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

Good afternoon. Welcome to the continuing schedule for this room for the Raymond James Institutional Investor Conference. I'm Greg Peters and I've been covering Verisk for maybe 10 years now, my Lord. Verisk has been participating in the Raymond James Conference for as many years as I've sort been covering them, maybe even longer. And it's always been a very popular company to be here. This year, I think, is particularly important, not only where we are from a stock perspective, but also from a historical perspective of the changes that are going on at Verisk. And to have management here, we're honored that you're back. So in the audience is Stacey Brodbar, who is the Investor Relations Officer for the company. And she is one of the most important people in the room, because if you guys have questions, guys and girls, her e-mail address and their phone number are available, and she's very responsive. So feel free, as you develop questions to reach out to Stacey, of course, we prefer for you to go through Raymond James, but Stacey is certainly available to answer questions. And then we have Lee here, who is our incoming CEO of Verisk. And I guess before we begin this fireside chat, and we encourage engagement from you all, I'd ask Lee to say, just give us some opening comments about Verisk. And this is an important time for you to be transitioning to CEO and give some ideas of what you see going on over the course of, say, the next year.

Great. Well, Greg, thank you very much for having us, and thanks to all of you for participating. I have been participating at the Raymond James Conference for at least the last 10 years, not at Verisk. I've only been at Verisk for 5 years, but prior to that, would come down when I was the CFO of NASDAQ. And our Head of Investor Relations really spoke about what a great opportunity it is to meet with so many generalists in the space. And this conference continues to stand out, I think, as one of the best uses of our time to be able to talk to a broad range of investors. Plus with Greg's coverage of the insurance industry, it's also a great opportunity for me to spend time with some of our leading clients at the dinners. And so an opportunity to kind of hear directly from them. And certainly, I plan on, over the next -- certainly, probably over the next 12 months to be spending a lot of time with our clients to understand what their needs are, how we serve them, what more we can do with them. And I'm going to use that as a jumping off point for Greg's question. At its core, what makes Verisk, I think, a pretty extraordinary company is that it was originally founded as a utility to serve the insurance industry. And it wasn't originally a data analytics business. It was a reporting -- an industry standard business to facilitate filings with state regulatory agencies. But sometimes businesses evolve, and we found ourselves in a situation where we had a lot of information that we could use for the industry's benefit. And I think the really wonderful thing about the business is that, that dynamic where Verisk continues to be able to invest on the part of the industry and be able to create value for them by making those investments and leveraging it really more effectively than they individually -- if they were to make all of those investments in data and information technology, creates value for them. And we're -- we have the great fortune of being able to participate alongside of them. And that has been at the heart of the company from the start. It's been something that Scott Stephenson has continued to champion. We have at our core a service mentality. And we are always thinking about what more we can do to create value for that industry, and I think that leads to growth opportunities. The two engines that drive our business are pretty fundamental. One is we continue to see rapidly growing data sets of relevance to the industries that we serve. And the data sets that are growing are satellite data, sense data, driving data, social media data, all of these new data sets that are around us all the time. The other engine is the increasing capacity and demand on the part of our clients to ingest and utilize that data. And Verisk, the 9,000 employees that are -- that I'm here to represent, really harness those 2 engines to create value and lift for the organization by serving our client set. So at the core, that's a very powerful mechanic for our business that I think will continue to drive growth. Opportunities beyond that, we'll continue to look for where we can utilize those data sets that have been relevant for the insurance industry or the energy industry, and find new ways of utilizing them, particularly given the heightened focus around ESG issues and particularly around the environment, with the energy industry. We're obviously all very mindful of the importance of the energy and the challenges that it faces. But the ability to integrate data sets across the energy industry is of increasing relevance. And so I think our opportunity to broaden that mission is very significant. And I think our opportunity to continue to help the insurance industry to find new ways to become more efficient, more effective from an underwriting and claims perspective, as well as new branches of the insurance industry. We've traditionally been a property and casualty service provider. But more recently, we've also found opportunities with new data sets to serve the life insurance industry. We've talked about that with many of the investors in our meetings. And so those are channels for growth. The emergence of cyber insurance represents a new form of coverage that is very data intensive, where we can be a consolidating and coordinating agent for risk models that assess that application. The advent of more usage-based auto insurance is very driven by data. We've created one of the largest data sets to help insurers understand usage-based auto insurance. So all of those underlying aspects represent, for me, a tremendous foundation to continue the growth, the return opportunity, and make investments that help create value for our clients and for our investors.

Yes. Again, for those who want to ask questions, feel free, but I'm going to just kick off with the capital allocation question. And in my career following the company, there's been times when they've ventured off with investments in businesses and acquisitions that didn't necessarily generate the type of returns that were expected. And one of the things that's impressed me about you is since you came to Verisk, it seems like you've been very focused about capital allocation, return on investment. And maybe you could give us an update on your perspectives about capital allocation and return on investment and when you think about acquisitions and dispositions.

Sure. Thanks, Greg. There have been investors that spent a lot of time talking with me about our financial discipline, probably reach a point of near nausea in my ability to talk about capital discipline. But it is -- the reason I think it's important for any CFO is that it's, to me, one of the most often overlooked disciplines. And certainly, growth has to be foremost as a means of creating value for shareholders. You certainly can't dispute operating cash flow growth as a primary driver. And I want to be important -- I think it's important to understand that as I prepare for the shift in responsibilities, I will, of course, never abandon capital discipline. But I think my focus has to shift to the growth dynamic and where are we generating growth within the business, how do we find new avenues for growth within that. But what's important about capital is that's a critical balancing point for growth, because you can certainly achieve growth through the injudicious use of capital, and that's probably the biggest risk when you look at M&A. There are businesses that are smaller, growing faster. And if you aren't disciplined about making certain that you're going to get a return on that, then you can actually destroy value. And I think what I was very happy to achieve was a recognition across the organization that, while everything isn't driven by returns, it's a very important component and deserves a seat at the table. And as a CFO, the one area that you probably have the greatest influence over is capital allocation, particularly as it relates to M&A but also significant investments within the business. And I feel as though that culturally that has been adopted. It's been adopted because I've forced it into our financial reporting internally. So I don't just talk to investors about our return on invested capital discipline, I spend a lot of time talking to the business units about the discipline and also where are they investing capital, what are the potential returns. And I know, within each of our business units, how we are progressing against our objective of generating good returns. And it balances that perspective and it encourages an investment mentality that I think certainly everybody in this room can appreciate, but in a lot of operating models isn't necessarily -- doesn't receive the attention. We generate a lot of capital. And I knew at the outset, if we weren't disciplined about how we utilize that capital, you could find yourself in a lot of trouble very quickly. So we've addressed that every year. We think very carefully about where our investment opportunities are. We have more investment opportunities, then we can absorb within the business given our growth objectives, given our margin objectives, but we want to be very thoughtful and disciplined about how we do that. Where that extends is that I think in this new role as a CFO, you have less scope to drive the operating decisions and the OpEx expenditures. But OpEx is cash and cash is liquid capital. And I want to be mindful of where are we making investments beyond sustaining the business and are we generating returns on that. And so that will be a natural extension of that discipline, that I think is healthy, for us to make the right choices. Sometimes, it's difficult to make the hard choices in investments or initiatives that you've developed. But if you have a discipline about it, the discipline makes it easier to confront and make those harder choices within the business. And then we'll complement that by thinking about where, again, from an efficiency standpoint, we can most effectively leverage the amazing data sets, the fantastic analytics and platforms that we have developed into a broader customer base.

AAs part of -- as you're answering the question, you made a comment and it struck a cord with me, when you talked about pivoting responsibilities from a CFO that's focused on capital allocation, and pivoting the growth as a CEO. And that is -- there is a shift there. You have to -- sort of being tight with their financials, now you have to figure out what are the levers for growth. So it's a good segue to -- one of the financial objectives that the company has had is a 7% organic revenue growth. Talk to us about how you feel the company is positioned to achieve that target. And I think your objective -- your stated objective is 7% organic with EBITDA, a little bit faster than that. So there's a near-term realization of maybe getting to that target and the longer term. So bridge the gap for what's going on now in getting to those targets near and longer term?

Sure. So as with most conversations that we have with investors, I can principally describe them from trying to go from a metric that is viewed as a reflection of a monolithic business, whether it's revenue growth or margin across the business to a portfolio of a wide variety of businesses that we manage and we track. And so when we think about the growth rates from the business, I want to go back and start with what are the fundamental drivers that support our growth. It is a growing number of data sets, the demand for our businesses. All of that informs the growth that we're able to drive through the business to different degrees. Now we have some businesses that are long-standing businesses that support the property and casualty insurance industry. Our ISO, our underwriting business, represents that. And for many years, that was a business that was viewed as a very stable but perhaps a lower growth business than our higher growth-oriented businesses or our newer businesses. And much to their credit, the management team for the underwriting businesses, as you will have observed in our quarterly reports, have demonstrated that this is a business where by identifying new channels of growth within the underwriting space, has been able to develop higher growth components in new channels that have added to that growth. The success in our LightSpeed suite of products, where we have assisted insurance companies in being more responsive to their customers that are looking for a bindable quote at the point of sale by leveraging the data sets that we've had, has enabled them to become more competitive in an environment where they face new competitors. Our catastrophic risk modeling business have found new areas of risk like cyber risk or flood risk, where we've developed new models to supplement that growth. And so those are examples of where, within existing businesses, we have to be open to where is the data that we can use to create new channels of growth and complement and supplement very strong businesses that we have and very strong customer relationships. Also core to our growth is the relationship that we have with the insurance industry. They hopefully will continue to view us as their partner in technology, making investments on a very efficient basis to help their businesses better. So our growth, in large part, depends upon our ability to service them. I've told the story of when Stacey and I were in London before the pandemic, and I had an investor tell me that he spoke to a half dozen of our insurance CEOs in the property and casualty insurance industry, and he said, "Lee, I have to tell you, that every one of them described you as a critical technology partner that makes their business better." Now I'm sure if you were to talk to every one of our CEOs, you might not hear that. But the fact that, that was such a predominant sample set is an example of -- is evidence of the opportunity that we have and the privilege that we have to bring new ideas and work as partners. That supports growth overall within the business. So those are the elements of growth that I think could continue to support that. I do think that over the past 5 years, the industry has moved architecturally to a more stronger embrace of cloud-oriented computing. And so their ability to generate data and ingest data, and importantly, the data increasingly has a kinetic quality where data becomes process. The ability to automate an underwriting process to facilitate a claim and our ability to activate that data in that process orientation, I think, opens up opportunities for us to become more than just a data provider, but almost an infrastructure provider to the industry as a whole. And I think that's an exciting opportunity for us.

I can speak from my experience in the insurance industry. There's a lot of opportunity there. A lot of the large insurance companies, the mutuals, et cetera, are dealing with legacy systems. I mean this is going to be a shocker to these people in the room, but State Farm has offices that still have those old CRTs in them. It was just mind boggling considering where we are today with technology. So there is a lot of opportunity there. And as an insurance analyst, I'm grateful you're focused on that because the other businesses I didn't understand as well. And one of the -- in some of the areas, the dispositions recently have gotten a lot of attention. So maybe talk to us about how you approached the evaluation of the dispositions. And then also then provide some perspective on what you've disposed and what you've kept.

Sure. So recently, we announced the sale of our 3E business. It's in an environmental health and safety business that was focused on providing information subscription services to workplaces to provide and prepare and create safety data, data sheets. And it is a very good business. It was very well managed. It generated very solid mid-single digits growth. It made an acquisition of a content business from SAP that was executed well, generated a good return on capital. What's not to like about it. Well, it was more of an information business than it was a data business. And we can provide leverage to data businesses, less so on the information side. We also saw this business, I think, because of a lot of the focus on ESG, where there was a lot of consolidation taking place. And I think in order to maintain our presence in the industry, it would have required a significant amount of capital investment in acquiring other entities to expand and grow that. And as we look with our capital discipline around that, we felt as though that wouldn't have been as strong a return opportunity as utilizing that capital within the business. And so we decided, given the appetite and demand, given valuations that we saw in the marketplace, that this would be an opportunity for us to separate that business. And so we are -- it's a great team. It's going to be, I think, very well placed under New Mountain, who was acquiring it, to do well. And for us, it was just a natural reason to separate that. So that was 3E. With Verisk Financial Services, this was a business -- this is a business that has a phenomenal data set, and they have phenomenal relationships in the financial services industry and serve that industry set extremely, extremely well. It is a business that was originally founded as a consulting business, and there were still elements of the consulting aspect of that business that created more volatility within that business and exposed us to some challenges from a growth perspective that would have required more time and more investment in getting there. The company, we think, was on track to continue to make progress, but the challenges of the pandemic, which hit a number of our businesses hard early on, made that more challenging. It was also a business that, from a scale standpoint, was in a space with some very large players in terms of the large card affiliations, the credit unions. And so we believe that there was an opportunity potentially for another player to see more value in that business than we believed we could deliver for our shareholders. So in both cases, we made decisions that were predicated on what is the value of the business to us, what could the value be to someone else, and we're going to make the choice of where there is greater value. And so in that case, we're very happy. TransUnion, a very strong company, very capable in the data analytics space, saw an opportunity for them to augment their business and expand what they're doing and enabled us to continue to focus our operations within the business.

And you still have an ongoing review of the businesses -- some of the other businesses. And one of the interesting data points are actually stemming from this conference, a couple of conversations I had, is from some investors who actually look at your -- the remaining energy business and see some real underlying value in the data sets that Wood Mackenzie has. Maybe talk for a minute about that business, the remaining energy business. And you've heard some of the same feedback. Share what your perspectives on what [ are ] the puts and takes of that business right now.

Sure. Thanks, Greg. And so I want to start off with the point that, again, as with 3E and with BFS, our primary focus is on what is the greatest opportunity for shareholder value creation within this entity. Our energy business, principally the Wood Mackenzie business, has accumulated some extraordinary data sets. And it comes from decades of their expertise in energy asset valuations. And it has really been impressive to me as I've come to appreciate how highly regarded Wood Mackenzie's reputation is in the energy community. And I hear it again and again and again, the intellectual capital that our research team and our consulting teams bring to that business is exceptionally highly regarded by the industry. They're really -- they're truly thought leaders. Those data sets, I've often used the description, existed in a technological archipelago, because they had accumulated within those specific categories of energy or fuel sources. And Increasingly, we believe our opportunity -- and we continue to see this today, is that as we need to understand the energy ecosystem broadly, the ability to integrate those data sets in order to understand the dynamics of the full energy supply and the full energy demand equation is really where there is tremendous appetite, not only among the energy companies, not only among the traditional banking community that we serve, but to investors as a whole. And we've made an acquisition with Genscape, which provides real-time monitoring data on the electricity grid, on fuel pipelines and a variety of energy networks. And so our objective has been to create a cloud-based environment, which is our Lens environment, to centralize those data sets and enable our clients to access and interact with that data and allow us to build a broader and more integrated set of analytics that serve the broader client base more effectively. And as we described on the fourth quarter call, what we were most thrilled about is that the reaction from very large investment banks, very large energy companies have recognized that this is an enhanced tool of substantially greater value and in a challenging end market in 2021, we were able to secure a high single-digit, even low double-digit price increases, on subscription renewals for multiyear contracts that reflected that value. That contributed to ACV growth in 2021 for -- of mid-single digits over the past 3 consecutive quarters. Now all of that leads to, I think, a stronger opportunity to demonstrate of the growth in subscription revenues, and we're only about 10% penetrated into our ACV with that platform. So we have structurally improved the platform with the investments that we've made. We know that we're generating already a strong return on capital for the investment that we've made, and we're opening up new channels of growth. So this is a business where there is increasing demand, new data sets. We have a technology platform that is delivering substantial value that we can see in terms of our pricing opportunities with clients. And so it clearly has value and momentum that I think we will continue to see in the business. And our job is to determine where can shareholders most directly participate in the value of what that business represents.

Fair answer. And as part of your answer, you mentioned the cloud. And I know that's a broader theme going on with [ that, where ] there's transition migration to the cloud, organizationally speaking. Give us some perspective of where you are and an update of where you are in that transition, the investment dollars that have been made in order to get you to where you are today and what's left in that journey?

Sure. So as of this point in time, about 3/4 of our process capacity is in the cloud. This has been -- we're in year 2 of a 3-year journey. And we expect by the end of 2022 to shut down 1 of our 2 data centers with the second to likely follow in 2023. From an economic standpoint -- and it's important to understand that when we're talking about cloud transition, you're moving from a CapEx-oriented expense to an EBITDA expense. And so we are shifting that expense. And so we first want to look at economically, have we been able to save money in the cloud? And the answer is, in 2021, we realized an economic benefit when we take our incremental OpEx associated with our cloud expense, offset -- the increase is more than offset by the reduction in our cloud-related OpEx as well as the CapEx expenditure from the cloud. So we'll expect that savings to continue as we progress through time. Now our cloud expenses will continue to grow because they are supporting the growth of the business. And in a longer-term sense, just as I've described with Lens and our ability to move those data sets into the cloud, it facilitates greater ease of utilization of those data sets and the potential of creation of more value by associating those data sets. And so what we will continue to do in the insurance business in migrating those data sets within the businesses, it opens up new opportunities for us to create similar Lens upgrades. And you heard us speak about the investment that we're making in our core lines business to improve and upgrade the platforms that our clients interact with those data sets, which should create value for them and certainly value for us. So that's kind of where we are in that process.

Great. Thank you. So we only have a minute left, but it's probably an important question that needs to be asked because I'm sure it's on everyone's mind. As you transition to the CEO role, [ Verisk ] is going to be in the market for a new CFO. Talk to us about how that process is evolving. Obviously, it's early stages, but give us some ideas of how you're approaching that.

Certainly. So first, I think it's important to understand that you -- we would like to find someone that has public company experience, so that they can step into the role. There are a lot of opportunities I'm excited about jumping into. I've done some of that on the energy side with our energy team, but there's a lot for me to do with the insurance team, and I'm very excited and working more closely with them, in partnership with Mark Anquillare, who will always know much more about the insurance business than I do, and I'm very fortunate to have him as a partner. So one, we would certainly like to have someone that can step into that role and come up the curve relatively quickly. I would say the other dimension is finding someone that has good operational experience within the business, someone that maybe brings some private equity experience and taking a fresh look at how our operations could be improved from an efficiency standpoint is something that we think would be a strength. And of course, it goes without saying someone that understands capital discipline and will be able to continue to carry that torch will certainly be an important quality from my standpoint as well.

Excellent. So where we've hit the 30-minute mark, and we appreciate your presentation. For everyone here, there's going to be a breakout session downstairs for another 30 minutes. So we have a chance for follow-up questions there. So thank you, Lee.

Okay. Thank you very much, Greg, and thank you all for your time.