Q3 2024 Earnings Summary
- 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.
- 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. ,
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Net Revenue Retention (NRR) | Q4 2023: Reported 107% with concerns over recent declines and a reliance on new product initiatives. Q1 2024: Achieved 110% driven by low churn and temporary onboarding boosts. Q2 2024: Maintained 110% with ambitions to reach 115% through increased cross‐selling. | Q3 2024: Reported an improved NRR of 114% with contributions from onboarding additional assets and a 2% AUM uplift from a rate cut. | Improved performance and a higher NRR with a focus on sustainability, while still noting temporary drivers. |
Broad‐based Booking Strength | Q4 2023: Achieved record-high year‐to‐date bookings with a robust pipeline. Q1 2024: Noted balanced revenue growth across geographies and industries. Q2 2024: Emphasized balanced growth from new logos and existing clients with significant new product contributions. | Q3 2024: Highlighted broad‐based booking strength across industries and geographies, with about 25% of bookings coming from new product innovations. | Consistently strong and diversified booking performance across periods. |
Margin Expansion & Investment Pressures | Q4 2023: Aimed for 200bps EBITDA margin expansion despite near‐term profitability pressures from increased GTM, R&D, and hiring. Q1 2024: Delivered a 31.3% EBITDA margin with plans to reinvest in growth initiatives. Q2 2024: Expanded EBITDA margins while strategically investing in R&D and go‐to‐market efforts. | Q3 2024: Reaffirmed the commitment to margin expansion (targeting 200bps improvement) while balancing incremental investments in GTM capabilities, product expertise, and hiring. | A continuously balanced strategy that supports profitability improvements alongside growth investments. |
Investments in New Product Innovation & R&D | Q4 2023: Detailed cloud migration completion and a reallocation of R&D capacity (50% then shifting to 60% for growth initiatives) with a focus on machine learning and generative AI. Q1 2024: Emphasized cloud migration and reallocation of R&D with 60% devoted to growth, contributing 25% of bookings from new products. Q2 2024: Highlighted cloud migration benefits and 60% R&D investment in new products, leading to higher new logo adoption. | Q3 2024: While innovation remains key, the detailed discussion on cloud migration and R&D reallocation is less prominent; focus is on new product contributions supporting overall NRR and booking strength. | Slight reduction in emphasis on cloud migration details in Q3, though continued focus on innovation remains critical. |
International Expansion & Global Market Penetration | Q4 2023: Invested in Europe and APAC with leadership hires and secured contracts (e.g. for ESG reporting) driving international revenue (18% of total revenue). Q1 2024: Signed new contracts across APAC and Europe with leadership impacts driving pipeline growth. Q2 2024: Expanded in APAC and Europe with key new client wins and strategic hiring. | Q3 2024: Reinforced global expansion with four strategic leadership hires in Europe and a new office in Hong Kong, bolstering new client wins in Europe and strong pipeline growth internationally. | Consistently strong focus on global market penetration with continued strategic leadership and contract wins. |
Acquisition Integration & M&A Strategy | Q4 2023: Mentioned integration challenges with the Jump Technology acquisition underperforming against targets and noted integration risks. Q1 2024: Expressed confidence in the Wilshire acquisition with no integration challenges highlighted. Q2 2024: Integrated acquisitions successfully, exemplified by the Wilshire deal, with no noted difficulties. | Q3 2024: No challenges or risks mentioned regarding acquisition integration; focus shifted away from discussing M&A challenges. | Sentiment improvement: earlier M&A challenges (Q4 2023) have not recurred in recent periods. |
Macro-economic Headwinds & External Market Pressures | Q4 2023: Adopted a neutral stance with balanced commentary on market conditions and resilient demand. Q1 2024: Implicitly acknowledged regulatory and external changes as opportunities. Q2 2024: Recognized external challenges but maintained optimism with strong pipelines and new product adoption. | Q3 2024: No significant macro headwinds noted; rather, a slight AUM tailwind from a rate cut provided a modest boost. | A resilient and optimistic outlook with minimal negative impact from external market pressures in Q3. |
Shift from Exclusive Focus on Organic ARR Growth | Q1 2024: Emphasized strong organic ARR growth (19.3% YoY) and cross-selling contributions. Q4 2023: Discussed organic growth alongside strategic acquisitions to expand revenue opportunities. Q2 2024: Demonstrated balanced growth between new logos, existing clients, and new product contributions. | Q3 2024: This specific strategic shift is not explicitly highlighted; discussions remain centered on overall revenue diversification without foregrounding an ARR focus change. | The topic is less foregrounded in Q3, suggesting a deprioritization or consolidation of the strategy into broader growth measures. |
Emerging Temporary Performance Drivers (AUM Tailwinds) | Q1 2024 & Q2 2024: Little to no emphasis on temporary AUM tailwinds; earlier discussions centered on cross‐selling and organic growth. Q4 2023: Briefly discussed pricing model benefits but did not specifically highlight rate‐driven AUM changes. | Q3 2024: Specifically noted a 2% AUM increase driven by a September rate cut, highlighting this as a temporary performance booster. | A new emphasis in Q3 on temporary drivers, marking heightened attention to short‐term AUM tailwinds from interest rate changes. |
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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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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.
Research analysts covering Clearwater Analytics Holdings.