Verisk Analytics Inc (VRSK) 2017 Q3 法說會逐字稿

Good day, everyone, and welcome to the Verisk Third 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, Ivy, and good day to everyone. We appreciate you joining us today for a discussion of our third 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'll 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 all. Reported revenue grew 10% for the quarter. Organic constant currency growth was 7%. We're pleased to have delivered faster organic growth in the third quarter than we saw in the first half of the year, as expected. We remained on track for an acceleration in the second half versus the first half. Profitability remained strong with total EBITDA margins of almost 50%.

We're excited about the addressable markets we serve. Our initiative is to create new solutions and the opportunities to help our customers with decision-making. Combined, insurance organic growth was 9% and excluding the demand due to extreme weather was about 7%. The team continues to do an outstanding job serving our customers and driving growth. Mark will talk about some of the extraordinary effort by our teams to support our customers in responding to the recent hurricanes.

At WoodMac, revenue growth continues to improve as the end market has stabilized. The team there is also doing an excellent job, evidenced in part by the 5% plus growth in subscription ACV year-to-date. WoodMac is expanding their addressable markets, and we will demo some of their newer products at our upcoming Investor Day.

We're very pleased to report a new Argus partnership with TSYS, as announced by their CEO, on their recent investor call. This partnership will allow us to bring a new range of data management and analytical solutions to new banks and markets that are incremental to our core base. This initiative, as well as the other positive developments at Argus, position it to return to solid organic growth in Q4, as expected, and continue to contribute good and accelerating organic growth in 2018.

On the capital allocation front, we have been active in M&A throughout 2017 and especially in the third quarter. Many of the acquisitions and companies we have been tracking for years and the timing is mostly a function of the availability of the targets. While the timing has been brisk, the integrations have been smooth and quick, given the nature of our purchases.

Our acquisitions in 2017 fall into 3 groups: the first group consists of small product sets with promising characteristics that fall into our existing verticals. The names here are Arium, ENI, Healix, Fintellix and MAKE. Collectively, we paid $94 million for these product sets with run rate revenue at the time of the acquisitions of around $23 million.

Arium provides liability-loss modeling that runs parallel to AIR's property loss modeling. ENI helps insurers determine damage amounts to automobiles for quick claim settlements. And Healix is the leading provider of travel insurance analytics in Europe. Fintellix is a global leader in compliance solutions for banks and seamlessly relates to our transaction-level data integration at Argus while bringing new functionality to our client banks. And MAKE is the global leader in wind generation analytics, integrating seamlessly with our solar generation analytics. In all cases, we have quickly brought these products into our existing channels of distribution with the expectation that all of these product sets will grow at double digits for an extended time and with ramping margins. When we add such products to our platform, they immediately gain profile and credibility in the market.

The second group was our acquisition of 7 regional remote imaging companies in the United States. We paid $31 million for these companies, who's 2015 revenues were $15 million, as we noted last quarter. Integration of these companies has been smooth and straightforward, led by our Geomni team, which includes experts of operated image capture operations for decades. Their expertise brought real value to customers in the latest storm season.

Lastly, we bought 3 larger companies in the third quarter, all leaders in their categories. We purchased Sequel, which provides solutions related to complex commercial insurance with a particular focus on the Lloyd's London market, as well as LCI and G2 Web Services, both of which provide distinct solutions for the retail banking world and both of which leverage Argus' distribution as well as enhancing products through overlapping capabilities. Collectively, we paid $583 million for these businesses, whose run rate revenue at the time of the acquisitions was about $78 million.

Mark will say more about them in a moment but in all 3 cases, we expect them to bring strong double-digit growth with ramping margins. We will provide further detail on these businesses, including their solutions, markets and economics at our upcoming Investor Day in December. While M&A remains our priority for use of free cash, we also repurchased our shares in the quarter through our long-standing program. Year-to-date through September 30, we have repurchased $270 million worth of stock, including $10 million in the third quarter.

At September 30, 2017, we had $366 million remaining under our share purchase reauthorization. Our strong cash-generating capability will bring down our leverage even assuming further capital deployment. We remain confident in the strategy built on the Verisk's 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 in serving our customers. As we look ahead, we have a constructive view for all of our businesses.

And with that, I'll turn it over to Mark for some additional comments.

Thank you, Scott. Following up on Scott's comments regarding the 3 August acquisitions. Sequel is a leading insurance and reinsurance software specialist, serving the London market. The acquisition further expands our comprehensive insurance offerings to the global complex commercial and specialty insurance industry, with worldwide premiums larger than the U.S. regulated market, we primarily serve today.

Sequel's a pioneer in complex commercial and special insurance software innovation with a diverse customer base that includes some of the world's largest specialty insurance players. LCI is an industry-leading provider of risk insights, prediction and bankruptcy management solutions for banks and creditors. We're also confident that the LCI solutions, are applicable beyond the banks to other companies that need to monitor consumer bankruptcy processes. The combination of Argus and LCI will allow us to introduce new and exciting range of insights, proprietary decision algorithms and state-of-the-art risk management workflow solution, aimed at addressing the growing need among our banking clients.

G2 is an industry-leading provider of merchant risk intelligence solutions for acquirers, commercial banks and other payment systems providers. G2 extends Argus's capabilities to mapping bad-actor networks, predicting payment risks and providing clients with the best opportunity to reduce losses and fines due to merchant and business fraud and compliance violations. Fighting fraud is an important theme for Verisk, as you know. And G2 complements our existing capabilities nicely.

Growth in insurance continue to improve, primarily on the strength of our solutions and customer relationships with some help from the weather. Engagement with our customers is a strong and ongoing focus across our insurance-facing businesses. Last month for example, we had our now annual U.S. Risk and Analytic Summit. We saw record attendance in terms of companies represented and number of attendees. We also had demonstrations of some of our newer and cutting-edge solutions. Feedback was very encouraging with attendees citing engaging and well-informed speakers, examples of benefits from forward-looking companies and thought-provoking panels.

As you know, after an unusually long period of relative calm, we've seen a surge in catastrophes over the past few months. Our Property Claim Services, or PCS business is the industry standard for catastrophe bank designation and share loss estimation in U.S., Canada and Turkey. In one of the most active periods on record, PCS has designated 50 events so far across 3 risk areas with insured loss estimates still developing but likely to exceed $70 billion.

In addition to the major hurricanes in the United States, PCS provided insurance loss estimates on 2 cyber risk loss events, following the launch of PCS Global Cyber in September. Cyber is the latest addition to the growing PCS global specialty lines loss reporting platform, following the PCS Global Marine and Energy launched earlier this year.

Our catastrophe modeling business which serves insurers, reinsurers, insurance brokers has proactively provided more than 30 loss estimates since September 1 and real-time alerts for customers on 13 catastrophes happening around the world. With particular note to the hurricanes, AIR clients use the information we provided to assess the potential losses as events were unfolding. And in some cases, to proactively deploy claims adjusters or to notify policyholders.

As a reminder, since customers subscribe to AIR solutions, there isn't a real-time revenue benefit. Client feedback has been positive, as our teams have worked, in some cases around the clock to give these reports to the market on a timely basis. We continue to speak with clients on their actual loss experience and plan to continue these dialogues over the coming months as the claims unfold.

In our repair cost estimating and imagery business, volumes increased meaningfully as a result of the catastrophes. At Xactware volumes were nearly double for the quarter versus the prior year period. As a reminder, many of our contracts are based on minimum volumes. So this volume increased even indirect proxy for revenue growth. It does highlight deep more full integration and the value we provide to our customers.

One of our newer solutions, Claim Experience proved to be very helpful tool for our customers as they serve their insurance. Claim experience allows our customers' customers to capture images and information from which there, we are able to generate repair cost estimate. As the industry focused on customer service and response times, this new solution is generating a lot of incremental interest.

Geomni, our remote imagery business, which we took to a new level of capability in second quarter was able to assist our customers with our cutting-edge technology. We were flying and capturing images 48 hours after Harvey in Texas and as soon as the FAA lifted flight restrictions in Florida. These images, in combination with our computer vision algorithms, automate the repair cost estimate processing, allowing, for example, one of largest insurers in the United States to start paying out claims before their customers could even get back into their homes. We are proud of having been able to help our customers deliver such outstanding service and speed of response at such a critical time for homeowners.

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

Thank you, Mark. In the third quarter, we again grew revenue and EBITDA while also investing in solutions with meaningful long-term potential revenue streams.

Growth improved again, consistent with our comments on the last 2 earnings calls. Revenue in the quarter grew 10.2%; organic constant-currency revenue grew 7%. The press release again has a table to help you see the acquisition and currency effects for each of our revenue line. As a reminder, organic constant-currency growth excludes the contribution from recent acquisitions and reflects current period exchange rate applied to prior period revenue. Currency held revenue results in the quarter by about $2 million. And total acquired revenue in the quarter from all deals that haven't moved into organic was $19 million, including partial period contributions from G2, Sequel and LCI. Revenue from the 3 August acquisitions contributed $7.6 million in the quarter.

Within the Decision Analytics segment, revenue increased 12.2%. Organic constant-currency revenue growth was 8.2%. Decision Analytics insurance revenue increased 16.9% in the third quarter and organic constant-currency revenue growth was 13.7%. Growth was led by very strong performance in loss quantification and remote imagery, with good growth in underwriting, catastrophe modeling solutions and claims analytics. The hurricane-related repair cost estimating and imagery-based solution contributed about $8 million in the quarter for Decision Analytics insurance. Energy and specialized markets revenue increased 2.1%. Organic constant-currency revenue increased 2.2%.

On an organic constant-currency basis, Wood Mackenzie revenue grew about 3.3%. We are pleased to see the trends in our subscription business continuing to be positive, complemented by good consulting revenue. The customer environment remained stable and while we continue to finalize certain renewals in 2017 and early 2018, we see an encouraging business trajectory.

Financial services revenue increased 20.2%. Organic constant-currency revenue declined 2% in the quarter. As we've discussed on prior calls, we had several contracts conclude last year, which contributed about $11 million in 2016. We continue to expect to see organic revenue growth in fourth quarter.

Risk Assessment revenue grew 6.9%, including contributions from our recent acquisitions, which are expanding the baseline for future growth. Organic constant-currency revenue growth was 4.9%, reflecting our 2017 invoices and continued contribution from newer solutions.

Total EBITDA increased 7.5% to $272 million. The combined constant revenue and SG&A increased 4.9% for the quarter and 3.5% year-to-date on an organic basis as we continue to focus on efficiency in our existing businesses and repurposing that spend to fund innovation, acquisitions added to the expenses in the quarter and for the year. EBITDA margins as reported were 49.6%. Margins were reduced by about 230 basis points due to acquisitions and the related fees, an effect that we expect to continue through the year. The acquisitions we are making are close to the core with well-defined paths to top line growth and margin expansion.

Reported interest expense was $30 million in the quarter. Total debt was $2.9 billion at September 30, 2017. Our leverage at the end of the third quarter was about 2.9x. 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 33.2%. Our tax provision in the quarter of $60 million represented an increase of 34% over 3Q '16, where the tax rate included some onetime benefits. This was a meaningful reason for the adjusted net income growth to be down 2.3% to $141 million and adjusted EPS to be unchanged from the prior period at $0.84.

Normalizing for the $2.4 million of tax, based on applying the third quarter 2017 tax rate to 2016, adjusted EPS growth would have been about 9%.

Average diluted share count was $168 million in the quarter. We bought about 100,000 shares at an average price of $81.85. Our repurchase program has been successful to date, generating annualized IRRs above our cost of capital. On September 30, 2017, our diluted share count was 167.8 million shares. Net cash provided by operating activities from continuing operations was $592 million for the 9 months ended September 30, an increase of 22.2% versus 2016.

Capital expenditures were $114 million for the 9-month period ended September 30, and CapEx was 7.2% of revenue year-to-date including investments supporting our remote imagery business. Free cash flow increased 27.5% to $478 million for the 9-month period ended September. Free cash flow was 61.9% of EBITDA year-to-date.

Across the 3 August acquisitions in U.S. dollars and reflecting a purchase accounting revenue haircut at Sequel, revenue in the fourth quarter should be around $17 million and EBITDA should be about $5 million. As you think about your models for 2017, we expect CapEx of about $185 million. CapEx will normalize to about 6% of revenue by 2021 after the initial remote imagery investments in 2017 and '18. Fixed asset depreciation and amortization of $135 million and amortization of intangibles of about $105 million.

Based on our current debt balances and interest rates, we expect interest expense to be around $119 million for the year. This includes noncash amortization of debt issuance to comp. We expect the full year tax rate to be around 33% or possibly a little bit higher. You will note that this implies a higher tax rate in the fourth quarter as we assume a retroactive U.K. tax law change will take effect.

In the adjusted net income calculation, we will continue to use 26% for the tax effects on intangible amortization. And finally, we expect a diluted weighted average share count of about 168 million to 169 million shares. We are pleased with the continuing overall improvement in revenue growth we have discussed all year. We think the opportunities for revenue growth, free cash flow generation and prudent capital deployment remained as strong as ever. 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 up the line for questions.

(Operator Instructions) Your first question comes from the line of Tim McHugh from William Blair.

First, just wanted to ask on the insurance vertical. The -- excluding the hurricanes, the 7% growth, is that -- can you talk about what, I guess, drove the acceleration in that underlying growth versus kind of, 5%, 6% we had been seeing? And is that sustainable? I know you also mentioned some cyber events. I don't know if that drove kind of short-term revenue. But just talk a little bit about the sustainability of that pace of growth in insurance?

Yes. So in reverse order, Tim, cyber didn't really contribute a lot. It's -- think of it as a new extension of a product set that we've always had. Cyber is a -- cyber insurance is a real thing. On the other hand, it's a fairly small line relative to the others. And most of what we do pricing -- or our revenue is going to relate to the premium, that premium and cyber insurance remains fairly small. I think the way to interpret the third quarter relative to say, the earlier part of the year is the anomaly was more the early part of the year. You'll remember, we described some onetime effects with respect to nonrecurring revenue in '16 that didn't work during the '17, for example. So I think what you're seeing now is more kind of our normal expectations for the insurance vertical. And other than the effects of the catastrophes, there's really not anything to point out that would sort of standout as a unique factor in the quarter that was contributing to the revenues. So we kind of feel like what we're seeing here is, over time, the kind of insurance-facing business that we've got.

Okay. And on the catastrophes, does any of that carry over into the fourth quarter, in terms of impact on claims and kind of a short term boost?

Yes, not a lot. Basically, the -- as you would imagine, our customers are very motivated to deal with catastrophe-oriented claims very quickly. And so they do actually tend to get dealt with within days of when the events actually occur. So no, not very much of that.

Your next question comes from the line of Jeff Meuler from Baird.

On Argus, can you just help us understand? Obviously, there's a big improvement in the trend there in the second half. As these new customers come online or the new partnerships come online, is there a meaningful onetime revenue contribution to the second half? Or is this more an increase in the subscription base?

It's both. So I think we've described for you before that there's an interesting quality to the nature of the business related to taking all of the spend analytics we've got and pointing them towards new use cases, for example, looking at media effectiveness. And that is that there is a onetime bit of work that needs to be done to essentially integrate our platform with our customer or partner's platform. And there is revenue associated with that integration. We get paid for that. But then what happens thereafter is a sustaining set of subscription revenues. So it's really at both ends. So yes, there will be moment in time effects associated with bringing on a substantial new customer and many of the customers we bring on are substantial. But at the same time, there is a -- there is an enduring and meaningful tale of subscription revenue.

But I guess that, the question I'm trying to get at is, is the on-boarding revenue going to create grow-over effects for 2018 that result in Argus growing below trend? Or is -- I mean, you're not quantifying it or calling it out on the call. Is it there but not material enough to have a big impact?

It's not -- I mean, it is there and -- it's a dynamic business where we are adding customers. So there will be an effect in there but relative to the overall performance of the business, I would say, not particularly material. And definitely, we need the business to continue to grow. But there will be something in there. But not...

Okay, and then if I can just sneak one more in. On the M&A program. Obviously, you continue to lean into it and see it as a source of potential value add for your shareholders. I think there's some more skepticism from some of your shareholders on the M&A program. Can you just maybe talk about how the board assesses capital allocation in terms of the review of management in your competition programs?

Yes. I think you actually asked 2 questions in there. So we bring the program of acquisitions to the board. We go in-depth through every opportunity. The effect of the board discussions is not always to affirm what it is that management has been working on, so the board is exercising discretion. With respect to -- I think you were then trying to relate that to how the board interacts with us, maybe particularly me and compensation. The board pays me according to their view of our performance and their primary view of our performance is, "How did we do for our shareholders?"

Your next question comes from the line of Manav Patnaik from Barclays.

I just wanted to clarify, Scott, to the first question I think that it was the $8 million hurricane impact that you were referring to, that does not repeat beyond the quarter. And I was hoping, of that $8 million, I guess how much would you attribute to the remote imagery aspect of it? And just curious why that wasn't an inorganic number, just because -- I understand that it was all the assets that you acquired that allowed you to go do that post hurricane activity?

Yes. So first of all, yes. You heard me correctly, the $8 million is not particularly bleeding into the fourth quarter, so period, end of the sentence. Most of that $8 million is related to solution sets that we've had for some time and not the remote imagery activity. And it's very straightforward on the classification of the revenues. The businesses that we acquired did not do anything in the insurance vertical. We acquired infrastructure. But in terms of actually causing business in the insurance vertical, that was entirely Verisk and existing Verisk.

Got it. And then just on WoodMac. I mean, it sounded like there were some positive developments, new products that you're going to show at the Investor Day and so forth. I guess, what I -- my question is more tied to 2.5 years in -- I was hoping you'd give us some commentary on how the sort of revenue synergies between WoodMac and insurance and so forth might be tracking?

Yes, one of the things that you'll see at Investor Day is a synthesis of our Energy data analytics and our insurance data analytics, very exciting new products. It's really kind of in the early stages. So it's not material, where the revenue is concerned right now, but we are really, really excited about it. It's called EPICS, and you'll get a chance to see that.

Your next question comes from the line of Hamzah Mazari from Macquarie Capital.

The first question is just on pricing. Could you give us a sense or just an update on whether there's an opportunity to price your book of business? I know you were owned by the insurance companies, and it seems like pricing is still pretty low relative to your market share, and maybe just give us some color how you think about that?

Yes. Well, I -- the pricing for us is really a proxy for the distinctiveness of our solutions in the amount of value that we're bringing to our customers. Across everything that we do, there would be a pricing effect, which relates the strength of what it is that we do. There are some parts of our business, where the pricing effect is a little bit stronger, for example, our very long-standing industry standard insurance programs and then other parts where it would probably be a little bit less strong because we're more on a transaction basis in our pricing. But there's a price effect everywhere. And that's really no different than it's ever been. I would only -- with respect to price, I would just add that we're in it for the long haul. We are making grounded decisions about how to price our solutions, because we really care about our relationships with our customers, and we want them to endure in a lot of our growth opportunities to bring new solutions, new value to our existing customers. So we feel a great burden to be responsible with how we price our products.

Great. And just a follow-up question. Outside of the P&C insurance universe, maybe just give us a flavor of what your exposure is to auto and personal insurance? And whether you see any headwinds in that business, either from autonomous homes or vehicles? Just any sense of how you think about the world outside of P&C and whether that's a growth avenue for you or not really?

Well, as I think, most folks know, we principally serve 3 vertical markets, which would be P&C insurance, retail banking and its extensions, including into retail and media effectiveness analytics and then the whole energy complex and natural resources. And the other 2 parts of the business, meaning the non-P&C parts, we're very excited about them going forward. We believe both of them have sustained very strong revenue growth opportunities. I think you were trying to ask also about the effect of, kind of like, personal lines and the way that automobiles are changing and -- with autonomous vehicles and connected vehicles, et cetera. We actually see that as an opportunity. We actually -- we believe, are the leaders in the United States in harvesting data off of connected cars. We've announced partnerships, and we'll have more to announce in the future. And so we -- it's new data basically that we can pull into our analytic methods. So we view it as an opportunity.

Your next question comes from the line of Arash Soleimani from KBW.

I wanted to know if you could provide some more detail on the area of imagery opportunities outside of insurance. I know you mentioned insurance was a $200 million market -- addressable market and perhaps how large the addressable market is outside the insurance sector?

Yes. The TAM for all of the applications outside of the insurance vertical are about an order of magnitude bigger than the insurance vertical. So we talk about the insurance (inaudible) and that's sort of our home base, that's where we started from. But actually, extensions into other vertical markets are going to be important to us. There is a lot of background noise, maybe somebody's is unmuted.

(inaudible) I had was, can you just provide a bit more detail about what Sequel does? And does that -- is that a roll up into Decision Analytics?

Yes, this is Mark. Let me just provide you a little bit of insight. One, the suite of solutions that [indiscernible] is really behind the scenes of all the major carriers in London. So a little bit of a nuanced market London and they have captured March there to do everything from what would be the analytics upfront from an underwriting perspective to the policy admin, to the claims even inside the reinsurance world and have a wonderful tool that provides visual representation and a good VI to versus. So there's an analytic aspect as well. What we are going to do is we're get (inaudible) insurance side of things and we think there's great opportunities to use some of those solutions to bring to may be some of our U.S. customers from the analytic back-end, which would be that visual geographic approach to banks as well as the front end, which is the underwriting. We also hope we can kind of supercharge some of their analytics inside the specific solution set. So we're very excited by it. Customers are very pleased, and we've gotten some very good feedback from the market in general. So we're optimistic about what we do with Sequel.

Your next question comes from the line of David Togut from Evercore ISI.

Could you comment a bit on Argus' new contract with TSYS? This looks very intriguing and in particular, I'm wondering if there's any exclusivity here that might preclude you from working with other large card issuer processors like a First Data, a Fiserv, and FIS?

No exclusivity. And in fact, one of the reasons why folks like TSYS like to partner with us is because of the richness and depth of our ecosystem, which creates a data asset that doesn't exist anywhere else in the world. And actually, as the next partner comes in, the ecosystem gets better, so the network effect is there. And the last one to come in knows that and the next one to come in knows that. So no, there's no exclusivity. And basically, it's a way of extending -- first of all, as they say, it improves the data asset. But in addition to that, it actually creates, yet more reach into specific banks that would be a part of TSYS ecosystem. We're very pleased by the partnership, very excited about it.

And just as a quick follow-up, is there any way to dimension the size of this contract with TSYS and potentially the size of this new market opportunity for Argus?

Well, we don't really put out the numbers around individual customer relationships. If you wanted to, sort of, do some work on that, you could sort of figure out what is TSYS' share of the processing world and try to relate that to the size of our -- the business we are already.

The next question comes from the line of Gary Bisbee from RBC.

Just wanted to add another question on the Sequel purchase. My sense of your foray into the U.K. is that you bought a bunch of interesting, but yet somewhat, disparate assets in the past and haven't really, completely integrated it all. I wonder given the relationships there, is this an opportunity to go-to-market with a more consolidated or integrated approach and solution? And then as part of that, what's the opportunity to take analytics and things you offer here, layer that in and drive a more meaningful revenue base from the existing customers that, that business has? Or is that not really an opportunity for some reason?

Well, to -- let me start with your last question and Mark, maybe you'd like to talk a little bit more about Sequel. I just want to interact with the premise of your question, which is the smaller acquisitions earlier in '17 not being integrated, that's just not accurate. So just to set the record straight on that. But yes, we -- with respect to how we see the business growing globally, you can create your data analytic method pretty much anywhere. What you need to do is to make it relevant for the local market, first, by having local data sets. And second, doing whatever customization you have to do to speak into that market and exactly the way that they want to be spoken to. So that is our view of how to grow our business. And yes, there are things that we do at Verisk today that will compliment Sequel nicely. I'll mention, for example, our Touchstone platform on the catastrophe modeling side and then you've got these accumulation tools on the Sequel side and they really play together very nicely. So that work is already underway. But Mark, do you want to, kind of, pick it up from there?

Yes. I think the other thing I'd like to highlight is there are some acquisitions, but I think this program of looking to go global is a combination of build and buy. And we've been spending a lot of time and energy putting a management team in place, putting business development/sales resources that cover the world, and specifically, in kind of the U.K. We've done quite a bit of work with Lloyds. We've done a lot of work with a lot of syndicates. We are building up natural expertise. So we are trying to take a lot of things we do here in the United States, maybe around property, around actual work bring it to the U.K. and maybe an example of this is, one of the earlier acquisitions was in Ireland, it provided some underwriting information. Today, we have significantly grown and brought that to market, a fuller blown, I'll call it ISO-type of loss cause beyond just traditional rating variables. So we've kind of put the Verisk way into Ireland. We're trying to move that type of thinking, that type of approach, augmenting acquisitions along the way to build up a platform that's substantial in the U.K. and beyond into Europe. So that's clearly our strategy and I think you'll see more of that as we progress in coming years.

Great. And then a follow-up, there were a series of articles after the hurricanes about insurers using their own drones to go take pictures and assess damage and cut -- reduce the dependence on people in the adjuster role. I guess, is that just a good story that was easy to tell coming out of that? Or do you -- is there some potential risk to whether it's your aerial imagery or some of the other solutions from insurers beginning to do some of this stuff a bit more on their own?

Yes, yes, so the way that the imagery ecosystem works is, first of all, you need to avail yourself as an insurer or an independent adjuster, or an insured, the ability to understand the asset and how it's changed. So one of the things that matters is you're understanding the assets before the events, before the damage. And so one of the things that is necessary is, sort of, a view of truth, which is, what is there before the damage occurs? And that has to be developed both precisely, in terms of the quality of the images, but also efficiently for cost reasons. You cannot do that with a drone. And actually, you can't do that with a satellite either. What you need is aerial imagery. That is the way to create the single view of truth in terms of what is was on the ground. And that we do not see changing. So that is fundamental and foundational. What you do here from some of the carriers is that in the wake of an event, if an adjuster can get to the building because remember, the radius in which you can fly a drone is very limited, then one of the ways that you can assess the property in addition to visually inspecting it as a human being, is to operate a drone. And some of the companies have begun to do that. So they literally would have some of their adjusters driving around with a small drone in their trunk. It's really kind of a technical augmentation of what an adjuster has always done, which is to try to get close to the property and understand what happened to it. It really does not represent very much change. The adjusters may find that using the drone, they could do their work a little bit faster, they can maybe be a little bit more precise. They can drive better images and we're up for it. Actually, we are able to provide a turnkey drone solution to our customers as well. And actually, one where the homeowner is actually sort of operating, if they have access to a drone, they can actually direct and capture the images and get them back to us. So that development is a good one. It's not an overwhelming one. It hasn't really changed the nature of the claims process. Maybe into the future, we'll have somewhat more effects, but the fundamental point is if you're going to do these analytics at scale, you're not going to do them with drones.

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

So a question for you on the EBITDA margins. The guidance had been that the second half margins were going to be flat with Q2 and Q3 it come in 100 basis points ahead of that. I understand, we've had the extreme weather benefit. I just wanted to ask if how we should think about margins heading into Q4 and into 2018.

Yes. Thanks, Bill. Well, what -- I think you hit the nail on the head when you talk about the margin in the quarter. And certainly, one of the benefits of our business model is we have nice incremental margins, and certainly, we saw some of that in terms of the storm benefit. We also have the impact on our margins that we've discussed which is around the acquisition. So those will be a little bit of a pull-down on the margins as we think about sort of, the fourth quarter. We have brought in the new acquisitions. We gave you some very specific numbers around how much those will contribute in the 4th quarter. That sort of -- call it roughly, a 30% margin based on what we said. Those margins will scale over time. But I think as you kind of put that all together, I would say that we did have an out-performance versus expectation and largely into the third quarter because of some of the storm benefits. And I would -- as you think about your model for the 4th quarter, I would put those other factors back in and certainly, we love to drive margins, but there will be probably more of a pull-down than a pull-up in fourth quarter.

And a quick follow-up, if I may. A housekeeping question on the revenue impact from the extreme weather. You had mentioned the $8 million, and having it given a couple point benefit to the insurance piece. I just want to make sure my math is right, if the constant-currency organic for the third quarter was 7.0%, it looked like 160 basis points coming from that extreme weather benefit. So that would mean about 5.4% versus the 4.1% in Q2. Is that about, right?

You are spot on, Bill.

All right. And then the context there is -- should we think that -- should we expect Q4 to be -- the organic growth to be higher versus that 5.4% normalized level?

Yes. So as you know, Bill, we don't get into specific quarterly guidance throughout the years we do express in terms of our growth rates. And I think you've seen that so far.

Your next question comes from the line of Andrew Steinerman from JPMorgan.

I wanted to jump back and see imaging revenues in the organic for DA insurance. If it wasn't for the hurricane effect, would aerial imaging be moving the revenue needle in the third quarter? And then -- because I thought it's still kind of a nascent business. And then the second part of my question is, you indicated aerial imaging acquisitions added $15 million of revenues. Could you give us a sense of how big your Geomni revenues in total are right now, including your prior internally built base?

Yes, I think both those questions are aimed at the same point, Andrew. And I'll just say that the Geomni business in the insurance vertical is growing and would have grown even absent the effect of the extreme weather. And growing very, very nicely. So there was a boost in the quarter. As I said before, that $8 million, most of it was not attributable to Geomni but preexisting Verisk solutions. So Geomni is growing nicely. It's sort of getting to a scale where we can almost begin to not call it nascent anymore, even though we're still early in the journey. But it is growing and would have grown and would've grown nicely in third quarter, even absent the extreme weather effect.

Your next question comes from the line of Alex Kramm from UBS.

Maybe this actually relates to the prior question. But -- and I've asked this before, but when I look at your Q and the disclosures there about subscription and nonsubscription and Decision Analytics, it continues to stand out that the nonsubscription line is growing really rapidly. I think it was like 38% year-over-year if I back into that right or $27 million. So I guess the question is, one, what is driving that nonsubscription growth? Is it all aerial imagery, for example? And then secondly, can you give a nonorganic -- I'm sorry, can you give an organic subscription number for the quarter in Decision Analytics? Because that continues to look a little bit anemic.

Yes. So the reason that the growth shows that we're -- or let me make a more general point as we sort of get into this topic, which is that customers often have a preference for how they'd like solutions, particularly new solutions, which is that they prefer to get into it -- in a transaction mode rather than in a subscription mode. Because they don't exactly know how much of it they're going to need. And we're happy to do business that way as we're moving into a category, which is either new for them, or it's at least new for us with respect to serving them. So we don't consider transaction-based revenues to be low-quality revenues because they very frequently mature. They ripen them into subscription agreements. So for example, in the Geomni world, and I'm just taking that as an example, today we're transaction-priced. One of the plans that we have worked on at length has been as our offerings begin to mature, one of the ways that we can offer them to customers would be in more of a subscription mode where you would essentially sort of be -- kind of, find the aerial imagery platform, I guess, is the way I would say it, without respect to any individual property that you want to look at. So that would be an example of -- there would be a progressive movement of what today is booked as transaction revenue into what tomorrow or down the road will be booked as the subscription revenue. So that's a -- and that's kind of a normal effect inside of a data analytic business. It's very common for the customers to want to start out in a transaction mode.

Yes. And I'll sort of, just going to add to that. I think when you look at the growth rates, certainly, the transactional growth rates were higher than the subscription growth rates in the third quarter and actually, in the second quarter as well. But if you actually look at the progression in that growth, you would see the subscription -- the relativity subscription growth has accelerated quite a bit as well as has transactional. And remember, because we are 80% subscription, the dollars associated with that, acceleration of subscription growth are really what's meaningfully driving growth. I don't have the organic numbers in front of me. But I would say that generally, some of the businesses that we're bringing in are a lot more transactional in terms of that. So I think if you were to parse that out of your transactional growth rate, back down to organic I think you would see a bit more balance. Although nonetheless, we had storm activity and so transactions, as Scott said, it's good revenue. So we'll take that.

That's very helpful color. Just secondly, real quick. You mentioned the hurricane or weather impact will bleed into the fourth quarter, which is good. But how should I be thinking about this more longer term? Because this was, I think, a more extreme event that we've seen in years? Like, where could there be incremental demand longer term, for example, maybe you will see some premium acceleration in some parts of the business, should that drive more or better end market? Will you see more subscription on aerial or maybe some models are changing that people have to purchase? What's the longer-term discussions with customers potentially coming out of this, kind of like very extreme time?

There are three things to keep in your mind. I'll touch on the first 2 and Mark will take up on the third. First of all, we said that the third quarter extreme events don't bleed into the 4th quarter with respect to revenue. So just hopefully, everybody heard that and heard that clearly. The second thing, to just sort of know about our business and obviously, we're talking here about insurance. We are very excited about where we're going in financial services and in the energy complex and I just want to continue to put that out there. But in the insurance space, the anomaly has been the amount of time that has passed since the last major event. So you can basically go back and say you had Sandy in '11 and then you had Katrina. And the unusual thing is sort of the spacing in there actually. So when you think about Verisk, one of the things that you should think about is, that part what we do for our customers has provide a whole suite of solutions which help them to be heartened against major events, major events happen. They happen not every year. We've actually been in an extended period where they didn't really happen with any frequency. But that's the anomaly. And so it is a part of our business. It won't show up every year. We'll see what the pattern is, and by the way, extreme event does not necessarily mean a hurricane. So there's also a sensitivity to, for example, things like major flooding events in the United States but they may not be atmospherically driven in the same way that a hurricane is. So you've got all that. But now, having said those 2 things, I think what we also want you to just understand is sort of the very balanced way in which our insurance-facing business is growing. It's related to a lot of things. Claims and new software platforms and, so Mark, if you want to just talk about that a little bit.

I just -- I think to your question, couple of things that typically help us a little bit on -- in the future is an event like these are insurer and reinsurer customers, take some initial thoughts around how and what they can do with regard to cat modeling. So there could be opportunities for AIR down the road, to the extent that someone wants the second model and maybe a more comprehensive suite of solutions, whether it's across perils, or different geographies. That's an opportunity. What we've also talked about sometimes with the catastrophes is that it does help pricing in the industry. From a primary perspective, I don't think we're going to see a big upsurge in pricing from a rate perspective. Reinsurance, it should bolster maybe reinsurance a little bit. That helps their customers who are growing, have more of an appetite to buy things. So that may be just another tertiary benefit to us. But just wanted to share those other observations, I think that's maybe you were searching for as well.

Your next question comes from the line of Joseph Foresi from Cantor Fitzgerald.

This is Mike Reid on for Joe. We'll just start with some of the production capacity going offline for a little bit from the storms. Could you see that having any impact to Energy CapEx spending at all in '18? If that would have any effect on the business?

No, no. The nature of the business in the South Central United States is a very engineering-intense way of extracting hydrocarbons from the ground and basically, in the unconventional space, for example. You can get your well established within 3 to 5 days. So it's a blip.

Okay, got it. And with all the acquisitions, the leverage ratio is going up a little bit. Do you have a feeling with how high you would go with the leverage ratio to complete the more necessary acquisitions?

So yes, so we have stated curves, and Eva, maybe you just want to describe those?

Yes, I mean, we talked about our reference point being 2.5x debt-to-EBITDA that will go above that to the opportunities. We've done that in the past. The way we really think about it is, we don't really -- we have covenants. Those aren't really the constraints for us. So for us, the measure is really how long does it take us to delever. And I think if you look at our business, especially in Q1, we generate a lot of free cash flow. So I would expect that, that ratio will come down relatively quickly, as such spending that cash on any other opportunity. So we feel very comfortable, we've got a lot of flexibility.

Your next question comes from the line of Jeff Silber from BMO.

It's Henry Chien on for Jeff. I just had a follow-up on the aerial imagery product or products, I should say. In terms of the timeline of the rollout to customers, I was wondering if you could just give us a sense of that and when we can see, at least a meaningful impact on growth in the insurance segment or business lines.

It's in the market now and impacting our growth rate now.

Okay, and in terms of the acquisition multiples, could you give us a sense on what those levels are as for the aerial imagery acquisitions?

I think we're really -- the aerial imagery acquisitions? I mean, I think Eva, remind me, but I think we actually talked about $2-ish million of acquired EBITDA at the time that we bought the 7 smallish regional imaging companies?

Okay, and in terms of the multiples, how they trended so far?

So we paid $30 million. Pardon me?

$31 million.

$31 million for those businesses.

Your next question comes from the line of Kevin McVeigh from Deutsche Bank.

Just -- post the Equifax breech, are you seeing any step-up in demand around kind of authorization and kind of preapproval as it relates to Argus?

Authorization and preapproval. I'm not quite sure what you're asking.

Scott, in terms of trying to manage fraud, fraud detection, early kind of -- in a preapproval process or at the point of authorization, are you seeing any potential step-up in demand from clients?

Well, the demand factors for Argus are very good. But that's not -- if I'm understanding your question, that's not really what Argus does.

Right. But as I guess -- so let me ask is that a potentially area that could potentially get into?

You mean to help companies -- help banks, for example, with their cyber security?

Yes.

That is potentially something that we could do at Verisk. That is not something that we do today. We do work on cyber insurance. So we help insurers think about how to manage their insurance products. But actually hardening companies, including banks, against cyber attack is not something that we do today. Though, potentially something that we could consider doing in the future.

Your next question comes from the line of Andrew Jeffrey from SunTrust.

And I appreciate all the colors on the natural disasters and other events, and so forth. My question is a little more granular on the acquisition strategy, particularly when I look at G2 in long quest. I think a little bit about what the bureaus are doing for banks, and perhaps, TransUnion in particular. And I was just wondering if you can comment on whether or not you think your business is sort of moving into adjacencies to what has been a traditional bureau offering? Or how you think about differentiating your financial services offerings generally?

Yes. I think that -- let me take it in reverse order. So Argus is a beautiful business that is founded on a data set that is utterly unique. And the data set is unique because of the granularity of the data that is being contributed by a wide -- a large, wide and growing number of companies that participate in this consortium where they are contributing data, we do our analysis and decision support and provide it back to them. And so that whole ecosystem is growing and strengthening. And that is the fundamental foundation of the growth of Argus. And we are finding our ways into new use cases related to that content. So for example, when you think about G2, a lot of what G2 does is to diligence merchants. To date, most of the application of the data set has been more about diligencing consumers, the borrower and then to -- and observe what they are doing in terms of their spending using their credit card product, for example, or their debit products. But it's the -- one of the things that you can do when your data set is as comprehensive as ours is, is you can also then sort of pivot and start to try to observe the activities of the merchants where these payment products are being used. That's kind of new business for us relatively. And G2 is already there. And so that's where the synergy occurs on that side. Then with respect to -- looking more at sort of LCI, another thing that you can do when you have comprehensive transaction data, is you can try to understand that as a fraud, which is a really great theme for us, one that's very important for us in the insurance world, for example. That's something that we have already done inside of Argus. It's a smaller part -- it's a small part of what we do at Argus today but it's available. And LCI helps supercharge that. When you move towards -- more towards the sort of the merchant analytics, there is -- there can be a degree of overlap with players out there, including the bureaus. And when you move towards trying to root out fraud, there's kind of a different set of solution providers out there that you might end up overlapping a little bit. But we believe, back to the most important point, we believe we come very equipped for this -- for these new categories, because of the depth of what we've already got. And so we feel advantaged in trying to bring new value to the market with respect to categories like merchants and fraud.

Okay. That's helpful. And then Eva, I just missed it. From a housekeeping standpoint, what was the intangible amortization comment for this year?

The intangible amortization for this year is $105 million.

Your next question comes from the line of Anj Singh from Credit Suisse.

This is Nicholas Verhein on for Anj. Can you maybe just give us a sense of what the WoodMac contribution was to your Energy and specialized markets revenue growth in the quarter?

I think we put that out there. It was 3.3%.

Okay. I must have just missed that. Can you just maybe then provide an update on maybe some of the customer conversations or maybe some sentiment what it's sort of trending like? And any updated thoughts on what sort of growth of business can aspire to in a sort of stable to low oil-price environment?

Yes. Well, first of all, just to observe on the environment, I think maybe you noticed that Brent closed at $61-something yesterday. So there's been actually fair progression in terms of the price of the commodity. We've said for some time we just need the environment to be stable for our customers to feel good and to lean in to growing their businesses and doing so, by doing business with us. And we feel like we're now in that environment. So we're actually very pleased about that. Customer conversations are very good. I mean, it's a large global dynamic space and probably every customer of ours in that space has their own story in terms of where are they in their journey towards growth and profitability and part of the reason why we're both a meaningful partner for them and also, we feel like we have really terrific opportunities is that we have these intimate relationships with essentially all of them. And so we're able to turn corners with them, specifically. Where are they trying to get to? And just like everything else we do, our business there also has a motive quality because we have data assets that are absolutely unique. So we feel very strongly about this business and are very excited about where it's going. I said at the time we bought it, and I still say that over intermediate and long periods of time, I'm looking for Wood Mackenzie to grow faster than the average of Verisk. And I -- we believe that's very possible -- probable.

Your next question comes on the line of David Ridley-Lane from Bank of America.

Did want to ask about how renewal rates have trended. And then also, did you offer any price concessions to clients during the downturn as you are doing your planning around next year, are you planning for price increases on those products?

Yes. We've actually talked about this effect before. So just to sort of reprise what we've said before. WoodMac has a -- at WoodMac, we do a mix of 1-, 2- and 3-year subscriptions. So part of what gets reported right at this moment is actually what was said in motion a couple of years ago and there were contracts that were being written and renewed, kind of in the depth of the pressure on the category. So when we report the 5 plus percent ACV progression year-to-date, it actually takes a little while for that to work its way into the reported results. And so as you're watching Wood Mackenzie step-up and we talked about this for several quarters now, it's because these good things that are happening, they just take a while to get expressed into the overall result. So you're seeing WoodMac elevate. I think '18 looks very interesting for WoodMac.

And then on acquisitions. Understand they are a 230 basis points drag to your EBITDA margins in the quarter. In terms of thinking about a timeline to narrow that gap, is a 2-year period too aggressive? Can you do it faster or slower? What's the rule of thumb to use?

Well, if you were to look at, for example, the 3 acquisitions we did in Q3, which are 75% of the spend that we've done in 2017, I think that you would definitely expect them within 12 to 18 months to essentially be sort of looking like they will look like at their run rates. And in all cases, I think you're then talking about a difference to the corporate margin level, which is much, much lower than that 230 basis point effect that we were -- that we've talked. The 230 basis points, Eva, was trying to help you understand Q4 of 2017. But these are highly profitable businesses.

Yes. I would also add that there are some onetime effects when we acquire businesses. There is some fees associated with that. There's some accounting associated with certain revenues, so that can be a more of a near-term weight on those businesses as well. So I think, as Scott, said before we're positive in terms of those ramping up.

All 3 of those businesses have the same quality as the rest of Verisk, which is to say, a high degree of fixed costs and some incremental margins, and all of those businesses are really good.

Okay. Seeing no other questioners on the screen there, I'll just say thank you very much for your time and your interest today. We look forward to seeing you. Hope you can all join us at our Investor Day in December. And as I mentioned right up front, we'll spend even more time on some of these newer parts of the company so that you have a very, very deep understanding of what they are and how they behave in the market and how they behave economically. So hope you can join us then. Thanks for your time today.

This concludes today's conference call. You may now disconnect.