CoreLogic, Inc.
Q1 2013 Earnings Call Transcript

Published: 25 Apr 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Quarter 1 2013 CoreLogic Inc. Earnings Conference Call. My name is Julianne, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Dan Smith, Vice President, Investor Relations. Please proceed, sir.

[Dan Smith:]

Thank you, and good morning. Welcome to our investor presentation and conference call where we present our financial results for the first quarter of 2013. Speaking today will be CoreLogic's President and CEO, Anand Nallathambi; and CFO, Frank Martell. Before we begin, let me make a few important points. First, we have posted our slide presentation, which includes additional detail of 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 included in the most recent annual report on Form 10-K. Our forward-looking statements are based on information currently available to us and we do not intend and undertake no duty to update these statements for any reason. Additionally, today's presentation contains financial measures that are non-GAAP financial measures. A reconciliation of these non-GAAP measures to their GAAP equivalents is included in the appendix to today's presentation. Finally, unless specifically identified, comparisons of first quarter financial results to prior periods should be understood on a year-over-year basis, that is in reference to the first quarter of 2012. Thanks, and now let me introduce our President and CEO, Anand Nallathambi.

[Anand K. Nallathambi:]

Thank you, Dan, and good morning, everyone. Welcome to CoreLogic's first quarter earnings call. I will bring -- begin my remarks today with an overview of our first quarter operating results. I will then recap the progress we are making against our 2013 business plan, as well as our strategic growth initiatives. Frank will then cover our financial results and we will end the call with Q&A. CoreLogic delivered double-digit revenue growth with significantly higher levels of operating and net income, earnings per share and adjusted EBITDA in the first quarter. Our high margin Mortgage Origination and Data and Analytics segments delivered strong top line growth in the quarter. Importantly, all 3 of our operating segments outperformed their respective markets. For the first 3 months of 2013, we are ahead of our targets for Project 30 cost reductions, free cash flow conversion and repurchases of our common stock. We also continue to make significant progress on the Technology Transformation Initiative. Our first quarter revenues were up about 11%. Revenues in our Mortgage Origination Services and Data and Analytics segment increased about 25% and 10%, respectively, as we gain market share and capitalize on higher demand for our must-have Property Information Analytics and Services. These high-margin segments accounted for approximately 85% of our total first quarter revenues. During the quarter, revenues in our Asset Management and Processing Solutions segment contracted by almost 11% compared to an estimated 15% decline in overall market volumes. We also exhibit certain low or unprofitable product lines over the past 12 months. During the first quarter, our Mortgage Origination Services segment continued to benefit from elevated levels of refinancing, as well as market share gains in the tax servicing business. We are benefiting from an increasingly complex regulatory environment and a trend by clients and prospective clients to seek out partners who offer stronger internal controls and processes. As a result of this trend and our strong underlying operating performance, we expect to continue to outperform market volumes over the balance of the year in this segment. We continued to expand our D&A footprint during the first 3 months of 2013. We grew data licensing and analytics revenues and expanded our advisory services business in response to our clients' need to navigate through today's evolving regulatory and compliance environment. We also grew our geospatial business, which leverages CoreLogic's unique property-related data assets at double-digit rates. As the housing and mortgage industries continue to strengthen and we extend the reach of our property data analytical tools and services into new verticals, we expect to continue to deliver high single to double-digit growth in D&A revenues. In addition to delivering double-digit top line growth, CoreLogic also expanded profitability during the first quarter. Year-over-year, adjusted EBITDA increased almost 16%. Boosted by Project 30 savings and a favorable mix, adjusted EBITDA margins were up 130 basis points from the first quarter of 2012. We believe we are solidly on track to reach the sustained 30% EBITDA margins as we exit 2013. CoreLogic's increased profitability and efficient management of working capital resulted in continued strong free cash flow generation in the first quarter. We used a significant portion of this cash flow to repurchase our common shares. Our continued aggressive share repurchase program reflects our view that, in addition to reinvesting for profitable growth and operating efficiency, this remains an attractive avenue for rewarding our shareholders. By almost any measure, the first quarter was a strong start for CoreLogic from a financial perspective. Our focus and highly integrated business model, built around industry-leading data, analytics and services, positions us well to capitalize on the opportunities presented by an improving housing market. Over the past 2 years, CoreLogic has delivered progressively stronger operating results. Our consistent track record of delivering strong revenue and profit growth and significant margin expansion is the result of our relentless focus on the following strategic imperatives

[Frank D. Martell:]

Thanks, Anand. Good morning, everyone. Today, I'm going to review our first quarter financial results. I'll also provide an update on our cost-reduction programs and the Technology Transformation Initiatives or TTI. I'll conclude with a brief discussion on free cash flow, our plans for capital return to our shareholders and 2013 financial guidance. As Anand just mentioned, CoreLogic delivered a strong set of financial results in the first quarter. Our success is the result of a singular focus on the consistent business plan centered on profitable growth, margin expansion and free cash flow generation. We continue to build on our core strengths in data and analytics and our must-have services business while we pursue a strategic plan, which we believe will fundamentally transform CoreLogic's underlying financial and business model over the next several years. From a financial point of view, the main highlights for the first quarter were

[Operator:]

[Operator Instructions] Your first question comes from the line of Darrin Peller, Barclays.

[Darrin D. Peller:]

I just want to start off with the -- when you look at actually run rate, your EBITDA for the first quarter was about $116 million. And when you think about that relative to your guidance for the full year, I mean, I understand first quarter was better than normal would be the case for seasonality-wise. However, when you consider the fact that you are spending more frontloaded-wise on TTI in the year, and there still are some seasonality, seasonal implications in the quarter versus other parts of the year would be, your EBITDA guidance of $460 million to $475 million it just makes me wonder a little bit given that your first quarter alone, extrapolating off that number, gets you to the midpoint. So can you just explain, I mean, is there anything that we should expect that's going to sort of depress EBITDA in the next few quarters, maybe it's around technology spending or anything else that I'm not thinking about properly?

[Frank D. Martell:]

Darrin, this is Frank. And I think, first of all, you have to factor in the refinancing trends, which has somewhat muted the normal seasonal patterns on the origination side. I think you also have to factor in the -- in the default area, foreclosure starts and delinquent loan volumes continue to drop at double-digit rate. So I want to make sure we're not over our SKUs [ph] in terms of projecting anything out of line with the market trends in that area. So I think those are the 2 biggest drivers. If you look at patterns in the business, obviously, we feel pretty good about the start of the year. But I think it's a little early to talk about changing our guidance for the full year.

[Darrin D. Peller:]

Okay, all right. Let me just follow up on the Data Analytics growth. I mean, again, you're trending near 10% overall. The margin was obviously down, and I know some of that was tax spending. I think Dan or you guys had mentioned earlier something to the effect of how it was really mostly just tech, the TTI initiatives. Can you explain what the growth rate of the EBITDA, D&A EBITDA would have been, maybe if I missed that on the call earlier, I'm sorry, but what would it have been without the sort of one-time or unusual items? Would it have been more similar to revenue growth?

[Anand K. Nallathambi:]

Yes. So I think in the final quarter of last year, the EBITDA margin was a little over 26.5%. So we've climbed in the first quarter of this year. And obviously, we're down just marginally from the first quarter of last year. The big drivers really are the TTI spending that you've talked about, Darrin, but also, as I mentioned in my remarks, we are spending a fair amount of money, as we did in the fourth quarter of last year, on ramping up our capacity and our docs solution business. And that's one of the things. As Anand talked about, we're seeing a lot of demand from clients for services related to compliance matters. So we -- the good news is the demand is outstripping the supply. The bad news is, we have to put in the capacity to handle the demand. So we expect that investment, over the first half of this year, will continue to make sure that we have the right capacity. And the right -- frankly, the right product and service offering in that area. And the other area that's been a little weak for us, which is smaller businesses, the -- is the Teletrack, the specialty credit business where we've had regulatory issues in a number of states. And that whole market has been under stress in the brick and mortar payday lending area. So that's been a little soft for us coming out of the year. So those are the big drivers of the current pattern and the D&A margins. I'd say that we don't -- we haven't changed our long-term perspective that this is a 30 margins business.

[Darrin D. Peller:]

All right. That was the Atlanta? I think if I remember correctly, the document -- was that Southeast? This is an actual plant you're adding, right?

[Frank D. Martell:]

We -- yes. It's actually -- it's in Charlotte.

[Darrin D. Peller:]

Charlotte, okay. All right. Just a last question on cash flows. You have -- again, $65 million or 57% or 56% of your EBITDA. Just help us understand, I mean, is that -- should we just assume that now we're on the 55% plus? I mean, is that going to stay consistent as a conversion? It's generally thought of as 50%, but it's obviously, continuously, they're coming in better than that. I mean, any moving parts of the quarter that should not be reflective of future quarters?

[Frank D. Martell:]

We didn't have -- the big thing is the timing of tax payments, pretty much. So in the second quarter, we'll have our estimated tax payments will kick in. So that's the big moving part. Now that we're through a lot of the heavy restructuring than we were in certainly 2011, the tax rates are normalizing around 40%. So that'll also make sure that, that's more consistent. And then the other thing that we do have that's a little bit different is the pattern on TTI spending, which will be, I think, a little -- it will fluctuate marginally. It's not a major impact, but it will fluctuate marginally by quarter.

[Darrin D. Peller:]

All right. Just last question and I'll turn it back to the queue, Frank. I mean, can you help frame for us or maybe -- Anand you can help us with this as well. The deal sizes or the [indiscernible], it's probably in data analytics primarily. But what types of deals are you actually looking for in terms of scale?

[Anand K. Nallathambi:]

Darrin, this is Anand. That's difficult to say. We -- obviously, there's a -- we look at a lot of different sizes. But one of the things that we are very careful of is the accretion and to make sure that something that really takes us to the next level in terms of leveraging our data sets. So I mean if you look at CDS Mapping, that was in the different price scale. And Case-Shiller was in a different level. So it's very difficult to put a number on it.

[Operator:]

Your next question comes from the line of Kevin McVeigh, Macquarie.

[Kevin D. McVeigh:]

Hey frank, as we think about taking the buyback up to 5 million from 3 million, just any thoughts around that relative to acquisitions? I mean, obviously, with the stock, at the level it is, it will probably make sense to deploy more capital there. But how should we think about buyback versus acquisitions? Any thoughts on that would be helpful.

[Frank D. Martell:]

Thanks, Kevin. We're not constrained, I think, either way. So we're going to be, as we have been, really, aggressive on share repurchase front. And we can afford to do that with our cash flow and with careful management, so I don't see any -- it's not a mutually exclusive thing. We could -- we feel we could do both. As Anand mentioned though, I think on the acquisition front, we just want to make sure that our acquisitions are disciplined and that they're focused on the D&A segment as well as tax and flood on the MOS side.

[Kevin D. McVeigh:]

Got it. And then just -- it sounds like we're taking a pragmatic and conservative approach to the guidance, but we did take the buyback up and didn't change EPS at all. Is that just conservative? Or is that the mechanics of when it'll be deployed? Because I know ultimately -- when you buy, ultimately it will impact the impact from an EPS perspective.

[Frank D. Martell:]

Yes. It's more of we just spread it into the second half of the year. So that's why it had a more of a marginal impact.

[Kevin D. McVeigh:]

Got it, got it. And then just any -- I know -- on the refinance range, any change in amount that's kind of origination or rather purchase versus refinance? Or how are we thinking about the $1.45 to $1.55 based on what we've seen today, year-to-date?

[Frank D. Martell:]

It's still pretty consistent. We were happy to see the HARP program extended to 2015 from a refi support perspective. But the percentages of total volumes remain the same. They're expected to tick down into the -- from the 70 -- low 70s to the mid-60% range as we move forward. But right now, we're still seeing kind of a 70-30 split. Although purchase activity definitely has been picking up, as you probably know.

[Operator:]

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

[Brandon Burke Dobell:]

Frank, I'm looking for a little more, I don't know, help or color on the pacing of the D&A revenues through the balance of 2013. I know there's been some -- things that kind of moved back and forth the past several quarters, which can move the growth rate around by a couple percentage points. As we think about moving forward from Q2 into the back half of the year, growth rate-wise, should we expect a modest acceleration? Is there some stuff that happened at the back half of '12 we need to be kind of reminded of? It'll -- it could depress the growth rate because of tough comps. I mean, whatever kind of help you could give us. Looking how to model that out would be helpful.

[Frank D. Martell:]

Yes, I think from the comp perspective, the fourth quarter, we had a rush of the advisory service type revenue. So that's probably a tougher comp in the fourth quarter from a revenue perspective. But I'd say, you'd see the same kind of growth pattern that you saw in the first quarter, fairly consistent.

[Brandon Burke Dobell:]

Okay, okay. Within the MOS segment, you guys consistently have talked in the past, at least the past I think 3 or 4 quarters, about taking market share and maybe a little more color behind, a, what does that mean for you guys? Is that just more transactions? Or is it more stuff per mortgage file at the same customers? And maybe some comments around the sustainability of that trend. How much higher do you think you can push the share. And maybe, kind of within that, if you separate out kind of the large customers from the rest of the market and how do you think about market share opportunities in those 2 larger buckets?

[Frank D. Martell:]

I would say, I mean, I'll -- but I'd say that from my perspective, there's incrementally more opportunity on the share gain front. I think it comes from a couple of factors, Brandon. One is people still do this type of work in-house and there's some fragmentation and smaller players. So I think as Anand talked about earlier, the flight to quality has definitely been a in favor of CoreLogic. Our services and our ability to meet SLAs in this businesses are, I think, are pretty darn good. So I think we got a good industry reputation. So as clients look to move away from small vendors that perhaps are not able to provide assurance on the compliance front, that favors CoreLogic. So I think we're seeing that those types of trends favor us. And then frankly, the automation and just the ability to take this volume on efficiently, effectively has also helped us to a great degree across each of the major MOS businesses.

[Anand K. Nallathambi:]

This is Anand, just to add to what Frank was saying. We are also seeing that the growth of subservices is really actually helping us. The -- well, we have seen -- volume losses are in the AMPS segment. And where we've seen the gains are is where our high-scale, high-operating leverage businesses like tax. So the trade off, so far, has been really profitable for us.

[Brandon Burke Dobell:]

Okay. That makes sense. And then final thing, within the, I guess, the broader business. Should we think about TTI or the kind of the platform changes you're making as opportunities to maybe drive more kind of superior subscription or true subscription revenue through the business? Or do you think it's just going to be -- the TTI will allow you to serve a different customers set, but with the same kind of contracts or kind of transaction set ups you already have?

[Frank D. Martell:]

I think it's going to do both. Probably, the bigger dollar opportunity in the near-term is around penetrating markets that we haven't been able to do with the kind of distribution platforms that we have. Things like the middle market is an example there, where you have an Internet-type delivery mechanism, where you can reach more people. You have alerts and you have other types of products that make the data more consumable. So I think that, in the near-term. But I think in the long-term, it helps facilitate a shift toward the D&A. Don talked about the 50% target. Because I think it does allow us to reach more folks with the data set and analytical tools versus the servicing businesses where you have lots of throughput and those are big, big industrial size kind of throughput engines.

[Operator:]

Your next question is from Brett Horn, MorningStar.

[Brett Horn:]

You mentioned TTI being a multi-year program. I was just wondering if you could give us some color on the trajectory of spending. Should we expect significant spending on TTI past 2013? And then also, when should we expect to see the cost savings start to show up?

[Frank D. Martell:]

Sure, Brett. So basically, when we talked about -- there's cash. There's 2 elements to the costs. One is cash and one is noncash. And the cash costs relates primarily to the transition of the data center infrastructure as it relates to the software platforms. We have to replatform our software to make it compatible with the cloud-based environment, as well as we have a contact with Dell, so they're providing certain services. So the cash spend are primary around Dell support and the re-platforming of the software. And then if you look at the -- on the hardware side and the noncash side and the infrastructure side, there's more around accelerated depreciation and that type of thing. In 2013, I'd characterize, broadly speaking, the expense levels is similar level to 2012, although it was more concentrated in 2012 because we kicked off the initiative in the middle of the year, so you'll see a more dispersed spending. We will spend the money throughout '13 and '14 because the plan is in early '15 we'll have both of our legacy data centers transition to a cloud-based environment in a Dell facility. So the spending will be primarily '13 -- '12, '13 and '14. I'd say '14, relatively less than '13 is the way it should happen. And then the savings is about $35 million to $40 million per year on current -- against current run rate, beginning in 2015. So you will see that kind of savings beginning in '15.

[Operator:]

Your next question comes from the line of Carter Malloy, Stephens Inc.

[Lauren Slabaugh:]

This is Lauren Slabaugh for Carter. My question is on the advisory services revenue. We know it's sort of project-based, so could you guys give any guidance on how we think about modeling it going forward or how sustainable that revenue stream is over the next few years?

[Frank D. Martell:]

Yes. We think it's -- it's a -- I'd say right now, that revenue stream is in a rapid growth phase where people are -- because the regulations themselves in the overall regulatory environment is still evolving. So regulations are being written, et cetera. So I think this year, we'll see a rapid growth phase. Next year, we believe, likely to be a kind of a similar growth phase with the following year, perhaps, smoothing out a bit as people get through the initial reviews and audits and put their compliance infrastructure in place based on unknown set of rules, frankly. So this year, next year, probably a good solid high growth. And then the following year, probably flattening out as you get out there. But that's hard to tell in the outyears.

[Lauren Slabaugh:]

Great, that's helpful. And then I know you all have spoken a good bit about AMPS, but should we assume it decelerates from here or -- on top line and just we hold margin?

[Frank D. Martell:]

Yes, last year. So last year, we actually grew 2% versus a market decline in the double-digits. A lot of that growth related to, I think, as you may remember, too, we did a lot of loss mitigation work for several large clients around things like loan modification. As that work tails off a bit, we'll be more subject to the overall market trends than we were last year. So I think the first quarter pattern, we're kind of anticipating, will be one that will continue certainly in the near-term in that business.

[Operator:]

You have no questions at this time. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.