Clearwater Analytics Holdings, Inc.

Q3 2021 Earnings Conference Call

11/3/2021

spk00: Hello and welcome to the Clearwater Analytics third quarter earnings conference call. My name's Emma and I'll be your operator today. If you'd like to ask a question at the end of today's presentation, simply press star followed by one on your telephone keypad. If you wish to retract your question, please press star followed by two. It's now my pleasure to hand the call over to JR Ritchie, Head of Investor Relations, to begin. Please go ahead.
spk05: Thank you and welcome everyone to Clearwater Analytics' first ever earnings conference call, highlighting our results for the third quarter of 2021. We're excited to have so many new shareholders joining us today after our successful initial public offering in late September. Joining me in the call today are Sandeep Zahai, Chief Executive Officer, and Jim Cox, Chief Financial Officer. After their remarks, we open the call up to a question and answer session. I'd like to remind all participants that during this conference call, any forward-looking statements are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Expressions of future goals, including business outlook, expectations for future financial 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 items with the SEC. Actual results may differ 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 in our earnings press release. Lastly, all metrics discussed in this call are non-GAAP, unless otherwise noted. A reconciliation can be found in our earnings press release that is now posted on our investor relations website. With that, I'll turn the call over to our Chief Executive Officer, Sandeep Sahar.
spk04: Thank you, JR, and welcome, everyone, to Clearwater Analytics' third quarter financial results conference call, our first as a publicly traded company. I wanted to start by thanking all of you for your continued interest in Clearwater. We truly appreciate it. We are also excited and incredibly proud of the team and the company that we are building. From a modest beginning, the company has grown organically to more than 1,300 employees across 10 offices in seven countries. We have over 1,000 clients, and on a daily basis, we process over $5.6 trillion in assets on our platform. But I feel like we are just getting started. I wanted to start by laying out the five core pillars that represent Clearwater's business model and strategy. The first pillar is Clearwater's consistent, durable growth that we have successfully achieved over several years. We have a 100% recurring revenue model and have, over multiple years, achieved a consistent, analyzed recurring revenue growth of more than 20%. The company has world-class gross revenue retention rate of 98% for 11 consecutive quarters because we provide a very sticky solution that our clients use every day. We have a solid net revenue retention rate of approximately 110 with absolute room to expand. What drives this net retention is our ability to capitalize on land and expand opportunities with existing clients, client AUM growth, and modest pricing increase. The second pillar is a high-quality business and financial model that also has room to expand. A recurring revenue model and high gross retention provides stability and predictability to a business. Our non-GAAP gross margins are approximately 75%. It gives us room to continue making investments while generating reasonable EBITDA margins and free cash flow. We are committed to maintaining our technological leadership and expect to continue to make significant investments in R&D, which currently comprises approximately 25% of revenue. Third, Clearwater has a disruptive technology platform with deep competitive moats. Our SaaS-based platform in the cloud is free of the constraints faced by legacy technology solutions. On our platform, securities are modeled and processed one time and used by everyone who owns that security. Data connections are added one time and used by all with the rights to that data. The myriad industry-specific nuances and regulatory reports are set up one time and used by all, resulting in powerful network effects. Each client adds to the power of the platform, and the same single-instance multi-tenant platform is used across industries and with client organizations of all sizes. Every day, our platform delivers a comprehensive view of our client's investment portfolio that is multi-asset, multi-basis, and multi-currency. The fourth pillar of our strategy is our multiple drivers for continued future growth, which we have laid out in what we refer to as our three horizons. Simply put, Clearwater is a market disruptor in a competitive environment filled with legacy incumbents. We have relatively low market penetration in our core markets that can, over the next few years, sustain more than 20% top-line growth because we win approximately 80% of the time we write a proposal. We believe that we can build a $1 billion business given the $4.7 billion of total addressable market that we have identified in these core markets. Thus, in the short term, or Horizon 1, we are focused on deepening our relationship with existing clients, gaining market share within core markets and clients, and continuing to grow our business in Europe. In the medium term, what we refer to as Horizon 2, we expect to make investments that will secure wins in adjacent client and markets, and deliver adjacent solutions that will allow for growth acceleration in europe and asia we see these opportunities to add to the total addressable market with additional solutions to extend the technology lead as well as gain additional traction with governments pension funds and sovereign belch funds the longer term opportunities for horizon 3 include delivering insight for current and future trends of our platform from a growing data set of more than $5.6 trillion of assets which are processed on our platform. Additionally, while we have focused on a purely organic approach, we have flexibility financially from our recent IPO that will provide opportunities to explore M&A in an effort to accelerate growth. The fifth and final pillar is client focus, which is embedded in the DNA of our culture. Our Boise roots have infused the company with a compassionate, customer-first mindset and way of working that simply delights our clients. Our offering, which combines the platform and our people, improves the lives of our clients' operations and accounting teams, and radically simplifies the process of producing the information they need to run their business every day. Clearwater's world-class 60-plus Net Promoter Score reflects our clients' recognition of our differentiated client service. Turning to our clients, in the early days of Clearwater, We focused solely on corporate clients, helping finance and treasury departments run their investment accounting and reporting processes, and reconciling the investment data to a web-based platform, instead of through manual, labor-intensive spreadsheets. In 2012, we expanded our client base to also include insurance companies, and two years later, we added asset managers. We have continued to evolve the platform to serve the needs of various industries and deliver investment accounting, analytics, and regulatory compliance. So why are clients moving to our platform? Clients in our cold markets are facing growing challenges driven by low yield and an increasingly complex and evolving regulatory environment. This has led to them investing in increasingly complex assets and investing globally. Organizations are currently solving these challenges by buying asset-specific and region-specific solutions and then building massive data warehouses and hiring armies of people to run slow and error-prone processes. But there is an easy way. They want to radically simplify investment accounting and analytics using a purpose-built, single-instance, multi-tenant platform that addresses these challenges in a fundamentally different way. First, we start by going directly to the source of all of our client data, creating and enhancing the universal security master, that allows us to reconcile the data once every day, clearly and without duplication. We then run our reconciled data to a proprietary multi-asset accounting and analytics engine before presenting the output to our clients through a modern, customizable web portal. Our platform frees up our clients from the onerous burden of managing multiple legacy software products and supporting data feeds while also delighting the accounting and client service routines. The Clearwater platform also creates a network effect where every new client we add increases the security and asset coverage of our universal security master, further strengthening our ability to add client value. All of that said, Clearwater's mission is to be the world's most trusted and comprehensive technology platform for investment accounting and analytics. And we believe that we can leverage our technology to eventually revolutionize the broader world of investing. Now that I've set the stage for how Clearwater operates as a company and how we are positioning ourselves for future growth, let's turn to our third quarter 2021 financial results. They will achieve solid year-over-year and annualized recurring revenue growth. We achieve consistent margin, even with our investments in growth, and those investments are starting to show promising results. And we've signed multiple notable client wins, a few of which I'll highlight. Our recent client wins in North America demonstrate our ability to achieve consistent, reliable, and durable growths. New clients include several large asset management firms, a large number of large insurers and reinsurers, corporations spanning multiple industries, including pharmaceuticals, energy, high-tech, and consumer goods, and a large West Coast-based city and county government. We also recently expanded into the Real Estate Investment Trust, the REIT market, and signed our first weak client, Chimera Investment Corporation. Chimera chose the Clearwater platform to replace the legacy system, manage the accounting of their complex assets, provide data reconciliation and validation, and simplify regulatory reporting. As I mentioned before, we are a disruptive SaaS-based technology platform that addresses industry-specific nuances and is used across industries regardless of organization size or number of assets under management. In the third quarter, we added 82-year-old global investment management firm Neuberger Berman as a new client because the firm was seeking a platform to replace its legacy systems with one that could provide a single source of accurate and transparent data flexible and integrated reporting, and automation. Clearwater is currently onboarding Neuberger's, Berman's OCIO, Outsource Chief Investment Office and Trust, and Wealth Business Labs. Clearwater is a technology company, so we invest 25% of our revenues into R&D. This means that we continue to innovate our platform and product offerings with the latest machine learning and AI tools. A key focus area is talent engagement. In the last 18 months, we have completed the build-out of a world-class management team who collectively bring not just tremendous experience to their roles, but also incredible passion. In the third quarter, we added two incredible technology leaders to round out our teams. Jody Koscianski, our president of product and technology, spent most of his 25 years building and running the product group at one of our largest competitors. And Shomit Das joined us as the chief technology officer, bringing his experience in prior CTO and senior engineering roles at PayPal, Zenefits, and Capital One Auto Finance. With international expansion being one of the key drivers for our growth acceleration in the third quarter, We built this momentum through key wins with one of the fastest-growing insurance firms across Asia, a first seven-figure Asia-Pacific client, in addition to a European insurer and reinsurer, a UK-based property and casualty insurer, and others. As an example of our deeply embedded client focus, we held Clearwater's annual North American User Conference, Clearwater Connect, last week. The second year in a row, it's a virtual conference due to COVID. Our clients and prospects attended sessions that covered trending topics important to our clients, including ESG investing, our insurance client survey findings, LIBOR, and platform-specific updates. We plan to hold our European user conference in the first quarter of 2022. Another example of how we want to leverage our technology to revolutionize the broader world of investing, we cemented our partnership with One United Bank, the largest black-owned bank in the U.S. in Q3. Under this partnership, Sharewater has enhanced the interface on our SaaS platform, which now allows Treasury departments within our large corporate client base to easily track and manage their deposits in minority-owned banks, who in turn provide deeded capital to minority communities. This partnership has the potential to help as many as 500 corporations invest in minority communities. We continue to execute on our five pillars of growth and are very pleased with the progress we have made in this last quarter. And now to provide more color and details on this quarter's performance, I'll hand it over to our Chief Financial Officer, Jim Cox.
spk11: Thanks, Sandeep, and thank all of you for joining us on our first earnings conference call. We were very excited to complete our initial public offering last quarter, and I want to thank my team and truly the dozens of others who helped us reach this milestone. As for my remarks today, I'll start with an overview of the business and financial model, review our financial results for the third quarter, and finally wrap up with guidance for the fourth quarter and full year 2021. Our business model is simple, consisting of 100% recurring revenue model, with visibility enabled by our consistently high gross revenue retention. This combination creates an incredibly durable business operating at scale, which allows us to reinvest back into our platform and our team to truly drive long-term growth. Our mission-critical SaaS solution and focus on delighting our clients has allowed us to legacy software as well as manual processes, while our superior client service team keeps clients happy, leading to a consistent gross revenue retention rate of 98% in each and every one of the last 11 quarters. Our unique platform, built over many years, leverages proprietary technology to manage and reconcile our clients' investment data with limited human intervention, allowing us to generate approximately 75% non-GAAP gross margin. These strong gross margins provide us with the opportunity to consistently invest in our solution with approximately 25% of revenue invested back into research and development. We believe we have the best solution and our significant investment in R&D only deepens our competitive mode. A strong margin profile and confidence in our offering from our 80% win rate when we write a proposal has led us to increase our investment in our operations and go-to-market capabilities in recent quarters to enable growth both domestically and globally. while still maintaining compelling adjusted EBITDA markets. We operate in a $10.1 billion total addressable market with our core markets of corporations, insurance companies, and asset managers in North America and Europe comprising $4.7 billion in TAM. This large and diverse TAM provides a long runway to continue consistent growth. Our sales cycle varies across the various market verticals and range from one to two months for smaller clients to a year for the largest and more complex. We typically sign monthly evergreen contracts with our clients using a basis point pricing model, which allows us to grow our revenues as our clients grow their assets. In Q3, we report net revenue retention rates of 111% as our clients continue to add assets to the platform. In summary, we believe our model aligns Clearwater's interests with that of our clients, while also enabling our land and expense strategy once we have established an initial relationship. The predictable nature of our revenue, driven by our high revenue retention rate and strong gross margins, allows us to confidently invest back into the business, helping to lead to long-term, durable growth and ultimately compelling returns for our investors. Before detailing our core financial results, I'll first address two items impacting the year-over-year comparability of our GAAP results. First, you will notice that we recorded a $10.3 million loss on the extinguishment of debt in the third quarter, as we used some of the proceeds from our initial public offering to retire our existing debt. while at the same time securing $55 million in new debt financing at more attractive interest rates. Next, you'll note we recorded $7.7 million of equity-based compensation expense in the third quarter of 2021, representing a $6 million increase over the third quarter of 2020. The increase in equity-based compensation primarily due to increased equity grant activity and the increase in Grant State fair value, as well as the modification of equity award in connection with our IPO. Next, I want to take one minute on earnings per share. Given our structure and the restructuring that occurred in connection with our IPO, our Q3 gap loss per share of 5 cents reflects only the last seven days of the quarter, or the period between our IPO and September 30th. And that period is impacted by the $10 million law on extinguishment of debt in connection with the IPO. Given the shortened period, we did not provide a non-GAAP EPS. In Q4 and going forward, we expect to provide both GAAP and non-GAAP EPS. Moving to our third quarter financial results, please note that our results will be discussed on a non-GAAP or adjusted basis unless otherwise noted. Revenue in the third quarter was $64.5 million, up 21% year-over-year, as the strong sales momentum we experienced in the first half of the year continued into the third quarter. Year-to-date, revenue has grown 23%. As of September 30, 2021, Annualized recurring revenue, or ARR, reached $257 million, a $12 million increase over June 30, 2021, and a 20% increase year-over-year. As I mentioned before, gross revenue retention was strong at 98%, marking the 11th consecutive quarter we reported gross revenue retention of 98%. The net revenue retention rate was a healthy 111%, up 220 basis points from the third quarter of 2020. We see our clients continue to grow their business using the Clearwater platform. Gross profit in the quarter was $48.1 million and gross margin came in at 74.5%. As we are investing to accelerate the onboarding of new clients close to date, and support the strong pipeline of new client opportunities we see in Q4. Although the whole team remains committed to increasing gross margins over the long term, we expect to continue to invest in this area through the first quarter of 2022 in anticipation of the continued strong new client demand across the globe. Specifically, we've added 20 resources in Eastern Europe with French and German language skills. to support our clients in these new markets. Notwithstanding the increased investment, we continue to target steady state gross margins for new clients at over 80 percent over the long term. Research and development expenses in the quarter were $16 million, or 24.8 percent of revenue, in line with our expectations. We're targeting our investment in R&D at 25 percent of revenue over the coming quarter, which we believe will allow us to continue to drive growth in our core market while also delivering on the adjacent growth opportunity, as Sandeep mentioned earlier in his remarks. We're hiring, so if you know smart developers, send them our way. Sales and marketing expense in the quarter was $8.4 million, or 13% of revenue, up 480 basis points year over year. We continue to invest heavily in our go-to-market capabilities, both domestically and internationally. And we are incredibly excited by the progress these new teams are making and expect to continue to increase our investment in this area heading into early 2022, with a heavy emphasis in further building out our presence internationally. General and administrative expenses in the quarter were $6.6 million. for 10.2% of revenue, up 280 basis points year over year, as we've now started to absorb the incremental cost of being a public company. We expect that general and administrative expenses will remain elevated as a percentage of revenue in the short term as we annualize the impact of this public company cost. However, we do expect to be able to scale our back office functions over time, providing operating leverage. to the business in the longer term. Adjusted EBITDA, or earnings before interest, taxes, depreciation, and amortization, in the quarter was $17.1 million, or 26.5 percent of revenue, down $1.9 million from the third quarter of 2020, primarily due to the increased investments in operations and sales and marketing, in addition to incremental public company costs. Turning now to the balance sheet, we ended the quarter with over $245 million in cash and cash equivalents and just under $54 million in debt, as we received IPO proceeds net of the underwriter discounted commission of $582 million in the quarter. Focusing now on guidance for the fourth quarter of 2021, we expect revenues to be in the range of $66 million to $67 million. representing 21 to 22% year-over-year growth from the fourth quarter of 2020. This raises total revenue guidance for the year to $248.3 million to $249.3 million, or approximately 22% year-over-year growth. We expect the fourth quarter adjusted EBITDA margin to be approximately 26%. as we continue to make investments while also absorbing incremental public company costs. To summarize, we're pleased with the performance of the business in the third quarter. We're delivering unique value to our clients while continuing to profitably grow our business. As I mentioned earlier, we operate in a large addressable market in which our penetration is still very low. We really believe we're in the early stages of a long growth path, and that the new business momentum we are seeing today, combined with the investments we are making, will lead to long-term, durable, and profitable growth. With that, I'll turn it over to Pandeep to provide some closing thoughts.
spk04: Thank you, Jim. As I said at the beginning of the call, I'm incredibly proud of what Clearwater has become, And I'm even more excited about our future. The company's commencement of trading on the New York Stock Exchange on September 24th, commemorated by our executive team ringing the opening bell, was an amazing milestone for everyone in the company. Our mission to be the world's most trusted and comprehensive technology platform for investment accounting and analytics is our guiding principle. Our third quarter financial performance, along with the explanation of our business model and growth strategy, should demonstrate to you how committed we are to achieving this mission. Speaking for both Jim and I, it's our honor to share the Clearwater story with you, and we look forward to discussing our performance and strategy for the company. Now let me turn it over to the operator for questions.
spk00: Thank you. If you would like to ask a question, you can do so by pressing star followed by one on your telephone keypad. Our first question today comes from Jackson Ada from JP Morgan. Please go ahead, Jackson. Your line is now open.
spk02: All right. Thanks for taking my questions, guys, and welcome to the public markets.
spk11: The first question I have is maybe bookings, is there any kind of seasonality we should be expecting in terms of maybe a net new ARR in a December quarter, virtually the September quarter versus the March quarter that we should be thinking about as we head toward the end of the year?
spk04: Yeah, thank you, Jackson. Go ahead, Kandi. Go ahead.
spk11: Go ahead, Kandi. Sure. Jackson, thanks for the question. So there's a couple mechanisms. So one, like typical enterprise software companies, there is more kind of contract signing in the fourth quarter. However, when you think about how our ARR rolls out, not only are we signing those contracts, but we're also onboarding those customers throughout that period of time. So that trend is abated somewhat because of that. But we feel really great about the pipeline we have going into the fourth quarter, and we're excited to execute against it.
spk02: Okay, great. And then somebody mentioned, or maybe it was you, Jim, I can't remember, on the seven-figure APAC,
spk11: I think it was the first one in the region. That seems to be ahead of schedule. I don't remember really thinking about the APAC region just yet becoming material. So I'm just curious, you know, what kind of resources and staffing do you actually have there in order to serve customers in that region?
spk04: Yeah, thank you for the question, Jackson. A little ahead of schedule would actually be right. Yes, we have a small presence in Singapore, and we expected them to be able to get some initial traction. But we are delighted that we got this seven figure client from a really fast growing insurance company. So yes, we seem to be a little bit ahead of schedule. And we will continue to build up that office a little bit faster than we thought.
spk10: Okay, great. That makes sense.
spk11: Thank you.
spk00: Thank you. Our next question today comes from Michael Turin from Wells Fargo. Please go ahead, Michael. Your line is now open.
spk07: Hey there. Thanks. Appreciate you taking the question and congrats on the first quarter as a public company. The retention rate keeps creeping up here. You're at 111% in Q3. Can you speak to what's driving that steady improvement? And we get questions on market exposure, given you mentioned more than $5.5 trillion in AUM on the platform. Can you just help those newer to the story frame out some of the reasons your model has proven more resilient, even in a volatile environment? Thank you.
spk11: Sure. Thanks so much, Michael. So we do have that AUM-based pricing model. It's a gentle tailwind to our pricing. And just to hit the kind of market volatility question straight on the head, 86% of the assets on our platform are fixed income and structured products. So they just don't have that equity market volatility. We just don't see that in our business. Now, look, we're really pleased to see some momentum. Over the last few quarters, we've been 109, 110. We're up to 111 in this quarter. One quarter does not a trend make. But when you look at some of the underlying drivers of what's driving that kind of modest expansion, 220 basis points, that's what's really interesting and exciting. And that's where we really have to focus as a business to think about strategically over the long run how we continue to grow that and expand it even further. Let me give you two examples that are really the majority of those drivers. One is with what we call our strategic asset management clients. These are our global asset managers that are using us. And we're continuing to see the ability to land and expand with those clients. As they grow their business, they're looking to us to grow their business. And that's consistently been the case in the strategic asset management market for us. Another example, which is more nascent, and we're encouraged by it, but again, we need to continue to execute to be able to continue to drive this expansion. But I'll use an example of a large insurance company that has as a fundamental driver of their growth to go out and acquire other businesses. And we have multiple large insurers on our platform who are able to really execute upon that expansion strategy. One, as we started onboarding, the client had 70 billion in assets by the time we finished had over 120 billion. And so when I think about kind of, well, if I want to double my business, you know, as a CFO, I worry about, well, how am I going to do that? And so, What Clearwater allows that CFO to do is worry about it's on, you know, it's on Clearwater's shoulders to burden that. And so that enables one to be really free to think about their, you know, strategic options there. And then the last thing I think I'll say is, you know, underpinning that 111, it's easy to get to 111 when you're always at 98 with that gross retention. That's a really, you know, world-class number. And so driving to that helps there.
spk04: If I could just add to that, that, you know, just, you know, testimony to the power of the platform a little bit, you know, this client Jim was talking about who went from 70 billion to 120 billion, the onboarding time didn't change at all. platform just simply absorbed it and moved on and that is the value i think we bring our clients that when they grow it's fairly effortless right and that is you know the single instance multi-tenancy i'm sure we have talked to you about that's very helpful detail thank you both
spk00: Our next question today comes from Kevin from Credit Suisse. Please go ahead, Kevin. Your line is now open.
spk10: Great. Thank you so much, and let me add my congratulations as well. I wanted to talk a little bit about the data insights as that scales. There's a certain level of asset. I mean, at $5.6 trillion, what does that need to be to really drive the incremental data insights across the business? Or is it a function of client duration, just as we think about incremental growth drivers beyond the business, more around data insights?
spk04: Yeah. Thank you, Kevin, for your question. So firstly, that's the business we are in, right? So we are driving insights for clients today. Every day we would come out and talk to them about how the portfolios are doing, what the risk is, the compliance issues are. But yes, data insights on a broader scale, frankly, we do for clients today, and we hope to do it across clients over time. So this is nothing we derive any revenue from, but we're investing R&D dollars in trying to build that capability. sort of over the next several years. But we do think, Kevin, of that as a horizon three day. So there's nothing we're expecting to do or sort of get meaningful revenue from in 22 or 23. But over time, we see that as a really, really powerful value we could bring.
spk10: That's helpful. And then just, you talked about kind of complexity versus geography. How do we think about that in terms of the incremental client needs? Is it the complexity versus the geographical reach? Is that evenly split or, you know, just from a client perspective in the scale as you scale up across your existing client base?
spk04: I think that when you think about complexity in the North American market, I don't think there is, you know, we continue to see a gradual increase in complexity, and frankly have seen it until into the last several years. So I expect that to continue to grow only because the client complex assets continues to grow quicker than the private assets. But as we grow out in Europe and now in Asia, that is different. because there are more asset classes there which are unique to those markets. There's also some data sources which are unique to that market. And we didn't want to do that because what that does is makes us a comprehensive provider. So you could have assets, frankly, around the world, and we would be able to report on that. We would be able to get the regulatory reporting on it. So we want to do that, but that does add more work, at least in the short term. If I can just also add that if you go back several years here, we had the same issue here in North America. And now, as you think about North America, we have most of the data connections, we have most of the reporting needs taken care of, and we are continuing to bring that out in Europe. Asia is just newer.
spk10: Thank you very much.
spk04: Thank you.
spk00: Our next question today comes from James Fawcett from Morgan Stanley. Please go ahead, James. Your line is now open.
spk03: Hey, good afternoon, Sandy. Good afternoon, Jim. I wanted to ask a couple of follow-up questions. First, back on the retention rate, like obviously great performance there. You know, And you gave a lot of reasons for why your retention rate should be so good. I'm wondering, just as a quick follow-up, should we expect that level of retention to continue to improve or even at least remain at these levels? And what are the things that maybe from a seasonal basis or other factors could move it around a little bit?
spk11: Yeah. Thanks, James. This is Jim. so you know as you've noticed there's no seasonality to our gross retention right the last 11 quarters 98 percent um when you think about so then let me also say long term right and and and i do mean this like strategically and in the long term you know recall we're we're effectively you know a single product company at this point So as you think about offering more to your clients and expanding and thinking about modularizing the offering, those are all rational, reasonable reasons to see that retention rate grow over time. If we look at it kind of over the next few quarters or so, I think that there are you know, there are tailwinds around driving asset aggregation as well. And I don't, I can't think of specific seasonality around, you know, why do insurance companies choose to do an M&A? Are they doing it in a, in Q1, Q2, Q3, Q4? I don't, I don't see that much difference. And so I see that that trend kind of is pretty, pretty normal throughout the, those throughout the calendar year. I think it comes down to how could that accelerate in the short term. It could be driven by the timing of some price increases, which are typically annualized based on when a client has signed their initial contract. If you assume contracts grow a little bit in the fourth quarter. There's relatively more new contracts signed in the fourth quarter than there are in the other three. There could be a slight tailwind there.
spk03: Got it, got it. I appreciate that, Jim. And then, you know, yeah, sorry to interrupt. Go ahead.
spk04: No, no, please. Oh, no, I was just going to ask a question.
spk05: The delay is catching us. Go ahead. Yeah, sorry.
spk02: I think I'm going to – I sound like I'm in a trash bin. And Sandeep's in another room.
spk11: Sorry.
spk04: Go ahead, Sandeep.
spk10: Please.
spk04: Well, all I was going to add was, James, that when you think about how the company has traditionally done this is it's had a single price for the entire platform. So if we got a client four years back, the price was what the price was. But we've obviously continued to add whole new set of functionality you know we spent that much money on r d so we obviously develop it but we just have never you know structured we thought about modularization of a platform and what you sell differently and those are avenues about of how you could structurally improve the net retention rate if that makes sense it does it does and i want to go back you know you were talking about um kind of the benefits
spk03: and as you expand internationally and incorporating other types of assets as well as data sources and really how that benefits everybody. And I think that explanation is quite compelling. I'm wondering if you're also seeing any notable wins in other verticals or adjacent markets yet, like state and local governments or those kinds of things, or how we should think about kind of the expansion beyond just international into some nearby opportunities, even if it's in different types of organizations?
spk04: Yeah, you know, that we continue to see. One thing which is true about the platform is it's the same platform, right? So you obviously know that. It's single instant policy identity. But is that applicable to local and state government? Absolutely. Now, you have to build a little bit to think about reporting needs which are specific to a state government or a local government? Yes. But that's reasonably easy. We did sell our first REIT this quarter. So that was interesting, is that we sold to a REIT. We found that our solution is fully capable of meeting that need. So those are two markets where we should continue to see growth. Obviously, we think about pensions and sovereign funds. as a Horizon 2 opportunity. And it's not like a platform can't address it today. It's just that we just don't have the same ability to go to the market, win 80% of the time. So that's where you sort of think about these markets as a sort of Horizon 2, compared to a Horizon 1 sort of core markets, which is insurance, asset management, and corporations, right? Where, frankly, when 80% of the time. And so that's how we see it. But those new markets are definitely interesting in the North American sense.
spk03: That's great, Khaled. Thank you very much.
spk10: Thank you. Thank you.
spk00: Our next question today comes from Brian Schwartz from Oppenheimer and Company. Please go ahead, Brian. Your line is now open.
spk09: Oh, good. Thank you very much. Hey, congratulations, Sandeep and Jim. Really a great quarter here. I have two questions. The first question I wanted to follow up on was the first question about the Q4 pipeline seasonality. You signed up a lot of big deals here this quarter. You talked about the one in Asia, the one in Neuberger. Can you shed any light in terms of how the big opportunities are looking in the pipeline here for Q4. I just want to make sure you didn't drain it here in Q3, and then I have a follow-up.
spk04: Yeah, you know, so, you know, Brian, thank you for that question here. We do continue to see a really good build-out of the pipeline. So when you think about the pipeline, obviously we have invested over the last two quarters pretty significantly in sales and marketing, right? So when you think about a pipeline, firstly, insurance and asset management in North America continues to power that. We see lots of traction in Europe. A bunch of traction in continental Europe, too. And so we do see a really robust pipeline. And as Jim mentioned, we're trying to get the operations ready to make sure we are effective in onboarding them as they come in, right? I think also Jim said, I think the seasonality isn't quite there. Is Q4 a little bit bigger? Often, but that's true for all enterprise software companies, I guess, right? But it's not like it shows up in the era right away because you have to onboard them. Jim, would you add anything to that?
spk11: Yeah, I think, you know, just to be blunt, you know, we did not drain the pipe, right? We feel, you know, that's why we're making the investments that we're making in operation. And if you think about it, we made investments in the leadership in sales and marketing, and, you know, we've built out those teams. But, you know, that's taken the whole year to do that. So you understand how it takes time for salespeople to become productive and build out teams. And so, you know, we're optimistic.
spk09: I appreciate that color. And then the one follow-up I had, it's a newer product, but I was wondering if you can give any update on the Prism Analytics. I'm just kind of curious if that was part of any of these big deals that you won in the quarter and just how the reception has been for that newer technology. Thanks.
spk04: This is Sandeep, Brian. You know, Prism is so exciting. I think it's so exciting because This whole open architecture allows us to go after a market which would have taken longer for us to go out and address. We have three clients live on it, which are significant. We have a pipeline which just continues to grow there, but our ability to position this in multiple industries is really interesting. When we had talked to you earlier, we had talked about this being a big mover in the asset management world. But really what we're also finding is it has a lot of receptivity in the insurance sector. And the reason for that is the larger insurers have other accounting engines, and they can't replace all of them at the same time. And so that conversation, being able to have those conversations now, I think is very, very helpful. So they don't always count as just prism deals as much as how do you bring the pipeline forward and build a pipeline you may have had trouble building otherwise.
spk09: Thank you for taking my questions this afternoon.
spk04: Thank you.
spk00: Our next question today comes from Gabriela Borges from Goldman Sachs. Please go ahead, Gabriela. Your line is now open.
spk01: Good afternoon. Thanks for taking the question and congrats on the IPO and the quarter. Wendy, if I wanted to follow up on some of the commentary provided on the asset management space in North America in particular. Could you share with us a little bit of detail on what you're seeing with the size of the deals relative to what you typically see in insurance and corporate? And then any color on the competitive environment, what that looks like today.
spk04: Yeah, thank you, Gabrielle. That's the question here. So it is different, right? So when you think about asset management, it's more land and expand than an insurance company. So a lot of the net revenue retention number comes from there. But I've got to say that our asset management business just continues to do really well, especially in North America. We obviously had announced a deal out in the UK earlier on asset management. So we continue to see good growth in that. And the insurance clients are obviously more one time. Normally, unless you have acquisitions, as Jim laid out, What else? Would you add anything else to that? You know, do you want to talk about? Yeah, that's it.
spk11: You know, Gabriella, we talk about how, you know, in general, we're getting the entire book, right, at the insurance company, whereas in the asset management space, we're nibbling it, to use the Neuberger-Berman example, right? It's OCIO and wealth pieces of their business, right, and winning. Now, those are Significant, you know, because we have an AUM based, it's all driven by kind of the total AUM. So not to say that that's a small piece of business by any stretch. But the point is in typical fashion, once we're in at a firm like that, we will work together. And we have some other example asset management clients where they brought us in for one piece of their business. It's working well. They're bringing us into the next piece. Those are typically, you know, they are six-figure deals, but they wouldn't be, you know, the seven-figure deals that you would typically get at a large insurance company.
spk01: That makes sense. And then the follow-up, Jim, you mentioned equity market volatility earlier and having very little exposure there. How about on the fixed income side? How do we think about the potential risk to AUM in a rising rates environment?
spk11: Yeah, so insurance companies are doing book accounting, right, as well. So I think they're pretty limited, I think, on the fixed income side. you know, that's possible. Also, remember, we're managing our whole book. So as they hedge, you know, those things are playing out as well within our AUM base.
spk04: Yeah, and I would just add to that. When you think about who our clients are, Their business really more often than not is to make sure they protect the current asset pool and then grow it. So it's like almost in their minds, it's a two-step process. It's not like they're putting assets out there which they wanted to grow 20% today and come down 30% tomorrow. So just the nature of investing keeps it, ensures that it's not volatile. Now, we went back and stress tested for... literally many, many, many quarters on end just to see if there was some volatility. And frankly, Jim's confidence about equity market comes from what happened a year back, a year and a half back. And with all of that disruption in the equity markets, you know, the assets on our platform, like to like, I think moved one or two percent. And so we now have a different degree of confidence, if you will, on on the lack of volatility on our platform.
spk01: Appreciate the call. Thank you.
spk04: Thank you.
spk00: Our next question today comes from Camille from William Blair. Please go ahead, Camille. Your line is now open.
spk02: Hey, guys. It's Bhavan. Hey, from Deepay Gym. Sorry, Camille had me in. We had a couple earnings. But anyway, congratulations. Nice job there. I guess I want to touch a little bit on your CTO here. How should we think about – I know it's early, but as you think about innovation, you think about expansion, some of these more complex assets, maybe crypto, maybe other things. How should we think about what his priorities are? And you've talked about sort of investing in sales and marketing, but how do you think about investing in R&D? and you've obviously discussed this with him, but not to understand some of these priorities.
spk04: Yeah, thank you. Thank you, Bob. So, I think if we think about our platform, does it do well today for our current clients? I think most clients would say yes, and resoundingly so. But then the question is, as you grow globally and you scale faster, right? Having somebody or show its background, you know, who's very involved with PayPal, for example, which scaled dramatically, right, in the years he was back. And we think he brings the program Jody Koscianski talks about a lot is 10x, right? How do you take a platform today and architect it such that it is capable of executing 10x in terms of transaction load and everything else? So that is one big one big focus is 10X. The second one is around growth globally. So a lot of energy going into thinking about how do we build software, which is completely at home in every part of the world, right? And that is, I think there's a lot of growth-led initiatives he's focusing on. And the third one is how do we more disruptively process things like private assets and complex assets? I think we do a good job as good as others, but how do we disruptively do that? Those are the three things I think to wake up in the morning and think about. That's what we are focused on. I did want to quickly add also that actually our needs spending has continued to go up. If you look at what it was last year and the year before that. We are very focused on we need to protect and grow our technological lead. Those people have the background, if you will, of having built systems like that. Does that make sense, Bob?
spk02: Yeah, no, I think it's fair. I think especially with the 3,000-plus data source connections in a particular mode, I think that makes a lot of sense. I guess my other question I had was, you know, you haven't touched on this today, but we did on, obviously, the roadshow earlier. but just about how you're leveraging partner channels, right, to enter, especially some of the new markets. Certainly in Europe, you know, you rely on channel pretty heavily, custodian partnerships, et cetera, but maybe an update on how those are progressing and sort of, you know, is there a chance to have the channel be more of a partner where the sales and marketing spend maybe in 22 goes up, but sort of maybe in 22, 24, 25 starts to trend down as a channel absorbs some of that go-to-market content whether it's Europe, Asia, or even the U.S. I'd love to get sort of a sense on how you think about that and how you're investing in that.
spk04: No, I completely agree, completely agree that in the European market context, those channels make a difference. Now, the good news is we've been getting all this growth without that channel, so can there be a true accelerator of growth rather than supplanting the current pipeline? But it does take time. I think if you looked at the progress we made over the last quarter, I think it's going really well. But the problem with this is it takes time. These partnerships and channels take time and you cannot sort of bank on them till they're fully up and running. But we have a dedicated team which is doing that now, which does just this, channels and partnerships. Traditionally, though, we haven't ever used it, right? And so it's a question of building that muscle. And we have dedicated teams actually out in Europe and in Boston sort of addressing this. But it's not like you can look at a pipe today, or not pipe, any of the closed deals and say, oh, those have come through the channel. So we're very committed to building out the channel, but this is not part of our current booking. We see this as an excellent way to do it.
spk02: Got it. That was helpful. Thank you, guys. Thanks for taking my questions, and really nice job again.
spk10: Thanks. Thank you. Thank you.
spk00: Our next question today comes from Rishi Jaluria from RBC. Please go ahead, Rishi. Your line is now open.
spk08: Hey, guys, thanks so much for taking my questions and nice to see a pretty solid quarter out the gate. Why don't we go back and maybe drill a bit deeper into thinking about contribution from new clients versus expansion, you know, and how we should be thinking about that mix going forward. And alongside that, how should we expect the pace of client ads to trend over the next several quarters? And then I've got to follow up.
spk04: Sure. Rishi, thank you for the question here. I think, Rishi, we continue to win this 80%. In our core markets, we will win 80% of the time when you write a proposal. So we continue to see that. Is our client satisfaction score really high? Yes, it is. onboard a large number of clients and logos yes we do right now i did want to just clarify that when you look at insurance companies a lot of the growth is from pure new logos when you look at the asset managers it is more divided only because asset managers have landed expand and they also have new logos in the corporate market ratio it's almost all new logos So we do generate a whole lot of new logos, and one measure would be the NRR, the net retention rate. I think those are from current clients, and the rest of the growth is all from new logos.
spk08: Got it. That's really helpful, Steve. I appreciate that. Yes, absolutely. And then the other question I just wanted to ask, thinking maybe a little bit more long-term, you know, look, you've obviously grown to this size almost entirely organically, if not entirely organically. As you think, though, about expanding the platform and functionality, how do you think about you know, future opportunities to do so, you know, via M&A and totally understanding that if you do that, you'd fully integrate the assets and kind of keep that single platform versus how some of your competitors approach M&A. But maybe can you give us a sense for just how you're thinking about M&A as a potential lever to accelerate R&D and accelerate that roadmap?
spk04: Absolutely. So, look, firstly, we have a really high bar, right? We have a good company. It sort of works. We can We can grow at this pace and frankly grow on an accelerated basis using things like channels, using things like pensions and the other markets we talked about. So our bar is pretty high. But then when you think about it, what would we look for? So I can give you some ideas on that. The first one is accelerated adoption in our core markets. So obviously if we build out in Europe, it takes time to hire the team, get them onboarded, blah, blah, blah. It takes time. Same thing with Asia. So if there was a way to accelerate adoption in our core markets, that would be a really good fit for M&A. More specifically, of course, growth in Europe and Asia. The third one would be growth in adjacent capabilities. So if there's more things in the REST space or in the reg reporting space, things of that ilk, that would be interesting. And the fourth item would be growth in adjacent industries, which are part of Horizon 2. So if there was a way to pull forward Horizon 2 and make it a Horizon 1, like pensions or things like that, then, yes, that would be the other one which would be interesting. So that's sort of a list, though, Rishi. We literally can go down that list and say, does it hit 1, 2, 3, 4, or 5, in which case it is interesting. But we do want to do it. The company has not had a history of doing M&A, and we think we could continue to do it organically, but really there's no reason not to accelerate adoption. So we want to think about it, and we are working on it quite diligently as we speak here. That's really helpful.
spk08: Thank you so much.
spk00: Our final question today comes from Arvind Ramnani from Piper Sandler. Please go ahead, Arvind. Your line is now open.
spk06: Hey, thank you, and congrats on the first quarter post-IPO. Most of my questions have been answered, but the one question I have is, since I've had your public listing You know, can you talk about some of the customer conversations you've had? Has the public listing made any difference? And, you know, from a kind of sales force, is that like being a new slide in the presentation deck when you're talking to prospective customers? And the last question on this is, like, you know, is any kind of – is the – kind of the environment charged up and excited or looking at this IPO as an event to sort of exit?
spk04: Yeah, thank you, Arvind, for those questions. So look, I've got to say, and just to make sure I say this correctly, I think employees are just across the board really excited and happy about this. I think from the mindset perspective, it switches us from being a challenger in the industry to be part of a company which can absolutely lead this industry worldwide. So from employees literally up into the whole team, I think there's real excitement about this. I've got to also tell you that one of the reasons we did the IPO, if you remember, was clients. Clients trust us with investment accounting, and it's a critical function, mission critical, if you will, And the fact that we are a public company is really helpful to them. They can see, firstly, they get transparency, which was difficult to provide as a private company. Secondly, they can see that we are growing quickly, we are investing in R&D, and we are profitable. the client receptivity has literally, bar none, been really, really, really positive. I think the one question people had was whether we would continue to invest in R&D and operations. And in all of our conversations with you, Arvind, and really anyone else, we've already said that we will continue to invest in R&D and operations, and those are pretty public statements. So look, I think that the biggest benefit of the IPO is The employees are really charged. They believe in what we could build. And then the second one really is around clients really see us as having some permanence from a corporate structure point of view and the transparency they get about our company. So I would say it's been really, really positive. It does take some time, though, you know, preparing for these analyst calls and doing these board meetings. But, you know, otherwise, all good.
spk06: Perfect. Thank you, and happy to involve you.
spk04: Yeah, absolutely. Thank you. Happy Diwali.
spk00: We have no further questions, so I will hand back the call to Sandeep Sahai for closing remarks.
spk04: Look, thank you all for joining. We very much appreciate the time you take to understand our business and for giving us the opportunity to present the company to you. We're really excited about Q3, and we look forward to discussing Q4 results with you early next year. And so thank you for all your fantastic questions. We appreciate it. Thank you all.
spk00: Thank you for joining today's call. You may now disconnect your lines.
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