Clearwater Analytics Holdings, Inc. Q3 FY2021 earnings

Clearwater Analytics closed its first quarter as a public company with revenue of $64.5 million, up 20.9% from $53.4 million in the third quarter of 2020. Year-to-date revenue reached $182.3 million, up 22.8%. Management credited new clients coming onto the platform and existing clients adding assets. The platform reports on more than $5.6 trillion in assets for over 1,000 clients. Annualized recurring revenue reached $257.0 million at September 30, 2021, an increase of 20% from $214.9 million a year earlier.

The top line held up. Profitability did not. Gross profit rose 13.8% to $46.7 million, slower than revenue, and gross margin slipped to 72.4% from 76.9% in the prior-year quarter, a drop of 4.5 percentage points. Higher equity-based compensation and spending to onboard new clients drove the compression. Operating income fell 56.0% to $7.3 million, and operating margin dropped to 11.3% from 30.9%, a decline of 19.7 percentage points. Equity-based compensation rose sharply and accounted for a large slice of the operating expense growth. Non-GAAP gross profit was $48.1 million and non-GAAP gross margin was 74.5%, which shows how much of the margin pressure came from share-based costs.

Adjusted EBITDA was $17.1 million, down from $19.0 million, for a 26.5% margin. Non-GAAP net income was $8.7 million versus $14.0 million a year earlier. On a GAAP basis the quarter produced a net loss attributable to Clearwater Analytics of $8.3 million, with diluted loss per share of $0.05. The year-to-date net loss attributable to the company was also $8.3 million, and the year-to-date diluted loss per share was $0.05. The IPO priced on September 23, 2021 and closed on September 28, 2021. The company sold 34,500,000 Class A shares at $18.00 each for net proceeds of $582.2 million and used part of the money to repay borrowings under its previous credit agreement. Cash and cash equivalents were $245.1 million at September 30, 2021.

Cash generation was uneven. Operating cash flow was $7.3 million in the third quarter, but the nine-month figure was negative $9.1 million, down 134.8% from $26.0 million in the prior-year period. Management pointed to a large increase in accounts receivable, including delayed remittances from several customers, and to prepaid management fees as drags on working capital. Capital expenditures were $1.3 million in the quarter and $3.5 million year to date, up 11.3% from the prior-year period. Deferred revenue carried on the balance sheet, current portion only, was $0.6 million.

Retention remains the backbone of the story. Gross revenue retention was 98% as of September 30, 2021, the eleventh consecutive quarter at that level. Net revenue retention was 111%, a 220 basis point improvement from 109% a year earlier. Guidance implies full-year 2021 revenue growth of 22% to 23%, and adjusted EBITDA margin is guided to approximately 26% for the fourth quarter of 2021 and approximately 28% for the full year. Parts of the guidance are given on a non-GAAP basis only, with no reconciliation provided.

Risks cluster around cost and structure. Gross margin could stay under pressure while the company absorbs onboarding costs and higher equity-based compensation. Sales and marketing is growing far faster than revenue as Clearwater pushes into international markets and adjacent end markets, where client acquisition costs run higher and brand awareness is thinner. Revenue is billed on assets held on the platform, so market values and interest rates feed directly into results, and 86% of those assets were high-grade fixed income securities and structured products at September 30, 2021. Working capital absorbed cash over the first nine months, partly from slow remittances on receivables. The Up-C organization, the tax receivable agreement, controlled company status, and the emerging growth company accounting election all add complexity for public investors.