Guidewire to Acquire hyperexponential Business Call - GUIDEWIRE SOFTWARE INC

Good day, and thank you for standing by. Welcome to GuideWire to Acquire Exponential Business Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star-one-one on your telephone. You will then hear an automated message advising your hand to trace. To answer your question, please press star one-one again. I would now like to turn the conference over to Alex Hughes, VP of Investor Relations. Thank you, Lisa. Hello, everyone. With me today is Mike 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, AK, furnished to the SEC, both of which are available in the Investor Relations section of our website. We have also posted on our website a supplemental presentation to accompany this discussion. Statements today include forward-looking ones regarding the proposed acquisition of hyper-exponential, 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 file with the SEC, including our most recent annual report on Form 10-K and our prior and forthcoming quarterly reports on Form10-Q filed and to be filed with the FCC 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 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 Hyper Exponential. 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 could 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 three 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 agentic underwriting. It's our belief that in the same way coding tools like Cloud 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-one capability is the result of a hyper-exponential 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 requires 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 two best companies in insurance technology. Hyper Exponential 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 gain a foothold in Europe, deep London market expertise, and a commercialized 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 insurer's 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 Santharasanan 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-outs are designed to align a portion of the consideration with the continued growth and performance of the business over the next three 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 ARR growth rate of at least 150 basis points beyond fiscal 2028. 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. Thank you. As a reminder, if you would like to ask a question, please press star 1-1 on your telephone. You'll hear that automated message rising your hand is raised. To remove yourself, please press star 1 again. We also ask that you wait for your name and company to be announced before proceeding with your question. One moment while we compile the Q&A roster. Our first question for the day will be coming from the line of Alex Schuyler of Raymond James. Please go ahead. Great. Thank you. Mike, maybe first one for you. Can you talk about what the meaning of this acquisition, how that impacts your own build around underwriting center? 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 underwriting center? Just how we should think about covering that full underwriting workflows now between the two solutions? Thanks. Yeah, 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 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, you know, Guidewire has a lot of experience in what we call flow-based business and sort of the more sort of scalable segments of commerciallines, whereas the HX team has focused more on the sort of very complex commercial lines in the underwriting and the under writing 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-based level? Any color on sizing of kind of deals that they have today and that 80 million of kind implied ARR for this year as it relates to some of your other centers today? Yeah, that'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 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, yeah, the deals are pretty significant. All right. Thanks, Mike. Thank you. Thank you, one moment for the next question, please. Our next question is coming from the line of Dylan Becker of William Blair. Please go ahead. Hey, gentlemen, really 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 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, maybe especially given the fact that it ties explicitly to faster binding processes and better loss ratios and kind of how it ties exclusively to outcomes and dollars, what that means maybe for sales cycles and underwriting. Thanks. Yeah, great, Dylan. Thanks for the question. So as Mike mentioned, you know, 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 we really drive both carrier efficiency and effectiveness and also industry effectiveness overall which is exciting and this is really fundamentally what i'm written team this is this is where they grew up this is who they are so it fits really well right right okay very helpful thanks john and then maybe um mike on kind of the comments around the shift to bespoke um i think there's a lot of momentum obviously in the specialized space but uh kind of look this unlocks from an opportunity perspective to get more personalized right more specialized and underwriting, closing the coverage gap, kind of feels like it aligns to that broader trend of where premium is flowing. But I've got any commentary on the opportunity to get more personalized there. Yeah, I love the question. You know, I think when you think about technology and maybe very specifically AI, agentic systems, you tend to say, how does this impact the world in 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 can 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 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, you know, 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 OMRA and team into Guidewire. Thanks, Mike. Congrats, everybody. Thank you. Thank you, as a reminder, if you would like to ask a question, please put a star one one on your telephone. One moment for the next question. And our next question will be coming from the line of Timid Chowcherry of Gutenheimer. Please go ahead. Thank you. This is Tamjit Chowdhury from Guggenheim Securities. I guess the first question, Hyper Exponential is an AI-native company that's focused on underwriting and pricing workforce specifically, right? And this acquisition is a year after you announced Underwriting Center and Pricing Center. Can you walk us through 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 Hyper Exponential at this point in their growth trajectory. This is a one of a kind company. And, you know, you just have to nurture a relationship with a founder like Amrit, in this case, in my case, like over years. And you know that relationship, that trust, that alignment of vision and that alignment of culture is, you know, 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, you know, more effectively and faster. And I think that's just a very, very important part of this. You know, we immediately boost our capacity to bring a solution like Underwriting Center to market and be successful. You know we just immediately put ourselves in the number one position, the default place where someone is going to look in order to think about making a decision like this. And we bring almost, you know, I think the company's in almost 300 people that have spent, you know at least at 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 two 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, you know, getting to bring that to the commercial lines under ready market. I'll just add one quick comment. Yeah, let John give a comment here. I'm going to add one quick comment there. So if you think about pricing, your enterprise pricing 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 Quantium, where pricing center going. And over time, that roadmap is going to cross over into admitted lines in the US and specialty lines overall. But if you thinking about that, think about those complex risks from a rating and pricing where the actuary is the underwriter. That's really what HyperX 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. As 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 really fundamentally define what that space is going to be in how we serve carriers is the part that unlocks this and is by no means is a binary between what we've done with our underwriting center and what hyperexponential brings. It is truly a combination to go after that space across all lines. Great. Thank you for that. 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? so we're not at this point providing any any sort of uh objective details about customer accounts or anything like that i would say that you know point back to what i said in the um in the sort of script you know they they have a phenomenal customer base it is uh you know there's a lot of great customers from the london market and especially in these specialty uh commercial underwriters uh and and there's definitely as i as i kind of hinted to customer relationships that they have that Guidewire envies. And so it's not a complete overlap, and they are definitely bringing net new customers into the Guidewire fold as part of this merger, or excuse me, as part of this acquisition. Great. Thank you so much. Thank you. One moment for the next question. Next question is coming from the line of Alexey Gogoliev of J.P. Morgan. Please go ahead. Hello, everyone, and congratulations with the acquisition. I wanted to ask, how do you think this changes your competitive differentiation versus other underwriting and pricing and rating vendors and internal build options at large carriers? Hey, Alexei, thanks for the question. Um, really the, the dynamic that we're able to go out the market with right now is really a business conversation, a business first conversation focused on business outcomes and the ability to access those chief underwriters, those product managers, um, the actuaries that are really driving the decisions for these underwritten lines is fundamental. And what HX brings is a relation, a deep relationship with that group, uh, and the ability to both listen and position the right business outcome conversation. But what they've proven over the last couple years is their ability to respond very fast with product features and functions that get right at the heart of what matters to that business community. So that to me not only puts us in a position to have the right conversations, it drives us, which has been so important to Guidewire for so long, is proximity of trust with customer. And that's a really nice cultural fit between our two companies. And it puts us in a position where I think from a comprehensiveness standpoint, from a business outcome standpoint, sitting on the platform of Guidewire with the data that Guidewire has available, it really does redefine that space and I think separates us from any potential competitors at a pretty alarming clip. And I'm excited to bring that to the market. Thank you, John. And maybe a quick follow-up on some of the financial targets. Can you talk about the accelerating organic ARR growth? What sort of levers do you think will drive that acceleration most? Will it be pricing power or maybe new SKUs, attach rates? That'll be great to get some comments there. Sure, Alexei. This is Jeff. Yeah, super excited about what HX brings to Guidewire. Obviously, we are very impressed with the technology that they've built, and there's a meaningful opportunity for us to help them realize the full potential of that technology by rolling it through our best-in-class distribution engine and our sales force. So kind of bringing that to bear in a meaningful way with this technology is a big part of how we see the vision. And then, you know, Mike talked about this in his prepared remarks, but just the TAM expansion opportunity that this creates and how we think the insurance industry generally is going to shift as it embraces generative AI and where this technology sits kind of right at the foundation of that shift that we're expecting to see in the industry. So, you know, one of these things that kind of aligns with our cloud vision integrates with kind of where we are today and helps position us for, you know, just building a very long-term, durable growth engine. Thank you, Jeff. Congratulations again. Thank you. And thanks, Alexi. Thank you one moment, please, for the next question. Our next question is coming from the line of Billy Fitzsimmons of Piper Sandler. Please go ahead. hey guys thanks for taking the question here um two quick ones for me i i guess the first is can you just frame in terms of timeline how we should think about the technical and integration roadmap for for this acquisition with kind of the core products yeah good question the i guess most important framing i would say is uh with hyper exponential we're in market selling right and and so that there's not going to be this like component of delay related to the sales activity and getting after it uh we're in market today and you know working hard especially around post-close to make sure that we are uh joining forces and bringing to bear everything at guidewire to accelerate the uh you know, the awareness and then demand and hopefully sales of this product. I would say, you know, last night, Amrit and I talked a lot about what the plan is going to look like in terms of integration planning. But I would Say within, you Know, three months of close, there'll be a clear explanation and joint roadmap that that's created that gives everybody clarity about how the two products fit together. But i definitely don't want people thinking that we are pressing pause on the sales activity at HyperExponential right now. And then, super helpful, and then the follow-up would be, just we, in the press release, we talked about kind of the ARR contribution for 27 and 2028. Just how do we think about, now that you are buying HyperExPonential, the ability to kind of scale that product with your sales force and maybe unlock growth that maybe they wouldn't have been able to do on their own. Is that a fair way to maybe frame some of the opportunity here or you push back on that? And how do we think about kind of the cross-sell opportunity relative to just the inorganic contribution from what hyperexponentials already do? No, no, no. That's absolutely part of the strategy here. I mean, you have a company here that clearly has product market fit. You know, like I said, they're about, you know, almost 300 people, but, you know, Guidewire is almost, you know, 4,000 people with, you know, footprint all over the world and carrier relationships all overthe world in a very, very developed ecosystem of partners. I mean, we're going to have an opportunity to scale their reach very, very quickly. And that's a significant part of this deal. It's just, that's the natural boost that you get when you acquire a company like that. We see this very clearly. We talked about this on our previous calls. It's like the success we've had with ProNavigator and the success that we've Had with QuantE that became pricing center and the demand and the ability for us to put those products in front of tier one carriers almost immediately and be able to earn the trust of those companies. It it's, it's just an extraordinary boost for these companies. And so it's definitely part of the strategy here. You know, hopefully that gives a sense. I mean, like, you know, we're going to be able to bring them, you know, into other regions, you know, where immediately we have distribution and we have relationships on the ground with implementation partners, you know, where we have relationships with local groups inside of insurance companies that otherwise they would have had to build that distribution army themselves, you know, and that was the phase that they were in as a standalone startup. And so, you know, that's what you get when you, when, like I said, when you earn the trust of a company like this and you make them feel comfortable that we're going to be able to really accelerate, you know, their mission. And so that's absolutely the plan. Yeah, I'll get into the weeds a little bit on this for just a second to take you through kind of some thought process. So if you think about mapping customers, I think it's a very complementary set of customers. But if you go one level deeper, it's the relationships inside of those customers. And that is exponentially more, hyper-exponentially, more complementary than just the customer list itself. And then if you dig in one level beneath that, I spend a lot of time looking at the business cases and how hyper-exponential thinks about writing a business case and how they sell their proposition going forward. It's very different. It's a very different starting point. And it's very, it's a different math with the same pricing structure as Guidewire. So very complementary in that regard. And then fundamentally, boots on the ground, if I look at what their forward deployed engineering teams are doing and what Guidewire's forward deployed engineering teams aren't doing, they could be existing inside the very same customer doing very different things and coming at the problem from, on one hand, a core processing standpoint, on the other hand, a risk selection and pricing standpoint for the complex underwritten lines. This is very complementary, and I think the customer base will be really excited to see this come together. super helpful context I appreciate it thank you one moment please for the next question our next question is coming from the line of Tyler Reckie of Citi please go ahead great good morning and look forward to discussing the deal more at connections today but But I wanted to just ask about the long-term revenue opportunity that you talked about. So sort of two questions. Like, number one is we think about the assumptions in sort of the near term. What are you sort of assuming in terms of synergy targets to reach those ARR lifts that you described in the press release? And then, you know, as you think about this long term, is there an opportunity to go even outside of P&C insurance as you just think about the broader agentic labor opportunity potentially in other verticals? Sure. Hey, Tyler, I'll touch on the question around synergies. We'll obviously get into a bit more detail on our Q1 earnings call. And so, you know, we're going to do some work and we have closing exercises to do and other things. So we'll provide more detail in Q1. As you think about what was embedded into the press release of the 650 basis points of inorganic growth that we'll see this year, and then that translating into, you know, around 150 basis points of incremental growth looking forward. What's embedded into that is largely an un-synergized plan. I mean, I think that there are synergies that we think we will unlock from bringing these two organizations together, and that presents some upside to some of the numbers that we put out there. But the team at HyperExponential had a very strong plan, had kind of planned targets that are embedded intothat forecast that are also aligned to how we talked about some ofthe are now consideration at the beginning of the press release. So there's all of these elements that are going on, but you should think about kind of those growth potential as being more combining Guidewire and HX standalone, and some of those synergies would reflect upside to the numbers that we presented there. I'll let Mike talk about the potential to expand beyond PNC. Yeah, my quick take is that, you know, Guidewire, we tend to be very, very focused on the PNC carriers, right, the insurance companies themselves, and a little bit up and down the value chain to reinsurance companies and MGAs and the distribution side. But I think that there's definitely going to be an expansion up and Down with this acquisition, and specifically this agentic underwriting use case is, you know, as a percentage of value to an organization, There's just more value in this segment to, you know, a distribution MGA-focused organization, you know, relative to like a core system like Guidewire sells. So, that's an exciting sort of expansion of, you Know, the footprint, so to speak, of where we might focus and where Hyper Exponential already has in their customer base examples of customers like this. And so that's how I would think about it. Beyond PNC, we'll have to get back to you about whether or not, you know, that materializes. But, you Know, I would just say like, this is one of the most exciting thing for me about this is that it opens up this extraordinarily large addressable market that's completely incremental to the way that we are currently running the company. and I think will be a growth driver for us for years to come. So thanks for the question. Thank you. Thank you, and that does conclude today's Q&A session. I would now like to turn the call over to Mike Rosenbaum, CEO for Closing Remarks. Please go ahead. Hey, thanks so much, everybody, for joining. Obviously, we have a big day today at Connections in our keynote and everything else. We look forward to seeing all of you that are here with us in Las Vegas at the Analyst Day and otherwise we'll see you on the recorded call. So thanks for joining and we'll see you later. Thank you all for participating in today's program. You may now disconnect.