CCCS - CCC Intelligent Solutions: Consider Financial Targets And AI Opportunities

2023-07-31 18:03:37 ET

Summary

• I hold the view that CCC Intelligent Solutions Holdings Inc. has a reasonably good chance of meeting its long term financial targets, based on an assessment of its revenue model and margin expansion levers.
• AI's rise could throw up new growth opportunities for CCC Intelligent Solutions; an example is its AI estimating solution which can potentially add $50 million to its annual top line going forward.
• CCC Intelligent Solutions shares are rated as a Buy, and I think that the valuation gap between the firm and its software peers should be narrower.

Elevator Pitch

I assign a Buy investment rating to CCC Intelligent Solutions Holdings Inc. ( CCCS ) stock. The company's positive growth outlook, as evidenced by its financial targets and AI growth opportunities, isn't completely factored into its valuations. CCCS' consensus forward Enterprise Value-to-Revenue multiple is lower than specific software peers, even though their respective revenue growth profiles are similar.

Business Profile

CCCS refers to itself as the operator of a "SaaS (Software-as-a-Service) platform for the multi-trillion-dollar P&C (Property & Casualty) insurance economy" in the company's media releases .

An Overview Of CCC Intelligent's SaaS Platform

A Brief Description Of CCCS' Offerings

Subscription software revenue accounted for 96% of CCC Intelligent Solutions' top line last year as disclosed in the company's fiscal 2022 10-K filing . Professional services and other revenue contributed the remaining 4% of CCCS' sales in the most recent fiscal year. Separately, CCCS generated 99% and 1% of its FY 2022 revenue from the US and China, respectively.

Financial Targets

CCC Intelligent targets to deliver an organic revenue CAGR in the +7%-10% range and improve the company's EBITDA margin to the mid-40s percentage level for the long run.

CCCS is in a good position to achieve a top line expansion rate in the high single-digit percentage level based on an assessment of the company's key metrics relating to its revenue model.

The company's software Gross Dollar Retention, or GDR, is as high as 99%, and this is aligned with CCC Intelligent Solutions' growth strategy focusing on driving 80% and 20% of its future revenue expansion from existing customers and new customers, respectively. In other words, CCCS is able to maintain a healthy pace of sales growth by keeping its existing clients happy and capitalizing on up-selling & cross-selling opportunities. As such, CCC Intelligent Solutions' revenue model is pretty resilient, as a large part of its growth isn't reliant on expanding its client base.

The company's EBITDA margin rose from 30% in FY 2019 to 34% in FY 2020, before improving further to 38% and 39% for FY 2021 and FY 2022, respectively. There are good reasons to believe that CCC Intelligent Solutions' EBITDA margin can eventually go up to the mid-40s percentage or higher as per the company's financial goals.

There are two key margin expansion levers for CCC Intelligent Solutions. One of them is cross-selling and up-selling to existing customers as highlighted above. Another profitability improvement driver is positive operating leverage, as CCCS should be able to grow its top line at a faster rate than its fixed expenses that don't vary with sales such as R&D (Research & Development) costs.

AI Opportunities

The rise of AI is a tailwind for many businesses, and CCCS is already leveraged to this key secular growth trend.

CCC Intelligent Solutions claimed to have created in excess of 300 AI models over the past five years. As it stands now, the company's AI solutions have been utilized by over 100 insurers, and 14 million automotive insurance claims have been handled with the usage of its AI tools. These metrics mentioned above are sourced from CCCS' investor presentation slides and its Q1 2023 results cal l.

As an example, CCC Intelligent Solutions indicated in its investor presentation that it has developed the "world's first AI touchless estimating solution" which it calls "Estimate - STP" that can "automatically generate full line-level estimates pre-integrated into existing insurer workflows." "Estimate - STP" was introduced to the market by CCC Intelligent Solutions in late 2021, and CCCS currently has 15 national insurance companies using this particular AI solution.

How CCCS Is Utilizing AI In Its Estimating Solutions

Looking ahead, CCCS thinks that "Estimate - STP" can potentially contribute incremental annual revenue of $50 million, as and when the company gets more national insurers to consider this new AI estimating solution. It is reasonable to assume that CCC Intelligent Solutions will have other new AI products in the pipeline, which could raise the ceiling for the company's revenue growth potential.

Valuations

The market currently values CCC Intelligent Solutions at 8.5 times consensus forward next twelve months' Enterprise Value-to-Revenue as per S&P Capital IQ's valuation data. In my opinion, I think that CCCS is justified trading at a higher valuation multiple in line with its software peers.

Verisk Analytics ( VRSK ) and ANSYS ( ANSS ) are now trading at relatively higher consensus forward next twelve months' Enterprise Value-to-Revenue ratios of 13.6 times and 12.8 times, respectively. But CCC Intelligent Solutions' organic revenue growth target of +7%-10% is comparable with VRSK and ANSYS' consensus top line expansion rates of +5.4% and +10.3% (source: S&P Capital IQ ), respectively. In that respect, there is a mismatch between CCCS' current valuations and its growth outlook.

Closing Thoughts

I have a favorable opinion of CCC Intelligent Solutions Holdings Inc.'s growth prospects, which leads me to rate the stock as a Buy. CCCS' financial goals imply that the company has meaningful top line expansion and profitability improvement potential, while there are growth opportunities that CCCS can capitalize on.

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