Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Verisk Analytics, Inc. (NASDAQ:VRSK)

Q3 2011 Earnings Conference Call

November 2, 2011 8:30 AM ET

Executives

Eva Huston – Treasurer and Head, IR

Frank Coyne – Chairman and CEO

Scott Stephenson – President and COO

Mark Anquillare – President and CFO

Analysts

Michael Meltz – JPMorgan

Bill Warmington – Raymond James

Kelly Flynn – Credit Suisse

Suzie Stein – Morgan Stanley

Eric Boyer – Wells Fargo Securities

Robert Riggs – William Blair & Company

James Friedman – Susquehanna Financial Group

Andrew Jeffrey – SunTrust Robinson Humphrey

Operator

Good day, everyone, and welcome to Verisk Analytics Third Quarter 2011 Earnings Results Conference Call. This call is being recorded. At this time, for opening remarks and introduction, I’d like to turn the call over to Verisk treasurer and head of Investor Relations, Ms. Eva Huston. Ms. Huston, please go ahead.

Eva Huston

Thank you, Tequila, and good morning to everyone. We appreciate you joining us today for the discussion of our third quarter 2011 financial results. With me on the call this morning are Frank Coyne, Chairman and Chief Executive Officer, Scott Stephenson, President and Chief Operating Officer, and Mark Anquillare, Chief Financial Officer. Following comments by Frank, Scott and Mark, highlighting some key points about our strategic priorities and financial performance, we will open the call up for your questions.

The earnings release referenced on this call as well as the associated 10-Q can be found in the Investor section of our website, verisk.com. The earnings release has also been attached to an 8-K that we have furnished to the SEC.

A replay of this call will be posted on our website and available by dial-in for 30 days until December 2nd, 2011. Finally, as set forth in more detail in today’s earnings release, I will remind everyone that today’s call may include forward-looking statements about Verisk’s future performance. Actual performance could differ materially from what is suggested by our comments today. Information about the factors that could affect future performance is summarized at the end of the press release as well as contained in our recent SEC filings.

With that, I will turn the call over to Frank Coyne.

Frank Coyne

Thank you, Eva, and good morning. In third quarter 2011, we delivered strong performance of 18.4% revenue growth and 25% diluted adjusted EPS growth. We performed well in many of our businesses and our recent acquisitions contributed as well. Risk assessment grew 2.7% for the quarter and 3.9% year-to-date, as our continued value to customers is reflected in our revenue growth.

Excluding the property specific category risk assessment growth in the third quarter was closer to 5%. We faced some challenges in our property specific revenue, which we will discuss on this call and that weighed on risk assessment growth in the quarter. In the quarter, Decision Analytics revenue grew over 30% and our insurance-facing solutions and Decision Analytics grew almost 17% of organically. Our health care solutions revenue grew over 25% organically, as we implemented our solutions for clients. Supply chain remains an area of focus and promise for us.

Overall, our organic revenue growth was 7.6% in the quarter and also year-to-date. Decision Analytics’ organic growth in Q3 was about 12%, driven by both accelerated growth from insurance-facing solutions as well as the strong growth in health care. The mortgage market continues to represent a challenge for us as well as other companies in the space and our revenue declined in the quarter.

We are keenly focused on our mortgage business and managing it through the volatile macro environment while not losing site of the 90% of our business that has both near-term and long-term growth opportunities. We continue to have conviction around our margin and overall profitability. We are pleased to deliver 25% growth in diluted adjusted EPS and 16% growth in EBITDA while expanding margins excluding recent acquisitions to almost 46%.

As always, we remained focused on delivering shareholder returns to growth in our business, disciplined acquisition, and our share repurchase program. While no new acquisitions were announced in this quarter, we are seeing the benefit of both financially and from a customer perspective of the 2Q acquisition. We also continue to hunt for the right opportunities. In share repurchases, we bought a 123 million of shares, a lower amount in 2Q as we continue to manage our buyback as part of our broader capital allocation plan including acquisition.

As we move through the final quarter of 2011, we are focused on positioning our business to perform both through challenging times as we have for the past few years as well as into the future when we see our economy return to a better growth environment. While our strong performance in a weak environment is notable, we believe we will perform even better as our clients see better performance in their businesses.

Improvement at our customer’s hand in the economic outlook, we’ll make it easier for them to spend incremental dollars of new solutions and re-engineering processes that may have been delayed in a weaker environment. Our customers have thrown their interest in new solutions during our customer conference n October, when we met with about 150 executives from leading P&C insurers.

Now, I’ll turn it over to Scott to talk about the progress we are making in a number of our business areas.

Scott Stephenson

Thank you, Frank. As we further our growth agenda, we remained focused on innovation as an important part of our business process. As you hear about new developments such as our claims tools for REO properties that is real estate owned by the lenders through a foreclosure process, or our vehicle symbols as part of our risk analyzer suite were nucleus, which is our new delivery platform for Verisk Health (inaudible) Solutions or our expanding insurance catastrophe modelling solutions.

You should know there are many other ideas behind those that we are working to develop and eventually commercialize. It’s important for us to be innovative as none of our markets stand still. This also requires the commitment to invest which we continue to do.

Speaking of growth, the pieces of our health care strategy are coming together nicely and the traction we’re feeling in that business is positive. While you can see our quarterly results in our supplemental data, we’re pleased with 25% organic revenue growth in the quarter and important point to me is that we’re seeing the synergy of bringing Bloodhound and Health Risk Partners into the fold. We’re going to market today as Verisk Health, which is being well-received by our customers.

With tools for population management, performance measurement and compliance and the payment integrity, there’s a lot of opportunity to grow. And while our business with a run rate of over $100 million of revenues reaching a meaningful scale for us, the size of our revenue today pales in comparison to about $2.5 trillion of annual health care spent. I’m optimistic and our team is optimistic that we can do more.

We continue to be encouraged about 3E and our supply chain team as it develops. We’re seeing many areas of crossover with solutions we provide in weather and catastrophe analytics, cargo solutions and others. And we believe that interesting acquisition targets as well as organic growth exist in this space.

Let me turn it over now to Mark to talk about our financial results.

Mark Anquillare

Thank you, Scott. As Frank noted, in the third quarter, we delivered 18.4% revenue growth and 7.6% organic revenue growth. For the third quarter, our Decision Analytics segment revenue continued to lead with 32.5% growth. Decision Analytics organic revenue growth, which was 11.9% in the quarter, excludes the acquisition of Crowe Paradis, 3E, Bloodhound and Health Risk Partners.

This quarter, we have introduced supplemental revenue within Decision Analytics segment to help you follow the changes as they relate to the vertical hand market themes, in addition to the (inaudible) loss prediction and loss quantification. We have not change in any of our historic financial results. We hope this transparency helps your understanding of our historical performance and opportunities going forward.

A few days ago, we provided historic supplemental data back to 2008 for your reference. That data was filed in 8-K and it’s also available on our Investor Relations website. The third quarter release contains the data in the same format for this quarter. In our supplemental data, we provided you Decision Analytics (inaudible) theme insurance, mortgaging financial services, health care and specialized market. We have grouped revenues by the primary end market of the various parts of our business.

In insurance, we have our insurance fraud solution including claim search, our catastrophe modelling solutions from ARR worldwide, and our insurance [Audio Gap] Decision Analytics.

In mortgage and financial services, we included our (inaudible) underwriting and forensic audit tools facing the mortgage market as well as strategic analytics business which should also serve our consumer finance markets. This grouping is the same as with mortgage on previous calls. Health care includes all of our tools for Verisk Health including the DxCG, Share Med [ph], D2Hawkeye, HDI, Bloodhound and Heath Risk Partners. And finally, specialized markets include our Climate Risk Analytics as well as 3E component of our supply chain risk management solutions.

I will reference somehow on this supplemental data. They died into the second performance. Within Decision Analytics, our loss quantification solutions continue to standout in this quarter with 29.8% revenue growth all organic. We continue to benefit from our 2010 new contract on the claim side.

Also, all the storms you read about including Hurricane Irene helped as many of our customers submitted higher than usual claim volumes. We also continue to see growth in our underwriting tools and newer solutions, such as content estimations with in-loss modification. In the quarter, we had launched XactPRM, our property repair and maintenance tool, which is aimed at the REO market, and we’re seeing interest from potential customer.

The revenue growth in fraud identification detection was 16% in the third quarter and 4% organic. We continue to see solid performance in our insurance fraud and related solutions in the quarter and Crowe Paradis contributed to the total growth. Our health care fraud assets performed well, with double-digit growth, as we implemented signed contracts for our health care fraud solutions.

Health care fraud growth was also bolstered by the addition of Bloodhound in the quarter. Also within fraud, our mortgage business declined 4.9% in the quarter in comparison to the peak quarter for mortgage revenue in the third quarter of 2010 as the mortgage remained bumpy. We were not able to fully offset the more than 20% decline originations versus 2010 with new customers increase usage of origination tools. Forensic audit revenues also declined in the quarter as increased volumes from certain customers was more than offset by declining volumes from one large customer.

We continue to be in constant conversation with our customer in ways we can help. We’ve seen a good pickup from our undisclosed (inaudible) tool and continue to work on new solutions to meet customer needs. However, we expect the mortgage market will remain hard to predict for the remainder of 2011 and, perhaps, beyond.

In loss prediction, total growth was 69.9% from the third quarter and 14.2% organic. Our catastrophe modeling solutions performed well in the quarter as we continue to add customers and sell new solutions. Large catastrophe events in 2011 have caused insurers and reinsurers to reassess their modeling needs and we’re seeing benefit.

In health care, we had double-digit growth in the third quarter and we’re seeing a positive response from customers on our new solutions from health risk partners as well as our existing solutions. We remain focused on generating new sales in health care. Our climate risk analytics business growth float as we cycled through a large contract we won in late second quarter of 2010 and as the government – the US government that is – looks to stretch out implementations of the contracts due to budgetary constraints.

In 2011, our total growth has benefited from the addition of 3E and Health Risk Partners in that grouping.

Turning to risk assessment. We grew revenue 2.7% in the quarter. Our industry standard programs grew 4.8% in the quarter, a continued reflection of the value base price increases from January and a moderation of premium declines at our customers, as well as new customers in 2011. Our premium linkage solutions also continued to add growth.

Our property specific information revenues declined 4.1% in the quarter because of lower volumes at certain customers we’ve discussed previously. The reasons behind the decline of property specific revenue are mix of a generally weak business environment as well as some changes in processes at certain customers driven by expense control. We have not lost any customers.

About 85% of our revenue in risk assessment is based upon subscriptions and long-term contracts, with 99% renewal rates, creating recurring in fairly predictable revenue of vast majority of the segment.

Overall, we are comfortable at enterprise performance even in the face of some specific market issues for the mortgage. Excluding mortgage business, organic growth in the quarter was over 9%. We also continue to manage the expense side of the business very closely.

EBITDA for the third quarter was $151 million as outlined in the Table 3 of our press release. EBITDA increased 16.2% for the quarter and our EBITDA margin was 44.4% as our consolidated EBITDA margin increases in the third quarter compared to 43.9% in the second quarter of 2011, and 42.9% excluding the benefit of the acquisition related liability earn-out.

In the quarter, our risk assessment margins were 50.5% versus 48.7% in the third quarter of 2010 and 48.5% in second quarter 2011. As we discussed in the second quarter, we had some accelerated stock option expense related to employees who attained age 62, resulting in less expense in the third quarter. We have to reduce certain cost, including the add-in of another cost which benefited the margin.

And margin in Decision Analytics was 40.1% third quarter versus 38.6% in the second quarter of 2011, excluding the acquisition liability adjustment benefit. Improving underlying margins for several of our businesses as well a mix shift to higher margin solutions benefited us in the quarter, partially offset by the impact from the mortgage business.

Our interest expense was up a little more than $6 million versus third quarter of 2010, kind of about flat with second quarter of 2011. Also, just after the quarter ended, we closed on an amendment to offer credit facility, which increased the facility by $100 million to a total of $700 million, while also reducing the pricing, extending maturity to October of 2016.

With the public bond we completed in the second quarter and our upsized revolving credit facility, we have significant debt capacity available to execute on our strategy. We ended third quarter with $160 million of our revolving credit facility drawn. Our reported effective tax rate was 39.2% for the quarter, down a bit due to favorable audit settlements, adjustments for actual state filings in the quarter, the continued execution of our tax planning strategies, and the benefits associated with R&D tax legislation.

Coming down to the next income line. We focused on the adjusted net income and non-GAAP measure, which we defined, in the current period, as net income plus acquisition-related amortization expense, less the income tax effect on that amortization. Our adjusted net income increased 14.7% to $76.3 million. Adjusted EPS on a fully diluted basis was $0.45 for third quarter of 2011, an increase of 25%. The adjusted diluted share count was $171.2 million in the quarter, and on September 30th, 2011, our diluted share count was $170.1 million shares.

We were active in the quarter with our share repurchase program, purchasing approximately 3.7 million shares. As of quarter end, we had a little less than 50 million left under our share repurchase authorization. As we have purchased approximately 340 million worth of shares year-to-date, I don’t anticipate us going beyond the remaining authorization in 2011.

Turning to the balance sheet. As of September 30, our cash and cash equivalence were about $53 million. Total debt both in short-term and long-term were just north of $1 billion at September 30th, about flat the second quarter of 2011, as acquisition closings were quite and we funded share buybacks largely with cash on hand and cash from operation.

Our debt-to-EBITDA ratio was about 1.8 debt to trailing 12 months EBITDA at quarter-end, well within our covenant, in the zone with our target leverage level of two times. Our debt capacity is about $700 million and will continue to grow with our free cash flow generation and as we add EBITDA from acquired companies.

Free cash flow in the first nine months of 2011 which we defined as cash from operations less capital expenditures was $275.5 million, an increase of $57.9 million versus first nine months of 2010. Free cash flow increased 27% year-to-date. We’ve benefited from strong profitability and also a temporary deferral of a third quarter tax payment resulting from a federal disaster declaration due to Hurricane Irene for certain countries in New Jersey, including where our corporate headquarters is located.

We’re still (inaudible) the tax payment in the fourth quarter so you’ll see the benefit reverse itself then. Without the tax deferral and related impacts, our operating cash flow would have been up about 17% and free cash flow would’ve been up about 8%.

As you remember we discussed major upgrades for our mainframe environment and related software earlier this year, which increased our CapEx year-to-date. Our CapEx in the third quarter was lower as a percent of revenue than the second quarter, about 4.1%. But we’ll finish the year in an elevated level versus 2010 due to those investments.

We continued our strong free cash flow conversion of EBITDA, which was 64% for the first nine months of 2011. We are pleased with the results in the quarter.

And with that, I’ll ask the operator to open the line for questions.

Question-and-Answer Session

Operator

(Operator instruction) Your first question comes from the line of Michael Meltz.

Michael Meltz – JPMorgan

Thank you. I think I have two questions for you. Can you talk a little bit about the expectation going forward? The organic growth rate in the third quarter, I guess, is on par with the year-to-date. What’s the expectation going forward? You talked a little bit about within analytics, mortgage remains tough, and I guess you’re saying AER might moderate. But what should we expect for this?

Mark Anquillare

Hi, Michael. I think what we feel is strength throughout the business. So I think we continue to believe that organic growth will continue to move kind of down the path that we’ve seen over the first nine months. The caveat to that is mortgage that’s still really difficult to predict.

So we don’t have great visibility into that, which could be slightly lower than what we’ve seen for the first time.

Michael Meltz – JPMorgan

Okay. And then, just a follow-on question to that. I think you had closed one, maybe two of the acquisitions fourth quarter last year. So there’s some cycling. Can you just remind us what to expect on the inorganic side for the upcoming quarter versus a year ago?

Mark Anquillare

So, in the upcoming quarter, the fourth quarter, we acquired both 3E and Crowe Paradis in these very latter stages of fourth quarter 2010. There were only a few days in December where we owned both those entities. So you won’t see too much of a grow-over as you think about the fourth quarter. There’s just a few days, maybe a couple of weeks in 2010 without revenue associated with those two entities.

Michael Meltz – JP Morgan

And then the other question for you, just on the property specific rating business, the fire suppression data. Can you talk a bit more about what’s going on there? I understand what you’re saying about certain customers you’re not – you haven’t lost contracts. That being said I don’t think you’ve had a downed quarter of revenue there in years. So, can you just give us a little bit more detail, please?

Frank Coyne

Yes, Michael. This is Frank here. It’s really a mixed bag that we’re seeing. Part of it is the economy as less business is being written, as we’ve got vacancies in some of the commercial properties. Some of it had to do with customers repositioning their portfolios. And we’ll see some return of that business as they work through that.

Some of it has to do with process changes within companies where they basically have cut back on their commercial writings for a period of time. And we would expect to see that return once they’ve cycled through their process changes. And some are just redesigns of their own internal processes as a result of expense controls. So, the positive is it’s a whole mixed bag of things and not a trend that we’re seeing in the use of our products.

Michael Meltz – JP Morgan

Okay. All right, thank you for your time.

Operator

Your next question comes from the line of Bill Warmington.

Bill Warmington – Raymond James

Good morning everyone.

Frank Coyne

Good morning.

Bill Warmington – Raymond James

I want to see if you could comment on how – see where the insurance premiums are trending on commercial PNC side. You mentioned you saw some benefits there this quarter?

Frank Coyne

Yes. I think as we have observed in the past, our sense was that the market has bottomed out and we were seeing some positive trends. The surveys would indicate that that is what is happening. I think more importantly the results that are being announced by the industry, all of which are our customers, would indicate that premiums are on the rise. And specifically with regard to our line of business, we are certainly seeing that. So, there are positive trends going forward.

Bill Warmington – Raymond James

And I wonder if you could comment on – a little bit about what’s behind the strong pick-up in health care. I think you’ve reach some sort of tipping point in terms of how companies are looking at health care spending?

Frank Coyne

Well, I would make a couple observations there and maybe Scott would add. And that is that we’re seeing growth in both our frontend and backend – the fraud solutions and the underwriting analytic solutions that we have there. So, we’re seeing positive signs in both parts of our business.

Also we had commented in the past that we had written contracts that we were in the process of implanting. And we are seeing that implementation complete now and just beginning to be able to recognize that revenue.

Bill Warmington – Raymond James

Okay. And then final question was that you had mentioned some – well, it sounded like pent-up demand and the insurance companies coming out of your customer confidence in October. When do you think that that starts to flow through for you in terms of revenue and what segments do you think benefit from that?

Frank Coyne

Well, what we specifically saw is that as we introduced our – some of the ideas that we have around new solutions – we saw a receptivity to understanding the value of those solutions.

So, it is hard to tell when the purses will open back up, as clearly as the industries health returns, so the results aren’t bad to the industry. But as premium writings begin to increase, we would expect to see a pick-up in the new solutions that we’re offering.

Scott Stephenson

I will just add to that, that one of the strong themes that seem to have caught the imagination of a lot of the insurance companies is the opportunity to better understand the weather and respond and prepare for it. And between climate science and in our capacity modeling, we really have a very unique set of capabilities.

To Frank’s point, it’s not a spike, it’s more a moving that intellectual property into that processes, which I think will occur steadily but I don’t think it’s a step function so much as just a kind of a gradual expansion of what it is we do with the company.

Bill Warmington – Raymond James

All right. Well, excellent. Thank you very much for the insight.

Operator

Your next question comes from the line of Kelly Flynn.

Kelly Flynn – Credit Suisse

Thanks. A couple of questions, just first on mortgage. I know you’ve said several times it’s very unpredictable but you said that last quarter and then it’s declined. So, I’m wondering if you can just, maybe give us a little bit of guidance on how you would advice us to model it. You think that business declines over the next couple of quarters or is it really so unpredictable that you have absolutely no idea at this point in the quarter?

Frank Coyne

Well, I would say a couple of things and certainly my colleagues could add to it if they desire and that is that, yes, it is unpredictable. Because you see what we see happening the macro environment, so you never know what might come out of Washington, for example. But as we look at our business – I mean we do have some sense of customer uptake on some of our new products. We just do not know what an individual customer would say. So, I’m not expecting a decline up from this quarter but it’s really hard to predict.

Kelly Flynn – Credit Suisse

Okay. And then, just going back to the issue someone else asked a couple of questions ago about the commercial premiums. I know you said that there’s a positive tone there but the Q2 commercial premiums, they grew, but they grew at a slower rate, I believe than they did in the first quarter. So, I’m wondering what you make of that. Do you think it’s possible that this macro weakness may be causing a deterioration there? Or do you just feel like that data tends to jump around and positive is good in general?

Mark Anquillare

So, let me first talk about the tangibles like (inaudible) business. I mean, the way our invoices are prepared it’s really the full year. So, we would begin our 2012, we’ll be looking a full year of 2010 premiums. And a full year of 2010 premiums rolled through to 2009, it is better news, okay? Not great news but better news. And so you think about 2013, you’re relating to 2011 premiums full year and that’s better news.

So, clearly the trend is improving. I think your questions was more industry specific and with the fact that the trends in the industry itself almost appeared to kind of regress a bit or digress a bit. The third quarter – excuse me, the second quarter premium growth was not as great as what we’ve seen in the first quarter. And I’m not sure we have great visibility into why that was.

So, you think about some cash fees, there was some activity. That usually puts some pressure. You also kind of see, hopefully, a function of a competition heating up and sometimes that helps us. But the market economy, it can be poor and I think that’s pulling down some of the ability of insurers to increase premiums to their customers. I’m sure (inaudible).

Frank Coyne

Yes. And I think actually some of these things tied together as we had a severe cash season as you know. And so that when you have that it – in particular it impacts the property business. So, as we see some of our customers reacting to that and I mentioned that repositioning of their property portfolio, that is some of the answer behind our specific property as well.

Kelly Flynn – Credit Suisse

Okay, great. I’ll leave it at that. Thanks guys.

Operator

Your next question comes from the line of Suzie Stein.

Suzie Stein – Morgan Stanley

Hi. Just a follow-up on Michael’s question on the spy [ph] database, should we expect that weakness to continue in Q4 or do you have kind of a sense of timing of should when you expect a recovery there?

Frank Coyne

Yes. Good morning, Suzie. I would not expect a further decrease in Q4 in that business. And it’s hard to say when it will turn, but we’ve got confidence in that business, in the value proposition associated with.

Suzie Stein – Morgan Stanley

Okay. And also, when you’re in public you talked about 5% to 7% as being kind of a normalized rate of growth in risk assessment. As we hopefully near the end of the cycle, do you expect that we can get to the high-end of this over the next couple of years?

Frank Coyne

Well, as we transitioned out of the cycle we would expect our organic growth in the risk assessment to increase.

Suzie Stein – Morgan Stanley

Okay. And then just a final question, can you just talk about how the health of the mortgage insurance market impacts your back-end mortgage business?

Scott Stephenson

Yeah, well, that part of our business is transaction-based as you know. So the volume of the folks that are foreclosing loans is basically what drives our revenue there. And a couple of the mortgage insurers have been somewhat constrained in their ability to source new business because of state regulation where the regulators are looking at capital adequacy. So if mortgage insurers are fundamentally suppressed in their ability to write a business, that will eventually express itself inside of our business.

Suzie Stein – Morgan Stanley

Okay. Got it. Okay, thank you.

Frank Coyne

Yeah. And just to follow-up on the mortgage question. We observed that we had a peak in premiums there in the third quarter – revenue on that premium in the third quarter of 2010 and our second highest quarter with the fourth quarter of 2010. So I want to make sure that I was clear in my earlier answer, expectations filling into the fourth quarter, a little difficult to assess.

We know we’re doing better than others. We know where our front-in solutions are catching some traction. But it’s hard to tell what mandates that might come out of governments that it could impact any of our customer’s performance. So it is very difficult to project what will happen there in the fourth quarter.

Mark Anquillare

And just to clarify I think – I know Frank made a comment about where we would be in fourth quarter, I think he was referring to it as kind of a year-to-date or full year, not in the quarter itself with regard to growth year-over-year, so just to clarify.

Eva Huston

Operator, do we have additional questions?

Operator

Your next question comes from the line of Eric Boyer.

Eric Boyer – Wells Fargo Securities

You talked about some of the implementations within health care converting to revenue. Are there more large implementations underway or is the line shared of those large implementations now included in the revenue?

Scott Stephenson

We’re midstream on all of that, Eric. So there is a lot of it still ahead of us, actually. Just to be clear for those who may be a little bit newer to our story. What we’re referring to here is the work that we do to suppress fraudulent claims flows and we basically have to go through a process of getting our engine or analytic engine hooked up to the customer’s data stores and then go through an ETL process to get their data flowing.

So that’s the implementation cycle that we’re talking about here. And with some of the large national health plans having sold many of their regions, there’s a stage implementation across their system. So that’s the part of our business that we’re talking about when we talk about these implementation cycles.

And actually I think relative to the 40-odd implementations we were looking at, what we were reporting on this earlier in the year, we’re not even quite halfway through that. Yes. So there’s a lot more to come.

Eric Boyer – Wells Fargo Securities

Okay, great. And then can you talk about just, I guess, the positioning of the company today compared to if we were to enter another recession compared to how you were positioned entering the last recession?

Frank Coyne

Well, I think one of the strengths of our revenue stream is that it’s well diversified and though we are impacted by this economy, I think we’re stronger today in terms of our diversification than we were before. I think we’ve got assets that are not really impacted by the recession – more assets that really aren’t impacted by the recession, an example in the health care area and even our 3E acquisition would be a strong contributor in spite of the possible second dip. So I think we’re in a better place.

Eric Boyer – Wells Fargo Securities

Okay. Thanks a lot.

Operator

Your next question comes from the line of Robert Riggs.

Robert Riggs – William Blair & Company

Good morning. Thanks for taking my question.

Scott, a couple of quarters ago you had mentioned looking to or any implementation stage of looking at streamlines and processes around the acquisition integration process, could you just give us some update kind of on where you stand with that?

Scott Stephenson

Yeah. I think that we’ve made considerable progress. And that issue exists at multiple levels. One level is trying to harmonize technology platform so that the next acquisition is a little bit more plug-and-play into what we’ve already got. And that has been a theme particularly in the health care vertical. And we’re very encouraged by the progress that we’ve made on that front.

Some of you will remember that we referenced the fact that there’s a wonderful platform that came along with the Bloodhound acquisition and we’re kind of re-purposing that to serve other parts of our health care business.

Some of the other pieces of it would represent – right now, we’re well-along in observing our opportunity to engage in data center consolidation across the entire enterprise. We have designated a function inside of the company which is solely given over to post-acquisition, post-merger integration. And all these things are kind of clicking ahead.

Robert Riggs – William Blair & Company

Great. Thank you.

Operator

Your next question comes from the line of James Friedman.

James Friedman – Susquehanna Financial Group

Hi, good morning.

First, let me say I appreciate the supplement revenue data. It’s very helpful with our analysis. I wanted to ask about in terms of the health care solutions and Decision Analytics, are there different margin characteristics of that business at this stage relative to the overall Decision Analytics product line?

Mark Anquillare

Well, I think at this time the answer is, we'll refer to it as strictly the front end, is experiencing some better margins in the backend. And I think that's really a function of disimplementation, as Scott was highlighting before. On the backend, we need to make sure we're integrated with the inside of our customer so we can get claims and information and pass them back potential fraud instances.

So, that upfront implementation does take time and does cost us money and does weigh our margins until that customer is up and running. What I will call in steady state, I think you would see margins of both being good nature, high, but probably not at the risk assessment type levels.

James Friedman – Susquehanna Financial Group

Okay. And then with regard to some of the specialized markets, would you say the same that you need that, same infrastructure and place in order to commend in streamline processing?

Scott Stephenson

To a degree, yes. So when I was talking about enterprise level, data center consolidation, that definitely applies where the specialized markets are concerned. But with respect to the applications that are at work, they are distinctive. So, to a degree, yes.

James Friedman – Susquehanna Financial Group

Great. And then the last question is with regard to the compensation increase. So that was primarily in the Q2 and seem to have extended in the Q3. Is that going to sunset for the Q4 or will that continue this quarter?

Mark Anquillare

Let me clarify it. Some of those parts, we issue equity on April 1st every year and the way the plan is written is that if you’re age is 62 and you were to leave, you definitely have no shares. So what that does is it causes us every year, every second quarter to expense the cost associated with those equity works for those people who have attained age 62.

So there's always a spike in second quarter relative to first third or fourth quarters. This year in particular the amount in second quarter is a little more than even last year second quarter. And that’s because of some other people who are now aged 62. The last point, I think, you brought up and I just want to highlight is, once we have that accelerated amount, the cost associated with the equity does go down and has gone down in third quarter and will continue at that lower level into fourth quarter.

James Friedman – Susquehanna Financial Group

Got it. Thank you for the clarification.

Operator

Your final question comes from the line of Richard Cheever.

Richard Cheever – SunTrust Robinson Humphrey

Hey. I'm on the line for Andrew Jeffrey. I just wanted to, I guess, first of all, reiterate my thanks for the additional disclosure. It is a really big help. Can you talk a little bit more about, I guess, the positive mix shift in Decision Analytics and how much of that is being driven by, I guess, the increased contribution by health care and specialized market? And talk maybe a little bit about the sustainability of that mix shift.

Mark Anquillare

Sure. Let me just try to take that on. I think you get this in the underlying fundamentals. Mortgage is down in the quarter. We have been effective in trying to cut cost there, but clearly margins there are kind of weighing on the profit margins and DA, Decision Analytics, a little bit. But sending out with this mix shift we're referring to is the health care business is improving and the margins are improving as we discuss. And we talked about cast a few modeling as well as just the typical claim search business, the claims fraud business. As they grow, great scaling opportunity leverage to those businesses.

So, as we grow the top line, a good chunk of that falls to the bottom and that's what we continue to see. And I will, obviously, as kind of Scott mentioned, the wonderful results in loss quantification has the same (inaudible) scale characteristics.

So, as we add and continue to grow organically in a very significant way, loss quantification, we continue to invest on business, but there's not a lot of additional cost associated with those new customers and new volumes.

Richard Cheever – SunTrust Robinson Humphrey

As those acquisitions specifically in health care in the specialized markets, as they anniversary, is there some additional lift there as you get past on the integration cost?

Mark Anquillare

So I think from an integration perspective, I think that's true inside of Verisk scouts. We are doing quite a bit, as Scott highlighted, to integrate those assets. And we're spending money to make that happen, maybe less sell in the other businesses because I don't think we've been able to, for the most part, pull some cost out as we try to integrate them into what is the Verisk family. But there was a lot of upfront cost there.

Scott Stephenson

Were you asking specifically about 2011 accusation, the two and a half year space?

Richard Cheever – SunTrust Robinson Humphrey

Right, if there are some additional lifts.

Scott Stephenson

Yes. Of those HRP, the integration task is kind of simpler and has the shorter timeframe. Bloodhound as I mentioned before has technology that we are really excited to reuse not just inside the payment integrity, but across the entirety of the health care vertical.

And that's a large project that we'll continue to bring forward, I think, through the better part of 2012. But we're encouraged by the progress we're making. It's just a big thing to get it done.

Richard Cheever – SunTrust Robinson Humphrey

Okay. I appreciate the color.

Frank Coyne

Thank you.

Richard Cheever – SunTrust Robinson Humphrey

All right. Thank you.

Operator

There are no further questions at this time.

Frank Coyne

All right. Well, thank you all for joining us today and we appreciate your ongoing support, and look forward to speaking with you again next quarter.

Operator

This does conclude today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Verisk Analytics CEO Discusses Q3 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts