Clearwater Analytics Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 1, 2024

There are 10 speakers on the call.

Operator

Thank you, and welcome, everyone, to Clearwater Analytics Q1 2024 Financial Results Conference Call. Joining me on the call today are Sandeep Sahaid, Chief Executive Officer and Jim Koss, 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 conference call, 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 limitations expressions using the terminology may, will, and expect and believe and expressions which reflect something other than historical facts are intended to identify forward looking statements. 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 statement. 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.

Operator

For more information, please refer to the cautionary statement Lastly, all metrics discussed on this call are presented on a non GAAP or adjusted basis unless otherwise noted A reconciliation to GAAP results can be found in the earnings press release that we have posted to our Investor Relations website With that, I'll turn the call over to our Chief Executive Officer, Sami Sahai.

Speaker 1

Thank you, June, and thank you all for joining us. Building a durable business that grows consistently while improving gross margin, EBITDA and cash flow has always been our stated endeavor. I'm pleased to report that Q1 2024 delivered on all those goals. Revenue grew 21% year over year to $102,700,000 in the quarter, and our EBITDA grew 42.9 percent year over year to $32,200,000 or 31.3 percent of our revenue. Let's discuss revenue growth, which was purely organic in some more detail.

Speaker 1

It starts with NPS. We believe our NPS scores are industry leading, and we have taken to reporting it as 60 plus because the numbers are even higher. As a direct consequence, we had incredibly low churn and gross revenue retention grew from an already outstanding 98% to an incredible 99%. Next, the revenue growth was widespread across geographies. North America grew 20% and Europe and Asia grew faster to deliver the aggregate 21% growth.

Speaker 1

ARR growth year on year reaccelerated to 19.3%. The multi product journey continues to gather momentum and new products introduced over the last two quarters delivered solid wins, contributing to an NRR of 110 for the quarter. The Clearwater Jump platform had a very strong quarter and added 6 significant clients in the quarter. Finally, our win rates continues to be 80% when a proposal is written and stands testimony to the disruptive power of our platform. Our plan for sustained growth is founded on 2 strategic pillars: number 1, continued acquisition of new logos across an increasing breadth of industries and geographies and number 2, growing NRR to 115.

Speaker 1

Let's take some actual wins in Q1 to substantiate the progress we are making. We welcomed a publicly traded healthcare company with multiple subsidiaries and $40,000,000,000 in AUM to the Clearwater community this quarter. Their decision to transition to us came after growing frustration with their previous legacy technology provider. An on-site demo followed by an RFP process demonstrated our ability to comprehensively address multiple asset classes on a single instance multi tenant platform. Several reference calls that attested to our ability to onboard efficiently and provide exceptional service seal the deal.

Speaker 1

Our ever growing solutions for alternatives continues to help us win deals and do more with current clients. We continue to see growth in these assets on our platform. Our newly introduced innovation, the Clearwater Intelligence Console or Quick LPX solution, our generative AI based solution for LPs, is now delivering investment insights to our clients on demand. Institutional investors can leverage Quick LPX to easily extract actionable insights from accounting data and performance metrics, even translating general partner documentation into 96 different languages. Let's discuss our recent win driven by our capabilities in alternatives.

Speaker 1

1 of our clients have been growing very rapidly where the complexity and size of the operations outpaced their ability to manage investment operations effectively. An acquisition added a significant number of LPs to the portfolio and they relied on a legacy platform for its processing. To get a comprehensive picture of the portfolio, they would have had to build a brand new data warehouse. A detailed demonstration of our platform showcased how Clearwater could streamline their processes for all asset classes into 1 single instance multi tenant platform. They decided to adopt Clearwater LPX and Clearwater LPX Clarity, in addition to the Clearwater core platform that they had already been using.

Speaker 1

We have discussed Prism many times before. This product has become a real winner for us across geographies and market sectors. We signed Erst Asset Management, part of Erst Group Bank AG, one of the leading asset managers in Central and Eastern Europe, managing €70,000,000,000 in asset for a broad client base, including pension plans. They join our fast growing community of European buy side clients. This win demonstrates Clearwater Prism's uniqueness and its ability to deliver a comprehensive view of their clients' portfolio, attracting asset flows that are so vital for asset managers in this challenging market.

Speaker 1

Talking about international markets, we signed new contracts in APAC, Germany, France and the U. K. All in the same quarter. We feel really good that the new leadership we announced last quarter is already adding value. We have identified new pockets of applicability for our platform and are excited about the build up of our pipeline.

Speaker 1

I'd like to talk about Clearwater for stable value funds. In Q1, we proudly announced that T Rowe Price selected that platform to support the firm's growing stable value fund business. The core platform already addressed a vast majority of the need, but a purpose built addition for that market allowed us to address the complex needs of stable value funds, streamlining trade ticket processes for investment contract issuers and other third parties. Stable value fund providers will benefit from a unified SaaS solution that offers daily reconciled investment data to both front and back office teams. Following up on that win, we now have another significant client on this platform.

Speaker 1

We also introduced Clearwater for pooled funds this quarter. It equips state treasuries and the pooled participants with a user friendly web based portal that integrates seamlessly with Clearwater's accounting and reporting platform. Again, a vast majority of the need was already addressed, but we have added a purpose built solution to address the specific needs, already regarded as a best in class investment accounting platform for state treasurer's offices, our new participant portal simplifies navigation of local government investment pools, providing participant portal logins and statement preparation all within one platform. One of Clearwater's jump platform wins is a company based in France and Luxembourg that manages assets including equity, fixed income and private debt. Prior to partnering with us, they lacked full functional coverage for front, middle and back office operations and depended on extensive manual processes.

Speaker 1

Clearwater Jump closes these gaps by enhancing data accuracy, reducing manual processes through automation and providing regulatory compliance. Another client specializing in fund and wealth management, primarily in equity and fixed income, embraced Clearwater Jump as its end to end asset management platform and the seamless coverage it provides across their front, middle and back office investment operations. This new client will use Clearwater to connect seamlessly with all its counterparties, leveraging critical market data and optimizing trading processes. Our newest corporate cash client, one of the world's largest pharmaceutical companies, enlisted our expertise to oversee the rapidly expanding separately managed account program. As their investment operations have grown to include multiple asset managers, custodians and money market fund portal partnerships, they now depend on the Clearwater platform for streamlined operations and a consolidated view of the portfolio.

Speaker 1

We trust that these examples illustrate the very meaningful progress we are making on both the acquisition of new logos across an ever increasing number of industries and geographies and secondly, in our continued journey towards becoming a multi product company that can deliver a sustained NRR of 115 and beyond. Switching gears, let me discuss progress on the addition of capabilities that will allow us to address more of the technology spend across the investment management lifecycle and not just investment accounting. We started with the acquisition of JUMP and the Clearwater JUMP platform is doing well and resonating with our clients in precisely the way we thought it would. We won 6 clients this quarter and are now able to offer solutions for the front, middle and back office. This quarter, we were thrilled to announce that we completed the acquisition of the risk performance and analytics platforms of Wilshire Advisors, Wilshire Axiom, Wilshire Atlas, Wilshire Abacus and Wilshire IQ Composite will now be integrated with Clearwater solution in the risk and performance space to create a powerful and compelling product for our clients.

Speaker 1

We are integrating these new capabilities into our risk and performance analytics platform, enhancing our capabilities manifold. We can now offer our clients significantly enhanced capabilities that would have taken us years to develop in house. Risk and performance models need to establish credibility by extensive use and it often takes years or even decades to achieve that. Simply put, this acquisition allows us to capture additional TAM immediately and scale the business. Our clients will benefit from a comprehensive suite of modular tools for portfolio construction, quantitative performance attribution, risk analysis, stress testing and portfolio analytics, all using the same underlying data from the core Clearwater platform.

Speaker 1

Our vision is to create the preeminent investment management platform for firms around the world. And by partnering with Wilshire and bringing their robust time tested models into our platform, we are one step closer to that vision. With the Jump and Wilshire acquisitions, we are building people, technology and market leadership to establish Clearwater as the definitive enterprise platform for the entire investment management process. Shifting to unit economics, we are very pleased to report that we have achieved this revenue growth while simultaneously increasing our gross margin to a new record high for the company at 78%. Our generative AI programs have started to positively impact our ability to deflect customer inquiries and enable our client servicing teams to deliver faster and more comprehensive responses.

Speaker 1

We feel very confident about our march towards our stated long term goal of achieving 80% gross margin, perhaps meaningfully faster. Thank you for your continued support and we look forward to sharing more about our product offerings and the latest innovations at Clearwater Connect in London on June 19, a great event where we expect hundreds of institutional investors will gather to learn about new technologies and solutions that can help grow their business. With that, let me turn it over to Jim to review our financial results in more detail.

Speaker 2

Thanks, Sandeep, and thank you all for joining us. I'm delighted to report that 2024 is off to a great start with exceptional results in Q1 across various key metrics. In the Q1, we decisively beat guidance for revenue by $2,200,000 and adjusted EBITDA by $3,400,000 Our organic revenue growth reaccelerated to 21.4% over Q1 of 2023. Revenue in the quarter was helped by incredibly low churn, resulting in a best ever reported gross retention rate of 99%. In addition to limited churn, we also expanded our relationships with our existing clients through cross sell of products, increasing our share of our clients' investment books on Clearwater and growth in our clients' AUM.

Speaker 2

When you put that together, it results in net revenue retention of 110% and solid

Speaker 3

revenue growth.

Speaker 2

The impressive improvement in both net revenue retention rate and gross retention rate is reflective of our market leading competitive positioning. Our single instance multi tenant product was stronger than ever in the Q1 versus legacy tech incumbents. The strong revenue results flow through to both gross margin and adjusted EBITDA. We achieved adjusted gross margin of 78% and an adjusted EBITDA margin of 31.3%, which is a stunning increase of 4 70 basis points from the Q1 of 2023. The unit economics of this single instance multi tenant platform are simply phenomenal.

Speaker 2

When you compare the EBITDA growth over the last year to the growth in revenue, the marginal EBITDA expansion is 53% over a year. And during that time, we increased research and development spend by 13%. So we are investing more in developing new products and generated more than 50¢ of EBITDA for every incremental dollar of revenue. With profitability characteristics like that, investors can have high confidence in our long term EBITDA targets of 40%. It was also satisfying to see tangible progress on our path to NRR 115, with our net revenue retention rate increasing to 110% as of March 31, 2024.

Speaker 2

I want to remind investors that we expect our NRR 115 path to progress directionally upwards in future quarters, but not necessarily in a linear fashion. The Q1 continued to show good signs of progress in upselling. And we believe that the positive momentum in upselling should continue to increase beginning in the second half of this year as we roll out new products and modules developed by the more than 60% of R and D capacity we are focusing on these growth initiatives. In addition, JMP progressed nicely in Q1 with the key booking wins as Sandeep mentioned. Jump has proven to be a good proof point as our first ever acquisition, and we continue to explore tuck in acquisitions like JUMP and Wilshire platforms that can allow us to harness strategic functionalities adjacent to our core strength and bring those functionalities to market more quickly for our clients.

Speaker 2

As of March 31, 2024, ARR increased to $402,300,000 representing a reaccelerated year over year increase of 19.3 percent from the prior year's 337,400,000 This year over year growth is purely organic. Furthermore, ARR grew sequentially by $23,200,000 our highest ever sequential quarterly growth in ARR. Now let's turn to profitability results. On the heels of blockbuster results in margin expansion throughout 2023, we made further tangible progress on our margin expansion path in the Q1 of 2024. This displays the power of our profitable unit economics and shows the true leverage of our business and the clear pathway towards our long term adjusted EBITDA margin goal of 40%.

Speaker 2

In Q1, we achieved gross profit of $80,200,000 78% gross margin, an increase of 2 10 basis points over Q1 of 2023. This results demonstrates that we are progressing quite nicely towards our long term gross margin goal of 80%. In addition, we reported $32,200,000 in adjusted EBITDA and 31.3 percent adjusted EBITDA margin in the 1st quarter, which handily beat our EBITDA guidance expectations and improved over the prior year's EBITDA margin by 4 70 basis points in line with prior quarters. The outperformance in our revenue flowed straight through to EBITDA. Having already achieved our EBITDA margin full year guidance target of 31% in the Q1, We expect to moderate the EBITDA margin expansion in the Q2 of 2024 to prudently reinvest some of that excess profitability back into our growth initiatives in R and D, including the integration of the acquisition of the Wilshire platform, which recently closed on April 27.

Speaker 2

Additionally, we will continue to lean heavily into the investments in international go to market activities. They are producing results and we see an addressable market that is right for the same disruption we've been able to achieve in North America. As we have indicated in the prior quarter's earnings call, R and D spend as a percent of revenue will continue to moderate over time since we have already completed our migration to the public cloud last year. In Q1, R and D dollar expense was up 13%. But as a percentage of revenue, it decreased to 24.9%, which was 190 basis points lower than Q1 2023.

Speaker 2

In Q1, equity based compensation was $28,500,000 a decrease of $4,000,000 from Q1 of 2023. As we noted in our Investor Day presentation in September 2023, the high watermark of equity based compensation as a percentage of revenue is behind us. Going forward in future years, including 2024, this percentage should continue to trend down. Lower equity based compensation expense as well as lower income tax and tax receivable agreement expense in the Q1 contributed to GAAP net income being positive in the Q1. Let's turn to the balance sheet and cash flow.

Speaker 2

Operating cash flow was $10,000,000 in Q1, a 26.5% increase year over year. Free cash flow was $8,600,000 for Q1, which again was a year over year improvement of 38.3%. Due to the seasonality of free cash flow, the conversion rate of EBITDA to free cash flow is generally lower in Q1 than other quarters. However, as previously mentioned, when looking at this conversion rate on an annual basis, the steady state should be approximately 70%, taking into account quarterly seasonality in free cash flow. We ended the quarter with $296,500,000 in cash, cash equivalents and investments.

Speaker 2

This total cash amount reflects the payment of $28,800,000 in taxes for the net settlement of equity awards, which is a financing cash flow and was completed to reduce share count dilution from the issuance of equity awards. Total debt was $47,900,000 thereby resulting in net cash holdings of approximately $249,000,000 We closed the Wilshire Risk and Performance product acquisition on April 22nd, and we paid $40,000,000 from our bank account. Even with this payment, we have plenty of dry powder should we choose to execute another tuck in acquisition. Now let's turn to guidance. For the full year 2024, we have meaningfully raised our revenue guidance to $438,000,000 to $442,000,000 representing an improved year over year growth rate of approximately 19% to 20%.

Speaker 2

This represents an increase at the lower end of $7,000,000 and at the higher end of $5,000,000 This full year guidance has incorporated both the outperformance in revenue in the Q1 and the forecasted uplift of revenue from the Wilshire acquisition. When we announced the acquisition, we indicated the asset run rate was approximately $7,000,000 So you can assume 2 thirds of that amount or $4,500,000 have been incorporated into our 2024 annual guidance. For the Q2 of 2024, we expect revenue to be in the range of $105,000,000 to $106,000,000 representing a year over year growth rate of approximately 17% to 18%. Q2 2023 is a tough comparable, as a very large client went live in April of last year, resulting in 22% growth last year. For the full year 2024, we have also raised our EBITDA guidance by $2,000,000 to $137,000,000 at the low end to $139,000,000 at the high end, which provides an adjusted EBITDA margin of 31% and an uplift of approximately 2 60 basis points from 2023.

Speaker 2

We continue to have confidence in our margin improvement for the remainder of 2024 because of the significant efficiency improvements we are continuing to see throughout the business, including our GenAI activities. In the Q2 of 2024, we expect adjusted EBITDA to be $31,000,000 or approximately 29 to 30 percent adjusted EBITDA margin. For the full year, we remain committed to our 31 plus percent EBITDA margin, and we can remain committed to greater than 200 basis points improvement in EBITDA margin over 2023. In summary, we are excited about our very clean Q1 in 2024 and look forward to utilizing this excellent start to build on our revenue growth, continue on our NRR 115 path and deliver on margin expansion for the rest of 2024. With that, I'll turn it over to Sandeep to provide some closing thoughts.

Speaker 1

Thank you, Jim. As we reflect on our Q1 results, I want to express my deep gratitude to our dedicated team at Clearwater. Their tireless efforts and commitment to innovation has allowed us to delight our customers and partner with them to build new products. Our achievements highlight not only our dedication to client success, but also our ability to grow and evolve. We are more excited to deliver about the future and remain focused on our strategic path of customer driven innovation, operational excellence and market expansion.

Speaker 1

As we push ahead into the Q2 and beyond, I'm confident in our company's ability to maintain its momentum. Our strategic acquisitions, Jump and Wilshire, have laid the groundwork for continued growth and expansion into new markets. Together with our industry leading client retention rates and growing portfolio of innovative offerings, we believe the company is uniquely positioned in the market. Our focus continues to be on creating meaningful value for our shareholders, clients and employees.

Speaker 4

Our first question today is from the line of Rishi Jaluria of RBC.

Speaker 5

Nice to see the NRR uptick again this quarter. Maybe 2. 1st, Sandeep, maybe if you could dig a little bit into Wilshire and the acquisition made there. Strategically, can you help us understand kind of what it brings to the table that you felt developing in house, I guess, was superior to developing something in house? And what's the path to integrate the assets you're buying there, given the learnings that you have after a relatively successful acquisition with Jump?

Speaker 5

And then I've got a quick follow-up.

Speaker 1

Yes. Thank you, Rishi.

Speaker 6

So about the Wiltshire platform acquisition, so the first thing is strategically, we want to address more of the investment management technology versus just investment accounting. So if you go back to the Investor Day, we talked about changing our ability to address 4 bps of what our clients spend instead of 1 bps. One large pocket of that is risk and performance. And if you think about risk and performance, it needs reconciled accurate and timely data and we do that already. Now we could have built it, but building risk and performance is expensive and cumbersome, but the most important point is Rishi that these models have to be out in the market for a period of time.

Speaker 6

People have to use it quite extensively and then they mature. And that could take you years, it could take you decades to get the right amount of respect, if you will, in the market. So given all of that, we had the opportunity to partner with Wilshire and go and buy this. We felt it was frankly a no brainer. I mean one of the items we were planning to build was risk and performance, so we can now take that, integrate it into the work we already do.

Speaker 6

So we already do risk and performance for our clients. This just takes it to a completely different level. So it felt super strategic and we are really cannot be more delighted with being able to close this deal earlier this month or pardon me, last month.

Speaker 5

All right. Wonderful. That's really helpful, Sandeep. And then maybe one for, I guess, both Jim and Sandeep. Just thinking through the guide, especially for Q2, Jim, I understand your comments on having a tougher comp in Q2 of last year.

Speaker 5

But I mean factually right, we saw ARR accelerate this quarter to a really healthy level. We saw NRR tick up. And when I look at the guide, you're talking about an organic 2 year CAGR that still implies meaningful deceleration from what you saw in Q1. Were there any one time factors or maybe can you help us understand the puts and takes of the Q2 guide? Thank you.

Speaker 6

Okay. So look, I'll give you my perspective and Jim maybe he can add to that. So firstly, we feel really confident about our annual guide. Now in Q1, churn was meaningfully lower. We've never seen a churn this low and it's lower than the 2% historic number.

Speaker 6

So sounds like we expect churn to go up, but we just don't model this kind of churn. 3rd thing was that one of our larger clients were expected to go live in Q2 and they went live in February instead. So that's good news, but it pulls some revenue from Q2 into Q1. Now having said all of that, obviously, the NRR is a contributing factor and that is driven mostly, Rishi, by new products. So I went through a whole litany of examples, but the point is we just feel that new products are a little bit difficult to predict exactly when it will happen and how it will happen.

Speaker 6

In the aggregate, we feel, yes, this revenue annual guide is really good, But quarter by quarter, we're still a little bit we feel concerned about projecting too high. Now Q1 was great. We had said I think 100.5 if I remember correctly and we came in with a really good number. And so we do feel we should be conservative on a quarterly level while feeling really confident at an annual level. Arun Jay, what do you add?

Speaker 6

That's great. Wonderful. Thank you. Thanks, Vish.

Speaker 4

Our next question today is from the line of Dylan Becker of William Blair. Dylan, your line is open. Please go ahead.

Speaker 7

Hey, guys. This is Faith on for Dylan. If I could start with maybe more high level question. But as we move back to base sales and engineering talent and the prioritization of the platform innovation, how should we think about the ramp cadence of these different initiatives and how to benchmark the success and progress of them throughout both this year and beyond?

Speaker 1

Yes. So Jim, I didn't take the question? But I do want to

Speaker 6

just say something quickly, which is I don't think there's any let up in chasing new logos. We don't see any difference in the market. We continue to see a demand for new logos to be quite high and robust. And the question is, should we also be building new products, which we can take to current clients and also use them to open new logos? Jim can provide a little bit more detail about the products we're investing in and just the size of those and what it could be?

Speaker 2

Yes. Thanks, Faith. So just at

Speaker 3

the high level, think about one of the key elements of driving to NRR 115 is really adding these incremental products back into our client base. And we have 4 products of the many that we're developing that are in market now. And we feel like we're getting good traction with them. You won't be surprised by these because you've heard these names before. LPX, Sandeep talked about the good traction we're getting there.

Speaker 3

Prism, Sandeep talked about the big win we had in Prism in Europe. Risk, that's very aligned to the Wilshire acquisition, but also we're already delivering on that. And Jump, which was an acquisition from 2022. Those are in the market and we see those doing very well. And as we see those continue to grow, we will continue to see ultimately NRR115 that metric tracking there.

Speaker 3

But those aren't the only R and D initiatives that we are driving to. There's a couple that are more focused on new logos, where we actually have a great solution. One of the best things about the Clearwater platform is that it is so flexible and has proven to be market leading, not only in corporates and in insurance companies and in asset managers and now in governments, and we move forward from there. There's 2 areas where as we add incremental functionality to the platform, it opens up those new TAM areas. And 2 of those examples that Sandeep spoke to, 1 is the pooled funds, right?

Speaker 3

The second is stable value funds. And those are, in one instance, in a pooled fund area that facilitates state and local governments interacting better, Taylor, and opens up that government market. In the stable value fund market, that's another element within these broader asset management complexes that we're able to drive. So we'll see what you'll continue to see traction and you'll listen to us as we talk about those new logos in those markets. And you'll also be able to see traction through seeing NRR 115.

Speaker 3

At the highest level, you might say, hey, wait a second, what's what are the size of those markets? And I think we've talked about it. We get excited about $100,000,000 markets. And so as you think about those, many of those are $100,000,000 markets. But others of them are smaller, but like, for example, stable value.

Speaker 3

But we are so close to being able to achieve it that it makes sense for us to add that incremental functionality to add those customers. One data point that just is a reference point. In Q1, about 25% of our total bookings in Q1 were related to these Go initiatives. So we won't share that all the time, because we don't want to get into disaggregating all of that information. But I think that's useful for you to understand, the pleasant trajectory we're seeing from these development initiatives.

Speaker 3

What else would you add?

Speaker 6

It's good.

Speaker 7

No, that was all super helpful. Thank you, guys. And then with a quick follow-up question, if I could. Just curious, with the shift to this T plus-one settlement coming up at the end of May, how might this be causing any stress to the capabilities of legacy systems and workflows? And have you been seeing anything from a pipeline perspective about this change?

Speaker 7

Is it causing any anxiety with customers or any incentives to maybe push through some transformation and innovation a little bit quicker?

Speaker 3

Yes. Faith, that's a great call out. And yes, it does obviously, that is helpful, right? But it's one of a1000000 different changes, regulatory changes and environmental changes that our clients and more importantly, our prospects are feeling every day. Another one, for example, is there are huge changes to NAIC reporting that we're helping our clients build for.

Speaker 3

T plus 1 is also important for folks. And so I would say that it's just another example of this long term trend that prospects not on Clearwater Solutions feel more pain and the more pain, the better we feel about our ability to solve it.

Speaker 7

All right. Awesome. Thank you. That's it for me.

Speaker 6

Thank you.

Speaker 4

Our next question today is from the line of James Faucette of Morgan Stanley. Please go ahead. Your line is open.

Speaker 8

Hi, everyone. It's Michael in Fontaine for James. Thanks for taking our question. Jim, you had previously mentioned last quarter that your objectives for NRR for 2024 were roughly in line with 23 levels sort of in that 106, 107 range, obviously really strong result in NRR this quarter. Do you think that 106, 107 level is conservative at this stage?

Speaker 8

I know you called out quarterly variability, but would be great to hear how you're thinking about it. Yes.

Speaker 3

I think if I can just help clarify, it was my fault. I said, hey, as we thought about our annual guide, right, for the year, we thought about NRR looking like that. And obviously, we were very happy with the result that we saw in Q1 and we feel optimistic about the whole year. Having said that, Michael, you're exactly right. It's don't draw a straight line anywhere.

Speaker 3

But we are definitely trending and I think it is fair to say that we feel like 106, 107 would be conservative at this point.

Speaker 8

Got it. And that's helpful. Maybe Sandeep one for you, really nice win with Aegon on the Prism side. I was just hoping you could level set with us in terms of the customer profile, the use case on the Prism side today and sort of how that's incremental functionality to the core Clearwater platform? Thanks.

Speaker 1

Yes. Thank you,

Speaker 6

Michael. Essentially, the functionality helps asset managers provide a better service to their clients, and thereby improving AUM inflow. So in that use case, it is really Prisma is helping build client reporting functionality for their clients. And so really if you think about data that comes in and makes up our entire client report, There's data from internal systems, there's data from accounting systems and risk systems and several other components from within the company. And what Prism does is takes all of that, intermingles what Clearwater does and other parties do and come up with one comprehensive view of data and one comprehensive report.

Speaker 6

So as you can imagine, it makes the clients reporting very easy. And when you can do that, people tend to provide give you more assets, if you will, when you go in for the RFP. So again, it's something which helps clients improve client service and therefore attract more assets.

Speaker 8

Got it. Thank you both.

Speaker 6

Thank you.

Speaker 4

Our next question today is from the line of Michael Turrin of Wells Fargo. Please go ahead. Your line is now open.

Speaker 9

Hey, guys. Thanks for taking the question. It's David on for Michael Turrin tonight. Just one from you guys. So you mentioned in the prepared remarks, you're seeing Gen AI investments having a positive impact.

Speaker 9

Can you just remind us how we should think about the percentage of spend of Gen AI that's going to revenue versus expense efficiencies? Thanks.

Speaker 6

Yes. Look, thank you for your question, Dave. Look, I think that Gen AI is strategic initiative within the company. And like you pointed out, there are 2 different streams. One is, can it make us more efficient?

Speaker 6

And that we've continued to see progress on that. And if you notice what we said on Investor Day about gross margin and the improvement we thought we would get, we had talked about 50 basis point improvement every year. And we're already at 78%, which is what we thought we would be in 2025. And definitely some of that is coming from GenAI. So what does it really do for us?

Speaker 6

The two points. 1 is, can it deflect client inquiries? So when a client has a question, can they go to the JENEI tool they have and get that question answered and therefore not even ask us that question. That obviously makes us more efficient. And the second one is when they ask a question, can JennyI sort of propose a response to our client service rep?

Speaker 6

And said this is a fully comprehensive response and the client service rep reviews it and feels it's the right one, they can click it, so much more efficient. So the case for helping us improve gross margin is very clear, frankly going a whole lot faster than we thought. That you have started to see a little bit on the P and L itself. The second one is this quick suite of products with applicability across various personas in various industries. That you haven't started to see though in the sense that they are being built so that we can drive revenue from them.

Speaker 6

So right now they are very much in the client design stage, which means we have got client partners who are helping us design this product and bring value from it. So that I would say is still several quarters out of being able to see meaningful improvement in revenue. So I think if you remember Jim spoke about 6 products, didn't mention Quick because of that. It is a big area of investment for revenue growth also. It's just that it is not getting traction from a revenue point of view today.

Speaker 6

Do we expect that in 3 4 quarters? Absolutely. But do we expect that in Q2 and Q3? We don't. That just gives you a wholesome response, if that makes sense.

Speaker 9

Appreciate that detail. Thank you.

Speaker 4

Our next question today is from the line of Brian Schwartz of Oppenheimer. Please go ahead. Your line is open.

Speaker 5

Hey, this is Ari Friedman sitting in for Brian Schwartz. I was wondering like with the Wilshire transaction, could you talk a little bit more about the customer profile that you're kind of getting from the Wilshire Advisors? Are they similar to the clients that you guys already have? Are they a little bit different? Is there a good opportunity there to tell them on like more of the Clearwater platform products?

Speaker 5

Thanks.

Speaker 3

Thanks, Ari. This is Jim. So that is one of the very interesting attributes. Obviously, the most interesting elements are those models time tested and stress tested over time to really benefit us there. But less than 20% of their clients are also Clearwater clients.

Speaker 3

So to your point, we have initiatives to how do we cross sell Clearwater to their clients and how do we then obviously cross sell those Wilshire solutions into our clients once those integrations are done.

Speaker 6

Yes. I think the also the interesting part here is when you think about risk models and performance models, they're used by asset owners. So asset owners may use them for exactly that performance and attribution, but they may also use it for regulatory reporting. So we feel like this could be taken to a wide swath of Clearwater clients. Same thing with risk.

Speaker 6

Risk obviously is used pretty extensively across the entire universe of clients. So we feel like there's strong applicability of these models to the Clearwater client base, but we also think that we could take the Clearwater platform and sell it to the current clients of Visual Analytics. So we think there is a potential to do both. But what we expect to do is not expect, we have already merged both these two businesses and coming out with one comprehensive reporting around risk performance and attribution. So we feel like we have a real strong proposition for our clients here.

Speaker 6

Thank you. Thank you, Harry.

Speaker 4

Our next question today is from the line of Alexey Gogolev of JPMorgan. Please go ahead. Your line is open.

Speaker 7

Hi. This is Ella Smith on Alexei's team calling in. Thanks for taking our question. So first, Jim, I know you said many times before the NRR will fluctuate quarter to quarter, but I was wondering if there was anything to call out for that 110%.

Speaker 3

Sorry, Ella. I'm so excited about it. I'm all choked up. Sorry. So number 1, obviously, we always have tremendous gross revenue retention at 98%, but we got an additional one additional percent to 99%, the best ever and really terrific there.

Speaker 3

So that helped on the margin. Secondly, we saw a nice uptick of the cross sell of those solutions that we were discussing. I mentioned earlier, it was about 25% of our bookings in the quarter. Now not all of that is reflected in the NRR because we have to onboard and get those assets flowing. But that was another important piece.

Speaker 3

And then the third element is, as we have always historically done, we've grown as our clients have grown. And so we were able to help with those additional asset expansion as well. And the last thing I would say is we were not hurt with the market changes at our client base. Over the last few years, they we certainly weren't helped dramatically by but we weren't hurt, which was helpful as well.

Speaker 7

Very clear. Thanks so much for that, Jim. And Sandeep, maybe for you. So earlier, Jim had mentioned that you have enough cash on hand for additional tuck ins. How are you thinking about your decision framework moving forward about when you buy versus organically build new technology?

Speaker 6

Yes. Thank you, Ella, for that. So as you know, we haven't done this programmatically and systematically. But we did announce 2 really senior executives we've brought in the company to do this on a more systematic way. And so when you think about how we look at these things, first, remember, the bar is always really high because we don't want to go mess up really clean business model that we have.

Speaker 6

But would we do it in the service of improving TAM? Yes. Would we do it in the service of improving geography coverage? Yes. Would we do it in the service of improving 1 bps to 4 bps?

Speaker 6

Yes. So I don't think we have changed anything here, but we just expect to become more programmatic about it. So I think you should expect us to do is that 2 tuck ins in a year or whatever that number is, but do it in the service of what our clients want. And the basis of it is we have a really satisfied client base, really high NPS. So they would like us to do more.

Speaker 6

And so we have to I feel our job is to go find out what causes them the most pain and can we develop things to go solve that. Now our first instinct unfortunately is always to build it, But sometimes we recognize also that building it will take too long. And when that occurs, then we tell the M and A team, you got to go find something. The problem is often you can't find things which sort of fit nicely. So we don't want to just do deals because we wanted to do deals, but we do expect programmatically to do such tuck in deals.

Speaker 7

Very clear. Thank you so much.

Speaker 6

Thank you.

Speaker 4

Our next question today is from the line of Gabriela Borges of Goldman Sachs. Please go ahead. Your line is open.

Speaker 7

Thank you. Sandeep and Jim, over the course of the last several months, you've announced a handful of high profile leaders, particularly in your go to market functions. I'd love to hear the feedback that these leaders are giving you as they get in the weeds and as they talk to customers. And in particular, are there a couple of initiatives where you've got some of leadership team coming back and saying, we should be doing ABC to really jump start the next phase of our growth.

Speaker 3

Sorry, you broke up a little, Gabriela. So, Sandeep, I think you said new sales leaders, new high profile leaders, what's the early feedback? What's the early what are the observations?

Speaker 6

Yes. Thank you, Gabriel. I think there is no question that the first order of business is to continue the growth in North America. So we were quite excited to say, look, North America this quarter year on year basis due at 20%. So we feel good about that.

Speaker 6

Now the question is where else do we see progress? So Europe is really, really interesting because of the immediate applicability of what our platform can do and the proof points we have already sort of produced and sort of announced. So we feel Europe is priority 1, if you will. Asia also is a really high priority, especially with a really strong leader we brought in last quarter. So we feel like those two priorities are really are going to drive growth for us for a period of time.

Speaker 6

So those are the 2 now. In terms of what products or what areas customers are most concerned about, alternative assets. So we talked about LPX for that. Comprehensive reporting for clients, we talked about Prism, lots and lots of discussions about risk performance and attribution. So the Wilshire should help with that.

Speaker 6

Obviously, the OMS, PMS and so Jump functionality. So just top of mind, we think about North America, then we think about Europe, we think about Asia, think about OPX, Prism, risk and performance and finally, job. So if you were to ask me what are the biggest ones you're worrying about, those are the 6 I sort of think about or what we can do to drive growth from there.

Speaker 7

Got it. And Jim, as a follow-up, you mentioned about 25% of total booking statistic related to cross line initiatives. Could you just clarify for us how you're calculating that or what products are in that? And I know you said you're not going to give it to us since it's myself, take the opportunity to ask what has it been historically or give us some kind of grounding and history so we can understand the measure of success that you're reporting? Thank you.

Speaker 3

Yes. No, good call out Gabriela and that's very fair. So why would we crow about 25%? It's because it's been about 10% if you look back. And what are those what are those 2 questions?

Speaker 3

Okay. It's LPX. It's the same that he just identified. LPX, Prism, Jump, Portfolio Management, middle office, those etcetera, etcetera. Sorry.

Speaker 6

It's a little bit earlier than we thought. As Jim said, just because you sell something doesn't mean it shows up in ARR right away. But yes, we are that's how we use the term sort of booking to sort of show that we're making progress. But yes, it's just that with innovation, it's always choppy. We're obviously happy about where we are.

Speaker 6

But we feel so worried about people drawing a straight line. So it's not there's no reason to be cautious. It's just we feel it's the right way to make sure investors know that.

Speaker 7

That makes sense. Congratulations on the quarter. Thank you.

Speaker 6

Thank you.

Speaker 4

Our next question today is from the line of Yoon Kim of Loop Capital. Please go ahead. Your line is open.

Speaker 5

Thank you. First, congrats on a strong execution. Sandeep, last year was marked by the influx of alternative assets. I believe that you mentioned that 40% of new AUM was came from that from the alternative assets. Do you see that trend continuing this year?

Speaker 5

And is that also driving the multiproduct adoption?

Speaker 6

Yes. So I don't have a percent for you, but I do know that in the sales process, almost the first things clients talk about is the difficulty in managing alternative assets. So a lot of our sales are sort of the discussions about how do I merge alternative asset reporting with public securities and give a comprehensive view. So I still think it's really, really important for our business. And if you look at it, one of the first products we always talk about is LPX, which is limited partnerships and how do you process them more effectively.

Speaker 6

So I look, we continue to believe that, that is a really important one. And then Prism, what it does is it brings public, private, all of it together and gives you one comprehensive view. So we continue to see a really big impact from the growth of alternative assets among our clients. I just don't have a percent of how much it grew in the last quarter. We can get you that.

Speaker 5

Okay, great. Because I think, the word alternative assets were not mentioned as much this time around, but this last year, that's why I thought I asked. If you can also talk about the mix between asset managers and insurance companies, is that mix skewing towards 1 or the other? And is that changing your go to market motion at all?

Speaker 6

Yes. This is Sandeep again. I'll let Jim sort of add to it. I don't think it's changing very meaningfully at all, but is it moving up 2% this way? And yes, it is.

Speaker 6

So I think that these are quarterly numbers. From a market perspective, we think it hasn't moved very much at all. But would it be 2 percentage points up in 1 sector versus another sector for the given quarter? Absolutely possible.

Speaker 3

Yes. I was going to say that it remains very consistent. That same trend remains very consistent. But one notable thing is that we talked a little bit about these portals, right, the investment portal at the government agency. And I think we've seen nice momentum where that's off of a small number, it's growing nicely as a percentage of revenue, those state and local governments.

Speaker 5

Okay, great. Thank you so much.

Speaker 6

Thank you so much. Appreciate it.

Speaker 4

Thank you. With no further questions in the queue, this will bring us to the end of Q and A. At this time, I would like to hand back to Sandeep for any closing remarks.

Speaker 6

Yes. We would like to thank all of you for your continued support and interest in Clearwater. We would also like to acknowledge the tremendous partnership we've had with Welsh Krasen 12, which invested in Clearwater in 2016 and fully exited their position in March of 2024. We note that they continue to have a significant investment through Welsh Carlson 13, which invested in our company in 2020. We thank you all, and we really appreciate the support of Tier 1.

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Earnings Conference Call
Clearwater Analytics Q1 2024
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