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

Good morning, everyone. I think everyone's -- people are making it down from the earlier presentation, but I think we're trying to keep it on time today with a very short 30-minute slot. So I'm Mike Funk, one of the 2 SMid-cap software analysts at Bank of America. I cover a lot of the vertical software names, including CCC. And once again, really happy to have Githesh and Brian. You were at the -- you couldn't make it last . You had kind of a Board meeting or something we were just talking about, but really great to have you back here again with us.

Yes. I appreciate you for hosting us. Thank you.

Thank you, Michael. Hello.

Yes, of course. And we have a couple of standard questions this week that we're asking all management teams. It may be less applicable to you, but can you give your view on how the macro is impacting the business today versus, say, 6 or 12 months ago?

Yes. I would say, for the industry we serve, which is the auto insurance economy, as we define it, there's roughly $350 billion in premiums being collected. And as what we've seen is that, for the last 24 to 36 months, inflation has been a huge factor. So you're seeing that in the cost of claims, that is then resulting in premiums being increased pretty significantly to factor for that. So at a very macro level, that focus on efficiency, managing cost, that continues to be a big theme for people. And even though what we are seeing with customers is as rates have gone up and P&C profitability is back, customers at the underlying level are dealing with shortage of labor, more efficiency needs, a substantial increase in complexity. Those are the 3. And the best way to really deal with those 3 that our customers are seeing and feedback we're getting is through the deployment of technology, digitization, AI and better tooling. So that's really what we are seeing for this -- for the part of the industry we do.

And then to kind of segue into the next one. You mentioned looking to gain efficiency, labor shortage. I think that connects pretty well with the next question, which is really the AI opportunity for CCC. It was kind of a softball for you guys, given the product that you have in the market today. But maybe remind the audience the value of AI products, market opportunity and even the traction that you're seeing.

Okay. Yes, sure. So maybe a couple of macro level thoughts. So we have been building our AI capabilities for about a decade. So about a decade ago, we were buying NVIDIA hardware, really start training our AIs and the models. We recruited a lot of people with doctorates in physics and deep learning and machine learning. So we built a lot of the IP and the algorithms because we have -- we're the beneficiary because of the industry we serve, with about $1 trillion of historical data, which is what you really need to train these models. So you need granularity. You need specificity because part prices, labor rates, costs vary by ZIP code, by geography throughout the United States. We also collect over 500 million photos a year from auto damage and accidents. So we've been able to train our models for well over a decade. And in November of '21 before the advent of that GPT and everything else, we actually went to market and there's a couple of pieces in the press about that. And what we are seeing since then is about a year ago, we reported that roughly 1% of auto claims are now using our most complex form of AI, which is the ability to take a photo of a car, translate that into an estimate and what the cost of repair. That's very complex because it involves lots and lots of different models, a lot of sophistication. And at the end of the day, our customers are paying out a lot of dollars. And what we saw about a year ago is that it penetrated about 1%, which is about $1 billion in claim value being processed. We said, look, that's still less than 1% of the -- what goes through CCC. What we've seen over the last year is that has now tripled to about 3%. And our customers, we said we reported we had about 20 customers. That customer base has gone from about 20 to about 30 customers. And the customers that were in the early stages of implementation have now expanded to more geographies, more use cases and more capabilities. So we're pretty excited about the impact of what this is having because of clients testing it, using it in production. So we are very encouraged with what we're seeing. But at the same time, we've also pushed another dimension, which has delivered a whole range of other AI solutions besides the flagship solution, which is Estimate-STP.

Yes. So there's probably a handful of solutions in the market using AI capabilities. As Githesh said, they're full production, they're generating revenue. And the pipeline that we have on innovation and the road map continues to be really robust, with a lot having AI capabilities attached.

And just to quantify for Estimate-STP, if anyone is not familiar, I believe you're charging, what is it, $20 for Estimate-STP, roughly?

Yes. I mean there's different price points. Some came in, in introductory price points, and they're piloting price points versus full rollout. Full rollout is around $15 on a blended rate is the way to think about. So you take the $15 with the claims and [ needs ] going through Estimate-STP, and that gives you kind of a rough size of the revenue.

And you can frame the revenue opportunity by number of accidents times the percent applicable with Estimate-STP times the $15, $20. It roughly gets you to how big of a market?

Yes. I mean the way we frame it is, we've highlighted that we think this is a $50 million to $100 million revenue opportunity for us. That's not the TAM. The TAM is much bigger if you put $15, $20 on the number of claims that run through repairables and that are eligible for Estimate-STP. But we think about it as a $50 million revenue opportunity for us over the next 3 to 5 years.

Okay. So we've done a lot of work in AI internally, and we actually report last year looking at 13 different factors across our entire universe for who would be advantaged in AI. And 2 of those were data and domain expertise in tech. You already touched on the data. We know the domain expertise. How difficult would it be for somebody else to replicate the data that CCC has and the domain expertise to launch a similar or comparable product?

First of all, we are very, very far. We are years and years of development, testing and the accuracy. The most important factor besides having the data set that we have and the customer base we have, the other thing that's really critical, Michael, is the amount of feedback we get on a daily basis. That is the really hard part, right? So even if you've got a data set that -- what we are able to do in terms of the accuracy or the drift in AI is that, on a daily basis, the volume that we're seeing and our ability to correct the models, to course-correct the models, get That feedback loop, is a massive feedback loop. And the more customers that are using it, the more data comes through, that is also another factor that is extraordinarily -- that is unique with what we deliver. So that uniqueness, coupled with the data set we have and the fact that we're spending enormous -- pretty substantially on the R&D capabilities, the hardware infrastructure we have for training as well as inference. And we are also expanding our AI capabilities to our repair facilities as well. It's not just insurance sold to repair facilities, where you have 30,000 repair facilities with a solution called Jumpstart, where you walk into a repair facility, take pictures around the car, it jump starts and writes 80% to 90% of it to start with. So instead of what could have taken a half an hour or 45 minutes to do, we can now help you get that work done in about 2 or 3 minutes, and also solves for the cognitive mode. So for us, it's not just the -- what we're able to do with improved quality of the AI, but also the breadth at which we are applying AI, the physics of the accident and the implication on medical injury as applying that in subrogation. All these different components are connected, and that connectivity allows us to deliver a very highly integrated solution for each of our customer bases. That's what makes what we do unique and the breadth of it.

You just mentioned subrogation. That's my next question, actually, I'm thinking about all the incremental revenue opportunities. One is Estimate-STP. Subrogation is another market that could present tremendous revenue opportunity for CCC. Can you talk a bit about that for a minute?

Yes. I mean subrogation is when a carrier is working with another carrier regarding liability and who owns the liability for the accident. And so today, about 10% to 15% of all claims go through subrogation. The industry is spending over $2 billion to support the administration overhead of subrogation. So it's a really large dollar. Today, it's largely manual. So teams are reviewing these demand packages, which are just large paper stacks, and they're going through those and making recommendations around the demands, both on inbound and outbound. So what our subrogation tool does is it takes AI and software and reviews those demand packages and helps the carrier reduce the cycle time and processing those and improves the outcome of those demands. And so it's certainly an efficiency play. So when you think about the dollars being spent, $2 billion, and the ability to drive significant efficiency, we think it's a really meaningful impact to the carriers. And we have many carriers that are testing the products. We've had some that have started to roll out. So we're seeing really good momentum on subrogation and expect that to continue as we go through the second half of the year.

And you just hosted your Customer Conference and Analyst Day like 2 weeks ago at Atlanta. Are there any key takeaways you wanted the audience to have from that? Maybe just to condense down the Analyst Day and conference down in a few bullet points?

Yes. I would say there are probably 3 overall takeaways. I think, first and foremost, what we saw is the desire of our customers to lean into the next set of solutions. So our customers desire to, hey, what can I do with this solution? What can I do with this solution? And the fact that we have a Net Promoter Score of 83 means we are truly delivering incredible value for our customers. And as the customers talk to each other, it also creates a reference space. So first and foremost, the desire of customers to actually wanting to lean in, deliver more efficiency, that was a big positive. Second, we were able to showcase in our tech showcase a range of new solutions that we've come out with. As you know, we have accelerated our product development capabilities over the last 24 months. We've added more capacity, more solutions coming out. So I would say, that was kind of a second [ theme ] that came through. And then the third is that we also held many advisory councils. We have a number of customers. There's OEMs or insurers or repairers, parts providers. So we have a number of advisory councils, and we got tremendous feedback, very granular specific feedback around each of our products and solutions. So overall, a very successful conference in that regard.

And just thinking about the growth algorithm for the business, what differentiates you versus other software is that very sticky customer base, right? GRR is like 98%, 99%.

Yes, exactly.

Something like that. So very, very low churn. Very balanced growth, right, across new products, net new customer additions, pricing. But within that, Brian, how should we think about the emerging products and their role in driving growth for the next 3 to 5 years? And you mentioned Estimate-STP, subrogation, Githesh, you mentioned kind of a much deeper bench of new AI-driven products. So how important are those to driving that growth algorithm?

Yes, absolutely. Yes. So emerging products, it's a cohort of solutions that have recently been put into market over the last couple of years. It also will reflect on new solutions that are going to come into the market through '24 as well. So that's kind of our labeling for kind of new product performance. In Q1, we had 1 point of contribution from these emerging solutions. We also highlighted that we are seeing momentum around these. We're expecting that to have a larger contribution in the second half of the year. And when we look at the full year of this year, emerging will be more like 2 points of contribution of overall growth. Over time, we expect these new solutions, the emerging solutions, to be about half of our cross-sell and upsell growth. So moving from a pretty small part of growth contribution to reflect about half of the cross-sell upsell growth opportunity over time. So they become a very meaningful part of the overall growth equation.

And you don't really have a lot of peers in the industry. Maybe for specific point solutions, there are competitors. But nobody seems to have the same breadth of coverage of product, at least not in North America, right? So in your assessment, though, are you outgrowing the industry? And then if so, why do you think that you're growing the industry? If that question makes sense to you.

Yes. I mean we look at the place we play. And what we're ultimately helping our clients do is to drive efficiency and to help them with their operational challenges, operational headwinds. When we -- so that's really the focus and really around it's a cross-sell, upsell story. And so our growth is predominantly driven through bringing more solutions into the market and having our clients adopt those. We're happy with the pacing that we're seeing. We're happy with the overall performance of growth. We think the innovation and the opportunity in front of us has never been stronger. And so that's really the focus. We -- as far as trying to peer -- looking at our peer set and how we're growing relative to them, there isn't really other public peers that we look at on a competitive basis. So it's hard to kind of benchmark at that level, but we'll really feel good on the momentum we're seeing. We feel good on the progress across the solution set.

And also, the one thing I would add to what Brian said is that, if you look at the amount of cost we help our customers manage, we're essentially a rounding error of very small -- tiny, tiny, tiny percentage for what we help our customers manage.

Yes, we're seeing like 20 basis points, less than 20 basis points of the claims spend for the carriers.

And presumably, they are seeing solid ROI based on using CCC solutions well. They're not buying it just to buy. They're seeing a high ROI based on replacing the human capital, improving velocity of their claims management or...

Enhancing the human capital, right?

Again, human capital.

Amplifying the capabilities. Because what people really want is their best people to provide empathy and help the customer as opposed to handling all this back-end complexity that our technology and our tools provide. So -- and these have been -- our customers have been customers for decades. They're seeing a track record of delivery. When we say we're going to deliver a solution, and it's going to deliver an ROI, our customers have known they can count on that, right? So the track record of delivery, the track record of innovation is extraordinarily important to our algorithm as well.

And Githesh, you mentioned it earlier, the innovation with AI-related products, obviously, subrogation, not a new area for you, but I think one that represents a tremendous growth opportunity. So as you think about future growth initiatives and investments, either through R&D or even acquisition, where do you see incremental opportunity?

So many of the spaces we're in are quite large, right? So when you think about where we are today, for example, you take casualty. The spend and the complexity of casualty is a very, very large footprint. There are tons of payment flows in the industry. There is electronic parts. Over $20 billion of parts are being ordered, yet less than 15% of electronic today. So you look at so many facets of this industry that are not really tightly connected or digitized, this is actually one of the key reasons we announced the IX Cloud at our conference. And so IX Cloud is an architectural layer that really connects all of these different components to move events from one place to the other. So that what used to be a very serial process for processing an auto claim can now be done in a very, very parallel sort of an effort. And each plane can be handled more uniquely based on what it is as opposed to a standard generic way of handling it. So the IX Cloud kind of amplifies that capability as well.

And is IX Cloud unique in your industry? Does anyone else have a similar integrated solution?

We believe IX Cloud is unique. The reason we believe it is unique is that would be -- because IX Cloud also depends on the depth of carriers, the number of parts providers, the number of OEM customers, the number of repair facilities. And we think we offer our customers the benefit of the largest and the broadest network, so IX Cloud becomes unique in that regard.

And I wanted to jump a bit because, in the last year, there's been a large shift in the share ownership structure, right? I think there's been 4 or 5 different instances of sponsors offering shares. So Brian or Githesh, either one of you, help us think about how that shift has improved liquidity and how we should think about the continuation of what we've seen last year?

Yes. I can start and then you can add. So if you go back to November of last year, private equity ownership is about 70% of the outstanding shares. If you look at it today, after about 5 secondaries that happened from November of last year to recently, they've come down to about 30% of outstanding. So a substantial shift in ownership and putting liquidity into the market. We're seeing very positive feedback on that liquidity kind of moving in, and the supply and demand getting met and the share price absorbing that supply and coming back to a reasonable position. So we're happy with the momentum. Advent has been in the position, who is the largest private equity holder. They came in, in April of '17. So they've been in the position for a while. They are going through a very thoughtful way of shifting ownership and more into the public. And we're really happy with the investors that have come into the position. Some of them have been in and have been able to size up their position. We've also had new investors come in. And so it's been a very positive natural transition from private equity ownership to public. So yes, I would say we expect further activity. We can't really highlight the pacing of that activity, but we do expect further activity going forward.

And liquidity probably have been somewhat of an overhang on the stock previously. So presumably, that's helped lift some of that overhang. And I believe you also recently addressed some of the warrants, correct?

That's right. Yes. We converted the private warrants. When we initially went public, we had both public and private. Early on, we addressed the public warrants because we could redeem those mechanically, and we were able to drive that. And then recently, we negotiated to redeem the private warrants. So we've cleaned up the warrant side of the cap table.

And I mentioned earlier, really standalone in North America, in my opinion, the least, but less exposure, really. No exposure internationally you want to speak of. How do you think about international as an opportunity? Is it an opportunity? Do you want to expand into Europe and Asia? Or are you happy remaining North American focused?

Certainly, over time, we will look at expanding into other geographies because we often get approached by customers from a lot of different geographies about bringing our technology to other geographies. And what we see job one today for us is really all of these new solutions are -- we are very excited. Our customers are excited. Job one is actually execute, deliver, make sure these solutions are taking hold and continuing to strengthen the network on the behalf of our customers. So that network gets stronger as we deliver more of these solutions. But at the same time, we do think international, Europe, just 5 countries in Europe represent 30-plus million claims. Asia is an opportunity. As you know, we're in China today. It's a very small piece of our business. And we see a lot of opportunity, but we want to be very measured in making sure that our execution and quality is maintained as we continue this path forward.

And what are the challenges internationally? Are there differences in the data you have to accumulate to offer the same quality of service? Or what are the gating factors?

Internationally, what we have seen, especially the work we've done in China, for example, there are very specific nuances in terms of regulatory environments, the way claims are processed. So there are different nuances and the data sets that you need are also different. But what is the same is cars and cars, and global manufacturers are more or less selling the same cars to the same places. The repairs are more or less the same. The technologies underneath are more or less the same. So that part is very much the same.

Okay. That's really very helpful. And really, next question for both of you. How should we think about -- I don't want to call it terminal because you probably [ don't ] want a terminal growth rate. But longer-term growth and margin, and I said both of you because I know Githesh, you need to invest back in innovation, and R&D is a large part of that. So you keep the R&D component as well. How should we think about longer-term top line growth, margin, R&D percentage of revenue?

Yes, I can start. I mean, so on the long-term growth, the long-term framework is 7% to 10% revenue growth inorganic. That is a U.S. metric, and that's how we frame it. We talk about within the 7% to 10%, 20% coming from new logos, 80% being cross-sell, upsell. And then within the cross-sell, upsells we talked about earlier, half of that coming from these new emerging solutions, and the other half coming from the established solutions that we've had in the market for a period of time. So that's how to frame the top line. On the margin expansion, we ended last year with margins about 41%. If you look over the last 5 years, we've seen over 1,000 basis points of margin improvement over the last 5 years. So we're really seeing margin progression. What we're suggesting is that margins will progress about 100 basis points per year on average. Going forward, we've given our guide is margins getting to the mid-40s. That is not a cap by any means. We're just trying to put a guide out into the market for people to look at over a 5-year horizon and think about the margin progression that we're expecting in the business. We will continue to invest in R&D within the framework that I'm outlining. We've been averaging about $150 million of investment in R&D. R&D will continue to grow at the fastest pace of our cost categories. But we think we can do all 3 of those. We talked about the long-term revenue guide, 7% to 10%, the margin progression. But continuing to invest in R&D to make sure that we're bringing out new products, that we continue to innovate for our clients, and we feel good on across all 3 of those categories.

And R&D percentage of revenue is where do they run?

It's around 16%, 17%.

Okay. It was the right level percentage of revenue?

Yes. I think there is some scale that will get in some leverage in R&D. We put a surge into R&D in late '22 and have kind of -- now we're adding at a more business-as-usual level. So we expect some leverage to come through R&D, but it will be the fastest-growing cost category. So we'll continue to grow R&D faster than sales and marketing, faster than G&A to make sure that we continue to put fuel and drive new innovation products into the market.

Okay. And then what is the debate and the conclusion on capital allocation? But obviously, a lot of choices. You can put back into R&D, put it into M&A. You can return capital to shareholders. What is the debate, and what's the conclusion of that argument?

Yes. So I would say, priority #1 in terms of capital structure is, what is it that allows the company to continue to be successful? Meaning deliver great products, deliver value for customers. We've been doing that for decades in terms of a track record, right? So we don't have any particular dogma around either a buyback or this or that or the other. We're also very conscious of returning value to shareholders. And so whatever is the right mechanism, it may take different mechanisms. Sometimes, as you've seen before, we bought back some stock. We spent several hundred million dollars buying back stock. We cleaned up warrants, when it made sense. So rather than having any particular dogma, it is seen through the lens of having a balanced approach that allows us to continue to grow and build their business and make sure that our shareholders are getting the right returns through the best decisions we can make. Sometimes, that might mean an acquisition, like we did with Safekeep or [ Sfara ]. So we just need to stay very flexible but look at it through that lens.

That's a great place to end it guys. Thank you so much for the time. Really appreciate it.

Yes. Thanks, Mike.

Thank you for having us.

Thank you all.