Clearwater Analytics Holdings, Inc. (CWAN) Earnings Call Transcript & Summary

All right. Thank you very much. I appreciate everybody joining us today. I'm James Faucette, senior research analyst at Morgan Stanley, and we're very pleased today to be joined by Jim Cox, CFO of Clearwater. Before we get started with Jim, I just have a quick disclosure, for important disclosures, please see Morgan Stanley research disclosures -- morganstanley.com/researchdisclosures or reach out to Morgan Stanley rep. So Jim, thank you very much for joining us to talk about Clearwater. I've got a set of prepared questions here. But for those that maybe aren't familiar with Clearwater and what you do, why don't you just give us kind of a brief overview of what the company is on background and that kind of thing.

That's great. Thanks, James and thanks for having us at the conference. It's been a really productive day. So really appreciate it, and thanks, everybody, for your interest. So Clearwater Analytics is a fantastic business founded in Boise, Idaho, by 3 founders and then went public last year in September. Thanks, in part, to you and others. So what Clearwater does is we do -- we actually do the investment accounting. We do investment accounting and analytics for corporations, insurance companies and asset managers. And so we provide a SaaS platform that really has a novel approach in collecting all the data, reconciling and aggregating it, cleansing it at the security level and really thinking about that security data master and then providing that information. And of our value prop is 09:00 a.m. every day, clean, reconciled data that any of those businesses can use that data to then run their business and manage their day.

So you guys are fairly unique. I mean look, people have been keeping track of the value of their investments for a long time, right? Longer than 20 years even, right? And so can you talk a little bit about like what the advantages are for Clearwater, particularly when you talk about like your customer group, whether it be life insurance or corporate treasury, et cetera, what's the benefit, the selling point that those people get with Clearwater generally?

Right. Sure. The real selling point is that we are truly comprehensive and truly reliable. So if you are a global insurance company, the world is reasonably complex for you. You have maybe more than 60 different asset classes that you're trying to manage. You have maybe 40 different currencies that you're trying to manage. You have multiple regulatory regimes that you have to manage across all of those areas. And so when you sit back and you have to think about, well, what is that comprehensive view? How do I understand that? How do I manage risk? How do I really think about my performance across the whole portfolio without getting that comprehensive, wholesome, accurate, fulsome view, you're really in the blind, right? Like harken back to just -- a couple of weeks ago, I bet everybody was asking, what's my exposure to Russia, right? What, when [indiscernible]? Well, if you don't have a comprehensive platform where you have visibility across all of those assets, you can't answer that question. You really can't. Clearwater enables you because we are comprehensive and fulsome and accurate allows you to answer that question when you need those questions.

Right. So when you say like accuracy and complete, et cetera, like how hard can it be? I just look upon Yahoo Finance or on my iPhone. So like talk a little bit about like what the portfolios look like for your customers and where they could run into problem.

Yes. You're right. I understand -- we all have Yahoo Finance, totally good. But really, that comes to really the nature of the instruments that folks have. And the real proliferation of our clients in alternative assets. So you can understand those things from an equity perspective reasonably well as you step through fixed income, as you step through structure products, as you think about residential mortgage-backed securities and having to understand the nuances of the ZIP codes that are underlying all of the securities then step through and say, oh, well, what about my LP -- the investments where I'm an LP, how do I know kind of what underlies all of that and looking through all of those into bank loans, et cetera, et cetera. Those are more opaque and those types of assets because they have higher yields because they have more opportunity, have really proliferated the investment portfolios of a lot of these insurers and [ asset managers ] over the last, call it, 10 years. So you're right. It does seem like a simple enough question to answer, but as you start to click through and understand this to be truly comprehensive, it is novel.

Right. Well, I think that was one of the things that was really eye-opening for me is that as we were talking to some of your customers or prospective customers, et cetera, is the number of customers who are just like, yes, it could take me 3 weeks or a month to figure out like what our actual positions are, just tracking down like what are the valuations or values of particular instruments, when was the last time something transacted? Because a lot of these holdings as you suggested, don't really -- they don't trade every day. So getting data on is hard.

I mean we're closing for our clients at month end in 1 day, 2 days and they're getting these consolidated information. Prior to using Clearwater, you're exactly right. It was 2 weeks. 3 weeks. So think about that. If you have to wait 2 weeks to know what your position was at the beginning of the month, let alone, whether it's comprehensive, like how does one act on that? And so you're exactly right.

Right. So I want to talk then about -- so if that's the business and kind of a selling point, let's talk about like the trajectory of the company. It seems like in the past, I would have thought, and I think this is consistent that maybe you grow around 20%. It seems like maybe right now, we're a little bit below that, especially given retention and churn. Can you talk through like what are the dynamics and how we should think about the right growth algorithm generally?

Sure. So I think we're really committed to 20% plus top line growth. And we have been able to execute on that over years and years and years, over the last 5 years. So feel really positive about that. And there's multiple vectors that we used to drive that. Let's start with -- the first thing is we have this incredible run rate business. And we have gross retention rates that are just off the chart at 98%. I think those are -- I mean you would know you see the whole spectrum that's very unique. And then you kind of step through that and you say, okay, so how do you think grow? So we've also started reporting net retention because folks are interested in that. And so we have this AUM-based pricing model, which drives a few basis points of growth. We have price increases that drive a few basis points of growth. But then really, what Clearwater allows you to do is really grow your business. And we've been successful. So the net retention rates at 110%, 111% in the most recent quarter reflects not only the price increase and the AUM expansion, but really the growth within our existing client base. So a couple of quarters ago when we went public, we talked about how strategic asset managers are able to grow their business with us. And that trend continues to be the case. If you want to add assets to your platform, if you want to grow your revenue stream, do it with Clearwater, we are the operational kind of secret sauce that you can [indiscernible] to do that. What's changed in the last kind of 4 or 5 months that we've observed, which I think is really interesting is global insurance companies are also thinking of Clearwater as the engine of their growth. And typically, you would have said, oh, we're comprehensive, an insurance company gets 100% of your book. Okay, how does that grow? Well, again, as an enabler of growth, you're able to bring on more assets, you're able to buy a different book of business, you're able to acquire other insurance companies and really use that vector of growth. And that has been a nice little tailwind that we've seen in the second half of this year as we see not only -- as we always have, our asset manager clients growing with us, but also our insurance clients growing with it. But that only gets us to kind of 111% growth. How do we get to kind of the 24% growth that we did last year and the 27% we did in the fourth quarter? And that really comes to new client acquisition. And we continue to drive on new client acquisition in the verticals that we win, corporates, insurance companies, asset managers in North America. And that's kind of a consistent process that we've continued to drive through. However, what is also kind of a pleasant -- kind of tailwind that we've seen is our ability to grow internationally. You know, 40% of our TAM is outside -- sorry, 40% of our total addressable market is outside of North America, but less than 10% of our revenues are there. Last year, 20% of our new business came from international. So that's -- we're making progress, right, [indiscernible], but we're making progress. And so the international business and really the momentum that we saw there, we've really been able to have some key customer wins that's been helpful.

So as you win in like an insurance company or maybe even a corporate, how long does it take usually to have -- I mean, for corporate, it seems like it would be pretty straightforward, but for an insurance company, how long does it take to get the entire portfolio that they have on Clearwater? Like what's that ramp and the associated timing?

Sure. I think it comes back to that function of if you have 40 different asset classes -- or sorry, 60 different asset classes and 40 different currencies, obviously, that's going to take a little bit longer versus maybe a corporate that has a reasonably [indiscernible]. So those corporates were able to turn on the smaller side. We will book them and onboard them in the same month. It happens that quickly. That's obviously at one end of the spectrum. As you get to more complex, you're talking about 3 months, 6 months, 9 months.

I mean is that -- so as you onboard that, so then -- like if I'm a life insurance company, pick your favorite life insurance company. So if it's 3, 6, maybe 9 months, depending on the complexity to onboard them. At that point, though, do you have their complete asset base on Clearwater at that point? Or is there still -- takes time to add additional components there?

You typically would have all of that. And then -- so that's where that was -- so yes, it would take 3, 6, 9 months, you have the whole book. They want a comprehensive view. They have a comprehensive view. But then what has happened is they step forward and they say, okay, this -- the operational kind of burden here is pretty low. I can think about some more strategic things. I want to grow my business. I'm going to go take on that book, we'll then onboard that and then we'll add to that.

What about adjacent end markets? Like what are the adjacencies? You kind of threw out a few, but just maybe sovereign wealth funds, government, et cetera. Like what's the opportunity there? And how should we think about those as contributors to revenue growth down the road?

Sure. So maybe before we go there, we really think about 3 different horizons just to frame it up. The first horizon is really just do more with our existing customers that 111%. How do we continue to drive that, improve that, increase that? Second is North America, asset managers and insurance go-go-go, continue to win. And we've put teams in place. We continue to put more teams in place to really sell, onboard, deliver. And then third, [ Europe ], I would say that piece, you have to believe we continue to execute on that for us to continue to go 20-plus percent revenue growth. Then we’d also talk about a horizon 2. So that's horizon 1. We spend most of our days worried about that. Horizon 2 is these adjacencies. We talk about adjacencies, either geographically, like Asia or, again, doing adjacent solutions for our clients like Prism, which we can get to in a minute, but to our adjacent markets that you're really talking about. So last year, we deployed a team to do state and local government. And we'd always kind of thought about it very consistent. As we learned more about that particular market, we understood just how similar it was, their need in that investment accounting analytics was [indiscernible]. And in the fourth quarter, we did kind of 2 very large city and counties of -- within the state of California, I won't be specific about those. And so we've seen great momentum across states and across these local governments. And that's one of the situations where we deployed resources, we put a team in place. We got them focused on it, and we're starting to results there. The next adjacencies that we see is pensions, sovereign wealth fund. And so we're starting to put teams in place against that and to drive to that. But I would say we've seen tangible success in state and local government, and we're yet to see in these next adjacencies.

Interesting. And so when you're talking about time frame to horizon 2, horizon 3, et cetera, what -- how should we be thinking about that?

Yes, I think that in that horizon 2 area, we have teams in place, right, and we're executing against it. And we're trying things. But it's not in our base model that says we know it's going to work. We want to believe in that. Horizon 3, I think, is something where you think about, well, how do you become maybe one of the world's most -- how do you revolutionize investment accounting or management -- pardon me, I'm all choked up -- I'm so passionate -- yes, sorry -- that next phase, we have a few people working on it, and it really comes -- that kind of horizon 3 is in that 3-to-5-year phase. As you think about, okay, we're going to continue to build. Now we'd like to obviously do that as quickly as possible but just being realistic about kind of how these things stretch out and where those priorities are.

Got it. I want to ensure if there are any questions, Marissa, she's got the microphone, she is ready to run, but I'll keep going here. But if you do have anything, just indicate to her and we'll get you to the microphone. So we've seen a lot of these deals, though, if we kind of come back now across verticals and geographies as clients increasingly recognize the value that Clearwater can deliver, and -- but in the medium term, do you think that the majority of your deals will still come from insurance companies on a vertical basis? Or are some of these other opportunities starting to pursue? Are they going to be the majority of wins, even if they're not the majority of revenue? Like where should we be tracking from a geo -- from a vertical standpoint, excuse me?

Yes. I think that -- I think we're going to continue to see a number of wins in insurance companies and in asset management. If you step back and say, of our $4.7 billion of TAM, about $3 billion of that is in asset management, right? About $1.4 billion of that is in insurance companies. And so there's plenty of runway in both of those markets for us to win. And they seem to be nicely connected and there seems to be a virtuous circle between winning enough investment managers that then compels asset -- insurance companies that then turns around and compels more asset managers who want to run the asset [indiscernible] insurance company in that process.

So looking at kind of the selling motion, et cetera, we've talked a lot about the verticals and what you can offer, et cetera. But your revenue retention that you talked about is fantastic, and it seems to be increasing compared to where it was in 2020. How do we think about the relative contribution from price increases versus upsell across the client bases drivers of net revenue retention? So just trying to understand kind of deconstruct what drives that contribution and how to think about that in the future?

Yes. Yes. And I think how we performed in Q3 and Q4 is probably a good kind of near-term view for how this will [ work ], which is -- so our gross retention starts at 98%. And how do you get from 98% to the 110%, 111%. So the first piece is price increases. That's, call it, 3% of that. Now we're up to -- and then there's kind of a gentle tailwind of -- typically a gentle tailwind of asset growth. Now people say, oh, what about market volatility, people focus on that. When you look at the nature of the assets on the platform, which is typically fixed income and structured products at about 80% -- 78% in December. And so there's only kind of 20-and-such percent in equities. There's less volatility in that. But what's happening is these companies are profitable and as they add -- and so there's as much organic asset growth as there is market appreciation in that tailwind of AUM. And so that's, call it, 3% or 4%. We've got kind of 7% of the 12% to 13% out there. So the rest is the -- the rest of the 5% or 6% is really additional assets and additional lines of business within our existing client base, so -- but it isn't necessarily asset growth in those. It's -- we're really adding accounts [ where ] our clients are winning new business and growing by using Clearwater as that -- that's, frankly, as a tool to be able to grow.

So they basically can increase their speed of reporting and performance, et cetera, that in turn helps attract the incremental assets to their business.

So the number of new clients that we've won in the asset management space because quite frankly, they lost mandates from insurance companies because the reporting they provided from their legacy platforms was not sufficient is that's a great rate catalyst, right? There's nothing like losing business because of your legacy technology platform to drive change in that organization.

So let's talk about the competitive landscape for a moment. Who is in that -- who makes up that landscape, particularly the legacy providers who have solution may be more akin to yours, what's that RFP process look like against whom? And what are the win rates for Clearwater?

Sure. We'll start with the win rates, which we're really proud of. So we have 80% win rates once a client goes to proposal. So once -- so that's kind of 4 out of 5 times, where you might say, why don't we win 5 out of 5 times. We ask that of our sales team quite often. And really, what it comes down to is frequently, we haven't done a compelling enough job to convince them to change. And so they just stay.

They just stay with whatever they have. Nothing comes up for a new evaluation and they are like we are going to just keep doing what we're doing.

Exactly, exactly. And that...

Like me and my fitness routine, [indiscernible].

Don't get me started on [indiscernible]. Yes. So kind of -- as we'll go through this process, we'll obviously -- the way we think about it is, is, okay, so because they've added asset classes or because they're not getting a comprehensive view for any one of these reasons, they might say, okay, we're in pain. We have to do a lot of manual processes, we have to -- it takes us 17 days to close, what [indiscernible] is this worth it? And so they'll evaluate that. So our selling process really goes through the steps of explaining to them, okay, here's how we can solve that pain. Here's how we can -- here's what you can do with your time instead of worrying about accuracy and reconciliation, all of that, how do you go through that process. Here's the strategic objectives [indiscernible], at which point then they say, okay, it's worth changing because there's a high bar to changing any accounting. And so that's really a lot of what the sales process.

Got it. Got it. Do you see -- I mean I guess it's kind of interesting, right? Like if you're winning 80%, do you see the legacy providers accelerating? Like who do you run into in those situations, and do you see them accelerating their own investment to try to match better your capabilities?

So we run across a variety of different -- so -- and again, it also depends on the vertical. In insurance, we might run across a software called PAM. We also might run across any variety of SS&C products in that vertical or in the asset...

Yes, it seems like they got a portfolio just like many different products, names. Right.

And so I think that a lot of these legacy providers have really said, okay, well, let's figure out a cloud offering. But I think what's missing from that is really the cleanliness of the data model that we have, right? It's a single instance, multi-tenant solution, right? And it has a single security master solution. So we're able to kind of ingest from over 2,500 data sources, right? We're reconciling that. We're sorting that and we get a single security master. And that really builds incredible scale because we're worried about the securities, not about the portfolio. So as you add more clients, if you already have those securities on your platform, then all you're determining is just, well, that's a different quantity for that portfolio [indiscernible]. So we really have a fundamentally different way of solving. So I think that I would expect in a competitive environment. I don't think we're under the radar with anyone anymore. People are attempting to compete in whatever way they can. And -- but I think that to your question, hey, how much investment would it take. At this point, it actually isn't about the investment. It's about the actual architecture and the single instance, multi-tenant data model that we have, which enables just a fundamentally different solution. And so although you could maybe lift something to the cloud or do something like that, which I think would be good for everyone, right? That's good for their customers, but I think it's just fundamentally different. So I think we feel very good about our competitive position.

And then just finally on capabilities and adding additional functionality. How should we think about the insights you can provide with all of the assets on the platform, which is approaching $6 trillion or was approaching $6 trillion? And you teased Prism a little bit earlier in our conversation, how has that offering played into your ability to deliver those insights?

So Prism is a really important offering [ for us ] at Clearwater because it's really enabling us to open up additional TAM. And frankly, as a company, it's important for us to understand, we are a single-product company. We offer Clearwater to everyone, and everyone gets the same product. To evolve as a business, as an investor -- to evolve a business from a single product company to a multiple solution company is -- opens up the opportunity to take that net retention rate. It opens up a lot of opportunities especially if you have happy clients that want to do more. So Prism is the first kind of foray into this. What this allows us to do is to really connect data streams through and without doing all of the accounting, all of the reporting. So it allows us to acquire new clients who maybe don't want all of those resources and a [ product that ] or we can sell Prism in connection with the Clearwater product to allow better connectivity with other systems, other data feeds, other things like that. So I think that as this evolves, it's still early days, and I think after Q1, I think we'll want to talk more about kind of [ other ] progress that we have on -- that we've seen within Prism. But I think that it's important for a couple of reasons, which is, one is, it's evolving our -- frankly, mindset as an organization to think about what more can we do. So that's maybe the first foray. But the other piece that Prism allows us -- then you also would think, well, what other adjacencies could we potentially do inorganically. I think we're busy thinking about that. And we obviously have a currency and capital to do that and we're evaluating things. But I think we're very committed to having a growing business that we also kind of -- if we're going to combine 2 businesses, we want them both to grow -- to keep growing and we want them to obviously grow faster together, having a really seamless solution for our clients. And so that's a pretty high bar.

Yes, for sure, for sure. So in the last minute here, just a question on stock, and this is a big question that we get from a lot of investors. How should we be thinking about the potential overhang from the high level of private equity ownership? They were owners before you went public. What's the -- what have you heard communicated from them? And what do you think the intentionality as much as you can say there is to kind of address that as a potential overhang? And it's something that comes up for potential incremental investors, at least in our conversations with them a lot.

Sure. Well, I would say that we're really lucky to have the board that we have and the private equity investors that we have. They have proven time again to be true to their word, which they want to build the very best business together that we can. And so they see -- so when you back up and you say, well, why did we go public in that context? We have much better brand globally, and we have much better transparency for our existing clients. This helps with our business. And so the marketing helps with our business, the transparency and then last, this currency to be able to also contemplate our growth from an inorganic basis. That's really what drove us going public. You'd have to ask them what their specific intentions are, but obviously, all of that would have to happen through some sort of a public offering in these -- kind of in this time period.

Got it. Got it.

So they seem reasonably excited with the performance of the business.

Good, good. Well, Jim, that's all the time we have. Thank you very much for joining us today.

Thanks, everybody. Appreciate it.

Thank you.