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Lender Processing Services (LPS)

Q1 2013 Earnings Call

April 25, 2013 10:00 am ET

Executives

Nancy Murphy - Vice President of Investor Relations

Hugh R. Harris - Chief Executive Officer, President and Director

Thomas L. Schilling - Chief Financial Officer and Executive Vice President

Analysts

Carter Malloy - Stephens Inc., Research Division

Darrin D. Peller - Barclays Capital, Research Division

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Kevin D. McVeigh - Macquarie Research

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Presentation

Operator

Good day, everyone. Welcome to the Lender Processing Services First Quarter 2013 Earnings Conference Call. Today's conference is being recorded. Your participation on this call is implied consent. If you do not wish to be recorded, please disconnect at this time. I'd now like to turn the conference over to Nancy Murphy, Vice President, Investor Relations. Please go ahead.

Nancy Murphy

Thanks you, Danna. Good morning, and welcome to Lender Processing Services First Quarter 2013 Earnings Conference Call. Hugh Harris, CEO; and Tom Schilling, CFO, are with us today to review results and answer your questions. To allow time to field questions from participants, we ask that you please limit yourselves to 2 questions and then reenter the queue if you would like to follow up. Before we get started, I would like to remind you that our earnings release and supplemental slide presentation are available on the Investor Relations section of our website. I would also like to remind you that we may make forward-looking statements during today's call and those statements are subject to various risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including our 10-K, most recent 10-Q and earnings release. We do not undertake any duty to update or revise those forward-looking statements, including quarterly guidance. In addition, our discussion today will contain references to non-GAAP results in an attempt to provide a more meaningful presentation in comparison to prior periods. Reconciliations between GAAP and non-GAAP results have been provided in the earnings release. Now, I'll turn the call over to Hugh.

Hugh R. Harris

Okay. Thank you, Nancy. Good morning, and thank you for joining our call today. I'm going to start with an overview of the first quarter then Tom will discuss our financial performance. And finally, we'll open the call up for questions. We are very pleased to begin 2013 with strong operating and financial performance. LPS delivered 10% growth and adjusted earnings per share to $0.66 in the first quarter, which is in line with our guidance. Continuing strong results in Technology, Data and Analytics and Origination Services fueled the positive performance. Our results reflect the successful execution of our customer and technology-driven strategy, aligned with the evolving needs of the mortgage industry. We believe we are on track to continue to achieve high-quality revenue growth in TD&A while managing profitability in Transaction Services in response to origination and default volumes. First, we'll address our TD&A segment. While the environment remains challenging, the mortgage industry is working through a significant transformation. The ability for industry participants to efficiently comply with new regulations and business process requirements is essential to long-term success. As lenders move beyond legacy issues, including the recent settlement of many bank Consent Orders, we are seeing an even greater focus on deploying technology to reengineer processes and to address the cost structure of originating and servicing loans. We are collaborating with our clients, including the nation's leading and emerging mortgage institutions, to address these needs. And we are providing our clients with solutions to deliver a high return on investment and that leverage our scale, compliance, integration and industry best practices. As a result of this focus, first quarter revenue growth in TD&A was one of the highest in LPS history. Servicing Technology had a particularly strong quarter as we continue to build on our market-leading platform. We're making progress on many initiatives, including winning share of first mortgage and home equity loans with existing and new clients while expanding systems capabilities to drive revenue per loan. Demand for LPS Professional Services continues to grow as our clients look for expertise in both mortgage and technology. For example, we recently implemented dedicated Default Technology teams for 3 top 10 services to optimize the value of the platform in their operations. We're also pleased with the progress of our new growth platforms, including Origination Technology and Data & Analytics. We expect these initiatives to expand our market leadership, generating high-quality, long-term revenue growth. Loan Origination Technology is an important part of our strategy to drive revenue from purchase origination volume as the housing market recovers. We have aligned our loan origination and loan quality platforms to meet the needs of lenders that are reengineering their processes for quality, transparency and efficiency. And we continue to expand the capabilities of these platforms. We are also moving forward with a strong contract pipeline. One example is the successful implementation of our LendingSpace platform to support Nationstar's correspondent originations. We completed an accelerated implementation and have heard that this platform quickly added value to Nationstar's correspondent lending operations. We're very pleased with this expanding relationship. Data & Analytics posted strong revenue growth as we continue to invest by valuable business intelligence to help our clients make more informed decisions. The market for big data in the mortgage space has attracted long-term growth potential as the industry moves forward with integrating data and analytics into their business processes. I've been very focused on meeting with clients over the past few months and our discussions reinforced this theme. LPS has the necessary advantages to win share and induce demand with our technology delivery channels, our mortgage industry expertise and our very deep client relationships. The expansion of our property records database is on track to be completed midyear. The expanded data set significantly strengthens our competitive position with coverage of over 98% of U.S. residential properties. Financial institutions, investors, government agencies and the real estate industry use this data for a broad range of purposes including managing risk, monitoring portfolios, assessing collateral, determining property values, loan acquisitions and customer retention. Additionally, as a leading aggregator of mortgage data to the U.S. government, we're very pleased to have significantly expanded our contract with the Federal Reserve Board around data aggregation. Moving onto Transaction Services. Origination Services capitalized on continuing strong mortgage refinance volume fueled by historically low interest rates and the HARP program. We are pleased with the recent announcement of the extension of the HARP program through 2015. Our highly efficient centralized settlement services support the majority of the top 20 originators who represent over 70% of the industry transaction volume. As we said last quarter, while we continue to expect that refi volume in 2013 will be down from the strong 2012 levels, we remain more optimistic than many market forecast, including the MBA. The LPS Mortgage Monitor reports that approximately 9 million loans still have refi-eligible characteristics. Moving to Default Services. We have made significant enhancements to improve the risk return profile to position LPS to meet client needs in these ever changing market conditions. While we cannot control industry volumes, we can deliver scale and compliance services while managing the profitability. Over the past year, foreclosure activity has declined to near pre-crisis levels as servicers adapt to new requirements. However, the LPS Mortgage Monitor still reports a significant backlog of approximately 3.2 million seriously delinquent loans. New regulations, including our National Servicing Standards, effectively extend the time it takes to complete the foreclosure process and encourages alternatives to foreclosure, including modifications and short sales. While the near-term outlook remains difficult to predict, we continue to believe we are well-positioned to win our share of industry volumes over time. On the legal and regulatory front, we're very pleased to have concluded many of the legacy legal and regulatory matters in the first quarter. We're moving forward with the final stage of the consent order and any remaining matters. I would also like to mention that we just completed our annual customer satisfaction survey and I'm very pleased with the results. Our clients tell us they see us as a strategic partner with the solutions to meet their evolving needs. The survey also told us that overall, our clients are happy with the customer support we provide which is a competitive advantage for LPS. Before I turn the call over to Tom, I would like to welcome John Snow, former Secretary of the Treasury and President of JWS Associates to LPS Board of Directors. John brings extensive experience and operating complex organizations with expertise in areas including strategy, regulation and public policy. His insight and guidance will be of great value to our company. Now, I'll turn the call over to Tom who will review the financial results in detail. Tom?

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