CoreLogic, Inc.
Q3 2018 Earnings Call Transcript

Published: 25 Oct 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the CoreLogic third quarter 2018 earnings conference call. Please also note that this event is being recorded. I would now like to turn the conference over to Dan Smith, Head 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 third 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 third quarter financial results to prior periods should be understood on a year-over-year basis. That is in reference to the third quarter of 2017. 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. Thanks, and now let me introduce our President and CEO, Frank Martell.

[Frank D. Martell:]

Thank you, Dan, and good morning everyone. Welcome to CoreLogic's third quarter earnings call. I will lead off today with a discussion of notable third quarter and year-to-date operating highlights and takeaways. Jim will discuss our third quarter financial results and guidance and we will wrap up the call today with the Q&A session. CoreLogic delivered a strong set of operating and financial results in the third quarter and for the first nine months of this year. Despite a double-digit contraction in U.S. mortgage loan volumes, for the first nine months of our 2018, our revenues were down 1% and we grew overall profits, expanded margins and purchased 2% of our outstanding shares. Operationally, we continue to grow our insurance and international footprint, leverage the benefits of our market leadership and underwriting solutions and aggressively drove cost management and capital return. Today, I'm going to focus my remarks on what I consider to be the most noteworthy takeaways from the past nine months and the most recent quarter. The four areas I will cover are

[James L. Balas:]

Thanks, Frank, and good morning, everyone. Today, I'm going to discuss our third quarter 2018 financial results and then provide updated views on capital return and financial guidance. As Frank mentioned, CoreLogic delivered strong operating and financial performance in the third quarter. Third quarter financial highlights included, first, revenue totaled $452 million, down 6%, as organic growth in the PIRM segment and market outperformance in the UWS segment were more than offset by a greater than 15% decline in the volume of U.S. mortgage loan originations. Second, during the quarter, we continued to achieve greater mix towards higher-margin subscription technology and non-mortgage-based revenues. Third, adjusted EBITDA totaled $128 million, a margin of 28%, largely in line with the prior year, as strong cost management and organic growth partially offset the impact of lower mortgage market unit volumes. Year to date, our total adjusted EBITDA margin is up more than 200 basis points over 2017 and also higher by approximately 100 basis points over the prior year when we exclude the impact of accelerated revenue recognition benefits as reported last quarter. Next, adjusted EPS totaled $0.72 in the quarter, as the benefit of productivity improvements, lower taxes, and sustained return of capital via share repurchases more than offset the negative impacts of lower revenues. And finally, for the 12 months ending September 30, 2018, CoreLogic generated $276 million of free cash flow, enabling the repurchase of 479,000 shares in the third quarter. Based on our strong cash flow performance, we are raising our targeted share repurchase amount for 2018 to at least 2 million common shares. Third quarter revenues totaled $452 million compared with $483 million in the same 2017 period, a decrease of 6%. PIRM revenues totaled $181 million, equivalent to 2017, as organic growth in property insights, including real estate-related and international operations, as well as contributions from insurance & spatial solutions acquisitions completed in 2017 were offset by the impacts of declining U.S. mortgage unit volumes, lower weather event-related revenues, and unfavorable foreign currency translation. UWS segment revenues were down 10% to $274 million, driven by lower mortgage market unit volumes and vendor diversification by two key appraisal management clients, which more than offset market outperformance in the segment's property tax, credit, and flood operations. UWS revenue also benefited from the scaling of CoreLogic's valuation solutions platform through organic growth and the acquisition of Mercury Network and a la mode technologies. Operating income totaled $60 million for the third quarter compared with $62 million for the same prior-year period, as the impacts of U.S. mortgage market headwinds were largely offset by aggressive cost management as well as organic and acquisition-related growth discussed previously. Operating income for the third quarter of 2017 also included a legal settlement charge, which had no 2018 counterpart. Third quarter operating income margin was up approximately 30 basis points to 13%. Third quarter net income from continuing operations totaled $23 million compared with $31 million in the same 2017 period. The decrease of $8 million was primarily attributable to a one-time $13 million provisional tax expense related to the transition tax for certain foreign earnings in connection with the Tax Cuts and Jobs Act. Third quarter diluted EPS from continuing operations totaled $0.27 compared with $0.36 in 2017. Adjusted EPS totaled $0.72, in line with the third quarter of 2017. Adjusted EBITDA totaled $128 million in the third quarter compared with $139 million in the same prior-year period. Adjusted EBITDA margin was largely in line with 2017 levels at 28%. The 7% decline in adjusted EBITDA was driven primarily by the impact of reduced U.S. mortgage loan unit volumes, lower revenues from weather-related events, unfavorable foreign currency translation and lower appraisal revenues discussed previously, which were partially offset by benefits of higher platform revenues, pricing and aggressive cost management. Third quarter adjusted EBITDA included $3 million in R&D expenses related to the enhancement of the company's data visualization solution delivery capabilities. PIRM adjusted EBITDA decreased 5% to $54 million, while UWS adjusted EBITDA decreased 12% to $80 million. Finally, despite the significant decrease in mortgage origination volumes, we continued to generate significant levels of free cash flow. For the 12 months ending September 30, 2018, free cash flow totaled $276 million, a 54% conversion rate of last 12 months adjusted EBITDA. I will close my prepared remarks today with a discussion on capital return and updates regarding our financial guidance. In terms of capital return, CoreLogic's strong free cash flow has enabled us to invest for future growth, while managing our overall debt balances and returning significant amounts of capital via share repurchases. Through the first nine months of 2018, we repurchased 1.8 million shares for a total of $87 million. For the full year, we expect to repurchase at least 2 million common shares. Regarding our financial guidance, despite the U.S. mortgage market headwinds Frank discussed earlier, based on favorable revenue mix towards higher margin subscription technology and non-mortgage-based revenues and our progress on cost efficiency, we are projecting that our fourth quarter adjusted EBITDA will be in the range of $95 million to $105 million. With respect to revenue, we expect to see typical seasonality patterns, which would imply an approximate 8% to 10% reduction in revenues for the fourth quarter, compared to third quarter actuals. We've achieved a solid first nine months of 2018 and we believe we are well positioned to continue to deliver strong financial results as we close out the year despite the current difficult housing and mortgage market environments. As Frank mentioned earlier, CoreLogic remains committed to achieving 30%-plus adjusted EBITDA margins in 2020 based on a normalized U.S. mortgage market and after accounting for the build-out of our valuation solutions platform. We expect to achieve our margin goals through a combination of profitable growth, favorable revenue mix as well as business model transformation and cost productivity. Thanks for your time today. I will now turn the call back over to the operator for Q&A.

[Operator:]

Thank you very much. Ladies and gentlemen, we will now begin the Q&A session. Our first question is from Darrin Peller of Wolfe Research. Please go ahead.

[Darrin Peller:]

Hey guys. Thanks. Could we just start off with the businesses that are not as mortgage-sensitive, for a moment? I just want to understand, I mean we saw some of the breakdown you gave, but first of all, if you give us a little bit more granularity on what you see happening there, both on international? And then just generally speaking, how do you think of the capability of growth for those businesses? I know some of them are indirectly related, touched by mortgage or the mortgage market, but overall, when we look into 2019 and beyond, Frank, maybe you can give us a little more color.

[Frank D. Martell:]

Yeah. Thanks, Darrin. Yeah. Look, I think the – I'll take them one at a time. So, international, we continue to see good growth there. A little bit of a haircut from currency in the third quarter that we haven't seen in past quarters. So, you have to take that into consideration, but the local currency growth rates continue to be pretty solid and I would expect those to continue. I think as we look at the other areas, we have a good growth in the realtor solutions platform area, high-single digit, low-double-digit growth rates there. I think we've had a bit of a resurgence in our tenant screening business as well, which is good. And then I think in insurance and spatial, we've had good results. The only thing in the third quarter that was a little bit of nuance was the fact that as you may have remembered last year, there was a confluence of hurricanes and other weather events that fortunately didn't occur this year from a country perspective, but certainly, we did benefit from a revenue perspective and a margin perspective from the number of weather events in the third quarter of last year that didn't repeat themselves. But if you exclude that, I'm pretty pleased with the progress of that business and certainly frankly, the addition of Symbility I think is a major win for us because once we close the acquisition, I think the combination of two companies will be a very strong accretive offering in the market.

[Darrin Peller:]

I mean, all right. That's helpful. But just when you think about the potential for those businesses to grow going forward, I guess we're just wondering given it was – it was a little below what we had expected. And again, I understand there's some more mortgage sensitivity to those businesses as well, but what are your – what is your confidence level of those businesses being low- to mid-single-digit growth drivers for the company overall in the next couple of years?

[Frank D. Martell:]

I have – it's the same – we've always been very confident in those businesses growing at similar or higher rates than in the past.

[Darrin Peller:]

Okay. All right. And then just my follow-up questions on margins. I mean, I understand again there's incremental and decremental margins that could be more material when we get further swings in the origination side. But what should we be expecting? I mean, if you look at the origination forecast that you're looking at now, when we think about the fourth quarter implications and then sort of carrying that forward, are we still thinking like 30% to 40% incremental/decremental margins on the extra dollar or lost dollar of revenue related to the market? Thanks guys. Thanks guys.

[Frank D. Martell:]

Yeah. I guess I would just take a step back and say obviously this year, you've seen a demonstration of our ability to offset a fair amount of the mortgage pressure through cost management activities and business mix. So, I think – I don't think the incremental margins or decremental margins will change that much, frankly. I think our ability to take additional cost actions should help cushion pressure. It doesn't completely offset it obviously, but it helps cushion it. So, I think that one of the big ones for the company has been our proven track record of being able to continue to drive productivity. And I think Google, for example, is a great example that over the next couple years, that move to the cloud and the GCP is going to yield significant additional benefit. So, I don't see any change in the margin characteristics or operating leverage in mortgage. And I just think we're going to get all that more productive and efficient on the cost side. That's why we kind of signaled the $20 million reduction in costs next year, which gives us some headroom obviously.

[Darrin Peller:]

Okay, that's helpful, guys. Thank you.

[Operator:]

Thank you very much. The next question is from Chris Gamaitoni of Compass Point. Please go ahead.

[Chris Gamaitoni:]

Good morning. Thanks for taking my call. Going to the cost side, I look at the G&A so far is down $7 million year to date – year over year. The gross margin is down 2 percentage points. So how much of the $15 million guidance is currently in the numbers year-to-date cost reduction?

[James L. Balas:]

It's pretty back-end loaded. It's probably 40% front half of the year, 60% back half of the year. So we're tracking to the $15 million ultimately.

[Chris Gamaitoni:]

Okay. Is it...

[James L. Balas:]

And then the other thing you need to factor, Chris, is we did have acquisitions that added some during the course of the year. So if you had to strip out the acquisitions, that would be the way to do the analysis when you get the 10-Q later today.

[Chris Gamaitoni:]

Okay, that's helpful. And is most of that cost reduction transparent in the SG&A line rather than the gross margin line or the cost of service line?

[James L. Balas:]

Yes, a good portion of it's in SG&A.

[Chris Gamaitoni:]

Okay. And could you give us an update on the tax business? It was down 8% year over year. I'm wondering if that's all volume-related or if there's some other nuances from how the curves work on revenue recognition we should be considering.

[James L. Balas:]

No real change on the tax business, it continues to perform well. The volumes – there are adjustments at times in the way we calculate the revenue due to changes in the portfolio, but it continues to perform well and outperform the market in the quarter.

[Chris Gamaitoni:]

Okay. And then finally, do you have any sense of where we are in the diversification of your two large clients in AMC, how much further there is to go, and if you'd be able to provide the revenue contribution of the previously disclosed new clients a couple quarters ago?

[Frank D. Martell:]

Chris, this is Frank. So obviously, the genesis of our AMC business was really two clients. We bought the captive appraisal operations of the two clients that are involved here. We don't specifically name clients obviously in our calls, but the diversification is no different than was planned. We announced they have a progressive plan diversification. I would say though – and then that – and that there's no surprise there, honestly. I think the fact that their individual shares and volumes are fluctuating, that is the one swing factor obviously, particularly in one case, which is a bit beyond anybody's control there. So that is one fact, one nuance there. But in terms of the plan diversification, there's no real change there. I would say on the other side of it, we are making good progress diversifying the revenue base there. We expect to see a growth rate this year, a fairly significant growth rate from those clients, those new clients, and that should more than double next year. So we're going to finally see the benefit of the diversification strategy that we put into place when we put those two companies together become a more meaningful benefit next year, as these clients actually flow revenue through the pipes in the business. So I don't think there's any surprise on the existing client base, maybe a little bit in terms of how they fare in the marketplace in any given quarter, but no surprise from a diversification standpoint, and then good news on the additional clients that we're signing up.

[Chris Gamaitoni:]

Is there any sense of – just any type of gauge or how large that can be relative base dollars – just any sense for us to track?

[Frank D. Martell:]

Are you talking about the new clients?

[Chris Gamaitoni:]

The new clients, yes, the new clients.

[Frank D. Martell:]

I think it's – my guess is we're going to add next year -probably 10% to 15% of the revenue will come from new clients.

[Chris Gamaitoni:]

Okay, thank you so much.

[Operator:]

Thank you. The next question is from Bill Warmington of Wells Fargo. Please go ahead.

[William A. Warmington:]

Good morning, everyone.

[Frank D. Martell:]

Good morning.

[William A. Warmington:]

So I want to ask your help on a calculation. We like to do this EBITDA bridge, and we've been having a little bit of a debate about what the proper base for 2018 to build that bridge into 2019 should be. And I'd say that normally it's not an issue. You have your guidance range, you come in somewhere in that range, and you build off of that. But this year, we have that $20 million that is a one-timer, and that's a benefit. But then you also – some of that portion is being spent. You talked about maybe $5 million to $10 million of that going into R&D. And so that's what I'm trying to get at. Should we be looking at really, let's say, $480 million to $500 million? The real range going forward to serve as that base really would be maybe $470 million to $490 million. Can you help me a little bit with that calculation?

[Frank D. Martell:]

Bill, this is Frank. I think the $20 million was – I think it is what it is. It's a single event related to a renegotiation of a contract that under the accounting rules, you have to recognize some revenue and profit, so that obviously is a discrete item. So whenever you do your – Jim gave you the top line EBITDA numbers for 2018 in his guidance update, which is a narrowing of the range. I want to emphasize. We have narrowed the range. We're not outside of our previous guidance range, so that all remains the same. And I think it should be – it's important to note that we have pretty much held our EBITDA guidance for the year throughout the year despite a deteriorating market condition, which is resulting of our ability to manage through our cost base. So that hasn't changed. None of that's changed. So I think you can use the math that Jim gave you and then factor in the discrete item to get to whatever numbers you're going to indicate for 2018.

[William A. Warmington:]

Got it. And then along those lines, the $20 million in cost savings that you announced, is that going to be $20 million in benefit in 2019, or is it going to be actions taken in 2019 and the benefit is partially in 2019, partially in 2020?

[James L. Balas:]

It will be realized in 2019.

[William A. Warmington:]

Got it. All right, thank you very much.

[Frank D. Martell:]

Thanks, Bill.

[Operator:]

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

[Thomas McJoynt-Griffith:]

Hey guys. This is Tommy McJoynt on for Bose. Let's see. Just starting with the Symbility, it looks like judging from kind of what the revenue numbers I did put out last year that it would add about 25% kind of incremental revenues to insurance and special line item. First of all, does that number sound right or is there some sort of overlap where some of that would be lost? And then going forward, how do you see those margins comparing to what that business already has at CoreLogic?

[Frank D. Martell:]

I think, as I said in my comments, Symbility is a great add for the company. Your percentage addition numbers are roughly a rough order of magnitude in the ballpark. I don't – can't give you exact number off the top of my head, but it's in that ballpark. So it gets us significant growth, it's a growth company or has been a growth company historically. I don't – there's no cannibalization. Actually I think quite the contrary, we see the potential for synergy and a multiplier effect of putting the two companies together. So there's no cannibalization there.

[Thomas McJoynt-Griffith:]

Okay. And then on the PIRM segment, you guys mentioned some weakness from the declining U.S. mortgage unit volumes in 3Q. And I understand that property insight revenues come in both ratably from the kind of the bulk deals that come in over time as well as more on a transaction basis by usage. Could you kind of give us a breakdown of how much revenue was in each piece of that?

[Frank D. Martell:]

I think where the mortgage sensitivity comes in primarily in PIRM is in some of the analytical areas, fraud analytics, for example. So there is not – from a bulk license perspective, those are longer term contracts; so there's not a direct correlation there to volume sensitivity. So the volume sensitivity is more in these fraud and some of the value – valuation analytics that are done there versus property data licensing revenues. Now obviously, there is an indirect muting effect obviously when you have a client base that is facing much, much more significant headwinds in the mortgage market and other markets in the lending market. So their propensity to spend or discretionary or otherwise is reduced in this kind of market conditions if you look at the model – if you look at all of the disclosure around those big lenders, so that does have a muting effect. But in general, where we're seeing the volume pressures as it relates to PIRM is simply in those couple areas.

[Thomas McJoynt-Griffith:]

Okay. And then last one for me. Has your valuation business seen any impact from the GSEs offering property inspection waivers or the treasuries come out and push for more automated appraisals? How do you see those policy changes impacting your appraisal business longer term?

[Frank D. Martell:]

It's early days. I think that the answer, short answer to your question is it's really been a de minimis impact. There's been small in the rounds area. But again, because we really are – we are really focused on just a few clients at this juncture. I'd say it's a relatively small impact. The future is hard to predict, but at this point, certainly we don't see a big impact.

[Thomas McJoynt-Griffith:]

Okay, thanks.

[Operator:]

Thank you very much. The next question is from Stephen Sheldon of William Blair. Please go ahead.

[Stephen Hardy Sheldon:]

Yeah. Good morning. Thanks for taking my questions. I guess first in the PIRM segment, can you maybe provide some more detail on the moving pieces that caused the deceleration in both property insights and insurance and spatial and maybe quantify the impact of the tough comps from hurricanes in the year-ago period and the impacts of the currency headwinds? And then you also have tougher comps there in the fourth quarter, but there's also some recent weather events that may drive some activity. So, any color on how you're thinking about the trajectory of those businesses in the fourth quarter?

[Frank D. Martell:]

I think in terms of quantifying, so if you look at the currency implications, it's several millions of dollars on the top line, $3 million, $4 million on the top line. So you can use that that kind of range number and I think use our more – our margin rate to get to the EBITDA impact. And then a similar quantum on the weather side, maybe slightly less year over year, it's hard to predict the weather events – we're having weather events this year, they're not as severe clearly fortunately as last year. So the hurricanes that we've had have been less, less severe, so I think whether we'll achieve the same kind of revenue we achieved in the third quarter of last year in the fourth quarter, I don't know – I don't see that at this moment, but certainly we are benefiting. There have been some weather events that we're benefiting from, but we'll have to wait and see what the fall through is in the fourth quarter.

[Stephen Hardy Sheldon:]

Got it. That's helpful. And then after the addition of Symbility which was – that was good to see, wanted to dig a little deeper on maybe how you view your broader capabilities in the insurance sector at this point, especially in relation to your biggest kind of competitor there. You now have the claims workflow tools with Symbility, you already had the cost pricing data with Marshall & Swift. You have the kind of small cap modeling business. So I guess just how do you view your broader ability to compete in insurance globally and maybe where would you need to add or expand in your solution set to provide more value to insurance customers?

[Frank D. Martell:]

Yeah, we think there's a lot of synergy between the property information that CoreLogic has and the assets that have been acquired over the last three or four years to offer insurance clients really good insights, we think unique insights. So clearly, we – I think we offer most of the capabilities that our competitors offer and some unique additional capabilities. We have to compete on our ability to add unique insights and value add. I think the acquisition of Symbility is a great one for us because it really more fully integrates our offerings, so we can be – present them effectively with a client base. So I think it's a great confidence booster and a great addition. Obviously we know Symbility for a long time. They've got a great team. We really like their team a lot. And I think that we've only scratched the surface in terms of what synergistic value there are and what additional products we have. I think also frankly, we have a pretty good international footprint, so do they. So we think there's some opportunity to leverage that, they're in Europe, they're in Australia and New Zealand, we're in Australia, New Zealand and Europe. So we think the combo can go global as well. So I feel pretty good about what we've assembled. We make good money in that area and I think there is a lot of platform revenue, which has been a big focus of the company, getting more of our revenues into the platform areas. So I think it's all good in insurance and I think plenty of upside potential as we really realize the full integration benefits of Symbility and CoreLogic.

[Stephen Hardy Sheldon:]

Great, thank you.

[Operator:]

Thank you very much. Next question is from Jeff Meuler from Baird. Please go ahead.

[Jeffrey P. Meuler:]

Yeah. Thank you. Just on your prior comment about – it's a tougher RFP environment given the challenges in your client base on the mortgage side. Can you just give us examples of maybe I don't know two or three solutions that you're most optimistic about, when the market conditions get more favorable that they'll represent sizable new business opportunities for you?

[Frank D. Martell:]

Jeff, just to clarify though, you made a comment RFP, we didn't say anything about RFPs are generally not.

[Jeffrey P. Meuler:]

A tougher selling environment.

[Frank D. Martell:]

Okay, sorry. Look, I think we're really excited about the platform business. We want to connect the real estate market, I think the platform business that I just discussed and valuations on my prepared remarks, we're getting good growth at high margins in that business; so very excited about that. Number one, we just talked about insurance and spatial, very excited about that. I think that clearly, we have a lot of opportunities in the real estate area. We have a realtor platform that connects 800,000 realtors with workflow tools, so that's, again, an area that is growing quite nicely for us. So those are three areas that come to mind immediately. I think on the mortgage side, actually if you look at the third quarter, even though our revenue was down 6%, I think as somebody pointed out earlier on the call, a chunk of that – and to me, the market outperformance is even better, if you look at the AMC situation and you look at the diversification and the market gyrations of those specific clients, it's – that's kind of a unique situation that's not necessarily market related. So I think if you even back that out, our 6% becomes even less in a pure market sense. So, that's a little bit of a thing that you need to factor in when you look at the trajectory of our mortgage business. We're doing great in analytics. I think tax, flood and credit are really strong businesses, the valuation platforms business. So really I think the pressure release needs to come in the in the AMC piece of it and I think we're working through it. And what's very encouraging is the diversification and the traction we're getting there and then also, to be quite honest with you, we still got lost a little bit in the market, but we still are working very hard to transform the appraisal workflow process to make it more efficient, making good progress there. So more to come on that in 2019, but that has been always and remains the underlying strategic implication there is to make the appraisal process much quicker and much more user-friendly. And we are making progress there as well.

[Jeffrey P. Meuler:]

Okay. And then just a clarifying question, the 30% margin target for 2020 being based on normalized market, got that, makes sense. The second part of that, the – after accounting for a build-out of the VSG platform, what exactly are you saying there as it relates to the 2020 margin target?

[Frank D. Martell:]

So since the genesis of the 30% target which came – which was established at the time that we were acquiring the AMC assets, Jeff, that comment has been consistent throughout and it reflects the fact that at the time the 30% margin target was established, obviously was looking at the market conditions underlying and also looking at that strategic initiative, which was to transform the appraisal business, as I just discussed. So that comment about after reflecting costs related to that, that's what that reflects. So there's absolutely nothing new there. Those costs have turned out to be not that material in the grand scheme of things. So – but that's a comment that we make because we need to make sure that people understand that we still want to transform that space and inevitably, you don't do that with no resources or no money, so – but it just so happened that we've been able to do that within the contours of the P&L.

[Jeffrey P. Meuler:]

Okay. And then just finally from me, you heard, I think, several different waves of tech investments and re-platforming, if I think back a few years ago, I think (00

[Frank D. Martell:]

Yes. So look, first of all, as a data analytics company, IT spending is a significant portion of our cost structure, obviously. When we spun off seven, eight years ago, we had a lot of data centers, we had a lot of platforms. So, the first move was what you described, which was the TTI, which was taking that and centralizing that, the TTI was a lot about addressing tech debt as well as putting our data centers into a private cloud-based environment with Dell. That was achieved in 2015-2016. The Google is the next logical step, which is taking it into a public cloud environment, where obviously you get additional operating efficiencies from that environment, so that's the basic theory there. But in addition, we expect to derive systems performance benefits as well as we expect to derive certain additional cost benefits. So it is a structural play, better security, addresses additional tech debt. You're never finished, obviously. I'm sure you talk to every company, you're never finished addressing and investing in technology, especially if you're a data and analytics company. But I think that we are – the Google deal allows us to take the next step and get really leading-edge in terms of the capabilities around the cloud. Obviously, everybody's doing it, so we're not unique in that regard.

[Jeffrey P. Meuler:]

Okay, thank you.

[Operator:]

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

[John Campbell:]

Hey, yes. Good afternoon guys.

[Frank D. Martell:]

Hey, John, good morning.

[James L. Balas:]

Good morning.

[John Campbell:]

Frank, just following back up on the last question on the cost reduction efforts, you guys have had several years in a row of pretty sizable efficiency efforts. It sounds like you've done a lot on the real estate consolidation side, and now it sounds like you're getting into the technology side. I'm just curious. As you look at your long-term plan, what innings we're in, or is it late innings? Have you done most of the heavy lifting, just kind of curious what remains?

[Frank D. Martell:]

No, look. I think John, one of the things obviously is we have rebuilt CoreLogic over the years, and we have changed the composition I talked about. Seven years ago, we were 95% mortgage-focused, now we're 60%, so the composition of the company has changed. So with that comes changes in the cost structure. So I don't think you're ever done optimizing your cost structure. $20 million for us is a little over a point of margin. So it's not like it's astronomical in nature. I'd like to do more, but we have to do it in the context of investing as well. So look, I don't think it's a large number that's unachievable. I think we're – I personally think we're going to continue to be able to trim back and reduce our costs. We're investing in things like machine learning and artificial intelligence, which again is not a new phenomenon, a lot of companies are doing that. That offers a significant automation benefit. So I think we've got continued room. There's probably no ginormous – it's a lot of work on a granular level, but it's something that is a way of life for the company and I think something that I expect that we'll be able to continue to maintain.

[John Campbell:]

Okay, great. And then on the $3 million in the reinvestment spend you guys called out for the quarter, I'm assuming that's all PIRM. Is that right, also in that segment?

[Frank D. Martell:]

The vast majority, yes.

[John Campbell:]

Okay. So margins I guess flattish year over year there ex the spend, is that the way to think about it?

[James L. Balas:]

You also have some from FX, you have about $1 million in EBITDA from the FX there and then the weather-related that Frank pointed out earlier.

[John Campbell:]

Okay. And just remind us again what you think about as far as peak margins there, long-term margins, where you can get that business to.

[Frank D. Martell:]

Are you talking – sorry, are you talking about...

[John Campbell:]

Just PIRM.

[Frank D. Martell:]

Just PIRM, we're not – we don't forward-guide on the segments, but I think we've always said, we believe that it's north of 30% margin, and I think that's still the case.

[John Campbell:]

Okay, great. Thanks, guys.

[Operator:]

Thank you. Next question is from Andrew Jeffrey of SunTrust. Please go ahead.

[Andrew Jeffrey:]

Hi, good morning. I appreciate you squeezing me in here. I guess a couple of big picture questions because we've gone through a lot of the detail, which is helpful. One I guess is just the overall portfolio composition. You're in a lot of different businesses. And it feels like much of the focus, especially for future growth remains in valuation, and insurance is obviously a nice business that doesn't have the mortgage exposure of some of your other operations. Are there sub-segments or businesses that might make sense to rationalize? I'm thinking about LOS, or is there anything else that maybe doesn't fit as well with your long-term strategic plans?

[Frank D. Martell:]

So look, I think first of all, the business – what we do is we sell residential property information. We sell to a bunch of verticals and we sell it really primarily in two areas. One is for underwriting property and casualty insurance policies and secondarily for mortgages. So we provide – the vast majority of revenue is for underwriting and risk management solutions, so it's really that. The good news is we've diversified where we're selling the property information vertical-wise and frankly from more internationally as well. So that's all I think a good thing for our growth opportunity there. We operate in basically very concentrated positions along the value chain of those risk management and underwriting spots, and we'll continue to do so because we believe in scale and market leadership. That's why I continue to tell people it's very important that we are a leader in U.S. mortgage as cyclical as it has been because it provides the scale we need to invest at a very large scale. I think in terms of looking at the portfolio, we have been very aggressive in terms of weeding out non-core assets. Over the last couple years, we've continued to bleed down business units and revenue streams that we don't think will add value. We are always looking at that and will continue to do so. So I can't speak to a specific, but you can rest assured that we are always looking at where we think we can add value and where we don't think frankly we can add value and therefore we shouldn't be doing it. So we will continue to do that.

[Andrew Jeffrey:]

Okay, thank you. And then with regard to just pricing, it was one of the initiatives in growth drivers, I think you called out, can you just characterize sort of maybe order of magnitude and perhaps some areas where you see the opportunity to price to value?

[James L. Balas:]

Pricing has continued to be a good support in the margin profile and the growth rate as we indicated on the past calls, so nothing new there. It continues to contribute to the organic growth rate and as we've indicated that it's become more programmatic on annual contract renewals and so forth. So, it continued to be strong.

[Andrew Jeffrey:]

Okay. Can we think about that as maybe a point of growth, two points of growth, just trying to frame it out?

[James L. Balas:]

It's the probably the larger contributor in the grand scheme of things on organic growth.

[Andrew Jeffrey:]

Okay, thank you.

[Operator:]

Thank you very much. The next question is from Glenn Greene of Oppenheimer. Please proceed.

[Glenn Greene:]

Thanks. Good morning. First question, could you help us quantify the revenue and EBITDA drag from the unit volume decline you saw in the quarter?

[James L. Balas:]

Yeah. On the revenue – hey, Glenn, it's Jim. On the revenue, it was about $45 million.

[Glenn Greene:]

Okay. And EBITDA?

[James L. Balas:]

EBITDA, I think the age-old 38% to 40% is probably about right.

[Glenn Greene:]

Okay. And then it was helpful to get the weather drag, so it was basically $3 million to $4 million weather on the revenue and $1 million on EBITDA, or that was the FX rather?

[James L. Balas:]

The FX was about $3 million, with $1 million on the EBITDA.

[Glenn Greene:]

Okay. And then a similar call out for weather.

[James L. Balas:]

Weather is like $2 million, not that big.

[Glenn Greene:]

Okay. And then just – I know it's early. But in terms of the market outlook, it was interesting that you sort of talked about purchase still sort of modestly growing, but how do you view and – I don't want to put a stake in the ground, but how do you view the outlook for 2019 as we sit here today? Do things moderate, or are we still thinking 10%, 15% type unit volume decline?

[Frank D. Martell:]

I think, Glenn – this is Frank. Thanks for the question. Just to go back, I think the good news in the mortgage market is and as we talked about this on last bunch of calls, purchase is increasing. It slowed down a bit from what we thought going into the year, but – and what everybody thought. But I think that most people think purchase will continue to be durable and have some growth in it. It's really re-fi this year's come down a lot. The Fed has pushed up rates. Mortgage rates have gone up significantly. I think also housing price is going up significantly. I think it's had a dampening effect on re-fi activity. People are a little more cautious. So I think as – that has come down quicker than anybody thought, I think. So I think as you look into next year, I think re-fi's – I mean a lot of the air has come out of the market. So I wouldn't expect a significant – as significant decline in re-fi activity next year as we saw this year. So I think certainly the trends I would expect them to moderate. That's certainly the external forecasts would seem to indicate that, but they've kind of – as they progressed through the year, they've ratcheted down their projection for this year. And so that that obviously changes the entry point into next year. But I would expect probably for next year purchase to be solid and re-fi to be a little bit volatile, but certainly not the quantum of decline that we saw this year. I can't hazard a guess in terms of what specifically it will be. I think the major indices are out there, but...

[Glenn Greene:]

I would assume you get to a certain natural floor at some point on the re-fi side I guess was kind of what you're – you were answering the question the way I thought you might, so that's actually helpful. And then just the final question, the 30% EBITDA margin target, can you get there with this kind of market environment or with your confidence level to get there?

[Frank D. Martell:]

Look, I think it's still a couple years out, so we're working on it. I think we have all of the elements necessary from a planning perspective internally to take the actions we need to get to 30% margin and the – one of the things that's always been a little bit of an interesting discussion with external people, they take the dollar volumes of origination and look at that, we – our revenue is based on units processed. So if you have a 6% increase in pricing, obviously you got to deflate that to get to the unit. So it depends on the unit volumes that we see as we get out there in 2020, I would be remiss if I try to project out there, I don't know what they're going to be. We've always said it depends on the market volume. So I think that's to be determined, but I think certainly, the most important thing is, we have the plans necessary to get to the 30% margin mapped out, we've taken a lot of actions. The GCP that I talked about in my prepared remarks is one of those actions, the cost reductions next year, we talked about some of those actions, so I think you can see the contours of that. There's enough action as you can see that and you can judge for yourself whether we have the confidence, I think we've always hit our target that we put forward and we're going to definitely drive to the 30% margin as we kind of indicated.

[Glenn Greene:]

Okay, thank you. Appreciate it.

[Operator:]

Thank you very much. The next question is from Kevin Kaczmarek of Zelman & Associates. Please go ahead.

[Kevin Kaczmarek:]

Hey guys, thanks for taking my call. I guess on the Google Cloud announcement, I had a couple more questions on the details. I guess one, you mentioned that the initial phase will be like two years. How many phases might there be or how much occurs in that initial phase?

[Frank D. Martell:]

Yeah. Hey, thanks, Kevin. So hey, look, I think number one is the Phase 1 is really – in summary level, it's basically we take our core legacy applications, re-platform them, and move them to the Google Cloud. And that's where the bulk of our revenue is generated, from those legacy. So that's the focus of Phase 1. So really, it's just the timeline is dictated by the work involved by applications. So that's what that is. So – and that's underway. I think all things are – look good on that application. So that's kind of Phase 1. Phase 2 will get into the additional, the residual applications, if you will, which are being built already, so you don't have to re-platform them, they can slide over because they're being built on the pivotal Cloud Foundry platform that we put into place a couple years ago. So those new applications are being built already public cloud-enabled, so there's less work involved there. So that's why they're coming as the second phase.

[Kevin Kaczmarek:]

Okay. And I guess at what point would the data center with NTT not be needed? And I guess related to that, do you own the equipment in there or could there be a shift from CapEx to the income statement when you're talking about expenses when making this move?

[Frank D. Martell:]

No, look, I think the implication of the Dell data center, it's going to be multi-year. There is a shift – as things shift, obviously things get moved over. We don't have a long-term revenue commitment in terms of the Dell data center; so there's no encumbrances there, so there really is no shifting between the P&L and the balance sheet as you kind of described...

[Kevin Kaczmarek:]

All right. And I guess the last one is how much of the $20 million in next year's expenses is from Google Cloud? The next year's expense reduction?

[Frank D. Martell:]

Relatively small.

[Kevin Kaczmarek:]

Okay, thanks. That's all I had.

[Operator:]

Thanks very much. Our last question is from Jason Deleeuw of Piper Jaffray. Please go ahead.

[Jason S. Deleeuw:]

Thanks for squeezing me in here. Just a question. There's been a lot of private capital, a lot of new companies operating and starting up in the real estate space, especially the last few years, high buyers, new real estate brokerage models, there is digital mortgage initiatives, some of this CoreLogic is trying to help develop. What's kind of a lay of the landscape and opportunities that you see for CoreLogic and also risks that you see?

[Frank D. Martell:]

Look, there's a tremendous amount of money going into housing and mortgage and I think – by the way, that's being put in by new players and existing players. So everybody is kind of focused on making the housing bucket more efficient. The good news is we're all about making, connecting the constituencies and driving better insight. So some of these players are – we're partnering with and they're using our data, so it's – I see it as all kind of all good, if you will, in terms of our potential growth as we go forward. A lot going into the – being at 2% or 3% brokerage. I don't know about how those models will end up. But I think in terms of adding value to the mortgage constituencies, I think will do that and I think the – anything that makes the housing experience better is good for CoreLogic and we'll be there to contribute it, because the property data is necessary no matter who it is and no matter what they're doing.

[Jason S. Deleeuw:]

Great, thank you very much.

[Operator:]

Thank you very much. Ladies and gentlemen, that then includes this conference call. Thank you for joining today's presentation and you may now disconnect your lines.