Oh, that's good. Always a pleasure to have.
Thank you. Thanks for coming.
Jim Cox CFO Clearwater Analytics with Michael Turrin with the software team here at Wells Fargo. It's day two of the Wells Fargo TMT Summit. I appreciate you sticking with us through the afternoon. Jim, we've gotten questions on this. I just thought we'd start with just your opportunity to kind of level set and respond to some of the recent headlines that have been out around Clearwater.
Oh, you noticed them.
Yeah.
Oh.
So I think investors have noticed too.
I know.
So if you'd like to kind of make an opening statement.
Sure.
In response to some of the reports, I think that's probably useful just for pushing that out of the way, and then we can go back into the core business and the thing you know well.
First of all, thanks so much. Thanks for breaking out the beautiful weather. LA's had some rain until now.
Yeah, Monday was rainy.
But what a venue. So thanks for the invite.
Yeah. Thanks for coming.
So nothing to comment specifically on the news, but I would just say, you know, historically, before we went public in 2021 and we got to know each other, we were owned by private equity. And there was a recap back then in 2020, where a lot of private equity firms got to know us at that time. And so we're probably a familiar name in that world. But so with the recent stock price movement, it doesn't surprise me that people would find us valuable, right?
Yeah.
It's, I think it's a durable, reliable business. And so that's just kind of like any public company, like any investor, no matter what type of class or anything like that is, I think people are looking for market-leading firms that have durable competitive advantage, moats, high recurring revenue businesses that throw off cash. Markets ebb and flow in how they view things. But kind of generally, winners in markets are great businesses and lucky to be part of that. So I don't.
So that's.
That doesn't really answer your question, but it's how I feel about the business, and so we could talk about that.
It's perfect. And it gives us a lot to follow through on.
Okay.
So.
Thanks.
All of the attributes that you're highlighting, I think, are things that we could draw questions around. But maybe just to start off with, set the stage for what Clearwater Analytics provides, the different.
Yeah.
Industries that you serve?
Yeah.
Maybe what certain customers were doing previous to Clearwater and what the advantages are post-implementing the technology.
So that's, so yeah. So if you think about CWAN, we serve four client segments, broadly under two broad umbrellas. One is asset managers, and the other is asset owners. Under the asset manager space, you have the traditional asset managers as well as you have hedge funds. On the asset owner space, you have insurance companies and corporates, endowments, foundations, state and local governments. Think of the people who actually own those underlying assets and then engage with managers to manage that money. So those are, those are the segments that we do. What do we do for them? We do accounting, reporting, performance, risk, compliance, trading. So think of anything you need to do to understand that across. Why do lots of firms do that? Why do we do it better than anybody else?
We have, obviously, we're in the cloud, and we have something that we broadly talk about as a single security master. So every, we don't really think about each individual client's portfolio. We think about the securities that underlie them and look at that as a common data layer. And that becomes very powerful. So every new client under any of those four verticals benefits from all the securities that are owned by other clients as well as makes that security data more rich and more comprehensive. And so that's kind of, you know, our value prop is really clean, reliable data to run your business every day.
The start of the year, Clearwater made some additions to the family.
Yeah.
Right? And so Enfusion and Beacon became a part of the Clearwater family. Maybe frame the rationale behind those additions and then kind of score progress.
Yeah.
Where we are today versus what you expected.
Yeah.
When those acquisitions came to be.
So let me go back to pre, you know, kind of the nomenclature we gave you was kind of for kind of where we are today when I described it across all of that. But if you go back to January 1st before these, what we heard from our clients was, "You give us such clean, reliable data, but then we go somewhere else to use it. We have to move somewhere else to do something with it." And so when you think about a client saying, "Hey," you're like, "Okay, I've got all this information, you know, and so let's talk about risk." And so when we were meeting with the folks at Beacon and Kirat, the founder at Beacon, and he, you know, he was explaining risk to me, and I was frankly baffled, truly baffled.
I said, "Wow, this sounds really hard," which was like, "That sounds like something that he would be helpful to our team on." And he said, "No, no. Actually, Jim, what's hard is using all the same data and, like, getting making sure that everyone's thinking about the same thing." And so, you know, that's, I was like, "Oh, this could be a match made in heaven." And then you kind of pivot to Enfusion where they're doing trading, order management, execution, intraday portfolio management. So our value prop to our clients is providing them that information for them to do stuff with. Now they can do something with it. They can trade on it. They could use the risk.
Right.
They could come up with a point of view using their risk information, trade on it, and then see it and communicate with their clients all through our platform as that comes together, and that's kind of, you know, that was driven by our clients.
Mm-hmm.
What they were looking for. You know, the other thing that I think helps us believe, you know, what you might ask fairly, "Well, why do you think you can do that better?" Other people have aggregated other things together. I think that we feel like we have a better opportunity than anybody else to do that because we're all in the cloud. We have similar architectures, and we can put this to, and we are committed to putting this data-centric model together across all of us. That will allow us to really accrue the benefits of all of that.
Can you just also speak to the TAM? I mean, you've sized the TAM.
Yeah.
And the expansion vectors that come with the additions. And then if the business model changes, it's more you become more directly able to address different pockets of the market that maybe you weren't.
Yeah.
In the same way. But just speak to how the business model evolves as well alongside the additions and the TAM expansion.
Absolutely. So, so the TAM is, you know, it was $10 billion, and now it's $23 billion. So it's a massive expansion. It's a massive expansion. And, and that's huge globally across those four verticals. But let me, let me double-click down. Like.
Yep.
That's useful, but I'm gonna talk a little bit about serviceable market and some a little more specificity, in one vertical just so that you can understand. This will be, this is across all the verticals, but I'll just do it in one.
Okay.
Let's talk about insurance. First of all, kind of to view insurance, there are about an equivalent number of insurance assets in Europe as there are in North America, as there are in Asia. It's kind of a third, a third, a third.
Okay.
Which is surprising to me. It's, that's.
Yeah.
In other markets, it'd be kind of 60/40, but, but that's, that's kind of the case. But now let's just pivot to North America and say, "Okay, in North America, our serviceable market for accounting, just accounting, which is where we grew up and started doing it, is probably $500 million. And we probably have, I don't know, $225 million of that. So 40% or-ish or so already on our platform. So we've obviously got more opportunity there. But this was the thing as we did the work to think about these that opens the, the SAM issues. That kind of $500 million of SAM, when you add alternatives.
Mm-hmm.
For insurance companies, it's about they pay about the same amount for that. When you add asset liability matching, it's core to their business. And risk, which is really risk for insurance companies, is this risk and asset liability match. It's more than the $500 million.
Yeah.
And so, and then you have kind of trading and front to middle office and the whole thing. So there suddenly you're like, "Wow, I was at $500 billion just in North America, just in insurers.
Yep.
Where we have a reasonable market share. Why don't I just take that $225 billion that I have and then go sell them also alternatives and risk and trading and those sorts of things? And there you go. Now you've got an incremental $600 billion on top of it. So that's kind of, and by the way, that's really granular, probably more granular than investors wanna understand. But I think that why that's important is for people to understand, like, that's the product strategy. That's, that's, this is the data that's driving that strategy. And then you pivot and go the other way and you say, "Wow, well, we have that opportunity. So now I've just described North America, and yet there's an equal opportunity in Europe and an equal opportunity in Asia for that." That is really the long, the long, long road of growth opportunity we have.
Now that's in that vector. Let me also, sorry, I'll go on and on and on because I'm excited about this. But asset managers, right?
Level.
In asset managers, in certain segments of the market, which we've arbitrarily picked $20 billion and below, but certainly they want an end-to-end solution. By the way, they're using an end-to-end solution today, so to win in those markets, you need to be able to displace the end-to-end solution.
Yep.
Now what we're able to do with risk, with trading, with intraday portfolio management, with client reporting and accounting, with all of that, we have that. So we're much more competitive. Now, was that TAM out there before? Yes, but is our right to win significantly increased in that market?
Right.
Absolutely. And I think that that market is looking for a vendor to really provide that commitment to them. And I think we're comfortable doing that.
Perfect.
Yeah.
So I wanna dovetail a little bit to the recent earnings report.
Yeah.
You seemed like a positive step. So maybe just kind of highlight the key points, maybe any questions you've been fielding from investors that you want to kind of.
Yeah.
Help calibrate around, and I can ask a few follow-ons.
Yeah. That's great. So Q3, we, you know, beat our guidance, which is par for the course for us, but very typically. And also, obviously, it's our first quarter. It was really a kind of milestone quarter for us because it's the first quarter where all three companies have kind of come together. We closed the acquisitions in Q2. And so this was the first full quarter. And I think what was remarkable, also not so remarkable, but comforting to folks is, you know, delivered on kind of where everyone expected on the top line. But what was remarkable was the EBITDA. And really the outperformance there. And that's just a reflection of kind of we went through, we did the synergies, we did them very quickly so we can now start focusing on growth.
And so to really outperform at that level was gratifying. You know, that was supported by very strong gross margins. And obviously cash flows flowed through, which was really great because it gives us the ability to pay down the debt that we had taken down. So that's kind of those are all the good things. You know, to be transparent, you know, net revenue retention, so gross revenue retention, 98%.
Yep.
You know, honestly, with these acquisitions, we thought it could tick down to 96, 97. That was kind of what I had modeled in my head. So to see that at 98 is really strong. I view that.
Yeah.
On the other hand, net revenue retention across the whole broader business was not as strong. We've long-term talked about that being a NRR 115% target. And we obviously stepped backwards in that in Q3, which was disappointing. But by the same token, when I look at, okay, we controlled churn, we executed against price, we executed against cross-sell very strongly, but yet we still have a lot of opportunity in cross-sell.
Yep.
And upsell was a little less strong.
I wanna spend a bit more time on the retention rate because you've spent so much time on it in the past. And.
Yeah.
We just wanna kind of unpack the various factors that are weighing on the 108% currently, which is.
Yeah.
Still very good. And then help us think through what needs to happen for the trajectory to turn back and drive to the 115%.
Yeah.
And some of the levels that you had achieved previously.
Yeah.
So.
Yeah.
You know, maybe just kind of walk through the sequencing of that metric, what's happening currently and how this could play through just, you know, as the various entities just come together in a cohesive way.
Yeah. I think there is a little, you know, cyclicality when you have a good quarter a year ago. It becomes more difficult the following year.
Yep.
But if you just back it, we spent a bunch of time breaking down it into the stuff we can control and then the stuff we can't control. So let's talk about the stuff we can control. There's churn. We feel really good about that. If we can keep that at 2%, that's fantastic. That's world-class, right? World-class. But that's and we're running a lot of programs to make sure that, you know, we keep clients as delighted as possible. Second piece is price increase. I think we're executing well in our price increase process, but we aren't executing well across the entire portfolio. So that isn't every client isn't executing against that. And over the next 12 months, we will institute that and put that in place so that that's kind of execute.
So I think we'll see slightly better yield on price, not because we're asking for more from clients, but that we're asking all clients.
Yep.
For that, which seems fair given how much we're developing in there. So that's price. Cross-sell, this is, it was 3%. There was a lot to be excited about the 3% across the broader portfolio given how the products that we delivered. Long-term, we want that to be 8%, not 3%.
Okay.
I think that is our best opportunity for sustainable growth, and when you think about, you have happy clients, you have sticky clients.
Yep.
Clients who are asking you to do more. And now we have more tools in the toolkit to be able to deliver that to them. And so that's that piece. Now, the 3% was good, or consistent. But what we haven't yet seen is the benefits from cross-selling risk, the benefits from cross-selling trading.
Mm-hmm.
Portfolio management, the benefits across that, so we've got that motion in place, but we just haven't seen the yield yet, and so I, I feel really optimistic about that opportunity, and then the next thing is upsell, which is allowing us to grow with our customers. We've done reasonably well there, and that's consistently been a situation where asset managers are adding clients because of their client reporting, and we're helping them with that, and then the last piece is other, which is kind of AUM and that sort of stuff and kind of changes through AUM that flow through there.
Mm-hmm.
or positive or negative AUM movements that we don't pay a salesperson for would be the way to.
Sure.
Think about it, or value movements, and so that was one where that came down a couple%. That other, so that's not really in our control. We generally do get a tailwind from it 'cause assets generally go up, but in this case, there wasn't really a tailwind provided there, so you look at it and you say, I'm a little disappointed with. It's an output number, right? We do a bunch of inputs to try and drive that. It's an output number that I'm a little disappointed with, but as we disaggregated and looked at it, we said, well, what could we do differently? Of course, there's a bunch we can do better, like sell more. Congratulations. That always helps, but when we looked at it, we said, oh, there's a little cyclicality here.
And so, excited to see that kind of continue to trend back up, you know, kind of in.
Yeah.
Over the next few quarters, and especially as we implement some of these programs across the whole business.
So you, I mean, you kind of joke with the sell more, but in terms of go-to-market changes or synergies.
Yeah.
You know, how would you characterize the sales team that you had in place and what bringing some of these new?
Yeah.
Offerings does? Are you at the point where the go-to-market is structured so you can drive that cross-sell from 3%-8% currently, or what needs to happen? And what are kind of the key product areas where you see the most near-term cross-sell opportunity?
I think that's so. I think you're right. And I think we've been doing a lot of hard work on it. The work is not done. And you certainly haven't seen that yet, right? So if you think about where we were a year ago, we only had certain things we could sell, and we were generally selling to accountants.
Right.
Now we're selling to portfolio managers, and we're selling to chief risk officers, and we're selling to traders, and we're selling to all these other people in addition, right?
Right.
And so that has one of the things we've thought about is, well, how do we optimize our relationship across these clients so that we have people who can talk about all of these choices, all of these solutions, all these products that clients can use without confusing or you know, while still sticking to really we are client-focused and as a firm. And so how do we make sure that DNA is in there? So we're doing that work. And I think that, you know, the first step in that process was to really align around those four client segments. Okay. We have hedge funds. We have hedge funds globally. We understand what they need. We know what they wanna do. Great. Okay. We have insurance companies. How do we think about that globally?
How do we sell across these much larger enterprises, asset managers, and those sorts of areas? And aligning around that. And then the next segment is stepping through and saying, okay, at the customer level, at the client level, what do we, where are we engaging? Where do we wanna engage? How do we do that?
Yeah.
I think we learn from like what succeeds. And so I think we had a great win in the first half of this year of a global asset manager where we were able to solve this globally. And it was truly a global team. And it was led by someone with a gravitas to talk at the very highest level with that firm. And that taught us, okay, this is the right way to go.
Mm-hmm.
And so that's where we're at. And, you know, obviously we're putting that in place. I think we'll see some of the benefits of that, you know, today, but also we'll see more of those benefits next year.
I wanna shift to margin.
Yeah.
Even like Sandeep sounds excited when he talks about gross margin and some of the improvements that you're seeing relative to.
We're old. We're old. We like profit. Yeah. Yeah. Yeah. Yeah.
You're durable. The word is durable.
Okay.
So maybe just speak to why you're seeing the margin improvements Q3 relative to Q2 and maybe focus in on gross margins first, and we can kind of speak to what you're doing on the EBITDA margin side alongside that.
It really is like the most important thing to look at, like this is something I learned really early on in my career before I was the CFO or anything. Like you look at, you know, a firm that has like a grocery store that has like sales of a bajillion and their gross margins are like 1% or something like that. I suddenly learned, oh, I think I understand. So I was like, I'm gonna gravitate towards higher margin businesses, right? Probably the only business that has higher margins than, higher incremental margins than software is like, is investment management. So congratulations to all of you for kind of picking the highest, margin business on, on an incremental basis. So we have always really focused on gross margins, and they were okay when we started. And thanks to Subi and the entire operations team.
Yeah.
She's our Chief Client Officer, Chief Operating Officer. And, you know, she's really driven a change there. And so there's some benefits we get out of the overall process. One is that single security master allows for a lot of efficiency in that process. Every new client is gonna be more efficient than the last because when they come on, those securities that they hold that someone else holds, we already have those connected. Every connection that we make for a client, if you already have clients connected, then you don't have to create that new connection for that next client. And so build it once, reuse it forever is really a good principle that has driven that. That's how we saw like the vast majority of our kind of expansion growth.
We've been very focused on, hey, you know, how many clients should a client services person be able to handle? How many, how much should a person be able to reconcile? You know, how many trillion or billion in assets should someone handle in a day? And those sorts of things and driving that metric-based approach, all of that worked great.
Mm-hmm.
We were tracking towards 80% gross margins, which we thought was kind of a bellwether for us. We started introducing AI a couple of years ago, and we've just seen the deflection rates for questions and inquiries go through the roof. Therefore, as a result of using that on top of all the machine learning, on top of all that automation, on top of all of that, layering all that on top of one another, we actually had gross margins of our steady-state clients. Those that have been onboarded and going 82% in the quarter, which is, you know, significantly more than where we thought we would end up landing with them. That makes us think, boy, could gross margin go past 80%? Absolutely.
I think we've kind of said 82 for now, but could it go past 82? Absolutely, as we continue to see that, and it's really the one place, like we've been investing in AI for a long time, and I think, initially we were like, well, we know we have to do it. We're learning. We're figuring this out.
Mm-hmm.
Now it's just very clear that the use cases we have to drive our own margins will support that team and kind of continue to reinvest. And we'll get benefits to our clients, and we'll get, you know, kind of, we will evolve on that path to thinking about more monetization and driving on that. But today, that's, that's really driving that. And then for the rest of the P&L, it's really about choices. Like I think it's very interesting that we spend more than 20 cents of every dollar that we receive from our clients pouring it back into R&D for them, right? Versus we spend about, you know, two and a half nickels on sales and marketing, right? And so, so it's upside down relative to most SaaS businesses. And most SaaS businesses are spending double on, on sales and marketing and half on R&D.
And it just comes back to we think our clients know what the industry needs. We think we can help the whole industry if we build it for them. And if we do that, our clients will help us win new business. And so that's kind of how we think about that. And then obviously we've been able to improve, you know, the name of the game is just make G&A as small as possible, right? And so through scale.
Yeah.
I think we've been reasonably good at scaling there.
Okay. That's very.
Sorry.
No, that's great. I laugh because G&A reports in the gym and.
Exactly. That's it. I'll be.
That's the beauty of you being here.
I didn't eat lunch. And I'm drinking your water, not mine. So, yeah.
So just when you're outperforming on gross margin like you are and you're kind of outpacing as CFO, how do you evaluate reinvesting some of that versus letting that flow through to the bottom line and how are you thinking about that today versus, you've given longer-term targets so we know what the trajectory will be.
Yeah.
Over time. But how are you kind of.
Yeah.
Looking at those trajectories?
No, I think it's, and look, I think Q3 was really informative. Like we lit it up on margin, right? Lit it up, and people didn't care. I was like, well, I was born at night, but not last night, so maybe as I think to that kind of going forward, right, maybe I should do something differently. We, you know, getting 250 basis points of margin improvement instead of 200 is not actually what investors care about. I think it's important as a business.
Mm-hmm.
To always get more efficient. So I think we're committed to always expanding our margins, especially when your incremental margin dollar is so high. Having said that, I think given what we talked about a little bit about, hey, we might wanna invest more in GTM and like connecting with those clients. Do we have more opportunity to invest more in AI to drive even more efficiency? I think we're gonna, as we look to next year, I think we might say, hey, we'll still do the 50 basis points of gross margin. We'll, and you know, maybe better than that. Do we need to like do the full 200? For the right reasons, I think we would back off on that.
Mm-hmm.
And that right reason is we're funding growth and you're gonna see it.
Yep.
But I'll also say, I don't want anyone to misconstrue this. We will always improve our margins overall. It's just how quickly do we wanna improve them?
Yep.
What are our trade-offs?
I think within that, it's also useful. I'll let you say the numbers because they're, they're good from a longer-term target margin perspective.
Yeah.
But, you know, you're marching towards goals of more than 80% gross margin, more than 40% EBITDA margin.
Yeah.
What gives you confidence you can get there? And then what are kind of the growth rates you're thinking about as you kind of reach that state of kind of higher margin within that?
At that higher margin. Yeah. Yeah. I think we can continue to grow, you know, as fast as we're growing today, and hopefully faster into the future. The TAM is there.
Yep.
The opportunity is there. And I think that there are places where we are, you know, in the sweet spot of the adoption curve within markets. And there's other places where we're very nascent, you know, so very early. So we've put a lot of investment into, call it continental Europe, and we're starting to see great returns there, which is gratifying to see over time. So I think that's how we think about those markets. And I think we're pretty simple. It's like, hey, for people who perform, where performance is good, let's invest more.
Makes sense.
And if performance isn't as good, well, what's the plan to perform better? Or we'll think, or we'll put those investments behind. And yes, 42% long-term and,
Not bad.
I have a lot of confidence in that just because every incremental customer is more efficient.
Yep.
The business scales beautifully.
How are you thinking about, I mean, we've gone through a period of M&A, so I know there's some suggestion there, but just the capital allocation framework?
Yeah.
How are you looking at assessing just, it's been a tougher market in some ways for some software companies that could maybe fit into the portfolio? You know, you've run a balanced capital allocation playbook previously. So how do you think about.
Yeah.
Buyback, future M&A, just other things that you have at your disposal as CFO of Clearwater?
Yeah. I think, so one thing we committed to was bringing the debt to EBITDA ratio below three times. And in after Q3, kind of on a pro forma basis, it's 2.7. So we're underneath that. And we're still, we throw off so much excess cash, we can pay down debt and we can buy back shares, which is why we announced the $100 million share buyback at the beginning of September. And we've kind of continued to execute against that. I think we think about that in the context of, of so as you think about that going forward, I think we want investors to have the same confidence that we, you know, obviously we have lots of confidence in our ability to repay our debt and how that works and how that works.
There's a level probably below three, maybe it's two and a half, maybe it's. I just spoke to someone else who said, no, I'd really like it to be below two. So we will be cognizant of that and thinking about that and paying that down. But with our EBITDA growth like it is, that's, we'll naturally delever that way as well. So then that leaves, okay, what are you, what do you do with your excess cash?
Mm-hmm.
I think that we are very happy with the product portfolio that we have. I think we're also humble enough to know there's always something more we learn. That's a possibility that we would think about. I think even today we have the capacity. We're not, but we have the capacity today to start thinking about other stuff.
Yep.
But ultimately it would come from our clients asking us for something like that. But I think we feel very good about having the full suite and, plus what we're organically building together. And so then that leaves us with, well, could we buy back stock? And I think we have. Let us finish our 100.
Yep.
Let us also, you know, I do think it's something that depending on the idiosyncrasies of the public market, if there's kind of misallocation or something like that, I think we have the opportunity to be aggressive if that's the case.
Yep.
but we'll, hopefully that'll never happen. Yeah.
Coming up on time.
Yeah.
I just wanna kind of turn it to you for closing thoughts. I think we've been closing a lot of the conversations with understanding what your next year priorities are, given you're probably in the kind of end of year planning cycle for next year as CFO.
Yeah.
And then in three years, if we're on stage talking about what Clearwater's successes have been, what would those look like? What do you think you'll be talking about in the future there?
Let me start with the future and then work backwards if that's okay.
Sure.
I truly think we've talked a lot about like the quarter and what we're doing and how we're plugging away and why we have confidence about how we're gonna execute next year. So I think people can understand that we just keep doing what we're doing. But I think what's underappreciated, even by ourselves, until we're reminded of it time and again, is just how much of an opportunity we have and how valuable we could be to the industry as a whole. So we, when we went public, we talked about, and our mission statement still says this, and we wanna revolutionize the investment management industry. With the data sets that we have and with the asset owner and asset manager, client sets that we have, we really are the only one who could uniquely position ourselves to do things fundamentally differently.
We could, and as we think about new instruments and new investment strategies and new things as, as everyone innovates around, who can be the place where we all operate? What is the opportunity there, to be the provider of truth, to be the Clearwater standard? Wouldn't it be awesome if everyone was talking about, well, is this Clearwater standard or not?
Mm-hmm.
And that's, and I think that's the opportunity, the benefits that accrue to that leader. You know, there are lots of companies out there that have become that leader. And I think we have that ambition. And I think we're really well positioned to do it. So that's the three-year vision that we focus on. But everything we're doing today is gonna make us more strong in that sense. More clients, more instruments, more regions, more understanding, more doing more for our clients helps us be that to the whole industry.
That's great. Jim, appreciate you, Jim.
Thank you.
Always good to see you.
Thanks. Thanks, everybody.
Thanks.