Intapp, Inc. (INTA) Q1 2027 Earnings Call Transcript

press star one again. I will now hand the conference over to David Trone, Senior Vice President, Investor Relations. Please go ahead.

Thank you. Welcome to INTAP's fiscal first quarter 2027 financial results. On the call with me today are John Hall, Chairman and CEO of INTAP, and David Morton, Chief Financial Officer. During the course of this conference call, we may make forward-looking statements regarding trends, strategies, and the anticipated performance of our business, including guidance provided for our fiscal second quarter and full year 2027. These forward-looking statements are based on management's current views and expectations, entail certain assumptions made as of today's date, and are subject to various risks and uncertainties, including those described in our SEC filings and other publicly available documents that are difficult to predict and could cause actual results to differ materially from those expressed or implied by such forward-looking statements. INTAP disclaims any obligation to update or revise any forward-looking statements except as required by law. Further on today's call, we will also discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results, including non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP operating margin, non-GAAP diluted net income per share, and free cash flow. Our GAAP financial results, along with reconciliations of GAAP to non-GAAP financial measures, can be found in today's earnings release and its supplemental financial tables, which is available on our website and as an exhibit to the Form 8K furnished with the SEC prior to this call, or a supplemental financial presentation, which is available on our website. With that, I'll hand the conversation over to John.

Thanks, David. Good afternoon, everyone, and thank you for joining us. Q1 was a defining quarter for Intap. This was the quarter we made Intap's Celeste generally available. And in the weeks since, we've seen firm AI moving from launch to adoption, a leading AI ecosystem building around Celeste, and more clients moving to the cloud. There are three categories of AI in professional firms today. horizontal ai speeds up everyday tasks for workers practice ai helps professionals with their individual work product like a brief or a diligence memo both horizontal ai and practice ai live at the desk firm ai is ai for the business of the firm That means winning clients, clearing conflicts, screening deals, capturing time, and managing engagement economics. That's where growth, market share, and operating margin are decided. It depends on the firm's own data and compliance rules, which generic AI tools can't and shouldn't be allowed to reach. Horizontal AI and practice AI make individuals faster. Firm AI makes the firm bigger. Our job is to deliver firm AI and to govern AI on behalf of the firm, wherever the firm's people use it. Firm AI is resonating at the very top of the world's leading firms. Our firm AI blueprint is circulating among managing partners and management committees, And the number of senior leaders we're meeting with now is unlike anything I've seen in the past. We're talking to firm owners and leaders because AI for the business of the firm is their priority. And it's a lane that is uniquely ours. On July 15, Celeste became generally available across all the industries we serve. Firm AI is an enterprise decision affecting the entire organization. Firm leaders are starting with the governance question across the entire firm. With news stories every week about AI agents operating without controls, firms are choosing carefully and governance is a key reason why they're choosing intact. Since GA, our Celeste pipeline has grown two to three times and has never been larger, with more firms moving from trials into deployment. What's working is consistent across the industries we serve. Firms start where firm AI delivers value fastest, in deal screening, intake and conflicts, and time capture, and then expand from there. We have already activated DealCloud with Celeste for more than 150 clients. On August 19, we made Celeste the core of two of our largest product families. Compliance with Celeste brings agentic workflows into in-tap intake, conflicts, and terms. And time with Celeste does the same for in-tap time. Firm AI generates revenue in three ways. Existing clients upgrade through new entitlements on products they already run. New clients choose Celeste-powered products from day one, and firms pay to govern every third-party AI tool they connect. Confidentiality has been one of the largest barriers to AI adoption at law firms. A firm cannot put thousands of lawyers on an AI tool if its ethical walls stop at the edge of it. That's why InTap Walls for AI is becoming the governance layer for AI in professional firms. More than 70 of the AMLA 100 rely on InTap Walls. And Walls for AI extends those same policies automatically into the AI platforms their lawyers use. That now includes the two leading practice AI platforms in legal. Our Harvey integration became generally available this past quarter and is already seeing adoption. At IltaCon in August, we announced a strategic partnership with Lagora that brings walls for AI and intact time into Lagora. Whichever platform a firm chooses, or if it chooses both, the governance is the same and it's INTAPs. Also, at ILTACON, we introduced the INTAP profitability network, which extends INTAP beyond systems of record into a connected profitability ecosystem. It's eight founding partners, Capacity, Engage AI Solutions, Legora, LexPipe, Narrative, Otter, ZebraWorks, and Zenvoice help firms manage how they price, staff, capture, bill, and collect on every matter. Our ecosystem has become one of the clearest validations of our firm AI strategy. When OpenAI launched Astro for Law, it selected Intact to bring the business of the firm into ChatGPT. And DealCloud with Celeste is part of the ChatGPT for Financial Services ecosystem. Celeste connectors are also available in Anthropics FOD. The leading horizontal AI platforms are coming to Intap because we sit where industry workflows, trusted data, and AI meet. That ecosystem is also becoming a growth engine for Celeste. Our data, AI, platform, and services partners extend what Celeste can do and help firms adopt and expand it. In Q1, partner-involved CoSell grew 34% year-over-year, and CoSell with Microsoft grew 26%. Our partners bring AI to the individual. we bring AI to the firm. Let me share a few highlights from the quarter. Cloud ARR grew 28% year over year and now accounts for 85% of our total ARR. We have more than 1,400 clients with more than $50,000 of ARR, including 908 with more than $100,000. Cloud net revenue retention was consistent at 123%. Following a record Q4, cloud migrations remained above historical levels in Q1. Celeste's general availability is a big part of that demand. As we transitioned clients from the on-premises version of intake, conflicts, and terms, demand for compliance with Celeste helped bring firms to the cloud. Walls for AI is also adding to that momentum. On average, on-premises clients ultimately spend significantly more with Intap once they move to the cloud. Every migration is an opportunity to grow, and we are seeing firms choose Intap to do more. Let's take a look at some client wins this quarter. Starting with legal, we saw a mix of existing clients expand and new clients join. A top 10 global law firm and an in-tap client for more than a decade is moving its compliance suite to the InTap cloud and adding Celeste. They chose to reaffirm their commitment to InTap in one of the largest deals in our history. Walls for AI drove several wins in legal. Brian Cave Leighton-Paisner, a global law firm, added Walls for Harvey and Walls for Lagora and is migrating Walls to the cloud so its ethical screens follow client content into both platforms. A leading intellectual property law firm chose Walls for AI to secure its Harvey deployment. And Troutman Pepper Lock, an Amlaw 100 firm, is migrating to the cloud with Walls for AI. Celeste is winning across our legal portfolio. A leading Wall Street law firm chose Intep Time, Billstream, and Celeste after a competitive evaluation against the industry's other time providers. Baker Donaldson, a leading national law firm, chose DealCloud with Celeste to modernize business development. A leading UK law firm chose DealCloud with Celeste and compliance with Celeste to build a single governed view of their clients. And Shoesmith, a leading UK law firm, added time with Celeste through a competitive RFP after choosing Intap's compliance platform last year. Next, accounting and consulting. A multi-billion dollar global management consulting firm expanded Intap compliance with Celeste from a single department to the entire firm. bringing agentic workflows to new engagement intake and approvals. BDO Capital, the investment banking arm of BDO USA, selected DealCloud with Celeste as the deal management platform for its capital advisory and investment banking teams. DealCloud now supports corporate finance teams at six of the top eight accounting firms, And Epic, a global legal AI services and software provider, chose field time with Celeste and time with Celeste to deepen its relationship intelligence. In financial services, the firm AI conversation is reaching some of the largest financial institutions in the world. Firms want Celeste to work across their entire technology landscape. making the release of integrations with our other products important drivers. A leading credit investment firm is a new client that shows DealCloud with Celeste to modernize its direct lending business. In Asia Pacific, the investment banking arm of a leading Japanese financial group shows DealCloud for its deal-level permissions, keeping information secure across client engagements. And a Singapore-based investment firm moved to DealCloud with Celeste, giving its team AI that meets its own data governance standards. And as examples of existing clients, a global investment firm client and a global private equity firm client each added DealCloud with Celeste to grow with us in real assets. One of the world's largest real estate investment firms, renewed and significantly expanded their partnership with Intap. The firm is deploying Celeste across the firm to enhance DealCloud, its system of record for every real asset it owns, with Intap firm-deployed engineers working alongside its teams. A multi-family real estate investment firm chose DealCloud with Celeste to strengthen investor relationships and fundraising. And a New York real estate developer and investor replaced its legacy deal management platform with DealCloud with Celeste. So its development and fund teams can work from one shared view of every deal. This is the most important year in Intap's history. Last year, we defined firm AI as a category. A few weeks into this quarter, we launched Celeste into general availability, and our pipeline has expanded meaningfully. This year, we're delivering it. Celeste is already in production at firms in every industry we serve. The leading horizontal AI providers are building with us because they need the market expertise and governance for these highly regulated industries that we've spent 25 years building. We are unique in our position running the firm's data, workflows, and compliance infrastructure, governed and ready for agents. With Celeste now shipping, that advantage will continue to compound every quarter. To our clients, partners, investors, board, and the global INTAP team, thank you.

David, over to you. Thank you, John, and thanks to everyone for joining us today. We delivered a strong start to fiscal 2027 with subscription revenue of 29%, non-GAAP operating margin of 22%, and free cash flow more than doubling year-over-year. Our thesis, AI for the business of the firm, is resonating with the market, and the core drivers of our path to $1 billion in ARR are in place. Extending cloud mix, deepening penetration of named accounts, expanding Celeste adoption, and monetization, ramping AI partner collaboration, and delivering more margin expansion. We crossed into fiscal 2027 with general availability launch of Celeste in July, compliance in time with Celeste in August, and the broader declaration of Intap's agentic firm AI value proposition. Where horizontal AI serves everyone and practice AI serves the individual practitioner, firm AI is built for the business of the firm. A vertically focused preview event in support of the GA release this quarter are generating all-time high qualified Celeste pipeline, up approximately two and a half times, quarter over quarter, which gives us confidence in FY27. Firm AI, now with Celeste, as the re-architected core platform across our growth, compliance, and profitability offerings, represented more than 40% of net new bookings in FQ1, up from over 20% last quarter. Demand is running ahead of our ability to engage, run proofs of concept, and deploy. Celeste is a true enterprise deployment configured around each firm's data, playbooks, and professional governance. We are adding deployment capacity to catch up to demand, and Walsper AI had its strongest contribution quarter since its release. As we look ahead, each incremental playbook release, use case discovery, proof of concept process, and pilot-turn deployed adopter will build references and proof points for a Celeste sales motion anchored with the firm leaders business of the firm transformation grounded in enterprise governance is a strategic systems decision this means buying at the highest level client managing partners and management committees are increasingly calling on us for celeste as more firms adopt celeste their proprietary data and playbooks compound inside the platform deepening the moat for each client. That gives us confidence in the demand ahead as we invest into the Agentec TAM opportunity to serve and grow with our professional firms. On to the FQ1 results. Subscription revenue was $125.5 million, up 29% year-over-year, accelerating from 27% in FQ4, reflected a continued strong expand motion highlighted by our AI offerings. License revenue was $23 million, down 21% year-over-year, reflecting the continued shortening of on-premise contract durations, many to one year or less as these clients prepare to move to the cloud for a energetic first future. We continue to move on-prem clients to the cloud, supported by AI transformation and access to Celeste. We expect this dynamic to continue as the fiscal year progresses professional services revenue total 12.7 million of three percent year-over-year and now represents just eight percent of total revenue as we continue to leverage our services partner organization for wider scale implementation support total revenue was 161.3 million up 16 year-over-year reflecting the continued strong growth in subscription revenue which is steadily progressing towards 80 percent mix. Our partner co-sell momentum continued this quarter with joint engagement on seven of our ten largest deals and we entered fiscal 2027 with renewed top-tier partner status with Microsoft and meaningful Azure credits to allocate and catalyze flagship deals. On the product side, we are scaling the ecosystem around Celeste and AI-enabled professional workflows to meet clients where they are. And this quarter, we continue to announce new integrations with key horizontal AI platforms and data providers. And our Walls for AI initiative is extending Intaf's trusted governance layer to practice AI providers with early client proof points to secure their deployment. As more practice AI providers build on it, the addressable market across our installed base expands. On to the profitability and cash flow, our non-GAAP gross margin was 80.4%, up from 77.7% a year ago, reflecting steadily increasing cloud scale. Joe. Our non-GAAP operating expenses were $94.2 million compared to $87.1 million in the prior year period, driven by continued investment in support of the Celeste launch and the broader firm AI sales motion entering the new fiscal year. Non-GAAP operating income was $35.4 million, up from $20.9 million last year, a 22% margin and up approximately 7 points, reflecting leverage from R&D and G&A. Non-GAAP diluted EPS was $0.44 compared to $0.24 a year ago. Free cash flow was $28.1 million, more than double the prior year, and trailing 12 months, free cash flow was approximately $160 million, and we ended Q1 with $147.7 million in cash and cash equivalents. Share repurchase activity continued this quarter with approximately 600K shares bought back for $25 million. At the end of FQ1, $50 million remained under our current repurchase authorization. On the key metrics, cloud ARR grew 28% year-over-year to $515.3 million, and total ARR increased 20% to $607.1 million. Cloud is now 85% of our total ARR, up from 80% a year ago. Our cloud net revenue retention rate was 123% in the first quarter, demonstrating continued strong retention and strong upsell and cross-sell expansion among existing cloud clients. Total remaining performance obligations were 799.4 million, up 12% year-over-year, with on-premise RPO representing the headwind to the overall growth rate, reflecting cloud migrations and shortening on-prem contract durations as described in the licensed revenue line. In addition, this quarter did not include many of the meaningful subscription renewals expected over the next six months. Clients generating at least $100,000 in ARR reached $908,000 of 12% year-over-year, and we exited the quarter with over 1,400 clients at 50,000-plus ARR. Under the outlook, for the second quarter of fiscal 2027, we expect subscription revenue between $129.1 and $130.1 million. Total revenue between $158.8 and $159.8 million. Non-GAAP operating income between $31.8 and $32.8 million. And non-GAAP EPS between $0.37 and $0.39 based on approximately $79 million diluted shares. For the full fiscal year of 2027, we expect subscription revenue between $530.5 and $534.5 million. Total revenue between $658.2 and $662.2 million. Non-GAAP operating income between $136.8 and $140.8 million. Non-GAAP EPS between $1.64 and $1.68 based on approximately 80 million diluted shares. Thank you, and I'll now turn the call back to the operator.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Alexei Gogolev with JP Morgan. Your line is now open. Go ahead.

Hi, this is Bella Kamajan for Alexei. Thanks for taking our question. So to start, the 2Q total revenue guide implies a sequential decline despite continued strong subscription growth and the full year revenue outlook moves modestly higher. So can you walk through what is driving the 2Q dynamic and whether this is primarily the ongoing license transition, timing, or anything you're seeing in the underlying demand environment?

No, that's exactly it, right? Because we specifically guide to total subscription. And then what you have is the total revenue. So obviously, we continue to excel and overachieve on some of our on-prem to cloud motion because they want to take advantage of all of our agentic offerings and even more so. And so as we continue to go through that transition, that's where you're starting to see an acceleration there. and it's really hitting us in FQ2. But as far as the basic fundamentals on subscription, as well as total services, those are all very much intact. So that's what you're seeing within FQ2 specifically and then a place through for the remainder of the fiscal year.

Got it. That makes sense. And as a quick follow-up, so cloud ARR grew 28% and unit of migrations remained above historical levels this quarter. So thinking about that, and now that Celeste is GA and helping drive cloud migrations, How should we think about the mix of growth from migrations versus expansion among existing customers and then versus new logos and whether Celeste can help sustain that momentum as the migration opportunity gets smaller?

Absolutely. And so really our key focus is on the Gentic opportunity and bringing that forward. We still have a lot of remaining clients today that we're working on, as you heard in my prepared remarks, that we can't necessarily keep up with demand. We are constrained and working aggressively to fix that with our specific firm deployed engineers with all the pilots underway currently today. But then even as you think about all of the pipe in front of us, not only for total in tap, but also for specifically on Celeste, we have a lot of net new logos as well as expand opportunities there. And so, for us, we're very confident on maintaining these, you know, prescribed growth rates that we've narrated around and guided to.

Understood. That's very helpful. Thank you.

Your next question comes from the line of Kevin McVeigh with UBS. Your line is now open. Please go ahead.

Great. Thanks so much, and congratulations on the continued execution. I wonder, could you just help us? It sounds like you announced some new or enhanced strategic collaborations with OpenAI, Moody's, Legora, and then I think you mentioned Harvey in the prepared remarks. So maybe help us understand what you're doing with Legora relative to Harvey and how those alliances overall compare with the existing Microsoft and KPMG alliances that you've had so much success with.

Kevin, thank you very much. The ecosystem that is forming around Celeste is fantastic. It includes the horizontal AI players, both Antropic and OpenAI, and the practice AI players, both Harvey and Lagora. And our category is the firm AI category. So we are talking to the senior leaders of the firm about how to agentify the macro business process that the firm runs from winning new clients or sourcing new investment opportunities to onboarding those and getting through the whole compliance and due diligence step of onboarding those opportunities to executing, managing the deals and the assets over their life cycle or executing the client engagements over time. So that large business process, we refer to the opportunity for gentrifying that as firm AI. And it really sets us apart from the horizontal players who are trying to provide great tools to the individuals in the firm or the practice-specific players who are trying to provide specific document manipulation capabilities on the desk, both of which are great opportunities. but there is a gigantic space. If you look at the labor pool that runs these firms, particularly the business services functions that support all the professionals, it's a giant portion of the firm's OPEX. And the opportunity to agentify that requires a whole compliance capability because the firms are highly regulated in the way that they execute those business processes and workflows. And it's a huge untapped space that InTap is perfectly positioned to go pursue. And in order to do that, we have our Celeste strategy, our firm AI playbooks, and now co-workers and agents to help them pursue those business processes for the entire firm and get cost effectiveness and operational efficiency and client success out of it. But at the same time, interoperating with the tools at the desk, whether that's OpenAI or Anthropic or that's Murvy or Lagora. So our ecosystem strategy, consistent with our whole history, is to work well with the universe of tools that exist inside the firm. So what you saw us do over the past six to nine months, and in particular this quarter, was make some major announcements to communicate the growing ecosystem of integrations that Celeste works with, running from the center of the firm in a governed way. And in fact, our platform with Walls for AI is the governance system for those tools now. So the firms can have more confidence deploying those desk tools if they are governed by Intep, which is a huge opportunity for us as well.

Super helpful. And then, John, just to whomever, just one point of clarification. Just to remind us, you talked about the sensitivity of kind of on-prem to the cloud, what the uptick is versus host AI versus pre, because I thought initially way back it was kind of the conversion what was was net neutral to revenue but it sounds like it's significantly more today did did i hear that right or maybe just could you repeat that comment yeah kevin well um the uh ar right when you when you sign a contract you'll take some um up front and then the rest will transfer when you deploy the revenue gets a little trickier

as you work through two year or three year, specifically duration of deals, if it wasn't upon renewal. The net of it is, is, you know, we are still seeing uptick when we do move it from on-prem to cloud, when we get them deployed. And yes, we are seeing them even outside of Celeste, we are still seeing, you know, that uptick of 20 or 30%. The acceleration of going from on-prem to cloud that we're seeing is really so that our key clients could take even more advantage of all of our agentic offerings, which is causing, not causing, but actually accelerating that motion.

Very helpful. Thank you so much.

Your next question comes from the line of Terry Tillman with Truist. Your line is now open. Go ahead.

Hi, good evening, team. This is Luke Redis on for Terry. Thank you for taking my question. I just wanted to go further into compliance with Celeste and time with Celeste and talk more about the transition for customers on the current product. Are these new products something customers pay extra for, or does it upgrade for current subscribers? Kind of based on that response, is that the way that we should be thinking about it for future rebuild products with Celeste?

Thanks, Luke. Yes. So we're very excited about these core product releases based on the Celeste agentic AI technology. We announced them for general availability in the middle of August, so we only had a few weeks of this quarter for those to be generally available, but the engagement on those has been tremendous because we have such a footprint in these firms, in these highly regulated workflows at the enterprise level around compliance, which is the process that they have to go through. It includes the process they have to go through for onboarding new clients and doing all the due diligence and all the compliance checks and then governing the relationship with those clients and all of their confidential information over the life cycle of their relationship with the firm. And then with time, which is, how do we help keep track of all of the effort that goes into working on these deals and clients over time? So people can use that for cost and economics management. And to the extent that the work is being built on an hourly basis, how can we help them build for that better? The agentic opportunity with Celeste is to transform those core workflows of the firm into a much more efficient, modern, AI-driven experience, saving labor, increasing quality, creating around-the-clock concierge services for all the professionals. It's an awesome value proposition to the firms, and they are so excited because we're the only people, really, that are talking to them about the firm side of the business, which is where all the operating margin is and where all the opportunity for performance improvement at scale is for the business. So firms absolutely pay extra as we bring these solutions out because the value proposition is significantly better even than what we were doing in the prior era. And we're perfectly positioned because we have command of those processes inside the firms today. We're the natural people to agentify them for these firms in a way that maintains their compliance requirements. So going forward, absolutely, this is the plan. The opportunity to do work replacement, labor replacement on the cost side has huge potential. Looking at the labor force of these firms, it's 20 to 30% of the opics of these firms is going to this kind of function. So the return here, if you can actually identify those jobs, is tremendous. But in addition to a pure cost argument, which is compelling in itself, there is a around-the-clock concierge that knows the entire internet and the entire portfolio of the firm's proprietary knowledge and history with each and every client and can personalize that for each professional if they need it at any time of day. The quality of service that we can create is light years ahead of the manual process that humans had to provide before, and the values to the firms associated with that is off the charts, And the firms know that they have to do this because the firm across the street is going to do it and become more competitive. So the whole Celeste story around firm AI, and in particular in these areas that you just named, is a transformational opportunity for these firms, not just at the depth, but in the way that the firm functions at a macro scale. And that's our strategy, is to go after that poor operating model transformation with the agentic generation of technologies in these areas and the other solutions that we bring to the market.

Awesome. That's great to hear. And then just a quick follow-up. Customers above 100K in ARR increased 11 sequentially this quarter, a little bit smaller than in recent quarters. Could you speak to this dynamic? Is this normal 1Q seasonality, or are you seeing longer sales cycles or smaller initial deals with these large firms?

I don't know. Nothing abnormal. I would just say, you know, there's some rounding involved with all of this. You know, at the end of the day, we're working each of our enterprise clients. The cohorts are strong. Our NRR is still solid. Our churn is still at the minimus level.

So we're very excited about the opportunity ahead, and even more so as we work through. um you know the pipeline sitting in front of us so um yeah no that new change okay thank you your next question comes from the line of alex sklar with raymond james your line is now open please go ahead thank you um john maybe first question for you um when you look at that strong two and a half times increase in celeste pipeline what are you hearing from these prospects in terms of evaluation period and how has the CELES pipeline progressed from a new logo perspective in particular? Have you seen it be an unlock in terms of improving win race for that new name 2K kind of logo that you don't have already today? Thanks.

Yeah, thanks, Alex. You know, we had two quarters about of limited availability during which time we brought out the Firm AI blueprint. It took several forms, but one of them is a white paper, and the circulation of that document among the most senior members of the leadership teams in the firm's this market has been incredible. The number of calls and inbounds that we're getting from people that have titles like managing partner or operating committee member, we've never seen this before. So I think we've really tapped into something that was missing. they've all bought into the horizontal ai or the practice ai tools their clients have asked them to do that everybody's doing it it's obviously a tremendous success story but what is there for them as the leadership team to leverage ai to manage the firm better and that's what this whole firm ai story and value proposition talks about and a lot of this pipeline growth that we've seen you know and we just did general availability launch a couple weeks into this quarter, and then the compliance and the time releases were actually halfway through the quarter. And so this uptick has happened very quickly with very senior members of the firm. I can tell you, even in that amount of time, we have gone to now 200 enterprise firms that are running Celeste today following this launch and have not yet converted to a full subscription. So very significant response inside that pipeline and that enterprise class of firm is where 70% of our TAM is and the business services spend, all these business services roles that the agents that we're bringing out can help to identify or support with co-workers is a giant portion of the economic spend of these firms. And it's the senior people who make that decision. It's not something that the individual desk people decide. This is something that's made at the top of the firm about the economic opportunity to agentify the business. That's what we're chasing. In terms of sales cycle, it is absolutely an enterprise decision. And so, you know, we announced in this quarter and you would expect us to get out and roll out this agentic platform. we have a firm deployed engineer group now that is working on the highest value identification opportunities across the business processes inside these firms from business development, fundraising, fund deployment, compliance, and onboarding through time recording. In each firm where this is happening, we have firm deployed engineers that are working with the leadership of the firm. And there is a little bit of a cycle there because because these are highly regulated processes and you can't just throw agents in there and have them figure it out for themselves. You have to be able to roll this out in a way that the firm can understand and defend. So our whole compliance capability is supporting us and being the people who can actually achieve the agentification opportunity inside these business services functions. So we're really excited about what's happening. Obviously, it was our launch quarter, So we had to get all those processes started, and a big chunk of them have come up in that amount of time, and we have an opportunity to convert them.

Okay, great color there. And maybe, John, another one for you. Just about context and the context engine. So you continue to add a lot of data and then technology partners in the ecosystem. Where do you feel like you stand today in terms of context advantage feeding to Celeste? And then how do you think about other areas of context that you'd like to add into the platform, either via some of the newer integrations on the practice of law side or some of your practice management side or just as a potential area of M&A? Okay.

Absolutely. So we think that we have a fundamental differentiation because of our history owning the core business data of these firms about their fundraisings, their fund deployments and deals, the life cycle of those deals and their dispositions of them, the same analogous experience with clients, the client relationship, the engagement history with each client. That's all proprietary business information that the firm holds, and that experience is what the firms use to differentiate themselves in their pitches and in their value propositions to their investors and their clients. So in addition to the practice-specific knowledge where you say, you know, what is the best precedent for this particular document, as a business, you want to say, I can show you my experience across my history as to why I am the best firm to win your business and your trust. And that's what we traditionally have excelled at and had unique access to. So the context that we have is the business level, firm level insight of what makes the firm unique historically, what makes the firm competitive historically, and how do you in this agentic AI era leverage that across the entire history of the firm's experience in each and every engagement or each and every pitch or each and every professional working with their client? And how do you help them leverage that into a much better, much more successful, much more compelling client win and ultimately client delivery experience? And so the context that we have is unique. It is governed and compliant because the flip side of that whole thing is you're not allowed to tell everybody everything. That's the point. You have the secrets of all of these firms. And the real art in working in this highly regulated industry is how do you get the most leverage on all that expertise without screwing anything up and spilling the beans on something that you're not supposed to. And in particular, if you propose to bring agents in here and have them start to operate as co-workers or even autonomously, every single one of those agents has to understand exactly what those rules are now. It is a serious thing to propose to do this. Huge opportunity, but you need a partner that has that governance and compliance expertise to really differentiate. So what you're seeing us do is connect to all the partners in the ecosystem, just as you say. So the horizontal AI players that I mentioned earlier, the practice AI players across the markets, in addition to the other enterprise software systems of records providers that have interesting data the firms want to leverage and third-party data and the internet. So all of those sources need to come together and then be governed consistently with the firm's obligations in the way that the agents manipulate and work with that data to drive performance for the firm. And so I think context and the governance of that context give us a really unique position to be the people that drive agentic transformation in these firms successfully. And the way that you do that is by talking to the most senior folks in the organization. And they don't flip the switch overnight, but when they do, they transform the whole firm. And that's what we're doing with Celeste.

All right, great. Thank you, John.

Your next question comes from the line of Parker Lane with Stiefel. Your line is now open. Please go ahead.

Yeah, hey team, this is Jack McShane on for Parker. Thanks for taking the questions today. David, you mentioned that demand for Celeste is running ahead of supply of headcount and the ability to serve deployments.

Is there any anticipated headwind due to this dynamic and how long would you expect until you can normalize uh the ability to serve celeste deployments it's tricky um meaning that you know as john had articulated um not only in the prepared remarks but even you know given qualification to some of that pipe that we're seeing the two and a half times just up sequential quarter and then working with over 200 enterprise clients um right now and then on top of that right and so as we continue to work through with resources and stand this up in their own governed framework uh where we excel at you know clearly we're seeing the execution come online through not only this quarter but through the back half of the year and so as we continue to garner more and more pipe more and more opportunities. Obviously, we're swiftly working through this, but we continue to be constrained in that matter.

Got it. Makes sense. And John, you specifically called out operating margins in relation to AI adoption in your prepared remarks. How quickly are firms that are leveraging Celeste able to actually capture this margin expansion? Are you seeing firms currently balance headcount because of Celeste's adoption or do you have any other like early ROI metrics that you can share with us? Thank you.

Yeah, thank you, Jack. It's a really interesting combination of factors because there is a operational transformation opportunity. How much of the labor forces work, particularly in the business services functions, which is 20-30% of the firm spend overall supporting all the professionals with all of the business development and finance and IT and compliance operational support. How much of that can we agentify? And what is the labor cost opportunity to make some of those jobs have better co-worker support and maybe in some cases even agentify some of those roles entirely? If you just do the math on that ROI, the transformation opportunity for the firm is profound. And so we're getting a lot of attention from the senior most people with that part of the story. But it doesn't actually stop there because there's a very interesting aspect to the Celeste architecture that we've talked about on previous calls, which is not every part of the firm's business problem is well suited to a probabilistic technology approach. So this is a little counterintuitive with all the AI buzz, but it's not a probabilistic question. How many clients do you have? Or which history do you have with this client? Or a whole set of facts that you need to pull out of the firm's information so that you can start to apply judgment to other aspects of the firm. And part of the elegance of the Celeste architecture is it knows when to apply deterministic approaches and when to apply probabilistic approaches to solve the business process problem. And unlike a lot of the other players who are throwing every single possible question against the model and burning tokens on it, Celeste is extremely token efficient because it makes this distinction. and it uses the models in the areas where you need a probabilistic answer and it uses other techniques where you need a deterministic answer, particularly in a highly regulated environment where you have to prove how you did it each and every time. And that architecture design, which I think, you know, people may not really appreciate this, but this was co-developed with the CIOs and the AI leaders of these highly regulated firms from the beginning. This is how we did it in our advisory sessions that Celeste was coming together, turns out to be a significantly more token efficient architecture and a much more high quality response rate because it's not guessing at the parts of the problem that are not supposed to be guessed at. And so there's a very interesting IT economic case in addition to the personnel and justification transformation just in the token spend, which is getting a lot of attention from the technical side of the people who are suddenly experiencing these new AI budget burns. And I think those two things together with the compliance angle just make this a home run. So I'm very excited about the response on exactly this point. What is the economic argument? And then on top of that, you have all of the service to clients and the service to the professionals argument for why this is the right architecture to to help them with all right your next question comes from the line of second calia with barclays your line is now open please go ahead okay great hey guys thanks for taking my questions here um dave maybe i'll start with you um i'd love to dig into net new arar a little bit

um you know you mentioned something about sort of um just seasonally weaker renewals this quarter You know, you look at net new error down about 11% year over year. Can you just talk about some of those dynamics in the quarter? And then similarly, I know that we don't guide to net new error through the year, but how do you think about the shape just as we think about, you know, year over year compares as well as what seems like a very fast growing Celeste pipeline?

Yeah, sure. You know, I don't think I necessarily commented anything specifically on seasonally renewals. the commentary would have been on on-prem. Some of that duration is starting to shorten as last quarter. And so when you get those shortened, obviously the on-prem, the cloud, that's playing a part of it. When you think about a big renewal season, that is our FQ2, our December quarter. And so, you know, those shape and form of the opportunity from your book of business will always exist both for the June and specifically for the December quarter. As we think about the total ARR, clearly we spent a lot of time and focus working our new AI Celeste agentification across our whole portfolio. And that's where not only our clients, but our respective sales team are leading with. And as we continue to work through and engage with our key clients, get through the POC successfully, deploy the firm deployed engineers to stand up each of these provisioned use cases within their own environments in a very safe matter and governed matter. You know, we're really excited about, you know, not only what this quarter, but then obviously the first half of calendar year 27 brings us. And so anyway, that's a long way of saying is we're really confident in the continued execution for our FY27 and beyond for that matter.

Got it. Very helpful. John, for me, for my follow-up, maybe for you, you know, in your prepared remarks, you talked about three ways to sort of monetize firm AI, right? I think there were new entitlements for existing customers, new customers starting with Celeste from day one, and then governance for use with third-party tools like Lagora and Harvey. As you look at sort of the deal activity so far and the pipeline, which of those three is sort of the biggest drivers or how would you sort of rank order them as you look at all this activity so far?

Thanks, Socket. I think the pipeline that I quoted includes all three of those. We are excited about the ability to go back to all of our existing clients who have technology from us that are running these core workflows and introduce Celeste and the agentic workflow opportunity to them because the whole firm AI story is different and fresh to the senior people who haven't really interacted with the AI tools themselves and they haven't had it as part of their business. So that's a big part of that pipeline growth and that firm AI paper has really helped us to build Pipeline there. As part of that, we're getting inbounds from new clients who have known about us, but have had alternative systems over the years who are looking at this Celeste and gentrification strategy and saying, that's a reason to engage with Intep. I'm very happy about these partnerships that we put in place with OpenAI, Ananthropic, and Harvey and Legora, because the Walls for AI story, which we've been working on, as we've talked with you all about over time, going back to the partnership with Microsoft as well, where we were securing Copilot and still do. It's a really important aspect of them being successful in rolling out these tools more broadly and allowing people to collaborate more broadly. They have to have a governance layer that is at the firm layer. Because a lot of these firms are not standardizing on one of these tools they're using multiple tools and so they need something that fits above those tools and governs them and as was shared this was our biggest walls for ai order as well that we've ever had and we're excited about where that's headed in addition so i think this firm ai strategy for highly regulated industries with a gentrification opportunity for the business of the firm and governance for the regulated nature that interacts with the rest of their technology portfolio, I think it's a winning strategy. And the responses that we're getting are very positive, and I'm very encouraged by this first quarter or half quarter of launch here.

Very helpful. Thanks.

There are no further questions at this time. I will now turn the call back to John Hall, Chairman and CEO, for closing remarks.

Thank you, everyone. We're very excited about the firm AI strategy and what we're rolling out. We appreciate the questions today. We look forward to talking to you again in 90 days. So thank you so much. And we'll let you go.

This concludes today's call. Thank you for attending. You may now disconnect