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    Clearwater Analytics Holdings Inc (CWAN)

    Business Description

    Clearwater Analytics Holdings, Inc. (CWAN) is a SaaS (Software-as-a-Service) provider specializing in solutions for automated investment data aggregation, reconciliation, accounting, and reporting services. The company serves a diverse client base, including insurers, investment managers, corporations, institutional investors, and government entities. CWAN generates revenue primarily through fees for access to its SaaS platform, offering clients automated and accurate investment data management and streamlined reporting processes.

    1. Investment Data Solutions - Provides a comprehensive platform for investment data aggregation, accounting, analytics, and reporting services, catering to the needs of institutional investors and other financial entities.

    Q3 2024 Summary

    Initial Price$18.57July 1, 2024
    Final Price$24.98October 1, 2024
    Price Change$6.41
    % Change+34.52%

    What went well

    • Broad-based booking strength across industries and geographies: The company's booking strength in Q3 was very broad-based, with contributions from new products, new logos, and back-to-base sales, without reliance on any single deal or market segment.
    • Strong Net Revenue Retention (NRR) approaching 2026 goal ahead of schedule: The company achieved an NRR of 114% in Q3, driven by increased wallet share from existing clients, cross-selling of new products, and a 2% AUM increase in September. This is close to their 2026 goal of 115%, indicating strong customer relationships and potential for continued revenue growth.
    • Strategic investments to fortify future growth while expanding margins: The company is committed to delivering at least 200 basis points of EBITDA margin expansion next year and is making strategic investments in go-to-market teams and new product innovations. This demonstrates effective management and strong future growth prospects.

    What went wrong

    • Clearwater Analytics is guiding for a slower revenue growth rate in Q4, despite strong Q3 results, which may indicate potential concerns about future demand or growth prospects. ,
    • The company expects lower EBITDA margins in Q4 due to increased investments in go-to-market efforts and hiring, which may pressure near-term profitability.
    • The significant increase in net revenue retention (NRR) to 114% this quarter was partly due to temporary factors like AUM tailwinds from interest rate changes, and management suggests that such levels may not be sustainable in the near term. ,

    Q&A Summary

    1. Net Revenue Retention (NRR)
      Q: NRR is close to your 2026 goal of 115%. Is this ceiling hard or could it be exceeded?
      A: Management believes achieving an NRR of 115% by 2026 is very achievable. They've been buoyed by recent results, noting that 9% of NRR was from new products and increased wallet share, which was 3% higher than last quarter. However, since the new products are still maturing, they prefer to see more consistency before raising targets.

    2. Sustainability of NRR Growth
      Q: What drove the wallet share gains, and can this momentum continue?
      A: Wallet share growth comes from large asset management clients growing and from M&A activities. Cross-selling new products like LPX and MLX also contributed. In September, they saw a 2% increase from AUM tailwinds compared to June. While new products are not yet mature, they expect these growth levers to become reliable over time.

    3. Interest Rate Impact on ARR
      Q: How will future interest rate cuts affect ARR under the new pricing model?
      A: Interest rate cuts are expected to be a tailwind, but the impact is less pronounced under the new base-plus model. In 2022, a 500 bps rate increase resulted in a 500 bps headwind. Under current contracts, they would capture most of the asset price increases due to rate cuts, though the exact impact depends on asset class pricing.

    4. Q4 Revenue Outlook
      Q: Why is the Q4 revenue growth guidance slightly slower despite strong demand?
      A: The company aims to deliver on its guidance and feels confident about Q4. They see no weakness or softness but consider the guidance appropriate at this point.

    5. Snowflake Partnership and AI Monetization
      Q: How will the Snowflake partnership and AI capabilities add value and be monetized?
      A: The Snowflake partnership allows clients to access Clearwater data through Snowflake, creating a single pane of glass for reporting. This enhances client satisfaction and may lead to operational efficiencies over time. While AI tools improve platform efficiency and contribute to gross margin, significant revenue impact is still early.

    6. Bookings Strength and Deal Distribution
      Q: Was the strong bookings result due to mega deals or broad-based strength?
      A: Bookings strength was broad-based across industries and geographies. There were no outsized mega deals; growth came from new products, new logos, and back-to-base sales.

    7. Product Mix Between Asset Managers and Insurance Companies
      Q: Is there a shift in the mix between asset managers and insurance companies?
      A: The mix remains within 1% of previous distribution; there's no significant change. Movement between insurance and asset managers is minimal, so go-to-market strategies remain consistent.

    8. 2025 Planning and Strategic Priorities
      Q: Have any priorities for 2025 surfaced given recent progress?
      A: The company feels more confident and plans to be more aggressive in pursuing partnerships, M&A, and leveraging technologies like GenAI. They focus on growth with increased ambition about future opportunities.

    9. Commitment to Margin Expansion
      Q: Are you still committed to delivering 200 bps of EBITDA margin expansion next year?
      A: They are 100% committed to at least 200 bps of margin expansion in 2025. Investments in Q4 aim to fortify future growth while exceeding current margin improvement targets.

    10. Momentum with Upmarket Insurers
      Q: Can you discuss the progress with upmarket insurers?
      A: They continue to win large insurer clients, bringing them live quickly. There's ongoing opportunity in this market segment, particularly as insurers invest more in alternative assets.

    Key Metrics

    View all financials →
    Revenue by Geography - in Millions of USDQ3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    United States70.05974.20376.70479.36300.3383.13587.9494.52
    Rest of World14.54715.67617.96019.6567.83819.58418.8521.31
    Total Revenue84.60689.87994.66499.02368.168102.719106.79115.83
    KPIs - Metric (Unit)Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Percentage of High-Grade Fixed Income Securities (%)77%77%77%77%-77%77%77%
    Net Revenue Retention Rate (%)106%109%108%107%-110%110%114%
    Global Invested Assets (Trillions USD)$6.4$6.4$6.4$7.3-$7.3$7.3$7.3
    Gross Revenue Retention Rate (%)97%98%98%98%-99%99%99%

    Executive Team

    NamePositionStart DateShort Bio
    Sandeep SahaiChief Executive Officer (Principal Executive Officer)July 2018Sandeep Sahai has been the CEO of Clearwater Analytics since July 2018. He previously served as CEO of Solmark (2014–2018) and held leadership roles at Headstrong and Genpact. He holds degrees from IIT Varanasi and IIM Kolkata.
    Jim CoxChief Financial Officer (Principal Financial and Accounting Officer)November 3, 2023Jim Cox serves as the CFO at Clearwater Analytics. He has been certifying financial reports for the company at least since November 3, 2023, based on the earliest available certification in the documents.
    Subi SethiChief Client OfficerJanuary 2020Subi Sethi has been the Chief Client Officer at Clearwater Analytics since January 2020. She previously led operations at UnitedHealth Group's Optum Global Solutions and held leadership roles at Genpact.

    Questions to Ask Management

    1. Your Net Revenue Retention Rate (NRR) increased to 114% this quarter, partly due to onboarding additional assets and cross-selling new products; can you elaborate on how sustainable this elevated NRR is, especially considering that some of the new products are not yet fully mature?

    2. You've mentioned that the recent interest rate environment provided a tailwind to your ARR growth; with potential future interest rate cuts, how do you anticipate this will impact your ARR, given your new contract structures and the sensitivity of your revenue to asset valuations?

    3. With the significant $290 million in net cash holdings, and the proposal to terminate the Tax Receivable Agreement (TRA), can you provide more details on your capital allocation priorities, particularly regarding M&A opportunities and returning value to shareholders?

    4. Your gross margin improvement of 110 basis points is ahead of your target of 50 basis points for the year; what are the key drivers of this outperformance, and how do you plan to sustain or accelerate margin expansion going forward?

    5. Given your investments in new products, international expansion, and leveraging technologies like GenAI, how are you balancing these growth initiatives with the need for operational efficiency and improving EBITDA margins?

    Past Guidance

    Clearwater Analytics (CWAN) Guidance from the Last Four Earnings Calls

    1. Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024 and FY 2024
    • Guidance:
      • Q4 2024 Revenue: At least $120.2 million, representing a year-over-year growth rate of approximately 21%.
      • FY 2024 Revenue: Raised to $445.5 million, representing a year-over-year growth rate of approximately 21%.
      • Q4 2024 Adjusted EBITDA: Expected to be $38.5 million, representing an EBITDA margin of approximately 32%.
      • FY 2024 Adjusted EBITDA: Raised to $142.5 million, an increase of $2.5 million from prior guidance, providing an adjusted EBITDA margin of approximately 32% and a 35% increase in EBITDA year-over-year.
      • Commitment for 2025: At least 200 basis points of EBITDA margin expansion next year on wherever they end in 2024.

    2. Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024 and FY 2024
    • Guidance:
      • Q3 2024 Revenue: Expected to be in the range of $113 million to $114 million, representing a year-over-year growth rate of approximately 19% to 20%.
      • FY 2024 Revenue: Expected to be in the range of $442 million to $444 million, representing a year-over-year growth rate of approximately 20% to 21%.
      • Q3 2024 Adjusted EBITDA: Expected to be $36 million, representing an adjusted EBITDA margin of 31.7%.
      • FY 2024 Adjusted EBITDA: Raised to $140 million, with an adjusted EBITDA margin of approximately 31.6%.
      • FY 2024 Depreciation and Amortization Expense: Increased guidance to $12 million.
      • FY 2024 Tax Receivable Agreement Expense: Expected to be approximately $17 million.

    3. Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q2 2024 and FY 2024
    • Guidance:
      • Q2 2024 Revenue: Expected to be in the range of $105 million to $106 million, representing a year-over-year growth rate of approximately 17% to 18%.
      • FY 2024 Revenue: Expected to be in the range of $438 million to $442 million, representing a year-over-year growth rate of approximately 19% to 20%.
      • Q2 2024 Adjusted EBITDA: Expected to be $31 million, with an adjusted EBITDA margin of 29% to 30%.
      • FY 2024 Adjusted EBITDA: Expected to be in the range of $137 million to $139 million, with an adjusted EBITDA margin of 31%.
      • FY 2024 Gross Margin: Progress towards their long-term goal of 80% gross margin .
      • FY 2024 Net Revenue Retention (NRR): Targeting 115% in the long term, with progress expected to be directional but not linear.

    4. Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: Q1 2024 and FY 2024
    • Guidance:
      • Q1 2024 Revenue: Expected to be $10.5 million, representing first-quarter revenue growth of 19%.
      • FY 2024 Revenue: Expected to be in the range of $431 million to $437 million, representing approximately 17% to 19% year-over-year growth.
      • Q1 2024 Adjusted EBITDA: Expected to be $28.8 million, with an adjusted EBITDA margin of 28.7%, approximately 200 basis points better than Q1 2023.
      • FY 2024 Adjusted EBITDA: Expected to be in the range of $135 million to $137 million, reflecting an approximately 250 basis point improvement from 2023.
      • FY 2024 Total Equity-Based Compensation: Expected to be approximately $106 million, a slight decrease from $108 million in 2023, representing a 5% reduction as a percentage of revenue.
      • FY 2024 Depreciation and Amortization Expense: Expected to be approximately $11 million.
      • FY 2024 Non-GAAP Effective Tax Rate: Expected to be 25%.