Good day, everyone. Thank you for standing by. Welcome to Clearwater Analytics Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Joon Park, Head of Investor Relations at Clearwater Analytics. Joon, please go ahead.

Thank you, and welcome everyone to Clearwater Analytics Fourth Quarter and Full Year 2023 Financial Results Conference Call. Joining me on the call today are Sandeep Sahai, Chief Executive Officer; and Jim Cox, Chief Financial Officer. After their remarks, we will open the call to a question-and-answer session. I would like to remind all participants that during this conference call, any forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Expressions of future goals, intentions, and expectations, including in relation to the business outlook, future financial and product performance, and similar items, including, without limitation, expressions using the terminology may, will, can, expect, and believe and expressions which reflect something other than historical facts are intended to identify forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors section of our filings with the SEC. Actual results may differ materially from any forward-looking statements. The company undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call, except as required by law. For more information, please refer to the cautionary statement included in our earnings press release. Before the market opens in Smart morning, we plan to file with the SEC a Form 10-K for the fiscal year ended December 31, 2023. Lastly, all metrics discussed on this call are presented on a non-GAAP or adjusted basis and include the results of Jump technology since the acquisition on November 30, 2022, unless otherwise noted. A reconciliation to GAAP results can be found in the earnings press release that we have posted to our Investor Relations website. With that, I'll turn the call over to our Chief Executive Officer, Sandeep Sahai.

Thank you, Joe, and thank you all for joining us. Let me start by saying that I'm incredibly proud of what we have achieved as a company over the last 5 years. We are on a mission to be the world's most trusted and comprehensive technology platform that simplifies the entire investment management life cycle and eventually revolutionizes the world of investing. While we are very ambitious, we want to build a durable business that grows consistently while improving unit economics, margin, EBITDA, and cash flow. That's why 2023 was a great year. Revenue grew 21.3%. Gross margin was 139 basis points better than the previous year. Adjusted EBITDA was 203 basis points higher than the previous year. And finally, our cash flow for the year increased by 57.2%. We have often talked about the power of a single instance, multi-tenant platform, and the network effect it produces. But the growth in Europe and then in Asia, and finally, new asset classes have masked the true impact. We're delighted to note that in 2023, we grew our revenue 21% without adding a single net new employee to our operations team, reflecting the true power of the network effect, aided by GenAI. We have always insisted that was not just about cost efficiency. Clients would be happier because the network effect made our data better and they would get the data faster. No surprise then that even though we did not add any operational headcount, we grew NPS and improved our employee satisfaction score. Finally, we are taking the GenAI power technology we have been using internally to our customers, and we launched Clearwater's intelligent console this month. Clearwater's success starts with disruptive technology. At our core, we believe that the level of complexity across the investing world is incredibly high,…

Thanks, Sandeep, and thank you all for joining us. On the heels of Q3's strong results, I'm happy to report robust results where we beat guidance on the top and bottom lines for both Q4 and the full year 2023. Full-year revenue grew at 21% year-over-year while expanding margin with Q4 EBITDA margin at 30.3% and full-year EBITDA margin at 28.8%, which was higher than the prior year's full-year EBITDA margin by 200 basis points. At our Investor Day, we announced our intent to expand EBITDA margin by 200 basis points in 2024 and by another 200 basis points in 2025. We expect to over-deliver on this margin expansion by delivering over 31% EBITDA margin for the full year 2024. Now turning to revenue in the quarter and full year 2023 results. In 2023, we're proud to have delivered year-over-year revenue growth of 21.3% with full-year revenue of $368.2 million despite the challenging macro environment in the overall fintech industry. In Q4 2023, we delivered $99.0 million in revenue, which translates to 19.8% year-over-year revenue growth. In addition, our clients continue to remain with us with a world-class gross retention rate of 98%. This really reflects our best-in-class customer satisfaction. We have achieved this 98% gross retention for 19 out of the last 20 quarters. Our path to NRR 115 is based on our solid bedrock gross revenue retention. Although the 98% is so routine for us that it's not really newsworthy, these gross retention numbers are truly exceptional across any business. Our net revenue retention rate continued to remain healthy at 107 as of December 31, 2023, which is higher than last year's 106. Heading into 2024, we continue to be focused on our path towards NRR of 115 or beyond, through upsell of new products and modules to…

Thanks, Jim. I'm very excited about Clearwater's journey through the last 5 years, and we look forward with renewed confidence and determination. We are building a track record of setting goals and exceeding them. Each goal we set, we meet. We set out to be durable, we are. We set out to demonstrate growth, we have. We set out to drive improved gross margin, EBITDA, and cash flow, and we have done just that. And as we look to 2024, we're committed to continuing these successes. Thank you.

[Operator Instructions] The first question is from the line of Kevin McVeigh with UBS.

And congratulations on really just exceptional execution really across the board. Sandy, the leverage or Jim, in the R&D seems pretty special in terms of -- it sounds like you're allocating more based on the leverage. Is there any way to think about that in terms of how that translates to growth? I wanted to start there.

Kevin, thank you for the question. So I think the best way to think about that might be that 50% of our R&D capacity last year was devoted to moving to the public cloud, and that has been now completed. So we now are devoting 60% of capacity really on to innovation and growth. Now this is 5 programs. Two of those are already being run, but these 3 programs are new. But just like any other product innovation, we expect impact in 2024 in the second half and really a more substantial impact in 2025. But we feel like we have to make these investments. Investment in Prism is doing really well, investment in LPX and LPX Clarity and MLX is doing well. So we feel we have to have this pipeline of products if we're going to drive towards a sustained NRR of 115. And that's the holy grade. And so these investments are really for that purpose.

That's helpful. And then I know it's still relatively early, but have you seen any kind of behavioral changes in clients in terms of initiatives around GenAI, where they're looking for certain modules or leading into certain things more than others because it's so transformational that I wonder if there's anything you're seeing from a client perspective that you just kind of highlight, even though relatively early.

Yes. Kevin, look, I do completely, completely think that generative AI and machine learning together is fully transformative and disruptive. There is no question about that. Are the clients excited about it? Yes. Every time we roll out a feature or a functionality, clients are really happy to try to bat testing and provide input to our development teams. But when you think about what we are doing, Kevin, with GenAI, essentially are 3 things we could do. One is, if you allow clients to ask the question themselves, our teams don't even get the question. So this is what you refer to as client deflection. So the inquiries which come in or questions people have about the data, if they can answer a certain portion themselves, then obviously, those questions don't even come to us and therefore, you need less capacity to answer that. The second one is just our ability to respond to questions. So when you take an experienced client services person, they can respond in a certain fashion. But GenAI allows a much more junior person to also provide an answer of the similar level of expertise. And thirdly, because of GenAI, you can provide a faster and more comprehensive answer. So something which would take 3 or 4 back and forth with the client, you can now answer more comprehensively because GenAI sort of does that for you and says what the follow-on question is likely to be. So I do feel there is a lot of excitement, and you might have read, we took our internal product, if you will, and launched it last week for clients to use. And so look, the excitement is there. Our clients asking us proactively no. I think at this point, we are -- I think we have a strong position in the clients' minds about a company which is sort of leading it a little. So I don't think this is a position where the clients are pushing us. I think they look to us to innovate.

The next question is from the line of James Polsat with Morgan Stanley.

It's Mike Infante on for James. I just wanted to ask on the revenue outlook and particularly jump. I mean given the fact that we're now lapping jump, is the implication that jump was probably contributing a bit more to revenue than you initially had thought. And the reason I ask that question is because if I look at the release and Jim, you reiterated this about jump revenue growth sort of not meeting the threshold for RSU vesting. So just want to think about the pairing of those 2 dynamics. Any color there would be helpful.

Sure. This is Jim. So First of all, look at the guidance for Q1, and I would say that's a full apples-to-apples comparison, right? And so I think that that's an appropriate way to think about that as we think about it. As it relates to jump, jump did grow this year, we're very happy with how it performed. But as part of the acquisition process, we mutually agreed to ambitious growth targets for that business to achieve those performance share earnouts. And so they did not achieve that. And so that's the reflection in the equity. And I think the picture for the growth rate, just a Q1 stands for itself. Sandeep, would you like to add anything?

And maybe just a quick follow-up on that. Maybe just on some of the new product contributions. You obviously cited LTX MLS, Prism, et cetera. And the commentary about NRR sort of in that 106, 108 range is helpful. Is it fair to assume that like as you think about the go-to-market motion that in addition to sort of driving that NRO over time, that new product contribution is becoming a bit more impactful to the growth algorithm than it historically has been? Just any directional color there would be helpful.

Yes. Thank you, Michael. This is Sandeep. Look, I think that once we completed the movement of the public cloud, which was very late last year, that's when we launched these additional innovation programs. We obviously have experience with LPX and PRISM. And therefore, we expect them to have some impact in H2 of this year, but really a more robust impact in 2025. So I think Jim said in his comments that our current guidance assumes the 106 to 108 NRR. So really from that, you can see that we expect a marginal impact in 2024. But we also think that the growth from NRR108 to 115 is almost entirely made up of new products and services we can take to market. So we have a lot of high expectations also because these are not ideas we came up with. Many of these ideas were developed jointly with clients. So we feel pretty good about it, but we just don't expect in the current forecast and guide to be majorly impactful in 2024.

Next question is from the line of Alexei Gogolev with JPMorgan.

This is Eleanor Smith on for Alexei Gogolev. So for the first question, I was hoping to ask about the OMS and the PMS applications that GenAI fit. Are those still mostly products for European customers? And how is the traction buying into the United States?

This is Sandeep. So look, if you think about jump and just sort of step back and think about jump, we thought they would give us better presence in Europe than they have. But the other one was, would they expand our offering to the asset management industry, and frankly, they have. But the OMS PMS, like you pointed out, was a little bit more directed at North America. Because we have the clients who did not have an auto management system and a portfolio management system and jump was going to bring that in. So I think in Q4, we announced 2 different wins where you had the OMS PMS from Jump and the core leader platform working together and sold together to solve an end-to-end need of a client. So I think it's working exactly like we thought. Do we think -- would we have wanted it to be faster? Yes. But is it working like we thought it would work in the OMS insurance market? I think exactly so.

Got it. That makes a lot of sense. And for my second question, I wanted to ask around the net revenue retention rate. Obviously, there's always some noise and fluctuations there, but it's been going down for the past few quarters. I was wondering if there's anything to call out there.

Thanks, Ella. This is Jim. So I think there's nothing to call out there. If you recall, it just rounded to slightly to 109. So 108, 107 in that area, 1% here or there is there's any matter of reasons for that to change. The core kind of algorithm now is 98% gross retention, a couple of percent from price increases, a couple percent from asset additions and profitability at our clients, and a few percent in the existing products that we're selling today. Then you extend that algorithm to say, "Oh, how does that go from this level to the 115 that we see in the future?" And that is all around the product initiatives that Sandeep was describing, we think there's much more product to sell across our client base. And we're building it and jump is a great example of where we have bought items. As Sandeep says, it takes time. We're very impatient, and we would always like it to go faster. But I think we see the opportunity to really broaden our footprint within our existing clients in the insurance space as well as in the asset management space. But that's kind of the journey for 2024 and 2025 as these products come online.

Next question is from the line of Peter Heckmann with D.A.

I didn't hear as much sometimes I missed a lot of data there, but I didn't hear as much out of the Asia Pac regional market in the fourth quarter. Can you give us an update there and how you're kind of thinking about that in terms of contribution to total revenue in '24?

This is Sandeep. So look, I don't think we were clear and we should have been that Sean Akeroyd obviously joined us early this year, and he's based in Hong Kong. And he's obviously been in Hong Kong for several years, understands the market really well. And so we are looking, as we had said, I think, in Q3 and Q4 to make a real push in that industry -- in that market. And that is really driven by the success we have had with large insurers in that market. And so have we got a lot more deals there? No. Do we have a really high-quality pipeline there? Yes, we do. So I just think it is obviously a really small market for us right now, but we do expect that to sort of grow meaningfully this year itself. So that's the best, I think, on the APAC side. I think you're building a team with a senior executive at the ELT level sitting in Hong Kong. Jim, would you add anything to that?

I mean so thanks, Pete. Yes, I think, obviously, the commitment is there. We didn't mention anything specifically this quarter, but kind of when you look overall at 2023 versus 2022. The U.S. and North America grew faster in 2023 than it did in 2022. The EMEA market grew faster as well, and also faster than North America. And Asia grew fastest, albeit off of a very small base. And so kind for 2023, international revenue is going to be 18% of total revenue, but nice acceleration across all regions.

That's really helpful. And then if you could just maybe not necessarily a prediction, but how are you feeling about landing some of the additional kind of top 25 global insurance carriers in 2024? I know you've been working on some of those pretty hard.

Yes, we feel really good. I'm not sure I can say more than that, except to say we feel really, really good. I think clients who would not have talked to us 3 years back, continue to engage with us very constructively. We continue to make solid progress. So we feel really about our ability to go out and land large logos.

Okay. So we should just stay tuned.

Yes.

The next question is from the line of Rishi Jaluria with RBC.

Sandeep, I wanted to start maybe first, you're having good signs of success with jump. Obviously, more work to get done there. Maybe how would you -- how should we be thinking about your view of M&A helping you add more product functionality to kind of get that 4 points of uplift from spending that you've talked about historically? And then I've got a quick follow-up.

Yes, Rishi. Look, we are really serious about what we said at Investor Day. We think we have to be disciplined. It's got to work. M&A has to work more programmatically and it has to be something we can take back to our current customers. So when you put it in that construct, we thought we could do something off and on, but what we did was we went and hired and brought in Sean Akeroyd to the team. Sean has worked for a long time at market, which then became IHS Markit and then became S&P. And the growth in those 2 companies, if you will recall, was half organic and half inorganic. So they really honed the ability to do that. They know how to do that. And Sean brings just a wealth of experience, not necessarily in investment accounting, but in the other 3 bps. So he joined us. He's already really hard at work. And what we hope to do is more programmatically look at this where we buy assets, which we can take to our current client base. So we expect to be much more aggressive, if you will, in this year and the next few years as we try and attack that 3 bps organically also. So like we talked about these 5 programs, some of them as organic, but we also appreciate that we're not going to be able to build everything ourselves. So look, this is something we're excited about. We think you will hear more through 2024 and also 2025 and from that time on.

Got it. That's really helpful. Maybe a follow-up to that philosophically. So what has helped you historically against a lot of your legacy competitors has been people appreciate. It's a single platform, single pane of glass works together well, whereas a lot of your competitors have kind of a frank and stack where it's a bunch of different assets that aren't integrated. How do you avoid falling in the trap that a lot of your competitors have that has turned them into shared donors and allowed you to be a fair game?

Yes. No, I completely -- look, we are very, very thoughtful about that. But when you think about the technology stack, it revolves around the security master and the data flow. So if you create multiple security masters for all kinds of reasons, and you have 2 sets of data and 3 sets of data and 4 sets of data, then you go into this frank casino architecture you speak to, right? But if you did something where data goes out of the Clearwater platform, there are some business functions that get done, and it comes back to the Clearwater platform, then, of course, you haven't muddied the data, the security master, and the architecture. So yes, we have to be very thoughtful about it. Because once you go down that path, so then you do mode. So yes, so philosophically, I'm completely in agreement with you that we would have to be very thoughtful about the architecture. And it makes a big difference because we are single instance, multi-tenant, we are cloud data, all that matters. And so we expect us to be very careful with that.

Next question is from the line of Michael Turrin with Wells Fargo.

It's David on ground for Michael Turrin tonight. This $1 million-plus customer stat, which is great, 20% growth year-on-year. I'm curious just how much of it was new wins versus AUM growth versus cross-sell, a little bit of color there.

Thanks, David. This is Jim. So it was a nice combination of all of those and as well as one other factor, right, which is as we're onboarding clients and we might have a situation where we're charging them some rate during the onboarding and then they step up to be $1 million customers once they're fully live and on the platform. So it would be across all of those 3 vectors.

Okay. I appreciate that, Jim. And then any changes you're seeing in terms of pipeline conversion this quarter versus historical trends?

Yes. This is Sandeep. So look, our Q4 was good, albeit it was more heavily in December. So our booking was much heavier in December, which is not always the case. More often than not, you see spread out across Q4, it was very heavy in December. Our booking for the year was the highest it's ever been in our history. So the booking continues to grow nicely. Our pipeline, we saw pretty significant growth throughout the year. We ended the year with a significant growth in our pipeline. The sharpest increase, though, was in asset management, and we saw that in frankly, maybe a little bit aided by jump because we can now provide a more comprehensive solution, and you can provide the earlier solutions in asset management. Insurance, while answering another question, I also spoke about the very large clients or prospects, pardon me, who are now in the pipeline who frankly have never been in the pipeline before. So we feel like the pipeline grew robustly. We feel the booking was, like I said, the highest it's been in the company's history. And then the only other issue was new logos versus non-new logos, if you will. And if you go back, it was roughly half and half new logos versus none in 2023 versus 2022, the new logo contribution was just a little bit higher than it was in 2022. So no real material change in the distribution of the booking of the pipe, but just slightly higher on new logos.

Next question is from the line of Gabriela Borges with Goldman Sachs.

I know how convicted you are that Clearwater is a 20% plus and maybe even 25% plus normalized growth company. Help us understand the starting point for revenue guidance this year. I know you said guidance that you want to outperform on. But help us think about the overhang to revenue growth this year that's needing you to set an initial starting point that is below the 20% plus that I know you aspire to.

So Gabriela, it's a bit of the same story as last year, right? We guided and drove forward off of that guidance. As I recall last year, Q1 was lower than the full-year guide. And the feedback was, how are you going to ramp in the second half of the year. And we said, hey, we have these things coming on board and feel a lot of confidence about that, and that worked out pretty well. As Sandeep just mentioned, we were -- in Q4, the bookings were heavily in December versus throughout the whole quarter. And these are also large programs as well. And so when you start to look at those having just closed and looking at kind of the periods for when that client will go live and getting those implementations up and running, you just have to be thoughtful about the variety of outcomes that could occur as it relates to that. So I think we're -- we try and guide confidently. And so we thought about it in that sense. And in addition, but I think we also have to be prudent and deliver throughout the period.

The one data point I might add is -- one item I might add, Gabriela, is that if you look at ARR growth, through the end of 2022, it was 16.4%, and we delivered what we did in '23. At the end of last year, the ARR growth was 17.2%. So really 80 basis points better than how we entered 2023. Now you can't just take that one data point and sort of extrapolate all the way. But we feel like we're starting in a good spot. These large programs make us a little bit more cautious because they tend to be more lumpy, if you will. But did the business grow nicely, we think it did.

That's helpful color. And Jim, I want to follow up on your commentary on NRR and particularly the contributions that you can get from pricing. I believe in the prepared remarks, you made a couple of comments about AUM and the AUM trends for the business being favorable or at least more favorable than what they were in 2022. So help us understand, with the new pricing model that you implemented from 2022, are you now still seeing a benefit and a tailwind to your revenue growth from being able to do the AUM plus more nuanced pricing model because you now have AUM growing on the platform again of what may have been a more volatile 2022? In other words, can you underwrite pricing contributing more to the growth algorithm now than you could a year ago?

So the AUM component of growth. So you're right, Gabriela, in the Base Plus model, we do always have the upside from AUM growth. And obviously, we mitigated that on the downside through the Base Plus model, but have tried to maintain that on the upside going forward. And so we do have that optionality. When we think about what we're underwriting for growth, we don't think about market conditions changing in that way. But you are absolutely right, it was a significant headwind in 2022, and it was not in 2023. But we haven't contemplated any -- you could hypothesize that there could be rate changes that could change asset levels at some point in the future. We haven't taken a viewpoint on it, Gabriela, at this point. But it would be an opportunity should those occur.

Next question is from the line of Brian Schwartz with Oppenheimer.

Congratulations on a great year in 2023. I have one question. I just wanted to take a high-level question just about the macro and the demand environment. Maybe, Sandeep, from the customers that you're talking to and their appetite to invest more in your technologies and how you're thinking about budget growth from those customers. Does it feel like that is loosening up that appetite to spend compared to last quarter, the Q3 second half of last year? Jim, maybe it's just a high-level question asking the assumption underlying the macro and kind of end-market project growth with your 2024 guidance.

Jim, why don't I just start by saying that we were a little surprised with how much movement we got in December, not just a fact where we did not -- so it felt like something loosened up towards the end of last year. Do we continue to see that? I think we have reasonable expectations, but we don't see anything dramatically different. The macro and things like that. We simply just don't take a point of view because we think if anything, is likely to be positive to us, right? So when you think about even interest rates, we think if anything does happen there, we think it will be likely positive. So we don't build that into our model. Jim, would you comment on anything on the…

I would say that, Brian, we are pretty neutral vis-a-vis the overall macro environment because there are reasons to buy Clearwater when times are good and companies are going public, we add lots of clients. When a lot of our asset management clients are thinking of us as a way to create efficiency and scale. And so there's a lot of different reasons why clients vis-a-vis -- there are many, many different reasons why clients select Clearwater as it relates to the kind of overall macro environment, our sales team is pretty agile at modifying to the specific needs of those clients, which may be more impacted by the overall macro environment. And so I think we see an opportunity to continue to win share in any of those market conditions.

The next question is from the line of Dylan Becker with William Blair.

Gentlemen, appreciate it. Here, maybe Sandeep for you, there's been kind of a lot of evolution in the regulatory landscape and environment across kind of geographies here over the last several years. So I wonder how that evolution maybe plays into incremental emphasis from the customer base on data integrity, transparency around that reporting capability, and that kind of compounding complexity. Maybe how GenAI plays into that and what that can mean from a workflow perspective, not only from the reporting angle but also how that flows into compliance as well.

Yes. We love it. They absolutely love the complexity. I'm actually out in EDM right now, and we were speaking to the sales team. And every time regulations change or they become more complex, data quality becomes even more important. And if clients have a patchwork of legacy systems, it becomes really hard. And the clear water value proposition signs every time, regulation becomes more complex or you have new asset classes, alternative assets or people invest globally or people invest in different regions. So yes, I think the short answer is those are very high-quality impetus for us to go out and get clients to move to our platform. So we love it.

That makes a ton of sense. And then maybe to -- outside of reporting, obviously, risk management is key for some of your customer base, maybe in particularly insurance. They've seen some pressure in their models. But again, that risk management evolution maybe the reinsurance landscape, again, the adaptability there, to anything you guys are seeing in that particular end segment or in market? Yes. I think in my prepared remarks, we spoke about our reinsurer. So you're exactly right. Frankly, these 2 questions are exactly on the money because it is an issue. When you think about risk, there is a whole mathematical side of risk, which is there, but there's also the other side, which is your data in a consumable fashion by these risk models. So either of those 2 help us. And so I shouldn't say we like it. But the fact is that higher regulations are more complicated reporting needs and more complicated risk management. All of those help make the case for a movement to a Clearwater-like platform.

Next question is from the line of Yun Kim with Loop Capital Markets.

Okay. Great. I'll make it pretty quick. How should we think about sales capacity this year and the timing of the ramp? Any focus on ramping international sales capacity this year?

So we continue to make very significant investments both in Europe and in Asia Pacific. Behind the leadership of Keith, like we spoke about, and also Sean. So we expect to make significant investments, and we are making already significant investments in Europe and Asia because we do think we can accelerate growth in these markets. And I do think, like Jim pointed out, they have grown nicely. And we do continue to believe that there will be outsized growth in these markets in the years to come. So yes, we do continue to think that there are strong GTM investments. And that's why you have more moderated EBITDA forecasting because we believe we have to continue to invest in R&D, and we believe we have to continue to increase our investments in GTM. And because of the efficiency on our system, we feel we can do both of those things while delivering an improved EBITDA number, and we are guiding to 250 basis points this year. So we think you can do all 3 and really comes from the capabilities of the platform. I don't know, Jim, do you want to add something to that?

No, well said.

There are no additional questions waiting at this time. So I'll pass the call back to Sandeep for any closing remarks.

I just want to thank everyone for your continued interest in our company. We have spent another year, another year has gone by, and we remain really confident about what we can build here. And we really thank you for your indulgence and your questions here. Thank you.

That concludes the call. Thank you for joining. You may now disconnect your lines.