Good evening. Thank you for attending today's Clearwater Analytics fourth quarter and full year 2021 earnings conference call. My name is Selena, and I will be your moderator. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, JR Ritchie, Head of Investor Relations. Please go ahead.
Thank you, and welcome everyone to Clearwater Analytics' fourth quarter financial results conference call. Joining me on the call today are Sandeep Sahai, Chief Executive Officer, and Jim Cox, Chief Financial Officer. After their remarks, we will open the call up to a question and answer session. I'd 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. Expression of future goals, including business outlook, expectation for future financial performance and similar items, including without limitation, expressions using the terminology may, will, can, expect and believe, and expressions which reflect something other than historical facts are intended to identify forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors section of our filings with the SEC.
Actual results may differ materially from any forward-looking statements. The company undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after the conference call, except as required by law. For more information, please refer to the cautionary statements included in our earnings press release. Lastly, all metrics discussed on this call are non-GAAP, unless otherwise noted. A reconciliation 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, Sandeep Sahai.
Thank you, JR, and welcome everyone, and thank you all for your continued interest in Clearwater. We finished 2021 strong. Revenue for Q4 was $69.8 million, which constitutes a year-on-year growth of 27%. For the full year, revenue grew 24%, which is a very nice re-acceleration to our historic growth rate. Gross revenue retention remains consistently strong at 98%, and I'm very happy to note that our net revenue retention increased to 111% in Q4, up 210 basis points year-over-year. We have continued to execute well, resulting in a gross margin of 75.5%, which in turn helped drive strong profitability in the quarter. We added 97 net new clients last year, and approximately 45% of them left a legacy competitor to move to our platform.
Some who were on a legacy platform for over a decade or more, while others barely finished the implementations just a few years back. We also won across the spectrum of clients. We now have 59 clients with an ARR of at least $1 million. I would be remiss if I did not acknowledge another very significant win for us in Europe in the fourth quarter. Athora is a leading, fast-growing, and acquisitive European insurer that has assets across many countries in Europe, and we're delighted to welcome them to the Clearwater platform. To understand this continued transition to Clearwater, I would like to talk about the value we bring to our customers. Simply put, Clearwater provides clients with a comprehensive, reconciled view of their global portfolio every day.
Our clients invest in a wide variety of asset classes across many geographies and have reporting requirements across multiple regulatory regimes around the world. Providing a comprehensive view is a complex endeavor. Single clients can have investments in 60 different asset classes, 40 different currencies, and we bring it all together every day. Our platform aggregates, reconciles, and validates data from more than 2,500 sources daily and leverages a single security master, where every security is validated once and then used by all our clients, yielding a very strong network effect. Finally, this leads to a very high-quality single source of truth, which is then used by our clients for making decisions about portfolio construction, risk, regulatory reporting, and tax. This technology and approach stands in stark contrast to the legacy providers who have multiple systems and multiple security masters.
Data from all of those systems have to be brought together to build a comprehensive view requiring armies of people, often leading to unreliable levels of accuracy. The power of the Clearwater single instance multi-tenant platform is being used by an increasingly wider set of clients across the world, including insurance companies, asset managers, and corporations in North America, Europe, and Asia. One unique business value we have not stressed enough is that our platform is a true enabler of growth for our clients. Investing in new asset classes and reporting in new geographies used to require implementing new technologies and building out additional operations teams. Our clients are able to scale globally, invest aggressively in widely varying asset types, acquire new businesses, and integrate them rapidly, because our solution provides them the infrastructure to do so on demand.
As one client told us after a $4 billion acquisition, that they had the new securities staged on our platform and ready for reporting before the deal even closed. Last year, we supported several clients as they integrated new assets from acquisitions. Others saw significant growth organically, and still others onboarded additional asset types. All had a constant and complete view of their portfolios daily. The fact is, Clearwater gives clients the freedom to grow into new asset classes, new geographies, and acquire new portfolios without having to spend months and years implementing new systems. Little has changed in our approach towards the three growth horizons, which provide us with multiple levers for continued future expansion. First, we are focusing on maintaining our growth trajectory by deepening relationships with current clients and capturing more market share in our core markets of insurance, asset management, and corporations.
Doing that both in North America and in Europe, where we have significant presence and strong track records. That is our foremost priority and takes the vast majority of our efforts. Second, we're entering adjacent markets, such as state and local governments here in the U.S., and expanding into Asia. We're also working to deliver adjacent solutions that we can upsell across our vast customer base. Third, we plan to provide deeper insights and help clients understand the best practice in this constantly changing world of investing. Our mission is to be the world's most trusted and comprehensive technology platform for investment accounting and analytics. We believe that we can leverage our technology to eventually revolutionize the broader world of investing.
Other business highlights, we had significant wins in North America across a wide variety of industries, including American Century Life Insurance, Carlisle Companies Incorporated, Circle, City and County of San Francisco, Highmark Health, Madison Re, Sprinklr, and many more. Our competitive win rate on deals that have reached the proposal stage remains strong at approximately 80%, and we continue to displace legacy solutions that cannot provide high-quality data and reporting in the ever-changing world of investment accounting. International expansion continued with the signing of many new clients, including Athora. This is on the heels of our first seven-figure client in Asia, which we had announced in Q3. Under the leadership of Gayatri Raman, President of our Europe and Asia operations, our international business continues to grow very nicely. The international market accounted for over 20% of newly signed business in 2021.
We have great momentum, and with approximately 40% of our total addressable market in Europe, we are excited about the opportunities ahead. We have made significant progress on our new product offering we call Prism, which allows Clearwater to offer a modular investment data aggregation and reporting platform. In situations where clients cannot move away from the current infrastructure in a given country or for an asset class, we can use Prism to integrate other data sources into Clearwater reporting platform to get a comprehensive view of the global portfolio. For example, a very large insurance company can now view additional details about their mortgages on Clearwater for a single view into their global multi-basis portfolio. We have a promising and growing pipeline for Prism in 2022.
To maintain our technological advantage, we reinvested 24% of our revenues into R&D in 2021, and made significant strides with our product enhancements in Q4. In 2021, we improved our product accessibility and usability, kept up with the ever-changing standards like Solvency II, NAIC, IFRS, Schedule BA, and others, so that our clients don't have to. We also continue to introduce additional support for multiple GAAPs around the world and enhanced our capabilities that address our alternative assets. We believe that this product investment allows us to be increasingly comprehensive, integrate new technologies, and continue to expand competitive moats. With continued focus on client success, all three of our operating centers are operating at scale, allowing us to deliver 24/7 operations. These centers deliver for clients across the globe every day and play an important role in onboarding clients.
I'm especially proud of the leadership team we have at Clearwater. Working as a team, we are committed to building a truly special company that enables clients to transform how they do investment accounting in an increasingly complex world. Before returning with a few closing thoughts, I would like to hand the call over to our Chief Financial Officer, Jim Cox, to provide more details on our fourth quarter and full year 2021 financial performance, as well as our initial guidance for 2022.
Thanks, Sandeep, and thank all of you for joining us today. We are very pleased with what can only be described as stellar financial performance for both the fourth quarter and full year. The fourth quarter exceeded our guidance for revenue and adjusted EBITDA margins on the strength of continued robust client demand, as well as an acceleration of client onboarding activity. As for my specific remarks today, I'll start with a review of our financial results for the fourth quarter and full year 2021, then wrap up with guidance for the first quarter as well as full year 2022. Before detailing our core financial results, I'll first address two items impacting the year-over-year comparability of our fourth quarter. First, you'll notice that we recorded a $49 million one-time recapitalization compensation expense charge in the fourth quarter of 2020.
During November 2020, we completed a recapitalization transaction on behalf of the existing unit holders at that time. The transaction allowed these existing unit holders to sell their units to new investors. In connection with the transaction, selling unit holders contributed $49 million towards bonuses paid to employees and related payroll taxes. Next, following the completion of a comprehensive review of sales tax reporting obligations across multiple jurisdictions in late 2020, we recorded a provision of $9.1 million to cover historical sales tax liabilities in many states, all of which was recorded in general and administrative expense in the fourth quarter of 2020. Throughout 2021, we began collecting and remitting sales tax to jurisdictions on behalf of our customers, contacting existing customers, and executing voluntary disclosure agreements across many state jurisdictions.
Some customers were able to prove usage outside of the taxing jurisdiction, ultimately leading to a $2.0 million reduction in its outstanding liability during the fourth quarter of 2021. Without the benefit of that reduction, Q4 2021 adjusted EBITDA margin would be 25.9%, consistent with the guidance we provided for the fourth quarter. Moving now to our fourth quarter and full year 2021 financial results. Please note that all of our results will be discussed on a non-GAAP or adjusted basis unless otherwise noted. Revenue in the fourth quarter was $69.8 million, up 27% year-over-year due to the successful onboarding of several large clients during the quarter and the growth in a number of existing clients.
Fourth quarter revenue was above our expectations as the investments we continued to make to expedite client onboarding began to pay off sooner than we had anticipated. For the full year, revenue grew an impressive 24%, returning to the durable growth that this business has produced over many years. As of December 31, 2021, annualized recurring revenue or ARR reached $277.8 million, a $20.8 million increase over September 30, 2021, and represents a 26% increase year-over-year. This increase primarily related to the strength of our new sales throughout the year. Gross revenue retention was a consistent 98%, marking the 12th consecutive quarter that we have reported gross revenue retention rate of 98%.
Net revenue retention was again healthy at 111%, up 210 basis points from the fourth quarter of 2020 due to strong overall gross retention, price increases, and upsells across our client base as clients continue to consider us a key enabler of their growth. Gross profit in the quarter was $52.7 million, and gross margin came in at 75.5%, due in part to the strong quarterly revenue performance. We were able to deliver these gross margins while increasing investments to drive faster client onboarding and expanding our international delivery capability. For the full year, gross margin came in at 75.6%, up 50 basis points over 2020. Looking ahead, we expect gross margin to remain at a similar level for the full year 2022.
Research and development expenses in the quarter were $16.5 million or 23.7% of revenue, and slightly below our expectations due to slower than anticipated headcount growth. The hiring market for top engineering talent remains very tight, but we are laser focused on multiple strategies for accelerating our hiring in this area in 2022. For the full year, research and development expenses came in at just over 24% of revenue. We expect our 2022 research and development expenses to be roughly on par as a percentage of revenues with 2021 as we continue to make investments in this area to drive growth in our core markets while also investing in the future products and growth opportunities that Sandeep mentioned earlier in his remarks.
Sales and marketing expenses in the quarter were $9.6 million, or 13.7% of revenue, up 280 basis points year-over-year and in line with our expectations. For the full year, sales and marketing expenses came in at 12.6% of revenue, representing an increase of nearly 370 basis points year-over-year, and demonstrates our continued investment into our go-to-market capabilities, both domestically and internationally. We are pleased that these investments helped drive the re-acceleration of revenue that we saw in 2021. We plan to keep our 2022 investments in sales and marketing at a level similar to the fourth quarter of 2021 in terms of percentage of revenue, as we believe we've made most of the key hires needed to execute our growth strategy in the near term.
General and administrative expenses in the quarter were $6.5 million, or 9.4% of revenue, down significantly year-over-year, due in large part to the reduction of the sales tax liability. For the full year, general and administrative expenses came in at 10% of revenue. Looking ahead to 2022, we expect that general and administrative expenses will increase slightly as a percentage of revenue as we annualize the impact of incremental public company costs resulting from our initial public offering. However, we continue to expect to scale our back-office functions over time, providing operating leverage to the business in the long term.
Adjusted EBITDA in the quarter came in above our expectations at $20.1 million or 28.8% of revenue, up $13.3 million from the fourth quarter of 2020, primarily due to the strong revenue performance as well as the favorable adjustments to our sales tax liability. For the year, adjusted EBITDA was $72.7 million or 28.8% of revenue, representing an increase of nearly 80 basis points year-over-year as we continue to drive robust, sustainable growth throughout 2021. I'll touch on our overall margin expectations for 2022 later in my remarks. First, let's turn to the balance sheet and cash flow. We ended the quarter with $254.6 million in cash and cash equivalents and $53 million in total debt.
Free cash flow for the fourth quarter was $10.9 million and included $1.5 million of capital expenditures, which was primarily made up of capitalized software development costs. Focusing now on guidance for the first quarter of 2022. We expect revenue to be approximately $70 million this quarter, representing 23% year-over-year growth from the first quarter of 2021. We expect the first quarter adjusted EBITDA to be in the range of $17 million-$18 million, with adjusted EBITDA margin expected to come down sequentially from the fourth quarter of 2021 as we continue to make targeted investments, specifically in client onboarding and in research and development, while also absorbing incremental public company costs. Now let's talk about guidance for the full year 2022.
Building on our strong Q4 results, we are currently expecting revenue to be in the range of $302 million-$304 million, representing just over 20% year-over-year growth at the midpoint. Some investors have asked about the potential negative impact of higher interest rates on the AUM value of our clients' fixed income holdings. To date, we have yet to see a strong signal that the expectation for higher interest rates has had a significant impact on our revenues. We plan to continue to monitor these impacts, and we'll provide you with additional commentary throughout the year as we update guidance.
We expect our adjusted EBITDA to be in the range of $80 million-$82 million, with adjusted EBITDA margins likely ramping up throughout the year as we plan to invest more heavily in hiring early in the year while also annualizing incremental public company costs until the late third quarter. Equity-based compensation expense is expected to be approximately $66 million. Depreciation and amortization is expected to be approximately $5 million, and we expect interest expense of approximately $2 million. Our full year non-GAAP effective tax rate is expected to be 29%, and we project full year fully diluted weighted average share count to be approximately 255 million shares. To summarize, we are very pleased with the performance of the business in the fourth quarter as well as for the full year of 2021.
We produced accelerated top line growth and maintained strong adjusted EBITDA margins, all while making targeted investments in driving future sales growth and increased client onboarding speed. Entering 2022, our revenue retention remains consistently strong, while our healthy pipeline makes us optimistic about the accelerating demand for our solution in the marketplace. We are very excited about the significant opportunities in front of us. With that, I'll turn it over to Sandeep to provide some closing thoughts.
Thank you, Jim. As you can see, we continue to run a strong, disciplined rule of fifty-plus company. We are proud of the many achievements we made throughout 2021, including ending Q4 on a strong note and going public in Q3 without letting the process slow our business. We believe that we have a disruptive platform in an industry that is ripe for change, and we plan to methodically march down the three paths of growth that we have outlined. We're looking forward to 2022, continuing to execute, continuing to delight our customers, and continuing to build a special company that all of us are proud to call our own. With that, let me turn it over to the operator for questions.
Thank you. If you'd like to ask a question, please press Star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press Star followed by two. Again, to ask a question, press Star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question comes from Kevin McVeigh with Credit Suisse. Please proceed.
Thank you so much and congratulations. Really exceptional results. Hey, I guess, Sandeep or Jim, in terms of the 2022 guidance, can you help us understand what type of AUM is embedded in that? You know, I know it's probably difficult, but is there any way to think about what type of interest rate assumptions are in there? Just 'cause it sounds like you're getting that question a little bit in terms of what type of rate assumptions are factored into the guidance.
Sure, Kevin. Thanks. This is Jim. Let me just start with Q1, right? We're guiding to 23% revenue growth, and we're actually picking a single point, $70 million for Q1, which is unusual, right? That's kind of an acknowledgment that we're further into the quarter and our confidence levels are naturally higher, right? The full year guide to $302 million-$304 million, I think, is $7 million more than the street consensus for 2022 at the midpoint there. It's totally consistent with our growth rate of being greater than a 20% grower. You know, you referenced interest rates, but that's one of really just a total handful of things that make these really unusual times.
You know, we have the invasion of Ukraine, volatility in equity and commodity markets, inflationary pressures, as well as, you know, the 25 basis point change in the interest rates. Let's not forget about COVID, right? That, who thought that would drop off the list? You know, the macro environment's pretty difficult to read, you know, two or three quarters into the future. We really wanted to stand by guidance that we could stand behind in light of that uncertainty. When you think about that AUM, and remember, we have, you know, a variety of minimums and things within our contracts. You know, we really looked at that guidance and contemplated, you know, what we see within our business model and our pipeline today. To date, we have not seen changes to that business model or pipeline.
We would expect the continued AUM growth that we've seen through adding new customers, growing with our existing customers, and you know, doing more for our clients, as we roll forward. I guess the last thing I'd say is when you think about, right, this is. Please go ahead, Sandeep.
No, please go ahead, Jim.
No, no. Yeah, please.
Yeah, all I was gonna say, Kevin, was if you look at our client base, I mean, the whole investment strategy revolves around protecting the asset pool. I mean, that's what they think. Traditionally, you've had very low volatility. You may recall during the IPO roadshow, I think, we had gone through the 2020, what happened, which was frankly a big disruption at that time, but the impact on our asset fundamentals was minimal. Interest rates started to change, and the expectations, I think, started to change in November of last year. We watched it, didn't expect any big change in our system and didn't see it. We continue to watch it, but like Jim said, we just don't notice it.
Clients are moving assets a little bit, and we sort of see where they're moving it, but the volatility continues to be really, really low.
I would almost think, Sandeep, given the kind of full lens you have across the platforms, it's probably gonna accelerate the demand for what you're providing if you do see some incremental volatility. Am I thinking about that right?
Yeah. You know, one more thing, Kevin, if you think about it, whenever there's uncertainty, variable cost base, right? That sort of accelerates movement to cloud, movement to managed services and things of that ilk, because that's really what you would want if you were the user on the other side, right?
Totally agree. Thanks so much. Great job.
Thanks.
Thank you.
Thank you, Kevin. The next question comes from Michael Turrin with Wells Fargo. Please proceed.
Michael, are you on mute?
Hello?
Michael, are you there?
We can hear you. Go ahead.
We can hear you now. Yeah.
Okay. This is Michael Burnell from Michael Turrin. Congrats again on a fantastic end to the year and first, you know, couple strong quarters as a public company. One thing I wanted to kind of double-click on is looking at the numbers from guidance and your color commentary on expenses in fiscal 2022 makes it seem like a pretty sizable step-up in sales and marketing expense. Is there anything in particular you're investing for? You mentioned customer onboarding, but you know, any geos or verticals to think about where you're investing in sales and marketing. Can we think about that potentially driving higher growth you know, above the 20% level moving forward?
Sure, Michael, that's
Yeah.
Go ahead, Sandeep.
Go ahead.
Sure, sure.
You and I got to team up. It'll just make it easy.
We do. This is the last time we're both doing this, right? Yes, I totally agree. Hey, so we feel really good about the opportunities we have. As you think about where are we investing, you know, last year, we continued to accelerate our investment internationally. We saw great returns on that, so we continue to lean in. As we mentioned in the prepared remarks, we have, you know, the leadership teams in place, and we'll be able to drive those, you know, those teams, throughout the year, and we'll continue to build there. We also are leaning in on our marketing spend. We have a great new CMO, and Susan's doing a great job.
You know, we have the event in London for our European clients in April of this year. We're gonna lean in on really the marketing spend that we have throughout here. We also obviously have done a bunch of investment throughout 2021 to build out those teams. Part of that expansion year-over-year is merely the annualization of those hires.
I would just add a few more things, Michael, to that. One is the investment obviously is consistent with the Q4 level, right? When we spoke to you all in Q2, Q3, actually, if you remember, we said we're gonna invest more in the operations side to onboard clients. Frankly, you saw that back, right? You saw in Q4 those numbers are really good. I do also want to just quickly mention that a lot of these offices we set up in Continental Europe and in Asia still have to blossom fully, right? I mean, it's not like they are contributing very much to the 2021 growth because they were set up, you know, in the May/June/July timeframe of last year. We expect them to contribute to growth in 2022 and definitely contribute to growth in 2023, right?
We still feel this 13%-14% investment in sales and marketing, I think, is good. We continue to believe that we can manage EBITDA at the levels you would like while making that investment, also because those margins are steady. Why not, right?
Got it. Thank you. One quick follow-up. Did you quantify the number of quota-carrying reps? If not, could you?
We have not historically disclosed that. We'll probably
Michael, I can tell you lots of money being spent on it. Good Lord, I look at that and say, "Oh, my God." We're adding a number of closers, and they all have to obviously be effectively onboarded and contribute to growth. We look forward to them doing that in 2022. Like I said, have a much larger impact in 2023.
Great. Thank you, and congrats again.
Thanks, Mike.
Thank you. The next question comes from Jackson Ader with JPMorgan. Please proceed.
Great. Hey, guys. Thanks for taking our question. I wanna ask about the onboarding investments that you made. I'm just curious. Because I think a lot of times you sign a customer and you will run Clearwater, right, in parallel for some pilot timeframe next to their legacy systems. I'm curious, do the onboarding investments try to drive faster time to that parallel running, or were they trying to shorten the amount of time that that pilot period would last? I'm just trying to get a kind of the sustainability here of that onboarding tailwind to growth.
Yeah, Jackson, this is Sandeep. Thank you for your question. Listen, I think when you think about onboarding, the first thing is you can't cheat time, right? I mean, you can get things onboarded really quickly, and yet you have to do the parallel to be confident about the rollover, right, of the system going live. You can't cheat that time. Secondarily, though, if you don't build a really solid organization, right, then the ability to execute around the world falls. As you know, we sort of won some deals a little bit ahead of time, like we saw in Asia and in Europe. That's the team Jim is talking about building out.
Today, if we get programs and projects literally anywhere in Europe and in Asia, I think we can execute them, right? We can execute them with speed. Are we trying to become a little bit more efficient incrementally? Yes. That's always the case, right? Do we now have leadership which knows how to execute very large programs? The answer is yes. We now have leadership at the senior level, at the next level, and those have been built out. They've been in the organization for reasonable periods of time that we feel a lot more confident about, programs of any size, like the Athora win. I mean, we sent out a press release, you may have seen about Athora.
You know, it's a really significant win in Europe, and we feel completely comfortable that we can implement that. Jim, anything you would add to that?
Gotcha. Okay.
Yeah.
Okay. All right. Great. Just a quick follow-up. I mean, is there any kind of seasonality in this end market that we should think about in terms of RFP cycles? I mean, is it just your typical fourth quarter tends to be the heaviest, or is there anything we should be thinking about as we head into 2022 on the placement cycle?
Not really. You know, Jackson, there's no real reason to do it at a certain time or not, right? I do think all of these. You know, so I'm not quite sure I can point to any seasonality about decision-making. Yeah. I don't know what you think. The only thing I would caveat,
Sandeep, for that is in the natural thing that happens across a lot of
Right.
Software and SaaS businesses, is Europe in the third quarter gets a little quieter. Because we're doing accounting and people are coming over, on the onboarding process, there's also, you know, people like to have clean years. We've been able to kind of manage through that process. People would want a full year of data on the platform.
Jackson, you're still talking about booking.
Right. I'm sorry about that.
When you're talking about the seasonality, it's not the revenue, because the revenue sort of follows, right? It's not like Q4 will naturally have higher revenue. That's not the case.
Right. Yeah. I was talking about like, you know, deal flow and bookings. That's right. Okay. Thank you.
Thank you, Jackson.
Thank you, Jackson. The next question comes from Bhavan Suri with William Blair. Please proceed.
Hey, guys. Can you hear me okay?
We can.
Yes.
Great. Loud and clear. Congratulations. It's a great set of results and I'm certainly excited about the outlook here. I guess I wanted to touch a little bit, you know, on your product side here. You know, you've obviously brought in a new CTO a little while ago. As you think about Souvik and you think about the AI machine learning we've discussed in the past, I'd love to understand how he and you are thinking about the potential to leverage some of the AI ML capabilities to gain additional insights from the assets on the platform.
Sort of, can you talk a little bit about the longer-term plans now that he's had some time about what you could do with the data and the assets on the platform to drive additional product sets?
Yeah. You know, favorite question of mine. Thank you, Bhavan. It's almost like I called you before this to ask you. Look, I think to be-
You did it.
Now, look, we are thrilled with bringing on Joseph Kochansky and Souvik to us. They bring really complementary skills, right? There's you know, if you think of the market and the industry, there is little Jody didn't quite understand. He does. He's been in it for a long time. Souvik comes from a really strong technology background, and again, in terms of scale, in terms of machine learning, AI, RPA, those kind of things, and how to really get value from them. We are really excited about what we are doing here. The one big area, of course, is insights, right? So what do clients want? They want insights from their data. I just have to say that we are continuing to make really good progress.
One of the biggest ways you get insight, Bhavan, is to bring all the data together in a normalized way. That's why you see Jim and me pushing so much on Prism, because what Prism does is, keyword is on keyword. That's easy. Then people have other systems in other countries, or they have something else for real estate, they have something else for derivatives perhaps. So what Prism does is brings all of it together, and that starts the insights. I do think that Clearwater's value gets very enhanced, when clients can get insights into a global portfolio, right? We continue to sort of invest in that, and we'll continue to do so for all of this year, next year.
Gotcha.
Bhavan, this is Jim. Let me give you one of the-
Yeah, of course.
Sorry. I was just gonna give you a little example of, like, bringing this data together all into one place and giving you an example. On Monday, we asked the data science team, you know, what's our exposure to Russian securities because we thought maybe someone might ask a question about that. They were able to come back to us, right, and say, "Oh, it's 0.03% are securities that are either, you know, embodied through the security master in Russia or denominated in ruble." Try and understand that. You think about that. That's across the $5.9 trillion in assets on the platform. You can figure those things out. That just throwing that one out. That was ad hoc, right?
That's the benefit of to your point, talking about kind of what's the opportunity for those insights. That's just one little quick example that we went through.
That was actually really helpful. I wasn't gonna ask that question, but thank you for answering it. I'm sure someone had. Let's touch on competition really quickly. Just any update on competitive environment, is it still status quo? I guess, who do you see most in bake-offs? Maybe some sense of win rates would be helpful.
Yeah, you know, I think you're asking all the questions I think we think about. You know, I just gotta say, if you look at win rates, just look at the mathematics of it and the analytics, our win rate is very steady at the 80% mark. This is once a proposal gets written and how many of those do we win. It's 80%. It's been 80% for a period of time. It wasn't true for Europe earlier, and now that is true for Europe. That is one thing. We continue to see we're not under the radar anymore, right? That's obvious, right? For the last 2-3 years, I think everywhere we go, there is some competitive pressure about the legacy provider fighting back, and that happens very often. The clients do an RFP.
Enough times the clients don't do an RFP and sort of simply move ahead with Clearwater. We have not seen any change in any of these factors in terms of win rates. Now, our job, I think, is knowing that, you know, 24% of our revenue, we're gonna continue to put into R&D, right? We wanna continue to be more comprehensive. We wanna be continually more comprehensive in asset classes, in countries, in accounting bases. Our whole agenda is, look, we have a lead, continue to push, continue to invent, continue to innovate. Literally as of last month, end of Feb, we haven't seen any competitive win rate degradation.
Gotcha. Okay, gotcha. That's great, guys. Thanks for answering my questions. Thanks for the detail and the depth, and congratulations.
Thank you.
Thank you, Bhavan. The next question comes from Gabriela Borges with Goldman Sachs. Please proceed.
Good afternoon. Thanks for taking my question, and congrats on the quarter. I wanted to follow up on the commentary on NRR and specifically NRR in the asset manager space. I know in the past you talked about how asset managers, as a vertical, is going to be more firm to the land and expand motion. It sounds like there's two things happening. Not only is asset managers getting bigger as it comes to sales fee, but it sounds like NRR within asset managers is also improving. Would love if you could just talk a little bit about what you're seeing and any updated thoughts on how you're thinking about modularizing the product stack. Thank you.
Hey, Gabriela. Thank you for the question. Look, I think I said in my remarks, we're quite excited about this 210 basis point increase in the NRR. If you think about NRR and why that grew, let's talk about each segment, right? Strategic asset managers just continue to grow with us. As you know, that is more of a land and expand strategy, right? And so growth happens because of one of two reasons. One is general growth of assets. Just that gives you a general thing. That's one thing. The second one is definitely clients are taking us into more divisions of their business. As you know, some of these asset managers, broadly speaking, if you call them asset managers, they have various lines of businesses.
They have wealth, they have set of pensions, they have, you know, all kinds of business functions. We continue to see growth in that. That's one. The second one, Gabriela, though, which is very interesting, is insurance companies definitely have become more acquisitive, right? Clearwater has sort of wins an even higher proportion of those because if you're a U.S.-based insurance company and you buy assets in Germany and suddenly you want all of that reporting, without Clearwater, you would have to go design all of it, think about all of it, and it would be hard. Clearwater can just simply turn it on. Obviously, it doesn't mean it's that quick, but the functionality exists right off the bat.
We are starting to see NRR growth come from insurance clients as much as we see it from asset managers. Having said that, asset managers are meaningfully bigger, so I don't want to equate them, but we continue this. This bump up has also happened because of insurance clients also buying tons of assets around the world. Jim, would you add anything to that, Jim?
Yeah. I would say, Gabriela, you are correct. That is new, right? That is a phenomenon that we saw evolve throughout 2021 to help with that.
That's helpful.
Continue, Gabriela.
One follow-up, if I may.
You're right.
Sorry, I didn't mean. I meant when we went on the road initially in the IPO, we really did talk about strategic asset management. This is just as important for global insurance companies who have aspirations to acquire and grow as well.
Got it. That's helpful. Thank you. As a follow-up, you have a comment in the press release on out of more than 100 new clients, nearly 45% left a legacy competitor. Maybe just ground that for us relative to history. How does that 45% compare to a year ago, 5 years ago? Then, the remaining 55%, is that mostly greenfield? Give us a little bit of color on what we're seeing for new customers that are not leaving behind a legacy competitor. Is that the money and power? Just a little more on that. Thank you.
Yeah, thank you for the question. Look, I do think we have had this half and half mix for a very long time. In fact, even like it, right? When we get 11% growth from current clients, and sort of, you know, that's sort of a good situation to be in. The question is, if we get 45% from new logos and legacy competitors, then what were the rest of the 55 doing before that, right? And where did it come from? Several of them. One is custodians, right? They were getting their accounting from custodians for certain asset class and another custodian for another asset class. They had multiple custodians doing the accounting for them, and they sort of transitioned to Clearwater. That's one.
People have internal systems, so that happens quite a bit. That is, people have just built data warehouses, if you will, to sort of pull all that information and provide some level of reporting there. That also happens quite a bit. Is there some movement from Excel? Yeah, believe it or not, especially on the lower end of the segment, people continue to use Excel and really giant Excel macros, and so people transition from that. I think custodians, internal systems, Excel, sort of are the three where you would normally see the other 50% or 55% of logos come from.
the last piece.
Sorry, go for it.
Within that is really truly the greenfield. These are people who are now investing for the first time. Those IPO companies, right? Or someone decides to actually take a different approach in their investment philosophy around their excess cash for corporations, et cetera.
That makes sense. Thank you.
Thanks, Gabriela.
Thank you, Gabriela. The next question comes from James Faucette with Morgan Stanley. Please proceed.
Thanks a lot. You talked a lot about grappling with and growing internationally and international capabilities, etc. I'm wondering if you can talk a little bit about how you're expecting that the contribution from international to grow. Seems like, you know, roughly international still is contributing less than 10% of revenue, but even Europe itself is probably 40% of TAM. You know, how should we think about the international mix, and should we expect it to develop first in Europe or Asia or, you know, what that composition is likely to look like?
Yeah. You're accurate.
Yeah. Keep going.
James. Oh, go ahead, Sandeep.
No, you should. Please.
Sure. You're accurate that the revenues as a percentage of revenues, right? Because that kind of has 20 years of business involved in it. It's less than 10%. This last year, right, as a percentage of our new business, it's 20%. You know, obviously, James, you're right. It's accelerating and we're seeing the returns from the focus. I think long term, when you think of TAM being 40%, you would see long term that your kind of contributions over time would ultimately move to those to the relative ratio of your overall total addressable market.
Yeah. If I can just add about it.
Yeah.
You know. Yeah.
I think we've learned.
Go ahead, Sandeep.
I think the best news that we've learned this year is that the needs in Europe, and I think we've learned them, you know, to a lesser extent, but we've also learned in Asia, those needs are consistent with the needs in North America. The, you know, the same drivers that we see, I think we have a lot of conviction around that, and so we think that has really great opportunities. Sorry, Sandeep, I'll let you.
Yeah. No, all I was gonna add, James, was exactly the key point you made, James, is that if you look at our larger clients, they already have assets around the world, right? It's not like you look at our larger clients, and they're only investing in the United States or North America. They've been investing in Europe, they invest in Asia already. We've always had a need for their IFRS in the look-through of all of the reporting in continental Europe. All of those have already been built quite a while back. Now, does that mean we don't have any work? Of course, we do. We just released Dutch GAAP, for example. Now, we didn't have Dutch GAAP earlier. And Thai GAAP. Okay, we didn't have Thai GAAP earlier.
I think there is work to be done, but the needs are if not exactly the same, if not more acute. That's because when you think about North America, at least it's all one regime, if you will, right? You go to Europe, and you got German GAAP and Dutch GAAP, and you've got every GAAP just a little bit different. Then when you think about Asia, there the need is even more acute because Japanese GAAP and Thai GAAP have almost nothing in common, right? I mean, those are really different. We think the need is more acute on that side, but it takes time, though, James. It takes time to build it out. We are going through it very purposefully. We've built out offices, we built out pre-sales capability, delivery capability, locally and otherwise.
It's a bit of a march.
Yep, that makes sense. I guess kind of along similar lines, it seems like at least your Horizon 2 initiatives, particularly expansion into adjacent end markets in APAC, have gained traction earlier than anticipated, or at least earlier than we had anticipated, especially in Asia. You know, while that opportunity was categorized as medium-term in the IPO process, are you now dual tracking those initiatives in a sense? Is that part of where we should think about the incremental investment going into in 2022?
I think in 2022, James, you will see a full-fledged office being set up. It has been set up in each of these locations. Are we going after, for example, state and local government? Okay, we have a dedicated team which has been working on this for the last, you know, six, seven, eight months. I do expect all of these Horizon 2, if you will, to be fully funded and fully working today. They're working today. Now, will the contribution be really high in 2022? Probably not. Will they be really significant in 2023? That's our expectation. We are dual tracking exactly like you laid out. You see the increase in sales and marketing costs sort of as a result of that.
It's just that we have the EBITDA, we have the growth, and we wanna push while maintaining EBITDA. We don't want it to go down further, but we wanna use the growth dollars, if you will, to drive further growth as we did in Q4. Q4 was a good testament to that, and we're quite excited because of that.
That's great. Thanks a lot.
Thank you.
Thank you, James. The next question comes from Rishi Jaluria with RBC Capital Markets. Please proceed.
Wonderful. Hey, Sandeep, James. Nice to see acceleration in the quarter. Two questions I wanted to ask you, quick ones. First, on gross margins, maybe can you talk about the longer term opportunity to see gross margin expansion in the model? Second, just wanna maybe philosophically understand how we should be thinking about your philosophy or attitude towards stock-based compensation, right? Because based on the guidance, you know, SBC is gonna rise to the mid-twenties, and we're gonna see a decent amount of dilution. Not unusual for software, but definitely seems like a departure, I think, from what we may have been expecting. Can you maybe walk us through how you're thinking about SBC and how we should be thinking about that long term? Thanks.
Sure. Just to start on gross margin, it's something that Sandeep and I focus on a lot and, you know, nothing has changed from the way we feel about the long-term kind of opportunity there. It's an 80% gross margin business. You know, that's a very healthy SaaS business. It's an 80%+ gross margin business, and we see that. Having said that's not the priority, right? We're building out kind of globally. We're building out the infrastructure, and that's why we're kind of staying consistent at the 75.5%, which is healthy. As it relates to SBC, I would say that if you look at Q4, the run rate on Q4 was $70 million. Actually $66 million is coming down.
The reason why it's coming down is because there's a lot of historical charges I referenced to the recapitalization transaction in Q4 of 2020. That had an impact on revaluing a bunch of options for stock-based compensation purposes, which really has no economic impact. You will see that taper off over a number of years as those amortize. I think we have a philosophy. I'll let Sandeep speak to the philosophy that we have, but I would say that we... You know, the nice thing about being a public company is we've been able to expand the pool of employees that are availed equity, and I think that has been very useful in both attracting and retaining employees. I think that has been a great tool.
I would say that we guided to that just so that everyone would know that. I think there are some historical elements to it that the will run out over time. Go ahead, Sandeep.
Yeah. We should do two things there. One is, look, the talent we are looking for on the tech side is bleeding edge, if you will, sometimes, right? There's a bit of a war for that talent. What we do is we methodically work with compensation consultants and sort of look at these 20 companies or so who are in our space, right? Who sort of develop software of the kind we do. We want to stay very much within that lane. There is nothing extraordinary we feel we want to do or need to do to attract talent. It's, you know, we go back and look at these companies and see what they do, how much they, what RSUs they provide people and don't. We try and, like I said, stay very much within that lane.
We don't find the need to do anything extraordinary there, right? So at this point, 100% of people in the company have RSUs, and we feel it's nice and sticky. It helps in retaining talent, it helps in attracting talent. That's our thinking there. I wish there was something more revolutionary here. There isn't. Our thinking is, look at what our competition does and sort of stay within the lane there. Some of our
All right.
Got it. It's really helpful. Thank you so much, guys.
Yeah. Thank you, Rishi. Thank you.
Thank you, Rishi. The next question comes from Yun Kim with Loop Capital Markets. Please proceed.
All right. Thank you. Congrats, Sandeep and Jim, on a very strong finish to the year. As you continue to make progress on the international front, what are you seeing in terms of the overall land and expand motion there? Are you seeing perhaps maybe smaller initial land deal size versus the U.S. and maybe faster expansion velocity afterwards? Thanks.
Yeah. Thank you for the question. You know, I would sort of point at two things. One is, it is. When Jim said, you know, 20% of new business sort of came from Europe, there's no expansion there. It is all new business. It is actually more. It's definitely more impressive when you sort of think about that, right? Now, ordinarily, when you go to a market, you would think of doing small deals and bigger deals and bigger deals. We have, you know, we talked about the leadership of Gayatri. I mean, the beauty of one is it's significant. I mean, we did a press release, right, on Athora, right? That was a significant deal. We did a press release on Aegon, I think, earlier in the year. Those are not small deals at all.
We continue to see traction with very large clients there. Is it a little bit surprising? Perhaps. We continue to see very significant deals. If you look at the construct of
Okay, great.
Go ahead.
Yep. The other question that I have is whether or not you know you can talk about one particular industry maybe that's asset manager or insurance that is growing faster than your expectation versus like just a couple quarters ago. Any meaningful you know monetization pricing trend that you're seeing in any particular vertical?
Yeah. Kim, I don't know if you want to comment. Look, the pricing is that we're able to price what we think is appropriate. I think as we said, we price a little bit trying to get to 80% steady state, and we can achieve that. We haven't seen push on that, right? We continue to be able to get this growth rate while continuing to get the right and appropriate gross margin, right? We continue to sort of see that. Jim, would you add anything else to that or?
Yeah, I think that's you know I think it's really the same story. Obviously, we're growing really nicely in insurance and state and local government has grown really fast off of a smaller number. Asset management has really continued to grow. That was growing you know faster when we went public and continues to grow very quickly. It's good news across all of our.
Okay, great. Thank you.
Thank you.
Great to hear. Thank you so much.
JR, is that our last question?
Thank you, Mr. Kim.
Yes, that's our last question. Sandeep, if you wanna just give a quick closing remark.
Sure. Sandeep, before we do that, I just have one administrative thing to share with everybody. It's just our lockup release is next Monday from the IPO. Just wanted to share that. That was in an 8-K. Go ahead, Sandeep.
Nothing. I just wanna thank all of you. Clearly from the questions, you all understand our business, and we're really happy about that because it allows us to be very, very transparent about what we are doing and why we are doing it. I hope you continue to support Clearwater. Thank you all for your questions, and we really, really appreciate it. Thank you.
That concludes the Clearwater Analytics fourth quarter and full year 2021 earnings conference call. Thank you for your participation. You may now disconnect your line.