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Executives

Haug Scharnowski - Director of Investor Relations

James P. Dolan - Chairman of the Board, President, Chief Executive Officer

Scott J. Pollei - Chief Financial Officer, Executive Vice President

Analysts

Jim Goss - Barrington Research

Robert Evans - Craig-Hallum Capital

Peter Everett - Piper Jaffray

Adam Fischer - Burnham Asset Management

Andrew [Slaven] - GLG Partners

Dolan Media Company (DM) F4Q08 and Year End Earnings Call February 24, 2009 4:30 PM ET

Operator

Good afternoon ladies and gentlemen and welcome to Dolan Media Company’s Fourth Quarter and Year End 2008 Conference Call. (Operator Instructions) I will now turn the call over to Mr. Haug Scharnowski, Director of Investor Relations. Mr. Scharnowski, you may begin.

Haug Scharnowski

Thank you Christine, good afternoon ladies and gentlemen and welcome to Dolan Media Company’s Fourth Quarter and Year End 2008 Conference Call. On the call, from the company, today are Jim Dolan, Chairman, Chief Executive Officer and President and Scott Pollei, Executive Vice President and Chief Financial Officer.

By now everyone should have had access to the fourth quarter 2008 earnings release which went out today at approximately 3:00 pm central time. In case you have not seen our release, you may find it on the Investor Relation section of Dolan Media Company’s website at www.dolanmedia.com. In addition, a slide presentation supplementing this conference call is also available on our web site.

This call is being web cast and the replay and slide presentation will be available on the company’s website for a period of 21 days.

Before we begin, we would like to remind everyone of the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Today’s prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. The words expect, believes, anticipates, estimate, continue, plans, will, outlook, guidance and similar expressions are intended to identify forward-looking statements. These forward-looking statements are based on information currently available to us and are subject to a number of risks and uncertainties and other factors that may cause our actual results, performance, prospects, or opportunities to be materially different from those expressed in our implied by these forward-looking statements.

For a more detailed discussion on the factors that could cause actual results to differ materially from those projected in any forward-looking statements, we refer you to the risk factors contained in Dolan Media Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2008 and as updated in our quarterly reports and prospectus filed last year.

Except as required by Federal Securities Laws, Dolan Media Company assumes no obligation to revise or update any forward-looking statements that may be made in today’s release or call. Please note that on today’s call, in addition to discussing GAAP financial results, the company will discuss various non-GAAP financial measures. This non-GAAP information does not substitute for any performance measure described in accordance with GAAP.

Today’s earnings release contains reconciliations between GAAP and the non-GAAP measures discussed in today’s call as required by SEC Regulation G.

With that, I would now like to turn the call over to Jim Dolan.

James Dolan

Thanks, Haug and thank you all for joining us today. I am happy to announce that today we are reintroducing guidance. Before I go into those details, let me first discuss some of last year’s highlights.

We are pleased with our performance in 2008. During the year we completed four acquisitions, we closed a $64 million pipe transaction, and in the fourth quarter we started to deleverage our balance sheet reducing debt used to fund our acquisitions. We demonstrated our ability to grow both operationally and financially, not withstanding the difficult regulatory and economic conditions we faced later in the year. Once again, we proved the benefit of our balanced business model. We successfully managed through a difficult macro economic environment, and regulatory uncertainty on the national and local levels. We achieved this balance by operating cyclical and counter cyclical business lines and also by our geographic mix as we served several dozen discreet markets across our business division. Because of this balance we believe the company is well positioned to continue to grow and to grow profitability.

For the year our revenue increased to nearly $191 million, up 25% over the last year and our net income increased to $14.3 million. Adjusted EBITDA increased 28.5% to $55.4 million and our adjusted EBITDA margin expanded 80 basis points to 29.2%.

Our fourth quarter performance was good despite changes in the regulatory environment and foreclosure prevention efforts by mortgage lenders and loan servicer’s. Compared to the same quarter the previous year revenues increased more than 44% to $59 million. National Default Exchange, or NDEx, which we acquired in September, contributed $18.6 million in revenue during the quarter and continues to perform in line with our initial expectations.

Net income increased 10.3% to $3.4 million and adjusted EBITDA increased 60% to $17.1 million. We also reduced our strong operating cash flow during the quarter to reduce our long-term debt by $16.2 million to $155.5 million at quarters end.

You will hear more financial details from Scott in just a few minutes, so I won’t focus on the numbers right now. We know there have been concerns about the effect on our business of these regulatory changes and voluntary lender programs. Let me tell you that we didn’t simply retreat to a bunker. We continue to manage and improve our operations while watching the environment closely, listening to our clients and acting upon what we learned. We are evolving, while continuing to build the balanced strategy that has served us so well.

The NDEx deal was the highlight of our year. NDEx is a leading mortgage default processing provider with a presence in Texas, California and Georgia. Putting NDEx under the umbrella of our American Processing Company combined two of the best processors in the industry. As a result, APC has a strong foothold in some of the countries most important markets. In February of last year we also entered the Minnesota market with the acquisition of the mortgage default processing services business of Wilford & Geske.

Our business information division expanded its reach in North Carolina with the acquisition of The Mecklenburg Times, a court and commercial publisher that covers business news and carries public notices in the important Charlotte market.

In addition our Counsel Press also completed a small but very strategic acquisition in the Chicago market. This gave us a Midwestern hub for appellate services, empowered our greater focus on servicing law clients appearing before the Seventh US Circuit Court of Appeals and state Appellate Courts of Illinois and surrounding states. As we discussed in our third quarter conference call, this is a challenging environment as lenders, politicians and regulators continue do struggle with the growing housing crisis and particularly with mortgage defaults.

We continue to monitor developments in these fast changing times. Last week the new administration announced its foreclosure avoidance plan. There has been plenty of news coverage and commentary about that plan, so we need not recap it here.

Our view remains that despite these efforts foreclosure volumes will continue to be high in 2009, as we have seen in the fourth quarter and so far this year. According to the Mortgage Bankers Associations national delinquency survey the number of seriously delinquent borrowers, defined as borrowers who are more than 90 days behind in their mortgage payments, jumped from 1.75% for the second quarter of 2008 to 2.2% for the third quarter.

Seriously delinquent home mortgage rates historically have been a leading indicator of future foreclosure starts. These data points have been closely correlated in the past. The rate of foreclosure starts, on the other hand, has remained flat at a little over 1% during the last two quarters. This represents a deviation from the historical correlation between seriously delinquent mortgages and foreclosure starts. We believe this can be attributed, in part, to loan modifications, to recent foreclosure moratorium and the foreclosure mitigation efforts on the part of mortgage lenders and loan servicer’s. These efforts have added additional steps and time to the process before a mortgage is referred for foreclosure. We don’t believe, however, that they are ending the foreclosure crisis.

We also believe that the recession and the continuing rise in unemployment will add pressure to the foreclosure crisis. According to the US Bureau of Labor Statistics, the national unemployment rate rose to 7.6% in January, that’s up more than two points in just a year and the outlook for jobs continues to deteriorate. The government’s broader calculation shows nearly 14% of Americans are unemployed. We expect that rising unemployment will continue to contribute to mortgage delinquencies. We also think this will make loan modifications for those individuals nearly impossible.

In short, despite the many aggressive and well intentioned regulatory efforts, we expect foreclosure growth for the country and for our business during 2009.

Now, as we look towards 2009 we’re taking a cautiously optimistic view of our business. At this time we are reintroducing guidance and we expect our financial results for 2009 to be as follows:

We expect total revenues to be in the range of $236 to $240 million.

For the business information division, we expect revenues between $88 and $90 million.

For the professional services division we expect revenues between $148 and $150 million.

We expect net income between $15.5 and $18 million; adjusted EBITA between $66.4 and $68 million; minority interest expense to be between $2 and $3 million; interest expense between $8.5 and $9 million; cash distributions to minority partners between $1 and $1.5 million; net income per diluted share between $0.53 and $0.61; cash earnings per diluted share between $0.90 and $0.98.

This guidance excludes any effect of acquisitions in 2009. It also assumes no material affect on the results of our operations from government and lender based programs focused on foreclosure.

With that, I will now turn the call over to Scott.

Scott Pollei

Thank you, Jim. I will begin by commenting on our cash flow and liquidity and then discuss fourth quarter highlights from the P&L.

During the quarter cash provided by operations was $18.2 million which resulted from the earnings of our business operations, including NDEx, the early payment of receivables from some of our customers and working capital improvements.

We reduced working capital by $7.2 million, mainly through a decline in accounts receivable. Day’s sales outstanding, or DSOs, at the end of the year was 62.6 compared to 68.9 at the end of the third quarter of 2008. This strong receivables management in the fourth quarter accelerated some collections of accounts receivables. This will result in a lower conversion of earnings to cash in the first quarter of 2009.

We used cash generated from operations as well as a $1.9 million refund from the NDEx escrow account to pay down our bank debt by $16.2 million.

Free cash flow, which we define as cash provided by operating activities less CapEx, for the quarter was $15.6 million.

At December 31, 2008 our cash and liquidity position was solid with $2.5 million cash on hand and our entire $40 million revolving line of credit available.

Total outstanding debt at the end of the year was $155.5 million.

Our bank facility consists of a $40 million revolver and a $154 million term loan that come due in 2012 and 2014 respectively.

Our leverage ratio at the end of the year was 2.3x total debt to trailing pro forma adjusted EBITDA, compared to a leverage ratio of 2.7 xs at the end of the third quarter of 2008. We expect our senior leverage ratio to be at or below 2.0xs at the end of 2009.

The maximum leverage allowed under the credit facility is 3.5x total debt to total trailing 12 month pro forma adjusted EBITDA.

We continue to be comfortable with our debt and are pleased with the strong operating cash flow our company generated in the fourth quarter.

Our fourth quarter financial performance was in line with our expectation. Revenue growth during the quarter was driven by operations from our 2008 acquisitions. Adjusted EBITDA margins during the quarter increased sequentially, as well as on a year-over-year basis to 29%.

Our revenue for the quarter increased $18.1 million, or 44.2%, to $59 million compared to the fourth quarter last year. This increase is primarily attributed to the mortgage default processing revenues of $18.6 million from NDEx, $1.4 million from APC’s Minnesota operations, both of which were acquired during 2008, and $800,000.00 of public advertising revenues in our business information division. Offsetting these increases were declines in display and classified advertising, circulation revenues, and commercial printing revenues, which in total amounted to $1.7 million.

Mortgage default processing revenues from existing businesses were relatively flat during the fourth quarter.

The professional services division, which consists of APC and Counsel Press, grew revenues of 105.6% year-over-year to $37.0 million. Acquired revenue growth was142.4%, or almost $20 million, and represented the divisions’ revenue growth during the quarter.

During the quarter APC processed 80,800 case files for its customers of which 48,200 case files were processed by NDEx and the Mortgage Default Processing Services business which we acquired from Wilford & Geske. This growth in file volume represented an increase of 132.6% from the 34,700 case files we serviced in the fourth quarter of 2007.

At Counsel Press revenue decreased $500,000.00 as we experienced a decline in the average revenue per filing on a flat year-over-year file volume of approximately 2.200 cases.

In the fourth quarter last year, we had three large cases that made a significant contribution to revenue, making for a difficult year-over-year comparison.

We have seen a slowing in the number of large, expensive appeals filed with appellate courts and we believe that this slowing is due to the high expense associated with such appeals in a difficult macro economic environment.

In our business information division, revenues decreased by $900,000.00, or 3.9% compared to the fourth quarter last year. Revenue decline in the division were driven by a $1.4 million decrease in display and classified advertising and a $200,000.00 decline in circulation revenues. These declines are typical during recessionary periods. We expect our display and classified advertising revenue to continue to be soft as our customers continue to tighten discretionary spending in light of local economic conditions.

Public notice revenue increased $800,000.00 of which $600,000.00 came from the Mecklenburg Times which we acquired in 2008.

Our consolidated operating expenses for the quarter were $50.3 million, an increase of 46%, from $34.5 million last year. Expenses for the quarter represented 85.3% of total revenues, a slight decrease from our third quarter 2008 results. For the same quarter last year, it was 84.3%.

Our direct operating expenses were up 59.6% to $21.7 million. Direct operating expense as a percentage of revenue in the fourth quarter increased to 36.7% compared to 33.2% for the same period last year. The increase in direct operating expenses is mainly attributed to an $8 million year-over-year in direct operating expense increases in the professional services division. These increases were attributable to operating index and the mortgage default processing services business from Wilford & Geske.

The business information division reported a little over $100,000.00 increase in direct operating expenses, all of which can be attributed to additional operating costs from the acquisition of the Mecklenburg Times.

During the quarter we also had a $4.5 million or 25.3% year-over-year increase in selling, general and administrative expenses. As a percentage of total consolidated revenues, SG&A expenses were 38.1% compared to 43.8% in the same period last year. The $4.5 million increase in SG&A is all related to the growth of professional services, as the business information division reported a 6.9% or $700,000.00 decrease in SG&A expense during the quarter. The increase in professional services is again related to the increased costs of operating acquired businesses in APC.

In the fourth quarter we also had a $125,000.00 year-over-year increase in SG&A stock based compensation expense and a $340,000.00 increase in expenses associated with being a public company, including approximately $100,000.00 in stocks compliance activities.

Operating expenses also increased due to added depreciation and amortization expense. Depreciation expense increased $1 million and amortization expense increased $2.3 million due to the assets acquired in the 2008 acquisitions.

Operating income for the fourth quarter 2008 was $10 million compared to $8 million for the same period last year. Operating margin for the quarter was down year-over-year as we reported higher amortization and depreciation expense primarily related to acquisitions.

Adjusted EBITDA for the fourth quarter was $17.1 million, an increase of 60%, from $10.7 million in the prior year period. Our adjusted EBITDA margin for the quarter increased 2.9% year-over-year to 29%. The increase in adjusted EBITDA margin can be attributed to additional adjusted EBITDA dollars from NDEx which has a higher margin than the business information division.

During the quarter we did not pay out cash distributions to minority interest and APC because the formula by which the pay out is determined includes deductions for APC debt service and capital expenditures. These expenditures offset the amount available for the cash distribution.

Net interest expense for the quarter was $3.8 million on an average debt of $165.2 million, compared to $1.9 million of net interest expense for the prior year period. Our net interest expense during the quarter included $1.3 million of non cash interest expense related to interest rate swaps required by our credit facilities.

GAAP net income for the fourth quarter was $3.4 million or $0.12 per diluted share on $29.9 million weighted average diluted shares outstanding. GAAP net income for the fourth quarter last year was $3.1 million or $0.12 per share on 25.3 weighted average diluted shares outstanding.

Our cash earnings in the quarter were [inaudible] or $0.24 per diluted share. In the fourth quarter last year we had cash earnings of $5 million or $0.20 per diluted share.

With that I will now turn the call back to Jim.

James Dolan

Thanks, Scott. I want to make a few closing comments about the last quarter and then we’ll go to questions. As you know, last November we suspended our forward guidance on our financial performance. We know that this surprised the market, although quite a few other companies did the same thing. After a great deal of internal discussion, we arrived at the conclusion that this was the only prudent move for us, given the extraordinarily unsettled economic and political conditions. The country was in the process, at the time, of choosing a new president, with all the attendant uncertainty for our economy and our nation. Many states and financial institutions were talking about imposing moratoria on the foreclosure process; nobody new for how long. In fact, nobody knew how bad the economic crisis might be, but statistics seemed to grow worse with the renewed cycle.

We never lost confidence in our company. Not in our balanced strategy, nor in our superb employees. Having managed our business through economic and regulatory uncertainty and with the fourth quarter results under our belt, now we have a better sense and understanding of the business environment in which we are operating. For that reason we’ve reintroduced guidance today.

With that, we will open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jim Goss from Barrington Research.

Jim Goss - Barrington Research

I was wondering a couple of things. One, what do you expect the environment to be over the next year based on what you’ve seen so far in terms of the level of defaults. It looks like it’s pointing to 2.2%, if that one indicator you provided was correct in terms of seriously delinquent. If that is the environment, at which pace will you expand your operations into new states of would it be more within the existing states?

Scott Pollei

Well we’re learning more all the time about this environment and what the regulators are able to do and are not able to do. One of the valuable lessons that we’ve learned over the last few months is that at the state level there is not a lot that the states can do except to change the process, usually to complicate it or slow it down on purpose, or to block it temporarily with a moratorium. That’s really all the power these things have. A lot of states have done that and are still talking about doing that.

We’re not really too concerned about that state by state. We’re in quite a few states, in one way or another, doing something involved with this industry whether it’s public notice for foreclosures or whether there is a mortgage default processing. So, we’ve become comfortable with operating in that environment. I think it was more difficult last year than it is this year when it comes to that kind of uncertainty.

Federal government has more power. It has power of the purse and it has the power to do more things involving structural changes. I think there is a new level of sophistication, among regulators and among the new administration, in having insight into the fact that you should not totally block foreclosures. We’ve not seen any serious discussion of that in quite some time at the federal level. It’s unhealthy for the system, long term and maybe even short term, to completely block foreclosures. There needs to be recovery of collateral in some organized way.

The defaults appear to be growing. In a technical sense, if you stop making payments you’re in default, so there is a very large growth in defaults that way. The foreclosures that come from defaults seem to be continuing to be held back and there is an overhang. It’s still there. It is quite a large overhang and the question, I think, for all of us is what the federal government will do about that overhang over time.

I think that they’re trying to manage the process, to slow down the foreclosure wave, but not stop it. Our view is that that will extend the cycle probably several years beyond what it would have been otherwise. By the way, this is not just us, there are a lot of experts in this field that feel the same way, so some of this is sort of received wisdom on our part, but it does match our experience in the field.

We are quite busy in the states where we are now. We are publicly, at least, in six states doing foreclosure processing, mortgage default processing. We’ve said in the past that we will expand to other states quietly when the volume of business becomes something that seems to approach material we will tell the world that we are in those states. That’s kind of the circumstance we are in now. We’re not talking about what else we’re doing, but we are quite busy in our own states and also working on expansions too.

Jim Goss - Barrington Research

Just one follow up, California was the one state in which you had some new regulations put in that slowed things down. Could you talk about that experience as it might relate to anything else you might see?

Scott Pollei

Yes. Last year there as a bill passed called Senate Bill 1137 that was a complete block to the process by adding more things to the beginning of it. It effectively road blocked all foreclosures for a times until the new processes could be put into place. Then the flow of foreclosure work began. In fact, we think, it might have been actually a little bit higher wave before closures once the flood gets opened again.

There as a bill passed more recently that does change the process yet again. It’s not the draconian change in process we saw last year. It is less restrictive. It has a lot of exemptions and outs in it and has a lot more definitions that narrowed the scope of what the bill could achieve. What we understand from the sponsor of the bill, this was the politically acceptable bill that could be gotten through the California legislature at this time. It clearly will have some mitigating impact on the flow of foreclosures, but there is such a large volume of foreclosures, and an even larger volume of defaults waiting in California, it still looks like a growth opportunity to us, although somewhat attenuated now.

Jim Goss - Barrington Research

All right, thank you very much.

Operator

Your next question comes from Robert Evans from Craig-Hallum Capital

Robert Evans - Craig-Hallum Capital

Good afternoon and nice job in a tough environment. First, can you clarify the income statement? Did you have roughly a $0.03 charge on the interest rate swap and can you clarify why that was?

Scott Pollei

That is correct, Bob. That was the non-cash interest expense related to our two interest rate swaps. When the rates were moved down this fall, because those are fixed rates, on a mark-to-market they move down in value and we recorded a $1.3 million charge for that, which translates after tax to about a $0.03 difference.

Robert Evans - Craig-Hallum Capital

Okay and your guidance for this upcoming year assumes no other interest rate swap movements one way or the other?

Scott Pollei

That is correct.

Robert Evans - Craig-Hallum Capital

Okay, so net, net GAAP number excluding the interest rate swap would be $0.15?

Scott Pollei

That is correct.

Robert Evans - Craig-Hallum Capital

The default rate that you had given earlier, I think it was 2.2% versus 1.75%. On that 1.75%, what was that comparison against?

James Dolan

I believe that was sequential quarters in 2008, the second or third quarters, I believe.

Robert Evans - Craig-Hallum Capital

Do you have any idea what the gross number are? I’m trying to get a sense of magnitude in terms of I believe the numbers I have seen for foreclosure for ’08 have been kind of around 2 to 2.3 million and I’m trying to get a sense of what that magnitude change would mean in terms of delinquents.

Scott Pollei

I don’t have those in front of me. I can get them and make them available to you.

Robert Evans - Craig-Hallum Capital

From a bigger picture standpoint, you said that given the government actions, the peak for foreclosures may be pushed out awhile. Do you have any sense of how are out your view is, or kind of what the industry view is in terms of peaks on foreclosures?

Scott Pollei

Well I can’t give a very precise answer, because things are changing so quickly and our experts have to redo the research almost on a constant basis now. Before all of the changes that occurred in the fourth quarter of last year, we were looking at a three peak cycle, where the first peak was sub prime last year and early this year. The second peak would be alt A which is late this year, early 2010 and then the final peak, which is prime loans or conforming loans, would have come after that.

The sub prime is, to some extent, passed us, although a lot of the volume we’re seeing now is still sub primes. Alt A is yet to come. I think it’s going to push the peaks of alt A and the primes back at least six months. That’s my laymen’s guess as to what’s going on. We will have a more finely tuned set of projections from our experts in a few weeks, I hope. It’s at least six months and possibly as much as 18 months, so pushing it back.

I think it’s also likely to take the top off the peaks and push it towards the end of the cycle: so you may not have such a steep up and down, but you might have a longer phase to it.

Robert Evans - Craig-Hallum Capital

Okay so you’re saying the peak on the prime is a good year to 18 months away at least?

Scott Pollei

We think so, yes. You had some underlying prime loans that were going to go bad anyway, plus you’ve got the recession now, which is a new additive factor, where you have more people losing jobs and unable to sustain their current mortgages.

Robert Evans - Craig-Hallum Capital

So you’re saying peak is maybe 2011, 2012?

Scott Pollei

Possibly, yes.

Robert Evans - Craig-Hallum Capital

You talked previously about loan modifications and all that. You are now set up to do so. How many states or programs or pilot programs might you have out there and what types of banks are you working with?

Scott Pollei

We are doing a loan modification work in a number of our locations and they are not driven by state or by location, they’re driven by clients. The law firm clients, these are the servicer’s. The servicer’s are drowning in work. They are urgently in need of help. A number of the servicers’ are coming to our law firms and to us and saying can you help us in all of our states. A lot of our work is of that nature. For instance, in our Texas center in the suburban Dallas we’re not just doing Dallas loss mitigation work, or just California, we’re doing it for the whole country and we’re doing it in fairly impressive numbers now with this deep growth rate.

Robert Evans - Craig-Hallum Capital

When you say fairly impressive numbers, in terms of number of files, can you give us some type of sense of magnitude?

Scott Pollei

I’m getting head shaking all around the table, so I guess I’m not allowed.

James Dolan

There is not a material dollar amount yet, Bob, because of the fee structure.

Scott Pollei

This is still the lowest fee for anything that we do. It’s fairly large numbers of them, but it’s small dollars per item.

Robert Evans - Craig-Hallum Capital

Now as part of the Obama plan on foreclosure mitigation, aren’t they trying to standardize a fee of, I believe, $1,000.00 for foreclosure that, I know it comes from Fannie, Freddie, but shouldn’t that help pricing?

Scott Pollei

It does and we’re encouraged by that in several ways. March the 4th is the deadline the administration was given for releasing details. The promising aspects we see are that there is a process coming that Fannie and Freddie will specify much more clearly what they want. There is more money coming in to the system. The $1,000.00 allowance that Fannie and Freddie are going to publish on the 4th puts much more money into the hands of more people.

Now, it is not just us in line for that money, but at the same time there are more things to be done in this process, so I think more work, more money, all in all it looks like an encouraging prospect to us. Although again we are guessing as to the details, we don’t have them in hand yet. Things seem to be going in the right direction from what we can see.

Robert Evans - Craig-Hallum Capital

On the business information side, do you happen to have the breakout of public notice display circulation for the quarter?

Scott Pollei

Yes. I am going to give it to you in round numbers, the public notice was $10 million for the quarter, display and classified was $8 million, circulation was $3 million, printing and other was about $0.5 million.

Robert Evans - Craig-Hallum Capital

Thank you very much.

Operator

Your next question comes from Peter Everett from Piper Jaffray.

Peter Everett - Piper Jaffray

Jim, what are you seeing in January in terms of piece of foreclosure volumes?

James Dolan

We are seeing terrific growth, very strong growth. Some of it is that some of the moratoria have expired and there wasn’t one single one, there were various, especially client driven moratoria where they just said we’re going to stop for awhile. A number of those ended during the month, so we had a surge in volume from that.

Scott Pollei

We should point out though, Peter, that surge then slowed down a little bit because of the folks that went for the Frank Committee of congress and they gave a voluntary slow down of that. Not a complete stop, but a slow down, until the Obama plan gets out.

Peter Everett - Piper Jaffray

Okay so January strong and then February maybe a little softer, is that how it works?

James Dolan

I wouldn’t say that. January and February were strong, but don’t classify them as a tsunami.

Peter Everett - Piper Jaffray

The question would be in the fourth quarter organic volume growth was basically flat, right? So the question is in the first quarter do you think we get back to positive organic volumes?

James Dolan

Through today that’s true.

Peter Everett - Piper Jaffray

Okay and Jim you mentioned comfort with the integration of NDEx. My recollection is there were some technology issues that had to be addressed to really get the leverage out of this. How is that specifically going?

James Dolan

It’s going well. It’s a somewhat complicated thing, but it’s on track. We’re working very hard on migrating to a single platform. Our timeline is holding from what we said when we bought it, which we think it’s going to take a full two years to completely get this integrated, but we’re working hard and are on track.

Peter Everett - Piper Jaffray

From productivity or a margin perspective, does that have any meaningful implications for 2009?

Scott Pollei

Well it’s consistent with what we said before, which was we are going to run parallel systems for awhile or two systems and NDEx, as you recall, has a lower gross margin than APC does on a stand alone basis because they’ve got the title operation. So we’re not going to be able to bring those in line within 2009. The one time adjustment to the margin will kind of hold steady for the year on the direct side.

Peter Everett - Piper Jaffray

And on the title operation, Scott, I assume that’s got to be weighing you down to some extent in terms of volumes in that business.

Scott Pollei

Well it’s really a captive. The title operation there is not what you think of as other title company’s where they get a lot of money from loan originations for new loans. This is really a title operation that’s pegged to the existing foreclosure process where you have to do title searches and stuff. So, as we said before, it operates at a lower margin, but it’s still profitable and it’s additive money for us.

Peter Everett - Piper Jaffray

Then how much flexibility is there from a cost perspective to sustain margins within the business information side in the context of what l

Scott Pollei

Our margins declined a little bit in the quarter on a year-over-year basis primarily because the costs were really flat and we went backwards by about $900,000.00 in revenue there. If there are drastic revenue changes, we could make some changes on the cost side; however, we still need to maintain our product quality and the distribution costs are sort of what they are. So, absent a significant change in revenue, those costs are more fixed than not.

Peter Everett - Piper Jaffray

Right, exactly. Then Jim, should we assume that for ’09 or at least for the time being, that acquisitions pretty much across the board are on hold?

James Dolan

I would not assume that, no. We have an active acquisition pipeline in every part of our business. We always have had and we continue to cultivate those. It’s getting to be more interesting every day and we don’t telegraph what we do in advance. I think the odds of a large, aggressive acquisition, for us, are not very good. This is not a very good time for that. But, for tuck ins and for easily absorbed, highly strategic things, it’s never been better.

Operator

Your next question comes from Adam Fischer of Burnham Asset Management.

Adam Fischer - Burnham Asset Management

I just wanted to go back to the revenue guidance for a minute. What kind of assumptions are you making for loan modifications, decreasing market share and entering new states, versus just kind of run rate being where we are today?

James Dolan

We have not baked in either any acquisitions or any significant new product line or market expansions.

Adam Fischer - Burnham Asset Management

Is your sense that your market share continues to grow, I think, it was kind of 10% last time we talked?

James Dolan

Yes it is our sense of that. It’s hard to get month to month numbers that are very meaningful, but our sense is that yes it is.

Adam Fischer - Burnham Asset Management

And are there competitors who may have been well financed a couple years ago who might be falling by the way side at this point?

James Dolan

It is very seldom that we’re head to head against anybody, except in a state here and there, so it’s not like there is a titanic battle of us versus somebody else out there where we could say we beat them this week or they beat us last week.

We do see other entities in our space who are having difficulties of various kinds and we’re seeing them less and less often where we are.

Adam Fischer - Burnham Asset Management

So do you have kind of a market share goal in mind for the year besides just kind of increasing it overall generally?

James Dolan

We have a goal, but nothing that we want to share publicly.

Adam Fischer - Burnham Asset Management

Okay. If I look at, you know what you were saying about cash flows, I think you said by the end of the year you expected debt to be below 2x EBITDA. Did I hear that correctly?

James Dolan

That is correct. That is at or below.

Adam Fischer - Burnham Asset Management

I figure you think EBITDA is going to grow through out the year?

James Dolan

We’ve given guidance, I think, of $64 to $68 million.

Adam Fischer - Burnham Asset Management

So debt should be below, just working through those numbers, should be below $135 to $130 by the end of the year. Am I thinking about that correctly?

James Dolan

Scott Pollei

I think you’re a little aggressive on the low end. I mean the current debt is $12 million on our existing, $155 and current portion it is $12 million. So if you just subtract that out you’re down to $143. On a net debt basis we would have cash to offset that as well. That’s how you get down to that $134 to ‘$136 range is [interposing].

Scott Pollei

[Interposing] is to build the cash position a little bit during the year.

Operator

Your next question comes from Andrew [Slaven] from GLG Partners.

Andrew [Sladen] - GLG Partners

You mention the loan modification business as an area where you’ve run some pilot programs. Can you just give us a little bit more color on if there were any incremental expenses that you might have incurred through the P&L to build up that expertise? And, again, I know you mentioned it’s a lower fee to you guys as opposed to processing a foreclosure, but what’s the margin structure on that fee? Do you need to add a separate workforce to handle loan modifications or retrain or is it just?

James Dolan

Well it’s early in the cycle now, so we don’t have a mature business line where we can talk about fine tuning the margins. I think that we’re probably making a small margin, but it’s largely staffing expense now. We are in the process of cross training others so that if there is a slow down in foreclosures we can move people across the aisle and they can work on loan modifications. That’s a smart move that will, I think, keep the costs down some. But, it’s not a major contributor and it’s not the kind of mature line that I can say our margin is this many points different this quarter versus last.

Andrew [Sladen] - GLG Partners

Right and I guess similarly where you have mentioned in the past your intention is to expand into other states quietly and you’ll announce it when you have something to announce. Should we assume that there were any expenses that, again, might have run through the P&L where you are beginning to process, albeit in small numbers, foreclosures in other states where there are direct expenses related to those states?

James Dolan

There is nothing material at this point.

Andrew [Sladen] - GLG Partners

Going back the prior question or two did talk about share of market and that’s something that you’ve been talking about on a, sort of a, 10% basis. I’m assuming you’ve made some assumptions on a top down basis to get to your guidance on where you think the market will grow and what you think your share will be, but can you give us just a little bit more granularity on the existing markets prior to the NDEx acquisition? Roughly what kind of growth you expect to see in 2009 and then what kind of growth do you expect to see out of the NDEx markets in 2009?

Scott Pollei

That’s pretty difficult because as you know, or as we said, the markets in Michigan and in Indiana were relatively flat in the fourth quarter. And we think the bulk of that was caused by the loan prevention efforts, either by the government or private parties. There continues to be this backlog of seriously delinquent stuff. Obviously for those two states, given the issues in the auto industry and the ancillary businesses that support that, it means those numbers are going to go up. I guess I’m not really comfortable telling you that we think it’s going to grow by 10% or we just don’t know at this point, so we’ve been fairly cautious in our guidance. When you guys pull them apart you will see that there is not a huge leap to get to those numbers.

Andrew [Sladen] - GLG Partners

Not a huge leap in market growth?

Scott Pollei

That’s correct.

Andrew [Sladen] - GLG Partners

Okay I understand that in Michigan and I guess in Indiana what you’re referring to. Can you just give a little bit more color on California? I know you talked about the moratorium, which sort of came back full speed towards the end of the year and maybe the beginning of this year after the moratorium lifted, maybe just a little bit more color on Texas and Georgia? I know they’re small, but are you seeing any more movement? I know Texas wasn’t a very robust state, but given what’s going on and the main commodity out of Texas being oil down, do you expect to see, again from your forecasting on a top down basis, do you expect to see a pick up from that market in 2009? Can you give us just a little bit of color on how you see your individual markets growing to get to the kind of guidance numbers you provided?

Scott Pollei

Well I think the growth in California and Texas will be stronger than in the other states given just the delinquency and the characteristics are different there with the types of loans and homeowners. Again in our guidance we haven’t forecast robust volume growth, but we’ve got it sort of baked in there at a little over a steady state.

Andrew [Sladen] - GLG Partners

Right, so you have modest market growth. Just to try to get our hands around it a little bit better, if there’s modest market growth, what kind of market share growth are you anticipating? I’m just trying to triangulate some comfort levels to get to the number you’re providing.

Scott Pollei

We’re holding our market share even.

Andrew [Sladen] - GLG Partners

Okay and that’s in your assumption. You maintain roughly 10% market share?

Andrew [Sladen] - GLG Partners

Yes.

Scott Pollei

Just one last word on Texas, it takes awhile for a foreclosure to become a foreclosure in Texas. It can take more than 100 days from when you stop making a payment until when it turns into a foreclosure. Their economy has begun to turn south as the prices of oil and gas have come down. Now it’s not going to be early in 2009 when Texas shows very much growth, it’s going to be later in the year.

Andrew [Sladen] - GLG Partners

I understand that. Lastly, it sounds like there is impressive growth projected for the year. It also sounds like, just from a common standpoint, it should be somewhat lumpy. Is there much visibility you can give us on a quarterly basis? Should we look to historical patterns or are we just going to wait and see how the government plays out and we’ll see fits and starts as we go through the year?

James Dolan

I think fits and starts. We’ve been looking at historical patterns for a year now and it’s not much help, because this is unprecedented so I think it will be lumpy.

Andrew [Sladen] - GLG Partners

Well done in a tough environment. Thanks for taking my questions.

Operator

Your next question comes from Jim Goss from Barrington Research for a follow up.

Jim Goss - Barrington Research

I’m looking at my model for ’09 versus what you just reported for ’08 and the guidance of revenues is a little lower than I was looking for, but the diluted EPS and the non-GAAP cash EPS are both higher and you’ve talked about NDEx having somewhat of a downward pressure on the gross margin line. I’m just wondering where the relief is coming, whether it’s better control at the SG&A level, that for a starter.

It also looks like the degree of increase is greater in the non-GAAP cash EPS so that there is sort of a widening between diluted EPS and non-GAAP cash EPS, so maybe you might talk about where that change is going too.

Scott Pollei

We are seeing some improvement in our SG&A margin, if you will, as we’re able to spread the fixed costs over a wider base, so that is part of it. Then the other piece, I think, is primarily in that SG&A line. Although the other piece is that our income tax rate has come down from the 41% that we were working with through the first three quarters to about 29.2%.

Jim Goss - Barrington Research

Then the difference between the two, the non-GAAP cash EPS? You’re achieving greater growth there, according to your guidance than…

Scott Pollei

I think it’s the fact of depreciation and amortization from the long lived assets is up so much from the NDEx acquisition.

Jim Goss - Barrington Research

One thing that pops up in discussions is the risk in your public notices advertising. Given what’s happening in print in general. And, I think you’ve talked in the past that you try to price your public notices ads the same whether they’re print or online or both. I wondered if you might talk about that process and how much risk there might be to those revenues as the things evolve towards [interposing].

Scott Pollei

The public notice laws specify print. I would guess there are several thousand laws requiring public notice, counting state and federal laws and I would guess about ten of them say you can also be online as well as in print, but print is a mandatory part of it. So, the pricing is also around in print. In almost every case, in fact I can’t think of one case where we’re not, the low cost provider as well as the best service provider in our local markets and there is more cost sensitivity in the whole world these days and we’re trying to be sensitive of that and not pushing our pricing there very much and we’re holding market share nicely.

This is the legislative season. There are bills being introduced from time to time on public notice. Nothing looks like it’s especially threatening to us right now, but what you may be thinking of is that we routinely will take the public notice from our print media and make electronic bodies of information which we can typically then sell. It’s a useful database and we will take it from our newspapers and make it into a searchable database. We will deliver it to clients who will pay for it by various means. That is a whole different thing from charging for public notice though.

Jim Goss - Barrington Research

Okay, thank you very much.

Operator

Your final question comes from Bob Evan Robert from Craig-Hallum Capital with a follow up.

Robert Evans - Craig-Hallum Capital

Can you comment on the growth from your acquired companies? Do you happen to have that what it was year-over year? I know Indiana and Michigan are excluded, but do you happen to know what the growth rates of those other states are?

Scott Pollei

On the professional services side $20 million of the revenue came from NDEx.

Robert Evans - Craig-Hallum Capital

Right, I’m actually looking more on a same store sale. I don’t have the metric in front of me that you gave out for Q3, but I know those states are growing year-over-year even though you haven’t owned them for a year and I’m just trying to get a sense of, for example, how did California grow for index year-over-year in the fourth quarter from market share gains, because I would assume there is growth there.

Scott Pollei

There is, but we don’t have it in a manner that we can give it out and stand behind it.

Robert Evans - Craig-Hallum Capital

Okay. Is it fair to say that you saw meaningful market share gains in index year-over-year? I’m just trying to get some sense of where that visibility – I know there was a lot of growth when you had the call and you acquired them. I’m just trying to get a sense of where that’s at.

Scott Pollei

Well I think in California we have been between 12% and 14% of the market share there and that number has slid around from 12 and some months to 14 to 15, down to 12, so it’s not like it has moved up dramatically in the last six months. We’ve been fairly steady at that level. Now a year ago if you remember, in ’07, they had just started January 1 of ’07. so they were starting from zero and went to 10% by the end of the year. So, we’ve gained a couple of points, but I don’t want you to think that we’ve grown it to 20% share there. We haven’t done that yet.

James Dolan

Let me give you some color, Bob, on how this works. In a normal day before all of these things started going crazy in the market, they might get 25 new files a day from a client for California to work on. That is sort of an average day for them. And then when the moratoria began to hit and bills were passed and the rules began to change, they would go sometimes a week with no new files and then on a Monday they might have 1,000 files come in from one client. So, it’s gotten really lumpy and so market share measurements month-by-month are becoming less meaningful because you can’t tell in such a narrow time frame. Even quarter-to-quarter they are less useful. So, we’ve had a hard time proving out any market share changes on such a short time frame.

Robert Evans - Craig-Hallum Capital

Okay. I think what we’re all trying to get at is just there are some states that you expect market share growth in and some that you’re more mature in. I would assume your bigger market share growth states are what, probably, California, Georgia, and Minnesota?

Scott Pollei

I would say that’s correct, yes. I think Indiana has some promising growth there too. Not to say that we’re settling for what we’ve got elsewhere, but I think as far as the opportunity set, I think you’ve named the states that are the greater opportunities.

Robert Evans - Craig-Hallum Capital

What is CapEx for 2009?

Scott Pollei

It is between 3% and 4% of revenues.

Robert Evans - Craig-Hallum Capital

And D&A, in terms of amortization expense from intangibles and deprecation? If we look at your Q4 numbers is that kind of the right run rate to use going forward?

Scott Pollei

It is and I would remind you that if you take a peak at the reconciliation of income to adjusted EBITDA there is a line in there for the amortization on the DLMP. That runs at 377 a quarter and that’s fixed, so that will be a million five.

Robert Evans - Craig-Hallum Capital

Right, but the other items that you break out is that basically the ballpark?

Scott Pollei

Yes the other items on the fourth quarter P&L I think are a good indicator, with one caution that I would give you. We have not completed the valuation study of the index acquisition and the finite life intangibles and so there is a possibility that at some point during the year the allocation between goodwill and finite life intangibles might change, which would change the amortization. We will give you that if that does change.

Robert Evans - Craig-Hallum Capital

Okay and if I remember right, the tax rate, although you are saying 39% we have to adjust for minority interest, so your affective tax rat ends up being lower?

Scott Pollei

I guess the way you might look at it there, that’s correct.

Robert Evans - Craig-Hallum Capital

Okay, I’m not sure what it blends out to be, but it should blend out less than 39?

Scott Pollei

Yes.

Robert Evans - Craig-Hallum Capital

Okay and I know you’re saying seasonality somewhat, but just so we don’t get off in areas how should we view Q1 sequentially relative to Q4? Any puts or takes there that we might be missing, from a seasonality standpoint? It sounds like you’re off to a good start on the mortgage default business, but is there anything seasonally that we need to worry about?

Scott Pollei

No.

Robert Evans - Craig-Hallum Capital

All right thank you.

Operator

At this time there are no additional questions.

James Dolan

Okay, thanks very much everybody. Thank you for participating. Have a good evening.

Operator

Thank you for participating in Dolan Media Company’s Fourth Quarter and Year End 2008 Conference Call. This concludes your conference for today.

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