They missed slightly on top line, beat on EBITDA and EPS and reiterated full year guidance. The street is at the high end of their guidance for the year. Revenues were up 5% – a consistent pace with last quarter. Data analytics segment (~15% of revenue) revenues declined 4% as they lapped some upfront revenues from long-term strategic license deals. Growth going forward in this segment should be ~3-5%. Software Solutions segment revenues were up 7% as servicing grew 7% and originations grew 5%. This segment is 85% of revenue and is comprised primarily of servicing revenue (75% of total revs) which is steadier than their originations revenue (10% of total revs). On the servicing side, they continue to dominate first lien loans with 62% share and are growing share in second lien loans. At the end of 2017 they had 13% share of second lien, they now stand at 17% share and expect to reach 30% once current commitments are implemented. Originations continue to be negatively impacted by rising rates, but the drag from lower refinancing activity is diminishing as it’s a shrinking portion of segment revenue.
Key Takeaways:
· Guidance seems conservative given they expect an acceleration in revenue growth through the rest of the year that would come at high incremental margins.
· Returned to growth in the Origination business after a stretch of declines driven by lower refinancing activity.
· Better EBITDA margins driven by higher mix of Software Solutions segment revenues and better margins in that segment.
· In June they acquired an AI company called HeavyWater to gain AI capabilities. Their “AIVA” AI technology will help lenders and servicers complete manual, repetitive tasks more efficiently. It can be used to automate tasks like verifying income and assets in the loan origination process, replacing hours of work per loan and improving the quality of the process.
· They are not expecting revenue from HeavyWater in ’18, but expect there to be a $2m headwind to adj. EBITDA in the second half, spread equally between Q3 and Q4.
· New products:
o Service Digital – customer facing mobile tool that enables mortgage payment, scenario analysis on refinancing etc. Banks can use to help in customer retention and cross-selling. Will help BKI grow rev per loan.
o Actionable Intelligence Platform – analytics platform launching in August. Will also help BKI grow rev per loan.
Valuation:
· Trading at a ~4.5% FCF yield is reasonable given growth potential, strong ROIC with a recurring, predictable revenue model 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 2.8x.
· Capital allocation priorities include opportunistic share repurchases, debt pay down and potential acquisitions.
Thesis:
- Black Knight is an industry leader with over 50% market share of the mortgage servicing industry.
- Stable business with 80% 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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