Black Knight Financial Services' (BKFS) CEO Tom Sanzone on Q4 2016 Results - Earnings Call Transcript

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Black Knight Financial Services, Inc. (NYSE:BKFS) Q4 2016 Earnings Conference Call February 1, 2017 5:00 PM ET

Executives

Bryan Hipsher - SVP, Finance

William P. Foley II - Executive Chairman

Tom Sanzone - President and CEO

Kirk Larsen - CFO

Analysts

Tien-Tsin Huang - JPMorgan

Jason Deleeuw - Piper Jaffray

Andrew Jeffrey - SunTrust Robinson Humphrey

Chas Tyson - Keefe, Bruyette & Woods

David Ridley-Lane - Bank of America Merrill Lynch

Bill Warmington - Wells Fargo Securities

James Schneider - Goldman Sachs

John Campbell - Stephens Inc.

Geoffrey Dunn - Dowling & Partners Securities

Glenn Greene - Oppenheimer & Co.

Operator

Greetings and welcome to the Black Knight Fourth Quarter and Full Year 2016 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

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

Bryan Hipsher

Thanks. Good afternoon everyone and thank you for joining us for the Black Knight Financial Services Fourth Quarter 2016 Earnings Conference Call. Joining me today are; our Executive Chairman, Bill Foley; President and CEO, Tom Sanzone; and Chief Financial Officer, Kirk Larsen. We'll begin with a brief overview from Bill, Tom will then provide an update on the business, and Kirk will finish with a review of financial highlights and our outlook for 2017. We will then open up the call for your questions.

This conference call includes forward-looking statements that involve a number of risks and uncertainties. Statements that are not historical facts, including statements about our expectations, hopes, intentions, or strategies regarding the future, are forward-looking statements. Forward-looking statements are based on management's beliefs as well as assumptions made by, and information currently available to, management.

Because such statements are based on expectations as to future financial and operating results and are not statements of facts, actual results may differ materially from those projected. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

The risks and uncertainties that forward-looking statements are subject to include, but are not limited to, the risks and other factors detailed in our press release issued earlier today and in the Statement Regarding Forward-Looking Information, Risk Factors, and other sections of our Form 10-K and other filings with the SEC.

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

This conference call will be available for replay via Webcast through Black Knight's Investor Relations Web-site at investor.bkfs.com. It will also be available through telephone replay beginning at 8.00 PM Eastern Time today through February 8. Replay number is 844-512-2921 or 412-317-6671, and the access code is 13652745.

I'll now turn the call over to Bill.

William P. Foley II

Thanks, Bryan. 2016 was truly an exceptional year for Black Knight as we delivered strong results including adjusted revenue growth of 10%, adjusted EBITDA growth of 12% and margin expansion of 80 basis points that exceeded the expectations that we had outlined at the beginning of the year.

In addition, we continued to execute on our strategic initiatives to drive organic growth through selling to existing clients, winning new clients in existing markets and the introduction of new products. Our significant implementation pipeline, driven by new client wins such as with Bank of America, JPMorgan Chase and PNC Bank, provides us with the confidence to deliver on our expectations for 2017 and beyond.

To complement our strong operational performance, we announced earlier today that our Board of Directors have authorized a share repurchase program of up to 10 million shares over three years. Per our previously stated capital allocation strategy, returning cash to our shareholders is another tool we can utilize as a means to maximize Black Knight shareholder value.

Overall, I'm extremely proud of our accomplishments in 2016. We remain very excited about Black Knight's strong business momentum across the enterprise and I look forward to another strong year in 2017. I'll now turn the call over to Tom who'll provide us with an update on the business and the progress that we have made towards the execution of our growth strategies.

Tom Sanzone

Thank you, Bill. Good afternoon and thank you for joining us for Black Knight's fourth quarter earnings call. 2016 was a year in which we exceeded our own high standards of performance and sales. In fact, we exceeded our internal plans and the guidance we provided at the beginning of the year for all key financial metrics and had what we believe was a record sales year. This exceptional year for sales means 2017 will be an implementation year for Black Knight. Implementations for many of the clients we have signed over the past several quarters will be complete around the middle of 2017 and into 2018.

Also, as you likely heard on Tuesday, CitiMortgage has made a decision to subservice a portion of its portfolio of first mortgages and home equity loans with Cenlar, who has been an MSP client for 30 years. In fact, Cenlar will be subservicing the mortgages originated and owned by Citi for Citi's retail banking clients. Additionally, Cenlar recently signed a multiyear renewal for MSP. We are very proud to continue to provide our innovative solutions to support Cenlar's dynamic growth.

These new implementations represent a significant head-start for growth in 2018 and 2019. The Servicing Technology business closed several deals during the year. When converted, these clients, which include Bank of America, JPMorgan Chase and PNC, will add a significant number of first mortgages and home equity loans to MSP. The conversions for Chase and PNC are among those scheduled to be complete in 2017.

We also continued to invest in our Servicing Technologies. Our ability to make these investments to support our clients greatest challenges is an important competitive advantage for Black Knight. As an example, we enhanced our LoanSphere Claims offering. Two MSP clients, including a Top 3 servicer, are currently using this solution and another leading servicer will be implementing Claims later this year.

In the fourth quarter of 2016, we launched our Loss Mitigation tool. This tool helps services manage the critical loss mitigation process more quickly and efficiently and supports changing government and investor requirements. New American Funding recently signed a contract to implement Loss Mitigation and we are talking with several other clients about this solution.

Our Origination Technology business also signed several deals in 2016. In the fourth quarter, a leading global investment banking firm signed a multiyear agreement to use Empower loan origination system. Earlier in the year, PNC signed an agreement to use Empower to originate first mortgages and home equity loans and to implement Quality Insight and multiple Data and Analytics offerings. Fifth Third signed an agreement to implement Empower, LendingSpace, Exchange and Quality Insight, and Santander will be using Empower to originate first and second mortgages.

As you can see, we continue to focus on selling additional products to existing clients. In fact, all key origination and servicing client contracts that were up for renewal in 2016 were resigned and many included additional products. PennyMac is another example of how we are successfully implementing this strategy. In 2015, PennyMac, which has been an MSP client for a number of years, signed a multiyear renewal for our LendingSpace correspondent origination system. In the fourth quarter of 2016, PennyMac renewed its MSP contract and added a number of our Data and Analytics solutions including McDash loan-level data.

We are also gaining traction selling the LoanSphere Data Hub and Motivity solutions, which together create our Enterprise Business Intelligence offering. In the fourth quarter of 2016, a Top 10 servicer and a Black Knight enterprise client implemented this EBI suite. And this morning, we announced that Union Bank, another enterprise client, will be implementing EBI. The combination of Data Hub and Motivity solutions are such a compelling product that we believe clients will include the EBI suite in all future renewals and contracts for Origination Technology.

In closing, 2016 was an exceptional year for Black Knight. It was a year in which we exceeded our own high standards of performance. As we move into 2017, our significant sold pipeline together with our ability to gain new clients and sell additional solutions to existing clients positions us well for years of future growth.

Thank you for your time today. I will now turn the call over to Kirk for an in-depth financial update.

Kirk Larsen

Thank you, Tom, and good afternoon everyone. Today I'm going to discuss our fourth quarter and full year 2016 financial results and outlook for 2017. As Bill mentioned earlier, Black Knight delivered results for full-year 2016 that exceeded the expectations we outlined at the beginning of the year. For the fourth quarter, the results were in line with our expectations and at the high end of the guidance ranges we provided on our third quarter earnings call.

Turning to Slide 3, on a GAAP basis, full-year 2016 revenues increased 10.2% to $1,026 million compared to 2015. Net earnings attributable to Black Knight Financial Services Inc. were $45.8 million or $0.67 per diluted share, compared to $20 million in 2015 and $0.29 per diluted share for the period from the IPO date through the end of 2015. For the fourth quarter, revenues increased 10% to $261.5 million. Net earnings attributable to Black Knight Financial Services Inc. were $11.8 million or $0.17 per diluted share, compared to $9.8 million or $0.14 per diluted share in the prior year quarter.

Turning to Slide 4, I'll now discuss our adjusted results for the full year. In 2016, adjusted revenues were $ 1,033.3 million, an increase of 9.9% compared to 2015. This result compares to our initial guidance range of 6% to 8%. Adjusted EBITDA was $463.1 million, an increase of 12% compared to 2015. This result compares to our initial guidance range of 8% to 10%. Adjusted EBITDA margin was 44.8%, an increase of 80 basis points compared to 2015. Adjusted net earnings was $175.4 million, an increase of 15.9% compared to 2015. Adjusted net earnings per share was $1.15. This compares to our initial guidance range of $1.09 to $1.13. And finally, full year CapEx was $80 million. By any measure, 2016 was an exceptional year for Black Knight.

Turning to Slide 5, I'll now discuss our adjusted results for the fourth quarter. During the fourth quarter, adjusted revenues were $263 million, an increase of 9.6% compared to the prior year quarter. Adjusted EBITDA increased 8.4% to $116.7 million, compared to $107.7 million in the prior year quarter. Adjusted EBITDA margin was 44.4% in the current year, compared to 44.9% in the prior year quarter. Adjusted net earnings was $45.2 million, an increase of 11.9% compared to the prior year quarter. Adjusted net earnings per share for the fourth quarter was $0.30, an increase of 15.4% compared to the prior year quarter. Capital expenditures in the fourth quarter totaled $24.1 million.

Turning now to Slide 6, I'll discuss our Technology segment results. In the fourth quarter, adjusted revenues for the Technology segment increased 10.9% to $219.2 million. Our Servicing Technology business had adjusted revenue growth of 9.5%, driven by strong loan growth on our core servicing platform, price increases and new client wins. In our Origination Technology business, adjusted revenues growth of 17.2% was driven primarily by the eLynx acquisition. Adjusted EBITDA increased 12.9% to $124.4 million, while adjusted EBITDA margin was 56.8%, an increase of 100 basis points compared to the prior year quarter. Full-year 2016 adjusted revenues increased 11.8% to $855.8 million and adjusted EBITDA increased 14.9% to $487.8 million. Adjusted EBITDA margin was 57%, an increase of 160 basis points compared to 2015.

Turning to Slide 7, in the fourth quarter, adjusted revenues for the Data and Analytics segment increased 3.5% to $43.8 million. The growth was primarily driven by the Motivity acquisition, partially offset by lower upfront revenues from long-term strategic license deals. Adjusted EBITDA was $4.5 million, compared to $7.2 million, reflecting higher data related costs in the current year quarter. Adjusted EBITDA margin was 10.3% in the fourth quarter of 2016, compared to 17% in the prior year quarter. Full-year 2016 adjusted revenues were $177.5 million compared to $174.3 million, and adjusted EBITDA was $26.5 million compared to $28.8 million. Adjusted EBITDA margin was 14.9%, compared to 16.5% in 2015.

Adjusted corporate expenses for the fourth quarter, excluding depreciation and amortization and interest expense, increased $2.4 million from the prior year quarter. Adjusted corporate expenses for full-year 2016 were $11.3 million higher than in 2015. The increase for the full-year was driven primarily by higher incentive bonus accruals, higher compensation and employee related costs as we expanded certain corporate functions to support our continued growth and public company costs.

Turning to Slide 8, I'll walk through our capital structure. At the end of December, we had cash and cash equivalents of $133.9 million. Total debt principal as of December 31 was approximately $1,579 million. We had revolver borrowings outstanding of $50 million, and $350 million of borrowing capacity remaining under our revolver. Our gross leverage ratio was 3.4x and our net leverage ratio was 3.1x.

Before I walk through our 2017 outlook, I'll provide details on a change we made for 2017 related to our Property Insight business that is summarized on Slide 9. Property Insight provides information used by title insurance underwriters, title agents and closing attorneys to source and underwrite title insurance for real property sale and transfer.

Effective January 1, 2017, we have realigned the commercial relationship between Property Insight and FNF. In connection with the realignment, Property Insight employees responsible for title plant posting and maintenance were transferred to FNF. Under the new commercial arrangement, Black Knight will continue to own the title plant technology and retain third-party sales responsibility. The realignment allows us to focus on the higher-margin technology solutions that are similar to our other businesses rather than the employee-intensive business processing activities associated with title plant posting and maintenance.

Following the realignment, we will not recognize the revenue and expense related to transferred employees, instead we will charge FNF a fee for use of the technology to access and maintain title plant data. Had the realignment taken place on January 1, 2016, our revenues and expenses would have been lower by approximately $31 million with no impact on EBITDA.

Turning now to Slide 10, I'll walk through our outlook for full-year 2017. Adjusted revenues growth is expected to be in the range of 6% to 8% if you adjust to reflect the Property Insight realignment as if it took place on January 1, 2016. This is in line with our long-term guidance range of 6% to 8%. On a reported basis, the growth is expected to be 3% to 5%. Adjusted EBITDA growth is expected to be in the range of 10% to 12%, which implies margin expansion well in excess of our long term guidance range of 50 to 100 basis points. And adjusted EPS is expected to be in the range of $1.32 to $1.36, which represents 15% to 18% growth. This is above our long-term guidance of mid-teens growth.

Before I walk through some modeling details, I'll go through a few items reflected in our outlook. We have a significant implementation pipeline from previously sold client deals that will drive long term recurring revenues. The go live dates for those implementations are generally in the middle of 2017, or 2018 in some cases. Specifically, we are not expecting to record any revenue related to the Bank of America MSP implementation based on the current timeline, or the Citi loans that Cenlar will subservice.

The implementation timing for previously sold deals means we won't have a full-year run rate from the respective clients in 2017, but it also means that we have approximately 5 percentage points of incremental revenue in 2018 compared to 2017 from the full-year effect of sold deals implementing in 2017, a partial year effect of sold deals expected to implement in 2018 which will annualize in 2019, and planned annual price increases.

As we have talked about before, while we are not highly correlated to origination volumes, our guidance assumes an approximate 1.5 percentage point headwind from the anticipated decline in origination volumes for the relatively small subset of our business that is sensitive to the origination market.

Additional modeling details underlying our outlook are as follows. We currently expect interest expense of approximately $70 million. This does not reflect the refinancing of our senior notes that we expect to complete prior to the planned distribution of FNF's ownership in Black Knight. Depreciation and amortization expense of $120 million, excluding the net incremental depreciation and amortization resulting from purchase accounting. A fully distributed effective tax rate of approximately 37%. Diluted weighted average shares outstanding of approximately 153 million shares, which does not include share repurchases under our new authorization. And finally, CapEx of approximately $90 million.

Although we do not provide quarterly guidance, I want to provide you with some color as to how we expect to progress through the year. We expect the first quarter of 2017 to look very similar to the fourth quarter of 2016 after you adjust revenue for the Property Insight realignment. Several implementations are expected to go live around the middle of the year with the revenue ramping meaningfully in the third and fourth quarters, and we expect EBITDA to rise from the first half to the second half reflecting high incremental margins as implementations go live.

In conclusion, we are very pleased with our fourth quarter and full-year results and look forward to another strong year in 2017. Operator, please open the line for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Tien-Tsin Huang of JPMorgan. Please proceed with your question.

Tien-Tsin Huang

Just sorting my thoughts from the awful lot that you gave, which was helpful, so thinking about the first quarter that looks like the first quarter of 2016, I'm assuming that bakes in some origination pressure with no incremental implementations. I'm asking, does that imply the pretty big ramp-up in the second half of the year to get to your full-year guide plus what you commented about 2018? Just trying to understand I guess the first half versus second half dynamics here. Anything you can give would be helpful.

Kirk Larsen

Tien-Tsin, that's exactly right. So first of all, just to be clear, it was Q1 is going to look a lot like Q4 of 2016 excluding the Property Insight piece. And really 2017 is in fact a story of a couple of things. First of all, it's the implementations, which as we talked about are in the middle of the year, which would provide that meaningful ramp in the second half versus the first half. And based upon what you can see out in the market, you can see refi volumes declining based on where rates are, and so there is that that you'll see in the beginning of the year as well. But it really is a story of implementation timing.

Tien-Tsin Huang

Okay. And then just thinking about on a look-back basis, your outperformance in 2016 versus your original guidance, could you maybe stack that up for us? Some of that I think is acquisition related. What drove sort of the outperformance there versus your original guidance?

Kirk Larsen

Certainly the acquisitions were not factored into our original guidance. So that's one dimension of it. I would also say that our origination volumes were a little higher than we expected over the course of the year as well. And really on the profitability side, one of the things that we are supremely focused on is stringent cost management or cost control, and it's really about protecting profitability. And so, as we looked at the revenue that was coming on and we looked at where we're making investments, we were able to maintain costs and controls around those costs and also get the benefit of the cost actions we took in the prior year. So it's really a combination of those three things that I would say are where we outperformed in 2016.

Tien-Tsin Huang

Let me just sneak in one quick one, just in the Data and Analytics space, the higher data cost in the fourth quarter, is this one-time or sort of a new base plan we should assume?

Kirk Larsen

We saw it in earlier quarters as well. It just wasn't as tough from a comparison perspective. There's an element of it that's seasonal, but I would also say that there's an element of it that's more one-time in nature that we would expect to see ramp down over time. And as you know, we are very focused on improving the margins in Data and Analytics. And so, not only reducing our data related costs but also just generally becoming more efficient is going to be a great area of focus for us, and you'll see us continue to work on to get those margins where we want them to be.

Tien-Tsin Huang

Great, thank you.

Operator

Our next question comes from Jason Deleeuw of Piper Jaffray. Please state your question.

Jason Deleeuw

Just first question on the M&A benefit to the 2017 revenue growth, by our math I think it's about 1 point, but just wondering how much from the lapping of M&A is going to help in the revenue – or is in the revenue guidance? And then just a little bit of color on kind of the Servicing Tech versus Origination Tech versus Data and Analytics growth and kind of how that builds up to the total revenue guidance for the year?

Kirk Larsen

Sure. So from an M&A perspective into 2017, as we talked about before, we really view those as organic opportunities in a sense of build versus buy. And so, we haven't broken out what those are contributing. Suffice to say, they are contributing nicely to next year and they are going well. But I would also say, think of those in the context of also the headwind from the market that I talked about the 1.5. And so you have a couple of things that are unusual in nature that are contributing to next year. So, rather than breakout what that detail is, it's really just a part of the way we're going to grow the business and our capital allocation framework.

As far as the guidance by segment for the year, the way to think about it is, in Technology we have a lot of implementations in Origination and in Servicing that will drive nice growth, but that's also where the effect of the market is coming into play. And so, really looking at mid-single-digits growth in the Technology segment, and that's really based upon when those implementations go live that we've talked about. And from a margin perspective, we expect strong margin expansion from that revenue growth as we get the revenue at high incremental margins and then when we manage costs as I described earlier.

Data and Analytics, if you adjust for the Property Insight realignment that I described, the $31 million of revenue, we're looking for low double digits and mid-teens growth in Data and Analytics. We really are gaining traction and you can see it from our recent announcements where Data and Analytics is becoming a part of the selling to the existing servicing client base for example. So you've seen that in recent announcements. We're gaining traction from that perspective. We also are expecting great performance out of our Motivity acquisition as well as out of the Data Hub. And again on the margin side, it's going to be high incremental margins on that growth as well as cost management.

And then for corporate, just to answer something maybe you didn't ask, it looks to be pretty flattish from a corporate cost perspective. We've made investments in corporate functions to support the growth and we think we've lapped those.

Jason Deleeuw

All right, that color is very helpful. And then just the Data and Analytics, the acceleration in growth expected for this year versus what we've been seeing, is that kind of primarily being driven by the Data Hub and the addition of this Top 10 lender servicer that you mentioned?

Tom Sanzone

Basically, Jason, we've been focusing on that business intensely for quite some time now, and one of the things that we needed to work through was how do we efficiently sell those, cross-sell those products through the Origination channels and the Servicing channels. So, we are excited I'll say about our success to date in successfully cross-selling those products into the other channels.

Now, the way in which we do that is, each year we have, right going into the year we have a ton of renewals that we're going to do. You got a number of your contracts coming up every year. So, what we've done effectively is embed the D&A capabilities into our team to negotiate the new deals, and as we negotiate let's say a new MSP deal, we cross-sell D&A products.

So this is what we've been focusing on. It took some time to have that culture change. We changed lots of things, including compensation systems and the like, but now when we go and do renewals, we go as a team across the businesses at Black Knight. We also clearly do it for new clients. So any time we have a new client MSP deal or a new client Empower deal, we're going not only with OT, but with Servicing and with D&A.

So, it's a combination of factors. I'd say, the cross-sell is the biggest, but now as we've mentioned, we invested a significant amount in building this Data Hub capability, we then acquired Motivity which now sits on top of that Data Hub – and remember, the Data Hub has all of the data around originations and servicing in one easy-to-access repository, and then Motivity sits above that and develops all the analytics that we deliver to clients. It's a very powerful new product and we've had our initial sales and we're excited about the pipeline.

Jason Deleeuw

Okay. Thank you very much.

Operator

Our next question comes from Andrew Jeffrey of SunTrust. Please proceed with your question.

Andrew Jeffrey

I guess a couple of things. Could you, Kirk, talk a little bit more about what happened at D&A this quarter just around the lower upfront revenue, sort of the rationale for shifting to some longer-term deals, whether that enhances the lifetime economics of the contracts, and I guess just some of the detail behind what happened there?

Kirk Larsen

Sure. So this is something that has been happening I'll say over the course of 2016. If you go back to 2014, the fourth quarter of 2014, we were looking for ways that we could monetise our investment in our property records database on more of on a long-term recurring basis as opposed to on one-off short-term deals. So what we did was, we entered into long-term deals, so I think 7 to 10 years, and it was recurring revenue. So we thought that was the best way to get the greatest return on that investment, and quite honestly, been very successful with that over the course of the past 2.5 years.

What that brings with it though is from an accounting perspective there is an element of the revenue stream that is recorded in the quarter that you'd first deliver the historical data, and that's a one-time revenue element, and then it's straight-lined over the remainder of the contract term. And so, you have to grow through those one-timers and we had more in the fourth quarter last year than we did this year. But it's certainly something that we think is a terrific way to have a recurring revenue stream that isn't based upon constantly having to sell, it's you sell once and it's long-term recurring revenue.

And then the other thing I would say, Andrew, as you look at the performance of Data and Analytics in the quarter from a revenue perspective, and we've talked about this on prior calls, we transferred some business over to FNF that was zero-margin business that we have them do as opposed to again a Property Insight business that I spoke about earlier, and it was about $4 million of revenue relatively spread evenly over the course of the year. That was the zero-margin business that we don't have the revenue effective January 1 of 2016. So we didn't have any of that in 2016, we had it in 2015. And so we didn't have that component. So really that was the other piece that was affecting revenue growth in Data and Analytics in the quarter.

Andrew Jeffrey

Okay. It sounds like, given your commentary, we don't see a lot of that effect at all in 2017, given the acceleration. And I'm wondering, the EBI commentary, the Data Hub attach rate, so pretty exciting, to the extent that's driving growth, and Tom, you said you expect basically all renewals to attach EBI, what does that mean do you think for the long-term, how additive is that to organic revenue within Black Knight over time?

Tom Sanzone

First of all, the EBI for sure we're seeing it, as I mentioned in my comments, on the Origination Technology business and we're working right now to create a Servicing offering as well. So, we have a Motivity offering that's been very successful for originations and now we're working to build that kind of same product for servicers, and very exciting from that perspective because as you know we have 70 servicing clients that are very deep relationships, and once we develop that product, we have kind of a captive audience to go right out and sell to.

So, what exactly it's going to be, we don't know. We're excited about how much of it we can sell. We see that there is an absolute need in the market to be able to put all this data together and deliver high-powered analytics that help the business make decisions. So there's a lot of excitement around it. It's going to be timing and being opportunistic with our clients to get the product out. But I'm looking forward to getting it out there in servicing.

And listen, we want to grow our D&A business at double digits and significant margin improvement going forward. That's our goal. I mean that's not a secret. That's what we want to do. We want to get it in line with some of our other products and we're investing in it and we're also, as we said, we're also focusing on cross-selling that business. So that's our goal.

Andrew Jeffrey

Okay. Thank you very much.

Operator

Our next question comes from Chas Tyson of KBW. Please proceed with your question.

Chas Tyson

Just want to ask first question about the pipeline going forward. Obviously you have a significant amount of implementations coming up this year and next. But with the new political paradigm, just wondering how conversations are going with your clients and how you're seeing demand shaping up for the product set?

Tom Sanzone

I get asked this question, as I'm sure many people do very often. I mean, at this point it's still too early to make any definitive statements. That being said, Black Knight offers solutions that make our clients more effective, more efficient and more compliant, which are outcomes that I think transcend the market, okay. What we're seeing right now in the client base is kind of BAU, business as usual, with an eye open to see which way this thing is going to break, okay.

So, I think from both a regulator perspective and a lender perspective, they are going to be in a wait-and-see mode over the next two, three months. I think three months from now we'll have a better view. Frankly, a lot of the sales that we, and we've talked about it here on the call, don't underestimate the compelling nature of the business case that we put together when we sell our products. The clients desire, especially after all of the expense they put in over post-financial crisis, their focus on getting more efficient and more profitable is a huge driver, and I don't see that changing frankly.

So, right now I would tell you that we're not seeing any significant change. I think it will evolve over the next number of months, and we'll see. But I think, we talked about it recently, you could also see shifts in other positive ways. Number one is, we have a number of our contracts as you know, take originations as an example, are at relatively at their minimums with clients. So, if regulations loosen up and the lenders are more willing to commit in both HELOCs and first mortgages, we got upside on that, right. We saw generating more volumes, we got upside on that. So, it could go a number of different directions and create more opportunity frankly.

Chas Tyson

Okay. And then on the share repurchase plan that you guys announced, I mean how are you thinking about that over the course of this year, given that obviously you've got a big event with the FNF distribution and should help to enhance liquidity of the stock? I mean, how were you thinking about that before and after that event?

William P. Foley II

So I would say that on the share repurchase, we want to put this in place because we anticipate there is some potential dislocation in the stock price when the spinout happens. A lot of shares are being, 85 million or 80 million shares are being distributed to the FNF shareholders, and should there be a negative impact on the stock price, we want to be in a position to step in and make some major repurchases. And so that would be sometime in conjunction with the spinout, which would happen in very, very late second quarter or sometime in the third quarter. So we're just in effect anticipating just what might happen in the marketplace and being ready for it.

Kirk Larsen

And Chas, the other thing I'd add is, as we've been talking about since the IPO, it's been one element of our capital allocation framework too to return cash to shareholders. And with the impending spin, it's something where there will be enough float that we can be opportunistic and could be another way to create shareholder value. So, not necessarily, I wouldn't view it as a change to the capital allocation strategy that we've talked about, but with this pending spin, there could be a dislocation at the time but then also more opportunity than there had been in the past.

Chas Tyson

Okay, that makes sense. And then just one last one on Data Hub and a question on the Top 10 lender servicer that you signed up and are implementing, how should we think about that revenue contribution versus signing up a Top 10 lender servicer or just Top 10 servicer on MSP?

Kirk Larsen

It expands our relationship. Are you talking order of magnitude?

Chas Tyson

Yes, order of magnitude is really where my question is going to.

Kirk Larsen

Here's what I would think about it. It's something that will start small, but it is, as we penetrate it and as the insights increase that holds the pie, that population of things that we can offer and the revenue stream would increase as well. So something that starts small but can get meaningful.

Tom Sanzone

I think, Chas, we'll need to talk more to you guys about this over time. The Data Hub is not only a new product but think of it as a chassis, right, and we're developing now and will continue new products that will automatically plug into that chassis and those new products will be sold incrementally from the original purchase, right. So, it's almost like you're buying the chassis and probably some initial capabilities and then we're going to develop further capabilities to sell into the market. And once that chassis is in place at a client, it's very easy to plug in new products. So that's the way we designed it.

Chas Tyson

Okay. Thanks very much, guys.

Tom Sanzone

And if you look at, we've talked to you folks in the past about we started with four or five enterprise clients that use our suite front to back. We have 10 implemented, three in the process of being implemented, and a very nice pipeline of potential new enterprise clients. Like that group as an example really would be top of the list on people to acquire the product, right, because they have everything from origination all the way through the close, servicing, default if necessary, all that on one platform, right, and the ability to access that data and right analytics on that data is very powerful. So, like there's a very strong list of, hey, go to these clients and sell them to this client base. If you notice, they are mentioned that the clients are both enterprise clients, because it's a no-brainer for them.

Chas Tyson

All right, thanks for the color.

Operator

The next question comes from David Ridley-Lane of Bank of America. Please proceed with your question.

David Ridley-Lane

So on the 150 basis points drag on revenue that you expect from lower origination volumes in your revenue guidance, what does that assume for market-wide volume decline, just so we have a sense of what your expectation is?

Kirk Larsen

15% to 17%, I mean it's 17% I think is the number. And just to give you a little color as to how arises, if you think about our revenue base, as we've talked to you about before, 67% of our revenue is servicing, which has no effect from origination volumes. Our Origination Technology business is 16% of our revenue and Data and Analytics is 17%. Where that 1.5 point comes is within Origination Technology. It's really a very limited impact in our loan origination system business, because as we've talked about before, those contracts have minimums, and as Tom mentioned earlier, most of the revenue from clients [on their losses] [ph] are actually below the minimums. And so that's protected from a decline in origination volumes.

Our Exchange platform has exposure to refi that we've talked about before. So if refis are down 40% or more, that's where you'll see part of that effect and then there's some in eLynx as well. In Data and Analytics, the exposure there is in the title data piece of the business, some in public records, and then there are tax data business. And so that's really where it comes from.

So kind of going back to the beginning, that assumes per the MBA a 17% decline in total originations, with purchase up 10% and then refi down 47%. Those numbers could always change from month-to-month but that's how we thought about it.

David Ridley-Lane

Okay. And because of the contract minimums, the relationship wouldn't be linear. If you did see that 5 points worse decline in origination volumes, how should we think about the incremental potential revenue drag?

Kirk Larsen

So if we are assuming 17%, you can think of that as there will be very little on the LOS. The contract space, we are already there, should be a little bit but really not much. So really you can think about it, if this correlates to 17%, you could do the math and get relatively close as to what it would mean.

David Ridley-Lane

Okay. Thank you very much.

Operator

Our next question comes from Bill Warmington of Wells Fargo. Please proceed with your question.

Bill Warmington

So a question for you on the two acquisitions that you've made this past year, the eLynx back from May, the thought there was to introduce mobile capability and electronic delivery of documents and signatures. How has that integration gone into RealEC, is that fully completed now?

Tom Sanzone

We are in the process of doing those integrations both into RealEC and into our Empower LOS platform. So, I don't have it right in front of me. I think it's potentially first quarter, but I'd have to go back and check on that. But that work is in progress.

Bill Warmington

Okay. And then also on Motivity back from June, where you provided the key performance indicators for the small and mid-sized banks, also was that integrated into the Data Hub platform and have you had any success cross-selling Motivity into any of the top 70 U.S. banks?

Tom Sanzone

It is integrated and we are having success and we're very excited about the potential of selling that product into our pretty substantial client [base] [ph].

Bill Warmington

Okay. And then last, sort of a housekeeping question, for those two acquisitions, what was the contributed revenue from them to Q4?

Kirk Larsen

As we talked about, Bill, we aren't going to give that level of detail, because once we buy them and integrate them, we don't look at them as acquired businesses but just additional products that are part of the suite.

Bill Warmington

Got it. All right. Thank you.

Operator

Our next question comes from Jim Schneider of Goldman Sachs. Please proceed with your question.

James Schneider

I was wondering if you could maybe give us a little bit of a color on your conversations with clients around potential changes that might be adopted by the Trump administration in terms of the regulatory regime or might be adopted by Congress, to the extent that any of the regulation on the mortgage industry is rolled back, what impact do you think that's likely to have on either new deal wins or the existing book of business?

Tom Sanzone

Existing book of business, I can't see really any impact on that, where we have mostly long-term deals, five to seven years. So I don't see an impact there. But listen, we continue to have a strong pipeline as our products are not only focused on risk and regulation but also on efficiency and effectiveness. So, our role as the leading tech provider in the mortgage technology space is to help our client drive increased profitability while running a compliant operation.

I don't see – emphasis may shift, I mean that's certainly possible, but I think if the emphasis shifts, the products that we bring to market, that Black Knight delivers to clients, are going to still be in their biggest challenges. So, as I've mentioned before, getting more efficient and getting more profitable is certainly a major driver of sales in our business. And then investments that we're making in new products, like the Claims product, like the Loss Mit product, these are all capabilities that clients want.

Generally, if you see the switch, my view, and I used to work on the other side of the business, and the way I see this is, the behavior is, as I've experienced it in my career, you've had probably five, six, seven years of pent-up demand for new products that frankly they couldn't afford to do because they were too focused on doing risk and compliance. So, that could change and then the desire for new products will be a driving force, and Black Knight has those products. So, I'm in a wait-and-see mode like the rest of the industry, but I think whichever way you go with this thing, Black Knight has an offering that will help clients meet their challenges.

James Schneider

Okay. And then maybe one for Kirk, clearly you've got a big slug of new implementations coming on as you said middle of this year, heading into 2018, as we think about our models for 2018, normally you would think that that would – that little amount of revenue uplift would have a pretty healthy incremental margin associated with it and especially in terms of margin expansion for 2018. So I guess the question is, should we assume that that would fall [indiscernible] in terms of incremental margins or would you expect there to be some kind of higher investment priorities where you look to put that money to work a little bit either on new product development or elsewhere in 2018?

Kirk Larsen

Our expectation is that that will flow through at high incremental margins. We already are making, and Tom talked about this before, we're making investments in new products already, and so as this revenue growth comes on, it will fall to the bottom line at high incremental margins. And so, you will see margins progress meaningfully as you go from Q1 up into Q4 based upon the timing of when the implementations go live.

James Schneider

Thank you.

Operator

Our next question comes from John Campbell of Stephens Inc. Please proceed with your question.

John Campbell

Congrats on a great year. Just back to the spinout, I assume some of the Property Insight realignment, I'm assuming that's tied to that, but anything else coming ahead of the spin or maybe post-spin, I mean does that technically change anything for you guys after the spin?

Tom Sanzone

The Property Insight realignment actually was unrelated to the spin. It was something that we thought was the right thing to do, so that if you think about Property Insight and the two pieces of that, one is the title plant maintenance, posting and maintenance that's very people-intensive, and then there's the technology piece, so we actually thought ordinary course of business the right answer was to keep the technology business and have FNF take over the 200 employees that do the title plant posting and maintenance.

As I think about the spin and what effect it will have and what will be leading up to it, we will be, as I mentioned earlier and we announced in December, we will refinance the senior notes, and so leading up to the spin we will do a refinancing of that. The timing and structure of that is to be determined, and as it happens, we'll be very clear what the effect is.

And then the other effect, which isn't necessarily leading up to the spin, is there are some things that FNF does for us today on a shared services basis that we will do ourselves. And so, there will be some of those functions that will come over to Black Knight over time. I wouldn't necessarily say it's flip a switch on the date of the spin that will happen. Some things will be that way but more things will actually involve some form of transition.

But other than that, I think the other thing I'd say about the spin, and you think about life in a post-spin world, we'll have increased flow obviously with 80 million shares hitting the market. We'll be able to pay down debt without constraint or tax consequence, which is something we've talked to you all about on prior calls, and certainly we'll have a more simplified structure with largely one, [if either not] [ph], potentially entirely one class of stock, and so with all the shares being in the Class A and structurally more simple which I know will avoid some confusion that's out there. So I think that's all good, but other than that, that's really what's happening leading up to the spin.

John Campbell

Okay, that's very helpful. And then, I want to get back to the implementations to make sure I heard you correctly. So you said, Bank of America and then the Citi subservicing I guess the ripple effect there. You're not expecting any revenue until 2018 and then you're expecting maybe I think you said 5% or 500 bps or so revenue growth uplift in 2018. Is that right?

Tom Sanzone

So correct on the first piece, the Bank of America and Cenlar piece, that is 2018 revenue. And then the 5 percentage points, what that represents is if you think about all the implementations in 2017 that we have a partial year, we'll have that annualize in 2018, we'll have deals that are implemented in 2018 that will get a partial year effect, and then we'll have planned price increases that we do every year, and we've talked to you about the various forms those take, both contractual, escalators and then strategic price increases. That what we can see today based upon those elements, there's 5 percentage points of incremental revenue in 2018 compared to 2017. So suffice to say, that's a pretty good start on two years from now.

John Campbell

Yes, absolutely. Okay, that makes sense. Thanks guys.

Operator

Our next question comes from Geoffrey Dunn of Dowling & Partners. Please proceed with your question.

Geoffrey Dunn

Kirk, I want to follow-up on what you just commented about the debt and the restraints from paydown being removed after the spin. I want to look at it the other way. Is there any reason to consider raising more debt rather than just refinancing the bond, should we be thinking about that at all? And then post that, is that more likely of a return of capital getting the debt even lower than share repurchase, how can we think about the way you're assessing the various values there?

Kirk Larsen

I would say that nothing has changed in the way we are thinking about capital allocation. So last quarter we talked about the same four elements of investing in our business organically, maintaining leverage around 3x, and then M&A, and then returning cash to shareholders. I'd say that framework is consistent. And so our intention in connection with the spin is just refinance the senior notes as opposed to raise additional debt. But then going forward, well both. We have cash on the balance sheet today that we can deploy and then we'll continue to generate cash, and then we would allocate in accordance with that framework. But I wouldn't say that anything post-spin is necessarily any different than it was prior thereto.

Geoffrey Dunn

Okay. And then in terms of M&A, I know things have been more of a attack-on approach, but have you been restrained to date on any M&A because of the FNF relationship or is that just again been smaller acquisitions that have come across your screen?

Tom Sanzone

That was our strategic focus, was adding products to the suite. And so that really was, there was no constraint on doing those kinds of deals. So I would say, no. And those continue to be things that we will be interested in looking for, are areas we can add a product to fill the gap and add a product that we can cross-sell to our existing client base and accelerate growth.

Geoffrey Dunn

Okay, thanks.

Operator

Our next question comes from Glenn Greene of Oppenheimer & Co. Please proceed with your question.

Glenn Greene

Just a few clarifications. The first one, I guess on the Citi sort of subservicing thing, is there any way to sort of directionally frame the magnitude of what that could mean for your business in terms of growth benefit or number of loans, any way to think about that?

Tom Sanzone

The number of loans that will be coming over, Citi and Nationstar announced that the 750,000 or 780,000 loans were being sold from Citi to Nationstar. The number of loans that Cenlar will be subservicing is pretty comparable to that number, is what we expect will come in 2018. So it's in our segment of benefit.

Glenn Greene

Yes, definitely. And on the D&A margins, I know you sort of talked about very good lift in 2017. By my math, and you can sort of check me on this, you just sort of optically get almost 300 basis points benefit just from the movement of the Property Insight to FNF. So I'm sort of thinking, you should be at least in the high teens.

Kirk Larsen

I agree with your math.

Glenn Greene

Okay. And then the third one is just sort of a question on Origination Technology, I guess one way to ask the question is, the growth slowed a lot from the last quarter, which you sort of put up over 50% growth I think and now you sort of talked about 17% growth and you clearly had the eLynx benefit within there, so any reason why your OT growth slowed?

Kirk Larsen

It really is a function of timing. So there's a couple of things that happened. If you think about 2015, Closing Insight went live and a number of other clients went live on our loan origination systems in 2015 and those annualized in quarters leading up to the fourth quarter I'll say. And so really the growth in that business is going to be about implementations and those are happening around the middle of 2017. So that's one element. And then there were some other things around Professional Services that were a little more robust in 2015 than 2016, again really related to the timing of implementations, because when we do an implementation of an LOS, there's a tail of professional services. And so when you annualize those, you're waiting for the next implementation effectively.

Glenn Greene

Okay, great. Thanks Kirk.

Operator

Ladies and gentlemen, we have reached the end of our question-and-answer session. I'd like to turn the call back to Mr. Hipsher for closing remarks.

Bryan Hipsher

We appreciate everyone listening in and hope you share the same excitement about Black Knight's progress as we do. Thanks again for joining and have a great rest of your day.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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