CCC Intelligent Solutions Holdings Inc. (NYSE:CCCS) Q2 2023 Earnings Call Transcript

CCC Intelligent Solutions Holdings Inc. (NYSE:CCCS) Q2 2023 Earnings Call Transcript August 1, 2023

CCC Intelligent Solutions Holdings Inc. misses on earnings expectations. Reported EPS is $0.06 EPS, expectations were $0.07.

Operator: Good day, and thank you for standing by. Welcome to the CCC Intelligent Solutions’ Second Quarter Fiscal 2023 Earnings Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would like to hand the conference over to your speaker today, Bill Warmington. Please go ahead.

Bill Warmington: Thank you, operator. Good afternoon and thank you for joining us today to review CCC’s second quarter 2023 financial results, which we announced in the press release issued following the close of the market today. Joining me on the call are Githesh Ramamurthy, CCC’s Chairman and CEO; and Brian Herb, CCC’s CFO. The forward-looking statements we make today about the company’s results and plans are subject to risks and uncertainties that may cause the actual results and the implementation of the company’s plans to vary materially. These risks are discussed in the earnings releases available on our Investor Relations website and under the heading Risk Factors in our 2022 annual report on Form 10-K filed with the SEC.

Further, these comments and the Q&A that follows are copyrighted today by CCC Intelligent Solutions Holdings Inc. Any recording, retransmission, or reproduction or other use of the same for profit or otherwise without prior consent of CCC is prohibited and a violation of the United States copyright and other laws. Additionally, while we’ve approved the publishing of the transcript of this call by a third-party, we take no responsibility for inaccuracies that may appear in that transcript. Please note, the discussion on today’s call includes certain non-GAAP financial measures as defined by the SEC. The company believes these non-GAAP financial measures provide useful information to management and investors regarding certain financial and business trends relating to the company’s financial condition and the results of operations.

A reconciliation of GAAP to non-GAAP measures is available in our earnings release that is available on our Investor Relations website. Thank you. And now, I’ll turn the call over to Githesh.

Githesh Ramamurthy: Thank you, Bill, and thanks to all of you for joining us today. I’m pleased to report that CCC delivered another quarter of strong top and bottom-line results, reflecting both the predictability and mission-critical nature of our solutions. The second quarter of 2023, CCC’s total revenue was $212 million, up 10% year-over-year and ahead of our guidance range. Adjusted EBITDA was $81 million, also ahead of our guidance range. Our adjusted EBITDA margin was 38%. On today’s call, I’d like to highlight three themes that underpin our performance. The first is CCC’s durable business model; the second is innovation; and third, the growing adoption of CCC solutions. First, our durable business model. As you know from previous earnings calls and media reports, the auto insurance economy is being impacted by multiple headwinds, including staffing shortages, inflation, supply chain issues, increasing vehicle complexity, and rising consumer expectations.

These challenges are being compounded by claim counts that have rebounded significantly from the pandemic and are now less than 10%, below 2019 levels. Net result of these trends has been a significant increase in repairable total loss and casualty cycle-times. We recently did a deep dive into a metric we first discussed back in 2021. The cumulative days of cycle-time for automotive claims in a year and by cycle-time, I mean the number of days from a claim being open to a claim being closed. Back in 2019, the cumulative days of cycle-time for automotive claims in the US was more than 1 billion days per year, a staggering figure with the accelerating macro pressures facing the industry. However, in 2022, that figure rose to more than 2 billion days.

To put that in perspective, 2 billion days is more than 70,000 human lifespans. This increase to 2 billion days underscores our claims in the P&C insurance economies need to address operational efficiency. We are uniquely positioned to help because our multisided cloud-native network with dozens of solutions links together companies across the entire auto insurance ecosystem. The breadth of our network is unmatched with over 35,000 customers consisting of over 29,000 repair facilities, over 4,500 parts suppliers, more than 300 insurers and 13 of the top 15 automotive OEMs. By connecting these companies and digitizing processes across the ecosystem, our platform increases their ability to be productive, reduce inefficiency and improve communications throughout the claims process, which ultimately can result in claims being resolved faster.

Estimate-STP, our AI-based estimating solution for insurers that can pre-populate a complete line level repair estimate on a qualified claim in seconds using photos from a mobile phone, is a great example of how our solutions speed time to resolution. Today, a repair estimate prepared manually by an adjuster can take hours or even days to schedule and complete, which can negatively impact customer satisfaction as well as costing the insurer over $150 a claim. It also typically involves driving on the part of the consumer and/or the adjuster as well as plenty of paper forms. Estimate-STP’s multiple AI models by contrast can prepare the repair estimate in seconds or minutes 100% digitally, thereby reducing the cycle-time, administrative expense and the environmental impact of the claims process.

Today, the information to prepare repair estimates is collected through 3 channels, known in the industry as method of inspection or MOI. Roughly 30% of claims are inspected by consumers via the mobile phone self-service channel, but 45% are inspected in the repair facility and approximately 25% are inspected by insurance staff in the field. While Estimate-STP’s initial application was using photos from a consumer’s mobile phone to prepare an estimate, we want every inspection channel to be able to take advantage of this groundbreaking technology. Towards that end, we are working to expand our Estimate-STP solution and to inject AI-based computer vision technology into the repair facility and field adjuster channels. Using these technologies to assist consumers, repair technicians, and field appraisers with inspection has the potential to reduce cycle-time in estimate preparation and improve operating efficiency across a much larger set of claims.

We believe our decades-long track record of helping clients with the mission-critical operations is a cornerstone of our durable business model and why customers typically adopt more of our products over time. A great example of this was a recent win with a top 20 insurer and a long-time CCC customer was only using our Casualty Solutions and not our Auto Physical Damage or APD Solutions. Last month, this customer agreed to add our full suite of APD Solutions, including Estimate-STP. This client will be transitioning services from multiple vendors to the CCC platform. We have begun the implementation planning for the integration and expect this new APD relationship to start contributing revenue in the first half of 2024. This is a great example of the significant opportunity and numerous ways we have to expand our solution set with the country’s largest insurers.

The second point I’d like to discuss with you today is innovation. While we are proud of the network and portfolio of solutions we have built today, we are still in the early innings of this industry’s transformation and remain committed to investing in innovation that will increase the value we deliver to clients. A good example is investments we have made in recent years in our Casualty Solutions, which we believe can be a major growth opportunity for CCC. We recently rolled out a new AI-based computer vision technology for casualty claims that can predict potential physical injuries to the occupancy of a vehicle involved in an accident-based on photos of the damaged vehicles. This use case links our APD and casualty capabilities and enables insurers contracting for both sets of solutions to analyze claims early in the process using multiple AI models, helping insurers more efficiently and effectively identify risk, reserve appropriately and guide claims through the claims process.

We have a long history of helping our APD clients improve their operating efficiency through early analysis of claims, the initial determination of likely total loss versus repair, for example, and we are now bringing that capability to our casualty clients as well. This is another example of our AI model development and deployment capabilities, which on a combined basis, represent one of CCC’s sustainable competitive advantages. In terms of model development, we have over $1 trillion of historical accident data, which is continuously updated on a real-time hyper-local basis across tens of millions of repair estimates annually. In terms of model deployment, we are already deeply embedded in the work streams of many of our customers across the auto insurance economy, enabling seamless deployment of our AI solutions with a minimum of effort.

We continue to see a large growth opportunity for CCC in casualty. The insurance industry pays out the same amount in indemnity payments for casualty and auto physical damage each year, with the revenue opportunity in each market being roughly equal as well. Yet today, only about 50 of our more than 300 APD or Auto Physical Damage customers also use our casualty solutions, and our revenue from APD is four times that from casualty. Delivering our growing set of casualty solutions into our APD customer base therefore, represents one of our biggest growth opportunities with insurers. We’re seeing early proof points that our strategy for Casualty is working. In Q2, for example, we added and expanded relationships with multiple new and existing customers.

We believe our investments in innovation, combined with our ability to integrate our data and solutions on the APD side of the business, position us to continue to drive growth in casualty. For my third and final point, the growing adoption of CCC solutions, I’d like to highlight our parts offering. While parts is currently only about 5% of revenue, it is growing significantly faster than CCC overall, and we believe it represents a large opportunity for us. Last year, the collision repair industry spent about $18 billion on parts. Based on our existing business model, we believe parts represents a multi-hundred-million dollar annual revenue opportunity for CCC or more than five times our current parts revenue. Today, only about 15% of industry parts volume is ordered electronically through the CCC network.

We believe that CCC has the opportunity to increase that percentage over time because our electronic parts ordering solutions helped improve operational efficiency for automotive OEMs, parts suppliers, repair facilities and insurers through process simplification, integration, and automation. Our parts platform brings relevant parties together to increase visibility to buyers into parts availability and pricing, making the entire parts procurement process faster and more transparent. Surprisingly, a meaningful portion of parts are still ordered manually by fax machines and phone calls, which is obviously slow, inefficient, error prone and emblematic of what needs to change to reduce the 2 billion days of annual cycle-time. In a world where supply chain disruptions are a regular occurrence, knowing supply and availability at the time of part selection is critical managing cycle-time and total operating efficiency.

Longer cycle-times can mean high rental car costs and lower customer satisfaction, lower shop and labor utilization for repair facilities and the lower volume of parts sold for part suppliers. This quarter, we further grew our parts network by expanding the participation of two leading automotive OEMs and signing a multiyear extension with one of the leading aftermarket parts suppliers. We are pleased with how our parts platform is scaling and are confident that a growing portion of the industry parts procurement will take place electronically on our network in the years to come. Let me conclude by saying that we are proud of what we achieved in the first half of 2023 and are excited about what we have planned for the second half of the year.

And we remain confident in our ability to continue to deliver on our strategic and financial objectives. I will now turn the call over to Brian, who will walk you through our results in more detail.

Brian Herb: Thanks Githesh. As Githesh highlighted, we are seeing strong momentum across our business in terms of innovation and adoption of solutions by our customers. A key component of our durable business is our highly efficient, predictable, and scalable financial model that enables us to balance investment in innovation and also drive operational efficiency throughout economic cycles. As we now turn to the numbers, I’d like to review our second quarter 2023 results and then provide guidance for the third quarter and full year 2023. Total revenue for the second quarter was $211.7 million, up 10% from prior year period. Approximately seven points of revenue growth in Q2 was driven by cross-sell, upsell, and adoption of our solutions across our client base, including the upsell of repair shop packages, continued adoption of digital solutions, and the ongoing momentum in casualty.

An incremental three points of growth came from new logos, mostly with our repair facilities and parts suppliers. I also want to highlight that we saw more than one point of growth in Q2 from our emerging solutions, mainly diagnostics and Estimate-STP. Now, turning to our key metrics. Software gross dollar retention, or GDR, captures the amount of revenue retained from our client base compared to the prior year period. In Q2 2023, GDR was 99%. This is consistent with last quarter and with all of 2022. We believe our strong software GDR reflects the value we provide and the significant benefits that are accrued to our customers from participating in the broader CCC network. Software GDR is a core tenet to our predictable and resilient revenue model.

Software net dollar retention, or NDR, captures the amount of cross-sell and upsell from our existing customers compared to the prior year period as well as volume movements in our auto physical damage client base. In Q2 2023, software NDR was 107%. This is up modestly from 106% last quarter. Now, I’ll move to the income statement in more detail. As a reminder, unless otherwise noted, all metrics are non-GAAP. We provided a reconciliation of GAAP to non-GAAP in our press release. Adjusted gross profit in the quarter was $162 million. Adjusted gross profit margin was 77%, flat with the second quarter 2022 and up slightly from 76% last quarter. The flat year-over-year adjusted gross profit margin, primarily reflects operating leverage on incremental revenue, offset by the higher depreciation expense from capitalized projects recently released to the market, while the associated revenue from these emerging solutions is still in the early stages of scaling.

Overall, we feel good about the operating leverage and the scalability of the business model and our ability to deliver against our long-term adjusted gross profit target of 80%. In terms of expenses, adjusted operating expense in Q2 2023 was $90.2 million, up 10% year-over-year. Expense growth reflects the impact of the headcount additions in the second half of last year that grew staff month capacity by close to 20% year-over-year. The quarter also included the non-recurring IT migration costs that we highlighted last quarter. Adjusted EBITDA for the quarter was $80.9 million, up 10% year-over-year and adjusted EBITDA margin was 38%. Now, turning to the balance sheet and cash flow. We ended the quarter with $404 million in cash and cash equivalents and $788 million of debt.

At the end of the quarter, our net leverage was approximately 1.2 times adjusted EBITDA. Free cash flow in the quarter was $55 million compared to $30 million in the prior year period. Unlevered free cash flow in Q2 was $65 million or about 80% of our adjusted EBITDA. While our level of free cash flow can vary quarter-to-quarter based on seasonality, phasing or one-time items, we expect it to continue to average out to the low to mid-60% of adjusted EBITDA over time. Normalized for the bonus payment in Q1, the year-to-date conversion of our adjusted EBITDA into unlevered free cash flow would be 67%. I’d like to finish with guidance beginning with Q3 2023. We expect total revenue of $215 million to $217 million, which represents 8% to 9% year-over-year growth.

We expect adjusted EBITDA of $86 million to $88 million, which represents a 40% to 41% adjusted EBITDA margin in Q3. For the full year 2023, we expect revenue of $851 million to $855 million, which represents 9% year-over-year growth. We expect adjusted EBITDA of $337 million to $341 million, which represents a 40% adjusted EBITDA margin at the midpoint. Two points to keep in mind as you think about the third quarter and full year guidance. The first is that we feel good about our ability to deliver our position for the year. We’ve raised our revenue guidance for 2023 by $5 million based on the momentum of the business and our durable revenue model that provides good visibility driven from our long-term subscription contracts. This has moved our revenue guidance range from 8% to 9% to 9% growth for the full year.

The second point is that we expect adjusted EBITDA margins to step up from 39% in the first half of 2023 to 41% in the second half as we benefit from operating leverage on the incremental revenue and also lapping last year’s second half headcount ramp. Overall, the strong trends we’re seeing in renewals and the relationship expansion reinforces our confidence in the underlying strength of the business and our guidance. The combination of our durable business model, advanced AI capabilities, interconnected network and broad solution set puts us in a position to help our customers in the P&C insurance economy, reduced cycle-times and administrative costs while improving the consumer experience throughout the claim process. The need for digitization across the P&C insurance economy continues to accelerate, and CCC is well positioned to drive durable growth in both revenue and profitability in the near and long-term.

We are confident in our ability to deliver against our long-term target of 7% to 10% organic revenue growth and adjusted EBITDA margins expanding into the mid-40s. As we continue to execute on our strategic priorities, we believe we will generate significant value for both our customers and our shareholders. With that, operator, we’re now ready to take questions. Thank you.

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Q&A Session

Operator: Thank you. At this time, we’ll be conducting the question-and-answer session. [Operator Instructions] Our first question comes from the line of Kirk Materne of Evercore ISI. Your line is now open.

Kirk Materne: Yes, thanks very much and congrats on a nice quarter. Githesh, I was wondering if you could talk a little bit more about the opportunity for Estimate-STP outside mobile and self-service. I think before you guys were thinking only about 30% of the market was sort of available to STP. That would seem to expand the TAM pretty dramatically if you can go through other channels or other claims are now eligible. Can you just talk about that a little bit and how that maybe changes either your thoughts on attach rate or the TAM?

Githesh Ramamurthy: Yes, sure. Thanks for the question. First and foremost, our mobile clients are continuing to adopt and roll out Estimate-STP, and we’ve got different states kind of continuing to move, more clients continue to adopt. And just as a reminder, we have mentioned in the past that our total Estimate-STP volume, while it’s still a little over $1 billion, still less than 1% of our total volume. So, I just want to make sure you understand that part. Second, we have been testing this capability out with insurance staff adjusters who also will need this capability, and the receptivity has been terrific. So, it does expand the TAM to a 25% — an additional 25% that’s insurance staff. As we continue to work with repair facilities, which is 45% of all inspections, we’ve been testing this capability with repair facilities, and we are seeing some real benefits in the ability for a repair facility to get — not only get the photos from consumers but also get a sense for what the repair would cost and what an estimate would look like.

That provides some real efficiencies. So, very early stages on the second two use cases we talked about, but it does expand our TAM and also a reminder that Estimate-STP is part of a much broader straight-through processing solution for us.

Kirk Materne: Great, that’s super helpful. And then Brian, just so we think about it correctly. As we go into the back half of the year, in terms of net retention, can you just talk — sorry, a net dollar retention. Should we be expecting it to remain around this like $107 million range? Kind of how should we — I know you don’t guide specifically. But any changes we should be expecting on that front? Thanks.

Brian Herb: Yes, absolutely. Yes. If you look historically, we’ve been around 106 is kind of a steady-state position. We did $106 million last quarter. We did $106 million in Q4. Obviously, we did $107 million this quarter. We feel good on the $107 million and the overall momentum and progress in the business. So, I think it’s going to be in that range, $106 million, $107 million. It will move around a bit quarter-to-quarter, but that’s how we think about it. Certainly, as we go longer term, we have highlighted that we think cross-sell and upsell will move more like 80% of total growth and new logos will be 20%, but that’s medium to longer term as we step towards those growth rates.

Kirk Materne: Great. Thank you all. Congrats on the quarter.

Githesh Ramamurthy: Thank you.

Operator: Thank you. Our next question comes from the line of Dylan Becker of William Blair. Your line is now open.

Dylan Becker: Hey guys. Congrats on the results here. Maybe starting on the AI kind of theme. You talked about casualty detection capabilities. You announced the partnership with Verisk for fraud detection. Githesh, I wonder how you think about the potential for AI and automation to change the core kind of underwriting workflows and decisioning process for carriers. And maybe effectively, is it digitizing existing but also unlocking entirely new capabilities, maybe new shares of premiums? How should we think about that potential?