Cannae Holdings Inc (CNNE) 2022 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Cannae Holdings, Inc. Third Quarter 2022 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded, and a replay is available through 11:59 p.m. 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 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, then open the line for your questions. Rick?

Thanks, Jamie, everybody. Bill is occupied working, trying to make us some money on another project. So I'm pitching in. And as you -- anybody who knows me, I'm not much of a script follower. So I'm just going to go down the list of things that occurred over the past quarter.

The most important of which is that we bought back in the quarter about 2.1 million shares for an average price of $20.76, which continues to be about a 43% discount to our -- what we believe is our net asset value. We are vigorously buying back shares and continuously we have been, as you know, for some time. Over the past year, what have we bought back, Bryan?

13.75 million shares, 15%.

15% of the company we bought back, and we're on the pace to keep on doing that. We hope our shareholders are happy with that. Our Board -- we've almost exhausted all of our original authorities, and our Board has authorized another 10 million shares. So we're going to keep buying back as long as it trades at a discount.

We raised a little cash. We sold CorroHealth for $80 million. We sold 75% of our stake of AmeriLife for $243 million. AmeriLife was a 2.7x multiple of our initial 2020 investment, so we're very pleased with that. We're going to get another closing for the second half. And when is it, December?

Yes, end of this month.

End of this month?

Yes.

Late November. And that will get a small amount of cash, not much less cash, and then we're going to roll a piece in the surviving company, which we still believe is bound for great things. It's just been a great trade for us.

Dun & Bradstreet, as you probably know, had a pretty good quarter. They matched their estimates and their guidance. They grew about 4% in organic revenue with -- this is all constant currency. Their overall revs were up about 7% in constant currency, and they've maintained a 40% EBITDA margin throughout. They're in sort of an investment cycle now, and they're starting to see the investments in new products come to fruition. So we're really pleased. We think -- we were just looking at some comps and the market is way undervaluing Dun & Bradstreet, even when you adjust for earnings growth -- revenue growth, revenue growth, et cetera.

Alight is 1 of my favorite companies in the world. They generated -- they had about 8.7% of overall revenues and nearly 10% growth in their flagship Employer Services segment, which is really their core segment. They -- at the same time, they're seeing some -- we're starting to see some margin expansion from their investment cycle. The BPaaS offering that they offer, that's business process as a service, I'm sure all of you guys know about their offerings and so forth, Worklife and et cetera. But that's really the transformative revenue line for Alight, and that grew 56% year-over-year through the first 9 months of the year.

So they're already about to hit their guidance. And they've got, what, 2 months left of the year. So they were doing really well, and you're going to see some really nice, surprisingly large new logos added over the next, call it, 60 days. They've signed them. They were not able to announce them just yet, but they're -- it just shows that they're just continuing to sop up all the Fortune 100 companies and make them customers. So we're very excited about Alight.

Duke, do you want to talk about Sightline?

Sure. So Sightline continues to make progress in their core segment, which is cashless gaming. They're currently working with Resorts World 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, J.P. Morgan 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 an 8-tier strategic partner. So we hope more good things are to come.

Thanks, Duke. So the only other thing, we had a couple of new investments that we've announced, 1 of them is Computer Services of glorious Paducah, Kentucky, a company that I've known since I was a young man or it's just been some time. And they do core processing for small banks and credit unions. And I'm talking like sub-billion asset banks. It's an unbelievably durable customer segment. And these guys pretty much -- I wouldn't say they own it, but they've got a great big market share.

And Frank Martire, who as you both know, as you all know probably, has an incredible track record both at Metavante and then when he -- and after Metavante was acquired by FIS, he became the CEO, Executive Chairman, Chairman of FIS for decades. And he's bringing his team to bear to grow that business. He's got great plans, and we have all kinds of optimism about multiples of our money.

It's kind of a 3 -- looking at their numbers with an exit at the same multiple that you're buying it, you're looking at kind of a 3x your money in 5 years. You might get lucky. There might be a buyer that comes earlier. But we really like the business. It generates cash. It's right up our alley. We all know this area very well, bank technology.

And then we -- as you probably know, we committed 125 point, whatever, 7 million for a 50.1% ownership in an English Premier League football club called AFC Bournemouth, and many of you have said, why would -- have asked us why -- you're doing -- you're technology guys, why did you do a team? And the short answer is this is a Bill Foley company. Bill started a hockey team from scratch 5 years ago, and he's been offered valuations of about 4x the original equity investment. I'm lucky to have been 1 of those. And we believe Bill and his team can work the same magic with Bournemouth.

It is way under investment in facilities, in sponsorships, in gear sales, media rights, all the stuff that Bill and his team at the VGKs, at the Vegas Golden Knights, have really knocked it out of the park. I mean there is top of the NHL in virtually every revenue category. So we think that they're going to apply that -- Bill has already got plans for how he's going to grow the business side of this. So we think -- I mean I asked to invest in this deal. I asked on behalf of Cannae because I think we're going to make 3 or 4x our money at a minimum over the next 5 to 7 years.

So with that, I think that covered -- unless you all have something, I think that covered all the major step for the quarter, and we'll turn it over to Q&A, if you're ready for that, miss operator.

(Operator Instructions) The first question today comes from Chris Sakai with Singular Research.

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'd say there are 3 options for us, and it's -- they're going to be sort of real-time decisions. As we are going to be relatively aggressively buying back our shares as we have -- with the cash that we have, as long as the discount is in the 40-plus percent range, probably a 30-plus percent range, it's just really cheap, and it's -- probably the best return that we can get with our capital right now is just to buy back our own shares at this huge discount to NAV.

But we're also supposed to be in the business of finding new investments, and we have a pretty robust pipeline of things. There's nothing that's going to happen today, but we could use some of that capital to support new investments. And 1 of the things that Bill has us doing is finding ways to bring in third-party capital to get a deal done so as to preserve more of Cannae's capital on a deal-by-deal basis. So we've got some help, and we're looking through that prospect.

And then third, there is a chance that our existing -- I'd say, the 2 portfolio companies that may need some future money, Computer Services, the Paducah, Kentucky core processor, they're fairly levered, but they have a pretty robust shopping list. And I expect it will get an -- and we have right of first refusal on new capital raises out of that partnership. I expect we'll get a chance to throw a little bit of capital into that. I don't know if it would be a lot. 2030s is probably what we're talking about. But we'd like to increase our exposure. It's only $84 million today in the core business.

And then the other would be Sightline that -- sometime down the road. Duke would know more about that than I do. So those would be the 3 and maybe we've got some other needs for other portfolio companies. But I'd say top of the list is buying back our shares and continuing to look for opportunities to do better than buying back our shares, but we haven't found 1 yet.

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

Public. Without a doubt.

Okay. Last for me, how long was this -- this soccer investment -- the soccer team investment in the works? How long has that been going on discussions for?

Bill and a couple of our guys, Ryan Caswell and Alex Ciniello, have -- we were approached 1.5 years ago by a fellow who wanted to pull the multi team -- multi-club team together. And it was exciting to Bill, and he did a lot of his own homework on it. And I think in the process, 1 of the -- I think Bill's interest was known and the Board became available because the -- of the current owner, shall we say, had potential sanctions issues and wanted to go to cash and pretty much everything that he has and go somewhere else, too. So we got a bargain on that, and that's how it happened.

So I'd say past 15 months. It's not spontaneous, if that's the question. It was not a -- this is something that Bill put a lot of thought into. And the most important part was the recognition that most of the business lines operate -- what I mean by that, in a soccer team or whatever, football, they operate very much like the business lines in the -- in an NHL team. Concessions, tickets, alcohol sales, sponsorships, jerseys and other gears, stuff like that. And he felt like he could master that.

So -- and then he'll learn. And he's got management over there, very skilled management that know the player part. The player and how do you win games and how do you stand the Premier League. And I think he's, in fact, had the team over here lately just to talk about how to fill the holes in management on that part of the operations. But he's going to bring his people to bear on helping build the business side -- the business revenue. I call it business. It's just like the nonplayer revenues.

(Operator Instructions) The next question comes from Kenneth Lee with RBC Capital Markets.

Just 1 on the AFC Bournemouth. And pardon me if I -- I've been jumping around but -- on the calls. But I wonder if you could just talk a little bit more about the -- how the mechanics and the economics could flow to Cannae. And then in terms of the $126 million commitment, is there any kind of obligation in terms of future player transfers, any kind of investments in infrastructure within Bournemouth in terms of the stadium and things of that nature? But I just want to get a better sense of the financial commitments there.

Got it. Good question. So we have a hard commitment for $125.7, whatever it is, million. It's GBP 120 million -- I don't know what it is, GBP 110 million. And that's it. We have no future obligations. In fact, we overfunded it. So the maximum of our investment is $125 million. It could very much be lower because there's about $33 million of -- and I know I'm probably getting my dollars and pounds mixed up, but there's about $33 million of extra capital. After you build a facility, after you pay -- there's an earnout in the deal where if they stay in the Premier League, we owe them GBP 20 million -- that seller GBP 20 million if they stay in next year. There is a stadium -- there's -- Bill wants to own and develop the stadium. They have a very, very poor, small stadium, and he wants to improve it and sell more tickets, of course, and all that stuff.

And there is a pretty healthy, very adequate player transfer budget for the next year or 2 in that. And the fact is these business cash flows. So this isn't like a lot of the ones that you'll look at that have just deep holes and -- just big cash holes. So we -- I believe that $125 million is -- in dollars, is the most we're going to do, and it could be less.

Now our -- Cannae's investment is a limited partner. Bill is the general partner. We do not pay him any fees. He does not earn any fees as a managing general partner. He's kind enough to do that. He does not get any kind of promote from the money that we raised, that we committed to the team. And we'll make a return when -- we'll make the same return that he makes. So we are totally aligned with Bill in that transaction. I hope that answers your question.

Absolutely, absolutely. Very helpful there. And then switching gears, just 1 follow-up, if I may. You talked about potentially bringing in third-party capital when you're looking around for potential new investments. Just wanted to get a little bit more color around what kind of form that could take.

It's -- well, of course, it's somewhat nebulous now because we don't have a hard -- it's abstract because we don't have a hard deal to talk to you about. But just say -- we're talking about a deal where the total equity -- it's probably an LBO. The total equity would be -- we could be buying a private company, but we could also go to an LBO. The total check with enterprise value could be $1 billion, $1.2 billion, $1.4 billion. We put -- we don't want to put too much leverage on the business, so call it 3x. So we'd need to raise $7 million or $8 million -- sorry, $100 million. Sorry. Maybe more than that, maybe up to $900 million. And Cannae would do, call it, $100 million. And then we would raise the other $800 million.

It's -- the form is called a special purpose vehicle. They're not uncommon out there in the world today. We just haven't pursued it as an alternative. But we're going to miss some deals because we don't have enough capital. And what we want to do is to go raise the capital to third parties, so we get some good deals.

The next question comes from John Campbell with Stephens.

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

We thought -- yes. Well, you bait-and-switched us.

Apologies about that.

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

Perfect. Good deal. 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 J.P. Morgan 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 are like a huge partner with the payment network. So it's 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 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?

Continue to find it attractive? I think that the liberal -- we believe that the liberalization of gaming markets is a matter of when, not if. The trends have all pointed to yes, that the timing has sometimes been in fits and starts. But we think that where this is headed is kind of, beyond doubt, we know what the future holds, and we're just ready to ride that wave as it continues to unfold.

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 was always opened up.

Massachusetts has or not?

I think if you get movement in California, Texas, Florida, that obviously will be game-changing for the industry. But even with the states that have legalized now, just continued growth and adoption and continued user sign-up. But it's still growing even without the free money out there. But the pulling of the proverbial punch bowl away, I think, caused at least a pause for a quarter or 2 in the rapid acceleration of the growth in that industry. But it's still supposed to be a $50 billion industry by 2025. So...

When I go look at draft -- I'm sorry, I'm highjacking your call. When I go look at DraftKings, they're trading back down to their SPAC level, like $11, $10. Is that because people have pulled back all these incentives and they're just not growing...

Combination of slowdown in the top line, and I think for some of these names specifically, there may be liquidity concerns. I don't think that we -- we don't have that issue at our business. Obviously, we're private and have great partners around the table, including 1 of the largest banks on the planet. So -- but we do still live in the same macro environment as those guys. We're a little bit better managing our P&L, though, we hope.

Hope so.

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

I would never say never, but we do not have any plans. And -- but we believe that the SPAC could be -- it's not -- they're not properly structured now, but what they could be and it could be a great alternative to an IPO for some companies. And because of the size and the quality of the amount of secondary sales that you can get, you can't do those in traditional IPOs. And you can't do -- you might do 10% of the company in an IPO and you could do a lot more of that.

So there are vehicles that have a use that are valuable, it got just terribly abused. And we -- it's going to take a while before there is a market again for those. And -- but -- and I don't want to say we'll never pursue them again. But I'd say right now, I don't see it on the horizon.

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

Actually, this is -- 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 3 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 1 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.