Clearwater Analytics Holdings, Inc. Q4 FY2022 earnings
CWANQuarter ended Dec 2022.
Summary
Clearwater Analytics closed fiscal 2022 with fourth-quarter revenue of $82.7 million, up 18.5% from $69.8 million in the prior-year quarter. Full-year revenue reached $303.4 million, up 20.4% from $252.0 million. Gross profit for the quarter was $59.7 million, up 20.4% from $49.6 million, while full-year gross profit was $215.6 million, up 17.1% from $184.2 million. Fourth-quarter operating income was $3.9 million, up 492.5% from $0.7 million. Full-year operating income fell 82.0% to $5.1 million from $28.5 million. Net loss attributable to Clearwater Analytics Holdings, Inc. was $2.96 million in the quarter, compared with net income attributable of $0.10 million in the prior-year quarter. The full-year net loss attributable was $7.97 million, compared with $8.21 million, so the loss narrowed.
Margins showed a similar split. Fourth-quarter gross margin was 72.2%, up 1.1 percentage points from 71.1%. Full-year gross margin was 71.1%, down 2.0 percentage points from 73.1%. Fourth-quarter operating margin was 4.7%, up 3.7 percentage points from 0.9%. Full-year operating margin was 1.7%, down 9.6 percentage points from 11.3%. Operating cash flow was $18.16 million in the quarter, up 46.2% from $12.42 million. For the full year, operating cash flow was $58.00 million, up 1627.4% from $3.36 million. Capital expenditures were $1.88 million in the quarter, up 23.1% from $1.53 million, and $7.76 million for the full year, up 54.4% from $5.02 million. Deferred revenue, current portion, was $1.18 million, up 49.1% from $0.80 million.
Non-GAAP results and operating metrics gave a different view. Adjusted EBITDA was $24.3 million in the fourth quarter, compared with $20.1 million in the prior-year quarter, and the adjusted EBITDA margin was 29.4%. Full-year adjusted EBITDA was $81.1 million, with a 26.7% margin. Non-GAAP gross profit was $62.6 million in the quarter, a 75.7% non-GAAP gross margin. Non-GAAP net income increased 23.3% to $17.2 million from $14.0 million. Free cash flow was $16.6 million in the quarter, compared with $10.9 million in the prior-year quarter, and free cash flow reflected a 68% conversion of adjusted EBITDA to free cash flow. Annualized recurring revenue reached $323.5 million as of December 31, 2022, up 16.4% from $277.8 million as of December 31, 2021, and included $6.4 million of JUMP Technology ARR. Gross revenue retention was 98%, while net revenue retention was 106%, up from 103% as of September 30, 2022. The company had 1,262 clients, including 67 clients that contributed at least $1.0 million in ARR.
Guidance points to slower growth but continued profitability. For the first quarter of 2023, Clearwater guides revenue to $83 million, with year-over-year growth of about 17%, and adjusted EBITDA of $20 million. For the full year 2023, revenue guidance is $361 million to $364 million, with year-over-year growth of about 19% to 20%, and adjusted EBITDA guidance is $97 million to $98 million. The company also guides equity-based compensation of about $80 million, equity-based compensation for JUMP Technology post-acquisition of about $25 million, depreciation and amortization of about $9 million, a non-GAAP effective tax rate of 25%, and a diluted non-GAAP share count of about 255 million.
Operationally, Clearwater completed the acquisition of Paris-based JUMP Technology in the quarter. Two more of the top twenty U.S. insurers by AUM chose to move off legacy platforms to Clearwater. Cardif Lux Vie selected the Clearwater JUMP solution. The company introduced Clearwater Prism and Clearwater LPx, and J.P. Morgan Asset Management expanded its relationship. In 2022, the company added over 130 new clients, and 80% of clients by annual recurring revenue either modified contracts to the Base+ framework or agreed to price increases.
Risks remain. Management cited a challenging macroeconomic environment with high interest rates and high inflation. Revenue is subject to fluctuations from market conditions, economic conditions, and the changing interest rate environment. As of December 31, 2022, 77% of assets on the platform were high-grade fixed income securities and structured products. Contracts are generally cancellable with 30 days' notice without penalty. International expansion costs more than North America, and sales and marketing spending in new end-markets is less efficient. Gross margins may fluctuate based on the number and size of clients onboarding. Accounts receivable aging increased due to short-term deterioration in days sales outstanding, which management believes is collectible. The JUMP acquisition brings integration risk, including retaining management and clients. Clearwater also faces risks tied to its controlled company status and its emerging growth company election.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q4 FY2022 | Q3 FY2022 | QoQ | Q4 FY2021 | YoY |
|---|---|---|---|---|---|
| Revenue | $82.7M | $76.6M | +8.0% | $69.8M | +18.5% |
| Gross profit | $59.7M | $53.8M | +10.9% | $49.6M | +20.4% |
| Gross margin | 72.2% | 70.3% | +1.9 pp | 71.1% | +1.2 pp |
| Research & development | $24.6M | $25.4M | -3.5% | $21.7M | +13.1% |
| Sales & marketing | $14.4M | $13.2M | +9.1% | $12.9M | +11.4% |
| General & administrative | $16.9M | $16.4M | +3.2% | $14.3M | +18.1% |
| Total operating expenses | $55.8M | $55.0M | +1.5% | $48.9M | +14.1% |
| Operating income (loss) | $3.9M | -$1.2M | +432.9% | $654.0K | +492.5% |
| Operating margin | 4.7% | -1.5% | +6.2 pp | 0.9% | +3.8 pp |
| Net income (loss) | -$3.0M | -$3.0M | +0.4% | $101.0K | -3032.7% |
| Net margin | -3.6% | -3.9% | +0.3 pp | 0.1% | -3.7 pp |
| Diluted EPS | -$0.02 | -$0.01 | -$0.01 | $0.00 | -$0.02 |
Risks
Substantially all revenue is derived from fees based primarily on assets on the platform, and net revenue retention rate as of December 31, 2022 was 106%, down from 111% as of December 31, 2021, primarily due to decreases in market value of assets clients maintain on the platform. The company estimates decreases in fixed income and equity security prices during 2022 resulted in a 5% reduction in annualized recurring revenue growth.
Gross margin for FY2022 year to date was 71.1%, down 2.0 percentage points from FY2021 year to date, and operating margin was 1.7%, down 9.6 percentage points. The decline reflects increased payroll, equity-based compensation, technology, and other costs as the company scales.
Insurance industry clients and asset manager clients derived 51% and 34% of total revenue for the year ended December 31, 2022, respectively. Consolidation, limited growth, or downturns in these industries could reduce demand and materially affect revenue.
Clients may seek to negotiate lower basis point fee percentages, including if index-linked investment products reduce fees paid to asset manager clients or if insurance clients' regulatory filing asset values decrease. Competition may also result in price reductions and reduced gross margins.
The financial services software market is highly competitive and includes SS&C, State Street, SAP, BNY Mellon, SimCorp, BlackRock, FIS, and Northern Trust. Some clients may develop in-house capabilities, and competitors with greater resources may respond more quickly or make more attractive offers.
The company relies on data from thousands of sources, including banks, custodians, and providers with which it often lacks direct contractual relationships. If sources restrict access or increase fees, the company may incur higher costs, discontinue certain solutions, or face legal claims related to data scraping.
Sales efforts targeting large financial institutions, corporations, and government entities involve longer sales cycles, complex client requirements, substantial upfront sales costs, and less predictability. International sales are expected to have even longer cycles, higher upfront costs, and less predictability.
The company depends on attracting and retaining high-quality management and employees in sales, development, software engineering, operations, and support. In 2022, the U.S. labor market tightened and became more competitive, and a prolonged labor shortage or increased turnover could increase labor costs and impair growth.
The company completed the JUMP Technology acquisition on November 30, 2022 for 75 million euros cash, with 67.5 million euros paid at closing and 7.5 million euros subject to a two-year holdback. Integration risks include incorrect assumptions about future results, failure to integrate operations, loss of key personnel, and diversion of management attention.
A significant portion of assets consists of goodwill and other intangible assets, primarily from the JUMP acquisition. Future impairment or accelerated amortization could have a negative impact on results of operations and financial condition.
As of December 31, 2022, there was $51.6 million of term loans outstanding under the New Credit Agreement. A portion is variable-rate debt, and the Federal Reserve raised interest rates several times in 2022, which could increase interest costs and adversely affect financial condition and cash flows.
Tax receivable agreement expense was $11.6 million for the year ended December 31, 2022, and the related TRA liability is expected to be paid in the fourth quarter of 2023. Unanticipated changes in effective tax rates or adverse tax examination outcomes could affect financial condition and results of operations.
Changes to laws or regulations applicable to the company or its asset manager and insurance industry clients could increase liability and compliance costs. The company is also subject to privacy laws including the California Consumer Privacy Act and UK GDPR, and failure to comply could lead to investigations, fines, and litigation.
The company partially hosts and intends to increasingly host its cloud service from third-party data centers operated by Amazon Web Services or Google Cloud. Any damage, failure, capacity limitation, or interference could interrupt cloud services, cause data loss, and adversely affect client relationships and growth.
International revenue grew to 14% of revenues in 2022, compared to 9% in 2021, but the cost to acquire clients in international markets is currently greater than in North America due to lower brand awareness and less historical sales and marketing investment. The company expects to invest more in international sales and marketing to achieve growth.
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
Assets Under Management (AUM)
Summary, forecast, risks and KPIs are extracted from Clearwater Analytics Holdings, Inc.'s SEC filings for Q4 FY2022 (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 1, 2026.