· They missed slightly on top line, beat on EPS and reiterated full year guidance. The street is at the high end of their guidance for the year. Revenues were up 7% and EPS was up 38%.
· Data analytics segment (~15% of revenue) revenues were up 2% an improvement from down 4% last quarter. YTD segment revenues are flat, though growth going forward in this segment is targeted at ~3-5%.
· Software Solutions segment (~85% of revenue) was up 7% driven by loan growth, higher average revenue per loan and cross-sales to existing clients.
o Within this segment servicing (~75% of revenue) grew 7%. This is steadier than their originations revenue. They continue to dominate first lien loans with 62% share and are growing share in second lien loans. They have high-teens share of second lien and expect to reach 30% once current commitments are implemented.
o Originations (~10% of total revs), which is made up of new loans and refi’s, grew 8%. Refinancing, down 28%, continues to be negatively impacted by rising rates.
o Margins expanded 230bps.
o Trends in this segment highlight a dynamic weighing on US housing statistics. The issue is a lock-in effect from lower mortgage rates. Homeowners have mortgage rates lower than prevailing rates making them less likely to sell as it would mean taking out a new mortgage at a higher rate. This is decreasing housing inventory and existing home sales. The average length of homeownership tenure has been rising from around 4 years in 2000 to over 8 years now.
Valuation:
· Valuation is reasonable. Trading at a ~4.7% FCF yield is reasonable given growth potential, strong ROIC with a recurring, predictable revenue model (90% recurring revenue) and high FCF margins, which are supported by high incremental margins and capex (~9% of revenue now) which should taper as they grow.
· Balance sheet is in good shape with a leverage ratio of 2.6x.
· Capital allocation priorities include opportunistic share repurchases, debt pay down and potential acquisitions.
Thesis:
- Black Knight is an industry leader with leading market share of the mortgage servicing industry.
- Stable business with 90% recurring revenues, long-term contracts and high switching costs.
- BKI has high returns on capital and high cash flow margins.
$BKI.UA
[tag BKI}
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
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