CoreLogic, Inc.
Q3 2015 Earnings Call Transcript

Published: 23 Oct 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the CoreLogic, Inc. Third Quarter 2015 Earnings Conference Call. [Operator Instructions] As a reminder, today’s call is being recorded. I would now like to turn the conference over to your first speaker for today Dan Smith with Investor Relations. You have the floor sir.

[Dan Smith:]

Thank you and good morning. Welcome to our investor presentation and conference call, where we present our financial results for the third quarter of 2015. Speaking today will be CoreLogic’s President and CEO, Anand Nallathambi, and COO, Frank Martell. Before we begin, let me make a few important points. First, we posted our slide presentation, which includes additional details and our financial results, on our website. Second, please note that during today’s presentation, we may make forward-looking statements within the meaning of the federal securities laws, including statements concerning our expected business and operational plans, performance outlook, and acquisition and growth strategies, and our expectations regarding industry conditions. All of these statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our SEC filings, including the most recent annual report on Form 10-K and subsequent 10-Qs. Our forward-looking statements are based on information currently available to us, and we do not intend and undertake no duty to update these statements for any reason. Additionally, today’s presentation contains financial measures that are non-GAAP financial measures. A reconciliation of these non-GAAP measures to the GAAP equivalent 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 2014. Finally, please limit yourselves to one question with a brief follow-up. We will take additional questions at the end of the call as time permits. Thanks. And now let me introduce our President and CEO, Anand Nallathambi.

[Anand Nallathambi:]

Thanks, Dan, and good morning, everyone. Welcome to CoreLogic’s third quarter earnings call. This morning I will recap our third quarter operating results, as well as progress on several strategic initiatives. Frank will summarize our financial results, and we will conclude the call with Q&A. CoreLogic continues to deliver strong operating results in 2015. We are executing against our financial targets and outperforming market volumes in our core operations. We are also making important progress with regards to our strategic plan. For the first nine months of the year, we generated strong growth in revenues, operating profit and earnings per share. Year to date, we grew revenues by 7%, operating income from continuing operations by 32% and adjusted EPS by 48%. Our free cash flow conversion rates are at record levels and we have returned over $97 million to our shareholders. As we’ve discussed previously, our strong operating performance is driven by the continued implementation of our strategic transformation program which is focused on the following major objectives. Number one, achieving market leadership in our core property intelligence, underwriting and risk management solutions businesses; two, driving operating leverage and expanding margins through process reengineering, work workflow optimization and cost efficiency; number three, optimizing our existing technology infrastructure and launching the CoreLogic innovation center and our Gen2 platform; and finally, building financial flexibility and consistently returning capital to our shareholders. Specifically in terms of the third quarter, revenues were up 7% on a constant currency basis. During the quarter, our underwriting related units capitalized on modestly higher US mortgage volumes and we grew our spatial, insurance and international operations. In addition, we gained market share in a number of the areas of the business and are beginning to see the positive impacts with our focus on pricing. We are also seeing the initial benefits of a strong product pipeline. Third quarter adjusted EBITDA was up 5% on a constant currency basis and our adjusted EBITDA margin was 30%. Throughout 2015, we have continued to invest in product and services development which has resulted in a robust pipeline of new products and product enhancements. We believe that this investment will enable CoreLogic to drive positive growth trends in the future. We are also investing in our Gen2 technology platform, compliance and information security and the further monetization of our diversified data asset. I’ll talk about more about our Gen2 technology platform in a few minutes. These investments are important strategically and represent a significant financial commitment by the company. Importantly, the strength of our underlying business model allows us to make these investments, while growing our year to date adjusted EBITDA by 21% and margins by three percentage points. As we move forward, we believe we are well positioned to capture growth opportunities in the areas of property intelligence, underwriting and risk management. At the same time, we continue to expand our profit margin. I will focus the balance of my comments today on these two topics. During the third quarter, CoreLogic advanced our long-term strategy of building must-have data enabled solutions for our clients’ most critical business needs by expanding our capabilities in property valuation. Over the past several years, we have focused on scaling our core underwriting and risk management solution and we believe this adjacency is a significant multi-vertical and global opportunity in the years ahead. In this regard, we are excited about the launch of our property valuation solutions group which will provide leadership for all of our valuation-related products and solutions. We believe we possess unique data, analytics and data enabled services that collectively will provide more accurate estimates of property values and data driven insights into important factors that may influence those values now and in the future. Late in the third quarter, we added to our existing valuation solutions capabilities by acquiring LandSafe Appraisal Services from Bank of America. The addition of LandSafe allows us to provide expanded value to one of our largest clients and at the same time increases our scale and ability to provide the market with differentiated valuation solutions. Another important 2015 investment in our future growth has been the formation and staffing of the CoreLogic innovation center which we first announced in December 2014. The innovation center is a conduit through which we are developing our Gen2 technology platform. This platform will augment and eventually replace substantial portions of our Gen2 system and support the launch of new and enhanced solutions. In terms of margin expansion, we believe that the successful completion of our ongoing cost management program and the eventual normalization of US mortgage unit volumes should position us to generate sustained adjusted EBITDA margin, above 30%. During the first quarter of this year, we announced the launch of a cost management program designed to lower annual run rate expenses by $60 million by the end of 2017. The major elements of this program includes the reduction of SG&A expenses, lower technology infrastructure costs and consolidation of facility. The US mortgage market is continuing to transition to a purchase-driven cycle. With the market fundamentals improving, the recent pick up in purchase volumes should help offset the expected tapering of refinancing activities. Also, sustainable job creation and overall economic recovery should support healthier housing starts and inventory levels over time. Overall, we believe this transition has set the stage for a more sustainable real estate market. In closing, CoreLogic has delivered exceptional results over the first nine months of 2015 and I believe our strong performance affirms the benefits and value creation opportunities inherent in our strategic plan. We are deeply embedded in our clients’ critical workflow. Our scale and ability to invest heavily in compliance automation and data enabled services as well as our reputation for delivering a high level of quality in service has made us a preferred partner for businesses and government agencies with the need for property intelligence and insights. I want to thank our employees, clients and shareholders for their continued support. I’m excited about the future and believe we are a great partner for our clients and a value growth opportunity for our long-term investors. With that, I will turn it over to Frank.

[Frank Martell:]

Thanks, Anand, and good morning, everyone. Today I’m going to briefly recap our third quarter 2015 financial results and provide you with some additional color on capital allocation, our cost management program and full year financial guidance. As Anand just mentioned, CoreLogic delivered a strong performance in the third quarter, both operationally and financially. In addition to solid top line growth, we delivered adjusted EBITDA margins of just over 30% in the second straight quarter and generated record levels of free cash flow. Our strong margin performance was driven by favorable revenue mix, operating leverage and ongoing cost management. Importantly, we were able to generate 30% margins after incremental investments of just over $6 million, equivalent to 150 basis points of margin in efficiency, innovation, information security and compliance related initiatives during the quarter. Third quarter financial highlights include

[Operator:]

[Operator Instructions] Our first question comes from the line of Bill Warmington from Wells Fargo.

[Bill Warmington:]

I thought we should probably start off by maybe asking about the data and analytics segment and if you could talk a little bit more about what the drivers of the growth were during this quarter and then also help us set our expectations for where you think you can take the growth over the next year?

[Frank Martell:]

In terms of D&A, I think the drivers of growth continue to be international, strong growth in international, spatial solutions; we’re seeing solid growth in insurance and some mortgage related analytics areas as well. So those are the key areas of strength for the D&A segment. As we mentioned, this quarter, we did have several supply agreements cancelled; these are primarily to non-end clients, they’re more to resellers and data suppliers to other clients that were cancelled due to either them bring that data in house or securing it someplace else. And then we had in the RMBS area a number of end customers are exiting that area and so they don’t need this service anymore. So those are the principal downsides. I think the organic revenue growth of 3% was slightly below our expectations. I’d like to remind everybody that percentage point of organic revenue in D&A $7 million for the full year. So it’s still not a major impact, but we expect that to be around 5% give or take in terms of organic growth rate for the year. And then we still expect our longer term growth rate to accelerate beyond 5% this year.

[Operator:]

Our next question comes from the line of Darrin Peller from Barclays.

[Darrin Peller:]

Let me just start off with the LandSafe deal. I’m not sure if we heard actual valuation metrics, but past is present and with what you have done with Bank of America or other types of outsourcing, we’ve seen somewhere in the 5 to 6 times EBITDA range I think that worked out to – should we assume a similar type of economics here in terms of contribution to EBITDA potential in 2016 from that? And maybe we can start there if you can.

[Frank Martell:]

I will let Anand talk about the strategic elements. I think it’s a super win-win for us and the Bank. So I will let him talk about that. But from a financial point of view, it’s well below our current trading multiple and I think you can assume it looks similar to the other transactions with the bank that we’ve done. And from my perspective, it secures and builds our relationship with a major client. So it’s very similar to our tax flood and credit arrangement, we are supporting the bank as a third party.

[Darrin Peller:]

And I guess just expand on that, Anand, the strategy behind it sounds like you are going to potentially use this to leverage from a scale standpoint into other relationships like it, can you just expand a little bit? It reminds us a lot of what you had previously with your [AMP] business?

[Anand Nallathambi:]

It’s really different than the AMP business. The AMP business was anchored by the [indiscernible] this is on the front end. But the reason we got out and we did get out of the AMC business in 2011, part of the reason is that at that time we did say that the focus on the liability issue being uncontrollable and the business mix wasn’t as helpful to our clients at that time. So we did get out. What makes get back in, what’s the attractive opportunity here is post the financial crisis, the regulatory and lender focus on getting the value right, making sure of LTV ratios and having better data and analytics to validate the appraisal process has taken on a new dimension in the collective industry, there is a lot of emphasis on having clear audit on the entire process. We feel like we are in the best position to provide that with all the data and analytics that we have supporting it, and we thought that the appraisal process also has a little bit more stability to it today and also has the opportunity to reengineer for the future. So that’s the driver for us to get back in and add scale. And in addition to it obviously, this consolidates a lot of the settlement services that we can provide for one of our largest customers.

[Darrin Peller:]

Just to hone in a bit more detail on the data analytics growth rate, clearly there was some business that obviously you didn’t necessarily see moving away from you earlier in the year, right, because I know you’ve reiterated your guidance around acceleration in the D&A side to a mid to high single digit growth rate, so can you give us a sense on really what happened here and what may or may not have surprised you just given that – like I said, it seems like obviously 3% growth rate was lower than I think you and we anticipated?

[Frank Martell:]

I’d say that we – just to back up a bit, we always did say that the first half – if you look at first half of 2014, obviously that was a much weaker mortgage origination market and generally a weaker market for property information. So the comps year over year were easier in the first of half of this year. So we were above 6% for the first half. The third quarter was going to be a tougher comp. I think at the end of the day, I think for the RMBS market, it’s a tough one, so the timing of those – we would hope that this could stay longer, but we can’t control the clients and what businesses they stay in. So that was a little bit of an inflection point for those clients. And then I think on the data supply agreement, these are not end customers for us, lenders, servicers, these are more suppliers of our data to other avenues. So from that standpoint, that was probably the one change in what we have thought for the third quarter. I think those are discrete. And so I think that is the good news of it. We still believe that the organic growth rate in D&A remains pretty robust as we go forward, but at this point, the third quarter, you had a few of those cross wins. And again as I mentioned, Darrin, in the totality of financial results, it’s still a several million dollars, it’s not material to the...

[Darrin Peller:]

I hear that. I think it’s just a question of whether or not this is a symptom of higher competition in the industry or is it not that, is it really just there is one reseller of data out there that decided to take things a different way or in-house or whatnot and there’s really no other players or clients of yours that could even do that?

[Frank Martell:]

We still believe we are the scaled player in property information and data in the industry. And I think our client roster demonstrably demonstrates that. We supply data to over 500 lenders across the North American landscape. So we are still the skilled player in data analytics and I think competition will ebb and flow. For example, as you guys know, we did have the best part of our MSP deal, we signed [indiscernible] another reseller called Reality Track in the market and that’s an example, but again small clients, mostly. So we have all the major clients on our client roster and I expect that will continue to be the case.

[Anand Nallathambi:]

One other thing that I would mention is in the third quarter there was also some shift of focus from the lender standpoint in trying to get ready and implement Trend. And so we don’t see that’s any alarming trend that we feel like we have a very robust product pipeline rolling out. We have really good people on that area, insurance is starting to Australia, New Zealand, so we feel like it’s just a question of time when things start to fire back and we’ll be fine.

[Darrin Peller:]

And then just on trade, I guess overall, A, is trade an opportunity for you guys in any way to generate revenue from either building your clients compliance around it or otherwise providing data around it? And then what did trade do in terms of any potential pull, you’re obviously not raising your guidance by what was a better EBITDA number in the quarter and I think some of it you suggested may have a pull forward into the quarter, trade may have pushed some of that, although I think really on the last week of the quarter really we saw apps go up. How much of that do you think impacted the quarter and otherwise investments, what changes to why you are not passing through the beat of $10 million in the quarter to guidance?

[Frank Martell:]

I think the net effect of trade was a small pull forward which we saw come back during the first couple of weeks of October. So I think it’s going to be in the grand scheme it’s going to be largely awash from our volume driven businesses. I think in terms of the – if you know, the dollar volumes of origination that are our headline numbers, we have to deflate those somewhat for price escalation to get the unit volume which drive our revenue numbers. So it’s a little bit more muted than that. So I think those additional volumes account for us being at the higher end of our range and also supporting some spending around the info sec and compliance areas that I talked about in my prepared remarks.

[Operator:]

Our next question comes from the line of Kevin McVeigh from Macquarie.

[Kevin McVeigh:]

You talked about pricing, it sounds like you’re going to be able to pass through some pricing increases, what part of the business is that in or is it a across all markets?

[Frank Martell:]

Kevin, really it’s across all of our – lot of our units, not all of them, but a lot of our units. So we’ve had a concerted effort to try to raise prices in a lot of areas. I think those are sticking in a number of areas. So we’re pretty pleased about that and I think that will continue. It’s particularly relevant in our underwriting area which is largely on the TPS side, but also D&A has also been a beneficiary as well.

[Kevin McVeigh:]

And then just going to the D&A, if we were at 3% and expecting resumption of normal trend, what’s going to make up for the over-performance in terms rather – the underperformance of some of the supply agreements that came in house, where are you going to see that offset and ultimately stronger growth to offset that kind of run-off if you would?

[Frank Martell:]

We have a very good product pipeline, so we are seeing several new products. We have been in the market with our product and we have many others. We have appraisal diagnostic tool, it’s gotten good adoption. So I think that will pick up some of the slack and we expect that to gather pace as we go forward. I think there is also – we continue to penetrate the mid mass market in D&A. So there is a lot of light space in D&A. And I think also as we scale up across and develop our solutions concept, we talked about valuation, that’s an area, as Anand mentioned, that is right for injection of data and analytics. And I think if you all followed some of the regulatory discussions, there is a lot of pressure and a lot of focus on using data to validate the underwriting process and help improve quality and reduce cycle time and improve the consumer experience. So this is another area of the strategy that will help us to accelerate growth. So the good news is D&A there’s not one lever or two levers we’re counting on, there is multiple levers that we think will improve our growth trajectory. So I don’t see a real issue exiting the year at 5% and then growing that rate again towards the upper single digits.

[Kevin McVeigh:]

And then just my last question, if I heard you right, it was – someone brought it back in house, what would drive the decision to bring it back in house as opposed to keeping it outsourced, given just the richness of the data you folks have relative to what I would think they had in house?

[Frank Martell:]

It depends. We obviously license discrete data elements, so we are not necessarily licensing our entire database. That’s a very specific question depending on their uses, their clients. Most of this data is servicing small clients, end clients. And so it may be for cost reasons; it may be that they found a cheaper source, so on and so forth. I wouldn’t presume to speak for them, but a lot of these folks have different sources that they can get data cheaper perhaps. I can’t speak to the quality of it, but that’s really the sum of that I think.

[Operator:]

Our next question comes from the line of Andrew Jeffrey from SunTrust.

[Andrew Jeffrey:]

I appreciate the color too on some of the moving parts in D&A. Looking at the multifamily business in particular, maybe you can comment on some of the trends that are affecting that segment? I know it’s small, but it seems to have been is in the downturn for a while and I wonder – when you look at that business, if it’s core or if that might be source of capital if you were to divest, it could be reinvested in some of your more core businesses, how do you think about that subsegment of D&A?

[Anand Nallathambi:]

I think multifamily for us is a very important segment, especially when you look at where the household formation is going to come from in the next 10 years. Multifamily is starting to play a big role mainly because of the rental component for it and we like having it as part of our mix and obviously we are trying to grow it with property management analytics and other things that we can bring to the table on the resident screening analytics that we can provide the landlords and property managers out there.

[Andrew Jeffrey:]

And is the recent weakness a function of just high rents and not a lot of folks moving in the face of that tight market or is there some other dynamic in play?

[Anand Nallathambi:]

There is a little bit of that to it. I wouldn’t necessarily call it a huge weakness. It’s starting to come back, the rental – preservation of rental formation is something that even the government, the [NDA] convention was specifically calling out for. So we like the prospects of the future.

[Andrew Jeffrey:]

And with regard to share gains, like you mentioned, within D&A, can you be a little more specific in what areas you are taking share and what are the drivers you think specifically of your share gains and is that one of the reasons you’re confident in the reacceleration of growth in that segment?

[Frank Martell:]

I’d say the share gains from a financial impact perspective, just to be clear, is more pronounced on the TPS side than it is on the D&A side. I think the share gains that we’ve taken have been more around adoption midmarket, mass market and centered really international and in the analytics area. So I mentioned some of the new products that we have. We have our appraisal diagnostic tool. It’s really been adopted by over 80 clients in the last 12 months or so. And that goes to what Anand was talking a little bit about the demand for data validation. So that’s very good. And we’re focused on providing D&A which we think is a great growth opportunity to move from a product to a solution, industry standard solution where we can leverage our scale to offer the industry a product and solution set that can be applied broadly across the client base versus today where there is a lot of fragmentation still in terms of how people go and get data and analytics and other workflow solution. So we think providing industry standards around things like property valuation that can give us based on our scale a leg up competitively with the clients. So that’s an example where – not a straight market share gain, but it’s a broad expansion of our footprint within our client set.

[Operator:]

[Operator Instructions] Our next question comes from the line of John Campbell from Stephens.

[John Campbell:]

On the $6 million investment, Frank, I think you mentioned in the quarter, was that predominantly in the D&A segment?

[Frank Martell:]

Yes. As I mentioned in my prepared remarks, a lot of it is in the D&A, the next gen, some of the compliance areas are focused in the D&A area.

[John Campbell:]

And then I’m not sure if you mentioned this, I might have missed it, but are you expecting [to book roughly that] same amount or may be a little bit more in the 4Q?

[Frank Martell:]

Probably just a tad less, but pretty close.

[John Campbell:]

And then on the LandSafe acquisition, I just want to make sure I’m thinking that about that correctly, so you guys are basically going to be an outsourced vendor for Bank of America, with them basically being the only customer, but the capabilities brought on by LandSafe is going to help you bolster or just kind of scale out that new data driven property valuation group, is that right?

[Anand Nallathambi:]

As you probably know, John, we are a major player in property valuation through our analytics, through our data and we’re already in appraisal management area already. So this scales up. I think as you guys know, one of our big success is we focus on core solutions area and we scale them up. So this is very much a similar type effort on our part. The LandSafe deal at this point is focused primarily on Bank of America, but over time we may choose to use this platform to expand to other clients. But for now, I think of it very much in terms of what we’ve done on the tax and credit side which is really fronting up against the Bank of America and supporting their needs as a primary focus. All of those acquisitions have been integrated and have proven to be just fantastic for I think both CoreLogic and the client. So we see this is very similar.

[John Campbell:]

And then just one last one here, as far as market share, I mean, obviously [indiscernible] you guys have pretty dominant market share there, can you talk a little bit about market share in valuation and where do you see that heading over time?

[Anand Nallathambi:]

At the moment if you include the appraisal area, it’s still a very fragmented – it’s a big market, you’re talking about $3 billion or $4 million on the appraisal side alone. So it’s a big market with a lot of players. We would be a significant player with the acquisition of LandSafe and our current activities, we would be a significant player already. And then when you throw in our AVMs, LSAM products and some of our other data related assets, we would become a very significant player with a lot of future growth opportunities. It’s a significant pain point for the industry, everybody wants data validation, everybody wants improved cycle time and quality, and we think we can bring a lot of those benefits to the market and that’s really what we are focused on.

[Operator:]

Our next question is from the line of Jeff Meuler from Baird.

[Jeff Meuler:]

I just want to make sure my math on the expectations around D&A are accurate. In terms of the headwinds that you’re calling out on reseller and RMBS, just given that there are several things going on or several clients that are impacting this, were they fully felt this quarter in terms of the magnitude of the headwind? I’m just guessing that there were different points in time in the quarter. And in terms of getting back to 5% or so or mid single digit growth, is that for Q4 or is that more of an exit rate that sets a good baseline as we get into 2016?

[Frank Martell:]

We will provide complete guidance for 2016 in January. But in terms of this year, as I said, we expect to finish this year about 5% organic growth in D&A. We ran through the first half at 6%. So the aggregate number is not too far away from the 5%. So in terms of where these impacts, you’re only talking about a couple of million dollars, so I think it’s pretty fully baked in the third quarter run rate. I don’t think there was a lot of impact in – at some point in the middle of the quarter, later in the quarter.

[Jeff Meuler:]

And the incremental or overall margins on those relationships and I guess I’m in particular focused on the reseller relationships, are they similar to the D&A or the domestic D&A average or were those lower margin relationships anyway?

[Frank Martell:]

No, they are not lower margin. They’re very similar.

[Operator:]

Our next question comes from the line of Jason Deleeuw from Piper Jaffray.

[Jason Deleeuw:]

I just want to make sure I understand the guidance, you guided to the higher end of your range and I believe you’re now seeing $8 million to $10 million of one-time expenses in this year? I believe it was $5 million to $8 million previously, so is that right? So you are just absorbing the incremental expenses from what you previously thought.

[Frank Martell:]

I think basically just to confirm, we believe we will be at the high end of our current guidance range. And as I mentioned in my prepared remarks, that includes a slightly elevated spending on compliance and info sec in particular above what we had previously baked in. So we’ve been able to absorb that in addition to the slightly higher spend on the cost program.

[Jason Deleeuw:]

And then on LandSafe, is there some initial investment that’s going to be needed to get it up and running? And when we think about 2016, can we think about a full EBITDA contribution in 2016 from LandSafe or is it going to be something that needs to ramp over time?

[Frank Martell:]

No. It’s a good cash generative business, it makes good money from the get go. There is not a major investment anywhere. So it will be an integration, but a softer one. So I wouldn’t expect any big investment above or anything like that. It’s a very, very good business and one that we think we can scale and drive operating leverage, but we don’t see a major investment to that.

[Operator:]

Our next question comes from the line of Bose George from KBW.

[Unverified Analyst:]

This is actually [Jason] on for Bose. I wanted to switch over to TPS and ask a question on the margins there, most market observers are forecasting mortgage market in 2016 is a little closer to 2014 as opposed to the market this year. So just curious where you guys think the impact will be on the margins if we should be expecting? Is it closer to 2014 or it should be closer to this year given the leverage you will be able to get out of the business there?

[Frank Martell:]

I don’t want to front run the 2016 guidance, but I would just say that we are continuing to become more efficient and drive margin up through efficiency programs. That’s going to benefit 2016. And we do have flow through, some of the share gains that were recorded this year, particularly in the midmarket by the TPS team should flow through and provide some additional revenue growth in next year that would offset any kind of vibration in the mortgage volumes. We are off to see what those are obviously, so that’s a positive for 2016 that flow through plus the efficiency. So we feel pretty good about the margin we’ve been able to achieve and the continued automation trajectory. We have a great team at TPS and we feel good about that.

[Unverified Analyst:]

On the insurance and spatial opportunity in Australia and New Zealand, is there a way for us to size that, how much you think that revenue stream could be available in that region of the world?

[Frank Martell:]

It’s in the early stages, but what we are seeing is that there is opportunities to fund underwriting solutions from all the [indiscernible] and then in addition to it, we also have the ability to reap that compliance management solutions systems on platforms there. So it’s tough to put a number there, by the time we get to the 2016 outlook, we will give you some color on that.

[Unverified Analyst:]

And then just one more quick one, on the investments made in the business this quarter, I think you said most of them are weighted towards D&A, if you add back I think it was $6 million, it was said earlier on the call to D&A and assuming all fell to the bottom line, did I get you closer to the margins you like on D&A from an EBITDA perspective around mid 30%, 35% or so?

[Frank Martell:]

Certainly the margins would be up significantly from the 31%. The margin is still 31%, but I think if you add several million and you can do the math, but I think it does have some margins in the numbers you’re talking about, mid 30%s.

[Operator:]

Our next question comes from the line of Glenn Greene from Oppenheimer. Q - Glenn Greene A few questions. The first one just a segue on the last one, but I think there are a few comments, probably from Anand and maybe for Frank as well regarding sustained margins above 30% over the next three years, could you just put in context what kind of environment that assumes, what kind of mortgage market that does assume and used to have a goal of getting above – sustaining above 25% margins, so what’s the market environment in the context that 30% sustainable and with the benefit of your cost saves, with the full run rate of the $60 million, what’s the reasonable potential for the margins?

[Frank Martell:]

I think we feel great about hitting the $15 million this year. That’s helped us to really fund to some of the other reinvestments. So I think that’s a great accomplishment by the team. When we talk about sustainable margins, I think Anand always talked about two things, one is mortgage market in the $1.5 trillion level, give or take, and then the $60 million in cost saves is a couple of hundred basis points in margins. So if you look at where we are today in that kind of upper 20%s, 28% to 30% range, yet a couple of hundred basis points for the cost reduction program and then a little bit 100 to 200 basis points of the increment to get to $1.5 trillion that gets you into that mid 30s% margin. That’s the math we do to validate the mid 30%s. And then I think you have all the other benefits that are working behind the scenes like the scaling and the automation et cetera that should also increase our overall efficiency as we focus on market leadership and things like pricing. But the big moving part to get to the upper 20%s to the mid 30%s are that $1.5 trillion market and to get to $60 million which we are making good progress on.

[Glenn Greene:]

And then on the LandSafe acquisition, I think in the press release, you paid about $120 million for it, could you just basically size for us what the EBITDA that we should be thinking about on an annual run rate and the revenue as well, I know it’s not in your 4Q guide because that’s immaterial to EPS and EBITDA, but clearly the revenues can flow through for a quarter?

[Frank Martell:]

This is obviously a seasonal business. So in terms of the fourth quarter it tends to be a lower quarter for those folks. We haven’t provided a public number yet, we will definitely do that in terms of 2016. But as I mentioned in my remarks, from an EBITDA and EPS, it’s positive, but not a material upside in the fourth quarter because again largely because of the seasonality element to it. Revenue is going to be not de minimus, but it’s not again really that material to the fourth quarter because of the seasonality.

[Glenn Greene:]

I’m just trying to work on a full year basis, maybe I think Darrin was trying to get at this, but you sort of alluded to you paid a multiple much lower than CoreLogic’s multiple is, but is it reasonable to assume a mid single digit type EBITDA multiple was what the valuation was?

[Frank Martell:]

If you want to model, I think that’s okay.

[Glenn Greene:]

And then finally back on – I won’t go too much on to the data and analytics in the lost clients, but just to be clear, is it subscription base data contracts or the one-off one-time license contracts and it sounded like it was maybe $2 million, $3 million drag in the quarter from the combination of the supplier agreements and the market environment, but is it reasonable to be thinking this is like maybe $10 million drag on a full-year basis or it’s not the right way to think about it?

[Frank Martell:]

No, I think that’s too high. These are a number of small agreements, relatively small agreements that relate to resellers, small resellers or people that are using information to their workflow that are non servicers and lenders. And I can’t predict some of these – we’ve had – some people switch and come back, so I think it’s early days yet. A number of these agreements churn, just happened to be we had more in one quarter than we normally do.

[Glenn Greene:]

So you don’t feel like it’s anything systematically has changed or anything competitively really has changed?

[Frank Martell:]

Not at all.

[Operator:]

Our next question comes from the line of Geoffrey Dunn from Dowling & Partners.

[Geoffrey Dunn:]

Two questions for you. First, with most of the investment spend in the D&A segment this quarter, was it mix then that pressured the incremental margin in TIPS or was something else going on there?

[Frank Martell:]

I think what you’re seeing – if there is pressure, largely it’s project related. Anand mentioned TRID and there is a few other things. So suffice it to say that a lot of clients are preoccupied with a lot of regulatory stuff. So TIPS does have a component of project related revenue in the compliance and staff augmentation area. That’s really where if there was a margin challenge, that was the area there, because that’s just more volatile from a timing perspective. It’s become a smaller portion of the TPS revenue mix over time which is I think fine, but that’s the area I think what you’re alluding to.

[Geoffrey Dunn:]

And then just a follow-up in terms of your comments last quarter about ultimately being able to trend to the mid 30%s margin, and the new MBA forecast is basically calling for flat volumes through the next three years, what if your businesses actually have positive leverage to an improving purchase market?

[Frank Martell:]

As Anand said, I think purchase market is fundamentally at the healthier platform for the housing industry in general than refi which obviously is rate sensitive and other things. So it’s more fundamentally driven. So we like a purchase driven market. But from my perspective, probably the one area that – the area that we are scaling up and now that will be a beneficiary is the property valuation area. We have good scale in the other areas; we are playing mostly in underwriting and risk management, high-value risk management services today. So I think the area that will be a big beneficiary will be the valuations area, property valuation and all of it is manifestations.

[Geoffrey Dunn:]

What about on the data analytics side, I would assume there is going to be more analytical demand on the purchase transaction than the refi, is that a stretch or is that something that seems reasonable?

[Frank Martell:]

Certainly, I think – and I’d say valuation is not just at TPS, but there is a lot of data analytics. Obviously, we have the appraisal diagnostic tool; we have AVMs et cetera. So we have a fair amount of revenue in the analytics area. We run the valuation consortium for the US. So D&A will benefit from that and probably as we get more data intensive around property valuation, I think that will be driven – that will benefit from a purchase market. Actually on the D&A side, you’re also getting – compliance continues to be a big focus and that’s not necessarily – it doesn’t matter whether it’s refi or purchase, the general compliance environment is requiring clients to get much better at the underwriting process and much more efficient at risk management. So if you look at all things we are doing on spatial around whether forensics and the impact of weather on a property value for example, these are things we can bring that are very unique that we think will help to drive in a more fundamental purchase market.

[Anand Nallathambi:]

In general, Geoff, on the TPS side, our solution set, I think in a purchase market, the stability and moving away from churn of the refi would be very helpful for those services. And on the front end, data and analytics is going to be more heavily focused on underwriting, especially because in a purchase transaction and also the first time homebuyer transaction.

[Operator:]

Our next question comes from the line of Alex Veytsman from Monness, Crespi.

[Alex Veytsman:]

Just to further dig into D&A, within the D&A business, I mean [indiscernible] spatial, insurance and international segments are arguably the strongest businesses which have been growing double digits, how did the performance within these segments trend versus the previous two quarters? Was it similar or was there also some deceleration that you saw?

[Frank Martell:]

Alex, are you talking about the trends within those three areas?

[Alex Veytsman:]

Each of those three areas

[Frank Martell:]

Very similar.

[Alex Veytsman:]

So I guess those as staying intact and any softness is from the reasons you discussed on the call?

[Frank Martell:]

Yes. I think the performance is very solid. I’d say that the gap is in the incremental expectations, whether you’re up single digits or 3%. So I think in that regard, I think we talked through the areas that created that gap. But I think the results in D&A are still very, very solid. We are making a lot of progress on a lot of fronts and – but I think obviously we did have those cancellations that we talked about earlier in this quarter.

[Operator:]

Our next question comes from the line of Brandon Dobell from William Blair.

[Brandon Dobell:]

Couple of quick ones. Any concerns on your forecast that you will see a repeat of some of these data resellers shifting course or further RMBS moves, I guess I’m just trying to get a feel for – to think this was really one quarter thing, or if we’re going to be addressed of this issue Q4, Q1 or Q2 looking into next year too?

[Frank Martell:]

I don’t think we are going to be addressing this every quarter. You guys know, the RMBS market has been a tough one. I guess people pulling up their tent pegs is not surprising, whether a few more might do that over time and I don’t think to see as many do it one time, although I can’t read their minds. I think in terms of the data licensing, I just think that’s going to be – it’s not going to be a major issue going forward, not to say that we won’t have shifts from time to time, but as I mentioned earlier, Brandon, I think we’ve had people leave and come back. And this is mostly smaller, a lot smaller stuff. So I think you’re going to have some shifting around, but again I don’t think that’s going to be a major focus every quarter.

[Brandon Dobell:]

As you guys think about the targets for the more important next gen or Gen2 products and offerings you guys are coming up with, how do we think about that lining up with some of these issues like RMBS market, some of the smaller providers out there off the shelf versus customized, I’m just trying to get a better feel for where some of those products are going to be targeted and if there is a risk that the regulatory environment has changed the landscape compared to when you started looking at these product opportunities?

[Frank Martell:]

A lot of the next gen platform development is focused on usability and access, platforms to access the data. One of our great opportunities frankly, as Anand mentioned, we had so many diversified data sets and we’ve been working on monetization of those. We think there is tremendous growth opportunity and further monetization of data assets we already collect. The challenge is always to deliver those in a usable format at the right time to the clients. So a lot of that development is going to that type of activity which we think will – is not limited to one area or one client set. So I don’t see that as being impacted at all by the two discrete areas we talked about in D&A.

[Brandon Dobell:]

And then final quick one, you mentioned Q4 was going to be a small quarter for LandSafe deal, should we expect seasonality of that acquisition to look like the mortgage market or is it more weather pattern related, I’m just trying to get a feel for the peaks and valleys as we try and model it for next year?

[Frank Martell:]

If you’re modeling, I’d say it’s primarily mortgage driven, although I would say that over time as we add more data and analytics around it, there might be some smoothing. But at least initially, I’d say for modeling purposes, I would assume a seasonality pattern.

[Operator:]

That is all the questions that we have in the queue for today. So I would like to take the opportunity to thank everyone for participating in today’s conference. This now concludes the program and you may all disconnect your telephone lines. Everyone, have a great day.