Kelly A. Flynn - Crédit Suisse AG, Research Division
Well, as you know, our next presenter is IHS. We're happy to have Jerre Stead, the CEO of the company, presenting; and Andy Schulz, Investor Relations, up here as well. And thank you guys so much for coming, and we appreciate it.
Jerre L. Stead
It's great to be here, Kelly, and thank you very much. So we'll start with a reminder of the Safe Harbor, of course, that we always want to take time for and Andy always reminds me to take time for. And now that I've done that, I'll get into the presentation.
Just for a quick background and a reminder for those of you that know us well and for those that don't, leading position in high growth markets. I'm going to talk about that quite a bit today because of what's going on in those 4 global markets that we're focused on. Must have offerings that support core workflows. We've worked for 7 years to arrive at 2013, 7 years since we went public, which is now focused on 4 global markets and 5 workflows that we're now delivering new product platforms across the board that'll change the way we go to market for years to come. Primarily, subscription-based revenue. Think of us over time at 78% to 80% of our total revenue, if not more. Annual subscription-based cash upfront as a reminder. And if anyone cancels, they have 60 days to return all information to us, which is because of our proprietary nature of the business. Very scalable business model, I'm going to talk about that. Just as a reminder, we've gone from 18% in Q4 of margins, EBITDA margins, in Q4 of 2006 when we went public to 34% in Q4 2012 as we wrapped up last year. During that period of time, we spent an enormous amount of time, effort and expense money creating an infrastructure that we're just finishing today that is changing the business for us in an amazing way.
And then strategies that continue to lead profitable growth. For those of you that don't know, this is the seventh public company I've led over the last 33 years. Average annual return to shareowners, compounded 28%. This is, and I tell you that, only is a way to think through when I say this is the best experienced management team I've been fortunate enough to build and one I'm very proud of.
So this is my favorite chart. This is just a reminder for everybody to see what we have done going from $16 a share to $111, 30% compound average growth over the last 7 years. Revenue CAGR, 18%, split exactly 50-50 between organic growth during that period of time and our acquisitions. Just as a refresher, back in 2008, Q4 of 2008, I laid out a personal goal for 2012 of $1.5 billion. At the time, we were at $640 million. We executed that to $1.530 billion last year. Adjusted free cash flow, great progress there with much more to come. You should think about us delivering 70% to 75% of our EBITDA as free cash flow, that's been 32% compound average growth. And then during these major investment times, we still delivered 28% compounded adjust -- annual growth of our EBITDA. EBITDA was a fun number last year because it had exceeded in EBITDA for the year the total revenue we had the year we went public.
Just a way to think about the business. This was based on Q4, 76% subscription based; 24% non-subscription based. That's slightly higher than it's been because of our acquisition of GlobalSpec, which was a critical acquisition for us in Q3 of last year. That's about 60% today non-sub based and I'll talk about how that'll play soon. 29% of EMEA revenue of our total; 11%, actually now 12% for the Americas, up from 6% 4 years ago; 60% in the Americas. One quick comment on that. The U.S. portion of that is 49%. The rest is in Canada, Central and Southern America. And then workflows, which are really the way we now go to market, split out as laid out below. The 2 biggest, as you would expect, being energy technical, which had a great year, 15% plus organic growth last year, and then strategy and analysis at almost 30% and that grew 11% last year.
The way we manage our data and the way we go to market with it makes it a very unique and proprietary process capability. We're updating our information and data 24 hours a day, 7 days a week, 365 days a year using a lot of automated tools, surveys, benchmarks, dashboards. We work hard on the 4 Cs, consistency, currency, correctness and completion and actually measure that on an hourly and daily basis. Moving more and more to think about our company as taking data, creating information and using insight to create analytics, predictive analytics, and scenario modeling.
We use these 5 benchmarks, publicly report on them each quarter. Customer delight, we survey 900,000 users a year, once a year of those 900,000, 4x a year. And the only public company I'm aware of that actually has -- gives every colleagues 6,300 around the world the opportunity to earn up to 50 shares per year if we meet or exceed our customer delight. This is now year 5. We've had that program in place. During that period of time, we've improved, as our customers measure us, by 43% from where we started. We're -- our benchmark to be -- set a new level of excellence as measured by Walker who is the company we use on a worldwide basis is to target in 2015, which would be 81% customer delight. We score very highly on our colleague's success because it all starts with our people. We use Aon [ph] to measure that and are looked at as world class there. And then report obviously on profitable top and bottom line growth, I'll come back on that. And then shareowner success relative to the peer group, and we also obviously report a measure of that.
Here's the way to think where we're at today. As I said, we evolved from when we went public being an engineering and energy company today to being a truly global company focused on these 4 industries: energy, natural resources, chemicals, electronics, transportation. So 27% of our revenue is adjacent markets, which we don't specifically spend research and development money on to build products, but use the products that are available to us from those 4 global markets where, for the first time as we work through all the changes, now globally organized by region into each of these industries. And then the customer workflows, and the way to think about those are how we work inside of the large customers we have and small and who our users are of those workflows on a worldwide basis. I'll talk more about that in just a minute.
This is the way we look at where we're at and where we set with each of those workflows in each of those global markets. The way to think about that is how much more opportunity do we have to provide more new products and new services to fill out those Harvey Balls in each of those 5 work streams.
One other quick comment. If you look at each of those businesses, and I'll talk more about it in a minute, they're highly interdependent on each other and these industry sectors. And here's what it is. The customers spend over $32 trillion a year in these sectors on capital and expense decisions. 51% of those $32 trillion or $16 trillion is actually spent between those core market expertise, knowledge, breadth and depth, i.e., chemicals, as you would expect, highly dependent on the information and insight we provide in energy and natural resources. As you would expect, electronics, where are the most electronics in the world sold today? Transportation. Where are the most chemicals processes and plastics sold? Transportation. So that gives you the interplay of where we're focused on each of those global markets.
Four primary drivers, I'm going to talk about each of those, of our organic growth. We often get questions, so Jerre, for the last 3 years since Scott Key, our President and COO, laid out these 4 primary drivers at an Investor Day 3 years ago, you've said your target is 9% to 15%. Why do you say that when most of the world would be happy to be growing 3% or 4% organically? Because we've arrived at the position this year as we exit 2013 that we literally believe we have everything in place to deliver the 9% to 15% sustainable year-after-year. Value realization, including price increases, if you will, we run 3% to 5%. We have and we'll continue to, our pricing leverage is very strong. Our customers will tell you on their measurements, not ours, that their average payback per year for a subscription base is about 1.5 months. So year-after-year you'll see -- and by the way, the product that you buy at the time we start our annual subscription base versus what you have at the end of the year is enhanced because we're constantly improving it. So think of value realization, price increases, 3% to 5%, running 4% to 5% now, will continue to for the future.
Wallet share is the place we have the most upside and that's where the new platforms that we've created are now going into place. We believe and as we enter 2014, we should be seeing 3.5% to 4% organic growth in our cross selling with our new platforms.
When we say new customers, what we really mean are bringing the customers that should be part of our 1,000 largest customers into that area. There's 350 of those. We're penetrated less than 10%, and that should be good for 2% to 2.5% 2014 and into the future.
The new products we're now shifting where we've spent so much money on building the infrastructure and the platforms, we're now shifting as we complete all of that effort to where our 800 developers will be moving to many more of our spend on new products versus maintaining the many, many old platforms of old products we've had.
This is what I was talking about a minute ago. This just gives you the way we now look at the target market of high potential accounts with limited penetration, less than 10% as I said today. So if you just look, energy and natural resources, which is our largest single global market, there are 325 accounts that could well be part of our 1,000 largest that are not today in that business. We're now attacking, of the 649 opportunity accounts, we're now attacking 350 of those this year where we've reassigned 104 sales positions to focus on those 350 accounts. That alone should provide $300 million to $400 million of organic growth for us over the next 3 years and we expect that to happen particularly as it kicks in, in 2014.
This is a different way to think about it. So our current 1,000 largest customers, 71% of our total revenue, just to give you a perspective, the largest customer we have today is $31 million. So the top 10 customers are 15% of our total revenue, $23 million. That was a number of $16 million 2 years ago. Our 1,000 largest customers 2 years ago were $700,000 per account; on average, now $1 million, and we'll be going forward in the years ahead to where we should see that number grow to $2 million as we exit 2015. So you can do the math of bringing the current customers where we're a little less than 30% penetrated in evolving the customers that should be in our 1,000 largest that are not today and that just gives you a good focus on how that'll play out, which means as we execute into the future, as I said, we should exit 1,000 largest customers on average $3 million per and the largest customers at $45 million to $46 million.
Just a quick sidelight on that. Exxon happens to be our largest customer today at $31 million. That means we're 0.1% of their total revenue. I sat a year ago last week with Rex Tillerson, their CEO. He gave a keynote speak at our energy conference in Houston. And Rex said, "So Jerre, every place we go, I find that we're using IHS product." He said, "In fact, 71,000 of our people, one way or the other, out of the 110,000 use something from IHS today. How much are we spending a year with you?" And I said, "So what do you think, Rex?" I said, "$250 million." I told him I could make him a deal for 1/2 of that on the spot at breakfast because we were doing $27 million. That's the magnitude of the power that we have for the future with really great customers like Exxon and others.
We have released and will continue to release more new products in 2012 and '13 than we've ever done in our history. A lot of that, as I said, is as we're able to shift our use of our 800-plus worldwide developers towards new products and far less of their time spent on maintaining products.
This is what we've been working for. Everything we've done in the last roughly 6.5 years in sequence that we laid out has been to scale our potential to $4.5 billion to $5 billion of revenue. We had, example only, 40-some billing centers, dozens of customer care centers, 14 general ledger centers, no Sales Force Automation. All of that is being completed as we speak today. We laid that all out and are now at a point for the first time where we've been spending $1 on expenses. As we grew, historically, we'll spend about $0.55 to $0.60, giving us significant margin expansion keeping in mind that we have already increased margins by over 1,400 basis points during this time that we've not had the scale that we now have in place with much more to come. So very excited. We said 2 years ago that we had 8 quarters of very heavy lifting to get through all the change. This happens to be that eighth quarter. And what we now have is tools and capability are -- what we must have to be the success we expect to be in the future. I said a few weeks ago at our ELT, our extended leadership team, our top 200 people, I expected 2013 to be a good year, a very good year, for IHS, but 2014 is going to be the most exciting year we've ever had because all the things we laid out and all the things we said we are going to do will have been -- are executed as we speak. So for the first time, we're in a position to deliver truly great performance for years to come.
Very disciplined acquisition strategy. As I said over the last 10 years, we've grown 19% per year, 9.5% organically, 9.5% through acquisitions. I won't go through all these, but on average, we're looking actively. Last week at our board meeting, we showed our pipeline that we show at each board meeting. Right now, very active, 265 potential acquisitions broken into 2 categories. Tuck-ins, which we'll do forever. Those are $5 million, $6 million assets. Acquisitions, 70% -- actually higher than that, 80% to 85% incremental margin. And our sweet spot is $25 million to $30 million of revenue that we add and integrate in pretty short order as we now have for the first time that infrastructure in place what was being integrated in 6 to 9 months will be integrated in 60 to 90 days, tremendous change.
If you look backwards, over the last 46 acquisitions, you'll see that we've done the following. On average we paid at the end of the first year, looking back, 2.8x revenue, 9.1x adjusted EBITDA. And in every case, have been neutral or positive adjusted EPS with every acquisition at the end of 6 quarters. So feel very good about that.
Pipeline is very full. We took a bit of a hiatus, if you will, in Q3, after the middle of Q3 last year, because of all the massive changes with infrastructure we were putting in place and the fact that we've done 9 acquisitions in the first 7 months last year. So pipeline remains full. There was nothing in the pipeline that we wanted to acquire that happened that will not allow us to make those acquisitions as we move forward. On average, we talked to people 3.5 to 4 years as we make acquisitions. We do not participate in auctions. Won't. See no need to do that and do it through becoming the "preferred" acquirer with time.
My favorite chart. I told my wife that someday when we retire, I was going to have this blown up for our living room. Probably not going to work out for me, but this tells you exactly how disciplined we've been over the years in each of those industry sectors, in each of those functional work streams and how they have fit. I couldn't be prouder of what we've done. Today in the pipeline, most of the active potential acquisitions we're looking at cover 2 to 3 of the work streams in at least one of the industry sectors.
Subscription base like I said does a great job of top line growth, 18% compounded, since we went public, 12% growth Q4 of 2012. Adjusted EBITDA, as I already said, you can see the margins and the increase year-over-year there. And our adjusted EBITDA in Q4 was 17% growth year-over-year. This is a critical chart for us. EBITDA, free cash flow. You should expect us to average something north of 70% as free cash flow of our adjusted EBITDA. We took a onetime shift down as we finished the Vanguard effort in this particular Q4 at 63% free cash flow for last year. You'll see that back to normal at 72% to 73% in 2013.
Earnings, we still like to look at this. This is what we drive our behavior on. This is our free cash flow, earnings per share, $4.59. Expect -- if you do the math, you'll see that we should exceed $5 plus in 2013 and should be at $9 to $10 with my personal goal in 2015.
Assets, great balance sheet. As you can see, net debt is at 1.5. Lots of flexibility. Most important thing you see here is the deferred revenue base, $550 million on the balance sheet. It says we're set up for great shape. We are truly building a company that's never existed. One that is converging information with workflows, knowledge and analytics, predictive analytics, must-have offerings, a great team of global professionals delivering long-term sustainable and profitable growth.
Thanks very much, and I think we then go to our breakout session. I'm happy to.
Kelly A. Flynn - Crédit Suisse AG, Research Division
Question on the deferred revenue metric. Can you just elaborate on why you think that metric and what that says about the next 12 months?
Jerre L. Stead
You bet, Kelly. What that is, is the parts of the annual subscription base that have not hit the P&L yet. So once we sign an annual subscription base, we do a 12 per month from the day we sign it till the end of that year. So that gives you a great indication of our growth and what is in the backlog already assured of revenue going forward. We -- and if I were to think about it, I would always make sure to look at that deferred as a very good indication of where we are going. Over the years, we have given an organic percent of that deferred. Last quarter, it was about 9.8% to be exact. That will be never perfect, but directionally correct. You will always know is it going up or down. The lowest we got was in Q2 of 2010. That's the beauty of an annual subscription base model, which was 4% organic growth. Great question, Kelly. Thank you. Others? Please.
You showed a slide before that showed your acquisitions over time and indicated it showed a disciplined approach. I was looking through your proxy and I noticed there's not a portion of your compensation or any of the executive ties to a return on invested capital metric or something. Would you consider something like that to help us understand how you're actually deploying capital?
Jerre L. Stead
Actually -- no, it's a good question. We won't do an acquisition if it's not at least 16% internal rate of return. We have not done one nor will do it. We report back to the board at the end of year 1 and year 2 on acquisitions. We also have not done an acquisition unless it's neutral or accretive at the end of 6 quarters on adjusted EPS. And then finally, because your question's a very good one, we have specific goals from a return on investment that I carry in my annual targets for -- any of my compensation along with our CFO and our President and Chief Operating Officer, who is the 3 people that make the decision on pricing. That's a great question. One other quick comment, any acquisition where we spend $50 million of capital or more has to have prior board approval.
Yes. How much of your growth at any one time is driven by industry development such as frac-ing and energy and that type of thing versus just knocking on doors and getting new customers?
Jerre L. Stead
Yes -- no -- a very good question. Clearly, a good example would be horizontal drilling and frac-ing today where we have all of the information of every well in the world. We're the only company in the world that does. So for example, these people are now going back to use so-called abandoned wells because of the technology change. That's a very helpful piece for us. It's a good question. Okay. Just been cut off at the back. Thank you very much. Look forward to time at the breakout session.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!