Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Management’s Discussion and Analysis of Financial Condition and Results of Operations and financial statements included in the Annual Report. As discussed in the section titled “Special Note Regarding Forward-Looking Statements,” the following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and in the section titled “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q and those discussed in the section titled “Risk Factors” in the Annual Report.
Overview
Clearwater brings transparency to the opaque world of investment accounting and analytics with what we believe is the industry’s most trusted and innovative single instance, multi-tenant technology platform. Our cloud-native software allows clients to radically simplify their investment accounting operations, enabling them to focus on higher-value business functions such as asset allocation strategy and investment selection. Our platform provides comprehensive accounting, data and advanced analytics as well as highly-configurable reporting for global investment assets daily or on-demand, instead of weekly or monthly. We give our clients confidence that they are making the most informed decisions about investment performance, regulatory compliance and risk.
We provide investment accounting and reporting, performance measurement, compliance monitoring and risk analytics solutions for asset managers, insurance companies and large corporations. Every day, Clearwater’s powerful platform aggregates and normalizes data on over $5.9 trillion of global invested assets for over 1,100 clients. We bring modern software to an industry that has long been dominated by difficult-to-use, high cost legacy technologies and processes, which often lack data integrity and traceability, and often require significant manual intervention. The strength of our platform is demonstrated by our approximately 80% win rate for new clients over the prior four years in deals that reached the proposal stage.
We allow our clients to replace legacy systems with modern cloud-native software. Our platform helps clients reduce cost, time, errors and risk and allows them to reallocate resources to other value-creating activities. Our software aggregates, reconciles and validates data from more than 2,500 daily data feeds and more than four million securities that have been modeled across multiple currencies, asset classes and countries. This cleansed and validated data runs through our proprietary accounting, performance, compliance and risk solutions to provide clients with powerful analytics and daily or on-demand configurable reporting. We offer multi-asset class, multi-basis, multi-currency accounting and analytics that provide clients with a comprehensive view of their holdings and related performance. This allows our clients to make better, more timely decisions about their investment portfolios.
Clearwater benefits from powerful network effects. With our single instance, multi-tenant architecture, every client, whether new or existing, enriches our global data set by making it more complete and accurate. Our software continually sources, ingests, models, reconciles and validates the terms, conditions and features of every investment security held by all of our clients. This continuous process helps to create a single repository of comprehensive, accurate investment data (often referred to within the industry as a “Golden Copy” of data) that benefits all our clients to the extent they otherwise have rights to the data. Through this continuous process, we are able to identify and adjudicate data discrepancies that otherwise could introduce error and risk into our clients’ investment portfolios. We believe that a meaningful competitive advantage of this network effect is that we are increasingly seen as the best and most accurate source of investment accounting data and analytics in the industry.
We have a 100% recurring revenue model. We charge our clients a fee that is primarily based on the amount of assets they manage on our platform, subject to contracted minimums. A majority of the assets on our platform are high-grade fixed income assets, leading to relatively low levels of volatility and highly predictable revenue streams. When applicable, we charge additional transaction fees for certain alternative asset classes (e.g., derivatives and other financial instruments).
Key Factors Affecting Our Performance
The growth and future success of our business depends on many factors, including those described below.
•Adding New Clients in Established End Markets: Our future growth is dependent upon our ability to continue to add new clients. We are focused on continuing to increase our client base in our established client end-markets of corporations, insurance companies and asset managers, and doing so with increasingly large and sophisticated clients. As we add clients, it takes time to fully onboard their assets to the platform. Our revenue generally increases as assets are added to the platform, while the effort to serve the client is relatively consistent over time. Therefore, we expect revenues and gross margins to increase for a client as the client transitions from the onboarding process to a steady state once assets have been onboarded. In any period, our gross margins may fluctuate based on the relative size and number of clients that we are onboarding at that time.
20
•Expanding and Retaining Relationships with Existing Clients: Our future growth is dependent upon retaining our existing clients and expanding our relationships with these clients through increases in the amount of their assets on our platform. We have enjoyed consistent gross revenue retention rates of approximately 98% over the past fourteen quarters. The consistency in revenue retention creates predictability in our business and enables us to better plan our future investments. Our relationships with our clients expands as these clients add more assets to our platform, with our net revenue retention rates (as defined below under “—Key Operating Measures”) above 104% over the past two years. Clients may add assets as a result of acquiring new clients themselves or by acquiring new businesses or simply through organic growth, which produces additional assets that they manage using our platform. We believe that our client service model and technology platform are strong contributing factors in our attractive retention rates. As such, we expect to continue to invest in both our operations and research and development functions to maintain and increase our high levels of client satisfaction, which we believe will lead to strong client retention and expansion.
•International Expansion: We believe that the value provided by our platform is equally applicable to asset owners and asset managers outside of North America, and there is a significant opportunity to expand our client base and usage of our platform internationally. Our future growth is dependent upon our ability to successfully enter new international markets and to expand our client base in our current international markets. Our cost to acquire clients in international markets is currently greater than in North America because there is less awareness of the Clearwater brand and our product capabilities, and we have to date invested less in sales and marketing internationally. For these reasons, we expect to invest more in sales and marketing in international markets relative to North America in order to achieve growth in these international markets.
•Adding New Clients in Adjacent or Nascent End-Markets: Our strategy is to also add new clients in our more nascent end-markets, which include state and local governments, pension funds and sovereign wealth funds, as well as a variety of alternative asset managers. Traditionally, our existing clients have been among our best resources for referring new clients to us, and we will continue to invest in sales and marketing to build awareness of our brand, engage prospective clients and drive adoption of our platform, particularly as it relates to expanding into new end-markets. As we establish our presence in new end-markets, we expect sales and marketing expenditures will be less efficient than in our established verticals and we will become increasingly more efficient at acquiring clients in new end-markets over time.
•Expanding Solutions and Broadening Innovation: Our future growth is dependent upon our continued expansion of our solutions in order to better retain our current clients and to develop new use cases that appeal to new clients. While we believe we will be able to reduce our research and development expenses as a percentage of revenues as we achieve greater scale, our priority is to maintain and grow our technological advantage over our competitors. As we identify opportunities to increase our technological and competitive advantages, we may increase our investments in research and development at rates that are faster than our growth in revenues in order to enhance our long-term growth and profitability.
•Fluctuations in the Market Value of Assets on the Platform: We generally bill our clients monthly in arrears based on a basis point rate applied to our clients’ assets on our platform, which can be influenced by general economic conditions. While 78% of the assets on our platform were high-grade fixed income securities and structured products as of December 31, 2021 and therefore typically subject to low levels of volatility, the value of our clients’ assets on our platform varies on a daily basis due to changes in securities prices, cash flow needs, incremental buying and selling of assets and other strategic priorities of our clients. For these reasons, our revenue is subject to fluctuations based on economic conditions, including market conditions and the changing interest rate environment. For example, our net revenue retention rate was impacted by decreases in clients assets under management on our platform by 2% during the three months ended March 31, 2022, and an incremental 3% during the three months ended June 30, 2022, reducing our annualized recurring revenue.
Key Components of Results of Operations
The following discussion describes certain line items in our condensed consolidated statements of operations.
Revenue
We generate revenue from fees derived from providing clients with access to the solutions and services on our software-as-a-service platform. Sales of our offering include a right to use our software in a hosted environment without taking possession of the software. Our contracts are generally cancellable with 30 days’ notice without penalty. We invoice clients monthly in arrears based on a percentage of the average daily value of assets within a client’s accounts on our platform during that month, or a fixed monthly fee. Payment terms may vary by contract but generally include a requirement of payment within 30 days following the month in which services are provided. Fees invoiced in advance of the delivery of the Company’s performance obligations are deemed set-up activities and are deferred as a material right and recognized over time, typically 12 months.
21
Cost of Revenue
Cost of revenue consists of expenses related to delivery of revenue-generating services, including expenses associated with client services, onboarding, reconciliation and agreements related to the purchase of data used in the provision of our services. Salary and benefits for certain personnel associated with supporting these functions, in addition to allocated overhead and depreciation for facilities, are also included in cost of revenue.
Operating Expenses
Research and development expense consists primarily of salary and benefits for our development staff as well as contractors’ fees and other costs associated with the enhancement of our offering, ensuring operational stability and performance and development of new offerings.
Sales and marketing expense consists of the costs of personnel involved in the sales and marketing process, sales commissions, advertising and promotional materials, sales facilities expenses, and the cost of trade shows and seminars.
General and administrative expense consists primarily of personnel costs for information technology, finance, administration, human resources and general management, as well as expenses from legal, corporate technology and accounting service providers.
Interest Expense, Net
Interest expense, net primarily relates to interest expense and reflects interest accrued on our outstanding term loan during the course of the applicable period. The accrual of interest varies depending on the timing and amount of borrowings and repayments during the period as well as fluctuations in interest rates. Interest income is also included in interest expense, net.
Tax Receivable Agreement Expense
In connection with the IPO and related transactions, we entered into a TRA that provides for the payment by us of 85% of certain tax benefits that we realize as a result of increases in our tax basis of CWAN Holdings resulting from redemptions or exchanges of CWAN Holdings units. Tax receivable agreement expense relates to payments we anticipate making under the TRA.
Other Expense, Net
Other expense, net consists of foreign currency gains and losses.
Provision for Income Taxes
Provision for income taxes consists of income taxes related to federal, state, and foreign jurisdictions where we conduct our business. Our effective tax rate may increase in the future as our ownership in CWAN Holdings increases via exchanges from historical partners. In addition, our discrete items may not be consistent from period to period and could cause volatility in our effective tax rate.
Key Operating Measures
We consider certain operating measures, such as annualized recurring revenue, gross retention rates and net retention rates, in measuring the performance of our business. The following table summarizes these operating measures for the dates presented:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
Annualized recurring revenue (in thousands) |
|
$ |
290,354 |
|
|
$ |
245,033 |
|
Gross revenue retention rate |
|
|
98 |
% |
|
|
98 |
% |
Net revenue retention rate |
|
|
104 |
% |
|
|
109 |
% |
Annualized Recurring Revenue
Annualized recurring revenue is calculated at the end of a period by dividing the recurring revenue in the last month of such period by the number of days in the month and multiplying by 365.
Because a substantial majority of the assets on our platform typically have low levels of volatility with respect to their market value, the growth in annualized recurring revenue is generally not attributable to the fluctuating market value of the assets on our platform. Rather, the growth in annualized recurring revenue is due to an increase in the number of clients using our offering as well as from onboarding more assets of our existing clients onto our platform.
Annualized recurring revenue increased 18% on account of growth in our client base as we brought new clients onto our platform and also added additional assets onto our platform from existing clients.
22
Gross Revenue Retention Rate
Gross revenue retention rate represents annual contract value (“ACV”) at the beginning of the 12-month period ended on the reporting date less client attrition over the prior 12-month period, divided by ACV at the beginning of the 12-month period, expressed as a percentage. ACV is comprised of annualized recurring revenue plus contracted-not-billed revenue, which represents the estimated annual contracted revenue for new and existing client opportunities prior to revenue recognition. In order to arrive at total ACV, we include contracted-not-billed revenue, as it is contracted revenue that has not been recognized but that we expect to produce recognized revenue in the future. Client attrition occurs when a client provides a contract termination notice. The amount of client attrition is calculated as the reduction in annualized revenue of the client at the time of the notice and is recorded in the month the final billing occurs. In the case of client attrition where contracted-not-billed revenue is still present for a client, both annualized recurring revenue and contracted-not-billed revenue associated with such client are deducted from ACV.
Gross revenue retention rates have remained consistent at approximately 98% since 2019. We believe the consistent and high gross revenue retention rate is a testament to the value proposition that our leading solution offers.
Net Revenue Retention Rate
Net revenue retention rate is the percentage of recurring revenue retained from clients on the platform for 12 months and includes changes from the addition, removal or value of assets on our platform, contractual changes that have an impact to annualized recurring revenues and lost revenue from client attrition. We calculate net revenue retention rate as of a period end by starting with the annualized recurring revenue from clients as of the 12 months prior to such period end. We then calculate the annualized recurring revenue from these clients as of the current period end. We then divide the total current period end annualized recurring revenue by the 12-month prior period end annualized recurring revenue to arrive at the net revenue retention rate.
Net revenue retention rate as of June 30, 2022 was 104% which represents growth in clients on our platform of 4% year over year. Net revenue retention rate as of June 30, 2022 decreased compared to net revenue retention rate as of June 30, 2021 primarily due to fluctuations in the market value of assets which clients maintain on our platform and decreased pricing of our clients’ fixed income securities.
Non-GAAP Financial Measures
We also consider certain non-GAAP financial measures that are not prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), such as adjusted EBITDA and adjusted EBITDA Margin, in measuring the performance of our business. The non-GAAP measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similar measures presented by other companies. However, we believe that this non-GAAP information is useful as an additional means for investors to evaluate our operating performance, when reviewed in conjunction with our GAAP financial statements. These measures should not be considered in isolation or as a substitute for measures prepared in accordance with GAAP, and because these amounts are not determined in accordance with GAAP, they should not be used exclusively in evaluating our business and operations. In addition, undue reliance should not be placed upon non-GAAP or operating information because this information is neither standardized across companies nor subjected to the same control activities and audit procedures that produce our GAAP financial results.
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA and Adjusted EBITDA Margin are supplemental performance measures that our management uses to assess our operating performance. We define Adjusted EBITDA as net income (loss) plus (i) interest expense, net, (ii) depreciation and amortization, (iii) equity-based compensation, (iv) tax receivable agreement expense, and (v) other expenses. We define Adjusted EBITDA Margin as Adjusted EBITDA (as defined above) divided by revenue.
23
The following tables reconcile net income (loss) to Adjusted EBITDA and include amounts expressed as a percentage of revenue for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands, except percentages) |
|
Net income (loss) |
|
$ |
(2,230 |
) |
|
|
(3 |
%) |
|
$ |
(211 |
) |
|
|
(0 |
%) |
|
$ |
(1,702 |
) |
|
|
(1 |
%) |
|
$ |
3,200 |
|
|
|
3 |
% |
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
403 |
|
|
|
1 |
% |
|
|
8,510 |
|
|
|
14 |
% |
|
|
832 |
|
|
|
1 |
% |
|
|
16,959 |
|
|
|
14 |
% |
Depreciation and amortization |
|
|
1,159 |
|
|
|
2 |
% |
|
|
735 |
|
|
|
1 |
% |
|
|
2,118 |
|
|
|
1 |
% |
|
|
1,412 |
|
|
|
1 |
% |
Equity-based compensation |
|
|
16,191 |
|
|
|
22 |
% |
|
|
6,691 |
|
|
|
11 |
% |
|
|
32,067 |
|
|
|
22 |
% |
|
|
11,556 |
|
|
|
10 |
% |
Tax receivable agreement expense |
|
|
3,100 |
|
|
|
4 |
% |
|
|
— |
|
|
|
0 |
% |
|
|
3,100 |
|
|
|
2 |
% |
|
|
— |
|
|
|
0 |
% |
Other expenses(1) |
|
|
451 |
|
|
|
1 |
% |
|
|
1,682 |
|
|
|
3 |
% |
|
|
1,522 |
|
|
|
1 |
% |
|
|
2,394 |
|
|
|
2 |
% |
Adjusted EBITDA |
|
|
19,074 |
|
|
|
26 |
% |
|
|
17,407 |
|
|
|
29 |
% |
|
|
37,937 |
|
|
|
26 |
% |
|
|
35,521 |
|
|
|
30 |
% |
Revenue |
|
$ |
73,409 |
|
|
|
100 |
% |
|
$ |
60,876 |
|
|
|
100 |
% |
|
$ |
144,187 |
|
|
|
100 |
% |
|
$ |
117,770 |
|
|
|
100 |
% |
(1)Other expenses includes management fees to our investors, income taxes, foreign exchange gains and losses and other expenses that are not reflective of our core operating performance including the costs to set up our Up-C structure and the Tax Receivable Agreement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
Up-C structure expenses |
|
$ |
— |
|
|
$ |
926 |
|
|
$ |
158 |
|
|
$ |
926 |
|
Management fees and reimbursed expenses |
|
|
597 |
|
|
|
493 |
|
|
|
1,188 |
|
|
|
1,083 |
|
Provision for income tax expense |
|
|
298 |
|
|
|
276 |
|
|
|
535 |
|
|
|
320 |
|
Miscellaneous |
|
|
(444 |
) |
|
|
(13 |
) |
|
|
(359 |
) |
|
|
65 |
|
Total other expenses |
|
$ |
451 |
|
|
$ |
1,682 |
|
|
$ |
1,522 |
|
|
$ |
2,394 |
|
24
Results of Operations
The following tables set forth our results of operations for the three and six months ended June 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Revenue |
|
$ |
73,409 |
|
|
$ |
60,876 |
|
|
$ |
144,187 |
|
|
$ |
117,770 |
|
Cost of revenue(1) |
|
|
20,919 |
|
|
|
15,576 |
|
|
|
42,091 |
|
|
|
29,898 |
|
Gross profit |
|
|
52,490 |
|
|
|
45,300 |
|
|
|
102,096 |
|
|
|
87,872 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(1) |
|
|
22,836 |
|
|
|
16,740 |
|
|
|
44,130 |
|
|
|
32,576 |
|
Sales and marketing(1) |
|
|
13,074 |
|
|
|
8,814 |
|
|
|
25,067 |
|
|
|
16,025 |
|
General and administrative(1) |
|
|
15,453 |
|
|
|
11,184 |
|
|
|
30,493 |
|
|
|
18,727 |
|
Total operating expenses |
|
|
51,363 |
|
|
|
36,738 |
|
|
|
99,690 |
|
|
|
67,328 |
|
Income from operations |
|
|
1,127 |
|
|
|
8,562 |
|
|
|
2,406 |
|
|
|
20,544 |
|
Interest expense, net |
|
|
403 |
|
|
|
8,510 |
|
|
|
832 |
|
|
|
16,959 |
|
Tax receivable agreement expense |
|
|
3,100 |
|
|
|
— |
|
|
|
3,100 |
|
|
|
- |
|
Other (income) expense, net |
|
|
(444 |
) |
|
|
(13 |
) |
|
|
(359 |
) |
|
|
65 |
|
Income (loss) before income taxes |
|
|
(1,932 |
) |
|
|
65 |
|
|
|
(1,167 |
) |
|
|
3,520 |
|
Provision for income taxes |
|
|
298 |
|
|
|
276 |
|
|
|
535 |
|
|
|
320 |
|
Net income (loss) |
|
|
(2,230 |
) |
|
|
(211 |
) |
|
|
(1,702 |
) |
|
|
3,200 |
|
Less: Net income attributable to noncontrolling interests |
|
|
198 |
|
|
|
— |
|
|
|
329 |
|
|
|
— |
|
Net loss attributable to Clearwater Analytics Holdings, Inc. |
|
$ |
(2,428 |
) |
|
$ |
— |
|
|
$ |
(2,031 |
) |
|
$ |
— |
|
(1)Amounts include equity-based compensation as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
$ |
2,376 |
|
|
$ |
749 |
|
|
$ |
4,687 |
|
|
$ |
1,272 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
4,565 |
|
|
|
2,034 |
|
|
|
8,870 |
|
|
|
3,686 |
|
Sales and marketing |
|
|
3,215 |
|
|
|
1,295 |
|
|
|
6,511 |
|
|
|
2,127 |
|
General and administrative |
|
|
6,035 |
|
|
|
2,613 |
|
|
|
11,999 |
|
|
|
4,471 |
|
Total equity-based compensation expense |
|
$ |
16,191 |
|
|
$ |
6,691 |
|
|
$ |
32,067 |
|
|
$ |
11,556 |
|
The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Revenue |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of revenue |
|
|
28 |
% |
|
|
26 |
% |
|
|
29 |
% |
|
|
25 |
% |
Gross profit |
|
|
72 |
% |
|
|
74 |
% |
|
|
71 |
% |
|
|
75 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
31 |
% |
|
|
27 |
% |
|
|
31 |
% |
|
|
28 |
% |
Sales and marketing |
|
|
18 |
% |
|
|
14 |
% |
|
|
17 |
% |
|
|
14 |
% |
General and administrative |
|
|
21 |
% |
|
|
18 |
% |
|
|
21 |
% |
|
|
16 |
% |
Total operating expenses |
|
|
70 |
% |
|
|
60 |
% |
|
|
69 |
% |
|
|
57 |
% |
Income from operations |
|
|
2 |
% |
|
|
14 |
% |
|
|
2 |
% |
|
|
17 |
% |
Interest expense, net |
|
|
1 |
% |
|
|
14 |
% |
|
|
1 |
% |
|
|
14 |
% |
Tax receivable agreement expense |
|
|
4 |
% |
|
|
0 |
% |
|
|
2 |
% |
|
|
0 |
% |
Other (income) expense, net |
|
|
(1 |
%) |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Income (loss) before income taxes |
|
|
(3 |
%) |
|
|
0 |
% |
|
|
(1 |
%) |
|
|
3 |
% |
Provision for income taxes |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Net income (loss) |
|
|
(3 |
%) |
|
|
0 |
% |
|
|
(1 |
%) |
|
|
3 |
% |
25
Comparison of the Three Months and Six Months Ended June 30, 2022 and 2021 (unaudited)
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
(In thousands, except percentages) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
|
Revenue |
|
$ |
73,409 |
|
|
$ |
60,876 |
|
|
$ |
12,533 |
|
|
|
21 |
% |
|
$ |
144,187 |
|
|
$ |
117,770 |
|
|
$ |
26,417 |
|
|
|
22 |
% |
Revenue increased $12.5 million and $26.4 million for the three and six months ended June 30, 2022, respectively, compared to the same periods of 2021. The increase was on account of growth in our client base as we brought new clients onto our platform, as well as changes to our existing clients’ assets on our platform. Average assets on our platform that were billed to new and existing clients increased 16% and 18% for the three and six months ended June 30, 2022, respectively, compared to the same periods of 2021. Average basis point rate billed to clients increased by 4.0% and 3.3% for the three and six months ended June 30, 2022, respectively, compared to the same periods of 2021.
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
(In thousands, except percentages) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
|
Equity-based compensation |
|
$ |
2,376 |
|
|
$ |
749 |
|
|
$ |
1,627 |
|
|
|
217 |
% |
|
$ |
4,687 |
|
|
$ |
1,272 |
|
|
$ |
3,415 |
|
|
|
268 |
% |
All other cost of revenue |
|
|
18,543 |
|
|
|
14,827 |
|
|
|
3,716 |
|
|
|
25 |
% |
|
|
37,404 |
|
|
|
28,626 |
|
|
|
8,778 |
|
|
|
31 |
% |
Total cost of revenue |
|
$ |
20,919 |
|
|
$ |
15,576 |
|
|
$ |
5,343 |
|
|
|
34 |
% |
|
$ |
42,091 |
|
|
$ |
29,898 |
|
|
$ |
12,193 |
|
|
|
41 |
% |
Percent of revenue |
|
|
28 |
% |
|
|
26 |
% |
|
|
|
|
|
|
|
|
29 |
% |
|
|
25 |
% |
|
|
|
|
|
|
Cost of revenue changed as follows:
|
|
|
|
|
|
|
|
|
|
|
Change From 2021 to 2022 QTD |
|
|
Change From 2021 to 2022 YTD |
|
|
|
|
|
|
|
|
Increased payroll and related |
|
$ |
2,440 |
|
|
$ |
6,107 |
|
Increased equity-based compensation |
|
|
1,627 |
|
|
|
3,415 |
|
Increased travel and entertainment |
|
|
361 |
|
|
|
486 |
|
Increased depreciation and amortization |
|
|
324 |
|
|
|
563 |
|
Increased facilities and infrastructure expenses |
|
|
276 |
|
|
|
402 |
|
Increased data costs |
|
|
267 |
|
|
|
606 |
|
Increased outside services and contractors |
|
|
109 |
|
|
|
393 |
|
(Decreased) increased technology |
|
|
(48 |
) |
|
|
240 |
|
Other items |
|
|
(13 |
) |
|
|
(19 |
) |
Total change |
|
$ |
5,343 |
|
|
$ |
12,193 |
|
The increase in cost of revenue for the three and six months ended June 30, 2022 was primarily due to increased payroll and related costs as a result of headcount growth of additional employees across our client services, onboarding and reconciliation teams to support a larger client base as well as increased equity-based compensation due to increased grant-date fair value of equity awards and higher headcount. Cost of revenue headcount grew at a faster rate than overall revenue growth as we continue to expand our scale to support our expected continued international expansion. International revenue grew to 15% and 14% of revenues in the three and six months ended June 30, 2022, respectively, compared to 8% and 9% in the three and six months ended June 30, 2021, respectively. In addition, cost of revenue increased due to increased travel and entertainment costs due to a reduction in travel restrictions related to
26
the COVID-19 pandemic, increased data costs to support a larger client base, higher utilization of third-party contractors on operational activities, and increased allocation of facilities cost and depreciation.
27
Operating Expenses
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
(In thousands, except percentages) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
|
Equity-based compensation |
|
$ |
4,565 |
|
|
$ |
2,034 |
|
|
$ |
2,531 |
|
|
|
124 |
% |
|
$ |
8,870 |
|
|
$ |
3,686 |
|
|
$ |
5,184 |
|
|
|
141 |
% |
All other research and development |
|
|
18,271 |
|
|
|
14,706 |
|
|
|
3,565 |
|
|
|
24 |
% |
|
|
35,260 |
|
|
|
28,890 |
|
|
|
6,370 |
|
|
|
22 |
% |
Total research and development |
|
$ |
22,836 |
|
|
$ |
16,740 |
|
|
$ |
6,096 |
|
|
|
36 |
% |
|
$ |
44,130 |
|
|
$ |
32,576 |
|
|
$ |
11,554 |
|
|
|
35 |
% |
Percent of revenue |
|
|
31 |
% |
|
|
27 |
% |
|
|
|
|
|
|
|
|
31 |
% |
|
|
28 |
% |
|
|
|
|
|
|
Research and development expenses changed as follows:
|
|
|
|
|
|
|
|
|
|
|
Change From 2021 to 2022 QTD |
|
|
Change From 2021 to 2022 YTD |
|
|
|
|
|
|
|
|
Increased equity-based compensation |
|
$ |
2,531 |
|
|
$ |
5,184 |
|
Increased payroll and related |
|
|
1,977 |
|
|
|
3,712 |
|
Increased technology |
|
|
1,091 |
|
|
|
2,067 |
|
Increased travel and entertainment |
|
|
214 |
|
|
|
261 |
|
Increased facilities and infrastructure expenses |
|
|
187 |
|
|
|
238 |
|
Other items |
|
|
96 |
|
|
|
92 |
|
Total change |
|
$ |
6,096 |
|
|
$ |
11,554 |
|
The increase in research and development expense for the three month and six months ended June 30, 2022 was primarily due to increased equity-based compensation due to increased grant-date fair value of equity awards and higher headcount, as well as increased payroll and related costs as a result of headcount growth of additional employees to focus on new offerings. In addition, research and development expense increased due to increased technology costs from higher utilization of third-party cloud computing services and other third-party IT services, increased travel and entertainment costs due to a reduction in travel restrictions related to the COVID-19 pandemic, and increased allocation of facilities costs.
Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
(In thousands, except percentages) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
|
Equity-based compensation |
|
$ |
3,215 |
|
|
$ |
1,295 |
|
|
$ |
1,920 |
|
|
|
148 |
% |
|
$ |
6,511 |
|
|
$ |
2,127 |
|
|
$ |
4,384 |
|
|
|
206 |
% |
All other sales and marketing |
|
|
9,859 |
|
|
|
7,519 |
|
|
|
2,340 |
|
|
|
31 |
% |
|
|
18,556 |
|
|
|
13,898 |
|
|
|
4,658 |
|
|
|
34 |
% |
Total sales and marketing |
|
$ |
13,074 |
|
|
$ |
8,814 |
|
|
$ |
4,260 |
|
|
|
48 |
% |
|
$ |
25,067 |
|
|
$ |
16,025 |
|
|
$ |
9,042 |
|
|
|
56 |
% |
Percent of revenue |
|
|
18 |
% |
|
|
14 |
% |
|
|
|
|
|
|
|
|
17 |
% |
|
|
14 |
% |
|
|
|
|
|
|
28
Sales and marketing expense changed as follows:
|
|
|
|
|
|
|
|
|
|
|
Change From 2021 to 2022 QTD |
|
|
Change From 2021 to 2022 YTD |
|
|
|
|
|
|
|
|
Increased equity-based compensation |
|
$ |
1,920 |
|
|
$ |
4,384 |
|
Increased payroll and related |
|
|
1,389 |
|
|
|
3,737 |
|
Increased marketing |
|
|
616 |
|
|
|
928 |
|
Increased travel and entertainment |
|
|
503 |
|
|
|
665 |
|
Increased facilities and infrastructure expenses |
|
|
106 |
|
|
|
151 |
|
Decreased outside services and contractors |
|
|
(287 |
) |
|
|
(887 |
) |
Other items |
|
|
13 |
|
|
|
64 |
|
Total change |
|
$ |
4,260 |
|
|
$ |
9,042 |
|
29
The increase in sales and marketing expense for the three and six months ended June 30, 2022 was primarily due to increased equity-based compensation due to increased grant-date fair value of equity awards and higher headcount, as well as increased payroll and related costs as a result of additional employees to expand sales coverage. In addition, sales and marketing expense increased from higher marketing costs due to increased focus on public relations, events and branding across the globe, increased travel and entertainment costs due to a reduction in travel restrictions related to the COVID-19 pandemic. These increases were partially offset by lower utilization of third-party consultants supporting marketing initiatives.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
(In thousands, except percentages) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
|
Equity-based compensation |
|
$ |
6,035 |
|
|
$ |
2,613 |
|
|
$ |
3,422 |
|
|
|
131 |
% |
|
$ |
11,999 |
|
|
$ |
4,471 |
|
|
$ |
7,528 |
|
|
|
168 |
% |
All other general and administrative |
|
|
9,418 |
|
|
|
8,571 |
|
|
|
847 |
|
|
|
10 |
% |
|
|
18,494 |
|
|
|
14,256 |
|
|
|
4,238 |
|
|
|
30 |
% |
Total general and administrative |
|
$ |
15,453 |
|
|
$ |
11,184 |
|
|
$ |
4,269 |
|
|
|
38 |
% |
|
$ |
30,493 |
|
|
$ |
18,727 |
|
|
$ |
11,766 |
|
|
|
63 |
% |
Percent of revenue |
|
|
21 |
% |
|
|
18 |
% |
|
|
|
|
|
|
|
|
21 |
% |
|
|
16 |
% |
|
|
|
|
|
|
General and administrative expenses changed as follows:
|
|
|
|
|
|
|
|
|
|
|
Change From 2021 to 2022 QTD |
|
|
Change From 2021 to 2022 YTD |
|
|
|
|
|
|
|
|
Increased equity-based compensation |
|
$ |
3,422 |
|
|
$ |
7,528 |
|
Increased outside services and contractors |
|
|
1,199 |
|
|
|
1,980 |
|
Increased insurance |
|
|
747 |
|
|
|
1,521 |
|
Increased payroll and related |
|
|
397 |
|
|
|
1,158 |
|
Increased travel and entertainment |
|
|
263 |
|
|
|
436 |
|
Increased facilities and infrastructure expenses |
|
|
102 |
|
|
|
327 |
|
Increased technology |
|
|
19 |
|
|
|
461 |
|
Decreased recruiting |
|
|
(751 |
) |
|
|
(781 |
) |
Decreased Up-C structure expenses |
|
|
(926 |
) |
|
|
(768 |
) |
Other items |
|
|
(203 |
) |
|
|
(96 |
) |
Total change |
|
$ |
4,269 |
|
|
$ |
11,766 |
|
The increase in general and administrative expense for the three and six months ended June 30, 2022 was primarily due to increased equity-based compensation expense due to increased grant-date fair value of equity awards and additional headcount, and higher utilization of accounting and legal professional services in connection with being a public company. In addition, general and administrative expenses increased due to insurance costs for our directors and officers, increased payroll and related costs as a result of headcount growth of additional employees, increased travel and entertainment expense due to a reduction in travel restrictions related to the COVID-19 pandemic, increased allocation of facility costs and increased technology costs. These increases were partially offset by decreased costs associated with creating the Up-C structure, including costs related to the Tax Receivable Agreement, and decreased third-party agency recruitment costs.
30
Non-Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
(In thousands, except percentages) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
|
Interest expense, net |
|
$ |
403 |
|
|
$ |
8,510 |
|
|
$ |
(8,107 |
) |
|
|
(95 |
%) |
|
$ |
832 |
|
|
$ |
16,959 |
|
|
$ |
(16,127 |
) |
|
|
(95 |
%) |
Tax receivable agreement expense |
|
$ |
3,100 |
|
|
|
— |
|
|
$ |
3,100 |
|
|
NMF |
|
|
$ |
3,100 |
|
|
|
— |
|
|
$ |
3,100 |
|
|
NMF |
|
Other (income) expense, net |
|
$ |
(444 |
) |
|
$ |
(13 |
) |
|
$ |
(431 |
) |
|
|
3315 |
% |
|
$ |
(359 |
) |
|
$ |
65 |
|
|
$ |
(424 |
) |
|
|
(652 |
%) |
The decrease in interest expense, net for the three and six months ended June 30, 2022 is due to lower borrowings under the New Credit Agreement compared with borrowings under the Previous Credit Agreement.
Tax receivable agreement expense relates to payments we anticipate making under the TRA. This expense is incurred in lieu of income tax expense when we utilize tax deductions subject to our TRA. Absent the utilization of these deductions we would be projecting to have taxable income in the current year, which would ordinarily incur income tax expense in our financial results. Absent the Up-C structure and TRA, income tax expense would have increased by $3.6 million and the TRA expense would be zero. Effectively, the Up-C structure and TRA are reducing total expenses for the Company by $500 thousand for the three and six months ended June 30, 2022. There are many assumptions and considerations that impact our taxable income position in the current year, some of which are out of our direct control. As such, the estimate of our taxable income position (and thus, the TRA expense we incur) for the current year could change significantly. Note that if our current estimates and assumptions do not change then the TRA liability related to this expense is expected to be paid in Q4 2023.
Other expense, net relates to foreign exchange gains and losses driven by fluctuations in exchange rates.
31
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
(In thousands, except percentages) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
298 |
|
|
$ |
276 |
|
|
$ |
22 |
|
|
|
8 |
% |
|
$ |
535 |
|
|
$ |
320 |
|
|
$ |
215 |
|
|
|
67 |
% |
The increase in provision for income taxes for the three and six months ended June 30, 2022 relates to change in mix of foreign jurisdiction taxable income in the period.
Liquidity and Capital Resources
To date, we have primarily financed our operations through cash flows from operations and financing activities.
As of June 30, 2022, we had cash and cash equivalents of $278.6 million. Cash and cash equivalents primarily consist of money market mutual funds, which are highly liquid investments purchased with an original or remaining maturity of 90 days or less at the date of purchase. We believe our existing cash and cash equivalents will be sufficient to meet our operating working capital and capital expenditure requirements over the next 12 months. Our future financing requirements will depend on many factors, including our growth rate, revenue retention rates, the timing and extent of spending to support development of our platform and any future investments or acquisitions we may make. Additional funds may not be available on terms favorable to us or at all, including as a result of disruptions in the credit markets. See “Risk Factors” in the Annual Report.
The following table shows our cash flows from operating activities, investing activities and financing activities for the stated periods:
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
2022 |
|
|
2021 |
|
|
(In thousands) |
|
Net cash provided by (used in) operating activities |
$ |
25,167 |
|
|
$ |
(16,352 |
) |
Net cash used in investing activities |
|
(6,968 |
) |
|
|
(2,231 |
) |
Net cash provided by (used in) financing activities |
|
7,196 |
|
|
|
(1,341 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
(1,346 |
) |
|
|
(133 |
) |
Net change in cash and cash equivalents during the period |
$ |
24,049 |
|
|
$ |
(20,057 |
) |
Cash Flows from Operating Activities
Net cash provided by operating activities of $25.2 million during the six months ended June 30, 2022 was primarily the result of our net loss plus non-cash charges, including equity-based compensation, tax receivable agreement expense, operating lease expense and depreciation and amortization. Cash flows resulting from changes in assets and liabilities include an increase in accounts receivable, an increase in deferred commissions and a decrease in accrued expenses and other liabilities. Accounts receivable increased $5.4 million, which is comprised of $2.6 million from growth in revenues and $2.8 million from ageing of small receivable balances across several customers due to short-term deterioration in days sales outstanding which we continue to believe is collectible. The increase in deferred commissions is due to higher revenues during the period. Accrued expenses and other liabilities decreased $7.1 million primarily due to payment of fiscal year 2021 bonuses to employees.
Net cash used in operating activities of $16.4 million during the six months ended June 30, 2021 was primarily the result of changes in operating assets and liabilities that decreased operating cash flow by $35.0 million. Accounts receivable increased $12.2 million during the period, which is comprised of $7.7 million from growth in revenues and $4.5 million from aging of receivables due to certain clients changing their internal systems and processes which caused a delay in remittance of payment. Prepaid expenses and other assets increased by $11.4 million primarily from the prepayment of management fees to certain affiliates of the Principal Equity Owners in the amount of $9.6 million. Accrued expenses and other liabilities decreased $9.5 million primarily due to payment of sales tax liabilities of $5.4 million, and reimbursement of $4.9 million in excess contribution to investors as part of a recapitalization transaction performed in October 2020.
Cash Flows from Investing Activities
Net cash used in investing activities of $7.0 million during the six months ended June 30, 2022 was attributable to purchase of property and equipment and short-term investments, and internally developed software.
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Net cash used in investing activities of $2.2 million during the six months ended June 30, 2021 was attributable to purchase of property and equipment, and internally developed software.
Cash Flows from Financing Activities
Net cash provided by financing activities during the six months ended June 30, 2022 was $7.2 million, of which $6.4 million was proceeds from the exercise of options and $2.4 million was proceeds from our employee stock purchase plan, which was partially offset by $1.4 million used in the repayment of borrowings and $0.2 million used in the repayment of costs associated with the IPO.
Net cash used in financing activities during the six months ended June 30, 2021 was $1.3 million, of which $1.5 million was used in the repayment of borrowings, $0.6 million was used in the repurchase of common units, $0.6 million was used to pay minimum tax withholding on behalf of employees for net unit settlement, and $0.4 million was used for the payment of costs associated with the IPO, which was partially offset by $1.6 million proceeds from the issuance of common units and $0.3 million proceeds from the exercise of options.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements and related notes, which have been prepared in accordance with GAAP. We review the accounting policies used in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities.
On an ongoing basis, we evaluate the process we use to develop estimates. We base our estimates on historical experience and on other information that we believe is reasonable for making judgments at the time the estimates are made. Actual results may differ from our estimates due to actual outcomes being different from those on which we based our assumptions.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in the Annual Report under the caption “Critical Accounting Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7.
On January 1, 2022, we adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), as amended, which supersedes the lease accounting guidance under Topic 840, and generally requires lessees to recognize operating and financing lease liabilities and corresponding ROU assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. We adopted the new guidance using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application and not restating comparative periods. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. See Note 2 — Basis of Presentation and Summary of Significant Accounting Policies and Note 6 — Leases in the notes to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the adoption.
JOBS Act Accounting Election
We meet the definition of an emerging growth company under the Jumpstart Our Business Startups Act of 2012, which permits us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use this extended transition period until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period. As a result, our condensed consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements applicable to public companies.
Recent Accounting Pronouncements
A discussion of recent accounting pronouncements is included in Note 2, “Recently Adopted Accounting Pronouncements” in the accompanying unaudited condensed consolidated financial statements.
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