The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including statements regarding expectations, hopes, intentions or strategies regarding the future. Forward-looking statements are based on
Black Knight, Inc.and its subsidiaries (" Black Knight," the "Company," "we," "us" or "our") management's beliefs, as well as assumptions made by, and information currently available to, them. Because such statements are based on expectations as to future financial and operating results and are not statements of fact, actual results may differ materially from those projected. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. The risks and uncertainties that forward-looking statements are subject to include, but are not limited to:
the occurrence of any event, change, or other circumstance that could give rise
? to a right in favor of Intercontinental Exchange, Inc. (“ICE”) or us to
terminate the definitive merger agreement governing the terms and conditions of
the proposed transaction;
? the outcome of any legal proceedings that may be instituted against us or ICE;
the possibility that the proposed transaction does not close when expected or
at all because required regulatory, stockholder, or other approvals and other
? conditions to closing are not received or satisfied on a timely basis or at all
(and the risk that such approvals may result in the imposition of conditions
that could adversely affect ICE or us or the expected benefits of the proposed
? the diversity of management’s attention and time from ongoing business
operations and opportunities on merger-related matters;
? security breaches against our information systems or breaches involving our
third party vendors;
? our ability to maintain and grow our relationships with our clients;
? our ability to comply with or changes to the laws, rules and regulations that
affect our and our clients’ businesses;
? our ability to adapt our solutions to technological changes or evolving
industry standards or to achieve our growth strategies;
? our ability to protect our proprietary software and information rights;
? the effect of any potential defects, development delays, installation
difficulties or system failures on our business and reputation;
? changes in general economic, business, regulatory and political conditions;
? impacts to our business operations caused by the occurrence of a catastrophe or
? the effects of our existing leverage on our ability to make acquisitions and
invest in our business;
? risks associated with the recruitment and retention of our skilled workforce;
? risks associated with the availability of data;
? our ability to successfully consummate, integrate and achieve the intended
benefits or acquisitions;
? risks associated with our investment in DNB; and
other risks and uncertainties detailed in the “Statement Regarding
? Forward-Looking Information,” “Risk Factors” and other sections of our Annual
Report on Form 10-K for the year ended
The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended
December 31, 2021filed with the SECon February 25, 2022and other filings with the SEC.
Black Knightis a premier provider of integrated, innovative, mission-critical, high-performance software solutions, data and analytics to the U.S.mortgage and real estate markets. Our mission is to transform the markets we serve by delivering innovative solutions that are integrated across the homeownership lifecycle and that result in realized efficiencies, reduced risk and new opportunities for our clients to help them achieve greater levels of success.
We believe businesses leverage our robust, integrated solutions across the entire homeownership lifecycle to help retain existing clients, gain new clients, mitigate risk and operate more efficiently. Our clients rely on our proven, comprehensive, scalable solutions and our unwavering commitment to delivering exceptional client support to achieve their strategic goals and better serve their customers.
We have a focused strategy of continuous innovation across our business supported by strategic acquisitions – and even more importantly, the integration of those innovations and acquisitions into our broader ecosystem. Our scale allows us to continually invest in
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our business, both to meet ever-changing industry requirements and to maintain our position as a leading provider of platforms for the mortgage and real estate markets. Deep business and regulatory expertise and an unparalleled, holistic view of the markets we serve allow us the privilege of being a trusted advisor to our clients, who range from the nation's largest lenders and mortgage servicers to institutional portfolio managers and government entities, to individual real estate agents and mortgage brokers. Clients leverage our software ecosystem across a range of real estate and housing finance verticals through multiple digital channels, using our offerings to drive more business, reduce risk and deliver a best-in-class customer experience, all while operating more efficiently and cost-effectively.
The table below summarizes active first and second lien mortgage loans on our mortgage loan servicing software solution and the related market data, reflecting our leadership in the mortgage loan servicing software solutions market (in millions):
First lien Second lien Total first and second lien as of June 30, as of June 30, as of June 30, 2022 2021 2022 2021 2022 2021 Active loans 33.1 32.3 3.1 3.3 36.2 35.6 Market size 53.2 (1) 53.1 (1) 12.5 (2) 12.4 (2) 65.7 65.5 Market share 62 % 61 % 25 % 26 % 55 % 54 %
Note: Percentages above may not recalculate due to rounding.
Estimates according to the Black Knight Mortgage Monitor Report as of June (1) 30, 2022 and 2021 for
subject to change.
Estimates according to the
mortgage loans. These estimates are subject to change.
We have long-standing relationships with our clients - a majority of whom enter into long-term contracts that include multiple, integrated products embedded into mission-critical, client-side workflow and decision processes. This speaks to the confidence our clients, which include some of the largest financial institutions in the world, have in our solutions and our commitment to serve them. The contractual nature of our revenues and stickiness of our client relationships make our revenues both highly visible and recurring in nature. Our scale and integrated ecosystem of solutions drive significant operating leverage and cross-sell opportunities, enabling our clients to continually benefit from new and greater operational efficiencies while simultaneously allowing us to generate strong margins and cash flows.
Black Knightecosystem stretches across four core "pillar" verticals: mortgage loan servicing, mortgage origination, capital markets and real estate; with our data and analytics flowing throughout and between the interconnected ecosystem of solutions. As we integrate our innovations and acquired technologies, we are committed to continually improving the end consumer experience, driving further efficiencies for our clients and helping them to win new customers and retain existing customers.
Optimal Blue Transaction
February 15, 2022, we entered into a purchase agreement with Cannae and THL and acquired all of their Class A units of Optimal Blue Holdco, LLC("Optimal Blue Holdco") through Optimal Blue I, LLC("Optimal Blue I"), a Delawarelimited liability company and our wholly-owned subsidiary, in exchange for aggregate consideration of 36.4 million shares of DNB common stock valued at $722.5 millionand $433.5 millionin cash, funded with borrowings under our revolving credit facility. The aggregate consideration of $1.156 billionand number of shares of DNB common stock paid to Cannae and THL was based on the 20-day volume-weighted average trading price of DNB for the period ended on February 14, 2022. As of February 15, 2022, we own 100% of the Class A units of Optimal Blue Holdco. Refer to Note 1 - Basis of Presentation and Overview for additional information. Merger Agreement On May 4, 2022, we entered into a definitive agreement to be acquired by ICE, a leading global provider of data, technology, and market infrastructure, in a transaction valued at approximately $13.1 billion, or $85per share, with consideration in the form of a mix of cash (80%) and stock (20%) (the "ICE Transaction"). The ICE Transaction is expected to close in the first half of 2023, subject to the receipt of regulatory 24
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Black Knightshareholder approval and the satisfaction of customary closing conditions. The ICE Transaction has been approved by the Boards of Directors of Black Knightand ICE. Refer to Note 1 - Basis of Presentation and Overview for additional information.
Business Trends and Conditions
Market trends that have spurred lenders and servicers to seek software, data and analytics solutions are as follows:
Integral role of technology in the
U.S.mortgage loan industry. Over the past few years, the homebuyer's processes have become more digital, and banks and other lenders and servicers have become increasingly focused on automation and workflow management to operate more efficiently and meet their regulatory requirements as well as using technology to enhance the consumer experience during the mortgage loan origination, closing and servicing processes. We believe technology providers must be able to support the complexity and dynamic nature of the market, display extensive industry knowledge and possess the financial resources to make the necessary investments in technology and software to support lenders and servicers. This includes an enhanced digital experience along with the application of artificial intelligence, robotic process automation and adaptive learning. Heightened demand for enhanced transparency and analytic insight. As U.S.mortgage loan market participants work to minimize the risk in lending, servicing and capital markets, they rely on the integration of data and analytics with solutions that enhance the decision-making process. These industry participants rely on large comprehensive third-party databases coupled with enhanced analytics to achieve these goals. Mortgage loan market participants are eager for timely data and insights to help them plan and react to the changing environment. Regulatory changes and oversight. Most U.S.mortgage loan market participants are subject to a high level of regulatory oversight and regulatory requirements as federal and state governments have enacted various new laws, rules and regulations. It is our experience that mortgage lenders and servicers have become more focused on minimizing the risk of non-compliance with regulatory requirements and are looking toward solutions that assist them in complying with their regulatory requirements. We expect this trend to continue as additional governmental programs and regulations have been enacted to address the economic concerns resulting from the pandemic, and our clients have had to adapt their systems and processes in record time to the shifting landscape. In addition, our clients and our clients' regulators have elevated their focus on privacy and data security in light of an increased level of cybersecurity incidents. We expect the industry focus on privacy and data security to continue to increase. Lenders increasingly focused on core operations. As a result of regulatory scrutiny, a decline in refinance origination volumes due to a rising interest rate environment and the higher cost of doing business, we believe lenders have become more focused on their core operations and customers. We believe lenders are increasingly shifting from in-house solutions to third-party solutions that provide a more comprehensive and efficient solution. Lenders require these providers to deliver best-in-class solutions and deep domain expertise and to assist them in maintaining regulatory compliance.
Our Business Segments
Our business is organized into two segments: Software Solutions and Data and Analytics.
Software Solutions Our Software Solutions segment offers software solutions that support loan servicing, loan origination and settlement services. Our software solutions revenues were 86% of our consolidated revenues for both the three and six months ended
June 30, 2022, and 85% for both the three and six months ended June 30, 2021. 25 Table of Contents The following table summarizes our software solutions revenues (in millions): Three months ended % of segment Six months ended % of segment June 30, revenues June 30, revenues 2022 2021 2022 2021 2022 2021 2022 2021
Servicing software solutions
$ 221.7 $ 207.865 % 68 % $ 444.3 $ 410.566 % 68 % Origination software solutions 117.7 97.6 35 % 32
% 225.8 190.7 34 % 32 % Software Solutions
$ 339.4 $ 305.4100 % 100 % $ 670.1 $ 601.2100 % 100 % Our servicing software solutions primarily include our core servicing software solution that automates loan servicing, including loan setup and ongoing processing, customer service, accounting, reporting to the secondary mortgage market and investors and web-based workflow information systems. Our servicing software solutions primarily generate revenues based on the number of active loans outstanding on our system, which has been very stable; however, we have some exposure to foreclosure and bankruptcy loan volumes, which can fluctuate based on economic cycles and other factors. As a result of the effects of the broad-based response to the COVID-19 pandemic, we have seen lower foreclosure-related transactional revenues due to the mortgage loan foreclosure moratorium in the prior year period. We expect higher foreclosure-related transactional revenues in 2022 compared to 2021 as a result of the expiration of the federal foreclosure moratorium. According to corresponding Black Knight Mortgage Monitor reports, foreclosure starts were 64,000 for the three months ended June 30, 2022compared to 11,900 for the 2021 period. Our origination software solutions primarily include our solutions that automate and facilitate the origination of mortgage loans and provide an interconnected network allowing the various parties and systems associated with lending transactions to exchange data quickly and efficiently. Our exposure to origination volumes is limited as our loan origination system revenues are based on closed loan volumes subject to minimum base software fees that are contractually obligated, and our secondary marketing technologies' revenues are primarily subscription-based. Some of our origination software solutions are exposed to variances in origination volumes, primarily related to refinance volumes, due to the nature of the services provided. While we saw elevated refinance origination volumes for a prolonged period of time, we have seen lower origination volumes in 2022 due to record volumes in prior years and a rising interest rate environment. According to the July 2022Mortgage Bankers Association Mortgage Finance Forecast, mortgage loan originations have declined 37% for the three months ended June 30, 2022compared to the 2021 period. Our origination software solutions that are more sensitive to origination volumes were approximately 3% of our consolidated revenues for the three months ended June 30, 2022, and revenues related to these origination software solutions declined approximately 32% for the three months ended June 30, 2022compared to the 2021 period, representing a headwind of approximately $5.6 million.
Data and Analytics
Our Data and Analytics segment offers data and analytics solutions to the mortgage, real estate and capital markets verticals. These solutions include property ownership data, lien data, servicing data, automated valuation models, collateral risk scores, behavioral models, a multiple listing service software solution and other data solutions. Our data and analytics business is primarily based on longer-term strategic data licenses, other data licenses and subscription-based revenues. For both the three and six months ended
June 30, 2022, our data and analytics revenues were 14% of our consolidated revenues. For both the three and six months ended June 30, 2021, our data and analytics revenues were 15% of our consolidated revenues. Our data and analytics solutions that are more sensitive to fluctuations in home buying activity and origination volumes primarily relate to services where we provide data necessary for title insurance and other settlement service activities. Revenues from these solutions were approximately 3% of our consolidated revenues for the three months ended June 30, 2022and declined approximately 23% for the three months ended June 30, 2022compared to the 2021 period, representing a headwind of approximately
$3.1 million. Results of Operations Key Performance Metrics
Revenues, EBITDA and EBITDA margin for the Software Solutions and Data and Analytics segments are presented in conformity with Accounting Standards Codification Topic 280, Segment Reporting. These measures are reported to the chief operating decision maker for
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purposes of making decisions about allocating resources to the segments and assessing their performance. For these reasons, these measures are excluded from the definition of non-GAAP financial measures under the
SEC'sRegulation G and Item 10(e) of Regulation S-K.
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