Duck Creek Technologies, Inc. (DCT) CEO Mike Jackowski on Q4 2020 Results - Earnings Call Transcript

Duck Creek Technologies, Inc. (DCT) Q4 2020 Earnings Conference Call October 20, 2020 5:00 PM ET

Company Participants

Brian Denyeau - ICR
Mike Jackowski - CEO
Vincent Chippari - CFO

Conference Call Participants

Sterling Auty - JPMorgan
Chris Merwin - Goldman Sachs
Brad Sills - Bank of America
Saket Kalia - Barclays
Alex Zukin - RBC
Bhavan Suri - William Blair
Tom Roderick - Stifel
Pat Walravens - JMP Securities
Mayank Tandon - Needham

Operator

Ladies and gentlemen thank you for standing by. And welcome to the Duck Creek Technologies Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. [Operator Instructions]

It is now my pleasure to introduce Brian Denyeau from ICR.

Brian Denyeau

Thanks, Andrew. Good afternoon and welcome to Duck Creek's earnings conference call for the fourth quarter of fiscal year 2020, which ended on August 31. On the call with me today is Mike Jackowski, Duck Creek's Chief Executive Officer; and Vincent Chippari, Duck Creek CFO. A complete disclosure of our results can be found in our press release issued today, which is available on the Investor Relations section of our website.

Today's call is being recorded and a replay will be available final conclusion of the call. Statements made on this call may include forward-looking statements regarding our financial results, products, customer demand, operations, the impact of COVID-19 on our business and other matters. These statements are subject to risks, uncertainties and assumptions and are based on management's current expectations as of today and may not be updated in the future. Therefore, these statements should not be relied upon as representing our views as of any subsequent date.

We also refer to certain non-GAAP financial measures to provide additional information to investors. A reconciliation of non-GAAP to GAAP measures is provided in our press release with the primary difference is being stock-based compensation expenses, amortization of intangibles, change in fair value of contingent earn-out liability and the related tax effects of these adjustments.

With that let me turn the call over to Mike.

Mike Jackowski

Thank you, Brian, and good afternoon everyone.

I want to thank all of you for joining us today for our first earnings call as a public company. Successfully completing our IPO was an important milestone for Duck Creek, as we execute on our mission to transform the global property, casualty insurance market with our modern low-code SaaS platform.

I'd like to also thank our new shareholders for their support and their belief in our ability to lead the insurance industries, transition of running core systems in the cloud. I'm excited to start by quickly reviewing our financial results for the fourth quarter, which were very strong across the board. We reported total revenue of $58.3 million, up 22% year-over-year and this was underpinned by subscription revenue, which is a revenue derived from SaaS of $24.6 million, up 54% year-over-year. And we were profitable in the quarter with adjusted EBITDA of $3 million.

On today's call, our CFO, Vincent Chippari will spend some time providing a few recent highlights on Duck Creek. Review our full year and fourth quarter 2020 performance and give some insight into how we're thinking about fiscal '21.

But first, let me begin by saying we hope that all of you and your families are safe and healthy. In light of COVID-19, the past six months has certainly been an unprecedented time for all of us. I'm incredibly proud of the strength of Duck Creeks culture, the resiliency of our people and their willingness to giving support those in need. Despite the health crisis in many related economic challenges, we have delivered two of the best quarters in the company's history since the onset of the COVID pandemic in March.

Our strong performance is due to both a robust and increasing market demand for our technology, as well as the diligent execution of our Duck Creek team. We seamlessly shifted over 1,300 employees to work-from-home over the course of two days and it continue to deliver on our sales targets, our project and services goals and supporting our customers during these challenging times.

In addition, we had many team members' engage in their communities through volunteer efforts and through our Duck Creek's back program, where we have a focused partnership with the Red Cross, through donations are matching program and also providing employees paid time off to volunteer.

Since this is our first call as a public company. I want to spend a few minutes providing an overview of Duck Creek. Our product offerings and our market opportunity. By way of background to be personally, I devoted most of my near 30 year career to the application and technology in the insurance industry. This started with the creation of the insurance software business with Accenture. After which I spent more than seven years at Allstate Insurance, leading large technology and business transformation programs.

And since then I've been leading Duck Creek for the past nine years and it's a privilege to be the CEO of this incredible company, as we continue our march to lead the - industry, the insurance industry to modern SaaS solutions.

For those that know me, you know I'm very passionate about how technology can transform insurance. However, I'm always grounded in the realities of the industry that we serve, including the challenges caused by P&C carriers having highly complex insurance products, varying service models in the highly regulated nature of our industry.

Global P&C sector is a massive industry that represents more than $2 trillion in annual premiums. Insurance carriers are aligned and core system software to manage the essential aspects of creating, quoting and selling insurance products, billing and servicing customers and importantly, responding to what I call them true moment of truth, when they have to process claims.

P&C carriers currently spend more than $80 billion on IT systems annually, of which approximately $15 billion is our addressable market opportunity for running and operating core systems and related digital services and Duck Creek OnDemand. Historically, these core systems have been largely on premise code driven applications that are highly customized and bill suited for the rapid pace of - required to thrive in today's P&C industry.

To successfully compete in today's market, carriers of all sizes are recognizing the need for a software platform that provides greater agility, faster speed to market and greater flexibility. Carriers innovate faster than ever before whether by creating new business models, launching new insurance products, expanding into new regions or digitizing and streamlining customer experiences. In traditional solutions often cannot support these needs, a fact that became readily apparent to many carriers as a struggle to adapt their operations in response to COVID-19.

We believe the global P&C industry it's just at the beginning of a generational shift to new technology platforms. We have led the way on this transformation since 2015 when our first customer went live on Duck Creek OnDemand, which is our comprehensive software as a service platform. Duck Creek OnDemand enables our customers to drive profitable growth by helping them accelerate product innovation, reduce costs in greater efficiency and dramatically improve their engagement with their customers.

We believe Duck Creek OnDemand as far and away the most robust mature SaaS solution for the global P&C industry. And this is reinforced by our success in the market. Fiscal 2020 was a milestone year for Duck Creek, we exceeded over $200 million in revenue, driven by tremendous growth in our SaaS revenues.

We are now clearly past the early adopter phase of the market and we are seeing SaaS to be the default choice for the vast majority of sales discussions in RFPs with prospects and clients. To be clear, this was very evident in the market prior to the onset of COVID, but we believe the pandemic has reinforced this trend.

Duck Creek's primary focus is to accelerate insurance carriers digital transformation by providing a SaaS platform that is purpose-built to deliver superior business performance and value to customers. Today, over 60 carriers have deployed Duck Creek OnDemand, 30 of which are running their core systems on our OnDemand platform. Our OnDemand customers range from large Tier ones, we have over $5 billion of Written Premium to Tier 4 regional insurance.

We are proud to be partnering with these customers on their digital transformations and revolution, I think the way the core systems are run. We had significant success during the first three quarters of our fiscal 2020 including a win with AIG, who chose Duck Creek OnDemand as part of their AIG 200 program, a multi-year enterprise wide effort focused on the long-term strategic positioning of AIG for the next 100 years.

We believe this is one of the most significant SaaS decisions ever made in the industry. This follows other significant Tier 1 customers who have selected Duck Creek OnDemand such as The Hartford and Liberty Mutual.

We have also seeing excellent momentum in Tiers 2,3,4 where we signed new OnDemand deals of carriers including The Doctors Company, Munich Re Specialty Insurance and Mutual Benefit Group among others.

We are particularly proud of our implementation of Munich Re Specialty Insurance, where we partnered with them and Accenture to launch a new product line for policy billing and claims in just 90 days, something that is unprecedented in our industry. Our success across the entire continuum of carriers speaks to the power and flexibility of our low-code SaaS platform.

In addition to these core system highlights, we also saw good traction with our standalone products which can add tremendous value for carriers without requiring a core system replacement. One example is in COVID insurance. A Tier 2 carrier who selected Duck Creek Distribution Management to streamline their onboarding, compensation and relationship management processes for the agent channel.

We carried this great momentum into the fourth quarter, but we saw very strong activity across our business. During the quarter, we signed eight Duck Creek OnDemand deals, four of which were with new customers, many of these wins were also multi-product contracts, continuing our trend to increase share of wallet within our customer base.

I'm excited to provide a little more detail on a few of our key wins this quarter as well. Some of our customers' successes. First, a significant win in the quarter was Manitoba Public Insurance, a provincial non-profit Crown corporation in Canada, who is selected the full Duck Creek OnDemand Suite to power, digital transformation.

Manitoba chosen standardize on Duck Creek with our policy, billing, claims, rating and insight solution to replace our homegrown system. The combination of Duck Creek's OnDemand maturity, security and breadth of capabilities were Key differentiators for Manitoba. Another exciting win was for our full suite of Duck Creek OnDemand at a large Tier 2 specialty insurer, the carrier conducted an exhaustive evaluation of the market to support their wide range of business lines.

The decision to utilize Duck Creek OnDemand will anchor their digital transformation initiative which is focused on reducing costs and streamlining operations. And in Australia, Lawcover a provider of professional indemnity insurance to law firms they selected the full Duck Creek OnDemand Suite for their system modernization effort. Lawcover will accelerate our digital transformation, leveraging Duck Creek to improve the service they provide a legal community. This was a competitive win and it showcases our ability to compete globally.

We also saw continued momentum in selling our non-core standalone solutions to both new and existing customers over Public Insurance. One of the 50 largest public insurers in North America selected Duck Creek Reinsurance Management to automate critical financial and administrative functions required to manage the reinsurance processes. We also expanded our relationship with MedPro Group, a Berkshire Hathaway company and the national leader in medical, professional liability insurance.

During the quarter MedPro selected Duck Creek Distribution Management as an add-on to their Duck Creek Suite deployment. In addition of these new deals, our Duck Creek service and delivery teams aided by our vast partner ecosystem remain focused on delivering a new innovative projects and partnership with our customers, all while continuing to successfully execute in a remote model due to COVID-19.

During the quarter Westfield Insurance, a leading Tier 2 personal and commercial lines insurer brought a new agent portal and core system in the market utilizing Duck Creek OnDemand policy, billing and digital engagement. The modern world-class system dramatically improve their agent experience and builds on Westfield's strong reputation in market.

THREE insurance is a new kind of small-business insurance brought to market by Berkshire Hathaway using Duck Creek OnDemand they launched into a number of new states with a new innovative approach to holistically protects small business, small businesses with one single comprehensive policy that ensures the Company's people, property and operations.

And in Europe, Ageas Portugal completed an important project with their leveraging Duck Creek policy, billing and insights to modernize their core operations. We delivered this program in partnership with Deloitte, which showcases both our platform, and our partners capabilities in Continental Europe. We have also seen great progress with Distribution Management with recent production launches of both NJM Insurance Group in GAINSCO Auto Insurance.

We believe Duck Creek is differentiated in our ability to harness the full depth and complexity of insurance via our low-code platform. And then deliver these capabilities as a SaaS solution. We continue to invest in our platform to push the pace of innovation and the balance of what's possible with the most advanced configuration tools available in the P&C market.

Some notable examples include the release of our page builder configuration capabilities, the latest enhancement to our industry low-code configuration tools. This new capability, allows non-technical designers to develop mobile responsive user interfaces with a drag and drop configuration approach building beautifully designed user experiences to meet the growing customer expectations.

We also announced the release of our partner development portal duckcreek.debt which accelerates the ability of leading insurtech providers to build meaningful integrations in the Duck Creek Platform using established patterns.

In the quarter we saw several partners take advantage of this new paradigm to dramatically reduce time to market for integrations to Duck Creek OnDemand a great example was prompt IO who integrated their transactional text messaging solution to fully tax enable with Duck Creek Platform.

We have also extended our ready-built integrations with key industry providers like Verisk and [indiscernible]. All of these partnerships help customers deliver solutions faster with greater confidence our robust ecosystem now has 50 partners and continues to grow.

During the quarter we also debuted our virtual formation website vFormation which houses dozens of demonstrations, customer stories and content to keep our customers' current with the latest from Duck Creek. Developed in response to the cancellation of our annual customer event formation due to COVID vFormation has been a huge success, reaching 5 times the number of participants of our typical in person event.

As we look ahead to the fiscal 2021 and beyond, we believe the future is incredibly bright for Duck Creek, we have by far the most robust and configurable SaaS platform for the P&C market. And we have a rapidly growing SaaS business approaching a $100 million in ARR with subscription gross margins in excess of 60%, which we believe is a clear indication of our leadership in the SaaS market.

We are confident and we will continue to achieve high levels of SaaS growth as well as improve our subscription gross margins as we continue to scale on demand and take advantage of the significant investments we have made in our SaaS platform. Our strategy to build upon the success is straightforward.

First, expand our customer footprint by signing new customers, new customers to our OnDemand platform. As mentioned earlier, the digital transformation of the P&C insurance industry is in its early stages in those carriers are yet to begin the move to the cloud.

Second, continue to successfully expand within the customer base, either by extending Duck Creek's footprint in the new lines of businesses are selling additional solutions across the enterprise.

This has been a consistent source of growth for our business, as evidenced by our SaaS net dollar retention rate that is consistently above 110%. Finally, and will continue to expand and strengthen our partner network. The open architecture of our OnDemand platform has enabled us to establish a vibrant, highly engaged ecosystem of partners that dramatically extends our sales and implementation reach.

To sum it up, Duck Creek delivered terrific fourth quarter results to finish what was a transformational year for the company. We believe we have established ourselves as a SaaS platform of choice in the global P&C industry, which puts Duck Creek in a great position to be one of the primary beneficiaries as this complex, highly regulated multi-billion dollar market undertaking generational re-platforming of its core systems.

We have never been more excited about the opportunities ahead of us and we're confident we can build upon our current success to create a much larger, profitable and highly successful public company that generate significant value for shareholders. We look forward to getting to know many of you better in the upcoming quarters and years and updating you on Duck Creek's success and progress.

I will now turn over to our CFO, Vincent Chippari. Hey Vincent over to you.

Vincent Chippari

All right. Thanks Mike.

Today, I'll review our fourth quarter fiscal 2020 results in detail and provide guidance for the first quarter and full year fiscal 2021. Since this is our first earnings call, I'd like to briefly review our financial model. We've successfully transitioned the business from a historical license model to a subscription model over the past several years. In fiscal 2020 approximately 96% of our bookings related to our OnDemand SaaS platform. With on-premise license sales generally limited to honoring existing contractual obligations.

This transition has impacted total revenue growth in recent years, but license revenue now representing under 5% of total revenue and subscriptions being our fastest growing revenue area. Revenue growth rates are accelerating.

Our initial SaaS contracts are multi-year commitments and are billed monthly, initial sales are often for a specific line of business within the insurance company or for particular solutions on our OnDemand platform. We have a land and expand model and a long track record of successfully increasing spend with our customers.

We also have a professional services revenue stream that is derived almost solely from implementation work related to our core products and generally billed on a time and materials basis.

Turning now to our operating results. We're pleased with the performance of the business, both in Q4 and fiscal 2020 overall. Total revenue for the fourth quarter was $58.3 million of 22% from the prior year period. Within total revenue, subscription revenue, which is comprised solely of subscriptions to our SaaS products was $24.6 million, up 54% year-over-year.

In Q4 subscriptions represented 70% of our software revenue and 42% of our total revenue. License revenue was $4.5 million up 6% year-over-year, due primarily to an add-on sale to an existing on-premise customer. Maintenance revenue, our revenue tied to on-premise maintenance contracts with $5.9 million and as expense - expected was essentially flat year-over-year as we concentrate efforts to grow our SaaS business.

Services revenue was $23.3 million, up 6% year-over-year. Services revenue, reflecting strong demand for implementation services and high utilization rates. We'll be reporting on two key metrics related to our subscription revenue on an ongoing basis SaaS, ARR and SaaS Net Dollar Retention. SaaS ARR which we calculate by annualizing subscription revenue recognized in the last month of the period was $95.6 million as of August 31, 2020, up 85% from the prior year.

SaaS, ARR growth has exceeded 75% in each quarter of fiscal 2020 based on the strength of both new sales and Net Dollar Retention. SaaS Net Dollar Retention as of August 31, 2020 was 117% over the past four quarters, our Net Dollar Retention has consistently exceeded 113% driven by a combination of high gross retention rates, sales of new products to existing customers and growth of DWP for products already operating on our SaaS platform.

Now let's review the income statement in a bit more detail. As a reminder, unless otherwise noted all metrics are non-GAAP. And we have provided a reconciliation of GAAP to non-GAAP financials, in our press release. Adjusted gross profit in the quarter was $35.4 million where gross margin of 61% compared to a gross margin of 60% in the fourth quarter of fiscal 2019.

Subscription margins in the quarter were 66.5% driven primarily by scale benefits as we continue to generate strong subscription revenue growth. The gross margin exceeded our expectations and didn't Beth - and good benefit from favorable timing of when we began recognizing revenue from certain contracts.

As we move into fiscal 2021 margins may decrease slightly from this level. Professional services margin was 41.4% in the quarter. Well, it has come down from fiscal 2020, it continues to track slightly above our long-term expectations. We believe the current level of utilization is unsustainably high for our services organization and as they moderate services margins will be decreasing towards a range of high 30s to approximately 40%.

Turning to operating expenses, R&D costs were $11.3 million or 19% of revenue roughly in line with the prior-year period, R&D cost increased 19% from the prior year due to higher bonus funding levels and continued investment in product technologies. Sales and marketing expenses were $8.9 million or 15% of revenue also in line with the year-ago period. This was below expected levels due primarily to COVID-19 related variances as expenses related to marketing events and T&E were lower than the prior-year period.

We remain in investment mode currently and expect to continue expanding our global sales footprint engagement efforts to ensure we're properly covering all opportunities in the market. G&A expense was $13 million or 22% of revenue compared to 19% in the prior-year period.

During the fourth quarter, we chose to downsize, two of our office locations, resulting in a non-recurring charge of $2.8 million. Excluding this charge, G&A expenses decreased as a percentage of revenue, compared to the prior year based on scale efficiencies, partly offset by higher bonus funding levels.

Adjusted EBITDA for the quarter was $3 million where 5% adjusted EBITDA margin. Non-GAAP EPS for the quarter was $0.02 per share based on 129.3 million weighted average shares outstanding. This share account was calculated using a consistent exchange ratio for all pre-IPO partnership interests and assuming that all common stock sold in the IPO was outstanding for the full fiscal year.

Our ending share count as of August 31, 2020 was 130.7 million shares. On a GAAP basis, our gross profit for the quarter was $28.7 million and we had a loss from operations of $21.6 million. We had a net loss in the quarter of $21.5 million. GAAP earnings per share for Q4 2020 and fiscal 2020 are not being presented because they produce results that would not be meaningful to investors as they represent results for the 17-day period following the IPO.

During the fourth quarter, the company recorded $19.7 million of share-based compensation, virtually all of which was related to the conversion of employee partnership interest in the IPO as further described in the financial tables of our press release. Based on the amount of invested partnership interest at the time of the IPO, future charges associated with this conversion will be significantly lower currently expected to be low to mid-single-digit millions over each of the next two years.

Turning to the balance sheet and cash flow, we ended the year with $390 million in cash and - cash equivalents and no debt. Our cash balance reflects approximately $321 million of net proceeds from the closing of our initial public offering in August. Free cash flow in the quarter was $16.3 million compared to $12.8 million in the year-ago period.

The increase in free cash flow is primarily related to improved working capital due to increased accrued expenses, strong cash collections in the quarter and improved positions in unbilled receivable and deferred revenue tied to the transition away from on-premise licensing.

Free cash flow for the year was $19 million compared to $6.6 million in the year ago period. We believe our ability to generate cash, while continuing to invest in our growth initiatives, reflects the inherent scalability of our platform and our business model.

And now, I'd like to kind of finish with guidance, beginning with the first fiscal - first fiscal quarter, we expect total revenue of $55 million to $56 million. Subscription revenue is expected to be $25.5 million to $26 million. Adjusted gross margins in the quarter are projected at 58.5%. And we expect adjusted EBITDA between 0 and $1.5 million.

Non-GAAP net loss is expected in approximately breakeven for $1 million were a bit under $0.01 per share. For the full fiscal year 2021, we expect total revenue of $244 million to $249 million. Subscription revenue is expected to be $114.5 million to $116.5 million. Adjusted gross margins for the year projected a 58% and we expect adjusted EBITDA of $3 million to $5 million. Non-GAAP net loss is expected to be between $3 million and $5 million for fiscal 2021 or a non-GAAP loss per share of approximately $0.02 to $0.04

In summary, I would say we are pleased with our financial performance in fiscal 2020 and our positioning as we enter fiscal 2021. Fueled by continued good sales momentum, a scalable cost structure and a strong balance sheet, we're confident in our ability to generate long-term growth and shareholder value.

And with that, we'd like to open up the call to Q&A. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Sterling Auty with JPMorgan.

Sterling Auty

I think one of the biggest questions on investors' minds that we're getting is just kind of the tone of demand for system modernization within Tier 1 companies for their core systems. We see a lot of interest in maybe some ancillary new digital go-to-market initiatives, but how would you characterize the appetite outside of the big AIG when which will be my follow-up question. But outside of that, what would you say the overall tone looks like for those core system replacements to move to the cloud at this point?

Mike Jackowski

Sterling its Mike. Thanks for your question and thanks for joining us. Your question specific to Tier 1s and the demand that they're showing for core system replacement and I would say at large, we see that demand strong, we're actually pleasantly surprised with how many Tier 1s are looking for a cloud-based solutions for their core system replacement.

Now what I will say in the Tier 1 space, is these carriers aren't rushing to market to say that they want to re-platform in essence the entirety of their book. What they're doing is they're perhaps boot strapping in new business line perhaps, they're taking a smaller line and saying you know what this would be a good opportunity to re-platforming it and run it into the cloud. So they're really starting with smaller books of business, as an entry point.

And then we know upon that success improving the model that we have a great opportunity to expand from there. So I think even in light of COVID, we're seeing Tier 1 continue to show interest in actually really start to set strategies to run core systems in the cloud.

Sterling Auty

That makes sense. And then one quick follow-up on the AIG win. How should investors think about how that rollout will kind of come into the financials in the coming years. Obviously, an organization that big it's going to take time. So how should investors that their expectations on what that business opportunity will look like for U.S. it rolls out?

Mike Jackowski

Sure. Well, let me just comment at a high level and maybe Vini could add some insight on it, but you will in terms of the work that we're doing with AIG there is a couple of areas in their business that had begun their operations. So we are already starting to those contracts are in place and provision environments and we already recognizing revenue on those arrangements.

And then in terms of AIG, we know that we have a broader opportunity in the overall account, you know, it's a very large organization, we're working across as I said, they're broad strategy of AIG 200 and we're excited about the opportunity to help them on an enterprise basis. So we're going to continue to work with their leaders and look for opportunities to expand within the overall account.

Operator

And our next question comes from the line of Chris Merwin with Goldman Sachs.

Chris Merwin

Thanks very much for taking my question and congrats on a great first quarter out of the gate here. So I wanted to ask about the partner ecosystem. Obviously eight wins in the quarter is a lot of, lot of deals to treat, if any of those were partner influence and at a high level, how should we be thinking about further investments in that investment in that ecosystem potentially driving new wins overtime and maybe in particular in international geographies. Thanks.

Mike Jackowski

Thank you, Chris for the question. Yes, of course, I'll just start out and say that investing in the partnered ecosystem will be key strategic pillar of Duck Creek after we carved out from Accenture. Of course, we have a very, very strong relationship with Accenture on a global basis and we work very closely with them, but we've been investing quite heavily in terms of training, skilling some of the core ecosystem providers, with systems integrators that are helping us along the way.

In fact, several of our partners in the past like Capgemini and Mindtree bought prior boutique Duck Creek implementers to really in essence scale their practices, very, very quickly. And then as I mentioned in the prepared comments, we are thrilled about the implementation with the Lloyd over [indiscernible] so we're starting to get some traction with our partners globally as well.

So we think it's an important dimension to continue to grow our business and we continue to invest in training and skilling resources within the respective practices that are helping us with those go-to-market motions.

Chris Merwin

And maybe just one follow-up for Vini, it looks like SaaS gross margins increased nicely year-on-year. I think you said in the prepared remarks there were some scale benefits there from some of the deals that you closed, but curious if you can add any more detail on the gross margin improvement. And then as a related question, are you seeing any more adoption of the multi-tenant SaaS offering that you have. Thanks.

Vincent Chippari

I'll start on the margin profile and Mike can jump in on multi-tenancy. So that subscription margins in the quarter were 66.5%, that's kind of above even where we targeted for next year. The timing element of that is we did start revenue on a couple of large deals that were recently signed that aren't incurring a lot of cost yet.

So I think if you want to look to a more normalized level, I think we'd expect a bit of a continual improvement, but that's going to be a gradual improvement quarter-by-quarter and Q3 for example is 64.5%. So we would expect it to move up a little from there, but obviously not 2 points. So it may come back down a little bit in the first quarter, but we think it's still overall scalable from where the year ended, which was at 64%.

Mike Jackowski

And then, Chris, as a follow-up on your question on multi-tenancy and of course it's a great question as it relates to overall subscription or SaaS gross margins. As we stated previously, we've been investing heavily in our multi-tenant architecture, which we launched last year and we've made progress where several customers are installed in our multi-tenant platform and some handling production claims on the platform as well. However, it's still very early for us.

We have had several customers also launch in multi-tenant this past quarter. So we're enthusiastic about that, but I'll also say that it's very early for us and I'd like to highlight the benefit of multi-tenancy are not required for us to hit our overall projections. We know that today we have to run in a hybrid mode.

We have some customers and the majority of our customers in single-tenant installations. And then we are launching new customers on our multi-tenant platform. And I just want to emphasize that we are not required to scale on multi-tenancy to hit our economic profile.

We've invested quite heavily in DevOps, our overall SaaS architecture in a lot of automation. So we feel that with that automation we're getting a lot of efficiency out of our single-tenant architecture and the reason why I bring that up is adopting multi-tenancy from a business perspective it's functional parity. So the carriers don't really see a difference, but from a technology perspective, IT has to implement using some different techniques and we also looking at our customers readiness to adapt the overall platform.

So depending on their maturity and where they're at, it might drive us whether we go single or multi-tenant, but we know as we continue to expand we're looking forward to getting higher utilization of our multi-tenant back then.

Operator

And your next question comes from the line of Brad Sills with Bank of America.

Brad Sills

Thanks and congratulations on your first quarter here, a nice quarter to start. I wanted to ask about the partner channel, maybe we saw some decrease in your services mix and I know there has been an effort there to kind of build out that channel for the globalized to take on more of the implementation work, how is that going? Do you - are you happy with the result this quarter? Is - am I right to just look at that revenue that services revenue mix coming down as a result of those efforts?

Mike Jackowski

Yes, Brad. Thanks for the question. And the short answer is yes, we've been kind of restraining a bit some of our services growth. We certainly want to enable our partners to take on the work, but I also want to emphasize that our model is not to own and take on all of these implementations are sold. We really just see these project with an expert model where we put in core architects, core business architects and configuration architects to really help with the overall solution.

So we are - we feel great about our core partners and how they are scaling their practices. The - you'll continue to report to us that their Duck Creek practices within their firms or respective firms are among the highest growing areas of their businesses. And we know we're going to continue to grow that footprint as time goes on. So that's why you're going to see us temper services growth moving forward as the ecosystem continues to thrive and help us with these installations.

Brad Sills

And then one more on the multi-tenancy comments you made earlier. What have the conversations been like, not just kind of for today, but when customers are kind of describing their roadmap for Duck Creek over time, are they more open to moving more workloads into the multi-tenant option over time? What are some of the puts and takes and some of the barriers that you might be hearing from customers willingness to adopt or are they getting more and more comfortable with the first step being single tenant and that's a logical next step. So it's more of a foregone conclusion, just any kind of color on just qualitatively how customers are viewing that? Thank you.

Mike Jackowski

You bet, great question by the way and here's what I'll say is I would say largely that some past objections of both SaaS and perhaps even multi-tenancy around security and data isolation and some of those capabilities are behind us.

And obviously us implementing and winning contracts as large carriers, Tier 1 carriers like AIG and like Liberty Mutual we have to go through a very, very detail process in terms of how do we run and operate our SaaS platform. I think what's happened now in terms of multi-tenancy is the conversation shifted a bit and it's shifted around this concept of that what we call in the industry of continuous integration and continuous deployment and this is about the adoption of updates and change.

We certainly have an aspiration if you will to have much more continuous updates of our technology on a much more frequent basis and we are moving there with our multi-tenant environment.

Usually we have this on the customer side, customers are at varying levels of maturity under ability to behave with CICD continuous integration, continues deployment processes because some of their integration points need to follow the same pipeline and patterns and this is where we're thrilled to be working with our SI channel who is working with our customers to modernize some of their processes on their side.

In fact, Cognizant is in SI the player that we're working with in large step in terms of these mechanisms and they're doing a very, very nice job with that. So we know that carriers are embracing this discussion, they're enthusiastic about it, but as I said they're in varying places in terms of their level of maturity and how fast they want to move to that environment both CIOs want to move there. So they're very encouraged about the conversation, the real question is at what pace? So we're excited about the opportunity and we think it represents a great opportunity for us to continue and thrive and grow.

Operator

And your next question comes from the line of Saket Kalia with Barclays.

Saket Kalia

Maybe to start with you, Mike, a few nice examples of international wins there in your prepared commentary. Can you just give us an update about how you feel about your international presence and maybe relatedly how the competitive environment looks internationally versus the, for example, broad brushes?

Mike Jackowski

Yes, great question Saket and obviously international represents a very large opportunity for Duck Creek, the majority of the global premium is outside of the United States call about 35%, 37% of the premium is in the U.S., about 45% in North America. But with that, we know that we need to make more investments to expand internationally, we feel very good about our track record of expanding in the U.K. and down in Australia and a landing point for Asia Pacific. So we already have presence, we have customers and some notable wins. And then now continuing to have that expansion in Continental Europe.

Here's what I'll say Saket, is I would say it's a great opportunity we're making investments. I'm a little bit guarded in terms of how fast some of those investments in Continental Europe are going to take hold, especially a bid in light of COVID-19. The one advantage that we have in our industry as we have these very intimate relationships with current customers. And I think that's one reason why we've been able to close so many deals even in a COVID environment, because they know who we are, they know our brand and they are very, very doing business with. As we're expanding in Europe, obviously we're a little bit less known.

So in some countries, we landed some feet on the ground and we're building up our capabilities. But I think we're keeping a close eye in terms of how the market responds especially in these COVID environment, but we know that our software is been successful, we have a proven out and that was about scaling to go-to-market operations and we'll keep a close read on it.

Saket Kalia

Makes sense. Maybe for my follow-up for you Vini actually want to talk about a much we haven't talked about as much, which is ARR. I think that net new ARR contribution this quarter was about $20 million probably one of the bigger ones that we've seen in the last couple of years, are there any anomalies in there that you'd call out or and you need to keep in mind about, about that number or sort of that ARR growth going out into fiscal '21 and the future?

Vincent Chippari

So Q4 was a bit of an anomaly, just as it related to the timing of when deals got provision. And just to reiterate how we calculate ARR, we're just annualizing revenue recognized in the last month of the period, we start recognizing revenue once the contract is sold in the customer has access to the system. That generally takes usually happens within about 30 days. So if we sign a deal, a large deal in the last month of the quarter, it may fall in one quarter or another, the way the timing worked out in Q4 is we got a very large Q3 deal that actually got provision early in Q4 and we got a very large Q4 deal that came late in the quarter that got provisioned within the quarter.

So we probably had unusually favorable timing. So the way it worked out about half our ARR growth hit in Q4 that's not our expectation, but we can vary quarter-to-quarter based on when the deal gets provision. So I think we'll tend to be a little back-end loaded, non-lot back-end loaded and it could be an individual quarter could move a little bit one way or another based on an individual deal. But we did have two large deals in the quarter that bumped up that fourth quarter ARR.

Operator

And you next question comes from the line of Alex Zukin with RBC.

Alex Zukin

Thanks for taking my question and congratulations again for a really strong first quarter out of the box. Maybe just the first one for you, Mike. A lot of investors are asking us about how your pipelines for new deals look how both at the top of the funnel at the mid-stage and if you think about your ability to, to look at sales cycles and how they're developing post-COVID with the opportunity to close those deals. How would you talk about those deals particularly given and what impact, if any of the IPO had both our pipeline and sales cycle?

Mike Jackowski

Yes, thanks for the question, Alex. And when you look at when we look at our overall pipeline we classify the entire pipeline over five stages. So we have a very disciplined process of how we look at it, and what we really refer to as a more mature side of the pipelines. A final three stages and we know that we're really in the evaluation or all the way through the contracting process, we're in those final three stages of the pipeline. And under the timeframe of COVID, what I will say is that we're very pleased with the expansion of the pipeline that we've seen since March.

So we've seen strengthening of the overall pipeline, we do believe that obviously the aftermath of COVID where carriers had to work virtually and send their workers home and be remote that many carriers are evaluating their technology needs, and we think that is serving as some kind strengthening, if you will, of the overall pipeline. So we're just pleased with the overall outcome and what the results look like today.

Alex Zukin

Perfect. And then maybe just a follow-up for Vini, I wanted to ask about two metrics. Obviously, you talked a little bit about SaaS ARR in the puts and takes in a given quarter, which were very strong this quarter particularly and you've now had two kind of straight quarters of accelerating growth there. Remind us what we should think about from a SaaS ARR tying it to forward SaaS revenue perspective.

And then also just remind us where I know you're not guiding to this metric, but how should we think about dollar based net retention trending, is it something that can bounce around or is it something where you expect to be above a certain matches over the course of time?

Vincent Chippari

Yes good questions and I'll start, I'll take the second one first, and I'll go back to the ARR question. Net dollar retention we've been pretty consistently. If I want to the widest range, we're probably in the 110 to 120 kind of range. And we've been averaging between that range over the course of this year.

I don't expect any near-term significant variation away from 113, 115, 117 kind of numbers the any individual quarter could move on a single deal so an existing customer like an AIG or somebody like that, who is rolling out a new product or has an add-on sale that could impact the quarter if it's a sizable individual deal. But I think the average net retention rates. We don't see anything happening in the way sales cycles are running, the way the pipeline mix looks, that would indicate that it's not going to be reasonably consistent for the foreseeable future.

And ARR, I think our ARR number is sufficiently transparent that you can assume that the exit point that we are showing you is pretty close to the entry point for the next quarter, but for deals that signed in the last month of the period.

So what I mean by that is, if we did, if we did a $2 million ACV deal on the last week of August. It's unlikely to have been provision to recognize any revenue in August that would start in September, but that tends to roll, year-to-year of sales cycles are reasonably consistent. So I think you can expect that the entry point going into a period is the ARR from the prior period plus maybe a little bit from a sale that might not have been provisioned.

Operator

And our next question comes from the line of Bhavan Suri with William Blair.

Bhavan Suri

Vini, congrats really good quarter out the giving me echo what Alex just said. Nice job. And then, maybe I'll start with high level Mike. So you, as you look at the new customers and new land and certain departments. I'd love to understand sort of whether that's more on the personal side of the commercial side. My sense and love some color of clarification on this. Is that a lot of the personal digital transformation, much of it has happened because of consumer like behavior driving that like I want to get a quote on my phone immediately, price policy and commercial is still kind of agent led and not as modernize is that what you're seeing opportunity, more on the commercial side when you land. How should we think about that just and where the premium bigger my still would be commercial, but love to get some color on that.

Mike Jackowski

Great question, and I would say at large. We continue to see almost a 50/50 split, a very consistent split between commercial and personal lines. In fact, in my pre-prepared remarks, I talked about 2-tier, 2 carrier wins that are implementing a full suite of Duck Creek, one of them is predominantly in all personal lines predominantly auto carrier, the other carrier, the other one is predominantly an all commercial lines carrier.

So I think even in the wins in the quarter, running our full suite you're seeing a balance of that. And I think there are a lot of carriers across the globe that are even in the Tier-2, 3 and 4 space on personal lines that have not modernized their technology, they are looking to have straight through processing and more direct access and digital engagement for their customers.

So there is demand out there. In terms of the overall premium, if you look broadly across the North American market, the majority of the premium are a big large, the largest chunk of premium is personal lines auto and then that is closely followed by homeowners and property. And then from there in the commercial segment is workers compensation and then a whole plethora of commercial lines. So you really do see quite a bit of balance is out there across the industry across both commercial and personal.

Bhavan Suri

And then a quick question, a little more tactical I guess on the new Duck Creek OnDemand platform, you talk about some of the wins and some of the customers. But when I look at the base and you've got a large base and you think about the conversion, I'd love to understand sort of what is their adoption and view because at some point they're going to upgrade it, they want all the functionality, how do you view that and then the skill sets that both your partners and your customers need to kind of move. I know it's low code - no code just great, but the whole skill that goes in sort of thinking about this whole new way, how do you think like that so, sort of, what does that cloud opportunity look like for guys for the existing base moving onto and is there a driver for that and do they need to retool. Thanks.

Mike Jackowski

Yes. Terrific, terrific question, I'm going to start with the second question first and then I'll come back to the on-premise base, but on the second question, investing in the SI's, the beauty of the Duck Creek platform is our low-code platform and that is really what differentiates Duck Creek.

And the strength of that is the way that you can figure product rules, rating rules, product hierarchy and all of the business rules around like risk appetite is the same type of approach and the same tool and that you would use on-prem as well as on demand. In fact, we believe, it's our low-code platform that allowed us to accelerate into the cloud, much, much more rapidly.

So the good news is, a lot of the core skills that our SI partners have are very, very transferable, as well as our customers, which is great. The real work now is how you integrate with the platform and how do you - how does a customer, obviously when they install Duck Creek, they have to integrate the core suite to their downstream financial systems or general ledgers and then many different systems within their overall organization and as well as third-party vendors, which is why we're investing so much in the ecosystem. And the techniques that are used on the multi-tenant SaaS platform, certainly are very different.

So what we've done is we created in Duck Creek University a whole set of course work that really trains our partners on how to do those proper integrations and how to do it in a manner that has a platform more readily and easily updated on a more continuous basis. So you are already going through that process on all of our SI's, in fact we expect it because to be trained under Creek means you have to be trained on those processes.

And then going back to your first question on the on-premise base. A couple of things, we do have some very, very good proof points. We've taken carriers like West Bend, [indiscernible] and Mutual Benefit Group lifted them from on-prem and all three of those carriers are not only undertaking migration, they are running in production in Duck Creek OnDemand today. So we know we have the proof points. When we look at the large the on-prem installed base at large, okay? We know it is a future opportunity for Duck Creek to migrate those customers to on premise.

The one thing that we do see with those customers is because we have a low-code platform and we can push out changes and what we call our content player. So these are changes like we see in our bureau products, keeping them current on ISO circulars for things like commercial, auto and workers' compensation for NCCI. They can still adopt those changes even as an on-premise customer.

So they tend to be quite happy and what we're doing is working with an installed base to find the right inflection point and usually that's around a business value project for them to migrate into Duck Creek OnDemand over time.

So we've been in discussions with many of those customers. The one thing that we do know that on their migration is we're not always in control. When you do - a customer has an on-premise install, we as a software vendor lose some sense of control. They could be clearing the database directly, they keep integrating using different techniques and they might have built a lot of complexity around that core.

And somebody has to pay the bill around simplifying that complexity and what we want to do is work with our customers and they have business value projects and a position of strength to perform that migration. So, we're in discussions with many of them and we know it's a future growth opportunity for Duck Creek.

Operator

[Operator Instructions] Our next question comes from the line of Tom Roderick with Stifel.

Tom Roderick

I'll let the sentiments and congratulations for a successful first quarter. I wanted to kind of put a finer point there on Bhavan's question Mike regarding digital transformation and we've all been kind of beat over the head with this term over the last six, seven months. And in particular, I'd love to hear how your customers are talking about. And in particular what does it really mean to them, how are they leaning into cloud with digital transformation and specifically what offerings are they leaning on? And then from a trend - from a go-to-market perspective Vini, the follow-on there would be how much faster do you think you need to ramp up your sales team or perhaps you could just talk about the growth by which you'd like to ramp that up this year, that would be really helpful. Thank you.

Mike Jackowski

Thanks Tom for the question. Regarding digital transformation, I will admit, lots of carriers may look at their particular digital transformation a little bit different based on their strategic objectives. For carriers that are personal lines and are really focused on customer service, they will think of a digital transformation around specifically the customer experience.

So it's about providing immediate access and immediate access to the bill to changing the policy and a simple example would be if you were to add perhaps your 16-year-old daughter to your auto policy that changes the whole terms of the policy, as well as a whole billing plan behind it and doing that real time and making that transaction that at the surface level seems very easy, I'm adding my daughter to the policy underneath the waterline is very, very complex, because you're recalculating premium, you're changing the overall billing sequence in terms of the terms of moving forward.

So they will think about it more from that customer point of view, but when you look at perhaps a commercial carrier it's really about the relationship with our brokers and agents and the efficiency of their underwriters.

So streamlining the underwriting process, sometimes when we talk to underwriters, there is a bit of frustration because so much of their time is not spent on really value-added activities that are really controlling the risk of the outcome that sometimes it's generating documents or it's doing things on the overall policy that need to be done.

So a digital transformation would be putting much, much more automation in so taking those routine things and automating them, perhaps using artificial intelligence and AI to automate decision making and then making sure that the things that have to be looked at for - by an underwriter are the right thing that need to be looked at. So again, it depends on the overall objectives of the carrier, but those are a couple of the themes that we're seeing in terms of an overall digital transformation.

Mike Jackowski

And just to hit your other question, the - I'd characterize as we spent the last couple of years once we focused on building the North American go to market organization and we've scaled the salesforce largely in North America to the point where it's starting to become more efficient. I think sales and marketing actually would have been scalable for here where it not for the fact that we want to try to take advantage and make sure we're covering opportunities outside the U.S.

So we're probably going to add that it would be in single digits, but we'll add some more direct sales resources primarily international, there is some support functions that go along with them that will be added to so. Headcount will continue to growth to grow largely in support of international.

So I've said before, I don't think I would expect sales and marketing as a percent of revenue to start going down within the next year or so. But after we've scaled international, which is largely of this year effort. I actually think it will start coming down a little bit as a percent of revenue in the future.

Operator

And our next question comes from the line of Pat Walravens with JMP Securities.

Pat Walravens

So Mike last week, one of your competitors made what I thought was a fascinating disclosure that 85% of their insurance suite customers were stuck on Version 7, 8 or 9, even though the most recent version, version 10 has been out since 2018. So, just with that backdrop, I'd love to hear your perspective on what that tells us about the nature of this industry that you're competing in and what it might tell us about the opportunity for Duck Creek?

Mike Jackowski

Well Pat. I think that's a very insightful and I'm glad you raised really that overall metric. And I think what it does, what it does say is that given the complexity of core transaction processing here that upgrades have just been too expensive. And I think that is why customers and prospects today are looking for cloud technologies.

And I think it's wide cloud has been so rapidly adopted in other industries because it's much as it's about compelling and new capabilities, which I think cloud Technologies accelerates I love the fact that we can do things today with 10 lines of code, that used to take thousands of lines of code before. This is much about staying current and even though this on-premise installation of applications has helped the insurance industry modernize. I think at large, the industry is a bit frustrated because once they done with an implementation, we're finding a cost to do an upgrade for finding that their system is completely outdated.

So I think this new model is about staying current and it's about a better economic means of staying current, we're watching this unfold and many, many other industries and we have some great industry leaders that are doing that.

So I think that's really what's driving a lot of the demand to get the majority of new core system decisions to be SaaS-based decisions. And I think you know, it's really about modern, modernizing as well as staying current. So I think it's a great indication for our future prospects.

Operator

Your last question for the day comes from Mayank Tandon with Needham.

Mayank Tandon

Vini, I'll just focus on margins for a second here. I think on the IPO you laid out the long-term target model is something close to 25% EBITDA margin. I just want to get a sense, what type of revenue level would you have to achieve to get to that margin level. And could you remind us of what the levers are both on the gross margin front and on the operating margin front to get to that type of target long term? Thank you.

Vincent Chippari

Yes, I don't think I want to go into the like exact specifics of the, the revenue balance. We need to hit 25% that was kind of a 5% year target or using organic growth rates kind of comparable to what we've got now. The key levers we need to get there or really continued leverage of the OnDemand platform.

So the subscription margins, which we do expect to move up from the current 64%. And besides that, we're not looking for more margin other services. We actually expect it to move down a little bit from there. So, but with the mix shifts. We think that overall margins will move up - gross margins will move up a little bit and then but for some international expansion, largely in sales and marketing this fiscal year, fiscal '21, all of our operating expense areas are pretty highly leverageable.

So coming out of fiscal '2,1 we would expect decreases as a percent of revenue across each of R&D, sales and marketing and G&A, probably a little less in sales and marketing and the other areas, but we'll see leveragability in all of the operating expense areas and it should be pretty consistent as we grow the business.

Operator

Thank you. I will now turn the call back over to CEO, Mike Jackowski for closing remarks.

Mike Jackowski

Okay, thank you everybody for participating in our first earnings call for public company. We certainly appreciate you investing your time with us. And let me wrap up by again highlighting the fact that we ended our first fiscal year 2020 with a record quarter in spite of the many challenges, as a result of COVID-19 and the related effects of the economic environment.

We're obviously very excited about Duck Creek's growth opportunity as the industry continues to transition to run core systems in the cloud. Again, I appreciate everyone joining today. Thank you. And please be safe healthy and well. Take care.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.