CCC Intelligent Solutions Holdings Inc. Q1 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to the CCC Intelligent Solutions First Quarter 2023 Earnings Call. Operator provided instructions. Please be advised that today's conference call is being recorded. I would like to hand the conference over to your speaker today, Bill Warmington, Vice President of Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us today to review CCC's first quarter 2023 financial results, which we announced in the press release issued following the close 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 2022 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 or reproduction or other use of the same for profit or otherwise without prior consent of CCC is prohibited and a violation of the United States copyright and other laws. Additionally, while we've approved the publishing of the transcript of this call by a third party, we take no responsibility for 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 results, reflecting the predictability and profitability of our business. The first quarter of 2023, CCC's total revenue was $205 million, up 10% year-over-year and ahead of our guidance range. Adjusted EBITDA was $79.5 million, also ahead of our guidance range. And our adjusted EBITDA margin was 39%. On today's call, I'd like to highlight 3 themes that underpin our performance. The first is CCC's durable business model. The second is innovation. And third is a growing adoption of CCC solutions. First, our durable business model. Our clients in the P&C insurance economy are increasingly focused on the need to manage the business through 2 powerful megatrends: accelerating operational complexity and rising consumer expectations. Last year, auto insurers in the United States paid out over $200 billion in claims indemnity and spent about $25 billion on administrative expenses to handle those claims known as loss adjustment expense or LAE. Increasing operational complexity and consumer expectations are raising those costs even further. At CCC, we are focused on developing tools to help our clients increase efficiency and customer satisfaction while simultaneously overcoming headwinds from labor shortages, inflation, supply chain issues and regulatory changes. We do this through innovation, specifically by developing new solutions that leverage our industry-leading focus on AI and our interconnected industry network. One of the main drivers of increasing operational complexity is a growing sophistication of vehicles themselves, whether that is the sheer number of parts on the cars, the introduction of advanced driver assistance systems known as ADAS or the expansion of electric vehicles or EVs. Increasing vehicle complexity has been and continues to be a major factor in rising loss costs. ADAS modules range from automatic braking to lane departure warnings and leverage a wide array of sensors and cameras. Repairing these systems typically requires more parts and more labor hours per repair as well as diagnostic and calibration services, contributing to an increase in the average total cost of repair from $2,900 in 2017 to $4,200 in 2022 or 44% growth during this period. As vehicles become even more intricate, we anticipate the P&C insurance economy needing increasingly sophisticated tools to manage this change. While EVs are still a very small percentage of cars on the road, less than 1% of vehicles in operation, they are becoming increasingly popular with U.S. consumers. In 2017, EVs were less than 1% of new car sales. In 2022, they were almost 6%. Unfortunately, the average total cost of repair for an EV in 2022 is 50% higher than the average for non-EVs. While total EV claims are currently quite small, only about 1% of the claims processed by CCC in 2022, the long-term growth in this number and the increased complexity it causes is something we are helping our customers anticipate and address. Growing complexity is not the only challenge our customers face. Consumers today expect their commercial interactions to be highly digital, simplified, personalized, fast, empathetic and available at all hours. The leading consumer-facing companies that have met those high expectations have essentially set the standard for interactions across our lives. The good news is that CCC's AI technology enables our customers to meet this standard by streamlining and digitizing the P&C claims journey. According to a CCC survey, 84% of policyholders prefer a digitized claims process. And CCC solutions are a key enabler of that shift. Whether that is enabling the submission of an auto claim via photos on their phone, instantly booking a repair appointment or even resolving an injury claim digitally, our customers are deploying CCC solutions to help them deliver these digital experiences. This brings me to the second point I'd like to discuss with you today: innovation. CCC's business, which began with a single product, vehicle valuations, sold to 1 customer group, insurers, has grown to a point today where the CCC cloud powers the mission-critical operations of more than 30,000 companies across the P&C insurance economy, including insurers, repair facilities, OEMs, parts suppliers, lenders and more. A fundamental driver of that expansion has been our commitment to innovation. And for the last several years, a major pillar of that innovation has been artificial intelligence. To date, more than 14 million auto claims have been processed using a CCC deep learning AI solution, generating tangible, real-world impact for our customers and significant direct revenue for CCC. Underpinning these advances are not just cutting-edge technology, but over $1 trillion of historical data as well as deeply embedded workflows that enable our customers to seamlessly deploy these innovations at scale. One example of our commitment to continuously expanding the scope of our AI-enabled innovations is our acquisition of Safekeep in February last year. Safekeep's technology uses AI and automated workflows to streamline the subrogation process, addressing a key pain point for our insurance customers. Subrogation is the process of insurance companies attempting to recover dollars from other parties who are at fault for a claim. It affects tens of billions of dollars in claims, cost insurers over $2 billion in estimated administrative expenses annually and is a highly manual and time-intensive process. Digitizing subrogation is a natural extension of plans to address the industry's vision of straight-through processing. This, in turn, creates additional network benefits for insurers using CCC and extends the CCC cloud into lines of insurance outside of auto. We have spent the time since the acquisition integrating Safekeep into the CCC cloud, so that CCC's more than 300 insurance customers will have the opportunities to take advantage of this capability with direct tie-ins to the CCC solutions they already have in place. We have made significant investments to expand Safekeep's product functionality and are very pleased with the level of customer engagement and real-world results delivered by the solution today. We are also continuing to make substantial investments in AI across the entire CCC product line, including new computer vision applications in our casualty business as well as ongoing enhancements to Update Plus, our industry-leading CRM solution for repair facilities that uses semantic AI to help repair facilities sort and respond to consumer queries throughout the repair process. In the 12 months ending March 2023, over 80 million messages have been sent by Update Plus by e-mail and text to over 17 million unique consumers, a significant increase from the 45 million messages sent to 10 million consumers in 2018. We remain tremendously excited about the long-term opportunity to digitize the P&C insurance economy by applying industry-leading AI to existing highly embedded workflows across the CCC connected network. My third and final point is a growing adoption of CCC solutions. The first solution I will cover is Estimate-STP, our AI-based system that can prepopulate a complete line level repair estimate on a qualified claim in seconds. The total number of claims processed through Estimate-STP continues to grow as we onboard new customers and as existing customers increase their claim volumes by activating more collision categories, geographies and vehicle types. The annualized run rate value of auto claims processed by Estimate-STP in March 2023 was over $1 billion. This is more than 10x our run rate in March of 2022. While this is still less than 1% of our current annual auto physical damage claim volume, the rate at which customers are moving towards Estimate-STP is very encouraging. In Diagnostics, we continue to grow both our network and the volume of scanned vehicles being verified on our platform. The first quarter of 2023, about 3,800 repair facilities ran a scan through one of CCC's diagnostic service partners. This was more than twice the number of repair facilities running scans in the first quarter of 2022. In the first quarter of 2023, over 0.5 million scanned vehicles were verified on the CCC network, more than double the volume in the first quarter of 2022. As a reminder, this solution is designed to help improve consistency and transparency of scans and calibrations between repairers and insurers. CCC Engage, our solution which enables consumers to schedule estimate and repair appointments online with participating repair facilities, is currently eliminating 50,000 phone calls from repair facilities every month by facilitating integrated scheduling for insurers direct to consumers who have been in an accident. This process is, in turn, already generating 25,000 leads per month for repair facilities by allowing consumers to request estimates online using photos. The online process eliminates the need for the consumer to physically drive to the repair facility to obtain an initial estimate, reduces interruptions for the repair facilities' estimators and helps insurers improve their customers' experience. We continue to see opportunities for product adoption across both our repair facility and insurance customers. We previously highlighted our cross-selling momentum in repair facilities where the number of customers using 4 or more solutions has increased over 20% since 2020. And the average revenue per repair facility has increased 30% during that time. On the insurance side, a way to think about adoption is to look at CCC's revenue in relation to the aggregate annual amount insurers spend on claim payouts, including indemnity and LAE. Today, CCC's insurance revenue represents a very small percentage of these expenditures, about 0.2% or less than 20 basis points overall. Yet our solutions are helping insurers manage hundreds of billions of dollars of costs. We believe that the continued focus on digitization by carriers and the expanded TAM from emerging solutions provides a path to growing our share of a growing market. Let me conclude by saying that we are excited about what we have planned for 2023 and remain confident in our ability to continue to deliver on our strategic and financial objectives. I will now turn the call over to Brian, who will walk you through our results in more detail.

Thanks, Githesh. As Githesh highlighted, we are seeing good traction in the business supported by both innovation and the growing adoption of solutions by our customers. A key component of our durable business is our highly efficient, predictable and scalable financial model that enables us to balance investment in innovation and also drive operational efficiency throughout economic cycles. As we now turn to the numbers, I'd like to review our first quarter 2023 results and then provide guidance for the second quarter and full year 2023. Total revenue for the first quarter was $204.9 million, up 10% from prior year period. Approximately 6 points of our revenue growth in Q1 was driven by cross-sell, upsell and adoption of solutions across our installed client base, including the upsell of repair shop packages and the continued adoption of mobile and other digital solutions. Within the 6 points, about 1 point came from casualty volumes. An incremental 4 points of growth came from new logos, mostly repair facilities and parts suppliers. I also want to highlight that we saw more than 1 point of growth in Q1 from our emerging solutions, mainly Diagnostics and Estimate-STP. Now 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 Q1 2023, GDR was 99%. This is consistent with all of 2022. We believe our strong software GDR reflects the value we provide and the significant benefits that accrue to our customers from participating in the broader CCC network. 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 movement in our auto physical damage client base. In Q1 2023, software NDR was 106%, consistent with Q4 last year. Now I'll move to the income statement in more detail. As a reminder, unless otherwise noted, all metrics are non-GAAP, and we provide a reconciliation of GAAP to non-GAAP in our press release. Adjusted gross profit in the quarter was $156.6 million. Adjusted gross profit margin was 76%. This was down from 78% in the first quarter of 2022. The lower adjusted gross profit margin primarily reflects higher depreciation expense from capitalized projects recently released to the market, while the associated revenue from these emerging solutions are still in the early stages of scaling. Overall, we feel good about the operating leverage and the scalability of the business model and our ability to deliver against our long-term adjusted gross profit target of 80%. In terms of expenses, adjusted operating expense in Q1 2023 was $86.3 million, up 10% year-over-year. Growth in these expenses was largely driven by headcount additions that were onboarded in the second half of last year. Regarding the headcount adds, we are pleased with the progress made to advance both our operational capabilities and capacity for new product development. We feel like we are in a strong position to continue to deliver ongoing innovation into the market and execute against our strategic agenda. Adjusted EBITDA for the quarter was $79.5 million, up 8% year-over-year, and adjusted EBITDA margin was 39%. Now turning to the balance sheet and cash flow. We ended the quarter with $338 million in cash and cash equivalents and $790 million of debt. At the end of the quarter, our net leverage was approximately 1.5x adjusted EBITDA. Free cash flow in the quarter was $18.5 million compared to $32.6 million in the prior year period. Unlevered free cash flow in Q1 was $28 million or about 36% of our adjusted EBITDA. Q1 is seasonally our lowest free cash flow quarter because of the payment of our annual incentives. When you normalize for these payments, Q1 unlevered free cash flow would be in the low to mid-60s range. While our level of free cash flow can vary quarter-to-quarter based on seasonality or phasing or onetime items, it should average out to the low to mid-60s over time. I'd like to finish with guidance beginning in the second quarter of 2023. We expect total revenue between $207.5 million to $209.5 million. This represents 8% to 9% year-over-year growth. We expect adjusted EBITDA of $76.5 million to $78.5 million, which represents a 37% adjusted EBITDA margin in Q2. For the full year 2023, we expect revenue of $844 million to $850 million, which represents 8% to 9% year-over-year growth. We expect adjusted EBITDA of $332 million to $338 million, which represents a 40% adjusted EBITDA margin at the midpoint. Two points to keep in mind as you think about our second quarter and full year guidance. The first is that we feel good about our ability to deliver our position for the year. While we did see some incremental benefit from higher volumes related to casualty in Q1, we are not factoring this trend to continue through the balance of the year. We have raised the low end of our guidance based on the momentum in the business and the durable revenue model that provides good visibility to our long-term subscription contracts. The second point is that we expect adjusted EBITDA margins to step up in H2 from the low point in Q2, which will be impacted by seasonal expenses such as the annual payroll step-up, our annual customer conference and the year-over-year effect the second half of last year headcount adds. Also in Q2, we have approximately $2 million of nonrecurring, dual-running hosting cost related to the migration from private to public cloud. For 2023 overall, we expect adjusted EBITDA margins to increase to about 40%, with most of the year-over-year expansion taking place in the second half of the year as we lap last year's headcount ramp and benefit from the continued operating leverage of the business. Overall, our guidance reflects our confidence in the underlying strength of the business. The combination of our advanced AI capabilities into our interconnected network puts us in a unique position to help our customers improve the speed of decision-making, the efficiency of their operations and the quality of the overall consumer experience. We believe we have many shots on goal across our solution sets. This includes solutions that we've had in the market for years as well as our new set of emerging solutions that we've recently released to the market. The need for digitization across the P&C insurance economy continues to accelerate, and CCC is well positioned to drive durable growth in both revenue and profitability in the near and long term. We are confident in our ability to deliver against our long-term target of 7% to 10% organic revenue growth and adjusted EBITDA margins expanding to the mid-40s. As we continue to execute on our strategic agenda, we believe we will generate significant value for both our customers and for our shareholders. With that, operator, we are now ready to take questions. Thank you.

Operator provided instructions. Our first question comes from the line of Michael Funk of Bank of America.

A couple for you, Githesh, if I could. And thank you again for all the commentary about growth and demand for Estimate-STP and then Diagnostics as well and quantifying that for us. Can you help us think though about the quantification, for example, 2x increase in Diagnostic, increased adoption of Estimate-STP, and link that through to modeling for revenue growth? So how we should think about that impacting revenue growth as demand for that accelerates. And then final piece of a multipart question. We've seen an increase in growth in DWP across insurance in the U.S. after a low point, I think, in '20. How does that potentially impact your revenue or growth trajectory, if at all?

Thanks for that question. I'll take the last part of your question first. I think this is one of the reasons I mentioned that small stat earlier: we are now roughly 0.2% of the entire spend, and spend correlates very closely to DWP. As DWP has continued to increase, our CCC spend as a percentage of revenue has actually gone slightly lower, even though we've added more solutions and everything else. So we feel very good about continuing to deliver more solutions because at the heart of it is really the dollars we're managing compared to the dollars we were managing even three years ago, which has increased; that's almost doubled in the last three to four years, partly because of inflation and other factors. As you know, our revenue model is primarily subscription-based, so it doesn't vary that much. But the need for solutions to manage more components of claims and other parts of insurance increases significantly. In terms of modeling, I'll make a couple of comments on Estimate-STP and Diagnostics before I turn it over to Brian on the actual modeling. If you look at Estimate-STP, the macro point is that we delivered the solution in November of 2021, and in less than a year from March of last year to where we are today we're at an annualized run rate of $1 billion of estimates and repairs going through, which is still a very small number relative to CCC overall. That product has gained traction, and Brian will walk you through the modeling. We feel very good about customer adoption. The same is true with Diagnostics, where we're continuing to see a nice uptake. Our Diagnostics solutions provide a lot of clarity and verification with scans upfront, in the middle of the process, and after. Brian, I'll turn it over to you if you want to address any of the modeling questions for Michael.

Yes, sure. Thanks, Githesh. Michael, so when we talk about the emerging solutions, we kind of look at Diagnostics, Estimate-STP. We put subrogation payment. So those are several of the key solutions that fit into the emerging solutions. The way we've modeled it out is we've said, for our long-term revenue growth, we're going to see about 20% of growth coming from new logos and 80% coming from our existing clients. And then we broke it down further and set out that 80% of growth. Half of it will come from products that we've had in the market for several years, and half of it will come from this new cohort of emerging solutions. So that's the way to think about the long-term guide on the impact of the emerging solutions. I mentioned for Q1, we had over 1 point of growth for the emerging solutions, so you think about kind of that's where we are today as a run rate and moving to the 3 to 4 points of growth based on that long-term guide.

Our next question comes from the line of Saket Kalia of Barclays.

Okay. Great. Githesh, maybe just to start with you, I wonder if we could just double-click a little bit on the casualty business. It was mentioned a little bit more in the script. I was just wondering, can we just maybe take a stab at roughly how big that is as a percentage of revenue? And more importantly, how do you sort of think about the drivers of growth there over the next couple of years?

Sure, Saket. I'll give you some overall thoughts. When you look at casualty in auto, out of every five auto claims roughly one results in a casualty exposure, a medical claim. Yet the dollar spend on medical claims is roughly in line with what is spent on auto physical damage. Dollar for dollar, they approach very similar overall amounts, so it's sizable. The reason we are in this business and why it makes sense is that the upfront part of an auto claim, right when an accident happens, produces a number of decisions and insights based on the physics of the accident, including AI work we've been doing with photos, which has a significant bearing on downstream payouts for the claim. That makes the business well suited to straight-through processing, even though casualty claims are only one in five. Another macro point is that as inflation affects casualty and other costs, there is a growing need for scientific precision and rigor in how you analyze the accident, the physics, and what you pay; a substantial amount of work is being done in this area. Looking at our customer base, roughly 300 insurance carriers in the United States use our auto physical damage product. The number of customers we have in casualty is a very small fraction of that, so we see the ability to continue to expand in casualty. Over the last three plus years we have invested substantially in the casualty platform and its core capabilities, and we're starting to see benefits from customers. Brian, would you like to add anything? Saket, did that answer your questions?

Yes. I would just add 1 data point. I think Saket asked specifically the size today. It's about 10% of revenue today, Saket. If we have the same market share as our APD business at scale, it could be a $300 million business over time.

Got it. Got it. That's all very helpful, guys. Brian, maybe for my follow-up, just a slightly different question. I was wondering if we could talk about the margin dynamics for the year, and particularly Q2. I think you mentioned, apologies if I missed the exact number, that there were some dual costs specifically in Q2. Can you talk about how those will trend as we think about margin expansion in the second half?

Yes. Happy to, Saket. Yes, so when we look at Q2, the margin, there's a couple of things happening when you look at the Q2 position. The first is we onboarded a meaningful part of our hiring plan last year in the second half. So we are seeing that margin pressure run through the first half of this year, and we'll begin to lap that as we get into the second half of the year. So that's putting pressure in Q2. We also have some seasonal points. So one is the payroll step-up that's happening in Q2. We also have our annual customer conference that plays through in the quarter as well. And then the third point, which you alluded to, is we do have this nonrecurring one-off dual running cost, and we highlighted about $2 million, and it's related to cloud migration. So we're moving from 1 cloud provider to another, and that's caused driving some onetime costs, which is about $2 million in the quarter. So all those are running through. We then get to the second half of the year, and we do see expansion. And so we're modeling out expansion in the second half, and we get to a full year and we're forecasting margin about 40% for the full year. So that's how it kind of plays through from Q1 performance into Q2 where we have some of those headwinds that's putting pressure. And then we do see expansion in the second half, we can get to 40% for the year.

Our next question comes from the line of Kirk Materne of Evercore ISI.

Congrats on the quarter. Githesh, I was wondering if you could just talk about sort of the AI boom we've had in terms of the democratization of the topic and how that's maybe influencing your conversations. I realize you guys have perhaps been ahead of the wave that we've seen over the last few months. But is it creating a greater sense of urgency for any of your customers to start investigating products like STP? Is it helping take pilot projects from a month to a couple of weeks? Or can you just talk about how that's sort of impacting the discussions and maybe the pipeline that you look at for your AI-driven products?

I would say the macro point, Kirk, is that with much more press around AI, you can't open a paper or article without reading about it. That increased visibility and awareness is a very positive trend for us. We have been building very sophisticated models for seven, maybe almost nine years. Two core advantages are that we have hundreds of models and enormous depth driven by about $1 trillion of historical data plus daily incoming data. On a daily basis we see hundreds of millions of dollars of real-time data coming in, so the feedback loops for the models are enormously powerful. Another helpful aspect our clients appreciate is that we integrate AI into existing workflows rather than applying it separately, so it fits seamlessly into current processes. What we're seeing is three dimensions of growth: new customers and pilots; customers we brought on board a year ago expanding into more markets, states and geographies; and adding more comprehensive vehicle types. It's nice to see the market develop. We were early in this process, and it's exciting and helpful to have the market and press supporting customer adoption.

You guys are definitely earlier on that trend. And then just one quick follow-up for Brian. Brian, regarding the headcount additions over the course of the year, is there anything we should keep in mind about how that will affect the margin ramp in the back half of the year? Are you on track with your plan? Where are you on headcount additions relative to your plan for the year? Yes, absolutely. Yes. So we had some catch-up headcount that we put in play last year, and it was weighted to the second half of the year. Beyond that, we are continuing to add heads, but nothing significant to call out that would distort any of the quarterly phasing. So we see kind of just normal progress as we go forward. Again, we're highlighting some margin pressure in Q2, but then we see the expansion in the second half, and we're guiding to about 41% margin in the second half to get us to the 40% for the full year. So our operational plan and our hiring plan is consistent with those assumptions.

Our next question comes from the line of Samad Samana of Jefferies.

I had a follow-up question on the AI side. And as I think about Estimate-STP and the other products that are powered by AI, how should we think about the usage increasing so dramatically? And maybe where does that flow into costs in the short term? And is that part of the reason why you're changing to a different cloud provider? I just wanted to maybe explore that topic a little bit more.

Samad, first of all, welcome to CCC. I think this is your first call. Thank you for joining.

It is. We really look forward to working with you all and continuing to get to know you better.

Great. So first and foremost, again, as I mentioned, it is still less than 1 percent. Even though the expansion has been substantial, we talked about a tenfold increase in the Estimate-STP component from processing on an annualized basis, going from a $100 million run rate in March of last year to $1 billion this year, it's still less than 1 percent. So I would say some of what we did is not really material; it remains a very small number, but it is super exciting to see the growth, the way customers have been piloting, testing, and deploying it. Lots of work has been done between us and our customers, and that gives me enormous comfort and confidence about the path we're on and the feedback we're getting. So we feel very good about that. Regarding your question on hosting costs, what we did in the quarter was move a small component of our hosting from one provider to another. There is a little parallel running, a couple of million dollars in the quarter, and that should be resolved this quarter. So really, the two items are not connected. Did that answer your question, Samad?

Absolutely. I appreciate the thoroughness. And maybe how does the company think about the type of seller or the sales organization and how they will go to market today versus increasingly having to sell solutions with a more technical element? Does that change the sales cycle or the type of seller you need? How are you thinking about that evolution with your current sellers?

Sure. First and foremost, we have a full complement of people who have been with us for a long time, and we cover all our customers. Although all our solutions have a very deep amount of technology behind them, what we're really delivering to customers are two things: operational excellence, meaning the ability to improve operational performance, and a return on investment. We've been delivering operational performance and ROI quickly for literally the last 20-plus years. That core ability hasn't changed. Where needed, we have added specialists from product development, product engineering, sales engineering and other areas. It's more augmentation as needed, not a major lift and shift for us.

Our next question comes from the line of Dylan Becker of William Blair.

Congrats. Maybe, Githesh, going back to the AI piece, too. You guys have spent a lot of time investing in R&D capabilities. You've got that massive differentiated data set. I would love to understand how you think about allocating resources. As we think about kind of stakeholders in the broader ecosystem, right, so going deeper in the AI capabilities kind of for the core customer base, customer segment and workflows today, obviously, expanding STP versus, again, I think go back to that like dark blue and light blue slide you guys had out of the IPO, but being able to address more of those kind of potential customer segments or integrations across the ecosystem as well. So maybe deeper versus wider.

Dylan, yes. If you look at what we've learned over almost a decade, we've built an extraordinary amount of deep expertise, from the early days when we were buying NVIDIA CUDA engines to build graphics and essentially our AI models, to where we are today. We have developed a core set of capabilities that lets us look at a problem and decide whether AI would be most helpful or a more traditional algorithm would be better. There are also side effects and second-order effects, such as drift in confidence levels. We've learned that governance around this is very important to our customers — what is the confidence level, what's the accuracy level — and we need to be transparent about all of that. From these learnings, we now have substantial engineering talent capable of building AI models across every facet of the business. We've also ensured our tech stack lets us deploy AI models quickly and seamlessly. Estimate-STP is a great example of using AI. We're using semantic AI in Engage, AI models for subrogation, and AI will be applied to parts ordering. We continue to enhance our tech stack so we can rapidly deploy AI to different vertical problems, so our newer and emerging solutions as well as our classic products and solutions are using AI. For example, even the simple decision between a repair and a total loss is being supported by AI.

Got it. That's super helpful, yes. And obviously, a lot of optionality there. So very exciting and encouraging. Maybe if we switch over to the Diagnostics side. It seems like there's a couple of drivers on that opportunity as well. So I mean how should we think about maybe not only the opportunity for just like a pure kind of pre or post repair scan tied to the vehicle upgrade cycle, but also the opportunity maybe for more in-process scanning capabilities or calibrations, obviously, as there's more centers connected to all of these vehicles. But thinking about kind of the different drivers and the importance between the 2, because it seems like kind of different ways that they could layer and be beneficial to the business as well.

Yes. You're right about this, because at the heart of it is increasing vehicle complexity. As vehicles become more complex and newer models arrive, there's a need to scan the vehicle at the beginning, sometimes in the middle, and sometimes at the end so you know exactly what's wrong and what needs to be reset. That's one component. As you pointed out, as the car park gets newer and new cars continue to arrive, scanning becomes enormously important for repairing a vehicle accurately. Another unique element our solution provides is the ability to verify that a scan was actually completed, whether a prescan or a postscan, so there is complete transparency between the carrier, the repair facility, and the provider. That's very important because it standardizes the process and provides transparency across these capabilities, and it also extends to calibrations. As we mentioned, we have excellent partners providing connectivity into the scanning solutions, and they have been fantastic. As I noted in my prepared remarks, we've seen a literal doubling of the number of scans from Q1 of last year to Q1 of this year. That said, it's still early days for scanning.

Our next question comes from the line of Chris Moore of CJS Securities.

A couple of questions. I thought the 20 basis point metric from the earlier conversation was a really interesting way to look at it. Understanding that the total cost of claims will keep rising, is there a target, in terms of that 20 basis points, that you think about? Could it be 50 basis points someday, or is that not part of the process?

Chris, thanks for joining. We don't really have a target. The way we think about this is that when you connect this to the TAM that we've laid out in our public documents, this is why we remain confident about a multibillion dollar TAM. And when you connect it to what the less than 20 basis points we get today, and this is what gives us enormous confidence in the TAM that is available, and so we just kind of wanted to share that as a basis point. But the way our products are built, the way our products are consumed by our customers, they're mostly subscription-based. So it was just another way of saying there is a sizable opportunity here.

Got it. And my follow-up, maybe a little less fundamentally or more focused on the stock. So you guys are coming up on your 2-year anniversary since going public. Given the relatively small float and things like sponsor earnout shares, there could be some added volatility. The stock ultimately moves back into the teens and beyond. Obviously, your focus is on the fundamentals, not you'd be rewarded as you've delivered there. But I just thought it would be worth discussing kind of longer-term equity incentives of management and how they were impacted by future stock prices. My understanding is that a $25 stock price is an important target for longer-term management incentives and just wanted to kind of hear your thinking there.

Sure. One of the things that's always been great about what we've done is that we've wanted our leadership team to act as owners, not just through equity, options and grants, but by actually owning stock. We believe significant ownership drives ownership behavior. If you look at the last two years we've been public, eight quarters from the first quarter of 2021 to where we are today, we've added about a third in revenue growth on a run-rate annualized basis, roughly $200 million. We have increased earnings by about half, and we've delivered $200 million of additional cash flow in that time frame. So we feel very good about the value we are creating for our customers and our operational performance. On the long run, regarding the float we have on the stock, we think we will power our way through these things provided we continue to deliver and execute. Remember, many of our leaders and employees have a very long-term orientation, and I've been at this for a long time, so people generally feel bullish about where we think we'll end up. Day to day, however, it's very hard to predict what the stock will do.

Our next question comes from the line of Tyler Radke of Citi.

You mentioned in your script, Githesh, about the increase in electric vehicles on the road. Could you share some data points on what you're seeing regarding repair shops that are more focused on electric vehicles? Is there any common customer behavior in terms of increased monetization rates or better product uptake, given they are likely dealing with higher claim ticket prices and presumably achieving a better take rate? Any comments on how that's impacting the fundamentals of your company based on what you see at those customers.

Yes. Tyler, great to have you on the call. I would say maybe two or three points. First, what we're seeing is that even though EV sales last year were about six percent of all vehicles sold, only roughly one percent is translating into the installed base today. The average cost of repair for EVs is about 50 percent higher than for non-EVs, and the complexity around those vehicles is a bit greater. When you have to disengage an 800-volt rail or deal with different voltage subsystems and electrics, diagnostics become much more important, as does having accurate repair procedures for how you disable voltage or where you cut the vehicle for a weld. We are also seeing some degree of specialization because of the capital expenditure required by some repair facilities, so the work is tending toward larger, more sophisticated shops. Over time we think this will balance out because collision repair typically deals with exterior panels, cameras, calibration devices, and other exterior components rather than the underlying subsystems like motors or gearboxes. That process should become more democratized as more electric vehicles get on the road, and OEMs want to see that as well.

Got it. So it sounds like a long-term tailwind for the business.

Yes. And helping our customers dealing with the complexity. Yes.

Yes, yes. Okay. And Brian, one for you. So you called out some elevated casualty volumes in the first quarter. I guess, and not to be too nitpicky here, but I think everyone is wondering about the macro environment. If I go back a year ago, I think you raised the high end of your guidance by $2 million coming out of Q1. I think this quarter you just took up the low end of the guidance. And again, no one is going to fault you for not being aggressive. But just curious if there's anything to call out, maybe any incremental conservatism that you're applying to the pipeline just as you give the updated guide here, which didn't increase on the high end despite the strength in the quarter.

Yes, absolutely. So as you remember, 80% of our revenue is subscription-based, and less than 20% is transactional. Part of the overperformance that we saw in Q1 was related to higher volume for casualty. And that's part of the transactional volume. So that higher volume is not guaranteed to sustain at that level. So we didn't model it through the balance of the year. That said, due to the visibility that we do have on the 80% that's subscription-based and under long-term contracts, we did raise the low end of the guide, and that also pushed up the midpoint of the range. And so we're happy with the performance and the momentum in the business. We are comfortable on the position for the year. That said, it is early in the year, and we are operating in dynamic markets.

Our next question comes from the line of Gabriela Borges of Goldman Sachs.

Githesh, Brian, there are a few companies that have shown resiliency throughout the macro volatility of the last 12 months. Following up on that last question, I'm curious, what kind of data or macro environment would make you incrementally more nervous about the pipeline or about longer sales cycles or essentially seeing a more negative impact on your business from macro volatility?

Gabriela, thanks for joining. As you know, we've operated this business for several decades and have seen various economic cycles. The only time we saw a decrease in claim frequency was during the first year of COVID. Because the business is mandatory insurance and people need to drive, that underlying architecture has meant our business over the last 20-plus years has not materially changed. There has been no cyclicality; it has been steady. Claim volumes generally trend up slightly over time as population increases. We have structured our business to deliver an ROI in 90 days, meaning when you deploy our solution it is not a multiyear implementation but a relatively quick one. Being on the cloud is very helpful. These are incremental solutions with quick ROI that our customers like to test. In answer to your question, we are monitoring the macro environment very carefully and cautiously, but our experience over many years is that the approach we have taken has worked.

Our next question comes from the line of Gary Prestopino of Barrington Research.

Githesh, I wanted to follow up on Estimate-STP. The last time we spoke you said you had only done a selective rollout, even though several insurance companies had adopted the product. Have you expanded beyond that selective rollout in a couple of states? It seems to me that with only about 1% of your claims volume going through it, and given how much more efficient the process is, how do you plan to get more insurance companies to use it?

Gary, a couple of things. First and foremost, as we've started working with clients, we wanted to be extremely careful that people were actually seeing great results. So we limited the number of vehicle types and have slowly expanded that. The solution is available more broadly now. We also encouraged early customers to limit the geography so we could test, pilot, and make sure it worked carefully in their environment. What we have seen is an expansion: we now cover a very broad range of vehicles, and some customers have rolled it out nationwide. We're still limiting the number of claims that go through this process to ensure very high confidence. As that confidence increases, we will continue to be thoughtful and careful in the early implementation days, but we feel very good about people adding additional staging and tuning processes and more clients wanting to pilot the solution.

Do the repair shops have to do anything to work with the insurance companies that are using this Estimate-STP? Any capital threshold for them?

The short answer is no. There is no need for the repair facilities to actually change anything from their process standpoint. And because of the network effects that we have between the insurers and the repairers, the transition of the photos, the estimate and even the estimate that's produced can be edited and changed by a repair facility. So that's very easy to do. And we'll also be delivering other solutions for repair facilities, AI solutions.

Our next question comes from the line of Alexei Gogolev of JPMorgan.

Could you elaborate on the traction of your payments business? There appeared to be quite a lot of applications to that product within your ecosystem. So maybe you could talk about which of those applications could potentially drive most upside to your revenue.

Alexei, first of all, welcome to CCC. I think this is your first call with us, so thank you for joining. On the payments solution, we see it as a horizontal solution in that it applies to all forms of payments across the network: payments to medical providers, payments from repair facilities to parts providers, and payments from insurers to repair facilities. We've built a generic payment solution that works across the platform. What we've been working on with customers are really the early use cases, and we do have some revenue starting to flow through, but we are primarily seeing more opportunities across the ecosystem, so it is not in any one particular application.

Okay. Perfect. And then could you maybe elaborate on the adoption of mobile? How has it been increasing? And what is currently the share of claims now settled through the mobile channel?

So what we have seen is that starting from essentially zero, with very little mobile usage at the beginning of January 2020 right before COVID, we are now hitting a threshold of about 28.5 percent, slightly under 30 percent. That number has steadily continued to increase because of all the benefits and efficiencies it provides to the consumer. We have also continued to enhance the solution substantially. Not only can you take guided photos of the accident, we can help you schedule a repair and you get updates throughout the repair process. Mobile has become a very integrated part of the platform, and we've seen it grow to about 30 percent today. I think it was probably in the 20 percent range a couple of years ago, so it continues to increase. We've also brought mobile capabilities to our repair facilities in a big way. The Engage solution enables consumers to take pictures and get estimates from repair facilities, whether the repair is insurance-paid or self-paid. Over the years we've added many mobile capabilities to collision repairs through tablets, mobile phones, and links to consumers.

I would like to turn it back to Githesh Ramamurthy, CEO and Chairman of the Board, for closing remarks.

Thank you all for joining us today. I'd like to thank our customers, our CCC team members and our shareholders for a great start to 2023. The durability of our business model continues to come through, and we remain confident in our ability to deliver on our strategic and financial objectives while helping our customers and investing in future solutions. We look forward to talking to you again in early August when we report our second quarter results, if not sooner. Thank you so much for your continued trust in us.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.