Cannae Holdings, Inc. Q3 FY2021 Earnings Call

Good afternoon, ladies and gentlemen and welcome to the Cannae Holdings, Inc. Third Quarter 2021 Financial Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the company’s brief prepared remarks, the conference will be open for questions with instructions to follow at that time. As a reminder, this conference call is being recorded and a replay is available through 11:59 p.m. Eastern Time on November 23 2021. With that I would like to turn the call over to Jamie Lillis of Solebury Trout.

Thank you, operator and thank you to all of you joining us today. On the call today, we have our Chief Executive Officer, Rick Massey; Cannae's President, David Ducommun; and Bryan Coy, the company's Chief Financial Officer. Before we begin, I would like to remind you that this conference call and the Q&A following our remarks may contain forward-looking statements that involve a number of risks and uncertainties. Statements that are not historical facts including statements about Cannae's expectations, hopes, intentions or strategies regarding the future are forward-looking statements. Forward-looking statements are based on management's beliefs as well as assumptions made by and information currently available to management. Because such statements are based on expectations as to future financial and operating results and are not statements of fact, actual results may differ materially from those projected. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. The risks and uncertainties, which forward-looking statements are subject to include, but are not limited to, the risks and other factors detailed in our quarterly shareholder letter, which was released this afternoon and in our other filings with the SEC. Today's remarks will also include references to non-GAAP financial measures. Additional information including reconciliation between non-GAAP financial information to the GAAP financial information is provided in our shareholder letter. I would now like to turn the call over to Cannae's CEO, Rick Massey, who will open with a few brief remarks and then open the line for questions.

Okay. Thanks, Jamie. Bill is our leader. Bill is momentarily delayed. He has excused us because he's working on Cannae business or maybe a potential piece of Cannae business. So he may join us he may not during the call. So you've got the backup quarterback today. Before we start, I just want to refer you to what we think is a pretty nice document, our third-quarter quarterly update. It's on our website. It's got a lot more to tell about our numbers, our portfolio companies, Bill's outlook on the business, recent events and so forth. It's going to cover a lot more detail than we're going to be able to on this call. I always want to start off by acknowledging that Duke and Bryan do a really nice job on that. We're an active manager, and the results of our active management approach began with this quarter with Dun & Bradstreet's third-quarter results, which were driven by an acceleration in organic revenue growth, which we believe is a key to improving the company's multiple valuation. We think eventually they're going to get a re-rate as their organic revenue continues to accelerate. In the quarter, they grew revenues by 22%. They had adjusted EBITDA growth of 12%, both compared to the third quarter of 2020. The best part of the story was that organic revenue growth accelerated to 3.7% in constant currency as compared with about 120 basis points below that in the second quarter. And then that was not 120 basis points. The growth is all in execution of Anthony's strategy, which is continued growth in international. They got low-digit growth in North America and they got that from what he calls the four horsemen. They added new logos, they upsold new products to their existing enterprise customers, they implemented price increases and they continue to grow their small- and medium-sized marketing business. They have a lot of organic growth momentum, and we believe that's going to accelerate through 2022. It's been said that D&B is a show me stock, and we believe they're beginning to show that. So, we're happy owners. I'm happy to own it personally and I believe many of you on the call along with me, are going to be happy shareholders. It's been sort of some dark days here lately, but we believe they're coming out of the ditch. And it's going to be a great stock to own. We're also pleased with Alight and Ceridian. They posted great results this quarter. Alight reported earlier today 20% revenue growth in their BPaaS revenue, which is their enterprise software platform. They had a 42% increase in BPaaS bookings in the third quarter, so incredible growth in the growth engine of Alight. They actually reported that at the end of the third quarter, they had achieved already 99% of the revenue that they had originally projected to achieve for the full year. So we obviously, we're really happy with this company. They've done a few deals to expand their product offerings. Those are listed in the quarterly report and in their own press release, but that was Venafi, ConsumerMedical and the Aon Retiree Health Exchange. We think Stephan and his team, Katie, Cathinka are best-in-class. And we share Stephan's vision of unlocking the power of Alight's BPaaS platform. It's funny because we were just talking about Alight starting this year as a public company; they talked about organic revenue growth of 1% for 2021. Then, sometime in the second quarter they said, 'Well, we might get maybe 3% revenue growth, 3%, 4%, maybe up to 5%. Then today they guided to 5% to 6% in 2021, and that obviously bodes very well. I don't think they guided for 2022, but you can expect our revenue to continue to accelerate as a company. In my personal opinion, I believe it will be a high single-digit grower in the very near future. That's going to get you a re-rate, much higher multiple of EBITDA. And we think you're going to be a very happy owner there. Ceridian continues to deliver consistent results and continues to gain a wider following as evidenced by their inclusion in the S&P 500. This is an affirmation of their consistent growth and outstanding leadership. Their cloud revenue increased very strongly in the third quarter, which supports our belief that Ceridian has a long runway ahead for value creation and growth. We are very excited about it. Bill, in particular, is very excited about the prospect of their wallet product and its expanding feature set. CDAY is up almost three times in the past five years. It represents a multiple of our original investment of what, 11 times more than that. I'm sorry I didn't write the number down, but it's incredible. David Ducommun, our President here, he is the man in charge of our Sightline investment besides Bill. And I particularly and we are all very excited about it. The Sightline investment is that we put in $240 million on a $1 billion post-money valuation and Cannae now owns 33% of Sightline. It is the provider, the lead maybe the only provider of cashless payment solutions to online and physical casino gaming betting markets. Its solution includes cashless payment methods for slot machines, table games, and casinos, plus payment methods for iCasinos and online sports betting. We are very impressed with the management team there. We think this ultimately is a public company. Everybody says transformational. This company is transforming the payments business inside of these casinos from cash and ATMs and all this old-school cash advances and so forth to a slick digital wallet. It's just a very exciting business. Paysafe, another one of our portfolio companies announced several wins across digital commerce verticals as well as three acquisitions that broaden their position in eCash and open banking. They report Thursday morning before the market opens. Trebia's merger with System1 continues to move forward. They're in the middle of the registration process. We think that's going to happen in the fourth quarter of this year or the first quarter of next year. I got a chance to meet Michael Glynn, very impressive, very smart guy. It is not an easy business to understand. We ask you to take to have the patience to study this business because we think it's a Rule of 40 company, but it also generates good cash and that's a pretty rare combination. So we like the business. We think it's durable. We like the management. We think it's going to be a lot bigger. We are encouraged with our progress as we work with our management teams to unlock the value within our portfolio. But we know we have a lot more to do. And we and particularly Bill will remain engaged and support our portfolio companies. I can't go without mentioning our portfolio conference next month. All of our significant portfolio companies will be at Cannae, as well as Black Knight and FNF. It's here in Vegas on December 8. If you have not been invited and would like an invitation, I'm sure Jamie or Bryan Coy, our CFO can get you there. So with that, we're ready operator for Q&A.

Thank you. Our first question comes from John Campbell with Stephens. Please proceed with your question.

Hey guys, good afternoon.

Hey John.

Rick, you mentioned the backup quarterback comments. I think Brady coming in for Bledsoe several years ago I think that worked out all right. I think we're in good hands.

No, I would say this is more like Bledsoe going in for Romo.

I got you. In the shareholder letter, I noticed the cash balance you guys mentioned as of yesterday that was $81 million. I think you ended the quarter with $173 million holding company cash. And then you picked up the $120 million or so of the CDAY shares sold a couple of weeks ago. It looks like a pretty big deployment there. Was that just to pay off the debt? Is that kind of a short-term thing, or is that a new investment maybe you can shed some light on?

John this is Bryan Coy. We entirely paid off the margin loan in October all $200 million of it.

Okay. That math adds up. And then outside of the CDAY monetization, you guys did a couple of weeks ago, it looks like you got a couple more coming. You got partial Legendary Baking so and then you got the Triple Tree bill. You guys have been busy. I think you're always busy, but just curious about the expected gross proceeds from those deals and any other ones I might be missing here?

John, this is Bryan. Proceeds we'll get this year on that will be probably less than $50 million all in. We've got some earn-outs that will come in the two or three years ahead and another combined with all of the properties in there you mentioned maybe another $5 million to $10 million that will come in January.

Got it. I have a question that we often revisit, as things tend to change. Your response might vary over time. You will likely address this more thoroughly in a few weeks in Vegas. However, could you provide some high-level insight on your investment strategy and how you envision it evolving? You were very active in SPACs late last year, and your most recent significant investment on the private side was in Sightline, which appears to be an attractive opportunity. Is this indicative of a shift in your strategy, or will your focus fluctuate based on market conditions? Any thoughts on this would be appreciated.

We are opportunistic investors. Looking back at 2020 and reflecting on 2019, we mentioned our intention to pursue four SPACs, of which we deployed two and have two still available. At that time, it would have been surprising to us. We plan to complete the deployments of the two SPACs we currently have open, but I'm uncertain if we will return to pursuing more SPACs. Our primary focus has typically involved making private investments in companies, allowing us to have greater influence over their management, often taking positions that resemble control or shared control with management or founders. This approach is where we have found success, and I believe it's where we will continue to concentrate our efforts. While it's not out of the question for us to engage in another SPAC, I believe that opportunity will eventually diminish.

Yeah. Makes sense to me. I’m going jump back to the queue. Thanks, guys.

That’s all you had.

I’ll be back.

Our next question comes from the line of Ian Zaffino with Oppenheimer. Please proceed with your question.

Hi, great. Thank you very much. As far as the SPAC comment you made there's still a SPAC that hasn't found its target yet, right? What should we expect there as far as the confirmation of a deal or an announcement of a deal on the ASC?

ASC, we've identified and have had discussions with a number of very attractive targets. We have identified a number of others. People are still wanting to talk to Bill and partner with us. And we're going to be patient about it in part because we've got plenty of time. The ASC is not even a year old yet, and we're a little nervous about valuations right now. So we're disciplined investors, and yes, we're not going to let it right and we're not going to get in a hurry and cut corners and not do something that's going to meet Bill's standards. But there are plenty of companies out there. Believe it or not, as fished out as the SPAC market might seem, there are still companies that only want to talk to us. When we compete, we're not competing with other SPACs. We're competing with IPOs and M&A.

Okay. Great. And then as far as capital the private investments now, you also have a buyback in place. How are we thinking about maybe shareholder returns versus alternative investments out there?

We're currently in a situation where I want to address your question by reframing it slightly. At the moment, we have two backstops in place, and we possess the resources to fulfill those commitments. In the coming weeks, we'll have a clearer idea of how likely those will be utilized, which will inform us about our available capital for other investments and stock buybacks. Both investments and buybacks will always be options we consider. We will continually evaluate the returns from alternative investments against the returns from repurchasing our own stock. I believe that buying our stock back at around $36 still appears to be a solid opportunity.

All right, guys. Thank you very much. I’ll hop back in the queue.

Thank you, Ian. I appreciate your interest. John, I know you had a question about this, and I hope I was able to address it.

Our next question is a follow-up from John Campbell with Stephens. Please proceed with your question.

Told you I would be back.

Yeah, well.

One last question for me. I've got kids myself I know it's impossible to name your favorite child. But in the past, you guys have kind of called out you pointed to Alight as one of the top risk-related return potentials out of the portfolio. Obviously, it's had a really good move. It's good to get past the leaseback event and all that stuff. It feels like it's got a lot more to go but considering that move and then considering some of the disconnects you guys are seeing across the portfolio. Curious, if Alight still holds that throne or what else might kind of stand out to you guys at this stage?

That's my personal view, not reflecting Bill, Duke, or Bryan. However, I have a strong appreciation for Alight; their recent report shows impressive results. The management team is excellent, and I believe they have great potential for growth. I expect them to achieve high single-digit revenue growth eventually, and I wouldn’t be surprised if a major company decides to acquire them, which could yield significant returns for us. On a personal note, while Duke has more insight, I believe the investment in Sightline is robust and experiencing rapid growth. It addresses a substantial market with a unique product in the cashless gambling space, which excites me. Additionally, I think Anthony is close to overcoming the challenges Dun & Bradstreet faced in achieving organic revenue growth, and they are showing strong momentum. I anticipate that this stock will perform well next year, assuming market conditions remain favorable.

Got it. Thanks for the color guys.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

I think that's me. So, thank you operator. We continue to be excited about our opportunities. I want to remind you again about our portfolio company conference in Las Vegas on December 8th and 9th. Management teams from, like I said, our substantial portfolio will be hosting presentations, group meetings, one-on-ones, and so forth. It will be really fun. Bill will give the keynote or something like that, the introduction. Bill will be there; the whole team will be there. You're going to be very impressed with these folks. So, we hope to see you there. Thank you for your interest in our company. I know it's a lot of work to understand this, but I think if you do it, it will pay off. Thank you, operator.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.