Where do you want to go?
Sure.
Let's be the pickle in the middle.
Exactly. We might as well keep it close, right? It feels so far.
Sorry.
I'm wondering. Oh, nice. It's solid.
I have some personality.
There you go. It's good.
Exactly.
Good morning, everyone. Thank you for joining us for the second day of Citi's 2024 Global TMT Conference. My name is Andrew Schmidt. I'm the Lead Fintech Analyst here at Citi. This session is for Citi institutional clients only. Today, it's my pleasure to host Clearwater Analytics. With us, we have Jim Cox, CFO of Clearwater. Good morning.
Great set. Thanks for hosting us. Thanks for picking up coverage.
Yeah.
Look forward to having this conversation and many more in the future.
Absolutely. No, it's been good to pick up coverage, and it's been good traction since the launch, so-
Great.
It's been great.
Okay.
So maybe we just, you know, start with traditional level set. Just overview of Clearwater's-
Yeah
... value prop. What does a Clearwater solution bring to clients? And then the pain points it solves across different end markets.
Great. So, see, you know what?
Do you mind if I switch seats?
Sure, please do. Sorry. It's kind of I felt like I was, I must be in the front row. Sorry. Yeah, this works. Is that all right? That's, is that all right?
Perfect.
Okay.
Yeah, this is great.
So, okay, Clearwater. So the most important thing to understand, actually, there's lots of important things to understand about Clearwater. But let me tell you why I work, even though I live in the Bay Area, why I work for a company headquartered in Boise, Idaho. Now, Boise is a very livable city, but that isn't what drove it. I was actually a client of Clearwater three times before I became the CFO. And so when you talk about what's the value prop that Clearwater provides, I can actually speak to that. Like, I really, really experienced it. So what Clearwater does is investment accounting, performance, risk, compliance, and reporting for investment assets. So if you think of yourself as a... Hey, are we running? Is the clock isn't running. Is that-
Okay.
Are we live?
Yes, we are.
Okay.
Start the clock, please.
Sorry. Oh, don't worry. So sorry. I was a client. And so Clearwater provides investment, accounting, reporting, performance, risk, compliance. And so if you think about it, if you're a cash-rich company, that was, you know, I'm a CFO of a cash-rich company.
Mm-hmm.
You basically have this excess capital, but you're worried, you know, kind of about a dozen different things. How do you grow? How do you become more profitable? What do you do? But you have this excess cash, you need to make a little money on it. You don't wanna lose any money. That's the easiest way for a CFO to lose his job--to lose a bunch of money. I was a CFO when The Reserve broke a buck. That was, fortunately, we weren't in it, but, for someone, it was a very unfortunate day, right?
Sure.
It gives complete visibility to the asset owner. In this case, I was a CFO of a corporate, of all of their assets, across all of their asset managers, across all of their instruments, across all of those elements, and we give it to you daily. Our value prop is 9:00 A.M., beginning of the day, clean, reliable data for you to go do your day. It's comprehensive, it's trusted, and it's understood. It was honestly game-changing for me as a CFO. I would have this conversation with my treasurer, right? She was great at many things, but she was not great at investment accounting.
Sure.
And so it would always end in tears. And the point is, she bought Clearwater. She's resourceful, so she bought Clearwater. She showed me these reports, and it's like, it was all there.
Mm-hmm.
So that's the value prop for kind of corporates. For insurance companies... Well, hold on, let me ask you. Like, if you think about it, where corporates invest it, they generally invest in relatively short maturity, fixed income, because you don't want to lose any money. Corporates, then, the company started with corporates, then you move to insurance companies, generally are investing in those same things and something. They start with the fixed income, and then they move into kind of more sophisticated and complex assets.
Mm-hmm.
That was really the life cycle of the company, pivoting from corporates into insurance companies, which is now kind of 52% of our ARR. Then, if you think about it, so two-thirds of our revenues are asset owners. If you are doing the accounting for asset owners, and your asset manager is providing you a report, and you don't like your asset manager's report, the asset owner can turn to the asset manager and say, "Please, can you please just give me the same information I'm getting myself from Clearwater?" That's how we moved into the asset management world. Ultimately, at the end of the day, it's, you know, trusted, clean, reliable data. I'm sure we'll get into this.
Yeah.
But there's a unique reason why we're so well positioned to do that.
Got it. Now, that's a great, that's a great level set. So, you know, maybe we'll jump right into it. Obviously, a lot of focus on the transition to a multi-product platform.
Sure.
Maybe we talk about where we're at in the journey, and then if we could weave in a side from NRR, what metrics do you use to gauge the progress of that transition?
Yeah.
And how have those been trending? And while you're answering that, I'm gonna grab a clock.
Thanks. Thanks. Yes, great. You're good. Okay, so as we think about. So first, before we go to multi-product, let me start with why. So if you just get to that beginning platform, and what is really such a differentiator in the platform is, and so this is kind of the secret sauce of the company. Not only are we in the cloud, not only are we single instance multi-tenant. But we have a single security master, a golden copy. And what that derives, and this gets into why all these-
Mm-hmm.
Additional products are there. So what's very unique about Clearwater is when you start, for every incremental client we have, it creates a network effect, both for the company, for investors, and for the clients themselves. So let me talk you through it. We have, you know, 3,800 connections already. Every new customer offers an opportunity for another connection, or if we're already connected to all those data sources, it's just very easy for them to connect. So instead of connecting all over, we connect once, and it works for all of our clients. If anyone else on the platform, because we also have a single security master, that is, if anyone else on the platform owns that same security, we consume it, and we reconcile it once.
So if you bring a book on, and all of those assets on the book are identical to other clients on the book, those securities are already there. The accounting for that is already there. And so what that provides to clients, what it provides to investors is, obviously, there's a lot of scale, there's a lot of efficiency. That's why our margins are 80%+ , that network effect, on a recurring basis, they're 80%+ . For clients, though, it creates quality. Because the idea is, if both of us own the same security, if you didn't use Clearwater, you would have your team reconciling it, and you would be trying to figure out what's gone wrong. I would be reconciling it and trying to figure out what's gone wrong.
But if, if on the Clearwater platform, what's different, if, if you find a mistake or anyone in this audience finds a mistake, and it gets fixed, the quality ripples through to everybody else. That's what the single security master... So if you just pause for a second and think, okay, we've got truly clean, reliable data. You talk to risk people, they say, "Ah, risk models, that's not so complicated." What's complicated is bringing in clean, reliable data that you can rely on. Now, I would assert risk models can be complicated. So-
Yes.
But if you're in that business, that doesn't seem complicated. So if you start with this concept of we have clean, reliable data, that is kind of across the entire ecosystem. And we provide accounting, reporting, performance, risk, and compliance. Suddenly someone says, "That's great. Thank you for providing me that information at the beginning of my day. What more can I do with that?" And so clients are coming to us because they say, "We have this data. This is this valuable thing. What more can you do?" And so that led us onto this multi-product journey, right? And so then you start saying, "Okay, well, what could we do? Could we help them with their trading?
Could we help them with more of their risk, not just their reporting around risk, but their pre-trade risk, perhaps?" You know, there's a whole variety of things, and so we did a study to say, "Well, how much money's there?" And we kind of said, "Hey, on average, on accounting, our clients and those in this industry, whether they use us or not, kind of in this industry, spend about a bip on accounting, but they spend about four bips across their entire stack for that, and so let's say that that's wrong by 50%, it's still one and a half times the opportunity that we have, right, and so what we said is, 'Okay, there's a nice TAM here. We have clients who are asking us to do it.'
It makes sense to move into this multi-product strategy, and so we've done that in a variety of ways. We're doing it organically, so we've been able to free up investment, and we're looking at investment, so an example of an organic one is a product called LPX, so we've always had... so I'm an insurance company, I have an allocation to fixed income, I have an allocation to private equity, I have an allocation to hedge funds, and in those allocations to private equity and hedge funds, all I'm getting is an LP statement once a quarter. Now, those assets were always on our platform because it's not that difficult. It's like, I get a number, and here's your number, and that's what it is, so it was already on our platform, but what's challenging about that LP is this: what, when is my next capital call?
When am I gonna get a distribution? How do I have to reserve some cash on the side because I'm gonna have investment flows between these asset classes, and what LPX allows you to do is look through and understand what your capital calls may be, what your distributions are, the workflows around that, and then look through into the underlying investments. If you were, we have some private equity investors, as well as being a public company, still as they kind of sell down. If you owned that fund and you owned Clearwater stock as an asset owner, you would probably have more exposure, which you'd like to understand your total exposure to Clearwater per se. With LPX, you can understand that because you'll understand at both those layers what your exposure is.
So that's an example of an organic process, because that we're doing, where we're doing more for our clients around the assets. That's the organic strategy. There's also inorganic that we've done. So in April of this year, we did a very small acquisition where we bought the risk technology models from Wilshire. And so Wilshire, you've heard of the Wilshire 5000. It's very, you know, these risk models, they were built in the eighties, and they've been tried and true, you know, and the math around them is kind of well regarded. And so what we can do is we can take those math models, blend that with our clean, reliable data, and provide our clients with yet more information than they would. So that's kind of...
As we move to this multi-product strategy, one thing that I-
Yeah
jumped over on the multi-product. It starts with this. The reason why a multiproduct strategy works for us is because we have a 98% gross retention rate. The last two quarters, it's been 99%, but a 98% gross retention rate is ridiculous. So when clients come on our platform, they stay. We have an NPS score that is ridiculous. I've never seen it anywhere else. As a former client, I understand why. It's because we do all that sausage making, and we just provide you that clean, reliable data.
Sure.
You don't have to do it, so happy customers, sticky customers, who have problems that they want us to do more for, that's ultimately it sounds pretty obvious now. I don't know why it took so long for us to think about it, but that's kind of the model to move to that. Then the last thing you said is, "Hey, how do we think about metrics? How do we think about kind of the progress towards that?" What we said is, in the first half of this year, of about 25% of our bookings were with these incremental products, which is nice to see. So we don't disclose bookings, but we'll talk contextually about kind of how. So we're seeing progress. We understand that there's demand, and we can see how that works.
But ultimately, the metric that is helpful for all investors to think about is net revenue retention. So I talked about our gross revenue retention, 98%-99%, world-class. I'll put that up against anybody's. 110, our NRR. Hey, last year it was kind of in the single digits, you know, that is politely pretty average for a world, you know, you look at world-class companies, they're 120, 125, something like that. Now, a little bit of a different business model, but we set out in September 2023 and said, "Look, aspirationally, we're going to NRR 115." So today, we're at 110, so we've made a few progress points on that. If you think about it, what are all the ways that we can grow our relationships with our clients?
You start at 100, you go down to 98 because you lose 2, right? That's the gross retention. You get about 3%, kind of, in price increase. You get kind of 2%-3%, depending on the year, of AUM, and that isn't really market volatility, but that's more just incremental profitability and the more assets coming onto the platform. Then we have something called wallet share, so that's doing more with our clients. Examples of that is, I'm at a strategic asset manager, and I have one line of business, and I either help them add assets at that line of business-
Mm-hmm.
or I move to another line of business. So Citi, thank you for being a great client. We're in your corporate cash space. We'd like to help you grow that business, and that would be great. And now that you're on Clearwater, that's gonna be very helpful for you. We'd also love to do many, many things. Citi is a very large organization, and so that would be wallet share with our core product. And then the final element is then, new products. And, you know, kind of in Q2, new products was about 2%, and we think that new products could be 7%, and so that's really the bridge from 110-115 . These incremental products, both organic and inorganic. And it isn't like one product is gonna be 7%.
It's about offering a variety of products that provide 1% or 2% and kind of build that NRR 115. So we'll watch the track of that.
Mm-hmm.
And so I think that's the journey. I think you'll also look for more announcements about new incremental products, because we really pivoted a lot of our investment at the beginning of this year to focus on these new products. And so you should see things coming out. And I know someone from your team is coming to Clearwater Connect in a couple of weeks.
Yep.
So we'll be able to update all of our clients on that, and we'll be able to test demand.
Yeah, I look forward to seeing what comes out.
Sorry, that was a really long answer. I'm sorry about that.
No, that's great. I appreciate you giving the backdrop, because I think just jumping into the multiproduct, you know, strategy, you need some context.
Yeah.
Context is important. That's super helpful. Maybe we stay on that same vein. You know, we'll come back to kind of how you approach the end markets in a second.
Yeah.
But since you talked about NRR, we'll jump to that.
Yeah.
You talked about the components to get you to 110.
Yeah.
Maybe we'll start there, like retention, AUM growth, pricing, wallet share, and obviously, cross-sell product.
Yeah.
Just in the current environment. Aside from retention, which you obviously have very good visibility on, are there components that you have more or less visibility on as you think about-
Yeah
... What makes up the current 110? Talk about the visibility in terms of the ability to deliver each of those components today.
Yeah.
Before we go to, you know, 110- 115, just the current 110.
Yeah, let's talk about the 110 .
Yeah.
So maybe I won't. I can give you some context about the visibility, but what I think is more powerful is I can tell you whose job it is-
Sure
To solve each piece of this. So we've broken that. You know, it's not just one number that we're fitting into. We disaggregate this, and we give somebody the job.
Yeah.
So number one, price increase. I talked about that. That's we, you know, roughly 3% on that. We have a team that does price increases. They execute on that. There's a person, she has a number, she executes to that number. We think of what that number is. So that's, that's kind of. And so there's pretty good visibility on that. That, a lot of that price increase comes through standard contract increases. Others are kind of negotiated and that sort of stuff. So that's, that's one piece. AUM, we don't have anyone that works on that, so no visibility on that. It kind of. Look, in 2022, it was a big headwind. In 2023, it was like, eh. In 2024, so far it's been, it hasn't hurt, but it's not been a huge helper, right? Wallet share.
Wallet share is really important, and we have sales teams. We have, within asset management, we've bifurcated the asset management. We kind of arbitrarily picked 20 billion. But 20 billion and below, there's a certain kind of buying pattern there. 20 billion and above, we call that strategic asset management. So Citi would be one of those examples. You can think of all the bulge bracket banks that have those. And these here, we have a relationship management model. Those are folks, and we have teams, whose responsibility, and they have the quota, to go meet with those folks, help them grow their business, right? And help them find other places within their business where they can use Clearwater, and that's that cross-sell. Then for new products, we have effectively, their titles change across the organization, but for each product, we have a general manager.
So we have a general manager for LPX. We have a general manager for a product that I'm overseeing. And these folks are ultimately, they hold a number. You know, when we decided how many resources to allocate to different groups, that was because the general manager stood up and said, "I'm gonna sell this much business this year, and therefore, I get 7 people or 12 people or 70 people," depending on the number that they're signing up for. And obviously, you don't get 70 people and sign up for $3 million, right? You got a sign up for a big number if you're gonna have that many people. And so that's. And so within that kind of, you know, so everyone has that number, if that makes sense. Now, the general manager also needs to work with the sales team, right?
So we have a little bit of a hybrid there. For the new product, you have sales engineers who understand the product and understand that, but the actual sales rep owns the client relationship. And so as a general manager, you have to be sufficiently compelling to the salesperson to get them to pitch your product. And so that's everybody's job. And, you know, what I would say is we have good visibility, not because we're great, but why we have good visibility is because we have a lot of irons in the fire. We just have a lot of optionality. We don't need every strategic asset management client to hit to get to our numbers, 'cause we know some it works for, some it doesn't. We don't need every product to hit to get there. We need...
Because we just understand that, and so we take a real portfolio approach.
Got it. Maybe just drill down on one of those components, which is AUM growth, and, you know, it's been, you know, it's been variable the last couple of years. Historically, obviously, there's been growth.
Yeah.
What are the sources? Is it, you know, when I think about the source of AUM growth, it might be an acquisitive insurance company, right?
Right.
Could be, could be rates. Maybe you wanna talk about rates impact on fixed income. What are the drivers of that AUM piece over time?
Yeah. So when you think about wallet share, right?
Mm-hmm.
So that's, you know, helping people. You know, that's very much controllable-
Yes.
and somebody has that number. And an example of that would be-
Mm-hmm.
So you might say, "Hey, wait a second, how controllable is an insurance company that's a client of ours choosing to sell or buy, you know, the assets of another insurance company?" Well, in general, that wouldn't be the case, but we have a great market within the reinsurance market, and they are in the business of buying assets, right? As well as taking on the risk and creating greater returns from that. You might think, why is Clearwater such a great fit for them? It's because if I'm a reinsurer and I buy a book, do you know whose job it is to make sure that that's accounted for and accurate and right and onboarded and everything's okay? That's my job. It's Clearwater's job.
So how freeing would it be to be the CEO of a reinsurer and say, "I have a strategic imperative to go buy these assets, and I don't have to worry about the operational burden that occurs"? If you look at these reinsurers and you see the sizes of their teams, they've stayed pretty constant, even as they dramatically scale. So that's something where, you know, our folks are working on that. So of course, it isn't in our control what they do, but there is more control around that. As it relates to rates, it's a very complicated question for a couple reasons. Obviously, just I'll summarize it by saying the 500 basis point increase in 2022 created about a 500 basis point headwind in our growth rate in 2022 over time. But two things have changed since then.
One, obviously, we changed our business model. We had an AUM-only business model at that point in time.
Right.
And as a private company, that worked great. As a public company, not so much. So we pivoted to this base plus model. So we've taken some of the upside, some of the downside-
Mm.
Out of AUM since that time period because it's, it helps with a more manageable, predictable business. It's really increased the predictability there. And frankly, our clients have enjoyed the predictability as well. The... So that's that. The other thing that happened at that time is the whole bloody curve moved. And so if you can tell me exactly, not what the Fed is gonna do, which is hard enough, right? And, and, at the... And for example, at the beginning of this year, everyone was asking me why I hadn't priced in seven rate cuts in my guidance for the full year of 2024 . Not, I mean, I guess I am crying about that. I'm really glad I didn't do that, but not only is it what the Fed does, but what does the whole curve do?
I think if you've seen some of the changes in SOFR recently, the curve has already shifted.
Yep.
It's hard to know kind of how that relates. It also comes down to, 'cause we don't have control of what our clients are investing in. Now, we're able to see, oh, that's interesting. Clients have extended duration... you know, because we see $7 trillion in assets coming across the platform, we can see that. We say, "Oh, that's interesting. 60% of clients have extended duration. Why have the other 40 not?
Yep.
Are they not looking? Do they don't know? Do they have a different point of view? I don't know.
Yep.
That's kind of the short answer. I generally think it's safe to say, across all asset classes, as interest rates fall, the asset prices go up, and so that's generally helpful, but- Quantifying it is difficult.
Yeah. And
Yeah.
We run our business to kind of provide more value.
That's good context.
Yeah.
Appreciate that. So I think, you know, you made just to round out the comments on 110, maybe overall comment on visibility. I think you've made comments previously, that this should be more of a floor from this point, you know, plus or minus, obviously, right?
Yeah.
How do you think about kind of the stability of 110 now, you know, over the next, you know, over the near term? Apologies for the near term point.
Yeah.
I'm just thinking about that.
I think we keep building. I think what I said on the last earnings call is, hey, I think-
Mm-hmm.
Here's, you know, at the beginning of the year, we were-
Mm-hmm
... roughly 106, I think, and-
Yeah
So now we're up to 110, and so we've made nice progress.
Yep.
But you know what, 99% gross retention, which is-
Right
Typically, we're at 98.
Right.
So could there be a point here or there between any of these? Yeah, but I think we're steadily... What we said-
Mm-hmm
... was. It's not about, like, getting to 115 once. It's about fundamentally changing the business-
Yes
so that our relationship with our clients expands at that rate consistently, year- over- year, over- year, over- year.
Yeah.
And so that's. We've definitely we feel confident in the sustainability of that, because there's you know in the first half of the year three products that were all organic, worked really well. In the second half of the year, it may be three different products that work very well, and or it may be those same three. The point is we have some optionality, which is nice.
That's super helpful. Now maybe we can just spend a little bit of time, the path of 110-115 .
Yeah.
So the additional five points of cross-sell, is that existing products, or is that or is new product efficacy required now? And you know, the, the
Yeah
the time when you expect to achieve the target.
Yeah. So I think that,
The answer is yes.
Always. Yeah, everything. Yes, all of the above, right?
Yep.
How I think about it is what was the success that we had in the first half of this year? I think of three big buckets. One was Prism had a good first half. LPX had a good first half, and then, what I'll broadly call Funds. Prism and LPX had been in market. Prism for, you know, far longer. LPX was really in market for all of 2020. So it takes time for these things to build in. What was a pleasant surprise to me about the first half is, this fund stuff was. It caught on much faster, much better than I had anticipated, and so that was net, a positive surprise. Funds was just one of the many things. We have kind of five buckets, that we have kind of been focusing on innovation.
Most of those products under those five buckets are still under development. So you'll hear about a commercial paper issuance product. You'll hear about Insights-
Mm-hmm
... shortly. And these types of products, they are. We've really, all we've sold those products, the only clients we've sold those products to date have been client development partners. People who have been helping us to say, "Oh, is this product right? Is this there?" And so, you know, who knows how much we're gonna do in that in kind of the last few months of the year.
Right.
But then we kind of move forward. But I do also wanna say, there's also been areas we don't know at all.
Mm-hmm.
We listen to our clients, and so let's use just the Wilshire acquisition as an example. The risk models that they put together, that they view as so simple, you know, I met with them, and they were talking about stuff, you know, I'm an accountant. You wanna talk about accounting with me? I can go all day long. I'll bore you all with that. But, you know, you start talking about these risk models, that to them, were very rudimentary. To me, I was like, "I don't even know what you're talking about." And so I think we also need to think of inorganic as an opportunity to expand our knowledge base in the specific areas where our customers are also asking us to. So it comes back to that bedrock of clean, reliable data. What can I do with it?
And we have some good ideas for what we can do with it, and I think our clients have great ideas about what we can do with it. And if we don't think we have the right to build that, then we're gonna look to buy things that will help people on that front.
Got it. Maybe we'll come back to the inorganic question later, but that's, that's really good context. If you could flip to gross margin-
Yeah
... and again, you know, maybe we'll come back to new logo, if we have time, but I wanna make sure we hit on gross margin. You know, there's a lot of things about the story that are attractive, but I think that, you know, the gross margin opportunities does seem somewhat underappreciated. So maybe we can just start with a basic question. Just the primary drivers of gross margin, you know, fixed cost leverage, network effect of the platform-
Yes
... scalability, scaling new markets, Gen AI.
Yeah.
You know, maybe you talk about, you know, the drivers of gross margin-
Yeah
and where we're at amongst each of the buckets, and if there's any other buckets that I missed.
Yeah. So in September of last year, what we said was we would expand gross margins by 50 basis points a year, kind of until we got to 80%. Generally, when we think about pricing new business on a recurring basis, we think of north of 80% margins. And, you know, so, so when we went and we talked about that, and if you go back and look at what we've performed since then, it's been. We've far outperformed that. Now, why did we say the 50 basis points? That comes to the network effect, right? Now, you offset the network effect, so every new client, right, makes us better, more efficient. If you already have the connections, then it's efficient. If you have a new client and you don't have the connections, then it's more burdensome.
That client would have lower gross margins while you get the connectivity going, and then once those connections are there for the next client, that comes behind, so as you enter a new region, like Europe or Asia, that would naturally just... You can intellectually understand why that would depress, you know. We probably have almost all the connectivity in North America. We have very much less in Asia. To just contrast those two. So, so those clients, you would expect there would be more burden there. Even though we had that expectation because of the network effect, the true network effect, we expected we could grow gross margins by 50 bips.
Now we've significantly outperformed that, and you might ask, "Well, why is that?" And that's really what we've looked at is we've implemented a number of ways where we're implementing these, you know, Gen AI, large language models.
Sure.
And really, there's no story yet on the revenue side. I mean, just as frustrating as that is, there's no story. And just to be realistic, it'll take time for people to figure that out. I don't think we're the only ones who've realized it takes time to figure out the right way to do that. But on the gross margin side, you can see it. So the two ways where we're really being effective is what we're able to do by looking at these questions and querying on the data. We know what the top 10 questions. Did you know that roughly half the questions we get, our client services team get every day is, "That number is seven, or that number is 12, or that number is 23." And the question is: Why is it 23?
Prove to me why it's 23. Why isn't it 24? Why isn't it 22? Why is it... And that, and generally, what you have to do to answer that question is you've got, "Oh, well, what number are you talking about? Show me the data. Let me show you this data." And there's five emails that go back and forth, and it takes a few hours for someone to kind of solve that with someone, if it's reasonably complicated. Those 10 questions are already there on the right-hand side, so someone can click and answer those questions, and it flows through.
Mm.
So that is true, deflection. And so that's a tool that we've been enabling. The other thing we've been enabling is human in the loop interactions, where the machine is coming up with, "Here's three answers. What do you think?" Now, a couple of things happen. Either the rep picks, says, "That looks like the right answer," they pick it, and it's done. That's great. Otherwise, if it doesn't give them the right answer, guess what? They do their job as if they did it.
Sure.
And so those are two ways. So look, those tools are in place, and then you say, "Wow! Okay, great. What are we really getting out of that?" I think we're definitely getting something out of it. Because if you look, our client satisfaction stays the same. Our employee satisfaction is still high, so they're not getting overworked. We're not burdening our clients even more, and yet we're seeing gross margin expansion because we just aren't adding the scale of these people that we would normally do. And so now we have rules say, "Hey, for this many assets on the platform, we'd expect this many people in kind of operations to help with that." Guess what? Those models are tweaking, and we're saying, "You know what? Instead of X, it's 30%.
It's 30% more than X, is as those assets shift, to be able to shift to that." I think we're just in the early stages there, but that has been the tangible spot where I think we have seen some benefits from that. Lots of investment has gone into this. We've had to build these models internally, and we've worked on that. But at least that's one spot where I feel like, I'm not sure it's working, but I think it is. At least the numbers show it, so-
Right. Right, exactly.
Yeah.
No, that's important. Maybe a direct question about, you know, a framework to think about the ceiling for gross margin. You know, obviously, you laid an 80%+ , you know, to get-
Yeah.
Emphasis on plus. But what's the right way to think about the ceiling for gross margin, especially considering, you know, what your comment about Gen AI not being, you know, like, fully ramped yet? Is there a framework to think about that?
Yeah, I think what you'll find is what's really important to Sandeep and to me is that when we say we're gonna do something, we do it, and we meet that.
Yeah.
And so I think that although we are very optimistic that we can go beyond 80%, I think what we'll do is we'll get to 80%, declare a bit of victory, and then come up with our new target. But I do think we're in a new world, and I think that any number I gave you would be a finger in the air and yes, at this point in time.
Understood.
But I do think that it's there.
Understood. And maybe one last question from me, and then we have time for a question or two from the audience. But, just, as we think about margin trajectories in general-
Yeah.
Are there larger investment projects, projects that we should think about, you know, either in cost or sales or OpEx, that we should, you know, think about over the intermediate or longer term, that might gate margin expansion? Or do you feel like you have a pretty good grasp on, you know, the investment profile of the business today? On an organic basis, obviously, inorganic it's a different story.
Yeah.
But just thinking about organic.
So organically, I think we're really happy with where we sit. Over the last, if you look backwards-
Mm-hmm.
In R&D, we spent, you know, we're upside down relative to other businesses. We love that we can tell clients we're spending, you know, a quarter of every dollar you give us on R&D, and clients love that, too. Now, we, we will continue to grow R&D, but not as quickly as revenue, and so I think that can come down over time. The reason why we can do that and innovate is we had two very large projects that we've completed, so we're kind of past that on the R&D side. One was the internationalization and providing GAAP throughout the world, and the second was really moving to the public cloud, and all that's done. So we've ingested that. The other thing is, in sales and marketing, though, you haven't seen it, because that number hasn't really changed. We've really expanded the footprint internationally as we've expanded.
I think those things are behind us, and so I think we think incrementally. Now, do we have other great ideas and other things we can do? Yes, but within the envelope of, you know, 200 basis point margin expansion year- over- year, very easily.
Got it. We've about a minute or so left. Any questions that people wanna sneak in?
Yeah. Oh, good. Go ahead. Do you wanna-
Do you wanna-
Oh, I can repeat it. I can repeat it.
Yes, if we have-
So I think the way to think about pricing is that it's about a relationship with a client, it's about the value you provide, and it's about the total relationship. And I think that when we think about NRR 115, that's growing a relationship with a client across a variety of different streams, right? Including that.
Go ahead, Pete, and you had a question?
In the front.
Yeah. So a competitive response? Sure. So yeah, I think generally, we are in a replacement market, you're right. And what I would say is that, you know, if you're an on-premise software provider that has a separate instance, you know, what are they doing? They're going to the cloud, and they're certainly trying to pitch that. But what you're missing there, what you don't have, is that single instance, multi-tenant, single data. No one else does it like this. That's the real... If there's one thing you can take away from this, it's we have a single security master. No one else does it like that. Has anyone else done it? It's hard. It's hard. It's a fundamentally different architectural structure.
So every other person thinks, "My container is my portfolio." And we think of it about the securities that are across portfolios. So if you think portfolio first, it's very difficult. If you think securities first, it's a fundamentally different way of thinking. Okay, well...
Sorry, go ahead. Yeah, last question.
Can you speak to the importance of Asia for your larger top line growth? I know you've mentioned kind of having invested in S&M a little bit last year to grow internationally. Are you kind of done on that front or kind of what do you see on the footprint?
So I think we've certainly broadened our footprint. And I think that when you think about our, so Asia is important, and it's a tiny piece of our business today. And here's how you would know that. We talk about TAM, and then we talk about core TAM. And our core TAM is where kind of, you know, we have kind of a certain element cadence, you know, referenceable clients, you know, product-market fit. Asia, honestly, we've been pulled into Asia, as clients have raised their hand and said: Please, you know, please, can we buy Clearwater? And so that's developed in our mind, "Hey, wait a second, there's an opportunity there," and so we're leaning into that now. So, yeah. Thank you.
Any closing remarks you want to leave us with, or?
Thank you so much. Thanks for your interest in Clearwater. I look forward to speaking with all of you, and thank you very much.
Good morning, everyone. Manhattan is back.
It's... You know, I saw that, too, today.
Yeah, for sure.
It was-
Absolutely.
It's very good. Thanks, everyone.
Thanks, everyone, for joining.