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Solera Holdings, Inc. (NYSE:SLH)

F1Q09 (Qtr End 09/30/08) Earnings Call Transcript

November 5, 2008, 5:00 pm ET

Executives

Kamal Hamid – Director, IR

Tony Aquila – Founder, Chairman and CEO

Jack Pearlstein – CFO

Analysts

Dave Lewis – JP Morgan

Pat Burton – Citigroup

Operator

Good afternoon, everyone, and welcome to Solera's first quarter fiscal year 2009 earnings call. Following today's remarks we will hold the question-and-answer session. As a reminder, this call is being recorded and will be available for playback. Details for accepting the replay will be made available at the end of the call. At this time I would like to turn the call over to Kamal Hamid, Director of Investor Relations at Solera. Kamal?

Kamal Hamid

Good afternoon, everyone. Thank you all for joining us on the call today and welcome to Solera's First Quarter Fiscal Year 2009 Conference Call. On the call with me are Tony Aquila, our Founder, Chairman and CEO, and Jack Pearlstein, our Chief Financial Officer.

Tony will begin today's call with a summary of our financial results for the quarter ended September 30, 2008 followed by comments on the facts describing those results. Jack will then comment further on our financial results for the first quarter and finish with an update of the company's fiscal year 2009 guidance. We will then open the call up for questions and end with concluding summary remarks from Tony.

Before we begin I'd like to remind everyone that our remarks during this conference call will contain forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are neither promises nor guarantees but involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements including, without limitation, those risks detailed in Solera's filings with the SEC including our most recent annual report on Form 10-K for the year ended June 30th, 2008.

We disclaim any obligation to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

We also plan to discuss certain non-GAAP financial measures on this call. A reconciliation of these financial measures to GAAP financial measures is included in today's press release which is available on the investor relations section of our company's Web site at solerainc.com. When we refer to consensus during this call we mean the consensus results of certain analysts that cover the company as reported on Thompson First Call. All information discussed during this webcast is protected by United States Copyright Law and may not be reproduced, distributed, transmitted, displayed, published or broadcast without the prior written permission of Solera Holdings, Inc.

I would like to now introduce Tony Aquila, our Founder, Chairman and CEO.

Tony Aquila

Thank you, Kamal. Good afternoon, everyone and thanks for joining us today. I'll start by giving you the financial highlights for the quarter and before turning the call over to Jack I will give you some color on some of the trends driving the continued performance.

I am pleased to report another strong quarter to begin our fiscal year '09. Our first quarter revenue of $143 million was up by almost $20 million and 15.1% over the prior year period. Our organic growth rate for the quarter came in at 9.2%, up approximately 30 basis points from our fourth quarter of fiscal year '08.

The primary drivers of the top line momentum include continued performance in Germany and the Netherlands coupled with better than 20% organic growth in our Latin American region and better than 30% organic growth in our CE region. This strong organic revenue growth, the natural leverage in our business model and our ongoing waste reduction efforts contributed to our Q1 adjusted EBITDA of $54.5 million, up 31.6% over the prior year period and a 38.1% margin.

Over the last several months we have fielded numerous questions from investors on how the global economic slowdown has and is likely to impact us. This has always been a difficult question for us to answer because there is no single metric that you can put your finger on.

The power of our portfolio is derived from the fact that we operate in over 50 countries, each of which is unique. In each of our markets we can grow through a combination of claims penetration and technology adoption, selling new products and services, winning market share, and finally, growth in the underlying insured claims. We are waiting of each of these drivers carries by market.

To give you an example, in our 13 mature markets selling new products and services are our key growth drivers. In our 28 evolving and 10 emerging markets the key drivers are claims penetration and technology adoption. Insured claims growth and market share gains essentially the movement from paper to electronic processing of insurance claims. This migration from paper to electronic currently more than offsets the impact of decreases in miles driven, slower new car sales and other macro economic factors.

In Q1 '09, we experienced a drop in claims volume in several of our mature markets. However, the majority of our mature markets experienced claims volume increases. In virtually, every one of our evolving and emerging markets we experienced claims volume increases in Q1.

To better understand our ability to grow despite lower claims volume let me give you a couple of examples. In the UK we saw Q1 organic growth of approximately 7.6% despite only a 0.4% increase in the number of claims processed. Why? We are able to grow at a solid rate because automated more manual processes for customers than we are able to generate approximately 7.5% more revenue per claim in Q1 than we did in Q1 '08.

In France, we saw Q1 organic growth of approximately 15.6% despite a 3.9% decrease in the number of claims processed. Why? Again? By automating more services along with each claim and offering a bigger bundle we were able to generate approximately 21% more revenue per claim in Q1 '09 than we did in Q1 '08.

In Brazil, we saw Q1 organic growth of approximately 22.2%, the result of a 14.9% increase in the number of claims processed. Here is an example of just pure adoption. And a 6% increase in the amount of revenue generated per claim in Q1 '09 than in Q1 '08 which was again the result of expanding our bundle.

In the Czech Republic, we saw Q1 organic growth of approximately 12.8%. The result of a 7.8% increase in the number of claims processed and an approximate 5% increase in the amount of revenue generated per claim in Q1 '09 than in Q1 '08, also the result of our expanding offering.

So what do these four markets tell us? Although claims volumes decelerated or were down slightly in some of our mature markets we still manage to grow nicely in Q1 because we increased our revenue per claim by selling high value additional products and services and in our evolving and emerging markets we turned in double-digit growth despite the current economic slowdown largely because insurance companies are adopting our technology, moving existing claims from paper to electronic in part because of a net expanding car park.

Net of puts and takes and consistent with our prior statement we believe that we can continue to grow the business in the 6% to 8% range organically for the foreseeable future.

Jack will now take you through the financials and then I will do a brief wrap up before we do some Q&A. Jack?

Jack Pearlstein

Thank you, Tony. As mentioned at the top of the call we are pleased to report on our first quarter fiscal year 2009 results. Our revenues of $143 million were up 15.1% over the prior year period. Our first quarter organic growth was approximately 9.2%. Our Americas revenues grew by 5.9% to $52.7 million while our AMEA revenues grew by 21.3% to $90.3 million.

In addition to the growth that Tony mentioned in our CEE and Latin American markets growth was also robust in some of our larger more mature markets. Revenue in the Netherlands was up approximately 16% while Germany was up approximately 13%. Spain had another strong quarter with 12% revenue growth and in the aggregate our brick [ph] countries grew by nearly 30% and are now approaching the $20 million annual run rate.

During the first quarter, our total cost of revenues declined by $1.8 million sequentially and declined as a percentage of revenue to 34.6% from 35.3%.

Our Selling, general and administrative costs were down $3.8 million sequentially and also declined as a percentage of revenue to 27.1% from 29.3%. The drop in our SG&A costs during the quarter were primarily related to very low SOX compliance costs in Q1 and a delay in a number of planned headcount additions. We expect SG&A costs to pick up significantly through each of the last three quarters of fiscal year '09 as it did in fiscal year '08.

Adjusted net income for the quarter came in at $28.2 million, up nearly 67.5% over the prior year period and adjusted net income per diluted share was $0.43, $0.10 ahead of consensus.

We ended the quarter with approximately $160 million in cash and we had total debt outstanding of $594.3 million, down $36.6 million from June 30 of '08. A million and half of this reduction was due to debt paid down and the balance was attributable to the strengthening of the dollar versus the euro. We ended the quarter with a total leverage ratio of 2.7 times as defined by our credit agreement.

Cash flow from operations was approximately $34 million for the quarter and accounts receivable at quarter-end was approximately $92 million which translates to DSOs of roughly 58 days. CapEx for the quarter were approximately $6 million which included principal payments for CapEx being financed of approximately $0.3 million.

Due to the continued volatility in the currency exchange markets we updated our guidance for fiscal year '09 in this afternoon's press release. Going forward, we plan to update guidance once a quarter during our quarterly conference calls we have done in the past and not during the quarter as exchange rates fluctuate.

Since October 21st the U.S. dollar strengthened by an average of 3.5% against our three largest currencies. The euro, the British pound and the Swiss Franc.

To help those of you track and factor the impact of the strengthening or weakening dollar throughout the remainder of the year we would use the following formula to help approximate. For each 1% strengthening of the U.S. dollar versus all the foreign currencies in which we transact business the negative impact of fiscal year '09 total revenues will be approximately 50 basis points. And the negative impact of EBITDA will be approximately 60 basis points.

For each 1% weakening of the U.S. dollar versus all the foreign currencies in which we transact business, the positive impact of revenues will be approximately 50 basis points and the positive impact of EBITDA will be approximately 60 basis points.

That concludes our prepared remarks. We will now take your questions and then Tony will provide a brief wrap up. Operator, please open the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Dave Lewis with JP Morgan. Please proceed.

Dave Lewis – JP Morgan

Hi, guys.

Tony Aquila

Hi.

Dave Lewis – JP Morgan

Tony, I was wondering if you just give us an update on the transition of the CFO role, Jack leaving, where that stands and if you think that would perhaps slow down some of the initiatives that you guys have so successfully done in the past, past year and a half to two years?

Tony Aquila

Well, first of all, just to tell you about the process, the process is well underway. We have a couple internal candidates and we have pretty good line up of external candidates coming together, so the process is on schedule. And we are happy with the results we are seeing. With respect to the operational tempo, that Jack and I have achieved over the years, I would tell you that there will be no interruptions as that we have been spent a lot of time these last few years building a very good team underneath us. And the momentum in a lot of the credit of the waste reductions – I mean we just kind of guide our guys, at the end of the day they do a lot of the execution. We got a good pipeline of things underway and we will continue to demonstrate that in the forward quarters.

Dave Lewis – JP Morgan

Got you. Thank you. My last question is just CCC Mitchell, I am not sure if you guys can speak to that at all. But I just wanted to see if there is anything at all to comment on?

Tony Aquila

Yes, I really don't have a lot to comment on there. Obviously, they are dealing with the government, trying to – just looking at the time frame we have obviously got some issues they are dealing with the government on and I really don't have a lot to comment on. What we are concentrating on at the business is just concentrating on our positioning. As you know, during these times, the markets don't do much and we are just operationalizing our business in the U.S. and preparing ourselves for various things that would happen whether it's a pro or con ruling.

Dave Lewis – JP Morgan

Thanks, guys.

Tony Aquila

Thank you.

Operator

And your next question comes from the line of Pat Burton with Citigroup. Please proceed.

Pat Burton – Citigroup

Hi, thank you. My question relates to I guess since we asked when gas was up to $4 we are asking now that gas has come back down. Any changes you have seen in driving patterns and/or accidents with ever changing price of fuel?

Tony Aquila

For the most part our business is pretty steady. As you can see from kind of the whipsawing that's been going on over the last six months to eight months in kind of the miles driven, I would assume that there probably be a little bit of positiveness as people take back to the roads, but I think we are pretty steady in the way claims volume happens.

Pat Burton – Citigroup

Okay. And similarly, in terms of the drop in new car sales, would that have any impact? I don't think it would, but I guess I should ask.

Tony Aquila

I think we've kind of proven – we said the thesis that really new car sales really builds a pipeline for us, many years down, because policies have to mature before claims happen. So we don't see that much of an issue. In fact, we actually see a growing possibility here with cars being kept on the road a bit longer; they are going to get repaired more frequently because you have less accident deterrent technologies in those cars. We think that there are some advantages for us as well. But we just haven't felt much from all these declining car sales and if there was impact it would probably be some years out.

Pat Burton – Citigroup

Thank you.

Operator

Gentlemen, at this time, we have no additional questions. I would now like to turn the conference back over to Tony for closing remarks.

Tony Aquila

We started fiscal 2009 on a strong footing. Certain factors such as foreign currency exchange rates weather and the slowdown in economic activity are beyond our control obviously. However, by continuing to focus and execute, we believe we are well-positioned to continue to deliver solid fundamental performance. By so doing we hope to continue to drive increasing value to our stockholders.

And lastly, and especially, I want to thank each and every one of our 1,900 associates around the world for a job well done. Your hard work and dedication have resulted in our continued success especially in these times. Thanks again for joining us on the call and we look forward to speaking with you throughout the quarter and at next quarter. Thank you very much.

Operator

A replay of this call can be accessed until midnight on November 19th 2008 by calling 866-356-3093 or if you are dialing from outside the U.S. 617-597-5381 and entering the following access code 506249418.

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Source: Solera Holdings, Inc. F1Q09 (Qtr End 09/30/08) Earnings Call Transcript
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