CoreLogic, Inc.
Q1 2020 Earnings Call Transcript

Published: 3 May 2020

[Operator:]

Thank you for standing by and welcome to the CoreLogic’s First Quarter 2020 Earnings Call. [Operator Instructions] Please note, this event is being recorded.I would now like to turn the conference over to Mr. Dan Smith, Investor Relations. Please go ahead.

[Dan Smith:]

Thank you and good afternoon. Welcome to our investor presentation and conference call where we present our financial results for the first quarter 2020. Speaking today will be CoreLogic’s President and CEO, Frank Martell and CFO, Jim Balas.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 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 as well as the impacts of the COVID-19 pandemic.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 SEC filings, including the most recent annual report on Form 10-K and the subsequent 10-Qs.Our estimates of the impacts of the COVID-19 pandemic as well as 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 first quarter financial results to prior periods should be understood on a year-over-year basis that is in reference to the first quarter of 2019.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.

[Frank Martell:]

Thank you, Dan and good afternoon, everyone. Welcome to CoreLogic’s first quarter earnings call. Today, I will discuss first quarter operating and financial highlights, our initial COVID-19 response and key areas of focus for the balance of the year. Jim will summarize our first quarter financial results and address our second quarter and full year financial guidance. We’ll finish up the call today with a Q&A session.CoreLogic delivered an outstanding operating and financial performance in the first quarter. We reported strong top line growth driven by acceleration in our core mortgage, insurance and spatial and platform-related businesses. Margins were up significantly driven by favorable revenue mix, operating leverage and ongoing cost productivity programs. During the first quarter, our core mortgage operations surpassed underlying industry trends.Regarding the COVID-19 pandemic, CoreLogic is laser focused on protecting our employees and fulfilling our client obligations. We aggressively deployed our business continuity plans during March. This included activating multi-disciplined crisis management teams, augmented facility management protocols and finally, making required adjustments in technology and data operations and securing our supply chain, approximately 95% of our workforce is now deployed in home-based work environments.We also designated as an essential infrastructure workforce due to our important role supporting many critical workflows that underpin housing finance and the housing economy. In the case where our employees are required to work from one of our facilities, we have implemented social distancing, aggressive cleaning and sanitizing and other actions to make our facilities as safe as possible. Importantly, our employees have done a great job delivering outstanding quality and uninterrupted service to our clients.CoreLogic, with its scale and financial strength, durable, high-quality operations and unique data driven solutions remains a strong and reliable strategic partner to countless real estate professionals, financial institutions, insurance carriers, government agencies and other housing market participants. While the full extent of COVID-related impacts on the global economy remains to be seen, the CoreLogic team is navigating the changing environment with organizational agility, determination and optimism. We are well prepared to support existing and emerging client needs.By almost every measure, we had a strong start to 2020 both operationally and financially. From a financial perspective, CoreLogic achieved its best ever first quarter results in 2020. Total company revenues were up 12% in the quarter normalizing for the AMC transformation and wind down of non-core technology units, which were largely completed over the course of the first three months of last year.Our core mortgage operations continued to gain scale and build market leadership through the provision of bundled solution packages that leverage our efficient and integrated technology and back office infrastructure and best in the industry data repositories. In addition to capitalizing on strong market volumes over the past several quarters, we’ve been gaining significant numbers of new clients seeking strategic, innovative and reliable partners for their critical underwriting processes.We have gained new customers across our core mortgage solutions including flood, tax servicing, mortgage credit and collateral valuations as well as for our reimagined AMC service. Regarding our tax servicing and AMC solutions, share gains included several mega wins. I expect the share gains I just discussed to significantly boost second half revenues. In terms of overall US mortgage market volumes, considering externally available forecasts our year-to-date internal volumes as well as a high level of outstanding mortgages with a clear economic incentive to refinance, we believe that refinancing activity will likely remain at elevated levels through at least the next several quarters.Higher refinancing activity should provide an important cushion for a likely decline in purchase transactions. We expect purchase activity to soften considerably in the second and third quarters as the economic fallout from the COVID-19 pandemic becomes more pronounced. In light of the pandemic, it’s too early to forecast full year 2020 mortgage volumes with a high degree of certainty. But based on current indicators and our view of likely trends, we believe that mortgage unit volumes will be largely in line with prior year levels.Our non-mortgage verticals are off to a solid start in the first quarter with local currency international revenues and insurance and spatial solutions growing by more than 3% during the quarter. We also saw growth in our analytics and modeling solutions. We expect recent share gains and in-flight investments in new innovative capabilities in such areas as insurance and spatial platforms, property marketing solutions, visual imagery and valuation models to boost our revenue growth beginning in the second half of this year.First quarter adjusted EBITDA totaled $130 million, a record level for any first quarter in our history. Collectively higher revenues and favorable revenue mix as well as operating leverage and ongoing productivity gains helped us to drive adjusted EBITDA margins to 29%, which is an improvement of six full percentage points over prior year. Over the past three quarters, the company has delivered margins in line with our 30% target. We achieved our targeted margin levels through a combination of favorable shifts in revenue mix, application of scale and operating leverage and the implementation of productivity initiatives.In terms of revenue mix, we continue to strengthen and grow our platforms, which connect many of the most critical activities and constituencies in the housing ecosystem. These businesses generate consistent revenue streams with strong margins and leverage our unmatched data and analytical solutions. Over the past several years, we have built and/or expanded our platform offerings related to mortgage underwriting, home purchase related marketing services and insurance and spatial solutions.The evolution of our collateral valuation business into a unique market leader is a great example of how we are shifting our mix towards platforms. Building off a strong 2019 trend, our collateral valuation platforms delivered an exceptional performance to start off 2020, growing over 35% as we picked up share and launched innovative solutions into the market. Our collateral valuation platforms accounted for approximately 60% of our total valuation revenues in the first quarter.Scale and operating leverage and cost productive initiatives also continue to help us to drive up margins. As our long-term investors know well, we have an established track record of successfully driving productivity in our push towards first quartile levels of operational excellence.In 2020, we expect to lower run rate costs by managing staffing levels, simplifying our organization, automating certain activities and other operational improvements. Growth and margin expansion helped us to achieve trailing 12-month free cash flow conversion rate of 59% in the first quarter. Our durable cash generative business model positions us well to address the challenges and the opportunities resident in these unprecedented times.Our capital allocation strategy remains anchored around three consistent imperatives. First, appropriate reinvestment in our platforms, solutions, human capital and infrastructure; second, returning significant capital to our shareholders; and finally, prudent management of our debt levels in line with our long-term targets.In terms of reinvestment, our priorities include 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 allow us to build operating leverage, tap into new growth opportunities across multiple verticals and sets the foundation for additional future margin expansion. In addition, we are investing in new solutions in digital tax processing, new AI-driven valuation models as well as state-of-the-art realtor workflow platforms and the national rollout of our digital, marketing and visual tour business.Finally, we are supporting the onboarding of new clients, including recent mega wins and funding productivity programs, as I discussed earlier. Beginning in mid-2020, the company will be also launching a new initiative to build out a next generation AI and machine learning-driven data intake and production capability to be located in North America. Over the next 24 to 36 months, we expect to invest between $20 million and $25 million in this important initiative, which we expect to reduce collection and production costs over time and provide greater supply chain flexibility.A long-standing principle in our capital allocation model has been the consistent return of capital to our shareholders. In this regard, from 2011 to 2019, we repurchased and retired over 40% of our common shares. During the fourth quarter of 2019, we initiated a dividend program. We paid our first ever dividend of $0.22 per common share in January. Yesterday, our Board authorized a second quarterly dividend in the amount of $0.22 per common share payable in June.I want to conclude my remarks today by thanking our employees, clients and shareholders for their support. These are certainly unprecedented times and the impacts of the global pandemic are significant and still unfolding. No person, community or nation will be left untouched. On behalf of our more than 5,000 global team members, I also want to sincerely thank every health care professional, first responder, government department and volunteer engaged in the historic fight against COVID-19. We owe you a debt of gratitude, words cannot fully express.We’re off to a great start in 2020. We’re controlling what we can control and delivering on our commitments to our stakeholders. Our team is up for the challenges ahead. And importantly, we’re excited about the opportunities ahead of us to create value for our stakeholders as we push to achieve our strategic vision of providing transformative, cutting edge, property insights, platforms and solutions. Thanks again for joining us today. Jim will now discuss our financial results.

[Jim Balas:]

Thanks, Frank, and good afternoon, everyone. Today, I’m going to discuss our first quarter 2020 financial results and provide updated views on financial guidance. As Frank mentioned, CoreLogic delivered a strong operating and financial performance in the first quarter of 2020 while delivering on our client commitments and providing for the ongoing health and safety of our employees amid the COVID-19 crisis.Financial highlights for the quarter included

[Operator:]

Thank you. [Operator Instructions] The first question comes from John Campbell with Stephens Inc. Please go ahead.

[John Campbell:]

Congrats on a great quarter. Just a two-part question here to kick off. Within valuations, Frank, I think you said the platform businesses make up maybe 60%. How quickly is that growing? First question.

[Frank Martell:]

Yes. So in our collateral valuation, John, I just talked about, it’s over 35% in the first quarter.

[John Campbell:]

Okay. And then the remaining 40% that transactional piece, if you guys are assuming kind of flattish year-over-year origination units. I’m just trying to get a better sense for the new contracts. It sounds like you’re going to see a pretty nice lift in the second half, that’s going to help offset some of the pressure in 2Q. I guess just conceptually, would you expect that business to outpace overall originations?

[Frank Martell:]

I would. Based on history and the share gains that you mentioned, John, yes.

[John Campbell:]

Okay. That’s helpful. And then the second question here, just from a higher level, as we get out of COVID, where do you guys sit as far as new products, new services that come out as you guys try to help the industry get a little bit more automated, a little bit more remote? I know we kind of got hung up in the industry with so many manual processes. But is there a new way forward? Is there new products that come out? I’m just trying to get a sense for how you guys play in that new world.

[Frank Martell:]

Yes. So we came into the year with high expectations. We had a lot of investment over the last couple of years around visual imagery, around automation, AI-driven tools, analytical models, which I think have a great opportunity to transform the way - some of the basic workflow processes of our clients. You hear a lot about things like visual tours and that type of thing. We have a significant footprint in place to provide that service and we’re working on nationalizing that footprint.So those things, once COVID has settled down and I think we’re past - through that, I think those will become much more prominent. So I think we’re really well positioned in the digital, visual automated range. And then I think a lot of our data repositories are going to be a lot more accessible across multiple verticals so we’ve got a lot in the hopper. And I think we were really - and I think our momentum in the first quarter is somewhat reflective of that, that momentum that we had coming out of last year. So I think we have a plethora of different opportunities, and we’re playing all of those, I think especially strong at the front end of the house purchase cycle around things like realtor [ph] platforms, visual tours and that type of thing and as well as throughout the underwriting process.

[John Campbell:]

Okay, that’s very helpful. Thanks guys.

[Operator:]

Next question comes from Kevin Kaczmarek with Zelman & Associates. Please go ahead.

[Kevin Kaczmarek:]

I guess regarding some of the wins, is there anything you can point to as a catalyst for some of these new client wins? You mentioned a mega win and I guess, tax processing and flood and whatnot. Is it maybe elevated refi volumes that are pushing people to a breaking point or maybe missteps like competitors?

[Frank Martell:]

No. I think in the case of - Kevin, in the case of mega wins, those take a while to secure. And I think that if I had to say, those individuals are based on our quality and our service and our domain expertise. And I think those were in the hopper for quite some time. There’s a couple of others out there that we feel are also actionable that we’re working on. So we hope that there’s more to come on the mega win side.I think we’re seeing a little bit of a flight to quality. We saw that in the recession, coming out of the recession where clients look for durable scale players like us that they can rely on. And I think these types of crisis always expose the cracks in some of the smaller players. So I think we see that as well. I think we are also - we retooled our sales organization last year, and we are on the front foot in the marketplace from a sales and marketing perspective as well. So I think those are the three principal areas that are driving the share gains that we’ve experienced. And I think they’ve accelerated over the last couple of quarters as well.

[Kevin Kaczmarek:]

Okay, great. That’s helpful. And on property tax solutions this quarter. I got that you have a big win that’s going to come on the second half. This quarter, were there any significant changes in maybe the assumptions? I know how you hate [ph] estimate kind of revenue recognition for that. But did anything change meaningfully in the quarter, either with those assumptions or maybe a share shift relative to the fourth quarter of 2019?

[Jim Balas:]

Kevin, its Jim. On the tax business, usually, you have to look at a couple of components, of course, as the deferred revenue model to it. We generally get about 25% in the first year. And on a year-over-year basis, the way the model worked is the runoff of the deferred was pretty much the same year-over-year. So that bump in the 18% year-over-year is primarily due to the new stuff coming online, taking a quarter of that 70% or so volume that we had, as I indicated in my prepared remarks. So it’s all the new stuff that came online that drove the increase. The year-over-year deferred was flat, in other words.

[Kevin Kaczmarek:]

Okay. That’s helpful. Thank you.

[Frank Martell:]

By the way, Kevin, just the other thing, this is Frank. We’ve talked about in the past, we have launched our digital tax platform, which we think is a superior offering in the marketplace, clearly a superior offering in the marketplace and as a result of that, that’s a great play for our new clients and we’ve been winning a lot of clients in tax as well, not just the mega win, but a lot. And that platform is part of the reason why we’re doing that. We’ve got a tremendous team there as well. So we just have a heck of a lot of momentum in that business that really was built up over the balance of last year and into this first quarter. So we expect that to progressively be boarded. Those loans are going to be boarded over the balance of this year, so that gives us a lot of runway for growth in the next bunch of quarters.

[Kevin Kaczmarek:]

And is the revenue recognition and kind of the expenses associated with that? Is that similar in terms of how the revenue flows through and the margins and all that to the - your more standard tax processing business?

[Frank Martell:]

No. So that is the new platform. The whole business is running on that platform. So it doesn’t really affect revenue recognition per se. It’s more efficiency and automation and client experience. So one of the reasons why you’re seeing margin accretion in that particular line is because of the - it’s tremendously more automated, that’s been traditionally a paper-driven. So a little bit what John alluded to. One of the new ways of working on the digital platform is you get rid of a lot of paper and a lot of cycle time. So it’s a completely new workflow, very exciting for our clients and a lot more user friendly. So that’s facilitating the adoption by existing and new clients. So it’s more of a, I’d say, a client experience and a cost play than it is a revenue recognition play.

[Kevin Kaczmarek:]

Okay, got it. Thanks a lot.

[Operator:]

The next question comes from Bill Warmington with Wells Fargo. Please go ahead.

[Bill Warmington:]

So I’m trying to reconcile the unit data that you’ve mentioned with the other pieces of the business. And Jim, I thought you did a good job reconciling the tax piece, meaning that was running at roughly a quarter of the level of the MBA units that they talked about for Q1, about 69%. And then flood looks like it tracked pretty closely to what you would expect, up 63%, that would seem to make sense. Maybe you can help bridge then the credit, the valuation piece and then the other piece, just to make sure I’m not missing something there.

[Jim Balas:]

Yes. When we file the Q later this evening or early tomorrow, you’re going to see our outlook on the closed loans is roughly 35% to 40% on closed loans, Bill. And that’s pretty consistent with what we saw for Title guys as well in their reports. I think one was around 34%. The other was in the low 40s. So I think the volumes that we see in tax, tax is kind of post close loans. So it’s a little bit different animal than the other businesses. Credit, as I indicated in my prepared remarks, kind of in the low 30s. And again, that was consistent with one of the other players that we saw as well in terms of peer companies.On the valuation side, the growth Frank put in his remarks is smacked out in that range, 35%. We thought the performance there was very good. On the AMC side, we’re kind of going through that transition piece of the trick [ph] post transformation and now the ramp up of new work that’s going to be coming online that we indicated will benefit the second half of the year. And then flood just was on a tear in this quarter, and that’s of course, on the - more at the open order part of the process and they had a terrific quarter and great results.

[Bill Warmington:]

Okay. And then you mentioned the $20 million to $25 million in IT investment that you’re planning to do. What kind of savings do you expect to generate from that investment?

[Frank Martell:]

Yes. So I think the pandemic has obviously had a lot of companies looking at their supply chains. And I think from that perspective, though I think there’s a couple of benefits to this initiative. First of all, one is with the advent of technology it’s time to reevaluate traditional supply chains. And we have a very good one, but it’s a traditional one. So we want to look at an onshore capability that’s machine learning and AI-driven. So it’s kind of a new concept. That’s going to take a couple of years to build out. My guess is that’s going to - we’re spending over $100 million a year ingesting and curating our data. So it’s a big area. I’d say we’d be looking at - I’m hoping 10% to 30% of that can come out.

[Bill Warmington:]

Off the $100 million?

[Frank Martell:]

Off the $100 million, yes, roughly speaking.

[Bill Warmington:]

The $100 million. Got it.

[Frank Martell:]

Yes. So it’s a big price. But I think equally important is transforming the supply chain because the other thing is we are - as I mentioned, we are investing a lot in visual and different imagery as well as new data sets and things like IoT and that type of very exciting new opportunities for us to get into different verticals with that data. And I think to - those are higher volume, complex data sets and to ingest those efficiently, I think this platform will help as well. So it’s a little bit of a - if you look at the current data, you’re going to say that 10% to 30%. But also, I think if you look at the growth opportunity and how to enable that type of margin, I mean, we’re running at 30%, that’s a pretty good clip. And so we want to bring on those new data sets at that type of margin, so this will enable that as well.

[Bill Warmington:]

Got it. All right, well. Thank you.

[Operator:]

Thank you. The next question comes from Jeff Meuler with Baird. Please go ahead.

[Jeff Meuler:]

In Q2 on the estimated negative COVID impact, just what’s all in that bucket? Is it rental screening and non-mortgage credit? Or am I missing a piece on the revenue side? And then on the similar EBITDA hit to revenue hit, is it like a high decremental margin plus there’s some unusual expenses that you’re incurring to operate because of COVID? Just trying to help better understand the Q2 COVID impact.

[Jim Balas:]

Sure. Jeff, its Jim. So on the COVID impact number of pieces in there, so it’s a continuation of what we saw in the first quarter, the newer element will be the impact on the international businesses. There wasn’t a lot going on in Q1, but we’ve seen a more dramatic impact in Q2. As we noted in our earlier comments, international was actually up 3% year-over-year ex-on a common currency basis. So we’re going to see the impact of those geographies largely in the second quarter and those tend to be higher margin platform type of businesses. So the way to think about what we believe we’re going to be impacted with in the second quarter is a few more business lines in there so it’s going to be the tenant screening, alternative credit, auto credit, the international, also some project-based work that we would typically see, not a lot of projects going on. So the overwhelming majority of that is going to be probably a higher margin mix with some elements to the cost structure.

[Jeff Meuler:]

Okay. And then I know you previously didn’t give Q2 guidance specifically. And it sounds like you’re not changing your full year mortgage assumption, but I would think that given the way volumes have been trending including the inquiries in March that closed loans in Q2 would be up a lot. Just what kind of closed loan growth assumption is underpinning your Q2 guidance?

[Jim Balas:]

I’m sorry, are you asking for full year or Q2?

[Jeff Meuler:]

No. For Q2 guidance.

[Jim Balas:]

Okay. So for Q2, the data points are - if you look at all the projections out there, they’re pretty all over the place. And so you’ve seen probably what I’ve seen, could be a minus 5% to plus 50%, that’s a pretty wide range. So what we basically went on in forming our guide for Q2, was to simply look at the trends of what we’re experiencing early in the quarter, in the weeks so far into April. And it feels like a continuation of the trends that we’ve seen in the last quarter or two, very strong refi volumes. The purchase seasonality that we would typically see probably not going to happen, as I’m sure you’re aware, a lot of the listing data is down for the most part. So we just went with a lot of internally driven data in order to support our view of the quarter.

[Jeff Meuler:]

Okay. And then on these mega wins, are they in the guidance now? Were they in the guidance before? Or I’m just trying to - when you’re talking about a mega win, I’m trying to understand how impactful these wins are going to be once they start impacting revenue.

[Frank Martell:]

Jeff, it’s Frank. So when I say mega wins, those are tens of millions a year contract value. So they’re large in the context of our business. And in some cases, the top end could be $30 million to $40 million a year. And they are in the projections for this year, more pronounced because it’s - if you look at the particularly the tax service win, we’ll start boarding those loans in the middle of this year. So you’ll see a ramp up this year, but they’re more pronounced. The full impact will be much more significant in 2021. But certainly for the back half of this year, it provides good support in case COVID gets worse or whatever. From that standpoint, those are very significant beginning in the second half, not a lot in the first half.The AMC win which I talked about last quarter, we started to board those volumes beginning in April. And what’s going to happen is they will ramp up as a percentage of that originators total volumes, which we expect to ultimately get to about third. Right now, we’re running kind of very - it’s relatively de minimis. But by the time we get into the second half of the year, we’ll get to 10%, 15%, 20%. And next year, if we perform well, we’ll get to the 30% level so that’s how that kind of plays in as well.

[Jeff Meuler:]

Got it. Thank you.

[Operator:]

Thank you. The next question comes from Tommy McJoynt with KBW. Please go ahead.

[Tommy McJoynt:]

I can’t recall if you guys had referenced this math more recently. But in the past, you had estimated that every $100 billion [ph] of mortgage volumes could translate to roughly $25 million of incremental revenues and that kind of on at a pretty high EBITDA margin upward like 50% or so. Now the industry forecast are a bit all over the place with some as high as $2.8 trillion we’ve seen. So that can provide quite a bit of tailwind for you guys. Just in general, does that math kind of still hold true today?

[Frank Martell:]

Tommy, that was our traditional kind of sensitivity for dollars. It does fluctuate a bit because we’ve had a period where we’ve had relatively high loan values being, so the dollar growth didn’t translate nearly into the unit growth. So when I talked about the market being flat year-over-year, our kind of estimate for the full year, that includes phenomenon like that as well as you have to deflate just the HPI and that type of thing. So there’s a little bit of nuance to it, but that’s traditionally been our overall sensitivity that we provided. I would say, as I said in my full year estimate of the market. I think, like a lot of people, we assume refinancing activity will be elevated.Rates are obviously at all-time lows and that is likely to continue. So you have a strong refi environment again, I think subject to, as you get out in the year, the impact of COVID on the ability of people to buy just on their employment, that type of thing. But you do have a strong refinancing. I think purchase is already impacted and is going to be impacted particularly in the second and the third quarter. The fourth quarter for purchase traditionally is a seasonal thing so you don’t have a lot of purchase activity traditionally in that quarter anyway. But the second and third quarter are impacted. And I think it’s really hard to tell what the full impact is and how quickly the purchase market comes back.I think a lot of that depends on how long people are locked down and a lot of other, the severity of the pandemic, etcetera. So I personally think our projections are pretty reasonable based on what’s known today. As Jim alluded to, the externally available forecast range dramatically, especially if you get into quarterly splits. And I just think it’s kind of chasing your tail trying to figure those out. We see a lot of other volumes, and we see most - we’re not exactly indexed to the full market, but we see a pretty good slug of volume.The one thing to remember is if we have a credit and a flood revenue dollar, typically the tax falls a quarter later or 60 days or 90 days later, when as Jim said, when you close the loan and board the loan. So there’s that kind of nuance as well, if you’re talking about quarterly split. But I think in general, my recommendation and the way we feel the market is going to play out is kind of largely a flat. If it’s a little bit better, we’ll do better.It’s hard to estimate the COVID impact because the problem is the COVID impacts tend to be shocked. So as Jim alluded to, we do have a high incremental impact on the bottom line because normally, if you see those shocks and they happen over time, you have a chance to address your cost structure. But these shocks are kind of sudden and we haven’t laid anybody off and we’re managing our cost structure as we do always carefully. But we’re not trying to react too suddenly because I think it’s a transitory impact that will hopefully, hopefully come out of as we get through the third quarter.

[Tommy McJoynt:]

Got it. Yes, I agree there’s a lot of uncertainty in the forecast out there. Switching topics, if we were to enter somewhat of a prolonged economic downturn, could you walk through which of your businesses have any countercyclical tendencies and apart from just low rates, generating higher mortgage volumes?

[Frank Martell:]

Well, I think one of the - I don’t know if it’s countercyclical, but kind of is, obviously, we’re seeing a lot of demand for loan modification work and other - we used to call it default services. And we used to have a very significant presence there. We still have the platforms and the analytical models that support work around portfolio valuations and loan modifications. So we’re seeing and I think it will grow over the second half of the year, that type of demand for those services will grow. And those are good margin say products for us.So that’s an example of something that we’ll do better. I think our businesses, the move to platform businesses, it gives us a - they’re very efficient. So it gives us a lot of, I think, protection on the profitability side assuming it’s not a complete blowout. And I don’t think there’s any reason to assume that. So I think we’re well positioned in our key businesses. The one area that’s a little bit of a wildcard now is international, which is not a huge chunk of our revenue. But right now, the UK and New Zealand, in particular, I think, are frozen. Their whole economy is frozen. And Australia is okay, but challenged.So I think those are economies that are pretty much going to come back whenever the government pulls the lever and people are able to do that safely. So I think it’s a collection of different impacts. But overall, we have held up remarkably well in every different cycle. And the last five to 10 years, we’ve seen a lot of different cycles in the mortgage market. And we’ve consistently improved our profitability and I think we made the company into a much more profitable and durable entity so I think we’re in pretty decent shape.I don’t know - COVID, I’m assuming will pass and I’m not a medical doctor. But I think we are hopeful that the third quarter will begin to see a return to some normalcy. And with that, the purchase market will pick up. It’s interesting. A lot of liftings have been pulled. If you go to the MLS, they’re pulled on a temporary basis, which in past cycles those temporary pulls tend to come back quicker.So I think that’s a hopeful sign. We’ll stay hopeful there so there’s signs that you could have a bit of a snapback in purchase. I think there’s still a lot of demand. But again, depending on how long and how big the unemployment is and how difficult the general economy is, I think that’s a big, big factor just waiting to be made more clear, and I don’t think anybody has the answer at this point.

[Tommy McJoynt:]

Okay, thank you.

[Operator:]

Thank you. The next question comes from Darrin Peller with Wolfe Research. Please go ahead.

[Darrin Peller:]

Glad to hear you guys are doing okay. Listen, I want to just touch - follow-up a bit about the resilience that you could have, if we were to hit a tough recessionary prolonged environment on the non-mortgage areas, whether it’s insurance or specifically analytics, some of your legacy businesses, I remember back in the First American days, I think we’re pretty resilient actually. And so I guess I’m curious what you think the resilience factor could be in some of those businesses, if we were to hit a tough time for 12 plus months?And then I guess on that note, on the expense side, you’ve always done a great job, obviously, managing our margins and expenses. And I’d be curious to hear if there’s more - if you had to, I mean, is there more room to step that up a notch and make that more pronounced of an impact on protecting the P&L? Thanks guys.

[Frank Martell:]

Yes. I’ll take that, Darrin. And again, appreciate the question. So first of all, I think that we used to be 95% mortgage origination and default and now we’re 60% origination and 40% non-mortgage. So that alone gives us a tremendous amount of I think, resiliency that wasn’t there. If you look at the non-mortgage piece, we have international, which I just discussed, which is we’re primarily high market share, integral part of the housing system in those markets. So I think those are very durable. And those markets have been resilient over the years. And I think there’s every reason to expect that those will snap back so I think that’s one thing.Secondarily is our insurance and spatial business. I think it’s pretty darn, steady and reliable. It drives on things like storms and climate and insurance claims and underwriting. And I think that’s in the property and casualty insurance area. So that’s pretty durable. And you always have to have insurance. So I think unless they ban insurance, I think that we’ll be doing pretty well there. I think if you look at the data license business and the analytics business, I think those are all longer term contracts.So I think those will not - I don’t think people will cancel, a lot of the data is embedded in the workflows of the clients and essential. So I don’t see that as a particularly risky area. So I think overall, with the exception of tenant screening, which has its own set of parameters. And frankly, is a relatively small piece of the overall pie. I think that the non-mortgage piece is pretty resilient. I mean oil and gas, the collapse there wasn’t helpful. We do have some energy related revenues that kind of evaporated with that, but they’re not again, not that meaningful to the go forward picture.On the mortgage side, I think our businesses are transformed. I mean, we essentially are mostly platform-related. If you look at all those businesses for the most part even tax is a platform, an automated platform. And I think we have over many, many years established the contractual relationships. And many of them again are multiyear or it’s very difficult to switch. So I think those give us a good grounding. And those businesses as you may recall in years ago, we’re in the low-20s margin. Now they’re at above 30% margin, which again provides us with a pretty good insulation from downward pressure. So I think even in a market that is not currently contemplated.We used to talk about $1.5 trillion and trying to make 25% margin, a $1.5 trillion market or more. And I think that is if anything, we’re beyond that. So I think we’re in pretty good shape, barring total collapse and I think that’s a different story. But I think in any reasonable downward scenario, I think we’re pretty durable in pretty good shape. And I think the market share gains that we have and the additional ones that are in the hopper are going to give us another insulation layer for the future.

[Darrin Peller:]

All right. And just I mean, in terms of the capital allocation, it sounds like you guys plan to keep your initial plans in track. Maybe just readdress your priorities on that, if you don’t mind. I know the dividend is relatively new, but it sounds like that’s very secure. Any thoughts around incremental buybacks given the market dynamics now or just preserving capital is probably more important? Thanks guys.

[Frank Martell:]

Yes. Thanks, Darrin. No, I think look Jim and the team have done a great job. We have a tremendous client base. What I’ve learned over time is the clients are key and our clients are the major carriers, the major banks, the major originators and servicers. And we expect they will pay. And so from that standpoint, and as consistent with the last recession, our - we don’t have a bad debt experience that’s very significant and I don’t anticipate that at this time. So I think we’ve got a great client base.I think that our cash flow is remarkably steady and strong and I think that gives us a lot of flexibility. It went from $100 million roughly to $150 million in a quarter. And so I think that we expect our liquidity to be pretty strong. We’ve delevered a little bit in the first quarter. So we’re heading towards three times leverage. So I think a lot of that is consistent with our long-term strategy, capital allocation.We did buy back 50,000 shares in the quarter. As you know, it’s such a short window that traditionally we haven’t bought a lot in the first quarter. As Jim alluded to, I think we are still able to opportunistically purchase shares. And we would expect to do so. The dividend also, as Jim said, I would expect as our profitability continues to grow, that we will grow the dividend over time as well. So from a liquidity and capital allocation perspective I think we’re in pretty good shape heading into the balance of the year.

[Darrin Peller:]

Got it. All right.

[Operator:]

There are no further questions at this time. The conference has now concluded. Thank you for attending today’s presentation and you may now disconnect.