Clearwater Analytics (CWAN) - 2022 Q3 - Quarterly Report

Glossary This section provides definitions for key terms used throughout the report Special Note Regarding Forward-Looking Statements 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] - 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] - The company explicitly states it does not undertake any obligation to update forward-looking statements made in this report[14] Part I. Financial Information Item 1. Condensed Consolidated Financial Statements (Unaudited) 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 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] - 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] Condensed Consolidated Statements of Operations 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] - 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] Condensed Consolidated Statements of Comprehensive Loss 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] Condensed Consolidated Statements of Changes in Equity (Deficit) 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] - 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] - 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] Condensed Consolidated Statements of Cash Flows 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] - 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] Notes to Unaudited Condensed Consolidated Financial Statements Note 1. Organization and Description of Business 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] - 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] 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 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][34] - 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] Note 3. Revenue Recognition 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] Note 4. Fair Value Measurements 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] Note 5. Supplemental Consolidated Balance Sheet Information 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] Note 6. Leases 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] - Operating lease cost was $1.9 million for the three months and $5.2 million for the nine months ended September 30, 2022[48] 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 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] Note 8. Loss Per Share 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] Note 9. Equity-Based Compensation 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][57] Note 10. Income Taxes 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] - 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] Note 11. Commitments and Contingencies 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] - 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] Note 12. Transactions with Related Parties 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] - 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] - 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] Key Factors Affecting Our Performance 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] - 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] - 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] - 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] Key Components of Results of Operations 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 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] Cost of Revenue 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] Operating Expenses 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] Interest (Income) Expense, Net 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] Tax Receivable Agreement Expense 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] Loss on Debt Extinguishment 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] Other Income, Net 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] Provision for Income Taxes 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] Key Operating Measures 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 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] Gross Revenue Retention Rate 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] Net Revenue Retention Rate 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] Non-GAAP Financial Measures 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 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] - 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] Results of Operations 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) 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 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] - 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] Cost of Revenue 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] - 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] Research and Development 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] - 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] Sales and Marketing 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] - 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] General and Administrative 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] - 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] Non-Operating Expenses 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] - 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] Provision for Income Taxes 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] Liquidity and Capital Resources 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] 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 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] - 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] Cash Flows from Investing Activities 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] Cash Flows from Financing Activities 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] - 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] - 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] Critical Accounting Policies and Estimates 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] JOBS Act Accounting Election 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] Recent Accounting Pronouncements 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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 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] - 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][110] Interest Rate Risk 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] - 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] Item 4. Controls and Procedures 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 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] Changes in Internal Control Over Financial Reporting 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] Inherent Limitations on Effectiveness of Controls 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] Part II. Other Information Item 1. Legal Proceedings 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] Item 1A. Risk Factors 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - There were no defaults upon senior securities[119] Item 4. Mine Safety Disclosures This item is not applicable to the company - This disclosure item is not applicable to the registrant[120] Item 5. Other Information No other information was reported under this item - No other information was reported[121] Item 6. Exhibits 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][124] 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]