Verisk Analytics, Inc. (VRSK) Earnings Call Transcript & Summary

Hi, it's Andrew Steinerman, your business information services analyst here at JPMorgan. This is the Verisk section of the Ultimate Services Investor Conference. I'll just make some quick comments before we get started with Lee Shavel, the CFO. Next year, we already have a date. So we'll be in person here at 383 Madison on November 18, Thursday, 2021. So please mark your calendars. You can also get our information services data book, which is our quarterly primer. It's on the website today, go into the Research section. So this is the format, Lee is going to make some very brief introductory remarks just to give some overview of Verisk for people who aren't as familiar, and then, of course, I'm going to jump into my 30 minutes of questions, hitting the questions that I know even the most informed investors want to hear from. So Lee, I'll turn it over to you for a couple of intro comments.

Great. Thank you very much, Andrew, and thanks to Andrew and JPMorgan for hosting this conference. We're really delighted to always participate in it. It's always a great turnout from an investor standpoint. So what I want to do very briefly was to orient those of you who may not be familiar with Verisk. We are a data analytics business that serves principally the insurance industry, the energy industry and the financial services industry, but most of our business is centered on the insurance sector. And what that enables, we have historically been a utility for the insurance industry. So we have a very centralized relationship with the U.S. property and casualty insurance market. What drives our growth, which is important to understand is separate from growth in the insurance industry, is that we have 2 primary engines. One is the growing number of data sets that are relevant to the U.S. P&C insurance market. And the second driver of growth is the increasing demand and the ability to take those data sets and apply them to the specific underwriting or claims functions within our insurance company clients as well as in the energy sector for data sets that are relevant to them. That provides for us a very strong growth business, but also one that has a very strong recurring revenue element. Approximately 80% of our revenues are recurring revenues. And we have demonstrated, despite the impact of the pandemic on several of our products and businesses that are impacted by driving activity or travel activity or other effects, that we still have been able to generate organic constant currency growth and EBITDA growth ahead of that due to the strong operating leverage within our business. And finally, what I will say is, one of the other opportunities that being in this space provides to us is the opportunity to invest capital in new analytic features or new analytic objects or platforms for our customer base that we can produce at a relatively low cost because we're really just moving data around and moving electrons around, and we're able to monetize that very effectively across our very large installed customer base. So that produces very high incremental returns on capital, which is a part of how we believe we deliver substantial value to our investors. So I'll stop there, and Andrew, over to you. Happy to take your questions.

Thanks, Lee. So this is around your third year anniversary at the company as CFO. And one of the signatures that you've drilled into me and I assume educated a lot of investors about is ROIC. It really does seem like your signature metric. It's not that it was ignored before or in the industry, but it really seems like it's your personal top metric and you surely have helped align the organization around that. Over the last couple of years, ROIC, I guess everyone can calculate a little bit differently, but in our data book, we have it about 13%, 14% for Verisk for the last couple of years. My question to you is, now that we understand this is what creates shareholder value, now we understand it's super important, how do we hold Verisk accountable to any ROIC goals? And what could the company do to bias ROIC upwards going forward?

Yes. Andrew, thank you for the question. And you're right, it is something that, obviously, I've emphasized. I thought it was an opportunity. And one way, I want to make it very clear, it's not the only metric, but it's an important complementary metric to the growth and innovation discipline that is very strong and very important at Verisk. But just as the income statement, the balance sheet and the cash flow statement are all interconnected and you have to understand them all, capital discipline, along with growth discipline and margin discipline, is a very important complement. And so what we have done over the past 3 years is really create a culture around capital management and building systems that allow us to understand at a macro level where we are investing capital, how that is affecting our overall returns and make certain that we are allocating capital to where we see the best returns within the business. And as I described earlier, I think that's one of the great opportunities from where we sit, as these data sets expand as the opportunities to deploy them is higher. That is built off of a very micro focus around tracking the actual capital that we are investing internally within the business for internally developed software, which is a leading source of investment for us. Our investment, for instance, in the Lens platform at Wood Mackenzie is an example of an internally developed software element that we are generating good returns on in, as an example, we are seeing solid price increases from our energy clients for the use of the Lens platform in contrast to an industry that is clearly experiencing some challenges. So we're mindful of those types of returns. In addition, we're tracking our investments in new initiatives like the energy transition initiative or the telematics initiative within insurance to gather data on driving statistics that can be monetized through our auto insurance clients or investments in our LightSpeed business that is helping insurance companies engage with our customers in a more digital format and get them to a bindable quote. And of course, in terms of M&A, it is driving our focus around, apart from acquiring a good business that has attractive growth dimensions to it, how can we create value by leveraging what our business units are able to do by expanding the distribution to drive returns. And that's something that we track and can report at an enterprise level for all of our business units and projects. But to come to your question, which is, how do we hold ourselves accountable and, consequently, for all of you, how do -- how should you think about holding us accountable for this. And it's a tricky question because a lot of what we're doing is happening on a project-by-project basis. But I am going to kind of break it into 2 pieces. First, the most important metric, from my perspective, is the incremental return on capital for our business. And one way to think about that is it is the change or the increase in net operating profit after adjusted tax or the numerator over the increase in our invested capital. So it's effectively capturing what are we doing incrementally and how is that return expanding over time? Now that can become a complex number and not necessarily easy to aggregate on an overall basis, but it's one way that I think that investors can look at for, if you are doing a return on invested capital calculation for us, you should be able to compare year-over-year how our NOPAT has increased and how our capital has increased. Now the reason that I emphasize that is that internally, as I mentioned before, we have very high rates of return on that internal investment or certainly that's our objective. When we look at external opportunities to invest in M&A transactions, we are certainly striving to achieve returns in excess of our cost of capital, but we may have an opportunity, for instance, to generate a return in, let's say, 10% to 12% return on invested capital, but that may be lower than where we are from a return on invested capital overall within the business. So that's again why I emphasize that marginal return, do we have confidence that we are deploying capital where we can generate returns attractive relative to our cost of capital? My objective and our objective collectively is to increase our overall return on invested capital over time. And I think we have seen progress against that objective, and that's going to be driven by probably more capital that we're allocating to internal investments where we can generate those high returns and supplemented by some continued external investment in M&A, which may not be as high but are value creative in terms of a higher return that we can achieve relative to capital. So I know that's a lot, Andrew, but I know that you weren't expecting a short answer from me on capital.

No. No. So I always like measurement questions. The next we're going to talk about a little bit is NPS. You guys are just awesome of publishing your NPS in your annual report every single year. I know this year it's tracking at 50, which, if anyone knows B2B NPS scores, that's an awesome score. And yet, yes, keeps on going up. So the level, the direction, everything is looking great from your clients' view of Verisk. All that has to translate into innovation. It's clear you have the relationships. My question actually pivots now and asks you how do you track and measure innovation? How do you know you have enough innovation in the system to get the growth that you're looking for in the future?

It's a great question, Andrew, and I really appreciate it. And this is a metric -- if ROIC is my signature metric, I would -- NPS is Scott's signature metric. And it kind of -- it embodies his focus on our relationship with our clients, how we are serving them, how we're innovating on their behalf. And while NPS, I think, is a very important starting point, what we don't want to do is become reliant on a sole metric. And as your question suggests, it's something that you want to be evaluating broadly within the organization. And I think there's a lot of merit to NPS. There are also some shortcomings, potential concerns about are you manipulating that in some way to kind of get to it. And so that's why we want to build a diverse set of metrics. And so we have been working on investment through some analytical tools that are provided by a company called Medallia that give us other metrics and data sets in terms of how our clients are responding to them. Are we being innovative? Are we creating value for them that we can then track to determine, are we on the right path? Is there appetite for this product innovation that we are making? And are we listening to what their needs are in terms of applying our data sets to their most immediate and specific needs? But I would supplement that also with some kind of common metrics. One thing that we look at, particularly in our relationship with the industry, is, are we able to demonstrate pricing increases that are value-driven because given the relationship that we have with the industry, if we can't substantiate our pricing increases in terms of hard dollar value that we're providing to our industry, then I think we're at risk of undermining that. So we are always looking at product by product what are we doing to add value, to create something new that they can monetize within their business of commercial value. And I talked earlier about the Lens product and the investment that we've made within Wood Mackenzie for that platform. That's a great example of how we are seeing solid evidence of it being value creative because of their willingness to entertain contract value increases because of what it can do for them.

Right. And just -- you keep on getting me curious with that Lens comment. You mean the whole bundle of your client's spend has a price increase when it includes Lens? You don't just mean you get price increases on lens, right?

That's right because Lens is a platform that enables access to our existing and expanding data and analytics. So effectively, we're trying to monetize and capture the value of Lens in terms of the pricing increases on those individual data set subscriptions.

That's great. Okay. You have these areas that you like to call breakout areas, and the company has been talking about them since shortly after you arrived. So it's really kind of 2018 to 2020, is another year of investment in breakout areas. I surely know which are the breakout areas. My question to you now is a revenue question. When you think about the next 2 years ahead of us, which of these breakout areas, which you've been investing in for 2 years now or 3 years now, will be the best needle movers to total revenues?

Yes. So it's -- and this isn't a dodge. I'll try to answer the question, but these are always questions where you're asked to describe which child you love best. And I think in fairness, all of these opportunities are ones that we feel represent substantial opportunities. And I want to kind of put them in context. So there are different levels of internal investment. One, our product features that are enhancements to existing products. The breakouts are intended to capture emerging areas where we don't have an existing product set. And so telematics is probably the best example of that. We had to make the decision to begin to develop a data set of driving data that would, at some point in the future, have relevance to the auto insurers in driving pricing for auto insurance. And part of that is how quickly would the industry adopt usage-based insurance. And early on, I would have to confess, we were concerned, we were putting a lot of money into that, and it wasn't clear that the industry was moving quickly to utilize that data. More recently, we have seen a more concerted uptake. We are generating revenue from that data. And I think with the advent of some leaders in the auto insurance space offering usage-based products or driving-based discounts, we're beginning to see more traction around that. And so if you think about, certainly, the scale of auto insurance, if there is a meaningful shift of that market to usage-based insurance, then this data set is highly relevant, highly valuable and centralized where it can serve the industry as a whole. So I think that gives you some sense of how we think about the scale of some of those opportunities. Similarly, Lens was a breakout opportunity in building a platform that allowed us to move Wood Mackenzie from a very strong research and consulting business to more of a data analytics business, and it's facilitating the centralization of those data sets and the utilization of those data sets in ways that our clients can interact with and allowing us then to draw greater association for those data sets, particularly as they relate to the full energy supply and demand spectrum, which is increasingly important in this energy transformation that we're undergoing from carbon-based to alternative fuel sources. So that, as a penetration opportunity for the energy industry, we think, represents a very substantial opportunity. So I've kind of tied Lens and the energy transformation breakouts as 2 elements that I think are significant penetration -- significant opportunities for us.

Right. And remember, the question was over the next couple of years? Like do you feel like telematics could be a relevant neo-mover over the next couple of years?

Yes.

Okay. Perfect. Okay. Another breakout opportunity is around Sequel, which was an acquisition in 2017 and had this great thesis that, hey, there's no utilities for P&C insurers in Europe but we could get into more of the P&C insurance processing, data processing business with a software company like Sequel. But the bigger ambition, of course, was to convince the U.K. industry as a P&C insurance industry that they will be better off having an industry utility like the American P&C insurance industry had long had for decades with Verisk. And I know there's no Verisk in Europe. So my question is, here we are 3 years later with Sequel. Is Verisk any closer to convincing the U.K. industry, the P&C insurance industry, that they are better off with the utility? And if I'm asking you the wrong question, is there another geography that sees the wisdom of the American P&C insurance industry?