Earnings Call
Guidewire Software, Inc. (GWRE)
Earnings Call Transcript - GWRE Q2 2021
Operator, Operator
Greetings and welcome to the Guidewire Second Quarter 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, Alex Hughes, Vice President of Investor Relations. Please go ahead.
Alex Hughes, Vice President of Investor Relations
Thank you, operator. Good afternoon and welcome to Guidewire Software’s earnings conference call for the second quarter of fiscal year 2021, which ended on January 31st. My name is Alex Hughes, I am Vice President of Investor Relations, and with me on this call 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 the press release issued today, as well as in our related Form 8-K furnished with 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, and 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 and our Quarterly Report filed on Form 10-Q, 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 also will refer to certain non-GAAP financial measures to provide additional information to investors. A reconciliation of non-GAAP to GAAP measures is provided in our press release. Reconciliations and additional data are also posted in a supplement on our IR website. With that, I'll now turn the call over to Mike.
Mike Rosenbaum, CEO
Thanks Alex and thanks, everyone, for joining us today. I'm pleased to report another strong quarter as our team continues to steadily execute on each of the key pillars powering our business. This includes driving a fundamental transformation of the company to a cloud service, continuing to lead the market for P&C insurance core system modernization, and developing an analytics capability that enhances the value we are able to deliver to our core customers, while providing us growth opportunities. In the quarter, we saw strong deal momentum for a broad selection of Guidewire solutions across customer tiers and geographies. We executed on a few key deployments on Guidewire Cloud. We had strong performance in our analytics business, and we continued to grow our partner ecosystem. We all feel great about our progress to date, and our execution in the quarter makes me increasingly confident in not just our full-year financial outlook, which Jeff will talk more about in a minute, but also in the long-term potential of our company to serve the P&C insurance industry. I'd like to take a moment to comment on the P&C insurance industry and the role it plays in our economy and our lives. I think that the severe weather events in the United States, and especially Texas, are a great reminder of how important and beneficial the transfer and sharing of risk is to the function of our society. When I saw all the videos and news stories showing burst pipes and flooded houses, I asked our team how dire the situation was for our customers insuring this risk. The answer was quick and, for me, reassuring. This event and its costs were, of course, large, but this event is exactly what the industry is here for, helping people, families, and businesses recover and get on with their lives. That answer was, as I said, reassuring, but also, for me, it was motivating. Having the opportunity to support an industry that helps families and businesses manage risk, giving us all some resilience in the face of crisis is a big part of why the team here at Guidewire loves what we do. Turning to the quarter. I'll walk through our sales highlights and then touch on some operational milestones. Cloud sales activity in the quarter was strong, with five InsuranceSuite Cloud wins and one InsuranceNow win. Economical, mutual insurance company, a Canadian P&C insurer and two-time winner of the Guidewire Innovation Award chose to migrate PolicyCenter and BillingCenter to the Guidewire Cloud to simplify their technical ecosystem and accelerate speed-to-market. Kentucky Farm Bureau, a Tier 2 insurer and the second-largest P&C insurer in Kentucky, agreed to upgrade their on-premise whole InsuranceSuite instance to the cloud and added predictive analytics. Mountain West Farm Bureau and 360 Insurance, a property and casualty insurance company operating in Colorado, Montana, and Wyoming, decided to adopt the full suite in the cloud, including reinsurance management, predictive analytics, and science, representing a significant customer expansion. Royal Sun Alliance, or RSA, an existing claim center and digital customer in the U.K., decided to upgrade to Guidewire Cloud, representing our first InsuranceSuite Cloud win in the U.K. A long-standing Guidewire customer and global insurer selected PolicyCenter in the cloud for a new greenfield opportunity, representing their first cloud-based deployment and an important Tier 1 insurer. Finally, Bowhead Specialty Underwriters, a new underwriting platform based in New York, selected InsuranceNow due to its cloud maturity and confidence in our ability to deliver. We also closed two very exciting self-managed deals in the quarter, which highlights the unique benefit of our approach to our cloud transformation. While we still expect the majority of our bookings to come from cloud, we are seeing some insurers who, for a variety of reasons, are not yet ready to transition to a cloud-based core system and still have legacy systems in need of modernization. These companies recognize that eventually, these applications will move to the cloud, and our approach offers them an opportunity to modernize now and smoothly migrate to our cloud when they are ready. We will work with these insurers to standardize their self-managed implementations, with an eventual upgrade to the cloud in mind. This dynamic is enabled by our design approach, which optimizes for the installed base of Guidewire customers, but its benefit to net new customers is proving to be important enough to call out. Covéa, France's largest P&C insurer is a good example of this dynamic. Covéa selected ClaimCenter, combined with digital and Guidewire for Salesforce. This important win in Europe highlights both our global strength with Tier 1 carriers and the value of our platform to large carriers seeking to modernize on-prem today with longer-term aspirations to go to our cloud. We're thrilled to establish a presence at Covéa and look forward to expanding our footprint over time as we demonstrate success in this critical account. In addition, James River Group, a Tier 2 insurer based in Bermuda, selected all of InsuranceSuite, including digital and data, after a comprehensive RSP process. Market leadership and platform investments were critical to this win, which will start on-prem today, but we hope to have the opportunity to upgrade them to the cloud in the future. Sales activity in data and analytics was also strong in the quarter, and we were very pleased to see the momentum of our offerings, both as part of the core and as stand-alone solutions. Analytics is proving to be a key driver in a number of our core deals as insurers look to strategically leverage analytics across multiple touch points within the insurance life cycle. We tend to think of core system modernizations as mechanisms to upgrade and derisk decades-old systems and to provide better support for new digital experiences, but analytics and specifically new approaches to embedding analytics-driven insights within core workflows can also improve decisions and efficiency. We also saw strong sales performance of analytics on a stand-alone basis with five deals, including one for our predictive analytics platform and four for science. This included a range of insurers from a large Tier 1 to an insurance broker focused on the London market. Switching gears to customer success. Our teams continue to drive solid customer deployment activity, with 12 customers going live on implementations for 35 Guidewire products globally. I was particularly pleased to see the important milestones with cloud deployments. In less than nine months, USAA was able to publicly launch their small business-focused product on the Guidewire Cloud platform. This milestone demonstrates our ability to work successfully with the largest and most complex insurance companies, as they execute on their business imperatives and cloud journeys. I look forward to continuing to execute and build on this very important relationship. Amica, one of the first customers to align with us on our cloud strategy, went live with BillingCenter on Guidewire Cloud. This is the first step in our partnership with Amica to migrate all of InsuranceSuite to our cloud. Amica has been an incredible partner in this journey with us, and this milestone is a proof point of the progress we've made towards establishing our cloud service. EMC, while not yet in production with their cloud implementation, successfully upgraded their preproduction instance from Aspen from the Aspen release band. This is an exciting early demonstration of the faster, more frequent, and more efficient customer upgrade cadence that will enable us to deliver greater value to our customers. Prior to the Guidewire Cloud platform, customers would start and complete their implementation journey on a single major release and only consider an upgrade years after the initial go-live event. In this instance, we had a customer take an upgrade during the preproduction implementation process, which will allow them to go live on a more current release. This is an exciting event, as it marks a new pattern for us, and it is more aligned to customer success and value. Finally, we saw Warrior Invictus Holding Company, a new InsuranceNow customer that we won last year, complete a successful initial go-live. Shifting to the ecosystem, we continue to see tremendous enthusiasm and excitement across Guidewire's global partner community and marketplace. With over 12,000 Guidewire-focused consultants, our SI partners remain important to facilitating implementations and accelerating customer success with value-added solutions. Moreover, the enthusiasm for Guidewire Cloud is growing. We finished the quarter with nearly 1,200 consultants from 28 partner companies who now have earned the advanced certifications required for Guidewire InsuranceSuite Cloud implementations. This is up from approximately 730 at the end of Q1. At the same time, the momentum with our marketplace partners also continues. There are now over 690 applications from Guidewire and over 100 partners, doubling the number of partners over the last two years. As we continue to grow this marketplace, we unlock greater value for our customers by enabling insurtechs to innovate on top of our platform through our open API-first approach. I was pleased to see second quarter momentum in Europe, where we added a number of new companies to PartnerConnect, including Sprout.ai and Tractable, who both use artificial intelligence technology to streamline the claims process. Sprout.ai offers AI-driven real-time claims recommendations to settle, investigate or repudiate a claim, and Tractable provides an AI estimating platform that uses photo capture and other metadata to generate first repair estimates. This quarter, we also announced the first partners and marketplace apps for InsuranceNow customers, and one of the first to join is Cloverleaf. Cloverleaf accelerates the insurance process by extracting detailed policy and claim data from InsuranceNow and loading it into a pre-built reporting and analytics business intelligence solution. Finally, it's gratifying to see all of our hard work continue to be recognized by industry analysts. In the second quarter, Celent gave Guidewire 3 of 4 excellence awards in its policy administration systems report for EMEA; PolicyCenter 1 for its breadth of functionality, customer base, and depth of service categories. Guidewire was also named best-in-class by IT group in its 2020 US P&C core systems report for vendor stability, client strength, client service, and product features. As we enter the second half of the year, both the progress we've made to date and the growing customer enthusiasm give us increasing confidence in our strategic direction and our ability to execute. In May, we will build on this momentum by releasing Cortina, the third release in our new Guidewire Cloud platform six-month release cycle and we plan to run a connections event to coincide with that release. This virtual event will be a great opportunity for you to hear more about our progress and to hear directly from our customers. Now I'll turn the call over to Jeff for more details on our financial results and our outlook for Q3 and the rest of the year.
Jeff Cooper, CFO
Thanks, Mike. I'll start with a summary of our second quarter results before turning to our outlook. Second quarter ARR ended at $520 million, up 10% year-over-year and in line with our expectations. As Mike noted, it was a strong quarter for new sales with a diverse mix of wins. One highlight worth noting was a number of existing customers that committed to upgrade to the Guidewire Cloud. Migrating our industry-leading installed base of customers to our cloud is a key pillar of our long-term strategy. And as we have noted in the past, migrations often have a relatively small initial year ARR impact but add meaningful ARR in future periods as these contracts fully ramp over time. With that backdrop and given the amount of migration activity in the quarter, we were pleased to see ARR finish at the upper end of the outlook provided on our Q1 call. Total revenue was $180.1 million, ahead of our expectations due to higher-than-expected license revenue. We added two significant term license customers in the quarter, which contributed to strong license revenue. We also recognized $4.2 million in incremental revenue from term contracts with durations longer than our standard two-year initial terms or annual renewals. Additionally, and somewhat counter-intuitively, cloud migration deals also add license revenue. This is because when we sell a migration to an existing customer, even though the intention is to migrate to the cloud, the customer will generally need to use their on-premise software during a migration period. As a result, we allocate a portion of the total contract value to term license revenue, which is recognized upfront, with the remainder being allocated to subscription and support, which is recognized ratably. A byproduct of this accounting treatment is that migration deals will contribute less subscription revenue when compared with a new subscription deal of a similar size. Outside of license revenue, the other components of total revenue were very much in line with our expectations. Turning to profitability. For the second quarter, which we will discuss on a non-GAAP basis, gross profit was $100.4 million. Overall, gross margin was 56% compared to 59% a year ago. Subscription and support gross margin was 43% compared to 56% a year ago, as we continue to see the expected impact of building out our cloud operations team. Services gross margin was negative 2% compared to positive 1% a year ago. Operating income was $7.5 million, exceeding our guidance range due to higher-than-expected total revenue and savings related to slower-than-expected hiring and lower travel and entertainment expenses due to the pandemic. We ended the quarter with $1.4 billion in cash, cash equivalents, and investments. During the quarter, we invested $39 million in the repurchase of 310,000 shares. Turning to our outlook. I will discuss the full-year outlook, and then I'll discuss our expectations for the third quarter. For the full year, we continue to expect ARR to be between $560 million and $571 million. We are increasing the midpoint of our outlook for total revenue, which we now expect to be between $725 million and $733 million. This reflects the increased strength we now expect in term license revenue, which is driven by self-managed wins like we saw at Covéa and James River and from cloud migration activity. As I previously mentioned, cloud migration sales initially benefit term license revenue at the expense of subscription revenue, since we must allocate components of the total contract value to various deliverables. Given higher-than-expected term license and migration activity in the first half of the year, we now expect subscription revenue to be closer to $162 million. This adjustment is the result of the timing of new cloud deals and not any shift in our cloud bookings expectations for the year. Our services forecast has strengthened a bit, but we have also removed all billable travel and expense from our forecast due to ongoing COVID-related travel restrictions. Billable T&E flows through services revenue at $0 margin. As of last quarter, we still had about $4 million of billable T&E in our expectations for the fourth quarter. We now expect services revenue to be closer to $183 million. We still expect total gross margin for the year to be approximately 55%, with subscription and support margin at around 40%. Services gross margin for the fiscal year are expected to finish in the low single digits. We are raising our operating income expectations to between $2 million and $10 million due to an increase in the midpoint of our revenue outlook and due to the timing of hiring, combined with less travel and entertainment expenses this year. Cash flow from operations expectations for the year are unchanged. Turning to our outlook for the third quarter. We expect ARR to be between $533 million and $536 million. Total revenue is expected to be between $155 million and $159 million. Subscription revenue is expected to be approximately $40 million. Support revenue is expected to be closer to $20 million, and services revenue is expected to be approximately $48 million. Non-GAAP operating loss is expected to be between $29 million and $25 million. In summary, it was a strong Q2, with continued cloud activity, broad geographic success, and key new customer wins. We look forward to building on this momentum as we work to close out the back half of the year. Operator, you can now open the call for questions.
Operator, Operator
At this time, we'll be conducting a question-and-answer session. And our first question is from Chris Merwin with Goldman Sachs. Please proceed.
Chris Merwin, Analyst
Okay. Thanks so much for taking my question. I just wanted to ask about the Guidewire Cloud platform. Obviously, you have another release coming up here. And can you talk a bit about the progress you're making in migrating customers to that platform such that they continue to get the benefit of the six-month release cadence? Anything you can share from a go-to-market perspective to try to focus customers in on that? And as you migrate more of those customers to the platform, how do we think about that gross margin ramp in the cloud over time? Thank you.
Mike Rosenbaum, CEO
Thank you for the question, Chris. My brief and overall response is that the rollout of our platform is progressing very well. We are effectively delivering updates to the operations involved in developing new innovations and integrating them into the platform. We are collaborating with all our existing cloud customers on plans to migrate to this platform and its release cycle. Completing all of these migrations will likely take a couple of years. It's not a question of if, but when it happens, and aligning with each customer depends on their priorities and initiatives. As you may know, we work closely with these customers, and we will continue to see advancements in those migrations, which is very encouraging. As for new customers, when you invest in Guidewire Cloud, you are essentially buying into the Guidewire Cloud platform that follows a six-month release cycle, which will be the core focus moving forward. While it's not impossible for someone to go live on a different system, it would be a rare case, and we would act promptly to transition them to the new platform. This approach is well-received by our customers; they appreciate our vision and see that we're gaining momentum and expertise daily, which is all very positive. To put it simply, this initiative allows us to incorporate a certain level of multi-tenancy into our architecture and helps us deliver services with improved margins. While it will take time for this to reflect in our financials, my view is that the first step was delivering the service, demonstrating our capability, and getting customers onboard. That phase is now complete, and we are entering the second phase of scaling it and continuing to execute. Over time, we expect to achieve the margin improvements we’ve previously discussed. Jeff, feel free to add anything if you'd like.
Jeff Cooper, CFO
No, I think you covered it.
Chris Merwin, Analyst
Perfect. Thank you. And maybe just a quick follow-up for Jeff. I think you said that migrations aren't having as much of an impact on ARR given, as you've always talked about, the ramping nature of those contracts. So is it fair to say that you're starting to see a divergence again in fully ramped ARR relative to rare ARR? I know fully ramped is an annual metric, but just directionally, are you starting to see that positive divergence again?
Jeff Cooper, CFO
Yeah. It's a good comment, Chris. And we are seeing a bit of a divergence there, and we'll be in a position to talk about that in more detail at year-end, but that would be my expectation as we see migration-heavy activity that there would be a bit of a divergence between those two metrics.
Chris Merwin, Analyst
Great. Thanks very much.
Mike Rosenbaum, CEO
Thanks, Chris.
Operator, Operator
And our next question is from Rishi Jaluria with D.A. Davidson.
Rishi Jaluria, Analyst
Hi, guys, thanks so much for taking my question and good to see accelerating cloud momentum. Two questions. I wanted to first start out with, Mike, a comment that you had made on strength in Europe. I know you had mentioned in the past that Europe has been a little bit more challenged, partly macro and partly just on willingness to move to the cloud. Can you give us a little bit more color on why it seems the European business is moving? And are they maybe more willing to embrace a move to the cloud than what we saw a couple of quarters ago? And then I got a follow-up.
Mike Rosenbaum, CEO
Thank you for the question. It's really encouraging to see our recent successes in Europe. We are thrilled to have earned Covéa's business, which is a leading Tier 1 insurance company in France. This is a very positive development. I also mentioned earlier that we have the capability to provide a modernized core platform that will enable them to modernize now with a future focus on the cloud. We'll have to see if this momentum indicates a broader trend in Europe, but these developments are certainly promising and help us gain traction in the region with our services and cloud offerings. It's important to note that the European market is quite fragmented, operating more as individual countries rather than a cohesive market. It requires significant time and effort to adapt to the local needs and expectations of each insurance company. We've had great success in the U.K. and Germany, and it’s wonderful to see positive results in France. I hope this will build on our momentum. Overall, this is a major win for us with a Tier 1 carrier that we are all very excited about.
Rishi Jaluria, Analyst
All right. Great, Mike. That's really helpful. I appreciate the color. And then, Jeff, I wanted to go back to the gross margin question and maybe get a little bit more granular on the subscription gross margins. Look, and based on the comments and your guidance, right that tells us that subscription gross margins are going to decline from where they are today to the back half of the year, probably in the mid- to upper teens, but at least sub-20%. Maybe – and I get the complications of the fact that there's cost allocated there and some gets recognized as term license on all those pieces, but that's been ongoing for a while, right, not new. So maybe can you talk a little bit about why subscription gross margins decline from where they are today and maybe – I know all the moves that you're making in terms of multitenancy and with Cortina coming out in cloud services, but at what point can we start to see subscription gross margins improve again and effectively get your total support and subscription gross margins towards that upper 60s that you talked about at the Analyst Day? Thanks.
Jeff Cooper, CFO
Sure. Yes. Thanks, Rishi. Look, I think we obviously don't break out subscription margins, but given the history of the math that you have around our maintenance revenue and our maintenance margins, you can understand that our subscription margins today are kind of in that low 20% range. This has been an ongoing reflection of the substantial investment we're making in our cloud operations team to support both our current and future cloud customers. The shape of the overall subscription margin is very consistent with our internal expectations and how we thought about this. We're continuing to add folks. Those customers will come on board this year and start to flow into subscription revenue in future periods, given the ratable revenue recognition. So it's not anything unexpected when we compare it to how we have modeled the business. And I think some of the commentary we provided at Analyst Day, which is still very consistent, is as we look next year is when we would expect to see subscription margins start to move back up in the right direction and start to demonstrate some expansion. It's hard to give you a specific quarter. But as we think about the annual basis, that's when we start to see margin expansion as we move into fiscal 2022.
Rishi Jaluria, Analyst
Okay. Got it. Thank you so much.
Operator, Operator
And our next question is from Sterling Auty with JPMorgan.
Sterling Auty, Analyst
Thanks. Hi, guys. Just one question from my side. I'm kind of curious in your discussions in the quarter, how many customers are you seeing that are on-premise customers that are deciding in this environment to still upgrade to your on-premise solutions?
Mike Rosenbaum, CEO
Okay, Sterling. I understand your question. We have on-prem customers using various older versions of Guidewire. Some of these customers might choose to upgrade to the latest on-prem or self-managed version, which is version 10, without opting for the cloud. As we've discussed before, there are several reasons for this decision, often related to their readiness. The number of customers doing this is significant. However, every conversation I've had suggests that these customers will eventually decide to move to the cloud. They may not be prepared at this moment, but they will be in the future. Guidewire's focus on creating a cloud solution that supports a smooth transition is recognized by them. Sometimes, I wonder if we're being too accommodating to customers. Yet, considering Guidewire's history and customer-centric approach, these systems are complex and crucial for insurance carriers. I want to ensure we're delivering a suitable solution for them. A good number are upgrading to version 10 with the intention of migrating in the future. We are diligently working to encourage those customers to conclude that moving to the cloud makes sense now. It's not an insignificant number. Does that help?
Sterling Auty, Analyst
It really does. Thank you, guys.
Operator, Operator
And our next question is from Ken Wong with Guggenheim Securities.
Ken Wong, Analyst
Great. Thanks for taking my question, guys. I wanted to just expand a little bit on Sterling's question there. In terms of those customers that are upgrading to IS 10, I think in the past, you talked about new customers coming in where you guys embed committed cloud pricing into the contracts. Are you seeing that kind of behavior with these customers that upgrade to IS 10 where perhaps you guys have talked through some sort of committed cloud pricing to the extent that they decide to migrate down the line?
Jeff Cooper, CFO
Yes. Sure, Ken. All of our customers or many of our customers are engaging with our sales force in some capacity and exploring what it would look like to embark on a cloud migration. In general, we have not seen customers as they embark on a migration kind of embed cloud pricing into that arrangement. It's not unusual for us to kind of embark on a new kind of sales contracting process as part of a migration process. So we haven't seen any of that behavior, but we have absolutely seen our sales force be out in front of most of these folks and helping them think through the pros and cons and the puts and takes in terms of migrating to version 10 versus going to our cloud today and being on our latest release that will be future-proof going forward. So those conversations are active and ongoing.
Ken Wong, Analyst
Got it. Got it. Thanks for the color. And then, Mike, you mentioned 5 stand-alone wins for data analytics. I guess I had always associated your kind of non-core systems products with just attach-type modules. Should we think of data and analytics as a potential new front door to the Guidewire franchise?
Mike Rosenbaum, CEO
Yes, I believe it's certainly a new entry point to Guidewire and possibly to the InsuranceSuite and InsuranceNow offerings. Predictive Analytics is an exceptional tool and platform that offers valuable capabilities for insurance companies, allowing them to leverage their data more effectively and make smarter decisions. We are also observing a growing interest in cyber risk modeling and the expansion of our product to include small business risk modeling for various commercial insurance scenarios. These developments present opportunities to build new customer relationships and potentially increase sales of the Guidewire product suite in the future. From a business standpoint, I feel that Guidewire's core offerings are currently prioritized, which may yield more benefits moving forward. However, the use cases centered around analytics are certainly feasible. More importantly, as I mentioned in my prepared remarks, analytics serves as a significant value generator in demonstrating how much a carrier can gain from a modern core system. A considerable part of that value can stem from the analytics and enhancements in the operational metrics used to manage their businesses, which is very exciting. While it is clear that a new digital interface is necessary for better customer interactions, maximizing data usage and making informed decisions will also aid in promoting the core offerings. For all these reasons, I believe this growth on a stand-alone basis will ultimately benefit our company. Thank you for your question.
Ken Wong, Analyst
Yes. Thank you. Very helpful.
Operator, Operator
And our next question is from Brad Sills with Bank of America.
Brad Sills, Analyst
Great. Thanks, guys, for taking my question. I wanted to ask about the CloudDirect program and the impact that might be having on kind of reducing friction in the installed base to go to the cloud release. Can you comment on that? It seems like that could be significant? And are you actually seeing elevated interest as a result of that program?
Mike Rosenbaum, CEO
Thank you for the question. I think customers are recognizing CloudDirect as a valuable tool for evaluating their options. It has provided us the chance to engage in more direct conversations about transitioning to the cloud. This approach helps to lower the overall upgrade costs throughout the customer lifecycle with Guidewire, creating a compelling opportunity for discussions about whether it's the right time for them to make that shift. This change in perspective makes it more logical for customers to consider moving to the cloud. We're optimistic about this development; it has been well received and appreciated by our customers. I believe it has already led to a different kind of dialogue with those considering their upgrade options.
Brad Sills, Analyst
That's great. Thanks so much, Mike, and then one more, if I may, please. Just on the data success that you're seeing here, that's interesting. It seems that customers are relying more and more on Guidewire as a strategic solution vendor. Could you comment on some of the use cases you're seeing? And are there any commonalities there? Any themes, whether it's cyber risk or new product development or just operational analytics? Any color there would be very helpful. Thanks again.
Mike Rosenbaum, CEO
Science is fundamental, stemming from the acquisition the company made a few years back. This continues to yield significant customer success. In my view, cyber risk and cyber insurance are critical issues that every company should consider. They present an insurance opportunity that numerous carriers and insurance firms are contemplating. Our Science Solution enables them to underwrite that risk more effectively, allowing for smarter decisions on which risks to select at appropriate price points. It’s a compelling offering, and as the insurance market expands, I believe our science will grow as well. Additionally, we've broadened this approach to encompass small business risks. We apply the same concept of gathering data from various sources to create a data asset that clients can use to assess small business risk in a distinct manner. This has been a focus in our discussions over recent years and it's exciting to see the rising interest both independently and among our core InsuranceSuite clients. On the predictive front, I believe there are countless applications of this approach within insurance processes. A simple illustration is estimating the total exposure to a carrier when a claim is filed. While there are various methods, predictive analytics provides a smooth, pre-integrated way to handle this. Our customers using ClaimCenter for their claims management will find this a logical augmentation. Over the past couple of years, we’ve focused on establishing a dedicated business unit for this area, investing in specific products and sales efforts. It's gratifying to observe that this investment is beginning to translate into increased sales activity.
Brad Sills, Analyst
Thanks so much, Mike.
Mike Rosenbaum, CEO
Thank you.
Operator, Operator
And our next question is from Tom Roderick with Stifel.
Tom Roderick, Analyst
Hey everybody. Thanks for taking my questions. I appreciate it. So, Mike, it's been a full year going into sales reps being on lockdown and just changing the way you've gone to market and appreciated last year as you started going through this. You had a pretty rigorous pipeline review and sort of trying to manage through communications with your customers. So, you did a really nice job sort of finishing that year strong. As you sit here with two quarters under your belt and you've maintained the ARR guidance and kind of steering us a little higher than the midpoint, that's great. I'd love to hear what sort of metrics you're watching as you sort of track some of these Tier 1 and Tier 2 deals through the pipeline, what customers are saying as they go through this experience as well this year with the benefit of some additional data behind them and just how those conversations are going that give you the confidence in closing the year strong the way you did last year?
Mike Rosenbaum, CEO
Thank you for the question. I'm glad you brought it up because I've adopted a mindset that COVID cannot be an excuse for us. However, it's important to acknowledge that COVID complicates complex enterprise sales. Everyone at Guidewire is eager to meet customers, discuss projects, and tackle the challenges involved in converting opportunities into approved projects. This process is inherently difficult due to the lengthy nature of enterprise sales cycles. Our team, together with our customers, has managed to adapt to Zoom-based selling and execution, which has worked decently. Yet, we all recognize that things will improve once travel restrictions lift. Looking at the second half of the year, I'm considering the numbers, our coverage, the deals in progress, and our potential. We have built momentum with our product and sales along with customer success. When I combine all these factors, I feel confident in reinforcing our projections for the year. Assuming that everyone performs well and COVID restrictions ease, that should only benefit us. However, we aren’t relying on that as the main factor. To summarize my positive outlook for the company in the second half, it stems from all these elements. We have developed a solid plan, especially concerning this new product and our strategy for moving customers onto it. For example, USAA's ability to launch a product in nine months on the Guidewire Cloud platform is an incredible achievement, and I believe we can leverage that along with our current pipeline to have a successful second half. Overall, I feel optimistic about our execution thus far and what it means for our future.
Tom Roderick, Analyst
Yeah. That's great detail on the pipeline, Mike, and I appreciate that. And I'm glad you brought up the USAA example, because not a ton of data points as you've gone through the skew release or the skew reserve release cycles. But as you're starting to go through various iterations of this, would love to hear how your customers; A, the ones that are getting live; and B, the ones that have been trying to get live on other products, how is this increasing the level of conversations you might have? In other words, is it adding touch points with the customer that might create further add-on sales cycles? Is it driving further stickiness? Again, I know it's early, but just some early reflections as you've gone through Banff and into Cortina here and through the early releases of the six-month cadence?
Mike Rosenbaum, CEO
I appreciate your question because it's quite insightful, and I'll provide a detailed answer. Our connection with our cloud customers is now much stronger and more aligned, which I believe will benefit us in ways we can't yet foresee. This year, we've established a dedicated customer success team that closely monitors almost every step of the complex projects involved in these implementations. This new team has positively transformed our discussions with customers. While it’s too early to measure the direct impact on the company's outcomes, I firmly believe it is advantageous. We now have a significantly better relationship with our customers and the key individuals managing these projects daily. In our previous on-premise customer base, we had a solid track record for customer success, and while that remains, the ongoing, frequent interactions about the progress of each project give me great confidence in our ability to deliver more value going forward with this approach. There may be listeners from other cloud companies who know this is typical for cloud services due to the visibility of usage, but we are beginning to see similar positive developments at Guidewire, making me very enthusiastic about our long-term potential.
Tom Roderick, Analyst
Makes a ton of sense. Great Detail. Thank you.
Mike Rosenbaum, CEO
Thank you.
Operator, Operator
And our next question is from Michael Turrin with Wells Fargo Securities.
Michael Turrin, Analyst
Hey, there. Thanks. Good afternoon. On the ARR number, you came in within the range you're targeting. Growth there has been fairly consistent, trending in the low double-digits. I understand and appreciate your forecasting similar levels there for the remainder of the year. But if you think about maybe one to two potential drivers of upside that you'd highlight, is it just more cloud maturity? Is there anything in the macro environment that you'd call out if we get to a quicker recovery that could drive maybe more of a seasonal spike in the back half of the year? But what are some of the maybe the bigger indicators you're focused on that could drive upside versus what's currently forecast?
Mike Rosenbaum, CEO
The most important aspect is the continued execution of our cloud transformation and demonstrating that we can successfully onboard live customers with effective implementations. This builds the confidence essential for establishing the trust needed to attract these customers. Looking at the pipeline for the second half, there is potential for ARR growth to accelerate when considering the upgrade opportunities within our customer base. However, these decisions are significant and involve complex projects, making it difficult to predict results within specific quarters or half-years. Overall, our plan for the company regarding product development and customer engagement is progressing well, and the analytics reflecting this are improving. While it's too early to predict significant acceleration due to the cyclical nature of this process, we are taking the right steps and feel confident in our outlook for the second half. Jeff may provide additional insights, but from my perspective, the transformation is going smoothly, which positions us well to potentially increase ARR growth moving forward.
Jeff Cooper, CFO
Yes. Mike, I believe you covered all the key points. As you all know, we closely monitor three factors in our ARR guidance: the number of new deals we secure and their expected contribution to first-year ARR, the carryover ARR uplift from deals made in previous periods, which reflects the realization of ramps, and any ARR attrition, which we monitor closely. As Mike mentioned, everything is largely aligning with our expectations as we entered this year, with a strong focus on securing new business in the latter half of the year.
Michael Turrin, Analyst
That's all helpful. Just as a follow-up, regarding gross margin, the subscription and support figures continue to decline, but you're maintaining the 55% target for the year. It seems like that trend is not too far from what you anticipated. When you provided the initial guidance for the year, is there anything else you can share about where you expect those numbers to stabilize? Are there specific levels of either cloud scale or milestones you are looking for that could help improve the overall profile?
Jeff Cooper, CFO
From a margin perspective, the overall gross margins... Well, this is ongoing. There's a lot that goes into that mix. And so obviously, embedded in our guide is a little bit higher performance on the term license side that comes at a very high-margin profile. So that has a positive impact as we look to this year and adjust our expectations for the year. Services we noted, this year is going in the low single digits. And then – as I previously noted on the call, we're investing very heavily to build out our cloud operations team. We are seeing good traction with Guidewire Cloud platform. It is providing me a lot more visibility into the concrete steps that we can take to drive scalability and future margin expansion. And so, we are comfortable as we look forward to next year to start seeing subscription margins moving in the right direction, but it's still an investment year this year for us.
Michael Turrin, Analyst
Got it. Appreciate all the detail there. Thank you.
Operator, Operator
And our next question is from Matt VanVliet with BTIG.
Matt VanVliet, Analyst
Yes. Thank you very much, guys. Wanted to ask about kind of the capacity of the development team now that you're into kind of the third iteration of the Guidewire Cloud platform, and a lot of that's maybe – the foundation is kind of built. Does this open the team back up to creating more of these data, analytics and digital add-on products? Or conversely, has the move to the Guidewire Cloud enabled you to continue the momentum of the partnerships that we continue to see in press releases and your talks with third-party software providers, providing those kind of point solutions at the end? So maybe just thinking about what the balance is internally of developing some of these newer features versus leaning on the partner ecosystem.
Mike Rosenbaum, CEO
It's an interesting question. I don't necessarily view it as partners versus internal. From my perspective on the product's progress and future expectations, I believe the answer encompasses both aspects. We've made substantial investments in the Guidewire Cloud Platform. While we might never be completely finished, the foundation has been laid. Looking ahead to our next two releases, we can observe a trend towards increased investment in application-centric areas of our product, as well as the innovation central to ClaimCenter, PolicyCenter, BillingCenter, underwriting, and more. This investment is in place and functioning well. While there's still more to accomplish, it's evident that changes are coming in our long-term plans, which will benefit analytics. On the partner front, we are simplifying integration with Guidewire, which will create numerous opportunities for partners. Our approach as a cloud service with consistently functional APIs facilitates easier connections for partners. This will spur innovation within the partner community and make it simpler for our customers to integrate innovative insurtech solutions into their Guidewire environments, aligning with their objectives. I don't think we need to sacrifice one for the other. A significant portion of the value of the Guidewire Cloud platform lies in its ability to streamline integrations. This benefit will apply both internally and externally. Thus, I believe the answer to your question involves both sides. We should anticipate increased fun and innovation on the product side at Guidewire as we progress on this journey with our customers in the upcoming releases.
Matt VanVliet, Analyst
And then on the global SI side of the partnership community there, are you seeing any areas of strength where they're seeing projects really starting to pick up in different regions of the world? Or conversely, are there areas that are sort of frustratingly slow to get back to where they were? Just help us think about kind of what the maybe partner solicited or kind of partner source deals, what those trends are looking like.
Mike Rosenbaum, CEO
Yes, I would say we haven't seen a change in that perspective. The global systems integrators are an incredibly important part of the ecosystem, helping us with deals, executing projects effectively, and bringing us a lot of opportunities, and that hasn't changed. I wouldn't say I've noticed any shift in that pattern. The key measure is how aligned those partners and their consultants are with our cloud certification, ensuring that everyone implementing Guidewire is updated on the process so that each implementation can be seamlessly upgraded with every release. The uptake from the partner community has been phenomenal, which points to a lot of success going forward.
Matt VanVliet, Analyst
All right. Great. Thank you for taking the questions.
Mike Rosenbaum, CEO
Thank you.
Operator, Operator
And our next question is from Tyler Radke with Citi.
Tyler Radke, Analyst
Hey. Thanks. I was hoping to ask you, Mike, about the go-lives you saw in the quarter. I think you talked about 12 customers going live. Maybe just give us a sense for how many of those were on Guidewire Cloud platform, the ski resort releases, and then just how you expect that number to trend going into the back half?
Mike Rosenbaum, CEO
The most significant go-live we had in the quarter was with Amica, one of our earliest customers, who went live during this period. It's interesting to note that these events are occurring almost continuously now. As we consider how to discuss this in our calls, particularly a month after the quarter ended, we are evaluating how to present this moving forward. However, the activity and momentum we are experiencing are very strong. The twelve numbers represent the entirety of Guidewire, including all of our on-prem and cloud customers. Amica was our major go-live event, and USAA's public launch of the small business insurance initiative powered by our platform was another significant milestone. You might want to relate this to the ratio of Guidewire's on-prem installed base compared to our cloud momentum. Over time, as we increase our cloud sales and more new customers adopt the cloud, go-live events will predominantly be on GWCP, making it less relevant to highlight them separately since it will eventually become the majority. When we project forward over the next quarters, that's the future we anticipate. Currently, I emphasize this because it's a crucial driver of customer success, innovation, and particularly margins, as we discussed earlier in the Q&A. I hope this clarifies things.
Tyler Radke, Analyst
Yes. Thank you. And Jeff, just a quick follow-up for you. So, understood that ARR guidance for the full year is essentially maintained. It sounds like you are seeing a little bit more strength in the term license deals. I guess is the way to think about it, I think at the Analyst Day, you talked about cloud ARR as a percent of total being 35% to 40%. I guess just in terms of that metric, should we think about it at the lower end or maybe a little bit below it given the strength that you're seeing in the term business?
Jeff Cooper, CFO
Yes. We haven't updated our disclosure regarding that, but overall, I believe we have observed an increase in term license activity in the first half as we review our pipeline and bookings for the year. There hasn’t been a change in the distribution between cloud and on-prem solutions; it remains consistent with our initial expectations for the year. In general, things are holding steady. Covéa was a significant deal for us, one we have been working on for several years. Concluding that in Q2 was a big win, which resulted in our first half on-prem total being somewhat higher than I initially anticipated for the year. However, my expectations for the year have not changed significantly.
Tyler Radke, Analyst
Okay. Helpful. Thank you.
Mike Rosenbaum, CEO
Thank you.
Operator, Operator
And our next question is from Joe Vruwink with Baird.
Joe Vruwink, Analyst
Great. Hi, everyone. Thanks for squeezing me in. I wanted to go back to just the existing customers that have already inked migration deals. And really, the question is on the magnitude of this and the level of visibility that is providing for ARR growth into FY 2022. And Mike, you brought up the potential for upside based on how certain things fall both pipeline and what you have visibility on. I guess, I'm wondering, when you consider what you have visibility on in terms of these migration deals, I mean, is it greater coverage or either ahead or behind, kind of, what you've budgeted as you sketch out? I think you've talked about ultimately getting back to mid-teens ARR, but maybe more in the near-term, it's low double-digit ARR growth. Are the nature of the migration deals any better or worse that might deviate the trajectory of ARR growth?
Jeff Cooper, CFO
One of the things we've discussed before is that as we plan for this year, we anticipate a fairly balanced contribution between new annual recurring revenue generated from deals made in previous periods and new annual recurring revenue from deals we close this year. This trend will continue to develop, particularly with migrations, which can contribute a modest amount of initial annual recurring revenue in the year they are sold. We are observing this play out as we expected. Looking ahead to next year and beyond, the outcome will largely depend on our ability to accelerate new modernization efforts as the market becomes more comfortable with cloud-based core systems. We do expect to see an increase from deals sold in prior periods, drawing from what we refer to as our annual recurring revenue backlog. This aligns with the expectations we've shared over the past few quarters and discussed during our Analyst Day.
Joe Vruwink, Analyst
Okay, great. Thank you very much.
Operator, Operator
And our next question is from Bhavan Suri with William Blair.
Bhavan Suri, Analyst
Hey, thanks guys. And I'll be pretty quick here. I just wanted to go back to the conversations you were having in the quarter. You mentioned having several customers on-premise. Do you see some of them deciding that they want to upgrade those on-premise installations to more modern versions of Guidewire? And if so, does that create any sort of tension in terms of competition between the traditional on-premise upgrade paths versus the cloud capabilities you guys are moving towards?
Mike Rosenbaum, CEO
Yes. I think that is an interesting dynamic. There are certainly some customers that are still looking at on-prem upgrades and choosing to go that route. I think it's a fair number. But the flavor I would give you for the nature of those conversations is that every single conversation I've had has ended with the tone that eventually, they will make the decision to go to cloud. That they may not be ready now, but they will be ready in the future. The orientation of Guidewire around architecting a cloud solution that facilitates that move in a seamless way is not lost on them. We're working to ensure those customers come to the logical conclusion to move to the cloud when they are ready.
Bhavan Suri, Analyst
Got you. Got you. Got you. And I guess the next question, which is really quick is, you've obviously had some nice deals in the cyber space. Any of that driven by sort of the SolarWinds impact? Like I know it's a tiny small – it's a small portion of DWP today. But when you think about the opportunity in cyber and the risks that we're exposed with SolarWinds, has that come up in conversations? Are you seeing any benefit of that, or is that too early, still? Because while fiber is supposed to be huge, it took a while to sort of play out. And I think now it's sort of some of the risks people seen, I wonder if that's going to drive more thought, more talk, more types of insurance policies in that sort of segment.
Mike Rosenbaum, CEO
I would say it's early. I'm 1.5 years into the role. And so – and I'm sort of learning how quickly these sorts of markets evolve. But these incidents, these cyber incidents continue to happen over and over again. And so the way I think about it is, okay, how – how in the news is this? How big a risk is this to each corporation? And what's the approach of the insurance industry to sort of meet that risk? I just think it's going to keep increasing. I don't think that it's going to have any kind of big step jump in terms of one incident driving a completely different and new risk to be underwritten. But the trend, unfortunately, maybe is that this risk is just continues to increase. And so that creates more and more of a market for ensuring that risk. So it's just unfortunately one more event in the long, consistent stream of these events that every company in the world is exposed to. And we – I think – it's almost like I feel bad saying it. It's like, unfortunately, our role in this is to help ensure it through our insurance customers, but I do think that it will continue to increase.
Bhavan Suri, Analyst
Yes. And unfortunately the bad actors don’t go away. And there’s no sort of – you can’t live in.
Mike Rosenbaum, CEO
Exactly.
Bhavan Suri, Analyst
All right. Thanks for taking my question, guys. Really appreciate it. Appreciate the color too. Thank you.
Mike Rosenbaum, CEO
Thank you.
Operator, Operator
Ladies and gentlemen, we have reached the end of the question-and-answer session. Now I’d like to turn the call back over to CEO, Mike Rosenbaum, for closing remarks.
Mike Rosenbaum, CEO
All right, everybody. I appreciate everybody joining us for the call. It's been a great quarter, and we'll talk to you at the end of Q3. So thanks very much.
Operator, Operator
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great evening.