Guidewire Software, Inc. (GWRE) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to Guidewire to acquire [ Exponential ] (sic) [ hyperexponential ] Business Call. [Operator Instructions] I would now like to turn the conference over to Alex Hughes, VP of Investor Relations. You may begin.

Thank you, Lisa. Hello, everyone. With me today is Michael Rosenbaum, Chief Executive Officer; John Mullen, President; and Jeff Cooper, Chief Financial Officer. Details regarding today's announcement can be found in our press release issued today as well as in our related Form 8-K furnished to the SEC, both of which are available on the Investor Relations section of our website. We have also posted on our IR website a supplemental presentation to accompany this discussion. Statements today include forward-looking ones regarding the proposed acquisition of hyperexponential, including expected financial and ARR impact, transaction financing, anticipated timing of closing, strategic benefits, operations and other matters. These statements are subject to risks, uncertainties and assumptions and are based on management's current expectations as of today and should not be relied upon as representing our views as of any subsequent date. Please refer to the press release and risk factors and documents we filed with the SEC, including our most recent annual report on Form 10-K and our prior and forthcoming quarterly reports on Form 10-Q filed and 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. During this call, we will offer -- refer to annual recurring revenue or ARR, which is an operational metric we use to quantify the annualized recurring revenue of active investor contracts, and it should not be considered in isolation or as an alternative to GAAP financial measures. And so with that behind me, I will now turn the call over to Mike.

Thanks, Alex. We're joining you live from our Connections Conference in Las Vegas. And I know we'll see many of you later today in person. It's an exciting day for Guidewire, and I'm thrilled to announce our agreement to acquire hyperexponential. When I joined Guidewire in 2019, the goal was to transform the company and bring the insurance industry into a common cloud platform. That objective was never really about efficiency and where the software runs. It was about innovation and upgrades. If we can make upgrades routine, core systems would stay current. And if core systems stayed current, insurers would be able to innovate faster. That objective, while not yet complete, has largely been achieved. We now have the majority of our customer base running their insurance core applications on our cloud platform and delivering innovation to that customer base faster than ever before. And we're seeing it work. Our customers are moving faster on digital initiatives, faster on product initiatives, faster on pricing and rating, faster getting new claims processes and workflows into production, helping to drive better insurance outcomes for their customers. And then in 2023, generative AI came along, and it turns out it works far better than anyone anticipated. And we see clearly that it will change the insurance industry in a lot of very positive ways. The good news is our platform is ready for it because an insurance company just cannot take advantage of AI on a core system that's decades behind. Today, we see 3 transformations happening in insurance. Each is an equally large market opportunity for Guidewire. First is the continuing system modernization driving our core business. The second is a revolution in claims automation and AI-based systems. And the third is a dramatic transformation in underwriting from a manual and cumbersome human-centered workflow to something I'll call agent -- agentic underwriting. It's our belief that in the same way coding tools like Claude and Codex and Cursor have transformed software development, agentic platforms will transform the work and the workflow of the underwriter. Today's acquisition is about delivering that new agentic underwriting platform. It's a commitment by Guidewire to lead the transformation to agentic underwriting across every segment and line of business in commercial insurance. Getting this right requires deep industry experience across actuarial science, data and analytics, pricing and core systems. This experience and day 1 capability is the result of a hyperexponential Guidewire combination. We believe this is an emerging $30 billion market and a significant growth engine that will accelerate us. Few decisions matter more to an insurer's profitability than which risks to underwrite and how to price them. Yet much of that work is still manual, modeled on spreadsheets and require significant human effort. Agentic AI systems can now automate increasingly complex underwriting work and improve the speed, consistency and quality of decisions, opening up an opportunity far beyond traditional IT software spend. This acquisition brings together the 2 best companies in insurance technology. Hyperexponential has built the most advanced underwriting platform in the industry. It's a fast-moving AI-forward team of almost 300 people with deep insurance experience. We gained a foothold in Europe, deep London market expertise and a commercial lines customer base that is the envy of every insurance technology company in the world, including Guidewire. With Hyperoperator, AI agents progressively automate submission ingestion, risk evaluation, triage and pricing preparation, all within the insurers own frameworks and controls. And what's especially compelling about this acquisition is what we can do together. We bring the core systems, policy and claims data, cloud infrastructure and customer relationships that underpin the industry's operations. By connecting that operational foundation with hx's underwriting intelligence, we believe we can deliver something truly differentiated, an end-to-end solution that helps insurers both run their business and make better underwriting decisions. So I'm excited to welcome Amrit Santhirasenan and the hx team to Guidewire. Together, we have an opportunity to accelerate innovation and bring these capabilities to a much broader customer base and create significant long-term value for our customers and shareholders. I'll now turn it over to Jeff to talk a bit more about the deal.

Thanks, Mike. We're very excited about this transaction and what it means for Guidewire's long-term growth profile. Let me briefly walk through the transaction terms and expected financial impact. Under the terms of the agreement, Guidewire will acquire hx for approximately $1.7 billion in cash consideration, inclusive of an employee retention pool, plus a contingent earn-out of up to $400 million based on post-closing performance. This represents potential total consideration of approximately $2.1 billion. The earn-out is designed to align a portion of the consideration with the continued growth and performance of the business over the next 3 years. We expect to fund the transaction through a combination of approximately $1 billion of new Term Loan A financing and cash on our balance sheet. And we will regularly evaluate our optimal long-term capital structure to support our strategic ambitions. From a growth perspective, we expect hx to be immediately accretive to our ARR growth rate, contributing more than 650 basis points of incremental ARR growth in fiscal 2027 on an inorganic basis. Importantly, beyond that initial contribution, we believe the combination can support an acceleration of our organic, growth -- ARR growth rate of at least 150 basis points beyond fiscal 2027, reflecting the significant opportunities to expand adoption of hx's technology across our customer base and accelerate the role of AI in delivering underwriting outcomes for the industry. We expect the transaction to close during our second fiscal quarter ending January 31, 2027, subject to customary closing conditions. There is no impact to our first quarter guidance, and we intend to provide an updated outlook for our fiscal 2027 on our first quarter earnings call. We believe this acquisition represents a compelling investment that extends Guidewire's competitive leadership, significantly expands our addressable market and creates a meaningful new engine of durable growth and long-term shareholder value. With that, we'd be happy to open the call up for questions.

[Operator Instructions] Our first question for the day will be coming from the line of Alex Sklar of Raymond James.

Mike, maybe first one for you. Can you just talk about what's the meaning of this acquisition, how that impacts your own build around UnderwritingCenter? Is this completely -- is this complementary at all to what you've been building? Does this kind of take priority over everything that you've built so far in UnderwritingCenter? Just how we should think about covering that full underwriting workflows now between the 2 solutions?

Yes, sure. Great question. So there's definitely some overlap in terms of the vision, but we think that the approach is going to be very complementary. Like, this is a space and a set of capabilities that are really just emerging at this moment. And so I'm very excited to be able to combine the teams and the approach. Everything that we've done in this area, I think, is only going to be able to sort of help us, bring a solution to market that covers the complete spectrum of commercial lines. And I think if you would like dig one tiny level deeper, Guidewire has a lot of experience in what we call flow-based business and sort of the more sort of scalable segments of commercial lines, whereas the hx team has focused more on the sort of very complex commercial lines in the underwriting and underwriting in the London market where these things are almost completely bespoke per risk. And so the combination of both of those approaches, we think, is going to be able to allow us to bring a product to market that covers the complete spectrum.

Okay. Great. And then maybe just a quick follow-up. Can you provide any color on how hx prices? Is it similar on a premium base level? Any color on sizing of kind of deals that they have today and that $80 million of kind of, implied ARR for this year as it relates to some of your other centers today?

Yes, it's a great question. It's one of the reasons why this is such a great strategic fit. This is a company that emulated Guidewire's approach to basis points-based pricing, and it fits right in. And it's like -- of all software segments, sort of this concept that we're helping insurers achieve insurance outcomes rather than pricing per seat and really charging based on some -- a measure of premium that aligns very clearly to the benefits that the software provides, it fits in perfectly. We're not at this point prepared to speak about the deal size. You guys are probably able to do some math. It's a pretty concentrated company just like Guidewire. The insurance industry and where the majority of this premium is written, it's really not thousands of companies. And we believe we're going to be able to achieve very significant ARR outcomes here. And so yes, the deals are pretty significant.

Our next questions come from the line of Dylan Becker of William Blair.

Congrats on this really exciting acquisition here. Maybe to kind of stick with that idea of deal sizes, maybe for John, we've talked about kind of the shift from IT to outcomes in the industry, and I think agentic underwriting sits right at the core of that. But could you give us a sense of how you're thinking about kind of the underwriting sales cycle and maybe especially given the fact that it ties explicitly to faster binding processes and better loss ratios and maybe kind of how it ties explicitly to outcomes and dollars, what that means maybe for sales cycles and underwriting?

Yes. Great, Dylan. Thanks for the question. So as Mike mentioned, the way that this combination of how Guidewire has historically thought about things and how hyperexponential thinks about things comes together really nicely. If you think about the history of Guidewire, so much of what we're doing is building the right capacity and the right solution and platform for the industry to run on. And a lot of that was about gaining efficiency, IT efficiency, operating efficiency. As we start to move into agentic underwriting across all underwritten lines, all markets in the world, we start to get more into the conversation of risk selection and pricing, capital allocation, and we start to think more about what it takes to compete to grow an insurance company and get the right capital adequacy to drive the right profit for the underwritten risks. And that's why I think this combination is so rich. It gets us right at the heart of what the C-suites are talking about and what they're talking about with their Boards to compete in tomorrow's world, which is going to be far more dynamic. And we haven't even yet scratched the surface on what it means to then put all of that focus on from capital adequacy to reinsurance contracts and risk management principles, really fundamentally giving us an opportunity to change the return on equity for the entire industry and really drive both carrier efficiency and effectiveness and also industry effectiveness overall, which is exciting. And this is really fundamentally what Amrit and team, this is where they grew up. This is who they are. So it fits really well.

Right. Right. Okay. Very helpful. And then maybe, Mike, on kind of the comments around the shift to bespoke. I think there's a lot of momentum, obviously, in the specialized space, but kind of what this unlocks from an opportunity perspective to get more personalized, right, more specialized in underwriting, closing the coverage gap kind of feels like it aligns to that broader trend of where premium is flowing. But kind of any commentary on the opportunity to get more personalized there?

Yes, I love the question. I think when you think about technology and maybe very specifically AI, agentic systems, you tend to say, how does this impact the world and the workflow that I live in right now. And the knee-jerk reaction is, okay, take the workflow, take the approach we have today, we could do it faster. We could do it more efficiently. But really, what ultimately happens when you introduce a new technology like this is that you end up changing the nature of the way that you conduct your -- the business, the workflow and in this case, the underwriting. And so I think there's been this push and Guidewire has been a big part of this is like how do we structure risk? How do we define the variables that represent the core components of a risk, extract those things and put them into a model and enable us to gain efficiency and sort of push things through a flow. But when you start to have what's effectively now -- you could think about it as infinite intelligence that you could apply to a situation and you're not kind of controlled by how many people work in your underwriting department, you can start to think that the approach to underwriting will shift. We think that is a very exciting component of this. It's not something like we can drive on our own, but by creating a platform that legitimately operates at scale in the insurance industry, it's very logical to believe that this trend that you're talking about will continue. That's an exciting part of this. I think there's also sort of -- this other kind of paragraph to that thought about how this potentially changes the way that brokers interact with insurance companies and that how these risks are shared up and down the value chain. These are like more strategic components of this vision that I think will come out over time, but I actually really appreciate the question because it's definitely a part of the thinking and a part of what we get when we bring Amrit and team into Guidewire.

[Operator Instructions] and our next question will be coming from the line of Tamjid Chowdhury of Guggenheimer (sic) [ Guggenheim ].

This is Tamjid Chowdhury from Guggenheim Securities. I guess the first question, hyperexponential is an AI-native focused -- AI-native company that's focused on underwriting and pricing workflow specifically, right? And this acquisition is a year after you announced UnderwritingCenter and PricingCenter. Can you walk us through like what -- how you thought about the make or buy decision there?

Sure, sure, sure. So first of all, I would say, I think we are very lucky to have the opportunity to acquire hyperexponential at this point in their growth trajectory. This is a one-of-a-kind company. And you just have to nurture a relationship with a founder like Amrit, in this case, in my case, like over years. And that relationship, that trust, that alignment of vision and that alignment of culture is -- you tend to like think of these things as financial transactions because that's sort of the headline. But underneath, it's both sides really understanding each other, understanding the culture, understanding the vision, understanding the approach and really trusting that the entity that they have created, this company is going to join Guidewire and really see a path towards executing their mission more effectively and faster. And I think that's just a very, very important part of this. We immediately boost our capacity to bring a solution like underwriting center to market and be successful. We just immediately put ourselves in the #1 position, the default place where someone is going to look to look in order to think about making a decision like this. And we bring almost -- I think the company is now almost 300 people that have spent years focused on this like very complicated commercial lines underwriting process, and that's a big part of this. And so when you look at the like software capabilities that we've built and the software capabilities that they've built, there's obviously going to be a process we work through to assess the overlap and bring a joint vision for that product functionality to market. But when you combine 2 companies like this, it is so much more than the software, honestly. It's that experience and energy and ambition that I'm very excited about getting to bring that to the commercial lines underwriting market. I'll let John give a comment here.

I'm going to add one quick comment there. So if you think about pricing, our enterprise pricing and rating is a fairly defined software market, okay? But the flow-based business that Mike talked about is very fundamental to what we've done with the acquisition of Quantee and where PricingCenter going. And over time, that road map is going to cross over into admitted lines in the U.S. and specialty lines overall. But if you think about those complex risks from a rating and pricing where the actuary is the underwriter, that's really what hyperex is very good at. So solving that across all lines is part of this equation. The other part of this is underwriting is as yet -- that's not necessarily specifically a software market. It is an analytics market. It's a software market. It is a human capacity market. It is a capital adequacy market. This is the part where unlocking this ambition to solve that problem and to really fundamentally define what that space is going to be in how we serve carriers is the part that unlocks this and by no means is a binary between what we've done with the UnderwritingCenter and what hyperexponential brings. It is truly a combination to go after that space across all lines.

Great. Are there any finer points you can share on like the customer count for hx and any kind of overlap statistics between Guidewire and hx?