U.S. Markets open in 3 hrs 3 mins

Edited Transcript of BKI.N earnings conference call or presentation 6-Aug-19 12:30pm GMT

Q2 2019 Black Knight Inc Earnings Call

Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Black Knight Inc earnings conference call or presentation Tuesday, August 6, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Anthony M. Jabbour

Black Knight, Inc. - CEO & Director

* Kirk T. Larsen

Black Knight, Inc. - Executive VP & CFO

* Steve Eagerton;Vice President, Investor Relations

================================================================================

Conference Call Participants

================================================================================

* Andrew William Jeffrey

SunTrust Robinson Humphrey, Inc., Research Division - Director

* Ashish Sabadra

Deutsche Bank AG, Research Division - Research Analyst

* Edward Christopher Gamaitoni

Compass Point Research & Trading, LLC, Research Division - MD & Head of Research

* James Edward Schneider

Goldman Sachs Group Inc., Research Division - VP

* Jason Scott Deleeuw

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

* John Robert Campbell

Stephens Inc., Research Division - MD

* Kevin Michael Kaczmarek

Zelman & Associates LLC - Head of Data and Analytics

* Puneet Jain

JP Morgan Chase & Co, Research Division - Computer Services and IT Consulting Analyst

* Stephen Hardy Sheldon

William Blair & Company L.L.C., Research Division - Analyst

* Thomas Patrick Mcjoynt-Griffith

Keefe, Bruyette, & Woods, Inc., Research Division - Assistant Analyst

* William Arthur Warmington

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings and welcome to the Black Knight Second Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Eagerton, VP of Investor Relations. You may begin.

--------------------------------------------------------------------------------

Steve Eagerton;Vice President, Investor Relations, [2]

--------------------------------------------------------------------------------

Thanks. Good morning, everyone, and thank you for joining us for the Black Knight Second Quarter 2019 Earnings Conference Call. Joining me today our Chief Executive Officer, Anthony Jabbour; and Chief Financial Officer, Kirk Larsen. Our results were released this morning, and the press release and supplemental slide presentation have been posted to our website.

This conference call will include statements related to the expected future results of our company and are therefore forward-looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to are described in our earnings release, Form 10-K and other SEC filings.

Today's remarks will also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to the GAAP financial information, is provided in the press release and supplemental slide presentation. This conference call will be available for replay via webcast through Black Knight's Investor Relations website at investor.blackknightinc.com. I'll now turn over the call to Anthony.

--------------------------------------------------------------------------------

Anthony M. Jabbour, Black Knight, Inc. - CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Steve, and welcome to the Investor Relations team. Good morning, everyone, and thank you for joining us for our second quarter earnings call.

Overall, the second quarter was another solid quarter. The core fundamentals of our business remained strong, and we continued to execute on our strategy to drive revenue growth by expanding relationships with existing clients, adding new clients and delivering innovative solutions. We continue to make great progress developing and selling innovative new solutions that are helping our clients gain new customers, improve customer retention and operate more efficiently while also helping them to manage risk.

Since launching Servicing Digital as part of our digital suite, 14 clients, representing more than 25% of the loans on MSP, have signed up to use this innovative solution to enhance customer experience and retention. Of the total, 6 clients signed in the second quarter, including 2 top-15 servicers.

Interest and excitement for this product is growing, and we continue to enhance the functionality. For example, we are currently working on an integration with Househappy to offer capabilities to simplify a customer's home care and maintenance needs through digital ordering and scheduling of services as well as convenient storage of home-related information. It's an additional feature within Servicing Digital that will create increased customer engagement and lead to increased customer retention for our client.

At the end of last year, we introduced the Rapid Analytics Platform, or RAP, which provides data scientists a cloud-based analytics lab where they can use Black Knight's data assets in conjunction with their own data to create models and analytics to help them drive additional revenue and efficiencies. Since launching, we have signed 3 clients, including a top-5 credit union, and we continue to build a strong pipeline.

Another innovative solution currently in development and an example of how we are helping our clients manage risk is our regulatory assist solution. This tool is integrated with Empower and performs origination compliance testing against state and federal regulations while checking for high-cost mortgage violations, allowable fees and client-specific compliance rules. Based on our preliminary conversations with clients, there is strong demand for this product because it eliminates the need to integrate with another provider.

Finally, let me give you an update on AIVA, our artificial intelligence virtual assistant, with a quantifiable example of the value AIVA delivers. Consulting firm MarketWise Advisors performed an independent study with a top-50 lender who is using AIVA. They found that using AIVA's skills for just income, asset, insurance and file intake could decrease the cost of origination by up to $437 per loan at this lender. MarketWise said that the anticipated cost savings will grow significantly as AIVA's machine learning enhances to include more skill sets.

Clients have shown a lot of interest in using AIVA to help lower their origination costs, which have significantly increased over the past few years. I look forward to continuing to update you on AIVA's progress.

From a new sales perspective, we had a very solid second quarter, and total new sales contract value is tracking to our plan through the first half of the year. In our origination software business, we had continued success in the second quarter, selling our Empower and Empower Now! solutions.

On our first quarter call, I talked about the development of enhanced correspondent functionality in Empower. Those efforts have paid off as we have established a new origination relationship with U.S. Bank to use Empower to manage loans purchased through its correspondent channel. U.S. Bank is also going to use AIVA for document classification, data extraction and exception management. We believe AIVA was a key factor in U.S. Bank's selection of Empower.

I also talked about our expectations for accelerating sales of Empower Now!. To that end, we signed 3 Empower Now! deals in the second quarter, which brings us to 4 new clients in the first half of the year. I continue to be confident that we can sign 8 to 12 new Empower Now! clients this year.

I'm also excited to announce that a top-20 lender recently renewed their Empower contract. This lender was operating in a self-hosted environment and, with the renewal, made the decision to move to the Black Knight hosted environment. When we host the software, our clients benefit from significant economies of scale, timely enhancements and the ability to focus their employees on the functions that will drive revenue for their businesses.

In servicing software, we continue to have success adding clients to our industry-leading MSP platform. In the second quarter, 2 mortgage companies, Triad Financial Services and Fidelity Bank, selected MSP for loan servicing. And we have a strong new sales pipeline, including servicers of all sizes. Fidelity Bank is also implementing Servicing Digital, Empower, our default suite of solutions as well as our Actionable Intelligence Platform. This is another example of the exponentially greater value clients can realize when using multiple Black Knight products.

We continue to make progress with implementation. In June, we announced that more than 1 million Ocwen loans were converted to MSP. We are in the process of converting first mortgages for 7 new MSP clients and converting home equity portfolios for 4 existing clients. We are also implementing Empower for first mortgages for 4 new clients while adding home equity capabilities for 5 existing clients.

As you can see, clients continue to see the value of using our proven software to originate and service both first mortgages and home equity loans. As a leader in our industry, we are focused on growing our business while also actively managing risk. As a result, a couple years ago, we made a strategic and risk-based decision to sunset a noncore single-client platform in our specialty servicing business. Although profitable, this business posed a potential risk to our franchise. Based on the complexity to convert to another platform, we had expected the client to deconvert from our system in 2020. However, the deconversion occurred at the end of the second quarter, resulting in a revenue headwind in the second half of this year.

In closing, the core fundamentals of our business remain strong, and we continue to focus on and make progress signing new clients, cross-selling our offerings, implementing signed clients and delivering new innovative solutions.

Thank you for your time today. I'll now turn the call over to Kirk for a financial update.

--------------------------------------------------------------------------------

Kirk T. Larsen, Black Knight, Inc. - Executive VP & CFO [4]

--------------------------------------------------------------------------------

Thank you, Anthony, and good morning, everyone. Today, I'm going to discuss our second quarter results and our outlook for the second half of the year.

Turning to Slide 3. On a GAAP basis, second quarter revenues were $295 million, an increase of 7% compared to the prior year quarter. Net earnings were $32 million, a decrease of 20% compared to the prior year quarter. Diluted net earnings per share was $0.21, a decrease of 22% compared to last year.

The effect of our indirect investment in Dun & Bradstreet, or D&B, was a reduction of net earnings of $13 million or $0.09 per diluted share. The D&B results reflect, among other things, the incremental amortization related to the application of purchase accounting as well as significant onetime restructuring charges.

Net earnings margin decreased 370 basis points to 10.8% compared to 14.5% in the prior year quarter. Year-to-date, revenues were $578 million, an increase of 6%. Net earnings were $71 million or $0.48 per diluted share, a decrease of 14%, and net earnings margin was 12.3%, a decrease of 280 basis points compared to the prior year period.

Turning to Slide 4. I'll now discuss our adjusted results for the second quarter and first half of 2019. Second quarter adjusted revenues were $295 million, an increase of 6% compared to the prior year quarter. Adjusted EBITDA was $148 million, an increase of 10%. Adjusted EBITDA margin was 50.1%, an increase of 170 basis points. Adjusted net earnings were $73 million or $0.49 per diluted share, an increase of 7%. And finally, second quarter capital expenditures were $23 million.

Year-to-date, adjusted revenues were $578 million, an increase of 5% compared to the prior year period. Adjusted EBITDA was $285 million, an increase of 8%. Adjusted EBITDA margin was 49.3%, an increase of 120 basis points. And adjusted net earnings per share was $0.94, an increase of 6%. And finally, capital expenditures were $45 million.

Turning now to Slide 5. I'll discuss our Software Solutions segment results. Second quarter adjusted revenues for the Software Solutions segment increased 7% to $255 million. Our servicing software solutions had adjusted revenue growth of 7%, driven by loan growth on our core servicing software solution from new and existing clients, higher average revenue per loan and a contract termination fee related to a client that was acquired, partially offset by lower ancillary revenues and transaction volumes on our core servicing solution.

In origination software solutions, adjusted revenues increased 8%, driven by growth in our loan origination software business. Adjusted EBITDA increased 9% to $154 million. And adjusted EBITDA margin was 60.3%, an increase of 90 basis points. Year-to-date, adjusted revenues in the Software Solutions segment increased 6% to $499 million. Adjusted EBITDA increased 6% to $295 million, while adjusted EBITDA margin was 59% in both periods.

Turning to Slide 6. Second quarter adjusted revenues for the Data and Analytics segment increased 3% to $40 million, driven by growth across nearly all business lines. Adjusted EBITDA decreased 4% to $9 million due to higher personnel costs as we grow our sales team and experience higher medical costs. Adjusted EBITDA margin was 23.7% compared to 25.3% in the prior year quarter.

Year-to-date, adjusted revenues increased 4% to $79 million. Adjusted EBITDA increased 5% to $19 million, while adjusted EBITDA margin was 24.3%, an increase of 20 basis points compared to the 2018 period. Adjusted EBITDA for the corporate segment in the second quarter was $2 million favorable compared to last year, driven by lower incentive-based compensation. Year-to-date, adjusted EBITDA for the corporate segment was $4 million favorable compared to the 2018 period.

Turning now to Slide 7, I'll walk through our capital structure. At the end of June, we had cash and cash equivalents of $9 million. Total debt principal as of June 30 was $1.644 billion with revolver borrowings outstanding of $403.5 million and $346.5 million of borrowing capacity remaining under our revolver. Our leverage ratio was 2.9x on a gross and net basis. Finally, we repurchased 205,000 shares for $12 million during the second quarter and continue to have approximately 3.6 million shares available to repurchase under our share repurchase authorization.

Turning to Slide 8. Primarily as a result of the earlier-than-planned client deconversion that Anthony mentioned, we are revising our outlook for full year 2019. We now expect GAAP revenues to be at the low end of the prior guidance range of $1.177 billion to $1.199 billion. Adjusted revenues are expected to be at the low end of the prior guidance range of $1.178 billion to $1.2 billion. Adjusted EPS is expected to be at the low end of the prior guidance range of $1.90 to $2. And adjusted EBITDA is expected to be at the low end of the prior guidance range of $581 million to $598 million.

Additional modeling details underlying our outlook are as follows: We expect interest expense of approximately $64 million to $66 million; depreciation and amortization expense of $138 million to $140 million (excluding the net incremental depreciation and amortization resulting from purchase accounting); and adjusted effective tax rate of approximately 25% to 26%; and finally, CapEx of approximately $105 million.

Overall, we are pleased with our second quarter and first half results, and look forward to another solid year for Black Knight in 2019. With that, operator, please open the line for Q&A.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from John Campbell of Stephens.

--------------------------------------------------------------------------------

John Robert Campbell, Stephens Inc., Research Division - MD [2]

--------------------------------------------------------------------------------

On the client deconversion, can you maybe provide a little more color around, I guess, the decision to roll it off, why it happened this year versus next? And then I might have missed this, but what was the rev impact? Just trying to get a better sense for the impact of the back half guidance.

--------------------------------------------------------------------------------

Anthony M. Jabbour, Black Knight, Inc. - CEO & Director [3]

--------------------------------------------------------------------------------

Sure. Yes, the revenue impact is a $16 million a year client. And the reason that we did that was -- we've got a great company like I said in my prepared remarks, and we need to grow it responsibly, and that involves managing risk, operational risk, security risk, reputational risk, et cetera. And this client was a single client that did no other business with us. And it was a noncore platform that no other client was using, and it wasn't core to our business that we thought introduced some unnecessary risk to Black Knight. So like I said, a couple years ago made the decision to no longer offer the platform to the client. And the client went on to build a replacement product with another partner, a custom solution. And based on the complexity of the platform and the conversion, and we assumed that they would maintain the full scope of the project, which they didn't towards the end. So there are a couple of changes that had accelerated the deconversion to the second quarter versus 2020.

--------------------------------------------------------------------------------

John Robert Campbell, Stephens Inc., Research Division - MD [4]

--------------------------------------------------------------------------------

Okay. That's very helpful. And then on the origination channel, I just want to check on the pricing environment. I mean, we've been hearing that, I guess, one of your top competitors on the origination side just is pushing price pretty dramatically. I don't know if you can comment on that. If not, maybe you could just talk to the kind of just the broader health of the channel if it's gotten back to a point of health where you guys might be able to take some price here and there?

--------------------------------------------------------------------------------

Anthony M. Jabbour, Black Knight, Inc. - CEO & Director [5]

--------------------------------------------------------------------------------

Yes, sure. We're very pleased, and you see it in the results of our origination business. We've got great momentum. And it's our origination platform, but it's all the other innovation that we're coming to market with seamlessly integrating to origination platform. So our capability and our story gets bigger and bigger. I'd say we're well within our range of pricing from the origination channel and feel good about the prospects there.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question comes from Jason Deleeuw of Piper Jaffray.

--------------------------------------------------------------------------------

Jason Scott Deleeuw, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [7]

--------------------------------------------------------------------------------

It's great to see the momentum here in the Servicing Digital wins and some of the things with AIVA and some of the other complementary solutions out there. I'm trying to get a sense of the incremental revenue and the benefit that we're going to get for revenue and earnings from those. Is there any way you can kind of help us think about that? Is it a material amount of revenue? Or how should we think about it?

--------------------------------------------------------------------------------

Kirk T. Larsen, Black Knight, Inc. - Executive VP & CFO [8]

--------------------------------------------------------------------------------

Sure, Jason. It's Kirk. It's a great question. As we've talked about in the past, looking at each of the individual ones we've been talking about now for a while, being Servicing Digital and AIVA and AIP as some of the more significant ones, they will be gradual. So for example, the wins on Servicing Digital, we're really thrilled to have the level that we've signed so far. The revenue will be coming on. There's some revenue this year. It'll ramp next year and then we believe will continue to sell, and so we'll ramp the next couple of years thereafter.

That product is certainly a great add-on to our servicing platform. And by order of magnitude, could be 1% to 2% of revenue, just looking at relative to our current base as it ramps up. And that will be the quickest to ramp.

The next one I would say would be AIVA. And that's one again was prerevenue when we acquired it last year. We continue to add skills. It continues to gain momentum with the client base. The excitement is tremendous related to AIVA. But that's one that again is going to ramp over time. And as we've talked about in the past, thinking about the magnitude of that, it certainly is going to play out over years as we continue to build skills and continue to roll it out. But it's not something that I could even range bound by how large it could be because, frankly, it'll grow in servicing -- I'm sorry, it'll grow in origination, adding skills, adding skills will expand it into servicing, and there's just so much that we can do that I really can't range bound that with size.

And with AIP, with the 100 analytics that we have there and including it in deals and signings that we're very pleased with in the quarter and the prospects there, that's another one that will just -- that'll ramp up, I'd say, a bit slower than the first 2. But that's something that I think, again, is just hard to range bound from a size perspective.

So as we look forward and think about the way that we're going to continue to grow this business at the levels that we have and that 6% to 8% going forward, I think, that introducing these new solutions will really be key to that last leg of growth, which is driving new deals. And we think those 3 plus the other ones that we've been talking about. And you'll notice as you go back to the last several calls, say, over the last year or so, each quarter, there is new things that we're talking about. This quarter, it was regulatory assist that we're talking about, which there's a lot of excitement in the client base around. So it's really important that not only that each of them contribute individually but that we continue the engine of innovation to drive that aspect of growth.

--------------------------------------------------------------------------------

Jason Scott Deleeuw, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [9]

--------------------------------------------------------------------------------

That's very helpful. And then another question on the mortgage origination front. A number of banks or a lot of banks will run separate platforms, I believe, on a corresponding channel versus a retail channel. And I'm just trying to better understand why is that changing? Are there compelling reasons to just integrate both of those channels on to one platform? Just like to get your perspective on that.

--------------------------------------------------------------------------------

Anthony M. Jabbour, Black Knight, Inc. - CEO & Director [10]

--------------------------------------------------------------------------------

Sure, Jason. It's Anthony now. The -- without question, it makes a lot of sense for them to combine on the Empower platform. I think at the end of the day, as they look at their different channels, their needs need to be satisfied. And when we look at all the different channel capabilities we have on Empower, we can meet them and exceed them. And so if you can do that by channel, then certainly putting them all onto the same platform is just going to give them synergies and efficiencies and the type of leverage that everyone is looking for in running their business. So we strongly believe that, that makes sense. That's -- it was the strategy that we called out that we're going after and we're working tirelessly against, and we're very pleased with the results that we're seeing so far.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

Our next question comes from Tien-Tsin Huang of JPMorgan.

--------------------------------------------------------------------------------

Puneet Jain, JP Morgan Chase & Co, Research Division - Computer Services and IT Consulting Analyst [12]

--------------------------------------------------------------------------------

This is Puneet sitting in for Tien-Tsin. A follow-up question on AIVA. Like, Anthony, in the past, you have talked about like the focus on increasing revenue per loan. So can you talk about like your progress there, like, how is that metric trending? And are you seeing any improvement in that with technology investments like AIVA? Or is it too early?

--------------------------------------------------------------------------------

Anthony M. Jabbour, Black Knight, Inc. - CEO & Director [13]

--------------------------------------------------------------------------------

Sure. No. Thank you, Puneet. Well, we want to quantify -- so first of all, we focused our AIVA efforts around origination for a couple reasons. We knew originations would really be a tailwind of growth for us in the company, and we wanted to wrap off this capability around it. We saw that the spend for origination had continued to grow over the years, and there was an opportunity to help our clients lower cost and be more efficient. And when we looked at it, we wanted to quantify it for our client so that it was something that they could bank on. And with the top-50 lender who was using AIVA hired MarketWise Advisors. And as I said in my prepared remarks, just on the income asset, insurance and file intake, those 4 skills save $437 per loan. So we're very confident if we can make it a very mathematical conversation with our clients to show the skills, show the savings, it becomes a capability and a skill set that sells itself. So we're excited about it because, again, on our -- I'd say my very first earnings call, I talked about our strategy to help transform the industry and to really help drive revenue growth, efficiency and manage risk for our clients. This was one where we've gotten a clear line of sight into how we can help them on the revenue side and on the efficiency side, and we're very focused on it.

--------------------------------------------------------------------------------

Kirk T. Larsen, Black Knight, Inc. - Executive VP & CFO [14]

--------------------------------------------------------------------------------

And Puneet, what I would add is if you go back a couple of years and think about how we were selling our loan origination system, we were selling the loan origination system somewhat on a stand-alone basis and selling the processing. What's happened since then is, frankly, we have worked to increase that revenue per loan by adding in additional capabilities, whether it be Data and Analytics or the Exchange or eLending and really bundling it all together, so that revenue per loan on a -- at a client level is increasing. And you've seen us further that with the fee capabilities that we acquired late last year with Ernst and then AIVA would be additive to that. So it is something that we absolutely have been focused on as we brought the entire company together and integrated components and then took it one step further by really bundling all of that, all those capabilities into the -- into our individual client deals. So that absolutely is the plan, and you'll see that going forward to continue.

--------------------------------------------------------------------------------

Puneet Jain, JP Morgan Chase & Co, Research Division - Computer Services and IT Consulting Analyst [15]

--------------------------------------------------------------------------------

Got it. And quickly, how fast your origination business responds to changes in interest rate environment? I know on the downside, you are protected by the minimums. But on the upside, if refi volume improves, how fast -- how quickly should we expect that to reflect in your origination business?

--------------------------------------------------------------------------------

Kirk T. Larsen, Black Knight, Inc. - Executive VP & CFO [16]

--------------------------------------------------------------------------------

Sure. If you look at the origination business in 2 buckets and you look at the loan origination system component where we have the contractual protections with the minimums that, as of last quarter, 98% of the processing revenues were at or below the minimums, this quarter, it's 95%. So there was a little bit of improvement with the drop in rates. But still, there is still -- there is room to go. The components of the business that we've talked about in the past being highly sensitive to refinance volumes is the Exchange, which is the network that connects lenders and service providers during the origination process to order settlement services.

And in that business, we saw the uptick in -- we saw the benefit of the -- of lower rates and an increase in refi volumes in the quarter as it went from -- as it went up, I think it was $28 billion or so according to the MBA from Q2 last year to Q2 this year. Frankly, not a very big increase in the grand scheme of things on a dollar -- at a dollar basis, percentage-wise it looked like something. But they're still at relatively low levels and have -- clearly have room to go from there. You look at the last 10-year average, the average quarterly origination volumes -- refi origination volumes were $229 billion. And this quarter, they were like $146 billion. So we're still nowhere near historical averages.

And -- but we did see the uptick so that is what we would expect to see, and it happens quickly. But it really -- the magnitude wasn't that great. And frankly, it was offset by lower foreclosure volumes because the quality of originations continue to be very high. And the good economy foreclosure volumes just really aren't very high, which then lends itself to an environment when a recession does come and rates continue to go down and refi volumes accelerate back up to the elevated levels that you've seen in prior recessions, and unemployment rises and foreclosure volumes go up. And that's where, frankly, the business would perform very well in that environment. So there's that aspect, too, which I know you're well aware of.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

Our next question comes from Bose George of KBW.

--------------------------------------------------------------------------------

Thomas Patrick Mcjoynt-Griffith, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant Analyst [18]

--------------------------------------------------------------------------------

Guys, this is Tommy on for Bose. I wanted to get an update on the changes at Ditech. Did that initial move from earlier this year impact 2019 numbers? And do you have an expectation for kind of how future numbers could be impacted depending on what happens to the rest of Ditech?

--------------------------------------------------------------------------------

Kirk T. Larsen, Black Knight, Inc. - Executive VP & CFO [19]

--------------------------------------------------------------------------------

Yes. Yes. The loans have been there in the process of moving related to that earlier announcement this year. As far as the path forward, the public announcement about NRZ acquiring some assets of Ditech and planning to move those loans to Shellpoint, which is their captive servicer, they talked about that on their earnings call. There's been no public disclosure on timing related to that. But what I would say is, to the extent that those loans move to Shellpoint, who is not an MSP client at this time, I would say to the extent that those -- if those do eventually move to Shellpoint, that suffice to say, we will work tirelessly to work with Shellpoint to try to bring them into the Black Knight family. But they are growing just by virtue of their loans and clearly are in a space where we think that there's a lot that we can do for them, that there's a lot that -- where we could benefit them and, frankly, any servicer of size that MSP would be the -- we think would a great solution for them.

--------------------------------------------------------------------------------

Thomas Patrick Mcjoynt-Griffith, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant Analyst [20]

--------------------------------------------------------------------------------

Got it. And sorry, if I missed this. Was the deconversion -- which segment, I guess, revenue line item did that hit? And what was the, I guess, general margin profile of those revenues?

--------------------------------------------------------------------------------

Kirk T. Larsen, Black Knight, Inc. - Executive VP & CFO [21]

--------------------------------------------------------------------------------

It's in servicing. So it's within the Software Solutions segment. And the profitability was pretty good on it, but it was not to the point where we were willing to continue to take that risk.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Our next question comes from Stephen Sheldon of William Blair.

--------------------------------------------------------------------------------

Stephen Hardy Sheldon, William Blair & Company L.L.C., Research Division - Analyst [23]

--------------------------------------------------------------------------------

Within the origination business, I think you've talked about high-single to low double-digit growth this year. You saw little acceleration this quarter. But can you maybe talk about expectations over the rest of the year? Would you expect maybe continued acceleration given implementations and the potential modest uplift from higher refi activity?

--------------------------------------------------------------------------------

Kirk T. Larsen, Black Knight, Inc. - Executive VP & CFO [24]

--------------------------------------------------------------------------------

Yes. We would expect there be faster growth in the second half than in the first half by virtue of sales and as well as an element of the volumes. But that's a business that, certainly as the headwinds abate from lower refinance volumes and we continue to have the success which we're very excited about around Empower Now! and our penetration with large lenders that we've talked about, we think the performance of that business is going to be terrific.

--------------------------------------------------------------------------------

Stephen Hardy Sheldon, William Blair & Company L.L.C., Research Division - Analyst [25]

--------------------------------------------------------------------------------

Great. And then, Anthony, maybe one for you. Clearly, you have a lot on your plate running 2 large complex organizations. So I guess, can you maybe provide some updates on where you plan to focus your time over the rest of the year within and kind of between the 2 businesses? And maybe just a broader update on how things are progressing at Dun & Bradstreet, in your view?

--------------------------------------------------------------------------------

Anthony M. Jabbour, Black Knight, Inc. - CEO & Director [26]

--------------------------------------------------------------------------------

Sure. I mean, all my time is spent on creating shareholder value for Black Knight, either directly here or through our investment in Dun & Bradstreet. And we've got very strong teams in place at both companies. We've had it here at Black Knight for a while, and I'd say, on the Dun & Bradstreet side, we've made a lot of changes at the early start of this year and have a very, very strong, very capable team running that operation.

What I'd say on the results, we're -- I know Cannae will be updating in a couple days, but we continue to be ahead of schedule on the cost takeout and on the reengineering of the business. So again, we're very pleased with that.

And again, in terms of the natural timing of these things, we looked at how we went through that process with Black Knight, what then followed was really the push on innovation, which we're seeing right now at Black Knight. And as Kirk said, every quarter, we're coming out with more and more new capability or functionality. So it's an innovation engine that we have here, which is running full speed. And it's something which I joke internally that I pushed on it a bit and then the teams all ran with it, and they're running way in front of all of us. And there is a spirit of innovation that's going on and an excitement around it. So that's how I kind of summarize where we are with both companies at a high level.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

Our next question comes from Chris Gamaitoni of Compass Point.

--------------------------------------------------------------------------------

Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [28]

--------------------------------------------------------------------------------

I wanted to talk about the strategic direction for the LOS business. If I look at the announcement for digital point of sale and the integration of Docutech, it appears to me that it signals a more concentrated push downmarket to kind of a out-of-the-box more standardized solution. Maybe just talk about your focus for Empower Now! over the next 2 years.

--------------------------------------------------------------------------------

Anthony M. Jabbour, Black Knight, Inc. - CEO & Director [29]

--------------------------------------------------------------------------------

Sure. Well, as I said, with Empower Now! and it going more downmarket, on a few of the calls we had last year when the questions came up, I answered them saying I understand the downmarket space and what we need to do. And it goes beyond just the product. It goes into the implementation. It goes into the customer servicing. And it goes into the integration and the out-of-the-box integration capabilities.

And I feel we've made steady progress on that. We've hired additional sales executives on to sell the product. And you see, again, the suite of solutions that we have around it. So as an example, looking at the AIVA product and what we talked about with the savings per loan would be, they are significant compared to what we would charge for origination software per loan. So really, the value that we're creating for our clients when you look at their total cost of ownership and capabilities is significant.

We expect that we'll continue to increase our sales of Empower Now! and continue to broaden out the family. Like I said on the last call, we probably doubled or tripled the amount of sales we've had over the last few years on Empower Now!. In 2019, I feel confident we're on track with that.

I'd say with the digital point of sale capabilities, we're very excited with that offering. And again, what we're doing with it is we are -- we're taking the additional capability such as AIVA and bringing it into the digital point of sale solution so that it's adding new and unique capability that doesn't exist in the market today with existing point of sale solutions. So that's just an example.

But what I'd say, the message is resonating though not with just Empower Now! and going downmarket but also with our larger clients as they look at our point of sale, as they look at these other capabilities and innovations that we brought in and integrated to them. So I'm very pleased with the progress we're making because we're not selecting going downmarket at the expense of ignoring the upper end of the market. We're an and company, and we're focused on both those markets. So -- and I expect that, that will continue for some time.

--------------------------------------------------------------------------------

Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [30]

--------------------------------------------------------------------------------

All right. And I'm not -- I think I missed exactly, you noted you added sales force in the quarter. Was that in Data and Analytics? Was that correct?

--------------------------------------------------------------------------------

Kirk T. Larsen, Black Knight, Inc. - Executive VP & CFO [31]

--------------------------------------------------------------------------------

We -- Anthony was referring to the sales resources we added in origination. But yes, we did add to the sales force in Data and Analytics as well.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

Our next question comes from Bill Warmington of Wells Fargo.

--------------------------------------------------------------------------------

William Arthur Warmington, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Analyst [33]

--------------------------------------------------------------------------------

So the stats we've seen on average spend per mortgage origination show about $8,100. And I wanted to ask if that stat was consistent with what you've seen and to ask what type of percentage savings can you promise clients? And does it differ between Empower and Empower Now! clients?

--------------------------------------------------------------------------------

Anthony M. Jabbour, Black Knight, Inc. - CEO & Director [34]

--------------------------------------------------------------------------------

Well, the $8,100, it's in the range, right, and the last number I saw I think had a 9 handle, the $9,000, but plus or minus, it's in the range. And really, the goal that I set for the team was I wanted us to find ways to reduce it significantly. And everyone, like I said, when you look at the total spend, not all of the spend is actionable, right? So for example, what's being paid to loan officers in the form of commissions is not something we could really action here. Now, we could indirectly action it with point of sale. So as our point of sale solution grows more and more and that becomes our primary channel and they change maybe how their sales efforts work or how they compensate, there may be some indirect savings from it. But I do think that there is meaningful ways that we can increase it, like I said, with the AIVA example that we gave that we've quantified through a thorough analysis. It's $437 per loan. And that's just for skills. So we think it's a meaningful opportunity there for us. And we think, again, just going through the math with our clients and with our prospects, it'll be obvious of ways that we can help them save significant dollars on this channel but, at the same time, improve the quality of it through the artificial intelligence.

--------------------------------------------------------------------------------

William Arthur Warmington, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Analyst [35]

--------------------------------------------------------------------------------

Okay. And then a couple housekeeping questions. Was there any revenue impact from the deconversion in Q2?

--------------------------------------------------------------------------------

Anthony M. Jabbour, Black Knight, Inc. - CEO & Director [36]

--------------------------------------------------------------------------------

No.

--------------------------------------------------------------------------------

William Arthur Warmington, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Analyst [37]

--------------------------------------------------------------------------------

And then the other one is just to ask about what happened on the D&A side, the deceleration to 2.6% growth versus the easiest comp in 2018? What was driving that?

--------------------------------------------------------------------------------

Kirk T. Larsen, Black Knight, Inc. - Executive VP & CFO [38]

--------------------------------------------------------------------------------

Yes. What I would say actually, there was a little bit of embedded tough comp in Q2 of last year. We had a couple of things that -- not significant to the enterprise but to that segment in particular, probably cost 1 point or 2 relative to this year's growth rate. And the other thing I'd say is we had probably a 1 point headwind from deals that we would've expected to sign in the second quarter that pushed into Q3. Doesn't change our outlook for the year. Last quarter, I talked about a mid-single-digit growth, and we still believe that is the case as of this time for the D&A segment for the year.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

Our next question comes from Ashish Sabadra of Deutsche Bank.

--------------------------------------------------------------------------------

Ashish Sabadra, Deutsche Bank AG, Research Division - Research Analyst [40]

--------------------------------------------------------------------------------

Just quickly, a quick clarification on the deconversion impact, the $16 million, that's annualized, right? So when we think about this year, just think about the back half impact, $8 million, is that the right way to think about it?

--------------------------------------------------------------------------------

Kirk T. Larsen, Black Knight, Inc. - Executive VP & CFO [41]

--------------------------------------------------------------------------------

That's exactly the right way to think about it.

--------------------------------------------------------------------------------

Ashish Sabadra, Deutsche Bank AG, Research Division - Research Analyst [42]

--------------------------------------------------------------------------------

Kirk, you also provided a lot of good color on the origination software side. And I was wondering, and if I missed it, could you provide what the growth rate was for Empower versus Exchange?

--------------------------------------------------------------------------------

Kirk T. Larsen, Black Knight, Inc. - Executive VP & CFO [43]

--------------------------------------------------------------------------------

It was -- so the loan origination system business grew 18%.

--------------------------------------------------------------------------------

Ashish Sabadra, Deutsche Bank AG, Research Division - Research Analyst [44]

--------------------------------------------------------------------------------

And that's the Empower -- that's the Exchange piece or the Empower piece? I'm sorry.

--------------------------------------------------------------------------------

Kirk T. Larsen, Black Knight, Inc. - Executive VP & CFO [45]

--------------------------------------------------------------------------------

That's Empower and LendingSpace.

--------------------------------------------------------------------------------

Ashish Sabadra, Deutsche Bank AG, Research Division - Research Analyst [46]

--------------------------------------------------------------------------------

Okay. And what about the Exchange, any colors, like, how much was the kind of the headwind there or the tailwind in this quarter from the refinance activity? I know you gave a lot of good color on the amounts but anything on personal milestones?

--------------------------------------------------------------------------------

Kirk T. Larsen, Black Knight, Inc. - Executive VP & CFO [47]

--------------------------------------------------------------------------------

Yes. It was very -- it was relatively small. It was -- I mean, you think about the -- again, the relatively small percent -- dollar value increase in origination volume. So it was a pretty small increase on the Exchange as a result of refi.

--------------------------------------------------------------------------------

Ashish Sabadra, Deutsche Bank AG, Research Division - Research Analyst [48]

--------------------------------------------------------------------------------

Okay. That's helpful. Maybe a quick clarification. I think you mentioned there was some term fees in the automation piece in the quarter -- second quarter. Would it be possible to quantify how big they were?

--------------------------------------------------------------------------------

Kirk T. Larsen, Black Knight, Inc. - Executive VP & CFO [49]

--------------------------------------------------------------------------------

Yes. It was $4 million. It was a client that was acquired and terminated in the quarter. And the annual revenue for that client -- it's really more of an impact on next year, is about $8 million.

--------------------------------------------------------------------------------

Ashish Sabadra, Deutsche Bank AG, Research Division - Research Analyst [50]

--------------------------------------------------------------------------------

Okay. That's helpful. And maybe just a final clarification on the NRZ acquisition of Ditech. Again, you provided some really good color. But as we think about it, just in terms of normally the amount of time it takes for any kind of conversion, you wouldn't necessarily think about -- the timing would be more next year. Would that be a fair assumption as well?

--------------------------------------------------------------------------------

Anthony M. Jabbour, Black Knight, Inc. - CEO & Director [51]

--------------------------------------------------------------------------------

Yes. That's our assumption at this stage.

--------------------------------------------------------------------------------

Ashish Sabadra, Deutsche Bank AG, Research Division - Research Analyst [52]

--------------------------------------------------------------------------------

Okay. That's helpful. And Anthony, congrats on solid momentum and new product launches and put options at the marketplace.

--------------------------------------------------------------------------------

Anthony M. Jabbour, Black Knight, Inc. - CEO & Director [53]

--------------------------------------------------------------------------------

Thank you so much, Ashish. The team's done a great job here.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

Our next question comes from Andrew Jeffrey of SunTrust.

--------------------------------------------------------------------------------

Andrew William Jeffrey, SunTrust Robinson Humphrey, Inc., Research Division - Director [55]

--------------------------------------------------------------------------------

Very thorough as usual. I wonder if I could delve into the point of sale opportunity a little bit. As the environment is sort of changing for banks in terms of third-party originations, for example, is there an opportunity to expand your technology exposure beyond mortgage in point of sale into other lending verticals? And I guess, sort of as a corollary, is there any talk -- I know you've got lots of different initiatives, but has there been any discussion about, for example, expanding MSP beyond mortgages? So I guess, a beyond mortgage question broadly.

--------------------------------------------------------------------------------

Anthony M. Jabbour, Black Knight, Inc. - CEO & Director [56]

--------------------------------------------------------------------------------

Yes, Andrew. It's Anthony. It is something that we've looked at and continue to look at in terms of seeing what the opportunity is as we look at other growth channels, such as geographic, et cetera. But what I'd say at this stage and having spent time working across all the different asset types previously in my career, there's a lot of nuance there, which, as we look at what we see that we can do in terms of impact, we see the impact that we can have really in mortgage for the next number of years just greatly outweighing what a more diluted focus would bring to us in that space. And so that's really the priority that we've got right now, and it's really -- strategy is always about how do you want to spend your time, energy and resources. And for us, we see a big opportunity here that we want to make sure -- it's like AIVA, right? We see opportunity with AIVA on the servicing side of the business, but we've got it very targeted on origination because we believe, by doing it that way, we're going to create something phenomenal. It's going to be very measurable and quantifiable, and that's going to help us grow and take full advantage of it.

It's the same thing I'd say on the point of sale and MSP in terms of the overall focus on the space. As you know, we're well into the home equity space, right? Pro forma, we've got about 1/3 of the market already after a very short period of time. So on all of these things, our strategy is really making sure we've got the focus to execute and to capture the market versus be an ocean wide and a range rock deep across a lot of different capabilities.

--------------------------------------------------------------------------------

Andrew William Jeffrey, SunTrust Robinson Humphrey, Inc., Research Division - Director [57]

--------------------------------------------------------------------------------

Okay. That's a high-class problem in that regard I think.

--------------------------------------------------------------------------------

Anthony M. Jabbour, Black Knight, Inc. - CEO & Director [58]

--------------------------------------------------------------------------------

Yes. Perfect.

--------------------------------------------------------------------------------

Andrew William Jeffrey, SunTrust Robinson Humphrey, Inc., Research Division - Director [59]

--------------------------------------------------------------------------------

And then, Kirk, I just wanted to clarify a comment. Did you say the company invested in -- incrementally in D&A sales in the quarter? And is that sort of an indication of perhaps an opportunity that you see to accelerate growth? I just want to get a little color on that.

--------------------------------------------------------------------------------

Kirk T. Larsen, Black Knight, Inc. - Executive VP & CFO [60]

--------------------------------------------------------------------------------

Yes. The resources were hired late last year, early this year. It affected the quarter, which is why I brought it up. I would say that we continue to focus on sales execution in Data and Analytics as well as increasing productivity there. And frankly, the performance we think has been very good. But do we think there is an opportunity to accelerate? We sure do. But certainly, sales force productivity takes time, and so that's something that we expect to see going forward. But it shows commitment to the business and the space and a focus on growth.

--------------------------------------------------------------------------------

Anthony M. Jabbour, Black Knight, Inc. - CEO & Director [61]

--------------------------------------------------------------------------------

And if I could add on to that. We've got a real focus not on just integration of our products and our solutions but also of our teams and our account management and our sales teams. And we see an opportunity to ramp that up as well. And so we're really just -- and it's not just D&A. It's in all the products that we have. How do we bring it all together for our clients in a frictionless way beyond technology and beyond just account and sales management?

--------------------------------------------------------------------------------

Operator [62]

--------------------------------------------------------------------------------

Our next question comes from Jim Schneider of Goldman Sachs.

--------------------------------------------------------------------------------

James Edward Schneider, Goldman Sachs Group Inc., Research Division - VP [63]

--------------------------------------------------------------------------------

Relative to the outlook, I just want to kind of confirm and apologies if I missed it before. Are there any changes to the existing kind of onboarding assumptions about your clients who are coming on to the servicing origination platforms in the back half of the year? Or is the entire update simply to reflect that one deconversion in Q2?

--------------------------------------------------------------------------------

Anthony M. Jabbour, Black Knight, Inc. - CEO & Director [64]

--------------------------------------------------------------------------------

Sure, Jim. No. What I'd say is we're pleased with the implementations that we've got underway. Things are on track, and the team's continuing to do a great job that way.

--------------------------------------------------------------------------------

Kirk T. Larsen, Black Knight, Inc. - Executive VP & CFO [65]

--------------------------------------------------------------------------------

And Jim, one last thing I'd add would be as you think about the guidance revision, we talked about the $8 million. Well, first of all, let me just take a step back. When we put guidance together at the beginning of the year, we planned at the midpoint. And so as you think about that and the relative change that we made today, we've got the $8 million related to the client deconversion. And then I mentioned in my remarks in the software segment ancillary services and transaction volumes in servicing. And that really would be the other component of it that, historically, we've seen steady growth in some of the activity-based charges in servicing, and this year, it's frankly been relatively flat. And so that really is the other aspect of it.

--------------------------------------------------------------------------------

James Edward Schneider, Goldman Sachs Group Inc., Research Division - VP [66]

--------------------------------------------------------------------------------

That's helpful. And then maybe, Anthony, relative to your commentary on Empower Now! sales. I think you talked about I believe 8 to 10 wins you expect for the year. Can you maybe just talk about at what point you feel that's going to be materially accretive to the overall growth on that subsegment? And I guess, any of that impacting the current year outlook or is that more like a -- kind of a mid-2020 statement?

--------------------------------------------------------------------------------

Anthony M. Jabbour, Black Knight, Inc. - CEO & Director [67]

--------------------------------------------------------------------------------

No. We are confident with our capability there, and we are on track with what I had mentioned as our projection with Empower Now! and it already is accretive. It's adding value and growth to the business already. So we're excited about that, and we think it'll continue and ramp up next year and the year after.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Kevin Kaczmarek of Zelman & Associates.

--------------------------------------------------------------------------------

Kevin Michael Kaczmarek, Zelman & Associates LLC - Head of Data and Analytics [69]

--------------------------------------------------------------------------------

Regarding the deconversion, can you give us a sense of how many other like noncore single-client platforms do you have, maybe a percent of revenue?

--------------------------------------------------------------------------------

Anthony M. Jabbour, Black Knight, Inc. - CEO & Director [70]

--------------------------------------------------------------------------------

Sure. I'll start, and Kirk, you can chime in. I'd say, like all great companies, we've consistently focused on a product portfolio to balance financial performance and to balance risk. We've sunset-ed a number of products over the years. But it's usually a business as usual event. We're only mentioning this one because of the -- really, the timing and the magnitude of it. So I'd say there are pockets of them as there are in every company, but they are nowhere near the scale of what this one was.

--------------------------------------------------------------------------------

Kevin Michael Kaczmarek, Zelman & Associates LLC - Head of Data and Analytics [71]

--------------------------------------------------------------------------------

Okay. That was very helpful. And regarding the -- you mentioned the Fidelity and Triad MSP wins. When you think about moving to maybe away from some of the very largest servicers, can you talk about the general fee per loan trends and incremental margins versus your historical base of larger customers? Obviously, something like MSP isn't cheap to implement, and it comes with a certain amount of fixed cost. So when you're going after the smaller clients, can you talk about how you're balancing the price per loan, the incremental margins and maybe comment on the cash flow during implementation and how you balance that with what you want to charge versus what they can reasonably pay?

--------------------------------------------------------------------------------

Kirk T. Larsen, Black Knight, Inc. - Executive VP & CFO [72]

--------------------------------------------------------------------------------

What I would say, Kevin, is that our pricing is tiered pricing. And so a smaller client will pay at a lower tier, so to speak, meaning a higher price. But it still is incredibly efficient for them relative to other options and puts them in a much more safe and secure place from a regulatory perspective. And so actually, the lower end of the market is very attractive to us from a price per loan perspective but yet is a tremendous value for the client. As far as the complexity to implement, and certainly for a smaller client, it's less complex to implement than it is for a larger client. And so, therefore, it should be on the quicker side and less expensive side to implement.

--------------------------------------------------------------------------------

Kevin Michael Kaczmarek, Zelman & Associates LLC - Head of Data and Analytics [73]

--------------------------------------------------------------------------------

Okay. And roughly, I know you don't want to give specifics on exactly when a client comes on. But when we're talking about a range of -- in terms of maybe a number of quarters or a number of months, how long might these be?

--------------------------------------------------------------------------------

Kirk T. Larsen, Black Knight, Inc. - Executive VP & CFO [74]

--------------------------------------------------------------------------------

A typical client is 12 to 18 months. Could be a little inside of that for depending -- but it really -- a lot of those is dependent on the client and not just on us.

--------------------------------------------------------------------------------

Anthony M. Jabbour, Black Knight, Inc. - CEO & Director [75]

--------------------------------------------------------------------------------

Yes. So for the 2 you look at most likely the 12-month range where what they're looking for from us and the way we're able to do it cost-effectively is our clients are looking for us to be more prescriptive with them in terms of what we think they should do versus erasing what's on the whiteboard, letting them design with how they want us to retrofit our system to match their needs. They're seeing with our scale and with the level of expertise we have with our colleagues here in Black Knight that they want us to be more prescriptive of how they should set up the system. And by doing that, it's easier for us to implement. It's faster and it's less expensive, and it works out really for both parties in this example.

--------------------------------------------------------------------------------

Operator [76]

--------------------------------------------------------------------------------

There are no further questions at this time. I would like to turn the floor back over to Anthony for closing comments.

--------------------------------------------------------------------------------

Anthony M. Jabbour, Black Knight, Inc. - CEO & Director [77]

--------------------------------------------------------------------------------

Thank you. As always, I'd like to thank my Black Knight colleagues for their exceptional efforts and our clients for their strong partnerships. Thank you for joining us on the call today and for your interest in our great company. Enjoy the rest of your day.

--------------------------------------------------------------------------------

Operator [78]

--------------------------------------------------------------------------------

This concludes today's conference call. You may disconnect your line. Thank you for participating, and have a pleasant day.