Good afternoon, ladies and gentlemen, and welcome to the Cannae Holdings, Inc. Third Quarter 2022 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 PM Eastern Time on November 16, 2022. With that, I'd like to turn the call over to Jamie Lillis, Investor Relations for Cannae.

Thank you, operator, and all of you for joining us this afternoon. On the call today, we have our Chief Executive Officer, Rick Massey; Cannae's President, David Ducommun; and Bryan Coy, our Chief Financial Officer. Before we begin, I would like to remind listeners 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 a reconciliation between the non-GAAP financial information and 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, then open the line for your questions. Rick?

Thanks, everyone. Bill is currently busy working on another project, so I'm stepping in. As anyone who knows me can attest, I'm not much for sticking to a script. I'll just go through the key events from the past quarter. The most significant one is that we repurchased about 2.1 million shares at an average price of $20.76, which remains approximately a 43% discount to what we believe is our net asset value. We are actively continuing our share buyback program, which we have been doing for some time. Over the past year, how many shares have we bought back, Bryan?

13.75 million shares, 15%.

We have repurchased 15% of the company and plan to continue this practice. We hope our shareholders are satisfied with these efforts. Our Board has nearly used up its original authorization, and it has approved an additional 10 million shares for buyback. We will keep repurchasing as long as our stock is priced at a discount. We also generated some cash by selling CorroHealth for $80 million and divesting 75% of our investment in AmeriLife for $243 million. Our investment in AmeriLife yielded a multiple of 2.7 times our initial investment from 2020, which we are very happy about. We anticipate another closing in the second half, likely in December.

Yeah, end of this month.

At the end of this month, in late November, we will receive a small amount of cash, and then we plan to roll a portion into the surviving company, which we still believe has a promising future. This has been a profitable trade for us. Dun and Bradstreet had a solid quarter, meeting their estimates and guidance, with approximately 4% organic revenue growth in constant currency. Overall revenue increased about 7% in constant currency, and they maintained a 40% EBITDA margin throughout. They are currently undergoing an investment cycle and starting to see the benefits of their investments in new products. We are very pleased, and based on some comparisons we've done, the market is significantly undervaluing Dun and Bradstreet, even when accounting for revenue growth. Alight is one of my favorite companies. They accounted for about 8.7% of overall revenues and nearly 10% growth in their core Employer Services segment. Alongside this, they are seeing margin expansion from their investment cycle. Their business process as a service (BPaaS) offering, which includes products like Worklife, is a key driver of revenue for Alight and grew 56% year-over-year in the first nine months. They are on track to meet their guidance with two months still left in the year and are likely to add some significant new clients in the next 60 days. They have already signed them but haven’t announced yet. This demonstrates their ongoing success in bringing Fortune 100 companies on board as customers, which is very exciting. Dave, would you like to discuss Sightline?

Sure. So Sightline continues to make progress in their core segment, which is cashless gaming. They're currently working with Resorts World in Las Vegas to kind of put their flagship end-to-end cashless gaming system in place. And hopefully, by the end of the year, they'll be in a position to start to retest that. Another good news, JPMorgan payments made a strategic investment in the business that came in at a premium to the value we invested in. So it's more liquidity for the company, a great stamp of approval from a tier-1 strategic partner. So we hope more good things are to come.

Thanks, Duke. We've made a couple of new investments recently. One is a service provider based in Paducah, Kentucky, which has a solid history. They focus on core processing for small banks and credit unions, particularly those with assets under a billion dollars. This is a very resilient customer segment, and they hold a significant market share. Frank Martire, who you all know has an impressive track record from Medavante to his long tenure at FIS, is leading the charge to expand this business. We are optimistic about achieving multiples on our investment, aiming for about three times our money in five years if everything goes well. We really believe in the cash generation potential of this business, especially since we have deep knowledge in bank technology. Additionally, we committed $125.7 million for a 50.1% stake in ASC Bournemouth, an English Premier League football club. Many of you have questioned our decision to invest in a sports team given our focus on technology. The simple answer is that this is a Bill Foley initiative. Bill successfully built a hockey team from the ground up and has received offers valuing it at around four times the original investment. We are confident that he and his team can replicate that success with Bournemouth, which currently lacks investment in areas like facilities, sponsorships, merchandise, and media rights—areas where they've excelled with the Vegas Golden Knights. Bill has plans to enhance the business, and I'm optimistic that our stake could yield three to four times our investment over the next five to seven years. With that, unless anyone has questions, I've covered the major points for the quarter, and we can move to the Q&A session.

We will now begin the question-and-answer session. The first question today comes from Chris Sakai with Singular Research. Please go ahead.

Hey, Chris.

Hi, good afternoon. Just wanted to know, so you've got a bunch of cash from the AmeriLife sale, plus $249 million on the balance sheet. So what are you guys planning on doing with that? Just buying back more shares?

Yes. I would say we have three options, and these will require real-time decisions. We plan to aggressively buy back our shares with the cash we have, especially while the discount remains over 40 percent, or even in the 30-plus percent range, as it's a great opportunity for returns compared to other uses of our capital. However, we also need to seek new investments, and we have a strong pipeline in that area. Although nothing is set to happen immediately, we could allocate some of our capital to support these new ventures. Bill is also working on ways to attract third-party capital for deals to help preserve more of Cannae's capital on a deal-by-deal basis. Additionally, there may be a need for future funding in some of our existing portfolio companies. Computer Services, for example, is quite leveraged but has a significant list of potential investments. I anticipate we will have an opportunity to invest a small amount there, likely ranging in the $20-$30 million area, as we aim to increase our stake since it currently stands at $84 million. There’s also potential for investment in Sightline down the line, though Duke would have more insight on that. Overall, our priority is to repurchase our shares while continuing to search for better opportunities, although we haven't identified any yet.

Okay. All right. Thanks for that. And then where are you guys seeing better valuations now, in private or public equity?

Public, without a doubt.

Okay. How long has the investment in the soccer team been in discussions?

Bill and a few team members, including Ryan Caswell and Alex Ciniello, were approached 1.5 years ago by someone interested in bringing together a multi-team setup. Bill found this idea exciting and conducted thorough research on it. During this time, it became apparent that there was interest from Bill, and the Board became available due to the current owner's potential sanctions issues and a desire to liquidate his assets and move on. This allowed us to secure a favorable deal. Over the past 15 months, this process has not been spontaneous; it has involved considerable thought from Bill. A key factor was recognizing that the operations of a soccer team closely resemble those of an NHL team, encompassing areas like concessions, ticket sales, alcohol sales, sponsorships, and merchandise. He believed he could effectively manage these aspects while also learning. Skilled management is already in place to address player-related operations and strategies for succeeding in the Premier League. Recently, he met with the team to discuss filling gaps in management related to those operations, while also focusing on enhancing business revenue.

All right. Okay. Sounds good. Thanks for the answers.

Sure. Thanks.

The next question comes from Kenneth Lee with RBC Capital Markets. Please go ahead.

Good afternoon. Thank you for the question. I wanted to ask about AFC Bournemouth. Could you elaborate on how the financial mechanics and economics might impact Cannae? Additionally, regarding the $126 million commitment, are there any obligations related to future player transfers or investments in infrastructure, like the stadium? I would like to gain a clearer understanding of the financial commitments involved.

We have a firm commitment of $125.7 million, which is approximately GBP120 million. This is the total amount we are obligated to invest, and we have no future financial commitments. In fact, we've overfunded our investment. The maximum investment stands at $125 million, but it could be lower due to an extra capital amount of about $33 million. Once we build the facility and address any outstanding earnouts, such as a GBP20 million payment if the team remains in the Premier League next year, our financial exposure is fairly managed. There's also a focus on improving their stadium, which currently has limited capacity, to increase ticket sales. Additionally, there is a sufficient budget for player transfers in the coming years. Importantly, this business generates cash flow, unlike many others that encounter significant financial shortfalls. Thus, we believe that $125 million is the upper limit of our investment, although it may be less. Our investment structure positions Cannae as a limited partner, with Bill acting as the general partner. We do not pay him fees, nor does he earn any fees for managing, as he is doing this out of goodwill. He does not receive any additional compensation from the funds we have committed to the team, and our returns will mirror his. We are perfectly aligned with Bill in this investment. I hope this clarifies your question.

Absolutely, very helpful there. Switching gears just for a moment, I have a follow-up. You mentioned the possibility of bringing in third-party capital when exploring new investments. I would like to get a bit more insight into what that might look like.

It's somewhat unclear at the moment because we don't have a specific deal to discuss. We're considering a scenario where the total equity might involve a leveraged buyout, possibly involving a private company. The total check could range from $1 billion to $1.4 billion. We don't want to over-leverage the business, so we're looking at around three times leverage, which would require raising between $700 million to $900 million. Cannae would contribute about $100 million, and we would need to raise the remaining funds through other sources. This would likely be structured as a special purpose vehicle, which is common these days, though it hasn't been a path we've pursued so far. We may miss out on some opportunities due to limited capital, and our aim is to secure funding from third parties to capitalize on good investment deals.

Got you. Very helpful there. Thanks, again.

Sure. Thanks, Ken.

The next question comes from John Campbell with Stephens. Please go ahead.

Hey, John.

This is A.J. Hayes stepping in for John today.

We thought that was the case. Well, you changed the terms on us.

Apologies about that.

Hi, AJ, no, we're just messing with you. We'd rather talk to you anyway.

Perfect. Good deal. Thank you for taking our questions. So you guys slightly touched on Sightline. But can you add some color on the benefits Sightline may realize as a result of the strategic relationship with JPMorgan payments? And then can you maybe add some update on the Sightline's fundamentals and then maybe how you're thinking about monetization of Sightline long term?

Sure. Let me answer these in order. So the strategic partnership with JPMorgan is incredible. We put a representative on the Board. They're both a huge partner with the payment network. So helping us with our approval issues with Visa and Mastercard. We think they can give us some important strategic advice to help get approval rates up. I think they can help us more efficiently design our network. They obviously have access to an incredible customer base in their own right. So I think the opportunity of partnership with JPMorgan affords a growing payments company like Sightline virtually unlimited. It's really unlocking both their intellectual capital and just breadth of network access. I think it can do wonders for Sightline's business. And so when you talk about the fundamentals of the business, I'd say online gaming has been a little bit challenged this quarter. I think with the demise of the $2,000 free sign-up credits from the casinos, you've seen overall volumes kind of stagnate and in some cases even drop. So Sightline is not immune from those trends. That being said, their core business is really developing the cashless solution inside the casino, and that's what's going to differentiate them long term from their competitors. From our perspective, I don't think a monetization of this business is near term in the next couple of quarters. I think we really want to see them execute in Resorts World. I think we want to see them get picked up in another large casino, Empire, whether it be Caesars or MGM, and really see the acceleration of that cashless solution. And I think once we have both confidence that they're on that S curve of adoption and we have year-over-year comparables so we can make predictable earnings estimates to the Street, I think that's the time to potentially explore what's next for this company, whether it be IPO or sale or what the next strategic alternative is. But my guess is we're probably at least a year away from an event like that.

Okay. And then you kind of touched on the near-term trends in the sports betting arena. But can you maybe provide an update on your bigger-picture thesis for that space and why you continue to find it so attractive?

I think the liberalization of gaming markets is a question of when it will happen, not if. The trends clearly indicate a positive direction, although the timing has experienced some ups and downs. However, we are confident about where this is headed. We understand the future possibilities and are prepared to embrace the developments as they occur.

What are the big new states, Duke, out there that you think are going to be opening up?

Michigan is opening up. New York has opened up. New Jersey has obviously opened up. Nevada has always been open.

Massachusetts has or not?

Movement in states like California, Texas, and Florida would significantly impact the industry. Even with the states that have already legalized, we continue to see growth, user adoption, and sign-ups. The industry is still expanding despite the absence of financial incentives. However, the removal of support has likely led to a temporary slowdown in rapid growth. It is projected to become a $50 billion industry by 2025.

When I look at DraftKings, their stock is back down to around $11 or $10. This is because people have scaled back on the incentives, and they are not experiencing growth.

There is a combination of slowdown in revenue, and for some companies, there may be concerns about liquidity. However, I don't think that's an issue for our business. Being private, we have strong partners, including one of the largest banks in the world. Nevertheless, we operate in the same macro environment as these other companies. We believe we are managing our profit and loss better, though.

Hope so.

Great. Really appreciate the color there. Last question, just at a high level, should we be viewing the wind-down of Australis I and II as the last of the SPAC activity for Cannae?

I would never rule it out completely, but we currently have no plans. We believe that while SPACs are not well-structured at the moment, they could potentially serve as a great alternative to an IPO for some companies. Due to the scale and quality of secondary sales available through SPACs, which are not achievable with traditional IPOs, there is value in these vehicles despite how they have been misused. It will take time before the market for them recovers. I don't want to say we will never consider them again, but at this point, I don't see them in our immediate future.

Okay. Got you. Congrats on the quarter and thank you.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Rick Massey for any closing remarks.

Actually, David Ducommun is going to finish this out.

Thank you, operator, and thanks for everyone who joined our call today. We remain focused and excited that we exited the third quarter in a strong position, and we look forward to the continued opportunities that we see ahead. Along those lines, we want to invite you to three upcoming events. We're going to be at the Stephens conference this month, November 15 and 16. We're going to be at the Credit Suisse conference in Phoenix, end of the month, November 29 and 30. And we all hope you'll come join us for Cannae's Annual Portfolio Conference on December 14 and 15 in the Wynn Las Vegas. Thank you again, and we look to see you at one of our future events.

Thanks, everybody. Have a good week.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.