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

Executives

Nancy Murphy – Vice President, Investor Relations

Hugh Harris – President and CEO

Thomas L. Schilling – EVP and CFO

Analysts

Julio Quinteros – Goldman Sachs

Carter Malloy – Stephens Inc.

Glenn Greene – Oppenheimer & Co.

Kevin McVeigh – Macquarie

John Kraft – D.A. Davidson

DeForest Hinman – Walthausen & Company

Geoffrey Dunn – Dowling & Partners

Donald Destino – Harvest Capital

Lender Processing Services, Inc. (LPS) Q4 2011 Earnings Call February 1, 2012 5:00 PM ET

Operator

Good day and welcome to the Lender Processing Services Fourth Quarter Earnings Conference Call. Today's conference is being recorded. Your participation on this call is implied consent. If you do not wish to be recorded, then please disconnect at this time.

At this time, I will like to turn the conference over to Nancy Murphy, Vice President of Investor Relations. Please go ahead.

Nancy Murphy

Good afternoon and thank you for joining our call. With us today are Hugh Harris, President and CEO; and Tom Schilling, CFO to review fourth quarter and full year 2011 results and answer your questions.

Before we get started, I'd like to remind you that our earnings release and the slide presentation we will use to facilitate today's discussions are available on the Investor Relations section of our website.

In addition I would like to remind you that we may make forward-looking statements during today's call and those statements are subject to various risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including our 10-K and our earnings release. We expressly disclaim any duty to update or revise those forward-looking statements, including quarterly guidance.

In addition our discussion today will contain references to non-GAAP results in an attempt to provide a more meaningful presentation and comparison to prior periods. Reconciliations between GAAP and non-GAAP results have been provided in the earnings release.

Now I'll turn the call over to Hugh Harris, President and CEO.

Hugh Harris

Thank you, Nancy, and good afternoon, everyone. I appreciate you joining us today to discuss Lender Processing Services' financial results for the fourth quarter and full year 2011.

I'm going to start the call today by giving an overview of our progress, then Tom Schilling, our CFO will walk through the company's financials. Finally, we will open the call up to questions. As you know, I joined LPS a little over four months ago. In that short time we made a lot of progress moving LPS forward. We began 2012 as a different and improved company. I'm excited about the company's future. We have a new management team in place. We have embraced the regulatory changes that are being made, and we have an employee base of 8,000 people who are committed to exceeding the needs of our customers.

2011 was a challenging environment in the mortgage industry, a year defined by changing regulations, declining origination volume, and delays in the foreclosure process. However, our team remained focused on meeting the needs of our customers, and as a result, we were able to expand relationships with many of the largest lenders in the industry.

Our financial results for the fiscal year demonstrate that we have a sound business model, which allowed us to outpace overall market growth in both the origination and foreclosure businesses, while maintaining consistent growth in our Technology, Data and Analytics segment. Our fourth quarter revenue, adjusted earnings per share, and cash flow were all ahead of our guidance.

For the full year of 2011, we generated revenue of $2.1 billion and adjusted EBITDA of $516 million. On our third quarter earnings call, I said that my objective was for LPS to start 2012 with a clear vision and the right resources to execute that vision. At that time, I set several key priorities. These included conducting a full review of the business, making sure the right people were in the right positions, to execute our business objectives, ensuring that what LPS does and the value LPS delivers to our clients is being shared with all of our stakeholders, and focusing on resolving our regulatory and legal challenges so that the Company can move forward and focus on the future. We have aggressively pursued this agenda and during the fourth quarter, LPS implemented many key business and operational initiatives.

As I mentioned, we recently completed a full strategic review of our business operations. This review accomplished many things. First and foremost, it confirmed for me that we have some of the most talented people in the industry. Second, it confirmed that our core technology, our Transaction Services business, and our offerings are in demand from our customers and provide opportunity for growth. The review helped us indentify and make the decision to exit non-strategic and underperforming businesses and it confirmed for us that both our Default and Data and Analytics businesses are important to the future success of our Company.

The review also allow us the opportunity to evaluate the senior management team and to identify experienced, well respected and trusted executives to put in leadership positions. Today, our new senior management team has an average of over 25 years of industry experience, operates at the highest levels of integrity and accountability, and each is committed to the Company's values and goals.

For example, Bob Caruso, a well respected leader in the mortgage industry is now leading our Default businesses. Bob has worked for major banks for most of his career. He understands how to successfully manage in a regulated environment, which is an area we needed to strengthen in our senior management team.

Joe Nackashi, our CIO, has assumed responsibility for our all servicing solutions, which enables him to ensure that our technology supports the servicing needs of both our clients and the industry. Dan Scheuble, our Chief Operating Officer, has more than 25 years of experience in the financial services technology area with the last 20 devoted specifically to the mortgage industry. And Bill Griffin is now our EVP of Sales and Marketing and is focused on growing our market share by identifying opportunities to deliver end-to-end solutions to the country's largest financial institutions.

After the realignment of our management team, we then took steps to reduce the Company's overall risk profile, which was an important development for our future. We made changes to our Default Services business to enhance discipline around processes, risk and compliance. The slowdown in 2011 allowed us to restructure our default organization with new management in place. Our view validate that LPS, as combination of scale, expertise, and comprehensive solutions for the Default segment position us well to meet the needs of our customers as the current backlog of foreclosures is processed. We are also making changes to improve operating leverage and reduce the risk profile of the business to adjust to the current environment.

Third, in 2011, we rationalized our cost structure and improved margins by removing $40 million from our annual operating expense. And finally in 2011, we improved financial flexibility and reduced debt which resulted in a stronger balance sheet.

Before I move on to talking about our business model and our strong customer relationships, I'd like to briefly discuss the Company's legal and regulatory issues. First, I want to assure everyone that senior management is focused on resolving regulatory and legal issues related to the past in a manner that is in the best interest of the Company, its customers, shareholders and employees. LPS has a strong commitment to complying with all legal and regulatory requirements, and any deviation from the letter or spirit of the law will not be tolerated.

Next, I want to provide an update on our progress on the consent order, which we entered into with the federal regulators in April of 2011. The consent order includes three primary phases, and in the next few weeks, we will begin the third and final phase. A review of documents executed through our default services business between 2008 and 2010. Let me assure you again this is a top priority at LPS.

Phase 2, which was a risk assessment of our default related businesses, was completed in September. It included a six-month long independent risk review, which was conducted by a highly respected risk advisory firm made up of experienced former federal regulators. While we are prohibited from disclosing anything explicit about the risk review results, LPS has in most cases addressed the issues identified and has plans in place to address the remaining concerns as quickly as possible. And finally, Phase 1 was a development of the enhanced plan for board oversight, which included compliance and internal audit. This plan was completed in June of 2011. To emphasize our commitment, the audit, risk, and compliance functions now have a direct reporting relationship to the Board and to me.

At the conclusion of the consent order process LPS will be the only provider of technology and services to the mortgage industry that has undergone such a thorough examination and risk review. This rigorous review sets us apart from other service providers and demonstrates that we are aspiring to achieve the gold standard, which represents our commitment to compliance, operating with integrity, and continuous review and improvement in all we do. As you know, there have been various activities from State Attorneys General. We remain committed to working closely with them to resolve outstanding issues.

As it relates to third-party litigation, we have made positive progress in many of these cases. With regard to the pending fee splitting cases, 14 of the 15 cases have now been dismissed. Other pending litigation has been moved to arbitration and in one of the shareholder derivative lawsuits that was brought against LPS in December of 2010, the parties have agreed to dismiss the matter with prejudice.

I have also spent a significant portion of my time over the last few months meeting with our customers, listening to their priorities and discussing how LPS Solutions can help address the opportunities and challenges they are facing. Because of the strong relationships that many of our executives have in the industry, we have been able to expand our business despite shrinking market metrics in 2011.

Because of these strong relationships and the fact that most of this management team has walked in our customers shoes at one time or another, we are better able to help drive technology and solutions innovation. This innovation has enabled us to provide our customers with the technology necessary to help them comply with the regulatory requirements, such as single point of contact and the Service Members Civil Relief Act.

As a Company, we embraced these regulatory changes and worked closely with our customers to respond to their needs. LPS is the only Company to provide a full end-to-end suite of solutions to the mortgage industry, and our customers continue to look to us for our expertise and technology. In fact in 2011, we signed seven new MSP customers, 15 new Desktop customers, and 24 new loan origination technology customers, which include our Empower and PCLender products.

Today, eight of the top 10 mortgage institutions use LPS mortgage processing and our Desktop platforms and in 2011 four of the top five mortgage servicers adopted our new Loan Quality Gateway technology.

In addition to signing new companies to our technology solutions, we also continue to increase our market share penetration with existing customers. Even during a very challenging environment, we expanded revenue from the top 20 originators, and in particular, the top five. Our automated title decisioning platform was used in the majority of the HARP 1.0 loans in 2011 and we are prepared to support HARP 2.0 in 2012. Our Technology, Data and Analytics segment grew revenue and EBITDA for the third consecutive year. We believe there is significant opportunity in this space and we are committed to continuing to invest in this business.

Next, I'd like to touch on our priorities for 2012. First, we will continue to deliver outstanding service and solutions to our existing and new customers. Our technology, default and origination services businesses remain key components of our strategy in customer commitment. Second, we will continue to focus on resolving the regulatory and legal issues related to the past in the best interest of the Company and our customers, shareholders, and employees. And third we will continue to underscore our commitment to achieving the gold standard for regulatory compliance in our industry and in support of our clients. And finally, we will continue to leverage our strong cash flow to build shareholder value.

Before I turn the call over to Tom, I'd like to take a moment to thank all of our employees. It has been a very demanding year, one full of change. Our employees have met the challenges they faced with professionalism and with a continued commitment to meeting the needs of our customers.

Now, let me turn the call over to Tom, who will review the financial results in detail. Tom?

Thomas Schilling

Thanks, Hugh, and good afternoon, everyone. I'll review the fourth quarter and full year results, including performance in our two business segments, Technology, Data and Analytics, and Loan Transaction Services. I'll be referring to the supplemental slides to facilitate the review.

As Hugh just mentioned, we faced a very difficult operating environment in 2011 caused by two key issues; first, delays caused by regulatory and legal challenges resulted in sharp decline in industry-wide foreclosure activity; second, mortgage refinancing volume declined significantly in spite of record low interest rates for much of the year as many homeowners are forced to remain in higher interest rate loans because they cannot qualify for refinancing. These factors drove a decline in our Loan Transaction Services revenue of $336 million or 20% for the full year of 2011.

Partially offsetting this decline, our Technology, Data and Analytics segment generated a third consecutive year of revenue and EBITDA growth. This performance reflects the consistency and strength of this business as technology solutions become an increasing priority for the mortgage industry. Combined, our total 2011 revenue declined $287 million or 12% from 2010.

In spite of the sharp decline in transactional revenue, we reported adjusted 2011 EBITDA of $516 million, or a 25% EBITDA margin, and record free cash flow of $381 million. These strong margins demonstrate the resiliency of the LPS business model to adapt to turbulent and unpredictable market conditions.

Now, I'd like to cover our quarterly and full year GAAP financial performance, as shown on Slide 6. Fourth quarter consolidated revenues totaled $534 million, reflecting a 13.6% decrease from the prior year. For the full year, consolidated revenues decreased 12.1% to $2.1 billion, reflecting lower origination and default industry volumes.

On Slide 7 we show the per share impact of a pre-tax charge in the fourth quarter totaling $132 million or $0.94 per share. The charge includes $78 million for legal and regulatory-related expenses, including cost to complete the document execution review phase of the consent order and the estimated cost to resolve other regulatory and legal inquiries. It is important to note that the accrual for legal contingencies is based on current estimates and the final impact could differ significantly. We will continue to assess the adequacy of the reserve and we'll make future adjustments as necessary.

The charge includes a $26 million provision for exiting non-core businesses that generated revenue of $51 million and adjusted operating loss of $18 million during 2011. During January we completed the sale of two businesses and the wind down of another. We expect to complete the sale of another operation before the end of 2012. Also included is a charge for $28 million for a number of nonrecurring items, including lease termination and compensation expense related to management changes during the fourth quarter.

Finally the after-tax impact of the charge reflects a tax benefit related to our 2010 tax return totaling $6.5 million. This benefit is primarily a result of recent clarifications and interpretations from the IRS that allowed us to take larger deductions for our development and licensing of software. Including the impact of this charge, we reported a fourth quarter GAAP net loss of $21 million, or $0.25 per share. For the full year GAAP net income was $97 million, or $1.13 per share.

My remaining comments regarding fourth quarter and full year financial performance excludes the impact of the charge and adjustments as outlined in the GAAP to non-GAAP reconciliation included with our earnings release.

Revenue in the fourth quarter increased 3% sequentially to $534 million, driven by strong mortgage refinance activity. We continued to outperform industry metrics during 2011 by expanding relationships and market share with the largest mortgage institutions.

In our loan facilitation business where mortgage refinancing is the main revenue driver, we benchmark our performance against the Mortgage Bankers Association refinance origination metrics. In 2011, refinance originations declined 22% compared to our revenue decline of just 15%. In our Default Services business, we benchmark against RealtyTrac notice of default metrics. In 2011, total notices of default declined 31% compared to our revenue decline of 23%. This outperformance of the industry metrics reflects our ability to expand our market presence during periods of cyclical decline.

Another important example of our success in the marketplace, during 2011 we increased our revenue with the top 20 originators by 1% and with the top five originators by 2% despite the declining market. The 20 originators represent the future of the industry, generating over 80% of total mortgage volume in 2011. Our ability to grow with the industry's largest originators and servicers positions us very well when the industry volumes begin to recover.

EBITDA was $135 million in the quarter, up 17% sequentially, primarily due to higher refinance origination volumes compared to the third quarter. During 2011, we eliminated approximately $40 million from our non-variable operational cost structure as we continued to right size the organization through this downturn in transactional volumes. This enabled us to sustain a 25% EBITDA margin despite these market headwinds. Corporate expenses for the quarter were $30 million compared to $34 million in the third quarter, mostly due to lower consent order costs. As a result of the legal charge taken in the fourth quarter, we expect corporate expenses to run at approximately $25 million per quarter for the near-term.

Adjusted free cash flow was very strong at $122 million in the quarter, driven by strong earnings and improvements in working capital, primarily within our Default Services business. For the full year, free cash flow was $381 million, a $39 million increase from 2010.

Capital expenditures were $105 million for the full year. This significant investment is a key point of differentiation for LPS and positions us as the leader in the industry. Consistent with our capital allocation strategy, in the fourth quarter, we paid a regular dividend of $8.4 million and reduced debt by $112 million. Outstanding debt at the end of the year was $1.1 billion, with an average interest rate at the end of the quarter of 5.7%.

Our liquidity at year-end included cash of $77 million and capacity under our revolving credit facility of $388 million, reflecting the repayment of substantially all the outstanding balance of the revolving credit facility during the quarter.

Looking ahead, we plan to continue our regular quarterly dividend, build and maintain liquidity at about $100 million of cash on the balance sheet, and use excess cash to pay down debt.

Now, I'll turn to the performance within our two business segments. I'll be referring to slides 8 and 9. Technology, Data and Analytics revenue grew nearly 5% compared to the year ago quarter with mortgage processing growing about 6% and other Technology, Data and Analytics growing 3.5%. Other Technology, Data and Analytics revenue consist of technology supporting both origination and default markets as well as our data and analytics business. While transactional volumes were off slightly year-over-year, our growth was fueled by new Desktop customers that converted since the year ago quarter. We signed 15 new Desktop customers in 2011. The LPS Desktop remains the leading default technology being used by servicers representing about 80% of the mortgages in the United States.

For the fourth quarter, Technology, Data and Analytics segment EBITDA increased year-over-year and sequentially by 4% to $83 million as a result of higher contributions from Desktop. For the full year, segment EBITDA of $317 million was up slightly from 2010. EBITDA margins for the segment remained robust at 43% for the fourth quarter and for the full year 2011.

Moving on to our Loan Transaction Services segment, revenue for the fourth quarter increased 2% sequentially, as strong refinancing activity drove 13% growth in loan facilitation revenue. Default Services revenue in the fourth quarter declined 6% sequentially due to the continued foreclosure delays. As Hugh discussed, Default Services remains an important business for LPS and a key service for our customers. Almost 4 million seriously delinquent loans were reported by the LPS Mortgage Monitor as of December 2011.

While the settlement reached last week between the top banks and State Attorneys General, we'll likely help a portion of those loans avoid foreclosure. We continue to believe the vast majority of these seriously delinquent loans will eventually go through the foreclosure process. While it is too early to draw any conclusions, we are hopeful that the settlement will result in more normalized foreclosure timelines in the future.

Fourth quarter EBITDA for Loan Transaction Services was $80 million, representing a solid 23% margin. Segment EBITDA increased 20% sequentially due to the higher refinancing volume but declined 30% compared to the prior year quarter due to the lower operating leverage from reduced volumes and less favorable product mix. As I mentioned earlier, fourth quarter and full year 2011 results prove the strength and resiliency of the LPS business model. We absorbed a $336 million or 20% year-over-year decline in our Loan Transaction Services revenue, yet we maintained strong margins through disciplined cost management.

Now I'd like to review financial guidance as showed on Slide 10. Due to the continued uncertainty and volatility in the industry transaction volumes, we're only providing guidance for the first quarter at this time. While 2012 looks to be another challenging year, we remain focused on expanding our market share and product and service capabilities to position us to capitalize when the market inevitably recovers.

With this as the backdrop, for the first quarter we expect consolidated revenue in the range of $470 million to $490 million and adjusted EPS to range in a range of $0.50 to $0.55. The sequential decline in revenue is driven by expected declines in both refinance originations and foreclosure activity in the first quarter.

In summary, we are entering 2012 as a better and more disciplined company with stronger and deeper relationships with our top customers and the industry's most important participants. We have exited unprofitable, non-core business lines and lowered our risk profile. Our performance in 2011 highlighted the strength and resiliency of our business model as the transactional market in which we compete shrunk by approximately 25% and yet we sustain strong margins and grew market share.

Now I'm going to turn the call over to the operator so we can take a few questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions). We’ll take our first question from Julio Quinteros with Goldman Sachs.

Julio Quinteros – Goldman Sachs

Great. Hey guys. Thanks a lot. So just on the first question for us, when we think about the settlement, I know it's kind of early coming out of it, but what specific milestones, clues or evidence are you guys looking for from the banks in terms of the potential for the volumes that come back online? I realize you're still pretty quick on the back of the settlement, but just curious on what you guys need to hear from some of your customers that they plan on moving forward on some of this $4 million or so of delinquent loans that are outstanding?

Hugh Harris

I'm sorry, I missed the beginning. This is Hugh. On the settlement itself, we think clearly it's a net positive for the industry and therefore net positive for us. Anything we would say at this point I think would be mostly speculation. I think everybody hopes that this will speed up the process and help things to move through the system, but I don't think anybody has made any decision around that yet. At least we have not heard that from any of our customers yet.

Julio Quinteros – Goldman Sachs

Okay. That's fair. And then I guess, maybe just on – looking on the other side of the legal, you actually outlined a bunch of different things that I think makes you guys feel more comfortable in terms of your own legal situation, but is there anything – and maybe just in terms of what you have outstanding, what would be the biggest thing to look for here in terms of outstanding AG cases and whatnot or have you guys have any way to frame where we go with regards to the AG situation?

Hugh Harris

Well, I think first of all to answer to your question, we are feeling better about all of the issues around the litigation. We've made progress during the fourth quarter and continue to make progress. You saw on the Nevada AG suit that we did file a motion to dismiss that. On the other AGs, it's not really appropriate at this time to go into any detail into that, but we are cooperating fully with the inquiries that we're getting and trying to move those forward.

Julio Quinteros – Goldman Sachs

Okay. That’s fair. Thank you.

Operator

Our next question comes from Carter Malloy with Stephens.

Carter Malloy – Stephens Inc.

Hey guys. Thanks for taking my questions. So first of all I just wanted to ask a question, could you tease apart the $78 million on cost to complete the document execution review versus what you're actually reserving for settlement or legal issues, and more importantly really, how you came to that number of what to reserve?

Thomas Schilling

I think the way to look at this is the ability to actually book this charge under our existing accounting rules is indicative of the progress we believe we've made during the fourth quarter. As Hugh just mentioned, we've made progress on several fronts to have better clarity around the scope of the document execution process. The issues that are addressed within the $78 million charge are all those items. It's the consent order, the various state attorney generals, and some of the other investigations that are going on right now. Carter, we're not going to itemize them simply for obvious reasons. But we believe that we have addressed all the issues that we believe are estimatable at this time.

Carter Malloy – Stephens Inc.

I didn't figure I was going to an itemization, but I had to try there. But more importantly, when you talk about the consent order and the AGs, I assume that some of the money you've set aside there is not to pay lawyers but is actually to pay some of the regulatory bodies or agencies in the form of some sort of settlement. Is that a safe assumption and do you feel comfortable in the way that you – the math behind that?

Thomas Schilling

Yeah, I think we're comfortable with our math, and just to be clear, it does include litigation expense or outside legal expense associated with negotiating and working at resolving those issues, I should say.

Carter Malloy – Stephens Inc.

Right. So that leads into the second issue here, a question rather. You've clearly taken some expenses out of the corp ex line from this reserve. On top of that, it looks like you've done a good job in killing out or selling off some unprofitable businesses. So can you help us understand your first quarter guidance relative to your fourth quarter outperformance here, and just why the conservatism, especially on the margin line?

Thomas Schilling

Yeah. I think if you look at the – and I think what is driving, if you look at most of the metrics in the industry, it's consistent with what we're seeing walking into the beginning of the year, is that refinance origination volumes are likely to be down pretty significantly over the fourth quarter, and we do expect default volumes to continue to drift down a bit through the first quarter. So I think the revenue decline is really tied to the metrics in our transactional businesses. And then the margins are pretty much in line with that revenue. So if you look at the decline in the EPS, it's related to the revenue decline. And I will say there is a little bit of seasonality going from our fourth quarter into our first quarter.

There's things, particularly on the default side. There are winterization issues or winterization services that take place in the fourth quarter that aren't there in the first quarter and some of the landscaping-type of services, grass cuts, etc., that don't start back up until the springtime. So the first quarter is a little bit of a seasonal low on the default services space. We also tend to have a little bit of seasonal downturn on our mortgage processing just as yearend processing tends to drive a little bit of extra charges at the end of the year that aren't there at the beginning of the year. But for the most part the lion share of what we're expecting in the first quarter is just the transactional volumes continuing to drift down a little lower in the first quarter.

Carter Malloy – Stephens Inc.

Okay, so just really macro and MBA type projection driven and there is no customer losses or any one-time items to be concerned about in there?

Tom Schilling

No.

Carter Malloy - Stephens Inc.

Okay. Thanks so much.

Operator

We’ll take our next question from Glenn Greene with Oppenheimer.

Glenn Greene – Oppenheimer & Co.

Thank you. Good afternoon. Just a couple of follow-ups. Just want to make sure I'm clear, Tom. The legal regulatory reserve is your best estimate of the full cost for all of these issues at this point, or otherwise I guess you wouldn't have been able to accrue it. But I just want to make sure this is sort of the full charge that you are thinking about going forward?

Thomas Schilling

Yeah. Thanks, Glenn. That is exactly how I would frame it. It is comprehensively what we believe at this point is estimatable to resolve these issues. And we – as I mentioned in my prepared remarks, we will continue to reassess it on a quarterly basis to the extent that we believe we need to change it up or down. We will do so as necessary.

Glenn Greene – Oppenheimer & Co.

Okay. And then just a couple of business questions. I know you are not giving guidance on '12 but maybe directionally you could help us with maybe your best expectation at this point for industry refi originations in '12 and maybe your assumptions for the flow of foreclosure activity during '12, once we get past 1Q?

Thomas Schilling

Obviously this is always a difficult area to predict, just going back to last year, I think as we entered 2011, most of the forecast, MBA as well as Fannie and some others were predicting the refi market would be down about anywhere from 50% to 70%. It ended up being down about 22% because of interest rate changes that really started about the first week of August of 2011 and really carried through with record low interest rates through the remainder of the year. So it's always difficult to predict that. But right now, I think most of the consensus is that it's going to be a down year. The issue will be how far down in terms of market, the refis. Now, I would say what is not completely probably baked into the forecast at this point are any impact that HARP 2.0 can have, and I think the industry is still – there is still some question about what impact that will have, but that could certainly be I think the upside case.

On default volumes, I think it's going to be a lot like it was in 2011. It's just going to be a little difficult to predict until we start to see some real changes in the timelines that hopefully will come out here as we go through the year. We're going to continue to focus on is like we always have. We're going to focus on continuing to leverage those relationships with our customers and build market share. So when the volumes do come back in both originations and default, that we're there to take advantage of it in and should have a lot of growth on the upside when the volumes do finally come through.

Glenn Greene - Oppenheimer & Co.

Okay. And then just quick one for Hugh. Just want to be clear, are we complete with the strategic review at this point, or should we perhaps expect more actions as we go throughout the year?

Hugh Harris

No. We did a thorough review in the fourth quarter of the businesses that we felt like were strategic for us and the ones that we did not need to be in. We'll always be reassessing that I think as we go forward, but at this time, I think we've made the moves that we planned to make and we're well-positioned to go into 2012.

Glenn Greene - Oppenheimer & Co.

All right, great. Thank you.

Operator

Our next question comes from Kevin McVeigh with Macquarie.

Kevin McVeigh – Macquarie

Great. Thank you. I know it's hard to kind of project 2012 at all. Given a base line assumption, is it reasonable to kind of extrapolate the midpoint and annualize that on the revenue and earnings side or is there more seasonality that we should expect through the year? And obviously there's a lot of moving parts here, but just to think about a way, a baseline assumption for the 2012 year-end. Any thoughts on that?

Thomas Schilling

As we said kind of in answering, I think Glenn's question, the difficulty in trying to predict out the year here. It’s always – and I would hesitate to tell you that you should use a midpoint of our first quarter and say that's a normalized rate for the year. And I just go back, if you look at our results for 2011 for loan facilitation for example, our sequential growth rate on that business was down about 28% in the first quarter, down about 18% in the second quarter, up 25% in the third quarter, up 13% in the fourth quarter. It's that volatile shifts in the transactional volume on that origination side, that even in any environment, it's difficult to say, there's a run rate for the quarter – a quarterly run rate. And I do think that once we see the timelines restored on default, or I mean on the foreclosures, that part of our business should become relatively, I want to say easy, but relatively…

Hugh Harris

Improve.

Thomas Schilling

Yeah, it should improve and we should be able to predict the timing of the revenue much better than we are today.

Kevin McVeigh – Macquarie

Got it. And then just obviously a very, very strong year in free cash flow in 2011. Do you have any thoughts on what 2012 should look like as you think about it? As a percentage of net income or just how should we think about free cash flow going into 2012?

Thomas Schilling

Our cash flow tends to be very chunky because it relates back to the various business lines. And what we had in 2011, which I don't expect to the degree in 2012 that we had in 2011, is the improvement in the working capital on the default side. And in fact hopefully what we'd like to see in 2011 is that the default transactions pick up and that we start to see some putting working capital to use there, which could affect working capital there. Our other businesses tend to be rather consistent relative to the revenue in terms of the cash they generate. So it's hard to just peg a yield rate for instance, because it's really going to matter about what the mix of the revenue is.

Kevin McVeigh – Macquarie

Okay. Thank you.

Operator

Our next question comes from John Kraft with D.A. Davidson.

John Kraft – D.A. Davidson

Hey guys, congratulations on the progress so far.

Thomas Schilling

Thank you.

John Kraft – D.A. Davidson

Just a couple of really housekeeping kind of follow-ups is all I have left. Tom, couple of quarters back I remember you were talking about specifically kind of feeling the pain of higher appraisal costs with the prior negotiated contracts for what you could charge your banks and sort of a plan to renegotiate those. What's the status there? Can you update us?

Thomas Schilling

Well, I think that those were the – in the second quarter, I think is when we started talking a little bit about the effects that Dodd-Frank was having on the margins in the appraisal space. That has still continued to affect the appraisal business. However, I think we're executing plans against that to both reduce our risk and liability associated with that business, and continue to run that business profitably. Though I think we're comfortable with where we are right now. We've had – the margins are probably not completely restored yet, but I think the way we view that business and its future that it will eventually get back to the margins that we enjoyed prior to Dodd-Frank.

Hugh Harris

I would just add to that. That's a very important service for our customers and a profitable business for us, and one that we plan to stay in. We're all adapting the business to meet the Dodd-Frank requirements and that's still a little bit cloudy I think is to both mortgage companies and to regulators at this point. So we're working through that progress.

John Kraft – D.A. Davidson

Well, I guess on that note too, specifically for what happened newly in Q4 as far as exiting certain lines of business on that side of the house. What specifically – what products wise did you decide to move forward on?

Thomas Schilling

As Hugh and I think both mentioned, these were all non-core unprofitable businesses. What we transacted here recently is we sold off our title agency production software business. We sold our tax services business, and our income verification business and we also closed down our auction solution business in the first quarter. Those were all businesses that were just for one reason or another were not meeting the expectations. We didn't see them recovering in a way that fit into our growth strategy for the future. So we have one more business that is being held for sale and we hope to get that completed before the end of 2012.

John Kraft – D.A. Davidson

Got you. Great. That’s helpful. And then just lastly, if I could, are all of the 15 new signed Desktop customers up and running online?

Hugh Harris

Yeah. I believe the answer to that is yes. We've implemented all those during 2011.

John Kraft – D.A. Davidson

Great. Thanks guys.

Operator

We’ll take our next question from DeForest Hinman with Walthausen & Company.

DeForest Hinman – Walthausen & Company

I am only going to beat a dead horse. But when we think about the 50 state settlement, if we look at the government website, we are still looking for the fine verbiage around that settlement. Are we part of that settlement? And if we are, is the legal accrual included in that fourth quarter number that you've disclosed, the $0.78?

Thomas Schilling

We are not part of that settlement to answer that question. And as you know, the consent order with the banks was different from the consent order with LPS, and we are still working through that process with the regulators at this point. As I mentioned, we're just beginning the third phase of that process. So there's nothing in that settlement that relates to LPS.

DeForest Hinman – Walthausen & Company

Okay. And in the past there was a disclosure regarding arbitration with American Home Mortgage. Is that arbitration included in the $0.78?

Thomas Schilling

Yeah. That is included in the $78 million charge.

DeForest Hinman – Walthausen & Company

Okay. And I know you have some mandatory payment levels on the term loan, and you had said you would use free cash flow to pay down debt. Are you going to use it to just do the mandatory payments? Are you going to do repayments on the debt that are in excess of the mandatory payments?

Thomas Schilling

Certainly we'll be making the mandatory payments and then we’ll determine the capital allocation of where we do that. As you know we have outstanding bonds in the marketplace as well as the credit facility. So we'll make that determination of how and when we take down debt.

Operator

(Operator instructions). Our next question comes from Geoffrey Dunn with Dowling & Partners.

Geoffrey Dunn – Dowling & Partners

Thank you and good afternoon. I’ll follow-up on that last question. When the Fed announced the sanctions last week against the five banks, it did indicate that it thought further sanctions against the institutions that were not addressed were appropriate. So can you specifically comment as whether or not you have an estimate for a sanction related to the Fed consent order in the charge this quarter?

Thomas Schilling

As I mentioned, the $78 million charge we took includes our best estimate at this point for resolving all these issues, and this would be one of those issues that's included in that charge.

Geoffrey Dunn – Dowling & Partners

Okay. And then on a bigger picture question, obviously mix and operating leverage are important on the LTS side of the business. Under the macro forecast for origination volumes, can you just comment as to the resiliency or the potential pressure on the LPS margin if we do see the projected decline in refinances that are being talked about?

Hugh Harris

Yeah. Well I think I would look back at 2011 obviously coming into the year. From where we were in 2010 to where we ended up in 2011, a pretty sharp decline in the revenue in the transaction services business. And I think what you should expect us to do is continue the same things we did during 2011. If the volumes are lower than our current expectations, then we'll adapt and we will find ways to continue to right size our organization for the volumes that are coming into that division.

Geoffrey Dunn – Dowling & Partners

Okay. Thank you.

Operator

The last question comes from Don Destino with Harvest Capital.

Donald Destino – Harvest Capital

I'm sorry to beat this horse. Let me just ask one more question on the $73 million. I know in the enforcement action, you were required to hire a consultant to estimate damages. Is the portrayal that that's your best estimate? Does that mean that that consultant came back with a number and that's what you're using as a component of that 73 million? And then just a follow-up to that is, is it reasonable to think that that number could be affected by the documentation review that you're going to do as Phase 3? And then finally, I don't know if there is any comment you could make on the Missouri indictment. That sounds a little out there. Is there anything that we need to worry about right there?

Thomas Schilling

Yeah. Let me take the first one first. The estimates that are included in the $78 million charge are our management estimates. There is no estimate by our independent third-party. They are engaged in actually doing that work. Question number two, which relates to could the document execution review change our view of how much we need in that reserve? It certainly could. It certainly could affect it as we go through that, as other factors could affect it. Like we said, we'll continue to assess the adequacy of the $78 million charge and make adjustments as necessary as we go forward. And then finally, we will be filing a motion to dismiss in Missouri. I don't think – from a content standpoint, there was nothing really new in the Missouri complaint. It's the same – it's essentially the same assertions and the issues that frankly LPS reported itself back in the early part of 2011 when it closed down its DocX division.

Hugh Harris

Yeah. And the indictment from Missouri is against Lorraine Brown, who is the former president of DocX, and as Tom said, we are filing a motion to dismiss on behalf of DocX.

Operator

That concludes today's question-and-answer session. Ms. Murphy, at this time, I'd like to turn the conference back to you for any additional or closing remarks.

Nancy Murphy

Well, thank you so much for joining us on the call today. Please feel free to contact us if you have any follow-up questions. Thank you.

Operator

That concludes today's conference. Thank you for your participation.

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: Lender Processing Services' CEO Discusses Q4 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts