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

Yes. Perfect. And then the Wilshire acquisition that you mentioned. It feels like it was an important product that some of your customers really wanted. But any other strategic decision why you decided to buy that business now?

So look, I think all of us will agree that risk and compliance and risk and performance is a big part of the TAM. So you have to try and address it. And frankly, we were inclined to just develop it ourselves. And it didn't go that well. The client design partners were very much about that, and we said, why? And then you have to think about what does a risk model do? It forecasts the future of the risk to the portfolio when certain events occur. So when we're developing and people said, okay, we have to adopt it. And then we have to try it for the next 2, 3 years, let the cycles play out and then adopt it and get credibility. So this felt like a 5-year program. And we were like good Lord. We can't wait 5 years. And so we said, okay, let's scan the market to see what's available, and we found 3 or 4 companies which are in this space. And Wilshire by far had been most time tested, I think, just given the history with the Wilshire index and all that. So -- and we were able to do a deal, which was a carve-out. And it's super tested at all kinds of scale. It doesn't mean there isn't a lot of work to do. I think there's a lot of work to do on it. But it just fit really nicely in sort of us trying to develop it over the next 5 years. So again, it fit really nicely. And so we just moved ahead with it.

And how do you plan to balance organic growth versus M&A going forward? What sort of cadence of M&A should we expect per year?

So look, our thinking right now is that we -- obviously, all of you know we have room in our P&L. So there's no sense, I think, at least, in expanding our P&L much faster or getting to better EBITDA numbers. We are at 31%. We thought we would be at 29%. We're not going to artificially suppress it, but the point is that we have enough money in the P&L to go invest in growth. And it is about growth. So why not continue to invest in growth? And so we don't find the need to sort of in our head, say, we need to balance these 2 things. Yes, we are going to go into Asia much more aggressively because we can do that while growing the bottom line 200 basis points or more. We're going to go after Europe much, much more aggressively because we feel we can do that without -- while continue to grow EBITDA really quickly. Long term, though, Alexei, best SaaS companies will balance these too. So you would typically think about new logo versus back to base as being equal, right? So they try and balance these 2 at about similar numbers. And then sort of do M&A on top of that is how people have thought about it. Our M&A right now is very much IP driven. It's not like we got to need revenue from Wilshire. I think we'll get like $4.5 million this year. So it's not about the revenue. It's about can we get that capability and bring it to market. So again, highest level, we think pursue all the vectors of growth, which are efficient and responsible without saying I need to bleed more into the EBITDA bottom line. That's number one. Number two, sort of switch with some time into M&A. We hired, as you know, a person who's done a lot of M&A across the world in these markets. We've also hired someone who headed up M&A for Guidewire, and he's a really strong executive. So these 2 are approaching M&A much more programmatically than we ever did. We were very transactional. So we we're looking for a risk system. Let's go look. And so it wasn't run properly and professionally. So should we expect one or 2 deals a year, yes, I think we would definitely want to do a couple of deals a year. But we have to be chasing either capability here in North America or geographic footprint in Europe and Asia. It can't be just M&A. We have really no interest in just doing M&A. It don't make sense.

No, absolutely. And in terms of the comment that you made earlier in the conversation around only addressing 1 quarter of potential take rate at the moment, 1 bp versus kind of 4 bps. What are the components that you feel you need to add in order to get to a higher take rate? And do you feel like are there any components or expertise that is missing still in your portfolio of services?

Yes. Always going to get a simple straight answer. So look, we do the accounting, right? So we think about LPs, which we have spent so much money and energy on. We were always doing the accounting for LPs. And that's not hard, right? You get these quarterly statements, you take 2 numbers from there, put it in the [indiscernible] compared to what the price was earlier, and you can account for that quite easily. But that's not where the pain is. The pain is in 200 accounting statements coming every quarter. How do you integrate that at a component level, not at a high level and sort of find out exposure to something across all your LP investments. So the point here is that we think you've got to be thinking about the biggest portion of this take rate comes from alternative assets, middle office and back in the front office. So you will see us continue to be pretty aggressive about building solutions for the middle office, not just accounting of these, but the middle office, bank loans. And you think about private debt, private credit. All of those, the problem isn't just the accounting. The problem is thousands and thousands of papers and documents and agreements, which have to -- you have to make sense of. And so our -- where you'll see us push really hard is alternatives, but in the middle front office, you'll see us push into risk and compliance in a big way, which has also got a fairly significant TAM. You'll see us push much harder in end-to-end front to back sort of systems, OMS/PMS. So we feel we have got those, but we also feel we have a lot of work here, Alexei. It's not like, okay, we have all the scale and asked a question of just execution. I think we're going to have to continue to invest in R&D which is why we have said at least at a dollar level, we will continue to invest in R&D. But as a percent of revenue, that will sort of decline as it did in Q1, and it will continue to decline out into 2024 and '25.

Sort of from more high-level financial projections perspective, I think a lot of investors got used to very consistent outlook of 20-plus percent top line growth. This year, you're guiding somewhat lower than that typical level. Can you maybe discuss which parts of the business or more visibility versus those that have some of an uncertainty, especially in this year?

Yes. So look I think the last guide was $440 million if I remember correctly. It was $440 million to $442 million or something like that. So that is roughly 20%. I thought the midpoint is 19.6% or something like that. So I think we're close to the 20%. But why do you see a little bit more conservativeness in the guidance in Q1 and so on? Is -- the clienteles becoming larger clients. It's just happening. You can sort of see that if you look at last year, our revenue grew 21.3%, if I remember correctly. But the $1 million clients grew 28%. And when you have larger clients, there's a little bit more -- it's a little bit more difficult to predict exactly when they get live. And so at a quarterly level, you'll see a little bit more constraint in trying to forecast accurately. And -- but on an annual level, we feel really confident about where we're going to end up. So that's how it is. Now Q1 was a little richer than we thought. I think many of you have asked, what the hell? What happened? Yes, it's just that one of the clients was supposed to go out in April 1, they went live a little bit earlier. Churn was lower by 1%. It's never been that case. So we outperformed Q1 a little bit, not a little bit a reasonable amount. We feel good about the annual numbers. We just feel a little bit more cautious about quarterly numbers. And I think we don't expect to, but we just feel there's a little bit more lumpiness in that. And that's because we have just larger clients whom we were just harder to predict exactly when they go live.

Yes, absolutely. Can you walk us through getting to the 115% NRR figure that Jim outlined last year?

Yes, Jim give T-shirts. I don't know, 115%, just to make sure. Look, I think that the current growth rate is if we can get to 20% and if we can expand gross margin to 80% and get EBITDA from 31% to 33% to 30%. I think this is a good trajectory. We like it, and we think we can execute to that. But I do think the NRR 115% makes us a different company. If we can sustain we get to NRR 115%, I think it makes us a different company. So we think it's strategic. So what are the elements of that? Basically, start with the 100%. We lose a couple of points on churn. So you're down to 98%, right? You get 3-ish percent from price, a little bit above that. And then for us, the prices of the assets grows every year roughly by inflation a little bit more. And so the prices of the revenue sort of goes up by that much every year. And then finally, you have gathering more assets within an asset manager. So we have the JPMorgan conference, but you get to JPMorgan asset management, then you can do work with other groups and wealth and things like that, and so you can gather more assets, which gives you mid-single digits, if you will. So that gets you to the 108, 109, somewhere there, you can sort of get down on a consistent basis. So how do you get to 115%? And that's why you see us talk so much about new products. I think the answer has got to be, we have to come up with 2 or 3 new products every year, which gives us a couple of points, right? And so if we can get 5%, 6% from new products, that's the path on a sustained way. Now if we only have 3 products, that's pretty risky. So we got to have more products, 8, 9 out of which 2 or 3 will fail. One or 2 will underperform, but 3 or 4 will do well. And if we can continue to run that through the innovation engine, then you get to the 115%, right? So we're happy about Q1, Alexei, but you don't see us celebrating because I think it's going to be a little bit -- the journey is going to be a little ragged til we get some volume. Once you get volume that is a little bit more sustained. You understand the pipeline movement, you understand all that. Right now, it's just, yes, that was great. And we don't yet feel like I can tell you that it is going to be x in Q2. I just couldn't say that right now. By the end of next year, first quarter of the following year, we expect to be 115%.

And to get to that product release cadence, I think you mentioned that 60% of your R&D capacity has now been freed up. Can you elaborate on sort of what parts of the business you're mostly investing that R&D capacity into?

Yes. So look, we spent a lot of energy and a lot of money on movement to the cloud last year. And that was very important for several reasons. One was you can't keep scaling by adding hardware. In our business, all of the data comes in the evening, not all. A vast majority of the data comes in the evening and they have to be ingested, reconciled and then the volume goes to 0, right? And so you always have to invest with the peak. It's just not the doable model, right? You'll always be having to buy enough hardware and all of that to go to the peak. So the cloud made a lot of sense. So what we did, of course, was we moved fully to the cloud. We got that done, I think, in November of last year. And that number, 55%, 60% of our team worked exclusively on that for 1.5 years. And when they came up after that, then we were able to take that whole team and sort of switch it because you certainly don't have to do rack and stack. You certainly don't have to do nondifferentiated heavy lifting. All of those people, which are on a project got done. So we took the 60% and pushed them all on innovation. And the way we did it was, like I said, there were some ideas which are this $25 million, $50 million, some are $100 million. We allocated teams to it. They are being judged on booking because R&D, all those things, they're doing great work, and they are. So -- but the point here is we care about are we getting a return which customers are willing to pay for. So if you're developing something that's fantastic, but only if customers pay for that, what you develop, do we consider. So that's how we think about it. We think you bring those 2 things together. I would not say that it's all mission accomplished, it's not. Because our NRR is not 115% yet, but I do expect over the next 6, 6.5 quarters to get to this good rhythm of new growth.

Absolutely. I'm happy to open the floor for questions if anyone has any. So at least for me, a big part of your story or your strategy has been that your single instance, multi-tenant cloud is sort of a core component of your business. I'm just wondering, as you grow through acquisition, you move to the front office. We're adding new capabilities and functionalities. How does that fit into that strategy? I mean to what degree is there integration? To what degree are you operating in separate clouds? How does that work?

Yes. Thank you for the question. Look, I think it's really -- that's a real constraint when we go out and look for acquisition goals, right? So I just want to give you 1 minute on single instance multitenancy. The whole point is that if your portfolio is with us, we don't process your portfolio. We process the securities you owned and then bring it to the other side. The benefit being with, if you were there and you shared securities, we process it at one time, right? And that's where you see the gross margin continue to go up because for every new client, you process less because more and more of these securities are there, more and more custody connections already there, more and more data sources are already there. So that is why -- there's a religion there. If you mask with that, then you're starting to go into this I'm buying assets trying to put it together and you're like everybody else. And you lose the biggest value is, I can give you a comprehensive view of your global assets everywhere in the world every day. That is a value proposition. So let's talk about each one. So when you talk about Wilshire, they are a risk modeling company, the moderate risk. So what happens is we take the data, we push it out to Wilshire and get the data back with the calculations and the risk. But notice we haven't changed the data. We've got the math from that model and back. How else do clients do it? The other accounting -- pardon me, the other risk engines in the world and people would do that same thing. They would take Clearwater data, they would have us push it to that engine, get the calculation and bring it back. So it hasn't changed. It hasn't moved the purity of our infrastructure about data. So it really matters. If you think about the next one, which you said quickly about JUMP is like the front-to-back system. Yes, but that's trading. So when you talk about auto management system and portfolio management system, we don't -- we never did anything with that. We take the trading data when it gets traded into our system, and that was a starting point, right? So in the evening, end of day, we would take all the trading that's occurred. Go to the custodian, go to the market sources, bring it all together and process it. So again, nothing has changed in our -- the flow, and we think about it. So I think that's the thing. We have to be super careful that we don't create multiple data streams and get into the same mess of I do 80% of your book. Some other systems do 10% each. Because then you're back to -- this is how you will kill the system. So yes, we have to be -- and it does limit us, like I'm not going to sit here and say it doesn't limit, it does. Because you can't just buy something because you like it, you have to think about how the data will flow and how will the sanctity of this infrastructure we kept. So yes.

And we had, obviously, one of your competitors here at our conference yesterday, SS&C. There are obviously a number of other big competitors like Aladdin that also operate in the space, State Street with their PAM product. How are you generally feeling about the competitive landscape? Has it changed incrementally in the last 12 months?

Yes. Look, look, they're all great companies. We are a small bit company, so I don't want to get ahead of myself. But I do just want to say that our -- the thing we look for. One is our take rate. so like price. And I think we -- in the latest filing, we were saying that it's 2.35% higher than last year. So I think the price has been maintained, and we can maintain it at an aggregate. Do we have some deals where we lose money? Of course. But at an aggregate, we had 2.35% higher. So that was one data point. I do think our win rates have changed at all. So I have a lot of SS&C has done and BlackRock does and State Street does. But I do think, competitively, if we go up on -- I guess one, we will win 80% of the time we add a proposal. There is 0 question about that. And yes, we do lose 20% of the time and 15% of the time is because they decided not to change, and that may very well be an SS&C product and they say, no, it's not compelling enough or they may say, it's PAM, it's not compelling enough. And so that's how I think about the competition. I don't think that number is budged, and we have been reporting this for so many quarters now. And so I don't think the number has changed. I think our challenge though is we shouldn't be -- I don't want to get too happy about our challenge or about this stat because we have to get clients to move. That's our job. If they come into the market, we will bloody win, but they have to come to the market. We have to instigate it. We can't be waiting for, oh, in every 10 years, they'll come up with an RFP. It's -- then we fail. We will continue to do what we're doing today. So the more we can instigate the market to go out and look, the more we win. But I do think the market has got more asset owners, asset classes and more regulation, more risk. So maybe everybody is growing. It's totally possible.

Thank you very much, Sandeep. It's been always -- as always, great to have you on the conference. Appreciate your time.

Yes. Thank you, everyone. Thank you all.