Clearwater Analytics Holdings, Inc.

ladies and gentlemen thank you for standing by and welcome to the clearwater analytics second quarter 2022 financial results conference call at this time all participants are in a listen only mode after the speaker presentation there will be a q a answer session and now i would like to welcome june park head of investor relations to begin the conference

Thank you and welcome everyone to Clearwater Analytics second quarter 2022 financial results conference call. Joining me on the call today are Sandeep Sahai, Chief Executive Officer, and Jim Cox, Chief Financial Officer. After their remarks, we will open the call to a question and answer session. I would like to remind all participants that during this conference call, any forward-looking statements are made pursuant to the safe harbor provisions of the Private Security 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 factor section of our findings with the SEC. Actual results may differ materially from any forward-looking statements. The company undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call except as required by law. For more information, please refer to the cautionary statement included in our earnings press release. Lastly, all metrics discussed on this call are non-GAAP, unless otherwise noted. A reconciliation can be found in 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.

Sandeep Sahai Thank you, Jun, and welcome, everyone. We continue to execute effectively and had a strong Q2. Revenue grew to 73.4 million in the quarter, which constitutes a robust 21% year-on-year growth and a strong sequential growth from 70.8 million in quarter one. Booking in Q2 was the highest ever Q2 booking in the company's history, which provides us with a solid foundation for sustained growth. Gross margin was a solid 75.7% and is a significant achievement. Increased efficiency helped balance the inflationary wage pressures we are seeing in the market. We continue to run an efficient business and delivered an adjusted EBITDA of 19.1 million, which translates to a 26% margin. This is an increase from 17.4 million in Q2 of 2021, a quarter in which we were not a public company and did not incur costs associated with being one. I'm very happy with the free cash flow generation of 16.5 million in the quarter. The 87% conversion of adjusted EBITDA to free cash flow is also a solid achievement. As robust as these numbers are, I am not satisfied with the numbers we are reporting because I don't think they reflect the inherent strength of our business. For the last five years, our AUM-based revenue model has been mutually beneficial to both our clients and to us. However, in Q1 and now in Q2, we have seen a decrease in the value of assets on our platform. This has been across asset classes. The price of equities, fixed income securities, currencies, and structured products have all fallen in concert. While this is a somewhat rare event, it led us to reevaluate a commercial construct and pricing model. For new clients, we have modified the commercial terms to introduce the fixed annual fee for the Cold Clearwater platform based on the size and complexity of the client's portfolio. Of course, as assets grow, or as clients add new modules like prisms, statements, or enhanced servicing, the fees also grow. Charging differentially for new models and functionality is a strategic priority, and we are accomplishing that with this commercial construct change. As importantly, And significantly, we are also working collaboratively with our current clients to change the pricing model to mirror what we are doing with new clients. As you can imagine, this takes significant effort and we expect to complete this over the next two quarters. Client receptivity to these changes has been good and is testimony to the solid relationships we have with our clients and the value we bring to our clients. These changes to our commercial construct will allow us to reduce volatility in our revenue and ARR growth, have a more predictable NRR metric, charge differentially for additional components, an additive functionality we have built, and the advancements we plan to build in the future. Taken together, it will bring us in line with the best-in-class pricing practices of leading SaaS companies. Coming back to the strength of the core business, our gross revenue retention rate was 98% for the 14th straight quarter. That is clearly a best-in-class metric. In Q2, new client acquisition was strong with organizations like Sutton Re, Trustmark Insurance, Knighthead Capital Management, Dirac Limited, modern woodman of america legal in general america and the university of pittsburgh medical center signing with clearwater to name a few arr grew to 290.4 billion which was up by more than 18 year-over-year as you can see even with great booking performance this growth was tempered because of the decline in the asset value of the portfolios of our existing clients The broad-based decrease in AUM led to our net revenue retention rate coming down from 107% to 104%. We expect the commercial changes we're implementing to mitigate this volatility in the coming quarters. Looking ahead, Clearwater's business model and strategy continue to be based on the five core pillars we have discussed in the past. The first pillar is consistent, durable growth. Clearwater has successfully achieved consistent growth over several years. And while the headline numbers do not fully reflect it, the underlying core business continues to grow at the same steady clip. Our platform is now used across several industries and across a broad range of geographies, in turn allowing us to have greater resilience in adding new clients, and sustained booking every quarter. The second pillar is a high-quality business and financial model that is designed to expand. Our recurring revenue model and high gross retention provides stability and predictability to our business. Our non-GAAP gross margin continues to be at approximately 75%, which reflects the fact that wage inflation across the world is being balanced by increased efficiency of our business. This allows us to continue to make investments in our product while generating reasonable EBITDA margins and free cash flow. Third, Clearwater has a disruptive SaaS-based technology platform with deep competitive moats. Our single instance multi-tenant platform continues to learn with each new client driving greater network effect and increased efficiency for both our clients and for Clearwater. We continue to win net new clients that choose to move from our more legacy competitors. In this quarter alone, 45 new clients went live on the Clearwater platform. Our sustained investment in R&D allows us to continue to enhance our platform. We are determined to serve our customers with what we believe is the most powerful investment accounting platform on the market. As an example of continued innovation, Clearwater expanded its capabilities around alternatives with new and significant capabilities for limited partnership assets. This truly next generation solution provides automated data aggregation validation, reconciliation, and reporting for private funds. The fourth pillar of our strategy is our multiple drivers for continued future growth. We are focused on the 10 billion market opportunity that we can address. While continuing to execute in our core markets of insurance, asset management, corporations, and the public sector, we are growing our business in Europe and Asia and we are happy to announce that we added MSIG, a multinational insurer based in Asia. Additionally, we are building momentum in adjacent markets like REITs and pensions, including adding the public employee retirement system of Idaho. Longer-term opportunities include delivering insights for current and future clients of our platform, from a growing data set of more than $5.9 trillion of assets which are processed on our platform. The fifth and final pillar is client focus, which is embedded in the DNA of our culture. There is no doubt that in-person and face-to-face engagement with clients makes a world of difference. That is why, as an organization, we have made a concerted effort to engage with our customers and prospects, meeting many of our clients in person over the last quarter. Clearwater continues to be recognized across the marketplace as an industry leader, with recent accolades including IASA Solution Provider of the Year Award and the FTF News Award for Best Client Reporting Solution for the second consecutive year. Speaking of our global team, we care deeply about the performance and development of our people. This year, we are proud to have grown our workforce by over 12% as we continue to hire around the globe. We continue to make investments in people-related programs that help make Clearwater an engaging, exciting, and rewarding place to work. Overall, we are very proud of our many accomplishments in Q2. Looking ahead, we're excited to host our annual in-person user conference, Clearwater Connect, taking place on September 14th and 15th at our headquarters in Boise, Idaho. Clearwater Connect will be an immersive learning experience designed to educate and inspire the hundreds of financial leaders in attendance and deliver opportunities for growth and connection between Clearwater, our customers, and our partners. Before returning with a few closing thoughts, I would now like to hand the call over to our Chief Financial Officer, Jim Cox, to provide more details on our second quarter financial performance, as well as updated guidance for our third quarter and full year 2022.