CoreLogic, Inc.
Q1 2018 Earnings Call Transcript

Published: 26 Apr 2018

[Operator:]

Good morning and welcome to the CoreLogic First Quarter 2018 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. I would now like to turn the conference over to Dan Smith of Investor Relations. Please go ahead.

[Dan L. Smith:]

Hi. To all on the call, apologies for our late start. We had some technical AV difficulties this morning. So we're ready to go now. So once again, sorry for the delay. Thank you, and good morning. Welcome to our investor presentation and conference call where we present our financial results for the first quarter of 2018. Speaking today will be CoreLogic's President and CEO, Frank Martell; and CFO, Jim Balas. Before we begin, let me make a few important points. First, we posted our slide presentation, which includes additional details on our financial results on our website. Second, please note that during today's presentation, we may make forward-looking statements within the meaning of the Federal Securities Laws, including statements concerning our expected business and operational plans, performance outlook, and acquisition and growth strategies, and our expectations regarding industry conditions. All of these statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our SEC filings, including the most recent Annual Report on Form 10-K and the subsequent 10-Qs. Our forward-looking statements are based on information currently available to us, and we do not intend and undertake no duty to update these statements for any reason. Additionally, today's presentation contains financial measures that are non-GAAP financial measures. A reconciliation of these non-GAAP measures to their GAAP equivalents is included in the appendix to today's presentation. Unless specifically identified, comparisons of first quarter financial results to prior periods should be understood on a year-over-year basis. That is in reference to the first quarter of 2017. Finally, please limit yourself 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 first quarter earnings call. I'm going to lead off the call today with a recap of notable operating highlights, including comments on revenue mix, profit margins, and market trends. Jim will summarize our first quarter financial results and provide guidance updates. We'll wrap up the call today with a Q&A session. I want to start off my prepared remarks today by thanking our employees, our clients, and our shareholders for their continued support. The CoreLogic team delivered a very strong start in 2018, both operationally and from a financial point of view. In the first quarter, we generated positive top-line growth despite an estimated 10% drop in U.S. mortgage unit volumes. In addition, we increased our adjusted EBITDA margins significantly by driving product mix, productivity, and operating leverage. Finally, we generated cash flow levels above our 55% to 60% target range. Importantly, during the quarter, 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. Our long-term focus on innovation, superior quality and service levels, as well as scale positions us to be a high impact strategic partner for our clients as we drive to enhance and, in some cases, transform underwriting and property valuation, risk management, and monitoring solutions. As I said on our last call, I believe one of the more significant takeaways from the past year and now for the first quarter is the durability and increasing resiliency of our business model. Our first quarter results are the latest example of our progress where we grew both revenues and profits despite lower U.S. mortgage market volumes. The successful and consistent execution of our strategic transformation program over the past five-plus years has allowed us to progressively reduce the impact of down-cycles and U.S. mortgage market unit volumes. Specifically, we've driven a continued shift in our revenue mix towards must-have solutions, expanded into non-mortgage adjacencies, and realized the benefits of scale and cost productivity. In the quarters and years ahead, I believe we will continue to realize additional benefits from the further positive evolution of our business model. During the first quarter, our total revenues were up $5 million to $445 million as we benefited from new and enhanced solutions in our underwriting-related units, price adjustments, as well as solid growth in our insurance & spatial solutions and international operations. Both of our operating segments, Property Intelligence & Risk Management, or PIRM, and Underwriting & Workflow Solutions, or UWS, delivered strong revenue growth in the quarter. Other notable first quarter revenue highlights included mid- to upper-single-digit growth in our insurance & spatial solutions and international units and the expansion of our data-driven Property Intelligence and valuation-related platform solutions. With regard to valuations, higher-margin data-driven platform volumes are expected to account for about one-third of overall business unit revenues in 2018. As I mentioned on our last earnings call, over the next couple of years, we are targeting to expand revenues from data, analytics, and platforms to 50% of total valuation revenues. Achieving this target should provide significant operating and financial upsides to our collateral valuations business and more broadly across the company. To this end, we're making very solid progress through a combination of strong organic growth, operation, operating and revenue synergies with other CoreLogic solutions areas as well as our recent acquisitions of eTech Solutions and a la mode. As separately announced, the a la mode transaction was completed in April, a la mode is a leading provider of subscription-based software solutions to more than 40,000 appraiser professionals across the U.S. As the gold standard desktop workflow solution for appraisers, a la modes' software platforms facilitate the aggregation of data, imagery and photographs in a GSE compliant format for the completion of U.S. residential appraisals. During Q1, we continue to strengthen our operational capabilities, leverage data gathering and evaluation businesses to enhance our enterprise data repository. We also continue to diversify appraisal-related revenues and introduced technology tools and automation in line with our plans. To close out the discussion of valuations, we are executing very well on our strategic plan, which focused 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 profitability, first quarter operating income rose 36% and adjusted EBITDA jumped 15%. Compared with last year, operating and adjusted EBITDA margins were up almost 300 basis points. Favorable margin trends in 2017 and early 2018 are the result of our focus over the past several years on optimizing our revenue mix around core capabilities, building an integrated and efficient organization, and driving automation, operating leverage, and productivity across CoreLogic. Looking ahead, we have set a goal of achieving at least 30% adjusted EBITDA margins by 2020. In this context, I'm pleased to report that we're making good progress on our previously announced 2018 cost management program which is expected to lower run rate costs by $15 million this year. These savings will be generated primarily by reducing complexity and simplifying our organization and automating work processes. As announced earlier this year, we also plan to make certain additional targeted investments in 2018 and 2019 to significantly enhance our operational, technology capabilities and accelerate workflow automation. While these investments are not expected to benefit 2018 financial results, we believe these programs will result in substantial quality and cycle time benefits, plus lower run rate costs as we exit 2019. As Jim will discuss later, we continue to successfully drive high rates of free cash flow to top-line growth, favorable mix, higher margins, and working capital management. CoreLogic's ability to deliver strong free cash flow has enabled us to consistently invest in future profitable growth, while continuing to return capital to our long-term shareholders through share repurchases. As our long-term investors know, over the past seven years, we've returned a significant portion of our free cash flow to shareholders in the form of stock buybacks. Since 2011, we've repurchased approximately 45 million of our common shares for $1.3 billion. Over the course of this year, we plan on repurchasing another 2% to 3% of our outstanding shares. To sum it up, CoreLogic's off to a strong start in 2018, and we believe we're well-positioned to pursue our strategic plans and deliver future success. We head into the balance of 2018 and beyond excited by the prospects offered by a growing purchase-driven mortgage cycle in the U.S., where we build unique must-have solutions 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 the call today. I'll now turn the call over to Jim for a discussion of our financial results.

[James L. Balas:]

Thanks, Frank, and good morning, everyone. Today, I'm going to discuss our first quarter 2018 financial results and then outline our views on capital return and our second quarter outlook. As Frank mentioned, CoreLogic delivered a very strong operating and financial performance in the first quarter. From a financial perspective, our results outperformed market volumes and exceeded the high ends of market expectations. Notable first quarter financial highlights included

[Operator:]

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

[William A. Warmington:]

Good morning, everyone.

[James L. Balas:]

Good morning.

[William A. Warmington:]

So, congratulations on a strong quarter, especially in light of the volume headwinds. So, a couple of questions for you. The first is, you mentioned doing some investments that could improve the quality and the cycle times, not in 2018, but in 2019. So, I wanted to ask how much are you putting into these investments in terms of dollars and what kind of reduction in run rate costs you think you could see in 2019?

[Frank D. Martell:]

Thanks, Bill. This is Frank, and appreciate the kind words. Yeah. Look, I think we talked about this on the first quarter call or the year-end call and now this call, the numbers, about $15 million was the estimate that we provided over the next couple of years and it's primarily in technology and automation, machine-learning bots, that type of automation, workflow automation. But the bigger numbers are in the IT infrastructure, around things like cloud enablement and utilizing some of the technologies available now and coming online. So, that's really the primary. And as you know, to put that all into place, it takes a little bit of time. So, that's why we're going to do this over the next two years or so. We do expect this to significantly benefit us. It's part of the climb to 30% and I think it's well in order and I think there's a great plan there to deliver that.

[William A. Warmington:]

Got it. And then, for my follow-up question, I wanted to ask about VSG. There clearly are some headwinds there in terms of the volumes. But then, in addition to that, you've talked about in the past the client with the vendor diversification program and how that's been putting some pressure on you as well. And could you talk a little bit about the revenue and the profitability dynamics between the appraisal side of the business and the platform side of the business? And then, kind of another thing would be how are you feeling about the pipeline of opportunity on the appraisal side of the business and when that's going to start to turn positive?

[Frank D. Martell:]

Yeah. Let me talk about the – first, I'll talk about the platform side. Great progress there. Terrific margins. Great stickiness, as you can imagine. And I think we've built the capability here. So, I think all systems go for the charge towards a 50% mix that I talked about. So, feel really good about that. We cover almost 800 lenders and another couple of hundred AMCs. So, it's a real – also enables us to connect a lot of the real estate ecosystem together, which I think is a high value add. On the appraisal side, as you know, the genesis of our current revenue mix is primarily two clients or has been. They are diversifying, one in particular, the other one, not so much. But there is a plan to diversify. I think that's gone pretty much as expected. Maybe a little bit slower, but pretty much as expected. I think we have a good pipeline. We've converted a ton of wins. Yeah, the reality is, I think as we talked about before, it's a little bit of a slower sell-in, so it takes a little bit time to get the volumes ramped up. But that's all happening and I think we feel good about that. Nothing really new to report there. We'll just continue to work through that. But we have quite a number of new clients signed up and contracted and being hooked up. So, we feel good. On the appraisal side, the margins are lower. We still have what we believe to be fairly solid margins in that business given the characteristics of the business. We are working to automate that business so we do expect the margins to come up over time. So if you look at the eTech acquisition, not a big one, but brings some really key opportunities from an automation perspective in appraisal. So, we're working all those angles. And I feel pretty good about our position. I did mention on the call, we use that data to also enrich our repository. Appraisal data is perhaps the richest source of property data out there in many respects. So, we have already used that to good effect. So, I feel really good about where the valuation business is right now and where it's headed, and the potential. And when you marry that up to where the purchase market's going, we should see progressive growth in the purchase market over the next couple of years. So, that bodes well for the volumes over the longer period.

[William A. Warmington:]

Got it. All right. Thank you for the insight.

[Frank D. Martell:]

Thanks, Bill.

[Operator:]

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

[Chris Gamaitoni:]

Thanks for taking my call. On your path to 50% mix in the appraisal business from the platform business, how do you get there? Is it organic? Is it inorganic? What drives the organic kind of platform revenue higher from here?

[Frank D. Martell:]

Hey, Chris. This is Frank. So, the 50% is a combination of different factors. But it's about a third right now, so it's not like we're going from a zero base. So, we have a pretty healthy mix of platform and data revenues there. Those revenues are growing very significantly from an organic perspective. So, we expect that to continue as we take these capabilities to new clients. There's plenty of white space there, so there's an organic feature to this. In addition, with eTech being a UK-based firm, we think we can bring that technology and revenue stream over to the U.S. So, there's a number of those other kind of organic-related actions. We think there's opportunity on the data and the analytics side as well. And then, I think there's obviously, over time, opportunities to add additional non-organic assets into the mix, but I think we can get a fair amount of the way there just organically.

[Chris Gamaitoni:]

Okay. And then, just the EBITDA performance, the outperformance versus your prior guide of $92 million to $97 million. I was wondering, what outperformed better than your plan. Was it revenue? Was it better cost management? Just any color kind of what was better relative to your plan.

[James L. Balas:]

Hey, Chris. This is Jim. Good question. On the EBITDA performance, there was multiple things. There was the revenue growth. We had a little better revenue in the quarter, and it was also the mix of that revenue. Some of the higher-margin businesses had higher performance. And then combine that with the cost productivity, that's what generated the better EBITDA performance overall. So, it's multiple factors.

[Chris Gamaitoni:]

Okay. That's perfect. And are you able to let us know what the benefit of the a la mode acquisition is for your 2Q and full-year EBITDA guidance commentary today?

[James L. Balas:]

Yeah. So, for a la mode, it's a software subscription model. So, it's going to have a deferred haircut component to it. So, the results for the second quarter are going to be pretty muted. So, there's not going to be a lot of impact, and then we'll consider an update as part of our second quarter call.

[Chris Gamaitoni:]

Okay. Thank you.

[Operator:]

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

[Glenn Greene:]

Thanks. Good morning. I had a similar question to last one, but I was curious on the confidence and sort of performing to the upper end of the range on a full-year basis. Is it just sort of the carry through from this quarter or what gives you visibility on the back three quarters to be confident to the high end of the range?

[Frank D. Martell:]

Hey, Glenn, this is Frank. As you know, we have good visibility in the second quarter. So, we can see the first half pretty good. And as both Jim and I said, we're off to a really strong start. So, we feel good about that. I think as Chris' question alluded to and Jim responded to, I think the cost programs, we're doing well there. So, I think those combination give us a pretty good visibility into the target for the full year in the upper end of the range.

[Glenn Greene:]

Okay. And then just back to the valuations business, it was a nice outperformance at least relative to what we were looking for. So, I guess, the question is, I'm just trying to triangulate the contribution from new business that's converted on versus the drag from the diversification effects. I mean, is any way to put color on those two things, positive and negative, and have we hit bottom from a diversification drag perspective?

[Frank D. Martell:]

Yeah. So, I'll take the last part of that first, which is there is a long-term diversification play. But these are only two clients. So, I think the reality is the game is more about bringing on new revenue sources, and there's no reason why we can't continue the success that we've seen there. So, I think there'll be an intersection point where that revenue volume matter will be resolved. It's not a big deal from a profitability standpoint. So, the good news is it's more of a revenue issue than it is a profit issue for us. Obviously, as we get more automated, we change the game a bit in terms of what's offered there. And I think we think that that will accelerate the margins and the growth there. I think we have something unique to offer. The platform piece of it we're really excited about, because it's really strong margin and it's really strong growth because it's an area of need in the industry. It's also one that, I would say, services all of the tiers of the client base, big, mass, medium and large. So, that's another conduit also to distribute additional products – CoreLogic products over. So, that's developed really well. But the specific appraisal thing you talked about, it's the same really. It's just they're kind of diversifying and we knew that. It's a little bit lower margin. So from a margin perspective, it's not a real issue for us. It's more of a top-line game. And I think we've got enough uptake that I feel pretty good about being able to offset the diversification kind of over the medium term.

[Glenn Greene:]

Okay. Let me just slip one more quick in, what I'll call the macro-adjusted organic growth ex-M&A for the quarter, if you could just give us that figure.

[James L. Balas:]

Yeah. So the organic growth ex-market, as we've done in the past, was in line with what we had in the fourth quarter when we talked about for the year. It was at 3%. M&A was about another 3%. And then, the market impact was a negative 5%. So that bridge gets you to the positive 1% total for the quarter.

[Glenn Greene:]

Perfect. Thank you very much.

[James L. Balas:]

Great.

[Operator:]

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

[Bose George:]

Hey, guys. Actually, just to follow up on that question on organic growth. Just on the UWS segment, can you talk about how much of that came from growth versus benefit from acquisitions?

[James L. Balas:]

Yeah. So Bose, this is Jim. On the acquisitions, we had about – roughly, what you'll see is about $14 million when we file the 10-Q later. And it was pretty equally distributed between the two segments.

[Bose George:]

Okay. Great. Thanks. And then, actually on the mortgage – the UWS segment, do you guys have pricing floors at all with any clients that offsets the impact of declining volume?

[Frank D. Martell:]

No. That's not possible to do under – there's no guarantees of volumes by regulatory statutes. So, we don't. But we have rate cards. And I think from my perspective, Bose, I mean I think we've done really well on the volume side. We've been able to – since we cover so many lenders now, we're able to – we've been picking up share. As you can see, some of the businesses on the UWS side, we actually were – still are gaining a good amount of share.

[Bose George:]

Okay. That makes sense. Thanks. And actually one more. Can you just remind us what you said about cash flow conversion in the past? Is there much upside to the run rate right now?

[James L. Balas:]

Hey, Bose, this is Jim. The free cash flow target for the year is 55% to 60%.

[Bose George:]

Okay.

[James L. Balas:]

And we think that's still a good range.

[Bose George:]

Okay. Great. Thanks.

[Operator:]

The next question is from Andrew Jeffrey of SunTrust. Please go ahead.

[Andrew Jeffrey:]

Hey, guys. Thank you for taking the question. Can you address pricing a little bit? I know you talked about pricing value across your businesses. Can you just delve in a little bit into specific pricing initiatives and where you might be seeing some ability to price to value?

[Frank D. Martell:]

Yeah, Andrew, so the pricing depends on the business. Most of our businesses fundamentally have a rate card structure. Some of it's volume, there's volume tiering. But for the most part, there's a rate card structure. And then for the longer-term contracts, we have a fair chunk of the revenue that's related to longer-term contracts. A fair portion of that has a cost escalation feature in it, kind of inflation recovery. And so, we try to look at the basic product, and the rate card, and the cost recovery from an inflationary perspective. And then there's a large host of enhancements that happen over time, and so we price for those. We have a fair number of new products or derivative products that come on stream. So, we try to value price those. So, it's a combination of all those factors that drive into pricing. And then finally, we do have some contracts occasionally that need to be remediated that were underwater. We have some issue with them that we negotiate separately on more of a one-off pricing perspective. But by and large, we're driven by inflation recovery and enhanced our new product.

[Andrew Jeffrey:]

Okay. And so, it sounds like, I guess, just to clarify, there is some pricing tailwind as you introduce new products and new technology. When I think about EBITDA, and EBITDA guidance and the outperformance in this quarter, is there anything that we need to think about in terms of investment timing or spending? Because the lift in margin you saw this quarter versus, for example, the full-year guidance is pretty significant, I wonder if it's just conservatism, if we're going to – at some point, sounds like, you might update your guidance. But I'm just thinking about the timing of any investment and issues or other spend we should be factoring into the back half.

[Frank D. Martell:]

I don't think it's very material. I mean, I think the first quarter, obviously, you kind of always start off a little bit slower than you'd like. But I don't think that's a big – that's a material reason why the margins were different. The margins were up really because I think we're fundamentally more productive and we have operating leverage. And as Jim mentioned, I wouldn't – the mix shift towards higher margin revenues is also a very, very positive factor. So, all those things are at play. I think, from an investment perspective, by kind of plan, it was a little bit more back-half-loaded, but that's all factored into what Jim talked about in terms of being at the upper end of the EBITDA guidance range. And we will, as we always do, kind of give all the metrics, all the guidance metrics in July when we do the second quarter update. So, we'll do revenue and EPS and stuff like that as well.

[Andrew Jeffrey:]

Okay. Thanks.

[Operator:]

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

[Jason S. Deleeuw:]

Yes. Thanks and congrats on the strong start to the year. Just kind of following up on Andrew's last question, I just want to make sure we're kind of all on the same page here. If I just look at your guidance, what's implied for margins on the back half of the year, it's kind of down margin. So, I just want to make sure we all understand if there's some costs or something that will be coming through or is there just an element of conservatism given kind of the mortgage, volume, volatility. Just any additional color would be helpful. Thank you.

[Frank D. Martell:]

Yeah. Look, I think, first of all, just to be clear, we're giving an indicative. It's kind of a soft guide on the range. So, we expect to be high. And I think we've – really, now you have a clear view of the first half based on Jim's kind of view of the second quarter. I think that in terms of the spending, there's not a big bolus coming through in the second half of the year. It's pretty distributed over the three quarters. So, I think, as I said, we'll give I think a better read on the guidance as we get into the July period where you could see both revenue, EBITDA and EPS there. There is no – I think as I said, we're doing really well on the cost side right now. I think we're doing really well on the mix side. So, the margin increases support the longer-term target and I think that's progressive in nature.

[Jason S. Deleeuw:]

Great. Thanks for that. And then just wondering on the digital mortgage origination experience, are you seeing any increased activity there from mortgage lenders looking to improve their interfaces and reduce frictions? And CoreLogic is – you should be a beneficiary of that. If you could just give us some additional color on exactly or just some ideas of how CoreLogic is positioned for that trend.

[Frank D. Martell:]

Yeah. I think we see that trend already manifesting itself across many different aspects. And I think everybody's interested in enhancing client experience, delivering the mortgage cycle faster, making it a more proactive experience. I think we are very well-positioned across a wide variety of elements of that stat (39

[Jason S. Deleeuw:]

Thank you.

[Operator:]

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

[Kevin Kaczmarek:]

Hey, guys. Thanks for taking my questions. I guess, on corporate expenses, they were a bit higher than I thought they'd be. Can you give us a sense of the largest drivers of the changes relative to the last quarter or last year?

[James L. Balas:]

Yeah. It's more timing and initiative-related, Kevin. We have a number of enterprise-wide initiatives, so a lot of those expenses are being captured in corporate.

[Kevin Kaczmarek:]

And how should that trend through the year? Is this first quarter level a good run rate then?

[James L. Balas:]

It should be pretty close. It'll probably taper down a little bit over the balance of the year. So, I think a little bit timing in the first quarter, it'll probably taper down a little bit in quarters, Q2 through Q4.

[Kevin Kaczmarek:]

Okay. Great. And then, on the insurance business. It seems like growth really decelerated a lot, especially considering you benefited from an acquisition. Was there a particular driver there?

[James L. Balas:]

Yeah. I think it was a couple of things. We had a lot of weather-related events in the back half of 2017 and weather events were pretty light in the first quarter. But overall, the growth was still in the middle single digits, so still strong.

[Kevin Kaczmarek:]

Okay. Great. And I guess one last one. On the expenses within the PIRM segment, did anything big come out of there going from the fourth quarter to the first quarter? Because I know you mentioned there was a significant mix shift in the products, but with revenue coming down, but EBITDA staying flat roughly, it seems like maybe some big costs came out (41

[James L. Balas:]

It was the same thing. It was the higher-margin businesses performing well, as well as productivity benefits.

[Kevin Kaczmarek:]

All right. Great. Thanks. It's all I had.

[Operator:]

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

[Jeff P. Meuler:]

Yeah. Thank you. I fully recognize the typical ammos since you (42

[James L. Balas:]

There's a couple of things there. So, the 15 where we're going to take the charges, those are excluded, you're correct. We're going to see those more through the second – through the fourth quarter. To Frank's point earlier, we got off to a little bit of a slower start. But the other thing I would signal is that, on the CapEx front, we did talk about in the last call that we would have heightened investment. And if you look at, for instance, our 10-K, we did signal that we expect the CapEx to be in the $90 million to $100 million range, which is, again, higher than what we had in 2017.

[Frank D. Martell:]

And Jeff, I think real estate and IT are the two big areas. And the real estate piece of it will be more in the second half than the first half.

[Jeff P. Meuler:]

Okay. That's helpful. And then, just on property insights, the year-over-year trend has gone the last few quarters, minus 5, minus 1, plus 1, plus 6. So, just what's driving the improvement there and is there some sort of acquisition effect on that sub-segment revenue line?

[Frank D. Martell:]

Yes. So, I would say – I would call out two things. One is we have a great team in there. And I think we've been aggressive on the marketing and sales side. We've had some product improvements, some quality improvements. So I'd say it's a lot about that and I'm hoping that that will continue.

[Jeff P. Meuler:]

And that's all organic?

[Frank D. Martell:]

Yeah. And then we also – the other thing is we have in there a pretty decent size slug of revenue that relates to some analytical support that we're providing to a client around some settlement activity that they've had. So that's a little bit of a factor as well, I think, particularly this quarter, and that will be over the next couple of years. So, that's kind of a sustainable run rate for that revenue improvement. But I would say in the main, my feeling is, we've got one of the best teams we've had in that area since I've been with the company. And we've done a lot of work on the sales, marketing, product quality, product offering area, which I think we're starting to see the benefits of in the trends that you indicated.

[Jeff P. Meuler:]

Okay. Thank you.

[Operator:]

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

[Stephen Hardy Sheldon:]

Yeah. Hi. Appreciate you taking my questions. I guess, first, you talked on last quarter about moving from a product-based kind of sales process to, I believe, more of a solutions-based process. Can you talk about what that means in terms of how the sales force is structured and where the company is in terms of implementing that?

[Frank D. Martell:]

Yeah. So, Stephen, this is Frank. We've actually been on this journey for a few years now. And if you look at – I think that one of the signals of the progress we're making is the operating restructuring that we did at the end of last year, where we formed the UWS segment, which really has most of the major housing underwriting activities in that segment. The reason why we're doing that is to make sure that we have no friction to pull together those products into a seamless kind of bundled solution for the client base. And so, that's a specific example there. We're working on from a platform and a delivery perspective, we have a digital gateway where we can put all of the underwriting solutions together in an efficient package that can be delivered through either directly into the client's factory or through an LOS platform. So, we are making substantial progress. It is important for us, because I believe there's still a very significant whitespace out there. We have high shares individually across a number of these businesses, but we don't have – it's not uniform. And I think we also have a great opportunity in the mid, mass market still. There's a lot of lenders out there. So, these bundled solutions are a more effective way to get at that market – those market segments. But you need things like the digital gateway where you can deliver those pretty easily. That's why I think also the valuation platform strategy is very symbiotic, because that is also plugged into already many of these smaller lenders. So if we can pop on these additional products through those platforms, then it's an easier way to get those out there. So, that's really what we're doing around the solutions area. There's other opportunities that are out there, I'd say, within the underwriting process, like valuations which we talked about, but also on risk management, on monitoring, which are really more in the formative stages and something that real estate industry hasn't really done a lot of over the years, at least on a syndicated offering basis. So, I'm actually pretty excited about the opportunities that are resident there, but that will be a little bit longer term. But for now, we're really focused strongly on getting our mortgage solutions into a cohesive package, and that's a terrific opportunity for us over the next two, three, four years.

[Stephen Hardy Sheldon:]

Got it. That's really helpful. And then, I guess, as we think about mortgage volumes starting to maybe stabilize some this year and potentially grow some next year, how should we be thinking about incremental margins in the UWS segment? Would you need to add much to sales and operational head count as volumes recover or is there kind of meaningful capacity within the current cost structure to absorb those higher volumes?

[Frank D. Martell:]

Yeah. I think I said it on the script that is a – we are highly geared, from an operating leverage perspective, to volume upsides. So, I think we will convert a great deal of any upside to profitability in those businesses. They're all – with the exception of the tax payment processing business, we have a little of – had some manual nuances to it, most of those businesses are automated platforms.

[Stephen Hardy Sheldon:]

Okay. Thank you.

[Operator:]

The next question is from John Campbell of Stephens. Please go ahead.

[John Campbell:]

Hey, guys. Congrats on a great quarter. I jumped on the call a little late, so apologies if I missed this. But could you just – Frank, if you could – maybe could you just provide what the all in Mercury, eTech and a la mode revenue contributions and EBITDA are for this year?

[Frank D. Martell:]

We don't spec those out, John. I think the a la mode, as Jim kind of said, from a pro forma, it's not that material this year, honestly. It is a good kind of modestly chunky little business with good margins. But this year, the contribution won't be that great. And then Mercury, Mercury is – I think the numbers we may have already provided out there on one of the calls. I can't recollect now, but it's a decent size in terms of margin and revenue, but again not enormously material.

[John Campbell:]

Okay. And this is just more of a higher-level question. But Frank, when you think about the long-term potential of VSG is that something that's like more geared towards like creating automation or efficiencies in a way things are done now? Or is it something like more transformational like moving away from a traditional appraisal to something like an e-appraisal?

[Frank D. Martell:]

Yeah. John, let me just talk about where we are and I think how that fits in. So, we have a great data analytics and platform business. It's pretty sizable and it makes a lot of money and it's growing organically at a good rate. So, we feel really good about that. And I think that will continue and we'll add capabilities there. I think on the appraisal side, the game is around automation, as you kind of alluded to. So, we're working hard to improve cycle times and reduce the cost structure. That's ultimately how that business will get up to kind of a 20% plus margin business. Cash flow is great. I'm not as worried. I think there has been a lot of discussion on the calls about the growth rates and stuff like that, but that business – the revenue, at this moment, progression is more about diversification that is necessarily driving huge growth rates, because I like that – I think the growth rates accelerate through a better product offering. We are looking at many different options for different types of appraisal, rules based, where you look at the methodology you're applying to appraise a property. But that requires many constituencies to weigh in, the GSEs, the lenders, other private entities that may be doing securitization. So, that's more of a longer term, I think. There has been some move to do some waivers and that kind of stuff, some of the GSEs in terms of, I think, more rural areas where it's harder to find appraisers. But I think we'll be able to address some of those appraiser shortages through our own Columbia Institute, some other things as well as the technology. So, I think that that kind of different forms of appraisal and valuation will evolve, but those will take a bit longer. I think our immediate focus is on driving massive automation where we can drive down our cycle times and drive up our margins and then offer a better offering there. Because if you look at appraisal, fundamentally, cost and cycle time, but I'd say probably more so cycle time drives a lot of friction in the market today. So if we can get the cycle time down, I think you'll see a lot of people much happier with the valuation area.

[John Campbell:]

And is there pricing headroom as you get cycle times down?

[James L. Balas:]

That will be interesting to see. I think there is dramatic margin improvement. I think whether you increase price, I don't know. But I think the net result will be a better profitability to that business.

[John Campbell:]

Understood. Thank you.

[Operator:]

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