue to change the world. We don't imagine that the work they’re doing is targeted at the deep, specific complexities associated with operating a core system in the insurance industry. Leveraging the capabilities that these tools provide, LLMs, or even these desktop applications that sit on top of their LLMs, will be most beneficial when connected to well-structured insurance processes running on modern core systems from Guidewire. We’re very open to working with these companies and with our customers that have partnered around solutions that connect them to Guidewire. In the script, I mentioned we see this as net beneficial to Guidewire because what you're going to do with the Guidewire core system that's deployed, your operations are modernized, and as these companies become more efficient, it will allow Guidewire's partners to wish to get better at what they do. This will drive demand.
Rishi Jaluria, Analyst
All right. Really helpful. Maybe just a quick follow-up. As we think about your own internal AI development, your own ability to bring AI to your customers, recognizing you are dealing with a highly regulated industry where it could take a while to see that meaningful adoption. But the question I’d like to ask is, as you think about – a lot of the focus is on efficiency, but do you see an opportunity to maybe even drive better revenue outcomes and ultimately better customer outcomes for insurers leveraging AI? And what would that look like with your current roadmap?
Mike Rosenbaum, CEO
1,000%, yes, okay? The insurance industry is incredibly complicated, right, if you zoom out. It has been structurally hamstrung by the amount of unstructured information and data that needs to be managed in order to effectively and efficiently conduct the art of insurance. Large language models address this directly. They help you underwrite more efficiently, which means that you can look at more risk. You can evaluate more risk more quickly. You can manage claims, the input of submissions, documents, and the conversations that you have to have with all the multiple parties can be analyzed more effectively. These two examples are tiny bits of why the underwriting process is going to become more effective and the claims management process will also improve. Ultimately, the overall insurance industry will become more efficient, which is beneficial to insurance companies and the broader society and our economies. Generative AI will bring significant improvement in efficiency, and we're excited to drive this.
John Mullen, President
I'll just hit on the daisy chain of product strategy because one part of your question was product strategy. On top of the core operating system, if you think about the pressure points, our customers need pricing agility, therefore, PricingCenter. That’s why we take that step. Product speed to market is the next thing in that daisy chain that drives competitive differentiation for them, therefore, advanced product designer. Broker efficiency and effectiveness is the thing that’s probably up for the most amount of transformation and disruption, given LLMs and the models available, therefore, UnderwritingCenter. The investment we’re making in product strategy ties closely to the things that drive differentiation for our customers that sit atop the core processing environment. We believe our core processing environment has an opportunity to gain market share by line of business specificity and geographic specificity because of the rate at which we can deploy products and the components we are putting out over the top of it.
Alex Hughes, Vice President of Investor Relations
Next up is Joe Vruwink from Baird.
Joseph Vruwink, Analyst
Great to hear about the urgency to modernize. I maybe wanted to ask about the pace around that modernization. There has been a lot recently; even COBOL got its time in the sun a few weeks ago on maybe AI tooling, making it easier to translate. I don't think necessarily the translation of COBOL is the challenging part, but I want to get your take on just modernization timelines more broadly and whether Guidewire has the ability to maybe accelerate time to value because of their AI usage.
Mike Rosenbaum, CEO
Yes. I'll give you a quick take on this, and I think John is probably going to want to add some perspective on it. Yes, we're definitely working hard to ensure that our teams that are working on migrations, both from on-prem Guidewire to cloud and the modernization projects are more efficient. We're starting to see early results in actual projects. There’s a whole litany of different steps involved in one of these programs, and many can be enhanced and potentially even automated with generative AI. Reducing that timeline and increasing the pace of that helps us make a case for modernization now. This is an exciting component of Guidewire's story. I would caution, there is a certain amount of, hey, this is running on legacy code and on a system we can’t support anymore. So, this one-for-one translation into something more supportable is okay. However, it doesn’t address what's often a major important part of modernization: rethinking your business processes and products. This requires engagement with companies like Guidewire and our ecosystem of SIs to help navigate this modernization journey.
John Mullen, President
Yes, I’ll add that, looking back to 2 quarters ago, we have to consider the investments that Guidewire is making in our professional services team, compounded by the investments SIs are making in their teams. There was a lot of investigation, discovery, and proofs of concept back then, creating a wide funnel of activity. That has started to narrow over the last two quarters, and we have seen impressive percentage reductions in time to value. Our next step is to increase the velocity of those proofs of concept and test cases for standard operating procedures in these programs. An important additional step will be rationalizing with the SIs because we want to ensure that the tools are consumable for our customer base.
Joseph Vruwink, Analyst
That's great. And then, Jeff, one for you. I appreciate the midyear disclosure on fully ramped ARR. I'd have to imagine there's seasonality in that number, just given the deal volumes in Q4 creating some second-half weight. Can you maybe frame how much of a given year's net new fully ramped ARR happens in the first half versus the second half?
Jeffrey Cooper, CFO
Yes. Obviously, you understand our business. Our seasonality is Q4 weighted. Q2 is historically our second strongest quarter, and we saw a very strong Q2 for us, which flowed through to some healthy additions on the fully ramped side. But you’ll have to wait until Q4 to see the full effect of that question. We’ll discuss it further in the fourth-quarter call.
Alex Hughes, Vice President of Investor Relations
Our next question comes from Parker Lane at Stifel.
J. Lane, Analyst
Jeff, I appreciate the disclosure on ARR retention rates and the commentary on how a few million dollar-plus churn events you've had in recent years. Looking at the remainder of this year and, more importantly, maybe your mid-term targets, what sort of assumptions do you make or cushion do you bake in around ARR churn? Do you anticipate that things remain relatively consistent with historical trends or are you accounting for some incremental conservatism there?
Jeffrey Cooper, CFO
Yes. I appreciate the question. This area is a strength of ours. The assumptions are as we go bottoms up in every single account and have visibility into any potential downsell risks that exist. The team flags all of those throughout the year. Usually, when we start the year, we have a good read, and we do a wide net on potential downsell events. We usually perform better than that net. This is not a top-down model assumption exercise for us. It’s very bottoms up, customer-by-customer, account-by-account.
J. Lane, Analyst
Got it. And one quick one on ProNavigator. I believe last quarter you said you were expecting $4 million of ARR and $2 million of revenue, 9 deals in the quarter. How is that trending relative to those expectations?
Jeffrey Cooper, CFO
Trending positively to those expectations. I was not expecting 9 deals in the first quarter, so we’re thrilled with that progress. We can think about how we will disclose that moving forward, but you should consider it as trending ahead of expectations.
Alex Hughes, Vice President of Investor Relations
Our next question comes from Michael Turrin at Wells Fargo.
Michael Turrin, Analyst
I wanted to spend some time on the commentary on duration increasing. It certainly seems positive in terms of willingness of customers to commit to Guidewire. Maybe just speak more to what's leading to that longer duration. Are you finding core replacements show up as a prerequisite for some of the longer-term AI-focused initiatives insurers might be looking at? Or what drives that?
Jeffrey Cooper, CFO
Yes, this is 100% just because of the software market backdrop. We felt that some of the durability elements of our business were being missed. So we thought it was a good time to lean into these disclosures that provide a bit more durability. I think Mike will probably jump in here, but on the contract duration, we’ve always engaged in longer-duration contracts. There was a period when we transitioned to ASC 606, where we forced shorter contracts on our customers. As we move to the cloud, our standard has been 5 years. In the early part of the cloud, if you look at duration, it was slightly lower than 5 years. Larger customers push for longer contractual commitments, and we've seen that activity kind of increase over the last 18 months.
Mike Rosenbaum, CEO
Nothing to add. You got it exactly right, Jeff.
Alex Hughes, Vice President of Investor Relations
Alex Sklar from Raymond James.
Alexander Sklar, Analyst
Mike or John, following up on Ken's question on PricingCenter and ProNav and some of the early success there. Can you just reframe how you expect the adoption curve to trend and sales cycles you've seen based on what you've seen to date? Were these particular deals in the pipeline prior to the acquisitions? And maybe, Jeff, how did those initial deals look like in terms of uplift on ARR?
John Mullen, President
So I’ll hit the first part and then Jeff can pick up the second. For the ProNavigator deals, the adoption curve in claims shows acceleration coming from customers already on cloud. The receptivity to have conversations and lay down tracks for this is very much in line. Regarding PricingCenter, customers that are using our PolicyCenter are very interested in proving these things out and looking at potentially large and long-term commitments. There will be significant work to make PricingCenter fit all regions and lines of business, resulting in investment over the next quarters.
Jeffrey Cooper, CFO
Yes. And on the ARR side, we haven’t spoken too much on this topic except to think about PricingCenter as a meaningful ASP product. As it’s a longer sales cycle, we expect the pipeline to build and transact a bit slower but be more impactful. Meanwhile, ProNavigator is currently at smaller price points, but we expect to evolve that into areas that will increase the value of that product over time.
Alexander Sklar, Analyst
Jeff, maybe just a quick follow-up on Joe's fully ramped ARR question for you. I appreciate some of the unknowns around seasonality given the larger Tier 1 customer base. But in the first half of this year, was there anything in the fully ramped result that was an outsized contributor, either in terms of steeper ramps or larger migrations that might be abnormal for a first half for you?
Jeffrey Cooper, CFO
It was an abnormal first half for us just in the fact that we saw some large deal volume that was very exciting. We hope to continue building on that. There’s nothing unnatural, but we are seeing continued momentum. There are deals in the first half that went beyond the typical 5 years, and there’s backlog that comes from that fully ramped ARR metric. This is all continued momentum, and last year’s signing with Liberty Mutual was a big event for us, creating a difficult comparison. We have a lot of interesting activity in the pipeline for the remainder of the year.
Alex Hughes, Vice President of Investor Relations
Our next question comes from Allan Verkhovski at BTIG.
Allan M. Verkhovski, Analyst
Mike, given the speed and innovation of what's possible from a coding perspective with AI, you've gone through a lot of investments over the years. You talked about demand for deployed services. Where are you making changes or leaning in more as it relates to your product roadmap? And how are you further adjusting it, if at all, your expected developer count growth over, call it, a multiyear basis?
Mike Rosenbaum, CEO
Great question. We're rolling out agentic development tools, a harness that works effectively for Guidewire developers. This will be leveraged by our devs and those in our professional services organization, our SI ecosystem, and all customer developers. We expect this to increase the pace over time for what we can deliver. The anecdotal feedback from first movers experimenting with these tools has been extremely positive, fueling confidence that our development velocity at Guidewire over time will increase. This raises questions about our long-term backlog and the ideas we need to include over time with this increased capacity. We have evaluated those roadmaps based on the assumption that we will see increased throughput. I’m excited about this potential, which aligns with the overall circumstances that have arisen from moving our customer base to our cloud. The cloud-based installed base and three releases we do every year for new functionality gives us tremendous opportunities. So I would consider our product roadmap extensive and sufficient for delivering value, now at a faster pace and for years to come.
Allan M. Verkhovski, Analyst
Perfect. That's really insightful, Mike. And then, Jeff, just as a quick one for you. Can you just stack rank the areas of outperformance in the quarter as it relates to the ARR beat?
Jeffrey Cooper, CFO
It’s a good question. As I build my ARR model, key elements I need to see include new deals in the quarter translating to ARR, how much ARR comes off backlog, and the attrition events we experience. We have clarity in the ARR that comes off backlog and visibility into attrition events. Both performed as expected. The outperformance primarily came from sales activity last quarter, with a bit of higher true-up activity, but overall, it was the deal volume in the quarter driving that outperformance. We saw a healthy mix of new customer wins, migrations, and expansions within existing customers.
John Mullen, President
Another dimension to look at is geographical. We have a good spread across personal lines and commercial lines, and our team in Europe continues to drive really solid activity, demonstrating influence in their markets. In Asia Pacific, we were in Sydney last week with a lot of customers. Their receptivity is heightened due to many already being on cloud, enabling powerful conversations.
Alex Hughes, Vice President of Investor Relations
Okay, great. We have time for a couple more questions here. Next is Aaron Kimson from Citizens.
Aaron Kimson, Analyst
First one, there are about 90 Tier 1 P&C insurers today. Guidewire has 96 customers exceeding $5 million in fully ramped ARR. How should we think about how many of your customers exceeding $5 million in fully ramped ARR today are Tier 1s? And how far down that TAM pyramid on Slide 5 do you actually have $5 million-plus FR ARR customers today?
Jeffrey Cooper, CFO
Yes. I have not sliced it in that way, but it is reasonable for us to have a number of Tier 2 and even Tier 3 customers that cross that threshold. The opportunity to see customers cross over that threshold is maybe broader than you might think.
Mike Rosenbaum, CEO
Yes, we continue to make solid progress with Industry Intel. It’s a process, and it’s not straightforward software development. There’s some R&D and research involved in pulling and cleaning the data sets, testing if they provide appropriate signals, and validating that. There’s a bit of research going on, but we're happy to see steady momentum and continued sales momentum in the quarter tracking as expected for that team. Overall, we are satisfied with the progress.
John Mullen, President
From a market coverage and distribution standpoint, the ability to demonstrate what that team has built is crystallizing, which has helped in the deal motion. Additionally, we are investing in our account management to navigate the right buyers inside existing customers and trigger healthier pipeline activities.
Alex Hughes, Vice President of Investor Relations
Our last question comes from Faith Brunner at William Blair.
Faith Brunner, Analyst
I know there's a lot of commentary on the pipeline in the back half of the year. But just wanted to touch on how we should think about the different products flowing through the funnel as customers increasingly want to land larger with longer duration. Has there been any shift to the conversations you're having or typical sales cycle timelines as people seem to be more eager to standardize on the platform?
Mike Rosenbaum, CEO
That’s an interesting question. I would say the outperformance we are seeing is more broad-based larger deals, rather than any product mix shift. We are establishing more confidence in the platform as a long-term home for core system operations at insurance companies. The AI story is driving urgency as we bring it to the table. The improvement is more about larger, longer-term deals rather than product mix shift. While we see product mix shifts continuing, it’s really core system wins and commitments driving the improved momentum. Time and stage remains as it was, but as we build our portfolio, some segments will have a different stage aging profile than core processing.
Alex Hughes, Vice President of Investor Relations
Okay. Thank you, everyone. It was a great quarter, and we're incredibly excited about it. We look forward to talking to you all over the next few weeks and months. Otherwise, we'll see you at the end of Q3.
John Mullen, President
Thank you.