Fidelity National Information Services, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Kenai Holdings Incorporated Fourth Quarter and Full Year 2021 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 1159 p.m. Eastern Time on February 24, 2022. With that, I would like to turn the call over to Jamie Lillis of Sulbury Trout.

Thank you, Operator, and all of you for joining us on this call today. On the call, we have our Chairman, Bill Foley, our Chief Executive Officer, Rick Massey, Kenai's President, David Dukaman, and Brian 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 Kenai's expectations, hopes, intentions, or strategies regarding the future, are forward-looking statements. Forward-looking statements are based on management's beliefs as well as assumptions made by and information currently available to management. Because such statements are based on expectations as to future financial and operating results and are not statements of fact, actual results may differ materially from those projected. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. The risks and uncertainties which forward-looking statements are subject to include, but are not limited to the risks and other factors detailed in our quarterly shareholder letter, which was released this afternoon, and in our other filings with the SEC. Today's remarks will also include references to non-GAAP financial measures. Additional information including reconciliation between non-GAAP financial information and to the GAAP financial information is provided in our shareholder letter. I would now like to turn the call over to the United States Chairman, Bill Foley, who will open with a few brief remarks and then open the line for questions.

Thanks, Jamie. Over the last year, we exited several businesses and deployed nearly $1.5 billion to acquire interests in a light, pay-safe sightline. In early 2022, we closed the business combination between the SPAC Trevia and System 1. All of these companies possess similar characteristics, a utility with large addressable markets, wide moats, and transformation opportunities. We will actively partner with management teams to increase value through both organic growth and strategic acquisitions. Our approach to active management can be seen in Dun & Bradstreet's results in Q4, where organic growth continued to accelerate to 4.8%. We were fortunate to increase our shares of D&B through the sale of our interest in Optimal Blue to Black Knight this week. In exchange for our interest in Optimal Blue, Kenai received 20.2 million shares of D&B and now holds 88.3 million shares, or approximately 20.5% of Dun & Bradstreet. Kenai also received $144.5 million in cash. Given the steep discount to Fair Value, we have been aggressive with our share repurchase plan. Since May of 2021, We've repurchased 5.2 million shares, nearly 6% of our shares outstanding, and have 9.1 million shares remaining on our authorization. Looking forward, we will continue to emphasize stock buybacks and we'll put more focus on corporate carve-outs and on investments in private companies like Sightline, where we can take a significant ownership interest and partner with management to to execute their transformation strategies. I'm encouraged by the strength of our portfolio, and we will continue to work with our portfolio management teams to unlock any unique value that exists within those companies. I'll now turn the call back to the operator to begin our question and answer session.

Thank you. At this time, we will begin our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Kenneth Lee of RBC Capital Markets. Please proceed with your question.

Hi. Thanks for taking my question. Just want to gauge your appetite. for taking on debt or drawing on financing facilities for share repurchases? Thanks.

Yeah, thanks for the question, Ken. You know, at the present time with the cash on hand, even after tax payments and so on, we have adequate cash on hand to continue our share repurchase program. We also do have about $300 million of undrawn lines of credit that we can take down to aid in share repurchases. So our philosophy is if we have a sight line to another monetization event occurring in the future, then we don't mind borrowing to continue stock buybacks. And frankly, with our stock prices current level, we're buying shares for what we believe to be about 55% or 60% of intrinsic value. So we're committed to the stock buyback program. And we're going to, as I said in our conference, I don't, I don't care if we buy back every share except the shares I own. That's my goal. I'll end up with owning a great company. You'll be the sole owner. I'll be the sole owner of a great company.

Very helpful there. Very helpful. Thanks again. And one follow-up, if I may. I know that Kenai has tended to hold its investments for a longer-term holding period, but just want to – see how you think about the investment portfolio as a potential source of liquidity over the near term. Thanks.

Well, yeah, we do see some of these assets that we've been acquiring over the last 12 months as potential liquidity events. Again, we're trying to balance what we believe the future prospects are for that particular company and not be the guys that sell too early. Unfortunately, we're being whipsawed by the market right now, but we've sort of – We sort of executed on that philosophy with our Ceridian investment, where we've been paring that back fairly steadily over the last 12 months, and now we're at the point we have about 8 million shares still within our portfolio. We are locked up on a couple of investments. The light, we were unlocked at the end of February and at the end of March, and we have a large number of shares in the light, 50-some-odd million. I believe sometime in July. It's a six-month lockup from the time we de-SPACed. But we're going to be looking to some of these investments to pair them back and, again, raise additional capital, and that capital will then be redeployed either in the form of share repurchases or investments in other companies. And we have a number of different interesting ideas that we're following up on, including for both of the remaining two SPACs that we have – in hand with where we have cash and trust. So does that help you?

It does. It definitely does. Thank you very much. Good questions, Ken.

Our next question is from John Campbell of Stevens. Please proceed with your question.

Hey, guys. Good afternoon.

Hey, John. Hi, John.

Hey, so I've been bouncing around a couple earnings calls this afternoon, so I haven't had a chance to fully get to the shareholder letter. But, you know, last quarter you guys called out a couple lingering items as far as, like, proceeds from sales and some of the other monetization events. It feels like kind of smaller stuff. But it looks like you guys did outline most of that in the shareholder letter. But just to keep it simple, if you guys can maybe talk to what you're kind of expecting as far as gross sales. cash proceeds this quarter, including, I guess, the recent Optimal Blue announcement, which was a good deal for you guys. And then as we think about kind of netting that out, if you guys can talk about expected cash outlays this quarter.

Yeah, cash outlays are really primarily going to be for stock buybacks as opposed to other. We don't have any current investments on the horizon that are going to be within this next 60, 90, 120 days. Really, the proceeds from the quarter, other than miscellaneous small amounts that come in from various investments that we get distributions on, were really the $144.5 million we received in connection with the Optimal Blue sale. And so that's a pretty simple quarter, really. It's Optimal Blue out and Optimal Blue in and Stock Buybacks out. Okay.

That makes sense. And then, you know, we've been following Sightline the last couple months. That seems like a really attractive investment for you guys. We're excited to see kind of what unfolds there. But outside of what you guys provide in the shareholder letter, just could you maybe talk to us about where those guys are in their funding journey and then how you're thinking about recognizing that value over time?

Yeah, so they pretty much have adequate funding to do everything they need for really the next couple of years. And they were EBITDA negative in 2021. Their budget is to be EBITDA negative about $8 million in 2022, but we believe we can cross that negativity to positivity sometime just after mid-year August-September timeframe. There's been certain changes in regulations so that now you can sign up for their app off-site. You don't have to be in the casino to actually sign up for their cashless app. And they believe that's going to add to significant growth this year. So last year, I think they ended with about $46 or $47 million of revenue. It's not going to be 100% growth this year, but it's going to be close to it. And then next year in 2023, we're expecting another significant growth year. So we're thinking sometime in late 23, early 24, this company is going to be ready for a for some sort of IPO transaction, and that would be a monetization event for us. That's sort of our target timeframe on Sightline. Rick or Duke, anything to add on Sightline?

Right on the button. It's all good. It's growing really nicely, great management. You met him, I think, probably at the – well, you weren't at our conference, but I know a lot of people did. I think Ken did. I think Oppenheimer did. A really, really sharp guy, and he'll make a great public company CEO.

Yeah, that's all great to hear. Last one for me, just on D&B, I mean, you're not necessarily doubling down on it, but, I mean, accepting some D&B shares with Optimal Blue Transaction, I mean, that's a vote of confidence for sure. You've got Jabor now who's the sole CEO there, so you're putting more resources there. I'm just curious if you could maybe talk, just remind us again, what you guys view as a long-term opportunity about D&B, why you're so excited about it over time.

Well, you know, DMV was a mismanaged company for 20 years, and we've now been involved with it since February of 19. The first year and a half was really about bringing synergies out of the business and getting the company back to a baseline. As you recall, we replaced, I think, 17 out of 18 managers in that first 15- or 16-month time frame. We then now have really formulated our management team. And, uh, I was, I was just elected executive chairman of the board. Anthony Jabbour is, has become executive chairman of Black Knight. So he's in a position to spend more time at Dun & Bradstreet. And that's really, that's going to be one of, you know, a good part of his daily workload is done, is really Dun & Bradstreet. And, um, the goal with Dun & Bradstreet are new products, innovation, be disruptive and have, uh, and develop new products. And Dun & Bradstreet developed about 15 new products last year that have now gone into their sales pipeline. We've made a couple of tuck-in acquisitions, and we're going to continue growing D&B organically and inorganically. And I believe the future's bright for Dun & Bradstreet. Otherwise, we wouldn't have taken 75% of the proceeds from the sale of Optimal Blue in common stock. And I I like our position at this point because we took stock in. We're locked up for six months, but we don't have plans to liquidate Dun & Bradstreet. We really like the investment, like the prospects. We can see the change from the inside internally going on with regard to the way we've attacked the marketplace and our penetration. We have so many great prospects that that I'm really enthusiastic about Dun & Bradstreet without getting into really non-public information.

That's a good insight. Thanks, Bill.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for additional questions. Our next question is from Ian Zaffino of Oppenheimer. Please proceed with your question.

Thank you very much. Hey, Bill, can you just maybe walk us through a little bit about Optima Blue? What sort of transpired there to get the deal done? How did you agree upon the price? And maybe talk multiples if you can or if you have them, but maybe your initial multiple to get in 18 months ago, and then sort of the exit multiple as well. Thanks.

So what I did, because I'm no longer on the Black Knight board, but I am on the Optimal Blue board, I really turned the handling of the negotiation relative to the disposition of Optimal Blue to Black Knight. I left it with THL. as a financial sponsor to negotiate the transaction, because I felt it did give us the best value, and I would not be involved. I would be in a conflict situation, and we were always kind of revolving around this 2X of our investment during all the discussions, and specifically on the On the multiple, do you recall what it was when we went in?

It was flat. We paid about 30 times trailing coming in, and we got about 30 times trailing coming out.

So it was the same multiple, but, of course, Autumn Blue had grown from, I don't know. It was an EBITDA double in that 18-month period. And the other thing that attracted me to the sale transaction was we were a minority. We were a 20% owner. of a non-public subsidiary of Black Knight. And I felt if we could convert that ownership, that private ownership interest in a controlled subsidiary of a public company, receive cash and stock in a public entity, I've improved my monetization prospects, which is exactly what we did. So we made 2X, did it in about 18 months. And we're now no longer an owner of a minority interest in a private company that's owned by a public company. Rather, we have additional ownership interest in a public entity, Dun & Bradstreet, and received cash, which we can redeploy and repurchase shares with. We can pay our taxes on all the gains that we have, which are pretty significant. And we can also redeploy part of that cash in other investments. So that's the whole rationale.

I would just say one thing, Ian. Bill started this process back, gosh, September, October, something like that. I mean, we all were whispering about it back then. Bill saw the optimal blue is heavy loaded, very sensitive to 30-year fixed mortgage rates. And during the course of all this, you can see over the past few months that I think that 30 year mortgage rate today is probably 30 bits above where it was when you started the negotiation. And so Bill was, you know, he came into my office and said he was happy to be getting out at this time because the originators were going to slow down and that in fact appears to be true.

Okay, good. Hey Bill, you know, another thing that you said that kind of piqued my curiosity was this corporate carve-out. I don't think you've mentioned that before. Can you maybe give us an example or something as far as what you're thinking as it relates to that? Would it be purchased through a SPAC? Would this be sort of like a private investment? How exactly would that work and kind of what would the mechanics be?

Yeah, so both, Ian, both approaches. So for our big SPAC and our smaller SPAC, we're looking at some different corporate carve-out opportunities whereby the corporation or the company we're dealing with, generally speaking, is a public company, so it's not a company that's owned by private equity. We've found with the private equity ownership, when you do a SPAC transaction or invest in that company, you've got a stock overhang that's facing you in the future. That's what's true with Alight. It's not so much true with System 1 because we're a partner as management. And it's true with Paysafe. So we've tried to move away from partnering with private equity in some of our investments that we're looking at, but rather look at entities, a corporation that may have some stranded or stepchild subsidiaries that aren't really appropriate for that particular company to acquire those businesses either in total or in partnership with the current ownership. And it's my experience with CEOs. If you're a CEO of a public company, you like your empire, and you really don't like to sell a piece of your empire. But if we can go to some of these corporations, and we have several in mind, and propose to them a carve-out of some of their assets, but they retain ownership, maybe even majority control, then the CEO's empire is in place, but we've got an excellent investment opportunity. So That's really kind of our mindset now. And as I said, we still have two SPACs that we'd like to deploy, but we're going to be very careful. The redemptions are high. We're not going to get in the position of doing significant backstops of these transactions. We're not going to raise pipes. And if it happens that these SPAC transactions can't come to a good conclusion with a good investment that we're happy with and we believe our shareholder base will be happy with, then we'll give the money back to our investors. We're not afraid to do that. We'd rather not, but if that's the best outcome, that's what we'll do.

Okay, thanks. And then just one final question. Maybe we'll get Brian involved in the mix here since I think he's been quiet so far. Can you give us an update on the NAB? And I know you have it on December 31st, but there's obviously been movement as it relates to Optimal Blue, and I think that might be it, but... Do you have maybe like a year to date or kind of an as of February 15th, something along those lines?

Sure, Ian. There should be one there as of today. If it's not out there right now, it should be out there shortly. But in summary, the fair value net of fees and taxes right now comes out to $41.27 a share, which is about a 45% upside to today's closing price.

Okay, great. Thank you very much. Take care, guys. Thank you.

Thank you. Thanks, Ian.

We have reached the end of the question and answer session. I will now turn the call back over to Mr. Foley for closing remarks.

Thank you, Operator. We're excited with the opportunities in our pipeline for the year ahead as we navigate this dynamic and difficult market. We will remain nimble and adapt our approach to the opportunities that we see in the market as we strive to create long-term shareholder value. We look forward to speaking with you again on our first quarter 2022 earnings call. Thanks again for your time today.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.