CoreLogic, Inc.
Q3 2017 Earnings Call Transcript

Published: 28 Oct 2017

[Operator:]

Good morning, and welcome to the CoreLogic Third Quarter 2017 Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the call over to Dan Smith with 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 third 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 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 equivalent is included in the appendix to today's presentation. And unless specifically identified, comparisons of third quarter financial results to prior periods should be understood on a year-over-year basis, that is in reference to the third quarter of 2016. Finally, please limit yourself to one question with a brief follow-up. We'll take additional questions at the end of the call as time permits. Thanks. And now let me introduce our President and CEO, Frank Martell.

[Frank Martell:]

Thank you, Dan. Good morning, everyone. Thank you for joining our third quarter 2017 earnings call. I will lead off today with a recap of market trends as well as our third quarter operating performance, including specific comments on revenue mix, growth trends, margins and capital return. Jim will cover our financial results and provide updates on capital structure, share repurchase targets as well as relevant Q4 financial guidance. We will conclude with Q&A. CoreLogic delivered another exceptional operating and financial performance in the third quarter. Consistent with the first half of the year, we focused on, one, building market leadership in our Property Intelligence, underwriting and risk management solution sets; two, building out our insurance public sector, spatial solutions and insurance footprint; three, expanding operating leverage and margins through process and workflow optimization; four, enhancing our technology and compliance capabilities; and finally, returning capital to our owners. Financially, our third quarter results were at the upper end of the guidance ranges that Jim provided on our last earnings call. Total revenues for the quarter were down 8%, as organic growth of 3% helped us to somewhat offset the impact of an estimated 25% decline in US mortgage market unit volumes. We have now generated solid underlying organic growth for seven consecutive quarters. This positive organic growth trend has been underpinned by growth in our insurance, spatial solutions and international operations as well as share gains, pricing, product development and innovation in core mortgage operations. As I've mentioned in the past, the US mortgage market is progressively transitioning to a purchase-driven cycle, which we believe is good news for both CoreLogic and the industry as a whole. The end of the refinancing boom over the last five years, although challenging in the near-term, sets the stage for more predictable and sustainable growth pattern in US mortgage volumes in the years ahead. Today, with roughly 11 trillion in outstanding debt and millions of transactions consummated annually, US mortgage and its ecosystem represents one of the world's largest consumers of property information and provides us the critical mass and operating leverage to be a strategic partner for our clients and a transformative force in providing residential property insights. Our team is continuing to build out our US mortgage capabilities with unmatched content, analytics and connectivity. CoreLogic data and insights now touch three out of every four loans underwritten annually and fuel the workflow of virtually every major lender and mortgage servicer in the US Our market penetration, strategic client protection focus and innovation has resulted in our revenue growth significantly outpacing US mortgage unit volumes since 2011. To further expand our insight and scale our advantages, over the past 18 months, we have been executing on an important strategic initiative to build our leadership position in US property valuation. CoreLogic is already a leading valuation solutions provider in both Australia and New Zealand. Over the next several years, our goal is to further build out our valuation-related content, analytics and platform assets in the US that provide us with important opportunities to help transform this multibillion-dollar market. This year, we are focused on building our potential operational capabilities and platform-based offerings, diversifying appraisal-related revenues and innovating digital and mobile solutions. These efforts support our drive to achieve best-in-class profit margins and cash flow generation. In the third quarter, we completed the acquisition of Mercury Network. Mercury is a fast growing technology company that provides the software used by small and medium-sized mortgage lenders and appraisal management companies to manage their collateral valuation operations. Mercury complements our leading FNC platform which primarily serves major lenders. Together, these platforms allow CoreLogic to provide unmatched content, analytics and/or workflow solutions to over 900 lenders and appraisal management companies and 80,000 appraisal, title and property inspection professionals. With our valuation platform business now a scaled high-margin operation, with a potential for significant future growth and revenue and cost synergies, it represents a foundational element of our strategy to transform the valuation space in the US. With revenues approaching 25% of our total valuation solutions top line, we expect to continue to expand our footprint in the platform arena going forward. During the quarter, we also continued to make solid progress relative to diversifying appraisal services client base. We're in the process of onboarding new clients we secured in the second and third quarters of this year, and at the same time, we're pursuing an active pipeline of prospects. As I discussed on our last call, our objective remains to offset a significant portion of currently anticipated share diversification from our legacy appraisal management clients. The scaling up of our platform, analytical and content-related businesses, as well as operational enhancements and continued diversification of appraisal-related revenue, should enable CoreLogic to continue to improve margins in the future. In this regard, following a very strong performance last quarter, the team improved total margins by 570 basis points in the third quarter compared with the last year, fueled primarily by top-line growth in our platform business and productivity in our appraisal management operations. The US residential property valuation market is poised for transformation. We believe that our scale, as well as our technology, data and analytic capabilities will prove to be advantages in the race to transform the way real estate's assets are valued. As I've said in the past, this will be a multi-year endeavor and represents a significant long-term growth opportunity. Today, our core US mortgage operations collectively represent about two-thirds of our revenues. Over our strategic planning horizon, we expect our US mortgage operations to ultimately contribute closer to one half of our revenues as we grow our presence in such areas as insurance, spatial, international, energy, infrastructure and the public sector. Regarding cost management and margins. The benefits are a relentless focus on becoming more efficient and integrated were evident in our third quarter results. Q3 adjusted EBITDA margin was 29%, up from 27% last year. Along these lines, we remain on track to reduce run-rate cost by at least $30 million in 2017 by consolidating facilities, reducing SG&A cost and making other operational improvements. We're also benefiting from favorable revenue mix, pricing, as well as the adoption of new technologies. Third quarter results point to the ongoing progress we're making toward achieving our goal of 30% plus adjusted EBITDA margins as we exit 2019 based on a normalized US mortgage market and accounting for the build-out of our valuation solutions platform. Our relentless focus on operational effectiveness and building scaled and unique solutions have resulted in the creation of a durable and cash generative business model. As our long-term investors know, we have an established track record of successfully reinvesting to build sustainable market leadership in our core operations. In this connection, we continue to make important investments in enhancing our solutions as well as expanding our innovation, technology, information security and compliance capabilities. As the pace of technology advancement has accelerated, CoreLogic has invested to capture the opportunities and benefits of emerging tools and capabilities. This year, we're expanding our focus in such areas as machine learning, voice and imagery. In addition to reinvesting in our products, services and people, we've also returned substantial levels of free cash flow to our shareholders. Last year, we repurchased 5 million or 6% of our shares outstanding for $195 million. So far this year, we have bought back another 3 million shares, reducing our share count by an additional 4%. Since 2010, we have returned $1.2 billion to our owners through an ongoing share repurchase program. This translates to a net reduction in our outstanding share count over this time period of 29% or 33 million shares. In conclusion, CoreLogic has delivered a very strong set of results so far in 2017, both operationally and financially. We remain laser focused on operational execution as we close out 2017 and set the stage for a strong revenue, margin and free cash flow performance in 2018. I believe that our success in transforming CoreLogic into 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 housing ecosystem to make better decisions in the areas of prospect identification, underwriting and continuous risk management and monitoring. I want to thank all of our employees, our clients and our shareholders for their continued support. And now, I'll turn the call over to Jim, who will discuss our financial results.

[Jim Balas:]

Thanks, Frank, and good morning, everyone. Today I will discuss our third quarter financial results, capital structure and update you on guidance. As Frank mentioned, CoreLogic achieved very strong results in the third quarter from both an operational and financial perspective. Over the quarter and for the first nine months of this year, we significantly outperformed US mortgage unit volume trends, drove scale and operating leverage benefits, significantly lowered run rate SG&A cost and generated high levels of free cash flow, allowing us to continue to return significant capital to our shareholders. Notable third quarter 2017 financial highlights included, one, continued organic growth trends supported by share gains, pricing and new products; two, closing the Mercury Network acquisition; three, achieving the targeted cost reduction and productivity benefits; four, adjusted EBITDA margin expansion; five, the repurchase of 2 million of our common shares; and finally, six, the refinancing and upsizing of the company's credit facility. Third quarter revenues totaled $483 million compared with $524 million in the same 2016 period, and up from $474 million in the second quarter of 2017. Third quarter revenues were up 2% sequentially. During the quarter, market share and pricing related gains as well as contributions from new products in both of our reporting segments helped to partially offset the impact of an estimated 25% decline in US mortgage volumes. RMW revenues totaled $227 million, a decline of 8% as the benefits from market outperformance, pricing and new product growth partially offset lower mortgage market volumes. PI revenues declined 8% to $258 million as higher insurance, spatial solutions and international revenues were more than offset by lower valuation solutions revenues attributable to reduced US mortgage market volumes and planned vendor diversification by a significant appraisal management client. Operating income from continuing operations totaled $62 million for the third quarter, 27% below the same 2016 period. The year-over-year decline in operating income was primarily driven by legal settlement cost totaling approximately $18 million and the impact of an estimated 25% decline in US mortgage origination volumes, that collectively more than offset the revenue upsides discussed earlier and the benefits of ongoing productivity and cost management programs. Operating margin was 13% of revenues, including the unfavorable impact of approximately 360 basis points attributable to the previously discussed legal settlement cost compared with 16% last year. Third quarter net income from continuing operations totaled $31 million, down 14% from prior year. The decrease resulted primarily from the impacts of legal settlement costs and lower US mortgage market volumes discussed previously as well as higher interest costs, which more than offset the operating benefits I noted previously. Diluted EPS from continuing operations totaled $0.36 for the third quarter of 2017 compared with $0.40 in 2016. Adjusted EPS totaled $0.72 compared with $0.73 in 2016. Adjusted EBITDA totaled $139 million in the third quarter compared with $143 million in the same prior-year period and up from $135 million in the second quarter of this year. The modest year-over-year decline in adjusted EBITDA was principally attributable to the estimated 25% decline in US mortgage unit volumes which were largely offset by operating leverage and cost productivity program benefits. Adjusted EBITDA margin was 29%, up from 27% in the same prior-year period. PI segment adjusted EBITDA totaled $72 million compared to $68 million in 2016, as growth in insurance, spatial and international operations, significantly higher valuation solutions-related margins and cost productivity initiatives more than offset lower mortgage unit volumes. PI adjusted EBITDA margin rose approximately 400 basis points to 28%, fueled primarily by revenue mix and higher valuation solutions-related margins. RMW adjusted EBITDA was $76 million, down 10% from 2016 levels, as market outperformance, pricing and new product growth and cost management partially offset the impacts of lower mortgage origination unit volumes. RMW adjusted EBITDA margin was 33%, down approximately 100 basis points year-over-year. Finally, we continue to generate strong levels of free cash flow. On a trailing 12 months basis, as of September 30, 2017, free cash flow totaled $293 million, which represented a 61% conversion rate of adjusted EBITDA. Due to our strong free cash flow in Q3, we were able to repurchase 2 million of our common shares. Year-to-date, we have repurchased 3 million or 4% of our outstanding common shares for $132 million. I will close my prepared remarks today with a discussion on our capital structure, our fourth quarter outlook and share repurchase plans. In terms of capital structure, we recently amended our senior secured credit facility which extends the term of the loan by 28 months to August 2022 and expands our borrowing capacity by more than $500 million. The amended facility will provide additional capacity and financial flexibility going forward. Our overall capital allocation priorities remain to fund disciplined reinvestment, return capital through the repurchase of our common shares, pursue opportunistic M&A and to progressively reduce our debt levels in line with our long-term leverage targets. Regarding full year guidance. Based on our strong third quarter results and our current view of likely market volumes, growth trends and cost productivity for the end of 2017, we have increased the bottom end of our full year adjusted EBITDA financial guidance to reflect a range of $465 million to $480 million, implying a fourth quarter range of approximately $101 million to $116 million. We are also raising our full year target for share repurchases by more than 10% to 3.65 million shares. Our strong year-to-date results in 2017 demonstrate CoreLogic's capabilities to outperform the market even in adverse US mortgage market conditions. This outperformance is consistent with our actual results over the past several 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 third 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:]

[Operator Instructions] The first question will come from Darrin Peller with Barclays.

[Darrin Peller:]

Just a quick comment again on guidance. Just given the improvement in the market on the back half around the lower-than-expected mortgage and tenure rates, where do you see areas of upside potentially coming, if at all? And just if you could also push on the -- touch on, I mean, the EBITDA implied guide, I think it's 100 million to 117 million versus about $116 million last year and the contribution from Mercury now. Is guidance just from the Mercury -- the increase is from the Mercury full quarter? Or is there anything organic on that as well?

[Jim Balas:]

Thanks, Darrin. So in terms of the guidance, Mercury was embedded in the guidance when we updated last quarter. So nothing new there. In terms of the range that we're providing now, we still have an outlook. As you recall from the last call, that we were expecting the market headwinds to be more challenging in the back half of the year. That has not changed. It's probably a little bit more improved than what we thought in -- on the second quarter call, but it's still going to be a significant amount of market headwinds going into the fourth quarter.

[Darrin Peller:]

All right. That's helpful. And then just for VSG for a second. How should growth for that area trend into '18 if the market's relatively flat or only slightly down? I guess will new client onboardings offset headwinds from the client diversification we're seeing? Obviously, it's -- I think it was a little more impactful than we expected in this current quarter. But I know you guys have mentioned some confidence over some of the add-ons.

[Frank Martell:]

Hey, Darrin, this is Frank. Yes, look, I think we're super pleased with how VSG is going and the team -- really, the margins are up a lot in the last couple quarters which is what we've really been focused on. I think the pipeline is strong, as I said. And I think we are onboarding a slew of clients now. So I think it's similar to the commentary last quarter. We expect to really substantially offset the attrition. So if the market's flat, we'll -- we should offset the attrition related to the diversification with the legacy client, the client base as we understand it today. And I think having higher margin profile and holding serve in a flat market next year would be a terrific result for us in VSG from an AMC perspective. I would say though that, we're also similarly, we're very excited about the platform business. The combination of FNC and Mercury has really given us a high margin platform which I think is going to pay a lot of dividends and produce some synergies as well, as we go forward. So the introduction of a significant portion of our valuation solutions coming from the platform and the Data & Analytics side is, I think, a very encouraging development in the VSG story.

[Darrin Peller:]

All right. That's helpful. Just last question, and I'll turn it back to the queue. But -- look, I mean, higher level, Frank, when we talk about the organic growth, constant market type growth, I think you guys were in the low single-digits, 3-ish percent now. Clearly, there have been market headwinds. If we're in an environment where VSG does actually show a little bit more level story of potential growth and then even in what you've seen or what you're seeing in market forecasts for originations in 2018, is that the environment we can get to the mid- to high single-digit organic growth profile?

[Frank Martell:]

Yes, I think the encouraging thing was, if you look at underneath the growth profile, Darrin, for the quarter and really for the last couple of quarters, it's been pretty evenly distributed in terms of drivers. So you've had pricing, you've had product introduction, you've had share gains. So I like to be riding a number of horses in terms of the organic growth profile. I think each one of those areas has potential upside opportunity for us if we can execute on what we have currently planned. So I think the growth profile this year at 3% to 4% year-to-date is pretty solid if you look at the turbulence in the market and you look at the spending patterns of some of the major lenders and servicers and so we're pretty pleased about that. And I think the pricing, we're getting more pricing progressively than we've had, really, for many, many years and that should bode well as we go forward. I think the share gains should continue because we're a -- as a major scale player, we are investing in things like compliance, info security which are increasingly critical for our client base. And so our clients are really looking for a safe pair of hands, and I think we provide that through our scale. So things like share gain should also improve. So I think we're riding a lot of horses. And I think as we go forward, I don't see a reason why we can't move that up into a higher range in terms of 3% to 4% that we're delivering this year.

[Operator:]

The next question will be from Oscar Turner with SunTrust.

[Oscar Turner:]

So first question's also on VSG. I'm just wondering whether you can provide any color on the customer feedback you're getting on the new valuation solution capabilities? Any specific call outs there whether it be technology, content, analytics or platforms?

[Frank Martell:]

Hi, Oscar, this is Frank. Appreciate the question. I think, in general, we're getting very positive client feedback. I think obviously, the appraisal management piece, we're in a sell mode, so we're in that kind of dialog. I think in terms of the platform business, good growth, good margins. I think very good reputation, both Mercury -- the Mercury team and the FNC team have got a high reputation in the market, so that's continually positive. I would say in terms of going forward and the real opportunity for transformation, that's still developing. We're talking to a broad array of constituencies around alternative valuation methodologies and things that can leverage, things like our data assets and our analytical platform. So that story is still to be fully written. But obviously, there's a lot of pent-up demand for change and more of a digital, a quicker experience around valuation. And that's where we have a lot of work going right now. And so again, early days, but obviously, everybody really wants that. So our challenge is to be able to deliver it.

[Oscar Turner:]

And then just on the margin side at VSG. I think you guys mentioned 500 basis points of margin improvement year-over-year. How much margin upside is there remaining? And then do you still have a target, I think it was 20% margin for that segment?

[Frank Martell:]

So I think one of the great things about this story, this quarter and last quarter is, it really validates what we've been talking about for quite some time. I mean, we're pushing that margin level in the last couple of quarters. So from that standpoint, we feel like we're right on track there. A lot of heavy lifting around operational efficiency, panel utilization, et cetera. So we're right on track in terms of what we're trying to do on the margin side in terms of VSG. I think the positive development recently has been the scaling up of the platform side of the business, which is an inherently much higher margin. So as that mix - I mentioned the 25% of the total, as that mix gets bigger, you'll see the margin percentage continue to be supportive and climb through kind of favorable mix in addition to the operational efficiency. So I think we're right on track with some good potential.

[Operator:]

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

[Jeff Meuler:]

I guess a follow-up on the last one on the VSG margins. Are the margins also up on the AMC portion of it? Or is this just a mix shift? And I guess what I'm wondering is, are you driving up staff utilization even in a down market? Or is that a benefit on the come?

[Frank Martell:]

Yes, actually - so Jeff, in terms of your first part of your question, both segments, the platform segment and the AMC segment are contributing significantly to the 570 basis point improvement that we've had. It's more or less kind of equal, maybe a little bit even more heavier on the AMC side. And I think in terms of your second part of your question, that's coming through a combination of pricing and that type of thing. But also, I think more fundamentally, we have the biggest - we believe we have the biggest staff panel in the industry. So full-time employee panel, a great group of people and the utilization of that panel is important in terms of driving the efficiency. So I think we're getting a benefit there. I think our efficiency is up now. And I think the other thing is, obviously you've been bringing the relative landscape companies together, so you’re bringing those panels together. So we're working through the last bits of the integration there. So you should see some - naturally, some efficiency from that as well which we are seeing.

[Jeff Meuler:]

And then on the adjusted organic growth, is there any way to break it out in terms of what the growth rate is organically for the non-US mortgage businesses? So combined insurance, spatial, international, the other things you throw on that bucket versus what it is for US mortgage on that adjusted organic basis?

[Jim Balas:]

On the international insurance and spatial data, I think we've said on past calls, they've been continuing to grow in the upper single digits.

[Jeff Meuler:]

And then the - I know you've been saying this target for a while, but you included it in your prepared remarks. The 50% of mix going to non-US mortgage over time. Are you signaling anything near-term in terms of a potential acquisition in one of those other markets? Or is this just the delta in the growth rates between them? Thanks.

[Frank Martell:]

No, that's really been a consistent strategy for some period of time. We talked about - VSG is an opportunistic play. We were tracking pretty strongly towards that target. So we added - to VSG, it adds a little bit more mortgage centricity in the US, but we think it's - the benefits there are already evident. So we still, from a planning perspective and a strategic perspective, we still want to get that mix to about 50%. But as I said in my prepared remarks, if you look at the US mortgage market, it is the largest consumer of property data. So to play and be a leader in that space where we make a lot of money and good cash flow it is important to provide the basic scale to allow us to invest in the leadership position we have. So that's important to keep that 50% or so. But having said that, as the company gets bigger in non-mortgage, I think it provides an offset to the cyclicality that we've certainly seen post-recession.

[Operator:]

Next question will come from Jason Deleeuw with Piper Jaffray. Please go ahead.

[Jason Deleeuw:]

Just looking for an update on the effort to shorten appraisal times. Where does that stand right now? And I guess it's still early days, but how important of a differentiator do you think that is as you go to market to try to win the appraisal business from the lenders?

[Frank Martell:]

Yes. So Jason, I think on that question, I think we're making - I'd say, we're making good progress. As I mentioned earlier, the transformative digital experiences is a ways out probably, because you've got to get alignment across the industry participants. But I think in terms of what we can control in basic efficiency and automation and using mobility, and as I mentioned in my remarks, looking at things like mobility, I think we're able to significantly improve what we think is already a leading position in terms of our cycle times, broadly speaking. So in the aggregate, we think we're kind of the quickest of the pack, but certainly a lot of opportunity to be truly digital and truly transformative, so. But I think so far a lot of investment around that, a lot of discussion with our clients. We have to work with the key players around their workflow solutions. But we're certainly investing behind this, and we think we can get more transformative as we go forward.

[Jason Deleeuw:]

And then just a question on the pricing which has become part of the CoreLogic story. It seems like, I guess, can we expect that to continue on the pricing gains and anyway to kind of parse it out for PI segment versus the RMW segment? And how we can think about the pricing benefits?

[Jim Balas:]

Sure. On the last part first, it's pretty balanced between the two segments in terms of where we have gotten the price. And that's just because it's becoming part of our strategy overall. And in terms of long-term, we do expect to continue to get price in the future. We're still in the early days. We have a lot of contracts that are multi-year. So as they renew, that's going to take more time. So yes, in a nutshell, we expect to get future price.

[Operator:]

The next question will be from Brandon Dobell with William Blair.

[Brandon Dobell:]

First, just quick numbers. One, as we think about free cash flow conversion, looking out the next year or even two, should we still expect kind of in that 55%, 60% range? Or as VSG recovers in growth, those kinds of things, should that free cash conversion percentage drift up a little bit given how VSG works?

[Frank Martell:]

First of all, I think the VSG assets' free cash flow from a percentage perspective really highly. So I think we're focused on dollars there. I think - look, I think Jim and the team have done - the entire team, really, have done a great job on free cash flow. We - 50% to - 55% to 60% has been a rock solid number for many years now. We ebb and flow a little bit. I think we're close to the top end of that range. I see no reason at this point that that is not going to continue in that range. We want to do better obviously. But I think at this point, that's a good number to - kind of a range to stick in your models.

[Brandon Dobell:]

And then in the remarks you mentioned just digital mortgage which seems to be getting a lot of press these days. Frank, from your point of view, to think about the top couple of opportunities that you guys have whether it's from a product point of view or maybe a wallet share point of view or the risks maybe it changes how your products have to get priced or who the eventual buyer is. How would you flesh out the two book ends that you guys see for digital mortgage?

[Frank Martell:]

Look, I think in the aggregate, digital mortgage is a tremendous opportunity. It requires investment. It's a - digital is a widely defined term depending on who you're talking to. I think the reality is, there are many applications of digital through distribution, through consumption. You talk about APIs, that kind of stuff. So we're playing in all those areas. We're partnering as well, you've got to partner with smart people, because nobody can do everything themselves. I think you're going to see the digital distribution as the kind of the lead-in for us. And then I think as we bring the content, which - digital is nothing without content and that really plays to our advantage because it's really, to me about distribution and the effective consumption of the content. So that's where we're really focused on. We've got a lot going on in mobility, voice. It's not necessarily classically defined digital, but the imagery area with drones and what can be done through drone imagery and modeling is tremendously exciting. So we're working in all those areas. And I think that's going to be something that we need to focus on where is the highest impact and not to get too distracted by trying to chase everything.

[Brandon Dobell:]

And then last kind of two, three years or maybe it's even longer than that, the larger financial institutions, the retail banks, the money center banks have seeded a lot of market share in the mortgage for a variety of reasons and it seems to have kind of stalled out, their share seems to have kind of flattened out or bottomed out. Do you see that cohort of lenders starting to get more aggressive in, especially as this market transitions to purchase? Do you see them not doing it? And how do you think about the impact of - to your business I guess based on what the answer would be?

[Frank Martell:]

My feeling is, at least traditionally, in a purchase driven cycle, the depository institutions make a - have a stronger share. I think the difference now is you've got some very significant long-established really high-quality, innovative players out there, they're here to stay. It remains to be seen by - the mid and lower tier of those non-depository originators, what they do. I think definitely share is kind of rebalancing a bit is my guess as we go forward towards the depository players.

[Operator:]

Our next question is from Glenn Greene of Oppenheimer. Please go ahead.

[Glenn Greene:]

I guess, maybe the first question. Could you help us directionally quantify what the revenue and profit drag as it relates to the 25% unit decline and maybe across the two businesses?

[Jim Balas:]

Overall, the market impact, if you do a simple bridge on the revenue, overall number was down 8%. The market hit us for about 12%, call it $60 million. And then organic growth was up to offset a portion of that for about 3%. And then you have some miscellaneous items like M&A and some wind down stuff for - accounting for the last point on a net basis.

[Glenn Greene:]

And of that, let's say, $60 million revenue decline, was that split roughly 50% in VSG and the balance in RMW? Or how much was - hit VSG?

[Jim Balas:]

It was a little bit more in VSG, I would say, call it like, I don't know, 55%-45%, 60%-40%.

[Frank Martell:]

One of the things, Glenn, too is, obviously, VSG has got the phenomenon that it's not a broad market exposure, its exposure primarily to clients. So there's a little bit of a diversification impact as well there.

[Glenn Greene:]

Yes, that was kind of my next question. I was sort of just trying to think through VSG and through - in terms of the market impact versus the client drag. And I don't know if you've gotten any benefit from your market share in your client wins that you sort of highlighted in the second quarter? Or is that still sort of to come and they haven't really converted yet?

[Frank Martell:]

No. We're onboarding them as I said. So it's prospective. The impact will be progressively more pronounced prospectively. So this year, we're seeing the kind of diversification we thought we'd see. And we're kind of adding the clients we thought we'd see. So I think you'll see a much more pronounced benefit from the additional clients next year. We said this was a bit of a longer onboarding cycle than a normal product line. But look, I'd say also, Glenn, just from my perspective, the market, although is tough, I mean, if you look at the RMW segment, I mean, just a tremendous result in the third quarter in my opinion. If you look at the margins and the year-over-year profile that the team and through share gain and pricing, I mean, it's really I think a real standout performance by that team and really, the VSG team as well in terms of what they could control. So we feel pretty good about the mortgage operation and how it performed despite the tough decline of the refi.

[Glenn Greene:]

As it related to them, obviously, there's been a few questions on the VSG margin expansion. And certainly in the context of the sharp revenue decline, it sounded like just a number of things mixed and better efficiencies and sort of integrating RELS and LandSafe. But is this sort of a sustainable, if not improving trajectory going forward as revenue sort of flattens out and then hopefully grows? And what is sort of your long-term thinking in terms of VSG margins as given what we've seen in terms of the margin expansion in the face of a really difficult market right now?

[Frank Martell:]

Yes, look, I think, on the last couple of calls, we've tended to kind of fixate on VSG. But VSG really, right today, it's a pretty darn - third quarter - it produced very good results. I mean - and especially if you look at the context of the competitive landscape. We are - it's a substantial business generating about 20% margins right now, and obviously, there's a little bit of seasonality there involved. But as we've talked about in the past, we think we can push the overall VSG margins up into the 20s. And that's going to be a strong business for us from a - I think from a cash flow and a client perspective and a data content perspective. So there're many other non-financial benefits and indirect financial benefits will be added. So we're - I'm very pleased with how the VSG team has driven that business.

[Operator:]

The next question will be from John Campbell with Stephens Inc. Please go ahead.

[Hayden Blair:]

It's Hayden Blair on for John Campbell. Most of my questions have been answered already. But I'm wondering is there any portion of the raising of the lower end of the guidance for 4Q? Is there any portion of that is implied that you guys have maybe finished realizing the $30 million of cost savings that you guys were expecting for this year? Or maybe just an earlier than expected finishing of that?

[Frank Martell:]

No, that's a continuation. And if you recall, we took the bulk of the actions in the first quarter, and then we expected the realization of the benefits to start in the second quarter, which did occur and - so it's been pretty - essentially on plan of what we expected. So that's been pouring through the second, third, and we expect that to continue into the fourth quarter.

[Hayden Blair:]

And then kind of looking out longer term here, you guys have talked about your pretty significant share repurchase over the past five or ten - or five years or so, and you upped your guidance for this year. But looking at the stock chart, the stocks basically doubled there over the past five years. And so then moving forward, are you at a point now where share repos is going to be a - may be a secondary or tertiary element of your capital return strategy and maybe M&A or something like that will take a greater position in that? Or is it going to be a continuation of this kind of steady share repurchase activity?

[Jim Balas:]

As always, we're going to remain opportunistic on all fronts. If we think the current value in the shares is greater than where they are trading then share repo is an opportunity, but we're going to be opportunistic on all fronts on how we allocate the capital.

[Operator:]

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

[Kevin Kaczmarek:]

We thought as some companies with exposure to real estate and mortgage volumes saw some weather impact, especially within Florida and Texas this quarter. Do you have any sense of how might that have affected results for you guys for your volume driven revenue? I mean, can we see a bit of a bump as - if the originations get delayed in 3Q? Could we see a bump in 4Q?

[Jim Balas:]

So we did get a little bit of activity in the third quarter but it was pretty modest. We had a little bit of pick up on the revenue side. But also from an accounting perspective, we're required to take charges when the event occurs. So it's a pretty modest impact on the results from the third quarter.

[Kevin Kaczmarek:]

I noticed you guys won a contract with the FHA to perform some of their workflow and valuation solutions. And I realize you guys have occasionally had lumpy contracts that come on and off line. Can you give us a sense of the size of this? Is this one of those lumpy contracts that could bump up revenue? Or would this be in guidance already?

[Frank Martell:]

Yes, we do have - Kevin, we have - we do have an - what we call, advisory services business that has some project-related revenue. That - the - what you're referring to is not sizable. Obviously, we don't speak of specific contracts because of contractual obligations. But in general, there are some lumpiness which we kind of called out as it occurred. Right now, we're going into a period of some good growth in that business related to a couple wins, really beginning of last - in the third quarter and the second quarter that will kick in as we get into the fourth quarter and into next year, but not that with FHA.

[Kevin Kaczmarek:]

And I guess lastly, can you give us some color on what you're looking at on the M&A side? And what the pipeline looks like?

[Frank Martell:]

Look, from my perspective, we've been really, really disciplined on M&A and to Jim's point on capital allocation, our first priority is to reinvest in the organic growth profile and the efficiency of the business. Secondly, as you know, we do look at M&A. It's a crazy pipeline out there. We want to be very disciplined in terms of what we will tackle, and we just consummated the Mercury deal. So we'll continue to look for things that are accretive in terms of capabilities, content, mostly connectivity and content is the focus for us, and there are things out there. But again, we will be disciplined there. And then just on our share repurchase, we have been consistent and we intend to remain consistent in terms of our approach to returning capital. So we are a capital return focused company, and we will continue to do that as we go forward.

[Operator:]

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

[Unidentified Analyst:]

This is Tommy on for Bose. Just wanted to follow-up on the large client diversification that you guys have talked about a few times. When do you guys see the effects of that wrapping up? And are there any indications that any other large clients are thinking of taking the same diversification approach?

[Frank Martell:]

So Tom, this is more of a situation. It relates to our acquisition of RELS and LandSafe, which were really captive appraisal operations. So by definition, you had two clients there that represented 100% of the revenue. So it's kind of unusual from that perspective. So the diversification is really just going in the market and acquiring other lenders that want to use our services which we believe to be really top-notch. So it's kind of just the progressive. So to your point of when does that end, it kind of never ends, if you know what I mean. We're continuing to look, the pipeline is large. This is large, the number of lenders you have out there that we can address adequately. The benefits will be, I think, material in 2018 from the diversification and bringing on new clients and then progressively larger thereafter.

[Unidentified Analyst:]

And some of the small and mid-sized clients that you guys are getting through Mercury, are the contract setup kind of similar where it's a multi-year contract and sort of price increases are naturally built in there? Or do they differ from kind of the larger clients that you guys have already had?

[Jim Balas:]

They're similar to probably what we have with the FNC side of the house. Price is a future opportunity that we'll evaluate going forward.

[Unidentified Analyst:]

And then just quickly on the sort of exit 2019 30s EBITDA margin that you guys have mentioned, how does that breakdown between Property Intelligence and RMW?

[Jim Balas:]

Should be fairly balanced between the two, as you look at the margins today, they're pretty similar at this stage. So I don't think it's going to tilt heavily towards one way or the other. So I would just assume pretty balanced.

[Unidentified Analyst:]

And then just last one. For fourth quarter and I guess full-year 2017, what is your forecast incorporated in terms of mortgage unit volumes? How much do they have it down?

[Jim Balas:]

So if you look around some - as we do, if we look at multiple sources out there, we're seeing anything from 25 to 35. I'm assuming it's - we're assuming it's 25 to 30-ish for the market down in the fourth quarter. But you do have the offsets from the productivity initiatives. You have the benefits of price and new products and the enhancements we've made in VSG to partially offset that.

[Operator:]

Ladies and gentlemen, this concludes today's Q&A session and thus concludes today's call. Thank you very much for attending today's presentation. You may now disconnect your lines. Take care.