Black Knight Financial Services' (BKFS) CEO Tom Sanzone on Q4 2015 Results - Earnings Call Transcript

| About: Black Knight (BKFS)

Black Knight Financial Services, Inc. (NYSE:BKFS)

Q4 2015 Results Earnings Conference Call

February 10, 2016 05:00 PM ET


Bryan Hipsher - Senior Vice President, Finance

Bill Foley - Executive Chairman

Tom Sanzone - President and CEO

Kirk Larsen - CFO


Tien-Tsin Huang - JPMorgan

Sara Gubins - Bank of America

Andrew Jeffrey - SunTrust

Bill Warmington - Wells Fargo

Jason Deleeuw - Piper Jaffray

Jeremy Campbell - Barclays

Chas Tyson - KBW

John Campbell - Stephens Inc.


Greetings and welcome to the Black Knight Fourth Quarter 2015 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I’d now like to turn the conference over to your host, Mr. Bryan Hipsher. Thank you. You may begin.

Bryan Hipsher

Thanks. Good afternoon, everyone. And thank you for joining us for the Black Knight Financial Services fourth quarter 2015 earnings conference call. Joining me today are our Executive Chairman, Bill Foley; President and CEO, Tom Sanzone; and Chief Financial Officer, Kirk Larsen. We’ll begin with a brief overview from Bill. Tom will then provide an update on fourth quarter accomplishments and the execution of our growth strategies. And Kirk will finish with a review of financial highlights and our outlook for 2016. We’ll then open up the call for your questions.

This conference call includes forward-looking statements that involve a number of risks and uncertainties. Statements that are not historical facts, including statements about our expectations, hopes, intentions, or strategies regarding the future are forward-looking statements. Forward-looking statements are based on management’s beliefs as well as assumptions made by and information currently available to management. Because such statements are based on expectations as to future financial and operating results and are not statements of fact, actual results may differ materially from those projected.

We undertake no obligation to update any forward-looking statements whether as a result of new information, future events, or otherwise. The risks and uncertainties that forward-looking statements are subject to include but are not limited to the risks and other factors detailed in our press release issued earlier today and in the statement regarding forward-looking information, risk factors, and other sections of our Form S-1 and other filings with the SEC.

Today’s remarks will also include references to non-GAAP and pro forma financial measures in order to provide more meaningful comparisons between the periods presented. These are important financial performance measures for Black Knight but are not financial measures as defined by GAAP. Reconciliations between non-GAAP and pro forma financial information to the GAAP financial information are provided in the attachments to the press release and in the appendix of the supplemental slide presentation.

This conference call will be available for replay via webcast through Black Knight’s Investor Relations website at It will also be available through telephone replay beginning at 8:00 pm Eastern Time today through February 17th. The replay number is 877-870-5176 or 858-384-5517. And the access code is 13628054.

I’ll now turn the call over to Bill.

Bill Foley

Thank you, Bryan. 2015 was a milestone year for Black Knight, as we successfully completed our initial public offering and continued to execute on our strategic initiatives and plus, delivered strong results.

Adjusted revenue growth in the fourth quarter was 8% compared to the fourth quarter of last year. The key drivers were strong growth in origination technology and solid growth in our market leading servicing technology business. For the full year, adjusted revenue growth was 9%.

Adjusted EBITDA was $108 million in the quarter, an increase of 8% from the prior year quarter. Adjusted EBITDA margin was 44.9%, which was consistent with last year’s very strong fourth quarter. For the full year, adjusted EBITDA was $414 million and the adjusted EBITDA margin was 44%.

As you can see from our financial performance in the fourth quarter and full year, the fundamentals of our business remain very strong. As we begin 2016, we continue to be very excited about Black Knight’s strong business momentum across the enterprise. Black Knight is uniquely positioned as the market-leading provider of comprehensive end-to-end solutions to help our clients manage and mitigate risk while driving greater efficiencies to improve their financial performance. I’m extremely proud of our accomplishments in 2015 and I look forward to another strong year in 2016.

I’ll now turn the call over to Tom, who will provide us with an update on the business and the progress that we have made towards the execution of our growth strategies.

Tom Sanzone

Thanks, Bill. Good afternoon, and thank you for joining us for Black Knight’s fourth quarter earnings call. On our call today, I’ll discuss how Black Knight continues to achieve excellent financial performance, in spite of a challenging macroeconomic environment, continues to execute on our growth strategies and how we are helping to move the industries forward through new and innovative solutions.

Black Knight’s business model is predicated on providing solutions to our clients that reduce risk and increase the profitability which are two non-cyclical variables. By entering into long-term agreements with high reoccurring revenues that is protected by minimum volume commitments and price escalators, Black Knight is the business built to grow in any market condition.

In spite of a challenging macroeconomic and geopolitical market, Black Knight was able to grow revenues by 9% and EBITDA by 17% respectively. These growth figures are direct reflection of our powerful business model and our ability to execute on the growth strategies we laid out during the IPO. We also had a strong fourth quarter and full year 2015 from a sales perspective. In the fourth quarter, we saw a particular strength in servicing technology with the two home equity wins that we announced, and we also closed another long-term strategic license deal in our data and analytics business.

When you look at the full year, our total contract values signed was meaningfully higher than a very successful year in 2014. Our success in selling new deals is a testament to the execution of our growth strategies that I’ll take a few moments to update you on.

Cross-selling additional solutions to our client base is our first growth strategy. We recently announced that PNC, one of the nation’s top servicers and a long time MSP client would be moving its portfolio of home equity loans in lines on to MSP in order to service all of their real estate backed mortgage loans on a single platform.

In similar fashion to the JPMorgan Chase home equity win, we were able to show these major market players how combining both portfolios on a single servicing system can help mitigate risk and increase efficiency. Both deals are executed while we were simultaneously renewing existing agreements for seven years or longer.

After the JPMorgan Chase and PNC conversions are complete, the number of home equity loans serviced using MSP will have more than doubled and will account for approximately 17% of the 17 million home equity loan market. We have made significant progress in increasing the number of home equity loans on MSP but we also have room to grow.

In addition to these home equity wins, we continue to focus on retaining and expanding relationships with existing customers. We signed several contract renewals in the quarter. For example, Quicken Loans, one of the fastest growing and most technology savvy lenders in the industry, signed a three-year contract extension for Black Knight servicing technologies, which contains additional solutions that will increase our revenue from Quicken. This ability to increase client revenues has been a steady growth driver for the Company.

The second growth strategy is our ability to win new clients in existing markets. A recent example is myCUmortgage, which signed a seven-year contract to service its mortgage loans, using Black Knight’s servicing technologies. Contracts like this are positive additions to our portfolio, as they come into a highly leveraged environment that are supported with fairly low levels of incremental cost.

In addition to our momentum in technology, our data and analytics business also closed another long-term strategic license deal in the fourth quarter. As we offer our comprehensive real estate dataset and analytics to major real estate market participants, we continue to see high rates of success.

Our third growth strategy is to introduce new innovative solutions, in many cases these new solutions are developed partnership with some of the top originators and servicers. For example, last quarter, we spoke about the release of LoanSphere Closing Insight to the origination community. This new product is benefiting our customers as well as driving meaningful growth in origination technology and is a prime example of Black Knight investing its capital into new innovative solutions that will drive stronger returns.

Another example of this growth strategy is the LoanSphere Data Hub. We continue to make progress in developing this powerful tool, which enables our clients to gain incredible insights on their portfolio because we can link their servicing, originations and the full loan data on Black Knight systems with our vast public records and real estate listing datasets as well as other public data sources. This combination allows us to provide operational and risk-based insights to drive greater efficiency and effectiveness for servicers and originators. And equally as powerful is that we can deliver these insights through our proprietary distribution channels such as MSP, SalesEdge, Empower and LendingSpace. No other company in our industry can link these extensive datasets and deliver these insights through our network. Client feedback on a data hub and the powerful insights that Black Knight can deliver has been incredibly positive.

We currently have agreements with three clients to ingest their data into the LoanSphere Data Hub. I’d like to share two examples of the valuable insight we can provide, when this data is linked. These examples support lead generation and portfolio risk reduction, two of the main challenges our clients face.

The first example benefits financial institutions that have both the bank and a mortgage division. Many bank customers have their mortgages with a different financial institution. Using a list of the bank’s clients, Black Knight can leverage the client’s MSP data along with Black Knight’s real estate listings data to alert the mortgage operation when a banking customer has put his or her house on the market. This can then be delivered directly in real time to the loan officer’s desktop, so outreach can begin immediately. This incredible insight can help the mortgage company potentially gain two new customers, the initial bank customer who has listed his or her house and the person purchasing the bank customer’s home.

As another example, the LoanSphere Data Hub can also help services reduce the risk of taking improper action on deployed military members with delinquent loans. With Black Knight’s military insight, we can link MSP data with a data from the Department of Defense to alert servicers when a delinquent loan belongs to a deployed military member, and alternative steps should be considered. We have made significant investments in the linking of these data assets in the development of these insights because we are confident, this is the key to future success for Black Knight and for our clients.

Overall, our clients receive exponential value for every Black Knight product they use. And this is why we continued client wins at a very robust pipeline. When a client leverages the majority of the LoanSphere platform, for example, MSP along with Empower or LendingSpace and the RealEC Exchange, we consider them an enterprise client. And as I have said in the past, one of our growth strategies is to convert core servicing clients to enterprise clients. We have made great progress in executing on this strategy. We currently have nine enterprise clients. And with the implementations currently in process, we expect to have 12 enterprise clients by the end of the year. We are also in discussions with many other clients that could become enterprise clients.

It’s clear that our clients see the value that can be gained from using this enterprise approach. And when a client goes from using a single Black Knight technology like MSP, to using multiple technologies, the revenue to Black Knight can more than double. From our deep and integrated product suite, low correlation to macroeconomic conditions, and ability to grow revenue with strong leverage, there is no other company like Black Knight in the mortgage industry.

I’m excited about our future and look forward to sharing more successes with you in the quarters to come. Thank you for your time today. I’ll now turn the call over to Kirk for an in-depth financial update.

Kirk Larsen

Thanks, Tom and good afternoon everyone. Today I’m going to discuss our fourth quarter and full year financial results, and provide our outlook for 2016.

Turning to slide three, as Bill mentioned earlier, Black Knight delivered strong results during the fourth quarter, driven by growth in our origination technology and serving technology businesses. We generated $240 million in adjusted revenues, an increase of 7.8% versus the prior year quarter. Adjusted EBITDA increased 7.8% to $107.7 million compared to $99.9 million in the prior year quarter. Adjusted EBITDA margin was 44.9%, in both the current year and prior year quarters.

As a reminder, the fourth quarter of 2014 benefited from upfront revenues from a long-term strategic license deal in our data and analytics business, and our corporate segment had a non-recurring insurance benefit that reduced expenses in that period.

Adjusted net earnings from continuing operations, which assumes the conversion of Class B shares into Class A shares, among other adjustments described in our earnings release, was $40.4 million, an increase of 10.1% compared to pro forma adjusted net earnings from continuing operations of $36.7 million in the fourth quarter of last year. Adjusted net earnings per share from continuing operations for the fourth quarter was $0.26.

Depreciation and amortization expense excluding the incremental depreciation and amortization resulting from purchase accounting increased $3 million to $27.1 million during the fourth quarter, primarily due to amortization of previously deferred implementation costs and certain software projects, mainly in origination technology.

Capital expenditures for full year 2015 totaled $95.7 million compared to $66.9 million for the same period in the prior year. The increase was driven by project timing whereby 2014 capital expenditures were unnaturally low, resulting in project carryover into 2015. If you look at 2014 and 2015 combined, it’s an average of approximately $80 million per year.

The full year 2015, adjusted revenues increased 8.7% to $940.3 million compared to the same period in the prior year. Adjusted EBITDA increased 16.5% to $413.5 million. And adjusted EBITDA margin was 44%, an increase of 300 basis points compared to the prior year. Pro forma adjusted net earnings from continuing operations were $151.4 million, an increase of 25.6% from $120.5 million in the prior year.

Turning now to slide four, I’ll discuss our segment results. In the fourth quarter, adjusted revenues for the technology segment increased 10.2% to $197.6 million. Our servicing technology business had adjusted revenue growth of 3.2%, driven by higher loan counts on our core servicing platform and increased communication and usage fees. The higher loan counts were driven by both new clients as well as organic growth at existing MSP clients.

In our origination technology business, adjusted revenues growth of 58.6% was driven by increased professional services and processing revenues from loan origination systems clients as well as revenue from Closing Insight clients. Adjusted EBITDA increased 13.8% to $110.2 million while adjusted EBITDA margin was 55.8%, an increase of 180 basis points compared to the prior year quarter.

For full year 2015, adjusted revenues for the technology segment increased 8.1% to $765.8 million from the prior year. Adjusted revenue growth was 4.1% in our servicing technology business, driven by higher loan counts as well as increased usage and communication fees.

In our origination technology business, adjusted revenue growth of 34.9% was driven by increased professional services and processing revenues from loan origination systems clients and revenue from Closing Insight clients. Adjusted EBITDA increased 14.7% to $424.4 million while adjusted EBITDA margin was 55.4%, an increase of 320 basis points compared to the prior year.

Turning to slide five, in the fourth quarter, data and analytics adjusted revenues were $42.3 million, compared to $43.3 million in the prior year quarter, reflecting lower upfront revenue from the long-term license deal that we signed in the fourth quarter this year compared to the deal that we signed in the fourth quarter of last year. Adjusted EBITDA was $7.2 million compared to $10.6 million in the prior year quarter, driven by the lower revenue and the strategic buyout of a data partnership in early 2015 that will continue to provide significant long-term benefits. Adjusted EBITDA margin was 17.0%, compared to 24.5% in the prior year quarter.

For full year 2015, data and analytics adjusted revenues increased 11.3% to $174.3 million, the growth was primarily driven by revenues from long-term license deals that carry a portion of upfront revenue. Adjusted EBITDA increased 75.6% to $28.8 million while adjusted EBITDA margin was 16.5%, an increase of 600 basis points compared to 10.5% in the prior year period.

Adjusted corporate expenses for the fourth quarter of 2015 excluding depreciation and amortization and interest expense increased $2.2 million from the prior year quarter. The increase was driven primarily by a non-recurring insurance benefit in 2014 and the addition of public company cost.

Adjusted corporate expenses for full year 2015 increased to $8.3 million from the same period in the prior year. The increase was driven primarily by the additional public company costs, a non-recurring insurance benefit in 2014, professional fees and severance benefits related to cost reduction efforts.

Turning to slide six, I’ll walk through our capital structure. At the end of December, we had cash and cash equivalents of $186 million and available capacity on our revolver of $300 million. Total debt principal at the end of the December was $1.67 billion with an implied gross leverage of 4 times. On a net basis, leverage was 3.6 times at the end of the fourth quarter. By virtue of our net leverage ratio being below 4 times at the end of September, the spread on our term loan and revolver was reduced from 225 basis points to 200 basis points beginning in November.

Turning now to slide seven, I’ll walk you through our outlook for 2016. Adjusted revenue growth is expected to be in the range of 6% to 8%. Adjusted EBITDA growth is expected to be in the range of 8% to 10%. And adjusted earnings per share is expected to be in the range of $1.09 to $1.13.

Before I walk through some modeling details, I’ll go through a few items reflected in our outlook. Our outlook reflects a continuation of current market conditions, including declining origination volumes, stable to slight decline in new seriously delinquent loans, and a stable number of total active first loans. For the technology businesses, it reflects the successful implementation of key deals and high incremental margins on the associated revenue growth. For data and analytics, it reflects increased cross-sell effort offset by a headwind from lower upfront fees from long-term license deals that will mute growth in that segment compared to 2015. It reflects an increase in depreciation and amortization relating to Closing Insight implementation and 2015 capital projects and an increase in interest expense due to an expected period of higher interest rates and the effective interest rate swaps put in place to convert $400 million of our floating rate debt to fixed rates for three years. The fixed LIBOR rate under the swaps is approximately 102 basis points.

Additional modeling details underlying our outlook are as follows: We currently expect interest expense of approximately $72 million. However, it could vary depending on the effective actual versus expected interest on our floating rate debt as well as the potential for the execution of additional interest rate swaps. Adjusted depreciation and amortization expense of approximately $109 million which could vary depending on the timing and amount of CapEx projects and implementations, to reflect a fully distributed effective tax rate of approximately 37% which is lower than 2015 to an expectation of higher tax credits in 2016 and 2015, and finally CapEx of $80 million to $90 million.

Although we do not provide quarterly guidance, I want to provide you with some color as to how we expect to progress through the year. We expect the first quarter to reflect a similar pattern to last year, which includes sequentially lower one-time revenues from license deals, a sequential increase in payroll tax expense of $2 million to $3 million due to the start of the new year and annual incentive payments that are paid in the first quarter and seasonal slowness in professional services and other transactional volumes. Our data and analytics business has a though comparison to the first quarter as it had a large long-term strategic license deal in the first quarter of 2015. And finally, as the year progresses, we expect revenues to rise sequentially at high incremental margins as implementations go live and volumes ramp up to full run rate.

In summary, we are very pleased with our fourth quarter and full year financial performance and look forward to a strong 2016. In closing, we continue to execute on the growth strategy that we outlined during our IPO, and we remain focused on generating strong profitability and deploying capital to create long-term value for our shareholders.

Thanks again for your time today. This concludes our prepared remarks. Operator, please open the line for questions.

Question-and-Answer Session


Thank you. [Operator Instructions] Our first question is from Tien-Tsin Huang from JPMorgan. Please go ahead.

Tien-Tsin Huang

I guess I’ll ask on the bookings front, I heard the strong TCV [ph] commentary from you, Tom. I’m curious what you’re thinking is for bookings growth or TCV [ph] growth in 2016 relative to 2015; what do you say?

Tom Sanzone

Well, we continue to see a very strong pipeline. As I talked about in my opening remarks, we’re really excited about the success we’re having in converting core servicing clients to enterprise clients. There continues to be a lot of interest in the client base to convert to a Black Knight enterprise deal. And what we’re doing now is that enterprise deal was normally adding origination technology as well as RealEC, and now we’re excited because we are getting more and more interest in the Data Hub as well. So that would be the full breadth of products that we could sell into the client.

And as I mentioned in the remarks that these are needle movers from the perspective of we often, often see the revenue when we convert to an enterprise client doubling or more. So, the conditions that we’ve talked about since the IPO still remain true. I mean the clients are looking at better tools and capabilities to manage and mitigate risk. They are looking for a technology that will improve the operational capability, operational excellence. And they are certainly looking for tools and capabilities that will drive profitability performance, both from a retention of existing assets to acquiring new clients. And so, we are really focused across our business on those three key things that the client is struggling with, and we have a number of solutions in each of those areas.

Tien-Tsin Huang

So, as my follow-up then, just on the -- maybe I’ll ask if there is any risk of the backlog converting perhaps a little slower; what have you seen in past cycles? Because this earnings season, we heard a lot about those types of gears, [ph] in terms of IT spending and some delays in project wins. Is that something that we should consider as a risk for Black Knight, Tom or Kirk?

Tom Sanzone

Listen, I think that a couple of things there; one is you should know that we take a certain amount of that into account, right? So, if we are doing a big conversion and a year before that conversion’s going to happen, the thinking is it’s going to be second quarter, we are likely to consider it a third quarter execution, right? So, when we look at the -- at our project portfolio and implementation portfolio, we do put a certain factor on top of it to account for natural movements. And depending on the product, we know what that normally is; whether it’s a quarter or a month or something like that. That’s always a risk in our business which you know, and we try and account for it in our plans.

Bill Foley

Hey, Tom, the only thing I think you should add is that you just went through the third quarter and fourth quarter with regard to all the implementations, you just might mention the success of those implementations and the risk that we had in providing products to our customers, if you wouldn’t mind.

Tom Sanzone

Yes. Last year frankly from a product implementation perspective for any business was probably the Mount Everest of challenges because you had this, which initially in August day, which turned into an October 3rd day where our business as an example in loan origination, we had to do dozens of implementations on a certain fixed date to get our client in a situation, which they would be compliant. At the same time concurrently, we built a brand new product which is Closing Insight for 10 lenders but we really had to interface some work with 40 providers in the industry to make it happen and that also had to go live on that date. So, we are good and we are good at implementations; that’s our core business; that’s our -- I think from our brands perspective that’s one of the reasons why we continue to get new business and we get large clients because we have a track record of not only delivering on time but also at scale providers, large clients that have significant risk.

So, we do a good job in this space but also we do take into account from experience what the delays could potentially be and we build that into the plan.


Our next question comes from Sara Gubins from Bank of America. Please go ahead.

Sara Gubins

In that past, you’ve talked about the potential for some large client wins that aren’t on your platform currently. Could you give us any update on status of conversations on those?

Tom Sanzone

Yes. There really isn’t much to add on that. As I’ve mentioned in the past, we really believe we have a compelling business case in this area. I think you are pointing mostly to MSP deals with large non-MSP clients. The only thing that I would add is I would say I think that the business case frankly has gotten stronger because of the trend now and our proven capability to convert loans and lines on to the platform. So, in the old days, you’d be looking at an MSP conversion which was just for first loans; now often in dialog with clients, you’re talking about the firsts and the seconds. And all what that does in practice Sara is make the business case more compelling because there is more -- frankly there is more cost saves, and there is more protection from a reg and compliance perspective for the client.

Sara Gubins

Okay, great. And then a question about the guidance, it’s a pretty tight range but could you talk about what might drive you towards the low or the high end of it? And just remind us of your exposure to origination revenue?

Kirk Larsen

Yes, our exposure to origination is relatively small. As you know, our contracts in origination technology business have -- those contracts are volume based at minimums. And so we have protection to the downside but we certainly capture the upside. So, that’s in the LOS part of our business and really see their -- Closing Insights, those contracts are also structured to be much more recurring in nature with upside from volumes. And then you have the exchange that’s still volume dependent. But all told, it’s a relatively small percentage of our revenue because the bulk is MSP that’s based on the number of loans outstanding, and that’s a very consistent and growing number.

Regarding your -- where we would be in the range, it’s a very good question. And I think to be at the low end of the range, it would have to be resulting from delays and implementations, lower than expected sale and deliver revenue which every client has some of that. And if there really were a severe downturn in the market, but we do have protection against that as I just described. As far as why we be at the high end of the range, it’s really the inverse. It’s implementations go quicker than we expect or if professional services spending is higher than we anticipate in our plan, if we sell more strategic license deals than we anticipate or the inverse on the market, if there is a material upswing. So that’s really why it would move within that as you pointed out relatively narrower range.


Our next question is from Andrew Jeffrey from SunTrust. Please go ahead.

Andrew Jeffrey

Hi guys, thanks for taking the question. So, I’d like to -- recognizing it’s a smaller part of the business, I’d like to focus a little bit on D&A. And I’d like to understand a little bit, has anything changed in your view in the competitive environment and/or I guess the contract structure environment, and as much as perhaps some of these bigger upfront strategic deals may not play as significant to role as they have in the past? Or generally speaking, I guess maybe you could talk to the evaluation of that business and perhaps anything that’s changing in your view competitively or structurally overall?

Tom Sanzone

Yes, I’ll take that, it’s Tom. Listen, I think that the -- actually the big strategic data deal is the change. So, in the past what we would do similar to a core is we would do licensing agreements that were much smaller in nature and shorter term in duration with a lot of restrictions whereas our data deals now are much bigger, longer term with less restrictions on a client as far as data usage. So, we’ve been very successful in shifting that model from the smaller one up, one year licensing agreements to long-term strategic data deals which we think will strengthen that business, just like it has in our other businesses, as far as having long-term deals in place with consistent revenue and nice margins. So, that’s one of the changes.

I think, if we can just take a step back for a second to just say where we are, I think we’re on a journey here. And so there is a lot that was done in a short amount of time. So, if you look at pre-2014 when we took over the company, that business was not growing and was on track to record significant losses pre-2014. There wasn’t necessarily a clear path to getting a return on the significant investment that was made in the property records data base as an example. So, we quickly changed the team, we restructured the business, laid out a strategy to monetize the public records investment through these large long-term strategic license deals. We have been seeing the benefit of that restructuring and have been very successful in selling large license deals. And you’re seeing the lumpiness of that in the P&L because part of the long term deals as we’re selling, not only their current data and then updating it as we go to clients but they’re buying the history. And the way in which the contracts are constructed is they pay for all the history upfront when we do the deal. And so those are meaningful numbers and that’s why you see these quarters that have tough comparisons.

The exciting next step for the business, and you talk about the competitive environment and maybe changing the game in a way. We are really excited about selling this data hub product; we invested a significant amount of money into this technology. Clients are now seeing it. Clients are excited by it. I gave you a few examples in my opening remarks. And frankly if we are successful with this product, I do think it’s a game changer. Because what we are doing here is we are moving away from selling particular data assets to basically selling a technology and what the client is buying are these insights that I talked about that are high value add to the business.

So in essence you get the appliance already loaded with all of these assets, you’re not even thinking about buying a particular asset, you are buying the insights that the appliance gives you to run your business. And we’re getting a lot of excitement around that. And we think that is a big next step in where we are going to go with the data business. And I do think it is a game changer from the perspective of we are uniquely positioned to deliver these capabilities because of our very substantial platform business where we have clients’ proprietary portfolios; we have substantial public assets like a public records data plus listing data and others, and we go to third party sources like I gave you with the Department of Defense, plus clients are contributing other proprietary assets. And we are able to create very powerful analytics and decision making tools for clients. And we distribute it through our platforms right to the person who needs the data kind of real time and that’s our proprietary network. So, this is where we are going and we are excited about that. And frankly if we are successful with this which we believe we will be, it’s going to be very hard to counter that given the unique set of businesses we have and relationships with the clients. I know that was a long answer but…

Andrew Jeffrey

It’s helpful in understanding the strategy. So, the follow-up, is it safe to assume that to the extent you continue to have the success with the more strategic positioning of that business that we could see perhaps upside from strategic deals in the year, revenue upside that is or is that contemplated in any way in the consolidated guidance you’ve given?

Tom Sanzone

I would say Andrew that that would be -- that’s something that I think would; it all gets baked in the guidance. I think we are on a journey, the timing of this is uncertain. But I would say, it’s generally contemplated and it’s certainly a longer term play.

Bill Foley

I think the interesting thing to consider about the data hub though, and I’ll be giving you guys updates on this as we go forward. One of the things that we manage with Black Knight and you guys have to take into account, a lot of our products we talked about it kind of the IPO our heart and lung transplants right. So, these are not products that you implement in 30 to 60 days and start making money; it’s usually six months, a year implementation for these products. The thing that we are also excited about the data hub is successful is the nature of the product as it can be implemented much quicker and revenue can be realized much quicker. And so that’s why we’re excited about it and that’s why I’ll keep you guys obviously informed on deals and what we are doing going forward because that could change the game a little bit on revenue recognition because that is a quicker turn product that can bring revenue in shorter duration.


Our next question is from Bill Warmington from Wells Fargo. Please go ahead.

Bill Warmington

Good afternoon, everyone. So for 2016 guidance, I was going to ask if you could discuss your visibility today on that 6% to 8% revenue growth target, specifically around how much, if you will, is coming from existing backlog; how much from contractual price increases; and what’s the stretch goal? I’m getting a lot of questions around what’s an Armageddon scenario for the company and that’s I’m trying to get at.

Tom Sanzone

Understood. So, if you think about the nature of what we do and our contracts and our level of visibility, first and foremost -- our price went up on January 1st, so we have our cost of living adjustment that is I call it point of growth that that happens once you get back from the holiday. And in any typical year, the vast majority of what we’re planning on for the next year is signed and either implemented or signed and to be implemented. And so really, there is a limited amount of what I’d refer to as sell and deliver or go get revenue. And so from an Armageddon scenario, we have such high visibility that is we feel very good about our guidance and what we can see going forward, just based on how you build up the building blocks to our guidance, particularly when you’re only looking out one year. If you’re looking out two to three years, certainly the visibility gets a little foggier but out one year, we feel very, very good about what we see.

Bill Warmington

And so, my follow-up question for you is, you talked about the progress you’re making in terms of adding enterprise clients, how much more profitable are the enterprise clients than non-enterprise clients?

Tom Sanzone

Well, as you think about adding new products and converting from when you are just an MSP clients to when you add the other products to fill out the suite, I think the contributions are very high. And you’re talking about doubling the revenues in many cases from where they were to where they’re going. So, at very high incremental margins, they are highly profitable. And so the more you add, the more efficient you get and the incremental margins are higher.


Our next question is from Jason Deleeuw from Piper Jaffray. Please go ahead.

Jason Deleeuw

Thank you. Nice work in the quarter. Question on the data hub with the revenue there, is that mostly like recurring revenue or is there a transaction based element to that?

Tom Sanzone

That’s going to be a recurring revenue model. What we’ve done over the past couple of years is we have sought wherever possible to put best practices that we’ve learned from our core business and take those strategies, both from a pricing perspective, just how we get paid and then also the call [ph] that goes with it. So, we’ve been very disciplined about that in the last couple of years trying to convert existing business models into the so called MSP model and so we’ve taken those best practices, we would tend to build those into the data hub model also.

Bill Foley

Jason, if you look at our new products like a Closing Insight as an example, those deals are based off that same MSP kind of best practice. And then what we did was existing businesses like our origination technology and obviously Closing Insight and RealEC, we started slowly as we got new clients or got renewals, we’re putting that model in place. So the data hub would be the same, it would be -- our goal would be to sell it on a long-term contract basis with callers [ph] and all the other aspects that a servicing deal would have.

Jason Deleeuw

And then for a follow-up on the guidance, the revenue growth and the EBITDA growth and the implied margin expansion, what are the expectations by segment? Are there any big differences by segment that we should be aware of or is there anything you could help us out in just thinking about modeling the segments for the revenue growth and kind of thinking about the margins?

Kirk Larsen

Yes, the way we’re thinking about it Jason is high single-digit growth for technology, driven by strong origination technology growth and really solid growth in servicing technology, and then more of low to mid single-digit growth in data and analytics due to the high upfront revenues from strategic license deals in 2015 that we’ve talked about earlier. And then from a margin perspective, we expect all businesses to expand more margins in 2016. But practically speaking the D&A segment should expand margins more than the technology segment, just in light of the starting point and then within technology, we would expect greater margin expansion from origination technology than servicing technology.


Our next question is from Jeremy Campbell from Barclays. Please go ahead.

Jeremy Campbell

Thanks, guys. I know you guys mentioned earlier that your exposure to originations is ultimately small and you are protected on the downside. But as the recent rate rally holds and at least stays here or maybe even goes lower, you would probably see many refi boom like we saw in the first half of last year. I’d assume Empower platform would benefit from that. So would that position you to the higher end of your guidance range or would it not have that big of an overall impact?

Tom Sanzone

It really wouldn’t have a significant overall impact. We did -- to your point, we did go through that in the first quarter of last year and it was marginal upside I’d say primarily in the RealEC business but as far as we were to see it now, part of it depends on -- it’s contract by contract basis to see where the minimums are and where we are relative to those. So, I think all told, I don’t think within some amount of a refi boom, I don’t think it would be a noteworthy effect but it certainly wouldn’t hurt and would help move us within the guidance range a bit but it’s not like it would blow us through the top end.

Bill Foley

And it would be specifically in the RealEC business…

Jeremy Campbell

Got it. And it sounds like you guys are making pretty good headway on cross-selling your current products and converting clients to enterprise but can you also provide us quick update on your cross-selling initiatives with providing some FNF or service link solutions?

Tom Sanzone

Yes, I mean, we take certain opportunities; it really comes down to the situation with the client. There have been some deals that we’ve done that were significant for both sides where we kind of came to the table together with a technology solution and a services solution. It really depends on the nature of what the client challenges and whether expands both businesses.


Our next question is from Bose George from KBW. Please go ahead.

Chas Tyson

This is actually Chas Tyson on for Bose. I just wanted to confirm on the guidance on the EPS part of the guidance that you gave that there is no buyback assumed in that. And also I ask you about your thoughts on allocation of capital as you go into 2016 here in by getting pretty closed of leverage target?

Bill Foley

There is no buyback contemplated in the current guidance. However we’ve always been opportunistic in all of our companies when share prices have been reduced through really in a the face of what we believe as a very-very strong company who is going to perform well that has its revenue and its earnings and its EBITDA performance kind of already baked in for the whole year and can really only have upside. So, if we were to continue to have pressure in the stock market, then we would reevaluate what our buyback situation would be going forward with Black Knight. But as Kirk was starting to say, it’s not presently contemplated but that doesn’t mean, we won’t execute against it because we have significant cash on hand, we have a situation where we really cannot prepay debt without entering some adverse tax consequences at the holding company. And we don’t have any large acquisitions that are presently contemplated. So, there is quite a bit of cash available and the company’s cash flowing very well. So that’s a non-answer to your question but I think you can get the drift of it.

Chas Tyson

That’s very helpful. And then just to follow up, curious about the trends that you are seeing in Closing Insight and demand you’re seeing for that product, if there was somewhat of a second wave it developed in terms of demand after maybe people who were using another product or were not using a product to struggle with the new regulations?

Tom Sanzone

Yes. I think that in Closing Insight we have a number of conversations ongoing around additional clients to be put on the platform. I think what’s going on there is that the industry, this thing kind of went off on October 3rd. It’s certainly being a challenge for everyone, the lenders; the providers; the title companies and the technology companies. So, I think what we are doing right now is are going through a burning period; we are improving usage. Getting 20,000 settlement agents often familiar with the process takes a fair amount of time. And we do see a more interest in the products but I think our focus would be probably after Q1, maybe Q2 but definitely after Q1 on doing additional implementations.

Chas Tyson

Okay, that makes sense. And then, just actually if you guys have any color on how are you seeing clients perform with that that would be helpful as well. Whether you saw delays in the initial regulation that have corrected as we’ve gone through time or were there really -- it was pretty smooth implementation from your perspective?

Tom Sanzone

I think from our perspective, from a technology view the technology for the most part there is always blips here and there but for the most part worked as was expected. I think that the burning process as I mentioned is probably going to take a good six months or so. And we’re seeing the signs of additional usage going up. I think from the business’ standpoint, I think you’ve read in the press, I think people have figured out ways to get their closings done. And now, it’s a matter of getting more and more efficient, getting them done as we go through it. So, I think generally, the industry reacted pretty well.


Our next question is from John Campbell from Stephens Inc. Go ahead.

John Campbell

Hey guys. Just first question here, just specific guidance on Closing Insight; it seems like Closing Insight, you guys have real potential there to maybe move the middle over the next few years, just depending on the rate of adoption. But the last that I saw, I think you guys were touching about 30% or so industry volume. So, curious about ‘16 guidance; does that assume a similar type of penetration rate or maybe little bit higher?

Kirk Larsen

It assumes some additional wins in Closing Insight. So, as Tom said, we are having conversations with folks. So, it assumes that we continue to win with Closing Insight and that there is a scope nicely next year.

John Campbell

Got it. And not trying to split hairs, but are we still right around that 30% rate or so?

Kirk Larsen


John Campbell

And then just last one from me, can you guys refresh us on the latest loan count for MSP? I think last I saw was about 30 million.

Kirk Larsen

Yes, it’s right around that area. So first on the first lien side, we are up to 59% share and pending the implementation of JPMorgan Chase and PNC, we held pretty constant on the second lien side.

John Campbell

Got it. And then the 17% of the total HELOC loans that Tom referenced, does that already include JPMorgan and PNC?

Kirk Larsen

That does. Yes, his specific comment was after converting those two, it would be about 17%, which is like 3 million loans.


Thank you. I’d like to turn the call back over to management for closing remarks.

Tom Sanzone

Okay. Well, thank you all for your time this afternoon and we’ll look forward to giving you updates in the future. Thank you.


Thank you. This does conclude today’s conference. You may disconnect your lines at this time.

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