Hi, everybody. Awesome. Thank you, everybody, for joining. My name is Dylan Becker. I'm the research analyst here at William Blair that covers Clearwater Analytics. We have the CFO, Jim Cox, here with us today. Thank you for taking the time.
Thank you.
For all the necessary disclosures, you can find those on williamblair.com. But maybe, Jim, to level set the conversation here, I think there's varying levels of familiarity to the story. Can you help us kind of with the evolution of Clearwater, what you kind of were started and foundationally looking to solve, and how you kind of think about the opportunity to really digitize the financial accounting landscape?
Sure.
Let's put it that way.
Yeah. So, listen, thanks, thanks, everybody, for your interest in Clearwater. And thanks, Dylan, for hosting us. Although it's raining today, I can put a plug in for the architectural tour. Went on that boat last night. It was pretty solid. Saw your building on the corner there.
Oh, yeah.
Well done. So thumbs up for that. If you get nothing from this, you'll at least get that. And then I guess I could have worn fancy socks if I'm behind this instead of showing up. But so Clearwater, so we're a vertical SaaS business. We serve asset managers, insurance companies, and corporates and other asset owners, foundations, state and local governments, endowments. So what we do is we do the investment accounting. So accounting, reporting, performance, and risk. That's what happens. But we actually do the accounting. And so because we do that, it's really important that we're both comprehensive and accurate. And so many years ago, the founders, there were two brothers and a friend. They went back to Boise, Idaho, which is where I understand that that's the hotbed of all tech innovation.
But they did go back there because that's where their families were from and founded this business. They actually started as a hedge fund, and they wanted to provide complete transparency to their clients. They were not successful in launching that hedge fund. But everyone they showed the technology to were like, fantastic. So they pivoted their technology company, and they've been obviously very successful as a result of that. So, OK, so those are the clients we serve. And let me explain a little bit about what is the special sauce, because I think there's lots of businesses. Accounting has been around as long as I have, or even longer. And so investment accounting, what makes this different? And there is something really unique. So the founders did a number of really smart things. Maybe they were lucky. Maybe they were smart.
This was the first one, which was we do it fundamentally differently than everyone else does. First of all, we're in the cloud, but that isn't fundamentally different with how everyone does it. It is a necessary element to this next piece, which is every other portfolio accounting system thinks about the portfolio as the container in which you do your accounting. If you think of your portfolios, and you can think of your kind of all of your investors, so you're thinking of your portfolios, generally, they think of that's the container and then what's in it. What Clearwater does is something different. What it says is it accounts for the securities within all of the portfolios without thinking about that.
So if you account for the securities first, what we do is we go out, we ingest the position information, we ingest the pricing information, we ingest the trade information. We also model it for fixed income and structured products and complicated. We'll model the cash flows. And it comes together. And we make sure that the security is absolutely 100% accurate, right, and clear. And then what happens is then we'll put that in a data store. We'll do the accounting for it, and we'll do all that. And then only at the point that you, customer A or customer B or portfolio C, comes in, at that time, you come in and you ask the question, show me my portfolio.
Only at that time does it understand your individual securities, and it pulls that up, and it shows you your securities that are single security master and that data store. Why is that useful? It's useful to us because it allows us to be incredibly efficient. Every new security makes us more efficient for the next client that comes on. Every new client that comes on makes us more effective. Every incremental report that someone is producing can be produced by others all through that. That's what's in it for us. What's in it for you? Our platform is at least as accurate as the very most accurate client that we have on it. Because for it to be wrong, for a number to be wrong, you would have to have the inputs wrong.
Our machines who do all the testing of it would have to miss it. We have 200 people who do the reconciliations for all the trade breaks and all of those things. They'd have to miss it, and then every client who holds that security would have to miss it. Because if a client looks at a number and says, I don't think that number is right, and they call us up, and it's true, and we fix that number, when we fix it in the single security master, any other client that holds it, it's instantaneously corrected, and it ripples through to everyone without them having to touch that, so think about a corporate action, and think about a corporate action that you've done wrong, and then think about how you have to fix that in 100,000 different places to get it right.
We take care of that, and it's because of this novel approach. So that's the novel approach. That's what we do. Sorry, I went into a lot of granular detail there because I'm an accountant, so I'm sorry. But that's stuff I love. I was also a client three times before I became the CFO. But look, nicely profitable, right? Portfolio accounting. In these, it's a vertical software business. These verticals are great verticals to be in because they're generally very successful companies. Insurance companies, asset managers have money, and they have lots of problems, and so you'll hear a theme of us that our clients are very satisfied with us, and they're also very interested in us doing more to help them as they grow. Sorry.
No, no, no. It was perfect. And maybe to that point, too, right? Can you walk us through the technical differentiation of being that single source of truth, how you help solve for that complexity in a world that seems to be getting increasingly more complex, and how that kind of shakes out from a value proposition perspective to your end customers?
Yeah. So what's happening across all of your businesses is you're being asked to invest in new areas. There's new regulations. There's new instruments that you're asking to be able to get that exposure to. Across any of those situations, if you didn't have Clearwater, you would probably have this tool called Excel that you would put that in, and it would have to sit there. It's our job to solve that problem for you. So you put it into Clearwater. If you have a new security, we have to solve for that. We will figure out how to account for it, how to model it, how to do that for you. And so that's fundamentally how we build that. And when you think about that, in retrospect, that's the right way to do it.
And I think we've been at it for enough years where we have 4,000 kind of feeds that are coming in and delivering that information and thousands and millions of securities that have been modeled on the platform over the periods of time, and so I think how that helps with the value prop for people is if you're an investment manager and you want to enter a new region, or you want to do something different, or you want to change a strategy, or you want to align better with your institutional asset management clients or other clients to have connectivity to them in a better place. Those are all reasons why folks would pivot and choose Clearwater.
And maybe to that point as well, too, what does a typical customer look like? A handful of them could potentially be in the room, but are these asset managers? Are these asset owners? Maybe how that mix has evolved and how you kind of think about the opportunity sitting between the two?
Yeah. So in the kind of and we'll get to kind of the acquisition in a little time. But if we talk about the core Clearwater business, it's about two-thirds asset owners, about 52% insurance companies, where we're holding the entire book for them. And then there's about one-third that are asset managers who are generally managing and doing reporting for those asset owner clients, like endowments, foundations, state and local governments.
Perfect, and then, yeah, I think it is a good segue into the acquisitions side of the equation, too, right? Can you talk to us about the strategic rationale behind Enfusion, behind Beacon, behind Bistro, and really what that enables and unlocks for your ability to maybe go after more of the traditional asset manager space?
Yeah. So we did a study. So obviously, you have 1,400 clients across all of those verticals. And we do an NPS study every six months where we're asking them, how satisfied are you? And so our Net Promoter Scores are actually, I think the team must cheat because the Net Promoter Scores are off the charts. But they're always off the charts. So they're very good. So we have generally happy clients. And happy clients with problems and money frequently are coming to us and asking us to do more for them. And so we did a study where we said, OK, well, how much more is there to do? And we were actually surprised because as accountants, we thought accounting was the most important thing. And we found that in general, people spend four bips on the technology for their investment lifecycle activities.
Of those four bips, only one is based on accounting and reporting. We have three times as much opportunity within a client based on their actual vendor spend. Sorry, one thing I should also explain to folks is generally, that's the other great thing is someone's already using something generally. So there is kind of a well-understood spend there. As clients came to us and said, hey, we have this new instrument. Hey, we'd love for you to do this. How can you help us with this? What can we do to add more? That leads us to this question. We obviously had an organic growth strategy where it's like, OK, let's do more with limited partnerships. Let's do more with derivatives. Let's do more compliance activities, exposure activities, but in addition, there's a whole lifecycle and there's a whole language.
When you think about risk, there's different nouns and verbs that you use than when you think about accounting. When you think about trading, there's different information that people speak to in trades and that sort of information. And so in the first quarter, actually in April, we closed both the acquisition of Enfusion, excuse me, easy for me to say, Enfusion, as well as Beacon. And between those two, Enfusion provides portfolio management, order management, and trade management, and has generally served the hedge fund industry and moved into the asset management. But generally, they started in hedge funds, and they're kind of the de facto leader in the hedge fund market. And after that acquisition, we're about 50/50, 50% asset managers between hedge funds and asset managers and 50% asset owners. So we have a unique opportunity where we see the world that the asset manager sees.
We also see the world that the asset owner sees, and we see it across all different instruments, private and public, international, and North America.
Sure. And maybe to your point there as well, the opportunity to move from a take rate of one basis point to four basis points, having more components to sell, how should we think about the pillars of the growth algorithm between maybe what's a net new logo momentum, the initiative around kind of NRR 115, and how we've thought about the evolution of cross-selling and expansion?
That's great. Thank you, Dylan. It's like we've been together before. That's fantastic. So what's nice about so when you think about it, we're in this vertical business. We're selling accounting. And the fact is there's a certain cadence of growth. And so the business has been wonderfully and very consistently and durably growing about 20%-25%. For the six years I've been there, it's done that. For the years before that, it's done that. It doesn't grow 40% and then 0%. It grows 20%, 22%, 21%, 23%, something like that %. And that's because there's a natural cadence of kind of people switching. And that buying cycle is once every seven years, once every 10 years, something like that.
Now, when you think about that, it's like and because we've grown about 20% over that period of time, it's been basically about half new logos and about half back to base. But in September of 2023, we sat down and we said, OK, we want to be really deliberate. We have an opportunity as kind of if we really have a high NPS, and people are telling us they want to buy more for us, we should be able to move our net revenue retention rate. Our gross revenue retention rate, I should start with, is 98%, world class. That's as good as anywhere in the world. But our net revenue retention rate at that time was kind of like 108%, 109%, 110%, really pretty average. I mean, great, we appreciate it, but pretty average relative if you're starting at a gross retention rate.
In September of 2003, we developed this initiative where we said, we're going to drive to NRR 115. And we gave T-shirts out to everybody. If anybody was there who got a T-shirt, I hope you still have it, because in Q4 of last year, we delivered 116. So that was great. But how did we kind of drive that? So you think about, well, we've got one team focused on minimizing churn. So churn's about 2%. That's the gross retention rate. That's about 2%. Then you have 4%-5% in price. Then you'd like maybe 7% in cross-sell. And how do you get to the 7% of cross-sell? Those are other products. And maybe you have five of those products, and you sell maybe 1%-2% run rate of those five products.
And then you have upsell, which is kind of growing with your customers, because asset managers frequently will utilize Clearwater to provide reporting so they can grow their businesses. Insurance companies are also that growing businesses are very interested in Clearwater because we solve for all of that. And so that's another piece of that growth. And then there's some asset kind of mix changes over that period of time. That's the algorithm for how we were trying to get to 115. Now, as we then you pivot and you say, OK, so there's demand, there's vendor spend, people want to do more with us. And we bought Enfusion, which does portfolio management, order management, trading. We also bought Beacon, which does risk. And when you look at those two pieces as well as accounting, you're talking about more like three of the four basis points.
Sure, there's still more that people are spending on than that, but those are the big chunks across the investment lifecycle, so the opportunity to increase wallet share within those clients is what's available there. So if you just go back to the highest level and think about the algorithm, it's probably a little bit we will step back that 115% NRR when we merge all the companies together. Neither Enfusion nor Beacon had the same kind of net revenue retention rate. That'll come back to where it was in September 2023. We'll call it 108%, 109%, 110%, something like that. We'll announce it after Q2, and so then we will march that up, and that will be primarily driven by increasing in cross-sell, because now we have all of those solutions to provide across our clients.
Maybe, can you talk about kind of the planned integration of how all of these pieces kind of come together necessarily, right? To your point, different financial profiles within each, but where you see maybe the most tangible opportunity for realized synergies, whether from a cost perspective or from a revenue perspective, maybe both?
Yeah. Well, maybe I'll do the easy one first, the cost synergies. So we committed to $20 million of cost synergies as a result of this over the next couple of years. I can tell everyone right now the $20 million's done. So we were able to achieve that pretty much in the month of May, and we closed in the end of April. So that's behind us. And we're not looking to do more synergies. We've been able to do that mostly in G&A. And so now it's all about growth, growth, growth, and investment. So let's talk about what the product strategy is and how we think about that integration. So the product strategy is really thinking about those four verticals. Hedge funds, asset managers, insurance companies, and other asset owners are the four verticals.
And if you think about hedge funds, Enfusion's already the market leader in that area. And so with more innovation and putting more wood behind that arrow in R&D, I think we see the opportunity to continue to expand and grow in that market area. With respect to insurance, insurance companies are using us for their investment accounting, reporting, compliance, risk. Frequently, insurers are holding back some of their assets and not fully allocating to all of the asset managers and doing the trading themselves. For those folks, that's a natural opportunity for them to use Enfusion. And we think for about half of our insurance clients, they will be using some sort of a trading solution that I think we can go for. With respect to risk, risk is incredibly interesting, especially for insurance companies, because it's all about asset liability matching.
That is literally the Holy Grail for insurance companies. And they will pay. I saw that Guidewire did very well. Congratulations to them. But they will literally pay whatever to get asset liability matching right and thinking about that. And so that's an opportunity that I think is obviously. There's some time to be able to execute against that, but that is a really significant opportunity as well. And then within asset management, we were coming from the asset owners into asset management and doing client reporting. Enfusion was coming from the front office, from the trading and the intraday activities of hedge funds and moving into asset management. And so together, we think co-selling together, we each were winning some amount of business there. And I think it's just rational, and we'll learn more as we go through this.
But our expectation is, together, we have a much more significant opportunity together than we do separately within what is our largest TAM.
Can you talk, maybe expand upon that last point as well, too, from like a competitive perspective, really how the combination of those two assets being end-to-end on top of that single source of truth really gives you that right to win maybe in the more traditional asset manager space? And who are you potentially looking to displace, or what are the systems that are in place today?
Yeah, yeah. So that's right. There are a certain subset of asset managers, and everybody in this room understands that better than I. Some who are using multiple pieces. But there's also the beauty of having the single vendor, the beauty of having one data source, and the promise of really using the single security master and the benefits of that and being able to use that across your entire investment lifecycle instead of just within your investment accounting. So who would we be competing against, my old employer, Advent Software, where I was the CFO 10 years ago, and great company, Stephanie DiMarco, great founder, great, but it's a little long in the tooth, and so I think we have an opportunity to really do that.
And there were a number of those firms that were saying, well, you can replace maybe the accounting piece, but you can't replace the trading. That enables us to have a more holistic view. That's at the smaller end of the market. And then as you move upmarket, you have more opportunity there. So there's a variety. I'll name that one. There's a variety. SimCorp is a company that's a Danish company that was bought by the Deutsche Börse. There's a number of other, there's this company that used to be called SunGard. It's now owned by FIS. These are long in the tooth systems that are out there that still exist. There's a number of banks who've bought accounting platforms that still have a significant number of clients on it. So there's lots of opportunity within.
That was really. I was just speaking just to that kind of 20 billion and below asset manager vertical.
Sure. And maybe to that point as well of the ability to have that kind of unified data set and now be able to facilitate end-to-end workflows. We've talked a lot about with Sandeep and the team as well, the opportunity for AI, not only internally to drive efficiency and delivery, but obviously externally as well, too, around kind of data synthesis and performance attribution. Maybe talk to the AI opportunity and the components that you see maybe most tangible to the business.
100% right. First of all, before I go to AI, let's talk about machine learning, which has been embedded into the platform for years and years and years. That is not generative AI. That is kind of that concept of innovating and improving. You see a trade break. How can I automate that? Let me build a machine rule to do that. That's in the DNA of the company, and that's what we've always been doing. We've been pretty successful at then layering on AI within a kind of a cost basis approach, which is to say, hey, how can I deflect questions coming to us? The most common question that we receive across the whole business from anyone is, because we're doing the accounting, I'll just say this: That number is seven. Why is it seven? Why is it not eight?
Why isn't it six? And so to go through that process, there's an interactive process absent the AI and the deflection that's available there. Absent that process, you have to go back and forth. OK, what are you talking about? OK, let's look at this. How do we do this? Yep, this is this. Here's why the number's this. Do you agree, et cetera, et cetera. Now, how we're deploying AI today and have been, and we've seen yield from this, is we have those top 10 questions. And people can click on the top 10 question instead of putting in a ticket. So that's complete deflection. So maybe that answers, maybe it doesn't. But that's the first choice. If it isn't in the top 10, or if there's a nuance to it that isn't captured in that, then they can put a ticket in.
Our client services team is then given suggested responses. They're given three choices, and they get to select. They may select. They can also select none of the above, but you could select one of the three choices. That's how we're training the AI. But in all these cases, the AI is all about understanding the data and having data sets that can provide inference and the right kind of pool to come to the right answers. And so if you come back and you say, oh, we have a single data set that isn't siloed, that single security master that is providing that information provides us with an incremental opportunity there.
We see if you're going to go way into the future and think about this. Let me just give you kind of a vision, which is where I think we could go because of the assets that we have today, as well as kind of the innovation that could be possible with AI. [It] is you could back up and you could say, OK, today we have any security that you want. Today we have asset managers and asset owners. What if we were the utility for the industry, for asset owners and asset managers to communicate across any asset class, across any geography, across anything they want? That's a really valuable opportunity. And then what could you do? How could you kind of how would your day be different?
How would you revolutionize that if you were for traders, for people evaluating risks, for you thinking about your counterparties, for you communicating with your clients and all of those interactions? That's the promise. We have a lot of work to do to get there. But those are some of the that's why we're excited.
Sure. And maybe how do you go to market? How do you price the solution, right, and maybe walk through the evolution of what was traditionally an AUM-based model to where you guys now sit with a Base Plus model?
So, I'd said we've very consistently grown the. We've also, because of that flywheel effect and the Single Security Master, where our unit economics are really strong, so just under 80% gross margins. And so when we think about adding a new client, we think about what's their scale, what are all their connections, where are they in the world, and what's the complexity of their assets. And we put that into a pricing algorithm, which says, here's a base fee. And now a lot of folks will invest in the Clearwater solution so that they can grow their business. So there's a base fee, which is the annual fee for the assets as they are today. But we also have plus. It's called Base Plus. And the plus is, as you plan to grow your business, there is some incremental piece. As your business grows, we grow with you.
And so that's the base plus fee. So it's generally a base fee, and there is some asset piece in that. Now you might say, wait, assets go up and down. So there are bases. What we do is we adjust that base fee as you grow over time. And the other thing I would think about is, as you think about insurance companies, for example, those assets don't go. Those aren't as volatile as other areas. And so that's why kind of that model works for those folks and aligns to the efforts and the value that they're getting.
Sure. And I mean, it's clear that what you guys are doing is creating a lot of opportunity for the business. You've talked about kind of the 20% durable growth framework. We haven't talked as much about the margin profile, mid-30s today. But if we were to think about kind of the long-term framework for the business, whether it's gross margin expansion, where do you see levers from an operating perspective? What is that right mix in your mind?
Yeah. So back in September 2023, when we did the NRR 115, we also said we're committed to improving our gross margin 50 basis points every year and improving our EBITDA margin 200 basis points every year. We've significantly outperformed all of those since in 2023 and 2024. And here we are in 2025. So at that time, we had talked about a long-term goal of 80% gross margins and 40% EBITDA margins. And I think that's probably not controversial when you look at vertical software businesses in this area. That was before we really started seeing benefits of AI. And so we haven't moved off that 80-40 goal and the 200 basis point improvement in EBITDA margin every year, which we could do that forever. But I do think we need to reevaluate the incremental margin expansion opportunities from AI, particularly in the top line.
And then as we kind of march 200 basis points a year towards that 40%. With these acquisitions, they are less profitable than we are. And so there's a little bit of a reset. But I would say there's nothing about the core unit economics of the business as we look at them together. And there's nothing, as we think about scaling those businesses, that would lead us to the conclusion that those businesses shouldn't, at scale, when combined with Clearwater, also be 40% EBITDA margin businesses. So kind of 20% top line growth, 40% EBITDA margin. And then when we get there, my boss is always, he's great, but he's always pushing me further. Well, let us get there, and then we'll talk about where we go from there.
No, that's perfect. And maybe in the final minute here as well, Jim, we've covered a lot of the opportunity ahead. What is the most exciting for you as we're kind of hitting the ground running with the integration of these most recently acquired assets? But if we were to take a look at the business in three to five years on a normalized basis, what's the most exciting opportunity for you? And how should investors be thinking about that?
Yeah. So I think that we're great at serving clients, and we're really excited about doing more with clients. And that's what we focus on 90% of the time. The other 10% is this opportunity to really revolutionize the way people are interacting with each other across the entire investment lifecycle. I think that has the opportunity that's very interesting. And it's very inspirational to us as a team. And it's frankly why Sandeep and I are so excited and why we kind of have done this to try and get the whole investment lifecycle together so that we can really capture that opportunity in the future.
Perfect. Jim, thank you very much. Thank you, everybody.
Thanks, everyone.
We will continue the conversation. For those that would like to follow us up to Ginny B.
Thanks.
Thanks.