Stewart Information Services Corp

NYSE:STC

Earnings Call Analysis

Stewart Information Services' Q2 2024 Results and Future Outlook

Stewart Information Services reported Q2 2024 net income of $17 million on revenues of $602 million, similar to the previous year's quarter. Adjusted net income was $25 million, slightly down from $26 million. The title segment saw a 6% revenue increase, but pretax income decreased by 6%. Domestic residential revenues dropped by 8%, while commercial revenues rose by 23%. The company expects title losses to average 4% for 2024. Stewart remains cautiously optimistic, aiming for low double-digit pretax margins as the market normalizes to around 5 million annual home sales .

Current Market Landscape and Company Positioning

Stewart Information Services is navigating a challenging real estate environment marked by historically low residential and commercial activity. In the second quarter of 2024, the company reported a net income of $17 million or $0.62 per diluted share on total revenues of $602 million, reflecting similar results to the previous year. Factors including elevated mortgage rates and rising home prices have contributed to this subdued market. Despite these challenges, Stewart has maintained a competitive edge by improving its financial and operational positions, eyeing opportunities for growth as market conditions stabilize.

Revenue Segments: Commercial vs. Residential

In the title segment, total operating revenues saw an increase of $29 million, primarily driven by stronger agency operations, while direct title revenues remained steady. Commercial operations showed notable growth, reporting a 23% increase with revenues of approximately $10 million due to improved transaction sizes and volume. Average commercial fees per file rose 17%, underscoring the segment's resilience. Conversely, residential revenues fell by $15 million (8%), influenced by a reduction in transaction fees. The company anticipates continued momentum in commercial transactions while recognizing possible short-term challenges due to rate cuts and the upcoming election.

Future Guidance and Margin Outlook

Looking ahead, Stewart expects to achieve low double-digit pretax margins as the market normalizes to approximately 5 million unit purchases. This forecast reflects the company's confidence in the strategic enhancements made within its operational framework. Despite the current environment, if market conditions improve, margins could enhance further, predicted to range between 11.5% and 12% in a normalized market scenario. The management emphasizes a proactive approach toward investments and expense management to reinforce competitive advantages without jeopardizing critical goals.

Operational Efficiency and Client Acquisition

Stewart’s focus on operational efficiencies has driven improvements in its employee cost ratio, which decreased to 30.5% from 33.9% year-over-year. Despite increased acquisition costs associated with onboarding new clients in the real estate solutions segment, the company is optimistic about its trajectory. The investment in client relationships and services is expected to normalize by year-end, after which the company anticipates a recovery in margins as the onboarding burdens lessen.

Financial Health and Strategic Investments

The company maintained a robust financial stance with approximately $310 million over statutory premium requirements and a fully available $200 million line of credit. Stewart’s total stockholders' equity stood at approximately $1.36 billion with a book value of about $49 per share. These strong fundamentals position Stewart well to capitalize on growth opportunities as the market begins to recover. The management expressed optimism, indicating that the next several quarters may be pivotal as market dynamics potentially shift with external factors such as interest rates and economic growth.

Earnings Call Transcript 2024-Q2

[Operator]

Hello and thank you all for joining the Stewart Information Services Second Quarter 2024 Earnings Call. [Operator Instructions] Please note today's call is being recorded. [Operator Instructions]

It is now my pleasure to turn today's conference over to Kath Bass, Director of Investor Relations. Please go ahead.

[Kathryn Bass, executive]

Thank you for joining us today for Stewart's second quarter 2024 earnings conference call. We will be discussing results that were released yesterday after the close. Joining me today are CEO, Fred Eppinger; and CFO, David Hisey. To listen online, please go to the stewart.com website to access the link for this conference call. This conference call may contain forward-looking statements that involve a number of risks and uncertainties. Please refer to the company's press release and other filings with the SEC for a discussion of the risks and uncertainties that could cause our actual results to differ materially. During our call, we will discuss some non-GAAP measures. For a reconciliation of these non-GAAP measures, please refer to the appendix in today's earnings release, which is available on our website at stewart.com.

Let me now turn the call over to Fred.

[Frederick Eppinger, executive]

Thank you for joining us today for Stewart's second quarter 2024 earnings conference call. Yesterday, we released financial results for the quarter, which David will review with you shortly. I'd like to kick off the call by sharing our outlook on the current housing market followed by an update on the progress we're making in each of our businesses. I am very pleased with our results this quarter. We have continued to make great progress on our strategic initiatives and are winning share in multiple businesses. These things are difficult to pull off in a normal market much less an environment that we're in now. The housing market has remained depressed much longer than most people anticipated, but Stewart has maintained our competitive edge by improving our financial and operational positions. We remain confident that we are well positioned to capitalize on improving market conditions.

Our view of the current housing market has not materially changed this quarter. We continue to experience a very suppressed housing market due to a combination of factors such as the continuation of elevated mortgage rates, rising home prices and low, but fully returning housing inventory. The market continues to bounce on the bottom where existing home sales every month for the last year have been worse except for 1 than the prior. The only exception was January of this year, which was flat relative to last year. To further illustrate how choppy the market conditions are, recent data shows that the overall majority of the Top 25 MSAs in the country are experiencing increased inventory year-over-year yet pending sales are down. In June, we saw a seasonally adjusted run rate of 3.98 million existing homes for sale, a 5% reduction from the prior year.

This has been a very recent -- there has been a very recent improvement in sentiment around interest rates and inventory continues to enter the market, but buyers are still exercising extreme caution. There are of course some transactions occurring as homes are being bought and sold given various life events, but many consumers continue to remain in a holding pattern given current headwinds. We expect 2025 will be the transitional year helping shepherd us back to a more normal market, which we see is characterized as around 5 million existing homes annually. So we're poised to capitalize on an improving market, but are diligently manning ourselves like the year will be flat to down. We do believe that the next 3 quarters will be interesting as we monitor things like CPA reports and rate cuts and the results of the upcoming election. So we will be prepared to capitalize on any improvement.

Turning towards our operations. We remain focused on building an improved competitive position by executing upon a disciplined operating model while also identifying efficiencies to prepare ourselves for a market rebound. We are dedicated to growing scale in attractive markets across all our lines of business and we have made great advances on improving our customers' experience in all channels through upgrades to our technology, capabilities and operations. We've implemented technology to enhance our title production processes and are working on utilizing technology to improve our data management and access. We continue to focus on attracting and retaining key talent and we know that Stewart is the best home for industry-leading talent to grow with us as the market improves.

Our direct operations segment is focusing their expansion efforts on targeted MSAs and we expect to utilize both acquisitions and thoughtful organic growth to drive share gains. We routinely evaluate markets to ensure we have a view of the most attractive markets for growth and leadership and we have limited our acquisition related investments in the current environment, but have maintained a warm pipeline to prepare ourselves for the improving market. Even though we are currently cautious about acquisitions, we are still very positive about the outlook for opportunities as the market normalizes and we have not deviated from our long-term goals for this business, which is to grow share and scale in attractive MSAs. In commercial, our results for the last 2 quarters reflect our focus on increasing share in our commercial operations.

This quarter we introduced our dedicated hospitality team and our new national affordable housing team through the acquisition of All New York Title Agency. We are making investments in talent across our commercial operations so that we have the leadership, operations and sales teams in place to achieve our goals. We are also investing in technology to support our commercial operations to allow us to better serve our customers and manage our business more efficiently. We expect our commercial transaction momentum to continue, but we know the near-term commercial market challenges may present themselves depending on the outcomes with rate cuts and the upcoming election. Our agency team remains focused on driving share gains in attractive agency markets.

We are focused on our 14 target states and are seeing very good progress in a number of states even in the current market conditions. Specifically, we have seen good leverage from our improved support services as well as our enhanced ability to serve commercial agents. While success comes from a lot of basic blocking and tackling, we see the opportunity for continued momentum. The real estate solutions team is focused on gaining share with the top lenders through new innovative solutions and cross-selling of our products as we leverage our significantly improved portfolio of services to better serve our lender clients. Our real estate solutions businesses maintained its solid financial results and growth in the second quarter particularly given the market.

We have seen significant growth in new clients as compared to the second quarter of last year mostly coming from some innovative solutions in our credit information and valuation services. In our pretax income results, you can see that we are experiencing an increase in customer acquisition expenses as we have onboarded a significant number of new clients. These expenses will normalize toward the end of the year. The current market makes cross-selling our business in this space a bit challenging, but we've been able to offset some of the challenges by gaining share from our existing clients and with new client introductions. Our momentum should continue as we have significant cross-sell opportunities available to build upon over the next couple of years as the market improves. We are thoughtfully managing all our lines of business and remain intentional on our investments in expense management.

We have been careful not to take expense actions that we feel will threaten our competitive position or take away from the critical initiatives that help us meet our long-term goals. We are confident that we are focused on growth across all businesses and work where we are doing to invest in our capabilities that will allow us to achieve low double-digit pretax margins as we return to a more normal 5 million unit purchase market. We maintain our positive long-term outlook for the real estate market and are confident that Stewart is on a journey to become what we call the premier title services company. We believe in the strength of the company and are committed to fortifying Stewart for long-term growth and performance. Our solid financial footing should best position us to take advantage of the opportunities that we believe that this cycle will continue to provide.

Thank you to our customer and agent partners for your continued trust. We are committed to doing our best to serve you with excellence. Finally, I'd like to express my gratitude to our employees. I'm thankful for your dedication to Stewart as we work together to create a more resilient company that continually delivers for our customers and I am particularly grateful to our Houston area employees that have maintained our standard level of service excellence while personally going through a very difficult period and with the recent weather events.

David, I will now turn it over to you to provide the update on our results.

[David Hisey, executive]

Good morning, everyone, and thank you, Fred. I appreciate the outstanding service of our associates and continued support of our customers through this difficult period. As Fred noted, historically low residential and commercial real estate activity persisted during the quarter causing our results to be similar to last year's quarter. Yesterday, Stewart reported second quarter net income of $17 million or $0.62 per diluted share on total revenues of $602 million. Adjusted for net realized and unrealized gains and losses, acquired intangible amortization and other expenses as presented in Appendix A of our press release; second quarter adjusted net income was $25 million or $0.91 per diluted share compared to $26 million or $0.94 per diluted share in last year's quarter.

In the title segment, total operating revenues improved $29 million or 6% driven by higher revenues from our agency operations while direct title revenues were similar to the prior year quarter. The segment's pretax income decreased $2 million or 6% primarily due to the lower agency remittance rate caused by geographic mix. After adjustments for purchase amortization and other items, the title segment's pretax income was $38 million, which was 2% higher compared to the prior year quarter with adjusted pretax margins comparable. On our direct title business, total open orders in the second quarter were 2% better while total closed orders were comparable. Our domestic commercial operations continued to produce solid results with higher revenues of approximately $10 million or 23% primarily driven by improved transaction size and volume in energy, industrial and multifamily asset classes.

Average commercial fee per file improved 17% to $13,500 compared to $11,600 last year. Domestic residential revenues decreased $15 million or 8% primarily driven from lower fee per file with a lower purchase transaction mix. Total international operating revenues improved $3 million or 10% primarily due to increased volumes in our Canada operations. On title losses, total title loss expense in the second quarter increased 7% consistent with the increase in title revenues. As a percent of title revenues, title loss expense was 4% for both second quarters '24 and '23. We expect title losses to average in the low to mid-4% range for the full year '24. Regarding the real estate solutions segment, pretax income improved $2 million compared to last year primarily resulting from increased revenues from our credit related data and valuation services business. Pretax margin was 5.5% in the second quarter compared to 4.6% last year.

Excluding acquisition, intangible expense and sales tax assessment charge; adjusted pretax margin was 11.5% compared to 14.5% in the prior year quarter. The boarding of new customers and scaling the business had an impact on margin as Fred noted in his comments. On our consolidated operating expenses, our employee cost ratio in the second quarter improved to 30.5% from 33.9% last year primarily driven by lower incentive compensation and average employee counts. On our other operating expense, ratio increased to 25.9% compared to 24% in the prior year quarter primarily driven by increased credit information and services expenses in our real estate solutions business. On income taxes, our second quarter effective tax rate was approximately 31%, higher than our historical tax rate primarily as a result of income sourced from international operations, which have a higher average income tax rate relative to domestic operations.

On other matters, our financial position remains solid to support our customers, employees and the real estate market during this difficult environment. Our total cash and investments at the end of the second quarter was approximately $310 million in excess of statutory premium requirements and we also have a fully available $200 million line of credit facility. Total Stewart stockholders' equity at June 30, 2024 was approximately $1.36 billion with a book value of approximately $49 per share. Net cash provided by operations in the second quarter was $21 million compared to $35 million last year primarily as a result in trade accounts receivable consistent with revenue growth. Lastly, thank you again to our customers and associates, we remain confident in our service for the real estate markets.

I'll now turn the call back over to the operator for questions.

[Operator]

[Operator Instructions] We'll hear first from the line of Soham Bhonsle at BTIG.

[Soham Bhonsle, analyst]

Fred, maybe just first one on market share. If I look at the noncommercial line, looks like at least on the purchase side relative to our estimate was a little bit lighter. Can you just maybe talk about what you saw on that front? Anything market-specific to note or anything competitors are doing this quarter, that'd be great.

[Frederick Eppinger, executive]

So yes, there's a couple of things. I feel good about it. As I look at kind of our share in that area, the res area across the board kind of holding our own, but there's a couple of exceptions that happened particularly this quarter. So if you remember at the end of the year as well as I did it again this quarter, I've shut some offices down in some micro markets. So our outlook was that we're going to stay down longer and I had some subscale markets where I felt it was appropriate to manage our kind of margin and our approach that we took some action. So you saw it in the fourth quarter, I took what was it $1.5 million plus $7 million so we'll take $2 million. I did think did the same thing this quarter. So there's some surgical stuff that we've done on some of the micro markets that is working its way through. The other thing I would say if you look at the NAR stuff by MSA and the Top 10 kind of decreases in pending home sales, a number of those markets are our biggest markets.

So places like Houston was the #1 in that, San Antonio within the Top 4. So there are some things to share. But I feel good we're kind of holding our own in those markets, but we did take some actions in my view to ensure the margin. We have a lot of great growth initiatives in our res business and kind of what we call our direct kind of res business where we're doing things like growing kind of main street commercial and bending that in our offices. We've got some really interesting things going on in micro markets with organic hiring in teams. So I'm not really worried about it and I feel it's pretty secure that over the next couple of years we'll have more share in the res market than we do today. But there are some tweaks that we're doing because I want to make sure that we're managing ourselves in a market that continues to be down a little.

[Soham Bhonsle, analyst]

Okay. That's super helpful. And then on the M&A comment, I was a little curious on the cautious approach here. Is that more of a function of where the bid-ask spread is today or something else? Because I would have thought that in the current environment is probably ripe for acquisitions just given that we're sort of at the trough versus waiting for sort of an improvement in the market.

[Frederick Eppinger, executive]

It's exactly what you said. So it's the trading price. So usually what's great about what we've been able to do is between getting to a fair price with an earn-out. You can get at it if the person selling thinks they could be more they could get captured and if they can't, they can't. And we've had every single transaction done that's been accretive and it's a great way to set it up. The problem right now is most agents are making very little money and so it's hard to bridge the value expectations with earn-outs. And so they don't feel as good, we don't feel as good. So in my view, you just got to have a little bit of normalization in the run rate and a little bit more transparency about the outlook and it will be fine. And so again will there be transactions? Sure, but it tends to be because somebody is retiring and they have to do it or whatever or you have some unique transparency to their pipeline because they're in a niche or something like that.

So we fully expect that comes back. We're having a lot of great conversations, dozens frankly. And so there's a lot of people that have rethought their position given the downturn and the stress they're kind of going through. So I think there's going to be lots of opportunities, but I think it's going to be light and will continue to be a little light for the next couple of quarters because of just what you said. It's really just that. We'll get there, but we had a little bit of that same thing right after '21 where people wanted to get paid like it was '21 be duplicated and it took us a while to settle so that we could get and beat the right kind of valuations and we did and we'll do it again. So I'm not really worried about it.

[Soham Bhonsle, analyst]

Okay. And then just last one on your long-term margins, I know that you said you can get to the low double digits in a normalized market. But maybe just talk to us about how much of that lift is in sort of your control versus just the overall market normalizing, right? And I'm asking because I think while the low double-digit margin doesn't seem that farfetched, I think it would be helpful for your thoughts here for investors to hear just to delineate between STC being sort of a show-me story versus sort of a set it and forget it story.

[Frederick Eppinger, executive]

Yes, great question. And again the reason I talk about it is because I have great confidence in the work we've done. So we have what I would consider excess capacity in our direct operations, right? That's where most of our fixed costs are, that's where our distributed offices are, that's where a lot of our revenue is. And the reality is because of the work we've done, any growth back to a normal market, a lot of it gets to the bottom line, right? So those margins -- I talk about the fact that in 2021 while we were showing 13.5%, part of that was fake because the marginal contribution of such a robust market was really high because we're using overtime and that wasn't sustainable. But in '21, my guess is we were in the 10% kind of margin. The work we've done since then, particularly in some research work and some decentralization, I believe that number is now 11.5% to 12% in a $5 million purchase market, which comes from the utilization of the capacity we've created in our system that we will come through when the market just gets normal.

And again it has a lot to do with the structure of how direct works in the offices and how much the workflow is centralized. Now I would also tell you we've done a heck of a job managing in a down market. We changed kind of our financial discipline and structure. So in the 10 years previous to our journey before I got here, the most we ever made in any given period was 5% margin. Well, we just went through the worst market ever, one of the worst markets in 35 years at 3.89% and we're at 5%. So I also feel good about our ability to manage our margins, but I feel that's the market. Now what's controllable by us, we've done a lot of the operating model so we're variabilizing more of the costs, making sure that kind of the way we manage the discipline of staffing is there. So yes, the journey from here to the numbers I'm talking about has some help from that. Now what's the exception of that?

Well, the exception of that is we are gaining share in some of our other businesses. So the reality is in things like our services business if we can continue to gain share and mature a larger business and that business was $30 million 3 years ago, it's now $350 million and I think it has an opportunity to double again as we continue to cross-sell, et cetera. So there's other things that I think regardless -- the market may not have to get all the way to 5%, it has to be better than horrible. But with a little bit of improvement, we'll also get some benefit from some of the growth we're seeing there in an agency where we're literally running share in many states. So again we need the market to get to the full opportunity that I talk about, I need it to just normalize a little bit. But for us again our model right now the problem we have is you got a market going down 5% or 3% to 5% and so you're overcoming the additional work you have to do to make up for that lost volume against your fixed cost base in direct. So I feel good about it, I'm confident in it, but I'd love a little help, let's say, from the market.

[Operator]

Next we'll hear from Bose George at KBW.

[Bose George, analyst]

I just wanted to follow up on the margin again. Just given the trends right now and I think you sort of alluded to this in your outlook comments as well. But does it look like this year if all trends continue, the margin is going to look kind of similar to what you guys did last year?

[Frederick Eppinger, executive]

Yes, that's the way I think about it. So if the market stays kind of where we are today or a tad better if the market is down a little bit, we'll be about where we were last year and it is what it is. We just got to tread water on the -- we still stay at this kind of decreasing a little bit, it's kind of going to be relatively similar to what we made last year. Now the comparisons are a little odd because if you remember last year the third quarter, there was a couple of very robust quarters and then the world came to an end, right? So the comparison is a little bit month-to-month are kind of interesting. But I think the way you articulated it is similar from last year's kind of the way we think about it.

[Bose George, analyst]

Okay. Great. And then just is there much to do now on the cost-cutting side or is it as -- like you said in your earlier comments need a little help from the market and you're kind of positioned for that?

[Frederick Eppinger, executive]

Yes, it's a great question. I mean I keep saying we're kind of running out of things that make sense. We've done some surgical things, as I said, this quarter and a little bit in the end of the year on some micro markets where I couldn't see the long-term view of getting where we needed to. But for the most part we're actually kind of we're there. We are trying to offset by being smart about prioritization of the investments we're making because we are making kind of a number of investments in some of the businesses that I talked about; whether it's commercial, whether it's what we're trying to do in some of the services businesses; particularly since we're ramping up clients. But we're trying to make sure we're making some trade-offs on other places to manage it. But to your point, I think that is a description. There's no magical place left after whatever we're talking 20 months of decreasing market to find a lot of expense opportunity.

[Operator]

[Operator Instructions] We'll hear next from John Campbell at Stephens Inc.

[John Campbell, analyst]

Okay. So I wanted to touch on real estate solutions, obviously really good results here, you're at some of the progress. Fred, you rattled off a few of the standouts, you talked to kind of broader market share. I'm hoping you guys can help maybe a little bit with the modeling. So first, maybe help on the transactional mix, transactional versus contractual? And then secondly, maybe for David, if you can double click on the commentary around onboarding costs. I want to see to what extent that normalizes this year. It sounds like maybe just a mismatch of revenues versus cost as you onboard. So maybe you could help us on that as well.

[Frederick Eppinger, executive]

John, both good questions. So if you look at our portfolio, it's a place where there's a little bit of a standout right now is kind of some of the data solutions we call -- one of the projects called Verification Waterfall. And so we have a really nice uptick in new clients that we're onboarding and it's quite a few. And so it's transactional by its nature, but it is kind of selling data and insight too. And so what you see is because of that, there is a big ramp up, we had a ramp up of onboarding costs. You got to integrate the new clients into your systems, there's a bunch of data you have to get access to buy and transition into the solution, you've got kind of a ramp-up of servicing personnel. And so there's a little pressure on margin as we have kind of the significant growth. And I would also say our first quarter solutions margin was probably a little high, we had some onetime things that happened that made it a tad high. But I do think as we get to the end of the year and things normalize a little bit, the margins will go up a little bit, right?

And so I think we went from mid-teens to low double digit and I can see it getting into that 12%, 13% again at the end of the year depending on the mix of all those solutions that we sell. Now it's difficult to predict that because if the market comes back a little bit, some of our other services will grow a little bit more too. But it is very much explicit like we know exactly what we're doing, we know the returns on those clients, we know what the ramp-up expenses are. There is a little bit of like there's been some data input cost increases in that world that we're now passing on to our clients that had some time delay, that's also in that mix a little bit. But I'm really quite excited about our services business because what we're doing is we'll get really good traction in a market that's still quite anemic and down particularly for lenders. I mentioned in my transcript and I believe this too. We don't have a $30 million business.

We have a $300 million business with multiple products in that. Typically, lenders like to be interested counterparty risk so they like to have people in that business with a balance sheet and we weren't participating. It was really the big boys that we're participating and then some private companies. Over time as the market gets just a tad better, our ability to cross-sell even going to get better because their markets they have the ability to get bigger and they tend to use multiple players on their shelf space. So we're living on a period of new client growth, which will transition to kind of cross-sell growth as we go forward here over the next few quarters. And so I'm pretty bullish on that business. That's why I talk about it because I believe it's going to continue some of the trends we're seeing there. I get it's seasonal so there's some seasonal nature to that space. But I like where we are and I do think the margins will normalize at the end of the year as the onboarding gets to be a more normal percentage of what the revenue is.

[David Hisey, executive]

And John, just to add a couple of things there. I think you were trying to get a sense on transactional versus more like subscription and the subscription is probably only in around the 15% or so of revenue range. Most of that business is transactional. And also just to give a little more color on the cost. So if you think about bringing on a big bank or a lender, you have to set up a service team, right? So you need account reps to give them what they need to run their business and so you're ramping a decent amount of people in particular for bringing on a big account.

[Frederick Eppinger, executive]

But again I like the margins today, frankly, and I think they'll normalize and get a little bit better going forward. So I think we're in a pretty good spot there.

[John Campbell, analyst]

Okay. That's very helpful. So David, the 85% transactional, it does sound like maybe that's reoccurring I guess where you're setting up a team around these guys, it's going to be seasonal, it's going to move with the housing market. But generally when you lock in that lender, it's pretty secure revenue, right?

[David Hisey, executive]

Correct. I mean it varies by service. So like on the credit side, you tend to get the lion's share of the business; on the appraisal side, it's spread around more. But yes, once you sign an account, you're getting their business and their business then varies by the market.

[John Campbell, analyst]

Okay. And then last one for me, just total other OpEx. That's grown at a much faster rate than revenues last 2 quarters. It sounds like that the real estate solution, the onboarding cost is part of that. Obviously you took the actions on the office closures. So I'm guessing maybe there was a little bit of obviously excess office or facility cost. So maybe if you could help talk through the extent of the savings from those office closures and it does sound like that you expect the mismatch to normalize in the real estate solutions segment. So just any kind of high level thoughts on overall total OpEx on revenue in this year.

[Frederick Eppinger, executive]

Again the office closings were only about $1.5 million and then severance I think was $500,000. So that's about $2 million. So it's not a huge amount. One of the interesting things, John, just to clarify what else is in there, which is relatively significant. We've had a tremendous growth of commercial and a lot of that commercial is big energy and in big energy, you do a lot of outside search and data work and we've had a pretty severe ramp-up in our commercial operations. So we've upsized our purchase of data and some of the outside third-party search because a lot of this energy stuff is in rural places where we don't have our own feet on the street or it's remote locations where you're using a third party to make sure we're accessing data. So a lot of the ramp-up is also that so it's in services and it's in commercial. And on the commercial side, one of the interesting things is there's a little bit of a mismatch, right?

So if you ramp up, you provide all those services, you pay for all the services because you have period expenses; but the revenue from those don't come till those transactions close. So we have a really nice pipeline of business in commercial that's going to continue through the year that we ramped up our search and outside third-party costs. So really it's that and it's the real estate serves better by far the 2 places where those businesses are growing pretty materially and they don't have input costs that are in that category. So the margins are good. When you look at it and you break it down by those businesses, the margins are good. But in both cases, there's also a tad bit of timing because our ramp-up was so fast, right? So there's a little bit of a delay in some of the revenue generation and earnings generation for both those things. So I'm very comfortable with the line of sight to the margin of those businesses and the reason for those.

But it is really -- if I think about our model. If you look at the beginning of the year and you think about our model and your guys' model versus where we are, what's different? Well, I think what's different is we felt that the market was going to grow 5% or so, right? Not a lot so our core business was going to expand where we have excess capacity. That has shrunk 5% through the year and continues flat. But what we've done is we've grown significant share of these other businesses. And so we've offset the shrinkage of the market by growth of these other businesses, but those other businesses have different profiles in their economics, right? And so part of that profile is this other expense category, which is the inputs of these businesses that have grown nicely for us. They just changed the profile of our expense base. But again I'm very comfortable with the margins in both places and the fact that we're going to have over time enhancing margins because of the timing if that helps any.

[Operator]

[Operator Instructions] And having no signals from our phone audience, I'll turn the floor back to Mr. Eppinger for any additional or closing remarks.

[Frederick Eppinger, executive]

I'd just like to thank everybody for your interest in Stewart during our call. Thank you so much.

[Operator]

Ladies and gentlemen, this does conclude today's teleconference and we do thank you all for your participation. You may now disconnect your lines.