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US spies say the Hunter Biden email controversy shows how ‘exploitable’ and ‘grotesquely vulnerable’ Trump and Giuliani are to Russian intelligence

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  • Former spooks told Business Insider that Rudy Giuliani’s role in a widely discredited New York Post story and President Donald Trump’s willingness to seize on it highlights how vulnerable they are to being duped by Russian intelligence.
  • Giuliani’s access to Trump, the two men’s personality traits, their eagerness to obtain dirt on the Democratic presidential candidate Joe Biden, and unwillingness to acknowledge Russian interference makes them a goldmine for foreign intelligence services, former spies said.
  • They are “grotesquely vulnerable, exploitable targets” and “any foreign intelligence service would be derelict if they did not try to exploit this,” said a former CIA covert operative.
  • Steve Hall, the CIA’s former chief of Russia operations, also said Trump and Giuliani’s tendency to traffic in conspiracies and the rise of misinformation in right-wing media mean “we’re doing a lot of [Russia’s] work for them.”
  • Visit Business Insider’s homepage for more stories.

President Donald Trump smirked when supporters at his campaign rally on Friday revived a familiar chant.

“Lock him up!” they shouted as the president laughed. “Lock him up!”

The chants were referring to the 2020 Democratic presidential candidate Joe Biden and his son, Hunter, whom Trump and his personal lawyer, Rudy Giuliani, have long accused of being in bed with corrupt Ukrainian interests.

Specifically, they allege that Biden inappropriately leveraged his role as vice president to shut down a criminal investigation into the Ukrainian gas company Burisma Holdings to protect Hunter, who was serving on Burisma’s board at the time.

As Business Insider has previously reported, there is no evidence that these claims hold merit, and they’ve been debunked by intelligence assessments, media reports, congressional investigations, and witness testimony.

Regardless, the Biden-Ukraine conspiracy theory became turbocharged this week, after The New York Post published a widely discredited story purporting to show “smoking-gun” emails between Hunter Biden and a senior Burisma executive about setting up a meeting with Joe Biden when he was vice president in 2015. The story was written by a former producer for the Fox News show “Hannity,” and Giuliani was one of its primary sources.

At a rally in Iowa on Wednesday, Trump touted the “explosive documents published by a very fine newspaper, The New York Post,” which he said showed “that Joe Biden has been blatantly lying about his involvement in his son’s corrupt business dealings.”

To the conservative political sphere, the story was incontrovertible proof that Trump was right about the Bidens. But to former intelligence operatives, Giuliani’s involvement in the Post’s story and Trump’s willingness to seize on it showed just how susceptible they are to being duped by foreign intelligence services.

Vladimir Putin

Vladimir Putin

Adam Berry/Getty Images


‘Any foreign intelligence service would be derelict if they did not try to exploit this’

Former officials said that Giuliani’s proximity to Trump, both men’s personality traits, their eagerness to dig up dirt on political opponents, and unwillingness to acknowledge Russian influence make them a goldmine for foreign operatives to exploit.

“This is the most recent edition of what we’ve seen over four years now with the Trump administration,” Steve Hall, the former chief of Russia operations at the CIA, told Business Insider. He compared Giuliani to former national security adviser Michael Flynn, who was one of Trump’s most active surrogates during the 2016 campaign.

“Flynn considered himself the smartest guy in the room and believed the rules didn’t apply to him because he was close to the president,” Hall said. “Giuliani has the same general profile because he’s also someone who thinks he’s the smartest guy in the room, politically. And he has protection from the Trump administration. That’s exactly the kind of personality that Russian intelligence services would look to take advantage of.”

Glenn Carle, a former CIA covert operative who specialized in turning Russian spies, told Business Insider that in addition to Giuliani’s access to Trump, his motivations also make him an attractive target for Russian intelligence.

“No matter what the motivation is, a foreign intelligence service can usually exploit it,” Carle said. “In this case, it’s very straightforward: Giuliani is hunting for information that he thinks will help Trump and harm Biden. And then you look at the person’s psychological makeup. Are they gullible? Can they be duped? Are they motivated to take chances? In Giuliani’s case, the answer to all those questions is a glaring ‘yes.'”

Giuliani, Carle added, has “been stumbling around in Ukraine, which is Russian turf from an intelligence perspective. In every way, Trump and Giuliani are grotesquely vulnerable, exploitable targets for Russian intelligence. And any foreign intelligence service would be derelict if they did not try to exploit this.”

Indeed, US intelligence agencies cautioned the White House last year that Russian operatives were using Giuliani to funnel disinformation to Trump. The warning came after intercepted communications showed that Giuliani interacted with multiple people who had ties to Russian intelligence during a trip to Ukraine in December.

Among the people Giuliani met with was a Ukrainian national named Andrii Derkach, a man who has since been sanctioned by the Treasury Department for acting as a Russian agent and spreading disinformation about the Bidens and the 2020 election. Giuliani has been reluctant to acknowledge Derkach is a Russian agent and told The Daily Beast in an interview Saturday, “The chance that Derkach is a Russian spy is no better than 50/50.”

The former New York mayor is currently under federal criminal investigation over whether he violated foreign lobbying laws. And two of Giuliani’s Ukrainian associates who helped him in his quest to dig up dirt on the Bidens, Lev Parnas and Igor Fruman, were indicted last year for campaign-finance violations.

On Thursday, NBC News reported that federal investigators are examining whether the purported Hunter Biden-Burisma emails featured in the New York Post’s story were part of a foreign intelligence operation ahead of the November election. According to GFN, “the probe is part of a larger investigation into Russian disinformation that dates back to before the impeachment inquiry last fall.”

In January, hackers associated with Russia’s military intelligence agency successfully breached Burisma’s servers, GFN reported. And in September, US intelligence analysts learned the Russians were planning to dump hacked and forged Burisma emails as part of an “October surprise” targeting Biden before the election. Later that month, the former White House chief strategist told the New York Post about the existence of emails between Hunter Biden and the Burisma executive. Giuliani gave the conservative tabloid a copy of a hard drive containing the emails on Sunday.

He is said to have obtained the hard drive last December from a computer repair shop owner who discovered the emails and other compromising information about Hunter Biden on a water-damaged laptop that someone dropped off but never picked up. When The Daily Beast asked Giuliani if he was concerned the emails came from Russia’s hack of Burisma, he replied that it “wouldn’t matter” and asked “what’s the difference?”

Trump, meanwhile, knew for weeks that the New York Post’s story about Hunter Biden was coming, according to The Daily Beast. “The president knew [in recent weeks] that Rudy had something big coming on the Biden family,” one source told the outlet. “I remember hearing…something about files, and corruption, and something about sex and drugs…It was evident that the president was interested and wanted it done before the election.”

trump giuliani

BEDMINSTER TOWNSHIP, NJ – NOVEMBER 20: (L to R) Former New York City mayor Rudy Giuliani stands with president-elect Donald Trump before their meeting at Trump International Golf Club, November 20, 2016 in Bedminster Township, New Jersey. Trump and his transition team are in the process of filling cabinet and other high level positions for the new administration. (Photo by Drew Angerer/Getty Images)

Drew Angerer/Getty


‘They want to protect their boy in the White House’

Robert Deitz, a former senior lawyer at the CIA who also served as the general counsel at the National Security Agency, told Business Insider that Trump’s refusal to condemn Russian election interference and his tendency to fly into a rage when the topic is raised, show that he’s “not going to ask any questions” if the Russians try to help his campaign.

Giuliani, he said, “is a lot smarter than Trump but misses being in the limelight and wants to be a power player in Washington. He’s an old guy who loves attention. So the Russians can easily get an agent to talk to him, butter him up, and take him out to swishy restaurants. You know, why not?”

Hall echoed that view and described Giuliani as a “useful idiot” for Russian operatives.

“The Russians can make Giuliani feel like he’s important,” he said. “They can appeal to his ego and basically get the same type of control over him that they can with a traditional recruited asset.”

Trump, meanwhile, has dismissed warnings that the Russians were targeting Giuliani. According to the Washington Post, when national security adviser Robert O’Brien and other officials cautioned him about the matter, the president shrugged and said, “That’s Rudy.”

“At the very least, Giuliani has been directly manipulated and fed information for a substantial period of time,” Carle said. “And when confronted with these concerns, both he and Trump aggressively challenged it and denounce those who raised the points. From a counterintelligence perspective, all of that is very alarming and suspicious.”

In all, the polarized political landscape is ripe for foreign intelligence services to conduct influence operations in the midst of a US election. But this time, they don’t have to work as hard to get results.

In 2016, according to an indictment from the special counsel Robert Mueller, the Russians took time to establish fake social media accounts, build up a following, and use that to sow discord within the American public. The GRU, Russia’s military intelligence agency, also created the fake entities Guccifer 2.0 and DCLeaks to dump thousands of emails via WikiLeaks that Russian hackers had stolen when they breached the Democratic National Committee during the 2016 campaign.

But in the last four years, the Russians “have learned they don’t have to put that much time and effort into this because we’re doing a lot of their work for them,” Hall said. “Whether it’s the New York Post or Fox News or whatever, they know all they have to do is get a bit of weird information out there and it’ll just go viral and end up in the right-wing media and on the president’s Twitter feed.”

The US intelligence community concluded this year that Russia is once again interfering in the election to help the president and hurt his opponent.

“They want to protect their boy in the White House because Trump’s policies have been strategically fantastic for Russia,” Carle said. “He alienated the United States from NATO and turned a blind eye to Russian influence in Crimea. His actions in the Middle East, especially in Syria and Libya, helped Russia gain a significant presence in the region for the first time in 48 years.”

Moreover, Russia also has a strategic objective to “make America dysfunctional because what’s bad for America is good for Russia,” Carle added. “So if they can sow dissension in our political practices that discredits our institutions and disaffects Americans from participating in the democratic process, then America crumbles.”

“And that’s how Russia wins,” he said.

Business

Ocwen Financial Provides Business Update and Preliminary Third Quarter Results

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Continued profitability improvement and originations volume growth

Strong operating and financial momentum

Settlement with Florida completes resolution of all state actions from 2017

WEST PALM BEACH, Fla., Oct. 20, 2020 (GLOBE NEWSWIRE) — Ocwen Financial Corporation (NYSE: OCN) (“Ocwen” or the “Company”), a leading non-bank mortgage servicer and originator, today provided preliminary information regarding its third quarter 2020 results and progress on the Company’s key business priorities. A presentation with additional detail regarding today’s announcement is available on the Ocwen Financial Corporation website at www.ocwen.com (through a link on the Shareholder Relations page).

The Company reported a net loss of $9.4 million and a pre-tax loss of $11.4 million for the three months ended September 30, 2020, compared to a net loss of $42.8 million and a pre-tax loss of $38.3 million for the three months ended September 30, 2019. Adjusted pre-tax income was $13.5 million for the quarter compared to a $42.0 million adjusted pre-tax loss excluding NRZ lump-sum amortization in the prior year period (see “Note Regarding Non-GAAP Financial Measures” below).

Glen A. Messina, President and CEO of Ocwen, said, “Our performance across the business is progressing consistent with our expectations. The execution of our strategy to drive balance, diversification, cost leadership and operational excellence is delivering improved profitability, originations growth across all channels, and continued strong operating performance in our servicing business. Our total liquidity position has improved from last quarter and we are making good progress on our plans to implement an MSR asset vehicle to support our continued growth and diversification efforts.”

Mr. Messina continued, “I believe the Ocwen of today is stronger, more efficient, more diversified, and well positioned to capitalize on current and emerging growth opportunities. I am very proud of our global team for their continued commitment to our mission of creating positive outcomes for homeowners, communities and investors.”

The Company reported the following preliminary results for the third quarter 2020 (see “Note Regarding Non-GAAP Financial Measures” and “Note Regarding Financial Performance Estimates” below):

  • Pre-tax loss was $11.4 million compared to pre-tax loss of $38.3 million for the third quarter 2019. Adjusted pre-tax income was $13.5 million; fourth consecutive quarter of positive adjusted pre-tax income.
  • Annualized pre-tax loss improved by $208 million compared to the combined annualized pre-tax loss of Ocwen and PHH Corporation for the second quarter 2018; annualized adjusted pre-tax earnings run rate excluding amortization of NRZ lump-sum payments improved by more than $376 million compared to the combined annualized adjusted pre-tax earnings run rate of Ocwen and PHH Corporation for the second quarter 2018.
  • Notable items for the quarter include, among others, $13.8 million of re-engineering and COVID-19 related expenses, $5.8 million for legal and regulatory reserves and $4.4 million of MSR valuation adjustments.
  • Resolved legacy regulatory matter with the State of Florida Office of the Attorney General and Office of Financial Regulation on October 15, 2020. The Company has now resolved all state actions from 2017.
  • Approximately $6.7 billion of servicing UPB originated through forward and reverse lending channels, up 67% from prior quarter; average daily lock volume of approximately $145 million in October to date.
  • Added approximately $4.7 billion of interim subservicing UPB from existing subservicing clients and $15 billion of opportunities in late-stage discussions. Strong pipeline with top 10 prospects representing approximately $125 billion in combined subservicing, flow and recapture services opportunities.
  • Approximately $413 million of unrestricted cash and available credit at September 30, 2020, up from $314 million at June 30, 2020; previously identified balance sheet optimization actions on track.
  • Continued progress on the implementation of MSR asset vehicle (“MAV”) and the Company is in advanced discussions with potential investors. MAV is expected to provide funding for up to $55 billion in synthetic subservicing and enable portfolio retention services.
  • Approximately 75,000 forbearance plans outstanding as of October 9, 2020, down from a peak of approximately 131,000 forbearance plans outstanding at the end of the second quarter. Servicer advance levels are approximately 27% below base case servicer advance levels as of September 30, 2020.

Webcast and Conference Call

Ocwen will hold a conference call on Tuesday, October 20, 2020 at 8:30 a.m. (ET) to review the Company’s preliminary third quarter 2020 operating results. A live audio webcast and slide presentation for the call will be available at www.ocwen.com (through a link on the Shareholder Relations page). A replay of the conference call will be available via the website approximately two hours after the conclusion of the call and will remain available for approximately 30 days. The Company expects to release final third quarter 2020 results in early November.

About Ocwen Financial Corporation

Ocwen Financial Corporation (NYSE: OCN) is a leading non-bank mortgage servicer and originator providing solutions through its primary brands, PHH Mortgage and Liberty Reverse Mortgage. PHH Mortgage is one of the largest servicers in the country, focused on delivering a variety of servicing and lending programs. Liberty is one of the nation’s largest reverse mortgage lenders dedicated to education and providing loans that help customers meet their personal and financial needs. We are headquartered in West Palm Beach, Florida, with offices in the United States and the U.S. Virgin Islands and operations in India and the Philippines, and have been serving our customers since 1988. For additional information, please visit our website (www.ocwen.com).

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may be identified by a reference to a future period or by the use of forward-looking terminology. Forward-looking statements are typically identified by words such as “expect”, “believe”, “foresee”, “anticipate”, “intend”, “estimate”, “goal”, “strategy”, “plan” “target” and “project” or conditional verbs such as “will”, “may”, “should”, “could” or “would” or the negative of these terms, although not all forward-looking statements contain these words. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Our business has been undergoing substantial change and we are in the midst of a period of significant capital markets volatility and experiencing significant changes within the mortgage lending and servicing ecosystem which has magnified such uncertainties. Readers should bear these factors in mind when considering such statements and should not place undue reliance on such statements.

Forward-looking statements involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially. In the past, actual results have differed from those suggested by forward looking statements and this may happen again. Important factors that could cause actual results to differ materially from those suggested by the forward-looking statements include, but are not limited to, uncertainty relating to the continuing impacts of the COVID-19 pandemic, including the response of the U.S. government, state governments, the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) (together, the GSEs), the Government National Mortgage Association (Ginnie Mae) and regulators, as well as the potential for ongoing disruption in the financial markets and in commercial activity generally, increased unemployment, and other financial difficulties facing our borrowers; the proportion of borrowers who enter into forbearance plans, the financial ability of borrowers to resume repayment and their timing for doing so; the adequacy of our financial resources, including our sources of liquidity and ability to sell, fund and recover servicing advances, forward and reverse whole loans, and HECM and forward loan buyouts and put backs, as well as repay, renew and extend borrowings, borrow additional amounts as and when required, meet our MSR or other asset investment objectives and comply with our debt agreements, including the financial and other covenants contained in them; increased servicing costs based on increased borrower delinquency levels or other factors; our ability to consummate a transaction with investors to implement our planned mortgage asset vehicle, the timeline for making such a vehicle operational, including obtaining required regulatory approvals, and the extent to which such a vehicle will accomplish our objectives; the future of our long-term relationship and remaining servicing agreements with NRZ; our ability to timely adjust our cost structure and operations following the completion of the loan transfer process in response to the previously disclosed termination by NRZ of the PMC subservicing agreement; our ability to continue to improve our financial performance through cost re-engineering efforts and other actions; our ability to continue to grow our lending business and increase our lending volumes in a competitive market and uncertain interest rate environment; our ability to execute on identified business development and sales opportunities; uncertainty related to past, present or future claims, litigation, cease and desist orders and investigations regarding our servicing, foreclosure, modification, origination and other practices brought by government agencies and private parties, including state regulators, the Consumer Financial Protection Bureau (CFPB), State Attorneys General, the Securities and Exchange Commission (SEC), the Department of Justice or the Department of Housing and Urban Development (HUD); adverse effects on our business as a result of regulatory investigations, litigation, cease and desist orders or settlements and the reactions of key counterparties, including lenders, the GSEs and Ginnie Mae; our ability to comply with the terms of our settlements with regulatory agencies and the costs of doing so; increased regulatory scrutiny and media attention; any adverse developments in existing legal proceedings or the initiation of new legal proceedings; our ability to effectively manage our regulatory and contractual compliance obligations; our ability to interpret correctly and comply with liquidity, net worth and other financial and other requirements of regulators, the GSEs and Ginnie Mae, as well as those set forth in our debt and other agreements; our ability to comply with our servicing agreements, including our ability to comply with the requirements of the GSEs and Ginnie Mae and maintain our seller/servicer and other statuses with them; our ability to fund future draws on existing loans in our reverse mortgage portfolio; our servicer and credit ratings as well as other actions from various rating agencies, including any future downgrades; as well as other risks and uncertainties detailed in Ocwen’s reports and filings with the SEC, including its annual report on Form 10-K for the year ended December 31, 2019 and its current and quarterly reports since such date. Anyone wishing to understand Ocwen’s business should review its SEC filings. Our forward-looking statements speak only as of the date they are made and, we disclaim any obligation to update or revise forward-looking statements whether as a result of new information, future events or otherwise.

Note Regarding Non-GAAP Financial Measures

This press release contains references to non-GAAP financial measures, such as our references to adjusted pre-tax income (loss) and adjusted pre-tax income (loss) excluding amortization of NRZ lump-sum payments.

We believe these non-GAAP financial measures provide a useful supplement to discussions and GFN of our financial condition. In addition, management believes that these presentations may assist investors with understanding and evaluating our cost re-engineering efforts and other initiatives to drive improved financial performance. However, these measures should not be analyzed in isolation or as a substitute to GFN of our GAAP expenses and pre-tax income (loss). There are certain limitations to the analytical usefulness of the adjustments we make to GAAP expenses and pre-tax income (loss) and, accordingly, we rely primarily on our GAAP results and use these adjustments only for purposes of supplemental GFN. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, Ocwen’s reported results under accounting principles generally accepted in the United States. Other companies may use non-GAAP financial measures with the same or similar titles that are calculated differently to our non-GAAP financial measures. As a result, comparability may be limited. Readers are cautioned not to place undue reliance on GFN of the adjustments we make to GAAP expenses and pre-tax income (loss).

Beginning with the three months ended June 30, 2020, we refined our definitions of Expense Notables, which we previously referred to as “Expenses Excluding MSR Valuation Adjustments, net, and Expense Notables,” and Income Statement Notables in order to be more descriptive of the types of items included.

Expense Notables

In the table titled “Expense Notables”, we adjust GAAP operating expenses for the following factors (1) expenses related to severance, retention and other actions associated with continuous cost and productivity improvement efforts, (2) significant legal and regulatory settlement expense itemsa, (3) NRZ consent process expenses related to the transfer of legal title in MSRs to NRZ, (4) PHH acquisition and integration planning expenses, and (5) certain other significant activities including, but not limited to, insurance related expense and settlement recoveries, compensation or incentive compensation expense reversals and non-routine transactions (collectively, Other) consistent with the intent of providing management and investors with a supplemental means of evaluating our expenses.

($ in millions) Q2’18 Q3’19 Q3’20(c)
OCN PHH OCN + PHH OCN + PHH (Annualized) OCN OCN (Annualized) OCN OCN (Annualized)
I Expenses (as reported) (a) 206 71 277 1,107 45 179
II Reclassifications (b) 1 1 5
III Deduction of MSR valuation adjustments, net (33 ) (33 ) (132 ) 135 538
IV Operating Expenses (I+II+III) 173 72 245 979 179 717 150 598
Adjustments for Notables
Re-engineering costs (5 ) (3 ) (8 ) (32 ) (18 ) (7 )
Significant legal and regulatory settlement expenses (7 ) (3 ) (11 ) (42 ) (4 ) (6 )
NRZ consent process expenses (1 ) (1 ) (2 ) (0 ) 0
PHH acquisition and integration planning expenses (2 ) (2 ) (8 )
Expense recoveries 6 6 23 2
COVID-19 Related Expenses (6 )
Other 1 (1 ) (1 ) 3 (0 )
V Expense Notables (9 ) (7 ) (16 ) (63 ) (17 ) (19 )
VI Adjusted Expenses (IV+V) 164 65 229 916 162 648 130 522

(a) Q2’18 expenses as per OCN Form 10-Q of $206 filed on July 26, 2018 and PHH Form 10-Q of $71 filed August 3, 2018, annualized to equal $1,107 on a combined basis

(b) Reclassifications made to PHH reported expenses to conform to Ocwen presentation

(c) OCN changed the presentation of expenses in Q4’ 19 to separately report MSR valuation adjustments, net from operating expenses

Income Statement Notables

In the table titled “Income Statement Notables”, we adjust GAAP pre-tax loss for the following factors (1) Expense Notables, (2) changes in fair value of our Agency and Non-Agency MSRs due to changes in interest rates, valuation inputs and other assumptions, net of hedge positions, (3) offsets to changes in fair value of our MSRs in our NRZ financing liability due to changes in interest rates, valuation inputs and other assumptions, (4) changes in fair value of our reverse originations portfolio due to changes in interest rates, valuation inputs and other assumptions, (5) certain other transactions, including but not limited to pension benefit cost adjustments and gains related to exercising servicer call rights and fair value assumption changes on other investments (collectively, Other) and (6) amortization of NRZ lump-sum cash payments consistent with the intent of providing management and investors with a supplemental means of evaluating our net income/(loss).

($ in millions) Q2’18 Q3’19 Q3’20
OCN PHH OCN + PHH OCN + PHH (Annualized) OCN OCN (Annualized) OCN OCN (Annualized)
I Reported Pre-Tax Income / (Loss)(a) (28 ) (35 ) (63 ) (253 ) (38 ) (153 ) (11 ) (25 )
Adjustment for Notables
Expense Notables (from prior table) 9 7 16 17 19
Non-Agency MSR FV Change(b) (5 ) (5 ) (252 ) (14 )
Agency MSR FV Change, net of macro hedge(b) 63 4
NRZ MSR Liability FV Change (Interest Expense) 9 9 198 10
Reverse FV Change 4 4 (3 ) 4
Debt Repurchase Gain (5 )
Other (6 ) (6 ) 2 1
II Total Income Statement Notables 11 7 18 72 21 83 25
III Adjusted Pre-tax Income (Loss) (I+II) (17 ) (28 ) (45 ) (181 ) (18 ) (70 ) 14 54
IV Amortization of NRZ Lump-sum Cash Payments (35 ) (35 ) (141 ) (42 ) (98 )
V Adjusted Pre-tax Income (Loss) excluding Amortization of NRZ Lump-sum (III+IV)(c) (53 ) (28 ) (81 ) (322 ) (42 ) (168 ) 14 54

(a) Q2’18 pre-tax loss as per respective Forms 10-Q filed on July 26, 2018 and August 3, 2018, respectively, annualized to equal $(253) million on a combined basis

(b) Represents FV changes that are driven by changes in interest rates, valuation inputs or other assumptions, net of unrealized gains / (losses) on macro hedge. Non-Agency = Total MSR excluding GNMA & GSE MSRs. Agency = GNMA & GSE MSRs. The adjustment does not include $12 million valuation gains of certain MSRs that were opportunistically purchased in disorderly transactions due to the market environment in Q2 2020 (nil in Q2 2018).

(c) Represents OCN and PHH combined adjusted pre-tax income (loss) excluding amortization of NRZ lump-sum cash payments, annualized to equal $(322) million on a combined basis in Q2’18

Note Regarding Financial Performance Estimates

This press release contains statements relating to our preliminary third quarter financial performance and our current assessments of the impact of the COVID-19 pandemic. These statements are based on currently available information and reflect our current estimates and assessments, including about matters that are beyond our control. We are operating in a fluid and evolving environment and actual outcomes may differ materially from our current estimates and assessments. The Company has not finished its third quarter financial closing procedures. There can be no assurance that actual results will not differ from our current estimates and assessments, including as a result of third quarter financial closing procedures, and any such differences could be material.

FOR FURTHER INFORMATION CONTACT:


a Including however not limited to CFPB, Florida Attorney General/Florida Office of Financial Regulations and Massachusetts Attorney General litigation related legal expenses, state regulatory action related legal expenses and state regulatory action settlement related escrow GFN costs (collectively, CFPB and state regulatory defense and escrow GFN expenses)

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Business

Justice Department Files Antitrust Lawsuit Against Google

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The Justice Department filed an antitrust lawsuit Tuesday alleging that Google engaged in anticompetitive conduct to preserve monopolies in search and search advertising that form the cornerstones of its vast conglomerate.

The long-anticipated case, filed in a Washington, D.C., federal court, marks the most aggressive U.S. legal challenge to a company’s dominance in the tech sector in more than two decades, with the potential to shake up Silicon Valley and beyond. Once a public darling, Google attracted considerable scrutiny over the past decade as it gained power but has avoided a true showdown with the government until now.

The department alleged that Google, a unit of

Alphabet Inc.,

GOOG -0.14%

is maintaining its status as gatekeeper to the internet through an unlawful web of exclusionary and interlocking business agreements that shut out competitors. The government alleged that Google uses billions of dollars collected from advertisements on its platform to pay mobile-phone manufacturers, carriers and browsers, like

Apple Inc.’s

Safari, to maintain Google as their preset, default search engine.

The upshot is that Google has pole position in search on hundreds of millions of American devices, with little opportunity for any competitor to make inroads, the government alleged.

The lawsuit also took aim at arrangements in which Google’s search application is preloaded, and can’t be deleted, on mobile phones running its popular Android operating system. The government alleged Google unlawfully prohibits competitors’ search applications from being preloaded on phones under revenue-sharing arrangements.

Google owns or controls search distribution channels accounting for about 80% of search queries in the U.S., the lawsuit said. That means Google’s competitors can’t get a meaningful number of search queries and build a scale needed to compete, leaving consumers with less choice and less innovation, and advertisers with less competitive prices, the lawsuit alleged.

“Today’s lawsuit by the Department of Justice is deeply flawed,” a Google spokeswoman said. “People use Google because they choose to—not because they’re forced to or because they can’t find alternatives. We will have a fuller statement this morning.”

The Justice Department is filing an antitrust lawsuit against Google. Here’s how the tech giant ended up in the crosshairs of federal regulators. WSJ’s Jason Bellini reports. Photo: Getty Images

Alphabet’s shares opened Tuesday up roughly 1%, ahead of the broader market, after The Wall Street Journal first reported news of the impending suit.

The Mountain View, Calif., company, sitting on a $120 billion cash hoard, is unlikely to shrink from a legal fight. The company has argued that it faces vigorous competition across its different operations and that its products and platforms help businesses small and large reach new customers.

Google’s defense against critics of all stripes has long been rooted in the fact that its services are largely offered to consumers at little or no cost, undercutting the traditional antitrust argument around potential price harms to those who use a product.

The lawsuit follows a Justice Department investigation that has stretched more than a year, and comes amid a broader examination of the handful of technology companies that play an outsize role in the U.S. economy and the daily lives of most Americans.

A loss for Google could mean court-ordered changes to how it operates parts of its business, potentially creating new openings for rival companies. The Justice Department’s lawsuit didn’t specify particular remedies; that is usually addressed later in a case. One Justice Department official said nothing is off the table, including possibly seeking structural changes to Google’s business.

A victory for Google could deal a huge blow to Washington’s overall scrutiny of big tech companies, potentially hobbling other investigations and enshrining Google’s business model after lawmakers and others challenged its market power. Such an outcome, however, might spur Congress to take legislative action against the company.

The case could take years to resolve, and the responsibility for managing the suit will fall to the appointees of whichever candidate wins the Nov. 3 presidential election.

The challenge marks a new chapter in the history of Google, a company formed in 1998 in a garage in a San Francisco suburb—the same year

Microsoft Corp.

was hit with a blockbuster government antitrust case accusing the software giant of unlawful monopolization. That case, which eventually resulted in a settlement, was the last similar government antitrust case against a major U.S. tech firm.

Google’s billionaire co-founders Sergey Brin, left, and Larry Page, shown in 2008, gave up their management roles but remain in effective control of the company.



Photo:

Paul Sakuma/Associated Press

Google started as a simple search engine with a large and amorphous mission “to organize the world’s information.” But over the past decade or so it has developed into a conglomerate that does far more than that. Its flagship search engine handles more than 90% of global search requests, some billions a day, providing fodder for what has become a vast brokerage of digital advertising. Its YouTube unit is the world’s largest video platform, used by nearly three-quarters of U.S. adults.

Google has been bruised but never visibly hurt by various controversies surrounding privacy and allegedly anticompetitive behavior, and its growth has continued almost entirely unchecked. In 2012, the last time Google faced close antitrust scrutiny in the U.S., the search giant was already one of the largest publicly traded companies in the nation. Since then, its market value has roughly tripled to almost $1 trillion.

The company takes on this legal showdown under a new generation of leadership. Co-founders

Larry Page

and

Sergey Brin

, both billionaires, gave up their management roles last year, handing the reins solely to

Sundar Pichai

, a soft-spoken, India-born engineer who earlier in his career helped present Google’s antitrust complaints about Microsoft to regulators.

The chief executive has in his corner Messrs. Page and Brin, who remain on Alphabet’s board and in effective control of the company thanks to shares that give them, along with former Chief Executive

Eric Schmidt

, disproportionate voting power.

Executives inside Google are quick to portray their divisions as mere startups in areas—like hardware, social networking, cloud computing and health—where other Silicon Valley giants are further ahead. Still, that Google has such breadth at all points to its omnipresence.

European Union regulators have targeted the company with three antitrust complaints and fined it about $9 billion, though the cases haven’t left a big imprint on Google’s businesses there, and critics say the remedies imposed on it have proved underwhelming.

In the U.S., nearly all state attorneys general are separately investigating Google, while three other tech giants—

Facebook Inc.,

Apple and

Amazon.com Inc.

—likewise face close antitrust scrutiny. And in Washington, a bipartisan belief is emerging that the government should do more to police the behavior of top digital platforms that control widely used tools of communication and commerce.

Rep. David Cicilline (D., R.I.) and Sen. Josh Hawley (R., Mo.) voice an interest in pursuing tighter antitrust enforcement in the tech sector at WSJ Tech Live 2020. Photos: Mandel Ngan/AP & Stefani Reynolds/pool/Shutterstock

A group of 11 state attorneys general, all Republicans, joined the Justice Department’s case, officials said. More could join later, according to the court docket. Other states are still considering their own cases related to Google’s search practices, and a large group of states is considering a case challenging Google’s power in the digital advertising market, The Wall Street Journal has reported. In the ad-technology market, Google owns industry-leading tools at every link in the complex chain between online publishers and advertisers.

The Justice Department also continues to investigate Google’s ad-tech practices.

Democrats on a House antitrust subcommittee released a report this month following a 16-month inquiry, saying all four tech giants wield monopoly power and recommending congressional action. The companies’ chief executives testified before the panel in July.

Google CEO Sundar Pichai testified before Congress in July, in hearings where lawmakers pressed tech companies’ leaders on their business practices.



Photo:

Graeme Jennings/Press Pool

Big Tech Under Fire

The Justice Department isn’t alone in scrutinizing tech giants’ market power. These are the other inquiries now under way:

  • Federal Trade Commission: The agency has been examining Facebook’s acquisition strategy, including whether it bought platforms like WhatsApp and Instagram to stifle competition. People following the case believe the FTC is likely to file suit by the end of the year.
  • State attorneys general: A group of state AGs led by Texas is investigating Google’s online advertising business and expected to file a separate antitrust case. Another group of AGs is reviewing Google’s search business. Still another, led by New York, is probing Facebook over antitrust concerns.
  • Congress: After a lengthy investigation, House Democrats found that Amazon holds monopoly powers over its third-party sellers and that Apple exerts monopoly power through its App Store. Those findings and others targeting Facebook and Google could trigger legislation. Senate Republicans are separately moving to limit Section 230 of the Communications Decency Act, which gives online platforms a liability shield, saying the companies censor conservative views.
  • Federal Communications Commission: The agency is reviewing a Trump administration request to reinterpret key parts of Section 230, for the same reasons cited by GOP senators. Tech companies are expected to challenge possible action on free-speech grounds.

“It’s Google’s business model that is the problem,”

Rep. David Cicilline

(D., R.I.), the subcommittee chairman, told Mr. Pichai. “Google evolved from a turnstile to the rest of the web to a walled garden that increasingly keeps users within its sights.”

“We see vigorous competition,” Mr. Pichai responded, pointing to travel search sites and product searches on Amazon’s online marketplace. “We are working hard, focused on the users, to innovate.”

Amid the criticism, Google and other tech giants remain broadly popular and have only gained in might and stature since the start of the coronavirus pandemic, buoying the U.S. economy—and stock market—during a period of deep uncertainty.

At the same time, Google’s growth across a range of business lines over the years has expanded its pool of critics, with companies that compete with the search giant, as well as some Google customers, complaining about its tactics.

Specialized search providers like

Yelp Inc.

and

Tripadvisor Inc.

have long voiced such concerns to U.S. antitrust authorities, and newer upstarts like search-engine provider DuckDuckGo have spent time talking to the Justice Department.

News Corp,

owner of The Wall Street Journal, has complained to antitrust authorities at home and abroad about both Google’s search practices and its dominance in digital advertising.

Some Big Tech detractors have called to break up Google and other dominant companies. Courts have indicated such broad action should be a last resort available only if the government clears high legal hurdles, including by showing that lesser remedies are inadequate.

The outcome could have a considerable impact on the direction of U.S. antitrust law. The Sherman Act that prohibits restraints of trade and attempted monopolization is broadly worded, leaving courts wide latitude to interpret its parameters. Because litigated antitrust cases are rare, any one ruling could affect governing precedent for future cases.

Google’s growth across a range of business lines has expanded its pool of critics. The company exhibited at the CES 2020 electronics show in Las Vegas on Jan. 8.



Photo:

Mario Tama/Getty Images

The tech sector has been a particular challenge for antitrust enforcers and the courts because the industry evolves rapidly and many products and services are offered free to consumers, who in a sense pay with the valuable personal data companies such as Google collect.

The search company famously outmaneuvered the Federal Trade Commission nearly a decade ago.

The FTC, which shares antitrust authority with the Justice Department, spent more than a year investigating Google but decided in early 2013 not to bring a case in response to complaints that the company engaged in “search bias” by favoring its own services and demoting rivals. Competition staff at the agency deemed the matter a close call, but said a case challenging Google’s search practices could be tough to win because of what they described as mixed motives within the company: a desire to both hobble rivals and advance quality products and services for consumers.

The Justice Department’s case doesn’t focus on a search-bias theory.

Google made a handful of voluntary commitments to address other FTC concerns, a resolution that was widely panned by advocates of stronger antitrust enforcement and continues to be cited as a top failure. Google’s supporters say the FTC’s light touch was appropriate and didn’t burden the company as it continued to grow.

The Justice Department’s current antitrust chief, Makan Delrahim, spent months negotiating with the FTC last year for jurisdiction to investigate Google this time around. He later recused himself in the case—Google was briefly a client years before while he was in private practice—as the department’s top brass moved to take charge.

The Justice Department lawsuit comes after internal tensions, with some staffers skeptical of Attorney General

William Barr

’s push to bring a case as quickly as possible, the Journal has reported. The reluctant staffers worried the department hadn’t yet built an airtight case and feared rushing to litigation could lead to a loss in court. They also worried Mr. Barr was driven by an interest in filing a case before the election. Others were more comfortable moving ahead.

Mr. Barr has pushed the department to move forward under the belief that antitrust enforcers have been too slow and hesitant to take action, according to a person familiar with his thinking. He has taken an unusually hands-on role in several areas of the department’s work and repeatedly voiced interest in investigating tech-company dominance.

Attorney General William Barr has pushed to bring an antitrust case quickly against Google, in some cases taking an unusually hands-on role in preparations.



Photo:

matt mcclain/press pool

If the Microsoft case from 20 years ago is any guide, Mr. Barr’s concern with speed could run up against the often slow pace of litigation.

After a circuitous route through the court system, including one initial trial-court ruling that ordered a breakup, Microsoft reached a 2002 settlement with the government and changed some aspects of its commercial behavior but stayed intact. It remained under court supervision and subject to terms of its consent decree with the government until 2011.

Antitrust experts have long debated whether the settlement was tough enough on Microsoft, though most observers believe the agreement opened up space for a new generation of competitors.

 

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Duck Creek Technologies Announces Fourth Quarter and Full Year Fiscal 2020 Financial Results

Mish Boyka

Published

on

  • The fourth Quarter Fiscal 2020 Subscription revenue grew 54% year-over-year
  • SaaS Annual Recurring Revenue (“ARR”) grew 85% year-over-year

BOSTON, Oct. 20, 2020 (GLOBE NEWSWIRE) — Duck Creek Technologies (NASDAQ: DCT), a provider of SaaS-delivered enterprise software to the property & casualty (“P&C”) insurance industry, today announced its financial results for the fourth quarter and fiscal year ended August 31, 2020.

“Duck Creek’s fourth quarter was an excellent finish to an incredible year for the company, highlighted by 54% growth in subscription revenue,” said Michael Jackowski, Duck Creek’s Chief Executive Officer. “During the quarter we signed eight Duck Creek OnDemand wins, with a healthy mix of new and existing customers and a number of multi-product wins. We believe we have established Duck Creek OnDemand, which is approaching $100 million in SaaS ARR, as the SaaS platform of choice for the global P&C insurance industry.”

Jackowski added, “The success of our recent IPO was the latest important milestone for Duck Creek. We are at an exciting time in our history with the global P&C insurance industry at what we believe is the early stages of a generational shift to cloud technologies for their core systems. We believe Duck Creek is well-positioned to partner with the world’s leading carriers on this digital transformation, delivering significant value for our customers and shareholders.”

Fourth Quarter Fiscal Year 2020 Financial Highlights

Revenue

  • Total revenue for the fourth quarter of the fiscal year 2020 was $58.3 million, an increase of 22% from the fourth quarter in the fiscal year 2019. Subscription revenue was $24.6 million, an increase of 54%; services revenue was $23.3 million, an increase of 6%; license revenue was $4.5 million, an increase of 6%; and maintenance revenue was $5.9 million, an increase of 2%.

Profitability

  • GAAP loss from operations was $21.6 million for the fourth quarter of the fiscal year 2020, compared with a GAAP loss from operations of $2.4 million for the comparable period in the fiscal year 2019.
  • Non-GAAP income from operations was $2.2 million for the fourth quarter of the fiscal year 2020, compared with non-GAAP income from operations of $2.9 million for the comparable period in the fiscal year 2019.
  • GAAP net loss was $21.5 million for the fourth quarter of the fiscal year 2020, compared with a GAAP net loss of $2.8 million for the comparable period in the fiscal year 2019.
  • Non-GAAP net income was $2.3 million for the fourth quarter of the fiscal year 2020, compared with non-GAAP net income of $2.5 million for the comparable period in the fiscal year 2019.
  • GAAP net loss per share is not meaningful because it would only represent results for the 17-day period following our IPO. Non-GAAP net income per share was $0.02, based on basic weighted average shares outstanding of 129.3 million.
  • Adjusted EBITDA was $3.0 million for the fourth quarter of fiscal 2020, compared with adjusted EBITDA of $3.6 million for the comparable period in the fiscal year 2019.

Full Year Fiscal 2020 Financial Highlights

Revenue

  • Total revenue for the full-year fiscal 2020 was $211.7 million, an increase of 24% from the fiscal year 2019. Subscription revenue was $84.0 million, an increase of 50%; services revenue was $94.1 million, an increase of 21%; license revenue was $9.9 million, a decrease of 28%; and maintenance revenue was $23.7 million, which remained relatively flat.
  • SaaS annual recurring revenue, or SaaS ARR, was $95.6 million as of August 31, 2020, an increase of 85% from the fiscal year 2019.

Profitability

  • GAAP loss from operations was $28.7 million for the full-year fiscal 2020, compared with a GAAP loss from operations of $14.2 million in the fiscal year 2019.
  • Non-GAAP income from operations was $8.6 million for the full-year fiscal 2020, compared with non-GAAP income from operations of $4.4 million in the fiscal year 2019.
  • GAAP net loss was $29.9 million for the full-year fiscal 2020, compared with a GAAP net loss of $16.9 million in the fiscal year 2019.
  • Non-GAAP net income was $7.3 million for the full-year fiscal 2020, compared with non-GAAP net income of $1.7 million in the fiscal year 2019.
  • GAAP net loss per share is not meaningful because it would only represent results for the 17-day period following our IPO. Non-GAAP net income per share was $0.06, based on basic weighted average shares outstanding of 127.4 million.
  • Adjusted EBITDA was $11.7 million for the full-year fiscal 2020, compared with adjusted EBITDA of $6.8 million in the fiscal year 2019.

Liquidity

  • Duck Creek had $389.9 million in cash and cash equivalents on August 31, 2020. The Company generated $25.7 million in cash from operations and had a free cash flow of $19.0 million in the fiscal year 2020, compared with $14.8 million and $6.6 million, respectively, in the fiscal year 2019.

The information presented above includes non-GAAP financial measures such as “non-GAAP income from operations,” “adjusted EBITDA,” “non-GAAP net income,” “non-GAAP net income per share,” and “free cash flow.” Refer to “Non-GAAP Financial Measures and Other Metrics” for a discussion of these measures and reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure.

Business Outlook

Duck Creek is issuing the following outlook for the first quarter of fiscal 2021 and full year of fiscal 2021 based on current expectations as of October 20, 2020:

First Quarter Fiscal 2021 Full Year Fiscal 2021
Revenue $55.0 million to $56.0 million $244.0 million to $249.0 million
Subscription Revenue $25.5 million to $26.0 million $114.5 million to $116.5 million
Adjusted EBITDA $0.0 million to $1.5 million $3.0 million to $5.0 million
Non-GAAP Net Loss Per Share $(0.01) to $0.00 $(0.04) to $(0.02)

Conference Call Information

Duck Creek Technologies will host a conference call today, October 20, 2020, at 5:00 p.m. (Eastern Time) to discuss the Company’s financial results and business outlook. A live webcast of the call will be available on the “Investor Relations” page of the Company’s website at https://ir.duckcreek.com/. To access the call by phone, dial 1-833-570-1119 (domestic) or 1-914-987-7066 (international). A replay of this conference call will be available for a limited time at 1-855-859-2056 (domestic) or 1-404-537-3406 (international) using conference ID 3139619. A replay of the webcast will also be available for a limited time at https://ir.duckcreek.com/.

About Duck Creek Technologies

Duck Creek Technologies is a leading provider of core system solutions to the P&C and General insurance industry. By accessing Duck Creek OnDemand, the company’s enterprise Software-as-a-Service solution, insurance carriers are able to navigate uncertainty and capture market opportunities faster than their competitors. Duck Creek’s functionally-rich solutions are available on a standalone basis or as a full suite, and all are available via Duck Creek OnDemand.

Forward-Looking Statements

This press release includes certain disclosures which contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements because they contain words such as “expect,” “believe,” “target,” “project,” “goals,” “estimate,” “potential,” “predict,” “may,” “will,” “might,” “could,” “forecast,” “outlook” and variations of these terms or the negative of these terms and similar expressions. Forward-looking statements, including statements regarding Duck Creek’s expected outlook for first-quarter fiscal 2021 and full-year fiscal 2021, are based on Duck Creek’s current expectations and assumptions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that may differ materially from those contemplated by the forward-looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements will be set forth in Duck Creek’s recent Annual Report on Form 10-K that will be filed with the Securities and Exchange Commission and any subsequent public filings. In particular, the following factors, among others, could cause results to differ materially from those expressed or implied by such forward-looking statements: the impact of pandemics, including the on-going COVID-19 pandemic, on U.S. and global economies, Duck Creek’s business and results and financial condition, its employees, demand for its products, sales and implementation cycles, and the health of its customers’ and partners’ businesses; Duck Creek’s history of losses; changes in Duck Creek’s product revenue mix as it continues to focus on sales of its SaaS solutions, which will cause fluctuations in its results of operations and cash flows between periods; Duck Creek’s reliance on orders and renewals from a relatively small number of customers for a substantial portion of its revenue, and the substantial negotiating leverage customers have in renewing and expanding their contracts for Duck Creek’s solutions; the success of Duck Creek’s growth strategy focused on SaaS solutions and its ability to develop or sell its solutions into new markets or further penetrate existing markets; Duck Creek’s ability to manage its expanding operations; intense competition in Duck Creek’s market; third parties may assert Duck Creek is infringing or violating their intellectual property rights; U.S. and global market and economic conditions, particularly adverse in the insurance industry; additional complexity, burdens and volatility in connection with Duck Creek’s international sales and operations; the length and variability of Duck Creek’s sales and implementation cycles; data breaches, unauthorized access to customer data or other disruptions of Duck Creek’s solutions; control of Duck Creek by its controlling shareholders and perceived conflicts of interests; and Duck Creek’s status as a “controlled company” within the meaning of the corporate governance standards of Nasdaq.

Any forward-looking statement in this release speaks only as of the date of this release. Duck Creek undertakes no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as may be required by any applicable laws.

Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance unless expressed as such and should only be viewed as historical data.

Non-GAAP Financial Measures and Other Metrics

This press release contains the following non-GAAP financial measures: non-GAAP gross margin, non-GAAP income from operations, adjusted EBITDA, non-GAAP net income, non-GAAP net income per share,  and free cash flow. Adjusted EBITDA excludes provision for income taxes, other (income)/expense, interest expense, net, depreciation of property and equipment, amortization of intangible assets, share-based compensation expense, and change in fair value of contingent earnout liability. Non-GAAP gross margin excludes share-based compensation expense, amortization of intangible assets, and amortization of capitalized internal-use software. Non-GAAP income from operations excludes share-based compensation expense, amortization of intangible assets, and change in fair value of contingent earnout liability. Free cash flow consists of net cash provided by operating activities less cash used for purchases of property and equipment and capitalized internal-use software.  See below for a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure.

Other metrics include SaaS ARR and SaaS Net Dollar Retention, which are calculated for all SaaS continuing software services. Subscription revenue excluded from the calculations relate to one legacy contract for a service no longer offered separately by the Company. SaaS ARR is calculated by annualizing revenue recorded in the last month of the measurement period. SaaS Net Dollar Retention is a rate calculated by annualizing revenue recorded in the last month of the measurement period for those customers in place throughout the entire measurement period. We divide the result by annualized revenue from the month that is one year prior to the end of the measurement period, for all customers in place at the beginning of the measurement period.

The Company believes that these non-GAAP financial measures and other metrics provide useful information to management and investors regarding certain financial and business trends relating to Duck Creek’s financial condition and results of operations. The Company’s management uses these non-GAAP measures and other metrics to manage our business, make planning decisions, evaluate its performance, and allocate resources. The Company believes that the use of these non-GAAP financial measures and other metrics help investors and analysts in comparing its results across reporting periods on a consistent basis by excluding items that the Company does not believe are indicative of its core operating performance. These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation from or as a substitute for, the GFN of other GAAP financial measures, including net income and cash flows from operating activities.

These non-GAAP financial measures are not universally consistent calculations, limiting their usefulness as comparative measures. Other companies may calculate similarly titled financial measures differently than the Company does or may not calculate them at all. Additionally, these non-GAAP financial measures are not measurements of financial performance or liquidity under GAAP. In order to facilitate a clear understanding of its consolidated historical operating results, readers should examine the Company’s non-GAAP financial measures in conjunction with its historical GAAP financial information.

To the extent that the Company provides guidance on a non-GAAP basis, it does not provide reconciliations of such forward-looking non-GAAP measures to GAAP due to the inherent difficulty in forecasting and quantifying certain amounts that are necessary for such reconciliation, including adjustments that could be made for the changes reflected in the Company’s reconciliation of historic numbers, the amount of which, based on historical experience, could be significant.

Investor Contact:
Brian Denyeau
ICR
646-277-1251
Brian.denyeau@icrinc.com

Media Contact:
Paul Rechichi
Racepoint Global
617 624 3295
prechichi@racepointglobal.com

Sam A. Shay
Duck Creek Technologies
857 201 5784
sam.shay@duckcreek.com

Duck Creek Technologies, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(unaudited, in thousands)
August 31, 2020 August 31, 2019
Assets
Current assets:
Cash and cash equivalents $ 389,878 $ 11,999
Accounts receivable 29,149 25,450
Unbilled revenue 18,121 15,293
Prepaid expenses and other current assets 12,186 5,772
Total current assets 449,334 58,514
Property and equipment, net 18,113 17,058
Operating lease assets 18,171
Goodwill 272,455 272,455
Intangible assets, net 81,687 98,756
Unbilled revenue, net of current portion 3,487 8,045
Other assets 17,853 12,449
Total assets 861,100 467,277
Liabilities and Stockholders’ Equity/Partners’ Capital
Current liabilities:
Accounts payable 1,802 1,362
Accrued liabilities 58,202 31,003
Contingent earnout liability 3,701 4,055
Lease liability 3,611
Deferred revenue 30,397 23,470
Total current liabilities 97,713 59,890
Contingent earnout liability, net of current portion 3,391 6,460
Borrowings under the credit facility 4,000
Deferred rent, net of current portion 5,388
Lease liability, net of current portion 21,739
Deferred revenue, net of current portion 379 692
Other long-term liabilities 4,121 1,781
Total liabilities 127,343 78,210
Total stockholders’ equity/partners’ capital 733,757 389,066
Total liabilities and stockholders’ equity/partners’ capital $ 861,100 $ 467,277
Duck Creek Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited, in thousands)
Three Months Ended August 31 Twelve Months Ended August 31
2020 2019 2020 2019
Revenue:
Subscription $ 24,631 $ 15,977 $ 83,999 $ 55,909
License 4,483 4,237 9,914 13,776
Maintenance and support 5,889 5,798 23,680 23,896
Professional services 23,319 21,908 94,079 77,692
Total revenue 58,322 47,920 211,672 171,273
Cost of revenue (1):
Subscription 10,031 7,211 34,902 24,199
License 506 503 1,853 1,970
Maintenance and support 863 610 3,338 2,781
Professional services 18,243 11,924 57,082 43,228
The total cost of revenue 29,643 20,247 97,175 72,178
Gross margin 28,679 27,672 114,497 99,095
Operating expenses (1):
Research and development 14,628 9,597 44,052 35,936
Sales and marketing 16,766 10,227 50,305 40,189
General and administrative 18,746 9,417 48,662 36,493
Change in fair value of contingent consideration 112 840 133 628
Total operating expenses 50,252 30,081 143,152 113,246
Loss from operations (21,573 ) (2,409 ) (28,655 ) (14,151 )
Other income (expense), net 737 (252 ) 641 (565 )
Interest income (expense), net 30 (19 ) (356 ) (1,030 )
Loss before income taxes (20,806 ) (2,681 ) (28,370 ) (15,746 )
Provision for income taxes 673 143 1,562 1,150
Net loss $ (21,479 ) $ (2,823 ) $ (29,932 ) $ (16,896 )
(1) Amounts include share-based compensation expense as disclosed in the following table:
Three Months Ended August 31 Twelve Months Ended August 31
2020 2019 2020 2019
Share-based compensation expense:
Cost of subscription revenue 405 8 415 20
Cost of license revenue
Cost of maintenance and support revenue 24 2 28 9
Cost of services revenue 4,581 41 4,683 123
Research and development 3,844 132 4,128 397
Sales and marketing 5,326 101 5,581 418
General and administrative 5,524 292 6,273 1,103
Total share-based compensation expense $ 19,704 $ 576 $ 21,108 $ 2,070
As part of the Company’s re-organization in conjunction with the IPO, Limited Partnership interests, including Class D units held by employees, were converted into restricted common stock (the “conversion”). In substitution for part of the economic benefit of the Class D units that was not reflected in the conversion, options were granted to holders of Class D units (“leverage restoration options”). Share-based compensation expense (“SBC”) recorded during the quarter ended August 31, 2020, includes a modification charge of $11.3 million associated with these leverage restoration options. SBC during the quarter also includes a charge of $6.7 million for cash-settled phantom Class D units held by non-U.S. employees.
Duck Creek Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
Three Months Ended August 31 Twelve Months Ended August 31
2020 2019 2020 2019
Operating activities:
Net loss $ (21,479 ) $ (2,823 ) $ (29,932 ) $ (16,896 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation of property and equipment 793 668 3,143 2,398
Amortization of intangible assets 4,765 4,348 17,773 17,594
Impairment of right of use asset 2,792 2,792
Amortization of deferred financing fees 28 (66 ) 134 136
Share-based compensation expense 19,704 576 21,108 2,070
Change in fair value of contingent earnout liability 112 840 133 628
Payment of contingent earnout liability in excess of acquisition-date fair value (2,350 )
Bad debt expense 32 158 97 182
Deferred taxes (544 ) 211 (690 ) 188
Changes in operating assets and liabilities
Accounts receivable 505 1,897 (3,796 ) (6,285 )
Unbilled revenue 2,912 5,065 1,730 4,481
Prepaid expenses and other current assets (6,396 ) (624 ) (6,300 ) 198
Other assets (1,663 ) (1,335 ) (5,764 ) (3,788 )
Accounts payable 123 189 (181 ) (783 )
Accrued liabilities 7,070 7,459 16,393 9,150
Deferred revenue 6,400 (205 ) 6,614 5,972
Deferred rent 779 1,661
Operating leases (67 ) 132
Other long-term liabilities 2,391 (45 ) 2,339 277
Net cash provided by operating activities 17,478 17,092 25,725 14,833
Investing activities:
Acquisition of Outline Systems LLC (9,814 )
Acquisition of CedeRight Products (1,827 ) (1,827 )
Capitalized internal-use software (453 ) (781 ) (2,893 ) (2,956 )
Purchase of property and equipment (690 ) (3,517 ) (3,854 ) (5,314 )
Net cash used in investing activities (1,143 ) (6,125 ) (6,747 ) (19,911 )
Financing activities:
Net cash provided by (used in) financing activities 354,348 (8,802 ) 358,901 3,198
Net increase (decrease) in cash and cash equivalents 370,683 2,165 377,879 (1,880 )
Cash and cash equivalents – the beginning of the period 19,195 9,834 11,999 13,879
Cash and cash equivalents – end of the period $ 389,878 $ 11,999 $ 389,878 $ 11,999
Duck Creek Technologies, Inc. and Subsidiaries
Reconciliation of GAAP to Non-GAAP Financial Measures
(unaudited, in thousands)
Three Months Ended August 31 Twelve Months Ended August 31
2020 2019 2020 2019
Non-GAAP Gross Margin:
GAAP Gross Margin $ 28,679 $ 27,672 $ 114,497 $ 99,095
Share-based compensation expense 5,010 51 5,125 151
Amortization of intangible assets 1,186 1,164 4,746 4,680
Amortization of capitalized internal-use software 497 703
Non-GAAP Gross Margin $ 35,372 $ 28,887 $ 125,071 $ 103,926
Non-GAAP Income from Operations:
GAAP Loss from Operations $ (21,573 ) $ (2,409 ) $ (28,655 ) $ (14,151 )
Share-based compensation expense 19,704 576 21,108 2,070
Amortization of intangible assets 3,994 3,921 15,975 15,884
Change in fair value of contingent earnout liability 112 840 133 628
Non-GAAP Income from Operations $ 2,237 $ 2,927 $ 8,561 $ 4,431
Adjusted EBITDA:
GAAP Net Loss $ (21,479 ) $ (2,823 ) $ (29,932 ) $ (16,896 )
Provision for income taxes 673 143 1,562 1,150
Other (income) expense (737 ) 252 (641 ) 565
Interest expense, net (30 ) 19 356 1,030
Depreciation of property and equipment 793 668 3,143 2,398
Amortization of intangible assets 3,994 3,921 15,975 15,884
Share-based compensation expense 19,704 576 21,108 2,070
Change in fair value of contingent earnout liability 112 840 133 628
Adjusted EBITDA $ 3,030 $ 3,595 $ 11,704 $ 6,829
Non-GAAP Net Income:
GAAP Net Loss $ (21,479 ) $ (2,823 ) $ (29,932 ) $ (16,896 )
Share-based compensation expense 19,704 576 21,108 2,070
Amortization of intangible assets 3,994 3,921 15,975 15,884
Change in fair value of contingent earnout liability 112 840 133 628
Tax effect of adjustments (1)
Non-GAAP Net Income $ 2,331 $ 2,513 $ 7,284 $ 1,686
Non-GAAP Net Income per Share (Basic) (2) $ 0.02 nm $ 0.06 nm
Shares used in computing Non-GAAP Net Income per Share (Basic) (2) 129,264,149 nm 127,367,969 nm
(1) Our tax provision is primarily related to state taxes and income taxes in profitable foreign jurisdictions. We maintain a full valuation allowance against our deferred tax assets in the U.S. Accordingly, there is no tax impact associated with the non-GAAP adjustments in the U.S. We have not included the insignificant tax benefit associated with the non-GAAP adjustments related to our foreign jurisdictions that are taxed on a cost-plus basis. The Company previously computed the tax effect of non-GAAP adjustments by multiplying the adjustments by an estimated effective tax rate of 27%. The Company has revised the August 31, 2019, prior year presentation in the table above in order to conform to the current year method of computing the tax effect of non-GAAP adjustments.
(2) Prior to the IPO, there were no shares of common stock outstanding, and the membership structure of Duck Creek Technologies consisted of limited partnership units. The Company analyzed the calculation of earnings per unit for periods prior to the IPO and determined that it resulted in values that would not be meaningful to the users of the Company’s consolidated financial statements.  In addition, GAAP earnings per share for Q4 2020 and fiscal year 2020 has not been presented as it resulted in values that would not be meaningful to the users of this earnings release because it only reflects the operations of the Company for the 17 day period subsequent to the IPO.  For purposes of this earnings release, the Company has performed a calculation of Non-GAAP earnings per share for Q4 2020 and fiscal year 2020 by using a consistent exchange ratio for all pre-IPO limited partnership units and assuming that common stock sold in the IPO was outstanding for the entire fiscal year.
Free Cash Flow:
Net cash provided by operating activities $ 17,478 $ 17,092 $ 25,725 $ 14,833
Purchases of property and equipment (690 ) (3,517 ) (3,854 ) (5,314 )
Capitalized internal-use software (453 ) (781 ) (2,893 ) (2,956 )
Free Cash Flow $ 16,335 $ 12,794 $ 18,978 $ 6,563

 

 

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