All right, good afternoon, everyone. This is Pete Heckman. I'm one of the research analysts on the tech team at D.A. Davidson. Thank you for joining us for this interactive chat with Clearwater Analytics. We have with us Jim Cox.
Hello, Pete. How are you, young man?
Very well, thank you.
How are you doing? Good looking.
Yes, yes. Two good-looking fellows.
Yes.
Thanks again for participating.
As fresh as you can tell.
That's it.
The end of the conference for you.
That's right. Relief. So prior to 2025, right, when Clearwater came public in 2021, there were still people who were kind of like, what does Clearwater do? Right? And so when we talk about cloud-based automation software for aggregation and reporting, what are you doing differently? And tell us a little bit about how you're doing things differently and how does that compare to what a lot of investment managers or any of your industry verticals are doing? What are they migrating off of to come to Clearwater?
Yeah. So maybe just to give you a little background. So we went public in 2021. The business has been around for almost 20 years now. It was founded by two brothers and a friend who had kind of been all over, and they moved to, they went back home to Boise, Idaho. So the financial Mecca of, it's even more Mecca than Nashville, maybe.
Sorry. Sorry. Don't get distracted.
So basically, they tried to run a hedge fund and weren't successful at that, so quickly pivoted. As part of their hedge fund strategy was to provide complete transparency. And so they built this technology tool to enable people to really see what was everything in their portfolio, really to understand that visibility. And at one of their meetings, someone said, "I will never give you any money, but I really like your tool." So they pivoted and became a tech company. So that's how they started. But what our secret sauce really is, it comes back to the, so we do investment accounting, reporting, performance, risk, compliance, all those things that you need to do for both asset owners and asset managers. But every other kind of investment accounting, portfolio accounting solution really thinks of the portfolio as the container and thinks of that as the unit of account.
These folks thought about it differently, and it has persisted to be really incredible, which is we don't account for portfolios. We account for the securities in the portfolio. And that's a little bit of a nuanced difference, but it's really important because what it means is if all the people in this room hold the same security, we ingest it once, we reconcile it once, we cleanse it once, and we make it correct for all of you. And then and only then, when you go in and log in and you say, "Oh, I want to look at this portfolio," or, "I want to look at this group of portfolios that happen to be discrete to the client," that then goes and pulls that information from the security. So it's a truly single security master, and it's fundamentally architecturally different.
Now, what were the requirements for a necessary but not sufficient element was that everything's in the cloud. The other element that is really unique about this with the special sauce, sorry, can you turn me down a little bit? I'm kind of in my own ears. You guys can hear me, right? Yeah. Yeah. The other element of it, it's a party, people.
Right.
So in addition to being in the cloud, we have all this connectivity. So we have over 4,000 data connections where we're consuming that. So if you take it through a day in the life, all of you have various fixed income securities. They're all paying on different dates. You have various equities. You have private--whatever security you want. Any security you want, that's our value prop. Whatever you own, wherever in the world, we will figure out how to consume it and figure it out and drive that to make it correct. So all of that data comes in. We also model all of those securities ourselves. So there's a true tri-party reconciliation. What do you say? What does your custodian say? And what do we say? So that if your bank shows up short, you can say, "Hey, wait a second.
I thought that security was going to pay today." We were modeling that. We know to ask that question, "Where'd the cash go? What happened? How did that work?" So I'm just getting into a little bit of the detail because it really is the special sauce. So we do all that work without knowing who holds the security. We know someone holds the security, and many times multiple people will hold the security, but it's agnostic to who that security is. Then you come in, we reconcile, cleanse that, store it. You come in in the morning and you type in and you say, "Oh, I want to run my portfolio. Three of these securities, seven of those, 12 of those," etc. The benefit of that to us and to you as shareholders is that there's incredible efficiency.
Every other business is when you have a trade break, you go into each individual portfolio and you fix it one after the next after the next. And if we did it that way, which is how every other portfolio accounting platform did, it would be incredibly costly. But because we can do it once and serve many, many, many, we're able to do that. Now, that's the benefit to you as shareholders. The benefit to you as customers or prospects is that the quality of this is at least as good as the best of any of you. Because let's say that we bring in a security and let's say that you look at that when you run your portfolio and you say, "Oh, that security, that price is seven. I think it should be eight." Well, we'll go back and we'll figure that out.
First of all, there's a bunch of things that have to happen. The data has to be wrong in the beginning. Our machines have to miss it. Our reconcilers have to miss it. All the people have to miss it to be able to get there. But it does happen. That does happen. And you say, "No, it shouldn't be seven. It should be eight." We agree that it's eight. We change it to eight, and anyone who holds that security, it immediately and instantaneously ripples to them as eight. So when they run there, it just goes again. So that is kind of why that single security master is really the special sauce. And it underlines what is really an opportunity. We're providing a SaaS solution, and how you're communicating with your data is via a technology kind of offering.
But there's all that work, all of that sausage-making across the industry is done before you get there. So that's why we have really high gross retention rates, 98% gross retention, really high NPS scores, really high win rates, because kind of people look at this and they go, "This is the right way to do it." They may be on something else today, and they're like, "I'm not ready to change," but they basically say, "Okay, this is the way of the future." And it's enabled by an underlying technology, and it's also enabled by all of that connectivity. And what we find, a big growth driver for us, why we've been able to kind of consistently, durably, reliably grown 20% for many, many, many years, +20% for many, many years, is because clients want us to do more. They understand the value of the data.
And so with that key component, they said, "We started by just doing accounting." And then they said, "Oh, can you do our Japanese accounting for us? Can you do our German accounting for us?" And then they said, "Oh, can you do compliance? I'd love to know compliance. Can you help me with this? Can you help me with my exposures? Can you help me with other things in our business?" Sorry, that's way much longer, but I think that is the special sauce.
It is. It's helpful because many of these customers that are using legacy software in an on-prem environment, depending on their size, they might have a dozen, two dozen, hundreds of people doing reconciliation and reporting, and as I've covered portfolio accounting software providers for over 20 years, and I meet with PMs, they always complain like, "Hey, the reports are always late. They're supposed to be daily. We only get them every week, and they're four days late," but importantly, with Clearwater, you have daily reporting where you're automating all these tasks that are currently being done by back office people.
Yeah. The way to think about it is we do all the work so that you can just consume the data, and the data is right.
And so at the end of last year, if my notes are right, you had just under $9 trillion of assets on the platform. And we talked a little bit about how the company started, but just real briefly, I mean, I think it's been very interesting how you've started to penetrate the insurance vertical and insurance investment funds. But just quickly talk about those three verticals, and then we can get into the big news.
The future. Okay. So yeah, so then who do we sell to? So started, actually, this hedge fund started by trying to sell to corporates. So think of cash-rich corporates. That's where we started. That's only 16% of the folks on our platform because it's a smaller market. But then moved, if you think about what do corporates invest in, what do insurance companies invest in, many of the same securities. So that's where you started to see that. And so 52% of the platform, of the assets or AUM of our business, is insurance companies. So about two-thirds is asset owners and one-third is asset managers. And basically what happened was we started in corporates. Insurance had many of the same securities, many of the same questions, many of the same answers. So there was a little bit of an evolution.
And then how we got into asset managers is the asset managers were sending reports to the asset owner, clients, insurers, corporates. And those clients were saying, "Can you just buy Clearwater? I don't like your reporting. I get better reporting from my own systems. Just buy Clearwater and send me the stuff that Clearwater can do." So that's kind of how we got into institutional asset management, was providing client reporting for their institutional clients. And we continue to evolve. A small part of the business is state and local governments, foundations, endowments. Those folks are kind of the next generation in that.
Right. Right. And so then we get into 2024. Has been much more interesting from a Clearwater said several good years is a very nice year as a public company and great performance. But beginning earlier this year, you announced or you directed just over $2 billion to acquiring three firms, including Enfusion, which is a publicly traded company. Can you describe briefly the capabilities that each one brings to the party and then your multi-year vision and kind of going back to your CEO, Sandeep, at the Investor Day talking about at the time of the IPO, you basically had technology that could service just one portion of an investment manager's total spend. And so how are these acquisitions going to help you address all of that investor spend?
So Clearwater, the core Clearwater solution, the original solution before we start talking about these acquisitions, was really everything was post-trade. It's after the trade. And our value prop was clean and reliable data to start your day. And then you can take that data and go do what you want with it. I also mentioned clients were saying, "What more can you do for us? How can we do more?" And there's various organic things that we've done to build that. But if you kind of pivot and you say, "Okay, intraday, I need to trade. I need an order management system. I need an intraday portfolio management. I need execution management. I also need to understand pre-trade risk." We were giving exposures, but not pre-trade risk. So clients were saying, "Please let us do more.
Please let us do more with you." And we did a study where we said, "Oh, well, how much are they spending?" And we realized that on accounting stuff, the stuff we do, accounting is about one basis point. Now, not all of we average about half a basis point is what we charge our clients. So there's other stuff that happens in that one basis point. But in total, clients are spending about four basis points over the investment lifecycle. So three times as much as what we're realizing is what their spend is. And that is in the middle office. That is in the front office. As you move more and more to the front, there's more, frankly, spending power. And so we did the study that said that. Clients were saying, "Please, please help us with this." And naturally, so then Enfusion fits in in this way.
It is intraday portfolio management, real-time data, and real-time trading capabilities. So PMS, OMS, EMS. And so the idea is that intraday, what can we do for those clients? Now, Enfusion had historically had hedge fund clients, which were not necessarily a clientele for us. But interestingly, what we found, we have 500 insurance clients, and about 200 of them we found. If you would have gone back 10 years ago, every insurance company would fully outsource their investment, except for the very, very largest. Almost every insurance company would outsource all of their asset management piece to institutional asset managers. Well, now what we're seeing is still the vast majority is being outsourced to asset managers, but they're holding back a piece because maybe they have a specific expertise. Or maybe they feel like, "You know what?
I can trade treasuries just as well as third-party asset managers." There's just not that much. It's not worth the kind of basis points. And so we're finding some asset owners, more sophisticated asset owners, are doing some of that work themselves. So not only are they needing the full comprehensive view that Clearwater provides, but they also need to trade some pieces of that. That's how Enfusion fits in. And then if you go up to making the decisions, the decision is really about, for the most sophisticated firms, especially insurance companies, the holy grail for insurance companies is asset liability matching. And how asset liability matching is done today is in this tool. You've probably heard of it. You may use it every day yourself. It's called Excel. And so the idea is, "Okay, how do we put that together?" We have all the asset side.
How do you think about these risks? How do you think about the actuarial side and the exposure, and you put that together. I'm not saying that's where we're at. This is the component pieces to put together an offering that enables something like that. We're not there yet with that, but that's the vision to be able to do that. In addition, Enfusion had hedge fund clients, so now today, we're very uniquely positioned. We were two-thirds asset owners, one-third asset managers. Today, we're 50% asset managers, 50% asset owners, so we're both sides of the same spectrum. In addition, we have the depth across any, this has always been a value prop of ours, but any asset class, publics and privates, North America and global, anywhere you want to be, any instruments you want to trade, any way you want to interact with your counterparties.
So that's kind of the long-term vision. That's a multi-year, that's the long-term vision. But if you can back up and say, "We are going to be an industry utility to connect asset owners and asset managers across all workflows, across all asset types," that's a very interesting business. When we went public, Sandeep always said, "I want to revolutionize the investment management industry," which I didn't really know. I don't think of investment management as revolutionary. [Foreign language] revolution. But this is fundamentally different. It is revolutionary. Should we achieve that vision? And so that's kind of the, that's the longer-term vision. We got to execute a lot of steps between here and there, but that's the promise that is available. And then not only does that unlock the four basis points that we were talking about, it also unlocks a completely different kind of framework to think about when you start.
You're in a pretty rarefied air when you become an industry utility like that.
So you went from having a unique process, back office, automation software that was a half basis point. Now with Enfusion, you're front to back office, automation software, portfolio accounting, back office. But then there's two other small acquisitions that we've worked on that address the desire for both institutional asset managers and others to incorporate private assets in the portfolio. So talk about that a little bit.
Yeah. Yeah. So that's under the risk. And obviously, public and private is really, really fundamentally important these days. Everyone's talking about private debt funds, and they've become public-private debt funds and all of these things. The punchline is that's just the flavor of the day. In two years, we're going to talk about something else. In two years, we're going to talk about yet something else. And so what we have to be able to do is we pride ourselves as always being able to account for it. That's what our platform is able to do. But there's other things you want to do with it. How do you evaluate the risk? How do you think about who are your counterparties? How do you think about trading? What do you think about all those things that maybe you didn't have to know in a more typical, very liquid security?
And so as those things come together, that's what Beacon and Bistro. Bistro was Blackstone's basically. Blackstone is a very important client of Clearwater's. And we went and we saw them, and we said, "How do you use your Clearwater data?" And they showed us Bistro. And in Bistro, they were using Clearwater data, and they were using Beacon data, which was the other company that we bought. They were using some other data as well, but those two were kind of the key fundamental drivers to how they did their day-to-day work in their business. And so what Bistro really is, is the intellectual property that shows kind of how people put that data together, how people make decisions, how they communicate with their clients about those decisions. And so those together, that's kind of the idea is at this point, it's a full end-to-end solution.
Right. Right. And so these acquisitions are closed. You've recently talked in some of your other conference participation that you've been realizing some of the cost synergies that you promised on the front end. One thing I get a lot of questions on, and when we did our due diligence on IEnfusion, when they went public and over the years, it seemed like everyone agreed the technology was very good, the system was very good. But in terms of the stock, there were some execution issues. And so one of the things you've talked about is re-accelerating Enfusion's revenue growth rate from kind of the low teens to potentially 20%. Talk about kind of the multi-year effort to do that and where you see some of the low-hanging fruit in that regard?
Yeah. Yeah. So let me just remind everyone, if someone's decelerating and you stop decelerating, that's actually acceleration. So you're going to see acceleration in that form. But Sandeep stepped out in our last earnings call and said in April, let's see, April 2027, Enfusion will grow 20%, which he also said, "We're going to change our entire commercial model in six months." And I was 6'4" at that time, and now I'm 5'10". But you know what? It did get done in that period of time. And so I'll call that an ambitious goal. But I think it's very. Look, it is the best solution for the hedge fund market, anywhere in the hedge fund market. Okay? It is SaaS. It is leading. It is very good. I think what we're able to do is lean in and reinvest in that market to win more share in that market.
We can also, like we've done ourselves, do more for clients, so Enfusion is kind of a software platform today, and yet there's more that hedge fund clients want them to do for them, and just like we do more for our clients, we can deploy some of the same methodologies that we've done to do more. I.e., at Enfusion, all that reconciliation, all that interconnectivity between folks is kind of managed at the client level. If you could take away that, their NPS would go up, clients would pay more. It's a valuable opportunity, so I think we see a lot of opportunity around that. We see a lot of opportunity about kind of reinvigorating and focusing.
And then also, I think that just like we did ourselves in reevaluating our commercial model and thinking about the optimum commercial model, I think we've spent some time, and we still have more thinking to do. But the punchline is we need to realign the commercial model with the value that clients derive from the solutions. And so all of that will come together, and that will be a meaningful growth driver. I think in a simple way, they were a $200 million business. They grew $23 million. So I really only have a $17 million problem, and I can solve $17 million problems in a lot of different ways. So there's a lot of optionality around that. And then obviously, together, the other thing we believe is we were selling to asset managers coming from our direction.
They were selling to asset managers coming from their direction, co-selling together. We're at least going to be as successful as each of us were independently in these early days. And then as we build out kind of more data connectivity, and I think at some point you then get to that vision of the future where it becomes, "Why am I not on this platform? Everyone else is." And you tip from saying, "Why do I need to go to it?" to, "Why am I the one that is not on that?
Right. Right. Okay. Let's talk about net retention a little bit. Net revenue retention at the investor day. I think at the time we were running around 107, 108, something like that. And you came out with a relatively ambitious goal of 115. And you were able to.
Do you have your T-shirt?
Yes. And there were T-shirts involved. And you were able to achieve that in the back half of 2024. So that was really impressive. In terms of thinking about, you have 1,400 clients, Enfusion has 900 clients. On a pro forma basis, about 23% of revenue is going to come from hedge funds. Is that correct?
Yeah. Right.
Okay. So how does kind of the inherent nature of hedge funds starting failing, how do you think that affects your net revenue retention in the aggregate?
Yeah. So maybe just starting with gross revenue retention. We have phenomenal gross revenue retention. It's been 98% forever or better forever. And Enfusion's is a few points below that. I think we can improve that on the margin. Will it get to 98%? I'm not sure, but I think we will definitely do a lot to make that better. And so you got to start with, so that helps with the gross retention. Obviously, we will take a step back. When you aggregate all these things together, Enfusion's net revenue retention was 100%, 101%, 102%, depending on the quarter. So pretty low. So if you kind of average those two out, it's like 110%, 109%, 110% is kind of the average. But I do think that less about getting to the 115% number, which was very satisfying, it was more about the way we ran it.
When you decompose what we want to do to get 15% growth, kind of in a same-store sales view, one is clog the leaky bucket, right? That's the 2%. You got to keep it at 2% or better. Two is some price increase. Three is upselling, which is kind of the same product, but finding other places to do it. Adding assets to the platform is what we call upselling. Cross-sell. Cross-sell was the key thing that was different about where we were and where we needed to be. What do you need to do more cross-sell? You need a variety of different products. And we have a number of products that we've organically built that we're cross-selling across and making some progress with.
But there's a real step change in opportunity for cross-sell when you have an Enfusion, when you have a Beacon, and you can do that across your clients. So I think that I don't think we're shying away from the 115 and our goal. Obviously, we'll step back, and we'll be able to make that journey again. But we understand how the components, the denominator may be bigger, but we understand how the components have to work to be able to achieve that. And we will work to execute on that. And what I would say is that having more of those cross-sell tools in the toolkit for our teams is kind of where that opportunity really comes into play.
So, I think that. Look, I am not yet I may be proven that. In fact, oh, hedge funds are a fundamentally different. I don't think it's controversial to say more hedge funds go in and out of business than insurance companies. I don't think that's too controversial, but I don't think folks should over-index to the industry. I think that any financial services firm has a nice, healthy allocation of services to hedge funds, like they have to asset managers, like they have to insurance companies, like they have to other asset owners, and I think that that's where we live, and we will figure out how to make it most sticky.
Yeah. I think that's fair. I think that's fair. And then just to cover the margin piece of it, I think you took your EBITDA margins down, what, maybe 700 basis points around the IPO to reinvest and expand geographically. And then over the last few years, you've been ahead of schedule, kind of returning margins back to above 30%, very high incremental margins. This series of deals will allow margins to step back a bit. But especially with Enfusion, their margins were materially below Clearwater's. Some of those things are easy, like moving public company costs. But just talk about the roadmap in terms of what you think you can get Enfusion's margins to over the next three years and how you do it.
I think at the end of the day, the punchline from the diligence work that we did, there's lots of detail, but the punchline from the diligence work we did was we came to the conclusion that there was nothing fundamentally different about the Enfusion business that didn't what we had told investors we were going to do was grow top line 20% and increase EBITDA margins by 200 basis points every year, targeting a 40% EBITDA margin. And we had done better than that. There's nothing structural or fundamental about that business that doesn't enable us to continue to do all those things. And so we've already we committed over a couple of years to do $20 million of kind of synergy. We did that in a month. And we're done doing synergy. We're all about growth. But is there more opportunity for incremental improvement? Of course, there's.
There's more opportunity for incremental improvement in our business, and that's why we're able the core unit economics of the Clearwater business, of the Enfusion business, of the Beacon business is so strong that the ability to kind of expand EBITDA margins while also making those trade-offs where you say, "I want to invest more to increase GTM internationally. I want to invest more to." We're able to a couple of years ago, we were able to say, "Okay, AI, that's really important. Let's move 40 engineers and put them on AI." We could do that, and nobody saw that in the numbers, right? We just could do that because we can make those trade-offs, and I think that we'll continue to kind of I think the margin side the truth is we could be a 40% EBITDA business tomorrow if we wanted to.
It's about thinking about what are our best opportunities for investing, not for growth even this year or next year, but in three years and in five years. Which is why we did these acquisitions was not because the business was running very well, which enabled us to say, "Okay, our business seems to be running pretty well. Let's take on this to try and fulfill this kind of bigger ambition.
Right. Right. And in terms of risk, right, Clearwater has been a high-quality growth company since you came public. I think on January 1st, you had a net cash position. And now with these three acquisitions, we're going to have a net debt position for a bit. And maybe on a net leverage basis, high threes, let's say. But Clearwater's underlying cash flow is strong. There's the opportunity to improve Enfusion's free cash flow conversion. But so how do you think about deleveraging and where would you like to get to, let's say, within 18 months and feel like, "All right, that's a level where you can be very comfortable running the business"?
So, excess cash flow, so yes, yes. One of my board members said, "You have such a lazy balance sheet." And I said, "Well, don't worry. It's not lazy anymore. We've got.
It's working hard now.
Exactly. But we were successful in securing that capital. And I think that it's because of the durability, the reliability of the business, the free cash flow characteristics. And so I think all of our excess free cash flow will be focused on paying down and deleveraging until we get below three times. And then I think that will happen within 18 months, comfortably, I think, within 18 months. And then once we get to below three times, then we'll continue to evaluate what we want to do. But I do think we take that seriously. We understand that. And the confidence we have in the underlying cash flows of the business is what enabled us to stretch. And I think at that point, we really felt like better to stretch and pay a little more cash because we value our equity.
And so I think that that's what we've been able to do.
Great. Great. Yeah. And overnight, we saw a larger trade. Some new supply came to market. And certainly, our assumption was, "Okay, that's probably one of the pre-IPO shareholders." And that's not unusual that someone would reduce a position three, four years after the IPO. But can you give us a little more color as regards to that and then talk about, in the aggregate, pre-IPO shareholders, what percentage of Clearwater's pre-IPO shareholders own the stock today?
Less than 2%. So we're done. It was 75%-80% of what they owned. And they owned between 1% and 2%. And so yes, it's been quite a journey moving through. It was a very different number a couple of years ago. It's been amazing how much has flown through the market. But we're past that now. And so one thing you'll see as a result of this, so we used to have kind of multiple share classes. Part of those share classes were for the pre-IPO shareholders to have 10x voting. That has now fallen away because they own such a small percentage. That all falls away. And so you'll see later this week when once that trade that people know about settles, it'll be one share, one vote.
Great. Great.
Which is great. I think that's helpful for a bunch of reasons for shareholders and for index capabilities and that sort of stuff.
Right. Right. Last one. We only have a few minutes left. But Clearwater, again, at the IPO, you invested in the geographic footprint in Europe, Asia-Pac. You had some nice wins in both areas over the last several years. Talk about where international was pre-acquisitions, where it will be afterwards. And then when you think about markets outside of the U.S., what are some of the key markets that are really important for you to penetrate with this new, fully modern front-to-back office solution?
Yeah. Yeah. Yeah. I think pre-acquisition of Enfusion, I think it was just 18% of revenues were outside of North America. And so a relatively small and just for context, half the world's wealth is outside of North America. So at maturity, you would expect it to be 50/50, which is why we made all those investments in international. We continue to see that. And the truth was we were okay internationally. But we were also, frankly, falling into things. And I'll take Asia as an example. We really had no plan or strategy, but we were being pulled into Asia where people were saying, "Please, can you?" And we're like, "Well, we don't really have an option. How do we?" Okay. There was enough need there. Well, Enfusion, I have to really commend them. They had a much more global footprint.
And both between Europe and Asia in particular, they were about a third each, kind of roughly. I'm maybe off a little bit. And so obviously, a much more significant portion of our business, particularly in Asia. And that has already, we've learned a lot. There's a huge opportunity in Asia. So there's more insurance assets in Europe than there are in North America. There are more insurance assets in Asia than there are in Europe. And here we are. We're really proud of our market share in North America. And that's great. And it just taught us, "Hey, we really are just scratching the surface." And so to think about how hard it is to go from zero to one, I think we had eight or nine people in Hong Kong, and now we have 75 people in Hong Kong instantly.
So that sort of stuff helps. And I think what we learned in Europe as well was having people in region at scale helps. And so I think we're excited about leaning into that opportunity.
Great. Great. Well, Jim, I really appreciate you coming during a very busy time for you and your team to travel to Nashville and be with us at our conference. So thanks again for participating. Everyone else, thank you.
Thanks for all your support.
Thank you.