Cannae - Q2 2023
August 9, 2023
Transcript
Operator (participant)
Good afternoon, ladies and gentlemen, and welcome to the Cannae Holdings, Inc. Second Quarter 2023 Financial Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the Company's brief prepared remarks, the conference will open for questions with instructions to follow at that time. As a reminder, this conference call is being recorded and a replay is available through 11:59 P.M. ET on August 16, 2023. With that, I would like to hand the call over to Rory Rumore of Solebury Communications.
Rory Rumore (VP of Investor Relations)
Thank you, operator, and all of you for joining us this afternoon. On the call today, we have our Chief Executive Officer, Rick Massey, Cannae's President, Ryan Caswell, and Bryan Coy, our Chief Financial Officer. Before we begin, I would like to remind listeners that this conference call and the Q&A following our remarks may contain forward-looking statements that involve a number of risks and uncertainties. Statements that are not historical facts, including statements about Cannae's expectations, hopes, intentions, or strategies regarding the future are forward-looking statements. Forward-looking statements are based on management's beliefs as well as assumptions made by and information currently available to management. Because such statements are based on expectations as to future financial and operating results and are not statements of fact, actual results may differ materially from those projected.
The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. The risks and uncertainties which forward-looking statements are subject to include, but are not limited to, the risks and other factors detailed in our quarterly shareholder letter, which was released this afternoon, and in our other filings with the SEC. Today's remarks will also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to the GAAP financial information, is provided in our shareholder letter. I would now like to turn the call over to Cannae's Chief Executive Officer, Rick Massey, who will open with a few brief remarks and then open our line for your questions.
Rick Massey (CEO)
Hey, thanks, Rory. Hello, everybody. Thank you for joining our second quarter conference call. Not a lot of news to report to our, our investors this quarter. The, the headline is gonna be that we bought back 3.1 million shares of our stock, in the past, since from May through July. It's kind of a quarter. We started, right after the end of the first quarter. We took a pause, during the first quarter for on buybacks, we got back, with both feet in the second, during May through, through July. We bought back, as I said, 3.1 million shares, average price $19.72. That's about 4% of the Company. It that's, that pretty much matches our most aggressive buybacks.
We continue to believe that our shares represent the best value for, you know, for us when we consider this, you know, shares versus making an investment in another Company or an existing Company. We're pleased to report that. No, no real activity, no sales of any any of our portfolio companies or acquisitions of shares of our, any of our portfolio companies. Just a couple of notes on a few of the, of our portfolio companies that we, we continue to believe are, are woefully undervalued, particularly when compared to their peers. Dun & Bradstreet, for an example, showed up with about a 4% growth rate. That includes headwinds on that, that we all knew about, with GSA and Credibility.
We still believe that that business is gonna continue to grow. I think its growth is going to accelerate. Bill is very pleased with the results of their operations. The stock market seems to be sort of in a wait-and-see mode, it's trading at today about 9.5x 2023. That's at least a 50% discount to some of its peers, and we all know who they are. In spite of the fact that its margins are better than many, and it's growing faster, and it has no more leverage than some of its peers, and yet it's trading at 9.5x. We think it's way undervalued. We think the team has done a great job.
Anthony has brought in a couple of really sharp people, Ginny Gomez being the, the, the number one sharp person, and she has really turned around the marketing business as well as the, the credit risk, credit risk segment. Alight showed revenues this quarter of 12.7% year-over-year, and I hope those of you who also own Alight shares have paused to think about the progress that that company has made just since it went public, and it was showing 2% revenue growth, and here it showed up with 12.7%. It beat all of it. It reguided and beat, and the stock sold off a bit on the fact that its BPaaS billings weren't as robust as many in the street would estimate.
That's it's sort of our fault that we have not, ours being Cannae and Alight, that we've not emphasized more the non-BPaaS section of that business that grows, you know, mid-single digits, is as solid as a rock, 100% retention. You know, once a customer is on their payroll, what their wealth, their, their health business, it's very, very hard to get them out. That really is the foundation of that Company's revenue growth and its cash flow. We're, you know, you'll probably hear us telling a slightly different story in the future, just so that we don't lose sight of the, of the, of the 70% of this Company that's not BPaaS, and still a great Company.
That's trading at about 10x 2023 EBITDA, Alight is, and we've... Again, that's, that's, compare that to, we're not gonna name the peers, I'm not gonna name names, but they-- this Company is growing faster, and it's trading at about a 50% discount to, to, to certain peers. There's no explanation for that other than, you know, there is a PE overhang, and we think that's keeping a, a clamp on the stock. We really like, we really like the team, we really like the Company. It's gonna be-- it's gonna continue to rock for some time. Just one last note, and that's on CDAY, Ceridian. They beat revised guidance. Their revenues were up, like, 26.5% or 27%.
The stock, that's been a very good performing stock. It, it was... Did you check the price before the call, Bryan? Anyway, it's in the low 70s. Yeah.
Bryan Coy (CFO)
72.
Rick Massey (CEO)
Really good. Really, it's trading really well. I'm not gonna go through everything in our portfolio. We've not. They're, we think a bunch of them are undervalued. We continue to work really hard with these management teams to maximize value and help, and help them, you know, help them grow a streamlined organization. With that, I'll answer, we'll answer questions. Operator, hello?
Operator (participant)
Thank you. We will now begin the question and answer session. To ask a question, you may press Star one on your touch tone phone. If you are using a speakerphone, please pick up the handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Star two. At this time, we will pause momentarily to assemble our roster. Your first question today comes from Kenneth Lee, from RBC Capital Markets. Please go ahead.
Rick Massey (CEO)
Hi, Ken.
Kenneth Lee (VP)
Hey, hey, everyone. How's it going? Thanks for taking my question.
Rick Massey (CEO)
Great, Ken. How are you?
Kenneth Lee (VP)
Doing well. Doing well. Just wanted to, to ask about, at, at a high level, what's like the, the latest thoughts around capital allocation? Obviously, you've stepped out on, on the repurchases, and, and in the past, you've talked about, potential investments in, in private companies, but just wanted to, reassess and, and see what your latest thinking there is in terms of capital allocation. Thanks.
Rick Massey (CEO)
Yeah, I mean, I, I think we, we had our Board meeting today. Bill and I reported on our pipeline and that very view, and the Board agreed that the best use of our capital today, our cash, if you will, is to in buying back our shares. It's hard to beat an almost instant, what is it? 45% discount. So a 90% pop on your net asset value from buying it back. So it's sort of hard to beat. As long as that's, it's trading at that substantial a discount, that's gonna be the case, Ken.
Kenneth Lee (VP)
Gotcha. Very helpful there. Just one quick follow-up on that one. Maybe just talk about a little bit about potential capacity for share repurchases and whether that could either include taking on debt or other options there. Thanks.
Rick Massey (CEO)
We've,got a revolver. We probably-- we, we may ping it, but it will not-- the, we're, we're gonna fund our repurchases with the sale of existing portfolio securities. We have, we have a number of very liquid securities. They're trading at various levels of discounts to what we think is the appropriate valuation. But we have some that are trading at very nice valuations, and, and that we've held for some time. I'm, again, I'm not gonna name names, but, you know, I think you can expect to see us peel off quite a, quite a bit of our, I would almost call them legacy shares of various things. I don't think you're gonna see us in the market selling Alight. You know, I don't think you're gonna see us in the market-...
selling Paysafe because there, there's still, we think, a quite, quite a bit of upside left on, on Paysafe, but everything else may be pre-game.
Kenneth Lee (VP)
Gotcha. Very helpful there. That's it. That's all I had. Thank you.
Rick Massey (CEO)
Okay. Thanks, Ken. Great questions.
Operator (participant)
Thank you. Your next question comes from John Campbell from Stephens Inc.
Rick Massey (CEO)
Hey, John.
John Campbell (Managing Director of Equity Research)
Hey, guys. Hey, guys, good afternoon.
Bryan Coy (CFO)
Hey, how are you? Afternoon to you.
John Campbell (Managing Director of Equity Research)
Doing great. Absolutely. Thanks for taking my questions. Just back to the buybacks. I mean, it was obviously great to see the step up in activity, but as far as the rate of buybacks, you guys, it, it looks like you called out for 3.1 million repurchase May through July. Just from a housekeeping standpoint, I'm curious what the repurchase activity was in the quarter versus what you did in July. Just trying to get a sense for whether that remained kind of constant or if the rate picked up month to month.
Bryan Coy (CFO)
We bought almost all-- Hey, John, this is Bryan. We bought almost all of that within the quarter. I think we bought less than, less than $100,000 within July because we get blacked out after we start getting information. Of the-
Rick Massey (CEO)
What he's saying is that pretty much was all during the vast majority was in the second quarter.
John Campbell (Managing Director of Equity Research)
Okay, exactly what I was looking for. And then on Sightline, you guys called out, you know, there's a brief blurb in the shareholder letter, but from a big picture standpoint, are you guys kind of at the spot you feel like you, you know, would be at, at this point, you know, relative to original investment? And then also, just kind of, any updated thoughts on the monetization timeline?
Rick Massey (CEO)
It's not going, it's not going as planned. I'm not really at liberty to go through all that, except that the product rollout's been slower. They've had to go back, and there have been a lot of modifications. Customer uptake has been, you know, slower than expected, and that despite a fairly booming gaming market. Yeah, we've been, we've been disappointed with it. I, you know, Bill is on it, is focused on it very, very much and is talking to the CEO. We've got some, we've got some options that we're gonna pursue on, on Sightline. You, you, you know, if before the end of next quarter, we might see you might see something on that.
John Campbell (Managing Director of Equity Research)
Okay, that's helpful. Then one other item I just wanted to clear the air on. I mean, you guys obviously had some back and forth correspondence with SEC just relating to the classification of the, I guess, the Investment Company Act of 1940. To be clear, we fully agree with your stance there. That's never really been a worry for us. But just for the sake of investors that are, that are tuning into your story, maybe if you could provide a quick rundown of why that's not the right classification for you guys, and why it's important that you steer clear of that.
Rick Massey (CEO)
Well, essentially, I, I've, You, you are a careful reader, John. I'll give you congratulations. You get a, you know, you get a homework gold star. We are not a, investment, Investment Company Act of 1940 investment companies are basically mutual funds. Management of the funds are passive. They own lots of positions, and we are not that. We are very, as, as I mentioned during the call, we're very active with our, with our portfolio companies. We're involved in the, you know, various aspects of management. Bill's the chairman of a number of them. I'm the comp committee chairman. We're, you know, we're all over the day-to-day operations, and classifying us as a, as essentially a mutual fund is not, is just not, not appropriate. We've had those conversations with the SEC.
Part of the problem, frankly, again, we, we were a little bit light in describing the level of activity that we have with our portfolio companies. When the SEC read our 10-K from, you know, a few years back, they said: Well, you know, you're not, you're just a passive investor. We, we dissuaded them of that, and we changed a lot of the language in our Securities Exchange Act of 1934 materials to reflect our, you know, our, our fairly active roles with, with these companies. It just doesn't. It's not, it's not right, and we don't, it would not, it would not be appropriate to regulate us as, as such. I'm not gonna. We, we've, we've not, we've not had any correspondence with the SEC on that issue in what, Bryan, a year?
Bryan Coy (CFO)
Over a year.
More than a year.
Rick Massey (CEO)
John in my experience as a lawyer, way back, we went back in the old stone age when I was a lawyer, they, they, they don't ever, they don't ever agree with you and, and cut you loose. They just, they just stop. They, they stop communicating. Usually, if you go a year without a communication, you can generally view that as that they've moved on, and they're not gonna pick on that issue anymore, John.
John Campbell (Managing Director of Equity Research)
Yeah, that makes a lot of sense. I mean, it, it, it's pretty clear to us that the Foley playbook is, is just the opposite of what would qualify you for the Investment Company Act of 1940.
Rick Massey (CEO)
Mm-hmm.
John Campbell (Managing Director of Equity Research)
I agree with you there. if I could-
Rick Massey (CEO)
You know us. Yeah.
John Campbell (Managing Director of Equity Research)
Yeah, absolutely.
Rick Massey (CEO)
Take as much time as you need. I don't... I mean, it's...
John Campbell (Managing Director of Equity Research)
Just here all day.
Rick Massey (CEO)
It is what it is.
John Campbell (Managing Director of Equity Research)
Just last one on, on Bournemouth and FC Lorient. I mean, that was great to see them both finish pretty healthily above the relegation line. I'm just hoping if you could provide a rundown of kind of what's on tap for the off-season, what you guys are looking to achieve kind of heading in the new season, and any kind of progress you've made?
Rick Massey (CEO)
... Ryan, are you on?
Ryan Caswell (President)
Yeah.
Rick Massey (CEO)
Ryan Caswell?
Ryan Caswell (President)
Hey, I'm on. Yeah, hey, Matt, I'm on.
Rick Massey (CEO)
Ryan, our President, is the expert.
Ryan Caswell (President)
Yeah. Hey, yeah, I think, I mean, I think we've, right now, it's a fitting time to ask the question. I think, I think one, one of the big things we've been focusing on is, is just the, the transfer window and transfer activity. We've, we've got a few players in, and there's hopefully a couple more. This is at Bournemouth. We've got a few players in, there's hopefully a couple more to come shortly, so just to improve kind of the overall makeup of the squad. I think one, one interesting is there was actually a player that, Bournemouth acquired and then loaned to Lorient to basically show the, kind of the, the benefits of the multi-club model.
What Bournemouth will look to get that player back next year, likely. I think the other big thing we're focused on is just all of the commercial, the commercial, side of the business. I was going around today at the stadium and just looking at, different things that we have done, both to improve the stadium, improve the revenue, per match, as well as kind of looking at all the different sponsorship and opportunities we've done there. I think there's...
Short to answer your question, I think there's both on the football side to improve the overall, you know, both of the overall teams, to, again, kind of move, move up, move up the table, and which will, which will both help from a revenue and a brand side, as well as basically, make the commercial operations better to generate, to generate more dollars that, that, that were not being picked up before. Those are kind of the big, the, the, the big off-season priorities, and then, you know, obviously, we need, we need to translate that into to success on the field.
John Campbell (Managing Director of Equity Research)
Yeah, makes a lot of sense, and we'll, we'll look forward to that Analyst Day at Bournemouth next year.
Rick Massey (CEO)
Yep, we're.
John Campbell (Managing Director of Equity Research)
That'd be great.
Rick Massey (CEO)
That'd be great.
John Campbell (Managing Director of Equity Research)
Thanks for taking our questions, guys.
Rick Massey (CEO)
Hey, sure, John. Thank you.
Operator (participant)
Thank you. This concludes our question and answer session. I'd now like to turn the conference back over to Mr. Rick Massey for any closing remarks. Please, go ahead.
Rick Massey (CEO)
If, let me just, before we get off, if Ken, John, anybody else has a question, let us, let us know. I'll go slow in my exit, so, you know, we, we wanna make sure we answer all your questions. Thank you. You've asked all the right questions in terms of, you know, what, what our capital allocation plans are. We told you what they are. We like our- we sure like our stock down here at $20 or wherever it is right now. We hate it from a valuation standpoint, but we like it from a valuation standpoint, if that makes sense. We are very appreciative of your interest, and, feel free to connect with Bryan or me anytime, night or day.
We are always happy to answer any questions or listen to your comments. Thank you very much.
Operator (participant)
That does conclude our conference for today. Thank you for attending today's presentation. You may now disconnect.