Verisk Analytics Inc (VRSK) 2018 Q2 法說會逐字稿

Good day, everyone, and welcome to the Verisk Second Quarter 2018 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 CFO, Mr. Lee Shavel. Mr. Shavel, please go ahead.

Thank you, Kyle, and good day to everyone. We appreciate you joining us today for a discussion of our second quarter 2018 financial results.

With me on the call this morning are Scott Stephenson, Chairman, President and Chief Executive Officer; and Mark Anquillare, Chief Operating Officer.

Following comments by Scott, Mark and myself highlighting some key points about our financial performance, we will open up the call for your questions.

Before we do that, I'd like to take the opportunity to introduce our new Head of Investor Relations, Stacey Brodbar. I am personally delighted, as you all can imagine, to have Stacey join us. Although, as I reflected on it last night, you all maybe even more excited than I am to have Stacey with us. She comes to us with 20 years of broad experience from the buy side, sell side and investment banking. Most recently, she spent 11 years at AllianceBernstein, where she served as a Senior Vice President and Senior Equity analyst covering the consumer discretionary sector.

Prior to that, she spent 7 years as a sell-side equity analyst at Crédit Suisse, analyzing the restaurant sector. She holds an MBA from Columbia Business School and a Bachelor of Arts in History from Duke University. I know that she is looking forward to engaging with all of you in this new role, and we will appreciate the same patience that you've shown to me as Stacey comes up the learning curve with the businesses at Verisk. Fortunately, she comes into the job with the benefit and knowledge of having been an investor in the company previously.

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. And we have also posted our investor presentation for the second quarter on our website at verisk.com. 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 today's earnings release, I will remind everyone that today's call may include forward-looking statements about Verisk's future performance. Actual performance could differ materially from what is suggested by our comments today. Information about the factors that could affect future performance is contained in our recent SEC filings.

Now I will turn the call over to Scott Stephenson.

Thanks, Lee. Good morning, everybody. I'm pleased overall with the second quarter results we are reporting today and with the progress occurring across our business.

I recently had 2 weeks in Europe with some of our largest customers and our leadership teams and come away encouraged about our situation and forward opportunities.

Let me summarize some of what I saw and heard. On the insurance front, we are a different company in the London and U.K. markets than we were just 1 year ago. Across many meetings, it became clear that our customers see and understand the logic of the new solutions we have brought to market through a combination of organic developments and acquisition.

On several occasions, I heard customers comment on the unique position we have achieved in the U.K. along with their anticipation of newly integrated offerings from Verisk. I hear customers referring to Verisk as a partner more frequently than in the past. They are asking for deeper dives into our solution sets and pipeline of new developments. Virtually every conversation with customers was forward-looking in nature, which is a good sign for our future.

I also met with the senior leadership of some of Europe's largest energy businesses. I heard continuing affirmation of the must-have quality of the data and the analytics we provide.

Equally encouraging were discussions around the need to transform commercial decision-making in the oil and gas industry through the application of modern data analytic methods.

This point is deeply felt by the energy companies who are awash in technical data but have yet to realize the promise of optimized commercial decision-making.

A goal of our Energy business customers is planning cycles measured in weeks rather than years, which can only be achieved with a level of cost and productivity benchmarking, which has previously been unseen.

Our customers in Europe and indeed, everywhere, see us as a natural partner in helping them achieve this transformation.

I spent an enjoyable afternoon in the offices of one of Argus' leading U.K. customers. It was great to spend time not only with our customer, but also our several person team who sit in the customers' offices, representing a wonderful level of intimacy.

After reviewing the considerable value attached to our current solutions, the conversation with our executive sponsor then moved to future opportunities to harness machine learning to amplify their analytics. Again, the conversation was primarily about the future and how our 2 companies can partner.

A consistent message across customer meetings is that some of the most important work being done by our customers is harnessing data and analytics to improve their business results, and they see Verisk as a unique partner in doing so.

With that, let me hand it over to Mark for some comments on the insurance vertical.

Thank you, Scott. In our Insurance business, we had another strong quarter in all Insurance-facing businesses. Underwriting & rating, as well as claims, contributing to growth. Let me highlight a few areas that drove top line growth and update you on several initiatives that better position us for the future.

To remind everyone of our new reporting segments. Underwriting & rating consists of: one, our ISO business unit, which provides industry-standard insurance programs, property-specific underwriting and rating information and our personal lines underwriting solutions; two, our AIR business unit, which offer -- which provides extreme event models; and three, Sequel, our business unit which provides insurance software solutions.

During the quarter, Underwriting & rating delivered strong organic growth across personal lines underwriting, extreme event modeling and industry-standard insurance programs through a combination of cross-sell with existing solutions to new customers and the sale of new innovative solutions.

Our legacy ISO business continues to maintain high customer retention rates while increasing its prominence as a thought leader in the property and casualty industry.

We have a series of new programs and product extensions fueling growth, including: cyber, one, our new program to address the growing cyber threat, which represents a significant avenue of growth for insurers; two, flood insurance, where we launched both personal and commercial lines coverage to satisfy the underinsured and uninsured problem in the U.S., as evidenced during Hurricane Harvey, where 2/3 of flood losses occurred outside of FEMA's 100-year floodplains. These ISO programs support all areas in the contiguous United States regardless of the FEMA flood zone; three, LightSpeed, our suite of underwriting data and analytics focusing on personal lines risks, primarily, personal auto and homeowner's risk; and four, Risk Analyzer, our deeply analytic and highly segmented suite of tools providing refined pricing detail on specific risks.

We continue to extend our Risk Analyzer suite and recently introduced a physical damage module for commercial auto.

In June, we held our Verisk London Risk Symposium, an event highlighting our InsurTech capabilities across Underwriting & rating and Claims, with a focus on key insurance and global risk issues. The number of follow-up opportunities was impressive as U.K. insurers and Lloyd's syndicates are becoming -- beginning to fully understand the scope and power of Verisk offerings.

After a week together in London, our leadership team was energized by the meetings with customers, developing strategy across our European businesses and prioritizing opportunities brought by these collaborative efforts.

Our Claims businesses include: one, claims analytics, our fraud prevention solutions featuring ClaimSearch; two, Xactware, our suite of solutions focused on loss quantification and repair cost estimating; and three, Geomni, our cutting-edge remote imagery business.

Claims experienced another exceptional quarter with organic growth across all business units through a combination of cross-sale and sale of new solutions.

During the quarter, we acquired Validus, a leading provider of claims management solutions and developer of the leading subrogation portal in the U.K. Subrogation incurs when an insurer pays an insured for a loss caused by a third party. Insurance companies then subrogates or steps into the shoes of the insured to interact with a third party to recoup the loss suffered by the insured. With the addition of a well-established subrogation platform to its existing claims solution set, Verisk is uniquely positioned to support the U.K. insurance market at every stage in the life of a claim.

As I highlighted during our prior earnings call, we are focused on helping our customers automate the claims process to drive towards right touch claims handling, where less complex and smaller dollar claims are handled with limited manual intervention. The subrogation process and coordination of benefits for bodily injury claims are areas where we can vastly improve the claims process and create efficiencies for our customers.

Geomni, our business that harnesses remote-sensing and machine learning technologies to provide information about residential and commercial structures has advanced its massive library of high-resolution imagery and data for substantially all properties in the United States. The aerial imagery and property data, including measurements of dimensions for commercial and residential properties, are seamlessly integrated through Verisk's platforms for claims, underwriting and catastrophe modeling. The image library, advanced analytics and tight integration with our repair cost estimating tools have resulted in exceptional efficiencies for insurers and strong growth at Geomni as well as Xactware.

Across all businesses, from both a customer and financial perspective, we're very pleased with the performance of the Insurance businesses.

With that, let me turn it over to Lee to cover our financial results.

Thanks, Mark. First, I'd like to bring everyone's attention to the fact that we have posted a quarterly earnings presentation that is available on our website. The presentation provides background data and trends and analysis to support our conversation today.

Moving to the financial results for the quarter. On a consolidated and GAAP basis, revenue grew 14.9% to $601 million. Net income increased 26.9% to $154 million for the quarter. Diluted GAAP EPS was $0.91 for the second quarter 2018, an increase of 26.4% compared with the same period in 2017.

Having presented our summary GAAP results, I will now shift to a focus on our organic constant-currency results for all year-over-year growth rates consistent with our financial targets and to eliminate the impact of currency fluctuations and recent acquisitions for which we don't have a full year-over-year comparison.

Acquired revenue and adjusted EBITDA in the quarter from all deals that haven't moved into organic results were $36 million and $9 million, respectively. Please note that nonrecurring acquisition-related transaction expenses are included in these EBITDA amounts.

Verisk demonstrated very solid growth performance and momentum in the second quarter. Revenue growth of 7.4% was ahead of our 7% long-term target and it was our fourth consecutive quarter at or above that target.

Adjusted EBITDA expense grew 5.9%, enabling EBITDA growth of 8.9% and demonstrating the benefit of our operating leverage. The EBITDA growth differential to revenue growth of 1.5% is also ahead of our long-term target of a minimum 1% differential. These results also produced an improved adjusted EBITDA margin of 49.6%, up from 48.9% in the prior year, reflecting the benefits of our scale and inclusive of continued investment across the business.

Let's now turn to our segment results on an organic constant-currency basis. As you will see on Table 2 in the press release, Insurance had a strong quarter with 8.4% revenue growth with Underwriting & rating contributing 6.2% and Claims contributing 13.2% growth.

Adjusted EBITDA for Insurance grew 10.5%, reflecting an increased adjusted EBITDA margin of 56.6%, up from 55.5% in the prior year.

Within our Underwriting & rating business, we saw solid performance across our product lines. We also continued to invest in our break out opportunities, including telematics, LightSpeed, data hosting, energy and global property with exceptional growth despite the relatively small scale at this point.

Within Claims, the continued strong growth was a function of strong product growth in most of our Claims businesses, offset by a slight decline in our employment screening business.

In addition, Geomni continues to generate strong growth as they expand and improve data quality for clients.

Energy and Specialized Markets delivered improved revenue growth of 5.0% for the quarter, up from 3.1% in the prior quarter as the energy industry continues to recover as many of you may have noticed, with the recent reported results from the energy companies.

Adjusted EBITDA increased 0.9%, also an improvement from a 5.9% decline in the prior quarter. Adjusted EBITDA margin of 30.1% was down slightly from the prior year period, 31.3% due to ongoing investments in the WoodMac 2.0 initiative and our chemicals, subsurface, power and renewables and analytics breakout initiatives that increased headcount and associated compensation expense.

These areas represent opportunities to leverage Wood Mackenzie's data and industry expertise more broadly and to deliver and develop products more swiftly and efficiently.

Overall growth was supported by research growth at Wood Mackenzie and strong growth in consulting and with our 3E revenues.

This improvement was achieved despite the ongoing 2018 revenue headwind from a global investment banking client that has substantially reduced their presence in the industry.

The Energy and Specialized Markets segment continues to enjoy core operating leverage and growth opportunities as demand for data analytics and its constituent markets continues to expand and it has been demonstrated in the growth of our breakout revenues and the early new contract wins at PowerAdvocate.

Financial Services also delivered improved revenue growth of 4.4% in the quarter, up from 1.5% in the prior quarter. Adjusted EBITDA increased by 4.5%, down from 5.1% in the prior quarter and the adjusted EBITDA margin was 31.1%, unchanged from the prior year. These results are below our long term expectations of the business but we believe the growth potential of the segment remains strong.

The organic revenue growth was supported by growth in portfolio management solutions, which include our foundational benchmarking analytics and strong growth in enterprise data management solutions, where we are leveraging our data management scale and expertise to support our clients.

Looking ahead to next quarter's Financial Services revenue results. We want to take the opportunity to remind everyone that consistent with our typical partnership revenue model, we expect to have a high level of nonrecurring license and implementation revenue in the early stage of our partnerships, followed by the development of recurring subscription revenues over time.

In this regard, the third quarter of 2018 will represent the 1 year anniversary of the formation of our TSYS partnership, which generated significant initial revenues in the third quarter of 2017 of $6 million with lesser amounts in the subsequent 2 quarters.

Consequently, our growth rates next quarter will reflect the burden of those nonrecurring revenues in the prior year. As we've discussed previously, the launch of our products through the partnerships had been delayed due to data integration challenges, but we expect to commence marketing with clients this quarter with the development of the ongoing subscription revenue opportunity to follow.

Consolidated depreciation and amortization was $74 million in the quarter, up 32.1% from the prior year quarter, reflecting the impact of acquisitions and increased capital expenditures in both periods.

Reported interest income was $32 million in the quarter, up 12.1% from the prior year quarter due to the funding of acquisitions in 2017. Total reported debt was $2.8 billion at June 30, 2018, down from $3.0 billion at December 31, 2017. Our leverage at the end of the second quarter was 2.4x on the basis of our credit facility calculation.

Our consolidated cash and cash equivalents were about $135.8 million at June 30, 2018. Our reported effective tax rate was 17% for the quarter compared to 28.8% in the prior year quarter as the result of recent tax reform. Our effective tax rate was lower than our targeted range due to significant exercises of outstanding employee stock options that produced a favorable tax rate impact.

We are maintaining our estimate of our effective tax rate in 2018 to be between 16% and 18%. However, the timing and impact of employee stock option exercises depends in part on the Verisk stock price and personal decisions. We expect that this impact will be more pronounced in 2018 and that we will revert to a higher effective tax rate in 2019.

Adjusted net income was $179 million, up 29.1% from $139 million in the prior year quarter. Diluted adjusted EPS was $1.06 for the second quarter, also up 29.3% from $0.82 in the prior year quarter. The increase reflects organic growth in the business, contributions from acquisitions and the impact of 2017 tax reform.

Equalizing the second quarter 2017 effective tax rate to that of second quarter 2018, both adjusted net income and diluted adjusted EPS were up 11.6%.

Net cash provided by operating activities was $207 million for the quarter, up 85% from the prior year. Capital expenditures were $56 million for the quarter, up 36% from the prior year, reflecting primarily increased investment in Geomni and software development for recent acquisitions.

As we've discussed previously, 2018 will be the peak year of capital expenditure for Geomni. Free cash flow was $151 million for the quarter, an increase of 114.3% from the prior year.

We returned $141 million in capital to shareholders through the repurchase of 1.3 million shares in the quarter at a weighted average price of $105.78.

At June 30, 2018, we had $686 million remaining under our share repurchase authorization, including a $500 million authorization approved in May 2018.

In addition, we initiated a $50 million accelerated share repurchase to be executed in the third quarter to accelerate the impact of share repurchases and to execute repurchases at a discount to VWAP over the period. We have the ability to repurchase additional shares during the quarter, so the $50 million ASR should not be viewed as our total repurchases for the quarter.

The average diluted share count was 169 million shares in the quarter and on June 30, 2018, our diluted share count was 168 million shares.

Overall, the results for the quarter represented: one, organic constant-currency revenue growth of 7.4% and EBITDA growth of 8.9%, both ahead of our targets; two, improved organic constant-currency margins; three, continued investment in attractive internal opportunities; and four, substantial return of capital to shareholders.

Insurance performance remains consistently strong in both Underwriting & rating and Claims. Our Energy and Financial Services continue to make progress towards their growth objectives.

Looking ahead to the third quarter, we want everyone to be mindful of the $8 million in storm-related revenue and $6 million in initial nonrecurring revenue from the TSYS partnership in the third quarter of 2017 that will affect the third quarter 2018 year-over-year reported growth rates, but don't represent a change in our underlying long-term growth expectations. We also don't know what the 2018 storm season will hold for us.

We are excited about the opportunities to invest in our business and remain focused on long-term profitable growth and solid returns on capital. 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)

With that, I'll ask the operator, Kyle, to open the line for questions.

(Operator Instructions) Your first question comes from the line of Hamzah Mazari.

You touched on what some of your European clients are saying on the insurance offering. Maybe if you could touch on -- do you still think you can double the Insurance business internationally in 5 years? I think you had highlighted that and maybe some of the challenges and sort of headwinds to that goal. Just maybe update us, how much bigger can that international business be and why you feel confident?

When we think about international opportunity as it relates to the insurance vertical, first of all, it's not just about the London and U.K. markets. We're actually pushing out in a number of European and Asian markets. I was highlighting London and U.K. partly because that's where I just was with the customers, but also partly because that is the largest part of our non-North American footprint today. I don't really see a lot of headwinds. I can tell you what the work consists of. The work consists of taking the methods that we've developed in the United States tailoring -- tuning them -- not tailoring them, tuning them to the local markets and then infusing them with a lot of good local data. We know how to do that. That is, in fact, what we're presenting in these overseas markets today. So it's organic. It feels very natural, and what we need and what we have are great people on the ground in these markets that understand the local customers and local conditions and can just cause our solutions to be their most relevant and make clear to the customers the value that they represent. But it's not -- it's mostly white space for us. I mean, Verisk, as you know, is about order of magnitude, 25% non-U. S. today. And it's a big world out there. So this is a long, sustained march for us. But I don't think of it in terms of headwinds. I think of it in terms of great people on the ground locally, taking what we're already good at and making it relevant.

Great. That's very helpful. And just a follow-up, I'll turn it over. Maybe for Lee. Lee, I know you spent a lot of time on capital allocation and over -- in terms of your analyst days, investor outreach, maybe just frame for us how you're thinking about that going forward? Have you, guys, thought about a dividend? Is it -- are there going to be more acquisitions? Are you going to add a third leg to the portfolio? Just broadly speaking, I know the history has been a little different where you had a health care business, then we bought Energy, now you're sort of focusing in on the core. Maybe just give us some feedback after your outreach program and how you're thinking about broadly capital allocation going forward?

Sure. Thank you, Hamzah. So the way -- what I would emphasize is, at this stage, what we're focusing on is starting with understanding capital generation, where we're generating it, how we're generating it, obviously, optimizing that. And then looking at the returns on capital within each of the businesses and most importantly, on an incremental basis, how we're investing the capital that we have effectively to improve those returns and to support the growth initiatives across the business and that's where it's a combination of looking not just at acquisitions, but looking at our internal investments through CapEx, through investments in our breakout initiatives and really, just enhancing that as a discipline across the organization as a whole with the objective of trying to identify as many attractive opportunities to invest capital. And I really think at the core, that's what's most exciting about Verisk. The opportunities that we have across the business, to put capital into growth businesses in the analytics and data management sector. With -- once we are doing that effectively, I think the next step is thinking about how we manage capital. And at this stage, we think about all our opportunities to return capital, we, as you saw in the second quarter, were very focused on repurchasing shares and so you see a focus there. That is determined on a quarterly basis based upon where we see opportunities. But longer term, we are certainly going to evaluate all opportunities, but we're really at the preliminary stage of just thinking about how are we generating capital and how we're deploying it within the business. The final thing that I will say, I think that you have heard Scott and Mark, in several cases, talk about what we see as the opportunities and the strength of our 3 verticals: Insurance, Energy and Specialized Markets and Financial Services. While we are always evaluating M&A opportunities that can create growth, we are very comfortable with the opportunities that exist within those 3 verticals. There's not an expectation at this point that there's any additional vertical that we're pursuing.

Your next question comes from the line of Alex Kramm.

Just a -- I think, Lee, you ended your prepared remarks on kind of like reminding us of the second half outlook and the strong storms. I guess, stepping back a little bit. I think you highlighted that last 4 quarters, growth was over 7%, but really, if you back out the claims which has been really strong, I think it was more like 5-ish or so. So more holistically, I mean, Claims growth is great, but I think there's the question about sustainability. I mean, how do you feel this can continue to grow in the kind of like teens and how could that weigh on your growth rate going forward? I'm not just thinking the next couple of quarters, but more holistically, longer term.

Yes. This is Mark. Let me maybe try to address it. Clearly, the claims area benefits from severe storm activities that occurred back in last year, third or fourth quarter. I think what we've seen is, as a result of some of that storm activity, we've had a little bit of a continuation of services to be continued to provide it to some contractors. And we've also seen insurers, for the most part, buy more. So I don't attribute first quarter, second quarter results to storm activity. I see the underlying business is continuing to be strong. I see the investment that we've made over the last several years in new products and new services and the extension into what I would refer to other parts of the insurance value chain to be working. And I just wanted to highlight that I think we have a lot of good things going in claims and personally, I wouldn't back it out in the way you just did. So I hope that provides, at least, a little context and maybe a little comfort on kind of the underlying solvency and strength of the business.

Good. And then Lee, just secondly, maybe on the cost side. I know you talked a lot about the margin and obviously, organic versus nonorganic. But stepping back, I think you've been there for, I think, almost 9 months or so. Are you spending a lot of time on how the cost base of Verisk looks holistically? I mean -- and I guess, I'm asking because in your prior shop, you -- the company was very well known for being very good on margin, very tight, very cost-conscious. Have you looked at how maybe processes at Verisk are? And if there are improvements, just generally speaking, not just from integration of acquisitions?

Yes. Thank you, Alex. And so -- first off, I feel obligated to say that I think Verisk starts with a very good discipline around cost management and you wouldn't see, I think margins of this strength without that discipline throughout the organization. And so that isn't to say that there aren't always opportunities to improve and as I learned from my prior shop, cost management is a beast that you have to fight every day. And in that regard, I've been spending time focusing on the cost structure. One area, in particular, that has gotten a lot of focus that we have been proceeding against has been against the broader migration mainframe to cloud migration, which I think represents opportunities for us from a cost and from a capital standpoint and so that's one dimension of it. But interestingly, you raised it on the call. We actually have also been evaluating a shift in our procurement strategy in which heretofore has been a very process-oriented procurement strategy. And we are going to be shifting with some changes in leadership to a focus on the cost structure elements and where we can attack data costs, other technology costs and find other efficiencies across the business in order to improve the overall cost structure. So it is something that has received focus. There are a number of initiatives that are underway, focusing on that opportunity and we hope with a reorientation of our procurement and strategic sourcing function to make further headway against that.

Well, yes. It's Scott here. I'll just add that kind of the -- sort of the deep drumbeat where the cost side of our business is concerned, really hinges on a couple of things. One is, as Lee was saying, the nature of the computing infrastructure inside of our company is going to change and we think, productively. It only costs you about $40,000 to source a raw petabyte of storage capacity in the cloud today, only $40,000. I mean, that's remarkable. And so as we move from on-prem to not on-prem, I think we're going to naturally see productivity there. Another opportunity for us that is at work now and I think we will make somewhat more use of into the future, will be to diversify where our talent comes from. There are talented people all around the globe. And at the moment, at least, there are asymmetries in terms of what highly competent professionals get paid. We've made less use of that than we might have. And then 2 other things real quick. One is, just sort of the strong and consistent drive towards effective operations, which we summarized thinking about Lean Six Sigma kinds of methodologies, which is really a quiet revolution that's going on inside of our company. And the last thing is, the ability to change the very nature of knowledge work by harnessing machine learning. To-date, most of that has been applied to making our solutions for our customers better, but the longer tail to the machine learning AI revolution is to actually change the way cognitive work gets done and we have a lot of knowledge workers around here, and I believe that we can really make them more productive by harnessing the machine more. So a bunch of things that underlie -- and these are all productive and they're not just quarter-to-quarter. This is year-to-year. Some of them are probably decade-to-decade kinds of developments.

Your next question comes from the line of Manav Patnaik.

My first question is on Argus. So the $6 million onetime benefit in last year's third quarter, I guess, is new disclosure for us or maybe me, at least. And so it implies that the third quarter is probably not going to have a good number. And so what I'm trying to understand is, 7 quarters of way underperforming, what we are used to seeing from Argus. Like, maybe I don't quite understand what's really going on there, like what the issues are. And I guess, even the margins took a hit this quarter. So I was just hoping you could maybe just flesh out again like what's going wrong there?

Well, first of all, I don't, at all, think that things are going wrong at Argus. It's a great business, which is founded on proprietary content just like much of -- most of what we do at Verisk. So it's actually a great business and if you were to ask me which of our 3 verticals over the next 5 years is going to turn in the highest rate of growth, I think there's a very good case to be made that it could be Verisk's Financial Services. I actually find it hard to handicap the 3 of them. I think they're all going to do well. So it's a great business of which we and I are very proud and provides wonderful levels of value to our customers. So all of that. Thinking about the last couple of years, as we have discussed in the past, 2017, there were a couple of major relationships that cycled out. One part of that was the federal government consolidated its use of what it is that we provide and the other was a very large player in the Financial Services world had essentially been bulk buying some of what we do on behalf of a lot of banks and they stepped out of that relationship. And so underneath that, we had been filling in with relationships with the banks individually. But that was a onetime effect, over and done. In 2018, you have to look across the different segments of the business. And one of the things that is at work right now is -- and we did call this out last quarter also, is the -- on the media and effectiveness side, I'm going to summarize a lot here in just a few words. But basically, the regulatory burden on banks includes really, really requiring a tremendous amount of disclosure around methodologies, which allow the discrimination of risk on an individual customer basis. I mean, the size of the report you have to write to justify methods that you're using is really kind of astonishing. The banks want to do this differentiating and they find our method as valuable as it ever was, but consuming our methods in the form that we had traditionally provided them has just become backbreaking from a regulatory point of view. So we're in the middle of rotating right now the way we present that underlying intellectual property to our customers. And so it's a moment where that shift is occurring. And then lastly, as Lee pointed out, again, in 2018, not only did he note the year over -- the grow over point with respect to the implementation, but we've talked about the couple of quarter delay in terms of actually getting it productive. Normally, what I mean -- and this is a truth of the business, when we establish a new relationship, there's a big surge of activity for data integration purposes and then this very nice annuity stream kicks in thereafter. The annuity stream is kicking in a couple of quarters later than we expected because of the integration issues. So that's what's going on inside the business, but our outlook on this business over intermediate and longer periods of time is completely unchanged.

Yes. And Manav, just to add. I think as Scott was describing, certainly it's an understandable question and we understand the frustration from a growth standpoint. I do think that it's important, kind of starting at that level, to step back and look at what the elements are that are driving it. It has been a chunky and a noisy business. We are -- have been in the process of focusing on how, from a revenue structuring standpoint, we can make this a more sustainable growth business. I think part of the story is that early on, several years ago, there were a number of large opportunities that naturally, we were compelled to pursue and that created some of the large component noise. Where we are now is looking at each of these businesses across the portfolio management solutions, enterprise data management solutions and the spend in marketing solutions, and focusing on how we deliver sustainable growth across those. And when you eliminate the onetime elements, and in this case, which we don't -- we certainly don't feel we want to apologize about the upfront revenues, but I think it's important to understand that those are licensing and implementation revenues with the value of the subscriptions accruing over time. That, that's the underlying dynamic that I think we see as both underlying growth and ongoing potential given the extraordinary data set and the relationships that we have with our clients and the opportunity to use that data to just broaden their applications. I know all of that is looking ahead, but we believe that, that opportunity remains undiminished despite the noise that we've experienced here over the past couple of years.

Okay, got it. I appreciate that color. My second question, Scott, maybe just to step back on the investments you're making in the WoodMac 2.0 platform. I recall, like the year after you made the acquisition, at one of the Investor Days, you talked about how there had already been investments made and a lot of new product platforms are rolled out. So my question was more like, is this 2.0 initiative sort of driven by customer feedback or is this some sort of new gen, you feel like it will help down in the future? Just wanted to get some more perspective there.

Yes. It's both. And let me give you one other contextual point also, which is, of the 3 verticals we serve -- and I am talking about customers now, I'm not talking about us, of the 3 verticals we serve, the Energy vertical is the one that is least transformed yet by large-scale data analytics for commercial decision-making. The companies are awash in technical data. So it's not that they don't know big data, but they haven't harnessed it the way that insurance companies and banks have to drive their commercial decision-making. And we knew that at that time that we -- in fact, that's one of the reasons why we were so excited to get into a business with WoodMac. And then, of course, the double tsunami hit in terms of the commodity price and the Brexit, which is -- what's hard on a U.K.-based pound-denominated sort of a company. So in the middle of these storms, we basically trimmed the sails and pulled the boat into port. Now the sky is clear, we're back out on the seas full sail. So I just want -- if folks haven't followed our story over the longer periods of time, I just wanted to make that point because there is a degree to which WoodMac 2.0 is what we intended from the beginning. And it's -- we just know that it's productive to have a very nicely digitally-based platform for all of your data because you can build the next generation and the next generation after that of products if your platformed in that way. And I think that the WoodMac that came into Verisk in 2015 reflected that -- reflected their customers, basically. In other words, sort of the volume and the speed of the data sets on the commercial side, were just not -- it just was not the way that environment had been behaving. So it's not that WoodMac was behind, I think they were reflective of the environment they were in, but then the other part of it is, yes, it is responsive to customers because their worlds have changed. Essentially, what's going on in the energy -- in the oil and gas energy space is that you used to have these years under -- on to decades planning cycles where you would have these bespoke offshore, multi-hundreds of millions of dollars of developments and essentially, every project kind of was onto its own. And so you planned in that context. What's happened is about half of all the incremental supply has been added in North America. And in North America, the business behaves very differently. You can be drilling a well in location X and you can say, "You know what, I want to move that 1,500 yards over there." And 3 days later, you can have a 1,500-foot well. And so planning cycles have reduced to weeks and days and that's actually exciting. The other thing that has happened is, it's not so bespoke, there are a lot of people in the Permian. There are a lot of people in the Bakken. Your position is next door to somebody else's position. And so the intensity of desire to sort of benchmark and use that to tune up operations and planning is much greater than it was. So in other words, to be effective, you have to be bigger data faster. And that's the conversion that's going on right now. And so you can also think of WoodMac 2.0 as being not only the tuning up of our own environment, but it's actually creating this capability to serve the customers on these faster cycles with a greater amount of benchmarking against like activities. I mean, that's fundamentally what's going on, and that is customer-driven.

Your next question comes from the line of Tim McHugh.

Yes. Can I just follow-up on the insurance growth rate? Was there any contribution then in this quarter that you would attribute to the storm activity? And can you help us understand at all the contribution of aerial imagery at this point to the growth rate?

Sure. So I think question one was really around severe storm and impact in this quarter. There was no explicit benefit. I mean -- I think what we've seen is contractors who purchased the solution back during the storm season. Some have extended that license. That has been good. It seems like that will continue, but there is nothing explicit around the storms. Let me now jump over to Geomni. Similarly, storm activity did help us during the third quarter with the storms last year. I think what you're seeing now inside Geomni is a very strong bit of growth, driven by really, customer adoption, where we're taking share, we had a very tightly integrated solution that for the most part, brings in the imagery, turns it to data and with that data, we're populating the repair cost estimates. At the very heart of what we're trying to do is, we're trying to increase dramatically the productivity of those claims adjusters at our customers. And by doing it in an automated way, whether that's from afar or having most of the information prepared in advance and visiting the location, it creates tremendous opportunity and efficiencies in that process. We are more accurate and I think we have really started to change the way those insurance companies are kind of automating their processes. And Geomni, organically, is helping the overall growth rate of insurance. That is very true.

Okay. And then can you help us [affect at all] the growth of the research business versus the consulting side of Wood Mackenzie? And my impression was, consulting was leading the growth rate versus the research side. I don't know if you have...

Yes, Tim, that's absolutely true. The consulting side is the portion that responds the -- most immediately to the increasing investment levels on the energy side. And so I would describe the growth there as strong growth. On the subscription side, that growth -- there has been growth there. I would say it's more modest growth, but clearly, the consulting side, which represents about 20% of the revenues has been benefiting earlier from that upside. But we are seeing a steady improvement in our overall research subscription levels as the cycle continues to improve for the energy sector.

Your next question comes from the line of Arash Soleimani.

A quick question on Geomni. The $200 million total addressable market there within insurance, is that on the claim side only or does that include both Claims and Underwriting?

So as it relates to insurance, we have -- we've talked about both the Claims business and the Underwriting business. We were very specific in use cases when we provided that estimate. That is in the context of what we refer to as property characteristics on the underwriting side, helping to better understand the physical attributes of the buildings and the residential homes and on the Claims side, as we described. So it is a combination of the 2 with a kind of known use case for insurance.

And aside from Geomni, can you talk about just increasing automation within the insurance industry and to what extent that presents an opportunity for Verisk?

Sure. Let me do that. I think we are...

That's going to take about an hour and a half.

But yes, maybe you can...

I will be quick. I think everyone in the insurance industry, both on the Claims side as well as the Underwriting side understand 2 things. One, they need to automate to get a lot out of -- to get -- rid themselves of operational fiction. The way they're doing that is, they're making an investment in technology and they're changing the way they go about processing. What that also helps to address is a graying of the talent population inside the insurance industry, where their most experienced claims handlers need to be on the more difficult claims or the very difficult underwriting risks. That's where the experience needs to be. So they're trying to create expert systems to handle about 80%. This is a little bit -- our estimate, 80% of claims in a no-touch, low-touch way. So everything else flows on an underwriting side, 80% of those claims, even on commercial, like personal, can be handled at point-of-sale with all the information so you can properly understand, assess and price the risk. And that transition, whether it's back office, policy admin, claim systems or in the world of data analytics, everyone is pushing in that direction with one overarching theme, digital engagement. They're trying to make sure they don't lose customers and they can stay close. So hopefully, I was efficient and quick, but InsurTech and all of that, that we're doing really is kind of making people extend and change the way they're doing business.

Your next question comes from the line of Andrew Steinerman.

This is Judah on for Andrew. I just wanted to circle back on Argus. You, guys, gave some helpful color on some of the holdbacks to growth last year and what's been going on this year. I wanted to ask about, outside of TSYS, you had mentioned 8 large multiyear contracts at Investor Day. You had mentioned bookings that were $13 million higher at Jan 1, 2018 versus the year prior. So I was wondering how the rest of those contracts were going if you were seeing any sort of implementation delays with those or is that something that we could see coming on the horizon?

So Judah, thanks for the question. I mean, the last time we visited this to kind of get a check is -- of the -- our sense is that slightly over half of that contract had been worked into our revenue with the balance expected over the remainder of the year. So I'll get an update on that, but that was kind of where we were previously. I suspect we've made some progress and so more of that has come in. But probably the majority has been realized kind of year-to-date, and there will probably be some carryover in the second half, but probably not a material impact on revenue growth.

Understood. And so for one quick follow-up on Argus. You had -- Scott had mentioned the heavy filing burden that is weighing on some of your bank customers. Maybe I missed this point, but is any of this specifically related to GDPR and similar types of regulations? One of your peers mentioned those regulations, those events as weighing on -- as being a headwind to some of their growth that's similar to your marketing effectiveness. So I was wondering if that's at play here.

No, This is specific to banking regulation in the United States, particularly. So no, it's not.

Your next question comes from the line of Bill Warmington.

So first question on WoodMac, the -- last quarter, you guys had talked about a couple of GEM cancellations. How have the renewals been trending, in general, this quarter? And specifically, how have the trends been on a like-for-like pricing basis?

Bill, I got to correct your facts there. So last quarter, we didn't talk about GEM cancellations. We talked about 2 things going on in the business. When customers consolidate, that can have an effect on the combined entity revenues for us and we did note that there was one of those. And then the other, and Lee talked about it in his remarks, was one investment bank has just sort of rethought their position with respect to the energy vertical. And it's not that GEM has gone away, it's just that they scaled back their relationship with us. So I just want to make sure our facts base is established.

Fair point. So and then...

Go ahead, Bill. Okay, Kyle, do you want to move to the -- I think we may have lost Bill. Can we move to the next question?

All right. I'll move to the line of Jeff Meuler.

I guess, I had a different take on insurance than a prior questioner, but it seems to me like the underlying insurance growth even ex the hurricane benefits is faster than it was a couple of years ago and I just -- how much of this is moving beyond the headwinds from the end market consolidation versus what other factors are at play, like is there generally an improved selling environment in the vertical? It sounds broad-based in terms of product, but are there any specific big product needle movers or any call-outs from that perspective?

Yes. So thanks, Jeff. Yes. And maybe I can start. Mark, please jump in. But first of all, I really appreciate the way you asked the question because there is no doubt that extreme events is -- the fact that there are extreme events is a productive factor as it relates to the rate -- the growth of our business, but it is a very long term sort of an effect underlying our results over very long periods of time. You can probably add a few tens of basis points that are there because there are extreme events. Sometimes they peak, sometimes, it's much more modest. But if you look over long cycles, there's something there, but it doesn't really explain what's going on in our business. So thank you for the way you characterized the question, first of all. The only thing I would really call out as a point-specific thing, actually, is the movement into remote imagery. That is a -- that's news. And that's been productive for us. Otherwise, I do think of it as broadly based and really, it's fundamentally about how innovative can we be. Our customers are trying to revolutionize their businesses with data analytics. And so it's really on us to be relevant and fast. And that's what determines the rate at which we grow. I -- our insurance capabilities, footprint, customer list are all stronger than they were a couple of years ago. So to your point, fundamentally, and I think it's very broadly-based, remote imagery would be the one call-out. Mark, I don't know if you want to add anything to that.

I think you highlighted the good products. I think we highlighted a few in here, but international I think, is going to kind of headline some of the growth and I think the way you opened was strong. I mean, I think we've always had great positions. But with some industry consolidations that does run a bit to our negative and this kind of moves beyond that at this point so good product development and good growth internationally. Limited headwinds helping us along the way.

Okay. And then Lee, just a follow-up in your answer to Judah's question, it wasn't clear to me. Were you saying the percentage of revenue that's worked its way -- or the percentage of bookings that have worked its way into revenue from the TSYS contract or were you saying the other large multiyear contracts and basically saying those are all coming in according to plan and this is all just the TSYS delay and media effectiveness into banks?

No, no. Yes. So I -- it was with regard to the broader group of contracts that I think was referred to at Investor Day at the time. And so my last sense is that -- and that kind of separate from the TSYS relationship and those opportunities, and so far, what we have worked into or have realized of that pool. And I don't have a current update because we don't track those as a group individually, but our sense that those were coming in according to plan.

Your next question comes from the line of Toni Kaplan.

You've highlighted across the years, just the importance of cross-selling as a key growth driver. And I -- in the past, I think, in insurance, you've sometimes mentioned the average number of products that your customers have bought and how that's been trending, but like, basically, I was wondering if there are some metrics maybe that you could give us that would be helpful for us to understand, just your progress with regard to cross-selling? Anything -- any sort of color would be helpful.

So, Toni, I appreciate you remembering this slide, we try to use it every year. We actually started to prepare for this day and this Investor Day, I think we've had similar positive results. I think what we've done, as you recall, we kind of grouped the number of products we had into about 25, 30 categories. And our sales team have this, kind of, this checkerboard approach, where we're looking to do project -- excuse me, account planning across all the different product sets. And we have a little bit of -- we call it the competitive chalkboard. We're trying to win business every day and we have realigned our sales force in such a way that we have a team that's focused outside North America. That's progressing. We have teams that are organized like our customers' personal lines and commercial lines and being able to sell a suite of solutions to personal lines or commercial lines has been winning. And I think it gives them a broader perspective on what customer needs are, a broader understanding of our products themselves. And those are the type of things that we focus on. We focus on customer retention. We focus on revenue from our new products or billings from our new products and a combination of pipeline and close sales. And we look at it basically monthly with a deep dive every quarter. So that process, those metrics continue to be positive.

And Lee, I wanted to ask my follow-up on capital again -- capital allocation, again. And so you have a 2.5x gross leverage target. I'd say that's fairly in line with the average of peers. Your business is very highly recurring. So one could argue that you could sustain a higher level, but on the other hand, maybe in certain environments, you would want to be higher or lower. So what are your thoughts around 2x? And is that a dynamic target? Is that the right target? Just wanted to hear your thoughts on it.

Sure. And Toni, very briefly, I think we are managing leverage generally within the 2.5 to 3x range, I think, that's what we believe is consistent with our run rate expectations for our ratings categories. So I would think about it as kind of being within that. It may be towards the lower end or towards the higher end, but that kind of is our target range.

Your next question comes from the line of George Tong.

This is Allison Chou on for George. Can you comment on the progression of integrating the various acquisitions you've made? And more specifically, how we can expect the process of integrating those deals to narrow the gap between organic and reported margins?

Well, you're actually asking 2 questions there. So Lee, maybe you would take on the second one in a moment, which is just the interplay between inorganic then becoming organic. I'm really happy with the integration of the companies that we brought in, in 2017, which fall into 3 primary categories. One is, we stitched together a set of regional imaging companies into one national capability. Very happy with the progress that we've made there. Secondly, we acquired Sequel over in the London market. That has been a textbook integration and we are -- and we've -- we're already presenting to customers the integrated product opportunities that come from that. And then lastly, is PowerAdvocate. As we've noted for folks, PowerAdvocate has already made sales based upon relatedness to other things we do on the energy side. And I would actually say that, that one flows in both directions because PowerAdvocate is, I'll use a funny word, very invasive, where our customers are concerned. I mean, it gets right into their systems and draws data out of our customer systems and is so good at managing large amounts of data that it actually facilitates other opportunities to help energy companies digitally transform. So it's just all green lights with respect to integration. Lee, just the inorganic to organic crossover, I don't know if you want to comment on that.

Yes, I'm going to touch on that. There are really 3 components. So we wanted to provide the organic so that analysts and investors could see that a like-for-like comparison without the influence of an acquisition before you have it in both periods. But I think, as you think about that delta, I think there are 3 components. One is going to be -- and we do have upfront costs associated with the deal that are nonrecurring. And so that will impact those near-term reported margins with the expectation relative to the deal as those pass on, that will improve the margin. Secondly, as we integrate the margin of the business into our overall, that may have a positive or negative impact on the blended margins. Generally, at the scale of the acquisitions, that's not going to have a material impact. But the most important component is what with each of our acquisitions we hope to do by improving the operating leverage of the business, extending the distribution and improving the productivity. And so that's something that we expect -- while the historical margins are going to trend towards that reported margin. What's not captured is over time, our expectation with each of these acquisitions, that we will see margin improvement through their natural operating leverage as they grow, plus the additional benefits that we can bring either on the costs or on the revenue side. So that's the way I think about the trend of that organic relative to the reported margin in a given period.

Your next question comes from the line of Joseph Foresi.

This is Mike Reid on for Joe. We're just thinking about the Energy business and kind of the mid-single-digit growth we're seeing now. Is this a good way to look at it going forward? Or could this potentially improve if CapEx spending improves with better oil prices and without the headwind from the large investment banking client when that rolls off?

Yes. I mean, two things. One is, yes, as I said earlier, we've got 3 verticals. And it's hard to handicap which will be the fastest growing in the coming 5 years. I think Energy has a lot of promise. We talked about the fundamental factors at work there. And those of you who have followed us for a while know that a lot of what we do in Energy is based on multiyear agreements. And so we've been cycling through those agreements as we pulled out of the commodity down cycle. And essentially, we just think that with time, these effects will -- the constructive effects will continue to be seen in what we do. So we have a very positive outlook.

Great. And then, I think, you noticed previously this year, price increases may be minimized, but would you still be looking to take advantage of pricing opportunities next year?

Are you on the Energy vertical?

No, no. I'm sorry. On insurance.

Price is always a factor inside of what we do. Our products don't come back year-over-year the same and the customers know that. So there's naturally price progression in most everything we do. Mark, (sic) [Mike] I think most of the multiyear agreements we write in insurance have year-over-year price escalation associated with them. So that's a persistent effect in our business. I don't see it as becoming more or less meaningful than it has been in the past.

Your next question comes from the line of Andrew Jeffrey.

Quickly, I wonder if you could articulate a little bit your Internet of Things strategy. How you see that playing out, how it functionally affects your solutions and so forth?

Sure. So I think you've probably seen the announcements. We are trying to aggregate a lot of information, not just from telematics and from cars, but even things around buildings and homes. Two primary focus, let me start with the side of Claims. We feel that we can very much effectively and more efficiently handle the first notice of loss process as it kind of starts inside the car. We put up relationships between what we have and the OEMs or the car manufacturers in combination with insurers so that we can speed a claim process, both the notification and the payment thereof. So that is a good news item. It helps the policyholders, helps the claims department, it saves money. And on the Underwriting side, it's about pricing. The information that is available from connected cars from mobile devices, it can tell you about how fast and how good and the behavior of the driver. And that information is effective in pricing your insurance policy. So we are taking steps to bring that information into both kind of the personal and commercial lines pricing so that our insurance customers can be better and more active in assessing that risk and pricing.

The final question will be coming from the line of David Ridley-Lane.

So within the Energy segment, I'm hoping to understand how far the cyclical rebound and core research for WoodMac revenue has proceeded? And where are we relative to prior peak revenue or client counts on that core WoodMac area?

So client retention is very high. So -- and in fact, we have more customers than we used to have. And as I noted before, the sort of the progression related to research, it's really a function of multiyear agreements rolling off, new multiyear agreements being signed. That has been at work -- since you could really call the turn of the commodity, which is within the last year, we've seen that effect at work. It will continue to be at work as we go forward. Basically, the condition of the commodity is no longer an issue. We consider this a normalized environment that we're in now. So it's constructive and productive for the work we're selling today and the work we hope to be able to sell in the future.

Okay, okay. All right, everybody, thank you. We appreciate your interest and I'm sure we'll be talking to a lot of you in immediate follow-ups and no later than next quarter. So thanks very much. Have a great day.

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