Lender Processing Services' CEO Discusses Q1 2012 Results - Earnings Call Transcript

May. 3.12 | About: Lender Processing (LPS)

Lender Processing Services (NYSE:LPS)

Q1 2012 Earnings Call

May 03, 2012 10:00 am ET

Executives

Nancy Murphy - Vice President of Investor Relations

Hugh R. Harris - Chief Executive Officer, President and Director

Thomas L. Schilling - Chief Financial Officer and Executive Vice President

Analysts

Darrin D. Peller - Barclays Capital, Research Division

Carter Malloy - Stephens Inc., Research Division

John Kraft - D.A. Davidson & Co., Research Division

Kevin D. McVeigh - Macquarie Research

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Geoffrey M. Dunn - Dowling & Partners Securities, LLC

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Brett Horn - Morningstar Inc., Research Division

Ty M. Lilja - Feltl and Company, Inc., Research Division

Operator

Good day, and welcome to the Lender Processing Services' First Quarter 2012 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'd like to turn the conference over to Ms. Nancy Murphy, Vice President, Investor Relations. Please go ahead.

Nancy Murphy

Good morning, and welcome to Lender Processing Services' First Quarter 2012 Earnings Conference Call. With us today are Hugh Harris, President and CEO; and Tom Schilling, CFO, to review first quarter results and answer your questions.

Before we get started, I would like to remind you that our earnings release and the slide presentation we will use to facilitate today's discussion are available on the Investor Relations section of our website. In addition, I'd 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 do not undertake 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 in comparison to prior periods. Reconciliations between GAAP and non-GAAP results have been provided in the earnings release.

I would also like to point out that we made some changes to our financial reporting structure this quarter to provide better transparency into our business and provide better alignment with how we are managing the business. These reclassifications do not impact the consolidated results of the company.

We have provided exhibits to our financial statements, reclassifying prior periods to conform with the current presentation for your modeling purposes. Tom will provide detail on these reclassifications in his remarks.

We're also providing greater visibility into our Technology, Data & Analytics segment. We're now reporting revenue for 4 categories rather than 2. These categories are Servicing Technology, Origination Technology, Default Technology and Data & Analytics. Exhibit E of our earnings release provides both past 9 quarters of revenue in the revised format and Page 6 of our supplemental material provides a description of each category.

Lastly, we have renamed the Loan Transaction Services segment, to simply Transaction Services and the Loan Facilitation Services subsegment to Origination Services. Now I'll turn the call over to Hugh.

Hugh R. Harris

Thank you, Nancy. Good morning, and thank you for joining our call today. I'm going to start with an overview of our progress then Tom Schilling, our CFO will walk you through our financial performance and then finally, we'll open it up to questions. We are very pleased that 2012 is off to a positive start for LPS. Although the operating environment remained challenging, we delivered first quarter results that exceeded our outlook, generating revenue of $506 million and adjusted net earnings of $49.5 million or $0.59 per diluted share.

Our Technology Data & Analytics segment posted another strong quarter of operating performance. Revenue in our Transaction Services segment was down overall. Although our Origination Services business was strong, fueled by the high refinance volumes, this was offset by declines in Default Services, which continue to be impacted by industry-wide foreclosure delays.

During the quarter, we expanded key customer relationships by continuing to deliver outstanding technology and services, enhancing the core drivers of our business, investing in our technology and focusing on resolving legal and regulatory issues related to past practices. We also continue to move forward with our commitment to achieving the gold standard in operational excellence. Although we have plenty of work ahead, we are beginning to realize the benefits of the changes we made in the last 2 quarters to position LPS as the most trusted and critical provider of technology and business services to the mortgage industry.

Technology is at the center of the LPS business model and we continue to make investments to expand our market leadership. We are seeing increasing demand for both our technology and expertise as the industry looks for solutions to reengineer the mortgage process in response to the evolving business improvement requirements and emerging national servicing standards.

As the leading provider of end-to-end integrated solutions, including origination, servicing and Default Technology, we believe LPS is best positioned to help lead the industry and work as a strategic partner to meet these evolving needs.

Let me briefly walk through the 4 areas where we are focusing our investments. Our Servicing Technology, MSP, which processes over 50% of the nation's mortgage loans had another solid quarter of growth. In the first quarter, we continued to see a flight to quality in response to regulatory changes and signed 2 new MSP customers representing approximately 125,000 loans.

Since becoming an independent company in 2008, we have increased Servicing Technology revenues each year, despite a decline in total number of mortgages outstanding. Our clients choose MSP because we continually add value to the platform by delivering system enhancements and innovative new capabilities, while providing consulting services to help our clients improve their operational performance.

Some of the recent enhancements include tools to help MSP clients to comply with requirements, such as single point of contact, the Servicemembers Civil Relief Act and HAMP. Our Default Technology, Desktop, is a great example of how our strategic partnerships with our customers can lead to innovation and first mover advantage. We have invested in the platform to develop industrial strength of capabilities to support servicers of all sizes. Desktop Default Technology is now the market leader and generated revenue of $120 million in 2011. Our scale and market leadership positions us well as the backlog of seriously delinquent loans is processed.

Moving on to our Origination business. Our Origination Technology is a growth area for LPS as the industry looks to strengthen the processes and enhance risk management. It is also an important component of our strategy to capture more of the purchase origination market in the future. The origination space has historically been very fragmented due to the lack of fully-integrated solutions for this market. We are investing in a comprehensive solution that addresses the need for compliance, transparency, accountability and operational performance.

This solution will leverage our strong product offerings, including our loan origination platforms and integration technologies. It will also offer seamless connectivity to our Servicing and Default Technologies, which is an important competitive advantage for LPS.

We continue to invest in our Data & Analytics business, which includes our leading proprietary loan-level database, property records data, valuation and analytics capabilities. Mortgage lenders and servicers use our Data & Analytics to help them make more informed decisions on their portfolios and to develop strategies for borrower interaction and loss mitigation.

Moving on to our Transaction Services segment. Origination Services had a strong quarter and benefited from refinanced volumes that were better-than-expected, as rates remain at historic lows. Because we have strong relationships with 17 of the top 20 originators and we operate the largest centralized title and closing operation, we are well-positioned to benefit from higher volumes. The HARP 2 program came on line in the first quarter and should provide a larger pool of loans to refinance due to revised underwriting standards.

While it is still too early to determine the success of the program, our largest customers have indicated that is off to a positive start and will likely exceed HARP 1. As you know, we have been a major participant in HARP 1 and expect to be a major participant in HARP 2.

Our Default Services business was down in the first quarter as the largest servicers continued to work through regulatory changes and emerging servicing standards, which resulted in industry-wide foreclosure delays. Our expertise in Default Services continues to be in demand with our key customers who value LPS's ability to deliver services that adhere to regulatory and compliance requirements. The enhancements we made to our management team and our processes in the second half of 2011, position LPS well when the volumes return.

There's still a backlog of approximately $3.7 million seriously delinquent loans, which are on average, over 500 days past due, as detailed in our LPS Mortgage Monitor report. We believe that the age and severity of these delinquencies make the foreclosure process the primary solution with a majority of these loans.

We are cautiously optimistic that volumes will increase later in 2012 as the largest servicers begin to implement the new regulations and standards. With regard to legal and regulatory issues related to past practices, as I outlined last quarter, it is one of LPS's top priorities to resolve these issues in a manner that is in the best interest of our company, our customers, our shareholders and our employees.

We continue to work with the various state attorneys generals and have had positive results on many of our third-party litigation matters. With regard to the work being done around the consent order, which we entered into with the federal regulators in April of 2011, we continue to cooperate with all requests and we have met all deadlines and requirements established by the regulators.

At the completion of this process, we continue to believe that LPS will be the only provider of technology and services to the mortgage industry that has undergone such a thorough regulatory and risk review. In recent articles, the CFPB has been quoted as saying that third-party vendors in the financial services industry will be under greater scrutiny to ensure they adhere to the same high standards as the banks.

We believe the work we've done under the consent order, combined with our commitment to achieving the gold standard in regulatory compliance and operational excellence addresses this requirement.

Furthermore, this strengthens LPS's competitive position as the industry establishes more rigorous standards for service providers.

I've continued to spend a great deal of my first 7 months at LPS meeting with our stakeholders, including our customers, shareholders, employees in various industry organizations and regulators. As I meet with our employees, I continue to be impressed with their enthusiasm and commitment to making LPS a better organization.

I've also spent a significant amount of time making sure our stakeholders and key external constituents understand the role LPS plays, the value we add and the actions we are taking to continuously strengthen, not only our business, but the industry at large.

Finally, I've been encouraged by the feedback our clients have given us about the value LPS provides and they told us they are looking to us for future solutions. As a result, we have even greater confidence that we have strong and trusted partnerships and a significant opportunity to leverage our technology-driven solutions and expertise to help existing and new customers succeed.

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

Thomas L. Schilling

Thanks Hugh, and good morning. I'll review the first quarter results and our guidance for second quarter in just a moment, but I'd first like to review the changes we have made to the presentation of our financial statements included with our earnings release.

First, as Nancy pointed out, we're providing additional revenue detail in our Technology Data & Analytics segments. Second, we made a few small changes to our reporting units that involved reclassifying revenue and expenses between our Technology Data & Analytics segment and our transaction services segment.

We previously reported certain services revenue within other TD&A and some small technology products that were included within Transaction Services. For example, as we have mentioned previously, broker price opinions used to be reported within other TD&A and now, they are reported within Default Services.

Third, we have pushed down certain expenses previously reported within corporate into the 2 business segments. These costs primarily include equity compensation expense, certain legal expenses, human resources and other functions associated with running our business unit operations.

The total impact for 2010 and 2011 was that we moved approximately $42 million and $49 million of expenses respectively, from corporate to the segments with the split between the segments being roughly 50-50.

Fourth, we include -- we changed our income statement expense captions to include operating expenses and depreciation and amortization, as well as a breakout of legal and regulatory charges and exit in impairment costs. These new captions replace the previous captions of cost of revenue and SG&A.

We believe these changes, particularly the revenue presentation changes, provide better clarity between our technology products and our transaction services. It's important to note that these changes did not impact our consolidated financial results. Now I'll review the first quarter performance.

We're pleased that the first quarter operating performance exceeded our expectations despite continuing industry headwinds. Revenue in the first quarter was $506 million and above our expectations due to mostly stronger-than-expected refinancing originations in Transaction Services segment and another strong quarter in our Technology Data & Analytics segment, driven by Servicing Technology growth.

Revenue declined 5.2% sequentially and 5.8% year-over-year due to the continued delays affecting foreclosure activity. On a GAAP basis, we reported first quarter net income of $47 million or $0.56 per diluted share compared to $56 million or $0.63 per diluted share in the same quarter last year.

My remaining comments regarding first quarter financial performance exclude the impact of the adjustments outlined in the GAAP to non-GAAP reconciliation included in our earnings release as exhibit B.

Our success with the industry's largest mortgage originators continued during the first quarter as we increased revenue on a year-over-year basis by 6% with the top 20 originators and 4% with the top 5 originators. The top 20 originators continue to drive the vast majority of industry volume, generating over 80% of the mortgage volume in 2011. Our ability to grow relationships with the largest institutions positions LPS very well for the future.

Adjusted EBITDA was $119 million, down 12% sequentially and 22% from the prior year, driven primarily by lower contributions from Default Services. Despite the revenue pressure, we achieved a 23.4% EBITDA margin, reflecting the resiliency of LPS business model during periods of cyclical decline.

Adjusted net earnings were $50 million or $0.59 per share. Cash flow from operating activities was $90 million in the first quarter and adjusted free cash flow was $69 million. Capital expenditures totaled $64 million in the quarter and reflect our continued investments in our core technology platforms.

In line with our capital allocation strategy during the quarter, we reduced debt by $17 million, paid regular dividends of $8 million and ended the quarter with cash of $104 million, up $26 million from the prior quarter end.

We've now achieved our liquidity objectives of paying off our revolving credit facility and reaching $100 million of cash on the balance sheet.

Since becoming a standalone company in July of 2008, our strong cash flows enabled us to reduce debt by over $450 million to $1.1 billion at the end of the first quarter.

The average interest rate on our debt was 6% at the quarter end, our near-term capital allocation objectives are to continue regular quarterly dividends, maintain roughly $100 million of available cash and use excess cash flows to pay down debt.

Now I'll review the performance in our 2 business segments. I'll refer to Slides 8 and 9. Technology Data & Analytics revenue grew almost 6% year-over-year. Servicing technology was up 5% driven by higher system usage and an increase in active loans on the system. Default Technology increased 8% to $32 million and Origination Technology was up almost 14% to $21 million. Our Servicing, Default and Origination Technology revenues have grown consistently in the past 3 years despite sharp declines in origination and forecast volumes -- and foreclosure volumes and represent $161 million of revenue in the quarter.

Data & Analytics revenue declined about 3% year-over-year as the depressed housing market impacted demand for services. However, we continue to make investments to enhance our Data & Analytics products and expect those investments to provide growth down the line.

EBITDA for the TD&A segment was $73 million, representing a strong 41% margin. EBITDA decreased 2% year-over-year as strong Servicing Technology contributions were offset by current investments in our Origination Technology as we position ourselves to capitalize on longer-term Origination growth opportunities.

Moving on to Transaction Services segment. Revenue decreased 8% sequentially. The decrease was driven primarily by an 11% decline in Default Services revenue as foreclosure filings reported by RealtyTrac were the lowest since fourth quarter of 2007. This included a 6% sequential decline in notices at Default. Origination Services revenue remains strong after a positive fourth quarter with a modest 3% sequential decrease as historically low interest rates drove solid refinance origination volumes.

EBITDA for Transaction Services was $56 million, down 26% sequentially, primarily due to lower operating leverage from reduced Default Services Volumes. As Hugh mentioned we believe the inventory of approximately $3.7 million seriously delinquent loans continue to represent a significant revenue opportunity for LPS as servicers begin to process this backlog over the next few years.

Strong open order accounts in the origination services also drove the need for additional staffing in the first quarter with expected closings to flow through in the second quarter. Corporate expenses for the quarter, which are net of allocations to the reporting segments totaled $10 million and were flat year-over-year. We expect corporate expenses to remain in this same range in the near-term.

Now I'll touch on our reserve for the legal and regulatory actions that we have established in the fourth quarter of 2011. During the quarter, we assessed the adequacy of the reserve and determined that no change was necessary at this time. As a reminder, the reserve is based on our best estimate of cost to complete the document execution phase of the consent order and estimated cost to resolve certain other regulatory and legal inquiries. It is important to note that the final impact could differ materially from our current estimates.

Now I'll review our guidance for the second quarter as shown on Slide 11. For the second quarter, we expect the operating environment to remain consistent to the first quarter and therefore, we expect consolidated revenue to be in the range of $500 million to $520 million, and adjusted EPS in the range of $0.58 to $0.62.

Again, we're very pleased with the first quarter results and with the progress we've made over the past several months to position LPS as the most trusted and reliable provider of technology and business services to the mortgage industry.

With that, I'll now turn the call over to the operator so we can answer some of your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Darrin Peller with Barclays.

Darrin D. Peller - Barclays Capital, Research Division

First question, just seems like Origination Services business continues to perform better than overall industry volume trends. Is this something we should expect continue going forward? And if so, how is this being achieved?

Hugh R. Harris

I think our origination services has traditionally outperformed the industry. I think it's largely, because of the technology that we provide into that segment. I think the service levels that are achieved within that segment tends to be a very attractive model for those particularly in the refi efforts for the centralized titling close.

Darrin D. Peller - Barclays Capital, Research Division

All right, so that should be continuing going forward, Tom?

Thomas L. Schilling

Yes, we continue to expect to perform at or better than the market metrics, generally speaking, in the Origination Services.

Hugh R. Harris

Yes, one of the things, too, we talked about, Darrin, was the fact that we did the majority of work around HARP 1 and we expect to do the same around HARP 2.

Darrin D. Peller - Barclays Capital, Research Division

Okay, that's helpful. Just one follow-up question on the Data Analytics side of the business. I mean, overall, most of your traditional data businesses were very strong, MSP, Desktop. The Data Analytics piece was the one area that actually was down, so of course, we're going to pick on that. Any opportunity for that to improve and move higher over time? And it like that hasn't been the biggest part of your data business in the past, but I know it's one that you've been in the focus of growing in the future.

Hugh R. Harris

Yes, it has been something we've been investing in, but one thing I would say about the Data & Analytics business, you really have to have the database built, which we have been investing in over the last several months and we'll continue over the next -- over the coming months in 2012. Once those products has had more comparability, competitively, then we expect to be able to take larger pieces of revenue. So that's something I'd say for 2013 and beyond that we look at as providing more growth than in the near term.

Darrin D. Peller - Barclays Capital, Research Division

All right. And then just 2 more quick ones maybe.

[Technical Difficulty]

Operator

We'll take our next question from Carter Malloy with Stephens.

Carter Malloy - Stephens Inc., Research Division

So I wanted to talk about the Default segment first here, you will take notice the Defaults were a little less of a decline than your segment. And I understand there's a difference for lifetime recognition throughout the foreclosure process, so can you remind us of how that works in terms of recognition in the model and when you guys expect to see that segment turn up a little bit?

Thomas L. Schilling

Yes, clearly, if you look at NODs, our revenue trailed back just a little bit in terms of the metrics. As we said in the past, NODs are as good a indicator as anything of the overall health of the foreclosure activity in the market condition, which is why we reference it. However, as you know, Carter, there's not a single metric that captures our revenue drivers precisely and sometimes that results and disconnects between our revenue and the metric, both positively and negatively. That being said, I think, in the quarter, a couple of things. We had a little bit of a mix issue going on. As you know, we have a pretty large piece of our Default Services revenue roughly about 1/3 of it is coming from field services and in the fourth quarter, you have a high amount of seasonality related to winterizations that peak in the fourth quarter and those are absent in the first quarter. We've also, as Hugh mentioned in his comments and I reiterated, the largest servicers who we're really aligned with, have not really influenced that number, I think they had probably, collectively, a steeper decline in NODs in the first quarter than the market did in general, which affected us. And additionally, we did say, we took some additional reserves on our receivables. As you can expect, some of our accounts receivable in the Default segment have aged out considerably given the delays in the foreclosure process, and we took some incremental reserves on some of those agings by at about $5 million in the quarter, which impacted our -- both revenue and EBITDA. But, and we've talked about in the past, I would say, we've made some substantial investments and changes in the Default Services business to improve our compliance, risk profile and the organization in general. And we believe those changes are going to position us well to capitalize on the growth opportunity that Default Services represents over the next couple of years.

Carter Malloy - Stephens Inc., Research Division

Okay. And then on the Origination Services side of the business, I understand that HARP will help back fill some of the hole left potentially from refis sort on the back half. But can you help remind us, within that segment, how important is refi versus central refi? And is there sort of a run rate based on their of appraisal volumes or the AVM-type volumes that'll stay sort of regardless?

Thomas L. Schilling

Yes. In terms of the skew of our revenue, it is largely the centralized refinancing activity that goes through there. In our title and close, we are probably 95% of our revenue on our title and close is from centralized refi activity. On the appraisal, it's probably more like 85% refi related and about maybe 15% purchase. We expect over the coming year or 2 years that you'll probably see a little bit more opportunity to grow the appraisal side into a centralized way, more so than you will the refi act or the purchase transactions coming in to that centralized model. But we think over the longer term, you'll see more and more of purchase transactions come in to a centralized model. But I just don't think that's going to affect us in the near term.

Carter Malloy - Stephens Inc., Research Division

Okay. And then lastly, it looks like we had a very good impression set with the summary judgment, Northern Mississippi, with promise and Johnson and Freidman there and the fee-splitting allegations. Does that influence your conversation with the regulators at all? Was that even really a topic to begin with?

Hugh R. Harris

I think the regulators are fully aware of everything we're doing on the legal side, Johnson and myself have constant dialogue with them. So they know everything that's going on there. I think the settlement, every time we get some of these things resolved and put behind us is helpful, in all of our work with the AGs, the Fed and everyone else. Some of the AGs have asked about it and we've answered all those questions at this point.

Operator

We'll take our next question from John Kraft with DA Davidson.

John Kraft - D.A. Davidson & Co., Research Division

I would personally dig into the $3.7 million delinquencies and get a little bit of color from you on really the puts and takes for you of a short sale as a resolution for those versus the traditional Default, and specifically, what sorts of services versus potential revenue?

Hugh R. Harris

Yes, let me just try to address that. The short sales have picked up, I'm sure everyone has seen that there has been a little bit of a surge in the short sales recently. We have chosen not really to pursue that as a channel for us. We're more of a B2B company, the short sales, in many ways, is B2C. But if you look at that $3.7 million loans and as Tom talked about, the fact that many of them are over 500 days delinquent, many of those homes today are vacant and the original borrowers are not even in the properties. So I don't think short sales will have a huge impact on that group. But as it does, it's important to remember that we participate in all of the activities around short sales, which include valuations, inspections, analytics and loan origination solutions. We just don't get involved in the B2C dialogue around short sales at this point.

John Kraft - D.A. Davidson & Co., Research Division

Right. I guess that's kind of what I'm getting at. So you would benefit from them on the origination side?

Hugh R. Harris

Yes.

John Kraft - D.A. Davidson & Co., Research Division

Okay. And then on the refi side, the volumes that we saw obviously, were for solid and being impacted by the lower rates. But in the past, you talked about the banks, your customers sort of being proactive in retention efforts to refinance those in sort of bulk. Is there -- how does, I guess, how did the April volumes look? And is there some effort there to kind of wrap those up sooner, or is that going to be a tailwind that lasts for several quarters?

Thomas L. Schilling

Yes. I think we have worked with the servicers on the kind of what we call the portfolio retention. Those, I would say, as we move forward, some of that activity has been -- once you're at a certain interest rate for a period of time, those start to get exhausted. But we're very hopeful that HARP 2, as it's ramping up, and I think we have a lot more clarity today that our servicers are feeling pretty good, that HARP 2 is -- the feedback we're getting from our customers is that HARP 2 is likely going to be bigger than HARP, the first, HARP 1 installment. So I think as we move forward in 2012, we anticipate that the HARP 2 activity will start to displace the decline in the sort of natural refinancings that are happening, given the interest rates have been at this current level for about 7 or 8 months now.

Hugh R. Harris

And I would just add to that, we've seen about a 5% increase over the March numbers or so.

Operator

We'll take our next question from Kevin McVeigh with Macquarie.

Kevin D. McVeigh - Macquarie Research

I wonder if you can help us understand what type of free cash flow we can expect for the full year based on how Q1 trends were -- just any sense on what the conversion should be?

Hugh R. Harris

Yes, I'll let Tom speak to the cash flow.

Thomas L. Schilling

Yes, we're not going to give you specific guidance on cash flow, particularly for the remainder of the year. But we will continue to have a strong cash flow model in this business. Some of it will depend on what happens on the Default Services side to the extent that we start to see the Default Services volumes increase significantly within 2012 that will obviously require us to deploy some working capital there, whereas right now that is being a working capital benefit as those revenues have declined. But I think we'll continue to be generating strong cash flows throughout 2012. I would caveat that when you look at the sort of conversion ratio back to revenue, it's not going to be at the level. We don't expect that was in 2011 because of the enormous working capital benefit we got in 2011.

Kevin D. McVeigh - Macquarie Research

Got it. And then, Tom, real quick, just any sense of when we'll get final resolution on the mitigation? And ultimately, whether or not the reserve needs to go up as a result of that and others? Just any type of clarity around timing, it would be helpful.

Thomas L. Schilling

Yes, I think the litigation process is what it is at this point. I mean, we've talked about it a lot since I've been here. But we're resolving these on a regular basis. Again, I'm very impressed with the legal team, both internally and externally and the work that's being done there. So I would tell you, I don't focus as much, on those things as I did initially because of the confidence level I have there. So I see things progressing well there. The regulatory fees, we're working very closely with the fed, working through all of those issues and the fed and and others kind of control the timing of that, but I would just say it's a process and I think we are very comfortable with and we're doing everything we're asked to do in that process.

Operator

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

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Just wanted to go back to sort of the origination trends in the quarter. I realize it was up 14% year-over-year, which looks nice. I'm kind of more focused on the 3% Q2Q decline and kind of the context of my question is, it looks like it was slower growth where our -- I was surprised that the decline, given that one of your primary peers had actually 10% sequential growth and a couple of the largest mortgage originators seem to have very healthy Q2Q growth, so I was actually surprised that the origination volume wasn't even stronger.

Thomas L. Schilling

Yes. I mean, I think like we said with any of the metrics, the metrics don't always translate perfectly to your business, because it really depends it's a customer mix issue in terms of -- as well as the kind of products that we're having. But we're pretty happy with the success we had. As we said, we had -- when you look, I know from a year-over-year standpoint, we also had a phenomenal year last year in the first quarter where we gapped the market metrics by a significant margins. So I know from a year-over-year standpoint, that's creating a little bit of issue on that. And as we mentioned, in terms of open orders to closed orders ratio, in the first quarter, that was down a little bit. So that bodes well, we have some open orders that we anticipate closing in the second quarter. So again, quarter to quarter, metrics can sometimes -- sometimes you overachieve them significantly, and sometimes you're a little less than them. But over the long term, as we've said, over the long term, we continue to expect to perform at or better than the sort of industry metric.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

You started to go down the line, and my second question was, the application volumes within the industry this quarter looked actually phenomenal, which would suggest pretty healthy trends for your business going into 2Q? Maybe you could help me kind of how you're think about that within the frame of your $500 million to $520 million guidance.

Thomas L. Schilling

Yes. I think -- because again, it's always a mix issue. But in our guidance, you can see that what we're expecting is, revenues to be relatively flat with what we just reported, but with the SKU to the up and that's really an issue. We do expect a fairly strong Origination Services result and we continue to expect Default Services to have a lot of headwinds during in the second quarter.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Do you have a sense for the when you expect the timing of the flow, the Default business, to pick up accelerate it? Obviously, you talked about the big pipeline of seriously delinquents, but it's kind of been out there for a while.

Hugh R. Harris

Yes. I think it's hard to predict that -- I think we've kind of quit trying to predict it. But I think, if you read some of the bank earnings releases, Chase and others. Chase talked about they felt some of that in their portfolio, would begin to move out over the next 7 or 8 quarters. And I do think everybody's focused on it, there's a lot of things that had to be done to meet all the regulatory and compliance requirements, but it's got to come out at some point.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

And just finally, any update on the various attorney general reviews and kind of getting a resolution on some of these?

Hugh R. Harris

Well, we continue to have a lot of dialogue with the attorneys generals, and I would just tell you I'm very pleased with the progress that's being made there. It, again, will take longer than any of us would like for it to take, but I have been encouraged by the dialogue over the last quarter.

Operator

Our next question comes from Geoffrey Dunn with Dowling & Partners.

Geoffrey M. Dunn - Dowling & Partners Securities, LLC

Two questions. First, the trend is evident with regard to your transaction volume business relative to the market volumes, and who knows what reality will be next year, but the projections currently have a very different view of refi versus the overall market with a substantially bigger decline in refi. Given the focus of your business, do you think that you have enough market share and purchase opportunities to continue to outperform the overall market if such an environment emerged, or we'd be looking for something between the overall and the refi?

Thomas L. Schilling

Yes, I think we're really, Jeff, track ourselves to the refi market. So again, it depends on what purchase market does. Obviously, I know the stats you're looking at, which I'm not so sure at this point. I think as we're heading into the beginning of the year, I think some of those projections on refi will probably, we felt were pretty good. I think as we're starting to see a little bit more clarity around HARP 2, I think we're a little bit more optimistic that maybe the refi numbers will not be as bad as originally predicted. But again, if you're expecting refis to go down to 1/3 or 25% of the total origination market, I wouldn't expect that we would be trying to peg ourselves to the total origination market then.

Geoffrey M. Dunn - Dowling & Partners Securities, LLC

Okay. And then looking into the balance sheet, you've kind of hit that threshold cash target. Can you talk a little bit about incremental cash flows and particularly, do you continue to look to build that cash balance? And on the other side of the balance sheet, how aggressively will you redeploy incremental cash flow towards your debt position?

Thomas L. Schilling

Yes, I think, we'll, obviously, as we said, our first priority, given where our leverage is currently, will be to reduce debt in the short term. But we're also, as we said before, we'll be opportunistic in terms of potential acquisitions we might be able to make, particularly tack on technology businesses, things that we think can give us a jump start in market opportunities that we see as more near term. So those will be the primary uses of cash as we go forward.

Geoffrey M. Dunn - Dowling & Partners Securities, LLC

Okay. And just on the acquisition front. Is there a particular interest in the D&A side to try to beef that up with tack on acquisitions or is that not necessarily a specific focus?

Hugh R. Harris

I don't think it's just specific to Data & Analytics, but I do think we have a bias towards the our Technology Data and Analytics segment in general than we do towards transactional side. The transactional side of our business, I don't think is something that we're particularly looking for additional acquisitions on.

Operator

We'll take our next question from Julio Quinteros with Goldman Sachs.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Just on the expense side of the modeling. As we think about unusual expenses, legal and otherwise that are still following through to the model over the next couple of quarters. Anything in particular that you guys can call out that helps us get a sense for whether there could be a little bit of movement around the expense side of the equation?

Thomas L. Schilling

Yes. I think the -- when you look at our expenses, a lot of it, you really -- because of the diversity of our business, you really kind of got to look at the margin standpoint within the segments. And as we mentioned a little bit within TD&A margin, we had some impact there from investments we're making right now on the Origination Technology side to just beef up everything from personnel, et cetera, just in that organization, so that we can position it better for growth. And that's incrementally short margins slightly in the near term. As that starts to translate into growth then obviously, those are relatively non-variable expenses that we should be able to leverage up as we have revenue growth to grow our margin. Within Transaction Services, it's an issue, right now that we're facing of both mix and scale. The foreclosure delays have reduced the overall volume, which is impacting our operating leverage. But in addition to the delays, the delays have impacted -- have had the impact of reducing the front end of the process, which are products like default title where we make a little higher margin on, but also then extending the life of things like field services on the back end, which are lower margin products. So I think as we go forward, a real catalyst for our margin will be a really, a more aggressive release of some of this $3.7 million of the backlog in Default Services, because I think that will help us. One, that's going to start releasing the back end quicker and it actually starts funneling in more front-end revenue. I think it's going to shorten the collection cycles, so it's going to help on the cash generation as well. So I think the biggest catalyst we're looking at in the future in terms of managing our costs relative to revenue is going to be that release of those default -- foreclosure delays.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

And on the legal and settlement expense side, what are you guys factoring in for the rest of the year around those 2 items?

Thomas L. Schilling

As I mentioned in the prepared remarks, we are not making any changes, or we did not make any changes in the quarter. We continue to asses that each quarter, so at this point, we are still, the reserve we took, which is the $78 million at the fourth quarter of 2011 remains our best estimate of the cost of resolve, the consent orders as well as all the various legal issues that were contained in that chart.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

I'm sorry, I just meant like -- pieces that were flowing through on the operating expense bases.

Thomas L. Schilling

As I say, our corporate expenses were roughly $10 million in the first quarter. Legal is contained within that, we expect it to be basically in that range for the near term.

Operator

Our next question comes from Greg Smith with Synergy.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Looking at the Default Technology revenue, which is now a new line item for us. I know Desktop is in there and that's the main driver, but how should we think about modeling it? How much is sort of foreclosure volume based versus recurring? And I guess I'd' have the same question for the Origination Technology line as well.

Thomas L. Schilling

On Default Services, it is the vast majority -- well, the entirety of the default technology is the Desktop technology and it contains -- it is volume driven, it is a model, it's a technology, but it's not a typical licensing and maintenance type of software revenue stream. It's really tied to the volumes in the industry. There's 2 pieces of that, there's the what we call process management, which is really handling the workflow of the foreclosure process and then there is the invoice manager, which is a little bit more constant, because it's based on the volumes that are being dealt with. So it's the invoicing of different field services, asset management going back and forth between the servicers and those various vendors. So it's got the 2 elements of that. But again, both of them are tied to the transactional volume in the industry process management, really tied a little bit more to the front end of the process, invoice management tied more to the back end of the process.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Okay. And then on the Origination Technology, is it sort of the same thing there then?

Thomas L. Schilling

It's a bit of the same thing. Although, I would say right now, it's roughly about 20% to 25% of that revenue, I think is tied to more transactional volume. We're actually and the rest of it, as professional services, as well as licensing and maintenance type of revenue construct. But we are moving, as Hugh has mentioned, previously, that we're trying to move to more of a transactional-based model to capture a bigger share of that growth in the future.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Okay. And then just back to the default then. Obviously, it's going to be market share gains why it's up year-over-year because of the underlying volumes in the industry are way down.

Thomas L. Schilling

Yes, exactly. If you recall, during 2011, we brought Wells Fargo on. So if you look at it from in spite of the volumes being down, we actually increased our market share from roughly just under 40% market share at the end of 2009 to about 80% market share as we sit here today.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Okay, great. And then with the consent order, I believe there was the potential for civil penalties, that door was sort of open. What's your thoughts on that, and is there anything contemplated in the charge you took last quarter related to potential civil penalties on the consent order?

Hugh R. Harris

We have not had any discussions at this point around any penalties or fines or anything like that. We are in the process, as we said, going through the work that has to be done. Again, having constant dialogue with the regulators around that and working through that process. But there has been no discussions at all around civil penalties or anything associated with that.

Operator

We'll take our next question from Brett Horn with Morningstar.

Brett Horn - Morningstar Inc., Research Division

I know you guys have been talking about you kind of foresee a pick up in foreclosure activity throughout the year. I guess, I just had a question in terms of, obviously, there's been a heavy spotlight shined on that area, and is it your sense at all that there's any kind of limit in terms of industry capacity, in terms of the maximum amount of foreclosures that can occur at any given time? And is that number lower -- materially lower than, say the volumes we saw a year or 2 ago?

Hugh R. Harris

Yes, I'll take that. I do think the volumes, going forward, are going to be controlled more so that nothing gets out of control and we don't have the issues we had before around compliance and regulatory stumbles. I think the banks are very comfortable at this point of setting up a flow when they're able to start moving things through the pipeline. I think that'll serve us well, as well as the industry, because we can do a better job for all of the servicers, it is in a more controlled environment.

Operator

We'll take our next question from Ty Lilja with Feltl and Company.

Ty M. Lilja - Feltl and Company, Inc., Research Division

I was thinking a bit about this $3.7 million in severely delinquent mortgages and kind of the logistical challenge that poses for mortgage servicers. As things stand now, from your vantage point, what would you say are technically the parts of the Default process that are still areas of concern or potential weaknesses in the process, have those all been resolved or are there still areas where the servicers are working to get their processes into compliance with the government?

Thomas L. Schilling

Yes. Well, I think the issues there are really related to the fact that the banks and others are trying to do their best to help anyone that they can, do a modification or resolve the issue without foreclosure. I think the industry has tried all along to avoid foreclosure if they could. So I think if they're going through this review process and the discussions with the AGs and their regulators, et cetera, I think they've been trying at length to resolve issues without going through the foreclosure process. I think at this point, they've identified, there is this group of loans that there's nothing can be done other than foreclosure. And so I think that's why you're going to see the big banks begin to go ahead and move through the process. I think the regulators are getting tough a little at this point. I think everybody is on board that they've done everything they can to try and avoid foreclosure.

Operator

That concludes today's question-and-answer session. I'll turn the call back to you Hugh Harris for closing comments.

Hugh R. Harris

Okay. Well, we appreciate your questions. In closing, we are pleased with our positive start to the year and the progress we've made in enhancing the core drivers of the business. While we still have plenty of work ahead of us, our management team and our employees are excited about the company's future and our ability to deliver value to our shareholders. In the coming quarters, we'll continue to focus on gaining market share by expanding the breadth and depth of existing and new customer relationships, investing in our technologies, managing our cost structure and underscoring our commitment to achieving the gold standard in regulatory compliance. We appreciate your interest in LPS and we look forward to continuing our dialogue about the company's progress. Thank you.

Operator

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

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