Q2 2019 Earnings Call
Please standby.
Good day welcome to the core logic second quarter 2019 earnings Conference call Today's conference is being recorded.
Today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.
To withdraw your question. Please press Star then too.
I'd now like to turn the conference over to Dan Smith Investor Relations. Please go ahead.
Thank you and good morning.
Welcome to our Investor presentation, and conference call, where we present, our financial results for the second quarter of 2019.
Speaking today will be Corelogics, president and CEO , Frank Martell, CFO , Jim Dallas.
Before we begin let me make a few important points first we've posted our slide presentation, which includes additional details on our financial results on our website.
Second please note that during today's presentation, we may make forward looking statements within the meaning of the federal securities laws, including statements concerning our expected business and operational plans performance outlook and acquisition and growth strategies and our expectations regarding industry conditions.
All of these statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described in the forward looking statements.
For further details concerning these risks and uncertainties. Please refer to our FCC filings, including the most recent annual report on Form 10-K , and subsequent 10-Q's.
Our forward looking statements are based on information currently available to us and we do not intend and undertake no duty to update these statements for any reason.
Additionally, today's presentation contains financial measures that are non-GAAP financial measures. A reconciliation of these non-GAAP measures to their GAAP equivalents is included in the appendix to today's presentation.
Unless specifically identified comparisons of second quarter financial results to prior periods should be understood on a year over year basis that is in reference to the second quarter 2018.
Finally, please limit yourselves to one question with a brief follow up we'll take additional questions at the end of the call as time permits thanks, and now let me introduce our president and CEO Frank Martell.
Thank you Dan and good morning, everyone welcome to Corelogic second quarter earnings call.
I'll lead off today with a recap of our second quarter operating performance and key takeaways, including market conditions progress on strategic initiatives and our efficiency programs.
Jim will follow and summarize our financial results and provide updated guidance for the third quarter and full year.
I'll wrap up the call today with the Q and a session.
The Corelogic team is off to a strong start in 2019.
From both the operational and a financial perspective.
Despite continuing market based challenges in the U.S. and Australia.
Over the course of the second quarter and for the first half we benefited from our continued focus on driving favorable revenue mix expanding sales of integrated solutions and platform offerings.
Securing white space in capturing the benefits of productivity and operating leverage.
In the first half of this year, we made important strides in a number of foundational areas, including building out our smart data platform and data visualization capabilities.
Migrating our technology infrastructure to the Google cloud platform or GCP.
Accelerating the AMC transformation program, and enhancing cyber AI and digital Britain workflows.
I'll expand on several of these areas a bit later.
In my presentation.
In the second quarter, we delivered results that were at the high end or above our guidance ranges.
We grew our insurance and spatial real estate and U.S. based valuation platform revenues.
We also benefited from U.S. mortgage market unit volumes that were modestly higher than last year.
At the same time, we aggressively press forward with our AMC transformation and the exit of non core mortgage and default technology units.
We also continue to take actions to reduce costs and drive productivity.
Jim will provide the details on our second quarter financial results in a few minutes.
You will note that we had two discrete items.
A revenue recognition benefit in last year's numbers and the impact of the wind down of our non core technology units in this year's results that impacted year on year comparisons this quarter.
On a run rate basis before these items revenues and adjusted EBITDA were in line with prior year levels and adjusted EBITDA margins were just over 29%.
In my view this is a very strong outcome, especially when viewed in the context of very challenging prior year comps.
This year, we've made steady progress advancing key elements of our strategic plan.
As you May remember from past calls our strategic imperatives focused on building market leadership and operating scale.
Driving revenue diversification sustained organic growth trends expanding profit margins and rewarding our long term shareholders through smart capital allocation.
We are continuing to grow our non U.S. mortgage volume sensitive revenues to at least 50% of total revenues in line with our strategic targets.
For the full year 2018, our non mortgage volume sensitive solutions accounted for about 35% of our total revenues.
Over the first half of 2019 this figure rose to about 40% fueled by our changing business mix and expanded footprint in international spatial solutions plus international.
[noise] corelogics continuing expansion into new verticals plus the growth our international footprint has been enabled in part by the scale and market leadership of our core us mortgage operations.
Core mortgage continues to benefit from a trend favoring our integrated solutions as well as a greater focus by lenders and Servicers on building strategic relationships with fewer key supplier partners.
As we have grown our market leadership in core mortgage we have significantly improved our margin margin profile through automation and by leveraging common technology and back office infrastructure and data repositories.
As noted in our release yesterday, we delivered a very strong underlying margin performance during the second quarter.
Last December we announced that we were accelerating the transformation of our AMC operation.
Over the past six months, we made significant progress, including Rightsizing, our overall panel and back office operations.
Automating critical workflows and upping the utilization of our in house Appraiser panel.
As Jim will talk about later these actions resulted in a significant noncash noncash impairment charge as well as severance costs in the second quarter.
So far in 2019, the AMC transformation program as resulted in lower revenues attributable to certain customers. While at the same time boosting the current and future margin profile. This operation.
We expect these revenue and margin trends to continue over the balance of this year and into the first half of 2020.
As the pilot and rollout our new AMC offering we are beginning to see improved turn times and efficiencies through the adoption of our new workflow technology.
Theres more work to do here.
But so far the team has done an excellent job.
Once fully implemented our AMC transformation program is expected to result in improved underlying organic growth trends and higher profit margins in this business area.
As our long term investors know well, we have established track record of successfully driving productivity and our push towards first quartile levels of operational excellence.
We're on track to lower run rate costs by at least 20 million in 2019 by consolidating facilities.
Managing staffing costs automating certain activities and other operational improvements.
As we look forward, we are making strong progress towards building next generation capabilities with a particular focus on data quality structures and visualization as well as technology platforms and advanced automation techniques.
These capabilities extend our market leadership.
Allow us to tap into new growth opportunities across multiple verticals and set a foundation for margin expansion.
Our single largest spend over the first half of 2019 relates to the transition of our technology platforms to the GCP.
The GCP migration is expected to generate material savings beginning next year.
This is a complex program and we expect to continue to expense significant time and effort on the GCP migration over the balance of this year and into next year.
The GCP migration and other in flight cost and productivity actions plus the AMC transformation and closure of non core mortgage technology related units support our growth of achieving at least our goal of achieving at least 30% adjusted EBITDA margins. During during 2020 based on a stable U.S. mortgage market and after accounting for the transformation of AMC and the wind down of our legacy noncore mortgage technology units.
Before I close out today I'd like to make a few comments on recent us mortgage market trends.
After nine straight quarters of significant headwinds based on externally available reporting mortgage unit volumes to the U.S. rose modestly in the second quarter from prior year levels.
This improvement was largely driven by the recent drop in interest rates.
In the short run lower rates should support more positive mortgage volume trends and somewhat helped to offset.
Based.
Portability pressure lack of.
Which will likely hold home sales.
Patients blood levels.
Normally expect given the strength of our overall comp.
To sum it up.
We have a very strong start in the first half and we're excited about the many opportunities ahead of us to create value for our stakeholders.
I want to thank all of our employees clients and shareholders for their continued support.
As the Corelogic team executes against our vision of creating a scale innovative and data driven enterprise. It delivers unique insights and helps millions of people define volume protect their homes.
Thanks for joining us today, Jim will now discuss our financial results.
Thanks, Frank and good morning, everyone today Im going to discuss our second quarter financial results and provide updated third quarter and full year financial guidance.
As Frank mentioned Corelogic delivered a strong operating and financial performance in the second quarter.
Financial highlights included first improved business mix, reflecting a greater proportion of higher margin subscription technology in non us mortgage base revenues.
Second continued strong adjusted EBITDA margin of 29% driven by favorable business mix and productivity, which more than offset the increased investment spend that Frank discussed earlier.
Third the amendment of our credit facility to provide for increased financial flexibility and finally significant return of capital through the repurchase of 700000 common shares.
Second quarter revenues totaled $460 million down $29 million or 6% compared to 2018.
The decline in revenue was driven primarily by 2018 revenue recognition acceleration benefit of $23 million, which had no 2019 counterpart.
The wind down of non core mortgage in default technology, and its which decreased revenue by $5 million.
Unfavorable currency translation of $3 million.
On a segment basis.
Our revenues rose, 1% from 2018 levels to $184 million as growth in insurance and real estate solutions offset lower market volumes in Australia and currency translation.
You Ws revenues totaled $279 million down 10% from prior year.
The decline in new WMS revenue, primarily reflects the prior year at 23 million dollar revenue recognition item discussed earlier.
Lower credit volumes and the impact of the wind down of non core mortgage in default technology units.
Operating income from continuing operations totaled $15 million compared with $90 million in 2018.
Lower operating income was principally driven by non cash impairment charges of $48 million in severance charges of $6 million incurred in connection with the Companys AMC transformation.
The impact of the wind down of non core operations in the prior year revenue recognition benefit.
Increased spending on core platforms and productivity programs as well as product service information security capabilities was offset by productivity benefits.
Second quarter net loss from continuing operations totaled $6 million compared with net income of $59 million, reflecting lower operating income levels discussed previously.
Adjusted EPS totaled 82 cents per share.
Adjusted EBITDA totaled $134 million in the second quarter compared with $159 million in the same prior year period.
The decrease in adjusted EBITDA $25 million or 16% resulted primarily from two discrete items.
First the prior year revenue recognition benefit for $23 million and second the impact of the wind down of non core mortgage and default technology units for more than $2 million.
Adjusted EBITDA margin was 29%.
PRM segment, adjusted EBITDA totaled $53 million compared to $60 million in 2018, reflecting higher spending levels on core platforms and technology as well as the impact of lower market volumes in Australia and currency translation.
You Ws adjusted EBITDA was $89 million compared to $104 million in the prior year.
Excluding the impacts of the two discrete items mentioned previously second quarter 2019, Youd give us adjusted EBITDA and margin increased by approximately $10 million and 350 basis points, respectively compared to the prior year, reflecting favorable revenue mix and productivity gains.
Finally, we continue to generate significant levels of free cash flow.
For the 12 months ending June 32019, free cash flow totaled $207 million, a 45% conversion rate of last 12 months adjusted EBITDA.
As discussed previously over the last 12 months, we increased spending levels attributable to strategic initiatives, such as the GCP migration, which will generate future savings and margin expansion.
Adjusting for these amounts our free cash flow conversion rate would be approximately 55%.
Our relentless focus on productivity and data driven insights has resulted in a durable and cash generative business model during the quarter, we repurchased 700000 or approximately 1% of our common shares while continuing to reinvest back into the business.
Heading into the second half of 2019, we remain on track to achieve our full year target of repurchasing, 2% to 3% of our outstanding share count.
I will close my remarks today with the discussion on capital structure and financial guidance.
In terms of capital structure, we recently amended our senior secured credit facility, which extends the term of the arrangement to May 22004.
The amended credit facility will provide improved terms and enhanced financial flexibility going forward.
Our overall capital allocation priorities.
Remain to fund disciplined reinvestment return capital through the repurchase of our common shares pursue opportunistic M&A and to progressively reduce our debt levels in line with our long term leverage targets.
Regarding our financial guidance, we have revised our full year 2019 guidance as follows.
We're expecting revenues of $1.7 billion to $1.74 billion.
Adjusted EBITDA of $460 million to $490 million and adjusted EPS of $2.45 to $2.70 per share.
Our revised 2019 guidance ranges reflect the following updated estimates and assumptions.
First we estimate that foreign currency translation will reduce our full year reported revenues and adjusted EBITDA by $15 million and $6 million respectively.
Second we expect full year 2019 us mortgage loan origination unit volumes to be in line to modestly better than 2018 levels.
With continued softness in purchase volumes in a high degree of uncertainty around central Brent Central Bank actions in the forward path of interest rates. We believe our current view on us mortgage volumes is prudent.
With more positive trends emerge through the third quarter, we will consider updating our guidance ranges at that time.
It should be noted that our increased full year financial guidance implies a significant acceleration in second half adjusted EBITDA margin relative to our first half results.
With regard to the third quarter of 2019 based on normal seasonality patterns in our current view of market volumes, we expect revenue to be in the range of $440 million to $460 million.
In terms of adjusted EBITDA for the third quarter, we expect to be in the range of $130 million to $140 million.
The outlook for revenues and adjusted EBITDA I just outlined increase include currently anticipated impacts of our AMC transformation and the wind down of our non core mortgage in default technology units.
In conclusion, we achieved very solid operating and financial results in the second quarter and believe we are well positioned to continue to deliver strong financial results throughout the balance of 2019.
Thanks for your time today, I will now turn the call back over to the operator for today.
Thank you.
I'll begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up the handset before pressing the keys, which are your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
And we'll take our first question today from Darrin Peller with Wolfe research.
Okay.
Thanks, guys.
I just have two questions. The first I want to start off is on the mortgage side and then a follow up on some of the the growth here parts of your business traditionally around insurance and some others.
But first on the mortgage I understand you're applying some conservatism on the mortgage outlook.
You know given the revise and rates.
And your point that the guidance <unk>. There's also been obviously ongoing reinvestment that's been accounted for now in your numbers.
If we were to get another uptick in volumes or in your outlook on volumes and that flows through to the revenue guidance, maybe in third quarter based on where trends are on originations should that pass through to EBITDA at a higher incremental margin than what we've seen this this increase in guidance passing through.
Hey, Dan. Thanks next question.
Look first of all just let me deal with the second 0.1st which is the overall flow through.
And if you looking at the increase in the guidance.
On revenue versus the higher EBITDA, both are significantly increase but.
But if you look at a lot of that revenue related to the original guidance assumptions around the AMC.
And the AMC.
Transformation program. So I'd say that we were relateiq relatively conservative assuming that there would be a bigger burned down the revenue sooner.
And that from an operational perspective is taking a bit longer.
And so that that's really the biggest assumptions you know that revenue largely comes at no EBITDA.
So that's really the reason why you don't you're not seeing that flow through a strong absolutely at the revenue if the if the a mortgage volumes any volume uptick where is that it's going to be highly accretive to EBITDA.
Okay, and so we should still assume something like.
I call it a 40% pass through or something maybe even I mean can you just give us some color on the actual you know when we think about unit numbers being 5% up or down on unit or on an origination numbers can you just remind us on your sensitivity thoughts on around revenue and EBITDA.
Yeah, So I would say that.
The incremental incremental margins should be well north of 40% 40, 50% easily.
Maybe a little bit higher depending on the nature of where the volumes come in but I think that's a that's a correction over 50%.
A little bit higher.
So uh huh.
I think that and I think on the sensitivity I think you just have to go back to our original sensitivity, which has worked for many many years, which is kind of that 12 to 15 million of EBITDA and 25 million revenue.
You know some of the other sensitivities had been floating around had been more related to adding in the AMC piece of it and as you know with the with the.
The volatility in the transformation of that revenue stream I just think it's a it's not easy to.
To apply a broad sensitivity around that number okay.
Okay, all right. Thanks.
Let me just follow up if you don't mind and then on the Nonmortgage typically the nonmortgage sensitive businesses, whether its insurance or international or its geo spatial.
Alright, and just data analytics in the U.S. I'd be curious to hear what do you think can be done to really help provide some lift to the opportunity and growth of that when we you know again, we go back thinking. This is an area combined collection of assets that should be able to grow in the mid to high single digits.
Is there are there maneuvers are moves you can make that can help you know expedite that process and get that back up again.
Yeah look I think by far and away the biggest challenge this year has been Australia.
Where the market's down after.
I think it's 25 or 20 straight years of growth. So that's a little hard for us to change honestly.
We are such a big market share there.
But I think the the volumes were down about 15% so.
So you're swinging additional growth market to a compressing market at least I'd say, it's in the short run honestly.
That's a great business makes a lot of money. So I think that that should turn around we have actually a lot of growth and a great result in the UK.
Our European business is growing on a smaller base, obviously, so I just think there's one issue.
Internationally at the moment, which is really the market.
And that we want to see that Toronto. In addition, frankly, you know FX is a.
Has also been a challenge over there.
So I'd say from an international perspective, I think when the market returns and Australia, I think you'll see us pop back up to more traditional upper single digit growth on the insurance side. You know I think we have you know we brought instability. We are integrating it I think we're going in the market. We're really excited about the opportunity there it's going to take a little bit of time.
That's not an industry that moves you know super quick.
In terms of moving business around but.
I I'm excited about the prospects there.
I think it seems and they should have a willing you offering together and getting out in the market.
So.
That gives me a lot of hope that the that the you know, we'll see we'll see growth over time in that business.
Traditionally as you know we've kind of it's been.
Kind of a low to mid single digit growth rate in that business again highly profitable.
So the wholesome ability deal was around trying to accelerate off of that base.
Okay.
Alright, Thanks Mark.
Next we'll hear from Bose George with KBW.
Hey, guys, it's Tommy on for Bose.
When you think about the low and high end of the guidance range is how much of that variability is dependent on the the more so the macro mortgage market versus more company specific factors, whether it be to the GCP migration or the AMC transformation et cetera.
So the revenue as we talked about earlier economy the revenue.
You know I think the biggest assumption right now I mean, we've obviously lifted or assault assumed.
Mortgage volume outlook in the U.S.
So that's a factor.
And again kind of in line with the the the numbers I talked about with Darrin on the sense overall sensitivity.
So that's one factor, but then the other one is I mentioned is the GCP or is the AMC transformation.
And you know we're just we're looking that operationally, we're obviously doing a lot of restructuring on the operations shutting down certain operations expanding certain other ones. So that you know it's just our best view at the moment, which is a little slower than the burned down we assume so that's really one of the reasons why the guide went up a little bit more revenue that didnt profitability side of it.
Okay that makes sense.
And then you are 30% adjusted EBITDA margin in 2020, and given that the normalized mortgage market does that assume that youve reached 50% non mortgage revenues by then and then do you with your current mix of business now assuming you know after we get past the the transformation do you have the businesses there to get you to 50% through some organic growth or is there more that you need to acquire.
So we're moving towards a 50 50.
But even with that I think it's important to recognize that our mortgage sensitivity that figure of kinda.
60% of our business being sensitive to mortgage at U.S. mortgage volumes, even within that we have certain I'd say not you know, it's not daily sensitive theirs.
Trending over time and a good example of that is the areas our tax business, where you got a model revenue stream. So it's not you know that that even though it's a little bit or different but I'd say that you know the 30% does not depend on any specific mix.
Yeah, that's with the current configuration gradually trending towards 50%. So that's a line of sight currently.
[noise].
Okay. Thanks.
Okay.
Glenn Greene with Oppenheimer has our next question.
Thanks, Good morning, Frank.
So I guess a couple of questions I wanted to parse sort of go back to that revenue growth versus EBITDA guide and it sounds like part of its slower wind down.
I'm on the AMC and part of its market. So could you sort of parse out to help us understand that and also I want to go back to sort of you were originally sort of thinking 70 to 100 million of AMC software and wind downs and in 19 and sounds like the timing of that's pushed out a little bit and drags into the first half at 20.
Can you kind of help us think through the timing of that how much has been absorbed is going to be absorbed and 19 versus 20, and then also you know back to reconciling the revenue guide change.
Yeah, I would say that.
What's changed because the.
But what's rolling into 2020 has always been the case.
Glenn because as you know like that for example, the the legacy business wind up you know those are contractual run run off. So you know that it is what it is time wise and that's always been a.
Several year fall in the AMC piece obviously.
The NC piece is more of an operational so we're working with the clients that don't want.
To subscribe to the transformed service and they would you know so they need to be transition. So that's really where a lot of the effort and so it's it's us and the clients working together so the timing is a little bit.
Outside of our control, but when we made the original guide you know we assumed a more aggressive run down and we're seeing a lot of that again is just the you know the working collaboratively to get the right.
The right run down Synar operationally.
And that revenue burned down that we assumed originally.
In the guide you know Theres very little EBITDA attributable to that.
That revenue. So that's why you're seeing you know almost all of the upswing in the EBITDA is related to other factors in the AMC, but a lot of the revenue is related to the assumption on AMC.
I shouldn't say it should be getting a meaningful since we're beginning a meaningful lift in the revenue in the back half given the you know you sort of took the mortgage market assumption up at least five points.
And the and conservative way.
A I would say.
There's other factors obviously than just the market you know.
Yeah, we talked about the GCP investment for example, we talked about the cost to transform AMC. So there's other factors I you know I think at the end of the day, you're talking about a couple million here or there. So it's a it's kind of in the round.
Plus the FX you know the international piece that Jim talked about in the in the currency and that's a little bit worse than we thought so there's there's a number of other factors, but they're all small.
There's nothing meaningful there.
Okay, I think the market the market conversion.
Yeah and by the way I think in terms of your characterization of the market you know that the conservative I don't think anybody really knows I mean everybody's brought up their forecast very relatively very recently, but even if you look at a unit perspective. The ranges are still somewhere between you know was zero to 1% and 4% to 5%. So there's still a pretty big range out there.
We'll see what the fed does.
You know 50 basis points 25, staggered one time, there's a lot of factors that go into it plus you know as I did mentioned in my remarks, you know you do have persistent headwinds out there on the purchase money side.
You know with availability in that kind of stuff housing stock.
So I think the mortgage market I think as Jim said it look if it's better will will lift our guide in the third quarter.
We don't normally like to do quarterly lifts, but if there's a.
Because that should be you know if it happens it should be a decent amount of upside so we'll see.
You know kind of on the fly as you go.
Okay and then just one number question for Jim If you could just sort of give us the organic revenue growth in the quarter sort of adjusted for macro factors.
Yeah. The the bridge on the revenue line I was.
Obviously were down 6%, a big chunk of that about 5% was the.
The Rev Rec item from the prior year and then the international FX and the wind that activity was about minus 3% and then you had plus two on the M&A side. So thats, how you get to that minus six.
And so organic growth with market.
Was essentially flat and with market and depending on which data point and looking at if it's flat too.
Up a point or two or whatever.
We're seeing is the market gave us about one to two points and then.
The traditional drivers were down about one or two that offset each other.
Got it okay. Thank you.
Great.
Next we'll hear from Chris Gamaitoni with Compass point.
Hi, Good morning, everyone could you update us on the.
Revenue contribution from Australia with NPR area.
We don't break that out it's included in the property insights.
It's a good chunk of revenue, but we don't break that out separately.
Okay.
And.
On the AMC transformation.
Process, having a little bit slower is that purely operational or is it somewhat reflective of.
More refinance volume came in as expected so their capacity.
Plans.
Our different than they originally expected.
Yeah, I'd say that Chris is ranked hey, I I'd say that it's it is there is a little bit actually certainly the second quarter, there was a little bit more market.
Upswing that we we had thought across our our client base.
So that that was a little bit again part of this.
Assumption change, but in the main you know what this is is you literally.
We're highlighting and then were damaging the new solution working with each client around.
Pricing and contracting a lot kind of stuff. So it's a case by case basis in every client.
You know has a different cadence in terms of what they can absorb themselves because they get their own business around so, but and and what makes US important is obviously, it's integral to revenue generation from the clients perspective. It's also an area that is closely view from the regulatory side. So you had to be super careful to make sure that transitions handle well, if you're going to move appraisal volume from one company to another so we just want to make sure that our clients are.
Well protected.
And that and that if we do transition volume to another supplier we do that.
Very very carefully and very well so it's just a it's a month at a time.
Factors in the EBITDA guide the GCP investment cost to transform the AMC.
Are are you accelerating some of those costs beyond what you had originally anticipated.
Into this year that would hit the EBITDA line item just trying to understand the kind of in the nuances you're pointing out.
Yeah. So so for example, just so some of the.
You know the investments are.
Not in the adjusted EBITDA metric.
Because they were called out originally and you know we we have a we have a bucket for those types of things that extraordinary items.
And then some are so so there's a there's a combination of those types of things.
And then you have capitalization an expense rules et cetera. So it. It's there is a mix of factors there but in general.
And by the way I'm, just Mark we talk about investment levels and spending but reality is for data analytics company. You are capex about a third of it relates to capitalize data, which is the same every year. So if you take that out we spent about 4% to 5% of our.
Revenue on Capex, which you know.
It's kind of on the low end.
So we're not talking about Super Duper high levels of Capex spending as it relates to other peer data and analytics driven companies technology driven company. So it's kind of a reasonable band, but in terms of things like the GCP honestly, it's a fit as I said, it's a very complex program.
But we're moving to state of the art public cloud, which is going to be part of our 30% margin.
Number next year. So it's a lot more efficient you know the cyber aspects of it are a lot better.
Backup and recovery lot better so that's where we're focused a lot on and frankly, that's where we've spent a lot more time on.
And tried to pull forward a bit some of that spending.
Because we want to get too quickly as we can.
Thank you so much.
Our next question comes from Bill Warmington with Wells Fargo.
Good morning, everyone.
And they'll tell Uh huh.
And another question on the on the flow through calculation.
I I realize that the EBITDA guidance has been taken up.
$10 million.
The but that's a net figure and I'm just trying to understand the.
The actual.
Gross figure if you will and how much of that what you're netting against that gross figure in terms of accelerated investments in the second half to get you to the 10.
Yeah, obviously, bill I think when you're using figures like and you're you're isolating the I don't know if you're using the top end of the range the midpoint or whatever but obviously, we're providing a range. So within that range people in trouble at a midpoint, but you know clearly we provided a range. So I think within that range.
It's not as precise as you're talking about I would say that we've reflected.
All of the market picked up.
As it relates to the second quarter on through the year.
So say that yeah that's.
The 10, if you want to say that just a rough numbers 10 12.
And that's generous because as you know 10 to 12 to EUR 12 to 15 as a full year number. So if you say 10 to 12 for the third the three quarters. That's all reflected in the upswing in our in our forecast for the year.
And then also you know as I said the AMC revenue.
Largely is margin less.
Because a lot of what we're getting we're moving out of frankly speaking is hey is Ah why we're making some of this transition we're moving to a more premium higher margin service is the is the goal which has a much better turnaround time, so that requires people to value that some people doing some people.
Prefer the more traditional route. So so we're just working through that part of it. So there's very little margin contribution there and as I said earlier, you know you have to put a stake in the ground and our guidance for this year that we're talking about originally was was really built in fourth quarter last year. It was our view of this year. So obviously were seven eight months into it and have a better view of what's happening this year. So that's oh.
That was just a a you know we took a an educated guess at how that would play out operationally and it's turned out to be a bit of a bit slower. What's you don't not surprising it's not it's not really a problem per se.
And for my follow up question just wanted to ask.
How how our share shifts in the mortgage market among your largest clients impacting your volumes are they helping you are they hurting is it neutral.
I would say that in the.
You know in the main I'm, excluding the AMC, because obviously, we have two clients that make up.
A big chunk of that so it's not a market representative revenue stream I'd say in the balance of the company I'd say broadly it's been either either you know a zero sum game or slightly positive.
But yeah, we service so many lenders that you know and service all the all the big lenders and Servicers. So we kind of get the volumes either way.
So I think I think from that standpoint, it's kind of a you know kind of a negligible.
Change I think in the AMC, though it just obviously a.
You know I think that we're seeing some share gains in those bigger lenders.
And I think it depends on the nature, where the volumes are coming in the market, but I think that's been a.
Actually added some revenue that we.
We didn't think we'd have that was part of the issue on the.
You know on the guide you know we didn't think were going to grow some of those clients that we end up rolling in the second quarter.
Got it well thank you very much.
Well now hear from Kevin Kids, Merrick with Zelman and associates.
Hey, guys can you talk about momentum with any new or potentially new clients on the transformed appraisal process like getting them you know updated number on new appraisal customers or their revenue contribution.
Kevin I think you know, we certainly we continue to take new.
Clients on in terms of contracting as you may recall from past past sessions. You know this is a you know you win the contract and it takes up a fair amount of time to operationalize more on the client side than the north side of it and that's more infrastructure and systems and that kind of stuff and Q sees and whatnot. So yeah I think those new clients actually is pretty good I think everybody everybody. Even some of the clients that are not willing to pay our.
Excited about the prospect of <unk>.
The new technology.
Yeah, we actually have real pilots with some of the clients. So I think those are Ah everybody's excited about it I think its a.
Yeah, what's it at scale, we'll see what happens, but nobody said look it's not an exciting opportunity I think it just again a more localized perspective is do they have the operations that.
Can work with it and they really value though.
You know the differential and I think that's different.
But we're getting a lot of clients signing up.
And Ah I think that's very encouraging.
Okay, you any order of magnitude sense of the number of claims I think you mentioned 10 clients at some point in the past or balances and I'm like double that.
Oh, no we haven't any more than 10, yeah. We have we have we have quite a few lenders signed up.
I would vary degrees of volume.
Attached to those so I'd say that we have.
So beyond the two major lenders we have we have.
Probably two dozen.
Contractor.
So it's pretty significant.
Are these generally top 100, <unk> lenders or are you de use going maybe smaller in terms of market share.
Summer top hundred I mean, it's a mix, but I think a lot of them are are yeah, I feel no fair amount on top on that.
Okay, and then one more I guess on the insurance you know if you look sequentially in insurance revenues increased only 7% usually you guys getting like a 10% to 11% lifts are heading from the first to second quarter.
Any reason for that for the weakness there versus the first quarter.
You know it maybe did stability maybe can contribute differently than people would have thought in the second quarter or is there was was there a drop off from the rest of the business.
Yeah. The one piece was that there was a little bit a weather in last year. So that was the main delta.
On the year over year.
When you look at the insurance line item, we had growth.
Primarily from from a suitability.
In the in the legacy business was essentially flattish.
Okay and the weather.
From last year, a in the a and the second quarter. So.
Your turn is then what you already have a little bit a pickup was it wasn't.
It wasn't like a couple of years ago, but yeah, just little pickups here and there.
Okay, not CJ <unk>.
All right. Thanks for taking my questions.
Next we'll hear from Andrew Jeffrey with Suntrust.
Hey, good morning, guys. Thanks for taking the question I really just have one for you.
Brown your your property tax business, if I normalize for the $23 million last year.
It looks like that business might have been a little soft I wonder if you could talk just a little bit about sort of what the competitive environment is like.
Whether whether pricing has come into play or.
Given the sort of relatively more recurring nature of that business. So I might have expected to see some some growth this quarter.
Yes, so enter thanks, yeah. So look I think I think part of obviously as you know is that we.
We actually have a very strong pipeline.
In that business and.
You're going to see a I think that flow through in the next couple of quarters.
You know you onboard the loans a lot them or life of loan. So you got an amortization of the revenue stream. So it's a little more muted in that business.
I you know we had I'd say there was a.
There could have been some.
Shifting of a volume between Servicers.
But I think that the big picture and that business is that.
You know I think there is a tremendous amount in the pipeline and you're going to see it you know obviously when you win stuff there you've got to.
Onboarded around the tax cycles themselves. So again, it's when it gets onboarded and when it flows through is a little bit more muted than like an instantaneous thing at a flood third or something like that so.
No I'd say that business is not at all I think it's a higher on a very solid.
And that's where we expect one of the businesses that we are putting a lot of money into.
New.
New new services, and Digitization, and I think you're going to see.
Continued improvement in the profitability in that business.
As well.
So just I guess to put a finer point on it from a timing standpoint should we expect that business to accelerate a little bit in the back half or are we thinking about more 2020 from a timing standpoint.
No I think you should see you should see an acceleration.
This year.
Okay. Thank you very much.
What I hear from Ashish Sabadra with Deutsche Bank.
Hi, Thanks for taking my question.
My question on the IR.
Margins, so you've talked about the investments and volumes being on the EBIT growth there.
And given.
The investments May continue for some time, how should we think about the inflection day like at what point do we start to see the growth in the theater PRM business.
Yeah, what we saw in the PRM in the second quarter was continued investment impacting the margin. There were other other couple of other components that you had stronger FX in the quarter and then also Australian market volumes were down about 15%, which is which was weaker than originally expected.
I think on the last call. We articulate was around 10%. So you did see more softening there so that did hamper the margins there.
And that's higher margin revenue.
Okay. That's helpful. Good news in that.
The expectation is that market will improve exiting this year.
Due to.
Credit standards loosening up a little bit and then also they've cut rates. There recently, so exiting 2019, we should have an improved market there.
That's helpful.
And maybe just on the corporate expense line that was slightly higher on a year on year basis any call out there or how should we think about that for the full year basis anything in particular that it gets to be a little lumpy with the spend levels in timing so nothing nothing unusual.
It's a model out consistently.
Thanks, that's helpful.
Jeff Mueller with Baird has our next question.
Yeah. Thanks, just come I understand kind of the the timing and the progress on the GCP and platform investments like how much is left to go and when it's done what does the business look like like do you go back to 55% free cash flow conversion, how does it impact adjusted EBITDA margins, how does it impact.
Organic innovation.
Yeah, So I think.
Jeff the the question on the cash flow rate. He is yes, you know it's a it's a short term.
I think the durability of the cash flow is been consistent over many many many years I don't see that changing so.
I think in terms of the progress. It is I would just say that it is a complex program.
Basically we're converting our platforms, it's not it's not we're changing the platform as we are converting them to a public cloud.
Platform, which requires.
Certain re platforming and we coating in that kind of stuff, but but by and large it's taking the existing platforms and upgrading them onto a more efficient Uh huh.
System and with that comes some benefits around cyber not not insignificant frankly speaking but.
So I think all of that is is underway you know most of that spending.
It's going to be.
This year and next year, but the vast majority of this year.
Hopefully.
And so we'll see that will clear that help this year I'm just trying to get as much of that done as quickly as we can.
Because then we can enjoy the benefits I'd say initially the big benefit will be in operating performance and cost efficiency. That's the that's the expectation.
It is part of our as I mentioned earlier, our 30%.
Goal.
Yeah, we are going to save a significant amount of run costs based on the estimates and the initial numbers that we're seeing so I think it's a very positive move.
Some of the other investments we talk about you know I would just say that step back.
Theres collectively a number of them, but they're not ended up themselves you know gigantic programs, it's not like the data center migration of a couple of years ago.
They are more enabling the infrastructure I'd say the biggest other investment area that we're looking at which is very exciting is around digital digital.
Property record and the visualization of the data the data property.
And that is where.
You will see more impact on the P.I.R.M. side.
Where I think that will access more verticals.
And allow us to get a more efficient and distribution of the of the other property records and the data. So I think that that that's where again you see a little bit of the margin pressure in the short run.
NP IRS them a lot of that is related to the fact that a lot of these platform to smart data platform fundamentally is drunk driving their revenue. So that's what that's what you're seeing there and I think that that's very exciting.
I think the revenue benefit will unfold over a bit longer time horizon.
But but this year and next year, we should see significant improvement you may recall, we bought a company called home visit last year, which takes a visual imagery of the properties.
Great opportunities for take that across our footprint nationally.
We're very excited about how that also plays into the data so those investments really.
Should result in both efficiency and revenue gains.
Okay, and then maybe just continue on the line of thought on the overall organic growth.
Right now, it's tough markets tough, but just other than those I guess to that you just called out one or the other.
New products that are selling well or where you see the most opportunity. The next next few years, if and when the market firms up.
Yeah look I think I think that there is we're doing a lot.
Credit it's been a pinch point for us as you know.
That's one of the things and that is.
SUPRESS that organic growth rate a little bit.
And so that that area is just a tough one because as you can see from some of our other peer groups.
Yeah, we actually outperformed on the credit side of a lot of other peers in the space because they are just is compression around.
Some of these lenders and we've had a lot of price increases over the time and there's there's there's just a natural kind of counter reaction to that so we're working through that but I think if you look at.
What we're doing in that area around borrower verification or more broad.
Kind of video we be away solution.
That should I think produced a higher value higher margin and get some adoption over the next couple of years. So that's one example of another area.
That is not only growth, but also a little bit of a transformative value play for us.
So that's a good example of another area I'd say, though when I talked in my prepared remarks.
Fundamentally we are seeing success in the integration of our existing solutions in a more seamless.
Kinda offerings.
Which is closing the white space.
That we may have ins with some clients.
So that's good traction there I think as well.
So there's a number of those in that one that's an area, where we it's more commercial and contracting and servicing versus developing a new a new product from scratch.
So I think again, that's another area that is it is a good opportunity for us.
Yeah, we had a tough comp in the first half of this year versus the first half of last year as we talked about we had a super tough comp I think as you get into the back half of this year.
It kind of inverse is and we have a last back half of last year was was not great for the market. So I think we'll see a better market. This year in the U.S. in particular, when we saw last year. So those comps are going to flip on us in the second half hopefully and I think that's a good thing for organic growth trend coming out of this year.
Okay. Thank you Frank.
Stephen Sheldon with William Blair has our next question.
Hi, Thanks, it seemed like a trend in insurance and spatial business continue to be a little choppy, excluding the boost from stability and some of that sounds like it's weather, but was just curious how results there over the last few quarters have come in.
Relative to your expectations as you know has there been any distraction from the integration between your existing solutions and some ability and how quickly could that business get to the low to mid single digit potential growth that you've talked about.
You know I think that if you look at the underwriting platform business I think it's a.
You know, it's performing well it hasn't it hasn't been a super duper double digit grower.
But it's certainly been a solid.
Kind of price and cut to increase low to mid single digit it had a little bit of a flurry of activity a couple of years ago, where we got up into the mid single digits, but it wants to be in the mid to mid to low single digits.
I think without substantial product changes I think the addition stability, which by the way. We're very pleased with I think the symbolic teams a terrific team. It's a terrific platform and so the idea really Steven is to get those two businesses seamlessly connected so that where are we are frankly more competitive in the in the North American marketplace.
And profit.
I think we present, a very credible alternative to some of our competition.
That's going to take time.
To try to secure some market share in that area, but I think that that's the goal there.
And I think we have the tools to get there or is it a distraction you know these things are always a bit of a distraction.
Has that materially hurt the organic growth you know.
I don't think Weve taken the eye off the ball that's for sure I think the team is really a done a good job. It's just going to take a bit of time, but again I think be a bit judicious ability has been a a.
A great add for the insurance vertical it gives us a complete offering it gives us a state of the art claims processing solution. So.
I'm optimistic as we get into next year.
The growth will likely accelerate but we do need to.
We do need to get adoption by some of the client base in North America.
To make that a reality.
Okay. That's helpful.
And then you know it's good to hear that you're you're continuing to improve the utilization of the internal staff appraisers.
Can you provide any detail on the on the overall utilization rate for staff appraisers, and maybe how that's trended over the last year or so and Additionally, how do you plan to manage internal staff versus using third party providers is the plan to to give them. The staff appraisers as much work as they can reasonably handle and then using third party resources for the overflows.
It just any detail there.
Yeah. So you know.
The utilization when I say utilization is it's in a broader sense, if you're thinking about you know a traditional consulting business, where you're looking at you know, 65% or so that we look at that but what I would <unk> the way I'm using it in the context of the call. This morning is around.
The mix of external and internal appraisal appraisers.
And how we utilize those two groups.
We're trying to drive more volume more consistently in an automated way around our our staff panel.
Which we have more control of.
And we think we can get automation more quickly so I think that that's a.
That's what I'm kind of talking about there.
And you know I think it is then when it gets into geography to be quite honest with you where are you utilize people obviously you know in.
More rural lower volume States, you tend to use third parties more.
So some of that will depend on the ultimate mix of where the revenue is coming from.
But the basic model is the same which is really using the automated workflow tools.
That we have adopted from really the tech platform.
What you bought a couple of years ago, which is Ah you know really could materially change the throughput.
And the efficiency of the appraisal process and that's what we're piloting right now so if that's the case then I think we'll we'll drive will be able to drive consistently more profitable volume across our staff Appraisers, then use the supplement your supplement with a third parties.
Great. Thanks.
[noise] John Campbell with Stephens, Inc has our next question.
Hi, Thanks, most of my questions have been answered, but Frank I'm kind of higher level. One for you I'm just curious about your thoughts on the GRC reform efforts and then if there was privatization how would that impact you guys I'm guessing. It's a it's a net positive or long haul, but I just wanted to get your take.
Oh Boy [laughter] Cat, John I think it's a it's early days I I think yeah. We we have ER we are monitoring.
You know the M.B.A. is providing a lot of input.
You know Mark Calabria as new.
You probably know is his his kind of thought pattern pretty well.
I think there's there's I think clearly people think there's a better chance for GST reform.
I think we play well either way you know current versus new but you know I think I think clearly there's probably room for some.
Progress on the on the Juicy reform front, but I don't know I don't know, how that's going to play out and when my guess is inevitably it will take longer.
Than currently thought but us clearly the there was a kind of a time I mean, a couple of months back where people thought is the train Mike Ashley Lee the station I'm not sure. This is the same.
Enthusiasm right. This second but and I think I think there's been some recent reports about delayed.
So but look at odd I, it's certainly not going to hurt us.
Got it I tend to agree with you.
And then lastly, I just want to check them a D.O.J. probe in the I guess the CIA do you guys received I don't think you guys are part of that program, but it's probably just matrix data, but anything you can discuss there any kind of update.
Not really I mean, we're not a target of the probe so so that.
There's I don't really have a concern on that at the moment.
And so for example, operating obviously like we need to.
Could you maybe just shed some light on what they're looking at maybe.
I can't really obviously [laughter] no.
Okay fair enough thanks, guys.
James Lu with Piper Jaffrey has our next question.
Yes, thanks for taking the question just on the per segment and specifically on property insights I'm, just trying to get a sense for the components of the revenue in there and you know I know there are a lot of different types of clients across different industry verticals. They use that property data.
And I'm, just trying to get a sense for where what client buckets are growing in their usage of the property data were where the revenue is growing and where it's not just trying to get a sense for how that is trending along by the customer types.
Yeah in terms of.
Property insights.
That has not only our domestic business, but also the international business. So when you're looking at the revenue streams in that revenue supplement that's where we have all the FX and the Australia market volumes impacting it on a year over year basis.
And in terms of new new categories, it's beyond our traditional banking mortgage and so forth. We are finding new use cases in other market verticals.
Energy telco retail other other types of use cases for the data.
Got it and then just a high level question.
Strategically and thinking about the collection of businesses in data assets.
That you have.
How are you thinking about things right now and we do things need to be.
Trimmed.
Does anything need to be added through M&A.
Just kind of some high level thoughts on the on what you're thinking there.
Yeah look I don't think we have you know we don't we don't have separable businesses we have.
Data repository.
Common IP stack and we have product lines.
Jason So I think it and really the model as you know most of the product lives.
Collect data, we collect data on behalf of those and utilize them across the business line. So it's it's pretty integrated.
You know I think that.
You know, we have a really profitable business in that area.
That's been an area honestly that I think is a has held its own despite.
Nine quarters, a tremendous pressure I mean, if you look at the.
You know the lender side of the service or side, you know insurance, but everybody's trying to.
Cut costs, so I think the growth the growth that is.
It's not easy to come by you know we've done some innovation with somebody offerings.
Yeah, we have a very exciting advanced in the JV am area that we're rolling out. So I think there are those kinds of things will help us to grow that business there.
You know I think we don't have anything that.
Fit.
So you know I don't think we're looking to dispose of a lot of stuff I think we're on the hunt for data assets obviously.
But we have to be smart about the ones that we add I think if you look at.
Home visit for example, that's a very smart.
Deal, where we can take a technology.
The work flow and use our existing backbone to expand that across.
The nation, so that could be.
Many acts times, the current size by just taking the capabilities and.
Yes, synergizing out across the platform, that's really what we're kind of looking for at the moment most of the multiples in the M&A world or as you know are extremely high.
And I think that's a it's not we don't want to chase stuff.
That has had no growth, but it is projected to have super growth because in the pay a high multiple for it I think those areas. We're not looking at we're looking at synergistic data capabilities.
And I think we're finding those albeit smaller the last couple of years.
All right. Thank you very much.
Next we'll hear from Geoffrey Dunn with Dowling and partners.
Thanks, Good morning.
Good morning, Frank.
To better understand how the Perm margin has transitioned this year and could transition next year.
Can you frame the incremental investment spend in some form or another.
How this year's run rate compares to last year or how much could peel off in 20, just so we can get a better idea of the.
The lift that you can get next year.
Well I think Jeff if you look at the <unk> I mean, just take the lift to question. So obviously, we're going from the margins that are implicit in our guidance. This year to 30 target margin next year, So thats us significant lift there from a profitability perspective.
That's being underpinned as I mentioned, a lot of our investments are around foundational items like the platform efficiency, the cloud and that kind of stuff. So.
So I think those are.
Those are I think just.
They're not rocket science, I mean that every company look at the public cloud.
So we're just trying to drive there quickly.
I'd say on incremental spend this year you know.
If you look at tradition as I mentioned, we don't we spend 5% of revenue.
I'd say most company if you look a lot of companies companies I've been out before we spent six 7% pretty consistently so we're not a super high even now.
I'd say that our.
Spending if I had to say I'd say, it's probably this year is going to be off kind of mid single digits.
Issue in terms of the totality of the spend as I mentioned you. If you look at our Capex line got to take about a third of that off for capitalized data. So.
So it is but it's not it's not dramatic per se.
Well, we do have a big lift Jeff I mean, if you look at next year to get to 30 margin. I mean were were 29% this quarter, which is pretty good.
They've got the AMC you know once CMC thing plays through you can have a different mix shift there with profitability that's going impact profitability. So so all those irons in the fire everything is kind of the.
The the railroad.
He said on the trains run down the tracks there so were pushing towards the 30% and that should be.
You know a substantial profitability increase.
Yeah, I understand that I guess, it's it's challenging because.
On the U.W.S. side, we can look at incremental margins of the market's model, but a lot of this story is about that lift in the perm side.
So to get any kind of better.
Framework for understanding that would be helpful.
Yeah, I wouldn't say a lot of the lift is dependent on the perm side honestly, because I think if you look at the W. S side.
You know I mentioned the automation in the in the tax business for example, you're going to see lift there as well continued lift there as well.
Some of those businesses are highly automated.
Already.
So I think from that perspective, we're not riding on you know more margin lift in from per Se, but certainly if you look at.
From I think right now this quarter and it looks you know.
Because if you're only talking about 56 million of EBITDA, you know three or 4 million of percentage wise looks bigger than.
You know the dollar implications of it are so I think but you're going to see that investment spend should trend down as it relates to put on as we get into next year. So you will see a benefit there for sure.
But I think if you look at the overall margin left the company, it's gonna be distributed across the segments and corporate et cetera. So it's not one you know segment is required.
Okay. Thanks.
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