CCC Intelligent Solutions Holdings Inc. Q3 FY2022 Earnings Call

Thank you for standing by. This is the conference operator. Welcome to the CCC Intelligent Solutions Third Quarter 2022 Earnings Conference Call. Please note the call is being recorded. I would now like to turn the conference over to Bill Warmington, Vice President of Investor Relations. Please go ahead, sir.

Good morning, and thank you for joining us today to discuss CCC's third quarter 2022 financial results, which we announced in the press release issued before the open of the market today. Joining me on the call are Githesh Ramamurthy, CCC's Chairman and CEO; and Brian Herb, CCC's CFO. The forward-looking statements we make today about the company's results and plans are subject to risks and uncertainties that may cause the actual results and the implementation of the company's plans to vary materially. These risks are discussed in the earnings releases available on our Investor Relations website and under the heading Risk Factors in our 2021 annual report on Form 10-K filed with the SEC. Further, these comments and the Q&A that follows are copyrighted today by CCC Intelligent Solutions Holdings, Inc. Any recording, retransmission, reproduction or other use of the same for profit or otherwise without prior consent of CCC is prohibited and a violation of United States copyright and other laws. Additionally, while we have approved the publishing of a transcript of this call by a third party, we take no responsibility for the inaccuracies that may appear in that transcript. Please note the discussion on today's call includes certain non-GAAP financial measures as defined by the SEC. The company believes these non-GAAP financial measures provide useful information to management and investors regarding certain financial and business trends relating to the company's financial condition and the results of operations. A reconciliation of GAAP to non-GAAP measures is available in our earnings release that is available on our Investor Relations website. Thank you. And now I'll turn the call over to Githesh.

Thank you, Bill, and thanks to all of you for joining us today. I'm pleased to report that CCC delivered another quarter of strong top- and bottom-line performance. For the third quarter of 2022, CCC's total revenue was $199 million, up 13% year-over-year and ahead of our guidance range. Adjusted EBITDA was $78 million, up 11% year-over-year and also ahead of our guidance range. Our adjusted EBITDA margin was 39.3%. Based on our strong performance in the third quarter and year-to-date, coupled with our outlook for Q4, we are raising our revenue and adjusted EBITDA guidance for the full year, which Brian will walk through. Today, I would like to discuss three topics. The first is the uniqueness and strength of the CCC platform. The second is how our efficient financial model enables continuous investment and innovation throughout economic cycles. And third is the progress we're making on our new solutions. Beginning with our first topic, what makes CCC's platform so unique is that it combines an efficient technology framework, close customer relationships and a multisided network that benefits all parties, resulting in a powerful business model. Our technology framework is a key element of the CCC platform. We have a long history of being at the forefront of technological innovation for the auto insurance economy. Whether that was introducing the CCC ONE platform for collision repair more than a decade ago, which today represents more than 40% of our revenue, or more recently launching and scaling several first-in-the-world AI solutions for claims. Innovation is at the heart of what we do. Today, our 100% multi-tenant cloud architecture is scalable and enables us to roll out new products and updates quickly and cost effectively. We are also very fortunate to have great customers who want to innovate with us and to do so over the long term. A good example of this is a recent renewal with a top-20 national insurer. This insurer extended their contract with us through 2029, a seven-year extension versus our typical three- to five-year contract length, and also expanded their relationship to include multiple new solutions. This arrangement underscores CCC's role as our customers' long-term innovation platform of choice, with customers increasingly looking to the CCC Cloud to help them transform their business and optimize their performance. A core part of delivering those results is how we work with customers. Delivering solutions with significant input from our customers enables us to effectively address customer pain points and deliver near-term operational efficiencies for our clients, in many cases years ahead of others. As a result, our solutions have high levels of customer adoption, ROI and renewal, which helps create a powerful and highly scalable business model. Maintaining close customer relationships is a key part of CCC's culture and a major driver of our consistent Net Promoter Score of 80. Our network is another key element of the CCC platform. Our network is large, complex, highly interconnected and generates value for all participants. It supports mission-critical processes at over 30,000 companies and across more than $100 billion of annual transactions. The network includes insurers, repair facilities, OEMs, parts suppliers and many other members of the auto insurance economy, with CCC the trusted partner powering and facilitating billions of interactions. As the CCC network has grown in both segments and participants, the value of the network to each participant has also grown—the classic network effect. We believe that an interconnected CCC network is an essential enabler of the auto insurance economy's transformation and is a great way for our customers to address the rapidly increasing complexity they face. The second topic I'd like to cover today is how our efficient financial model enables continuous investment in innovation throughout economic cycles. Our financial model is both predictable and scalable. In terms of predictability, over 80% of our revenue is subscription-based under three- to five-year contracts, and we have 99% gross dollar retention. In terms of scalability, CCC's high-70s percent gross margin is a product of our highly efficient, cloud-based service delivery model I discussed earlier. In addition, we have an efficient go-to-market model because we already have broad customer coverage with our growth increasingly coming from existing clients. These efficiencies allow us to continually reinvest in our state-of-the-art technology stack over the long term, enabling rapid deployment to customers. During the pandemic, for example, we continued to invest aggressively in developing new solutions such as Estimate-STP, Diagnostics and Payments. These investments, combined with decades of previous investments, position CCC at the heart of a major digital transformation of the auto insurance economy. A good analog is how the financial crisis of 2008–2009 accelerated the digital transformation of the financial services industry in the decade that followed. We believe the pandemic illustrated to auto insurance economy participants the need for new tools to improve consumer experiences and operational efficiency. We believe this industry is in the early innings of this transformation and that these forces will underpin our growth for the next decade. The third topic I'd like to talk about today is the progress we are making on some of our newer solutions. We have a long history of developing solutions combining software, hyper-local data and our interconnected network to solve problems for our customers. Today, our customers' problems include labor shortages, supply chain challenges, inflation, lack of repair facility capacity and rising consumer expectations, all compounded by the increasing complexity of vehicles and of the ecosystem itself. So far in 2022, for example, repair costs are running over 12% higher than the same period in 2021. And in third quarter 2022 the national average scheduling backlog for auto accident repair has reached 4.8 weeks, more than twice the previous peak, up 2.2 weeks since the first quarter of 2017. And those figures are all before the impact of Hurricane Ian. Customers recognize that investing in digital solutions is the best way to counteract the negative impact of the macro challenges we are facing. This morning, I wanted to give you an update on two of our solutions that are helping to do that. We discussed these last quarter: Estimate-STP and Diagnostics. Estimate-STP is our AI-based system that can write line-item insurance claim estimates from photographs with little to no human involvement based on carrier configuration. We now have 14 clients on Estimate-STP, up three from the 11 we mentioned on our last earnings call in August. We now have seven of the top 10 insurers, representing over 50% of the industry claim volume, running Estimate-STP, and we are excited that clients are starting to roll it out nationally. The absolute volume levels are still a tiny fraction of the potential, but they are growing quickly off that small base. In September, the number of claims being processed through Estimate-STP was several multiples of the number of claims processed in January. I also wanted to mention CCC Smart Red Flag Cross-Carrier in the context of Estimate-STP as well as the broader straight-through processing opportunity. CCC Smart Red Flag Cross-Carrier is an AI-powered fraud detection system that leverages the claims data of the participating insurers on the CCC Cloud. Five weeks ago, we announced that GEICO was the first auto insurer to join. Since then, eight additional carriers have signed up. These nine carriers include three of the top 10 and represent about 30% total market coverage. We believe Smart Red Flag Cross-Carrier is an important digital enabler for the auto insurance economy because it helps increase trust in the digital claims system as the velocity of auto claims increases. The second solution I'm going to talk about is Diagnostics. Cars are getting safer, but all these safety features are also making cars more complex. As a result, diagnostic scans are getting more and more important because damage is not always visible to the naked eye. Five years ago, the number of repairable appraisals that included the scan was about 3%. Today, that figure is about 50%. Over the past few years, we built out a robust network of leading providers of diagnostic services such as asTech, AirPro, Opus and Honda. In fact, last week, just before a large trade show in Las Vegas, we launched a new optional add-on package to CCC Diagnostics, our diagnostic solution for repair facilities. The add-on enables repairers to simplify the administration of diagnostics, creating more consistency in reporting, improving verification of scans and increasing transparency between repairers and insurers. We have also received strong endorsements from OEM and automotive customers who see this capability as being very helpful to repair quality and safety. The new CCC Diagnostics add-on is part of the previously defined $50 million to $100 million revenue opportunity for Diagnostics and is another example of the central role CCC is playing in digitizing the auto insurance economy. Before concluding my remarks, I'd like to welcome Mike Silva to our executive team as CCC's new Chief Commercial and Customer Success Officer. Mike has run multibillion-dollar U.S. and international operations at companies like Microsoft, IBM, UnitedHealth and most recently Salesforce. Best of all, he represents the core values we look for in our leaders. Mike also has direct industry experience, having started his career as a claims manager at Chubb Insurance. He has deep experience with enterprise-level sales in SaaS, cloud and AI across insurance, financial services and other industries. I have high confidence in Mike's ability to help our customers improve their operational efficiency and consumer experiences. Mike, it's great to have you as part of our team. I will now turn the call over to Brian, who will walk you through our results.

Thanks, Githesh. As we now turn to the numbers, first I'd like to review our third quarter 2022 results and then discuss our updated guidance for the fourth quarter and for the full year 2022. Total revenue for the third quarter was $198.7 million, up 13% from the prior year period. Approximately 10% of our revenue growth in the third quarter was driven by cross-sell and upsell into our installed client base, including continued strong adoption of our digital solutions; about one percentage point of the 10% came from the large expansion deals that we closed in the second half of last year that we've been talking about over the last several quarters. An incremental 3% came from new logos, mostly repair facilities and parts suppliers. I'd also note that 99% of our revenue in the third quarter was domestic. Turning to our key metrics. Software gross dollar retention, or GDR, captures the amount of revenue retained from our client base compared to the prior year period. In Q3 2022, GDR was 99%, consistent with last quarter. We believe our software GDR reflects the value we provide our customers and the stickiness of the network effect. Software GDR is a core tenet to our predictable and resilient revenue model. Software net dollar retention, or NDR, captures the amount of cross-sell and upsell from our existing customers compared to the prior year period as well as volume movements in our auto physical damage client base. In Q3 2022, software NDR was 110%, which is above our historical average. The consistently strong NDR performance in recent quarters reflects the success we've been having with our cross-sell and upsell opportunities across our client base, including the large expansion deals signed in the second half of last year. NDR is a core driver in our business, and we have excellent opportunities to execute against this for the foreseeable future. Now I'll review the income statement in more detail. As a reminder, unless otherwise noted, all metrics are non-GAAP, and we provided a reconciliation of GAAP to non-GAAP in our press release. Adjusted gross profit in the quarter was $154.1 million with adjusted gross profit margin of 78%, which is consistent with the third quarter of last year. We feel good about the operating leverage and scalability of our business and being able to deliver against our long-term target of 80%. In terms of expenses, adjusted operating expenses were $83.1 million, which grew 11% year-over-year. Growth in these expenses was driven mainly by headcount additions and to a lesser extent an increase in discretionary spend as these expenses are largely normalized. On the headcount point, we are pleased with the progress made to advance both our operational capabilities and capacity for new product innovation by adding key positions across product management and product development. We feel we are in a strong position to continue to deliver ongoing innovation into the market and execute on our strategic agenda. Adjusted EBITDA for the quarter was $78.1 million with a 39.3% adjusted EBITDA margin. Adjusted EBITDA grew 11% year-over-year with a slight margin decline of 40 basis points compared to Q3 of last year. The modest margin decline reflects operating leverage of our revenue growth being offset by investment in resources to support our long-term growth initiatives. As an example, year-to-date, we have increased our product development staff month capacity by approximately 20%. Now turning to the balance sheet and cash flow. We ended the quarter with $248 million in cash and cash equivalents and $794 million of debt. At the end of the quarter, our net leverage was approximately 1.8x adjusted EBITDA. In an effort to proactively manage our interest rate risk, during the third quarter, we put in place a 4% three-year interest rate cap on $600 million of our floating-rate debt. Going forward, the interest rate on our debt will continue to float based on a one-month LIBOR, but approximately three quarters of our debt will be subject to an interest rate cap of 4%. Free cash flow in the quarter was $17.4 million compared to $25 million in the prior year period. Year-to-date, we've converted approximately 43% of our adjusted EBITDA into unlevered free cash flow. Adjusting for the timing of customer receipts, which were collected in October, the interest rate cap and the headquarter buildout, adjusted unlevered free cash flow would have been in the low 60s range year-to-date, consistent with historical results. Now I'd like to finish with guidance, beginning with the fourth quarter. We expect total revenue of $200 million to $202 million. This represents 7% year-over-year growth at the midpoint. We expect adjusted EBITDA of $77 million to $79 million, which represents a 39% adjusted EBITDA margin at the midpoint. For the full year 2022, we expect revenue of $779 million to $781 million, which represents 13% year-over-year growth at the midpoint. We expect adjusted EBITDA of $302 million to $304 million, which represents a 39% adjusted EBITDA margin at the midpoint. Three points to keep in mind as you think about our fourth quarter and full year guidance. The first is that we have now lapped all the large expansion deals that we signed in the second half of last year. These deals contributed 5% of revenue growth in the first quarter of 2022, 4 points in the second quarter and 1 point in the third quarter. We will receive no benefit from these deals in the fourth quarter. The second point is that we had a 2 percentage point contribution from nonrecurring revenue in the fourth quarter of last year. This creates a two-point revenue headwind for us in the fourth quarter, which means the implied fourth quarter guidance of 7% to 8% revenue growth without the 2-point headwind would be 9% to 10% growth in the fourth quarter. The third point is that we are raising our adjusted EBITDA margin forecast for the full year based on the operating leverage of our revenue performance in Q3 and year-to-date. We expect adjusted EBITDA margin will be up approximately 80 basis points for the full year 2022 to about 39%. This represents about 900 basis points of margin expansion since the end of 2019. We continue to be focused on investing in innovation to support our growth ambitions while at the same time progressing towards our long-term mid-40s adjusted EBITDA margin targets. Overall, our guidance reflects our confidence in the underlying momentum of the business and we feel good about the strategic position and the long-term opportunities in our product portfolio. We believe we have many shots on goal, two of which were highlighted today with Estimate-STP and Diagnostics, but we have many other exciting opportunities across both our emerging solutions like subrogation and payments as well as our more established solutions like casualty, repair shop package upsells and Engage. The need for digitization across the P&C insurance economy continues to accelerate, and CCC is well-positioned to drive durable growth in revenue and profitability in the near- and long-term. We are confident in our ability to deliver on our long-term organic revenue growth target of 7% to 10% next year and beyond. As we continue to execute on our strategic priorities, we believe we will generate significant value for both our customers and our shareholders. With that, operator, we're now ready to take questions. Thank you.

The first question comes from Gabriela Borges of Goldman Sachs.

For both Brian and Githesh: Brian, you talked a little bit about the puts and takes, the fourth-quarter guidance. Githesh, you talked about some of the longer-term secular tailwinds you're seeing post-COVID. I'd ask about the long-term growth rate, so the 7% to 10%. Maybe give us a little bit of insight into what would drive you to be at the low end of that range versus the high end of that range in any given year? And any early visibility into 2023 and how we should be thinking about that?

Yes. Gabriela, I'll start thinking about Q4 and the range we put out. So we talked about 7% at the midpoint and 8% at the high end of the range. Remember, within there, there's two points of headwind that we're facing. So when you normalize that, that's 9% and then 10% at the high end of the range. So I think that's a good way to think about how we're going to end the year and then the stepping-off point into next year. When you think about what will drive the high end of the range, one of the key factors will be the adoption of our newer solutions and how those track. And so when we think about what will push us to the high end or beyond, it's really going to be the progress of those new solutions that we're rolling out and the adoption of them.

Gabriela, one of the things that we have focused on is having a very, very scalable and modern cloud architecture. As we deliver new solutions, our ROI tends to be very quick—we're talking about 90 days, typically from the time we roll out a product or a solution. As a result, we have high adoption. As an example, I mentioned Estimate-STP. If you look at even just over a quarter, we've added three large clients. As we roll out existing products and our newer solutions, we're also continuously developing new products. So I would say adoption as well as the pipeline we have of new solutions is what gives us confidence. Most importantly, we've had a number of meetings with our customers and they all have indicated a very deep propensity to continue to roll our solutions out. That's what gives us confidence in our growth.

That all makes sense. As a follow-up, Githesh, congratulations on hiring Mike. Maybe give us a little bit of a preview. What are a couple of key projects that Mike will be looking on? And what are some of the areas where you think you can really move the needle?

Sure. Mike is primarily focused on, first and foremost, making sure he has an extraordinarily deep understanding of our customers, our products and solutions as we built all of these over the long run. Mike's primary focus is working with our customers to really roll out many of these newer solutions, a whole range of solutions working with our teams. Mike has deep experience in go-to-market rollout of new solutions, and that's a big focus for him.

The next question comes from Dylan Becker of William Blair.

Congrats on the quarter. I guess maybe starting with Githesh, the idea—you touched on STP, planning out around claims automation, obviously some solid early traction there. But as you think about the idea of rounding out the broader touchless claims opportunity, I think that there's probably other components that you could build out, right? So speaking to that innovation piece, you touched on smart enabler. I would just understand how the early track you're seeing maybe gives you and the market confidence in claims automation capabilities and how you're thinking about rounding out that suite in the future innovation cadence there?

Okay. Thanks for the question, Dylan. Here's what we're seeing. What we started to do, first and foremost, was when we started rolling out Estimate-STP, people started testing Estimate-STP in a handful of geographies. People tested it in one or two states, maybe three states. Prior to Estimate-STP, we had rolled out Smart Estimate, which was our AI solution being used by thousands of adjusters, so people got really comfortable with the capability of the AI and its fundamental performance. As we move to Estimate-STP, what we are now seeing is clients going from one, two or three states to, in some instances, all 50 states, and volumes are still very tiny. But as we tune the models, add more customers and people roll it out in more states, we see tremendous opportunities for Estimate-STP to continue to roll out across our client base. Estimate-STP is part of a much broader view we have around STP or straight-through processing. The ability to demonstrate in very tangible terms what Estimate-STP can deliver gives our customers a lot of confidence, and we're working at design levels with many of our customers across a much broader STP, which starts all the way from the consumer through settlement and takes advantage of the network of customers we have across insurers, repairers and parts providers because you have to bring all of these pieces together to truly pull off straight-through processing.

That's very helpful. I appreciate the color there. Maybe switching over to the repair facility side as well: the idea of consolidation playing out in the space. You've got a healthy share here. I'd assume that many of your customers tend to be the consolidators. You touched on a lot of the macro impacts, but maybe how they're prioritizing investment and efficiency to address growing backlogs, material and labor challenges?

In fact, I was at our trade show just day before yesterday talking to many of our repair customers. We have a lot of independent customers as well as multi-store operators. When we say we have 27,500-plus customers, it's made up of multi-store operators and independents, so it's a large share of both. What we are seeing is that the pressures they have in terms of labor shortage, inflationary costs and many of the things we pointed out are leading them to look to save time. Time is the one thing that, if they can have technicians and others be highly productive, it yields the most benefit. Part of our solutions eliminates and simplifies processes. For example, CCC ONE streamlines the operation of both multi-store operators and independent repair facilities. As we add functionality like Diagnostics, Diagnostics has a dramatic impact on improving the entire flow between OEM procedures and connecting to insurers. What we're seeing across the board is people are seeing volume come back, but at the same time the drive for more digital capabilities and more efficiency—we hear that across the board from our repair customers as well.

The next question comes from David Kelley of Jefferies.

Thanks for all the color on the lapping of your large expansion deals from last year. But maybe regarding the new top-20 expansion deal you announced this morning, how should we think about contribution from the new deal going forward? And also curious if there's any other major contracts potentially up for renewal in the coming months that we should be considering?

Yes, David. Within the deal, we highlighted a top-20 renewal. Within that renewal, we had several products that were included as a cross-sell. We highlighted it also because of the term: it's a seven-year term and really highlights the commitment this carrier has for CCC. You think about that in our normal step-up of growth sequentially. When you look at our absolute dollars, you see each quarter it's building—it's part of that natural step-up of cadence and nothing particular to highlight on this deal within the guidance that we're seeing for Q4 and when we talk about the guidance for next year. We are always working with our clients on cross-sell and expanding their bundles. That's the natural cadence and we'll continue to do that as we think about next year. We'll always be cross-selling and upselling into our client base.

Okay. Got it. And then we're starting to see used vehicle values soften from really high and frankly record levels. This will have implications for vehicle total rates and clearly your repair facility customers. I was hoping you could walk us through how this trend impacts CCC. Clearly not nearly to the extent given your recurring revenue stream, but high level, how do you think about a market where used vehicle values are starting to correct from the robust post-COVID supply-shortage-driven levels?

Sure. First and foremost, we have deliberately designed our business model so that our goal for clients is to give them the correct answer every single time. It's important that whether a vehicle should be repaired or totaled, we provide the accurate decision for that particular vehicle. With that said, as total loss prices have come down, total loss valuation hit a $16,000 peak just a couple months ago. Over a period of about 20 years, total losses had gone from roughly $6,700 to $10,000 and in the last two years it went from $10,000 to $16,000. So we've seen a significant bump. More recently, in September and late into October, total loss percentages have come down from the 20% range closer to 18%, and that is directly related to the softening of used car prices. The impact it has for our repair customers is that as total loss percentages change, repair volumes can shift, but for the CCC business model, it has no implications one way or the other.

The next question comes from Saket Kalia from Barclays.

Okay, great. Githesh, maybe for you. Great to see the 14 carriers on Estimate-STP. I was wondering, is there a catalyst to accelerate that adoption? And from CCC's perspective, do you see economic scale as that adoption increases? Maybe you could talk about that at a broad level.

Sure. From a customer standpoint, there are a number of factors. Vehicle complexity is increasing substantially; with literally hundreds of models and variations, what AI can do is take photos—we collect over 500 million photos a year—and translate that into what the repair estimate should be for that vehicle, producing a line-level estimate. As customers start using it, they find substantial benefits in speed, reducing complexity and jump-starting estimates for their own staff. Sending a person out to look at a vehicle can cost as much as $200. These tools are having a significant impact on that and also dramatically improve the consumer experience after a claim because of the speed. For us, in terms of CCC, as scale increases over the next 24 to 36 months, we see Estimate-STP continuing to roll out nicely. As rollout increases, revenue increases commensurate with that. Even though from January to September we've seen a multiple increase in the number of Estimate-STP claims, on an overall basis for this year it is still a very small number. We are excited about what it can do for our clients and we believe strongly this will be a revenue driver for us.

Got it. Brian, maybe for my follow-up: great to see the software NDR continue around that 110% range, particularly given the tough compare from the big renewals last year. Can you dig into what drove that? And I know you don't guide to software NDR, but how do you think about that ebbing and flowing in the coming quarters?

Absolutely. We feel good about the 110% posted in the quarter. Historically we've been around 106%–107%, so this is a good trend and traction. Three things underpin that metric. One, we see continued strong growth contribution from our digital solutions—mobile, AI, Engage, and some digital tax and fee solutions for total losses. Second, we see continued strength in our upsell at the repair facilities, trending higher than historical levels. Third, the large expansion renewals are still in the metric, although tapering off for Q3; that will go away in Q4. Going forward, about 80% of our growth is expected to come from our existing installed base. That will flex quarter-to-quarter but gives you a view for thinking about NDR in the overall growth equation.

The next question comes from Kirk Materne of Evercore ISI.

Githesh, maybe following up a little bit on Saket's question. When we think about adoption of STP by your customers, how much of it is a business process challenge for them to start integrating it into their existing processes? Is this something that has to happen on a state-by-state basis? Or once they do a proof of concept, can adoption scale quickly? I'm trying to get a sense whether adoption will be a steady push higher or whether there are opportunities for it to go more exponential.

First of all, there is no need to go state-by-state. It is more about tuning. There are hundreds of parameters from an AI standpoint that have to be tuned and every carrier has unique needs in terms of tuning, and we work with them on that. Once you plug it in, we can roll it out across our entire platform and geographies. It's not a technology issue nor a major training issue, so it's relatively quick. Our customers are deeply integrated into the CCC platform with their systems and our systems. When we rolled out mobile several years ago, almost all our customers adopted our mobile capabilities. In fact, adoption of mobile in the industry has gone from zero to about 30% of claims coming in via mobile channels. Consumers receive a link, take pictures, and then the AI starts to work. So that part of the funnel is already built for consumers and the entire workflow is in place. There are some adjustments to the operating process, and it's more about people getting comfortable with it. That's why we're excited to see that we had 11 customers last quarter and added three more customers this quarter.

Yes, that's very helpful. I was just trying to get a sense on whether there are gating factors for adoption to adoption. Brian, on the big renewal this quarter, it's great to see your customers so committed to CCC in terms of seven years. Can you remind us: are there pricing escalators built into contracts generally, perhaps to address inflation? Or is it basically still volume-based?

Good question. We are always looking at our strategic pricing and tuning. Like many SaaS providers, we'll look at packaging and the value we're driving for our clients, and we'll make sure we're getting appropriate value back to us for bringing solutions to our clients. There's nothing new that we're doing specifically on the back of inflationary challenges. We're continuing to look at pricing in a strategic way as we have historically.

The next question comes from Tyler Radke of Citi.

I wanted to follow up on the large renewal. Can you remind us: are these large renewals typically a catalyst for the carriers to take on more products? Or do expansions happen independently? And as you look out over the next 12 months, how does the renewal pipeline look relative to 2022? Are you expecting things to step up based on contract timing?

When you look at whether people add additional components of our solutions, it's really independent of whether we are renewing the contract. The platform is already in place and new solutions like Estimate-STP can be added regardless of contract timing. Interestingly, when people do renew, there's an opportunity for both the customer and us to add additional functionality. I would not say there's anything unusual about contract extensions having a link to rolling out additional solutions. They can work together, but they're not strictly dependent on each other.

I'll just reiterate that we look at opportunities in different ways. Sometimes a renewal is a catalyst to expand the broader bundle, other times we just add a product schedule within an existing contract without a renewal, and sometimes product extensions drive a renewal. They work in all different ways. When we look at our pipeline, we feel really good about the opportunities in front of us, both adding new product capabilities and renewing key deals as we go into next year. So we feel good about where we sit with our clients, the renewal cadence and cross-sell/upsell opportunities.

Brian, maybe for you: how are you thinking about the hiring environment here? CCC has typically had less churn, particularly at the senior level, relative to peers. Have you noticed any changes for better or worse in the hiring environment? And how are you thinking about expense growth and headcount growth into next year?

I'll start with the hiring part and Githesh can add. We remain focused on balancing our investment in strategic innovation and margin progression. We're fortunate to have a very efficient business model so we can fund strategic initiatives while progressing margins. We saw margin move from 38% to 39% this year and expect continued progress. We are seeing good progress in hiring: we've added about 20% of staff-month capacity year-to-date. We're able to continue to make key hires and we are seeing low churn and high retention. Overall, we feel good heading into next year with the capacity and skill sets needed for the long term.

Historically we've had very low churn and that continues. Most of the 20% capacity increase is coming in two areas: engineering, where we have full-stack developers and AI capability, and product management. We're continuing to add top talent in engineering and product management. We're able to recruit across geographies and if anything, recruitment has become a little easier in the last few months.

The next question comes from Gary Prestopino of Barrington Research.

Githesh, with Estimate-STP that you have out there, as insurers sign up for this are there adjacent products that you are offering that are must-haves to work with Estimate-STP—maybe on the repair side or insurance side—that add to the potential growth you foresee from this product?

Gary, the answer is yes. Estimate-STP is important to establishing the broader concept of STP or straight-through processing. It has implications across many facets of the claims process where we can apply AI and other capabilities since we're already deep in customer workflows. We're working with repair facilities of various types to link all the way from engaging the consumer through our Engage product in repair facilities. We see work going on in subrogation, where we've done acquisitions and seen opportunities. We have work going on at first notice of loss. As people test and see significant impact, we're excited about the broader straight-through processing opportunity across our entire customer base.

Great. That's good to hear. And then just a quick one for Brian: with the nonrecurring deal you had last year in Q4, you said it was a 2% contribution of revenue. I looked at that—that's about $4 million of revenue. Is that correct? And would most of that have flowed directly down to EBITDA?

Yes, that's right. Last year we had two points of nonrecurring impact in Q4 and we called it out at the time. That did flow all the way through. You saw it flow through in our gross profit. Gross profit in Q4 of last year was slightly elevated at 79% and that was part of the flow-through. So yes, you are looking at that correctly.

The next question comes from Arvind Ramnani with Piper Sandler.

I wanted to ask: you've been around during various periods of macro stress. If the macro environment is challenging in 2023, can you walk us through the puts and takes on your business? What would be the anticipated impact if a tougher macro persists?

Arvind, you are right—we have been through several cycles. During the dot-com crash, we invested to build and roll out web-based solutions for the insurance market. During the 2008–2009 financial crisis, we invested heavily in building out the CCC ONE platform that generates almost half of our revenues today. In 2020 with COVID, customers needed new ways of connecting to consumers, which drove adoption and investment in mobile and AI. We have a history of investing through cycles and maintaining close customer relationships that give us an advanced view of customer needs. Having an efficient financial model allows us to weather cycles. We continue to monitor the environment closely and apply lessons learned from previous cycles.

If macro weakens, does it benefit you in some ways or is it a headwind? What are some ways it could benefit the business and ways it could be a persistent headwind?

When you look at our clients' businesses, the fundamental nature of what we do is mission-critical. Auto insurance is a mandatory product—people drive and insurance is required. While pricing can change, claim volume continues to be stable and is not discretionary. Our business is rooted in an industry that is not discretionary, so demand for mission-critical solutions remains.

One other point: our revenue model is resilient and predictable. The vast majority is subscription-based and recurring, and that should be considered when thinking about macro impacts.

The next question comes from Michael Funk from Bank of America.

Thinking about economic sensitivity: I understand the resiliency of the business model, but are you seeing any elongation of the sales cycle or a change in purchasing behavior among your customers?

Nothing material that we're seeing.

And one more: thinking about NDR longer-term, how much will that be driven by existing solution penetration versus developing new solutions to sell into the base?

Mike, we laid out the long-term model: about 80% of growth will come from our installed base through cross-sell and upsell and 20% from new logos. Within that 80%, roughly half will come from more established solutions and half from newer initiatives like Diagnostics and Estimate-STP. So newer digital solutions will be an important portion of the growth mix.

There are no more questions from the phone line. This concludes the question-and-answer session. I would like to turn the conference back over to Githesh Ramamurthy for any closing remarks.

Well, thanks, everybody, for joining us today. We are proud of our performance to date in 2022, for which I'd like to thank our customers, our CCC team members and, of course, our shareholders. We remain confident in our ability to continue to deliver on our strategic and financial objectives. The durability of our business model continues to come through as we deliver innovation and operational efficiency for our customers. We look forward to talking with you on our fourth quarter call in early March, if not sooner. Again, thank you very much for your continued interest, and on behalf of all my colleagues, a big shout out to all our CCC team members who make CCC a great place every single day for our customers and for ourselves. Thank you.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.