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Edited Transcript of ACTA earnings conference call or presentation 9-Aug-17 2:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Actua Corp Earnings Call

Wayne Sep 15, 2017 (Thomson StreetEvents) -- Edited Transcript of Actua Corp earnings conference call or presentation Wednesday, August 9, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Karen Greene

Actua Corporation - MD of IR & Marketing Communications

* Raymond Kirk Morgan

Actua Corporation - CFO

* Walter W. Buckley

Actua Corporation - Co-Founder, Chairman and CEO

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Conference Call Participants

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* Jeffrey Lee Van Rhee

Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst

* Tom Mao

Evercore ISI, Research Division - Analyst

* Vincent Alexander Colicchio

Barrington Research Associates, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good morning, and welcome to the Second Quarter 2017 Actua Earnings Conference Call. My name is Brendan, and I'll be your operator for today. (Operator Instructions) Please note, this conference is being recorded.

And I will now turn it over to you, Karen Greene. Karen, you may begin.

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Karen Greene, Actua Corporation - MD of IR & Marketing Communications [2]

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Thank you, and good morning. This is Karen Greene with Investor Relations, and I want to welcome you to Actua's Second Quarter 2017 Conference Call.

I'd like to remind everyone that we are going to use presentation slides to accompany our prepared remarks today. These slides can be found on our website at actua.com. Go to the Investor Information tab, and you'll see an icon for our second quarter conference call. The slides can be accessed through that icon. For those of you without immediate access to our website, the conference call and presentation slides will remain on our website and be available for future reference.

On the call this morning, we will be discussing certain non-GAAP financial measures. For additional information on these non-GAAP financial measures, including a reconciliation of these measures to the most comparable GAAP measures, please refer to the press release we put out this morning, including the attachment to this press release. The press release is also available on our website, which, again, is actua.com. To access the press release on our website, go to our homepage and select the August 9, 2017, press release. The attachments to the release can be accessed by clicking on the PDF file contained within the release itself.

Before we begin, I'd like to briefly review our safe harbor language. The statements contained in this press release that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve certain risks and uncertainties, including, but not limited to, risks associated with our ability to compete successfully in highly competitive, rapidly developing markets; the valuation of public and private cloud-based businesses by analysts, investors and other market participants; our ability to retain key personnel; our ability to deploy capital effectively and on acceptable terms; the effect of economic conditions generally; capital spending by our customers; our ability to retain existing customer relationships and secure new ones; developments in the markets in which we operate and our ability to respond to those changes in a timely and effective manner; the availability, performance and security of our cloud-based technology, particularly in light of increased cybersecurity risks and concerns; our ability to successfully integrate any acquired business; the impact of any potential acquisitions, dispositions, share repurchases or other strategic transactions; our ability to have continued access to capital and to manage capital resources effectively; and other risks and uncertainties detailed in Actua's filings with the United States Securities and Exchange Commission. Those and other factors may cause actual results to differ materially from those projected.

Now let me turn the call over to Walter Buckley, Actua's Chairman and CEO.

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Walter W. Buckley, Actua Corporation - Co-Founder, Chairman and CEO [3]

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Good morning, and thanks, Karen. Today, I'll provide an overview of Actua's performance for the second quarter 2017. And Kirk Morgan, our Chief Financial Officer, will follow with Actua's financial results for the quarter.

Our second quarter results were in line with our expectations. We are pleased to report that we are entering the second half of the year right on track. We're excited about the continued investment we have made in Actua through stock repurchases, which we view as a fourth platform. Year-to-date in 2017, we have repurchased close to 2.2 million shares of Actua stock for approximately $30 million. And over the last 12 months, we've repurchased 6.8 million shares of Actua stock for $94 million, representing an almost 20% reduction in shares outstanding.

Now turning to our businesses, starting with Slide 6. BOLT revenue growth in Q2 was 14%. Total bookings for the quarter were $1.65 million with ARR bookings of $200,000. During the quarter, BOLT signed a top 10 carrier for its BOLT Premier product, which is expected to go live September 1. While this engagement is starting as a 6-figure annual contract, the relationship has the potential to grow significantly over time. And as a reminder, BOLT Premier is a new product that was launched in Q1. It allows midsized as well as large carriers to easily onboard and utilize a light version of the software platform that is more plug-and-play. And while this product was aimed at the midmarket, we are seeing large carriers choose this option as an easy entry point. Its lower price point and faster implementation period results in significantly shorter sales cycles.

BOLT also renewed its contract with Florida-based Citizens for an additional 5 years, with a minimum payment of $1.9 million a year. And as a reminder, the Citizens Clearinghouse uses the BOLT Platform to offload risk from a government-owned insurance carrier to private carriers. In the first 5 years of the contract, BOLT successfully helped Citizens reduce its policy load by well over half, diverting over 500,000 policyholders to private carriers.

Now turning to existing customers. Our newest top 10 carrier is continuing to rapidly grow their usage of the platform. Their rate of new premiums sold, which is their key metric, increased 34% in Q2 from Q1 and has tripled the rate of Q4 2016. A second top 10 carrier customer added an additional 50 seats, bringing it -- its total seat licenses up to 550 from 350 this time a year ago. Additionally, this carrier has also gone direct-to-consumer and is utilizing the BOLT Platform to execute on that strategy through website and mobile capabilities. Finally, the company reported positive operating cash flow this quarter for the first time.

Now as reflected on Slide 7, FolioDynamix had a very good quarter, with Q2 revenues increasing almost 27% compared to Q2 2016. ARR bookings for the quarter were approximately $1.6 million. Folio signed 11 deals in Q2, 21 year-to-date. The majority of deals signed in Q2 were in the RIA space, which is a good proof point of our expanding footprint in that part of the market. We attribute this momentum to the capabilities we gained through the SaaS acquisition, which we completed roughly 9 months ago.

Now Folio's pipeline of new deals is the strongest we have seen since we acquired the company. We're seeing a great deal of activity with larger firms now that they have moved beyond DOL and expect several to close this year. The company was EBITDA positive and ahead of expectations on the bottom line. And finally, regulatory assets under management at the end of Q2 were $7.5 billion compared to $5.3 billion at the end of Q2 2016. And total AUM, or assets under management, is now over $800 billion on the platform, an 18% increase over a year ago. And the number of accounts on the platform has increased by 14% over that same time frame.

Now turning to VelocityEHS on Slide 8. The company achieved revenue growth of 12% in Q2 compared to Q2 2016, with SaaS revenue growing 17% during that period. New SaaS booking for chemical management, which has an ASP of roughly $5,000, was up 11% over the same prior year period. New SaaS bookings for EHS, which includes all modules, but chemical management and has an ASP of roughly $50,000, was up 26% over Q2 2016.

We are pleased to see the sales momentum for the EHS platform continue to build. We believe this is a direct result of the expanded platform capabilities we now offer, a full suite of services to the safety manager as well as the leverage we are realizing in the sales force. We also believe the market is maturing, reaching an inflection point where enterprise buyers would rather purchase a suite of applications versus point solutions. This progress helps to offset the tough comparison to the quarter ended June 30, 2016, when the GHS deadline expired. That deadline drove significant service revenue in Q1 and Q2 2016. And the most notable impact of this can be seen in the lower offering revenue this quarter, down 50% versus Q2 2016.

Velocity added approximately 350 new customers in the quarter, bringing the total customer count to roughly 12,900, up from 12,000 a year ago. In Q2, the company closed 97 platform deals, meaning deals where more than one module was sold, which is a record number and significantly higher than last quarter in which we sold 74. Additionally, the company reported 175 up-sells, representing expanding relationships with existing customers who are buying more seats of our core chemical management offering. And this is up from 125 last quarter. Finally, Velocity continued to see strong build in the pipeline across all its products and expect this to translate into increased bookings in Q3 and Q4 and accelerated revenue growth as we enter 2018.

In summary, Q2 results were right in line with our expectations. With the leverage we are seeing across the board and healthy bookings and pipeline growth, we are well positioned to continue to drive long-term shareholder value.

And with that, I'll turn it over to Kirk. I look forward to reporting to you on our progress next quarter.

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Raymond Kirk Morgan, Actua Corporation - CFO [4]

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Thanks, Buck. Slides 10 through 12 summarize our consolidated results. Revenue for the quarter was $31.2 million, up 16% from $26.9 million in the 2016 quarter. GAAP net loss was approximately $6.9 million compared to a net loss of $12.7 million in the 2016 quarter. Adjusted net loss for the quarter was $0.01 per share compared to an adjusted net loss of $0.07 per share for the 2016 quarter. And cash flow from operations was a source of $100,000 in the quarter, an improvement of $2.8 million from the 2016 quarter.

We are very encouraged by the significant improvements we're reporting on the bottom line metrics, in particular, on the adjusted EBITDA line where we reported positive adjusted EBITDA for the first time.

Focusing on the quarterly metrics. Gross margin of 75% is up from 73% in the 2016 quarter. Sales and marketing and G&A decreased as a percentage of revenue, while research and development increased on both the dollar and percentage of revenue basis as we continue to invest in the technology platforms across our businesses.

Slides 13 to 15 provide the details of our quarterly revenue, A&I and operating cash flow.

Slide 16 summarizes our share repurchases. We ended the quarter with almost $70 million of cash on our balance sheet after repurchasing 970,000 shares in the second quarter, deploying approximately $14 million of cash. Since the end of the second quarter, we have repurchased another 380,000 shares, bringing our 2017 repurchase total to 2.2 million shares for approximately $30 million.

Let me provide some additional color on the businesses. All 3 businesses had solid top line revenue growth. FolioDynamix and VelocityEHS had excellent positive A&I and EBITDA quarters, while BOLT and VelocityEHS had positive operating cash flow quarters. The quarterly results of the businesses may be a bit lumpy, which is why we try to focus on their annual performances in managing the businesses.

Now turning to 2017 guidance on Slides 17 through 19. We continue to expect 2017 annual GAAP revenue in the range of between $125 million and $130 million, representing annual growth in the range of between 14% and 19%. As I discussed on our year-end call and as evidenced by our year-to-date results, revenue growth in the first half of 2017 is expected to be a bit stronger than what we will see in the second half.

Turning to operating cash flow. We expect annual GAAP cash flow from operations to be in the range of between negative $2 million and a positive $2 million. We expect annual non-GAAP net income loss per share in the range of a loss of between $0.10 to $0.15 per diluted share.

In summary, we had a good first half of 2017.

And with that, I'd like to open the call up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And from Evercore ISI, we have Kirk Materne online.

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Tom Mao, Evercore ISI, Research Division - Analyst [2]

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This is actually Tom Mao, on for Kirk. Just a few quick questions. First of all, Actua maintained its guidance for EPS and cash flow, despite the strong margin performance we've seen year-to-date. I'm assuming it's probably from the BOLT, but is that just kind of embedding a layer of conservatism? Or is there some specific seasonality we should expect in 2 -- in the second half?

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Raymond Kirk Morgan, Actua Corporation - CFO [3]

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Yes. And we're very -- we're very encouraged by what we're seeing on the bottom line. I think we'll continue to see good improvement on the -- from a company perspective in the second half. I'm being a bit conservative in the forecasting of what our compliance cost at corporate will be around Sarbanes-Oxley and implementing new revenue standards there, Tom. So I'm just being a bit cautious on where we are from a corporate standpoint.

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Tom Mao, Evercore ISI, Research Division - Analyst [4]

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Got it. And then on kind of deferred revenue, I saw the growth is pretty strong quarter-on-quarter with pretty strong robust -- or pretty robust billings growth. Is there something that drove that performance? And with the new carrier added by BOLT, how should we think about the impact from bookings and billings potentially on revenue reaccelerating in 2018, gross number in general?

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Walter W. Buckley, Actua Corporation - Co-Founder, Chairman and CEO [5]

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I think -- yes. I mean, we -- I think you have to look at each company. But overall, we were pleased with the bookings we saw and the pipeline build, frankly. And I think that's going to translate into accelerating revenue as we enter 2018. And so I think, overall, we're encouraged. From a BOLT standpoint, there wasn't actually a lot of deferred revenue based on this new signing. And most of the deferred revenue we're getting there is from existing customer growth. And I also think Folio had a really good quarter across the board with good growth, really good bookings and, I think, real momentum in the RIA space. So we think that they're well positioned as we sort of -- for the second half of the year in 2018. And Velocity had a -- had good bookings as well, overall. And I think as the GHS deadline sort of gets further in our rearview mirror, we're going to see accelerating growth there as well.

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Tom Mao, Evercore ISI, Research Division - Analyst [6]

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Got it. And just the last one. You guys have been pretty aggressive with share repurchases in the quarter and year-to-date with $30 million in buybacks. Should we expect to see the company continue to buy back stock at this pace?

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Raymond Kirk Morgan, Actua Corporation - CFO [7]

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Yes, we're going to continue to evaluate it as we always had and, from a capital standpoint, look at strategic tuck-in acquisitions as well.

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Operator [8]

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From Craig-Hallum, we have Jeff Van Rhee online.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [9]

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A number of questions for me. I guess, one, just to the high-level growth questions first. As we look at Velocity, you called up the tough compares because of the harmonization standards and the authoring that went with it. How does Velocity growth rate play from here through the rest of the year? Namely, was this the low in the year-over-year growth rates and that business accelerates through the rest of the year?

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Walter W. Buckley, Actua Corporation - Co-Founder, Chairman and CEO [10]

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Yes. Jeff, good question. I mean, I think there was some good service revenue in Q3 2016, so I think as we get through the third quarter, you're going to see growth accelerate in Q4. The SaaS revenue at 17% is sort of -- we think that should be 15% to 20% and potentially higher, but -- so that was right on plan. So -- as I think as you think about it, Q4 and then into '18 should we begin -- we should begin to see that business reaccelerate back to the 15% to 20% overall growth.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [11]

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Got it, got it. And then I think, Kirk, you were reiterating the faster growth in the first half than the second half on -- within the annual guide of 14% to 19%. What are the key drivers of the decelerated or the slower growth? It sounds like Velocity kind of bottoms Q3 and then picks up. Just maybe you can call out some of the compares or what's driving that.

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Raymond Kirk Morgan, Actua Corporation - CFO [12]

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Yes. I mean -- right. I mean, we sort of talked about that at year-end when I set the guidance that it was going to be a 2017 sort of build in a different way than what we've seen in the past. And really -- it really relates to just the first half of '16 and the compares that we had there. As you recall, '16 was -- the first part was sort of a difficult standpoint. So it was just from a compare standpoint, Jeff, really.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [13]

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Is there any one particular name within in the portfolio that really is going to accentuate that deceleration in the second half?

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Raymond Kirk Morgan, Actua Corporation - CFO [14]

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No. And again, I wouldn't characterize it as -- we grew roughly 18% year-to-date, guidance 14% to 19%. So it's really -- the sequential growth will continue. So it's not going to be -- if we go to the midpoint of the range, it's not going to be a dramatic slowdown in the second half.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [15]

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Okay. And then the guided range, obviously, left a $5 million range low to high. What are the key variances? Obviously, you come into your years with most of the year baked. But what does it take to get to the high end? And what would have happened if you ended up at the low end?

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Walter W. Buckley, Actua Corporation - Co-Founder, Chairman and CEO [16]

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I think we're at 18% now. And I think we're being conservative, overall. And I think that some additional large Folio and BOLT signings can generate the high end of that -- can put us in the high end of that range or above.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [17]

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And then just maybe, Buck, spend just a minute or 2 more on BOLT. You launched Premier. I think you touched on it briefly that you're seeing good uptake and, surprisingly, actually seeing large customers prefer the Premier at -- potentially as their entry point. What are the implications of that, that, that's their given entry point, namely more deals, start smaller, scale over time? And how do you envision them building? Just kind of walk through with that in mind.

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Walter W. Buckley, Actua Corporation - Co-Founder, Chairman and CEO [18]

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Yes, it's a good question, Jeff. I mean, I think as we look at it, BOLT really is transformational in terms of what it does to a carrier, just stepping back and making sure everybody's up to speed on it. What BOLT allows carriers to do is to sell other carriers' products, to fulfill 100% [or forwards] a larger percent of that customer's insurance requirements. And so it's a mind-set shift to begin with. And -- but also very profitable.

Just the point we like to make is that an auto carrier -- insurance carrier, if they just sell auto, the churn rate is every 2 years. They lose that customer in 2 years. If that customer has auto and homeowners, it's an 11-year relationship. And so it's a very compelling value proposition. But it's a significant change in terms of how insurance executives think about things. And so what we've tried to do with BOLT Premier product is to make it an easier decision, both from an entry point, from a price point, from a logistics standpoint. And we're seeing nice uptick, both in the midmarket, but frankly, surprisingly in the large carrier market. This is a way for them to get in without completely disrupting the entire fabric of the organization. And I think we're excited about what we're seeing from the 2 carriers we've already got onboard as well as the pipeline behind that. And I think you'll see more to come there.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [19]

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Great. And if I could sneak just one last one in with respect to Folio. The ARR $1.6 million in Q1 and 2 of this year showed some growth to last year. Last year, I guess, was $2.8 million, so we went from $2.8 million to $3.2 million for the first half. You talked about the pipeline there looking very, very good and sort of looking for acceleration. Is that -- is it fair to look at the second half bookings of ARR there as a benchmark from '16 that we should show acceleration versus that for the second half of '17?

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Walter W. Buckley, Actua Corporation - Co-Founder, Chairman and CEO [20]

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Yes. I mean, there's a couple of questions in there, I think. But first, just from an overall market perspective, DLL, which is the government regulations from the Department of Labor, really, especially in the large enterprise marketplace, banks, brokerages and trust, froze the market from a Folio -- from our perspective, as people tried to figure out how to -- what DOL meant and how to deal with it. And I think with DOL now on the sidelines, the need is only greater for these large organizations to begin to automate their front-end office, frankly. And so we're really excited about what's going on in the marketplace, in general, and the discussions we have going on, specifically. And so I think that bookings should remain strong this year and that should translate into good growth -- to very good growth next year.

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Operator [21]

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From Barrington Research, we have Vincent Colicchio.

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [22]

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Nice quarter. Question on Folio. Has the DOL half-baked implementation had any impact? What are your thoughts there?

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Walter W. Buckley, Actua Corporation - Co-Founder, Chairman and CEO [23]

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Well, I think -- as we talked about in the last question, I mean, it definitely slowed decision-making for the large enterprises last year and the first quarter of this year. And I think that as that -- there's been greater clarity as most of the rules and regulations have either been put on hold or a few were adopted. Now people can get back to business. And I think that, that bodes well for us and, frankly, for the industry. And so I think we're -- as I said earlier, we've got as robust a pipeline as we've had since we acquired the business. I think that's really a reflection of what's going on in the marketplace as well as I think better sales execution of Folio. And so we're very encouraged by what we're seeing.

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [24]

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And could you remind us what types of tuck-ins are of highest priority right now?

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Walter W. Buckley, Actua Corporation - Co-Founder, Chairman and CEO [25]

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Sure. I think there's tuck-in opportunities, specifically at Velocity, continue to build out their suite. Also from an international perspective with Folio, there are tuck-ins potentially in the RIA space as well as additional functionality. So you'll -- we're continuing to actively look at those opportunities.

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [26]

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And then one last one for me, a big picture question. So with easier comps at Velocity, better sales execution at Folio and nice interest in Premier with large prospects at BOLT, as we look to 2018, do you think it's fair to say we should see growth acceleration?

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Walter W. Buckley, Actua Corporation - Co-Founder, Chairman and CEO [27]

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Yes. And I think that's what we're saying without giving guidance. I think with the environment at Folio improving significantly with BOLT, with the Premier product and actually, with their overall product as well, I mean, we're not losing any prospects in that pipeline. And with the comps getting much easier as we get into Q4 for Velocity, I think we're well positioned as we enter 2018.

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [28]

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Actually, one last one. You had mentioned that Velocity should get back to 15% to 20% growth. What's the time line on that?

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Walter W. Buckley, Actua Corporation - Co-Founder, Chairman and CEO [29]

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I think Q4, Q1. I mean -- remember -- I think the most important metric to take out the 2 most for Velocity is that SaaS bookings were up 17%. It's really what we really care about long term. And the leverage we're now seeing in the EHS platform, which is really thinking about the suite, as enterprises move to point solutions -- from point solutions to suite solutions. And I think we're really, really well positioned there. And I think as we get into Q4, you're going to be able to see that translate into GAAP revenue growth.

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Operator [30]

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We will now turn it back to Walter Buckley for closing comments.

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Walter W. Buckley, Actua Corporation - Co-Founder, Chairman and CEO [31]

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I'd like to thank all of you for joining us this morning and look forward to reporting on Q3 earnings in early November.

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Operator [32]

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Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.