Guidewire Software, Inc. (GWRE) Earnings

Management highlights

- **Quarterly Business Momentum** * 11 total cloud deals closed in the quarter, including 2 net new core system wins and 5 ProNavigator (AI workflow automation) deals * Key wins include a 7-year extension and DWP expansion with Auto Club of Southern California, a net new large strategic win with Bradesco Seguros (Brazil), and the first U.S. PricingCenter win with Oklahoma Farm Bureau * 3 PricingCenter wins closed, spanning Europe and North America, as demand grows for integrated, agile pricing tools * Global core system modernization activity remains strong, with new deals across Europe, North America, and Latin America * Data and analytics offerings continue to gain traction as customers embed real-time insights across insurance workflows - **AI and Platform Capability Expansion** * Recent Guidewire developer summit in Bangalore drew 3,000 attendees (double 2025 levels), with strong global ecosystem engagement * Guidewire has built a custom development harness that integrates leading LLM/Agentic tools like Claude code with the Guidewire platform, unlocking major productivity gains for internal teams, partners, and customers * AI-powered developer tools accelerate core platform product creation, integration build-out, and digital interface development; they are also cutting timeline and cost for legacy cloud migration projects * ProNavigator embeds AI decision support directly into core daily insurance workflows for underwriters, claims adjusters, and customer service teams, with growing customer adoption * Guidewire maintains an open platform strategy, partnering with leading LLM vendors rather than building proprietary large models, aligned with customer demand for flexible integration - **Leadership and Organizational Updates** * Chief Commercial Officer David Laker will step down from his role at the end of FY26, transitioning to a new role focused on strategic partners and initiatives * Shane Cassidy, former Executive Vice President of Global Insurance at Capgemini, will join Guidewire and formally assume the CCO role after Q4, reporting to President John Mullen

Guidance

- Full year FY26 ARR guidance is maintained at $1.229 billion to $1.37 billion, representing 18% to 19% year-over-year growth; fully ramped ARR growth is expected to continue outpacing headline ARR growth, setting a foundation for durable growth beyond FY26 - Total revenue guidance for FY26 is updated to $1.46 billion to $1.47 billion, with midpoint growth of 22% (up from 20% prior guidance and 16% at the start of the fiscal year) - Subscription and support revenue guidance is raised to $963 million to $969 million, a $20 million increase from prior guidance, reflecting strong DWP true-up activity, high new product attach rates, and a robust Q4 pipeline - Services revenue guidance is updated to approximately $270 million, driven by stronger-than-expected cloud demand and customer demand for Guidewire-led field engineering and AI capability implementation - Full year FY26 margin guidance is maintained: 74% for subscription and support gross margin, 14% for services gross margin, and 67% for overall gross margin - Non-GAAP operating income guidance is raised to $314 million to $324 billion (GAAP operating income guidance is $124 million to $134 million), reflecting higher revenue and gross profit, partially offset by higher bonus accruals and a larger services revenue mix - Operating cash flow guidance for FY26 is raised to $365 million to $380 million; CapEx guidance remains $30 million to $35 million, including ~$18 million in capitalized software development costs - Management expects a very strong Q4, with any deals that slipped from Q3 expected to close in the quarter, and a potential record Q4 performance

Segment performance

Guidewire reports two core revenue segments for Q3 FY26: 1. **Subscription and Support Revenue**: $245 million, representing 35% year-over-year growth, contributing 65.7% of total Q3 revenue. Non-GAAP gross margin for this segment was 74%, up from 71% year-over-year, driven by cloud platform scalability. 2. **Services Revenue**: $72 million, up 32% year-over-year, contributing 19.3% of total Q3 revenue. Non-GAAP gross margin for this segment was 14%, up from 13% year-over-year. Margin improvements from strong utilization were partially offset by higher subcontractor expenses to meet demand. Total company-level performance for the quarter: Total revenue of $373 million (up 27% year-over-year); annual recurring revenue (ARR) of $1.147 billion (up 19% year-over-year); non-GAAP gross profit of $247 million (up 29% year-over-year) with an overall gross margin of 66%; non-GAAP operating profit of $78 million; operating cash flow of $61 million; total cash, cash equivalents and investments of $1.15 billion.

Risks & headwinds

- Guidewire has a business model concentrated on a relatively small number of large discrete deals per quarter, which creates quarterly revenue and ARR timing variability: deals may slip across quarterly boundaries even when underlying demand remains strong - Unrealized foreign currency exchange rate gains and losses can create volatility in GAAP financial results, which the company now excludes from non-GAAP reporting to improve performance visibility - GenAI/LLM token usage for customer-facing AI features creates potential margin risk if usage exceeds contracted expectations, though the company has implemented technical and contractual guardrails to mitigate this exposure - Large legacy core migration and modernization projects have long sales cycles (often multiple years), which can create variability in quarterly revenue recognition and closing timelines - Geopolitical and macroeconomic uncertainty could impact customer IT budget allocation, though management has not observed any material impact to demand to date

Analyst Q&A

• Q: ARR came in at the lower end of guidance due to deal timing misses; is this driven by external factors like macro or AI related customer delays, and will it impact Q4? /

  A: The miss is purely timing variability inherent to Guidewire's business model of large, discrete deals, and is not related to macro or AI-related budget shifts. Underlying demand and pipeline are growing, and management expects any slipped deals will close in Q4, which is on track to be a very strong, potentially record quarter. Fully ramped ARR growth remains healthy at above 20%, and the company prioritizes long-term customer lifetime value over near-term quarterly ARR optimization.

• Q: What is Guidewire's integration and build vs. partner strategy for large language models, and how are you monetizing embedded Gen AI features? /

  A: Guidewire partners with leading LLM vendors, focusing on building the platform integration layer (a development harness) that lets LLMs work effectively with the Guidewire stack, rather than building proprietary large models. This open architecture aligns with customer demand, and has already delivered major productivity gains. Guidewire monetizes embedded AI products like ProNavigator via basis point pricing tied to customer direct written premium, matching its core product model, with contractual and technical guardrails to manage token cost risk.

• Q: How much has AI accelerated cloud migration timelines, and what productivity improvements are you seeing? /

  A: AI tools have already delivered a 35% improvement in on-prem to cloud migration timelines, driven by faster database conversion and implementation work. Management expects this improvement to grow to ~55% as tools mature, before leveling off due to inherent change management timelines for large programs. Faster, lower-cost migration is creating strong incremental demand, as customers move forward with projects they had previously delayed.

• Q: What is the demand profile for newer products like ProNavigator and PricingCenter, and when will they meaningfully contribute to ARR growth? /

  A: Both products are already exceeding full year FY26 expectations, with shorter sales cycles than large core modernization projects. ProNavigator has benefitted from increased customer trust post-acquisition, with demand for quick AI operationalization. PricingCenter is overwhelmingly selling to existing core platform customers and alongside new core deals, aligned with its value proposition of deep integration with Guidewire's product and policy tools. As the products grow faster than the core portfolio, they will become an increasingly large share of total ARR and bookings.