IHS, Inc. F4Q08 (Qtr End 11/30/2008) Earnings Call Transcript

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IHS Inc. (IHS) F4Q08 Earnings Call January 8, 2009 5:00 PM ET


Andy Schulz – Senior Director, Investor Relations

Jerre L. Stead - Chairman of the Board & Chief Executive Officer

Michael J. Sullivan - Chief Financial Officer & Executive Vice President

Jeff Tarr – President and Chief Operating Officer


John Neff -William Blair & Company, L.L.C.

Anurag Rana – Keybanc Capital Markets


Welcome to the quarter 4 IHS Inc. earnings conference call. My name is Wayne and I will be your operator for today. At this time all participants are in listen only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Andy Schulz, Senior Director of Investor Relations.

Andy Schulz

Thank you for joining us for the IHS fourth quarter and full year 2008 earnings conference call. If you do not have the news release we issued today you will find a copy on our website at www.IHS.com.

Some of our comments and discussions on the quarter are based on non-GAAP measures. Our non-GAAP or adjusted numbers exclude stock-based compensation and other non-cash charges, net pension income, restructuring charges, gains and losses on sales of assets and other items. Our earnings release includes both our GAAP based income statement and statement of cash flows and reconciliations to the non-GAAP measures discussed during this call

These reconciliation schedules can also be found on our website. The non-GAAP results are a supplement to the GAAP financial statements. IHS believes this non-GAAP presentation and the elimination of these items is useful in order to focus on what we deem to be a more reliable indicator of ongoing operating performance. As a reminder this conference call is being recorded and webcast and is the copyright and property of IHS.

Any rebroadcasts of this information in whole or in part without the prior written consent of IHS are prohibited. The agenda for today’s call is as follows, Jerre Stead, our Chairman & CEO will provide an overview of the year and update you on our strategies including current developments regarding our integration of Global Insight; Mike Sullivan, our Executive Vice President and CFO will review the fourth quarter and full year financial results and provide an update to our outlook for fiscal 2009.

After formal comments we’ll then open the call for Q&A at which time we will be joined by Jeff Tarr, President and COO of IHS. Please keep in mind that this conference call especially the discussion of our outlook, may contain statements about expected future events that are forward-looking and subject to risks and uncertainties. Factors that could cause actual results to differ and vary materially from expectations can be found in IHS’s filings with the SEC and on the IHS website.

With that it is my pleasure to turn the call over to Jerre Stead, IHS chairman and CEO.

Jerre L. Stead

Good afternoon and happy new year to all of our investors and colleagues. Our world has certainly seen an extraordinary several months making me feel very fortunate to be here today to review the fourth quarter and full year performance of IHS, a company which has continued to deliver strong results and to create and capitalize on ever increasing opportunities for profitable growth.

On December 1st IHS kicked off its 50th anniversary year. We are building upon a strong and storied history and are very excited about the prospect of the next 50 years. We have a lot to share with you today. I’ll begin by touching briefly on our outstanding fourth quarter results, talk about what we’re doing to drive continued success in our business, followed by an update on our strategies and the progress of integration of IHS Global Insight.

First our financial results, revenue for the fourth quarter was $231 million up 17% over last year. Adjusted EBITDA increased 26% and 200 basis points to a record $64 million. Adjusted earnings per diluted share were $0.58 an increase of 23% over last year and we generated $45 million of free cash flow during the recently completed quarter. Mike will discuss our financial results in more detail.

I want to recognize the great results delivered by my IHS colleagues especially in light of the current economic climate. I thank each of you for your continued diligence in delighting customers and delivering superior performance to IHS share owners. These are very challenging times for businesses everywhere. However it is precisely in this environment that many positive features of our business model really shine. You’ve heard us discuss them before.

These attributes include critical information and insight offerings which are fundamental to the core processes of our customers, a leading position in attracted markets, an environment where no single competitor can match the depth and breadth of our offerings, a nearly 75% subscription based revenue model delivering recurring revenue and generating high levels of cash flow, a diversified and global customer base, a scalable business model with significant remaining operating leverage, clear focused strategies driving continued profitable growth and an outstanding experienced management team.

These corporate characteristics put IHS in the unique position to perform well despite the current market. Case in point we are now five weeks into our 2009 fiscal year and we continue to see solid renewals of our subscription based products. Before I move away from our key corporate characteristics this is a good time for me to once again dispel a misperception about IHS which is that there is a strong correlation between the price of oil and the performance of IHS.

Let me remind you of a few facts. First our energy domain offerings are approximately 50% of our revenue in total. Those offerings not only include oil but also natural gas, alternative fuels, coal and nuclear. Our energy clients operate using their long term investment horizons. The cycle of leasing, permitting, drilling, refining, transporting and marketing commodities can take several decades.

Short term volatility is a part of everyday life in the energy industry. We provide must have products and services and our energy offerings are essential to the core work flows of our customers. Finally in many cases we offer critical information and insight that customers cannot get any place else.

Before we move on to our corporate goals I want to provide you with a factual data point. Over our past fiscal quarter the price of a barrel of oil has fallen over 50%. During that same period the rate of growth for organic subscription revenue in our energy domain was over 13%.

At IHS our vision is to be the source for critical information and insight, specifically our primary strategy is to continue to improve our global leadership position for information and insight across four targeted information domains, energy, product life cycle, security and environment. Our strategies are directly linked to four corporate objectives.

These goals include committed annual targets for customer delight, colleague success, profitable top and bottom line growth and share owner success is measured by margin improvement relative to our peer group. Let me briefly discuss our performance against these corporate goals.

Our first objective is to put customers first in everything we do. We set targets for improving customer delight each year. We use an outside firm to measure our results through an annual customer survey. This year’s customers first survey was completed during the fourth quarter and once again we got excellent actionable feedback from our clients.

We also reaffirmed the significance of our offerings to our customers. First 83% of our surveyed customers stated that IHS provides information that improves their business results. Second 83% of our surveyed customers stated that IHS is an important supplier to their industry. Finally 82% of our surveyed customers reported that they are likely to continue using IHS products and services.

These are powerful statements made by our customers regarding the criticality of our offerings. You may remember that our 2008 goal was to improve upon our 2007 customer delight score by at least 10%. I’m proud to announce that we did in fact improve by over 10% year-over-year. Looking ahead our goal for 2009 is to improve at least 10% again with a longer term goal of being world class in 2010.

I look forward to sharing our further progress with you in another year but I am confident that we will achieve our customer first goals in part because we provide an incentive to every single IHS colleague. I believe I am correct when I say that we are one of the only companies today that rewards all of its colleagues with restricted shares if we meet or exceed our customer delight goal.

In 2008 as an example every one of our colleagues around the world received at least 50 restricted shares of IHS stock as a result of achieving our customer delight goal. Our second corporate objective is to create a best in class work environment that supports profitable growth. I firmly believe that customer delight is created as a direct result of having an engaged workforce and a great colleague organization and as with customer delight we partner with an outside firm to help us measure our colleague engagement.

We all know that response rates are often low in broad surveys. I’m pleased to report that IHS had a 92% response rate to this year’s colleague survey. We’ve created an environment where every colleague knows that we respect and encourage open, candid and caring conversation. We want opinions and input to be voiced. I believe that we have achieved such a high response rate because of this culture.

I’m pleased to announce that we’ve made terrific progress over last year and that our colleague engagement score improved about 10% over 2007 results. I’m particular proud of this accomplishment in light of the many changes, data accumulation, regional reporting structures as examples that we made within our organization during 2008. According to our research partner this is one of the highest year-over-year improvements they’ve seen in any company they measure.

This comparison is against a data base of several million active employees from companies around the world. Similar to 2008 we have chosen two focus areas for 2009. They are teamwork and involvement and service quality with change management remaining a key area of focus for IHS leaders.

Further progress on teamwork and involvement will help us to better optimize our new regional product services organization structure, identify and execute on opportunities at the intersection of our domains and yield improvements in our acquisition integration efforts. Progress in the service quality area is critical to our efforts to improve customer delight, top and bottom line, brand equity and company reputation.

Our third corporate objective is to drive profitable top and bottom line growth by achieving a leading position across our targeted information domains. From an organic growth standpoint our subscription based businesses which represent approximately 75% of total revenue continue to grow in low double digits. In addition acquisitions play a key role in our growth strategies as they are integral to strengthening the offerings in our domains.

In this very interesting time in which we live we’ll continue to rigidly adhere to the same principles that have served us so well to date. We will continue to be a disciplined and patient acquirer and with our liquidity and strong balance sheet we have two competitive advantages we will use appropriately. I’ve had many questions from investors about this so let me make a couple of comments on the current M&A environment as we see it.

First we’re seeing certain targets particularly some of the smaller potential acquisitions that we’ve been tracking for a year or two starting to have balance sheet issues but in most cases the expectations for sales valuations has not adjusted proportionately. Frankly we’ll continue to push those out until realism settles in.

Likewise there are larger potential acquisitions that are either divisions of large organization, are owned by private institutions where reality has not set in either. So we’ll wait and either reality will set in or it won’t but we will continue to be disciplined. History has proven us to be a very patient acquirer.

As an example we have looked at both Global Insight and Jane’s for several years before we acquired them. We will wait for the right time to make the acquisitions when these companies fit our criteria. IHS Global Insight is a great example. It is the recognized leader in providing the most comprehensive global macro economic information, analysis and advisory services to businesses and governments around the world.

IHS Global Insight was a critical one for us truly transformational because it touches and overlaps all four of our information domains. The reason it fits so well for us is that it now puts us at the clear center of the most critical business decisions that our customers make. With IHS Global Insight we now have 325 macro economists that provide hourly, daily, weekly and monthly updates for over 200 countries and for over 170 vertical markets.

We collect data that’s proprietary in most cases and provide it into economic modeling and forecasting. As an example right now we are the only partner of the Chinese government for their economic data. We believe that we’ll end up with about a third of that data available to us on a proprietary basis. That’s an example of how no other company in the world has the data we do to turn into critical information and insight.

We are now able to provide demand forecasting to industries on a global basis and we are able to help companies make global supply chain decisions and finally we are now able to link macro economic information to the industry markets where we provide great depth for all of our customers. During 2009 we’ll report out adjusted EBITDA margins with and without Global Insight so that you can see how we’re tracking.

At this point I am very pleased with the progress. Upon closing the transaction we immediately began to work to achieve our targets. We are making a careful review of all of the products that were offered and driving toward getting much more productivity out of the organization. As an example the IHS insight businesses have run about $275,000 of revenue per head. Global Insight was running about $175,000, so there is an obvious opportunity.

We will exit businesses that do not fit strategically particularly the one off consulting projects. We will also exit markets previously served by Global Insight that don’t fit well with our domain strategy. Moving back to our overall company goals our fourth objective is to improve margins and quality through operational transformation as we continue to leverage our scalable business model.

As we have stated previously our mid-term goal is to improve our adjusted EBITDA margins up to the 30% range. We are making steady and significant progress towards that goal as evidenced by our fourth quarter 2008 margin of 27.8% up 200 basis points compared to last year’s fourth quarter and if we exclude Global Insight our fourth quarter margin was 29.6%. We have many opportunities for our operational improvement.

An example is the recent success we’ve had with the consolidation of all business units and acquisitions into a single physical office location in Singapore. Our colleagues from IHS Global Insight are relocating to this IHS office upon expiration of their lease during the next year. We still have many separate role wide locations and there are many, many opportunities for further rationalization of our physical space and collaboration of our colleagues.

We also have interesting opportunities with increased cross selling, product improvement and development and partnerships. You may have noticed that we issued a release earlier today announcing a distribution agreement between Lloyd’s Register-Fairplay and ORBCOMM.

By combining the detailed coastal information from LRF with the satellite data from ORBCOMM we will provide the timeliness and coverage of ship positional data that is unrivaled by any other organization. One significant prospect for this data is the creation of insight products on world trade particularly for bulk commodities and hydrocarbons. I’m very excited about the potential of this partnership.

Finally we’ve identified six key operational priorities to guide us in 2009 and which include the strengthening of our leadership capability and bench, optimization of our sales organization and tools, realization of the full potential of Global Insight, development of new products and common platforms, continued improvement of data quality and design processes to improve quality and cost through programs like Vanguard our quote to cash project.

We expect to see ongoing operational efficiency and cost savings in the future as a result of these areas of focus. In summary it was another strong quarter for us an exclamation point on what was an outstanding year. As we enter 2009 our company’s 50th year we are as excited today as we’ve been at any point in our company’s history about the many opportunities that lay before us.

Now it’s my pleasure to turn the call over to Michael.

Michael J. Sullivan

I’ll provide an overview of our fourth quarter and full year 2008 results including some additional revenue details. I’ll also provide an update to our 2009 annual guidance. Regarding the financial results for the quarter let’s start with revenue, top line growth was 17% driven by 8% organic growth and 14% growth from acquisitions.

Foreign currency movements held down revenue by 5% in the quarter and based on the current rates we expect for for ex to continue to pressure the company’s rate of revenue growth in 2009. More on that later. Revenue growth was broad based in nature with growth in all three regions and across both our critical information and insight offerings. Americas revenue grew 21%, AMEA revenue grew 8% and APAC increased 23%.

Organic revenue growth was 8% overall with Americas growing 8%, AMEA growing 5% and APAC growing 15%. In terms of revenue performance by offering type critical information grew 10% and represented 69% of total revenue and insight grew 36% and accounted for 31% of total revenue.

For the fourth quarter of 2008 revenue by domain was as follows, energy was 50% of total revenue and grew 10%, product life cycle was 33% and increased 6%, security was 8% down 3% since last year but up 12% after eliminating FX and environment was 3% of overall revenue with nearly all of its increase being acquisitive. You’ll note that 6% of our total revenue is not allocated to the four domains.

Let me start by explaining the way that we divide our revenue amongst our four domains is through a mapping of each of our products to a particular domain. However certain of the capabilities and the associated revenues brought to us by Global Insight support all four of our domains and therefore we have not forced an allocation into a specific domain for this revenue.

For example IHS Global Insight’s country and market forecasting capabilities provide insights which are valued and used by customers at all of our domains. This remaining 6% of revenue represents our offerings at the immediate intersection of all four domains. Beginning this quarter in order to enhance transparency into revenue growth we will begin providing visibility into revenue levels and revenue growth by transaction type as well.

Specifically we will categorize revenue into one of four transaction types, subscription based, transactional, consulting and other. As you know our subscriptions based revenue accounts for about 75% of our revenue. In fact in Q4 it was 74%. During the quarter our subscription based revenue grew 12% organically very consistent with the steady low double digit growth rates it has posted for the last couple of years.

Our transactional revenue consists of revenue streams like our product life cycle single document business where some customers purchase single documents versus taking annual subscriptions. Similarly it also includes one time data sales in the energy domain and we also sell a modest amount of other hard copy documents especially in our IHS Jane’s business.

In addition to viewing many of these customers as potential subscription based customers there is a recurring element to many of these relationships despite the fact that they are buying on a one off basis. During Q4 our transaction business accounted for 8% of overall revenue and it was down 6% organically compared with last year. This organic revenue decline was only about $1 million and importantly because of the nature of the transactions involved the growth rate of our transaction business is more volatile than our other revenue streams.

Moving now to our consulting business, it continues to be soft yet profitable. It accounted for 8% of our fourth quarter revenue and was down 24% organically compared to last year. A slight uptick in the percentage of total revenue represented by our consulting business is reflective of the addition of Global Insight. If you look at just the legacy IHS business and exclude IHS Global Insight consulting represented 6% of total revenue for Q4.

As Jerre mentioned earlier we will be exiting certain businesses that do not fit strategically. Therefore you will likely see this percentage tip back down again in the next quarter or two. Consistent with last quarter we were able to manage the profit flow through stemming from this softness as evidenced by the fact that we delivered solid margin expansion in both the third and fourth quarters of 2008 despite the softness in this area.

Notwithstanding our success in delivering margin improvement we remain very focused on improving our execution in consulting. In addition to certain personnel changes that we’ve made management is deeply engaged in reassessing the role and scope of this part of our business which is primarily rooted in the upstream oil and gas industry.

To be clear we remain committed to our consulting business and we have seen modest improvements in our pipeline at IHS CERA and continue to focus on larger individual consulting opportunities. Lastly as we get into the back half of 2009 we also will have the benefit of more favorable year-over-year comparisons. Finally the remaining product offerings are grouped into the other category.

This category includes events and conferences like CERA week coming up in February, certain energy and environment non-subscription based software products, certain implementation services related to our environment and parts businesses and advertising. Other revenue accounted for 10% of total Q4 revenue and it grew organically 17% during the quarter with several small product offerings posting increases.

Looking at the rest of the P&L gross margins improved 70 basis points year-over-year to 57.1%. SG&A as a percent of and exclusive of stock-based compensation expense was roughly equivalent to last year at 31%. Adjusted EBITDA totaled $64.0 million up 26% versus a year ago. Adjusted EBITDA margin improved by 200 basis points to 27.8% from 25.8%. excluding IHS Global Insight our margin was 29.6% for the legacy IHS business.

Adjusted EPS increased 23% to $0.58 per diluted share in the fourth quarter up from $0.47 last year. Turning to cash flow we generated free cash flow of $45.4 million in Q4 down from $48.3 million the prior year. Fourth quarter free cash flow was suppressed by $5 million of restructuring cash outflows. Importantly full year 2008 free cash flow was $175.4 million compared to $129.8 million a year ago. This represents a conversion rate of 78% of adjusted EBITDA.

Keep in mind our conversion rate was suppressed by the fact that we funded about $11 million related to our third quarter restructuring which held free cash flow down. After taking that into account our free cash flow conversion was almost 83%. Perhaps most importantly to really highlight the correlation of profit and free cash flow we added $57.7 million of adjusted EBITDA during 2008 and added $45.5 million of free cash flow during that time.

When you exclude the restructuring outflow the incremental profit and free cash flow was almost 1 to 1. Regarding segment profitability Americas adjusted EBITDA increased 20% to $53.0 million in the fourth quarter compared to $44.3 million in the prior year period. AMEA’s adjusted EBITDA was $20 million in the fourth quarter 2008 up 42% from last year’s $14.1 million and benefited from the inclusion of the Lloyd’s Register-Fairplay profit and IHS Jane’s improvement.

APAC’s adjusted EBITDA was $6.2 million in the current quarter up 44% versus last year’s fourth quarter. The reported tax rate for the fourth quarter of 2008 was 28.7% significantly better than last years 31.0%. This lower tax rate reflects the benefit from the recent implementation of an intercompany debt structure between two wholly owned subsidiaries discussed previously in the third quarter.

Stock-based compensation expense decreased by $1.4 million versus a year ago due primarily to the reversal of previously recognized expense associated with certain stock forfeitures. Adjusted net income for the fourth quarter of 2008 totaled $36.3 million up 24% from $29.4 million in the prior year. Adjusted EPS increased 23% to $0.58 per diluted share versus $0.47 per diluted share in the fourth quarter of 2007.

Please note that our earnings release provides the per share figures for a number of items that we exclude in measuring operating performance on the schedule attached to the release. This schedule will show you the detailed reconciliation of reported EPS to adjusted EPS. Now let me touch on year-to-date results just briefly. Reported revenue for 2008 was $844 million up 23% versus a year ago.

Our organic revenue growth was 8% overall when adjusting for a certain engineering standard released once every three years. It was 7% unadjusted. Adjusted EBITDA for 2008 was $225 million up 34% versus the prior year and the resulting adjusted EBITDA margin increased 240 basis points to 26.7% from 24.3% last year. Let’s move on to a few balance sheet highlights.

We ended the year with cash of $31 million and $96 million of debt which primarily stems from the borrowing we made to partially fund the Global Insight purchase in October. Deferred revenue at the end of the year was about $288 million which represents a year over change of $49 million or 20%. The organic growth rate inherent in this increase was 17%.

This rate of growth was unusually high due to the accelerated timing of certain renewals. Normalized for that impact the organic growth rate was approximately 14%. Please note that this measure can be choppy from quarter to quarter but still demonstrates the organic strength in our subscription business. Regarding our share repurchase program during the fourth quarter of 2008 we repurchased approximately 528,000 shares of common stock for $25 million or $47.36 per share.

During fiscal 2008 we repurchased approximately 1.2 million shares of stock for $65.5 million or $54.64 per share. additionally as employee equity awards vest and related tax withholdings come due IHS withholds enough shares in treasury to cover the tax liability and makes a payment to the tax authority out of corporate cash. During fiscal 2008 IHS withheld approximately 317,000 shares or about $19 million of treasury stock under this program.

Now let’s get into 2009 guidance. Our guidance is on an all in basis and assumes constant FX rates and the effective acquisitions completed to date. In keeping with our commitment to update you on FX movements we did want to point out that the movement in FX since December 1 will adversely impact revenue by a further 1% or so.

Having said that we’re going to maintain our all in top line guidance provided in early December and we continue to expect all in 2009 revenue growth of 16% to 18% from a 2008 base of $844 million. Do recall however that while our revenue line is subject to foreign currency movements specifically a weaker dollar benefits our revenue and a stronger dollar adversely affects our revenue our profit line is much more insulated to currency movements.

We expect all in 2009 adjusted EBITDA growth of 21% to 24% from a 2008 base of $225 million. We expect net interest expense to be approximately $1 million to $2 million. We expect depreciation and amortization to be $50 million to $55 million in 2009. Our 2009 stock-based compensation expense is expected to be in the range of $55 million to $60 million.

Our projected stock-based compensation expense has been reduced based on the current projected stock price ranges expected on future grant dates in comparison to those previously expected. We expect our 2009 GAAP tax rate to be approximately 29% to 30% and we expect fully diluted shares to be about 64.2 million in 2009. Again the 2009 outlook assumes no further currency movements, restructurings, unanticipated events or additional acquisitions.

In summary we are pleased that our underlying subscription based business continues to see double digit organic growth as well as steady margin improvement. I think the sequential quarterly increase in our top line organic growth rate was a particularly positive highlight of the quarter and with that let me turn the call back over to Jerre.

Jerre L. Stead

In closing we had a strong quarter which was a fitting cap to an excellent fiscal 2008 for IHS. We see much opportunity in the future and are very excited about what’s ahead for our company. Thank you for your time today. Mike, Jeff and I are now ready to open up the call for Q&A.

Andy Schulz

Wayne, we’re ready for the Q&A please.

Question-And-Answer Session


(Operator Instructions) Questions will be answered in the order received. We’ll allow a few moments. Our first question comes from John Neff -William Blair & Company, L.L.C.

John Neff -William Blair & Company, L.L.C.

A couple questions here for you, first I guess I was wondering, Jerre, if you could provide us with a wallet share update, something you’ve talked about in the past, in terms of where you think the current penetration among say the top 1,000 customers is? Dovetailing with that if you could give us an update on the progress of global account teams?

Jerre L. Stead

Two or three things and I’ll answer part of it and them I’m going to ask Jeff to answer part of it. I’m glad you asked because every place we go we get that question from investors. Just for a quick background for those that aren’t familiar, what John’s asking about is our review of potential selling wallet size in our 1,000 largest customers.

As a refresher, our 100 largest customers provide approximately 35% of our revenue and our 1,000 largest customers 75% to 76%. If we were to think about what we could sell into each of those customers, not by saying we would sell all of our products and services, but indeed selling what we believe is specific to each customer, that’s how we create wallet size.

Our belief is, and just for information, each month now at our leadership team meeting, we have one of the GAMs or Global Account Managers, come in and update us on their account progress. On average, we would expect to see about 25% of our total currently being sold into the 1,000 largest customers. That range is from as small as 3% or 4% of potential to as high as 50%, but on average, 25%. Jeff, pick up if you would on the progress with the GAMs.

Jeff Tarr

In fact they are related questions because the global account management program is one of our most powerful levers for driving that penetration and increasing our share of wallet. We’ve made a lot of progress and our global account management program has really moved from an initiative to a way of doing business and it’s become deeply embedded in the fabric of our company.

During the most recent year the program did drive organic growth and in general our global accounts did grow at a faster rate than the company overall. A number of key successes I’m particularly proud in the fourth quarter of progress with our environmental domain, that’s our youngest domain. It is growing very rapidly and we’re seeing a significant and rapid penetration within our global accounts of our environmental offerings.

That’s something we’re very excited about. Going forward, a couple of things we’re doing. Number one is bringing more focus on cross selling and we’re doing that with objectives, measures and rewards which strongly motivate our global account teams to sell in the full portfolio of IHS offerings. Secondly, we’re adding global accounts and we’re doing that particularly to an increasing extent outside of the energy vertical.

That’s also an exciting opportunity for us. More to come. I say we’re still early days but we are seeing results and expect more going forward.

Jerre L. Stead

Thanks, Jeff, because I think we all agree that that is so critical to our future and 100% support what Jeff said. I believe 2009 is the first year we’ll see real significant progress from that and much more in 2010.

John Neff -William Blair & Company, L.L.C.

One other question if I could, or maybe a couple, if you could just give us a sense of what’s been happening from a renewal standpoint? Clearly, it looks like everything is going well and the deferred revenue growth, if I heard that right, organic deferred revenue growth 17% and 14% normalized would suggest that this is happening but, how much renewal activity takes place in the quarter you just reported? And, what has the renewal rate been maybe for the fourth quarter and for the year if you could disclose that and how have those renewals trends varied across different domains and end markets?

Michael J. Sullivan

Let me just pick up a summary of that John. As I mentioned when I was covering our fourth quarter results I did mention that during the first five weeks of our current fiscal year we continue to see very good progress with our renewal rates. We’re very pleased with those. The company in total has a higher percent of our renewal periods in the fourth and first quarter than in the second and third quarter. So, we are very pleased with the progress in the fourth quarter, certainly pleased with the progress in the first quarter.

I would tell you that we’re highly pleased with the renewal rates, they are very, very high. When you think of our 1,000 largest customers, the renewal rates are ones that the world would love to have. Your question is a good one John, we do not split those out by domain because of our 1,000 largest customers its unusual today that when we’re going through renewals there isn’t at least two of the four domains, if not more, included.

John Neff -William Blair & Company, L.L.C.

Maybe one more and I can get back in the queue but Jerre you had mentioned in talking about Global Insight the proprietary data that is being gathered by that company. I wondered if you could just give us some more color around that?

Jerre L. Stead

Let me just pick up on a couple of pieces of that. I gave you an example of our announcement that we’re today the only company that has a relationship with China and we expect about a third of that to be proprietary. That’s true with most countries throughout the world and is proprietary of current information as well as proprietary on a historical basis where we’re the only ones that can provide that.

Jeff Tarr

John, as with all of our domains what we deliver to our customers is information and insight. What we do is take raw data and we transform that in to critical information and insight and that’s no different within IHS Global Insight. That work is done by over 300 economist and we have a huge database of time series data across the world. That data is of high quality, it’s accurate, it’s consistent, it delivers great value to our customers. If you look at it from that lens of information and insight, I’d say it’s all proprietary.

Michael J. Sullivan

I would just add one more comment, as we continue to partner inside of Global Insight more and more, I mentioned today 170 vertical industry markets that we are doing daily, weekly, monthly and quarterly forecasts. While over 90% of that is information on a historical basis that we build our models on.


Our next question comes from Anurag Rana – Keybanc Capital Markets.

Anurag Rana – Keybanc Capital Markets

Mike, gross margin for the first time I’m looking at around 57%, we haven’t come across that number, I was looking through my model, I don’t think at any quarter is saw that high of a number. Should we believe that this amount of gross margins can continue next year as well?

Michael J. Sullivan

Anurag I wouldn’t necessarily project a static rate for Q4 in to next year. I think appreciate first and foremost that Q4 has been our most profitable quarter. Not by a large amount but certainly a quarter that this year held 28% full year EBITDA last year held about 30% so while we’re lessening reliance on Q4, it still is a profitable quarter. Part of that is because there is still some business there that finds itself in to Q4 and not other places and that business is gross margin enhancing.

So, similar to the fact that the profit, the EBITDA margin are higher in Q4, that will follow up in to gross margins as well. Now, having said that we’ve continued to see good progress and good margin improvement on the gross profit line in part fueled by the success of the data accumulation efforts and the continuation of those movements. So, I would think about gross profit and how it looks quarter-by-quarter next year more in that context.

Anurag Rana – Keybanc Capital Markets

Jerre, just as we look in to ’09 and your comments recently at a conference about having single high digit organic growth rate for ’09, how should we break this down in terms of price increases and new products?

Jerre L. Stead

I’ll give you my take on that Anurag. We have said for some period of time that about 40% of organic growth was pricing, about 40% increased wallet size share and about 20% new areas from a global or new product standpoint. I think I’ve also said consistently over time that we would expect to see a shift where we were making more progress on the gaining share in our wallet size and more progress in new customers, new products and new geographic regions where we might see a tempering over time with pricing.

If I were thinking about it and if you heard what Jeff said a couple of minutes ago with [inaudible], we’re very positive about seeing increased wallet size, increased share of wallet size. So, I think you can think about a shift of perhaps 5% to 10% out of price as a percent of total organic growth in to wallet share size increase. If anything, you could probably also think about new products and new customers complimenting at least 20% growth of the total organic growth for some period of time because what’s happened to us and we’re so pleased with that, we’re now at about 400 – we now do business with about 400 out of the global 500 largest companies in the world.

So, when we’ve added people like Global Insight as an addition, that’s opened up an entirely new entrée. As you can guess, we’ll move in there very quickly in adding our global account teams like Jeff talked about a few moments ago. So, I think we’ll see that part pick up in the future. Jeff, anything you want to add to that or Mike?

Jeff Tarr

Only that related to that through the more than 20 acquisitions that we’ve done over the last several years we’ve brought approximately 200 products that are new to many of our customers in to the portfolio. We are driving those very aggressively using our global account management program and objectives, measures, rewards in to our customer base. Just to give you an example, everyone who reports to me has one of their short list of bonusable targets, a direct tie to revenue growth from acquired products. So, we expect that to deliver results and then that’s also aligned obviously with front line sales compensation programs.

Jerre L. Stead

Let me add to that, thanks Jeff you just reminded me of an important part, it was our CFO’s idea that we put in place and got board approval on. We actually have a kicker for our incentive program in 2009 for our top 250 to 300 executives of organic growth exceeding certain targets. If we exceed those as a percent of total growth we’re going to feel very good about it. That’s a first for us but that will help you understand how important organic growth focus is for us.

Anurag Rana – Keybanc Capital Markets

Just one last one, Mike I think I heard you said that there were about 180 basis points drag in the fourth quarter because of Global Insight. Did I hear that correct.

Michael J. Sullivan

That’s right Anurag.

Anurag Rana – Keybanc Capital Markets

So if I look at your guidance for next year – now, should this drag continue for the next three quarters as well?

Michael J. Sullivan

I’m glad you’re asking about it. Let me make a couple of comments, first to reiterate we did see 200 basis points of all in EBITDA margin improvement and we’ve mentioned that it would have been 380 without Global Insight so there’s the 180 you’re referencing. Just to point out a couple of things, I’m not trying to apologize for good margin improvement but to be clear, about 60 basis points comes from the inclusion of the Lloyds registered fair play equity method investment.

We’ve commented on this each of the last three quarters now and that will continue on for one more quarter. It will help juice the margin a bit. Secondly, strangely enough, foreign currency. While foreign currency is suppressing revenue and suppressing profit, as we had said it suppresses revenue more so than profit and that has the odd result of actually bringing our margin up a little bit.

So, we would attribute about 20% of margin improvement or something in that range to the foreign currency market that we’re driving through at the moment. All that is a long way of saying on a normalized lens I think we’re still looking at a good 200 to 250 basis points of year-over-year margin improvement in the company stemming from the eight points of organic growth.

Jerre L. Stead

Let me just add Mike because your question was on Global Insight too that if you remember when we announced the acquisition it was high single digit margin as a percent of revenue. We committed to leaving 2009 with a significant increase in to the high 18% 19% EBITDA as a percent of revenue in 2009. As I said in my talk, we will be reporting those Mike we’ll cover each quarter for you so that you see our margin improvement with and without.

The last quick comment on that because it’s a good question, we’re very, very optimistic about our ability to meet that target that we set for 2009 with Global Insight.


At this time we have no additional questions. I will hand the call back over to Andy Schulz for closing remarks.

Andy Schulz

We thank each of you very much for your interest in IHS. This call can be accessed via replay at 888-286-8010 or international dial in 617-801-6888, pass code 63568583 beginning in about two hours and running through January 15th. In addition, the webcast will be archived for one year on our website at www.IHS.com. As always, you can contact ISH investor relations with any follow up questions. We can be reached at 303-397-2969. Thank you and we appreciate your time and interest.


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