Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Clearwater Analytics Holdings Inc (CWAN, Financial) reported a 19% year-on-year increase in revenue, reaching $106.8 million for Q2 2024.
- Annual Recurring Revenue (ARR) grew by 22% year-on-year, indicating strong business momentum.
- The company achieved an industry-leading 99% gross revenue retention for the second consecutive quarter.
- Adjusted EBITDA margin for the quarter was 31.3%, a 370 basis points improvement over the previous year.
- Free cash flow from operations was $42.4 million, a 116.9% increase from the previous year.
Negative Points
- Despite the strong performance, the company faces risks and uncertainties as highlighted in the Risk Factors section of their SEC filings.
- Equity-based compensation was $25.2 million, although it decreased from the previous year, it remains a significant expense.
- The tax receivable agreement expense increased to $6.2 million for the first half of 2024, with expectations to reach $17 million for the full year.
- The company continues to invest heavily in R&D, with 60% of capacity focused on new products, which could impact short-term profitability.
- The macroeconomic environment remains uncertain, and the company is watchful of potential impacts on new logo momentum and overall business performance.
Q & A Highlights
Q: Sandeep, I wanted to ask you about the new product cadence. We've seen a faster new product cadence from the company over the past year. How sustainable is this trend, and could it possibly accelerate over the next 18 months?
A: (Sandeep Sahai, CEO) The new product addition is very deliberate in our path to become a multiproduct company. We thought adoption by our current clients would take time, but it has been quicker. In Q1, 25% of bookings came from new products, and it was incrementally faster in Q2. We expect more activity from new products and more contribution to bookings. Our high NPS is a core reason for this success.
Q: Jim, could you provide more color on sales cycles and buying patterns for new logos in Q2? Have macro challenges impacted these?
A: (Jim Cox, CFO) We are optimistic about the second half of the year, with good pipelines and opportunities. This is reflected in our ARR expansion and guidance. We haven't seen any change in new logo momentum or new product adoption, which has been faster than expected.
Q: You've mentioned using AI internally to speed up implementations and onboardings for customers. Could this also accelerate new business?
A: (Sandeep Sahai, CEO) We are very excited about AI and have seen improvements in gross margins and onboarding efficiency. While the impact on revenue and bookings is incremental, we have 10 clients signed up for new AI-driven products. We believe AI will play a massive role in future expansion.
Q: Would you provide the organic growth of your revenue in both Q2 and for your guidance in Q3 and Q4 without Wilshire?
A: (Jim Cox, CFO) The Wilshire acquisition added about $7 million to our ARR. Even excluding this, our organic ARR growth was still over 20% in Q2. We expect this to continue contributing positively to our growth.
Q: What is your outlook for NRR for the rest of the year, and can you update us on the path to 115% by Q1 2026?
A: (Jim Cox, CFO) Our NRR remained strong at 110% in Q2. We expect it to expand as we deliver more solutions to clients. The impact of new products on NRR will be more significant as they mature and contribute to revenue.
Q: Can you elaborate on the margin impacts of investing 60% of R&D capacity into new products?
A: (Jim Cox, CFO) We expect more efficiency from back-to-base sales, which will offset incremental investments in global expansion. We aim to grow EBITDA by 200 basis points while continuing these investments. Our R&D expense will trend down to mid-20% in the long term.
Q: How should we think about the impact of potential interest rate cuts on ARR and revenue growth in 2024 and beyond?
A: (Jim Cox, CFO) Our 2024 guidance does not include any rate cuts. We initially expected seven cuts this year, but we will adjust our view based on future rate decisions.
Q: Are new products driving higher win rates or helping close deals faster?
A: (Sandeep Sahai, CEO) Yes, new products help close deals faster and enhance our value proposition. This has positively impacted our win rates and deal closures in Q1 and Q2.
Q: How are you thinking about hiring over the next 12 months, and can you provide more color on sales and marketing productivity?
A: (Jim Cox, CFO) We are comfortable with our current sales and marketing investments and are onboarding new reps while refreshing existing ones. We aim to deliver expanded EBITDA margins while investing incrementally in new products and global expansion.
Q: Can you remind us of the drivers behind the gross margin improvement in the quarter?
A: (Jim Cox, CFO) The fundamental reason for our gross margin improvement is our single-instance multitenant platform. Onboarding clients faster also helps. The marginal gross margin in the last two quarters was around 88-89%, reflecting the network effect.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
