Clearwater Analytics Holdings, Inc. Q1 FY2023 earnings

Clearwater Analytics opened fiscal 2023 with first quarter revenue of $84.6 million, up 19.5% from $70.8 million in the prior-year quarter. Management credited growth in the client base and changes in existing clients' assets for the increase. Average assets on the platform billed to new and existing clients rose 12%, and the average basis point rate billed to clients rose 1.5%. Gross profit was $59.8 million, up 20.5% from $49.6 million. Gross margin reached 70.7%, up 0.6 percentage points from 70.1%. On a non-GAAP basis, gross profit was $64.2 million, a 75.9% non-GAAP gross margin.

Profitability moved the opposite way. Operating income swung to an operating loss of $6.3 million from operating income of $1.3 million, and operating margin fell to negative 7.5% from 1.8%. Net loss attributable to the company was $4.4 million, against net income of $0.4 million a year earlier. Diluted earnings per share swung to a loss of $0.02 from $0.00. The main cause was stock-based pay, with equity-based compensation expense and related payroll taxes of $24.5 million in the quarter, including $5.5 million tied to the JUMP Technology acquisition. Adjusted EBITDA was $22.5 million, compared with $18.9 million, and adjusted EBITDA margin was 26.6%. Non-GAAP net income increased 37.6% to $17.6 million from $12.8 million.

Recurring revenue metrics held steady. Annualized recurring revenue reached $337.4 million as of March 31, 2023, an increase of 17.5% from $287.1 million as of March 31, 2022. Net revenue retention was 106%, unchanged from December 31, 2022. The gross revenue retention rate was 97%, compared with 98% as of March 31, 2022, and the decline came mostly from a larger number of customers being acquired over the prior twelve months. Cash generation improved modestly. Operating cash flow rose to $7.9 million from $6.9 million, and free cash flow increased by 32.6% to $6.2 million from $4.7 million. Capital expenditures were $1.7 million, down 22.9% from $2.2 million. Deferred revenue, current portion only, was $3.5 million, up 109.8% from $1.7 million. Cash, cash equivalents and investments totaled $256.8 million at March 31, 2023, and total debt, net of debt issuance costs, was $49.9 million.

Guidance points to a similar trajectory. For the second quarter of 2023, Clearwater guided to sales of $87.5 million, growth of 19%, and adjusted EBITDA of $22.8 million. For the full year 2023, the outlook calls for $362 million to $364 million in sales, growth of 19% to 20%, and adjusted EBITDA of $97 million to $98 million. The full year plan assumes $80 million of equity-based compensation expense and related payroll taxes, $25 million of equity-based compensation related to the JUMP Technology acquisition, $9 million of depreciation and amortization, a 25% non-GAAP effective tax rate and a diluted non-GAAP share count of 255 million. Management did not reconcile the non-GAAP guidance components to GAAP.

The risk profile fits an asset-based software model with a short contract cycle. Revenue is tied to the value of client assets on the platform, so market volatility, an economic downturn or a changing interest rate environment can move billings. Contracts are generally cancellable with 30 days' notice and no penalty, which caps visibility even with retention near current levels. The JUMP Technology acquisition, completed in December 2022, adds integration work and the need to retain JUMP management and its clients. Other disclosed risks include keeping pace with rapid technological change, managing growth, attracting and retaining skilled employees, disruptions in computer and cloud systems, protecting confidential information, infringement claims, and the company's status as a controlled company. One item worth watching is working capital. Accounts receivable rose $6.1 million, of which $4.4 million came from aging of balances for certain customers due to a short-term deterioration in days sales outstanding, which management still considers collectible.