CoreLogic CEO Discusses Q2 2012 Results - Earnings Call Transcript

Transcripts

CoreLogic Inc (CLGX) Q22012 Earnings Call July 24, 2012 11:00 AM ET

Executives

Dan Smith – Senior Vice President, Investor Relations
Anand Nallathambi - President and Chief Executive Officer
Frank Martell - Chief Financial Officer

Analysts

Carter Malloy – Stephens
Bill Warmington - Raymond James
Kevin McVeigh – Macquarie
Brett Horn -Morningstar
Darrin Peller - Barclays Capital

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2012 CoreLogic, Inc Earnings Conference Call. My name is Erica, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. [Operator Instructions].

I would now like to turn the presentation over to your host for today's call. Mr. Dan Smith. Please proceed.

Dan Smith

Thank you and good morning. Welcome to our investor presentation and conference call, where we present our financial results for the second quarter of 2012. Speaking today will be CoreLogic's President and CEO Anand Nallathambi and CFO Frank Martell.

Before we begin, let me make a few important points. First, we posted our slide presentation, which includes additional details on our financial results on our website.

Second, please note that during today's presentation, we may make forward-looking statements within the meaning of the federal securities laws, including statements concerning our expected business and operational plans, performance outlook, and acquisition and growth strategies, and our expectations regarding industry conditions. All of these statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

For further details concerning these risks and uncertainties, please refer to our SEC filings including the most recent Annual Report on Form 10-K and subsequently filed 10-Qs. Our forward-looking statements are based on information currently available to us and we do not intend and undertake no duty to update these statements for any reason.

Additionally, today's presentation contains financial measures that are non-GAAP financial measures. A reconciliation of these non-GAAP measures to their GAAP equivalents is included in the appendix to today's presentation.

Finally, unless specifically identified, comparisons of second quarter financial results to prior periods should be understood on a year-over-year basis, that is in reference to the second quarter of 2011.

Thanks, and now let me introduce our President and CEO, Anand Nallathambi.

Anand Nallathambi

Thank you, Dan and good morning everyone. Welcome to CoreLogic's second quarter 2012 earnings call. I will lead off with a recap of our second quarter and first half performance, and then discuss our focus for the balance of 2012. Frank will follow and cover our financial results and we will end the call with Q&A.

CoreLogic delivered strong, double digit revenue growth and record levels of operating and net income, earnings per share, adjusted EBITDA and free cash flow in the second quarter. In addition to the double-digit top line growth, all three of our operating segments delivered significant margin expansion in the second quarter.

We also exceeded our target for Project 30 cost reductions, free cash flow conversions and debt reduction. Finally, we returned capital to our shareholders in the form of significant repurchases of our common stock.

In terms of revenue growth, we generated more than 18% in the second quarter led by a 29% jump in revenues from our Mortgage Origination Services segment. The Data and Analytics and Default Services segments also grew revenue revenues at double-digit rates.

The company continued to drive significant cost productivity and improved profit margins in the second quarter. Progress in this area was evidenced by a 92% year-over-year increase in adjusted EBITDA and adjusted EBITDA margins of 32%, 12 percentage points higher than last year.

We believe that our focus on profitable revenue growth, together with the strong expansion of adjusted EBITDA margins, demonstrate that the company is on the right trajectory to achieve its target of at least 30% adjusted EBITDA margins as we exit 2013. Our strong second quarter and year to-date operating results and the recent increase in our full year financial guidance are the result of our laser-like focus on executing against our strategic business plan.

As we discussed on past calls, our strategic business plan is focused on our four main pillars. First, grow the Data and Analytic segment at double-digit rates. Second, drive operating leverage and margin expansion and position the Mortgage Origination and Default segments to outperform their respective markets. Third, achieve Project 30 cost reduction target. Fourth, deliver consistent free cash flow in excess of 50% of adjusted EBITDA and build financial flexibility.

I will focus the balance of my remarks today, on the progress we are making in each of these areas and what we are focusing on over the balance of 2012 and into 2013.

The long-term expansion of our Data and Analytic segment is the major strategic imperative for CoreLogic. We have grown this segment from about 32% of the company's total revenues in 2009 to just under 40% in 2011. We are targeting to increase this percentage to over 50% in the next three years.

Year to-date, our Data and Analytic segment revenues are up 16%. As we have discussed in the past, a strong base of subscription revenues, high client retention rates and continued demand for our analytical solutions and advisory projects is driving the growth. We expect to see continued strong growth in this segment by improving market activity over the balance of the year.

In the first six months of 2012, we increased adjusted EBITDA margins in this segment to 32%, up about 7 percentage points compared to 2011. CoreLogic's best-in-class data, patent-protected analytics and risk management solutions positioned this segment well to generate double-digit revenue growth over the medium to longer term.

In terms of our second major focus area, driving margins and positioning our Mortgage Origination and Default segments to outperform their respective markets, we are making excellent progress. Over the past 18 months, we have relentlessly driven workflow automation and cost efficiency in our Mortgage Origination Services. Our objective is to increase the operating leverage resident in the higher market share, high scale businesses within these segments.

Our target is for this segment to deliver adjusted EBITDA margins of at least 25% in a $1 trillion origination market. As market activity increases above these levels, this segment should capture significantly higher levels of incremental profitability. The benefits of this strategy were clearly evident in the first half of 2012, as the Mortgage Origination segment capitalized on the continuing wave of refinancing related activity.

During the first half of 2012, segment revenues jumped by 25% and adjusted EBITDA rose 88%. This drove adjusted EBITDA margins up from 27% to 41% year-over-year. In addition to driving operating leverage, we also believe, we are gaining market share based on volumes processed. Specifically, we continue to benefit from deeply embedded relationships with existing clients and are increasing our penetration with new customers and business verticals. We believe that our must-have servicing businesses are very well positioned to capitalize on improving outlook for mortgage originations over the balance of 2012.

With regard to our Default Services segment, we remained focused on delivering profitable revenue growth and margin expansion. This segment grew revenues about 14% and adjusted EBITDA margins expanded to over 20% in the second quarter despite an overall decline in market activity.

In terms of Project 30, our third strategic pillar, we are making outstanding progress. Year to-date, we have realized about 60% of our full year savings target. These savings relate primarily to reductions in corporate overheads and IT spending as well as cuts in real estate and outside services costs.

Last week, we took a major step to expand the size and scope of Project 30 with the launch of our technology transformation initiative, or in short form, TTI. The TTI is designed to provide CoreLogic with a next-generation technology platform and an agile IT infrastructure. We believe the strategic partnership we assigned with Dell Services will reduce cumulative net operating expenses of $175 million to $200 million over the next seven years. Frank will provide additional details on the TTI later.

CoreLogic is focused on achieving a best-in-class cost structure and we are making excellent progress towards this goal. Project 30 and other business unit-specific efficiency programs are the largest single driver of our margin expansion in 2012 and well into the future.

Finally, regarding our last strategic pillar. The growth in revenues and profit margins combined with a disciplined approach to allocating capital has resulted in a material improvement in our cash flow generation. This increase has allowed us to fund reinvestments in growth and efficiency programs and at the same time pay down debt and buyback our common stock.

Over the first half of the year, we exceeded our target of converting at least 50% of adjusted EBITDA to free cash flow. Strong cash flow generation allowed us to complete our previously announced $100 million debt reduction program, repurchase 1.7 million of our common shares and maintain a significant cash reserve.

As a result of our accelerating cash flow generation, we have also announced our intent to double the size of our 2012 share repurchase program. The continuing repurchase of significant numbers of our shares reflects our belief that the current price of our common stock is below its long-term strategic value.

In closing, CoreLogic has delivered four successive quarters of strong revenue and profit growth. Our progress has been driven by a focused strategy that leverages the company's unique data assets as well as the market-leading position and scale of our servicing businesses. I would like to thank our clients, employees and shareholders for their continued support. The entire CoreLogic team is focused on delivering an outstanding performance on all fronts in 2012.

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

Frank Martell

Thank you, Anand. Good morning, everyone. Today, I'm going to review our second quarter financial results. I will also provide an update on our cost reduction programs and efforts to increase free cash flow. I will conclude my remarks with a brief discussion on capital structure and our 2012 financial guidance.

CoreLogic delivered double-digit revenue growth and significantly higher margins in the second quarter. Margin expansion was driven by our cost reduction programs as well as favorable operating leverage and revenue mix. Free cash flow generation accelerated during the quarter fueled by revenue growth, improved profitability and a reduction in collection cycles.

We are rapidly transforming CoreLogic's underlying financial and business model by relentlessly executing against the multipronged strategic plan Anand just outlined. I believe that our 2012 financial results provide important insight into the progress the company is making with regard to growth, best-in-class operational efficiency and superior cash flow generation.

Second quarter revenues were up 18.6% to $389.4 million. Data and Analytics revenues totaled $145.8 million for the second quarter. This represents the year-on-year increase of 12.4%, or $16.1 million. Growth in this segment resulted primarily from the acquisition of RP Data and Tarasoft, higher analytics revenues and growth in Advisory Services.

Our Mortgage Origination Services segment revenues jumped year-over-year by 28.5% to $154.1 million. This increase was principally attributable to higher refinancing volumes, market share gains and increases in pricing, in some business units.

Default Services' second quarter revenues totaled $93.6 million, which was up 13.9% from the prior year. The increase was mainly due to higher volumes and field services and client wins related to loss mitigation programs.

Operating income from continuing operations totaled $67.6 million for the second quarter of 2012, compared with $18.8 million for the second quarter of 2011. This increase was driven primarily by higher revenues and cost reductions.

Second quarter 2012 operating income included $7.3 million in gains related to settlements of certain intellectual property related claims asserted by CoreLogic, which were partially offset by $3.1 million in one-time costs associated with the recent launch of the Technology Transformation Initiative or TTI as well as the strategic review process which concluded earlier this year.

Operating income margins were 17% for the most recent quarter, compared with 6% for the second quarter of 2011.

Second quarter adjusted EBITDA totaled $125.1 million, a jump of 91.6% year-on-year. Adjusted EBITDA margins were 32.1%, up from 19.9% in the second quarter of 2011. For the quarter, Data and Analytics adjusted margins were 34.9%, 10.9 percentage points higher than last year.

Adjusted EBITDA margins in our Mortgage Originations Services segment rose to 43.6% from 27.5% in the second quarter of 2011. Both of these segments benefitted from strong revenue growth in Project 30-related cost reductions. We also continue to capture progressively higher levels of operating leverage through workflow automation and our Origination Services units.

Default Services adjusted EBITDA margins increased to 23.1% from 16.3% a year ago as we continue to focus on improving operating efficiency, growing our higher margin loss mitigation programs and improving field services pricing.

Anand mentioned earlier that Project 30 is a major driver of our margin expansion in 2012. This year, the company is targeting to achieve $60 million in cost reductions. During the second quarter, we achieved $21.6 million in incremental saving compared to second quarter of 2011.

For the six months of 2012, our total Project 30 cost savings were $35.1 million. The savings achieved over the past six months is modestly higher than planned due to the phasing of certain program investments.

We are expanding and extending Project 30 through our recently announced TTI program. We expect this multi-year initiative will provide the company with a new state-of-the-art technology infrastructure with new functionality, increased performance and an overall reduction in application management and development cost.

The transformation of CoreLogic's technology infrastructure under the TTI program is an integral part of our long-term strategic technology plan and is expected to substantially lower our cost profile. Importantly, the TTI will also provide a platform that enables and supports future revenue growth.

Following a transition period of approximately 30-months, CoreLogic expects to realize net operating expense reductions of approximately $35 million to $40 million per year, compared to a projected 2012 operating cost run rates. The company expects to incur non-recurring cash and non-cash charges totaling approximately $40 million during the transition period in conjunction with exiting its existing data centers infrastructure.

Second quarter net income from continuing operations totaled $41.1 million, an $800,000 increase from prior year. Second quarter 2011 net income from continuing operations included a one time, after tax gain of $35.9 million related to the company’s purchase of RP Data. Excluding the impact of this gain, second quarter 2012 net income from continuing operations were up nine fold.

Diluted earnings per share from continuing operations totaled $0.30 for the second quarter, an increase of $0.02 from 2011. Second quarter 2011 EPS included a one time gain of $0.33 million related to the acquisition of RP Data which I just discussed.

Adjusted EPS for the second quarter was $0.46, significantly out of expectations and $0.31 higher than the second quarter of last year. Increases in EPS and adjusted EPS reflects improved financial results and the impact of share repurchases in 2011 and the second quarter of 2012.

The balance of my remarks today will focus on cash flow, capital management and guidance for 2012. Generating significantly higher levels of free cash flow is a major focus for the company. I am pleased to report we are making excellent progress.

During the second quarter, CoreLogic generated $93.5 million of free cash flow, which represented 74.7% of adjusted EBITDA. As mentioned in our earnings release, this amount included non-operating items totaling approximately $19.2 million. excluding these items, our free cash flow conversion ratio was 63%.

Year-to-date, free cash flow totaled $142.7 million. As of June 30, the company had unrestricted cash of $259.7 million and total debt of $794.6 million with approximately $499 million in available capacity under our credit facility.

Given our ample cash reserves as well as significant improvements in profitability and free cash flow, the company elected to expand its 2012 share repurchase program to at least 10 million shares from the previous target of five million shares. We kicked off our 2012 share buyback program in the second quarter repurchasing approximately 1.7 million shares.

One final point of capital structure. Over the past six months, we paid off $113.6 million of our outstanding debt. We expect to continue to reduce debt levels on an opportunistic basis over the balance of this year.

The final topic I will cover today, is our 2012 financial guidance. On June 28, we issued an upward revision of our 2012 guidance. Today, we are confirming that we expect our full year results to be at the upper end of that guidance range. For the full year, we expect to generate revenues of $1.45 billion to $1.48 billion with adjusted EBITDA of $370 million to $390 million and adjusted EPS of $1.15 to $.1.20.

This guidance reflects a $1.3 trillion originations market in 2012. It also factors in our current view related to the outlook of the company’s revenue growth prospects in each segment and the Project 30 cost savings. This guidance does not reflect the potential benefits of stronger origination volumes over the balance of 2012 or the EPS impact of our expanded share repurchase program. We intend to provide updated 2012 guidance as part of our third quarter earnings release cycle.

Now, specifically in terms of the third quarter of 2012, we believe that the current volume trends within our businesses are consistent with the average run rates we experienced in the first half of the year. Based on the resulting revenue profile and the latest view of the timing of Project 30 savings as well as reinvestments required to launch the TTI program, we believe that adjusted EBITDA and adjusted EPS from continuing operations in the third quarter should be at least in line with first quarter levels.

In closing, CoreLogic delivered a very strong set of financial business results in the second quarter. Our focus remains squarely on our strong operational execution and delivering against our business plan objectives. This is positioning us to deliver significant shareholder value over the medium to long term.

Thank you for your time today. I will now turn the call over to the operator to kick off the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Carter Malloy with Stephens. Please proceed.

Carter Malloy – Stephens

Congratulations, again, on another good quarter.

Frank Martell

Great quarter.

Carter Malloy – Stephens

Yes, absolutely. So, first off, on the default side of the business, material picked up there and you alluded to a contract win on the (inaudible) and improvement in pricing within your field services. Looks like field services was down sequentially in terms of volume. So can you give us a little more color there on the drivers and if those should sustain for the rest of the year and if you are still implying a 10% decline in the market there?

Anand Nallathambi

Carter, this is Anand. Yes, the volumes on field services is not the big story. The big story on default services is the pipeline has been very active and we have a good pipeline of staff augmentation work in terms of helping clients with loss mitigation and on the field services side, its better manage in the far supply network and a retention of the growth margins.

Carter Malloy – Stephens

Okay, and on the pricing side as well, can you help us understand that a little better and then maybe how meaningful that (inaudible) contract is and if it will carry forward? Ultimately, I am just trying to get a sense of, should we dial back the default business for the back half of the yea meaningfully or not?

Anand Nallathambi

Currently it looks like the volumes are holding and the pipeline is pretty good but we are cautiously optimistic that things will hold.

Frank Martell

Yes, I think, Carter, you will have to look at your question about the overall market, we still expect the overall market to decline. As you know, this segment is really centered around a couple of key clients. So in terms of the overall volumes, as Anand mentioned, I think we have a great pipeline but I think I would be cautious and assume that the challenge in the market will continue.

Carter Malloy – Stephens

Okay, and then Frank, also on the cost saves, we initially expected it to be 40/60 front half to back half weighted, it looks like the opposite has happened but you alluded to it a little bit in the prepared comments but should we look at it as a flip-flop or should we use these cost saves at a run rate? In other words, is there potential to gain more than just $60 million in cost saves this year?

Frank Martell

We are targeting as much as we can, obviously but I think in terms of what happened really was the reinvestments that we are putting in through the P&L are shifting a little bit because we have the TTI initiative which was originally expected to be really coming in at the end of the first quarter, a quarter later. So that’s really the major driver.

Carter Malloy – Stephens

Okay, and then lastly, I am sorry for so many questions. Though lastly, if I look at your implied guidance was 3Q being somewhere to 1Q, then it only leaves to see there, I think, what is it, $0.15 or so in the last quarter of the year?

Should we expect some exaggerated seasonality there?

Frank Martell

No. I think there will be seasonality obviously. We are also cautious. Our origination forecast is still, attracts the MBA forecast at $1.3 trillion. They just came out yesterday. I believe there is $1.320 trillion. So we are still forecasting a decline in origination activity in the fourth quarter and then the swing factor is the investment required on the TTI.

Carter Malloy – Stephens

Got it, okay, thanks so much for the color. I will hop back in queue.

Operator

Our next question comes from Bill Warmington with Raymond James. Please proceed.

Bill Warmington - Raymond James

Good morning, everyone and congratulations on strong performance this quarter.

Frank Martell

Thank you, Bill.

Bill Warmington - Raymond James

One question on Data and Analytics. It looks like the organic growth in Data and Analytics increased from about 4% in the first quarter to 5% to 6% range in the second quarter. Just wanted to confirm that.

Then also ask about where you are seeing that is going to trend in the second half and if you could talk a little about what is driving that and whether you think it is going to ultimately be able to take it into the double digits.

Frank Martell

Hi, Bill, this is Frank. First of all, in the second quarter, the organic growth rate for D&A was 6% and year-to-date at 5%, because of the timing of the acquisitions, the second half will be primarily organic. So we expect that growth rate to tick up. I think we talked about targeting upper single digits organically for the full year and then I think if you look at the total company for the second quarter, we had 19% growth rate, 16% of it was organic and year-to-date that’s 10% organic and 16% overall.

Anand Nallathambi

From a product perspective, the growth is coming from fraud solutions, evaluation, analytics and advisory projects and we expect that to continue.

Bill Warmington - Raymond James

Got you, and then on the mortgage originations side, you guys, I think, have excellent visibility into the pipeline and I know that you referenced the MBA forecast and the decline that is predicted in the fourth quarter, I am just curious whether given your visibility into the pipeline for the refi and for purchases and also for HARP I and HARP II, what odds would you put on that decrease in the fourth quarter? It sounds like it is coming in stronger than expected.

Anand Nallathambi

Bill, let me take the hard question first and then I will go to the refi. In terms of HARP, we saw very little activity in the first half of the year and we think that it is going to start to show up in the second half but as far as refi volumes are concerned, refi volumes are still holding but compared to past low interest rate cycles, refi volumes are relatively lower due to lower credit eligibility and stricter underwriting standards.

So we are cautiously optimistic that as recovery continues, demand will increase but it is too early to tell.

Bill Warmington - Raymond James

Got you, and then I noticed that the realtor accounts were flat sequentially which is an improvement because normally in the last couple of years, we have seen them be down from Q1 to Q2 and was just curios if you could comment on that and what impact that has on the business?

Frank Martell

To say, financially, Bill, it is not material. Obviously, it is one of those green shoots in our opinion in terms of the overall housing market with the pricing levels stabilizing and in some cases coming up and less inventory and in some areas, I think, this is just another indication that the overall market is stabilizing hopefully.

Bill Warmington - Raymond James

Okay, right, well thank you very much.

Frank Martell

Thank you.

Operator

Your next question comes from the line of Kevin Mcveigh with Macquarie. Please proceed.

Kevin Mcveigh – Macquarie

Okay, great, thanks. I wonder, of the $154 million in originations in Q2, how much of that is related to refinance versus purchase? It seems like the seasonal down tick in Q4, the probability that’s pretty low but just what percentage is refinance versus purchase?

Then as we start to look into 2013, how are we thinking about the business particularly given the season and then just increase in the buyback?

Frank Martell

In terms of the refi percentages, I think its mirroring the market by a little bit less about 65% of the volumes are driven by refinancing activity.

Kevin Mcveigh – Macquarie

Okay.

Frank Martell

I think in terms of 2013, it’s anybody’s guess but clearly there is a sentiment that there is improving activity in the housing market going into ’13 but I think time will tell.

Kevin Mcveigh – Macquarie

Got it, and then, Frank, obviously you guys have done a real nice job in terms of cost management and capital allocation. How are you thinking about the longer term top and bottom line growth rates for the business as we think about ’13 and beyond in terms of a steady run rate through cycle?

Frank Martell

I think, as Anand mentioned, one of our biggest thrust frankly is to get the mortgage origination businesses to where they can thrive in even a $1 trillion market. I think we made good progress in that regard. We are targeting at least 25 adjusted EBITDA margin in $1 trillion market. Clearly it is above that. We are seeing the benefit of that. I think that’s a great strategy to floor the profitability if you can do that and I think things like that help us to try to target a double digit increase each year in profitability levels and I think we are certainly targeting at least in upper single digit to low double digit growth rate.

Kevin Mcveigh – Macquarie

So you said, upper single digit revenue, translating into 10% round numbers EPS or just I terms of the growth of the business?

Frank Martell

Correct.

Kevin Mcveigh – Macquarie

Okay, and then, do you have a sense of what the weighted average interest rate now is across the type of processing you are doing in terms of where your rates are relative to what your clients have from a weighted average in terms of the mortgage portfolios?

Frank Martell

Probably better if we get back to you offline on that, we should verify it.

Kevin Mcveigh – Macquarie

Okay, thank you. Nice job.

Frank Martell

Thank you.

Operator

Our next question comes from the line of Brett Horn with Morningstar. Please proceed.

Brett Horn -Morningstar

Yes, hello. Just wanted to follow up on a previous question on the refis. You pointed to the low rates as really being the primary driver on that. Would you have any sense from past cycles if rates just flat line from here, how long will you be able to hold at this volume level?

Anand Nallathambi

It remains to be seen. All we can tell is, our research shows that in the past cycles when interest rates were like in the 5 to 6 range, when the refis hit 10 years, it was three to four times where we are seeing now and the only thing that we can point to is lower credit eligibility and stricter underwriting standards. So it’s a question of the economy recovering and as the recovery takes shape, we think that this will continue to go because we think the rates are going to remain low for an extended period of time.

Brett Horn -Morningstar

Okay, great. Thank you.

Operator

Our next question comes from the line of Darrin Peller with Barclays Capital. Please proceed.