2023-05-18 16:51:04 ET
Summary
- CCC Intelligent Solutions Holdings Inc. reported its Q1 2023 financial results on May 2, 2023.
- The firm provides a range of vehicle insurance industry software and related services.
- CCC Intelligent Solutions Holdings has been resilient in recent quarters as the cost of capital has increased, but management has guided to slower growth in 2023.
- I'm therefore on Hold for CCC Intelligent Solutions Holdings Inc. stock in the near term.
A Quick Take On CCC Intelligent Solutions
CCC Intelligent Solutions Holdings Inc. ( CCCS ) reported its Q1 2023 financial results on May 2, 2023, beating expected revenue while matching forecasted EPS estimates.
The company provides software to insurance companies seeking to increase the automation of their various operations.
I previously wrote about CCC Intelligent Solutions Holdings Inc. with a Hold opinion here .
I'm concerned about the slower revenue growth rate in CCC Intelligent Solutions Holdings Inc. management's guidance combined with ongoing macroeconomic headwinds that are expected to intensify in the second half of 2023.
As such, my outlook remains on Hold for CCC Intelligent Solutions Holdings Inc. stock in the near term.
CCC Intelligent Solutions Overview
Chicago, Illinois-based CCC Intelligent was founded in 1980 to help property and casualty insurance companies with software that increases their operational efficiency.
The firm is headed by Chairman and Chief Executive Officer Githesh Ramamurthy, who joined the company in 1992 and was previously a founding member of Sales Technologies, later acquired by Dun & Bradstreet.
The company's primary offerings include:
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Customer experience.
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Workflow management.
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AI claims processing.
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Network management.
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IoT and Exchange.
The firm acquires customers among insurance carriers, collision repairers, automobile manufacturers and parts suppliers via its direct sales and marketing teams as well as through partner referrals.
CCC Intelligent Solutions' Market & Competition
According to a 2022 market research report by Allied Market Research, the market for claims processing software was an estimated $33.9 billion in 2020 and is forecast to reach $73 billion by 2030.
This represents a forecast CAGR of 8.3% from 2021 to 2030.
The main drivers for this expected growth are a desire for insurance companies to automate its claims processing approach and manage the entire claim lifecycle from first filing until closure.
Also, N. America represented the greatest revenue by region in 2020. However, the Asia Pacific region is expected to grow markedly through 2030.
Major competitive or other industry participants include:
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Mitchell International.
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Guidewire.
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Applied Epic.
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Pega Claims Management.
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LexisNexis Carrier Discovery.
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Duck Creek Technologies.
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Quick Silver.
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Hyland Software.
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FINEOS.
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VENTIV.
CCC's Recent Financial Trends
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Total revenue by quarter has grown per the following chart:
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Gross profit margin by quarter has trended lower in recent quarters:
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Selling, G&A expenses as a percentage of total revenue by quarter have produced the following results:
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Operating income by quarter has been largely flat in recent quarters:
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Earnings per share (Diluted) have been at breakeven in recent periods:
(All data in the above charts is GAAP)
In the past 12 months, CCCS' stock price has risen 10.34% vs. that of Guidewire Software, Inc.'s ( GWRE ) rise of 4.23%, as the chart indicates below:
For the balance sheet , the firm ended the quarter with $338.4 million in cash and equivalents and $780.5 million in total debt, of which only $8.0 million was categorized as the current portion due within 12 months.
Over the trailing twelve months, free cash flow was $137.9 million, of which capital expenditures accounted for $48.2 million. The company paid $115.1 million in stock-based compensation ("SBC") in the last four quarters.
Valuation And Other Metrics For CCCS
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Enterprise Value / Sales | 8.0 |
Enterprise Value / EBITDA | 41.4 |
Price / Sales | 7.4 |
Revenue Growth Rate | 11.6% |
Net Income Margin | 3.6% |
EBITDA % | 19.4% |
Market Capitalization | $5,910,000,000 |
Enterprise Value | $6,430,000,000 |
Operating Cash Flow | $186,120,000 |
Earnings Per Share (Fully Diluted) | $0.04 |
(Source - Seeking Alpha)
As a reference, a relevant partial public comparable would be Guidewire Software; shown below is a comparison of their primary valuation metrics:
Metric [TTM] | Guidewire Software | CCC Intelligent Solutions | Variance |
Enterprise Value / Sales | 7.2 | 8.0 | 11.7% |
Enterprise Value / EBITDA | NM | 41.4 | --% |
Revenue Growth Rate | 13.9% | 11.6% | -16.4% |
Net Income Margin | -19.2% | 3.6% | --% |
Operating Cash Flow | -$14,100,000 | $186,120,000 | --% |
(Source - Seeking Alpha)
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.
CCCS's most recent Rule of 40 calculation was 31.0% as of Q1 2023's results, so the firm has improved in this regard, per the table below:
Rule of 40 Performance | Calculation |
Recent Rev. Growth % | 11.6% |
EBITDA % | 19.4% |
Total | 31.0% |
(Source - Seeking Alpha)
Commentary On CCCS
In its last earnings call ( Source - Seeking Alpha ), covering Q1 2023 results , management highlighted the "predictability" of the firm's business model and exceeding previous guidance for revenue and adjusted EBITDA.
Leadership noted that demand for the firm's software continues to increase as the complexity of automobiles increases and consumer demands for an improved claims experience increase.
The company is also continuously expanding its investment in AI-driven solutions for claims processing and related areas.
CCCS' software net dollar retention rate was 106%, similar to Q1 2022's results, and indicates reasonably good product/market fit and sales & marketing efficiency.
Total revenue for Q1 2023 rose 9.7% year-over-year, while gross profit margin fell 1.7 percentage points.
Selling, G&A expenses as a percentage of revenue increased 0.6 percentage points year-over-year and operating income fell 3.6%.
Looking ahead, management guided full-year 2023 revenue growth of 8.5% at the midpoint of the range, which, if achieved, would be a materially lower growth rate than 2022's growth rate over 2021.
The company's financial position is moderately strong, with substantial liquidity, mostly long-term debt and significant free cash flow.
Regarding valuation, the market is valuing CCCS at an EV/Sales multiple of around 8.0x.
The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 5.5x on April 27, 2023, as the chart shows here:
So, by comparison, CCCS is currently valued by the market at a material premium to the broader Meritech Capital SaaS Index, at least as of April 27, 2023.
Risks to the company's outlook include an economic slowdown that may be underway, reduced credit availability which may affect customer/[prospect spending plans and lengthening sales cycles which may reduce its revenue growth potential in the near term.
From management's most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:
I'm most interested in the frequency of potentially negative terms, so management cited "Challeng[es][ing]" once and "Macro" eight times.
The negative terms refer to questions about the macro economy and whether management is seeing the effects of a slowdown.
Company leadership contended that "the only time where we saw a decrease in claim frequency was during the first year of COVID."
A potential upside catalyst to CCC Intelligent Solutions Holdings Inc. stock could include lowered cost of capital as interest rate hikes may pause shortly.
However, I'm concerned about the slower revenue growth rate in management's guidance combined with ongoing macroeconomic headwinds that are expected to intensify in the second half of 2023.
As such, I'm on Hold for CCC Intelligent Solutions Holdings Inc. in the near term.
For further details see:
CCC Intelligent Solutions Guides To Slower 2023 Revenue Growth