Clearwater Analytics Holdings, Inc. Q3 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Clearwater Analytics' Third Quarter 2022 Financial Results Conference Call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. 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 third 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. Expectation 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 demonstrate momentum with a strong Q3. Revenue grew to $76.6 million in the quarter, which constitutes some 19% year-on-year growth, beating the upper end of our revenue guidance by 2%. As significantly, we showed strong sequential growth of 4% from Q2 to Q3. We are very happy to announce significant new wins where we are displacing legacy competitors. We are excited to welcome Nationwide Mutual Insurance Company, Altos Labs, Chandler Asset Management, Continental General Insurance Company, FAI Capital Management, The Bank of Nevis Limited, Sonatus and several other clients to our platform. In addition, we continue to drive international expansion with our first-ever win in Australia, where we added Bronte Capital, a Sydney-based global long/short fund manager to power the investment data management, reporting, and portfolio analytics. Market trends are quickly changing. Others want to be more nimble when it comes to cost and their ability to take advantage of market dislocations by acquiring new books of assets with confidence. Finally, a desire to manage the risk and compliance of the rapidly changing global portfolio drives clients to the Clearwater platform. Given these drivers, the demand environment for our platform continues to be robust and the positive momentum remains unchanged. Gross margin was a solid 74.8% as increased efficiency helped balance the inflationary wage pressures we are seeing in the market. Given the strong demand environment, we continue to make investments to build out our operations teams in Europe and Asia and are excited to announce that FWD Group, a leading insurer in Asia, is now live on our platform. We run an efficient business, delivering an adjusted EBITDA of $18.8 million, which translates to a 24.6% margin. This is an increase from $17.1 million in Q3 2021, a quarter in which we were not a public company for a majority of the quarter and did not incur costs associated with being one for that time period. Our free cash flow generation was $12.8 million in the quarter, which continued the trend of solid conversion of adjusted EBITDA to free cash flow at 68%. As we discussed in the last earnings call, the AUM on our platform was impacted by the rising interest rate environment. In response, we launched a program to modify a commercial construct, which includes a base-plus model and/or pricing increases. We continue to see clients approach these conversations constructively, and are happy to report that as of the end of last week, we have agreed to a new commercial construct with clients representing 49% of ARR. We expect to finalize similar agreements with clients representing another 30% of ARR by the end of the year. A significant portion of the remaining clients are very new to the platform or are still being onboarded. This program has met our aggressive expectations without disrupting booking momentum, and we are very proud of that achievement. Coming back to the strength of the core business, our gross revenue retention was 98% for the 15th straight quarter, that continues to be a best-in-class metric. The move to a multiproduct company continues to be a strategic goal. And we are happy to report that Clearwater LPx, a full-service platform for private funds that automates the aggregation and normalization of unstructured data and provides validated accounting, reporting, and analytics at scale has been adopted by a number of clients, including Arkansas Blue Cross Blue Shield and the Pittsburgh Foundation. Going live with Clearwater LPx solves many operational challenges associated with data aggregation, reconciliation, accounting, and reporting requirements. With increased adoption, we now sell Prism and Clearwater LPx as separate modules that are priced and sold separately. In the third quarter, we marked a corporate milestone announcing our first ever acquisition. We agreed to acquire JUMP Technology in France, a software company dedicated to the investment management industry. JUMP's clients include market leaders Rothschild & Co Asset Management, Groupama, Groupe VYV, APICIL Asset Management, and Moneta Asset Management, to name a few. JUMP's modular approach allows clients to use a specific solution for a particular business need, PMS, OMS, Performance Attribution, NAV, Unit Linked Funds, Reporting, or for the entire Front-to-Back value chain. This acquisition is significant for several reasons. One, we add 70-plus clients in France and the French-speaking markets and our 100 employees in Paris, both of which dramatically enhance our presence in Continental Europe. Two, a segment of the asset management industry, namely hedge funds, private banks, family offices, insurers and institutional investors, need an integrated end-to-end investment management platform, including a PMS, OMS accounting performance, and reporting. We can now service that market. Three, the modular nature of the JUMP platform allows us to sell and deliver enhanced performance and attribution to our current clients. Four, current clients who use Clearwater, but also have a direct investment desk can now get a robust PMS, OMS solution from Clearwater. Five, finally, several clients in Europe have extensive unit-linked fund portfolios. We bring a best-in-class solution for that asset class, which can then be integrated via Prism to provide a comprehensive view. We expect this transaction to close in the fourth quarter of 2022. In Q3, ARR grew to $303.6 million, which was up by more than 18.1% 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 our existing clients. Our net revenue retention rate is steady, coming in at 103%, which is only 1% lower than the prior quarter despite continued market headwinds. As the commercial changes we have negotiated come into effect late this year and early next year, we expect the impact of these headwinds to be mitigated and future volatility reduced. One of our key strengths is our disruptive single instance, multi-tenant SaaS platform, which continues to spark a replacement cycle and encourages clients to add additional books of assets to our platform. New clients continue to choose Clearwater to replace highly fragmented and predominantly manual-driven legacy systems. In the third quarter, 49 clients went live on the Clearwater platform. Our continued growth and profitability allows us to continue investing in our platform very aggressively. We will continue to invest in an effort to increase TAM, build market-leading capabilities in managing alternative assets and boost automation and machine learning investments to improve quality and enhance margin. With the JUMP Technology acquisition, we bring that product to the U.S. and broaden the depth and breadth of our product portfolio, offering additional modular components spanning the entire investment management life cycle. A key pillar of our approach is client focus, which is at the heart of everything we do. Not only do we focus on our clients' needs, but we also strive to delight them and earn their trust. In September, we hosted our Annual User Conference, Clearwater Connect, in Boise that brought together more than 500 current and prospective Clearwater Analytics enthusiasts, eager to explore the future of investment operations. They learned about Clearwater's award-winning platform and its newest features and capabilities and how these innovative technologies can be applied to significantly boost business productivity and growth opportunities. During our Inaugural Clients Award program, we named standout leaders that have achieved growth and have taken an innovative approach with investment operations using Clearwater's platform, including Unum, Mutual of Omaha, Venerable, Performa, CNA Insurance, Markel Corporation, Chimera Investment Corporation, Qualcomm, Morgan Stanley, Reliance Standard Life Insurance, Government Portfolio Advisors and JPMorgan Asset Management. Speaking of awards, we were also recognized as an industry market leader by Captive Review. Clearwater Analytics won the Top Award and the 2022 U.S. Captive Review Awards in the Software Solution category. In addition to our external success, we care deeply about the performance and development of our people. This year, we are proud to share that we grew our workforce by approximately 20% as we continue to hire around the globe. We are dedicated to making investments in people-related programs that help make Clearwater an engaging, vibrant, and rewarding place to work. Overall, we are proud of our continued momentum and our many accomplishments in Q3. 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 third quarter financial performance, as well as updated guidance for our fourth quarter and full year 2022.

Thanks, Sandeep, and thank you all for joining us. It is gratifying to report our Q3 results. Despite the continued downturn in the market prices in both equity and fixed income securities during September, we delivered 19% revenue growth, exceeding our guidance range by $1.6 billion. These results reflect our continuing focus on execution in a challenging environment. As a testament to the market-leading capabilities of our solution, we were able to partially offset market headwinds with the execution of price increases and a new base-plus pricing model. And presently, we have rolled out these changes to 49% of our annualized recurring revenue runway. We reported $18.8 million in EBITDA, missing our guidance by $200,000, due in part to $700,000 in additional commission expense from our strong bookings and price increases. Moving now to details about our third quarter financial results. Please note that our results will be discussed on a non-GAAP or adjusted basis, unless otherwise noted. As of September 30, 2022, annualized recurring revenue or ARR reached $303.6 million, a $46.5 million increase over September 30, 2021, representing an 18.1% increase year-over-year, again due primarily to continued strong new client acquisition and additional assets loading onto our platform from existing clients. The increase in annualized recurring revenue was partially offset by the decreases in clients' assets on the platform, resulting from decreases in fixed income and equity security prices during the first 9 months of 2022. This resulted in a 5% reduction in the growth of our annualized recurring revenue. Net revenue retention was 103%, which is a decrease from the 104% on June 30. The new pricing construct has partially offset the ARR decrease, which has resulted from the downturn in both equity and fixed income markets. Although net revenue retention was impacted by these market changes, gross revenue retention remained consistent at 98% for the 15th consecutive quarter. Gross profit in the quarter was $57.3 million and gross margin came in at 74.8%. Gross margin continues to be resilient as we continue to execute on operations for new client growth, including our investment in international markets. As a result, we expect gross margin to remain at a similar level in the fourth quarter. Research and development expenses in the quarter were $19.9 million, or 26% of revenue, an increase of $1.9 million from Q2 as we successfully grew our R&D headcount by 39 people in the third quarter. These additional R&D headcount will augment our initiatives with Prism, additional functionality for alternative investments like Clearwater LPx and incremental international GAAP reporting. Sales and marketing expenses in the quarter were $10.2 million, or 13.3% of revenue, up 30 basis points year-over-year as we hosted Clearwater Connect in-person in September. General and administrative expenses in the quarter were $8.4 million, or 10.9% of revenue, up 70 basis points year-over-year as we continue to annualize the impact of incremental public company costs resulting from our initial public offering last September. Adjusted EBITDA in the quarter was $18.8 million, or 25% of revenue, an increase of $1.8 million over Q3 2021. Below operating expenses on our GAAP income statement, you'll see that we incurred $2.6 million in Tax Receivable Agreement expense in Q3. 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 will be projected to have taxable income in 2022, primarily because of capitalization of R&D expenses and less stock-based compensation tax deduction and our stock-based compensation expense. Absent the Up-C structure and Tax Receivable Agreement, income tax expense would have increased by $3.1 million, and the TRA would be zero. So the TRA is effectively reducing these non-operating expenses by about $0.5 million. Now let's turn to the balance sheet and cash flow. We ended the quarter with $291.5 million of cash, cash equivalents and short-term investments and $51.1 million in total debt, resulting in net cash holdings of approximately $240 million. In connection with the JUMP Technology acquisition, we will be utilizing approximately $75 million in the fourth quarter. Free cash flow in the third quarter was $12.8 million, reflecting a conversion of EBITDA to free cash flow at 68%. And free cash flow included $1.9 million of capital expenditures. Focusing now on guidance for the fourth quarter of 2022. We expect revenues to be in the range of $79.3 million to $81.3 million this quarter. This guidance assumes asset prices at September level and approximately $1 million in revenues from the JUMP Technology acquisition. We expect the fourth quarter adjusted EBITDA to be in the range of $22.2 million to $23.2 million, with adjusted EBITDA margin expected to be higher than the third quarter of 2022. For the full year 2022, we are increasing our revenue guidance, which is now expected to be in the range of $300 million to $302 million, representing approximately 19% to 20% year-over-year growth. We expect adjusted EBITDA to be in the range of $79 million to $80 million. The guidance we provided previously for all other measures remains unchanged. To summarize, in the third quarter, we continue to win large new logo clients and expand into new geographies and adjacent markets, including our announced pending acquisition of JUMP Technology. In addition, we are very satisfied with our progress transitioning our clients to the new pricing construct. 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. Overall, we are very happy with Q3, not only because of solid execution within the quarter but how it sets us up for Q4 and calendar year 2023. Our continued progress in booking and selling to clients of all sizes across a variety of industries, coupled with the continued success in transitioning our commercial contracting and pricing model, have improved the quality of our business and allowed us to execute with confidence. Investing in the strategic acquisition of JUMP Technology will allow us to continue to innovate for our clients and prospects increasingly complex needs, while expanding our mission to now being able to serve the full investment management life cycle and eventually revolutionize the world of investing. With that, let me turn it over to the operator for questions.

The first question for today's call comes from James Faucette from Morgan Stanley.

It's Michael Infante for James. I just wanted to try to get a little bit more color on where the pricing conversation stand. So I guess if you could, today, what percentage of clients and what percentage of total revenue are live on the new pricing model? And how do you sort of envision that trending throughout the balance of '22?

Michael, thank you. This is Jim. As Sandeep pointed out, 49% of our annualized recurring run rate is now based on the new model or in the new commercial structure. We anticipate that around 80% of this will be completed by the end of the year, focusing on revenue. For context, when we introduced this program in Q2, we discussed client counts in terms of waves. In Q2, we had communications with 61% of Wave 1, which has increased to 81% by the end of Q3. For Wave 3, which includes our largest and most complex clients, we were at 10% previously and have risen to 39%. This gives a good indication of our client count blend, and the overall impacted revenue stands at 49%, which we expect to continue growing until the year's end. Sandeep, would you like to add some details?

Yes. Just one more thing, Michael, is that when we're saying 49% of the clients we have signed a contract with, with the new contractor, it doesn't mean those are fully applicable yet, right? So they are going to be applicable towards the end of the year and the beginning of next year. So yes, I just want to make sure you understood that nuance also.

Got it. That makes a lot of sense. I appreciate that. Regarding JUMP, thank you for hosting the call to announce the acquisition. Just to touch on it quickly, aside from the clear geographical diversification benefits, when I think back to the IPO process a couple of months ago, the PMS and OMS capabilities weren't really emphasized. So, how do you see JUMP enabling you to penetrate what could be a relatively difficult asset management environment more effectively or rapidly?

Yes. So, thank you for asking that. But let me try and explain how we see it. I think PMS and OMS by itself was not attractive, and frankly, would not be attractive even today. But what happens is that when you look at some insurance clients, they're starting to manage their own book. So once they manage their own book and they have their accounting with us, then to additionally get PMS, OMS from us becomes a very good add-on and a very good cross-sell, if you will. So that was point one. The point two was, Michael, that some part of the asset management industry, when you think about hedge funds, private banks, family offices, they tend to buy an integrated end-to-end platform, right? And we obviously did not have the front end. So having JUMP allows us to bring that capability not just in Europe but bring it here to the U.S. So those things made a difference. The other big one, Michael, was around performance. They have a really good performance module, which is often bought separately or in conjunction with the Clearwater platform. And so while we already do performance, this gives us enhanced performance and is something which we think a number of our current clients would buy. Lastly, they do really good work with unit-linked funds. And as a matter of fact, it is market-leading in Europe. And this is a capability we have but very limited capability. And using JUMP, we can go back with unit-linked funds and sell to our current client base and prospects. So we think it fits really, really nicely, and that's why we worked pretty hard to get it done as reasonably quickly as we could.

Got it. Thanks, Sandeep. Thanks, Jim.

The next question today comes from the line of Peter Heckmann from D.A. Davidson. Please go ahead. Your line is now open.

Good afternoon gentlemen. Thanks for taking the questions. Just on JUMP, correct me if I'm wrong, but I think on the deal call, you had given us 2021 revenue and talked a little bit about the growth rates, and now we've got a little bit of shifting FX. But just ballparking in terms of revenue and margins on an annualized basis for 2023, are you prepared to give that on today's call?

So I think what we've provided, Peter, was approximately $1 million in Q4. The reason why we gave it so approximately is that we just don't know when exactly we're going to close the transaction in the fourth quarter. We're very confident we will close it in the fourth quarter. As we look forward, historically, they've had that kind of, call it, roughly $12 million, and they've been growing nicely on an IFRS basis. And so if we assume that's kind of consistent, you can kind of build to the growth. I think we're reluctant to give specific guidance on JUMP until we actually close the transaction and do that work. So I think we'll be fulsome in providing you kind of that and being explicit in our 2023 guide as it relates to how much JUMP grows, growing what is our otherwise strong organic growth in 2023.

Okay. We will need to follow up on that. Regarding the 500 basis point headwind to net revenue retention in the quarter, that was the cumulative effect from the first three quarters, really reflecting the trailing four quarters, but it was influenced by market action.

That is the cumulative effect of that market action over that period of time. We believe that the impact would have been more significant had we not modified the commercial constructs. What you're seeing is the impact of those contract changes and the effect of that market change.

Peter, if I could just add to that, that look, we think that when you just look at what we are delivering this year, this 19% to 20% growth year-on-year, with this 5% headwind, I think if we just do the math, you'll see that the business has been absolutely as robust as you would expect, right? Now that's not a good enough answer. So what we have done is obviously worked on the client contracts, and so we expect this volatility to be essentially mitigated next year. But below that, below if you get past the 5%, you will see the business itself is performing really, really well. So that's the point we're trying to make.

Okay. That's very clear. And just lastly, remind me, but I think of the JUMP clients, only a small handful were also already Clearwater clients, correct?

A very, very small handful. You would say that the client count was roughly 70 in French and French-speaking geography.

That was what was interesting about that is that you are really going to a geography where we were not represented well at all, and it gives you these 70 clients. So you get immediate presence in the market which it takes a while to build. So that's a JUMP sort of just check so many boxes.

Right. Right. Okay, I appreciate it.

Thank you.

Thanks.

The next question today comes from the line of Rishi Jaluria from RBC. Please go ahead. Your line is now open.

Oh, wonderful. Thank you so much for taking my questions and I appreciate all the incremental color on today's call. First, I wanted to go back to the user conference. So when we're talking to customers out there, one of the things that they seem to really like about Clearwater was their ability to shape the road map and the fact that you listen to their feedback over time. So I'd be curious, having hosted this conference after a period of not doing it because of COVID, was there anything that you saw in terms of feedback from customers that really stood out to you either in terms of your current products or kind of future products, features functionality that you'd want to discuss? And then I've got a quick follow-up.

I appreciate everyone being here and invite all of you to our next client conference, where I hope you'll be clients as well. It was encouraging to see strong alignment among our clients regarding our roadmap and the tangible benefits they are experiencing. One particularly exciting aspect, which we haven't discussed with investors yet, is the potential for insights we can offer based on the $5.9 trillion in assets on our platform. We touched on this in a few different sessions, revealing some insights from our work with machine learning and artificial intelligence. Clients expressed enthusiasm about the practical applications of these insights, even beyond our current imagination, and this collaborative innovation with them is personally thrilling. Sandeep, please go ahead.

Yes. One of the things I think we saw a lot of issue was our clients continue to be under pressure. So they continue to be under pressure to manage costs more aggressively to do more. So we got a lot of requests about what else can Clearwater do in adjacent spaces to really improve their operations. So a lot of interest in our road map, a lot of, frankly, just relief that we were going to continue to invest in our platform to make it better and sort of address more of their problems. So really a great conference. We obviously enjoy meeting people. But just having customers get here and validate what we are doing, and frankly, change some of what we were doing, I think was really, really good.

Great. That's really helpful. And then one for Jim, maybe specifically. So you talked about wanting to get 80% of kind of the revenue base on the new subscription model by the end of the year. If that kind of happens and you slowly get closer and closer to that 100%, would you consider introducing or highlighting RPO as a more relevant disclosure since it will be more upfront and more contracted rather than on the variable AUM, AUA-based pricing model?

Let me explain the components of the new commercial structure to ensure everyone is on the same page. The first component is a base model, which essentially consists of an annual fee. If we billed annually upfront, we would adopt an RPO view, but for now, we are billing monthly. This fee is a fixed annual amount based on the client's total assets under management. That's the initial step. The second component involves a scaling of fees based on the growth of the client's business, usually linked to their AUM balances. The third aspect is that we have clearly outlined what core Clearwater allows us to sell as separate modules. Lastly, there will be an annual increase to the base fee to drive continued growth. I want to emphasize that the acceptance of this model from our new clients has been excellent, which is great news for both our new and existing clients. As we transition to invoicing the annual base fee in advance, that will mark our shift to the RPO model.

Got it. That's really helpful. Really appreciate the thorough answer. Thanks so much, Jim and Sandeep.

Thank you. Thanks, Rishi.

The next question today comes from the line of Kamil Mielczarek from William Blair. Please go ahead. Your line is now open.

Hi, everyone. Thanks for taking my question. First on the pricing model, it's nice to see the strong progress there. I just want to follow up on how the Wave 3 is progressing. Can you provide maybe some more color on how you approach these more complex conversations, how the change is being received by the larger customers? And where are you seeing the most pushback, if any, given the favorable pricing in this market with the existing model?

Thank you, Kamil, for your question. I don't think we're experiencing significant pushback. Almost all the clients have been receptive and engaged with us, although it does take longer. When discussing the Wave 3 clients, the numbers involved are obviously larger, which makes it challenging to complete everything in five weeks. Therefore, it requires more time. That's how I would describe the situation. I haven't noticed any change in the constructive nature of our conversations; it just takes longer. Jim, do you have any insight on whether there's a particular market where we see this?

I think the acceptance in corporate and insurance is almost universal. And in asset management, it takes a little more time to kind of walk through that.

Yes. I think that's fair.

That's helpful. It's good to hear. And if I could just follow up on a question on Europe, can you update us on how demand is trending there? And what countries have you seen the most traction? And have you seen any changes in customer conversations in recent months?

Yes. So Europe continues to have a really strong pipeline. I think we disclosed that 15% of our revenue now is international. So that's huge from last year, if you remember. So we've been really successful with Europe. We are very bullish on Europe. Frankly, the acquisition of JUMP in Europe is a bit of testimony to the fact that we think we can grow really quickly. It just takes a while to set up these offices and hire all the people, and that's why the acquisition made so much sense. So, look, we continue to expect to get very strong growth there. I think year-to-date, we've added 13 new logos in Europe. So we have about 13 new logos there. So, look, all in all, it's going about as well as we think it could have. We're also a little bit excited that we had FWD go live. I mean this is one of the larger insurers in Asia. Also a little bit excited we got our first client in Australia. And this isn't with a team there, it is with them calling in. And so we really, which we think all of the international business is going quite well.

That's great to hear. I appreciate the color. Thanks again.

Thank you.

The next question today comes from the line of Ella Smith from JPMorgan Chase. Please go ahead. Your line is now open.

Hi. Thanks so much for taking my question. My first question, so your revenue guidance would imply about 19% growth year-over-year. Would you say this increase is mostly due to new client acquisition versus pricing? And would it be possible that your overall client count is actually north of 19% year-over-year by year-end?

We are definitely experiencing growth from acquiring new clients, as well as from existing clients adding more assets to the platform. As our company has evolved, we continue to target higher-value markets. While our total client count is increasing, it's not at 19%. However, when we look at clients with balances over $100,000, $250,000, and $1 million, which we report annually, we see those numbers increasing. As the share of these larger clients grows, you'll notice that contributes to driving the overall 19% growth.

That's very clear. Thank you. And from...

Perhaps, it will be 20%. Perhaps, it will be...

Yes. Yes. Obviously, it's going to...

Great. Very clear, thank you. And my second question pertains to the JUMP acquisition. I believe during the call in September, you referred to an IFRS discrepancy due to licensing. I was wondering if you have any updates about the accounting nuances associated with the acquisition?

Yes. We're continuing to work through that with them as we move to U.S. GAAP. And obviously, as we kind of bring the JUMP solution into the cloud, consistent with what Clearwater does, that IFRS U.S. GAAP thing diminishes over time, but we're just still working through that as we work through the closing process. And I think we'll be able to give you a full debrief of that after Q4 once we've closed.

Great. Thank you both very much. I appreciate it.

The next question today comes from the line of Michael Turrin from Wells Fargo. Please go ahead. Your line is now open.

Thank you for taking the question. It seems that the retention rates are stabilizing, with the net revenue retention number being similar to what we saw last quarter. You're clearly maintaining strong gross retention rates again. Is it reasonable to assume that the net revenue retention will mostly stabilize around these levels, especially since the gap is narrowing with the gross number? Additionally, how does the transition you are undergoing affect the anticipated trajectory, if at all?

Yes, I think that's a great point. I believe that, barring any significant macroeconomic events, we have reached the bottom. Considering all the additional modules we have and the JUMP acquisition coming to fruition, we have numerous strategies to improve our net revenue retention as we navigate through this issue.

Yes, no, I would absolutely expect all of these contract changes we continue to work on and have worked on to start to have an impact in Q4, towards the latter part of Q4 and the beginning of next quarter. So we absolutely expect that number to improve. And obviously, barring something strange happening in the macroeconomic sphere. So yes, we're happy to stabilize, but we're not happy with the number. Everything is going to be north of these numbers.

Understood. That makes sense. And just on the guidance, you're taking the top line up a touch on the beat. Obviously, there's a little bit of JUMP assumed in there as well. On the EBITDA, just sort of the fine-tuning versus that number moving up a touch in tandem with the top line. Is that mostly tied to JUMP as well or are there other impacts for us to just to be mindful of on the EBITDA side?

I want to clarify regarding EBITDA; there's no contribution from JUMP included. The closing date for JUMP is difficult to predict, but as Jim mentioned, we anticipate completing it in the fourth quarter. Now, regarding EBITDA, our revenue is tracking as expected, and we are effectively managing it since we are heavily investing in our team. The main consideration is how quickly we can expand our operations in Asia and Europe. In Q3, our EBITDA is at a level we do not want to drop below. Looking at our guidance for Q4, it is significantly higher, and we expect to perform better. As we mentioned last year, we prefer to see this figure around 25% and not lower; we currently estimate it at 24.7%, with the expectation of returning to a higher percentage.

With Clearwater Connect, we had some nuances with the commissions, and we also had some nuances around the vesting of RSUs and the employee tax costs to that, which caught us out a little bit, but we really understand all that, we have the ability to manage. We think the investing has been fruitful, responsible, and I think we'll continue to, but we think Q4 will be a more profitable quarter from an EBITDA margin perspective.

Michael, we thought you would like the fact that we paid higher commissions in the quarter. But that means our...

That's also a good point. Thanks very much.

The next question today comes from Brian Schwartz from Oppenheimer. Please go ahead. Your line is now open.

Sandeep, I wanted to follow up on the kind of the big logos that you won in the quarter. You gave us drivers in your introductory commentary on those wins. But I was wondering if it's possible to parse that out a little more or rank them in the sense that when these customers are buying the platform for you, is a bigger driver coming from them looking to replace legacy architectures to save money in what is a very tight budget environment that we're heading into versus, say, the other drivers, which are really more about driving automation in the organization to help increase productivity?

Yes. Thanks, Brian. So we obviously have been very watchful simply because of the news coming out of the economy, just every management team, I think, is being more watchful. So 3 things are driving the funnel right now, right? The first one is people who need efficiency, they need it now, they need it quickly to manage costs better, right? So that is definitely a big segment of the prospect base and the client base, which needs to manage that. So that's one. Second one, which is really interesting is people are looking at these market dislocations and buying books from other asset owners. So there's lots of acquisitions going on, buying books, getting into new asset classes, and people want to do that in a bit of a hurry, and it's impossible to go set up a brand-new architecture system for that. Coming to Clearwater makes them very nimble. They can buy assets in Germany tomorrow, they can buy assets and mortgages or whatever. So there's definitely a class of people who are pushing on that, and that seems to be the sole reason they are doing that. And the third thing is it just risk people from audit committees and literally getting calls from audit committees saying, I need to get your risk in order with this rapidly changing and volatile environment. And so that drives it is just better control on a day-to-day management of risk and managing it better and being responsive to the market. And so one of those 3 is what's driving it. I mean you still have some cases where people are doing large-scale financial transformations, and that drives it. And sometimes, you will have a currently awarded client go to another company and saying, wow, this is not the way to do it, and they were bringing us along. So if you think about these 5 elements, I would hazard there's a vast majority of our prospects would fall into one of these.

And then one follow-up for Jim. Just thinking about the guidance for Q4, is it fair to assume that, that there's still going to be a slight headwind here from the customers that are still on the old pricing plan, we see where AUMs are going? And then, Jim, are you factoring in the macro at all as you contemplated and initiated the Q4 guidance here today?

Yes. When we reviewed the Q4 guidance, we understood the Fed's perspective and it appeared they acted as anticipated today. We took that into account while evaluating the guidance.

Thank you for taking my questions.

Thank you. Take care, Brian.

Thank you, Brian.

Thank you. There are no further questions registered at this time. So I'd like to pass the conference back over to Sandeep Sahai for closing remarks. Please go ahead.

Look, I just wanted to thank you all for your continued interest in Clearwater. I think we've had a really good year-to-date performance. I think we've had headwinds, but we really found that we continue to deliver and target a 20% growth rate for the year, that we are very excited about that. We are very excited also about, I think being able to make all these contractual changes while booking the right amount really throughout the year. And really that was really important for calendar year 2023 that if we had not done this, we would continue to be subject to the volatility of the market, and we hope to mitigate that quite a bit. So thank you all. I really appreciate your interest and your time. Thank you.

Thank you all. This concludes today's conference call. Thank you for your participation. You may now disconnect your lines.