CoreLogic, Inc.
Q4 2017 Earnings Call Transcript

Published: 27 Feb 2018

[Operator:]

Good morning and welcome to the CoreLogic Fourth Quarter and Full-Year 2017 Financial Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. At this time, I would like to turn the conference over to Dan Smith, Senior Vice President of 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 fourth quarter and full-year 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 posted our slide presentation, which includes additional details on our financial results on our website. Second, please note that during today's presentation, we may make forward-looking statements within the meaning of Federal Securities Laws, including statements concerning our expected business and operational plans, performance outlook and acquisition and growth strategies, and our expectations regarding industry conditions. 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 fourth quarter financial results to prior periods should be understood on a year-over-year basis that is in reference to the fourth 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. Good morning, everyone. Welcome to CoreLogic's fourth quarter 2017 earnings call. I will lead off the call today with a recap of our 2017 operating performance, including comments on revenue mix and growth trends, profit margins, and capital return. I will also touch on important market trends. Jim will summarize our fourth quarter and full-year financial results and provide high-level first quarter 2018 guidance. We'll then wrap up the session with a Q&A. I want to start my prepared remarks today by thanking our employees, clients, and shareholders for their continued support. Over the past six years, the CoreLogic team has successfully executed against our shared vision of creating a scaled, innovative, data-driven enterprise that delivers unique must-have solutions to the global housing ecosystem. I believe our strategic transformation program has produced an exceptional track record of consistent high performance. Since 2011, we have grown revenues at an annual compounded rate of 9%, adjusted EBITDA by 12%, and adjusted EPS by 26%. Favorable revenue mix trends and a relentless focus on cost management and productivity drove up operating margins by more than 860 basis points. In addition, we reinvested in our long-term growth and returned almost $1.3 billion in capital to our shareholders. Our sustained high performance has resulted in a 260% increase in share value for our long-term holders. CoreLogic delivered outstanding results both operationally and financially in 2017. We achieved the top end of our guidance ranges for adjusted EBITDA and EPS as we significantly outperformed U.S. mortgage market volume trends for the sixth straight year. Importantly, we continue to aggressively invest in building market leading solutions that provide our clients with unique insights and connect the totality of the real estate ecosystem. These investments position us to be a long-term strategic partner for our clients as we drive to enhance, and in some cases, transform underwriting and property valuation, risk management, and monitoring solutions. I believe one of the more significant takeaways from the past year was the durability and increasing resiliency of our business model, which is built around must-have market-leading insights and solutions. Since 2011, we have progressively reduced the impact of down cycles in U.S. mortgage market volumes on our financial results, and 2017 is just the latest example of our progress. In 2017, our total revenues were down just 5% compared with the 20% estimated drop in overall U.S. mortgage market unit volumes. Our ability to significantly outperform the market was attributable to the benefits of share gains, price increases, and new enhanced solutions in our core mortgage units as well as strong growth in our insurance & spatial solutions and international operations. It is also notable that we boosted our adjusted EBITDA margin in 2017 despite the tapering of U.S. mortgage volumes. We achieved this feat by driving productivity and operating leverage. In addition, our durable and cash generative business model allowed us to deliver free cash flow conversion rates well above our 55% to 60% target levels. The continued shift of our revenue mix towards must-have solutions and expansion into non-mortgage adjacencies, as well as the benefits of scale and cost productivity are the principal reasons why we have been able to progressively reduce the impact of down cycles in U.S. mortgage market volumes. In addition to outperforming U.S. mortgage market trends, notable 2017 revenue highlights included, first, single digit – high-single-digit growth in our insurance & spatial solutions and international units. And second, the expansion of our data-driven property intelligence and valuation-related platform solutions. With regard to valuations, higher margin data-driven platform revenues are now approaching 30% of overall unit revenues. Over the next couple of years, we are targeting to expand revenues from data analytics and platforms to at least 50% of total valuation revenues. In terms of diversifying appraisal-related revenues, the team continues to make solid progress in line with our expectations. Over the past year, we have also strengthened our leadership team, operational capabilities, and leverage data glean from our valuation business to enhance our enterprise data repository. And finally, our recent acquisition of UK-based eTech Solutions expands our international valuation-related footprint and is expected to support our progress relative to automating appraisal workflows. To close out the discussion of valuations, we are continuing to execute against our strategic plan, which focuses on building unique and integrated solutions that offer the potential to transform the way real estate assets are valued. As we said in the past, the opportunity to transform the valuation space will be a multiyear endeavor and represents a potentially significant long-term opportunity for CoreLogic. In terms of 2017 profitability, our full-year adjusted EBITDA totaled $480 million. Adjusted EBITDA margin was 26%, up 20 basis points from 2016. As I discussed earlier, this exceptionally strong performance was fueled by favorable revenue mix, operating leverage and productivity. As our long-term investors know, we have an established track record of successfully driving productivity and our push towards first quartile levels of operational excellence. In this context, I am pleased to confirm that we reduced our run rate costs in 2017 by more than $30 million by consolidating facilities, managing staff costs, outsourcing certain activities, and other operational improvements. I believe that our 2017 results point to the ongoing progress we are making toward our goal of achieving at least 30% adjusted EBITDA margins by 2020 based on a normalized U.S. mortgage market and after accounting for the build out of our valuation solutions offerings. To further support our long-term 30%-plus margin target, we expect to lower run rate costs by an additional $15 million in 2018. In addition, as recently outlined in our 2018 guidance release, we plan to make certain targeted investments this year and next to significantly enhance our operational technology capabilities and accelerate workflow automation. While these investments are not expected to materially benefit 2018 financial results, we believe these programs will result in substantial quality and cycle time benefits plus lower run rate cost as we exit 2019. To sum it up, I believe 2017 was another terrific year for CoreLogic, and we are well-positioned for future success. As we look forward to 2018, we expect the U.S. mortgage market to largely complete its long transition from a dependency on high levels of refinancing to a purchase-driven cycle. A return to a purchase-driven cycle market should provide a more predictable and sustainable growth pattern in U.S. mortgage volumes in the years ahead. We head into 2018 excited by the prospects offered by a growing purchase-driven mortgage market in the U.S. where we built strong market-leading positions that are poised to capitalize on the benefits of operating leverage. In addition, our expanding footprint in insurance & spatial solutions and international markets provide us with sizable opportunities for high-margin noncyclical growth. Thanks for joining us today. Jim will now discuss our financial results.

[James L. Balas:]

Thanks, Frank, and good morning, everyone. Today, I'm going to discuss our fourth quarter and full-year 2017 financial results, highlight our recent re-segmentation, and then outline our views on current market trends and 2018 financial guidance. As Frank mentioned, CoreLogic delivered a very strong operating and financial performance in 2017. From a financial perspective, our full-year results outperform market volumes and achieved the high end of market expectations. Notable 2017 financial highlights included, one, continued positive organic growth trends supported by share gains, pricing, and new products; two, overachievement of our cost reduction and productivity targets; three, margin expansion despite significant market headwinds; four, strong generation of free cash flow levels; and finally, the repurchase of 4.6 million of our common shares, which reduced our total share count by 5%. Full-year 2017 revenues totaled $1.85 billion and were down 5% compared to 2016. Operating income from continuing operations was $239 million. Net income from continuing operations was up 36% to $150 million. Full-year adjusted EBITDA was $480 million and adjusted EPS was $2.37 per share. Both adjusted EBITDA and EPS were at the high end of our 2017 guidance. In addition, we generated $304 million of free cash flow, which represented a 63% conversion rate of adjusted EBITDA. The balance of my comments on 2017 results relate to our fourth quarter performance. Fourth quarter revenues were $454 million compared with $475 million in the same 2016 period, as 3% organic growth mostly offset the impacts of an estimated 15% decline in U.S. mortgage loan origination volumes. Property Intelligence and Risk Management Solutions or PIRM segment revenues rose 5% to $180 million, driven principally by share gains in insurance & spatial solutions and the benefits of recent acquisitions focused on property insights. Underwriting and Workflow Solutions, or UWS, segment revenues totaled $276 million, down 10% from 2016 levels, as benefits from pricing, market share gains and growth from valuation solutions platforms, partially offset lower mortgage volumes and the planned diversification by significant appraisal management client. Operating income from continuing operations totaled $65 million for the fourth quarter compared with $58 million in 2016. The 13% increase in operating income was principally attributable to cost productivity-related gains and margin improvement in our insurance & spatial solutions, credit solutions, and our international operations. Fourth quarter operating margin was 14% compared with 12% for the fourth quarter of 2016. Fourth quarter net income from continuing operations totaled $65 million compared with $6 million in 2016. The increase was mainly attributable to a one-time $38 million net tax benefit related to the revaluation of our net deferred income tax liabilities to reflect lower tax rates resulting from the recent U.S. tax reform. In addition, we experienced a fourth quarter 2016 non-cash impairment charge associated with the wind-down of two investments in affiliates which had no 2017 counterpart. Diluted EPS from continuing operations totaled $0.78 up from $0.07 per share a year ago. Adjusted diluted EPS totaled $0.55, essentially in line with the fourth quarter of 2016. Adjusted EBITDA totaled $117 million in the fourth quarter compared with $116 million in the same prior-year period. The increase was principally the result of sustained organic revenue growth and cost productivity benefits that more than offset the negative impacts of lower mortgage volumes. PIRM segment adjusted EBITDA totaled $50 million and was in line with 2016 levels. UWS segment adjusted EBITDA was $72 million, down from $76 million in 2016, as organic growth and benefits from cost management were more than offset by lower mortgage volumes in the planned diversification by a significant appraisal management client. Finally, free cash flow continued to be very strong in the fourth quarter. For the year ending December 31, 2017, free cash flow totaled $304 million, a 63% conversion rate of full-year 2017 adjusted EBITDA. This level is above our long-term conversion rate guidance of 55% to 60%. Our relentless focus in operational effectiveness and building scale in unique solutions has resulted in the creation of a durable and cash-generative business model. Over the past seven years, we have repurchased more than 44.6 million or 39% of our common shares for approximately $1.3 billion. In 2017, we returned 68% of our free cash flow to our investors through the repurchase of 4.6 million or 5% of our outstanding shares for $207 million. In 2018, we plan to repurchase an additional 2% to 3% of our outstanding share count. Our share repurchase program has been a significant source of value creation for our long-term shareholders. Although our market capitalization has increased significantly over the past several years, we believe that the intrinsic value of our business today and its future potential warrants the ongoing repurchase of our common shares. I will close my prepared remarks today with a discussion on financial guidance and the re-segmentation of our business operations. Our full-year 2018 financial guidance issued on February 6, 2018 remains unchanged. In terms of the first quarter of 2018, based on seasonality and our current view of origination unit volume trends, we believe that adjusted EBITDA should be approximately $92 million to $97 million. With regards to our reporting re-segmentation in the fourth quarter of 2017, CoreLogic reorganized its business operations into two operating segments

[Operator:]

Thank you. We will now begin the question-and-answer session. The first question will come from Bill Warmington of Wells Fargo. Please go ahead.

[William A. Warmington:]

Good morning, everyone.

[Frank D. Martell:]

Good morning.

[William A. Warmington:]

So, first question I wanted to ask, one that I've been getting this morning is around the bridge to the 2020, 30% EBITDA target, specifically, how you guys are going to get there from where we are now finishing 2017 to 2018, and then ultimately to 2020?

[Frank D. Martell:]

Hey, Bill, this is Frank. Good morning and thanks for the question. First of all, I think I just want to start by saying we made tremendous progress the last couple of years. And I think 2017 was a foundational year in terms of getting more efficient in the operations and continue to drive operating leverage. So, that's one of the ways that we're going to get to 30% is the basic efficiency of the company and process, et cetera. Secondarily is greater automation. The use of things like machine learning, bots et cetera, which you hear a lot about in the press, we're certainly doing a lot of work in that area as well. We talked a lot about revenue mix as a component, the company has continued drive towards that 50% non-mortgage related revenue target. That brings along with it a mix benefit. And then we expect also to have a significant improvement in some of the lower margin areas like appraisal management and a few other areas that will help us. So I think there's plenty of levers in addition to the normal pricing and other things. So we're going to pull all of those levers. I think it's a fairly realistic target. You'll see, I think you saw that we're up in the fourth quarter. I think the fact that we're able to actually improve margins in the down cycle in 2017 is a terrific validation of I think the trajectory that we're on. So, we're going to get there.

[William A. Warmington:]

Okay. And then for my second question, I wanted to ask on Valuation Solutions Group. You've highlighted that you've got a large client that's reducing volumes as part of a planned vendor diversification strategy. I mean you've also highlighted that you've got some whole series of new relationships that are ramping. And my question is, when do we reach the crossover point with those two and start to drive some acceleration in – positive acceleration in the VSG?

[Frank D. Martell:]

Yeah. So, I think first of all I do want to stress, Bill, I think – and that's one of the reason we talk about, there is a mix and a drive towards higher data analytics and platform revenues and valuations. We expect to get those to 50% of the total revenue mix. I think that's important to realize because that they come with significantly higher margins than the appraisal management component of the valuation solutions. Appraisal management and those revenues, I'm really pleased with the team's progress in terms of getting new clients. I think that's in line as I said with our expectations. I think when exactly arithmetically that that intersects from a revenue perspective is a bit of a moving target obviously because of the mortgage volumes and share shifting, but I think that's we've definitely made progress. And I think within our financial guidance and the growth of valuations, I think we're going to be able to grow that business in the right areas. I think appraisal management diversification is important, but also automation and workflow improvements is also equally important. I think we've always talked about those because we want to make sure that our growth in appraisal is also high margin growth or higher margin growth. And that's really to me even the bigger focus than purely trying to get a lot of volume. I think we'll get the volume anyway but I want to make sure that it's the right margin characteristics. So, we're not looking at multi multi-years but I think we're – over the next couple of years, we'll be well-diversified and hopefully at a higher margin in the appraisal management area, and that a 50% of overall revenues on the platform side and the data and analytics piece.

[William A. Warmington:]

Okay. Thank you very much. Appreciate the insight.

[Operator:]

The next question will be from Darrin Peller of Barclays. Please go ahead.

[Darrin Peller:]

Thanks, guys. Frank, maybe just start off at high level. Number one, I mean, in the backdrop of some NIM expansion we're seeing in banks and some of the sentiment we're hearing from some of the IT services companies around financial services getting a little better. I mean, are you seeing better conversations or stronger conversations with regard to the end-market you deal with? And regard to some of the value-add offerings? And then maybe as attach to that question, when we look at your guidance for next year and if you adjust for the, obviously, the 10% decline in originations, you're talking – it really calculates in our math, just about a mid-single-digit growth rate organically, if you were to back out, call it, $90 million to $100 million of impact to revenue from originations being off alone. I think you guys were 3% this quarter, again, adjusting for macro. And so, is that still back to pricing and market share to new products? What's the bridge to that growth profile next year? If you could just give us more color on the components there again. And how strong each one of those components are?

[Frank D. Martell:]

Thanks, Darrin. Yeah, just to unpack that a little bit, I think in terms of market sentiment and lenders and servicers, I think it's more positive. I think the transition to purchase is positive. I think people feel, in general, at least the people I talked to that the purchase market for the next couple of years will be growing. I think certainly, there's things like housing supply and other friction points that taper that a bit. But I think people see a solid growth platform, obviously, more predictable.

[Darrin Peller:]

Yeah.

[Frank D. Martell:]

So, I think that's all good. I think with the compression of refinancing volumes, I think there's some maybe pressure on the non-depository originators, that's increased as that cycle progresses, and I think that's in line with historical norms. I think, in general, it's a bit of a mixed bag on the bigger originators around cost – the extent of the cost management requirements, et cetera. So, I think there'll be a little bit of caution in some of those players, and I think they'll be a little bit of investment by others. So, I think that balances out largely. So, I think a good story around purchase. I think it's also a good story around innovation and the drive to try to reduce friction points in the market. And I think that's good for us because it's right in our wheelhouse. All the things we've been trying to do around solution sets and automation and cycle time reduction I think plays into that theme quite nicely. I think in terms of bridging ourselves this year versus last year in terms of organic growth, I think we'll see some acceleration. I think the good news in 2017 was despite all the market challenges, I think we had solid pricing growth. I think we've had some good traction on the product side not only in new products, but also enhanced products, which I think is good. And then, we continue to take share, which I think is one of the things that we've stressed the last many years around scale and operating leverage.

[Darrin Peller:]

Yeah.

[Frank D. Martell:]

So, there's a benefit of both on the top line and the bottom line quite frankly. So, those will continue to be themes in 2018.

[Darrin Peller:]

All right. That's helpful. Just very quickly on VSG's growth expected for 2018, maybe you said it before and I missed it, but versus 2017's growth profile. I mean, I know the client shifting away is occurring, but I would imagine that the impact is less significant in 2018 from that alone than 2017. Volumes are down, but what would we expect from that piece of business versus last year?

[Frank D. Martell:]

Yeah. I mean, I think, first of all, I would just say that we still have a dependency on two clients. I think what's important though, Darrin, is that that dependency, quite honestly, is more from a revenue perspective. From a materiality perspective, the impact on the profit line is relatively small, honestly from the swings that are generated there. I think that the new revenue and the new clients will be at similar margin characteristics, maybe a little bit better. But as I said, I think with the eTech Solutions acquisition, with some of the work that the team has done on automation, I think the game there is about how to make that revenue stream much more profitable, and that's where a lot of our focus is. But I think in terms of the top line, there's really nothing has changed. I think we continue to do the work around getting the new clients. We've got a bunch of them. I think we'll get a bunch more in 2018. We already have a few in 2018 that we've secured. So, I think that's going pretty much along the lines that we expected. It is a longer sell-in. I think there's no surprise to that. So, this is kind of a one step at a time, but we're making good progress. And I think the important thing is that we do have a diversified client base as we get out of this year and into next year.

[Darrin Peller:]

Got it.

[Frank D. Martell:]

And I think we'll achieve that.

[Darrin Peller:]

All right. Just last question for me, and I'll turn it back to the queue. But from a financial standpoint, you guys are talking about 55% to 60% free cash conversion. Obviously, that's still very strong. I mean, you had been 50% plus then 55%. Just talk a little bit about the ins and outs on that, anything onetime in nature happening in 2018 that would be impacting that number. And then, is tax reform potentially going to help even higher per conversion after maybe 2018?

[James L. Balas:]

Yeah. Hey, Darrin. This is Jim. So, on the free cash flow, we think we've sized the free cash flow target about right. We do have a couple of onetime things that are going to be in there. So, we're going to have some heightened investment as part of these programs to get to our long-stated goal of 30% margin, so we'll be a little bit more on the investment side. We have rising interest rates, which we've factored into our cash flow projection. We also have that legal settlement from the prior year that we announced in the third quarter. And then, yes, we will have some benefit that offsets some of that from the tax reform.

[Darrin Peller:]

Okay. I mean, so there very well could be actually a higher conversion in 2019, for instance, depending on some of these variables?

[James L. Balas:]

Ex the legal, it could be. But the wildcard will be the interest rates.

[Darrin Peller:]

Got it. Great. All right, guys. Thanks again.

[James L. Balas:]

Thanks.

[Operator:]

The next question will come from Stephen Sheldon of William Blair. Please go ahead.

[Stephen Hardy Sheldon:]

Yeah. Hi, guys. Thanks for taking my questions. I guess just first, looks like you saw a strong acceleration in the second half of the year in the insurance & spatial business. So, I guess, can you maybe provide some color on what's driving that and maybe how you're thinking about the potential growth in that business as we look through 2018?

[Frank D. Martell:]

Sure. So, thanks, Stephen. This is Frank. I think there's – in the insurance & spatial solutions area, we've had some good growth from a product perspective. So, we've had a product we've launched the last couple of years that have gotten progressive traction. So, I think that's one piece of that puzzle. Secondly, is that's a business that we've been able to take price increases progressively for many, many years. And then, also we've had some share gains there. The spatial business had a good year. Part of it was – it wasn't tremendous, but we did get a bump a little bit from the hurricanes and some of the natural hazard phenomena that happened particularly in the last half of the year, we had a lot of those, it seems like. So, that helped as well from the spatial's perspective. And we're also expanding the international footprint a bit as well. So, those were the primary areas.

[Stephen Hardy Sheldon:]

Okay. That's helpful. And then, I definitely get the benefits of moving more towards steadier purchase-driven mortgage market. But can you maybe provide some detail on how that impacts the revenue you generate per unit? Do you typically see more revenue per refinancing origination than purchase origination? And if so, maybe what's the rough scale on that differential?

[Frank D. Martell:]

Yeah. It's the same economics, Stephen, either way for purchase or refi, so, we don't really benefit from a mix shift per se. I think what we're emphasizing is if you look at the last couple of years, we capitalized on a tremendous amount of refi activity. And so, that's been good for us. On the flip side, it introduces volatility. And so, the purchase market is obviously much more fundamental-driven, household formation, economic activity, et cetera, and that is a trend that will be durable over time. So, I think that's the big benefit for us is the predictability and the durability of the purchase market versus the volatility to the refi market. It's been great while it lasted, but I think the good news is there's been a really tremendous progression in the purchase market. It's built on solid fundamentals, and that should continue.

[Stephen Hardy Sheldon:]

Okay. Thanks.

[Operator:]

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

[Glenn Greene:]

Thanks. Good morning. Maybe, Frank, could you talk a little bit more about getting the valuations business toward the 50% mix in platforms. That's a heck of a goal and obviously, it would be great for your economics. But can you talk a little bit about what's going to drive that and does it require acquisitions? And maybe just remind us the relative margin differences between the platform business versus the AMC business.

[Frank D. Martell:]

Yeah. I mean, I think we've made already – and if you look at really from, I think, the last two years, we've gone from 0% to 30%. So, it's been a pretty quick progression. Obviously, we've had two deals that drove that spike. One was FNC and the other one was Mercury Network. But in addition, we have a pretty good analytics business and we have a greater monetization of the data. So, I think that foundation helps us organically to continue to drive forward. One of the big benefits of this area, too, is the platform connects us to a lot of different constituencies and gives us opportunities to sell into many different areas of the housing market that it's not easy to reach. Home inspectors, for example, obviously appraisers, a host of other constituencies, so that's something – and we're cross-monetizing insurance products into there. So, there's a lot of good things around the connectivity aspect of these platforms that allow us to monetize. I mentioned in the call, Glenn, one of the other things that's been great is the data that was resident within particularly FNC, we've been able to use to augment our data repository and use that in the core mortgage area as well. So, those will be all factors. Acquisitions always play a role. I think anything we would do would not be surprising, I don't think, in terms of its bolt-on scaling more of the same type of work. We like the eTech play. It's a leading platform player in the UK. It helps us to scale in the UK. So, those are the kinds of acquisitions we would look to do to get to the 50%. But I think it'll be a little of both, but I think a substantial portion should be organic.

[Glenn Greene:]

Okay. And then, shifting gears back to VSG for a bit, obviously, you've been dealing with the client diversification drags from one large client. I don't know, maybe just using a baseball analogy, but what inning are we in as it relates to that client drag, and are we expecting to see a client diversification drag from the second large client?

[Frank D. Martell:]

I can't speculate. I can only tell you that, basically, the diversification program for both of the clients is really as they've indicated to us it would be, maybe a little bit slower actually in some cases than we had planned on. So, I think that's good news. I don't manage their businesses, so I don't know what their ultimate objectives are. But one of the other things about the diversification that I think has emerged is that it's taking longer, just because the operational work flow aspects from a client perspective to diversify. It's not an easy thing because it's a complex business equation. So, I think the ramp is probably a little slower than we expected, but I would say it will continue. I think the good news it being a little bit slower has allowed us to get additional clients in the meantime. So, I think that's a positive honestly. We can't control their plan, so I wouldn't say that I know exactly what they're going to do. We also can't control their market shares, et cetera. But they are very, very large players and will be very large players in the mortgage market, and they're great partners. We want to keep as high a share as possible and we're fighting every day to do that. But I'd say again, to answer your question, it's a little bit slower. We're still, I think, early days, I think, in terms of a gradual diversification, but I think it's manageable.

[Glenn Greene:]

Okay. Thank you. Appreciate it.

[Operator:]

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

[Bose George:]

Hey, guys. Good morning. Just a follow-up question on the margin, how should we think about the margin by segment in 2020? Is there still room for much upside in the PIRM segment?

[Frank D. Martell:]

Hey. Bose, yeah, I think there is going to be margin expansion in both segments. Obviously, the UWS segment, I think, is poised, as I said in my remarks, poised. If we get a poof (41

[Bose George:]

Okay, great. That's helpful. And then actually, with the realignment, how much exposure does the revenue at the PIRM segment now have to mortgage volumes?

[Frank D. Martell:]

So really, as a practical matter, the segmentation puts most – almost virtually all of our U.S. mortgage exposure into one segment. And by the way, the reason why we resegmented was largely because the company is moving from a product sale to a solutions base sale. So it reflects how we're going to market because we believe we have comprehensive solutions, which is a competitive advantage. So you'll see us talking more about solutions, underwriting solutions for mortgage, underwriting solutions for insurance, risk management solutions. These are things that are new to the industry and I think helps the industry progress more quickly because they're comprehensive solutions and should be high quality and relatively good cycle time type solutions.

[Bose George:]

Okay. Great. Thanks.

[Operator:]

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

[Kevin Kaczmarek:]

Hey, guys. I guess regarding the credit report business, it seems like you guys have benefited from some pricing increases and product enhancements over the past few years. And we've noticed some additional pricing changes from some lenders earlier this year. Can you talk about what you expect from pricing gains within credit in the coming year? And also, could you talk about maybe any price increases on the tax processing in flood side?

[Frank D. Martell:]

Yeah. Look – hi, Kevin. I think in terms of credit, so credit – our credit revenues, as you may remember, break down into a couple of different buckets. Actually, our mortgage-related credit business, which has had honestly the largest price increases, really from two factors. One is a product change, so things like the trended data, et cetera, and then also I think cost escalation in terms of the raw material. That I think we're two trended data, but I think you're going to see some additional innovation. But, largely, I think the cost increases will be driven by raw material price increases. The balance of the business is kind of a different type diagnostics, and auto and transportation related and those, I think, will be probably going forward probably in line with the tri-merge piece of it as well. We'll get solid price increases. I don't think they may be as dramatic as they were when you push through it like a trended data, but I think these will be more digestible in that regard in terms of the industry.

[Kevin Kaczmarek:]

Okay. And what about tax on flood? It didn't seem like there had been much movement there over the past few years. Is that a correct statement and might that change a little going forward or should we kind of model that out at a similar pace?

[James L. Balas:]

No, Kevin, this is Jim. We've had price in those businesses as well. In fact, our pricing strategy is not just confined to credit and tax. It's pretty broad-based, as I think including our comments related to insurance, the PIRM segment as well as UWS.

[Kevin Kaczmarek:]

Okay. Great. I guess...

[Frank D. Martell:]

And flood, Kevin, also flood, we had some product introduction as well. So, we just recently released a couple of product enhancements which are, I think, fairly bleeding edge. And so, we're going to get some price from that as well.

[Kevin Kaczmarek:]

Okay. Great. And I guess one more on the eTech Solutions acquisition. Do you have a sense of how much time that could save, appraisers in the U.S. over time? I realize it's not instant, but how much efficiency you can gain there, in terms of the appraisal process in the U.S.?

[Frank D. Martell:]

We're still working on it. We hope it's substantial, but the thing is that their model has been based in the UK. It's a different market. So, they've had some strong results in the UK, certainly. We're taking that and adopting it to the U.S., a bigger footprint, a lot of other nuances. So, we hope there's a good play there. Time will tell, but one of the benefits of doing that deal, in our mind, was the opportunity there which, if you played it out, could be very large, but it'll take a bit of time to figure that out.

[Kevin Kaczmarek:]

And then the non-platform cost in VSG, again, what percent is personnel roughly? Was it like half or more?

[Frank D. Martell:]

Are you talking about the appraisal portion?

[Kevin Kaczmarek:]

Yeah. The appraisal business. Yeah.

[Frank D. Martell:]

Yeah. I mean, it's a very people-intensive business at the moment, so that's....

[James L. Balas:]

It's a higher COGS business model, so more valuable type of cost model.

[Kevin Kaczmarek:]

Okay. All right. Thanks a lot. That's all I have.

[Operator:]

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

[Jeff P. Meuler:]

Yeah. Thank you. Just so I understand on the organic growth metric, the plus 3%. Are you counting the diversification by a large AMC client against you?

[Frank D. Martell:]

Yeah.

[Jeff P. Meuler:]

And then, as I think about – so that would be the first part of the question. You are? Okay. And then as I think about, so that's going against you. I mean you talked about several drivers of growth in terms of share gains and product and price. When you're at 3% growth, I don't know if these are three-plus-one factors aggregating up to plus 3%. But can you just help us understand other than the client diversifying away from you, any other negatives that are going into that number? I'm wondering if the gross number is higher. And then, as you think about mid-single digits, is it similarly broad acceleration or is it weighted towards one of the factors like new product versus the others?

[James L. Balas:]

So, in terms of how we measure consistent with what we've said in the past, our metric is ex market largely. There's a few other items like FX which is not that big this year over the course of 2017. It's ex wind downs, product sunsets, which again is not as big a number. So, it's largely ex-market and obviously less acquisitions to get to the 3%. In fact, it was a little over 3%. In terms of the growth going forward, I think early – if you would look back a year or two ago, it was mostly share and we've made a big push to get more systematic on how we approach price and emphasis on innovation and new products. So, those are becoming bigger drivers going forward. So we take those having all three levers at our disposal will help us grow – increase the growth rate in the future.

[Jeff P. Meuler:]

Okay. And then, CoreLogic has a long term track record of productivity programs. I guess what's different about the 2018 productivity programs than what you've done in the past or is it more a continuation? It sounds like there was more kind of back-end workflow work or data architecture. And then, just as we build out our models, you have a 2020 target that implies quite a bit of margin expansion from 2018 to 2020 given that you're in the process of implementing some of the productivity programs. Is it prudent at this time for us to, I guess, weight the bulk of the margin expansion from the – in the out year from 2019 to 2020?

[Frank D. Martell:]

Yeah. I'd say that if you look at our – if you look, Jeff, at our history, we've had very, very large cost take-outs and we always get the question, can these be sustainable? Obviously, some of that has been structural as we've transformed the company and we've absorbed the benefit of that. I think there are some that are longer term like real estate consolidation. We've just chosen instead of big bang, we've chosen to roll off the leases and that kind of stuff. So, that's continued to mete it through, but we'll eventually tail down as we go forward. So, there's a little bit of that why you're seeing the numbers come down. There's still $15 million, give or take, it's still about 1 basis point. So, that's still a fairly decent amount. The other thing is I think what we're signaling in the 2018 guidance is that we see an opportunity from a technology and automation perspective that's a bit different. It goes around things like machine learning and taking advantage some of the data capture technologies that will open up, I think, new areas of automation and efficiency that you can't get at. We still have – as a big data shop, we have – we spend a lot of money collecting and curating the data. I think that's where machine learning can be of huge help to us. So, it's a little bit of a different mix of cost reductions. But I think, potentially, very large opportunities there from an IT perspective, things like the cloud, et cetera, where things have gotten so much more advanced now than they used to be in terms of security and other things that enable you to – companies like us to use the cloud more securely. So, it's kind of exciting. I think it's one of the areas that I think will be available to a lot of companies. But, in our case, I think it's a fairly large opportunity to drive things forward. So, that's really why we're able to continue. The $15 million versus the $30 million is just as we're whittling down the real estate portfolio as we're taking out the back office costs, that will drop down a little bit and I think will be replaced by these other opportunities.

[Jeff P. Meuler:]

And the timing of realizing the savings, should we be weighting to 2020 or is it more evenly spread?

[Frank D. Martell:]

Well, no. I think as we said, 2018 is – 2018, we're getting our stuff together and moving on. I think, 2019, as we get into 2019 and through 2019, you're going to see a benefit and then because we're going to pop up from a low margin to kind of a 30% or overnight either. So, as we get through the first part of 2019, I think you'll see the margins accelerating, and I think you'll see that the very clear path toward the 30%.

[Jeff P. Meuler:]

Thank you.

[Operator:]

The next question will be from Chris Gamaitoni of Compass Point. Please go ahead.

[Chris Gamaitoni:]

Good morning. Thanks for taking my call. I wanted to follow up on...

[Frank D. Martell:]

Good morning.

[Chris Gamaitoni:]

Good morning. I wanted to follow up on a prior question relate to the valuations platforms getting to 50%. Is that more additional product sale increasing revenue? Is it signing additional clients? Just wondering kind of what the drivers are in a volume neutral environment or what will really take you to 50% assuming that the AMC business reaches a breakeven or can even grow in the future?

[Frank D. Martell:]

Yes. So, the platform business, as we talked about earlier, I think the 50% is a combination of organic growth and also potentially acquired growth as well. We still are able to extend the pipes to different constituencies. I think there is market share gains to be had. This is a competitive market. So, we have some competitors where we have some white space. We also have the opportunity to put additional existing CoreLogic products through those pipelines, those pipes as well. So, it's all those types of things, Chris, that will be – will go into that platform. It's not just platform. It's data and analytics platforms. We do have some pretty strong analytics in terms of appraiser diagnostics and quality as well. So, those will be things that will help us to get to 50%.

[Chris Gamaitoni:]

Okay. And now I want to just touch on the insurance business. Revenue was up 22% year-over-year, which was certainly a big acceleration from what it had been in recent periods. Do you have any sense of what the impact of the storms were or kind of what the – what the type of future levels are going to be? It's just such a large step change that I'm trying to figure out what kind of the core growth rate of that business is currently?

[James L. Balas:]

Yeah, on the insurance, we did have good organic growth as we stated earlier. We also had a deal earlier in the year that so you had some acquisition growth in there as well. And as it relates to the hurricanes, we did have a modest pickup. We talked about that on the last quarter call, but it wasn't a huge number.

[Chris Gamaitoni:]

So, I don't know if you'll guide this, but do you have any sense of how we should think about that growth rate moving forward given your pick up on organic or just even what the organic was in the quarter?

[James L. Balas:]

Yeah. We don't guide at the business unit level.

[Chris Gamaitoni:]

Okay. Thank you.

[Frank D. Martell:]

Thanks.

[Operator:]

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

[Oscar Turner:]

Hi. Good morning.

[Frank D. Martell:]

Hey, Oscar.

[James L. Balas:]

Hey, Oscar.

[Oscar Turner:]

So, I just had one question, it's on some of the go-to-market commentary, I think. Obviously you made the reporting change this quarter and talked about focusing more on solution-based sales as opposed to product sales. Do you think this shift changes the value prop to customers? And then, I guess as a follow up, does it competitively – does it help competitively differentiate CoreLogic versus competitors? And have you seen evidence of that?

[Frank D. Martell:]

Yeah. I think. Good question, Oscar. I think, first of all, we really do think it's a significant competitive advantage for CoreLogic. It's hard to get to, but the theory is, we provide, really, an end-to-end point solutions today, so from really application through to loan closing, as an example, on the origination side. We provide many, many different services, but they're individually procured. They're individually managed, and they have different characteristics in terms of SLAs. So, we think by providing a more integrated and seamless end-to-end solution set, that will, at a minimum, reduce the level of oversight, and just the vendor management, if you will, that today goes on in the system. Secondarily, I think it allows for some consistency across the marketplace. Today, there's a lot of variation by clients in terms of how they procure and how they consume different products. And I think this will smooth that out. Obviously, we have, we think, the most comprehensive point solutions in all of these areas. So, obviously, from that perspective, it is a competitive advantage. It should help us to, hopefully, penetrate additional white space. And lastly, I think solutions are easier to consume and more effective for mid and mass market clients, where I think we can actually provide middle and mass market clients with a more sophisticated toolset than they've had before. Probably, going to market as point solutions probably would not have been very feasible before. So, I think all those reasons make us pretty excited about the solutions that we have today. And I think that we will be enabling through some of these investments that we're making, that we mentioned for 2018.

[Oscar Turner:]

Okay. Thanks, and actually, one follow-up to the previous question. So, it looks like your 2018 guidance calls for, I think, sustained constant macro revenue growth in maybe a 3% percent range. I guess one, is that accurate? And then, two, acknowledging there's no guide at the product level, but can you provide any color on growth outlook for any product segments that deviate from that 3% range? I mean, obviously, it looks like valuations would come in below there, given the vendor diversification?

[Frank D. Martell:]

I think from an organic perspective, you'll see the same pattern in 2018 that we saw in 2017, all the things that Jim talked about there.

[Oscar Turner:]

Okay.

[Frank D. Martell:]

I think will continue. I think that the high level story is I think continued pricing, share gains, and penetration by the core mortgage operations, and I think solid growth by the non-mortgage piece of the company, I think those will be the same thematic points in 2018.

[Oscar Turner:]

Okay. Thanks a lot for that color.

[Operator:]

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

[Jason S. Deleeuw:]

Yes. Thanks. I was hoping just to get a little bit of color on the competitive environment for the property data and analytics business. Just wondering if there's been any changes or any share changes or just kind of go-to-market changes that you would call out.

[Frank D. Martell:]

Yeah. I think, Jason, the competitive marketplace, I think, there's a lot of competitors in this space, a lot of small ones, medium-sized ones, I think people that are specializing in areas as well. I think, to me, that's more of the same as we've seen in the last couple of years. A lot of people talk about fintech and the emergence of fintech players and disruptors. I think there's a lot of money going into a lot of areas, just like we are investing in different areas. I think the great news is, to a certain extent, where we're playing, we have the power of incumbency, which is important because a lot of our solutions are pretty deeply embedded in the workflows of the clients, and client's have invested behind that. I think we also have a fairly good advantage in the fact that I think we have a good track record from a quality and service perspective that has passed muster from a regulatory point of view. I think that gives our customers reason to be confident and assured in our services. So, I think those things help us in the competitive world. I'd say, certainly, since I've been with the company, it's become more broadly competitive, but I don't think that there's been a material ramp up or change in the recent past.

[Jason S. Deleeuw:]

Great. Thanks for that. And then the drivers of the guidance range, I think the range is a little bit wider than we've had historically. Just wondering, is that primarily on the origination volume or any other factors to call out?

[James L. Balas:]

Yeah. You're referring to the adjusted EBITDA range?

[Jason S. Deleeuw:]

Yes.

[James L. Balas:]

Yeah. We've typically been in that $20 million to $30 million range. So, this year isn't anything unusual.

[Jason S. Deleeuw:]

And the drivers of kind of the low to the high end, is it the volume or are there other factors?

[James L. Balas:]

No. I mean, there's nothing unusual there. It's a typical range that we put together. The big thing, as you know, is the 10% down market. So, there's not much more to it than that.

[Jason S. Deleeuw:]

Okay. Thank you.

[Operator:]

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

[John Campbell:]

Hey, guys. Good morning. On the segment reporting, I just want to make sure I get the moving parts here. Frank, are you guys still feeling good about the rule of thumb, the kind of $20 million to $25 million of revs on every $100 billion of origination swings? Is that still accurate?

[James L. Balas:]

Yeah. That's still correct and that would be the ex the valuation businesses.

[John Campbell:]

Okay. So, it sounds like UWS, I mean, obviously, now you have all the mortgage exposure there. So, I guess on a base level, if the origination forecast holds, about a 2% decline of revenue, and then you've got the incremental, I guess, diversification, is that right? Can you help maybe size that up a little bit?

[James L. Balas:]

I'm sorry. Can you repeat that?

[John Campbell:]

So, about a 2% decline in UWS rev, that's where it looks like will be jumping off if the origination forecast holds. But then you guys talked about the, I guess continued diversification efforts. Just trying to get an idea, is that kind of a good base level and then kind of what we should grow or how much faster we should decline that based on diversification?

[James L. Balas:]

Yeah. There's no real change in the sensitivity due to the market. So, I don't think there's anything unusual. We've already kind of talked about the valuation piece. So, there's not much there.

[Frank D. Martell:]

Yeah. I think John the sensitivity Jim mentioned that's kind of a – obviously, the non-appraisal portion. The reason why we don't include that, obviously, is because you don't have a market exposure. You have a client, a client-specific exposure. And so that's why we kind of do it that way. But I don't think there's anything unusual. As Jim said in the UWS, I think that we expect to continue to outperform in the mortgage market volumes, those 10% we tend to expect to do significantly better than that. We don't obviously guide by segment specific level, but I think all of our exposure is in that segment for the most part. And I think that will give you better visibility to our performance there.

[John Campbell:]

Okay. That's helpful. Thanks for that, Frank. And then, on the margins by segment, I mean obviously you guys don't guide the segment margins but if we look at the UWS, it seems like that's probably got the biggest leverage point in getting to the 30% kind of total company margin. Is there kind of broad range we should think about by 2020? Like how much could you guys expand that margin from here?

[Frank D. Martell:]

Yeah. I think it's hard to say, but you're exactly right, John. I think that and as I said in my prepared remarks, we're excited because the purchase market goes and as the predictability of the volumes go, I think that that's good for us and we are poised operating leverage-wise to pop the margins up. So, I think that's a very good long-term value driver for this company. It's cash generative. It's high margin. We've got and as we automate further, there should be even better operating leverage as we get into 2019 and 2020. So, you're exactly right on that point.

[James L. Balas:]

And as Frank said earlier, we expect both segments to be above the 30% target by 2020.

[John Campbell:]

Okay. Great. That answers my question. Thank you, guys.

[Operator:]

And ladies and gentlemen, this will conclude our question-and-answer session. And that this time, we will conclude the CoreLogic's fourth quarter and full year 2017 earnings conference call. We thank you for attending today's presentation. And at this time, you may disconnect your lines.