Cannae Holdings, Inc. (NYSE:CNNE) Q3 2022 Earnings Conference Call November 9, 2022 5:00 PM ET
Company Participants
Jamie Lillis – MD, Solebury Trout, IR
Richard Massey – CEO
Bryan Coy – CFO
David Ducommun – President
Conference Call Participants
Chris Sakai – Singular Research
Kenneth Lee – RBC Capital Markets
Operator
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 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.
Jamie Lillis
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?
Richard Massey
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?
Bryan Coy
13.75 million shares, 15%.
Richard Massey
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 or $243 million. AmeriLife was a 2.7 times 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?
Bryan Coy
Yeah, end of this month.
Richard Massey
End of this month, 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 and 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 and Bradstreet. Even when you adjust for earnings growth — revenue growth, revenue growth, et cetera.
Alight is one 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 past offering that they offer, that’s a business process as a service.
I’m sure all of you guys know about their offerings and so forth, work life and et cetera. But that’s really the transformative revenue line for Alight, and that grew 56% year-over-year through the first nine months of the year. So they’re already about to hit their guidance. And they’ve got, what, two 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 discontinuing to sop up all the Fortune 100 companies and make them customers. So we’re very excited about that.
Dave, do you want to talk about Sightline?
David Ducommun
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 an 8-tier strategic partner. So we hope more good things are to come.
Richard Massey
Thanks, Duke. So the only other thing, we had a couple of new investments that we’ve announced, one of them is pure services of our 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 a — believe 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 Medavante and then when he — and after Medavante 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 — 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 lead football club called ASC Bournemouth, and many of you have said, why would — have asked us why you’re doing your technology guys, why did you do a team? And the short answer is this is a build-buy company.
Bill started a hockey team from scratch 5 years ago, and he’s been offered valuations of about 4 times the original equity investment. I’m lucky to have been one 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 and gear sales, media rights, all the stuff that Bill and his team are at the BGK at the biggest goal of night have really not 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 4 times our money at a minimum over the next five to seven 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.
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Chris Sakai with Singular Research. Please go ahead.
Richard Massey
Hey, Chris.
Chris Sakai
Hi, good afternoon. Just wanted to know, so you’ve got a bunch of cash from the Marelli’s sale plus $249 million on the balance sheet. So what are you guys planning on doing with that? Just buying back more shares?
Richard Massey
Yes. I’d say there are three 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 one 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 two 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. 2030 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 sidelined that sometime down the road. Duke would know more about that than I do. So those would be the three 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 one yet.
Chris Sakai
Okay. All right. Thanks for that. And then where are you guys seeing better valuations now, in private or public equity?
Richard Massey
Public, without a doubt.
Chris Sakai
Okay. Last for me, how long was this — the soccer investment — the soccer team investment in the works? How long has that been going on discussions for?
Richard Massey
Bill and a couple of our guys, Rank as well and Alex, have — we were approached year and ahlf years ago by a fellow who wanted to pull the team the 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, one of the — I think Bill’s interest was known and Board met 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 the 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 — 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, I think he’s, in fact — he, 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 non-player revenues.
Chris Sakai
Okay. Thanks for the answers.
Richard Massey
Sure thanks.
Operator
[Operator Instructions] The next question comes from Kenneth Lee with RBC Capital Markets. Please go ahead.
Kenneth Lee
Hey, good afternoon. Thanks for taking the question. Just one 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 Bornemouth in terms of the stadium and things of that nature? But I just want to get a better sense of the financial commitments.
Richard Massey
Got it. Good question. So we have a hard commitment for $125.7, whatever it is, million. It’s GBP120 million — I don’t know what it is, £ 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 GBP20 million — that seller GBP20 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 two in that. And the fact is this business cash flows. So this isn’t like a lot of the ones that you’ll look at that have just deep holes and the 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 as 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.
Kenneth Lee
Absolutely, absolutely. Very helpful there. And then switching gears, just one 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.
Richard Massey
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 3 times.
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 party, so we get some good deals.
Kenneth Lee
Got you. Very helpful there. Thanks, again
Richard Massey
Sure, thanks, Ken.
Operator
The next question comes from John Campbell with Stephens. Please go ahead.
Richard Massey
Hey, John.
Unidentified Analyst
This is AJ Hay [ph], stepping in for John today.
Richard Massey
We thought — yes. Well, you bait-and-switched us.
Unidentified Analyst
Apologies about that.
Richard Massey
AJ, no, we’re just messing with you. We’d rather talk to you anyway.
Unidentified Analyst
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 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?
David Ducommun
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 in 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 for the partnership with JPMorgan affords a growing payments company like Sightline are 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 Sideline 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, and 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 whether next strategic alternative is.
But my guess is we’re probably at least a year away from an event like that.
Unidentified Analyst
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?
David Ducommun
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 yeah, that the timing has sometimes been in fits and starts. But we think that where this is headed is kind of beyond the doubt. We know what the future holds, and we’re just ready to ride that wave as it continues to unfold.
Richard Massey
What are the big new states, Duke, out there that you think are going to be opening up?
David Ducommun
Michigan is opening up. New York has opened up. New Jersey has obviously opened up. Nevada was always open, up in at costs or not I think if you get some 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 continue the user sign-up. So 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 and the rapid acceleration of the growth in that industry. But it’s still supposed to be a $50 billion industry by 2025.
Richard Massey
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 spec level, like $11, $10. Is that because people have pulled back all these incentives and they’re just not growing —
David Ducommun
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 don’t have that issue at our business. Obviously, we’re private and have great partners around the table, including one 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.
Richard Massey
Hope so.
Unidentified Analyst
Great. Really appreciate the color there. Last question, just at a high level, should we be viewing the wind-down of Australis 1 and 2 as the last of the SPAC activity for Cannae?
Richard Massey
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.
Unidentified Analyst
Okay. Got you. Congrats on the quarter and thank you.
Richard Massey
Thank you.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Rick Massey for any closing remarks.
Richard Massey
Actually, this is — David Ducommun is going to finish this out.
David Ducommun
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 one of our future events.
Richard Massey
Thanks, everybody. Have a good week.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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