Hello, everyone. I'm Alexei Gogolev, head of JPMorgan Vertical Software team, and I'm excited and delighted to welcome Sandeep Sahai, CEO of Clearwater, here at our Boston TMC conference. Sandeep, welcome.
Thank you.
Great to have you back. Sandeep, would you mind walking us through some near-term tailwinds, and perhaps some headwinds that you're seeing across the three main customer groups: insurers, asset managers, and corporations?
Yeah, sure. So firstly, thank you all for coming, and if you think about the tailwinds for Clearwater, they haven't changed that much, right? When clients invest in a new asset class, there are two choices: either they buy a new accounting system for that asset class, or they come to Clearwater. Same thing with if they invest in a new country. Two choices: either they buy a new accounting software for German accounting, or they come to Clearwater. Also the same thing for alternative assets. If you invest in public debt or private debt, you have the same choice. So I think our tailwinds haven't really changed in what matters to clients. Sometimes it is risk, right?
And, as you see consolidation in the insurance sector, which I'm sure you all have noticed, well, that is usually a time where clients will say, We can't have two disparate systems. So the tailwinds, I think, are pretty consistent. Then what is the headwinds? And again, that also hasn't changed very much, which is the, the desire to change is there, but the timing is always difficult to predict, of a client actually making the leap. When they do decide to make the leap, Alexei, though, we win. As you know, we win 80% of the time, write a proposal. So when I think about it, nothing much has changed. As insurance companies a little bit more active, yes. Are asset managers a little bit more active? Yes. Are corporate IPOs a little bit more active? A little bit, yes.
But I wouldn't say it's anything outstandingly different. I, I just don't see it quite yet.
Quite a lot of your focus right now has been and still remains fixed income. But lately you've talked a lot about diversifying more towards equities. Could you maybe discuss your strategy on how you plan to get there?
Yeah, sure. So look, firstly, if we, if we come to the asset owner clients, which is about 67%-68%, we will almost always do the full book. So if they do more equities, we'll do more equities. If they do more fixed income, we'll do more fixed income. So the question about diversification is, the way you asked is perfect, which is, so where? And, and so you've got to think about us as being more focused on investment management process versus investment accounting. And what is the point? The point is, investment accounting is one basis point. When you do investment management, that is more like four basis points. We do almost exclusively investment accounting and analytics. So where does the diversification come from is front office systems, right?
So that's why I think you're talking about equities, OMS, PMS, portfolio management systems, risk and compliance is the other one, and when you think about regulatory systems, that's the other one. So we are more focused on alternatives, front, middle, back office, risk systems, rather than just equities and fixed income, right? It is more a desire to be involved with the entire investment management life cycle.
And, in terms of some of your new products, about a quarter of total bookings in the first quarter came from these products, LPx, Prism, JUMP. That was above the historic level. So I was wondering how you see cross-sell of those new products balancing with new logo additions?
Yeah. So, these are intense questions. So look, the first thing is we are thrilled. When we sat here last time, I think we said 10% of our new booking came from new products.
Mm-hmm.
Being 25% in Q1 feels a little good, feels like we made this move towards a multi-product company, and that is sort of working out. The way we think about these things is everyone who comes up with ideas, they're not allowed to come up with an idea unless they've got four or five clients who are willing to sign on as client design partners. So that's hurdle number one. Then you sort of think about the TAM. Is this a $25-$50 million product idea, or this a $100 million product idea? If it's $25-$50 million, then it has to hit quickly, then it's got to be on a short fuse. And if it's $100 million, then we will let go on for a year or whatever.
So first quarter was better because stable value funds, which is just a unique market, sort of did really well right out of the gate. pooled funds did really well, and that's also right out of the gate. But Alexei, the investment needed to build these products is very little, because 90% of the work we were already doing.
Mm-hmm.
So when you think about making it work for pooled funds , it was a very small incremental effort, and so we could, we could make that happen. So that's how we think about R&D dollars being invested for cross-sell, is some things which are faster but smaller, and the other things which are just longer term, but much bigger TAM. But in all cases, it is client-led. It is not led by us. Some of those are, but most of them are basically the clients telling us what they would like us to do in adjacency.
... Mm-hmm. And last year, at your Investor Day, you talked a lot about Clearwater GPT. Could you maybe elaborate a bit more what have been the initial results? And is the copilot already providing ingestions and analysis into your LPx product?
Yes, very excited to talk about it now. So, so look, usually, when you think about GenAI and AI in general, it's a great topic to talk about. But if you look at us, we've been able to get real progress here, and, and the proof is in the unit economics. So when we met in the Investor Day, we said we want our gross margin to be 76%, and we, we were talking about improving it 50 basis points every year. So really, we're thinking about 76.5%, 77%, 77.5%, 78%, right? But mostly from GenAI, we hit 78% in Q1 of this year. And so how do we do it? Basically, when you think about GenAI and efficiency, there are two things.
One is obviously about deflection, which means a client can ask a question and get an answer, so Clearwater never even gets the question, right? So the question may be: Why is my amortization $31.2 million, not $31.3 million, which is what I expected? So obviously, we can deflect the question that sort of improves unit economics right away. And the second one is, once one of our analysts get the question, how much can GenAI help them answer the question faster and more comprehensively? And so I would say we are sort of in our second innings of our journey. We have got hard targets on these things, on what we expect to improve on.
I do think when we came last year, we said, you know, gross margin is gonna top out at 80%, and last time we said, "Look, it's gonna be higher. I don't know how much quite yet," but we are really seeing movement of 200 basis points on gross margin itself. So I feel sitting here, we have made real progress. It's in the financials. We continue to see much more room there, and so I would just urge all of you to, whichever company is gonna be focused on GenAI, push them on it. They should invest, and they should get real benefit. But you should be able to see it in the financials. If it's just about doing things better, who cares, right? So yeah.
Mm-hmm. Another part of long-term opportunity that you talked about was this indexing and benchmarking.
Yeah.
Anything to highlight about potential tailwinds to revenue from this anonymized data?
Yeah. Look, I'm happy to have that—answer that question. We obviously are single instance, multi-tenant, which means we have all of the clients' data in one spot, and therefore, our ability to query and add value for our customer is high. I would say this: I think that we did launch a product in Q2, which was... We have customer acceptance already, and so what you will see is some minimalistic revenue in Q3 and Q4 from it. We expect it to become much more real in 2025, and we expect it to be a real contributor to growth in 2026. But we have moved from thinking about it to getting real clients signed up and the booking done in Q2. We expect more in Q3.
So we'll see some, but I think the initial revenue streams would not be - won't be that high. But in 2025, we expect to see it as a real growth enabler and, and a real growth engine, if you will, in 2026. So yeah, that's - we're very excited about it. We don't talk about it because it's still, still very nascent. So a little surprised with the question, but yeah, but it is nascent, but it is there.
Perfect. Amazing. If I may, shift gears a little bit and talk about sort of the opportunity in terms of acquisitions, 'cause it's almost two years ago that you carried out your first acquisition. What was the strategic vision behind it? We sort of touched a little bit on it when we talked about equities exposure.
Yeah.
But, can you tell us about what's been the progress and what sort of capabilities you're hoping to expand?
Yeah, I think, look, there were three reasons we did the deal at that time. And the first one is very simple, that we did not have a front-to-back system for asset managers. We were middle back office, so it gave us that capability. Now, remember, it doesn't go for all asset managers, but mid-tier and smaller asset managers-
Mm-hmm.
-so it gave us that capability. The second one was, most asset owners were starting to manage some of the money themselves. So while they gave much of their money to people like yourselves and, and companies, and money managers around the world, they were also starting to manage 20% of the assets themselves. So they were sort of behaving like asset managers, more or less, themselves. So they needed somewhat a lighter-weight system, if you will.
Mm-hmm.
The third thing was, we had no presence in Continental Europe, so we thought we would do all three. The first two, I think we announced six new deals in Q1. So I think we were a little bit slow out of the gate, last year on that. I love the French team, but it takes a little bit longer to sort of get everybody marching in the same direction. But, you know, Q1 was great. We continue to see really good progress in Q2, so I'm quite excited about what you might do. But this is actually something we did not have. We just did not have the capability to address that need when the clients had it. So we felt it was. It's a good transaction, but we also learned.
So when we did this Wilshire deal, which, I know you know about, we integrated it very differently. The rhythm of integrating it very differently, but it's good for us to do a few of these before we wanna do anything bigger than that.
Okay. Do you feel like your European footprint is now complete? Is there something else internationally that you're looking at right now?
Yeah, I think the—I'm sure you know this, but there just isn't the concept of European, right? So you can do something in France, and Germany sort of don't give a crap, and then you do that same thing in the U.K.. So I think that the European march is a big deal for us. Our revenue from the international markets is about 17.5%-18%, so it's not anywhere near where we would like it. As you know, insurance is about the same size. Actually, Europe is a little bit bigger, so our revenue should be meaningfully higher. So we'll continue to look for things which can help us expand geographically in Europe, but not in the U.S.. In the U.S., it's more about buying capability, which is too hard to build sometimes.
Mm-hmm.
But in Europe and in Asia, we will look for things which can get us boots on the ground and sort of allow us to expand faster.
In the U.S., applying this JUMP product and JUMP experience would be to target, as you said, smaller and mid-size asset managers.
as the OMS, PMS for asset owners.
Mm-hmm.
So asset owners who are already on the Clearwater platform, how do they get a OMS, PMS in the front? Yeah.
Yeah.
So it's both of those, yeah.
Perfect. Then the Wilshire acquisition that you mentioned-
Yeah
... It feels like it was an important product that some of your customers really wanted, but any other strategic decision why you decided to buy that business now?
Yeah. So look, I, I think all of us will agree that risk and compliance and risk and performance is a big part of the TAM-
Mm-hmm
... so, so you have to try and address it. Frankly, we were inclined to just develop it ourselves, and it didn't go that well. The client design partners were very much about, Eh, and we said, Why? Then you have to think about, what does a risk model do? It forecasts the future of the risk to the portfolio when certain events occur.
So when we were developing it, people said, Okay, we have to adopt it, and then we have to try it for the next 2-3 years, let the cycles play out, and then adopt it and get credibility. So this felt like a 5-year program, and we were like, Good Lord, we can't, can't wait 5 years. And so we said, Okay, let's scan the market to see what's available, and we found three or four companies which are in this space, and Wilshire by far had been most time-tested, I think, just given the history with the Wilshire Index and all that. So and we were able to do a deal which was a carve-out, and it's super tested at all kinds of scale. It doesn't mean there isn't a lot of work to do.
I think there's a lot of work to do on it, but it just fit really nicely instead of us trying to develop it over the next five years. So again, it fit really nicely, and so we just moved ahead with it.
How do you plan to balance organic growth versus M&A going forward? What sort of cadence of M&A should we expect per year?
So look, our thinking right now is that we—obviously, all of you know this, we have room in our P&L. So, you know, there's no, no sense, I think at least, in expanding our P&L much faster-
Mm
... or getting to better EBITDA numbers. We are at 31%. We thought we would be at 29%. We're not gonna artificially suppress it, but, but the point is that we have enough money in the P&L to go invest in growth. And it is about growth, so, so, so why not continue to invest in growth? And so we don't find the need to sort of in our head say, We need to balance these two things. Yeah, we are gonna go into Asia much more aggressively because we can do that while growing the bottom line 200 basis points or more. We're gonna go after Europe much, much more aggressively because we feel we can do that without, without... while continuing to grow EBITDA really quickly. Long term, though, Alexei, best SaaS companies will balance these two.
So you would typically think about new logo versus back to base as being equal, right? So they try and balance these two at about similar numbers and then sort of do M&A on top of that, is how people have thought about it. Our M&A right now is very much IP-driven. It's not like we got any revenue from Wilshire. I think we'll get, like, $4-$4.5 million this year. So it's not about the revenue; it's about, can we get that capability and bring it to market? So again, highest level, we think, pursue all the vectors of growth which are efficient and responsible, without saying, I need to bleed more into the EBITDA bottom line. That's number one. Number two, sort of switch with some time into M&A.
We hired, as you know, a person who's done a lot of M&A across the world in these markets. We've also hired someone who headed up M&A for Guidewire, and he's a really strong executive. So these two are approaching M&A much more programmatically than we ever did. We were very transactional. So we were looking for a risk system, let's go look, and so it wasn't run properly and professionally. So should we expect one or two deals a year? Yeah, I think we would definitely want to do a couple deals a year, but we have to be chasing either capability here in North America or geographic footprint in Europe and Asia. It can't be just M&A. We have really no interest in just doing M&A.... it don't make sense.
No, absolutely. And, in terms of the comment that you made earlier in the conversation around, you know, only addressing one quarter of potential take rate, at the moment, one basis point versus kind of four basis points, what are the components that you feel you need to add in order to get to a higher take rate? And, do you feel like, there are any components or expertise that is missing still in your portfolio of-
Yeah
-services?
Yeah. So always gonna get a simple, straight answer. So look, we do the accounting, right? So we think about LPs, which we have spent so much money and energy on. We were always doing the accounting for LPs, and that's not hard, right? You get these quarterly statements, you take the numbers from there, put it into that, compare it to what the price was earlier, and you can account for that quite easily. But that's not where the pain is. The pain is in 200 accounting statements coming every quarter. How do you integrate that at a component level, not at a high level, and sort of find out exposure to something across all your LP investments?
So the point here is that we think you've got to be thinking about the biggest portion of this take rate comes from alternative assets, middle office, and back office, and the front office. So you will see us continuing to be pretty aggressive about building solutions for the middle office, not just accounting of these, but the middle office bank loans. You think about private debt, private credit. All of those, the problem isn't just the accounting, the problem is thousands and thousands of papers, and documents and agreements which you have to make sense of. And so, where you'll see us push really hard is alternatives, but in the middle front office, you'll see us push into risk and compliance in a big way, which has also got a fairly significant TAM.
You'll see us push much harder into, you know, end-to-end, front-to-back sort of systems, OMS, PMS. So we feel we have got those, but we also feel we have a lot of work here, Alexei, to do. It's not like, okay, we have all the scale, now it's a question of just execution. I think we're gonna have to continue to invest in R&D, which is why we have said at least at a dollar level, we will continue to invest in R&D.
Mm-hmm.
But as a % of revenue, that will sort of decline as it did in Q1, and it'll continue to decline into 2024 and 2025.
Mm-hmm. Sort of from more high-level financial projections perspective, I think a lot of investors got used to very consistent outlook of 20%+ top-line growth. This year, you're guiding somewhat lower than that typical level. Can you maybe discuss which parts of the business offer more visibility-
Yeah
... versus those that have somewhat of an uncertainty, especially this year?
Yeah. So look, I think the last guide was $440 million, if I remember correctly. It was $438 million-$442 million or something like that. So that is, you know, roughly 20%. I thought, the midpoint is 19.6% or something like that.
Mm-hmm.
So I think we're close to the 20%. But why do you see a little bit more conservativeness in the guidance in Q1 and so on? Is our clientele becoming larger clients. It's just happening. You can sort of see that if we look at last year, our revenue grew 21.3%, if I remember correctly, but the million-dollar clients grew 28%. And when you have larger clients, there's a little bit more... You know, it's a little bit more difficult to predict exactly when they get live. And so at a quarterly level, you'll see a little bit more constraint in trying to forecast accurately. But on an annual level, we feel really confident about where we're gonna end up.
Mm-hmm.
So that's how it is. Now, Q1 was a little richer than we thought, and I think many of you have asked, What the hell? What, where... Yeah, it's just that one of the clients was supposed to go out on April 1. They went live a little bit earlier. Churn was lower by 1%. It's never been that case. So we outperformed Q1 a little bit, not a little bit, a reasonable amount. We feel good about the annual numbers. We, we just feel a little bit more cautious about quarterly numbers.
Mm-hmm.
And it's not like we don't expect to, but we just feel there's a little bit more lumpiness in that. And, and that's because we have just larger clients whom we—who are just harder to predict exactly when they go live.
Yeah, absolutely. Can you walk us through getting to the 115% NRR figure-
Yeah
... that Jim outlined last year?
Yeah, Jim gave T-shirts that said NRR 115%, just to make sure. Look, I think that the current growth rate is, you know, if we can get to 20%, and if we can expand gross margin to 80% and get EBITDA from 31 to 33 to 30, I think this is a good trajectory. We like it, and we think we can execute to that. But I do think the NRR 115 makes us a different company. If we can sustain, we get to NRR 115, I think it makes us a different company. So we think it's strategic. So what are the elements of that? Basically, start with 100. We lose a couple points on churn, so you're down to 98, right?
You get 3-ish% from price, a little bit above that. Then for us, the prices of the assets grows every year, roughly by inflation, a little bit more. And so the prices or the, the revenue sort of goes up by that much, every, every year. And then finally, you have gathering more assets within an asset manager. So we had the JPMorgan conference, but, you know, you get to JPMorgan Asset Management, then you can do work with other groups and wealth and things like that, and so you can gather more assets, which gives you, you know, mid-single digits, if you will. So that gets you to the 108%, 109%, somewhere there. You can sort of get there on a consistent basis. So how do you get to 115%?
That's why you see us talk so much about new products. I think the answer has got to be, we have to come up with two or three new products every year, which gives us a couple points.... right? And so if we can get 5%-6% from new products, that's the path on a sustained way. Now, if we only have three products, that's pretty risky, so we gotta have more products, eight-nine, out of which two or three will fail, one or two will underperform, but, you know, three or four will do well. And if we can continue to run that through the innovation engine, then you'll get to the 115%, right?
So we're happy about Q1, Alexei, but you don't see us celebrating because I think it's gonna be a little bit, the journey is gonna be a little ragged-
Mm.
Till you get some volume. Once you get volume, then it's a little bit more sustained. You understand the pipeline movement, you understand all that. Right now, it's, it's just, yeah, that was great, and but we, we, we don't yet feel like I can tell you that it is gonna be X in Q2. I, I just couldn't say that right now.
Mm-hmm.
While by the end of next year, first quarter of the following year, we expect to be 115%, and-
To get to that product release cadence, I think you mentioned that 60% of your R&D capacity has now been freed up.
Yeah.
Can you elaborate on sort of what parts of the business you're mostly investing that R&D capacity into?
Yeah. So, look, we spent a lot of energy and a lot of money on movement to the cloud last year. And that was very important for several reasons. One was, you can't keep scaling by adding hardware. And in our business, all of the data comes in the evening. Not all. A vast majority of the data comes in the evening, and they have to be ingested, reconciled, and then the volume goes to zero, right? And so you always have to invest for the peak. It's just not the doable model, right? You'll always be having to buy enough hardware and all of that to go to the peak, so the cloud made a lot of sense. So what we did, of course, was we moved fully to the cloud. We got that done, I think, in November of last year.
And that took... That number, 55-60% of our team worked exclusively on that for a year and a half, and when they came up after that, then we were able to take that whole team and sort of switch it, because you certainly don't have to do rack and stack. You certainly don't have to do non-differentiated heavy lifting. The all, all of those people which are on a project got done. So we took the 60% and pushed them all on innovation. And the way we did it was, like I said, there were some ideas which are this $25-$50 million, some are $100 million. We allocated teams to it. They are being judged on booking, because R&D always thinks they're doing great, great work, and they are.
But the point here is, we care about are we getting a return which customers are willing to pay for? So if you're developing something, that's fantastic, but only if customers pay for that, what you've developed, do we consider. So that's how we think about it. We think you bring those two things together. I would not say that it's all mission accomplished. It's not, because our not 115% yet. But I do expect over the next 6.5 quarters to get to this good rhythm of new growth.
Absolutely. I'm happy to open the floor for questions, if anyone has any.
So, at least for me, a big part of your story or your strategy has been that your single-instance, multi-tenant cloud is sort of a core component of your business. I'm just wondering, as you grow through acquisition, you move to the front office, we're adding new capabilities and functionalities, how does that fit into that strategy?
Yeah.
I mean, to what degree is there integration? To what degree are you operating in separate clouds? How does that work?
Yeah, you know, thank you for the question. Look, I, I think it's really... That's a real constraint when we go out and look for acquisition goals, right? So, so I just want to give you one more- one minute on single-instance multi-tenancy. The whole point is that if your portfolio is with us, we don't process your portfolio. We process the securities you own a- and then bring it to the other side. The benefit being with, if five of you were there and you shared securities, we'd process it one time, right? And that's why you see the gross margin continue to go up, because for every new client, you process less. Because more and more of these securities are there, more and more custody connections are already there, more and more data source are already there. So that is why there's a religion there.
If you mess with that, then you are starting to go into this, I'm buying assets, trying to put it together, and you're like everybody else, and you lose... The biggest value is I can give you a comprehensive view of your global assets everywhere in the world, every day. That is a value proposition. So let's talk about each one. So when you talk about Wilshire, they are a risk modeling company. They model risk. So what happens is, we take the data, we push it out to Wilshire and get the data back with the calculations and the risk. But notice, we haven't changed the data. We've got the math from that model and back. How else do clients do it? There are other accounting, other, pardon me, there are other risk engines in the world, and people would do that same thing.
They would take Clearwater data, they would have us push it to that engine, get the calculation, and bring it back. So it hasn't changed, it hasn't moved the, the purity of our, of our infrastructure about data, so it really matters. You think about the next one, which you said quickly about JUMP, is like, they call front-to-back system. Yeah, but that's trading. So when you talk about order management system and portfolio management system, we don't, we never did anything with that. We take the trading data when it gets traded into our system, and that was our starting point, right? So in the evening, end of day, we would take all the trading that's occurred, go to the custodian, go to the market sources, bring it all together, and process it. So again, nothing has changed in our data flow, and we think... So-...
I think that's the thing. We have to be super careful that we don't create multiple data streams and get into the same mess of I do 80% of your book, some other systems do 10% each. Because then you're back to. Well, this is how you will kill the system. So yeah, we have to be. And it does limit us. Look, I'm not gonna sit here and say it doesn't limit. It does, because you can't just buy something because you like it. You have to think about how the data will flow, and how will the sanctity of this infrastructure be kept? So yeah, we yeah.
And we had obviously one of your competitors here at our conference yesterday, SS&C. There are obviously a number of other big competitors like Aladdin that also operate in the space, State Street with their PAM product. How are you generally feeling about the competitive landscape? Has it changed incrementally in the last 12 months?
Yeah. So look, you know, they're all great companies. We are a small bit company, so I don't want to get ahead of myself. But, but I do, I do just want to say that our... There are two things we look for. One is our take rate, so, like, price, and I think we, in the latest filing, we were saying that it's 2.35% higher than last year. So I think we have the price has been maintained, and we can maintain it at an aggregate. Do we have some deals where we lose money? Of course. But, but at an aggregate, we are, we are 2.35% higher, so that was one data point. I don't think our win rates have changed at all.
So I have a lot of respect for what SS&C has done and BlackRock does and State Street does, but I do think competitively, if we go up one on one against one, we will win 80% of the time we write a proposal. There is zero question about that. And yeah, we do lose 20% of the time, and 15% of the time it's because they decided not to change, and that may very well be an SS&C product, and they say, "No, it's not compelling enough," or they may say, "It's a PAM. It's not compelling enough." And so that's how I think about the competition. I don't think that number has budged, and we have been reporting this for so many quarters now. And so I don't think the number has changed.
I think our challenge, though. I don't want to get too happy about our challenge, or about the stat because we have to get clients to move. That's our job. If they come into the market, we will bloody win, but they have to come to the market. We have to instigate it. We can't be waiting for, Oh, in every 10 years, they'll come up with an RFP. Then we fail. We'll continue to do what we're doing today. So the more we can instigate the market to go out and look, the more we win. But I do think the market has got more asset owners, asset classes, and more regulation, more risk, so maybe everybody's growing. It's totally possible. Yeah.
Absolutely. Thank you very much, Sandeep. It has been always, as always, great to have you on at our conference. I appreciate your time.
Yeah. Thank you.
Thanks, everyone.
Thank you, all.