Guidewire Software, Inc. (GWRE) Q2 2022 Earnings Call Transcript

Guidewire Software, Inc.  (NYSE: GWRE) Q2 2022 earnings call dated Mar. 08, 2022

Corporate Participants:

Alex Hughes — Vice President of Investor Relations

Mike Rosenbaum — Chief Executive Officer

Jeff Cooper — Chief Financial Officer

Analysts:

Matt VanVliet — BTIG — Analyst

Jackson Ader — J.P. Morgan — Analyst

Peter Heckmann — D.A. Davidson — Analyst

Ken Wong — Guggenheim Securities — Analyst

Michael Turrin — Wells Fargo — Analyst

Dylan Carden — William Blair — Analyst

Maxwell Osnowitz — Stifel — Analyst

Presentation:

Operator

Greetings, and welcome to the Guidewire Second Quarter 2022 Financial Results Conference Call. [Operator Instructions]

I would now like to turn the conference over to your host, Alex Hughes, VP 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 2022 ended on January 31. My name is Alex Hughes. I am Vice President of Investor Relations, and with me on the call is Mike Rosenbaum, Chief Executive Officer; and Jeff Cooper, Chief Financial Officer.

A complete disclosure of our results can be found in our press release issued today as well as in our related Form 8-K furnished to the SEC, both of which are available on our 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 ones regarding our financial results, products, customer demand, operations, the impact of COVID-19 on our business and other matters. These statements are subject to risks, uncertainties and assumptions and are based on management’s current expectations as of today and should not be relied upon as representing our views of any subsequent date. Please refer to the press release and the risk factors and documents we filed with the SEC, including our most recent annual report on Form 10-K and our quarterly report 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 non-GAAP financial measures to provide additional information to investors. A reconciliation of non-GAAP to GAAP measures is provided in our press release. Reconciliations and additional data are also posted in the supplement on our IR website.

And with that, I will now turn the call over to Mike.

Mike Rosenbaum — Chief Executive Officer

Thanks, Alex. Good afternoon, and thanks everybody for joining us today. I want to start by briefly commenting on the war in Ukraine. Guidewire has very little financial exposure to this tragedy, but I believe that understates its actual impact on our company. We have a number of Ukrainian citizens in our company with family in Ukraine, and we have a very strategic development center in Krakow, Poland, where the ties to Ukraine are very direct. To say that for them, this situation is unconscionable, is an understatement. It’s just impossible for people to operate effectively when they have friends and family sleeping in bomb shelters and fighting in a war.

I lived in Belgium from 1986 to ’89, and while there, I had an opportunity to travel to Moscow, Saint Petersburg, East Berlin, Prague and Budapest. While I was in the Navy, I was part of a U.S. visit to Severomorsk, where the Russian Northern Fleet is based. So for me, this dramatic regression in Russian relations is startling. I hope that we can find a peaceful resolution to this conflict quickly, and we are glad to play whatever role we can and the sacrifice required to see this concluded as this is not the world we want for our teams and for their families and for our friends in Ukraine.

So with that, I will turn it over the business. Before I get into the details of the quarter, I want to briefly touch on three reasons why I am excited about Guidewire’s future. First, we have a market-leading position providing a mission-critical service in a very resilient, large global property and casualty insurance market. Second, we have broad support to fundamentally transform and enhance our value proposition by transforming the company from a software provider to a Cloud service provider. Third, we are steadily, effectively and successfully executing on this very difficult Cloud transformation. These three facts continue to support our confidence and optimism about the long-term potential for Guidewire to be a source of consistent, durable and profitable growth, and this quarter is a great reflection of that potential.

We saw continued sales momentum for Guidewire Cloud and cloud products overall, again, make up over 90% of our new sales in the quarter. Strong sales activity drove Q2 ARR above the high-end of our guidance range with ARR growth of 19% year-over-year. There were a few key takeaways from the quarter. First, I want to start with sales. We saw continued Cloud momentum across new logos, Cloud migrations and expansions with continued success with Tier-1 and Tier-2 insurers. In total, we closed 11 Cloud deals in the quarter. This included four net new customers with wins at both Tier-1 and Tier-2 insurers. Two new customers selected full InsuranceSuite Cloud. A Tier-1 global insurer based in New York selected InsuranceSuite Cloud for an initial projects covering their renters insurance line and a Tier-2 super-regional insurer based in Tampa, Florida selected InsuranceSuite Cloud to support personal and commercial lines across 16 states. Additionally, we added a new ClaimCenter Cloud customer and a new InsuranceNow customer.

Migration activity for InsuranceSuite Cloud was also very strong. We closed four cloud migrations in the quarter, including both Tier-1 and Tier-2 insurers. A Tier-1 insurer with major lines across business, personal and specialty will migrate its North American renters line to InsuranceSuite Cloud and Workplace Safety and Insurance Board, a Tier-2 insurer is adopting PolicyCenter Cloud and BillingCenter Cloud to power the workers’ compensation insurance it provides to over 350,000 employers throughout Ontario, Canada. In addition to these four cloud migrations, core expansion activity was also healthy with existing Cloud customers increasing their Cloud footprint across new lines and new modules. There were three core Cloud expansions. Two Tier-1 insurers, one of which was CNA Insurance and a Tier-2 insurer, Church Mutual Insurance Company.

We also continue to see a great deal of activity with our data and analytics offerings. We had just under 20 standalone deals for data and analytics products, a majority of which came from HazardHub. We are very excited about the momentum we are seeing there and the opportunity for further growth. Many of the HazardHub deals are small at the outset with an opportunity to grow, but we did see six deals that were over $100,000 of ARR in the quarter, which is a strong signal for HazardHub’s potential. Overall, I am thrilled with our continued sales momentum, but as I have discussed before, the ultimate measure of our progress is customer success with our products and the incredibly complex programs our products support.

We continue to make progress on boarding and supporting the volume of Cloud deals we have closed and operationally scaling Guidewire Cloud. To put our progress in perspective, we have closed over 100 Cloud deals from over 100 customers, including 70 deals for InsuranceSuite Cloud since moving to our cloud model. This has created a portfolio of transformation programs comprised of some of the largest and most complex insurers in the world. We are energized by the fact that we have deployed over 50 of these programs in production environments with nearly 20 InsuranceSuite Cloud customers having at least one initial go-live.

I am also pleased to see that even our Tier-1 customers have not only deployed Guidewire Cloud, but have done so based on updates to our new releases. This is exciting progress, and more importantly, it’s validating the premise of the investments we have made in our Cloud platform and approach. Things are going well overall, but I continually feel the need to reiterate that these programs are complex and often difficult. Our organization is learning from each program and improving our approach, our systems and our platform with each new Cloud release. We are investing in these programs to ensure that they are successful and we will continue to prioritize customer success above all else. Successfully migrating customers to our Cloud platform will create a company capable of delivering significantly more value to the P&C industry, and serve as a powerful reference as more insurers look to modernize. But given the complexity and the importance of this work, it’s appropriate to recognize that we will always prioritize success over speed.

Now, switching gears to our ecosystem. We continue to see a growing and energized partner community. This is an important dimension of our strategy. Given that, as I just said, moving the core systems to the Cloud is a large and complex project, and a strong partner ecosystem enabled to scale necessary for these projects. At the end of Q2, our SI partners were engaged in 80% of our Cloud projects. The number of SI consultants grew 16,800, up 39% year-over-year. Specifically, Cloud certified consultants grew more than 200% to over 3,600 reflecting the increasing strength and momentum we are seeing in Guidewire Cloud. We saw similar strength from our solution partners with the number of partners increasing 38% year-over-year to 146. A large solution partner ecosystem can speed up insurers time to innovation and deployment on Guidewire.

Finally, I am very excited to have welcomed John Mullen to our leadership team. John joined last month as President and Chief Revenue Officer, and leads our Global Sales, Delivery Services and Customer Success organizations. He brings to Guidewire deep experience in our industry and a complete understanding of our customers motivations and objectives based on 25 years of experience leading growth teams at Capgemini, including the North American and Insurance business units. John will be instrumental in further unifying our approach to customer engagement with a strategic and consultative mindset and approach.

With that, I will turn it over to Jeff.

Jeff Cooper — Chief Financial Officer

Thanks, Mike. I will start with the summary of our second quarter results, before turning to our outlook. Second quarter ARR ended at $620 million, up 19% year-over-year or 18% on a constant currency basis. As a reminder, we report ARR on a constant currency basis during the year and then update currency exchange rates at year-end. This growth rate benefited from strong new sales activity and growth in ARR from Cloud deals sold in prior periods.

Total revenue was $204.6 million, ahead of our expectations due to stronger performance across all components of revenue. Cloud strength continues to be visible on subscription revenue, which was $62.9 million, up 64% year-over-year. Subscription and support revenue was $84.3 million, up 42% year-over-year. License revenue was $69.8 million, down 10% when compared to Q2 last year. Services revenue was $50.5 million, up 19%.

Turning to profitability for the second quarter, which we will discuss on a non-GAAP basis. Gross profit was $108.6 million. Overall, gross margin was 53% compared to 56% a year ago. The year-over-year decline was driven by the revenue mix shift towards subscription and support revenue, and away from higher margin term license revenue. Subscription and support gross margin was 47% compared to 43% a year ago. We benefited from Cloud infrastructure cost controls we put in place post Q1. We also benefited from a one-time $1.3 million credit from a Cloud service provider that we originally expected to fall in the third quarter from an accounting perspective. Around $800,000 of this credit impacted cost of subscription and support revenue, and the remainder benefited operating expenses, primarily R&D spending. Services gross margin was 3% compared to negative 2% a year ago due to higher billable utilization.

Overall, operating income was $3 million, exceeding our guidance range due to higher-than-expected total revenue and savings related to slower than expected hiring, the $1.3 million credit I just mentioned, delayed internal project spend and some exchange rate benefit due to the dollar strengthening against the euro. We ended the quarter with $1.1 billion in cash, cash equivalents and investments. We also completed our $200 million share repurchase program in the quarter buying back 96,000 shares for $11 million.

Turning to our outlook. I will discuss the full-year outlook, and then I will discuss our expectations for the third quarter. For the full year, we are increasing our outlook for ARR to be between $664 million and $670 million to reflect our second quarter outperformance and continued optimism. This outlook reflects the removal of $3 million in ARR from Russian customers as we are halting all operations in Russia. Per our usual approach, our ARR assumes foreign currency exchange rates as of the end of our last fiscal year. The last couple of years exchange rates had benefited ARR at year-end. If current exchange rates remain unchanged, there would be a negative impact of approximately $9 million to our ARR at year-end.

We are also increasing our outlook for total revenue, which we now expect to be between $784 million and $792 million. We expect our subscription revenue to be a couple of million dollars higher than prior expectations, approximately $254 million, and overall subscription and support revenue closer to $337 million, representing 51% and 34% year-over-year growth respectively. It is great to see this annual growth acceleration. Expectations for license revenue and services revenue remain unchanged.

We continue to expect total gross margin for the year to be around 50%. This assumes approximately 44% subscription and support gross margins, the team has made a lot of progress since the last earnings call, putting in controls on our Cloud infrastructure costs which is beneficial to subscription and support gross margins. However, this is offset by some of the earlier Cloud migration projects taking a bit more effort than we originally expected, and this is impacting services gross margins. We now expect services gross margins for the year to be closer to breakeven. Our commitment to customer success has been a hallmark of Guidewire’s success over the years, and we remain 100% committed to ensuring all Cloud customers achieve successful outcomes.

With respect to operating income, we expect an operating loss of between $50 million and $42 million for the fiscal year. This adjustment reflects the upward revenue adjustment, I previously mentioned. It also benefits from some lower operational expenses largely related to slower hiring and some expense benefit from current exchange rates. While our second quarter cash flow from operations was negatively impacted by the timing of collections, our annual cash flow from operations expectations are unchanged.

Turning to the outlook for the quarter. We expect ARR to be between $632 million and $635 million. Total revenue is expected to be between $186 million and $190 million. Subscription revenue is expected to be approximately $65 million, and subscription and support revenue is expected to be approximately $85 million. We recognize our ratable revenue daily, and Q3 has three fewer days than Q2, which impacts sequential growth. Services revenue is expected to be approximately $51 million. We expect subscription and support gross margins of approximately 43% and total gross margins of 44%. Non-GAAP operating loss is expected to be between $29 million and $25 million.

In summary, it was a strong Q2. We are proud of what the team has accomplished and we are excited to see our Cloud strategy playing out.

Operator, you can now open the call for questions.

Questions and Answers:

Operator

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Matt VanVliet with BTIG. Please proceed with your question.

Matt VanVliet — BTIG — Analyst

Yeah, thanks for taking the question guys. Nice job on the quarter. I guess, as you look at the overall macro demand environment here, are you seeing, I guess, any divergence between overall kind of desire to modernize around the technology stack here? And then, what you are actually seeing in terms of Cloud migrations? So maybe, I’ll ask slightly differently, is the overall market continuing to trend in the positive direction, and you are seeing Cloud demand sort of equate that and seeing a lot of customers now fully entertaining the idea of migrating?

Mike Rosenbaum — Chief Executive Officer

Hey, thanks for the question. I think the simple answer is, yes, we continue to see the overall market trend positively. We did see a a wide range of business objectives that all fundamentally depend on IT agility, and the insurance companies that we support, all sort of recognize that that IT agility comes from the modernization of core systems, or call it, the migration of those core systems to Cloud and getting those systems on the latest release of Guidewire.

All of those things create more flexibility, more agility, more ability to just effectively meet the business objectives, and whether that means launching new product lines or instantiating new digital interfaces and digital channels, new pads to the market through partnerships. And then there is also pretty significant efforts underway to modernize operations through analytics and data, and making better decisions so that the operational efficiency of the overall company can be improved.

All those things in the insurance industry sort of stems from are accelerated by how modern the core platform is. And so all those things, you add them together and it sort of points towards just a steady and continual improvement in the market and the overall demand. Jeff and I have been talking about this for a long time, I think that the market was a bit on pause while the major systems vendors moved to the Cloud. But I think that that approach to Cloud is now well understood and well accepted and gaining traction, and so that’s just overall trend is positive.

Matt VanVliet — BTIG — Analyst

Right, great. And then,

Mike Rosenbaum — Chief Executive Officer

Hopefully, that helps.

Matt VanVliet — BTIG — Analyst

No, that’s very helpful. And then, obviously, a lot beyond just sort of the movement of troops in Russia and Ukraine, but the cybersecurity environment I think has gained a little bit more in terms of the headlines as well in terms of what’s been happening both proactively in some areas and then sort of a, I guess, attack basis, is that impacting any conversations you are having around the Cyence business, I guess, maybe how has that been progressing so far this year and has this created any additional demand?

Mike Rosenbaum — Chief Executive Officer

Yeah, actually it’s a great question. Certainly this incredibly unfortunate situation in Ukraine has caused everybody to step-up their guard, so to speak, as it relates to cyber activity, and that if any company hasn’t done that, they need to immediately. This is pretty unprecedented, I suppose in terms of the global event like this, where it’s very clear that cyber attacks are a component of the dynamic that’s playing out militarily, and that’s extremely interesting, and it’s not just Guidewire obviously in our Cyence efforts, but it’s numbers and numbers of people have commented on this.

You know as the CEO of the company, I will tell you that cyber risk is on the top of my mind, it’s on the top of our Board’s mind, it’s something that we pay a significant amount of attention to, and I expect every CEO in the world is thinking about this more and more as we proceed. That is a risk, right, and that creates the potential for an insurance market to exist and for Cyence to support that insurance market and for that insurance market growth to create growth and demand for Cyence.

But it’s a little interesting. It’s like such a dynamic risk category, that it’s not clear yet how exactly that will manifest in terms of true underwrites and how it’s underwritten. But for sure in the long run, I think that this will be a major line for insurance carriers and a big growth driver for Cyence. But it’s just so dynamic right now that I think different companies are taking different approaches to how they take advantage of the underwriting opportunity that’s supposed to exists based on that risk. But when I think about the long run, just in terms of how much of the value of companies are wrapped up in digital assets and data and how much risk there really is to protecting that from cyber attack, I am confident that it will drive demand for Cyence over the long run. But thanks, yeah, an interesting question.

Matt VanVliet — BTIG — Analyst

All right, great. Thank you.

Operator

Our next question comes from the line of Jackson Ader with J.P. Morgan. Please proceed with your question.

Jackson Ader — J.P. Morgan — Analyst

Great. Good evening, guys. Thanks for taking my questions. The first is really just a follow-up on the Russia and Ukraine war. I mean, you mentioned that you have the office or the footprint in Poland, can you just clarify how many people are there, what functions generally? And then any contingency plans in place at the moment?

Mike Rosenbaum — Chief Executive Officer

Sure. So, it’s an R&D location with about 100 people. It’s driving important part of our R&D organization, and we feel very, very confident and very really bullish on that market as a source of talent for us. Obviously, it’s a trying circumstance for them, and we have been doing everything that we can to support them, especially around humanitarian efforts in supporting people who are being evacuated from Ukraine. That’s been very, very important to that team.

But I don’t think that in the long run, this has a negative impact on Guidewire. In the short run, we have got to do what’s necessary for our employees and for their families and for their friends, and just what’s morally correct, in order to where they are putting our priorities over the short period of time. We are all obviously hopeful that this war ends as quickly as it possibly can. But that’s basically the size of the effort in in Krakow, actually in Poland, and we are very actually, I would say, if they are listening, very proud of the work and the stance that they have taken to this, and we are proud to have the opportunity to support them.

Jackson Ader — J.P. Morgan — Analyst

Okay. That’s great.

Mike Rosenbaum — Chief Executive Officer

Does that help answer your question? I just want to make sure we answer,

Jackson Ader — J.P. Morgan — Analyst

It does. No, yeah, it absolutely does. I was just looking for more detail. It feels a little clearly catalyst to pivot to something more towards the business. But then the delayed hiring and the delaying of some internal projects, Jeff, I think you mentioned helping margin. Just curious, the projects obviously that’s Guidewire’s choice, but the delayed hiring is that because of a tight labor market or are you — I don’t pried eyes on the hiring efforts?

Jeff Cooper — Chief Financial Officer

No, no. Yeah. We are full steam ahead in terms of our hiring efforts, and in fact, we have been investing in some of our talent attraction functions in order to better support that. I think it is as high as it has been a tight market, especially for the types of talent profile that we are looking for, and so that has impacted our hiring plans a little bit. But I would say, no change to our overall hiring plans. And then on the project side, those are still projects that we expect to complete for the most part the internal projects that I referenced in the fiscal year. We just didn’t get started on them as quickly as we originally thought.

Jackson Ader — J.P. Morgan — Analyst

Okay. All right, great. Thank you.

Operator

Our next question comes from Peter Heckmann with DA Davidson. Please proceed with your question.

Peter Heckmann — D.A. Davidson — Analyst

Hey, good afternoon, and thanks for taking my question. Just in terms of the Cloud deals, can you remind us a little bit about net new versus into out migrations kind of the mix that we have seen over the last four quarters? And talk a little bit about the relative complexity of some of those on-premise to Cloud deals, whether there are hitting your expectations or you are finding them a bit more complex?

Mike Rosenbaum — Chief Executive Officer

Yeah. Super questions. So over the past four quarters, I would say overall 50-50, right, is in terms of net new versus Cloud migrations. And then with respect to complexity, I think that, and this is nothing special about Guidewire, it all has to do with what you are replacing. So to the extent that you are replacing something, the new system has the map to sort of one for one, the functionality, procedures, capabilities of the system you are replacing. Those things, based on how complex the system is that you are replacing are complicated. When we do net new with either new customer or existing customer but a new line, those things are very straightforward.

And so I would say that the complexity of a migration and a replacement of a system is complicated and equal to or slightly above what we expect, the complexity of a net new line of business or a net new instantiation of something that on Guidewire Cloud we can support is surprising all of us with how smooth and fast it goes. And so, when it’s a net new line, there is a lot of great technology here that can accelerate those types of projects. And so that’s kind of the feedback that we get is these things, like I said in the prepared remarks, these things are very, very complicated and they have to be done very carefully, and they have to be done very completely and sometimes they are slow and they take a little bit longer than we thought or we want. But on the net new side, which is a significant portion of the demand, things are going quite well, and we are pleasantly surprised by how quickly we can execute on those kinds of projects.

And I think, somewhat if you give me two second seconds to go a little long on this answer, this is an interesting characteristic of Guidewire strategically, which is that we can be a platform for these companies to do the vast majority of their core system processing, the big lines of business that they need to support and run their companies, but also on the very same platform provide them a mechanism to innovate and be agile and launch new product lines and integrate the existing product lines into new channels, all on that same core system. And I think that’s a unique characteristic of the value proposition we provide for our insurance customers. So hopefully that helps, and thanks for the question.

Peter Heckmann — D.A. Davidson — Analyst

Yes. Thanks for the insights. And then just in terms of, if I heard you correctly of the 100 Cloud deals closed, 70 were for InsuranceSuite, and I think you said 20 clients have at least one module live. What type of timeframe should we be expecting for all 70 of those to have at least one module live, and are we looking out maybe 2 years, 2.5 years?

Mike Rosenbaum — Chief Executive Officer

No, I would say you should bring that in a little bit probably stretches out at the most a year and a half and with the majority within a year. Things are ramping up a lot for us in our operations with our services and partners, and there is a lot coming online over the next 6-months. But you shouldn’t think about it as a 2 year to 2.5 year timeline. It’s more 1 year, 1.5 year timeline for the majority of the accounts.

Peter Heckmann — D.A. Davidson — Analyst

Okay. That’s good to hear. Thanks.

Mike Rosenbaum — Chief Executive Officer

Yeah. Thank you.

Operator

Our next question comes from Ken Wong with Guggenheim Securities. Please proceed with your question.

Ken Wong — Guggenheim Securities — Analyst

Great. This question I think probably for Jeff. I believe last quarter you guys mentioned having kind of plan for higher churn of head count, and didn’t see it. Just wondering, any update there as far as that churn activity?

Jeff Cooper — Chief Financial Officer

Yeah, we are still really pleased with our overall employee attrition rate, I think it’s trending below, kind of what we see in a lot of our peer group in the Valley here. That being said, we we have modeled some higher attrition this year. We didn’t see that as we had expected in Q1. We have seen a little bit of increase in attrition in some key elements within product development and some areas of the organization. We are talking 1 percentage point or 2 percentage point higher than what we saw previously. So it’s something we are clearly watching. And I already mentioned how we are seeing some of our talent attraction efforts to make sure that we can show those seats and keep hiring aggressively, but still trending positively, so more in line with how we adjusted our model post-Q1.

Ken Wong — Guggenheim Securities — Analyst

Got it. And then just as we think about the kind of the higher confidence in the AAR run rate. I see that modest uptake as a sort of an interpretation that you guys feel better about the business, is that more just a byproduct of, hey, we are another quarter along, so further along the kind of you are closer to the goalposts? Or is there actually some, I know it’s only 3 months, but incremental change in terms of either conversion or kind of conversations are further along, and you have a higher likelihood of closing, which is a lot of sense for kind of what else you are seeing underneath that that might be pushing some of those numbers higher?

Jeff Cooper — Chief Financial Officer

Yeah. So clearly, we have done a much better job this year with respect to linearity, and you see that in the first half results. So, that is playing out very positively and something that was a push for us this year. As we inspect pipeline and look at the back half of the year given where we are today, we feel very confident that pipeline coverage is there, the activity is high, the deals are all there for us. Obviously, as you know, our history, Q4 for us is always a very significant event. And so that is out there on the horizon and causes us to be a little bit cautious as we have good visibility into these deals, but Q4 is still a couple of quarters away. So I think that’s how we are thinking about it. We did layer in some unexpected churn related to the Russian customers, had that not been there, obviously we would have raised our outlook a little bit more.

Ken Wong — Guggenheim Securities — Analyst

Perfect. Thanks a lot.

Operator

Our next question comes from Michael Turrin with Wells Fargo. Please proceed with your question.

Michael Turrin — Wells Fargo — Analyst

Hey, there. Thanks. Good afternoon. Appreciate you taking the questions. Maybe given that the fiscal Q2 upside on just the headline numbers revenue and operating income, it looks like you would be buying more in Q2 than maybe the midpoint of the full year outlook would carry through. And so, I know there was a comment around $3 million tied to Russia, and appreciate the context of the Q4 commentary Jeff just made as well, but anything else we should just be mindful of as you pace towards the end of the fiscal year given the Q2 upside was more pronounced, but maybe you didn’t carry through on the full year guide just yet?

Jeff Cooper — Chief Financial Officer

Yeah, I mean I look, I think we are trying to monitor a number of things going on. And so as we inspect the year, the first half has been very promising in terms of our ability to drive better linearity. But the big mountain decline is always the back half of the year. And so we feel very good about all the activity that we are seeing there. And so, I wouldn’t necessarily read anything into that other than that. There was this wasn’t unexpected impact of $3 million of ARR that came out of the number, but absent that, we feel very good about where we are for the first half of the year, and it just gives us increasing confidence for us to hit our targets for the full year and slightly raise those targets.

I wouldn’t say, it’s always hard for us to pouch when a deal is going to fall. Q2, was a very good outcome for us, and we often get the question is, did we pull forward deals, and we don’t really think about it like that, I mean these are long complex arrangements, and so we are very pleased with the activity that we able to get over the finish line in Q2. At the beginning of Q2, some of those deals we may have thought we would close in Q3, so happy to see the teamwork and get those deals over the finish line. But we always think about the business on an annual cadence, and think about activity and pipeline in that way.

Michael Turrin — Wells Fargo — Analyst

That all makes sense. So with $1.1 billion on the balance sheet, the buyback program you mentioned came to completion. How are you thinking about just capital allocation from here, is this environment where you could have some appetite for tuck-ins that help supplement some of the emerging categories of risk given the broader pullback you are seeing in valuations, or maybe just some context around the optionality you are preserving there? Thank you.

Mike Rosenbaum — Chief Executive Officer

Sure, it’s a great question. Yeah, pretty consistent with what we said before is, we are open to looking for nice acquisitions. As I mentioned, things are going very well for us so far with HazardHub. We are quite pleased with the interest that exists in the customer base, and even outside of the customer base for that products. We are very happy with that, and gives us a little bit of confidence to be looking at things as you say, we expect valuations to be a little or maybe a whole lot more reasonable. And as we build confidence in our Cloud transformation, and our success in selling it, our success in deploying it, just feeling more and more confident that that future is assured for us. That gives me more confidence that we could look more strategically at other things that we could add to the product portfolio at Guidewire. So I feel great about the position and optionality it gives us, and also the overall strategic position in the company and our ability to sort of execute on this one data point at least under my watch so far of HazardHub. So all those things pretty positive, and hopefully that gives you enough context to understand how I am thinking about this.

Michael Turrin — Wells Fargo — Analyst

That’s helpful. Thank you.

Operator

Our next question comes from the line of Bhavan Suri with William Blair. Please proceed with your question.

Dylan Carden — William Blair — Analyst

Hey guys, it’s Dylan on for Bhavan. Congrats on the quarter. And thanks again for taking our questions. Maybe two from a higher level for me. First, as you guys think about the value from a carrier perspective right from automation and straight through processing being unlocked and enabled by better leveraging data, you have announced Data Studio, a number of partnerships with data providers and a number of wins here in the quarter, I think you highlighted earlier. But how big of a focal point is this for carriers as they are thinking about their operational efficiency? And maybe how that contributes to some of their modernization initiatives as well?

Mike Rosenbaum — Chief Executive Officer

Hey, it’s a great question. I would say some of the carriers that we work with is a top priority. Other carriers, it’s less of a priority, and they are focused on other things. I think that there is a few of our customers that are just extremely focused on this and see a very, very big potential for it. There’s others that are more focused on, call it, customer engagements and growing the top-line and sort of think about customer experience in a less automated way, and so their strategy is somewhat different, but I think the potential certainly exists in the overall industry for, I would say, small percentage-based operational improvements, but when you multiply it by the size of the industry, they are pretty dramatic improvements in the way that the industry works overall. And those are the things that we see from these customers, especially on the claims side, who are interested in just really honing in on the data points and the analysis and the models that they can apply to the workflows that drive the claims operations, because there is potential there, I think to get a lot more efficient. So it’s a bit of a mixture. And I would guess and this is just, I don’t know if it’s guess, maybe it’s an informed projection that as this starts to unfold and you see more success from some carriers, you will see as that gets proven this will get sort of pulled in to the rest of the environments based on the success of these programs.

Dylan Carden — William Blair — Analyst

Got it. That actually going to lead into my second question as well. So looking at the other side of that equation, right, from a revenue optimization perspective, I think a key focal point at the conference last fall was around kind of enabling embedded insurance, right, so kind of a lot of carriers talking about digital experiences, purchases becoming more digitally focused enabled. I guess, how are you guys kind of thinking and positioning the Cloud platform today as enabling this opportunity for carriers whether established or kind of new providers to capitalize on embedded insurance within the point of consumption, how that’s more efficient maybe than the legacy systems available today? And then how this could maybe serve as an overall incremental kind of driver of premium growth? Thanks guys.

Mike Rosenbaum — Chief Executive Officer

Super, super question. I will give you the technical side of it and then the business side of it next. The technical side of it is, Guidewire Cloud supports the ability to create products faster and adjust those products more quickly, and then the APIs necessary to embed those quote flow, so to speak, involving, getting a price and actually committing yourself to ensure those products, those APIs get generated much more seamlessly and automatically so that these kinds of initiatives are much faster and easier to execute on. So that’s like the technical side of how Guidewire Cloud helps the carrier with these kinds of things.

But the fundamental, I guess, business opportunity for insurance company I think is pretty profound. There is a lot of projections around how people expect auto and motor lines to change over the next decade just in terms of where people, where households, where drivers procure insurance, and whether or not it happens with the sale of the car, whether it happens the way it does today, at least in the U.S. market and sort of separated from that that car purchase. But that same idea can apply to whole bunches of different things. there is like vertical markets for small commercial insurance, you can think of different companies playing a more significant role in the distribution of insurance products to small businesses as they get started or as they get loans or as they, there is just this opportunity I think with digital agility, with the ability to embed these things technically and all these other business process flows that make the distribution of insurance a lot more efficient and a lot more effective.

And so, these things are very, very exciting for a lot of our customers. And like I said, these things all come down to IT agility. and I often tell people like, idea is great, right, but then you got to look at how expensive it is to execute that idea before you can assess whether the idea is going to work. And so if you can make the costs to just attempt that idea with an IT project, you can do a lot more experiments. You can just think about the approach that you take to your business in a very different way when you have a greater degree of IT agility. And that’s exactly what we are trying to do with Guidewire Cloud, with new things like our Advanced Product Designer and our new digital layers that are embedded in the Cloud products. So all designed to make these experiments and these new ideas a lot more easy for companies to execute on. And thanks, I really appreciate the question.

Dylan Carden — William Blair — Analyst

Yeah. Very helpful. Thanks again for taking the questions guys, and congrats on the quarter.

Mike Rosenbaum — Chief Executive Officer

Thank you.

Jeff Cooper — Chief Financial Officer

Thank you.

Operator

Our next question comes from Parker Lane with Stifel. Please proceed with your question.

Maxwell Osnowitz — Stifel — Analyst

Hi guys. It’s Max Osnowitz on for Parker. Congrats on the quarter. For starters, I just want to dig a little deeper on HazardHub. I know you mentioned there is a few nice announcements, standalone deals in the quarter. Can you just talk a little bit more about the conversations around that? And then what the kind of competitive market is for HazardHub? And then additionally, if there is room for upsell into those kind of siloed lands, or if they are just going to remain HazardHub customers solely?

Mike Rosenbaum — Chief Executive Officer

Sure. Thanks for the question. So with respect to property data somewhat my perspective is the more you have it, the easier it is to access, the higher the quality the better, you are going to be, the better job you are going to be at assessing the risks and the underwriting price of risk. And a very, very significant number of companies in the world could benefit from more fluid, more up-to-date, more accurate, more robust data as it relates to property risk. And the acquisition thesis was that this is a really good product, really good company, and that we can plug it into a a distribution team at Guidewire that had embedded relationships with a whole bunch of different insurance companies, and just accelerate the sales. And so far that’s playing out really well. The feedback from the customers — excuse me, the feedback from our sales team, and then next the feedback from the customers has so far been very positive and it gives us a lot of confidence.

As it relates to the competitive, it’s a reasonably competitive space. But this is a really interesting data asset to put together. The team at HazardHub did a really, really good job over a number of years putting together the very — think of this as like really, really hard nitty-gritty work associated with taking disparate datasets and putting together and matching them and going out and finding the datasets that they need in order to predict certain risks, and really just really fallen in love with that domain in such a way as they can put together something that is really, really robust and complete.

The other side of it, which I think is very interesting is, this is all API based. I talked about this a little bit before is that, the idea isn’t so much as a complete solution that does everything, but it’s a point solution that you can embed anywhere you needed to be embedded, and because it’s all based on this idea of an API, the companies can use it wherever they want and however they want, and that’s also very interesting. So those are all, I don’t know, characteristics that I think give you a little bit more color about why I think we’re seeing the — why we have the positive quarter and why we expect and hope for continued success there.

Maxwell Osnowitz — Stifel — Analyst

Yeah, that’s really helpful. Thanks. And then just as a follow-up, thinking about the partner ecosystem, it’s really grown over the last 2 years, especially over the last year and still the last two quarters. Is that something that we should continue to see growing at this pace or kind of hampered down a little bit and then what are the end expectations for this ecosystem, if you will?

Mike Rosenbaum — Chief Executive Officer

I certainly hope we will continue to see it grow. And the reason is fundamentally what we are doing with Guidewire Cloud is, we are making Guidewire Cloud easier to integrate to. So if you think, what’s the level of effort for Guidewire and a partner to build an integration together, and it’s X. And if we can draw X down to a 10th of X or maybe some day, even 100th of X, there going to be thousands more partnerships that makes sense for us to build and launch together. And so the expense necessary, because I will connect it back to a previous answer I gave about doing experiments, right, and how much it costs to do an experiment, when two companies launch a partnership together, there is a bit of a risk that both companies are taking, how much demand is there for in Guidewire customer base for this partner solution? Is it worth me doing an investment to build an integration to Guidewire in order to penetrate Guidewire’s customer base? I don’t know, that’s a risk. So at the cost to do that integration is high, you got to be really confident that it’s going to pay off before you can justify building that integration.

But as we bring the cost of doing that integration down and down and down and down, it makes the equation much easier for people to solve and you would say, well, Guidewire, is a great insurance customer base. they have got this many customers on Cloud I can afford to do a lightweight integration to Guidewire Cloud to see what the demand is, and you will see a lot more partnerships, a lot more partner applications available on our marketplace. I think this is a pattern that you see in a number of other enterprise software ecosystems, and it is certainly something I expect we will be able to emulate here. And as you know, as we mature our Cloud offering and the integration expense comes down and down and down as we get more Cloud customers, net installed base of endpoints that those partners can connect to goes up and up and up and up, it just creates a healthy dynamic that will cause the ecosystem to grow. So that’s how I see it, and hopefully it helps to answer your question.

Maxwell Osnowitz — Stifel — Analyst

Awesome. Thanks. Yeah, it’s really helpful.

Mike Rosenbaum — Chief Executive Officer

Yeah. Thank you.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Mike Rosenbaum for closing remarks.

Mike Rosenbaum — Chief Executive Officer

I just want to thank everybody for participating in the call today. We are obviously thrilled with our continued cloud momentum across new existing and existing customers and with Tier-1 and Tier-2 insurers. It’s a great validation of strategy and gives us increasing confidence in the long-term opportunity here. And so we look forward to catching up further with many of you throughout the quarter. So thanks very much. Have a great evening.

Operator

[Operator Closing Remarks]