Solera Holdings Inc. F2Q09 (Qtr End 12/31/08) Earnings Call Transcript

Feb. 4.09 | About: Solera Holdings, (SLH)

Solera Holdings Inc. (NYSE:SLH)

F2Q09 Earnings Call

February 04, 2009; 5:00 pm ET

Executives

Tony Aquila - Founder, Chairman and Chief Executive Officer

Jack Pearlstein - Chief Financial Officer

Kamal Hamid - Director of Investor Relations

Analysts

Tony Cristello - BB&T Capital Markets

Gary Prestopino - Barrington Research

Franco Turrinelli - William Blair & Company

Dave Lewis - New York-New York

John Maietta - Needham & Company

Peter Appert - Piper Jaffray

Operator

Good afternoon, everyone and welcome to Solera’s Second Quarter Fiscal Year 2009 Earnings Call. Following today’s remarks, we will hold a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded and will be available for playback. Details for accessing 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, please proceed.

Kamal Hamid

Good afternoon, everyone. Thank you all for joining us on the today’s call and welcome to Solera’s second quarter fiscal year 2009 conference call. Today, 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 December 31, 2008 followed by comments on the factors driving those results. Jack will then comment further on our financial results for the second quarter and finish with an update of the Company’s fiscal year 2009 guidance. We will then open up the call 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 quarterly report on Form 10-Q for the quarter ended September 30, 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 maybe 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 during 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 website 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 Thomson First Call.

All information discussed during this call and 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 now like to introduce Tony Aquila, our Founder, Chairman and CEO.

Tony Aquila

Thank you, Kamal. Good afternoon, everyone and thanks for joining us today. I’m pleased to report yet another strong quarter for the company. Our second quarter revenue of $131.3 million was up approximately 9% on an organic basis after excluding the contribution from Inpart and HPI. This marks the third quarter in a row in which we have exceeded the high-end of our 6% to 8% organic revenue growth guidance range.

This speaks to the strength of our business model. Our geographic diversification and the fact that we sell essential software and services that deliver real savings and high ROI to our customers. This has served as well in weathering the effects of the downturn in the global economy to-date.

In Q2, America’s revenue growth on an organic basis was up approximately 4.8% year-over-year and EMEA revenue growth on an organic basis was up approximately 11.8% year-over-year. Among some of our larger contributors this quarter on an organic basis were France, which was up approximately 11.6%, the U.K., which is up approximately 15.2%, Mexico which was up approximately 26.1% and our Central and Eastern European countries, which were up approximately 41.5%. Jack will provide additional country level performance details in a moment.

Our Q2 adjusted EBITDA of $48.8 million, was up over 300 basis points over the prior year and represents a 37.2% margin. The strengthening dollar over the last several quarters continues to pressure our margins, so we are evaluating the acceleration of a number of waste reduction initiatives that we’ve been scoping for its next phase.

As mentioned at the beginning of the call, our business model continues to drive significant organic growth despite the tough global economic conditions. Although we have seen some impact on the business from the global downturn, to-date, it has not been significant nor wide-spread and therefore we have been able to go through it. We remain confident in our ability to continue to grow the business 6% to 8% on an organic basis.

Our strategy over the past two years of investing in the development of high value essential products and services is really beginning the pay off. In Q2, while we saw some claims volume declines in certain Western European markets. We were able to offset these declines with our ability to generate an increased amount of services delivered in revenue per claim.

In Spain, for example, Q2 claims volumes were down approximately 4.6% year-over-year, but our Q2 revenue per claim was up 13.8% resulting in an overall year-over-year revenue growth of approximately 8.5%. This ability to increase the size of our bundle to sell more of our products and high value services along with each claim enabled us to more than offset the claims volume declines we experienced in some of our markets.

In our evolving markets, we continued to see not only revenue and services delivered for claim increases, but also in increasing claims volume. Looking at a basket of 10 of our evolving markets, including Brazil, Mexico, Poland, Russia and Romania, our aggregate claims volume grew in excess of 50% on a year-over-year basis, while the revenue per claim grew by 6.9%.

In our evolving markets, we believe we will continue to see an increase in the number of claims we processed driven by further claims penetration and technology adoption, insured claims growth and market share gains.

Before I turn the call over to Jack, I’d like make a few comments on our recently completed acquisition of HPI as well as provide you with an update on our acquisition efforts since our November equity offering. The acquisition of HPI was consistent with our strategy of investing in companies that are both aligned with and extend our core automotive claims and data services offerings.

The acquisition will help us meet some of the increased demand from our insurance clients for enhanced decision support information that will help them be more disciplined in their underwriting and claim settlement process. We are excited to have completed this transaction and we are already in discussions with several of our customers regarding how, we can leverage the assets of Solera and HPI to their benefit. Their early signs look good and more to follow.

In our November perspectives, we stated that we were in negotiations with two international acquisition opportunities, each with a purchase price that could exceed $100 million. The first of those was obviously, HPI. We are in ongoing negotiations with the second acquisition opportunity. We remain extremely disciplined in our approach to this transaction. However, we cannot say with certainty at this moment, whether or not we will be able to conclude a deal.

We also continued to actively pursue a number of other smaller yet exciting domestic and international acquisition opportunities, so stay tuned for updates. Jack will now take you through the financials and then I will do a brief wrap-up after we do a Q&A.

Jack Pearlstein

Thank you, Tony. As mentioned at the top of the call, we are pleased to report our second quarter fiscal year 2009 results. Our 2Q revenues of $131.3 million were up approximately 9% year-over-year on an organic basis, which excludes the contribution from HPI and InPart and adjust for the impact of FX.

Excluding the revenues in the quarter from HPI and InPart, currency had a negative impact for the quarter of 10.6%. Revenues on a reported GAAP basis declined approximately 0.6% versus the prior year’s quarter. Q2 organic growth was approximately 11.8% in our EMEA segment and approximately 4.8% in our America segment. Our U.S. and Canadian revenues grew approximately 1.9% on an organic basis over the prior year period up from roughly 1.6% in the first quarter.

As Tony mentioned previously, our CEE revenues were up approximately 41.5% on an organic basis in the quarter over the prior year. Within the CEE, Russia was up approximately 122.8% in Q2 on an organic basis versus the prior year period, while Poland was up approximately 17.6% and the Czech Republic was up approximately 17%. Elsewhere, Brazil was up approximately 28.3% and South Africa was up approximately 11.8%.

On the expense side of the business, we continue to focus on keeping our overall spend in check as well as studying additional ways to eliminate waste. After adjusting for changes in foreign currency exchange rates, Q2 operating expenses decreased 1% year-over-year and systems development and programming expenses decreased 7.3% year-over-year.

SG&A expenses however increased by 9.8% after adjusting for changes in foreign currency exchange rates, due to primarily to increased personnel costs associated with the build-out of our corporate infrastructure and $0.6 million increase in stock compensation expense. Our adjusted EBITDA came in at $48.8 million for the quarter, a margin of 37.2%. This was inline with our expectations and keeps us on track for the full fiscal year.

During the second quarter, we sold our FX option, which netted us $12.4 million in cash as well as a $7.6 million gain recorded in other income expense. This should reduce the volatility in the other income expense line going forward.

Adjusted net income for the second quarter came in at $26.1 million, up nearly 39.6% over the prior year period. Adjusted net income for diluted share was $0.39, roughly $0.05 ahead of consensus. We ended the quarter with approximately $173.3 million in cash and we had total debt outstanding of approximately $594 million. Our consolidated leverage ratio pursuant to the terms of our credit agreement was approximately 2.5 times at quarter-end.

During the quarter, we raised $86 million net of fees in expenses due to public sale of $4.5 million common shares. We used approximately $105.7 million of cash during the quarter to acquire HPI and InPart and we paid down approximately $1.8 million of debt during the quarter as we conserved cash in anticipation of executing on additional acquisition opportunities.

Cash flow from operations was approximately $24 million for the quarter and accounts receivable at quarter-end was approximately $86.1 million, which translates to DSOs of roughly 59 days. CapEx for the quarter was approximately $5.1 million. In today’s earnings release, we issued updated guidance for the remainder of fiscal year ‘09.

For FY09, we estimate revenues of $549 million to $553 million, adjusted EBITDA of $204 million to $207 million, GAAP net income of $52 million to $54 million, adjusted net income of $106 million to $108 million and adjusted net income for diluted share up $1.56 to $1.60.

As stated in the press release earlier today, these figures assume relatively constant currency exchange rates from those prevalent today and no additional acquisitions. After factoring-in the expected impact of currency changes and excluding the expected contributions of HPI and InPart, the mid-point of our new revenue guidance range, implies an organic growth rate for the core business of approximately 7% for the second-half of the fiscal year.

Due to recent strength of the U.S. dollar as well as high volatility in the currency markets, we are approaching the remainder of the year a bit cautiously, even though the general tone and tenor of the underlying business remained solid. Since our last earnings call on November 5, the U.S. dollar has gained considerably versus almost all of the currencies in which we transact our business.

The British Pound averaged approximately 157 to the dollar during Q2 and now sits at approximately 144 an approximate 8.2% decline.

Our guidance related to HPI in December was issued with the British Pound at 150, a little over 4% higher than it is today. Evolving market currencies have also fallen versus the dollar as of late. From Q2 average exchange rates against the dollar, the Polish Zloty has declined approximately 20.2%, the Mexican Peso approximately 11.1%, the Romanian Leu approximately 12.9% and the Russian Ruble approximately 24.3%.

Further strengthening of the dollar will place pressure on our ability to grow the top-line on a U.S. GAAP basis year-over-year. Consistent with our guidance policy, we do not plan to update guidance during the quarter, but only at our regularly scheduled quarterly conference calls. To help those of you track and factor-in the impact of the strengthening or weakening dollar throughout the remainder of the year, we would approximate using the following formula.

For each 1% strengthening of the U.S. dollar versus all the foreign currencies in which we transact business. The negative impact to fiscal year ‘09 revenues will be approximately 0.4% and the negative impact to EBITDA will be approximately 0.2%. For each 1% weakening of the U.S. dollar versus all the foreign currencies in which we transact business, the positive impact of fiscal year ‘09 revenues will be approximately 0.4% and the positive impact to EBITDA will be approximately 0.2%.

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 Tony Cristello - BB&T Capital Markets.

Jack Pearlstein

Tony we are having trouble hearing you?

Tony Cristello - BB&T Capital Markets

Tony, if you could maybe talk a little about what we are seeing now in terms of the macro backdrop in the U.S. versus what the macro backdrop is doing internationally? And I say that because you have seen all state in progressive, a couple of the insurance companies here domestically talk about claims and severity actually this quarter seeming to impact their businesses to a greater extent and which I guess would have a positive benefit for you at some point, and I am just wondering what’s the lag on how that translates to what goes on internationally? And how should we be thinking about that as the recession sort of is ongoing?

Tony Aquila

Yes, I think it’s a good question Tony. The thing you got to think about, you’d actually answer the question in kind of three different categories those in mature markets, those in evolving markets and those in emerging markets. And starting with the maturing markets, I think that, while we see some low couple of percentage point tightening of claims volume in some of these markets. We have been well ahead of that with the fact that the insurance carriers are sensitive to what’s happening to progressive in all state right now. Where we saw in prior downturns, where you get a good quarter of low claims volume and then all the certain claims volume and/or severity starts spiking because, people are very focused on getting the most for the repair bill or negotiating more aggressively occurs, because of optimizing profitability.

So, in the mature markets in Western Europe while we have seen a little bit tightening in a few of the markets and we have plenty of the mature markets as well that have had some expansion in growth, the trick for us has been making sure that we have a healthy queue of services that we’re able to automate next, and give them immediate return on those investments because they’re also cutting claims processing costs. So, they’re cutting LAE costs since well.

So, that gives us an opportunity, as long as we regulate that and balance that we’re in good shape. In the U.S, we’ve got a little bit of a good trend that’s occurred here as of late where we have seen more total loss volume because of the downgrading in car values and we’ve got a queue of some new services we’re trying to get out on the decision support side. So, depending on how we time that, we can buffer our way through that and of course the next quarter, I think will be pretty telling as to whether we see increase severity and/or stabilization of volume.

Tony Cristello - BB&T Capital Markets

When you look at your international segments and when you talk about emerging or evolving, when you go into a potential customer and right now are they weighing the cost to implement or the capital that’s required to implement versus what they need to preserve just from a fundamental standpoint, or when they look at it, is it still that compelling to say, “hey, if my cost go up from a severity or per claim standpoint”, it’s still better for me to save that money on each claim notwithstanding what it costs me to implement the software?

Jack Pearlstein

Well, one of the things that happens in a tightening of markets is that obviously when volumes go down in body shops, they have less volumes, so price gets adjusted a bit and obviously insurance carriers need decision support tools to kind of make sure everybody stays in balance. Now, we’ve developed over the last few years, we’ve concentrate on the lightest footprint technology so that we don’t have a huge implementation.

If you look at the execution we’re getting out of Eastern Europe and Central Europe, there is an example of our ability to light footprint, immediate ROI giving these guys somewhere or anywhere from 4 to 8 to 1 return, pretty much immediately once they pay us. So, a lot of things that are happening in this economy is also helping us and that’s pretty much in the evolving markets.

In the emerging markets, we are seeing a little bit of a slower adoption, but as you guys know in the way we put guidance out there, we do not put a lot of emphasis on our emerging market, so those are hedged very, very well and allows us to kind of execute our 6% to 8% in that range.

Tony Cristello - BB&T Capital Markets

And then one last question Jack, when you look at the guidance. Was this quarter, serving us better than our estimated consensus? Is this internally a better quarter than you had anticipated? And then as we look out, you sort of kept EPS sort of the same and is that a function of one conservatism, and two the currency or is there something else going onto that? You did more, this quarter? It’s more of a heavily weighted quarter and what we would typically see in the next two?

Jack Pearlstein

I mean I think this quarter was obviously a great quarter. I mean, when you peal back the impact of currency, when you peal back the impact of the acquisitions, we grew the business 9% organically and that’s pretty good, it’s around the same level we’ve been growing this business for the last couple of quarters.

I think we are generally a conservative bunch by nature, but I think as we look out and the difference between the currency rates that we experienced in Q2 and the currency rates we see today, unfortunately we had to basically adjust the guidance. I mean there is going to be a pretty big impact from currency and if you look at today’s press release, our expectation is a minus 15% right in Q3 and a minus 17% in Q4 and that’s a big headwind to try and fight against, but the core business we continue to expect to grow in that 6% to 8% range.

Operator

Your next question comes from the line of Gary Prestopino - Barrington Research.

Gary Prestopino - Barrington Research

Jack, just a quick housekeeping question, what are the rates that you’re using for the British Pound and the Euro, relative to the dollar for this quarter?

Jack Pearlstein

You mean in terms of forward-looking?

Gary Prestopino - Barrington Research

No, in terms of what you’re kind of pegging your guidance on?

Jack Pearlstein

Basically guidance is pegged-off of, where we sit today. So, I didn’t check it in the last hour or two, but the Pound was roughly 144 and the Euro was roughly 129.

Gary Prestopino - Barrington Research

I want to add that for housekeeping and then your understanding what’s going on in the evolving and emerging markets where you are having good adoption of your processes, your software whatever, but still you cited some numbers here, France, U.K. up in the teens, some decent growth in the U.S. in what is a very sluggish market, besides the estimating product, I mean could you really give us some idea what products and services you are selling to increase your bundle and thus increase your revenue proclaim in each of these markets?

Jack Pearlstein

Yes it’s a multitude of different things, some of it has to do with a lot of decision support items, we can help them make better decisions so, intelligent triage, dispatch those kind of capabilities so, they can utilize more get more efficiency at a less assets that their managing claims and make less errors. We are also seeing more just on management information, we are also seeing more on communication, automation of steps as well as in the part side obviously with the InPart acquisition their ability to manage the parts costs and then of course along the lines of not making mistakes with the parts costs.

We have been launching a special WIN application throughout Europe that has been above our expectation in adoption, because it eliminates errors and a whole bunch of steps in the process. So, there is just a whole bunch of things that we have been doing, that we have been working on and these things had been sized market-by-market. We run a decentralized product portfolio system, so these things are very well correlated to what’s ready for adoption in that market.

Gary Prestopino - Barrington Research

So, you mentioned that some of these emerging companies your claims were up 50%, is that correct, can I write that number down?

Jack Pearlstein

Yes, those are penetration rates. So, what happens is in some of these Eastern Countries we’re saving them hundreds of dollars per claim and they are like “gees, we have got to roll this out as soon as possible”. So, that we are seeing these guys step on the gas and that’s what happens in a downturn market because these guys are under pressure from an LAE perspective.

In addition to that Gary, we’re also aggressively going after the salvage disposition, total loss arena, as the softening of counter prices have hit it has caused, more use of our application in determining a total loss or valuing a car. So, those things have also increased and I think our team has done a really good job of kind of keeping a close eye on what’s going on at the micro and macro levels.

Operator

Your next question comes from the line of Franco Turrinelli - William Blair & Company.

Franco Turrinelli - William Blair & Company

Tony, I suppose you sort of answered this already, but obviously the last few quarters, you have been comfortably above that target range of 6 to 8 and I’m just wondering what you feel needs to happen or what you’ve allowed for to happen in using 7% as for mid point of your outlook? I mean obviously that would be a bit of a slowdown from what we’re currently seeing and I am just to trying to understand what you’ve allowed for in your guidance?

Tony Aquila

I think in the first category I’ve putted in Franco is that it’s consistent with the way we kind of run a disciplined approach to outlook. Secondly, we live in more turbulent time, so you kind of want to tighten those led nuts up a couple extra turns just in case. And then lastly, it’s an execution issue, making sure we’re getting adoption of these high value essential software services, we’re pumping out there and getting those things into the market and staying focused on that execution, which we very much are focused on.

Franco Turrinelli - William Blair & Company

Hey, that’s helpful. Tony, I’m assuming that the U.S. customer that we previously discussed is also factored into that guidance?

Tony Aquila

Absolutely, as well as walking into this room, we just got verbal approval from one of our top five customers that we’ve been wanting to renew in the North American market. We’ve got that renewal verbal and we’re happy to say with no erosion in price and in fact we think, there is a little upside. So, I think after offering high value services and focusing in our math, when you have something that saves the clients a lot of money, there is an opportunity out there today [multiple speakers]

Franco Turrinelli - William Blair & Company

Jack, I certainly can get to the incremental impact from Forex, but I guess I can’t quite get to the absolute impact. Is there any additional disclosure that you can give us without getting too granular regarding the percentage of revenue what we should think of is coming from your no major functional currencies, I thought you would sigh at my question.

Jack Pearlstein

You know it’s tough there I mean, I would say you probably are going to be looking it and these are neighborhood, right. So, neighborhood 50% of revenues coming in the form of euros and probably in terms of British Pound, you’re probably neighborhood right, talking in that we’ll call it 15% to 16% or 17% range and then I think it’s dropped so, fairly significantly premiere, but if you go back to the conference call text, you’ll see there is a Zloty, you’ll see the Mexican Peso. I think you can piece it together, how big some of these countries are and hopefully get to where you need to be without me giving you a list of countries.

Franco Turrinelli - William Blair & Company

Tony, any update on finding a replacement for Jack because he doesn’t answer any of our questions on the call?

Tony Aquila

Well, we’re entering the final selection process. We feel like we got a good queue of competitive candidates that meet our spec for the next evolution year for the company and more to follow.

Operator

Your next question comes from the line Dave Lewis - New York-New York.

Dave Lewis - New York-New York

Quick question for you on the weight reduction that you talked about, could you give us an indication on what the goal would be for the year and what some of those plans you’re thinking about? Thanks.

Tony Aquila

Yes, well we’ve got items being executed across our DDC, our data development centers. We’re obviously reloading and re-leveling our development of data queues, based on the manufacturing queues of the car manufacturer. So, we’re taking an opportunity to kind of use that to our advantage. It’s going to yield us some savings and we’re also playing the labor arbitrage pretty effectively and the team has been working on in this for a while, where we’re shifting some jobs into Mexico and other markets and those arbitrages are starting to flow through nicely.

In addition to that, we’ve got in some of the higher cost markets, as we’ve regionalized the business linguistically, we’ve been able to kind of level out some of the job activities as well as consolidate some of the IT infrastructure and the HPI acquisition gave us two buildings. One of them meets the criteria for us to put a data center in it, which will allow us to really get a lot of leverage out off of that asset. So, there is a whole bunch of things, each region has a few at least kind of 30-30 projects underway and the size of those, right now we’re probably pacing at around currency adjusted, probably we got a queue of about $4.5 million or so.

Dave Lewis - New York-New York

Okay, thanks and then Jack, could you give us a little more detail on potential one-time components to revenue that’s clearly it’s very strong, but I would just think for the slight impact from the mix that we’ve see in the past and any other items that might move the needle, basis points that’s are somewhat material.

Jack Pearlstein

I would say the only one-time impacts, operationally to speak of our, the HPI and InPart acquisitions and in the quarter together they were about $1.2 million of contribution from a revenue standpoint, so pretty mine.

Dave Lewis - New York-New York

Terrific guys and then last one for me is just CCC and Mitchell have you seen any impact from that the decision there on your business one way or the other?

Tony Aquila

The markets kind of freeze when there is pending decision like that. I think we’re pretty excited that we got an early renewal of top contract in the state, but I would say that the market is running very tight right now and that once the final decision whatever that maybe it starts to flow. I think the opportunity is kind of open up and I think there is opportunities on both sides of that equation, but obviously it’s tough for us to predict the timing of that.

Operator

Your next question comes from the line of Vincent Lin - Goldman Sachs.

Vincent Lin - Goldman Sachs

I just wanted to double check the verbal approval that you just mentioned, double checking that was actually including in your guidance?

Tony Aquila

It is

Vincent Lin - Goldman Sachs

Okay and then just secondly. I’m wondering if you can talk about more on pricing both here in America’s and also in Europe, I understand that you have been, generating pretty impressive revenue per claim results, but in terms of like or like pricing and pricing from funded renewals that you have been seeing, if you can provide some more details and that will be great.

Tony Aquila

Yes, well the detail I’d provide you on that is, is that we concentrated on and we actually, we launched a couple years ago a very comprehensive strategy market-by-market about delivering high value services and powering the bundle, our shift to a full comprehensive our claims services offering and based on that we measure that the growth per claim rather than the one-to-one because we don’t price it that way when you’re going in there with the bundle, the customer kind of gets a few options to work with and obviously those bundles are more powerful and I would just go back to the numbers that I cited to you which is we are seeing significant and meaningful growth in that area.

Vincent Lin - Goldman Sachs

That’s helpful and then just wondering in the context of current macro backdrop, just wanted to if you can comment a little bit in terms of whether you are seeing any differentiations on your sort of the subscription-based business versus the transaction based business?

Tony Aquila

You know what we’re holding very well. I think a couple of years ago, we did a very good job, my complements to our team and kind of being ahead of some of this stuff, we really analyzed kind of where we should be subscription-based versus transaction-based and we continue to monitor that, and I think that the disciplines we put in place that coupled with the bundles had given us a little bit insulation that has deflected some of this macro conditions.

Vincent Lin - Goldman Sachs

Okay and then just lastly, on your EBITDA margin trajectory. It looks like based on your guidance EBITDA margin on adjusted basis for the second half is going to be flat to down versus that the 2Q levels. So, I just wondering whether that was, primary currency related conservatism or is there any other thing? And then related to that maybe you can comment on whether you are still comfortable with your intermediate margin target and annual margin expansion?

Tony Aquila

Yes, I think if you recollect, we put out there the stride for 37.5. We’re obviously very focused on that. We are a bit of ahead schedule to what we had talked about with that. We are very sensitive to the needs of our customers right now and the difficulties they are going through and so we’ll continue to kind of take our consistent methodical march to executing our 37.5. Again, we gave guidance on let’s say a conservative basis taking into effect that we’ve got a little more volatility in the market these days.

Jack Pearlstein

And long-term Vincent, no change, right. I mean I think we’ve historically talked about sort of 100 bips a year of margin expansion and I don’t think anything we see today would change that outlook.

Tony Aquila

Yes, I mean that’s a very good point and that, its just we’re executing our plan.

Operator

Your next question comes from the line of John Maietta - Needham & Company.

John Maietta - Needham & Company

I was just wondering, when you saw in those bundles, does that changed who in the customer organization that you are selling, would it potentially go higher as more of a strategic sale?

Tony Aquila

We are focusing in on moving up particularly now with the HPI acquisition. We’re able to now bring the front office and back office negotiations together with carriers. We already have some of our large clients in discussions. We’re at a higher level with those discussions and so as far as we power up the bundle you bet we swim upstream.

John Maietta - Needham & Company

Okay and then as you are looking at potential acquisition candidates, have you started to see private company valuation, expectations come inline a little bit or they kind of stayed where they have been for the past six months?

Tony Aquila

John, if you’ve been around a lot of our earning calls, you know that people asked us a lot of questions, in the earlier time we were public about acquisitions, at that time they were too frothy. We obviously feel good about valuations now. We are bit of a value buyer as well as portfolio buyer. So, those were our disciplines what we like, what we see and we’re hoping to see, even more improvement as time goes on.

John Maietta - Needham & Company

Got it, okay and then Jack with regard to the free cash in the second half of the year, how should we think about that? Is this quarter or good run rate, I haven’t actually done the math on it, but how should we think about?

Jack Pearlstein

This quarter is probably a little bit on the low side from a run rate prospective.

Operator

Your next question comes from Peter Appert - Piper Jaffray.

Peter Appert - Piper Jaffray

Tony, the decline in developmental program expenses year-to-year is pretty substantial in the quarter. How does that book with some of the things you talked about in terms of efforts to accelerate product development, etc?

Jack Pearlstein

Well, cost doesn’t have anything to do with productivity in the way we run the shop. We’re very focused on eliminating DIFX and if you would talk to our boys around the world, they will tell you that. We constantly monitor DIFX, we get to the route caused as DIFX and we terminate them quick and we’ve also decentralized a lot of our operations in developing very market-centric applications and that’s with that natural hedge and the U.S dollar strengthening, obviously helps us because we get a better leverage, out of the arbitrates on those things. So, I think some of the moves we made were smart moves, as well as the team is executing very well because we’re measuring the DIFX rate and a success rate.

Peter Appert - Piper Jaffray

Jack, do you think that the sort of $14 million issues that run rate for that line item?

Jack Pearlstein

Yes, I mean obviously, depending upon where currency goes that could be enthusiastic.

Peter Appert - Piper Jaffray

Okay and Jack what else is in the other non-operating expense line and which of that look like going forward?

Jack Pearlstein

I mean the other income expense line as I mentioned on the call, as we call it $7.5 million for round number purposes, from the sale of the FX option in there. The way we transferred money to actually execute the purpose of HPI, netted us in another couple of million dollar gains. So, we’re hopeful that most of noise is out of that line on go-forward basis. So, I would expect it to be pretty small going forward. I would not expect to see 10 plus million there, for quite sometime unless we would do something quite different with the business.

Peter Appert - Piper Jaffray

So, maybe a couple of million a quarter?

Jack Pearlstein

Yes, I would say on the high-end.

Peter Appert - Piper Jaffray

Lastly, Tony you sort of touched on this a bunch times in course of the call, but is it possible to think about in aggregate? How you think of the business going forward in terms of the mix between unit growth and revenue per claim and pricing if those are the three primary drivers of top-line growth?

Tony Aquila

So, Peter, you’ve been around us for a long time. So, you know that we’ve been very big about concentrating on breaking our model into three elements of the market emerging, evolving and maturing, and therefore as you move from emerging, you move away from estimate centric. Once you get into evolving, you’re really claim centric and by making that very focused execution on our side, it just opens up a whole bunch of stuff for us to automate because we broaden our application out and that is where that revenue per claim starts to grow, because we’re getting these, it’s essential software we’re dropping into these clients and they go hey, you just saved me X number of dollars on the way I effectively write in our claims. Now, have you helped me to handle the claim and that’s where that claim-centric thing goes and that’s where we’re very focused on and your point about dropping costs and in the way we did the model and we’re also ripping a lot of step off from the regions and giving it other regions, and we are getting a lot a lot of throughput. So, our outlook is, we got a pretty good pipeline to penetrate in both estimate and claim-centric executions.

Operator

Your next question comes from Gary Prestopino - Barrington Research.

Gary Prestopino - Barrington Research

Is the absolute level of shares outstanding that you’re using in the back half of this year?

Jack Pearlstein

I think you’re going to see a number somewhere in that 69 million, 70 million share range.

Gary Prestopino - Barrington Research

Well, are you now still in pilot in Turkey and Australia and also contemplating Italy for pilot in 2010?

Tony Aquila

Garry, that’s a good question to follow-up on. Yes, so we are seeing in the emerging markets, we’re anticipating let’s say. That they make take us longer to adopt in, we are happy to say in Australia, we’ve got the application localized, we got a working right and we’re in discussions with a couple of serious clients about the rollout of that. We haven’t pegged the timing of that nor we have we put that into our projections.

In Italy, we maintain in discussion with the three market leaders in how we can bring a market solution and then there is a handful of other countries, that’s one of the things that we’re also very focused on is kind of planting seeds in the right places, of the world that are ready so, but we’re trying to get our grips on what timing looks like, but we’re not reflecting that stuff in guidance.

Gary Prestopino - Barrington Research

All right and then, now you may have mentioned this before, but in your experience as you’ve been in the business quite a while and we’re repeating [ph] Mitchell. I mean, when you do go into a recessionary environment like this, there is a natural step-up in the uses of your product and services by insurance companies?

Jack Pearlstein

You and I had I think this debate a long time ago when we first met as my view is that the markets they go through a little bit below and then they kind of roar back as you’re kind of seeing with some of the all state and progressive and others around the world, where, if volumes goes down, severity goes up then so on so. I think that there is some good trend, but you know what, be honestly Gary I haven’t been through one as volatile as this I’ve been through a couple, but we’re battle down the hatches and we’re really selling value.

Gary Prestopino - Barrington Research

Okay, and then if you could and you may not be able answer this, I mean, as far as the market share or amount of electronic claims processing that’s been adopted in, these evolving and emerging markets. I think for instance you said a one-time only 60% of the Central and Eastern Europe is using electronic and maybe some 25% Latin America and South America. Do those number still stand, I mean I’d assume, we’re still looking at a significant runway for grow the year through the adoption of your products and services in these markets?

Jack Pearlstein

Yes, that’s correct. You’ve got those two numbers reverse though, I bet you were you are cited. So, it’s the other way around in penetration, so Eastern Europe is just at the tip of the sword. Central Europe is just kind of at the tip of the sword in penetration and in certain parts of Central and Latin American, of the electronic claims, we were around 60ish percent penetrated.

So, we got some runway there plus we’re just shifting those guides from estimate-centric to claim-centric. So, we’re getting those guides, they’re studying a lot of things we’ve done in other countries in trying to bring those things home, so, yes we think we got a runway and that’s why we take a conservative 6 to 8 for EU.

Tony Aquila

Thanks Gary and I think that will be our last question now, and I’ll just wrap-up here. Our worldwide business showed continued strength and momentum despite tough global economic conditions. We believe that the high ROI, we are able to deliver to our insurance customers will allow us to continue our top line organic growth trajectory in the 6% to 8% range.

With this organic growth augmented by strategic acquisitions, we hope to continue to drive increased value to our customers and our stockholders. And lastly, I want to give a very special thanks to everyone of our nearly 1,900 associates for a job outstandingly well done. Your hard work and dedication have resulted in our continued success in these difficult times. Thanks again for joining us on the call and we look forward to speaking with you again in next quarter. Thank you very much.

Operator

A replay will be available until midnight on February 18, 2009. To access the replay, dial 888-286-8010 or from outside the U.S. 617-801-6888 and enter the following access code when prompt 87460477. Thank you for your participation on today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

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