Black Knight Inc (BKI) 2018 Q4 法說會逐字稿

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

I would now like to turn the conference over to your host, [Ed Humis], Investor Relations for Black Knight. Thank you. You may begin.

Thank you. Good morning, everyone, and thank you for joining us for the Black Knight Fourth 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 morning, 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 for our company and are therefore forward-looking statements. Our actual results may differ materially from our projections due to the number of risks and uncertainties. The risks and uncertainties are forward-looking statements are subject to -- are described in our earnings release, Form 10-K and other SEC filings. Today's remarks will also include references to non-GAAP financial measures. Additional information including reconciliation between non-GAAP financial information to the GAAP financial information is 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.

Thank you, Ed, and good morning. Thank you for joining us for our fourth quarter earnings call.

I would like to take some time today to discuss highlights from 2018 and our plans for 2019.

When I joined the company almost a year ago, I was excited about our opportunities to leverage our many industry touch points and drive innovation for our clients and the industry.

A year later, I'm proud of the progress we made in 2018 and am equally excited about our plans for the future.

Let me take the next few minutes to discuss what we're focused on in 2018 and how we delivered on our commitment.

In 2018, we were committed to achieving our financial target, working closely with our clients on implementation, adding top-tier originators to our Empower platform, further penetrating the home equity loan market and launching innovative solutions to help our client.

From a financial performance perspective, 2018 was another solid year, where we delivered on our target.

Adjusted revenue was $1,116,000,000, just above the midpoint of our original guidance range and up 6% from last year.

Adjusted EBITDA was $542 million towards the high end of our original guidance range. And adjusted earnings per share was $1.87, which was above the high end of our range due to efficient capital allocation and a lower tax rate.

From an implementation perspective, we successfully converted a long list of top lenders on to our Empower loan origination system, including P&C, Fifth Third, Navy Federal Credit Union and Santander Bank.

On the servicing side, we added more than 1 million loans to MSP through implementations for servicers of all sizes, including KeyBanc, First Bank, Old National and Lake Michigan Credit Union.

We made significant progress signing new top-tier lenders to our Empower platform. About a year ago, we announced the signing of JPMorgan Chase and CitiMortgage on to Empower. I'm thrilled to say that we completed the implementation for both JPMorgan Chase and CitiMortgage on to Empower in less than a year.

We work closely with our clients to achieve these expedited time lines and are continually focused on improving our implementation process.

Regarding home equity expansion in 2018, we increased our home equity market share on MSP from 13% to 19%. Commerzbank, a client for more than 30 years, extended its use of MSP and is adding its home equity loans in line, and we'll be implementing KeyBanc's and Regions' home equity loans to MSP in the future. We also added home equity loans to Empower for JPMorgan Chase, Union Bank and Santander. We have a strong pipeline of implementations for both Empower and MSP.

Other highlights from the year include a multiyear renewal for Quicken Loans and adding ServiceMac to our growing list of MSP clients. Quicken Loans, which is ranked #1 by J.D. Power for client satisfaction, signed a multiyear renewal for MSP.

As part of the renewal, Quicken CEO, Jay Farner, said that in order to continue to meet the needs of their service customers, it is imperative that they work with the best technology companies out there, and they have that with Black Knight.

ServiceMac, a new entrant in the mortgage servicing market, led by industry veteran, Bob Caruso, selected MSP because of Black Knight's reputation for successful conversions, superior client support and dedication to helping clients achieve their goals.

And lastly, let me summarize the progress we made on innovation. In 2018, we launched Servicing Digital; AIVA, our artificial intelligence virtual assistant; our Actionable Intelligence Platform, or AIP; an enhanced Expedite Close solution; and our Rapid Analytics Platform.

We've signed 8 clients since the launch of Servicing Digital last summer, including 2 of our top 5 clients. Interest in our Servicing Digital offering continues to grow, and we look forward to announcing additional clients taking advantage of this capability in the near future.

We've discussed AIVA and AIP throughout the year, and I'm excited about the momentum we are seeing with these innovative solutions.

We also enhanced our Expedite Close solution to include advanced intelligence, where expedited close process can be determined the way that we close the loan based on lender preferences and county requirement. Whether that means the closing requires wet ink signatures, can be signed digitally or is a combination of both.

And our last innovation in our steady stream for transformative solutions is our Rapid Analytics Platform, or RAP. RAP provides data scientists a virtual analytics lab, where they can leverage Black Knight's data asset in conjunction with their own data to create models and analytics to help them drive additional revenue and efficiencies within their companies. We have a strong pipeline for RAP in both mortgage and secondary market.

We believe that our growing collection of innovative solutions will help us expand our market share because they help our clients grow revenue and reduce the overall cost to originate and service loans.

As we move to 2019, our strategic initiatives remain the same, and we continue to be focused on delivering value for our clients through innovative solutions, integration and acting with urgency.

I'm excited about the opportunities we have ahead of us, and I'm energized by the excitement, the commitment and the dedication my colleagues continue to demonstrate as we deliver transformative new solutions, delight our client and set our course for the future.

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

Thanks, Anthony, and good morning, everyone. Today, I'm going to discuss our fourth quarter and full year 2018 financial results and our financial plan for 2019.

Turning to Slide 3. On a GAAP basis, full year 2018 revenues were $1,114,000,000, an increase of 6% compared to 2017. Net earnings attributable to Black Knight, Inc. were $168.5 million or $1.14 per diluted share compared to $182.3 million or $1.47 per diluted share. For the fourth quarter, revenues were $285.4 million, an increase of 7% compared to the prior year quarter. Net earnings attributable to Black Knight, Inc. were $42.8 million or $0.29 per diluted share compared to $147.2 million or $0.97 per diluted share.

The fourth quarter and full year GAAP results for 2017 include a tax benefit of $111 million related to the revaluation of our net deferred income tax liability to reflect the lower tax rates resulting from the tax reform legislation passed in December 2017.

Turning to Slide 4. I'll now discuss our adjusted results for the full year and fourth quarter. Full year 2018 adjusted revenues were $1,116,500,000, an increase of 6% compared to 2017. Adjusted EBITDA was $542.5 million, an increase of 7%.

Adjusted EBITDA margin was 48.6%, an increase of 70 basis points. Adjusted net earnings was $277.9 million, an increase of 33%. Adjusted net earnings per share was $1.87, an increase of 36%. And finally, 2018 CapEx was $103.1 million.

For the fourth quarter, adjusted revenues were $285.6 million, an increase of 6% compared to the prior year quarter. Adjusted EBITDA increased 6% to $140 million compared to $131.9 million.

Adjusted EBITDA margin was 49% compared to 49.1%. Adjusted net earnings was $74.1 million, an increase of 31%. Adjusted net earnings per share was $0.50, an increase of 35%. Adjusted net earnings and adjusted net earnings per share for the fourth quarter and full year 2017 do not include the one-time tax benefit resulting from the tax reform legislation that I mentioned earlier. Capital expenditures in the fourth quarter totaled $29.4 million.

Turning now to Slide 5. I'll discuss our Software Solutions segment result. In the fourth quarter, adjusted revenues for the Software Solutions segment increased 6% to $245.8 million. Our servicing software solutions had adjusted revenue growth of 7%, driven primarily by strong loan growth on our core servicing software platform from new and existing clients, higher average revenue per loan and new client wins.

In origination software solution, adjusted revenue increased 4%, driven by a 35% growth in our loan origination system solution, partially offset by lower volumes on our exchange and eLending platforms, primarily as a result of the 40% decline in refinancing originations, as reported by the Mortgage Bankers Association.

Adjusted EBITDA increased 7% to $144 million, and adjusted EBITDA margin was 58.6%, an increase of 60 basis points.

Full year 2018 adjusted revenue increased 6% to $962 million, and adjusted EBITDA increased 10% to $567.2 million. Adjusted EBITDA margin was 59%, an increase of 190 basis points.

Turning to Slide 6. In the fourth quarter, adjusted revenues for the Data and Analytics segment increased 7% to $39.8 million, primarily driven by growth in our portfolio analytics and multiple listing service businesses.

Adjusted EBITDA increased 13% to $11.3 million, and adjusted EBITDA margin was 28.4%, an increase of 150 basis points.

Full year 2018 adjusted revenue increased 2% to $154.5 million, and adjusted EBITDA increased 3% to $39.5 million. Adjusted EBITDA margin was 25.6%, an increase of 30 basis points.

Adjusted EBITDA for the corporate segment in the fourth quarter was $3.1 million unfavorable compared to the prior year quarter and $15.1 million unfavorable for the full year 2018.

Both the fourth quarter and full year reflected higher incentive-based compensation and incremental corporate costs following the spin-off from FNF last year.

Turning to Slide 7. I'll walk through our capital structure. At the end of December, we had cash and cash equivalents of $20 million. Total debt principal as of December 31 was $1,350,000,000. We had revolver borrowings outstanding of $82.5 million and $667.5 million of borrowing capacity remaining under our revolver. Our leverage ratio was 2.5x on both a gross and net basis.

Turning now to Slide 8. I'll walk through our outlook for full year 2019.

GAAP revenues are expected to be in the range of $1,177,000,000 to $1,199,000,000. Adjusted revenues are expected to be in the range of $1,178,000,000 to $1.2 billion. Adjusted EBITDA is expected to be in the range of $581 million to $598 million, and adjusted EPS is expected to be in the range of $1.90 to $2.

Additional modeling details underlying our outlook are as follows. We currently expect interest expense of approximately $68 million to $70 million, reflecting the effect of higher interest rates, expiring interest rate swaps and the borrowings related to our investment in Dun & Bradstreet; depreciation and amortization expense of approximately $135 million, excluding the net incremental depreciation and amortization resulting from purchase accounting; an adjusted effective tax rate of approximately 26%; and finally, CapEx of approximately $105 million.

Although we do not provide quarterly guidance, I want to provide you with some color as to how we expect to progress through the year. We expect to grow first quarter adjusted revenues and adjusted EBITDA approximately 4% compared to the first quarter last year. The first quarter will also include higher interest expense for the reasons I mentioned earlier.

For the remainder of the year, we would expect to see year-over-year growth accelerate from Q1 to Q2 and then be more consistent for the third quarter and fourth quarter growth rates compared to the prior year.

Overall, we are pleased with our fourth quarter and full year results and look forward to another strong year for Black Knight in 2019.

With that, operator, please open the line for Q&A.

(Operator Instructions) Our first question comes from the line of Jason Deleeuw with Piper Jaffray.

Yes. I was just wondering on the guidance, the contribution to the revenue guidance from complementary solutions, I'm just wondering how much you're expecting those solutions to add to the 2019 revenue. And then also if you could just talk about the sales cycle and just how that's going. Is it a shorter -- much shorter sales cycle than the other products? If you can just give us some color on that.

Sure. Well, maybe I'll start with the sales cycle, Jason. It's progressing well. We're seeing a lot of excitement in the market for what we're bringing to market with our new solutions. And in some cases, it's a very, very short sales cycle, such as in the digital space where, with our first client that we had mentioned with AmeriFirst, we had signed them and they're live in 2018 on our Servicing Digital capability. And with our others, they're broader changes, as we said they'd be, in terms of changing more the infrastructure of how our clients run and leveraging the analytics, et cetera. But I'm very excited about it. They are smaller and easier implementations as well, so that's going well.

And from -- Jason, from a perspective of how much the innovative solutions are contributing to revenue in 2019, relatively small. As we talked about, AIVA, when we bought it, we bought that business. We bought Heavy Water. It didn't -- it was pre-revenue. We certainly are expecting to sign a few clients; and we expect to see revenue from them in 2019, but I'll say on a relatively small basis. Digital, we have the 8 clients that Anthony mentioned. They will all -- each contribute to revenue in 2019, but I would say it's still on a relatively small basis but will grow over time. And then the others are also in their early stages. So we see each of those solutions as terrific opportunities, as Anthony mentioned, to grow revenue. We see it building over time. We're starting with 2019 and ramping from there.

That's helpful. And then just wondering on the guidance range, the revenue guidance range. What are the drivers that we should be thinking about from -- that would factor in for the low versus the high end of the range?

Sure. Great question, Jason. Thanks for asking. Our philosophy on guidance is that we plan around the midpoint. And the things that -- if all the stars align, then we could end up at the higher end. And conversely, if things don't go as we expect, we could end up at the lower end. The things that will drive us from above or below the midpoint really are consistent with what they've been in prior years, which is implementation timing, the nature and timing of professional services and then our success with sell-and-deliver or as I refer to it, go-get revenue. So it's really the same factors that there always are kind of moving around the midpoint.

Our next question comes from the line of Tien-Tsin Huang with JPMorgan.

Just a follow-up to the last question. Just on the timing of backlog conversion, maybe cadence for the year. Or is there anything, Kirk, specific that we should consider quarter-to-quarter-to-quarter, here, as the year plays out?

Sure. As far as the aggregate amount, we see what's coming in for the year consistent with what we talked about at Investor Day, which was that 20% to 25% of the backlog number that I discussed, the $160 million. As far as the cadence through the year, it builds through the year. So when I talked about the quarterly cadence of revenue growth being about 4% in the first quarter, and then accelerating in Q2 and staying steady for the rest of the year, that's really based upon implementation timing.

Yes, okay. And just maybe big-picture question just with Ellie Mae going private here. Any implications for Black Knight and how that might change the go-to-market in any way?

Well, good morning Tien-Tsin. It's Anthony. As I said before, our success is really based on how we perform. It's not dictated by our competitors, and I really believe that. We feel very good about our competitive position. Our loan origination system, the business is performing at a very high level. We continue to see opportunities, both at the high end and the mid-tier space. So we feel very good about where we are right now.

Our next question comes from the line of Bill Warmington with Wells Fargo.

And a shout-out to Bryan Hipsher and his new job as CFO of Dun & Bradstreet, joining the Short Hills gang. So first question on the -- I wanted to ask about the negative revenue impact in the 2019 guidance coming from the mortgage volume headwinds. The MBA is looking at total unit volumes down about 7% in 2019 versus down about 13% in '18. So a little better, but still a headwind.

Sure. Certainly compared to 2018 and 2017 in particular, it is much less of a headwind. As the volumes are declining, refi specifically, the percentages still can look a little daunting. But it's the law of large numbers working in reverse. So it's on a smaller base. So the effect of that is really -- it's less than 0.5 point, right? It's 0.2%, 0.3% of a headwind in 2019.

Okay. And then on the Ernst Publishing acquisition, was just going to ask if you could comment how it fits in strategically. And how much it's contributing to 2019 revenue and EBITDA, if anything?

Sure. Yes, with Ernst, part of our strategy on the loan origination side is bringing more and more capability to our solution set and integrating tighter and tighter. The more that we integrate, the greater functionality that we can provide for our clients and greater functionality that they can provide to their customers. So with Ernst, it's really tightening down the fee calculations upfront, which is continuing to be very important from a customer satisfaction perspective as well as a financial perspective for our clients. So that was the reason there. And again, as we continue to look at building up more capabilities in the loan origination space, that was what was driving that.

And Bill, from a contribution perspective, it's a very small business. So it's just like adding another product into the solution set. So it's a very small contribution from a revenue and EBITDA perspective.

Our next question comes from the line of John Campbell with Stephens Inc.

So I know Ditech is -- they're going through some challenges right now. I know you guys really can't comment on that, but any sense for what their plan is for their loan service? And then maybe if you could talk to, just kind of broadly, how you're accounting for that within 2019 guidance?

Well, I'll start. Obviously, we're still operating as business as usual with Ditech right now. As you can imagine, we're a critical vendor and want to make sure we do everything to support them along the journey. But what I'd say, maybe at a high level, is with our market share, as loan moves, we have a high likelihood of the loan's remaining on MSP.

And John, I would add, for that reason, we haven't factored anything into our 2019 guidance just because of the uncertainty around what the ultimate outcome would be. So we're letting it run its course, supporting them, as we always will support our clients, and we'll see what happens from a financial perspective.

Okay, that makes sense. And then 2 quick kind of housekeeping questions. We can wait on the 10-Q for this, but if you've got it handy, what was the ending loan count for first and second lien on MSP?

The ending loan count was -- grabbing it as we speak. It was -- on MSP, it was $34.6 million.

That was total -- above total...

That's total, yes. First is about $32 million, and the second is about $2.5 million.

Okay. And then on D&B, are you guys are going to run that with equity method accounting? Have you really worked through all that?

That's our expectation.

Our next question comes from the line of Ashish Sabadra with Deutsche Bank.

Just a quick question on the announced BB&T and SunTrust merger. Can you just kind of give us any information on whether these are your existing customers? And how should we think about any kind of benefit from this merger?

Sure, sure. Yes, they're both clients of ours today, and we're looking forward to continuing to work with them and do more with them in the future. First of all, I'm very happy and excited for them. I mean, they're making a real pivot in their strategies and -- by coming together with a lot of energy and a lot of focus on technology in general. So we're excited. We think it fits well with our innovations that we brought to market and we're going to continue to bring to market. And I think directionally, where we're heading is on the same line of direction as they are as well. So we're very excited for them.

Okay. And maybe a quick question on CoreLogic. They made a decision in December to exit the loan origination system, their Dorado business. Did that open up opportunity, in particularly the JPMorgan post lien origination because you already do the second lien origination as well as the servicing for both first and second lien? Any thoughts there? Any color?

Sure. I'd say any time a competitor sunsets a product, it creates opportunity for others that are in the industry. And we're certainly aware of it and certainly focused on it. And I'd also say with JPMorgan Chase, more generically, we can't talk specifically in terms of where things are. But what I'd say is the second lien has gone very well, and we're going to continue to work hard with them, as we do with all of our clients, to expand what we do and show them the value that we can deliver to them.

(Operator Instructions) Our next question comes from the line of Bose George with KBW.

This is Tommy Mcjoynt on for Bose. I just wanted to ask, on the origination side, how many of your clients were operating at the contractual floors in the fourth quarter?

A significant majority of our -- within that business, if you look at just the processing revenue within loan origination system, 94% of the revenue was at or below the minimum. And 6% would be the revenue. The processing revenue, that's above. As you think about that as part of the revenue base, there's that component. And then we have professional services, and we have the implementation revenue that we amortize over the life of the deal. So the processing is a significant component. And that piece, 94% is at or below the minimum.

And then just the other one. In the Data and Analytics segment, it looks like the EBITDA margin got a nice bump this quarter. Was there anything to call out there?

No. I mean, with stronger revenue growth than it had, had in previous quarters, and so -- and what was driving that, frankly, would be higher-margin businesses, which are portfolio analytics business as well as our multiple listing service business. So higher growth in businesses that have higher contribution margin.

Our next question comes from the line of Stephen Sheldon with William Blair.

I was just curious with the JPMorgan Chase implementation of kind of when those were completed and how the success of those implementations may be impacting conversations with other big banks. Has that driven more in-depth conversations with other potential big clients about switching onto Empower?

Sure. Thank you, Stephen. Yes. I mean, they went live in the fourth quarter, and I'd say a real testament to both our teams working exceptionally well together to bring it live so quickly. But like I said, I do believe that there is opportunity. I believe that large clients had built proprietary systems in the past. And as everyone looks at how do they pivot the relative businesses, where should they be spending their capital and their energy? It's shifting from loan origination to other areas. And we've got such a strong proven, scalable feature-function rich capability that I do believe it's of interest really for the largest lenders in the country.

Okay, that's helpful. And then I appreciate the commentary on the first quarter growth expectation. But just as we think about the full year, can you maybe talk about high level growth expectations between servicing, originations and D&A? And especially if you're expecting any significantly, I guess, different trends, size business relative to what we've seen so far this year.

Sure. Thinking of it at one level below, I would say that servicing would continue to grow about the level that it has been, maybe a little bit lighter than that. So kind of in the mid- to high single. In origination, I would look at that in the high singles to low double kind of range. And then, D&A, I would say continuing in that low to mid-single digit area.

Our next question comes from the line of Chris Gamaitoni with Compass Point.

To follow up on the large lender proprietary system opportunity, do you have an estimate, not through the client, but in the aggregate of the potential market that is still out there for you to go after, either in market size or loans or averaging about plan exposure.

I mean, it's significant, and it's something, obviously, that, yes, we could feed off for many years to come. I'd say that at a very high level that way. So it's -- we don't see a shortage of opportunity. And it's also important as you think about loan origination that you pivot from that to other areas, right? Such as our robotic process automation, our artificial intelligence with AIVA and our Actionable Intelligence Platforms, where there's an opportunity to sell additional capability to our clients running our loan origination software. So I'd say, as you look at it, I want you to see it the way we're seeing it, which is you can get the actual origination software. But there's a whole lot more that goes around it that, candidly, is what's really -- it's one of the key areas that's generating a lot of excitement. It's -- this add-on capability and innovation that we brought to market in 2018 has given us a little more wind in our sails.

And Chris, just to give you a sense of magnitude. If you go back to our Investor Day deck, when Anthony talked about the opportunity in origination, it showed our market share and how much we could add as we grew in certain segments of the market. So I don't have it in front of me, but I'd ask you to go back and look at that to help get a sense.

Okay, perfect. And could you provide an update on Empower Now! and kind where your sales focus is on that -- in that -- on that product focusing on mid-market?

Sure. We continue to be very pleased with the progress that we're making with Empower Now! And not just on the sales effort, but on the implementation results that we're seeing and in the support, right, which like you said, it's important as you look at scale and how you scale for the mid-market. But it continues to go well. We've hired additional sales resources for that, and it is a big focus for us.

Our next question comes from the line of Jim Schneider with Goldman Sachs.

Can you give us a little bit more color -- I appreciated on the cadence of revenue through 2019, but any more color on the client environment with respect to the implementations. Does everything you kind of thought you saw in the pipeline with the 20%, 25% for this year still hold in terms of when most of those clients plan on implementing, relative to maybe what you thought about 3 months ago or so.

Sure, Jim. Yes, they -- things are very much still on track. As we looked at 2018, we're very pleased with the cadence we had on our implementations. There's great focus by the team, and great results are very much in line. And we expect that as well so far going into 2019.

Okay. And then relative to the revenue commentary you gave, Kirk, on Data and Analytics, still relatively sluggish. Maybe talk about, if you look at the overall strategic priorities for the company, did that really rank in terms of the top 3 in terms of kind of accelerating that revenue growth you're getting in that segment? Or is it more focused around all the core initiatives at this point?

I would say, Jim, that is -- we are focused on growing all of our businesses. And so we have very specific strategies on how we will grow the Data and Analytics business. And certainly, we have higher expectations than low- to mid-single digits for that business. And so we do have strategies that we'll execute again onto the leadership of that business, and we also have a continued focus on improving margins in that business. So I mean, it's one of our initiatives. We don't narrowly think of 2 or 3 of our initiatives and focus on those, it's broader than that. It's really across each of them, across each of the segments. So we have strategies. We're focused on them, and we certainly will work to improve the performance of that business.

(Operator Instructions) Our next question comes from the line of Henry Coffey with Wedbush Securities.

First, I know you did make some comment about the mortgage headwind. If you focus that just on your loan origination systems, how does that sort of translate into a likely impact?

That impact actually is virtually 0 on our loan origination system because of the nature of our contract, long-term in nature, subject to minimums. And as I talked about before, 6% of that -- the processing revenue in loan origination systems is above the minimum. There's a negligible -- there's not a measurable effect in 2019. Where we will see the effect is really on our lending solutions or Exchange platform. That is a refi-centric platform that really has caused the majority of the headwind related to lower refi volumes. And also, on our eLending platform, we also see a component of that. But it's mostly on the exchange platform that we see it. It's really not measurable in LOS.

And then this is a very general question, and I would appreciate a layman's answer, but everyone we talk to complains about their mortgage system and talks about the next generation. Maybe you could put some color on that for me in terms of where you think Black Knight is in providing that "next generation." And what is it that they're looking for? What is it that you think you can provide? And besides Ellie, if you could identify 2 or 3 large competitors in the space, that would be helpful as well.

Well, I'd say, generically -- and we've seen it through the cycles. You see it in the general banking cycle. You're seeing it now on the mortgage cycle in reverse. But when -- everyone's more critical when times are tougher. And so right now, in the mortgage -- especially for originators, it is a tough time for them. And they're looking for help, right? And that's really what we wake up every day to try and answer the call. How can we help them? And it really was the impetus for the direction we took the company last year, right? As I joined, I met with the majority of our clients immediately, spent time really understanding what their needs were. And it was obvious where the industry was heading, where interest rates were heading. And so we pivoted to a focus on automation, on leveraging artificial intelligence and adding capabilities that would impress their customers as well as lower their internal costs, such as our digital solution. So I think from a perspective of what clients are faced with right now and what we can do for them, I think there's a great opportunity, right? I mean, very few of them are leveraging our artificial -- any of our new products, really. I mean, a very, very small percentage of them are leveraging them. And there's a great ability for us to step in, lean in and help. And that's what they're seeing. So we've got an incredibly functionally rich, strongly compliant solution with our servicing platform. Our origination platform has really shown that it's got the chops to handle the largest lenders in the country from a feature functionality perspective, a scale perspective, a configuration perspective. And we've also brought analytics to leverage our tremendous data assets as well as just our overall view of our clients. There's no one else that really has the total view of our clients like we do because we're covering it really from the servicing side all the way to the origination side and leveraging everything and anything we can to help them.

Is it -- who's competing? I'm assuming it's not one set of products by someone -- well obviously, except for Ellie Mae and maybe Cadence. But are there modules where you're competing with "better products"? Someone has a better POS system. Someone has more share there. And if you think of what the mortgage technology chain looks like, are there names that pop up that are really worth watching to try to understand what's going on here?

Well, I think on any given day, someone's message may resonate with a prospect of theirs. So it may be a new feature that they just launched. It could be an incredibly low price they're willing to offer. It could be a range of things, but there are players in that space. You asked me to name a few names, Blue Sage is there in that space. Cadence is there. Blend on the point of sale side, Roostify, Digital Risk. There's a number of them, and they're solving a piece of the solution. And like I said, I think what's really important is how do we help drive the broader relationship and help solve broader business dynamics for our clients? So -- and that's certainly how we're trying to approach it. We're trying to take our solutioning to the next level.

And our next question comes from line of Kevin Kaczmarek with Zelman & Associates.

Can I get your latest thoughts on capital allocation going forward and how you think about incremental share repurchases versus maybe some debt paydown and more acquisitions or other investments?

Sure. Kevin, the strategy really hasn't changed. It's been consistent for the last 3 or 4 years now, where we're going to focus on investing in growth with a pivot strongly towards innovation, while also maintaining a strong balance sheet and ample liquidity. So we'll focus on investing in growth, where that could be internal, that could be through tuck-in acquisitions or other external investment. And beyond those investments in growth, we'll balance debt repayment and share repurchase. So as we think about 2019, what we've assumed is that we'll pay down the revolver -- partially pay down the revolver in the first quarter. So we use excess cash flow for that. And then in the third -- second, third and fourth quarter, we would balance between share repurchase and paying down the revolver. Thinking of it as -- if you look over the last couple of years, our share repurchase volume, both in shares and dollars, was relatively consistent. And that's really what we would look to do this year as well.

Okay, that's very helpful. And on the D&B investment, can you give us a sense of what contribution that makes to your EPS guidance kind of either outright or net of the incremental debt? And how will you report that investment going forward? Are you going to give us perhaps a mark-to-market or some measure of earnings outside of what shows up in the income statement?

We will -- so we report on equity method. So our -- we'll report our share of their GAAP earnings, which will reflect purchase accounting and initially will reflect costs related to the transaction and costs to achieve the savings that are targeted there. So it's going to be relatively noisy, I think, for some amount of time. I don't plan on providing a mark-to-market because that would -- I think that could be potentially misleading. So as far as other updates on that, I think the more detailed update, just so there's consistency, will largely from [Kanai] as it's a material investment to them. It's 5% of our market cap investment to us. And so we'll provide some updates on progress, but focus on the core Black Knight business. And as far as what's assumed, there's nothing assumed in the guidance related to the earnings of Dun & Bradstreet. My plan is to -- that it won't be included in adjusted earnings because it will be noncash until a monetization event.

Okay. So looking forward, I would just include the incremental interest expense with no income assumed from D&B?

That's correct. That's correct, Kevin.

Our next question comes from the line of Oscar Turner with SunTrust Robinson Humphrey.

Just had a question on margin, on the margin outlook. So it looks like next year's guide implies expansion of 100 basis points, which is at the high end of your long-term guidance. Can you give some color on the key drivers underlying that 100 basis points? And then how should we think about longer-term drivers of margin expansion? I assume that the D&A segment's scaling is 1.

Well, I would summarize it as each of our businesses have high incremental margins on revenue growth. And that's going to be the fundamental driver of margin expansion, both in 2019 and going forward. What you could see from time-to-time is a little bit of noise around corporate costs. Like this year, we had higher incentive compensation costs and some incremental corporate costs following the spin-off from FNF. There could be some noise like that going forward just from year-to-year. Not necessarily spin-off-related costs, but corporate can move around a little bit. But I would say, set that noise aside, it's really all about the incremental margins on revenue growth. So if we grow in the midpoint of that range, we would expect to be able to expand margins in the midpoint of our long-term range or towards the higher end just due to the upward pressure from the contribution margin.

Okay. And then how should we think about the margin potential for Data and Analytics?

We are absolutely committed to getting that business to 30%. That time line, of course, as we talked about, is a journey. That's a business that had pretty weak margins, if you go back a few years. We're getting that now to the mid- to high 20s. And so we continue to target that 30%. And as I've said before, we don't plan to stop there. That business certainly can go above 30% as well. So we're focused on that. We're pushing that business to not only grow as rapidly as it can, and that's a work in progress, but also to increase efficiency, so we can drive margins up beyond just the pure contribution margin on revenue growth.

Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Anthony for any final comments.

Thank you. As always, I'd like to thank my Black Knight colleagues for their exceptional efforts and our clients for their strong partnerships. Thank you for joining us on the call today and for your interest in our great company. Enjoy the rest of your day. Thank you.

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