Real Matters Inc

TSX:REAL

Earnings Call Transcript 2019-Q1

[Operator]

Good morning. My name is Mariama, and I will be your conference operator today. At this time, I would like to welcome everyone to the Real Matters Q1 2019 Conference Call. [Operator Instructions]I would now like to turn the call over to Lyne Fisher, Vice President, Investor Relations. You may begin your conference.

[Lyne Beauregard Fisher]

Thank you, operator, and good morning, everyone. Welcome to the Real Matters financial results conference call for the first quarter of fiscal 2019. 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 results for fiscal 2019 for the period ending December 31, 2018. 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, which reflect the current expectations of management with respect to our business and the industry in which we operate. These forward-looking statements are based on management's experience and perception of historical trends, current conditions and the expected future developments as well as other factors that we believe to be appropriate and reasonable in the circumstances. The forward-looking statements reflect management's beliefs based on information currently available to management and should not be read as a guarantee of the occurrence or timing of any future events, performance or results. Forward-looking information is subject to risks, uncertainties and other factors that are difficult to predict and they could cause actual results to differ materially from historical results or results anticipated by the forward-looking information. A comprehensive discussion of the factors which could cause results or events to differ from current expectations can be found in the Risk Factors section of the company's Annual Information form for the year ended September 30, 2018 and under the heading Important Factors Affecting Results from Operations in the company's MD&A for the 3 months ended December 31, 2018, each of which is available on SEDAR and on our website. As a reminder, we refer to non-GAAP measures in our slide presentation, including net revenue, net revenue margins, adjusted EBITDA and adjusted EBITDA margin. Non-GAAP measures are described in our MD&A for the 3 months ended December 31, 2018, where you'll also find 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. Today, we reported consolidated revenues of $60.5 million in the first quarter of fiscal 2019, representing a decline of 18% from the first quarter of fiscal 2018. As we highlighted in our news release and in line with the outlook we provided last quarter, the U.S. mortgage market was weaker than the comparative quarter in fiscal 2018 due to a variety of headwinds. And we estimate that U.S. mortgage origination volumes were down 23% in the first quarter of fiscal 2019 compared to the same quarter last year as evidenced by the double-digit declines reported by Tier 1 lenders in the same period. [ We ] believe that this decline was principally driven by a significant drop in refinance volume. Taking a look at our U.S. Appraisal business, I'm pleased to report that we gained market share with our Tier 1 lenders in the first quarter of fiscal 2019 and on a sequential basis, and we continue to rank as top performer across all Tier 1 lender scorecards. We also gained market share with some of our larger Tier 2 and Tier 3 clients, and we extended our reach into new appraisal channels with 2 top 100 lenders in Q1, all of which will contribute to our long-term market share growth objectives for our U.S. Appraisal business. We continue to make progress towards the launch of a fifth Tier 1 lender in the main origination channel, passing a number of critical gateways, including completing the technology integration and selecting launch markets. As we've highlighted in the past, the process for going live with a Tier 1 lender can be lengthy, and the timing is often hard to nail down. That said, we remain confident we will be live with this lender prior to the important spring market. In the first quarter of fiscal 2019, we posted market-adjusted volume growth of 16% in our U.S. Appraisal segment. We also saw significant improvements in net revenue and adjusted EBITDA margins, which Bill will speak to in his remarks. Turning to our U.S. Title segment, Q1 revenues in fiscal 2019 were down 23% year-over-year due to lower estimated market volumes for refinance activity. This lower refinance activity resulted in a 20% decline in market-adjusted volumes. As you know, our U.S. Title segment currently does not service the purchase market and the 20% market-adjusted decline is a calculation of our performance against the whole market. I can confirm no meaningful customers were lost, customers were added, and our pipeline is robust. Revenues from diversified services were modestly higher and accounted for 42% of total U.S. Title revenues in the first quarter of fiscal 2019 compared to 30% in the same quarter last year. Having said that, we went live with 1 new top 100 lender in the first quarter of fiscal 2019. And as we noted during our last conference call in November, we're now live with a Tier 2 lender for title services. Our pipeline continues to grow in our U.S. Title business and we're engaged in a number of RFPs with top 100 lenders. We're investing in our sales efforts to move this business forward with a view of achieving our long-term market share goal. In our Canadian segment, first quarter revenues for fiscal 2019 were down 20% year-over-year. A weaker Canadian dollar contributed to the decline, and higher appraisal volumes from increasing market share with certain Canadian clients was offset by a weaker mortgage origination market in Canada. With that, I'll hand it over to Bill. Bill?

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

Thank you, Jason, and good morning, everyone. Turning to Slides 4 and 5 for a closer look at our financial results. As Jason stated earlier, consolidated revenues were down 18% in the first quarter of fiscal 2019 compared to the same quarter last year due to lower mortgage market activity, which contributed to the decline in revenues across all 3 of our segments. Despite that, our continued focus on the things we can control resulted in improved consolidated net revenue margins and a modest decline in adjusted EBITDA margins on a comparable quarter basis. Let me break that down into the segments and provide more color. In our U.S. Appraisal segment, transaction costs declined 20% year-over-year versus the 16% decline in revenues over the same period. Net revenue margins in our U.S. Appraisal segment increased to 22.8% in the first quarter of fiscal 2019 from 19.1% in the first quarter of fiscal 2018, an increase of 370 basis points. This improvement was a result of competition within our network for volumes and certain initiatives, including the bundling of orders, which increased the productivity of independent field professionals in our network. Operating expenses in our U.S. Appraisal segment decreased to $5.6 million from $6.8 million in the first quarter of fiscal 2018, which was the primary contributor to the 56% increase in adjusted EBITDA year-over-year. Adjusted EBITDA margins in our U.S. Appraisal segment increased to 37.8% in the first quarter of 2019, up from the 24.4% we posted in the first quarter of fiscal 2018. Lower payroll and related costs was the primary contributor to the decline in operating expenses, the result of lower estimated market volumes and the integration of certain operations carried out in fiscal 2018. In our U.S. Title segment, first quarter revenues were down 23% year-over-year, while transaction costs declined 13% by comparison. This resulted in net revenue margin compression of 460 basis points. Our U.S. Title net revenue margins declined to 58.2% from 62.7% in the first quarter of fiscal 2018 due to revenue mix changes for diversified services and lower margins on rate refinance volumes we serviced in the segment. Operating expenses in our U.S. Title segment declined to $7.7 million from $9.0 million in the first quarter of fiscal 2018 and adjusted EBITDA decreased to $1 million from $3.2 million in the same quarter last year. As Jason mentioned earlier, we estimate that market-adjusted volumes declined 20% in our U.S. Title segment, which had a significant impact on the segment's financial results. In Canada, the first quarter decline in revenue was fairly consistent with the decline in transaction costs, and we recorded net revenue margin of 18.4% compared with the 18% in the first quarter of fiscal 2018. Canadian operating expenses were flat for the first quarter of fiscal 2019 and adjusted EBITDA declined to $0.5 million in the first quarter of fiscal 2019 from the $0.6 million reported in the same quarter last year. So putting this all together, first quarter consolidated net revenue declined to $18.8 million from the $22.5 million reported in the first quarter of fiscal 2018, due principally to the $3.5 million decline in net revenue earned in our U.S. Title segment from lower refinance-related volumes. However, consolidated net revenue margins increased to 31.1% from 30.4% in the first quarter of fiscal 2018 due to healthy net revenue margin expansion in our more mature U.S. Appraisal business despite the reported decline in our U.S. Title segment. For the same reasons I just outlined for net revenue, consolidated adjusted EBITDA declined $0.7 million to $1.7 million in the first quarter of fiscal 2019 from the $2.4 million reported in the first quarter of fiscal 2018. Our U.S. Title segment contributed $2.1 million to the year-over-year decline, which was partially offset by a $1.2 million improvement in our U.S. Appraisal segment and lower corporate OpEx. Consolidated adjusted EBITDA margins were 9.1% in the first quarter of fiscal 2019 compared with the 10.6% in the first quarter of fiscal 2018. Turning to the balance sheet. We had cash and cash equivalents of $69.5 million at the end of this quarter, up $1.4 million from September. And we continue to purchase shares under our normal-course issuer bid, purchasing an additional 982,000 shares at a cost of about $3 million in the first quarter of fiscal 2019. We have purchased an additional 316,000 shares since December 31. With that, I'll turn it back to Jason. Jason?

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

Thanks, Bill. Overall, our performance in the first quarter was in line with our expectations. Our U.S. Appraisal business performed well against tough market conditions. We posted market-adjusted revenue growth of 16% in our U.S. Appraisal business and grew our market share across our portfolio, which included some of our largest clients. We went live in new channels with 2 top 100 lenders in the U.S. Appraisal, and we also increased our net revenue and adjusted EBITDA margins in U.S. Appraisal. Our U.S. Title business was impacted by the slowdown in the U.S. refinance mortgage origination market, and that said, we continue to focus on the things we can control. We went live with 1 new top 100 lender in our U.S. Title segment, and we're building that pipeline and working through the sale cycle. We hosted our first Investor Day in November, during which we reiterated our long-term objectives for the business. We also provided more transparency around our U.S. Appraisal and Title segments. Based on investor feedback, this was positively received by the investment community and provided a clearer understanding of Real Matters' plans for growth. We continue to win appraisal market share and we see increases in our pipeline for the second and third quarters. On the whole, we're feeling good about the business. With that, operator, we'd like to open it up for questions now.

[Operator]

[Operator Instructions] Your first question comes from Gavin Fairweather with Cormark.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Just wanted to zero in on the Appraisal net revenue margins for a second. So the MD&A referenced higher pricing from lenders, but also lower appraisal fees from your field agents. Maybe you could just help us understand which was the bigger factor, and whether you see those trends kind of continue in the few quarters?

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

I think it'd be the latter, Gavin, that will be the most pronounced impact. So that will be the short story there.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Okay. And is that -- like when you look at appraisal transaction costs, I mean, you obviously have your internal efforts to increase productivity, but does the slower market also help that in terms of fostering competition there?

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

I wouldn't say that as a pronounced impact, Gavin. It's Jason. I think that you've seen this margin expansion happen for quite a number of quarters now. We have our 27% target by 2021 on a doubling of volumes. So we do see further strengthening in our net revenue margins in '19.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Okay. And then just on operating expenses, quite a bit lower than what I was expecting. In Title, it was kind of flat from Q4 when you adjust for the bad debt expense, but in Appraisal, it was down about $1 million. Is this a good run rate to look at?

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

Well, I think obviously, there's a variable cost component there, Gavin, that we need to be mindful of. So it's a great starting place to launch. And as we grow the business, especially into the Q3, Q4 time frame, which are seasonally highest volume time frames for the business, you would expect our OpEx to increase commensurate with that increase in volume.

[Operator]

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

[David Emerson Ridley-Lane]

Just wondering, some of the cost reduction efforts you had in the quarter, did you receive the full benefit in the quarter, or will there be some further benefit next quarter?

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

David, it's Bill. I think that any benefit would probably be marginal and modest at this stage. There'll be -- we're always continuing to look at ways to make ourselves more efficient. But I don't think it will be a very significant number to think through as we go forward sequentially into Q2, Q3, Q4, et cetera.

[David Emerson Ridley-Lane]

Okay. And does the -- if I could ask you to put on your forecasting hat a little bit for the market, does the Fed Chairman's yesterday's announcement that considerable pause, does that change your thoughts around refi volumes, and I guess, the broader U.S. housing market? Are you a little bit more optimistic? Or is that kind of what you were planning for?

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

Got it. Well, certainly, I think, the materially lower 10-year treasury yield, which drives 30-year mortgage rates, entered 2019 much lower than, I think, any economist had forecast. And so I think that there is a number of drivers that play on that rate. So we try to focus on what we can control, which is our market share gains and focus on high-quality clients and try to drive a scalable business model that can move up and down with volume. So certainly, I think January volumes are robust, and there is a lot of commentary in the market on that. I think that's primarily driven by the 10-year being so low. And I think that that's playing through on both the purchase side of the business and the refi side of the business. So this is an interesting quarter, the one that we're in right now in that February typically in just a purchase market curve, Q2 -- our Q2 is usually lower than our Q1 for the whole market, but January is the lowest month of the 3. So February is typically higher and then March is higher again as you approach the spring market. So I think it's too early for us to extrapolate that into the rest of the year, never mind in the quarter. We're going to focus on growing share and operating the business from that perspective.

[Operator]

Your next question comes from Robert Young with Canaccord Genuity.

[Robert Young, Director]

Maybe I thought if you could add to the last question around the environment. Just talk about the U.S. shutdown, what kind of impact it had, what kind of impact you might expect if it starts to get in February? And I have another couple.

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

Yes, so I think that we saw robust volumes in January that were primarily driven by the lower mortgage rates, driven by the lower 10-year treasury yield. And we have no specific comment on quantum in terms of the government shutdown affecting volumes at all. It was -- we didn't see an impact on it. But it could be embedded and difficult to see if the volumes would have been even higher with the 10-year so low without the government shutdown. So it's difficult for us to comment on that. But our clients across the board seem that they were working well through their pipelines and weren't raising serious concerns.

[Robert Young, Director]

Okay. Great. At the end of your monologue, you were talking about seeing increases in the pipeline for Q2 and Q3. Just wondering, if you can maybe put some context around that. Is that the -- you said that there is a Tier 1 ramp that you said was imminent. Is that part of what you're thinking there? Or is that a broader comment?

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

Yes, I think it's a broader comment. In our Appraisal business, we saw significant market share increases in Q1. We had additional market share increases that didn't impact Q1 and are playing through in Q2. On the Title side of the business, we had a new top 100 lender go live, and we continued to grow share with that first Tier 2 lender. So -- and our Title pipeline is robust. So I think we see continued market share gains, both with existing and new clients on a continuous basis throughout 2019.

[Robert Young, Director]

Okay. Great. And then last question for me. One of your competitors was talking at the end of December about accelerating the transformation of its AMC operation. They were talking about an expected negative impact to their revenue in 2019. And so I was wondering if you could talk about any change in the competitive dynamic that you might see or expect from that.

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

Yes, we're not seeing anything specifically on that, that, I think, you're referencing to, Robert. I think we're very comfortable with our strategy. We don't see significant shifts in sort of appraisal rates or share or pricing. In fact, we see those things heading in the right direction for our business.

[Operator]

[Operator Instructions] Your next question comes from Andrew McGee with National Bank.

[Andrew Brice McGee, Associate]

I'm just going to build on Rob's question there in discussing the number of RFPs you have in your TNC and the engagement you're seeing there. Hoping that you can maybe provide any thoughts on how that pipeline has expanded over the last year or even the last couple of quarters. And just to kind of give an order of magnitude on the number of lenders that you see in that pipe or any growth rates. That would be very helpful.

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

Yes, sure. Thanks, Andrew, for the question. I think when we set out at our IPO, we laid out a plan to launch our first Tier 2 lender at the back half, at the very end of 2018 and to launch our first Tier 1 bank at the end of 2019. And we achieved our first objective with the first Tier 2. It's very early days. They start off much like an appraisal with a little bit of market share, and in the next quarter, they scorecard you and move up, et cetera. And so we do believe we will get live additional Tier 2 clients in the year. We continue to believe we'll be successful launching just a very little bit of our first Tier 1 client by the end of 2019. But other than that, it's so difficult to speak to when we go live, decision-making time frames of the banks. And so we've learned through experience to really not make more specific comments until we're live with them because anything can change in the market. But we're engaged with regional banks. We're engaged with existing customers, and we have a very large client base of over 60 of the top 100 banks. So we're engaged in healthy discussions across our client base. And so it's certainly more than a handful, and we continue to progress well.

[Andrew Brice McGee, Associate]

Okay. And would you be comfortable quantifying how that pipeline might have -- in terms of how it expanded from year-over-year? Would you be comfortable dropping any numbers or growth rates around that?

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

I wouldn't really. It's so difficult. And then you've got different size clients and customers where they have different mixes of business, what's relevant to [ the segment ]. So I think we're just focused on engaging with all the good quality clients out there. We have a phenomenal track record. As we said, we're #1 scorecard across our client base, and we expect that to convert over on to the title side.

[Andrew Brice McGee, Associate]

Okay. And then just my next question here is just on your share buyback program and -- whether you think that that's going to continue to be a priority through this year or whether or not you see any other opportunity to your cash balance, and that's it for me.

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

Great. Well, I think that we continue to believe that our stock is undervalued and not reflective of the franchise value we're building in the business in terms of market share and our large great quality client base. And so we plan on continuing that program. And being thoughtful of -- we always will maintain a strong balance sheet because it's important to these very large clients that we have. And so we have no other thought in terms of use of cash at this time.

[Operator]

Your next question comes from Daniel Chan with TD Securities.

[Daniel Chan, Research Analyst]

Just wanted to follow up on this new Tier 1 channel that you're expecting this quarter. What gives you the confidence that they're actually going to be able to launch -- you're going to be able to launch with them by this quarter?

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

I will never say the live date is the live date until it's live. It's -- we are very far advanced in numerous discussions, but we're certainly not live yet.

[Daniel Chan, Research Analyst]

Okay. And then in the press release, you mentioned in the title and closing market, you saw market-adjusted decline about 20% in the volumes. You said no customer losses. Anything else going that's on there that's driving some of that volume decline faster than the market?

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

No, Dan, we don't actually see any of that. We think it's, for all practical purposes, principally attributable to the drop in the refinance market on a compare basis and it's just simply that.

[Daniel Chan, Research Analyst]

Okay. So it's just your mix of refi versus purchase, right?

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

Yes, it's basically 100% refi and 0% purchase for us. But, yes, the market has flipped the other way, hence the number is reflected in the volumes.

[Operator]

There are no further questions at this time. I will now turn the call back over to Jason for some closing remarks.

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

Thank you, operator. That wraps things up for today. Thank you for joining our call. Goodbye.

[Operator]

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