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Edited Transcript of BKFS earnings conference call or presentation 3-May-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Black Knight Financial Services Inc Earnings Call

Jacksonville May 7, 2017 (Thomson StreetEvents) -- Edited Transcript of Black Knight Financial Services Inc earnings conference call or presentation Wednesday, May 3, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bryan Hipsher

Black Knight Financial Services, Inc. - SVP of Finance

* Kirk T. Larsen

Black Knight Financial Services, Inc. - CFO and EVP

* Thomas J. Sanzone

Black Knight Financial Services, Inc. - CEO and President

* William P. Foley

Black Knight Financial Services, Inc. - Executive Chairman

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Conference Call Participants

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* Chas Tyson

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

* David Emerson Ridley-Lane

BofA Merrill Lynch, Research Division - VP

* James Edward Schneider

Goldman Sachs Group Inc., Research Division - VP

* Jason Price Weaver

Wedbush Securities Inc., Research Division - SVP and Senior Equity Research Analyst

* Jason Scott Deleeuw

Piper Jaffray Companies, Research Division - VP and Senior Research Analyst

* John Robert Campbell

Stephens Inc., Research Division - Research Analyst

* Kevin Michael Kaczmarek

Zelman & Associates LLC - Director

* Oscar D. Turner

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Tien-tsin Huang

JP Morgan Chase & Co, Research Division - Senior Analyst

* William A. Warmington

Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to Black Knight Financial Services First Quarter 2017 Earnings Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Mr. Bryan Hipsher, Senior Vice President of Finance. Thank you, Mr. Hipsher, you may now begin.

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Bryan Hipsher, Black Knight Financial Services, Inc. - SVP of Finance [2]

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Thanks. Good afternoon, everyone, and thank you for joining us for the Black Knight Financial Services first quarter 2017 earnings conference call. Joining me today are 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 first quarter accomplishments, as well as an update on the progress that we've made towards the execution of our growth strategies, and Kirk will finish with a review of financial highlights and our updated outlook for 2017. We'll 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 fact, 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 Securities and Exchange Commission.

Today's remarks will also include references to non-GAAP 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 schedules 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 website at investor.bkfs.com. It will also be available through telephone replay from 8:00 p.m. Eastern time on May 3, 2017, through May 10, 2017, by dialing (844) 512-2921 or (412) 317-6671, and the access code will be 13659504.

I'll now turn the call over to Bill.

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William P. Foley, Black Knight Financial Services, Inc. - Executive Chairman [3]

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Thank you, Bryan. We're off to a solid start in 2017. During the first quarter, we delivered adjusted revenue growth of 6% or 9% excluding the effect of the Property Insight realignment and adjusted EBITDA growth of 8%, which drove adjusted EBITDA margin expansion of 90 basis points compared to the prior year quarter. Our first quarter results reflect our continued execution against our long-term strategic initiatives to drive organic growth through cross-selling, winning new clients in existing markets and the introduction of new products and solutions to help our clients drive greater efficiencies to improve their financial performance while better managing and mitigating risk.

During the first quarter, we enhanced our financial profile through the successful repricing of our Term Loan B facility. Further in April, we redeemed our senior notes and refinanced our existing revolver and Term Loan A. We expect these combined actions to yield significant annual interest expense savings for Black Knight.

In addition, FNF continues to make progress toward the planned tax-free distribution of Black Knight common stock to FNF Group shareholders. FNF is filed as private letter ruling request for the IRS and remains on track to close the tax-free distribution in the third quarter of 2017.

I'll now turn the call over to Tom, who will provide us with an update on the business and the progress we have made towards the execution of our growth strategies.

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Thomas J. Sanzone, Black Knight Financial Services, Inc. - CEO and President [4]

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Thank you, Bill, and good afternoon. Thank you for joining us for our first quarter's earnings call.

2016 was a great year for Black Knight and 2017 is off to a solid start. As I said on our last call, we have what we believe was a record sales year in 2016, which means completing successful implementations will be a significant focus for us in 2017, '18 and beyond. In fact, several significant conversions to LoanSphere MSP are expected to be completed this year, including the Chase and PNC Home Equity portfolios.

Additionally, as previously announced, Bank of America's conversion of first mortgages and home equity loans continues to progress. There are also several conversions in process on the origination side, which are scheduled to be completed this year. These includes Fifth Third's conversion to LendingSpace Empower and Quality Insight, PNC's conversion of first and second mortgages to Empower and Santander's conversion to Empower.

Overall, our implementations continue to progress well. However, some have been delayed due to various circumstances such as client resource constraints, greater-than-expected complexity with the integration to the downstream applications and other client-specific issues. These implementations are highly complex, hard and loan-transplant type projects. And the final go decision resides with our clients as they are ultimately assuming the transition risk. That being said, we are extremely confident in the successful conversion of our implementation pipeline as we have had a long track record of successes delivering complex platforms to the industry's largest participants. And it is worth noting, that this is nothing more than a timing issue.

While we are clearly focusing on successful implementations, we also continue to pursue and sign new deals and renew contracts with existing clients. In both cases, our goal is to cross-sell other offerings with a focus on our data and analytic solutions.

For example, in the first quarter, Evergreen Home Loans, a full-service direct lender and servicer, signed a new multi-year agreement to use MSP. Evergreen will also use our data and analytics Lien Alert solution. Lien Alert is integrated with MSP and helps services proactively manage risk and improve decision-making. As part of the contract, Evergreen will also have access to our data and analytics McDash Standard Industry Reports.

We continue to build momentum in adding home equity loans to both Empower and MSP, which is one of our key growth strategies. I'm excited to announce that Wells Fargo Home Loans, the largest mortgage servicer in the United States, has signed an agreement to process 200,000 home equity loans on MSP. And Regions Bank, one of the nation's top 20 banks, has renewed its contract for MSP to service its mortgage loans as well as its portfolio of home equity lines and loans, which are being converted to MSP from another third-party servicing platform.

Additionally, Huntington Bank signed a multiyear contract renewal and is adding more home equity loans through MSP. By servicing both first mortgages and home equity loans on a single system, these companies will be able to enhance customer service and lead generation, as well as reduce risk and benefit from greater insight into their portfolios.

We also renewed several key client contracts in the first quarter. Union Bank recently expanded its use of Empower by using it to originate home equity loans. Additionally, another top lender, Fifth Third, recently added LoanSphere bankruptcy and foreclosure to the portfolio of Black Knight products they use.

EverBank Mortgage, a longtime MSP client, that also uses our foreclosure bankruptcy and invoicing solutions, signed a contract renewal and added our Lien Alert offering to the solutions they are using. This renewal also includes access to McDash industry reports.

These are just a few examples of our continued success in cross-selling our offerings to our substantial client base.

Also in the first quarter, we announced long-term contract renewals for RoundPoint, a client for more than 8 years; and Webster Bank, a client for more than 12 years. Last year, we announced that myCUmortgage signed a long-term contract to use MSP. myCUmortgage recently reported that they are now subservicing for 9 other credit unions.

As you can see, we continue to sign new deals, which will add first mortgages and home equity loans for MSP. We also continued to renew existing clients. These contract renewals speak to our extremely high client retention rates. As an example, our top 10 clients have been with us for more than 23 years. The clients that renewed contracts this year have been on MSP for an average of 21 years. And on average, MSP clients across-the-board have used the system for more than 16 years.

Introducing new and innovative solutions is another growth strategy and one that I am very excited to discuss. Historically, Black Knight has focused on the top 50 lenders and servicers in the industry. We recently made a decision to expand our reach. As a result, last month, we announced the new Empower Now! offering, which is configured based on the industry's most common lending practices. This new offering enables regional banks, mid-market lenders, and independent mortgage bankers to benefit from the robust capabilities of Empower, but with a greatly streamlined implementation process, resulting in reduced timelines and costs. Lenders can then add feature functionality as needed. This allows lenders to remain on the same system as their business grows. This is a significant differentiator for Black Knight since lenders often have to convert to a new LOS, when their businesses expand.

Empower Now! is seamlessly integrated with our MSP servicing platform, which is leveraged directly by approximately 70 servicers that represent hundreds of other lenders and financial institutions throughout the country. And we have integrated our data and analytics tax solution for quick, accurate and cost-effective access to property tax information.

We are in the process of talking with our mid-market clients who currently use competitor's loan origination systems. A number of these companies are legacy Motivity and eLynx clients as well as the mid-tier banks that use MSP. In fact, we have close to 100 clients who we will be speaking with about this new offering. We have already seen a great deal of interest in this new offering, and we are excited about the possibilities we have with this expanded market.

We are also adding digital technology capabilities to many of our products, which we believe will create a competitive advantage for our clients. Our digital strategy represents an end-to-end view of digital capabilities across the loan life cycle. We recently announced a technology partnership with Lender Price, which will combine the technology capabilities of our Empower platform with the digital capabilities of Lender Price's digital user interface and product and pricing engine. The combination of these capabilities will accelerate Black Knight's digital strategy, and increase the speed to market for our Empower customers, who are aggressively expanding into the digital marketplace.

Last month, we hosted our 34th Annual Client conference. We have a record attendance once again, this year, with more than 1,200 attendees and 100 more clients and business partners that attended last year. It's clear that our clients receive value from this conference where we discuss new and current offerings, trends in the industry and our product strategy.

For the past several years, the mortgage industry has principally focused on regulatory requirements, overall risk mitigation and improving profitability. We are now beginning to see lenders and servicers have a renewed emphasis on technology innovation and the creation of new products. As a result, the solutions we presented at the client conference were very well received and we have many follow-up meeting schedule.

In closing, we have had another solid quarter and I'm excited about our opportunities for the future.

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

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Kirk T. Larsen, Black Knight Financial Services, Inc. - CFO and EVP [5]

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Thank you, Tom, and good afternoon, everyone. Today, I'm going to discuss our first quarter financial results and update on our capital structure and our outlook for the remainder of 2017.

Turning to Slide 3. For the first quarter, revenues increased 6.7% to $258.1 million. Net earnings attributable to Black Knight Financial Services, Inc. were $12.2 million or $0.18 per diluted share compared to $11.4 million or $0.17 per diluted share in the prior year quarter. Earnings before income taxes for the first quarter of 2017 include $3.2 million of expenses associated with the Term Loan B repricing and the spin-off from FNF. The effect of these items on net earnings attributable to Black Knight Financial Services Inc. was $1 million or $0.01 per diluted share.

Turning to Slide 4. I'll now discuss our adjusted results for the first quarter. Adjusted revenues were $259.5 million, an increase of 6.3% compared to the prior year quarter. Excluding the effect of the Property Insight realignment, adjusted revenues increased 9.5%. Adjusted EBITDA was $119.4 million, an increase of 8.4% compared to the prior year quarter. Adjusted EBITDA margin was 46%, an increase of 90 basis points compared to the prior year quarter. Adjusted depreciation and amortization was $30.8 million compared to $28.4 million, an increase of 8.5% compared to the prior year quarter. This increase was primarily associated with the acceleration of certain deferred implementation costs of $3.3 million.

Adjusted net earnings was $45.3 million, an increase of 10.8% compared to the prior year quarter. Adjusted net earnings per share was $0.30, an increase of 11.1% compared to the prior year quarter.

And finally, first quarter CapEx was $16.2 million.

Turning now to Slide 5. I'll discuss our technology segment results. In the first quarter, adjusted revenues for the technology segment increased 9% to $220.6 million. Our service and technology business had adjusted revenues growth of 10.6%, primarily driven by loan growth at our servicing platform, price increases and higher transactional volumes.

In our origination technology business, adjusted revenues growth of 1.9% was driven primarily by the eLynx acquisition, partially offset by lower consulting revenues, client contract termination fees, and volumes on the exchange as a result of a decline in refinancing originations of 10% as reported by the MBA. Adjusted EBITDA increased 10% to $126.9 million or adjusted EBITDA margin was 57.5%, an increase of 50 basis points compared to the prior year quarter.

Turning to Slide 6. In the first quarter, adjusted revenues for the data and analytics segment decreased 6.9% to $38.9 million. Excluding the effect of the Property Insight realignment, revenues increased 12.4% compared to the prior year quarter, driven by the Motivity Solutions acquisition and growth in our multiple listing service and property data businesses

Adjusted EBITDA was $5.4 million compared to $6.8 million in the prior year quarter.

Adjusted EBITDA margin was 13.9% in the first quarter of 2017 compared to 16.3% in the prior year quarter. Adjusted corporate expenses in the first quarter, excluding depreciation, amortization and interest expense, increased $800,000 from the prior year quarter.

Turning to Slide 7. I'll walk through our capital structure. At the end of March, we had cash and cash equivalents of $107.5 million. Total debt principal as of March 31 was $1,563,000,000, with revolver borrowings outstanding of $50 million and $350 million of borrowing capacity remaining under our revolver. Our gross leverage ratio was 3.3x and our net leverage ratio was 3.1x.

On February 27, we completed the repricing of our existing $394 million Term Loan B under our senior secured credit facility. The Term Loan B was repriced from 300 basis points to 225 basis points over LIBOR. On April 26, we amended our senior secured credit facility to increase our Term Loan A by $300 million and increased our revolver by $100 million. We also extended the majority of the facility by nearly 2 years to February 2022, reduced the pricing on Term Loan A and revolver by 25 basis points and reduced the unused commitment fee on the revolver by 5 basis points. The proceeds of the refinancing were used to complete the redemption of our senior notes that were guaranteed by FNF.

Turning now to Slide 8. I'll walk through our outlook for full year 2017. We are reiterating our guidance of 3% to 5% revenue growth, which is 6% to 8% if you adjust to reflect the Property Insight realignment as it took place in January 1, 2016. We are also reiterating our guidance of 10% to 12% adjusted EBITDA growth. We are increasing our adjusted EPS guidance to be in the range of $1.34 to $1.38 to reflect lower interest expense as a result of our refinancing. That range represents growth of 17% to 20% compared to 2016.

Additional modeling details underlying our outlook include: Interest expense of approximately $62 million; 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; and finally, CapEx of approximately $90 million. Along with these details, I want to provide a few other insights into how we expect the year to progress.

As we look to the remainder of 2017, the implementation is expected to go live around the middle of the year continued to progress. We have seen some delays due to client-specific circumstances, which could result in a 1 percentage point headwind to revenue growth. With that in mind, we continue to expect to see revenues ramping meaningfully in the third and fourth quarters, but with only minimal incremental revenues from new implementations in the second quarter.

Overall, we are very pleased with our first quarter performance and the continued positive momentum at Black Knight. Operator, please open the line for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Oscar Turner of SunTrust.

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Oscar D. Turner, SunTrust Robinson Humphrey, Inc., Research Division - Associate [2]

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First question, just on the LOS side of the business. Can you share any of the customer feedback on Empower Now! thus far? And also, what kind of assumptions have you made there to re: the product ramp?

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Thomas J. Sanzone, Black Knight Financial Services, Inc. - CEO and President [3]

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Well, what I can say is since the announcement, we've had a tremendous amount of interest in the product. One of the things that we did clearly was, we time did so that we could have significant dialogue with clients at our IE Conference, I was mentioning where we had over 1,200 participants and 100 new clients and business partners this year. So where we are in the process right now is we have -- we've made the presentations, we've had initial conversations and we're seeing a great interest in the follow-up conversations with a number of clients. So we're kind of early in the process, but that's where we're at the moment.

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Kirk T. Larsen, Black Knight Financial Services, Inc. - CFO and EVP [4]

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So Oscar, just to be clear too. I think based upon where we are today in the launch, it's really more of a late 2017 early 2018 revenue story. So really it's the building momentum now state that we're in.

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William P. Foley, Black Knight Financial Services, Inc. - Executive Chairman [5]

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Tom has also identified about 220 midrange customers that would be potential candidates. And roughly I think, Tom, about 100 of those are...

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Thomas J. Sanzone, Black Knight Financial Services, Inc. - CEO and President [6]

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Yes, close to half of it are people we already have an existing relationship with. So we're excited about that and that obviously is going to be a place where we start.

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Oscar D. Turner, SunTrust Robinson Humphrey, Inc., Research Division - Associate [7]

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Okay. And just to clarify. Are those customers who are currently using a competitor's solution? Or just what percentage of those customers are currently using a competitor's solution?

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Thomas J. Sanzone, Black Knight Financial Services, Inc. - CEO and President [8]

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They're mostly using a competitor's solution. There's probably some level of custom implementation in there but mostly competitors.

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Oscar D. Turner, SunTrust Robinson Humphrey, Inc., Research Division - Associate [9]

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Okay. And then second question just on D&A, you guys in the past have talked numerous times about the strategy of cross-selling D&A when your other deals come up for renewal. Can you provide any color on the win rates with this strategy to date? And then how does that compare to your long-term goals?

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Thomas J. Sanzone, Black Knight Financial Services, Inc. - CEO and President [10]

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Yes. We're very happy with the progress we're making in particular on cross-sell off D&A product. And you'll notice from my remarks today, and some of the press releases that we've put out, you are now starting to see Black Knight products, including D&A being bundled in the normal course of business. Not only on new deals but in renewals. I think the exciting thing that you're seeing is when we do renewals, years ago, might have been just focused on the servicing product suite, now you're starting to see some cross-sell business and sometimes origination technology as well. And so I think more and more, as you see us talk about as an example in MSP renewal or an MSP new deal, you are seeing additional products and very often D&A included. So we're happy with the progress we're making and I think it's becoming more and more ingrained in the course of business. It was a transition over a couple of years to get the right process in place, and it's somewhat of a little bit of a cultural shift as well. But I feel that we've made that shift.

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Operator [11]

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The next question is from John Campbell of Stephens.

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John Robert Campbell, Stephens Inc., Research Division - Research Analyst [12]

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On the Wells Fargo MSP win, that's a great development for you guys. So congrats there. But, Tom, did you say that was the first or second lien business?

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Thomas J. Sanzone, Black Knight Financial Services, Inc. - CEO and President [13]

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Those are HELOCs.

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John Robert Campbell, Stephens Inc., Research Division - Research Analyst [14]

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Okay. And then I think you said 200,000 loans, that seems like just maybe a sliver of their total book. So is this more of a, I guess, a pilot-type deal, where we possibly scale it over time, just how should we think about maybe expanding that relationship?

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Thomas J. Sanzone, Black Knight Financial Services, Inc. - CEO and President [15]

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Well, I mean certainly, we're very excited about this opportunity. I think, frankly, what drove it on the client side is this is a portfolio, a particular portfolio that they have of home equity. We've actually done other transactions with them in first loans where they had other portfolios like Wachovia and other things that they then consolidated on top of MSP. This is a particular portfolio that they would like on MSP because of it’s, I think, particularly it's reg and compliance capabilities and that's it. I mean, that's what drove this. We, of course, will never give up on going for a bigger market share of home equity in any client, but certainly, Wells.

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John Robert Campbell, Stephens Inc., Research Division - Research Analyst [16]

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Got it. And then just curious about your thoughts, just the regulatory challenges. I think some of your servicing platform competitors are facing. And then, I guess, secondly, are those issues may be helping drive a little bit of incremental market share to Black Knight? And then just any kind of longer-term thoughts about the ripple effect there?

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William P. Foley, Black Knight Financial Services, Inc. - Executive Chairman [17]

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Well, I mean we've talked -- John, we've talked many times about the franchise and about the MSP platform. But what's behind the MSP platform, which is quite an advantage for us is we have always spent a lot of time, resources and investment on staying on top of the regulations and close to the regulators, close to the clients and building those rules and regs into our platform. Take a lot of pride in that, that's a distinct confidence of Black Knight. And certainly with our growth in market share on first and now we're seeing it in seconds, that's not a small driver. I mean, it's an important driver of our franchise and something we think is a distinct confidence of Black Knight.

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Operator [18]

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The next question is from Jason Deleeuw of Piper Jaffray.

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Jason Scott Deleeuw, Piper Jaffray Companies, Research Division - VP and Senior Research Analyst [19]

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On the delays, is that just on the origination tech, new client onboard? Was that also on the servicing tech? It sounds like there's a 1 percentage-point headwind this year with the delays, but the guidance was maintained. So should we just interpret that as there were some outperformance in other areas and you're able to maintain the guidance range?

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Kirk T. Larsen, Black Knight Financial Services, Inc. - CFO and EVP [20]

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Jason, I would say it's predominantly in the loan origination system conversion pipeline, where we're seeing those delays. As far as the guidance range, what I would say is as we've talked about before, there is a number of factors that go into where we fall within the range. It's implementation timing, it's level of professional services, it's market volumes to a lesser degree. And so within that guidance range, it's just one factor as to why we would end up in one spot versus the other. So that's the way I would characterize what that means relative to the range.

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Jason Scott Deleeuw, Piper Jaffray Companies, Research Division - VP and Senior Research Analyst [21]

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Okay. And then on the seconds, it seems -- on the home equity loans, it seems like there's a lot of momentum there. And can you just update us on how many seconds you have or home equity loans you have now on MSP? And are you still targeting that same 60% roughly market share that you have in the first? Do you still think you can get that on the seconds?

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Kirk T. Larsen, Black Knight Financial Services, Inc. - CFO and EVP [22]

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So where we are today is we have 8% market share of a $15 million loan market. And as we think about the different components that we've talked about building that from where we are starting with Chase and PNC and Bank of America and building it up and we talked about getting into the low-20s as we got there. As you kind of now rack and stack all of it, when you layer on Chase, PNC, regions, Wells, Huntington, Bank of America, you're now looking at a market share of say 29%, at what we expect the volumes to be. So that's going from 8% to 29% of a quantum leap that will happen over the next couple of years that we're really, really excited about. And as Tom said, we're certainly not going to stop at that and as opposed to a march towards the same first lien share. But it's a journey and I have to say and I think we're actually progressing maybe a little bit better than I expected a year ago when we signed those initial deals, as we keep bringing these on and hopefully the momentum continues.

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Operator [23]

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The next question comes from Chas Tyson of KBW.

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Chas Tyson, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [24]

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I just want to ask on the D&A segment. It seemed like the revenues there after you adjust that property in, say, were kind of high singles in terms of growth. Can you just talk about how that -- you're expecting that to grow through the rest of the year and margin expectations there as well?

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Kirk T. Larsen, Black Knight Financial Services, Inc. - CFO and EVP [25]

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Sure. From a growth perspective, last quarter I talked about a low double-digit growth there reaching it was 12% this quarter. So it's kind of -- it was right there. We do expect to gain traction in the -- with the cross-sell and new sales within data and analytics over the course of the year. So -- and from a margin perspective, in Q1 -- the Q1 margins reflect -- so the expenses from the data hub that previously were an enterprise investment. And so you'll see that affecting the margins in the quarter. But as that revenue comes on over the course of the remainder of the year, you will see the margins go up meaningfully.

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Chas Tyson, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [26]

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Okay, got it. And then also on products, also you made a higher government capital markets and end markets and clients. Can you talk about how significant that end market is for that product as it relates to other mortgage clients?

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Thomas J. Sanzone, Black Knight Financial Services, Inc. - CEO and President [27]

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Well I mean, what we're doing right now is we have an investment in this hub infrastructure, which is we're basically loading all of our data assets, client portfolio data in this device sort of a hub. And now what we're doing is we're building strategically-specific products on top of it. I guess, an example, the Motivity product for the originations' business is now sitting on top of it, and we can go to market with it. We're in the process of developing the servicing client version of the Motivity product for originations. And we're excited about that. We've got a lot of interest in that product. So I mean, what we're doing now is we're looking at different areas where we can -- if you think about the date hub as a chassis, we're looking to develop and bring in products that we can plug into that chassis. And of course, it gets more and more compelling over time. So that's basically the strategy we are pursuing at this point.

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Operator [28]

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The next question is from Tien-tsin Huang of JPMorgan.

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Tien-tsin Huang, JP Morgan Chase & Co, Research Division - Senior Analyst [29]

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Just wondering on the outlook, if you've made any sort of changes in your volume assumption from a macro perspective? Just curious.

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Kirk T. Larsen, Black Knight Financial Services, Inc. - CFO and EVP [30]

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We haven't. As we look at where it was when we have had the -- on our last call, where with the forecast were. It's been a little consistent, refi's gotten a little bit better, they purchase a little bit worse, but overall pretty consistent. And so the headwind for us as we've talked about is relatively muted just because of our contracts and the like and the fact that it doesn't affect the servicing business. But we saw the 10% decline in Q1 and it does ramp-up if you look at the MBA stats for Q2, 3 and 4. But they're pretty consistent with what we expected a couple of months ago, a few months ago.

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Tien-tsin Huang, JP Morgan Chase & Co, Research Division - Senior Analyst [31]

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Good, good. Just wanted to check. I understand the muted impact just figured I would ask. And then just on the M&A front, I mean, Tom, you just -- appetite and just pipeline, has that changed at all now that we're into May this calendar year?

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Thomas J. Sanzone, Black Knight Financial Services, Inc. - CEO and President [32]

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No, I think our capital strategy is pretty consistent. I mean, as we said before, Tien-tsin, we invest a lot in the business in the current product line. As Kirk talked about, the $90 million CapEx and we continue to invest and enhance our products. We are certainly open and have the ability to acquire where we have any product gaps in our whole product strategy and we'll continue to look at those opportunities. But I don't think we've changed our overall focus.

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Kirk T. Larsen, Black Knight Financial Services, Inc. - CFO and EVP [33]

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Now, Tien-tsin, one thing I'd add is you saw with the Lender Price announcement that we made that Tom was talking about earlier, that's was a situation where we chose to partner as opposed to acquire to have a mutually beneficial deal to move forward with digital. So we think that's also on top of the other ways we allocate capital, it's another way we can progress things.

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Operator [34]

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The next question is from David Ridley-Lane of Bank of America.

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David Emerson Ridley-Lane, BofA Merrill Lynch, Research Division - VP [35]

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I was wondering if you would expect to see any revenue lift from kind of the organic increase that's going on in home equity origination? Have you started to see -- and it sounds like you've already have some clients that have brought on other business subservicing and that sort of thing?

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Thomas J. Sanzone, Black Knight Financial Services, Inc. - CEO and President [36]

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Yes. I mean, one thing that we're looking at and could be a very nice win for us is, we're in the process of doing home equity implementations, the biggest of which is Chase. But we have PNC, BofA a little bit further out, excited to see a piece of that business come from Wells Fargo. I mean, if you look at it when the moment, the tipping point comes if those -- the market and particularly those firms chose to now focus on that more and drive that business, clearly if Black Knight has some of the top handful of players with tremendous market share, that's going to be good for us. And so I don't know that we've seen it yet in the numbers. We're still -- Kirk mentioned, we're at 8%, we're on a path to get to 29%. But as we convert the big players and when they shift and if they put a focus on our product that's obviously good news for Black Knight.

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David Emerson Ridley-Lane, BofA Merrill Lynch, Research Division - VP [37]

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And then it sounds like really strong client interest level in Empower Now!. But maybe, is there any change that you need to make in terms of the sales model given that the larger number of prospects doesn't seem like it would be a difficulty in the implementations given that these would pretty be simplified implementations. So maybe are you making sort of changes in the sales process and later to reach out to that mid-market bank channel?

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Thomas J. Sanzone, Black Knight Financial Services, Inc. - CEO and President [38]

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Yes. Our leadership in origination technologies is on top of that. The thing that's helpful there for us is, as I mentioned before, in the last year, we acquired eLynx, we acquired Motivity. Those teams had relationships and a significant number of potential target clients in the mid-tier, as well as our team on servicing technology has a number of relationships in that tier. So out of the gate, we're going to leverage our relationships and our sales teams across both OT and ST to get into those clients and get that dialogue. So you're correct that it is a change. But surprisingly enough, we interact that Black Knight with a significant number of clients in that middle tier that would be targets for us.

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Operator [39]

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The next question is from Bill Warmington of Wells Fargo.

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William A. Warmington, Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Analyst [40]

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So Tom, back in February, you have been talking about the clients being a bit hesitant in terms of signing up new products and a bit of a lengthening of the sales cycle. And it sounds like that's behind us now. But I just wanted to ask you to compare the new business pipeline as it was back in February with the way you see the new business pipeline today in May?

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Thomas J. Sanzone, Black Knight Financial Services, Inc. - CEO and President [41]

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Yes. I think that it hasn't -- it's not a revolution, in my view, it's an evolution that's going on. I think that for many years both Black Knight and other providers as well as the client focus most of our very significant part of their both people process and technology on reg compliance and general risk mitigation. And we're all highly focused on that and targeted. I think what we're seeing now is a little bit of a shift like I say, an evolution not a revolution. And you've got to imagine that over all those numbers of years, people have to make economic decisions about what they could afford and what they could invest in. And so now what we're starting to see is continued focus clearly on reg and compliance, but a little bit more of a shift in their investment focus into innovation and new products. And so that's right in alignment with what we've talked about our mission statement, which is risk mitigation and compliance as well as improving -- helping clients improve in profitability and efficiency, right? And at the same time, we made some, I think, some smart investments in new products that are now coming out. And like an example, our LOS mid-Product and our claims product and our servicing business. We are seeing renewed interest in those products as well. So I think it's evolving a little bit and now it's a little bit more of a balance between reg and risk mitigation, as well as with innovation and new products.

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William A. Warmington, Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Analyst [42]

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And then you also talked about an increased level of bundling on the renewals. And I wanted to ask, what kind of revenue lift are you seeing on average on renewals these days?

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Kirk T. Larsen, Black Knight Financial Services, Inc. - CFO and EVP [43]

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It varies by clients. But certainly, it's an amplifying effect when we get our typical price increases that we've talked about on prior calls. And then on top of that selling new products. But you can see the results in the improved performance in data and analytics as an example of the kind of lift that you can. I mean, it's not a multiplier effect on the underlying MSP contract itself, but the increment is meaningful across the business.

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William A. Warmington, Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Analyst [44]

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Got it. And then one final housekeeping item. You gave some very helpful detail on the share on the second lien mortgage side going from 8% to 29%. I wanted to ask also, how that was looking on the first lien side these days once you factor in all of the additions?

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Kirk T. Larsen, Black Knight Financial Services, Inc. - CFO and EVP [45]

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So we're at 62% as of the end of March. With the others, I think we're still in the -- you get to the high 60s, low-70s kind of area.

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Operator [46]

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The next question is from Jason Weaver of Wedbush.

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Jason Price Weaver, Wedbush Securities Inc., Research Division - SVP and Senior Equity Research Analyst [47]

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So this is relatively recent, but I wanted to get your thoughts on the effect of any MSP demand you're seeing after this renewed enforcement action on parts of the state and CFPB versus a couple of servicers focusing a lot on their technology.

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Thomas J. Sanzone, Black Knight Financial Services, Inc. - CEO and President [48]

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Well, I mean, you've seen a number of deals that we've done in the MSP space. As I've mentioned, I think that -- I have told you -- I have told you guys just straight out that, I mean, if someone's running a proprietary platform or a platform that's been customized, I just know that Black Knight can put a presentation and a business case in front of them that is not only financially compelling, but as I said before, we have a strong reputation in the market for investing a lot in our platforms on regulatory change and compliance. And so, we feel very strong in any one of those situations that we can present a business case that is compelling for our client.

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Jason Price Weaver, Wedbush Securities Inc., Research Division - SVP and Senior Equity Research Analyst [49]

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Okay. That's helpful. And I'm just trying to get a better visibility on the raised EPS guidance. Is that faster margin expansion? Or how do you expect that to progress over the rest of this year?

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Kirk T. Larsen, Black Knight Financial Services, Inc. - CFO and EVP [50]

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So we talked about the revenue and how that will progress in the second half of the year and that the implementations won't have really any incremental revenue in Q2. So that's the revenue side of things. Expenses should be relatively flat through the year, Q2 to Q4. And then the EPS raise was reflecting the refinancing that we did. We're able to bring down the spreads on both our -- basically, our entire credit facility.

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Jason Price Weaver, Wedbush Securities Inc., Research Division - SVP and Senior Equity Research Analyst [51]

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Got you. And that actually leads to my next question. On that refinancing, can you talk a little bit about how you evaluated moving that to the facility versus or term loan versus doing a large -- another long-term senior unsecured note?

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Kirk T. Larsen, Black Knight Financial Services, Inc. - CFO and EVP [52]

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Sure. I looked at it from a cost of capital perspective and from a flexibility perspective. And so if you think about what we did, we raised more Term Loan A with relationship banks and it's LIBOR plus 175 so very cheap money with LIBOR at 100 basis points now and a 5-year swap is about 2%. So you can think about the kind of savings there. And then the other piece that we did is we increased our revolver. So that gives us the flexibility as we generate cash to pay that down and be able to reborrow if we find opportunities to deploy around whether it's M&A or share repurchase or other things. So really it's a, first and foremost, a cost of capital issue and then from that point, it was a flexibility issue.

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Jason Price Weaver, Wedbush Securities Inc., Research Division - SVP and Senior Equity Research Analyst [53]

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Got you. And then one last one. Can you talk a little bit -- and even if this is the case, is there a different pricing model for Empower Now! than for most of your other products?

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Thomas J. Sanzone, Black Knight Financial Services, Inc. - CEO and President [54]

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No. Actually, we were going to pursue the same structure that we generally had in place over the last few years. Remember, we took kind of the best practices model at both from MSP and OT and others, and we've put this general contract structure in place, minimums, things of that nature. That's what we're sticking with at the moment.

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Operator [55]

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The next question is from Jim Schneider of Goldman Sachs.

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James Edward Schneider, Goldman Sachs Group Inc., Research Division - VP [56]

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Just regards to the pipeline of deals that are going to be coming online. I know you've talked about a couple of potential push outs in the origination side. But can you maybe talk to the rest of the pipeline? You talked about several deals coming on in the middle of the year. Are any of those potentially in quarter, in Q2? And can you maybe talk about how any of the other kind of servicing pipeline is kind of going in terms of implementation?

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Kirk T. Larsen, Black Knight Financial Services, Inc. - CFO and EVP [57]

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I'd say at this point, based upon the delays that Tom described earlier, middle of the year is more of a Q3 benefit. So there are some that are coming online in Q2, but it's the latter part. And so that when we start seeing the revenue, you'll starting seeing it more meaningfully in Q3.

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James Edward Schneider, Goldman Sachs Group Inc., Research Division - VP [58]

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That's helpful. And then maybe just very broadly. On the regulatory environment, obviously, there's a bunch of regulatory rollback measures in Congress right now. New bills as well as a number of rules that could be rescinded under the CRA. I wonder if you could just talk broadly about the impact that you see, the likelihood of any of those coming to pass and the impact on your business?

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Thomas J. Sanzone, Black Knight Financial Services, Inc. - CEO and President [59]

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I mean, right now, I would say that the client's positioning is business as usual still at this point. And we'll react if any of these things actually come down and impact reg changes that have already been announced and that we are working on together between Black Knight and the clients. So we're kind of in a business-as-usual mode and waiting to see how these things play themselves out. As far as on the business side, still a focus on -- obviously, a focus and a concern on risk and reg and that plays through our strong suit. Like I said, in some of the areas, a little bit more focus on increase our capabilities, get more efficient, and add some innovation to the platform. So there's been some level of evolution, I would say there. But still, highly focused on reg and compliance. I haven't seen that change completely, yet.

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Operator [60]

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(Operator Instructions) The next question is from Kevin Kaczmarek of Zelman & Associates.

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Kevin Michael Kaczmarek, Zelman & Associates LLC - Director [61]

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You mentioned Empower Now! can integrate with MSP. But I was under the impression that MSP is a big system and maybe a bit expensive for some of these lenders. So one, can you comment on whether that's the case? And two, have the clients that you're talking to for Empower Now!, have they shown an interest in maybe a middle market version of MSP that could give you a competitive advantage versus some of the more popular LOSs in that segment of the market?

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Thomas J. Sanzone, Black Knight Financial Services, Inc. - CEO and President [62]

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You're a little bit ahead of us. But I mean, clearly, the first move kind of on the game board here was with Empower Now! and we think that makes a tremendous amount of sense for us. Like I said, focusing on the top 30 or so clients is great and we feel very strong in that space. But it's a small number and you have to get the timing right. They got to be -- you got to catch them as they're ready to make this big change. So now, expanding it by another 200 or more opportunities, obviously, we can drive more business and drive more deals. And so we believe that's the right move. Part of doing this was to develop more of a standard product that can be delivered quicker and efficiently, right? If not a leap to say that we could extend that clearly to a servicing platform that would not be the servicing platform completely that you'd sell to a -- or delivered to a Wells Fargo or a Chase. But could you develop a kind of mid-tier servicing capability that would be very competitive? I would say the answer to that should be, yes. But we haven't made that move yet. The first move we're making here is with Empower.

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Kevin Michael Kaczmarek, Zelman & Associates LLC - Director [63]

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Okay. And I guess, one follow-up on the Wells Fargo HELOC point. Do you guys have a sense for how much incremental market share if all your existing MSP clients moved all of their first and second lien loans on to this system? I guess, how much is left for those existing clients?

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Kirk T. Larsen, Black Knight Financial Services, Inc. - CFO and EVP [64]

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We haven't racked and stacked that, Kevin. But suffice to say, if you get the rest of Wells Fargo that moves the needle because they would have the largest portfolio. And if you added all of 70 plus MSP clients, some of them have the home equities on now and some don't, that it would bridge much of the gap between 29% and the 60-plus percent that we're at.

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Operator [65]

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(Operator Instructions) Okay. It appears we have no further questions. I would like to turn the conference back over to Mr. Foley for closing remarks.

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William P. Foley, Black Knight Financial Services, Inc. - Executive Chairman [66]

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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 day.

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Thomas J. Sanzone, Black Knight Financial Services, Inc. - CEO and President [67]

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Thank you, guys.

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Operator [68]

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Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.