Clearwater Analytics Holdings, Inc. (NYSE:CWAN) Q1 2023 Earnings Conference Call May 4, 2023 5:00 PM ET Company Participants Joon Park – Head-Investor Relations Sandeep Sahai – Chief Executive Officer Jim Cox – Chief Financial Officer Conference Call Participants Kevin McVeigh – Credit Suisse Rishi Jaluria – RBC Michael Infante – Morgan Stanley David Unger – Wells Fargo Jackson Ader – SVB MoffettNathanson Gabriela Borges – Goldman Sachs Dylan Becker – William Blair Ari Friedman – Oppenheimer Yun Kim – Loop ...

Table of Contents FORM 10-Q Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted ...

PART I [Item 1. Business](index=7&type=section&id=Item%201.%20Business) Clearwater Analytics offers a cloud-native SaaS platform for investment accounting and analytics, serving over 1,200 clients with $6.4 trillion in assets - Clearwater Analytics provides a cloud-native, single-instance, multi-tenant SaaS platform for investment accounting and analytics, aggregating and normalizing data for over **$6.4 trillion** in global invested assets for over **1,200 clients**[272](index=272&type=chunk)[287](index=287&type=chunk)[303](index=303&type=chunk)[311](index=311&type=chunk) - The company acquired JUMP Technology in November 2022 for **€75 million** cash, aiming to strengthen its position in investment management software globally and expand in European markets[273](index=273&type=chunk)[241](index=241&type=chunk)[310](index=310&type=chunk) - Clearwater operates on a **100% recurring revenue model** (excluding JUMP license revenue), with fees primarily based on the value of assets on its platform[272](index=272&type=chunk) - In 2022, **80% of clients** transitioned to a 'Base+' contract framework or accepted price increases to limit downside volatility[288](index=288&type=chunk) - The company maintains a high client satisfaction rating with an NPS of **60+** and a gross revenue retention rate of approximately **98%** over the past sixteen quarters[288](index=288&type=chunk)[312](index=312&type=chunk) [Item 1A. Risk Factors](index=18&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from market competition, asset-based fee volatility, operational failures, financial liabilities, and complex organizational structure - The company operates in a highly competitive industry, facing competition from large-scale players and internal client IT departments, which could lead to price reductions and reduced gross margins[284](index=284&type=chunk)[345](index=345&type=chunk) - Revenue is highly dependent on fees based on the value of assets on its platform, making it vulnerable to market volatility, economic downturns, and changes in client investing patterns[284](index=284&type=chunk)[346](index=346&type=chunk)[348](index=348&type=chunk) - The company faces risks from potential undetected errors or defects in its investment accounting and reporting solutions, which could harm its reputation, lead to lost sales, and incur significant costs[284](index=284&type=chunk)[355](index=355&type=chunk) - A significant portion of assets consists of goodwill and other intangible assets, primarily from the JUMP acquisition, which are subject to impairment tests and could negatively impact financial results[20](index=20&type=chunk) - The company is a holding company dependent on distributions from CWAN Holdings to pay taxes and expenses, including substantial payments under the Tax Receivable Agreement (TRA), estimated at **$625 million** under certain assumptions[38](index=38&type=chunk)[41](index=41&type=chunk) - Principal Equity Owners maintain significant influence over the company (**96.6%** of combined voting power as of Dec 31, 2022) and the company is classified as a 'controlled company,' allowing exemptions from certain corporate governance requirements[55](index=55&type=chunk)[57](index=57&type=chunk)[284](index=284&type=chunk) [Item 1B. Unresolved Staff Comments](index=43&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reported no unresolved staff comments from the SEC - No unresolved staff comments were reported[89](index=89&type=chunk) [Item 2. Properties](index=43&type=section&id=Item%202.%20Properties) The company leases its corporate headquarters in Boise, Idaho, and additional offices globally, deeming current facilities adequate - Corporate headquarters in Boise, Idaho (**106,780 sq ft**, lease expires Oct 31, 2026, with two 5-year renewal options)[90](index=90&type=chunk) - Leases additional office space in Paris, Edinburgh, Seattle, New York, Noida, London, McLean, San Jose, Luxembourg, Frankfurt, and Singapore[82](index=82&type=chunk)[90](index=90&type=chunk) - All facilities are leased; no real property is owned. Existing facilities are deemed adequate, with additional space available for growth[90](index=90&type=chunk) [Item 3. Legal Proceedings](index=43&type=section&id=Item%203.%20Legal%20Proceedings) Management believes no material legal proceedings or claims could adversely affect the company's financial condition or operations - Management believes there are no material legal proceedings or claims that could adversely affect the company's financial condition or operations[82](index=82&type=chunk) [Item 4. Mine Safety Disclosures](index=43&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Mine Safety Disclosures are not applicable to the company - Mine Safety Disclosures are not applicable[91](index=91&type=chunk) PART II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=44&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Class A common stock trades on NYSE, while other classes do not, with no current plans for dividends and significant equity compensation plans - Class A common stock is listed on the NYSE under 'CWAN'; Class B, C, and D common stocks have no established public trading market[94](index=94&type=chunk) - As of March 1, 2023, there were **7 holders of record** for Class A common stock, **5** for Class B, **3** for Class C, and **8** for Class D[95](index=95&type=chunk) - The company does not anticipate paying cash dividends on Class A or Class D common stock in the foreseeable future, prioritizing debt repayment, working capital, and business growth[66](index=66&type=chunk)[96](index=96&type=chunk) - A stock performance graph compares the cumulative total return of Class A common stock against the S&P 500 and S&P Information Technology Sector Index from September 24, 2021, through December 31, 2022[98](index=98&type=chunk)[100](index=100&type=chunk) [Item 6. [Reserved]](index=45&type=section&id=Item%206.%20%5BReserved%5D) Item 6 is reserved and contains no information [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.](index=46&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations.) Revenue grew **20%** to **$303.4 million** in 2022, with a net loss of **$(6.7) million** and Adjusted EBITDA of **$81.1 million**, supported by strong liquidity - Clearwater Analytics' revenue increased by **$51.4 million**, or **20%**, in 2022 compared to 2021, reaching **$303.4 million**[112](index=112&type=chunk) - This growth was primarily due to an increase in client base and assets on the platform, with JUMP acquisition contributing **$2.7 million**[112](index=112&type=chunk) - The company reported a net loss of **$(6.7) million** in 2022, an improvement from **$(8.1) million** in 2021 and **$(44.2) million** in 2020[110](index=110&type=chunk) - Adjusted EBITDA for 2022 was **$81.1 million**, with an Adjusted EBITDA Margin of **27%**[85](index=85&type=chunk) - Cash and cash equivalents stood at **$250.7 million** as of December 31, 2022, with operations primarily financed through cash flows from operations and IPO proceeds[139](index=139&type=chunk) - Annualized recurring revenue increased **14%** from December 31, 2021, to December 31, 2022, driven by client base growth and additional assets on the platform, despite a **5%** reduction from decreases in fixed income and equity security prices[267](index=267&type=chunk) - Net revenue retention rate was **106%** as of December 31, 2022, indicating **6%** year-over-year growth from existing clients, though this was a decrease compared to 2021 primarily due to market value declines[269](index=269&type=chunk) [Item 8. Financial Statements and Supplementary Data.](index=66&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data.) Audited consolidated financial statements for 2020-2022 are presented, including balance sheets, income statements, cash flows, and detailed notes on accounting policies and key transactions - KPMG LLP issued an unqualified opinion on the consolidated financial statements for the three-year period ended December 31, 2022, confirming conformity with U.S. GAAP[164](index=164&type=chunk) Consolidated Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2022 | Dec 31, 2021 | | :----- | :----------- | :----------- | | Total Assets | $481,942 | $344,355 | | Total Liabilities | $143,556 | $82,487 | | Total Stockholders' Equity | $338,386 | $261,868 | Consolidated Statements of Operations Highlights (in thousands) | Metric | 2022 | 2021 | 2020 | | :----- | :--- | :--- | :--- | | Revenue | $303,426 | $252,022 | $203,222 | | Gross Profit | $215,642 | $184,158 | $149,959 | | Income (loss) from operations | $5,117 | $28,461 | $(20,418) | | Net loss | $(6,695) | $(8,094) | $(44,230) | Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | 2022 | 2021 | 2020 | | :----- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $58,005 | $3,358 | $(6,486) | | Net cash used in investing activities | $(76,551) | $(5,025) | $(3,806) | | Net cash provided by financing activities | $16,229 | $195,288 | $51,041 | - The company adopted ASU No. 2016-02, Leases (Topic 842) on January 1, 2022, recognizing a **$23.1 million** ROU asset and **$24.6 million** lease liability, with no material impact on results of operations or cash flows[165](index=165&type=chunk)[236](index=236&type=chunk) - Goodwill increased to **$43.8 million** in 2022, primarily due to the JUMP acquisition (**$42.5 million**), which is not expected to be deductible for income tax purposes[245](index=245&type=chunk)[243](index=243&type=chunk) - Clearwater Analytics Holdings, Inc. operates as an 'Up-C' holding company, with its principal asset being a controlling interest (**79.7%** as of Dec 31, 2022) in CWAN Holdings, LLC, which conducts all business operations[195](index=195&type=chunk)[199](index=199&type=chunk)[201](index=201&type=chunk) - The company completed its IPO on September 28, 2021, raising **$582.2 million** in net proceeds, used to purchase LLC interests, repay debt, and cover IPO expenses[188](index=188&type=chunk)[196](index=196&type=chunk)[274](index=274&type=chunk) - The JUMP Technology acquisition on November 30, 2022, involved a total purchase consideration of **€75 million** (**$77.1 million**), with **€67.5 million** paid upfront and the remainder subject to an indemnification holdback[241](index=241&type=chunk)[273](index=273&type=chunk) - The Tax Receivable Agreement (TRA) requires the company to pay **85%** of certain tax benefits realized from tax basis increases and other attributes to Continuing Equity Owners and Blocker Shareholders, with an estimated aggregate payment of **$625 million** under certain assumptions[41](index=41&type=chunk)[580](index=580&type=chunk)[615](index=615&type=chunk) - The company recognized **$65.7 million** in equity-based compensation expense in 2022, reflecting increased grant-date fair value of awards and higher headcount[174](index=174&type=chunk) - As of December 31, 2022, the company had **$51.6 million** in term loans outstanding under the New Credit Agreement, amortizing at **5.00%** per annum, paid quarterly[15](index=15&type=chunk)[416](index=416&type=chunk) [Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.](index=101&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure.) No changes in or disagreements with accountants on accounting and financial disclosure were reported - No changes in or disagreements with accountants on accounting and financial disclosure were reported[475](index=475&type=chunk) [Item 9A. Controls and Procedures.](index=101&type=section&id=Item%209A.%20Controls%20and%20Procedures.) Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2022, excluding the JUMP acquisition - Disclosure controls and procedures were evaluated as effective as of December 31, 2022, providing reasonable assurance for information recording, processing, summarizing, and reporting[476](index=476&type=chunk) - Internal control over financial reporting was effective as of December 31, 2022, excluding the JUMP acquisition, which will be included in the 2023 assessment[477](index=477&type=chunk) - No material changes in internal control over financial reporting occurred during the period, except for those related to the JUMP acquisition[478](index=478&type=chunk) [Item 9B. Other Information.](index=102&type=section&id=Item%209B.%20Other%20Information.) No other information was reported for this item - No other information was reported for this item[480](index=480&type=chunk) [Item 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections.](index=102&type=section&id=Item%209C.%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20That%20Prevent%20Inspections.) Disclosure regarding foreign jurisdictions that prevent inspections is not applicable - Disclosure regarding foreign jurisdictions that prevent inspections is not applicable[481](index=481&type=chunk) PART III [Item 10. Directors, Executive Officers and Corporate Governance.](index=103&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance.) The company's corporate governance details its Board of Directors, executive officers, and policies, operating as a 'controlled company' with Principal Equity Owners' significant influence - The Board of Directors consists of ten individuals, divided into three classes with staggered three-year terms[482](index=482&type=chunk) - The Board values diversity, with **60%** of its members identifying as women, racial/ethnic minority, or LGBTQ+[338](index=338&type=chunk)[485](index=485&type=chunk)[491](index=491&type=chunk) - The company is classified as a 'controlled company' under NYSE standards due to Principal Equity Owners controlling a majority of voting power, allowing exemptions from certain corporate governance requirements (e.g., majority independent directors, independent committees)[57](index=57&type=chunk)[488](index=488&type=chunk) - The roles of Board Chair (Eric Lee) and Chief Executive Officer (Sandeep Sahai) are separated to ensure strong oversight and operational focus[498](index=498&type=chunk) - The Audit Committee, composed of independent directors, is responsible for overseeing financial reporting, internal controls, and risk management, including cybersecurity[521](index=521&type=chunk)[529](index=529&type=chunk) - The company has a Code of Ethics applicable to all directors, officers, and employees, and policies prohibiting hedging and promoting anti-corruption[500](index=500&type=chunk)[527](index=527&type=chunk)[528](index=528&type=chunk) [Item 11. Executive Compensation.](index=113&type=section&id=Item%2011.%20Executive%20Compensation.) This section details the 2022 compensation for named executive officers, including base salary, incentive plans, equity awards, and other benefits, along with director compensation - Named executive officers for Fiscal 2022 include Sandeep Sahai (CEO), Jim Cox (CFO), Scott Erickson (President, Americas and Asia), and Souvik Das (CTO)[565](index=565&type=chunk) 2022 Summary Compensation Table (in $) | Name | Salary | Stock Awards | Option Awards | Non-Equity Incentive Plan Compensation | All Other Compensation | Total | | :--- | :----- | :----------- | :------------ | :------------------------------------- | :--------------------- | :---- | | Sandeep Sahai | 653,400 | — | — | 787,420 | 277,802 | 1,718,622 | | Jim Cox | 425,000 | — | — | 384,852 | 115,391 | 925,243 | | Scott Erickson | 362,500 | — | — | 309,074 | 134,349 | 805,923 | | Souvik Das | 375,000 | 1,612,500 | — | 148,501 | 25,845 | 2,161,846 | - Named executive officers earned between **96.2%** and **106.6%** of their target annual cash incentive awards for Fiscal 2022, based on company-wide and individual performance[570](index=570&type=chunk) - Equity compensation includes stock options and Restricted Stock Units (RSUs), with vesting conditions often tied to time-based schedules (e.g., **25%** on first anniversary, then monthly) and performance-based metrics (e.g., annual revenue growth rate)[571](index=571&type=chunk)[572](index=572&type=chunk) - Directors not affiliated with a Principal Equity Owner are eligible for an annualized cash retainer of **$40,000** and an annual RSU grant of **$200,000**[581](index=581&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.](index=120&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters.) Beneficial ownership details for Class A and D common stock are provided, highlighting significant voting power held by Principal Equity Owners and equity compensation plan information - As of February 17, 2023, Principal Equity Owners (Welsh Carson, Permira, Warburg Pincus) collectively hold significant voting power, with Welsh Carson affiliated entities owning **60.4%** of combined voting power[586](index=586&type=chunk) - The company has a multi-class common stock structure: Class A and B common stock have one vote per share, while Class C and D common stock have ten votes per share[199](index=199&type=chunk)[551](index=551&type=chunk) Equity Compensation Plans Information (as of Dec 31, 2022) | Metric | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | | :----- | :---------------------------------------------------------------------------------------------- | :------------------------------------------------------------------------------ | :---------------------------------------------------------------------------------------------------------------------------------------- | | 2021 Omnibus Incentive Plan | 27,282,118 | 8.47 | 25,961,402 | | 2021 Employee Stock Purchase Plan | — | N/A | 3,123,260 | | Total | 27,282,118 | | 29,084,662 | [Item 13. Certain Relationships and Related Transactions, and Director Independence.](index=123&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence.) This section details related party transactions, including the LLC Agreement, Tax Receivable Agreement, and Stockholders' Agreement, which grant Principal Equity Owners significant control - The Audit Committee is responsible for reviewing and approving related party transactions, with a policy requiring consent for transactions exceeding **$120,000**[591](index=591&type=chunk) - Prior to the IPO, the company paid management fees to affiliates of Welsh Carson, Warburg Pincus, and Permira, totaling **$2.5 million** in 2022 and **$2.4 million** in 2021, which terminated upon the IPO[612](index=612&type=chunk) - The LLC Agreement governs tax distributions to LLC Interest holders, which are pro rata based on CWAN Holdings' net taxable income and may exceed the amount of taxes if CWAN Holdings were a corporate taxpayer[593](index=593&type=chunk) - The Tax Receivable Agreement (TRA) requires the company to pay **85%** of realized tax benefits to Continuing Equity Owners and Blocker Shareholders, with estimated aggregate payments of **$625 million** under certain assumptions[562](index=562&type=chunk)[615](index=615&type=chunk) - The Stockholders' Agreement grants Principal Equity Owners the right to designate Board nominees and committee members, maintaining their significant influence over the company's governance[599](index=599&type=chunk) - The company indemnifies its directors and officers to the fullest extent permitted by Delaware General Corporation Law (DGCL) and has entered into customary indemnification agreements[621](index=621&type=chunk) [Item 14. Principal Accounting Fees and Services.](index=130&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services.) This section details fees paid to KPMG LLP for audit, audit-related, and tax services in 2022 and 2021, overseen by the Audit Committee - The Audit Committee is responsible for engaging, compensating, and reviewing the performance of KPMG LLP, ensuring auditor independence[600](index=600&type=chunk) Aggregate Fees for Professional Audit and Other Services (in $) | Category | 2022 | 2021 | | :------- | :--- | :--- | | Audit fees | 1,150,000 | 2,341,000 | | Audit-related fees | 422,500 | — | | Tax fees | 815,273 | 530,979 | | All other fees | — | — | | Total | 2,387,773 | 2,871,979 | - Audit fees in 2022 included annual audit and quarterly review procedures, as well as fees related to the JUMP acquisition. In 2021, audit fees included IPO-related services[601](index=601&type=chunk) PART IV [Item 15. Exhibits, Financial Statement Schedules.](index=131&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules.) This section lists all financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K, including various agreements and certifications - All financial statements are listed in the 'Index to Consolidated Financial Statements' under Part II, Item 8[624](index=624&type=chunk) - Other financial statement schedules are omitted as not applicable or included in the consolidated financial statements and notes[624](index=624&type=chunk) - Exhibits include organizational documents, various agreements (e.g., Registration Rights, Stockholders', Tax Receivable, Credit, Employment), equity compensation plans, and certifications (e.g., SOX 302, 906)[604](index=604&type=chunk)[605](index=605&type=chunk)[627](index=627&type=chunk) [Item 16. Form 10-K Summary](index=132&type=section&id=Item%2016.%20Form%2010-K%20Summary) No summary for Form 10-K was provided in this section - No summary for Form 10-K was provided in this section[629](index=629&type=chunk) [SIGNATURES](index=133&type=section&id=SIGNATURES) The report is duly signed by the principal executive and financial officers, along with other directors, on March 3, 2023 - The report is signed by Sandeep Sahai (CEO and Director) and Jim Cox (CFO) on March 3, 2023[609](index=609&type=chunk)[634](index=634&type=chunk) - Additional directors also signed the report on March 3, 2023[609](index=609&type=chunk)

Financial Data and Key Metrics Changes - Revenue for Q4 2022 was $82.7 million, and full-year revenue was $303.4 million, representing a year-over-year growth of 20.4% [78][99] - Gross revenue retention remained at 98% for the 16th consecutive quarter, while net revenue retention increased to 106% [88][8] - Gross profit for Q4 was $62.6 million, with a gross margin of 75.7% [38][88] - EBITDA for the full year 2022 was $81.1 million, with a Q4 EBITDA margin of 29.4% [104][88] - Annualized recurring revenue (ARR) at the end of December 2022 was $323.5 million, including $6.4 million from the JUMP acquisition [92] Business Line Data and Key Metrics Changes - The insurance vertical accounted for 52% of ARR, asset management for 33%, and corporates/government for 15% as of December 31, 2022 [92] - The JUMP acquisition is expected to enhance the total addressable market (TAM) by $1 billion, allowing for the delivery of front office systems [89] Market Data and Key Metrics Changes - Clearwater's platform processes and reports on $6.4 trillion in assets daily, an increase from $5.9 trillion at the end of 2021 [92] - The company is onboarding clients in various international markets, including Singapore, Thailand, Hong Kong, Australia, Japan, France, the UK, and the Netherlands [38] Company Strategy and Development Direction - The company focuses on a client-centric approach, aiming for consistent, reliable, and durable growth [4] - Clearwater plans to continue investing in R&D, allocating 25% of revenue in 2022 and maintaining this level in 2023 [34] - The transition to a base plus pricing model is a key strategy, with 100% of new clients with contracts over $500,000 adopting this model [37][62] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in 2023 guidance, expecting revenue growth of 19% to 20% [95][99] - The company remains vigilant regarding economic conditions and plans to align headcount growth with new business growth [95] - Management noted that the demand for Clearwater's solutions remains strong, particularly in the face of regulatory challenges [100] Other Important Information - The JUMP acquisition closed in November 2022, and the integration is expected to enhance Clearwater's offerings [6][89] - The company incurred $5.9 million in Tax Receivable Agreement expenses in Q4 2022 [39] Q&A Session Summary Question: What is driving the confidence in ARR growth? - Management highlighted strong bookings in Q4 and a focus on bookings as a leading indicator for future revenue [13][42] Question: Are there expectations for growth in specific verticals for 2023? - Management indicated that they are gaining share across all verticals, with a particular focus on asset management due to its larger TAM [20][50] Question: Can you elaborate on the due diligence process for potential acquisitions? - Management stated they are open to acquisitions that enhance geographic expansion or add value to current clients, emphasizing a high bar for any future deals [56][66] Question: What trends are being observed in the top of the funnel and conversion pace? - Management noted a strong funnel and continued interest from large clients, with a positive outlook for conversions [30][61] Question: How is the transition to the base plus model impacting NRR? - Management clarified that while the base plus model stabilizes revenue, the focus remains on increasing product adoption to drive NRR higher [12][112]

Financial Data and Key Metrics Changes - Revenue for Q3 2022 reached $76.6 million, representing a 19% year-on-year growth and exceeding the upper end of revenue guidance by 2% [6][25] - Gross margin was reported at 74.8%, reflecting increased efficiency despite inflationary wage pressures [9][29] - Adjusted EBITDA was $18.8 million, translating to a 24.6% margin, an increase from $17.1 million in Q3 2021 [10][31] - Free cash flow generation was $12.8 million, maintaining a solid conversion rate of adjusted EBITDA to free cash flow at 68% [10][33] Business Line Data and Key Metrics Changes - Annualized recurring revenue (ARR) grew to $303.6 million, up 18.1% year-over-year, driven by strong new client acquisition [17][27] - Gross revenue retention remained consistent at 98% for the 15th consecutive quarter, indicating strong client loyalty [13][28] - The company launched a new pricing model, with 49% of ARR now under this model, expecting to reach 80% by year-end [11][38] Market Data and Key Metrics Changes - The company reported a decline in asset values on its platform due to market conditions, impacting ARR growth by 5% [17][28] - The demand environment for the company's platform remains robust, driven by clients' needs for risk management and compliance [8][19] Company Strategy and Development Direction - The strategic goal includes transitioning to a multiproduct company, with the introduction of Clearwater LPx for private funds [13][20] - The acquisition of JUMP Technology is expected to enhance the company's presence in Europe and expand its product offerings [14][15] - Continued investment in international markets and operational teams is planned to support growth [9][30] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to navigate market headwinds and maintain growth, targeting a revenue range of $300 million to $302 million for the full year 2022 [35][91] - The management team highlighted the importance of transitioning clients to the new pricing model to mitigate future volatility [18][36] Other Important Information - The company hosted its Annual User Conference, which received positive feedback from clients regarding the platform's roadmap and future capabilities [21][59] - The workforce grew by approximately 20% year-to-date, reflecting the company's commitment to investing in its people [23] Q&A Session Summary Question: What percentage of clients are live on the new pricing model? - 49% of annualized recurring revenue is on the new model, with expectations to reach approximately 80% by year-end [38][39] Question: How does JUMP Technology enhance market penetration? - JUMP allows the company to offer integrated end-to-end solutions, particularly appealing to clients managing their own books [42][43] Question: What is the impact of market conditions on net revenue retention? - Net revenue retention was 103%, slightly down from the previous quarter, but management expects improvements as new pricing constructs take effect [18][76] Question: How is demand trending in Europe? - Europe has shown strong demand, with 15% of revenue now coming from international markets, and the company is optimistic about growth in this region [68][69] Question: What are the drivers behind new client acquisitions? - Clients are seeking efficiency, looking to manage costs, and needing better risk management solutions in a volatile market [84][86]

[Glossary](index=4&type=section&id=Glossary) This section provides definitions for key terms used throughout the report [Special Note Regarding Forward-Looking Statements](index=6&type=section&id=SPECIAL%20NOTE%20REGARDING%20FORWARD-LOOKING%20STATEMENTS) This section cautions readers that the report contains forward-looking statements based on management's beliefs and assumptions, subject to various risks - The report contains forward-looking statements based on management's beliefs and assumptions, primarily in the 'Management's Discussion and Analysis of Financial Condition and Results of Operations' section[11](index=11&type=chunk) - Key risk factors that could cause actual results to differ materially include intense industry competition, market volatility affecting asset values, challenges in sustaining rapid revenue growth and retaining talent, potential failures in investment accounting solutions, reliance on IT infrastructure, inability to protect intellectual property, significant influence by 'Principal Equity Owners,' and the requirements of being a public company[12](index=12&type=chunk) - The company explicitly states it does not undertake any obligation to update forward-looking statements made in this report[14](index=14&type=chunk) Part I. Financial Information [Item 1. Condensed Consolidated Financial Statements (Unaudited)](index=8&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements%20%28Unaudited%29) This section presents the company's unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive loss, changes in equity, and cash flows, along with detailed notes explaining the organization, accounting policies, revenue recognition, fair value measurements, supplemental balance sheet information, leases, non-controlling interest, loss per share, equity-based compensation, income taxes, commitments, and related party transactions [Condensed Consolidated Balance Sheets](index=8&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section presents the company's unaudited condensed consolidated balance sheets, detailing assets, liabilities, and equity at specific reporting dates **Condensed Consolidated Balance Sheets (In thousands):** | Item | September 30, 2022 | December 31, 2021 | | :--------------------------------------- | :------------------- | :------------------ | | **Assets** | | | | Cash and cash equivalents | $288,523 | $254,597 | | Total current assets | $373,146 | $321,338 | | Total assets | $419,728 | $344,355 | | **Liabilities** | | | | Total current liabilities | $35,552 | $31,198 | | Total liabilities | $109,465 | $82,487 | | **Stockholders' Equity** | | | | Total stockholders' equity | $310,263 | $261,868 | - Total assets increased by **$75.37 million (21.9%)** from December 31, 2021, to September 30, 2022[18](index=18&type=chunk) - Total liabilities increased by **$26.98 million (32.7%)** over the same period, primarily due to new operating lease liabilities and tax receivable agreement liability[18](index=18&type=chunk) [Condensed Consolidated Statements of Operations](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This section provides the company's unaudited condensed consolidated statements of operations, outlining revenue, expenses, and net loss over specified periods **Condensed Consolidated Statements of Operations (In thousands, except per share amounts):** | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue | $76,552 | $64,489 | $220,739 | $182,259 | | Gross profit | $53,832 | $46,704 | $155,928 | $134,576 | | Income (loss) from operations | $(1,164) | $7,263 | $1,242 | $27,807 | | Net loss | $(3,026) | $(11,428) | $(4,728) | $(8,228) | | Net loss attributable to Clearwater Analytics Holdings, Inc. | $(2,974) | $(8,314) | $(5,005) | $(8,314) | | Basic Net loss per share (Class A and D) | $(0.02) | $(0.05) | $(0.03) | $(0.05) | | Diluted Net loss per share (Class A and D) | $(0.01) | $(0.05) | $(0.02) | $(0.05) | - Revenue increased by **18.7%** for the three months ended September 30, 2022, and by **21.1%** for the nine months ended September 30, 2022, compared to the same periods in 2021[20](index=20&type=chunk) - The company reported a net loss of **$(3.0) million** for Q3 2022, an improvement from **$(11.4) million** in Q3 2021; for the nine months, net loss was **$(4.7) million** in 2022, an improvement from **$(8.2) million** in 2021[20](index=20&type=chunk) [Condensed Consolidated Statements of Comprehensive Loss](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Loss) This section presents the company's unaudited condensed consolidated statements of comprehensive loss, including net loss and other comprehensive income/loss items **Condensed Consolidated Statements of Comprehensive Loss (In thousands):** | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net loss | $(3,026) | $(11,428) | $(4,728) | $(8,228) | | Foreign currency translation adjustment | $(1,100) | $(127) | $(2,362) | $(111) | | Comprehensive loss | $(4,126) | $(11,555) | $(7,090) | $(8,339) | | Comprehensive loss attributable to Clearwater Analytics Holdings, Inc. | $(3,842) | $(8,322) | $(6,851) | $(8,322) | - Foreign currency translation adjustment significantly increased comprehensive loss, reaching **$(1.1) million** for Q3 2022 and **$(2.4) million** for the nine months ended September 30, 2022, compared to much smaller impacts in 2021[22](index=22&type=chunk) [Condensed Consolidated Statements of Changes in Equity (Deficit)](index=11&type=section&id=Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Equity%20%28Deficit%29) This section details the changes in the company's stockholders' equity, reflecting net loss, equity-based compensation, and LLC unit exchanges - Total stockholders' equity increased from **$261.87 million** at December 31, 2021, to **$310.26 million** at September 30, 2022[24](index=24&type=chunk) - Significant activities impacting equity during the nine months ended September 30, 2022, include **$48.77 million** in equity-based compensation, **$8.35 million** from LLC unit exchanges, and a net loss of **$(4.73) million**[24](index=24&type=chunk) - Class A common stock shares outstanding increased from **47,948,888** to **59,199,868**, while Class B common stock shares decreased from **11,151,110** to **1,662,802**, largely due to LLC unit exchanges[24](index=24&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=13&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section outlines the company's unaudited condensed consolidated statements of cash flows, categorizing cash movements from operating, investing, and financing activities **Condensed Consolidated Statements of Cash Flows (In thousands):** | Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------------------------ | :----------------------------- | :----------------------------- | | Net cash provided by (used in) operating activities | $39,847 | $(9,059) | | Net cash used in investing activities | $(8,880) | $(3,499) | | Net cash provided by financing activities | $5,469 | $196,686 | | Net increase in cash and cash equivalents | $33,926 | $184,006 | | Cash and cash equivalents, end of period | $288,523 | $245,094 | - Net cash provided by operating activities significantly improved to **$39.85 million** for the nine months ended September 30, 2022, compared to a net cash outflow of **$(9.06) million** in the prior year[27](index=27&type=chunk) - Net cash provided by financing activities decreased substantially from **$196.69 million** in 2021 (due to IPO proceeds) to **$5.47 million** in 2022[27](index=27&type=chunk) [Notes to Unaudited Condensed Consolidated Financial Statements](index=14&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) [Note 1. Organization and Description of Business](index=14&type=section&id=Note%201.%20Organization%20and%20Description%20of%20Business) This note describes Clearwater Analytics Holdings, Inc.'s formation as a holding company for its IPO, its Up-C corporate structure, and its core business as a SaaS solution provider for investment data aggregation, reconciliation, accounting, and reporting services. It also details the IPO proceeds utilization and the organizational transactions that established the multi-class common stock structure and the Tax Receivable Agreement - Clearwater Analytics Holdings, Inc. was incorporated in May 2021 as a holding company, operating an 'Up-C' structure where it is the sole managing member of CWAN Holdings, LLC, which conducts all business operations[29](index=29&type=chunk) - The company completed its IPO on September 28, 2021, selling **34.5 million** Class A common shares for net proceeds of **$582.2 million**, used to purchase LLC interests, repay debt, and cover IPO expenses[30](index=30&type=chunk) **Common Stock Attributes as of September 30, 2022:** | Class of Common Stock | Votes per Share | Economic Rights | | :-------------------- | :-------------- | :-------------- | | Class A common stock | 1 | Yes | | Class B common stock | 1 | No | | Class C common stock | 10 | No | | Class D common stock | 10 | Yes | [Note 2. Basis of Presentation and Summary of Significant Accounting Policies](index=15&type=section&id=Note%202.%20Basis%20of%20Presentation%20and%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines the basis of presentation for the unaudited condensed consolidated financial statements, confirming adherence to U.S. GAAP for interim reporting and the consolidation of CWAN Holdings as a Variable Interest Entity. It also highlights the adoption of ASU No. 2016-02, Leases (Topic 842), effective January 1, 2022, which resulted in the recognition of ROU assets and lease liabilities on the balance sheet - The financial statements are prepared in accordance with U.S. GAAP for interim financial information and consolidate CWAN Holdings as a Variable Interest Entity, with Clearwater Analytics Holdings, Inc. controlling its business operations[33](index=33&type=chunk)[34](index=34&type=chunk) - Effective January 1, 2022, the company adopted ASU No. 2016-02, Leases (Topic 842), using the modified retrospective transition method, resulting in the recognition of a **$23.1 million** ROU asset and a **$24.6 million** lease liability for existing operating leases[38](index=38&type=chunk) [Note 3. Revenue Recognition](index=16&type=section&id=Note%203.%20Revenue%20Recognition) This note details the company's revenue recognition policy, which includes an optional exemption from disclosing transaction price for remaining performance obligations due to contract duration. It also provides a geographical breakdown of revenue, showing significant growth in international markets **Revenue Disaggregated by Geography (In thousands):** | Geography | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :---------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | United States | $65,420 | $59,445 | $189,307 | $166,765 | | Rest of World | $11,132 | $5,044 | $31,432 | $15,494 | | Total revenue | $76,552 | $64,489 | $220,739 | $182,259 | - Revenue from the Rest of World segment grew by **120.7%** for the three months and **102.9%** for the nine months ended September 30, 2022, compared to the same periods in 2021, indicating strong international expansion[39](index=39&type=chunk) [Note 4. Fair Value Measurements](index=16&type=section&id=Note%204.%20Fair%20Value%20Measurements) This note presents the fair value of the company's financial assets, primarily cash and cash equivalents (money market funds) and short-term investments (certificates of deposit), categorized within the fair value hierarchy **Fair Value of Financial Assets (In thousands):** | Item | September 30, 2022 (Level I) | September 30, 2022 (Level II) | December 31, 2021 (Level I) | | :-------------------------- | :--------------------------- | :---------------------------- | :-------------------------- | | Money market funds | $284,873 | — | $248,744 | | Certificates of deposit | — | $3,000 | — | | Total assets at fair value | $284,873 | $3,000 | $248,744 | - The company's financial assets measured at fair value primarily consist of highly liquid money market funds (Level I) and, as of September 30, 2022, **$3.0 million** in short-term certificates of deposit (Level II)[40](index=40&type=chunk) [Note 5. Supplemental Consolidated Balance Sheet Information](index=17&type=section&id=Note%205.%20Supplemental%20Consolidated%20Balance%20Sheet%20Information) This note provides a detailed breakdown of specific balance sheet accounts, including accounts receivable, prepaid expenses, other current assets, and property and equipment, highlighting changes and components within these categories **Accounts Receivable, net (In thousands):** | Item | September 30, 2022 | December 31, 2021 | | :--------------------------------------- | :------------------- | :------------------ | | Unbilled accounts receivable | $27,696 | $27,086 | | Billed accounts receivable | $37,640 | $23,227 | | Accounts receivable, net | $65,241 | $50,190 | **Prepaid Expenses and Other Current Assets (In thousands):** | Item | September 30, 2022 | December 31, 2021 | | :--------------------------------------- | :------------------- | :------------------ | | Prepaid expenses | $10,233 | $11,722 | | Deferred contract costs, current portion | $3,867 | $3,573 | | Prepaid expense and other current assets | $16,382 | $16,551 | - Depreciation and amortization expense for property and equipment increased to **$1.4 million** for Q3 2022 (from **$0.8 million** in Q3 2021) and **$3.5 million** for the nine months ended September 30, 2022 (from **$2.2 million** in 2021)[44](index=44&type=chunk) [Note 6. Leases](index=18&type=section&id=Note%206.%20Leases) This note details the company's lease accounting practices following the adoption of ASC 842 on January 1, 2022. It outlines the recognition of operating lease ROU assets and liabilities, the use of incremental borrowing rates, and presents future minimum lease payments - Upon adoption of ASC 842 on January 1, 2022, the company recognized a **$23.1 million** ROU asset and a **$24.6 million** lease liability for existing operating leases[38](index=38&type=chunk) - Operating lease cost was **$1.9 million** for the three months and **$5.2 million** for the nine months ended September 30, 2022[48](index=48&type=chunk) **Supplemental Lease Information (Nine Months Ended Sep 30, 2022):** | Item | Value | | :---------------------------------------------------------------- | :------ | | Weighted average remaining lease term | 4.29 years | | Weighted average discount rate | 3.77% | | Cash paid for amounts included in lease liabilities | $1,534 thousand | | Noncash ROU assets obtained in exchange for operating lease obligations | $26,027 thousand | [Note 7. Non-controlling Interest](index=19&type=section&id=Note%207.%20Non-controlling%20Interest) This note explains the non-controlling interest in CWAN Holdings, LLC, which arises from the company's Up-C structure. It details the ownership percentages of Clearwater Analytics Holdings, Inc. and the Continuing Equity Owners in CWAN Holdings **Ownership of LLC Interests in CWAN Holdings:** | Entity | September 30, 2022 (Ownership %) | December 31, 2021 (Ownership %) | | :------------------------------------------------ | :------------------------------- | :------------------------------ | | Clearwater Analytics Holdings, Inc. interest | 79.4% | 75.3% | | Continuing Equity Owners' interest | 20.6% | 24.7% | - Clearwater Analytics Holdings, Inc.'s ownership interest in CWAN Holdings increased from **75.3%** at December 31, 2021, to **79.4%** at September 30, 2022[49](index=49&type=chunk) [Note 8. Loss Per Share](index=20&type=section&id=Note%208.%20Loss%20Per%20Share) This note provides a reconciliation of the numerators and denominators used to compute basic and diluted net loss per share for Class A and Class D common stock, considering the impact of non-controlling interests and potentially dilutive securities **Net Loss Per Share (Class A and Class D Common Stock):** | Metric | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2022 | | :------------------------------------------------ | :------------------------------ | :----------------------------- | | Basic Net Loss per share (Class A) | $(0.02) | $(0.03) | | Basic Net Loss per share (Class D) | $(0.02) | $(0.03) | | Diluted Net Loss per share (Class A) | $(0.01) | $(0.02) | | Diluted Net Loss per share (Class D) | $(0.01) | $(0.02) | **Weighted Average Shares Outstanding (Basic & Diluted):** | Metric | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2022 | | :------------------------------------------------ | :------------------------------ | :----------------------------- | | Basic (Class A & D) | 187,824,531 | 184,026,378 | | Diluted (Class A & D) | 237,869,291 | 237,441,224 | - Potentially dilutive securities, including stock options, RSUs, and ESPP shares, totaled **10.89 million** for the three months and **11.99 million** for the nine months ended September 30, 2022[53](index=53&type=chunk) [Note 9. Equity-Based Compensation](index=22&type=section&id=Note%209.%20Equity-Based%20Compensation) This note details the company's equity-based compensation plans, including the 2021 Omnibus Incentive Plan and the 2021 Employee Stock Purchase Plan (ESPP). It summarizes the activity for stock options and Restricted Stock Units (RSUs), outlines the fair value determination methodology, and reports unrecognized compensation expenses **Stock Option Activity (Nine Months Ended Sep 30, 2022):** | Item | Stock Options | Weighted Average Exercise Price | | :-------------------------- | :-------------- | :------------------------------ | | Balance - Dec 31, 2021 | 22,315,171 | $8.52 | | Granted | 43,986 | $18.19 | | Exercised | (1,151,656) | $6.88 | | Forfeited | (941,296) | $10.48 | | Balance - Sep 30, 2022 | 20,266,205 | $8.54 | | Options vested - Sep 30, 2022 | 10,678,809 | $6.78 | **RSU Activity (Nine Months Ended Sep 30, 2022):** | Item | Units Activity | | :-------------------------------- | :------------- | | Unvested units as of Dec 31, 2021 | 6,070,668 | | Granted | 1,426,336 | | Released | (573,235) | | Cancelled | (514,121) | | Unvested units as of Sep 30, 2022 | 6,409,648 | - As of September 30, 2022, total unrecognized compensation expense related to unvested options was **$51.4 million** (expected over 2.3 years) and for RSUs was **$88.5 million** (expected over 2.9 years)[56](index=56&type=chunk)[57](index=57&type=chunk) [Note 10. Income Taxes](index=24&type=section&id=Note%2010.%20Income%20Taxes) This note explains the company's tax structure as a corporation taxed on income allocated from CWAN Holdings (a partnership). It details the provision for income taxes, the effective tax rate, and the Tax Receivable Agreement (TRA) liability, noting a full valuation allowance against U.S. deferred tax assets and the impact of recent tax legislation **Provision for Income Taxes (In thousands):** | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Loss before provision for income taxes | $(2,602) | $(11,212) | $(3,769) | $(7,692) | | Provision for income taxes | $424 | $216 | $959 | $536 | | Effective tax rate | (16.3%) | (1.9%) | (25.4%) | (7.0%) | - The company has recorded a full valuation allowance against U.S. deferred tax assets, as it is not probable that tax benefits from U.S. losses will be realized[62](index=62&type=chunk) - A Tax Receivable Agreement (TRA) liability of **$5.7 million** was recorded as of September 30, 2022, based on projected taxable income for the current year, with estimated future tax benefits related to ownership exchanges totaling **$410 million**, of which **$348 million** is the associated TRA liability[64](index=64&type=chunk) [Note 11. Commitments and Contingencies](index=26&type=section&id=Note%2011.%20Commitments%20and%20Contingencies) This note discloses the company's binding agreement to acquire JUMP Technology for €75 million, aiming to expand its investment management capabilities. The transaction is expected to close in Q4 2022, subject to regulatory approvals - Clearwater Analytics entered into a binding agreement to acquire JUMP Technology for **€75 million**, with an additional **3.8 million** restricted stock units for employees, aiming to expand investment management and operations capabilities[65](index=65&type=chunk) - The acquisition is expected to add **100** employees and **70** customers across Europe, with the transaction anticipated to close in the fourth quarter of 2022, pending French regulatory requirements and other closing conditions[65](index=65&type=chunk) [Note 12. Transactions with Related Parties](index=26&type=section&id=Note%2012.%20Transactions%20with%20Related%20Parties) This note details transactions with related parties, specifically management fees paid to Principal Equity Owners and an advisory agreement with a former board member **Management Fees to Principal Equity Owners (In thousands):** | Period | Amount | | :-------------------------------- | :----- | | Three Months Ended Sep 30, 2022 | $600 | | Three Months Ended Sep 30, 2021 | $600 | | Nine Months Ended Sep 30, 2022 | $1,800 | | Nine Months Ended Sep 30, 2021 | $1,700 | - An advisory agreement was entered into with Marcus Ryu in April 2022 to retain his insights on go-to-market strategy in the insurance sector, amending his existing stock options for a half-yearly vesting period[67](index=67&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=27&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations, including an overview of its business, key performance drivers, detailed analysis of revenue and expenses, key operating measures, non-GAAP financial measures, liquidity, and critical accounting policies. It also discusses the impact of the JUMP Technology acquisition and market conditions [Overview](index=27&type=section&id=Overview) Clearwater Analytics provides a cloud-native SaaS solution for investment accounting, data, and analytics, serving over 1,100 clients with $5.9 trillion in global invested assets. The company benefits from network effects, a 100% recurring revenue model, and recently announced the acquisition of JUMP Technology to expand its investment management capabilities - Clearwater offers a cloud-native SaaS solution for automated investment data aggregation, reconciliation, accounting, and reporting, managing over **$5.9 trillion** in global invested assets for over **1,100** clients[69](index=69&type=chunk) - The company operates on a **100% recurring revenue model**, primarily charging fees based on assets managed on its platform, with a majority of assets being high-grade fixed income securities, ensuring predictable revenue streams[69](index=69&type=chunk) - Clearwater announced a binding agreement to acquire JUMP Technology for **€75 million**, aiming to expand its investment management and operations capabilities with a front-to-back end solution, expected to close in Q4 2022[69](index=69&type=chunk) [Key Factors Affecting Our Performance](index=28&type=section&id=Key%20Factors%20Affecting%20Our%20Performance) The company's performance is driven by adding new clients in established and nascent markets, expanding relationships with existing clients, international expansion, continuous solution innovation, and managing the impact of market value fluctuations on assets under management - Future growth depends on adding new clients in established markets (corporations, insurance, asset managers) and nascent markets (government, pension funds, alternative asset managers), with revenue and gross margins increasing as assets are onboarded[71](index=71&type=chunk) - Expanding and retaining existing client relationships is crucial, supported by consistent gross revenue retention rates of approximately **98%** and net revenue retention rates above **103%** over the past two years[71](index=71&type=chunk) - International expansion is a significant opportunity, requiring increased sales and marketing investment due to lower brand awareness and higher client acquisition costs compared to North America[71](index=71&type=chunk) - Revenue is subject to fluctuations based on economic conditions and market value of assets on the platform; a **5%** reduction in annualized recurring revenue growth was observed year-to-date due to decreases in fixed income and equity security prices[71](index=71&type=chunk) [Key Components of Results of Operations](index=29&type=section&id=Key%20Components%20of%20Results%20of%20Operations) This section defines the key line items in the condensed consolidated statements of operations, including revenue generation from SaaS fees, cost of revenue related to service delivery, operating expenses (R&D, sales & marketing, G&A), and non-operating items such as interest, tax receivable agreement expense, debt extinguishment loss, other income, and provision for income taxes [Revenue](index=29&type=section&id=Revenue) Revenue is generated from fees for accessing the company's SaaS platform, primarily based on a percentage of the average daily value of client assets on the platform or a fixed monthly fee, with contracts generally cancellable with 30 days' notice - Revenue is derived from SaaS fees, primarily calculated as a percentage of the average daily value of client assets on the platform or a fixed monthly fee[72](index=72&type=chunk) [Cost of Revenue](index=29&type=section&id=Cost%20of%20Revenue) Cost of revenue includes expenses directly related to delivering revenue-generating services, such as client services, onboarding, reconciliation, data purchase agreements, and associated personnel costs and allocated overhead - Cost of revenue encompasses expenses for client services, onboarding, reconciliation, data acquisition, and related personnel salaries, benefits, and allocated overhead[73](index=73&type=chunk) [Operating Expenses](index=29&type=section&id=Operating%20Expenses) Operating expenses are categorized into research and development (staff, contractors, enhancement costs), sales and marketing (personnel, commissions, advertising, events), and general and administrative (IT, finance, HR, legal, accounting services) - Operating expenses are divided into Research and Development (staff, contractors, new offerings), Sales and Marketing (personnel, commissions, advertising), and General and Administrative (IT, finance, HR, legal, accounting)[74](index=74&type=chunk) [Interest (Income) Expense, Net](index=29&type=section&id=Interest%20%28Income%29%20Expense%2C%20Net) Interest (income) expense, net, reflects interest earned on cash and cash equivalents less interest incurred on debt obligations, which varies with borrowings, repayments, and interest rate fluctuations - This line item represents the net effect of interest income from cash and cash equivalents and interest expense from debt obligations, influenced by borrowing levels and interest rates[75](index=75&type=chunk) [Tax Receivable Agreement Expense](index=29&type=section&id=Tax%20Receivable%20Agreement%20Expense) Tax Receivable Agreement (TRA) expense is recognized when the company determines it is probable that payments will be made under the TRA, which provides for 85% of certain tax benefits realized from increases in CWAN Holdings' tax basis - TRA expense is recorded when it is probable that payments will be made under the agreement, which entitles TRA holders to **85%** of certain tax benefits realized by the company[75](index=75&type=chunk) [Loss on Debt Extinguishment](index=29&type=section&id=Loss%20on%20Debt%20Extinguishment) Loss on debt extinguishment refers to costs incurred from the early repayment of borrowings under the Previous Credit Agreement, which occurred in September 2021 in connection with the IPO - This loss resulted from the early repayment of borrowings under the Previous Credit Agreement, which was completed in September 2021 during the IPO[75](index=75&type=chunk) [Other Income, Net](index=29&type=section&id=Other%20Income%2C%20Net) Other income, net, primarily consists of foreign currency gains and losses, reflecting the impact of exchange rate fluctuations - This line item mainly comprises foreign currency gains and losses, driven by fluctuations in exchange rates[75](index=75&type=chunk) [Provision for Income Taxes](index=29&type=section&id=Provision%20for%20Income%20Taxes) Provision for income taxes includes federal, state, and foreign taxes, with the effective tax rate potentially increasing as the company's ownership in CWAN Holdings grows and subject to volatility from discrete items - Income taxes are recognized for federal, state, and foreign jurisdictions, with the effective tax rate influenced by the proportion of pre-tax income in multiple jurisdictions and discrete items[75](index=75&type=chunk) [Key Operating Measures](index=30&type=section&id=Key%20Operating%20Measures) This section presents key operating measures, including Annualized Recurring Revenue (ARR), Gross Revenue Retention Rate, and Net Revenue Retention Rate, which are used to assess business performance and growth [Annualized Recurring Revenue](index=30&type=section&id=Annualized%20Recurring%20Revenue) Annualized Recurring Revenue (ARR) is calculated based on recurring revenue in the last month of the period, multiplied by 365. Its growth is primarily driven by client base expansion and increased assets on the platform, rather than market value fluctuations **Annualized Recurring Revenue (in thousands):** | Period | Amount | | :----------------------------- | :------- | | Nine Months Ended Sep 30, 2022 | $303,560 | | Nine Months Ended Sep 30, 2021 | $257,022 | - Annualized recurring revenue increased by **18%** due to growth in the client base and additional assets from existing clients, but this growth was partially offset by a **5%** reduction from decreases in fixed income and equity security prices during the first nine months of 2022[77](index=77&type=chunk) [Gross Revenue Retention Rate](index=30&type=section&id=Gross%20Revenue%20Retention%20Rate) The Gross Revenue Retention Rate measures the percentage of annual contract value retained from clients, accounting for attrition. It has remained consistently high at approximately 98% since 2019, reflecting strong client satisfaction and value proposition **Gross Revenue Retention Rate:** | Period | Rate | | :----------------------------- | :----- | | Nine Months Ended Sep 30, 2022 | 98% | | Nine Months Ended Sep 30, 2021 | 98% | - The gross revenue retention rate has remained consistent at approximately **98%** since 2019, indicating strong client retention and the value of the company's solution[78](index=78&type=chunk) [Net Revenue Retention Rate](index=30&type=section&id=Net%20Revenue%20Retention%20Rate) The Net Revenue Retention Rate measures recurring revenue retained from clients over a 12-month period, including changes from asset additions/removals, contractual adjustments, and client attrition. It decreased to 103% as of September 30, 2022, primarily due to market value declines **Net Revenue Retention Rate:** | Period | Rate | | :----------------------------- | :----- | | Nine Months Ended Sep 30, 2022 | 103% | | Nine Months Ended Sep 30, 2021 | 111% | - Net revenue retention rate decreased to **103%** as of September 30, 2022, from **111%** in the prior year, primarily due to decreases in the market value of client assets and reduced pricing of fixed income securities[79](index=79&type=chunk) [Non-GAAP Financial Measures](index=31&type=section&id=Non-GAAP%20Financial%20Measures) This section presents non-GAAP financial measures, specifically Adjusted EBITDA and Adjusted EBITDA Margin, which management uses to assess operating performance. It includes a reconciliation from net loss to Adjusted EBITDA and emphasizes that these measures are supplemental and not a substitute for GAAP results [Adjusted EBITDA and Adjusted EBITDA Margin](index=31&type=section&id=Adjusted%20EBITDA%20and%20Adjusted%20EBITDA%20Margin) Adjusted EBITDA is defined as net income (loss) adjusted for interest, debt extinguishment, depreciation, equity-based compensation, TRA expense, transaction expenses, and other expenses. Adjusted EBITDA Margin is Adjusted EBITDA divided by revenue. Both metrics show growth in absolute terms but a slight decrease in margin percentage year-over-year **Adjusted EBITDA and Adjusted EBITDA Margin (in thousands, except percentages):** | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Adjusted EBITDA | $18,849 | $17,082 | $56,786 | $52,604 | | Adjusted EBITDA Margin | 25% | 26% | 26% | 29% | - Adjusted EBITDA increased by **10.3%** for the three months and **8.0%** for the nine months ended September 30, 2022, compared to the same periods in 2021[82](index=82&type=chunk) - Adjusted EBITDA Margin slightly decreased from **26%** to **25%** for the three months and from **29%** to **26%** for the nine months ended September 30, 2022, compared to the prior year[82](index=82&type=chunk) [Results of Operations](index=32&type=section&id=Results%20of%20Operations) This section provides a detailed comparison of the company's consolidated statements of operations for the three and nine months ended September 30, 2022, and 2021, analyzing changes in revenue, cost of revenue, operating expenses (R&D, sales & marketing, G&A), non-operating expenses, and provision for income taxes [Comparison of the Three Months and Nine Months Ended September 30, 2022 and 2021 (unaudited)](index=33&type=section&id=Comparison%20of%20the%20Three%20Months%20and%20Nine%20Months%20Ended%20September%2030%2C%202022%20and%202021%20%28unaudited%29) This sub-section provides a detailed breakdown and analysis of the changes in each line item of the consolidated statements of operations for the three and nine months ended September 30, 2022, compared to the same periods in 2021, highlighting the drivers of revenue growth, increased expenses, and shifts in non-operating items [Revenue](index=33&type=section&id=Revenue_comparison) This sub-section analyzes revenue growth drivers, including client base expansion and increased assets on the platform, for the three and nine months ended September 30, 2022 **Revenue (in thousands, except percentages):** | Period | 2022 | 2021 | $ Change | % Change | | :----------------------------- | :------- | :------- | :------- | :------- | | Three Months Ended Sep 30 | $76,552 | $64,489 | $12,063 | 19% | | Nine Months Ended Sep 30 | $220,739 | $182,259 | $38,480 | 21% | - Revenue increased by **$12.1 million (19%)** for the three months and **$38.5 million (21%)** for the nine months ended September 30, 2022, driven by growth in the client base and increased assets on the platform[87](index=87&type=chunk) - Average assets on the platform billed to new and existing clients increased by **15%** (QTD) and **17%** (YTD), while the average basis point rate billed increased by **3.7%** (QTD) and **3.4%** (YTD)[87](index=87&type=chunk) [Cost of Revenue](index=34&type=section&id=Cost_of_Revenue_comparison) This sub-section details the increase in cost of revenue, driven by headcount growth, equity-based compensation, and data costs, for the three and nine months ended September 30, 2022 **Cost of Revenue (in thousands, except percentages):** | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Equity-based compensation | $2,594 | $899 | $7,281 | $2,171 | | All other cost of revenue | $20,126 | $16,886 | $57,530 | $45,512 | | Total cost of revenue | $22,720 | $17,785 | $64,811 | $47,683 | | Percent of revenue | 30% | 28% | 29% | 26% | - Total cost of revenue increased by **$4.9 million (28%)** for the three months and **$17.1 million (36%)** for the nine months ended September 30, 2022[89](index=89&type=chunk) - The increase was primarily due to higher payroll and related costs from headcount growth in client services, onboarding, and reconciliation teams, increased equity-based compensation, and higher data costs to support a larger client base and international expansion[89](index=89&type=chunk) [Research and Development](index=34&type=section&id=Research_and_Development_comparison) This sub-section examines the increase in R&D expenses due to headcount growth, equity-based compensation, and technology costs, for the three and nine months ended September 30, 2022 **Research and Development Expenses (in thousands, except percentages):** | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Equity-based compensation | $5,133 | $2,226 | $14,003 | $5,912 | | All other R&D | $20,305 | $16,189 | $55,565 | $45,079 | | Total R&D | $25,438 | $18,415 | $69,568 | $50,991 | | Percent of revenue | 33% | 29% | 32% | 28% | - Research and development expenses increased by **$7.0 million (38%)** for the three months and **$18.6 million (36%)** for the nine months ended September 30, 2022[90](index=90&type=chunk) - The increase was mainly driven by higher payroll and related costs due to headcount growth for new offerings, increased equity-based compensation, and higher technology costs from increased utilization of third-party cloud computing services[92](index=92&type=chunk) [Sales and Marketing](index=35&type=section&id=Sales_and_Marketing_comparison) This sub-section outlines the rise in sales and marketing expenses, attributed to compensation, marketing initiatives, and travel, for the three and nine months ended September 30, 2022 **Sales and Marketing Expenses (in thousands, except percentages):** | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Equity-based compensation | $2,941 | $1,655 | $9,452 | $3,782 | | All other S&M | $10,246 | $8,471 | $28,802 | $22,369 | | Total S&M | $13,187 | $10,126 | $38,254 | $26,151 | | Percent of revenue | 17% | 16% | 17% | 14% | - Sales and marketing expenses increased by **$3.1 million (30%)** for the three months and **$12.1 million (46%)** for the nine months ended September 30, 2022[93](index=93&type=chunk) - Key drivers include increased equity-based compensation and payroll costs from expanding sales coverage, higher marketing costs for public relations and events (e.g., Clearwater Connect conference), and increased travel and entertainment[95](index=95&type=chunk) [General and Administrative](index=36&type=section&id=General_and_Administrative_comparison) This sub-section details the increase in G&A expenses, driven by equity-based compensation, acquisition-related costs, and professional services, for the three and nine months ended September 30, 2022 **General and Administrative Expenses (in thousands, except percentages):** | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Equity-based compensation | $6,033 | $2,903 | $18,032 | $7,374 | | All other G&A | $10,338 | $7,997 | $28,832 | $22,253 | | Total G&A | $16,371 | $10,900 | $46,864 | $29,627 | | Percent of revenue | 21% | 17% | 21% | 16% | - General and administrative expenses increased by **$5.5 million (50%)** for the three months and **$17.2 million (58%)** for the nine months ended September 30, 2022[96](index=96&type=chunk) - The increase was primarily due to higher equity-based compensation, transaction expenses related to the JUMP Technology acquisition, increased insurance costs, and higher utilization of accounting and legal professional services as a public company[97](index=97&type=chunk) [Non-Operating Expenses](index=37&type=section&id=Non-Operating_Expenses_comparison) This sub-section analyzes changes in non-operating expenses, including a decrease in net interest expense and the recognition of tax receivable agreement expense **Non-Operating Expenses (in thousands, except percentages):** | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Interest (income) expense, net | $(693) | $8,302 | $139 | $25,261 | | Tax receivable agreement expense | $2,600 | — | $5,700 | — | | Loss on debt extinguishment | — | $10,303 | — | $10,303 | | Other income, net | $(469) | $(130) | $(828) | $(65) | - Interest (income) expense, net, significantly decreased by **$9.0 million (108%)** for the three months and **$25.1 million (99%)** for the nine months ended September 30, 2022, due to lower borrowings and increased interest income[99](index=99&type=chunk) - Tax receivable agreement expense of **$2.6 million** (QTD) and **$5.7 million** (YTD) was recorded in 2022, as the company expects to utilize tax deductions subject to its TRA due to projected taxable income[99](index=99&type=chunk) [Provision for Income Taxes](index=37&type=section&id=Provision_for_Income_Taxes_comparison) This sub-section explains the increase in the provision for income taxes due to changes in the mix of foreign jurisdiction taxable income **Provision for Income Taxes (in thousands, except percentages):** | Period | 2022 | 2021 | $ Change | % Change | | :----------------------------- | :--- | :--- | :------- | :------- | | Three Months Ended Sep 30 | $424 | $216 | $208 | 96% | | Nine Months Ended Sep 30 | $959 | $536 | $423 | 79% | - The provision for income taxes increased by **$0.2 million (96%)** for the three months and **$0.4 million (79%)** for the nine months ended September 30, 2022, primarily due to a change in the mix of foreign jurisdiction taxable income[100](index=100&type=chunk) [Liquidity and Capital Resources](index=37&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses the company's cash position, sources of financing, and ability to meet its financial obligations, including operating working capital, capital expenditures, and the JUMP Technology acquisition. It also analyzes cash flows from operating, investing, and financing activities - As of September 30, 2022, the company had **$288.5 million** in cash and cash equivalents, which it believes is sufficient to meet operating, capital expenditure, and the **€75 million** JUMP Technology acquisition requirements over the next 12 months[102](index=102&type=chunk) **Cash Flows (in thousands):** | Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------------------------ | :----------------------------- | :----------------------------- | | Net cash provided by (used in) operating activities | $39,847 | $(9,059) | | Net cash used in investing activities | $(8,880) | $(3,499) | | Net cash provided by financing activities | $5,469 | $196,686 | | Net increase in cash and cash equivalents | $33,926 | $184,006 | [Cash Flows from Operating Activities](index=38&type=section&id=Cash%20Flows%20from%20Operating%20Activities) Net cash provided by operating activities significantly improved to $39.8 million for the nine months ended September 30, 2022, compared to a net cash outflow in the prior year. This improvement was driven by non-cash charges and changes in working capital, despite increases in accounts receivable and deferred commissions - Net cash provided by operating activities was **$39.8 million** for the nine months ended September 30, 2022, a substantial improvement from **$(9.1) million** used in the prior year[104](index=104&type=chunk) - The increase was primarily due to net loss plus non-cash charges (equity-based compensation, TRA expense, operating lease expense, depreciation), partially offset by increases in accounts receivable (**$15.0 million**) and deferred commissions (**$3.6 million**)[104](index=104&type=chunk) [Cash Flows from Investing Activities](index=38&type=section&id=Cash%20Flows%20from%20Investing%20Activities) Net cash used in investing activities increased to $8.8 million for the nine months ended September 30, 2022, primarily due to purchases of property and equipment and short-term investments - Net cash used in investing activities was **$8.8 million** for the nine months ended September 30, 2022, primarily for purchases of property and equipment (**$5.9 million**) and short-term investments (**$3.0 million**)[105](index=105&type=chunk) [Cash Flows from Financing Activities](index=38&type=section&id=Cash%20Flows%20from%20Financing%20Activities) Net cash provided by financing activities significantly decreased to $5.5 million for the nine months ended September 30, 2022, compared to $197.7 million in the prior year, which included substantial IPO proceeds and new borrowings - Net cash provided by financing activities was **$5.5 million** for the nine months ended September 30, 2022, a significant decrease from **$197.7 million** in the prior year[106](index=106&type=chunk) - 2022 financing activities included **$7.9 million** from option exercises and **$2.4 million** from ESPP, offset by **$2.6 million** for tax withholding, **$2.1 million** for debt repayments, and **$0.2 million** for IPO costs[106](index=106&type=chunk) - 2021 financing activities were dominated by **$582.2 million** in IPO proceeds and **$55.0 million** from new borrowings, largely offset by **$434.2 million** in debt repayments[106](index=106&type=chunk) [Critical Accounting Policies and Estimates](index=39&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section states that there have been no material changes to the company's critical accounting policies and estimates, except for the adoption of ASU No. 2016-02, Leases (Topic 842), on January 1, 2022, which required the recognition of ROU assets and lease liabilities - No material changes to critical accounting policies and estimates were reported, except for the adoption of ASU No. 2016-02, Leases (Topic 842), on January 1, 2022[107](index=107&type=chunk) [JOBS Act Accounting Election](index=39&type=section&id=JOBS%20Act%20Accounting%20Election) The company qualifies as an emerging growth company under the JOBS Act and has elected to use the extended transition period for complying with new or revised accounting standards, which may result in non-comparable financial statements with other public companies - As an emerging growth company, Clearwater Analytics has elected to use the extended transition period for new or revised accounting standards, potentially affecting comparability with other public companies[108](index=108&type=chunk) [Recent Accounting Pronouncements](index=39&type=section&id=Recent%20Accounting%20Pronouncements) This section refers to Note 2 for a discussion of recently adopted accounting pronouncements - Details regarding recent accounting pronouncements are provided in Note 2 of the unaudited condensed consolidated financial statements[109](index=109&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=40&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section discusses the company's exposure to market risks, specifically AUM market price risk, where revenue is sensitive to the value of assets on its platform, and interest rate risk, related to its LIBOR-indexed debt [AUM Market Price Risk](index=40&type=section&id=AUM%20Market%20Price%20Risk) The company's revenue is primarily based on the value of assets on its platform, making it susceptible to fluctuations in securities prices or investment performance, although a minimum fee structure and a high proportion of fixed income assets mitigate some volatility - Substantially all revenue is derived from fees based on the value of assets on the platform, making it sensitive to fluctuations in securities prices or investment performance[110](index=110&type=chunk) - While a minimum fee is charged, and **78%** of assets were high-grade fixed income securities as of December 31, 2021, market movements could still lead to lower fees[71](index=71&type=chunk)[110](index=110&type=chunk) [Interest Rate Risk](index=40&type=section&id=Interest%20Rate%20Risk) The company faces interest rate risk due to its LIBOR-indexed debt under the New Credit Agreement. A hypothetical 100 basis point change in LIBOR would impact annual interest expense by approximately $0.5 million based on its $52.3 million debt balance - The company's debt under the New Credit Agreement is indexed to LIBOR, exposing it to interest rate risk[111](index=111&type=chunk) - A hypothetical **100 basis point** increase or decrease in LIBOR would change annual interest expense by approximately **$0.5 million**, based on the **$52.3 million** debt balance at September 30, 2022[111](index=111&type=chunk) [Item 4. Controls and Procedures](index=40&type=section&id=Item%204.%20Controls%20and%20Procedures) This section reports on the effectiveness of the company's disclosure controls and procedures and internal control over financial reporting, concluding that they were effective as of September 30, 2022, with no material changes during the period, while acknowledging inherent limitations of any control system [Evaluation of Disclosure Controls and Procedures](index=40&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the effectiveness of the company's disclosure controls and procedures as of September 30, 2022, and concluded they were effective - The company's disclosure controls and procedures were evaluated by management, including the CEO and CFO, and deemed effective as of September 30, 2022[112](index=112&type=chunk) [Changes in Internal Control Over Financial Reporting](index=40&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) There were no changes in the company's internal control over financial reporting during the period covered by this report that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting - No material changes in internal control over financial reporting occurred during the period covered by this Quarterly Report on Form 10-Q[113](index=113&type=chunk) [Inherent Limitations on Effectiveness of Controls](index=40&type=section&id=Inherent%20Limitations%20on%20Effectiveness%20of%20Controls) Management acknowledges that while disclosure controls and internal control over financial reporting are designed to provide reasonable assurance, they have inherent limitations and cannot prevent or detect all errors or fraud due to factors like faulty judgments, simple errors, circumvention by individuals, or management override - Management believes controls provide reasonable, not absolute, assurance, acknowledging inherent limitations such as faulty judgments, simple errors, circumvention, or management override[114](index=114&type=chunk) Part II. Other Information [Item 1. Legal Proceedings](index=41&type=section&id=Item%201.%20Legal%20Proceedings) The company is not involved in any legal proceedings or claims that management believes could have a material adverse effect on its operations, financial condition, or business - Management believes the company is not involved in any legal proceedings or claims that could materially adversely affect its results of operations, financial condition, or business[116](index=116&type=chunk) [Item 1A. Risk Factors](index=41&type=section&id=Item%201A.%20Risk%20Factors) This section refers readers to the 'Risk Factors' section in the company's Annual Report for a comprehensive discussion of potential risks and uncertainties - For a discussion of potential risks and uncertainties, refer to the 'Risk Factors' section in the Annual Report[117](index=117&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=41&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section details the unregistered sales of Class A common stock issued upon the exchange of Class B common stock and corresponding LLC Interests by stockholders, which are exempt from registration under Section 4(a)(2) of the Securities Act **Unregistered Sales of Class A Common Stock (Upon Exchange of Class B Common Stock and LLC Interests):** | Date | Shares Issued | | :------------- | :------------ | | July 31, 2022 | 5,000 | | August 31, 2022 | 80,645 | | September 30, 2022 | 948,338 | - Shares of Class A common stock were issued to stockholders upon the exchange of Class B common stock and corresponding LLC Interests, exempt from registration under Section 4(a)(2) of the Securities Act[118](index=118&type=chunk) [Item 3. Defaults Upon Senior Securities](index=41&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities during the period - There were no defaults upon senior securities[119](index=119&type=chunk) [Item 4. Mine Safety Disclosures](index=41&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - This disclosure item is not applicable to the registrant[120](index=120&type=chunk) [Item 5. Other Information](index=41&type=section&id=Item%205.%20Other%20Information) No other information was reported under this item - No other information was reported[121](index=121&type=chunk) [Item 6. Exhibits](index=42&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including corporate governance documents, certifications from executive officers, and XBRL interactive data files - The exhibits include the Amended and Restated Certificate of Incorporation and Bylaws, certifications from the Principal Executive Officer and Principal Financial Officer, and Inline XBRL Instance Document and Taxonomy Extension Documents[123](index=123&type=chunk)[124](index=124&type=chunk) [Signatures](index=43&type=section&id=Signatures) This section provides the official signatures certifying the accuracy and completeness of the report - The report was signed on November 4, 2022, by Jim Cox, Chief Financial Officer (Principal Financial and Accounting Officer and Authorized Signatory)[128](index=128&type=chunk)

Financial Data and Key Metrics Changes - Revenue for Q2 2022 reached $73.4 million, representing a 21% year-on-year growth and an increase from $70.8 million in Q1 2022 [6][28] - Gross margin was reported at 75.7%, with adjusted EBITDA of $19.1 million, translating to a 26% margin, up from $17.4 million in Q2 2021 [7][39] - Free cash flow generation was strong at $16.5 million, with an 87% conversion of adjusted EBITDA to free cash flow [8][43] Business Line Data and Key Metrics Changes - Annualized recurring revenue (ARR) grew to $290.4 million, an 18.5% increase year-over-year, although growth was tempered by a decline in asset values [14][30] - New client acquisition was robust, with 45 new clients going live on the platform in Q2 [13][29] - Gross revenue retention rate remained high at 98% for the 14th consecutive quarter [12] Market Data and Key Metrics Changes - The decline in asset values across various asset classes negatively impacted net revenue retention, which decreased from 107% to 104% [14][31] - The company is addressing a $10 billion market opportunity while expanding in Europe and Asia [21] Company Strategy and Development Direction - The company is evolving its pricing model to a fixed annual fee for new clients, aiming to reduce revenue volatility and improve predictability [10][11] - Clearwater Analytics is focused on five core pillars: consistent durable growth, high-quality business model, disruptive technology, multiple growth drivers, and client focus [15][16][21][23] - The company continues to invest in R&D to enhance its platform and maintain a competitive edge [19][35] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's resilience despite market downturns, emphasizing strong client relationships and ongoing investments [47][48] - The management team anticipates that changes to the pricing model will lead to more predictable revenue and improved client engagement [90][92] Other Important Information - The company ended Q2 with $281.6 million in cash and cash equivalents, resulting in net cash holdings of approximately $230 million [42] - The company plans to host its annual user conference, Clearwater Connect, in September 2022 [26] Q&A Session Summary Question: How is the transition to a fixed recurring subscription fee expected to impact revenue growth? - Management acknowledged that the transition may initially drag on revenue growth but emphasized the long-term benefits of a more stable pricing model [50][51] Question: Are there any signs of slowdown in new procurements or decision cycles? - Management noted that while some regions, like Europe, showed slower activity, overall bookings were strong, and the pipeline remains healthy [53][56] Question: Will the contract duration or renewal timeline change with the new pricing model? - Management confirmed that while the approach remains consistent, larger clients may prefer longer-term contracts [59] Question: Can you provide insights on segment performance in Q2? - Management highlighted strong performance in the insurance segment and noted significant wins in both insurance and asset management [65][66] Question: What has been the initial feedback on the new pricing model? - Management reported little resistance from new clients and a cooperative approach from existing clients during the transition [72][73] Question: How should we think about the pace of free cash flow margin expansion longer term? - Management indicated that free cash flow conversion is expected to stabilize around 70% of EBITDA, with potential for growth as the business scales [84] Question: How does the pricing change impact long-term growth? - Management believes the new pricing model will provide better predictability and maintain growth potential despite recent market fluctuations [88][90]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-40838 Clearwater Analytics Holdings, Inc. (Exact Name of Registrant as Specified in its Charter) Delaware 87-1043711 (State or oth ...

Financial Data and Key Metrics Changes - Revenue for Q1 2022 grew 24% year over year to $70.8 million, marking a quarterly record [5][19] - Annualized recurring revenue (ARR) increased 23.5% year over year, reaching over $287 million [6][19] - Adjusted EBITDA for Q1 was $18.9 million, representing 26.7% of revenue [24] - Gross revenue retention remained at 98% for the 13th consecutive quarter, while net revenue retention was 107% [6][20] Business Line Data and Key Metrics Changes - The company reported strong client onboarding and an increase in total clients, contributing to revenue growth [19] - New product offerings, particularly Clearwater Prism, are gaining traction and expected to enhance revenue streams [14][16] Market Data and Key Metrics Changes - International revenue growth accounted for 13% of total revenues, up from 9% in the previous year [22] - The company signed its first French insurance client and first European foundation, indicating expansion into adjacent markets [11] Company Strategy and Development Direction - The company aims to continue investing in R&D and expanding its presence in international markets, particularly in Continental Europe and Asia [22][24] - Clearwater's platform is positioned as a disruptive solution in the investment operations space, with a focus on automation and efficiency [8][12] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the demand for their solutions despite macroeconomic uncertainties, including rising interest rates and geopolitical tensions [28][42] - The company raised its full-year revenue guidance to a range of $303 million to $305 million, reflecting strong Q1 performance [27] Other Important Information - The company ended Q1 with $263.7 million in cash and cash equivalents, indicating a strong balance sheet [25] - Management highlighted the importance of maintaining a competitive edge through continuous innovation and investment in technology [85][86] Q&A Session Summary Question: Impact of interest rates on net revenue retention (NRR) - Management acknowledged that the interest rate environment has been slightly worse than expected, but strong bookings and a solid pipeline are helping to offset this [33][34][35] Question: Sustainability of revenue growth - Management believes that consistent performance in the 20% growth range is achievable, supported by strong client demand and successful product offerings [39][42] Question: Competitive landscape changes post-IPO - Management noted increased awareness of the company in the market but emphasized that win rates remain strong and unchanged [84][94] Question: Visibility into demand compared to past downturns - Management indicated that the current pipeline is robust and active, contrasting with the quiet demand seen during the early pandemic [80] Question: Wage inflation and hiring challenges - Management confirmed awareness of wage inflation but expressed confidence in their ability to attract talent and manage costs effectively [73][76]

| --- | --- | --- | --- | --- | --- | --- | --- | |-------|-------|-------|-----------------------|-------------------|-------|-------|-------| | | | | | | | | | | | | | CLEAR WATER | | | | | | | | | | | | | | | | | | | A N A L Y T I C S | | | | | | | | | | | | | | | | | | · · | | | | | | | | Investor Presentation | | | | | | | | | | May 4, 2022 | | | | Safe Harbor This presentation contains "forward-looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Re ...