Real Matters Inc

TSX:REAL

Earnings Call Transcript 2018-Q1

[Operator]

Good morning. My name is [ Jody ], and I will be your conference operator today. At this time, I would like to welcome everyone to the Real Matters First Quarter 2018 Conference Call. [Operator Instructions]Thank you. Lyne Fisher, Vice President of Investor Relations, you may begin your conference.

[Lyne Beauregard Fisher]

Thank you, operator, and good morning, everyone. Welcome to Real Matters Financial Results Conference Call for the first quarter of 2018. With me today are Real Matters' Chief Executive Officer, Jason Smith; and Chief Financial Officer, Bill Herman.This morning, before market opened, we issued a news release announcing our Q1 2018 results for the period ending December 31, 2017. The release, accompanying slide presentation as well as the financial statements and MD&A are posted in the Investor Relations section of our website at realmatters.com.During the call, we may make certain forward-looking statements that relate to our current expectations and views of future events, including, but not limited to, future market share and future results. We base these forward-looking statements on our current expectations and projections about future events and financial trends that we believe might affect our financial condition, results of operation, business strategy, and financial needs. A comprehensive discussion of the risks that impact Real Matters can be found in the company's annual information form dated December 27, 2017, which is available on SEDAR and on our website. Actual results may differ materially from those indicated or underlying forward-looking statements as a result of various factors, including those described under the heading Important Factors Affecting Results from Operations, outlined in the Strategy and Outlook section of the company's MD&A for the 3-month period ending December 31, 2017 and 2016.As a reminder, we refer to non-GAAP measures and key performance indicators in our slide presentation, including market share, net revenue, net revenue margins, adjusted EBITDA, adjusted EBITDA margins, adjusted net income and adjusted net income per share. Non-GAAP measures are described within our MD&A, where you will also see reconciliations to the nearest IFRS measures.With that, I'll now turn the call over to Jason.

[Jason Smith, Founder, President, CEO & Director]

Thank you, Lyne, and good morning, everyone, and thank you for joining us on the call today. Turning to Slide 3, we were very pleased with our financial performance in Q1. We reported consolidated revenues of $74 million and delivered estimated market adjusted revenue growth of 19%, which was in line with our expectations. We achieved market-adjusted revenue growth of 28% in appraisal and 4% in title and closing. As noted in our press release, the first quarter of fiscal 2017 was a very tough comp for us as it was the peak of the refi boom in the U.S. On a year-over-year basis, we estimate the market was down 28%, principally because of the massive fall off in refi volumes. The size of the origination market in the first fiscal quarter of 2018, so the period ending December 31, 2017, was what we would deem to be a normal market on a historical run-rate basis. In fact, we've been running in a normalized market since the second quarter of fiscal 2017. Looking ahead into the third and fourth quarters of fiscal 2018, the total market is forecast to be roughly the same size as the comparable quarters in fiscal 2017.Taking a look at our appraisal business in the first quarter. We continued to keep pace with our expectations for market share increases with our clients. We also added clients, signing 2 new Tier 2 lenders in the first quarter, which have since gone live. From an operations perspective, we were ranked #1 on lender scorecards for all of our Tier 1 lenders. Turning to the title and closing business, our first quarter results demonstrated market adjusted growth, particularly in our refinance origination products, which exceeded our expectations. As we've discussed on previous calls, we also offer clients a variety of title and closing products that aren't subject to the same trends as the overall mortgage origination market, and so revenues for this part of the business don't follow the same seasonality curve.We made significant progress with our title and closing pipeline within the top 100 lenders in the first quarter, making us confident in our ability to achieve our 2018 objectives for title and closing. We expect to grow title and closing market share with the top 100 lenders in our existing portfolio and with the addition of new lenders. As we communicated on our last call, we've hardened the business to meet the requirements of regulated banks and have made the transition to our network management operating model. The last piece of this transition is porting the business to our technology platform, which is the same platform we use for appraisal, and we are on track to deliver on this by March 31.During our last call, I also talked about how our engagement with Tier 1 and Tier 2 lenders for title and closing was moving faster than we anticipated. We believe that those efforts will come to fruition in the second quarter. That said, we do not foresee changing our outlook for growth in title and closing as we will be rationalizing other title and closing products into this growth.With that, I'll hand it over to Bill. Bill?

[William P. M. Herman, Executive VP, CFO & Chief Accounting Officer]

Thank you, Jason, and good morning, everyone. Turning to Slide 4 for a look at our segment results. We reported U.S. revenues of $66 million compared with $72 million in the first quarter of fiscal 2017. U.S. appraisals and ancillary service revenues were $50 million in the first quarter of 2018, which was on par with the first quarter last year. Taking into account the estimated 28% decline in the U.S. mortgage origination market, appraisal revenues grew organically by 28% due to higher appraisal volumes from new clients and market share gains with our existing clients.Title and closing revenues declined to $16 million from $22 million in the first quarter of 2017. We estimate that the refinance mortgage origination market declined 50% since the first quarter of 2017, which significantly impacted our title and closing revenues due to their high correlation to changes in refinance market activity. On a market-adjusted basis, we estimate our title and closing revenues were up organically by 4%.Taking a look at the Canadian segment. Revenues were up 4% to $7.4 million, led by higher appraisal and ancillary service revenues. We increased our market share in Canada during the first quarter, and FX also had a positive impact. However, these contributions to revenue were partially offset by lower estimated market activity.Turning to Slide 5. Consolidated revenues declined 6.4% to $73.9 million due to lower title and closing revenues of $5.5 million in the first quarter of fiscal 2018 versus the same period last year. We estimate U.S. total residential mortgage origination activity declined 28% between the first quarter of fiscal 2018 and fiscal 2017, comprising an estimated 1% increase in residential mortgage purchase activity and a 50% decline in refinance activity. On a consolidated basis, transaction cost declined 2.8% to $51.4 million in the first quarter of fiscal 2018. We benefited from lower transaction costs in our supply of appraisal services and the decline in refinance market volumes drove transaction costs lower in our supply of title and closing services.First quarter net revenue was $23 million compared with $26 million in Q1 2017, and net revenue margins decreased to 30.4% from 33% over the same period. The change in net revenue margins was principally attributable to a change in our U.S. revenue mix and product mix within our title and closing service line. As you know, net revenue margins in our title and closing business are higher than in our appraisal business. And so lower proportional title and closing revenues impacts both net revenue and net revenue margins. That said, we recorded net revenue margin expansion on a comparative quarter basis, as we continued to benefit from the network effect on the appraisal side of the business.We expect to leverage our platform to lower transaction costs as a percentage of revenues over the long term, as we continue to build market share with clients. And we remain confident in our ability to deliver on our net revenue margin target of 35% to 40% by 2021.Working our way down the income statement. Consolidated operating expenses were down $0.1 million in the first quarter of fiscal 2018 compared to the same quarter last year. Lower operating expenses in our U.S. segment was the result of reduced headcount from lower refinance volumes and an early day shift to a network management model in our supply of title and closing services. These reductions to operating expenses were partially offset by an increase in corporate segment costs, attributable to higher public company costs and higher staffing levels to support investments in our platform. The result of these changes to revenues, transaction costs, and operating expenses resulted in a decline in adjusted EBITDA to $2.4 million from $5.5 million in the first quarter of 2017. This decline was primarily due to lower mortgage origination market activity, which we discussed, a change in U.S. segment revenue mix and higher corporate segment costs.Before I hand it back to Jason for his closing remarks, I wanted to address the recent tax changes resulting from U.S. tax reform and its impact on our results and deferred tax assets. The change in the U.S. statutory income tax rate resulted in a significant reduction to the carrying amount of our deferred tax assets. Deferred tax assets in the U.S. were previously recorded applying a tax rate of 40%, which compares to a tax rate of 28% at December 31, 2017. Accordingly, we recorded a onetime charge deferred income tax expense of $4.7 million in the first quarter of fiscal 2018. On a go-forward basis, we expect our effective tax rate in the U.S. to be 28%, reflecting the federal rate of 21% and estimated State tax rate of 7%. On a consolidated basis, we are expecting an effective tax rate of roughly 27% to 27.5%.With that, I'll turn it back to Jason. Jason?

[Jason Smith, Founder, President, CEO & Director]

Thanks, Bill. Overall, we were very pleased with our performance in the first quarter. We posted market-adjusted revenue growth of 19%. The U.S. mortgage origination market continues to be very healthy, fueled in part by a steadily growing purchase market. Our appraisal business continued to thrive by delivering organic growth and new customer wins based on its strong fundamentals. We are on track with our appraisal market share goals for 2018 and out to 2021. We also advanced our title and closing pipeline with top 100 lenders, which makes us confident that we can achieve our 2018 objectives for title and closing. On the whole, we're feeling really good about the business, the market and the year ahead.With that, operator, we'd like to open it up for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Thanos Moschopoulos from BMO Capital Markets.

[Thanos Moschopoulos, VP & Analyst]

Jason, just given your commentary in terms of how your efforts to sign a Tier 1 or Tier 2 for title and closing and your approaching fruition, just remind us, what ramp time we would expect from the time you sign a customer to the time you start generating revenue?

[Jason Smith, Founder, President, CEO & Director]

Sure. Well, the hard work is typically in the ramp up to executing the master services agreement. And so we are very fortunate that within our large customer base, we have connectivity, and we have a master services agreement in place. So it's significant we cut down and where really focuses on executing a statement of work with these customers, which really lays down the pricing, the markets that we're going to launch in. And so when we announce or execute on a statement of work, we would expect deployment to start very shortly thereafter, so within really a matter of 30 days. And so I think, as I indicated in my remarks, this pipeline has been growing significantly, and we actually expect, Thanos, to have a statement of work executed within the quarter that we're in right now. I'll sort of bring you back to the 2021 model. We weren't expecting a Tier 2 bank to launch until the very back half of this year, just a little bit in Q4, and then not a Tier 1 bank into the very back end of 2009 (sic) [ 2019 ]. And the larger the banks and the regulated nature of them fit really well with our value proposition. So this is higher quality revenue as we think about it. It's in that core refi business, and we will continue to rationalize sort of these noncore, default, REO, commercial business lines into that growth. So I'd say that we're not moving up our guidance for 2018 or 2021. We will rationalize these other product streams that were acquired through Linear into that growth. So we're very pleased with our progress.

[Thanos Moschopoulos, VP & Analyst]

Good to hear. And just to clarify a point. You were saying that by March 31, your existing title and closing customers for centralized refi are going to be on the new platform. Is that correct?

[Jason Smith, Founder, President, CEO & Director]

That's correct. So when we think about the platform, Thanos, we're really referring to 3 things. One is, the operating model and our internal staff being lined up to support the whole platform. The second is the network in place and the right network, and this will be closing agents or abstractors in the case of title. And then the third component is the technology itself. So the first 2 are done, and they've been hardened with respect to the footprint that we're in. And on March 31 is the full port to the technology, and that will have the whole business on the platform. And that technology would be the demos and -- that you would've seen in the November time frame.

[Thanos Moschopoulos, VP & Analyst]

Great. And just one last one. You mentioned that you signed 2 Tier 2 appraisal customers in the quarter who are already ramping. That seems to be a very quick time frame. Is that unusually quick? Have you gotten faster in terms of your deployment ability over time? Or is this sort of just specific to those customers in terms of why you are able to get them up and running so quickly?

[Jason Smith, Founder, President, CEO & Director]

Yes. So the pipeline -- so these customers have been in the pipeline for a long time, RFIs, RFPs. And when we finally execute a master service agreement and a statement of work, it is around the deployment timeline. And so in these particular cases, the master services agreements and files were executed very close to when we were set to deploy. So all the hard work was done in Q1 and the quarters prior to that. And we were ready to deploy here right after the new year. So thrilled with our execution on that front.

[Operator]

Your next question comes from the line of Daniel Chan of TD Securities.

[Daniel Chan, Research Analyst]

There are a number of dynamics happening in the market, Fannie and Freddie waivers that we've always known about, but also the tax reform with mortgage interest rate deduction caps. Do you have any view on how these all play out in terms of the overall market for you guys?

[Jason Smith, Founder, President, CEO & Director]

Sure. The way that we look at it, and we've done significant work on it, both pre our IPO and post, is essentially neutral to the plan that we laid out in our perspective. The waivers and the very small percentage of the waivers that we're playing out --- played out actually before we went public. So when we look at our total addressable market as we laid down, we had factored a small percentage of waivers in that -- in the market. And so we do not see a change in our total addressable market. I think, the commentary around Fannie and Freddie with respect to these waivers is interesting and really speaks to the small effect of that. And Dan, I happened to read your phenomenal report where you broke down the market and the different market segments that this would address and came up with a less than 5% number. And what's interesting in that, and you went one step further which is -- and that's when it's an offer. And so for the regulated banks, just because they're offered, it doesn't mean that they take Fannie or Freddie up on it. And so you even go further down that. So many of the Tier 1 banks don't know who in the regulated banks they are ultimately going to sell the mortgage loan to, whether or not they're going to keep it on their balance sheet. And so they're actually managed to a much lower standards, the highest quality standard, which is a full appraisal. Many homeowners in the U.S. actually write in the purchase agreement that it's conditional upon appraisal, not for mortgage financing purposes, but for consideration around the purchase price, so that they have an out if the appraised value comes in differently than the purchase price. So the overall effect of waivers is very insignificant on our business and something that our customers tell us that is not changing the behavior. With tax, I would say that the overall market effect is neutral. There are certainly markets where it does impact part of the market, but on balance, I think most of the commentary is neutral, and we have not seen -- we don't have particular concentration in those areas. So I would say that there are some pros, there are some cons, and so net, that is at neutral in terms of tax effect.

[Daniel Chan, Research Analyst]

Great. You also mentioned that you're going to be migrating some of your business over to the new title and closing platform, the digital platform. How do we look at that in terms of impact on net revenue margin versus EBITDA margin?

[Jason Smith, Founder, President, CEO & Director]

Sure. Bill, do you want to?

[William P. M. Herman, Executive VP, CFO & Chief Accounting Officer]

So again, I think it's best laid out this way, Dan, in that -- we've stated this a few times in that when we think about our title and closing business, where we bought a company that was a 60-40-10 as it relates to revenue, net revenue and EBITDA contributor to the business, we still think of it as a 60-30-15, when we think forward about porting that business on to our network management platform. So again, that 60-30 -- I'm sorry, yes, 60-30-15 is revenue, net revenue and EBITDA, just to be clear. So again, no change there in what we're thinking about how that business is going to behave as we think forward into and through to 2021.

[Operator]

[Operator Instructions] Your next question comes from the line of Robert Young of Canaccord Genuity.

[Robert Young, Director]

On the presentation, you mentioned that you're being ranked #1 on all of the scorecards for your Tier 1 lender customers. And so I think -- could you talk about how that feeds to share? Is it a very precise process that the banks run around how they allocate share? Or is there some subjectivity? Maybe you can talk about the dimensions of that scorecard, like what are they looking at, what's important? Just -- maybe just some broad color around what that means -- what it means for the share growth going forward?

[Jason Smith, Founder, President, CEO & Director]

Sure. So Robert, addressing your -- the second part of your question at first. So what -- the big drivers for the banks in scorecarding, number one, is quality and so that's the error rates in appraisals. It's whether or not the end appraisal meets the requirements of the Fannies or Freddies, it meets the requirements of the bank's regulator, if it meets the requirements of the state regulator. And so quality with that respect is the #1 focus. So think of that as an error rate, and they're benchmarking their providers with respect to that error rate. The second component in terms of priority for the bank goes to speed. And that's becoming more important in a purchase-driven market. And so on refis, you have longer closings and as long as you got the rate lock, when it actually closes is less important. When on a purchase you've got in highly competitive markets, where you've got consumers competing and the bank competing amongst other banks for the deal in order to get that closed, getting that appraisal in the front of the deal is very important. And so speed and turn time, not just delivering the appraisal report or getting into the house, but the process of delivering that report with no errors on it and a final firm form. So the entire end-to-end process is very important. And then the third, with the respect to sort of capacity in the marketplace. So as we've moved into a seasonality-driven purchase market where the spring market and the summer markets of our Q3s and Q4s have much higher overall market volume in it, the ability of a business model to scale becomes very important. And it's great that in January and February, you can do all right, and I would tell you that this is where through -- if you were competing with a staff appraisal model, we would be one of their strongest markets, because they don't have to worry about scaling and extending out to third parties that they're not used to working with. Having that ability to scale for the purchase market becomes very important. So being ranked #1 on all 3 of those components in that ranking order is very important to market share growth. In terms of how the banks -- there is no exact measure here. There are different drivers within the banks based on their strategies. And so as we think about it over a year-long process, we know that coming into the spring market, in the busy spring market, is when banks are really focused on making sure that they have their vendors, their best vendors, in the best shape. But if a bank is still dealing with a captive and they've got to wind down that captive's volume relative to our performance, that can drag on their growth, et cetera. So I would say that it's in plan, but no, it's not measured every month. And every month, you get a tick up based on some formula, and it's the same for all. It's directionally in that direction. But I tell you that the focus on great performance, great quality and a great consumer experience is top of mind for the banks like no -- like never before. And driving your volume to your best vendor is strong. I mean, we've indicated in the past with that first Tier 1 lender that we were launched, that we continue to see significant growth even after the 29% share that we were at when we went public last year. And that's directly driven to creating a better consumer experience, the speed in a highly compliant manner for the bank with the ability to flex up in busy times of the market.

[Robert Young, Director]

Okay. And is this -- is that performance consistent with past periods? Like have you improved those rankings over time? Or are you highlighting it now because it's hit a high mark? Or what's going on there?

[Jason Smith, Founder, President, CEO & Director]

Yes. So we are constantly improving. So we constantly have improvement metrics within our business. As volume grows, that's by network effect. So as volume grows, we get a stronger and stronger base. The competition in competitive markets continues to ramp up. That's how volume is allocated across our business. So we have constant targets on a quarterly basis around improvements, balancing the capacity we're building in the network through the outsize performance that we're looking to get. And I think I gave an update a quarter or 2 ago around our consumer scheduling initiative, which also delights the consumer for the bank. It's the #1 focus for spend at the bank right now, is their digital consumer experience. But it also affects the turnaround time, and we saw half a day improvement as we've been rolling out consumer scheduling. So that drives as well. So continual improvement, that's our focus. And really not just focusing on the average, but focusing on the long tails, that taking those -- the last 5% out for the bank and delighting them on the noise within their business. So it's a continued improvement effort.

[Robert Young, Director]

Okay. And then, if I could ask a question about the market. Some of the commentary recently has been around the comparison from the end of 2016, where there was a spike in refi. We're now getting past that, but it looks as though the macro data, the market data, was a little bit different than we expected this quarter. So could you revisit those comments and talk about what you expect to see through the balance of the year?

[Jason Smith, Founder, President, CEO & Director]

Yes. So we'd be happy to. So -- I mean, the real challenge in our business was the Brexit-led boom in what are our Q1 -- sorry, our Q4 and Q1 quarters. And that outsized activity around refi drove the overall market and, particularly, drove the refi market. And so once we entered January of 2017, we entered what we would call a normalized market, a market that was 1.7 -- $1.6 trillion, $1.7 trillion of total originations, which is a very healthy average mortgage market. We just had an outsized very large market back in 2016. So I would add that not only it was an average-sized market, it was made up largely of the very healthy purchase side of the business and has continued to grow in the right direction. So with respect to the overall mortgage markets, we've been in great healthy market since January. We continue to focus on growing share within these very healthy mortgage markets that are in front of us. And so just the year-over-year compare goes away. When we look to our next quarter and you look at the forecast for mortgage origination versus that quarter next year, then as we think through that 30% market share growth we had in appraisal and our focus on the title and closing business was moving up that pipeline, it becomes easier to see that come across on a pure revenue basis -- that growth on a pure revenue basis versus on a market-adjusted basis. I think, what becomes very interesting in the last 2 quarters of our year is those are the really busy quarters and pronounced so from a purchase activity. So we're focused on scale. We're focused on the clients that we're launching and growing market share with and making sure we have capacity in the market and in delivering excellent service to our customers. So as we look at on 2018 and the balance of our fiscal year, we're feeling great in all aspects of our business and think we're set up well for '18 and consistent with our objectives out to 2021.

[Robert Young, Director]

Okay. And the last one, hopefully, a little quicker. The -- you said you added 2 Tier 2s. I think, in Q3, you had 3 that you added, 2 or 3. So you've added 5 since going public. Can you talk about the strength of the pipeline of other Tier 2s? I think now you said 60 out of -- of the top 100, so maybe you have 65 now. Of those 35, are those in the pipeline? Can you win those? And how quickly do those turn into revenue? And then I'll pass the line.

[Jason Smith, Founder, President, CEO & Director]

Yes. I would say that given the long sales cycles and the difficulty of predicting when we go to live -- get to go live, we do not build those into our budgets for the year. One of the drivers for us to go public was that we knew we got the master services agreement. We've got to first appointment with the large drivers of our revenue, so the revenue is much more predictable. So we've got an aggressive sales team. We're really focused on the quality of clients. There are customers out there that don't line up fantastic to our value proposition, based on their business model. So we'll never have 100% of them. But I think, we'll continue to see execution there over the 2021 period and continue to add great customers to our customer base.

[Operator]

Your next question comes from the line of Richard Tse of National Bank Financial.

[Richard Tse, Managing Director and Technology Analyst]

I was wondering if you could give us a bit of color in terms of your go-to-market strategy in title and closing with your existing base. Are you pitching with the same decision makers? And I'm kind of curious to see on a relative basis the timing of those sales cycles or your expectations of those sales cycles going forward?

[Jason Smith, Founder, President, CEO & Director]

Yes. I mean, I think there's 2 elements to this, Richard. There is the customer win and then there's also the network buildup. So the way that we're thinking about executing on this business is geographically. So as much as we'd love to be able to take a large Tier 1 bank that's national right off the get go, and there's certainly a lot of pain there, we have to be thoughtful that those lenders want us to deliver for them in every single market, right? It's just too expensive for them to deal with a large number of smaller regional players. So the Tier 2s are perfect. This tracks our appraisal model. We focus on banks that have constrained footprint, so think Midwest or think the Southeast or California. And we focus on launching a number of them such that we can build up to that national footprint, so that we can be at the very back end of 2019 live with our first Tier 1 with a very small market share of their business but across the nation. So that's how we think about it. I think the positive comments that I gave about the pipeline was originally focused on Tier 3, Tier 4 customers. And the Tier 2 is advancing, the higher regulated focus of the bank, the focus on the consumer has moved that up. And so I think our long-term guidance in terms of growth off the base is indicative of how we think these things will track. And I'd have no other specific color in terms of conversion times or number of launches per quarter, et cetera because we're very focused on thoughtful delivery, knocking out of the park with these customers when we launch, building out those full national footprint such that we can be focusing on the long game of the delivery to the largest lenders in the nation.

[Richard Tse, Managing Director and Technology Analyst]

Okay, great. And I noticed that you made commentary in terms of your ranking with your Tier 1 lenders, which is great. Sort of a different question here. Would you have some similar context when you look at the appraisers on your network? And I asked that because I certainly noticed that you had a bit of a change, I think, in the timing on how you pay appraisers here.

[William P. M. Herman, Executive VP, CFO & Chief Accounting Officer]

Well, I think, Richard, we've changed the demand on which we pay appraisers last year, actually. So we actually increased the speed with which we make payment to them, really just to further forge those partnership relationships that we have with them. And really that was the premise of that change. So we haven't made any subsequent changes since.

[Operator]

Your next question comes from the line of David Ridley-Lane of Bank of America Merrill Lynch.

[David Emerson Ridley-Lane]

Sure. So just on the U.S. tax changes, the highest State and local tax jurisdictions are areas like California, New York, Connecticut, Massachusetts. Would your business roughly match the national mix? Or is there a bit of an over or an underway to those higher tax U.S. States?

[Jason Smith, Founder, President, CEO & Director]

Well, I would -- it's a good question. The analysis that we've done, as I stated earlier, is quite neutral in terms of the overall impact. I'm a big Crossing the Chasm fan. So where we've come from and where we have higher concentration of volume is on Tier 2 lenders, and they tend to be regional lenders. So I would say that we have areas of the market where we're very strong, that are sort of outweighed the national average. But we also have had significant growth, half of our market share growth last year came with only Tier 1s, which happen to be national. So on mix, David, our analysis is that the tax changes are neutral to our business, as we also then break down and think through product line. So full 1004s on appraisal, home equity, et cetera, where we're seeing the pipelines as we talk to our customers, where they're targeting their campaign so on and so forth.

[David Emerson Ridley-Lane]

Understood. And then a question for Bill. I understand the commentary on the onetime reevaluation of the deferred tax assets. But any thoughts on the normalized tax rate you would have going forward, given your mix of pretax income and the new statutory tax rates?

[William P. M. Herman, Executive VP, CFO & Chief Accounting Officer]

Yes. So the way we're thinking about it, David, is that we're going to see about a 27% to 27.5% effective tax rate on the consolidated basis. That's our early estimate of how that's going to play through our consolidated results.

[Operator]

Your next question comes from the line of Steven Li of Raymond James.

[Steven Li, Senior Vice President]

Jason, on your slide with market sizes, you have the Q2 market size expected down sequentially from Q1. So my question is that, do you have enough positive offsets, maybe the new Tier 2s or share gains to have revenues and net revenues up sequentially from Q1?

[Jason Smith, Founder, President, CEO & Director]

Thanks, Steven. Yes, the 30% appraisal market share growth within 2017, so that data point that's right on the bottom of that slide would be the very significant offset to $389 billion to $349 billion. The big challenges are the very significant drops off from the bigger peaks back in '16. So at our growth rates, those relative market changes are manageable.

[Steven Li, Senior Vice President]

But if we just -- so we not -- if I'm not looking at it year-over-year, but just looking at Q1 as the base where your market size was $416 billion and your revenues was $74 million. So your market goes down to $349 billion. Is there enough offsets to be -- to show revenues or net revenues up? Or you might be a little bit down quarter-over-quarter?

[Jason Smith, Founder, President, CEO & Director]

Yes, I would say there's enough offset. So the interesting part of our business is just where we get share gains and where we launch relative to the seasonality curve on the appraisal side of the business. And so if you thought -- a good data point for you would be if you looked at our Q2 fiscal '17, we delivered $18.5 million of net revenue. And so you can sort of think through that market size relative to where we are now and what we just delivered and how we're feeling about the growth of the business.

[Operator]

Your next question comes from the line of Hubert Mak of Cormark Securities.

[Hubert Mak, Analyst of Institutional Equity Research]

I just wanted to touch on that OpEx. I think, obviously, you're investing in your platform as well as I think your -- obviously, your deployments for Tier 1s as well. So if you look at the OpEx, it's been essentially flat here. So if you can just comment or give us some commentary in terms of how that should trend over the course of the year and maybe even into '19? Whether there's any significant ramp up in expenses here?

[William P. M. Herman, Executive VP, CFO & Chief Accounting Officer]

Yes. Hubert, it's Bill. I mean, I think really it's an operating leverage story that's playing through OpEx, as we think of -- as we think how that played out thus far. I don't see a significant uptick as it relates to OpEx relative to how we've been performing and how we expect to continue to perform. Clearly, as we think through to 2021, that obviously plays out nicely for us in additional expansion. So in that, we've got the ability to leverage that a little bit further as we think out that far. But for the purpose of you thinking through 2018, I'm not seeing any significant change.

[Hubert Mak, Analyst of Institutional Equity Research]

Okay. And then just my last question, I think I may have missed this earlier. But can you comment on the upselling of titles and closing into your appraisal base? Can you maybe just talk about pipeline and whether we see anything in the sort of next 6 months?

[Jason Smith, Founder, President, CEO & Director]

Yes. So as the comments I made, last quarter was the pipeline was growing faster than we thought, which is fantastic. We expect to execute on a statement of work this quarter, Hubert, from that pipeline. And so we would expect to see that revenue play out in the Q3 and Q4 of this year.

[Operator]

There are no further questions in the queue at this time. I'll turn the call back over to Mr. Smith.

[Jason Smith, Founder, President, CEO & Director]

Well, thank you, operator. That wraps things up for today. Thank you all for joining our call. Have a great day.

[Operator]

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