CoreLogic, Inc.
Q2 2019 Earnings Call Transcript

Published: 25 Jul 2019

[Operator:]

Good day and welcome to the CoreLogic Second Quarter 2019 Earnings Conference Call. Today's conference is being recorded. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]And I would now like to turn the conference over to Dan Smith, Investor Relations. Please go ahead.

[Dan Smith:]

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 CoreLogic's President and CEO, Frank Martell; and CFO, Jim Balas.Before we begin, let me make a few important points. First, we 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 SEC filings, including the most recent Annual Report on Form 10-K and the subsequent 10-Qs. 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 of 2018.Finally, please limit yourselves to one question with a brief follow-up. We will 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 morning, everyone. Welcome to CoreLogic's 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&A session.The CoreLogic team is off to a strong start in 2019 from both an operational and a financial perspective, despite continuing market space 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 light space and capturing the benefits of productivity and operating leverage.In the first half of this year, we've 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 driven 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 are in line with part of your 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 your comps.This year, we made steady progress advancing key elements of our strategic plan. As you may remember from past calls, our strategic imperatives focus 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 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.CoreLogic's continuing expansion as a new verticals plus the growth or international footprint has been enabled in part by the scale and market leadership of our core U.S. 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've grown our market leadership and core mortgage, we have significantly improved our 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 right sizing 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 non-cash impairment charge as well as severance costs in the second quarter.The following 2019, the AMC Transformation Program has resulted in lower revenues attributable certain customers, while at the same time boosting the current and future margin profile this operation. We expect these revenue margin trends to continue over the balance of this year and into the first half of 2020. As we pilot and roll out our new AMC offering, we are beginning to see improved turn times and efficiencies through the adoption of our new workflow technology. There's more work to do here, but so far, the team has done an excellent job. Once fully implemented, our MC 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 that 2019 by consolidating facilities, managing staff and costs, automating certain activities and other operating improvements. As we look forward, we're 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 expend significant time and effort on the GCP migration over the balance of this year and into next year. The GCP migration and other inflight costs and productivity actions, plus the AMC transformation and closure of non-core mortgage technology related units, support our growth of achieving at least a goal of achieving at least 30% adjusted EBITDA margins 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 non-core mortgage technology units.Before I close out today, I'd like to make a few comments on recent U.S. mortgage market trends. After nine straight quarters of significant headwinds based on externally available reporting, mortgage unit volumes in the U.S. rose modestly in the second quarter from prior 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 help to offset more headwinds, such as [Technical Difficulty] which will likely hold home sale and mortgage origination in both levels, one with normally expect, given the strength of our overall economy.To sum it up, we have a very strong start 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. And the CoreLogic team execute against our vision of creating a scaled, innovative and data driven enterprise that delivers unique insights and helps millions of people to find, buy and protect their homes.Thanks for joining us today. Jim will now discuss our financial results.

[Jim Balas:]

Thanks, Frank, and good morning, everyone. Today I'm 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, improve business mix, reflecting a greater proportion of higher margin subscription, technology and non-US mortgage based 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 700,000 common shares.Second quarter revenues total $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 has no 2019 counterpart. The wind down of non-core mortgage and default technology and its which decrease revenue by $5 million and unfavorable currency translation of $3 million.On a segment basis, PIRM 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. UWS revenues total $279 million down 10% from prior year. The decline in UWS revenue primarily reflects the prior year $23 million revenue recognition item discussed earlier, lower credit volumes and the impact of the wind down of non-core mortgage and default technology units.Operating income from continuing operations totaled $15 million dollars compared with $90 million in 2018. Lower operating income was principally driven by non-cash impairment charges of $48 million and severance charges of $6 million incurred in connection with the company's AMC transformation, the impact of the wind down non-core operations and the prior year revenue recognition benefit.Increased spending on core platform and productivity programs, as well as product, service and 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 $0.82 per share. Adjusted EBITDA total $134 million in the second quarter compared with $159 million in the same prior year period. The decrease in adjusted EBITDA of $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%. PIRM segment adjusted even our total $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.UWS adjusted EBITDA was at $9 million, compared to $104 million in the prior year. Excluding the impacts of the two discrete items mentioned previously, second quarter 2019 UWS adjusted EBITDA and margin increased by approximately $10 million in 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 30, 2019, 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 increase spending levels attributable to strategic initiatives, such as the GCP migration, which will generate future savings and margin expansion. Adjusting for these amounts, a free cash flow conversion rate would be approximately 35%.I will always focus on productivity and data driven insights has resulted in a durable and cash generative business model. During the quarter, we repurchased 700,000 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 account.I will close my remarks today with a 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 2024. Amended credit facility will provide improved terms and enhanced financial flexibility going forward. Our overall capital allocation priorities remain to fund discipline reinvestment, return capital through the repurchase for 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 are expecting revenues of $1.7 billion to $1.74 billion. Adjusted EBITDA $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 U.S. mortgage loan origination unit bonds to be in line to modestly better than 2018 level. With continued softness and purchase volumes and a high degree of uncertainty around Central Bank actions in the forward path of interest rates, we believe our current view on U.S. mortgage volumes is prudent. The 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 regards 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 billion.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 include currently anticipated impacts of our AMC transformation, and the wind down of our non-core mortgage and default technology units.In conclusion, we achieved a 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 Q&A.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We’ll take our first question today from Darrin Peller with Wolfe Research.

[Darrin Peller:]

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 growth of your 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, given the resize and rates. And you’re applying that to guidance, there’s also been obviously ongoing reinvestment that’s been accounted for now and 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, then what we’ve seen this increasing guidance passing through?

[Jim Balas:]

Hey, Darrin, thanks, thanks for the question. Look first of all, just let me deal with the second point first, which is the overall flow through. If you are looking at the increase in the guidance on revenue versus the higher EBITDA, both are significantly increased. But if you look at a lot of that revenue related to the original guidance assumptions around the AMC and AMC Transformation Program, so I’d say that we were relatively conservative assuming that there will be a bigger burn down the revenue sooner. And that from an operational perspective is taking a bit longer. And so that’s really the biggest assumptions you know that revenue largely comes in no EBITDA. So that’s really the reason why you’re not saying that slow through strong. Absolutely if the revenue – if the mortgage volumes, any volume uptick, where is it going to be highly creative to EBITDA.

[Darrin Peller:]

Okay. And so we should still assume something like, call it a 40% pass through or something maybe even, I mean can you just give us some color on the actual – when we think about unit numbers being 5%, up or down on unit around and on origination numbers, can you just remind us are your sensitivity thoughts on around revenue on EBITDA?

[Jim Balas:]

Yeah, so I would say that the incremental margins should be well north of 40%, 40%, 50% easily could be a little bit higher depending on the nature of where the volume is coming in. But I think that’s the correct number 40% to 50%, a little bit higher. So, I think that and I think as a 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 million to $15 million of EBITDA and $25 million of revenue. Some of the other sensitivities have been floating around and have been more related to adding in the AMC piece of it. As you know, with the volatility in the transformation of that revenue stream, I just think it’s not easy to apply a broad sensitivity around that number.

[Darrin Peller:]

Okay. All right, thanks. Let me just follow-up if you don’t mind. And then on the non-mortgage is, typically the non-mortgage sensitive business is, whether it’s insurance or international or its geospatial, even just data analyst analytics in the U.S., I’d be curious to hear what do you think can be done to really help provide some left 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 or moves you can make that can help expedite that process and get that back up again?

[Frank Martell:]

Yeah, look, I think by far and away the biggest challenge this year has been Australia, where the markets down after, I think it’s 25 or 20 straight years and grow. So that’s a little hard for us to change, honestly. We’re such a big market share there. But I think the volumes are down about 15%. So, swinging additional traditional growth market to a compressing market 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 U.K. Our European business is growing a smaller base, obviously. So, I just think there’s one issue international at the moment, which is really the market. And that we want to see the turnout. In addition, frankly, FX is also been a challenge over there. So, I say from an international perspective, I think when the market returns in Australia, I think you’ll see us pop back up to more traditional upper single digit growth.On the insurance side, I think we have – we brought instability, we’re integrating it. I think we’re going to the market, we’re really excited about the opportunity there. It’s going to take a little bit time. That’s not an industry that moves super quick in terms of moving business around. But I’m excited about the prospects there. I think teams have willing to offering together and getting out in the market. So that gives me a lot of hope that the – we’ll see growth over time in that business. Traditionally we’ve kind of – it’s been a kind of a low to mid-single digit growth rate and that business again, highly profitable. So, the whole stability deal is around trying to accelerate off of that base.

[Darrin Peller:]

Okay. All right, thanks, Frank.

[Operator:]

Next were here from Bose George with KBW.

[Thomas Tedesco:]

Hey, guys, this is Tommy on for Bose. When you think about the low and high end of the guidance ranges, how much of that variability is dependent on the more so the macro mortgage market and versus more company specific factors, whether it be the GCP migration or AMC transformation, et cetera?

[Jim Balas:]

So, the revenue as we talked about earlier Tommy, the revenue, I think the biggest assumption right now, I mean, we’ve obviously lifted our assumed mortgage volume outlook in the U.S. so that’s a factor. And again, kind of in line with the numbers I talked about with Darrin on the overall sensitivity. So that’s one factor to them. The other one, as I mentioned, is the GCP – is the AMC transformation and we’re just we’re looking at operationally we’re obviously doing a lot of restructuring on the operation, shutting down certain operations expanding certain other one. So, it’s just our best view at the moment which is a little slower than the burn down we assume. So that’s really one of the reasons why the guy went up a little bit more revenue that didn’t profitability side of it.

[Thomas Tedesco:]

Okay, that makes sense. And then your 30% adjusted EBITDA margin in 2020 and given that to a normalized mortgage market, does that assume that you’ve reached 50% non-mortgage revenues by then? And then do you – with your current mix of business now, assuming after we get past 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?

[Jim Balas:]

So, we’re moving towards 50-50. But even with that, I think it’s important to recognize that our mortgage sensitivity, that figure of kind of 60% of our business being sensitive to U.S. mortgage volumes, even with then that we have certain I say not, it’s not daily sensitive. There’s trending overtime. And a good example of that is our tax business where you’ve got a model revenue stream. So, it’s not that – that even that’s a little bit different. But I’d say that the 30% does not depend on any specific mix, that’s where the current configuration gradually trending towards 50%. So that’s line of sight currently.

[Thomas Tedesco:]

Okay. Thanks.

[Operator:]

Glenn Greene with Oppenheimer has our next question.

[Glenn Greene:]

Thanks. Good morning, Frank. I guess a couple questions. I wanted to sort of go back to that revenue guide versus EBITDA guide, and it sounds like part it is slower wind down on the AMC and part of its market. So, could you sort of parse out to help us understand that? And also want to go back to where you were originally sort of thinking 100 million of AMC software wind downs in 2019, and sounds like the timing of that pushed out a little bit and dragged into the first half of 2020. Can you kind of help us thinks for the timing of that how much has been absorbs going to be absorbed in 2019 versus 2020 and then also go back to reconciling the revenue guide change?

[Frank Martell:]

Yeah, I would say that, you know, what's changed, because the, you know, what's rolling into 2020 has always been the case, Glenn, because, you know, for example, the legacy business wind ups, yeah those are contractual run off. So, you know, that it is what it is time wise. And that's always been a several years smaller than AMC piece, obviously. The AMC piece is more of an operational, so we're working with the clients that don't want to subscribe to, you know, the transformed service, and they – you know so they need to be transition. So that's really, where a lot of the effort is. 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 rundown, and we're seeing a lot of that, again, is just the, you know, the working collaboratively to get the right rundown center operationally. And that revenue burned down, we assumed originally, in the guide, you know, there's very little EBITDA attributable to that revenue. So that's why you're saying, you know, almost all the upswing in the EBITDA is related to other factors in the AMC. That a lot of the revenue is related to the assumption the AMC.

[Glenn Greene:]

So, should be getting a meaningful lift on the revenue on the back half given the, you know, sort of the mortgage market assumption up at least five points and then conservatively?

[Frank Martell:]

I would say, you know, there's other factors, obviously, just the market, you know, we talked about the GCP investment, for example, we talked about, you know, the cost to transform the AMC. So, there's other factors, you know, I think at the end of the day, you're talking about a couple million here or there. So, it's kind of in the round, plus the FX, you know, the international piece that Jim talked about and the currency, and that's a little bit worse than we thought. So, there's a number of other factors, but they're all small, there's nothing meaningful there. I think the market conversion – and by the way, I think in terms of your characterization of the market, you know, the conservative, I don't think anybody really knows, I mean, everybody's brought up their forecasts very relatively very recently. But even if you look at a unit perspective, the ranges are still somewhere between, you know, 0% to 1%, and, you know, 4% to 5%. So, there's still a pretty big range out there. You know, 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 didn't mention in my remarks, you know, you do have persistent headwinds out there on the purchase money side, you know, with availability and that kind of stuff, housing stock.So, I think the mortgage market, I think, you know, Jim said it look, if it's better, we'll lift our guide in the third quarter. We don't normally like to do quarterly lifts. But if there's – you know, 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 ago,

[Glenn Greene:]

Okay. Just one number question for Jim. If you could just sort of give us the organic revenue growth from the quarter sort of adjusted for macro factors?

[Jim Balas:]

Yeah. The bridge on the revenue lineup was, you know, obviously, we were down 6%, of big chunk of that about 5% was the item from the prior year. And then the international FX, and the lineup activity was about minus 3%. And then you had plus two on the M&A side. So that's how you get to the minus six. And so organic growth with market was essentially flat. And with market and depending on, you know, which data point and looking at if it's flat to, you know, up a point or two or whatever, you know, we're saying as the market gave us about one or two points, and then the traditional drivers were down about one to two that offset each other.

[Glenn Greene:]

Got it. Okay. Thank you.

[Jim Balas:]

Great.

[Operator:]

Next we'll hear from Chris Gamaitoni, Compass Point.

[Chris Gamaitoni:]

Good morning, everyone. Could you update us on the revenue contribution from Australia with PIRM?

[Jim Balas:]

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.

[Chris Gamaitoni:]

Okay. And on the AMC transformation process happening a little bit slower. Is that purely operational? Or is it somewhat reflective of, you know, more refinance volume came in that expected, so their capacity plans, you know, are different than they originally expected?

[Frank Martell:]

Yeah, I'd say that – Chris, it's Frank. Yeah, I'd say that it is a little bit actually, certainly the second quarter, there was a little bit more market, up scaling, you know, we had thought across our, our client base. So that that was a little bit again, part of this, you know, assumption change. But in the main, you know, what this is, is you literally, you know, we're piloting and then we're demoing the new solution, working with each client around, you know, pricing, and contracting and all that kind of stuff. So, it's a case by case basis, and every client, you know, has a different cadence in terms of what they can absorb themselves, because they get their own business to run. So, but and what makes this important is, you know, obviously, it's integral to revenue generation from the clients' perspective, it's also an area that you know, is closely viewed from the regulatory side. So, you have 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 then if we do transition volume to another supplier, we do that very, very carefully and very well. So, it just, it's a, you know, month at a time, working very closely with the clients. And you know, frankly, it always takes a little longer than you think when you originally plan these things, because, you know, life happens.

[Chris Gamaitoni:]

Understood. I want to follow-up on some of the comments about other factors in the EBITDA guide the GCP investment cost to transform the AMC. Are you accelerating some of those costs beyond what you had originally anticipated into this year that would hit the EBITDA line item, trying to understand it kind of in the nuance that you're pointing out?

[Jim Balas:]

Yeah, so for example, you know, just some, some of the you know, the investments are not in the adjusted EBITDA metric, because they were called out originally and, you know, we have a, we have a bucket for those types of things, extraordinary items. And then some are. So, there's a combination of those types of things. And then you have capitalization and expense rules, et cetera. So, there's a mix of factors there. But in general, you know, and by the way, I would just remark, we talked about investment levels and spending, but the reality is for data analytics company, our CapEx about a third of it relates to capitalize data, which is the same every year. So, if you take that out, we spend about 4% to 5% of our revenue on CapEx, which you know, is kind of on the low end. So, we're not talking about, you know, super-duper high levels of CapEx spending as it relates to other peer, a data analytics driven companies, technology driven company. So, it's kind of a regional. But in terms of things like the GDP, honestly 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 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 try to pull forward a bit, some of that spending, because we want to get this quickly as we can.

[Chris Gamaitoni:]

Thank you so much.

[Operator:]

Our next question comes from Bill Warmington with Wells Fargo.

[Bill Warmington:]

Good morning, everyone.

[Jim Balas:]

Hi Bill.

[Bill Warmington:]

Another question on the flow through calculation. I realized that the EBITDA guidance has been taken up $10 million. But that's a net figure. And I was trying to understand the actual gross figure if you will, and how much of that. What you're netting against that growth figure in terms of accelerated investments in the second half to get you to the 10?

[Frank Martell:]

Yeah, obviously, Bill, I think when you're using figures, like 20, you're isolating, I don't know if you're using the top end of the range or the midpoint or whatever, but obviously, we're providing a range. So, within that range, people interpolate in 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 reflected all of the market pick up as it relates to the second quarter on through to the year. So, say that, you know, that's the 10, if you want to say that just a rough numbers 10-12. And that's generous, because it's 10 to 12 – 12 to 15 is a full year number. So, if you say 10 to 12, for the three quarters, that's all reflected in the upswing 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 why we're making some of this transition, we're moving to a more premium, higher margin services, is the goal, which has much better turn on time. So, you know, that requires people to value that some people do, and some people prefer the more traditional route. So, we're just working through that part of it. So, there's very little margin contribution there.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 really built in fourth quarter last year, was our view of this year. So obviously, we're seven, eight months into it, and have a better view of what's happening this year. So that's was just a, you know, we took an educated guess at how that would play out operationally and it's turned out to be a bit a bit slower, which, you know, it's not surprising. It's not, it's not really a problem, per se.

[Bill Warmington:]

And as my follow-up question, and just wanted to ask, how are share shifts in the mortgage market, among your largest clients, impacting your volumes? Are they helping you? Are they hurting? Is it neutral?

[Jim Balas:]

I would say that in the main, excluding the AMC, because obviously, we have two clients to makeup 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 you know, zero sum gain or slightly positive. But you know, we serve so many lenders that service all the big lenders and servicers. So, we kind of get the volumes either way. So, I think that's the employees’ kind of a negligible change. I think in the AMC, though, it's just obviously, 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 actually added some revenue that we, you know, we didn't think we'd have that was part of the issue on the guy, you know, we didn't think we're going to grow in some of those clients that we end up growing in the second quarter.

[Bill Warmington:]

Got it. Well, thank you very much.

[Operator:]

We now hear from Kevin Kaczmarek with Zelman & Associates.

[Kevin Kaczmarek:]

Hey, guys. Can you talk about momentum with any new or potentially new clients on the transformed appraisal process, like any updated number in a new appraisal customers of their revenue contribution?

[Jim Balas:]

Kevin, I think, you know, we certainly we continue to take new clients on in terms of contracting, as you may recall, from past sessions, you know, this is a, you know, you win the contract, and it takes a fair amount of time to operationalize more on the client side than our side of it. And that's more infrastructure and systems and that kind of stuff, and QCs and whatnot. So, I think those new clients, actually, it's pretty good. I think everybody, even some of the clients that are not willing to pay are excited about the prospect of the new technology. We actually have real pilots with some of the clients. So, I think those are, everybody's excited about it. I think it's, you know, once it set scale, we'll see what happens. But nobody said, look, it's not an exciting opportunity. I think it just, again, more clients' perspective is today the operations that can work with it and they really value the differential, and I think that's different. But we're getting a lot of clients signing up. And I think that's very encouraging.

[Kevin Kaczmarek:]

Okay. Any order magnitude sense of the number of clients that you mentioned 10 clients at some point in the past year, but let's think double that?

[Frank Martell:]

Oh, no, we have many more than 10. We have quite a few lenders signed up with vary degrees of volume attached to those. So, I'd say that we have beyond the two major lenders we have. We have probably two dozen contracts. So, it's pretty significant.

[Kevin Kaczmarek:]

You already is generally top 100 lenders or is going maybe smaller in terms of market share?

[Frank Martell:]

Some are top hundred. I mean it's the mix but I think a lot of them are – yeah, I feel fair amount on top hundred.

[Kevin Kaczmarek:]

Okay. And then one more, I guess on insurance. You know, if you look sequentially in insurance revenue it increased only 7%, early you guys get like a 10% to 11% lifts heading from the first to second quarter. Any reason for the weaknesses versus the first quarter? You know, maybe disability maybe contribute differently than people would thought in the second quarter? Or was there drop off from the rest business?

[Frank Martell:]

The one piece was there was a little bit of 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 some ability and the legacy business was essentially flattish.

[Kevin Kaczmarek:]

Okay. And the weather from last year in the second quarter, so?

[Frank Martell:]

We had a little bit of hiccups. Wasn't like a couple years ago, but you know, just little hiccups here and there.

[Kevin Kaczmarek:]

Okay. Alright, thanks for taking my questions.

[Operator:]

Next, we'll hear from Andrew Jeffrey from SunTrust.

[Andrew Jeffrey:]

Hey, good morning, guys. Thanks for taking the question. I really just have one for you. Around your property tax business, if I normalized for the $22 million dollars. You know, 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, you know, whether pricing is as come into play or given the sort of relatively more recurring nature that business side, I might have expected to see some growth this quarter.

[Jim Balas:]

Yeah. So, Andrew thanks. Yeah. So look, I think part of obviously as you know, is that, you know, we actually have a very strong pipeline in that business and you're going to see, I think that flow through in the next couple of quarters, you know, you're on board the loans, a lot of more life of loan, so you've got an amortization and revenue stream. So, it's a little more muted in that business. You know, we had, I'd say there was, there could have been some shifting of volume between servicers. But I think that the big picture in that business is that, you know, I think there's 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 onboard it around the tax cycles themselves. So again, just when it gets on board, and when it flows through is a little bit more muted than, like an instantaneous thing at a flood surge or something like that. So, no, I say that business is not week at all, I think it's very, very solid. And that's where we expect one of the businesses that you know, we are putting a lot of money into new services and digitization. And I think we're going to see continued improvement and profitable in that business, as well.

[Andrew Jeffrey:]

So, it just gets 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 we’re thinking about more 2020 from a timing standpoint.

[Jim Balas:]

No, I think you should see an acceleration this year.

[Andrew Jeffrey:]

Okay. Thank you very much.

[Operator:]

And I hear from Ashish Sabadra with Deutsche Bank AG.

[Ashish Sabadra:]

Hi, thanks for taking my question. A quick question on PIRM margins. So, you've talked about investments and volumes being on the EBITDA growth there. And given the investments may continue for some time, how should they take about the inflexion there, like at what point do we start to see the EBITDA growth in the PIRM business?

[Frank Martell:]

Yeah, what we saw in PRIM in the second quarter was continued investment impacting the margin. There were another couple other components that you had stronger FX in the quarter. And then also Australian market volumes were down about 15% which was weaker than originally expected. I think in 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.

[Ashish Sabadra:]

Okay, that’s helpful.

[Frank Martell:]

Good news is 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.

[Ashish Sabadra:]

That’s helpful. And maybe just on the corporate expense side that was likely higher on year-on-year basis, and you call out there, how should we think about that for the full year basis, anything in particular? Thanks.

[Frank Martell:]

Yeah it gets to be a little lumpy with the spend levels in timing, so nothing – nothing unusual just to model out consistently.

[Ashish Sabadra:]

Thanks, that’s helpful.

[Operator:]

Jeff Meuler with Baird has our next question.

[Jeff Meuler:]

Yeah, thanks. Could you just help me understand kind of 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? Do you go back to 55% free cash flow conversion and how does it impact adjusted EBITDA margins? How does it impact organic innovation?

[Frank Martell:]

Yeah, so I think yes, the question on the cash flow rate, is yes, 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 platforms, we are converting them to a public cloud platform, which requires certain re-platforming and recoding and that kind of stuff, but by and large, it’s taking the existing platforms and upgrading them onto a more efficient system. And with that comes some benefits around cyber not insignificant, frankly, speaking. But so, I think all of that is – is underway most of that spending is going to be this year, next year, but the vast majority this year, hopefully.And so, we’ll see that will clear that half 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 big benefit will be an operating performance and cost efficiency. That’s the – that’s the expectation. It is part of our, as I mentioned earlier, 30% goal, we are going to save a significant amount of run costs based on the estimates and the initial numbers that were saying. So, I think it’s a very positive move.Some of the other investments we talked about, I would just say that step back, there’s collectively a number of them, but they’re not, in and of themselves, gigantic programs sound like the datacenter migration a couple years ago. They’re more enabling the infrastructure, I’d say the biggest other investment area that we’re looking at, which is very exciting is around the digital property record, and the visualization of the data-to-data property. And that is where you’ll see more impact on the PIRM side, where I think that will access more verticals, and allow us to get more efficient in the distribution of the of the – of the property records and the data. So, I think that – that’s where again, you see a little bit of the margin pressure in the short run in PIRM, a lot of that is related the fact that a lot of these platforms, the smart data platform, fundamentally, is driving their revenue.So that’s what – that’s what you’re saying there. And I think that that’s very exciting. I think the revenue benefit will unfold over a bit longer time horizon. But this year, next year, we should see significant improvement. You may recall, we bought a company called home visit last year, which takes 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.

[Jeff Meuler:]

Okay, let me just continue on the line of thought on – the overall organic growth right now is tough markets tough. But just other than those, I guess, to that you just called out what are the other new products that are selling well, or where you see the most opportunities the next few years? Isn’t when the market firms up?

[Frank Martell:]

Yeah, look, I think – I think that there is, we’re doing a lot of – credit it’s been a pinch point for us. As you know, that’s one of the things and that is to press the 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, we actually outperformed on the credit side, but a lot of the other peers in this space, because there 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 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, a more broad kind of VOE, VOI solution, that should, I think, produce 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 to my prepared remarks. Fundamentally, we are seeing success in the integration of our existing solutions in a more seamless, kind of offering, which is closing the white space that we may have into with some clients. So that’s traction there, I think as well. So, there’s a number of those and that 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 a good opportunity for us. We had a tough comp 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 universes and we have a last back half of last year was not great for the market. So, I think we’ll see a better market this year in the U.S. in particular. And 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.

[Jeff Meuler:]

Okay. Thank you, Frank.

[Operator:]

Stephen Sheldon with William Blair has our next question.

[Stephen Sheldon:]

Hi, thanks. It seems like yeah, it turns in insurance and then the spatial business continues to be a little choppy, excluding the booze from Cindality. And some of that sounds like its weather, but was just curious how results there over the last few quarters have come in, relative to your expectations. And has there been any distraction from the integration between your existing solutions, instability? And how quickly could that business get to the low to mid-single-digit potential growth that you’ve talked about?

[Frank Martell:]

I think that if you look at the underwriting platform business, I think it’s – 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 kind of increase a little low to mid-single-digit. It had a little bit of a flurry of activity a couple 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 additional stability, which by the way, we’re very pleased with I think the similarly teams, a terrific team. It’s a terrific platform. And so, the idea really, Stephen is to get those two businesses seamlessly connected so that we’re –we are frankly more competitive in the in the North American marketplace. And 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. Is that a distraction, these things are always a bit of a distraction has that materially hurt the organic growth. I don’t think we’ve taken the eye off the ball, that’s for sure. I think the team has really done a good job; it’s just going to take a bit of time. But again, I think the additional stability has been 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 that growth will likely accelerate. But we do need to get adoption by some of the client base in North America to make that a reality.

[Stephen Sheldon:]

Okay, that’s helpful. And then, it’s good to hear that you’re continuing to improve the utilization of the internal staff appraisers. Can you provide any detail on the overall utilization rate for staff appraisers and maybe how that’s trended over you last year or so? And additionally, how do you plan to manage internal staff versus using third party providers? Is it the plan to give the staff appraisers as much work as they can reasonably handle and then using third party resources for the overflows is just any detail there?

[Frank Martell:]

Yeah, so the utilization, when I say utilization, it’s in a broader set, if you’re thinking about a traditional consulting business where you’re looking at 65% or 70%, we look at that, but when I – the way I’m using it in the context of the call this morning is around, the mix of external and internal appraisers and how we utilize those two groups. We’re trying to drive more volume more consistently in an automated way around our staff panel, which we have more control of and we think we can get automation more quickly. So, I think that’s what I’m kind of talking about there. And I think then when it gets into geography, to be quite honest with you where you utilize people, obviously in more rural lower volume states, you tend to use third parties more. 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 eTech platform, which we bought a couple years ago, which is 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 drive it will be able to drive consistently more profitable live across our staff appraisers then use the supplement of the third parties.

[Stephen Sheldon:]

Great, thanks.

[Operator:]

John Campbell with Stephens Inc. has our next question.

[John Campbell:]

Hey, thanks. Most of my questions been answered. Nut Frank, I’ve got a higher level one for you. I’m just curious about your thoughts on the GSE reform efforts and then if there was privatization, how would that impact you guys? I’m guessing it’s a net positive over the long haul but I just want to get your take?

[Frank Martell:]

Oh boy. I think – John I think it’s early days, I think we are monitoring. The MBA is providing a lot of input. Mark Calabria if new, you probably know, his kind of pattern pretty well. I think there’s – there’s, I think clearly people think there’s a better chance for GSE reform. I think we’ve play well either way, current versus new. But I think clearly, there’s probably room for some progress on the GSE reform front, but 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 clearly the there was a kind of time in a couple of months back where people thought this the train might pass leave the station. I’m not sure this is the same enthusiasm right the second. But I think there’s been some recent reports about delays. So, but look at, it’s certainly not going to hurt us.

[John Campbell:]

Got it. I can agree with you. And then lastly, I just want to check on the DOJ probe and I guess the CID guys received. I don’t think you guys are part of that probe but it’s probably just matrix data. But anything you can discuss any kind of update?

[Frank Martell:]

Not really, I mean, we’re not to target the probe. So, there’s – I don’t really have a concern on that at the moment.

[John Campbell:]

And so, can you maybe….

[Frank Martell:]

We are cooperating obviously, like we need to.

[John Campbell:]

Could you maybe just shed some light on what they’re looking at maybe?

[Frank Martell:]

I can’t really obviously. No.

[John Campbell:]

Okay, fair enough. Thanks, guys.

[Operator:]

Jason Deleeuw with Piper Jaffray has our next question.

[Jason Deleeuw:]

Yes, thanks for taking the question. Just on the PIRM segment and specifically on property insights, I’m just trying to get a sense for the components of the revenue in there. And I know there are a lot of different types of clients across different industry verticals that use that property data. And I’m just trying to get a sense for where what client buckets are – are growing in their usage of the property data 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?

[Frank Martell:]

Yeah, in terms of property inside, 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 you have all the FX in the Australia market volumes impacting it on a year-over-year basis. And in terms of 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, and other types of use cases for the data.

[Jason Deleeuw:]

Got it. And then just a high level question strategically and thinking about the collection of business is in data assets that you have. How are you thinking about things right now? I mean, do things need to be trimmed? Does anything need to be added through M&A? Just kind of some high level thoughts on what you’re thinking there?

[Frank Martell:]

Yeah, look, I don’t think we have a – we don’t – we don’t have separate, businesses, we have a data repository, a common IT stack, and we have product lines, Jason. So, I think it and really the model is most of the product lines, collected data, or collect data on behalf of those and utilize them across the business line. So, it’s pretty integrated. I think that we have a really profitable business in that area, that’s been an area, honestly, that I think is that sell its own down, despite nine quarters of tremendous pressure. I mean if you look at the lender side or the servicer side or insurance side, everybody’s trying to cut costs. So, I think the growth it’s not easy to come by, we’ve done some innovation with some of the offerings. We have a very exciting advance in the ABM area that we’re rolling out.So, I think there those kinds of things will help us to grow that that business there. I think we don’t have anything that doesn’t fit. So, I don’t think we’re looking to dispose 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 and a workflow and use our existing backbone and expand that across the nation. So that could be many x times the current size, but just taking the capabilities and synergizing that 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 are, as you know, are extremely high. And I think that’s – it’s not – we don’t want to chase stuff that has had no growth but is projected as super growth because in PI multiple floor, 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 last couple years.

[Jason Deleeuw:]

All right. Thank you very much.

[Operator:]

Next, we have from Geoffrey Dunn with Dowling & Partners.

[Geoffrey Dunn:]

Thanks. Good morning. Frank, to better understand how the PIRM margin has transition 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 compared to last year or how much could peel off in '20, just so we can get a better idea of the lift that you can get next year?

[Frank Martell:]

Well, I think, Geoffrey, as you look at the – I mean just take a lift question. So obviously, we're going from, you know, the margins that are in place in our guides this year to the 30 target margin next year. So that's a significant lift there from a profitability perspective. That's being underpinning, a lot of our investments are around foundational items like the platform efficiency, the cloud, and that kind of stuff. So, I think those are you know, those are, I think, just, they're not rocket science. I mean, every copy looks at the public cloud, you know, so we're just trying to drive there quickly. I say an 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 companies, you look a lot of companies, companies I've been at before, we spent 6%-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 you know, this year, it's going to be up kind of mid-single digits in terms of totality to spend. As I mentioned, if you look at our CapEx line, you got to take about a third of that off for capitalized data. So, but it's not, it's not dramatic per se. So, we do have a big lift, Geoffrey, I mean, if you look at next year to get 30 margin, I mean, we're 29% this quarter, which is pretty good. They got AMC, once the AMC thing plays through, you are going to have a different mix shift there. It’s going to impact profitability. So, all those irons in the fire, everything is kind of you know, the railroad, you know, said and the trains run down the tracks, they are pushing towards the 30%. And that should be you know, a substantial profitability increase.

[Geoffrey Dunn:]

Yeah, I understand that. I guess it's challenging because on the UWS side, we can look at incremental margins when the market is volatile. But a lot of this story is about that lift in the firm side. So, to get any kind of better framework for understanding that would be helpful?

[Frank Martell:]

Yeah, I wouldn't say a lot of the lift is depend on the firm side, honestly, because I think if you look at the UWS side, you know, I mentioned the automation in the tax business, for example, you're going to see lift there as well, continue 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, margin lift in firm per se, but certainly, if you look at firm, I think right now, this quarter, and it looks, you know, because it's you're only talking about 56 million of EBITDA, you know, 34 million of percentage wise, looks bigger than, you know, the dollar implications of it. So, I think, but you're going to see that investment spent should trend down as it relates to firm 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 of the company, it's going to be distributed across the segments and corporate et cetera. So, it's not one you know, segment is required.

[Geoffrey Dunn:]

Okay, thanks.

[Operator:]

At this time, there are no more questions in the queue. The conference is now concluded. Thank you for attending today's presentation.