Clearwater Analytics Holdings, Inc. Q2 FY2023 Earnings Call

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Clearwater Analytics Second Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-mode only. After the speakers' 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' second quarter 2023 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 provision of the Private Securities Litigation Reform Act of 1995. Expressions of future goals, intentions and expectations, including in relation to business outlook, future financial and product 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 statements included in our earnings press release. Lastly, all metrics discussed on this call are presented on a non-GAAP or adjusted basis and include the results of JUMP Technology since the acquisition on November 30, 2022, unless otherwise noted. A reconciliation to GAAP results 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 to our Q2 earnings call. Allow me to start by saying that I'm incredibly proud of the entire Clearwater team for our outstanding execution in Q2. There are four key areas where we executed very well. One, we successfully brought both large and small clients live. And even more impressively, we saw best-ever customer satisfaction and NPS scores. Second, the sales team had a very good quarter, and they continue to win against competitors who largely offer legacy solutions. Third, we continue to see positive impact from the commercial model we rolled out last year. And fourth, we continue to innovate and deliver products that address our customers' pain points. Let's dive into each of these. First, let's start with operational excellence. We have been investing in increasing the maturity and scalability of our onboarding team, and Q2 was a testament to how far they have come. Aviva is fully live on our platform. As you know, Aviva is a leading U.K. provider of insurance, wealth, and retirement products serving over 18 million customers. They have the global assets on our platform, and we provide a daily comprehensive view of their portfolio consisting of more than £350 billion in AUM. Achieving this milestone is very significant because we had to build unique functionality specific to Europe, including asset class coverage, coverage for local accounting standards, and regulatory reporting for countries across Europe. With this accomplishment, we have proven to the market that we can handle the highest level of complexity in Europe, combined with the multi-country onboarding of FWD in Asia. Our platform is now used by large sophisticated customers across the world. Other major go-lives in Q2 included Amica Mutual Insurance, Greenwich Investment Management, and Highmark Health to name just a few. In Q2, we saw our average go-live time decrease, with the average time taken to bring customers live on our platform being approximately six months. The network effect of our single-instance multi-tenant platform allows us to continue improving this process and bring value to clients faster. As you all know, our NPS is one of the highest you will find in the industry and is a metric we're incredibly proud of. In Q2, we exceeded our already industry-leading numbers and recorded our highest NPS to date. To me, it says that our customers are happy with the platform, the access we provide to best practices, and an acknowledgment of the care our client services and onboarding teams provide. It is a giant team effort, and we are thrilled that our customers acknowledge that and place their trust in us. That allows us to continue growing with significant support from references provided by our current clients. Second, let's discuss the demand environment. The pain our customers feel while working with legacy systems in the industry is significant. We continued to close deals and saw our pipeline build throughout the first half of 2023. Our growth has been fairly even across our key industries of insurance, asset management, corporates, and government. In the second quarter, we expanded our footprint with existing clients and added marquee clients including Apollo Syndicate, Covenant Capital, Delta Dental of Wyoming, Finance Incorporated Limited, Intellia Therapeutics, Medical Protection Society Limited, Omnicap Group, Viridian Therapeutics, and Western Asset Mortgage Capital Corporation. We announced a strategic partnership with JPMorgan Asset Management, integrating our platform with the Morgan Money Global Trading Platform. This allows permissioned users to easily navigate between both systems. The joint solution will make it easier for financial professionals to have a globally connected view of the investment portfolios and empower them to make real-time investment decisions on the Clearwater and Morgan Money platforms. We continue to see strong sales of our add-on products like Clearwater LPx and Prism. As an example, one of our large existing insurers signed on to use Prism for reporting, which led this client to more than double the AUM with Clearwater. Europe had a very strong first half with several new wins in Northern Europe and the French and Benelux market. This included both midsized clients and large institutions in the insurance and asset management industries. We've had several successes here in the U.S. with JUMP's full front-to-back platform. We were also successful with an offering that paired JUMP's front office suite with Clearwater for accounting and reconciliation. As you may recall, Clearwater acquired JUMP with a vision to revolutionize the entire investment life cycle, and we're executing on that plan. These deals underscore the value our clients receive from both our platforms working together. They also validate our premise of an expanded TAM with a combined product offering. Overall, our product continues to resonate across the globe, and we don't see any change in the competitive environment. Our sustained investments in our platform continue to set us apart in the market. Thirdly, on our commercial model, we continue to be pleased with the changes we drove last year and the impact it is having and can have on our growth trajectory. As you might recall, last year we made the leap from a pure AUM-based model to a base-plus model. We couldn't be happier with the results, and this commercial model has now become the default way we contract with clients across industries and sizes. With Prism, LPx, and JUMP's modules, we are increasingly acknowledged by our customers as a multiproduct company capable of providing solutions across the value chain. Our strong NPS clearly helps customers feel confident in purchasing more software from us. Clearly, our approach here continues to create a win-win for both our clients and for Clearwater. Fourth, our aggressive and sustained investments in R&D allowed us to expand the platform to address the needs of clients in both Europe and Asia. We have invested in building products to solve the needs of existing customers here in North America. Many of these efforts involve using clients as design partners, and that gives us confidence that our investments will continue to pay off. I already mentioned Clearwater LPx and Clearwater Prism, but also in Q2, we began a beta program with Clearwater MLx, which is a solution designed to improve the visibility and detailed accounting for commercial and retail mortgage loans. We expect to launch Clearwater MLx in Q3. Another frontier of investment would be to bring front office and front-to-back functionality to the U.S. using the Clearwater JUMP platform. We're delighted that we already have North American customers who want to work with us. Next, we are working on additional capabilities including health service allowing our customers to configure and manage the growth of their accounts. We are also enhancing intraday data and reconciliation, which is sometimes referred to as T+0 processing. This will help us improve how we deliver same-day investment book of record for clients who need near real-time visibility. We have to talk about the work we are doing with generative AI and the potential to transform and disrupt the market. You may have seen our recent press release on this topic, where we announced that we stood up our own instance of a large language model which we are calling Clearwater GPT. We are working on rolling out new generative AI-driven solutions and dramatically improving the way we service clients. Clearwater GPT is the first solution of its kind that seeks to address the full investment life cycle. We see this effort as both adding to the revenue growth of the company with new Gen AI-based product offerings and impacting the bottom line with efficiencies across our operations. I'm sure you're immediately wondering if we can predict what this might mean for our financials. Let me just say that the product is very promising, and the early results are very good. But the technology is new, and it is hard to assess the full impact it can have. We expect to have more details for you in the coming months. Given that our robust multiproduct offering caters to diverse geographies around the world, we are excited to welcome Sunil Dixit as our new Chief Product Officer, who brings proven expertise in innovating and building multiproduct platforms at leading SaaS companies. When I stop and think about these four areas: operational excellence, demand based on addressing clients' pain with a large DAM, an effective commercial model, and a disruptive platform. I'm not only proud of our team, but I also recognize that this is what allows us to deliver stable growth with the potential to increase margins consistently. That is what we set out to deliver, and our actions and results in the last two years since we went public bear out the strength of our approach. We are setting aggressive goals and executing on our plan. It's frankly a great time to be at Clearwater Analytics. Now, let me turn it over to Jim to discuss the financial results of the company and the outlook for the year.

Thanks, Sandeep, and thank you all for joining us. We're very proud of our Q2 2023 results. Let me start with the top line and the metrics that drive revenue. In Q2 2023, we delivered $89.9 million in revenue, which translates to 22.4% year-over-year revenue growth driven by solid expansion at our existing clients and continued strong onboarding activity by our operations team. Over the last few quarters, we've completed 83 onboarding programs. And in Q2, those onboarding programs had an average duration of just over six months. With time to value like that, it's not surprising that so many prospects are choosing Clearwater. We reported annualized recurring revenue or ARR at the end of the second quarter of $349.5 million, an increase of 20.4% year-over-year. This is particularly satisfying when we look back one year to Q2 2022 and recall the worry over asset price value and our announced transition from AUM pricing to the base-plus model. I expect not many investors would have predicted back then that our durable, reliable 20-plus percent growth would remain intact one year into the future. Today, we remain even more optimistic about our future for one reason: our clients. Clients stay with us, as evidenced by our return to 98% gross retention as of June 30, 2023. That's 17 out of the last 18 quarters for which gross retention has been 98%. More importantly, clients grow with us, as evidenced by our net revenue retention rate of 109%, as of June 30, 2023. We are seeing success within our client base by doing more for our clients. And this in fact is the true NPS dividend. We aspire to expand NRR to 115% or beyond because we believe we can help our clients do more. We've completed the foundational elements with the market acceptance of the base-plus model and our recent rollout of bundled offerings for the North American insurance and corporate markets. With the new bundled offerings, we offer prospects a choice between base, professional, and enterprise bundles. These market-specific bundles allow prospects to select the Clearwater offering that matches their sophistication and solves today's burning problem while providing a path to our expanded capabilities when they expand. Now that we have LPx, Prism, and all of the functionality that JUMP solutions provide, coupled with the expected launch of MLx, we have the opportunity to expand our reach within our clients. We will continue to evolve our go-to-market engine to focus on both new client acquisition and add teams focused on expanding our relationship with existing clients across all of our market segments. The fee in second-quarter revenue flowed through to our full-year revenue guidance as we are raising our full-year guidance by $2 million, and our guidance range for the full year is $364 million to $366 million or 20% to 21% year-over-year growth. Now let's turn to profitability results. We reported $24.8 million in adjusted EBITDA at a 27.6% EBITDA margin in the second quarter, which is a solid result and better than our guidance by $2 million. This translates to a 9% fee as our revenue outperformance flowed straight through to EBITDA. Non-GAAP gross profit in the second quarter was $68.1 million, and gross margin came in at 75.8%, which was a slight improvement from 75.7% in the second quarter of 2022. This is the fourth consecutive quarter where incremental gross margin exceeded our reported gross margins, illustrating that we are making progress on our path toward our long-term goal of 80% gross margin. Non-GAAP research and development expenses in the quarter were $23.6 million or 26.2% of revenue. That is a sequential decrease of 0.6% of revenue from the R&D spend of 26.8% in Q1 of 2023. We expect R&D expense to trend down as a percentage of revenue going forward with the efficiencies we are achieving in R&D. For example, large programs in Europe are entering more of a steady-state base. Sales and marketing expenses in the quarter were $10.9 million, an increase of $1.1 million or 11.5% year-over-year. That equates to 12.2% of revenue. General and administrative expenses in the quarter were $8.8 million, sequentially flat with the first quarter. And as a percentage of revenue, G&A decreased to 9.8%, showing better leverage. On a GAAP basis, equity-based compensation increased to $28.7 million, including $5.5 million related to the JUMP acquisition, as the full quarter of expense from awards granted in Q1 were reflected in Q2. We expect that this is the high water level for equity-based compensation expense and that it will decrease as a percentage of revenue going forward. The significant expense in 2023 results from the granting of three-year performance-based awards in Q1. Although the awards vest one-third in each 2024, 2025, and 2026, assuming achievement of the performance criteria, for GAAP purposes, 61% of the expense is recorded in the first year versus 33% as you might intuitively assume. Below the operating income line, we recorded $1.3 million of interest income net from the investment of our excess cash balances, and we recorded $6.7 million of year-to-date tax receivable agreement expense. We record tax receivable agreement or TRA expense in lieu of income tax expense. We will be a cash payer of the TRA because of capitalization of R&D costs for U.S. federal tax purposes. After the amendment of the tax law, we expect to pay the tax receivable agreement expense in the fourth quarter of 2023. Let's turn to the balance sheet and cash flow. We ended the quarter with $277.8 million in cash, cash equivalents, and investments and $49.3 million in total debt. That results in net cash holdings of approximately $229 million. During the quarter, we continued to invest our excess cash in fixed income securities for excess yield. Free cash flow for the second quarter was $19.6 million, representing year-over-year growth of 18.5% from free cash flow in the second quarter of 2022. This includes $1.6 million of capital expenditures. In the second quarter, the conversion of EBITDA to free cash flow was at a rate of 79%. We reported a GAAP EPS loss of $0.06 per share, and fully diluted non-GAAP EPS was $0.08 per share. For non-GAAP EPS, we utilize our fully diluted share count for which Q2 was 252.2 million shares. That fully diluted share count is essentially flat with last quarter and with the end of last year and even Q4 of 2021, reflecting that there has not been shareholder dilution since the company went public. Now, let's turn to guidance. Focusing on guidance for the third quarter of 2023, we expect revenue to be $92 million, and we expect adjusted EBITDA to be $25.5 million or approximately 27.7% for EBITDA margin, consistent with Q2. For the full year 2023, as I said before, we've increased the revenue guidance to $364 million to $366 million, which is an increase of $2 million in the low and high end of the range and represents approximately 20% to 21% year-over-year growth. We have also increased our full-year EBITDA guidance by $2.5 million at the midpoint to $100 million for the full year 2023. That guidance represents EBITDA margins of 27.3% to 27.5% for the full year, an expansion of 60 to 70 basis points over 2022. As Sandeep noted and our numbers demonstrate, the second quarter was another quarter of strong execution with reaccelerated revenue growth to 22%, solid EBITDA, and free cash flow. We look forward to keeping the momentum going. With that, I'll turn it over to Sandeep to provide some closing thoughts.

Thank you, Jim. As I reflect on the second quarter, I'm incredibly proud of the exceptional team we have at Clearwater. We remain laser-focused on our mission to revolutionize the investment management industry. By every measure, our growing portfolio of product offerings are undeniably best-in-class. I'm particularly excited about the potential for generative AI and its capabilities to ignite new opportunities that will disrupt and transform the fintech sector. Our team at Clearwater continues to innovate boldly, consistently meeting our clients' ever-changing needs. At the end of the day, seeing our clients satisfied with our platform and growing their assets under management matters the most to us. When they achieve their goals, we achieve ours. Thank you.

Our first question is from Peter Heckmann with D.A. Davidson. Your line is now open.

Good afternoon. Thank you for the question. Could you provide some insights on the onboarding, which you mentioned is at 83% in the first half, and your acceleration of the go-lives? How do you view this in relation to the average size of your clients? Are they increasing in size, or remaining about the same?

Thanks, Pete. This is Jim. Can you hear me okay? Great. I just wanted to ensure I was off mute. There are 83 programs, which may include onboarding additional assets at some of our larger existing clients, as well as new products and solutions. Sandeep mentioned Aviva, one of the top 20 insurance companies worldwide. There's a wide variety among these programs. Ultimately, it's not just about the impressive number, but about reducing both the size and the time it takes for clients to realize value. This involves several key factors. First, the network effect: as we add more clients in various locations, that opportunity expands. Second, our onboarding team has worked hard over the last couple of years to structure and formalize the collaborative onboarding process, ensuring accountability among all participants, including data providers, custodians, clients, and ourselves. What we've observed in the first quarter and continue to see in the second quarter is the successful integration of all these elements, and we're proud of what that team has achieved.

Pete, this is Sandeep. The only thing I would add is, just talking about things like six months to go live. I'm sure you've covered ERP systems in the past. You talk about years, you talk about several years for programs to go fully live. And the fact that we talk about six months and how to improve it, we're just trying to provide a contrast to what the network effect allows us to do. So, I do think it's super impressive, just having been in the industry for that long.

Okay. That's helpful. And then just in terms of Morgan Money and their global trading platform, it sounds as if you have a strategic partnership in place that's going to allow users to use Clearwater. But in terms of the contribution, I guess, how do you think about that ramping? And could you maybe size a little bit about how big that client could be, if you're successful in cross-selling with existing JPMorgan customers?

Yes. JPMorgan is already one of our largest clients. Additionally, it enables users to easily utilize functionality on both platforms, which typically allows clients to increase their assets under management on our platform. This ease of trading and accessing data attracts more clients to us. We have experienced sustained growth in assets under management from clients through similar partnerships, and new clients have also joined due to the seamless transition between the platforms. We view this as a strategic move that strengthens our relationship with JPMorgan and positions us for future growth.

All right. Thank you. I’ll get back in the queue.

Our next question is from Rishi Jaluria with RBC. Your line is now open.

Oh, wonderful. Hi, Sandeep. Hi, Jim. Thanks so much for taking my questions. Nice to see continued strength in the business. I wanted to start by going a little bit deeper into Clearwater GPT. No doubt the press release sounds pretty impressive. But can you talk a little bit about some of the use cases that you anticipate seeing from Clearwater GPT? And maybe more importantly, how does that tie into your broader generative AI strategy? Because it feels like there's a really big opportunity for you to be a verticalizer of some of these LLMs and really help customers, given the data and the relationships you have in ways that they can't do themselves. So, I would love to drill a little bit into both of those and I've got a quick follow-up.

Thank you, Rishi. We believe generative AI is transformative and disruptive. For our business, we see it having significant and mostly positive impacts. We launched Clearwater GPT, and I want to share some examples. They can be classified into two categories: those that enhance revenue and those that improve operational efficiency. Starting with operations, efficiency is crucial as it drives gross margin. We've indicated that there's a path from 75% efficiency to 80%, and we believe ChatGPT can help us achieve better operating results. We process around 2,800 data feeds every morning that need to be reconciled, aggregated, and normalized. We think a significant portion of this could be accomplished using generative AI, which could be transformative. Additionally, we spend considerable effort on client servicing and onboarding, both of which could see significant improvement with the successful deployment of ChatGPT. We have dedicated teams working on these areas and expect to report progress in the coming months. On the revenue side, two main areas stand out. First is customer interaction; natural language interaction enhances the value derived from our platform. The second, and perhaps more exciting, is the insights we can gather. ChatGPT enables us to analyze a large volume of data and draw insights from our ten years of work, which clients can use to improve yields and other functions. We've invested in dedicated teams and leadership to pursue these opportunities. I want to emphasize that we are already using machine learning, but the potential impact of this initiative is on a different scale. We're enthusiastic about it, with dedicated R&D and product teams currently at work. However, we are not ready to make any definitive claims yet; we prefer to take a few more months to further evaluate the potential of generative AI before we share our findings.

Wonderful. Thanks, Sandeep. That’s a very thorough answer and really helpful. Maybe just continuing on generative AI and thinking about other potential use cases. How do you think about the ability to use generative AI to make it easier for asset managers out there to migrate from their legacy solutions on to Clearwater, right? Because that's a long process. Obviously, there's a lot of data complexity involved in that. But given what we've seen a lot of companies in this space using generative AI to make migration from legacy to next-gen faster, it feels like that's a big opportunity for you as well. So how are you thinking about that? Thanks.

Thank you, Rishi. But, yeah, absolutely. I do think it can completely change how we think about onboarding. And as you know, onboarding is the hard part. And once you have done the transformation, then of course Clearwater gives you the full functionality you could want and the agility and the analytics. And so we feel like generative AI could transform how we onboard it. To take an example, let's say we move a client to onboard them from a competitive legacy platform, while we probably have done 30, 40 of those transformation onboarding exercises from that same legacy platform. You point generative AI to that, and the next onboarding you're doing can be done meaningfully faster, right? Because it has learned from all those 30 onboarding exercises you've done. So we do think that's transformative. We do think it changes the risk profile of the onboarding exercise and really time to value meaningfully. So look, we think it is actually perhaps the biggest use case when it comes to the efficiency side of it, not on the revenue side but just on the efficiency side.

Wonderful. Thank you so much.

Thanks, Rishi.

Our next question is from James Faucette with Morgan Stanley. Your line is now open.

Hi guys. It's Michael Infante on for James. Thanks for taking our question. I just wanted to circle back on NRR. Obviously, really impressive to see the sequential and year-over-year improvement there. I think migrating to this level we anticipated to take a little bit longer, so great to see that. Jim, is it possible to decompose that improvement between last year's pricing initiatives versus incremental attach of new products? And does the recent improvement accelerate your confidence in getting to that NRR level of 115 over time? Does that pull that forward?

Yeah. Thanks Michael. Thanks. So the revenue acceleration from 2019 to 2022 can almost be correlated to NRR moving from 106 to 109. And we do believe that is sustainable as we look into the near future. So you're right, Michael, why is it growing? It's been, obviously, a primary strategic initiative of the company over the last 12 months to really build in the commercial model, build in the base-plus pricing, have the default price increases flowing through, and adding these incremental modules of LPx, MLx, Prism. And that sophistication just continues. We were happy to see that the improvements in NRR were across all of the market verticals that we focus on, and that improvement really comes into those existing customers and really see the 12 months of effort across all of those pieces bridging the gap from the 106 to the 109.

So, Michael, I would just add that this is pretty deliberate. It's not something we say, 'Hey, let's do something; we got something.' No. We think that these four things you can run, that Jim walked you through. And if you continue to improve in each of these, you can sort of get better sequentially. And so do we think the 109 number is now a new normal for us? We think so. Does that improve the path to 115? Absolutely. Compared to when we had this first discussion, Michael, we were at 103, but better at 106, which we said was sustainable, and we are up at 109, which we think is sustainable. And so we think it makes the 115 more in sight. It doesn't mean we're going to get the next quarter or in the next two quarters. But how we get there and the elements we're going to use to get there are defined now. We know. And it's just that in many of those you are still in the second or third innings of a game. And the multiproduct strategy, for example, we talk about LPx, we talk about MLx, we talk about Prism. Those are still second or third innings. You just have to let it mature. And as they mature, it should continue to push that number up. So we feel really good about the path we're on here.

Thank you. Appreciate that. Maybe just pivoting to JUMP specifically, I saw the commentary in the release surrounding the pairing of JUMP in the front office with Clearwater in the back office. How powerful is that cross-sell motion? And is there a particular client type or client size that that pairing would be most applicable for?

Thank you. We are very enthusiastic about our partnership with JUMP, especially in Paris. Let's discuss the specifics. JUMP is significantly improving its competitive position in the French market against larger competitors, winning more deals because of this larger organization. Additionally, they are now able to sell end-to-end solutions in North America for small and mid-sized asset managers. This capability, which we couldn't have achieved previously, includes the order management system, portfolio management system, and accounting tools, leading to a substantial increase in our overall performance. Furthermore, the potential to combine JUMP's front-office modules with the Clearwater platform is particularly exciting. We can target new prospects or offer these modules to our existing asset owner clients who already use Clearwater. We've seen success in this area, which is promising. Lastly, JUMP also has capabilities in unit-linked funds in Europe, and we have had success with that in the first half of the year. In summary, we believe we are making excellent progress, although we recognize that we are still in the early stages of what we can achieve with JUMP.

Thank you both.

Thank you. Thanks, Michael.

Our next question is from Jackson Ader with MoffettNathanson. Your line is now open.

Thank you for taking our questions. Let's continue with the topic of AI. It's evident that your cloud-based architecture and infrastructure provide a competitive advantage over others that aren't cloud-focused, especially regarding the integration of AI and machine learning into your products. However, considering that generative AI is customer-facing, do you believe you may have a similar edge over competitors when it comes to enhancing customer interactions, perhaps by layering a GPT on your existing systems?

Yeah. So Jackson, thank you for the question. Look, I think it's a super valid question because it certainly opens up opportunities, frankly, which I did not think was there about a year back. So look, the core of all of these AI technologies is the quality of data you have and the accessibility to that data, right? If you don't have the data in one nice structured way, it makes it much harder, right? So should that meaningfully improve our ability to do a reconciliation, or ability to do onboarding client services? Yes. I think those are obviously there. But what you're asking about is, can you think about new client-facing applications? And I would just say that the answer is a very resounding yes because it is specific to our clients' data. So let me just try and define that a little bit more. Look, if we generically talk about returns, that's interesting to a certain degree. But what we can do is we can talk about returns specific to a client's portfolio. So we can generate insights with specific reference to what our client's portfolio looks like and what they did yesterday and what they did last week and what they did last month. And based on that client's specific portfolio, we can come up with ideas and recommendations about what they should do and shouldn't do. Now this is a line of thinking we did not have about a year back. But this does allow that. And that's why I think it is exciting on two different levels. And so I tried to distinguish between look, revenue growing value adding to the front office is a different game versus efficiency-oriented, which is a different game. I'm not saying one is more exciting than the other; both are very significant for us. And our commitment and dedicated leadership behind all four of these initiatives is already there.

Okay. By switching gears to maybe we're getting past the first kind of major waves of the base-plus anniversaries here. And I'm just curious, just general feedback like how are customers feeling about pricing increases maybe versus what they would have realized with AUM drift, and then similarly, how you guys view just basically how this first year of renewals or anniversaries are going relative to last year?

So I think Jim can comment on the numbers here, but I should tell you it's a non-event now. Almost all our new contracts don't depend on what the size of the industry; they're on the new commercial model. Frankly, I don't think I've heard resistance to that over the last 90 to 120 days. I don't think I've heard of one. And so it's now just the way we do business. I haven't heard pushback from clients. I haven't heard back or heard anything to the contrary. I don't know, Jim, would you add some to those?

Now, I remember that when we went through this process, we aimed to replicate the experience that our clients were consistently receiving through normal growth. We weren't focusing on making it a win-win situation. As we acknowledge the anniversary of this and move forward, it's clear that this year, the process is much more automated than it was last year when we were making this evolutionary change. I often think about how Sandeep jokes with me, "Jim, why didn't you do this sooner?" What we've discovered is that it has functioned as we anticipated, and the results have been positive.

Okay. All right. That’s great. Thank you.

Thank you so much. Yeah. Thank you.

Our next question is from Dylan Becker with William Blair. Your line is now open.

Hey, gentlemen. Thank you for the questions, and I apologize for any repetition since I joined late. Starting with Jim or Sandeep, there was a nice net dollar retention figure, and it seems like JUMP is beginning to gain traction in several areas. How much of that is influenced by the recent sales segmentation shift towards hunters and farmers, and the domain expertise that is focusing on the specific customer needs in different industry verticals?

Look, I would just say thanks for the question here about the impact of JUMP on our revenue is very muted, right? Because you obviously go sell these deals; they take a while to onboard, and then they come out and they start to get ARR, right? So I think the results on the revenue beat is very muted. And would that improve over the next few quarters? Yes, absolutely. But I don't think you should look at the Q2 results and ascribe much of that to the cross-sell showing up in the revenue line or in the profitability line. I think all of the commentary about JUMP, about the deals we have won, but doesn't necessarily convert to revenue that quickly. Sorry, Jim, go ahead; you can add to it.

I think we are still at the beginning stage with respect to LPx and Prism in these areas. We are also in the early stages of evolving our go-to-market strategy. These results indicate that we should keep pursuing this direction. Therefore, we will continue to focus on identifying and segmenting sales opportunities and channels. Our experience has shown that as we concentrate and segment our efforts, the results tend to improve.

Got it. Okay. That’s super helpful. And then maybe to just quickly touch on kind of the competitive landscape. You did have a competitor internationally that was acquired. I wonder if you've seen any opportunity situations kind of arise off of that, any displacement kind of commentary as you are looking to kind of build out your own kind of global footprint here? Thanks.

Yes, these are tricky things to comment on. But I would just say that on the margin, we feel the competitive environment in Europe has improved very meaningfully for us. And so, I would just say that, and that reflects a little bit in the pipeline build we have seen in H1. And so we are really happy with the transaction that was announced.

Fair enough. Okay. Thank you guys.

Yes. Overall, we believe we have a really strong competitive position. Our multi-tenancy and single security master capabilities keep everyone up to date, creating a network effect that no one else offers. We think that focusing on these advantages will be beneficial.

Our next question is from Gabriela Borges with Goldman Sachs. Your line is now open.

Hi. This is Kelly on for Gabriela. Congrats on the quarter and really strong numbers. First one from me, Sandeep, really enjoyed that Forbes article you wrote on Gen AI could the impact you're expecting to see in fintech. You talked a bit in that about the data accuracy issues with generative AI. I am just curious, like what your team is doing to address those issues at Clearwater.

Thank you for the question. Our work in investment accounting demands a high level of accuracy, and we strive to be right nearly all the time. Our Chief Client Officer, Subi Sethi, has significant expertise in quality and focuses on getting things right the first time. Currently, we believe that Generative AI applications will operate with human oversight. We are not ready to let Generative AI handle customer interactions or transactions on its own yet. Typically, individuals spend considerable time researching and developing potential solutions. We expect Generative AI to generate alternative options, allowing humans to select the best one, which also helps in training the model. Human oversight remains crucial due to data accuracy concerns. There may be instances where the model can respond directly to certain questions, but our current view is that our goal is not to achieve 100% efficiency. If we can reach 70% or even 50%, that would be a positive outcome. Our focus is more on enhancing efficiency rather than completely eliminating human involvement.

Yes. That makes sense. Thank you. And then second one for me is just how are bookings trended in the first half of the year just relative to 2022? You talked a lot about the visibility you've got in the business from bookings can you vary forward-looking. It would be great any insights in the past six months? And then any differences you're seeing in North America versus international?

Sure. We haven't noticed any changes in the overall competitive landscape. As Sandeep mentioned regarding margins, the competitive situation in Europe has improved, and that contributes positively. The pipeline has expanded significantly in the past six months, and we are very enthusiastic about the number of deals, particularly those involving our additional product offerings. The announcement of the Aviva go-live is paying off, and we are observing benefits in Europe as well. Looking back at the first half, we believe it has been well balanced between our existing customers and new acquisitions. Last year, we secured deals with two major insurers, and this year, we anticipate achieving similar or even better results in that arena. Overall, we feel optimistic about our prospects there.

Yes. That rate reflects our belief that we are in a strong position. However, I want to highlight that our pipeline has exceeded our expectations, indicating growth. I believe there is still significant work to be done with legacy systems, and I hope that the shift towards companies offering leading technologies continues to gain momentum, and we believe our technology fits that need.

Great. Thank you, and congrats again.

Thank you so much.

I think that's a good question. Are there more questions?

Our next question is from Michael Turrin with Wells Fargo. Your line is now open.

Hey, it's David Unger filling in for Michael Turrin. Thanks for squeezing me in. Just one for me. Guys, I know the JUMP acquisition wasn't too long ago, but just curious about your appetite to add additional products or go deeper in a particular geo. You've made some comments tonight on Europe. So, the appetite to do an acquisition that's perhaps harder to build organically. Thanks.

Thank you for the question. I believe there is definitely an interest in pursuing more opportunities. To explain our perspective, we consider JUMP to have demonstrated a strong proof point. While there is still considerable work ahead, it has clearly shown the value of our Net Promoter Score, which is simply that clients want to engage more with us. We need to develop certain capabilities, which might take time; however, acquiring a company could be an effective approach. I want to emphasize that our criteria for acquisitions remain strict. They need to help us geographically expand and enhance our functionality. Since the JUMP acquisition, our focus has sharpened in three main areas. First, we are concentrating on understanding current customer pain points that extend beyond investment accounting. Second, we see a significant imperative in our ability to cross-sell products from potential acquisitions, as this will aid in our net revenue retention. Lastly, we feel prepared to take a lead in the global market. Acquisitions that enable us to offer comprehensive functionality through a platform are now more appealing than they were three years ago when we were more hesitant about leading an entire industry in a specific function. Overall, while our approach is consistent, there is a slight shift in our attitude towards what we can achieve.

Always appreciate the detail, Sandeep. Thank you.

Thank you so much.

Our next question is from Brian Schwartz with Oppenheimer. Your line is now open.

Hi, Sandeep and Jim. Thank you for taking my question. Just one question here very high level. Sandeep, just how you're thinking about the macro environment heading into the second half of the year? It looks like the business did well in Q1. It looks like the business did even better here in Q2. You gave us the same size since all the exciting initiatives and what's going on internally on sales efficiency in the pipeline. But how about just what you're seeing in terms of cycles and just buying patterns from the end market? Has your view about the macro environment in the second half changed at all since last time we spoke three months ago? Thank you.

Thank you for your question. In January, we were concerned about the environment worsening. Currently, we believe it won't get much worse, nor do we expect significant improvement. Our planning assumes a status quo situation, with some minor fluctuations. This outlook is more optimistic than three months ago when we were quite worried about the economy's trajectory. We have increased confidence now, partly due to our new commercial model, which helps reduce risks in our planning. While we don't foresee substantial improvement, we think the markets have remained stable, and we feel good about their current state. However, our forecasts and guidance do not account for any improvements in economic conditions, as we don't see that happening yet.

Thank you all.

Thank you so much. Yeah. Thank you.

Our next question is from Yun Kim with Loop Capital. Your line is now open.

Hi. Great. Thank you. Congrats on another solid quarter. One question for me as well, can you just talk about how the mix of asset types is changing between, I guess fixed income, equities, alternative investments? And how has that mix changed providing any pricing uplift? Thanks.

Yeah. So broadly, the mix is staying consistent. But like, let me give you one little nugget. We talked about MLx and how we're teasing on that. So that's kind of to help with mortgages. Just for context, as we were sizing that opportunity and looking at the assets on the platform, we have north of $500 billion in mortgage-related assets on our platform today. So, that's just kind of like one little sliver. As you see more and more of these types of alternative assets, mortgages, derivatives and those sorts of things and structured products broadly, we continue to see kind of that trend with fixed income and structured products to flow through. And that's why we're doing LPx and MLx and moving down that path to provide additional alternative asset coverage for clients beyond the investment accounting for those assets.

Yeah. And I would just try to say that if you just look at the overall platform.

Thank you.

I think we're at time or a little over.

Are there any other questions, please?

There are no more questions. So I'll pass the call back over to the management.

Okay good. I want to thank you all for your interest in our company and your continued support. I also want to mention our Investor Day, which is scheduled for September 7th, and I hope to see many of you there. Thank you again.

Good bye.

That concludes the conference call.