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spk09: Good evening. Thank you for attending today's Clearwater Analytics fourth quarter and full year 2021 earnings conference call. My name is Selena and I will be your moderator. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, J.R. Ritchie, head of investor relations. Please go ahead.
spk10: Thank you and welcome everyone to Clearwater Analytics' fourth quarter 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 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 provisions of the Private Securities Litigation Reform Act of 1995. Expression of future goals, including business outlook, Expectation 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 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 have arised after the conference call, except as required by law. For more information, please refer to the cautionary statements included in our earnings press release. Lastly, all metrics discussed in this call are non-GAAP, unless otherwise noted. A reconciliation 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.
spk00: Thank you JR and welcome everyone and thank you all for your continued interest in Clearwater. We finished 2021 strong. Revenue for Q4 was 69.8 million, which constitutes a year on year growth of 27%. For the full year, revenue grew 24%, which is a very nice re-acceleration to our historic growth rate. Gross revenue retention remains consistently strong at 98%, And I'm very happy to note that our net revenue retention increased to 111% in Q4, up 210 basis points year over year. We have continued to execute well, resulting in a gross margin of 75.5%, which in turn helped drive strong profitability in the quarter. We added 97 net new clients last year, and approximately 45% of them left a legacy competitor to move to our platform. Some who were on a legacy platform for over a decade or more, while others barely finished the implementations just a few years back. We also won across the spectrum of clients. We now have 59 clients with an ARR of at least $1 million. I would be remiss if I did not acknowledge another very significant win for us in Europe in the fourth quarter. Hathora is a leading, fast-growing, and acquisitive European insurer that has assets across many countries in Europe. And we're delighted to welcome them to the Clearwater platform. To understand this continued transition to Clearwater, I would like to talk about the value we bring to our customers. Simply put, Clearwater provides clients with a comprehensive, reconciled view of the global portfolio every day. Our clients invest in a wide variety of asset classes across many geographies and have reporting requirements across multiple regulatory regimes around the world. Providing a comprehensive view is a complex endeavor. Single clients can have investments in 60 different asset classes, 40 different currencies, and we bring it all together. every day. Our platform aggregates, reconciles, and validates data from more than 2,500 sources daily and leverages a single security master where every security is validated once and then used by all our clients, yielding a very strong network effect. Finally, This leads to a very high quality single source of truth, which is then used by our clients for making decisions about portfolio construction, risk, regulatory reporting, and tax. This technology and approach stands in stark contrast to the legacy providers who have multiple systems and multiple security masters. Data from all of those systems have to be brought together to build a comprehensive view requiring armies of people, often leading to unreliable levels of accuracy. The power of the Clearwater single instance multi-tenant platform is being used by an increasingly wider set of clients across the world, including insurance companies, asset managers, and corporations in North America, Europe and Asia. One unique business value we have not stressed enough is that our platform is a true enabler of growth for our clients. Investing in new asset classes and reporting in new geographies used to require implementing new technologies and building out additional operations teams. Our clients are able to scale globally, invest aggressively in widely varying asset types, acquire new businesses, and integrate them rapidly because our solution provides them infrastructure to do so on demand. As one client told us, after a $4 billion acquisition, that they had the new securities staged on a platform and ready for reporting before the deal even closed. Last year, we supported several clients as they integrated new assets from acquisitions. Others saw significant growth organically, and still others onboarded additional asset types. But all had a constant and complete view of their portfolios daily. The fact is Clearwater gives clients the freedom to grow into new asset classes, new geographies, and acquire new portfolios without having to spend months and years implementing new systems. Little has changed in our approach towards the three growth horizons which provide us with multiple levels for continued future expansion. First, we are focusing on maintaining our growth trajectory by deepening relationships with current clients and capturing more market share in our core markets of insurance, asset management, and corporations, and doing that both in North America and in Europe, where we have significant presence and strong track records. That is our foremost priority and takes the vast majority of our efforts. Second, we're entering adjacent markets, such as state and local governments here in the U.S., and expanding into Asia. We're also working to deliver adjacent solutions that we can upsell across our vast customer base. And third, we plan to provide deeper insights and help clients understand the best practice in this constantly changing world of investing. Our 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. Other business highlights? We had significant wins in North America across a wide variety of industries, including American Century Life Insurance, Carlyle Companies Inc., Circle, City and County of San Francisco, Highmark Health, Madison Ring, Sprinklr, and many more. Our competitive win rate? It looks at deals that have reached the proposal stage, remain strong at approximately 80%, and we continue to displace legacy solutions that cannot provide high-quality data and reporting in the ever-changing world of investment accounting. International expansion continued with the signing of many new clients, including Atora. This is on the heels of our first seven-figure client in Asia, which we had announced in Q3. Under the leadership of Gayatri Raman, president of our Europe and Asian operations, our international business continues to grow very nicely. The international market accounted for over 20% of newly signed business in 2021. We have great momentum, and with approximately 40% of our total addressable market in Europe, we are excited about the opportunities ahead. We have made significant progress on our new product offering we call PRISM, which allows Clearwater to offer a modular investment data aggregation and reporting platform. In situations where clients cannot move away from the current infrastructure in a given country or for an asset class, we can use PRISM to integrate other data sources into Clearwater reporting platform to get a comprehensive view of the global portfolio. For example, a very large insurance company can now view additional details about their mortgages on Clearwater for a single view into the global multi-basis portfolio. We have a promising and growing pipeline for Prism in 2022. To maintain our technological advantage, we reinvested 24% of our revenues into R&D in 2021. and made significant strides with our product enhancements in Q4. In 2021, we improved our product accessibility and usability, kept up with the ever-changing standards like Solvency II, NEIC, IFRS, Schedule BA, and others so that our clients don't have to. We also continue to introduce additional support for multiple gaps around the world and enhanced our capabilities that address alternative assets. We believe that this product investment allows us to be increasingly comprehensive, integrate new technologies, and continue to expand competitive modes. With continued focus on client success, all three of our operating centers are operating at scale, allowing us to deliver 24 by 7 operations. These centers deliver for clients across the globe every day and play an important role in onboarding clients. I'm especially proud the leadership team we have at Clearwater. Working as a team, we are committed to building a truly special company that enables clients to transform how they do investment accounting in an increasingly complex world. Before returning with a few closing thoughts, I would like to hand the call over to our Chief Financial Officer, Jim Cox, to provide more details on our fourth quarter and full year 2021 financial performance, as well as our initial guidance for 2022.
spk07: Thanks, Sandeep, and thank all of you for joining us today. We are very pleased with what can only be described as stellar financial performance for both the fourth quarter and full year. The fourth quarter exceeded our guidance for revenue and adjusted EBITDA margin on the strength of continued robust client demand, as well as an acceleration of client onboarding activity. As for my specific remarks today, I'll start with a review of our financial results for the fourth quarter and full year 2021, then wrap up with guidance for the first quarter, as well as full year 2022. Before detailing our core financial results, I'll first address two items impacting the year-over-year comparability of our fourth quarter. First, you'll notice that we recorded a $49 million one-time recapitalization compensation expense charge in the fourth quarter of 2020. During November 2020, we completed a recapitalization transaction on behalf of the existing unit holders at that time. The transaction allowed these existing unit holders to sell their units to new investors. In connection with the transaction, selling unit holders contributed $49 million towards bonuses paid to employees and related payroll taxes. Next, following the completion of a comprehensive review of sales tax reporting obligations across multiple jurisdictions in late 2020, we recorded a provision of $9.1 million to cover historical sales tax liabilities in many states, all of which was recorded in general and administrative expense in the fourth quarter of 2020. Throughout 2021, we began collecting and remitting sales tax to jurisdictions on behalf of our customers, contacting existing customers, and executing voluntary disclosure agreements across many state jurisdictions. Some customers were able to prove usage outside of the taxing jurisdiction, ultimately leading to a $2.0 million reduction in its outstanding liability during the fourth quarter of 2021. Without the benefit of that reduction, Q4 2021 adjusted EBITDA margin would be 25.9%, consistent with the guidance we provided for the fourth quarter. Moving now to our fourth quarter and full year 2021 financial results, please note that all of our results will be discussed on a non-GAAP or adjusted basis unless otherwise noted. Revenue in the fourth quarter was $69.8 million, up 27% year over year due to the successful onboarding of several large clients during the quarter and the growth in a number of existing clients. Fourth quarter revenue was above our expectations as the investments we continued to make to expedite client onboarding began to pay off sooner than we had anticipated. For the full year, revenue grew an impressive 24%, returning to the durable growth that this business has produced over many years. As of December 31, 2021, annualized recurring revenue, or ARR, reached $277.8 million, a $20.8 million increase over September 30, 2021, and represents a 26% increase year-over-year. Again, this increase primarily related to the strength of our new sales throughout the year. Gross revenue retention was a consistent 98%, marking the 12th consecutive quarter that we have reported gross revenue retention rate of 98%. Net revenue retention was, again, healthy at 111%, up 210 basis points from the fourth quarter of 2020 due to strong overall gross retention, price increases, and upsells across our client base. As clients continue to consider us a key enabler of their growth, Gross profit in the quarter was $52.7 million, and gross margin came in at 75.5%, due in part to the strong quarterly revenue performance. We were able to deliver these gross margins while increasing investments to drive faster client onboarding and expanding our international delivery capability. For the full year, gross margin came in at 75.6% of 50 basis points over 2020. Looking ahead, we expect gross margin to remain at a similar level for the full year 2022. Research and development expenses in the quarter were $16.5 million, or 23.7% of revenue, and slightly below our expectations due to slower than anticipated headcount growth. The hiring market for top engineering talent remains very tight. we are laser focused on multiple strategies for accelerating our hiring in this area in 2022 for the full year research and development expenses came in at just over 24 percent of revenue we expect our 2022 research and development expenses to be roughly on par as a percentage of revenues with 2021 as we continue to make investments in this area to drive growth in our core markets while also investing in the future products and growth opportunities, as Sandeep mentioned earlier in his remarks. Sales and marketing expenses in the quarter were $9.6 million, or 13.7% of revenue, up 280 basis points year over year and in line with our expectations. For the full year, sales and marketing expenses came in at 12.6% of revenue, representing an increase of nearly 370 basis points year over year, and demonstrate our continued investment into our go-to-market capabilities, both domestically and internationally. We are pleased that these investments helped drive the re-acceleration of revenue that we saw in 2021. We plan to keep our 2022 investments in sales and marketing at a level similar to the fourth quarter of 2021 in terms of percentage of revenue. as we believe we've made most of the key hires needed to execute our growth strategy in the near term. General and administrative expenses in the quarter were $6.5 million, or 9.4% of revenue, down significantly year over year, due in large part to the reduction of the sales tax liability. For the full year, general and administrative expenses came in at 10% of revenue. Looking ahead to 2022, We expect that general and administrative expenses will increase slightly as a percentage of revenue as we annualize the impact of incremental public company costs resulting from our initial public offering. However, we continue to expect to scale our back office functions over time, providing operating leverage to the business in the long term. Adjusted EBITDA in the quarter came in above our expectations at $20.1 million, or 28.8% of revenue, up $13.3 million from the fourth quarter of 2020, primarily due to the strong revenue performance as well as the favorable adjustment to our sales tax liability. For the year, adjusted EBITDA was $72.7 million, or 28.8% of revenue, representing an increase of nearly 80 basis points year over year as we continue to drive robust, sustainable growth throughout 2021. I'll touch on our overall margin expectations for 2022 later in my remarks. But first, let's turn to the balance sheet and cash flow. We ended the quarter with $254.6 million in cash and cash equivalent and $53 million in total debt. Free cash flow for the fourth quarter was $10.9 million and included $1.5 million of capital expenditures, which was primarily made up of capitalized software development costs. Focusing now on guidance for the first quarter of 2022, we expect revenue to be approximately $70 million this quarter, representing 23% year-over-year growth from the first quarter of 2021. We expect the first quarter adjusted EBITDA to be in the range of $17 million to $18 million, with adjusted EBITDA margin expected to come down sequentially from the fourth quarter of 2021 as we continue to make targeted investments, specifically in client onboarding and in research and development, while also absorbing incremental public company costs. Now let's talk about guidance for the full year 2022. Building on our strong Q4 results, we are currently expecting revenue to be in the range of $302 million to $304 million, representing just over 20% year-over-year growth at the midpoint. Some investors have asked about the potential negative impact of higher interest rates on the AUM value of our clients' fixed income holdings. To date, we've yet to see a strong signal that the expectations for higher interest rates has had a significant impact on our revenue. But plan to continue to monitor these impacts and we'll provide you with additional commentary throughout the year as we update guidance. We expect our adjusted EBITDA to be in the range of $80 million to $82 million, with adjusted EBITDA margins likely ramping up throughout the year as we plan to invest more heavily in hiring early in the year, while also annualizing incremental public company costs until the late third quarter. Equity-based compensation expense is expected to be approximately $66 million. Depreciation and amortization is expected to be approximately $5 million. And we expect interest expense of approximately $2 million. Our full-year non-GAAP effective tax rate is expected to be 29%. and we project full-year, fully diluted weighted average share count to be approximately 255 million shares. To summarize, we are very pleased with the performance of the business in the fourth quarter, as well as for the full year of 2021. We produced accelerated top-line growth and maintained strong adjusted EBITDA margins, all while making targeted investments in driving future sales growth and increased client onboarding speed. Entering 2022, our revenue retention remains consistently strong, while our healthy pipeline makes us optimistic about the accelerating demand for our solution in the marketplace. We're very excited about the significant opportunity in front of us. With that, I'll turn it over to Sandeep to provide some closing thoughts.
spk00: Thank you, Jim. As you can see, we continue to run a strong, disciplined, rule of 50-plus companies. We are proud of the many achievements we made throughout 2021, including ending Q4 on a strong note and going public in Q3 without letting the process slow our business. We believe that we have a disruptive platform in an industry that is ripe for change, and we plan to methodically march down the three paths of growth that we have outlined. They're looking forward to 2022, continuing to execute, continuing to delight our customers, and continuing to build a special company that all of us are proud to call our own. With that, let me turn it over to the operator for questions.
spk09: Thank you. If you'd like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you'd like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you are using a speaker phone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered.
spk06: first question comes from Kevin McVey with Credit Suisse please proceed thank you so much and congratulations really really exceptional results hey I guess Sandeep or Jim in terms of the 2022 guidance can you help us understand what type of AUM is embedded in that and you know I know it's probably difficult, but is there any way to think about what type of interest rate assumptions are in there? Just because it sounds like you're getting that question a little bit in terms of what type of rate assumptions are factored into the guidance.
spk07: Sure. Sure, Kevin. Thanks. This is Jim. So let me just start with Q1, right? We're guiding to 23% revenue growth, and we're actually picking a single point, $70 million for Q1. which is unusual, right? That's kind of an acknowledgement that we're further into the quarter and our confidence levels are naturally higher, right? The full year guide to 302 to 304, I think, is $7 million more than the street consensus for 2022 at the midpoint there. And it's totally consistent with our growth rate of being greater than a 20% grower. But, you know, you referenced interest rates, but that's one of really just a totally handful of things that make these really unusual times. We have the invasion of Ukraine, volatility and equity in commodity markets, inflationary pressures, as well as the 25 basis point change in the interest rates. And let's not forget about COVID, right? Who thought that would drop off the list? So the macro environment is pretty difficult to read two or three quarters into the future. And so we really wanted to stand by guidance that we could stand behind in light of that uncertainty. And so when you think about that AUM, and remember, we have a variety of minimums and things within our contracts. We really looked at that guidance and contemplated what we see within our business model and our pipeline today. And today, we have not seen changes. that business model or platform. So we would expect the continued AUM growth that we've seen through adding new customers, growing with our existing customers, and, you know, doing more for our clients as we roll forward. I guess the last thing I'd say is when you think about, right, this is – please, go ahead, Sunny.
spk00: No, please, go ahead. No, no, no, please. Yeah, all I was going to say, Kevin, was if you look at our client base, the whole investment strategy revolves around protecting the asset pool. I mean, that's what I think. And so traditionally, we've had very low volatility. And you may recall during the IPO roadshow, I think, we had gone through the 2020, what happened, which was frankly a big disruption at that time. But the impact on our assets and the market was minimal. And interest rates started to change, and the expectations of things started to change in November of last year. And we watched it, didn't expect any big change in our system, and didn't see it. We continue to watch it, but like Jim said, we just don't notice it. And clients are moving assets a little bit, and we sort of see where they're moving it. But the volatility continues to be really, really low.
spk06: And I would almost think, Sandeep, given the kind of full lens you have across the platforms, it's probably going to accelerate the demand for what you're providing if you do see some incremental volatility. Are we thinking about that right?
spk00: Yeah, I did one more thing, Kevin. If you think about it, whenever there's uncertainty, variable cost base. And that sort of accelerates movements to cloud, movement to managed services, and things of that ilk. That's really what you would want if you were the user on the other side.
spk06: Totally agree. Thanks so much. Great job. Thank you.
spk09: Thank you, Kevin. The next question comes from Michael Turin with Wells Fargo. Please proceed.
spk07: Michael, are you on mute?
spk05: Hello? Michael, are you back here?
spk07: We can hear you.
spk05: We can hear you. Okay. This is Michael Bergdahl from Michael Tern. Congrats again on a fantastic end to the year and first, you know, couple strong quarters of the public company. One thing I wanted to kind of double-click on, is if you're looking at the numbers from guidance and your color commentary on expenses in fiscal 22 makes it seem like a pretty sizable step up in sales and marketing expense. Is there anything in particular you're investing for? You mentioned customer onboarding, but any geos or verticals to think about where you're investing in sales and marketing? And can we think about that potentially driving higher growth outcomes? Yeah, above the 20% level moving forward.
spk07: Sure. Sure, Michael. That's, um... Go ahead, Sandy.
spk00: No, thank you, Jim. Sorry.
spk07: Next time, Jim, you and I got a little game on. Don't just make it easy. We do. We do. This is the last time we're both doing this. Yes, I totally agree. Hey, so, uh, so we feel really good about the opportunities we have, and... So as you think about where are we investing, you know, we, last year we continued to accelerate our investment internationally. We saw great returns on that. So we continue to lean in. We, as, as we mentioned in the prepared remarks, we have, you know, the leadership teams in place and, and we'll be able to drive those, uh, you know, those teams, uh, through throughout the year and we'll continue to build there. We also are leaning in on, uh, our marketing spend. We have a great new CMO and, uh, Susan's doing a great job. And we have the event in London for our European clients in April of this year. And we're going to lean in on really the marketing spend that we have throughout here. We also obviously have done a bunch of investment throughout 2021 to build out those teams. So part of that expansion year over year is merely the annualization of those hires.
spk00: We'll just add a few more things, Michael, to that. One is the investment obviously is consistent with the Q4 level, right? And when we spoke to you all in Q2, Q3, actually, if you remember, we said we're going to invest more in the operations side, go on board time. And frankly, you saw that come back, right? So you saw in Q4, those numbers are really good. I do also want to just quickly mention that a lot of these offices we set up in continental Europe and in Asia still have to blossom fully, right? I mean, it's not like we are contributing very much to the 2021 growth because they were set up, you know, in the May, June, July timeframe of last year. So we expect them to contribute to growth in 22 and definitely contribute to growth in 2023, right? So we still feel there's 13, 14% investment in, Sales and marketing, I think, is good. We continue to believe that we can manage EBITDA at the levels we would like while making that investment, also because those margins are steady. So why not, right?
spk05: Got it. Thank you. And one quick follow-up. Could you quantify the number of quota-carrying reps? If not, could you?
spk07: We have not historically disclosed that.
spk00: Michael, I can tell you lots of money, lots of money being spent on it. Good Lord, I look at that and say, oh, my God. So we're adding a number of choosers, and they all have to obviously be effectively onboarded and contribute to growth. So we look forward to them doing that in 22. And like I said, have a much larger impact in 23.
spk05: Great. Thank you. And correct again.
spk00: Thank you, Mike.
spk09: Thank you. The next question comes from Jackson Ader with JP Morgan. Please proceed.
spk05: Great. Hey, guys. Thanks for taking our question. I want to ask about the onboarding investments that you made.
spk07: I'm just curious because I think a lot of times you sign a customer and you will run Clearwater in parallel for some pilot timeframe next to their legacy system. And I'm curious, did the onboarding investments try to drive faster time to that parallel running, or were they trying to shorten the amount of time that that pilot period would last? I'm just trying to get at kind of the sustainability here of that onboarding tailwind to growth.
spk00: Yeah. So, Jackson, this is Sandeep. So, thank you for your question. Listen, I think when you think about onboarding, the first thing is you can't cheat time, right? I mean, you can get things onboarded really quickly, and yet you have to do the parallel to be confident about the rollover, right, of the system going live. So you can't cheat that time. Secondly, though, if you don't build a really solid organization, right, then your ability to execute around the world falls. And as you know, we sort of want some deals a little bit ahead of time, like we saw in Asia and in Europe. So that's the thing Jim is talking about, building out. Today, if we get programs and projects, literally anywhere in Europe and in Asia, I think we can execute them, right? And we can execute them with speed. So are we trying to become a little bit more efficient incrementally? Yes, that's always the case, right? But do we now have leadership which, which knows how to execute very large programs, and the answer is yes. We now have leadership at the cinemas level, at the next level, and those have been built out. They've been in the organization for reasonable periods of time that we feel a lot more confident about programs of any size, like the authority. I mean, we sent out a press release you may have seen about authority. You know, it's a really significant win in Europe. and we feel completely comfortable that we can implement that. Jim, anything you would add to that? Gotcha. Okay. Yeah. Okay.
spk07: All right. Great. And then just a quick follow-up. I mean, is there any kind of seasonality in the end market that we should think about in terms of RFP cycles? I mean, is it just your typical fourth quarter tends to be the heaviest? Or is there anything we should be thinking about as we head into 22 on the placement cycle?
spk00: Not really. There's no real reason to do it at a certain time or not, right? I do think all of these... Yes, I'm not quite sure I can point to any seasonality about decision-making. Yeah, I don't know.
spk07: The only thing I would caveat, Sandeep, for that is the natural thing that happens across a lot of software and SaaS businesses is Europe in the third quarter gets a little quieter. And then because we're doing accounting and people are coming over, on the onboarding process there's also – you know, people like to have clean years. And so, but we're, we've been able to kind of manage, um, through, through that process, people would want a full year of data on the platform.
spk00: Jackson, you're still talking about booking. So when you're talking about the quality, it's not the revenue because the revenue sort of follows, right? So it's not like Q4 will naturally have higher revenue. That's not the case.
spk07: Right. Right. Yes. I was talking about like, you know, field flow and booking. That's right. Okay. Thank you.
spk00: Thank you, Jackson.
spk09: Thank you, Jackson. The next question comes from Bob and Suri with William Blair. Please proceed.
spk10: Hey, guys. Can you hear me okay?
spk07: We can. Okay.
spk05: Great. Great. Loud and clear. Congratulations. Great set of results and certainly excited about the outlook here.
spk01: I guess I wanted to touch a little bit, you know, on your product side here. You know, you've obviously had, you brought in a new CTO a little bit, a little while ago. As you think about Suvix and you think about the AI and machine learning we've discussed in the past,
spk07: I'd love to understand how he and you were thinking about the potential leverage, some of the AI ML capabilities to gain additional insights from the assets on the platform.
spk01: So can you talk a little bit about the longer-term plans now that he's had some time about what you could do with the data and the assets on the platform to drive additional product sets?
spk00: Yeah, favorite question of mine. Thank you, Marvin. It's almost like I called you before this to ask you this. Look, I think... You did it. Now, look, we're thrilled with bringing on Jody Koshansky and Shobik Das. They bring really complementary skills. If you think of the market and the industry, there is little... Jody doesn't quite understand. He does. He's been in there for a long time. And Shobik comes from a really strong technology background. And again, in terms of scale, in terms of machine learning, AI, RPA, those kind of things, and how to really get value from them. So we are really excited about what we are doing here. The one big area, of course, is insights. So what do clients want? They want insights from their data. And I just have to say that we are continuing to make really good progress. But one of the biggest ways you get insight, Bhavan, is to bring all the data together in a normalized way. And that's why you see Jim and me pushing so much on Prism, because what Prism does is, obviously, what's on Keyword is on Keyword. That's easy. But then people have other systems in other countries, or they have something else for real estate, they have something else for for derivatives perhaps. And so what PRISM does is brings all of it together, and that starts the insights. But I do think that Clearwater's value gets very enhanced when clients can get insights into a global, global portfolio, right? So we continue to sort of invest in that, and we'll continue to do so for all of this year and next year.
spk10: Gotcha.
spk00: Yeah, of course.
spk07: Sorry, sorry. I was just going to give you a little example of like bringing this data together all into one place and any example. So on Monday, we asked the data science team, you know, what's our exposure to Russian security? Because we thought maybe someone might ask a question about that. And they were able to come back to us, right, and say, oh, it's 0.03%. are securities that are either embodied through the security master in Russia or denominated in Ripple. Try and understand that. So you think about that. That's across the $5.9 trillion in assets on the platform. You can figure those things out. Just throwing that one out, that was ad hoc, right? But that's the benefit of, to your point, talking about kind of what's the opportunity for those insights. That's just one little quick example that we went through.
spk05: That was actually really helpful. I wasn't going to ask that question, but thank you for answering it. I'm sure someone has. Let's touch on competition really quickly.
spk03: Just any update on the competitive environment? Is it still status quo? I guess who do you see most in bake-offs? Maybe some sense of win rates would be helpful.
spk00: Yeah, I think you're asking all the questions I think we think about. But, you know, I just got to say, if you look at win rates, just look at the mathematics of it and the analytics, our win rate is very steady at the 80% mark. And this is once a proposal gets written, then how many of those do we win? It's 80% has been 80% for a period of time. It wasn't true for Europe earlier, and now that is true for Europe. So that is one thing. We continue to see, we're not under the radar anymore, right? That's obvious, right? For the last two, three years, I think, Everywhere we go, there is some competitive pressure about the legacy provider fighting back, and that happens very often, or the clients doing an RFP. But there are enough times the clients don't do an RFP and sort of simply move ahead with Clearwater. So we have not seen any change in any of these sectors in terms of win rates. Now, our job, I think, is, Bhavan, that 24% of our revenue, we're going to continue to put into R&D. And we want to continue to be more comprehensive. We want to continue to be more comprehensive in asset classes, in countries, in accounting bases. So our whole agenda is that we have a lead, continue to push, continue to invent, continue to innovate. And literally as of last month, end of Feb, we haven't seen any competitive win rate degradation.
spk03: Roger. That's great, guys. Thanks for answering my questions. Thanks for the detailed depth and congratulations.
spk00: Thank you.
spk09: Thank you, Robin. The next question comes from Gabriella Borges with the Goldman Sachs. Please proceed.
spk08: Good afternoon. Thanks for taking my question, and congrats on the quarter. I wanted to follow up on the commentary on NRR, and specifically NRR in the App and Magic space. I know in the past we've talked about how asset managers as vertical is going to be more prone to even land and expand motion. But it sounds like there's two things happening. Not only is asset managers getting bigger as it's trying to sell to you, but it sounds like NRR within asset managers is also improving. So I would love if you could just talk a little bit about what you're seeing and any updated thoughts on how you're thinking about modularizing the product stack. Thank you.
spk00: Thank you for the question. And so look, I think I said in my remark, we're quite excited about this 210 basis point increase in the NRR. So if you think about NRR and why that grew, so let's talk about each segment, right? So strategic asset managers just continue to grow with us. As you know, that is more of a land and expand strategy, right? And so growth happens because of one of two reasons. One is general growth of assets. So that gives you a gentle thing when that's one thing. Second one is definitely clients are taking us into more divisions of their business. As you know, some of these asset managers, broadly speaking, if you call them asset managers, they have various lines of businesses. They have wealth, they have sort of pensions, they have all kinds of business functions. And so we continue to see growth in that. That's one. The second one, Gabriel, which is very interesting, is insurance companies definitely have become more acquisitive, right? And so Clearwater sort of wins an even higher proportion of those because if you buy, if you're a U.S.-based insurance company and you buy assets in Germany and tomorrow you want all of that reporting, Without Clearwater, you would have to go design all of it, think about all of it, and it would be hard. And Clearwater can just simply turn it on. Obviously, it doesn't mean it's that quick, but the functionality exists right off the bat. So we are starting to see NRR growth come from insurance clients as much as we see it from asset managers. Having said that, asset managers are meaningfully bigger, so I don't want to equate them. But we continue this bump up that's happened because of insurance clients also buying points of assets around the world. Jim, would you add anything to that, Jim?
spk07: Yeah, and I think, Gabriel, you are correct. That is new, right? That is a phenomenon that we saw evolve throughout 2021 to help with that. That's helpful.
spk08: Anyway, one follow-up if I may.
spk07: When we went on the road initially in the IPO, we really did talk about strategic asset management. And this is just as important for global insurance companies who have aspirations to acquire and grow as well.
spk08: Got it. That's helpful. Thank you. And as a follow-up, we have a comment in the press release on out of the 100 new clients, more than 100 new clients, nearly 45% left a legacy competitor. Maybe just ground that for us relative to history. How does that 45% compare to a year ago, five years ago? And then the remaining 55%, is that mostly Greenfield? Or give us a little bit of color on what is being for new customers that are not leaving behind a legacy competitor. Is that the money in parallel? Just a little more of that. Thank you.
spk00: Yeah, thank you for the question. I do think we have had this half and half mix for a very long time. In fact, I think we like it, right? We get 11% growth from current clients, and that's sort of a good situation to be in. So the question is, if we get 45% from new logos and legacy competitors, then what were the rest of the 55 doing before that, right? And where did it come from? So several of them. One is custodians, right? So they were they were getting their accounting from custodians for certain asset class and another custodian for another asset class. And so they had multiple custodians doing the accounting for them and they sort of transitioned to Clearwater. So that's one. People have internal systems. So that happens quite a bit is that people have just built data warehouses, if you will, to sort of pull all that information and and provide some level of reporting there. So that also happens quite a bit. And then is there some movement from Excel? Yeah, believe it or not, especially on the upper end of the segment, people continue to use Excel and really giant Excel macros. And so people transition from that. So I think custodians, internal systems, Excel, sort of other three where you would normally see the other 50% or 55% of logos come from.
spk07: And then the last piece within that is really truly the green field. So these are people who are now investing for the first time. So those IPO companies, right, or someone decides to actually take a different approach in their investment philosophy around their excess cash for corporations, et cetera.
spk08: That makes sense. Thank you.
spk00: Thanks, Gabriella.
spk09: Thank you, Gabriella. The next question comes from James Fawcett with Morgan Stanley. Please proceed.
spk04: Thanks a lot. You talked a lot about going with and growing internationally and international capabilities, et cetera. if you can talk a little bit about how you're expecting the contribution from international to grow. It seems like, you know, roughly international still is contributing less than 10% of revenue, but even Europe itself is probably 40% of TAM. So, you know, how should we think about the international mix and should we expect it to develop first in Europe or Asia or, you know, what that composition is likely to look like?
spk07: Yeah, so you're accurate. Go ahead, Sandy. No, no, you should. Sure. So you're accurate that the revenues as a percentage of revenues, right, because that kind of has 20 years of business involved in it, it's less than 10%. But this last year, right, as a percentage of our new business, it's 20%. So, you know, obviously, James, you're right. It's accelerating, and we're seeing the returns from the focus. And then I think long-term, when you think of TAN being 40%, that you would see long-term that your kind of contributions over time would ultimately move to the relative ratio of your overall total addressable market. The best news that I think we've learned is that the needs in Europe, and I think we've learned them to a lesser extent, but we've also learned in Asia, those needs are consistent with the needs in North America. And so the same drivers that we see, I think we have a lot of conviction around that. And so we think that has really great opportunities. Sorry, Sandeep, I'll let you.
spk00: Yeah, no, all I was going to add, James, was exactly the point you made, Jim, is that if you look at our larger clients, they already have assets around the world. So it's not like you look at our larger clients and they're only investing in the United States and North America. They're investing in Europe, they're investing in Asia already. So we've always had a need for the FYFRS and look at all of the reporting in continental Europe. All of those have already been built quite a while back. Now, does that mean we don't have any work? Of course we do. So we just released Dutch Gap, for example. Now, we didn't have Dutch Gap earlier, and Thai Gap. We didn't have Thai Gap earlier. So I think there's work to be done, but the needs are, if not exactly the same, if not more acute. And that's because when you think about North America, at least it's all one regime, if you will, right? But you go to Europe, and you've got German gap and Dutch gap, and you've got every gap just a little bit different. And then when you think about Asia, there the need is even more acute because Japanese gap and Thai gap have almost nothing in common, right? I mean, those are really different. So we think the need is more acute on that side. But it takes time, though, James. It takes time to build it out. And we are going through it very purposefully. We've built out officers. We've built out pre-sales capability, delivery capability, locally and otherwise. And so it's a bit of a march.
spk04: Yep, that makes sense. And I guess kind of along similar lines, it seems like at least your Horizon 2 initiatives, particularly expansion into adjacent end markets and APAC, have gained traction earlier than anticipated, or at least earlier than we had anticipated, especially in Asia. You know, while that opportunity was categorized as medium term in the IPO process, are you now dual tracking those initiatives in a sense? And is that part of where we should think about the incremental investment going into in 2022?
spk00: I think in 2022, James, you will see a full-fledged office being set up. It has been set up in each of these locations. So are we going after, for example, state, local government? Okay, we have a dedicated team which have been working on this for the last six, seven, eight months. So I do expect all of these Verizon 2, if you will, to be fully funded and fully working today. They're working today. Now, will the contribution be really high in 2022? Probably not. But will they be really significant in 2023? That's our expectation. And so we are doing tracking exactly like you laid out. And you see the increase in sales and marketing costs sort of as a result of that. And just that we have EBITDA, we have the growth, and we want to push while maintaining EBITDA. So we don't want it to go down further, but we want to use the growth dollars, if you will, to drive for the good, as we did in Q4. Q4 was a good testimony to that. We're quite excited because of that.
spk04: That's great. Thanks a lot. Thank you.
spk09: Thank you, James. The next question comes from Rishi Deloria with RBC Capital Markets. Please proceed.
spk00: Wonderful.
spk07: Nice to see acceleration in the quarter. Two questions I wanted to ask you, quick ones. First, on gross margins, maybe can you talk about the longer-term opportunity to see gross margin expansion in the model? And second, just want to maybe philosophically understand how we should be thinking about your – philosophy or attitude towards uh stock-based compensation right because based on the guidance you know sbc uh is going to go rise to you know the mid-20s and we're going to see a decent amount of dilution not unusual for software but but definitely seems like a departure i think from what we may have been expecting um can you maybe walk us through how you're how you're thinking about sbc and how she should be thinking about that long term thanks sure so so just to start on gross margin uh it's something that uh sandeep and i focus on a lot and you know nothing has changed from the way we feel about the long-term uh kind of opportunity there it's it's an 80 gross margin business but you know that's a very healthy task business is an 80 plus gross margin business and we see that having said that that's not the priority right we're building out kind of globally we're building out the infrastructure and so that's why we We're kind of staying consistent at the 75 and a half, which is healthy. As it relates to SBC, I would say that if you look at Q4, the run rate on Q4 was 70 million. So actually 66 is coming down. And the reason why it's coming down is because there's a lot of historical charges. I referenced the recapitalization transaction in Q4 of 2020. That had an impact on revaluing a bunch of options for stock-based compensation purposes, which really has no economic impact. And you will see that taper off over a number of years as those amortize. And so I think we have a philosophy. I'll let Sandeep speak to the philosophy that we have, but I would say that the nice thing about being a public company is we've been able to expand the – pool of employees that are availed equity. And I think that that has been very useful in both attracting and retaining employees. And so I think that that has been a great tool. But I would say that we guided to that just so that everyone would know that. But I think there are some historical elements to it that will run out over time. Go ahead, Sandeep.
spk00: Yeah, we should do three things. One is, look, the talent we are looking for on the tech side is bleeding edge, if you will, sometimes, right? And there's a bit of a war for that talent. What we do is we methodically work with compensation consultants and sort of look at these 20 companies or so who are in our space, right, who sort of develop software of the kind we do And we want to stay very much within that lane. There is nothing extraordinary we feel we want to do or need to do to attract talent. So we go back and look at these companies and see what they do, what are issues that provide people and don't. And we try and, like I said, stay very much within that lane. And we don't find the need to do anything extraordinary there. And so at this point, 100% of people in the company have RSUs, and they feel it's nice and sticky. It helps them retain talent. It helps in attracting talent. And that's our thinking there. So I wish there was something more revolutionary here. There isn't. Our thinking is look at what our competition does and sort of stay within the lane there.
spk06: It's really helpful.
spk00: Thank you so much, guys.
spk06: Thank you, Rishi.
spk00: Thank you.
spk09: Thank you, Rishi. The next question comes from Yong Kim with Loop Capital. Please proceed.
spk01: All right, thank you. Congrats indeed, and Jin, on a very strong finish to the year. As you continue to make progress on the international front, what are you seeing in terms of the overall land and expand motion there? Are you seeing perhaps maybe smaller initial land deal size versus the U.S., and maybe faster expansion velocity afterwards? Thanks.
spk00: Yeah, thank you for the question. You know, I would point out two things. One is, it is when Jim said, you know, 20% of new business sort of came from here. There's no expanse there. It is all new business. So it is actually more, it's definitely more impressive when you sort of think about that, right? Now, ordinarily, when you go to a market, you would think of doing small deals and bigger deals and bigger deals. But we have, you know, we talked about the leadership of Gayatri, I mean, the deals we've won is significant. I mean, we did a press release right now on Atora. I mean, that is a significant deal. We did a press release on Agon, I think, earlier in the year. Those are not small deals at all. And so we continue to see action with very large clients there. Is it a little bit surprising? Perhaps. But we continue to see very significant deals.
spk01: The other question that I have is whether or not you can talk about one particular industry, maybe that's asset manager or insurance, that is growing faster than your expectation, for instance, like just a couple quarters ago. Any meaningful, you know, motivational pricing trend that you're seeing in any particular vertical?
spk00: Yeah, Jim, I don't know if you can comment. Look, the prices, we don't. So we're able to price what we think is appropriate. And I think, as you said, we price a little bit to trying to get to 80% steady state, and we can achieve that. And we haven't seen push on that, right? So we continue to be able to get this growth rate while continuing to get this right and appropriate gross margin, right? So we continue to sort of see that. Jim, would you add anything else to that, or?
spk07: Yeah, I think it's really the same story. Obviously, we're growing really nicely in insurance, and state and local government has grown really fast off of a smaller number, and asset management has really continued to grow. That is growing faster when we're in public and continues to grow very quickly. It's good news across all of our .
spk01: Thank you so much.
spk07: So, JR, is that our last question? Thank you, Mr. Kim.
spk10: Yes, that's our last question, Sandeep, if you want to just give a quick closing remark.
spk07: Or I was just, Sandeep, before we do that, just one administrative thing to share with everybody. It's just our lockup releases next Monday from the IPO. Just wanted to share that. That was in the name. Go ahead, Sandeep.
spk00: Nothing. I just want to thank all of you clearly from the questions. You all understand our business, and we're really happy about that because it allows us to be very, very transparent about what we are doing and why we are doing it. So I hope you continue to support. Clearwater, thank you all for your questions, and we really, really appreciate it. Thank you.
spk09: That concludes the Clearwater Analytics fourth quarter and full year 2021 earnings conference call. Thank you for your participation. You may now disconnect your lines.
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