CCC Intelligent Solutions Holdings Inc. Q3 FY2024 Earnings Call

Good day, and thank you for standing by, and welcome to CCC Intelligent Solutions' Third Quarter Fiscal 2024 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Bill Warmington, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and thank you all for joining us today to review CCC's third quarter 2024 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, and the earnings release is available on our Investor Relations website and under the heading Risk Factors in our 2023 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 United States copyright and other laws. Additionally, while we will provide a transcript of portions of this call and we've approved the publishing of a transcript of this call by a third party, we take no responsibility for inaccuracies that may appear in the transcripts. Please note that 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 financial performance. The third quarter of 2024, CCC's total revenue was $238 million, up 8% year-over-year and slightly above our guidance range. As a reminder, in Q3 of last year, growth benefited by 1% from incremental one-time revenue on a subscription contract. Adjusted EBITDA for the quarter was $102 million, up 9% year-over-year and ahead of our guidance range. Our adjusted EBITDA margin was 43%, up approximately 60 basis points year-over-year. Our solid performance in Q3 and year-to-date demonstrates our durable revenue growth and margin expansion, driven by multiple new business wins, renewals and contract expansions across our customer groups. While we are pleased with our consistently strong financial performance, we are even more excited about the value creation customers are realizing from our next generation of solutions. This is the foundation for the next leg of growth for CCC. In today's call, I'd like to cover three themes. The first is how paradigm shifts, step change improvements and technology capabilities propelled transformation across the P&C insurance economy. The second is why CCC is uniquely well positioned to power the next transition. And third is the adoption of CCC's new generation of high-impact solutions. But looking back over the company's history, a key tenet of our durable growth model has been our ability to identify, invest ahead of and capitalize on technology paradigm shifts across the P&C insurance economy. Twenty years ago, our investments in internet and cloud-based architectures preceded and helped enable the industry's transition to platforms and dramatically more dynamic and connected operations. The subsequent rollout of CCC ONE for collision repairers also helped to power the emerging class of multi-store operators who have benefited over many years from the scale of our highly integrated best-in-class platform. Over the past decade, our investments in advanced solutions on top of these architectures enabled customers to realize further game changing improvements in efficiency and customer service. For example, our investments in mobile, ahead of COVID-19 made it possible for the industry to keep processing claims and repairs when remote work became essential. And today, over 100 insurers and thousands of collision repairers use these tools in their daily operations. And critically, we have consistently helped our customers navigate these transitions through already established CCC integrations and workflows without having to replace their existing systems. I believe we are at the beginning of an even more transformational shift that we call Intelligent Experience, or IX for short, that combines artificial intelligence, an event-based architecture and the connectivity of our multisided network to help our customers achieve a step change improvement in operating performance and consumer experience. We believe macro industry forces make adoption of an IX-based approach by the P&C insurance economy essential for two primary reasons. The first is the pervasive and accelerating amount of complexity facing the industry whether that is vehicle complexity, data proliferation, changing consumer expectations or other forces. These dynamics are impacting all participants in the P&C insurance economy and challenge even the most experienced professionals. The second is industry-wide labor shortages that are being made even more acute by the ongoing retirement of the industry's most tenured people. As a result, every month, the burden on an already strained industry and newer workers grows. We believe this trend is unsustainable and can only be solved by embracing new IX-driven approaches to technology that deliver a transformational impact. As in previous waves, we have been investing ahead of the curve in key technologies that are essential to the IX era, over $150 million in R&D annually and well over $1 billion in the past decade. The first of these technologies is AI, where, over the past decade, we have built deep expertise in building and deploying AI solutions for high-value mission-critical use cases. These solutions leverage hyperscale, hyperlocal data and can be seamlessly integrated into our customers' existing workflows. They've also been tested at scale by some of the world's most sophisticated customers when it comes to performance. AI is now an eight-figure business for CCC. And while these solutions have already been used across tens of millions of claims with aggregate value in the billions of dollars, we believe that we are still just scratching the surface of what is possible from deploying AI across all aspects of the P&C insurance economy. The second key technology we've been investing in is our new event-driven architecture powering the CCC IX Cloud. Think of this architecture as the distribution system for AI-enabled workflows. The architecture can handle massive amounts of data from multiple sources in real time. It uses a publish and subscribe model, which enables everyone in our 35,000-plus company network to set up notifications for relevant business events and also to configure actions based on those events using AI. Important business event notifications might include, depending on the customer and their place within the P&C insurance economy, estimate complete, parts ordered, vehicle ready for pickup. Today, these notifications may take place ad hoc through bilateral connections or even by phone or email. With the CCC IX Cloud, they can take place instantly and simultaneously across our connected ecosystem. The CCC IX Cloud is a powerful accelerant for clients to achieve a step change improvement in speed, efficiency and performance. Implementation of the event-based architecture is streamlined because it is an internal layer that overlays onto existing CCC cloud applications, customer workflows and integrations with customer and partner systems. IX Cloud enables customers to deploy CCC solutions faster and easier and increases the number of ways customers can use multiple CCC solutions together. This further extends the value of the CCC network to our customers, whether that customer is an insurer, collision repairer, auto manufacturer, parts supplier, dealer, medical provider among others. We have been supplementing these technology investments with additional activities that increase our ability to support customers on their transformation journey. These include the completion of our transition to the public cloud as well as changes we've made to streamline our customer-facing organizations so we can be an even stronger partner to our customers as they deploy our high-impact solutions and transform their operations. I would like to turn next to the progress of our newer products. We remain very excited about the growth opportunity from our emerging solutions. And this portfolio of products continues to be the fastest-growing part of CCC with additional customer contract wins and momentum each quarter. While the pipeline for these solutions continues to build backed by strong demonstrated ROI and feedback from customers, the velocity of revenue conversion from these new solutions remains slower than anticipated, consistent with what we described last quarter as clients continue to navigate their internal change management processes to fully realize the benefits of these transformative solutions. The main reason customers are enthusiastic about our innovation portfolio is the bottom line ROI these solutions deliver and I thought I'd share some select examples of how we're doing that by bringing intelligent experiences to life for customers. I'll start with First Look, our AI tool for claim handlers. As a reminder, First Look applies a variety of AI models to photos that insurers receive from consumers, repairers and a variety of other sources. One top 10 insurer piloting First Look has been using it to improve claims triage, for example, by more quickly identifying likely total losses sitting at repair facilities. Early results for this insurer have shown an average cycle time improvement of three days to redirect such claims, reducing rental and storage fees, freeing up space in their repair facility for repairable vehicles, and overall, providing a faster and more satisfying resolution for the consumer. We're also seeing strong early results from Intelligent Reinspection, which uses AI to help insurers streamline the review of incoming repair facility estimates. Insurers receive millions of such estimates each year and Intelligent Reinspection helps reinspectors review increasingly complex estimates quickly, shortening the time to approval. We have multiple top 20 insurers piloting the product, and the results show a substantial increase in operating efficiency. Rounding out insurance, our AI-powered subrogation solution continues to build on the momentum from previous quarters with double-digit percentage increases from Q2 to Q3 in the number of files reviewed and in customer value delivered from the tool. Our pipeline in subrogation is strong and the feedback from contracted customers has been very positive. For repair facility clients, we are seeing increased adoption of our intelligent estimating solution for shops, Mobile Jumpstart. About 45% of repair estimates are written by technicians and repair facilities. Jumpstart uses AI to dramatically reduce the time it takes technicians to generate an initial estimate, from half an hour to about 90 seconds. We now have thousands of repair facilities generating hundreds of thousands of estimates using Jumpstart. This is helping labor-challenged collision repairers get vehicles repaired and back on the road faster, providing a win to repair facilities, consumers and insurers and also helping to positively impact the approximately two billion days that elapse every year between auto claims being opened and closed. On our last earnings call, I mentioned the recent launch of CCC Build Sheets, the CCC ONE add-on that provides collision repairers with data that automatically identifies vehicle-specific packages, paint codes and parts based on how that vehicle was manufactured. This solution helps repairers more precisely identify the vehicle and also reduces manual effort, resulting in fewer parts ordering errors and shorter cycle times. Since the product was introduced in July, we have signed up over 2,000 repair facilities, the fastest adoption rate of any repair facility product in CCC's history. We also recently launched another exciting product extension, CCC Payroll. This solution further expands the breadth of CCC ONE as the operating system for repair facilities. By extending our traditional strengths in the front office and repair operations to the back office, CCC ONE already calculates billions of dollars of gross pay for hundreds of thousands of collision repair employees each year. And with CCC Payroll, we have established a complete end-to-end payroll solution for the collision repair industry. This differentiated solution addresses piece rates, commissions, incentives and other factors inherent to the collision repair industry and is fully integrated into CCC ONE. The product is now live, with 100% of our early pilot customers converting to paying customers. And we also see potential for a variety of other new category extensions beyond Payroll going forward. We believe that the next paradigm shift of technology transformation for the P&C insurance economy has begun and that CCC is well positioned to help our clients navigate this journey. By combining our multisided network with our AI capabilities and IX Cloud platform, we believe we can continue to deliver high-ROI solutions for our customers that solve their most pressing problems. And we are investing accordingly to capitalize on this generational opportunity. While the velocity of our new products' contribution to revenue is taking longer than we initially expected, we believe this is a timing issue driven by the pacing of each client's digital transformation journey, and we remain confident in our ability to deliver our strategic and financial objectives over the near and long term. 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 continue to see strong client engagement across our broadening solution set, and we are pleased with our solid revenue growth, margin expansion and the free cash flow generation of the business, which reflects a balance between investment in our growth initiatives and ongoing margin discipline. Now as we turn to the numbers, I'd like to review our third quarter 2024 results and then provide guidance for the fourth quarter and full year 2024. Total revenue in the third quarter was $238.5 million, up 8% from the prior year period. In the third quarter of last year, we had a one percentage point benefit from one-time revenue on a subscription contract. Adjusting for this benefit, year-over-year growth in the third quarter 2024 would be 9%. Approximately five percentage points of our growth in Q3 was driven from cross-sell, upsell and the adoption of our solutions across our client base, including repair shop upgrades and the continued adoption of our emerging solutions, and the ongoing strength in casualty and parts. That said, we have seen some softness affecting claim volume across 2024. Approximately 3 points of growth came from our new logos, mostly in our repair facilities and parts suppliers. About 1 point of growth in Q3 came from our emerging solutions, mainly Diagnostics, Estimate-STP and new adjacent casualty solutions. Run rate from emerging solutions overall was about 3% of total revenue in Q3 of 2024 as these solutions continue to be the fastest-growing portion of our portfolio. 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 Q3 2024, our GDR was 99%, which is in line with the last quarter. Note that since the first quarter of 2020, our GDR has been between 98% and 99% and is either rounded up or down, driven primarily by repair shop industry churn. We believe our GDR reflects the value we provide and the significant benefits that accrue to our customers from participating in the broader CCC network. Our strong GDR is a core tenet of 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 2024, our NDR was 106%, down modestly from 107% in Q2 2024. Now I'll review the income statement in more detail. As a reminder, unless otherwise noted, all metrics are non-GAAP. We provide a reconciliation of GAAP to non-GAAP metrics in our press release. Adjusted gross profit in the quarter was $186 million. Adjusted gross profit margin was 78%, which was flat sequentially and year-over-year. Overall, we feel good about the operating leverage and the scalability of our business model and our ability to deliver against our long-term adjusted gross profit margin of 80%. In terms of expenses, adjusted operating expense in Q3 2024 was $95 million, which is up 6% year-over-year. This was mainly driven by higher IT-related expenses and the timing of professional services costs. Adjusted EBITDA for the quarter was $102 million, up 9% year-over-year with an adjusted EBITDA margin of 43%. Q3 adjusted EBITDA had some phasing benefit as some expenses shifted from Q3 into Q4. Now turning to the balance sheet and cash flow. We ended the quarter with $286 million in cash and cash equivalents and $778 million of debt. At the end of the quarter, our net leverage was 1.3x adjusted EBITDA. Free cash flow in Q3 was $49 million compared to $46 million in the prior year period. Free cash flow on a trailing 12-month basis was $200 million, which is up 4% year-over-year. Our trailing 12-month free cash flow margin as of Q3 2024 was 22%, down modestly from 23% as of Q3 a year ago. We did have some modest impact to the timing of receivables for a few of our larger clients. The significant balances have already been collected in October. Unlevered free cash flow in Q3 was $61 million or approximately 60% of our adjusted EBITDA. While our level of free cash flow can vary quarter-to-quarter, we expect it to continue to average out in the low to mid-60% range of our adjusted EBITDA on an annual basis. I'll now discuss guidance beginning in Q4 2024. We expect revenue between $242.5 million to $246.5 million, which represents 7% growth year-over-year at the midpoint. We expect adjusted EBITDA of $103 million to $105 million, a 43% adjusted EBITDA margin at the midpoint. For the full year 2024, we expect total revenue of $941 million to $945 million, which is 9% year-over-year growth and is unchanged versus our previous range. For adjusted EBITDA, we are raising the full year 2024 range to $394 million to $396 million, a $2 million increase at the midpoint. The midpoint of our new guidance range represents about 110 basis points of year-over-year expansion in adjusted EBITDA margin to 42% for 2024. So three things to keep in mind as you think about our Q4 and full year guidance of 2024. The first point is, as we mentioned in our call in February of this year, Q4 2023 revenue growth had about 1 point of benefit from one-time items and year-end true-ups above our contractual commitments on subscription contracts, which gives us a more difficult year-over-year comp for us in Q4 of this year. The second point is, as I referred to earlier, we have seen some softness in claim volume during this year. About 20% of our revenue has transactional volume components. Year-to-date through September, we estimate claim volumes are down approximately 6% year-over-year, implying about a 1 point headwind of revenue growth, though that can vary depending on solution and client mix. The third consideration is that the midpoint of our updated guidance implies an adjusted EBITDA margin of about 43% in Q4 and about 42% for the full year 2024. Consistent with our past performance, we expect Q4 to represent the peak margin for the year. As such, we expect the starting point for next year's margin expansion will be on the full year 2024 margin of 42%. Also, as a reminder, in Q4 of 2023, we benefited from a $3 million one-time insurance claim reimbursement, which we expect to create a one percentage point margin impact as we lap this in Q4 of this year. So as we wrap up, I would highlight our continued confidence in our ability to deliver our long-term target of 7% to 10% organic revenue growth and mid-40s adjusted EBITDA margin as we continue to execute on our strategic priorities and generate significant value for both our customers and our shareholders. With that, operator, we're now ready to take questions.

And our first question comes from Kirk Materne from Evercore ISI. Your line is now open.

Yes, thanks very much and congrats on the quarter. Githesh, can you talk about what needs to happen to unstick the bottleneck around adoption of your newer products? Is there anything at the macro or industry level that needs to change, or are there actions you can take to grease the skids as we start thinking about 2025?

Sure. First and foremost, if you look back over the last 20-plus years, we've rolled out $1 billion of product that's essentially new. We've gone through waves of adoption, and it almost always comes down to three specific things. First, it requires a substantial amount of energy from our customers to pilot, to evaluate new workflows, to put these solutions into play, ensure they are tested, calculate the ROI, and then determine what it takes to fully implement them. On that score, looking at those three metrics for all of these new solutions, we're making very good progress. For example, with solutions like Estimate-STP that we've talked about before, adoption rose from 3% last quarter to 4% now. Ultimately, it comes down to the consistency of working through those steps, and we are very engaged and focused with each customer in multiple pilots to get there.

And then, Brian...

Yes, go ahead.

I was just going to say, as a sort of a follow-up for Brian or you, Githesh, just on the softness in claim volume this year, one of the things you guys have talked about historically has been that while claims can go up and down, the cost per claim is going up as the complexity of vehicles. Does that factor in at all as you talk to customers going forward, meaning if claim volume were to remain a little bit depressed, is there an opportunity to go back to talk about the broader value as contracts renew just to get away from some of the variability of that?

Thanks. Sure. First of all, we've seen these cycles go up and down. As we talk to many of our customers, what we're seeing is that when you look at vehicle miles driven or the number of accidents, we don't think there has been a material change. More importantly, our customers don't think there's a material change. What has happened over the last 18 months or so is that the cost of insurance and premiums have risen substantially more than CPI. Whether you look at CPI or core CPI, the cost of insurance has gone up significantly. That has created some reluctance to file claims because customers worry about rate increases, and we think we are about 18 months into that cycle. Our customers and our observations lead us to believe that this will even itself out over the next quarter or two. So we are not factoring any material increases in claim frequency. The most important thing for us is the breadth of the solutions we offer, because every claim has many different components, and we are focused on delivering that breadth.

And our next question comes from Michael Funk from Bank of America. Your line is now open.

Yes. Thank you all for the questions tonight. One for you Githesh, along the lines of the first question. Are you contemplating or planning any changes in how you either sell to your customers or helping with onboarding to increase the conversion rate of the emerging solutions? Or would that not be impactful in your view?

What we are doing is we've aligned our client-facing organizations to put a little more energy into the number of pilots and the number of solutions we are working on with customers. We believe it's a matter of time as these solutions get rolled out. We're seeing that with early customers who are seeing tremendous ROI. We're working closer with customers, but at the same time, the volume of pilots that we're experiencing across all our new solutions is significantly higher, so we feel very good about the pipeline of customers. It is customer specific. It is customer specific. It is customer specific. It's not a macro issue in any way, shape or form.

Okay. And that's my second question, Githesh. Heard from a number partners and resellers, there is some caution or pause in front of the election. Any sense that there's any pause in your customers in front of the election given some of the uncertainty around tax and other factors?

No, we don't believe it's a macro issue. We don't see any macro issues. In fact, many of our publicly reporting customers are seeing the highest levels of profit, and they know this is the time to prepare and put the next generation of solutions in place. As you look at the insurance industry over any period of time, these cycles can be very, very tight. You can have a cycle where things look very good, and then a cycle where profitability is under a lot of pressure. Our customers are in this for the long haul, and we don't see any macro issues whatsoever.

And our next question comes from Dylan Becker from William Blair. Your line is now open.

Hi guys, thanks for the questions here. Maybe, Githesh, you touched on it quite a bit in your prepared remarks around kind of the interoperability and integration of IX Cloud with your existing kind of data network. It feels like that has the potential to be a notable amplifier of kind of that value proposition for some of these customers that are running these pilots. So I guess how are you thinking about that impact and that dynamic on ROI versus kind of the change management and the internal focus that might be a little bit less out of your control as you've kind of talked to as well here?

Yes. What we are seeing with IX Cloud is that customers often evaluate multiple solutions at the same time. For example, a customer might deploy First Look, Intelligent Reinspection, Subro and Casualty in different parts of the organization, piloting multiple solutions concurrently. There is an efficiency that comes from deploying multiple solutions, and, as you pointed out, the interoperability of these solutions is very helpful. The value varies client to client, but at the core we evaluate ROI for each individual solution and the aggregate ROI, and so far the results have been absolutely terrific. Speaking from more than 20 years of delivering solutions to this industry, we feel very good about the value being delivered.

Okay. Great. That makes sense. And then, thinking about it from an industry perspective as well, Githesh, a question I get frequently is in this hardening environment, does the impact shift from repairs toward total loss? Can you walk us through the nuance between those two? It seems to generate additional workloads and processes and brings other solutions into the conversation that weren't as readily addressed on the repair side. How should we think about the trend we are seeing between total loss and repairs?

Yes, sure. Let me comment on that. At the peak, about six quarters ago, we saw total loss values, meaning the cost to settle a total loss, peak at a little over $16,000 to $16,500. Since then, used car valuations have dropped — we track this closely because of the accuracy required — and total loss values are now down in the $14,000 range. That has led to a slight increase in the number of vehicles that are totaled. The mix between repairable vehicles and total losses used to be about 79/21 and has moved to roughly 76/24. At the same time, newer vehicles coming on stream are generally a lot more expensive to repair, so we have seen a small increase in total losses and a slight decrease in repairables. This is where solutions like First Look become extraordinarily important, because you do not want a totaled vehicle sitting at a repair facility for too long; you need to remove it quickly using photos and AI. The accuracy of these decisions is even more critical, and tools like our First Notice of Loss and our Predictive Analytics at the front end help customers decide which direction to take. This dynamic is causing customers to think holistically about how all of these pieces fit together, rather than treating them separately.

Okay, great. Thanks Githesh. Appreciate it.

And our next question comes from Gabriela Borges from Goldman Sachs. Your line is now open.

Hi, good afternoon. Thanks for taking the question. Brian and Githesh, I'm trying to reconcile your comments on emerging solutions adoption and NRR with some of the deceleration that we're seeing more broadly in the business. So if we look year-over-year, there's about a 3 point deceleration in total growth for CCC. There's about a 1 point impact as best we can tell from NRR. So it looks a little bit like the new business dynamics are slowing as well. So maybe just talk to that a little bit. Are you seeing a slowdown in new business dynamics? And how do you think about that piece of the business given all the commentary you already provided on the cross-sell piece?

Gabriela, it's Brian. I'll be happy to take that. First, I'll highlight that our guide for the full year is 9%, which is at the high end of our long-term range. Regarding the point you raised about growth, three factors are affecting the second half and Q4. First, we face tougher comps in the second half; we called out one point in Q3 and another point in Q4 as headwinds. Second, we're seeing softness in volume. Claim volume is down about six points overall, which creates roughly a one-point headwind. Third is the timing and flow of deals, which can vary quarter to quarter; one quarter can be strong, another weaker. We focus on the long term and the full-year position, though quarter-to-quarter deal flow can have an impact. To size Q4, we expect sequential growth over Q3 of about 2.5 points, which is broadly consistent with the last two Q4s in 2023 and 2022, where growth was around 2.5 to 3 points.

Got it. Thank you for the detail.

And our next question comes from Josh Baer from Morgan Stanley. Your line is now open.

Thank you. One for Githesh, one for Brian. For Githesh, just hoping you could take us through a typical time line for a customer that was an early adopter of like Estimate-STP or some of your other AI products that's already made it through the piloting, the testing, the implementation, like hoping to generalize how much time will it take from this building pipeline to really convert over to revenue.

Yes. For Estimate-STP in particular, there's a slight difference because in the first six to eight quarters we were very deliberate and only allowed processing of front-end hits and back-end hits. We gradually increased the number of vehicle types you could process. It wasn't until about four to six quarters ago that we opened the door to SUVs and every type of vehicle. So if you look at the true starting point for Estimate-STP, call it four to six quarters ago, we have customers who range from about 3% to 4% using photo AI and Estimate-STP to some customers who are as high as 60%. There's broad variation as people get comfortable, test this out in various locations, and make sure the accuracy and performance are there, so we see a pretty wide range. Last quarter we highlighted one customer who rolled it out at a top-10 carrier to now cover 20-plus percent of their claims; in their case, after it was in full production it took about three to four quarters to fully ramp and feel comfortable rolling it out. So it varies by solution, but in general it takes a couple of quarters, and nonstandard customers tend to move faster than standard insurance customers.

Okay. Great. And then, Brian, just wondering, like we had the implied Q4 guidance from last quarter. So Q4 was lowered by about $2.5 million. I just wanted to clarify, was that, like, versus 90 days ago, was that all the softness in the claims that you're talking about? Or were there any other changes that popped up in the last 90 days?

Josh, for the full year we kept the guide at the same position as last time at 9%. We had a similar range of $941 million to $946 million, so that's consistent. As I highlighted in the previous question, there are some moving parts as we think about year-end and how that will play through. You have the true-ups, which are harder to forecast. We talked about the tougher comp that's playing through. We have the volume weakness that has been moving around quarter to quarter. And then there's the deal flow, what will close from the pipeline this year versus fall into next year. All of those factors are reflected in the guide. But I would reiterate that the full-year position is consistent with where we were when we talked 90 days ago.

Okay. Thank you.

And our next question comes from Samad Samana from Jefferies. Your line is now open.

Hi, good evening. Thanks for taking my questions. Maybe first, appreciate the color on the claim volume and kind of the related sensitivity. Could you just maybe help us think about are you expecting volumes to kind of persist at this like tracking down 6% levels going forward? Are you expecting them to rebound? Like what have you embedded? And I know it's a couple of months away from 2025. But are you thinking that we should think about volumes at this kind of like lower level? Or are you expecting a rebound? Just maybe help us understand how we should think about that.

Yes, sure. Samad, it's Brian. So the way that we're looking at forecast for claims, they have been bouncing around a bit. Q1 was soft. Q2 improved a bit, and then Q3 was softer again, which gets you to the 6% down year-to-date. As Githesh said, based on what is driving the claim or our view of the claim fluctuation, this is not a permanent trend, and we do think it will change over time. That said, we are not changing because we don't know when that recovery will happen. We're not changing our forecast. We're not assuming that claims get softer, but we're also not assuming that they're going to recover. So Q4 is factoring in similar levels. And then we're factoring in similar levels in '25 at kind of a baseline level. So that's how we're thinking about the claim volume and how it will play through the forecast.

Great. And then maybe just as a follow-up, when you guys made the changes to the kind of the customer service organization or customer-facing side of the organization, like how have you thought about the impact of that? And how should we think about that maybe flowing through to the business as we look forward?

Yes. So it's Brian. I'll start and let Githesh add some color. So clearly, we're setting the organization up for what we believe will be successful and the best way to engage with our clients. And so having one customer-facing organization, bringing both client services and our sales organizations together, we think will give a more seamless interaction with our clients. We do believe it will improve the velocity of our sales. We also have brought in product sellers, which was a recent investment that we brought into the organization, especially to help with these newer solutions with people that have expertise in these areas. And they're certainly having an impact as we built the pipeline on our engagement with clients. But that's how we're thinking about the organizational changes and the setup for next year.

Fundamentally, what we're doing is to make sure that our organization reflects the product architecture that we talked about. And that's really what we're doing because more and more of these solutions are deeply interconnected with each other, and that's why we're making these changes.

Great. Appreciate you taking my questions. Thank you.

And our next question comes from Saket Kalia from Barclays. Your line is now open.

Okay, great. Hi guys, thanks for taking my questions here. A lot of my questions have been answered, so I'll keep it to one. Brian, maybe for you. I've gotten the question from a couple of investors on the impact of hurricanes here. Now, of course, that's going to be much more impactful to home insurers. But unfortunately, those events tend to also generate a lot of auto claims during those big storms. So just to make sure the question is asked, in the wake of some of these storms recently, can you talk to us a little bit about what sort of impact that is having this year, if any? And maybe give us some historical perspective as we think about this going forward?

Sure. Yes, I can take it, Saket. So as a reminder, when you think about our revenue streams, 80% of the business is subscription and 20% is transactional or has volume-based. And it really comes into three places, the volume. So one is our casualty solutions. There's a part of our parts business that's transactional. And then there is a portion that relates to our auto physical damage client base. But those, for the most part, are going to be your smaller regional carriers that are paying volume versus the large nationals. So that's how the revenue breaks out. As far as the hurricanes, the volumes we have seen to date have not been material and are not really moving the number. It really matters on the client mix. Some of our clients are in all-you-can-eat flat fees, and so the excess volume doesn't necessarily play through their numbers. Others, it will play through, depending on if they're paying transaction or have transactional components of their agreement. So mix really matters as well. But I would tell you, to date, the hurricanes that we've seen, although significant for the carriers and impact have not been a material part of what we're seeing in our volumes.

Super helpful. Sorry, Githesh, please, if there was something you wanted to add.

Historically, it does affect people locally in each region, but on a national basis it's still relatively small and doesn't shift the overall national posture.

Thanks again, guys.

And our next question comes from Alexei Gogolev from JPMorgan. Your line is now open.

Thank you. This is Elyse Kanner on for Alexei Gogolev. My question was could you elaborate on why SBC as a percentage of revenue grew slightly sequentially to 18%. And can you reiterate what the outlook for SBC as a percentage of revenue is for next year?

Yes, this is Brian. Happy to do that. It was 18% in the quarter, broadly consistent with Q2 and slightly down from Q1. The main driver was a modification to the TSR, which resulted in a P&L charge of about $70 million. Most of that charge runs through 2024, and it increased our share-based compensation by roughly 6 percentage points. This was essentially a one-time driver; no additional units were issued with the modification, and the details are disclosed in the proxy. The modification has largely run through in 2024, with a small tail in Q1 2025 that is not material. For 2025, we expect share-based compensation to be around 12% to 14% of revenue.

Got it. Very helpful. And then as a quick follow-up, what are the key challenges you're facing that prevent you from full rollout of outbound subrogation? And are you seeing elongated decision-making even around inbound subrogation product adoption?

Yes. Inbound subrogation is much easier because of the existing integrations already in place. Outbound requires more complexity and additional integration, so we've focused more on inbound subrogation across the board. We're seeing significantly increased volumes; as we went from Q2 to Q3, we saw double-digit increases in the number of files processed and have a large pipeline of customers. We're concentrating on inbound subrogation first and are in the early stages of implementing outbound, which remains more complex.

Got it. Thank you so much.

And our next question comes from Chris Moore from CJS Securities. Your line is now open.

Hi, good afternoon, guys. Most of that was answered. I just wanted to ask from a modeling standpoint: you have an unusual model where you can continue to invest heavily in R&D while still expanding margins. R&D has been roughly in the 20% range these last few quarters. Is that a reasonable level to assume moving into 2025, or how should I be thinking about that?

Chris, it's Brian. Yes. So R&D is an area that we put significant investment in. We've added a lot of capacity over the last couple of years really to make sure that we could support the innovation pipeline. So there's a significant amount of capacity that's been built into the system over the previous two years. We do expect R&D to continue to grow but at a moderate rate. That is an area that we continue to invest and invest heavily. So I think as a proxy, your percent of revenue is reasonable for going forward, and it will grow consistent with what it has been this year. So yes, it's a good modeling assumption.

Perfect. I will leave it there. I appreciate it, guys.

And our next question comes from Shlomo Rosenbaum from Stifel. Your line is now open.

Hi, thank you for taking my questions. Githesh and Brian, I was just wondering if the volumes could at all be attributed to market share gains amongst the client base or in specific, Progressive, I believe, has been investing throughout the period the last couple of years or so in terms of getting new clients, whereas a lot of the other insurance companies were not as aggressive because of the rate issue that we've had in all the various states. And I was wondering if you are hearing any of that amongst your clients as one of the reasons why the volumes might be pressured this year. And after that, I have one more question.

Sure. When you look at the top 10 carriers, almost all of them are customers. Some of our top 10 customers have gained market share while others have lost share, so in aggregate we don't see a material difference. The industry numbers show the usual puts and takes, but nothing significant. We believe the change in claim frequency is driven more by consumer behavior than anything else.

Okay. And then can you give me another example? When you talk about potential extensions of the payroll system product, that seemed very interesting. We saw it at your conference in some of the demos, and I was just wondering where else you could extend it.

I think so. First of all, when you look at the repair market, the payroll in the repair facility market is in the tens of billions of dollars, probably somewhere between $30 billion and $40 billion. And so we are very focused on that, but we also see several other back-office solutions that are on the pipeline that we don't plan to discuss right now. But just as we enter the front office, then we focused on the repair process itself, the back office represents another large opportunity to help streamline. But we haven't detailed those out other than payroll.

Okay. Thank you.

And our next question comes from Gary Prestopino from Barrington. Your line is now open.

Hi Brian and Githesh, a couple of questions here, well, first one and then a follow-up. Do you find that with these new products that you've launched, particularly I'll just point out Build Sheets, which I think should save insurers a ton of money given all the different trend levels that cars have, with these newer solutions, since they're driving more efficiencies, are you able to price at a better than 5:1 ratio that you'd often cited as how you price your products?

Yes. Gary, it's Brian. Yes, so a lot of the 5:1 ratio, I mean, we based the products and insurers very clearly on an ROI basis. And we do that, as we've talked about, on a 5:1. These Build Sheets, we're selling into the shops, and so the price dynamic is slightly different. Clearly, it drives a lot of efficiency both for the shops and for the part suppliers. It's eliminating significant returns. And then just lag times in the repair and having to store the car, having it wait for the proper part to be received if they ship the wrong part. So there is a really efficient play here, and it certainly has a strong ROI. But the 5:1 that we've talked about historically has been more on how we price into the carriers.

Well, even with what you're selling to the carriers since you're driving more efficiencies, are you seeing a step-up there? Or is that something you're not seeing, or what?

Yes. I mean in general, products have different dynamics. Some will have a better ratio and be 3:1. Others could be 7:1. It depends. I mean, certainly, on these newer solutions, the emerging solutions, they're very compelling. They have a very strong ROI. We do think that gives us pricing opportunity. But I think, in general, we still look at a 5:1 ratio as a good rule of thumb of how we price our products and the value it drives for our customers.

Okay. And then getting back to this claims drip down decline. Githesh, it sounds like it's more of an economic issue than anything else. But I guess are you also hearing from your insurance clients that as ADAS proliferates to the car park that, that is also causing a decline in claims in the market?

No. By and large, what we're seeing and what customers tell us is distracted driving. Many other behaviors haven't changed fundamentally. For example, some ADAS reduces front-end impacts but is causing more rear-end impacts because cars can brake suddenly, so that's less of an issue. What we consistently hear is consumers being constrained by affordability and the fear of premiums being raised. Those are the factors. We're about 18 months into this. Our customers expect normalization in the next couple of quarters, but we'll see.

Okay. Thank you.

I am showing no further questions. I would now like to turn the call back over to Githesh Ramamurthy, CEO, for closing remarks.

On behalf of all of us at CCC, I want to say thank you for joining us. I'd also like to take the opportunity to thank our customers, our CCC team members, and our shareholders for their trust and support. Where we sit today, we believe we're at the beginning of a transformational shift toward intelligent experience across the P&C insurance economy, and CCC's investments in a multisided network, AI, and our event-based architecture position us well to help our customers capitalize on this transition. We'll also continue to deliver on our strategic and long-term financial objectives and feel very good about those moving forward. With that, we'll end the call here. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.