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Guidewire Software, Inc. (NYSE:GWRE)
Q3 2018 Earnings Conference Call
June 5, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Please stand by. Good day, and welcome to Guidewire's third quarter Fiscal 2018 financial results conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Curtis Smith, CFO. Please go ahead.

Curtis Smith -- Chief Financial Officer 

Good afternoon and welcome to Guidewire Software's earnings conference call for the third quarter of Fiscal Year 2018, which ended on April 30th, 2018. My name is Curtis Smith, Chief Financial Officer of Guidewire, and with me on the call is Marcus Ryu, Guidewire's Chief Executive 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 the Investor Relations section of our website at ir.guidewire.com. As a reminder, today's call is being recorded and a replay will be available following the conclusion of the call.

During the call, we will make forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigations Reform Act of 1995 regarding trends, strategies, and anticipated performance of the business, including additional information related to our recent acquisition activity.

These forward-looking statements are based on management's current views and expectations as of today and should not be relied upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. Actual results may differ materially. Please refer to the risk factors in our most recent form 10-K and 10-Qs filed with the SEC.

We will also refer to certain non-GAAP financial measures to provide additional information to investors. The reconciliation of non-GAAP to GAAP measures is provided in our press release. Reconciliations and additional data are posted in a supplement on our IR website.

During the call, we may offer incremental metrics to provide greater insight into the dynamics of our business. These details may be one time in nature and we may or may not provide updates in the future.

With that, let me turn the call over to Marcus for his prepared remarks and then I will provide details on our third quarter results before providing our outlook for Q4 and Fiscal 2018. Marcus and I will then take your questions.

Marcus Ryu -- President and Chief Executive Officer

Thank you, Curtis. Our third quarter financial results exceeded our revenue and non-GAAP profitability guidance ranges, with total revenue of $140.5 million and non-GAAP earnings of $0.05 per share. Momentum with cloud-based solutions continued in the third quarter. Almost 50% of our year to date new sales are subscriptions and we continue to be at the high-end of our prior communicated range of 30% to 40%, with nearly all of the remainder coming in the form of traditional recurring term licenses.

The transition to cloud-based solutions continues for both the P&C industry and for Guidewire. Cloud-based core systems and a delivery model in which the solution is delivered the vendor in production are still relatively new concepts for P&C insurers, but we are seeing broad interest in all regions and from all segments of our market. Smaller insurers have been earlier adopters of cloud core systems, but the benefits of simplification and risk transfer are just as compelling to large and midsize insurers.

Cloud implementation should enable us over time to reduce the total cost of ownership for our customers through more standard implementation and integration and the leverage of cloud-native architectures. Our market experience strongly suggests that lowering TCO combined with the transfer of risk and complexity away from our customer's operation to a trusted partner will increase the rate of market adoption.

Cloud adoption comes at a time when insurers and their CIOs are challenged with managing extremely ambitious technology project agendas with finite resources and management bandwidth. By transferring non-differentiating core operations to Guidewire, our clients can focus their resources on driving value for policy holders, by delivering new products and digital engagement.

Cloud economics are also compelling for Guidewire because we are compensated for bearing that additional risk and complexity with annual subscription fees that are substantially greater than comparable annual term licenses. Although we're still in the earlier stages of price discovery, we expect cloud deployments to drive a material expansion of our TAM, as both existing and new customers are attracted to the convenience, efficiency, and value that cloud-based core systems offer.

The shift to cloud deployment also enables us to ensure that customers are on the latest release of our software, which avails them of the full benefit of our R&D investments and reduces our maintenance. We're very excited about the opportunity and customers are excited as well, as reflected by the adoption of InsuranceSuite Cloud in the third quarter by two existing customers. One of these is a Tier 1 insurer who will be using InsuranceSuite Cloud to drive premium growth in a new line of business. The other is Grinnell Mutual, a regional insurer based in the Midwest, which had already licensed InsuranceSuite and has now opted for Guidewire to implement and manage it as a cloud-delivered solution.

Looking at sales activity beyond InsuranceSuite Cloud for the future, we again enjoyed a mix of activities from new and existing customers. In the quarter, we added five new insurers to our customer community, for of whom selected InsuranceSuite, including an international business unit of Travelers, the second-largest writer of US commercial property and casualty insurance and also a leading provider of auto, home, and business insurance.

Ayr Farm Mutual, based in Ontario, Canada, a provider of auto, home, farm, and commercial insurance selected a broad set of products, including InsuranceSuite, data hub info center, and our digital products. Argentina's La Segunda Co-Op, a group of companies offering P&C, group life for depend retirement selected InsuranceSuite, business intelligence for InsuranceSuite, and client data rating and reinsurance management products.

Also, in North America, IAT Insurance Group, a specialty insurance company based in Texas, licensed Policy Center and Rating Management. In addition to these four, we added InsuranceNow customer, Farmers Union Insurance, a mutual insurance company serving farmers, ranchers, homeowners, and businesses across North Dakota, who selected our all-in-one cloud-based solution, InsuranceNow, to replace their current core solution. We also continued to gain traction with our digital and data products. 13 existing customers selected one or more of these in the quarter.

In addition to sales momentum, we had an active quarter for implementation, with nine customers going live with InsuranceSuite, InsuranceNow, data or digital products during the quarter, and four customers having major version core upgrades.

Turning to products, last month, we announced the latest release of Guidewire Insurance Platform. This release includes enhancements to our core data and digital and all-in-one product families, along with more than 80 ready for Guidewire validated accelerators. Collectively, these product enhancements and third-party solution editions enabled insurers to reinvent customer, agent, and employee experiences.

We also announced availability of our first P&C insurance CRM applications for Salesforce Financial Services Cloud. These applications will be natively integrated to FSC and enable P&C insurers to unify their core, digital, and CRM strategies with much less complexity. Finally, our leadership continues to be recognized by the industry, as demonstrated by our winning two awards for policy administration by industry analyst, Celent.

In summary, our third quarter performance reflects continued momentum in the marketplace, including continued adoption of products across the Guidewire Insurance Platform and notable successes with the selection and implementation of InsuranceSuite Cloud. Adoption of our cloud service as well as the robust attach rates of our digital and data products continue to validate our platform value proposition and contribute to our growth. We look forward to our customers' and prospects' reception of the many products we are releasing this year as well as celebrating the progress many of them are making in their transformation initiatives relying on Guidewire.

With that, I'll turn it over to Curtis to detail the financial results of our third quarter.

Curtis Smith -- Chief Financial Officer 

Thank you, Marcus. We had an active Q3. We exceeded our guidance ranges on both the top and bottom line. We successfully completed a capital raise and we closed two new InsuranceSuite Cloud customers. As a result of this cloud momentum and as noted by Marcus, almost 50% of our new sales year to date were subscription. We continue to expect to be at the high end of our prior communicated range of 30% to 40% of this year's new sales as subscriptions.

We note that seasonally high Q4 activity will have a large impact on the final percentage. We are also on track to add four to five insurance suite cloud deals this year, with three closed year to date. Total revenue for the quarter increased 14% from a year ago to $140.5 million. Within revenue, license, and other revenue of $50.4 million represented a decrease of 50% from a year ago. As a reminder, a very sizable recurring payments from one of our tier one customers was recognized in Q3 last year, but will be invoiced for payment and therefore recognized in Q4 in this and subsequent years.

In addition, approximately $4.6 million of revenue that was expected in Q3 was recognized in Q2 due to earlier payments last quarter. Perpetual revenue in the third quarter was $5.7 million. Maintenance revenue was $18.7 million, representing 11% year over year increase and at the midpoint of our guidance range. As we shift toward cloud subscription services, we do expect maintenance growth rates to moderate as ongoing maintenance activities are included in the subscription fees.

Our rolling fourth quarter recurring revenue consisting of term license, subscription, and maintenance revenue totaled $334.4 million in the third quarter, up 10% from a year ago. In Q3, this metric was significantly impacted by the quarter shift in invoicing for the customer I just referenced. Additionally, as we had mentioned previously, our ongoing transition to subscription and the eventual adoption of ASC 606 in Fiscal Year 2019 make this metric less relevant to our business. After this Fiscal Year, we will no longer highlight rolling fourth quarter recurring revenue as a key metric.

Services revenue was $71.4 million, a 50% increase from a year ago and also above our guidance range. Faster services growth in the quarter was driven by three primary factors -- greater demand for Guidewire services personnel and in some of our initial InsuranceSuite Cloud implementations, inclusion of and growth in InsuranceNow implementation and hosting services following the acquisition of ISCS, which did not occur until partway through Q3 of last year, and recognition this year of previously deferred services revenue.

Turning to profitability, we will discuss these metrics on a non-GAAP basis and we have provided the comparable GAAP metrics and reconciliation of GAAP to non-GAAP measures in our earnings press release issued today, with the primary difference being stock-based compensation expenses, amortization of intangibles, the amortization of debt discount and issuance costs from our convertible note, and the related tax effects of these adjustments.

Non-GAAP gross profit of $77.5 million decreased 4% from a year ago and represented a non-GAAP gross margin of 55.2% compared to 65.1% a year ago. The expected decrease in margin was due primarily to the previously mentioned payment shift of a tier 1 term customer as well as the increase in our services revenue and investment in our cloud operations.

Non-GAAP operating expenses were $75.2 million in the third quarter, an increase of 19% compared to a year ago. This increase was primarily driven by continued investments in R&D and sales. The impact of our recent acquisition of Cyence and, to a lesser extent, the work associated with several large infrastructure projects, including new ARP and configure to price quote systems and related implementation expenses.

This resulted in non-GAAP operating income of $2.3 million, which was above our guidance range, primarily due to higher than anticipated revenue and modestly lower than anticipated expenses in the current period. Non-GAAP net income was $3.9 million or $0.05 per diluted share compared to non-GAAP net income of $12.3 million or $0.16 per diluted share a year ago.

Turning to our balance sheet, we ended the quarter with $1.2 billion in cash, cash equivalent, and investments up from $569.5 million at the end of our second quarter, primarily due to $571 million in net proceeds adjusted from the cost of the cap call from the financing we completed in the third quarter.

In addition, operating cashflow in the third quarter was $20.2 million and free cashflow was $19 million. Total deferred revenue was $134.6 million at the end of the third quarter, an increase from $130.9 million at the end of the second quarter. As a reminder, our deferred revenue balance can vary widely from quarter to quarter and has not been a meaningful indicator of business activity since we typically bill term license contracts annually and recognize the full annual payment upon the due date.

However, deferred revenues will likely sustain higher levels as we increase sales and subscriptions, but we expect deferred revenues to continue to be highly variable. The growth of deferred revenue in the quarter was in part attributed to license deferred revenues generated by subscription sales.

Now turning to guidance -- first, let me address our expectations for the full year. I will then speak to Q4. Finally, I will make some comments on Fiscal Year 2019. For the full year, we now anticipate total revenue to be in the range of $647 million to $653 million, an increase of 26% to 27% from Fiscal 2017. We expect annual license and other revenue to be in the range of $306 million to $312 million, an increase of 13% to 15% from Fiscal 2017.

Our license and other revenue is being impacted by our transition to cloud-based subscription sales, which as noted earlier, we expect to be at the high-end of our previously communicated 30% to 40% range. Compared to term and perpetual licensees, we can recognize only a portion of the annual subscription invoices in the initial year due to routable revenue recognition.

Additionally, we expect perpetual license revenue between $9 million and $10 million for the year, a decrease from $13 million last year. Our outlook for maintenance revenue is $76 million to $77 million. Services revenue continues to be elevated in Fiscal 2018. In particular, cloud implementation and our work for new European customers currently require greater Guidewire participation. Our outlook for services revenue is $262 million to $266 million.

Required buildout of services processes and best practices to support the cloud will require increased service and support that cannot all be passed on to the customer. As a result, we expect services margin to be between 18% and 19% this fiscal year.

Due to higher profitability in Q3 and our higher revenue outlook, we are raising our non-GAAP operating income guidance for Fiscal 2018 to $104 million to $110 million. We're also increasing our free cashflow guidance for the year from $115 million to $125 million. In addition, we are raising our outlook for non-GAAP net income to $83.3 million to $87.7 million or $1.05 to $1.11 per diluted share based on approximately $79.3 million diluted shares.

Turning to Q4, we anticipate total revenue to be in the range of $234 million to $240 million. Within revenue, we expect license and other revenue to be in the range of $141 million to $147 million, maintenance revenue of $19 million to $20 million and services revenue of $71 million to $75 million.

For the fourth quarter, we anticipate a non-GAAP operating income between $78 million to $84 million and non-GAAP net income of between $58.8 million and $63.2 million or $0.72 per share to $0.77 per share based approximately $82 million diluted shares.

Looking ahead now to Fiscal 2019, we want to provide some preliminary qualitative commentary. Unless otherwise stated, all of our commentary is based on our adoption of ASC 606 on August 1st of 2018. As we have discussed in the past, the transition of subscription contracts and the adoption of 606 have an impact on our outlook for 2019. This outlook is very much evolving. We will spend more time discussing this during our Q4 call and during our analyst day in September.

With respect to topline, Fiscal 19 will be impacted by a number of factors. Two primary factors positively impacting growth -- subscription revenue associated with contracts sold in Fiscal 18 will increase in Fiscal 19, since we will be able to capture the full annual value of these contracts when compared to a partial year amount in Fiscal 18. And new term license contracts will recognize two years of annual license amounts due to our standard contracts being two years of duration at signing coupled with annual auto-renewals. Under 606, we will typically recognize the full two-year contract value upfront.

These positive factors will be offset by growth in new subscription sales, which will result in lower revenue recognized in Fiscal 19 due to routable revenue recognition as well as two accounting effects associated with our adoption of 606. The first amounts due in Fiscal 19 for two-year licenses sold in Fiscal 18 will not be recognized as revenue and will be accounted for as retained earnings, and two, revenue lost to retained earnings due to existing long-term customer contracts that we are not able to modify to annual renewals.

Netting these factors, we expect licensed and other revenue to grow modestly faster than in Fiscal 2018. This assumes subscription contracts will be approximately 40% to 60% of new sales. At this mix and assuming the successful modification of remaining long-term contracts, we expect 606 will have a net-neutral impact on license and other revenue. With respect to total revenue, we expect growth to taper slightly as services revenue growth begins to normalize in 2019.

Turning to profitability, there are three primary factors putting pressure on operating income and operating margin in Fiscal Year 19. First, gross margin will be lower due to transition to the cloud and continued elevated services revenue as a percent of the total mix. Second, we previously indicated that 2018 would be a year of investment as we migrate to the cloud and invest in R&D and cloud operations to support this transition.

We have spent less than initially anticipated year to date in 2018, largely due to headcount additions being slightly backend-weighted in 2018. 2019, we expect slower hiring and digest the investments made. However, the full impact of the investments made this year will be reflected in operating expenses in 2019. Third, we continue to expect science to be diluted to our operating income in Fiscal 2019. As a result of these factors, we do not expect to see operating margin expansion in 2019. As we have mentioned in the past, cashflow and other metrics will be key indicators of progress moving forward and further discussed at our analyst day.

In summary, we executed well in the third quarter to deliver revenue and profitability that exceeded our guidance levels. We are optimistic that we will see a seasonally strong fourth quarter and that we remain well positioned to continue capturing a meaningful share of the multi-billion-dollar opportunity ahead of us.

Thank you. Operator, can you now open the call for questions.

Questions and Answers:

Operator

Thank you. If you'd like to ask a question, please signal by pressing *1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow us to not hear your equipment. Again, press *1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions.

We'll take our first question today from Monika Garg with KeyBank.

Monika Garg -- KeyBank -- Analyst

Hi, thanks for taking my question. First, I want to confirm -- I remember last time you gave us a metric that each 10% makes a subscription is about $3 million to $4 million negative impact to license revenue. Given that mix is almost 10% higher than your previous guidance, is that the right way to think about negative impact on the license?

Curtis Smith -- Chief Financial Officer 

I think that's one way to look at it. We have done some sensitivity around that, looking at different ranges. We are currently expecting to be at the high-end of the previously announced range of the 30% to 40%. As we move to the higher end of that range and have more subscription, we do then see less revenue come in given that it's ratably recognized.

Monika Garg -- KeyBank -- Analyst

Got it. And then Curtis, the ASC 606 impact for next year, which you talked about, can you share how much is the negative impact on the license because of ASC 606, like a dollar amount, any metrics you can share quantitatively?

Curtis Smith -- Chief Financial Officer 

We did do some preliminary analysis of that. We're not sharing those numbers here, but we'll spend some more time on that when we get to our Q4 earnings call and when we talk about metrics going forward and the impact of 606 going forward on our analyst day.

One thing we did note, though, when we provided the preliminary commentary on '19 is when we take both the puts and the takes of 606, the positive and the negative, along with the subscription as a percent of revenue range that we're expecting in Fiscal 19, which is now 40% to 60%, we believe that taking that all into account, there is a net neutral impact from 606 on license and other revenue.

Monika Garg -- KeyBank -- Analyst

Thank you so much. That's all for me.

Operator

Next, we'll hear from Jesse Hulsing with Goldman Sachs.

Jesse Hulsing -- Goldman Sachs -- Analyst

Thank you. Marcus, it seems like you're seeing a pretty big step up in interest from new customers and existing customers on expansions for your cloud product. I'm wondering if you've given much thought to expanding cloud beyond new business and migrating the base. If that were to happen, what would the timing of that look like?

Marcus Ryu -- President and Chief Executive Officer

Absolutely. Migrating the base is an important expected portion of the demand we have ahead of us. Some of the acceleration in demand is stimulated by us because we actively have been initiating these conversations not necessarily on the mind in the near term, but so that our customers understand our strategic direction and can start thinking about their overall deployment strategy as they're going to roll out the current project they may be involved in or the future products they may license from us.

It's very early in the transition. We're in a low single-digit number of InsuranceSuite Cloud customers out of a customer base of hundreds of insurers, but our expectation is that over time, a very large portion, quite possibly a majority or even a significant majority of our customers want the kind of division of labor that's involved in our cloud deployments as preferably.

I think we have quite a few degrees of freedom in modulating the speed in which that happens. We would never make commitments that we could not follow through with confidence, but I think we'll be much more -- I think if anything, we'll be constrained by our own appetite to follow through on that well than it will be buying by customer demand.

Jesse Hulsing -- Goldman Sachs -- Analyst

Curtis, question for you -- given the multiple puts and takes next year on growth with subscription transition into ASC 606, just the lumpiness of your contracts already playing into that, have you given thought to any metrics beyond what's being provided? You mentioned retiring trailing 12 months recurring revenue. I'm wondering if you've given any thought to ARR or some metric to replace that to give us more visibility in the demand every quarter.

Curtis Smith -- Chief Financial Officer 

Yes. Thanks for that question. We spent some time in the last quarter talking to investors about what metrics might be helpful from their standpoint to better understand the progress we're making as we transition to a cloud business. Some of the things we provided already, just as a reminder, the number of IS Cloud deals -- we confirmed that number this quarter that we're expected four to five IS Cloud deals this year and added two this quarter.

Another metric that we've been sharing is subscription as a percent of new sales in the quarter. We confirmed that 30% to 40% range with the expectation for us to land at the high end of that range this year.

In the past, we've also talked about breaking out and talking to subscription as a percent of licensed and other revenue and we've pointed to, at the end of the year, at getting pretty close to 10% when that happens. We intend to break that out in Fiscal year 2019.

To your question on the other key metric, the ARR ACB, it's clearly one that is at the top of our list to think about and to be potentially adding to the mix to give you a better idea of the progress we're making in the transaction to cloud. So, our expectation is to talk about that more during analyst day and potentially on the Q4 call.

Jesse Hulsing -- Goldman Sachs -- Analyst

Fantastic. Thank you both.

Operator

Next, we'll hear from Sterling Auty with J.P. Morgan.

Sterling Auty -- J.P. Morgan -- Analyst

Yeah, thanks. Hi, guys. The first one is for you, Marcus. For an InsuranceSuite Cloud customer, what do the implementation times that you expect to be like for a brand new customer and what is the implementation time for an existing customer shifting into the cloud?

Marcus Ryu -- President and Chief Executive Officer

I appreciate the question, Sterling, because it's a chance to remind those listening that, at least at this stage, there is no meaningful acceleration in implementation time for a cloud-based project versus our traditional on premise one. That's because the main drivers our configuration and integration. Those are not meaningfully different in the cloud world.

We do believe that we have a lot of levers to drive higher standardization. That's something that we've been working on for years now. We're doubling our effort every year to urge customers and to give them the strong professional guidance about the importance of conforming to a more standard solution. Of course, we're evolving our platform to be ever more complete.

In the cloud modality, we think that we'll be able to advance that further as well as make certain architectural advances in the product that will really leverage cloud scalability and frivolous architecture and so forth. So, over time, it's not only our expectation, it's our mission to significantly reduce the cost of ownership and to simplify and standardize projects. But that will take time to evolve.

For the time being, programs are really very comparable in duration to what they are now. We've talked about this many times in the past. There's a lot of variation within our customers depending on what product they're implementing and what scope and so forth. Typically, we want our significant core system transformation program to go live something like 12 to 18 months from the start.

Sterling Auty -- J.P. Morgan -- Analyst

That's great. As we think about the significant increase in revenue that you would get from an existing customer moving into the cloud, how should we figure out how that layers in -- and what I mean is if you have an existing full InsuranceSuite customer, are they going to move claims and then once claims is in the cloud, move policy, or would they do the entire insurance suite, insurance line by insurance line or geography by geography just so we can understand how we might see the increase in the revenue associated with a customer moving into the cloud.

Marcus Ryu -- President and Chief Executive Officer

Yeah. That's a thoughtful question. I think the minimum unit of transition will be one of the core applications -- policy, claims, or billing. It really wouldn't make sense to migrate slices of a claims implementation or slices of a policy implementation, but it is quite possible that a customer would opt to do one application at a time versus the entirety. There may be cases where they try to ship multiple at the same time.

Of course, we have large complex customers that may have more than once instance of our core application because their businesses may even operate semi-independently of each other. It's very case by case, but the minimum will be a transition of one of the core applications to the cloud. As we talked about in the past, we kind of improvements or increase in the annual revenue to Guidewire but now coming in subscription form would be our expectation from where we sit today.

Sterling Auty -- J.P. Morgan -- Analyst

Got it. Thank you.

Operator

Our next question comes from Alex Zukin with Piper Jaffray.

Taylor Reiners -- Piper Jaffray -- Analyst

Hi. This is Taylor Reiners on for Alex. I had a question for Marcus. I wanted to dig in from the Salesforce announcement from a couple weeks ago that you now have two applications for their financial services cloud. I was wondering if you could speak to any earlier indications and tractions you've seen in that area and maybe any updates you have for us from a go to market standpoint.

Marcus Ryu -- President and Chief Executive Officer

Sure. So, the Salesforce partnership is a highly strategic one for Guidewire. We are not in the habit of announcing partnerships with other technology companies. Salesforce is a very notable exception to that because of their tremendous market traction and the awakening of interest in the last few years in the industry to rethinking, sometimes dramatically, their whole approach to CRM.

Quickly following that is the recognition that any kind of CRM initiative they undertake has to be deeply integrated with the transactional and operational core, which is, of course, what we do. There's a very natural complementarity between our businesses and our value proposition, though it did take us a few years to persuade each other of that, but now, I think we're completely on the same page and are working together in stride. There has been like very encouraging level of interest across the industry, including internationally for this connection and I think the expectation of a lot of insurers is that we would productize this integration and solve that complexity for them rather than them doing it themselves.

At a go to market level, they're a great organization to work with. They're an enormously successful and professional sales team that we can complement with our deeper industry understanding as well as now we have a very coherent complementarity of value proposition.

Taylor Reiners -- Piper Jaffray -- Analyst

Got it. Thank you.

Operator

Next, we'll hear from Justin Furby with William Blair & Company.

Justin Furby -- William Blair & Company -- Analyst

Thanks, guys. Marcus, I thought the Travelers announcement in the international markets in Europe was interesting because I don't think you have a relationship with them in the US. I guess I'm just wondering what the cloud does for you in terms of strengthening your tier one pipeline. Second to that, can you just give some sort of update on overall bookings versus your expectations in the quarter? I guess with all the moving parts, it's hard to get a sense here. Then I've got one quick bullet for Curtis.

Marcus Ryu -- President and Chief Executive Officer

Sure. So, with respect to the relationship between cloud and the tier one, I would say tier one insurers are just as interested as any other segment in the market in disburdening themselves with some of the complexities of their core environment. Some tier one insurers are an aggregation of multiple smaller businesses that work under one corporate umbrella.

We think it's extremely likely and we're already seeing this happening, that some of those individual divisions will kind of think of themselves as smaller insurers will be motivated to transition more quickly to the cloud for the same reasons that a completely stand-alone smaller insurer would be, mainly that they just don't have the bandwidth to undertake all the different transformation programs they want to do, in data and analytics, digital engagement, etc.

So, the cloud delivery model becomes increasingly appealing to them. So, I think as we mature this model and we have references to show for it, especially as we reduce total cost of ownership, I think we're going to see acceleration across all segments motivated by the cloud across tier one. There was another portion to your question I just forgot.

Justin Furby -- William Blair & Company -- Analyst

Just around overall bookings in the quarter, how they came in and what you expect.

Marcus Ryu -- President and Chief Executive Officer

As you know, we think of bookings very much on an annual cycle, which also explains some of our reticence around bookings metrics because it's challenging enough to corral that on an annual basis and it's daunting to think about doing some and reporting on it on a quarterly basis. So, that's some of the hesitation you hear from Curtis and me on that score.

But specifically, with respect to this year, on an annual basis, I think we feel really good about how things have gone across the board, across insurance suite, insurance now, the data products, the digital products, active conversations around the newer things we're doing around the science and Salesforce partnership, which will be a licensable edition to our product portfolio. It's the breadth as well as the quantitative aggregate of the demand that's really encouraging. That said, we have a lot of work ahead of us too and sales execution will be extremely important if we're going to fill our commitment.

Justin Furby -- William Blair & Company -- Analyst

Thanks for that. Maybe just quickly for Curtis, appreciate the initial read for next year. Just wondering on the services line, though, because it's such a big number of you guys, I'm just wondering if there's any high-level commentary. I know the Street said a 20% growth number. Is that a reasonable way of thinking about next year for now? Any framework would be helpful. Thanks.

Curtis Smith -- Chief Financial Officer 

We commented that the subscription growth level was unusually high and we expect that to begin coming back down to normal levels next year in the coming years. That's part of the guidance we provided around the services line. We'll be able to talk in more detail about that too in the Q4 call and in the analyst call as well.

Justin Furby -- William Blair & Company -- Analyst

Okay. Got it. Thanks very much, guys.

Operator

Next, we'll hear from Rishi Jaluria with D.A. Davidson.

Rishi Jaluria -- D.A. Davidson -- Analyst

Hey, guys. Thanks for taking my question. I guess, Marcus, starting with you, as you look at the potential M&A landscape, be it larger acquisitions like Cyence or smaller technological acquisitions, it's not secret we're seeing elevated multiples in software and technology in general. I just wanted to get your viewpoint on what you're seeing out there, how that M&A pipeline looks, how you're thinking about valuation and where there's opportunities. I have a follow-up for Curtis.

Marcus Ryu -- President and Chief Executive Officer

Sure. As you know, if you've followed all the insure tech phenomena over the last few years, it's certainly a very target-rich environment, far more opportunities in early stage technology companies than I would personally have ever imagined, even explicitly focusing on the P&C industry, it's an utterly different landscape than when the company was started some decade and a half ago.

It's a very interesting vector of education for us that we had not put a lot of mindshare toward in previous years, but now through the very natural partnerships that we have for analytics and digital offerings that it naturally complements our transactional and operational platform and InsuranceSuite as well as just our location here in Silicon Valley, where the preponderance of the insure tech phenomena is happening.

It's immodest to put it this way, but out stature in the industry, the fact that we have prominent names in our customer community -- all of these things help us be, I think, in an advantaged position for these conversations and allow us to be very patient making the right choice and not overpaying to the degree that's possible in this environment.

One individual in my team that's well known to most of the people on this call, Richard Hart, leads that whole evaluation and management of the pipeline. He's very busy with a lot of conversations, but he's also extremely disciplined about valuations. I think that served us very well so far.

Rishi Jaluria -- D.A. Davidson -- Analyst

Okay. Thanks. That's helpful. Curtis, I appreciate the color on next year and helping us break down the moving parts with subscription, ASC 606, I understand revenue impact is basically a wash. From an OpEx standpoint, should we expect some benefit from 606 on the OpEx side, which is maybe offset from increased subscription deals and higher services, being a drag on gross margins?

Curtis Smith -- Chief Financial Officer 

So, with more subscription -- we guided preliminarily through 40% to 60% of new sales is subscription, that will have an adverse impact on gross margin and then operating margin. So, that's part of what we were factoring in when we provided the guidance around our operating margin that we did not expect to see operating margin expansion in 2019. We noted some other things.

Obviously, we continue to invest in the cloud and the cloud transition. Some of the investments we made this year were to some extent backend-loaded. We'll see the full-year impact of that in 2019 that you didn't necessarily see in '18. Those are some of the things that preliminary took a look at that we don't expect to see operating margin expansion in 2019 from the guidance provided today for the full year.

Rishi Jaluria -- D.A. Davidson -- Analyst

Okay, just to clarify -- from 606 alone, is there any benefit on the OpEx side form the adoption of 606 or is there no change there?

Curtis Smith -- Chief Financial Officer 

Modest, potentially modest.

Rishi Jaluria -- D.A. Davidson -- Analyst

Okay. Perfect. Thanks, guys.

Operator

We'll move on to Tom Roderick with Stifel.

Tom Roderick -- Stifel Nicolaus -- Analyst

Hey, gentlemen, thank you for taking my question. Marcus, I wanted to build on an earlier question about Salesforce.com, given that in your prepared remarks you highlighted the transformation journeys that a lot of your customers are undertaking to the cloud and really updating their offerings. We heard very similar remarks from Salesforce which highlighted some big deals in insurance just recently.

If we think about what's driving some of these transformation journeys, particularly for your bigger customers and thinking about two choices that drive this, one being inside out starting with policy and claims and billing, sort of inward-facing functions as opposed to outside in, the digital functions that face the consumer, which of those two options are driving that. With respect to that, can you talk a little bit more about the integration points with Salesforce's FSC?

Marcus Ryu -- President and Chief Executive Officer

I think the motivations for core system replacement and undertaking digital transformation, they're many and varied, but they're also consistent across company. What I mean by that is there are lots of frustrations that can vary from organization to organization with specific deficiencies, specific frustrations they may have with their current system environment, i.e., they can't instantiate the product that they want to sell or there's limitation in their system environment that prevents them from selling in a particular market or adjusting their pricing with the frequency they think they need to be competitive or their customer engagement value proposition is eroding because the bar has been rising so much faster than they're able to keep up with.

So, the specific of which concern is the most urgent will definitely vary. It's a menu of maybe five to eight themes that we hear over and over again across our entire customer and prospect base that are strikingly similar. They are very positively for us, they continue to grow in urgency.

Now, where CRM fits into that is a recognition by insurers that they need to think about their policy holders not just because of units of risk, which is great exposure each customer might represent as underwriting carefully, but also as customers, as consumers who want to be catered to, who have life events, who have different preferences about how they want to be sold to in service, etc.

That need to have a much more customer-friendlier omnichannel-like experience that the customers now expect from a retailer or other financial services world has really come with conviction to the industry. That requires marrying two quite disparate domains, the very horizontal CRM and FSA functionality that you have in the Salesforce and then the transactional and operational platform that we have in insurance suite, which really need to intersect at the moment that you don't just want to look for information but want to transact on either an existing customer or new customer.

So, that transactional intersection is where our customers want us to build productized integration between us and Salesforce. What we're doing is natively embedding Guidewire data entities and transactional flows into Salesforce Financial Services Cloud so that natively in Salesforce screens. We think that will be compelling to a very large segment of the industry. It requires some fairly heavy lifting at the product level so it's a true native integration and not just punching out at the different screen.

Tom Roderick -- Stifel Nicolaus -- Analyst

Makes perfect sense. That's really helpful detail. Thank you. Curtis, follow-up question just around the numbers -- targeting now on the subscription side, high-end of the 30% to 40% range for new sales for the year -- can you break out -- and apologies if you've done this before, I don't think you have -- but if we think of the InsuranceSuite Cloud versus Insurance Now, the four to five high-end customers you hop to win on ISC as opposed to the myriad of tier three and lower customers that you might see on Insurance Now.

How should we think about the rough split that drives the high-end of the 30% to 40%? Maybe a better way to look at it is maybe what's a better deal size for InsuranceSuite Cloud as opposed to Insurance Now. Any direction you can give us on the split there would be really helpful. Thank you.

Curtis Smith -- Chief Financial Officer 

Thanks for the question, Tom. We haven't broken that out or added detail on why the segmentation around that 40% to 50% among tiers, Insurance Week now versus other. So, that's not something we've historically talked to. It's something that we consider going forward as we continue to evaluate some of the different metrics that might be helpful for investor community to better understand our progress in the cloud. That's one we can start to consider when we start to prepare for our analyst day in September and our Q4 call.

Tom Roderick -- Stifel Nicolaus -- Analyst

I'll ask again in September. Perfect. Thank you.

Operator

Next, we'll hear from Brad Sills with Bank of America.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Thanks for taking my question. One please on digital and data. If you can illustrate for us maybe some scenarios or use cases where customers have gone really deep there. What does the deployment look like over time? What are some of the scenarios they're using digital and data for. Then would the move to the cloud representing a potential catalyst for adoption of those offerings? Thanks so much.

Marcus Ryu -- President and Chief Executive Officer

Thanks for the question, Brad. You can think of digital as externalizing all of the data, all of the products, the pricing, the underwriting business logic, the transactional flows, everything that happens at the heart of the core systems that we build, but externalizing all of that to participants outside of the four walls of an insurer.

Of course, you can extend that also to your own employees, but the primary use cases are to the distribution channel, mainly brokers and agents that are a hugely important part of how insurance is distributed and then also directed at policy holders, either for point of sale or equally importantly for customer service, which could mean policy maintenance or it can mean claims.

Really, what you're trying to do is enable a much more contemporary, potentially human-involved process, but one that's as self-service and intuitive as possible to transact much more efficiently. Insurers have a sense of being behind the curve in delivering the contemporary consumer-grade experience that people have been trained to expect from the likes of Amazon, Uber, etc.

So, we divide our digital products into three families, ones that support the distribution channel, which we call producer engaged, one for direct to consumer, the policy holder engaged, then one for vendor partners, body shop, and others involved in the claims supply chain who have a need to interact with the insurance transactional flow. These are very broad in appeal and we're experiencing a very high attach rate with them, pretty much across all geographies and market segments.

On the data side, data is a huge frontier with many different dimensions to it, a portion of it was managing the operational data and transactional data that's generated by the system and putting it into an operational data store that can be accessed by other enterprise systems. We call that Project DataHub. Then there is a somewhat conventional business intelligence that naturally our customers want using that data. That's a product called InfoCenter. Then there's been mining that data for statistical predictive insights with a different set of machine learning-based tools that guidewire predictive analytics increasingly we are embedding directly in the screen flows of the courses themselves. That's a principle that we call Smart Insurance.

Then there are other data horizons beyond that, which is to incorporate for the first-time data from outside the enterprise generally out on the internet and using it to essentially build a profile of potential insurers in advance of actually having them as customers as insurers are making underwriting decisions.

And there's much more beyond that that we still aspire to. So, we think of data and digital not so much as products but as product frontiers, where we can do a lot more with the current products we have as well as build a lot of new ones.

Your second question was about cloud, I think. Everything that we're building today, every major unit of functionality we will be building going forward is cloud-based or cloud-native, cloud-only. So, all of the multiple data products are only available in cloud form and we're in the process of transitioning all of our digital products as well to be cloud delivered. Just as with the core itself, we expect that will accelerate adoption.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

That's great. Thanks, Marcus.

Operator

We have a follow-up question from Sterling Auty with J.P. Morgan.

Sterling Auty -- J.P. Morgan -- Analyst

Yeah. Thanks, guys. I just want to clarify a couple items. As we're all going to modify our models and set estimates, including for Fiscal 19, you mentioned that in respect to total revenue, expect growth to taper slightly in 2019. But taper off as compared to what growth rate in 2018 because you do have some acquisition-related revenue with Cyence. I want to make sure we're all level set in thinking about which growth rate do we start with and then taper to come to the 2019 expectation.

Curtis Smith -- Chief Financial Officer 

Yeah. So, the growth rate -- thanks for the follow-up question, Sterling -- the guidance growth rate that we provide in the call for the full year and that's the one we're basing our '19 growth rate off of is the total revenue range that we provided, $647 million to $653 million, that's a 26% to 27% growth rate over 2017. It includes all revenue in that number. So, what we talked about in terms of that high-level preliminary commentary on our total revenue growth rate for '19 as we expected it to taper slightly off of that 26% to 27% growth rate that we saw in '18 over '17. That's partly due to us seeing, as noted earlier, that services revenue growth begins to normalize as sort of an accelerated level in '18. We see that coming back down in '19.

Sterling Auty -- J.P. Morgan -- Analyst

Perfect. That really helps. I want to take a step back. When you guys began the work -- I know, Curtis, this predates you, but I'm sure Richard gave you the full download. As you started to work on 606, the discussion was going back to customers, customers had around a five-year average first contract length and with 606, because of the high-renewal rates, you go back and rework those deals.

I thought the idea was to get them on to one-year deals so with the upfront recognition, you didn't end up with a dramatic impact. So, when you talk about the two-year term, did customers want to not go to one-year, they wanted two-year for some reason? For new customers if they choose term, are they also going with two-year? Is there an option to go longer or even shorter with one-year?

Curtis Smith -- Chief Financial Officer 

Yeah. We've made a lot of progress modifying the existing customers' contracts to address this potential 606 issue. In many cases, though, it ends up being a two-year term. That's part of, I think, what we were evaluating when we were trying to assess the impact of 606 on our 2019 numbers.

And then when we looked at that together with some of these other puts and takes we talked about along with now what we're projecting to be our subscription as a percent of new sales mixed, bumping up the 40% to 60%, we think, overall impact on 606 will be net neutral to license another revenue.

That being said, we know there's still some work to do between now and the end of the quarter and we intend to fine tune our thinking around that and provide updates in more detail when we get to our Q4 call.

Sterling Auty -- J.P. Morgan -- Analyst

Okay. Last question -- subscription, we have several terms being thrown around here. We have subscription, we have term, we have cloud -- does subscription include all of the cloud licensing or maybe flipping it around, is there subscription revenue that is not cloud. If so, why does that get ratable treatment versus term.

Marcus Ryu -- President and Chief Executive Officer

There's a simple answer to that, Sterling -- all subscription and cloud revenue are synonyms for us. All cloud revenue comes in subscription form and there is no subscription revenue that is not cloud-based.

Sterling Auty -- J.P. Morgan -- Analyst

Perfect. Thank you, guys. I appreciate it.

Operator

That will conclude the question and answer session. I will now turn the call over to Mr. Marcus Ryu for any additional closing comments.

Marcus Ryu -- President and Chief Executive Officer

No additional comments, but thank you all for participating on our call today. Bye, bye.

Operator

That does conclude today's conference call. Thank you for your participation. You may now disconnect.

Duration: 58 minutes

Call participants:

Curtis Smith -- Chief Financial Officer 

Marcus Ryu -- President and Chief Executive Officer

Monika Garg -- KeyBank -- Analyst

Jesse Hulsing -- Goldman Sachs -- Analyst

Sterling Auty -- J.P. Morgan -- Analyst

Taylor Reiners -- Piper Jaffray -- Analyst

Justin Furby -- William Blair & Company -- Analyst

Rishi Jaluria -- D.A. Davidson -- Analyst

Tom Roderick -- Stifel Nicolaus -- Analyst

Brad Sills -- Bank of America Merrill Lynch -- Analyst

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