Clearwater Analytics (CWAN) - 2022 Q4 - Annual Report

PART I Item 1. Business 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][287][303][311] - 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][241][310] - 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] - In 2022, 80% of clients transitioned to a 'Base+' contract framework or accepted price increases to limit downside volatility[288] - 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][312] Item 1A. Risk Factors 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][345] - 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][346][348] - 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][355] - 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] - 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][41] - 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][57][284] Item 1B. Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - No unresolved staff comments were reported[89] Item 2. Properties 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] - Leases additional office space in Paris, Edinburgh, Seattle, New York, Noida, London, McLean, San Jose, Luxembourg, Frankfurt, and Singapore[82][90] - All facilities are leased; no real property is owned. Existing facilities are deemed adequate, with additional space available for growth[90] Item 3. Legal Proceedings 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] Item 4. Mine Safety Disclosures Mine Safety Disclosures are not applicable to the company - Mine Safety Disclosures are not applicable[91] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] - 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] - 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][96] - 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][100] Item 6. [Reserved] Item 6 is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 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] - This growth was primarily due to an increase in client base and assets on the platform, with JUMP acquisition contributing $2.7 million[112] - 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] - Adjusted EBITDA for 2022 was $81.1 million, with an Adjusted EBITDA Margin of 27%[85] - 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] - 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] - 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] Item 8. Financial Statements and Supplementary Data. 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] 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][236] - 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][243] - 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][199][201] - 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][196][274] - 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][273] - 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][580][615] - 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] - 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][416] Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 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] Item 9A. Controls and Procedures. 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] - 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] - No material changes in internal control over financial reporting occurred during the period, except for those related to the JUMP acquisition[478] Item 9B. Other Information. No other information was reported for this item - No other information was reported for this item[480] Item 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections. Disclosure regarding foreign jurisdictions that prevent inspections is not applicable - Disclosure regarding foreign jurisdictions that prevent inspections is not applicable[481] PART III Item 10. Directors, Executive Officers and Corporate Governance. 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] - The Board values diversity, with 60% of its members identifying as women, racial/ethnic minority, or LGBTQ+[338][485][491] - 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][488] - The roles of Board Chair (Eric Lee) and Chief Executive Officer (Sandeep Sahai) are separated to ensure strong oversight and operational focus[498] - The Audit Committee, composed of independent directors, is responsible for overseeing financial reporting, internal controls, and risk management, including cybersecurity[521][529] - The company has a Code of Ethics applicable to all directors, officers, and employees, and policies prohibiting hedging and promoting anti-corruption[500][527][528] Item 11. Executive Compensation. 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] 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] - 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][572] - 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] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 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] - 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][551] 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. 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] - 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] - 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] - 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][615] - 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] - 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] Item 14. Principal Accounting Fees and Services. 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] 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] PART IV Item 15. Exhibits, Financial Statement Schedules. 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] - Other financial statement schedules are omitted as not applicable or included in the consolidated financial statements and notes[624] - 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][605][627] Item 16. Form 10-K Summary No summary for Form 10-K was provided in this section - No summary for Form 10-K was provided in this section[629] 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][634] - Additional directors also signed the report on March 3, 2023[609]