Black Knight 1Q21 Earnings

Current Price: $74           Price Target: $96

Position Size: 2.3%          TTM Performance: +6%

 Key Takeaways: 

·      Q1 results that beat on revenues and adjusted EPS and they raised guidance for FY21. The revenue beat was driven by strong growth in data and analytics. 

·       Data & Analytics strength (+17% YoY): Seeing continued improvement with cross-selling Data & Analytics (~15% of revenue), which could be a solid future growth driver for them.

·       Lower foreclosures is a headwind: as they indicated last quarter, they are seeing lower foreclosure-related volumes in their Specialty Servicing software business due to the foreclosure moratorium. This should ease 1H22.

 

 Additional Highlights:

  • Q1 revenues of $350m, +20% and adjusted EPS growth of 19%. Organic revenue growth was 9% – highest rate since 2016, despite transitory headwinds related to the foreclosure moratorium.
  • Very positive commentary about YTD new customer wins in each segment and some recent product innovations. New clients drove 10 points of organic growth. Everything else (annual price escalators, loan growth, origination volumes, foreclosure volume transitory headwind) all netted out to ~1% headwind – that gets you from the 10% down to the reported 9% organic growth. So super high quality, new client, new solution driven quarter.
  • Their stake in D&B is now worth $1.3B. They invested just under $500m in their D&B stake ~1 year ago giving them a pre-tax unrealized gain of >$800m.

Data analytics segment (~15% of revenue) revenues were up 17%. Driven by growth in their property data and portfolio analytics businesses.

  • Organic revenue growth of ~11%
  • EBITDA margin +480bps YoY.
  • Trending ahead of LT targets in recent quarters on strong cross-sales related to new client deals, as well as renewals. They continue to see promising momentum in this business.
  • Current situation is highlighting their unique data sets and analytics. They are the only company with real-time visibility into the majority of active mortgage loans in the US. 

Software Solutions segment (~85% of revenue) up 21% YoY.

  • Organic growth of ~9%
  • Within this segment servicing (~70% of revenue) was up 4% – new client loan growth helped offset foreclosure moratorium headwinds.
  • They continue to dominate first lien loans with leading share and are growing share in second lien loans. Market share for first mortgages is >60%.
  • Originations (~16% of total revs) made up of new loans and refi’s – revenues increased 90% b/c of Optimal Blue acquisition, new clients, higher consulting revenues and higher origination volumes.
  • Segment EBITDA margin increased 80bps YoY.
  • Acquired the NexSpring cloud-based loan origination platform – a digital lending platform designed specifically for mortgage brokers that will be integrated with Empower.

Increased Guidance: FY 21 revenues expected to be +14% to 15% on organic growth of 6% to 8%. Prior range was +13% to 15% on organic growth of +5% to 7%. Includes a full year foreclosure moratorium headwind of approximately $12 million compared to 2020.

Valuation:

·       Trading at ~3.5% FCF yield on 2021 –valuation has gotten less expensive more recently and is supported by growth potential, strong ROIC with a recurring, predictable revenue model (>90% recurring revenue) and high FCF margins, which is aided by high incremental margins and capex which should taper as they grow.

·       Leverage ratio at 3.3x

·       Capital allocation priorities include debt pay down, opportunistic share repurchases and 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.

 

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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

 

$BKI.US

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