Jul 30, 2018
Executives
Bryan Hipsher - SVP of Finance Anthony Jabbour - CEO Kirk Larsen - CFO
Analysts
Jason Deleeuw - Piper Jaffray John Campbell - Stephens Bill Warmington - Wells Fargo Tien-Tsin Huang - JPMorgan Andrew Jeffrey - SunTrust Ashish Sabadra - Deutsche Bank Chris Gamaitoni - Compass Point Jim Schneider - Goldman Sachs Glenn Greene - Oppenheimer Bose George - KBW Geoffrey Dunn - Dowling & Partners Stephen Sheldon - William Blair
Operator
Greetings, and welcome to the Black Knight Second Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
I’d now like to turn the conference over to your host, Bryan Hipsher, Senior Vice President of Finance. Thank you.
You may begin.
Bryan Hipsher
Thanks. Good afternoon, everyone, and thank you for joining us for the Black Knight second quarter 2018 earnings conference call.
Joining me today are Chief Executive Officer, Anthony Jabbour; and Chief Financial Officer, Kirk Larsen. Our results were released this afternoon and the press release and supplemental slide presentation have been posted to our website.
This conference call will include statements related to the expected future results of our company and are therefore forward-looking statements. Our actual results may defer material from our projection due to a number of risks and uncertainties.
The risks and uncertainties that forward-looking statements are subject to are described in our earnings release, in our Form 10-K and other SEC filings. Today’s remarks will also include references to non-GAAP financial measures.
Additional information including reconciliations between non-GAAP financial information to the GAAP financial information are provided in the press release and supplemental slide presentation. This conference call will be available for replay via webcast through Black Knight’s Investor Relations website at investor.blackknightinc.com.
I’ll now turn the call over to Anthony.
Anthony Jabbour
All right. Thank you, Bryan, and good afternoon, everyone.
Thank you for joining us for our second quarter earnings call. First and foremost, I'm pleased with our operational execution and the financial performance we delivered in the second quarter.
During the quarter, we achieved adjusted revenue growth of 5% and adjusted EBITDA growth of 6%, which drove margin expansion of 50 basis points compared to the prior year. We continue to make progress in implementing our sole pipeline and are seeing the benefits of those revenues coming on at strong incremental margins.
Our focus continues to be on the execution of our long-term strategic initiatives to drive organic growth through cross-selling, winning new clients in existing markets and the introduction of new products and solutions through innovation and acquisition. From a new sales and innovation standpoint, our momentum has only increased since my first day at the company and we’re developing and delivering new solutions to our clients with a heightened sense of urgency.
As I stated on our last call, acting with urgency is a priority for me. So, let me first talk about the innovative solutions we have recently been focused on.
In the second quarter, we launched Servicing Digital which allows consumers to utilize their mobile devices to provide a more interactive and self-service oriented experience such as being able to quickly make loan payments, dynamically look at what if scenarios around payment and refinance options and getting notifications about their loan plus many more features, all with the significantly enhanced user experience. Ultimately, Servicing Digital enables our clients to deliver enhanced customer service which will help improve their customer retention and ability to cross-sell other products.
We are pleased to announce that AmeriFirst Home Mortgage and Pennsylvania Housing will be the first clients to utilize Servicing Digital. In June, we added artificial intelligence and machine learning capabilities through the acquisition of HeavyWater and its AIVA solution.
AIVA is used to comprehend vast amounts of data, draw conclusions and take action that can help our lenders and servicers complete manual repetitive tasks more efficiently. For example, on the origination side, lenders can use AIVA to verify income and assets that can save hours of work per loan.
On the servicing side, AIVA can be used to increase efficiency and verification of homeowner's insurance coverage. On the sales front, I'm excited about the level of enthusiasm within our client base and how our early stage pipeline is beginning to build.
AIVA is a great solution to address the rising cost of origination and servicing that we discussed on our last earnings call by giving our clients the ability to automate many of these manual tasks, they will be able to reduce cost and invest more in growing their businesses. Last quarter, I introduced the idea of actionable analytics.
We are now incorporating actionable analytics into a new offering we are launching in August called the actionable intelligence platform or AIP for short. AIP builds on the investments we have made over the past few years to acquire additional data assets, build out the data hub and develop powerful analytics and it provides a common framework to make it easier for our clients to realize the benefit of these investments.
AIP delivers analytics for every level of a client’s organization. For example, AIP includes additional strategic analytics for executives that will give them a clear view of their company's performance across the enterprise.
AIP also includes enhanced proactive analytics for managers that will help them become more aware of activities that require attention so they can proactively respond and take informed action. The newest component of AIP will be actionable analytics that will leverage our unmatched breadth of data and end-to-end loan lifecycle capabilities.
These actionable analytics can direct frontline employees to take the appropriate and timely actions to capture opportunities and minimize issues. We continue to work with our clients to develop AIP and we look forward to helping our clients grow revenue, improve efficiency and remain compliant.
While we continue to roll out new solutions, we also continue to see strong demand from our existing solution set. From a servicing software perspective, we continue to be laser-focused on the final 30% of the first mortgages not currently on our servicing platform or being implemented.
I personally received a weekly update on our progress with this specific set of prospects, and I'm excited about the momentum we are seeing there. At the same time, we continue to pursue the remaining 70% of second mortgage loans and lines, and we are confident in our ability to grow that share meaningfully over the next few years.
On the origination software side, demand for our artificial intelligence solution AIVA is supplementing our already best-in-class LOS platform. We continue to see an environment which lenders are looking to significantly reduce their origination cost, and we are confident that Empower and our other integrated origination software offerings are the solutions to do just that.
In closing, I want to reiterate my focus on growing Black Knight through successfully implementing our sole pipeline, acting with urgency to proactively deliver innovative solutions and continuing to cross-sell our end-to-end product set into our exceptional client base. Thank you for your time today and I would now like to turn the call over to Kirk for an in-depth financial update.
Kirk Larsen
Thanks, Anthony, and good afternoon, everyone. Today, I'm going to discuss our second quarter results and our outlook for 2018.
Unless otherwise noted, comparisons are to the second quarter of 2017. Turning to Slide 3.
On a GAAP basis, second quarter revenues increased 5% to $276.6 million compared to $262.2 million in the prior year quarter. Net earnings attributable to Black Knight were $40 million or $0.27 per diluted share compared to $8.2 million or $0.11 per diluted share.
Year-to-date, revenues increased 5% to $546.9 million and net earnings attributable to Black Knight were $82.7 million or $0.56 per diluted share. Turning to Slide 4.
During the second quarter, adjusted revenues were $277.4 million, an increase of 5% compared to the prior year quarter. Adjusted EBITDA increased 6% to $134.2 million compared to $126.3 million.
Adjusted EBITDA margin was 48.4%, an increase of 50 basis points. Adjusted net earnings was $68.4 million, an increase of 28% and adjusted net earnings per share was $0.46, an increase of 31%.
Capital expenditures in the second quarter totaled $27.3 million. Year-to-date adjusted revenues were $548.6 million, an increase of 5% compared to prior year period.
Adjusted EBITDA was $264.1 million, an increase of 7.5%. Adjusted EBITDA margin was 48.1%, an increase of 110 basis points.
Adjusted net earnings was $132.5 million, an increase of 34%, and adjusted net earnings per share was $0.89, an increase of 37%. Adjusted net earnings for the second quarter and year-to-date period include the benefit of a lower federal statutory tax rate as well as a lower than planned blended state tax rate and higher than expected tax credits.
And finally, year-to-date capital expenditures were $52 million. Turning now to Slide 5, I'll discuss our software solution segment results.
In the second quarter, adjusted revenues for the Software Solutions segment increased 7% to $238.7 million. Our servicing software business had adjusted revenue growth of 7%, driven by strong loan growth on a course servicing software solution from new and existing clients and an increase in our average revenue per loan.
In our origination software business, adjusted revenues increased 5%, including 35% growth in our loan origination system business, partially offset by lower lending solutions revenues primarily as a result of the 20% decline in refinancing originations as reported by the Mortgage Bankers Association. Adjusted EBITDA increased 11% to $141.8 million, while adjusted EBITDA margin of 59.4%, an increase of 220 basis points due to revenue growth coming on a high incremental margin and disciplined cost management.
Year-to-date adjusted revenues in the Software Solutions segment increased 6% to $472.3 million, driven by our servicing software business that had adjusted revenue growth of 7%. Adjusted EBITDA increased 10% to $278.6 million, while adjusted EBITDA margin was 59%, an increase of 230 basis points.
Turning to Slide 6. In the second quarter, adjusted revenues for the Data and Analytics segment were $38.7 million compared to $40.4 million, as growth in new title data and multiple listing service businesses was more than offset by up-front revenues from long-term strategic license deals in the prior year.
Adjusted EBITDA was $9.8 million compared to $11.9 million. Adjusted EBITDA margin was 25.3% compared to 29.5%.
Year-to-date adjusted revenues in the Data and Analytics segment were $76.3 million compared to $76.8 million. Adjusted EBITDA was $18.4 million compared to $18.8 million, while adjusted EBITDA margin was 24.1% compared to 24.5%.
Adjusted EBITDA for the Corporate segment in the second quarter was $4.3 million lower compared to the prior year quarter reflecting higher incentive compensation and incremental costs following the spin-off. Year-to-date adjusted EBITDA for the Corporate segment was $6.9 million lower compared to the prior year.
Turning to Slide 7, I’ll walk through our debt structure. At the end of June, we had cash and cash equivalents of $11.4 million.
Total debt principal as of June 30 was $1.479 billion. We have revolver borrowing outstanding of $196 million and had $554 million of borrowing capacity remaining under our revolver.
And our leverage ratio was 2.8 times. Turning now to Slide 8, I’ll walk through our outlook for full year 2018 which remains consistent with prior guidance ranges.
Revenues are expected to be in the range of $1.102 billion to $1.122 billion. Adjusted revenues are expected to be in the range of $1.105 billion to $1.125 billion.
Adjusted EBITDA is expected to be in the range of $530 million to $545 million and adjusted earnings per share is expected to be in the range $1.76 to $1.81. Additional modeling details underlying our outlook are as follows, with HeavyWater being effectively a startup, we expect there to be a $2 million headwind to adjust the EBITDA in the second half spread equally between the third and fourth quarters.
We are not expecting revenue from HeavyWater in 2018. We also expect interest expense of approximately $54 million, depreciation and amortization expense approximately $125 million excluding the net incremental depreciation and amortization resulting from purchase accounting, an effective tax rate of between 25% and 26% for the second half of the year, share count of approximately 148 million shares; and finally, CapEx of approximately $100 million.
Overall, we are pleased with our second quarter and look forward to continue to execute in the second half of 2018. With that, I'll turn the call over to the operator for questions.
Operator
[Operator Instructions] Our first question is from Jason Deleeuw from Piper Jaffray. Please go ahead.
Jason Deleeuw
My question is on the guidance for the remainder of the year. You reaffirm the full year if we get the $2 million headwind from HeavyWater on the EBITDA, but I'm just wondering if there's any help you can give us in thinking about the second half 2018 revenue and EBITDA, just kind of the cadence as we go through the rest of the year?
Kirk Larsen
Sure, Jason. Good question.
So, as we look to the rest of the year, very consistent with what we provided last quarter, we expect Q3 revenue growth to be a little higher than Q2 revenue growth. And the same for Q4 to be a little bit higher than that.
So, we expect sequential improvement in revenue from Q2 to Q3, and then also from Q3 to Q4. From a profitability perspective, we would expect that there would be no material changes to the cost structure as we go from Q2 to Q3 for revenue would come on at high incremental margins.
And then in Q4, no material changes in sort of gross expenses, but as we've talked about before the seasonality with our expenses is that, the fourth quarter because of the holidays and vacations and the like, there's less capitalized software and less capitalized implementation cost, which means some of that expense then flows through such a seasonal pattern that would be consistent with prior years.
Jason Deleeuw
And then, just a question on the environment and mortgage lenders, large lenders and how they're thinking about outsourcing solutions? Has there been any noticeable change in your thinking?
And then also on the competitive environment, has there been any changes there in the competitive environment, as you go after the larger lenders for origination software?
Anthony Jabbour
Hi Jason, it's Anthony. No, I would say there is a there is not a material change from our last call.
I'd say there's definitely a focus on cost reduction and an increased focus on user experience, both the consumer and employee. And as you can see by our actions and what we've acquired and what we're rolling out, we're moving to not only where we see things today but where we see the market ultimately moving towards.
So we feel very good with how we’re positioned in that segment. Our implementations continue to progress well and I’ll share the HeavyWater acquisition really has a lot of interest from our clients, especially the largest because it’s at scale, it can provide some very meaningful cost savings for them.
Jason Deleeuw
And then the competitive environment, any noticeable changes there?
Anthony Jabbour
No, I wouldn't say anything material.
Operator
Our next question is from John Campbell from Stephens. Please go ahead.
John Campbell
So, for the customers on your HELOC origination platform, what are the benefits from also doing the retail channel? Is there something aside from pricing that might I guess lead a lender to outsourcing more channels with you guys versus maybe taking a different channel elsewhere?
Anthony Jabbour
Yes, I’d say there are a number of subtle benefits in terms of integration. But the biggest one is just common people process and technology.
Having the same flow, the same controls, being able to leverage - I’ll share with you, we look at our Servicing Digital application. What's really exciting for our clients with that is if they're honest with home equity as well, they benefit from this Servicing Digital application right out of the box.
So, it services their first mortgages but also their second. Like I said, all kind of pre-integrated and completed.
John Campbell
And then I wanted to dig in on the origination business for a second. So, you guys got back to year-over-year in the quarter.
Looks like a pretty long stretch of declines. Just curious about the outlook from here, are you guys at a point where most clients are contract minimums and you've got kind of a baseline for growth here?
Kirk Larsen
Yes. John, so the way to think about the growth in that business and it’s certainly is a tale of two businesses within origination.
On the loan origination system side, where we saw the 35% growth in the quarter, that’s being driven by the implementations for clients that have gone live. Some of the post-production support and professional services, and that will drive growth for the coming quarters, as those annualize.
And then of course, there's more implementations coming on. The other side of the business, the lending solutions piece, which includes the exchange, has the effect of the lower refinance origination volumes which as, if you look at the MBA, the forecast is showing that it's relative, it's flattening, as you go out to Q3 and Q4 and then sort of baselining at that level over the course of 2019.
And so you'll have a bit of headwind from that for the next several quarters. Sort of until it annualizes into the sort of middle part of next year.
But we would expect there to be growth in the loan origination system, that business that would offset that. And as you start to layer on AIVA from the HeavyWater acquisition that we did, that will start to layer on.
That literally as I mentioned in my prepared remarks is no revenue right now, but we have some clients that are very excited to get started with it. And so that'll start and then that will end up growing over time as AIVA continues to add skills, and we continue to charge - initially, we'll be charging on a per-loan basis.
And so, as you roll that out, and then as you add skills, you end up growing that as well. And one important thing to think about with AIVA is it’s loan origination system-agnostic.
And so you can imagine will certainly sell to our Empower clients – or sorry, origination system clients, I should say, immediately. But then, we certainly are not going to limited to that because as Anthony said.
And then we've talked about certainly the cost to originate a loan is that all-time highs right now that all-time highs for everybody, and so we see a lot of opportunity there. So whether it's 35% in a given quarter, or whether it's a little bit variance from that.
We still, we have very high hopes for our LOS business.
Operator
Our next question is from Bill Warmington from Wells Fargo. Please go ahead.
Bill Warmington
So, first question on AIVA. It sounds like there's a pretty good new product pipeline there.
When I ask, how many clients are currently in beta and do you think you will actually see some revenue from that product in 2019?
Anthony Jabbour
There are zero clients in beta right now, and we don't expect to see any revenue in 2018 from AIVA is the short answer.
Kirk Larsen
But we do, Bill, we certainly expect revenue in 2019.
Bill Warmington
Yes.
Kirk Larsen
So we have clients that, that frankly we were thinking about leading up to doing the HeavyWater deal, that were expressing their interest in artificial intelligence and machine learning and the capability of that helped them reduce their cost. And so, we have a line of clients, we have talked to, or want to talk to.
And so, we’re going to, but we would expect that this is a solution, that’s a little bit different than our typical platforms that takes say 12 to 18 months to implement. This can be put in – well, this may put in much quicker.
And so, as we go through and sign up clients we’ll see revenue much quicker.
Anthony Jabbour
Yes. And maybe I’ll add some more onto that.
Really their skill set, it learns through the machine learning and really with what we’ve done with the initial push of our servicing digital, our AIVA machine learning capability, and our actionable intelligence platform, we're really - we look to say what are the problems in the industry, so is retention for servicers and that's where the digital helps improve the retention side. And you know the market share we have on servicing, we can leverage it and have immediate benefit.
With machine learning, a huge need there is just tremendous amounts of data to actually learn the skill. And again, we've got such tremendous depth and breadth of data across the whole loan life cycle.
We can leverage that again to get a tremendous advantage. And then lastly with the actionable analytics, it's really about bringing all of our different disparate data and our knowledge of the end-to-end loan capabilities to find ways to help our clients grow their revenues, either through retaining existing clients or attracting new ones, improving their operational efficiency and staying regulatory compliant.
So we certainly have high confidence in the AIVA product and the teams are aggressively working on developing the skills for our clients in this industry.
Bill Warmington
And then a question on the margins, they looked very strong in the Software Solutions side year-over-year. Is there something going on with the mix shift there?
Is that the implementation revenue kicking in? Were there any onetime items?
And what I'm trying to get at is, should we think about that as kind of a sustainable level for the Software Solutions piece going forward?
Anthony Jabbour
From a margin expansion perspective, Bill, we did - we took some cost actions in the second quarter last year that was now annualized, we get the final benefit of that. There weren't really any one-timers.
I would say we've been very focused on how we're allocating resources between maintenance versus value added activities like I talked about last quarter around implementation and software projects and the like. So, there's certainly some element of that.
But we expect that business to be high margin that it's so efficient particularly on the software solutions side. And then as you look at it from - on the origination software business, that's a business that isn't at scale yet.
And so, we would expect there to be margin expansion as that business grow. And we see that the revenues from the implementations come on high incremental margins.
And so, just without speaking to a particular quarter, we would expect there's continue to be the ability to expand margins in the Software Solutions segment. And then, yes, as it relates to the data and analytics business and what's going on in margins there, that was very much a revenue story because of the up-front revenues we recognized last year that had extremely high incremental margins.
So, that's really the comparison there. And then of course, as you look at it from an aggregate basis, total company in corporate, we had the higher cost.
We talked about that. Frankly, if you normalized last year for the higher post spin costs that we've been talking about the last couple of quarters, you would've seen margin expansion for the total company towards the higher end of our longer term guidance range.
Operator
Our next question is from Tien-Tsin Huang from JPMorgan. Please go ahead.
Tien-Tsin Huang
Just a follow-up on that data analytics. How did that come in versus planned?
And can you give more specifics on third quarter, fourth quarter? And what your expectations are there for data and analytics?
Kirk Larsen
I mean it largely came in line with our expectations when we put the plan together, we certainly knew and we talked about and we give guidance that we have that tough comparison in the second quarter. But frankly, we expect that business to gain a bit of traction and see higher revenue over the course of the remainder of the year than it had in the second quarter.
And so we continue to focus tremendously on cross-selling to the existing base which I think has gained traction over the last couple of years. Some of which is that that strong performance has been covered up at times because we've had these strategic license deals that are good, but then certainly the next year we have that tough comparison.
So we continue to believe that the data analytics business - if you normalize for that, for the one-time last year, it grew 3% or 4% and last quarter we talked about what to expect from that particular collection of assets, it would be in the low to mid-single digits and so I think that's where you saw and that's sort of where we continue to see it. What I would say though is when we talked about the actionable intelligence platform and what that could do, I think it may not per se be seen in the data analytics segment, but we're excited about the opportunities to leverage the data and the analytics that we can create and deliver through our platforms that we think can drive growth.
Now certainly the data analytics business has the data assets and some of the analytics that will feed that but they may ultimately be delivered through the platforms themselves whether it's EMPOWER or MFP. So the growth you may see it in different places but we think that as we talked about that could be a pretty exciting opportunity.
Tien-Tsin Huang
That’s good to know and you didn't - I know you said it was second quarter. I just couldn't recall if there was a change in the in the second half.
And just my - for my follow-up on the new product commentary, you mentioned servicing digital. I'm just curious just overall philosophically, new products do you view those as true add on products that you're working on now in the R&D world or are some of these new products going to be enhancements that can just push your pricing up in the aggregate?
Anthony Jabbour
Tim, it’s Anthony. They are new products, and they will absolutely increase our pricing.
And as we look at just at a high level, the average revenue per loan, it would help increase that.
Tien-Tsin Huang
I see.
Anthony Jabbour
So these products are absolutely going to do that for us.
Tien-Tsin Huang
Maybe, if I could sneak in one more, sorry, just for the Investor Day, the Analyst Day that’s coming up. Just a way to preview it a little bit here.
Will you be updating your long-term financial outlook at that event?
Anthony Jabbour
So one thing on Investor Day, we had it scheduled for September, we've looked at the schedule and actually we're going to be pushing it back most likely to November. So just a quick way to get that out.
We haven't sent out the revision of that, but as far as what we would expect to communicate on that day, certainly would be a looking at the long-term guidance as we would make that a part of it. We think that's critical for investors to note, Tien-Tsin.
So that would be important. And then of course, I would focus on really a deeper dive into the business and how we provide that, what we provide, how we provide value and how we're going to grow is really the theme of the way we're thinking about it.
Operator
Our next question is from Andrew Jeffrey from SunTrust. Please go ahead.
Andrew Jeffrey
Just to maybe drill down a little bit more on the question that Tien-Tsin was asking. As I think back on the sort of the value-added growth drivers, I guess maybe is one way to think of them.
And how maybe they've evolved a little bit, is it right to say that Black Knight now is looking to monetize more as a customer-facing solutions company and customer-facing solutions company maybe more than you might have been a couple of years ago?
Anthony Jabbour
Well, Andrew, certainly we are. So, if we look back in time and the solutions that we are offering and we looked to how the industry has evolved with more digital, more consumer-facing capabilities required.
As we looked at that, we certainly looked at it and said that there's a value that we can provide for our clients that we can help them go faster, better, cheaper and help improve their customer retention rates and therefore retaining the client’s cross-sell them additional products. So, without question we are, with Servicing Digital, moving further in the value chain.
But with the other product, they will support the banks and mortgage companies providing service to their customers. But it’d be through the banks than mortgage companies themselves.
Our clients can also use the API that we have if they want to control the front end on the digital experience and do that themselves. We've got flexibility that way as well.
And I imagine we'll see some of the largest ones doing that and – but there’ll be a mixture.
Kirk Larsen
Andrew, one thing I'd add is that, one thing we won't lose sight of is that we still want to be in with at our core as we are the engine room for our clients.
Anthony Jabbour
Yes, we are a hosting company; we provide software-as-a-service solutions. We are what they need to operate and they can benefit from the scale and skill that we have to do that for them, so that they can - we can - it’s a much more efficient process.
They don't have to be the ones that invest directly in a single platform just for themselves. We will never lose sight of what’s at our core.
But these opportunities like servicing digital are ones that we think we are the right partner to help our clients with. And so we will branch out in that fashion but never losing sight of what’s at the core.
Andrew Jeffrey
I wonder if in aggregate, as the industry evolves and as Black Knight continues to be sort of the go-to engine room as you say, Kirk, is the TAM expanding, I mean is that something we can think about in terms of how big the market is and as a consequence, how sustainable your growth might be?
Kirk Larsen
Yes, absolutely, Andrew. And that's really what we're doing with these additional products and capability and the real focus we've got on delivering additional capability to the market.
There's a need for a player like us. Like I mentioned on the first call, I'm excited about ways that we can help transform the industry for the benefit of all.
And as I look at these products and other ones, we’ll absolutely increase the TAM.
Andrew Jeffrey
And then one last one if I may, recognizing there's the way that the data and the analysts are being consumed, changes perhaps where the revenue shows up, are there – is there functionality or are there data that you feel you're lacking in that segment or do you think your - so acquisitions - would acquisitions make sense or do you feel like you're pretty well positioned competitively?
Kirk Larsen
I think on the data side, we're well positioned. When I look at really the raw materials that we have, we've got a lot of great assets again.
I'm approaching my fourth month in the role and continue to be excited with what I see that we already have and what we can do with it.
Operator
Our next question is from Ashish Sabadra from Deutsche Bank. Please go ahead.
Ashish Sabadra
I was just wondering, if you can talk about the prospect pipelines for Empower or your loan origination systems? And how is the conversation going especially with the big banks?
Anthony Jabbour
Well, what I'd say is we continue to have great conversations with all our clients, and especially the larger ones, because some of the capabilities that we have such as robotics and now with the machine learning are really hitting the nerve of what our clients are looking for. And more than anything, our proof point of being able to deliver quickly and efficiently really resonates with them, with all of them.
So we're excited about the conversations that we're having. And as you know, especially, we have Ashish on the larger ones.
It's hard, I'd say, I think we spoiled you a bit, making it look easy with Bank of America and Auckland and Chase and PNC, Fifth Third, et cetera. It's hard in getting these large organizations to make a decision.
And the previous sales we had were from just lots of work building up to it. And what I'd say is we're banging away hard at it.
And if they're not open to a full-scale changes, our component that we can do is a small piece, we can do a proof of concept, we’re going to do an operational review to show them what the future could look like with us. So we're banging away hard at it, we've got lots of conviction that we’re the right answer for our clients.
Ashish Sabadra
And maybe just a quick clarifying question on the models. So when we think about the tax rate, the tax rate has gone down for the full-year, interest expense is down slightly compared to your original expectations.
And I understand HeavyWater is likely incremental expense but net as we think about the earnings, the EPS range that you've given. Kirk, is that a way to think about within that range where you may come in any kind of - any further clarity that you can provide?
Kirk Larsen
Yes, I mean I think if you look at all the puts and takes, if you look at everything below EBITDA, as to where some of that are coming, I mean there's certainly is – there's a little bit of upward pressure towards the higher end of the range on EPS as a result of all the things you just said. So, we maintain the range but all the factors you describe are correct including the tax rate that's coming in lower.
It's really good work by our tax team to bring that down. So, you're thinking of it in a fair manner.
Ashish Sabadra
And then maybe just how should - is there a way like the tax rate in the back half, is that more sustainable level going forward?
Kirk Larsen
It’s a very good question. Much of what - there were some - there's a revaluation of some deferred tax liabilities that put some - that was a bit of a benefit in the quarter, or for the year, I should say, that's in there.
And then as we get, as we look to next year and beyond, we go outside of the window where IPO companies don't have the 162(m) exception apply which relates to executive compensation. And so, that's one where I think we have to – there's some work we still need to do.
So, we’ll need a little bit more time to see what that effect is going to be or said differently, we'll provide that guidance going forward. So, there may be a little bit of upward pressure on it but I would expect that it would come below the 27% that we came into the year expecting.
Much of what we are trying to do with the state tax rate and with the higher tax credits that I mentioned are sustainable things. So really just it’s just there some things in the tax reform from last year that actually put a little bit of upward pressure back.
Operator
Our next question is from Chris Gamaitoni from Compass Point. Please go ahead.
Chris Gamaitoni
Can you give us a sense of - I mean, congratulations on signing your first two clients with Servicing Digital. Can you give us a sense of how the larger clients are thinking about that, and maybe what we should expect from some of your bigger clients may be taking that or moving, taking that platform or taking that product, I'm sorry in the future?
Anthony Jabbour
Yes. Chris, it’s Anthony.
What I’d say is, there's a lot of interest in – from clients of all size. And even the largest, some of the way in which they deploy it maybe differently, but there certainly is interest from all of them and we're excited about that.
Chris Gamaitoni
Is there any way to – there's a lot of new products being launched and is there any way for us to think about the potential size of this opportunity that you've laid out on a per loan basis, in aggregate, your total existing finds. So is there really any way to conceptualize the potential opportunity for Black Knight?
Kirk Larsen
Sure. So the way I would think about each of these opportunities, servicing digital being a very good one is the population is finite.
It's really of the clients that we have with loans on MSP. So for example, that $34.5 million loans at the end of June was what was outstanding.
So we would charge on a per loan basis for the whole portfolio, it’s the expectation. And so that's kind of how you would think about it.
The end pricing and sort of what the opportunity is, I'm a bit sensitive to that, because we don't talk specific pricing for any particular product, Chris. But I mean as you think about it, each of these opportunities, whether it's servicing digital, whether it's AIP, whether it's AIVA, these are things that are additive to – these things are what we would expect to help drive the 6% to 8% that we've talked about on a long-term basis.
So, individually, will they be nine-figure businesses? That's not what we would plan for.
They really are more incremental product adds that that can help add a point here, a point there over a given period of time. So, apologize for not being overly specific but pricing is something we're very sensitive about.
And so, we don't get that granular.
Chris Gamaitoni
I completely understood. And is it possible to give us any update or any detail on what type of data is AIVA leveraging?
And what problem was that really trying to solve for your clients?
Anthony Jabbour
Sure. The data that it’s leveraging, there is multiple types, actually there are many different skills.
And when you say – when you talk about machine learning, it's limitless. So, really where we're starting off initially on the loan origination side is around the verification step.
And so, as you apply for a mortgage, you share your information about your income, your assets, et cetera. Then you get approved.
And you've got to verify it. And today, as back office agents would look electronically to the forms that were submitted, it's - they're always showing up.
There's different types of forms. It's complex.
It takes a while. Really what we're starting off with machine learning and AIVA is learning the forms, highlighting in green boxes or yellow boxes or red boxes, based on the confidence level, the actual field on a complex form.
So when it pops up, the agent’s eyes go straight to the highlighted section to look for the data elements that they're looking for, and where they could find it quickly. Now the power of this is that as you continue to learn more and more, it's always a green box.
And if you get to that, always a green box phase, you can now skip the step. So you could hope that you can get everyone to operate TIs and it could all be programmatic calls to get all the information verification that you need.
But that's just not the reality of where things are right now in the industry. And so in the meantime, our clients are suffering and this is something that we think can help minimize some of the costs and improve the quality of the process at the same time.
Kirk Larsen
So just to take that one step further, Chris, if you think about what data we're talking about, it's all the forms. If you think about a loan package, a complete loan package has all the forms, all the examples that frankly you need - we need to run through AIVA for AIVA to learn to automate the process and then just we talked about to make the process more efficient, to make employees more productive, so they can put more loans through the same process faster.
And so with our clients, particularly the larger ones, we can get tens of thousands of loan packages that they would authorize us to use to help AIVA learn and then perform those tasks for the benefit of all clients at that point. And so, I think that that's the part that that's where the data comes from, that's why it's so important that with our with our platforms, with our servicing platform and our origination platforms, that all the data was resident that can be used to help with the artificial intelligence with the machine learning so that AIVA can help automate these tasks.
Operator
Our next question is from Jim Schneider from Goldman Sachs. Please go ahead.
Jim Schneider
I was wondering if you can maybe, as you look into the second half of the year, comment on the client implementation pipeline you expected and whether you expect all those clients are going to kind of implement on the timeline you have previously expected. Seems like things are tracking pretty well, pretty much across the board in the Software Solutions segment, but I just want to check on those assumptions.
Anthony Jabbour
Jim, it's Anthony. The implementations are tracking as we had budgeted and there's – we don't see an acceleration in implementations and – in the first half.
We don't expect it to be one in the second half. But the conversations with clients are going well overall.
We can't talk about specific ones obviously but we're pleased with the progress that we're making.
Jim Schneider
And then maybe as just as a follow-up, I want to clarify your comments around AIP and whether or not it would be kind of a separately sold product. Would it impact data and analytics revenue?
Or do you think of it more as part of the bundle? And maybe can you comment on where it might be more likely to show up, whether that's the origination side or in servicing.
Anthony Jabbour
Sure. With AIP, it will - there will be some revenue from AIP that shows up in data analytics and others in our servicing and origination businesses.
So it's really a collection of all the data and wherever the analytic is created is how will – how have the revenues obviously to follow the work but - do you have anything to add to that?
Kirk Larsen
Jim I would add. I agree with what Anthony said.
It's going to be based upon where the data resides, where it’s funded – where it comes from and then how it's delivered. But what I would add is, rest assured that we'll communicate, if it's a driver, if and when it’s driver of growth, where it is, we'll talk about it.
So, it'll be transparent from that perspective.
Operator
Our next question is from Glenn Greene from Oppenheimer. Please go ahead.
Glenn Greene
Just following-up on Jim's question, I was wondering if you maybe at a high level going back and talking about the backlog. I'm just trying to get a sense for conversions that you saw in the quarter relative to sales activity that you saw in the quarter, meaning as broadly is the backlog still growing?
Where did you sort of taken, covert - what are magnitude of conversions they had in the quarter that benefited revenue?
Anthony Jabbour
Glenn, I would say, it was roughly in line as we looked at it. It’s a metric that we don't want to quantify more than annually just because it gets a little unclear what it's comparing to.
But I would say it’s pretty consistent from quarter to quarter, the ultimate backlog, the run rate of annualized revenue that we’ll see by the end of 2020. So, I’d say no material change in that regard.
Glenn Greene
And then just quickly on the revenue drag within the origination software from the lower refi volumes like, I’d call it, the 20% down in unit volumes. Can you just remind us what the revenue drag was?
Anthony Jabbour
Yes, it was about one percentage point to the company.
Glenn Greene
And then finally just on the data business which obviously had the tough compare in 2Q. If I recall, I think you have a tough compare of 4Q also on an organic basis.
Will you be able to grow through that or should we expect some pressure in the fourth quarter somewhere to this quarter?
Anthony Jabbour
There really wasn't a tough compare last year. If you look at the revenue from in Q3 and Q4, it’s pretty flattish.
And so, I wouldn't expect there to be a comparison issue in data and analytics in the fourth quarter.
Operator
Our next question is from Bose George from KBW. Please go ahead.
Bose George
Was there any impact from ASC 606 this quarter on revenue or earnings?
Kirk Larsen
Bose, this is Kirk. So, it was about $1 million of revenue and about $2 million of EBITDA, primarily related to professional services, the nature of what we were performing and just we recognize, as opposed to being deferred.
I would tell you that, it was very consistent with what it was in the second quarter of last year. So, as you look at things on a year-over-year basis, they're very, very similar.
Bose George
And can you just update us on how we should think about uses of free cash and just a balance between acquisitions and potential share buybacks. And on a related note, is the leverage kind of a good run rate?
Kirk Larsen
Sure. So the way we're thinking about capital allocation going forward is, in the third quarter, our current plan is to pay down the revolver, which had a balance in part due to the share repurchase activity that we have in the first quarter as part of Thomas H.
Lee's secondary offerings, where we bought shares as part of the deal. So, that would be a plan for third quarter.
As we think beyond that, we continue to believe that investing in product development, investing in infrastructure, et cetera is sort of the CapEx is our highest and best use to drive growth. And so, that will be something we'll continually evaluate.
Naturally, you do run out of projects that have returns that are attractive at the right risk profile. And so, what we look beyond that to potentially buy or otherwise use capital in other ways.
And so, we will continue to look for acquisitions that can catalyze growth, that fill product gaps very consistent with what our strategy has been. I would say HeavyWater was a great example of a build-versus-buy decision where we could accelerate our capabilities in artificial intelligence and machine learning by potentially two to three years by buying that start-up for a very reasonable price.
And so, that's a good example. And if you look back, you can see other deals that we've done.
So, we will look to do tuck-in acquisitions. As we look beyond that, fourth quarter and beyond, we certainly would look to or consider share repurchase after we've exhausted other ways to grow assets and other potential of use capital.
As far as our leverage, our target is 3 times, we're at 2.8. If we continue to grow and just pay our mandatories, that leverage will go down and that's something that we will continue to evaluate the appropriate level in light of a rising interest rate environment and a financial risk attendant thereto.
We'll continue to talk to our board about that. But I would say we're very comfortable where we're at.
And we look to allocate capital in the way I described.
Operator
Our next question is from Geoffrey Dunn from Dowling & Partners. Please go ahead.
Geoffrey Dunn
First question, with respect AIVA, is there any aspect of the technology that you can use for your own operations and improve your own internal processes?
Anthony Jabbour
Yes. Great question, Geoffrey.
There absolutely is. And as we look at it, one of the challenges that I have is making sure that I prioritize what we do with the product first, right?
And for us, it's revenue first. And so as we look at that, like I said, the pain points in the industry and how do we help our clients to be great partners for them.
This one's a win on all fronts. And so to start, we're going to focus on our client and as we continue to build up skills and talent that can help run that business will absolutely look at that.
Geoffrey Dunn
And then Kirk I wanted to revisit the margin on DNA, not looking against the comp year-over-year but sequentially, as we look at that development, are we thinking more mix shift or incremental margin? How would you kind of explain the sequential development of the quarter and maybe how we can apply that into the back half expectation for revenue to continue to improve?
Kirk Larsen
Yes. Certainly, mix comes into play at times and there could be some movement in the cost of goods sold as there could be some seasonality to how we buy data.
But, Geoff, as we look at it, we expect to continue to make progress with margins and in data analytics where we continue to target getting to that 30% level and frankly not stopping at the 30% level when we get there. But as I said here, I would say that we would expect margins to improve from the 25% sequentially over the back half of the year.
Operator
Our next question is from Stephen Sheldon from William Blair. Please go ahead.
Stephen Sheldon
Most of my questions have been asked, but I wanted to ask about the servicing business, you noted 34.5% active first lien loans at the end of June which I believe would be up high-single or low-double digits year-over-year. So I guess will active loans on the platform maybe provide the backdrop for stronger growth and servicing in the second half of 2018 and into 2019?
Kirk Larsen
So I mean, yes, there was 5.4% growth in loans on the system on average Q2 versus - this year versus last year. I would say that business has been performing tremendously.
I mean, for it to be growing 7% I think has been a great outcome and a credit to the leadership running that business. So I think that - but as we continue to implement and those implementations of course will come in over time.
But I would say, I wouldn't necessarily say that the Q2 performance would mean an acceleration, but rather we expect to see continued strong performance in that business consistent with where it's been growing for a number of quarters now.
Operator
Thank you. This concludes the question-and-answer session.
I'd like to turn the floor back over to management for any closing comments.
Bryan Hipsher
Thanks. I'd like to thank the investment committee for your interest in our great company, our clients for their partnership and to all my Black Knight colleagues for their focus on our clients and our growth.
I hope you enjoy the rest of your day. Thank you.
Operator
This concludes today's teleconference. You may disconnect your lines at this time.
Thank you again for your participation.