Verisk Analytics Inc (VRSK) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Verisk Analytics third-quarter 2010 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to your host, Ms. Eva Huston, Head of Investor Relations for Verisk Analytics. Please go ahead.

Thank you, Melina, and good morning to everyone. We appreciate you joining us today for a discussion of our third-quarter 2010 financial results. With me on the call this morning are Frank Coyne, Chairman, President, and Chief Executive Officer; Scott Stephenson, our Chief Operating Officer; and Mark Anquillare, Chief Financial Officer.

Following some comments by Frank and Mark highlighting some of the key points about the quarter, we will open up the call for your questions. The earnings release referenced on this call, as well as the associated 10-K, can be found in the Investors section of our website, Verisk.com. The earnings release has also been attached to an 8-K that we have filed with the SEC.

A replay of this call will be posted on our website and available by dialing for 30 days until December 4, 2010.

Finally, as set forth in more detail in today's earnings release, I will remind everyone that today's call may include forward-looking statements about Verisk's future performance. Actual performance could differ materially from what is suggested by our comments today. Information about the factors that could affect future performance are summarized at the end of our press release as well as contained in our recent SEC filings.

And with that, I will now turn the call over to Frank Coyne, Chairman, President, and Chief Executive Officer.

Thank you, Eva, and good morning. This quarter is a milestone for us as it represents a full-year cycle from our IPO in October 2009. During that year we have executed against the plans we set out at the time of the IPO and have accomplished many things, including -- we delivered consistent revenue growth, margin expansion, and strong bottom-line performance while continuing to invest in innovation. We continue to take leadership initiative in developing new solutions to serve our customers, such as predictive analytics with P&C underwriting, healthcare fraud tools, GIS platforms, and mortgage and financial portfolio analytics.

We executed a successful secondary offering of about $600 million, providing liquidity to our Class B shareholders while increasing float and affording new investors an opportunity to create a base position in our stock. Through our open market and follow-on repurchases, we bought over $300 million worth of shares at an average price of $27.56 and accessed our newly expanded credit facility.

As I reflect on the year behind us and look forward to the future, the number one reason why we have been successful and will continue to be is our employees. The people in our Company are the ones who have built our key competitive advantages, including deep understanding of our verticals; embedded solutions that are mission-critical to our customers; differentiated product suites that comprehensively address aspects of risk and are predictive; our culture of continuous improvement, which creates an innovative and disciplined approach to the business; and a disciplined acquisition strategy, completing 16 acquisitions since 2005, which have been additive to customer solutions, growth, and ROI.

The current environment remains challenging for many of our end-market clients. But we find ourselves growing and well positioned to help them through this period. We also see preliminary indications of improving conditions for our customers.

In the P&C insurance space, in Q2 2010 net written premiums grew for the first time in 13 quarters. In the mortgage space, while originations are down, the industry is increasing their focus on quality underwriting, where our tools play an important part. And in healthcare, as the debate continues around what shape reform will take, payers are active in managing their cost as they relate to quality care and fraud prevention.

Of course, we are pleased that our financials year-to-date and in this quarter reflect the strong strategic positioning and competitive advantages Verisk has in the market. In third quarter, revenue growth was 11.2% and organic revenue growth was 10.4%. Year to date our revenue growth is 10.9%.

EBITDA margins expanded to 45% in the quarter. We continue to focus on long-term and believe that we are well positioned for continued growth.

A few notable things in the quarter include 10.2% growth of our insurance-facing solutions in Decision Analytics and strong performance of our loss quantification solutions, including new customers that bring our industry penetration in the homeowners claims space to over 75%. Continued growth of climate risk solutions within AER, and the potential for commercialization of some of their analytics as weather becomes an important theme in the P&C insurance space. Growth from our mortgage solutions, including business with a government-sponsored entity where we are helping them with quality control and underwriting standards.

And just post the quarter, the completion of our successful follow-on offering, primarily on behalf of our Class B shareholders. We sold 21.9 million secondary shares into the market and also concurrently repurchased 7.3 million shares at $26.36. We see a real benefit in reducing the Class B shares that could have come to market in April and October of next year and to providing an opportunity for new shareholders to create a base on which to build their holdings of Verisk.

In addition to our follow-on repurchase we have found value in buying our shares in the open market and as a result have announced today an incremental share repurchase authorization of $150 million to be added to our remaining balance of $3 million under the previous authorization.

We also continue to work hard on the acquisitions front. With our upsized bank facility, which was completed in September, we now have committed capital of $575 million at a lower price and with more flexibility than our previous facility.

We also continue to invest in developing new solutions and continue to commercialize solutions that we have developed already. We currently have over 50 invest initiatives in various stages. We believe that this will contribute to our sustainable, long-term growth.

I just returned from our customer conference where we spent two days listening to our customers. The feedback was positive and will help us develop new analytics as we look to continue to advance our customers' profitability.

We launched our Verisk Insurance Solutions brand, which was well received, and we believe it will enhance our cross-sell. With that I'll turn it over to Mark Anquillare, our Chief Financial Officer, to go through more details around the third quarter.

Thank you. As Frank mentioned, in this quarter we delivered 11.2% revenue growth and 10.4% organic growth. Year to date, revenue growth was 10.9% and organic revenue growth is 10.1%.

For the third quarter our Decision Analytics segment revenue continues to lead, with 17.8% growth and 16.1% organic growth, which are consistent with our growth rates in the second quarter. I'll note that organic revenue growth excludes the recent acquisitions of TierMed, Enabl-u, and Strategic Analytics. TierMed will become part of our organic growth in the fourth quarter 2010, as we purchased it in July 2009.

Within Decision Analytics our loss quantification solutions continue to stand out in this quarter with 24.8% revenue growth. We continue to add customers, both large and midtier, to our core claims solutions and continue to gain traction on the underwriting tools within loss quantification.

This quarter we ended a trial period with a large personal lines insurer who chose to adopt out solution. We now exceed 75% of the market for our base back-end claims tool for homeowners insurance.

The revenue growth in fraud identification detection continued to be robust at 17.7% for the third quarter, and 16% organic. We remain relatively balanced between front-end and the back-end. Our front-end asset services work for a GSE this quarter contributed to our growth.

Our back-end continues to perform, as noise around robosigners doesn't have an impact on our business. Our back-end business is focused on all loans with mortgage insurance, not just those in foreclosures. It is business as usual for our back-end customers.

We continue to see solid performance in our insurance fraud and related solutions. In healthcare, we are seeing interest from P&C insurers for use of our solutions to attack fraud in workers compensation and personal automobile bodily injury claims. We are hopeful that we will be successful in this cross-selling initiative.

In loss prediction, total growth was 12.6% for the third quarter and 9.8% organic. Revenue from AER's climate risk analytics solutions continues to grow. At our customer conference we were encouraged by the level of interest from P&C insurers in the type of work we can do to help them mitigate loss, identify fraud, and communicate with their clients.

In healthcare we won a contract with one of the largest forward-thinking US employers and plan to use this as an opportunity to continue our penetration with self-insured employers as well as other payers. Our catastrophe modeling moderated the overall growth in loss prediction as the ongoing impact of broker consolidations, withdrawal of insurance-linked securities investors, and lower project-related revenue from government entities slowed growth in the quarter.

Turning to risk assessment, we grew revenue 4.8% in the quarter. Our industry standard programs grew 5.3% in the quarter, with additional sales to existing customers as well as new customers adding to the growth. Our property-specific information revenues grew 3.9% in this quarter due in part to the strength of our property appraisal solutions and community rating services.

EBITDA and adjusted EBITDA in the quarter were $129.4 million as outlined in Table 3A of our press release. Adjusted EBITDA increased 18.2% for the quarter and 15.3% year to date.

Our adjusted EBITDA margin was 45% in the quarter, up from 42.4% in the third-quarter 2009 and 44% in the second-quarter 2010. We benefited from the operating leverage in our business and also from a reduction in our pension costs versus 2009.

I am sure I am going to get a question about margins as it relates to our previously stated targets. What I would say is that we are pleased to be able to deliver operating leverage to the EBITDA line.

But we plan to continue to invest in new solutions, as Frank mentioned earlier, as we see appropriate returns. At this time I wouldn't be ready to commit to continuing the margins increases over time.

To delve into the segments, adjusted EBITDA margin was 41.7% for Decision Analytics and 48.7% for Risk Assessment in the third quarter. Overall margin benefited in part from operating leverage and was also helped year-over-year by the reduction in pension expense.

Within Risk Assessment, a slight decline in margin versus second-quarter 2010 related to the normalization of state employment tax credits in the third quarter. As a side note, within expenses you see a small $500,000 contract expense which relates to a reduction in our liability for earnout on one of our acquisitions, TierMed.

In the quarter, we determined that while TierMed is performing well and in line with our expectations it did not hit the aggressive targets within the required time frame to qualify for an earnout. Current GAAP standards require that we take this decrease in liability through the income statement; but we have not included the benefit in our adjusted EBITDA.

Also note in the quarter that we increased the earnout liability for our AER acquisition by about $2 million because of its outperformance. This increase did not run through the income statement, as it was a 2008 acquisition prior to some accounting changes that took place.

We continue to like the earnout structure where possible for economic obvious economic benefit. But with the new rules, they will likely have impact time-to-time on our P&L.

Our interest expense remained relatively consistent versus second quarter at $8.5 million on a debt balance of $530 million. As a part of the offering repurchase that occurred on October 1 we borrowed $160 million under our newly expanded revolver to fund the share repurchases. I will talk more about the offering a bit, but I would expect a slight increase in interest expense as long as we carry this balance.

Our reported effective tax rate of 40.3% for the quarter and 40.7% year-to-date, excluding the impact of the Medicare subsidy charge in the first quarter. This is consistent with our expected normalized rate of about 41% for the full year 2010.

Coming down to the net income line we focus on adjusted net income, a non-GAAP measure which we define in the current period as net income, plus acquisition-related amortization expense, less the income tax effect on that amortization. In 2009, we also added back ESOP allocation expense and IPO-related costs, both of which do not occur in 2010.

Our adjusted net income increased 23.5% to $66.5 million for the quarter. Adjusted EPS on a fully diluted basis was $0.36 for 3Q 2010, an increase of 20%.

The average diluted share count was 187.2 million in the quarter; and on September 30, 2010, our diluted share count was 185.8 million shares, reflecting the full impact of the 2.5 million shares we repurchased in the quarter in the open market. The 7.3 million Class B shares we repurchased as a part of the secondary offering will impact the fourth-quarter share count, reducing the share count by approximately 6.3 million after taking into account the impact of options exercised into the offering.

Turning to our balance sheet, as of quarter-end our cash and cash equivalents were $107.3 million, very similar to our second-quarter 2010 balance. Total debt both short-term and long-term totaled $530 million at September 30, flat versus second quarter, even with us deploying approximately $71 million to repurchase shares in the quarter.

In the quarter we expanded our revolving credit facility, increasing its size to $575 million from $420 million and reducing the drawn and undrawn costs substantially. Subsequent to the quarter we drew $160 million to refinance a portion of the offering share repurchase.

Our debt ratio was about 1 times debt to trailing 12-month EBITDA at the quarter, and 1.35 times pro forma for the $160 million of borrowings on October 1. Our debt capacity is over $800 million based on our debt-to-EBITDA covenant of 3 times; plus we have significant free cash flow, allowing us to execute our acquisition strategy and continued buybacks.

Share repurchases in the quarter were $2.5 million for a total of $71 million. The Board recently authorized as additional $150 million that will be added to the remaining balance of $3 million under the original share repurchase authorization.

We continue to be disciplined about the prices at which we purchase our shares and are pleased to have achieved an average purchase price of $27.56, reflecting repurchases through 3Q and the follow-on repurchase.

Free cash flow year-to-date, which we define as cash from operations less capital expenditures, was $217.6 million, a decrease of $6.6 million versus the first nine months of 2009. This decrease was primarily the result of good news in fourth quarter of 2009 as certain customers accelerated payments of 2010 invoices into the fourth quarter of 2009. Other items adversely affecting free cash flow included increased pension funding of approximately 11, among others.

For the nine months of 2010 capital expenditures were 2.9% of revenue. Year to date we have strong free cash flow conversion to EBITDA of approximately 58%.

To round out our discussion I will address the follow-on offering we completed on October 1. We closed the secondary offering of 17 million -- 19 million shares, which subsequently became 21.9 million shares when the greenshoe was exercised by our underwriters.

As you are aware, at the time of the IPO our Class B shareholders and senior management team agreed to restrictions on the sale of their shares until April and October of 2011. That restriction remains in place today.

As the first date was approaching, we saw the opportunity to execute a market transaction that would benefit the Company and its shareholders by reducing potential impact as the lockups expired. Prior to the offering, 29% of our diluted shares were held by Class B insurance company holders; and after the offering that has been reduced to approximately 15%.

We are pleased with the discussions we had with shareholders on the road and the outcome of the offering, which priced at $27.25, a positive outcome at it relates to the file to offer discounts for similar transactions in 2010. We are also pleased to have attracted new shareholders to the Verisk story and increased the flow in trading volume in our stock.

Concurrent with the offering we spent $192.5 million to buy back 7.3 million shares at $26.36, representing the same price as the net proceeds to shareholders after the underwriting fees. This repurchase was authorized by our Board and is separate from the ongoing share repurchase program.

In all, we see this as a very strong quarter, very positive for Verisk. We appreciate the continued support of our existing as well as new shareholders. With that I will ask the operator to open up the line for questions.

(Operator Instructions) Michael Meltz, JPMorgan.

Thank you. I have two questions for you. At the Risk segment with the industry standard insurance or solutions you certainly had a nice pick-up in the quarter. At this point, I am not exactly sure when you send out invoices for the next year, but I have got to think it is pretty soon. Can you talk about pricing in '11? Should we think about it as equal to what we saw in '10?

Then I have another question just on the margins for the fourth quarter. Mark, just on your comment, I think -- remember last year, you had a really surprising margin move fourth quarter of '09. Is it fair to say margins will be down year-over-year in the fourth quarter of this year? Thanks.

Sure, so let me start with the first one. I think the question was around invoices. We have typically sent out our invoices for what would be 2011 sometime in early December of 2010, so those are not yet prepared.

When we look at the premiums as it relates to now two years prior -- so 2011 invoices are on 2009 -- for Risk Assessment lines, things seem to be a little better than what we saw a year ago. And that is good. It seems like we have been through the worst of it in that regard.

As far as actual pricing itself, we believe our services are value added. We continue to work hard to increase the value of them, and those invoices will reflect that value. And I am not sure we have gotten to the point where we have actually determined pricing on all that at this point, Michael.

I think your second question was a little bit about 4Q 2009. If you recall there was a little bit of, I will call it noise, around the 4Q 2009 margins. I think we were up over 45%, 45.6% on the margin.

There was a little bit of good news around what happened at the time of the IPO. Things like the ESOP and the 401(k) match. So those one-time items that we highlighted back -- boy, seems like a year ago -- will not continue to happen.

I think you should probably base where you are in third-quarter 2010 and understand that expenses will probably tend to run similar in 4Q relative to 3Q; and margin should be similar. If the top line grows a little bit, that would obviously add a little bit of bottom line from the operating leverage that we have. Hopefully that was responsive.

The answer was 4Q margin similar to Q3? Is that what you are saying?

Agreed.

All right, thank you.

James Kissane, Merrill Lynch.

Thanks and great job, guys. Just following up on the margin question. The margins were up obviously big in Decision year-on-year. What were the key drivers of the margin expansion?

I know, Mark, you said you are not committing to continued margin expansion at these rates. But it seems like that should be sustainable as you grow revenues there. So kind of a sense of what the drivers are; and is it sustainable; and if not, why not? Thanks.

Sure, I think what we saw inside of the Decision Analytics segment was good margin expansion. There is naturally operating leverage across our businesses, and I think we would expect to continue to see that.

Offsetting the margin expansion are two things that we have always talked about. One, we continue to see opportunities especially in Decision Analytics, and want to and will be -- continue to invest behind those new initiatives. So we know there is some cost and expenditure in fourth quarter and into the future around invest initiatives.

The other item as we have described is a little bit of a product mix. Some of the historic insurance applications have some higher margins than, say, some of the newer verticals. So as we continue to expand and grow in various products sometimes the margins aren't quite as large and as high. So those are the couple things that kind of mitigate.

I guess following up on that, Frank, it seems like healthcare has been a bit of a drag on the organic growth. You took a slight hit on TierMed in the quarter because it is not hitting the aggressive plan.

What are some of the issues in healthcare? I know you signed a new employer. Is that needle moving? What is holding us back? Are you still confident that it can grow in line with Decision's targets of 15%-plus organic growth? Thanks.

Yes, sure, Jim. Let me first deal with the TierMed observation. As Mark indicated, TierMed did meet our expectations, did not meet the much more aggressive plans that were put forward at the time of the acquisition at this time.

So it is a timing issue more than a performance issue. So we are happy with that acquisition. And this goes a little bit to the margin question too.

As you know, the healthcare field is developing and there is a lot of opportunities there as payers focus on increasing quality care at a more efficient rate and fight fraud. So we are going to be investing in that business because we do see a lot of opportunities, and we are happy with the way it is progressing.

Some of the slowdown in healthcare this quarter had to do with the fraud side. Principally that is the result of implementation delays.

When we sign on a customer there is a lot of IT resource necessary to implement; and as you know some of that gets into the job jar and takes some time to get out of it. So some of that is a slowing mechanism.

With regard to the large customer, it is not a large contract but it is significant in that it is a leading company that is going to -- that is using our products very efficiently and effectively to control their costs and to analyze their program. And we think that it will give us some good leverage into the marketplace.

Okay. Frank, if I can get one last one, you indicated in the release that you don't think the foreclosure issues out there impacting the originators is going to have much of an impact on your business. I get it on the back end; but is there some risk that ultimately it causes people to stop buying houses and slow down originations and could impact your front-end business there?

No, actually I don't think it will have any impact there. The thing that will pick up that front-end market, quote, the refis, there is going to be opportunities there as the Fed works on interest rates. When the economy gets going again, the housing market will pick up; and in some parts of the country we are seeing that.

Okay. Excellent, thank you.

Bill Warmington, Raymond James.

Good morning and congratulations on the nice quarter.

Thank you very much.

A question for you to see if we can get an update on some of your new products and strategies, specifically supply chain risk and some thoughts on some of the new rating paradigms you are looking at for the personal auto insurance underwriting.

Yes, this is Scott. Those are things we spend a lot of time on.

The new rating paradigms, we continue to make progress on that. We are up to -- on the personal auto line we are filed in over 30 states. We just got some state approvals not long ago that were very encouraging to us. Texas just approved our personal auto filing.

So we are rolling now into the larger states. We have had very encouraging conversations with some of the largest and most sophisticated personal lines writers who are in fact those who are most focused on predictive modeling as a new trend.

So it just takes a long time to establish a new industry standard, and that is exactly what we are working on. We're doing it the Verisk way, which includes working through the regulatory framework. So it does take time, but we are encouraged by where we stand.

Supply chain remains a very active important scene for us. You have noted that we have our crimes analytics segment. And in fact, with respect to the logistics system we are finding that there is real appetite for the data aggregates that we are putting together right now. So we feel definitely as if we are on a theme there that is moving ahead.

We do want to continue to expand in that area. There are some dimensions of supply chain which are still out there in the future for us, particularly as the supply chain intersects environmental health and safety kinds of considerations. But we are actively at work on that as well. So the themes are alive and very vital.

Okay. One question on the P&C insurance market. You had mentioned that you saw some improvement for the first time in 13 quarters, back in the second quarter. You have a pretty unique position in terms of visibility on data from the insurance market. I wanted to know your thoughts on how the third quarter, fourth quarter were shaping up.

I mean I think the market data that we see is as indicative of anything. The signals are that we have bottomed out, and I personally would expect some improvement, certainly in 2011.

Excellent. All right. Thank you very much.

James Friedman, Susquehanna.

Hi, thank you for taking my questions. Frank, I wanted to ask you about your international objectives. At the analyst day you had described those. I wonder if you could provide an update.

Yes, at that time, I believe that we -- without specifically remembering what we said -- that we were opportunistic with regard to international opportunities. And we continue to be, meaning that we don't have a certain strategy to have a certain percentage of our revenue stack from international in a set time frame. But as we see opportunities we will go after them.

We are doing that, and we are having, I think, good progress in the areas that we have focused on. It will be slow growth, but we think it will be steady growth.

As we implement our acquisition strategy, that is one of the factors that we take into account. If we find something that has an international capability and footprint, it is a plus.

Thank you. Then, Mark, I wanted to ask about headcount. Did you mention the current headcount of the Company? What should we anticipate in terms of your hiring needs going forward?

We don't typically provide a lot of detail around headcount. But I think the best way to describe it is we have a largely scalable operation.

So if we are doing for the most part the same thing, we don't require new heads to fulfill that. As a matter of fact, we really drive and strive to keep and be more productive, so we really look to drive greater margin expansion on those base products.

When we are hiring people, it is usually around a growing product -- we have to support customers -- or around new initiatives. We continue to talk about significant spend on the investment side.

That is a combination of things that we are developing as well as new products that have become commercially available over the last three years. And that is where the better portion of our new hire is coming.

Great, thank you.

(Operator Instructions)

Okay, so hearing no further questions, I want to thank everyone for joining us this morning and for your continued interest in Verisk Analytics. We look forward to the next opportunity to chat with you. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference and you may now disconnect.