Q2 2023 Cannae Holdings Inc Earnings Call

Participants

Bryan D. Coy; CFO; Cannae Holdings, Inc.

Richard Nelson Massey; CEO & Director; Cannae Holdings, Inc.

John Robert Campbell; MD & Research Analyst; Stephens Inc., Research Division

Kenneth S. Lee; VP of Equity Research; RBC Capital Markets, Research Division

Rory Rumore

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to the Cannae Holdings Inc. Second Quarter 2023 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 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 August 16, 2023. With that, I would like to hand the call over to Rory Rumore of Solebury Communications.

Rory Rumore

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, 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 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 Chief Executive Officer, Rick Massey, who will open with a few brief remarks and then open the line for your questions.

Richard Nelson Massey

Okay. Thanks, Rory. Hello, everybody. Thank you for joining our second quarter conference call, not a lot of news to report to our investors this quarter. The headline is going to be that we bought back 3.1 million shares of our stock in the past from May through July. So it's a quarter we started right after the end of the first quarter. We took a pause during the first quarter on buybacks, but we got back with both feet in the second during May through July, we bought back, as I said, 3.1 million shares, average price $19.72. That's about 4% of the company. So that pretty much matches our most aggressive buybacks. We continue to believe that our shares represent the best value for us when we consider these shares versus making an investment in another company or an existing company. And so we're pleased to report that. No real activity, no sales of any of our portfolio companies or acquisitions of shares of any of our portfolio companies.

Just a couple of notes on a view of our portfolio companies that we continue to believe are locally undervalued, particularly when compared to their peers. Dun & Bradstreet, for example, showed up with about growth rate, and that includes headwinds that we all knew about with GSA and credibility. And we still believe that, that business is going to continue to grow. I think it's growth is going to accelerate. Bill is very pleased with the results of their operations. The stock market seems to be in a wait-and-see mode. But it's trading at today about 9.5x 2023 EBITDA. That's at least a 50% discount to some of its peers, and we all know who they are. In spite of the fact that margins are better than many, and it's growing faster. And it has no more leverage than some of its peers. And yet it's trading at 1.5x, we think it's way undervalued. We think the team has done a great job. Anthony has brought in a couple of really sharp people. [Jenny Domez] as being the #1 sharp person, and she has really turned around the marketing business as well as the credit risk segment. Alight showed revenues this quarter of 12.7% year-over-year, and I hope those of you who also own Alight shares have paused to think about the progress that, that company has made just since it went public and it was showing 2% revenue growth. And here, it showed up with 12.7%. It beats all of it, it reguided and beat.

And the stock sold off a bit on the fact that its BPaaS billings weren't as robust as many industry were would estimate. It's our fault that we have not -- ours being eyes and Alight management that we've not emphasized more than non-BPaaS section of that business that grows mid-single digits is solid as a rock, 100% retention. You went to customers on their payroll, their wealth, their health business, it's very, very hard to get them out. And that's really is the foundation of that company's revenue growth and its cash flow. So you'll probably hear us telling a slightly different story in the future, just so that we don't lose sight of the 70% of this company that's not BPaaS and still a great company. And that's trading at about 10x 2023 EBITDA, Alight is. And again, compare that to, we're not going to name the peers, not going to name names, but this company is growing faster and is [training] about a 50% discount is to certain peers. And there's no explanation for that other than there is a PE overhang. And we think that's keeping a clamp on the stock. But we really like the team. We really like the company. It's going to continue to rock for some time. If one last note, and that's on Seabay, Ceridian, they beat revised guidance. Their revenues were up 26.5% or 27%. The stock, that's been a very good performing stock. Did you check the price before the call, Bryan? Low 70s, yes. So really good, it's trading really well. So I'm not going to go through everything in our portfolio. We take a bunch of them are undervalued, and we continue to work really hard with these management teams to maximize value and help them grow a streamlined organization.

And with that, we'll answer questions. Operator?

Question and Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) Your first question today comes from Kenneth Lee from RBC Capital Markets.

Kenneth S. Lee

Just want to ask about at a high level, what's the latest thoughts around capital allocation? Obviously, you stepped out on the repurchases in the past, you've talked about potential investment in pipe companies. But I just want to reassess it and see where your late thinking there is in terms of capital allocation.

Richard Nelson Massey

I think we had our Board meeting today and Bill and I reported on our pipeline and that very view and the Board agreed that the best use of our capital today, our cash, if you will, is in buying back our shares. And it's hard to beat on almost instant, what is it, 45% discount. So 90% pop on your net asset value from buying it back. So it's hard to beat. And as long as that is trading at that substantial discount, that's going to be the case, Ken.

Kenneth S. Lee

Got you. Very helpful there. And just one quick follow-up on that one. Maybe just talk a little bit about the potential capacity for share repurchases and whether that could either include taking on debt or other options there.

Richard Nelson Massey

We've got a revolver. We may ping it, but we're going to fund our repurchases with the sale of existing portfolio securities. We have a number of very liquid securities. They're trading at various levels of discounts to what we think is the appropriate valuation. But we have some that are trading at very nice valuations and that we've held for some time. Again, I'm not going to name names, but I think you can expect to see us peel off quite a bit of our -- I would almost call them legacy shares of various things. I don't think you're going to see us in the market selling Alight. I don't think you're going to see us in the market selling Paysafe because we think, quite a bit of upside left on Paysafe, but everything else may be pregame.

Operator

Your next question comes from John Campbell from Stephens Incorporate.

John Robert Campbell

Just back to the buybacks. I mean it was obviously great to see the step up in activity. But as far as the rate of buybacks, it looks like you called out the $3.1 million repurchase made through July. Just from a housekeeping standpoint, I'm curious what the repurchase activity was in the quarter versus what you did in July. Just trying to get a sense for whether that remains constant or if the rates picked up once a month.

Bryan D. Coy

John, this is Bryan. We bought almost all of that within the quarter. I think we bought less than 100,000 within July because we get blacked out after we start getting information.

Richard Nelson Massey

What he's saying is that pretty much was all during the vast majority of the second quarter.

John Robert Campbell

Okay. Exactly what I was looking for. And then on Sightline, you guys called out there's a word in the shareholder letter. But from a big picture standpoint, are you guys spot you feel like you would be at, at this point relative to original investment? And then also just any updated thoughts on the monetization timeline?

Richard Nelson Massey

It's not going as planned. I'm not really at liberty to go through all that, except that product rollout has been slower. They've had to go back and there have been a lot of modifications. Customer uptake has been slower than expected, and that despite a fairly booming gaming market. So we've been disappointed with it. Bill is on it, is focused on it very much, and it's talking to the CEO, and we've got some options that we're going to pursue on Sightline. And before the end of next quarter, you might see something on that.

John Robert Campbell

Okay. That's helpful. And then one other item I just want to clear the air on. You guys obviously had some back-and-forth correspondence with SEC just relating to the classification of the Guest Investment Company Act of 1940. To be clear, we fully agree with your stance there. That's never really been a worry for us. But just for the sake of investors, they're tuning into your story. Maybe if you can provide a quick rundown of why that's not the right classification for you guys and why it's important that you clear of that.

Richard Nelson Massey

Well, essentially, you are a careful reader, John. Congratulations. You got homework. 40 Act investment companies are basically mutual funds. Management of the funds are passive, they own lots of physicians and we are not that. As I mentioned during the call, we're very active with our portfolio companies. We're involved in the various aspects of management, Bills, the Chairman of a number of them. I'm the Comp Committee Chairman. We're all over the day-to-day operations and classifying us as essentially a mutual fund is just not appropriate. We've had those conversations with the SEC. Part of the problem, frankly, again, we were light in describing the level of activity that we have with our portfolio companies. And when the SEC read our 10-K from a few years back, they said, "Well, you're just a passive investor." And we just waited under that, and we changed a lot of the language in our 34 Act materials to reflect our fairly active roles with these companies. So it's not right. It would not be appropriate to regulate us as such. And we've not had any correspondence with the SEC on that issue in what, Bryan, a year?

Bryan D. Coy

More than a year.

Richard Nelson Massey

And in my experience as a lawyer way back, we went back in the old stone age when I was a lawyer, they don't never agree with you and cut you loose, they stop communicating. And usually, if you go a year without communication, you can generally view that they've moved on and they're not going to pick on that issue anymore, John.

John Robert Campbell

Yes. That makes a lot of sense. At the full playbook is just the opposite of what would qualify you for the Investment Company Act of 1940. So I agree with you there.

Richard Nelson Massey

You know us. Take as much time as you need.

John Robert Campbell

Just last one on [SE 1]. That was great to see them both finish pretty helpful above the relegation line. I'm just hoping if you could provide a rundown of what's on pack for the off-season, what you guys are looking to achieve hedging this season. And any progress you've made?

Richard Nelson Massey

Bryan, are you on?

Bryan D. Coy

Yeah, I'm on.

Richard Nelson Massey

Bryan is the expert.

Bryan D. Coy

I mentioned (inaudible) one right now. So it's getting time to ask the question. So I think one of the big things we've been focusing on is just the transfer window and transfer activity. We've got a few players in, and there's hopefully a couple more -- this is a [four]. We've got a few players in, there's hopefully a couple more to come shortly. So just to improve the overall makeup of the squad. I think an interesting is there was actually a player that [Bornman] acquired and then loan to Florian to basically show the benefits of the multi-club model. And one if we'll look to get that player back next year, likely. I think the other big thing we're focused on is just all of the commercial side of the business. I was going around today at the stadium and just looking at different things that we have done, both to improve the stadium, improve the revenue per match as well as looking at all the different sponsorship and opportunities we've done there. And short to answer your question, I think there's both on the football side to improve both of the overall teams to, again, move up the table and which will both help from a revenue and the brand side as well as basically make the commercial operations better to generate more dollars that were not being picked up before. So those are the big off-season priorities. And then obviously, we need to translate that into success in the field.

John Robert Campbell

Yes, makes a lot of sense. And we'll look forward to our Analyst Day at more next year.

Richard Nelson Massey

Yes. That would be great.

Operator

This concludes our question-and-answer session. I'd now like to turn the conference back over to Mr. Rick Massey for any closing remarks. Please go ahead.

Richard Nelson Massey

before we get off, if Ken, John, anybody else has a question, let us know. I'll go slow in my exit. So we want to make sure we answer all your questions. So thank you. You've asked all the right questions in terms of what our capital allocation plans are. We told you what they are. We sure like our stock down here at $20 or wherever it is right now. And we hate it from a valuation standpoint, but we like it from a valuation standpoint, if that makes sense. So we are very appreciative of your interest. And feel free to connect with Bryan or me anytime, night or day, we are always happy to answer any questions or listen to your comments. Thank you very much.

Operator

That does conclude our conference for today. Thank you for attending today's presentation. You may now disconnect.