Source: CCCS Investor Presentation (May-June 2024)
CCCS competes with a private equity owned company called Mitchell and to a lesser degree a company called Solera. Historically, the way the market has worked is that competitors would come up with single point solutions, which CCCS would then either copy or acquire, plugging into their established install base, and winning through a one-stop-shop solution. As such, overtime, the overlap between CCCS and their smaller competition has gotten less and less as the Mitchells of the world retreat to areas of the market CCCS isn’t big in like casualty.
My understanding is the only large insurer that uses Mitchell for estimation purposes is Progressive, so repair shops may maintain a Mitchell subscription just to get that Progressive business, but in almost every case they will have the CCCS subscription as well. Mitchell has basically bet its entire product roadmap on pleasing Progressive, and as such has lost business with everyone else. The way one customer puts it:
Every few years, we would look at them. And the only real competitor out there, honestly, was Mitchell. And Mitchell was, I would say, Mitchell was way behind for a very long period of time.
At the end of the day, there was nothing that compelled us to feel like we needed to make the change away from CCC. There was nothing that Mitchell was bringing to the table that we thought would benefit us from moving away from CCC. Solera is out there, but really Mitchell is the only other, I think, meaningful competitor realistically.
CCC’s technology is really good. They are very linked into the body shop network. But there are a couple of other things. First, CCC has really been, I think, on the cutting edge of expanding their capabilities in the auto space. So, they're owning more and more of the space. It's no longer just auto physical damage. They're into other areas as well. So, there's a whole suite of products right now that we were utilizing that go beyond offerings that Mitchell has. Now Mitchell has a bill review tool as well, but Mitchell isn't so much involved in the other spaces. So that's another thing.
And then the final thing that I would add is that CCC is really excellent in terms of client relations. They have individuals that are dedicated to each of their carriers. There's a regular dialogue that takes place between them and the carrier partners that they work with. They do a lot of one-off things, whether it's data requests or customization things that we want to do. And they also have what they call an advisory council. And that advisory council is made up of customers. And those advisory council meetings, they seek feedback on what's working, what's not working, what other things could we do that would be of value, et cetera, et cetera. So, I mean, they've just carved out huge aspects of this business in a way that there's a lot of stickiness.
One of the benefits of the CCC tool is we get a lot of data. And the data is helpful to us in terms of evaluating shops, in terms of developing performance scorecards for our staff and insights into the business around what's happening from a trending perspective.
Consider if a repair shop was to use Mitchell and a customer came in with insurance that didn’t use Mitchell, then there would just be no way to electronically submit that claim to the insurance company’s adjusters. It must be e-mailed, or faxed in. So, the options really are to use CCCS as a repair shop, or do things manually, and wait for a check in the mail that can take weeks.
Another thing to consider here is CCCS’s relationship with insurance core vendor Guidewire which is basically the lifeblood system for the work adjusters do. CCCS plugs into Guidewire through an API and as far as we can tell, there’s very little decision support tools and capabilities built within Guidewire itself, instead that is integrated through vendors like CCCS. Guidewire builds their system in a way that they can integrate easily with a lot of these data platforms. And so, it really is in synergy with one another as opposed to direct competition with one another.
As far as the competitive moat here, it is basically switching costs, the network effect, and the scale + data advantage. On the first and second point, CCCS has a Direct Repair Program (DRP). Basically, a DRP connects auto insurers and collision repair shops to facilitate standardized repairs. These DRP connections have created a strong network effect for CCCS’s platform, as insurers and repairers both benefit from a virtuous cycle in which more insurers on the platform drives more value for the repair shops on the platform, and vice versa.
On that last point, CCCS can spend more on R&D in absolute terms than their competitors, and the historic crash data that they have is an amazing asset – they have $1 trillion of crash data that they can train their models on. This data is very granular, consistent of hundreds of data elements per claim, and is updated in real time from the massive amount of data flowing through the system daily.
All of this lends itself to considerable pricing power – this is a chicken and egg thing where insurance can’t roll off CCCS because all the repair shops use them, and the repair shops can’t roll off because all the insurance companies use them. And yet, CCCS has never been that aggressive on price – they've been a pretty good partner. From a customer:
So, we always found them to be good partners, they’d come back every few years when the contract was renewed, they'd want more, and we pushed back a little bit at it. But I felt like it was a pretty good and healthy dialogue, and we never ended the contract negotiation with them in a place where there was any bitterness.
What is the Growth Runway for CCCS?
Source: CCCS Investor Presentation (May-June 2024)
To say the U.S. car market is large might be an understatement. There are ~285M registered vehicles and ~240M registered drivers. Americans purchased ~16M new cars in 2023 and the total miles traveled by all vehicles in 2023 was nearly 3.3T. Given these numbers, there will inevitably be accidents.
Processing the claim from a single accident can require hundreds of transactions involving consumers, lenders, collision repair facilities, automotive manufacturers, dealers, parts suppliers, medical providers, vehicle auctions, and others.
These transactions depend on extensive hyper-local decisions and data, creating a level of complexity that can increase processing costs as well as the potential for fraud and other forms of claim leakage. This complexity is only getting worse due to several converging factors:
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Vehicle parts proliferation: Repairable parts per auto claim have increased 60% since 2010.
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Internal technology systems: The average lines of software code per new vehicle doubled from 100 million in 2015 to 200 million in 2020.
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Growing connected car capabilities: By 2030, 95% of new vehicles sold globally are expected to be connected.
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Advanced Driver Assistance Systems (ADAS) and diagnostics systems: The number of vehicles receiving a diagnostic scan as part of a collision repair has increased 1,000% since 2017.
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Vehicle Electrification and related infrastructure: By 2035, 50% of global car sales are expected to be electrified vehicles.
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Vehicle damage severity from collisions: Since 2017, the cost to repair vehicles damaged in automotive claims has increased 54%.
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Labor constraints: there’s an acute level of labor shortage across the industry with the knowledge and capability to both assess claims and repair these increasingly complex vehicles.
For many years in a row now, combined loss ratios in the insurance industry have been over 100%. In other words, insurance companies take in $1 of premium and pay out more than $1 in claims and expenses. Inflation has caused huge issues with parts and labor costs while regulations make it difficult for insurance companies to raise prices fast enough to offset the impact.
Source: https://www.bloomberg.com/opinion/articles/2024-05-23/more-cars-are-being-totaled-as-repair-costs-used-car-prices-bite
The only way to effectively manage this increasing complexity and cost is through digitization. Back in the day, all this was a highly manual process. Very disjointed, lacking coordination. Everybody kind of did it differently. As we already talked about, along came CCCS saying, hey, we're going to try to standardize this process and automate it. If everyone in the ecosystem can operate on the same platform and they can all agree on some standardization around pricing for things like parts and labor, it makes it less arbitrary, it creates less friction, and it reduces cycle time. Hence why the ecosystem has come to not only rely on but embrace CCCS as a near monopoly solution.
Management has put out a 7-10% organic topline growth guide and internally it sounds like they target 15% topline growth. How are they going to hit these numbers?
Source: CCCS Investor Presentation (May-June 2024)
Let’s start with the automotive repair side. They have about 29,500 auto shops on their platform, and the total market is probably 40,000 repair shops, in which maybe 34,000 are doing real auto body work, and the rest are doing things like oil changes. That leaves maybe 4,500 new logos to go after, so not much growth runway there and that 4,500 is probably exclusively Progressive and Mitchell’s DRP anyway. The remaining growth here is going to largely be from upsell.
The entry level SKU for repair shops is just going to be Estimating, the next level up is going to be estimating plus DRP tools, and then the big package is going to be all of that plus workflow (ERP for the repair shop). Workflow customers are only about 30-40% penetrated and there does remain a long runway as mom-and-pop locations are consolidated and update their tech stacks.
The other opportunity here is in their diagnostics product (think car readouts). As the diagnostic scanning rate increases over time, the way CCCS monetizes that is they charge a toll for providers to be on their network. As usage increases, it’s basically a 100% EBITDA drop through because there's not really a cost associated with it. Maybe 15%-25% of all repair orders today have a diagnostic scan, but that is increasing quickly as repair shops need to make sure sensors, cameras, and ADAS systems are working before sending cars back on the road.
Management has talked about this being a north of $300M revenue opportunity (they only did $866M of revenue in 2023).
And then moving to the insurance side of things. Similarly, there isn’t much room for new logo growth, they already process something like 80%+ of all claims. Instead, the main growth engine here will be adoption of straight through processing (STP) over the next few years. STP is just a fancy way of saying fully automated claims processing from start to finish. It will take a few years to fully scale this product, starting with simplistic claims, like a small fender bender with one party, and then building off that with better models until 100% of all auto claims are completely touchless. They have had early success here with customer feedback being very positive.
The other driver on the insurance side is going to be on the casualty side, think bodily injury in car crashes. CCCS may have a monopoly in physical damage, but they haven’t even scratched the surface on the casualty side (Mitchell actually has more market share on the casualty side). If CCCS can get their casualty product up to par with point solutions in the market, and plug it into their full menu offering, then there is the opportunity for significant growth here.
The other nascent business with upside is their parts marketplace. Parts is tricky, up until a couple of years ago there were three main players, OPSTrax, OEConnection, and CCCS, and each of them had approximately 1/3 market share. But then OPSTrax and OEConnection merged with each other, giving them the best scale, which is important when you are a marketplace, offset by the fact that they aren’t integrated with the insurance estimating process.
Where CCCS could still win here is by winning on the STP front and having parts procurement just one more step on the fully automated process. In other words, taking the decision away from the body shop technicians who might not be shopping around for the best deal nor the best cycle time in the way an automated process could. According to a former employee:
I talked to the CEOs of a couple of MSOs when I was refreshing the parts strategy, and they both said this uniquely on their own and saying, "Hey, if you can like automate this, like I will drop the other providers, and I will exclusively go with you because this is like a huge deal. We're leaving lots of money, gross profit dollars, on the table because we're not able to automate the decisioning”.
Big picture, the way to think about CCCS is that the steady state business can do 5-10% organic growth purely from established pricing and upselling. Along with that, there are some upside options, if they nail STP, if they nail the parts marketplace, if they nail something entirely different that we aren’t even talking about today that will help the ecosystem, the growth rate can be closer to 13%-15%. If we can buy this underwriting 9% growth, then these upside options will give us a nice margin of safety.
We believe the economics here are pretty locked in for the next few years, and at today’s valuation we expect to earn double digit returns with very little risk of permanent business value impairment.