Verisk Analytics, Inc. (VRSK) Q2 2020 Earnings Call Transcript

Good day, everyone, and welcome to the Verisk Second Quarter 2020 Earnings Results Conference Call. This call is being recorded. At this time, all participants are in a listen-only mode. After today's prepared remarks, we will conduct a question-and-answer session. For opening remarks and introductions, I would like to turn the call over to Verisk's Head of Investor Relations, Stacey Brodbar. Ms. Brodbar, please go ahead.

Thank you, JP, and good morning, everyone. We appreciate you joining us today for a discussion of our second quarter 2020 financial results. Today's call will be led by Scott Stephenson, Verisk's Chairman, President and Chief Executive Officer, who will provide an overview of our business; Lee Shavel, Chief Financial Officer will follow with the financial review; Mark Anquillare, Chief Operating Officer; Nick Daffan, Chief Information Officer; Neal Anderson, President, Wood Mackenzie; and Lisa Bonalle Hannan, President, Verisk Financial will join the team for the Q&A session. 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. 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, including, but not limited to the potential impact of the COVID-19 pandemic. 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'll turn the call over to Scott.

Thanks, Stacey. Good day, everyone, and I'm glad to be with you today. The second quarter was unique as we dealt with the macro effects of the COVID-19 event, and I hope you and your families continue to stay well in this moment. At Verisk, our priorities are unchanged as we remain committed to delivering for our customers, protecting the health and well-being of our 9,000 plus teammates and continuing to drive our innovation agenda. I'm pleased, but not surprised that our second quarter results reflect the strength and stability of our business model, the mission-critical nature of our solutions and the hard work and resilience of our teammates, who quickly adapted to the work-from-home environment and have remained focused on customer needs and innovation. I'm proud of our team and want to thank each teammate for their dedication and focus during a fluid moment. Before we discuss the quarter, I want to make two related points about where Verisk stands. First, we believe that the net effect of the COVID-19 moment should benefit Verisk in the long run, given that our customers will persevere and make it through to the other side with even more focus on becoming the better digital versions of themselves. This should make our customers more capable and desirous of using our many solutions. And second, the consistent performance you see from us now and into the future is a function of our structure and position and not only cyclical or momentary effects. Our results are a function of the steady and ongoing accumulation of innovation and success with customers. Our business performed as we had expected in the second quarter. We previously communicated to you our analysis that approximately 85% of our revenues are subscription-based and subject to long-term contracts, and therefore, we did not see any material impact on these revenues from the COVID-19 environment. In the second quarter, those revenues grew approximately 6.5% on an organic constant currency basis when normalized for the one-time impact of the injunction related to roof measurement solutions. Of the remaining 15% of revenues that are more transactional in nature and are subject to COVID-19 impacts, those revenues declined approximately 20% on an organic constant currency basis in the second quarter in line with our expectations. We experienced sequential improvement throughout the quarter and into July, as the underlying causal factors began to diminish and we expect to see continued progress on that front. During March, as the expense of the pandemic became clear, we quickly moved to action and deliberately protected profitability without, and this is important, cutting investment in our business. We did this by moderating headcount growth, but without resorting to large scale furloughs or layoffs by focusing on operational discipline and by benefiting from the natural responsiveness of our compensation structure. Together, these actions delivered strong organic constant currency adjusted EBITDA growth. Even while delivering strong profitability, we continue to fund investments in our innovation agenda and continued monetizing our technical infrastructure through cloud migration, tokenization of key data sets and a leading-edge data fabric supporting great analytics as we have done for the last several years. We will provide more details on our performance in its financial review. During the second quarter, Verisk operated predominantly in a work-from-home environment and our teams across the organization have remained highly effective. Operationally, our computing and network capacity has consistently and comfortably exceeded our daily requirements even as demand for our solutions and platforms have increased meaningfully in this remote environment. For example, in our Insurance segment, usage of our digital claims settlement tool increased over 55% in the second quarter. And we are successfully converting free trials into paid subscriptions as customers realize the benefit of this new innovative platform to help them on their journey to becoming more digitally engaged. And in the energy vertical, we saw visits to our portal grow by over 40%, as customers value our content, particularly in moments of uncertainty. We moved our innovation agenda forward evidenced by our continued investment across the enterprise. And the use of digital collaboration tools has helped our team stay connected to develop new and updated solutions for our customers. A few examples. In Insurance, we launched a new micro-business insurance program with advisory forms, rules and loss costs, specifically for small businesses. This program is designed to help insurers cover the unique risks of micro-businesses that are often part of the gig economy, often operated out of home or shared spaces and having fewer than four employees. We also released an updated cyber risk modeling platform and launched Life Risk Navigator, our cloud-based stochastic risk modeling platform that offers in-depth portfolio analytics, which can enhance risk selection, quantify changes in mortality rates, improve hedging strategies and drive better financial decision-making for our life insurance customers. In our catastrophe modeling business, we have released Version 8 of our Touchstone platform, which includes timely updates for many of our models in the U.S., Australia and the Caribbean, and continues to fulfill our innovation promise. In Energy and Specialized Markets, we continue to push forward with our differentiated analytic platform called Lens, and are on track for further releases in the back half of the year related to upstream portfolio optimization, renewables and carbon emissions. Despite the softness in the Energy market, we continue to see demand from our customers for Lens, which is reflected in both adoption and constructive pricing. Also within our Energy segment, we launched a solution in April, which analyzes pandemic-related supply chain risk and allows our Energy customers to anticipate potential disruptions in their business operations. We are currently enhancing the existing solution by adding data sets from across Verisk that address additional elements of supply chain risks such as vulnerability of suppliers to extreme events, the environmental, social and governance risk factors that suppliers may pose and movements in commodity markets impacting supplier costs. And in Financial Services, our loan loss forecasting model called LookAhead is gaining momentum with customers as it helps them understand the changes to their anticipated loan loss curves related to government stimulus programs, trends in unemployment and COVID-19 generally. This solution is unique to the marketplace given that it is founded on the total customer wallet view data set, which is proprietary to Verisk Financial Services. On the sales front, our teams have adjusted nicely to a fully digital sales model. To help our salesforce adjust to the virtual environment, we developed a series of trainings for best practices. We use virtual tools, including Skype, Zoom, Teams and Prezi. These sessions were very effective in making our sales teams comfortable with the new format. Outreach to our customers is robust, and with customers in their home offices, we have found they are often more reachable than ever. As a result, calls with customers increased over 50% in the second quarter versus the prior year. In addition, we successfully converted most of our scheduled in-person customer events to virtual events. Virtual events have enabled us to increase reach and attendance, including at our Signature London-based InsurTech Event in June called Verisk Vision, which saw a 63% increase in attendance this year versus the prior year's in-person gathering. Additionally, we hosted 48 webinars across our Insurance segment in quarter two, and had over 8,000 customers in attendance, which is more than a doubling versus last year. In Energy, we hosted a number of virtual events throughout the second quarter, delivering thought leadership and content to more than 3,000 clients and prospects. We continue to invest in the virtual space and make enhancements to our platform. We've decided that all events for the remainder of the year will be virtual and we're making plans accordingly. Virtual engagement with customers extends to the executive level. It is clear from these discussions that the pandemic has heightened the recognition among our customers that they need to become more digital and more automated and to do so at pace. At the CEO level, I have also been pleased to maintain a steady and high degree of contact with our customers' CEOs in the virtual moments. Like me, our customers' CEOs are highly focused on the well-being and productivity of their teams and consider the further digitization of their companies to be a highest priority. I continue to receive feedback along two lines, one, Verisk is a unique and differentiated partner; and two, our customers look to us for a steady stream of innovation to help them on the journey to becoming more digital and more automated. Even with a video screen between us, the depth of alignment and degree of mutual respect is as high as ever. The net result of all this activity across all levels is that sales opportunities and our pipelines continue to grow, as we capitalize on this structural growth trend. We are experiencing a modest lengthening of our sales cycles across our businesses as compared to historic norms. We are managing this closely and view this more as a timing issue and a function of the complexity of bringing stakeholders together and closing deals in a remote environment. While we have been successfully executing in a work-from-home format, I'm pleased to share that we've begun to open some of our global offices for a safe and phased return to office for those employees who would like to work from the office. In fact, we have opened more than 50 of our global locations in a Phase 1 format over the past few weeks, including our headquarters in Jersey City. I'm hosting this call from our offices, and it feels great to be back in the office. Additionally, as the stay-at-home restrictions have been lifted across the US, we have seen our field force return to a five-day week schedule, so that they can begin to work on the backlog that built up when entering commercial buildings was restricted. I also want to note how pleased we are with the integration and sales momentum of our recent acquisitions, including FAST, BuildFax and Genscape. While still early, we are realizing both revenue and cost synergies consistent with our expectations at the time of those deals. We're monitoring these acquisitions carefully and supporting the management teams to ensure that we are generating a solid return on invested capital. With that, let me turn the call over to Lee to cover our financial results.

Thank you, Scott. First, I would like to bring to everyone's attention that we have posted a quarterly earnings presentation that is available on our website. Moving to the financial results for the quarter, on a consolidated and GAAP basis, revenue grew 4% to $679 million, while net income increased 19% to $179 million. Diluted GAAP earnings per share increased 20% to $1.08 for the second quarter 2020. The year-over-year increase in GAAP net income and EPS is primarily the result of organic growth in the business, cost discipline, the impact of the timing shift of a $10 million expense related to annual long-term equity incentive grants and a decrease in acquisition-related costs. Moving to our organic constant currency results adjusted for non-operating items as defined in the non-GAAP financial measures section of our press release. We are pleased with our operating results, particularly in light of the impact from COVID-19. On an organic constant currency basis, Verisk delivered revenue growth of 1.1% for the second quarter of 2020. This growth was driven by positive results in our Insurance segment, offset in part by modest declines in Energy and Specialized Markets and Financial Services. Normalizing for the $8 million revenue impact of the injunction on roof measurement solutions, revenue grew 2.4%. As we detailed last quarter and Scott mentioned in his prepared remarks, we completed a careful review of our solutions and services to evaluate the potential exposure to COVID-19 impacts. Through that exercise, we noted that we did not expect to see any material impact from COVID-19 on approximately 85% of our consolidated revenues because they were generally subscriptions or subject to long-term contracts. As such, in the second quarter, those revenues grew approximately 6.5% on an organic constant currency basis when normalized for the injunction. This speaks to the stability of our subscription business model. Moreover, as we expected, we did experience a negative impact from COVID-19 on certain of our products and services, largely transactional in nature, which represent the balance or 15% of our consolidated revenues. These revenues declined approximately 20% on an organic constant currency basis during the second quarter, owing to weakness in the underlying causal factors, including lower auto and travel insurance activity, the inability to enter commercial buildings to perform engineering analysis, decreased capital expenditures in the Energy sector and reduced levels of advertising spending and project-based work from the banks. While we did experience revenue declines in this group of products and services in each month of the quarter, as the underlying causal impacts began to diminish, we did see some of the pressure on our revenues abate. For example, we have seen trends improve sequentially in our auto insurance lines as driving mileage has recovered and are also experiencing improvement in our commercial surveys, as our field staff is now allowed to enter buildings. On the Energy side, the macro backdrop continues to pressure consulting, but trends seem to have stabilized, and we are starting to have early discussions with the strongest operators about future engagements. The net result is that we have experienced continued progress in sequential revenue improvement throughout the second quarter and into July. Despite the impact on revenue in the second quarter, we are pleased to report that we maintained strong EBITDA growth and expanded margins as the result of effective expense and headcount management. Organic constant currency adjusted EBITDA growth was 12.4% in the second quarter, and normalizing for the impact of the injunction and the LTI timing shift, organic constant currency adjusted EBITDA increased 11.6%. Total adjusted EBITDA margin for the quarter, which includes both organic and inorganic revenue and adjusted EBITDA was 51.3% in the quarter. This margin included a one-time benefit of approximately 150 basis points from the previously communicated timing shift of annual LTI grants. Despite the expense control driving EBITDA growth and margin improvement, we continue to invest substantially in our business and infrastructure, including our cloud transition, and those costs are reflected in this margin as well. On that note, let's turn to our segment results on an organic constant currency basis. As you see in the press release, Insurance reported 2.5% growth, while our adjusted EBITDA increased 13.8% for the quarter. We saw healthy growth in our industry standard insurance programs, catastrophe modeling solutions and repair cost estimating solutions, offset by the impact of the injunction on roof measurement solutions and a decline in certain transactional revenue that was negatively impacted by COVID-19. Normalizing for the impact of the injunction and LTI timing, Insurance would have achieved 4.3% organic constant currency revenue growth and 13.8% organic constant currency adjusted EBITDA growth, demonstrating strong margin expansion despite certain revenue declines and investment in our breakout areas. Energy and Specialized Markets revenue decreased 2.8% in the second quarter due to declines in consulting and implementation projects and lower events revenues across the Energy segment. We were very pleased to see continued growth in our subscription-based core research and data analytic platforms, environmental health and safety service solutions and weather analytic solutions, resulting in outperformance relative to the end market. We believe our strong performance is a function of the must-have nature of our solutions, the diversification of our revenue streams into breakout areas like the Energy transition practice and the strength of our relationships in the industry. Despite the revenue declines and normalized for the LTI timing, adjusted EBITDA grew 2.4% in the second quarter, driven by strong operational controls and modest actions taken to reduce headcount to be more balanced with the current level of consulting work. Financial Services revenue declined 2.7%, owing to weakness in project-based retained analytics and spend-informed analytics, as our bank customers reduced spending due to the pandemic. Despite decreased spending across the banking industry, we experienced growth in our subscription businesses, an area that has been a strategic focus for us over the last six quarters. Normalizing for the LTI timing, organic constant currency adjusted EBITDA remained flat for the quarter, while margins declined owing to portfolio actions we closed earlier in the year. Our reported effective tax rate was 20.4% for the quarter compared to 19.7% in the prior year quarter. Looking forward, we now believe that our full-year tax rate for 2020 will be between 21% and 23%, up from the 19% to 21% range we had previously provided. This is primarily the result of UK legislation that was enacted in July, but retroactive back to April 1st of 2020, that increases the UK corporate tax rate from 17% to 19%. As a result, we will take a one-time catch-up charge in the third quarter of this year related to the valuation of a deferred tax liability, which will likely drive the quarterly rate above the full-year range provided, but we do not anticipate a material long-term impact from this increase. Adjusted net income was $213 million, and diluted adjusted EPS was $1.29 for the second quarter, up 15.8% and 17.3% from the prior year respectively. These increases reflect the cost discipline in the business, lower travel and entertainment expenses, contributions from acquisitions, the above-mentioned timing shift in expense related to annual long-term equity incentive grants and lower average share count. Net cash provided by operating activities was $250 million for the quarter, up 24.6% from the prior year period. Capital expenditures were $57 million for the quarter, up 20.9% from the prior year period, and CapEx represented 8.4% of total revenues in the quarter. We now believe that CapEx in 2020 will likely be toward the higher end of our previously provided range of $250 million to $270 million, as investing in our business and our people continues to be among our highest priorities. Related to CapEx, we now expect fixed asset depreciation and amortization to be within the range of $185 million to $195 million higher than the prior provided range of $170 million to $180 million. This increase is related to the timing of implementation of certain internally developed software projects as we continue to push forward on introducing innovation to the marketplace. We continue to expect intangible amortization to be approximately $165 million in 2020. Free cash flow was $193 million for the quarter, an increase of 25.7% from the prior year, primarily due to an increase in customer collections and operating profit, a reduction in travel and entertainment expense as a result of COVID-19, as well as the deferral of federal income taxes and certain employer payroll taxes resulting from the CARES Act, partially offset by earn-out payments of $65 million. During the second quarter, we returned $119 million in capital to shareholders through share repurchases and dividends. And I'm pleased to report that our Board of Directors has approved a $0.27 per share dividend for the third quarter to be paid in September. As we detailed last quarter, we continue to believe that the collective causal factors from COVID-19 represent pressure on achieving our 7% long-term growth objective in 2020. However, we do not think they represent a structural change in our fundamental growth drivers and believe that as the underlying causal factors abate, we will show strong resilience in recovery. Each of these causal factors has its own recovery curve, making it difficult to predict the duration of the impacts to our revenue growth. We continue to have confidence in our ability to manage the cost structure effectively and deliver operating leverage, while also continuing to invest in our innovation agenda. While we have restricted headcount growth in the shorter-term, we will pace new hiring as we see a return to a more normalized operating environment. Taking this altogether, we continue to believe that the stability of our subscription revenues along with our core operating leverage, driven by the responsiveness of our compensation structure and cost discipline will continue to support revenue and EBITDA growth in 2020. We hope this provides some useful context for you, and we look forward to addressing your questions. We continue to appreciate all the support and interest in Verisk. We ask for the Q&A session that you limit yourself to one question and one follow-up. And with that, I will ask the operator to open the line for questions.

Your first question comes from the line of Manav Patnaik of Barclays. Your line is now open.

I just wanted to focus firstly just on the Energy and Specialized Markets segment. Last quarter you gave us some anecdotal commentary on the different mix between upstream and renewables and so on and so forth. I was just wondering if you could give us some color on how each of those are doing within that business?

Neal, would you like to speak to that?

Yes, sure, certainly, Scott. First thing is we're very, very pleased in terms of our subscription business, how robust that business has been. And as Scott and Lee mentioned, it grew through the second quarter. While we had, as we predicted, challenges on the transactional side, both the consulting and the event side, that was more of a headwind. When we look at Wood Mackenzie in the Energy and Specialized business, it's a fundamentally different business than it was four or five years ago at the time of the acquisition. At that time, the majority of our revenue was more exposed to the upstream side. Today, that part of the business is less than 50% of our business. Just as Scott mentioned, we're much more focused on the Energy transition and all the key growth areas, which will drive the business in the longer term.

And Scott, just the other question I had is, you've been talking a lot about software being an increased focus for you guys at Verisk. And I was just wondering, is there a way to quantify like how much as a percentage of your business software is today, and if that's just an Insurance phenomenon or is it across Energy and Financial as well? Thank you.

It's definitely a committed part of our strategy, Manav, in all parts of our business and it is a growing part of the mix. What we talk about all the time at Verisk is the best expression of what we can do for our customers is to provide them platforms to analytic environments and great, what we call, analytic objects. And the mix of both of those things inside of all of what we do is increasing and it is a strong focal point. You get kind of an interesting thing if you're trying to parse your revenue streams—taking Energy as an example. So Lens is our platform. Moving through that platform is content that customers—some of what moves through that platform is content that customers have made use of through time. And so if we talk about sort of where the revenue stream is headed and growing, it's a little bit artificial to parse how much of that you're attributing to the software that you generated versus the total platform and the value that the customers find in it. But definitely, software is a growing part of our mix and it's meaningful in all of the verticals.

Your next question comes from the line of Toni Kaplan of Morgan Stanley. Your line is now open.

Wanted to start out with the margins, really strong quarter there expanding—EBITDA margins expanding 470 basis points. I know you attributed about 150 basis points to the LTI shift. But wanted to ask if it's fair to say that the remainder is coming from lower variable comp and T&E, and should that come back once this period is over or is there some level of permanent savings that we should be expecting to remain?

Lee, would you start with that question, please?

Sure, absolutely. Thank you, Toni. So, I agree with your observation. Once you eliminate the LTI impact, which we indicated was about 150 basis points, and then look at the businesses on a pre-investment basis, we are still seeing strong margin improvement across the three businesses. To give you some sense of the overall contribution to margin, the reduction in T&E was approximately 150 basis points and the short-term compensation impact was about 100 basis points. So naturally, that's a function of the growth impact that it relates to the overall improvement. We are seeing what you might describe as the COVID-19 impact on our cost structure that is benefiting us in that period. But there are efficiencies that we have identified that I think will enhance our operating leverage ahead. Some of that relates to the nature of our sales function and sales productivity. We don't expect to be in this completely remote format for an extended period of time, but we have found potential efficiencies that may improve the margin on a longer-term basis. So I think there are some structural elements that we've identified that will persist, but clearly a significant part of this margin improvement is a function of the responsiveness of our cost structure and the actions that we've taken to manage headcount. It's, as always, a blend of a lot of different factors influencing margin.

I would just add, Toni, one item that you didn't have in the ones you highlighted is the increasing efficiency of our technical infrastructure. Over the last couple of years we've been working to rotate to the cloud, as well as upgrading the data fabric inside of our analytics, and that continues. As we move forward, the unit cost economics associated with our technical infrastructure do improve and that's happening now and will continue to happen.

And wanted to ask about the 15% of the business that's non-subscription that you said dropped 20% in the quarter. It sounds like your business overall is improving. Just wanted to find out where that 20% stood in the July timeframe and which segments saw the greatest declines in the non-subscription side? Thank you.

At our call in May, we actually parsed for you the relative impact and allocated the 20% across the three reporting verticals. Generally, the recovery is being felt relatively evenly across the three verticals. We have noted in July even some positives in each of the three verticals. The one I will watch the closest is the recovery in ad spending and how that relates to our revenues on the spend-informed analytics side in Verisk Financial, but as I said, all three verticals are showing that same upward movement.

Your next question comes from the line of Hamzah Mazari of Jefferies. Your line is now open.

My first question is just on the Insurance segment. As it relates to COVID-19, I know it's a fluid situation, but if P&C insurance companies are on the hook for COVID claims, maybe you could walk us through what you're hearing there and how it impacts your business? A couple of years ago, customer consolidation was a headwind. Claims tend to be good for you. I'm trying to parse out how you think about the puts and takes there?

You actually had several points in there. Let me begin and then Mark, if you'd like to add anything. Specific to the idea of claims as they relate to the business interruption line of insurance, our view is—and we come from a very informed place because we actually author the contract language that goes into the policy—that it's really pretty clear that, unless otherwise explicitly stated, and generally it's not explicitly stated, business interruption insurance does not cover losses related to pandemics. That's not to say that there won't be some court cases; maybe some businesses which have taken out business interruption insurance naturally would like to be covered. But in reality, if you read the language carefully, our reading is that it's pretty clear. So we don't think that there is some substantial discontinuous event that's going to happen for our customers as a function of COVID-19 and business interruption claims. It is true that claims activity generally is positive for us. The insurance companies remained quite active in the second quarter and will remain quite active. Our customer demography actually doesn't change very much with the exception that as InsurTechs come into being, we do very well with them. But the existing insurance companies—the pace of consolidation really is not all that great. We don't see anything in this moment that would stimulate that to higher rates. Mark, anything you want to add to that?

I would just highlight or echo a couple of things. The language that we use in our programs clearly states that pandemic-related business interruption would not affect property coverage, and property is really what's key to coverage. There are other programs out there, especially on the reinsurance side, where some of this business interruption and the effects of a pandemic will be invoked. So some programs and some insurers will have some payments to make and those could be sizable. Another factor in insurance economics is commercial lines premium. We expect in 2020 a combination of exposures and premiums down perhaps 5% to 6%. We believe from a forecast perspective that those rates and exposures will rebound in 2021, which may affect some insurers. Overall, we don't see this as something that is systematically problematic. During these times, insurers focus on underwriting discipline, and many of the actuarial and underwriting solutions we provide are grounding for that approach. I hope that provides color.

Thank you. My follow-up question is around your commercial sales organization. We've talked about investing in software and an elevated investment spend cycle as it relates to CapEx on new products. Financial Services has had some restructuring. Have you changed the commercial sales organization structure at all as it relates to compensation or how it's structured from a vertical standpoint or has it been consistent over the last several years?

The go-to-market teams are specific to the three verticals, and even within that, we have a multi-tier approach with account representation and product specialists. The way we take our products to market has not changed. What we sell is complex and needs to be explained and demonstrated. Very frequently, there have to be proofs-of-concept followed by trials before we get to enterprise-wide agreements. It's a process that takes time. We're good at it; we've done it for a long time, and we continue to do it the way that we have done in the past. We're always open to adding teammates who, as the solution set expands, can take them to market and help customers find the value, but in terms of the general approach, no, we haven't changed our successful model.

Your next question comes from the line of Alex Kramm of UBS. Your line is now open.

First, a follow-up to Toni's question when she asked about what you saw during the quarter. Can you be a little bit more specific on that 20%—how it trended in April, May, June and maybe even into July, so we can see the trajectory? And if there's any incremental color you can give on what areas you think will improve over the course of the year? Trying to get to the trajectory a little bit, any help would be helpful.

Lee, anything you want to add to your comments in the upfront part of the meeting?

Thanks, Alex. We're not going to break out monthly results, but what I will reinforce is that within the segments, we saw the underlying causal impacts improve. For instance, in Insurance, as driving activity began to recover, that had a positive impact. Across the quarter for the COVID-sensitive revenues—the 15%—we saw sequential improvement across the quarter and that improvement continued into July. There's still uncertainty in terms of the geographic impact and how that influences driving activity, but at least through July, we saw a continued trend of improvement. Within Energy and Specialized Markets, we also saw improvement through the quarter and are beginning to see signs of re-engagement around the consulting side. For that component, recovery will likely take longer and will follow CapEx trends more closely compared to driving activity, where we see rebound more quickly. So if you think about timing, Energy consulting will take a bit longer, but into July we were beginning to see improvements. Finally in Financial Services, it's a blend—advertising component is down but recovering, similar to auto activity, while project analytics and retained analytics from banks will likely have a slower recovery as they respond to COVID-19. Within each category there are multiple products with different degrees of severity, but across them all, we did see improvement through the second quarter and into July. That's the best texture I can give you, Alex.

That's good texture. Thank you. A similar question on the subscription side: you mentioned sales cycles are lengthening. Any dimensions you can put around that? And maybe related to that, how is the pipeline looking today versus a quarter ago?

You generally see a lengthening, and that can vary depending upon the project. We're seeing that getting all stakeholders together with the disruptions takes a little longer, which affects the back end of the pipeline closest to contract. However, at the front end, we're actually seeing a healthy level of engagement—an increase in sales calls and client engagement—because of accessibility and demand for our products. So we feel good about the pipeline despite the disruptions. That feeds into our long-term perspective: COVID-19 pressures encourage more utilization of our product sets and analytic platforms to support clients' needs to digitize, which is constructive for Verisk and reinforces our growth drivers.

Pipeline is good. We believe the pressures from COVID-19 are encouraging clients to digitize more of their operations, which should be constructive over the long term.

Your next question comes from the line of David Chu on behalf of Gary Bisbee of Bank of America. Your line is now open.

Just wondering, is there a lag effect to the 85% that is subscription? So is net new sales trending below the 6.5% organic that you mentioned?

The nature of our subscription business is often multi-year and features price escalators year-over-year. A good fraction also is perpetually renewing—particularly in traditional rules, forms and loss costs in Insurance. So there is not just stability but momentum because of how we contract with customers. When we talk about sales cycles, we're really talking about cross-selling a solution a customer hasn't used or introducing a new solution. These are high-ticket items and require time. The underlying decision framework for customers hasn't fundamentally changed; it's more that they need to organize themselves during this moment. Many of our existing subscription contracts have momentum because they're multi-year with price escalators.

And has implementation of new products been an issue in this work-from-home environment?

Not at all.

Your next question comes from the line of Jeff Meuler of Baird. Your line is now open.

Scott, in your prepared remarks you talked about the long-term benefits to Verisk of the digital transformation of your customers. You talked about them being more desirous to use your solutions and their capabilities to consume what you provide. How much of a barrier is that today? Could you illustrate with how it's different with an InsurTech you do well with or a traditional carrier that's further along with digital transformation?

I like how you framed that. InsurTechs that are born with modern infrastructure adopt our solutions faster. They can connect, integrate, and consume via APIs or embed our platform analytics into their workflows more easily. Those companies can implement and derive value more quickly. Often the implementation is part of a broader technology backlog the customer must address; when they can work through that quickly, they adopt faster. As customers become more analytic in their decision-making, the value of our content and analytics stands up even higher. So both the ease of implementation and the quality of their analytic environment amplify the value we deliver.

Your next question comes from the line of Andrew Nicholas of William Blair. Your line is now open.

At a geographic level, growth in the US was a bit stronger than international in the quarter. I'm assuming that's primarily a function of business mix and exposure to transactional revenue. Anything else to call out in terms of regional growth differences in the period?

You caught it: it's largely mix and the fact that international is a newer part of our mix, and early market development can have a higher proportion of transactional business. Customers often start transactional and then prefer subscription models as they gain confidence. So international being a newer part of our overall mix, it's not surprising there might be some short-term differences, but we don't expect it to change the long-term growth picture.

I was hoping you could provide an update on your relationship with Vexcel, how that partnership has performed this year relative to your expectations? And how those capabilities are replacing Geomni?

Mark is one of our Board members at Vexcel. Mark, would you take that on, please?

What we've attempted to do, and I think quite successfully, is combine image capture capabilities to scale and increase coverage. The combination of Geomni and Vexcel image capture has considerably increased coverage across the United States, Canada and parts of Europe and Asia-Pacific. We now have two types of coverage—broad landscape imagery and higher-resolution orthogonal views—and because we have more data to work with, our algorithms and analytics improve. For example, we can layer weather analytics on top of imagery to provide triage tools for analytics across regions where we have coverage. The combination gives us scale and leverage and allows us to provide more analytics more efficiently.

Your next question comes from the line of Andrew Steinerman of JPMorgan. Your line is now open.

Lee, would you be willing to comment if Verisk expects company EBITDA margins to be up year-over-year directionally in the second half of the year and what puts and takes might affect the EBITDA margins in the second half?

Andrew, as you know, we don't provide forward-looking guidance on results. We are focused on expressing operating leverage and this quarter demonstrates our ability to manage the cost structure and achieve operating leverage. We continue to manage operations and expenses to deliver operating leverage and are constantly working to achieve year-over-year improvement.

Some of the expenses that were held back in the second quarter—will they naturally come back in the second half of the year? Could you highlight which types of expenses you expect to come back?

There are two primary elements influencing margin, excluding the LTI impact. First, T&E is down materially as a result of COVID-19. As the impact abates and we engage in a more normalized environment, some of that will come back. We will try to retain some efficiencies, but there's no full substitute for being in front of clients when appropriate. The second element is compensation: incentive compensation tied to growth will be impacted by revenue and earnings, and headcount growth is being managed to be appropriate with revenue growth to maintain operating leverage. Those are the primary expense elements in flux for the second half of the year, and you'll see continued influence from COVID-19 and our active management of the cost structure.

Your next question comes from the line of Bill Warmington of Wells Fargo. Your line is now open.

CoreLogic announced the competitive takeaway of Marshall & Swift/Boekh, which competes with you in the residential property space and in replacement cost estimation used in underwriting. How big a threat is CoreLogic's new property insurance solution and is it a change in the competitive landscape?

Let me remind you Marshall & Swift is a tool used to understand replacement cost value for homes. CoreLogic also has other products, such as their stability offering, and they acquired various tools over time. These tools have been in the market for decades. I haven't seen a material new investment change because Symbility is now part of CoreLogic and they've talked about combining products. We continue to closely monitor wins and losses and the incumbent landscape. We continue to win more frequently than we lose and we remain pleased with our competitive advantages and market position.

A follow-up on LightSpeed: has COVID-19 impacted usage and adoption of the product?

Mark, do you want to continue on LightSpeed?

LightSpeed is our tool for taking a lot of information into the underwriting process to make quote and bind one unified process, bringing in our data and third-party data and scoring so customers have confidence. We've seen success in personal lines and are moving into commercial lines. During the middle of COVID there was less driving and some policyholders were waiting for refunds, so there was less shopping and lower volumes. But as driving has increased, volume has slowly returned, and we've seen adoption recover.

Your next question comes from the line of George Tong of Goldman Sachs. Your line is now open.

After normalizing for the LTI shift, your EBITDA margins expanded much more materially in the Insurance segment than in Energy and Financial Services. Can you elaborate on what drove that relative outperformance—was it related to the amount of investment spending in the other segments, or were there other one-time cost actions impacting Insurance more?

George, one significant contributor to the Insurance margin expansion is the result of the Vexcel transaction. We have been able to reduce expenses associated with that activity, which materially contributed to margin improvement in Insurance. That being said, we still saw solid margin expansion even absent that effect within the business, but that is a significant element of the differentiation.

George, are you still there?

Yes, thank you. Turning to the Financial Services segment: after divesting the Argus Data Warehousing business, the underlying growth rate improved meaningfully to the 5% to 7% range before COVID. I'm surprised to see organic constant currency growth down as much as it is. Can you unpack why Financial Services revenue declined, especially given that you indicated only about 3% of the COVID-sensitive portion was in Financial Services?

Keep that 3% in context relative to Financial Services as a percentage of total revenue; that transactional element is a larger element proportionally in Financial Services than in other segments. We had consulting impacts in retained and project analytics similar to Energy consulting, and we also saw a pullback in advertising, which directly impacts our spend-informed analytics business. Both those factors influenced revenue and, because of higher concentration of COVID sensitivity in Financial Services, resulted in a larger revenue impact compared to other segments.

No further questions from the phone line. Presenters, you may continue.

Okay, well thank you everybody for joining us today. As always, we appreciate your interest and questions; we'll be following up with many of you. I appreciate your time today. Have a great rest of the day. Bye for now.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.