CCC Intelligent Solutions Holdings Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited results. CCC provides cloud-based software and data-enabled workflows for the property and casualty insurance ecosystem, primarily insurers and collision repair businesses.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $176.6 million | $157.8 million | $501.2 million | $467.7 million |
| Gross profit | $118.8 million | $107.3 million | $353.2 million | $312.3 million |
| Gross margin | 67.2% | 68.0% | 70.5% | 66.8% |
| Operating income (loss) | ($189.2 million) | $23.1 million | ($160.0 million) | $52.8 million |
| Net income (loss) | ($189.8 million) | $4.7 million | ($191.1 million) | ($22.5 million) |
| GAAP diluted EPS | ($0.34) | $0.01 | ($0.36) | ($0.04) |
| Adjusted EBITDA | $70.1 million | $53.6 million | $185.7 million | $144.7 million |
Revenue grew 12.0% in Q3 and 7.2% year to date. Software subscriptions were $170.0 million in Q3 (96% of revenue) and $481.8 million year to date (96%). Management attributed growth chiefly to existing-customer upgrades and broader product adoption, supplemented by new customers; divested First Party Clinical Services reduced the comparison.
- Profitability and unusual costs: Q3 operating expenses rose to $308.0 million from $84.2 million, driven principally by $219.9 million of stock-based compensation versus $1.9 million a year earlier. The expense reflects modification and vesting of awards in connection with the July business combination. Nine-month stock-based compensation was $235.4 million. Q3 also included a $26.9 million warrant fair-value expense and $15.2 million loss on early debt extinguishment. Adjusted EBITDA and adjusted net income are non-GAAP measures and exclude specified items; Q3 adjusted net income was $29.7 million versus $21.1 million.
- Cash flow: Nine-month operating cash flow was $96.7 million versus $66.8 million. Investing cash outflow was $35.3 million, including $25.0 million for software, equipment and property and $10.2 million for an equity-method investment. Financing cash outflow was $62.9 million, including debt repayments and $269.2 million of dividends, partly offset by $763.3 million net business-combination proceeds and new debt proceeds. Cash ended at $160.5 million, down $1.7 million from year-end 2020.
- Liquidity and debt: Current assets were $299.8 million and current liabilities $153.9 million, yielding working capital of $145.9 million. Long-term debt was an $800 million Term B Loan principal balance (carrying value net of discount and fees was $788.2 million); no revolving borrowings were outstanding and $249.3 million of the $250 million revolver was available. The loan bears variable LIBOR-based interest; Q3 weighted-average rate was 3.0%. Management said cash, operating cash flow and revolver capacity should fund operations and commitments for at least 12 months.
- Other metrics: Software net dollar retention was 113% for the September quarter, compared with 103% a year earlier; software gross dollar retention was 98% in both periods. Remaining performance obligations were approximately $936 million, of which $437 million was expected to be recognized over the next 12 months.
Material changes and developments
- The July 30, 2021 SPAC business combination was accounted for as a reverse recapitalization. CCC received $763.3 million in net cash proceeds. The transaction and related award modifications materially affected reported expenses, share count and capital structure.
- On September 21, CCC refinanced its prior first-lien debt with an $800 million Term B Loan and a $250 million revolving facility, repaid the prior term loan, and paid $10 million to terminate interest-rate swaps scheduled to expire in 2022. Reported debt fell from $1.3 billion net at year-end to $780.2 million long-term net plus $8.0 million current at quarter-end.
- Cash dividends totaling approximately $269.2 million were paid to legacy CCC stockholders before the combination. Common shares outstanding were 603.2 million at September 30.
- In October, the company granted approximately 18.4 million restricted stock units and paid $10.2 million to holders of vested phantom shares.
Outlook, risks and contingencies
The filing provides no specific forward revenue or earnings guidance. Management expects investment in research and development, sales and marketing, and public-company costs to increase in absolute dollars, while anticipating reduced professional-services costs following the divestiture. It cites growth from customer expansion, new-customer additions and product development as business drivers.
- The $800 million term loan is floating rate; a 100-basis-point rate increase was estimated to raise annual interest expense by $8.0 million. A springing leverage covenant applies from Q1 2022 if revolving-facility utilization exceeds the specified threshold.
- Warrant liabilities were $85.3 million at quarter-end and are remeasured through earnings, creating potential earnings volatility. The filing recorded a $26.9 million Q3 fair-value expense.
- COVID-19 effects remain uncertain. Management said pending or threatened legal matters were not expected, based on current information, to materially affect financial position or results; litigation outcomes remain uncertain.
- Other exposures include customer concentration in receivables (two customers each represented 11% at quarter-end), execution and retention risks, and estimates used in valuation and stock-based compensation. Management reported no goodwill or intangible-asset impairment in its September 30 annual test.
Most important facts for investors to verify
- How much of reported losses and expense growth reflects one-time or transaction-related stock compensation, and how do non-GAAP adjustments reconcile to recurring economics?
- Whether subscription growth and 113% software net retention persist, and how much growth is organic versus affected by divestitures or mix.
- Debt pricing, future interest-rate exposure, covenant headroom and the availability of the revolver under the new credit agreement.
- The potential dilution and earnings volatility from warrants, earnout shares, stock awards and subsequent restricted-stock grants.
- The $936 million remaining performance obligations estimate, expected timing of recognition and exclusions for renewals and usage-based revenue.