Black Knight Inc (BKI) 2018 Q2 法說會逐字稿

Greetings, and welcome to the Black Knight Second Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Bryan Hipsher, Senior Vice President of Finance. Thank you. You may begin.

Thanks. Good afternoon, everyone, and thank you for joining us for the Black Knight Second Quarter 2018 Earnings Conference Call. Joining me today are Chief Executive Officer, Anthony Jabbour; and Chief Financial Officer, Kirk Larsen.

Our results were released this afternoon, and the press release and supplemental slide presentation have been posted to our website. This conference call will include statements related to the expected future results of our company and are therefore forward-looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to are described in our earnings release and our Form 10-K and other SEC filings.

Today's remarks will also include references to non-GAAP financial measures. Additional information, including reconciliations between non-GAAP financial information to the GAAP financial information, are provided in the press release and supplemental slide presentation.

This conference call will be available for replay via webcast through Black Knight's Investor Relations website at investor.blackknightinc.com.

I'll now turn the call over to Anthony.

All right. Thank you, Bryan, and good afternoon, everyone. Thank you for joining us for our second quarter earnings call.

First and foremost, I'm pleased with our operational execution and the financial performance we delivered in the second quarter. During the quarter, we achieved adjusted revenue growth of 5% and adjusted EBITDA growth of 6%, which drove margin expansion of 50 basis points compared to the prior year.

We continue to make progress in implementing our [sold] pipeline and are seeing the benefits of those revenues coming on as strong incremental margin. Our focus continues to be on the execution of our long-term strategic initiative to drive organic growth through cross-selling, winning new clients in existing markets and the introduction of new products and solutions through innovation and acquisition.

From a new sales and innovation standpoint, our momentum has only increased since my first day at the company, and we are developing and delivering new solutions to our clients with a heightened sense of urgency.

As I stated on our last call, acting with urgency is a priority for me, so let me first talk about the innovative solution we have recently been focused on.

In the second quarter, we launched Servicing Digital, which allows consumers to utilize their mobile devices to provide a more interactive and self-service-oriented experience, such as being able to quickly make loan payments, dynamically look at "what if" scenarios around payment and refinance options, and get notifications about their loan, plus many more features, all with a significantly enhanced user experience.

Ultimately, Servicing Digital enables our clients to deliver enhanced customer service, which will help improve their customer retention and ability to cross-sell other products.

We are pleased to announce that AmeriFirst Home Mortgage and Pennsylvania Housing will be the first clients to utilize Servicing Digital.

In June, we added artificial intelligence and machine learning capabilities through the acquisition of Heavy Water and its AIVA solution. AIVA is used to comprehend vast amounts of data, draw conclusions and take action. It can help our lenders and servicers complete manual, repetitive tasks more efficiently.

For example, on the origination side, lenders can use AIVA to verify income and assets that can save hours of work per loan. On the servicing side, AIVA can be used to increase efficiency and verification of homeowners' insurance coverage.

On the sales front, I'm excited about the level of enthusiasm within our client base and how our early-stage pipeline is beginning to build. AIVA is a great solution to address the rising cost of origination and servicing that we discussed on our last earnings call. By giving our clients the ability to automate many of these manual tasks, they will be able to reduce costs and invest more in growing their businesses.

Last quarter, I introduced the idea of actionable analytics. We are now incorporating actionable analytics into a new offering we are launching in August called the Actionable Intelligence Platform, or AIP for short. AIP builds on the investments we have made over the past few years to acquire additional data assets, build out the data hub and develop powerful analytics. And it provides a common framework to make it easier for our clients to realize the benefits of these investments.

AIP delivers analytics for every level of a client's organization. For example, AIP includes additional strategic analytics for executives that will give them a clear view of their company's performance across the enterprise. AIP also includes enhanced proactive analytics for managers that will help them become more aware of activities that require attention so they can proactively respond and take informed action.

The newest component of AIP will be actionable analytics that will leverage our unmatched breadth of data and end-to-end loan life cycle capabilities. These actionable analytics can direct frontline employees to take the appropriate and timely actions to capture opportunities and minimize issues. We continue to work with our clients to develop AIP, and we look forward to helping our clients grow revenue, improve efficiency and remain compliant.

While we continue to roll out new solutions, we also continue to see strong demand from our existing solution set. From a servicing software perspective, we continue to be laser-focused on the final 30% of the first mortgages not currently on our servicing platform or being implemented. I personally receive a weekly update on our progress with a specific set of prospects, and I'm excited about the momentum we are seeing there.

At the same time, we continue to pursue the remaining 70% of second mortgage loans and lines, and we are confident in our ability to grow that share meaningfully over the next few years.

On the origination software side, demand for our artificial intelligence solution AIVA is supplementing our already best-in-class LOS platform. We continue to see an environment which lenders are looking to significantly reduce their origination costs, and we are confident that Empower and our other integrated origination software offerings are the solutions to do just that.

In closing, I want to reiterate my focus on growing Black Knight through successfully implementing our sold pipeline, acting with urgency to proactively deliver innovative solutions and continuing to cross-sell our end-to-end product set into our exceptional client base.

Thank you for your time today, and I would now like to turn the call over to Kirk for an in-depth financial update.

Thanks, Anthony, and good afternoon, everyone.

Today, I'm going to discuss our second quarter results and our outlook for 2018. Unless otherwise noted, comparisons are to the second quarter of 2017.

Turning to Slide 3. On a GAAP basis, second quarter revenues increased 5% to $276.6 million compared to $262.2 million in the prior year quarter. Net earnings attributable to Black Knight were $40 million or $0.27 per diluted share compared to $8.2 million or $0.11 per diluted share. Year-to-date, revenues increased 5% to $546.9 million and net earnings attributable to Black Knight were $82.7 million or $0.56 per diluted share.

Turning to Slide 4. During the second quarter, adjusted revenues were $277.4 million, an increase of 5% compared to the prior year quarter. Adjusted EBITDA increased 6% to $134.2 million compared to $126.3 million. Adjusted EBITDA margin was 48.4%, an increase of 50 basis points. Adjusted net earnings were $68.4 million, an increase of 28%. And adjusted net earnings per share was $0.46, an increase of 31%.

Capital expenditures in the second quarter totaled $27.3 million. Year-to-date adjusted revenues were $548.6 million, an increase of 5% compared to the prior year period. Adjusted EBITDA was $264.1 million, an increase of 7.5%. Adjusted EBITDA margin was 48.1%, an increase of 110 basis points. Adjusted net earnings was $132.5 million, an increase of 34%. And adjusted net earnings per share was $0.89, an increase of 37%.

Adjusted net earnings for the second quarter and year-to-date period include the benefit of a lower federal statutory tax rate as well as a lower-than-planned blended state tax rate and higher-than-expected tax credits.

And finally, year-to-date capital expenditures were $52 million.

Turning now to Slide 5, I'll discuss our Software Solutions segment results. In the second quarter, adjusted revenues for the Software Solutions segment increased 7% to $238.7 million. Our servicing software business that had adjusted revenue growth of 7%, driven by strong loan growth on our core servicing software solution from new and existing clients and an increase in our average revenue per loan.

In our origination software business, adjusted revenues increased 5%, including 35% growth in our loan origination system business, partially offset by lower lending solutions revenues, primarily as a result of a 20% decline in refinancing origination, as reported by the Mortgage Bankers Association.

Adjusted EBITDA increased 11% to $141.8 million, while adjusted EBITDA margin was 59.4%, an increase of 220 basis points due to revenue growth coming out of high-incremental margins and disciplined cost management. Year-to-date, adjusted revenues in the Software Solutions segment increased 6% to $472.3 million, driven by our servicing software business that had adjusted revenue growth of 7%.

Adjusted EBITDA increased 10% to $278.6 million, while adjusted EBITDA margin was 59%, an increase of 230 basis points.

Turning to Slide 6. In the second quarter, adjusted revenues for the Data and Analytics segment were $38.7 million compared to $40.4 million as growth in the title data and multiple listing service businesses was more than offset by upfront revenues from long-term strategic license deals in the prior year.

Adjusted EBITDA was $9.8 million compared to $11.9 million. Adjusted EBITDA margin was 25.3% compared to 29.5%. Year-to-date, adjusted revenues in the Data and Analytics segment were $76.3 million compared to $76.8 million. Adjusted EBITDA was $18.4 million compared to $18.8 million, while adjusted EBITDA margin was 24.1% compared to 24.5%.

Adjusted EBITDA for the Corporate segment in the second quarter was $4.3 million lower compared to the prior year quarter, reflecting higher incentive compensation and incremental costs following the spin-off. Year-to-date adjusted EBITDA for the Corporate segment was $6.9 million lower compared to the prior year.

Turning to Slide 7, I'll walk through our debt structure. At the end of June, we had cash and cash equivalents of $11.4 million. Total debt principal as of June 30 was $1,479,000,000. We had revolver borrowings outstanding of $196 million and had $554 million of borrowing capacity remaining under our revolver, and our leverage ratio was 2.8x.

Turning now to Slide 8, I'll walk through our outlook for full year 2018, which remains consistent with prior guidance ranges. Revenues are expected to be in the range of $1,102,000,000 to $1,122,000,000. Adjusted revenues are expected to be in the range of $1,105,000,000 to $1,125,000,000. Adjusted EBITDA is expected to be in the range of 1 billion -- of $530 million to $545 million. And adjusted earnings per share is expected to be in the range of $1.73 to $1.81.

Additional modeling details underlying our outlook are as follows. With Heavy Water being effectively a start-up, we expect there to be a $2 million headwind to adjusted EBITDA in the second half, spread equally between the third and fourth quarters. We are not expecting revenue from Heavy Water in 2018.

We also expect interest expense of approximately $54 million; depreciation and amortization expense of approximately $125 million, excluding the net incremental depreciation and amortization resulting from purchase accounting; an effective tax rate of between 25% and 26% for the second half of the year; share count of approximately $148 million -- 148 million shares; and finally, CapEx of approximately $100 million.

Overall, we are pleased with our second quarter and look forward to continuing to execute in the second half of 2018.

With that, I'll turn the call over to the operator for questions.

(Operator Instructions) Our first question is from Jason Deleeuw from Piper Jaffray.

My question is on the guidance for the remainder of the year. You reaffirmed the full year. And you've got $2 million headwind from Heavy Water on EBITDA. But I'm just wondering if there's any help you can give us in thinking about the second half 2018 revenue and EBITDA, just kind of the cadence as we go through the rest of the year.

Sure, Jason. Good question. So as we look to the rest of the year, very consistent with what we provided last quarter. We would expect Q3 revenue growth to be a little higher than in Q2 revenue growth and the same for Q4 to be a little bit higher than that. So we expect sequential improvement in revenue from Q2 to Q3 and then also from Q3 to Q4.

From a profitability perspective, we would expect that there would be no material changes to the cost structure as we go from Q2 to Q3. So the revenue would come on at high incremental margin. And then in Q4, no material changes in sort of gross expenses. But as we've talked about before, the seasonality with our expenses is that the fourth quarter, because of the holidays and vacations and the like, there's less capitalized software and less capitalized implementation costs, which means some of that expense then flows through -- sets a seasonal pattern that would be consistent with prior years.

Great. And then just a question on the environment and mortgage lenders, the large lenders, how they're thinking about outsourcing solutions. Has there been any noticeable change in their thinking? And then also on the competitive environment, has there been any changes there in the competitive environment as you go after the larger lenders for origination software?

Jason, it's Anthony. No, I would say that there is a -- there is not a material change from our last call. I'd say that there's definitely a focus on cost reduction and an increased focus on user experience, both the consumer and employee. And as you can see by our actions and what we've acquired and what we're rolling out, we're moving to not only where we see things today but where we see the market ultimately moving towards. So we feel very good with how we're positioned in that segment. Our implementations continue to progress well. And I'll share, the Heavy Water acquisition really has a lot of interest from our clients, especially the largest, because at scale it can provide some very meaningful cost savings for them.

Great. And then on the competitive environment, any noticeable changes there?

No, I wouldn't say anything material.

Our next question is from John Campbell from Stephens.

So for the customers on your HELOC origination platform, what are the benefits from also doing the retail channel? Is there something aside from pricing that might, I guess, lead a lender to outsourcing more channels with you guys versus maybe taking a different channel elsewhere?

Yes. I'd say the -- there are a number of subtle benefits in terms of integration, but the biggest one is just common people, process and technology, having the same flows, the same controls, being able to leverage. I'll share with you, we looked at your Servicing Digital application. What's really exciting for our clients with that is, if they're honest with home equity as well, they benefit from the Servicing Digital application right out of the box. So it services their first mortgages but also their second, like I said, all kind of pre-integrated and completed.

Okay. That's helpful. And then I wanted to dig in on the origination business for a second. So you guys got back to year-over-year growth in the quarter, looks like a pretty long stretch of declines. Just curious about the outlook from here. Are you guys at a point where most clients are at contracted minimums and you've got kind of a baseline for growth here?

Yes, John. So the way to think about the growth in that business, it certainly is a tale of 2 businesses within origination. On the loan origination system side where we saw the 35% growth in the quarter, that's being driven by the implementations for clients that have gone live, some of the post production support and professional services, and that'll drive growth for the coming quarters as those annualize. And then of course, there's more implementations coming on. The other side of the business, the lending solutions piece, which includes the exchange, has the effect of the lower refinance origination volumes, which, if you look at the MDA, the forecast and showing that its relative -- it's flattening as you go out to Q3 and Q4 and then sort of baselining at that level over the course of 2019. And so you'll have a bit of headwind from that for the next several quarters sort of until it annualizes into the sort of middle part of next year, but we would expect there to be growth in the loan origination system business that would offset that. And as we start to layer on AIVA from the Heavy Water acquisition that we did, that will start to layer on. That literally, as I mentioned in my prepared remarks, is no revenue right now. But we have some clients that are very excited to get started with it. And so that'll start and then that'll end up growing over time as AIVA continues to add skills and we continue to charge -- initially, we'll be charging on a per loan basis. And so as you roll that out and then as you add skills, you end up growing that as well. And one important thing to think about with AIVA is it's loan origination system agnostic. And so you can imagine we'll certainly sell to our Empower clients -- to our loan origination system clients, I should say, immediately, but then, we certainly are not going to limit it to that because, as Anthony said, and as we've talked about, certainly the cost to originate a loan is at all time highs right now, it's at all-time highs for everybody. And so we see a lot of opportunity there. So whether it's 35% in a given quarter or whether it's a little bit variant from that, we still -- we have very high hopes for our LOS business.

Our next question is from Bill Warmington from Wells Fargo.

So first question on AIVA. It sounds like there's a -- it's a pretty good new product pipeline there. I wanted to ask, how many clients are currently in beta? And do you think you will actually see some revenue from that product in 2019?

Bill, well, there are 0 clients in beta right now, and we don't expect to see any revenue in 2018 AIVA is the short answer.

But we do, Bill -- we certainly expect revenue in 2019. So we have clients that, frankly, we were thinking about leading up to doing the Heavy Water deal that were expressing their interest in artificial intelligence and machine learning and the capability of that to help them reduce their costs. And so we have a line of clients we have talked to or want to talk to, and so we're going to -- but we would expect that it -- this is a solution that's a little bit different than our typical platforms that take, say, 12 to 18 months to implement. This can be put in -- this can be put in much quicker. And so as we go through and sign up clients, we'll see revenue much quicker.

Yes. And maybe I'll add some more onto that. Really, there's skills that it learns through machine learning. And really, with what we've done with the initial push of our Servicing Digital, our AIVA machine learning capability and our Actionable Intelligence Platform, we're really -- we look to see what are the problems in the industry, so it was retention for servicers, and that's where the digital helps improve the retention side. And you know the market share we have on servicing, and we can leverage it and have immediate benefit. With machine learning, a huge need there is just tremendous amounts of data to actually learn the skill. And again, we've got such tremendous depth and breadth of data across the -- the whole loan life cycle, we can leverage that, again, to get a tremendous advantage. And then lastly, with the actionable analytics, it's really about bringing all of our different disparate data and our knowledge of the end-to-end loan capabilities to find ways to help our clients grow their revenues, either through retaining existing clients or attracting new ones, improving our operational efficiency and staying regulatory compliant. So we certainly have high confidence in the AIVA product, and the teams are aggressively working on developing the skills for our clients in this industry.

And then a question on the margins. They looked very strong in the Software Solutions side year-over-year. Is there something going on with the mix shift there? Is that the implementation revenue kicking in? Were there any onetime items? And what I'm trying to get at is, should we think about that as kind of a sustainable level for the Software Solutions piece going forward?

From a margin expansion perspective, Bill, we took some cost actions in the second quarter of last year that would now annualize. We'll get the final benefit of that. There weren't really any one-timers. I would say we've been very focused on how we're allocating resources between maintenance versus value-added activities, like I talked about last quarter, around implementations and software projects and the like, so there's certainly some element of that. But we are -- we expect that business to be high margin. It's so efficient, especially -- particularly on the Software Solutions side. And then as you look at it from -- on the origination software business, that's a business that isn't at scale yet, and so we would expect there to be margin expansion as that business grows. And we see that the revenues from the implementations come on high incremental margin. And so just without speaking to a particular quarter, we would expect there'd continue to be the ability to expand margins in the Software Solutions segment. And then as it relates to the Data and Analytics business and what's going on in margins there, that was very much a revenue story because of the upfront revenues we recognized last year that had extremely high incremental margins. So that's really the comparison there. And then, of course, as you look at it from an aggregate basis, total company -- in Corporate, we had the higher costs that we talked about that, frankly, if you normalized last year for the higher post-spin costs that we've been talking about the last couple of quarters, you would have seen margin expansion for the total company towards the higher end of our longer-term guidance range.

Our next question is from Tien-tsin Huang from JPMorgan.

Just to follow up on that Data and Analytics. How did that come in versus plan? And can you give more specifics on third quarter, fourth quarter and what your expectations are there for Data and Analytics?

It largely came in line with our expectations. When we put the plan together, we certainly knew, and we talked about when we gave guidance that we have that tough comparison in the second quarter. But frankly, we expect that business to gain a bit of traction and see higher revenue over the course of the remainder of the year than it had in the second quarter. And so we continue to focus tremendously on cross-selling to the existing base, which I think has gained traction over the last couple of years, some of which that strong performance has been covered up at times because we've had these strategic license deals that are good. But then certainly the next year, we have that comparison. So we continue to believe that the Data and Analytics business -- if you normalize for that -- for the one-timer last year, it grew 3% or 4%. And last quarter when we talked about what to expect from that particular collection of assets, it would be in the low- to mid-single digits. And so I think that's where you saw it, and that's sort of where we continue to see it. What I would say, though, is when we talk about the Actionable Intelligence Platform and what that could do, it may not, per se, be seen in the Data and Analytics segment, but we're excited about the opportunities to leverage the data and the analytics that we can create and deliver through our platforms that we think can drive growth. Now certainly, the Data and Analytics business has the data assets and some of the analytics that will feed that, but they may ultimately be delivered through the platforms themselves, whether it's Empower or MSP. So the growth, you may see it in different places, but we think that, as we've talked about, that could be a pretty exciting opportunity.

Okay. That's good to know. I know you said it was second quarter. I just couldn't recall if there was a change in the second half. And just for my follow-up, the new product commentary. You mentioned Servicing Digital. I'm just curious, just overall, philosophically, new products, do you view those as true add-on products that you're working on now in the R&D world? Or are some of these new products going to be enhancements that can just push your pricing up in the aggregate?

Yes. Tien-tsin, it's Anthony. They are new products, and they will absolutely increase our pricing. And as we look at, just at a high level, the average revenue per loan, it would help increase that. So these products are absolutely going to do that for us.

Maybe if I can sneak in one more. Sorry, just for the Investor Day, the Analyst Day that's coming up, if there's a way to preview it a little bit here. Will you be updating your long-term financial outlook at that event?

So one thing on Investor Day, we had it scheduled for September. We've looked at the schedule. And actually, we're going to pushing it back, most likely to November. So just a quick way to get that out, we haven't sent out the revision of that. But as far as what we would expect to communicate on that day, certainly would be a -- looking at the long-term guidance, absolutely, we'd make that a part of it. We think that's critical for investors to know, Tien-tsin. So that will be important. And then, of course, we'd focus on really a deeper dive into the business and how we provide -- what we provide, how we provide value and how we're going to grow is really the theme of the way we're thinking about it.

Our next question is from Andrew Jeffrey from SunTrust.

Just to maybe drill down a little bit more on the question that Tien-tsin was asking. As I think back on sort of the value-added growth drivers, I guess, maybe is one way to think of them, and how maybe they've evolved a little bit, is it right to say that Black Knight now is looking to monetize more as a customer-facing solutions company and customer-facing solutions company maybe more than you might have been a couple of years ago?

Well, Andrew, certainly, we are. So if we look back in time and the solutions that we were offering and we look to how the industry has evolved with more digital, more consumer-facing capabilities required, as we looked at that, we certainly looked at it and said that there's a value that we can provide for our clients, that we can help them go faster, better, cheaper and help improve their customer retention rates, and therefore, by retaining the clients, cross-sell them additional products. So without question, we are -- we're Servicing Digital, moving further in the value chain. But with the other products, they will support the bank and mortgage companies, providing service to their customers, but it'd be through the banks and mortgage companies themselves. Our clients can also use the APIs that we have. If they want to control the front-end on the digital experience and do that themselves, we've got flexibility that way as well. And I imagine, we'll see some of the largest ones doing that and -- but there'll be a mixture.

Andrew, one thing I'd add is that one thing we won't lose sight of is that we still want to be and what's at our core is we are the engine room for our clients. We are a hosting company. We provide Software-as-a-Service solutions. We are what they need to operate, and they can benefit from the scale and skill that we have to do that for them so that they can -- we can -- it's a much more efficient process. They don't have to be the ones that invest directly in a single platform just for themselves. We will never lose sight of what's at our core, but these opportunities, like Servicing Digital, are ones that we think we are the right partner to help our clients with. And so we will branch out in that fashion, but never losing sight of what's at the core.

Sure. That makes sense. I wonder if, in aggregate, as the industry evolves and as Black Knight continues to be sort of go-to engine room, as you say, Kirk, is the TAM expanding? I mean, is that something we can think about in terms of how big the market is, and as a consequence, how sustainable your growth might be?

Yes. Absolutely, Andrew. And that's really what we're doing with these additional products and capability and the real focus that we've got on delivering additional capability to the market. There's a need for a player like us, like I mentioned on the first call. I'm excited about ways that we can help transform the industry for the benefit of all. And as I look at these products and other ones, we'll absolutely increase the TAM.

Okay. And then one last one, if I may. Recognizing there's the way that the data and the analysts are being consumed changes perhaps where the revenue shows up. Are there -- is there functionality or are there data that you feel you're lacking in that segment? Or do you think you're -- so acquisitions -- would acquisitions make sense? Did you feel like you're pretty well positioned (inaudible)

I think, on the data side, we're well positioned. When I look at, really, the raw materials that we have, we've got a lot of great assets. Again, approaching my fourth month in the role, I'm continuing to be excited with what I see that we already have and what we can do with it.

Our next question is from Ashish Sabadra from Deutsche Bank.

I was just wondering if you can talk about the prospect pipeline for Empower or your loan origination system? And how's the conversation going, especially with the big banks?

Well, what I'd say is we continue to have great conversations with all of our clients, and especially the larger ones, because some of the capabilities that we have, such as robotics and now with machine learning, are really hitting the nerve of what our clients are looking for. And more than anything, our proof point of being able to deliver quickly and efficiently really resonates with them -- with all of them. So we're excited about the conversations that we're having. And as you know, especially, you asked, Ashish, on the larger ones, it's hard. I'd say, I think we spoiled you a bit, making it look easy with Bank of America and Ocwen and Chase and P&C, Fifth Third, et cetera, it's hard in getting these large organizations to make a decision. And the previous sales we had were from just -- lots of work building up to it. And what I'd say is we're banging away hard at it. And if they're not open to a full sail change, is there's a component that we can do, a small piece. Can we do a proof-of-concept? Can we can do an operational review to show them what the future could look like with us? So we're banging away hard at it. We've got lots of conviction that we're the right answer for our clients.

That's helpful. And maybe just a quick clarifying question on the model. So when we think about the tax rate, the tax rate has gone down for the full year. Interest expense is down slightly compared to your original expectation. And I understand Heavy Water is likely an incremental expense. But net-net, as we think about the earnings and EPS range that you have given, Kirk, is there a way to think about, within that range, where you may comment any kind -- any further clarity that you can provide?

Yes. I mean, I think if you look at all the puts and takes and you look at everything below EBITDA as to where some of those are coming, I mean, there certainly is -- there's a little bit of upward pressure towards the higher end of the range on EPS as a result of all the things you just said. So we maintain the range, but all the factors you just described are correct, including the tax rate that's coming in lower. It was just some really good work by our tax team to bring that down. So you're thinking of it in a fair manner.

That's helpful. And then maybe just -- how should -- is there a way -- like the tax rate in the back half, is that more sustainable level going forward?

There -- it's a very good question. Much of what -- there were some -- there's a revaluation of some deferred tax liabilities that put some -- that was a bit of a benefit in the quarter -- or for the year, I should say, that's in there. And then, as we get -- as we look to next year and beyond, we go outside of the window where IPO companies don't have the 162(m) exception applied, which relates to executive compensation. And so that's one where I think we have to -- there's some work we still need to do. So we'll need a little bit more time to see what that effect is going to be. Or said differently, we will provide that guidance going forward. So there may be a little bit of upward pressure on it, but I would expect that it would come below the 27% that we came into the year expecting. Much of what we are trying to do with the state tax rate and with the higher credits that I mentioned are sustainable things. So it really -- it just is are just some things in the tax reform from last year that actually put a little bit of upward pressure back.

Our next question is from Chris Gamaitoni from Compass Point.

Can you give us a sense of -- I mean, congratulations on signing your first 2 clients with Servicing Digital. Can you give us a sense of how the larger clients are thinking about that and maybe what we should expect from some of your bigger clients maybe taking that -- or moving -- taking that platform -- or taking that product, I'm sorry, in the future?

Yes, Chris, this is Anthony. What I'd say is there's a lot of interest in -- from clients of all size and even the largest. Some of the way in which they deploy it maybe differently, but there certainly is interest from all of them. And we're excited about that.

Okay. Is there any way to -- there's a lot of new products being launched, and is there any way for us to think about the potential size of this opportunity that you've laid out on a per loan basis, in aggregate, your total existing clients? Is there really any way to conceptualize the potential opportunity for Black Knight?

Sure. So the way I would think about each of these opportunities, Servicing Digital being a very good one, is the population is finite. It's really all the clients that we have with loans on MSP. So for example, that's 34.5 million loans at the end of June was what was outstanding. And so we were charging a per loan basis for the whole portfolio is the expectation, and so that's kind of how you would think about it. The end pricing and sort of what the opportunity is, I'm a bit sensitive to that because we don't talk specific pricing for any particular product, Chris. But I mean, as you think about it, each of these opportunities, whether it's Servicing Digital, whether it's AIP, whether it's AIVA, these are things that are additive to -- or these things are what we would expect to help drive the 6% to 8% that we've talked about on a long-term basis. So individually, will they be 9-figure businesses? That's not what we would plan for. They really are more incremental product adds that can help add a point here, a point there over a given period of time. So I apologize for not being overly specific, but pricing is something we're very sensitive about, and so we don't get that granular.

Completely understood. And is it possible to give us any update or any detail on what type of data is AIVA leveraging? And what problem was that really trying to solve for your clients?

Sure. The data that it's leveraging their is multiple types. Like, so there are many different skills. When you say -- when you talk about machine learning, it's limitless. So really, where we're starting off initially on the loan origination side is around the verification step. And so as you apply for a mortgage, you share your information about your income, your assets, et cetera, then you get approved and you've got to verify it. And today, as back office agents would look electronically to the forms that were submitted, they're always showing up. There's different types of forms, it's complex, it takes a while. Really what -- we're starting off with machine learning and AIVA is learning the forms, highlighting in green boxes or yellow boxes or red boxes, based on the confidence level, the actual field on a complex form. So when it pops up, the agent's eyes look straight to the highlighted section to look for the data elements that they're looking for and where they could find it quickly. Now the power of this is that, as you continue to learn more and more, you -- it's always a green box. And if you get to that always a green box phase, you can now skip the step. So you could hope that you can get everyone to offer APIs and it could all be programmatic calls to get over the information verification that you need. But that's just not the reality of where things are right now in the industry. And so in the meantime, our clients are suffering and this is something that we think can help minimize some of the costs and improve the quality of the process at the same time.

So just to take that one step further, Chris. If you think about what data we're talking about, it's all the forms. If you think about a loan package, a complete loan package has all the forms, all the examples that, frankly, you need -- we need to run through AIVA for AIVA to learn to automate the process that Anthony just talked about, to make the process more efficient, to make employees more productive so they can put more loans through the same process faster. And so with our clients, particularly the larger ones, we can get tens of thousands of loan packages that they would authorize us to use to help AIVA learn and then perform those tasks for the benefit of all clients at that point. And so I think that's the part -- that's where the data comes from. That's why it's so important that, with our platforms, with our servicing platform and our origination platforms, that all the data is resident that can be used to help with the artificial intelligence, with the machine learning so that AIVA can help automate these tasks.

Our next question is from Jim Schneider from Goldman Sachs.

I was wondering if you could maybe, as you look into the second half of the year, comment on the client implementation pipeline that you expected and whether you expect all those clients are going to kind of implement on the time line you have previously expected. It seems like things are tracking pretty well pretty much across the board in the Software Solutions segment, but I just wanted to check those assumptions.

Yes. Jim, it's Anthony. The implementations are tracking as we had budgeted and there is -- we don't see an acceleration of implementations in the first half, don't expect there to be one in the second half. But the conversations with clients are going well, overall. We can't talk about specific ones, obviously, but we're pleased with the progress that we're making.

That's helpful color. And then maybe just as a follow-up. I wanted to clarify your comments around AIP and whether or not it would be kind of a separately sold product that would impact Data and Analytics revenue? Or do you think of it more as part of the bundle? And maybe can you comment on where it might be more likely to show up, whether that's the origination side or in servicing?

Sure. With AIP, it will -- there will be some revenue from AIP that shows up in Data and Analytics and others in our servicing and origination businesses. So it's really a collection of all the data. And wherever the analytic is created is -- how will -- how do the revenues flow, obviously, to follow the work. But Kirk, do you have anything to add to that?

Yes, Jim. I would add, I agree with what Anthony said. It's going to be based upon where the data resides, where it's funded -- where it comes from and then how it's delivered. But what I would add is, rest assured that we'll communicate if it's a driver -- if and when it's a driver of growth, where it is, we'll talk about it. So it'll be transparent from that perspective.

Our next question is from Glenn Greene from Oppenheimer.

Just following up on Jim's question. I was wondering if you -- maybe at a high level, going back and talking about the backlog. I'm just trying to get a sense for conversions that you saw in the quarter relative to sales activity that you saw in the quarter, meaning, broadly, is the backlog still growing? Or did you sort of take in conversions -- the order of magnitude of conversions that hit in the quarter that benefited revenue?

Glenn, I would say it was roughly in line, as we looked at it. It's a metric that we don't want to quantify more than annually just because it gets a little unclear what it's comparing to. But I would say, it's pretty consistent from quarter-to-quarter. The ultimate backlog, the run rate of annualized revenue, that will see by the end of 2020. So I'd say no material change in that regard.

Okay. And then just quickly on the revenue drag within the origination software from the lower refi volumes, like I caught the 20% down in units volumes. Can you sort of remind us what the revenue drag was?

Yes. It was about 1 percentage point to the company.

Okay. And then finally, just on the data business, which obviously had a tough compare in 2Q. If I recall, I think you have a tough compare in 4Q also on an organic basis. Will you be able to grow through that? Or should we expect some pressure in the fourth quarter similar to this quarter?

There really wasn't a tough compare last year. If you look at the revenue from -- in Q3 and Q4, it was pretty flattish. And so I wouldn't expect there to be a comparison issue in Data and Analytics in the fourth quarter.

Our next question is from Bose George from KBW.

Was there any impact from ASC 606 this quarter on revenue or earnings?

Hey, Bose, this is Kirk. So it was about $1 million of revenue and about $2 million of EBITDA, primarily related to professional services, the nature of what we were performing, and just we recognized as opposed to being deferred. I would tell you that it was very consistent with what it was in the second quarter of last year. So as you look at things on a year-over-year basis, they're very, very similar.

Okay, great. And can you just update us on how we should think about uses of free cash and just the balance between acquisitions and potential share buybacks? And on a related note, is the leverage kind of a good run rate?

Sure. So the way we're thinking about capital allocation going forward is, in the third quarter, our current plan is to pay down the revolver, which had a balance in part due to the share repurchase activity that we had in the first quarter as part of Thomas H. Lee's secondary offerings, where we bought shares as part of the deal. So that would be a plan for third quarter. As we think beyond that, we continue to believe that investing in product development, investing in infrastructure, et cetera, sort of the CapEx, is our highest and best use to drive growth. And so that'll be something we'll continually evaluate. Naturally, you do run out of projects that have returns that are attractive at the right risk profile, and so we look beyond that to potentially buy or otherwise use capital in other ways. And so we will continue to look for acquisitions that can catalyze growth, that fill product gaps, very consistent with what our strategy has been. I would say, Heavy Water was a great example of a build versus buy decision where we could accelerate our capabilities in artificial intelligence and machine learning by potentially 2 to 3 years by buying that startup for a very reasonable price. And so that's a good example. And if you look back, you can see other deals that we've done. So we will look to do tuck-in acquisitions. As we look beyond that, fourth quarter and beyond, we certainly would look to or consider share repurchase after we've exhausted other ways to grow. So that's another potential use of capital. As far as our leverage, our target is 3x; we're at 2.8x. If we continue to grow and just pay our mandatories, that leverage will go down. And that's something that we will continue to evaluate the appropriate level in light of a rising interest rate environment and the financial risk attendant thereto. We'll continue to talk to our board about that. But I would say, we're very comfortable where we're at and would look to allocate capital in the way I described.

Our next question is from Geoffrey Dunn from Dowling & Partners.

First question, with respect to AIVA, is there any aspect of the technology that you can use for your own operations to improve your own internal processes?

Yes. Great question, Geoffrey. There absolutely is. As we look at it, one of the challenges that I have is making sure that I prioritize what we do with the product first, right? And for us, it's revenue first. And so, as we look at the, like I said, the pain points in the industry and how do we help our clients and be great partners for them, this one's a win on all fronts. And so to start, that -- we're going to focus on our clients. And as we continue to build up skills and talent that can help run that business, we'll absolutely look at that.

Okay. And then, Kirk, I wanted to revisit the margin on D&A, not looking against the comp year-over-year but sequentially. As we look at that development, are we thinking more mix shift or incremental margin? How would you kind of explain the sequential development of the quarter and maybe how we can apply that to the back half expectation for revenue to continue to improve?

Yes. Certainly, mix comes into play at times and there can be some movement in the cost of goods sold as there can be some seasonality to how we buy data. But Geoff, as we look at it, we expect to continue to make progress with the margins in Data and Analytics. We continue to target getting to that 30% level and, frankly, not stopping at the 30% level when we get there. But as I sit here, I would say that we would expect margins to improve from the 25% sequentially over the back half of the year.

Our next question is from Stephen Sheldon from William Blair.

Most of my questions have been asked, but I wanted to ask about the servicing business. You noted 34.5 million active first lien loans at the end of June, which I believe would be up high single or low double digits year-over-year. So I guess, will active loans on the platform maybe provide the backdrop for stronger growth in servicing in the second half of 2018 and into 2019?

So I mean, yes, there was 5.4% growth in loans on the system on average Q2 versus -- this year versus last year. I would say that business has been performing tremendously. I mean, for it to be growing 7%, I think, has been a great outcome, and then credit to the leadership running that business. So I think that's -- but we continue to implement and those implementations, of course, will come in over time. But I would say, I wouldn't necessarily say that the Q2 performance would mean an acceleration, but rather we expect to see continued strong performance in that business, consistent with where it's been growing for a number of quarters now.

This concludes the question-and-answer session. I'd like to turn the floor back over to management for any closing comments.

Thanks. I'd like to thank the investment community for your interest in our great company, our clients for their partnership and to all my Black Knight colleagues who focus on our clients and our growth. I hope you enjoy the rest of your day. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you, again, for your participation.