BLACK KNIGHT, INC. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including statements regarding expectations, hopes, intentions or strategies regarding the future. Forward-looking statements are based onBlack Knight, Inc. and its subsidiaries ("Black Knight ," the "Company," "we," "us" or "our") management's beliefs, as well as assumptions made by, and information currently available to, them. Because such statements are based on expectations as to future financial and operating results and are not statements of fact, actual results may differ materially from those projected. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. The risks and uncertainties that forward-looking statements are subject to include, but are not limited to:
changes in general economic, business, regulatory and political conditions,
? including those resulting from pandemics such as COVID-19, particularly as they
affect foreclosures and the mortgage industry;
the outbreak of COVID-19 and measures to reduce its spread, including the
? effect of governmental or voluntary actions such as business shutdowns and
stay-at-home orders;
? security breaches against our information systems or breaches involving our
third-party vendors;
? our ability to maintain and grow our relationships with our clients;
? our ability to comply with or changes to the laws, rules and regulations that
affect our and our clients' businesses;
? our ability to adapt our solutions to technological changes or evolving
industry standards or to achieve our growth strategies;
? our ability to protect our proprietary software and information rights;
? the effect of any potential defects, development delays, installation
difficulties or system failures on our business and reputation;
? risks associated with the availability of data;
? the effects of our existing leverage on our ability to make acquisitions and
invest in our business;
? our ability to successfully consummate, integrate and achieve the intended
benefits of acquisitions;
risks associated with our investment in Dun & Bradstreet Holdings, Inc. ("DNB")
? and integrating and achieving the intended benefits of the acquisition of
other risks and uncertainties detailed in the "Statement Regarding
? Forward-Looking Information," "Risk Factors" and other sections of our Annual
Report on Form 10-K for the year ended
the
The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSEC onFebruary 26, 2021 and other filings with theSEC .
Overview
We are an award-winning software, data and analytics company that drives innovation in the mortgage lending and servicing and real estate industries, as well as the capital and secondary markets. Businesses leverage our robust, integrated solutions across the entire homeownership life-cycle to help retain existing clients, gain new clients, mitigate risk and operate more effectively. Our clients rely on our proven, comprehensive, scalable products and our unwavering commitment to delivering superior client support to achieve their strategic goals and better serve their customers. We have market-leading vertical software solutions combined with comprehensive real estate data and extensive analytic capabilities. Our solutions are utilized byU.S. mortgage loan originators and servicers, as well as other financial institutions, investors and real estate professionals, to support mortgage lending and servicing operations, analyze portfolios and properties, operate more efficiently, meet regulatory compliance requirements and mitigate risk. We believe the breadth and depth of our comprehensive end-to-end, integrated solutions and the insight we provide to our clients differentiate us from other software providers and position us particularly well for emerging opportunities. We have served the mortgage and real estate industries for over 55 years and utilize this experience to design and develop solutions that fit our clients' ever-evolving needs. Our proprietary software solutions and data and analytics capabilities reduce manual processes, improve compliance and quality, mitigate risk and deliver significant cost savings to our clients. Our scale allows us to continually and cost-effectively invest in our business in order to meet industry requirements and maintain our position as an industry-standard platform for mortgage market participants. 22
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The table below summarizes active first and second lien mortgage loans on our mortgage loan servicing software solution and the related market data, reflecting our leadership in the mortgage loan servicing software solutions market (in millions):
First lien Second lien Total first and second lien
as of March 31, as of March 31, as of March 31,
2021 2020 2021 2020 2021 2020
Active loans 32.3 30.8 3.4 2.6 35.7 33.4
Market size 53.2 (1) 53.0 (1) 12.3 (2) 13.4 (2) 65.5 66.4
Market share 61 % 58 % 28 % 19 % 55 % 50 %
Note: Percentages above may not recalculate due to rounding.
(1) According to the Black Knight Mortgage Monitor Report as of
and
According to the
respectively, for
We offer our solutions to a wide range of clients across the mortgage and consumer loan, real estate and capital markets verticals. The quality and breadth of our solutions contribute to the long-standing nature of our relationships with our clients, the majority of whom enter into long-term contracts across multiple products that are embedded in their mission-critical workflow and decision processes, particularly in the Software Solutions segment. Given the contractual nature of our revenues and stickiness of our client relationships, our revenues are highly visible and recurring in nature. Due to our integrated suite of solutions and our scale, we are able to drive significant operating leverage, which we believe enables our clients to operate more efficiently while allowing us to generate strong margins and cash flows.
Our Markets
TheU.S. mortgage loan market is large, and the loan lifecycle is complex and consists of several stages. The mortgage loan lifecycle includes origination, servicing and default. Mortgage loans are originated to finance home purchases or refinance existing mortgage loans. Once a mortgage loan is originated, it is serviced on a periodic basis by mortgage servicers, which may not be the lenders that originated the mortgage loan. Furthermore, if a mortgage loan goes into default, it triggers a set of multifaceted processes with an assortment of potential outcomes depending on a mix of variables. Underlying the three major stages of the mortgage loan lifecycle are the software, data and analytics support behind each process, which have become integral to industry participants. As the industry has grown in complexity, participants have responded by outsourcing to large-scale specialty providers, automating manual processes and seeking end-to-end solutions that support the processes required to manage the entire mortgage loan lifecycle.
Business Trends and Conditions
COVID-19 Pandemic
OnMarch 11, 2020 , theWorld Health Organization ("WHO") declared the COVID-19 outbreak to be a global pandemic. In addition to the devastating effects on human life, the pandemic is having a negative ripple effect on the global economy, leading to disruptions and volatility in the global financial markets. MostU.S. states and many countries have issued policies intended to stop or slow the further spread of the disease. COVID-19 and theU.S.'s response to the pandemic are significantly affecting the mortgage and real estate industries. OnMarch 18, 2020 , theU.S. Department of Housing and Urban Development ("HUD") and theFederal Housing Finance Agency ("FHFA") announced a 60-day moratorium on mortgage loan foreclosures and evictions. Likewise, the FHFA also announced mortgage loan forbearance programs for certain borrowers that allow mortgage loan payments to be suspended for up to 12 months. The Coronavirus, Aid, Relief and Economic Security Act (the "CARES Act") was signed into law in an effort to provide economic assistance to workers, families and businesses and codified the actions of HUD and the FHFA. 23
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Subsequent to the CARES Act, theFederal Housing Administration ("FHA") extended the moratorium on mortgage loan foreclosures and evictions through at leastJune 30, 2021 . In addition, many states have implemented additional guidance that extends their moratorium on mortgage loan foreclosures and evictions, and additional extensions of these moratoriums may be implemented in the future. There are no comparable events that provide guidance as to the effect the COVID-19 pandemic may have, and, as a result, the ultimate effect of the pandemic is highly uncertain and subject to change. We do not yet know the full extent of the effects on the economy, the markets we serve, our business or our operations.
Black Knight Response and the Effect on Our Business
We continue to execute on our business continuity plans to address the challenges related to the ongoing COVID-19 pandemic. SinceMarch 2020 , substantially all of our employees have been working from home. We are following the requirements and protocols published by theU.S. Centers for Disease Control , theWHO and country, state and local governments. Our most important priorities are the health and safety of our employees and helping the communities where we work and live. A phased return to office plan has been created, which outlines when and how we will slowly begin to lift the actions put in place as part of our business continuity plans. The plan includes a phased return to office, social distancing , travel restrictions and additional safety precautions and will be enacted at each location when the risk to re-open has been reduced to an acceptable level. We continue to monitor the effects of the pandemic on our global workforce and have contingency plans in place to mitigate business risks. We believe working from home has been successful and has not significantly affected our results of operations, financial condition, cash flows or control environment. The extraordinary effects of the broad-based response to the COVID-19 pandemic have delayed the timing of certain revenues. Specifically, the current mortgage loan foreclosure moratorium and forbearance plans offered as part of the CARES Act are reducing the number of foreclosures being processed on our BankruptcySM/ForeclosureSM and InvoicingSM software solutions for which revenue is recognized as transactions occur. Many of our clients continue to work from home while experiencing refinance origination volume increases as well as an elevated number of customer service calls. Our teams are focused on supporting our clients in this shifting landscape and stand ready to deliver our solutions. Our clients have experienced the significant changes in how their customers want to, or are able to, interact with them throughout the pandemic and have realized these changes will likely persist beyond the pandemic. In reaction to these changes, our clients are prioritizing automated technology solutions that enable them to remotely engage with their customers and provide streamlined ways of performing the core functions of their businesses, all while maintaining regulatory compliance in an environment that is rapidly changing. We believe our solutions are well-positioned to help our clients address these needs. We partner with many of the industry's best lenders and servicers and believe it is our duty to serve in a leadership role as we manage through this crisis and beyond. From the start of the COVID-19 crisis, we have worked to provide leadership on behalf of our clients and to provide them with actionable intelligence, including our monthly Mortgage Monitor report and our McDash Flash Forbearance Tracker. We have also published in-depth white papers, held town hall meetings with our clients and have had frequent meetings with senior executives at our clients, government agencies and industry associations. We believe the in-depth data and insights we offer are essential for both mortgage market participants and government entities as we work together to address the economic ramifications of the crisis. Our investment and innovation in digital mortgage loan solutions have made it possible for a majority of the mortgage application, underwriting and closing processes to happen online and remotely. Our industry-leading servicing system and a mortgage loan contributory data set represents a majority of the U.S. market and is modeled to represent the entire U.S. market. Our robust analytics and seamless integration ties them all together and allows for real-time visibility into the majority of active mortgage loans and a holistic view of the homeownership lifecycle. The depth of our integrated software, data and analytics enables clients to see what the effects of the pandemic mean for their business and industry. Our clients use these robust solutions for modeling, forecasting and reserve setting, which is critical, especially in this current environment. Market Trends
Market trends that have spurred lenders and servicers to seek software, data and analytics solutions are as follows:
Integral role of technology in theU.S. mortgage loan industry. Over the past few years, the homebuyers' processes have become more digital, and banks and other lenders and servicers have become increasingly focused on automation and workflow management to operate 24
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more efficiently and meet their regulatory requirements as well as using technology to enhance the consumer experience during the mortgage loan origination, closing and servicing processes. Since the start of the COVID-19 pandemic, our clients have become increasingly aware that digital solutions are integral to their ability to stay connected with their customer base in times when face-to-face interactions are not possible. We believe technology providers must be able to support the complexity and dynamic nature of the market, display extensive industry knowledge and possess the financial resources to make the necessary investments in technology and software to support lenders and servicers. This includes an enhanced digital experience along with the application of artificial intelligence, robotic process automation and adaptive learning. Heightened demand for enhanced transparency and analytic insight. AsU.S. mortgage loan market participants work to minimize the risk in lending, servicing and capital markets, they rely on the integration of data and analytics with solutions that enhance the decision-making process. These industry participants rely on large comprehensive third-party databases coupled with enhanced analytics to achieve these goals. The pandemic is putting pressure on theU.S. economy, affecting millions of American jobs and creating a high-level of uncertainty in the volume of work that our clients are facing with possible delinquent mortgage loans. Mortgage loan market participants are eager for timely data and insights to help them plan and react to the changing environment. Regulatory changes and oversight. MostU.S. mortgage loan market participants are subject to a high level of regulatory oversight and regulatory requirements as federal and state governments have enacted various new laws, rules and regulations. It is our experience that mortgage lenders and servicers have become more focused on minimizing the risk of non-compliance with regulatory requirements and are looking toward solutions that assist them in complying with their regulatory requirements. We expect this trend to continue as additional governmental programs and regulations have been recently enacted to address the economic concerns resulting from the pandemic, and our clients have had to adapt their systems and processes in record time to the shifting landscape. In addition, our clients and our clients' regulators have elevated their focus on privacy and data security while many of our clients' employees are working from home and in light of an increased level of cybersecurity incidents. We expect the industry focus on privacy and data security to continue to increase.
Our Business Segments
Our business is organized into two segments: Software Solutions and Data and Analytics.
Software Solutions
Our Software Solutions segment offers software and hosting solutions that primarily support loan servicing, loan origination, settlement services and secondary marketing activities. The following table summarizes our software solutions revenues (in millions):
Three months ended % of segment
March 31, revenues
2021 2020 2021 2020
Servicing software solutions
$ 295.8 $ 244.7 100 % 100 % Our servicing software solutions primarily include our core servicing software solution that automates loan servicing, including loan setup and ongoing processing, customer service, accounting, reporting to the secondary mortgage market and investors and web-based workflow information systems. Our servicing software solutions primarily generate revenues based on the number of active loans outstanding on our system, which has been very stable; however, we have some exposure to foreclosure and bankruptcy loan volumes, which can fluctuate based on economic cycles and other factors. As a result of the effects of the broad-based response to the COVID-19 pandemic, we have seen lower foreclosure-related transactional revenues due to the mortgage loan foreclosure moratorium and expect this trend to continue due to the mortgage loan forbearance plans offered as part of the CARES Act. As ofApril 27, 2021 ,Black Knight's McDash Flash Forbearance Tracker estimated 2.3 million homeowners, or 4.4% of allU.S. mortgage loans, were in COVID-19 mortgage loan forbearance plans. Our origination software solutions primarily include our solutions that automate and facilitate the origination of mortgage loans and provide an interconnected network allowing the various parties and systems associated with lending transactions to exchange data quickly and efficiently. Our exposure to origination volumes is limited as our loan origination system revenues are
based
on closed loan volumes
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subject to minimum base software fees that are contractually obligated, and our secondary marketing technologies' revenues are primarily subscription-based. Some of our origination software solutions are exposed to variances in origination volumes, primarily related to refinance volumes due to the nature of the services provided. Given the continued low level of mortgage loan interest rates, we have seen elevated volumes related to refinance originations. However, we expect to see lower volumes related to refinance originations during the remainder of 2021 due to the record volumes in the prior year periods and rising interest rates. We have also seen improvement in purchase origination volumes due to pent-up demand and the current interest rate environment and expect this trend to continue. Our origination software solutions that are more sensitive to origination volumes, were approximately 5% and 6% of our consolidated revenues for the three months endedMarch 31, 2021 and 2020, respectively.
Data and Analytics
Our Data and Analytics segment offers data and analytics solutions to the mortgage, real estate and capital markets verticals. These solutions include property ownership data, lien data, servicing data, automated valuation models, collateral risk scores, behavioral models, a multiple listing service software solution and other data solutions. Our data and analytics business is predominantly based on longer-term strategic data licenses, other data licenses and subscription-based revenues. For the three months endedMarch 31, 2021 and 2020, our data and analytics revenues were 15% and 16% of our consolidated revenues, respectively. Our data and analytics solutions that are more sensitive to fluctuations in home buying activity and origination volumes were approximately 5% of our consolidated revenues for the three months endedMarch 31, 2021 and 2020 and relate to services where we provide data necessary for title insurance and other settlement service activities.
Results of Operations
Key Performance Metrics
Revenues, EBITDA and EBITDA margin for the Software Solutions and Data and Analytics segments are presented in conformity with Accounting Standards Codification Topic 280, Segment Reporting. These measures are reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their performance. For these reasons, these measures are excluded from the definition of non-GAAP financial measures under theSEC's Regulation G and Item 10(e) of Regulation S-K. 26 Table of Contents
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