Chief Financial Officer, GUIDEWIRE SOFTWARE INC
Gaining Strategic Advantage in Vertical SaaS With Guidewire's CFO, Jeff Cooper
In this episode, CJ is joined by Jeff Cooper, the CFO of Guidewire, a publicly traded vertical software company serving the ...
About Jeffrey Cooper
Jeff Cooper, CFO of Guidewire Software, discussed the company's strategic focus on annual recurring revenue (ARR) over traditional revenue in a September 2024 podcast. He stated that a decline in services revenue is not negative if it accelerates ARR growth, and noted that ARR aligns with how the company compensates its sales force. Cooper explained that Guidewire prices its software based on the volume of business processed through its applications rather than on a per-seat basis, and that many cloud contracts include multi-year terms with built-in ARR visibility. Cooper described Guidewire's market as roughly 2,000 insurers globally, with the company's modules touching approximately $600 billion of the $2.4 trillion in global property and casualty direct written premiums. He noted that replacing legacy mainframe systems is a difficult process, and that the company maintains a commitment to "no customer left behind" with a focus on successful project outcomes. Cooper also addressed the company's July fiscal year end, saying it reduces pressure during the holiday season, and identified Q2 and Q4 as the company's largest quarters.
Transcript (30 segments)
C
CJ0:00
You have to get everybody, including employees, the board, and investors, all aligned on what success is.
Right, and for us success is ARR more so than revenue. We want to drive ARR. Services revenue may decline, that's not a negative thing, especially if it can help us increase the pace by which we drive ARR. Right, is this thing on? Yesterday's price is not today's price.
Hey, thank you, and welcome to Run the Numbers, where I interview world-class CFOs, operators, and the investors who fund them on how to get the most out of your company's performance. This podcast is a playbook of sorts for ambitious people in the worlds of finance, strategy, and operations. Today my guest is Jeff Cooper, the CFO of Guidewire, a publicly traded vertical software company serving the insurance industry. Jeff had an illustrious investment banking career, helped to take Guidewire public in 2012 before joining the company as an operator. We spend the episode going through what it's like to have deal cycles that can take up to multiple years to close, the benefits of owning the control point within a customer's tech stack, how to balance burning through your market when you are a vertical software company, the pros and cons of having a non-standard fiscal year, guiding to ARR, and how to think about the value of professional services within your valuation and value proposition, and if you should outsource it to your partners or do it yourself. For all the operators out there with a professional services element to your business, this episode is illuminating. It's a tight RPP walk where you need to ensure your customers are successful, especially when there's a CIO betting their career on the success of an implementation, while also thinking about the long-term durability of your revenue. Jeff also takes us behind the curtain on how he decides on the metrics he reports on and guides to in public earnings calls. All this and much more after a short word from our sponsors. As a SaaS CFO, I know firsthand how difficult it is to prepare your business for funding. It's not enough to simply know your metrics, you need to be able to tell the story of your business. That's why I'm so excited to partner with the sponsor of today's episode, Maxio, the leading billing and financial operations platform for B2B SaaS. Maxio helps finance teams at top SaaS companies like Chili Piper, Crunchbase, and Stack Overflow get cash in the door faster, automate revenue recognition, and tell their stories with investor-grade metrics. I love building all of your SaaS metrics off the same dataset as your financials, so you'll avoid major headaches when telling your story to investors and to your board. So whether you need to get funded, stay funded, or impress your board, visit maxio.com/runthenumbers to supercharge your financial operations in 2024. Not only does requesting a demo using the Run the Numbers link help support the podcast, your boy, you'll also receive a 10% discount on your first year with Maxio. Please do it, it will be awesome. That's maxio.com/runthenumbers. Woo! Financial operations are needlessly complex. Startups have to cobble together a patchwork of tools to reconcile transactions from different sources, work to get a holistic view of cash flow and how it maps to company priorities, and struggle to glean answers from platforms that speak different languages. Simplicity can transform your business operations. That's why Mercury powers your financial workflows from the bank account so you can pay bills faster, stay in control of company spend, and speed up reconciliation. Apply in minutes at mercury.com and join over 100,000 ambitious startups that trust Mercury. I like that, not just for banking and credit cards, but for the precision control and focus they need to transform their financial workflows and perform at their best. Mercury, the art of simplified finances. Mercury is a financial technology company, not a bank. Banking services provided by Choice Financial Group and Evolve Bank and Trust, members FDIC. I always want to do that voice. Jeff, thanks for joining the podcast, appreciate you being here.
J
Jeffrey Cooper4:04
Happy to be here, looking forward to it.
C
CJ4:10
I made this corny joke before I hit record, but I do feel like I already kind of know you from listening to about five to seven of your earnings calls over the weekend.
J
Jeffrey Cooper4:17
Okay good, you're well versed. I'm looking forward to the conversation.
C
CJ4:24
I'm a business model nerd and I'm also at a much smaller company, vertical software CFO. Can you break down the ways in which Guidewire monetizes its business?
J
Jeffrey Cooper4:32
Sure. Guidewire is a software company selling to the P&C insurance industry. We sell core systems of record, so policy administration, claims management, and billing systems to support a lot of the back office of an insurance company. These are really critical functions to running and managing an insurance business. A lot of that was done on the mainframe system, and we're working really hard to modernize the industry and bring that first into client-server and now finally into the cloud. We sell our software as a kind of basis points on the direct written premium, so we don't price our software based on number of seats, but we price it based on the volume of business that flows through the Guidewire suite of applications. It's a nice model. It allows us to price differently for different sizes of insurers, and it also gives us an attach to future growth. So just like a software model that attaches to seats as the employee base grows, we attach to the direct written premium. So as an insurer's business grows, we can participate in a small way in that success. That's the foundational pricing model. Then we have a suite of applications that surround our core suite, which we call our policy administration, claims management, and billing systems. You may hear us use the word 'core' a lot. Those are our core applications. Then we have data and digital products that surround that core, so think of it as core system of record, then systems of engagement which would be digital applications, and systems of insight or analytics that would be some of our data products that attach to the core.
C
CJ6:24
We're off to a hot start. I've got about five things I want to ask you from that. First thing: I haven't heard anybody say 'mainframe' in a while. That's a common theme in a lot of vertical software businesses where you're trying to take something that's legacy and bring it into the cloud.
J
Jeffrey Cooper6:43
Right. Mainframe is probably still running the majority of the workloads in our industry. Those systems in many cases are 30 or 40 years old. If you are a COBOL developer, you can make a lot of money these days.
C
CJ7:02
Yeah, blast from the past. COBOL.
J
Jeffrey Cooper7:07
A lot of the business logic was codified directly on those systems, and then insurers just patch and support them. They're pretty bulletproof, they work. We think they're brittle and can constrain agility and create a bunch of issues, so we encourage all insurance companies to deal with that foundational core suite of applications. But there's a lot of it out there still.
C
CJ7:33
Something else you said: you said basis points on direct written premiums. Is that essentially a take rate model?
J
Jeffrey Cooper7:39
That's how we think about pricing. Our shareholders will use the word 'take rate' a lot. What's our take rate per dollar of direct written premium? So it's a little bit like that, but it creates a good foundation. We give a volume discount mechanism, so we cover from $100 million of direct written premium to $20 or $30 billion. We don't quite make the same basis point per dollar of direct written premium between those two universes.
C
CJ8:16
That does tend to be a common structure in models like this, where you tier them down and they step through those tiers to incentivize them to do more business with you.
J
Jeffrey Cooper8:22
Yes, that's right. As insurers put more volume on the platform, they get a little better basis points per dollar of direct written premium.
C
CJ8:40
That's an innovative structure in a lot of ways for the insurance premium. I just want to call that out for listeners because it's not like you can take a seat-based model and just cram it into any sort of business.
J
Jeffrey Cooper8:52
It's kind of like a usage model. It's funny, we talk a lot about usage. We're moving more to the cloud side, and with cloud there are more platformy things and more traditional usage-based models, but I like to remind people we're foundationally a usage-based model. It's just how much DWP is flowing through the platform.
C
CJ9:11
I love that. Primarily a usage-based model. You also mentioned you're the core system of record. One of the reasons why I'm so intrigued by Guidewire is you do occupy that control point for a client, which gives you a lot of room to run.
J
Jeffrey Cooper9:24
I think that's right. We like to refer to that as our strategic high ground.
C
CJ9:30
I've never heard that one, that's a good one.
J
Jeffrey Cooper9:36
Our strategic high ground is hard fought and earned. You earn that strategic high ground because ripping and replacing a 30- to 40-year-old mainframe system with 20 or 30 years of business logic codified into it is not an easy task. These are very large, consequential programs. CIOs often bet their career on this program to modernize the core suite of applications to support their business. It is hard fought, but once you are in there and occupy that position, it is very strategic and creates a good foundation for us to grow and think about share of wallet. How do we land that strategic high ground and then expand from there?
C
CJ10:17
Do you look at Guidewire as a data company, an insurance company, a SaaS company? How do you describe it to friends if you're having a coffee or beer with them?
J
Jeffrey Cooper10:29
We're a software company. We think about ourselves as a software company increasingly becoming a SaaS company. Now well over 50%, about 50 to 60% of our ARR comes from our cloud products, so we've crossed the chasm with respect to transitioning into a SaaS company. That's how I think about it. We're a SaaS company that services the insurance industry. Data is a key part of what we do, but it's not what defines us at this point.
C
CJ10:59
While you serve the insurance industry, are there any quirks about it that people wouldn't realize from the outside looking in?
J
Jeffrey Cooper11:06
There are a ton. I've been at Guidewire now for six years. My background was I was an investment banker for a long time, so I worked on the Guidewire IPO and have known the company for a long period of time. The biggest quirk with the insurance industry is it's a very conservative industry. You have a conservative buyer that is very thoughtful on how they make decisions and willing to be patient and take their time. There's a reason why a big part of the industry is still running on mainframe: they are thoughtful and take their time as they think through these technology shifts. So that's the biggest quirk. A lot of software companies think about growing ARR, which means growing bookings. How do I grow bookings? They think about their sales capacity model. But here, you have to realize the industry moves at its own pace. Throwing sales and marketing dollars at that problem won't necessarily yield the outcome you want. You have to get comfortable with how this industry moves, and you can't try to force it. It's an industry that talks a lot, especially as you go into specific countries, there's a lot of collaboration. So playing the long game is really important.
C
CJ12:42
You seem to be the de facto standard for how these companies operate technologically. When you say they move slow, is it a rip and replace, or is it showing them that this is a problem they need to solve?
J
Jeffrey Cooper12:56
There are a variety of ways people come to the decision that their current core system won't support them as they look ahead. Some of that is the systems are so rigid it's creating challenges. For example, maybe an insurer wants to allow bundling a homeowner's policy with an auto policy, which can be very difficult without the right system support. Or digital disruption is coming, or generative AI might change how they do business, and they're not set up to capitalize on that success. So there are a variety of things that create that compelling event. We've worked hard to build a leadership position and invested a lot in this cloud journey. Our thesis has always been that we were a market leader on-prem, and that's really important and hard fought. Market leadership is going to matter even more in the cloud domain because it's one thing to trust a vendor to sell you software you manage behind your four walls, but it's another to enable a vendor to run a core system of record on your behalf. That trusted partnership and market leadership are really important assets, and we protect them and take them very seriously.
C
CJ14:31
You called that owning the high ground, or I called it owning the control point. What benefit does that give you within a customer's workflow?
J
Jeffrey Cooper14:44
Once you occupy that spot, the process to go live and release a new core system framework can take 12 to 18 months for smaller insurers. We have examples with large insurers where it takes a decade to get fully done, going state by state. These are massive programs. So once you're there, it's very sticky.