Verisk Analytics Inc (VRSK) — Q2 2018 Earnings Call Transcript

Thank you, Kyle, and good day to everyone. We appreciate you joining us today for a discussion of our second quarter 2018 financial results. With me on the call this morning are Scott Stephenson, Chairman, President, and Chief Executive Officer; and Mark Anquillare, Chief Operating Officer. Following comments by Scott, Mark, and myself highlighting some key points about our financial performance, we will open up the call for your questions. Before we do that, I’d like to take the opportunity to introduce our new Head of Investor Relations, Stacey Brodbar. I am personally delighted, as you can imagine, to have Stacey join us. Although, as I reflected on it last night, you all may be even more excited than I am to have Stacey with us. She comes to us with 20 years of broad experience from the buy-side, sell-side, and investment banking. Most recently, she spent 11 years at AllianceBernstein, where she served as a Senior Vice President and Senior Equity Analyst covering the consumer discretionary sector. Prior to that, she spent 7 years as a sell-side equity analyst at Credit Suisse analyzing the restaurant sector. She holds an MBA from Columbia Business School and a Bachelor of Arts in History from Duke University. I know she is looking forward to engaging with all of you in this new role, and we will appreciate the same patience that you’ve shown to me as Stacey comes up the learning curve with the businesses at Verisk. Fortunately, she comes into the job with the benefit and knowledge of having been an investor in the company previously. 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. We have also posted our Investor Presentation for the second quarter on our website at verisk.com. 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 today's earnings release, I will remind everyone that 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 contained in our recent SEC filings. Now, I will turn the call over to Scott Stephenson.

Thanks, Lee. Good morning, everybody. I'm pleased overall with the second quarter results we are reporting today and with the progress occurring across our business. I recently had two weeks in Europe with some of our largest customers and our leadership teams and came away encouraged about our situation and forward opportunities. Let me summarize some of what I saw and heard. On the insurance front, we are a different company in the London and U.K. markets than we were just one year ago. Across many meetings, it became clear that our customers see and understand the logic of the new solutions we have brought to market through a combination of organic developments and acquisitions. On several occasions, I heard customers comment on the unique position we've achieved in the U.K. along with their anticipation of newly integrated offerings from Verisk. I hear customers referring to Verisk as a partner more frequently than in the past. They are asking for deeper dives into our solution sets and pipeline of new developments. Virtually every conversation with customers was forward-looking in nature, which is a good sign for our future. I also met with the senior leadership of some of Europe's largest energy businesses. I heard continuing affirmation of the must-have quality of the data and analytics we provide. Equally encouraging were discussions around the need to transform commercial decision-making in the oil and gas industry through the application of modern data analytic methods. This point is deeply felt by the energy companies who are awash in technical data but have yet to realize the promise of optimized commercial decision-making. A goal of our energy business customers is planning cycles measured in weeks rather than years, which can only be achieved with the level of cost and productivity benchmarking which has previously been unseen. Our customers in Europe and indeed everywhere see us as a natural partner in helping them achieve this transformation. I spent an enjoyable afternoon in the offices of one of Argus's leading U.K. customers. It was great to spend time not only with our customers but also our several-person team who are present in the customer's offices, representing a wonderful level of intimacy. After reviewing the considerable value attached to our current solutions, the conversation with our executive sponsor then moved to future opportunities to harness machine learning to amplify their analytics. Again, the conversation was primarily about the future and how our two companies can partner. A consistent message across customer meetings is that some of the most important work being done by our customers is harnessing data analytics to improve their business results, and I see Verisk as a unique partner in doing so.

Thank you, Scott. In our insurance business, we had another strong quarter in all insurance-facing businesses, with underwriting and rating, as well as claims contributing to growth. Let me highlight a few areas that drove topline growth and update you on several initiatives that better position us for the future. To remind everyone of our new reporting segments, underwriting and rating consists of one, our ISO business unit which provides industry-standard insurance programs, property-specific underwriting and rating information, and our personal lines underwriting solutions; two, our AIR business unit which provides extreme event models; and three, Sequel, our business unit which provides insurance software solutions. During the quarter, underwriting and rating delivered strong organic growth across personal lines underwriting, extreme event modeling, and industry-standard insurance programs through a combination of cross-sell of existing solutions to new customers and the sale of new innovative solutions. Our legacy ISO business continues to maintain high customer retention rates while increasing its prominence as a thought leader in the property-casualty industry. We have a series of new programs and product extensions fueling growth including cyber warning, our new program to address the growing cyber threat which represents a significant avenue of growth for insurers; two, flood insurance where we launched both personal and commercial lines coverage to satisfy the underinsured and uninsured problem in the U.S., as evidenced during Hurricane Harvey, where two-thirds of flood losses occurred outside of FEMA's 100-year flood zone. These ISO programs cover all areas in the contiguous United States regardless of the FEMA flood zone; three, LightSpeed, our suite of underwriting data and analytics focused on personalized risks primarily personal auto and homeowners' risk; and four, risk analyzer, our deeply analytic and highly segmented suite of tools providing fine pricing detail on specific risks. We continue to extend our risk analyzer suite and recently introduced a physical damage module for commercial auto. In June, we held our Verisk London Risk Symposium, an event highlighting our InsurTech capabilities across underwriting and rating and claims with a focus on key insurance and global risk issues. The number of follow-up opportunities was impressive as U.K. insurers and Lloyd syndicates are beginning to fully understand the scope and power of Verisk offerings. After a week together in London, our leadership team was energized by the meetings with customers developing strategy across our European businesses and prioritizing opportunities brought by these collaborative efforts. Our claims businesses include one, claims analytics our fraud prevention solutions featuring ClaimSearch; two, Xactware, our suite of solutions focused on loss quantification and repair cost estimating; and three, Geomni, our cutting-edge remote imagery business. Claims experienced an exceptional quarter, with organic growth across all business units through a combination of cross-sell and sale of new solutions. During the quarter, we acquired Validus, a leading provider of claims management solutions and developer of the leading subrogation portal in the U.K. Subrogation occurs when an insurer pays an insured loss caused by a third party. Insurance companies then subrogate or step into the shoes of the insured to interact with the third party to recoup the loss suffered by the insured. With the addition of a well-established subrogation platform to its existing claims solution set, Verisk is uniquely positioned to support the U.K. insurance market at every stage in the life of the claim. As I highlighted during our prior earnings call, we are focused on helping our customers automate the claims process to drive towards right-touch claims handling. We are where less complex and smaller-dollar claims are handled with limited manual intervention. The subrogation process and coordination of benefits for bodily injury claims are areas where we can vastly improve the claims process and create efficiencies for our customers. Geomni, our business that harnesses remote sensing and machine learning technologies to provide information about residential and commercial structures, has advanced its massive library of high-resolution imagery and data for substantially all properties in the United States. The aerial imagery and property data, including measurements of dimensions for commercial and residential property, are seamlessly integrated through Verisk platforms for claims, underwriting, and catastrophe modeling. The image library, advanced analytics, and tight integration with our repair cost estimating tools have resulted in exceptional efficiencies for insurers and strong growth added by Geomni, as well as Xactware. Across all businesses from both a customer and financial perspective, we are very pleased with the performance of the insurance businesses. With that, let me turn it over to Lee to cover our financial results.

Thanks Mark. First, I’d like to bring everyone's attention to the fact that we have posted a quarterly earnings presentation that is available on our website. The presentation provides background data and trends and analysis to support our conversation today. Moving to the financial results for the quarter, on a consolidated and GAAP basis, revenue grew 14.9% to $601 million, net income increased 26.9% to $154 million for the quarter, diluted GAAP EPS was $0.91 for the second quarter of 2018, an increase of 26.4% compared with the same period in 2017. Having presented our summary GAAP results, I will now shift to focus on our organic constant currency results for all year-over-year growth rates consistent with our financial targets and to eliminate the impact of currency fluctuations and recent acquisitions for which we don't have a full year-over-year comparison. Acquired revenue and adjusted EBITDA on the quarter from all deals that haven't moved into organic results were $36 million and $9 million respectively. Please note that nonrecurring acquisition-related transaction expenses are included in these EBITDA amounts. Verisk demonstrated very solid growth performance and momentum in the second quarter. Revenue growth of 7.4% was ahead of our 7% long-term target and it was our fourth consecutive quarter at or above that target. Adjusted EBITDA expense grew 5.9%, enabling EBITDA growth up 8.9% and demonstrating the benefit of our operating leverage. The EBITDA growth differential to revenue growth of 1.5% is also ahead of our long-term target of a minimum 1% differential. These results also produced an improved adjusted EBITDA margin of 49.6%, up from 48.9% in the prior year reflecting the benefits of our scale and inclusive of continued investment across the business. Let's now turn to our segment results on an organic constant currency basis. As you will see in table 2 in the press release, insurance had a strong quarter with 8.4% revenue growth with underwriting and rating contributing 6.2% and claims contributing 13.2% growth. Adjusted EBITDA for insurance grew 10.5% reflecting an increased adjusted EBITDA margin of 56.6%, up from 55.5% in the prior year. Within our underwriting and rating business, we saw solid performance across our product lines. We also continued to invest in our breakout opportunities including telematics, LightSpeed data hosting, energy and global property, with exceptional growth despite the relatively small scale at this point. Within claims, the continued strong growth was a function of strong product growth in most of our claims businesses, offset by a slight decline in our employment screening business. In addition, Geomni continues to generate strong growth as they expand and improve data quality for clients. Energy and specialized markets delivered improved revenue growth of 5.0% for the quarter, up from 3.1% in the prior quarter as the energy industry continues to recover, as many of you may have noticed with the recent reported results from the energy companies. Adjusted EBITDA increased 0.9%, also an improvement from a 5.9% decline in the prior quarter. Adjusted EBITDA margin of 30.1% was down slightly from the prior year period of 31.3% due to ongoing investments in the WoodMac 2.0 initiative and our chemicals subsurface, power and renewables, and analytics breakout initiatives that increased headcount and associated compensation expense. These areas represent opportunities to leverage Wood Mackenzie's data and industry expertise more broadly and to develop products more swiftly and efficiently. Overall growth was supported by research growth at Wood Mackenzie and strong growth in consulting with our 3E revenues. This improvement was achieved despite the ongoing 2018 revenue headwind from a global investment banking client that has substantially reduced their presence in the industry. The energy and specialized markets segment continues to enjoy core operating leverage and growth opportunities as demand for data analytics in its constituent markets continues to expand and has been demonstrated in the growth of our breakout revenues and the early new contract wins at PowerAdvocate. Financial services also delivered improved revenue growth of 4.4% in the quarter, up from 1.5% in the prior quarter. Adjusted EBITDA increased by 4.5%, down from 5.1% in the prior quarter and the adjusted EBITDA margin was 31.1% unchanged from the prior year. These results are below our long-term expectations for the business but we believe the growth potential of the segment remains strong. The organic revenue growth was supported by growth in portfolio management solutions which include our foundational benchmarking analytics and strong growth in enterprise data management solutions where we are leveraging our data management skills and expertise to support our clients. Looking ahead to next quarter's financial services revenue results, we want to take the opportunity to remind everyone that consistent with our typical partnership revenue model, we expect to have a high level of nonrecurring license and implementation revenue in the early stage of our partnerships followed by the development of recurring subscription revenues over time. In this regard, the third quarter of 2018 will represent the one-year anniversary of the formation of our Thesis partnership, which generated significant initial revenues in the third quarter of 2017 of $6 million with lesser amounts in the subsequent two quarters. Consequently, our growth rates next quarter will reflect the burden of those nonrecurring revenues in the prior year. As we've discussed previously, the launch of our products through the partnerships had been delayed due to data integration challenges but we expect to commence marketing with clients this quarter with the development of the ongoing subscription revenue opportunity to follow. Consolidated depreciation and amortization was $74 million in the quarter, up 32.1% from the prior year quarter, reflecting the impact of acquisitions and increased capital expenditures in both periods. Reported interest income was $32 million in the quarter, up 12.1% from the prior year quarter due to the funding of acquisitions in 2017. Total reported debt was $2.8 billion at June 30, 2018, down from $3.0 billion at December 31, 2017. Our leverage at the end of the second quarter was 2.4 times, based on our credit facility calculation. Our consolidated cash and cash equivalents were about $135.8 million at June 30, 2018. Our reported effective tax rate was 17% for the quarter compared to 28.8% in the prior year quarter as a result of recent tax reform. Our effective tax rate was lower than our targeted range due to significant exercises of outstanding employee stock options that produced a favorable tax rate impact. We are maintaining our estimate of our effective tax rate in 2018 to be between 16% and 18%. However, the timing and impact of employee stock option exercises depend in part on the Verisk stock price and personal decisions. We expect that this impact will be more pronounced in 2018 and that we will revert to a higher effective tax rate in 2019. Adjusted net income was $179 million, up 29.1% from $139 million in the prior-year quarter. Diluted adjusted EPS was $1.06 for the second quarter also up 29.3% from $0.82 in the prior year quarter. The increase reflects organic growth in the business, contributions from acquisitions, and the impact of 2017 tax reform. Equalizing the second quarter of 2017 effective tax rate to that of the second quarter of 2018, both adjusted net income and diluted adjusted EPS were up 11.6%. Net cash provided by operating activities was $207 million for the quarter, up 85% from the prior year, capital expenditures were $56 million for the quarter, up 36% from the prior year reflecting primarily increased investment in Geomni and software development for recent acquisitions. As we've discussed previously, 2018 will be the peak year of capital expenditure for Geomni. Free cash flow was $151 million for the quarter, an increase of 114.3% from the prior year. We returned $141 million in capital to shareholders through the repurchase of 1.3 million shares in the quarter at a weighted average price of $105.78. At June 30, 2018, we had $686 million remaining under our share repurchase authorization, including a $500 million authorization approved in May 2018. In addition, we initiated a $50 million accelerated share repurchase to be executed in the third quarter to accelerate the impact of share repurchases and execute repurchases at a discount to WACC over the period. We have the ability to repurchase additional shares during the quarter, so the $50 million ASR should not be viewed as our total repurchases for the quarter. The average diluted share count was 169 million shares in the quarter and on June 30, 2018, our diluted share count was 168 million shares. Overall, the results for the quarter represented one organic constant currency revenue growth of 7.4% and EBITDA growth of 8.9%, both ahead of our targets. Two, improved organic constant currency margins. Three, continued investment in attractive internal opportunities, and four substantial return of capital to shareholders. Insurance performance remains consistently strong in both underwriting and rating and claims. Our energy and financial services continue to make progress towards their growth objectives. Looking ahead to the third quarter, we want everyone to be mindful of the $8 million in storm-related revenue and $6 million in initial nonrecurring revenue from the Thesis partnership in the third quarter of 2017 that will affect the third quarter 2018 year-over-year reported growth rates but don't represent a change in our underlying long-term growth expectations. We also don't know what the 2018 storm season will hold for us. We are excited about the opportunities to invest in our business and remain focused on long-term profitable growth and solid returns on capital. 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 and one follow-up. With that, I’ll ask the Operator, Kyle, to open the line for questions.

You touched on what some of your European clients are saying on the insurance offering. Maybe if you could touch on, do you still think you can double the insurance business internationally in five years I think you had highlighted that. And maybe some of the challenges and sort of headwinds to that goal. Just maybe update us how much bigger can that international business be and why you feel confident?

When we think about the international opportunity as it relates to the insurance vertical, first of all, it's not just about the London and U.K. markets. We’re actually pushing out into a number of European and Asian markets. I was highlighting London and U.K. partly because that's where I just was with the customers, but also partly because that is the largest part of our non-North American footprint today. I don't really see a lot of headwinds, I can tell you what the work consists of. The work consists of taking the methods that we’ve developed in the United States, tuning them to the local markets, and then infusing them with a lot of good local data. We know how to do that and that is in fact what we’re presenting in these overseas markets today. So, it's organic, it feels very natural and what we need is great people on the ground in these markets that understand the local customers and local conditions and can just ensure our solutions are most relevant and make clear the value they represent. But it's mostly white space for us. I mean, Verisk is about 25% non-U.S. today and it's a big world out there. This is a long sustained march for us, but I don't think of it in terms of headwinds. I think of it in terms of great people on the ground locally taking what we’re already good at and making it relevant.

And just a follow-up I'll turn it over maybe for Lee. Lee, I know you spend a lot of time on capital allocation and in terms of your analyst days investor outreach, maybe just frame for us how you're thinking about that going forward. Have you guys thought about a dividend? Are they going to be more acquisitions? Are you going to add a third leg to the portfolio? Just broadly speaking, I know the history has been a little different where you had a healthcare business than we bought energy now you're sort of focusing in on the core. Maybe just give us some feedback after your outreach program and how you're thinking about broadly capital allocation going forward?

So the way - what I would emphasize is at this stage what we’re focusing on is starting with understanding capital generation, where we’re generating it, how we’re generating it obviously optimizing that. And then looking at the returns on capital within each of the businesses and most importantly on an incremental basis how we’re investing the capital that we have effectively to improve those returns and to support the growth initiatives across the business. And that's where it's a combination of looking not just at acquisitions, but looking at our internal investment through CapEx, through investments in our breakout initiatives. And really just enhancing that as a discipline across the organization as a whole with the objective of trying to identify as many attractive opportunities to invest capital. I really think at the core that's what's most exciting about Verisk. The opportunities that we have across the business to put capital into growth businesses in the analytics and the data management sector. Once we are doing that effectively, I think the next step is thinking about how we manage capital. At this stage we think about all of our opportunities to return capital. As you saw in the second quarter, we’re very focused on repurchasing shares, and so you see a focus there that is determined on a quarterly basis based upon where we see opportunities, but longer term we are certainly going to evaluate all opportunities. But we’re really at the preliminary stage of just thinking about how are we generating capital and how are we deploying it within the business. The final thing that I will say, I think that you have heard Scott and Mark in several cases talk about what we see as the opportunities and the strength of our three verticals, insurance, energy and specialized markets and financial services. While we are always evaluating M&A opportunities that can create growth, we are very comfortable with the opportunities that exist within those three verticals. There is not an expectation at this point that there's any additional vertical that we’re pursuing.

Just I think Lee you ended your prepared remarks on kind of like reminding us of the second half outlook and the strong storms. I guess stepping back a little bit I think you highlighted that that's for quarter’s growth with over 7%, but really if you back out the claims which has been really strong I think was more like 5ish or so. So more holistically, I mean claims growth is great but I think there is a question about sustainability. How do you feel this can continue to grow in the kind of like teens, and how could that weigh on your growth rate going forward. I'm not just thinking the next couple quarters but more, holistically longer term?

This is Mark; I’ll maybe try to address it. Clearly the claims area benefits from the severe storm activities that occurred back in last year's third or fourth quarter. I think what we’ve seen is as a result of some of that storm activity, we’ve had a little bit of a continuation of services to be continued and provided to some contractors. And we’ve also seen insurers for the most part buy more. So I don't attribute first quarter, second quarter results to storm activity. I see the underlying business continuing to be strong. I see the investment we’ve made over the last several years in new products and new services and the extension into all parts of the insurance value chain to be working. I just wanted to highlight that I think we have a lot of good things going in claims and personally I wouldn’t back it out in the way you just did. So I hope that provides at least a little context and maybe a little comfort on the kind of the underlying solvency and strength of the business.

And then Lee just, secondly maybe on the cost side and I know we've talked a lot about the margin and obviously organic versus non-organic, but stepping back I think you've been there for almost nine months or so. Are you spending a lot of time on the how the cost base of Verisk looks holistically? I mean and I guess I'm asking because at your prior shop, the company was very well known for being very good on margin, very tight, very cost conscious. Have you looked at how maybe processes at Verisk are if there are improvements just generally speaking not just from integration of acquisitions?

Yes, thank you, Alex. And so first off I feel obligated to say that I think Verisk starts with a very good discipline around cost management and you wouldn't see, I think the margins of this strength without that discipline throughout the organization. And so that isn’t to say that there aren’t always opportunities to improve and as I learned from my prior shop, cost management is a beast that you have to fight every day. And in that regard, I have been spending time focusing on the cost structure. One area in particular that has gotten a lot of focus and that we've been proceeding against has been against the broader migration from mainframe to cloud migration which I think represents opportunities for us from a cost and from a capital standpoint. That’s one dimension of it. But interestingly you raised it on the call we actually have also been evaluating a shift in our procurement strategy in which heretofore has been a very process-oriented procurement strategy. We are going to be shifting with some changes in leadership to a focus on the cost structure elements. Where we can attack data costs, other technology costs and find other efficiencies across the business in order to improve the overall cost structure. It is something that has received focus there and there are a number of initiatives that are underway, I'm focusing on that opportunity and we hope with a reorientation of our procurement and strategic sourcing function to make further headway against that.

Very good thank you, I’m sorry…

It’s Scott here, I'll just add that - kind of sort of the deep drumbeat where the cost side of our business is concerned, really hinges on a couple of things. One is, as Lee was saying, the nature of the computing infrastructure inside of our company is going to change. We think productively. It only costs you about $40,000 to source a rock headed by our storage capacity in the cloud today. Only $40,000, tell me this is remarkable. As we move from on-prem to off-prem, I think we are going to naturally see productivity there. Another opportunity for us that it is at work now and I think we will make somewhat more use of it in the future will be to diversify where our talent comes from. There are talented people all around the globe and at the moment at least, there are asymmetries in terms of what highly confident professionals get paid. We made less use of that than we might have. Two other things real quick, one is just sort of the strong and consistent drive towards effective operations, which we summarize thinking about Lean Six Sigma kinds of methodologies, which is really a quiet revolution that's going on inside of our company. The last thing is the ability to change the very nature of knowledge work by harnessing machine learning. Today, most of that has been applied to making our solutions for our customers better, but the longer trails to the machine learning AI revolution is to actually change the way cognitive work gets done, and we have a lot of knowledge workers around here and I believe that we can really make them more productive by harnessing the machine more. So bunch of things that underlie - these are all productive and they are not just quarter-to-quarter, this is year-to-year. Some of them are probably decade-to-decade kinds of developments.

My first question is on Argus. So, the $6 million one-time benefit in last year's third quarter, I guess is new disclosure for us so maybe me at least. And so it implies that the third quarter probably is not going to have a good number and so what I'm trying to understand is seven quarters of we are underperforming what we used to see from Argus. Maybe I don't quite understand what's really going on there, like, what the issues are and I guess, even the margins took a head this quarter. So I just hoping you could maybe just flus out again like what's going wrong there.

I don't believe that things are going wrong at Argus. It’s a solid business based on proprietary content, similar to much of what we do at Verisk. If you were to ask me which of our three verticals might achieve the highest growth rate over the next five years, I'd argue that Verisk financial services has a strong case. It's challenging to predict how the three will perform, as I think they will all succeed. Argus is a business we take pride in, providing significant value to our customers. Reflecting on the past couple of years, as we mentioned previously, 2017 saw the conclusion of major relationships, including the Federal Government consolidating its use of our services and a large financial services plan that had been bulk purchasing from us, which no longer maintained their relationship. We've since been establishing new relationships with banks individually to fill that gap, which was a one-time issue. In 2018, it’s important to examine the various segments of the business. We pointed out last quarter that on the median effectiveness side, there’s a significant regulatory burden on banks requiring extensive disclosures around methodologies that enable risk assessment on an individual customer basis. The amount of documentation needed to justify these methods is quite overwhelming. While banks still find our methodology valuable, the traditional way of consuming our methods has become quite challenging due to these regulatory requirements. We are in the process of adapting how we present our underlying intellectual property to our customers, indicating a transition is underway. Lastly, as Lee mentioned in 2018, there was a delay in revenue growth related to implementations we discussed, which took longer to become productive than we anticipated. When we establish a new relationship, we usually see an initial surge of activity for data integration followed by a steady annuity stream. However, the annuity stream is starting a few quarters later than expected due to integration issues. This is what's happening within the business. Our outlook for this business over intermediate and longer periods remains entirely unchanged.

And Manav, to add to what Scott was saying, I understand your question and the frustration from a growth perspective. It's important to step back and examine the factors driving our performance. This has been a complex and unpredictable business. We are working on how to structure our revenue to achieve more sustainable growth. In the past, we pursued several significant opportunities that led to some of the noise in our results. Currently, we are assessing each area of our business, including portfolio management solutions, enterprise data management solutions, and marketing solutions, to ensure that we deliver consistent growth across these segments. When we remove one-time elements from the equation, we want to emphasize that we don’t apologize for the upfront revenues. It's essential to recognize that those revenues come from licensing and implementation, with subscription value building up over time. This underlying dynamic reflects both our growth potential and ongoing opportunities, thanks to the extensive data we possess and the strong relationships with our clients, which allow us to expand the applications of that data. While this is all forward-looking, we believe the opportunities ahead remain strong despite the challenges we've encountered in recent years.

My second question, Scott, maybe just to step back on the investments you're making in the WoodMac 2.0 platform. I recall, like, the year after you made the acquisition, at one of the investor days you talked about how there have already been investments made in a lot of new products and platforms rolled out. So, my question was more like, is this 2.0 initiative sort of driven by customer feedback or is this some sort of new generation you feel like it will help down in the future? Just wanted to get some more perspective there?

Yes, it's both. Let me also highlight that among the three verticals we serve, the energy vertical is the one that has been the least transformed by large-scale data analytics for commercial decision-making. Companies in this sector have access to substantial technical data; however, they have not utilized it in the same way that insurance companies and banks have to enhance their commercial strategies. We recognized this when we partnered with WoodMac, which is one reason for our excitement. Then, of course, we faced significant challenges due to the downturn in commodity prices, particularly affecting a U.K.-based, Pound-denominated company. In the midst of these difficulties, we pivoted and took a step back. Now that conditions have improved, we are ready to move forward again. For those who may not have followed us over time, I wanted to emphasize this point. We viewed WoodMac 2.0 as a part of our initial vision from the start. It is beneficial to have a robust digital platform that allows for the development of next-generation products. When WoodMac joined Verisk in 2015, it reflected its customers' needs; the volume and speed of commercial data were not aligned with market demands. WoodMac was not behind; it mirrored its operating environment. Furthermore, the industry has evolved. In the oil and gas sector, the lengthy planning cycles for large-scale projects have diminished. Now, with half of all incremental supply coming from North America, the landscape is different. Projects can now adapt quickly, with planning cycles reduced to weeks or even days. This shift is exciting, and there is now a greater emphasis on benchmarking operations due to the increased competition in the Permian region. To remain effective, companies need to harness larger and faster data. WoodMac 2.0 is not only about refining our internal operations but also about enhancing our ability to meet customer needs quickly with more comprehensive benchmarking against similar activities. This transformation is fundamentally driven by our customers.

Could I just follow up on the insurance growth rate, was there any contribution done in this quarter that you would attribute to the storm activity? And can you help us understand at all the contribution from aerial imagery at this point to the growth rate? Thanks.

Question one was really around severe storm and impact in this quarter. There was no explicit benefit. I mean, I think what we've seen is contractors who purchased the solutions back during the storm seasons, some have extended that license, that has been good. It seems like that will continue. But there is nothing with regards to storms. Let me now jump over to Geomni. Similarly, storm activity helped us during the third quarter with the storms last year. I think what you're seeing now inside Geomni, is a very strong bit of growth driven by really customer adoption, where we're taking share. We had a very tightly integrated solution that for the most part brings in the imagery, turns it to data, and with that data we're populating the repair cost estimates. At the very heart of what we're trying to do is, we're trying to increase dramatically the productivity of those claims adjusters at our customers. By doing it in an automated way, whether that's from afar or having most of the information prepared into bands of visiting location, it creates tremendous opportunity and efficiency in that process. We are more accurate, and I think we have really started to change the way those insurance companies are kind of automating their processes. Geomni is helping the overall growth rate of insurance, that is very true.

Can you help us assess that the growth of the research business versus the consulting side of Wood Mackenzie? My impression with consulting was leading the growth rate versus the research side?

Yes, Tim, that's absolutely true. The consulting side is the portion that responds the most immediately to the increasing investment levels on the energy side. I would describe the growth areas as strong growth. On the subscription side, there has been growth there. I would say it's more modest growth but clearly the consulting side, which represents about 20% of the revenues has benefited earlier from that upside. But we are seeing a steady improvement in our overall research subscription levels as the cycle continues to improve for the energy sector.

Quick question on Geomni, the $200 million total adjustable market there within insurance, is that on the claims side only or does that include both claims and underwriting?

As it relates to insurance, we've talked about both the claims business and the underwriting business. We were very specific in these cases when we provided that estimate. That is in the context of what we refer to as property characteristics on the underwriting side, helping to better understand the physical attributes of the buildings and the residential homes, and on the claims side as we described. So, it is a combination of the two with a known use case for insurance.

Thanks, and aside from Geomni, can you talk about increasing automation within the insurance industry and to what extent that presents an opportunity for Verisk?

Sure, let me do that. I think we are…

That's going to take about an hour and a half.

I will be brief. Everyone in the insurance industry understands two main points. Firstly, they need to automate operations to eliminate friction. They are investing in technology and changing their processing methods. This also addresses the aging workforce in the insurance sector, where the most experienced claims handlers should focus on the most complex claims and underwriting risks. Their goal is to develop expert systems to manage around 80% of claims in a no-touch or low-touch manner. Additionally, 80% of claims, even commercial ones, need to be addressed at the point of sale with all necessary information to properly assess and price the risk. There is a shift occurring across back office operations, policy administration, claims systems, and data analytics, all aimed at enhancing digital engagement. They want to retain customers and maintain close relationships. In summary, InsurTech and our initiatives are encouraging people to rethink and adapt their business practices.

Quickly I wondered if you could articulate a little bit your Internet-of-Things strategy, how you see that playing out, how it functionally affects your solutions and so forth?

Sure. I think you probably seen the announcements we are trying to aggregate a lot of information not just from telematics and from cars, but even things around buildings and homes. Two primary focus, let me start with the side of claims we feel that we can very much effectively and more efficiently handle the first notice of loss process as it kind of starts inside the car. We've put up relationships between what we have in the OEMs and the car manufacturers in combination with insurers so that we can speed up the claim process both the notification and the payment thereof. So that is good news, helps policyholders, helps claims departments and saves money. On the underwriting side, it’s about pricing. The information is available from connected cars, from mobile devices can tell you about how fast and how good and the behavior of the driver and that information is effective in pricing your insurance policy. We are taking steps to bring that information into both kind of personal and commercial lines pricing so that our insurance customers can be better and more active in assessing that risk and pricing it.

Within the energy segment, I'm hoping to understand how far the cyclical rebound and core research of WoodMac revenue has proceeded. And where are we relative to prior peak revenue or client counts in that core WoodMac area? Thank you.

So, client retention is very high. In fact, we have more customers than we used to have. As I noted before, the sort of the progression related to research it’s really a function of multiyear agreements rolling off, new multiyear agreements being signed. That has been since you could really call the turn of the commodity which is within the last year. We've seen that effective work. It will continue to be at work as we go forward. Basically, the condition of the commodity is no longer an issue. We consider this a normalized environment that we’re in now. So it’s constructive and productive for the work we’re selling today and the work we hope to able to sell in the future. All right everybody, thank you. We appreciate your interest and I'm sure we’ll be talking to a lot of you in immediate follow-ups and no later than next quarters. So thanks very much. Have a great day.