Verisk Analytics Inc (VRSK) 2017 Q2 法說會逐字稿

Good day, everyone, and welcome to the Verisk Analytics Second Quarter 2017 Earnings Results Conference Call. This call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to Verisk's AVP of Investor Relations, Mr. David Cohen. Mr. Cohen, please go ahead.

Thank you, Patrick, and good day to everyone. We appreciate you joining us today for discussion of our second quarter 2017 financial results. With me on the call this morning are Scott Stephenson, Chairman, President and Chief Executive Officer; Mark Anquillare, Chief Operating Officer; and Eva Huston, Chief Financial Officer. Following comments by Scott, Mark and Eva highlighting some key points about our strategic priorities and financial performance, we will open up the call for your questions.

Unless stated otherwise, all results we discuss today will reflect continuing operations. The earnings release referenced on this call as well as the associated 10-Q 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 furnished to the SEC. The earnings release contains reconciliations of several non-GAAP measures, which we will reference on today's call. A replay of this call will be available for 30 days on our website and by dial-in.

Finally, as set forth in more detail in yesterday's earnings release, 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 is summarized at the end of our press release as well as contained in our recent SEC filings.

Now I will turn the call over to Scott Stephenson.

Thank you, David. Good morning, everyone. Reported revenue grew 5% for the quarter. Organic constant currency growth was 4.1%. As expected, we are seeing the performance progression we discussed on our first quarter earnings call. Profitability remained strong with total EBITDA margins of around 49%, and diluted adjusted EPS increased about 12%.

When I look at the organic initiatives and recent acquisitions, I'm very encouraged by our people, our assets and the outlook. Our teams are working hard on all the new solutions in which we are investing. The long-term opportunities remain robust, and we are seeing real progress in terms of market demand and our customer interactions.

While M&A remains our priority for use of free cash, we were pleased to continue repurchasing our shares in the quarter through our long-standing program. We bought 2 million shares for a total return of capital to shareholders of $156 million in the quarter. At June 30, 2017, we had $376 million remaining under our share repurchase authorization. We have capacity to make strategically relevant acquisitions as well as additional repurchases.

During the quarter, we spent $48 million on acquisitions, including MAKE, which is the leading expert in wind energy data analytics. MAKE is an important complement to Greentech, the solar data analytics business we acquired last year, as we round out our capabilities in the renewable energy space.

Additionally, as you've seen in the press release yesterday afternoon, during the quarter, we acquired 7 leading aerial imagery companies for a total consideration of around $31 million to support our remote imagery solutions which are provided as part of our Geomni business. The acquisitions position us as a leader in remote sensing and enhance our analytics solutions for the property-casualty insurance industry. The acquisitions bring us a talented group of professionals as well as aircraft and sensors. We have put together a great team and a great network of geographic coverage, which is critically important to serving our customers.

Our geospatial imagery database serves as the foundation for analytics solutions addressing the needs of property-casualty insurers as well as photogrammetry surveying and mapping companies, known as PSM, and other end markets. Additional applications will serve energy, banking, architecture, engineering, emergency response and urban planning. The new companies, combined with our expertise in computer vision-based imagery processing and large-scale data management, accelerate our efforts to meet the needs of our property-casualty insurance customers with the required frequency, resolution and U.S. coverage. You may recall that we explored a higher cost option in 2014, which would have accelerated us into the space. We have come up with an even better solution, which provides us with greater intellectual property at a significantly lower investment. By building the capability ourselves with control over the aircraft sensor technology and flight plans, we are able to create what we need at a much lower total spend.

Including the $31 million purchase price of the acquisitions, we will be investing up to $100 million in a remote sensing platform initiative across 2017 and '18. These investments will enable Geomni to address an annual opportunity of over $200 million in the insurance space at an aggregate level of investment lower than previously possible. Additionally, with this valuable imagery data set, we expect to be able to access other addressable markets with multibillion dollars of current spend.

Even in the context of the near-term increase in capital expenditures to support this initiative, we expect CapEx to normalize to about 6% of revenue by the year 2021. This moderation in CapEx reflects the maturation of the re-platforming and investment opportunities we've been discussing with you.

Finally, last week, we announced the signing of an acquisition agreement for G2 Web Services. We expect to close the transaction this quarter and are excited about the opportunity to integrate its fraud-fighting solutions into our unique Argus platform.

We remain confident in a strategy built on the Verisk distinctives of: one, unique data assets; two, deep domain expertise; three, first-to-market innovations; and four, deep integration into our customer workflows. As you know, with the distinctives come network effects, scale economies and a large percentage of subscription revenue. From this foundation, we are focused on executing on our plans, which include ongoing innovation and serving our customers. As we look at the rest of 2017, we continue to have a constructive view for the insurance business with the second half performance better than the first half, and we expect WoodMac to make progress inside of a stabilized end market.

I'd like to put our expectations for financial services for this year in a broader context. Argus became a part of Verisk five years ago. Over that time period, it has averaged 17% organic growth. That growth has come from new logos, new solutions, new international markets and modest pricing effects. We've seen a 67% increase in U.S. clients and an 80% increase in international clients over that time period. 2017 is clearly an outlier since the acquisition in 2012. Since we came together, Argus' addressable market has expanded materially. In 2012, much of our TAM related to credit card issuance. Now we serve banks with respect to fraud fighting, compliance and data management as well as serving a growing list of leading non-bank entities. With these has come a changed profile of revenue acquisition. While our bank consortia products provide recurrence just the same as other parts of Verisk, the newer products bring with them large upfront engagements followed by recurrent streams at somewhat lower levels. So we create grow-over effects as the business grows. But overall, our growth over the past 5 years was against a smaller TAM and we are optimistic about the future.

At the moment, as you know, we had several noncore contracts, which ended in 2016 whose $11 million represented about 9% of revenue. These are onetime events that will not recur. Our current assessment is that several important new contracts will come online in 2017, but later in the year than anticipated.

The core business remains in excellent shape, and underlying growth remains solid with very good growth in the spending and media analytics part of the business. More important, our data sets are continuing to grow and remain unique, allowing us to create solutions for our customers that no one else can offer.

At Argus, we have 4 strategic growth pillars including: one, core banking solutions; two, data management solutions; three, decisioning algorithms; and four, spend and media analytics. The core banking solutions are the Argus foundation. We continue to lead with our core banking solutions and are expanding these to new international markets.

Data management solutions follow from our leading capabilities around aggregating, standardizing and structuring data for analysis, often more efficiently than our customers could do themselves. We have expanded our capabilities in this space with the acquisition of Fintellix, in particular related to global regulatory compliance.

The decisioning algorithms include established solutions like wallet share models and new ones such as fighting first-party fraud including through the pending acquisition of G2. Primary to this pillar are the sophisticated data science skills and methods we apply to our proprietary data sets.

The fourth area of spend and media analytics reflects the opportunities we have been speaking with you about in recent years where we are working with consortia partners including companies with insights into traditional and new media presentation and measurement.

All of this adds up to addressable end markets of over $2 billion. As we pursue market-leading growth rates over time, we do expect new solutions initially to show more variability relative to our heritage solutions. This is especially evident in financial services. And while revenue declined in the quarter, when we review the quality of our data assets and capabilities, the levels of customer engagement, the run rate business contracts and the future opportunity, we are very confident that our solutions are positioned to win in the long term.

So with that, let me turn it over to Mark for some additional comments.

Thank you, Scott. First, as you saw on the release, growth in insurance picked back up as we expected. As we expand our business to serve the property-casualty insurance industry, we have several key themes including vertical big data, industry automation and digital engagement.

A good example of industry automation introduced recently is Underwriters Advantage, a single-source solution providing detailed underwriting data and accurate rebuild cost estimates for U.K. residential and commercial underwriters and brokers. We have taken our well-established U.S. expertise and broadened it to the U.K. through the recently-acquired GeoInformation Group acquisition. We are actively working to pursue other international markets as well. More broadly, the solution highlights the process we are making in the U.K., an area in which we are excited to continue to invest. Progress in the U.K. is also underscored by the success of our annual risk symposium, which had record attendance in June.

Cyber is another important growth area within the insurance space, which we are addressing at both AIR and at ISO. As you may recall, we launched ARC or Analytics of Risk from Cyber, which allows insurers to evaluate any commercial policy, measure and monitor aggregations of cyber risk within a portfolio and estimate potential insured cyber losses for portfolios. More recently, ISO launched a cyber insurance program with enhanced rating variables and coverage options designed to help insurers respond to the rapidly-changing world of cyber risk. Building on the work we have done, ISO recently launched a process to aggregate cyber data from the industry, a classic application of the vertical big data concept.

AIR had a good quarter including nice wins in the cat modeling space as Touchstone continues its success in the marketplace. In addition, we are seeing growing interest in the solutions we have introduced from Analyze Re in the Arium acquisitions. While small, we see a long runway for portfolio optimization in casualty event risk management. Finally, AIR continues to be the leader in the cat bond market, which was particularly strong in this quarter, providing models for much of the new issuance this year-to-date.

Finally, another example of automation is the ongoing rollout of ISO ClaimSearch integrations, which allows our customers to receive instant access to essential claims analytics and insights directly in their claims management systems. This is part of a larger opportunity driven by the availability of the next generation of ClaimSearch, which provides a platform for an ongoing and steady stream of new analytics enhancements, assisting users with the investigation and adjustment of claims by providing real-time alerts and actionable intelligence using state-of-the-art data visualization techniques. Response from customers has been very positive.

With that, let me turn it over to Eva to cover our financial results in more detail.

Thank you, Mark. In the second quarter, we grew revenue and EBITDA while also investing in solutions with meaningful long-term potential revenue streams. Our growth in the quarter picked up, consistent with our comments in the last earnings call. As we move through the year, we remain confident that revenue growth will continue to improve.

Revenue in the quarter grew 5% and organic constant currency revenue grew 4.1%. The press release again has a table to help you see the acquisition and FX effects for each of our revenue lines.

As a reminder, organic constant currency growth excludes the contribution from recent acquisitions and reflects current period exchange rates applied to prior-period revenue.

Currency hurt revenue results in the quarter by about $7.2 million. And total acquired revenue in the quarter was $12 million including the contributions from our aerial imagery acquisitions and MAKE in the renewables space.

Within the Decision Analytics segment, revenue increased 4.2%. Organic constant currency revenue growth was 4%. This quarter, insurance was the fastest-growing vertical and also the largest contributor of dollars to growth. Decision Analytics insurance revenue increased 8.8% in the second quarter and organic constant currency revenue growth was 8.4%. Growth was led by strong performance in underwriting and catastrophe modeling solutions. Claims analytics growth was good and loss quantification solutions also contributed to growth in the quarter.

Energy and specialized markets category revenue declined 0.7% in the quarter. And on an organic constant currency basis, revenue increased 0.6%. On an organic constant currency basis, WoodMac grew in the quarter. While the British pound impacted revenue in the quarter, we're pleased to see continued improvement in customer demand inside a stabilized energy market, as expected. As you know, the benefits will be over time given the multiyear subscription nature of the majority of that business. The category revenue growth was affected by a decline in environmental health and safety solutions due to lower demand following the late 2015 completion of GHS standards-related implementation.

Financial services revenue declined 4.3% in the quarter. Organic constant currency revenue declined 9.3% in the quarter. As Scott said, strong growth in media effectiveness and good growth in core banking solutions were more than offset by the contracts, which concluded last year. We noted last quarter that those contracts contributed about $11 million in 2016.

We remain optimistic about the long-term prospects for the business and building on what is a great data set and analytic capability. The impact of the noncore contracts are roughly even across the full year.

Underlying growth excluding the 2016 noncore nonrenewals is good. Media effectiveness growth remained strong. We were anticipating additional revenue from nonbank companies in the payment space in 2017. The dynamics of the sales cycle with those companies vary from those of the banks, but the long-term value proposition for this customer segment is compelling. As we bring in new data assets and capabilities to our financial services solution, such as Fintellix and G2, we reinforce the path to long-term sustainable growth as we move into 2018.

Risk Assessment revenue grew 6.4% in the quarter including contributions from our recent acquisitions, which are expanding the baseline for future growth. Organic constant currency revenue growth was 4.4%, reflecting our 2017 invoices and continued contribution from newer solutions. While still early, we are encouraged by the strong efforts to drive new product development in this part of the business. The organic investments and acquisitions reflect our ambition, particularly in international markets, to build on our strong foundation.

Total EBITDA increased 3.7% in the quarter to $254 million. We continue to invest with a focus on revenue we see in the pipelines and the opportunities for this year and into the future.

The combined cost of revenue and SG&A increased 7.3% or $19 million in the quarter. However, the increase was just 2.4% on an organic basis as we continue to focus on efficiency in our existing businesses and repurposing that spend to fund innovation.

EBITDA margins as reported were 48.6%. Margins were reduced by about 120 basis points due to acquisitions, an effect that we expect to continue through the year. Total acquired EBITDA in the quarter was about $1 million excluding acquisition-associated expenses. The acquisitions we are doing are close to the core with well-defined paths to top line growth and margin expansion.

We expect the temporary pressure on margins from acquisitions as well as investment opportunities to continue through 2017. While full year margins are likely to be consistent with the second quarter, we are constructive over the long term. As we've said previously, we view our leading margin level as a gauge of the strength of our solutions.

Reported interest expense was $29 million in the quarter. Total debt was $2.4 billion at June 30, 2017, and our leverage at the end of the second quarter was about 2.5x. Our strong capital structure is an asset as we continue to explore opportunities to drive growth.

Our reported effective tax rate in the quarter was 28.8%. The tax rate benefited primarily from the ASU 2016-09.

Adjusted net income in 2Q increased 11.5% to $139 million.

Adjusted EPS on a fully diluted basis was $0.82 in the quarter, an increase of 12.3%. Diluted adjusted EPS from continuing operations increased because of organic growth in the business and lower interest expense, provision for income taxes and share count. The increase in the adjusted EPS was partially offset by higher fixed asset depreciation.

The average diluted share count was 168.3 million in the quarter, and we bought about 2 million shares in the quarter at an average price of $79.73. Our repurchase program has been successful to date, generating annualized IRRs above our cost of capital. On June 30, 2017, our diluted share count was 167.9 million shares.

Net cash provided by operating activities from continuing operations was $430 million for the 6 months ended June 30, 2017, an increase of 11.6% versus 2016.

Capital expenditures were $73 million for the 6-month period ended June 30, and CapEx was 7.1% of revenue year-to-date. Free cash flow increased 14.5% to $357 million for the 6-month period ended June 30, and free cash flow was 71.5% of EBITDA. Growth in free cash flow was driven by positive operating results and this is an important metric for the measurement of driving enterprise and therefore shareholder value.

In the second quarter, as Scott noted, the new additions to our aerial imagery capabilities contributed to our revenue of about $700,000. In 2016, these companies generated about $15 million in revenue and about $2 million in EBITDA. They will be included in the Decision Analytics insurance line for reporting purposes and will be treated as acquired until the third quarter of 2018. As Scott mentioned, including the purchase prices of about $31 million, we expect to invest up to $100 million across 2017 and '18. The additional investments will largely be in the form of CapEx to further expand data-gathering capabilities through planes and remote imagery sensors. The 5-year plan, when looking at the investments and operating costs relative to our revenue forecast and the resulting free cash flow we expect to generate, is compelling. As you've seen in yesterday's press release, the insurance-related market opportunity is over $200 million annually and we also see opportunities in broader markets.

As you think about your models for 2017, currency will continue to be a headwind, moderating a bit as we move into the second half. To help you look at the FX impact, the following 2016 total revenues are restated as of June 30, 2017, rates. If rates were unchanged from June 30, these would be the base for organic constant currency revenue growth. Most of the impact falls within the energy and specialized markets segment in Decision Analytics. For 3Q 2016, it would be $496 million versus the reported $498 million. And for the fourth quarter 2016, it would be $508 million versus the reported $506 million.

In addition, we expect CapEx of about $185 million, an increase versus the prior amount to reflect the remote imagery investments. As Scott noted, we expect CapEx to normalize to about 6% by 2021. Fixed asset depreciation and amortization will be almost $140 million for the year, and the amortization of intangibles, about $95 million.

Based on our current debt balances and interest rates, we expect interest expense to be around $115 million for the year. This includes noncash amortization of debt issuance costs.

We still estimate the full year tax rate to be in the range of 32% to 33%. In the adjusted net income calculation, we continue to use 26% for the tax effect on intangible amortization.

And finally, we expect a diluted weighted average share count of 169 to 170 million shares.

We look forward to continued overall improvement as we move through 2017 and beyond. We're excited about the opportunities to invest as we work to drive long-term free cash flow. We remain confident that we have the financial strength and capital structure to support investment for the long term. We continue to appreciate all the support and interest in Verisk.

(Operator Instructions) And with that, I'll ask the operator to open the line for questions.

(Operator Instructions) Your first question is from Tim McHugh, William Blair & Company.

I guess, start off with maybe a 2-part question on just insurance. One, how meaningful was the strength in catastrophe bonds to the growth that you saw in Decision Analytics insurance? And secondly, I guess, elaborate just why now are you ready to pull the trigger on going more aggressively after aerial imagery?

This is Mark. Let me start out, Tim. Obviously, the cat bond market was robust in the quarter. We continue to be the model of choice, and as a result, that did help us a little bit. But I just want to make sure I don't -- we don't overemphasize how much revenue we get from the cat bond market. It's certainly an indicator of kind of the strength of our AIR brand, but at the same time we're talking a couple of million dollars. It was nothing overly dramatic.

Yes. And Tim, I would just add that if we had not seen any growth on the cat bond line there, we still would have seen acceleration in the insurance growth, yes.

And to your question, Tim, about aerial imagery, we've really been on this topic for some time now and much of what we've given attention to over the last couple of years have been our analytic methods. And so our machine-learned methods for interpreting image sets, I think, are the best in the world and we've been working on those for a few years. What we concluded was that in order to assume the position that we want to where this market is concerned, we had to complement that excellence with equal distinctiveness with respect to the image sets that are available to us. To date, we've been working with third parties and so this we see as really the final step in order to be fully prepared to serve this marketplace. And so it's not that we haven't been here. It's that this was sort of the final piece.

Okay. And then just one quick follow-up. I guess, Eva, I think you said, insurance, you expect faster growth in the second half. Is that relative to 2Q? And -- or is the first half? Just to kind of, I guess, clarify what you're saying.

We're generally looking at first half versus second half, Tim. As you know, we prefer to talk about it from an annual basis, but that's the way we think about it.

And your next question comes from Jeff Meuler with Baird.

On the aerial imagery, the investment that you're talking about, is that all incremental on top of the level that you've already been investing in aerial imagery including the amount that you've been spending to source the images from third parties?

No. So our own efforts at image capture will substitute for what we have had to spend with third parties in order to capture images today. Now there's a bit of an overlap period here where, even today, we're still being supplied by the third parties that we put together. But in a short period of time basically, it will all be our own image capture and therefore these costs associated with the third parties will go away.

Can you give us any rough order of sizing in terms of how much is incremental?

Well, I think the way to think about it, Jeff, is when we're talking about $100 million investment, that's the M&A of about $31 million plus CapEx. And I think, as we're talking about third parties, that's more on the OpEx side so I think it's a little bit of apples and oranges. But I think, fundamentally, as Scott was saying, I mean, this is a better way to do it. Overall, it's going to be less expensive and we're going to have more control and better images.

Okay. And then just going back to the Argus performance and the outlook commentary. I think there was a comment somewhere in Scott's prepared remarks about run rate business contracts. So is this more contracts that are signed? And the question is when they go live and you start to recognize revenue? Or is this pipeline that is not yet contracted in terms of what seems to be more delayed than your previous expectations?

It's a combination of both, Jeff. So we can see the cumulative effect of what has already been put in place and also anticipating new contracts, particularly in these new segments that I was talking about before. So it's both.

Your next question comes from Hamzah Mazari from Macquarie.

Just a clarification around CapEx. Is it fair to say that Verisk is in a multiyear elevated CapEx cycle? You guys pointed to $100 million spread over 2 years, but then you threw out a 2021 figure of 6% of CapEx. So just maybe a little more color after 2018. Is it still elevated, the CapEx spend, and it just goes down in 2021? Or -- any color would be great there.

Yes. Well, so there are a couple of layers in there. Thank you for the question. I think maybe I'll start by saying sort of prior to the discussion of the $100 million investment in aerial imagery, of which, remember, $30 million of that is M&A, $31 million, and the remainder is CapEx. So we're talking about that across '17 and '18. But before that, what you know is we've been re-platforming our businesses, and we were already starting to work our CapEx percentages, [bringing it] down. This is something that will sort of elevate it for '17 and '18, but our expectation is that we will continue on that downward trajectory. This is just a layer on top of the path that we had already discussed with you.

Great, that's very helpful. And then just a longer-term question. Maybe if you could frame for us what catalysts investor should look for, for the company to have greater penetration internationally outside of energy? Is it simply that data analytics markets need to develop more overseas? Or is there anything else that you are hearing from your customer base that could be relevant?

Yes -- no, I mean, it's -- there's no single effect, but the rest of the world is the same as the United States in the sense that data analytics is what companies are doing, companies inside of our vertical markets are working on today. So it's really just a matter of us being present and presenting credentials and we're very encouraged by the engagements that we've been able to generate in 2017 with names that didn't use to be on our customer list. And it's just that it's steady march that will get us there. But there's nothing fundamentally different about the rest of the world. I mean, there are maybe some differences in terms of regulatory structure and that can have some effect on market structure. But overall, it's really -- it's the same thing. So no, it's not a matter of catalyst. It's a matter of us being present, bringing our great intellectual property into these markets and finding our place.

Our next question is from Manav Patnaik with Barclays.

Just first question, just to clarify a couple of things on the aerial imagery investment. So in terms of the revenue opportunity, you've been working on this since 2014. You talked about $200 million TAM on the insurance side, I guess. I was wondering if you could just help us frame what that revenue penetration looks like for you guys today. And just to clarify, the $70 million is '17 and '18, but after that, what should the run rate look like in terms of spend there?

Yes. So we've accessed less than 5% of that TAM today. So this is the opening minutes of the first quarter. We've been working on our methods for a long time, as I've responded to Tim's question, but we feel like we put the final piece in place here. But we've accessed 5% -- or less actually of that TAM. So very, very early days. With respect to the CapEx profile, there will be a sustained tail of CapEx because essentially the infrastructure necessary to generate these image sets always has to be refreshed. But as Eva was mentioning before, with respect to CapEx, '17 and '18 are kind of this bubble and then we come down to substantially lower sustained levels to essentially keep this network in the United States operating in perpetuity.

Okay. And maybe just one question for Eva. Last quarter, you guys talked about 7% to 8% as your target for financial plus insurance. That clearly sounds like that's not going to be met because of financial. Would you be willing to give us what that range would look like now?

Yes. So you're right. We're -- because of the discussion we've had around financial, which we're still very encouraged by the business overall, but I think, in 2017, it's not going to show the type of growth that we would need to get to that target that we had talked about earlier. So I think, as we talked about insurance, we expect that to continue to accelerate in the second half. We feel very good about it. So that's kind of where we sit.

7% to 8% is still the reference benchmark for us. Nothing has changed. We're simply talking about quarters here.

And your next question comes from Jeff Silber, BMO.

It's Henry Chien calling for Jeff. Just had a question, a follow-up question, on the aerial imagery space. Is this -- in terms of how you're building up your aerial imagery business, is the focus still on the insurance end market? Or are you also positioning the data and the services to other end markets? And just any thoughts on how you plan to position this future aerial business versus some of the other competitors out there.

Yes. So I think you asked a couple of questions in there. This capability will serve more than the insurance market, but the insurance market is a primary consideration for us simply because of the nature of the business that we do. But in fact, there are marketplaces today consuming the analyzed output of aerial imagery, which are larger than the insurance use cases and we intend to tap those markets as well. So it's really -- it's genuinely at both ends. And the way we think that we're going to win, the way that we are making progress today, is basically a combination of great data, which is what this announcement about the aerial imagery capture program is about, combined with leading analytic methods and you also have to build great workflows so that the customers can easily ingest the data and the analysis. We got all that and we are actively, actively presenting credentials in the market today and very encouraged by what we're seeing.

Okay. That's great. And just a follow-up question on the gross margins. It looks like it's been trending downwards. Is there anything that's been driving that, that you could highlight?

I mean, I think you're probably seeing some impact of some of the acquisitions in that.

Your next question comes from Andrew Jeffrey with SunTrust.

It's Oscar Turner on for Andrew. So was just wondering, can you provide any color on the competitive environment in Argus? Has anything changed there?

No, nothing has changed there. No, we still have a very unique position inside of the banking ecosystem with respect to the data asset that we have. Nothing has changed.

Okay. And then just as a follow-up, we've seen an uptick in the pace of M&A recently, though it has been somewhat smaller deals. How should we think about your M&A strategy going forward in terms of size, vertical and geography?

So we -- our history at Verisk has been we have created a lot of value for our shareholders through the program of M&A and the reason that it has created value is that it is tightly linked to our strategy. So we start from within the customer markets that we serve with a deep understanding of what they need and what their emerging needs look like, and from that, we derive our strategy. And from that, we ask questions about should we build it or should we buy it? That's the way we've always done it. That's the way we will continue to do it. We're not doctrinaire about the amount that we spend on M&A. We're not doctrinaire about the size of the deals. What we're looking for are things which fit our strategy. The strategy is tightly yoked to 2 things: one is the vertical markets we're serving and the other is the 4 distinctives that we always talk about, and those are really the criteria that we use to -- those and financial metrics to look at potential acquisitions. So we're on the same course that we were always on. And so with respect to expectations going forward, we will continue to lean into the M&A agenda. We will continue to lean into the share repurchase program. And the amount of transactions at any given moment will be a function of mostly kind of availability, and we do a lot of cultivation and things take time. But I think you can look to us for a very steady stream of acquisitions in the future.

And your next question comes from Bill Warmington with Wells Fargo.

So first question for you on WoodMac. You had pointed out that the growth on an organic basis, constant currency, up about 0.6%, but it's actually a little better than that because EHS was negative against it. So I wanted to ask whether you were seeing -- what you were seeing on the renewals, whether you're seeing on the dollar value, are you seeing price improvements? Expansion? What's driving the growth there?

Yes, it's -- we're very encouraged by what's happening with the subscription revenues, that's real-time business. And that is -- as with the way that we face off with our customers in all vertical markets, when we come to a renewal moment, it isn't just a sort of a raw question of price increase on what they were using previously. First of all, our products are always sort of dynamically changing. But in addition to that, we sort of bring bundles. So when we look at what -- what we're paying attention to, Bill, is the subscription amounts associated with existing customers then obviously with new customers as well and there has been very nice progression in terms of those subscription revenues. As Eva pointed out, because we sign multiyear agreements, it will take a little while for the full effect of what's happening right now to show up on the revenue line, but it's progressing nicely. And as I said, just to be clear about this, inside of the resource and energy world, we don't need the commodity to be -- for example, if we're talking about the oil commodity, we don't need it to be at the record highs it was at a few years ago. We just need our customers to be stable and looking to the future, which is actually kind of where we are now. There has been a tremendous reduction in breakevens inside the industry and so it's -- we just need stability and essentially there is stability at this point. So we're enjoying what's happening in that business.

Okay. Then a clarification on the 7% to 8% constant currency organic target for the total insurance including -- plus financial services. It -- when we talked about this in early May, at that point, it looked like about 2/3 of that target was under contract and about 1/3 was coming from new sales. And I just wanted to check whether we were still on track for that for the year. And I wanted to also -- back of the envelope, it looked like that combined organic constant currency was somewhere in the 4% to 5% range for the second quarter. That's my math and I know your math is better than mine, so just wanted to check that.

All right. There were like 7 questions in that, Bill, (inaudible). So I'll start with the last one first. Organic constant currency combined insurance and financial in the quarter was 5.1%, that compared to 4.9% last quarter. So there was a progression there. Going back maybe to the top -- a clarifying point with the 1/3-2/3 comment you made. That was the comment we made specifically around insurance last quarter. And maybe after I get through more of your questions, we'll have Mark make a comment on how we're progressing on that. With regards to the combined targets for financial and insurance, going back to the comments that Scott and I made, financial in 2017, because of some of the dynamics we talked about, is not going to perform at the level we had expected for 2017. So I would say that when we look at that combined target that we talked about, that is not something that we're looking at because of the financial performance that we're now expecting in 2017. So with that, maybe I'll just let Mark make a comment on how we're progressing on the insurance side.

As we, I think, demonstrated in the second quarter, we continue to feel like there's a ramp inside of insurance and we just kind of reinforced second half versus first half. One of the metrics I think we tried to provide during the first quarter call was the element of how much of the contracts -- or how many of the additional growth was relative to committed contracts and things that will be happening because of a commitment and signed contract versus go-get pipeline. And I think we feel good about the progress we've made over the course of the quarter and that number is even more positive today, so I'm comfortable with at least the progress we made.

Got it. So I understand what you were saying now on the 7% to 8% target. Did you want to give us a revised target for that combined segment for 2017?

I think Scott's described well the dynamic in financial and for insurance that we talked about acceleration in the second half.

Yes. We expect progress as the year goes on, and the target remains the target and it's just a question of timing.

Your next question is from Andrew Steinerman with JPMorgan.

Eva, EBITDA margins were down year-over-year in the first half of the year in 2017. Might we see EBITDA margins down the same or more in the second half of the year, year-over-year? And when should we get back to margin expansion?

Yes. So Andrew, thanks for the question. If you were to look at what we -- what I said on the call with regards to margins, I think if you look at second quarter and think about the year, I mean, that's kind of where we are. We've got a couple of things going on there. Obviously, we have talked about the beginning of the year some of the investments that we're making in the business; we continue to make those, we're excited about those. We now have brought in some acquisitions. I dimensioned for you some of the revenue and EBITDA in those acquisitions. Those are lower margins than our existing business and so that will be a pull for this year. But as you know, I've said before, we continue to be constructive on margins over the long term.

And our next question is from Arash Soleimani with KBW.

So one question, you mentioned in your prepared remarks a bit about cyber. I was just wondering -- obviously cyber is still a relatively young insurance market. Are you seeing pretty large appetite from your insurance carrier clients to grow that line?

So this is Mark. I think one of the things that every insurer is looking to do is grow and cyber offers that opportunity. In a world where premiums and rates have been relatively soft, cyber offers that opportunity. The challenge is it's tough to quantify that risk, actually understand what you're underwriting and how big it could be, especially with all the cyber-attacks and the exposure that's out there. So there is, I'll call it, an under or uninsured opportunity here and everyone's looking to try to seize on that. We have done several things that I think are -- respond to that need. We have typically focused on insurance and our insurer customers or reinsurers. And you kind of heard some of the things from cat models to actually programs and coverage forms. We're aggregating data to better improve the loss cost. We're going to try to put out what we refer to as like a -- we typically have these Building Underwriting Reports. We're going to try to kind of have a similar type of report for businesses. The theory is that both from a risk by risk and a portfolio perspective, we can provide a lot of solutions to our customers that need support in writing this risk. Last comment, this is the type of risk, if we do it right, has the ability to kind of leg outside of insurance and into the corporate market. So it provides even a bigger TAM and bigger opportunity if we do it right. So we are excited about the opportunities here and we're working hard to be the first or at least first to market.

That's helpful. And the other is was there anything unusual on the tax rate this quarter? It seemed a bit lower than usual.

So as I mentioned, remember, we have this -- the new approach from an accounting perspective to how we have (inaudible) benefit for stock option. So you're going to see a bit more variability across the quarters and that's what you saw in this quarter for the tax rate. But we still think, for the year, we're going to be looking at 32% to 33%.

Your next question comes from Toni Kaplan with Morgan Stanley.

You've talked a lot about financial so far, but I'm not sure I have a great idea of the growth expectation in the second half for this segment. You're facing sort of mid-20s comps organically, but you do have the large contracts in the pipeline that you're expecting to come on later in the year. So basically, I'm just trying to understand how much should these large contracts contribute to growth. And just facing the tough comps, I'm just trying to get a sense directionally of how we should be thinking about financial.

Yes. So we expect it to grow in the fourth quarter, more in Q4 than Q3.

Okay. And basically, it should -- Q3 be -- should we be thinking positive organically? Or how should we be thinking about that?

I mean, that's kind of where I'm going to leave it with you, Toni. It's just -- it's progressing from where it was in the second quarter and the second half will net out to growth, and it will be more Q4 than Q3.

Okay. And then Mark, I think, talked about the changed profile of revenue in Argus. I'm just trying to understand are there different types of products that customers are demanding? Or have you just changed the structure of the contracts for the existing products? Just any examples of maybe changes in purchasing behavior, if there are, or just what's going on.

Yes. So there were a couple -- this is Scott. There were a couple of comments that we made on that. So as we've expanded the product set, we've also moved to a new set of customers so actually you have both effects going on at the same time. And the new solutions take on a somewhat -- some of the new solutions take on a somewhat different shape and profile than, say, the consortia-based products, which were the ones that really you first got a look at. That was most of what you were seeing when you were looking at Argus circa 2012, 2013. They have the same kind of recurrent quality as many, many of the things we do around Verisk. But as we moved into new solutions sets, for example, media effectiveness, the nature of the engagement with the customer, which is a different customer, takes on a different profile where there is a -- there's sort of an intense engagement as you get started because we have to integrate data sets with data sets in order to be able to create the analysis that we're looking to do, which then you come off that high somewhat as you move into then a recurrent relationship. And so that shape is different than the shape of what the Argus business began with inside of the consortia model. So as we move to new solutions, we also move to new customers. And those new solutions sets for those new customers do have a somewhat different profile, but extremely good business. The difference that we can make, the value that can be added, is substantial.

And your next question comes from Joseph Foresi with Cantor Fitzgerald.

This is Mike Reid on for Joe. Wanted to go quick back to what the long-term margin opportunity was. And would that come from less acquisitions and lower investments? Or are there other levers there?

Well, I think, as you think about our business model, it all comes from the top line growth. And as we're investing, we are working to enhance that top line growth and I think you'll see that scalability. I think, similarly, with our acquisitions, and you've seen the acquisitions we're bringing in, they're not all at our margins today, but they also are growth opportunities. And so as we start to scale that, I think you'll just see that naturally fall to the bottom line as you have historically.

Okay, great. And then do you think there could be any seasonality margin-wise between Q3 or Q4 or probably not much?

I don't think that's a typical period in which we see seasonality. I mean, there is always variability, but I don't think there's anything specific I'd call out.

And your next question comes from Alex Kramm with UBS.

I hope this question is not too detailed, but I wanted to just ask about subscription growth in the quarter. Now when I look at your subscription disclosures in the 10-Q and I back into the implied growth, the 2Q had less than 1% subscription revenue growth in Decision Analytics. And I think all the growth came basically from nonsubscription growth, I think it's about 60% by my calculation. And I think subscription growth was flat in the first quarter, too. So I know there's a lot of moving pieces, FX, acquisitions, the different businesses, but I guess if I just step back and look at this more holistically, it looks a little bit more like the business is becoming much more dependent on onetime sales and maybe the subscription growth has stalled. So again, a lot of moving pieces, but maybe you can elaborate how you would look at that.

Yes, I think if you -- you kind of have to unbundle it and I think there's a reasonable impact from the comments we've made around Argus. Those long-term contracts that did not renew at the end of last year as expected, those were subscription and long-term contracts. So I think part of the impact you're seeing relates to that. We -- I can circle back with a little more detail later on, but I would consider that in your analysis.

Okay. So still very comfortable. Obviously, that's the subscription core is positioned for steady growth, I guess.

Absolutely, absolutely.

That is the drumbeat inside of our company and always will be.

All right, good. But then, secondly, and maybe related to the same data. I think, Eva, you kind of rushed a little bit through the cat bond answer there when somebody asked earlier and you said a couple of million. Again, by just backing into the nonsubscription growth, I think I get to $11 million. I guess, these are adjusted as well. But where is that $11 million coming from if it's not the cat bond strength? What other kind of like nonsubscription items contributed this quarter that you may want to call out?

Sorry, I'm not sure I know your $11 million reference, but let me go back to what Mark said about cat bonds and what I said. I think Mark said he didn't want to overstate the size of the business. It's millions of dollars, not tens of millions of dollars. And the comment that I made, I think in response to Tim's question was that even if we were to assume that -- so cat bonds obviously grew nicely in the quarter. But even if we to assume that we got no dollar growth in cat bonds this quarter, you still would have seen an acceleration in Decision Analytics insurance growth. So the comment I was making was really just trying to -- I mean we're excited about it. We love to get cat bond revenue, it's great. But I just wanted to make the point that the strength of the business was not solely related to the cat bond market. Hopefully that helps.

Yes. That's how I heard it the first time.

And your next question comes from Anj Singh with Credit Suisse.

This is [Nick Ryan] on for Anj Singh. Now that you've kind of made the last step, if you will, on aerial imagery, can you maybe just update us on what the competitive landscape looks like for you guys now that's a sort of bigger focus? And maybe any sort of estimates on the margins today and/or where they could go over time?

Yes. So this is Scott. There is -- in the insurance marketplace, there's one primary competitor. And outside of the insurance marketplace, it's actually a fairly unconcentrated sort of long list of companies that provide -- that are small-ish that provide a fraction of the services that we're interested in. And so that's really the sort of the nature of where it sits. And one of the things about being in the insurance vertical is that the analyzed output from remote imagery needs to get put into platforms where the customers then make decisions based upon the remote imagery-derived analysis and a lot of other inputs as well. We are the provider of most -- we are the leading provider of many, if not most, of those platforms and so it's one of the reasons why we feel that we have a winning proposition that is going to take its place.

Okay, great. And maybe just any commentary around where you estimate the margins are today and maybe where they're expecting to go?

Well, just like most of the things that we do, will show a lot of scale as it grows. You have the semi-fixed cost of creating your data sets and you have the semi-fixed cost of the tech stack that you build to do the analysis. And so as this business grows, we expect the margin characteristics to materially improve.

Our next question comes from Gary Bisbee with RBC.

First question, just on the margins. Eva, did I hear you right that the margin for the full year approximates the second quarter? And if so, it -- given the margins were stronger second half versus first half a year ago, it seems to imply quite a bit larger contraction in the next few quarters. Is that just the impact of the recent M&A? Or is there some other stepped-up investment elsewhere you're expecting?

Yes, we haven't shifted our investment plan for the year, so I would say that a lot of that impact you're seeing really relates to M&A. And maybe just kind of looping back to the question before on the inorganic side on aerial imagery, I gave you the data points in the script that companies that we acquired in 2016 had about $15 million revenue, about $2 million of EBITDA. So you can kind of do the math on that and see that, that will have some impact in the short term.

Okay, great. And then a follow-up. Just on the longer-term 7% to 8% organic revenue framework that you discussed, how are you thinking today about the energy business long-term potential? At the time of the deal, it was definitely above that. I think you've indicated it tempering that. And I guess, relevant to what's going on now, how do you think about financial services against that long-term framework?

Yes. So first of all, we haven't tempered that view with respect to the resources and energy business, so we remain in the same place. We actually have a wonderful franchise and many different ways that we can grow it. So we actually haven't tempered that franchise. And you asked about financial services, our belief is that it has the potential to exceed the corporate average as well.

Your next question comes from Kevin McVeigh of Deutsche Bank.

Wondered if you could frame or just longer-term frame what the potential opportunity could be around fraud as you make those investments within Argus and what type of growth driver that could be for the business.

Yes. So fraud is one of those persistent issues that never goes away. It's actually a topic that we like, and it's one that I think you all know, we give a great deal of attention to in the insurance vertical. And so what you're basically counting are many basis points against very, very large transaction volumes. And then what modifies that view of TAM a little bit is the degree to which our customers consider fraud a cost of doing business versus an opportunity to get after. In the insurance vertical, it's pretty well established that fraud is a category to go after. And our view is that in the financial services vertical, it is increasingly viewed the same way and what's really needed are precise tools that create great confidence that you're actually getting after something and that the gains that you get will persist. And so we believe it's a very large marketplace. And it's a very small part of what it is that we do in financial services today. So it's a very good theme for us.

And is that tied in, Scott, with kind of the cyber? Are those kind of -- do you do them jointly? Or are those independent?

Well, so Mark, if you want to talk about cyber again -- although Mark's comments about cyber, first pass, relate to the insurance vertical. But there is -- if you want to call it kind of a cyber dimension, so for example, G2 Web Services, if you take the opportunity to look into that a little bit more, this is basically about diligence-ing online merchants. And I won't sort of go into the specifics today, but it is about trying to find sort of bad actors. And maybe you wouldn't call it fraud exactly, but it is about trying to find bad actors. And then Mark, do you want to add anything with respect to cyber?

Well, I mean, let me pick cyber as well, some of the things we do. I think there's a general theme that we've always found, there's high correlation to the extent that you have bad guys that operate across a lot of spaces. We have the opportunity to find more fraud to the extent that we have a broader set of databases. So to the extent that you think about all the insurance claims that are inside of our database, we've brought in health care, which has kind of improved the accuracy and the ability to fight fraud. Cyber is another dimension. And to the extent that we can gather some information with all the proper approvals around some of the credit card fraud that happens, I think we would be more effective in fighting fraud across these different communities of interest. So that's the general feeling that we have and I think it's a positive one.

No, that's a good point. Thanks.

And management, I'd now like to turn it back over to you for closing remarks.

Okay. Well, thanks, everybody, for your time today and for your interest, and I know we'll be talking to many of you in the days and weeks following this. And we look forward to bringing you our third quarter in a few months. And so again, thanks for your time today.

Thank you. And this does conclude today's conference call. You may now disconnect.