Clearwater Analytics Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 13 speakers on the call.

Operator

Afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Clearwater Analytics Second Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen mode only. After the speakers' presentation, there will be a question and answer session. And now, I would like to welcome Joon Park, Head of Investor relations begin the conference.

Speaker 1

Thank you, and welcome everyone to Clearwater Analytics' 2nd quarter 2023 financial results conference call. Joining me on the call today are Sandeep Sahai, Chief Executive Officer and Jim Cox, Chief Financial Officer. After their remarks, we will open the call to a question and answer session. I would like to remind all participants that during this Any forward looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Expressions of future goals, intentions and expectations, including in relation to business outlook, future financial and product performance and similar items, Including without limitation, expressions using the terminology may, will, can, expect and believe And expressions which reflect something other than historical facts are intended to identify forward looking statements.

Speaker 1

Forward looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors section of our filings with the SEC. Actual results may differ materially From any forward looking statements, the company undertakes no obligation to revise or update any forward looking statements in order to reflect events that may arise after this conference call, except as required by law. For more information, please refer to the cautionary statement included in our earnings press release. Lastly, all metrics discussed on this call are presented on a non GAAP or adjusted basis and include the results of Jump Technology since the acquisition on November 30, posted to our Investor Relations website. With that, I'll turn the call over to our Chief Executive Officer, Sandeep Sahai.

Speaker 2

Thank you, Jun, and welcome to our Q2 earnings call. Allow me to start by saying that I'm incredibly proud of the entire Clearwater team for our outstanding execution in Q2. There are 4 key areas where we executed very well. One, we successfully brought both large and small clients live. And even more impressively, We saw best ever customer satisfaction and NPS scores.

Speaker 2

2nd, the sales team had a very good quarter And they continue to win against competitors who largely offer legacy solutions. 3rd, We continue to see positive impact from the commercial model we rolled out last year. And 4th, we continue to innovate and deliver products that address our customers' pain points. Let's dive into each of these. First, let's start with operational excellence.

Speaker 2

We have been investing in increasing maturity and scalability of our onboarding team and Q2 was a testament to how far they have come. AVEVA is fully live on our platform. As you know, AVEVA is a leading U. K. Provider of insurance, wealth and retirement products serving over 18,000,000 customers.

Speaker 2

They have their global assets on our platform and we provide a daily comprehensive view of the portfolio consisting of more than £350,000,000,000 in AUM. Achieving this milestone is very significant because we had to build unique functionality specific to Europe, including asset class coverage, coverage for local accounting standards and regulatory reporting for countries across Europe. With this accomplishment, we have proven to the market that we can handle the highest level of complexity in Europe. Combined with the multi country on boarding of FWD in Asia, our platform is now used by large, Sophisticated customers across the world. Other major bolides in Q2 included Amica Mutual Insurance, Greenwich Investment Management and Highmark Health to name just a few.

Speaker 2

In Q2, We saw our average go live time decrease with average time taken to bring customers live on our platform was approximately 6 months. The network effect of our single instance multi tenant platform allows us to continue improving this process and bring value to clients faster. As you all know, our NPS is one of the highest you will find in the industry And it is a metric we are incredibly proud of. In Q2, we exceeded our already industry leading numbers and recorded our highest NPS to date. To me, it says that our customers are happy with the platform, The access we provide to best practices and an acknowledgment of the care our client services and onboarding teams provide.

Speaker 2

It is a giant team effort and we are thrilled that our customers acknowledge that and place their trust in us. That allows us to continue growing with significant support from references provided by our current clients. 2nd, let's discuss the demand environment. The pain our customers feel while working with legacy systems in the industry It's significant. We consider to close deals and saw our pipeline build throughout the first half of twenty twenty three.

Speaker 2

Our growth has been fairly even across our key industries of insurance, asset management, corporates and government. In the Q2, we expanded our footprint with existing clients and added marquee clients such as Apollo Syndicate, Covenant Capital, Delta Dental OR Vioming, Finance Incorporated Limited, Intellia Therapeutics, Medical Protection Society Limited, Omnicap Group, Viridian Therapeutics, Investment Asset Mortgage Capital Corporation. We announced a strategic partnership with JPMorgan Asset Management, integrating our platform with the Morgan Money global trading platform. This allows permission users to easily navigate between both systems. The joint solution will make it easier for financial professionals to have a global connected view of the investment portfolios and empower them to make real time investment decisions on the Clearwater and Morgan Money platforms.

Speaker 2

We continue to see strong sales of our add on products like Clearwater LPX and Prism. As an example, one of our large existing insurers signed on to use Prism for reporting, which led this client to more than double the AUM with Clearwater. Europe had a very strong first half with several new wins in Northern Europe and the French and Benelux markets. This included both midsized clients and large institutions in the insurance and asset management industries. We've had several successes here in the U.

Speaker 2

S. With Jum's full front to back platform. We were also successful with an offering that paired Jump's front office suite with Clearwater for accounting and reconciliation. As you may recall, Clearwater acquired Jump with a vision to revolutionize the entire investment lifecycle and we are executing on that plan. These deals underscore the value our clients receive from both our platforms working together.

Speaker 2

We also validate our premise of an expanded TAM with the combined product offerings. Overall, Our product continues to resonate across the globe and we don't see any change in the competitive environment. Our sustained investment in our platform continues to set us apart in the market. Thirdly, on our commercial model, we continue to be pleased with the changes we drove last year and the impact it is having and can have on our growth trajectory. As you might recall, last year we made the leap from a pure AUM based model to a base plus model.

Speaker 2

We couldn't be happier with the results and this commercial model has now become the default way We contract with clients across industries and sizes. With Prism, LPX and Jumps modules, We are increasingly acknowledged by our customers as a multiproduct company capable of providing solutions across the value chain. Our strong NPS clearly helps customers feel confident in purchasing more software from us. Clearly, our approach here continues to create a win win for both our clients and for Clearwater. 4th, our aggressive and sustained investment in R and D allowed us to expand the platform to address the needs of clients in both Europe and Asia.

Speaker 2

We have invested in building products to solve the need of existing customers here in North America. Many of these efforts involve using clients as design partners And that gives us confidence that our investments will continue to pay off. I already mentioned Clearwater LPX and Clearwater Prism, but also in Q2, we began a beta program with Clearwater MLX, which is a solution designed to improve the visibility and detailed accounting for commercial and retail mortgage loans. We expect to launch Clearwater MLX in Q3. Another frontier of investment would be to bring front office and front to back functionality to the U.

Speaker 2

S. Using the Clearwater Jump platform. We are delighted that we already have North American customers who want to work with us. Next, we are working on additional capabilities, including self-service, allowing our customers to configure and manage the growth of their accounts. We are also enhancing intraday data and recon, which is sometimes referred to as T plus 0 processing.

Speaker 2

This will help us improve how we deliver same day Investment book of record for clients that need near real time visibility. We have to talk about the work we are doing with generative AI and the potential to transform and disrupt the market. You may have seen our recent press release on this topic, where we announced that we stood up our own instance of a large language model, which we are calling Clearwater GPT. We are working on rolling out new Gen AI driven solutions and dramatically improving The way we service clients. Clearwater GPT is the first solution of its kind that seeks to address the full investment lifecycle.

Speaker 2

We see this effort as both adding to the revenue growth of the company With new Gen AI based product offering and impacting the bottom line with efficiencies across our operations. I'm sure you're immediately wondering if we can predict what this might mean to our financials. Let me just say that the product is very promising and the early results are very good. But the technology is new And it is hard to assess the full impact it can have. We expect to have more details for you in the coming months.

Speaker 2

Given that our robust multi product offering caters to diverse geographies around the world, We're excited to welcome Sunil Dixit as our new Chief Product Officer, who brings proven expertise in innovating and building multiproduct platforms at leading SaaS companies. When I stop and think about these four areas, Operational excellence, demand based on addressing client pain with a large TAM, An effective commercial model and a disruptive platform, I'm not only proud of our team, but I also recognize that this is what allows us to deliver stable growth with the potential to increase margins consistently. That is what we set out to deliver and our actions and results in the last 2 years since we went public bear out the strength of our approach. We are setting aggressive goals and executing on a plan. It's frankly a great time to be at Clearwater Analytics.

Speaker 2

Now let me turn it over to Jim to discuss the financial results of the company and the outlook for the year.

Speaker 3

Thanks, Sandeep, and thank you all for joining us. We're very proud of our Q2 2023 results. Let me start with the top line and the metrics that drive revenue. In Q2 2023, we delivered $89,900,000 in revenue, which translates to 22.4% year over year revenue growth, driven by solid expansion at our existing clients and continued strong onboarding activity by our operations team. Over the last two quarters, we have completed 83 onboarding programs.

Speaker 3

And in Q2, those onboarding programs had an average duration of just over 6 months. With time to value like that, it's not surprising that so many prospects are choosing Clearwater. We reported annualized recurring revenue or ARR at the end of the second quarter of $349,500,000 an increase of 20.4% year over year. This is particularly satisfying when we look back 1 year to Q2 2022 and recall the worry over asset price value and our announced transition from AUM pricing To the Base Plus model, I expect not many investors would have predicted back then that our durable, reliable 20 plus percent growth would remain intact 1 year into the future. Today, we remain even more optimistic about our future for one reason, Our clients.

Speaker 3

Clients stay with us as evidenced by a return to 98% gross retention as of June 30, 2023. That's the 17th out of last 18 quarters for which gross retention has been 98%. More importantly, Clients grow with us as evidenced by our net revenue retention rate of 109% as of June 30, 2023. We are seeing success within our client base by doing more for our clients and this In fact, it's the true NPS dividend. We aspire to expand NRR to 115% or beyond because we believe we can help our clients do more.

Speaker 3

We've completed the foundational elements with the market acceptance of the BASE Plus model and our recent rollout of bundled offerings for the North American insurance and corporate markets. With the new bundled offerings, we offer prospects a choice between base, professional and enterprise bundles. These market specific bundles allow prospects to select the Clearwater offering that matches their sophistication and solve today's burning problem while providing a path to our expanded capabilities when they expand. Now that we have LPX, Prism and all of the functionality that JMP solutions provide, coupled with the expected launch of MLX, We have the opportunity to expand our reach within our clients. We will continue to evolve our go to market engine to focus on both new client acquisition and ad teams focused on expanding our relationship with existing clients across all of our market segments.

Speaker 3

The beat in 2nd quarter revenue flows through to our full year revenue guidance as we are raising Our full year guidance by $2,000,000 and our guidance range for the full year is $364,000,000 to $366,000,000 for 20% to 21% year over year growth. Now let's turn to profitability results. We reported $24,800,000 in adjusted EBITDA, that's 27.6 percent EBITDA margin in the 2nd quarter, which is a solid result and better than our guidance by $2,000,000 This translates to a 9% beat as our revenue outperformance flows straight through to EBITDA. Non GAAP gross profit in the 2nd quarter was $68,100,000 and gross margin came in at 75.8%, which was a slight improvement from the 75.7% in the Q2 of 2022. This is the 4th consecutive quarter where incremental gross margin exceeded our reported gross margin, illustrating that we are making progress on our path toward our long term goal of 80% gross margins.

Speaker 3

Non GAAP research and development expenses in the quarter were $23,600,000 or 26.2 percent of revenue. That is a sequential decrease of 0.6% of revenue from the R and D spend of 26.8 percent in Q1 of 2023. We expect R and D expense to trend down as a percentage of revenue going forward with the efficiencies we are achieving in R and D. For example, large programs in Europe are entering more of a steady state phase. Sales and marketing expenses in the quarter were $10,900,000 an increase of $1,100,000 or 11.5% year over year.

Speaker 3

That equates to 12.2% of revenue. General and administrative expenses in the quarter were $8,800,000 sequentially flat with the Q1. And as a percentage of revenue, G and A decreased to 9.8%, showing better leverage. On a GAAP basis, equity based compensation increased to $28,700,000 including $5,500,000 related to the Jump acquisition as the full quarter of expense from awards granted in Q1 were reflected in Q2. We expect that this is the high water level for equity based compensation expense and that it will decrease as a percentage of revenue going forward.

Speaker 3

The significant expense in 2023 Results from the granting of 3 year performance based awards in Q1. Although the awards vest 1 third in each 2024, 2025 and 2026, assuming achievement of the performance criteria. For GAAP purposes, 61% of the expense is recorded in the 1st year versus 33% as you might intuitively assume. Below the operating income line, we recorded $1,300,000 of interest income net from the investment of our excess cash balances, and we recorded $6,700,000 of year to date tax receivable agreement expense. We record tax receivable agreement or TRA expense in lieu of income tax expense.

Speaker 3

We will be a cash payer of the TRA because of capitalization of R and D costs for U. S. Federal tax purposes. Absent amendment of the tax law, we expect to pay the tax receivable agreement expense in the Q4 of 2023. Let's turn to the balance sheet and cash flow.

Speaker 3

We ended the quarter with $277,800,000 in cash, cash equivalents and investments and $49,300,000 in total debt. That results in net cash holdings of approximately $229,000,000 During the quarter, We continue to invest our excess cash in fixed income securities for excess yield. Free cash flow for the Q2 was $19,600,000 representing year over year growth of 18.5% from free cash flow in the Q2 of 2022. This includes $1,600,000 of capital expenditures. In the Q2, the conversion of EBITDA to free cash flow was at a rate of 79%.

Speaker 3

We reported a GAAP EPS loss of $0.06 per share and Fully diluted non GAAP EPS was $0.08 per share. For non GAAP EPS, we utilize our fully diluted share count for which Q2 was 252,200,000 shares. That fully diluted share count It's essentially flat with last quarter and with the end of last year and even Q4 of 2021 reflecting that there has not been shareholder dilution since the company went public. Now let's turn to guidance. Focusing on guidance for the Q3 of 2023, we expect revenue to be $92,000,000 and we expect adjusted EBITDA to be $25,500,000 or approximately 27.7 percent for EBITDA margin, consistent with Q2.

Speaker 3

For the full year 2023, as I said before, we've increased the revenue guidance to $364,000,000 to $366,000,000 which is an increase of $2,000,000 in the low and high end of the range, and represents approximately 20% to 21% year over year growth. We have also increased our full year EBITDA guidance by $2,500,000 at the midpoint to $100,000,000 for the full year 2023. That guidance represents EBITDA margins of 27.3% to 27.5% for the full year, an expansion of 60 to 70 basis points over 2022. As Sandeep noted and our numbers demonstrate, the 2nd quarter was another quarter of strong execution with reaccelerated revenue growth to 22%, solid EBITDA and free cash flow. We look forward to keeping the momentum going.

Speaker 3

With that, I'll turn it over to Sandeep to provide some closing thoughts.

Speaker 2

Thank you, Jim. As I reflect on the Q2, I'm incredibly proud of the exceptional team we have at Chewater. We remain laser focused on our mission to revolutionize the investment management industry. By every measure, our growing portfolio of product offerings Undeniably best in class. I'm particularly excited about the potential for generative AI and its capabilities to ignite new opportunities that will disrupt and transform the FinTech sector.

Speaker 2

Our team at Clearwater continues to innovate boldly, consistently meeting our clients' Ever changing needs. At the end of the day, seeing our clients satisfied with our platform And growing the assets under management matters the most to us. When they achieve their goals,

Operator

Our first question is from Peter Heckmann with D. A. Davidson. Your line is now open.

Speaker 4

Hey, good afternoon. Thanks for taking the question. Can you comment a little bit In terms of the onboarding, you said 83 in the first half and you're speeding the go lives. I guess is that How do you think about it in terms of average size of the clients? Are they getting larger or staying about the same?

Speaker 3

Sure. Thanks, Pete. This is Jim. Can you hear me okay?

Operator

Yep.

Speaker 3

Okay. Great. I just wanted to make sure I was off mute. Sorry about that. So, yes.

Speaker 3

So those are 83 programs. So some of those could be onboarding of additional assets at some of our larger existing clients, Onboarding additional products and solutions, as well as onboarding Sandeep spoke about AVEVA, You know, one of kind of top 20 insurance companies across the globe. Right? So there's there's a broad variety across those. I think what it comes down to, it's less about the number, although that's very impressive.

Speaker 3

It's more about shrinking the size and Shrinking the period of time it takes for clients to get to value, and that really comes down to a few elements. Number 1, it's the network effect, right? As we're adding more clients in different geographies and building out that networking opportunity. You're seeing that. Number 2, the onboarding team has Danae really has put a lot of effort in over the last couple of years to really Formalize and structure the collaborative onboarding process with our clients and holding mutual accountability between all of the participants in that process, the data providers, The custodian, the clients, the upstream and downstream streams as well as ourselves, principally and most importantly ourselves.

Speaker 3

And so this what we're seeing here, which we saw in the Q1 and continue to see in the Q2 is really the amalgamation of all of those elements coming together. And I think we feel proud of the accomplishments of that team.

Speaker 2

Yes, Pete, this is Sandeep. The only thing I would add is just talking about things like 6 months To go live, I'm sure you have covered ERP systems in the past. You talk about years. You talk about Several years for programs to go fully live and the fact that we talk about 6 months and how to improve it, we're just trying to provide a contrast to What the network effect allows us to do. So I do think it's super impressive just having been in the industry for that long.

Speaker 1

Okay. That's helpful. And then just in

Speaker 4

terms of Morgan Money and their global trading platform, You've it sounds as if you have a strategic partnership in place, it's going to allow users to use Clearwater. But In terms of the contribution, I guess, how do you think about that ramping? And could you maybe size a little bit about How big that client could be if you're successful in cross selling with existing JPMorgan customers?

Speaker 2

Yes. So one is that JPMorgan is already one of the largest clients we have. So that's point 1. The point 2 is that it allows people to use functionality on both platforms very easily. And that usually allows clients to bring on more and more AUM on our platform.

Speaker 2

So that's the play for us. The play is The ability to trade on that platform and look at the data on our platform, if you can do that easily, it attracts more and more clients to our platform. Now we have done that with other partnerships and we saw a sustained growth of AUM from those clients. And we also had new clients join our platform because of the ease with which they could go between these two platforms. So we think it's quite strategic.

Speaker 2

We think it continues to cement our relationship with JPMorgan and continues to grow them in the years to come.

Operator

Our next question is from Rishi Jaluria with RBC. Your line is now open.

Speaker 5

Wonderful. Hey, Sandeep, Jim. Thanks so much for taking my questions. I'd like to see continued strength in the business. I wanted to start by going a little bit deeper into Clearwater GPT.

Speaker 5

No doubt the press release sounds, I think, pretty impressive. But can you talk a little bit about some of the use cases that you anticipate seeing from Clearwater GPT? And maybe more importantly, how does that tie into your broader generative AI strategy? Because it feels like there's a really big opportunity for you to be A verticalizer of some of these LLMs and really help customers and given the data and the relationships you have in ways that they can't do themselves. So we'd love to drill a little bit into both of those and I've got a quick follow-up.

Speaker 2

Yes. Thank you, Rishi. So look, we believe Gen AI is transformative and disruptive. You can also understand that for our kind of business, we think it can have very significant and mostly positive impact on our business. We obviously launched Clearwater GPT.

Speaker 2

So let's just talk about some examples. And I think you can basically put them into 2 different buckets. One is which enhances revenue. So things which can help grow our revenue. And the second one is the ones which can improve efficiency of our operations.

Speaker 2

So let's talk about operations just first. Obviously, efficiency is important because that drives gross margin. So whenever we have talked to yourselves, we have said, look, there's 75% and there's a path And the question is, is there much more room there and we think ChatGPD allows us to think about Meaningfully better operating results. Now what exactly are we talking about? As you know, we get many, many data feeds every morning, Some 2,800 data feeds and they have to be reconciled, they have to be aggregated and normalized.

Speaker 2

Now could a significant portion be done using something like GenAI? We think so. We think they could have a meaningful impact in what we have to do ourselves, worse than what the machine can do. So we think that can be majorly disruptive. The second one is we spend a lot of our energy on client servicing and onboarding.

Speaker 2

And again, both those could change very meaningfully if ChatGPD can be successfully deployed. So both those ideas, we have sort of teams of dedicated people with dedicated leadership working on those and we expect to have some I'll be able to report some progress in the coming months. The other side of it obviously is revenue oriented. What can help us drive revenue? And there are 2 big areas.

Speaker 2

1 is just customer interaction. Natural language interaction completely changes the value you can derive from a platform. That's one, Ada. But the second one and the most exciting one is the insights you can draw. Because Chat GPT allows us Look at a very large volume of data and frankly historically going back to 10 years of what we have been doing, what insights can we draw, which clients can use to either improve yields or improve the other functions, I think it's super interesting and exciting.

Speaker 2

So again, those are two areas where we have invested dedicated teams and dedicated leadership to get after it. We already so I just want to caution one more thing, Rishi. We're obviously using machine learning already. This is just a Very different order of magnitude of what impact this could have. So we're really excited about it.

Speaker 2

We have dedicated R and D teams and Product teams working on it and have been working for a period of time. And so it's just that we are not yet ready, if you will, To qualify and say, look, this has a chance to make AD something else. We want this to go on for another 3, 4 months And then we will be in a better position, I think, to come back to all of you and say, look, here's where we think we can go with GenAI.

Speaker 5

All right. Wonderful. Thanks, Sandeep. That's a very thorough answer and really helpful. Maybe just continuing on GenAI and thinking about other potential use cases, do you think about the ability to use GenAI to make it easier for asset managers out there To migrate from their legacy solutions and onto Clearwater, right, because that's a long process.

Speaker 5

Obviously, there's a lot of data complexity involved in that. But given what we've seen

Speaker 6

a lot of companies in

Speaker 5

the space using generative ad to make migrations from legacy to next gen faster, it feels like that's a big opportunity for you as well. How are you thinking about that? Thanks.

Speaker 2

Yes. Thank you, Hishi. But yes, absolutely. I do think it can completely Change how we think about onboarding. And as you know onboarding is the hard part.

Speaker 2

And once you have done the transformation then of course Clearwater So it gives you the full functionality you could want and the agility and the analytics. And so we feel like Chen AI could transform How we onboarded. To take an example, let's say we move a client to onboard them from a competitive legacy platform. Well, we probably have done 30, 40 of those transformation onboarding exercises from that same Legacy platform. You point Gen AI to that and the next onboarding you're doing and it can do it meaningfully faster, Right, because it has learned from all those 30 onboarding exercises you have done.

Speaker 2

So we do think that's transformative. We do think it changes The risk profile of an onboarding exercise and really time to value meaningfully. So look, we think it is Actually perhaps the biggest use case when it comes to on the efficiency side of it, not on the revenue side, but just on the efficiency side.

Speaker 5

Wonderful. Thank you so much.

Speaker 2

Thanks, Trish.

Operator

Our next question is from James Faucette with Morgan Stanley. Your line is now open.

Speaker 7

Hi guys. It's Michael Infante on for James. Thanks for taking our question. I just wanted to circle back on NRR. Obviously, really impressive to see the sequential and year over year improvement there.

Speaker 7

I think migrating to this level, We anticipate it to take a little bit longer, so great to see that. Jim, is it possible to decompose that improvement between Last year's pricing initiatives first incremental attach of new products and does the recent improvement sort of Accelerate your confidence in getting to that NRR level of 115 over time, does that pull that forward?

Speaker 3

Yes. Thanks, Michael. Thanks. So the revenue acceleration from 2019 to 2022 can almost be correlated NRR moving from 106 to 109, and we do believe that is sustainable as we look into the near future. So you're right, Michael.

Speaker 3

Why is it growing? It's been obviously Primary strategic initiative of the company over the last 12 months to really build in the commercial model, Building the base plus pricing, have the default price increases flowing through, adding these incremental modules of LPX, MLX, PRISM. And that sophistication just kind of continues. We were happy to see that the improvements in NRR were across all of the market verticals that we focus into. And that improvement really comes into and those existing customers and really see the 12 months of effort across all of those pieces Bridging the gap from the 106 to the 109.

Speaker 2

Yes, Michael, I would just add that this is pretty deliberate. It's not something we say, hey, let's do something, we got something. No, we think that these four things you can run that Jim walked you through. And if you continue to improve in each of these, You can sort of get better sequentially. And so do we think the 109 number is now a new normal for us?

Speaker 2

We think so. Does that improve the path to 10115? Absolutely, compared to when we had this first discussion, Michael, we had 103, It felt better at 106%, which we said to you was sustainable and we are up at 109%, which we think is sustainable. And so we think it is It makes the 115 more insight. It doesn't mean we're going to get there next quarter or in the next two quarters, but how we get there And the elements we're going to use to get there are defined now, we know.

Speaker 2

And it's just that in many of those you're still in the second or third innings of a game. And the multi product strategy, for example, we talk about LPX, we talk about MLX, we talk about Prism, those are still second, third innings. And you just have to let it mature. And as they mature, it should continue to push that number up. So we feel really good about the path we are on here.

Speaker 7

Makes a ton of sense. Appreciate that. Maybe just pivoting to Jump Specifically, I saw the commentary in the release surrounding the pairing of Jump in the front office with Clearwater in the back office. How powerful is that cross sell motion? And is there a particular client type or client size that that pairing would be most applicable for?

Speaker 2

Yes. Thank you. Look, we all get quite excited about Just the partnership with them and Paris is just exceptional. So let's just talk about specifics. 1, Is JMP's ability to compete in the French market against larger players much, much better?

Speaker 2

Clearly, Clearly, they're winning more deals in the French market because they are a part of this larger organization. 2nd, Ability to sell front to back in North America for small asset managers and midsize asset managers? Absolutely. This is something, Michael, it's clear what I would not have been able to do. But now we have the OMS and the PMS and the portfolio management system and the accounting and all of that.

Speaker 2

So just end to end market, which we could not compete in earlier works and therefore increases TAM very meaningfully. The third one which is the one you pointed to is perhaps the most exciting which is can I take the jump front office modules and pair it with the Clearwater platform, either for new prospects, which is the one we were talking about, or To go back to all of our asset owner clients who already have the Clearwater platform and then provide the front office More deals to them? So again, we've had success there. That's exciting. And finally, Jump brings capabilities in A unit linked fund out in Europe and we've been successful with that also.

Speaker 2

All of this in the first half. So look, we think it is Really good progress. We again think unfortunately that is still in the early innings, is it still the second, third innings What we could do with Chump? Yes, I think it is.

Speaker 7

Thank you, both.

Speaker 2

Thank you. Thanks, Mike.

Operator

Our next question is from Jackson Ader with MoffettNathanson. Your line is now open.

Speaker 6

Great. Thanks for taking our questions guys. So the first one, actually, why don't we stick With the kind of the AI line of questioning, I think it's pretty clear that the architecture and infrastructure being cloud based versus maybe some other competitors that are not lent itself already to the use of AI and machine learning within your own products That kind of created an advantage, but is there any reason why, Sandeep, you said it yourself, this generative AI is a different thing and it's Kind of customer facing. And is there any reason why you think that you might have a similar advantage Over your competitors when it becomes more about customer facing and maybe layering a GPT on top Something that you already have?

Speaker 2

Yes. So, Jackson, thank you for the question. Look, I think It's super valid question because it certainly opens up opportunities, frankly, which I did not think was there about a year back. So look, the core of all of these AI technologies is the quality of data you have and the accessibility to that data, Right. If we don't have the data in one nice structured way, it makes it much harder, right?

Speaker 2

So should that Meaningfully improve our ability to do reconciliation, ability to do Onboarding client services, yes, I think those are obviously there. But what you're asking about is, can you think about new client facing Applications and I would just say that the answer is a very resounding yes, Because it is specific to our client's data. So let me just try and define that a little bit more. Look, if we genetically talk about returns, That's interesting to a certain degree. But what we can do is we can talk about returns specific to a client's portfolio.

Speaker 2

So we can generate insights with specific reference to what our clients portfolio looks like And what they did yesterday and what they did last week and what they did last month and based on that client specific portfolio, we can come up with Ideas and recommendations about what they should do and shouldn't do. Now this is a line of thinking we were we did not have about a year back. But this does allow that and that's why I think it is exciting on 2 different levels. And that's why I tried to distinguish between look, revenue growing, value adding to the front office is a different game versus efficiency oriented, which is a different game. I'm not saying one is more exciting than the other.

Speaker 2

Both are very significant for us. And Our commitment and dedicated leadership behind all four of these initiatives is already there.

Speaker 3

Okay. Yes, that's

Speaker 6

great. All right. Switching gears to maybe we're getting past The first kind of major waves of the base plus anniversaries here. And I'm just curious, just general feedback like how are customers feeling about pricing increases maybe versus what they would have realized with AUM drift, and then similarly, how you guys view, just basically how this 1st year renewals or anniversaries are going relative to last year.

Speaker 2

So I think Jim can comment on the numbers here, but I just want to tell you, it's a non event now. Almost all All new contracts don't depend on what the size of the industry. They are on the new commercial model. There is Frankly, I don't think I've heard resistance to that over the last 90, 120 days. I don't think I've heard of 1.

Speaker 2

And so it's now just the way we do business. I haven't heard of pushback from clients. I haven't heard back or heard anything to the contrary. I don't know, Jim, would you add some of that?

Speaker 3

No, I think Remember, Jack, when we went through this process, right, we wanted to simulate the experience that our clients were always getting, right, through this kind of normal growth, right? We weren't we were trying to make this a win win. And so I think that that as we anniversary these and continue through this process, this isn't It's obviously a much more automated process this year than it was when we were kind of going through that last year and kind of making this evolutionary change. But I think we

Speaker 8

Sandeep always says to me, Jim,

Speaker 3

why didn't you do this sooner, you idiot? You know? No. No. He doesn't say that.

Speaker 3

I'm just I'm giving him a hard No. I think what we've learned is it has worked the way we had hoped it would work and I think the outcomes have been good. Okay. All right. That's great.

Speaker 3

Thank you.

Speaker 2

Thanks, Jackson.

Operator

Our next question is from Dylan Becker with William Blair. Your line is now open.

Speaker 9

Hey, gentlemen. I appreciate the questions and apologize for repeating anything. Jumped on late here. But I guess starting with Jim maybe or Sandeep as well, I guess, but nice net dollar retention number there, Cross sell, it seems like John's kind of starting to gain traction in a number of these. I guess, how much of that too is a function of some of the recent kind of sales segmentation that shipped to Hunter Farmers And really some of that domain expertise that's prioritizing again kind of the particular customer needs in each of those particular industry verticals.

Speaker 2

Look, I would just say, thanks for the question here about The impact of jump on our revenue is very muted, right, because you obviously go sell these deals that take a while to onboard And then they come out and they start to get ARR, right? So I think the results on the revenue beat is very muted. And would that improve over the next few quarters? Yes, absolutely. But I don't think you should look at the Q2 results and ascribe much of that to The cross sell showing up in the revenue line or in the profitability line.

Speaker 2

I think all of the commentary about jump about the deals you're But doesn't necessarily convert to revenue that quickly. Sorry, can you maybe add something to that?

Speaker 3

No, I think that we so Sandeep has mentioned, we're A bit in the early innings with respect to LPX, Prism and these areas. And I think we're also in the early innings As we think about evolving the go to market engine that we have, I think we're obviously these results reflect something we should continue to do. And so we will continue to lean in to being more thinking about these sales opportunities or sales channels discretely and further segmenting. The thing we've learned time and again is as we focus and segment, the results become better.

Speaker 9

Got it. Okay. That's super helpful. And then maybe to just quickly touching on kind of the competitive Gabe, you did have a competitor internationally that was acquired. I wonder if you've seen any opportunity situations kind of arise Off of that, any displacement kind of commentary as you are kind of looking to kind of build out your own kind of global footprint here?

Speaker 9

Thanks.

Speaker 2

Yes. These are tricky things to comment on. But I would just say that on the margin, we feel the competitive environment has in Europe has improved Very meaningfully for us. And so I would just say that and that reflects a little bit in the pipeline build we have seen in H1. And so we are really happy with the transaction that was announced.

Speaker 9

Fair enough. Okay. Thank you, guys.

Speaker 3

Yes, overall, we continue to see we think we have a really strong competitive position. And there's things that we have between the multi tenancy, the single security master, that allows everyone to be the most up to date.

Operator

Our next question is from Gabriela Borges with Goldman Sachs. Your line is now open.

Speaker 10

Hi, this is Callie on for Gabriela. Congrats on the quarter and really strong numbers. First one from me, Sandeep, really enjoyed the Forbes article you wrote on GenAI, The impact you're expecting to see in FinTech, you talked a bit in that about the data accuracy issues that's generated by it. And just curious like what your team is doing to address those issues at Clearwater?

Speaker 2

Yes. So thank you for the question about that. We obviously deal with Investment Accounting, and we can't just be right 95% of the time. We have to be right almost all the time. And as you know, our Chief Accounting Chief Client Officer, Subhi Sethi has a very large background in quality.

Speaker 2

And she approaches all of these things with trying to be right the first time. And so for a while though, I believe that the Gen AI Applications we talk about will be with the human in the loop, right. So we don't expect quite yet To let JNEI respond to customer clients or actually perform a transaction. But recall that when you think about what an individual does, it takes a lot they take a lot of time to research something, came out with Alternatives then come up with then a potential solution and we expect Jeneai could just produce alternative 1 and alternative 2. And at that time, the human in the loop could go and pick, put on a one and that helps train the model of course.

Speaker 2

So we think it is still human in the loop because of the data accuracy concerns. I think there could come a time where for a certain class of problems And class of questions, you could have the model respond directly, but we do think right now in our thinking it isn't about 100% improvement in efficiency. If we can get 70%, we can get 50%, that'd be great, right? And so we think more about that kind of approach rather than we're just going to eliminate all function or all human trash.

Speaker 10

Yes, that makes sense. Thank you. And then second one for me is just how are bookings trended in the first half of the year Relative to 2022, you're talking a lot about the visibility you get in the business, your bookings can be very forward looking. So we create any insights The past 6 months and then any differences you're seeing in North America versus international?

Speaker 3

Sure. We don't see any change in the overall competitive environment. As I think Sandeep just mentioned on the margin, the competitive environment in Europe has improved. And so and I think that helps. The pipeline has grown aggressively over the last 6 months.

Speaker 3

And we're really excited by the number of deals in the pipeline, especially those deals, what we would call our Additional product deals offering there? I think we're seeing dividends from announcing the AVEVA go live and we're seeing a benefit in Europe potentially there. And really in the first half when we look back on it, I think we feel the same way. We've always thought it was nicely balanced between back to base and new logos. And last year, we closed 2 mega insurers.

Speaker 3

This year, I think we expect to do similar or even better in that environment. So I think we feel really good about Our opportunities there.

Speaker 2

Yes. And our rates reflect that. Obviously, there is a raise reflects the fact that we think we are in a good position. But I did want to just point out that our pipeline has surprised us, that's the growth of the pipeline. And I do think that people have a lot of work to do with legacy systems and that movement I'm hoping continues to accelerate towards Companies which can provide leading technology and we think ours does.

Speaker 10

Great. Thank you and congrats again.

Speaker 11

Thank you so much.

Speaker 3

I think that's are there more questions?

Operator

Our next question is from Michael Turrin with Wells Fargo. Your line is now open.

Speaker 11

Hey, it's David Unger filling in for Michael Turrin. Thanks for squeezing me in. Just one for me. Guys, I know the Jump acquisition wasn't too long ago, but Just curious your appetite to add additional products or go deeper in a particular geo. You've made some comments tonight on Europe.

Speaker 11

So the appetite to do an acquisition that's perhaps harder to build organically. Thanks.

Speaker 2

Yes. Thank you for the question. Look, I think absolutely there's appetite to do more. And if I can quickly just tell How we think about it? We think of Jump as having provided a good proof point.

Speaker 2

There's lots of work to be left to be done And there's a number of things you have to do, but it does provide a really good proof point that there is a value to our net promoter score. And it's quite simple. The value is that clients want to do more with you. So there's something we have to develop which will take too long. Pivoting and doing an acquisition to bring that capability sounds like a good way to go.

Speaker 2

So I'll just make one more point here that what has not changed? What has not changed is We have a pretty high bar for doing an acquisition. It must expand, help us expand geographically. It must help us expand functionality and then what has changed. So after Jump, what has changed is 3 things.

Speaker 2

One is, we have a much sharper focus on understanding the current customer pain points beyond investment accounting, but sort of adjacent to investment accounting. So that's one thing. Second thing is our ability to cross sell The products from a potential acquisition is a massive and clear imperative because that also helps as you can imagine the NRR, Right. And the third one is, we really feel we are ready to lead globally. And so acquisitions that can help us lead in a market by us being able to provide end to end functionality using a platform, I think are very interesting now.

Speaker 2

Would have been less interesting 3 years back when we might have been somewhat more tentative about Trying to lead an entire industry in a certain function. So, yes, those are the it's very similar to before, but it does reflect a little change in attitude about

Speaker 11

Always appreciate the detail Sandeep. Thank you.

Speaker 2

Thank you so much.

Operator

Our next question is from Brian Schwartz with Oppenheimer. Your line is now open.

Speaker 12

Hi, Sandeep and Jim. Thank you for taking my question. Just one question here, very high level. Sandeep, just how you're thinking about the macro environment heading in second half of the year? It looks like the business Yes.

Speaker 12

You know, did well in Q1. Looks like the business did even better here. Q2, you gave us insights into all the exciting initiatives and what's going on internally on sales efficiency in the pipeline. But how about just what you're saying in terms of cycles And just buying patterns from the end market, has your view about The macro environment in the second half, has that changed at all since last time we spoke 3 months ago? Thank you.

Speaker 2

Thank you so much for that question. Look, I think our thinking is that If you had talked to us in January or sometime like that, we were worried about the environment becoming worse. At this point, our sense is It's not going to become much worse. We also don't expect much improvement right now. So in our planning, We're assuming you just sort of status quo, there may be a little bit of moving up and down, but it is different from how we felt 3 months back And we felt we are reasonably worried about how the economy may play out.

Speaker 2

So we feel a lot more confident about that. It's also true that we have the new commercial models that helps us mitigate some of the risk. So that also increases the level of confidence we have in our planning. And so that's how we think. We just don't see much improvement.

Speaker 2

The only other point I would make is that when you think about AUM, Just across the board, we feel like the markets have been quite stable. And so we feel look at this point, we feel pretty good about The market is. But our forecast and our guidance and all that doesn't include any improvement in the economic conditions. We just don't see that yet.

Speaker 8

Thank you.

Speaker 11

Thank you so much, yes.

Speaker 3

Thank you.

Operator

Our next question is from Yoon Kim with Loop Capital. Your line is now open.

Speaker 8

All right, great. Thank you. Congrats on another solid quarter. One question for me as well. Can you just talk about how the mix of asset types is changing between, I guess, fixed income, equities, alternative investments?

Speaker 8

And How has that mix changed providing any pricing uplift? Thanks.

Speaker 3

Yes. So broadly, the mix is staying consistent. But like let me give you one little nugget. We talked about MLX And how we're teasing on that, so that's kind of to help with mortgages. Just for context, as we were sizing that opportunity and looking at the assets on the platform, We have north of $500,000,000,000 in mortgage related assets on our platform today.

Speaker 3

So that's just kind of like one little sliver. As you see more and more of these types of alternative assets, mortgages, Derivatives and those sorts of things and structured products broadly. We continue to see kind of That trend with fixed income and structured products to flow through. And that's why we're doing LPX and MLX and moving down that path to provide additional alternative asset coverage for clients beyond the investment accounting for those assets.

Speaker 2

Yes. And I would just try to say that if you just look at the overall platform

Speaker 3

I think we're at time or a little over.

Speaker 2

Yes, and I'll be are there any other questions? There are no

Operator

more questions. So I'll pass the call back over the management

Speaker 2

team. So look, I just want to thank you all for your interest Our company and the continued interest frankly and I'd also like to do a plug for Investor Day, which is coming up on September September 7, pardon me. And I hope to see many of you there. Thank you again.

Speaker 10

Goodbye.

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Earnings Conference Call
Clearwater Analytics Q2 2023
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