Description

CCC INTELLIGENT SOLUTIONS HOLDINGS INC. (CCCS) – Long

Last Sale: $12.60/sh

Market Cap: $7.5b

TEV: $8.2B (~$730mm Net Debt)

30 Day Avg Daily Volume: 2mm shares/day (~$25mm)

Investment Horizon: ~3 years

Summary

Founded in 1980, CCCS is a leading maker of software for the property & casualty (P&C) insurance industry, with a focus on the automotive insurance and repair vertical.  Their software is industry-standard and serves as the backbone of the auto insurance claims process – they count as customers 18 of the 20 largest P&C insurers, over 27,000 collision repair shops, and numerous auto OEM’s, parts makers, and dealerships.  More than $100B of claims data is annually processed over CCCS’ network; this library of auto insurance and repairs data is a major (and perpetually growing) competitive advantage, as it allows CCCS customers to accurately assess and address claims quicker than its peers.  And, not to be overlooked, CCCS is led by a CEO who has been at the helm for over two decades and is well-aligned with shareholder interests as he owns a substantial amount of stock.

Looking out over the next several years, I believe CCCS can grow sales at a high single digit rate, inline with recent history, as the company rolls out new products and increases market share among repair shops.  With modest margin expansion and lower interest expense, FCF can grow at low double-digit rate during this same timeframe.  While it’s hard to argue CCCS is a bargain in an absolute sense, CCCS trades cheap to comps - ~20x.’25 EV/EBITDA vs ~25x for a peer group of high quality vertical software and services businesses.  Looking out several years (to ’26 where I have them earnings $500mm EBITDA), and assuming the stock trades inline with its peer group, would yield a ~$20/sh target price.  Upside to my base case exists should management execute accretive bolt-on M&A deals (as my base case assumes FCF piles up on the balance sheet).  Alternately, should the shares languish, I believe there is a reasonable chance CCCS is taken out – given its history inside of PE (and with several Advent investors on the board) this scenario is not a stretch and should mitigate the downside somewhat.

Why This Opportunity Exists?

I believe there are a number of reasons as to why the stock has not been a great performer since coming to market via SPAC merger several years ago:

1)      SPAC dynamics – SPAC’s have terrible track records and can have a complicated shareholder structure so many investors shy away from these situations altogether.

2)      Relative trading illiquidity and small float (though both are improving)

3)      CCCS, while a high-quality franchise, is not the sexy high-growth type of business that typical TMT investors are attracted to.

Investment Thesis

Given a stellar competitive position and very good medium-term organic growth prospects, I believe CCCS is undervalued.  My investment thesis is based on:

1)      CCCS is an exceptionally high-quality business whose competitive advantage continues to grow.

-          96% of revenue is recurring with typical contract lengths of 3-5 years (and a major recent insurance contract was struck for 7 years in length).

-          Software gross dollar retention (which measures what percent of prior year revenue is retained the following year) has consistently been among the best-in-class at 99%.

-          Net Promoter Score (NPS) of 80, which is top tier in the software industry and comparable to some of the most admired brands in the world.

-          40+ year proprietary library of insurance and collision data provides a considerable moat that competitors can not replicate.

o   CCCS has processed >$1T data across its platform (now doing >$100B annually) – this dataset allows the company to help its customers quickly and accurately diagnose the situation at hand, and is the foundation for new CCCS product launches.

o   In particular, CCCS’ historical data repository is a key differentiator as the company rolls out advanced AI (artificial intelligence) offerings, such as STP (straight through processing), which would allow claims to be processed without human intervention.

o   This dataset will become more valuable over time as the complexity of vehicles goes up due to autonomous driving and electric vehicles.

2)      CCCS has very good medium-term top-line growth prospects, and their long term growth target of 7%-10% per annum is reasonable (and inline with results over the last decade).

-          Auto accounts for about 45% of the P&C insurance market – this market segment is growing ~7% annually (according to the company), providing a constructive backdrop for CCCS.

-          CCCS is able to push price annually – their long-term growth target includes 3%-4% for ‘Established Products’, which is largely price hikes.

-          Cross-sell opportunity set is large and growing, which can provide 3%-4% to growth per annum.  Over time, CCCS has proven to be very good at cross-selling new/additional products to its loyal customer base.

o   In their repair shop business (~42% of sales), CCC doubled its revenue per repair facility from 2010 to 2020, and the number of customers using more than one product has grown from 11% in 2010 to ~65% today. On average, repair customers buy ~2.5 products and 24% of customers use more than three products.

o   In its insurance business (~52% of sales), CCC increased average revenue per insurance customer by 80% from 2010 to 2019. In a recent case study, CCC illustrated that over the course of two years, they were able double the initial subscription value of a top 5 insurance customer and still have an opportunity to drive a 3x revenue uplift from the initial subscription if the customer adds additional products.

3)      There remains decent potential for CCCS to continue expanding its margins

-          Since 2019, EBITDA margins have expanded from 30% to 41% in 2023

-          CCCS targets 45% long term EBITDA margins

4)      CCCS is led by an experienced and well-aligned management team that will judiciously allocate capital

-          Gitesh Ramamurthy has been with CCCS for over 30 years, the last 25+ of which he has been CEO.

5)      CCCS is reasonably priced given the high-quality nature of the business

-          Trades ~20X ’25 EV/EBITDA vs ~25x for a peer group that includes high quality vertical software and services businesses (including VRSK, ADSK, BSY).

-          On FCF – CCCS trades ~20x ’25 FCF vs a ~35x for its comp set.

Business Overview

Founded in 1980, CCCS is a leading provider of software to the P&C insurance industry, with a particular focus on the automotive insurance ecosystem.  In its early days, CCCS began by leveraging data to provide insurance carriers with a detailed life history report of vehicles.  It then transitioned to further using this data to provide digital claims estimates and connecting to repair facilities in order to provide an end-to-end view of the auto repairs process.

In the 2008-2012 timeframe, CCCS began transitioning to a pure multi-tenant SaaS model. This transition was ahead of peers and allowed customers to benefit from the advantages of a cloud architecture, including better total cost of ownership and more dynamic functionality.  Today, CCCS provides solutions to the entire auto ecosystem, including insurance carriers, collision repair facilities, auto manufacturers, parts suppliers, lenders, and fleet operators. This breadth of connectivity puts CCCS at the center of enabling repair outcomes by limiting costs for insurance carriers and increasing business opportunities for collision repair facilities through the CCC network. 

Today, CCCS’ industry-leading platform processes more than $100 billion in annual transaction value across this ecosystem, digitizing workflows and connecting more than 30,000 companies across the P&C insurance economy, including insurance carriers, collision repairers, parts suppliers, automotive manufacturers, financial institutions and others.

CCCS went public through a SPAC merger on 8/2/2021 when it merged with Dragoneer Growth Opportunities and priced at $10 in August 2020.  This is the second time CCCS has been a public company, as the firm was LBO’s by Investcorp in 2005.  Thereafter, CCCS was owned by several other PE players, including Leonard Green, TPG, and Advent.

Key Risks

The main risks to CCS are:

-          Loss of a key P&C insurance customer

-          Poor M&A decision

-          China – while only accounting for ~1% of annual sales, China is perceived as a growth area for CCCS.  Today, 4 of China’s top 5 insurers use the CCCS platform.

-          Consolidation among customers – both an opportunity and a risk

-          Interest rates rise further

Catalyst

Capital allocation (bolt-on M&A in particular)

Continued strong execution

Improvement in trading liquidity that can come from further selling from the PE sponsors