Cannae Holdings Inc

NYSE:CNNE

Earnings Call Transcript 2023-Q2

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Cannae Holdings, Incorporated Second Quarter 2023 Financial Results Conference Call. During today's presentation, all parties will be in listen-only mode. Following the company's brief prepared remarks, the conference will be open for questions with instructions to follow at that time. As a reminder, this conference call is being recorded and a replay it is available to 11:59 pm Eastern Time on August 16, 2023.

With that, I would like to turn the call over to Rory Rumore of Solebury Communications.

[Rory Rumore, Solebury Communications]

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 the 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 investors this quarter. The headline is going to be that we bought back 3.1 million shares of our stock in the past from May through July, so 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, but we got back, with both feet and the second during in May through July, we bought back.

As I said, 3.1 million shares, average price [19.72], that's about 4% of the company. So it pretty -- that pretty much matches our most aggressive buybacks. We continue to believe that our shares represent the best value for us when we consider this at shares versus making an investment in another company or an existing company. And so we're pleased to report that.

No real activity, no sales of 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 our portfolio companies that we continue to believe are woefully undervalued, particularly when compared to their peers.

Dun & Bradstreet, for an example, showed up with about a 4% growth rate and that includes headwinds on -- that we all knew about with GSA and credibility. And we still believe that that business is going to continue to grow. I think its growth is going to accelerate. Bill is very pleased with the results of their operations. The stock market is seems to be sort of in a wait and see mode, but it's trading at today about 9.5 times 2023 EBITDA. 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 9.5 times. 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. Jenny Gomez being the number one sharp person. And she is really turned around the marketing business as well as the 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 it's 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 management that we've not emphasized more than non-BPaaS section of that business that grows mid-single-digits is solid as a rock, 100% retention. Once a customers on their payroll, what their health business -- it's very, very hard to get them out. And that's really is the foundation of that company's revenue growth and its cash flow.

So, you'll probably hear us telling a slightly different story in the future just so that we don't lose sight of the 70% of this company that's not BPaaS and still a great company. And that's trading at about 10 times 2023 EBITDA Alight is and we've -- again, that's compare that to, we're not going to name the peers, it's not going to name names, but this company is growing faster and is trading at about a 50% discount-ish to certain peers. And there's no explanation for that other than there is a [P overhang], and we think that's keeping a client on the stock. So -- but we really like the team. We really like the company. It's going to be -- it's going to 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%. That's been a very good performing stock. I think it was -- did you check the price before the call, Bryan?

It's really good. It's trading really well. So I'm not going to go through everything in our portfolio. We think a bunch of them are undervalued. And we continue to work really hard with these management teams to maximize value and help them grow streamlined organization.

And with that we'll answer questions. Operator? Hello?

[Operator]

[Operator Instructions] Your first question today comes from Kenneth Lee from RBC Capital Markets.

[Kenneth Lee, RBC Capital Markets]

Just want to ask about, at a high-level, what's sort of like the latest thoughts around a capital allocation? Obviously, you've stepped out on the repurchases and in the past you've talked about potential investments in private companies, but just wanted to go reassess and see what your least thinking there is in terms of capital allocation?

[Rick Massey, CEO]

I think we had our board meeting today and 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. And it's hard to beat, an almost instant, what is it, 45% discount. So a 92% pop on your net asset value from buying it back. So it's sort of hard to beat, and as long as that's -- it's trading at that substantially discount that's going to be the case, Kenn.

[Kenneth Lee, RBC Capital Markets]

And just one quick follow-up on that one. Maybe talk about a little bit about potential capacity for share repurchases and whether that could either include taking on debt or other options there?

[Rick Massey, CEO]

We've got a revolver. We probably, we may ping it, but it will not -- we're going to fund our repurchases with the sale of existing portfolio securities. We have a number of very liquid securities that 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 we failed for some time, again, I'm not going to name names, but I think you can expect to see us peel off quite a bit of our, I would almost call them legacy shares of various things. I don't think you're going to see us in the market selling light. I don't think you're going to see us in the market selling Paysafe because they're still, we think a quite a bit of upside left on Paysafe, but everything else may be pre-game.

[Operator]

Your next question comes from John Campbell from Stephens Incorporated.

[John Campbell, Stephens]

Just back to the buyback, I mean, it was obviously great to see the step up in activity. But as far as the rate of buyback, you guys, it looks like you called out the 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 of that within the quarter. I think we bought less than 100,000 within July, because we get blacked out after we start getting information.

[Rick Massey, CEO]

Pretty much was all during the vast majority in the second quarter.

[John Campbell, Stephens]

And then on-site line, you guys called out, 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, would be at this point relative to original investment? And then also just kind of any updated thoughts on the monetization timeline?

[Rick Massey, CEO]

It's not going as planned. I'm not really at liberty to go through all that except that product rollout's been slower. They've had to go back and there have been a lot of modifications. Customer uptake has been slower than expected and that despite a fairly booming gaming market. So we've been disappointed with it. Bill is on it, is focused on it very, very much and is talking to the CEO and we've got some options that we're going to pursue on site line. And before the end of next quarter, you might see something on that.

[John Campbell, Stephens]

And then one other item I just wanted to clear the air on. I mean, you guys obviously have the 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 -- they're tuning into your story, maybe if you can 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]

Essentially, you are a careful reader, John, I'll give you congratulations. You get a homework.

We are not a -- Investment 40 Act 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 I mentioned during the call. We're very active with our portfolio companies. We're involved in the various aspects of management bills the chairman of a number of them, I'm the comp committee chairman. We're all over the day-to-day operations and classifying us as essentially a mutual fund is not -- it's just not appropriate. We've had those conversations with the SEC part of the problem, frankly, again. We were a little bit -- we were lied in describing the level of activity that we have with our portfolio companies.

And when the SEC read our 10-K from a few years back, they said, well, you're just a passive investor. And we dissuaded them of that and we changed a lot of the language in our 34 Act materials to reflect our fairly active roles with these companies. So it just doesn't -- it's not right. It would not be appropriate to regulate us as such. And I'm not going to -- we've not had any correspondence with the SEC on that issue in what Bryan year-over-year. And my experience as a lawyer way back, we went back in the old Stone age when I was a lawyer, they don't ever agree with you and cut you loose. They just stop. They stop communicating. And usually if you go a year without a communication, you can generally view that that they've moved on and they're not going to pick on that issue anymore John.

[John Campbell, Stephens]

Yes, that makes a lot of sense. I mean, it's pretty clear to us the Foley playbook is just the opposite of what qualify you for the Investment Company Act 1940. So I agree with you there.

[Rick Massey, CEO]

Take as much time as you need. [Indiscernible].

[John Campbell, Stephens]

Just last one on Bournemouth and [Indiscernible]. I mean that was great to see them both finished pretty helpfully 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 the new season and any kind of progress you've made?

[A –Rick Massey]

Ryan, are you on?

[Ryan Caswell, President]

Yes. I think we've [indiscernible] right now, so it's hitting time they ask the question. So I think one of the big things we've been focusing on is just the, the transfer window and transfer activity. 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 interesting is there was actually a player that Bournemouth acquired and then loaned to Laurie end to basically show the kind of the benefits of the multi-cloud model. And wonderful 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 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. So I think there's, in short, to answer your question, I think there's both on the football side to improve the overall, both of the overall teams again, kind of move up the table, and which will both help from a revenue and a brand side as well as basically make the commercial operations better to generate more dollars that we're not being picked up before.

Those are kind of the big, the big off-season priorities. And then obviously we need to translate that into success on the field.

[John Campbell, Stephens]

Yes, makes a lot of sense and we'll look forward to that Analyst Day at Bournemouth next year.

[Rick Massey, CEO]

Yes. That would be great.

[Operator]

Thank you. This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Rick Massey for any closing remarks. Please go ahead.

[Rick Massey, CEO]

Let me just, before we get off, if Ken, John, anybody else has a question let us know. I'll go slow in my exit. So, we want to make sure we answer all your questions. So thank you. You've asked all the right questions in terms of what our capital allocation plans are. We told you what they are. We like our, we sure like our stock down here at 20 bucks or wherever it is right now. And we hate it from a valuation standpoint, but we like it from a valuation standpoint, if that makes sense.

So 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]

That does conclude our conference for today. Thank you for attending today's presentation. You may now disconnect.