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

Great. Thank you all for coming out. This is my last fireside for the day. So, I always like to say, save the best for last. But we are, all getting started. We're thrilled to have Jim Cox, CFO of Clearwater Analytics. I'm Kevin McVeigh, the Vertical Services Software Analyst here at Credit Suisse. This is our second year, which I can't believe and have jokingly said, what a difference a year makes. What I want to do is just kind of -- I'm going to sit down and start up with a little Q&A and try to make this as interactive as possible, but I've got a ton of questions, and hopefully, we'll have some interaction from the audience as well. If not, we'll keep it going.

Thank you. Kevin, thanks so much, thanks for your support. Thanks for Credit Suisse's support, and thanks for the invitation. It's a -- what a venue, what a venue and you're right. It's a -- lot of energy, a lot of people here. It's great.

And I'd tell you, I think I've started every meeting with this. And I just think it's really important. I think, Jim, take us from the beginning because it's a revolution, but it's -- the way the business started, I think, really sets the foundation kind of where you are today. So, let's start there and we're going to kind of build on that pretty dramatically, but let's start there.

Perfect. Perfect. I mean, it's an incredible business. I wish I would have founded it. But basically, it was founded by 2 brothers and a best friend. 2 of them worked for Goldman Sachs, and one of them was a trader on the Chicago Board of Trade, and they all moved home to Boise, Idaho, and they decided they would start a hedge fund. And so raising money for an unproven hedge fund based in Boise, Idaho, can be exciting. So, they went out and they were trying to raise money. And they went to a corporate client who then turned to them and said, hey, I don't -- I'm not going to give you my money, but that tool you use to show me what I'm doing, that's really interesting. So, the 3 of them really pivoted quickly and moved forward and really started and Cisco was kind of the first client that they had and successful from there. So, started in corporations and really figured out what those folks needed. Corporations are generally investing in high -- good credit as well as other fixed income treasuries and those types of securities and they care about duration, they care about capital preservation. And so went through and had a lot of success in the corporate marketplace and then eventually went and talked to some insurance clients. And the insurance clients lo and behold, they invested in mostly the same stuff. So, it seemed to make sense, but they said, hey, can you build this thing called a Schedule D, do some of this reporting. And so of course, they said yes, very entrepreneurial and kind of built it from there. And then moving from there, asset managers came along and said, hey, wait a second, all of our clients are using this reporting, and they're saying, our reporting isn't as good as this. And so that's how we moved into the asset management space. But a couple things that were really I'd love to say they were present that really set us apart from kind of others in the industry that are a little bit of luck, right? These guys were based in Boise. It's hard to fly in and out of Boise. It's a very livable city, but the airport is a little suboptimal. And so they really didn't want to have to fly to their clients and implement this stuff. So, they started it in the cloud, and they kind of developed it in the cloud and kind of went from there. And then the other thing that was really present that they came to was they said, hey, we're going to think about this differently. We're not going to think about this client by client. We're going to think about this security by security. And we're going to think about how do we aggregate all this data across because we had clients that had similar data. So, how can we do it more efficiently? And so on the cloud from the beginning, single security master from the beginning, incredibly flexible product that actually played across these 3 relatively different industry verticals but with certain specifications between them. It's the same product. We do the same thing for all 3 of those verticals. But what they -- the problem that we solve for them is very different. And that really, I think, is a testament to how great the solution is. So, now we fast forward to today, right? And so we've gone through -- we're in these 3 kind of core markets where we're winning. It's been mostly North American kind of operation. And so now this solution has proven to be flexible enough to move internationally. Flexible enough to move into new markets like REITs, like state and local governments, like state pensions. And so there's lots of new and adjacent markets to think about. But yes, just a tremendous, tremendous story for these folks.

One of the things that really I always marveled at was, to your point, you started with corporates, yet that's the smallest percentage of the business today because the insurance has been so growth as well as asset management, and then you've got all the optionality on the corporate side, it's just really remarkable. One thing I wanted to drive down a little bit on too, is the efficiency of the business. What's interesting is as we thought about this sector, you've got legacy companies like SS&C, BlackRock, Van, things like that. And I call it kind of the Class 21 where I would include Clearwater, nFusion, NTAP, Q4. And you differentiated yourself in a much tougher environment with really impressive revenue growth, you had the margin profile, the cash flow dynamics of the business to continue to invest, and you've done that. Maybe talk to that a little bit because as we think about the business going forward, it just -- it continues to crystallize, particularly given the throughput, which I still think is around 91%. And the leverage that, that brings to bear, it just becomes this multiplier effect as you go into new markets. And I know there's a lot there. I also want to tie that into JUMP because this is going to just be a huge opportunity for you.

I think it's really incredible. So, let me talk a little bit about margin and then pivot over to growth and then go to JUMP if that makes sense. Keep me -- I have a tendency to wander, so keep me on track. So, just backing up for a second, that single security master and the ability to process securities for all of our clients once, right, ingest it once, process it once, reconcile it once for all of our clients. There's natural flywheel effect there where as you overlap in your securities, there's efficiency to build. But as we add new clients with new securities for that next client, it builds. And so I -- right now, we're at about 75% gross margin on a non-GAAP basis. And we see a clear path to 80% there. In fact, that's how we think about our steady-state business. It's a little lower than that because we're making investments internationally. As kind of you enter a new market, there's less of that overlapping scale. You also have kind of onboarding of clients and as we push through that. And so I think with an 80% gross margin business, you have a lot of optionality. I think you'll also see that our business is a little unusual. 25% of our revenues goes to R&D versus a lot of SaaS businesses, it might be in the teens and your sales and marketing, it might be in the 20%, 30%, 40%, 60%. Maybe that's 2021. But -- and so our sales and marketing is 13%, and our R&D is 25%. Our clients love that we're pouring 25% of all of those revenue dollars back into the product because we have a lead through some thoughtful kind of initial creation of the product, we have a lead. And so we're compelled to maintain, extend and build that lead with the competitive -- building that competitive advantage. And we think that investing that 25% does that. Now what do you have to believe for us to continue to grow? You got to believe that we continue to have runway in insurance, which is you're right, 50% of our ARR, but still a fraction of the global TAM in insurance. You have to believe we're going to continue to win in asset management in North America. You have to believe that we're going to continue to build in Europe, which we -- which -- these are our core kind of growth drivers. And then lastly, you have to believe that we're going to be able to continue to broaden our relationships with our clients. We have a world-class gross retention rate of 98%. Our net retention is not world-class, if I can just be honest. And that's because we've had a single product. We've got a single solution. So every year, year-over-year, we're pouring 25% of our revenues into R&D, and we're not actually charging separately for any of that innovation that we're building. We're not thinking about that. And so as we kind of think about evolving as a company, we think about how do we evaluate what are the core elements of our product that all of our customers want and that are part of our core product. And what are those things that we should think about commercializing separately. So, as we think about expanding our relationships with our existing clients, we really think about, okay, what are those things that we can build. And we have a couple of those that we've built organically and then to your comment on JUMP. So, JUMP is about a $75 million acquisition. It's a French company. They have about 100 employees and about $10 million, $12 million of revenue based in Paris, France. We think it gives us a lot of alignment. I love this acquisition because it makes us better for our clients and it helps us improve what we want to do. How does it do that? One, it helps us with a presence in Europe. We already have 200 people in Edinburgh servicing folks around the world. This adds another 100 folks in French-speaking in Paris, French-speaking folks, engineers and service folks that can really drive for that. So, I think it really shows the commitment we have to the Continental European marketplace and how we're driving there. That's one piece of it. It also creates functionality that sits around what we do. We do world-class reconciliation, aggregation, accounting, reporting, compliance, risk. We also have performance that works great for asset owners. JUMP has a great module that does performance for asset managers, allows variable flexibility in your benchmarks and allows you to position things around that. For our asset management clients, they want that. Also, what's our value prop? Clean, reliable data at the beginning of the day at 9:00 a.m. JUMP has functionality in portfolio management and order management, which we believe we can sell into our insurance clients who kind of mostly they outsource their book to asset managers, but also they're doing some trading themselves so that can work around them as well as asset managers. And then lastly, we think that once we kind of engineer JUMP for the North American marketplace, we have a portfolio management, order management, accounting, reporting and performance solution in the cloud for our asset management clients in North America and I think that could be -- I know that market, it's a great market, and I think we can really win in that. So that's -- sorry, so JUMP. The last piece is about, again, customer acquisition within North America and driving in that asset management space. But those other pieces, unit-linked funds, performance, portfolio management, order management, are all things where we think we can capitalize on the great NPS scores we have, the really high gross retention we have and really accelerate what was a pretty pedestrian net revenue retention into -- when you start with gross retention at 98%, net retention should be world-class as well if we execute.

And not to minimize OMS or EMS, but a lot of the complexities in the accounting, so you're able to leverage that expertise into the front and middle office, which is a huge opportunity for you. And it just -- I think we talked in -- over the course of a couple of calls, talked about potentially 3x revenue, maybe I'm thinking 3 to 5 with the initial run rate of the business is. Now that's not next year. But as we scale out over time, and it's just -- it's really the multiplier effect of what JUMP brings to bear, which was just a real nice opportunity and just really good multiple too. I think it was 6x or 7x, which feels very, very efficient given the functionality you're bringing there.

I think we think there's 5 real opportunities to have a meaningful business there and we probably need 1 or 2 of them to hit to make sense. And if any of them hit meaningfully, I think we aspirationally think of using that -- those features, functions composite together to have another $100 million business.

It's just amazing. The other thing that just -- I think I shared in the past, I'm a CPA by background, the complexity of these accounting systems, they're not all uniform. You've got IFRS, you've got US GAAP, you've got insurance accounting. These are all very, very different accounting systems that aren't easy to replicate. So, it's not like there's one generic go-to-market, and that's where you've really been able to differentiate yourself in a pretty dynamic way. And to me, and I want to spend a minute -- more than a minute on it because I think it's important. You've been able to demonstrate that through a reset of your pricing this year as well as the way the contracts, you have no minimum guarantees on your contracts and you're still able to generate the revenue you do. And that, to me, is a function of how powerful the offering is. So, maybe we talk to that a little bit, not only from initially, but also the pricing, which is going to be a wonderful outcome for you today, tomorrow and versus the way it's been structured to store?

I think it's really important that element. And I'll just be honest with you, it's been more successful than I would have expected. And -- but then I reflected on this a little bit. And as to why that might be. I'm sure it's our great negotiated skill, without a doubt. It's actually it's just -- it's this. It's 25% of our revenue goes into building product, making it better every day. So you think about, well, what does that mean to our clients? It's wherever they want to go in the world. So, you say these different gaps are complicated, 100%, you're right. And you know what people typically have to do if they want to expand globally, buy a new system. With us, you just add it on, right? You just go through that. So we think about -- so that's where our investment dollars are going. How do we think about international? Once you get the gap, that's great. You still have to do all the regulatory reporting around it, and we have to build around that and they understand that. And so that's our core value prop that we're providing. That's one way that we're investing, that 25%. The second piece is really depth across different asset classes and instrument coverage. Not only do you want to handle all your fixed income, all your equities, all of these things, all your derivatives, all your mortgage backs, all your VC-backed, PE backed. The point is, no matter what you want to invest in, you can come to us. And so it's all in one place, a global consolidated view, however you want every day at 9:00 a.m., not last quarters, not last month, every day, 9:00 a.m. That's your information. And then you might think about, well, okay, so this instrument class of I'm a limited partner in some stuff, fine, fine, you can do the accounting for it. But what I really want you to do is tell me look through that. Tell me what underlies that investment that, that private equity firm is in. Tell me when my capital calls are coming, tell me when I should expect my return so that I can understand how this small piece of my portfolio actually affects the entire broader landscape of it. So that last piece, right, that is an accounting. That isn't what we do in a core way. So there, we're commercializing that discretely and separately. We call it LPX, just using this as an example. We'll do that with other asset class. You can -- if you think about all of the operational workflows around derivatives and mortgage-backed securities and GSE things, those things come into play. And so those are opportunities for us to price modularly going forward. But coming back to the core, right, all of that core functionality that we deliver year after year, we were able to go back to our clients and say, hey, market conditions are unusual. We're still doing all the same work. It's just security prices are down 6%, 10%, if you're in equities, maybe more percent and -- but we're still doing all this work. And so -- but look at the relationship that we've had, look at what we've tried to do. You want a real NPS score. We survey people for NPS every 6 months, and they look good. You ask them for a price increase. You ask them for a contract renegotiation. That is where you actually know what your -- who your net promoters are and who they aren't. And so our ability to actually execute that with our largest clients going and talking about this base plus pricing model, where we can limit our downside, share in the upside, think about an annual price increase and lastly, kind of define core Clearwater. So, as we add functionality, we can charge separately for that in the future. There was a lot of alignment around that and people got around that. Also, price increases across the broader base, happy -- folks were -- no one's happy about that. People understood it. CPI is this. I have my client servicing team. I talk to those folks every day. I understand that's important. That was -- it was a much easier conversation than I would have anticipated. And so I think it's taught us we were doing a lot of things right. It also taught us we were doing some commercialization things wrong that we are able to fix and move forward as a public company.

I've got a lot more questions. I want to open it up, see if anyone has any questions in the audience as we would not leave it to the end because I think it's pretty fluid. Any questions? Yes.

Just a quick question on your TAM. There's a limited number of investment companies out there. Is there any push on, a, moving past investment companies to corporations and they're reporting their taxation, their SEC filings, anything on that front? And then also, is there any -- for smaller investment companies that there are hundreds of them that are just like 5 to 7 employees and they're very price sensitive. Is there any base kind of, not a freemium model, but where they come at a certain low price and then you can go and as they grow bigger, go through their journey and keep adding new features and pricing?

That's it. So, I think we have a ton of runway in our TAM with our existing product today to go and run. But do we always think about product adjacencies and looking at those areas, we absolutely do and that's where JUMP comes into play. So, that's our first foray into inorganic growth. All of our growth up until now has been totally organic. And so as we think about it, we want a seamless experience for our clients. And so thinking about, well, how do we add performance to our clients, how do we add portfolio management, order management. That's the next step in that foray. The second piece you talked about, so asset management is the largest -- so we think about our core TAM as $4.7 billion. So, there's plenty of runway in that core TAM that's in Europe and North America, insurance companies, asset managers and corporations. And so we have a long runway there. But there are so many clients in that thousands, literally thousands of that 5, 8-person shop, right? We call those our heartbeat clients, right? We are the heartbeat of their organization. If our heart doesn't bet, they die. So, we have that level of kind of focus for them. And some of them are here at this conference. And so JUMP, I think we do a great job with them but JUMP with some of the intraday opportunities and some of the performance that we talk about for them, that aligns with what those clients were asking us to do. And so this is really what drove us to the conviction that we have around this as a next step. The other thing the founders did besides like some of those is the founders instilled and maybe it's a Boise, Idaho thing or maybe it's the founders or maybe it's probably a combination of and just who they were able to hire. There is such a focus on delighting our clients at the very lowest level, like people wake up every day and they think, I've got to do this. They worked so hard, right, for folks, for these clients that they talk to on the phone and think about every day. And so that client focus is really the aperture through which we think about anything inorganic. What is it that we can do for our clients that they want us to do that they've asked us to do. That's why we're doing more with all the alternatives. They've asked us, hey, this is great, but we want this. This -- do you want to see what I have to do with my day. Now that Clearwater does all this for me, this is what I do with my day. We look at that, we say, oh, we could take that off your hands. So, thanks.

Good, let's keep it going. Thank you for that. I think another thing, Jim, during the price discovery, 2 things just because I don't want to say necessarily related to price, but there's no professional services component to the business that you charge, which kind of underscores just the efficiency of the implementations. So, maybe talk to that a little bit? And then I think as we've kind of transitioned the pricing it's probably created some opportunity around modularity. So, maybe talk to that a little bit because I think there's probably some additional optionality that I wouldn't say necessarily undiscovered, but you could probably transact a little more efficiently for in the model. So, a little bit on just the efficiencies and implementations and then just the modular approach that could potentially come given some of the value that clearly you're delivering.

And that is -- so you're exactly right. That's something that I think we'll admit, we didn't do great. We thought of ourselves as a single product company. And so we just built it and bundled it in. And if someone wanted it, we turned it on for them and all in the name of client delight. So, I think what we're doing now is we're trying to discern amongst our client base. What does 80% of our clients use and what do certain segments of 20% use because that's the way to start to think about how do we break the product down commercially into modularity. And so as we continue to roll this out, I think that's an opportunity for us as we roll through 2023 to kind of further evaluate that and further build that out both through the inorganic piece as well as through PRISM and LPX and some of those adjacent tools that we've sometimes sold together, and now we need to be deliberate about thinking discretely. The other thing we're doing in 2023 to try and facilitate that is we've separated the team. So everyone used to have named accounts, some of which were existing clients and some of which were net new names. And so now we're kind of saying, okay, we just have specific teams that what we've learned is if you restrict people's plates and you ask them to focus on an area, they figure it out. And so that's what we're -- that's the other piece that we're doing from a go-to-market perspective next year in North America. And I think that will obviously produce a lot of -- I think it will be a great experiment and I think it will be successful.

Agreed. Jim, for maybe some that are online, just maybe remind us how Blue Prism -- not Blue Prism rather, Prism fits in and just from a revenue perspective and because clearly, that's been a big growth driver for you as well?

Yes. So, Prism is a set of -- it's a solution that has 3 discrete functionalities for the client. One, it provides a data lineage. So, the Clearwater system is fantastic. But what it does is you have to start at the beginning and you get it at the end. There aren't any onboard or offboarding ramps. And for some clients, they want to onboard and offboard data partway through. And -- but we have a firm belief that, that data has to be clean and you have to understand it. So, it has a very robust data at lineage linkage. And so sometimes we sell it together with that. In addition, it's a reporting and statements tool. So, we have 1 client who doesn't use core Clearwater all, Prism-only. And basically, we are ingesting their data and producing, I believe we produce 8,000 statements a month for this client. And that would have taken 30, 40 people, and we're doing it, obviously, there is an incredible ROI on that for those clients. And so it's either through kind of an interface or through a produced statement. And so that's kind of -- that is sold in conjunction with core Clearwater and on its own, depending on the accounting use case that folks want. And so that's great.

I think the other thing is the timeliness of the data, right? When you've got kind of a single architecture, particularly Russian invasion or Ukraine, right? You always use that example, too, in terms of clients want to know what their exposure is. If you think about traditional methods versus your delivery, it's not incomparable.

Yes. Yes. I mean that was -- when they invaded we were able to go through and look across the entire platform without understanding a specific client, but just across the whole platform, what is cumulative folks exposure to what we believe to be Russian securities or those types of things, and we were able to quantify that. Last week, when there was a little excitement on some counterparty with the crypto, right? You had some people who were saying, hey, what does that mean for me? And so we said, oh, well, let's look across that across the platform and try to value that. So, those types of insights, right, that's not at the client level, although we could, at some point, if you look into the future of what's really exciting, what if you could do that at the client level, what if you could share that anonymized across our client base. And one of the benefits of being at Clearwater is all the benefits that you get, but you also understand this peer environment that they have. That's the power of having like the single instance, it's the power of having the single security master. $6 trillion in assets flowing through the platform every day, it's not insignificant, like that is a real scale. And so we hope for it to be $10 billion shortly.

And I guess just in the -- because we're coming up on time, but any thoughts kind of lessons learned. Again, it's -- I'd say, what a difference a year makes. We were up here a year ago, you were a new public company, you've really executed well in a less than ideal environment.

Yes, I think that we feel -- so we went public for 3 reasons, right? One was to make sure that our clients could have the visibility into us. Second was to build our brand globally. And third was to be able to have the capital to think about inorganic or more strategic items. And I think it's worked well for clients to understand the visibility of us. I think clearly, we have increased our competitive or improved our competitive positioning over the last 12 months. Part of that is just awareness. The other part of that is just continuing to build and grow and so I think that marketing angle, people's understanding of us has helped. And then we're going to do our -- we're -- we've announced our first acquisition. I hope to close it here this quarter. And so I think the reasons why we went public are -- have proven to be valid reasons. And although it has been an exciting market, I think continuing to execute growing north of 20%, delivering solid EBITDA margins with the principle to grow a conversion of that EBITDA into cash. These are in a vertical market, a SaaS market player with a strong competitive positioning is, I think it's been well received.

Particularly with the meaningful reinvestment to your point earlier.

Yes. Yes. Thank you. Thanks, everyone. Thank you.

Awesome.

Thanks.

Thank you all.