Verisk Analytics, Inc.

Good day and welcome to the very second quarter 2021 earnings result conference call. This call is being recorded. At this time, all participants are in a listen-only mode. After today's prepared remarks, we will conduct a question-and-answer session where we'll limit participants to one question and one follow-up. We will have further instructions for you at that time. For opening remarks and introductions, I would like to turn the call over to the head of Investors Relations, Ms. Stacey Broadbar. Ms. Broadbar, please go ahead.

Thank you, Jay, and good day, everyone. We appreciate you joining us today for a discussion of our second quarter 2021 financial results. Today's call will be led by Scott Stevenson, their chairman, president, and chief executive officer, who will provide an overview of our business. Lee Shavell, Chief Financial Officer and Group President, will follow with a financial review. Mark Anquillari, Chief Operating Officer and Group President, will join the team for the Q&A session. The earnings release referenced on this call, as well as the associated 10Q, can be found in the investor section of our website, Verisk.com. The earnings release has also been attached to an 8K that we have furnished to the SEC. A replay of this call will be available for 30 days on our website and by dialing. 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 their future performance, including, but not limited to, the potential impacts of the COVID-19 pandemic. 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.

Thanks, Casey, and good day, everyone. Thanks for joining us for our second quarter 2021 earnings conference call. I'm pleased to share that Veris delivered a strong second quarter result. The strength of our business model has been on full display since the start of the pandemic and continues in the recovery. We delivered solid top line and profit growth in every quarter last year, despite the weak economic environment and operating challenges from lockdowns because of the consistent and durable growth in our subscription-based businesses. As expected, we are now fully participating in the recovery as our transactional businesses are showing strong resilience and rebounding with the rollout of vaccines and global economies opening up. To be more specific, in the second quarter, Barris delivered organic constant currency revenue growth of 6.3%, comprised of growth of 5.5% in our mostly subscription-based non-COVID sensitive revenues, and growth of 12.1% in our mostly transactional COVID sensitive revenues. In fact, certain of our transactional businesses have already returned to pre-COVID levels. We have confidence this general trend can continue and believe that as the COVID impacts fully abate, we can return to delivering financial results in line with our long-term model. Lee will provide more details in his financial review. These results were delivered through the hard work, dedication, and consistent focus on our customers by our 9,000 employees around the globe. In many parts of the world, we've already begun welcoming our employees back to our offices with a plan guided by our mission of protecting the health and well-being of our team members and in line with directives from local governments and public health officials. While our Global Protection Services team is keeping a close eye on developments with the Delta variant, our teams are energized to work together in person again. In fact, currently more than half of our global offices are operating in a Phase 2 or 3 format. Across the U.S., we have plans to return to full use of our offices in September unless circumstances change considerably. We have implemented a return-to-office policy of three days in the office, four with customers, and two days remote. This approach, which incorporates the best learnings from the pandemic, balances individual flexibility with the collaboration and creativity that stems from working together in person. We also believe that this flexible working policy will help to retain and attract the very best talent as we continue to grow in what is a very competitive hiring environment. Not only are we returning to office, we are also beginning to have certain in-person meetings with our customers, including on-site training and sales opportunities. Given how effectively we've worked in a fully remote format, we have confidence that this return to office policy is the optimal design. Our computing and network capacity have consistently and comfortably exceeded what we require, and our teams have adjusted to using all the virtual collaboration tools we have implemented enterprise-wide. On the topic of technology, we continue to make great strides on our efforts to modernize and optimize our technology platforms to always be best in class. As of today, we have effectively and seamlessly moved most of our applications off the mainframe. This has been a huge undertaking and is a great example of true collaboration and partnership between our IT teams and business units around the globe. In total, we currently have thousands of solutions running native in the cloud, including those that were moved from prior on-premise environments and those built native to the cloud. We are advancing our cloud-first strategy and currently have more than half of our compute environment running in the cloud. The migration to the cloud is a multi-faceted, multi-stage project, and we are pacing this transition in lockstep with our customers to ensure that we are always delivering on their highest expectations. In addition, as we advance on this journey, the process is ever improving, and we are seeing real benefits in terms of pace of innovation, resiliency, security, and compliance. Our ability to introduce new products and release updates to existing products in a quick and efficient manner is vastly improved because of our shift to the cloud. We are also able to onboard new customers and enter new geographies faster and with reduced capital intensity. For example, we successfully deployed our new cloud-based visualized ISO claim search platform to our P&C insurance customers. This modernized version of our industry-leading claim search platform provides a more engaging user experience for thousands of claim adjusters and investigators. and allows us to offer new features, functionality, and solutions quickly and easily to customers through this platform. In addition, our new insurance digital media contributory database will take advantage of the flexibility and efficiencies of cloud technology to process, store, and analyze claim-related digital images from more than 160 insurers. Initially, we expect to receive over 8 million digital media files per week as this new offering ramps up to help insurers better detect potential fraud and increase settlement speed for meritorious claims. The cloud is also advancing our sales process as we can offer customers an easy and cost-beneficial way to pilot or trial new solutions that was previously much more cumbersome in Verisk's prior on-premise format. This allows customers to truly see in action the value of our solutions. Our sales team can then focus on converting those customers to long-term subscriptions. The cloud has also made our solutions more resilient with less downtime, as the duration of maintenance windows are greatly reduced. We no longer must take our cloud-native solutions offline to do things like update, forward, and protocols. We've also constructed a cloud security program that uses artificial intelligence and machine learning to continuously monitor our entire environment, making us more secure and able to audit our entire process for full accountability. And finally, the cloud makes it easier to keep applications and data that are running in local geographies to adhere to the increasing nuances of regulatory and compliance requirements that are geographically specific. As our business expands globally, this becomes an increasing benefit of the cloud. From a capital perspective, our cloud migration has reduced our ongoing need to spend on third-party hardware and software. We are reallocating those savings toward internal innovation and spending more on growth capex. We are leaning into our highest growth, highest return on invested capital, organic opportunities across insurance and energy. Within insurance, we have seen great success with the development of the Lightspeed platform. This organically developed data forward platform has automated and improved the underwriting process for our customers and is driving strong top line growth within our ISO business as we have extended it across personal and commercial lines. Specific to commercial lines, we've seen continued success in small commercial for business owners and commercial auto. With Lightspeed, we have augmented our AI and machine learning capabilities, introducing image analytics that will help present a holistic view over risk at the point of quote and ensure that small business owners get the coverage they need. We've also expanded our entity resolution and benchmarking data and analytics to help our diverse client base scale and increase their speed to market. We are also accelerating our customers' journey towards zero application questions, helping drive speed and efficiency. With over 80 traditional and InsurTech customers leveraging Lightspeed Commercial, we're enabling the industry to free up underwriting talent to focus on more complex risks and helping our customers become the carrier or managing general agent of choice in this fast-moving and profitable space. Within energy, our internally developed cloud-based lens platform is transforming the way customers interact with McKinsey data as we are integrating our complex data sets seamlessly into their workflows. We have greatly reduced our research cycle times from days to hours, allowing us to commercialize solutions more quickly and update data in existing solutions more frequently. This empowers our customers with the data necessary to make timely and well-informed decisions about commodity markets around the globe. We are seeing strong value-based price realization and revenue growth, resulting in solid returns on capital for this platform. The capital management discipline is also evidenced in our acquisition strategy. While interest and valuations for data analytic assets are high, we've been very selective and focused our attention only on assets where we can create incremental value by combining data sets for new solutions, leveraging our infrastructure, or improving sales and distribution through our strong customer relationships and industry scale. Our recent acquisition of Fast is a great example of how we are leveraging our relationships across the industry to accelerate the adoption of Fast software, driving strong returns on invested capital. On the engagement front, even in a mostly virtual mode, we continue to get ever closer to our customers. This engagement starts at the C-suite and runs through all levels of the organization. This is evidenced by increasing frequency of meetings, better attendance at our virtual events, and increasing interest from customers to work with us as development partners. In fact, we recently announced two key development partners for our Lens power solution, namely Vestas and Quinbrook. It has also translated into building sales pipelines and more sales opportunities. And we're having great success converting these sales opportunities into new contracts as we benefit from our ability to bundle our broad offerings to meet our customers' unique needs. This is particularly evident with our fastest-growing customer segment, the insure tech companies. On the innovation front, we recently launched Cyber Risk Navigator, our cyber loss modeling application. This release represented a year-long effort to redevelop the platform from an on-premise solution to a cloud-native SaaS solution. Given the scalability of the cloud, clients are now able to run analyses in minutes that used to take hours. It also provides us the ability to bring new features and model updates to the market quickly, rather than being tied to annual software releases, which is essential for a rapidly changing risk, such as cyber. We've also made great strides in advancing our offerings in the telematics space with the introduction of the driving DNA score. This enhanced solution is powered by the unique data from Verisk's data exchange. that includes 260 billion miles and growing of robust driving behavior data from 8 million connected car drivers. The driving DNA score enables our customers to enter and expand the rapidly growing usage-based insurance market and is another key addition to our whole suite of telematic solutions. Finally, I'm excited to share about some of the changes Ferris has made on our environmental stewardship commitments. We recently completed our 2020 greenhouse gas emissions inventory. I'm pleased to report that for the fourth straight year, we balanced 100% of VAERSC's reported Scope 1, 2, and 3, including business air travel emissions, through a combination of purposeful reduction initiatives and investments in renewable energy certificates and carbon offsets. We remain focused on implementing meaningful physical and operational changes that will reduce our greenhouse gas emissions over the long term. Those include the consolidation of multiple various offices in Boston and London into new energy-efficient business centers, as well as the continuing strategic realignment of our data management activities to take advantage of the major efficiencies presented by cloud computing. Building on the progress we've already achieved to date, I'm also pleased to share that Verisk has committed to an absolute 21% reduction in our scope one and two greenhouse gas emissions by 2024 compared with the 2019 baseline. In developing the targets, Verisk collaborated with Echometrica, an accomplished leader in the field of sustainability metrics, software, and services. The resulting targets incorporate the latest science-based targets guidance aligned with the one and a half degree celsius global future i look forward to updating you on our progress as we remain committed to addressing the very real impacts of climate change today and for the benefit of future generations i have great confidence that our focus on innovation and serving our customers will help us deliver on our long-term growth objectives creating lasting shareholder value as our business recovers from the short-term impacts of the pandemic We continue to actively study the signs of resilience across the different parts of our company. Our dynamic capital process is designed to ensure that our capital is deployed into the highest growth and highest return opportunities. With that, let me turn the call over to Lee to cover our financial results. Thank you, Scott. First, I would like to bring to everyone's attention that we have posted a quarterly earnings presentation that is available on our website. Moving to the financial results for the quarter, on a consolidated and GAAP basis, revenue grew 10.1% to $748 million. Net income attributable to Verisk decreased 14% to $154 million, while diluted GAAP earnings per share attributable to Verisk declined 13% to $0.94 per share. These declines are the result of a non-cash revaluation charge related to the UK tax law change. Adjusting for the impact of the 21 cent per share non-cash revaluation charge, diluted adjusted EPS increased 7% to $1.38. Moving to our organic constant currency results, adjusted for non-operating items, as defined in the non-GAAP financial measures section of our press release, we are very pleased with our operating results, led by consistent growth in our subscription revenues and a recovery in our transactional revenues as our business rebounds from the COVID-related declines from last year. In the second quarter, organic constant currency revenue grew 6.3%, led by continued strength in our insurance segment and sequential improvement in our energy and financial services segment. Our non-COVID sensitive revenues, as we defined at the beginning of the pandemic, increased 5.5% in the second quarter of 2021, as compared to the growth of 6.5% in the prior year quarter. This stable growth in our non-COVID-sensitive revenues, representing approximately 85% of our total revenues, reflects the durability and resilience of our primarily subscription model. Our COVID-sensitive revenues, which represent 15% of our consolidated revenues, continued on the sequential improvement trend and returned to growth this quarter, increasing 12.1%. This compares to declines of 20% in the second quarter last year and the prior quarter performance of declines of 5.9%. Growth was primarily the result of improvements in consulting in our energy segment and a return to pre-pandemic growth rates in many of our products and services within insurance, particularly within the U.S. continued COVID-related weakness in our financial services segment as government forbearance programs are negatively impacting bankruptcy volumes. Organic constant currency adjusted EBITDA growth was 4.2% in the second quarter, led by solid growth in insurance and energy, offset in part by weakness in financial services. Total adjusted EBITDA margin for the quarter, which includes both organic and inorganic revenue and adjusted EBITDA, was 49.6% in the quarter, down 172 basis points on a year-over-year basis, but still above our pre-pandemic margin level of 46.6% recorded in the second quarter of 2019. Much of the decline is associated with the normalization of our costs as we anniversary the COVID benefits from last year, including reduced headcount growth and lower incentive compensation. This margin also reflects an increase in the pace of investment in our technological transformation, including our cloud transition costs and the impact of acquisitions. On that note, let's turn to our segment results on an organic constant currency basis. In the second quarter, insurance segment revenues increased 7.8%, demonstrating strong resilience in recovery. We saw healthy growth in our industry standard insurance programs, catastrophe modeling solutions, repair cost estimating solutions, and international insurance software solutions. We also experienced strong growth in transactional revenues associated with an increased level of securitization revenues in our catastrophe modeling business. a modest benefit from storm-related revenue and double-digit recovery growth in our COVID-impacted revenues as we compared against declines last year. Adjusted EBITDA grew 6.6% in the second quarter, while margins declined 148 basis points, reflecting a return to a normalized rate of headcount growth compared to the prior year and higher year-over-year short-term incentive compensation expense. We also continue to invest in our breakout areas as well as our technology modernization, including our cloud transition. Energy and specialized markets revenue increased 5% in the second quarter due to recovery in our consulting and project-based revenues across energy and power, strong growth in environmental health and safety solutions, and our energy transition research. Included in the quarter was revenue associated with a strategic consulting project that added approximately one point to segment growth. We continue to benefit from strong adoption of our lens platform as customers are seeing the value of our integrated cloud-based data analytic environment. We remain a key part of our customers' most strategic conversations as they deal with the ever-changing energy landscape and our broad base of solutions across all commodities are mission critical to our customers as they navigate through this dynamic environment. Adjusted EBITDA grew 8.4% in the second quarter, while margins expanded 74 basis points, reflecting continued cost discipline and leverage from sales growth. As we look to the remainder of 2021, we want to remind you that we have a very tough margin comparison in the third quarter associated with some headcount reductions, furloughs, and compensation adjustments that we made in reaction to the top operating environment in 2020. However, some of these costs were reversed in the fourth quarter of 2020. All that said, we have a solid track record of managing through volatile times effectively and believe we are well positioned with our energy transition solutions as well as our lens platform to continue to outperform the end market and help our customers navigate this broad energy transition. Financial services revenue declined 8.1% in the quarter, reflecting the continued impact of contract transitions that we undertook in 2020 and will continue through the third quarter of 2021, as well as a lower level of bankruptcy revenue because of government support and forbearance program. Spend-informed analytics demonstrated stronger growth than expected as spending and advertising improved, which enabled us to reduce some of the negative impact on revenue growth from the contract transitions that we originally anticipated. A dusted EBITDA declined 77% in the quarter, reflecting the negative impact of lower sales and a larger impact of corporate expense allocations on the segment's smaller base. We continue to believe that the actions we've taken with VFS over the last few years are setting the business on a stronger foundation from which to grow going forward. Our reported effective tax rate was 35.6% compared to 20.4% in the prior year quarter. This higher tax rate is the result of an earlier than anticipated enactment of a UK tax law change that caused a non-cash revaluation charge. This is simply a timing difference from our original expectations as the impact occurred in the second quarter instead of the third quarter as we had originally forecast. There was no change to full-year results. Given the earlier timing of the tax law change and the fact that this charge was one time in nature, we now expect our tax rate to approximate 20% to 22% for the second half of 2021. Adjusted net income was $191 million and diluted adjusted EPS was $1.17 for the second quarter of 2021. Adjusting for the impact of a $0.21 per share non-cash revaluation charge related to the UK tax law change described earlier, diluted adjusted EPS increased 7% to $1.38. These increases reflect organic growth in the business, contributions from acquisitions, and a lower average share count. Net cash provided by operating activities was $233 million for the quarter, down 6.5% from the prior year period. The prior year period's cash flow benefited from a deferral in both federal income tax payments and certain employer payroll taxes as a result of the CARES Act, partly offset by earn-out payments. Year-to-date, net cash provided by operating activities was $682 million, reflecting growth of 11.4% versus the prior year period. Capital expenditures were $62.5 million for the quarter, up 10.2%. We continue to believe that CapEx will be in the range of $250 to $280 million, reflecting our continued investment in our innovation agenda, our technological transformation, as well as the carryover of certain expenditures that were delayed in 2020 as a result of the pandemic. Related to CapEx, we expect fixed asset depreciation and amortization will be within the range of $200 to $215 million and intangible amortization to be approximately $180 million, reflecting the impact of recent acquisitions and changes in foreign currency rates. Both depreciation and amortization elements are subject to FX variability, the timing of purchases, and the completion of projects and future M&A activity. During the second quarter, we returned $197 million in capital to shareholders through share repurchases and dividends as our strong cash flow allows us to invest behind our highest return growth initiatives, but also return capital to shareholders consistently. Our strategy to deliver long-term sustainable growth remains unchanged. We are encouraged by the recovery we are experiencing in our COVID-impacted businesses, and we believe the stability and predictability of our subscription revenues will persist. We also have confidence in our ability to manage the cost structure effectively to protect profitability. While we do have tough cost comparisons this year, we believe that we should retain some of the margin expansion we experienced in 2020, delivering margins ahead of our 2019 level of 47%. Taking this all together, we believe that as the COVID impacts abate and the global economies continue to open up, we can return to our long-term growth growth, with core operating leverage allowing EBITDA to grow faster than revenue, although it is difficult to predict that timing. We hope this provides some useful context for you, and we look forward to addressing your questions. We continue to appreciate all of the support and interest in Verisk. Given the large number of analysts we have covering us, we ask that you limit yourself to one question and one follow-up. With that, I'll ask the operator to open the line for questions.