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Lender Processing Services (NYSE:LPS)

Q3 2012 Earnings Call

October 30, 2012 10:00 am ET

Executives

Nancy Murphy - Vice President of Investor Relations

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

Analysts

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

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

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

Carter Malloy - Stephens Inc., Research Division

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

Kevin D. McVeigh - Macquarie Research

Paul B. Thomas - Goldman Sachs Group Inc., Research Division

Operator

Good day, and welcome to the Lender Processing Services' Third 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. I would now like to turn the conference over to Nancy Murphy, Vice President, Investor Relations. Please go ahead.

Nancy Murphy

Good morning, and welcome to Lender Processing Services' Third Quarter 2012 Earnings Conference Call. Tom Schilling, CFO, is with us today to review results and answer your questions. [Operator Instructions] 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.

We'd also 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 most recent 10-Q 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.

Before we begin the formal part of our earnings call, I would like to take a moment to offer our thoughts to all of those along the East Coast impacted by Hurricane Sandy. Being based in Jacksonville, Florida, we understand the concerns many people and families are facing today and the challenges they will encounter over the coming days. Everyone here at LPS is praying for the safety of those impacted by the storm. Now I'll turn the call over to Tom.

Thomas L. Schilling

Thank you, Nancy. Good morning, everyone, and thank you for joining our call today. Before I get started, I'd like to take a moment to provide an update on the Hugh Harris' progress. Due to his continuing treatments, he's unable to participate in today's call. He is, however, listening in. His treatments are going well and the prognosis remains extremely positive. He is in his last week of treatment, and we are all looking forward to having him back, full-time, very soon.

Now I'll review the third quarter operating results, our progress against strategic initiatives and review our financial guidance for the fourth quarter. We'll then open up the call for questions.

First, we're very pleased to report another strong quarter of operating performance. Adjusted earnings per diluted share increased 20% year-over-year to $0.71, which includes a loss from discontinued operations of $0.02, and is near the high end of our guidance range. Revenue of $513 million was about flat year-over-year and in the midrange of our guidance. This positive performance was driven by strong growth in Technology, Data and Analytics, continued strength in refinance origination volume, disciplined cost management and improved revenue mix. These factors contributed to an expansion of our EBITDA margin to about 27% compared to about 22% a year ago.

While the mortgage industry continues to face uncertainty and headwinds, particularly surrounding foreclosure activity, LPS is realizing the benefits of the many enhancements we've made to the business over the past year, including focusing on our core strengths and strategic assets while exiting nonstrategic businesses; investment and focus on operational and compliance excellence; establishing a more disciplined cost management culture; and strengthening our balance sheet. Today, LPS more is a nimble and focused company, better able to deliver the innovative solutions our customers need and to profitably capitalize on the growing market opportunities in front of us.

Technology Solutions remain at the center of our model and our performance during the quarter reflects the traction we're gaining in this area. TD&A revenue climbed 11% year-over-year, fueled by growth in all business lines. We continue to see positive demand and favorable market dynamics driven by compliance, efficiency and loan quality requirements. TD&A margins remained robust at 41% in the third quarter despite increased investment in growth areas.

Servicing Technology revenue increased 4% year-over-year to $112 million fueled by higher loan counts driving growth in recurring revenue and from continued strong Transactional and Professional Services revenue. Expanding our market share of first mortgages and home equity loans, while adding capabilities to the MSP platform, remain top priorities.

In the third quarter, we converted approximately 300,000 loans to MSP, including about 240,000 home equity loans. We also generated solid loan growth from existing customers. We strongly believe the MSP value proposition is more relevant today than ever. MSP delivers a high ROI solution for clients by leveraging our scale and expertise, operational and compliance excellence, shared industry best practices and integration with our Origination and Default Technology solutions. These are all key competitive advantages as the industry adapts to the changing marketplace. We continue to see shifting of mortgage servicing rights with an opportunity to expand our technology leadership as emerging scale servicers look for best-in-class solutions.

Origination Technology posted its strongest quarter of revenue growth in our history. Revenue climbed 25% year-over-year and 13% sequentially to $26 million. This is a major opportunity for LPS as loan origination process is being reengineered with a focus on loan quality and business process enhancements. The cost to originate a mortgage has increased significantly over the past few years, and the MBA now estimates a cost more than $5,000 to originate a new mortgage. We have aligned our Origination Technology components, including Loan Quality Gateway and our recent LendingSpace acquisition, to provide end-to-end solutions that help our clients improve underwriting quality and transparency while reducing costs.

The Gateway was the principal driver of third quarter Origination Technology growth, as we capitalized on strong refinance volume. This platform connects over 2,000 lenders and 15,000 service providers in the origination process. We have 17 of the top 20 originators either using or in the process of converting some portion of their originations to the Gateway. We continue to believe that Origination Technology will be a key growth area for LPS in 2014 and beyond as we add new customers and new channels for existing customers.

Default Technology revenue climbed 28% year-over-year and 6% sequentially to $36 million. Growth was fueled by new customer implementations in 2011, which are annualizing, and demand for Professional Services. We are the clear market leader in Default Technology. Mortgage servicers representing about 80% of outstanding loans are using the LPS Desktop platform to manage loans in the foreclosure process. Our Default Technology revenue is driven primarily from transactional volume on the system. Given our robust market share, our future revenue should generally track with the foreclosure activity in the market.

Data & Analytics revenue grew 7% year-over-year and 2% sequentially. Revenue benefited from the strong origination activity, driving demand for automated valuation models and other products. We continue to make investments in this area of our business and believe it represents future growth opportunity. Again, we're very pleased with our strong performance in the TD&A segment and continue to believe this segment will provide sustainable growth in the future.

Origination Services continue to capitalize on strong refinance volumes in the third quarter. Revenue climbed 16% year-over-year and 2% sequentially. Revenue was driven by historically low interest rates and strong HARP 2 activity. We continue to improve our revenue mix as title and escrow services grew over 50% year-over-year and 5% sequentially, offsetting declines in appraisal management. Since the implementation of Dodd-Frank, we have been disciplined in balancing risk, revenue and return within appraisal management services, and we will continue to do so moving forward.

We mentioned in our second quarter call that we felt the industry forecasts were too pessimistic for the second half of 2012 and for 2013. Over the past weeks, the origination forecasts have been increased substantially. The MBA, for example, is now predicting refinance volumes will be down about 36% in 2013, compared to about 60% in their previous forecast. And we would agree directionally with the revised MBA forecast.

Default Services continues to face challenging market conditions as the industry responds to new regulations and process changes related to foreclosure activity. We remain responsive to our client needs for regulatory-compliant and cost-effective services, while effectively managing for profitability. Revenue declined 15% sequentially and 22% year-over-year and was in line with our second quarter guidance that reflected sluggish industry volumes and more rigorous approach to managing risk and return within our Field Services segment.

While the inventory of seriously delinquent loans remained high, third quarter industry-wide foreclosure filings were down 5% sequentially, hitting a post-2007 low point. We continue to expect the vast majority of the roughly $3.5 million seriously delinquent loans to eventually go through the foreclosure process. However, the timing of sustainable volume flow remains unclear.

The National Servicing Standards, agreed to in the State Attorneys General settlement with the banks, along with the California Homeowners Bill of Rights, which goes into effect in January, will continue to delay processing of foreclosures well into 2013. So we remain cautious about the near-term outlook and we'll manage our business and cost to current volumes.

Our focus on the Transaction Services segment is delivering high-value services to our clients while managing for profitability and cash flow. Third quarter Transaction Services EBITDA margin was 21.5%, 4 percentage points better than a year ago, as we benefited from improved cost management, favorable revenue mix and business model changes to enhance margin. Sequentially, the EBITDA margin was down slightly from 23%, due mostly to the default revenue decline.

While it remains difficult to forecast near-term volumes in Transaction Services, we are confident in our ability to manage the business through the volume changes and expect to sustain margins at or above 20% over the long term. Adjusted cash flow from operating activities was $91 million and adjusted free cash flow was $69 million in the quarter. Free cash flow remained strong but decreased sequentially, primarily due to our semiannual bond interest payment and increased tax payments. Year-to-date, adjusted free cash flow was $253 million after investing $72 million in capital expenditures primarily targeted in our technology platforms.

Now I'll provide a brief update on legal and regulatory matters. We continue to make progress towards resolving issues related to past practices. On October 14, we announced a settlement with the Attorney General of Delaware. And yesterday, we announced the settlement to the Attorney General of Colorado related to legacy document execution practices. We have now settled 3 State Attorneys General inquiries and we continue to have ongoing discussions to address remaining matters.

The document execution review required under the Consent Order is moving ahead and we expect it to continue well into 2013. The legal or the reserve for the legal and regulatory matters at the end of the third quarter was $196 million, down $7 million from the second quarter. The majority of the $7 million is attributable to the Missouri settlement and the continuing cost related to the Consent Order document execution review. After assessing all open matters, we concluded that no change was necessary to the reserve in the third quarter. We will, however, continue to assess as we move forward. Resolving the issues related to past practices in a manner that is in the best interest of our company, our customers, our shareholders and our employees, continues to be one of our top priorities.

During the third quarter, we initiated a successful refinancing program to lower our cost of capital and further strengthen our balance sheet. We issued $600 million of 5.75% 10.5-year senior notes at par value. The transaction reduced our weighted average interest rate from 6.2% to 5.4% and nearly doubled the weighted average maturity from just over 4 years to just under 8 years. This will save us approximately $9 million in annual interest expense or about $0.06 per diluted share. In the fourth quarter, we will recognize a charge related to debt financing of approximately $25 million or $0.18 per share, which is excluded from our guidance.

Now I'd like to review our outlook and financial guidance for the fourth quarter. We expect demand for our Technology, Data and Analytics solutions to remain strong with revenue about flat with third quarter. We expect refinance origination volumes to remain elevated, although down slightly in the fourth quarter. At the same time, we expect foreclosure activity to continue to be under pressure and Default Services revenue to decline. Therefore, we expect fourth quarter consolidated revenue to range from $475 million to $495 million and earnings per share to be in a range of $0.65 to $0.69.

We're very pleased with our third quarter results and the progress we continue to make in positioning LPS for long-term growth opportunities. We're confident that our technology-driven model, end-to-end solutions, data assets and industry expertise, provide unique advantages to LPS to drive revenue growth and build long-term shareholder value. Now I'll turn the call back to the operator, so we can take some questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll hear first from John Kraft with D.A. Davidson.

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

A couple of questions here. First, on the default forecast. Tom, in the guidance, you specifically said that you thought that the foreclosure volumes might be down in Q4 sequentially. Is that simply because of the typical seasonality you see in Q4, when banks aren't inclined to bump people out of houses during the holidays? Or is there some new change there that might be the new run rate?

Thomas L. Schilling

Yes. John, I think the key reason is just the continued sluggish -- sluggishness we've seen in the foreclosure activity. As I mentioned in the prepared remarks, the National Servicing Standards, as well as what we're anticipating the impact from the Homeowner Bill of Rights that will go into effect in January in California, are both continuing to slow down default activity. And I think right now, if you look at the National Servicing Standards, for example, it's going to take a minimum -- I mean, if you look at just all the steps that have to be gone through, it is difficult to imagine that you could move a loan from a delinquency stage through OREO sale in anything less than about 8 to 12 months, just given all the steps that have to be gone through. So I think we've sort of -- those National Servicing Standards are going to institutionalize here what we refer to as the long process of a foreclosure, that, that is going to be the norm as we move forward. And I think that as we adjust to, particularly in California, which is a large state with large volume, it's going to affect volumes probably into the first quarter as well. But we continue to think -- look, we've continued to look at the $3.5 million loans in the backlog as delayed, not eliminated, and we expect the vast majority of them to still ultimately come through the foreclosure process.

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

Sure. And then on the Servicing side, you said that, obviously, MSP remains a top priority. Can you just update us on the current market share that you have on both the mortgage side, and then also on the home equity side and let us know maybe how the pipeline looks for both of those?

Thomas L. Schilling

Yes. We currently are roughly about 55% market share on MSP, on first loans, considerably less than that on HELOCs. As we've talked in the past, over the last couple of years, I think some of the momentum on bringing HELOC loans or the home equity loans onto the system has been delayed by all the other turmoil in the industry. We're starting to see signs that those activities are being reprioritized and we kind of look at home equity lines as being another growth opportunity as we move forward. But we're real excited about all our Technology offerings and Data & Analytics as we move forward. MSP continues to be the cornerstone of our growth and really is what creates the strategic relationships we have that's allowed us to bring out other offerings like the LPS Desktop and attain market-leading share in a very short period of time. And we think that we're looking to duplicate those kind of efforts in the Origination Technology space, as well as the Data & Analytics space.

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

As far as the pipeline, would you say it's in line with where it's been in the recent past or better or worse, directionally?

Thomas L. Schilling

Yes. I'd say it's consistent with the recent past. If you look at loans on the system, we're up about 4% year-over-year and we continue to see the same kind of activity. I mean, we consistently see that as MSRs change hands, as I said in the prepared remarks, we look at that as still an opportunity for us because generally speaking, we win more than we lose as those shift hands. And we've seen that play out in 2012 and we expect that to continue to play out in 2013 and beyond.

Operator

We'll hear next from Greg Smith with Sterne Agee.

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

Tom, the Default Services revenue, still the sequential decline there was surprising because it's generally tracked your foreclosure starts. I guess, we don't have your actual foreclosure starts you report in your Mortgage Monitor in September. But did they fall -- I guess, the question is did they fall off a cliff in September? And is anything changing as far as your revenue opportunity per foreclosure?

Thomas L. Schilling

Yes. That's a good question. I think if you go back and look at our second quarter guidance, our revenue was actually pretty much in line with our guidance in the second quarter with one exception. I think we had expected industry volumes to be roughly flat, second Q to third quarter, and expected our revenue to be down because we are selectively moving away from certain low-margin, high-risk contracts. The only thing that was different is we were a little lower than expected, but that was largely because industry volumes actually did decline in the third quarter versus the second quarter. So we're pretty much where we expected to be in the third quarter. And I think that we are seeing industry volumes continue to decline and we expect, because of the seasonality that we normally see in the fourth quarter, as well as the continued delays that are associated with not only the National Servicing Standards but the anticipation of the Homeowner Bill of Rights in California, are going to continue to delay that into the fourth quarter and then as we enter 2013.

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

Okay. So I understand the delays and whatnot. There's obviously nothing you can do about that. But so how -- are we talking then about maybe $20 million to $30 million of revenue a quarter from getting out of low-margin, high-risk contracts? Is that the way we should think about it? That just whatever we thought, if we were modeling this for the first time going forward, should we just assume sort of $20 million to $30 million less revenue per quarter than you otherwise would've had?

Thomas L. Schilling

I mean, that's probably not a bad estimate. I mean, that's about the -- when I think about some of the low-margin contract business that we have walked away from, that's probably in the range. But the only thing I would say is we're going to continue to be pretty vigilant about how we manage that business. We're managing the Transaction business for margins and with a mind towards the risk we take on. So we want to do those products in a way that we can be proud of and those services in a way that we can be proud of and at the kind of margin that our shareholders expect us to get.

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

Okay. And then as we look at the Default Technology revenue, obviously, it shows a different story, where it actually accelerated. If we're thinking about volumes getting pushed out and delayed, can Default Technology continue to grow at anywhere near this pace? Is that just market share gains? How should we think about that line?

Thomas L. Schilling

Well, from a year-over-year standpoint, a good portion of it was market share gains because some of the large -- couple of large conversions came on during the third quarter of last year. So we're still getting the annualizing effect from those. In the quarter, from a sequential standpoint, we actually are seeing some increased demand for our consulting services, Professional Services, surrounding the Default Technologies and how we look at our Professional Services when we're delivering them, if they're tailored towards a particular area, like Default Technology, then obviously, it follows that revenue. So we're seeing some strong growth in the third quarter from that as well.

Operator

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

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

With regard to the consulting services in Default Technology, given kind of the extent of the problems and the amount of scrutiny that the servicers continue to be under, how sustainable is that extra revenue?

Thomas L. Schilling

I think in the interim term, I'd say for the next couple of -- next several quarters, probably next couple of years, I think it's going to continue to remain in demand, because really, what we're doing is consulting work around helping the servicers utilize our technology tools in a better way, more efficient so that they can address the problem loans on their system. Obviously, as the problem loans go down and the transactional side of the business goes down, so would the consulting. But I think they would kind of go hand in glove as the foreclosure bubble or backlog gets managed through.

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

Sure. And also just a question around your Gateway. I was wondering, are we at a point where we could start to talk about the number of different services an originator could buy through it? How many they're buying now? How many they might buy in the future?

Thomas L. Schilling

Yes. I mean, I think we're still a little early into it. Some of the products and services are still being deployed to several of the servicers who are in the -- who have converted or are in the process of converting. But yes, at some point, I mean, what we're focused on is getting the gateway installed even if it's in some smaller channels, in some servicers, but getting engaged with it, and then beginning to grow over time as they expand the usage of it throughout their origination footprint.

Operator

We'll hear next from Carter Malloy with Stephens.

Carter Malloy - Stephens Inc., Research Division

So first off, on the -- just walking into next year, I'm going to trying to get something out of you, you're probably not going to give us. But if we're thinking about foreclosures and refis probably both being under pressure next year, is it safe to say that those segments will be down or down healthy next year and you can continue to offset that with some share gains and growth in your technology businesses?

Thomas L. Schilling

Yes. I think, as we look at the things right now based on what we know today, I think you kind of hit it on the head. I think if you look at where we expect refi activity to be next year and what we expect to continue to be a pretty challenging environment on the default side, that we would expect that we'll have to continue to manage those businesses very tightly on the Transaction Services side and would expect to probably have decline on an annual basis on revenue. On the TD&A side, again, we see a lot of opportunity. I think probably some of our biggest growth is beyond 2013. We are expecting to conclude our investments in Data & Analytics in the second quarter of 2013 and we do expect that to begin growing in the second half of the year, next year. And Origination Technology, as we've talked many times, we look at that as kind of a 12- to 18-month opportunity window here. And so we're looking at that to be a provider of growth in 2013. But I think we're more excited for the 2014 and beyond for that as well. But yes, TD&A will continue to be where we feel we're going to have sustainable growth. And on the Transaction Services side of the business, as we've said, we'll continue to manage that business to the ups and downs. We are much more interested in managing the risk and the return that we get and the margins, as opposed to market share.

Carter Malloy - Stephens Inc., Research Division

Okay. And then on the appraisal management side of your Origination Services business, it seems like that was the primary drag here this quarter. But how big is that business? Are you chopping off all of it? Or there are just a few key contracts going away? And how much of a pressure should that be incrementally to that segment?

Thomas L. Schilling

In appraisal?

Carter Malloy - Stephens Inc., Research Division

Correct.

Thomas L. Schilling

Yes. In appraisal, yes, it's about 1/3 of our Origination Services revenue at this point. It used to be a little bit bigger than that. So like we said, we're continuing to see very strong growth in our title and escrow services and keeping up with or exceeding industry metrics there. But appraisal management, again, it's a similar profile of some of the other businesses that we're deemphasizing, if you will, because we want to make sure that we're doing it in a profitable way. And we're mindful of the margins and the risk we're taking on with those. So that business will be managed accordingly going forward.

Operator

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

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

I guess, the first one, just sort of want to go back to sort of the industry comment related to refi for '13. I think if I heard you right, you said the MBA revised forecast is for down 36%. And you kind of suggested that would be directionally accurate or you agree with that directionally?

Thomas L. Schilling

Yes.

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

Isn't the activity that you're seeing maybe from your largest clients suggests maybe more optimistic than that? It kind of strikes me, even though the MBA revised more favorably, that it's still massively conservative. I just want to get some sort of sense for your underlying view what sort of suggests that you think that might be accurate.

Thomas L. Schilling

Yes. I think if you go back, when we talked in the second quarter, I think the MBA -- and I forget where Freddie and Fannie estimates were, but I think they were congregating around the 50% to 60% down. And we said at the time, we thought that was too pessimistic. Again, 36%, you can certainly make an argument, I think there's some reasons to say it's more optimistic. But again -- or that there could be room for more optimistic. But I think what we're trying to -- what we would say is that directionally, I think it's going to be down. It's going to be a down year probably for refi activity. When you look at the amount of loans that have been reified, the fact that we're not going to get incremental momentum from probably lowering interest rates -- we're assuming pretty much a stable interest rate environment throughout 2013. And I think, to expect any, the volumes to remain flat or to have an up year next year, I think you'd have to see continued lowering of interest rates. And we just don't expect that to happen next year.

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

Okay. And then how much of your Origination business is HARP-related at this point or has been this year?

Thomas L. Schilling

We would estimate -- it's hard to sometimes differentiate on a HARP order versus a traditional refi, but we're kind of attributing roughly about 30% to 40% of our volume from the HARP activity.

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

Okay. Then finally, if your TS revenue declines in '13, as you perhaps suggested -- and I heard you give some comments on the margins, but it's basically a TS margin question or directionally how to think about it into '13 if revenue declines.

Thomas L. Schilling

Yes. Again, what we're focused on is managing that segment to 20% or better margin. Just to be clear, if we have sharp declines in volume in a particular quarter, we may not see ourselves attain that margin goal every quarter. But over the longer term and as volumes stabilize, our goal is to continue to manage that into the 20% or better margin on Transaction Services in total.

Operator

[Operator Instructions] We'll hear next from Kevin McVeigh with Macquarie.

Kevin D. McVeigh - Macquarie Research

Tom, what's the sensitivity around, in incremental contribution from, call it, $100 billion or so boost in originations to the positive and the negative? So for every incremental $100 billion or so, what's the EBIT impact on the upside and the downside?

Thomas L. Schilling

Yes. There is not a real simple financial metric you can do there as volumes go up and down because obviously, it depends on how far they go away from where you were. So I mean, I think the higher volume growth you get, obviously the more you're incrementalizing on the way up. And on the way down, the same thing, you've got to do more to take out more costs if the volume's going down. So it's not a real simple metric, so I'm not going to try and throw something out like that. What I would just kind of repeat is we're confident that over the long term, we can manage that business to a 20% margin, regardless of where the volumes end up. And again, if we have sharp volume changes in a particular quarter, it may take us a quarter to catch back up. But over the longer term, we think we can sustain margins at 20% or better in that business.

Kevin D. McVeigh - Macquarie Research

Got it. And then can you remind us, in Q3, what percentage of the Origination business was refinanced? And does the HARP business, is it the same profitabilities your traditional vanilla refi? Or is the contribution-different?

Thomas L. Schilling

The first question, in terms of refi, we are still largely refi. I think we're probably, on our title and escrow services, probably put it at 90% or more refi-driven. On the appraisal side, it's probably pretty close to that as well, maybe a little lower, maybe 80% to 85% refi-driven. And in terms of the profitability between a HARP and a traditional, it really kind of depends on what steps the servicer is going through, in some cases. But in terms of whatever product we get from it, the profitability is the same. So in another words, if we're getting an appraisal order around HARP, it's the same margin on an appraisal order as we get from a traditional. Same thing with title and close. If we're doing title -- or title and escrow, the margin for that loan is going to be the same pretty much as it is. The issue is, in some cases, in certain HARP orders, they're not even ordering appraisal.

Kevin D. McVeigh - Macquarie Research

Got it. And then Tom, real quick. It looks like we have 3 settlements with 3 different state AGs, yet the majority of the reserve is still out there. Where are we in that process? And does that get settled within the next 12 months? And if I have it right, I think you're about 13 states you're negotiating with. You settled with 3. But on a relative basis, you're really de minimis what the penalties are. I mean, is that primarily geared towards California and some of the other higher states? Or can you just help us understand kind of where that reserve is and how we should expect that to be absorbed over the next 12 months or so?

Thomas L. Schilling

Yes. First, we're pleased with the settlements we've reached so far and pleased with the progress we're making on the other states as well. We're not going to get into a lot of specifics around how the allocation of the reserve is allocated. But we continue to have productive dialogue with the various state AGs and are actively pursuing an alternative that's, a resolution that's in our best interest. And that reserve, you've got to remember, $196 million that remains on the reserve is for all legal matters, it's not just the state AGs or the Consent. It encompasses the state AG issues, the U.S. Attorney investigation, as well as the Consent Order.

Operator

Your last question will come from Julio Quinteros with Goldman Sachs.

Paul B. Thomas - Goldman Sachs Group Inc., Research Division

This is Paul Thomas in for Julio. Maybe just one last one on the legal settlement front. I believe in the Delaware filing, you disclosed that Docx revenue in that state was around $60,000. What was the total annual revenue for Docx? And does that help us understand what the potential size the legal settlement could be?

Thomas L. Schilling

No, it doesn't really because it's only a particular product, if you will, within Docx. Docx was a unit that was less than $10 million in annual revenue back in 2008 or '09. But this was only revenues pertaining to certain activities.

Operator

At this time, I'd like to turn the call over to Tom Schilling for closing remarks.

Thomas L. Schilling

Well, thank you for participation today and we look forward to talking to you again after year end. Thank you.

Operator

This does conclude today's conference. We thank you for your participation. You may now disconnect.

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