All right. Thanks everybody for joining us this morning here at the Morgan Stanley Fintech Conference. We'll be kicking off this presentation or this session with Clearwater Analytics, Jim Cox, CFO.
Thanks.
Before we get started, Jim, I do have to read this important disclosure. Please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. Maybe just as Jim, as an introduction/preamble, you know, for those of you that maybe aren't familiar with Clearwater, could you provide an overview of the business and value prop you bring to the asset management, insurance, and corporate clients?
Sure.
Yeah.
Clearwater Analytics does accounting, reporting, compliance, and risk, and performance for asset managers, insurance companies, and corporates. We actually do the accounting, right? Our value prop to these folks is, at 9:00 A.M. every day, we provide clean, reliable data for them to then go and do their day, interacting with their clients, interacting with the other stakeholders there. I guess there's lots of firms that do that.
Right.
What's kind of unique about Clearwater is a couple things. One, took a reasonably novel approach in kind of how they address this, which is we go to the source data. We're going to your custodians, to your pricing sources. We're modeling the data ourselves, and we think about things at the security level as opposed to the client or portfolio level. What happens when you do that is you pull the securities in, and then only once you get to your client level, do you think about the details of kind of those individual portfolios. When you're able to look at it at the security level and model that, you have this incredible single security master, this clean, reliable data that creates a great flywheel effect, where we continue to.
For every next client, every next security you add, there are benefits that accrue to all of your existing clients.
Right. Right. Right.
That's the value prop to clients. I was a customer as a CFO at three prior companies before. Like the Hair Club for Men, I was also a customer. I understand really the benefit that it does for corporates.
Right.
We also do for insurance and those others, but maybe some metrics on the business, kind of a 20+ % top-line grower, very consistent, durable, reliable. Metric we're really proud of is our really high, gross retention rate.
Right.
98% gross retention rate, and obviously a profitable business. That's a little bit of the prop to investors as opposed to our clients, which we do focus on.
So wanna ask, maybe you can give a little bit of. At least I always find it helpful to go through, like, how this account-- Because every asset manager has to have accounting, right?
Yeah.
Like, by definition.
Yeah. Yeah.
By definition, your market is 100% penetrated at any given point.
Yeah. Yeah.
Right.
Mostly a replacement market.
Right. Right. Right. That's right.
Yeah. Yeah.
Other than maybe if, you know, somebody's starting up.
Yeah.
What's different about Clearwater's approach and what are, to your point, is like, what are the pain points that you're helping address for your customers?
Why does someone... In corporates, you know, if you start investing, you know, as a CFO, this is. I can speak to this. You know, I have a day job. I gotta figure out growth. I gotta figure out profitability. I have to think about the business, and I also have this excess cash that I worry. I'd like to make a little money with that.
Right.
I certainly don't want to lose my money, and I, and I wanna know when I'm gonna get it back, so I can do things like dividends or buy back stocks.
Right.
Buy another business.
Right.
-or something like that. I think about duration, and I think about that. That's what a corporate firm thinks about, and so that's that mechanism. You know, and 52% of our revenues are based on insurance companies, so we'll talk about insurance companies.
Right.
An insurance company is generally doing the same thing. They don't want to lose the money that their policyholders have given to them, and they wanna know when they're gonna get it back so that they can pay claims and make some money on it in the, in the meantime. That's pretty consistent. To your point, what has to change? What happens is someone says, Oh, I'd like to invest in a new asset class.
Okay.
I'm interested in mortgage-backed securities. I'm interested in derivatives. I would like to expand our portfolio into LP. Someone says, you know what? I'd like to invest in Europe or Japan, or, I'd like to buy a business," you know, or, I'm a reinsurer, and I'd like to acquire a set of assets and take on a set of risks. What do I do with that? In any of those cases, for an insurance client, that's a basically a reimplementation in their legacy platform. More likely what they do is the investments are made, and the accountants are doing it in Excel and figuring out a way to, like, blue sheet back in. When that pain. That's the pain that I'm an accountant, so I can say accountants live in pain.
You kind of live in that pain, and then at some point, you say, wait a second, this pain is too much. Let's switch. That's generally, you know, one of those drivers for an insurance client would drive that. Separate, different kind of pain for asset managers.
Right.
Asset managers, you're in the business of gathering assets, and when you lose mandates, because your client reporting is insufficient when you miss out on opportunities because of the information that you have and your relationships with your clients are in pain, then you say, Okay, I want to use Clearwater. Morgan Stanley, thank you for being a great client. You know, you're across many, many different business lines, but really, what you're doing, why how you use Clearwater and how many of our asset management clients use Clearwater, is really to help interface with their client reporting and connecting with those clients and understanding that globally. At other asset managers who perhaps don't use Clearwater, if they lose a mandate, we have a tendency to hear from them.
That's generally an entrée into the firm. Then it's our job to figure out how to win kind of other business. Sorry, one thing I didn't mention is generally, if you're an asset owner, like a corporate or a pension-
Right.
an insurance company, you take the whole of your platform comes onto Clearwater day one. That isn't true with asset managers, because you're gonna focus on different mandates and differently. We have a back-to-base sales motion within our asset management clients that, until this year, probably didn't exist in our asset owner.
Right. Right, right. Can you help us think about the durable rate of growth for you and the TAM generally? You mentioned that Clearwater consistently has been a little over 20% growth and, you know, the TAM is sized at around $11 billion. I'm curious how you think about your existing penetration, what that ultimately could scale to, and that's really kind of the important thing. You know,
Yeah.
Your revenue base right now is around $300 million. That means you're about 3% penetrated, but if you compound for 20% for the next decade, and the market grows mid-single, you know, you're still gonna.
There's still a huge amount.
Yeah, there's still a lot of runway. Just help us think through, like, what are the drivers there and why is. I guess maybe the question we get a lot is, like, why?
Why not faster?
Yeah, why not faster?
Yeah.
Why is that number so consistently-
Yeah.
in that, you know, low twenties range?
That's the same question I ask everybody in my company. Why not faster? Why not? We're really focused on that. Let's talk through it. Okay. Step one, let's talk about our TAM and where we are and where we've come from, right?
Okay.
We talk about an $11 billion TAM. That includes some adjacent markets. That includes Asia Pac-
Right.
And some new products that are relatively nascent. We internally, when we think about our go-to-market teams and what we're driving at, we really think about our core TAM, which is $5.9 billion. Of that, about $4 billion is in asset management, $1.6 billion is in insurance, and $300 million is in corporate.
Okay.
Now. Let's click that down. Why do we call that our core TAM? We have teams that have our go-to-market, kind of in each of those verticals, we have go-to-markets driving against those. We also have 80% win rates, referenceable clients across all of that. That's for us to say this is our kind of core TAM. That's what we have to believe, and that's our experience.
Right.
Let's kind of, separate into kind of, the next level down of that TAM when we disaggregate it, and we understand this because people have to file their assets.
Right.
for regulatory filings. We take that, kind of, assume that in, into that level. About half of that 5.9 of TAM is international, it's only 14% of our
Right. Right.
Kind of as you think about how do we accelerate that, or we think about it a little bit differently as opposed to the penetration of the TAM, because I think we both want to expand our TAM. We want to, you know, grow kind of our core TAM.
Right
As well as just the penetration levels. We do wake up and think: How do we become a billion-dollar company? Like, what does this business look like?
Right.
I think at a billion-dollar company, you know, if we're 14% of last year's revenues was international and half the TAM is international, like, as you move from, you know, this year, it's roughly we're guiding $360 million. You know, as you move to $1 billion, there's a significant increase in that international element. In fact, in insurance, which is our largest kind of percent of our, of our ARR, it's 52% of our ARR. There's more TAM outside of the United States than there is in the United States and insurance.
Right.
Obviously, the international element is a key to adding more, you know, to that kind of growth rate and continuing to penetrate that TAM. I think that investors. You know, you can look at that growth rate and the consistency of the growth rate. We have really high gross retention rate, we really want every client that we bring on board to be successful, especially when you're entering new markets. It's important to make those clients successful or doing new things with clients, to make them successful, referenceable, and drive that. I think we're deliberate about that process.
We've grown at that rate, you know, pretty consistently. We would love to grow faster, and we focus on thinking about that. You know every day. What investors probably underestimate is just the power of this compounding. You know, even with these legacy platforms, their retention rates are 90+ %.
Right, right, right.
That really means, okay, that's, you know, $6 trillion of TAM, $5.9 of TAM. Really, $600 is up for grabs every year.
Right, right.
You split that between kind of international and North America. You're talking about $300 in each place. Okay. Our job is really to capture as much of that $300-
Right
in North America, and as much of that other $300 internationally, and figure out where that is, frankly, internationally, to grow. I think, you know, we've got a real opportunity to continue to compound kind of indefinitely.
Got it. Talking about the markets, and you highlighted the international market. It's about half the TAM.
Yeah.
It's only about 14% of your revenue. Where are you excited, specifically internationally, about the best opportunities for Clearwater to win business, and what regions should we be paying attention to?
Yeah. Okay, when you think about where have we invested.
Right
To date, we have roughly 250-300 people in the U.K. Those are teams that are servicing clients in Europe and in Bermuda.
In that area. We also have sales teams in London, in Paris, and in Frankfurt. We've been most successful, I would say, in Northern Europe, and obviously, the JUMP acquisition in Paris. T hat adds 100 employees in Paris, which helps in a French-speaking market and driving to that. I think we're very much excited about that market. We're excited about the combination of JUMP and Clearwater together in the insurance market.
Right
in continental Europe. I think that's exciting. Honestly, we have not invested a ton in Asia Pacific, and we wouldn't even say that APAC is in our core TAM, in that $5.9 billion core TAM.
Interesting.
We've been drawn into it. You know, we had a couple salespeople there, and, you know, honestly, their clients have come to us, right?
Right.
I think we're interested about the opportunity there. Obviously, we continue to be the market leader in North America, and I see that drives that. As we look to the future, I think the lion's share of kind of incremental new logo growth is in Europe.
Got it. If that's where you see the most incremental opportunity, at least right now, is in Europe.
Relative to where we stand today.
To where you stand today.
If you say, hey, we're growing 20% here and when you're at $1 billion in revenue, you've got to grow $200 million every year.
Right, right.
That's that increment.
I mean, like you mentioned, the JUMP acquisition, that added 100 people or so in France. Do you have the enough infrastructure and headcount in place to service that market? What should we expect expenses and expense growth to look like to be able to take advantage of that?
Yeah, I think, you know, when I got to Clearwater in 2019, 9% of our revenues were in sales and marketing.
Mm.
That's now up to a whopping 13%.
Right.
Still very efficient in sales and marketing. That incremental investment was all in about building out international.
Right.
I think we like where we sit in sales and marketing as a percentage of revenues now, and think we can execute on the opportunity at that level for a couple reasons. One, we've made a ton of investment internationally, and we just are not as efficient in the sales and marketing function internationally, that we are in North America today. Stepping then through that, obviously we expect European sales to get more efficient. That'll be offset again by incremental investment being pushed in APAC and.
Right.
As far as servicing, you know, making sure that clients are successful in those markets, we've also put that investment in. I think we're feeling that, in, on the servicing side, we feel good about the investment there. Then actually in R&D, we've spent a reasonable amount building out the nuances of, you know, German GAAP and Italian GAAP.
Right.
for that sort of things. We actually see that kind of, we're coming to the end of that investment cycle on R&D, so I think we'll see some efficiencies on the R&D side.
Got it.
As well as... you know, obviously, we'll redeploy some of that. I think as you look at kind of where we've been investing, I think we have an efficient.
Got it. Got it. Maybe let's turn to pricing and the like. Can you spend a couple minutes, Jim, outlining the changes the management team has implemented on pricing since Clearwater became public? What impact do you expect that will have on the resiliency of the model moving forward?
Yeah. It's key. When you think about the brand of Clearwater to investors-
Mm-hmm
Dura ble, reliable, predictable growth, right?
Yep.
That's what we've done. profitable, cash flowing, and all those things. When we went public, we had one piece of the model that we had liked very much over a long period of time, which was we had an AUM-based pricing model. Helps to align with our clients. Being a public company where you have to report every quarter and also seeing, you know, kind of Fed funds rate go from basically 0- 500 bps.
Right, right.
in the world's fastest period of time, you know, made for some exciting. Basically, this time last year, all anyone would talk to us about was what's happening with your AUM pricing.
Right, right.
Not underlying the durable. We pivoted, and we did two things. For all new clients, they're on a base plus model, and for existing clients, we went back and we actually reached out to our clients to recontract on a base plus model.
Okay.
What is a base plus model? It basically takes out the AUM volatility. It says, here's a base fee. Here's an annual base fee for your business. This is what you're going to pay." Obviously, that aligns with the resiliency that you were talking about in the business and the brand in the business. There's a base fee, but you know what? As businesses grow, there's an AUM component for the growth in our clients' businesses. The third piece of it is the base fee then increases each year. However, if your AUM grows 7% in a year.
Right.
The base fee obviously isn't, it's what it's doing is, it's then ramping up to ratchet underneath kind of that AUM fee. What we're doing is we're kind of remarketing the base fee as the client's business grows. Really, what that does is it limits the downside. As we talk to clients, it actually. They liked the certainty of the base fee.
Right. Okay.
They liked understanding, and people could appreciate, oh, I can understand how a base fee goes up over time. Frankly, for most of our clients, that are growing, it's transparent to them.
Right. Right, right.
The AUM is kind of expanded, and what we're doing is just matching that base fee. The argument we made to the clients, which fit very well, was, "Hey, we're making investments in your team.
Right, right.
How it's working, and people were pretty aligned to it. The last piece that we did, which didn't have much of an economic impact, I'll say the other thing is as we made this transition, a lot of people asked, "Well, what did you think You know, what's the uptick from it?
Right. Yeah.
Honestly, we had a good model where we were having 3%, 4%, 5% kind of AUM expansion over time. We really were able to view this as a neutral, and I think that's why our clients also kind of accepted it as readily as they did. You could look back at history and say, Look, you're kind of, you know. Your costs have grown at this rate anyways. Here's how it's going to work going forward. Everybody kind of aligned to that. The last piece is we were not very precise. The benefit of Clearwater working across all markets and doing many things for different clients, is that it's an incredibly flexible product.
Mm.
The detriment is that we were a single product company. If you were an insurance company and we got your whole book, there wasn't a whole lot more we could sell you.
Right. Right, right.
The final piece of the base plus model was we just were a little crisp about saying, This is what you bought. This is what's in the product today, and this is what you bought." When we add functionality like German GAAP or additional reporting or additional kind of functionality around alternatives, which has been really successful, people understand, Okay, I don't get that for free.
Mm-hmm.
By the way, very fair. People accept that. They understand it, and so that's the last piece, which was the first step of us really making this evolution from a single product company to a multi-product company. When we think about ourselves as a billion-dollar revenue.
Right.
Right? I talk about, hey, we're going to get a lot more international than we are today. The other piece is we're going to have multiple products.
Mm-hmm.
That kind of composition of our growth between. Today, it's almost, you know, the vast majority is new client acquisition. As we move into a more mature business model, it will tend to be both new client acquisition and will continue to be focused on that. That's the lifeblood, but also selling back into our base.
Got it. No, I appreciate that. You've clearly made progress on pricing, I would say that we've been pleasantly surprised how well you've been able to.
You and me both.
Yeah.
Yeah.
Yeah.
Your historical clients, to that. How should we think about the cadence then, of NRR over the next several quarters and years? You know, how long do you think it takes us to get back to where we were, say, a couple of years ago of 110% or.
Yeah.
or so? Yeah, James, I think I've said this, you know, aspirationally, we think if you think about yourself as a consistent 20+% compounder and 10% in NRR is 110%, that's one thing. For NRR to be 115%, it really changes the business.
Yeah, yeah.
Changes the trajectory and the opportunity. We talk aspirationally. As we, you know, we have the commercial construct in place now. We'll continue to evolve that. We have the go-to-market that we're starting to, that is in place, but we'll continue to evolve. The last piece is, okay, what are the products, both organic and inorganic, that we're adding to the portfolio to try and drive that? You're right, you know, 110% was kind of the high water mark of what we had.
Yep.
Historically done. We troughed at 104% when we were really into the AUM headwinds that we had seen, and we're at 106% most recently. I think we'll steadily see that go back, and we wanna march, you know, consistently. You know, I think we see the path kind of. I think we see ourselves staying at 106% here for the interim period while we kind of work through this. As we kind of move through, we aspirationally think at 115%, both through continuing kind of to sell within our asset management clients and broadening our footprint there, but also selling, you know, additional products and solutions across more clients. I think it's a multi-year program.
Right.
I think it's so strategic, it's worth us.
Right, right.
stepping through that.
Look, you've mentioned a couple of times selling incremental products or at least.
Yeah
You know, modularizing a little bit like you're offering. It's still early, but can you comment on the progress you've seen or made in terms of that module-based pricing? You know, especially now that you are starting to have LPx and Prism. You mentioned the multi-GAAP.
Yeah
as standalone modules. Like, how much impact or contribution are those having today?
Yeah
versus where should they be?
When we think about our organic, multi-product organic, like, it takes a long time to, you know, kind of create a product.
Mm-hmm
Grow it and build. Historically, it has. We should talk about some of the innovations that are accelerating that. You know, we think about $100 million products.
Okay.
We think of Prism as a $100 million product. We think of our alternatives, which, you know, LPx, MLx. You know, when you think about these are assets that we have on our platform, and we account for them. With alternatives, you wanna do more than just account for them. You wanna be able to understand the underlying if you have a mortgage-backed security or an or a limited partnership interest.
Mm-hmm.
You wanna understand cash commitments, cash returns, and cash flows. You wanna think about, with derivatives, collateral and thinking about kind of your counterparty relationships there.
Yeah.
All of those aren't accounting. Those assets are on our platform, if you talk to our clients, our users, you ask them: W ho do you send this information to? What do you do 15 minutes before you're on Clearwater, or the 15 minutes after you're on Clearwater?" They're doing these types of things. That tells us we have a right to win there.
Right. Right.
Those are important elements. I think we're making good progress in alternatives and feeling good about that. Prism is a much more mature product. We started kind of developing it in 2020, and, you know, it feels like we've been talking about it to me for a long time.
We're now finally starting to see. You know, I think success would be, you know, net new business, you know, 10%, 20% of that being Prism this year.
Right. Right.
still small on the whole.
Right
Whole basis, but when you start thinking about that and you start thinking about that compounding over time, you can see how you could have either of those be $100 million businesses.
Got it. Got it.
BuT it's still it takes too long. We're impatient. It's, I wish it was all going faster. JUMP is also the inorganic piece of that. We didn't have any new client wins in Q1, but we've had 2 in Q2, and, you know, really, we're gonna focus on making sure those clients are successful. What's really interesting about that is those were 2 back sells to existing Clearwater clients, and either providing additional performance or portfolio management trading for those. As we think about broadening, I think we have a right to broaden our functional-
Yeah. Yeah.
With our asset management clients, and that's the path. We got to make those folks successful and referenceable, and then we'll, you know, really crank up the efforts there.
Can I ask you, so you mentioned a little bit about some of the things that you're doing from a developmental standpoint. Like, how do you improve the pace at which you can add additional capabilities and start to monetize it? I mean, is that purely like a change in development approach, or what other things can you do there?
Yeah, so I think that, I think what we've realized, like everyone, over the last kind of, call it 4-6 months, is that your expectations around development productivity in this new world of... are just much faster.
Mm.
I think that we view ourselves as a real winner in being able to develop, because we do have that single security master.
Right
That single data source.
Right.
we can understand how to solve that, kind of at that single level. And we just have a ton of data-
Right
that we can read into to try and build that. I just think, honestly, my kind of our headcount models, our way of thinking about headcount growth in the past, based on clients or revenues or programs that we wanna do, honestly, we're thinking fundamentally differently about that because we're just seeing the productivity in our dev org going up. It, it has to do with the AI tools. It also has to do with the leadership and the focus-
Mm-hmm
The product alignment. Frankly, we're in a really enviable position because our clients do want to co-innovate with us. When we talk about these things, we're able to find, you know, we understand it because we're in it every day, but we also want our clients to participate in that. I think that that has fundamentally changed within our business over the last kind of as we think about that. Really excited about accelerating that.
Got it. Let's talk about profitability. You know, you guys are already quite profitable and particularly relative to other vertical software companies we track, you know, where they're typically running 75% gross margins and around 27% adjusted EBITDA margins. You have higher aspirations than that.
We do.
You've talked about, you know, that you would like to get to long-term targets of 80%+ gross margins and 40%+ adjusted EBITDA margins. You know, help us think about what are the drivers and a reasonable or realistic timeframe to achieve that.
Yeah. I think that, Let's park aside the efficiency opportunities-
Okay.
that we see in AI for a second.
Okay.
Talk about what our models were before, and then I'll finish with that. You know, we have made a ton of investment, kind of globally, to build out kind of support systems for our international client base and across that.
Mm-hmm.
We're seeing the benefits of that. I think we continue to see efficiencies there. I think at the beginning of this year, if you would have asked me, I would have said 100-200 basis points, margin improvement, year- after- year- after- year- after- year. The business is built for that. How do you get that? In Q1, we were at 27% R&D as a percentage of revenues. You know, I think we see that heading to 20%. I think we like where we're at on the sales and marketing as a percentage of revenue at 13%. Then we have additional efficiency in G&A, and then a lot of efficiency in kind of continuing to expand at the gross margin level. Further, when you start thinking about with the. Like, remember, we're doing the accounting.
Mm-hmm.
We're doing the data ingestion, the normalization, the reconciliation, the modeling of these securities. We already have, you know, hundreds and hundreds of machine learning rules...
Right, right.
that are facilitating this process.
Right.
guess what? Trades break.
Right.
Humans fix that, and we have hundreds of humans that are fixing data breaks or data inconsistencies, or frankly, these decisions. You just back up for a second and you say, Well, we know that it's generally one of these things, usually, and we have the information, and we're able to pull that data. An efficiency tool where then that reconciliation person, instead of having to solve that, is able to pick the best of their three, right?
Right.
You know what I mean?
Right.
The efficiencies around this are meaningful.
Yep. Yep.
I think that we are really excited about that on that opportunity front. We're even more excited about what we can do for our clients with kind of the summarizing data and saying, hey, here's. What insights would you like?
Right. Right.
What do you want to understand? You know, we're not going to share what other people do, but as we think about that derived data and benchmarks and thinking about those things, I think everyone will be interested in that data. I think we have a unique opportunity, given the data set that we have and the new technology offerings that are available, to be meaningfully more impactful for our clients.
Got it. Just in the last minute, Jim. You guys have had an acquisition strategy. You recently acquired JUMP Technology, which you mentioned. How do you think about the prospect of incremental M&A, and what kind of assets and/or geographies are you looking at?
Yeah, you know, Look, it takes a long time to grow internationally.
Mm-hmm.
We're really interested in international opportunities. I think, you know, if you just take JUMP as an example, we wanted European footprint, asset management functionality, and something we could sell back into our base. Something like along those lines, because we have 30 seconds, along those lines.
Mm-hmm.
That's exactly, you know, what we're looking for, and we continue to look at that. What more can we do for our clients, and how can we expand our global footprint?
That's great. Jim, thank you very much.
Thank you.
Appreciate you being here.
Thanks, everyone. Cheers. Thanks. That's awesome. Thanks.