Verisk Analytics, Inc.

Good day, everyone, and welcome to the Verisk 4th Quarter 2021 Earnings Results Conference Call. This call is being recorded. Currently, all participants are in the listen-only mode. After today's prepared remarks, we'll conduct a question-and-answer session where we will limit participants to one question. We will have further instructions for you at that time. For opening remarks and introductions, I would like to turn the call over to Verisk's Head of Investor Relations, Ms. Stacey Broadbore. Ms. Broadbore, please go ahead.

Thank you, Ren, and good day, everyone. We appreciate you joining us today for a discussion of our fourth quarter and full year 2021 financial results. Today's call will be led by Scott Stevenson, Verist's Chairman, President, and Chief Executive Officer, Lee Schabel, Chief Financial Officer and Group President, and Mark Anguillari, Chief Operating Officer and Group President. The earnings release referenced on this call, as well as the associated 10K, can be found in the Investors section of our website, Verist.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 and 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 your future performance, including, but not limited to, the potential impact 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 FDC filing. And now, I'd like to turn the call over to Scott.

Thanks, Stacy. Good morning, everyone, and thank you for joining us for our fourth quarter 2021 earnings conference call. Before we discuss the company's performance, I want to first reflect on the recently announced leadership succession plan. After 21 years at Verisk, I will be retiring as CEO following our annual meeting of shareholders, and I'm pleased that Lee Schabel will succeed me as CEO and Mark Anquillari as president. It has been an honor and privilege to lead Verisk through critical and our company and the industries we serve. With a dynamic executive team, deep bench of talent, strong balance sheet, collaborative culture, a modernized technical environment, and leading-edge analytic and software platforms in place, this is the right time to begin the transition to Verisk's next CEO. I have every confidence that under Lee and Mark's steady leadership, the team will continue to empower a better, more resilient, and sustainable tomorrow for customers and the world. I'd like to personally thank all 9,000-plus Verisk teammates for their passion and dedication to always being innovative, for their underlying commitment to our customers, and for conducting business each and every day with the utmost integrity. I know the Verisk I will be leaving is more data-rich, more modern, and more integrated with our customers, and the future is very bright. Both of you know Lee quite well. Since joining Verisk in 2017, he has served as our chief financial officer and has been a trusted partner who has sharpened our focus on the effective allocation of capital. In 2021, Lee became group president of our energy and financial services segments and successfully integrated the business for improved strategic and operating coordination and accelerated investment in the company's energy data analytics In addition, he's been actively engaged in the company's ongoing business and portfolio review, which I'll speak to in just a bit. Partnering with Lee will be Mark Aguilari, who has been elemental to Verisk's growth, operational excellence, and customer-centric culture for 30 years. Mark has been instrumental in growing the company's insurance vertical and aligning the company's enterprise risk assessment and management with its core operations. With Leah CEO and Mark as president, I have great confidence that we have the right team in place as we execute on our plans to enhance shareholder value, and I look forward to working together toward a smooth transition of leadership. I also want to comment briefly on the recent governance actions that were announced last week. These actions were the culmination of a broad shareholder engagement and outreach program that the management team and independent members of our board of directors have undertaken since last year's annual meeting. As part of our proactive approach, we focused on environmental, social, and governance matters, as well as long-term strategic positioning and operational excellence. We appreciated the broad set of perspectives we heard over the course of conversations with investors, who represented a wide variety of geographies and investment styles, and we greatly valued the input we received. Reflecting this feedback from shareholders, we've taken a series of actions, including first, a proposal in the company's 2022 proxy statement to declassify the board of director election terms. Second, the separation of the chairman and CEO roles effective at the 2022 annual meeting. Third, the implementation of return on invested capital-based incentives for named executive officers and other leaders. Fourth, direct oversight from the boards on the risks and opportunities that sustainability issues create. And fifth, continued ongoing board refreshment. We believe these actions will bring improved transparency, increased accountability, and further align our corporate governance with best-in-class practices. Turning now to the financial results, I'm pleased to share that Veris delivered a strong fourth quarter, demonstrating the consistency and stability of our subscription-based business model, the relevancy and mission-critical nature of our solutions, and our relentless focus on our customers. The net result for the fourth quarter was organic constant currency revenue growth of 5.2% and organic constant currency adjusted EBITDA growth of 7.6%, reflecting solid growth in our insurance segment and sequential improvement in energy and financial services. For the full year, Verisk reported consolidated revenue growth of 7.7% and adjusted EBITDA growth of 6.8%. reflecting the positive impact of acquisitions including Jornaya, Data-Driven Safety, Rosskill, and Whitespace. On an organic constant currency basis, bears grew revenue 5% and adjusted EBITDA 4.7%. The last year was also one of major technological transformation, international expansion, and continued investment in innovation, all of which occurred alongside our comprehensive portfolio review. Starting with our insurance business, 2021 was a strong year, as we reported 6.9% organic constant currency revenue growth and 6.5% organic constant currency adjusted EBITDA growth. We experienced exceptional new sales growth across a broad range of insurance solutions, including underwriting claims, extreme events, and international software solutions, and strong uptake for new insurtech solutions like our Lightspeed platform. We continue to see strong demand for our ESG-related solutions for corporate customers, including our country, climate, and human rights data and analytics solutions. Overall, our insurance franchise remains competitively positioned, and we are advancing our lead by continually building our data advantage and maximizing the strategic synergies across our insurance data assets and solutions. This year, We added 47 new data contributors to our statistical agent database to support rate making across our core insurance lines and provide our insurance customers with valuable analytics that can help them innovate and expand in the rapidly changing marketplace. This includes contributions from global, national, super regional, and regional companies and builds upon the 37 contributors we added in 2020. Additionally, we expanded our contributory image library with real-time images of damaged property and autos for claim settlement with the contribution of images from a top-five insurer. We also expanded our data use rights for automated underwriting, analytics, and subrogation. We continue to experience exponential growth in our small business database, which should fuel future opportunities across the small business lines of insurance. This continued growth in our contributory data is a testament to our partnership with our customers who entrust us with their data assets, a responsibility that we do not take for granted. These ever-growing data sets not only enable and empower us to innovate further to solve our customers' problems, but they also fortify our competitive position and strengthen our growth potential into the future. Importantly, our strategic decision to extend our data analytics to additional areas within the broader insurance segment is delivering results for our customers and for Veris, For example, various life insurance solutions combine our data analytics and software platforms within the life and annuity segment, helping carriers, distributors, and acquirers transform their product rollout, customer buying experience, underwriting, policy management, and claims. In addition, we are saving our customers significant capex and opex and expediting their speed to market for new products. During 2021, Verisk Life Insurance Solutions delivered strong double-digit growth with faster growth in our licensed revenues. Moreover, our late 2020 acquisition of Jornaya and the subsequent acquisition of Contact State in the UK is enabling us to extend our data analytic capabilities into the marketing suite of our insurance customers and is driving strong growth for Verisk. Our marketing analytics solutions help insurance carriers and financial services companies improve the timing, relevancy, and compliance of consumer engagements using in-market behaviors and consent-based data solutions. Marketers are increasingly focused on first-party data enrichment as their foundational strategy, all while managing risk and protecting consumer privacy in an increasingly complex and evolving privacy landscape. Jornaya partners with the biggest insurers and powers data-driven personalized marketing programs for their customers' acquisition and retention. We are also excited about the added capabilities we will be bringing to our marketing solutions through the addition of Infutor, a strategic acquisition that we closed earlier this month. The investment rationale for this transaction is clear. Infutor offers real-time identity resolution and consumer intelligence to marketers to help understand the consumer behind each marketing interaction. Combining this with Jornaya's unique insight into in-market behaviors positions Verisk Marketing Solutions as a key data partner to our insurance customers. It also further strengthens our insurance offering as we continue our portfolio reshaping efforts and increase our focus on the insurance segment. Turning to our energy and specialized market segment, for the full year 2021, we delivered organic constant currency revenue growth of 2.4% and organic constant currency EBITDA growth of 6.4%, reflecting sequential improvement as we moved through the year. This was driven in large part by an enthusiastic reception to our LENS platform, which helped our energy businesses deliver solid annualized contract value growth. resulting from three consecutive quarters of mid-single-digit ACV growth. As we continue to integrate the business for improved strategic and operating coordination and accelerate technology investments, we have an active pipeline of new features and functionality scheduled to be released during 2022 within our LEMS platform, including ongoing development of discovery and valuation capabilities in our power, upstream, and subsurface packages. In addition, we will continue to bolster our existing data to include emerging technologies such as hydrogen and carbon capture and storage. These combined efforts should continue to drive increased adoption and uptake by our customers. With just over 10% of our ACV related to LENS, we feel confident in our penetration runway and expect this to support continued sequential growth in 2022. Now let's turn and discuss our portfolio review process. As we've mentioned on previous earnings calls, we've been engaged in an ongoing and comprehensive bottoms-up review of our non-insurance businesses and overall portfolio composition. With the assistance of outside advisors, our board and management team have extensively studied each of our non-insurance business units, analyzing them across a broad spectrum of financial and operating metrics, including long-term sustainable growth, operating leverage, and capital return potential. We also carefully explored competitive positioning, business scale, cross-vertical data and technology synergies, and the shape and long-term development of the end markets. Here, our decision-making is driving synergies across our businesses and improving sustainable returns on invested capital. It is with this in mind that we determined to sell two of our business units that after careful review did not meet certain operating metrics or did not prove to generate the needed synergies. First, we recently announced the sale of our environmental health and safety business 3E to New Mountain Capital for a total potential aggregate consideration of up to $950 million. Verisk intends to return the immediate after-tax proceeds of roughly $460 million to shareholders through share repurchases once the transaction closes late in the first quarter of 2022. Second, as we announced yesterday, we have signed a definitive agreement to sell Barris Financial Services to TransUnion for a total cash consideration of $515 million. BFS has a unique and proprietary data set that positions them at the nexus of payments, commerce, and banking as the only provider of a full customer wallet view of consumer banking and spending behavior. This transaction will best position Veris Financial to capitalize on the changing market dynamics and continue digitization of banking and retail while providing increased focus for Veris going forward. The closing of this transaction is subject to customary closing conditions, including regulatory approvals. Like with 3E, we intend to return the after-tax proceeds to shareholders through share repurchases. Moving on to our energy business, We continue to actively evaluate alternatives for this business with relevant work streams underway. This includes preparing for the potential creation of a standalone public entity that would benefit from enhanced independence, agility, and unique brand value. We are also exploring how to structure such a transaction in a way that enhances tax efficiency to the benefit of our shareholders. We believe the 2021 ACV momentum, the penetration runway we have for Lens, and the long-term growth prospects of the energy transition represent an immediate growth and return opportunity. We are also undertaking a more intensive review of where we can leverage data sets across our insurance and energy businesses to create value for our clients and shareholders. These actions, combined with an improving energy industry and market and newly changed leadership team within the business unit, give us confidence in the continued momentum of this business. and gives us the necessary flexibility regardless of which long-term strategic path we pursue. In connection with our comprehensive portfolio review, we are also undertaking a proactive study of our cost structure to make sure that we better align our costs with the scale and requirements of our ongoing various businesses. Under Mark's leadership, we will continue to work to reduce our overall expense base by more than just those costs associated with the two business units we have agreed to divest. This work includes productivity initiatives from our Lean Six Sigma teams, use of our global talent optimization hubs, the continued modernization of our technology infrastructure, and careful management of headcount. Certain of these actions are already underway, and we plan to further update you on our progress on our next earnings call. We have confidence that through our active management of costs and ongoing transformation of our portfolio, cost structure, and technology infrastructure, we can return to growth in line with our long-term objectives and deliver OCC-adjusted EBITDA growth ahead of revenue growth in 2022 and beyond. On our technology transformation, we continue to make progress on our move to the cloud, and 2022 marks a pivotal year. I'm pleased to share that Veris no longer owns a mainframe, and we've outsourced our small remaining mainframe footprint Additionally, as we approach over three-quarters of our compute environment residing in the cloud, we will reach the point late this year where we will begin closing the first of our U.S. data centers with the second to follow in 2023 and officially retire the mainframe at that time. This is an exciting milestone for Verisk, and we look forward to achieving these goals and delivering all the benefits of cloud to our customers. Before turning it to Lee, let me touch on our strong free cash flow generation. which enables us to fund the highest return on invested capital opportunities while also directly returning capital to our shareholders. In 2021, we returned over $660 million to shareholders through dividends and share repurchases. I'm pleased to announce that our board of directors has approved a 7% increase in our annualized cash dividend to $1.24 a share and an incremental $1 billion in our share repurchase authorization to support ongoing capital return. And now with that, let me turn the call over to Lee for the financial review. Thank you, Scott. And on behalf of the entire team, let me thank you for your leadership and dedication to Verisk. You have driven success at Verisk, broadened our horizons, and provided a rare balance of leadership and humanity. It has been a privilege to work with you and learn from you over the past five years, and I'm fortunate to know that I will have your support and counsel through this transition. I'm humbled to be named Verisk's next CEO and excited about our opportunities to build upon our track record of success and further strengthen the company ahead. I would like to thank the many shareholders who have personally expressed their confidence in my leadership ahead, and it has been a pleasure to get to know so many of you over the past five years, understand your perspectives, and take your input. I look forward to building on this dialogue going forward. Before we discuss the financial results, I would like to bring to everyone's attention that we have posted our traditional quarterly earnings presentation that's available on our website. For the fourth quarter of 2021, on a consolidated and GAAP basis, revenue grew 7.4% to $766 million. Net income attributable to Veris decreased 19.5% to $142 million, while diluted GAAP earnings per share attributable to Veris decreased 18.7% to $0.87 per share. Our GAAP results include a release of a $50 million litigation reserve previously taken for a patent suit with Eagle View Technologies that has now been settled and a $134 million non-cash impairment charge related to our financial services segment. 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 continued and consistent growth in our subscription revenues. In the fourth quarter, organic constant currency revenue grew 5.2%, driven by continued strength in our insurance segment and sequential improvement within our energy and financial services segments. Our non-COVID sensitive revenues, as we defined at the beginning of the pandemic, increased 6.2% in the fourth quarter of 2021, our strongest quarter of growth for the year. This stable growth in our non-COVID sensitive revenues representing 85% of our total revenues, reflects the durability and resilience of our primarily subscription model and the mission-critical nature of our solutions. Our COVID-sensitive revenues, which represent 15% of our consolidated revenues, declined 1.1% as compared to declines of 12.5% in the fourth quarter last year. While certain of our businesses are back to pre-pandemic levels, we experienced a modest step back relative to the third quarter in certain transactional businesses. including workers' compensation claim solutions, repair cost estimating solutions, auto solutions, and energy consulting services. Additionally, we saw continued COVID-related weakness in the part of our financial services segment related to bankruptcy volumes. To be specific, our COVID-sensitive revenues decreased 2% in both our insurance and energy segments, but increased 4% within financial services. As we move into 2022, we will no longer report this breakdown of our revenue growth as it's becoming less relevant as we are two years into the pandemic and compares have normalized. Consolidated OCC adjusted EBITDA growth was 7.6% in the fourth quarter, reflecting core operating leverage on solid revenue growth and cost efficiencies. Total adjusted EBITDA margin, which includes both organic and inorganic revenue, and adjusted EBITDA was 49% in the quarter, up 80 basis points on a year-over-year basis and still well above our pre-pandemic margin level of 47.1% recorded in the fourth quarter of 2019. While we are experiencing some inflation in certain of our salaries and benefits and the return of certain COVID-related costs back into the business, we were able to offset that with core operating leverage and efficiencies. This level of margin also includes approximately 70 basis points of headwind from our ongoing technological transformation, including our cloud transition costs, which we absorb into our cost structure. That said, we are already generating real economic value from our cloud transition as our cash flow benefits, primarily from lower capital expenditures on third-party hardware and software, exceed our P&L expense. On that note, let's turn to our segment results on an organic constant currency basis. In the fourth quarter, insurance segment revenues increased 6.4%. We saw healthy growth in our industry standard insurance programs, claims analytic solutions, extreme event solutions, life insurance solutions, and international insurance software solutions. We did experience a 2% decline in our transactional revenues because of a slower storm season versus last year and a modest step back in certain COVID-related revenues, including workers' compensation claim solutions. Adjusted EBITDA grew 6.3% in the fourth quarter, while margins declined 50 basis points to 54.1%, reflecting a return to a more normalized rate of hit count growth compared to the prior year, higher year-over-year short-term incentive compensation expense, and the return of certain travel expenses. Nevertheless, This quarter's margin is still 160 basis points above our pre-pandemic levels recorded in 2019 and continues to reflect accelerated investment in our high growth areas like life insurance and marketing solutions. The impact of acquisitions, as well as our technology modernization, including our cloud transition. Energy and specialized markets revenue increased 2.8% in the fourth quarter, a modest sequential improvement from the third quarter with building momentum as we enter 2022. In the quarter, we delivered double-digit growth in energy transition and chemicals research, coupled with modest growth in our core research subscriptions. As Scott mentioned, 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 and had a successful renewal cycle in the fourth quarter of 2021, our largest renewal quarter of the year. Adjusted EBITDA increased 15.3% in the fourth quarter and margins expanded 360 basis points to 36.2%. A portion of the margin expansion reflects favorable comparisons versus last year's fourth quarter, which included a timing difference for certain compensation expenses that were one time in nature. For the full year, margins in the energy segment expanded 90 basis points, reflecting core operating leverage and inclusive of continued investment in our LENS platform and our cloud transition. As we look forward to 2022 for modeling purposes, 3E contributed a high teens percentage of segment level revenue and adjusted EBITDA in fiscal 2021. Given that the transaction is likely to close in the first quarter of 2022, financial results for this business will be included in our GAAP results, but will be excluded from all organic constant currency growth Financial services revenue was essentially flat in the quarter, reflecting double-digit growth in combined spend-informed analytics and portfolio management, offset by continued weakness, primarily in the bankruptcy business. Adjusted EBITDA increased 4.6% in the quarter, while total adjusted EBITDA margins were 28.9%, up 230 basis points year-over-year because of expense discipline. Like 3E, results from VFS will be included in our GAAP results but will be excluded from all organic cost and currency growth figures. Our reported effective tax rate was 13.7% compared to 18.4% in the prior year quarter. This quarterly tax rate benefited from higher levels of stock option activity and certain one-time discrete items in the quarter. Looking ahead to 2022, we expect our full-year tax rate to be between 20% and 22%. though there will likely be some quarterly variability related to the pace of employee stock auction exercise. Adjusted net income increased 14.8% to $240 million, and diluted adjusted CPS increased 15.7% to $1.47 for the fourth quarter of 2021. These increases reflect organic growth in the business, contributions from acquisitions, a lower effective tax rate, and a lower average share count. Net cash provided by operating activities was $188.6 million for the quarter, down 24% from the prior year period, reflecting the impact of the one-time payment related to the settlement of the EVT litigation. For the full year, net cash provided by operating activities was $1.2 billion, reflecting growth of 8.2% versus the prior year period. Capital expenditures were 85.3 million for the quarter up 17.8% versus last year, reflecting increases in capitalized software development offset in part by savings on third party software and hardware as we move to the cloud. CapEx for the full year 2021 268.4 million as we continue to invest in innovation and future growth opportunities. Capital expenditures as a percentage of revenue was 9% for 2021. As we have discussed previously, our business is becoming increasingly software intensive, both organically and through our recent acquisitions. Our customers are recognizing the value and capabilities that our proprietary software can deliver as evidenced by increased subscription pricing and deeper integration with our customers' workflows. As we look forward to 2022, we expect our capital expenditures to approximate $280 to $310 million. This range supports our plans to increase our software investment through the acceleration of our pace of development in Lens and extending software development into core underwriting, where we believe there is a similar opportunity for platform enhancement. Additionally, it reflects the reality of inflation for hiring talent in software development, data science, and cloud architecture, and the impact of prior acquisitions. These software investments generate some of the highest internal rates of return as we drive incremental value by distributing these platforms across our broad customer base and become even more deeply embedded in customer workflows. We believe these investments will continue to build upon the trend of improving returns on invested capital we have recently delivered. Related to CapEx, we expect fixed asset depreciation and amortization, should be within the range of $220 to $240 million and intangible amortization to be approximately $145 million. 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 fourth quarter, we returned $122 million in capital to shareholders through share repurchases and dividends as our strong cash flow allows us to invest behind our highest growth and highest return initiatives while also returning capital to shareholders consistently. As we look to 2022, we expect to deploy the after-tax proceeds from the sale of our 3E and various financial businesses for share repurchases, in addition to our normal pace of quarterly repurchases, which we generally execute through an accelerated share repurchase program. In summary, we are seeing increased momentum across our businesses as demonstrated by our quarterly business. At the same time, we were making important progress executing on strategic operational and governance initiatives, several of which we announced since our last quarterly call and some of which remain ongoing today. And all of which are consistent with our commitment to enhancing shareholder value. We will continue to move diligently ahead in pursuing the most value creating path for our shareholders and all of their stakeholders. And we have confidence that through our active cost management and ongoing transformation of our portfolio, cost structure, and technology infrastructure, we can return to growth in line with our long-term objectives and deliver OCC-adjusted EBITDA growth ahead of revenue growth in 2022 and beyond. We hope this provides some useful context for you, and we look forward to addressing your questions. We continue to appreciate all 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. With that, I'll ask the operator to open the line for questions.