Cannae Holdings, Inc. (CNNE) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Cannae Holdings, Inc., First Quarter 2023 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded, and a replay is available through 11:59 p.m. Eastern Time on May 16, 2023. With that, I would like to turn the call over to Rory Rumore of Solebury Strategic Communications. Please go ahead.

Thank you, operator, and all of you for joining us this afternoon. On the call today, we have our Chief Executive Officer, Rick Massey; Cannae's President, Ryan Caswell; and Bryan Coy, our Chief Financial Officer. Before we begin, I would like to remind listeners that this conference call and the Q&A following our remarks may contain forward-looking statements that involve a number of risks and uncertainties. Statements that are not historical facts, including statements about Cannae's expectations, hopes, intentions or strategies regarding the future are forward-looking statements. Forward-looking statements are based on management's beliefs as well as assumptions made by and information currently available to management. Because such statements are based on conditions as to future financial and operating results and are not statements of fact, actual results may differ materially from those projected. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. The risks and uncertainties, which forward-looking statements are subject to include, but are not limited to, the risks and other factors detailed in our quarterly shareholder letter, which was released this afternoon and in our other filings with the SEC. Today's remarks will also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to the GAAP financial information is provided in our shareholder letter. I would now like to turn the call over to Cannae's Chief Executive Officer, Rick Massey, who will open with a few brief remarks, and then, open the line for your questions.

Thanks, Rory. It's Rick Massey. Thank you all for joining the call. We'll -- I'll try to be brief, but I'm going to stand on a soapbox here for a second. We are not in the -- everybody on these calls, including us, listen to a lot of earnings calls, and we've heard a lot of management prognostications on the market and the economy and all that. And we're not dumb enough to get out and start making guesses about where the economy is headed. I'll say, talking to the CEOs of the companies that we deal with, there's a lot of uncertainty out there. What we are convinced of is that our portfolio almost to a company is grossly undervalued. And I'm going to go through just a few examples. And of companies that have recently reported, our largest holding, for an example, is Dun & Bradstreet. We've got 79-and-change million shares. It's trading at a very low multiple of EBITDA -- enterprise value to EBITDA. They reported an overall organic growth of 3%. That may or may not disappoint you, but if you look at their peers, you'll see that there are 2 peer -- there are 2 U.S. peers in the consumer credit business, the closest peers to Dun & Bradstreet, one of them had revenues -- revenue growth of 2% and one had revenue shrinkage of 4.5%. Yet those 2 companies trade at almost twice the EBITDA multiple of Don & Bradstreet. We're a little clueless about that. Dun & Bradstreet does not have that much more debt than some of its peers. It has a better margin. And like I said, it has better growth than its peers have shown. And what you'll see if you look under the cover on Dun & Bradstreet is they -- Anthony and the team there have done an incredible job of turning around their marketing services division by using essentially a data management platform where customers can use their own data, third-party data, and Dun & Bradstreet data to perfect their account-based marketing. It's going like gangbusters. Hoovers had a 60% churn rate. That is a 40% customer retention rate just a few years ago when they set about to fix Hoovers. And it has a retention rate now in the 80s. So stunning turnaround for Dun & Bradstreet and yet the market is -- it's -- they're selling it off. And we're -- it's really disappointing to us. We wish that there's more attention to be paid to Dun & Bradstreet because they've done a really nice job under the covers fixing a very broken company. They've got it back to growth, and growth faster than peers, and yet they've not been rewarded for that. Peers traded, like I said, twice the multiple. I said I'd be brief. I'll try to be a little quicker. Alight reported today 15% revenue growth in the first quarter, 15%. Their BPaaS, which is sort of their enterprise offering, multi-application offering. Their sales were up -- BPaaS sales were up 50%. Their bookings were a little soft, but that's because they have had all these giant jumbo contracts that they've signed and are now in execution mode like Exxon and GE and others. So ADP, the closest comp to Alight grew at 9%. They've -- this company Alight, one of my favorites in the whole universe of stocks, grew at 15% and yet Alight is trading at about half the multiple of ADP, go figure. It's a little depressing. We know that the market was disappointed that Stephan and the team at Alight didn't forecast or upgrade their forecast for '23. And I would just ask all of you and those investors to listen to a number of calls that have been made in the first quarter and see how many companies who beat their guidance actually -- for the first quarter actually came out and raised for '23. In my own anecdotal experience, it's a very low percentage because of the uncertainty in the markets out there and who can blame Stephan and Katie for not sticking their necks out and forecasting of increasing growth in a choppy sort of economy. Look at CDAY. CDAY beat the market substantially in terms of its guidance. And the stock is down 15% since their earnings call. You go figure. It doesn't make -- it makes no sense. It's trading in the -- like the mid-50s now. And it's -- our last sale, we sold 1 million shares at $78, and that was a good trade, and we probably would sell another 1 million at $78 if it ever gets back there. But at $55, it's dumb. It's just a really dumb price. Paysafe, everybody's whipping child. Paysafe actually turned in high single digits revenue growth, flat EBITDA growth, which is pretty amazing given the mess that Bruce and the team inherited. The stock is up a little bit, but they did -- this is a business that did $420 million of EBITDA in '22 and on track to do even better than that in '23. So it's kind of been thrown out with the bathwater, too. So this quarter, we are -- we're looking at a lot of things, but we are not sure it's timely given the -- all the noise in the capital markets, especially the debt capital markets and all the uncertainty and the economy on the back half of the year. So don't be surprised if we don't strike at something in the second quarter and don't be surprised if we do. The -- we are not -- we did not buy back any shares in the first quarter, and it's principally because we don't have a lot of extra capital to do so. And in order to raise that capital, we're going to have to sell one of those aforementioned holdings at a very disappointing price, and we're just not that dumb. It doesn't make sense to sell Dun & Bradstreet at $10 when it's worth $15 and so that you can go buy your shares back at a deep discount, too. It just doesn't make sense to me. The math doesn't work. So you may be -- some of our investors may be disappointed we didn't buy back any shares, but we think it's prudent -- just prudent portfolio management. Ryan Caswell is our President. He's been busy with our Black Knight Financial. I know there will -- there may be some questions about that, where we sit and how is Bournemouth doing, and what did they -- are they out of the death zone, and what's your view.

No, we -- I think we talked about it last time, we spent some money in the transfer window, and the team has performed much better. So it looks like we are very close, if not out of the relegation zone, which is a great outcome. And we're doing a lot on the business side. From a commercial perspective, in terms of increasing sponsorships, thinking about optimizing ticketing revenue. And so we're very pleased with the football performance to hopefully stay up in the Premier League, which will allow all of the other stuff in the multi-club strategy to perform much better.

We think we got a steel on Bournemouth or Bill got a steel. He's the one -- he and Ryan were ones that warmed their way into the process and got a deal. We paid 0.8x revenues. The comps are now probably double what they were at the time, maybe 5x. You're seeing people pay 5x for small EPL teams. So that's going to turn out to be a really good one for us, and we're excited about it. I don't have anything else. Did I miss anything, Bryan?

No.

No. Okay. Bryan Coy, our CFO, is here with us. Unless you have anything to report, we'll just go to questions.

No. Let's go to questions. Operator?

Thank you. We will now begin our question-and-answer session. [Operator Instructions]. The first question comes with Ian Zaffino with Oppenheimer.

Thanks for all the commentary. This is helpful. And since you 3 are out there, I'm going to press you a little bit on this. You basically almost have 100% upside if you buy back your stock, right? And so -- I mean, my argument is bird in the hand if you buy back your stock versus one that's in the bush. So help us understand this, right? Because when I'm sitting here, I would rather buy back something that's worth half the price right now as opposed to sitting and waiting, kind of like what your prepared remarks indicate. So try and square that and push you a little bit on your thinking there.

I think the underlying assumption is that we are buying back at a 50% discount to book value. It's not clear that the -- that buybacks have a -- have any effect on market value. And I'll say we ran a grand experiment in '22. And we bought back, I don't know, 12% or 15% of our company, and the stock actually declined. So it doesn't seem -- yes, if you buy our stock at $20 and then tangible book -- or what the net book value per share is $40, it's a theoretical double, but it's a theoretical double to book value per share. And clearly, we don't trade on book value per share. And I would rather -- we think that the market for our stock is depressed, not because we don't buy back enough shares but because the -- our portfolio companies are poorly valued. And we're -- that's why our strategy is let's just -- before we go sell something, let's wait for it to hit the target price, the price that we sort of thought about when we went into the deals in the first place. I don't know if that satisfies you or not, but when -- the assumption behind -- it's a double -- it's an instant double is only in the case of a liquidation, and we're not in liquidation. And yes, we could buy it at $20. And then if we liquidate it tomorrow, we'd get $40 a share. So these are rough -- I don't know what our actual stuff is, but it's $40, $42, or what is it -- what's it, you tell me.

It's $35 roughly today.

So $35. So -- but that's only in the case of a liquidation. We're not in a liquidation. If the shareholders want us to liquidate, we'd be glad to listen to that. But even then liquidating at these values would be -- it seems to me to be pretty dumb. We're not naturally sellers at deep discounts, so...

Okay. Understood. And then maybe a little bit in the same vein here. You kind of threw out the strawman of selling Dun & Bradstreet, and this kind of dovetails into the next question is you sold some CDAY. But why not more CDAY? Why talk about selling Dun & Bradstreet and why not talk about selling CDAY or more of CDAY or maybe just your thinking is different on CDAY, so...

Well, we sold -- Ian, great point, great question, and I appreciate the -- you're pushing us on these because we -- our credibility is everything. That's not to say -- we sold 1 million shares. We've got 5 left, 5 million left. I'm not going to say -- we can't and shouldn't say one way or another what we're going to do with that inventory, but it wouldn't surprise me for us to sell more. I think we'd prefer to sell it back in the $78 range versus the $55 or $56 range. And you might forgive us if we hold out a little bit to see if it doesn't bounce back to that. It's sort of an -- CDAY is -- if you look at the chart, it's really interesting because there they blew out their numbers, and their stock is down 15% in the -- since May 3 when their numbers came out. It didn't make any sense at all.

The next question comes with John Campbell with Stephens Inc.

Rick, you were on fire with the valuation rundowns on your soapbox. We agree with your stance there. You got a lot of puzzling, kind of disconnects across a handful of these public investments. So we hear you there. On Bournemouth, I mean, obviously, great kind of run of things of late, several points above that relegation line. So it does seem like you guys are in a good spot. You had mentioned last call that -- I think you were kind of tongue in cheek, but mentioned existential threat if you were to go and be relegated. So that's a good outcome so far.

No, it wasn't. It wasn't an existential threat for Bryan and I. It was just for Ryan Caswell, who's sitting here with us.

I heard that. I heard that. But in the past calls, you guys have talked to maybe 3 to 4x your investment on Bournemouth and you're talking about maybe a 5-, 7-year type horizon. And then, Massey, I think you've repeated twice that the implied takeout or the implied value was about 8 -- 0.8x revenue, so a really good price. When you look at MANU stock, I'm not close enough to that to determine whether that's pure apples-to-apples, but that one is at about 5x revenues. And Rick, I think you mentioned your perceived peer groups about 5x, so that seems to kind of check-up. If you guys were to get that on Bournemouth, I mean that's pretty substantial. I think it's about $8 per share of incremental value for you guys, about a 40% hoop.

That's -- I was just doing the math in my head. Yes, I think you're in the right range, John.

Yes. So that seems to be a pretty meaningful opportunity. I mean, obviously, as we assess the portfolio, there's -- the lion's share of the value is kind of tied to public assets. We can see the price day-to-day. On private side, that's where there's maybe a little bit of extra torque, Bournemouth seems to be the clear opportunity here. So my question here after that rambling is, what do you think the steps you guys need to take to juice the revenue, to get things going, where you think you can eventually be awarded that 5x valuation?

Bryan will handle that.

Yes. I mean I think when we took over Bournemouth, if you look at the commercial side of the business, it wasn't run as well as we would have hoped or as well as we think that we can do it. So we believed that was a big opportunity. We've hired some people over there, specifically focused on that. Clearly, part of the thesis is you have to stay in the Premier League to get that valuation, which we think we're doing. We also believe that building out the multi-club model, which started with our investment in Lorient, and we're looking at a few others. We think that further cements and helps the value because it helps create sort of additional sponsorship to build -- to make your brand look more -- like some of the clubs if you look further up the standings or the table. So look, I don't think it -- I don't think we'd sell it -- I don't think we're looking to sell it tomorrow. I think there's some work that we need to do, but we think we're very much on the way in terms of, one, requalification for the Premier League; secondly, building out all of the commercial side of the business and then really taking the learnings from the Vegas Golden Knights, and it's kind of super -- enhancing what they were doing. But -- I don't think it's -- I don't think we could flip it today, John, but I think we are creating the value to get to those comparable transaction multiples that you mentioned earlier.

Yes, John, we were kind of thinking of this as a 5- to 7-year hold and kind of 3, 4x our money as sort of a baseline IRR. I'm not promising that, but that's what we were thinking. It's going to take a while, and -- but you've got the best. Bill brought -- what's the guy's name that...

Jim Frevola.

Jim Frevola.

Jim Frevola over there from the Knights. And according to Bill, he's already working magic, and Jim Frevola was ran with the business side. I mean, I don't know, you call it the revenue -- the tickets, sponsorships, concessions, food, beverage, all that stuff. And they were more -- they were unmanaged over there. So there's a long way to go on the downside, but there's a lot of upside.

Yes. I agree.

Yes. Makes sense. That seems like a very promising opportunity. So we'll be keeping tabs on that. And this is one just kind of minor housekeeping item, but I noticed in the shareholder letter last go around, I think you guys said a 50.1%, so a majority ownership position in BKFE. It looks like on the April update and also in the shareholder letter it's saying 49%. Obviously, not a big difference, but...