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

We're 96% revenue -- sorry, revenue is 96% software revenue, about 80% subscription as far as kind of the breakdown of revenue. So that's just a brief profile of who we are and what we do.

Awesome. So would love to drill in a little bit on each of your customer bases. So you talked about kind of the main folks and customers that are in your food chain. You got the repair shops, you've got auto OEMs, insurance carriers, part suppliers. Maybe just given the -- I know my semiconductor analyst is pretty bearish on autos at the moment and we've definitely heard some choppier data points on the macro side. Just give us a sense of the health of your end market, how resilient you are versus sort of some of the cyclical trends that we're seeing?

Yes. So when you look across it, maybe just to profile our revenue. So roughly half of our revenue comes from the carriers -- the insurance carriers, 45% of the revenue comes from the repair shops, and about 5% comes from parts suppliers. I would say on the carrier side, they've gone through a lot of change, right? So if you look back, in the past couple of years, they had rising cost of repair, rising cost of total losses through an auto claim, medical claims that they have to cover are -- have been increasing. And before they were able to reset rates, they had moved into kind of loss positions. Now the rates have been pushed through, and many of them are seeing much stronger P&L performance. That said, they're still dealing with rising costs. They're still dealing with labor shortages on their side. And so that's a dynamic at the carrier. On the shop side, they also have labor challenges and just shortages of labor. A lot of their staff and labor is also retiring out of the industry. And so when you look at those kinds of big customer groups, there's common themes that we're helping address. So we are -- our software addresses efficiency, which helps with their cost base. It also improves cycle times, which is important both for the carrier and the shops. And it also improves the customer experience because we're reducing friction in the process and speeding things through going from the beginning of a claim to the end of the claim. So our technology helps with those dynamics. And I would say over the cycles and over the years, the demand has remained fairly strong because we're addressing those macro themes. The other thing to note is our software is relatively quick implementation times. They're not long implementation times. They're not big upfront outlays on capital and they have quick ROI. So in different cycles, the demand will remain pretty strong and consistent just because of the dynamics of the software and the ROI basis that we're facilitating.

Got it. So as we think about the demand that you're seeing out there in the market, I mean, I think results since you've gone public, have been very, very steady and kind of consistent beat and raise. This past quarter, you did talk about some pushouts at least in terms of how you're thinking about the contribution of some of your newer products. Maybe just start there, what's been last quarter? And would you attribute this more just to some of the macro challenges that are facing some of your customers? Or was this just more of the markets sort of not ready for this next generation of solutions?

Yes. So the dynamic that we had was when we started the year, we expected our newer solutions which we call the emerging solutions. So products that we brought into the market over the past couple of years and more recently to deliver 2 points of growth. So contributing 2 points from this cohort of new products. As we got through the year or as we work through the year, we're now anticipating to be more like 1% of growth contribution. So we've downgraded that position by a point of growth. And I wouldn't attribute it to kind of macro conditions, what we're seeing really is -- and when you talk specifically about it, there are pilots for some of the solutions, so clients will test a new solution. They will pilot that and see the results in the pilot. We're seeing those pilots with positive results. But having a longer -- from moving from pilot taking longer to move to revenue. So that's a dynamic that we're seeing. Those opportunities are not lost. We see those opportunities as delayed. The other dynamic that we're seeing in some of our solutions that are volume-based, like Estimate-STP, we just expected the volume to ramp faster than what we're seeing. So today, about 3% of claims go through Estimate-STP. We were expecting that to pick up. We do see positive signs, so we had a recent carrier, top 10 carrier that is now converting and moved 20% of their volume to Estimate-STP. So that's a signal of what we're expecting to come. We believe these delays are really down to change management on the client side for them to be able to deploy the tools in the most efficient and effective way and they have to make changes on their side to do that. And so that's pushing out some of the decisioning for them. And then that decisioning is then delaying the revenue. We see the impact kind of playing during the second half of this year. We don't believe that impact will delay kind of the medium to long term as we kind of frame the opportunity with these emerging solutions. We absolutely believe that opportunity is still there. And so it's not a structural issue. It really is a delay to revenue.

Got it. And I think the comments around seeing these pilots delayed moving into revenue. I mean, in some ways, it's consistent with what we've heard on the generative AI front just broadly across the software space, whether that's Microsoft Copilot, right? I think you're seeing some of that. So maybe double-clicking because you have a lot of products within emerging solutions, right? We talked a little bit about Estimate-STP, which I think is volume-based. But I guess in terms of those pilots, what products are those that you're seeing that most pronounced? And are they what you would consider GenAI products or just kind of newer non-AI related products?

Both. I mean some of them will have AI components. Some will be just newer solutions. I mean the dynamic that we're seeing is, these solutions are not displacing existing solutions. So they're not necessarily competitive takeaway. They are moving from work that's done today in teams are being done manually, manual workflows, and we're putting software in place to automate or drive efficiency through those workflows. So we're just in a new space and the clients have not used this software before. And so there's a lot of testing to understand how it will impact the results, how they will deploy it. So some of it has an AI component but others is just software that's automating workflow, like subrogations and other products that really plays through this pilot dynamic. So subrogation today is through carriers is really done through teams and really paper-based. So a carrier sends a demand to another carrier for subrogation. We have software that will help automate that and help automate the decision and where to focus the negotiation between the 2 carriers. There's AI components in subrogation. And so the carriers are really testing that to understand not only the results and the ROI of deploying the tool, but how they're going to operationalize that tool. So if they purchase that software and they deploy it within their organization, how will that work within existing teams? And how will they operationalize around that tool? And so that dynamic is what we're seeing is pushing out some of the decision-making and some of the delays to revenue.

Got it. And then on the Estimate-STP side, you talked about a top 10 carrier which is encouraging. How quickly do you think -- and have you seen these customers ramp up those volumes sort of once they sign the contract?

Yes. I mean the carrier, that example that we had was they were on the platform Estimate-STP at the end of '21. So it has been kind of moving pretty slowly and then more recently has kind of committed to this is the tool that they're really going to drive significant volume through. And so they've kind of been stepping along and then this is a significant ramp-up and step change to move towards more like 20% of the volume. So that's what we're seeing. We have 30 clients on the Estimate-STP platform. Yes, some of the smaller carriers that are using it at a much higher clip where they have a much higher percent of volume going through that. The smaller carriers, it is easier to operationalize that change versus some of the larger carriers where they're doing more limited tests in rolling out in 1 state or 3 states or only putting claims through that or a certain dollar amount and so they're just testing it in different ways. We do anticipate they'll convert over time and that volume will ramp. It's just taking longer than we originally anticipated.

Got it.

Nothing drives adoption -- adoption…

Yes. Right. And maybe the last question on the emerging solutions because I know we've asked a lot of follow-ups. But just as you look at what's happened, I mean, are you doing anything differently internally, whether that's deploying more resources towards enabling and educating customers about these solutions? Or maybe are you pushing more back towards the established solutions if there's sort of like a market readiness gap. Just anything that you're sort of doing differently in response to the dynamics you're seeing.

Yes. I mean we're continuing to evolve, I mean what we're learning around these new solutions in the selling cycle and the support for our clients and continuing to adapt, we are not pulling back from the emerging solutions, we continue to see the opportunity. The client engagement remains very strong. So we're not seeing clients pilot and then detach from the process. We are seeing them continue to engage. And so that gives us confidence that these solutions will take and they will ramp. And so we continue to support those sales cycles, those engagements with clients. And as I said, we have confidence that the emerging solutions will ramp.

Got it. So turning to the established solutions, I think is what you call it.

Yes, that's right...

So what's -- I think been impressive is the continued new logo growth that you put up every quarter, especially on the repair shop side. Obviously, CCC has been around for a number of years. So where are those new logos coming from? How would you sort of frame alpha penetrated you are through that opportunity? And is this mostly competitive displacements? Or is it repair shops kind of doing things manually or a combination of Excel and Outlook, et cetera?

Yes. So the new logo strengths and new logo performance have been really good, and we've been happy with it. About 30% of our growth has been coming from new logos. It does come from all 3 of the customer groups. The largest one though is the shop side, as you suggest, we have 30,000 shop clients. We think about the market about 40,000 in total. We've been adding about 1,000 net new logos a year, and we've been doing that consistently over the past 5 years or so. In that space, it is largely competitive takeaways. But there are some shops that are using manual processes and not using software and then they're converting into software. And they'll start at the low end of our software and then they'll move up over time, and they'll kind of switch in with just using estimating as kind of their first step into software. So in the shop side, most of it is competitive takeaway and some is conversion of people that are not using software. On the parts suppliers, we have about 4,500 clients. We think about being about 60% penetrated. We do continue each month to sign up new part suppliers, new rooftops. So continue to see that opportunity. And then on the shops, although we have 300 carriers, and we have 27 of the top 30, so we have a lot of the larger players. There is a long tail of carriers. So we are adding additional carriers as we go. Again, most of that will be competitive takeaways. I'd say on the newer solutions, the emerging solutions, kind of going back to the discussion we just had around change management, those solutions are largely not competitive takeaways because it's work that's being done manually in our clients today. And so we're replacing kind of manual workflows with software and helping to automate some of the decisions through those workflows.

Got it. And as you think -- I think you talked about roughly 3 points of growth coming from new logos. What's the durability of that growth? I mean as you mentioned, there's only so many repair shops, only so many carriers and probably not the most massive growth industry in terms of new repair shops cropping up. So how do you sort of see the levers to extend that runway, be it international expansion, M&A, just walk us through how durable that new logo growth engine is.

Yes. I mean we'll frame it initially kind of in the long-term growth question that we can talk about international expansion because they're slightly different. Because when we think about our long-term growth, and we set the target, so we talk about 7% to 10% of growth. Over time, we do expect new logos to moderate just because of, as you said, we're selling into a vertical, and we have a defined client set within that vertical. We expect new logos to moderate from 30% of the growth and moving more to like 20% of contribution. We expect cross-sell, up-sell to be the balance of 80%. So we do expect to cross-sell, up-sell motion to accelerate with new logos moderating slightly over time. And that's kind of how we set out the long-term guide of 7% to 10%. We think these emerging solutions will move from 1 point of contribution, which we've seen more like 3 to 4 points of growth going forward. And so that step-up of these emerging solutions and the contribution will offset the new logo moderation over time, and that's kind of how we think about the long-term guide. The long-term guide that we talk about is the U.S.-based guide. And so it doesn't really contemplate international expansion in it. Today, the business is 99% in U.S. We have a 1 point of total growth contribution from a small business in China. As far as future international opportunities, the way we look at it is really through an M&A lens. We don't expect to have significant investment for an organic build internationally. We think about international growth, either coming through partnerships or M&A, and that's how we'll evaluate international opportunities beyond what we're doing today. But again, I'd just make a point that, that assumption is not in the 7% to 10% guide that we have out there, and we think about those opportunities that should be additive or incremental to that opportunity.

Got it. Sort of sounds like at some point, we see this kind of the new logo growth as the emerging solutions in Flex. Do you have a sense, is that 2 years out? Is it 5 years out, what sort of...

Yes, we haven't really put out the time horizon. I mean, I think about it more as glide path. So kind of just how these trends will shift over time. If you look at new logos, it's been 30% of the growth over the past several years. So in the first half of the year, it was 30%. So it continues to remain strong. I think what we're just saying is we think this shift will happen over time. And we've kind of set it up as a medium-term guide. So yes, over the next several years, it will start to step that way. I don't think of it as a dramatic step change. It's going to kind of just kind of migrate to that at kind of a slow, steady pace.

Right. And as you think about the installed base, sort of the expansion levers that you have with them outside of maybe these emerging solutions, I know there's various tiers of products you can buy in the repair shop side, you have some capabilities to engage customers on mobile and websites and all that. How do you sort of think about that mental model of the expansion of your existing customers? Like what's sort of the path to getting there?

Yes. If you think about the establishment, maybe take one step back, we frame the TAM that we operate in for U.S. opportunity about $10 billion of TAM. And then if you break it down, our existing products and solutions cover about $5 billion of TAM. And then if you break it down further, that's a combination of established solutions and emerging solutions in this TAM. And the TAM we think about is kind of selling solutions we have in market today, to the end market. And kind of if everyone bought everything, what would that opportunity be? So in our established solution, which is the vast, vast majority of our revenue. So we're coming on $1 billion of revenue we see an incremental $2 billion of opportunity selling our established solutions to the marketplace. So we see a long runway of opportunities on solutions that we've had in the market for years. And those can -- some of the ones we're really focused on is casualty, selling upgrades to repair shops and kind of the broader software packages, parts, mobile. So those solutions that have been in market for years have really long runways in front of us and give us confidence that established will continue to be strong for the years ahead.

Got it. Okay. One of the big picture questions we often get from investors is just how do you, as a company, think about more autonomous or driverless future, right? And I think there's a lot of different ranges of outcomes and timing in terms of how that plays out. But how do you think about that? Do you have a perspective on how that evolves? And then just help frame investors what that business looks like, should we go further down that path?

Yes. Happy to. I mean the 3 things we think about and our clients are focused on is kind of at a macro trend basis that our clients really are addressing is, one is frequency to the volume of auto claims. The second is severity. So the cost of repair or the cost of replacing the car or severity could be medical claims as well. And then the third is complexity. And as cars become have more ADAS, have more technology as the interconnected network continues to expand, complexity continues to grow. So when you think about those through 3 things that the clients are addressing, our clients are addressing, frequency, we do believe will moderate over time with ADAS. That said, we see severity and complexity increasing. And so what we really focus on and what we're working with our clients is really addressing the complexity side of the equation. And how does our software, how does our workflow, how does AI help our clients be more efficient, be more effective and navigate through a complex ecosystem. And that's really what we're focused on. As long as there are auto claims that our clients are working through, our software will be relevant for them. If you think about the revenue model, about 80% of our revenue is tied to subscription. So it's not tied to volume specific. So yes, that's how we think about kind of ADAS and kind of more -- and how frequency will play out over time. I don't know, Bill, if you have anything to add?

I was just going to say that society has been -- or American society has been very intolerant of anything other than perfection when it comes to autonomous vehicles, right? So I could drive down the street and have an accident down [ Batson High. ] But if I'm doing that in an autonomous vehicle, it's front-page news. And so I think there are a lot of applications where autonomous driving in contained environments. I think that will be very effective, full Level 5 autonomous driving. I think, is still a challenge that's many years off. It's apparent there would be nothing that would make me happier than to have no more accidents. But...

And obviously, it's hard to say exactly how it plays out, but do you sort of view that trend as a net neutral, net positive, net negative? How do -- I mean, on one hand, maybe the complexity offsets the lower volumes or...

Yes. I mean as we talked about before, I mean, we're seeing the demand relatively consistent over the past years, and we have seen frequency come down along the way. And that has not had an impact on the business and complexity is more than offsetting that with kind of the breadth of the solutions that we're bringing into the market and how we're supporting the clients' needs and how those clients needs are changing through this interconnected network and the complexity of the cars. So we're not necessarily handicapping that in the future, that complexity overrides frequency. We're just saying we feel good that our solutions are set up to help our clients navigate their operational challenges as we go forward.

Got it. Okay. So turning to profitability. You hit on it earlier, just in terms of already very impressive EBITDA margins at CCC, I think your long-term targets call for a mid-40s EBITDA margins and continuing to do what, call it, 100 basis points a year of margin expansion. Walk us through the drivers. I mean you're already very profitable. I imagine there's a lot of investment areas in emerging solutions. How are you able to deliver that? How should we sort of think about your expense growth relative to your revenue growth?

Yes, absolutely. Yes, if you look at the last 4 years, we've driven over 1,000 basis points of margin improvement. We're suggesting that, that will look like, as you say, 100 basis points going forward. So today, we're at 41% margins. We've set a target in the mid-40s that we see ourselves kind of stepping towards, the mid-40s is not a ceiling, we're just putting a target out there that feels reasonable and achievable in kind of a 5-year horizon. And so that's where we're setting it out. We have a very efficient infrastructure and cloud platform that pushes out a lot of leverage. We remain really focused. A lot of the time, myself, Githesh, the CEO, spends around balancing investment in innovation that future innovation and how do we continue to drive productivity and efficiency in the business model to drive margins. And I think that balance is a healthy tension. We see leverage coming through cost of revenue. Today, our gross profit is 78%. We see that ticking up to 80% over time. So we'll get some economies of scale in cost of revenue. We see leverage in sales and marketing and G&A. We'll continue to see those drive operating leverage as we get to scale. Our R&D will be our fastest-growing category as we continue to invest. That said, we do see opportunities for leverage there as well as we just continue to scale the business. So a lot of ways to see margin expansion. We feel very confident on kind of the targets that we put out there in the pathway, and we feel this kind of margin progression while being really focused on innovation and investing in innovation, we can do both and do that successfully.

For a lot of companies, it's kind of feast or famine on the margins. I think one of the things that differentiates CCC is that we're putting in -- we put over $1 billion into R&D over the past decade. We're putting in over $150 million a year to drive that innovation that typically doesn't produce revenue for 2 or 3 years. And the margin expansion is taking place on top of that as opposed to at the expense of that.

Yes. Got it. And as you think about capital return, help us understand how you're thinking about deploying that. You talked about potential M&A down the road paying down debt and then returning cash to shareholders. I know you did some accelerated share repurchases earlier this year, too.

Yes. The investment we're talking about in R&D is largely through the P&L. So we're able to do that through the P&L. And so we think about the capital side. It really is -- first is M&A and looking at opportunities to continue to set up the company for long-term growth opportunities and thinking about our strategic ambition. We think about M&A from kind of product buys, so instead of building can we buy capabilities for speed to revenue? We think about M&A in adjacencies kind of across the P&C insurance economy. And then we think about M&A, which we talked about as international opportunities, international expansion. So M&A remains kind of top of mind. That said, deals and deal flow, it's hard to predict timing, hard to predict the size. Where there are not deals, we will look at other deployments of cash and capital. We did a buyback last November, where we had low leverage, I think our leverage at that point was around 1x and determined that we should put the cash to work and the stock price was at a point that felt like that was a good use of capital. So we'll continue to evaluate those opportunities as well. I mean, the long -- our view really is around shareholder returns and what's -- does that come in through M&A? Does that come in through buybacks? And so we'll remain open to both of those as we think about the balance sheet and making sure that we're being efficient with our balance sheet.

Got it. One of the questions that we've been getting more recently is just how to think about the competitive landscape. One of your private equity-backed competitors recently filed to go public. But just sort of how you would frame your competitive overlap and how investors should sort of think about the market.

Yes. I mean we have been in a competitive marketplace. I mean if you look back 15 years, those competitors, [ Solera, Mitchell ] have been -- we've been competing against them. I don't think necessarily them going through a public market changes the competitive dynamic. We've been in a competitive dynamic for a long time. Also, there are insurtech that continue to pop up and go after specific points of the processes that will be more narrow focus, but going after a specific feature of function. And so that competitive tension has been there, will be there. We remain hyper-focused on our clients and driving innovation. And I think for us, innovation is the differentiator. So we really focus on bringing new solutions into markets that are addressing our clients' needs. And if we do that and keep clients happy, we have an NPS score of 83. If we do those, we believe we'll be in a good space from a competitive landscape. That said, we're hyper focused on where we are and where we are with our clients and where our competitors. And so we don't see that changing. But we also feel confident in kind of not only the products that we have today in addressing the clients' needs, but the road map of solutions that will be coming into the market over time as well. I don't know, Bill, do you want to add anything to that?

That's good.

Great. Last question I wanted to ask you is just on the product side, and I know Githesh isn't here to sort of give his vision. But the announcement around the IX cloud, I believe, in Q1. Can you just frame the significance of that? And how does that play into CCC's GenAI strategy?

Yes. So think about the IX Cloud, it's really an event-driven architecture that we're rolling out that our solutions plug into. So it's not a new product, so we won't drive revenue off of it. It is a framework that are -- think about it as an amplifier for our products that are connected to this platform and this framework that makes the products more efficient and effective as they get deployed. So we think about it as an opportunity to support the network of all the clients that are on our platform and our network in allowing them the benefit as the solutions plug into this platform and the framework to drive events and do that in an automated way. And maybe the best way to do is just through an example. So if you think about a car going into a repair shop, they believe it's going to be repaired at a certain price point and all of the stakeholders across that are anticipating that as an outcome. The repair goes in, starts to do the work. There's more damage than originally observed. So now it moves to a total loss. And so as that total loss, that claim changes from a repairable to a total loss, events can get triggered. So the repair shop software can notify the carrier now that is moving from a repairable to a total loss that could go to a tow company knowing they have to pick up a car that event could trigger to a salvage yard knowing they're going to need to receive a car and sell that client through the auction. The carrier is now communicating with the policyholder in changing the status that car or rental car can be changed in that. So the more clients on the platform, the more of the solution of the platform allows some of these events to trigger in an automated way, which makes the process more efficient rather than sequentially people picking up a phone or sending an e-mail or text to kind of alert these changes, the software is helping to facilitate that. And so we see that as the power of the platform, the power of the network and allowing our clients, the more clients on it, the more of their trade partners that are on it, give them an opportunity to be more efficient.

Awesome. Well, I think we're right out of time. It's a good note to end on. Thank you very much for joining us, and thanks, everyone, for coming.

Great. Thanks, Tyler.

Thank you.