CoreLogic, Inc.
Q1 2017 Earnings Call Transcript

Published: 26 Apr 2017

[Operator:]

Welcome to the CoreLogic's First Quarter 2017 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. 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 first quarter of 2017. 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 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 known - 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 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 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 2016. 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 First Quarter 2017 Earnings Call. I'll begin today with a recap of our first quarter operating performance, including update on market conditions, growth trends and capital return. Jim will cover our first quarter financial results, cost management programs and our second quarter outlook. We'll conclude a Q&A. Before I begin my prepared remarks, I want to acknowledge the passing of Anand Nallathambi on March 2. Anand was an outstanding leader and a close friend and I want to sincerely thank the many individuals and organizations that extended their condolences and best wishes to the CoreLogic team and importantly, to the Nallathambi family. Anand and I worked very closely together over the past 5.5 years to execute against the shared vision of creating an innovative, data-driven enterprise that delivers unique property-level insights to the global housing ecosystem. Anand was passionate about CoreLogic and I know he would have been very proud of the company's strong start in 2017 and our continued execution against our medium- and longer term strategic imperatives. CoreLogic delivered a strong operating performance in the first quarter of 2017. We remain very focused on building market leadership in our Property Intelligence, underwriting and risk management solutions sets, expanding operating leverage and margins through process and workflow optimization, enhancing our technology infrastructure and expanding our Innovation Center and returning capital to our owners. Our Q1 financial performance was in line with our expectations and with the outlook Jim provided on our last earnings call. During the quarter, we substantially offset the impact of a 20% decline in U.S. mortgage applications through a combination of market share gains, pricing and the launch of new and enhanced products. These positive factors should provide us with solid momentum and help to somewhat offset the forecasted slowdown in U.S. refinancing volumes this year. We generated underlying organic growth for the fifth consecutive quarter despite mortgage market headwinds, lower projected - project-related revenues and planned vendor diversification by a significant appraisal management client. In Q1, underlying organic growth aggregated 3%. Over the past several years, we have continued to build scale, leveraged our core data assets and insights and diversified our revenues beyond our traditional stronghold in U.S. mortgage underwriting. Today, our non-U.S. mortgage operations represent about 40% of our non-VSG revenues versus 10% 5 years ago. Collectively, they grew at a strong pace in Q1. As we expand these businesses, we're also executing on our strategic initiative to build a scaled leadership position in property valuation solutions in the U.S. We believe ultimately, this is a multi-vertical and global opportunity. CoreLogic is already the leading provider of valuation solutions in Australia and New Zealand. In 2016, we integrated LandSafe, RELS and FNC into CoreLogic and built out our valuation solutions management team. Over the course of this year, we will be focusing on building our operational capabilities and platform-based solutions offerings as well as diversifying appraisal-related revenues. With regard to revenue diversification, in the first 3 months of this year, we signed up several new clients for appraisal management services and expect to book revenues related to these wins beginning late in the second quarter. Diversification will continue to be a major focus for our appraisal management services team throughout 2017. The U.S. residential property valuation market is poised for transformation. We believe that our scale as well as our technology data and analytics will prove to be advantages in the race to transform the way real estate assets are valued. As we said in the past, the opportunity to transform the valuation space and bring greater transparency to the underwriting process will be a multi-year endeavor and represents a significant long term opportunity for us. During the first quarter, we continue to make important investments, enhancing and scaling our solution sets as well as expanding our innovation, technology and compliance capabilities. This strategy allows us to outperform U.S. mortgage volume trends over the short, medium and longer terms and to sustain our competitive advantage. Our focus on scaled and unique data-driven solutions makes us a logical strategic partner for any firm looking for a deep insight into the global real estate ecosystem. As the pace of technology advancements has accelerated, CoreLogic has invested to capture the opportunities and benefits of emerging tools and capabilities. We launched our first Innovation Center a little over 2 years ago. In the first quarter of this year, we expanded our innovation platform with the opening of a new center in Dallas. The Dallas center is slated to be our global innovation headquarters. We also opened satellite innovation labs in Sydney, Australia and Oxford, Mississippi. Our positive organic growth trend over the past 5 quarters is underpinned to a significant degree by our continued focus on share gains, pricing and product development innovation. I believe our track record in making smart investments support durable growth and ultimately ensures our market leadership. We're able to reinvest because of our aggressive focus on driving scale, operating leverage and efficiency. Regarding cost management and margins, over the past several years, we have made important strides in our pursuit of first quartile levels of operational excellence. Every member of the CoreLogic team is focused on quality and service improvements, process and operational efficiency and cost productivity. Jim will provide more color on this a bit later. Our relentless focus on building scaled and unique solutions and driving for best-in-class operational effectiveness has resulted in the creation of a durable and highly cash-generative business model. CoreLogic remains committed to consistently returning significant levels of capital. Over the last 6 years, we returned over $1 billion to our owners through our ongoing share repurchase program. In 2016, we repurchased 5 million shares. In 2017, we plan to repurchase another 3 million shares or about 4% of our outstanding share count. Through the first 3 months of this year, we have repurchased 0.5 million shares. Although our share count - our share price has increased significantly in the past several years, we believe that our current share price does not fully reflect the intrinsic value of our business and its future potential. Therefore, in our view, the ongoing repurchase of substantial numbers of our shares remains a significant source of long term value creation. My final prepared remarks today will discuss market trends. Our view of the mortgage market volumes remains unchanged from our last earnings call. The U.S. mortgage market is progressively transitioning from its dependency on high levels of refinancing to a purchase-driven cycle. We believe this transition will largely be completed during 2017. We expect purchase volumes in 2017 to increase from 2016 levels, fueled by growth in the economy, population and first-time homebuyers. Millennials are also becoming an increasing source of new housing demand and will be so for the foreseeable future. We believe a return to the - of the U.S. mortgage market to a purchase-driven foundation is good news in many ways for CoreLogic and the industry as a whole. The end of the refinancing boom in the last 5 years, although challenging in 2017, sets the stage for a more predictable and sustainable growth pattern in U.S. mortgage volumes in the years ahead. This bodes well for our future as we have a long-established track record of consistently outperforming mortgage market trends through a focus on driving market leadership and scale in our core operations as well as smart acquisitions. I believe that the success in transforming CoreLogic as a high-performing global leader is a direct result of our continued successful execution against our strategic imperatives which are focused on delivering unique property insights. These insights allow participants in the housing ecosystem to make better decisions in the areas of prospect identification, underwriting and continuous risk management and monitoring. In closing, CoreLogic is off to a solid start in 2017. We remain laser-focused on market leadership and accelerating our growth rates as well as expanding margin and cash flow. I want to thank our employees, our clients and our shareholders for their continued support. Jim will now discuss our financial results.

[James Balas:]

Thanks, Frank and good morning, everyone. Today, I'm going to discuss our first quarter financial results, cost management programs and second quarter outlook. As Frank mentioned, CoreLogic is off to a strong start in 2017, both from an operational and a financial perspective. For the first 3 months of the year, we outperformed U.S. mortgage application volume trends, drove productivity and cost-reduction initiatives, generated high levels of cash flow and returned significant capital to our shareholders. Notable first quarter 2017 financial highlights included, first, continued organic growth trends supported by share gains, pricing and new products; second, significant progress towards achieving our cost-reduction targets; third, generation of substantial free cash flow; and finally, the repurchase of 0.5 million of our common shares. First quarter revenues totaled $440 million compared with $454 million in the same 2016 period. During the quarter, market share and pricing-related gains as well as contributions from new products in both the Property Intelligence and the Risk Management and Work Flow segments helped to offset the impact of an estimated 20% decline in U.S. mortgage applications, lower demand for project-related advisory services and the wind-down of noncore product lines. PI revenues declined 6% to $227 million in the first quarter driven by lower valuation solutions revenues due to lower mortgage application volumes and planned vendor diversification by a significant appraisal management client. Additionally, PI revenues were also impacted by lower demand for project-related advisory services. PI revenues attributable to insurance, spatial solutions and international were higher in the first quarter. RMW revenues totaled $214 million, consistent with 2016 levels, as the benefits from organic growth offset the unfavorable impacts from lower mortgage volumes and the wind-down of noncore product lines. Operating income from continuing operations totaled $33 million for the first quarter compared with $58 million in the prior year. The decline in operating income was principally attributable to lower mortgage application volumes as well as charges associated with cost-reduction programs, including severance and real estate consolidation cost and investments in technology, innovation and compliance programs. First quarter operating income also included a onetime acceleration of stock-based compensation. First quarter net income from continuing operations totaled $13 million compared with $28 million in 2016. The decline was primarily the result of lower levels of income from operating activities discussed previously, partially offset by lower interest costs and tax provisions. Diluted EPS from continuing operations totaled $0.15 for the first quarter of 2017 compared with $0.31 in 2016. Adjusted EPS totaled $0.37, down 23% year-over-year, reflecting lower first quarter operating income levels, partially offset by the benefit of lower interest costs and tax provisions and the impact of share repurchases. Adjusted EBITDA totaled $90 million in the first quarter compared with $107 million in the same prior year period. The 16% year-over-year decline in adjusted EBITDA was principally the result of lower mortgage application volumes, higher technology, innovation and compliance costs and charges associated with cost-reduction programs. PI segment adjusted EBITDA totaled $45 million compared to $50 million in 2016. The reduction in PI adjusted EBITDA was attributable to the impact of lower mortgage application volumes, planned vendor diversification by a significant appraisal management client and the impact of lower demand for project-related advisory services. RMW adjusted EBITDA was $51 million, down $11 million from 2016 levels, as continued organic growth and productivity benefits partially offset the impacts of lower mortgage application volumes and higher spending on compliance and cost management programs. Finally, we continue to generate very strong levels of free cash flows in the first quarter. On a trailing 12 months basis, as of March 31, 2017, free cash flow totaled $344 million or 71% of adjusted EBITDA. I will close my prepared remarks today with a discussion on our cost management programs and our second quarter financial outlook. As we previously announced, we expect to reduce run rate cost by $30 million in 2017 by consolidating facilities, reducing staffing levels, outsourcing certain activities and other operational improvements. During the first quarter of this year, we moved aggressively to secure these cost reductions by reducing our global staffing levels by 3% and consolidating various offices and/or operations. Although the cost of taking these actions reduced our Q1 profitability somewhat, the achievement of our full year savings target should boost adjusted EBITDA margins by about 160 basis points. CoreLogic is committed to achieving 30%-plus adjusted EBITDA margin over the next 3 years based on a normalized U.S. mortgage market and after accounting for the build-out of our valuation solutions platform. We expect to achieve our margin goals through a combination of profitable growth, favorable revenue mix as well as business model transformation and cost productivity. In terms of the second quarter of 2017 based on normal seasonality patterns and our current view of market volumes and cost trends within our business as well as investment timing, we expect that adjusted Q2 EBITDA will be 40% to 50% higher than first quarter 2017 levels. Our full year 2017 financial guidance remains unchanged. Our long-stated capital allocation strategy remains in place. We will continue to reinvest in product and service development, productivity and cost management programs. In addition, we will opportunistically pursue strategic acquisitions in the repurchase of our common shares as well as retirement of outstanding debt. To sum it up, CoreLogic is off to a strong start in 2017 and we believe we're well positioned to continue to deliver strong financial results over the balance of this year. Thanks for your time today. I will now turn the call back over to the operator for Q&A.

[Operator:]

[Operator Instructions]. The first question comes from Bill Warmington with Wells Fargo.

[William Warmington:]

Frank, back when you first joined CoreLogic in August 2011, you and Anand, may he rest in peace, implemented an operational efficiency and cost-reduction program that basically lowered CoreLogic's breakeven point from around $1.5 trillion in mortgage originations to about $1 trillion. And that level was tested and proved out when the mortgage market troughed back in the first half of 2014. But since then, you've made a number of changes to the business with acquisitions, divestitures and additional cost cuts. And so my question is, how do you think about your mortgage market breakeven point today and going forward?

[Frank Martell:]

Yes. Thanks, Bill. So I think a couple of factors are relevant to answer that question. First of all, as I talked about the revenue diversification of the company, we had been working on a pre-VSG taking the mortgage concentration down. I think we've been pretty successful there. As I mentioned, we went from kind of 90% to about 60% of concentration mortgage and that - I think that trend will continue. We're - we do believe that valuation solutions represent a very unique opportunity for the company. And I think from that perspective, it's well worth the investment. It's not only - not only is it a mortgage opportunity, but it's also a multi-vertical and a global opportunity. So we see that as unique. It's a very fragmented space. So in the near term, that's - I wouldn't put in the context of a breakeven scenario, but it's certainly, in terms of us trying to get to, as Jim said, the 30% margin threshold for the total company, that requires a bit more time. But we're - we used to talk about, in a $1 trillion market, making at least 25% margin for the mortgage-related businesses. I think, clearly, we've exceeded that threshold. I don't know the exact number, but probably several hundred basis points, if I had to guesstimate on the call. And so I think we've improved on that scenario that you talked about. I don't think we ever talked about it in terms of breakeven. But in terms of holding a reasonable 25% margin and in a trough market, we've done that. I think the mix of the company is materially better than it was 5 years ago, well, much more concentrated in terms of our solution set and where we play than we used to be. So we're a fewer bigger businesses with much more operating leverage. So I think our profitability characteristics are clearly superior. Right now, as we talked about, the real challenge is really absorbing VSG and getting that to a higher-margin threshold. Right now, we're in the low teen and we need to get that up. And I fully expect to get - be able to get that up through, really, a combination of mix, price recovery, cost management and a diversification of the AMC revenue.

[William Warmington:]

And then for my brief follow-up, how are you feeling about 2017 guidance, given the new wins at VSG and also the strong free cash flow performance that's well ahead of the 55% EBITDA conversion that you've been guiding to?

[Frank Martell:]

Yes, I think, first of all, the first quarter was exactly what we expected it. We had to make some investments. We had to get the cost actions. The sooner you can get those done, the better off you are from an impact perspective. So we went hard at the cost elements of that. Obviously, you have things like severance involved there. As Jim mentioned, we're really aggressively continuing to compress our real estate footprint. We think that has many benefits beyond, frankly, the cost elements. So I think that was a good result. So the first quarter, in terms of taking the actions we need, I thought was exactly as we expected. We continue to invest in innovation which was a point I stressed in my prepared remarks. But also, we invested a fair amount in compliance as we had the last couple of years. Because, as you know, the Dodd-Frank rules and the CFPB and everything else has ratcheted up the performance in that area and it makes us a stronger partner for our clients. So we've invested in those areas as well. And I think those will bear fruit on the top line and the margin line as we go forward. So I think first quarter was a very solid kind of on-the-script type of a quarter. Jim provided second quarter numbers on EBITDA. I think, obviously, we're going to see a 40% to 50% acceleration on the level of EBITDA for the first quarter. Some of that is seasonal. We usually get a 20%, 25% seasonal bump. So that's obviously an acceleration beyond the normal seasonal characteristics. Some of that is less cost on some of these investments and some of it is the efficiency benefit of the cost actions. So I feel good about second quarter. It validates the full year range that we have out there right now. And yes, we'll revisit that. In the midyear, I would say the other thing is a real home run for us, obviously, was cash flow in the first quarter. And we bought back more shares that we traditionally do in the first quarter because it's such a short window. But we will continue to repurchase shares on an aggressive level as we go through this year. And I think the cash flow is a real win there. And again, I think as we look at the guidance, we'll probably look at that conversion target that we normally use to - and update that in midyear as well.

[Operator:]

The next question comes from Darrin Peller with Barclays.

[Darrin Peller:]

Look, I think we've characterized the results more as an outside strength in the RMW side of the business just based on what we would have expected on originations to impact that. So clearly, market share gains there were coming in strong. With - on the other side of that, the VSG side being a bit of a slower start maybe attributable to certain clients. But I guess, if you - give us a sense - it would be helpful to give us more of a sense of this sustainability to that. I mean, in terms of the origination-sensitive businesses outside of VSG first, market share gains there were - is that going to continue? I mean, is that an opportunity for you guys to continue to really outperform the origination trends in that area through the year? Maybe a little more color on what you see happening there. And then on the VSG side. I mean, I know it's - you indicated it came in, in line with what you'd expected. But again, there's a couple of clients or a client that I think has been maybe a little more either challenged or moving share around. So just curious to know what types of scale we're talking about in terms of new clients that can roll on to VSG in the second half. And what kind of run rate we could expect?

[Frank Martell:]

Sure, Darrin. Yes, so just on - to parse that out, I do think the first quarter was as expected and as we kind of talked about on the last call. So I don't - there wasn't really any new news in the first quarter. I think we executed really almost exactly as we planned to do and as we thought we'd do. I would say that we've tried to be aggressive on the cost actions. I mentioned it earlier in Bill's - in response to Bill's question. So I think first quarter, there's no surprise there. There's no really anything kind of different. In terms of the question on non-VSG origination, RMW had a good performance in the first quarter, as it really has for the last 4 or 5 years. I think the team there has done a terrific job really focusing on quality, service levels and also product innovation which I think has been why they've been able to take share. We've done a great job the last couple of years in credit as well as tax and flood, in particular, those 3 businesses. That credit has come on strong. Now some of that's trend - things like trended data and a few other things like that flowing through for the full year. But clearly, our 3 kind of powerhouse origination businesses have performed well. And I think that's really a tribute to the team and the underlying product, quality and delivery. I think there's additional realm room for share per share gains, particularly credit. We have some new product in tax and flood that I think will continue to grow those businesses. So I think those businesses are in good shape and I think they'll continue the same trend we saw in the first quarter. So I have no concern there and I'm optimistic there. As it relates to VSG, as we've talked about, there's really 2 components of the revenue stream in VSG. There's the appraisal management end of the business which is really, as you guys may remember, there was 2 clients that was really RELS and LandSafe. Those 2 were captives. So we had a noncompete. So we really were not able to diversify revenue in 2016. We started working on it in the first quarter. And I think we have a solid number of new clients signed up. It just takes a while to see the revenue. So I think we'll see - in the back half of the second quarter, we'll see some revenue flow there. Is it going to be an exact replacement in the short run for some of this diversification from the one client? I think it'll fill up that bucket to a certain degree but not fully in the short run. But that's factored into the guidance. So I think that's not a surprise. I think, ultimately, we will end up with a diversified mix there. But - and a scale that's unique in the industry on the appraisal side. Obviously, the game for us is not to do it the same way it's always been done, but to really automate, digitize and make it a really different customer expense. So ultimately, the margins that traditionally are in that business which are kind of the mid-teens, to upper teens, I think could grow into the mid-20s through automation, digitization, et cetera and that's what we're working hard on. The other part of the business which we haven't focused as much on but ultimately is extremely important in the strategy, is the platform side of this equation. FNC is a great platform used by over 100 lenders, connects the over - well over 50,000 appraisers and a myriad of other constituencies, like home inspectors. So that's a huge platform for us to reach out and monetize more of our services. So that's an area that we will be talking more about as we go forward and one that's a tremendous opportunity and at a much, much higher-level margin. So if you look at the last couple of calls, we talked about margins that are for VSG in the aggregate that ultimately will look something like the 30% target that we have and that will come through the mix in the expansion of that area which we have a big focus on. So I think VSG is, again, no new news there, but I'm giving you a little more granularity because I want to make sure that people know that those are the key areas of focus, those 2 areas. And I think diversification on the AMC side, the expansion of the platform side and then I haven't gotten into the third area which, ultimately, I think, is an extra benefit, is the monetization of the data resident on those platform businesses. We have over 30 million appraisals, for example, in our national database that came with FNC that is a rich source of additional data. So lots of opportunity on the VSG side. Early innings. We talked about it. It's a multiyear because it's a pretty stayed area of the market but one that's critical for our clients and critical for our business partnership.

[Darrin Peller:]

All right. So I mean, just to characterize, it sounds like you're saying that RMW is going to be able to grow, outpace the mortgage market the way you did this quarter, I guess, in the next couple of quarters. Is that right? And then the VSG side, we should expect some revenue to fill in what was sort of lost loss from the diversification but not to the same full degree?

[Frank Martell:]

Yes. So I would say that, that's correct, Darrin and I think that's all embedded in our guidance for the year. And look, I think, again, just to kind of give the RMW guys a pat on the back, I mean, they've really earned their market positions through quality and service. And I think we're clearly the market leader in the 3 businesses and we're innovating and growing and I think that's going to continue.

[Darrin Peller:]

Okay. That's helpful. Just a very quick follow-up, just to be clear, at least. The margin side, I know they were the onetime items you mentioned. I mean, those were some of the severance costs, et cetera, that impacted the quarter's margins, especially on the RMW side. That - your guidance is, still for margin expansion for the year, suggesting obviously that those really are more onetime in nature, I guess and you're going to have - not see a lot of that repeat. I just want to make that - make sure that's clear.

[James Balas:]

Yes, Darrin, the severance, clearly, we don't expect that going forward. The other components - we'll still have a little bit of compliance on the first half of the year. It'll probably normalize in the back half.

[Operator:]

The next question comes from Chas Tyson with KBW.

[Chas Tyson:]

I just want to follow up on the last point you made, particularly on kind of increasing the margin in the VSG. You noted that's a combination of mix, price recovery and cost management. Can you just rank order those and talk about which ones contribute the most? And then on FNC, can you talk about how you expand that platform? Is it essentially increasing the number of offerings that are on there away from just appraisal to more offerings and kind of making it a more holistic mortgage gateway?

[Frank Martell:]

Yes. So Chas, this is Frank. So I think on FNC, it's been - the revenue has been traditionally around the order entry and fulfillment aspect of that platform. So I mentioned data, but there's a lot of other. We're looking at how to add more of a CoreLogic existing data sets on to that order entry fulfillment. So there's a distributional play there. There's a data play, an analytics play. So there's a number of different factors that we think we can take existing assets and mix them in on that platform and get a benefit from that. So I think there's that. Also, the - just the organic growth that, that company has grown and continues to grow organically through new client acquisitions. So I think FNC is a - has a pretty durable business, revenue model and also, frankly, has a, I think, some upside opportunity there. All of that should be at strong margin levels. So as that business grows, it becomes a more important part of the mix of the VSG. That's going to lift our margins. I think on the AMC side or the appraisal management side, it is definitely, if I rank order, in the near term, it's about panel integration and getting diversification. Those are really, I'd say, the key elements to this year. But also, as you look at the next year, fundamentally, the optimization, the workflow, it takes 10 to 14 days on average to do an appraisal these days. That's too long for the industry to - from a client-experience perspective. So we're trying to looking to shortening that substantially. If you can shorten it, then the economics and the margin characteristics change dramatically. That's just a manufacturing-type truism. If you can do something twice as fast, you're going to be able to have a lot of leverage there. So that's what we're working on there ultimately. And so that's, I would say, an important but maybe perhaps medium to longer term.

[Chas Tyson:]

Okay. And then on the major client that's diversifying, I guess, just based on some rough math but quickly, maybe 10% of the revenues came off. Is that the right way to think about it? Is there - I mean, how much more do we have to go in terms of them diversifying throughout this year or maybe next?

[Frank Martell:]

Yes. Well, obviously that's - to their discretion, there's no lender can guarantee you volumes under the regulations. So from that perspective, we have - I'd just emphasize, we have a very strong leadership position with both of these clients. So we're not talking about something dramatic there. But they - when we acquired that asset, they had a stated diversification plan. We knew that. It's in the numbers. So it's not a surprise to us. And so the key to me is not their diversification because we kind of know what that is. It's more how quickly we can fill the bucket and ultimately, frankly, to have a much more stable revenues in REO because obviously, the diversification - you're not hitching your start to just 1 or 2 players. But having said that, those 2 players have and will provide a tremendous foundation for market leadership for CoreLogic. And so we want to make sure that we keep as much share as possible. So we're not relinquishing share beyond what we have to, to accommodate their planning. We're definitely fighting hard for every dollar of revenue in both of our major clients but also as we get the diversification going.

[Operator:]

The next question comes from Kevin McVeigh with Deutsche Bank.

[Palmer Miles:]

This is Palmer, on for Kevin. Can you give a little bit more color on the revenue split between RMW and PI as it relates to the guidance? And you guys have touched on it before, but how should we think about that revenue mix moving forward?

[Frank Martell:]

Yes. For the first quarter, revenues roughly 50-50 for the quarter and that's kind of where we were last year, ex VSG, obviously. And so this quarter, I think - I don't see that's going to shift dramatically, the ex VSG potentially. But the revenue of the company remains kind of that 50-50-ish. And I think in terms of growth levels, we expect - in the guidance, we expect them to both outperform the mortgage market. Obviously, RMW is significantly exposed to U.S. mortgage volumes; and the PI segment, less so. So that provides us a little bit of a different growth characteristics, depending on how the market behaves.

[Operator:]

The next question comes from Jason Deleeuw with Piper Jaffray.

[Jason Deleeuw:]

So I was just hoping to get a sense for the pricing benefits to revenue. And can we expect those to continue to kind of or just to flow through for the remainder of the year? And then any color on kind of new products also kind of contributing to the revenue growth outlook.

[James Balas:]

So if you think about it, the organic growth rate was about 3%. The 2 big levers in that were essentially the pricing and the new product growth. They were pretty equal in contributing to that amount. If you think back the last year, we have a 7% growth rate exiting the fourth quarter. Half of that was roughly market and the balance was coming from share gains, pricing and new product growth. So this was very much in line with what we expected. And yes, we do expect that to continue throughout the year.

[Jason Deleeuw:]

And then, Frank, I'm just kind of - would like to get your thoughts on M&A. I mean, the business is cash flowing great. And I'm just wondering if, strategically, are all the pieces in place? Or are there other avenues you're looking at or full-time stuff? Just would like to get your high-level thoughts.

[Frank Martell:]

Yes, so I'd say there's nothing new on M&A. We - there is a tremendous amount of assets out there in play. I think I don't know if that's a function of where the market cycle is. But we remain pretty disciplined. The VSG deals we did in really '15 were the last ones we've done. We didn't do - we just closed FNC in '16, early '16. But we do remain focused on our M&A stream which is scaling capabilities, data-focused and I think that screen has served us well the last six years. We're focused on that. I think there are a lot of assets out there. But I want to be disciplined in where they - if we do any transactions, where that is and how that integrates into the company. We're obviously interested in scaling our VSG-related areas in the right areas, as an example, continue to look at our spatial business, for example. And it's been a tremendous growth there for us in high value-added areas. So those types of areas remain of interest to us and then just general scaling. So I think they would all have to be largely accretive, but we remain pretty disciplined on that front.

[Operator:]

The next question comes from Andrew Jeffrey with SunTrust.

[Andrew Jeffrey:]

Along the lines of insurance and spatial, Frank, I'm wondering if we could get a little bit of color in terms of how that business is growing, how much of the growth is from share and price and new products and what the competitive environment is generally. I know you don't break it out formally in your reporting, but would love to get a little color on how much that's contributing to the growth and how much it might going forward.

[Frank Martell:]

Sure. So the ISS business, the insurance and spatial business, is growing kind of mid-single digits the first quarter of the year. So - and again, there's not a - there's not the same seasonality characteristics in insurance as there is in a little bit more in spatial, frankly. So a solid start to the year. That growth rate is a little bit higher than historically they've grown in the last 5, 10 years. I'd say, there's a pretty good balance between price and product. We've actually had a lot more product introductions the last 2 years which are starting to yield some good benefit. Not a significant share component to that, so it's more pricing and product introduction that's driving that growth. And we feel pretty good about that. Starting to see some leverage with the CoreLogic data assets and that was one of the premises when we built up the insurance verticals, there's a lot of cross polarization of data assets, both from insurance into the core business and from the core business to insurance. So that's working pretty well. So that business - and again, very, very good margin, very good cash flow business and a great data and synergy play for us and it's been terrific.

[Andrew Jeffrey:]

And then how do you think about organic revenue growth sort of through the cycle for your business, recognizing that, as you said, the mortgage market is changing now? Do you think that - you're putting up 3% in a pretty tough macro environment. What should we think about if '18, for example, is a flat-volume kind of year?

[Frank Martell:]

Yes. Actually, I think the good thing is I was pretty pleased with the organic growth because we don't - implicit in the volume situation is a lot of lenders and the services are still under siege in their own operations, a lot of regulatory pressure. You guys see the headlines and some of the different things that are going on out there. So a lot of lenders are not rushing to spend a lot of money. In fact, they're cutting back in a lot of areas. So it's an interesting time period. I think we've been able to grow organically through share gains. But I think, importantly, pricing is a bigger component and product. And that's going to have a benefit as we come out of this cycle that's going to be more pronounced than it is right now. If you look at pricing, I think we feel pretty good we're going to get to that. We talked about it a couple of years ago, but we're going to get to that 3 percentage type annual impact as we roll through '18 and the mortgage market finally gets back to kind of a purchase-driven market. Because it's been a real roller coaster the last 5 years in terms of refis and it's been great and not great, great. So with that flattening out, I think you're going to see a more pronounced benefit on pricing. We just - we said it before, but we've got - I think the best product pipeline we've had in [indiscernible] with the company and that's been hard fought. But it's - and the good news, it's not just one product; it's a lot of different areas and it leverages off the course. So I think those 2 areas in particular are going to be beneficial to us. I think we have share gains that are still to go. There are a lot of very interesting areas in the property space, but we have to make some investments. What you saw the first quarter around technology platforms and all that kind of stuff can deliver those and deploy those in a digital age. And so I think - I feel good about the hopeful acceleration of our organic growth trends beyond the last couple of years which have been okay. But I think I look forward to acceleration.

[Operator:]

The next question comes from Jeff Meuler with Baird.

[Nick Nikitas:]

This is Nick Nikitas, on for Jeff. Can you walk through your sensitivity or exposure to mortgage apps versus origination volumes in any given quarter? So I know you mentioned that apps were down, I think it was 20% in Q1. The origination forecast, I think, was expecting volumes up slightly. So I'm just wondering how we should think about that exposure going forward and the quarterly impact.

[James Balas:]

Yes, Nick. This is Jim. The way to think about it is, first of all, the first quarter was a bit disconnected between the closed loans and the applications and that was essentially due to transition in the market going to higher volumes to lower. And then in terms of our sensitivity, apps, ex the tax services which is really at the closed loan stage, the majority of our products are really at the application - have the application exposure because of their early upfront in the origination process.

[Nick Nikitas:]

Okay. That's helpful. And then just going back to the organic growth. I just want to confirm. So the 3% for this quarter is kind of ex end market or mortgage market volumes.

[James Balas:]

Correct.

[Nick Nikitas:]

And then so if we look back to kind of the past couple of quarters, the right way to think about it is kind of this 3%-ish plus a little bit rate going back to the second half of '16 with a mix 50-50 kind of new products and pricing?

[James Balas:]

Correct. As we discussed on the last call, we had 7% and about half of that was market. And now that we're in the dire market, we're quoting about a 3% number which is pretty consistent with what we exited the back half of 2016.

[Operator:]

The next question comes from Glenn Greene with Oppenheimer.

[Glenn Greene:]

Sorry, I have to belabor, I just want to go back to the organic growth. Just on - I want to understand your definition of it because you still have another quarter of FNC that's sort of rolled in and probably at a 350 basis points or something and FX was probably added to it as well. So I just want to understand, so we've got a baseline, how to think about it going forward. What are you including or excluding from underlying organic growth?

[James Balas:]

It's market, the product wind-downs that we've done in the past and it definitely excludes acquisitions. We don't include acquisitions growth in the organic growth value and we also strip out FX. FX was pretty modest this past quarter.

[Glenn Greene:]

And how much was the noncore product wind-down, roughly? How much of - what kind of impact to revenue was that?

[Frank Martell:]

Yes. Really, Glenn, it's become pretty de minimis now. It's I think a $2 million or $3 million with the amount, total amount. We were really at the tail end of that wind-down.

[Glenn Greene:]

And does FNC have any meaningful volume sensitivity? Or I didn't think it did, but - so I was thinking that was more like '15, '16 line of quarter.

[Frank Martell:]

There's a little bit of volume sensitivity in FNC, but it's - as you know, it's a platform company, so there's other aspects to it that are not volume-related.

[Glenn Greene:]

Okay. And then the one number that really stood out to me and I think Darrin might have touched it this. But the credit and screening business which you would think would be the most sensitive to mortgage apps and you called out the negative 20% mortgage apps. But that line grew 5%. Was there meaningful pricing in there? Is there trended data in there? I can't...

[Frank Martell:]

Yes, there's trended data which is obviously running through that line. Just remember, the mortgage piece of that business is less than - it's kind of a little bit below 50%. That business has other components to it that are nonmortgage, tri-merge mortgage support. So you've got auto and you got a few other things in there as well. So the trends won't be a match for the mortgage market trends, necessarily. Clearly, Glenn, there - the team has done - I mean, that's been [indiscernible], so we've picked up some good share over the last couple of years and that, in addition to trended data, are really what's fueling that line.

[Glenn Greene:]

Okay. And then the diversification of the one of the large clients in VSG. I know you expected the diversification. But is it - is the magnitude of the diversification happening like you thought? And - or was it sort of that a full - do you think of full run rate? Or is there more to come?

[Frank Martell:]

No, I think it's a little more episodic than we thought it would be. And actually, we probably are in better shape, a little bit in better shape than we thought we would be because when we did the deal, there was a plan that was presented. But that plan obviously will change, but we've never really - we don't consult on that. Obviously, that's their plan and not our plan. So - but we have a pretty good dialogue going and I think we're definitely holding our own. There's not a real surprise. I think the biggest challenge is more timing, frankly, than anything else because we provide guidance based on certain assumptions and then we can't control that. But it's been pretty - I'd say, it's been within the realms.

[Glenn Greene:]

Okay. And then just sort of a nuance question. But your 30% EBITDA margin target you talked about with 3-year time frame sort of parse this. But are you thinking end of 2019, end of 2020? I just wasn't clear on that.

[James Balas:]

Yes, I think kind of '19-ish is what we were - what we're kind of thinking about, but--

[Operator:]

The next question comes from John Campbell with Stephens.

[John Campbell:]

Just want to touch back on the cost-reduction target and then the spin required to get you there. I mean, it sounds like maybe a lot of the full year investment spend was kind of pulled forward into 1Q. That drove margin compression, but obviously, you guys are expecting a solid 2Q EBITDA. Can you kind of just - I don't know, Jim, if you can do this. Can help us size up what that spin was in 1Q? What remains for the - or what's remaining on the balance of the year? Just basically trying to get to a, I guess, "net cost saves" of that $30 million you guys called out for the year.

[James Balas:]

Yes. So on the savings - on the cost and the actions, the majority of that is on the first quarter. We will experience additional spend throughout the year, but clearly, the biggest component was in the first quarter related to severance and things like facilities and so forth. And that's included in kind of those unusual spikes in costs that we had within the $10 million to $15 million. And the way the phase will roll out during the course of the year is we'll see that start to hit in the second quarter. A good slug of it will be in the second quarter and it'll probably top up in the third and fourth quarters.

[John Campbell:]

Okay. And then back to VSG, nice job on the wins there. I know you guys called that out last quarter maybe that you were expecting that. But is there something that you had factored in or implied in annual guidance when you guys [indiscernible] put that out? Or is that upside to original guidance?

[Frank Martell:]

Yes. We clearly had a diversification factored into the guide. I think first quarter was pretty much in line with where we thought 3, 4 clients, so that was kind of good. And they're the right clients for us, so that worked out really well. But it's - that clearly, we hadn't assumed.

[John Campbell:]

Okay. And then, I guess, the new client wins, it sounds like you guys have actually signed them and you're maybe just in the process of onboarding and you expect that in the back half. But what was that - did you have those new client wins in original annual guidance?

[Frank Martell:]

Yes. There's a lag once you contract. But - so we expect revenue - as I said in my remarks, it's kind of we expect revenue flow in the back half of Q2. And then it should ramp over the remainder of the year in terms of the numbers of clients and the revenue contributions. So I think that's pretty normal.

[Operator:]

The next question comes from Kevin Kaczmarek with Zelman & Associates.

[Kevin Kaczmarek:]

Just following up on the last question, can you give us some color on who these clients are? Are they like top 50 lenders, top 100? And how much of their appraisal work do you think you can eventually get over time?

[Frank Martell:]

Yes. I mean, so there - I would say, first of all, they're a mix of depository and nondepository originators. They're definitely the top 100 and top 50, frankly. So they're not small. We would not be, for example, Kevin, 100% of their volume. We're a portion of their volume. And so what we're trying to do is make sure that as we add clients that, as I said, it's kind of the right fit for us and what we'll try to do ultimately with the digitization and the customer experience there. And so these clients definitely fit that mold. But we would be a portion of these new clients' volumes. And I think it's a good start. As I said, I think it's within - certainly, within my expectations.

[Kevin Kaczmarek:]

Okay. And are these faster-growing lenders like some of the online guys that have been growing at above market pace? Or are they more kind of maintaining their share over the past few years?

[Frank Martell:]

No. I'd say that they're growth originators. Obviously, let's put it in the context that the market is coming down. But I think in the context of the market, yes, they're a good growth kind of innovative lenders.

[Kevin Kaczmarek:]

Okay. I think, just one last thing. Within the servicing business overall, there's been a lot of movements. Citi is getting out of direct servicing and there's some private-label services that are changing around. Does this affect you guys in terms of tax processing? Should we see any lumpy additions or subtractions in the next couple of years as all these changes kind of take place?

[Frank Martell:]

No. As you guys know, we did have a small JV with Citi that's been wound down and - but there's nothing material.

[Operator:]

The next question comes from Josh Lamers with William Blair.

[Joshua Lamers:]

Since we're over the hour mark here, I'll just ask 2 quick broader-based questions. First, looking at VSG, out over the next couple of quarters, couple of years, is there anything to note in terms of pressure there, whether it's coming from lack of supply of appraisers, increased compensation, excessive regulation, anything that we should read into that might impact these segments over the next couple of years?

[Frank Martell:]

Josh, look, as I said, this area is ripe for transformation, honestly. And to do that, you need to scale and you need innovation and you need data. And we have all of those assets. So that's why we're kind of in this. So I think this industry will change. I personally don't think it's a lack of appraisers; it's more workflow and automation and applying technology which I think everybody wants to do. So there's an alignment of interest, I think, across the constituencies. So I think there's a lot of opportunity for growth in this area, frankly and insight. So I don't see the need for appraisals going away. I don't see reshaping. There's lots and lots of fragmentation. Obviously, we're trying to scale up a bit to leverage our existing scale and I don't see a dislocation per se. There's clearly pressure points in the industry. As you mentioned, there's demographics of appraisers. There's regulatory pressures. There's lots of rules and regulations that are challenging and those are all under discussion. But I think it's going to - the outcome is going to be for a better customer experience and a more automated experience. And I think we hope to be a leader there.

[Joshua Lamers:]

And then one last one. Given the expansion of the non-U.S. operations, just a quick comment on the Australian housing market and any impact, anything we might expect or could surprise us if the Australian housing market does take a dive.

[Frank Martell:]

Not really. I mean, every year, they kind of project pressure. But every year, the housing market is pretty - it's been pretty durable in Australia. You got kind of the capital cities which is where all the action is. And we're out of the gate strong in the first quarter. So I don't see any major issue there.

[Operator:]

This concludes our question-and-answer session and the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.