Good afternoon! Hi, good afternoon. Thanks, everybody.
Thanks, everyone. This is day two of our conference, so hopefully it's been a productive conference for everyone. I'm Arvind Ramnani, Fintech and Vertical Software Analyst at Piper Sandler. Thank you. And with me, I have Clearwater CFO, Jim Cox.
Thanks, Arvind. Thanks, and thanks, Piper Sandler, for having us. I've never... So I've owned a John Deere tractor. I've never followed a John Deere at an investor conference, so this is great.
And at a tech conference of all places.
Yeah, exactly. Exactly. Good, good.
Terrific. So, yeah, I have a bunch of questions-
Good.
- I'm gonna run through, but, you know, just to kind of level set, you know, perhaps you can just start with a couple of minutes of introduction on, on Clearwater.
Sure.
Then we'll jump into Q&A.
Sure. So, Clearwater does investment, accounting, and analytics, risk, compliance, and reporting for your investable assets, for corporations, insurance companies, and asset managers. So if you think about it, about two-thirds of our business is asset owners, where we get the whole book. So an asset owner, an insurance company or a corporate or a pension, would then outsource some of that to asset managers, who would then be doing that for reporting. We're the accounting book of record, and so that's really important. We're comprehensive. It's important that we're trusted. The company was founded in Boise, Idaho, and the three founders have now left, but that's still our headquarters. We're relatively distributed over the world. Started with corporates, moved into insurance, and then into asset management.
We went public in September 2021, and, just had our Analyst Day last week, so our first Analyst Investor Day. So if you wanna watch that at double the speed, I won't be offended, but you can get some background on that. The special sauce of Clearwater is really a couple things. One is, we have a bit of a different approach than most of the legacy players in the market. Number one, we're in the cloud, which many folks are in the cloud. That's kind of industry standard. But in investment accounting, it's a little... We're still getting there. The other piece that really is the secret sauce is, when we account for something, we think of it at the security level as opposed to the portfolio level. Most people think about a firm or a portfolio or something like that.
And so therefore, each client or each business or each entity has its own problems to solve. They have to ingest their own data. They have to reconcile their own data. They have to do that. We did it differently. Well, the founders did it differently, and I've joined subsequently. And the idea is that we take it at the security level, and that's really fundamentally different. It's architecturally different than anybody else in the market. And you might say: Who cares? Why does that matter? Why that matters is, if you share security—if you're both Clearwater clients, and you share securities on our platform, we ingest it once, we reconcile it once, and we create the Golden Copy, so that there's incredible network effects across the platform for those shared securities that you have. I think that's really an important thing to understand, so.
Terrific.
Sure.
You know, and then, you know, so just jumping right into Q&A.
Yeah.
The last couple of years has been... it's been in the macro concerns and kind of slowdown in growth. You know, as we're looking forward into 2024, what are some of the model drivers you have that will kind of get you all back to kind of a healthier growth?
Yeah. Well, we've, we've... I think we're proud to say that we've grown, you know, we're a very durable, reliable grower. We grow 20+%, and we have for many, many, many years. And if you look at kind of the trend, it's a very consistent trend. We grow between 20%-25%, each year. We also make money. We, we've, you know, 28% margins, and, and grow on that. In 2022, obviously, with equity prices and, fixed income prices going down, that created a bit of a headwind, and I think you'll probably wanna- everyone wants to ask about, the kind of pricing model change. But, but the thing to think about is, is we're in a replacement market. Almost everyone has an investment accounting system that they're using.
So where is our growth, and why do we have such steady growth? Because the pain is high across the industry, and so there are replacement cycles that come up, and so we've been able to deliver and grow. There's really... When you think about what are our vectors for growth-
Mm-hmm.
which remain consistent and have remained consistent under all economic environments.
Right.
You know, one is just continuing to grow with North American insurance companies and asset managers. Second vector is kind of growing internationally.
Mm-hmm.
Went from 9%-17%, kind of over the last few years. Then also, thirdly, and most importantly, doing more for our existing clients. With our asset owner clients, we typically get the whole book, right? Because we wanna be comprehensive. You wanna know all your assets in one place. So then the question is, what more can we do for them? That's that third vector of growth.
Terrific. And then, you know, I know Europe was an area of investment.
Yeah.
Can you give us an update on how things are going in Europe?
Yeah, yeah. Going well. We're last quarter, we were really proud to announce that, at the beginning of Q2, Aviva had gone live with us. And they're, you know, call it, they're an enormous insurer in Europe. And so, we've done a lot of work to bring them live. Think about delivering all of the GAAP. We've done a bunch of investment in kind of the operations teams and putting them in Edinburgh and in India to try and service kind of our global client base. We also had to build out a bunch of product, right? And, you know, German GAAP, French GAAP, Dutch GAAP, all of those sorts of things, and all of the regulatory reporting around that.
So now that Aviva is live, it's kind of a good housekeeping seal, for lack of a better term, that says, "Hey, you know, some of the world's largest clients are using us in those markets." So I think it's going well. I think, you know, Europe is not monolithic either.
Mm-hmm.
So I would say that, you know, in, you know, Aviva's in the U.K., and I think in Great Britain, we're doing great, and, you know, we continue to evolve. The next most exciting market there is in France or French speaking, and maybe you'll ask about JUMP, but we're definitely bolstered by a very small acquisition we did at the end of last year called JUMP Technology, which has about 100... founder-led company with about 100 employees in Paris. So that's really helped to instantiate us in that market. There's a lot of credibility around that.
Yeah. And I know Europe is, you know, quite a bit different, but maybe can you touch upon some of the, like, advantages you'll have? I mean, I would imagine the fact that you already have, like, very highly referenced with clients in the U.S., that helps, then the insurance company helps-
Yeah, definitely makes it credible. But let me tell you... So we talked about some of the investments we made in going to Europe, but there were also things that we didn't have to change, right? So if you're an insurer, a U.S.-based insurer, and you have investments in France or in Germany, and you were already on the Clearwater platform, guess what? We have those securities on our platform. We have some of that connectivity already. And so we are actually around the world. We have insurers in the U.S. that are owned by Japanese parents, so we have to do Japanese GAAP for them, for example, or those sorts of things. So there were certain kind of, because back to that kind of single Security Master, the Golden Copy, the network effects of that just accrue all over the place.
And so that's, that's part of the benefit that we have there. And then obviously, because when we-- kind of if you go back many, many years, the company first started selling to CFOs like me. By the way, I was a client three times before I became the CFO. So I can understand it in the corporate context, how really impactful it is, but then moved kind of from corporate into insurers. And back then, we really just started with the smallest insurers, but then have grown and have some of the, you know, North America's largest insurers on our platform today. So when we move to Europe, we don't have to start at the low end there. We understand, you know, kind of what that, what that largest... So the entire European market is available to us.
Interestingly, when we look at our TAM in the insurance marketplace, the European TAM is twice the size, roughly, of the North American marketplace. And we have about 30%, we think, of the North American insurance market, and we're, you know, just, just starting in something that's a billion-dollar market.
Yeah, but you know, when you just think of the growth records, you have the product, you have reference for clients, now you got this insurance client. Are you all at a point that, like, growth is gonna inflect and take off over there? Or like, are there certain one or two things that need to happen before you're able to kind of see that accelerated growth in Europe?
So I think from a boy, nothing, nothing would please me more than for it to happen much sooner. But I do think you have to think about when you're entering a new market, you've got to have a couple things.
Right.
You've got to have people who understand our product and how to qualify well based on what our product can do for those clients.
Mm-hmm.
You also need people who can provide access and influence and, gravitas, right?
Yeah.
Especially in your... You know, you know, if you're gonna go to a Swiss chalet-
Yeah
... you know, you need a certain-
Yeah.
You know, you need to know how to ski, I guess.
Yeah.
So you need people who are local as well, who can kind of navigate that and understand that, and so we have to bring together that blend.
Right.
You know, that's a constant balance, and that is not unique.
Mm-hmm.
I don't think that's unique to our company. Every company, as you think about moving from that, kind of single to international, those are, those are kind of consistent challenges. And so, we're making good progress.
Yeah, that's, that's perfect. Moving on to, of course, pricing.
Sure.
Favorite topic-
Sure. Yeah
... for the last year and a half. You know, I know a lot of the transitions have happened. This cohort of folks who are kind of like late adopters, how are you gonna incentivize them to move to the new pricing model?
Sure. So maybe just to contextualize-
Sure
... for everybody who doesn't know.
Sure.
So when we went public in 2021, we had generally something that was called an AUM-based pricing model. So as our clients' assets were on the platform and they grew, you know, our pricing would grow. And so when we thought about, oh, how do we add assets to the platform at our asset management clients, and how do we do that? And generally, that's how it works. But when both fixed income and equity prices really decreased, we went to one of these investor conferences, and we couldn't tell them about our durable, reliable growth, or how our product was, you know, market leading, or what our thoughts for innovation for the future were. Everyone wanted to talk about AUM. And so... Sorry, my phone's going off. That's a bit embarrassing. Hope that's not my mother.
So she's saying, "I can't hear you, Jimmy," or something. So I don't know.
Maybe the wife.
Yeah, there you go. So we kind of evolved this, and what we've evolved into is something called a base plus model. And really what that means is, for the book of business that you have, there's a certain amount we're gonna charge you every year. And then the plus is, as your business grows, we grow with you. So that's the second piece, is the pluses, and there is a component of AUM involved. The third piece is that we have an annual increase of that base fee. But if your AUM grows sufficiently, then it's probably transparent to you, right? That if your AUM grows 7%, but your base fee goes up five, then, you know, there's your increase has already gone up.
But the most strategic piece to it, and this is the piece that I think has the potential to create the most value for the business, and frankly, has changed us as a company, was the last piece was we said: and what you bought is—and what we've delivered today is what you've purchased. And if you wanna buy something more, we should talk about that. So another way to say that, a more eloquent way to say that, was Clearwater was very much a single product company, and everything we put into the product, we gave away.
Going forward, we said, "Look, our clients didn't expect that." You know, frankly, it was just, you know, poor management on my part to not say, "Hey, let's put a box around what we're selling," so that the next thing that we deliver, you know, we're spending, you know, roughly $100 million in R&D. Everything that we're delivering for our clients, they're happy to pay for it. And so that's a really important evolution that we started last year. It's been really successful. I would say, Arvind, to answer your actual question, which is: what are you gonna do with those folks who haven't changed? Indifferent. The risk around AUM is sufficiently mitigated, that that's not what I worry about.
I'm now entirely focused on how do we get more product to sell back into our clients and drive our net revenue retention higher over time. And that we can... You know, it was about a 500 basis point headwind last year, that the risk of that is, it's not zero. Let's just say there's still... But it is so mitigated that I just focus a lot more on how do we get back to growing and getting to a multi-product company.
Perfect. I just wanna also open up the audience for questions, if anyone has any questions. Do I keep going?
Very polite group.
Yeah. Yeah, NRR has, of course, been a big focus.
Yeah.
You know, I think it came in at 109%, during the quarter.
Yeah.
What factors do you need to... Like, how do you get it to your goal of, like, 115, and why is that an important goal for you?
Yeah, yeah. So we-- so let's just back up, contextualize. So it's accounting software, so it's pretty sticky, right? And oh, by the way, we're connecting, you know, outside of the client's platform to third parties and delivering this information across the value prop is 9A. So we're-- we have-- we're lucky enough, and partly because of the industry, partly because we have great client service, partly because we have great value. Gross revenue retention is 98%, world-class. I've never seen another business like it. It's great. Net Revenue Retention has lived kind of in the 105, 110, got as low as 104, 103 when we were having that, those AUM headwinds.
It now was 106 in Q1, 109 in Q2. It looks like... That's a very... The polite word is pedestrian, but it's really, it goes to show you that we really have only thought of ourselves as a single product company. And when you back up and you say: What are the best SaaS businesses do? We have best-in-class gross revenue retention. We do not in net revenue retention. So we've said, "Why is that the case?" Well, because we have a single product, let's build more products. Let's figure out how to sell those back into the base. Let's create a new contract structure that allows for that to happen, and so those pieces are getting into play. We aspirationally talk about NRR of 115.
It's a calling card we have to the employees of the company to think about it, so that we think about that. But if you just back up for a second and you say we've traditionally grown 20%-25%, and of that, you know, probably less than half of that has been our back to base. The opportunity there is compelling. And so what we've said is aspirationally we wanna go to 115, and the single most important way to get there is to do multiple products.
Now, you might say, "Well, why do we believe that we can get to that 115?" So we looked, and in some of our asset owner clients, we did a study to say: What are they spending on investment management technology and that sort of stuff? Just the software, not the hardware, like the software and services, the things that are around us. That's about four basis points. And today, what we cover is about 1, right? And actually, if you look at our assets on our platform and what our ARR is, like, we're yielding about half of it, right? So we could have anywhere between 8 times, you know, kind of more growth. There's eight times more spend within our client that isn't being spent with us....
and we have a 60+ NPS, and they have lots of problems, and they want us to do more. And so when you look at that, you say, "Okay, we need to really re-architect and rethink about how we evolve this relationship with our clients." And then if you just get to the investor level, right? If we're growing 20%-25% and 15% is from our back to base, you know, in Q2, we grew 22% with a 109 NRR, 13% was net new. We have a long runway in international. We have a long runway in our core markets, where we're winning 80% of the time. You add this to it, it becomes, frankly, Sandeep, I can't, I can't claim this.
Sandeep, our CEO, who's an incredible leader, said, "Just think how it changes the entirety of the business, how the whole company changes when you're able to evolve to that 150." Now, it's not easy. It's not easy. There's lots of pieces that we have to put together. That's why we talk about it aspirationally. But, I think to put a point out there, that's how these things get achieved.
Yeah, of course. And, margins, right?
Yeah.
Margins of 28%, I know part of it is being in Boise. Running a tech company out of Boise is-
No, it's the gray hair. It's the gray hair, my friend. I and Sandeep believe that businesses should make money. We believe in unit economics. We understand how there's other ways to do that and think about that, but it's this business has always made money and delivered nice kind of free cash flows off of that, you know, kind of EBITDA number. And so that's kind of, that's kind of how the business is run.
Right.
You know, we're lucky enough to have kind of 75 on the path to 80% gross margin. So when you have a gross margin business like that, we have really high Net Promoter Scores, so our clients are a good source of leads, so we don't spend that much. We spend about 12% on sales and marketing, and so, so there's a lot of leverage in the business. At our Analyst Day, we actually, we've kind of said, "Hey, 100, 100 basis points growth is kind of what you would expect to come out of this business, just as a natural scaling business." But at Analyst Day, we were far more specific.
We said, "An incremental 200 basis points in 2024, and an incremental 200 basis points on top in 2025 of what we do in 2024." And you might say, "Mm, how are you gonna do that?" So in Q2 of this year, we did north of 26% of revenue was R&D spend. We have two large-scale projects that are coming to the end. We've made a ton of investment in building out the infrastructure and the accounting rules around international, and, and we've come to the close on that. There's always still maintenance on that. There's always something new, but we're able to take a, a lot of those resources and redeploy those, right, into other growth initiatives. Whereas in the past, we would've had to hire to find those employees to, to, to build that.
We can now redeploy a portion of those employees. Same thing is we've been working a lot on scaling the business, and we've come to this point where, at the end of this month, we'll be on a single global cloud provider. We were. We had a multi-cloud strategy. We'll come to the end of that, and we see a ton of scale coming out of those. So we see we'll always continue to grow R&D, and we continue to be incredibly committed to investing there in incremental product and building that, but we just don't have to grow that team like we're gonna grow revenue. And so that's how we get to scale.
Perfect. We're running close to time, but we can't finish this discussion without talking with GenAI.
Yeah. All right. Oh.
Yeah, that's-
So, okay.
Yeah. Yeah.
So lots of exciting things. We have our client conference next week, where we're gonna reveal more to clients. That's really interesting. But I think that there's two things to take away from, like, why should you believe in and within GenAI, we have ability to make our product much more accessible to clients through that, and we have significant efficiency to drive within our own scale, which, by the way, is not in that 200 incremental basis points. We think that there's an incredible amount there. We just aren't yet ready to commit to what that number is. But why do we think that it's actually even more important for Clearwater? Because we have that single data source, right? We're pulling that. You need the data to pull this through.
So we've done an example where it took two or three days. Someone might ask a question on an efficiency side, someone asked a question, "Why is that number, that number?" And generally, how it works is you have three emails back and forth. The number is that because of this reason, "Well, why is that?" "Well, what if you I looked at this, how would this be different?" Back and forth. That's, that's a normal interaction. We can do all that, like, in moments. Now, we do not think you extract the human from the loop, but we've done millions of reconciliations, and so for the large language model to be able to look, look at those millions of reconciliations and say, "These are the 3 most accurate reasons. Pick the one you think is most likely," it just makes a ton of sense.
That's on the efficiency side. On the product side, there's just a ton of accessibility and insight that we're able to provide, and again, it comes back to having that large data set that we think differentiates us from other folks in that area.
We'll just do one last one out-
Yeah
... over here. When you think of the opportunity with GenAI, is it in the next 12 months, do you think, it's more for revenue driver or cost saving, internal cost savings?
Yes, yes, both.
Okay.
Both. We have four initiatives going on.
Yeah.
We got 40 people working on it. four initiatives going on. Two are on the revenue side, two are on the efficiency side.
So, you think it can be equally attractive across both revenue and margin?
We'll find out.
Okay.
We'll find out.
Okay.
It's early days. Thanks, everybody.
Thank you.
Thanks for your interest.