Black Knight 3Q21 Earnings

Current Price: $75           Price Target: $96

Position Size: 1.8%          TTM Performance: -25%

 Key Takeaways: 

    • Beat estimates: similar to last quarter, they beat estimates on strong new customer adds and cross-selling progress aided by their recent acquisition, Optimal  Blue. 
    • Increased their long-term growth targets: this is very positive and the stock reacted to that today. “Based on the ongoing successful transformation of our business, we are updating our long-term revenue growth expectations to 7% to 9%, an increase from our prior view of 6% to 8% that was in place since our IPO six years ago.”
    • Data & Analytics segment continues to be key growth driver (+10% YoY): seeing continued improvement with cross-selling Data & Analytics (~16% of revenue), which could be a solid future growth driver for them and aided in their higher LT growth targets.
    • Headwind from foreclosure moratorium set to reverse in 2022.

 Additional Highlights:

    • Seeing robust organic growth, ahead of LT targets: Revenues increased 21%; organic revenue growth of 11%.
    • Increased guidance: Now expect FY revenue growth of 18-19% (prior 17-18%) on organic revenue growth of 9.5-10% (prior 8-9%)
    • Limited impact from higher rates/end of refinancing boom:
      • Interest rates drive mortgage volumes but BKI revs are more tied to loans outstanding than the cyclicality of volumes.
      • Revenues tied to origination volumes are a relatively modest percentage of total revenue (sub-10%… or  ~18%  of  origination  revenues  and  26%  of  data  & analytics).
      • The rest of their revenue is recurring (>90%) with 5-7  year contracts and price escalators (adds ~1.5% to top line annually).
    • Focus on innovation and integrated offerings: their strategy is to continue to deliver innovation and selectively pursue acquisitions to further strengthen their end-to-end offerings across the mortgage life cycle. Example of new innovation: earlier this year they launched their underwriter assist solution, which uses AI enhanced automation to review loan package documents more efficiently, reducing the overall cost by reducing manual review time and supporting effective decision-making by underwriters.

Data analytics segment (~16% of revenue) revenues were up 10%. Driven by growth in their property data and portfolio analytics businesses.

    • Organic revenue growth of ~7%; 160bps of margin expansion.
    • Trending ahead of LT targets in recent quarters on strong cross-sales related to new client deals, as well as renewals.
    • 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 (~84% of revenue) up 23% YoY

    • Organic growth of ~10%; 60bps of margin expansion.
    • Servicing (mid-60’s % of revenue) was up 9%
      • Cross-selling aiding growth – i.e. MSP (their core servicing software) clients adopting their Loss Mitigation Solution and Servicing Digital Solution (a web and mobile solution that provides end customers with customized information about their mortgages as well as self-service capabilities).
      • Foreclosure moratorium headwind coming to an end: the federal moratorium has expired, they will see revenue benefit in 2022 as foreclosures make their way through the legal process. The moratorium was a $37m headwind (~3%) in 2020 and ~$48m headwind (3%) in 2021.
    • Originations (~20% of total revs) – made up of new loans, refi’s and HE– revenues up 66% (organic rev +14%)
      • Growth driven by Optimal Blue acquisition and new clients.
      • Originations are down >20% YTD, but only a 4pt headwind to this segment revs.
      • Strategy is to create a comprehensive end-to-end solution to digitize the origination process and increase efficiency through automation and AI to reduce the costs to originate a loan.

Valuation:

    • “bought back $100 million of shares in recognition of strong cash flow and our stock trading at levels that we believe is meaningfully below its intrinsic value.”
    •  Trading at >4% FCF yield on 2022 –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.
    • They should see high-single-digit top line growth and margin expansion in both segments – LT mgmt. goal of 50-100bps total per year – that, combined w/ modest share buybacks, should drive low-double-digit FCF/share growth.
    • Net leverage ratio at 3.4x
    • 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. 
    • Digitization of real estate transactions is still in early stages
    • 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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