Hispanolistic
Funding motion
I advisable a purchase score for CCC Clever Options (NASDAQ:CCCS) after I wrote about it in Might, as I anticipated the enterprise to develop at low ranges over the long run as the brand new IX Cloud has made the platform even stickier and gives extra cross-sell alternatives. Primarily based on my present outlook and evaluation, I like to recommend a maintain score. My downgrade is just not attributable to any structural impairments within the CCCS enterprise, however somewhat, I’m fearful about additional consensus cuts and valuation downgrades if rising options’ development disappoints. Till CCCS has optimistic developments on this entrance, I’m keen to take a seat this one out.
Evaluate
CCCS reported earnings on the 30th of July, and it was a great mixture of positives and negatives. Sadly, the market was way more targeted on the unfavourable facet, and therefore, the share worth fell sharply. Whereas I belong to the bullish camp for CCCS, I’m additionally downgrading my score from purchase to carry for the close to time period, simply to make it possible for administration can ship the anticipated development from new options. Beneath, I’ll begin by sharing my ideas on the positives, adopted by the negatives.
Firstly, the apparent optimistic spotlight is that CCCS did very properly for 2Q24. Complete income grew ~10% y/y to $232.6 million, beating the road’s estimate of $230.3 million (~9% y/y development). Subscription income grew on the identical tempo as complete income (~10% y/y to $223 million). Profitability additionally got here in strong, with an EBITDA margin of 41.2% vs. the road’s estimate of 39.5%. Relative to my expectations, the CCCS 1H24 efficiency tracks fairly properly. 1H24 y/y development is ~10%, whereas that is 100bps under my full-year expectations, 1H24 adj EBITDA is monitoring so much higher (annualized at $360 million vs. my expectation for $346 million).
Secondly, numerous working metrics point out that CCCS continues to be resilient. Software program gross greenback retention [GDR] remained at 99%, sustaining the identical pattern because the previous few quarters, and internet greenback retention [NDR] additionally continued to maintain at 107%, indicating that CCCS continues to see optimistic cross-selling traction (certainly one of my bullish thesis factors). On the brand new demand pattern, it additionally continues to be strong, as CCCS added over 600 restore outlets cumulatively in 1H24, bringing the overall to greater than 30k on the CCCS platform.
The primary half of this 12 months as seen as renew a number of purchasers, add numerous new logos and cross-sell a wide range of incremental merchandise throughout a buyer base. We have additionally added over 600 new restore services to this point in 2024. 2Q24 name
Lastly, the adoption of Estimate-STP is displaying nice traction. At the moment, Estimate-STP is being adopted by over 30 insurers, and this accounts for 3% of complete claims going by way of the CCCS platform. For these unaware, Estimate-STP permits is an AI that may assist purchasers pre-populate a full line-level estimate for certified repairable automobiles inside seconds. This considerably improves effectivity (much less labor must go and verify every automobile) and productiveness (lesser time and assets allotted to this a part of the method). As this adoption will increase, it ought to make CCCS even stickier. An encouraging signal that the adoption charge will maintain going up is that one of many high ten insurance coverage firms is at present dealing with practically 20% of their repairable claims utilizing run-rate processing.
Whereas quantity from income producing purchasers in manufacturing continues to be simply 3% of annual claims, by way of our deep engagement mannequin we now have helped one high 10 provider be on monitor to course of practically 20% of their repairable claims on a run charge foundation by way of this expertise. 2Q24 name
Unfavourable takeaway / valuation
Now for the negatives that made me downgrade to a maintain score (for the close to time period). Administration decreased its expectation for rising options’ development contribution, which led to a reduce in FY24 steering. 3Q24 income is now guided for 7.2% on the midpoint (vary between $236 and $238 million), coming in under consensus pre-results expectation for ~9% development. This led to a 50bps reduce for FY24 income steering (from 9.3% y/y development prior to eight.8% development on the midpoint). The weak implied 2H24 is due to the weaker than anticipated contribution from Rising Options.
The extended period of pilot intervals brought on by prospects evaluating these options is inflicting CCCS to face slower conversion to income, which is why expectations have been lowered. This isn’t nice from an expectation perspective, particularly when, within the final quarter, administration expressed elevated expectations for the contribution of rising options to the general development algorithm in FY24 to develop to 200 bps vs. 100 bps in FY23.
As such, I feel CCCS inventory sentiment and narrative are at a crossroads now. The bear case is that the CCCS rising answer will not be as helpful because it appears to be, and this makes it uncertain whether or not new rising options can obtain administration’s long-term steering of 300–400 bps development contribution. It additionally makes my FY25 estimate for 11% development much less seemingly. It’s also possible to see consensus chopping their estimates after elevating them for many of the previous 12 months. If rising options’ development contribution continues to disappoint, consensus is prone to additional reduce expectations, which goes to additional strain the inventory.
CCCS now trades at 16.6x ahead EBITDA. Whereas that is close to the all-time low, multiples may go decrease if the CCCS development profile dips to a excessive single-digit degree. For reference. Sapiens Worldwide (SPNS) valuation went all the way down to the mid-teens when development was 8.4% in FY23.
Bloomberg
The bull case is that that is only a short-term factor, and due to the unsure macro state of affairs, purchasers are simply being a bit extra cautious in opening up their finances to buy extra modules. With the Fed now more and more prone to reduce charges in September, finances scrutiny ought to ease. Administration did be aware that pipeline and buyer demand had been encouraging, so that is undoubtedly a optimistic level.
Nonetheless, I feel it’s safer to attend for CCCS to indicate proof that demand for rising options continues to be as sturdy as it’s anticipated to be and that it contributes to development significant. Till then, I feel the clever alternative is to only sit this one out.
Remaining ideas
My advice is a maintain score for the near-term. The corporate’s core enterprise stays resilient, as evidenced by sturdy software program retention metrics and continued new buyer acquisition. Moreover, the traction gained by Estimate-STP is encouraging. Nonetheless, the uncertainty surrounding the expansion trajectory of rising options is a priority because it impacts near-term development expectation and in addition CCCS long-term development profile (whether or not it could possibly maintain above 10%). Till CCCS can reveal that demand for these options stays strong and contributes meaningfully to development, I imagine it wiser to undertake a cautious stance.
