CCC Intelligent Solutions Holdings Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results; amounts below are in U.S. dollars unless stated otherwise.
Business context
CCC provides cloud-based software, data and AI-enabled workflows for the property and casualty insurance economy, principally connecting insurers and automotive collision repair businesses. Software subscriptions generated 96% of revenue in both comparative periods. The company reports one operating segment and operates primarily in the United States.
Financial performance
| Metric | Q3 2022 | Q3 2021 | First nine months 2022 | First nine months 2021 |
|---|---|---|---|---|
| Revenue | $198.7 million | $176.6 million | $578.3 million | $501.2 million |
| Gross profit / margin | $145.6 million / 73.3% | $118.8 million / 67.2% | $423.0 million / 73.1% | $353.2 million / 70.5% |
| Operating income (loss) | $17.1 million | $(189.2) million | $42.2 million | $(160.0) million |
| Net income (loss) | $9.8 million | $(189.8) million | $37.3 million | $(191.1) million |
| Diluted EPS | $0.02 | $(0.34) | $0.06 | $(0.36) |
| Adjusted EBITDA / margin | $78.1 million / 39.3% | $70.1 million / 39.7% | $225.3 million / 39.0% | $185.7 million / 37.0% |
| Operating cash flow | Not separately provided | Not separately provided | $118.4 million | $96.7 million |
| Free cash flow | $17.4 million | $25.0 million | $79.6 million | $71.7 million |
Q3 revenue grew 12.5%, primarily from existing-customer upgrades and expanded solutions (10% contribution) and new customers (3%). Nine-month revenue grew 15.4%, with 12% from existing customers and 3% from new customers. Software net dollar retention was 110% for the quarter, compared with 113% a year earlier; gross dollar retention was 99%, versus 98%.
Liquidity, debt and capital
- At September 30, cash and cash equivalents were $248.2 million; working capital surplus was $252.5 million.
- Term B Loan principal outstanding was $794.0 million, with $8.0 million current. The loan matures September 2028; scheduled quarterly principal payments are $2.0 million. The company had $249.3 million available under its $250 million revolving facility.
- The Term B Loan’s weighted-average interest rate was 4.6% in Q3 2022, up from 3.0% in Q3 2021. In August, CCC entered into interest-rate caps on $600 million of notional debt at a 4.0% cap through July 2025.
- Cash increased $65.6 million over the first nine months. Investing used $67.2 million, including $32.2 million for the Safekeep acquisition and $38.8 million for software, equipment and property purchases.
Material changes, outlook and risks
- Gross margin improved year over year, while the prior-year comparison was materially affected by $219.9 million of Q3 2021 stock-based compensation, largely from vesting modifications associated with the 2021 business combination. Q3 2022 stock-based compensation was $28.7 million. The large GAAP earnings swing therefore is not solely indicative of underlying operating growth.
- Interest expense declined year over year, mainly reflecting lower debt balances, but the floating-rate loan remains exposed to higher interest rates. The new caps provide partial protection.
- CCC acquired Safekeep, an AI-enabled subrogation software provider, for $32.3 million cash at closing. Potential additional earnout consideration is capped at $90 million. The company recorded $27.4 million of goodwill from the acquisition.
- Management stated existing cash, operating cash flows and revolver capacity should fund operations, required debt repayments and capital expenditures for at least the next 12 months. The filing provides no numerical revenue or earnings guidance.
- The annual goodwill test found no impairment, but the China reporting unit had limited headroom: estimated fair value was approximately 10% above carrying value, and a 60-basis-point increase in the discount rate would reduce fair value to approximately carrying value. Future impairment remains possible if assumptions or performance weaken.
- Other risks include customer concentration and retention, claim volumes and industry conditions, competition, cybersecurity and third-party dependencies, execution of growth initiatives, and the ability to service debt. One customer represented 16% of net receivables at quarter-end. Management did not expect pending or threatened legal matters to have a material adverse effect based on information then available.
Important facts for investors to verify
- Whether revenue growth and 110% software net retention remain durable, given retention declined from 113% a year earlier.
- Underlying profitability after considering stock-based compensation and other exclusions in Adjusted EBITDA; this non-GAAP measure is not a substitute for GAAP results.
- Cash conversion and investment needs, including the effect of receivables growth and ongoing software and infrastructure spending.
- Floating-rate debt exposure, cap coverage and terms, repayment requirements, and compliance with credit-facility covenants.
- Safekeep’s integration and performance against the earnout conditions, and the China reporting unit’s impairment sensitivity.