Ladies and gentlemen, thank you for standing by, and welcome to the Clearwater Analytics Second Quarter 2022 Financial Results Conference Call. And now I would like to welcome Joon 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 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 filings with the SEC. Actual results may differ materially from any forward-looking statements. The company undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call, except as required by law. For more information, please refer to the cautionary statement included in our earnings press release. Lastly, all metrics discussed on 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.

Thank you, Joon, 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 1. 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 re-evaluate our commercial construct and pricing model. For new clients, we have modified the commercial terms to introduce a fixed annual fee for the core Clearwater platform based on the size and complexity of the clients' portfolio. Of course, as assets grow, or as clients add new modules like Prism, 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 and 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 Secondary, Trustmark Insurance, Knighthead Capital Management, Dara Limited, Modern Whitman of America, Legal & General America and the University of Pittsburgh Medical Center signing with Clearwater to name a few. ARR grew to $290.4 million, 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 sustain bookings 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 helped 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 14 and 15 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.

Thanks, Sandeep, and thank you all for joining us today. In light of the significant downturn in the market prices in both equities and fixed income securities during Q2, we are proud to deliver 21% revenue growth with revenue coming in at the higher end of our guidance range at $73.4 million. We achieved these results because of our continued ability to win new clients and successfully on-board them. For example, in the second quarter, 45 new clients went live on our platform. We are also proud of our solid 26% adjusted EBITDA margin and our strong operating cash flow of $18.3 million in Q2. Moving now to details about our second quarter financial results. Please note that our results will be discussed on a non-GAAP or adjusted basis, unless otherwise noted. As of June 30, 2022, annualized recurring revenue, or ARR, reached $290.4 million, a $45.3 million increase over June 30, 2021, and represents an 18.5% increase year-over-year, again, due primarily to continued strong new client acquisition. ARR growth was negatively impacted by AUM decreases within our clients' portfolios as evidenced by our lower net revenue retention on June 30. Net revenue retention was 104%, which is a decline from the 107% on March 31. The drop in both equity markets and fixed income security prices in Q2 created a 3% headwind to NRR in June. That headwind is in addition to the headwinds we discussed in Q1. As Sandeep said in his remarks, for the past five years, this AUM pricing has been mutually beneficial to both us and our clients. However, after our experience in the first half of the year, we are well underway evolving our new contract terms to limit AUM exposure going forward. There are two prongs to our approach. For new clients, we are providing fixed fees for their current AUM with a variable component for any incremental AUM. For our largest existing clients, we are working with them to modify their existing contracts to a fixed fee plus incremental AUM construct. We are pleased with our early results from these discussions. Although net revenue retention was impacted by these market changes, gross revenue retention remained consistent at 98%. Gross profit in the quarter was $55.6 million, and gross margin came in at 75.7%. Gross margin continues to be strong, even as we invest to further establish our presence in international markets. As we have expanded in Edinburgh and Noida, the strength of the U.S. dollar in Q2 marginally lessened the dollar cost of these investments. With our new client growth, we plan to continue to invest. As a result, we expect gross margin to remain at a similar level in the third quarter. Research and development expenses in the quarter were $18 million or 24.5% of revenue, an increase of $1.2 million from Q1 as we successfully grew our R&D headcount by over 50 people in the second quarter. We see a lot of opportunity, and these team members will increase our speed to market with Prism, additional functionality for alternative investments, incremental international GAAP reporting and enhancements to our offerings to asset managers. Sales and marketing expenses in the quarter were $9.8 million or 13.3% of revenue, up 110 basis points year-over-year. We expect increased investment in this area in Q3 as we roll out planned marketing programs, including our in-person Clearwater Connect conference in September. General and administrative expenses in the quarter were $8.7 million or 11.9% of revenue, up 20 basis points year-over-year as we continue to annualize the impact of incremental public company costs resulting from our IPO last September. Looking ahead, we expect the general and administrative expenses will remain at a similar level for the remainder of the year. Adjusted EBITDA in the quarter was $19.1 million or 26% of revenue. I'll touch on our overall adjusted EBITDA expectations in the third quarter later in my remarks. Below operating expenses on our GAAP income statement, you'll see that we incurred $3.1 million in tax receivable agreement expense in Q2. These expenses are incurred in lieu of tax expense when we utilize tax deductions subject to our tax receivable agreement or TRA. Absent the utilization of past losses and deductions, we would be projecting to have taxable income in 2022 and primarily because of, one, the capitalization of R&D expenses under Internal Revenue Code Section 174 and two, less stock-based compensation deduction than our stock-based compensation expense. Absent the Up-C structure and tax receivable agreement, income tax expense would have increased by $3.6 million and the TRA expense would be 0. So the TRA is effectively reducing these non-operating expenses by $500,000. Now let's turn to the balance sheet and cash flow. We ended the quarter with $281.6 million in cash, cash equivalents and short-term investments, and $51.7 million in total debt, resulting in net cash holdings of approximately $230 million. Free cash flow for the second quarter was $16.5 million, reflecting conversion of EBITDA to free cash flow of 87%. Free cash flow also included $1.7 million of capital expenditures. Focusing on guidance for the third quarter of 2022. We expect revenue to be in the range of $74.5 million to $75 million this quarter. This guidance reflects the headwind to growth from AUM decreases and assumes asset price levels as of June. We expect the third quarter adjusted EBITDA to be in the range of $19 million to $19.5 million, with adjusted EBITDA margin expected to be roughly flat to the second quarter of 2022. For the full year 2022, we are lowering our full year revenue guidance, which is now expected to be in the range of $298 million to $300 million, representing 19% year-over-year growth at the midpoint. We expect our adjusted EBITDA for the year to be in the range of $79 million to $81 million. The guidance we provided previously for all other measures remains unchanged. To summarize, in the second quarter, our business and our AUM pricing model was not impervious to the dramatic asset price decreases throughout the quarter. However, the resilience of the business is strong and the following remains true: one, we are a next-generation displacement caliber solution for investment accounting; two, we continue to win new clients and make them successful at an ever-increasing pace; three, we will continue to invest to extend our market-leading position; and four, we are actively working to mitigate the variability to our business, resulting from dramatic AUM decreases, and we look forward to further updating you on our progress on future calls. With that, I'll turn it over to Sandeep to provide some closing thoughts.

Thank you, Jim. As you just heard from Jim, we had a solid Q2. And we are incredibly proud of the grit and determination our teams continue to show. We are excited about driving the changes to our commercial model and we believe this will lead to what we want to deliver: consistent, steady growth using a disruptive technology platform with high-quality profitability and cash generation, all with clear room to expand. We thank you for your ongoing interest and confidence in Clearwater. With that, let me turn it over to the operator for questions.

Thank you. The first question comes from Peter Heckmann with D.A. Davidson. Your line is open.

Good afternoon, thanks for taking the questions. Jim, I just wanted to see if there was a way or how are you thinking about as you alter existing clients, especially larger clients onto a more of a fixed recurring subscription fee? How do you anticipate kind of the net changes both in the short term and then in the intermediate term, should we expect that, that maybe drags just a bit on revenue growth because in most periods, it was a gentle tailwind?

Yes, Peter, thank you. This is Sandeep. So absolutely right. I think when you think about the past five years, it has been a general tailwind in the 2% to 3% range. Now what we've done is, after we saw this impact over the first six months, we broke up all of our clients into three sections in three waves, if you call it, wave one, wave two and wave three, with wave one being the smaller clients, if you will, and wave three being some of the larger and the more complex relationships. And we went out and frankly, just spoke with many, many, many of them and explained what was going on and why we felt that this new construct is a better relationship for the longer term between both the client and us. And to give you a sense of our progress, 61% of wave one has been completed. Obviously, the wave three are longer negotiation, more complicated somewhat, and their 10% are completed. We expect to finish this exercise over the next two quarters. So our expectation is that over the next two quarters, we will realign these contracts in, frankly, partnership with clients.

That's very helpful. Following up on the macroeconomic news and the uncertainty regarding economic growth and global issues, did you notice any slowdown in new procurements or decision cycles, despite the record second quarter bookings?

Yes. I think what has changed about our business is that previously, we needed everything to align to achieve our booking numbers. Now, we see improvement across various geographies and industries. For instance, in the first half of this quarter, we believed Europe was slower, yet asset management businesses in the U.S. performed better. It seems to balance out, and when we look at Q2, it was quite strong compared to Q2 of last year. We continue to have a solid pipeline and good conversion rates, though there are some areas that are slower than we initially anticipated at the start of the year.

Okay. On my line, Sandeep, you cut out for almost the entire answer, but maybe you can just check with the operator and see if you need to repeat that. Otherwise, I'll get back in the queue.

Operator, could you hear us?

Yes, I could hear you all loud and clear.

So Peter, I can quickly reiterate what I think we were indicating. Over the last two years, our business has evolved as we are now involved in many different industries and numerous geographies. What this means is that we don't need to rely on all of them to achieve our booking goals. In the first half of the year, we did notice that Europe was slower than we initially anticipated, but despite that, Q2 was a remarkable quarter in terms of bookings, and our pipeline remains very strong. We are seeing good conversion rates and anticipate that Europe will pick up pace. Overall, the booking figures for Q2 are impressive.

And the demand environment continues to be strong.

Thank you. Our next question comes from Michael Turrin with Wells Fargo. Please proceed.

Hi, thanks for the question. This is Michael Berg on for Michael Turrin here. I have a quick question going back to the revising of the pricing model. Will the contract duration or just the renewal timeline change at all? I know you guys have the monthly, I guess, we'll call it renewal cycle based on AUM. How can I think about some of those pieces of the pricing and contracting model?

Yes. So this is Sandeep. Michael, thank you for that question. Michael, our approach has not changed at all. But I do want to say that when we go to the larger clients, sometimes they will want a meaningfully longer term, right? Obviously, they are mission-critical and sometimes they are desirous of getting a longer-term contract, multi-year contract. And in those cases, we will do it. So I don't think our approach has changed. But as we have gone down and talked to clients about this new model, I do think we have seen more of that. And we are continuing to be, I think, responsive to it. We obviously want price increases every year. And just again, just what is normal best practice. We're not trying to do anything different. But I do think philosophically, we have changed around wanting a fixed fee and more after that.

Got it. That makes plenty of sense. One quick follow-up. How can we think about the mix of fixed versus variable by the time you finish converting all your customers to this new pricing model? It sounds like the vast majority, at least initially, will be fixed. But as time goes on and the AUM grows, will the variable component ever become significant?

Yes. So this is Sandeep. We don't have a number for you, yes, but exactly the sentiment. We think a vast majority of our revenue will become fixed with changes every year because of AUM growth or new modules or new servicing. So yes, we expect it to be much less volatile based on quarterly AUM movements and things of that nature.

Yes, I believe that going forward, all new clients will have a fixed component to their revenue. The metrics Sandeep shared pertain to our existing clients, and the effects of those take longer to materialize. In response to Pete's question about potential headwinds, we typically experience a natural tailwind from AUM expansion. During our discussions, we consider annual price increases and aim for stable revenue, so we view this as a mutual benefit based on historical AUM.

Got it, got it. Thank you very much.

Thank you.

Thank you. The next question comes from Brian Schwartz with Oppenheimer. Your line is open.

Yes, hi thanks for taking my questions this afternoon. I have two. One follow-up on the record 2Q bookings. Is it possible to provide more color on the segment performance between the insurance, the corporate, the asset management that you saw in the quarter?

Sure. In the second quarter, the insurance segment stood out, and in the first quarter, the asset management segment also performed well. We are observing a good balance between these two primary segments.

And Brian, if I could add here. So we did see some significant large wins which we spoke about earlier. So it isn't like we're just winning smaller clients or something like that. No, we've had certain wins that were significantly large. We also won MSIG out in Asia, which continues to surprise us a little bit that we are winning this early in our cycle there. So I think it was insurance that was strong, obviously, like we had.

Thank you. And then the one follow-up question I had on the revised pricing model. Jim, does the invoicing change in the revised model? Can you share how you're planning to invoice now that you're going to go to annual contracts?

So I think we're sticking with monthly, except for the very small clients where we would pivot to annual in advance. But in general, you should think of it as the same invoicing model that we've had.

Thank you.

Thank you. The next question comes from Rishi Jaluria with RBC. Please proceed.

Oh hi, I think that's me. This is Rishi Jaluria from RBC. Thanks for taking my questions. Two for you. First, I want to go back to maybe the changes in the pricing model that you're discussing. I guess, number one, what has been initial feedback as you've talked to new customers with that as well as I'm sure you've had early conversations with existing customers, generally what that looked like? And maybe alongside that, when we think about your historical AUM growth rate, like it was up nearly 30% in 2021. Now it's obviously on the other side, it's down about 10% year-over-year relative to last year. But typically, if we think about that 30% number, how much of the growth in AUM has been from net new assets coming on versus just the return in the assets? And then I've got a follow-up.

Yes. The vast majority of that 30% growth is net new assets and the fund flows into our asset management clients as well as adding new clients, right? And the assets that those new clients are bringing on. That's the vast majority. We've historically talked about the AUM expansion being that tailwind of 2% to 3%.

Got it. Okay. That's helpful. And just in terms of feedback question.

Yes. I don’t want to say that we faced much resistance from new clients as we implemented this. However, when it comes to our largest existing clients and renegotiating contracts, that requires longer discussions. You can’t simply enter these large organizations and expect to finalize a new contract immediately. It doesn’t work that way, as you can imagine. That’s why we’ve outlined a plan to complete this over the next two quarters. I believe the process has been very collaborative. It makes sense, right? This is likely what clients prefer as well. We haven’t encountered any resistance at all, but it does take time. I don’t want to give the impression that everything will be finalized in the next month or two; it does take time.

Okay, that's helpful. As a quick follow-up, your SBC seems a bit high at just over 20% of revenue dilution, which is challenging to normalize given the recent IPO. This appears elevated, especially with many employees in Boise and plans for overseas expansion in Edinburgh and Noida, where there may not be the same demand for options and RSUs as in the Bay Area. Could you clarify your philosophical approach to stock compensation and how we should consider stock comp and dilution over time? Thank you.

Sure, sure. Thanks. So I think just to remind you, stock comp was impacted somewhat by the modifications and the work we did in conjunction with going public. So we're working through kind of a little bit of that bump. And so as we look to the future, we see stock-based compensation as a percentage of revenue going down over time. Having said that, right, I think when we time spend with our compensation consultant and we look at our peers, we are in the middle of our peers, perhaps in your data a little bit higher, depending on the peer group that you're looking at. But I think that our dilution goal is consistent with what we've said in the past and very consistent with our peers. And as this business scales at 20% plus over time, that SBC number obviously would naturally taper down.

I believe it's important to clarify that we are not attempting anything out of the ordinary. We have a group of peers that are similar in size and profitability, and the compensation committee reviews that entire group to determine a fair median number. We anticipate this will continue to be our method. However, as Jim mentioned, once we move beyond these one-time and natural occurrences related to the IPO, we expect the trend to improve as revenue increases.

All right. Really helpful guys.

Thank you.

Thank you. The next question comes from Kamil Mielczarek with William Blair. Your line is open.

Hey, thank you for taking my questions. So another one on the pricing. Can you maybe provide some more detail on how you're incentivizing existing customers to transition to the new model, especially the wave three that may have more leverage? And given your high growth retention and the recent inflation we've seen, do you see potential to maybe raise ASPs as you make this change? Or should we the average effective customer spend are paying relatively flat relative to the prior model?

Thank you, Kamil. I realize we could have explained this better. To be straightforward, it's beneficial for our clients and for us. If fees keep decreasing while inflation rates rise, it doesn’t help us invest in research and development or improve operations. That's the essence of our discussions with clients. We inform them that our fees were at a certain level in January, and it’s not sustainable for them to continue declining while costs increase. This situation isn’t good for the business. We believe we share leverage with our clients as we aim to offer high-quality service and operations. I must mention that clients have been quite cooperative in this regard. It’s important to note that they didn’t budget for a decline in technology fees at the start of the year. Therefore, I believe there's flexibility to make this work. We aim to determine a fee that reflects the quality of work we deliver, and that's the nature of our conversations. It's not about wanting to increase prices, and that's not our approach. Does that make sense, Kamil?

Yes. That's very helpful. I appreciate all the color you put on here. And if I could just follow up on the free cash flow. It's nice to see the uptick in the quarter. How should we think about the pace of free cash flow margin expansion longer term? Is that just primarily driven by scale? Or are there other catalysts that we should watch out for in the coming years?

I think when you look back historically, there was a lot of noise in the year we went public on our free cash flow numbers and various transactions that went through with that. The way we think about it is we're kind of targeting throughout the year about 70% of our EBITDA converting to free cash flow. Obviously, we were much higher than that in Q2. And so we'll continue to monitor that. But as you think about certain seasonal ebbs and flows throughout the four quarters of the year, I think, targeting that. And so as you think about, okay, what's our revenue growth, what's our EBITDA margin growth? And then how do we think about the free cash flow conversion of that.

Okay, it's helpful. Thank you guys.

Thank you. The next question comes from James Faucette with Morgan Stanley. Your line is open.

Hey thank you very much. And thanks for the questions. I want to go back to the adjustments to the pricing. And I know a lot of the focus has been on customer receptivity, etc., and that's understandable. But how should we think about that change impacting your long-term growth algorithm if you don't, it seems like this was compromised to the ability to get kind of the natural 2% to 3% tailwind from AUM accretion that you historically have gotten.

Yes, Jim, thank you for your question. However, we have a different perspective, James. If you consider the logic, we have a fixed fee for our current portfolio, and as that portfolio expands, the fees will increase, although not exactly in proportion, but with some capacity for growth. Additionally, we're planning to implement module fees that we will charge for separately. There's no resistance from clients when we say that using this module should come with a different payment structure. Furthermore, with a fixed fee structure, it's easier to justify a price increase annually in line with inflation, which is currently around 4% or similar. In the past, we were cautious about this due to fluctuations in assets under management, but now, if I were to tell you that due to inflation of 5% and 7%, we will increase your rates by 4% or 5%, I believe there would be little resistance. Essentially, you can expect a consistent tailwind and much better predictability, and I will no longer face questions about whether rates will increase or decrease each quarter when meeting with any of you or our investors. Finally, regarding the downturn Jim mentioned, which included a 3% decline this quarter and a 2% decline the previous quarter, we anticipate this adjustment will help recover a significant portion of those losses.

Understood. And then I guess as a metric to kind of measure customer engagement and as a way to forecast the business. A lot of us rely on NRRs. And obviously, those have come down over the last couple of quarters. But I'm wondering, how should we think about like where the floor is on that metric? And how to price these pricing dynamics fit into that? And I guess the real question is how quickly do you think we can return to the historical levels of 111%, 112%, especially given the relative contribution between the price changes and Prism uplift?

Yes, great question, James. We are not pleased with the 104% number, but there are positive aspects within it. Firstly, it indicates growth, as same-store sales with existing clients are up 4% year-over-year. The change from Q1 to Q2 was primarily due to a 3% AUM headwind, decreasing from 107% to 104%, which was entirely related to AUM changes. All our upsells, churn, and net upsells were consistent with our expectations. Looking ahead, when we think about annualizing this metric, it's important to consider the same-store sales aspect. If we look at the period from September 30 of 2021 to September 30 of 2022, the markets experienced growth from June to September last year. We are optimistic that the markets will show improvement in this half, and we expect to see a positive impact from the recent commercial changes. However, if we analyze the situation, there is an inherent challenge to achieving better numbers in the next quarter.

But James, if I can just add, this is Sandeep. I think this is exactly what we don't want. We should be discussing, for example, our core business and what we are winning and the strength of that competitively. That said, we spent a lot of time on NRR, and once we complete this exercise, which we expect to finish by the end of the year, I believe that number will stabilize. We can provide direction on it because it shouldn't be significantly affected by the markets. As Jim mentioned, churn this quarter was down, indicating improvement. We are onboarding clients faster, and overall, the business has performed really well. However, we are focused on the 3% and 5% declines, which are accurate. I’m not criticizing that, but our hope is that this change in how we work commercially with our clients will allow us to concentrate our efforts on doing what's best for the business.

That's great color. Thank you, gentlemen.

Thank you.

Thank you. The next question comes from Gabriela Borges with Goldman Sachs. Please proceed.

Hi guys, thanks for taking my question. I wanted to ask about this concept of time to value. Where in the feedback we get on Clearwater is there a significant ROI from being implementing Clearwater. And so I'd love to ask you, Sandeep. How are you seeing sales cycles trend? How are you seeing implementation cycles trend? Are there any incremental things you can do in your control to shorten the time to value for your customers?

Thank you, Gabriela. I appreciate it. I believe one of our key selling points is the time it takes to see a return on investment in Clearwater. It varies by business, but in some cases, we see a return in as little as four months. We feel that when you invest, the return is typically within a four-month cycle. However, we haven't observed significant changes in our sales cycles; they are not primarily driven by RFPs, as we often initiate those ourselves. In the U.S., we have not noticed a change in this regard. In Europe, however, we did experience longer sales cycles in the first half of the year. Nevertheless, we performed quite well overall, as the U.S. exceeded our expectations and Asia also outperformed slightly. On a broader scale, we don’t see substantial changes. Notably, from a competitive standpoint, the market seems to have improved for us. We compete with various vendors, and given the complexities of accounting at this level, we have noticed a slight easing in the competitive landscape, which we are pleased about and intend to leverage.

That's helpful. And the follow-up is for Jim. A little bit of color on the pockets of slowdown. You're going through a little bit of a pricing transition business, at least as an analyst, feels a little harder to predict in the near term. Would love to hear, is there any change in your approach to guidance as it relates to derisking some of these factors in the second half, particularly around the pipeline of work orders and maybe the cadence of the pricing transition?

Thank you, Gabriela. As we assessed our guidance for the second half, we used the AUM levels from June as our baseline, which had decreased during that time. This is where we made a change. We are optimistic about the pipelines and have confidence in our team's ability to onboard, and there have been no changes in those areas.

Yes. Gabriela, I would just add that the onboarding time, the amount of time taken has definitely improved. So we track something called the BNB metric, which is a book not bill metric, and that's doing really well. So I think as people have come back into offices and everything isn't only through Zoom, I think that has definitely improved. So again, the core business, I think, continues to do really well. And as you know, isn't so much you can do about AUM decline except to change the contracts. And that's what we are doing. We have had enough of waiting and being affected by this. The market is taking it up and taking it down even though it is 3% and 5%, it matters. And we spend energy watching that and doing something, but not doing nothing about it. And that's where we stop. We said; let's go out to the contracts. Let's go talk to our clients and make the changes, and we are well on our way to do that.

Thank you for the color.

Thank you. The next question comes from Noah Herman with JPMorgan. Your line is open.

Hi, thanks for taking the question. Appreciate it. Can you maybe elaborate a little bit on what in the environment or so how should we also think about the seasonality of revenue and bookings, both near term and long term, given the pricing model? Thanks.

Sure. I think just to repeat the question; you broke up just a little bit for us, maybe not for everyone else. I think asking about the relative competitive environment, do you want to start with that? I think we feel incrementally better about that. And then the seasonality of bookings and revenue, let me take revenue really quick. Obviously, with such a high recurring revenue, we kind of continue to see that flowing through. Booking has a tendency to has natural cadence around the timing of business and we would expect to see bookings continue to accelerate throughout the end of the year. That's just kind of the seasonality.

Well, sometimes I feel that. But volatility sometimes helps us, right, because clients want to see the portfolios more often, and they define the price of owning legacy technologies goes up, because you can't get the data you're trying to get with the speed what you would like. So I do feel if you look at Legal and General, if you look at Secondary I mean those really excited to welcome them onto our platform, move away from legacy technologies and have a high ability to respond. And so I think it does help us. But I don't think we've seen anything vastly different whether in Q1 or Q2 compared to past years. I do think with the exception of Europe, which you pointed out.

But interestingly, right, to talk about the demand environment. We had a client event in Europe, where we had over 100 clients kind of attending. So there's interest, there is demand there. Obviously, things are a little more complicated in Europe right now. But the tailwind of our differentiated product and relative competitive abilities.

I think Jim is correct. The pipeline, particularly in Europe, looks very promising for the second half of the year. So, I believe it's mainly a matter of timing.

Great. Thank you so much.

Thank you Noah.

Thank you. Our next question comes from Yun Kim with Loop Capital.

Thank you. Jim, obviously, a lot of questions on pricing change because theoretically, there could be a lot of near-term uncertainty regarding the business and obviously the revenue flow if you can give us a little bit more insights into how you were able to get to your top line guidance, specifically you really didn't expand the top line guidance range. It remains only about $2 million range for the year. Does that imply that the pricing model change is fairly predictable from your perspective? Just trying to understand if the pricing model change could introduce additional variability to your top line, but your guidance suggests otherwise.

Yes. We are making this pricing model change to reduce revenue variability and to concentrate on essential drivers. We believe this is a robust and predictable business, and our guidance demonstrates our confidence in it.

If I can just add here is, Sandeep here. Look, I think the current contracts are still there, right? It's that we don't want to see a 1% and 2% movement, and so we're going to clients and trying to change the contract for it. But they don't change our revenue expectation, except for the better in the second half. The question is how quickly we can get that done? And that is what I think it is, but it's not like we're going and saying, "Hey, let's talk about something completely new. We're doing that work today. So I don't think it introduces an uncertainty. I think what we're trying to do is reduce volatility. But I don't think it changes what we do for them on a day-to-day basis and how they use our platform on a day-to-day basis. Nothing changes in that, right?

Okay. That helps a lot. And then just quickly changing the topic away from the pricing model change. If you can talk about Sandeep on the progress you're making in Europe in regard to new customer acquisitions there. You kind of said things were good, but at the same time, the sales cycle did lengthen in the first half of the year. Can you just talk about the overall business in Europe? And any change to the investment levels that you're making into that region?

Thank you again. In Europe, we have established a comprehensive infrastructure; this is not merely about selling in Europe. We have a strong team in Scotland and Edinburgh, another in London, and also teams in Paris, France, and Frankfurt, Germany. There's a full marketing and product management initiative in place as well. I want everyone to understand that this is a coordinated effort in Europe. The region performed very well last year, but I noticed that in the third, fourth, and fifth months of the first half of this year, sales cycles became longer. However, currently, we recently held a client event that had significant turnout, with 100 clients participating, indicating high interest and engagement. Consequently, our pipeline in Europe is very robust. While some things have changed, the core proposition remains the same; there was just a slight slowdown during that period.

Okay, great. Thank you so much.

Thank you.

This concludes the Clearwater Analytics Second Quarter Earnings Conference Call. Thank you for your participation. You may now disconnect your line.