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Guidewire Software, Inc. (NYSE:GWRE)

Q2 2013 Earnings Conference Call

February 26, 2013, 17:00 PM ET

Executives

Marcus Ryu - Chief Executive Officer

Karen Blasing - Chief Financial Officer

Analysts

Saket Kalia - JPMorgan

Brent Thill - UBS

Stan Zlotsky - Deutsche Bank

Tim Long - Citigroup

Brendan Barnicle - Pacific Crest Securities

Chris Growe - Stifel Nicolaus

Operator

Good day, everyone. Welcome to the Guidewire Second Quarter 2013 Earnings Conference. Today's call is being recorded.

At this time, I'd like to turn things over to Ms. Karen Blasing, Chief Financial Officer. Please go ahead, ma'am.

Karen Blasing

Good afternoon and welcome to Guidewire Software's earnings conference call for the second quarter of fiscal 2013 which ended on January 31. This is Karen Blasing, 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. To access the press release and the financial details, please see the Investor Relations section of our website at www.guidewire.com. As a reminder, today's call is being recorded and a replay will be available following the conclusion of the call.

During today's call, we will make statements related to our business that may be considered forward-looking under federal securities laws. These statements reflect our views only as of today and should not be reflected upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook.

These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. These risks are summarized in the press release that we issued today. For a further discussion of the material risks and other important factors that could affect our actual results, please refer to our Annual Report on Form 10-K for the period ended July 31, 2012 and our quarterly report on Form 10-Q for the period ended October 31, 2012, both of which are on file with the SEC.

Also, during the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation scheduling GAAP versus non-GAAP results has been provided in our press release issued after the close of market today.

Finally, at times in our prepared comments or responses to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that this additional detail may be one-time in nature and we may or may not provide an update in the future.

With that, let me turn the call over to Marcus for his prepared remarks and then I will provide details regarding our second quarter and our outlook for the rest of fiscal 2013.

Marcus Ryu

Thanks, Karen. I'm pleased to report that our second quarter exceeded our expectations with revenue and profitability that were again above the high end of our guidance ranges. Demand for our next-generation core system software remains strong, and we continue to strengthen our leadership position as the industry we serve replaces the decade-old legacy systems which it largely runs today.

Revenue in the second quarter was 72.2 million, an increase of 31% from a year ago and 7 million above the top end of our revenue guidance. In addition to strong execution during the quarter, approximately 4.5 million of this overachievement came from new and existing customers who paid earlier than their payment due dates in the third quarter. This included 1.7 million in anniversary payments from existing customer.

On the expense side, we continued our program of investment in global sales and services expansion as well as enhancing our offerings with distinctive new capabilities. Hiring in the second quarter was roughly on track with nearly 70 new employees. Despite this, expenses were lower than anticipated and thus combined with a revenue upside, we report non-GAAP operating income of 15.5 million, which is well above the high end of our guidance.

A key metric of our progress is the recurring term license and maintenance revenue that we have recognized on a rolling four-quarter basis. At the end of the second quarter, this metric was 127 million, a 32% increase from the end of the same period a year ago. Even though 4.5 million of our revenue upside in the second quarter was revenue brought forward from the third quarter, we are increasing our revenue guidance for the year based on two factors.

First; momentum from the first half of the year and second, high visibility into revenue because of the anniversary payments from already contracted business which is due to be invoiced in the second half of the year. We are also increasing our profitability expectations for the same reasons as well as the lower than expected costs that we incurred in the first half of the year.

Beyond financial performance, we believe this quarter provided several positive indicators of our progress in the marketplace, including our continued momentum in policy and full suite sales and additional go-live that extend our track record of implementation success.

Let's start with PolicyCenter and suite sales. For several years now, our top strategic goal has been twofold. First, to develop PolicyCenter as a best-in-class application for the most critical function of an insurance company. And second, to sell and deliver all of our products as a compelling unified suite across policy, claims, billings, rating, customer data management and other critical function.

We're encouraged by the extremely positive response we continue to see for both of these value propositions. For example, in the second quarter, we had a substantial win with an existing customer, Wawanesa Mutual, one of the largest P&C insurers in Canada. Wawanesa has been a ClaimCenter customer since 2009 and they selected PolicyCenter, BillingCenter, Rating, Client Data Management and Reinsurance Management, expanding their existing Guidewire investment to the full InsuranceSuite.

Another significant win was the Insurance Corporation of British Columbia. With 3.7 billion in direct written premium, ICBC selected PolicyCenter to complement ClaimCenter which they acquired in 2011, thereby making them our seventh PolicyCenter customer in Canada. ICBC is a successful ClaimCenter customer scheduled to go live in July 2013. And after a rigorous and competitive process, they selected us to provide their replacement policy administration system.

Workplace Safety and Insurance Board of Ontario selected our full InsuranceSuite as well as our rating technology, key components to their strategic plan to revamp the entirety of their core systems over the next few years. With this win, we now have six new customers in Canada including all of the (inaudible) side-by-side.

Among our longstanding Canadian customers is a Cooperator, a $2.4 billion insurer. In the second quarter, they selected three additional modules; Rating Management, Client Data Management and Reinsurance Management to complement their prior investment. We also had several up sell successes outside of Canada.

For example, Great American Insurance is a significant customer with over 1 billion in premiums who has been live for some time with ClaimCenter and BillingCenter. This past quarter, their Workers' Compensation unit called Republic Indemnity selected PolicyCenter to replace their legacy environment.

We also had a significant expansion of our relationship with Tokio Marine, the third largest insurer in Japan and our largest ClaimCenter customer to-date. A few weeks after they had their production go live on ClaimCenter in Tokio, they decided to have several of their U.S. subsidiaries licensed ClaimCenter and BillingCenter. Tokio Marine North America, the First Insurance Company of Hawaii called FICOH and Philadelphia Insurance.

In addition to these transactions, among other, we were pleased by another significant market achievement. Earlier this month, Gartner published a MarketScope report for North American P&C policy management solutions. Of the 14 solutions evaluated, only Guidewire PolicyCenter received the highest rating "Strong Positive," and Gartner highlighted PolicyCenter's scalability, reliability and strongest sales record among its differentiators.

Turning now to operations, we report progress in our go-to-market strategy in the second quarter as well. We continued the expansion of our global direct sales force, which we are augmenting across all roles, including sales consultants and account executives. In January, we also added the key leader to the organization with the new general manager for the EMEA region to support our ambition of significant growth.

While macro conditions in Europe remain tepid, we have been very active there and see a healthy opportunity in our specific market, where our long-term goal is to have the sizeable aggregate premiums in Europe represented proportionately in our customer base. Equally important to our go-to-market strategy is our global service team who leads and advises on the implementations of our software.

Our track record of successful implementations and customers around the world remains Guidewire's most important differentiator. Growth in our installed base of PolicyCenter and full suite customers is a significant driver to the expansion of our recurring revenue base. As such, we continue to expand our services organization which plays a key role in these implementations, as our systems integrator ecosystem continues to mature and build its credentials by working with us on major implementations.

During the second quarter, the services team led a number of significant go-live. Tier 1 insurer Nationwide went live with ClaimCenter in January with an implementation that was led by Ernst & Young. As we announced on our last call, Nationwide has already selected PolicyCenter and that implementation is already underway with the BillingCenter implementation to follow.

Liberty Mutual Commercial Insurance has also gone live of a ClaimCenter. With a number of recent acquisitions, this complex implementation brought together what was previously four separate claims, profits and environments onto a single platform creating a much more efficient environment for Liberty Mutual, a top five player in the U.S. market.

Columbus Ohio-based insurer State Auto went live with PolicyCenter and BillingCenter at their subsidiary Rockhill Insurance with an implementation project led by PricewaterhouseCoopers. One of America's leading church insurers GuideOne Insurance went live on a ClaimCenter in another PWC let implementation in the second quarter.

As our consulting organization and SI partners become more experienced with PolicyCenter and InsuranceSuite implementations, we are seeing increased efficiencies in our project activity. This experience helped a full suite implementation to get completed in just 14 months at the Canadian Automobile Association.

In a similar example, Royal Automobile Club of Queensland Insurance, the largest carrier of motor vehicle insurance and the second largest of household insurance in Queensland, Australia went live on PolicyCenter and BillingCenter. RACQI's implementation was also led by Ernst & Young and with their prior ClaimCenter implementation, RACQI is now live with a full InsuranceSuite.

In a third key implementation in the second quarter, Universal Insurance, the market share leader in Puerto Rico also went live with a full suite. A large majority on this project was completed by PWC and it will serve as a great credential for them on PolicyCenter and suite opportunities in the future.

The results that our customers realize from upgrading to our flexible, upgradable, next-generation technology is always rewarding to see. For example, following Superstorm Sandy, our largest customer NJM -- our customer NJM, the largest personal auto insurer and third-largest homeowners' insurer in New Jersey leveraged their ClaimCenter implementation to quickly respond to customers. Just six weeks after the storm, they had already closed 45% of the record 52,000 claims they had received dispersing nearly 100 million to policyholders.

It's also rewarding to witness a significant ROI that our customers are deriving by adopting Guidewire. In the third quarter results, UK-based ClaimCenter customer Direct Line Group called out key strategic benefits enabled by their Claims Transformation Program. Direct Line Group, the leading market share provider for personal motor insurance in the UK expect their ClaimCenter implementation to help them save GBP100 million per year in 2014, a goal they are already halfway to achieving.

Underlying these successes is our track -- investments in R&D enable us to continue to enhance our comprehensive suite of core system software for the P&C industry, while developing new technologies such as our innovative offering Guidewire Live. Though it was just introduced in October, several existing customers are already contributing data daily and they're evaluating the first wave of our on-demand cloud-based apps.

While we are still in the very early days of Guidewire Live, the interest and feedback we've received so far has been encouraging and we intend to steadily increase our investment in the periods to come. In addition to Guidewire Live, we still have considerable opportunities to widen our differentiation with the core capabilities of our suite, and we are investing in our development organization accordingly.

In summary, the momentum is strong as we continue to make headway in a long-term opportunity that we see to replace the legacy core systems prevalent in the P&C industry today.

Now, I'll turn the call over to Karen.

Karen Blasing

Thank you, Marcus. We're pleased to report results that exceeded our revenue and earnings expectations for the second quarter of fiscal 2013. Total revenue was $72.2 million, a 31% increase from the second quarter of fiscal 2012. Within revenue, license revenue was $30.8 million, a 20% increase from the second quarter of fiscal 2012.

It is important to understand that the composition of this license revenue reflects our intentional emphasis on recurring term licenses as opposed to perpetual licenses.

Term license revenue increased 49% year-over-year to $29.5 million, while perpetual license revenue was approximately $1.3 million, down from $5.9 million in the second quarter of fiscal 2012.

Maintenance revenue, which is recognized ratably through the year, was $9.2 million for the second quarter, up 35% from a year ago and reflecting overall license growth trends. Services revenue was $32.2 million, up 43% from a year ago, reflecting the increase in the quantity and scale of projects we are engaged in. Notably, there was no catch-up revenue coming from the balance sheet in the second quarter.

Strong bookings in the first half of the year helped drive total revenue that was above the high end of our guidance. Adding to revenue upside in the quarter was approximately 4.5 million in payments from new and existing customers that were received and recognized ahead of their payment due dates in the third quarter. Because of the quarter-to-quarter revenue variability arising from factors such as this, we plan and evaluate our business on an annual basis.

Our high annual revenue visibility is driven by the recurring nature of our multiyear term licenses and ongoing [Technical Difficulty] both of which are predominately built annually. Rolling fourth quarter term license and maintenance revenue for the period ending January 31 totaled 127 million and was up 32% compared to a year ago.

With respect to geographic mix, the United States represented 51% of revenue in the second quarter, with 49% of revenue coming from outside the U.S. In the year-ago period [Technical Difficulty] of revenue came from outside the U.S.

Our geographic mix can be variable on a quarter-to-quarter basis, depending on the timing of larger transactions and the associated revenue recognition. From a high level perspective, we continue to see solid demand both domestically and overseas, despite the challenging global economic environment.

We'll discuss our profitability measures on a non-GAAP basis, and we have provided a reconciliation of GAAP to non-GAAP measures in our earnings press release issued earlier today, with the primary difference being stock-based compensation expenses.

Non-GAAP gross profit in the second quarter was $44.6 million, representing a 61.8% non-GAAP gross margin. Breaking that down, gross margin for licenses was 99.6%, non-GAAP gross margin for maintenance was 84.3% and non-GAAP gross margin for services was 19.2%.

We anticipate non-GAAP services margins in the mid-teens range over the next several quarters, as we continue to increase staffing levels in our services organization to support a growing number of implementations, particularly for PolicyCenter and our full suite offering.

Turning to operating expenses, total non-GAAP operating expenses were $29.1 million in the second quarter, an increase of 22% compared to a year ago. This resulted in non-GAAP operating income of $15.5 million, representing a non-GAAP operating margin of 21% which was considerably above the high end of our guidance.

For the second quarter, we generated $16.4 million in adjusted EBITDA or an adjusted EBITDA margin of 22.7% which was also above the high end of guidance. While our hiring of almost 70 net new employees was roughly on track in the quarter, several factors drove upside to profitability metrics.

First, revenue was 7 million above the high end of our guidance and virtually all of that upside fell to the bottom line. Second, more employees than anticipated used vacation time in early January decreasing accrued paid time off expenses and also reducing discretionary expenses. And finally, many of our new hires in the quarter didn't start until late in the quarter.

Non-GAAP pre-tax income was $15.6 million in the quarter. Our non-GAAP effective tax rate was 29%. And with the reinstatement of the R&D tax credits, we now anticipate a 30% tax rate for the full year. Non-GAAP net income for the second quarter was $12.9 million or $0.21 per diluted share, also well above our guidance.

Now turning to our balance sheet, we ended the second quarter with $203.2 million in cash, cash equivalents and investments compared to $185.5 million at the end of the first quarter. During the quarter, we purchased a net 101.8 million in short-term and long-term investments. With strong profitability, operating cash flow was also strong and inflow of 19.4 million in the quarter compared to an inflow of 14.8 million in the year-ago period.

Our current deferred revenue was $43.0 million. Total deferred revenue was $45.1 million at the end of the second quarter, an increase from $43.6 million at the end of the first quarter.

As we've shared in the past, we do not believe the deferred revenue is a meaningful indicator of business activity during the quarter, since we typically bill term license contracts annually and recognize the full amount on the due date, which is generally 30 to 60 days after the original contract date and each anniversary date. There is no specific pattern to whether an invoice and its due date span the end of the quarter and therefore result in an increase in deferred revenue.

Additionally, when customers pay us ahead of the due date, as we saw in the second quarter, we are obliged to recognize revenue upon receipt in which case the invoice amount does not go into deferred revenue at all.

Furthermore, our multiyear contracts combined with annual payment terms mean that a significant amount of our contractually committed fees are not visible on our balance sheet. We believe that this large base of business already under contract combined with our best-in-class renewal rates provides us with a very high level of visibility towards 2013 revenue today.

We share this visibility through our metric of rolling fourth quarter recurring revenue which is a good measure of our business under contract. Combined with our guidance, we believe it is the best indicator of our business momentum.

Now turning to our guidance for the rest of the year. As we indicated, the significant portion of our revenue and earnings upside in the second quarter was the result of early payments that were not due until the third quarter. These quarter-to-quarter variations are also part of why we believe it makes sense to look at our financial results on a longer term and trended basis.

However, in spite of this variability we are comfortable increasing the midpoint of our full year revenue expectations by 5 million, as a result of our business momentum in the first half of the year and very high visibility to anniversary payments with existing customers anticipated in the second half of the year, particularly in the fourth quarter.

We are also increasing our profitability expectations for the year in order to reflect increased revenue expectations and the reality that while we have done an excellent job hiring so far this year, with approximately 140 net new employees, we don't expect to meet all of our investment targets for the year. As such, we are increasing the midpoint of our non-GAAP operating income guidance by 13 million from prior expectations.

Therefore, looking at the full year, we anticipate revenue to be in the range of 286 million to 292 million and increase from prior revenue guidance of 279 million to 289 million, and representing year-over-year growth of 25% at the midpoint.

For the full year, we anticipate license revenue in the range of $116 million to $119 million, maintenance revenue of approximately $37 million and services revenue of between $133 million and $136 million. We now believe that services will represent approximately 47% of total revenue in fiscal 2013.

In terms of profitability, as I mentioned, we are improving our expectations for operating income for the year. We now anticipate a GAAP fiscal 2013 operating income to range from a loss of 4 million to an income of 2 million. We anticipate a GAAP net income to range between a loss of 2.8 million to an income of 1.4 million or a loss of $0.05 per share to income of $0.02 per share based on an estimated weighted average diluted share count of 62.8 million shares.

Our GAAP operating income and net income per share expectations include $40 million in stock-based compensation expense. Excluding this non-cash expense, we expect full year non-GAAP operating income to be in the range of $36 million to $42 million and increase from our prior expectations of $22 million to $30 million and representing non-GAAP operating margin of 13% at the midpoints of our revenue and operating income guidance.

With [depreciation] of approximately 5.4 million for the year, we anticipate adjusted EBITDA in the range of $41.4 million to $47.4 million in fiscal 2013. And we anticipate non-GAAP net income in the range of $25.2 million to $29.4 million or $0.40 to $0.47 per share, based on a fully diluted share count of 62.8 million shares and increase from prior expectations for non-GAAP net income of $0.23 to $0.31 per share. We anticipate a non-GAAP effective tax rate of approximately 35% for the full year.

As we mentioned last quarter, the fourth quarter is seasonally our strongest quarter, typically with meaningful sequential growth off a seasonally weaker third quarter. In 2013 we expect this pattern to be particularly pronounced for two reasons. First, revenue in the second quarter was above expectations including approximately 4.5 million in revenue that was brought forward from the third quarter revenue due to early payments from our customers as we discussed.

And second factor driving an unusually strong sequential revenue increase in the fourth quarter of 2013 is the volume of contractually committed anniversary payments as well as some anticipated perpetual license activity from existing customers. It's important to note that the contracted nature of these fourth quarter anniversary payments provides us a high degree of confidence in our full year revenue, even with the seasonal dip occurring in the third quarter.

Quantitatively, we have approximately 80% in anticipated license revenue in the fourth quarter already under contract. Therefore, for the third quarter of fiscal 2013, we anticipate total revenue to be in the range of 62.5 million to 64.5 million. This guidance includes license revenue in the range of 21 million to 22 million. We expect most license revenue to come from term licenses with perpetual revenue in the range of 3 million to 4 million.

We anticipate maintenance revenue of approximately 9 million and services revenue in the range of 32.5 million to 33.5 million. Based on the full year guidance I just outlined, this means we anticipate fourth quarter revenue to be in the range of 88 million to 92 million.

We anticipate fourth quarter license revenue in a range of 44 million to 46 million, which we expect perpetual revenue to be in the range of 3 million to 4 million. We anticipate maintenance revenue of approximately 9 million and services revenue in the range of 35 million to 37 million.

For the third quarter, we anticipate a GAAP operating loss between 8.7 million and 6.7 million. And we expect GAAP operating income between breakeven to 4 million in the fourth quarter. We anticipate a third quarter net loss of 6.1 million to 4.7 million or $0.11 to $0.08 per share based on an estimated weighted average basic share count of 56.8 million shares.

For the fourth quarter, we anticipate GAAP net income of breakeven to 2.8 million or breakeven to $0.04 per share based on an estimated fully diluted weighted average share count of 63.1 million shares. We anticipate an effective GAAP tax rate of approximately 30% in the third and fourth quarters, primarily due to foreign stock-based compensation that is ineligible for tax deduction.

Our GAAP operating income and net income per share expectations include 9.7 million in stock-based comp expense in the third quarter and 10 million for the fourth quarter. Excluding this non-cash expense, we anticipate non-GAAP operating income between 1 million to 3 million for the third fiscal quarter and non-GAAP operating income between 10 million and 14 million in the fourth quarter.

We expect adjusted EBITDA to be between 2.6 million to 4.6 million in the third quarter and 11.7 million to 15.7 million in the fourth quarter. We anticipate an effective non-GAAP tax rate of approximately 30% in the third and fourth quarters. We anticipate non-GAAP net income between 0.7 million to 2.1 million or $0.01 to $0.03 per share in the third quarter based on a fully diluted average weighted share count of 62.8 million shares.

For the fourth quarter, we anticipate non-GAAP net income between 7 million to 9.8 million or $0.11 to $0.16 per share based on estimated fully diluted average weighted share count of 63.1 million shares.

In summary, we are pleased to report continued business momentum and a strong second quarter. We believe we remain well positioned to capture a disproportionate share of the significant opportunity ahead of us and that with strong execution, we can drive strong revenue growth and profitability in the years ahead.

Operator, can you now open the call for questions.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions). We'll go first to Sterling Auty with JPMorgan.

Saket Kalia - JPMorgan

Hi, guys. It's Saket here for Sterling. A quick question on the early customer payments this quarter. A similar situation happened last January as well. Can you comment on whether these were some of the same customers? And perhaps if you expect them to continue this payment schedule going forward?

Karen Blasing

Hi, Saket. It's interesting to know it was not the same customers. I believe that whatever happens in the insurance industry is that they -- once they have got a legitimate claim from a customer that they go ahead and advance those payments as quickly as possible. What it looks like happens is actually they did that for their suppliers as well, because we had a number of customers that did pay us just a few days early but happened to fall into the January quarter.

Saket Kalia - JPMorgan

Got it. And then of the 29.5 in term license revenue, can you maybe comment on how much of that is now ratably recognized (inaudible) arrangements to what you have with Nationwide, for example?

Karen Blasing

So a relatively small percentage of that is still in quarterly payment terms. So, overall, when I look across the year, it's probably close to 20% of our payments on a quarterly basis as opposed to annual in advance.

Saket Kalia - JPMorgan

Great. And then lastly, if I could sneak one last one in. You said about 140 net employees so far in the first half. What's sort of the goal as you look towards the end of 2013, where do you think that number should be?

Karen Blasing

I expect the headcount increases to ramp slightly in Q3 and Q4. We seemed to be quite successful over the last couple of quarters kind of hiring in net new 70. I would expect those numbers to go up, maybe 10, 15 to 20 employees in each of the next quarters.

Saket Kalia - JPMorgan

Got it, very helpful. Great quarter, guys. Thanks.

Operator

We'll hear next from Brent Thill with UBS.

Brent Thill - UBS

Thanks. Marcus, can you just bring us up to speed in terms of some of the conversations you're having with some of the tier 1 insurance providers given the success that you've been building on? If you could just tie that maybe, I think there was an echo of a very global tone of some of the customers you mentioned, maybe add on that? And I had a quick follow-up for Karen.

Marcus Ryu

Yeah. Thanks, Brent. No major qualitative change to signal with respect to the tier 1. I can tell you that we are in more conversations that we've ever been before that the recent go-lives and of course wins and I would count not just Nationwide which we had a lot of discussion about in the last couple of quarters, but also the Hartford is actually equally significant because of their stature in the industry.

That, I think, establish our bonafides into upper tier of the market in a very useful way, even though we've had some longstanding customer relationships with huge names like GEICO and Liberty Mutual. And it's not just that they made new selection decisions, it's also or equally important is their stories about going live and their experiences sometimes, a couple of years after they've been implemented.

The Liberty Mutual, for example, was one of our first live customers but for a variety of reasons the sheer size and complexity of their operation, by the time they get to a full enterprise rollout across their many subsidiaries, the ClaimCenter has taken a long time and that in itself is a very significant milestone even though it's not a major new license win. So in short, we're having a lot of -- we're basically relevant, we believe, to all insurers in the world of any size in our industry and we're in more of those conversations than ever before with more stories to tell.

Brent Thill - UBS

Okay. And just a quick follow-up for Karen on the, I believe, 3 million to 4 million in perpetual that you're looking for, for Q3. Is that license revenue that you have visibility from existing clients or is that new license? Can you just help us understand the components of that?

Karen Blasing

Yes, Brent. So we are expecting kind of before 3 million to 4 million in each of Q3 and Q4 of perpetual license. And the visibility that we have on it, it is all from existing customers and it's either increase licensing fees which those customers will owe us or other arrangements set up within their contracts. So we have a lot of visibility on those.

Brent Thill - UBS

Great. Thank you.

Operator

Next, we'll hear from Tom Ernst with Deutsche Bank.

Stan Zlotsky - Deutsche Bank

Hi, guys. Good afternoon. It's Stan Zlotsky sitting in for Tom. Just a very quick question to follow-up on what Saket was saying earlier. On the investments, are you thinking of accelerating your pace of investments to capture more growth possibly when you're starting to look at fiscal '14?

Marcus Ryu

I think it's fair to say, Stan, that our pace of investments is pegged more by the rate at which we can recruit rationally and comfortably assimilate new professionals onto the team than it is by any kind of budget consideration at this stage. So, I think we have the throttle fully open pretty much for every function in the company but the main constraint is finding people to meet our standard and ensuring that they're on boarded successfully. As Karen mentioned, I think we can continue to get better at that. And so we expect to on board more per quarter than we did each previous quarter, but there's sort of a maximum speed at which that can happen.

Stan Zlotsky - Deutsche Bank

So if the opportunities present themselves and there is appropriate content that's available, would you be willing to take down margins slightly in '14 in order to grab that talent?

Marcus Ryu

At a high level, I'd say yes, definitely.

Stan Zlotsky - Deutsche Bank

All right, perfect. Thank you.

Operator

Walter Pritchard with Citigroup has our next question.

Tim Long - Citigroup

Hi, guys. This is Tim Long for Walter. Marcus, a quick question on just deal cycles. I mean now that you guys have established yourselves in the upper tier, you guys have a full suite offering, have you seen deal cycles shorten at all?

Marcus Ryu

I wouldn't say that was true with any kind of global sense of any kind of pattern that we could hang our head on. There have been some outlier cases where deals even significant ones have closed faster than we expected. But there are cases even we have an existing customer that's already a licensed ClaimCenter and is now evaluating PolicyCenter and you would think that all the factors point in the same direction and yet, we are put through our paces for a full 12-month evaluation cycle just because of the scale of the capital investment and the gravity of what's been contemplated. So, not yet a pattern.

On top of that even though competitively I think we continue to widen the lead in all the respects that matter, we haven't had any competitors go away in the recent period and they're determined to continue fighting and they're using the tools that they have at their disposal to do so including price. It means that we still face a tough competitive situation on many opportunities and even when it's not competitive, we have a lot of things to prove before we can the selection and the contract.

Tim Long - Citigroup

Got you. And Karen, just – I took a look at, sales and marketing look flat q-over-q and given the big top line and even the strong billings, I would have thought this number would have been higher. Could you perhaps maybe remind us kind of how you guys pay your reps? And if there's anything specific we should look into in terms of the sales and marketing?

Karen Blasing

So I don't think there's anything particular to call out in that vein. All the commissions expense that is earned by the sales reps and the sales consultants is booked in the quarter and contracts are signed. So, when you look at any individual quarters, I think there is some -- just like we have seasonal variations in our revenue, sometimes there are seasonal variations when contracts actually gets completed and the commission expense is booked as well. That's probably the predominant piece of it.

Tim Long - Citigroup

Okay, great. That's it for me. Thanks guys.

Operator

We'll hear now from Brendan Barnicle with Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities

Thanks so much. Karen, in the 4.5 million that was accelerated payments, was that all license revenue or was there any other mix of revenue in there?

Karen Blasing

All license.

Brendan Barnicle - Pacific Crest Securities

Perfect. And then can you remind us on implementation because you had several during the quarter. What does implementation do to revenue recognition?

Karen Blasing

Nothing any longer. It's simply a matter of a completion actually of the -- nearly completion for the services projects that's there, though there is always some of our service personnel who say around after that initial implementation to kind of do some additional tweaks for it. So, sometimes you'll see a switch in large service projects from those implementation ones. There's no effect on licenses and no effect on maintenance.

Brendan Barnicle - Pacific Crest Securities

Perfect. And then just following up on Tim's question, was there anything that changed in the competitive landscape at all? I mean it didn't sound like there was any change in deal terms or deal cycles, but anything competitive whether you noticed one way or the other, Marcus.

Marcus Ryu

No, nothing that I call out. It's the same primary competitor that we've faced for essentially the whole company's history which is [Accenture] and they remain a formidable competitor.

Brendan Barnicle - Pacific Crest Securities

Great. Thanks, guys.

Operator

Our last question will come from Tom Roderick with Stifel Nicolaus.

Chris Growe - Stifel Nicolaus

Hi, guys. This is Chris Growe for Tom. Good job on the quarter. So just to clarify in terms of the bookings comment that you guys called out, I think for the first time really that explicitly in the press release, is it safe to say that the bookings environment accelerated in Q2 relative to Q1 or would you say it was relatively steady between the two quarters? Thanks.

Marcus Ryu

No acceleration to call out. I think the reason for mentioning it explicitly in the release was to make it very clear that early -- some of the accelerated payments notwithstanding, we would still have been above the high end of our guidance range. And we just wanted to be very explicit about that and not have -- and not engender any confusion that we're just talking about an acceleration. We feel great about how the quarter went on its own merits with that timing issue aside.

Chris Growe - Stifel Nicolaus

Yeah, we definitely appreciate it. And thank you, Karen, for breaking out the quarters as well. So if I look at the kind of implied term guidance for the year, I think it's -- if you get 8 million for perpetual, it does seem like kind of a net organic 7 million increase for the year relative to what you did before and that kind of with, if you adjust Q2 not necessarily a huge amount of [beat]. So I guess is there something out there that you're seeing that's giving you that confidence? And that's why I guess maybe I was asking the bookings question, because it does seem like the tone of business definitely has picked up at some point within those two quarters. I'm just trying to figure out whether that was the case throughout the whole period or whether there was some activity late there?

Marcus Ryu

Chris, just one thing I'd say is our view on guidance is always conditioned by our degree of confidence in the pipeline and the visibility we have on transactions that are coming. So, that's a major input into deciding how we guide for the coming period. It's just a coincidence that we happen to use the word bookings in the press release, but that primarily began to differentiate between -- bookings performance in the quarter versus this earlier acceleration of some of the payments.

Chris Growe - Stifel Nicolaus

Okay, great. And then last question for me. I think in the past you've mentioned the policy approach the customers have been doing. Do you still see that or has that maybe abated a little bit? Have you seen any of that pickup that you would expect from the initial successes?

Marcus Ryu

No change in that pattern. What gates customers ability to implement is not confidence in the solution, it's often the complexity or the diversity of their different business units as well as just the amount of inherent risks, which is not necessarily technology risks. It's business transformation risks. They're willing to digest the case probably years into the future that as companies adopt PolicyCenter, they will do so one business unit at a time some more at least. Smaller companies, they have it all in one system, they'll probably go full enterprise. The big ones, I think it will continue to be the case. And again, not through any shortcoming in the technology to go piece by piece.

Chris Growe - Stifel Nicolaus

I know and I wasn't trying to imply there was any shortcoming in technology. I just wanted to understand if -- because that might sound like something that might have been unexpected earlier but it doesn't sound like there was much of a change there, so I appreciate it. Thanks, guys.

Marcus Ryu

Okay.

Operator

At this time, I'd turn the conference back to you all for closing remarks.

Marcus Ryu

No other remark beyond just thank everyone for participating in our call today. We look forward to speaking with you soon.

Operator

That will conclude today's conference. Thank you all for your participation.

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