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

Thank you for joining us today, and I'm delighted to welcome Sandeep, CEO of Clearwater, today with us. Sandeep, thank you very much for joining.

And as a starting point, could you walk us through what you're seeing across the 3 core consumer groups, the insurers, asset managers and corporates at the moment? And also, maybe if you could talk about some near-term headwinds that you're seeing in each of the respective segments?

Yes. Sure. So I'm Sandeep Sahai. So first thing, we are looking for headwinds. So every time we come to these quarterly meetings, we're asked about the headwinds. So we're very consciously looking for these headwinds. But I just want to say that in the asset management industry, I think we announced Bank of America Private Wealth, and we also announced Merrill Lynch. So we continue to see traction, and we can talk about why because it's not exactly the most vibrant market, and this is not exactly the market where people have -- where people don't have cost pressures, but we continue to win because of what we offer them. Insurance companies, I think we announced 2 insurers last year. And this year, we expect to do more -- we expect to do 2 and perhaps even a little bit more. So we continue to see traction in the insurance market. The third one is a little bit more about Europe. Europe continues to grow for us. I think last year, Europe was 9% of our revenue. It's about 14% right now. So we continue to make advancement in Europe. But I just think that what we are doing is following the bookings. So if you look at our attitude used to be, let's assume the booking, let's grow the business, lets grow the number of people we have, let's make the investment sort of ahead of the curve. And over the last 3 or 4 quarters, our attitude has changed, and we are just following bookings. So the booking is great, we just continue on our merry path, and we don't worry about headwinds. We don't worry by the economy and we just keep going. But we are super watchful about it, but we just haven't seen the headwind quite yet, that we're looking. It's not a good answer, but it looks like you're out in the ocean looking for something you can't find it, it's a little bit true. We are looking for signs of -- is the pipeline conversion growing, and we don't see that. And do we see the inflows growing, and we don't see that quite yet.

That's great to hear. And obviously, vast majority of assets under your administration, there are more fixed income and alternatives. But we obviously are now aware that Clearwater is moving more towards equities. So if you could maybe talk about how the platform needs to evolve in order to service some of these clients?

That's a really good question about equities. So I just want to make the point firstly that when you look at our client base, you look at insurers, we have the whole book. So we're not making a choice about should I process the equities or not. Same thing with corporates. We just have the full book. Now if they change our assets and our platform changes, is it mostly fixed income and structured products? Yes, it is. But is it approximately 20% equities? Yes, it is. So we do process more than $1 trillion of equities on our platform today. And so that scales -- and I don't know so, and it's not like we will go seek it out. We should be able to scale that without much change on the product. But what has changed, Alexei, is that if there was a $10 billion asset manager who is mostly in equities, in the previous time, we would have just walked away from that, because it's not the best use of Clearwater's ability. Clearwater is powerful when you have investments in equities and fixed income instruments and derivatives and things which are more complex, if you will, then the value of our platform is really high. But given the JUMP acquisition, our ability to service that market has definitely improved dramatically. I think we have announced 2 products. So there is product work in making the front office of JUMP work better with the accounting performance reporting off the Clearwater platform. So we do think our platform will evolve because the market segment, Alexei, we're talking about is a little bit different, whom we did not serve very well. I mean that was the market -- for example, we don't do hedge funds, because Clearwater just wasn't a great fit for hedge funds, but once you have these capabilities, can you go to the $10 billion asset manager who may be mostly equities? Yes, you can, but it does need work over the next several quarters to bring it to the market here.

Understood. And I think it's worth discussing your SVB exposure. Could you maybe remind us what was it back in March? And I think the typical reaction was obviously negative for many companies that had exposure to SVB. But could you elaborate on possible benefits that you were able to provide to your clients at this time of uncertainty?

Yes. So I like the way you framed it that initially thought of a negative. Initially, we were really worried. It's like when you build a model in life and you know it's supposed to stand the stress, but when it actually happens, then you're like panicked, you're like, damn, it better work. So -- but again, you've just got to think about what we do for SVB. We're not reporting on SVB's assets. We are reporting for the 2,000 institutional clients. So SVB has, literally on our platform, 2,000 institutional clients, and we are reporting on that, for their clients. So the moment SVB happened what we started to see was a movement of those institutional assets to other banks. And because we get a comprehensive view on a daily basis, we could just tell you. This is moving to this bank, this is moving to this bank. Obviously, our revenue sort of didn't get impacted because just the revenue in the other bank went up, right? Now what we did was we gave all of these institutional clients direct access to our platform. And obviously, otherwise, they would come through SVB in a single sign on, but we gave them direct access. And they really used our platform, to do what? To understand the exposure, to understand the risk, to understand the compliance parameters and really they're accounting on a day-to-day basis. And so literally, people used our platform and continue to use our platform really, really aggressively. So that's how we think about it. I think we also said that including SVB, if you think about regional banks, they make up like 3% of our AUM -- or ARR, pardon me. So it's not significant. But again, we sort of work for their institutional clients. In this case, they got bought. So we turned it back to SVB. Citizens is a client of ours and JPMorgan is a client of ours. By the way, JPMorgan did really well. And if you just see the asset movements, I'd talked to some of our clients in JPMorgan and said, it's good for you almost, and they wouldn't acknowledge that, but it was, it was really good for them. And so I think we were able to get clients a lot more transparency. And your question about how do you think about growth in asset managers. Asset managers are on our platform at a level they've never been, on a daily basis, trying to understand exposure, trying to understand exposure to countries, to asset classes, to regional banks, to large banks and all of that. And that's the benefit of the cloud. It doesn't matter what the scale of inquiry into your platform is. It can scale as they needed and sort of come down from there. So I think we provided transparency. And if you look at our pipeline from asset managers, it is chasing that. It is chasing transparency where they have not had that level of transparency. So we -- is it a net benefit, not really? Is it a net negative? Not really. I think it's been going on for a month or 2 months. The only big impact we have seen is their usage of our platform has gone up dramatically and mostly on the risk and exposure side.

And all the research that we have done so far appears to suggest Clearwater is a top-notch platform for insurers, positioned to gain market share there. But it seems like in other segments, within asset managers, there is a bit more acute competition. So could you discuss what could be your competitive advantages?

Yes, sure. So look, I think that this -- I think we talk about asset managers generally speaking. We don't do a lot of work in segments of the asset management. And so there do we have competition? No, we don't even compete. So if we talk about the whole hedge fund market, we simply don't -- have never had a product, never gone after the market. So do we have more competition? Yes, but also because we're not there. We don't even have a product. But when you come to our space, which is large institutions, asset managers, accounting and reporting for that. And then institutional clients, for example, JPMorgan Asset Management, their clients, that reporting and analytics and accounting, I think we're hard to beat. I don't think there is a difference in the win rate in the segment we work in. Now if you're in the wealth -- retail wealth space, yes, is there competition? Yes, but we don't play in that segment at all. We play in a segment where you have institutional clients who need -- who have multiple desks in banks they work with. And they want a comprehensive picture or they invest across countries or they invest across a number of asset classes. And they want every day, 9:30 or several times a day, they want an understanding of the portfolio and their exposure across asset classes, that's where we are strong. And in that, we don't have any difference in win rates. But you're right, look, in equities long only, if you will, if you had a hedge fund or if you were in retail wealth, those segments, Clearwater just doesn't play in. Now the additional jump allows us to build a capability for the $10 billion asset manager. And that is a new capability. We still haven't brought it to the U.S. so much, but we did announce, I think, 2 wins at the end of Q1, and we expect that to continue to gain pace because that market is available. The small asset managers and the higher end of hedge funds, I think, is where our product -- the product would fit really well with the promise that as they grew the integration with the Clearwater, which is sort of able to do any scale of work, that integration would be really, really high.

Sandeep, I'm sure you're surprised that it took me 15 minutes to get to my AI question. So here it is. I'm interested in how you're applying AI in your existing operations? And whether you think further adoption of AI could be a disrupt or a tailwind for your business?

Yes. I am sure everybody is getting asked that, and it's going to change the world. I really believe that if we look at regenerative AI, it is going to alter everything. And people will ask me, is it going to change your business? No, no, no, it's going to change every business. I think the question is not right. I think when you think about the Internet, a lot of people said, maybe it will change my business. Oh, it's not applicable to me, wrong. It'll change it completely. I also feel that it'll change it -- make businesses more efficient, and that's a different use case from transforming businesses, and yes it's a different business case from disrupting businesses. So I think the Lyft CEO was here talking before me, you could have said the idea should be, let's go do a taxi stand and make them more efficient. So the answer calls faster. And how do they get taxis to clients faster? Yes, that would have been the improvement bucket. But really, the answer wasn't to improve the taxi stand at all. The answer was to come up with Uber and Lyft. And so I think all 3 are true. And as far as Clearwater is concerned, we are very focused on that, on how this technology will change. What is different about us, what makes us a little bit unique on our moat is not that we do U.S. GAAP, but that among our 1,200 customers, no 2 clients do accounting the same way. Everybody has 5%, which is different. They do some amortization differently. They do some bounded regulatory reporting differently. So our secret sauce has always been the fact that all these clients are just a little bit different. So if I can just give you another 1 or 2 minutes on regenerative AI because that's an interesting one on the LLM. It's already been there. The problem with LLM was it was super expensive to build. I mean if you think about LLM, you sort of have a sentence and you're trying to predict the next word, and you're going through billions of documents to come up with what the next word is, what the best next word is. And then when you figured that out, you're trying to figure the next word and the next word. And that's how you pull together the best report or the best -- sequentially the best paragraph or the summary. And that needs gigantic amount of computational power. And we just -- people like us just had no way you could do that. But what's happened now is you transfer learning, which is people like ChatGPT built that model for you and is generic. And now you can adapt that pretty easily to your use case. And Jim and I were talking about, it's like training a dog. A lot of the work is in training the dog, and the trained dog is available now. Now if you want to use it for hunting, you still need to train it a little bit more. And if you want to use it for -- as a service dog, you've got to train it a little bit more. But the basic work, the hard work has been done by several institutions. And you could do -- literally get it as a service, which many of us do. There's also this -- so I feel for Clearwater, you should be thinking about -- one more minute on it. The thing is people think about, will AI replace humans? Wrong question, I think. Will it assist humans to become massively more efficient, that is absolutely doable and will happen soon. And in that, what I mean is here's a client who wants to know how do you come up with this amortization number. Why is this amortization $21 million, not $21.2 million. A normal human being in our -- Clearwater would have gone back, figured this out, wrote up the summary and had it ready for the clients in, let's say, 25 minutes. What AI will do -- regenerative AI, it will produce the way we would want to use it, is you don't respond to the client, not the regen AI shouldn't respond to the client. What should respond to the client, give us 3 options. So I'm the analyst in about 2 minutes or 1 minute, I'll get 3 options and I click it. Yes, this one looks right. Let me do it. So you've got to be thinking about is there something we took 25 minutes, can I do it in 2? With no risk because we all understand the issues with hallucination -- and those are real, by the way, right? But the way you've got to think about this is, can I make every piece of our operation massively more efficient. I think that is there, can be done. Then there's the other issues around transformation and disruption. Those are a little bit further. But I feel like every company should wake up and address it now. ChatGPT1 was like 15 months back whenever. Every 3 months is becoming massively better. This is not something about 2024 planning Yes.

I appreciate it. No, Sandeep, very insightful. If you don't mind, I wanted to slightly change gears and talk about some of the elements of your story, which I think is underappreciated, and that's the revenue opportunity related to sort of the fact that your platform is servicing clients with $6.4 trillion worth of assets. And you have all this data that can potentially be monetized. So maybe if you could talk about what you see as an opportunity to monetize this information?

Yes. So look, we don't talk a lot about it, but I will give you what we have, and I'll explain why I think it's interesting. We have -- all of you know this, we have a single instance multiturn platform, which means we have a single security master where if all of you were clients and they were 1,200, all of your data would be on one database, it's in one database. It's like Salesforce or Workday, any of them. They all have everyone's data in one instance of the software, right? So that's point number one. So we obviously produce data every day. And so we know who's sold what, when, where, how much which tax slot, we know every detail, why is that? Because we're doing accounting on it. You can't do accounting at a high level. You have to know exactly what, when, where, how it got sold. So the level of detail we have is pretty high. And then the other point you got to think about is when we work for insurance companies and corporates, we have the global book. We don't have their equity book or their LP book or something, we have the global book. And why is that? Well, because we do accounting. And then we do regulatory reporting, and we do compliance checks. There's no sense of doing accounting for -- it's like me sending you Clearwater's P&L for 80% of our business. Nobody cares. You want the full P&L, right? So the data we have and the freshness of the data we have is a little bit outstanding. I don't know if one other competitor who has it. If you think about all of our competitors and you think about how architecturally they sell the software and how people work with it, not one of them have this in a single security master. And so that gives us insights, which is a little bit off the charts. Unfortunately, it takes a while to come up with something, which can be priced correctly and appropriately and not underpriced. And actually, Jim here is leading charge on a dedicated team, which is developing products, which would work for asset managers, insurance companies and corporates. But just to give you a flavor of what we could do is we can go to Jim who manages our money, obviously, and say, Jim, your return compared to every other client we have in our platform is in the 34th percentile. We could be that precise. And then we could say your municipal bond portfolio, that's in the 17th percentile. And the equity portfolio is in the 82nd percentile. And we are not providing opinions here. We are just telling you from the data today. And Jim's next question would be, hopefully, what is the best people doing? What are the people in the top decile doing? And we can say, you know what, their asset mix is different. They have so much in treasuries. They have so much in this. They have so much in that, and their asset mix is different. Their managers are different. So we could help change meaningfully your yield. And that is a proposition which is, I think, very, very exciting. But it's -- we launched some products this year. I think it will gain some momentum next year. But 2 years out -- 2.5 years out, I think it will be a big part of who Clearwater is.

And you've mentioned pricing and pricing accurately. Could you talk a little bit about your recently launched new pricing scheme? And how many of your customers have already onboarded on the platform and maybe underscore the retention rates, which appear to be very high?