Hey, everybody. Thanks a lot for joining us today. Get to chat with Jim Cox, CFO of Clearwater Analytics Holdings. Before we get started, a couple of quick things. So, as a matter of introduction, I'm James Faucette, a senior fintech analyst at Morgan Stanley. Michael Infante from my team is actually the lead analyst on Clearwater. So, if you want to reach out to him, that's great. He's just on paternity leave right now. His wife's actually expecting any moment. So, I'm stepping in. So, if I screw up, blame it on Michael because he's the one getting the questions.
Exactly.
Exactly. It's all Michael's fault.
So, exactly. Quickly, but for important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. And welcome to everybody that's here in the room as well as listening via webcast. So, Jim, great to have you here.
Thank you.
Again with us at our TMT conference. Definitely like to cover a lot of topics, including NRR, competition, margins, your acquisition of Enfusion, etc. But before we do that, for those that aren't as familiar with your business, could you provide a quick overview of Clearwater and what you offer to your customers?
Yeah. Yeah. Sure. And James, thanks so much. Good to see you. Let's all have a good thought for Michael and his wife.
Right.
And wish him all the best. And thanks for the invite to the conference. It's been phenomenal. We have lots and lots of meetings. So, thank you very much. This is great. And thanks for being a client. So, okay. So, what does Clearwater do? So, we do investment accounting for asset managers as well as asset owners. So, think of corporate insurance companies as well as the asset managers who are doing reporting to them. So, think of it as accounting, compliance, risk, performance, everything you need to do to understand your investment business. And what's unique about Clearwater is the way we do that. Investment accounting is done all over the place. But what's unique about us is we have kind of a single instance multi-tenant platform and a single security master. And what that benefit accrues to shareholders is there's this tremendous flywheel effect of the efficiency.
If one of our clients owns a security, for the second client to purchase that security, it's already on the platform. If someone has a custodian or an asset manager that they're using and another client uses that same custodian or asset manager, it's already connected. And so, you can obviously see that there's a great flywheel effect with that, which obviously accrues to the efficiency of the platform. It accrues to the benefit of our clients, who all of you, please feel free to come to me and become clients like good Morgan Stanley is. And it accrues to you because you get better quality. You get better efficiency, right?
Our quality is at least as good as the best client on our platform because if someone finds an error in the security, let's say that it goes through our whole process and our machines miss it and our people miss it and the whole process we go through to refine the information and it gets to you and you look at that and you say, "Hey, that number seven should be eight." Guess what? We'll go back, we'll fix that, and everyone else who owns that security, they just see the number eight once it gets fixed, so we fix it for one, we fix it for all, so that's kind of at a high level. We've been nicely profitable since the beginning. We grow nicely about 20%-25% every year.
Very consistent, durable, reliable growth, big market, and tremendous opportunity for us as kind of a next-gen provider to this ecosystem.
No, that's great. And I think it's funny kind of when we've talked about Clearwater. So, when we first started talking to you, it made a lot of logical sense in terms of what you could do. But it was interesting in talking to your customers. I never really appreciated the pain that a lot of times these companies go through just to figure out what the asset price is, etc., and have to do it periodically. So, it's a huge service there. So, before we dig into kind of the forward-looking specifics of our questions, I was hoping you could briefly recap your most recent earnings results. And in particular, your NRR and ARR were standouts again. But what were one or two areas that surprised or excited you the most from the recent developments?
Well, I was certainly excited. I was pleasantly surprised by the NRR.
Right.
116 back in September of 2023, we had an investor day where we said in Q4 of 2025, we would be able to deliver net revenue retention or kind of growth. Think of it as same-store sales, year-over-year growth of our clients to 115. We were at about 107 at that point in time. And so, to do that a whole year early is great. Look, our work is not done. Our brand is really durable, reliable, consistent growth. And so, we still have work to do to durably, reliably do that. But I'd rather be at 116 and thinking about how to keep it durable there than something else. So, that was great. Obviously, revenues were even better than we had anticipated. I had anticipated some revenue.
We generally have a recurring revenue model, but we had kind of some circumstances happen where some clients needed us to do some work for them, and we got that done in Q4, so we kind of lit it up both from profitability and relative revenue growth relative to kind of what we guide typically, and so those were kind of marquee events of the fourth quarter. Other things that are really probably important to shareholders as well that we were able to achieve in the fourth quarter was this: we went public in 2021. We've got this multi-share class structure. We had this TRA arrangement. We had all the classic trappings of kind of 2021 IPOs, and we were able to clean up the TRA and settle that in Q4, which will be very meaningful to shareholders going forward. Those were some of the things.
Got it. So, let's talk about NRR. I remember at that analyst meeting in 2023, you and I were talking about this target. And at the time, I think you had done something like internally, you were trying to enthuse people by printing T-shirts and that kind of thing. And at the time, you said this feels, even for people internally, a little bit aspirational, but I think we're going to get there and this is how we're going to do it. So, maybe you can talk a little bit about, as you said, that you got to 116 in fourth quarter, so more than a year early, a couple of years early. But recognizing that you still are very early days on driving cross-sell and price across the base, what have been the key performances that have driven NRR of late?
Is that going to change as we go forward?
It's very good. Exactly. So, look, we have a lot of T-shirts at Clearwater. So, we had a T-shirt that said NRR 115, and it manifested itself. So, I highly recommend whatever you want to achieve in your life, put it on a T-shirt. Or stop.
I'm actually going to do that.
All right.
All right.
No, it was good.
It's so good.
It was actually nice. A couple of investors sent me an, "You need a new T-shirt." I was like, "Oh, great," so look, I'll just lay out the numbers, and when you're trying to think of something growing 15% in your client base every year, you can kind of hope for that, but we broke it down into smaller pieces, and we gave everybody at the company a job tied to some of those pieces, and people really bought in and drove that, so let me just take you through the pieces that we have. First piece is we started 100, right? So, let's eliminate the leakage, right? Let's make churn as small as possible. Now, we benefit from having a very sticky product and a very healthy market, but we have kind of 2%. Our gross revenue retention is 98%, 99% consistently, so we benefit from that.
We're down 2%. We focus with our client servicing team. Their scorecard has minimizing churn on it. That's that. The second piece is then price. Back in 2022, we really didn't have a formal pricing program at all. In Q4, we actually realized between 4% and 5% from price. I'm really proud of the team for delivering that because what's fundamentally changed is our clients are now understanding every year there is a price increase. Whereas if you go back five years, internally, we debated whether that would be something we would be able to do or something like that. Kind of what's nice is that across the whole broad portfolio, everyone has a price increase there. That's kind of 4%-5%. We're very happy with where that sits.
One thing that was a pleasant surprise, it's obviously a lot of hard work, and people work really hard on this, is what we call our upsell. So, we talk about upsell and cross-sell differently. So, let me just define what upsell is. Upsell is the core Clearwater product that we are selling more broadly within our existing clients. So, Morgan Stanley is a fantastic example of this. There might be other places within the Morgan Stanley business where they're adding assets or they're using the Clearwater platform elsewhere in the business. Or within existing Morgan Stanley business, like for example, wealth management, we add more advisors within that area and grow that business in that way. Pardon me. So, that would be another kind of upsell element.
Then the third element of upsell would be kind of like within our insurance clients, any M&A activity or reinsure or doing something like that. So, that was about 7% this quarter, which is probably as good as it gets. You have to be a little lucky. We have sales teams that are prosecuting against that all day long. They have named accounts. They're walking around your floors trying to find new business all the time. But you've got to win the business. You've got to grow your business for us to grow our business. Then the other element is cross-sell, which cross-sell was about 3%-3.5%. And we'd like to see that's the one delta from where we are today to what we need to do to be more sustainable. Cross-sell is other products, other than core Clearwater that we're selling within our client base. Okay?
And so that ties to it could be the depth of products that you're looking at. We have products like LPx for your limited partnership ownership interest. It could be MLx, which is for private debt and mortgages, and that sort of information, derivatives, that sort of elements in one direction. And then the other direction is, oh, more risk, more middle office services, more trading, other solutions around that, or additional reporting and regulatory solutions. So, we aspire to have that to be about 7.5%. And the algorithm for that is let's have five products that each do 1%-2%. And you kind of add that up and that. But we have a big denominator. So, you've got to really build meaningful products to do that. And so that's the next iteration. As we see that 3% move to 7%, that becomes even more compelling.
Then the rest kind of to get to this 16, besides those pieces, if you're doing math at home, there's about 3% of other. Now, that's kind of everything else I've defined up till now. Someone has a score card. Someone has a number or a component of it on their score card. Cross-sell, all the product people, each of those products, they have a number that they're trying to hit. In this case, other, it could be just AUM growth. It could be profitability at our clients and they're putting more assets on. It could be market conditions. It could be something else. And that's generally been a gentle tailwind to us and was in the fourth quarter.
So, I just want to ask you a couple of quick questions there. So, over time, based on what you're saying, right now, upsell seems to be driving about twice as much as cross-sell. But should those eventually kind of reverse or come close to that?
In a perfect world, they'll be equal at seven.
Right. Okay.
That would be a really great outcome. But in all likelihood, the 70% of upsell probably comes back.
Right. Right. Right.
That's less controllable. Cross-sell, I feel like it's entirely in our control. We're building the products. We have the opportunity to manage the pipe and that sort of stuff.
Got it. And then just a little quick few sentences on what typically contributes to your churn or leakage component.
So, that churn is for whatever reason. So, it's generally clients going out of business or a corporate who has, I don't know, $250 million and they go and do an M&A transaction and they no longer have investments.
Right. Got it. Got it.
So, it's M&A. It's going out of business.
Got it. Okay. That's really helpful. So, let's talk about margins and quality of earnings. As you said, Clearwater has been nicely profitable really back to the beginning and has always done well that way. But on the topic of outperforming your prior investor day targets, your initial EBITDA margin targets for 2024 and 2025 were 29% and 31% respectively. And you just delivered 32% in 2024. So, more than 3 percentage points better than your initial targets. And with your 2025 EBITDA margin target of 34%, also 3 percentage points better. What has driven such significant margin outperformance? And how much more room is there to go in terms of potential OpEx leverage?
Yeah. So, I think we've done, and the nice thing about it is when you're growing kind of 20% plus and you have incredible unit economics. So, the first thing we need to start with is gross margin. Gross margin has been better. In addition to saying, "Hey, EBITDA margins are going to expand 200 basis points a year," which we've dramatically outperformed. We also said gross margins would improve 50 basis points a year till we get to 80%. Gross margins, we've done far better than the 50 basis points in our gross margin level. And there's a couple of drivers for that. One is we've really gotten everyone bought in on thinking about that. And the longer we have a client, generally, the more as you're onboarding a client, there's more cost to serve as they're onboarding. And so, we figured out how to shrink the onboarding timeline.
And that obviously helps kind of with your gross margins. And it helps your clients get time to value faster. So, it's a real win-win to kind of shrinking that period of time. So, I think we have kind of the average onboarding is like five months. And in other kind of providers, it'd be multiple years. That's one. But the other piece that has been really pleasantly meaningful to us, and you've seen it in our gross margin, is the use of AI. So, not in 2024, but sorry, we're in 2025. So, at the beginning of 2024, we put 40 people working on AI to try and drive efficiency. And I think we've seen incredible ability to try and drive that efficiency. And that's been another increment.
It's been so good that kind of at the September investor day, we said, "Hey, long term, our gross margins are going to be 80% and our EBITDA margins are going to be 40%," and I think we'll say, "Hey, let's get to 80." We're at 79. Let's get to 80, but I'm not sure that's a natural feeling for us. I think there continues to be more opportunity that we can do in just using it, and you might say, "Well, why is Gen AI doing this?" One, we're doing complete deflection. So, at our clients, you have a right screen, and most of our clients are asking us, "Why is this number this number?," and outside of Gen AI, you probably put a ticket in and we talk about it back and forth and we iterate back and forth to answer that question for them.
The top 10 questions are in a drop-down bar. People click on it and they can get that answer for the most likely question. So, that's kind of deflection. The client service team isn't even touching that anymore. But then if you're in the client service team, the Gen AI engine is giving you answers to those questions. Now, we will always have a human in the loop because it's accounting. So, you have to be right. But the punchline is there's a lot of efficiency in allowing them to look at what those choices are. And okay, that is the right answer and clicking on that. So, that's been great. And then the rest has kind of flowed. We just have a very kind of because we have sticky clients, because we have high client satisfaction and high win rates, we have very efficient sales and marketing.
We have kind of twice as much we're spending on R&D than we are on sales and marketing, which our clients like, we like, right? It builds a more valuable program.
I want to ask about another element. That's really helpful. Another element, especially given where you are from a profitability standpoint, a place where we get some investor pushback, and that tends to come down to magnitude of stock-based compensation. And I think it was a bit below 23% of revenue in 2024. How should we think about where that metric will trend over the next one, three, five years? And how do you think about the full earnings power of the business long term?
That's very fair. And I talked about all of those elements of being a 2021 IPO. Not only do you have the multi-share class and the TR, you also have really high stock-based comp.
Right?
But pretty quickly, people pivoted to, "Wait a second. Let's think about this." And so, what we've committed to investors in, and we were able to achieve that last year, was to have a flat kind of cost in dollar terms of stock-based compensation and gradually bringing that down over time. So then, as a percentage of revenue, it shrinks dramatically over time. But kind of we've kind of lived at that level and we remain committed to living at that level or less as we kind of grow.
Got it. All right. So, let's turn to acquisition of Enfusion. First, as a sell-side analyst, I want to say thank you because for the longest time, we were overweight Enfusion. It was a battle, but people kept asking us, "Why are you going to stay? Why are you staying overweight?" I'm like, "Because Clearwater's got to buy this out.
Very hard.
Ultimately, when it came to fruition, I was like, "Man, it took Jim about two years longer than I would have liked, but I appreciate it." But let's talk about the strategic rationale. And it's clearly a transformational deal for you and the company. But like I said, one that we'd been hoping at least that would happen. Talk to us about some of your early diligence work on the company, what your early impressions were, and perhaps how some of those impressions have evolved as you've spent more time digging in on Enfusion.
So, and maybe just before we get to diligence, let me just step back even one second and say we'd had those conversations all along. We went public in September. They went public in October. We were kind of linked together and understanding it. And they had started in the hedge fund world and were moving into asset management from their point of view. And we had started in the insurance corporate asset owner world and had moved into asset management as well. So, we were both coming to asset management, but from opposite ends of the spectrum. And so, it was always interesting to see kind of how that came together. And so, when we started in the diligence, the first question, we don't have hedge fund clients. At least maybe we have one, but that isn't a core market for us.
So, the first question we asked was, "We think it's the best next generation system for hedge funds. Is it?" Check. Yes. Absolutely. Small hedge funds, medium hedge funds, large hedge funds, multi-strategy hedge funds, yes. Equity long-short hedge funds, yes. Yes, yes, yes, yes, yes. So, clearly the winner in hedge funds. Great. Good to have a solution that's a market winner, right? We live that from that side. Secondly, we sat down and we listened to their strategy or their evolution of moving from being hedge fund-centric to broader asset class, like asset managers, and thinking about that. And we were obviously coming at it from a much different position than they were coming from. And it made a ton of sense. I think they were very thoughtful about the approach and what was going to have to happen there.
But unfortunately, they were a public company and it takes a long time to enter a new market, even when you have the best product and you're trying to win. And that just takes time. And so, they were stuck a little bit in this spot where they were moving into this other market, which was attractive to them, but it was taking longer than they would have liked. This is also a very large, the asset management TAM is collectively a very large TAM. For us, it's very interesting. Now, also, let's think about this for a second. We do investment accounting. Our value prop is clean, reliable data to start your day. You can also think about we're thinking about NRR 115 and doing more with our clients. We have really high NPS. We have generally happy clients. They want to do more with us.
What do they do? And generally, when we're providing that clean, reliable data at the beginning of your day, we're sending it out somewhere else for them to do work in some other system during the day. Enfusion has a portfolio management system, an order management system, and an execution management system. That's what most asset managers are doing all day long, rebalancing their portfolios, thinking about their execution, trying to find the best thing, but where do they need to start? They need to start with great information to start their day that's reliable and true, and they need to communicate with their clients better than they are. Those were the flaws that Enfusion felt they had, and yet those are our strengths, and yet we didn't have the intraday activity that Enfusion has.
So, if you back up and you say, "We want to do more for our clients, our large insurance clients, our asset management clients," and it comes together. So, that was what fit together. And as we spent time together, the promise of that solution all on a modern platform became really, really exciting. For asset owners as well as asset managers, throughout your day and in communication with kind of all those other counterparties has the opportunity to really, really be a game changer. So, we got very enthusiastic about that.
Got it. Got it. I appreciate that. We've been chatting here for about 25 minutes. I want to make sure if anybody has any questions in the audience, raise your hand and we'll get you a microphone. So, let's talk about customer feedback. What are you hearing from Enfusion's customers or your own on the receptivity to the transaction so far? Who is most interested in the front office capabilities out of the gate? And is there anything noteworthy in terms of either size of the client or their overall asset complexity where you've seen people gravitate to kind of the vision you laid out with the combination?
Yeah. So, that's the interesting thing is because we were coming at it from different spots, our overlap of clients is in the single digits. We have 1,400 clients. They have, I forget whether it's 900 or 1,000. And you put that together and there's only a handful that overlap there. So, let me start with, okay, number one, they are the market leader in hedge funds. Full-throated commitment to hedge funds. You're going to see development. You're going to see innovation. You're going to see growth. And you're going to see opportunities there within that market vertical. We have fully embraced that as a market vertical across insurance companies and asset managers and corporates and hedge funds. Makes a ton of sense. And so, if you think about it, they were moving into asset management. Perhaps people were worried, "Hey, how committed are they to hedge funds?" 100% committed.
I think we see great opportunity in that market going forward. Number two, now that's on their client side. On our client side, our largest insurers are generally, if you back up five years ago, almost every insurer allocated all of their assets out to asset managers except for the very largest who kept some in-house. In general, I think what we're seeing, or at least what our clients are asking us to help them with is we're going to continue to allocate to asset managers, but there are places where we think we have some expertise and we'd like to manage it ourselves. Or the relative kind of benefits that I'm getting, we'll bring that in-house. For those folks, this is the perfect opportunity. They've actually been asking us, "Help us with this intraday.
Help us to do trading, but also give us the view for our risk and our regulations to be able to see the whole thing. I need to see my third parties and I need to see myself because what I'm going to do for trading, I have to understand what they're doing for trading and understand between those two elements." So, those what I'll say larger insurance clients are right down the middle of the fairway.
Right, right.
I think that's the place we're going to, so that's number two in our clients. There's this third set, which is our right to win, our collective right to win together in kind of end-to-end asset management space, is 100% better, right, than either of us on our own. In that space, there's generally a full front-to-back solution, is a vended solution. To be able to provide a full front-to-back solution just obviously significantly increases the right to win there. Those are the three places where we're focused on things coming together.
Got it. So, let's talk about financial impact. Give us just a brief recap of how you're thinking about core growth for Clearwater, how dilutive to growth, at least initially, are you envisioning Enfusion as that's folded in? And then what are the things that you can do to, do you think you can do to kind of accelerate growth, if you will, for the Enfusion part and what that means for the long-term growth algorithm for the combined companies?
So, if we go back to September 2023, when we did our investor day, we said 20% top-line growth, 80% gross margin, 40% EBITDA margins. Nothing has changed. That is plus Enfusion. That is there, right? And so, that's kind of, it's very clear. Now, Enfusion is growing much slower than 20%. The core Clearwater, you can see how we did in Q4, above 20% and continue to see great visibility. They are less. And so, it will be a journey for them coming back to that. But the mantra that we're really talking about are those three things collectively as a whole organization and moving towards that. So, we're not changing the goalposts as a result of this acquisition. We're just going to be a much larger company achieving those goalposts. So, that's the growth. I think there's some tactical things we can do.
I think there's some more strategic things that we'll do. And I think it will obviously, that is the piece that we're most focused on. And we're not closed yet. So, we're limited in what we can do, but we've started to talk about mutual kind of plans of what we think. And I think we're optimistic about the opportunity there.
What's the targeted close date again? Remind us.
Mid-April.
Mid-April. That does seem doable right now, I guess.
Yes.
Okay.
Yeah.
Got it. So, let's talk about international. We just have a few minutes here left, but international markets probably represent around half your TAM, but really are only high teens, maybe 18% of current revenue. What specific barriers have historically limited your international expansion? And how will Enfusion's presence help you kind of overcome them so you can better address the TAM?
Really important. So, I think this is a place where clearly Enfusion has done a better job than we have kind of in their evolution is they have about 40% of their revenue outside of the United States, which is compelling. They have 60-some people in Hong Kong. I think we have less than that. Well, I know we have less than that. I was going to tell you, but now I'm not going to. Less than that. So, that's meaningful. They have a larger presence than we do in London as well. And so, that international presence and the thinking that comes through that, I think, is going to be very helpful. What have we missed? Number one, brand. The joke we used to tell was when we first so, the company is headquartered in Boise, Idaho. Very livable city in the summer. Less so in the winter.
It's quite cold in the winter, but it's a very livable city, but we would take salespeople and they would fly from Boise to Salt Lake City, Salt Lake City to New York, New York to London, and then they would try and go sell in London, and the first question that people would ask is, "Where is Boise, Idaho?", right?, and so when you're starting with that, right?, but you know what? We have some excellent, excellent global clients, right?, and so obviously the platform works, but the brand awareness that we had, and it's our own fault, is poor, and so I think that having substance, having infrastructure, having people in place helps legitimize, right, you to the local markets, because at the end of the day, all markets are local, and so that's something, so I would say brand is one piece that comes into play.
And then kind of substantive understanding that has also been the case. The other thing is, honestly, we've been growing nicely in North America for a while. So, the investments we're making in international, the reason why we're doing the Enfusion acquisition isn't for 2025 or 2026. It's about we're going to be this much bigger in 2027. How do we fortify our growth in 2027? And so, we've put a lot of investments in place to try and drive for that growth in the future. And I think this just the Enfusion acquisition just helps us to further amplify the focus and importance of it. Because you're right. Any kind of scaled global software company should have a significant maybe it's 40%, maybe it's 50% outside of North America.
Got it. So, just a minute and a half here left, Jim, to conclude lightning round. What are your top three to-dos for this year?
Sure. So, successfully get the teams working together for Enfusion and Clearwater and bringing us together. Two, actually, number one is grow 20%. Number two is grow 20%. Number three is grow 20%. In service of that, it's to get Enfusion together and build that. It's to deliver on the promise that we had as a single instance multi-product solution with this kind of global Security Master and make progress on delivering for that for our clients.
Love it. Jim, thank you very much. Really appreciate you being here.
Thank you.
Best of luck and look forward to seeing how things come together the rest of this year. Appreciate it.
Thanks. Thanks, everybody. Thanks.