CWAN 9.16.25
Analyst 2
The way I looked at it was more focused on Enfusion. I think that's what management guided to as well, indicating “Hey, we’re just going to continue to get it to 13% growth, but we’re going to stem up the gross retention.” If you do that, then whether it impacts growth this year or more next year, you start to see some of that organic growth come back just because you're fixing the leaky bucket on Enfusion. Whether that actually plays out or not, I think it's still to be determined.
I would say management has been thoughtful about saying, “Hey, Enfusion did really well when they sold to new hedge funds that were launching.” If we just focus on the hedge fund market, we can get back to some growth. I think they took the asset management team and actually merged that with core Clearwater so that the Enfusion team is now a hedge fund leader. The challenge with Enfusion, at least from my view, is they're almost a little bit rudderless right now. Neal Pawar, who was the COO of Enfusion, and then was named president at Clearwater, is no longer on the website. He is no longer leading that. He understood hedge funds deeply. He had worked at DE Shaw. He had been a CTO at multiple funds. Not having him spearheading Enfusion post-acquisition definitely leaves it a bit like, “Well, who is the clear leader for this?”
For core Clearwater, I think it's this insurance tailwind and the AUM benefits, that they’re almost sandbagging their numbers in terms of guidance. I think in their investor slide, they said 2% of net retention came from AUM pricing. But that could actually flex a little bit more with AUM increasing. So I think they're sandbagging what net retention could be, which then means they need less net new ARR to go off of to meet the numbers. So that's where in the short term, I think you actually have something that looks a lot better than what they're guiding to. But I'm curious about your views.
Analyst 1
It’s super helpful that they break it out like that. I think we did some work around looking at that total growth. I guess the real top line was 23%, and if you bridge the gross retention to net, it was something similar in 2024. I think this year, it seems okay to me to assume that they really are at that 20%. When I think about it, a realistic midterm goal is more like 18% top line growth. The decomposition of that's more like 6% new logos. I think they’ve done seven in 2024. They’ve talked about the market growing mid-single digits, so I'm going to assume that it's probably better than 5%, and they're a share taker here.
Then, AUM growth is probably like 2% to 3%. Cross-sell is probably like 2% to 3% from most of the other products. I think they had a really strong upsell period in 2024, but they signaled that that was unusual. They called out 7%, but I assume it's more like 3%. I do think there is a real pricing story here. They’d been asked about it and said, “Oh, yeah. We could raise prices 10%, but people would be mad at us.” But I do think it's a GDP plus kind of pricing raiser, which is 4% a year. 18% growth is probably realistic. Your downside in a bad market environment, you have 0% AUM growth and probably not a lot of upsell, maybe a little cross-sell, and then pricing’s a little bit lower. So maybe a really bad environment is like 10% growth. That is how I think about it. We’ve done similar work on Enfusion, which I'm happy to share as well.
Analyst 2
Enfusion to me is the interesting one because I ask, “Can they really either maintain that or reaccelerate that from 13% as they say?” Right now, I don't quite see how in the short term they get that going meaningfully. But I do think that if you get gross retention up, then you can seal that bucket a little bit so you can start to eke out some accelerating revenue growth.
Analyst 1
If you’ve ever worked at a hedge fund and you have Enfusion, it's really tough to rip out. That’s core to a lot of the middle office and their workflows, and they would really fight to keep it. When you look at 2024, I think their front book, what they call it, was 15% growth in new customers, and their back book, which is organically new clients, was 1%. That just tells me that they're not taking a bunch of pricing. I think we haven’t gotten those numbers for this year, but I imagine it's probably similar on the back book, maybe 1% to 2%, which means the front book is probably just like 11% to 12%, so a little bit of a slowdown.
When they provided that bridge at the investor day, I think people cheered because they put it out there. But I didn't quite love it, maybe just because I didn't know what “model changes” and “focus on hedge funds” really meant and didn't feel like it was explained super well. To me their bridge was probably something like 12% front book growth, probably like 4% back book, which is just pricing on organic clients. I think they have some of that built in the contracts, but could take some more pricing as they come up for renewal. So that's above their 20% or so guide; I think it's 22% or something. So they're just going to say, “Oh, it’ll be a little bit below that, and that's how we get reaccelerated to 20%.” I just didn't love their explanation of this. Also, when I think about the industry, Enfusion had a couple of great growth years. They were growing 30% to 40%, and now it's 13%. That’s a major deceleration. I just think about the number of new hedge funds launching these days versus podification and people hanging their new shingle, being less and less than it really was in 2021 or so. To me, 15% growth for Enfusion is realistic. But that's some of the skepticism I have around whatever “sales model”, “go to market model” changes and “focus on hedge funds” means.
Analyst 2
I hear your skepticism. A couple of things were interesting as I dove into it. One, the funny thing is the gross retention across every solution in this market is quite good. Enfusion's is poor not because of ripping out, but because hedge funds are dying. They’re mostly in those new hedge funds that are starting versus the more established ones. There’s a great example of Aviva, which is one of the largest core Clearwater customers. They’re also BNY Mellon's Eagle product's largest customer. The interesting thing is those are competing products. So why are they in the same one? Well, actually, for Aviva, Clearwater's the insurance arm, and Eagle is their asset management arm and all their other stuff. No one is going to rip those solutions out. So the gross retention is quite good.
The question really becomes, “Okay, well, does this whole end-to-end solution win you net new?” Management was arguing, “This is the reason why we won that German insurer.” It was like, “You know, they only buy end-to-end, and we were able to sell that story and talk about being tech forward.” I don't know if that rings true or not, because I don't think we have enough data yet to show. But I do think there’s probably something in terms of the RFPs that you're going through where, before if you were just like, “Hey, we’re the back office solution,” then you're just not going to be in the same room. Now you get more into the BNY Mellon, State Street, and maybe even BlackRock type conversations. In the near term, I think the management team is highly incentivized to shore up the leaky bucket, make sure everything’s going tight, and then get a couple of near-term tailwinds that give them some easy upside over the next year or so. On top of that, you have this thing where they get to tell a story around, “Hey, we’re winning more cross-sell business and upsell business.” So when I look at that from today's valuation, at $19 and change, it's basically at, call it, 6.5 times forward, 2026 ARR. That just seems cheap to me for something that has the potential to work out. It has some near-term tailwinds versus all the puts and takes of, “Okay, how much pricing will they be able to take? Will they be able to stem churn or not? Is core Clearwater growth slowing or not?” All those questions are valid, but I think the market is also factoring that in a bit. It sounds like that's not your view, and I'm curious why.