Verisk Analytics Inc (VRSK) — Q2 2017 Earnings Call Transcript

Thank you, Patrick, and good day to everyone. We appreciate you joining us today for a discussion of our second quarter 2017 financial results. With me on the call this morning are Scott Stephenson, Chairman, President and Chief Executive Officer; Mark Anquillare, Chief Operating Officer; and Eva Huston, Chief Financial Officer. Following comments by Scott, Mark, and Eva highlighting some key points about our strategic priorities and financial performance, we will open up the call for your questions. Unless stated otherwise, all results we discuss today will reflect continuing operations. The earnings release referenced on this call, as well as the associated 10-Q, can be found in the Investors section of our website, verisk.com. The earnings release has also been attached to an 8-K that we have furnished to the SEC. The earnings release contains reconciliations of several non-GAAP measures which we will reference on today's call. A replay of this call will be available for 30 days on our website and by dial-in. Finally, as set forth in more detail in yesterday's earnings release, today's call may include forward-looking statements about Verisk's future performance. Actual performance could differ materially from what is suggested by our comments today. Information about the factors that could affect future performance is summarized at the end of our press release, as well as contained in our recent SEC filings. Now, I will turn the call over to Scott Stephenson.

Thank you, David. Good morning, everybody. Reported revenue grew 5% for the quarter. Organic constant currency growth was 4.1%. As expected, we are seeing the performance progression we discussed on our first quarter earnings call. Profitability remained strong with total EBITDA margins of around 49% and diluted adjusted EPS increased about 12%. When I look at the organic initiatives and recent acquisitions, I'm very encouraged by our people, our assets, and the outlook. Our teams are working hard on all the new solutions in which we are investing. The long-term opportunities remain robust, and we are seeing real progress in terms of market demand in our customer interactions. While M&A remains our priority for use of free cash, we were pleased to continue repurchasing our shares in the quarter through our longstanding program. We bought two million shares for a total return of capital to shareholders of $156 million in the quarter. At June 30, 2017, we have $376 million remaining under our share repurchase authorization. We have capacity to make strategically relevant acquisitions as well as additional repurchases. During the quarter, we spent $48 million on acquisitions including MAKE, which is the leading expert in wind energy data analytics. MAKE is an important complement to Greentech, the solar data analytics business we acquired last year as we round out our capabilities in the renewable energy space. Additionally, as you've seen in the press release yesterday afternoon, during the quarter, we acquired seven leading aerial imagery companies for a total consideration of around $31 million to support our remote imagery solutions which are provided as part of our Geomni business. The acquisitions position us as a leader in remote sensing and enhance our analytics solutions for the property casualty insurance industry. The acquisitions bring us a talented group of professionals as well as aircraft and sensors. We have put together a great team and a great network of geographic coverage which is critically important to serving our customers. Our geospatial imagery database serves as the foundation for analytics solutions addressing the needs of property casualty insurers as well as photogrammetry, surveying, and mapping companies known as PSM, and other end markets. Additional applications will serve energy, banking, architecture, engineering, emergency response, and urban planning. The new companies combined with our expertise in computer vision-based imagery processing and large-scale data management accelerate our efforts to meet the needs of our property casualty insurance customers with the required frequency resolution and U.S. coverage. You may recall that we explored a higher-cost option in 2014 which would have accelerated us into the space. We have come up with an even better solution which provides us with greater intellectual property at a significantly lower investment. By building the capability ourselves with control over the aircraft sensor technology and flight plans, we are able to create what we need at a much lower total spend. Including the $31 million purchase price of the acquisitions, we will be investing up to $100 million in a remote sensing platform initiative across 2017 and 2018. These investments will enable Geomni to address an annual opportunity of over $200 million in the insurance space at an aggregate level of investment lower than previously possible. Even in the context of the near-term increase in capital expenditures to support this initiative, we expect CapEx to normalize to about 6% of revenue by the year 2021. This moderation in CapEx reflects the maturation of the re-platforming and investment opportunities we've been discussing with you. Finally, last week we announced the signing of an acquisition agreement for G2 Web Services. We expect to close the transaction this quarter and are excited about the opportunity to integrate its fraud fighting solutions into our unique Argus platform. We remain confident in the strategy built on the various distinctives of one, unique data assets; two, deep domain expertise; three, first-to-market innovations; and four, deep integration into our customer workflows. As you know, with the distinctives come network effects, scaled economies, and a large percentage of subscription revenue. From this foundation, we are focused on executing on our plans which include ongoing innovation and serving our customers. As we look at the rest of 2017, we continue to have a constructive view for the insurance business with the second half performance better than the first half, and we expect Wood Mac to make progress inside of a stabilized end market. I'd like to put our expectations for financial services for this year in a broader context. Argus became a part of Verisk five years ago; over that time period it has averaged 17% organic growth. That growth has come from new logos, new solutions, new international markets, and modest pricing effects. We've seen a 67% increase in U.S. clients and an 80% increase in international clients over that time period. 2017 is clearly an outlier since the acquisition in 2012. Since we came together, Argus's addressable market has expanded materially. In 2012, much of our total addressable market related to credit card issuance; now we serve banks with respect to fraud fighting, compliance, and data management, as well as serving a growing list of leading non-bank entities. With this has come a changed profile of revenue acquisition. While our bank consortia products provide recurrence just the same as other parts of Verisk, the newer products bring with them large upfront engagements followed by recurrent streams at somewhat lower levels. So we create grow-over-facts as the business grows, but overall, our growth over the past five years was against a smaller TAM, and we are optimistic about the future. At the moment, as you know, we have several non-core contracts which ended in 2016 whose $11 million represented about 9% of revenue; these are one-time events that will not recur. Our current assessment is that several important new contracts will come online in 2017, but later in the year than anticipated. The core business remains in excellent shape and underlying growth remained solid with very good growth in the spending and media analytics part of the business. More importantly, our data sets are continuing to grow and remain unique, allowing us to create solutions for our customers that no one else can offer. At Argus, we have four strategic growth pillars including; one, core banking solutions; two, data management solutions; three, decisioning algorithms; and four, spend in media analytics. The core banking solutions are the Argus Foundation. We continue to lead with our core banking solutions and are expanding these to new international markets. Data management solutions follow from our leading capabilities around aggregating, standardizing, and structuring data for analysis often more efficiently than our customers could do themselves. We have expanded our capabilities in the space with the acquisition of Fintellix, particularly related to global regulatory compliance. The decisioning algorithms include established solutions like Wallet Share models and new ones such as fighting first-party fraud including through the pending acquisition of G2. Primary to this pillar are the sophisticated data science skills and methods we apply to our proprietary datasets. The fourth area of spend in media analytics reflects the opportunities we have been speaking with you about in recent years where we are working with consortium partners including companies with insights into traditional and new media presentation and measurement. All of this adds up to addressable end markets of over $2 billion. As we pursue market-leading growth rates overtime, we do expect new solutions initially to show more variability relative to our heritage solutions. This is especially evident in financial services, and while revenue declined in the quarter, when we review the quality of our data assets and capabilities, the levels of customer engagement, the run rate business contracts, and the future opportunity; we are very confident that our solutions are positioned to win in the long term. So with that let me turn it over to Mark for some additional comments.

Thank you, Scott. First, as you saw in the release, growth in insurance picked back up as we expected. As we expand our business which serves the property and casualty insurance industry, we have several key themes including vertical Big Data, industry automation, and digital engagement. The good example of industry automation introduced recently is Underwriters Advantage, a single source solution providing detailed underwriting data and accurate rebuild cost estimates for U.K. residential and commercial underwriters and brokers. We've taken our well-established U.S. expertise and broadened it to the U.K. through the recently acquired geo-information group acquisition. We're actively working to pursue other international markets as well. More broadly, the solution highlights the progress we're making in the U.K. in an area which we are excited to continue to invest. Progress in the U.K. is also underscored by the success of our annual risk symposium which had record attendance in June. Cyber is another important growth area within the insurance space which we are addressing at the IR and at ISL. As you may recall, we've launched ARC or Analytics of Risk from Cyber which allows insurers to evaluate any commercial policy, measure and monitor aggregations of cyber risk within a portfolio, and estimate potential insured cyber losses for portfolios. More recently, ISO launched a cyber-insurance program with enhanced rating variables and coverage options designed to help insurers respond to the rapidly changing world of cyber risk. Building on the work we have done, ISO recently launched a process to aggregate cyber data from the industry, a classic application of the vertical Big Data concept. AIIR had a good quarter including nice wins in the cat-modeling space as Touchstone continues its success in the marketplace. In addition, we are seeing growing interest in the solutions we have introduced from Analyzere in the area of acquisitions. While small, we see a long runway for portfolio optimization in casualty event risk management. Finally, AIIR continues to be the leader in the cat bond market which was particularly strong in this quarter providing models for much of the new issuance this year-to-date. Finally, another example of automation is the ongoing rollout of ISO claim search integrations which allows our customers to receive instant access to Central Plains Analytics and insights directly in their claims management systems. This is part of a larger opportunity driven by the availability of the next generation of claim search, which provides a platform for an ongoing and steady stream of new analytics enhancements, existing users with the investigation and adjustment of claims, but providing real-time alerts and actionable intelligence using state-of-the-art data visualization techniques. Response from customers has been very positive. With that, let me turn it over to Eva to cover our financial results in more detail.

Thank you, Mark. In the second quarter, we grew revenue and EBITDA while also investing in solutions with meaningful long-term potential revenue streams. Our growth in the quarter picked up consistent with our comments on the last earnings call. As we move through the year, we remain confident that revenue growth will continue to improve. Revenue in the quarter grew 5% and organic constant currency revenue grew 4.1%. The press release again has a table to help him in FX or fax acquisition. As a reminder, the constant currency growth rate excludes the contribution from recent acquisitions and reflects current period exchange rate to prior period revenue. Currency hurt revenue results in the quarter by about $7.2 million. And total acquired revenue in the quarter was $12 million including the contributions from our aerial imagery acquisitions and MAKE in the renewable space. Within the decision analytics segment, revenue increased 4.2%, organic constant currency revenue growth was 4%. This quarter, insurance was the fastest-growing vertical and also the largest contributor of dollars to growth. Decision analytics insurance revenue increased 8.8% in the second quarter and organic constant currency revenue growth was 8.4%. Growth was led by strong performance in underwriting and cash remodeling solutions. Claims analytics growth was good, and last occasion solutions also contributed to growth in the quarter. Energy and specialized markets category revenue declined 0.7% in the quarter, a quarter, and on an organic constant currency basis, revenue increased 0.6%. On an organic constant currency basis with MAC grew in the quarter while the British pound impacted revenue in the quarter. We're pleased to see continued improvement in customer demand inside a stabilized energy market. As expected, as you know, the benefit will be over time given the multi-year subscription nature of the majority of that business. The category revenue growth was affected by decline in environmental health and safety solutions due to lower demand following the late 2015 completion of V.H.S. standards related implementation. Financial services revenue declined 4.3% in the quarter, organic constant currency revenue declined 9.3% in the quarter. As Scott said, strong growth in media effectiveness and good growth in core banking solutions were more than offset by the contracts which concluded last year. We noted last quarter that those contracts contributed about $11 million in 2016. We remain optimistic about the long-term prospects for the business and building on what is a great dataset and analytic capability. The impact of the non-core contracts are roughly even across the full year. Underlying growth excluding the 2016 non-core non-renewals is good, media effectiveness growth remains strong. We were anticipating additional revenue from non-bank companies in the payment space in 2017. The dynamics of the sales cycle with those companies varies from those with the banks, but the long-term value proposition for this customer segment is compelling. As we bring in new data assets and capabilities to our financial services solutions such as Fintellix and G2, we reinforce the path to long-term sustainable growth as we move into 2018. Risk assessment revenue grew 6.4% in the quarter including contributions from our recent acquisitions which are expanding the baseline for future growth. Organic constant currency revenue growth was 4.4% reflecting our 2017 invoices and continued contribution from newer solutions. While still early, we are encouraged by the strong efforts to drive new product development in this part of the business. The organic investments and acquisitions reflect our ambition, particularly in international markets to build on our strong foundation. Total EBITDA increased 3.7% in the quarter to $254 million. We continue to invest with a focus on revenue we see in the pipelines and opportunities for this year and into the future. The combined constant revenue and SG&A increased 7.3% or $19 million in the quarter. However, the increase was just 2.4% on an organic basis as we continue to focus on efficiency in our existing businesses and repurposing that spend to farm innovation. EBITDA margins as reported were 48.6%. Margins were reduced by about 120 basis points due to acquisitions and the fact that we expect to continue through the year. Total acquired EBITDA on the quarter was about $1 million excluding acquisition associated expenses. The acquisitions we are doing are close to the core with well-defined paths to topline growth and margin expansion. We expect the temporary pressure on margins from acquisitions as well as investment opportunities to continue through 2017. While full year margins are likely to be consistent with the second quarter, we are constructive over the long-term. As we've said previously, we view our leading margin level as a gauge of the strength of our solutions. Reported interest expense was $29 million in the quarter. Total debt was $2.4 billion at June 30, 2017, and our leverage at the end of the second quarter was about 2.5 times our strong capital structure and assets as we continue to explore opportunities to drive growth. Our reported effective tax rate in the quarter was 28.8%. The tax rate benefited primarily from the ASU 2016 09. Adjusted net income in 2Q increased 11.5% to $139 million. Adjusted EPS on a fully diluted basis was $0.82 in the quarter, an increase of 12.3%. Diluted adjusted EPS from continuing operations increased because of organic growth in the business and lower interest expense, provisions for income taxes, and share account. The increase in the adjusted EPS was partially offset by higher fixed asset depreciation. The average diluted share count was $168.3 million in the quarter, and we bought about two million shares in the quarter at an average price of $79.73. Our repurchase program has been successful today generating annualized IRRs above our cost of capital. On June 30, 2017, our diluted share count was 167.9 million shares. Net cash provided by operating activities from continuing operations was $430 million for the six months ended June 30, 2017, an increase of 11.6% versus 2016. Capital expenditures were $73 million for the six months period ended June 30, and CapEx was 7.1% of revenue year-to-date. Free cash flow increased 14.5% to $357 million for the six-month period ended June 30, and free cash flow was 71.5% of EBITDA. Growth in free cash flow is driven by positive operating results, and this is an important metric for the measurement of driving enterprise and therefore shareholder value. In the second quarter, as Scott noted, the new additions to our aerial imagery capabilities contributed to our revenue of about $700,000. In 2016, these companies generated about $15 million in revenue and about $2 million in EBITDA. They will be included in the decision analytics insurance line for reporting purposes and will be treated as acquired until the third quarter of 2018. As Scott mentioned, including the purchase prices of about $31 million, we expect to invest up to $100 million across 2017 and 2018. The additional investments will largely be in the form of CapEx to further expand data gathering capabilities through planes and remote imagery sensors. The five-year plan, when looking at the investments and operating costs relative to our revenue forecast and the resulting free cash flow we expect to generate, is compelling. As you've seen in yesterday's press release, the insurance-related market opportunity is over $200 million annually, and we also see opportunities in broader bottom markets. As you think about your models for 2017, currency will continue to be a headwind moderating a bit as we move into the second half. To help you look at the FX impact, the following 2016 total revenues are restated as of June 30, 2017 rates. If rates were unchanged from June 30, these would be the base for organic constant currency revenue growth. Most of the impact falls within the energy and specialized market segment and decision analytics. For 3Q 2016, it would be $496 million versus the reported $498 million, and for the fourth quarter 2016, it would be $508 million versus the reported $506 million. In addition, we expect CapEx of about $185 million, an increase versus the prior amount to reflect the remote imagery investments. As Scott noted, we expect CapEx to normalize to about 6% by 2021. Fixed asset depreciation and amortization will be almost $140 million for the year, and the amortization of intangibles about $95 million. Based on our current debt balances and interest rates, we expect interest expense to be around $115 million for the year; this includes non-cash amortization of debt issuance cost. We still estimate the full year tax rate to be in the range of 32% to 33%, and in the adjusted net income calculation, we continue to use 26% for the tax effective on intangible amortization. And finally, we expect a diluted weighted average share count of 169 million to 170 million shares. We look forward to continuing the overall improvement as we move through 2017 and beyond. We are excited about the opportunities to invest as we work to drive long-term free cash flow. We remain confident that we have the financial strength and capital structure to support investment for the long term. We continue to appreciate all the support and interest in Verisk. Given the large number of analysts we have covering us, we ask that you limit your questions to one question and one follow-up. And with that, I'll ask the operator to open the line for questions.

Thanks. I guess to start off with maybe a two-part question on just insurance; how meaningful is the strengthening capacity bonds to the growth that you saw in decision analytics insurance? And secondly, I guess elaborate just why now are you ready to pull the trigger on going more aggressively after aerial imagery?

This is Mark. Let me begin, Tim. The cap on market was strong in the quarter, and we continue to be the preferred choice, which did have a slight positive impact. However, I want to clarify that we shouldn't overstate how much revenue we derive from the cap on market. It reflects the strength of our AIR brand, but we're only discussing a couple million dollars rather than anything overly significant.

Yes. And Tim, I would just add that if we have not seen any growth in the cap on there, we still would have seen acceleration in the DA insurance growth.

And to your question Tim about aerial imagery, we've really been on this topic for some time now and much of what we've given attention to over the last couple of years have been our analytic methods. And so our machine learned methods for interpreting image sets, I think are the best in the world, and we've been working on those for a few years. What we concluded was that in order to assume the position that we want to, where this market is concerned, we had to complement that excellence with equal distinctiveness with respect to the image sets that are available to us. To date, we've been working with third-parties, and so this we see as really the final step in order to be fully prepared to serve this marketplace. And so it's not that we haven't been here, it's that this was sort of the final piece.

Okay, thanks. Just one quick follow-up. Eva, I believe you mentioned that you expect faster growth in insurance during the second half. Is that growth compared to the second quarter or the first half? I'm just looking for clarification on what you meant.

We're just only looking at first half versus second half, Tim.

Okay.

And, you know, we prefer to talk about it from an annual basis, but that's the way we think about it.

Okay, thank you.

Thanks. On the aerial imagery, the investment that you're talking about is that all incremental on top of the level that you've already been investing in aerial imagery including the amount that you've been spending to source the images from third-parties?

No. So our own efforts at image capture will substitute for what we have had to spend with third-parties in order to capture images to date. Now there is a bit of an overlap period here where, even today, we're still being supplied by the third-parties that we put together, but in a short period of time basically it will all be our own image capture and therefore these costs associated with the third-parties will go away.

Can you give us any rough order of size in terms of how much is incremental?

I think when considering Jeff, the $100 million investment includes approximately $31 million for M&A and CapEx. When discussing third-parties, that's primarily related to OpEx, so it's somewhat different in nature. However, as Scott mentioned, this approach is fundamentally better; it will be more cost-effective, grant us more control, and provide superior imagery.

Okay. And then just going back to the Argus performance and the outlook commentary; I think there were the comments somewhere in Scott's prepared remarks about run rate business contracts, so is this more contracts that are signed and the question is when they go live and you start to recognize revenue, or is this pipeline that has not yet contracted in terms of what seems to be more delayed than your previous expectations?

It's a combination of both Jeff. So we can see the cumulative effect of what has already been put in place and also anticipating new contracts, particularly in these new segments that I was talking about before; so it's both.

Okay, thank you.

Good morning, thank you. Just a clarification around CapEx; is it fair to say that Verisk is in a multi-year elevated CapEx cycle? You guys pointed to $100 million spread over two years, but then you threw out the 2021 figure of 6% of CapEx. So just maybe a little more color after 2018, is it still elevated that CapEx spend and does it just go down in 2021 or any color would be great there?

There are a few aspects to consider. Thanks for the question. To begin with, prior to discussing the $100 million investment in aerial imagery, it’s important to note that 30% of that amount is for M&A, which accounts for $31 million, while the remaining portion is for CapEx. This relates to our plans for 2017 and 2018. Before this, we have been re-platforming our business and have already started reducing our CapEx percentages. Although we expect an increase for 2017 and 2018, we are confident that we will maintain a downward trend moving forward; this is simply an additional layer on the path we have previously outlined.

Great, that's very helpful. And then just a longer-term question, maybe if you could frame for us what catalysts investors should look for the company to have greater penetration internationally outside of energy? Is it simply that data analytics markets need to develop more overseas or is there anything else that you are hearing from your customer base that could be relevant? Thank you.

There is no single effect, but the rest of the world operates similarly to the United States in that companies are focusing on data analytics. Companies within our vertical markets are currently engaged in this work. It's crucial for us to be present and showcase our credentials. We are optimistic about the partnerships we've developed in 2017 with clients who were not previously on our list. Progress may take time, but there is nothing fundamentally different about global markets. There may be variations in regulatory structures that could influence market dynamics, but overall, the situation is quite similar. It is not a question of catalysts; rather, it involves our presence, leveraging our intellectual property in these markets, and establishing our place.

Great, thank you.

Thank you, good morning. I have a question regarding the aerial imagery investment. You've been working on this since 2014 and mentioned a $200 million total addressable market on the insurance side. Can you provide clarity on what the current revenue penetration looks like for your company? Additionally, the $70 million figure pertains to 2017 and 2018; what should the future spending run rate look like after that?

We have currently accessed less than 5% of that total addressable market. This is just the beginning of the first quarter. We have been refining our methods for a long time, and we believe we have now completed the necessary preparations. Since we have only tapped into 5% or less of that total addressable market, it is very early in the process. Regarding capital expenditures, we expect a continuous level of spending since the infrastructure needed to create these image sets requires regular updates. As previously mentioned, the spending in 2017 and 2018 represents a peak, after which we will see a significant reduction to maintain the network in the United States over the long term.

Okay. And maybe just one question to Eva, last quarter you guys talked about 7% to 8% as your target for financial plus insurance, clearly it sounds like that's not going to be met because of financial; would you be willing to give us what that range would look like now?

Yes, you're right. Based on our discussions about financials, we remain optimistic about the overall business; however, I think in 2017, we won’t see the type of growth necessary to reach the previously discussed target. Regarding insurance, we anticipate continued acceleration in the second half, and we feel confident about that. That's where we currently stand.

7% to 8% is still the reference benchmark for us; nothing has changed, we're simply talking about quarters here.

Thanks, good morning, it's Henry Chien. I have a follow-up question regarding the aerial imagery sector. Is your ongoing focus still on the insurance market, while also providing data and services to additional markets? I would appreciate any insights on how you plan to establish your future aerial business.

Yes, I believe there are a couple of points to address. This capability will extend beyond just the insurance market, although that remains a key focus for us due to our business nature. However, there are current marketplaces utilizing analyzed aerial imagery data that are actually larger than the insurance applications, and we plan to target those markets as well. We see opportunities on both ends. Our strategy for success, the way we are progressing, is to combine high-quality data, like what our aerial imagery capture program announcement entails, with advanced analytic methods. Additionally, we need to develop efficient workflows to ensure that customers can seamlessly incorporate the data into their analyses. We have all of this in place, and we are actively establishing our credentials in the market, finding the feedback very promising.

Okay, that's great. And just a follow-up question; on the gross margins, it looks like it's been trending downwards, is there anything that's been driving that?

I mean I think you're probably seeing some impact of some of the acquisitions in that.

Okay, alright. Thanks so much.

Good morning, it's Oscar for Andrew. So I was just wondering, can you provide any color on the competitive environment in Argus, has anything changed there?

No, nothing has changed there. No, we still have a very unique position inside of the banking ecosystem with respect to the data asset that we have; nothing has changed.

Okay, thanks. And then just as a follow-up, we've seen an uptick in the pace of M&A recently though it has been somewhat smaller deals; how should we think about your M&A strategy going forward in terms of size, vertical, and geography?

Our experience at Verisk shows that we have generated substantial value for our shareholders through mergers and acquisitions. This value creation is closely tied to our strategy, which begins with a deep understanding of the markets we serve and their evolving needs. From this understanding, we determine whether to build solutions in-house or pursue acquisitions. This approach has remained constant, and we will continue to follow it. We are flexible regarding our M&A expenditures and the size of deals, as our focus is on acquisitions that align with our strategy. This strategy is connected to the vertical markets we operate in and the four distinct principles we emphasize, which serve as our criteria along with financial metrics for evaluating potential acquisitions. We remain committed to the same course and, looking ahead, we will continue to pursue M&A opportunities and engage in our share repurchase program. The volume of transactions at any time will largely depend on availability, as cultivating opportunities takes time. However, you can expect a consistent stream of acquisitions from us in the future.

Okay, that's helpful, thanks.

Good morning everyone. My first question is about Wood Mac. You mentioned that organic growth in constant currency is up about 0.6%, but it's actually slightly better than that since EHS was negative. Can you share what you're observing in renewables? Are you seeing any price improvements or expansion that is driving the growth?

We are very encouraged by the developments in our subscription revenues. This is an active business that interacts closely with our customers across various markets. When we approach renewal periods, it's not simply a matter of increasing prices on past usage. Our products are continually evolving, and we also offer bundles. What we're focusing on is the subscription amounts from both current and new customers, and we have seen significant progress in those subscription revenues. As mentioned, because we have signed multi-year agreements, it will take some time for the full impact to reflect in our revenue figures, but things are progressing well. Specifically in the resource and energy sector, we do not require commodity prices, such as oil, to reach historical highs. Our priority is for our customers to remain stable and future-focused, which is currently the case. The industry has seen a considerable decrease in breakeven points, and we are now experiencing the required stability, allowing us to appreciate the growth in that business segment.

I would like clarification on the target of 7% to 8% for constant currency organic growth in the total insurance sector, including financial services. In early May, it appeared that about two-thirds of that target was secured through existing contracts, while one-third would be generated from new sales. I want to confirm whether we are still aligned with this target for the year. Additionally, my rough calculations suggest that the combined organic constant currency growth for the second quarter may be around 4% to 5%. I know your calculations are likely more precise, so I wanted to verify that.

All right, there were like seven questions in that.

Sorry about that.

To begin with the last point, the organic constant currency for insurance and financial services in the quarter was 5.1%, which is an increase from 4.9% last quarter. Regarding the one-third, two-thirds comment about insurance that was discussed last quarter, I can elaborate on that after I answer a couple more of your questions, and then Mark will provide an update on our progress in that area. As for the combined targets for financial and insurance, reflecting on the remarks made by Scott and myself, we had certain expectations for financial performance in 2017 due to various factors. Therefore, we are no longer focusing on that combined target because of the financial results we now anticipate for 2017. Now, I will discuss our progress on the insurance front.

As we demonstrated in the second quarter, we feel like there is a ramp inside of insurance and we were just kind of reinforce second half versus the first half. One of the metrics I think we tried to provide during the first quarter call was the element of how much of the contracts or how many additional growth was relative to committed contracts and things that will be happening because of a commitment and signed contract versus go get your pipeline; and I think you feel good about the progress we've made over the course of quarter, and that number is even more positive today. So I'm comfortable with at least the progress we're making.

Got it. So I understand we were saying now on the 7% to 8% target; did you want to give us a revised target for that combined segment for 2017?

I think Scott's described well the dynamic and financial and for insurance that we've talked about acceleration into the second half.

Yes, and we expect progress as the year goes on, and the target remains the target, and it's just a question of timing.

Thank you, Bill.

Good morning. Eva, EBITDA margins were down year-over-year in the first half for the year in 2017; might we see EBITDA margins down in the same or more in the second half of the year, year-over-year, and when should we get back to margin expansion?

Thank you for the question, Andrew. When considering our margins, particularly in the second quarter and for the year overall, we're navigating a few factors. As we've previously mentioned, we're making several investments in the business which we are enthusiastic about. We've also completed some acquisitions, which impact our revenue and EBITDA. These acquisitions generally have smaller margins compared to our existing business, which influenced our outlook for this year. However, as I have stated previously, we remain optimistic about our long-term margin potential.

Thanks, good morning. So one question you mentioned in your prepared remarks a bit about cyber; I was just wondering, obviously cyber is still a relatively young insurance market are you seeing pretty large appetite from your insurance carrier clients to grow that line?

This is Mark. One key goal for every insurer is growth, and cyber insurance presents a significant opportunity in a market where premiums and rates have generally been low. However, quantifying that risk can be challenging; it's difficult to fully understand what you're underwriting and the potential scale of that risk, particularly in light of the numerous cyber-attacks and exposures present today. I see this as an underinsured opportunity that many are eager to capitalize on. We have taken several steps to address this need. Historically, we have concentrated on insurance and supporting our customers or reinsurers, and we've shared insights from CAT models to various programs and coverage forms that utilize aggregated data to enhance loss predictions. We aim to release what we call building underwriting reports for different businesses. Our approach is that, from both an individual risk and overall portfolio standpoint, we can offer substantial solutions to customers seeking assistance with these risks. Additionally, if approached correctly, this type of risk could extend beyond insurance and into the corporate market, thereby expanding the total addressable market and creating more opportunities. We are enthusiastic about these prospects and are diligently working to lead the market.

Thanks, that's helpful. And the other question is, was there anything unusual in the tax rate this quarter; it seemed a bit lower than usual?

As I mentioned, remember, we have this new approach from an accounting perspective to how we have to write for the benefit for stock option. So you're going to see a bit more variability across the quarter, and that's what you saw in this quarter for the tax rate that we still think for the year we're going to be looking at 32% to 33%.

Alright, great, thanks for the answers.

You're welcome.

Hi, good morning. You've talked a lot about financials so far, but I'm not sure I have a great idea of the growth expectation in the second half for this segment, you're facing sort of mid 20's comps organically, but you do have the large contracts in the pipeline that you're expecting to come on later in the year. So basically, I'm just trying to understand how much of these large contracts contribute to growth and just facing the tough comps, I'm just trying to get a sense directionally of how we should be thinking about financial?

Yes, so we expect it to grow in the fourth quarter, more in Q4 than Q3.

Okay. Should we be thinking positively about organic growth for Q3 or how should we approach that?

I want to emphasize that it's progressing from where it was in the second quarter, and the second half will show growth, particularly in Q4 compared to Q3.

Okay. And then Mark I think talks about the changed profile of revenue in Argus; I'm just trying to understand are there different types of products that customers are demanding or have you just changed the structure of the contracts for the existing products? Just any examples of maybe changes in purchasing behavior if there are or just what's going on? Thanks.

Yes, there are a few points to mention. As we've broadened our product offerings, we've also targeted a new customer base, resulting in two effects occurring simultaneously. The new solutions are evolving in ways that differ from the consortium-based products you saw in Argus during 2012-2013. While these new solutions share the same recurring revenue characteristics as many of our offerings at Verisk, the nature of our engagement with customers has changed. For example, in areas like media effectiveness, our partnerships now involve more intense engagement initially because we need to integrate various datasets to conduct the necessary analyses. This engagement subsequently transitions into a more routine relationship. Thus, the dynamic is different compared to the original consortium model of the Argus business. As we introduce new solutions, we are also attracting new customers, and these solutions tailored for them have distinct profiles, yet they represent a highly valuable business opportunity for us.

Perfect, thanks Scott.

Hi, this is Mike Creed on for Joe, thanks for taking the question. I wanted to go quick back to what the long-term margin opportunity was and would that come from less acquisitions and lowered investments? Or are there other leverage there?

I think as you think about our business model, it all comes from the top line growth, and as we're investing, we're working to enhance that top line growth, and I think you'll see that scalability. I think similarly with our acquisition and you've seen the acquisitions we're bringing in, they are not all at our margins today, but they also are growth opportunities, and so as we start to scale that, I think you'll just see that naturally fall to the bottom line as you have historically.

Okay, great. Do you believe there will be much seasonal variation in margins between Q3 and Q4?

I don't think that's a typical period in which we see seasonality. I mean there is always variability, but I don't think there is anything specific I'd call out.

Okay, great. Thanks.

Thank you.

Good morning. I hope this question is not too detail but I wanted to just ask about subscription growth in the quarter. Now when I look at your subscription disclosures in the 10-Q and I backed into the implied growth, the 2Q had less than 1% subscription revenue growth in decision analytics and I think all the growth came basically from non-subscription growth; I think it's about 16% by my calculation, and I think subscription was as flat in the first quarter too. So I know there is a lot of moving pieces, effects, acquisitions, the different business, but I guess if I just step back and look at this more holistically, it looks a little bit more like the business is becoming much more dependent on one-time sales and maybe the subscription would have stalled. So again, a lot of moving pieces, but maybe you can elaborate how you would look at that?

I think it's important to break it down, and there is a significant impact from our comments regarding Argus. The long-term contracts that were expected to renew at the end of last year didn't, and these were subscriptions under long-term agreements. So, part of the impact we are observing can be attributed to that. I can provide more details later, but I suggest you consider this in your analysis.

Okay. So still very comfortable, obviously, that the subscription core is positioned for steady growth.

Absolutely.

Those are our own successes within the company.

Alright, good. And then but secondly, and maybe related to the same data. I think Eva, you kind of rushed a little bit for the cap-ons answer there when somebody asked early and you said, a couple of million; again, by just backing into the non-subscription goals, I think I get to $11 million; I guess it is adjusted as well, but where is that $11 million coming from if it's not the cap-ons strength, what other kind of like non-subscription items contribute at this quarter that you may want to cause?

I'm not exactly sure where the $11 million figure comes from, but I want to reiterate what Marc mentioned regarding cap-ons. He indicated that he didn't want to exaggerate the size of the business, emphasizing that it’s in the millions, not tens of millions. In response to Tim's question, I noted that even if we assumed there was no dollar growth in cap-ons this quarter, we would have still observed an increase in decision analytics insurance growth. The point I was making was that while we are excited about cap-on revenue, the overall strength of the business isn't solely dependent on the cap-on market. I hope that clarifies things.

Yes, there is always a first time. Thank you.

Thank you.

Good morning, this is Nick Ryan on for Anjaneya, thanks for taking my questions. Now that you've kind of made the last step if you will, on aerial imagery, can you maybe just update us on what the competitive landscape looks like for you guys now that's a sort of bigger focus and maybe any sort of estimates on the margins today and/or where they could go overtime?

Yes, this is Scott. In the insurance marketplace, there is one main competitor, while outside of this sector, there is a relatively unconcentrated landscape of smaller companies that provide only a limited range of services we are interested in. This is the essence of the situation. Being in the insurance vertical means that the analyzed results from remote imagery must be integrated into platforms where customers make decisions based on this analysis and various other inputs. We are the leading provider of many, if not most, of those platforms, which is one reason we believe we have a strong proposition that will succeed.

Okay, great, thank you. And maybe just any commentary around where you estimate the margins are today and maybe where they are expecting to go?

Well, this is like most of the things that we do. We'll show a lot of scale as it grows, you have the semi-fixed cost of creating your datasets, and you have the semi-fixed cost of the tech stack that you build to do the analysis. And so as this business grows we expect the margin characteristics to materially improve.

Okay, great, thank you.

Thanks, good morning. First question, just on the margins; Eva, did I hear you correctly that the margin for the full year is similar to the second quarter? If that's the case, given that the margins were stronger in the second half compared to the first half last year, it seems to suggest a significant contraction in the next few quarters. Is this mainly due to the recent M&A activity, or are you anticipating increased investment in other areas?

Yes, we haven't shifted our investment plan for the year so I would say that a lot of that impact you're seeing really relates to M&A. And maybe just kind of moving back to the question before; on the inorganic side on aerial imagery, I gave you the data points in a script that the companies that we acquired in 2016 had about $15 million, about $2 million of EBITDA, so I'm kind of doing the math on that, even that will have some impact in the short term.

Okay, great. And then the follow-up; just on the longer-term 7% to 8% organic revenue framework that you've discussed, how are you thinking today about the energy business long-term potential; at the time of the deal it was definitely above that. I think you've indicated tempering that, and I guess relevant to what's going on now, how do you think about financial services against that that long-term framework? Thank you.

So first of all, we haven't tempered that view with respect to the resources and energy business. So we remain in the same place; we actually have a wonderful franchise and many different ways that we can grow it; so we actually haven't tempered that franchise. And you asked about financial services, you know, our belief is that it has the potential to exceed the corporate average as well.

Great, thank you.

Great, thanks. I wonder if you could train or just the longer term frame, what the potential opportunity could be around fraud as you make those investments within G2; you know, what type of growth driver that could be for the business?

Yes, so fraud is one of those persistent issues that never goes away, it's actually a topic that we like and it's one that I think you all know we give a great deal of attention to in the insurance vertical. And so what you're basically counting are many basis points against very, very large transaction volumes. And then what modifies that view of TAM a little bit is the degree to which our customers consider fraud a cost of doing business versus an opportunity to get after. In the insurance vertical, it's pretty well established that fraud is a category to go after. And our view is that in the financial services vertical, it is increasingly viewed the same way, and what's really needed are precise tools that create great confidence that you're actually getting after something and that the gains that you get will persist. And so we believe it's a very large marketplace, and it's a very small part of what it is that we do in financial services today; so it's a very good theme for us.

Is that related to the cyber initiatives, or do you handle those separately?

So Mark, if you want to discuss cyber again, Mark's comments about cyber primarily relate to the insurance sector, but there is a cyber aspect to consider. For instance, G2 web services involves looking into online merchants. I won’t go into the specifics today, but it's about identifying bad actors, and while it may not be precisely fraud, it focuses on recognizing those individuals. Mark, do you have anything to add regarding cyber?

Let me address cyber as well as the other areas we operate in. There's a consistent theme that we have observed: when bad actors operate across multiple sectors, we have a greater chance of identifying fraud, especially with a more extensive database. Considering all the insurance claims in our database, the inclusion of healthcare data has enhanced our accuracy in combating fraud. Cyber is another aspect, and if we can collect information—while adhering to appropriate approvals—regarding credit card fraud, we will likely improve our effectiveness in detecting fraud across various related areas. This is a general insight we have, and I believe it is a positive development.

No, that's a good point. Thanks.

Great, thank you.

Thank you all for your time today and for your interest. We look forward to speaking with many of you in the coming days and weeks, and we are eager to share our third quarter results in a few months. Again, thank you for your time today.