CoreLogic, Inc.
Q2 2017 Earnings Call Transcript

Published: 26 Jul 2017

[Operator:]

Good morning and welcome to the CoreLogic Q2 2017 Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Dan Smith with Investor Relations. Please go ahead, sir.

[Dan L. 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 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 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 2016. 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 D. Martell:]

Thank you, Dan, and good morning, everyone. Thank you for joining our second quarter 2017 earnings call. I'll lead off today with a recap of our second quarter operating performance, including specific comments on growth trends and revenue mix evolution, valuation solutions, margins and capital return. Jim will cover our financial results and provide updates on capital structure and our 2017 guidance. We will then conclude with Q&A. CoreLogic delivered another exceptional operating and financial performance in the second quarter. We remain focused on building market leadership in our Property Intelligence, Underwriting, and Risk Management solution sets, expanding operating leverage and margins through process and workflow optimization, enhancing our technology and compliance capabilities, and finally, returning capital to our owners. Our second quarter financial results were at the top end of the guidance range that Jim provided on our last earnings call. Total revenues were down 5% for the quarter as organic growth of 4% helped us to significantly offset the impact of an estimated 15% decline in U.S. mortgage market unit volumes. We have now generated solid or underlying organic growth for six consecutive quarters. Our positive organic growth trend has been underpinned by share gains, pricing, product development and innovation. We are continuing to build out our U.S. mortgage capabilities with unmatched content, analytics, and connectivity. CoreLogic data and insights touch three out of every four loans underwritten annually and few of the workflow of virtually every major lender and mortgage servicer in the U.S. The U.S. mortgage market is one of the world's largest consumers of property information and provides the critical mass required for scale and operating leverage that enables CoreLogic to be a strategic partner for our clients and a transformative force in providing residential property insights. We believe 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 be largely completed over the next 6 to 12 months. We expect purchase volumes in 2017 to increase from 2016 levels, fueled by growth in the economy, population, and first-time home buyers. Millennials are also becoming an increasing source of new housing demand and will be so for the foreseeable future. We believe a return of the U.S. mortgage market to a purchase-driven foundation is good news for CoreLogic and for the industry as a whole. The end of the refinancing boom of the last five years, although challenging this year, sets the stage for a more predictable and sustainable growth pattern in U.S. mortgage volumes in the years ahead. Today, our core U.S. mortgage operations represent about two-thirds of our revenues. Over our strategic planning horizon, we expect our U.S. mortgage operations to ultimately contribute closer to one-half of our revenues, as we grow our presence in such areas as insurance, spatial, international, and the public sector. Over the past five years, we have progressively built up a significant footprint in these areas, which now collectively represent about 20% of our total revenues compared to less than 10% in 2011. In addition to expanding our non-U.S. mortgage businesses, we are also executing on our strategic initiative to build a scaled leadership position in U.S. property valuation. CoreLogic is already a leading provider of valuation solutions in Australia and New Zealand. Over the past 12 to 18 months, we have built market leadership in valuation-related content, analytics and platforms in the U.S. that provides us with important scale needed to transform this $4 billion annual market. This year, we are focused on building our operational capabilities and platform-based offerings as well as diversifying appraisal-related revenues. At the same time, we are working on innovative digital and mobile solutions and increasing margins and cash flow. In June, we acquired a 45% ownership position in Mercury Network LLC for $70 million. Mercury is a fast-growing technology company which provides the software used by more than 800 small and medium-sized mortgage lenders and appraisal management companies to manage their collateral valuation operations. The purchase of the remaining 55% ownership of Mercury is subject to customary closing conditions, and we expect to close this transaction in the third quarter. We have received regulatory clearance. The acquisition of Mercury is a significant step in advancing our valuation solutions capabilities. It complements our leading FNC platform, which today serves over 100 major lenders. Together, Mercury and FNC allow CoreLogic to provide unmatched content, analytics, and workflow solutions to over 900 lenders and appraisal management companies, and 80,000 appraisal, title, and property inspection professionals. Our valuation platform business is now a scaled, high-growth, and high-margin business, and a foundational element of our strategy to transform the valuation space in the U.S. During the second quarter, we made excellent progress in diversifying our appraisal management services client base. Market interest in our services has been strong, and so far in 2017, we've added 10 new clients. We expect revenues related to these wins to provide substantial growth going forward that should offset to a significant degree currently anticipated share diversification from our legacy appraisal clients. In the second quarter, we improved total VSG margins by 300 basis points, fueled by top-line growth and margin expansion in our platform businesses as well as productivity in our appraisal operations. The acquisition and integration of Mercury, accelerating growth in FNC revenues, plus operational enhancements and continued diversification of our appraisal-related revenues should enable CoreLogic to continue to improve margins substantially into the future. 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. The chance to transform the valuation space and bring greater transparency to the underwriting process will be a multiyear endeavor and represents a very significant long-term opportunity for us. During the first half of this year, we continued to make important investments in enhancing and scaling our solutions as well as expanding our innovation, technology, and compliance capabilities. Our focus on delivering unique data-driven solutions makes us a logical strategic partner for firms looking for deep insight into residential property. As the pace of technological advancement has accelerated, CoreLogic has invested to capture the opportunities and benefits of emerging tools and capabilities. This year, we are expanding our R&D focus in areas such as machine learning, voice and imagery. We have also opened a new innovation center in Dallas which is slated to be our global innovation headquarters and established satellite innovation labs in Sydney, Australia and Oxford, Mississippi. Now regarding cost management and margins, we continue to make important strides in our pursuit of first quartile operational excellence. We expect to reduce run rate cost at least $30 million in 2017 by consolidating facilities, reducing SG&A costs, and other operational improvements. The benefits of our relentless focus on becoming more efficient and integrated were evident in our second quarter results. Q2 operating income and adjusted EBITDA margins were each up over one full percentage point to 17% and 28%, respectively. We remain committed to achieving 30% plus adjusted EBITDA margins over the next three years based on a normalized U.S. mortgage market and 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. Our relentless focus on operational effectiveness and building scale and unique solutions has resulted in the creation of a durable and cash-generative business model. As our long-term investors know well, we believe that significant and consistent capital return is a source of long-term value creation, and we have a great track record of returning substantial levels of our free cash flow to our shareholders. Since 2011, we have returned $1.1 billion to our owners through our ongoing share repurchase program. Last year, we repurchased 6% of our shares outstanding for $195 million. This year, we plan to buy back another 3.3 million shares, representing over 4% of our shares. CoreLogic is off to a great start in 2017. We remain laser-like focused on accelerating our growth rates, expanding margins, and cash flow. I believe that our success in transforming CoreLogic into a high-performing global leader is the 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 areas such as prospect identification, underwriting, and continuous risk management and monitoring. I'd like to close by thanking all of our employees, our clients, and our shareholders for their continued support. Jim will now discuss our financial results.

[James L. Balas:]

Thanks, Frank, and good morning, everyone. Today, I'm going to discuss our second quarter financial results, capital structure and guidance, including third quarter and full-year outlook. As Frank mentioned, CoreLogic is off to a strong start in 2017 from both an operational and financial perspective. Over the second quarter and the first six months of the year, we outperformed U.S. mortgage volume trends, drove productivity and cost-reduction initiatives, generated high levels of cash flow, and returned significant capital to our shareholders. Notable second quarter 2017 financial highlights included, one, continued organic growth trends supported by share gains, pricing and new products; two, the purchase of a 45% stake in Mercury Network; three, achievement of significant and accelerating cost reduction and productivity benefits; four, operating income and adjusted EBITDA margin expansion; five, preparation for the refinancing of the company's credit facility; and six, the repurchase of 0.5 million of our common shares. Second quarter revenues totaled $474 million compared with $500 million in the same 2016 period. During the quarter, market share and pricing-related gains as well as contributions from new products in both of our operating segments helped to offset the impact of an estimated 15% decline in U.S. mortgage origination volumes. RMW revenues totaled $225 million, largely consistent with 2016 levels as the benefits from organic growth offset the impacts related to lower mortgage unit volumes. PI revenues declined 9% to $251 million as higher insurance, spatial solutions, and international revenues were more than offset by lower Valuation Solutions revenues attributable to reduced U.S. mortgage volumes and planned vendor diversification by a significant appraisal management client. Operating income from continuing operations increased to $78 million for the second quarter compared with $76 million in the same 2016 period. The year-over-year growth in operating income was driven primarily by significant efficiency gains from ongoing productivity initiatives, which more than offset investments in technology and innovation platforms as well as compliance capabilities. Operating margin was 17% of revenues, up from 15% in the same prior-year period. Second quarter net income from continuing operations totaled $41 million compared with $40 million in 2016. The increase resulted primarily from higher operating income and lower interest expense and tax provisions, offset partially by a onetime $6 million charge associated with the final settlement of our previously terminated pension plan. Diluted EPS from continuing operations totaled $0.48 for the second quarter, up 7% from the same prior-year period. Adjusted diluted EPS was $0.72 or 11% higher year-over-year, reflecting increased operating income levels, lower interest cost, and the impact of share repurchases. Adjusted EBITDA totaled $135 million in the second quarter compared with $136 million in the same prior-year period. The 1% decline in adjusted EBITDA was principally attributable to lower U.S. mortgage volumes, which was largely offset by operating leverage and cost productivity benefits. Adjusted EBITDA margin was 28%, up from 27% in the same prior-year period. PI segment adjusted EBITDA totaled $70 million compared with $71 million in 2016 as the impact of lower mortgage origination volumes was mostly offset by the benefits of cost productivity initiatives and higher margins in our valuation solutions related businesses. PI adjusted EBITDA margin was 28%, up from 26% in the same prior-year period. RMW adjusted EBITDA was $72 million, down 3% from 2016 levels as continued organic growth and cost management mostly offset the impacts of lower mortgage volumes. RMW adjusted EBITDA margin was 32%, down from 33% in the same prior-year period. Finally, we continue to generate strong levels of free cash flow. On a trailing 12-month basis, as of June 30, 2017, free cash flow totaled $305 million, which represented a 63% conversion rate of adjusted EBITDA. Second quarter free cash flow was reduced by a onetime $13 million cash payment associated with the terminated pension plan I discussed previously. I will close my prepared remarks today with a discussion on capital structure plus our third quarter and enhanced full-year financial guidance. Regarding capital structure, the company has recently initiated process to refinance its current term loan and revolving credit facilities. The purpose of this refinancing is to secure a new credit agreement that increases the company's financial flexibility by expanding capacity and extending tenor. We expect to close the new credit agreement in August 2017 with terms substantially equivalent to our existing credit agreement. Regarding full-year guidance based on our strong second quarter and first-half results and our current view of likely market volumes, growth trends, and cost productivity for the second half of 2017, we have moved our full-year financial guidance to the higher end of our previously issued ranges. For the full-year 2017, we expect to generate revenues of $1.835 billion to $1.875 billion, adjusted EBITDA of $460 million to $480 million, and adjusted EPS of $2.20 to $2.40 per share. Our guidance also reflects a 10% increase in our share repurchase target to 3.3 million shares. In terms of the third quarter of 2017 based on seasonality and our current view of U.S. origination market, unit volume trends, and internal business plans, we expect adjusted EBITDA to be $130 million to $140 million, broadly in line with our second quarter 2017 results. Our first-half results and full-year 2017 guidance reflect a significant outperformance of projected U.S. mortgage market volume trends. This outperformance is consistent with our actual results over the past five years and reflects the strength of our strategic plan and durable business model. To sum it up, CoreLogic delivered another very strong operating and financial performance in the second quarter. I believe we are well positioned to continue to execute strongly against our tactical and strategic plans and deliver outstanding 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:]

Thank you. We will now begin the question-and-answer session. The first question will come from Darrin Peller with Barclays. Please go ahead.

[Darrin Peller:]

Thanks, guys. Nice start for (22

[Frank D. Martell:]

Good morning, Darrin. This is Frank. I guess, I'll take that in pieces. So, first of all, on the products, I think I mentioned last quarter, we have the best product pipeline we've ever had, and we're starting to get traction, and that's definitely contributing increasingly to the revenue growth rates we've experienced. And I think we mentioned a number of these in the past, but things like CondoSafe, SkyMeasure, Roof IQ trended data. These are all products that have been in the market for a little while now, and they're starting to see adoption and growth. So, we feel pretty good about the number and the scale there. On pricing, I'd say it's become more broad-based in terms of our pricing, and it's now a significant component of our growth and I think because we have a lot of multiyear revenue contracts will become increasingly so as we get into next year. So, we feel pretty good about that it's not a one or two products, it's really across both segments...

[Darrin Peller:]

Okay.

[Frank D. Martell:]

...of the company as well as VSG frankly.

[Darrin Peller:]

So, there is still more room to go, in other words, on both those initiatives it sounds like versus the growth that you've already had.

[Frank D. Martell:]

Very definitely. Yes.

[Darrin Peller:]

Okay. All right. Just a follow-up question is around quickly on the VSG segment. I guess, just trying to understand the sensitivity, again, pro forma for the deal you just did in Mercury. I mean, in terms of originations versus the more network effect of the business you acquired and combined with what you had already, percentage of that that you would say is actually tied to originations going forward now. And then maybe as a follow-on as part of that question, just trying to understand when we think about the decline that we're expecting in the second-half in originations overall as well as the shifts in one or two of your clients in that area, how much room is there to offset that with the new clients you've been adding in VSG I guess? And then that's pretty much it there, but thanks again guys.

[Frank D. Martell:]

Okay. Yeah. Look, we had a great quarter in VSG in my opinion. And I think it validated everything we've been talking about, so we had margin expansion and I'll take that one first and the AMCs. We've been working hard to integrate the panels. That doesn't happen overnight because you've got very large numbers of people and operational systems. And we're starting to see significant traction there in the second quarter in terms of the utilization and the efficiency of the panel operation, and that drove a reasonably large chunk of the margin expansion because that is the lower end and the more volume-sensitive part of that operation. I think we got 10 new clients signed up, many more in the pipeline. That revenue contribution from those 10 is very significant on an annual basis and as I mentioned in my remarks, should offset the impact of the diversification and maybe a little bit more so. And as I mentioned, the good news is there is a lot more in the pipeline...

[Darrin Peller:]

Frank, that's on a (25

[Frank D. Martell:]

I'm talking about revenue.

[Darrin Peller:]

Okay. That's great.

[Frank D. Martell:]

And then I think on the pipeline, it's very strong. So, I think the good news is the 10 is not the last 10. There's going to be many more, so that's good news there. And I think the more we can diversify, the less volatility obviously and I think the higher the margins will be. So, that's good news. I think that also equally significant, Darrin, is the platform side of the business. On a pro forma basis for the full year, Mercury and FNC will become about a third of the revenue at much, much more significant margins...

[Darrin Peller:]

Yeah.

[Frank D. Martell:]

...well beyond our average margin. And the good news there is if you look at – we're really very pleased by FNC. In the quarter, FNC added nine new clients on its own. So, if you see between the AMC and the FNC, we have almost 20 new clients for the quarter. So, we're picking up a lot of new client interest because of our scale, because of our capabilities and our people. And that's only going to build. So, we're very bullish on the top line progression there and the margin progression in VSG this quarter.

[Darrin Peller:]

Okay. That's great to hear. All right. Thanks, guys.

[Operator:]

The next question will come from Bose George with KBW. Please go ahead.

[Bose George:]

Hey. Good morning. Actually just following up on the Mercury Network, I mean, how should we think about the revenue and EBITDA contribution from Mercury? And does that fit at all into the guidance for this year or is that a little later on?

[James L. Balas:]

Thanks, Bose. This is Jim. In terms of Mercury, it's in the guidance, but it's going to have a very nominal impact on the bottom line. It can be de minimis, and the reason for that is we're going to have integration and transition costs. And you're going to be at the tail end of the year where we have less volume ultimately. So, it'd be a nominal impact de minimis.

[Bose George:]

Okay. Great. Thanks. And then actually just one on the cash flow. I guess, last quarter, I think you'd said that you'd give us an update just on your longer-term free cash flow conversion expectation. I mean, I just wanted to see if there is any update there.

[Frank D. Martell:]

Yeah. Sure. In terms of the cash flow, we have talked about being in that 55% to 60% range. Nothing has changed since the last quarter. That is a slow uptick from the last several years obviously, so nothing in there.

[Bose George:]

Okay. Great. Thanks.

[Frank D. Martell:]

Great, Bose. Welcome back to the coverage universe and we appreciate it and...

[Bose George:]

Thanks.

[Frank D. Martell:]

...offering to Jim's point, not to get lost, we've been at 50% to 55%, and so we've kind of nudged it to 55% to 60%. So, that is an uplift in the guidance range for free cash flow.

[Bose George:]

Thanks.

[Operator:]

The next question will come from Kevin McVeigh with Deutsche Bank. Please go ahead.

[Kevin McVeigh:]

Great. Thanks. Hey. Nice job on the margins. Just a quick one on the Mercury, is there any incremental step-up in the purchase price? So, if you pay $70-odd million for 45%, is there any incremental step-up to take out the balance and how does that kind of set out over the course of 2017?

[Frank D. Martell:]

Hi, Kevin. So, we'll close it in the third quarter. It's pretty straightforward. We got to wait for approval. It's a pro-rata, so you can do the math. It's propositional. There is no step-up or anything.

[Kevin McVeigh:]

Okay. So, it's one to one. There is no incremental based on majority.

[Frank D. Martell:]

Correct.

[Kevin McVeigh:]

And then just the puts and takes on the margins, it looks like you had a real nice job in terms of outperformance in Q2. Again, was that primarily in the VSG? Was there anything else in there? Because it looks like the revenue was a little light but a real nice speed on the EBITDA.

[Frank D. Martell:]

No, I think it was two things. Bottom line is VSG moving forward, but also, I think as Jim had mentioned, first quarter, we took a lot of actions. So, you're seeing less expense related to implementing those actions and more related to the benefits flowing through. So, that was another component. And I'd say the third component is if you look at the mix of the company and the growth of some of the ones that I've talked about, insurance, spatial, international, those are higher-growth areas that have been growing nicely, so that contributes to the margin as well.

[Kevin McVeigh:]

Got it. Okay. Thanks so much.

[Frank D. Martell:]

Thanks.

[Operator:]

Our next question will come from John Campbell with Stephens, Inc. Please go ahead.

[John Campbell:]

Hey, guys. Good morning. Congrats on a great quarter.

[Frank D. Martell:]

Thank you.

[John Campbell:]

Just going back to Mercury again, anything to call out just relative to seasonality and then maybe how we should be thinking about that growth rate or outlook going into next year?

[Frank D. Martell:]

Yeah, John. It's not a full-on volume-sensitive business. But there is obviously some seasonality to it. So, as Jim kind of said, it's a less of second quarter, third quarter strong like the other mortgage businesses, all of it flatter, but there is still some seasonality there. For your purpose, I would assume that kind of looks the same as the mortgage market in general, so kind of a strong second and third quarter and then less so in the fourth quarter. I think as we get out into next year, it has been a very high-growth firm at solid margins, and so we expect both margins and revenue growth to be much better next year.

[John Campbell:]

Okay. That's helpful. And then could you maybe just walk us through what's driving that growth? I mean, it seems like it's a pretty similar offering to the FNC, but maybe a different clientele. So, are they just predominantly focused on the kind of lower to mid end of the market?

[Frank D. Martell:]

Yeah. So, as I mentioned, they have quite a large coverage of the smaller end of the market. So, there is really little to no overlap between FNC and Mercury. So, we look at this – we're really covering large, medium and small. It is a separate platform obviously in FNC. But they've been taking a lot of new client growth, and they've been building up their product set. So, it's really those both and then penetration of the market. We view this – there is an additional opportunity here which is the synergy with our products and services, and to the extent that we can put additional content on the platforms gives it a bit of a turbocharge potential.

[John Campbell:]

That's great to hear. And then last one for me, just on modeling of interest expense, I mean, it sounds like you guys are swapping up some of the debt. It looks like you'll probably drill down a little bit more on the revolver for the rest of that Mercury deal. But if you guys can maybe just directionally just kind of point us in the right direction on interest expenses, kind of run rate back half of this year and into next.

[Frank D. Martell:]

Yeah. It will probably be like a couple of million more, H1 versus H2.

[John Campbell:]

Okay. Great. Thanks, guys.

[Frank D. Martell:]

Great.

[Operator:]

Our next question will be from Bill Warmington of Wells Fargo. Please go ahead.

[William A. Warmington:]

Good morning, everyone.

[Frank D. Martell:]

Good morning.

[William A. Warmington:]

So, for my first question, I was going to ask for some help bridging the reported revenue, down 5%, to the organic, up 4%, just to make sure I understood how you're getting to that core growth number?

[Frank D. Martell:]

Yeah. So, organic growth was about 4%. And then the market impact across the mortgage-sensitive businesses, you're talking about a 9% decline. So, that kind of nets out to your 5% roughly.

[William A. Warmington:]

Got it. And so, like the products on setting kind of offsets the FNC contribution for the quarter basically?

[Frank D. Martell:]

Yeah. It's becoming a less significant number on the exits (34

[William A. Warmington:]

Okay. And then for the follow-up question, I wanted to ask about VSG. You've talked about some nice client wins in the quarter. It sounded last quarter like they were going to be coming online late in the second quarter. So, I was curious whether they actually started to generate revenue in Q2 or was that actually Q3. And then to try to get a sense for when the year-over-year growth of VSG as a result of those clients coming on turns positive, is it going to happen in 2017 or is that 2018 when that happens?

[Frank D. Martell:]

Yeah. So, I guess, as you know, Bill, the sell in and the onboarding, it takes a little time. So, we were...

[William A. Warmington:]

Yeah.

[Frank D. Martell:]

...really only able to start to sell really in January because of the non-compete we had. So, I think 10 is a tremendous number, and we did get revenue in June. So, it has started to flow. And I would just say, there is additional market interest well beyond the 10. We got a pretty healthy pipeline. So, I would expect next year, if you assume a flat mortgage market that we should be able to offset the diversification based on what we know today and grow a little bit based on the new win. So, I think that's really a little bit ahead of where I thought we would be actually. And I think that growth rate should ramp as you get into 2018 over the balance of the year.

[William A. Warmington:]

Excellent. Congratulations on the good quarter.

[Frank D. Martell:]

Thanks, Bill.

[James L. Balas:]

Thank you.

[Operator:]

The next question will be from Jason Deleeuw with Piper Jaffray. Please go ahead.

[Jason S. Deleeuw:]

Thanks for taking my question. Just another question on VSG and with Mercury, I'm just wondering where you think the VSG margins can get to. I believe previously, you talked about kind to low to mid-20s type EBITDA margins for all of VSG, but now with Mercury, does that change at all? What's the latest update?

[Frank D. Martell:]

It certainly helps, Jason. And I think if you look at Q2, we're getting closer to 20% in the aggregate for VSG, which is a great result where we thought we would be. And so, I give the team a big amount of credit for getting us to almost 20%. I think that bodes well when you add in Mercury. As Jim mentioned, it's not a gigantic add this year, but we'll add progressively next year. And I think that's where things like adding the clients in FNC and the growth in Mercury that higher growth rate in the higher-margin area, the platform area is significant because it will evolve the mix. So, if you look at kind of on a pro forma basis, it's a little over a third of the revenue will come from platforms. And we (38

[Jason S. Deleeuw:]

Great. Thanks for that. And then just on the guidance, the guidance implies a little bit more conservative second half versus start of the year. I just want to kind of understand all the puts and takes just given that we saw such strong margins in the second quarter. Just help us understand kind of the puts and takes and how you're thinking about the guidance for the rest of the year.

[James L. Balas:]

Yeah, Jason. This is Jim. In terms of the guidance, I think it's pretty well understood that the second half is going to have even stronger market headwinds. So, that's one of the factors in the equation there. All the outlooks are coming in in the mid-20s to 30% decline year-over-year. So, what the guidance implies is that the second half will be stronger despite that market has been valued (39

[Jason S. Deleeuw:]

Okay. Thank you for that.

[Frank D. Martell:]

Thanks.

[Operator:]

The next question will come from Oscar Turner of SunTrust. Please go ahead.

[Oscar Turner:]

Hi, guys. Good morning.

[Frank D. Martell:]

Good morning.

[Oscar Turner:]

So, you mentioned the long-term goal of reducing U.S. mortgages to 50% of revenue from two-thirds today. And I was just wondering, does M&A play a role in that planned diversification or do you think you can get there organically?

[Frank D. Martell:]

Yeah. That's hard to tell. I'd say that I wouldn't say – I think M&A has always been an important facet of reshaping the company over the last couple of years. And I think we look for quality assets in content and analytics. So, if we do, do something like that Oscar, we would do it in those areas. And I think if you look at Mercury, I would just say to you guys is this is an example of almost all the deals we've really ever done which is snap-on, bolt-on capability plays that we can leverage and have synergy off of. So, I think there may be some of that as we go forward. We do have a lot of organic growth in those non-mortgage areas as well. But I think it's important to note that the mortgage part of the company is a very high operating leverage, high margin, high cash flow portion of the company. So, we benefit from that as a critical mass to help us to expand into the non-mortgage areas, which we've done.

[Oscar Turner:]

Okay. Thanks. And then just another question on VSG. So, just wondering how your long-term view of the VSG opportunity has changed now that you've had the opportunity to gauge receptivity of new clients. I believe you've mentioned before it's a $4 billion U.S. appraisals market, so was just wondering how much of that is addressable by CoreLogic's offerings?

[Frank D. Martell:]

Yeah, look, I think about 70% of it is addressable ultimately, depending on how you view and how things evolve. I believe that the opportunity is even greater than we thought to be quite honest. I think there are a lot of stresses and strains in the valuation market and the need for transformation, which really plays into our hand from an analytics and I think a content perspective and particularly the platform. So, that's really what we're going after. So, I think it's a tremendous opportunity, tremendous need for data analytics and insights. And we have all that. So, I think the opportunity frankly for me is probably a little bit more compelling. It was very compelling from the beginning, but even more so now.

[Oscar Turner:]

Okay. Thank you.

[Operator:]

The next question will be from Glenn Greene of Oppenheimer. Please go ahead.

[Glenn Greene:]

Thanks. Good morning. Another VSG question for you. But on the diversification drags, could you just give us a sense for how far along we are on that and how that's comparing to your expectations with the thought being that as we get closer to the end of that and with the benefit of these new deals, which sounds like maybe even better than you thought, you start to get a nice lift going into 2018 potentially.

[Frank D. Martell:]

Yeah. It's a little bit difficult to answer that question because we have a projection for the impact of the diversification, the two legacy clients that we have. Obviously, we are moving from a 100% share, which we expected them to diversify. I'd say, Glenn, it's pretty much as expected. It's hard to read as you go out. I would say, 10 client wins is a little bit more than we expected. I think the market is very receptive to our offerings. So, I think we have very high-quality services in the appraisal area in particular, and then we're adding to the platform, which is growing quicker. So, I think I'd say the diversification matter is well managed, and I don't see it as deteriorating. I see it as kind of, I'd say, marginally better than expected.

[Glenn Greene:]

Okay. And then the next one is just sort of a clarification. Someone had asked whether Mercury was in the guide or not. And I understand that, but just to clarify a couple of things. Is it the 45% interest that's on the guide or is it the total that's on the guide? And the Mercury revenue, it will be helpful to know what that is on an annual basis. And the context of your total company guide for revenue looked like it only went up $10 million at the bottom end of the range.

[Frank D. Martell:]

Yeah. As Jim mentioned, the pro forma for Mercury is in the guide. But if you look at it from a revenue perspective, half year – well, actually, 5/12 of the year essentially is in the guide. So, it's not that much on either top line or the bottom line to be quite honest and I think less so. It's kind of (45

[Glenn Greene:]

Okay. All right. Thanks.

[Operator:]

The next question will be from Kevin Kaczmarek with Zelman & Associates. Please go ahead.

[Kevin Kaczmarek:]

Hey, guys. I had just a quick update on the $30 million cost save program. How much is kind of embedded in expenses on a run rate basis in the second quarter? How much we model in for the same?

[Frank D. Martell:]

You mean, Kevin, just for clarification, how did the $30 million split by quarter?

[Kevin Kaczmarek:]

Yeah. And how much do you have in and how much have you recognized already in the year?

[Frank D. Martell:]

Yeah, I would – as Frank mentioned earlier, we pick the actions exiting the first quarter, so the bulk of the charges were in the first quarter. And then I would just kind of assume from a modeling perspective that you take the $30 million equivalent tranches in each of the remaining three quarters.

[Kevin Kaczmarek:]

Okay. And then I had a one more question on VSG. Can you just give us some color on the type of clients like what size are they in terms of annual originations ? Are they banks, non-banks? Are they fast growing or more mature, maybe community banks or some online lenders? Can you just give us some high-level color there?

[Frank D. Martell:]

Yeah, they are medium to larger-sized lenders. They're depository and non-depository. So, it's a mix. And I would say that they are all very, very solid names and I'd say reasonably good growth characteristics for all of them. So...

[Kevin Kaczmarek:]

But they generally have over $1 billion of originations each year?

[Frank D. Martell:]

We could check that out. I'm not sure off the top of my head.

[Kevin Kaczmarek:]

Okay. All right. Thanks, that's all I have.

[Operator:]

The next question will be from Jeff Meuler with Baird. Please go ahead.

[Jeff P. Meuler:]

Yeah. Thank you. Can you just talk through – I guess, I know part of the goal is to improve appraiser productivity, but how have you been managing appraiser head count and where does utilization stand today? I guess, I'm trying to get at what are the incremental margins as the new business comes on board on the AMC side just given that you talked about some panel consolidation and margins were so good in the quarter, just want to know how much capacity they have and what the incremental margins are.

[Frank D. Martell:]

Yeah. Hey, Jeff. So, one of the things that makes us a leader is the fact that we have the largest on-staff appraiser panel. And so, we have many hundreds of full-time appraisers. So, we want to utilize that panel to the fullest extent possible. I think the team has done a great job of driving up the utilization, so that's step one. There are geographic challenges where there is lack of appraisers, so you need to use contracted folks. But in general, maximizing that panel is key. The lift is probably – it's significantly higher than the aggregate AMC margin, but there's a lot of factors, so it's hard to quantify that exactly. But I would say that having that big panel is the key advantage. Then the other thing is working hard to enable. So, I mentioned we're working on mobility applications and other ways to make those appraisers more effective and I think we're making good progress on so that you'll see more of a benefit of that as we go forward. But we're still with the mix and the margin improvements that are being made. We still believe that VSG can ultimately approach more like the margin targets in the aggregate that we have.

[Jeff P. Meuler:]

Okay. That's helpful. And then on trended data and the Fannie requirement, it was a pretty noticeable needle mover in terms of the growth rates at the credit bureaus. Can you give us any sense of quantification in terms of how much it's benefited you? And just is it something we should be explicitly considering in terms of modeling to the back half?

[Frank D. Martell:]

It's not comparable to the bureaus to be quite honest. I mean, obviously, it's a much bigger deal for them. Our tri-merged credit business is a portion of our overall credit reporting services. So, it's not as meaningful. It is a big chunk of additional pricing and product. So, it's in that area that we're getting benefit, but it's not a callout like you'd be on when the bureau calls obviously.

[Jeff P. Meuler:]

Okay. And if I could just try to squeeze one more in, on AMC, as you sign new clients, I think that they can't commit explicitly volume to you. So, what does the new client signing entail? And generally, what is the expectation, rough ballpark in terms of how much volume you'll ultimately get in terms of percentage of client total volume once it's fully ramped up? Thank you.

[Frank D. Martell:]

Yeah. So, these are typically where a lender will sign us up for a percentage of their volume. I would say it's kind of 20% to 25% typically at the beginning, and then you tend to vary based on quality of service and SLA delivery is what the toggle is there.

[Jeff P. Meuler:]

Okay. Thank you, Frank.

[Frank D. Martell:]

Okay.

[Operator:]

Our next question is a follow-up from Kevin McVeigh of Deutsche Bank. Please go ahead.

[Kevin McVeigh:]

Hey. Sorry to labor the Mercury. I just want to make sure the revenue – because if I do 1% of annualized revenue, that would be $18 million for Mercury. Is that the way to think about what the contribution is for 2017 or is it 5/12 of that?

[Frank D. Martell:]

No. So, 5/12 is less than 1%. So, if you were trying to annualize it, it would be a little more than double that, around double that.

[Kevin McVeigh:]

Okay. So, the contribution to the 2017 is about $18 million, Frank, is that the way to think about that?

[Frank D. Martell:]

No, it's just a little bit less than that.

[Kevin McVeigh:]

Okay. So, about $15 million is a good number to use?

[Frank D. Martell:]

I'd say $10 million to $12 million is probably a good number.

[Kevin McVeigh:]

$10 million to $12 million on the revenue, right?

[Frank D. Martell:]

Yeah.

[Kevin McVeigh:]

Okay. Thank you so much. Sorry for the follow-up.

[Operator:]

The next question comes from Josh Lamers of William Blair. Please go ahead.

[Josh Lamers:]

Thanks. Good morning, gentlemen. Maybe we'll just start with – in the press release that you guys put out last night, you said that mortgage market was down 15%. And just based on some of the public data that's out there, I'm seeing some different percentages no matter how you spin it. So, I'm wondering if you could specify how you're getting to that. Is it some kind of volume-weighted percentage based on refi origination or what's the math behind that?

[James L. Balas:]

Yeah, Josh. This is Jim. In terms of originations, we don't use dollars. We're agnostic to the price. So, we adjust the dollars with price. So, if you factor in year-over-year, the home price appreciation, that would get you to the number of units.

[Josh Lamers:]

Got it.

[Frank D. Martell:]

And then also we look around at what the title companies put out on our client (53

[Josh Lamers:]

Okay. Okay. Thanks.

[Frank D. Martell:]

Sure.

[Josh Lamers:]

Maybe one other quick one. I'm wondering where you're seeing, if at all, any market saturation and I guess, I'd pose this company-wide, right, in terms of product and pricing. And we'll just say saturation and we'll just keep it simple in terms of small, medium and large lenders. Are you seeing saturation in the large lender base and the ability to push further pricing or products? Or I guess just simply, where is the whitespace out there to continue that growth?

[Frank D. Martell:]

Yeah. So, Josh, I would just say this is a very, very large market, and so I don't think we're saturated by any stretched imagination. I would say the big lenders are looking for transformation for cycle time speed. There is a whole new opportunity there. I think technology has opened up an amazing amount of opportunities. If you look at inventory, if you look at voice, and machine learning, I think the opportunity for a cycle time reduction, quality, accuracy are really phenomenal. So, they're looking for that. I think the mid and mass area with platform is the connectivity, which is our strategy. We're starting to be able to penetrate them on a more of a mass scale and more of efficient scale. So, I'd say there is a lot of whitespace there just simply because it's been difficult to do that on a significant scale, so that's again where a strategy around connectivity comes in. So, I think there is a massive whitespace opportunities with existing and new products and capabilities. And I think that's where it's just important – in order to tap into that, that's where our scale is very, very important, the ability to invest and drive into those areas is very important.

[Josh Lamers:]

Okay. Thank you.

[Operator:]

Ladies and gentlemen, this concludes our question-and-answer session and thus concludes today's call. We thank you for attending today's presentation. At this time, you may disconnect your lines. Take care.