Clearwater Analytics Holdings Inc

NYSE:CWAN

Earnings Call Analysis

Clearwater Analytics Increases Revenue and Profitability

Clearwater Analytics reported a strong Q2 2024 with revenue rising 19% year-over-year to $106.8 million, driven by new and existing clients. The ARR growth was 22%, achieving $427.2 million. Gross margin improved to 77.5%, with adjusted EBITDA at $33.4 million, surpassing their guidance. The company raised its full-year revenue guidance to $442-$444 million, anticipating 20%-21% growth. Adjusted EBITDA guidance for the year increased to $140 million, with a margin of 31.6%. Clearwater ended the quarter with $297.6 million in cash and investments, positioning itself for strategic investments and acquisitions.

Strong Financial Performance

In the second quarter of 2024, Clearwater Analytics reported a robust financial performance. The company achieved a revenue of $106.8 million, marking a 19% year-over-year increase. This was driven by balanced growth from both new and existing clients across North America and international markets. Additionally, their Annual Recurring Revenue (ARR) saw a notable 22% year-over-year increase, reaching $427.2 million.

Improved Profitability

Clearwater continued to enhance its profitability metrics. The company reported an adjusted EBITDA margin of 31.3%, which is 370 basis points higher than the previous year. This improvement is significant as it surpasses their annual goal of a 200 basis point increase. The gross margin also saw an increase, reaching 77.5%, up by 170 basis points from the previous year.

Cash Flow and Investments

One of the highlights of the quarter was Clearwater's exceptional free cash flow of $42.4 million, representing a 116.9% year-over-year increase. This strong cash flow enabled the company to fund strategic acquisitions, like the Wilshire Analytics purchase, without significantly affecting their cash reserves. Clearwater ended the quarter with $297.6 million in cash, cash equivalents, and investments.

Revenue and EBITDA Guidance

For the full year 2024, Clearwater raised its revenue guidance to a range of $442 million to $444 million, indicating a year-over-year growth rate of 20% to 21%. The company is also optimistic about the third quarter, expecting revenue between $113 million and $114 million, which represents a growth rate of approximately 19% to 20%. On the profitability front, Clearwater increased its full-year adjusted EBITDA guidance to $140 million, corresponding to an adjusted EBITDA margin of 31.6%.

Product Innovation and Market Expansion

Clearwater's strategic focus on product innovation and market expansion plays a crucial role in their growth. The company continues to invest significantly in R&D and sales and marketing. New products, which contributed incrementally to bookings in Q2, are expected to drive future growth. Additionally, the company's efforts in international markets, particularly in Europe with new clients and increased presence in regions like France and Germany, are yielding positive results.

Client Retention and Expansion

Client retention remains a strong suit for Clearwater, with an industry-leading gross revenue retention rate of 99% for the second consecutive quarter. The company continues to see healthy upselling dynamics, reflected in a net revenue retention rate of 110%. They have also grown their client base significantly, now boasting 93 clients with over $1 million in Annual Recurring Revenue (ARR), a 21% increase year-over-year.

Technology and Innovation

Clearwater's single instance multi-tenant platform continues to be a key competitive advantage. The platform allows the company to efficiently process data from over 3,000 sources, providing clients with a consolidated view of their global portfolios. This technological edge is bolstered by their investments in artificial intelligence and machine learning, which are expected to further enhance client onboarding, data ingestion, and overall operational efficiency.

Looking Ahead

Clearwater is optimistic about their future prospects, focusing on both organic growth and strategic acquisitions. The company aims to maintain its momentum in revenue growth and margin expansion, supported by their innovative technology platform and strong client relationships. With a clear strategy and favorable financials, Clearwater is well-positioned to sustain its growth trajectory and drive long-term shareholder value.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Clearwater Analytics Second Quarter 2024 Financial Results Conference Call. [Operator Instructions] And now I would like to welcome Joon Park, Head of Investor Relations, to begin the conference.

[Joon Park, executive]

Thank you, and welcome, everyone, to Clearwater Analytics Second Quarter 2024 Financial Results Conference Call. Joining me on the call today are Sandeep Sahai, Chief Executive Officer; and Jim Cox, Chief Financial Officer. After their remarks, we will open the call to a question-and-answer session. I would like to remind all participants that during this conference call, any forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Expressions of future goals, intentions and expectations, including in relation to business outlook, future financial and product performance and similar items, including, without limitation, expressions using the terminology may, will, can, expect and believe and expressions which reflect something other than historical facts are intended to identify forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the risk factors section of our filings with the SEC. Actual results may differ materially from any forward-looking statements.

The company undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call, except as required by law. For more information, please refer to the cautionary statement included in our earnings press release. Lastly, all metrics discussed on this call are presented on a non-GAAP or adjusted basis, unless otherwise noted. A reconciliation to GAAP results can be found in the earnings press release that we have posted to our Investor Relations website.

With that, I'll turn the call over to our Chief Executive Officer, Sandeep Sahai.

[Sandeep Sahai, executive]

Thank you, Joon. I'm pleased to report that Q2 2024 was a very strong quarter for the company. Our ability to win in the market, to develop new products for our clients and our ability to execute consistently on all fronts has never been more evident. Revenue for the quarter was $106.8 million, a 19% year-over-year increase. The momentum of our business was evident in ARR growth, which grew 22% year-over-year. Growth was balanced between new logos and current clients, between the North American and international markets; and finally, between new products and the core platform.

New products were an incrementally higher contributor to bookings in the quarter and that gives us confidence to continue down the path of developing adjacent products in partnership with our clients. All of that combined with an industry-leading 99% gross revenue retention for the second consecutive quarter and continued success with bringing clients live on our platform gives us confidence to meaningfully revise revenue guidance upward for the year. It's not just about revenue growth. Our disruptive platform and our outstanding customer focus allows us to grow earnings very meaningfully, while we continue to grow.

Adjusted EBITDA margin for the quarter was 31.3%, which is 34.7% higher than last year and 370 basis points better than last year, meaningfully higher than the margin expansion goal of 200 basis points a year we had laid out at last year's Investor Day. Finally, free cash flows from operations during the quarter was $42.4 million, which is 116.9% higher than last year and truly exceptional. An interesting observation that we substantially paid for the Wilshire acquisition in Q2 using the cash generated from operations in Q2 alone.

Let's discuss a few elements of our business and our plan for continued revenue and earnings growth. Starting with revenue growth. Number one, new logos. There is little to no change in the competitive landscape. Competitors have tried to create offerings by taking legacy platforms and making them accessible on the cloud or by stitching various products together, but that does not change the core legacy offering.

Clients come to Clearwater because we have a single instance, multi-tenant platform, allowing us to ingest data from over 3,000 sources, reconcile it and provide clients with a comprehensive view of their global portfolio. This has been a core offering of the company and continues to drive new logo booking. Number two, back to base growth. As we have said before, we are spending 60% of R&D capacity on building new products in partnership with our clients. In the last call, we had said that approximately 25% of our booking in the quarter was from these new offerings. It is with great enthusiasm that we note that booking was incrementally higher in Q2 from these products. We had expected these new products to be adopted by current clients first, but we're pleasantly surprised to see that more than 50% of bookings for these new products came from new logos.

Number three. Alternatives remained one of the biggest drivers of growth because the efficient processing of these asset classes continues to be challenging for clients everywhere. The innovation and functionality we're bringing to the market has led to significant client adoption as evidenced by the roughly 30 deals we closed with new or existing clients in Q2 alone.

Our substantial investments in this area have been pivotal in attracting new clients and deepening existing client relationships. I'm delighted to share details about a major addition to our platform. A U.S. investment adviser recently selected our LPx solution because they have a broad footprint that encompasses private equity, real estate, credit and secondary markets. They were previously mined in manual processes compiling data from GPs and living in Excel spreadsheets. The combination of Clearwater's LPx, user-friendly interface, seamless data ingestion and validation capabilities and its robust reporting features dramatically increased the scale of the operations. With Clearwater, clouds receive a single platform that ties accounting and performance book of record, all from a single source of data, thereby gaining a level of transparency that they did not have before with other legacy systems.

Number four. Clearwater Prism continues to make inroads with a range of use cases emerging across a diverse client base. In Q2, we announced M&G Investments, selected Clearwater to automate its investment management and regulatory reporting while supporting the complex need of their global insurance clients. With a white labeled version of Clearwater's platform, M&G's insurance clients will have access to an M&G web portal and rely on Clearwater Prism for monthly report generation. This automated investment reporting system will provide clients with a complete view of their investments and enable them to meet complex multi-basis accounting requirements.

Number five. Let me give you a status of both JUMP and the analytics platform of Wilshire. The Clearwater JUMP platform had an exceptional quarter. In North America, we secured 5 deals with managers who had diverse multi-asset portfolios that not only replaced the accounting, but order management as well. In Europe, the Clearwater JUMP platform was chosen by numerous new clients, demonstrating the growing demand for our high-value solutions that span the front, middle and back office operations.

Let me illustrate with a few examples here. In Q2, we announced that France-based Galilee Asset Management will implement Clearwater JUMP to consolidate fund and wealth management activities across its entire investment life cycle. Their selection of Clearwater JUMP is a vote of confidence, as Galilee Asset Management seeks to support its rapid growth and consolidate its activities after acquiring several investment management companies. A leading life insurer based in France selected Clearwater JUMP to modernize their IT stack. While another French-based fund and wealth manager chose Clearwater JUMP to increase efficiencies across the entire end-to-end investment management operation.

All these wins underscore the value we bring to leading firms, cost efficiency, modernization, scalability and unparalleled user experience are just a few reasons clients continue to choose Clearwater JUMP.

Number six. Following our acquisition of the risk performance and analytics platforms of Wilshire Advisors, the integrated Clearwater Wilshire platform can offer an integrated solution for transactions [ and positions ]. Our clients can now leverage a unified reporting platform for portfolio construction, quantitative performance attribution, risk analysis, stress testing and portfolio analytics, all using the same underlying data from the core Clearwater platform. This has already started to pay dividends as seen with our expanded relationship with a leading portfolio manager who is now leveraging Clearwater Wilshire Analytics for deal performance attribution and factor-based ex-ante risk analyses.

The expansion highlights the success of Clearwater's strategy to offer an integrated platform encompassing accounting performance attribution and risk and strategically positions us to strengthen existing client relationships that help to drive future growth.

Number seven. And finally, let's discuss our continuing expansion across Europe and APAC this quarter. As our platform continues to make a significant impact across the world, we're delivering best-in-class localized accounting and investment analytics that provide our clients with a comprehensive view of the assets and gives them confidence that they're making the most informed decisions about their investments. Let me highlight a few of the impressive deals we closed. In the U.K., we announced an exciting new win with Pool Re, Britain's government-backed reinsurer. Pool Re will leverage Clearwater's single-instance multi-tenant platform to streamline and modernize their finance and investment processes and support highly efficient, monthly close processes.

The scalability and flexibility of the Clearwater platform will also enable Pool Re to rapidly adapt to evolving market dynamics and their treasury reporting obligation.

In APAC, we signed on a new asset manager in Singapore that is now able to redesign a cross-company asset strategy and build the technology infrastructure for significant asset growth. Another client in that region can now significantly decrease their operating risks and free up their investment team to play offense versus defense. Now I would like to switch to unit economics and overall profitability. The foundation of our continued growth and profitability is industry-leading retention and NPS and our ability to onboard clients in a relatively short time. How do we do that? Our platform allows us to reuse public data we are already ingesting, reuse custody connections we have already built, and reuse the thousands of other connections we have already built.

Accounting is very nuanced. And over the years, we have created an incredible array of configuration options, which is needed as we onboard increasingly sophisticated clients and portfolios. The benefits of this approach are twofold. Number one, it is incrementally easier to onboard the next client because we already have many of the data sources and securities modeled on our platform. Number two, on a day-to-day basis, we reconcile data once and use it for every client on the platform who invests in that security. Both of these practices incrementally improve gross margin.

Add to that, the progress we are making with Generative AI, and you will understand why we have outperformed our margin goals and have strong confidence in continuing to improve unit economics. Our clients' onboarding experience continues to be incredibly positive, including notable go-lives with leading global firms, such as France Active in Europe. In less than 5 months, they're realizing significant business benefits, including timely book of record accounting, efficient period end operational tasks and increased productivity because the Clearwater platform helps automate data ingestion, reconciliation and reporting.

On the regulatory front, Clearwater experts continue to provide valuable guidance, ensuring our clients remain ahead of the curve with the most significant NAIC update since 1991. Global regulatory reporting is built into the Clearwater platform, so reports always stay current to meet the latest regulatory guidance.

Our team of regulatory product experts monitor guidance closely and work with our engineering team to incorporate those changes into Clearwater's platform. Because Clearwater is a web-based SaaS solution, those updates deploy seamlessly to users. Switching gears, I want to talk about our continuing investment in our core platform. We live in an ever-changing world where new securities are created every day, entire asset classes emerge, regulations change and accounting standards evolve. It is critical for our technology to be a beacon of reliability, scalability and operational rigor, attributes critical to a world where change is constant.

Last year, we completed our movement to the cloud completely changing our ability to scale. That change has helped us continue to process data daily, meet deadlines and lower costs even as data volume grew substantially over the year. At month end, our data intake increases by a factor of roughly 12.5x, but we successfully handle the surge using the cloud where it is easier to add and then reduce compute power on demand.

Earlier, we would have had to provision for the peak load. And that would have sat idle during much of the quarter. In another significant change, our investment in non-differentiated heavy lifting has gone down meaningfully, allowing us to deploy our engineering resources to growth.

And finally, having a single instance platform obviates the need to maintain and manage multiple versions of the software. Our follow the sun model is not just a good to have operating [ more ]. It is essential when you want to effectively address the needs of the clients around the world in a reliable fashion, even in the face of a global IT outage, like the one on July 19 that caused technological havoc. Clearwater responded with urgency and agility.

Because we have a single instance platform that all our clients use, we had one version of the software to focus on and rectify, not multiple versions, some on-prem and some on the cloud. As the events unfolded, our team in India swiftly diagnosed and worked on rectifying the problem. Ensuring that by the time Europe and the U.S. started the day, the disruption was already well understood and largely mitigated. Such instances reaffirm the stability and scalability of operational capabilities and highlights the technological superiority of the single instance multi-tenant model. That is now the de facto standard across industries.

The success of Generative AI is largely dependent upon access to data on an ongoing basis. This is where Clearwater single security master shines because all our data resides in one logical database. Using Generative AI, we harness this technology's potential to our natural advantage and eventually to benefit all our clientele. We have already seen benefits from this technology and expect to deploy more applications across our platform.

Last month, I had the pleasure of connecting with our European user base and prospective clients at Clearwater Connect in London. The interactions I had were enjoyable and insightful and I'm really excited about the momentum we are seeing across the board. We have a strong team in London, Paris and Germany, a local operating center in Edinburgh and deep domain expertise across the market.

We continue to grow our presence in the U.K. market, and we are energized by the growing momentum in the French and German markets. We are even more excited about our next user conference. Clearwater Connect in Boise set for September 17 and 18, where we expect institutional investors will come together to learn about new technologies and solutions that can help them grow their business.

And with that, let me hand the call over to Jim to review our financial results in more detail.

[James Cox, executive]

Thanks, Sandeep, and thank you all for joining us. I'm happy to report our second quarter results that continue to build upon the strong momentum from the first quarter. The second quarter was strong across all metrics, but I would like to highlight 2 metrics that I believe should be particularly compelling to investors. First, ARR increased by 22.2% year-over-year to $427.2 million, up from the prior year's $349.5 million. This is a very strong result and represents faster growth than our Q2 revenue.

We have included the ARR of acquired Wilshire technology clients in our ARR, and that helped our growth. But even after excluding that impact, the year-over-year growth in organic ARR was still in excess of 20%.

Second, the team delivered remarkable cash flows in Q2 with operating cash flows of $43.9 million, that represents a 108% increase year-over-year. Record high free cash flow of $42.4 million, again, representing an impressive year-over-year improvement of 117%. Put this all together, and it results in record high free cash flow to EBITDA conversion of 127% in Q2. This success in cash flows in Q2 resulted from stronger GAAP income and positive working capital changes, including improved collections.

Strong cash flow generation is the bedrock upon which strategic optionality is built. For example, we can combine our development efforts with purchase solutions as we did in the second quarter with the Wilshire Solutions acquisition. And whether we choose to evaluate other inorganic opportunities, or return capital to shareholders at some point in time, the company, our clients and our investors all benefit from the optionality provided by such a healthy financial profile.

In Q2, we also beat both our revenue and EBITDA guidance for the quarter. While the outperformance in both revenue and EBITDA may sound routine for Clearwater, it is not an easy accomplishment for most companies. And we are very proud of the team for delivering again as they continue to since we became public.

Our growth dynamic continues to be boosted by 2 underlying vectors: growth from both existing clients and new logo clients in Q2. We continued the stellar momentum in upselling to existing clients in Q2, which was reflected in our net revenue retention rate of 110%. In addition, we continue to win new logo clients at a healthy pace. We understand the importance of adding new customers, and we are proud to note that we now have 93 clients with over $1 million in ARR, a 21% increase year-over-year.

Now let's turn to profitability results. We have a clear guide path towards our long-term goals of both 80% gross margins and adjusted EBITDA margin of 40%. In Q2, we achieved a gross profit of $82.7 million, which translates to 77.5% gross margin, an increase of 170 basis points over Q2 of 2023. In addition, we reported $33.4 million in adjusted EBITDA and 31.3% adjusted EBITDA margin in the second quarter, which beat our EBITDA margin guidance of 29% to 30% and improved over the prior year's EBITDA margin by 370 basis points.

What is most impressive is that we are achieving these EBITDA margin improvements while investing significantly in new product innovation and international go-to-market headcount. Non-GAAP R&D expense is up more than $2 million over Q2 of last year. And non-GAAP sales and marketing investment is up over $1 million. In Q2, equity-based compensation was $25.2 million, a decrease of $3.5 million from Q2 of 2023. This shows good progress on our path to reduce equity-based compensation as a percentage of revenues.

With respect to the tax receivable agreement expense, this amount was $6.2 million in the first half of 2024. And absent significant changes, we expect this amount to be a total of approximately $17 million for the full year 2024, an increase from the $14.4 million reported for the full year 2023. Let's turn to the balance sheet. We ended Q2 with $297.6 million in cash, cash equivalents and investments, even after we paid for the Wilshire Analytics acquisition in April 2024. Total debt was $47.9 million, thereby resulting in net cash holdings of approximately $250 million. Thus, we continue to have dry powder and the ability to generate cash from operations to enable another acquisition in the future, should we choose to do that.

Now let's turn to guidance. For the full year 2024, we have again raised our revenue guidance to a range of $442 million to $444 million. This represents an improved year-over-year growth rate of approximately 20% to 21%. The low end of our current guidance for the year now equals the high end of our guidance provided last quarter. This full year guidance has incorporated both the outperformance in revenue in the second quarter and our continuing incrementally positive view on the second half of 2024.

For the third quarter of 2024, we expect revenue to be in the range of $113 million to $114 million, representing a year-over-year growth rate of approximately 19% to 20%. For the full year, we have increased our guidance for depreciation and amortization expense to $12 million, reflecting the incremental amortization from the acquisition of the analytics software business from Wilshire.

For the full year 2024, we have also raised the adjusted EBITDA guidance to an even $140 million, an increase of $3 million on the low end and $1 million on the high end of our prior guidance. This provides an adjusted EBITDA margin of approximately 31.6% for the full year 2024 and is higher than the previously stated full year 2024 target of 31%, outperforming our stated plan to improve EBITDA by 200 basis points over the full year 2023.

This EBITDA guidance implies only slightly better EBITDA margins in the second half of 2024 when compared to Q2 2024. Although we have the capability to expand EBITDA margins more quickly, we are thoughtfully investing where we are seeing returns and we will embrace that flexibility to strategically invest now to fortify continued growth for, say, 2027 and beyond.

For the third quarter 2024, we expect adjusted EBITDA to be $36 million, which represents an adjusted EBITDA margin of 31.7%.

In summary, we're excited about the strong second quarter and look forward to continuing to deliver revenue growth and margin expansion for the second half of 2024 and well, well, well into the future.

With that, I'll turn it over to Sandeep to provide some closing thoughts.

[Sandeep Sahai, executive]

Thank you, Jim. We are very pleased with the Q2 results but are even more delighted with the increasing momentum of the business. To be able to grow revenue meaningfully, improve unit economics and grow EBITDA and cash flow all at the same time is incredibly exciting. We are increasingly confident about our capability to execute, and we'll make a sustained push to stake out our leadership position in the investment management industry not just in investment accounting and analytics.

[Audio Gap]

[Operator]

[Operator Instructions] Our first question is from Brian Schwartz with Oppenheimer.

[Brian Schwartz, analyst]

Congratulations on a good result. Sandeep, I wanted to ask you about thinking about the new product cadence. We've seen a faster new product cadence from the company over the past year. And I'm just wondering how sustainable is this trend, whether it's either through organic or inorganic R&D. And could the new product cadence possibly accelerate over the next 12 to 18 months?

[Sandeep Sahai, executive]

Thank you, Brian. I think that the new product addition is very deliberate in our path to become a multi-product company. When we funded a number of these last year, frankly, we thought they would take a reasonable amount of time to get adopted by our current clients and had just being quicker. I think we reported in the first quarter that 25% of all booking in Q1 came from these new products. And we thought, is that sustainable? But if you look at Q2, I think we said earlier in the script that it was incrementally faster.

I do feel that a number of these products are just getting started, though. So I don't want to say here that we think we are going to run at this pace. I do think we can run faster. So the answer to the question is we do expect more activity from new products and more contribution in booking. And I'd tell you, Brian, that when we look back, what we think is the core reason. It's the NPS. Our NPS is really high and our clients want us to solve problems which are adjacent with products we can provide. So I think the adoption by clients has been, frankly, very, very encouraging.

I think one other last point, Brian. There was -- we always thought that these products would be adopted by current clients first. But frankly, we're quite surprised to see that 50% of the booking for these new products come from new logos, where customers are not even on the Clearwater platform and they buy a new product. So to be incredibly excited about it. We do think there is room to accelerate. We don't have a logical point which says, "Hey, we're going to stop this at this point." But as you know, we're investing 60% of R&D capacity. That's a lot. I don't know, Jim, whether you'd add anything to that?

[James Cox, executive]

No, that's great.

[Brian Schwartz, analyst]

The follow-up question I had for Jim was -- just wanted to see if you could provide a little more color on what you're seeing in terms of sales cycles and buying patterns for the new logos in 2Q? And if the business has experienced any shifts in 2Q when compared to earlier in the year. Trying to get a read to see if the macro challenges that are out there are having any impact, at least in the buying pattern. Doesn't look like it based on your ARR results, but what are you seeing in terms of sales cycles and buying patterns on the new logo side?

[James Cox, executive]

Thanks, Brian. And Sandeep, I'll start, but please feel free to chime in. What I would say is, we're obviously optimistic about the second half of the year. And I would say we're incrementally optimistic relative to where we were at the beginning of the year. Pipelines are good. And I think we see a lot of opportunity out there. And I think that's really reflected in the increment -- not only the results you can see, which is that ARR expansion, but also in our guidance and as we look to the second half of the year. We've always felt good about that, and we're feeling even better. Sandeep?

[Sandeep Sahai, executive]

Yes. I would just add, Brian, that look, if you look at our second -- the full year guidance, you can see that we feel pretty confidently that we will continue to grow at this pace or higher. So we feel very good, but we are super watchful. We are very aware that a number of enterprise software companies saw weakness in pipeline and eventually in booking and eventually in revenue. And so over the last several months, we continue to be watchful. We haven't seen anything change in new logo momentum towards our platform and very little change in new products also. Like I said, our new products adoption has been faster than we thought. So all very positive right now.

[Operator]

Our next question is from Rishi Jaluria with RBC.

[Christopher Fountain, analyst]

This is Chris Fountain on for Rishi Jaluria. You've mentioned a couple of times using GenAI internally to speed up implementations and onboardings for customers. And it's really exciting to hear about what that can do for margins over time. But do you also think this initiative could also accelerate new business if simply the onboarding process is just easier as well?

[Sandeep Sahai, executive]

Yes. Chris, thank you for the question. Look, we are very excited about GenAI. We continue to make a very significant amount of investment in that. Obviously, the gross margin has continued to improve at least partially because of that. So one is -- that is true.

The second thing is onboarding, like you mentioned. But onboarding also accelerates revenue growth, right? Now has this [ full ] initiative been as effective in growing bookings and revenue? Not yet. Have we got 10 clients who have signed up on new products we're developing for GenAI? Yes. So I think the right answer would be a lot of promise by clients actually signing up, but the impact on revenue and booking is not as significant as what we have seen on the efficiency side.

The efficiency side, return came right away, shockingly faster but, if you will. But on the revenue side, it's been more incremental, if you will, as we have taken products out to market. But like I said, have 10 clients signed on real purchase orders with deals and ARR? Yes, they have. Thinking in the longer term -- I'll just finish by saying, Chris, in the longer term, we do believe that will play a massive role in [ rev case ] expansion also.

[Operator]

Our next question is from Alexei Gogolev with JPMorgan.

[Alexei Gogolev, analyst]

My first question is probably more to Jim. Would you be able to provide us with organic growth of your revenue in both 2Q and also for your guidance in 3Q and 4Q of this year without Wilshire?

[James Cox, executive]

Sure, Alexei. What we said at the time of the acquisition was that it was about a $7 million run rate, and that is reflected in our ARR now in Q2. And so what we said on that call was, although our ARR grew 22.2% even if you take out that amount that -- then we're still growing ARR organically north of 20% in Q2.

I think the other thing we said was we said about 2/3 of that $7 million was incorporated in our guidance in -- when we did the Q1 update on guidance. And I think that's kind of -- that was what was acquired, obviously, we're out in the market selling that along with our other products, that is now in our stable. And so we're hopeful to see that grow going forward. Hope that helps.

[Alexei Gogolev, analyst]

And then the second question on NRR. Obviously, it's still at a very solid level, unchanged sequentially. What is your new outlook for NRR for the rest of the year? And can you update us on the path to 115% by first quarter of 2026?

[James Cox, executive]

Yes. I think that when we look at NRR in Q2 and compare that to NRR in Q1, it's very, very similar. Not only was the top line similar, but the elements of it remained very similar between those periods, which is to say AUM was not a headwind in either Q1 or Q2, but it was also not a meaningful tailwind within the first half of this year. Where we -- when you think about the components of doing more with our clients, cross-selling, upselling, increasing wallet share. Those numbers were strong.

And as we look to grow that NRR from 110% to 115% or beyond, that as we have more of these solutions in the hands of our salespeople and delivering them to our clients, we see that expanding. I think Sandeep mentioned this earlier, but I think the interesting thing was we had thought of these multiple product sales as all being back to base sales. And about half of them are just larger bundles upfront as we're selling core with these additional products to our new clients. And so that's encouraging, as we're able to do that suite sale, both back to base as well as to new clients.

And then the last thing I'll say, Alexei, is as excited as we are about these new products right? We're just booking that now. And so then obviously, it then has to get into revenue. And then once it's in revenue, then it starts to reflect in NRR. So I think we expect a larger impact from that as we look out and these products mature.

Sandeep, anything to add?

[Sandeep Sahai, executive]

No, I think that was very comprehensive.

[Operator]

We have a question from Michael Turrin with Wells Fargo.

[David Unger, analyst]

It's David Unger on for Michael Turrin. So I just wanted to go back to the 60% of R&D capacity in the prepared remarks. So would you mind just kind of giving us the way to think about the margin impacts in the near term? And if you continue to see momentum in bookings from this, how should we think about the LTV to CAC dynamics in the long run?

[Sandeep Sahai, executive]

Jim, do you want to answer that?

[James Cox, executive]

Sure. Thanks, David. So we -- obviously, we already have a very highly efficient sales and marketing when you look -- function when you look at that. And that is attributed to the fact that we have high NPS. We have good references from clients. That helps us sell.

I think a natural course across the SaaS industry is that as you're selling back to base, that the time period to close that deal would be shorter than a new logo. And so you would get yet incremental efficiency in that selling process.

So I think long term, we expect more efficiency from that back-to-base sales motion than we do from the new logo. However, I caution you to -- that I think -- and Sandeep, keep me honest on this, but I think we collectively feel like that efficiency, we then want to pour into our global expansion of our sales and marketing. Right? As we add more opportunities, we're very encouraged by the European signals that we've seen in the French-speaking market, in the German-speaking market. And Asia is still very, very early for us. And so I think we could see incremental investments there, which perhaps offset that incremental efficiency in the back-to-base motion.

[Sandeep Sahai, executive]

Yes, David, I would just add that our attitude to this is we have a disruptive platform where we win 80% of the time. And once we get a client, our gross revenue retention for the last 2 quarters was 99%. And before that, it was largely 98%. So our sense is that you have the advantage, you have a disruptive product which is superior, suppressed the advantage. But we want to do this in a disciplined way, which is why we said we will grow EBITDA 200 basis points while continuing to make these investments.

Now do we expect that R&D investment into new products to become more efficient? Yes. We started to make that investment at the end of last year. And there's a learning about what succeeds, what doesn't succeed, what GTM works and what doesn't work. So do we expect that to become more efficient? Yes. Do we expect that number to continue to grow? No.

And that is why we have said that this 25%, 26% R&D expense will trend down in the mid, long term to 20%. So again, we have set up a discipline about how to think about this, but we are also pretty aggressive about pushing our advantage, which we know we have technologically.

[David Unger, analyst]

I appreciate the [ contrast mentioned ] there. And then if I could just squeeze one more in. You're balancing growth with investment, but just on the gross margin side. I know we've talked about 80%. Can we just hit on that and kind of where we see gross margin trending perhaps over the next 3 years? Maybe just going back to the Investor Day, and then you could elaborate on there?

[James Cox, executive]

Yes. I think what we've committed to at the Investor Day was 50% -- pardon me. I'd love that 50 bps of gross margin improvement kind of year over year, over year until we get to that 80%. Now we've been able to do better in 2023 than that and kind of in the beginning of 2024. But I think we're very comfortable with 50 bps improvement year-over-year consistently.

[Sandeep Sahai, executive]

I would just add, Jim, that when we did the Investor Day last year, while it feels like a long time back, the impact of GenAI wasn't fully understood. And I think what you have said in the past few months is, we think that we have a glide path to the 80%, which we can see. But is there other numbers which are higher than that, which we could get behind? And I think the answer is yes. But we also said that we will take a couple more quarters to come up with a number we feel like we have a real plan for. And that would be in the use of GenAI and machine learning to improve data ingestion, to improve onboarding, to improve client servicing. And so we feel there is room there because of GenAI and the impact has already been felt, but we don't have a number yet about what this could be.

[Operator]

Our next question is from Michael Infante with Morgan Stanley.

[Michael Infante, analyst]

Apologies if I missed it, but I just wanted to clarify whether or not interest rate cuts are directly contemplated in the '24 outlook. It doesn't seem to be when I look at the full year raise versus the prior guide. So I was curious if you have a view surrounding the impact of perhaps a 25 basis point rate cut just in terms of NRR and revenue growth in '24 and beyond.

[James Cox, executive]

You're exactly right, Michael. It is no rate cut or AUM impact from that is included in our 2024 guidance. Remember, at the beginning of this year, we thought we were going to have 7 cuts. And so I think I saw the note quickly from the meeting that nothing this time. So we'll definitely have a point of view should they adjust rates in September.

[Michael Infante, analyst]

Got it. That's helpful. And then just in terms of the commentary, surrounding 50% of the new product bookings being driven by new clients. I think we're all well accustomed to your 80% plus win rate. I was just curious if those new products in and of themselves are either driving win rates higher or perhaps allowing you to close deals that maybe would have taken a little bit longer to get some prospective customers over the hump. I'm just curious if you have any commentary there.

[Sandeep Sahai, executive]

Yes. We could actually just go through many instances. But the answer to both of those is yes. I do think the new products help us close deals faster. There is no question about that. The value proposition is superior to what it would be without that new product. So I think that has helped many a deal in Q1 and Q2, which we are feeling really good about the second half of the year. So we feel like that does happen.

I think when we sell to current clients, I think the only reason we don't win would be the client decides to push the decision out a little bit. But the win rate is very high. I don't have a number for you, Michael. But yes, those -- the answer -- short answer to both your questions is a very strong yes.

[Operator]

Our next question is from Gabriela Borges with Goldman.

[Gabriela Borges, analyst]

Sandeep, you made an interesting comment earlier about how some other companies have talked about a slowdown in enterprise and it's not something that you're seeing. I'll ask you about the insurance industry, in particular. We had PCC last night talking about how their new product construction is slowing because their customers are evaluating a more wholesale transformation and digitization type to AI. Are you seeing any of that in the insurance industry? How do you think about the risk that perhaps your business also see a pause, not because the new products aren't valuable but because customers are trying to think through more holistically how they want to adopt over a longer period of time.

[Sandeep Sahai, executive]

Yes. Thank you, Gabriela. I feel very strongly, very, very strongly that when it comes to our platform, we lead the industry today in how to think about GenAI in the insurance industry, in the asset management world. So I feel like if things change and they change quickly, we are at the forefront of it. What we are achieving today, even financially -- when you look at how much we've been able to grow gross margin and how quickly, it is the real impact of GenAI. We have products in the hands of many, many clients today who are using it today. So I feel like if these changes continue to occur faster, we will be a big recipient of -- on the positive.

The second thing is, and I would love for you to think about this a little bit is what is the core skill you have to have for GenAI to do better? Access to training data, that's what you need. It's about how much data do you have on which these models can be trained. And if you think about Clearwater's model, all of our data, the data of all 1000-plus clients is in one logical database, and none of our competitors have that at all.

So our access to data and our push on GenAI very early in the cycle and the continued push, I think positions us very strongly. We have many, many clients who come to us and say, "What are you all doing? What can you do to help us adopt GenAI more broadly?" So I feel like GenAI is a very strong strength of Clearwater.

I want to make one more point here is, yes, it's not a horizontal solution which can be just disrupted. Accounting, as I was saying, is super nuanced, no 2 companies do accounting exactly the same way. And so you have to be thinking it's not just a horizontal product which can be disrupted. The nuance matters. Clearwater has that built on our platform today. So I feel we are competitively very strongly positioned and mostly because of a platform we have and the single instance multi-tenant platform we have. So I didn't mean to go on for this long, but GenAI is something where I think we lead and we look forward to having real impact with that on a continuing basis.

[Gabriela Borges, analyst]

That's helpful. Jim, a follow-up to you is on sales and marketing productivity. I know that Clearwater has been thoughtful over the last 6 to 9 months on how you think about which leaders do in which geographies? Help us understand how you're thinking about hiring over the next 12 months. And it sounds like the productivity -- that curve is coming up nicely. Any additional color you can provide on sales and marketing productivity, would be helpful to us.

[James Cox, executive]

Sure thing, Gabriela. So I do think that we're -- we've obviously been leaning into hiring around the globe. And I think we're happy with the pace of people onboarding. In fact, we're implementing the concept of everboarding as we're onboarding these new reps. We're also refreshing all of our existing reps because we have so many more solutions for them to sell today. And so perhaps if they joined years ago, it's a little bit of a different story. And so I think that's helping with the onboarding.

I think we feel comfortable with where we are with sales and marketing as a percentage of revenue. As I mentioned, we're able to deliver these EBITDA -- expanded EBITDA margins while incrementally investing. And I think we're open to that and leaning into that across these different products. Sandeep, anything to add?

[Sandeep Sahai, executive]

No Jim, that's good. Thanks.

[Operator]

Our next question is from Dylan Becker with William Blair.

[Dylan Becker, analyst]

Maybe, Sandeep, starting with you going back to kind of the 50% of new bookings from new logos. Maybe some additional color on kind of how that's creating greater surface area. I think you called out some jump wins in the quarter as well, but unlocking kind of some of those newer capabilities given this inherently is kind of that untapped funnel that you can leverage more of that back-to-base effort in the future?

[Sandeep Sahai, executive]

Yes. Thank you for the question, Dylan. So just we obviously are building products, as you know, not in isolation. So what we do is we go to clients in separate industries and geographies and try and understand what else we could do in an adjacent space. So let me take some examples, right? So I think one of the best standout product family, if you will, which emerged in the first half was funds. And so we did really well with stable value funds. We did really well with pooled funds, and unit-linked funds. Now these were things we did at a certain level in accounting, but our ability to go deep into addressing the need of these industries.

Essentially, 90% of it is still already in the Clearwater core platform, and we had to build a layer on top of it to make it work for pooled funds. And then we have built a certain amount to make it for stable value funds, and likewise for unit-linked funds. So these products tend to be adjacent, which is why they are doing well, and they're getting adoption faster than we imagined.

And so look, we expect to continue to make these investments, but we also will be prudent about cutting back on areas, which don't get client traction or which look very difficult to build. And one of those examples is risk. We started to build it and we talk to clients, is there a need? Yes. How long will it take for us to come up with a credible product which people can use, and we felt the time line was too long. So that it made sense to say, let's go buy a certain asset and use that, intermingle it with the work we are doing already and then come out with a stronger product.

So again, I still think we are learning and we will continually evolve how we think about investing in these initiatives. But very happy with the booking we are getting from there and subsequent revenue.

[Dylan Becker, analyst]

Okay. That's great. Maybe switching over to Jim. Pretty impressive $1 million ARR customer count and growth metrics there, effectively given that it's growing above kind of your guys' broader growth target. I would assume that many of these customers aren't entirely tapped out, though. So how should we think about kind of the runway within that large enterprise base and maybe kind of the potential dynamics here as that enterprise cohort maybe becomes a larger contributor to the aggregate business?

[James Cox, executive]

Yes. That's -- Dylan, you're exactly right. That's why we track that metric is -- that's not a finishing point. That's a starting point with many of these clients. And so you're right. It's a great vertical to be in because our clients are generally quite successful, and they have lots of problems that they need solved and they are looking to valued partners to help them with those. And so that's -- we're very fortunate to be in that place with our clients. So we hope to optimize on that.

[Sandeep Sahai, executive]

Yes. Jim, if I could add a little bit, Dylan to that is -- that these clients are obviously significant clients if they're spending that much money on investment accounting and analytics. We have a really high NPS, but we also know that they're spending a total of 4 bps on investment and management technology. While we are getting 1 bp or whatever that number close to that, for investment accounting. So there is usually room in investment accounting, but there's also a big runway in this 4 bps market, which is why you see us launch these products and make this significant, significant R&D investment because you want to go try and capture that and thereby extend the runway with those clients.

[Operator]

We have a question from Yun Kim with Loop Capital Markets.

[Yun Suk Kim, analyst]

All right. I'll make this pretty quick. Jim, gross margin, again showed a pretty big improvement in the quarter. Can you remind us the drivers behind that improvement? And how much is still left? And then also, I am assuming a new customer onramp continues to shorten. Is that also providing the better visibility into your revenue flow?

[James Cox, executive]

So I think for a lot -- it's a virtuous cycle, right? Which is when we onboard clients faster, generally, that's in the onboarding process. Clients have a lower gross margin than they do in the steady-state process. And so as that shortens that helps on the gross margin and helps for all those reasons that you alluded to. And so I would just say that -- but don't forget, the fundamental reason why our gross margin goes up over time is because of the single instance multi-tenant platform, the single security master. Every client is more efficient. Every new security that's held by more than one client helps us with that. And that is the fundamental reason.

I think if you look at the marginal gross margin in the last 2 quarters, it's -- I don't have the number in front of me, it's like 88%, 89% on the marginal dollar to the marginal gross profit. And that just comes from -- that is truly the financial expression of the network effect.

[Operator]

We have no additional questions, so I'll pass the call to Sandeep for any closing remarks.

[Sandeep Sahai, executive]

Thank you all for joining the call. Look, we really appreciate your questions, your advice throughout the quarter and you're following our company. So thank you again. We appreciate all your support, and we look forward to continue to talk to you and more formally talk to you at the end of next quarter. Thank you.

[Operator]

That concludes today's call. Thank you all for your participation. You may now disconnect your line.