Earnings Call Transcript
Guidewire Software, Inc. (GWRE)
Earnings Call Transcript - GWRE Q4 2021
Operator, Operator
Greetings, and welcome to the Guidewire Fourth Quarter and Fiscal 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Alex Hughes, Vice President, Investor Relations. Please go ahead.
Alex Hughes, Vice President, Investor Relations
Thank you, operator. Good afternoon, and welcome to Guidewire Software’s earnings conference call for the fourth quarter fiscal year 2021, which ended on July 31st. My name is Alex Hughes, I’m Vice President of Investor Relations. With me on the call today is Mike Rosenbaum, Guidewire’s Chief Executive Officer; and Jeff Cooper, Guidewire’s Chief Financial Officer. A complete disclosure of our results can be found in our press release issued today, as well as in our related Form 8-K furnished to the SEC, both of which are available on the Investor Relations section of our website. Today’s call is being recorded, and a replay will be available following the conclusion of the call. Statements made on this call include forward-looking statements regarding our financial results, products, customer demand, operations, the impact of COVID-19 on our business, and other matters. These statements are subject to risks, uncertainties, and assumptions and 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 for information on risks, uncertainties, and assumptions that may cause actual results to differ materially from those set forth in such statements. We also will refer to 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 the supplement on our IR website. And with that, I’ll now turn the call over to Mike.
Mike Rosenbaum, CEO
Thank you, Alex. Good afternoon, everyone, and thanks very much for joining us today. I’m very excited to have the opportunity to report on the results of what was truly a remarkable year. I’m proud of everyone on our Guidewire team for staying focused throughout the year and remaining determined to just steadily continue to execute on our mission to help power P&C insurance innovation. We had a particularly strong finish to the fiscal year, which was the result of a lot of hard work in the quarter but also a lot of hard work for months and years prior to this. With the team’s execution, I continue to feel more and more confident in the path that we’re on and the approach we’re taking to reinvent Guidewire and our InsuranceSuite customer base to a modern cloud platform and operating model. Our cloud momentum in the quarter and fiscal year positions us well to continue to accelerate and help drive continued innovation in the P&C insurance industry. Q4 cloud activity was phenomenal with 17 core cloud transactions, bringing our total cloud customer count across InsuranceSuite and InsuranceNow to 92. We closed twice as many cloud deals in fiscal 21 than in fiscal 20 and closed more deals in Q4 than in all of fiscal 20. This momentum gives us more confidence that we will continue to move customers to our cloud platform and continue to attract new customers to Guidewire Cloud. Every new customer helps fuel the Guidewire ecosystem that is so important to amplifying innovation and delivering value to our customers. In August, we also took another important step in enhancing our data and analytics platform by welcoming HazardHub to the Guidewire team. Through its API-based risk modeling approach, HazardHub adds a best-in-class property risk and hazard data service to our analytics offering. And by embedding its data and risk scores into customers’ workflow, we will power smarter decisions and better service for end consumers. Turning to Q4. Cloud momentum was strong with sales strength on a number of fronts. Cloud sales comprised 89% of new sales activity in the quarter and just over 82% for the year compared to just 70% last year, which illustrates how quickly and clearly we have shifted to a cloud-driven business. Cloud deal volume was also strong. Of the 17 core cloud transactions this quarter, 16 were for InsuranceSuite Cloud and 1 for InsuranceNow, and the majority of these deals included add-ons for data and analytics. Moreover, we saw broad-based activity, including straight migrations, migrations with significant expansions and five exciting new customers. Let me touch on our new customers first. In the Americas, we added three: SGI, Saskatchewan’s compulsory auto insurer and a property and casualty insurer in five Canadian provinces adopted InsuranceSuite on the Guidewire Cloud platform after a comprehensive process. Guidewire’s modern architecture, deep content, and technical vision were important factors as SGI looks to drive greater efficiency and speed to innovation. National American Insurance Company, or NAICO, a regional insurance carrier based in Oklahoma, providing commercial property and casualty coverage since 1987, selected the full InsuranceSuite Cloud, along with reinsurance management and our digital and data capabilities. Qualitas U.S., a subsidiary of one of the largest carriers in Mexico, selected InsuranceNow. Qualitas is seeking a core platform that will scale with its growth, streamline internal processes, and leverage data throughout its workflow with predictive analytics. In EMEA, a large car manufacturer selected InsuranceSuite Cloud to deliver motor insurance across multiple European countries. And in APAC, Hollard Insurance, a rapidly growing insurer across Australian and New Zealand markets, selected ClaimCenter cloud for its comprehensive functionality and ongoing innovation. We are excited to partner with Hollard on this next-generation claims project. In addition to these new customers selecting Guidewire Cloud, we also signed another 12 cloud deals with existing customers. As our cloud operations mature and gain traction, we expect the conversion of our self-managed customer base to continue to accelerate. We saw strength across the board in the quarter, with migrations occurring in both personal and commercial lines across a variety of tiers and with customers choosing to expand into new core systems not previously managed by Guidewire. Key themes we hear consistently from customers choosing to embrace cloud are the importance of a unified cloud platform, strong product vision and road map, and the ability to access innovation faster. I won’t cover every migration deal in the quarter but a few that I think deserve specific mention. Auto Club of Southern California, a nearly $5 billion DWP carrier and the largest of the AAA Federation, had previously decided to upgrade their ClaimCenter instance to Version 10, but prior to starting that project, changed course to ultimately decide to migrate ClaimCenter to Guidewire Cloud while also adding PolicyCenter and BillingCenter in the cloud. This exciting deal represents a significant increase in our footprint at this customer. Similarly, Amerisure, who has served the commercial lines market for more than 100 years, not only elected to upgrade its ClaimCenter implementation to Guidewire Cloud but after a comprehensive competitive review, decided to also buy PolicyCenter and BillingCenter to take advantage of a single unified cloud solution and to facilitate greater speed of innovation. Pekin Insurance Group, a regional Midwest P&C insurer, decided to migrate their InsuranceSuite instance to Guidewire Cloud after a review of their overall cost structure to support their core system framework in a self-managed mode, yielded significant cost savings by moving to our cloud offering. And finally, California Casualty decided to migrate their full suite to our cloud. For over 100 years, CalCas has been a provider of auto and home insurance to educators, firefighters, law enforcement, and nurses across the country and is also one of our earliest customers, having adopted ClaimCenter in 2007 and then expanding to PolicyCenter and BillingCenter in 2017. We are thrilled with the partnership here and excited to work with CalCas on this next endeavor. At the end of fiscal 2021, $539 billion of direct written premium was under license for at least one Guidewire core application. I’ve said for a while now that with Guidewire operating as the core system of record for many of the leading insurers around the world, we have an enormous opportunity to instantiate cloud with our customer base and leverage this success to drive new customers to our platform. It was great to see this play out in the fourth quarter. Additionally, demand for Guidewire’s data and analytics solutions was healthy in the quarter. As we grow cloud adoption, we have the opportunity to leverage Guidewire’s position as the core system of record to embed both data and analytics throughout the core workflow to drive greater customer insights and better decisions. I was pleased to see a number of customers take this approach by including one or more of our analytics offerings in their cloud transactions. Ten of the cloud deals that we closed in the quarter included analytics products. And in addition, science continued to show momentum in the quarter with two notable deals: Aon’s Reinsurance Solutions, a leading global reinsurance broker will collaborate with Guidewire Cyence team to help cyber insurers better quantify their exposures and manage their risks in the face of rising ransomware and evolving cyber attacks. Aon chose Cyence for its cyber model transparency and maturity in addition to Guidewire’s technical expertise. EmergIn Risk, part of Ryan Specialty Group, selected Cyence after comparing cyber risk selection and portfolio aggregation tools. And also of note, in early August, we deepened our longstanding relationship with S&P, enabling them to expand their use of our Cyence cyber risk analytics to help power S&P’s global rating service. In addition to growing cloud adoption, we also continue to drive customer cloud deployments. We had 11 customers go live on 26 products across both cloud and self-managed. We saw 4 cloud go-lives, bringing our total to 16. We saw 2 customers go live on InsuranceNow and 2 customers go live on InsuranceSuite, a Tier 1 insurer and Gore Mutual. The cloud deployment at Gore Mutual really speaks to the power of our cloud platform. They have deployed InsuranceSuite in the cloud to help transform a national-scale, purpose-driven and digitally-led insurer in just a few short years. Already Gore Mutual has seen time to quote reduced from an average of over 30 minutes to about 8 seconds. And the time from app in the door to coverage issued improved from several days to about 15 minutes. A fundamental pillar to driving cloud adoption and deployments is our growing partner ecosystem. Upgrading the core to the cloud represents a large and complex project for many insurers, so it’s important to bring a deep and talent-rich SI partner community to the table. We continue to see very healthy engagement from this community in both our deal flow and cloud deployments. We finished the fourth quarter with 13,500 SI consultants from over 32 partners, and the number of Guidewire Cloud-certified consultants grew 157% year-over-year to 2,315. Eleven SI partners are now involved across 29 cloud projects. At the same time, our solution partners and the Guidewire Marketplace continue to be important to powering P&C insurance innovation for our customers. We finished the fourth quarter with 731 apps from Guidewire and over 130 solution partners while growing the number of solution partners by 43% in 2021. Before handing it over to Jeff to cover our financial performance, I’d like to briefly discuss why cloud matters so much for Guidewire, our customers and the P&C industry. Cloud is a fundamentally more efficient mechanism for delivering technology innovation to our customers. Every six months, we seamlessly deliver updates and new innovation to our growing cloud footprint, while at the same time, solution partners can efficiently plug in through a common API-based framework, which amplifies innovation on our platform even further. As a cloud service provider, we also have significantly better access to usage data and the real-time customer feedback necessary to further improve adoption, drive innovation, and help our customers achieve the business outcomes they’re targeting. The transformation of Guidewire to a cloud service is such a monumental task that it often sounds like it’s our primary goal, but it’s not. Our ultimate goal is to help power innovation for our customers, to help them achieve their objectives and improve the state of the insurance industry. The cloud is an essential step in this larger mission. And while I’m very excited to see cloud momentum across deal volumes, ARR growth, and other quarterly results, it’s important to realize that there’s a larger goal of empowering innovation alongside our customers that we’re focused on, making progress against and very, very proud of. I’ll now turn the call over to Jeff to discuss our financial results in more detail.
Jeff Cooper, CFO
Thanks, Mike. We finished the year with great momentum, which is visible in our financial results. Our strong execution in fiscal 2021 sets us up well to achieve our long-term financial targets. ARR ended the fiscal year at $582 million, up 13% from a year ago. On a constant currency basis, ARR increased 12%, finishing the year at $575 million and above our guidance range. As a reminder, we measure ARR on a constant currency basis during the fiscal year and then revalue ARR at year-end for current FX rates. ARR overperformance was driven by strong new ARR conversion from 17 core cloud deals sold in the quarter. We also saw healthy conversion of ramped activity in the quarter and the fiscal year. Finally, we did better than our expectations on gross ARR attrition, and core attrition finished the year at under 3%. Total cloud ARR, which we define as the ARR for all of our cloud products and for customers that have contracted to move to the cloud, even if they are not fully transitioned yet, finished the year at $234 million, up 51% year-over-year. Cloud ARR ended the year at 40% of total ARR, which is the upper end of the 35% to 40% range that we discussed at our Analyst Day last year. We expect to continue to break this out on an annual basis. Fully ramped ARR, which is defined as the fully ramped annual price outlined in the customer contract, ended the year at $694 million, representing 14% year-over-year growth and 12% growth on a constant currency basis. In other words, we expect to add $112 million of expansion ARR as we execute to the ramping fee schedules outlined in customer contracts. Total revenue in fiscal 2021 was $743.3 million, ahead of the guidance we discussed last quarter, as a result of strength across the board. Subscription revenue for the year was $168.6 million, up 41% year-over-year due to ongoing cloud activity. As Mike noted, the vast majority of our new sales are coming from our cloud products, representing 89% and 82% of new sales activity in the fourth quarter and fiscal year, respectively. Subscription and support revenue ended the year at $252.3 million, up 24% over last year. License revenue finished in line with our expectations, with a $4 million impact from deal duration longer than our standard terms occurring in the fourth quarter, the majority of which was already included in the outlook we provided last quarter. Services revenue finished a bit ahead of our expectations on stronger-than-expected delivery in Q4. Turning to profitability for the fiscal year, which we will discuss on a non-GAAP basis, gross profit was $413.2 million. Overall gross margin was 56% compared to 61% a year ago. Subscription and support gross margin was 43%, and services gross margin was 5% compared to 9% a year ago. A key part of our strategy is to migrate existing customers to our cloud. These existing customers have invested significant amounts to install and configure their Guidewire on-premise applications, and moving requires an upgrade and remediation work to align to our cloud best practices. In order to accelerate these projects, we are investing alongside our customers by working on migration services at discounts to our standard billable rates. While revenue recognition guidelines require us to account for the multiple performance obligations in these arrangements and allocate some of the recurring subscription contract value to services revenue, services margins are still impacted as we execute on the cloud migration opportunity in front of us. Operating income was $26 million, better than our guidance range due to higher-than-expected total revenue and lower-than-expected expenses due to the timing of hiring and lower travel and entertainment expenses. Operating cash flow ended the year at $111.6 million, well ahead of our expectations. This was positively impacted by lower-than-expected expenses, strong collections, including $12 million of early payments not due until Q1, and approximately $5 million incremental cash flow from FX. Free cash flow finished at $82.7 million, including $15 million in expenditures associated with our office build-outs in Toronto and Dublin. We ended the quarter with $1.3 billion in cash, cash equivalents and investments. During the quarter, we invested $39 million on the repurchase of 366,000 shares and had $37.5 million remaining in our share repurchase authorization at the end of Q4. Now, let me turn to our outlook for the fiscal year 2022 and the first quarter. For the year, we expect ARR of $657 million to $667 million, representing 14% constant currency growth at the midpoint. This outlook does factor in approximately $4 million to $5 million in ARR from our acquisition of HazardHub. Going forward, HazardHub will be incorporated into our analytics business, and we do not expect to break out ARR for HazardHub in the future. Total revenue for the year is expected to be between $780 million and $790 million. We expect that subscription revenue will be approximately $250 million, representing 48% growth, and that support revenue will decline by about $2 million year-over-year. License revenue is expected to continue to decline due to the demand for new subscription sales and cloud migrations. We have not modeled in any positive impact of new term deals or renewals with longer duration than our standard. Services revenue is expected to be approximately $200 million. We expect total gross margins for the year to be approximately 51%, but this gross margin percentage will ultimately depend on our final revenue mix. Subscription margins should start to grow from approximately 23% to the low-30% range. Overall subscription and support margins should be flat to up 1 point or 2 as the subscription margin improvement is offset by the mix shift between subscription and support revenue. With respect to operating income, we expect an operating loss of between $38 million and $28 million for the fiscal year. This reflects continued investment in customer success, sales, and product development, which will help us widen the competitive moats as we execute against this large market opportunity. We recognize that it is an extremely consequential decision for an insurer to entrust a third party to deliver their core system as a service, and we expect to be the logical choice as insurers consider this path. These investments align with our expectations and were factored into our midterm and longer-term margin targets when we updated investors at our Analyst Day last year. Additionally, our operating income is impacted by the varying revenue recognition patterns reported on our income statement. While the revenue pattern is different if we sell a multiyear term license, a cloud migration arrangement, or a new cloud deal, our customers continue to pay us in the same way, which is primarily annually upfront. Over time, the vast majority of our ARR will come from cloud, and the variation in revenue patterns will become less pronounced, and operating income and cash flow will start to converge, but we’re still a few years away from this. Cash flow from operations in fiscal 2022 is expected to be between $30 million and $40 million. Year-over-year comparisons are challenging due to four factors. First, is the size and timing of the Company’s annual bonus and year-end sales commission payout, which usually occurs in Q1 for the previous fiscal year. In fiscal 2022, this results in a $30 million higher cash payout in fiscal 21. This is due to higher Company performance in fiscal 21 but also because the fiscal year 2020 bonus was partially paid out early in Q3 of 2020 due to an employee COVID relief initiative, which lowered the cash impact in fiscal 2021. Second, we are moving our U.S. employee base to an unlimited vacation policy, and as a result, have an $18 million one-time payout of vacation accruals in fiscal 22. Third, we had $12 million of early payments from customers in fiscal 21. And finally, fiscal 21 benefited from approximately $5 million due to changes in currency exchange rates. We expect to spend approximately $30 million in capital expenditures, including $10 million in build-out expenses as we finalize our new offices in Dublin, Ireland and Toronto, Canada. Turning to our outlook for Q1. We expect ARR to finish between $586 million and $590 million. We expect total revenue of between $162 million and $166 million. As a reminder, Q1 in fiscal 2021 benefited from $15 million in incremental license revenue from deal duration, including a significant contract consolidation, and these items will not recur in Q1 of fiscal 2022. We expect subscription revenue of approximately $55 million and services revenue of approximately $50 million. We expect an operating loss of between $27 million and $23 million in Q1. In summary, we are proud of what the team was able to accomplish in fiscal 2021. We remain on track to hit the financial targets discussed at Analyst Day last year, and we look forward to providing more detail at our Analyst Day this year, which will be on September 30th. We recently made the decision to transition this event to a 100% virtual event.
Operator, Operator
Thank you. Your first question comes from the line of Matt VanVliet with BTIG.
Matt VanVliet, Analyst
Yes. Thanks for taking my question, guys. And good job on the quarter. I guess, as you look to continue the cloud migration momentum, how much are you hearing from existing customers that are very fixated on reference customers going live, seeing your success and efficiency of those migrations and getting more of those existing customers sort of deeper in the pipeline on their own cloud migration?
Mike Rosenbaum, CEO
Thank you for the feedback. I want to emphasize that we are observing a steady improvement in engagement from our existing customers. As I mentioned in our last quarterly call, the amount of time our current customers spend with us to evaluate our cloud platform and its impact is crucial. The more time they invest in understanding its benefits, the better. When they engage with us more frequently, it signals a serious intent to evaluate that we hope will lead to a successful migration. Our Tier 1 customers continue to highlight the importance of implementations, often inquiring about them. We recognize that successfully operating those programs and launching them on time is vital. Overall, the most significant indicator we see is the increasing engagement with our customer base regarding the cloud.
Matt VanVliet, Analyst
Great. And then, as you look towards some of the international markets, great to see that you had a new cloud deal in both EMEA and APAC. Are those regions starting to be a little more receptive to the cloud? How should we think about the overall mix maybe over the next year or two of deals in the pipeline? Is it still pretty U.S.-centric, or are you seeing a more holistic demand across the globe? Thank you.
Mike Rosenbaum, CEO
I think that the annual recurring revenue base and customer base of Guidewire are primarily centered in the U.S., with a strong presence in Canada as well. This focus is reflected in our pipeline and business activity since most of our new annual recurring revenue will come from cloud migrations within these regions. However, we are noticing increasing confidence and interest in cloud solutions internationally, and we were pleased to secure those two deals. Additionally, we have a solid pipeline in international markets across EMEA and APAC this fiscal year that we’re excited about. While I don't expect a complete shift to cloud next year, it is definitely a growing trend, especially on an international scale.
Operator, Operator
Your next question comes from the line of Jackson Ader with JP Morgan.
Jackson Ader, Analyst
First one is on the ARR outlook. Jeff, if we adjust for the HazardHub, $4 million, $5 million or so, the guidance looks pretty similar to the preliminary guidance you provided on the third quarter call. And just given that the activity, particularly in the cloud, really strong in the fourth quarter, I guess, I’m just curious why the increase in activity didn’t lead to a larger increase in the ARR guidance.
Jeff Cooper, CFO
Yes, that’s a good question. First of all, the growth rate is similar but on a larger base. We actually performed better than we anticipated in Q4. So, when considering the larger base in absolute dollar terms, it exceeds what we communicated for the upcoming year. Some of the Q4 performance may create tougher comparisons in terms of growth. Therefore, we are pleased that we were able to maintain the same organic growth rate that we shared with investors last year, and we are enthusiastic about how this will unfold as we progress through the year.
Jackson Ader, Analyst
Yes. That’s fair. And then any kind of tiering information maybe you can provide on either the cloud wins in FY21 or new customers, renewal customers? Any tier striation you can provide would be great.
Jeff Cooper, CFO
We observed that our progress in cloud deal activity was quite widespread. During the call, we mentioned that we had a very large Tier 2 customer on the verge of becoming a Tier 1 that decided to migrate to the cloud. However, we have not seen any significant movement from Tier 1 customers this year. Therefore, there remains a lot of work for us to do in the coming years.
Operator, Operator
Your next question comes from the line of Ken Wong with Guggenheim Securities.
Ken Wong, Analyst
Mike, I noticed that when you mentioned the 17 cloud deals, much of the commentary suggested that there were individuals who intended to upgrade but then changed direction, leading to increased product attachment. Do you feel that there is currently much less need for selling and educating from Guidewire's side, and that it's more about customers being prepared while you align with their cloud adoption timelines? Or is there something specific you would point out that has contributed to a shift from the previous situation, which seemed to present a tougher sales challenge for Guidewire?
Mike Rosenbaum, CEO
I wouldn’t say that there's less selling involved. I believe our teams did an excellent job this year, particularly in the fourth quarter. Each customer making a decision conducts a thorough evaluation of the product, their plan, and the project requirements. This is the type of investment we need to make to effectively serve the industry. What is improving is our operational readiness and the confidence we have in predicting outcomes for our customers using our cloud service. This confidence stems from the experience gained through implementations, updates, and upgrades, as well as the organizational knowledge from both Guidewire and our partner ecosystem. Our strong partners who have experience with various projects help instill the confidence necessary to encourage customers to make timely decisions. I still anticipate that selling activity and sales expenses will remain significant as that is what we are prepared for. However, as we continue to release updates and gain experience, I expect our confidence to grow steadily, which is what we are currently observing.
Ken Wong, Analyst
Got it. Thank you for the insights. They’re very useful. And then Jeff, just one on margins. As we look out to next year, you’ve got an operating loss there, which I think makes sense, given the scale of the investment in the pipeline that you guys are closing here. Is it fair to assume that we’re at a trough from a profitability perspective as we kind of march towards that 14% to 16% range in the medium term and 26% to 29% in the later stages?
Jeff Cooper, CFO
Yes, Ken. I mean, I think there’s a lot going on in our income statement and some of the revenue, timing of revenue and complexity around how that gets recognized in the income statement can cause some of those challenges that we’re seeing. I mean, some of the things that we focus on is the ARR growth. And then, if you look at how that compares to revenue growth, you can see kind of some of the stuff that’s more income statement-driven versus real business factors that are driving some of that. With respect to operating income, we do expect next year to be the bottoming-out point with respect to operating margin. We’re going to continue to align people more on cash flow margin and just how the cash flow dynamics work in the business. There’s some unusual items that we walked through on the call for cash flow from operations in fiscal ‘22. We were obviously really excited about the cash flow achievement we did in fiscal ‘21. So, you’ll hear us continue to focus on that metric a bit more as we go through the transition.
Operator, Operator
Your next question comes from the line of Bhavan Suri with William Blair.
Unidentified Analyst, Analyst
Hey guys. It’s Dylan on for Bhavan. I guess I maybe wanted to double-click on one of those last questions around kind of the partner ecosystem. And you guys continue to see steady momentum there with that cloud-certified number. So, maybe wanted to dig into more like what are the requirements necessary for partners to kind of establish this? And then, what are you hearing as well from both the partners and the customers as kind of drivers of demand, right? So, I assume it’s a combination here for carriers looking for more capacity towards their digital initiatives but then also kind of partners positioning to capitalize on these broader industry trends. So, I’d love to get a sense of how you guys are thinking about that.
Mike Rosenbaum, CEO
Regarding partner certification demand, we aim to ensure that the implementations of InsuranceSuite deployed on Guidewire Cloud are designed for seamless updates. Guidewire is a highly configurable platform, and if implemented correctly, we believe we can update our customers every six months indefinitely. It's crucial for those carrying out the implementations to understand how we expect the system to be configured for various lines of business and integrations, and to be familiar with the latest capabilities of the platform for successful implementations. This represents a significant shift for Guidewire, with over 10,000 individuals globally involved in these implementations. Our certification program is meant to train and prepare them effectively. These partners have a vested interest in being recognized as implementation partners, often collaborating with us to persuade customers of the right choices. The more certified partners engaged in a program, the higher the chances of securing business as the implementation partner. I am particularly enthusiastic about the growing number of certified partners because it shows the consulting ecosystem is actively preparing for this transition rather than remaining passive. They are working with us to certify professionals, thus facilitating a shift in our customer base. I genuinely believe that demand for innovation in the P&C insurance industry will continue to rise. As we onboard more customers onto the Guidewire Cloud platform, we will drive significant innovation in the broader P&C insurance sector, with the partner ecosystem playing a vital role in that process.
Unidentified Analyst, Analyst
Yes, I appreciate the insight on that. I have one more question. As we consider the developments over the next year, a significant part of the installed base is approaching the end of its support life. First, can you provide an update on the pace of migration discussions you are having? Additionally, for Jeff, could you explain the dynamics related to the impact of these migrations on revenue recognition?
Mike Rosenbaum, CEO
Sure. I’ll discuss our outlook for the fiscal year and our approach moving forward. I've mentioned before that the decisions and projects we undertake are very significant for our customers and often need to be aligned with other business goals. Regarding end-of-life transitions and various version-related factors, our priority is to be a reliable partner for our customers. It's essential that they can trust us to deliver this service to them, regardless of the circumstances. We aim to enhance our cloud product as much as possible and make it as seamless as we can for customers to transition. Our goal is to minimize risks to nearly zero. However, we understand that each customer will have their own timeline based on other business objectives. We need to prepare for that. Looking at how this affects our business in the current fiscal year, the success we experienced in Q4 and last year gives us greater confidence in gradually increasing the pace of cloud migration and sales. We believe our guidance is sound and optimistic. Overall trends are positive. Nonetheless, these are still significant and complex decisions. We aim to encourage progress in the industry and among our customers as quickly as we can, but we don't have complete control over the process. We will strive to do everything within our capability, and I think things are progressing well. We're confident in the guidance we've provided and its connection to cloud demand.
Operator, Operator
Your next question comes from the line of Michael Turrin with Wells Fargo.
Michael Turrin, Analyst
You closed 15 InsuranceSuite deals here. Do you feel like you’re getting back to more of a normalized seasonal trend? And if so, can you just talk more about how that informs the visibility you have into the ARR and updated outlook for the upcoming fiscal year?
Mike Rosenbaum, CEO
Yes. So, we did 16 InsuranceSuite deals, InsuranceSuite Cloud deals, which is very, very positive. Certainly, one of the things we always talk about is one of the things I think maybe all people bang their head up against the wall is how do we get the business to be more linear. Obviously, we had a great, great Q4. We’d love to see the business be a little bit more linear. I don’t know whether or not you can describe what we’ll see for the next year as being more normal. But certainly, I think I would sort of pivot back to the confidence that we feel in the cloud product and our operational ability to deliver it as being something that can drive a little bit more consistent demand quarter-over-quarter. And we work real hard with the teams here at Guidewire and with our customers to try to linearize that demand. But the most important thing regardless of any other factor is our readiness and the maturity of the products.
Jeff Cooper, CFO
The other thing I would add is as we highlighted some new customer wins and even in some expansions and migration, some kind of new system modernizations that are taking place. So, it’s exciting to start to see that play out. As you all know, there was a period of time when the cloud platforms were still unknown to insurers and we saw a bit of a slowdown in overall modernization activities. So, we’re starting to see that return, which is a very positive sign. I would say from how we’ve modeled it, we haven’t necessarily modeled it back to historical levels pre-cloud when people were looking at on-prem modernization projects, but we are starting to see that soften a bit, which is good.
Michael Turrin, Analyst
That’s helpful. And then, I guess, just going back to the comment on the subscription gross margin line. I appreciate the mix dynamics, but I think you said those because you think the subscription gross margins can trend in the low-30s over the course of the year. I just wanted to revisit that. Is that mostly just better scale as we get through the year, or is there anything else just to be mindful of that can drive just structural improvement on the gross margins there?
Jeff Cooper, CFO
Yes. So, on the subscription side of things, we’ve made heavy investments in cloud operations over the last two years. You will continue to see the full year effect of that as we move into next year. But as subscription revenue scales up and we see an acceleration in the subscription revenue line, that will help us drive expansion next year and then clearly into the future as we move towards our longer-term targets that we set out at Analyst Day.
Operator, Operator
Your next question comes from the line of Joe Vruwink with Robert W. Baird.
Joe Vruwink, Analyst
My question on the existing customer migrations. Are the deal sizes getting larger, Mike? The examples you shared, it sounded like these were all full core deals. I think there’s been a tendency in the past for maybe starting with an individual module or greenfield, so smaller in scope. Has there been a noticeable change in this regard with what some of the existing customers are deciding to do?
Mike Rosenbaum, CEO
It's encouraging to see migrations that also involve expansions, which are very positive for us. Customers are considering their overall cloud strategy, who their cloud partner is, and the benefits of Guidewire. They appreciate the full suite implementation and a consistent approach across claims, policy, and billing, which is advantageous for us. We are pleased to secure these deals. While I can't definitively say this indicates a trend, it's evident that when we start these projects, we look at the entire enterprise architecture and existing landscape, collaborating with customers to find the best and most efficient modernization path. Although it might be premature to assert a trend, the quarter showed a very positive signal.
Joe Vruwink, Analyst
Okay. That's helpful information. Regarding the cash flow outlook for the year, I would like to confirm that by excluding the $12 million and $5 million from this year's figures, and then adding them to next year's numbers along with the extra $18 million in one-time vacation accruals, it seems operating cash might be normalized to around $70 million this year. If that sounds correct, is that how you expect things to develop?
Jeff Cooper, CFO
Yes. I think that’s fair. That’s the right way to think about it. There’s been lots of puts and takes in the number this year, but that’s the fair way to think about it.
Operator, Operator
Your next question comes from the line of Brad Sills with Bank of America.
Brad Sills, Analyst
I wanted to ask a similar question to Joe’s question, which is when you get a customer migrating to the cloud, are you finding that with some of the cohort of customers that have been on the cloud for a longer period of time that your ability to upsell them into the broader suite or even just data and analytics is more seamless? In other words, those customers, because they’re on your servers, you have a better ability to upsell these customers.
Mike Rosenbaum, CEO
I want to clarify that embedded in your question is the idea that customers are already using our cloud system, and we are upselling them rather than them working with us to upgrade to the cloud. At that point, we collaborate with them to evaluate which core applications they are currently using and what they should be utilizing in the future. The positive trend we observed this quarter is that we have an existing customer using one of our core solutions, such as ClaimCenter, and it makes sense for them to migrate to the cloud. Simultaneously, they are considering what to do with their policy administration and billing systems, which need modernization. Therefore, we look at the complete suite from Guidewire, as it provides a consistent cloud platform, a reliable partner, and a unified experience throughout the organization, where the systems are designed to work together. This transition leads them from using just one aspect of the Guidewire footprint to implementing the full suite in the cloud, which is a highly favorable outcome. Over time, as more customers move to the cloud and we gain greater insight into how they use the system, what products they adopt, and the business challenges they face, there will be increased opportunities for us to upsell them data and analytics solutions. This is something we anticipate will unfold over the years as we see more of our customers transitioning to the cloud. Currently, much of this upselling is occurring as part of their evaluation of a cloud migration, where we assist the customer in visualizing what their enterprise architecture and core systems would look like in the cloud with Guidewire, and we partner with them to identify a mix of products across data, analytics, and our core systems that would be beneficial for them.
Brad Sills, Analyst
Great. Thanks so much, Mike. And then, one for you, Jeff, if I may, on just the subscription margin guide for flat or up a percentage. If you could remind us kind of where we are, as you look towards that 66% to 68% midterm target that you outlined there, what are some of the drivers that could get us there in the coming years? Thanks so much.
Jeff Cooper, CFO
Yes, sure. So, I think what we said was subscription margins are going to be up in the low-30% range off of what was 23% last year. And then, subscription and support would likely be kind of roughly flat to up a percentage. And that dynamic is a result of the mix shift as support, which is usually around 82% margin declines as the overall mix that has an impact on the overall margin. And then, from where we are, where we are is we’re seeing a lot of uptick, a lot of demand and transacting on demand for our cloud products. The accounting can be complicated, especially in a migration arrangement, but we are seeing accelerating subscription revenue growth. And we feel really good about the investments we’ve made over the last two years on cloud operations so that we can start to leverage those investments. And that should drive margin expansion as we look forward. Very much on track with what we were expecting as we set out those targets last year, and we feel good about the targets we talked about at Analyst Day.
Operator, Operator
Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mr. Mike Rosenbaum for closing remarks.
Mike Rosenbaum, CEO
Thanks very much. So thanks, everybody, for participating in the call today. It was a really big quarter during an exciting time for Guidewire and the P&C industry. We’re incredibly excited about the continued demand we see for our platform and for the advancement of our cloud strategy. We remain as optimistic as ever about our long-term vision and the opportunity for all of our stakeholders. So, we look forward to talking again later this month at Analyst Day, which as Jeff said, that’ll be September 30th as a virtual event. So, thanks very much and have a good evening.
Operator, Operator
This concludes today’s conference. You may disconnect your lines at this time. Thank you all for your participation.