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Teamwork: Black Knight Financial Services has been going gangbusters ever since its spinoff in May of last year.


Fasten your seatbelts, Bill Foley is buying stuff again. That would be William P. Foley, the title insurance entrepreneur and longtime chairman of Fidelity National Financial Inc. (FNF), Jacksonville, Florida. And spoiler alert: It's a sports team. [paragraph] Foley has a whole career of corporate spinoffs, initial public offerings (IPOs) and all manner of capital market moves under his belt. Actually, that's putting it mildly. [paragraph] Just last year, in May, he spun off Black Knight Financial Services Inc. (BKFS) in an IPO. The basic components of BKFS had most recently spent time under FNF's corporate umbrella. But the essential thing to know here is that Black Knight Financial Services is made up of businesses that have a long history in the Fidelity stable of companies. [paragraph] To go back over that history might be helpful, or possibly just confusing, but here's the gist of it: Foley reacquired Lender Processing Services (LPS) and merged it with FNF's ServiceLink division in 2014, and renamed the combined group Black Knight Financial Services. That lasted until May 2015, when it was time to reshuffle again and the decision was made to spin off the technology, data and analytics components of the companies that had been put together into a publicly traded company--named Black Knight Financial Services. The mortgage services that ServiceLink provides stayed under the FNF umbrella.

Today, the spun-off Black Knight Financial Services, Jacksonville, Florida, is going gangbusters. Traded on the New York Stock Exchange under BKFS, the stock price was up roughly 19.24 percent year-to-date as of late August. That is more than triple the roughly 6.35 percent gain for the S&P 500 index for the same period.

The spin price of the BKFS stock when it debuted in May 2015 was $24.50. As of midday trading on Aug. 26, the price per share had risen to $39.42.

But more recently Foley's checkbook has wandered even farther afield. He's done mortgage technology, title insurance and a family wine business--not to mention restaurants. But now he's onto something really different: a professional hockey franchise. That's right. A new startup NHL hockey team was awarded to Foley and it will be based in Las Vegas. The media hoopla has been pretty much nonstop.

As of mid-August, the name game was well underway. Speculation swirled in the Vegas media around a variation on the Black Knights theme.

Foley is a West Point grad and the Army's sports teams are named the Black Knights. But for a variety of reasons, that name seemed unavailable for the new hockey team. (London Knights in the Ontario Hockey League already has dibs on that name in Canada.)

At press time, the team's name had not been announced. All we know is that the Vegas team, with Knights as part of the name, will hit the ice at T-Mobile Arena.

And while Foley has been caught up with the countless details involved with launching a new professional hockey franchise, Tom Sanzone has been at the helm of Black Knight Financial Services acquiring his own set of companies to fill gaps in BKFS' extensive mortgage technology offerings.

With an impressive Wall Street resume, Sanzone is a careful student of earnings, growth opportunities and management strategies. But he came to Black Knight with little or no knowledge of the mortgage business. Yet that hasn't seemed to hold him back one bit.

As chief executive officer and president of Black Knight, analysts are saying a lot of good things about Sanzone and his team's accomplishments since the spin. The stock price kind of speaks for itself.

And while Foley clearly serves as owner (FNF retains a 55 percent ownership stake in BKFS), Sanzone is a much more hands-on coach. (Although I'm pretty sure he owns a few shares himself.)

And his coaching tenure comes at a time of heavy regulatory demands, intense profit pressures and dramatic technology innovation.

Even so, Sanzone has found a way to navigate the mortgage industry's current challenges and deliver solutions that seem to be resonating. The company's second-quarter financial results were strong and on Oct. 25 when the company reports again, more good numbers are expected.

That's partly why Piper Jaffray & Co., Minneapolis, rates the stock an "overweight" for investors.

We talked to Piper Jaffray Senior Research Analyst Jason Deleeuw, based in Minneapolis, to get more details about what Black Knight has been doing right. And then we had a chance to sit down one-on-one with Sanzone for a deep-dive look at the progress since the spin.

It turns out it's a good time to be in the mortgage technology space, especially if you can deliver solutions that enhance lender efficiency. The other thing lenders are desperately looking for right now is reliable enterprise technology that can address regulators' serious ongoing angst about the entire mortgage business. The fewer times you need to rekey customer information between your operating silos--each with their own niche systems--the better. Because if you can sync everything up seamlessly with technology, that means fewer chances for error and less regulator trouble.

BKFS offers both those things. Plus, Black Knight has built a deep bench of loyal customers over time. Add to that very predictable revenue streams from long-term contracts, and you start to get the picture.

And then there's the secret sauce of Sanzone himself. He's helped bring the internal corporate culture together around a new cohesive mission, where it once was operating in silos.

It's enough to make Wall Street swoon.

Delivering the goods

To get the investor perspective, we took a look at the most recent earnings report. Revenues for the second quarter of 2016 grew by 10 percent at BKFS over the second quarter of last year. The company saw revenues rise to $255.5 million in the second quarter, up from $232.1 million in the same quarter last year.

An earnings release notes adjusted net earnings from continuing operations for the second quarter increased by 21 percent to $44.7 million.

Piper Jaffrey's Deleeuw helped us understand what's been driving the stock up since the spin. He says, "Black Knight has done a good job of executing on its growth strategy."

He says on the servicing technology side, where BKFS had dominant market share with its MSP[R] platform, Black Knight has "had new customer wins, with the biggest being Bank of America." But he says the company has added customers on the origination technology side as well. (Bank of America was a servicing technology customer of Black Knight's until the bank bought Countrywide and converted to that company's servicing system.)

Deleeuw says the stock boost is mostly explained by "solid organic growth." He adds that Black Knight's recent acquisitions of eLynx and Motivity Solutions have helped a little, but "it's mostly all been organic through share gains from winning more clients."

Deleeuw says Black Knight's organic revenue growth has been attractive to investors, especially when compared with other technology companies. He notes that Black Knight has "generated high recurring revenue."

The company is made up of two basic divisions: servicing/origination technology and data & analytics. Deleeuw says revenue growth for the technology segment over the last few quarters has been stronger. He described the growth from data & analytics as "flattish."

Deleeuw points out that Irvine, California-based CoreLogic, a leader in the property data space, still generates more revenue from property data than BKFS.

Deleeuw's firm is forecasting that revenue growth from the technology side of Black Knight will continue to outpace revenue growth from data & analytics. In 2015, Piper Jaffrey estimated revenue from the technology side accounted for about 81 percent of the company's revenues. This year the securities firm is forecasting that technology will account for 83 percent of BKFS' overall revenue, with data & analytics accounting for 17 percent.

A tutorial on growing a company

Tom Sanzone is clearly good with numbers. But he's also good at breaking things down to a core mission. Then he finds the levers that will motivate the needed change.

When he first arrived at Black Knight, the company was operating as basically four independent business units. There was the company's industry-dominating servicing system, or MSP. Then there was origination technology, mostly the Empower loan origination system (LOS). There was the far-reaching settlement-services ordering and fulfillment portal called RealEC, with its built-in connections to title insurers, mortgage insurers, closing agents and others integral to the closing process. And finally there was data & analytics, with its property records, servicing loan-level data and multiple listing service (MLS) listing data.

Sanzone says, "These teams were doing a good job, but they were going out into the market independently." They were selling their products as one-offs to customers, which wasn't maximizing revenue from customer relationships.

He recalls, "One of our early decisions was to break down the silos and integrate the company across the board in every dimension ... integrating our products from front to back, going to market together as one team."

Sanzone says the company is uniquely positioned in that it can offer a platform with a product suite that spans the full loan life cycle--from lead generation to loan origination, to the closing of a loan, servicing of a loan and then, if needed, delinquency/bankruptcy solutions.

When the company sells a customer on that whole product-suite package (called LoanSphere[R]), it is known as an enterprise deal. Sanzone says that since the IPO for BKFS, the company has announced a number of those enterprise deals.

He adds that when BKFS started out trying to sell enterprise deals, it had four enterprise clients. By the time we sat down with him in early July, the company had grown that number to nine. "By the end of the first quarter of 2017, we should have 12 enterprise clients, and then there are others in the pipeline," he says.

Why is this such a big deal? Sanzone explains that by selling an enterprise deal to a client who has been a customer for only one product line, "we can often double the revenue of the account--double or more the revenue of the account."

But enterprise deals don't just sell because they are good for Black Knight's bottom line.

The current environment for mortgage lending is rife with regulatory enforcement risk--and lenders are being held directly responsible for the actions of all their vendors. And the profit-margin squeeze that is driving so many smaller guys out of the business has created a huge appetite for enhanced efficiencies. If you can solve for both of those problems with one megavendor relationship, what's not to like?

So, bingo, as Sanzone explains, enterprise technology rides to the rescue--and basically has been kind of selling itself.

"I would say the biggest magic we've had in the last two and a half years is turning the company from more of a siloed, independent business model to a Black Knight enterprise value company and selling our enterprise to the clients," he says.

"We continue to do MSP deals. We continue to do LOS deals that are not enterprise, or not yet enterprise. That continues where it makes sense. But the big needle-mover for us was integrating all of our products together, creating exponential value for clients by that integration and selling the enterprise," he adds.

And it's not just enterprise deals that are helping to drive revenue. It's the reliable revenue stream that comes from having long-term contracts with most of its customers.

Sanzone says that on average, Black Knight's contracts with clients are for five years. "More and more we are getting seven-year deals for both servicing and origination technology, and more even in the data & analytics space."

It's all been music to Wall Street's ears.

Making it happen

When Sanzone first came on board, the silos were firmly in place, with the business model revolving around the four legacy divisions. The presidents of the four business units used to get paid predominately on their unit's performance.

"Now they get paid on Black Knight's performance," Sanzone says.

He adds, "That may sound like a logical thing and it may sound like an easy thing--but it is neither. So, making that change at the top was the catalyst to begin the culture change."

Sanzone says, "I could tell you as a CEO, I very rarely get in any conversations about where a particular dollar of revenue goes because it really doesn't matter. Because at the end of the day, it is Black Knight's performance that drives the compensation and reward process at the company."

This sounded to me a lot like Coach Sanzone speaking: "I don't have business heads fighting over a dollar of revenue, and therefore we are focused on driving the results for Black Knight. One of the things I talk to them all the time [about] is we win or lose as a team, and there is no winning in losing."


There was a strong people component to driving the management integration because the company had been successful for many years before Sanzone came on board. Sanzone explains that his goal was not to change the culture, but to evolve it in order to get to a place where the company could perform even better than before. (Tricky business, but a good coach could make it happen.)

Opportunities in servicing

Black Knight is probably best known for its workhorse servicing technology (MSP). The company holds roughly a 60 percent market share among system-of-record vendors in the residential servicing market.

The steady contract revenue from MSP has been the cash-cow juggernaut that has financed growth and acquisitions in other parts of the enterprise. And that continues to this day. But demanding new servicing regulations might test the technology--and less sympathetic regulators at the Consumer Financial Protection Bureau (CFPB) might test things even more.

The CFPB clearly has its eye on servicing performance. In June, the bureau released the results of its extensive supervisory audits of mortgage servicers. It underscored the problems CFPB has identified, particularly in loss mitigation and servicing transfers. The last line of the report's conclusion highlights how important tested and reliable technology is to the bureau's way of thinking on servicing compliance.

It reads: "A growing point of emphasis for Supervision in achieving needed improvements in servicer compliance will be to require servicers to submit specific and credible plans describing how changes in their information technology systems will offer assurance that they can systematically and effectively implement the changes made to resolve the issues identified by Supervision."

CFPB Director Richard Cordray said in a press release announcing the servicing exam highlights, "Mortgage servicers can't hide behind their bad computer systems or outdated technology. There are no excuses for not following federal rules."

He added, "Mortgage servicers and their service providers must step up and make the investments necessary to do their jobs properly and legally."

That kind of adversarial enforcement environment is why getting a vote of confidence from a top-tier commercial bank means more than just the ink on the contract. And that's why Bank of America's return to Black Knight's MSP is about more than just revenue.

With Bank of America returning as an MSP customer, the servicing technology offered by Black Knight remains the market leader. The bank signed a deal with Black Knight back on June 3 to use MSP for both first and second mortgages.

Enforcement environment aside, there are definite opportunities for servicing system customer growth for BKFS. Sanzone says that the large market share that Black Knight enjoys is mostly for servicing first mortgages. That stems from the fact that traditionally first mortgages were serviced by the mortgage division of a bank or by a mortgage bank, while second mortgages were handled by a bank's consumer lending division.

But more recently this has started to change, and it has opened up a whole new area of growth for MSP. "There's been a movement in the client base to move second mortgages onto MSP," Sanzone confirms.

He says that a short time ago, Black Knight had "single-digit market share" in second mortgages, home-equity loans and lines of credit being serviced on MSP. He adds, "Now we have started to make inroads in capturing market share in second mortgages. We have announced some pretty big deals with companies like JPMorgan and recently PNC, and of course Bank of America eventually will be on the platform."

Single-digit second-mortgage servicing share "in the next year or so should be about 17 percent and then eventually into the 20s," says Sanzone.

"So when you talk about the market share with servicing, yes--it is very strong in first, but we're just starting to capture market share in second [mortgages]. So that is a nice opportunity for us in the servicing business."


In the past year, BKFS has grabbed headlines for a few mortgage technology acquisitions. In May of this year the company acquired eLynx, a company that specializes in electronic mortgage document delivery. Then in June the company acquired Motivity Solutions, a mortgage analytics firm.

We asked Sanzone what the overarching strategy was when it comes to acquisitions. He says when Black Knight adopted its new enterprise focus, the company mapped all of its capabilities across the entire loan life cycle for both first and second mortgages.

The natural outcome of the mapping exercise was to identify gaps in the product strategy, Sanzone says. He says the company has now defined all its products, and how they fit together and how it will invest in evolving the products over the next three to five years.

Also, conversations with existing clients helped identify other product gaps. That's partly how the eLynx acquisition came about.

Black Knight's clients said they wanted BKFS to be in the e-mortgage delivery space. Adding such a capability will be helpful in two ways. It will be added to Black Knight's own LOS platform (Empower) and the capabilities also will be made available to the industry via RealEC.

After the e-mortgage delivery piece was found to be a gap, BKFS had to decide whether to buy or build a solution.

That's when the opportunity to acquire eLynx came along. Sanzone says, "It was quickly apparent to us that [eLynx] would be a very nice acquisition for us because it has almost zero overlap with any of our products, and almost from Day 1 [it would be] incremental to our capabilities by acquiring them and integrating them into our product line."

He says, "The whole e-sign, e-delivery, e-mortgage capability was a gap--and eLynx fit that gap really nicely."

The Motivity Solutions deal allows mortgage industry players to gain greater insights into activity that is relevant to their mortgage business. It provides data clues that can help them retain servicing or even get new mortgage business right as consumers are listing their homes for sale.

The product offering also will help isolate areas needing more operational efficiency and areas of high compliance or credit risk. The solution will be integrated into BKFS' existing data hub on the data & analytics side and be offered on several price levels. The data hub will be a part of the menu of products that can be sold as part of new deals and renewals. Customers can buy incremental insights on top of the standard set of information.

As far as what might be coming from future acquisitions, Sanzone says they will "more likely be in origination and data & analytics." He says the product suite in servicing is pretty full.

Acquisition targets will be companies with a similar business model to Black Knight's. Sanzone adds that means companies with longer-term contracts with their customers. And he adds it would be companies that price similar to the way Black Knight does--by transaction or volume.

Black Knight offers companies it acquires the ability to get in front of larger, well-capitalized clients that might not have been accessible to these standalone smaller firms. But that works both ways. Sanzone says that both eLynx and Motivity Solutions had a set of clients that Black Knight didn't typically do business with. Now those doors are open to BKFS.

Origination technology

Sanzone says his company currently has about 20 percent market share in the origination technology side of the market when you combine its loan origination technology LOS offerings with RealEC's business.

"If you look at our financials, you will see that our loan origination business is growing very significantly. We're very excited and very bullish about that business--and that's really loan origination technology and RealEC," he says.

One very timely product implemented on this side of Black Knight was Closing Insight, which helps lenders comply with the new Truth in Lending Act (TILA)-Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure rule (TRID).

Sanzone says his intent is to drive much higher growth rates in both origination technology and data & analytics than in servicing. He says that will help improve the balance in revenues. And he sees Empower's ability to originate second mortgages as another area of enhanced revenue growth.

Sanzone says he thinks of his company as "the engine room" for mortgage lenders. Whether it's in servicing or originations, Black Knight has built the nuts and bolts for doing the basic functions required.

For lenders trying to vastly improve the customer experience in the mortgage origination business, he believes that will involve a whole different set of investments. But he doesn't see that threatening the basic origination technology that Black Knight offers.

Sanzone says, "Black Knight delivers a front-to-back platform for processing loans, and I think the innovation is on the front of that with mobile technology and web technology. That will be additive to the platform."

He adds, "But I don't think you're going to have lots of players saying: 'You know what, let me build my own LOS system or let me build my own servicing system, uniquely for me.'"

A tough business

Sanzone is no stranger to regulation or complicated financial markets. He is a veteran of Wall Street and money center banks. So what does he think of the amount of regulation now bearing down on the mortgage business?

"Mortgages were at the heart of the financial crisis, so what's happened from a regulation and compliance perspective--in the last eight years or so since that event--is probably unprecedented," he says. "It has probably been the most intense amount of change that I've ever seen in my career in one business area."

To put that in perspective, he says, "I've been in financial services my whole career. And I've been responsible for IT [information technology] and operations and everything across huge global financial institutions, and there has always been an intense focus on regulations and compliance."

He adds, "But this business [mortgages] was at the heart of the financial crisis and it also was very much connected to the consumer, whereas other financial businesses like some of the big capital markets businesses are not so connected to the consumer and therefore the impact [of the regulatory crackdown on mortgages] was much more significant."

Sanzone came on board at Black Knight after the crisis and smack in the middle of the subsequent crackdown. So we wanted to know on a scale of one to 10 (with 10 meaning it makes your brain hurt), how hard the mortgage business seems to this Wall Street veteran.

It turns out he gives it a 10. "If it was pre-crisis, it would be a different answer," he explains.

"The amount of change in a short period of time is like nothing I've seen before in any other financial services business. That pressure of all that change makes it a 10."

Maybe not quite as hard as coming up with a name for a new professional hockey team--but still right up there.

We asked him if he was a hockey fan before Foley bought the Vegas team. Trims out he was.

His team was the New York Islanders. "But now I'm definitely a Vegas fan," he wisely says. (We think this guy might go places.)

Janet Reiliey Hewitt is editor in chief of Mortgage Banking.
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Title Annotation:PROFILE
Comment:Teamwork: Black Knight Financial Services has been going gangbusters ever since its spinoff in May of last year.(PROFILE)
Author:Hewitt, Janet Reilley
Publication:Mortgage Banking
Date:Oct 1, 2016
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