CoreLogic, Inc.
Q3 2016 Earnings Call Transcript

Published: 25 Oct 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the CoreLogic, Inc. Q3 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Dan Smith, Investor Relations. Sir, you may begin.

[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 2016. Speaking today will be CoreLogic's President and CEO, Anand Nallathambi; CFO, Jim Balas; and COO, Frank Martell. Before we begin, let me make a few important points. First, we've posted our slide presentation which includes additional details on our financial results on our website. Second, please note that during today's presentation, we may make forward-looking statements within the meaning of federal securities laws, including statements concerning our expected business and operational plans, performance outlook and acquisition and growth strategies, and our expectations regarding industry conditions. All of these statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our SEC filings, including the most recent Annual Report on Form 10-K and subsequent 10-Qs. Our forward-looking statements are based on information currently available to us, and we do not intend and undertake no duty to update these statements for any reason. Additionally, today's presentation contains financial measures that are non-GAAP financial measures. A reconciliation of these non-GAAP measures to their GAAP equivalents is included in the appendix of today's presentation. Unless specifically identified, comparisons of third quarter financial results to prior period should be understood on a year-over-year basis that is in reference to the third quarter of 2015. 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, Anand Nallathambi.

[Anand K. Nallathambi:]

Thanks, Dan, and good morning, everyone. Welcome to CoreLogic's third quarter earnings call. I will lead off the call today with observations on our operating performance, strategic direction, and noteworthy market trends. Jim will follow with a review of third quarter financial results. Frank will then close out our prepared remarks this morning with an update on key areas of operational focus and color on capital return and financial guidance. Building off a great first half, CoreLogic delivered an exceptionally strong operating performance in the third quarter – our best quarter ever. Revenues for the third quarter were up 36%. Operating income was up 29%. Adjusted EBITDA was up 23%. And adjusted EPS was up 35%. Quarterly revenues and operating income were at record levels as we grew our market leadership on a number of important fronts and expanded operational scale. During the quarter, we continued the build out of our Valuation Solutions Group, which we believe will be a significant future growth driver and valued capital. Importantly, we delivered accelerated rate of organic growth. We also expanded our expense management program, significantly lowering our borrowing cost and ramped up our share repurchases. For the first nine months of the year, revenues were 30% above last year, and operating income was up 24%. Adjusted EBITDA and adjusted EPS rose 15% and 20%, respectively. This growth is due to the successful implementation of our strategic transformation program over the past five years. This program is built around a relentless focus on efficiently deploying scaled and unique property insights that enable our clients to more precisely underwrite and manage their risk and capitalize on new opportunities. From 2011 to 2015, our revenues grew at a compounded annual rate of 9%, and we expanded adjusted EBITDA margins about 700 basis points. Since 2011, we have successfully built scaled market-leading capability and unique data-driven underwriting and risk-management solution. We built clear leadership positions in our core mortgage solutions and have also successfully diversified our revenue mix from almost exclusively U.S. mortgage in 2011 into areas such as insurance, geospatial analytics, weather forensics, international and other data solutions. Today, about 40% of our revenues are stores outside of our core mortgage verticals. Expanding our footprint and building market leadership in insurance, geospatial and international has been a major success and will continue to be a strategic focus area. Over the past five years, we have increased revenues contributed by these units almost threefold. These businesses are delivering strong growth in 2016 and they are highly synergistic with our core Property Intelligence assets. We expect them to be a significant growth opportunity for us into the future. So far, this year, our total reported revenues are up 30%, a significant component of this high rate of growth is our strategic investment in building a scaled leadership position in property valuation solutions in the U.S. CoreLogic is already the leader in providing valuation solutions in Australia. The $4 billion U.S. residential property valuation market is poised for transformation. We're actively collaborating with lenders, service providers and other critical market participants to establish new go-forward standards that include the application of enhanced technology and new sources of data and analytics, the opportunity to transform the way real estate assets are valued, and to bring greater transparency to the underwriting process, makes this a significant medium in long-term growth opportunity for us. Importantly, in the third quarter, we generated strong and accelerating organic growth rate from our core operations. More than half of our organic growth in the third quarter came from such areas as share gains, pricing, as well as new and enhanced products. We also capitalized on improving market volumes in the quarter. Frank will discuss organic growth in more detail later. As I mentioned on past earnings calls, the U.S. mortgage market is progressively transitioning to a purchase-driven cycle. We believe this transition will continue fueled by expected increases in population and first-time home buyers, plus fewer cash purchases. Millennials are also rapidly becoming a big source of new housing demand. After a relatively flat first half of 2016, we believe the U.S. mortgage market grew about 20% in the third quarter. Volume increases were driven by a number of factors including home price appreciation and elevated levels of refinancing activity. Based on our research, we now believe the ongoing growth in home purchase activity and the return to a normalized level of refinancing supports the new normal mortgage market of $1.5 trillion to $1.7 trillion going forward. We have long established a track record of consistently outperforming market volume trends. This strong performance has resulted from our focus on our core business unit through market share gains, product development, as well as smart acquisitions. In closing, I want to thank our employees, clients, and shareholders for their continued support. We continue to deliver outstanding results in 2016 and I believe our performance demonstrates the value-creation opportunities inherent in our strategic plan. Our focus remains squarely on strong operational execution and superior long-term growth and stakeholder value creation. With that, I'll now turn the call over to Jim from an update on our financial results.

[James L. Balas:]

Thank you, Anand, and good morning, everyone. Today, I will recap our third quarter financial results. As Anand mentioned, third quarter revenues, operating income, adjusted EBITDA, free cash flow, and adjusted EPS were up significantly from 2015 levels. Notable third quarter financial highlights included

[Frank D. Martell:]

Thanks, Jim. Good morning, everyone. Today, I'm going to discuss key areas of operational focus including top-line growth and margin expansion and provide some thoughts on the increase on our 2016 financial guidance and our 2016 and 2017 cost reduction and capital return target. As Anand and Jim highlighted, we delivered a very strong set of results over the first nine months of this year including the third quarter. Year-to-date, our revenues, operating profit, cash flow and adjusted EPS were up double-digits. I believe the success in transforming CoreLogic into a high-performing global leader is the direct result of our continued successful execution against our strategic imperatives, which are focused on delivering unique property insights. These insights allow participants in the real estate ecosystem to make better decisions in the areas of prospect identification, underwriting and continuous risk management and monitoring. Our consistent focus on driving scale and operating leverage, cost productivity and cash flow allows us to reinvest in leading-edge product development, technology initiatives and risk management programs. This helps us sustain our competitive advantage and broaden our capabilities. In terms of our top line growth, as Anand mentioned, revenues were up 36% for the quarter, and 30% year-to-date. Our strategic investment in standing up the Valuation Solutions Group over the past year contributed significantly to our growth in the third quarter and so far, in 2016. In addition, we also generated strong organic growth from our core operations in Q3. As Jim mentioned, organic growth in the third quarter was just over 7%, which is more than double our 3% growth rate for the first half of this year. More than half of the organic growth in the third quarter came from such areas as share gains, pricing and new or enhanced products. Higher-mortgage unit volumes in the U.S. also helped to fuel our strong quarter. We expect several areas to generate solid tailwind for organic growth as we exit 2016 and move ahead into 2017. During the quarter, we secured several significant new contract wins and launched trended data reporting in our Credit Services business. In addition, we are seeing the emerging benefits of higher pricing on certain core products and solutions areas, and we also have the strongest product pipeline in our history. We also expect the Valuation Solutions Group to begin to contribute organic growth as we exit 2016 and our property appraisal business passes the one year anniversary of the VSG launch, and we expand and diversify our services beyond our current client base. Pricing actions and product enhancements should also fuel upside in 2017. As we scale and drive top-line growth, we're also relentlessly pursuing first quartile levels of cost efficiency. Total third quarter adjusted EBITDA margin was just over 27%, including a roughly 400-basis point compression attributable to the launch of VSG. We are committed to achieving 30%-plus adjusted EBITDA margins over the next three years 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 the combination of profitable growth, favorable revenue mix, as well as business model transformation and cost productivity. In terms of the profitable growth, we expect the benefits of the launch of high-margin syndicated products, as well as in-flight and future value-based pricing increases in the VSG and other CoreLogic solutions areas to boost margins 2017 and beyond. In addition, we expect to reduce run rate cost by at least $30 million in 2016 and an additional $30 million in 2017 by consolidating facilities, reducing SG&A cost, outsourcing certain business activities, and other operational improvements. I will close my prepared remarks today with a brief discussion around increased 2016 financial guidance and capital return. Based on our year-to-date performance and our latest views on fourth quarter market activity and client spending patterns, we expect to deliver 2016 revenue, adjusted EBITDA, and adjusted EPS at the top-end of our current guidance ranges. For reference, these ranges are as follows

[Operator:]

Thank you. Our first question comes from Bill Warmington from Wells Fargo. Your line is open.

[William A. Warmington:]

Hello. Good morning, everyone, and congratulations on a very strong quarter.

[Frank D. Martell:]

Thanks, Bill.

[James L. Balas:]

Thanks.

[William A. Warmington:]

So, you mentioned the strong mortgage volume is being a contributor but you also mentioned share gains and pricing and product development. And I was hoping to get some additional color on where you're able to take some share? What products you're able to get some pricing on in addition to trended data? And then, which products are the ones where you're seeing the most attraction for the new products?

[Frank D. Martell:]

Hey, Bill. Good morning, and thanks for your complements. We appreciate that. Yeah, I think that the good news is our pricing increases are pretty broad-based, significant flood are coming through our mortgage underwriting areas such as credit, tax, flood, et cetera, where we've had a concerted effort over the last two or three years to take pricing actions in those areas. And I mentioned in my prepared remarks things like trended data but also other price increases as well. We actually have, in the VSG, also put through prospectively some fairly significant value-based pricing increases that we expect to really drive up margins and help top-line growth, exiting this year and going into 2017. So, it's pretty broad-based. We're also – in terms of product launches – as I mentioned, we really have a very strong product pipeline, the strongest I've seen in the company in over five years. We had significant wins in the areas of CondoSafe and a recently-launched product that involves property tax liability estimation, which has been a pain right across industry. And these are areas that are high margin because they leverage the existing data infrastructure of the company and the delivery mechanisms of the company. So, that's very, very good signal for the future in terms of both growth and margins as well. So, I feel good about that. And then, I think if you look at share gains, we continue to do, I think, a really good job in tax and flood, but also credit. I think this is our best year in several years in terms of taking share in the credit business. And we're also doing pretty well in the data licensing and the analytics area. And you look at insurance and flood and geospatial, they're also stronger. So, all that is good because it's broad-based and it spreads across the portfolio.

[William A. Warmington:]

Got it. And then, for my follow up question, I was going to ask about the components of the organic constant currency growth just to make sure I have those right in terms of acquisition and foreign exchange. And then, if you have any color in terms of how those split between PI and RMW, that would be helpful too.

[Frank D. Martell:]

Yeah. So, I think – or maybe I'll have Jim weigh in. But I think in terms of the – so, the organic growth, as I mentioned, was a little over 7%. Jim kind of mentioned, as you guys know, we're running off a few small businesses that really primarily were related to project, project-based and data retrieval and document retrieval businesses that were low margin, and we decided to exit really last year and we're seeing the end of the tail of that this year. So, but if you exclude those at 7%, about two-thirds of that, roughly speaking, relates to the pricing, share gains. We talked about – the mortgage market was the other third. So, that's roughly how that kind of breaks out across. And as you know, RMW is primarily where the market gains are because that's most U.S. mortgage focused for the company.

[William A. Warmington:]

Got it.

[Frank D. Martell:]

And then Jim can talk about – actually foreign exchange, I don't believe that's a material...

[James L. Balas:]

Yes. It was very insignificant. FX was insignificant in the quarter. And then the price – more in the RMW side but we did see some in the PI side as well.

[William A. Warmington:]

Got it. All right. Well, thank you very much and congratulations to you.

[James L. Balas:]

Thanks, Will.

[Frank D. Martell:]

Thanks.

[Operator:]

Thank you. Our next question comes from John Campbell from Stephens Inc. Your line is open.

[John Campbell:]

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

[Frank D. Martell:]

Thanks, John.

[James L. Balas:]

Thanks.

[John Campbell:]

Yeah. Do you guys – if I just look at the incremental margin, it has been, I think, 19% this quarter, 16% last quarter. It does sound like most of that is VSG-related. But just looking at the back of the napkin now for 4Q guidance, I think it implies about 50% incremental margins. So, just curious what's driving the bulk of the leverage? Is that just the wrap up of the VSG integration or is it maybe just timing of cost saves?

[Frank D. Martell:]

Yeah. I think, John, we're – we have a seasonal pattern, obviously. So, if you look at the big, like VSG for example, a lot of volume as you rightly called out, and we knew that. We've talked about the margin compression, really just standing up that unit. So, that's kind of expected. But if you go into seasonal fourth quarter, volumes drop off. So, the mix of our revenue shifts towards a higher margin set of revenues. So, that really accounts for the phenomena you're calling out.

[John Campbell:]

Okay. Got it. And then, back to VSG, I guess mainly within the PI segment. Just thinking about margins, could you maybe help us out a little bit just assuming some of that integration is done with the sequencing or maybe a good range for margin for PI for next year?

[Frank D. Martell:]

Yeah. We don't provide, obviously, specific forward guidance. We'll do that in January. But yeah, I think as we talk about VSG, especially right now this year, we have the integration of LandSafe and RELS which, obviously, have the normal integration cost. So, there's a little bit of a margin compressive effect to that. We expect the margins in VSG though, once we're moving through that. And actually, to be quite honest with you, the integration of VSG has gone remarkably well and that we're really, really pleased by the leadership team we have there and what they've been doing in terms of the integration. And we think that sets us up very nicely for 2017. I mentioned earlier we put through some pricing actions, which we think will also significantly boost the margins. So, in terms of the trending, it's a strong positive going into next year based on the current view of next year through pricing and also lack of integration cost. And also, more efficiency as you integrate both RELS and LandSafe. Obviously, we're seeing operating leverage benefits of having one panel versus two. So, there are many factors that will help us to boost the margins. And if you look at CoreLogic pre-VSG in the third quarter, the margin was 31% – a little over 31%. So, we're headed towards that 35% on the non-VSG piece and we're doing that through the cost reductions and other mechanisms that I talked about. So, I think the margins clearly are expanding strongly in the right direction. It's just going to take a little time based on the size of VSG. But as Anand talked about, it really is kind of a, we think, a transformative opportunity and one that's well worth it in terms of the margin compression. As Jim alluded to, part of the strong cash flow, the correlated strong cash flow is helped by the fact that that is a good cash flowing business as well. So, a lot of positives on the VSG, I think.

[John Campbell:]

Absolutely. Thanks. And then I might have just missed this. What is the current forecast? What's the industry projection you're using?

[Frank D. Martell:]

We follow the MBA pretty much for...

[James L. Balas:]

Yeah. They're around $1.8 trillion for the full year.

[John Campbell:]

Okay. Great. Thanks for taking my questions, guys.

[Frank D. Martell:]

Thanks.

[James L. Balas:]

Great. Thanks.

[Operator:]

Thank you. Our next question comes from Darrin Peller from Barclays. Your line is open.

[Nikhil Dixit:]

Hi. This is Nikhil Dixit on for Darrin. Congrats again on the strong quarter.

[James L. Balas:]

Thank you.

[Frank D. Martell:]

Thanks.

[Nikhil Dixit:]

I wanted to circle back to VSG again and ask about your expectations there. Now that the non-compete is over, what are you kind of seeing as the opportunities for new business for VSG? And how we should we think about the growth rate there moving forward?

[Frank D. Martell:]

Yeah, as I mentioned in my prepared remarks, clearly, their non-compete fell away at the end of the third quarter. We want to be considerate on where we expand but clearly – as Anand kind of talked about – it's an enormous, enormous market, so the opportunities for organic growth are very, very significant. At the same time, we're looking to transform the way valuation is done. So, we're looking for clients that are receptive to automation and data support. But having said all that, there are many, many opportunities for organic growth. And we expect VSG to be a driver of organic growth through significant share gain and pricing, frankly, in 2017.

[Nikhil Dixit:]

Okay. Great. Thanks. That's helpful. And then on the cash flow side, we saw strong conversion again this quarter at 65%. Can you talk kind of about the sustainability of that rate going forward and what you see there?

[James L. Balas:]

Yeah. As you know, we target 55% conversion, but if you look at the historicals, we've been probably closer to 60%. Now, there's anomalies in there, sometimes with dividends or other one-time cash items. But we feel pretty good about the consistency of the cash flow. We'll learn more as we proceed in the future with VSG. A lot of those assets carry a different financial profile to them – high operating income, lower adjusted EBITDA, but also a lower CapEx portion. So, they cash flow very, very strongly.

[Nikhil Dixit:]

Okay. Great. That's very helpful. Thanks a lot for taking my questions.

[Anand K. Nallathambi:]

Thank you.

[Operator:]

Thank you. Our next question comes from Brandon Dobell from William Blair. Your line is open.

[Brandon B. Dobell:]

Thanks. Guys, maybe focus just first on, I don't know, a couple of potential risks. How do you guys view your exposure? So, UK and Australia, both from a combination of this currency noise, especially the last handful of months, but also the property markets, in particular in Australia. I know VSG has made those things smaller but how do you guys think about those as kind of an ongoing headwind or maybe not to the business right now?

[James L. Balas:]

Okay. In terms of the currency on Australia, we've gone through the bulk of that. It was pretty muted in the third quarter. There's no big change that we're looking out for at this stage. On the UK, our footprint there is quite small, so it has been not that material to us. It's been immaterial, so not significant at all.

[Brandon B. Dobell:]

Okay. Perfect.

[Anand K. Nallathambi:]

Brandon, this is Anand. From a business standpoint, I think Australia and UK are still really good businesses for us. And Australia and New Zealand, mainly because of our market share, we – everything goes through us as far as they call it the valuer piece, which is the appraisal piece. The political climate there is trying to move away from cash investment purchases more towards generating ownership amongst the people there. And so, that would be – that would mean well for sustainable growth, although maybe not at the 12%, 15% growth, but 6% to 10% growth is still good in Australia. In the UK, we – I think post-Brexit has some positive momentum for us that UK now realizes that they have to do some things internally because of the need to generate business and I think that's good for us, presented with some opportunities. We have a small operation there. It's very profitable and we see opportunities to grow.

[Brandon B. Dobell:]

Okay. And maybe as a dovetail there, Frank, you mentioned a couple of the businesses that are winding down. When would you expect those to be fully wound out of the business? And I know it's kind of a material headwind right now. But from a growth point of view, how much should the next couple of years benefit or how much organic growth will benefit from those businesses not being a headwind as you think about 2017 and 2018?

[Frank D. Martell:]

Yeah. We're really – Brandon, most of it is going to be done this year, in fact, the vast majority – done this year.

[Brandon B. Dobell:]

Okay.

[Frank D. Martell:]

So, these are a combination of some of the servicing business that we couldn't exit and a lot of the document retrieval businesses that were good performers couple of years back when the settlements and other things were happening, but have now kind of dwindled. So, the good news is it's more of an issue on the top line. From a profitability perspective, it's actually going to be fairly positive.

[Brandon B. Dobell:]

Okay. And then final one for me. You touched on, I think, Frank, on a comment you made about VSG. As you think about the next kind of chunk of prospective customers, how much pushback are you guys getting just on the idea of moving, maybe from less people or fewer people doing appraisals and valuations to more of a data driven, kind of technology-driven solution given what the regulations are, et cetera? Do people still want that kind of hand-holding or are you finding receptivity to more of an automated solution?

[Anand K. Nallathambi:]

Yeah. The supplier side of the Valuation business is not changing that much. What is changing is data standards and new forms of new sources of data, and that's where I think the focus has been. That's where Fannie and Freddie are also working on, and we are trying to do it. I don't think there's a huge movement towards replacing appraisers. The cater (37

[Brandon B. Dobell:]

Got it. Okay. Perfect. Thanks a lot, guys.

[Frank D. Martell:]

Thanks, Brandon.

[Operator:]

Thank you. Our next question comes from Chas Tyson from KBW. Your line is open.

[Chas Tyson:]

Hi, guys. Just want to follow up on the question about the non-core products. I think most of them are in RMW. I was just curious if you assume that most of those products are coming out of pretty low margins, what the benefit will be to margins when they go and it seems like the margins could be – go from mid-30%s to high-30%s so obviously bullish. I'm just wondering if I'm thinking about that right.

[Frank D. Martell:]

No, Chas. I think – these are businesses. I mean, if you look at roughly per quarter, you're talking about $12 million, $13 million of revenue. So, it's not a big needle mover for us. And we're kind of – these have been progressively been wound down, so the impact varies a little bit quarter-to-quarter if you look at year over year. But by and large, it's not going to – it's helpful, right, but not needle-moving from a margin standpoint. Certainly, not something that's going to generate a percentage point change in our margin.

[Chas Tyson:]

Okay. Okay. Thanks for that clarification. And then on VSG, it seems like if we assume that the Property Information part of the business is still coming on at the 30-percent-ish margin, that VSG is coming on around a 15% margin. I was wondering, you guys scale that up, organically and inorganically, just looking at next year, what we should think about the incremental margins are and what we can kind of just get if there's natural improvement on margin there from standing it up?

[Frank D. Martell:]

Yeah. As you can – this is Frank. As you can imagine the margin, as I mentioned earlier, the margin profile of the business in 2016 is depressed by the integration. So, there's a little bit of depressive effect. So, we're going to see an acceleration in 2017 related to VSG margins, which is good – full year of FNC, which is a significantly more profitable portion of that capability. But also, the integration, the panel. We have the largest staff appraisal panel in the U.S. coming out of this year. And as Anand mentioned, we're looking to data-enabled making them even more productive through automation, a data enablement tool. So, expanding their ability to more as well. So, that's going to help margins as well. So, there are plenty of – there's a lot of client interest in using our panel. And so, as I mentioned, we just want to make sure that we are careful on how we onboard the clients. Thesis is a very large revenue contract. So, I think organic growth is not going to be an issue in VSG and margins will be higher next year than this year by a fair degree because of the things I mentioned earlier.

[Chas Tyson:]

Okay. Is there a way to think about the incremental margin or it's early to tell?

[Frank D. Martell:]

It's a little early because the mix is uncertain and also, as Anand kind of mentioned, in terms of strategic transformation, this is going to be an ongoing assessment, I think. So, we want to toggle the mix a little bit. So, it's difficult to project that with complete accuracy.

[Anand K. Nallathambi:]

Yeah. To follow up on what Frank is saying, even just switching between refi loans, the purchased loans is going to – as the refis wane, naturally our margins should improve in VSG because we go more towards the staff appraisers than contracted appraisers. So, that's a lot of dynamic display. Much is driven by how can we prepopulate things through the appraiser, making them more productive with new sources of data? That's squarely what we're trying to do.

[Chas Tyson:]

Okay. Thanks, guys.

[Operator:]

Thank you. Our next question comes from Andrew Jeffrey from SunTrust. Your line is open.

[Andrew Jeffrey:]

Hey, guys. Thanks for taking the question. I guess the first question I have for you is on trended data. It's a nice tailwind in your core business. Can you talk a little bit about who the customers are and whether that should grow in a linear way over the next year or so? Or is there a longer tail as more of the market moves toward trended data? Just trying to gauge for how long and what the order of magnitude is in that tailwind.

[Anand K. Nallathambi:]

Yeah. There's no specifics on customers. It's more of an industry phenomenon. We got two bureaus or (42

[Andrew Jeffrey:]

Okay. So, to the extent there's a staggered rollout, this is something that could benefit your credit business beyond 2017 perhaps?

[Anand K. Nallathambi:]

Yes, it would...

[Andrew Jeffrey:]

Okay.

[Anand K. Nallathambi:]

... to the extent that our supplier cost will also go up because trended data cost are higher than regular bureau cost.

[Andrew Jeffrey:]

Okay. But still accretive to margin, I assume?

[Anand K. Nallathambi:]

I would think so.

[Andrew Jeffrey:]

Okay. And then, with regard to VSG, and you may have just touched on it, but I just want to be clear for my own edification. New products and revenue synergy, are you seeing the benefit of sort of new functionality today in VSG or is it more price and/or share and can 2017 sort of be a combination of price share and rev synergies?

[Frank D. Martell:]

Yeah. I think that's correct, Andrew. I think that as we move forward, you'll see all those benefits. I mean, right now, a lot of focus as you can imagine because we really only acquired those assets progressively over the last kind of nine months or so. But it's around integration and enablement right now. And this is something, again, that – we are a partner, an existing partner of very large lenders, so we need to make sure that the integration goes seamlessly. So, that's a lot of focus this year. But as we get out into next year, all the benefits Anand talked about, about enabling appraisers, automation, mix, et cetera is going to come into play. So that's going to be a very positive story, we believe, for growth in margins.

[Andrew Jeffrey:]

Okay. Thanks. Helpful.

[Operator:]

Thank you. Our next question comes from Jeff Meuler from Baird. Your line is open.

[Jeff P. Meuler:]

Yeah. Thank you. International and insurance and spatial have been positive callouts for a while now. Just within the Property Information & Analytics, hoping you could comment on how growth is trending for you within the U.S. mortgage vertical and also how's client retention trending for you there?

[Frank D. Martell:]

I think client retention has been strong. I'd say that the growth rates have been okay, not as strong as insurance and some other areas. I think that by nature, these are workflow data sets that we're licensing in the industry. So, I think – I'm not to be – I think I wouldn't expect anomalies in growth rates over time. I think it's a solid performer for us. And the good news is that insurance and spatial have been strong growth areas. We've had a lot of product innovations from share gains, from pricing. So, it's been an area that is a little bit more leveraged to the upside than the basic workflow, I think, that are coming to – things like data licensing. And as we mentioned on previous calls, there's some – in TIA, (46

[Jeff P. Meuler:]

Okay. Thanks for that. And then just so I understand that the trended data to Fannie and to mortgage market, does that drive incremental operating profit for CoreLogic, meaning, does the pricing exceed I guess the supplier costs from the bureaus to you?

[Frank D. Martell:]

Yes. Yes.

[Jeff P. Meuler:]

Okay.

[Frank D. Martell:]

We factored into our go to market strategy and the margin is either on par or a little higher.

[Jeff P. Meuler:]

Perfect. And then just finally, the incremental $15 million of expense savings for 2017, is there a increased cost to achieve the incremental $15 million or the whole $15 million flow through in 2017?

[Frank D. Martell:]

Yeah. So, when we provide 2017 guidance, we'll have – it will be inclusive of costs and benefits. But the total cost reduction is $30 million. Some of that, Jeff, is going to come through. I think – we feel really good about what we've done in 2016. So, we're going to have some benefit from flow-through benefit, annualized benefit of what we're doing. And in some areas like real estate, our real estate books – we've had a faster consolidation. So, we're trying to put the pedal to the metal, as they say. So, I think that definitely if you look at $30 million, it's a percentage point or more margin for the company. So, we want to get that and put that into the margin accretion as we go forward.

[Jeff P. Meuler:]

Got it. Thank you.

[Operator:]

Thank you. Our next question comes from Kevin Kaczmarek from Zelman & Associates. Your line is open.

[Kevin Kaczmarek:]

Thanks. Thanks, guys for taking my questions. On VSG, I know you've approached this a couple different ways. I just wanted to ask a slightly different way. A number of our industry contacts have noted the high human capital costs in the business and how a lot of higher-priced people aren't doing really value-added activities. I guess, from a productivity standpoint, do you think you can – if you don't get rid of the appraisers, can you maybe increase the number of appraisals done per person at a given time period?

[Anand K. Nallathambi:]

Absolutely.

[Kevin Kaczmarek:]

Do you have a sense of how much you can do that?

[Anand K. Nallathambi:]

Yeah. We believe that's the immediate thing that we could do, and we have seen that in action in Australia.

[Kevin Kaczmarek:]

Can you give us a sense of how much you were able to improve productivity over there?

[Anand K. Nallathambi:]

I don't have the exact numbers but the fact that we could prepopulate things that we send to the appraisers' desktop, with information about the property and the comparables, and we can kind of also pinpoint to say from an auditor's standpoint, which ones were specifically significant in terms of picking value and if they are gone outside, what was the risk that was brought into it. So, this is not only for improving the productivity of the appraisers, but to improve the credit quality of appraisals to the lenders and the regulators.

[Kevin Kaczmarek:]

Okay. And then, on the price increases, could you give us a sense of how the size and magnitude, is this like a $100 increase per appraisal for the value-add products moving to next year or maybe something smaller?

[Frank D. Martell:]

Yeah, because we're dealing with individual clients and a few main ones here, we can't give you specific numbers. But in general, I'd say that they are significant and they are reflective, I think, of some of the value. We think that we are driving and can drive in the future. So, I think they are significant both, frankly, on the appraisal side and also on the platform side as well. So, it's not just appraisers we're talking about, it's other areas of the valuation area.

[Kevin Kaczmarek:]

Okay. And I guess one last one on the property tax estimate. I notice, I think, some competitors have also come out with some products. I guess, why are these coming out now? Is this something to do with TRID where people realize they can't deal with the error tolerances or something on the LE and, therefore, need a product like this? So, I guess, why are these coming out now?

[Frank D. Martell:]

Yes, it's an industry – it has been an industry pain point. I think the tolerance for error is dropping for I think a lot of the industry participants and I think this is a broader phenomena that's helped CoreLogic over time because has been people looking for more robust solutions in some of these areas and what's better than having an industry solution that everybody is using. So, property tax estimation is one of those areas that if you get it wrong, it's a pain. We have all the data required to do that work, so we provide a consistent industry solution. We have the largest escrow tax payment processing business in the U.S. we pay well over $100 billion a year in property tax payments. So, that gives us a tremendous insight into the data required to do this. So, we think we have the most robust solution. And as I mentioned earlier, we signed some contracts that I think validate that.

[Kevin Kaczmarek:]

And I guess when you think about your data and the proprietary aspects of it, how many other firms can do this? Is it just a handful or do a number of them actually have the ability to estimate these property taxes?

[Frank D. Martell:]

I can't comment on what their abilities are. I would say that we, by virtue of our scale and our insight, I mean, you're talking about over 20,000 taxing jurisdictions. I mean, this is a tremendously complex area and rates are changing all the time, and you have different values. So, we have the data reach to be able to do that accurately and, I believe, most accurately in the industry.

[Kevin Kaczmarek:]

Okay. Thanks a lot for taking my questions. That's all I have.

[Operator:]

Thank you. Our next question comes from Glenn Greene from Oppenheimer. Your line is open.

[Glenn Greene:]

Thank you. A couple of questions. Going back to VSG. I wanted to talk about the potential headwind and sort of – you're clearly thinking about strong growth into 2017, and there's been some chatter that your two big clients there would be diversifying their volume streams, so it clearly sounds like you can grow through that. So, I want to understand the order of magnitude of that if that's accurate or that should be a headwind from BofA and Wells. And given the fact that, I guess, the non-compete is over, it sounded like at the end of the third quarter, have you been out in the market already building a sales pipeline and is that what gives you visibility into the growth going into 2017 despite the presumed headwind? And then I've got some margin questions on VSG, too.

[Frank D. Martell:]

So, we've actually been in the market. Yes, I think there's nothing to stop Wells Fargo and Bank of America to use other suppliers. There is I think, Glenn – this is a very entrenched business from a workflow perspective, so I wouldn't anticipate sudden dramatic shifts. I'd say if they're shifting, it would be over time. So, as Anand mentioned, it's a very, very large market today. So, the opportunity, I would imagine to acquire diversified revenue streams beyond those two clients is very, very significant obviously. So, I think from that perspective, we're not that concerned about it. We want to make sure that Wells Fargo and Bank of America are very, very happy with our service level. So, we are – we think we are the best in the business and we need to make sure to continue to be the best to keep that position. And if we do that, I don't see why we would face the diversification issues on those two clients. And so, I think we feel good about the organic growth prospects of that business unit.

[Glenn Greene:]

Okay. That's very helpful. On the margin side, I could probably back in and do the math but I haven't done it yet. I think, Frank, you alluded to the VSG was basically a 400-basis point drag on aggregate margins.

[Frank D. Martell:]

Yeah.

[Glenn Greene:]

Was that including the integration cost headwind? I mean, could you just sort of help us – tell us what was the VSG margin in the quarter and did that include the integration cost?

[Frank D. Martell:]

Yeah. So, as you mentioned, we do have integration cost, which we've kind of, I think, absorbed the majority of those through the end of this last quarter. So, I think that has been a depressive effect on the margins. The margins are significantly lower than our aggregate margin, obviously. And part of the margin equation also is how Wells has accounted for in previous periods in terms of the adjusted EBITDA metric. I think you're familiar with that.

[Glenn Greene:]

Yeah.

[Frank D. Martell:]

So, but as I said, I think those are – a lot of those costs are focused in 2016. The pricing actions that we are putting through are more prospective. So, that margin raise is going to pop-up, not in line with our full margin but enough to have a significant benefit to our margin profile in 2017.

[Glenn Greene:]

And the integration costs, if I recall, were targeted at like $12 million, $13 million for the year? Is that right? It sounds like it's basically done.

[Frank D. Martell:]

Yeah. That's correct.

[Glenn Greene:]

And then just real quickly. Just looking at the fourth quarter, the implied revenue expectation given you sort of maintained the full year guide. It sort of looks like something like $442 million of revenue, which is about an $80 million sequential drop. And I realized there's some seasonality in there. But any other factors that may drive that magnitude? It just feels like it's awfully conservative.

[Frank D. Martell:]

Look, we've also been viewed as conservative. So, my view is there is seasonality. We feel we're going to have a good fourth quarter and we're certainly get the top-end of the range. It's a little early to call around that in expense of that. But we feel great about the fourth quarter and we feel great about this year. It's a super year for the company and I think we're well-positioned for 2017. So, we feel good about the numbers coming out of this year.

[Glenn Greene:]

Okay. Terrific. Thanks a lot.

[Anand K. Nallathambi:]

Thank you.

[Operator:]

Thank you. And our last question will come from Jason Deleeuw from Piper Jaffray. Your line is open.

[Eric M. Robinson:]

Hey, thanks, guys. You've actually got Eric Robinson stepping on for Jason here. Congrats on the solid quarter. Just had a couple of quick questions here and the first one is going to follow up on the last question. But just on the implied fourth quarter guidance, can you give us a sense of where the seasonality would be more pronounced? Would it be more on PI or RMW? Just kind of have to think about that?

[Anand K. Nallathambi:]

It will be more pronounced in the RMW businesses. You have credit, credit flood, and also resident screening. I mean they – post Thanksgiving, you'll see a drop and then into the holidays. So, the mid of January, you'll see a drop. And then, the subsequent impacts on appraisals and the Valuation business is also there.

[Eric M. Robinson:]

Got it. Okay. All right. And then just on the VSG front, there's been a couple of publications out there talking about a potential shortage in property appraisers in the industry. Can you just talk about if CoreLogic has seen any of this potential shortage in terms of head count or, really, if there is an opportunity there for you guys?

[Anand K. Nallathambi:]

Yeah. There is definitely a shortage of appraisers because there's not a lot of new ones coming into the business and the older ones are just about a moon away or retiring, so to speak. We are trying to push that up. And I also think – this is where I said taking the cap off the refis will also help because the refis have a shorter turnaround, full appraisals or something that gives the appraiser a little bit more meat on the action. So, I think the market conditions are going to favor. And we're also trying to do, in combining the panel, we'll have a better ability to affect the supply base.

[Eric M. Robinson:]

Got it. Okay. All right. That's helpful.

[Frank D. Martell:]

Just to clarify to the shortage, I think that you maybe – there's some states and geographies that have a more acute shortage, there are others that don't, so it's a geographical. There's over 80,000 appraisers and not to mention, it's kind of a mix of people who are doing part-time and people that are full-time. We have a full-time employed panel of appraisers. So, we work on the quality assuring and productivity and cycle-time reduction. So, there is a shortage but it can be dealt with through education, through our skill, inducting more full-time appraisers, and making them more productive. So, we are working hard on that area.

[Eric M. Robinson:]

Got it. All right. Well, thanks very much. I appreciate it.

[Anand K. Nallathambi:]

Thank you.

[James L. Balas:]

Thank you.

[Operator:]

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.

[Frank D. Martell:]

Thank you.

[James L. Balas:]

Thank you.

[Anand K. Nallathambi:]

Thank you.