CCC Intelligent Solutions Holdings Inc. (CCC) Earnings Call Transcript & Summary

Okay. Good morning, everyone. Thank you for joining us today. We are thrilled to have the Chairman and CEO, Githesh Ramamurthy; and the Executive Vice President, Chief Financial and Administrative Officer, Brian Herb, from CCC Intelligent Solutions with us today. Thank you, guys, for joining.

Githesh, I'm going to start with a simple question, and so maybe give the audience and the investors on the webcast, a brief overview of CCC and the company's core capabilities.

Okay. Thank you, Eric. Appreciate everyone being here. So in a nutshell, $200 billion are spent in the United States, putting cars back on the road after auto accidents, $200 billion. CCC provides the SaaS and technology platform for insurers, repairers, parts providers, OEMs and the like to help put consumers back in place. So that's the nutshell what we do. We are a subscription software business. We have -- we've been a SaaS platform for many, many years. 20 years of revenue growth and earnings growth in terms of records. So does that give you a quick sense?

That gives me a sense. So maybe to jump into the crux of it. What is straight-through processing or SGP? Is it a concept, the vision of product, all 3 or not?

Yes. It actually is a combination of all 3. Let me ask your audience a quick question because I've learned to ask this question. How many of you have a car? Okay, good because now the answers become easier. Otherwise, most people in New York you talked to, has said, look, what's the car? So we won't go there. So here's what happens. In the old days, when you had an auto accident, somebody would come. You'd have to wait, did a lot of phone tag, adjuster comes, right comes to your car, look in rights and estimate and says, this what it's going to cost. Then you've got to find a repair facility. Today, the way we have helped build this process forward is the concept of straight-through processing overall, means minimal number of touches -- minimal number of humans touches throughout the process. So the average repair bill is roughly $4,000. The average total loss is roughly $15,000. And every one of these has hundreds of other related transactions. So when you think about straight-through processing, here's what a modern experience looks like. You call your carrier or your car sends a telematics message through the CCC platform. If you're a Toyota or Lexus customer, if you have an accident, it comes to the CCC platform. We initiate the claim and the carrier through the CCC platform sends you a link to your cell phone, and the cell phone link actually guides you and AI guides you through taking pictures around your car. And then our AI, which has been trained on about [ $1 trillion ] of historical pictures, 500 million photos a year, can actually right the line level estimate. You as a policyholder get access to the open table style. You get access to the repairs calendar. You plot the appointment, you show up at the repair facility, you still have to physically drop your car off. We haven't figured out a way to get that through the digital pipes, but you have to drop your car out. But other than that -- so there are so many steps. So straight-through processes is a combination of products, solutions. It's a huge -- it's a part of our overall vision. It's also a huge problem solver for all our customers.

So you mentioned AI. Maybe talk a little bit about the adoption of Transfer Digital Solutions. How you're leveraging AI, how your customers receive it, and how it makes their business is much more efficient?

So we've got about 95 of our customers in production using various forms of AI. So AI for us is an integral part of every product and every solution. And here are some 2 or 3 examples of where we use AI. So policyholder calls and says, I've met an accident, and we can say, send us a single picture. Policyholders send a single picture. From that single picture, we can help determine, is this car repair? Is this car should be totaled? That is a very expensive decision. AI is also used to do predictive analytics to help route the car through the right channel. AI, as I just described earlier, can be used to do the photo and to write the estimate relatively using AI for parts ordering. So there are many, many applications of AI. And we've built all of these models, Eric, ourselves with -- we've got higher dozens of people with Ph.D. in deep learning, machine learning, particle physics, and we've built most of these models using our own data sets.

So talk about the macro environment. How are you managing the business in light of inflation, labor shortages, supply chain issues relative to how you've done it in the past? And how are these headwinds affecting your clients and the demand for what CCC has to offer?

Sure. Is anyone here invest in insurance carriers? I take it not -- oh you do. All right. A little? All right. So if you looked at the earnings releases of a number of carriers, you will see that loss costs have gone up, right? Which means, to -- Eric, to your point, in terms of inflation, in terms of profitability, there's been a significant impact on that. And at times like that, our products and our solutions become all the more important, all the more mission-critical because people are saying, how am I doing relative to my competitors? How am I doing with parts usage? How am I doing with these processes? So we've seen -- at the start of COVID, we saw a significant increase in adoption of digital, and then as inflation has continued, we are seeing significant increases. And we just had our customer conference last week, and across the board, the concept of STP, more digital tools because everyone is also having the second corollary to what you're saying with inflation is that the industry is having a difficult time hiring enough people. So now I've got the double whammy of inflation, not being able to hire adjusters, technicians and the like, which means I'm forced to do a lot more. So that means these solutions become super critical.

Brian, let's talk a little bit about how you think about prioritizing revenue growth versus margin expansion. Talk a little bit about your current levels versus your long-term targets. Talk about how you balance the 2 of them or if you can successfully improve both at the same time? And then what are the implications for profitability as revenue growth comes increasingly from cross-selling and upselling versus new customer logos?

Yes. Absolutely. So we believe we can do both. So we can deliver durable revenue growth and do that over the long term and at the same time, improve margins. We have a track record of delivering both. So if you look at historical trends and historical performance, if you look at the 5 years up through or before '20, we delivered 10% organic revenue growth. And at the same time, we're improving margins 100 to 200 basis points per year. When you look at the last 2 years, '20 and '21, again, if you average across the 2 years, we did 10% organic revenue growth, and each year, we had 400 basis points of improvement. So we had kind of upside margin improvement over the last couple of years. We're holding margins flat to make sure this year and holding them at 38% to catch up some of the investment in the business and making sure we're balancing long-term growth opportunities and investing in the business and also setting up long-term margin progression. So we feel really good about delivering both. We have an efficient business model. We have a multi-tenant cloud platform. We have low customer acquisition costs. 96% of our revenue is reoccurring software revenue. So we feel really good about the scalability of the business. And so when we set the long-term guidance, we've talked about 7 to 10 as a long-term organic revenue growth, doing that over time and its scale. And within that we've also talked about moving our margins from where they are today, which is 38% and moving them up to the mid-40s. And so that's how we think about the long-term guide both from a revenue and margin progression.

Perfect. Okay. Let's talk a little bit about M&A. So Githesh, you recently acquired Safekeep, which is a leader in AI-powered subrogation claims management. Maybe explain to the audience what that is, why it matters and how it fits within your broader strategy?

Sure. So subrogation is the process. Remember, I talked about $200 billion being spent in auto claims. Subrogation is the process by which you either -- you collect from the other carrier. That means your policyholder is not at fault, partially at fault or fully informed. If fully at fault, then you pay the other carrier. If partially at fault, then there is an settlement. If not at fault at all, then you collect from the other carrier. So that process of subrogation affects tens of billions of dollars of claims every year. And it's been done in a very traditional, put the paper package together, ascended by mail to the other side, then the other side responds back. It's very cumbersome and very convoluted. So what we are doing is with the acquisition of Safekeep and putting them, dropping them onto our SaaS platform, the one that Brian just described, we can make that available to all our customers. So we just had our conference. In fact, the receptivity was just terrific. Many people thought was the best solution in the industry by far.

So keeping with the M&A theme, Brian, over the past 15 years, CCC has mainly been organic growth. There's been small M&A deals, but it's largely been organic. How do you think about M&A as a public company? How do you think about leveraging your balance sheet for M&A or other reasons? And how do you think about and how do you decide which expansion opportunities to generate shareholder value?

Yes. So you're right. I mean over the past several years, we have not been active from an M&A perspective. That said, we have brought in the leaders that have recently come into the business have deep M&A experience. We've also have a new M&A execution team with deep M&A deal experience. So we feel good about the capabilities that we have. We also have an extremely flexible balance sheet. So we have net leverage about 2.2x our adjusted EBITDA. So we feel good about being able to fund and having the capacity to fund deals. As Githesh said, we did a small deal in February, acquiring Safekeep. We thought about that deal very much as a product extension. So instead of building out a solution like that, we went on and bought it and gave it speed to revenue. It's a great cross-sell opportunity across our client base. So the way we're going forward and we are thinking about deals, there's kind of 3 categories of deals we're thinking about. One is these product extension. So how do we buy instead of build and Safekeep is an example to that where we can cross-sell those capabilities, that platform across our client base. The second area that we're focused on is looking at some of our adjacencies. So how do we open up new products to new customer groups in the ecosystem or potentially moving beyond auto and putting some products around the broader P&C insurance economy. So that's the second area. And then the third, we think about is international expansion. So if we're going to move -- today, our revenue is about 98% U.S. We have a small business in China. Anything we do internationally will be through partnership or M&A. So that's the third area that we're focused on. So those are kind of the themes we have from an M&A perspective.

Okay. One more question for Githesh and then I'll pause and see if the audience has any questions. So when we think about growth opportunities, clearly, you have an incredible core business with a huge TAM, and there's lots of things you could put around the core. There's casualty. There's STP -- estimate STP, there's diagnostics. There's horizontal opportunities like subrogation and payments we've talked about. How do you rank these opportunities? What's the biggest opportunity? How do you decide which one you want to go after first? Maybe talk a little bit about how you think about these questions and whether you think organic inorganic combination of both?

Yes. So first of all, what we're starting with is, we are focused on digitizing this industry, right, which means the vision of STP, straight-through processing. So when you think about straight-through processing, what -- there are so many more manual processes that need to be automated, digitized, apply AI to it. So -- and we have multiple customer segments. So there's a number of solutions that we prioritize for insurers like our digital capabilities, the consumer estimate STP. And then -- but for the collision repairs, so we think about it as priorities for each of our markets. So for collision repairs, for example, the complexity of the vehicle is increasing dramatically. We had 2 electric car models 10 years ago. As of fall of this year, we'll have 134 electric models. So the complexity of vehicle repair is a lot. So building solutions like diagnostics, repair procedures, the ability to interact with consumers, so those are super, super critical. Same thing with parts providers. We're working with almost every OEM today to get telematics data out of their vehicles to start processing cars. If you're a Toyota or Lexus customers I mentioned earlier that, that happens. But most important, what we're trying to do is to make sure that our solutions for insurers are reinforcing solutions for repairs or parts providers for fleets, all of these. So building solutions that tie all of these things together is also a big priority, but our priorities are really by customer. So we're very customer-centric, and so we also get very advanced early warnings of the next problem, the next problem and the next problem to solve. And when you have a Net Promoter Score of 80, which as you know, in enterprise software is almost -- is right up at the top, right? That means these customers have tried these solutions over the last 20 years and super successful. In fact, a lot of the times, we had our tech showcase last week. A lot of people came and said, can I be the first run to go in this? Can I try this? So there's kind of that propensity. It creates that intensity.

Perfect. Why don't I pause and see if anyone in the audience has any questions. Hold that one second, they'll bring you a microphone.

The business has been around for a very long time. I think it's 40 years operating history. So you've seen many cycles, many recessionary environments before. Wondering if you could give us a few learnings from the last 2 real recessions, 2008, maybe 2001. Smaller business, obviously, but what you saw in the business? What you learned? And how you're going to use those learnings going forward, if we do end up in a recession?

You asked for 2, I'll give you 3 data points. All right? First was '99, 2000. So we were public back then in '99, 2000. So we saw the '99 -- the [ Y2K ] issue, then we saw the dot-com crash. We're building -- starting to build out our Internet platform. So what we did in that time frame, what we learned in that time frame, very first learning was we put enormous amount of focus on building out our Internet platform in the 2001, 2002 times. So if you go back, we wish to trade at CCCG. NASDAQ was minus 32% that year. They were one of the toughest years for tech. We're the third best performing stock in the entire United States, plus 187%. It was because as we saw this problem happen, our focus on really delivering these solutions and making sure we have a balance sheet, we had cash flow, we were solidly profitable. It has always been important for us. Next cycle happens, which is the GFC. So when you look at -- when GFC happened, what we saw is -- again, a fair amount of stress, but we also noticed that underlying claim frequency, people's need to drive. Insurance being a mandated product, not an optional product and that we did not see much of a blip in core business. Customers were slightly more cautious in that time frame. But the underlying metrics of the industry and the way we were approaching it, again, no issues. We continue to grow. We had a record year in 2002, as I said. GFC, we navigated that beautifully. And then COVID happens, right, 2020. So claim frequency drops dramatically significantly, but the way our contracts are structured with our customers, with subscription revenues and the like, was not a great growth year for us. In 2020, we only grew [ 5% ]. We grew earnings...

20%.

We grew earnings 20%. Revenue growth was 5%. So -- and then you can see that since then, we've kind of bounced back up. So that was at the heart of COVID. So when I look over the last 20 years in terms of the different stresses, we've been through these stresses. The fundamental difference, I would say, are really 3 things. We delivering incredible ROI across our products, across our solution Second, the need to digitize across this entire supply chain is just accelerating because it's a competitive advantage, and we don't see that trend changing anytime soon; and third is the underlying metrics of the industry relative to claim volume, claim frequency, more -- you look at our GDP growth, half our GDP growth comes from population increase. So you're getting more cars on the road. You're getting more of that as well. So that underlying metric has been fairly steady, except for the COVID frequency. Does that give you a sense? Longer answer than you wanted from.

We get 2 over here. So you'll go next.

Just when you chat about digitizing the industry, could you just chat about where you see the opportunity and barriers to get insurance companies to actually digitize? Are you going in through the tech world or through the operating line? Maybe you could just chat about how you see that progressing.

We primarily go through the operating line. If you think about what I mentioned earlier, $200 billion are spent in restoring cars after [indiscernible] right, medical costs, collision repair costs and the like. So we provide inordinate amounts of operating leverage, whether it was during COVID when our customers [indiscernible] 20,000, 30,000 people home, and they needed digital capabilities to connect to the consumers for their own employees. So we help manage a large amount of cost from intake of the customer claim through triage, through managing the claims, sending it to the repair network to get repaired, solving the total loss, doing the payments, so this whole process. So our entry point is typically from an operating standpoint. Now on the flip side, we have deep integrations with -- we have 300 carrier customers. That means we have deep integration at literally at the 2 second level, right? Latencies no more than a couple of seconds of in carriers integrated. That's -- so that's really how we go in from an operating side, and obviously, we interface with the IT side of all of these companies.

I think there's one more question over here, then we'll get you back there.

Great. Maybe 3 quick questions. One, just an update on the competitive landscape as you've kind of invested and moved to the cloud. Second, in 5 years, if we're sitting at 30% plus EV penetration, how do you think about volume of automotive claims? And then third, maybe just pros and cons of coming SPAC?

I'll let Brian answer the last one. I'll take your first. First -- sorry. So the -- I would say on the -- your first one was competitive lens. So that, I would say, is having done this for a long time. 18 of the top 20 carriers in this country are exclusively standardized on our platform, right? So that's a -- and as you know, the top 20 carriers account for a pretty sizable amount of market share. So over time, what we have observed is a single platform that integrates and provides a massive ecosystem of parts providers, OEMs and the operating leverage we provide. And frankly, it's a reference-based sale. We don't spend money on advertising, right? So carriers turn to other carriers. So that market share has shifted, and in every single case, our customers have gone from 1 or 2 solutions or 3 solutions to a large suite of solutions, insurers, repairs and the like. So that landscape has shifted pretty substantially, and our network gotten richer. Our data sets gotten bigger. So our AI also gets better. And then today, we're the largest processor -- our platform is the largest processor of EV vehicles. So whether it is the most popular EV vehicle out there, whether it's a Hyundai, whether it is others cars as Hyundai, as you guys know, is #2 today on EV. So our platform also process -- a collision is a collision, a car is a car. There are nuances, but we are the largest processor of electric vehicles today, and we don't see that changing. We just think that mix is going to continue. And again, complexity is our friend, right? So solutions like diagnostics, how to actually repair the car. As complexity increases, the need for AI and software to actually help people repair the vehicle, process it becomes extremely important. And I'll turn it over to Brian about the third one after...

Yes. So the pros and cons on the SPAC. I mean we certainly could have gone through a traditional IPO. You look at the fundamentals of the business, the 40 years where revenue is profitable cash flows. We had the opportunity to work with Dragoneer. So they are great technology investors. Smart guys. Great guys to work with. And so we met with them early on in the process and really had alignment. The other benefits of a SPAC is, you're able to build your long -- your shareholders early on. And so we got smart technology, institutional investors that came in as part of the process, and you agree value early on. So those are the positive sides of it. There's certainly some overhang with being a SPAC. There's also some -- just this back banner is a bit noisy and can cause people to -- if they're not going to do the work, just say, well, you went through a SPAC, you couldn't have gone through a traditional and then they have to dig in. And if they spend time on the story and they understand the fundamentals, you get past that. But it's really building and making sure people understand the story and the strategic opportunities and the investment thesis, and we feel really good about where we are and the opportunities in front of us.

Yes. Just on the long-term topline growth, could you break down the 7% to 10%? I think claims volume historically grows low single digit in the U.S. So just maybe help bridge that gap. And then, I guess, longer term, as more vehicles on the road get driver safety and some of these automatic braking, lane avoidance technologies, how does that impact your industry broadly, if the auto market is safer 10 years from now?

Yes. Let me start kind of with -- sorry about that. Look, from a safety standpoint, what we have seen is that frequency with whether it is self-driving -- again, remember, we're the largest processor of claims and we see. So we have not seen any significant change in frequency. Frequencies mostly affected by congestion. So over the very long term, we do think there might be some minor over like a 10-year time frame. There might be some minor implications on frequency. So our solutions, as we -- I am so sorry, let me just silence this thing. Somebody persisted. So the -- so when you look at -- so we've not seen a material change. We actually publish on our website a report called the Crash Course, which has actually got a lot of data about these stats. So you may be helpful if you wanted to actually dig into it. It's on our website. Now when you look at growth rates, when I look at the last 10 years and you look at our public -- the data that we put out there and you look at growth this quarter, last quarter, you look at this, claim frequency hasn't grown by -- we grew last quarter, what, 18%. Earnings growth of 33%. Claim frequency suddenly didn't go up by 18%. So there's a huge disconnect between what you call claim frequency and our growth rate. The reason for that is so much of the process is still manual and is not digitized. You're talking about tens of billions of dollars. Takes subrogation, $30 billion, $40 billion a year of subrogation taking place, still very manual, right? So we're taking medical casualty. So we're taking large chunks that are not digitized and really running that through the platform. So I would say, for the next 10 years, the underlying frequency or growth rate, it actually provides stability to the core business, but it gives us ability to now make changes from an implementation standpoint. Brian, anything else?

No. Just maybe on the growth and some of the math behind it. So long term, we've set out a 7% to 10% organic revenue growth, and so that's over the long term and doing at scale. The way we break it down is about 20% of that growth will come from new logos and about 80% will come from cross-sell, upsell across our installed client base. And then the further breakdown from that is, out of that 80%, about half of it will come from existing products that have been in the market for the past couple of years and then half of it will come from these newer solutions that were more recently bringing into market, and those are the estimate STP that we talked about. It's diagnostics. It's subrogation as Githesh talked about today. It's payments. So we have a handful of new solutions that we're excited about that will be part of the growth going forward as well, and it's really that cross-sell and upsell is a key driver of our long-term growth model.

Any more audience questions? I'll keep going. Okay. So Githesh, talk about trends for large multiyear renewals. When do the customer start engaging with you? What are you seeing? And has the process changed at all over the past handful of years?

Sure. So at any given point in time, there's always renewals, but the most important thing is, we can add -- these are master contracts, right, whether it's an OEM insurer and the like to have master contracts and they all have product schedules. So master contract with product schedules. So as we release a product, we can add -- simply add a schedule, essentially a sheet of paper. Customers tested it, piloted it, so it can be implemented at any time. And there are some times when you do have some years where you have more renewals than others. But by and large, we can add products and solutions any time, and we're always working on renewals. These are customers who have been with us for 20 years, 15 years.

Perfect. Brian, talk about free cash flow growth and how you think about prioritizing uses of capital, whether it be buybacks, dividends, M&A, organic investment or otherwise?

Yes. So our unlevered free cash flow, if you look over history, has been low to mid-60s, converting and looking at that from an adjusted EBITDA perspective. And as you take that forward, that's a reasonable expectation moving forward. We have a very efficient balance sheet. So right now, we're about 2.2x levered on a net debt basis. So we certainly have flexibility on the balance sheet. We're focused on growth, new product capabilities and really thinking about that through the M&A lens. So as we're active in M&A, leverage will go up for a point in time, and then we will, through scaling of EBITDA and the natural growth of the business through the cash flows, we will delever back over time. And so that's really how we're thinking about the primary use of the balance sheet. That said, we continuously will evaluate the balance sheet, our leverage ratios and make sure that we're being thoughtful of the most effective way to drive value and returns for our shareholders.

Perfect. So I think we have time for 2 more questions, so I'll see if I can squeeze in both in. So Githesh, you mentioned before -- Brian, maybe you mentioned that 98% U.S., 2% international, small business in China. Githesh, how do you think about new markets? How do you think about international? Is it a part of your future company growth? Or would you prefer to stay status quo?

Yes. So first of all, we do our plans 5 years at a time, right? When I look at the last 30 years, every 5 years we say, look, this is where we want to be. So we feel very, very confident. We didn't lift a finger to go to any other country outside of the geographies we're in, we'll do completely fine. With that said, Europe, we can invite it to Europe all the time. We get invited to Japan all the time. We get invited to these places. It will probably require some kind of M&A as well, but -- so with a local provider, but using our technology, which is pretty far ahead, so the combination of those 2 is what will be required. Again, we're not seeing it as something that's they must have to deliver the returns we deliver.

Perfect. I have one more question. Anyone else in the audience have a question that they'd like to ask instead? Okay. So Githesh, talk about one trend in the sector that you're focused on, and for whatever reason, the analyst community or investors aren't focused on it.

Okay. The one trend that I would say people don't look at is that the underlying dynamics, it looks like a sleepy industry, right? It's been around for a long period of time, but the rate at which the change is taking place, if you're not close to the industry, what we're seeing is that the fundamental rate of change adaptation, when I look at the last 2 years, it's faster than it was 5 years ago. So that rate of change, exponential change is not something that people intuitively understand, and we're seeing exponential change in this industry and the early phases of any exponential curve looks pretty linear. And so if you've seen even our revenue growth rates, you can see this accelerated in the last few years. So I would say that's the change that we're starting.

All right. Well, thank you, everyone, for joining us. Congrats on all your success as a private company, and we look forward to watching you thrive as a public company.

Thank you so much.

Thank you.