Welcome to the session with Clearwater Analytics. My name is John Bian. I work with Brent Thill on the software team. Today, very happy to have Jim Cox, CFO.
Thanks so much. Thanks for having me.
Thanks for making the trip.
Thanks, Jefferies.
Great, great. We do not have formal coverage, but obviously we're familiar with your story, and, you know, it's a small group. Maybe you can just kind of get started, give some background, you know, why, you know, you joined Clearwater and, maybe a little background on the company as well.
I was a client 3 or 4 times before actually joining Clearwater, so I actually... Like HairClub for Men, but I first became a CFO. I'm an accountant, and Clearwater does investment accounting, so it kind of makes some sense. I first became a CFO at Advent Software, where I was the CFO for 22 quarters. Everything lives at a quarter level. Went off and did a couple start-ups between then, where at Advent and at Glassdoor and at Lithium, we were all Clearwater clients. If you think about it, if you have excess cash, if you're a tech company or a pharma company or some kind of...
You have excess cash, whether you're private or public, you know, what do you do with that excess cash? Well, you don't want to lose it, right? You wanna know the duration of that stuff so that when it comes out of the investment, you can then use it for your other things. Clearwater was, like, the perfect solution for that. So I was very familiar with it. Obviously, I joined Clearwater in 2019, and then we went public in 2021 and have rolled as a team from then.
Clearly a very interesting story, and a very modern platform. Just maybe you can give a little bit of history on the company. Why is it different?
Yeah
Than, you know, some of the vendors that came before?
Yeah.
Maybe are more larger.
Yeah. Okay, this is actually really interesting. Clearwater is based in Boise, Idaho. Actually, it was two brothers and a friend, one who traded options on the Chicago Board of Trade, and two that worked at Goldman Sachs, and they went to Boise, Idaho, and started a hedge fund. Unproven hedge fund in Boise, Idaho, trying to obtain money from new potential investors proved a little bit difficult. What they did was they developed this technology solution to provide, like, complete transparency. They came out and they were pitching it to, you know, one of the first. Think back to when they started and some of the tech companies, maybe Cisco, for example, I'll use that as an example.
Everybody said: "There's no way I'm giving you any money. You got to be out of your mind to give you money, but I really love that tool." They pivoted and became a tech company. Boise is a very livable city, especially in the summer, but it is not the center of the universe as it relates to air travel. They were like: "Okay, we're now starting to sign up customers. I am not gonna travel to implement this, so we're gonna start this as a SaaS solution." I'd like to say it was far more strategic, but that was literally it. They were like: "I can't be asked. We're gonna deliver this through the web, and we're gonna go forward with that." That became one, like, really important attribute of the business that continues.
They also made another decision, which was, we're gonna consolidate all this data. We're not gonna worry about the data. We're gonna think of the securities first and not as the portfolios. When you think about most people, think about portfolios, and then they think about the securities. They kind of turned it on its side, and those two decisions have really been kind of the start of what was an incredible run for this company. The founders were brilliant in that regard. By going with the security-first approach, what the company has, in addition to being a SaaS solution, it has a single golden source security master. That creates incredible benefits, kind of from a flywheel perspective. As the company first started with corporates, right?
They flew down to San Francisco and sold, you know, Advent and other companies on, you know, basically consolidating there. If you think about it, if you're a corporate treasurer, you're investing in fixed income securities, you're investing in. You know, you don't want to lose money, right? If you think about it, you don't want to lose money. You want to know kind of how it's spread out, you want to know what your concentrations are, and you want to know when you get the money back. They kind of very successfully ran through the corporates. Lo and behold, when you think about it, and you think about an insurance company investing, they kind of are invested in the same instruments. They're interested in duration, they're interested in concentration risk.
Cause they, the idea is insurance company, we're gonna give you money, you're gonna invest it, and then we're gonna ask for it back later. They were able to the same platform, right, with the single security master on the SaaS platform, was able to move from corporates to insurance companies, and then to asset managers. Asset managers were saying, "Hey, wait a second, that reporting that our clients have is actually better than ours." They moved from that, into now, and now more recently into government. That's kind of the evolution of kind of, you know, what is, what has proven to be an incredibly flexible and dynamic product.
Oh, it's really interesting. I mean, you started, I guess, the three segments: corporates, insurance, and asset management. You started with the smallest AM and then kind of moved up, as you convince them of the value of the, you know, the product behind it. How are you thinking about those three segments TAM now, in terms of the opportunities? How much of a focus you're putting on in terms of, you know, research behind it?
We have a total of an $11 billion TAM. We talk about a core TAM, for something to be in our core TAM, we have to have like, you know, a number of marquee referenceable clients. We have to have win rates that are 80%, which we share win rates across corporates, asset managers, and insurance companies. That's kind of $5 billion in TAM between and amongst those. The largest of those TAMs is asset management, followed by we have about $1.7 billion in TAM for insurance companies, and then relatively small in corporate. Our ARR, 52% of our ARR is with insurance companies, and that's just 'cause we've been in there longer than...
In 33% is in asset management, then the remainder in corporates. I think what that reflects is there's a ton of TAM across all of those, it just reflects kind of the maturity of our product across that. I think the other thing that's really interesting about the TAM is it's 50% in international and 50% in the U.S., which makes sense if you think about where are all the assets domiciled in the world, half in North America, half elsewhere. Only 14% of our revenues are international versus that 50% of TAM. We've got a huge international runway, that's kind of the next evolution.
Yeah. Maybe on the top of international, I mean, what sort of resources are you deploying there? I mean, does it require a lot of investment in terms of, you know, go-to-market activities, in terms of getting, you know, reference accounts and brand awareness? I mean, how big of a push is that?
Yeah, it's something that we've started relatively recently. Remember, we're doing the accounting, right? Our value prop is 9:00 A.M. every day, clean, reliable data that you can use to run your business anywhere in the world. Before you can even think about the go-to-market drivers there, you also have to put the infrastructure in place. We have 200 people in Edinburgh who are kind of servicing folks. We have 500 people in India, 'cause if you think about it, you wanna keep going east of your clients, because then you get the benefit of the day so that they can have beginning of day information. If you keep going east, that helps. We built that infrastructure in place.
We've opened up offices in London, in Paris, in Frankfurt, kind of are starting to build out the go-to-market teams around that. We have a number of Surprisingly, you know, we've been very successful even before we had those offices in place, as people had kind of heard of Clearwater and were willing to take a chance. We have a number of marquee clients in Europe and have seen that also occur in Asia as we've kind of stepped forth. Again, been pulled more into Hong Kong and Singapore than actually being pushed as clients have said, "Hey, here's our problem, can you solve it?" We've moved into that direction.
I would say the final piece, when you think about it, you've got to have the operational infrastructure, you've got to have the go-to-market, but you also have to have the product, right? We kind of have a product that has, you know, end versions of GAAP and have driven that. We've made a pretty significant investment over the last two years, building out GAAP in regulatory reporting in Germany and France, in the UK, in IFRS. I think we see ourselves coming to kind of getting ourselves to the end of that large investment cycle on the R&D side to make the product, you know, truly global. I think we're now, you know, we have a really compelling solution in any of those markets.
You know, obviously, once you get additional clients, you learn more and there's more nuance, so we'll kind of continue to build there.
In terms of the product, I mean, the core being the accounting, are there additional modules in the portfolio? you know, how big can those be in addition to the core accounting? you know, what sort of penetration do you have in terms of the, let's say, in insurance as well as asset managers? How much more is there room to go?
Yeah, there's a lot of room. Just to back up, so when you think about the blessing and the curse of the business was how flexible the core solution was. It does accounting, reporting, performance, risk, compliance for our clients. The benefit of that is it's very flexible, you can move across markets, and you can win. However, as you think about your growth vectors, moving from a single product company to a multi-product company enables that growth in wallet share, right? We have incredibly high NPS scores, and so our clients actually want to buy more from us, right? But yet, we have a solution. In addition to an international evolution, we've kind of also evolved from a single product company to a multi-product company. That takes time, right?
It's a mindset shift difference. It's, there are go-to-market changes that you have to shift through. You have to think about packaging and bundling and how you think about that differently. We're on the cusp of, and we're starting to see finally the returns of that pivot to the multi-product strategy. on the organic side, like products that we have developed and grown and built, is one called PRISM, which is think of it as, it allows for data lineage, both through our accounting platform and other data that people want, combined with their accounting data to get a fulsome picture. Think ESG. You want ESG data points. You fill that in, and it allows for additional reporting. There's also the other vector of let's do more with those clients.
You ask kind of what's the penetration at an insurance company? Well, a lot of insurance companies have investments in limited partnerships. Accounting for a limited partnership is complicated, but not that interesting. You know, there are more complicated things to try and get the accounting and reporting right on. What's really interesting about LPs is: what are my capital commitments? What are my distributions? When am I gonna receive that? How do I understand that? Oh, let me look through into that LP and understand what all of the underlyings are of that partnership. Well, we already did the accounting for it. Now, through LPx is this solution. You can understand those cash flows associated with the LP and the look-through with that.
You think about that, you think about what people do with all the mortgage-backed securities. You think of all of the investments in derivatives and the requirements to post collateral and retrieve collateral, think about that. Those are all things that people use Clearwater to start their day to go do their work, and we believe we have the right to keep them in the Clearwater platform, doing those workflows throughout their day. That's just on the organic side. This also allows us. We also... As you think about multi-product, it really drives an inorganic story as well, what do we want to think about? If we have incredible gross retention rates at 98%, 97%, you know, very historically sticky product, happy clients with high NPSs.
Generally, it's a fertile ground for back-selling into the clients, and so that's what we think about both from an organic and inorganic methodology.
Great. Great. obviously, a lot of that has come through some of the financials. I mean, go to fifty-.
Yeah
For a while. Although, I guess some of the metrics have come down a little bit in Q1 recently. I mean, if you could talk about that, you know, whether it's macro or other drivers or, you know, how soon can you know, can those come back to higher levels?
I think we, Yeah, we are, you know, focused on growing top line and really driving that, and I think it's net new logos, you know, strategy one on one, add more customers and sell more to the customers you have, so, and building that out. The net retention levels have been. In the past, we had an AUM-based pricing model, which, you know, kind of over 500 basis points of increase in federal funds rate has a tendency to put a headwind against that. Last year, we went through a process of evolving our pricing model to what we call a base-plus pricing model, to restrict some of that volatility. We're still seeing some of that.
You know, it was a 500 basis point headwind to our growth rate last year, the market movements. That obviously continues to go down now as we've kind of evolved, the pricing structure and recontracted with the base on that front. There is still a bit of a headwind. Really, we think about. Aspirationally, we think about our net revenue retention. Gross retention's always been incredible, 98%, 97%. That's, it's, we can lay that up against anyone. Even on our best days, our net retention was only 110, which is pretty average, right? Really, we want to back up, and we want to say, "Okay, how do we think about aspirationally a net revenue retention rate of 115?" Right? Because then you have 15% growth there, new logo growth.
You can think about how, as a billion-dollar company, you continue to grow 20%-25% when you put those things in place. In order to do that, how we have grown with our clients in the past is they've acquired, you know, more assets, or at our asset management clients, we've been open to other lines of business that they've opened them. You know, we kind of For example, last quarter, we landed BofA and Merrill Lynch. Those are not huge clients, but, you know, JPMorgan's a huge client, Morgan Stanley is a huge client, Goldman Sachs, you know, there is a path to those other... Jefferies will soon be a huge client of ours. Yes, yes. The opportunity is there with those asset management clients to grow those assets.
Now that we have a multi-product strategy, we have something to think about with respect to our insurance clients and our corporate clients, which is really two-thirds of our ARR today.
You mentioned changes to the pricing model.
Yeah.
You know, how far along are you in going to that base-plus, and any pushbacks from clients? How do you convince them to go from one model to the other?
Yeah, it's the proof is in the pudding with your NPS scores when you go to a client, you say, "We want to talk about changing your contract." We had an AUM-based pricing model last year. About this time last year, the only question any investor would ask me is: What's happening with your AUM-based pricing model? Really, we sat back, we reflected and thought, "There's a better way to do this." What we did was we pivoted to what we call a base-plus pricing model. There's a base fee for your book of business. To the extent your business grows, your AUM grows within that business, you know, there's an increment on that. That's the second piece, is that's the plus.
The third piece is that your base fee has price increase, just like every other SaaS business has an increase. If your assets grow, you know, let's say that your price increase is 5%. If your assets grow 7%, then your base fee has gone up 5%, but it's transparent to you. You don't, you don't see it, right? What we're doing is we're limiting the downside. Then the most strategic piece of the base-plus contract was to draw four corners around what we've actually sold. We used to spend $0.25 of every dollar on R&D and give it all away to our clients, right? We never charged extra for that.
Now we're saying, "Hey, for additional functionality, there's the opportunity to charge for that." That's kind of the change, and we did it in 2 quarters. I used to be 6 foot 4, now I'm 5 foot 10. It was not easy, but honestly, you know, we have a really special relationship with our clients. Our client services team is so dedicated to client success that, you know, every day they're talking to their clients to try and help them. 'Cause we're doing their accounting. Every day, we're doing their accounting, we're making. When those folks spoke to them about, like, this is what's important, it was actually those folks said, "Yep, understand it." Because what had happened was they were paying us $100 at the beginning of the year.
They probably budgeted $100, and with the AUM, they'd gone down to 90. If we said, "Hey, you know, something has to change," they understood it and embraced it, and went far better than I had suspected at the beginning. Now we still have more clients to transition, but it's not, you know, at the front of the mindset. It is as a conversation goes, comes up with clients about buying more product, that's when we talk about this, and it's worked.
Seems like it better aligns some of the values, obviously, and reduced the downside, as you said. If you're kinda. The core accounting system, obviously, there's a ton of data sitting there.
Yeah.
You know, including the security master, but as well as, you know, your clients' information there as well. I mean, what are some of the opportunities, obviously, using AI?
Yeah
-on that, I mean, to maybe come up with a new product or enhance existing products and, you know, and then extracting value from that as well, but
Yeah, I think there's. Remember, there's the single security master, now that we've scaled, you know, there's over 6 trillion in assets flowing through that every day, every buy, every sell. You know, kind of understanding people's relative performance, understanding that, we can understand all that, I think that that's a really valuable asset, regardless of AI. I think as we think about AI and what our opportunities, what anyone's opportunities are with respect to that, thinking about large data sets is helpful, I think we're very uniquely positioned because of this kind of single instance that enables us to kind of go forth with that. We have a number of irons in the fire on that.
Some of them are on the efficiency side, and when you think about how do you service a client, remember, if you're flowing $6 trillion in assets, there's, you know, thousands of trade breaks every day that are occurring. How do you resolve those? Today, we have people resolving those. Well, how do you know, there's a lot of efficiencies in place there. As you step through and you say, "What's the next kind of solution that you could do?" Well, when you start thinking about, well, everyone wants to know, in good markets and bad markets, I know how I'm doing, but how am I doing compared to everybody else? As you start to think about those as opportunities, that's kind of one way we're headed.
Interesting. I mean, maybe, I don't know how much demand there is, but maybe you just ask for it, just generate me an ESG report on certain things, and then comes out.
It would come back. It would come back, yeah. Yeah.
We have about a minute or two. I don't know if there's any questions? If not, maybe one final one. Kind of long-term vision, you know, where, what do you think you'd like to see Clearwater in, you know, five plus years in terms of the profile, what it looks like? obviously, much more built-up portfolio.
Yeah
just kind of big picture.
You know, continue to go global, right? Globalization. I think it's beyond... Right now, I think, you know, in our mission statement, we say, "And revolutionize the investment management industry." I think if you go, if you go into the future and we continue to grow, that $6 trillion in assets will be $10 trillion-$15 trillion, and you start to see that. You're able to share those insights across, you know, the world, across every investor class and can think about that. It becomes really powerful. I think we have the opportunity to really transform how people interact with their data, how people interact between asset owner and asset manager, and participate in that ecosystem in a really meaningful way, so.
Great. Jim, thanks very much for coming.
Thank you. Thanks, everybody.
Great conversation.
Thank you.