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Lender Processing Services (LPS)

Q3 2012 Earnings Call

October 30, 2012 10:00 am ET

Executives

Nancy Murphy - Vice President of Investor Relations

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

Analysts

John Kraft - D.A. Davidson & Co., Research Division

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

Ty M. Lilja - Feltl and Company, Inc., Research Division

Carter Malloy - Stephens Inc., Research Division

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

Kevin D. McVeigh - Macquarie Research

Paul B. Thomas - Goldman Sachs Group Inc., Research Division

Presentation

Operator

Good day, and welcome to the Lender Processing Services' Third Quarter 2012 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, then please disconnect at this time. I would now like to turn the conference over to Nancy Murphy, Vice President, Investor Relations. Please go ahead.

Nancy Murphy

Good morning, and welcome to Lender Processing Services' Third Quarter 2012 Earnings Conference Call. Tom Schilling, CFO, is with us today to review results and answer your questions. [Operator Instructions] Before we get started, I would like to remind you that our earnings release and the slide presentation we will use to facilitate today's discussion are available on the Investor Relations section of our website.

We'd 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 and most recent 10-Q and our 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.

Before we begin the formal part of our earnings call, I would like to take a moment to offer our thoughts to all of those along the East Coast impacted by Hurricane Sandy. Being based in Jacksonville, Florida, we understand the concerns many people and families are facing today and the challenges they will encounter over the coming days. Everyone here at LPS is praying for the safety of those impacted by the storm. Now I'll turn the call over to Tom.

Thomas L. Schilling

Thank you, Nancy. Good morning, everyone, and thank you for joining our call today. Before I get started, I'd like to take a moment to provide an update on the Hugh Harris' progress. Due to his continuing treatments, he's unable to participate in today's call. He is, however, listening in. His treatments are going well and the prognosis remains extremely positive. He is in his last week of treatment, and we are all looking forward to having him back, full-time, very soon.

Now I'll review the third quarter operating results, our progress against strategic initiatives and review our financial guidance for the fourth quarter. We'll then open up the call for questions.

First, we're very pleased to report another strong quarter of operating performance. Adjusted earnings per diluted share increased 20% year-over-year to $0.71, which includes a loss from discontinued operations of $0.02, and is near the high end of our guidance range. Revenue of $513 million was about flat year-over-year and in the midrange of our guidance. This positive performance was driven by strong growth in Technology, Data and Analytics, continued strength in refinance origination volume, disciplined cost management and improved revenue mix. These factors contributed to an expansion of our EBITDA margin to about 27% compared to about 22% a year ago.

While the mortgage industry continues to face uncertainty and headwinds, particularly surrounding foreclosure activity, LPS is realizing the benefits of the many enhancements we've made to the business over the past year, including focusing on our core strengths and strategic assets while exiting nonstrategic businesses; investment and focus on operational and compliance excellence; establishing a more disciplined cost management culture; and strengthening our balance sheet. Today, LPS more is a nimble and focused company, better able to deliver the innovative solutions our customers need and to profitably capitalize on the growing market opportunities in front of us.

Technology Solutions remain at the center of our model and our performance during the quarter reflects the traction we're gaining in this area. TD&A revenue climbed 11% year-over-year, fueled by growth in all business lines. We continue to see positive demand and favorable market dynamics driven by compliance, efficiency and loan quality requirements. TD&A margins remained robust at 41% in the third quarter despite increased investment in growth areas.

Servicing Technology revenue increased 4% year-over-year to $112 million fueled by higher loan counts driving growth in recurring revenue and from continued strong Transactional and Professional Services revenue. Expanding our market share of first mortgages and home equity loans, while adding capabilities to the MSP platform, remain top priorities.

In the third quarter, we converted approximately 300,000 loans to MSP, including about 240,000 home equity loans. We also generated solid loan growth from existing customers. We strongly believe the MSP value proposition is more relevant today than ever. MSP delivers a high ROI solution for clients by leveraging our scale and expertise, operational and compliance excellence, shared industry best practices and integration with our Origination and Default Technology solutions. These are all key competitive advantages as the industry adapts to the changing marketplace. We continue to see shifting of mortgage servicing rights with an opportunity to expand our technology leadership as emerging scale servicers look for best-in-class solutions.

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