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Edited Transcript of REAL.TO earnings conference call or presentation 21-Nov-19 3:00pm GMT

Q4 2019 Real Matters Inc Earnings Call

THORNHILL Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Real Matters Inc earnings conference call or presentation Thursday, November 21, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jason Smith

Real Matters Inc. - Founder, CEO & Director

* Lyne Beauregard Fisher

Real Matters Inc. - VP of IR and Marketing

* William P. M. Herman

Real Matters Inc. - Executive VP & CFO

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Conference Call Participants

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* Daniel Chan

TD Securities Equity Research - Research Analyst

* Gavin Fairweather

Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research

* Paul Steep

Scotiabank Global Banking and Markets, Research Division - Analyst

* Richard Tse

National Bank Financial, Inc., Research Division - MD & Technology Analyst

* Robert Young

Canaccord Genuity Corp., Research Division - Director

* Thanos Moschopoulos

BMO Capital Markets Equity Research - VP & Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Real Matters Fourth Quarter and Fiscal 2019 Conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker for today, Ms. Lyne Fisher. Please go ahead.

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Lyne Beauregard Fisher, Real Matters Inc. - VP of IR and Marketing [2]

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Thank you, operator, and good morning, everyone. Welcome to Real Matters Financial Results Conference Call for the Fourth Quarter and Fiscal Year ended September 30, 2019. With me today are Real Matters' Chief Executive Officer, Jason Smith; and Chief Financial Officer, Bill Herman. This morning, before market opened, we issued a news release announcing our Q4 and full year financial results for the 3 months and year ended September 30, 2019. The release, accompanying slide presentation as well as the financial statements in MD&A are posted in the Investor Relations section of our website at realmatters.com.

During the call, we may make certain forward-looking statements, which reflect the current expectations of management with respect to our business and the industry in which we operate. These forward-looking statements are based on management's experience and perceptions of historical trends, current conditions and expected future developments as well as other factors that we believe to be appropriate and reasonable in the circumstances. The forward-looking statements reflect management's beliefs based on information currently available to management and should not be read as a guarantee of the occurrence or timing of future events, performance or results.

Forward-looking information is subject to risks, uncertainties and other factors that are difficult to predict and that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information. A comprehensive discussion of the factors which could cause results or events to differ from current expectations can be found in the Risk Factors section of the company's annual information form for the year ended September 30, 2018, which is available on SEDAR and on our website.

As a reminder, we refer to non-GAAP measures in our slide presentation, including net revenue, net revenue margins, adjusted EBITDA and adjusted EBITDA margins. Non-GAAP measures are described in our MD&A for the year ended September 30, 2019, where you will also find reconciliations to the nearest IFRS measures.

With that, I'll turn the call over to Jason.

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Jason Smith, Real Matters Inc. - Founder, CEO & Director [3]

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Thank you, Lyne, and good morning, everyone, and thank you for joining us on the call. I will kick things off today by discussing some of the highlights of our fourth quarter and year, including some of our key performance indicators, namely, market share and margins. Bill will then take a deeper dive into our segment financials. And I'll wrap up the call with some additional remarks about our performance for the year.

Turning to Slide 3. There is no question that our fourth quarter results ended the year on a high note. We reported consolidated revenues of $107.3 million and adjusted EBITDA of $14.1 million in the fourth quarter of fiscal 2019. On a year-over-year basis, fourth quarter revenue increased 58%, and adjusted EBITDA was up more than sixfold. We surpassed the record performance we reported in Q3 for U.S. Appraisal and U.S. Title volumes as well as adjusted EBITDA, setting a new high-water mark for the company.

Similar to the third quarter, our fourth quarter results were an indication of how our platform scales at higher volumes and translates into adjusted EBITDA. U.S. market volume was up an estimated 11% in the fourth quarter relative to the comparable period in 2018. Our estimate of the market change included growth in the U.S. mortgage origination market of 20%, which was offset by estimated declines in home equity and default volumes of approximately 30%. The increase in total origination volume of 20% comprises estimated purchase volumes that were flat and an increase in estimated refinance volumes of about 73%. We also estimate that the average loan sizes for purchase and refinance activity increased about 6% and 30%, respectively, on a comparative basis. We were very pleased with the performance of our U.S. Appraisal business in the fourth quarter, as we recorded market-adjusted volume growth of 18.6% year-over-year, expanded net revenue margins by 260 basis points and we tripled adjusted EBITDA.

We gained share with the majority of our Tier 1 lenders on a sequential and year-over-year basis, and we continued to rank at the top of the lender scorecards in our U.S. Appraisal segment this quarter. U.S. Appraisal market share increased to 10.6% in fiscal 2019 from 9% in fiscal 2018 as a result of our strong operating performance, which translated to more market share over the course of the year. We also onboarded a number of new clients, including the sixth Tier 1 lender. With our strong client base, that includes all of the Tier 1 lenders as well as the majority of the top 100 lenders in the U.S., we remain focused on achieving our market share target range of 15% to 20% by September 30, 2021. In our U.S. Title segment, Q4 revenues rose 108% year-over-year, and we recorded market-adjusted volume growth of nearly 203%. We calculate market-adjusted volume growth based on our estimate of the total market, however, our U.S. title segment almost exclusively services refinance activity. We estimate that U.S. refinance market volumes were up about 73% year-over-year, which means the vast majority of our growth this quarter came from market share gains, new client additions and our view that the clients we service capture a larger portion of the estimated increase in market volumes for refinance activity.

The significant increase in adjusted EBITDA and adjusted EBITDA margins in our U.S. Title segment reflects the scale of our business from higher volumes and is a direct result of the integration work we did porting the business onto our platform last year. In the quarter, we went live with 7 new clients, including one top 100 lender in our U.S. Title segment, and the sales pipeline continues to be strong. In fiscal 2019, we increased our title market share to 1% from 0.6%, hitting the low end of our target range of 1% to 3%, which we set out when we went public in 2017, 2 years ahead of schedule.

In our Canadian segment, fourth quarter revenues were up 17% year-over-year and adjusted EBITDA was up 55%, driven by higher appraisal volumes from increasing market share with certain Canadian clients and a stronger mortgage origination market in Canada. Taking stock of how we performed for the year, consolidated revenues were up 15%, and we delivered adjusted EBITDA of $29 million, up from $6 million in fiscal 2018. Our strong financial performance was driven by strengths in both our U.S. Appraisal and Title businesses year-over-year. Continued market share gains in our more mature U.S. Appraisal business delivered 17% market-adjusted growth. In our U.S. Title business, we onboarded 15 new clients this year, including 6 top 100 lenders, and also grew share across our client base. In fiscal 2019, our U.S. Title segment posted market-adjusted growth of 73% and the 122% improvement in adjusted EBITDA is a direct reflection of the integration efforts we made to support this business to our platform. Simply put, we continue to execute on our strategy during the year, focusing on performance to drive share across our client base, increasing penetration in U.S. Title and letting the scale of our model deliver improved financial results.

With that, I'll hand it over to Bill. Bill?

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William P. M. Herman, Real Matters Inc. - Executive VP & CFO [4]

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Great. Thank you, Jason, and good morning, everyone. Turning to Slides 4 and 5 for a closer look at our financial results. Consolidated revenues were up 58% in the fourth quarter of fiscal 2019 compared to the same quarter last year due to significant revenue growth in both our U.S. Appraisal and U.S. Title segments. Revenues in our U.S. Appraisal segment were up 49%, while revenues in our U.S. Title segment increased 108%. And Canadian segment revenues rose 17%, each expressed on a comparative basis. In our U.S. Appraisal segment, we serviced higher origination volumes for market share gains, and our average revenue per unit increased in the fourth quarter as we serviced a greater proportion of higher-priced origination volumes and a lower proportion of lower-priced home equity and default volumes. Transaction costs in our U.S. appraisal segment increased 44% year-over-year compared to the 49% increase in revenues for the same period. As a result, net revenue was up 67% to $15.9 million, and net revenue margins increased 260 basis points to 23.1% in the fourth quarter of fiscal 2019, up from the 20.5% we posted in the fourth quarter of fiscal 2018. Sequentially, we reported a slight reduction in U.S. Appraisal margins from those we reported in Q3 due to higher volume service that was directly attributable to a stronger market for volumes of refinance activity. The improvements in net revenue margins was due to the network effect, increased competition for volumes across our network and a higher proportion of higher-priced origination volumes serviced. We are very pleased with the progress we've made to date as we move toward net revenue margins of 27% on a doubling of volumes from fiscal 2018 levels.

Operating expenses in our U.S. Appraisal segment increased 2% to $6.6 million, up from $6.5 million in the fourth quarter of fiscal 2018 due to higher payroll and related costs from higher volumes serviced. The increase in payroll costs partially offset the increase in net revenue, which together contributed to the 204% improvement in adjusted EBITDA year-over-year. In addition, adjusted EBITDA margins in our U.S. Appraisal segment increased to 58.6% in the fourth quarter of fiscal 2019, setting a new high-water mark for this segment and up from the 32.2% we posted in the same quarter last year.

In our U.S. Title segment, fourth quarter revenues were up 108% year-over-year, while transaction costs were up 130%, leading to net revenue margin contraction of 420 basis points. This contraction reflects early days for our network management strategy in this segment, and we expect that with higher sustained volumes to achieve scale, we will deliver a similar network effect as our U.S. Appraisal segment to improve this segment's net revenue margins. U.S. Title segment revenues attributable to reported volumes for this segment, meaning revenues generated from our mortgage origination clients, increased to $19.2 million from $6.1 million in the fourth quarter of fiscal 2018. However, our average revenue per unit declined due to geographic mix. While diversified revenues increased due to higher activity for capital markets, commercial and third-party search services. Operating expenses in this segment increased to $9.4 million from $6.9 million in the fourth quarter of fiscal 2018, and adjusted EBITDA increased to $7.7 million from the $1.9 million we posted in the same quarter last year.

Similar to the third quarter, the scalability of our platform was on display in the fourth quarter and delivered a significant improvement to adjusted EBITDA year-over-year. In Canada, revenues increased 17% to $8.3 million, and we leveraged our network to expand net revenue margins by 50 basis points. We did, however, experience a sequential decline in net revenue margins, which is due in part to a higher composition of lower-margin appraisal revenues versus insurance inspection services stemming from higher mortgage market volumes. Canadian segment operating expenses declined $0.6 million from $0.7 million in the fourth quarter of fiscal 2018, and adjusted EBITDA margins increased to 60.3% from 47% in the fourth quarter of 2018.

Putting this all together, fourth quarter consolidated net revenue increased 76% to $34.4 million, up from the $19.6 million reported in the fourth quarter of fiscal 2018, on strong contributions from both our U.S. Appraisal and U.S. Title segments, as previously noted. And consolidated net revenue margins increased to 32% in the fourth quarter of fiscal 2019, up from the 28.8% in the fourth quarter of fiscal 2018, due principally from the contributions made by our more mature U.S. Appraisal business. As a result of our solid operating performance, consolidated adjusted EBITDA rose to $14.1 million in the fourth quarter of fiscal 2019, up from $2.1 million in the same quarter last year. Consolidated adjusted EBITDA margins were 41% in the fourth quarter of fiscal 2019 compared with 10.9% in the fourth quarter of fiscal 2018.

Turning to the balance sheet. We ended the year with cash and cash equivalents of $71.7 million, up $3.6 million from September 30, 2018. We continued to purchase shares under our normal course issuer bid, purchasing approximately 1 million shares at a cost of about $6.5 million in the fourth quarter of fiscal 2019. And we purchased 4.6 million shares at a total cost of $20.2 million for the year.

With that, I'll turn it back over to Jason. Jason?

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Jason Smith, Real Matters Inc. - Founder, CEO & Director [5]

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Thanks, Bill. Turning to Slide 6. The business delivered strong results in the fourth quarter, which capped off an excellent year for Real Matters. From market share to margins, we were very pleased with our progression. We serviced record high U.S. Appraisal and U.S. Title transaction volumes, which drove a 15% increase in consolidated revenues, a 220-basis-point expansion of net revenue margins and a fivefold increase in adjusted EBITDA. We recorded adjusted EBITDA margins of 28.4% in fiscal 2019, which is at the higher end of our fiscal 2021 target range of 25% to 30%.

In U.S. Appraisal, we gained market share with our largest clients. We went live with the sixth Tier 1 lender. We were successful in selling into new channels like new construction and high net worth, and we also added new clients. This resulted in an increase in overall market share for our U.S. Appraisal to 10.6% from 9% in fiscal 2018, keeping us on track to hit our fiscal 2021 target of 15% to 20%. In U.S. Title, we ended the year with a 1% share of the $10 billion U.S. Title market, hitting the low end of our fiscal 2021 market share range, 2 years ahead of plan and with only 6 top 100 lenders as clients so far.

Looking ahead, we continue to target additional top 100 lenders, including our existing Tier 1 clients, and we are optimistic about our growth prospects in this segment. Given the strength of our existing client relationships and current market share as well as our runway for growth with our clients in both Appraisal and Title, we have a very solid foundation from which to grow in fiscal 2020 and beyond. As always, we continue to watch moves in the 10-year Treasury yield, which is a leading indicator of market volumes over the short term. We remain focused, however, on driving market share through operational performance and scale to build value over the long term.

As always, I'd like to thank our team and the field professionals on our network for helping us deliver exceptional results this year.

With that, operator, we'd like to open it up for questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from the line of Daniel Chan of TD Securities.

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Daniel Chan, TD Securities Equity Research - Research Analyst [2]

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Congratulations on the strong quarter. You reiterated your fiscal '21 market share target of 15% to 20% for your Appraisal Management business. And you went from 10.6% to -- from 9.9% this last year. So it sounds like you're still looking for an acceleration in your market share gains over the next couple of years. Can you just kind of detail why you expect this market share acceleration?

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Jason Smith, Real Matters Inc. - Founder, CEO & Director [3]

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Sure. Well, look, I think we have the clients that we need in Appraisal to accomplish that objective. We have not been capped out with any particular lender in terms of still being able to grow. And as we mentioned, we launched our sixth Tier 1 lender earlier in the year. And so I think as we look at our client base, we have the majority of top 100 lenders of customers, we can see our way easily to that 15% to 20%. And I would also state that we don't believe that, that's an ultimate terminal value in terms of what we think we can accomplish for the business.

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Daniel Chan, TD Securities Equity Research - Research Analyst [4]

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Okay. But just on the Tier 1s and your client base there, we saw them as recently as a few quarters ago continue to lose market share in the mortgage origination space. But it seems to have reversed recently. Can you comment on why that's -- why that reversal is happening right now?

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Jason Smith, Real Matters Inc. - Founder, CEO & Director [5]

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Sure. I mean, we've seen now, I think, for 3 quarters where the public deposit-taking institutions have reported increases that outpace the increases that we've seen from the nonbank channel. And what we hear from our clients and customers is that those banks are interested in getting back aggressively into the mortgage market. They're at record-low share of the overall market, the deposit-taking institutions used to lead over the nonbanks. And so I think that's just, 3 quarters now, a nice tailwind. And we have no reason to believe it will accelerate or stop, but it was definitely nice to see.

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Daniel Chan, TD Securities Equity Research - Research Analyst [6]

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Okay. And just one last one for me before I pass the line. You've already hit your Title and closing target 2 years ahead of schedule. Where do you think you'll land in fiscal '21 at the higher end of the range? Or would you consider revising your goals higher as we move forward?

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Jason Smith, Real Matters Inc. - Founder, CEO & Director [7]

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No, I think it's still early days for our Title business. We're comfortable with that 1% to 3% range. We're focused on now growing and executing within top 100 lenders, of which we have 6 on. We're continuing to add more and we're laser-focused on the Tier 1 segment. We're not there yet. It's very difficult to predict their timing. And they start off with just a small amount of volume, much like we saw in Appraisal. But ultimately, I think that takes us to a much higher number and would, like Appraisal, not view that as a terminal value or cap in terms of what we can do in this space.

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Operator [8]

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Your next question comes from the line of Paul Steep with Scotia Capital.

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Paul Steep, Scotiabank Global Banking and Markets, Research Division - Analyst [9]

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Jason, could you talk a little bit about the pricing dynamics we're seeing on the Appraisal side? We've seen, obviously, an uptick and we recognize it moves around with mix, but what's been going on in the market in terms of the lift on pricing that you've maybe seen on overall Appraisals?

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Jason Smith, Real Matters Inc. - Founder, CEO & Director [10]

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Yes. I'll take a tackle on that and see if Bill wants to add anything on. Really, it's a shift of less home equity and default products in the market. They dropped 30% year-over-year relative to strength in the origination market. And home equity and default tend to be a lighter diligence around the property and, therefore, they have a lower price point. Full refi and purchase tend to be a larger price point. It's the full interior inspection. So really, it's the mix going on there in the market, where we have fewer in our total transactions of the lower-priced products relative to the higher price points. Would you add anything to that, Bill?

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William P. M. Herman, Real Matters Inc. - Executive VP & CFO [11]

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Yes. I would just -- I would agree with that wholeheartedly. And then just to add to that, where our current focus is as we're growing share with our current complement of, be it, Tier 1s or broader -- more broadly, all of the clients that we service in Appraisal. Our primary focus is on purchase and refinance mortgage origination activity. So I think in combination with the tilt of the market together with our continued focus in that particular arena, I think those 2 are adding up to the increase in average revenue per unit in that segment.

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Paul Steep, Scotiabank Global Banking and Markets, Research Division - Analyst [12]

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Great. And then the second one for me would just be on Appraisal. If we think about your 15% to 20% share of the market by 2021, if we actually think outside of 2021 and look longer term, what are the factors we should think about there that might influence where your ultimate market share could go in this market or either limitations or what you've heard from clients in terms of how comfortable they'd be seeing a materially higher share of the market for someone?

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Jason Smith, Real Matters Inc. - Founder, CEO & Director [13]

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Paul. Yes, in terms of ultimate share gains, we have some Tier 2 lenders, where we're their only supplier. Many of the larger lenders have historically had multiple lenders. We continue to focus on out-executing competition on turnaround time and quality and continue to make the case for increased share. And so it gets quite binary with the larger lenders. And so it's very difficult to predict, but we're on a mission to be the platform and continue to add value to our customers and be rewarded with share gains. So it'd be difficult to put a specific number on it. And I think we can see some different execution lender to lender. But I don't believe that, that would get cap for us in terms of the market of 15% to 20%. I think we've got additional growth opportunities beyond that.

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Operator [14]

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Your next question comes from the line of Richard Tse of National Bank Financial.

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Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [15]

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With respect to the Title business, I'm kind of curious to see what are the Tier 1s looking forward to adopt your title services? Or what are you trying to do here eventually to bring those customers on-board?

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Jason Smith, Real Matters Inc. - Founder, CEO & Director [16]

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Yes. It's really a -- we've, of course, come through this on the Appraisal side, where you start with regional lenders and you build a national footprint, and then you get up into the larger banks. So our experience on that side of the house is that they're just a more intense version of a Tier 2 lender. And -- but at the end of the day, it's an Appraisal. It's in a closing and we still have to network manage. We still have to have the same local folks execute on the deal. So nothing surprises us there. It's really around the bandwidth of the lender. I mean if you're going to -- in this sort of environment, they're definitely seeing the pain and that they need a national scalable vendor such as us. They're also very busy as an institution. They're seeing record high volumes, they're understaffed and so their ability to move forward with launches and go through the security and the Tack audit, the integration work, et cetera. It's just time-consuming and it's team based. So it's less work that we have to do on our side per se. In terms of that constraint, you're driving the timing. It's really the focus of the lender. I would sort of draw a comparison to the sixth Tier 1 bank that we went live with this year. That particular lender, we actually won the RFP 18 months before, and it was really just around the bank's own internal priorities and execution to actually get us to first transaction. So they start off with very low volume. So it's less of an issue for our revenue within next year in terms of driving that. But our focus is on that 3-year goal and beyond and getting in with the lenders. Our experience on appraisal was also that once you get one, they tend to move as a pack. And I would say that we're working across the board with our client base with respect to provisioning Title services to them.

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Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [17]

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Yes, that's great. And with respect to the platform, if you sort of look out to next year, where are you making investments from a product or a technology perspective?

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Jason Smith, Real Matters Inc. - Founder, CEO & Director [18]

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Right. Our product road map hasn't evolved. As you can imagine that we've been also very focused on handling the volume within the marketplace. And I think I'm particularly proud with how the platform's scaled the investments, the rationalization that we did -- the work we did over the previous 2 years. And so really, it's around continuing to focus on the consumer experience on Title and closing. That's critical. It leverages our core network management capability. So we have a road map there that is pinned right to the Appraisal road map. We're focused on continued investments to network manage more efficiently, everything from the performance enhancements and bundling orders. We're focused on supporting some of the new channels that we've launched into, such as home equity, high net worth and new construction channels. And so I think that would be a good summary of the areas that we continue to invest on the platform.

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Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [19]

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Okay. And then you, no doubt, have made great progress in terms of the operating leverage this year. And clearly, your '21 estimates would suggest that to continue. How should we look at OpEx here going into 2020, though?

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William P. M. Herman, Real Matters Inc. - Executive VP & CFO [20]

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It's -- Richard, it's Bill. So I guess, when we think about OpEx, there's maybe a few things that I would say is when I think about Q4 in particular, there was quite an uptick in operating costs, and it was largely attributable to our Title business in particular. So thinking of that rise, most of it was attributable to Title, and that was a function of an increase in volumes. When I looked at corporate, in our Q4 time frame, we had an uptick in costs there of about $400,000, which is directly attributed to the manner in which we our compensation philosophy is founded. So we've moved away from variable compensation that is 100% attributable to a reward or award of options. And bifurcate that into 2 components. So taking that $100 and splitting it $50 to options and $50 to cash. So we took a full year's charge in our Q4 results this year. But obviously -- that charge will obviously be spread across the entire year, thinking forward into 2020. So with that all said, again, I think when I think about OpEx through to 2020 generally, I think we're laser-focused on cost to serve. The relationship between net revenue and volumes and how we're managing our costs so that we've got the right EBITDA results. I think it's a lot of more of the same, steady as she goes. Volumes will obviously dictate where we make our spends and our investments and where we'll focus our time and energy. So not a lot there for you, but that's really the short of it.

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Operator [21]

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Your next question comes from the line of Robert Young of Canaccord Genuity.

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Robert Young, Canaccord Genuity Corp., Research Division - Director [22]

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So rates are up a little bit off of the bottom, and there's some news recently that mortgage refi applications are falling. And so you're reporting a little later in the quarter than typically, and I was wondering if you'd share any insight on how volume has been tracking, given those 2 dynamics since the end of summer.

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Jason Smith, Real Matters Inc. - Founder, CEO & Director [23]

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Yes. So this is Jason. Thanks, Rob, for the question. Certainly, in the summer, when we saw the 10-year drop quite low that drove activity. We've seen a little bit of a slowdown as rates moved up, as you would expect. But we've continued to see a robust level of activity. I think there's -- it's really hard to pinpoint because there's a lot of things going on. You notice that in Q4, the average refi loan size went up by 30%. And the first cohort to go through the refinance or the larger mortgages because the absolute dollar savings are greater. But we continue to hear about strong pipelines from lenders and strong activity across the base. So I wouldn't speak to any particular percentage or number because it also requires us to try to forecast the 10-year Treasury yield. It went up to a high of 1.95% just a couple of weeks ago and back down to 1.75% again. So we focus on execution, driving effective net revenue margins and, by performing, we're going to drive market share with our clients. And I think, especially in our Title business, we're still at these low levels of market share. So we really can focus on a lot of growth with -- from a wallet share perspective.

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Robert Young, Canaccord Genuity Corp., Research Division - Director [24]

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Okay. And it'll probably be really helpful for investors to understand the timing as these factors drag through Real Matters' business. When rates start to increase, I know there's -- the Appraisal part of the business is a little closer to the front of the mortgage process whereas the Title business is kind of in the middle and at the end. And so if we see a slowdown in volume, how long does that -- maybe you could just talk to the timing of the change as it goes through Real Matters?

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Jason Smith, Real Matters Inc. - Founder, CEO & Director [25]

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Sure. So I would start with -- on our Title side of the business that we recognize revenue on average 45 days after we've -- the order's been sent in. So we definitely get a delayed impact there, so you can be thoughtful around that. When we're in this sort of environment, you've got different regions acting -- geographical regions acting differently. You have, as I said, high net worth or jumbo folks coming in and then you've got the next layer coming in. You've got the cash out phenomenon going on. You still have a very strong percentage of these loans having a cash out refinance percentage. And then also the successful closing ratios have been improving as well. So it's real hard to pinpoint. There's a lot going on there. But I would say that we're seeing high-quality transaction volumes come through. Small changes up to 1.95%, et cetera, don't put brakes on volumes at this stage. We're thoughtful that we think that the 10-years could go up higher next year, but it's not based on some forecast or any crystal ball that we have. We just have to be thoughtful in managing the business that way, but we'll also be responsive to opportunities as the market stays -- if rates stay low. And as you know, through the leverage in our -- both our Appraisal and our Title business, that scales to the bottom line nicely.

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Robert Young, Canaccord Genuity Corp., Research Division - Director [26]

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Okay. That's really helpful. Okay. You touched a little bit on this in your prepared remarks, but I want to make sure I understood it. You -- I think you made an attempt to parse out the growth in the Title business based on the customer growth and the rate refi driven volume. I think you said that it was new customer growth that was the greater driver. Maybe if you could revisit that statement, maybe put a little more color around it, that would be helpful for me.

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Jason Smith, Real Matters Inc. - Founder, CEO & Director [27]

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Sure. So when we look at the revenue growth in our Title business in Q4, 70% of it was organic. The balance was strictly to market, and that's the easy math.

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Robert Young, Canaccord Genuity Corp., Research Division - Director [28]

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And so that -- the growth is being driven by these top 100 companies joining on to the platform because the linear business that you'd acquired, a lot of that was mostly Tier 3, Tier 4 and they would have had a much smaller volume. Whereas these new customers are coming on much larger, maybe -- is that the right way to think about it?

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Jason Smith, Real Matters Inc. - Founder, CEO & Director [29]

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Yes, you're bang on that, and these are new ones that we've added through our client base. We have the majority of top 100 clients on the Appraisal side. And so we've been very active in our sales pipeline activity over the course of the last 18 months to launch of them on Title. They start off with small amounts of volume and then you get this launch in this growth. That's what's driven the 70% organic execution.

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Robert Young, Canaccord Genuity Corp., Research Division - Director [30]

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And so in those 7 top 100 that you've said you -- is there a lot of wallet share growth opportunity inside of those customers you've already won? You said the pipeline is strong, but just if you could talk about your ability to grow within those customers and maybe the execution there. You talked a lot about Appraisal execution, but not so much on the Title side.

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Jason Smith, Real Matters Inc. - Founder, CEO & Director [31]

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Yes. So if we were to sum up the whole year, it's actually 15 new Title clients that we launched, 6 of which are top 100 clients. We got one of those top 100 in this last particular quarter. And so they're at different stages of growth. These lenders are also -- have very different strategies. In terms of varied levels of aggression in the market to go after refi activity. So I wouldn't say that there's an easy model there. We have additional market share opportunities within that client base. We continue to launch new clients. If we do see a slowdown in activity, Rob, with either the seasonality and/or rates going up, that would be an opportunity for us to launch some new clients. And the banks themselves are all busy getting through this volume. And where they're feeling the pain, it's when we'd see a slowdown that we can then accelerate some of the launch activity. So I think we've got lots of runway to accomplish our objectives.

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Robert Young, Canaccord Genuity Corp., Research Division - Director [32]

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Okay. And last question for me, just on what you just said there, when you see a lot of volume like you've just seen in the last 2 quarters, customers don't change things as much. And so is there a lagging share allocation that you might benefit from in the seasonality, when seasonality turns down from the scorecard rankings you had?

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Jason Smith, Real Matters Inc. - Founder, CEO & Director [33]

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Right.

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Robert Young, Canaccord Genuity Corp., Research Division - Director [34]

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Or has all that come through? Is there a lagging share benefit, maybe that will...

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Jason Smith, Real Matters Inc. - Founder, CEO & Director [35]

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Yes, not first day. So if we have a busy market and we're live already with the client, we still see market share gains. Actually in Appraisal, we saw some very strong market share gains, not just the market volumes, market share gains within the quarter because we're already live with them, it's easy for them to execute. We're not relying on a whole team of folks to launch us new from that particular lender. So I think the lagging effect we'll see is new client launches, which then give us that 1% share to start from that we can then climb our way up from -- for the next couple of years.

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Operator [36]

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Your next question comes from the line of Thanos Moschopoulos of BMO Capital Markets.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [37]

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Can you provide some color in terms of what we should expect from the diversified business for 2020? I guess with the caveat, if the refi market were to be stable, how should we expect that business to perform in 2020?

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William P. M. Herman, Real Matters Inc. - Executive VP & CFO [38]

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Sure, Thanos. It's Bill. So looking back from 2017 through to 2019, it's almost 100% sort of result that diversified, contributes about 1/3 of total top line revenues to our Title business. So in each of 2017 through 2019, we've seen about 1/3-2/3 split diversified being 1/3 of the total revenues in any particular year. So really, we expect more of the same as we think forward. Now having said that, obviously, diversified related activity is project based. So it is lumpy, and it finds its way up and down. So in your example, where the Title business as it relates to refi-related activity is relatively stable. I wouldn't see much of a change. If, however, we had significant strength or significant weakness, then I think that you might have a slightly different proportion of diversified contributions to total title revenues would be my view.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [39]

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Okay. Looking at the 2021 share targets in Appraisal, I'm assuming that the bulk of that is expected to be driven by the core origination channel as oppose -- relative to new channels, is that correct, firstly? And then secondly, can you give us an update in terms of your opportunity in further penetrating new channels?

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Jason Smith, Real Matters Inc. - Founder, CEO & Director [40]

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Yes, I think we're doing very well with larger lenders on the new channels. So -- and that's still very early days in terms of our share penetration there. So I think our 2021 targets will be a combination of the origination market growth as well as the new channels, home equity, new construction and complex. I would say more on the origination side. I'd said more on the origination side.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [41]

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More origination, okay. Okay.

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Jason Smith, Real Matters Inc. - Founder, CEO & Director [42]

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It's going to depend on the market, though. So the nice point is we're in -- on the Appraisal business now, we want to take a very long view. You're going to see stronger home equity markets and default markets and complex new construction markets and major refinance. So with our large lenders, we want to be in all the channels. And as we see different mortgage environments, we will be able to build share and build growth.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [43]

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Okay. And then I continue to be amazed by the lack of apparent competitive response in your markets, given your share gains. Is that still the case? Can you -- have you seen any update in terms of competition? Or is it kind of steady as she goes on that front?

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Jason Smith, Real Matters Inc. - Founder, CEO & Director [44]

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I think it's steady as she goes on that front. And we continue to focus on beating our own scorecards and continuing to improve and try to widen that advantage we have over the model. But I wouldn't say there's any change in the competitive landscape.

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Operator [45]

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Your next question from the line of Gavin Fairweather of Cormark.

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Gavin Fairweather, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [46]

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You talked about how the focus for the Title businesses is on the top 100 lenders. But when I look at the mix of clients that were added to the platform this quarter, it was kind of more non-top 100 lenders. Curious if you could just talk about how deep that market is and the profile of the lenders that you're going after in kind of the Tier 3 and Tier 4 buckets?

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Jason Smith, Real Matters Inc. - Founder, CEO & Director [47]

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Yes, interesting. So if I looked at the -- on Title, the 15 lenders that we launched in the year and 6 of them being top 100, and then you look at things in Q4, we launched 7 lenders, and one of them was top 100. I think that drives back to the larger lenders that are more complex and they have larger teams. This is where it's really hard for them to respond and launch a new vendor, because they tend to be largely in compliance, if more moving parts. So I think it's more of a function of that in terms of what's going on in the market, and it is one segment responding to us better than another. We have a robust pipeline across the client base, and we continue to focus on that.

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Gavin Fairweather, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [48]

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Yes, that's fair. And I think, would it also be fair to say with 7 lenders launched in the Q4 that just a busy market is a bit of a catalyst for you in terms of being able to onboard new lenders with some of those ones that don't have the impulses/policies and procedures that they have to jump through?

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Jason Smith, Real Matters Inc. - Founder, CEO & Director [49]

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Yes. I think it's definitely easier. I mean, up with a large Tier 2 or large Tier 1, you're going to get slower launch, but I wouldn't say that they are slower ramp. That they'd be very similar ramped, and it's more of what's going on inside that particular lender.

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Gavin Fairweather, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [50]

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Got it. And then just lastly for me on Title, maybe for Jason, maybe for Bill. When I look at the Title EBITDA margins, 45% as a percent of net revenue this quarter, definitely very high and notably above your target model of, call it, 30%. So is it fair to say that that's probably not totally sustainable. But there could be kind of upside to that EBITDA margin profile as you continue to scale that business?

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William P. M. Herman, Real Matters Inc. - Executive VP & CFO [51]

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So sure, Gavin, it's Bill. So just with respect to that, I mean, you're absolutely right. We had an incredible EBITDA performance in Q4 in our Title business. Obviously, volumes clearly came in at a much faster clip than we would have expected. And you just simply can't step up fast enough in order to handle the volumes. Clearly, we handled the volumes, and we handled them well. So it's certainly an indication of what is the art of the possible in this business. But I think we still feel very comfortable with a 30% EBITDA margin in this business over a longer period of time. I think that's more of a sustainable number. When I reflect on, even our Q4, and here's just a highlight and shine a light on the earn possible, when I think of Q4 relative to Q3. So on a sequential basis in Title, in particular, we did, for every dollar of incremental revenue, we put $0.78 to the bottom line in the quarter. And absent STIP, it was $0.83. So very, very strong results. But again, I think, again, a 30% margin and a $0.60 drop of net revenue to EBITDA is the right way to think of this over the longer period of time at current volumes, by the way.

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Operator [52]

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(Operator Instructions)

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Jason Smith, Real Matters Inc. - Founder, CEO & Director [53]

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Thank you, operator. That wraps things up for today. Thank you for joining our call. Have a good day.

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Operator [54]

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