Earnings Call Transcript - CCC Q3 2023

Operator, Operator

Thank you for standing by, and welcome to CCC's Third Quarter 2023 Financial Results Conference Call. Please be advised that today's call is being recorded. I would now like to turn the conference over to your host, Mr. Bill Warmington, Vice President of Investor Relations. Please go ahead.

Bill Warmington, Vice President, Investor Relations

Thank you, operator. Good afternoon, and thank you all for joining us today to review CCC's third 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 release 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 United States copyright and other laws. Additionally, while 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 that transcript. Please note that the discussion on today's call includes certain non-GAAP financial measures as defined by the SEC. The company believes that these non-GAAP financial measures provide useful information to management and investors regarding certain financial and business trends related to the company's financial condition and the results of operations. 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.

Githesh Ramamurthy, Chairman and CEO

Thank you, Bill, and thanks to all of you for joining us today. I am pleased to report that CCC delivered another quarter of strong top and bottom line results reflecting both the predictability and mission-critical nature of our solutions. For the third quarter of 2023, CCC's total revenue was $221 million, up 11% year-over-year and ahead of our guidance range. Adjusted EBITDA was $93 million, up 19% year-over-year and well ahead of our guidance range. Our adjusted EBITDA margin was 42%, up 270 basis points year-over-year. Based on our strong performance in the third quarter, and year-to-date, coupled with our outlook for Q4, we are raising our revenue and adjusted EBITDA guidance for the full year, which Brian will walk through. On today's call, I would like to highlight three themes of significant importance. The first is CCC's durable business model; the second is innovation; and the third is our strategic outlook for the business. First, our durable business model. A key part of our business model's durability is the diversity of our customer base and product offerings. Over four decades, we have built one of the industry's most comprehensive platforms, comprised of a range of different solutions that brings together over 35,000 participants across the P&C insurance economy, including insurers, repair facilities, part suppliers, automotive OEMs and more. The result is a growth algorithm balanced across a wide variety of solutions, clients and customer groups. We're focused on continuing to grow our customer base while investing in innovation that brings new high ROI solutions to the market. These solutions not only drive improvements in our customers' operating efficiency and consumer experience, but also serve to expand the CCC network. We believe our decades-long track record of helping clients with their mission-critical operations is a cornerstone of our durable business model and why customers typically adopt more of our products over time. That support from our customers is reflected in our financial results. In the 11 quarters since becoming public, we have grown our revenue run rate by roughly $250 million to more than $880 million, an increase of about 40%, while growing our adjusted EBITDA run rate by roughly $150 million to more than $370 million, an increase of nearly 70%. We believe the digitization of the auto insurance economy still has a long way to go and can support this attractive combination of top and bottom line growth well into the future. A key driver of our durable growth model is the breadth of our multisided network. Since our founding, our network has steadily grown by adding individual participants as well as new categories of participants within the P&C insurance economy. As the total network has grown, so has the value of the network to each participant. CCC's electronic parts ordering solution is a good example of how multiple participants in the ecosystem benefit from being in the CCC network. Our electronic parts platform brings the relevant parties together to increase buyers' visibility into parts availability and pricing, and to help reduce errors and cycle time. As a result, CCC's parts platform can help improve operational efficiency for insurers, automotive OEMs, part suppliers and repair facilities through process simplification, integration and automation. A case in point is auto manufacturer Toyota Motor North America. We expanded their participation in CCC's parts network to support its Toyota and Lexus dealers earlier this year. That, in turn, has contributed to strong sign-ups of new dealers for electronic parts ordering, with over half of those new dealers in the last couple of months being Toyota or Lexus dealers. We're also seeing an increase in electronic parts ordering in general as a wider range of dealers choose to transact on our platform. At this point, about 17% of the industry's parts volume by gross market value is being ordered electronically through the CCC network. The second point I'd like to discuss with you today is the strong velocity of innovation in each of our customer groups. Our goal at CCC is to enable the digitization of the entire automobile claims supply chain, from first notice of loss through subrogation. AI enables insurers and repair facilities to automate more steps in the process based on their rules, and thereby more efficiently support their customers. In order to drive operating efficiency and a better consumer experience, we believe all members of the insurance economy—insurers, repair facilities, parts providers and others—need seamless integration leveraging AI, connected networks and digital engagement. You may recall we added substantial development capacity in 2022 to deliver our future product roadmap. I'm also pleased to report that we have completed substantial improvements to our multi-tenant public cloud IT infrastructure, which further improves seven key areas of our infrastructure: speed to market, system availability, performance, agility, scalability, security and cost structure. This combination of development capacity and infrastructure upgrades gives us the confidence in our ability to continue to scale innovation and efficiently deliver new solutions and updates. Over the last several years, we have also invested heavily in building AI into the workflow solutions we offer our customers. With insurers, for example, we are seeing growing traction of Estimate-STP and strong customer interest in our AI-driven subrogation solutions. Last quarter, we talked about our new AI-based computer vision solution for casualty claims known as Impact Dynamics, which links our auto physical damage or APD and casualty capabilities to predict potential physical injuries to occupants of a vehicle involved in an accident based on photos of the damaged vehicles. Customers have reacted very positively to the solution, and we already have a top 5 auto insurer contracted for it. As a leading operating system for the collision repair industry, we believe that CCC is well positioned to continue to roll out new differentiated solutions for repair facilities that help to solve their key pain points, as we've been doing for more than a decade. In 2010, we had about 20,000 repair facilities on CCC ONE, and only about one in ten repair facilities used more than one product. Today, we have over 29,000 repair facilities and about two-thirds of them use more than one product. That's a nearly tenfold increase in the number of repair facilities using multiple CCC products, yet we still have many new growth opportunities ahead of us. These include expanding our network to new partner integrations, adding new AI solutions to improve repair facilities' efficiency and lead generation effectiveness, and introducing new capabilities to help our repair facility customers with their front and back office productivity. In September, we announced a collaboration with Google to make it easier for consumers to schedule online appointments with collision repairers that use Engage, our scheduling and self-service lobby check-in package for repair facilities. This collaboration adds a user-friendly "Book Online" button to Google Business Profiles, Search and Maps, helping participating repair facilities stand out in search results and making it easier for consumers to schedule repair appointments. We believe this type of deep integration across products helps improve repairers' lead generation, consumer experience and operating efficiency. Last month, we announced two new AI-driven solutions that help address the tight labor challenges facing repairers in writing estimates for damaged vehicles. The first, Repair Cost Predictor, is a new AI-powered feature within Engage that allows consumers who are shopping for a repair to upload photos of the damaged vehicle and receive a predicted range for the cost of repair in seconds. The consumer can then book an appointment for an estimate or directly schedule a repair, giving repair facilities the ability to efficiently capture and convert digital leads even after hours. The photos and predictions are seamlessly integrated into CCC ONE, further enhancing repair facilities' ability to service their customers. The second new AI-based solution for repairers, Mobile Jumpstart, is a new feature within our CCC ONE Estimating-IQ solution that helps estimators significantly reduce the time it takes to prepare estimates by leveraging their mobile phones. Mobile adoption in the collision repair industry is high, with about 85% of users operating the CCC mobile app daily and collectively taking over 40 million digital photos per month on their phones. In early usage, Mobile Jumpstart is reducing the average time to complete an initial estimate from about half an hour to a few minutes or less. This is a game-changer. And with about 45% of repair estimates written by estimators at repair facilities, we are optimistic that the combination of Repair Cost Predictor and Mobile Jumpstart can have a meaningful impact on cycle time in the industry. In addition to improving repair operations, our repair facility customers are also asking us to deliver new solutions that enhance their front and back office productivity. Last month, we introduced ONE solution targeted at addressing a common customer pain point: digital presence. Consumers generally expect businesses to have a modern website they can interact with, yet often in the collision repair industry, those websites are outdated and many repair facilities do not have one at all. Our new solution called Amplify enables repair facilities to quickly and easily set up a modern, professional-looking website with deep integration to CCC ONE. Amplify automatically pulls the relevant information from the repair facility's CCC ONE profile into a prebuilt customizable template and keeps that information in sync. So for example, when the repair facility adjusts hours of operation in CCC ONE, those hours automatically update on the website. The repair facility's new digital presence also integrates seamlessly with their other CCC capabilities—for example, by incorporating Engage's online scheduling capability directly into their website. And as new CCC solutions roll out, that repair facility digital presence can be continually upgraded as well. Digital presence is just one of many front and back-office solutions our customers are looking for, and with our platform, network and AI capabilities, we see many additional opportunities that we can deliver in the future. For my third and final point, I would like to discuss our strategic outlook for the business. We recently completed our five-year strategic planning session, and as a very long-term shareholder in CCC, perhaps the longest shareholder in CCC, I wanted to say that this is the most excited I've ever felt about our long-term opportunities. As you all know, our industry has serious secular challenges. In all the years of talking to our customers, I have never seen more determination to deal with the biggest challenges facing the industry: labor shortages, rising vehicle complexity, persistent inflation, increasing consumer expectations—challenges that are reflected in over 2 billion cumulative annual days of cycle time for automotive claims. I believe these forces are driving a once-in-a-generation digital upgrade cycle across the auto insurance economy, and that CCC is uniquely positioned to help our clients navigate this transition. We put a lot of time and effort into understanding our customers' businesses and their pain points. We hold advisory council meetings for our client groups multiple times per year, and conduct deep business reviews with many individual clients quarterly. As a result of this deep understanding of the auto insurance economy, we are able to build novel mission-critical solutions with high ROI and short time to value that leverage our multisided network. These solutions drive billions of dollars of impact to customers annually and are central to improving their consumer experience and support our 98% plus retention rate and 82 Net Promoter Score. We feel good about the business, and I'm very encouraged by our pipeline of solutions, both recently introduced and in development. Our new solutions increasingly combine our multisided network and artificial intelligence to help our clients improve their operating efficiency and consumer experience. In addition, I believe we will continue to have opportunities to develop new solutions for our clients to help them deal with the growing technological and other complexities facing their businesses. I will now turn the call over to Brian, who will walk you through our results in more detail.

Brian Herb, CFO

Thanks, Githesh. As Githesh highlighted, our balanced growth algorithm, the multisided network and velocity of innovation are driving positive momentum across the business and reinforcing our confidence in our long-term growth outlook. We are pleased with our top and bottom line performance which reflects a balance between investment in growth initiatives and margin discipline. As we now turn to the numbers, I'd like to review our third quarter 2023 results, and then provide guidance for the fourth quarter and full year 2023. Total revenue for the third quarter was $221.1 million, up 11% from prior year period. Approximately 8 points of our revenue growth in Q3 was driven by cross-sell, upsell, and adoption of our solutions across our client base, including the upsell of repair shop packages, continued adoption of our digital solutions, and the ongoing momentum in casualty and parts. About 1 point of the 8 points came from catch-up revenue on a subscription contract. An incremental 3 points of growth came from new logos, mostly with our repair facilities and part suppliers. I also want to highlight that we saw about 1 point of contribution in Q3 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 Q3 2023, GDR was 98%, which is down modestly from 99% last quarter. This is the result of rounding. Since the first quarter of 2020, GDR has been between 98% and 99% when rounded up or down, driven primarily by industry churn. 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. 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 2023, NDR was 107%, which is consistent with last quarter. Now I'll move to 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 in our press release. Adjusted gross profit in the quarter was $172.1 million. Adjusted gross profit margin was 78%, up from 77% last quarter and flat to the third quarter of last year. The flat year-over-year adjusted gross profit margin primarily reflects operating leverage on the incremental revenue being offset by the higher depreciation expense from capitalized projects recently released to the market while the associated revenue from these emerging solutions is 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 margin target of 80%. In terms of expenses, adjusted operating expense in Q3 2023 was $89.4 million, up 8% year-over-year. This was driven by the impact of headcount additions and higher IT costs related to system migration. Adjusted EBITDA for the quarter was $92.9 million, up 19% year-over-year with an adjusted EBITDA margin of 42%. Now turning to the balance sheet and cash flow. We ended the quarter with $449 million in cash and cash equivalents and $786 million of debt at the end of the quarter; our net leverage was 1x adjusted EBITDA. Free cash flow in the quarter was $46 million compared to $17 million in the prior year period. Unlevered free cash flow in Q3 was $57 million or approximately 61% of our adjusted EBITDA. While our level of free cash flow can vary quarter-to-quarter based on seasonality, phasing or one-time items, we expect it will continue to average out to the low to mid-60s percent of our adjusted EBITDA over time. I'd like to finish with guidance. Beginning in Q4 2023, we expect total revenue of $221.5 million to $223.5 million, which represents 9% to 10% year-over-year growth. We expect adjusted EBITDA of $92 million to $94 million, which represents a 42% adjusted EBITDA margin in Q4. For the full year 2023, we expect revenue of $859 million to $861 million, which represents 10% year-over-year growth. We expect adjusted EBITDA of $345 million to $347 million which represents a 40% adjusted EBITDA margin and a year-over-year improvement of about 120 basis points at the midpoint. Three points to keep in mind as you think about our fourth quarter and full year guidance. The first is we feel good about our ability to deliver the position for the year. We've raised our revenue guidance in 2023 by $7 million at the midpoint on the momentum in the business and the durable revenue model that provides good visibility from our long-term subscription contracts. This has moved our revenue guidance range to 9% to 10% growth for the full year. The second point is that while the midpoint of our Q4 revenue and adjusted EBITDA guidance implies strong year-over-year growth, revenue and adjusted EBITDA are relatively flat sequentially on a dollar basis. This is the result of the quarter-to-quarter comparison created by the $2 million in revenue catch-up we recognized in Q3. The third point is that we expect adjusted EBITDA margin to expand about 260 basis points year-over-year to 42% in Q4 at the midpoint as we benefit from operating leverage on the incremental revenue as well as lapping last year's second half headcount ramp. Given the seasonality in our adjusted EBITDA margin, we think of the starting point for next year's margin expansion at the full year 2023 target of 40% versus our Q4 target of 42%. Overall, the strong trends we're seeing in renewals, relationship expansions and new solution introductions reinforce our confidence in the underlying strength of the business. The combination of our durable business model, advanced AI capabilities, the interconnected network and the broad solution set puts us in a unique position to help our customers in the P&C insurance economy reduce cycle times and administrative costs while improving their customer experiences throughout the claim process. 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 priorities, we believe we will generate significant value for both customers and our shareholders. With that, operator, we are now ready to take questions. Thank you.

Operator, Operator

Our first question comes from Gabriela Borges of Goldman Sachs.

Kelly Galanis, Analyst, Goldman Sachs (on behalf of Gabriela Borges)

This is Kelly Galanis on for Gabriela. Great to hear about the long-term auto physical damage customer adding Impact Dynamics as its first casualty solution. Do you expect to see more deals like this as a result of Impact Dynamics?

Githesh Ramamurthy, Chairman and CEO

Yes. That's our belief that this is a unique, game-changing solution that really takes the physics of the auto accident and the AI capabilities, and we think this is applicable in a very broad way across the board.

Kelly Galanis, Analyst, Goldman Sachs (on behalf of Gabriela Borges)

And then for Brian, just as you look at planning for 2024, are there any specific dynamics investors should be aware of that could be different next year versus this year? And then how are you expecting emerging products to contribute next year?

Brian Herb, CFO

Yes. Sure, Kelly. So maybe I'll start with the emerging solutions, and then we can talk to the broader guide. Emerging solutions contributed 1 point of growth in the quarter. That's approximately what it has done throughout the year. So year-to-date, emerging solutions is about 1 point of growth. We have highlighted over time that we expect that to move to more like 3% to 4% of the total growth coming from emerging solutions, but that's going to be over a multiyear journey going from the 1 point today to 3 to 4 points in the future. So that's how to think about emerging solutions. As far as the guide, we're not putting anything specific out there. We would just highlight that we point toward the long-term guide of 7% to 10% organic. We do see really good momentum across the business from the broad set of solutions and a lot of opportunities to grow, and there's good momentum in the business. So we feel good as we exit the year and come into next year; we'll be more specific on the guidance as we get into next year and talk about Q4.

Operator, Operator

Our next question comes from the line of Dylan Becker of William Blair. Our next question comes from the line of Matt Bullock of Bank of America.

Matthew Bullock, Analyst, Bank of America (on behalf of Mike Funk)

I'm on for Mike Funk. My question is on Estimate-STP. I was hoping you could maybe walk us through the progression of one of the company's more mature Estimate-STP customers. At a high level, how quickly have the volumes and revenue contribution ramped at the highest and most enthusiastic adopters? And then how might you expect this to trend over the next 12 months?

Githesh Ramamurthy, Chairman and CEO

Thanks, Matt. A couple of broader perspectives. If you recall last quarter, we said we have expanded the AI capabilities from not just the mobile channel. Today, the mobile channel after an auto claim is about 30%; another 20% to 45% are through the facilities; another 25% of claims come in where a staff appraiser goes in and looks at the claim, and we have now expanded the AI capabilities across all of these channels. We've also expanded the number of customers that are rolling out Estimate-STP to where we now have over 20 customers who are rolled out. That number continues to increase. Specifically, for individual customers, what we have seen is that customers start out in 2 or 3 states, expand to about 10 to 15 states, then roll out broadly to about 30 to 40 states, and we have customers who are now in pretty much every state. As they fine-tune their processes, they start adopting more and more of the capabilities. To give you a perspective on the range of customers, we have some customers who use these capabilities at a pretty high percentage and some who are at a very low percentage. We are very encouraged overall with the rollout of customers and the adoption trends. Brian, in terms of the actual dollars of revenue and how that's flowing through, do you want to add anything to that?

Brian Herb, CFO

Yes. We're not breaking out Estimate-STP as an individual item. We talk about it just within the overall emerging solutions that we've already highlighted. Emerging solutions—including Estimate-STP and Diagnostics—added about 1 point of growth for the quarter. So I won't get more specific. I would just say to get to Githesh's point, we are seeing good traction and momentum. We are still very much in the early innings and even the more advanced users of Estimate-STP are still sending through smaller portions of their overall claim volume. So we see adoption continuing to grow and feel really good on where it's headed and the traction that we have against the product.

Operator, Operator

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

Alexei Gogolev, Analyst, JPMorgan

This is Alexei Gogolev from JPMorgan. I wonder if you could update us on total Estimate-STP volume of claims, either in percentage terms or in absolute terms of total volumes?

Githesh Ramamurthy, Chairman and CEO

Alexei, what we're seeing in aggregate is that Estimate-STP is still under 1% of claims. So in terms of straight-through processing of claims in the aggregate, it is still under 1%. What we are seeing is that Estimate-STP, for customers who have rolled it out and adopted it, is capable of handling around 10% of all repairable claims. Different customers are at different stages, but the aggregate number remains under 1%. We really like the way it is developing and how people are starting to adjust their processes to put this in production.

Alexei Gogolev, Analyst, JPMorgan

A quick follow-up on Subrogation: how will this fit into the STP ecosystem? And have you tried to calculate ROI benefits for your customers versus manual processes?

Githesh Ramamurthy, Chairman and CEO

Yes. We have started testing our Subrogation solution with a number of customers where we've taken closed files and run them through the system. We're seeing primary benefits for customers. First and foremost, the AI that underpins our Subrogation platform is able to scan and process a large volume of pages, documents and photos, and then zero in on which files should be subrogated and how to adjust the inputs based on what the AI is seeing. We're seeing a tremendous improvement in speed on the Subrogation side. For customers who are testing it, the lift versus manual methods in terms of ROI is significant. We are very encouraged that we have both an inbound and an outbound Subrogation solution, and the results our customers are seeing are very promising.

Operator, Operator

Our next question comes from the line of Shlomo Rosenbaum of Stifel.

Shlomo Rosenbaum, Analyst, Stifel

There's been a lot of questions about Estimate-STP. I wanted to ask a little bit about some of the other ones that are out there, like is there any movement in terms of traction on the payments product? How is that going out in the marketplace now?

Githesh Ramamurthy, Chairman and CEO

Payments continues to present opportunity. In fact, we see more use cases every day—from insurers paying repairers to repairers paying parts providers. So we keep seeing more use cases and opportunities. That said, payments is in earlier stages of rollout. Compared to a solution like Subrogation, payments will be a slower adopter.

Brian Herb, CFO

Yes. I would just add that it is generating revenue today. But as Githesh said, it's in the early innings, and we expect it to scale over the next several years.

Operator, Operator

Thank you. One moment, please. Our next question comes from the line of Dylan Becker of William Blair.

Dylan Becker, Analyst, William Blair

Congrats, guys. Nice job here. Githesh, I think you mentioned in your prepared remarks about the development capacity and data scale over the years fueling new innovation and value for customers. I wonder how you're thinking about how that evolution has trended over the past several years and how you think about the opportunity set to potentially accelerate that cadence if it shapes up that way, as you think about that innovation funnel going forward and the opportunity to capitalize on this digital investment capacity.

Githesh Ramamurthy, Chairman and CEO

Thanks, Dylan. At a macro level, what we hear consistently from customers is a need to move faster and to roll out more solutions. We see this as a once-in-a-generation opportunity to leverage our capabilities. We started to see this a couple of years ago. In 2022, we added substantial development capacity—about 20% more development capacity. We're still adding development capacity today, but not at that same rate. We feel very good about our development capacity and engines. The results Brian and I discussed on this call are a direct result of that enhanced development capacity. Additionally, the transition to the public cloud has enabled strategic capabilities in our ability to deploy software releases, improve speed to market, reliability and scale. We feel well prepared with the tech stack and infrastructure to work closely with customers, which is translating into a broadening of new solutions.

Dylan Becker, Analyst, William Blair

Got it. That makes a ton of sense, super helpful. Brian, maybe on your year-end too: I know you called out the 17% spend, a little bit of a step-up on the parts side of the equation. But as we reconcile that back to the 70% to 80% of claims volume you guys are seeing across the network, how should we expect those two metrics to converge? Any reason why we wouldn't see similar adoption rates, understanding it's going to take time?

Brian Herb, CFO

We feel really good on the parts opportunity. There are two ways we'll continue to grow: adding new rooftops each month which expands footprint, and seeing additional adoption of online, electronic parts ordering. The natural volume of people moving from offline ordering to online ordering provides strength and momentum. As we build out the footprint, parts is growing faster than the rest of the business and will be a growth contributor going forward. So yes, we feel really good about the opportunity in front of us.

Githesh Ramamurthy, Chairman and CEO

One more data point, Brian: in 2020 that number was about 10%. You can see it moved from 10% to 15% in 2022 and is now continuing to grow past that.

Dylan Becker, Analyst, William Blair

Got it. Super helpful. And really congrats on the nice numbers here.

Operator, Operator

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

S. Kirk Materne, Analyst, Evercore

Githesh, I was wondering based on your comments about the challenges facing the industry, can you talk about how the cohorts are progressing as it relates to going from pilot projects to production—meaning as more of your clients start playing with newer products like Subrogation or Estimate-STP, have you seen clients move from pilots to production at a faster pace? Are external pressures helping them move along faster?

Githesh Ramamurthy, Chairman and CEO

Thanks, Kirk. Broadly, we work with multiple customer segments. Within insurers, the teams handling Subrogation, appraisals and total losses are different. On the repair facility side, we help with core estimating and front and back office solutions. We have breadth of solutions and a broad customer base at various adoption stages. At SEMA last week, I saw repair customers using Jumpstart and their reaction was immediate: they said this will save them a ton of time because of labor shortages. Those 'aha' moments lead to adoption pilots and broader rollouts. We're seeing pilots convert and adoption broaden, which reinforces our focus on building out a broader solution set.

S. Kirk Materne, Analyst, Evercore

And then Brian, on the early look at adjusted EBITDA for next year: 40% is an impressive level. Any specific investments you guys are focusing on for next year that keep you in that range versus where you end up? Or are there one-time items in the back half that influence that as well?

Brian Herb, CFO

It's a good question. We're happy with the margin in the second half and the exit at 42%. Moving from a 40% full year baseline, some things play through: seasonal reset on payroll taxes and merit increases that come at the beginning of the year, our customer conference which is an investment in the first half, and additional headcount adds that will come in the first half. Those types of items will naturally come in during the first half of the year, which is why we're using 40% as the full year baseline rather than the 42% exit margin.

Operator, Operator

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

Saket Kalia, Analyst, Barclays

Echo a very solid quarter. Githesh, maybe to expand on the parts business strategically: what are you typically replacing when customers are not using the network today, and do you see anything on the horizon that can help accelerate adoption of parts networks like CCC? It's grown quite a bit over the last couple years—what could accelerate adoption further?

Githesh Ramamurthy, Chairman and CEO

Thanks. Fundamentally, many parts orders are still handled through phone calls and emails. Historically, people might have been ordering roughly 8–9 parts for a repair; today, people are ordering 13 parts—complexity has increased. We're replacing the phone and email process with a seamless electronic system where once you write the estimate you can click to send orders, set up suppliers, receive invoices and reconcile electronically. In earlier years, we needed to build out geographies and maximize supplier participation. Today, we have the vast majority of suppliers—OEMs, recyclers and aftermarket—on the platform. It's now about driving adoption. Given labor challenges, if we can save 10 minutes on a parts order or get it right the first time, customers are more willing to adopt our electronic parts solution because it's integrated, saves time and improves accuracy.

Saket Kalia, Analyst, Barclays

Got it. Brian, as a follow-up: can we dig into the revenue acceleration this quarter? You called out the $2 million subscription catch-up, but other lines like other revenue are a bit higher. Can you unpack that acceleration a bit?

Brian Herb, CFO

Happy to. So the 11% total growth: 8% came from cross-sell and upsell within existing clients. Within that, about 1 point was casualty, which had a strong contribution. We had 3 points from new logos as well. It was broad-based—no single product drove the performance. We did 10% growth in Q1, 10% in Q2 and 11% in Q3. We called out the 1 point from the subscription catch-up. Below that, it was a broad-based performance across the product set, and we're really pleased with the momentum.

Operator, Operator

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

Unknown Analyst, Analyst (on behalf of Chris Moore)

This is an analyst on for Chris Moore. Can you talk a little bit about annual price increases and how they are embedded or not embedded into your revenue growth target?

Brian Herb, CFO

We do not explicitly call out pricing within the 7% to 10% organic growth guide. We continuously look at pricing and make sure we're pricing products for the value delivered to customers and think about pricing in a strategic way, but there's not a specific metric to highlight within the guide to call out.

Unknown Analyst, Analyst (on behalf of Chris Moore)

Super helpful. And then one more: CCC Payments is an important long-term opportunity—what are some critical milestones we should be thinking about in 2024?

Githesh Ramamurthy, Chairman and CEO

For 2024, the focus is on continuing to expand the solution set, ensuring customers that are piloting feel good about expanding pilots into broader rollouts, and expanding the set of payment-related solutions we offer. We have internal milestones, but broadly it's about growing pilots into production and expanding functionality.

Operator, Operator

Our next question comes from the line of Arvind Ramnani of Piper Sandler.

Arvind Ramnani, Analyst, Piper Sandler

Phenomenal set of results. I had a question on progress across new logos and cross-sells. Who are you typically replacing in these new logo cohorts and in the cross-sell activity?

Brian Herb, CFO

On new logos, the three points were largely driven by repair facilities—that's the biggest contributor. Many smaller shops are moving from pencil and clipboard to software. It's a combination: repair facilities are the largest part, followed by part suppliers, and some smaller regional insurers are included in new logos as well. So it's broad-based.

Githesh Ramamurthy, Chairman and CEO

To add, Arvind, most of our growth focus is on delivering new solutions to our existing customers. That's what drives over 80% of our growth over the next several years.

Arvind Ramnani, Analyst, Piper Sandler

When you add new products or enhance existing ones that generate significant value for clients, how do you decide how much of that value to capture through pricing versus how much value to leave for the customer? For AI-driven innovations, how do you balance pricing and customer ROI?

Githesh Ramamurthy, Chairman and CEO

For the most part, our focus is that every new solution's ROI needs to stand alone. We look at the ROI that the solution delivers to the customer. For example, Engage is used by about one-third of our repair facilities today; two-thirds have not adopted Engage. Enhancements like Google appointments or additional functionality make Engage more palatable to the other two-thirds and can drive significant growth. For solutions like Subrogation, which deliver a clear financial return and time savings, we evaluate what's fair from a customer standpoint in terms of pricing. Essentially, the customer ROI is central to our pricing decisions.

Brian Herb, CFO

To summarize, we generally think about pricing in the context of value delivered. On average, we think about a roughly 5:1 ratio—so pricing products with about a 5x return to the customer—though some products will be higher and some lower.

Arvind Ramnani, Analyst, Piper Sandler

Terrific. That's really great, and phenomenal execution this quarter.

Operator, Operator

I'm showing no further questions at this time. I'd like to turn the call back over to CEO Githesh Ramamurthy for any closing remarks.

Githesh Ramamurthy, Chairman and CEO

Thanks, everybody, for joining the CCC call. We are proud of our performance year-to-date in 2023. I'd like to thank our customers, our CCC team members and our shareholders. Brian and I hope to give you an update in February when we report the fourth quarter. I'd just add that we remain confident in our ability to continue to deliver our strategic objectives and the durable business model we have. Thank you for joining the call today.

Operator, Operator

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.