Q3 2021 Verisk Analytics Inc Earnings Call
Good day, everyone and welcome to the <unk> third quarter 'twenty 'twenty. One earnings result conference call. This call is being recorded currently all participants are in a listen only mode. After todays prepared remarks, we will come.
A question and answer session, where we will limit participants to one question and one follow up we will have further instructions for you at that time.
For opening remarks, and introductions I would like to turn the call over to <unk> head of Investor Relations Ms. Stacy broad bar MS brought bar you May go ahead go ahead.
Thank you Julia and good day, everyone. We appreciate you joining us today for a discussion of our third quarter 2021 financial results today's call will be led by Scott Stephenson.
Chairman, President and Chief Executive Officer, who will provide an overview of our business.
Stable Chief Financial Officer, and group Pat will follow with the financial review, Mark <unk>, Chief Operating Officer and group President will join the team for the Q&A session.
The earnings release referenced on this call as well as the associated 10-Q can be found in the investors section of our website <unk> Dot com.
Earnings release has also been attached to an 8-K that will be a furnished to the SEC. A replay of this call will be available for 30 days on our website and by dial. It finally as set forth in more detail in today's earnings release, I will remind everyone that today's call may include forward looking statements about their future performance, including.
But not limited to the potential impacts of the COVID-19 pandemic.
Actual performance could differ materially from what is suggested by our comments today information about the factors that could affect future performance is contained in our recent SEC filings now I'll turn the call over to Scott.
Hello, everyone and thank you for joining us for our third quarter 2021 earnings conference call I'm pleased to share that <unk> delivered a solid third quarter results building on our deep domain expertise innovative offerings and strong relationships with our customers specifically <unk> delivered organic constant currency revenue growth of five one.
Sure Seth.
Organic constant currency adjusted EBITDA growth of two 1% for the third quarter, what I find encouraging is looking at the results on a two year basis to adjust for the lumpiness related to the pandemic and this view barron's delivered two year accumulative organic constant currency revenue growth of eight 7% and <unk>.
Organic constant currency adjusted EBITDA growth of 16, 8% demonstrating strong core operating leverage and a sequential improvement from the second quarter. We will provide more details in his comprehensive financial review.
Cross insurance, we are seeing strong demand for our products as our customers are striving to become more digital and more automated and are turning to <unk> solutions to help them.
Engagement with our customers remains at very high levels as we continue our virtual work in our sales force and customer service teams are doing an excellent job staying connected in fact, we recently hosted our signature underwriting conference called Barrick velocity again in a virtual format. This.
This year's event was another success with over 600 attendees participating across 27 different thematic sessions. This year's focus was accelerating the digital transformation and developed a new ways to increase efficiency and improve underwriting outcomes to better serve their customers.
Strong customer engagement within insurance is translating into strong sales with growing hcp's longer contract terms and very robust sales pipelines that Ed we have been very successful penetrating the new insure tech companies as they can take advantage of the full suite of <unk> solutions across underwriting and.
Additionally, with our more traditional P&C customer base. We are also having success leveraging our scale and our comprehensive insurance solution offering easier.
These are two of our competitive advantages by bundling our solutions together, we are driving increased adoption of these solutions across many different customer segments and these bundles are proving to be quite sticky.
One area of growth, we are particularly excited about is our international expansion within insurance, which is predominantly in the U K today, but we see a long runway as we expand our analytic capabilities within the U K and extend our global footprint into new developed markets within our sequel business in the U K we are building.
A truly integrated and digital ecosystem across carriers syndicates brokers and managing general agents throughout the specialty market and.
And we are bringing in new customers and expanding our suite of products across existing ones. Most recently, we made a tuck in acquisition of ignite software systems. A SaaS platform that includes policy administration rating engine and digital engagement for brokers managing general agents and insurers.
This acquisition expands equal capabilities and enables sequel to add a modular API driven SaaS platform to the sequel suite of products.
Within our core underwriting we are using the time tested playbook that has worked in the U S for years using proprietary data assets to help better price and understand risk and extending to the UK with our data enrichment hub.
Data insights hub is enabling the digitization of the personal and commercial lines insurance in the U K deploying a data forward strategy to pre fill key data elements and provide predictive analytics that help customers with risk assessment and pricing.
Our recent investment in hugged hub extends these capacities upstream to support the ecosystem at point of sale and distribution.
Our international travel business has experienced significant declines due to pandemic related travel restrictions, but we believe we are well positioned to take advantage of the rebound when cross border travel concerns.
On the claims front and consistent with our focus on the insurance business and international expansion. We recently announced the acquisition of act in a L. A market leader for personal injury claims digitalization and medical assessment in Germany Act.
<unk> will be integrated into our broader various claims Europe business and should provide a strong platform to grow our footprint across continental Europe, and established Paris, SB Pan European leader in the personal injury and medical malpractice sectors. We.
We are encouraged by the opportunity to create incremental value by helping deploy act and <unk> technology and services across Europe, and leveraging customer relationships.
We also plan to introduce other claims solutions to these key European markets.
Lastly, we are excited about the growth opportunity within international markets for our extreme event business.
In June we released an on time update to our Japan Typhoon and earthquake models.
These updates reflect the latest science and learnings from recent catastrophes in Japan Eric.
Our extreme of that business has very strong share in the key Japanese market, both primary insurers and reinsurers as customers.
Both of them rely on our models for the quality of the science of the local knowledge that we incorporate to our partnerships with local insurers.
Within the energy segment, we're seeing a strong uptake of our new and innovative solutions, including our energy transition and chemicals research as well as our innovative lens platform. We are realizing double digit growth in HCV for contracts that include lens as our customers recognize the value of this innovative solution.
Importantly, less is being adopted by customers across industries, including upstream oil and gas financial services and power and renewables. Moreover, with roughly 10% of our customer base on lunch today, we see a long runway for growth as we expand its use cases to include additional commodities and geographies.
Over the next few years.
<unk> heard me say before that at various we're moving ever closer to our customers and that we're on an exciting and successful journey to deliver best in class customer experiences.
Our collaborations with management leaders, along with a customer first mindset how power this journey customer.
Customer experience is not just the responsibility of our dedicated customer service teams, but it runs throughout the entire organization in the third quarter colleagues from every part of Arris participated in barrick's discover CX summit.
It was a moment in time, when we came together to listen learn and collaborate on how we can be better partners for our customers leaders across every area of the company assembled to focus on learning CX best practices and we have emerged with a robust pipeline of ideas that I believe will lead to innovative solutions and outcomes that benefit our customers.
<unk> and Paris.
On the personnel front I am pleased to publicly welcome Sunita Holzer as our new Chief Human Resources Officer, and Deanne Green as our new head of inclusion diversity and blogging.
So neither brings with her three decades of enterprise level human resources leadership across several industries, including technology and insurance, Dan brings a business centric mindset to IV and B from her decade long experience as a business leader in the payroll and HR solutions industry at.
At a time, when attracting and retaining diverse talent is top of mind for every business.
I am really excited about partnering with Sunita N P M to develop a comprehensive and differentiated human capital strategy for Paris, and foster our diverse inclusive and equitable culture.
<unk>.
We are committed to enhancing shareholder value and as part of that commitment to allocating capital to the highest growth and highest return opportunities.
Accordingly, Paris has been undertaking a bottoms up review of our businesses in portfolio composition. Our review is ongoing with a focus on the most value creating paths for sustainable growth and success and doing what's in the best interest of our shareholders and all stakeholders.
As we've said previously we believe that portfolio changes are probable in the next two to three quarters.
The market conditions.
With that I will turn the call over to Lee to cover our financial results. Thanks, Scott first I would like to bring to everyone's attention that we've posted a quarterly earnings presentation. That's available on our web site moving to the financial results for the quarter on a consolidated and GAAP basis revenue grew 8% to 759 million net income attributable to <unk>.
<unk> increased eight 6% to 202 million, while diluted GAAP earnings per share attributable to <unk> increased 10, 7% to $1 24.
Moving to our organic constant currency results adjusted for nonoperating items as defined in the non-GAAP financial measures section of our press release, we are very pleased with our operating results led by continued and consistent growth in our subscription revenues in the third quarter organic constant currency revenue grew five 1% driven by.
Continued strength in our insurance segment and modest growth in energy and specialized markets. This was offset in part by weakness in the financial services segment as we experienced the final quarter of impact from the contract restructurings as well as continued COVID-19 related impacts.
Our non COVID-19 sensitive revenues as we defined at the beginning of the pandemic increased five 6% in the third quarter, which was consistent with results reported in the second quarter 2021, despite tougher year over year comparisons as our non Covid sensitive revenues included seven 8% in the third quarter of 2020.
The stable growth in our non COVID-19 sensitive revenues, representing approximately 85% of our total revenues reflects the durability and resilience of our primarily subscription model and the mission critical nature of our solutions.
Our cobot sensitive revenues, which represented 15% of our consolidated revenues increased one 6% as compared to declines of 10% in the third quarter last year growth was primarily primarily the result of improvements in consulting in our energy segment and a return to pre pandemic growth rates in many.
Our products and services within insurance, particularly within the U S.
We did experience continued COVID-19 related weakness in our financial services segment as Covid forbearance programs are negatively impacting bankruptcy volumes to be specific our COVID-19 sensitive revenues increased 8% and 12% within the insurance and energy segments, respectively, but registered decline.
<unk> of 28% within financial services. It's also important to note that that 28% decline also included the impact of the contract restructuring that we have described previously and which ended in the third quarter.
Given that financial services is the segment with the largest percentage of Covid sensitive transactional revenues. This had a disproportionate impact on the overall result.
Organic constant currency adjusted EBITDA growth was two 1% in the third quarter.
Organic constant currency adjusted EBITDA growth was impacted by tough comparisons as we took aggressive cost actions in the third quarter of 2020 in response to the pandemic across all our segments total adjusted EBITA margin, which includes both organic and inorganic revenue and adjusted EBITDA was 49, 9% in the core.
<unk> down 221 basis points on a year over year basis, but still well above our pre pandemic margin level of 47, 4% recorded in the third quarter of 2019.
Much of the decline is associated with the normalization of our costs as we anniversary the COVID-19 benefits from last year, including reduced headcount and lower incentive compensation.
This level of margin also includes approximately 100 basis points of headwind from our ongoing technological transformation, including our cloud transition costs, which we absorbed into our cost structure on.
On that note, let's turn to our segment results on an organic constant currency basis.
In the third quarter insurance segment revenues increased seven 4% demonstrating strong resilience and recovery, we saw healthy growth in our industry standard insurance programs repair cost estimating solutions claims analytics solutions catastrophe modeling life insurance solutions and international insurance software solutions, we also experienced solid.
Growth in transactional revenues, including 8% group and our Covid impacted revenues as we compare it against flattish results last year. We also experienced a modest benefit to growth from storm related revenue, resulting from Boise Idaho.
Adjusted EBITDA grew four 8% in the third quarter, while margins declined 200 basis points to 55, 9%, reflecting a return to a normalized rate of head count growth compared to the prior year and higher year over year short term incentive compensation expense.
Nevertheless, this quarters margin is still 300 basis points above our pre pandemic levels recorded in 2019 and continues to reflect accelerated investment in our breakout areas like life insurance and telematics as well as our technology modernization, including our cloud transition.
Energy and specialized markets revenue increased two 5% in the third quarter due to recovery in our consulting and project based revenues across energy and power strong growth in environmental health and safety solutions and in our breakout solutions, including energy transition in chemicals, we continue to benefit from strong adoption.
Of our lens platform as customers are seeing the value of our integrated cloud based data analytics data and analytical environment and we are very pleased with their contributions to our annualized contract value progression over the course of the last two quarters.
Adjusted EBITDA declined two 6% in the third quarter, while margins contracted 300 basis points, reflecting tough comparisons from last year, when we enacted headcount reductions furloughs and compensation adjustments in reaction to the challenging operating environment in 2020.
This was still well above the 33, 3% margin we reported in the third quarter of 2019 before the pandemic, we remind you that some of the costs taking in the third quarter were reversed in the fourth quarter of 2020, making for easier comparisons in the fourth quarter 'twenty one.
Within our energy segment, we are working to combine the proprietary data assets skill sets infrastructure expertise and deep capabilities of our wood Mackenzie Gen Scape and power advocate businesses, specifically, we were taking the best of breed from each business and combining it with a common data architecture as the backbone.
Modern and flexible data architecture will enable more efficient and effective sharing of data.
Accelerating the innovation process for new solutions in key areas like supply chain cost management power and renewables chemicals hydrogen carbon and metals and mining.
This will also empower stronger cross sell solutions across the various customer basis, particularly in the global power and renewable sector as we help our global customers navigate this broader energy transition.
Financial services revenue declined 13, 5% in the quarter, reflecting the final quarter of impact from the contract transitions that we undertook in 2020 as well as a lower level of bankruptcy revenue because of government support and forbearance program.
Spend informed analytics demonstrated strong growth as spending in advertising levels continue to improve as the economy emerges from Covid adjusted EBITDA declined 42% in the quarter, reflecting the negative impact of lower sales and a larger impact of corporate expense obligations on the segment's smaller base.
Total adjusted EBITDA margins were 19% still down from the prior year, but an improvement from the first half of 2021 as a result of expense discipline and lower bad debt expense.
Our reported effective tax rate was 28% compared to 22, 6% in the prior year quarter in line with our expectations. Looking ahead, we expect our tax rate to approximate 18% to 20% for the fourth quarter of 2021.
Adjusted net income increased seven 4% to 234 million and diluted adjusted EPS increased 9% to $1 44 for the third quarter 2021. These increases reflect organic growth in the business contributions from acquisitions, a lower tax rate and a lower average share count.
Net cash provided by operating activities was 285 million for the quarter up 38% from the prior year period. The prior year periods cash flow was negatively impacted by the timing of certain federal income tax payments in certain employer payroll taxes because of the cares act year to date net cash provided by operating activities was 967 million.
Reflecting growth of 18% versus the prior year period.
Capital expenditures were $61 4 million for the quarter down 5% versus last year, reflecting cost savings on third party hardware and software as we move to the cloud.
We continue to believe that Capex for 2021 should be in the range of 250 to 280 million, reflecting our continued investment in our innovation agenda, our technological transformation as well as the carryover of certain expenditures that were delayed in 2020 as a result of the pandemic.
Related to Capex, we expect fixed asset depreciation and amortization should be within the range of $200 million to $215 million and intangible amortization to be approximately $175 million, both depreciation and amortization elements are subject to FX variability the timing of purchases and the completion of projects and future M&A activity.
During the third quarter, we returned $197 million in capital to shareholders through share repurchases and dividends as our strong cash flow allows us to invest behind our highest growth and highest return capital initiatives, but also return capital to shareholders consistently.
In summary, we are not sitting still with various as demonstrated by our third quarter performance and Scott's earlier comments regarding our portfolio review.
<unk> ahead, we have confidence in our ability to manage the cost structure to protect profitability. We continue to believe that we have tough cost comparisons relative to the COVID-19 impact in quarters last year, we should retain much of the margin expansion. We experienced in 2020 delivering margins ahead of our 2019 pre pandemic level of 47%.
Further we believe that as the Covid impacts continue to abate and global economies. Further open up we can return to our long term growth model of 7% organic constant currency revenue growth with core operating leverage, allowing EBITDA to grow faster than revenue. We hope. This provides some useful context for you and we look forward to addressing your questions. We continue to appreciate.
All the support and interest in <unk>, given the large number of analysts we have covering us we ask that you limit yourself to one question and one follow up with that I'll ask the operator to open the line for questions.
If you would like to ask a question press Star then the number one on your telephone keypad.
Well pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Manav.
Patents.
Thank you good morning, guys.
Just the.
Full year review I think this is the first time you've put it in writing in the press release, it's a booster I was just hoping you could give us a little context and look at all of the non insurance business days or just any color there would be appreciated.
Our focus is on the <unk>.
Hi, Manav.
Our focus is on the non P&C parts of our business that said, we're always asking questions about the utility of capital we have invested everywhere, but the but the depth of our analysis is non P&C, you'll remember that at the beginning of the year, we ask <unk> to take responsibility for those businesses and his re.
Have you has been everything from operational to organizational too.
The strategic questions that are in the portfolio portfolio overview.
Got it I appreciate that and then just on the international expansion. You know this is something you guys have been trying to go out to for a while is it still fair to say that the opportunities are more of these.
Do you get to build upon or are they any decent sized assets out there.
Well, we're going to we're we're always starting from his strategy. So what is it that is logical relative to what we're doing.
That will be meaningful for our customers and of course, we'll filter that through questions like the size of assets that we might add you've seen a record recently we've been.
<unk> focused on mostly tuck in.
I don't want to constrain with kind of artificially constrained.
Kind of what size range, we might be in but what were driven by is the logic of one plus one becoming III.
Got it thank you very much.
Your next question comes from the line of Greg Peters.
Good morning, everyone.
Yes, I was looking over your exact wear report.
Because the insurance industry is really struggling with.
Inflationary pressures I guess, it's both I mean, there's a frequency issue, but also a severity issue.
And I'm curious if you could provide some more color about how your services are helping the industry. During this time I know the auto market. The auto insurance market is probably in a period of the most distress. It's been in in the last 10 or 15 years.
And they are having they are struggling to get their rate increases approved with regulators. So.
Some color on how your services are helping them would be helpful.
Well, maybe a couple of comments here and Mark leads our insurance vertical so please dive and mark but first of all I think I hope folks are familiar with the range of things that we do on behalf of the insurers. So it's everything from.
How does the select risk to have price risk and then win loss occurs how to think about the value of the Lawson whether the claims amount of losses accurate so were really across the entire insurance value chain.
And one of the things that helps us to be so relevant for our customers is the speed with which we.
Ingest data signals, which tell us whats going on in the market and then translate them into a forward view.
And provide that to our customers. So one of the things. We do is to move as rapidly as the environment is moving so you referenced exact wear so just to pick that one in particular, so we have a very dynamic way of assessing the underlying factor costs associated with.
Repairing our structure and the speed with which we update the data.
Our customers stay ahead of where the likely next claims.
<unk> is going to be with respect to cost so the depth of the data and the speed of the data both help us to give really reliable signals to our to our customers and yeah. I mean, the custody. The insurance companies are looking to respond to.
A marketplace that has been moving around a fair amount.
But that's really kind of always the case there are unique conditions associated.
With the pandemic.
But it's that's just kind of a particular inside of the general case. So it's speed. It's automation. It's depth of data those are all the things that allow us to add a lot of value for our customers.
Thank you for that answer.
I guess my follow up question again, something I hear a lot of your customers talking about would be just the pressure around recruiting new employees and employee retention.
Lee I heard your comments about the margin expectations going forward relative to what you did pre pandemic, but I'm I'm curious if you well I was hoping maybe you could spend a minute and talk to us about what youre doing from an employee retention standpoint, what youre doing from a.
Routing standpoint, and how.
This might how rising compensation costs might affect your margins.
So we are we.
We add a lot of people.
To our organization.
Consistent basis, so we have very well established pathways for recruiting talent into the company that can be from industry that can be at the entry level a lot of our focus is on hiring technical talent something that we've been doing for years now actually has to go right to the.
The head end of the.
Data analytics.
And.
Data science educational pipelines, and basically sort of build our own.
Programs, where we bring people in.
Really is there first.
Counter with industry.
Then lead them through a series of development activities and deploy them into the business.
We have found doing things like that to actually be more cost constructive than simply going out and sort.
Sort of hand to hand combat with other tech companies, we do hire people from name brand.
Technology companies, but we have found that our own efforts to cultivate.
Our own team have been highly reported and Thats not just data science that is cloud architecture that is software development that applies everywhere basically and.
We like I think most companies have experienced a degree of.
The need to be extra alerts.
To retaining talent.
Coming out of the disrupted or moving through the disruptive moment that we've been in but actually our experience has been pretty good on trend relative to where we've been prior to the pandemic, it's not that different for us. So yeah, we're paying attention yachts importance.
Have a diverse set of <unk>.
Talent sources, and I would I would mention here that we operate not only in the United States, but also in other economies around the world.
Including we have a very large footprint in India, which gives us additional options for staffing our team.
And Greg one thing I would add to Scott's comments is you know of course.
I appreciate you raising that I think a lot of businesses are struggling on that on that front from a recruiting and retention standpoint, that's one dimension of it I think we would recognize that there probably are some we're anticipating some higher cost as most companies are but we're also experiencing some savings as we adapt to this new environment.
<unk>, we are working through our real estate portfolio finding efficiencies as we are adopting more remote remote work I think our belief is that the level of <unk>.
Travel expense is going to be lower than it was previously and so while we are experiencing some of those pandemic induce induced inflationary pressures from a recruiting standpoint, but I think all companies are we also are generating probably more net benefits from that and then finally I would say on the on the <unk>.
Retention standpoint there.
Is ah.
There's some little things that you can identify that maybe coming very soon or what are the big things that that you're considering that maybe take a little bit longer and that's why you were talking about those two to three quarter time on here. Thank you.
Well I would just say in the most general sense, Alex that it's a comprehensive review that we're doing as I mentioned upfront our <unk>. Our focus is everything which is outside of the Pnc's segment I don't think it would be productive to call out specific parts of our.
Portfolio I, just don't think it's constructive inside of the.
The process that we're we're on here right now, but we are we are looking deeply and broadly essentially and everything.
And we're certainly aware of where we stand in the process of consideration, but I just don't take it as constructive to sort of name individual piece parts at this moment.
I figured I'd try. Thank you and then maybe just shifting gears to to the energy business for a second here I think you're prepared remarks, you mentioned I think lens with specific numbers. You also talked about you know the energy transition as an area of upset again, maybe can you just put some some.
More numbers around that in terms of how big that businesses today, what the growth rates are you experiencing and where you were having the most success actually selling some of these new products into the marketplace as as everybody's clearly thinking about energy transition. These days. Thanks.
Yeah. So thank you Alex Uhm, let me try to give you some some context and I think the most important things that are the most important element that I would draw your attention to because I think it represents where we are seeing the most significant impact from our investment in lens and I want a different.
He did from the fact that within the energy transition and within chemicals. Those are businesses that we had invested again 12, 18 months or so ago and have already been generating double digit growth. They are becoming a more significant component of that but what we are experiencing more recently, which isn't reflected.
In the revenue numbers, yet uhm is b R ability to increase the pricing uhm for lens delivered products. The lens platform has enable us to that has enabled us to demonstrate to clients uhm improved ability to access an intern.
Rack with <unk> with the the datasets with the analytics and as I've described before we have been able to translate that into double digit price increases for those products where mm lens is now a component of what we what we do.
That is contributing directly to the reference that I made to the increase in our subscription uhm growth of ours are are annualized contract values, where we have seen mid single digits Uhm and more recently high single digits increases in the overall level of that.
As do those of you that they follow other companies with kind of an a C V dynamic that uhm immediately hits a C V. But it will it will be realized over time. The other point that I would emphasize that we mentioned use that we currently are only approximately 10% penetrated into our customer base.
And so as we further penetrate that customer base and add more products onto the lens platform over time. It has a multiplicative effect on the revenue opportunity and so that's where I would specifically draw your attention in terms of representing the the grill.
Opportunity and for me certainly the return opportunity on the investment that we've made in lens that encouraged encourages further investment in acceleration of many of those of those products. All of that is supported by the ongoing growth I'm certainly anyone on on I'd expect on this call has seen the level of focus in the energy.
Transition uhm from all of the press around cop twenty-six is driving uhm nearly incessant demand for our expertise and our perspectives on the energy transition and then finally as we pointed out the consulting element of the business is also experiencing that cyclical uplift of strength in the sector.
Hopefully that gives you some context around what we are experiencing and how we expect that will continue to translate into a a improve growth performance as we look ahead.
Very good thank you.
Your next question comes from the line of Ashish <unk>.
<unk>.
Thanks for taking my question I, just wanted to follow up on the <unk> on the margin front the margins in this quarter were pretty robust when you look at it on a sequential basis, there wasn't that discussion on compensation cost, but I was just wondering how should we think about the margins going forward as some would that be any comes back and as you would.
Put your investment is that enough that you can bring into cost savings that can continue to maintain these margin levels. Thanks.
Yeah, you know thanks, so she's like you know it's one of the one of the challenges is that there are a lot of elements that factor into factor into margin and I and I. Appreciate you raising kind of the you know the shorter term dimension there were in the in the third quarter. Some impacts on margin part of that which we described where some except an exception.
Really difficult comparison to the third quarter, particularly in energy and specialized markets because of some of the furlough uhm compensation reductions that we took in that in that period that normalised in this period and some of that will be you you will see a uhm a corresponding can rebound.
In the fourth quarter, when we reverse those based upon the performance of the of the business. So that's an element that is more acute in the third quarter. In addition, we had some higher level of legal expenses in the third quarter across some of our businesses that again with a an acute short term effect.
There will be so all all of that is I've got to say that in the in the third quarter. There was probably a higher level of it of expense than we would normally expect uhm impacting margins and they were still above where we were prepandemic uhm, but you're going forward I don't think we expect that the same the same acute impact there will.
Be ongoing normalization potentially on travel uhm potentially on on compensation as things normalize, but I think that we will still be able to hold on to some meaningful portion of that structural benefit that we'd had uhm through the pandemic hopefully that helps you dissect a little bit of the short.
Some of the short term elements uhm that impacted us a little heavily in the third quarter and our expectations ahead.
That's a great clearly and maybe if I can ask a quick follow up question is would it be possible to quantify the benefit from stomped related revenue I understand was that a small and should be C. A similar benefit going into the next quarter as well. Thanks.
Thank you Ashish <unk> it isn't material enough, where we where we feel that it's necessary to call that out I I think that what went when it becomes a market impact our material impact we do it but we don't think it rises to that level at this point.
That's very helpful and congrats on quickly thankfully.
<unk>.
Your next question comes from the line of.
<unk> Oh, sorry.
Hi, This is Mary <unk> selling it for Honda I know you've touched on this in the past that you just mentioned it again on the call around your ability to help insurers through automating berries pack and whether that would be underwriting or in the claims process, but.
Maybe you can just talk about how much of an opportunity that may be still going forward and then can you also to touch on your new product growth and your vitality and that's it and how that looks with an insurance today.
Alright. Thanks for the question this is mark.
So let me just describe it I think I've always highlighted that the world of insurance is really focused on three things right now that and we'll make sure I think we kind of wrote that way for awhile clearly the other two things are kind of intersecting but it's this digital engagement.
As well as this push towards automation, which we kind of refer to as interconnected ecosystem. What insurers are trying to do and you probably experienced if you wanted to go online and get an auto quote.
Yeah.
Very quick and efficient auto quote an automated way because all the information about you.
Is available it's all publicly available you would.
Clearly provide for it yesterday privacy and what we're trying to do is make that experience.
Available to not just personal auto.
Homeowners small commercial and you have the ability to now get a quote very efficiently go very effectively using what I refer to as both gap and analytics to make it cheaper more efficient and more accurate and it's all interconnected in a way digital experienced that small busy.
His owner or you as a homeowner have the ability to get that quote life and that's where the pushes.
Both on the insurer tech side.
What was the traditional insurers and you know I'm proud to say that we were kind of at the forefront of helping people do that and I think there's a long runway there because it's both reducing the cost for insurers as well as creating a better experience for those policyholders. So we'll we'll we'll look forward to that continuing to me.
And then coming a couple of years I think the next question was a little bit about the bite cilacap vitality in Texas, I think that we feel like the solutions, we have orange robust and as numerous as we've ever had there's a lot going on in <unk> I'm excited about it that's both on the claim side I think that's on the underwriting some.
And you know I I know that we always talk about vertical I think there's opportunities to take with some of the things that we do today and focus them insurance, but also see if there's a way to horizontally get into other verticals and I think that's an exciting dimension as well as an example, a lot of things, we do with climate a climate change.
Corporates need to know as we think about <unk> and resiliency those are the type of things that they get as excited but we're still on the air with it certainly early days. So thanks for the question.
Absolutely and then just a I'm a follow up could you just talk about how the competitive dynamic within the financial services segment has changed if if at all you have the credit bureaus, you have to fit tax the payments all getting more aggressive on M&A and and doing more internal investment around dataset. Just wondering if you have you seen any any real shift.
There and how is that being considered while you're doing your business review of that segment.
Yeah, Mario Thank you Uhm, we do look at that competitive that competitive dynamic and I would start by saying that our financial services business is at the at the core of benchmarking service for the large credit card issuing banks and that's a very unique position.
And where the large banks trust first to provide their data so that they can understand their performance against others. There is is no one that collects as broad or provides as comprehensive a benchmarking service in that in that context and so.
To a degree that is a less competitive space for us where we do see more competition is around some of the consulting aspects of the business outside of that outside of that benchmarking and in some of our businesses such as in fraud detection naturally there are a lot of small companies and business.
<unk> that are that are offering similar detection uhm fraud avoidance types of types of solutions and so that becomes a a consideration. So yes. Overall, we look at the level of competition, we look at some of the other skilled players in the industry.
What they're doing in the space of and evaluate are competitive strengthened strengths and merits that factor into our assessment of our ability to those both create value and and optimize value for those businesses.
Great. Thank you very much.
Your next question is from the line of Kevin Mcvey.
Great. Thank you so much and thank you for all the information.
Eight could you give us a sense in terms of where you are in the cloud transition.
Overall across the enterprise and then maybe a little bit of detail in terms of insurance first financial services versus energy.
Yeah. So there are there are multiple elements to our migration. So first of all every new application is being author in the cloud at this point.
So and we offer a lot of new applications. So we're 100% with respect to that which is current and new with respect to the legacy we're substantially along the way, but a kind of implicit in some things that Lee said earlier not completely done.
So we are at the point of essentially turning off our operation of the mainframe that we used to make yourself.
We are close to the moment, when we will shut down our power data centers, but not quite there yet uhm and a large by count.
The larger fraction of all of our applications have migrated our.
Our legacy applications have migrated into the cloud so we're still.
In process.
We're we're making lots of good progress.
And as Lee was referencing before we've already seen the cash flow benefits associated with this.
<unk> and there is more to come because we will shut down data centers that aren't yet shut down and then the the corresponding point on all of that is because computing in the cloud is so productive one of the things that's happening is we're doing more development.
In the cloud so we've got lots of new things that we're doing that will consume cycles in the cloud in the future that we just literally didn't used to do so there's kind of a I'll put in a take volume grows in this really productive environment. The legacy stuff gets shut off the net effect of it is it is beneficial to cash flow.
And does interact with both the Capex and the Opex lines.
It's very helpful. And then just wanted to clarify.
When you folks talked about this 79% returning to that Lee is that as the portfolio is currently constructed or would I guess point being you know if you were to Monte.
Monetize certain parts of the business there'll be upside to that number is that assuming any type of strategic outcome and that 79%.
I would describe it as our expectations for the business as a whole and doesn't M. Implicitly assume anything in terms of the portfolio restructuring as as we as we said before and we expect to each of our business businesses in a normalised environment to be able to achieve 7% organic growth obviously, there's been.
Differentiated performance against that but that's the expectation or the business as currently configured.
Thank you.
Your next question comes from the line of Tony Caplin.
Thanks, So much wanted to ask another question to clarify that marriage, an expectation for next year imagine that sorry can you be higher than 47%, but that seems like it doesn't really bacon any of the efficiencies that you've talked about and how many I was thinking about it as.
And he is.
If you look at the here you don't have any than it does here until hopefully that I'll Normalise next year. So is it fair to think of it as bargains and 20 until essentially be 21 levels minus a hunter base points for Kenny and if 100 basis points isn't right like yeah feel free to.
Correct me on that.
Yeah. So Tony I. Appreciate the question I I think it's hard to anticipate what the the impact on travel is going to be in 2022 and to get will fundamentally be driven by what we think is best from a client interaction of business development.
Uhm dimension for the business and I think that's inherently unknowable at this at this stage if we if we feel that it's in our best interest as we have new products and want to be in front of clients to develop those ideas to to be out there and then that will influence the T. The are.
<unk> spent and then obviously the environment in terms of safety and regulatory aspects is unknown as as well so I'm very reluctant to make any forecast of what that is going to be because I think it will depend upon the business circumstances, and the and the environment at the time.
I do think that we have been able to to realize savings some of which are structural uhm and and which we think we will be able to routine over time in terms of real estate real estate costs, you'll probably a lower level of travel but in the short term.
Of looking at year over year comparisons I'm, just I don't think we're in a position to be able to to make an estimate of what T. D. As a as a percent of total revenue was likely to look is going to be.
Yeah, I understand that that is the only real delta that'll between this year and next year is that the main one.
You know I think the other the other element Tony is our level of headcount growth within this and here again, you have a attention between the the the <unk> the retention element and the retention pressures that we are experiencing are.
Our ability to fill those positions that was clearly an impact in terms of where that that influenced our compensation expense in 2021, we would like to be able to to I'm, certainly recover to where we were and I'm too.
Support the growth of these new initiatives. So that dimension I think is also difficult to to predict uhm in and is our most significant expense I'm from at about 70% of our our of our overall operating expenses. So that would be just the other area that I think.
He has a has an uncertain variable you'll naturally we have more control on that but in this regard we do want to continue to be able to grow headcount to support the development of these businesses, but the environment is making that more more challenging from an actual hiring and also from a compensation expense standpoint.
Got it and then I just wanted to ask a follow up on energy transition I guess, who are your main competitors that you're facing up against there is at IHS.
IHS market or are you competing in different products areas.
And then I guess I'll set separately is there any cannibalization from energy transition services from those customers, thereby upstream or is it completely additive those are just tonight two questions on that.
Uhm. Thank you Tony so on the on the first question I think there are a range of of other players at one level. I think you have a high level consultants that are like a mckinsey or Boston consulting that are doing a lot of work in the in the energy transition space.
That is that is high and we have consulting consultants that also do that works. So there's competition on that on that front, they're in kind of thought pieces around what's happening.
Yeah with Bloomburg, new energy they are providing competition and I think most other large energy data players are certainly looking to take advantage of the demand for analytics and data in the new energy space, We do think that our competitive advantage in that era.
<unk> is one that we have been applying in developing or specific datasets on the upstream space in the in our Poweradvocate area in terms of what companies are spending on infrastructure uhm for port facilities, new generation capabilities.
S as well as our familiarity with so real time data that we acquire from our Genscape, which is is part of the rationale for why we think that's additive. So we have I think a very valuable dataset and we have a great brand and reputation in the energy sector. So there is other competition, but we we feel so we're very compare.
Natively differentiated.
Thank you.
Your next question comes from Nick.
Nicholas.
Andrew Nicholas I apologize.
Thanks for taking my questions in the morning Uhm. The first question I had was was <unk> Scott Uhm you mentioned in your prepared remarks about some success you've had with the the international playbook.
At least as it relates to the sequel and now you've you've made an acquisition of that to NATO uhm.
In Germany, it sounds like so I'm just wondering if you could maybe spend a little bit more time on that deal how it fit into your existing product line up and maybe what the playbook looks like for for that asset in particular.
Yeah, So actonel participates in the claims process and.
And the German market. The claims process is a very central part of what we do on behalf of all insurers and one of the things that applies when you're the kind of data analytic company that we are is that methodologies can travel across national boundaries, but you still need data at the local level in order.
To be able to do analysis that is relevant for the local level and fundamentally that's what <unk> provide so there at a particular part of.
Of the P and Seaworld in Germany, where they face.
Auto and and then sort of the the medical issues that arise from automobile accidents. That's the part of the of the marketplace. There in so the growth that is going to occur relative to act and <unk> will be along in a couple of dimensions, one is being parted in central Europe.
<unk>, we will seek opportunities to push the method out into other national economies, but secondly, we've got a whole set of claims solutions, where the methodologies are perfectly applicable to the German market now we will have a beachhead.
In which to go in behind the relationships with the with the German companies that come along with that canal and now present, our other solutions basically and then we'll do what we always do which is aggregate.
Ideally contributory data, which is specific in which is even unique inside these customer relationships and then just have the the accumulative benefit of a deeper connection with customers more forms of value because we have more kinds of data.
But within general categories like claims underwriting as in other general category.
Great. Thank you that's helpful. And then for my follow up I wanted to switch gears, a little bit you've talked I think for for some time about the opportunity on the cyber security front in the cyber rich burnt and it seems that at least from our vantage point that there's a growing number of providers targeting that space that some of which.
Have some some positive momentum so I'm wondering if you could just refresh us on various positioning in that market and maybe where you feel the biggest opportunities are for both organic or even inorganic growth. There in terms of helping clients underwrite cyber security risk specifically. Thank you yeah, a couple of comments on cyber one is.
It's an important line, but you have to have it in context as well it actually is not that big a line. When you talk about direct rent written premium so sort of the emergence of cyber cover is in many ways actually still waiting to happen.
But we take a very broad are are positioning is that we have a broader set of offerings of all with respect cyber so if you're asking about us versus.
Other providers, because we sort of we're sort of soup to nuts.
In the cyberspace, So we model way upfront. So that you can have a high level portfolio view of the amount of cyber rescue might you might be holding as an insurer in your portfolio, we actually can diligence individual companies.
Cyber risk of that they represent.
And that can be used in the in the risk selection and underwriting process and then on the back and we've actually got a completely unique.
Activity, which is through our P. C S.
Unit, we're in the same way that insurers tell us after a natural disaster exactly what their progressively with time, they tell us what their actual claims experience was denominated.
We now have a variety of insurers are doing that with us in the cyber well so.
There isn't any other company that does those three things that I just mentioned, so our positioning inside strongly to breath.
Breath, and we're very happy to be in this place and happy with what we're doing.
Against the line that gets a lot of attention, but it's not there isn't really that much premium and the cyber line just yet.
Thanks, that's helpful.
Your next question comes from the line of Andrew Steinman.
Hi, It's Andrew <unk> two questions. The first one is you know as you can probably shells, one or more of your industry specific data and tech businesses will very likely but calm and then for services provided that's just more focused in terms of number of end markets or is it likely that.
<unk> will expand it to a new industry after exiting and and market around market I also have a second question.
So it's not it is not inside our pattern of thought Andrew to say, we need to be in N vertical markets that we don't have that thought at all actually.
And so.
It simply would not be in our analysis or pattern to say well. Okay. We may have stepped out of this vertical market or that vertical market, here's some proceeds and let's invest them in the next new vertical market that is not the way that we think not at all so I think that's the primary answer.
To your question, but I will go back to what Mark said before one of the really nice opportunities for our company is a is a is a function of the fact that you get to observe so much of the economy through the mechanism of insurance because almost everything is insured.
Maybe that maybe it's not as completely insured as it should be but more or less every category of asset is insurance. So you get to see kind of what's going on economy wide and my point here is that we really like solutions.
Where I'll call it the killer App grew.
Grows up in the insurance vertical.
But then if it's extensible two other customer groups well, great you know, particularly if it doesn't need to be modified very much in order for it to be relevant to that next customer groups. So so I I I'm really sending you two messages here and I think they are clear and I hope we have them distinct which is we don't need to <unk>.
Platform ourselves and other verticals, we are interested in following from the powerful place of the insurance industry and the killer apps inside of the insurance industry. If they have a clickability and other places that's good business.
And we'll we'll pursue that all day, but we wanted yoked to the to the power place where we start.
That makes a lotta sense. So here's my second question could you also talk about the cyclical rebound I had for a very farish energy organic revenue crowd, just noting that day. The AD market now has some tailwind.
Sure Andrew So thanks for the question they're.
There is certainly a sense of the.
Mm trends that we're experiencing on the consulting on the consulting side that are driving some of the the the strength in the performance of the revenue growth within that within that sector.
And and well that's a positive it is.
Not as as much of a focus for us as the broader uhm, what I would describe as secular trend to understanding the datasets for the energy transition and or structural ability to tie those datasets together through the lens platform, which I was describing earlier.
Uhm again in response to Alex's question and so that we believe is the more material <unk> <unk>.
Secular trend within the business that as opposed to existing within those discrete upstream midstream downstream chemicals elements. We're now looking at data across that uhm and and building an architecture that allows us to meet those those growing growing needs I do think that some of this this cyclical.
Short term uplift is encouraging Ah more adoption of of those broader applications that we've described so there is a bit of a tailwind. The fact that we're beginning to to experience certainly on the subscription side and then as we as we realize the revenue from that subscriptions it should become more more apparent in.
The overall revenue results at least if I can just add to what you were saying, they're just very.
Very briefly and maybe this was a little bit implicit in your question Andrew over the course of the last seven years, there have been two remarkable price shocks and the underlying commodity, particularly oil and gas <unk>.
Petroleum there has been a Brexit and there's been a pandemic.
Hopefully the next pandemic as decades away from now.
The UK can only Brexit once and the first of the two price shocks was totally supply let it was basically Saudi Arabia.
Sort of flexing muscle with with with Russia, and I think it's interesting to consider the fact that on a go forward basis.
Saudi Aramco now answers to market forces in a way that it didn't.
Seven years ago, where it was kind of like the Piggy bank for the for the Royal family. So I think the environment is different than.
Then it has been over the last seven years, and we are structurally different and that our exposure to to that as a result of the development of our data businesses. The growth of other elements Uhm has substantially muted the at the impact of that.
Still be some impact always describe but is is much less acute than it would have been certainly three years ago.
That should be all set thank you.
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