Cannae Holdings, Inc. Q1 FY2023 Earnings Call

Good afternoon, ladies and gentlemen. And welcome to the Cannae Holdings Inc. First Quarter 2023 Financial Results Conference Call. During today's presentation, all parties will be in 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 it is available until 11:59 PM Eastern Time on May 16, 2023. With that, I would like to turn the call over to Rory Rumore of Solebury Strategic Communication. Please go ahead.

Thank you, operator, and thank you all for joining us this afternoon. On the call today, we have our Chief Executive Officer, Rick Massey, Cannae's President, Ryan Caswell, 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 an information currently available to management. Because such statements are based on conditions 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 to which statements are subject 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 Chief Executive Officer, Rick Massey, who will open with a few brief remarks and then open the line for your questions.

Thank you, Rory. It's Rick Massey, and I appreciate everyone joining the call. I want to emphasize that while many on these calls share insights about the market and economy, we are cautious about making predictions on where things are headed. From discussions with the CEOs of our partner companies, there's significant uncertainty in the market. However, we firmly believe that our portfolio is undervalued across the board. For instance, our largest investment is in Dun & Bradstreet, where we hold 79 million shares. The company is trading at a low EBITDA multiple and reported an organic growth rate of 3%. While this figure may not be ideal, it's worth noting that two of their competitors in consumer credit reported revenue growth of 2% and a decline of 4.5%, yet they trade at nearly double the EBITDA multiple of Dun & Bradstreet, which is perplexing. Dun & Bradstreet's financials show they carry similar debt levels to their peers but maintain better margins and higher growth rates. The team at Dun & Bradstreet has significantly improved their marketing services division by leveraging a data management platform, enabling clients to optimize their account-based marketing using their own data alongside Dun & Bradstreet's offerings. Their retention rate for Hoover's has dramatically increased from a low of 40% to the 80s following their turnaround efforts. Despite these achievements, the market’s lack of recognition for Dun & Bradstreet is disappointing, especially since they have returned to growth at a faster pace than their peers. To be brief, Dun & Bradstreet recently reported a 15% revenue growth in the first quarter, and their enterprise offering has seen a 50% increase in sales. Although bookings have slowed, it’s due to the execution of large contracts with clients like Exxon and GE. In comparison, Alight, another favorite of mine, grew by 15%, while ADP, their closest competitor, experienced a 9% growth and yet Alight is valued at approximately half of ADP's multiples, which is disheartening. It’s understandable that the market reacted negatively when Alight's management didn’t raise their guidance for '23 despite positive growth. If you look at various companies that exceeded guidance recently, you'll find only a small fraction adjusted their forecasts upward due to the prevailing market uncertainty. Take CDAY, for instance; despite beating expectations, its stock has dropped 15% post-earnings call, which is illogical. Their shares are trading in the mid-50s, and while we previously sold shares at 78, the current price seems irrational. Additionally, Paysafe, often criticized, managed to show high-single-digit revenue growth and flat EBITDA growth, which is remarkable given the challenges they faced. The stock has seen some upward movement, but the company is poised to exceed its EBITDA goals for '23. As we look ahead this quarter, the noise in capital markets, particularly in the debt space, creates uncertainty for the latter half of the year. Therefore, it’s possible we won’t make moves in the second quarter, although we might. In the first quarter, we did not buy back shares primarily due to limited capital. Raising funds would require us to sell some of our holdings at unfavorable prices, which is not a wise strategy. We won't sell Dun & Bradstreet at $10 when it's worth $15 just to buy back shares at a discount. While some investors may be disappointed by our decision not to repurchase shares, we view it as a responsible approach to portfolio management.

I think we talked about last time we spent some money in the transfer window. The team has performed much better. So it looks like we are very close, if not out of, the relegation zone, which is a great outcome. We're doing a lot on the business side from a commercial perspective in terms of increasing sponsorships and optimizing ticketing revenue. So we're very pleased with the football performance to hopefully stay up in the Premier League, which will allow all of the other stuff in the multi-cloud strategy to perform much better.

We think we got a steal on Bournemouth. Our bill got a steal. He's and Ryan and where's it wound their way into the process and got a deal. We paid 0.8 times revenues. The comps are now probably double what they were at the time; maybe five times. You're seeing people pay five times for small EPL teams. So that's going to turn out to be a really good win for us, and we're excited about it. I don't have anything else. Did I miss anything, Bryan? No? Okay, Bryan Coy, our CFO, is here with us. Unless you have anything to report, we'll just go to questions.

Questions operator?

Thank you. We will now start the question-and-answer session. The first question comes from Ian Zaffino with Oppenheimer. Please proceed.

Hi, thank you very much. How are you guys?

Good. Great.

Thanks for all the commentary; this is helpful. I'm going to press you a little bit on this. You basically almost have 100% upside if you buy back your stock, right? My argument is bird in the hand if you buy back your stock versus one or two in the bush. So help us understand this, right? Because if I'm sitting here, I would rather buy back something that's worth half the price right now as opposed to sitting and waiting, kind of like what your prepared remarks indicate. So just square that and push a little bit on your thinking there. Thanks.

I believe the assumption is that we are repurchasing shares at a 50% discount to book value. However, it's unclear if buybacks have any real impact on market value. In 2022, we conducted an extensive experiment by buying back approximately 12% to 15% of our company, yet the stock price actually decreased. So, while buying our stock at $20 and having a net book value per share of $40 suggests a theoretical double, it only reflects the book value, and we don't trade based on that metric. We think the market undervalues our stock, not due to insufficient buybacks, but because our portfolio companies are not valued properly. Therefore, we prefer to wait for a portfolio asset to reach its target price before selling, which is the price we initially anticipated when we made the investment. This might be surprising, but the assumption that you’ll get an instant double applies only in a liquidation scenario, which we are not in. While we could buy at $20 and potentially get $40 per share in liquidation, our actual numbers are more like $40 to $42, but I'm not certain.

35 bucks, I would say.

35. But that's only in the case of liquidation. We're not in a liquidation. If our shareholders want us to liquidate, we would gladly listen to that. But even then, liquidating at these values would be, seems to me, to be pretty foolish. We're not naturally sellers at a discount.

Okay, understood. And then maybe a little bit in the same vein here; you kind of throw out the straw man of selling Dun & Bradstreet. This dovetails into the next question: you sold some CDAY, but why not more CDAY? Why talk about selling Dun & Bradstreet and why not talk about selling CDAY or more CDAY or maybe your thinking is different on CDAY?

Well, Ian, great point. Great question, and I appreciate you're pushing us on this because our credibility is everything. Not to say. We sold a million shares; we've got 5 million left. I'm not going to say we can't and shouldn't say one way or another. We're going to deal with that inventory, but it wouldn't surprise me for us to sell more. I think we'd prefer to sell it back in the $78 range versus the $55 or $56 range. You might forgive us if we hold out a little bit to see if it bounces back up. It's sort of interesting; if you look at the chart, they blew out their numbers, and their stock's down 15% since May 3 when their numbers got out; that doesn't make any sense at all.

Okay, great. Thank you very much.

Sure. Thank you, Ian. The next question comes from John Campbell with Stephens Inc. Please go ahead.

Hey, guys, good afternoon.

Hey, John.

Rick, you're on fire with the valuation rundowns from your soapbox. We agree with your stance yet there are a lot of puzzling disconnects across a handful of these public investments, so we hear you there. On Bournemouth, I mean, obviously, there’s a great kind of run of things of late several points above that relegation line. It does seem like you guys are in a good spot. But you had mentioned last call that I think you were kind of tongue in cheek, but mentioned existential threat if you were to go down; so that's a good outcome so far.

No, it was an existential threat for Bryan. I was just for Ryan Caswell, who's sitting here with us.

Heard that. But, you know, in the past calls, you guys have talked about maybe three to four times your investment in Bournemouth, and you're talking about maybe a five-to-seven-year type horizon. Then Massey, I think you've repeated twice that the implied takeout or implied value was about 8.8 times revenues. So, that's a really good price. We look at menu stock; I'm not close enough to that to determine whether that's pure apples to apples. But that one's at about five times revenues. And, Rick, I think you mentioned your perceived peer groups at about five times. So that seems to check out. If you guys were to get that on Bournemouth, I mean, that's pretty substantial. I think it's about $1 per share of incremental value for you guys.

We're just doing the math in my head. Yeah, I think you're in the right range, John.

Yeah. So that seems to be a pretty meaningful opportunity. I mean, obviously, as we assess the portfolio, the lion's share of the value is kind of tied to public assets. We can see the price day-to-day on the private side. That's where there's maybe a little bit of extra torque; Bournemouth seems to be the clear opportunity here. So my question here after that rambling is, what do you think the steps you guys need to take to juice the revenue to get things going where you think you can eventually be awarded that five-time valuation?

Ryan will handle that.

When we took over Bournemouth, the initial management of the business was not as effective as we would have liked, which presented a significant opportunity for improvement. We've brought in new team members who are dedicated to addressing this. A key part of our strategy is remaining in the Premier League to achieve our desired valuation, which we believe we are on track to accomplish. Additionally, we are expanding the multi-club model that began with our investment in Lorient, and we are exploring other opportunities. This strategy enhances our value by increasing sponsorship opportunities and elevating our brand to align more closely with higher-ranked clubs. While we are not planning to sell Bournemouth in the immediate future, we recognize that there is work to be done. We are focused on requalifying for the Premier League and enhancing our commercial operations while applying lessons learned from the Vegas Golden Knights. Currently, we are not in a position to sell, but we are actively creating value that can lead to comparable transaction multiples in the future.

John, we were considering this as a five- to seven-year investment with a target of three to four times our money as a baseline internal rate of return. I'm not making promises, but that's the general idea. It will take some time. However, Bill has brought in Jim Prowolla from the Knights, who is already making a positive impact on growth. Prowolla handled the business aspects, including managing tickets, sponsorships, concessions, food, and beverages. Previously, those areas were unmanaged. While there's still a significant amount of work to be done, the potential for growth is considerable.

That seems like a very promising opportunity, so we'll be keeping tabs on that. I noticed in the shareholder letter last time, you mentioned a 50.1% ownership position in BKFE. However, the April update and the shareholder letter indicate it's 49%. It's not a significant difference, but it's worth noting.

Yeah, I just took those extra shares and put them in my pocket, John. What happened was the company established, as with all companies that were associated with a management incentive plan for equity for people like Prowolla. We were slightly diluted by that, and we wrote a check this week to get us back. It was $3.5 million to get us back to 50.1%. Good catch on that stuff; we appreciate it.

Yeah, absolutely. And then the last one here, and this is another housekeeping item. With the $133 million commitment you guys have called out for BKFE. Does that include both Bournemouth and Lorient, right?

Yes. And in there, we have to pay the seller of Bournemouth another check, one of 20 for staying in the Premier League.

Okay, and that's incremental to the 40 that's already planned for you?

No, that's included.

Okay, included. All right, that's all I got. Thanks, guys.

Thank you, John. Appreciate your answers.

The next question comes from Chris Sakai with Singular Research. Please go ahead.

Hi, good afternoon.

Hey, Chris.

Just wanted to ask about potential investments. Where are you seeing better valuations now, in public or private investments?

I don't believe the mark-to-market adjustments have aligned with the current valuation expectations of many publicly traded companies. As I mentioned in our portfolio discussion earlier, those public companies have experienced significant declines. We don't see our internal valuations reflecting that kind of downturn. There are some private opportunities we are considering, but we're likely to shift towards a go-private strategy or invest in public companies at these low prices instead of the prices we are still observing. However, I want to stress that those prices are contingent upon a functioning debt capital market, which is currently nonexistent. No one is making deals right now; it's completely inactive.

Okay, yeah, thanks for that. And then can you mention or provide some color on where you're looking for your next investment?

We're definitely focused on building out the multi-club strategy under the leadership of Bill and Ryan. I believe the concept of creating a multi-sport business is promising, and that's an area where we've invested a lot of time. My own focus has been on traditional industries, such as utilities, tech-heavy companies, tech services, or pure software. Additionally, we are considering that some of our best investments over the next year may come from our existing portfolio companies.

Okay, great. Thanks for the answers.

Thank you. This concludes our Q&A session. I would like to turn the conference back over to Mr. Rick Massey, Chief Executive Officer, for any closing remarks. Please go ahead.

I want to ensure we haven't overlooked any questions, operator. We usually have RBC on the call, so I don't want to disconnect if they have a question. Can we take a moment to check if they want to join us? If not, I want to express my gratitude for your participation and interest. I hope you recognize the value in our stock and our portfolio; it's certainly evident. We are excited about maximizing that.

All right. I see here that we do have another questioner. Okay, it comes from Kenneth Lee with RBC Capital Markets. Please go ahead.

Hey, guys. Good afternoon, and thanks for taking my question.

We knew you'd probably be on the call, and we didn't want to hang up without giving you a chance to badger us one way or another.

I truly appreciate your time. I have a question regarding FC Bournemouth. As you consider future prospects, how much is the profitability of club ownership expected to rely on the enforcement of UEFA Fair Play regulations? I would like to hear your perspective on this. Is strong enforcement of fair play necessary, or can your projections manage without it being strictly enforced? Thank you.

I believe there are several aspects to UEFA fair play. Overall, most of this regulation targets larger clubs that spend heavily to compete in European tournaments. It tends to be less focused on smaller teams. In fact, I think it might even improve the competitive balance for these smaller teams slightly. We have definitely considered this in our projections, and I don't believe Bournemouth will face as many issues with it as some other teams might.

Got you. Very helpful there. And then, one follow-up if I may. Is there any thoughts around the legacy restaurant business? What are your longer-term thoughts there? Can we potentially see some actions or view around that business? Thanks.

Ken, this is Bryan. The one thing I'll say is that our Restaurant Group has just done a phenomenal job in the last 24 months. They've faced a pandemic, they've faced a labor crisis, and they've faced commodity price and literal inflation; they've done a great job. Year-over-year they closed 17 restaurants that were underperforming and dragging on the business, and its had great effects. Average guest checks raised prices; average guest checks are up 9%. I think they're doing a phenomenal job in an industry that just had unprecedented obstacles in the past couple of years. We like the business. I don't know that we're going to be in it long-term, but with what's been going on in the last couple of years, it's definitely not been the right time to think about moving it. But we're very happy with the way that they have managed through that.

Got you. Very helpful. And one last question.

You can ask all the questions you want. All time is yours. Sure, we appreciate your interest.

Really appreciate it again. Just looking at a high level, just based on other comments earlier on the call, would you say that further monetizations within the portfolio? Is that going to be predicated upon improving valuations, or would a deeper discount in your own shares cause you to review it further? I just want to gauge what could be the potential catalyst down the line in terms of further portfolio monetization? Thanks.

That's a great question. Bill may have a different perspective, but our primary focus is to manage our portfolio of companies. It's challenging to operate under a dual track where we're concerned about our share prices and their discounts. We believe our responsibility is to maximize the value of the portfolio, rather than just the stock. In response to your question, I would say it's about 70% based on portfolio valuation and 25% on stock valuation. It doesn't make sense for us to sell shares of Dun & Bradstreet at $10, which is half of what its peers are trading at, just to buy back our shares or hold cash, or for any other purpose. We believe the market will eventually recognize both Cannae and Dun & Bradstreet, as well as Cannae and Alight. Ideally, these developments will happen simultaneously, and we won't have to make a choice.

Got you. Very helpful there. Thanks again.

Well, that was a helpful question. You are helping us sharpen the way we think about this. This is hard. These are hard questions that we have to answer. Right now, it just feels foolish to sell any of these things anywhere near the prices that we're talking about.

And with that, we conclude our question-and-answer session. I would like to turn the conference back over to Mr. Rick Massey for any closing remarks. Please go ahead, sir.

Okay. I think I already do, but thanks a lot. Thanks for your interest, and we look forward to speaking with you again next quarter. Obviously, any of you want to have some side chats with us, work through Rory and Bryan to set something up; we'd be happy to talk. So have a good rest of the day.

This concludes today's conference. Thank you for attending today's presentation. You may now disconnect. Have a good day.