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

Great. I think we'll go ahead and get started. Thanks so much for joining us at the [indiscernible] services session at the conference. I'm delighted to have on stage with me, Brian Herb.

Yes, absolutely. Thanks for having us.

I'd love to start the business model question, which is, you all have 40-plus years of data, which is potentially unprecedented in a lot of vertical software or even horizontal software model.

Yes.

And so how do you think about your core competitive differentiation? What are some of the longer-term ways you can monetize that data? And it essentially gets into the conversation that we were just having on how do you take the strength of the software business model and marry it with the strength of an information services business model?

Yes, that's great. Yes. So 4 years of data, and you can think about that in claim terms by $1 trillion of historical claims that the businesses has pulled together or used with our clients over the years. And so that data is a significant differentiator. And the things we think about with our data, I mean, one is -- that data really drives our software. And it really is the fuel that makes our AI work the way it works and gives us the precision and the accuracy that our clients need. The other thing that the data really helps with is our clients utilize that when we do operational reviews with them. So we'll do quarterly reviews, and they can understand how they're performing relative to benchmarks as well. And so that becomes another important part of how the data is used. I think beyond data as far as competitive differentiation, I mean, the other thing that really is not necessarily intuitive for a vertical software company is just the network effect that's been built up over time. And so the business has, on a single platform, 30 -- or 300 insurers, 27,000 repair facilities and thousands of parts suppliers. And so as that network has built and built up over time, each part of that customer group on that network is better off with the scale. And so the more repair facilities, the better is for the carriers. The more the carriers, the better is for the repair facilities. The more repair facilities, the better is for part suppliers. And so this network effect really has a compounding benefit for all the participants on it. And I think that is another important part of competitive differentiation.

I do want to ask more on competition and some of the specific AI problems that you're solving.

Okay.

Before we do that, let's talk about the last couple of years. What were the 1 or 2 things that you think change the most about the company during your ownership with Advent. And then lead us up to the decision to decide to go back and why Dragoneer was the right stock [indiscernible]

Okay. So Advent came in, in April of 2017. They have been and continue to be the largest shareholder in the business, and they have been great partners. And what I -- for me, the thing that really highlights it is how long term they -- and their long-term thinking they put around the business. You think about some of the private equity and really focused on short-term cycles and margin optimization. And the Advent team was very much -- supporters of the business really helped drive the innovation or the thinking around the innovation. And we've talked about so much of the new solutions that we're bringing into the market, things like Estimate-STP, things like payments, diagnostics. Those investment cycles really happened on as they were part of the business. And so it was very much of a innovation mindset and really around the long-term revenue and thinking about setting -- or setting the business up for long-term success. And so they've been absolutely great partners and owners of the business and still are today. As far as the SPAC side of the transaction, so Advent will be 5 years -- was 5 years in. And so as we were talking with them at the Board, thinking about what is the next ownership cycle, we decided going public was the right decision for us. We started down that journey in the end of '20, and we actually started down a traditional IPO pathway. We weren't out in the market looking for a SPAC transaction. Dragoneer came in and approached us about doing a SPAC and really had great alignment with them. So at the most senior levels between the Board and the Dragoneer team and Githesh and myself spending time with them, there was really good strategic alignment and the long-term vision of where we were going with the business. They were really instrumental in building out our shareholder base. And so when you look at the companies that are on our cap table today, they're very long institutional investors or they're really smart technology investors. And our cap table does not look like other SPAC cap tables. And although we went through a SPAC, our approach was very much thinking about operating as a public company. So we didn't go out with crazy projections and multiyear, really aggressive position. We set out a position we felt very comfortable. We put out a forecast for the year at '21. We delivered, exceeded that position. We set up a long-term guide of 7 to 10. That's the same guide we're using today. So we approached this SPAC very much as how we're going to operate as a publicly traded company. And the last thing I'd say is when we did the SPAC with Dragoneer and we started down the path, we were kind of -- we were in a period of time before SPAC has the negative connotation it has today. And certainly, it has some negativity associated with it. For us, it was a vehicle to go public, and we're now really focused on operating as a public company and delivering against the expectations that we put into the market.

That makes sense. Let's talk more about the data piece business. So help us understand the data advantage that you have on the property side, started to talk more recently about getting into casualty in a bigger way. There are, and specifically, there is one incumbent in casualty that I think has a dominant position. And I would imagine arguably can say the same things about the data advantage and the network effect in casualty that you can say about your core business on the property side. So how do you think about the barrier to entry to be more successful in casualty when there is already an incumbent [indiscernible]

Yes. And maybe just to set the stage and give kind of some sizing. So today, casualty is about 10% of our revenue. We have about 50 carriers or so that use our casualty platform. If you look at the auto physical damage side of the business, as Gabriela is saying, is that has about 300 carrier clients on it. And it's more like $300 million of revenue. And when we think about the opportunity, the opportunity is for casualty to be as big as our auto physical damage side of the business. And so that's the upside that we see. And we have a lot of opportunities to cross-sell. Like our business and our other parts of business, it is a sticky platform, right? And so it needs to really have a compelling there's going to be a compelling reason for the carriers to change. We have put a lot of investment into this platform. So we acquired the platform in 2014. We have been investing in the platform. We also have the other side of the claim, right? So we have the auto physical data as well. And so there is synergy with the claim from that side of the business with the casualty. And we feel really good around the product, the functionality product and the overall user experience, and we feel there is a compelling reason to move platforms. And so we're excited about the opportunity.

Another question on how to think about the barriers in the different swim lanes within the insurance software ecosystem broadly. And specifically, I think folks have spent time in the investor community with the likes of Duck Creek and [indiscernible] which you do not compete with.

That's right.

So remind us where is the bifurcation between where they compete and where you [indiscernible] and could this [indiscernible]

Yes. So the way to think about a Duck Creek or Guidewire is they're in broad IT monetization transformation programs really around how they take their core system, which is largely into the 4 walls of the carriers and convert that into a cloud-based solution. So that's moving the policy side, the underwriting side of the carriers. Where we're focused today is really around the claim process and driving a digital experience across that claim process. So from first notice of loss to returning the policyholder back to pre exiting condition and how do we help our carriers manage that process, at the same time connecting the carriers with their trade partners out in the ecosystem. So today, we integrate with a Guidewire or a Duck Creek, or the carrier's proprietary system. So that's how we interact today with them. And so as your point, it is not competitive. It's more how we work with that.

It leads into a little bit of compare and contrast question on the demand environment. So one of the adages that we use is the health of a vertical software company and the demand pipeline and at a given time isn't part a function of how healthy it is.

Yes.

And so give us an update on how steady your demand picture is -- and how do you think about the risk that there are potential delays in implementations or add-ons feels like get pushed.

I think one of the things that's different for us is we have short cycles. So when we are implementing new solutions -- we're typically dealing with less than 90 days from starting the implementation to getting the [indiscernible]. So we have short implementation cycles, very little to no cost to implement. And we're ultimately driving value even when we get into more difficult macro environments, we still have [indiscernible] of what we're [indiscernible] when you think about some of the macro [indiscernible] that ours [indiscernible] our platform [indiscernible] we actually [indiscernible]

The tailwinds, if there was an interesting comment on the earnings call around the pace and the willingness of insurance customers in being more comfortable with adopting new [indiscernible], what do you think is driving perhaps more willingness to invest compared to say, pre-COVID.

Yes, there's a few things going on. I mean one are those operational -- those real operational challenges that the clients are dealing with, with labor shortages, with supply chain issues, with cost challenges. And since our solutions have this ROI, that drives them to be more willing to take on new solutions. Also, COVID itself changed some of the dynamics that happened. So how the carriers are working with their policyholders or how repair facilities are working with their client base, that had a change on the back of COVID and the pandemic. And so both of those are impacting the engagement and the clients' willingness to try [indiscernible] things. So take Estimate-STP as an example. So we launched Estimate-STP last November with one client, a flagship client. And by the last earnings call, we announced that we had 11 clients using that platform or that solution. And not only 11 clients, but some of the largest clients, we have over 50% of the top 10 carriers are on that solution. So that's an example of a solution that's relatively new to market, but quickly got adoption for people to take that on is it very much is an efficiency play for their operations.

So it leads into your earlier comment on your longer-term guidance for 7% to 10% organic growth. How do you think about the moving pieces of any given year that were driving low end of that versus the high end of that. And I imagine there is a piece that's tied to the product cycle. So maybe we take the 2 separately, the product cycle piece and then the overall. To what extent do you think the overall growth environment or the macro environment impacts the 7% to 10%?

Yes. Yes, I mean so the way we've broken the 7% to 10% down, maybe just take into its pieces and then come back to the macro is we've said 7% to 10% and 20% of that will be coming from new logos. And then 80% will be coming from cross-sell, upsell from our existing client base. Within the 80%, we've then broken it down to, say, 50% of that, to 40% is from existing solutions that have been in market for a while, such as a casualty product as an example. And then the other part of the 80%, so the other half of that, is going to be coming from these new emerging solutions. So that's the STP, Estimate-STP, that's going to be payments, subrogation and the diagnostics, the newer solutions. So that's how we think about kind of the long-term guidance. To the point that the macro conditions do feel if those headwinds are going to continue and some of those operational challenges that our clients have will continue going forward, and really -- the solutions really play towards that demand. So we feel good. We don't necessarily have a macro or cyclical challenge with the business. And so we feel like the 7% to 10% will play out over time and doing that at scale. To your point, what will move us in that range. When I look at it, it's really around the pace of the newer solutions and the adoption rate. So we feel really good about the new solutions. We feel really good on our long-term position in the ecosystem and the value that will drive to these new solutions. Getting towards that, the high end of the range or pushing over the range will really be acceleration of adoption of those solutions into the market.

From a forecasting standpoint, the 40% of the 80% that's coming from existing, how predictable or easy to model is that? Do you view the cohort analysis where you can essentially take each product that's existing and have a pretty good sense for where it's going to be how much variance there in that?

Yes. There isn't that much variance just because we're dealing with largely software subscription that reoccurs on a monthly basis. We have long-term contracts. We've been very fortunate to have high retention rates. So we don't -- we have -- we see less impact on clients churning out of the base. So we have gross dollar retention of 98%. Historically, the last 2 quarters has been 99%. So again, that's a really sticky base. And then we have good pipeline on the new solutions we're bringing out, and modeling out the take rate to those new solutions gives us good visibility. And so the business model has predictability and has a good base to forecast against.

I'll pick up on some of the products [indiscernible] that you mentioned. So maybe we can start with Estimate-STP because I know that's part of a broader vision on straight through processing. So I think the update you've given us are the majority of the top 10 auto insurance customers in the U.S. now adopted Estimate-STP. What do you think can drive -- are we still in the stage of early adoption? Or are we now through kind of the knee of the curve to get to kind of middle majority, late majority if that makes sense.

Yes, it does. And maybe just one comment on the broader STP vision [indiscernible]. When we talk about kind of the focus of the business with the insurance carriers, the vision is really how do we drive straight through processing the entire claims process. So from first notice of loss all the way to closing a claim out, there are numerous decision points, numerous trade partners that are involved. And so the vision we have is how do we drive automation through all of that and get to a straight-through process. So within that estimate, getting an estimate written from a carrier perspective to share with the policyholder is an important step in that claim life cycle. And so what we've rolled out is a way to do that in an automated way using AI. And so traditionally, what would happen is a policyholder would contact the carriers, say they have been in an accident, the carrier would dispatch a field appraiser to go to the person's home or work and write up an estimate on what it will take to repair that car and share that with the policyholder. We've started -- we've launched mobile several years ago, like 4 years ago, and started the pathway to use mobile to take pictures, to start to drive efficiency against that. And the next version or the next iteration of that was a smart estimate. So what that did is took the mobile capabilities, turn that into photos. And then the Smart estimate started to write a line item estimate. And so that was the early work of moving into AI and let's just make -- say the AI was writing 30% and you were still having an appraiser write the balance of the estimate. So there's been kind of a progression of the capabilities from -- on the AI side. And now what we're talking about is rolling out Estimate-STP, which is the policyholder calls the carrier. The carrier sends the link to the policyholder. The link helps the policyholder take photos around the car, and then the AI writes the entire estimate. So we go all the way that they're writing a line item estimate to give the policyholder in exact cost to repair the car. And so that's the migration that we've seen. What -- where we are now is we have, is that what you've said, Gabriela, you have 11 carriers on it. And half of them were -- over half of the top 10 carriers are on this tool. We have the scale on the volume coverage that are going out. Where we are is various levels of rollout. So we're going from -- some are testing in very specific regions. Some are piloted in. But overall, as they become more comfortable and they continue to tune it, they're going to go from very little volume that's running through that application or that solution today to high volumes. And so that's the opportunity that we see is as our AI improves, as they become more comfortable with it, they'll start to push more volume through that, and that becomes a great opportunity for us and for the carriers because they're driving significant efficiency. Think about how many cars someone could touch if they're out in the field driving around writing up an estimate versus having the AI write the estimate. And so it's a significant efficiency for the carrier side and one we think that they're getting more and more comfortable with.

How do we map the efficiency that you're driving on the carrier side to the revenue opportunities for CCC? Is there a way to think about for your insurance customers that are adopting Estimate-STPs, the average size of potential opportunity or the average deal goes up by 10%, or help us frame the implication of the model.

Yes. I mean, what we've talked about is we've said kind of historically, those -- the cost to write an estimate in the traditional way has been $150 to $200. We always sell on an ROI basis. So we have different rates depending on the type of solutions to get a 5:1 return, so -- and that's how we price. That could be 7:1, it could be 3:1. And so when you think about that, that helps give an outline to the unit economics. When you think about the volume side of it, there are roughly 20 million claims in the U.S., 80% are repairable, 20% are total losses. Over time, we believe that out of the 80% that over 50% will be eligible for Estimate-STP over time. And so those are some of the modeling assumptions that we're thinking about within the long-term model.

And clarify for us. From a pricing standpoint, is it a subscription-based pricing or is it a volume-based pricing?

It can be a bit of both. It can be volume based or it could be subscription but in tiers. And so a client would get so much volume in a tier, they eat through that tier, they move into another tier. So -- it will continue to move as the adoption -- we'll continue to have revenue opportunity as the adoption rate picks up.

And on the topic of volume-based pricing more broadly, the interesting data that shows various relationships between the number of car accidents and overall GDP growth or the overall environment. So the question for you would be, the piece of your business that's tied to volume, remind us specifically what piece that is. And is there a risk that if we see fewer car accidents, that the volume-based piece of your business comes under pressure.

Yes. So our revenue model is 80% software subscription and 20% volume. So that's at the enterprise level. The 3 areas where transactions, that the volume-based pricing is, there's a little bit in our parts business, so recycle, aftermarket, percent of GMV. The casualty business that we talked about which is about 10% of our revenue, that is largely a volume-based business. And then there is some volume base in our auto physical damage side of the business, it's usually more of the small carriers. And the large national carriers are on bundled subscription, but the smaller regional carriers will pay at a transactional level. So overall, 80% is largely subscription. I think when you look at the extremes on that, you take COVID as an example where claim volume went down significantly, in that year was down around 25%, we still grew the business 5%. And that really highlights the resiliency of the business model. And so we feel really good about the long-term prospects and just the overall growth of 7% to 10%, doing that over time and doing that at scale.

Absolutely. So I'm going to ask a couple of questions about margins, but I would love to open this up to the audience as well. So please, if you have a question, feel free to raise your hand. On the margin piece of this, so we think about what you've talked about in terms of your gross margin target, your longer-term EBITDA margin targets. Maybe we'll start on the EBITDA margin side, which is how do you think about sales planning, capacity, efficiencies, data metrics of all the companies [indiscernible] CAC. A little bit different in the [indiscernible] because of how strong your relationships are with your customers, and we really picked up on that customer market. So a little bit on the strategy in go-to-market. How is it changing, if at all? And how do you benchmark and measure it?

Yes. It's a great question. I mean I would tell you that the way we're set up today is our sales organizations have existing coverage. So we have a sales organization that covers the carriers, we have a sales organization that covers the repair facilities. We have a sales organization that covers the parts suppliers. We have a sales organization that covers OEM. So today, we're at scale on the sales coverage. And so as we talk about the cross-sell being the largest part of our business, there's great leverage on that because we already have the existing coverage today. And so -- and we're not a lead generation business. And so there's significant efficiencies in that model, and we hold on to clients for a really long time with the gross dollar retention of 98%, 99%. So it's a highly efficient sales model and selling motion. And as we think about these broader solutions and building out the bundles and the cross-sell we're really able to leverage those existing -- our existing sales organization. And because there isn't a lead gen, the CAC model isn't as relevant. For us, it's really around how are we optimizing against our sales organizations, how we're looking at individual targets and group targets and benchmarking our performance. But we feel really good on our markets coverage and the position that we have. That's an important part when we think about your initial question around where we are on margins. So moving from the upper 30s today, we're at margin at 38%. We put guidance out that we'll move to mid-40s over time. We do see significant leverage in sales and marketing as we're able to scale and cross-sell. What we clearly see opportunities in G&A to leverage there as well. R&D will be the fastest-growing category for us because that's really where our investment is focused, how we're bringing on additional product engineers, product leaders to really drive that innovation and the road maps in the pipelines. And so that will be the area that we're investing the most. There still can be leverage there as well. But across sales, marketing, G&A. And then we'll talk about gross profit, but there's also gross profit improvement. Those all give us confidence around moving the margins into the mid-40s.

Leading into gross profit. So the 3% to 4% that you've talked about coming from established products within the 7% to 10%.

Yes.

How do you think about natural pricing inflation within that 3% to 4%?

Yes. We have not historically put a lot of pricing or inflation into the revenue. And so most of our growth on revenue has really been around cross-selling and just increasing the bundles and like-for-like pricing has not been a key driver of growth. We are, like all software companies, we are constantly looking at our software packages, how do we optimize those software package? How do we make sure we're driving value to our clients and also getting fair compensation for the value that we're driving. So that optimization is always occurring. Pricing is not a material part of the guidance going forward. So when you break down the 3% to 4%, pricing is not a material part of that.

Let me frame at a different way, which is, if we think about the value and the pricing model that's based on the value that finding to your customers, I think it's fair to say that the value of delivering today is greater than the value you're delivering 10 years ago. Similarly, we can make the argument that, especially with more electronic content per vehicle and some of the secular trends that I see in your industry, the value you're delivering 10 years from now will be even greater. [indiscernible] of Which is to say, is there a ceiling to the gross margin you think you can achieve long term, or the EBITDA margin that 4% to 5%.

Yes. No, so the guidance we put in the market, 80% on the gross profit margin, and then the mid-40s. We've given that to give a steer towards the medium term. So say, 5 to 7 years that we feel comfortable -- there is not a natural cap on those. They can continue to move, especially as the cross-selling motion continues to be as important as it is. If you take on the cost of revenue, driving gross profit, there is both fixed and semi-fixed components in those cost areas. And so as we continue to scale, we'll get leverage on those as well. So we feel really good about 80% on gross profit, and mid-40s on EBITDA over the medium term. We think there is the opportunity for those to improve potentially beyond that in the long term.

Maybe I'll ask specifically on the impact of your payment solution on margin and it allows me to ask about payments because you mentioned it earlier.

Yes.

So talk us about what are the use cases that you think will be early adopters for payments -- and the monetization mechanism with payments, how is that going to impact your growth model?

Yes. So the way to think about our platform is we have on any -- every year, we have about $100 billion that are moving across the platform. And so that is carriers paying repair shops, repair shops paying parts suppliers, carriers playing the medical network, et cetera, et cetera. And so you look at the ecosystem map and you see the flows, there's $100 billion of opportunity. What we're really focused on is embedding the payment solution deep within our workflow. So really making -- giving the end users an integrated approach to how they pay. And then taking -- our competition would be taking a take rate on that. And so that's the flow. The cases we're really focused early on: one is carrier to repair facilities. So how do we help digitize those flows in that experience today, a lot of checks still go out in the mail from the carrier's perspective. Repair facilities are still calling the carriers asking about the status of the check and where is it in the status of it? And the answer is literally the check's in the mail. And so how do we draw the deep integration? So the carriers have a digital experience all the way through the distribution. The repair facilities know the status of that payment. And as it's received, they can close out the repair order because today, the repair facilities have a lot of people that are reconciling manual checks coming in to repair orders. And so that's an example of a use case that we feel like we're in a great position with our multisided network to help both of those customer groups to drive value across this customer groups. We will have -- the model around pricing, it will be a mix of some subscription, some level of transaction as well -- and then there are V-cards that are in the ecosystem as well. So there are V cards in some of the repair facilities, there are V cards in some of the medical providers. And so V Card we will be an element as well. We are not -- we partnered with the rails. And so we -- our value proposition is really around the deep integration into our workflow. So when we think about kind of the economics on it, this is -- this will be a high-margin solution and certainly additive from a gross profit margin and EBITDA margin.

Any questions from the audience? Please.

[indiscernible]

Yes. We don't -- we haven't given out specific market share metrics. I would point to -- we've included in the materials that we have 18 of the top 20 carriers that are using our network. If you did -- if you looked at the market, 20 -- top 20 represents about 80% of the direct premiums written in the economy. So that gives you a directional view of market share.

[indiscernible]

Yes. For those carriers, we're going to be processing their claim -- their automotive claims process. For most of our clients who were exclusively getting all their volume, and managing their automotive claims process.

Maybe we'll finish on the topic of M&A, which is help us put some guardrails around the right type of acquisition for you? How big is too big? How much leverage is too much leverage? And it's -- I find it interesting that when you've talked about M&A in the past, you focused on international markets. So curious how you think about prioritizing geographies in terms of relying I know you have a little bit of [ China ] already.

Yes. So maybe start with the leverage and we can talk about the type of target. So today, we're about 2x levered. So net-debt-to-adjusted EBITDA is just under 2x. Clearly, in a private equity setting, we were much more comfortable with high leverage, higher leverage. We certainly won't be going back to those levels, but there is room to move up on the leverage and feel very comfortable with the financial profile of the business, the cash generation that we can support a higher leverage position. And M&A is the -- when we think about moving up on leverage, M&As would be one of the drivers to do that. And we will be active in M&A. We think about M&A in kind of 3 areas. I mean, one is product extensions. So similar to the deal we did earlier in the year where we acquired the subrogation platform from Safe Keep, it's a product that is very core to the automotive's claims process. It's something that we can integrate in and cross-sell into our clients. And so that's a very synergistic move for us. And we see those as a way to buy versus build product extension and be able to cross-sell within our clients. The second is looking at the ecosystem. Are there other customer groups within the ecosystem that would make sense to buy capabilities, to extend out the customer groups still under the P&C insurance economy, but just move into another customer group. And then the third is, as you suggested, is international. We do look at international opportunities. We don't see inorganic build internationally beyond what we're doing today in China. And so if we see an opportunity there through partnership or M&A where we can take a position and have a position to be able to scale the business, that can be interesting for us as well. So those are the 3 areas from an M&A perspective that we think about.

That tees us up nicely for another 40-minute conversation. So [indiscernible] let's leave it there. Thank you so much.

Yes. Absolutely, Gabriela. Thank you very much for having us.

Take care.