Clearwater Analytics Holdings, Inc. Q2 FY2023 earnings
CWANQuarter ended Jun 2023.
Summary
Clearwater Analytics reported $89.9 million of revenue for the second quarter of fiscal 2023, up 22.4% from $73.4 million in the same quarter last year. Year-to-date revenue reached $174.5 million, an increase of 21.0%. New client wins and asset growth at existing accounts did the work. Annualized recurring revenue stood at $349.5 million as of June 30, 2023, up 20.4% from $290.4 million a year earlier. Average billed assets on the platform rose 25% in the quarter while the average basis point rate billed to clients fell 5.1%, so volume rather than pricing carried the growth. Retention improved: gross revenue retention was 98%, up from 97% at March 31, 2023, and net revenue retention was 109%, up from 106% at the prior quarter end.
Profitability moved the other way. Gross profit climbed to $62.9 million from $52.5 million, but gross margin slipped to 70.0% from 71.5%. The operating line swung to a loss of $7.1 million from income of $1.1 million a year earlier, and operating margin went from 1.5% to -7.9%. Equity-based compensation expense and related payroll taxes totaled $28.7 million in the quarter, and $5.5 million of that came from the JUMP Technology acquisition. General and administrative costs took the biggest hit from those awards. Net loss attributable to Clearwater was $10.9 million, compared with $2.4 million a year earlier, and diluted loss per share was -$0.06 versus -$0.01.
Cash generation held up. Operating cash flow for the quarter was $21.1 million, up 15.8% from the prior-year quarter, and year-to-date operating cash flow was $29.1 million, up 15.5%. Free cash flow, a different measure that also deducts purchases of property and equipment, rose 18.5% to $19.6 million in the quarter. Capital expenditures were $1.6 million, down 9.5%. Deferred revenue, current portion, was $2.8 million at June 30, 2023, up 157.1%. On a non-GAAP basis, adjusted EBITDA was $24.8 million, up 30.2% from $19.1 million, at a 27.6% margin, and non-GAAP net income rose 50.9% to $20.0 million. The balance sheet showed $277.8 million of cash, cash equivalents and investments and $49.3 million of total debt, net of debt issuance costs.
Guidance points to steady top-line growth. For the third quarter of 2023, Clearwater guides to revenue growth of 20% and adjusted EBITDA of $25.5 million. For the full year 2023, the company guides to revenue growth of 20% to 21% and adjusted EBITDA of $100 million. The full-year plan assumes $80 million of equity-based compensation expense and related payroll taxes, including $25 million tied to JUMP, $9 million of depreciation and amortization, a non-GAAP effective tax rate of 25% and a diluted non-GAAP share count of 255 million. The company provides these components on a non-GAAP basis only.
The client list kept moving. Aviva went live on the platform on April 1, 2023, and second-quarter go lives included Amica Mutual Insurance, Greenwich Investment Management and Highmark Health. Clearwater added names such as Apollo Syndicate, Delta Dental of Wyoming, Intellia Therapeutics and Viridian Therapeutics, and closed a deal with a French insurer for unit-linked funds. It also announced a partnership with J.P. Morgan Asset Management to connect with the Morgan Money trading platform and set up Clearwater-GPT for generative AI work.
Management flags several risks in the 10-Q. Revenue depends on the value of assets on the platform, so market volatility and interest rates can move results, even though 77% of those assets were high-grade fixed income securities and structured products as of December 31, 2022. Onboarding timing can swing gross margin. International expansion costs more per client than work in North America. The JUMP acquisition carries integration and client retention risk, and the company remains a controlled company. Cash conversion is worth monitoring as well: the first-half increase in operating cash flow came alongside aging of certain receivable balances and a short-term deterioration in days sales outstanding that management still considers collectible.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2023 | Q1 FY2023 | QoQ | Q2 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $89.9M | $84.6M | +6.2% | $73.4M | +22.4% |
| Gross profit | $62.9M | $59.8M | +5.3% | $52.5M | +19.9% |
| Gross margin | 70.0% | 70.7% | -0.6 pp | 71.5% | -1.5 pp |
| Research & development | $29.8M | $28.1M | +6.2% | $22.8M | +30.7% |
| Sales & marketing | $14.3M | $14.7M | -2.5% | $13.1M | +9.6% |
| General & administrative | $25.9M | $23.3M | +11.0% | $15.5M | +67.4% |
| Total operating expenses | $70.0M | $66.1M | +6.0% | $51.4M | +36.4% |
| Operating income (loss) | -$7.1M | -$6.3M | -12.7% | $1.1M | -732.2% |
| Operating margin | -7.9% | -7.5% | -0.5 pp | 1.5% | -9.5 pp |
| Net income (loss) | -$10.9M | -$4.4M | -149.1% | -$2.4M | -349.8% |
| Net margin | -12.2% | -5.2% | -7.0 pp | -3.3% | -8.8 pp |
| Diluted EPS | -$0.06 | -$0.02 | -$0.04 | -$0.01 | -$0.05 |
Risks
Based on public float as of June 30, 2023, Clearwater expects to lose emerging growth company status as of December 31, 2023, triggering its first formal assessment of internal control over financial reporting and an audit by its independent registered accounting firm. The filing warns that this evaluation may identify material weaknesses or that failure to remediate existing material weaknesses could prevent timely financial reporting and lead to SEC or NYSE sanctions.
General and administrative expense increased 67% for Q2 FY2023 versus the prior-year quarter, primarily from a $10.1 million increase in equity-based compensation including JUMP acquisition-related awards. Total equity-based compensation expense was $28.6 million in Q2 FY2023 versus $16.2 million in Q2 FY2022, contributing to an operating loss of $7.1 million in Q2 FY2023, a swing from operating income of $1.1 million in Q2 FY2022.
The company intends to continue presenting non-GAAP measures such as Adjusted EBITDA in future filings and public statements. It warns that any failure to accurately report and present these non-GAAP financial measures could cause investors to lose confidence in reported financial and other information and likely negatively affect the trading price of Class A common stock.
Revenue is generally billed monthly in arrears as a basis point rate applied to client assets on the platform, making it sensitive to market values. Although 77% of assets were high-grade fixed income securities and structured products as of December 31, 2022, the filing states revenue is subject to fluctuations from economic conditions, market conditions and the changing interest rate environment.
Clearwater says its cost to acquire clients in international markets is currently greater than in North America due to less brand awareness and lower historical sales and marketing investment, and it expects to invest more internationally. It also expects sales and marketing in adjacent end-markets such as state and local governments, pension funds, sovereign wealth funds and alternative asset managers to be less efficient initially.
MD&A states that as the company identifies opportunities to increase technological and competitive advantages, for example generative AI, it may increase research and development investments at rates faster than revenue growth. Research and development expense already rose 31% for both the three and six months ended June 30, 2023 compared with the prior-year periods.
Accounts receivable increased $9.9 million in the six months ended June 30, 2023, including $3.6 million from aging of receivable balances for certain customers due to short-term deterioration in days sales outstanding. Management says it continues to believe the balances are collectible, but slower collection could pressure operating cash flow.
Tax receivable agreement expense rose 112% to $6.6 million for Q2 FY2023 and 115% to $6.7 million for the six months ended June 30, 2023. The company expects to utilize tax benefits subject to the TRA and has recorded associated expense, which reduces net income and can create volatility in its effective tax rate.
Gross margin declined to 70.0% in Q2 FY2023 from 71.5% in Q2 FY2022, and cost of revenue rose 29% versus revenue growth of 22.4% in the quarter. Management notes that gross margins may fluctuate based on the relative size and number of clients being onboarded in any period.
SaaS KPIs
All quarters →Net Revenue Retention Rate
Adjusted EBITDA
Adjusted EBITDA Margin
Free Cash Flow
Non-GAAP Gross Margin
Total clients
Gross Revenue Retention Rate
Annualized Recurring Revenue (ARR)
Summary, forecast, risks and KPIs are extracted from Clearwater Analytics Holdings, Inc.'s SEC filings for Q2 FY2023 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 2, 2026.