Clearwater Analytics Holdings, Inc. Q4 FY2023 earnings
CWANQuarter ended Dec 2023.
Summary
Clearwater Analytics closed fiscal 2023 with fourth quarter revenue of $99.0 million, up 19.8% from $82.7 million a year earlier. Full year revenue reached $368.2 million, up 21.3% from $303.4 million. Gross profit rose to $70.7 million in the fourth quarter, up 18.4%, and $261.0 million for the full year, up 21.1%. Gross margin slipped to 71.4% in the fourth quarter from 72.2%, while full year gross margin was 70.9%, down 0.2 percentage points from 71.1%. Annualized recurring revenue was $379.1 million, up 17.2% from $323.5 million at the end of 2022.
GAAP profitability remained under pressure. Fourth quarter operating income was $2.6 million, down 33.2% from $3.9 million. The full year swung to an operating loss of $16.7 million from operating income a year earlier. Net loss attributable to Clearwater Analytics Holdings was $4.4 million in the fourth quarter, compared with $3.0 million a year earlier, and $21.6 million for the full year, compared with $8.0 million. Full year diluted EPS was -$0.11, down from -$0.04. Operating margin was 2.6% in the fourth quarter, down 2.1 percentage points from 4.7%, and -4.5% for the full year, down 6.2 percentage points from 1.7%. Non-GAAP results looked different: fourth quarter adjusted EBITDA was $30.0 million with a 30.3% margin, up 80 basis points, and full year adjusted EBITDA was $105.9 million with a 28.8% margin. Non-GAAP gross profit was $76.2 million in the fourth quarter, a 77.0% non-GAAP gross margin, up 120 basis points. Non-GAAP net income was $24.1 million in the fourth quarter, up from $17.2 million.
Cash generation improved. Fourth quarter operating cash flow was $24.1 million, up 32.7% from $18.2 million. Full year operating cash flow was $84.6 million, up 45.9% from $58.0 million. Capital expenditures were $1.56 million in the fourth quarter, down 16.8%, and $5.62 million for the full year, down 27.5%. Free cash flow, a non-GAAP measure, was $22.5 million in the fourth quarter, up from $16.6 million, and $79.0 million for the full year, up 57.2% over full year 2022. Deferred revenue was $2.8 million, up 133.4% from $1.2 million. Remaining performance obligations were $3.1 million.
Operational metrics held steady. The gross revenue retention rate was 98%, consistent with the prior year. Net revenue retention rate was 107%, compared with 106%. Clearwater served 1,349 clients, and 86 clients contributed at least $1.0 million in ARR, up 28.4% from 67 clients a year earlier. The platform processed $7.3 trillion in assets daily, compared with $6.4 trillion. The company ended 2023 with essentially the same headcount as the end of 2022, and more than 150 programs went live on the platform. After completing its cloud transition, Clearwater now devotes more than 60% of research and development capacity to fueling growth. It also added three senior executives to support expansion in Europe and Asia.
Management set guidance for the next quarter and the full fiscal year. For the first quarter of 2024, the company guided revenue to $100.5 million, up 19%, and adjusted EBITDA to $28.8 million at a 29% margin. For full year 2024, revenue guidance is $431 million to $437 million, up 17% to 19%, and adjusted EBITDA guidance is $135 million to $137 million at a 31% margin.
Risks remain. The company cites rapid technological change, including artificial intelligence, and competition as challenges. Market volatility or a downturn could reduce asset values on the platform, which would affect revenue because some clients still pay basis-point fees. International expansion costs more than North America, and sales and marketing in new markets is less efficient. Gross margins may fluctuate with the size and number of clients onboarding. The Base+ contract model limits downside, and most assets are high-grade fixed income. Other risks include the ability to manage growth, attract and retain skilled employees, solution failures, disruptions in cloud systems, data security, intellectual property claims, and its controlled company structure.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q4 FY2023 | Q3 FY2023 | QoQ | Q4 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $99.0M | $94.7M | +4.6% | $82.7M | +19.8% |
| Gross profit | $70.7M | $67.7M | +4.5% | $59.7M | +18.4% |
| Gross margin | 71.4% | 71.5% | -0.1 pp | 72.2% | -0.8 pp |
| Research & development | $33.7M | $32.3M | +4.6% | $24.6M | +37.4% |
| Sales & marketing | $16.3M | $15.0M | +8.6% | $14.4M | +13.4% |
| General & administrative | $18.1M | $26.3M | -31.3% | $16.9M | +6.8% |
| Total operating expenses | $68.1M | $73.5M | -7.4% | $55.8M | +21.9% |
| Operating income (loss) | $2.6M | -$5.9M | +144.0% | $3.9M | -33.2% |
| Operating margin | 2.6% | -6.2% | +8.8 pp | 4.7% | -2.1 pp |
| Net income (loss) | -$4.4M | -$1.9M | -134.7% | -$3.0M | -49.7% |
| Net margin | -4.5% | -2.0% | -2.5 pp | -3.6% | -0.9 pp |
| Diluted EPS | -$0.02 | -$0.01 | -$0.01 | -$0.02 | ±$0.00 |
Risks
Management determined that internal control over financial reporting was not effective as of December 31, 2023 due to deficiencies in change management and computer operations, program development and user access controls related to the billing system, constituting a material weakness. The company is transitioning to a new automated billing system in 2023 and expects to continue this transition in 2024; failure to remediate could result in material misstatements or unreliable financial reporting.
Substantially all revenue is derived from fees primarily based on the amount of assets on the platform. For the year ended December 31, 2023, insurance industry clients and asset manager clients accounted for 52% and 30% of total revenue, respectively. Market volatility, economic downturn or large-scale withdrawals could reduce portfolio market value and fee-based revenue.
Clients may seek to negotiate a lower fee percentage or cease using services. The average basis point rate billed to clients decreased by 2.2% from 2022 to 2023, while average assets on the platform billed to new and existing clients increased 19%. Competition includes SS&C, State Street, SAP, BNY Mellon, Simcorp, BlackRock, FIS and Northern Trust.
For the year ended December 31, 2023, loss from operations was $16.7 million compared to income from operations of $5.1 million in 2022, and net loss attributable to Clearwater Analytics Holdings, Inc. widened to $21.6 million from $8.0 million. Operating expenses grew 32% in research and development and 47% in general and administrative, driven by equity-based compensation and headcount growth.
Sales efforts targeted at large financial institutions, corporations and government entities involve longer sales cycles, complex client requirements, substantial upfront sales costs and less predictability. The company anticipates even longer sales cycles and higher upfront costs for clients outside the United States.
Data aggregation solutions rely on data from thousands of sources, often through clients' agreements with third-party providers rather than direct contracts. In the past, a limited number of third parties blocked access or requested cessation of data scraping; future restrictions could increase costs, require discontinuing solutions or harm gross margins.
Revenue for the year ended December 31, 2023 grew 21% compared to 2022, and continued growth depends on attracting and retaining top talent. Competition for qualified employees is intense, and a prolonged labor shortage or increased turnover could increase labor costs and impair ability to serve clients.
Client contracts are generally terminable upon thirty days' notice by clients or prior to such time for cause, which may include breach of contract, bankruptcy, insolvency and other reasons. A significant number of client terminations without sufficient new clients could materially adversely affect results.
As of December 31, 2023, there was $48.8 million of term loans outstanding under the New Credit Agreement. A portion of the debt is variable-rate, and interest rate increases could raise interest costs; covenants restrict operations and failure to comply could result in default.
A significant portion of assets consists of goodwill and other intangible assets, primarily from the JUMP acquisition. Future impairment tests or accelerated amortization could negatively impact results of operations and financial condition.
The company expects to invest more in sales and marketing internationally, where cost to acquire clients is greater than in North America due to less brand awareness and lower prior investment. Sales and marketing expenditures in new end-markets are expected to be less efficient.
The company is subject to privacy and data security laws in the United States and other countries, including the California Consumer Privacy Act and UK General Data Protection Regulation. Increased regulation of data collection, processing, transfer and security could require operational changes and significant additional expense.
The Principal Equity Owners control a majority of voting power, and the company relies on controlled company exemptions from certain corporate governance requirements. During the year ended December 31, 2023, Principal Equity Owners sold 62 million shares of Class A common stock in four underwritten secondary offerings, which could depress the stock price.
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)
Non-GAAP Gross Profit
Assets Under Management (AUM)
Summary, forecast, risks and KPIs are extracted from Clearwater Analytics Holdings, Inc.'s SEC filings for Q4 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.