BLACK KNIGHT, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including statements regarding expectations, hopes, intentions or strategies regarding the future. Forward-looking statements are based on
Black Knight, Inc.and its subsidiaries (" Black Knight," the "Company," "we," "us" or "our") management's beliefs, as well as assumptions made by, and information currently available to, them. Because such statements are based on expectations as to future financial and operating results and are not statements of fact, actual results may differ materially from those projected. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. The risks and uncertainties that forward-looking statements are subject to include, but are not limited to:
the occurrence of any event, change or other circumstance which may give rise to
? a right in favor of Intercontinental Exchange, Inc. (“ICE”) or us to
terminate the definitive merger agreement setting the terms of
the proposed transaction;
? the outcome of any legal proceedings that may be brought against us or ICE;
the possibility that the proposed transaction may not close as expected or
at all because it required regulatory or other approvals and other conditions to
? closing are not received or satisfied in a timely manner or at all (and the risk
that such approvals may result in the imposition of conditions that could
adversely affect ICE or us or the expected benefits of the project
? commercial uncertainties and contractual restrictions while the ICE Transaction
is pending, which could adversely affect our business and operations;
? the diversion of attention and time from the management of current affairs
merger transactions and opportunities;
? security breaches against our information systems or breaches involving our
? our ability to maintain and develop our relationships with our customers;
? our ability to comply with or change laws, rules and regulations that
affect our business and that of our customers;
? our ability to adapt our solutions to technological or evolving developments
industry standards or to achieve our growth strategies;
? our ability to protect our proprietary software and information rights;
? the effect of any defects, development delays, installation
difficulties or system failures on our business and reputation;
? changes in general economic, business, regulatory and political conditions;
? impacts on our business operations caused by the occurrence of a disaster or
? the effects of our existing leverage on our ability to make acquisitions and
invest in our business;
? risks associated with recruiting and retaining our skilled workforce;
? risks associated with data availability;
? our ability to consume, integrate and successfully achieve goals
benefits of acquisitions;
? the risks associated with our investment in DNB; and
other risks and uncertainties detailed in the “Statement Regarding
? Forward-Looking Information”, “Risk Factors” and other sections of our Annual Report
Report on Form 10-K for the year ended
The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended
December 31, 2021filed with the SECon February 25, 2022and other filings with the SEC.
Black Knightis a premier provider of integrated, innovative, mission-critical, high-performance software solutions, data and analytics to the U.S.mortgage and real estate markets. Our mission is to transform the markets we serve by delivering innovative solutions that are integrated across the homeownership lifecycle and that result in realized efficiencies, reduced risk and new opportunities for our clients to help them achieve greater levels of success.
We believe businesses leverage our robust integrated solutions across the homeownership lifecycle to help retain existing customers, win new customers, mitigate risk and operate more efficiently. Our customers rely on our proven, comprehensive, and scalable solutions and our unwavering commitment to providing exceptional customer support to achieve their strategic goals and better serve their customers.
We have a focused strategy of continuous innovation across our business, supported by strategic acquisitions – and, more importantly, the integration of those innovations and acquisitions into our broader ecosystem. Our size allows us to continually invest in
our business, both to meet ever-changing industry requirements and to maintain our position as a leading provider of platforms for the mortgage and real estate markets. Deep business and regulatory expertise and a holistic view of the markets we serve allow us the privilege of being a trusted advisor to our clients, who range from the nation's largest lenders and mortgage servicers to institutional portfolio managers and government entities, to individual real estate agents and mortgage brokers. Clients leverage our software ecosystem across a range of real estate and housing finance verticals through multiple digital channels, using our offerings to drive more business, reduce risk and deliver a best-in-class customer experience, all while operating more efficiently and cost-effectively.
The table below summarizes active first and second mortgage loans on our mortgage management software solution and related market data, reflecting our market leadership in mortgage management software solutions (in millions) :
First lien Second lien Total first and second lien as of September 30, as of September 30, as of September 30, 2022 2021 2022 2021 2022 2021 Active loans 32.9 32.5 3.1 3.1 36.0 35.6 Market size 53.4 (1) 52.9 (1) 12.7 (2) 12.3 (2) 66.1 65.2 Market share 62 % 61 % 24 % 25 % 54 % 55 %
Note: The above percentages may not be recalculated due to rounding.
Estimates according to the Black Knight Mortgage Monitor Report as of (1) August 2022 and
estimates are subject to change.
Estimates according to
Mortgages. These estimates are subject to change.
We have long-standing relationships with our clients - a majority of whom enter into long-term contracts that include multiple, integrated products embedded into mission-critical, client-side workflow and decision processes. This speaks to the confidence our clients, which include some of the largest financial institutions in the world, have in our solutions and our commitment to serve them. The contractual nature of our revenues and stickiness of our client relationships make our revenues both highly visible and recurring in nature. Our scale and integrated ecosystem of solutions drive significant operating leverage and cross-sell opportunities, enabling our clients to continually benefit from new and greater operational efficiencies while simultaneously allowing us to generate strong margins and cash flows.
Black Knightecosystem stretches across four core "pillar" verticals: mortgage loan servicing, mortgage origination, real estate and capital markets; with our data and analytics flowing throughout and between the interconnected ecosystem of solutions. As we integrate our innovations and acquired technologies, we are committed to continually improving the end consumer experience, driving further efficiencies for our clients and helping them to win new customers and retain existing customers.
Optimal blue transaction
February 15, 2022, we entered into a purchase agreement with Cannae and THL and acquired all of their Class A units of Optimal Blue Holdco, LLC("Optimal Blue Holdco") through Optimal Blue I, LLC("Optimal Blue I"), a Delawarelimited liability company and our wholly-owned subsidiary, in exchange for aggregate consideration of 36.4 million shares of DNB common stock valued at $722.5 millionand $433.5 millionin cash. The cash portion of the consideration was funded with borrowings under our revolving credit facility. The aggregate consideration of $1.156 billionand number of shares of DNB common stock paid to Cannae and THL was based on the 20-day volume-weighted average trading price of DNB for the period ended on February 14, 2022. As of February 15, 2022, we own 100% of the Class A units of Optimal Blue Holdco. Refer to Note 1 - Basis of Presentation and Overview in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information. Merger Agreement 25 Table of Contents On May 4, 2022, we entered into a definitive agreement to be acquired by ICE, a leading global provider of data, technology, and market infrastructure, in a transaction valued at approximately $13.1 billion, or $85per share, with consideration in the form of a mix of cash (80%) and stock (20%) (the "ICE Transaction"). The aggregate cash consideration in the ICE Transaction consists of approximately $10.5 billionand the aggregate stock consideration was valued at approximately $2.6 billionbased on ICE's 10-day volume weighted average price as of May 2, 2022of $118.09. The ICE Transaction is expected to close in the first half of 2023, subject to the receipt of regulatory approvals and the satisfaction of customary closing conditions. The ICE Transaction has been approved by the Boards of Directors of Black Knightand ICE and Black Knightshareholders. Refer to Note 1 - Basis of Presentation and Overview in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information.
Trade Trends and Conditions
Market trends that have prompted lenders and service providers to seek software, data and analytics solutions include:
Lenders increasingly focused on core operations. As a result of regulatory scrutiny, a decline in refinance origination volumes due to a rising interest rate environment and the higher cost of doing business, we believe lenders have become more focused on their core operations, including ways to reduce costs. We believe lenders are increasingly shifting from in-house solutions to third-party solutions that provide a more comprehensive and efficient solution. Lenders require these providers to deliver best-in-class solutions and deep domain expertise and to assist them in maintaining regulatory compliance and reducing costs. Integral role of technology in the
U.S.mortgage loan industry. Over the past few years, the homebuyer's processes have become more digital, and banks and other lenders and servicers have become increasingly focused on automation and workflow management to operate more efficiently and meet their regulatory requirements as well as using technology to enhance the consumer experience during the mortgage loan origination, closing and servicing processes. We believe technology providers must be able to support the complexity and dynamic nature of the market, display extensive industry knowledge and possess the financial resources to make the necessary investments in technology and software to support lenders and servicers. This includes an enhanced digital experience along with the application of artificial intelligence, robotic process automation and adaptive learning. Heightened demand for enhanced transparency and analytic insight. As U.S.mortgage loan market participants work to minimize the risk in lending, servicing and capital markets, they rely on the integration of data and analytics with solutions that enhance the decision-making process. These industry participants rely on large comprehensive third-party databases coupled with enhanced analytics to achieve these goals. Mortgage loan market participants are eager for timely data and insights to help them plan and react to the changing environment. Regulatory changes and oversight. Most U.S.mortgage loan market participants are subject to a high level of regulatory oversight and regulatory requirements as federal and state governments have enacted various new laws, rules and regulations. It is our experience that mortgage lenders and servicers have become more focused on minimizing the risk of non-compliance with regulatory requirements and are looking toward solutions that assist them in complying with their regulatory requirements. We expect this trend to continue as additional governmental programs and regulations have been enacted to address the economic concerns resulting from the pandemic, and our clients have had to adapt their systems and processes in record time to the shifting landscape. In addition, our clients and our clients' regulators have elevated their focus on privacy and data security in light of an increased level of cybersecurity incidents. We expect the industry focus on privacy and data security to continue to increase.
Our sectors of activity
Our business is organized into two segments: Software Solutions and Data & Analytics.
Our Software Solutions segment offers software solutions that support loan management, loan origination and loan settlement services. Our software solutions revenue represented 86% of our consolidated revenue for the three and nine months ended
26 Table of Contents The following table summarizes our software solutions revenues (in millions): Three months ended % of segment Nine months ended % of segment September 30, revenues September 30, revenues 2022 2021 2022 2021 2022 2021 2022 2021
Servicing software solutions
$ 217.7 $ 210.965 % 66 % $ 662.0 $ 621.466 % 67 % Origination software solutions 115.0 108.7 35 % 34
% 340.8 299.4 34 % 33 % Software Solutions
$ 332.7 $ 319.6100 % 100 % $ 1,002.8 $ 920.8100 % 100 % Our servicing software solutions primarily include our core servicing software solution that automates loan servicing, including loan setup and ongoing processing, customer service, accounting, reporting to the secondary mortgage market and investors and web-based workflow information systems. Our servicing software solutions primarily generate revenues based on the number of active loans outstanding on our system, which has been very stable; however, we have some exposure to foreclosure and bankruptcy loan volumes, which can fluctuate based on economic cycles and other factors. As a result of the effects of the broad-based response to the COVID-19 pandemic, we have seen lower foreclosure-related transactional revenues due to the mortgage loan foreclosure moratorium and other measures that were in effect from 2020 through 2021. We have seen higher foreclosure-related transactional revenues in 2022 compared to 2021 as a result of the expiration of the federal foreclosure moratorium. According to corresponding Black Knight Mortgage Monitor reports, foreclosure starts were 56,400 for the three months ended September 30, 2022compared to 15,200 for the 2021 period. Although foreclosure starts are higher than the prior year period, they are still below levels prior to the pandemic. Our origination software solutions primarily include our solutions that automate and facilitate the origination of mortgage loans and provide an interconnected network allowing the various parties and systems associated with lending transactions to exchange data quickly and efficiently. Our exposure to origination volumes is limited as our loan origination system revenues are based on closed loan volumes subject to minimum base software fees that are contractually obligated, and our secondary marketing technologies' revenues are primarily subscription-based. Some of our origination software solutions are exposed to variances in origination volumes, primarily related to refinance volumes, due to the nature of the services provided. While we saw elevated refinance origination volumes for a prolonged period of time, we have seen lower origination volumes in 2022 due to record volumes in prior years and a rising interest rate environment. According to the October 2022Mortgage Bankers Association Mortgage Finance Forecast, mortgage loan originations have declined 63% for the three months ended September 30, 2022compared to the 2021 period. The portion of our origination software solutions revenues that are more sensitive to origination volumes were approximately 3% of our consolidated revenues for the three months ended September 30, 2022, and revenues related to these origination software solutions declined approximately 37% for the three months ended September 30, 2022compared to the 2021 period, representing a headwind of approximately $6.2 million.
Data and analytics
Our Data and Analytics segment offers data and analytics solutions to the mortgage, real estate and capital markets verticals. These solutions include property ownership data, lien data, servicing data, automated valuation models, collateral risk scores, behavioral models, a multiple listing service software solution and other data solutions. Our data and analytics business is primarily based on longer-term strategic data licenses, other data licenses and subscription-based revenues. For both the three and nine months ended
September 30, 2022, our data and analytics revenues were 14% of our consolidated revenues. For both the three and nine months ended September 30, 2021, our data and analytics revenues were 15% of our consolidated revenues. The portion of our data and analytics solutions revenues that are more sensitive to fluctuations in home buying activity and origination volumes primarily relate to services where we provide software and data necessary for title insurance and other settlement service activities. Revenues from these solutions were approximately 2% of our consolidated revenues for the three months ended September 30, 2022and declined approximately 33% for the three months ended September 30, 2022compared to the 2021 period, representing a headwind of approximately $4.7 million.
Key performance indicators
Software Solutions and Data and Analytics segment revenue, EBITDA and EBITDA margin are reported in accordance with Accounting Standards Codification Topic 280, Segment Reporting. These measures are reported to the chief operating decision maker for
purposes of making decisions about allocating resources to the segments and assessing their performance. For these reasons, these measures are excluded from the definition of non-GAAP financial measures under the
SEC'sRegulation G and Item 10(e) of Regulation S-K.
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