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CCC INTELLIGENT SOLUTIONS HOLDINGS INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the forward-looking statements included herein. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" as set forth elsewhere in this Quarterly Report on Form 10-Q. Unless otherwise indicated or the context otherwise requires, references to "CCC," the "Company," "we," "us," "our" and other similar terms refer toCypress Holdings Inc. and its consolidated subsidiaries prior to the Business Combination and toCCC Intelligent Solutions Holdings Inc. and its consolidated subsidiaries after giving effect to the Business Combination.
Business Overview
Founded in 1980, CCC is a leading provider of innovative cloud, mobile, AI,
telematics, hyperscale technologies and applications for the property and
casualty ("P&C") insurance economy. Our SaaS platform connects trading partners,
facilitates commerce, and supports mission-critical, AI-enabled digital
workflows. Leveraging decades of deep domain experience, our industry-leading
platform processes more than $100 billion in annual transaction value across
this ecosystem, digitizing workflows and connecting more than 30,000 companies
across the P&C insurance economy, including insurance carriers, collision
repairers, parts suppliers, automotive manufacturers, financial institutions and
others.
Our business has been built upon two foundational pillars: automotive insurance
claims and automotive collision repair. For decades we have delivered leading
software solutions to both the insurance and repair industries, including
pioneering Direct Repair Programs ("DRP") in the United States ("U.S.")
beginning in 1992. Direct Repair Programs connect auto insurers and collision
repair shops to create business value for both parties, and require digital
tools to facilitate interactions and manage partner programs. Insurer-to-shop
DRP connections have created a strong network effect for CCC's platform, as
insurers and repairers both benefit by joining the largest network to maximize
opportunities. This has led to a virtuous cycle in which more insurers on the
platform drives more value for the collision shops on the platform, and vice
versa.
We believe we have become a leading insurance and repair SaaS provider in the
U.S. by increasing the depth and breadth of our SaaS offerings over many years.
Our insurance solutions help insurance carriers manage mission-critical
workflows, from claims to underwriting, while building smart, dynamic
experiences for their own customers. Our software integrates seamlessly with
both legacy and modern systems alike and enables insurers to rapidly innovate on
our platform. Our repair solutions help collision repair facilities achieve
better performance throughout the collision repair cycle by digitizing processes
to drive business growth, streamline operations, and improve repair quality. We
have more than 300 insurers on our network, connecting with over 27,000 repair
facilities through our multi-tenant cloud platform. We believe our software is
the architectural backbone of insurance DRP programs and is the primary driver
of material revenue for our collision shop customers and a source of material
efficiencies for our insurance carrier customers.
Our platform is designed to solve the many-to-many problem faced by the
insurance economy. There are numerous internally and externally developed
insurance software solutions in the market today, with the vast majority of
applications focused on insurance-only use cases and not on serving the broader
insurance ecosystem. We have prioritized building a leading network around our
automotive insurance and collision repair pillars to further digitize
interactions and maximize value for our customers. We have tens of thousands of
companies on our platform that participate in the insurance economy, including
insurers, repairers, parts suppliers, automotive manufacturers, and financial
institutions. Our solutions create value for each of these parties by enabling
them to connect to our vast network to collaborate with other companies,
streamline operations, and reduce processing costs and dollars lost through
claims management inefficiencies, or claims leakage. Expanding our platform has
added new layers of network effects, further accelerating the adoption of our
software solutions.
We have processed more than $1 trillion of historical data across our network,
allowing us to build proprietary data assets that leverage insurance claims,
vehicle repair, automotive parts and other vehicle-specific information. We are
uniquely positioned to provide data-driven insights, analytics, and AI-enhanced
workflows that strengthen our solutions and improve business outcomes for our
customers. Our suite of AI solutions increases automation across existing
insurer processes including vehicle damage detection, claim triage, repair
estimating, intelligent claims review, and subrogation. We deliver real-world AI
with more than 95 U.S. auto insurers actively using AI-powered solutions in
production environments. We have processed more than 9 million unique claims
using CCC deep learning AI as of December 31, 2021 , an increase of more than 80
percent over December 31, 2020 .
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One of the primary obstacles facing the P&C insurance economy is increasing
complexity. Complexity in the P&C insurance economy is driven by technological
advancements, Internet of Things ("IoT") data, new business models, and changing
customer expectations. We believe digitization plays a critical role in managing
this growing complexity while meeting customer expectations. Our technology
investments are focused on digitizing complex processes and interactions across
our ecosystem, and we believe we are well positioned to power the P&C insurance
economy of the future with our data, network, and platform.
While our position in the P&C insurance economy is grounded in the automotive
insurance sector, the largest insurance sector in the U.S. representing nearly
half of Direct Written Premiums ("DWP"), we believe our integrations and cloud
platform are capable of driving innovation across the entire P&C insurance
economy. Our customers are increasingly looking for CCC to expand its solutions
to other parts of their business where they can benefit from our technology,
service, and partnership. In response, we are investing in new solutions that we
believe will enable us to digitize the entire automotive claims lifecycle, and
over time expand into adjacencies including other insurance lines.
We have strong customer relationships in the end-markets we serve, and these
relationships are a key component of our success given the long-term nature of
our contracts and the interconnectedness of our network. We have customer
agreements with more than 300 insurers (including carriers, self-insurers and
other entities processing insurance claims), including 18 of the top 20
automotive insurance carriers in the U.S. , based on DWP, and hundreds of
regional carriers. We have more than 30,000 total customers, including over
27,000 automotive collision repair facilities (including repairers and other
entities that estimate damaged vehicles), thousands of automotive dealers, 13 of
the top 15 automotive manufacturers, based on new vehicle sales, and numerous
other companies that participate in the P&C insurance economy.
Key Performance Measures and Operating Metrics
In addition to our GAAP and non-GAAP financial measures, we rely on Software Net
Dollar Retention Rate ("Software NDR") and Software Gross Dollar Retention Rate
("Software GDR") to measure and evaluate our business to make strategic
decisions. Software NDR and Software GDR may not be comparable to or calculated
in the same way as other similarly titled measures used by other companies.
Software NDR
We believe that Software NDR provides our management and our investors with insight into our ability to retain and grow revenue from our existing customers, as well as their potential long-term value to us. We also believe the results shown by this metric reflect the stability of our revenue base, which is one of our core competitive strengths. We calculate Software NDR by dividing (a) annualized software revenue recorded in the last month of the measurement period, for example, March for a quarter endingMarch 31 , for unique billing accounts that generated revenue during the corresponding month of the prior year by (b) annualized software revenue as of the corresponding month of the prior year. The calculation includes changes for these billing accounts, such as change in the solutions purchased, changes in pricing and transaction volume, but does not reflect revenue for new customers added. The calculation excludes: (a) changes in estimates related to the timing of one-time revenue and other revenue, including professional services, and (b) annualized software revenue for smaller customers with annualized software revenue below the threshold of$100,000 for carriers and$4,000 for shops. The customers that do not meet the revenue threshold are small carriers and shops that tend to have different buying behaviors, with a narrower solution focus, and different tenure compared to our core customers (excluded small carriers and shops represent less than 5% of total revenue within these sales channels). Our Software NDR includes carriers and shops who subscribe to our auto physical damage solutions, which account for most of the Company's revenue, and excludes revenue from diagnostic providers, smaller emerging solutions with international subsidiaries or other ecosystem solutions, such as parts suppliers and other automotive manufacturers, and also excludes CCC Casualty which are largely usage and professional service based solutions. Quarter Ending 2022 2021 Software NDR March 31 114% 106% June 30 110% September 30 113% December 31 115% Software GDR We believe that Software GDR provides our management and our investors with insight into the value our solutions provide to our customers as represented by our ability to retain our existing customer base. We believe the results shown by this metric reflect the strength and stability of our revenue base, which is one of our core competitive strengths. We calculate Software GDR by dividing (a) annualized software revenue recorded in the last month of the measurement period in the prior year, reduced by annualized software 31 -------------------------------------------------------------------------------- revenue for unique billing accounts that are no longer customers as of the current period end by (b) annualized software revenue as of the corresponding month of the prior year. The calculation reflects only customer losses and does not reflect customer expansion or contraction for these billing accounts and does not reflect revenue for new customer billing accounts added. Our Software GDR calculation represents our annualized software revenue that is retained from the prior year and demonstrates that the vast majority of our customers continue to use our solutions and renew their subscriptions. The calculation excludes: (a) changes in estimates related to the timing of one-time revenue and other revenue, including professional services, and (b) annualized software revenue for smaller customers with annualized software revenue below the threshold of$100,000 for carriers and$4,000 for shops. The customers that do not meet the revenue threshold are small carriers and shops that tend to have different buying behaviors, with a narrower solution focus, and different tenure compared to our core customers (excluded small carriers and shops which represent less than 5% of total revenue within these sales channels). Our Software GDR includes carriers and shops who subscribe to our auto physical damage solutions, which account for most of the Company's revenue, and excludes revenue from diagnostic providers, smaller emerging solutions with international subsidiaries or other ecosystem solutions, such as parts suppliers and other automotive manufacturers, and excludes CCC's casualty solutions which are largely usage and professional service based solutions. Quarter Ending 2022 2021 Software GDR March 31 99% 98% June 30 98% September 30 98% December 31 98% Recent Developments Business Acquisition-OnFebruary 8, 2022 , the Company completed its acquisition ofSafekeep, Inc. ("Safekeep"), a privately held company that leverages AI to streamline and improve subrogation management across auto, property, workers' compensation and other insurance lines of business. In exchange for all the outstanding shares of Safekeep, the Company paid total cash consideration of$32.3 million upon closing, subject to adjustment for certain post-closing indemnities. As additional consideration for the shares, the acquisition agreement includes a contingent earnout for additional cash consideration based on the achievement of certain revenue targets during the year endingDecember 31, 2024 .
For additional information, see Note 4 to the condensed consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q.
Secondary Offering-DuringApril 2022 , certain existing shareholders completed a secondary offering where the selling shareholders sold 20,000,000 shares of common stock at a price to the public of$9.70 per share. In addition, the selling shareholders granted the underwriters a 30-day option to purchase up to an additional 3,000,000 shares of the Company's common stock at the same per share price. The Company did not receive proceeds from the sale of these shares by the existing stockholders.
Components of Results of Operations
Revenues
Revenue is derived from the sale of software subscriptions and other revenue, primarily professional services. Software subscription revenues are comprised of fees from customers for the right to use the hosted software over the contract period without taking possession of the software. These revenues are billed on either a subscription or transactional basis with subscription revenue recognized ratably over the contract period and transactional revenue recognized when the transaction for the related service occurs. We generally invoice software subscription agreements monthly either in advance or in arrears, over the subscription period. Software subscription revenue accounted for$179.8 million and$152.0 million , or 96% and 96%, of total revenue during the three months endedMarch 31, 2022 and 2021, respectively.
Other revenues include fees from customers for the Company's professional
services and non-software services and are recognized in the period the service
is performed.
Costs and Expenses Cost of Revenues
Cost of Revenues, exclusive of amortization of acquired technologies
These costs include costs of software subscription and professional services
revenue. Our cost of software subscription revenue is primarily comprised of
cloud infrastructure costs, software production costs, information technology
("IT") security costs, license
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and royalty fees paid to third parties and personnel-related expenses, including
salaries, other direct personnel-related costs and stock-based compensation, and
depreciation expense. We expect cost of revenue, exclusive of amortization of
acquired intangibles, to increase in absolute dollars as we continue to hire
personnel, require additional cloud infrastructure and incur higher royalty fees
in support of our revenue growth.
Our cost of other revenue is primarily comprised of personnel-related expenses
for our customer support teams and contractors, including salaries, direct
personnel-related costs and stock-based compensation, and fees paid to third
parties. We expect our cost of other revenue to increase in absolute dollars in
support of our revenue growth.
Amortization of Acquired Technologies
We amortize to cost of revenue the capitalized costs of technologies acquired in
connection with historical acquisitions.
Operating expenses
Operating expenses are categorized into the following categories:
Research and development
Our research and development expenses consist primarily of personnel-related costs, including stock-based compensation, and costs of external development resources involved in the engineering, design and development of new solutions, as well as expenses associated with significant ongoing improvements to existing solutions. Research and development expenses also include costs for certain IT expenses. Research and development costs, other than software development costs qualifying for capitalization, are expensed as incurred. Capitalized software development costs consist primarily of personnel-related costs. We expect research and development expenses, excluding stock-based compensation, to increase in absolute dollars as we continue to dedicate substantial resources to develop, improve and expand the functionality of our solutions. We also expect an increase in the rate of capitalization of our investments in research and development for the foreseeable future.
Selling and Marketing
Our selling and marketing expenses consist primarily of personnel-related costs for our sales and marketing functions, including sales commissions and stock-based compensation. Additionally, selling and marketing expenses include advertising costs, marketing costs and event costs, including the Company's annual industry conference, generally held annually in the second quarter.
We expect our selling and marketing expenses, excluding stock-based
compensation, to increase on an absolute dollar basis as we continue to increase
investments to support the growth of our business.
General and Administrative
Our general and administrative expenses consist primarily of personnel-related costs, including stock-based compensation, for our executive management and administrative employees, including finance and accounting, human resources, information technology, facilities and legal functions. Additionally, general and administrative expenses include professional service fees, insurance premiums, and other corporate expenses that are not allocated to the above expense categories.
We expect our general and administrative expenses, excluding stock-based
compensation, to increase in absolute dollars as we continue to expand our
operations, hire additional personnel, and incur costs as a public company.
Amortization of Intangible Assets
Our amortization of intangible assets consists of the capitalized costs of
customer relationships and favorable lease terms acquired in connection with
historical acquisitions.
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Non-operating income (expense)
Non-operating income (expense) is categorized into the following categories:
Interest Expense
Interest expense comprises interest expense accrued or paid on our indebtedness. We expect interest expense to vary each reporting period depending on the amount of outstanding indebtedness and prevailing interest rates.
Gain on Change in Fair Value of Interest Rate Swaps
Gain (loss) on change in fair value of interest rate swaps comprises fair value adjustments of our interest rate swap agreements at the end of each reporting period. InSeptember 2021 , we extinguished the interest rate swaps and do not expect to recognize any gain or loss on the change in fair value of interest rate swaps in subsequent periods.
Gain on Sale of
Gain on sale of cost method investment comprises the gain recognized at the time of sale for the Company's cost method investment. Subsequent to the sale inFebruary 2022 , the Company no longer has investments accounted for using the cost method.
Change in Fair Value of Warrant Liabilities
Change in fair value of warrant liabilities comprises fair value adjustments of the Private Warrants assumed in connection with the Business Combination. We expect the change in fair value of warrant liabilities to vary each reporting period depending on the fair value adjustments and number of exercises of outstanding Private Warrants during each reporting period.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income on the
Company's cash balances and foreign currency transaction gains and losses
related to the impact of transactions denominated in a foreign currency.
Income Tax Benefit
Income tax benefit consists ofU.S. and state income taxes and income taxes in certain foreign jurisdictions in which we conduct business. Earnings from our non-U.S. activities are subject to local country income tax and may be subject to currentU.S. income tax. Due to cumulative losses, we maintain a full valuation allowance for deferred tax assets for our operations in foreign jurisdictions. We expect to maintain this full valuation allowance for the foreseeable future.
Results of Operations
Comparison of the Three Months Ended
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Three Months Ended March 31 ,
Change
(dollar amounts in thousands, except share and per share data) 2022 2021 $ % Revenues$ 186,823 $ 157,789 $ 29,034 18.4 % Cost of revenues, exclusive of amortization of acquired technologies 42,701 38,013 4,688 12.3 % Amortization of acquired technologies 6,695 6,580 115 1.7 % Cost of revenues(1) 49,396 44,593 4,803 10.8 % Gross profit 137,427 113,196 24,231 21.4 % Operating expenses: Research and development(1) 35,681 30,624 5,057 16.5 % Selling and marketing(1) 26,802 19,417 7,385 38.0 % General and administrative(1) 44,207 37,839 6,368 16.8 % Amortization of intangible assets 18,080 18,077 3 0.0 % Total operating expenses 124,770 105,957 18,813 17.8 % Operating income 12,657 7,239 5,418 74.8 % Other income (expense): Interest expense (7,341 ) (18,766 ) 11,425 60.9 % Gain on change in fair value of interest rate swaps - 3,277 (3,277 ) -100.0 % Change in fair value of warrant liabilities 2,136 - 2,136 NM Gain on sale of cost method investment 3,578 - 3,578 NM Other income, net 82 87 (5 ) -5.7 % Total other income (expense) (1,545 ) (15,402 ) 13,857 90.0 % Income (loss) before income taxes 11,112 (8,163 ) 19,275 NM Income tax benefit 863 3,079 (2,216 ) NM Net income (loss)$ 11,975 $ (5,084 ) $ 17,059 NM Net income (loss) per share attributable to common stockholders: Basic $ 0.02$ (0.01 ) Diluted $ 0.02$ (0.01 ) Weighted-average shares used in computing net income (loss) per share attributable to common stockholders: Basic 603,104,839 505,072,914 Diluted 641,028,410 505,072,914 (1) Includes stock-based compensation expense as follows (in thousands): Three Months Ended March 31, 2022 2021 Cost of revenues $ 849 $ 219 Research and development 3,530 575 Sales and marketing 4,830 555 General and administrative 14,435 11,305 Total stock-based compensation expense$ 23,644 $ 12,654 NM-Not Meaningful Revenues Revenue increased by$29.0 million to$186.8 million , or 18.4%, for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 . The increase in revenue was primarily a result of 15% growth from existing customer upgrades and expanding solution offerings to these existing customers as well as 3% growth from new customers. 35 --------------------------------------------------------------------------------
Cost of Revenues
Cost of revenues increased by$4.8 million to$49.4 million , or 10.8%, for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 .
Cost of Revenues, exclusive of amortization of acquired technologies
Cost of revenues, exclusive of amortization of acquired technologies, increased$4.7 million to$42.7 million , or 12.3%, for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 . The increase was due to a$1.6 million increase in personnel costs, including stock-based compensation, a$1.8 million increase in third party license and royalty fees and a$0.8 million increase in consulting costs.
Amortization of Acquired Technologies
Amortization of acquired technologies was
ended
Gross Profit
Gross profit increased by$24.2 million to$137.4 million , or 21.4%, for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 . Our gross profit margin increased to 73.6% for the three months endedMarch 31, 2022 compared to 71.7% for the three months endedMarch 31, 2021 . The increase in both gross profit and gross profit margin was due to increased software subscription revenues and economies of scale resulting from fixed cost arrangements. Research and Development Research and development expense increased by$5.1 million to$35.7 million , or 16.5%, for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 . The increase was due to a$6.4 million increase in personnel costs, including stock-based compensation, a$1.0 million increase in consulting costs, and a$0.9 million increase in IT costs, partially offset by a$3.6 million increase in the amount of capitalized time on development projects. Selling and Marketing Selling and marketing expense increased by$7.4 million to$26.8 million , or 38.0%, for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 . The increase was primarily due to a$6.5 million increase in personnel costs, including stock-based compensation, sales incentives and employee travel costs, a$0.3 million increase in marketing and event costs and a$0.3 million increase in consulting costs.
General and Administrative
General and administrative expense increased by$6.4 million to$44.2 million , or 16.8%, for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 . The increase was primarily due to a$3.7 million increase in personnel costs, including stock-based compensation, a$1.8 million increase in insurance costs and a$0.8 million increase in loss on disposal of software, equipment and property associated with the closure of the Company's previous headquarters inMarch 2022 .
Amortization of Intangible Assets
Amortization of intangible assets was
ended
Interest Expense
Interest expense decreased by$11.4 million to$7.3 million , or 60.9%, for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 primarily due to less outstanding long-term debt and a lower variable interest rate during the three months endedMarch 31, 2022 .
Gain on Change in Fair Value of Interest Rate Swaps
The gain recognized during the three months ended
proximity of the maturity date of the swap agreements prior to the
extinguishment of the interest rate swaps in
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Gain on Sale of
Gain on sale of cost method investment was$3.6 million for the three months endedMarch 31, 2022 . The gain recognized was due to the$3.9 million payment received in exchange for its equity interest in an investee as a result of the acquisition of the investee. The Company did not recognize any gain or loss on sale of cost method investment during the three months endedMarch 31, 2021 .
Change in Fair Value of Warrant Liabilities
Change in fair value of warrant liabilities was$2.1 million for the three months endedMarch 31, 2022 . The warrant liabilities were recorded as part of the Business Combination and therefore did not exist during the three months endedMarch 31, 2021 . The income from the change in fair value was due to the decrease in the estimated fair value of the Private Warrants, primarily from the lower price of the Company's common stock atMarch 31, 2022 , compared toDecember 31, 2021 . Income Tax Benefit Income tax benefit was$0.9 million for the three months endedMarch 31, 2022 , compared to$3.1 million for the three months endedMarch 31, 2021 . The change in the income tax benefit was due to the Company having pretax income during the three months endedMarch 31, 2022 , reduced by the tax benefits of discrete items, compared to a pretax loss during the three months endedMarch 31, 2021 .
Non-GAAP Financial Measures
In addition to our results determined in accordance withU.S. GAAP, we believe that Adjusted Gross Profit, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings Per Share, which are each non-GAAP measures, are useful in evaluating our operational performance. We use this non-GAAP financial information to evaluate our ongoing operations and for internal planning, budgeting and forecasting purposes and setting management bonus programs. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors in assessing our operating performance and comparing our performance with competitors and other comparable companies, which may present similar non-GAAP financial measures to investors. Our computation of these non-GAAP measures may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate these measures in the same fashion. We endeavor to compensate for the limitation of the non-GAAP measure presented by also providing the most directly comparable GAAP measure and a description of the reconciling items and adjustments to derive the non-GAAP measure. These non-GAAP measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using non-GAAP measures on a supplemental basis.
Adjusted Gross Profit
We believe that Adjusted Gross Profit, as defined below, provides meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our recurring core business operating results. Adjusted Gross Profit is defined as gross profit, adjusted for amortization of acquired technologies, stock-based compensation and related employer payroll tax, which are not indicative of our recurring core business operating results. The Adjusted Gross Profit Margin is defined as Adjusted Gross Profit divided by Revenue. Gross Profit is the most directly comparable GAAP measure to Adjusted Gross Profit, and you should review the reconciliation of Gross Profit to Adjusted Gross Profit below and not rely on any single financial measure to evaluate our business.
The following table reconciles Gross Profit to Adjusted Gross Profit for the
three months ended
Three months ended March 31 ,
(amounts in thousands, except percentages) 2022
2021
Gross Profit$ 137,427 $
113,196
Amortization of acquired technologies 6,695
6,580
Stock-based compensation and related employer payroll tax 933 219 Adjusted Gross Profit$ 145,055 $ 119,995 Gross Profit Margin 74 % 72 % Adjusted Gross Profit Margin 78 % 76 % For the three months endedMarch 31, 2022 , Adjusted Gross Profit increased$25.1 million or 20.9%, while Adjusted Gross Profit Margin increased 2% to 78%. Each of these increases in Adjusted Gross Profit and Adjusted Gross Profit Margin were primarily due to an increase in software subscription revenue and economies of scale resulting from fixed cost arrangements. 37 --------------------------------------------------------------------------------
Adjusted EBITDA
We believe that Adjusted EBITDA, as defined below, is useful in evaluating our
operational performance distinct and apart from financing costs, certain
expenses and non-operational expenses. Adjusted EBITDA is defined as net income
(loss) adjusted for interest, taxes, depreciation, amortization, gain on change
in fair value of interest rate swaps, change in fair value of warrant
liabilities, stock-based compensation expense and related employer payroll tax,
business combination transaction costs, lease abandonment charges, lease overlap
costs for the incremental expenses associated with the Company's new corporate
headquarters prior to termination of its existing headquarters' lease, net costs
related to divestiture, merger and acquisition ("M&A") and integration costs and
gain on sale of cost method investment. Net income (loss) is the most directly
comparable GAAP measure to Adjusted EBITDA, and you should review the
reconciliation of net loss to Adjusted EBITDA below and not rely on any single
financial measure to evaluate our business.
Adjusted EBITDA is intended as a supplemental measure of our performance that is
neither required by, nor presented in accordance with, GAAP. You should be aware
that when evaluating Adjusted EBITDA, we may incur future expenses similar to
those excluded when calculating this measure. In addition, our presentation of
this measure should not be construed as an inference that our future results
will be unaffected by unusual or non-recurring items.
The following table reconciles net income (loss) to Adjusted EBITDA for the
three months ended
Three months ended March 31,
(dollar amounts in thousands) 2022 2021
Net income (loss) $ 11,975 $ (5,084 )
Interest expense 7,341 18,766
Income tax benefit (863 ) (3,079 )
Amortization of intangible assets 18,080
18,077
Amortization of acquired technologies-Cost of
revenue 6,695
6,580
Depreciation and amortization related to software, equipment and property 6,807 5,153 EBITDA 50,035 40,413
Gain on change in fair value of interest rate
swaps - (3,277 ) Change in fair value of warrant liabilities (2,136 ) - Stock-based compensation expense and related employer payroll tax 24,656
12,654
Business combination transaction costs 732 3,002 Lease abandonment 1,222 909 Lease overlap costs 1,338 924 Net costs related to divestiture 60
772
M&A and integration costs 1,407 - Gain on sale of cost method investment (3,578 ) - Adjusted EBITDA$ 73,736 $ 55,397 Adjusted EBITDA increased$18.3 million , or 33.1%, for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 . This increase was driven primarily by increased software subscription revenues from expanding solution adoption among existing customers, existing customer upgrades and sales to new customers and economies of scale resulting from fixed cost arrangements.
Adjusted Net Income and Adjusted Earnings Per Share
We believe that Adjusted Net Income, as defined below, and Adjusted Earnings Per
Share are useful in evaluating our operational performance distinct and apart
from financing costs, certain expenses and non-operational expenses. Adjusted
Net Income is defined as net income (loss) adjusted for the after-tax effects of
amortization, gain on change in fair value of interest rate swaps, change in
fair value of warrant liabilities, stock-based compensation expense and related
employer payroll tax, business combination transaction costs, lease abandonment
charges, lease overlap costs for the incremental expenses associated with the
Company's new corporate headquarters prior to termination of its existing
headquarters' lease, net costs related to divestiture, M&A and integration costs
and gain on sale of cost method investment. Net income (loss) is the most
directly comparable GAAP measure to Adjusted Net Income, and you should review
the reconciliation of net income (loss) to Adjusted Net Income below and not
rely on any single financial measure to evaluate our business.
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Adjusted Net Income and Adjusted Earnings Per Share are intended as supplemental
measures of our performance that are neither required by, nor presented in
accordance with, GAAP. You should be aware that when evaluating Adjusted Net
Income and Adjusted Earnings Per Share, we may incur future expenses similar to
those excluded when calculating these measures. In addition, our presentation of
these measures should not be construed as an inference that our future results
will be unaffected by unusual or non-recurring items.
The following table reconciles net income (loss) to Adjusted Net Income and
Adjusted Earnings per Share for the three months ended March 31, 2022 and 2021:
Three months ended March 31,
(dollar amounts in thousands) 2022 2021
Net income (loss) $ 11,975 $ (5,084 )
Amortization of intangible assets 18,080
18,077
Amortization of acquired technologies-
Cost of revenue 6,695
6,580
Gain on change in fair value of
interest rate swaps - (3,277 ) Change in fair value of warrant liabilities (2,136 )
-
Stock-based compensation expense and related employer payroll tax 24,656
12,654
Business combination transaction costs 732 3,002 Lease abandonment 1,222 1,833 Lease overlap costs 1,338 - Net costs related to divestiture 60
772
M&A and integration costs 1,407
-
Gain on sale of cost method investment (3,578 ) - Tax effect of adjustments (11,577 ) (9,551 ) Adjusted net income$ 48,874 $ 25,006
Adjusted net income per share attributable to
common stockholders: Basic $ 0.08$ 0.05 Diluted $ 0.08$ 0.05 Weighted average shares outstanding: Basic 603,104,839 505,072,914 Diluted 641,028,410 523,164,329 Adjusted Net Income increased$23.9 million , or 95.4%, for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 . The increase was driven primarily by increased software subscription revenues from expanding solution adoption among existing customers, existing customer upgrades and sales to new customers and economies of scale resulting from fixed cost arrangements and less interest expense resulting from less outstanding long-term debt and a lower variable interest rate.
Liquidity and Capital Resources
We have financed our operations from cash flows from operations. The Company generated$46.9 million of cash flows from operating activities during the three months endedMarch 31, 2022 . As ofMarch 31, 2022 , the Company had cash and cash equivalents of$195.5 million . The Company had a working capital surplus of$187.5 million atMarch 31, 2022 and had an accumulated deficit atMarch 31, 2022 totaling$734.4 million . As ofMarch 31, 2022 , the Company had$798.0 million aggregate principal outstanding on term loans. We believe that our existing cash and cash equivalents, our cash flows from operating activities and our borrowing capacity under our revolving credit facility will be sufficient to fund our operations, fund required long-term debt repayments and meet our commitments for capital expenditures for at least the next twelve months.
Although we are not currently a party to any material definitive agreement
regarding potential investments in, or acquisitions of, complementary
businesses, applications or technologies, we may enter into these types of
arrangements, which could reduce our cash and cash equivalents or require us to
seek additional equity or debt financing. Additional funds from financing
arrangements may not be available on terms favorable to us or at all.
39 --------------------------------------------------------------------------------
Debt
OnSeptember 21, 2021 ,CCC Intelligent Solutions Inc. , an indirect wholly owned subsidiary of the Company, together with certain of the Company's subsidiaries acting as guarantors entered into a credit agreement (the "2021 Credit Agreement").
The 2021 Credit Agreement replaced the Company's 2017 First Lien Credit
Agreement (the "First Lien Credit Agreement"), dated as of
amended as of
The proceeds of the 2021 Credit Agreement were used to repay all outstanding
borrowings under the First Lien Credit Agreement.
2021 Credit Agreement-The 2021 Credit Agreement consists of the$800.0 million Term B Loan and 2021 Revolving Credit Facility for an aggregate principal amount of$250.0 million . The 2021 Revolving Credit Facility has a sublimit of$75.0 million for letters of credit. The Company received proceeds of$798.0 million , net of debt discount of$2.0 million , related to the Term B Loan. Beginning with the quarter endingMarch 31, 2022 , the Term B Loan requires quarterly principal payments of$2.0 million untilJune 30, 2028 , with the remaining outstanding principal amount required to be paid on the maturity date,September 21, 2028 . Beginning with the year endingDecember 31, 2022 , the Term B Loan requires a prepayment of principal, subject to certain exceptions, in connection with the receipt of proceeds from certain asset sales, casualty events, and debt issuances by the Company, and up to 50% of annual excess cash flow, as defined in and as further set forth in the 2021 Credit Agreement. When a principal prepayment is required, the prepayment offsets the future quarterly principal payments of the same amount. As ofMarch 31, 2022 , the Company is not subject to the annual excess cash flow calculation and no such principal prepayments are required.
As of
million
Borrowings under the 2021 Credit Facility bear interest at rates based on the ratio of the Company's and its subsidiaries' consolidated first lien net indebtedness to the Company's and its subsidiaries' consolidated EBITDA for applicable periods specified in the 2021 Credit Facility. The interest rate per annum applicable to the loans under the 2021 Credit Facility are based on a fluctuating rate of interest equal to the sum of an applicable rate and, at the Company's election from time to time, either:
(1)
a base rate determined by reference to the highest of (a) the rate last quoted by theWall Street Journal as the "prime rate," (b) the federal funds effective rate plus 0.50%, (c) one-month LIBOR plus 1.00% and (d) with respect to the Term B Loans, 1.50% and with respect to the Revolving Credit Facility, 1.00%, or
(2)
a Eurocurrency rate determined by reference to LIBOR (other than with respect to Euros, Euribor and with respect to British Pounds Sterling, SONIA) with a term as selected by the Company, of one, three or six months (subject to (x) in the case of term loans, a 0.50% per annum floor and (y) in the case of revolving loans, a 0.00% per annum floor).
A quarterly commitment fee of up to 0.50% is payable on the unused portion of
the 2021 Revolving Credit Facility.
During the three months endedMarch 31, 2022 , the weighted-average interest rate on the outstanding borrowings under the Term B Loan was 3.0%. The Company made interest payments of$5.9 million during the three months endedMarch 31, 2022 . The Company has an outstanding standby letter of credit for$0.7 million which reduces the amount available to be borrowed under the 2021 Revolving Credit Facility. AtMarch 31, 2022 ,$249.3 million was available to be borrowed under the 2021 Revolving Credit Facility. Borrowings under the 2021 Lien Credit Agreement are guaranteed byCypress Holdings ,Intermediate Holdings II, Inc. and certain of its US subsidiaries by a perfected first priority lien on the stock ofCCC Intelligent Solutions Inc. and substantially all of its assets, subject to various limitations and exceptions.
The 2021 Credit Agreement contains representations and warranties, and
affirmative and negative covenants, that among other things, restrict, subject
to certain exceptions, our ability to: incur additional indebtedness, incur
liens, engage in mergers, consolidations, liquidations or dissolutions; pay
dividends and distributions on, or redeem, repurchase or retire our capital
stock; and make certain investments, acquisitions, loans, or advances.
In addition, beginning with the three months endedMarch 31, 2022 , the terms of the 2021 Credit Agreement include a financial covenant which requires that, at the end of each fiscal quarter, if the aggregate amount of borrowings under the 2021 Revolving Credit Facility exceeds 35% of the aggregate commitments, the Company's leverage ratio cannot exceed 6.25 to 1.00. As ofMarch 31, 2022 , the Company was not subject to the financial covenant. 40 --------------------------------------------------------------------------------
First Lien Credit Agreement-In
Lien Credit Agreement.
The First Lien Credit Agreement initially consisted of a$1.0 billion term loan and revolving credit facilities for an aggregate principal amount of$100.0 million , with a sublimit of$30.0 million for letters of credit under the First Lien Revolvers. InFebruary 2020 , the Company refinanced its long-term debt and entered into the First Amendment to the First Lien Credit Agreement. The First Lien Amendment provided an incremental term loan, amended the amount of commitments and the maturity dates of the First Lien Credit Agreement's revolving credit facilities.
The First Lien Amendment provided an incremental term loan in the amount of
Revolvers to an aggregate principal amount of
Revolvers continued to have a sublimit of
The First Lien Term Loan required (after giving effect to the First Lien Amendment) quarterly principal payments of approximately$3.5 million untilMarch 31, 2024 , with the remaining outstanding principal amount required to be paid on the maturity date,April 27, 2024 . The First Lien Term Loan required a prepayment of principal, subject to certain exceptions, in connection with the receipt of proceeds from certain asset sales, casualty events, and debt issuances by the Company, and up to 50% of annual excess cash flow, as defined in and as further set forth in the First Lien Credit Agreement. When a principal prepayment was required, the prepayment offset the future quarterly principal payments of the same amount. As ofDecember 31, 2020 , subject to the request of the lenders of the First Lien Term Loan, a principal prepayment of up to$21.9 million was required. InApril 2021 , the Company made a principal prepayment of$1.5 million to those lenders who made such a request.
The Company made a principal prepayment of
Subsequently, in
provided in the 2021 Credit Agreement, the Company fully repaid the remaining
Amounts outstanding under the First Lien Credit Agreement bore interest at a variable rate of LIBOR, plus up to 3.00% per annum based upon the Company's leverage ratio, as defined in the First Lien Credit Agreement. A quarterly commitment fee of up to 0.50% was payable on the unused portion of the First Lien Revolvers. During the three months endedMarch 31, 2021 the weighted-average interest rate on the outstanding borrowings under the First Lien Term Loan was 4.1%. The Company made interest payments of$13.4 million during the three months endedMarch 31, 2021 . Cash Flows
The following table provides a summary of cash flow data for the three months
ended
Three months ended March 31 ,
(dollar amounts in thousands) 2022
2021
Net cash provided by operating activities$ 46,865 $ 38,234 Net cash used in investing activities (42,615 ) (4,686 ) Net cash provided by (used in) financing activities 8,691 (136,501 ) Net effect of exchange rate change 12 9 Change in cash and cash equivalents$ 12,953 $ (102,944 ) Net cash provided by operating activities was$46.9 million for the three months endedMarch 31, 2022 . Net cash provided by operating activities consists of net income of$12.0 million , adjusted for$30.9 million of non-cash items,$14.7 million for changes in working capital and($10.7) million for the effect of changes in other operating assets and liabilities. Significant non-cash adjustments include depreciation and amortization of$31.6 million , stock-based compensation expense of$23.6 million , non-cash lease expense of$1.2 million , deferred income tax benefits of ($21.2 ) and a change in fair value of warrant liabilities of($2.1) million . The change in net operating assets and liabilities was primarily a result of a decrease in accrued expenses of$16.5 million due to timing of cash disbursements and employee incentive plan payments, an increase in other assets of$10.8 million due to timing of payments and other deferred costs, partially offset by a decrease in income taxes of$20.4 million due to timing of payments, a decrease in accounts receivable of$2.0 million due to timing of receipts of payments from customers, an increase in accounts payable of$4.8 million due 41 --------------------------------------------------------------------------------
to timing of cash disbursements and an increase in deferred revenue of
million
Net cash used in investing activities was$42.6 million for the three months endedMarch 31, 2022 . Net cash used in investing activities was due to$32.2 million for a business acquisition and$14.3 million of capitalized internally developed software projects and purchases of software, equipment and property, partially offset by$3.9 million of proceeds from the sale of a cost method investment. Net cash provided by financing activities was$8.7 million for the three months endedMarch 31, 2022 . Net cash provided by financing activities was due to$10.7 million of proceeds from exercise of stock options, partially offset by$2.0 million of principal payments of long-term debt.
Recent Accounting Pronouncements
See Note 2 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one, of their potential impact on our financial condition and our results of operations. Critical Accounting Estimates Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue, costs, and expenses and related disclosures. Our estimates are based on our historical experience, trends and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these judgments and estimates under different assumptions or conditions and any such differences may be material. Except as described below, there have been no material changes to our critical accounting estimates as compared to the critical accounting policies and estimates disclosed in our audited consolidated financial statements and notes thereto for the year endedDecember 31, 2021 , included in our Annual Report on Form 10-K.
Fair Value of Contingent Consideration
Earnout liabilities arising from business acquisitions represent contingent
consideration that may be payable in cash and recorded as a liability at fair
value upon acquisition and re-measured at fair value in each subsequent
reporting period. Changes in fair value are recorded in the consolidated
statements of operations.
Determining the fair value of contingent consideration requires us to make assumptions and judgments. We estimate the fair value of contingent consideration using a Monte Carlo simulation model. These estimates involve inherent uncertainties and if different assumptions had been used, including but not limited to forecast inputs and discount rates, the fair value of contingent consideration could have been materially different from the amounts recorded. During the three months endedMarch 31, 2022 , we have made a preliminary estimate of the fair value of the contingent consideration associated with the acquisition of Safekeep.
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