BKI held an investor day last week. The key takeaways are that they maintained their long term growth expectations, but growth will now be more reliant on their ability to cross-sell products like data analytics. Additionally, they announced an investment in Dun & Bradstreet which has resulted in some weakness in the stock.
· LT outlook unchanged – Given higher penetration in 1st and 2nd lien loan servicing (70% of revenue), this suggests confidence in their cross-selling opportunities.
· Guidance is for 6-8% revenue growth, 50-100bps of margin expansion per year, and mid-teens EPS growth. They aim to keep leverage ratio at 3x.
· Growth opportunity:
o Revenue drivers are 1pt from loan growth, 2pts from rev/loan (price escalators and renewals), and 3-5pts on sales from new clients and from higher share of spending with existing clients (i.e. cross-selling).
o Most of their business is recurring revenue (93%) based on long term contracts. Servicing accounts for about 70% of their business and is not susceptible to exogenous factors like interest rates which can impact mortgage originations. It is based on the volume of mortgages outstanding. They have over 70% market share of the 1st lien market and, w/ their pipeline, about 30% of 2nd lien. This gives them an opportunity to sell their origination software (where their market share is quite low) and data analytics to existing customers.
· Dun & Bradstreet acquisition:
o $375m for <20% stake. They will draw down on their revolver to finance this.
o BKI CEO (Anthony Jabbour) will also be DNB CEO, but will be run as a separate company.
o DNB is a leading source of commercial data analytics and insights for businesses. Their data helps companies gauge risk management matters like who to extend credit to, will a customer pay on time, what credit limits they should set and how to avoid supply chain disruptions. That business is ~60% of revenue. Their other 40% of revenue is Sales & Marketing Solutions which provides things like lead generation, digital marketing solutions and market research.
o There is some skepticism around this acquisition for several reasons. For starters, it may occupy a lot of Anthony Jabbour’s time which could be detrimental to BKI. Also, there are no obvious synergies…nor did management specifically point to any. DNB’s data has different use cases, different end markets and they have struggled with organic growth. I think the commonality is really around two companies that have unique data sets which could be valuable as utilization of AI progresses because, as many are saying, “data is the new oil.”
o Management’s justification for the acquisition is that it diversifies them away from the mortgage market and they said that “the other compelling value for us in this space is we’ll have a front row seat to see how this industry unfolds over the coming years. And we think that’s an option that’s really worthwhile for us because of where we think this company can grow on a pure financial basis, but also where it can help us from our ability to really become further and further ahead of the pack in the data and analytics industry.” This is clearly lacking in any real detail, but it was as close to a justification as they gave. And I think it is consistent with my prior point about how they view their potential with AI.
· An example of their cross-sell opportunities:
o AIVA is their AI technology that can help clients automate what is still a very paper intensive origination process.
o Mortgage originations are expensive and getting more expensive partly because they are so labor intensive. They are also prone to errors. Why? A mortgage processor receives roughly 50 documents per loan, which equates to about 280 pages per loan. With over 7m originations projected for 2018, the mortgage industry is processing 350 million documents or 2 billion pages.
o The documents need to be verified, classified and entered into an origination system. AIVA can read, analyze and extract the data. It then creates queues of documents for a processor to scan and make corrections. In doing this, each new set of origination documents serves as training data, making AIVA “smarter” and more efficient.
o This obviously would speed up, lower the cost and increase the accuracy of the process. BKI says it reduces a 95 minute process to a 5 minute process. They are still in the early stages of selling this.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
www.crestwoodadvisors.com
