Cannae Holdings, Inc. (NYSE:CNNE) Q3 2023 Earnings Call Transcript

Cannae Holdings, Inc. (NYSE:CNNE) Q3 2023 Earnings Call Transcript November 7, 2023

Cannae Holdings, Inc. misses on earnings expectations. Reported EPS is $-2.18 EPS, expectations were $-0.3.

Operator: Good afternoon, ladies and gentlemen, and welcome to the Cannae Holdings Inc. Third Quarter 2023 Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded, and a replay is available through 11:59 p.m. Eastern Time on November 14, 2023. With that, I would like to turn the call over to Jamie Lillis of Solebury Communications. Please go ahead.

Jamie Lillis: 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 a reconciliation between non-GAAP financial information with the GAAP financial information is provided in our shareholder letter.

I would now like to turn the call over to Cannae’s CEO, Rick Massey.

Richard Massey : Thanks, Jamie, and thanks, everyone, for joining us on our third quarter conference call. As Jamie mentioned, Bryan Coy, our CFO; Ryan Caswell, our President. They’re both here with me. I want to remind you that we filed on line 2 things; one of which is our shareholder letter, which we filed about half an hour ago, an hour ago or so. That’s got a much more detailed discussion of our various portfolio companies, cash position, et cetera. And secondly, we have — we filed a — Bryan, dutifully filed some of the parts, which essentially was our net asset value per investment and then broken down on a per share basis — per Cannae share basis. We do that on a month on a monthly basis. So you — if that’s right?

Bryan Coy: Yes, yes.

Richard Massey: So we — those — I recommend you check in on those, you’ll get really more than I can tell you on this short phone call. So I’ll be brief since all that information is out there public. We still believe that stock is our — our own stock is our best investment with our precious capital. We — as you may have noted from our shareholder letter, our buyback authority was replenished by our Board a couple of weeks ago. And so we have over — well over 10 million shares authority. We bought back 2.7 million shares in the third quarter, which turns out to be about roughly 4% of the company in that 3-month period of time. And since we started our little journey on buybacks, we bought back almost 1/4 of the company and — with about $0.5 billion.

And we have no reason to discontinue that operation. As I said, everything — based on what we see out there, we don’t see anything better than buying back our own stock. It’s hard to turn down a double essentially on liquidation value with your — if that hits you and that’s there instantly. I’ll just mention a couple 3 portfolio companies in alphabetical order. Alight light had a really, really good quarter, 8.4% revenue growth which excited the market. The 26% BPaaS growth, that’s their sort of comprehensive enterprise offering that is really selling well and providing increasing margins to Alight. For those of you who are cash flow nerds like me, the most promising and encouraging news out of Alight was that they spiked their — they grew their EBITDA margin by about 175 basis points to nearly 20%, which is really good.

And in my opinion, and they blew it out on cash flow. Their cash flow was a multiple of cash flow over the corresponding quarter. So they’re finally getting the benefit of this restructuring that they’re doing and the automation that’s embedded within the movement of employees from call centers to mobile. Stephan mentioned on his earnings call that — in the Q&A, he mentioned that they were able to — they’re handling hundreds of thousands more, I don’t recall the precise number — hundreds of thousand — maybe 1 million more employees during this enrollment period and yet the number of calls and the number of call center people is flat. Their mobile uptake has tripled over the past year, over last year’s enrollment period. So this is right up the plan.

You’re starting to see the benefits of automation. The company’s humming. The stock is way depressed, not for any reason other than the fact that there is a lot of PE overhang. And when that certain private equity firm is sold, they’ve sold it — they’ve really crashed the stock afterwards. We don’t know where they are. They’ve gone off the board. They don’t report their ownership anymore. They’re below 10%. But we are certainly hoping that we see some excess volume there. So we’re hoping that that’s then moving out of the stock and maybe they’ll be out shortly. D&B is another one that’s woefully undervalued on the — this morning, I did the math. They’re trading at about a 40% discount to peer multiples despite the fact that they’re growing in line with peers.

And revenue-wise, they grew 5.8% on a — before FX basis and the third quarter revenues — over third quarter of 2022. And their margin expanded a little bit, and they are able to delever a little bit. So they have — they do have a little bit too much leverage. We ought to be thinking about strategies to reduce that as we — and Alight had a little bit too much leverage. And we’re thinking about trying to come up with some strategies to help delever those businesses that we think will help. At least it will give them some buyback power. So Ceridian as usual, just knocked it out of the park for the third quarter. I’ll just note that UBS — I just was handed a report, UBS just picked up both — I got it right here. Just picked up — Kevin McVeigh, who was covering Alight at CS moved to UBS and just initiated on Alight, and Ceridian $10 price target on Alight and an $87 price target on Ceridian.

So obviously, pretty bullish on those. I’m going to turn it over to Bryan to talk about a handful of things.

Bryan Coy: Sure. I wanted to briefly — and Rick Massey referred to what we put out there monthly, just to demonstrate the discount in our net asset value. We started the year with an aggregate net asset value of $2.7 billion, which was about a 43% discount where our stock was at the time. We were trading at $20.65. And as of today, we’re still at a $2.3 billion aggregate net asset value against our stock price of $17.80. So that comes out to $31.79 intrinsic value per Cannae shares or 44% discount. So the discount has remained rather steady. It’s why we have been dutifully continuing to buy our shares down month after month after month, that you’ll notice a little bit of a decrease in that aggregate fair value, reflecting some of that we’ve sold off 20%, another 20% of our Ceridian shares.

We’ve taken a couple of hits on fair marks: System1, Dunn & Bradstreet, Alight, Ceridian. All those are fair valued every month and therein tied to the stock price. This month, in particular, we even took a further write-down for book on System1, reflecting the market’s opinion of the stock at the time. And we also took a rather large mark on Sightline. I’ll talk about that one briefly. We discussed on our second quarter earnings call that Sightline has had a lot of challenges lately, ease and sign up for the app, acceptance rates from processors. Product rollout has definitely been slower than anticipated, acceptance and rollout to other major strip operators. All those have kind of factored into a lot of their challenges. And in late Q3, we further questioned their plans and timings.

And as a result, engage a third-party firm to prepare evaluation of Sightline. That resulting valuation range was well below Cannae’s recorded book value as well as the fair value mark from a third-party investor from late 2022. And accordingly, we recorded about a $70 million impairment to its book value and reduced the fair value by another $157 million on some of the parts. So the fact that we’re still holding at $2.3 billion and a 44% discount has been pretty steady and validates us continuing to buy our own stock. Ryan?

Richard Massey: We’re going to turn it over to Ryan?

Ryan Caswell: Yes. I’ll just quickly touch on Black Knight football. We’ve continued to make good progress over the quarter, year-to-date. Commercial revenues are up about 30% year-over-year, which shows what Jim and some of the new hires have been doing to both increase the sponsorship, increase hospitality, increase ticketing. That’s positive. We also invested in some players as well as re-signed some of our kind of top players to keep the kind of the contract value and the financial value of those players over time. Lastly, we did raise a little bit of capital of Black Knight. Cannae contributed about $25 million. We had third parties in the remainder. So it was about — we raised a little over $60 million in the quarter.

Richard Massey: With that, we’ll — operator, we’ll turn it over to questions.

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Q&A Session

Operator: [Operator Instructions]. And the first question comes from Ian Zaffino of Oppenheimer.

Ian Zaffino: So I wanted to ask you as far as just kind of philosophy here of the company. Are we going to see new investments on the horizon? Or what’s kind of your thoughts on investments? Maybe selling down DNB, given kind of how big it is in your portfolio? And at what point does it maybe make sense just kind of collapse the structure here instead of this buying back shares, buying back shares? How about just return everything to shareholders?

Richard Massey: Okay. Great questions all. I’ll see if I can deal with those generally. As I said, we are not — if I haven’t said this, I’ll say it today. We’re not actively looking, nor have we been shown any interesting investments. We’re not actively looking for investments. We are on a path to buy back our shares within the amounts — within the limits provided by law. The — and yes, you could say we — it would be stupid and probably not even legal for us to telegraph what we’re going to do with our publicly traded portfolio companies and our ownership there. But there are shares that we own that are below basis, so far below our basis that will never catch up. And those would make really nice tax harvesting structure offsets as well as giving us some cash to do more buybacks.

So I’ll let you go do the math on our portfolio. But I don’t think I should get in much more detail about that. As to the collapsing of the structure and so forth, a, it’s very tax inefficient to do it that way; b — and a couple of reasons for that. The main reason being that if we buy back more than a certain number of shares then we lose the availability of our capital loss carryforwards and carrybacks. And so theoretically, we could take some capital losses today and reach back to prior periods. And we’re thinking about this, reach back to prior periods and get a refund for taxes that we paid in prior years. If we were to have bought back over a 3-year period, a control of the company, then we — the availability of those carryforwards are — they’re not going to be available, they’ll be severely limited.

That — we are a C-corp. So we — those losses are important to avoiding sort of a double tax on distribution of assets. So we can’t go a lot faster than we’re going and preserve these very valuable tax assets. So except over time, our ability to buy is volume limited. Our daily volume can increase as we buy back more. And it’s sort of snowballs and we’ll be able to accelerate our buybacks as we continue to do this. I think our — it’s 25% of our average daily trading volume. Our average daily trading volume is about 425,000 shares-ish. So — and over time, we plan on it creeping up. So does that make — does any of that make sense? We’ve had quite a few people come and say, why don’t you just liquidate the thing and distribute the proceeds?

Well, that’s taxable to you. That’s the main reason. And it would be taxable to us if we liquidate something for a gain. So we at least would like to not have a gain on the corporate — on the C-Corp side. So hopefully, that makes sense.

Ian Zaffino: Yes. And then as far as maybe even raising more cash for even more buybacks, how do you think about O’Charley’s and 99?