Good afternoon. I'm Kevin McVeigh, formerly of CS, and I'm thrilled to be here as part of the UBS effort in the tech conference. Next up, we have Jim Cox, who's the CFO of Clearwater Analytics. It's a company we've been. We took public back in 2021, and it's really been a really, really nice opportunity to come back and revisit Clearwater pretty consistently over the course of the years. But at this event every year, and you can see the way they really execute and just continue to grow the model. I try to keep these as iterative as possible. I'm going to start out with a little Q&A. If anyone wants to ask the questions, we'll get you to do it with a mic or through the iPad.
Obviously, this is Ballroom App, and then alternatively, you can also email me kevin.mcveigh@ubs.com, and we'll get to it. You know, we started this right after Clearwater went public in 2021, and I think it's been helpful. I like to start this way for a couple reasons. Number one, I think it really helps frame the success you folks have had in the public markets, but also to help provide a little bit of a lens of where you differentiate relative to some of your competitors. You know, I don't think Jim ever gets tired of answering this question, but I'll start with, so tell us about Clearwater today versus the time of IPO.
What's kind of been interesting is it hasn't been the most accommodating markets, and you folks have really executed, and I think it really underscores what you and Sandeep have done and the team collectively, but just also the strength of the platform. So maybe we'll start there a little bit.
Thanks. So first of all, Kevin, thank you very much. Thanks to UBS for supporting us and for your continued support all along this. We really appreciate it. And this is a webcast, so I don't know if people can see us or not, but this is a legit green backdrop. And the other thing I have to compliment UBS on is, as big a fan, as big a buy as I am on Clearwater, the cookie and ice cream in the mid-afternoon snack is at every conference I've been to maybe not thousands, but hundreds of conferences. That is, that's right at the very top. So I'm very, very long on the cookie and ice cream.
So, if there's one thing you take away from this, it's go get the cookies and ice cream. Well played, well played. And, yeah, thanks for your support. I mean, I remember the first time we were here, it was this time in 2021.
That's right.
We'd just gone public in September, and we were still in COVID. This was the first conference, and we did it outside because of COVID.
That's right.
We're still doing it outside. This is the other thing I'll say about this conference: you can get a tan while you're talking to investors.
Correct.
-which is AUM, clients, and investors. That's a good day.
Doesn't get any better.
That's a good day.
Doesn't get any better.
Take us back to kind of where we were in 2021, or even when I joined in 2019. You know, in 2019, when I joined Sandeep, you know, it was... So the company is still proudly headquartered in Boise, Idaho. But, you know, 90% of the employees were in Boise. Today, you know, we still have more employees in Boise in 2023 than we had in 2019, but we have hundreds in Edinburgh, hundreds in New York, or about 100 between New York, Seattle, the Bay Area, Washington, D.C., hundreds in India. So it's really become a much more global organization, since that point in time. You know, when we went public, a lot has stayed the same.
Right.
So it's been nice that, you know, consistency is good. So we're in a replacement market where we sell portfolio accounting, reporting, analytics, compliance, performance, and risk to... We started in corporates long ago. That's when I was a client. Before I was a CFO, I was a client of Clearwater, a user of the system, a light user of the system, but a user of the system. And then moved to insurance and selling to corporates, insurance companies, and then asset managers. Much of that is the same. We've added on. We have a number of REITs that we're proud to welcome to the threshold, to the party, a number of state and local governments in North America.
So it was, so kind of that has stayed the same, and we continue to kind of consistently, displace and win. And why is that the case? That's because the problems from 2019 to 2021 to 2023 have only gotten harder, right? So when you do accounting, you need to be comprehensive, you need to be trusted, you need to be accurate. And when people continue to invest more globally and continue to invest in different instruments and increasingly complex instruments, the needs continue to become greater and greater and greater. And basically what ends up happening is there's a little tipping, and it just makes sense to move over to Clearwater. So that's, that's another...
We've all-- What's stayed the same, we've always been quite profitable, and we've always consistently grown kind of 20%-25% in these new markets. What is new? Not necessarily new, but has evolved is a couple things. One, we are more and more internationally focused as we expand. When we went public, less than 10% of our revenues were outside of the United States. And now, you know, it's in the double digits. But if you look at the global wealth, especially a firm like UBS, that understands it as well as anyone, you know, half the world's wealth is outside of North America. So in the long, long term, you would think that we would be as large outside of North America as we are in it.
Nicely profitable and generating cash flow and continuing to invest. So that's. I would say other things that have evolved is what's the same is our clients have generally always loved us, and they still do. We benefit from really high gross retention rates and really high net promoter scores. So our clients are really promoters. That's stayed consistent over that period of time I've been here, but what's different is we're really leaning in to try and think about what more can we do with our clients, for our clients to make them better? So you'll hear us continue to focus on net revenue retention and growing with our clients as they see the need. Yeah, sorry, that's a very long-winded answer, my friend.
It was winded, but I think you're being modest, though, too. And I mean that sincerely in terms of, you know, I think one of the things we marveled at was your ability to change the pricing model without really impacting the revenue at all. So maybe talk about that a little bit. And I think while simultaneously doing that, identifying, you know, I think within the existing market, I think one of the things that really gets lost on the market sometimes, and I think I'm a little biased because I'm a CPA by background, is just the complexity of the accounting software that you have.
Yeah.
I mean, there's a reason, and, and maybe talk to this a little bit, too, within the framework of the pricing. You know, there's a reason you serve insurance companies, corporates, asset managers domestically, because it's very complex accounting, and, and you folks made a very, smart strategic decision to start in the back end, and you flexed out that product through, again, another very strategic acquisition in JUMP. Maybe talk to that a little bit, because there's a reason you've been able to grow 20%, where a lot of the relative comps in, in a more uneven macro haven't. And again, I think it's the stability of the clients, the modules.
Yeah.
Talk to that a little bit-
Yeah.
because I think it's really important within the context of a very efficient tech stack.
Thanks. Thanks. So yeah, so maybe backing up to kind of when we went public, we had generally an AUM-based pricing model and kind of had fallen into that from the perspective that, in general, assets go up, and so that generally helps. And that it's aligned with how our clients think about their business and their assets, both our asset owner clients as well as the asset management clients. They think about the assets that they have, and so created great alignment. And that was kind of in 2021 when we went public, we talked about that.
We said, "Hey, 80% of our assets are high-quality fixed income, and so we don't have that much volatility in the revenue stream." Well, then, 2022 came along, and we were a public company where people were tracking us quarter by quarter by quarter. And, the Fed funds rate went from basically zero to five in a record amount of time, which put... Let's just be clear, it did put significant pressure-
Yes
... on our revenue. We came to the realization that there was a better way to do that. There were a lot of things that, you know, there's always a list of things that you can do better. And, and so we, Sandeep and I will always talk about never waste a crisis. So this was an opportunity for us to rethink our commercial model into a better way. And so what we did was we pivoted from this AUM-based pricing model to what is called a Base Plus pricing model. So it was interesting. What we used to do when we would get a new client, even in the AUM pricing world, is we would say, "Okay, tell me about your assets. Tell me about kind of, you know, where they're, where they're domiciled, how complicated they are.
Tell me about what you need to report on and all those things, so that we can kind of understand that." And then we would kind of figure out what we thought it would cost, and we thought, "Hey, we probably need at least 80% gross margins." Then we would think about the specific market we were in, and we would come up with what we thought was an annual price that made sense. Then we would take that annual price, and we would do division. We would divide it by the AUM that they had and say, "Here's your basis point, right?" So we did this amazing thing with the sales team. We said, "Stop doing division." Just that number, you know, $100,000, $500,000, $1 million, whatever that annual fee is, that's the base fee. But we have the plus, right?
And so because, you know, a lot of people are leaning into Clearwater because they want to do something new. They want to grow their business. They want to move into a new geography. They're, they're investing in new asset classes or different asset classes and doing something different. And so that, that book is gonna evolve. And so you can then say to those new clients, "Okay, here's your base fee for your book today. As your book grows and evolves, there's a basis point fee that goes along with that." Then the third thing we said was, "Hey, let's not create a problem in five years from now where your assets have doubled and your base fee is basically the same price, and now we don't have the, the—we haven't de-risked the downside.
So we have kind of an annual price increase on that base fee that kind of builds up." And so that's kind of the commercial construct of that, that went through and... But the most strategic element of it was, up until that point in time, we had sold this thing called Clearwater. One product to everyone, and then we would spend 25 cents of every dollar of revenue we got on R&D, and we would put that in the product and give it away. These are things we can do better. So the final piece that we did was we said, "Hey, what you bought is, we're going to define what you bought, and what we build in the future that is different, we will charge you separately for that, if you want to buy that." All very rational things.
It's amazing that it took us that long to come up with that, but that's kind of the pricing scheme that we went through. It has worked incredibly well for all new clients. And the other thing we did, because we had a little bit of a hole in the bucket in 2022, is we went back to our existing clients and said, "We'd like to change that." And that's where the proof is in the pudding of high NPS scores, high gross retention rates, high customer satisfaction. When you go back to your customer and you say, "Hey, we need your help," and they say, "We're in it with you, we can understand that," that was a really great outcome for investors, for the strategy of the company and for our clients.
Because what it allows us to do is really lean in and invest for growth in areas that we can then, you know, offer these products to our clients, going forward. So that was kind of the pricing model change. Again, I went on, you had a second... Oh, doing more for our client-
Yep.
and the JUMP acquisition. So that's the other... And so now that we have the commercial construct in place where we can do more for our clients, we have organic elements that we're doing for them, like Prism or LPx, which these are additional products. Fundamentally, LPx is just... We already had LP investments on the platform, but when you invest in an LP, you want to know different things than accounting about it, and you want to be able to look through it and understand it. That's what LPx provides you. And guess what? Clients understand there's incremental value for this. I'll pay more for this. That's one example of that product. We also, on December first of last year, did our first acquisition. We had been 100% organic growth up until that point.
Did a small acquisition of a company called JUMP, which is about 100 people based in Paris. And what they provide us is kind of they did more of a suite for the asset manager, middle office, trade order management, as well as some accounting and reporting. And they had some specific nuances for the French-speaking marketplace that was useful. So we did that, and I think that acquisition has gone relatively well. So we're excited to both invest, you know, with kind of within our R&D for organic additional product expansion, as well as look to doing more things for our clients through an inorganic approach as well.
One other thing before we get off the topic, that's really important, too, is, you know, the contract, your contracts are such that a client could opt out any month. I mean, there's no minimum-
They can.
Right? So if you think about that relative to more traditional software contracts, it could be three to five years, and then you enjoy the retention rates you do really underscores, I think.
That's. I've been a CFO at a lot of software companies. The first thing I did in 2019, I went to Sandeep. I said, "I got an idea, three-year contracts." He goes, "Try and figure out what problem you're trying to solve, Jim." And, you know, we have 98% gross retention. And the month-to-month contracts, the founders, the founders did a few things right. This is another one of these things, because it's created a culture within the company that is so client-focused. Because you can't sign a three-year contract and ignore a customer for 18 months and then kind of warm them back up in time for the renewal. You have to prove your value every day. That's why we have contracts like that.
Clients, clients like that, and, you know, I think, you know, the gross retention rates prove that, you know, you can do that on a month-to-month basis.
Great. Are there any questions in the audience or... Let me just check my email real quick. Otherwise, I want to pivot over to the Investor Day, because I think there's-
Yeah.
A couple of things to really focus on.
Yeah. Sure. So they, so for the, for the webcast, the question was to talk about competition. So we're generally in a replacement market. Someone has something, typically. And so let's talk about it market by market. You know, there's nuances, North America versus international, as well as by. So within. So I'm gonna contradict myself with the first. Within corporates, that's the one place where there is some greenfield. So a startup gets funded with $100 million, and they start investing in that. That would be one place. But there are also various legacy treasury systems where someone's using treasury system and doing some accounting within it, and we will displace those.
Within the insurance segment, there's a variety of legacy competitors that we're replacing, and those would be kind of either large software companies that you've heard of that are a variety of different brands or software pieces that have been kind of subsumed into maybe trust banks or something like that. And so that's in that.
On the asset management side, we're also competing against a variety of those legacy competitors that are kind of large public companies with lots of brand. As you pivot internationally, what's interesting is accounting, investment accounting is the la-- I had an old boss, she used to say, "It's the land of a thousand niches." There's lots and lots of these when you get into France or Germany or Hong Kong or the U.K., there are special purpose kind of entities. What we-- our value prop is really any asset class, any geography, anybo- if you wanna have a consolidated view, that's what we're solving. When we come in, we're generally displacing that legacy competitor.
We're displacing all the spreadsheets that sat around where that legacy competitor fell short, and we're generally displacing, at least from an accounting perspective, a data warehouse where people have put stuff together, and then those people can go off and do other things.
I think, Jim, to drive that point home, I think one of the subtle undercurrents to a lot of these models is the IP buildup over time, right? 'Cause I think, correct me if I'm wrong, but 90% is flow through, but then there's that incremental 10% where you're creating what the accounting interpretation is, and then that goes into your system, right?
Yeah.
To your point earlier, and it's a terrible example, but the war in Ukraine, right, really drove home people needed to know what their exposures were.
Yeah.
It really exposed a lot of the shortfalls of your competitors, and with the systems you have, it gives you that real-time capability, which-
Thank you, Kevin. Thank you. I buried the lead. This is the most important thing you can understand, is we truly have a differentiated technology. We do it differently, and I always forget this. So most portfolio accounting systems think about a portfolio. Whether you're in the cloud or on the ground, you're thinking about a unique portfolio that's unique to you as a customer or you as a customer, or even within customers, unique. You might have multiple, right, within a customer. We do it differently, and this was a second thing that the founders did brilliantly. I think they locked into it, but it's still brilliant, which is we don't think about a portfolio. We think about the securities in your portfolio. We have a single instance, multi-tenant platform that has a single security master.
And that is a little nuance that we're accounting for the securities underlying that. But it's really important because what it means is, if half the people in this room have the same security, we ingest it once, we reconcile it once, and we clean it once. The benefits of that are obviously efficiency to us, but the benefits are also to our clients because the quality. Let's say that the price is wrong on that security, we fix it once, and it ripples through to every client that has that security. Find it once, fix it once, ripples to everyone. And so we actually have a view that's, to my knowledge, no one else has this architectural construct. No one. Legacy, new entrant, anything like that, no one does it this way.
And it's very powerful because we have 2,400 data feeds that are coming in that are driving those securities. And we've modeled those thousands and hundreds of thousands, if not millions, of securities have also been modeled. And so we get the securities right, and only after we have all the data clean, validated, and run, do we actually care whether it's customer A or customer B or portfolio C, and you run that up. This allows you to go up and down. It allows you to do any GAAP anywhere. You wanna look at GAAP, you wanna look at IFRS, you wanna look at tax, boom, boom, boom. It's all the same core underlying data. It's just spun up. All accounting is, is a set of underlying rules as long as you get the data clean. That's, that's honestly the true differentiator.
When people see that, they're like, "Oh," you know. Sandeep likes to say, and I agree with him, "If you knew to do it this way..." No one says, "Oh, you shouldn't do it this way." Like, everyone who hears this is like, "This is the right way to do it." It's just that, the founders came up with that.
And then another subtle impact is how much more efficient you are in auto processes and consolidation, things like that.
Absolutely. Absolutely. So yeah, so when we go out after we get a client, a year later, we'll ask them: "Okay, what problem did we solve for you?" And, you know, across insurers, it's, you know, time to close because we're doing a daily soft close. So when they get to month-end, 80% of our clients are closing on day one or day two. And trust me, before they come to us, they're closing on day 16, and there's 22 days in the month. So if you haven't closed until day 16, do you really—how do you act? How do you trade with any confidence around that if you don't know that?
To switch gears, I think, because you had an inaugural Investor Day this year, which is really just a really, really eloquent, we thought, at the time and continue. But, you know, a couple of things that really jumped out were the improvement you're seeing in the Net Revenue Retention over time.
Yeah.
So maybe talk to that a little bit. If you can build it up, maybe from the gross to the net, and then ultimately, you know, you said, and I promised I was going to bring the shirt. It's in my bag. The 115% NRR, which is a terrific, where, again, depend upon the quarter and, not 106%-109%-
Yeah.
is where it's been over the last year or so.
Yeah.
But you'll maybe help us understand that and then a little bit of a bridge to the 115%... We, I can't—we have to spend some time on it because it was important, but, you know, you've got really, really impressive margin expansion targets.
Yeah.
that don't have any AI
Right.
benefit in them. So, a lot to unpack there, I know, but I think, again, it, it's a framework that really endorses an efficient-
Yeah. So we have a situation where we have very sticky customers who like us and wanna do more with us. We really should do better than where we are at NRR. It's pretty average, 106%, 108%, 109%, where we're living. Now, it was very, very average when it was 104% in 2022, before we—when we had the headwinds from the AUM and had not changed the model. But if you start with ... It's really the NRR concept is same-store sales. Start at that, we lose about 2%, generally due to acquisition or people run out of money, and they no longer invest, so that goes to 98%. Then you have some price increases that are involved, right?
Some natural AUM expansion that's involved, and then you have some back-selling, both of additional business lines of some of our asset managers or additional products like LPx. That gets us to where we are. We really believe that when you look at great, fast businesses, and that's what we aspire to be, those NRR rates are 115%, 120%, or even higher. I think we do a great job commercializing upfront, and so I think 115% is a really... It's a hairy goal, but it's one that we are really focused on because we like to get behind them. And so as we add more products and solutions for our clients, we can see bridging that from, call it, the 108% of last quarter up to 115%, as we sell more back into that client base, and do more for those clients.
That's really important. The other piece that we talked about to close out was we've always been nicely profitable. You know, before we were public, we were at about 30%. EBITDA margins went down a little bit when we went public. There's this thing called public company costs. By the way, lovely hotel. Yeah. You know, in September 2023, EBITDA margins would be 27%. We've stepped that up to 28%. But in September, we said we're gonna increment 200 basis points of margin improvement in 2024 and another 200% in 2025. We stand by that, even though this year we're gonna do 28%, so we'll go 28%, 30%, 32%. Why can we do that?
Because within our R&D, which is about 26% of revenues in the last quarter, generally, R&D will continue to grow and go up in real dollar terms. But as a percentage of revenue, it's gonna go down to normalize to 20% because we've just completed two major programs. One, was we built all these global GAAPs, so that we could compete internationally. It was a huge lift by the team. That's now largely complete. Those resources are free enough to do other growth initiatives. So we don't have to hire additional people to do those additional growth initiatives. We can just redeploy them on that. And secondly, we're fully in the cloud on AWS, and so that also creates efficiency, and there was a reasonable amount of work to do that. So R&D is gonna step down. We've always had nice leverage, right?
We have this single security master, so there's a natural scaling in the business. So we've seen gross margins continue to march up, and we expect those to march up to 80% gross margins, about half a percent per year, kind of, as, as we kind of continue to scale. You might ask, "Why isn't it over 80% already?" And I would say that that's because we were building out international. You have, you have a lot of efficiency in North America with all the securities, but when you go into a new region, that's obviously a natural headwind against it. And then, obviously, we'll continue to scale in G&A as we kind of ... Those public company costs are at least relatively fixed.
That's a nice model, and we convert to cash at a reasonable rate, along those lines as well.
But also say the JUMP acquisition, in addition to extending kind of the capabilities, created a nice European beachhead for you.
Really.
Right.
Really important. That's probably the thing that I underappreciated, was just having 100 people in Paris from acquiring JUMP helps Clearwater sell. The other thing that I probably underappreciated was JUMP being part of Clearwater, they're getting larger and more sophisticated clients than they had as well, just on their old, their same platform, you know. Now, what we have to do is we've got to put those together and really deliver on the promise that we see available.
Any other questions in the audience? I always like to close these out. Jimmy, you've been really transparent to public markets. Anything you think that if you were to think about across Clearwater today, maybe the market doesn't have as much focus from a Clearwater perspective?
Yeah. Yeah, I think that—I think... So I think if I were gonna say, what are the five things that everybody needs to understand? Number one, you know, we do it differently, right? This, this having the single security master really is a fundamental differentiator. Number two, we're in a replacement market. And when you have a fundamental differentiator in a replacement market, the ability to compound on that and grow. Why do we believe we will grow 20%+ into the future? Because we always have. But that compounding in a replacement market, where you are the next generation winner, goes on. It takes longer than everyone expects, because accounting software is really sticky, but it also goes on much longer than anyone expects.
And so that is a great business to be a CFO in, because you can see the visibility, and you can then make investments that are intelligent to be able to maximize that opportunity in the future.
You see, you know, indeed, to your point, you've always been very, very on the front foot of innovation, and that continues.
Yeah, we're just getting started with AI. AI, given the single-instance, multi-tenant solution and the single security master, we think we have an opportunity no one else has in our little place in the world with respect to that, but there's more to do there.
Thank you. Thanks, everybody, for joining.