Hello,
Please see write-up on BKI for Q4 2021 provided below. I have been working with Sarah (and Julie) on some of the quarterly updates. If there are any questions please feel free to reach out to us. Thanks!
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Current Price: $56.24 |
Price Target: $80 (down from $96) |
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Position Size: 1.52% |
TTM Performance: -32.38% |
Key Takeaways:
- Beat estimates: similar to the previous quarters in FY21, they beat estimates on strong new customer adds and cross-selling progress aided by their recent acquisition, Optimal Blue. “From a sales perspective, 2021 was a record year and the fourth quarter was the highest of the year.”
- Optimal Blue: an agreement with Cannae Holdings and Thomas H. Lee Partners has been reached in which Black Knight will be acquiring the remaining interest, to own 100% of Optimal Blue.
- Management promotions: announced that Joe Nackashi (35-years with BKI and President as of 2017) has been appointed CEO. Kirk Larsen (joined as CFO in 2014) has also been appointed President and CFO. Anthony Jabbour, previous CEO, will be chairman and will continue to act as CEO of DNB.
- Continued growth through strong acquisitions: the company continues to expand their capabilities in automation and cost reduction through acquisitions like Surefire. “We’re also developing new capability for the recently acquired Surefire marketing automation platform that was originally built to serve the origination market to help service and provide better customer service and reduce call volume.”
- Positive sales and client outlook: in FY21 they were able to grow their customer base and are expecting to see stronger growth going forward. “Based on our strong pipeline and sales momentum, we expect to sign more clients in 2022 than we did last year.”
Additional Highlights:
- Seeing robust organic growth, ahead of LT targets: For the quarter, revenues increased 13%; organic revenue growth of 11%. As for the year, revenues increased 19%; organic revenue growth of 10%.
- Guidance in line w/ LT targets: Anticipating FY22 revenue growth of 8-9% on organic revenue growth of 7-8%.
- Tailwind from higher foreclosure volumes (~$30m).
- Headwind from lower origination volumes (~$30m).
- Cost headwinds as operating environment is reaching a more “normal” level: Expecting an approximately $12m increase in expenses over FY21 levels. “On the expense side, we’re expecting increases in sales and marketing and travel and entertainment expenses as a result of a return to a more normal operating environment and higher personnel expenses and wage inflation above our typical annual increases.”
- Margins (EBITDA) may see a short-term decline in 2022: Anticipating EBITDA margin to slightly decline in Q1 2022 compared to Q4 2021 due to normal seasonality, but expect this to quickly turn around in the following quarters.
- 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.
- Example of a strengthening acquisition: the purchase of Surefire will help reduce call volume and customer servicing by sharing explanatory and personalized videos for Servicing Digital (ie. escrow statement flow, private mortgage insurance, refi benefits, etc…).
Data & Analytics segment (~15% of revenue) Q4 revenues were up 11% and FY21 revenues were up 13%. Driven by strong sales execution and revenue from new innovative solutions.
- Organic revenue growth of 8%; 220bps of operating margin expansion.
- Anticipating negative revenue growth of a few percent due to origination volume headwinds and the removal of two data deals at lower annual rates.
- 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 (~85% of revenue) Q4 revenues were up 13% and FY21 revenues were up 20%.
- Organic growth of 11%; 130bps of operating margin contraction.
- Expecting low double-digit revenue growth in FY22.
- Servicing (low-60’s% of revenue) revenues up 7%
- Growth driven by higher usage based revenues on MSP (Mortgage Servicing Platform), new innovative solutions, and new clients.
- Expecting high-single digit revenue growth in FY22.
- Originations (~20% of total revs) – made up of new loans, refi’s and HE– revenues up 28% (organic revenues up 20%)
- Growth driven by Optimal Blue acquisition and new clients.
- Expecting mid-teens revenue growth in FY22.
- 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 dropped to 3.2x
- 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.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
Micah Weinstein
Research Analyst
Direct: 617.226.0032
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109