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Edited Transcript of CLGX earnings conference call or presentation 24-Oct-19 3:00pm GMT

Q3 2019 Corelogic Inc Earnings Call

SANTA ANA Dec 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Corelogic Inc earnings conference call or presentation Thursday, October 24, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dan L. Smith

CoreLogic, Inc. - IR Officer & Senior VP - Information Solutions Group

* Frank D. Martell

CoreLogic, Inc. - President, CEO & Director

* James L. Balas

CoreLogic, Inc. - CFO

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Conference Call Participants

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* Andrew William Jeffrey

SunTrust Robinson Humphrey, Inc., Research Division - Director

* Darrin David Peller

Wolfe Research, LLC - MD & Senior Analyst

* Edward Christopher Gamaitoni

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

* Glenn Edward Greene

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Jeffrey P. Meuler

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* John Robert Campbell

Stephens Inc., Research Division - MD

* Kevin Michael Kaczmarek

Zelman & Associates LLC - Head of Data and Analytics

* 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

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Presentation

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Operator [1]

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Good day, and welcome to the CoreLogic Third Quarter 2019 Conference Call. Today's conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Dan Smith, Investor Relations. Please go ahead, sir.

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Dan L. Smith, CoreLogic, Inc. - IR Officer & Senior VP - Information Solutions Group [2]

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Thanks, and good morning. Welcome to our investor presentation and conference call where we present our financial results for the third quarter of 2019. Speaking today will be CoreLogic's President and CEO, Frank Martell; and CFO, Jim Balas.

Before we begin, let me make a few important points. First, we've posted our slide presentation, which includes additional details on our financial results on our website. Second, please note that during today's presentation, we may make forward-looking statements within the meaning of the federal securities laws, including statements concerning our expected business and operational plans, performance outlook and acquisition and growth strategies and our expectations regarding industry conditions. All of these statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our SEC filings, including the most recent annual report on Form 10-K and subsequent 10-Qs.

Our forward-looking statements are based on information currently available to us, and we do not intend and undertake no duty to update these statements for any reason. Additionally, today's presentation contains financial measures that are non-GAAP financial measures. A reconciliation of these non-GAAP measures to their GAAP equivalents is included in the appendix to today's presentation. Unless specifically identified, comparisons of third quarter financial results to prior periods should be understood on a year-over-year basis, that is, in reference to the third quarter of 2018. (Operator Instructions)

Thanks, and now let me introduce our President and CEO, Frank Martell.

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [3]

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Thank you, Dan, and good morning, everyone. Welcome to CoreLogic's Third Quarter 2019 Earnings Call. I'll lead off the call today by outlining important takeaways from the quarter and then spend some time summarizing our progress relative to strategic initiatives, including our AMC transformation as well as our efficiency programs. Jim will follow and summarize our financial results and provide updated guidance for the fourth quarter and the full year. We'll then conclude with a Q&A session.

Regarding the third quarter, we delivered results that were at the high end of our guidance ranges. We generated positive revenue momentum driven by growth in platform-related and other high-margin businesses. We also capitalized on higher refinancing volumes in the U.S. These gains allowed us to more than offset the expected revenue attrition attributable to the transformation of our AMC operation and the exit of certain noncore mortgage and default technology units.

A combination of top line growth and favorable revenue mix, operating leverage and cost productivity drove substantial increases in third quarter operating and net income from continuing operations. Adjusted EBITDA, net income and EPS were also up significantly. Importantly, we increased adjusted EBITDA margins by 140 basis points to 30% in the quarter, and I believe that we are well positioned to achieve sustained higher margin levels over the back half of 2019. Achieving the 30% adjusted EBITDA margin threshold in the third quarter is an important reference point that the company is on the right path to achieve its long-held 2020 margin target.

During the third quarter, we also increased free cash flow generation and trailing 12-month free cash flow conversion rates. This affords us the flexibility to invest in our products and solutions and at the same time, lower debt and repurchase our common shares. Jim will discuss capital allocation in more detail later in the call.

I believe our third quarter and year-to-date results demonstrate that we have made important progress advancing the key elements of our strategic plan. As outlined on past earnings calls, our strategic imperatives include: first, establishing strong client partnerships through unique data insights and solutions; second, driving scale and operating leverage in our core mortgage operations; third, deriving at least 50% of our total revenues from non-U. S. mortgage volume-sensitive solutions; fourth, achieving adjusted EBITDA margins of at least 30%; and fifth and finally, optimizing capital allocation and providing a consistent return of capital to our shareholders.

With regards to building strong, strategic client partnerships through unique data-driven insights and solutions, we continue to invest in best-in-class products and solutions as well as our operational capabilities, technology platforms and infrastructure.

Over the course of 2019, we have focused on building our smart data platform, migrating our technology infrastructure to the Google Cloud Platform, or GCP, and transforming our AMC offering. As we look forward, we're also making strong progress building next-generation capabilities with a particular focus on data quality, structures and visualization as well as technology platforms and advanced automation techniques. These capabilities allow us to build operating leverage, tap into growth opportunities across multiple verticals and steady foundation for additional margin expansion in the future.

In terms of revenue mix and diversification, we are continuing to grow our non-U. S. mortgage volume-sensitive revenues to at least 50% of total revenues, in line with our strategic targets. For the first 9 months of 2019, this shift has been fueled by growth in platform-related revenues as well as our continuing expansion in new verticals and internationally. As we grow these adjacent revenue streams, we also continued to build market leadership in our core U.S. mortgage solutions, which leverage common technology and back-office infrastructure and data repositories. Our mortgage operation continues to benefit from a trend among lenders and servicers, favoring integrated solutions and strategic relationships with key supplier partners.

Recently, our mortgage operations also benefited from higher refinancing volumes, catalyzed by the recent drop in mortgage rates. We estimate that total origination unit volume increased approximately 20% to 25% in the third quarter. Origination volumes expressed in dollar terms rose at a faster pace than unit volumes during the quarter as the average loan sizes increased by 15% to 20% as higher loan balances have tended to be the first-in-line to refinance.

Purchase market transactions continue to register modest growth, reflecting ongoing structural headwinds in the broader housing market.

Last December, we announced that we're accelerating the transformation of our AMC operation into a higher-performing premium service offering. This program is both a growth and margin play.

I'm pleased to report that we're making excellent progress in rightsizing our operations, automating critical workflows and upping the utilization of our in-house appraiser staff. As we continue to test and roll out our new valuation offering, we are receiving positive feedback from our clients on our new service which features improved cycle times and efficiencies as well as a better and more uniform customer experience.

As I discussed earlier, our new operating model has driven revenue attrition for AMC this year as certain customers opt to maintain more traditional service models. Over the course of 2020 and beyond, we expect to see a return to positive revenue growth, with enhanced profit margins associated with the broader adoption of our upgraded technology and create a data-driven AMC solution.

I'll close out my prepared remarks today with comments on operational excellence. As our long-term investors know well, we've established track record of successfully driving productivity in our push towards first-quartile levels of operational excellence. We remain on track to lower run rate costs by at least $20 million in 2019 by consolidating facilities, managing staff costs, simplifying our organization, automating certain activities and other operational improvements. Our laser focus on operational excellence is a major reason for our outstanding Q3 margin performance and supports reaching our long-held goal of achieving at least 30% adjusted EBITDA margins during 2020, based on a stable U.S. mortgage market and after accounting for the transformation of our AMC and the wind-down of our noncore mortgage technology units.

In conclusion, I want to thank all of our employees, clients and shareholders for their continued support. 2019 has been a year of significant progress and achievement on many important fronts. We're excited about the opportunities ahead of us to create value for our stakeholders as we push to achieve our strategic business program. We're continuing to make significant progress in our quest to provide transformative and cutting-edge property insights, platforms and solutions, which will enable real estate professionals, financial institutions, insurance carriers, government agencies and other housing market participants to help millions of people find, acquire and protect their homes.

Thanks for joining us today. Jim will now discuss our financial results.

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James L. Balas, CoreLogic, Inc. - CFO [4]

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Thanks, Frank, and good morning, everyone. Today, I'm going to discuss our third quarter financial results and provide updated full year financial guidance.

As Frank mentioned, CoreLogic delivered a strong operating and financial performance in the third quarter. Financial highlights included: first, revenue growth reflecting strong performance in our core mortgage, insurance and real estate solutions businesses. Second, improved business mix reflecting a greater proportion of higher-margin subscription, technology and non-U. S. mortgage-based revenues. Third, significant expansion of adjusted EBITDA margin to 30%, an increase of 140 basis points, driven by favorable business mix and productivity gains. Fourth, a reduction of $54 million in our outstanding debt. And finally, significant return of capital through the repurchase of 700,000 common shares or 1% of our outstanding share count.

Third quarter revenues totaled $459 million, up $7 million or 2% from 2018 levels. Revenue growth reflected strong performance in core mortgage, insurance and real estate solutions. In addition, revenues include a decline of approximately $16 million attributable to the AMC transformation and wind-down of noncore mortgage and default technology units.

UWS revenues totaled $281 million, up $7 million, reflecting the benefits of higher U.S. mortgage origination volumes and gains from pricing in new products, which more than offset lower credit services and the impacts of the AMC transformation and the planned wind-down of mortgage and default technology units discussed previously.

PIRM revenues rose modestly from 2018 levels to $182 million, as growth in insurance and real estate solutions more than offset unfavorable currency translation and reduced housing market activity in Australia, which together aggregated approximately $6 million.

Operating income from continuing operations totaled $74 million compared with $60 million in 2018. The 23% improvement in operating income was primarily due to workflow efficiency and cost productivity programs as well as favorable revenue growth and mix. Operating margin totaled 16%, an increase of approximately 280 basis points. Higher operating income drove net income from continuing operations to $41 million compared to $23 million in the same prior year period, an increase of 80%.

Diluted EPS from continuing operations totaled $0.50 versus $0.27, an increase of 85% compared to the prior year period. Adjusted EPS totaled $0.82, up from $0.72, an increase of 14%.

Adjusted EBITDA totaled $137 million, up 6% compared to the same prior year period. Adjusted EBITDA margin was 30%, an increase of approximately 140 basis points. The $8 million increase in adjusted EBITDA was principally attributable to revenue growth, improved business mix and the benefits of ongoing cost efficiency and productivity programs. As our investors are aware, margin expansion has been a top priority, and our margin performance in the third quarter of 2019 is our strongest since 2015.

UWS adjusted EBITDA was $93 million compared to $80 million for the prior year quarter. The increase of $13 million reflects improved U.S. mortgage unit volumes, benefits from pricing of new products, favorable revenue mix and continued productivity gains, which more than offset the impact of the AMC transformation and wind-down of noncore mortgage and default technology units discussed earlier. Overall, UWS adjusted EBITDA margins increased approximately 400 basis points.

PIRM segment adjusted EBITDA totaled $53 million, in line with 2018, as growth in insurance and real estate solutions and cost productivity helped to offset unfavorable currency translation and reduced housing market activity in Australia. In addition, we continued to invest in platforms as well as data and technology, which we expect will support future revenue growth trends.

Finally, we continue to generate significant levels of free cash flow. For the 12 months ending September 30, 2019, free cash flow totaled $227 million, a 48% conversion rate of last 12 months' adjusted EBITDA. As discussed previously, during the last 12 months, we have increased spending on several strategic initiatives, such as the GCP migration, which we expect to generate future savings and margin expansion. Normalizing for spending on these strategic initiatives, our free cash flow conversion rate would be greater than 50%.

In terms of capital structure, our overall capital allocation priorities remain to: fund disciplined reinvestment, return capital through the repurchase of our common shares, pursue opportunistic M&A and to progressively reduce our debt levels in line with our long-term leverage targets. During the third quarter, we reduced our debt by $54 million.

Our relentless focus on productivity and data-driven insights has resulted in a durable and cash-generative business model. During the quarter, we repurchased 700,000 or approximately 1% of our common shares while continuing to reinvest back into the business. Through the first 9 months of 2019, we have repurchased 1.4 million common shares for $62 million. As we close out 2019, we remain on track to achieve our full year target of repurchasing 2% to 3% of our outstanding shares.

I will close my remarks today with a discussion on financial guidance. As we indicated in our release, we have revised our full year 2019 guidance as follows: we're expecting revenues of $1.74 billion to $1.76 billion, adjusted EBITDA of $485 million to $495 million and adjusted EPS of $2.65 to $2.75 per share. Our revised 2019 guidance ranges reflect actual year-to-date financial results as well as our updated view on the U.S. mortgage market. Based on our current view, we now estimate 2019 U.S. mortgage unit volumes to be 8% to 10% higher than 2018 levels.

In addition, the outlook for revenues and adjusted EBITDA I just outlined includes currently anticipated impacts of our AMC transformation and the wind-down of our noncore mortgage and default technology units. Finally, our full year guidance update implies a fourth quarter adjusted EBITDA range of $117 million to $127 million.

In conclusion, we achieved very solid operating and financial results in the third quarter and believe we are well positioned to continue to deliver strong results through the end of 2019 and into next year.

Thanks for your time today. I will now turn the call back over to the operator 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 comes from Bill Warmington with Wells Fargo.

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William Arthur Warmington, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Analyst [2]

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A question for you on the margin side. The UWS margins were very strong, up 400 basis points year-over-year. If you could talk a little bit about what's driving that. And then also to talk about what gives you confidence that you can hit your 30% full year margin target for 2020.

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [3]

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Thanks, Bill. This is Frank. So I guess I'll take the second part of your question first. I think we -- so we're clearly seeing achieving near 30% margins in the second half of the year. So I think that gives us a 6-month runway of demonstrating that we're getting very close. I think we have -- as we talked about, we have a number of significant in-flight productivity programs like the GCP that are going to increase the level of productivity in the company as we get into next year. So I think lots of good things going on there. And then mix has been also a significant benefit to that.

So I think the pathway is very clear in the second half of the year. I think we've got the programs in place that had been going and been -- and are already demonstrating savings. So I think we feel very good about the margin target for next year.

I think in terms of UWS, we've had a great run there. A lot of productivity activity impacting UWS that is helping us marginalize. In addition, the mix there, we have a lot of growth in high-margin areas like flood that are helping. So I think it's a combination of mix, market as well as the automation that are going on in some of the major businesses.

The one item, the AMC is a little bit of a revenue attrite kind of reset year this year. But I think as I said earlier, my feeling is that next year, we're setting a pathway for growth, both on the top line and the bottom line.

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William Arthur Warmington, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Analyst [4]

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So my follow-up question, you talked about the valuation platform returning to growth in 2020. Maybe talk a little bit about the progress that you're making there on that platform and also some of the assumptions for mortgage volume that would be embedded in that plan for 2020.

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [5]

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Yes. So I think obviously, we are -- we're creating a totally different experience in the appraisal space. As I mentioned, it's kind of more of a premium, more automated, I think a better customer experience. We've actually been trialing this service offering in a number of markets. And I think we're getting very strong positive reaction. I think the fact of the matter is we just had to work through those clients this year that were on our historical roster that just didn't want to go there. So I think once those are cleared, and that will be cleared out this year. So the good news is that, that noise will be out of those numbers as we get into next year.

We're in active discussion around new contract revenues. We've already picked up quite a number of new clients for the volume of flow next year. So I think the pathway to growth in that business is pretty clear. We want to make sure that with that growth comes the margins as well. So that's where the automation, the efficiency comes in.

We're getting very strong pickup in the trial markets around the efficiency and the throughput of appraisals that can be done with the automation. So I think, as I said, it's definitely a growth and margin play, and we want to get both of those. I think we've already demonstrated in the pilot markets that we can do it. And I think you're going to start to see very quickly sequential growth as we move into next year. It's not going to reflect the broader market obviously because you've got a subset of clients, but you're starting from a relatively low revenue base coming out of this year. So we'll grow off of that into next year.

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Operator [6]

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Our next question will be from Bose George with KBW.

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Thomas Patrick McJoynt-Griffith, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant Analyst [7]

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This is Tommy on for Bose. I wanted to ask if there's anything structural going on that's driving the weakness in the credit services revenue over the past few quarters? And then if you could just give us a reminder of how much of that business is sensitive to U.S. mortgage versus auto versus consumer more broadly?

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [8]

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Yes. So thanks, Tommy. So that business is roughly 60% mortgage focused. So the balance being paid lending and mostly auto credit.

In the third quarter, we were down about $3.5 million on the top line. Last year, we had about a $3 million project that we did for a customer. That was a one-off. So that came out of the run rate. So that explains a lot of the drop. Obviously, the market was up. So -- and I think that from that perspective, there were 2 offsets in the quarter related to that. One was the diversification of one of our larger clients just moving to more suppliers. That's largely finished, but obviously the year-over-year comparisons are impacted. That's the bulk of the market taking away the market benefit.

I would just say more broadly though, credit, it's a tough competitive environment right now. Obviously, the market, even though we've had the refi wave, the market still remains in a cost efficiency drive. Most of our clients want to see efficiency. Credit is not immune to that. And that's an area that there is a lot of smaller competitors. So you see the drive to -- on the pricing side in particular, and we're not immune from that. So that's the other, I'd say, more macro level pressure in this business this year that we're seeing. As you know, there was a lot of increases in the price of credit over the last couple of years, with things like trended data. And that's created, I think, a little bit more urgency to drop the price and get the credit cost down a little bit in some of the major players.

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Thomas Patrick McJoynt-Griffith, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant Analyst [9]

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Okay. And then just switching over to the PIRM segment. Could you walk through the organic growth map in the quarter, touching on macro, how much Symbility contributed, FX, Australia, et cetera?

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [10]

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Jim could take that one.

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James L. Balas, CoreLogic, Inc. - CFO [11]

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Okay. So for PIRM, it would have been essentially modestly up without the impact of the Australia business due to the market environment as well as the FX. So that $6 million, if you were to add that back, it'd be modestly up in the quarter. And Symbility continues at the same run rate that you've seen in the Qs, kind of in that $8 million to $9 million range.

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Operator [12]

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Our next question will be from Darrin Peller with Wolfe Research.

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Darrin David Peller, Wolfe Research, LLC - MD & Senior Analyst [13]

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It's good to see the flow-through on the origination uptick in the quarter and the outlook for the year. But I do -- I still want to hone in on the property intelligence and risk segment again. Just look, when we look at the segment, and especially the insurance, geospatial and the data analytics, it was still, as you just mentioned, relatively flat even backing out some of the variables. If you could just give us a little more of a sense into the headwinds in each of these businesses in the past quarter, and really even putting aside the Australia housing market. And then more importantly, I think, is really to figure out are there any proactive efforts that you guys think you could take, be it M&A or investments, pricing, products, anything that you think could help reposition the nonmortgage-sensitive businesses for better growth?

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [14]

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Sure. So as you know, Darrin, that business -- let me take them one at a time. So insurance and spatial, we acquired Symbility; we're out in the market with a more comprehensive product offering. I think we're getting a lot of pilot activity. So we expect to land some revenue as it relates to pilots that we're doing this year as we get into next year. It's just -- it's a function of having a unified offering and being in the market. And it's a market that is careful to assess suppliers and partners and takes some time. So I feel pretty good about insurance.

Honestly, we've had 1 drag in that area, which is not new news. We had a -- have a catastrophic risk modeling business, so a small footprint that service the reinsurance market, reinsurance market blew up. So that revenue slice is coming down. It's not an insignificant. It's not huge in the grand scheme of things, but it's a couple million dollars. So -- but I think without that, you'd see a traditional growth rate in the insurance. I think with more to come with the integration of Symbility. That's kind of insurance.

International, Jim talked about a lot of FX and just the market volumes. We are a big player in the housing market, and we are subject to their market volumes. So other than that, the international business is doing I think fairly well. Good business in the U.K. in valuations. I think a very good market position in New Zealand and Australia. So I feel pretty good about the international business. But it's not -- with the FX being what it is in the market, we just have to kind of rise through that. But structurally, the business is in pretty good shape.

In terms of the real estate solutions business, which is the other big chunk of revenue in there, that is growing well and continuing to grow well. I think we've got some exiting new products to go into market next year. So I think that business is really solid, and there's solid growth in there.

The other one, which has been a perpetual challenge has been the tenant screening business, where we're seeing some revenue attrition. It's -- low tenant turnover, the same thematic; nothing really new there. In addition, we got out of a -- we had a product line, which was a couple of million dollars of revenue, which we're exiting related to some, I guess, some higher exposure revenue that we felt we needed to exit. So that -- that's been extenuating the drag this quarter in that area. So I think fundamentally, that segment is in pretty good shape. And I think we should see growth rates that are higher as we get into next year, especially if the market pressure in Australia releases a bit, which the early signs are that we are seeing some improvement in the market volumes there.

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Darrin David Peller, Wolfe Research, LLC - MD & Senior Analyst [15]

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All right. That's good to hear. All right. Just one quick follow-up. I think origination forecast right now are calling for double-digit declines in '20. And so I'm just -- when you consider the ability to -- go back to the margin question again, in terms of where we're going to start the year off and the opportunities you have to have efficiencies and the mix that you mentioned earlier, should we still feel pretty good about it despite assuming we're in the -- the market ends up being exactly where the MBA is calling for as of now. Is that still realistic?

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [16]

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Yes. I mean, if you look at what Jim talked about on the guidance, Darrin, I think the fourth quarter is going to be one of our best fourth quarters ever on really all counts. But if you look at the margin, it's going to be astronomical compared to the normal. Now some of that is the refi benefit but in general, the cost structure is really in good shape. And I think these platform businesses, which we didn't talk about but will then, a lot of our units were a lot heavier on the platform side. If we take a look at the valuation business, which we talked about in the past, super, super good margins, super good growth. So that mix will continue to benefit us as we go forward.

So I think we're confident in the margins. I don't know at this point about what the final call will be on the volumes. Refi wave, question right now every hour is how long and how big that refi wave is going to be. But I think, clearly, it looks like it's going to carry into early next year at a minimum. So I think that's very good for us as well. We'll call our best view of the market when we get into January.

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Operator [17]

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Our next question will be from Chris Gamaitoni with Compass Point.

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Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [18]

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I wanted to touch back on PIRM. Noting the headwinds in the Australia business, can you give us a sense of what the updated percentage of revenue in that unit comes from Australia?

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James L. Balas, CoreLogic, Inc. - CFO [19]

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So we don't break it out obviously within the revenue stream that we disclosed, but it is a good -- it's not quite 1/2, but it's a healthy percentage of it, probably about 1/3.

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Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [20]

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Okay. And then you mentioned optimism for growth in various businesses within a unit. It's really difficult to see from the outside. So could you give us any type of sense of where you think -- including all the headwinds, you think revenue growth per unit is going to trend organically? And maybe some specifics of why there's increased -- you're increasingly excited in like the real estate solutions business?

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James L. Balas, CoreLogic, Inc. - CFO [21]

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Yes. Frank mentioned earlier we do have a number of initiatives and investments that are going to be geared towards the real estate side of the house within the PIRM segment that we will start to see some time in 2020. So we do have some investment plans targeted towards growth, which are not necessarily tied to the mortgage market or the Australia market, more domestic, that we are excited about.

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [22]

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Yes. I think, Chris, as you know, I mean to just amplify that: in the realtor area, in the real estate solutions area, our primary footprint there is massive in terms of our realtor footprint. We have -- the majority of realtors use our workflow platform, and that gives us a lot of revenue opportunity. We've also launched our service to healthy MLS businesses. Or the MLSs themselves manage their data as well. So we have a lot of things going on there that are good margin, driven off the platform, data-intensive initiatives, which has fueled specific growth this year and I think will continue to grow next year. But we have a tremendous market position with that platform, which is the foundation of that area. There are other services in there, but that's the foundational asset there.

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Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [23]

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Okay. So no -- just thoughts on -- I think you previously have said low single digits growth rate in the unit. I'm wondering if that's still your target or where you're thinking it can go over the next 2 years or something.

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James L. Balas, CoreLogic, Inc. - CFO [24]

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Yes. We don't parse it out that fine, but I think we have -- that is one of our higher-growth areas, and has been for the last couple of years. So I think it's been in that upper single-digit growth area.

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [25]

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I don't presume to project that into next year, but I think we should -- I don't see anything that's going to materially change the trajectory of that business.

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Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [26]

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All right. And maybe just one quick follow-up is post all the investments you've started in Google Cloud, where do you think CapEx goes 2020 and beyond?

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James L. Balas, CoreLogic, Inc. - CFO [27]

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Yes. So I think we have elevated our CapEx spend this year. Traditionally, we've kind of been in that $80 million, $90 million range. But again, don't forget, about $30 million of that is capitalized data that we acquire year in and year out. So if you take it out, our kind of apples and apples to most other companies is around $50 million. And so that may go up $10 million or like this year, because of Google, that's our biggest CapEx increase this year, has been around that cloud move. So it's very discreet. But I think the -- we've been pretty much in that 4%, 5% of revenue range for a long time, which frankly, as a benchmark is very consistent with most companies. So we don't -- we are necessarily not overspending. But I think it'll grow kind of a little bit this year and hopefully, that will drop down next year.

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Operator [28]

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Our next question will be from Kevin Kaczmarek with Zelman & Associates.

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Kevin Michael Kaczmarek, Zelman & Associates LLC - Head of Data and Analytics [29]

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Looking at the implied 4Q guidance, it looks like you guys are expecting an EBITDA margin of 29% to 30%. And I think everyone understands you're winding down the lower-margin business, but is there anything chunky in terms of expenses coming out that you could point to? Because I mean that imply a more than 200 basis point acceleration in kind of year-over-year margin gain. So -- and given we're already a month into the quarter, can you give us some -- maybe some color on what exactly is going on there.

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [30]

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Yes. Look, I think it's 2 things. It's 2 things. One is it's the mix that we talked about. And I think that mix clearly is resident in that third quarter ramp-up in the margin. So we're up 140 basis points. I think you're just seeing that carry through, so the mix will carry through.

And secondarily, I think as you can -- as you know, the cost actions that we take have a progressively larger impact on the cost structure. So the efficiency, that carries through, and most of our initiatives or all of our initiatives are really more or less permanent structural change. So things like Google Cloud, automation and some of our more intensive people businesses, AI machine learning benefits, those will continue. And then obviously, the refis will benefit the fourth quarter as well. And as Jim alluded to, we are certainly factoring in an increase from the refi wave in the fourth quarter.

But I think I'd say the mix -- fundamentally, the mix and the cost efficiency, we've been working very hard, the team has worked very hard the last couple of years. And we're seeing that clearly over the course of this year. Let's say, the first half, you didn't see it quite as clear as you're seeing it now because we had a bit more noise in terms of the level of transformation in the AMC, et cetera, that was going on. But I think as we come through the year, you're seeing it much more clearly because that -- those anomalies are falling away.

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Kevin Michael Kaczmarek, Zelman & Associates LLC - Head of Data and Analytics [31]

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Yes. And I guess that leads to my follow-up question, how much revenue is remaining from the legacy AMC clients that you expect will go away?

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [32]

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We will be substantially -- we'll be at a nominal amount in the fourth quarter.

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Kevin Michael Kaczmarek, Zelman & Associates LLC - Head of Data and Analytics [33]

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And I guess in terms of dollars, like what -- or I guess what would be a good run rate? What will be left at this point, you think, after that revenue comes out?

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [34]

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It'll be $60 million, $70 million, $75 million coming out this year. But as I said, we've got a number of clients already signed up, which will come onstream. And this is -- we have to operationalize when the client -- they have to operationalize a new vendor, but that work has already been won. But I think we got a good pipe into next year in terms of new clients. And as I said, it's kind of a nominal revenue into the fourth quarter. So we cleared out those historical clients that really just don't want to go to the new service level. Like conceptually do but not necessarily are all ready to do that from a workflow perspective or a pricing expectation perspective.

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Operator [35]

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Our next question will be from Stephen Sheldon with William Blair.

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Stephen Hardy Sheldon, William Blair & Company L.L.C., Research Division - Analyst [36]

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First, good to see the guidance increase for the year, but it may be a little less on the adjusted EBITDA side than some would have expected given the strong uptick in mortgage volumes in the second half. So I guess are there any offsets that you point out where maybe you've lowered your adjusted EBITDA expectations?

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [37]

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No. I think we got -- most of the sentiment's been that -- we've had -- it's a significant flow-through. I mean I think we've had only positive increase in our expectations, no negatives. Look, I think the margin is exceptionally strong and the flow-through is exceptionally strong.

If you look at the second -- you look at the third quarter performance, it's the strongest in several years. And the market, even though refis have been a recent increased -- purchase market has been chugging along. So that's a lot of self-help in that margin appreciation number there through efficiency and infrastructure change and mix change, which is all permanent. So I think the guide is a strong -- it's our second guide in a couple of months. And again, it's -- as we're clear on the -- on where the volumes look in the market in the U.S.

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Stephen Hardy Sheldon, William Blair & Company L.L.C., Research Division - Analyst [38]

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Okay. Got it. And then within property tax solutions, obviously, you saw better trends in that business. I think you talked last quarter about a solid pipeline that should flow through over the next few quarters. So I guess as we think about the acceleration this quarter, how much was higher industry volumes and how much was kind of the pipeline converting? And how does the pipeline look there now?

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James L. Balas, CoreLogic, Inc. - CFO [39]

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Tax continues to be a very strong business for us. And you've got to remember, it's not going to grow at the same rate as the other mortgage transactional businesses. It has a deferred revenue model to it. So we had strong growth during the quarter. The pipe -- we continue to win clients and you'll see -- you'll continue to see that pickup. And the other part of the equation with tax is that it tends to lag the cycle because it's a post-close loan offering. So once the loan closes, we'll then get it sometime thereafter, 60 to 90 days after. So tax lags the typical market in terms of the application phase to the close phase.

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Operator [40]

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And our next question will be from John Campbell with Stephens Inc.

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John Robert Campbell, Stephens Inc., Research Division - MD [41]

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Frank, I think you said, you're expecting, I think you said, $60 million to $70 million of headwinds from the wind-down in AMC. I think you guys had $11 million or so in the first half and you had $16 million this quarter. So are you expecting -- I mean, are you expecting a $33 million to $43 million impact in 4Q? Is that right? Or am I missing something with that math?

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [42]

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No. So if you look at the curve of the revenue, we attrited a small amount of revenue over the first half of the year, and that's accelerated. So it's going to go down to 0.

So if you look at fourth quarter of last year, seasonal -- seasonality wise, it was a low quarter. So -- but you'll see that equivalent revenue come out of the fourth quarter of this year. So as you compare to next year, it's going to be a strong -- obviously, very strong comp in the second half. The first half of next year, we're going to be looking at more of that legacy revenue in the prior period this year obviously. But then you'll see that reverse as we exit that revenue stream. So it's a sharp wind-down in the third quarter and into the fourth quarter, is the trend this year.

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John Robert Campbell, Stephens Inc., Research Division - MD [43]

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Okay. And I guess you guys had originally called out the $75 million to $100 million. Are you still thinking that's the case and just some of that hits in the first half of next year? Is that the way to think about it?

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James L. Balas, CoreLogic, Inc. - CFO [44]

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The number that we gave there was the full year impact on 2019, and we indicated on the last call that it was kind of delaying and dragging out a little bit more. So probably towards the lower end of that range. In all honesty, probably finish the year somewhere around $60 million as opposed to the $70 million, is my guess once that's all said and done, combination of both the AMC and the default technology units and so forth.

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John Robert Campbell, Stephens Inc., Research Division - MD [45]

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Okay. And what I'm just trying to get to is, as you guys set out this initial target, is it just a timing issue where you're still kind of expecting maybe just the lower end of that, on the $75 million, but some of that actually trickles into the next year? I'm just trying to get a sense for the impact early next year.

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [46]

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So next year, John, we're going to be clean here. So next year is going to be new service. And I think the client base will be clean, clean in the sense that there's no transformative-type changes.

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John Robert Campbell, Stephens Inc., Research Division - MD [47]

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Okay. Makes sense. And then a quick one, just to add on, on the property tax rev, you guys had a pretty good bounce there. That business has kind of been a little bit weaker of late. What drove that? And how sustainable is that growth?

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [48]

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Yes. So you're talking about our tax business?

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John Robert Campbell, Stephens Inc., Research Division - MD [49]

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Right.

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [50]

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Yes. So as you know, that -- because of the revenue recognition and the deferred revenue component of that, it doesn't follow as directly the volumes, days and months. It's a deferred revenue model. So it's a smoother trend. So what you're seeing is the buildup of the deferred balances as the market picks up. And I think you'll see that trend continue for a while. It -- the revenue, and the actual recognition lags, obviously, you're pulling flood report and credit reports sooner in the mortgage origination cycle than you are when you close the loan and provide the tax service. So you're just seeing that trend, there's nothing really anomalous there.

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John Robert Campbell, Stephens Inc., Research Division - MD [51]

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Okay. So that kind of low double-digit growth probably can hold maybe even over the next couple of quarters?

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [52]

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Yes. I mean -- and I think it's a -- in that business, you're -- as I said, it's kind of much more of a smoother curve than the volume, daily volume type of thing.

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Operator [53]

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Our next question will be from Jeff Meuler with Baird.

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Jeffrey P. Meuler, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [54]

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There seem to be I guess a lot of different variations of the question, I guess why isn't mortgage adjusted organic growth better? Or why isn't reported revenue growth better, considering how strong originations are trending right now? So just I guess would love your perspective on that specific question on, is your view that it's mostly just, hey, we're at a really challenging part of the cycle for many of the end markets we serve. And then I guess you have some noncore wind-down and some smaller businesses like Eqecat and tenant screening that are just maybe more challenged? Or is there something that gets fixed by the data capabilities investment, where that will raise your growth rate? Would just love your view on, I guess, how you raise the organic profile of the business or if it's just about the way the end markets are cycling.

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [55]

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Yes. Look, I think, first of all, if you look at the market this year, the purchase market is moving up modestly, and our -- none of the structural challenges in the housing market -- I mean, we see that every day in the reporting, it has changed a lot. I think there's a lot of positive movement and negative movement. Obviously, the rates coming down have spurred, in the third quarter, in particular, a rise in refi activity until several weeks and the last couple of months. I think we converted that and realized the benefit of that with the exception obviously of the credit discussion we talked about earlier, where you've got some more pricing and the -- a few anomalies with the vendor diversification that I mentioned.

But by and large, I would say that we are absolutely capturing the full benefit of the refi activity in our financial numbers. And I think it's -- yes, we grew 2% in total. Our mortgage-sensitive business is about 60% of our total revenue; not 100%. So I think it was a great quarter. Then I think we just have a couple of those anomalies where if you look at them, the 3 or 4 -- the reinsurance thing I mentioned, the -- the project win that we had last year that didn't continue this year, that's kind of $10 million, $12 million, $15 million of those types of things that were in this quarter. So I think if you normalize for those, I think you're looking pretty, pretty good in terms of growth rate.

And certainly, I think we've got -- we've demonstrated, I think Jim's discussion on the guidance for the balance of the year, I mean a 25.5% kind of middle -- midpoint of the range for the fourth quarter, I mean that's a very strong margin percentage for us in the fourth quarter.

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Jeffrey P. Meuler, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [56]

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Yes. And then just as your line of sight improves into the 2020 margin target realization, I think a lot of that has come from productivity improvement and cost takeout. I guess just beyond 2020, is there a good way to think about a margin framework? Does it become largely organic growth dependent? Are there significant additional cost and productivity actions you can take?

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [57]

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The answer is yes, there are. You'll see the lift into next year based on what's currently in flight this year. So there's a significant lift in cost productivity next year or even baked into the run rates. And a lot of the programs like the cloud initiative and others, we'll see escalating benefits in the out years. So what we have in flight should generate escalating benefits in 2020 and beyond. And I think that we'll continue to refine our processes. We're doing a lot of work with things like AI, machine learning which should automate more data-intensive -- complex data-intensive data set; and machine learning offers a lot of benefits in our data management area as well. So I think lots of positives there as we go forward from an efficiency perspective.

Margin, we'll get into our guidance for next year in January specifically, but I think it's a lot of positives. Look, I think I would just reemphasize, if you look at the second half of the year of this year, the actual margin progression, you don't have to take my word for it, it's very, very strong; and I think it validates, to a large degree, the trajectory towards 30% next year.

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Operator [58]

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Our next question will be from Glenn Greene with Oppenheimer.

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Glenn Edward Greene, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [59]

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Frank, can I go back to the AMC commentary? Because I guess I'm a little confused. You're obviously talking about -- I guess I heard the transformation largely done this year. You'll be clean going into next year. Jim alluded to the transformational drags being sort of closer to $60 million this year. Does that suggest that the drags that, all else equal, that you thought going into the beginning year are certainly clearly less than you thought? And also just trying to understand sort of the growth commentary going into next year, what that means for the entirety of the valuations line item within UWS? Just some clarity on AMC.

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [60]

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Yes. So first of all, just -- and some of this may be just reconciling the -- we had 2 significant revenue items that were discrete this year. One was the AMC reset and the second one was really exiting the MTS and DTS line items, which was not insignificant.

I'd say on the AMC portion, as Jim said, it's not a massive difference. I think what changed though, Glenn, was the I think trajectory -- which is really largely beyond our control, I mean the clients that are moving away, that's largely at their pace and there are obviously the refi wave and stuff like that. So there's been some puts and takes. But I think the fact that the attrition this year was a little less probably had to do a little bit with the market being a little bit better than we thought it would be when we established that. It's probably actually the biggest chunk of it actually. Because you remember, we entered the year thinking the market would be kind of down. And instead it's going to be up, so I think that obviously impacted the clients that are exiting. So a little bit better volume on their side, a little bit slow on their side, but nothing really changed there.

I think as we look into next year, that business is going to be 50%, 60% size wise coming into next year than it was coming into this year, and it's going to be with new clients being onboarded versus attriting out. So it's going to be on a growth path at a higher margin level.

I think the other thing is that obviously, the implication of that is the mix of our valuation business for 2020 shifts fairly dramatically towards more than 50% is the platform business versus the AMC business. So you're actually seeing inversion of the traditional kind of 65-35. That has massive margin implications, obviously, for what's going to be reported as a very, very positive set of margin implications on that. So I think that business is going to be a great story for us in 2020. So it's kind of flipping from the noise of the wind-down to a strong -- kind of a stronger sequential growth story next year.

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Glenn Edward Greene, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [61]

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And just to be clear, you're still going to -- still got a meaningful year-over-year headwinds in the first half because you're feeling the wind-down impact from the back -- mainly in the back half of '19?

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [62]

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Yes. We'll have that quantified so you can see exactly -- I mean, the good news is it's almost all revenue related versus the margin of that particular revenue stream, which is fairly low. So the big comparative change would be on the revenue side.

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Glenn Edward Greene, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [63]

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Okay. And then just back on the cost saves, particularly you're reiterating the $20 million for this year. But you had made a comment on one of the earlier earnings calls, I'm not sure if it was the second quarter or the first quarter, of potentially doubling those cost saves going into 2020. And you alluded to you've got sort of the full benefit of the cost actions you've taken this year going into ['20]. But any sort of commentary in terms of the directional sort of doubling of cost saves going into '20?

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [64]

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No. I think I don't know about the doubling, to be honest with you, Glenn, but I think we have -- over the last 2 years, we've taken out that $20 million, $25 million of reduction through primarily workflow changes, real estate consolidation, the things that I mentioned in my prepared remarks; that will carry on as we go forward. Some -- the quantum of some of those numbers may change.

What will happen is we're going to layer in a different type of efficiency program through really the Google Cloud, where it's more of a run rate savings on the IT production. So the nature of the savings will change. But I think what you may be referring to is that as you look next year, we've talked in the past about things like the Google Cloud and our automation, our tax business providing, when it's all said and done, with a significant lift, which is new coming into the year. But obviously you have puts and takes on that number. But we will continue to have a significant -- very similar to the last couple of years, maybe a bit more, in terms of run rate cost savings flowing through the annual P&L progression. I'm not familiar with that, but it's not a -- it doesn't go $25 million to $40 million or $50 million or whatever.

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Glenn Edward Greene, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [65]

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I thought I'd try. But one more for Jim. Maybe -- and someone asked the organic growth for PIRM, but could you just help us with the overall total company organic growth bridge, just bridging from the 1.6% reported with the mortgage and FX, the puts and takes in Australia or however you want to define it?

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James L. Balas, CoreLogic, Inc. - CFO [66]

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Sure. So overall headline numbers, 2% plus. M&A, once you see the Q later today, net of the wind-down activity is roughly minus 2%. And then market, organic growth, net of the FX, is plus 4%. So organic growth ex the market is roughly flat to modestly down.

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Operator [67]

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Our next question will be from Andrew Jeffrey with SunTrust.

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Andrew William Jeffrey, SunTrust Robinson Humphrey, Inc., Research Division - Director [68]

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Frank, I think you've made it pretty clear that you like the assets you have, and you think they're all really strategic. I think the thrust of a lot of the questions that we've heard for the last 0.5 hours or so are really around growth acceleration. And I want to ask that a little differently, which is some of the businesses you have or the collection of the businesses you have seem to contribute to volatility in quarterly results, whether that's because of mortgage exposure or because of other aspects such as cat modeling. Are there any thoughts, I mean beyond increasing the non-volume mix to smoothing or driving more consistent quarterly results? I think that's one of the things that the market might like to see in terms of how it values your stock. So kind of a theoretical question, but I wondered if that's something that you think about internally.

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Frank D. Martell, CoreLogic, Inc. - President, CEO & Director [69]

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Andrew, so I think, first of all, I would just start with saying that we are a diversified property information company. So we have a common repository, a common technology stack, a common infrastructure that all of our product lines feed off of. So they're not independent units or discrete units. And we're increasingly integrated as a company. And so that's where we're getting scale benefit. I mean, 30% margin for a diversified property information, even a data and analytics company, is a very strong number. So I think we feel extremely good about that.

I think the volatility, we are a housing player. As I said many times before, if you want to play at scale, you better be in U.S. mortgage, it's the biggest consumer of property information in the world, bar none. That's why we're almost a $2 billion revenue company. And that's why we have 30% margins. So I think that, that scale has always been central to our strategy. It's allowed us to stand up a high-margin insurance play and other adjacencies, and I think you'll see it continuing there.

I think within the housing market itself, so obviously when you get into things like mortgage, you're subject to the laws of the land. So if you have things like RESPA, where you cannot put a subscription-based revenue model into place under the construct of the legal laws of this country, so you have to be paid on the basis of actual services rendered.

So those -- and that's frankly where the majority of the volatility comes in. I think we've been great at those businesses in that arena, still make 30%-plus EBITDA margins, so they're not low-margin businesses. I just think that you -- we obviously look at how to make sure that we're driving positive margin trajectories in every business. But the reality is not every product line is going to be 35%, 40% margin. It's a collective. And our clients, our major clients buy everything from us. So if you want to start to change that complexion, then you end up with a different discussion with major clients that have a different perception of the company. I think it's worked very well. I mean we've taken the margins up almost 10 percentage points over the last 5, 7 years. So I think that, that margin expansion will continue.

I think the good news is we have a lot going on around visualization and some other things, which I think offer some growth opportunities that weren't resonant a couple of years ago, high-margin growth opportunities, to add into our existing platform. So I don't feel that we have significant ability to change the mortgage profile to a subscription base. We do -- having said that, we do have more and more platform revenue, which is the combination of license and some volume exposure. So that is muting. If you look at our revenue cycle, we absolutely muted dips and downs in the mortgage market to a significant degree over the last 5 or 6 years, and we're dedicated in continuing that.

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Operator [70]

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I'm showing no further questions in the queue at this time. And this concludes today's teleconference. You may now disconnect.