EPIQ Systems, Inc. (NASDAQ:EPIQ)
Investor and Analyst Day Conference
April 04, 2013 10:00 am ET
Lew P. Schroeber - Vice President of Investor Relations and Finance
Tom W. Olofson - Chairman and Chief Executive Officer
Christopher E. Olofson - President, Chief Operating Officer and Director
Laura Kibbe - Managing Director of Document Review and Expert Services
Elizabeth M. Braham - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Corporate Secretary and Treasurer
Peter J. Heckmann - Avondale Partners, LLC, Research Division
Delroy Warmington - Delwar Capital Management
Raman Brar - CIP Capital
Jonathan Buba - Nantahala Capital Management, LLC
Michael Braner - Sagard Capital
Hendi Susanto - Gabelli & Company, Inc.
Herbert C. Buchbinder - George K. Baum & Company, Research Division
Lew P. Schroeber
Well, good morning, everyone. We'll go ahead and get started. And welcome to Epiq Systems' Investor Analyst Day. My name is Lew Schroeber, and I'm responsible for the Investor Relations function at Epiq Systems. So after this meeting, and as you get back to your offices and have further questions, please don't hesitate to reach out to me.
As you could see, we have a full agenda today, and I think one that we believe will be very informative for all of you. We'll start with Tom providing a financial overview and we'll go through some information around Epiq differentiation, talk a little bit about our business units in terms of eDiscovery, Bankruptcy and the Class Action. Betsy will conclude with the financial summary and then we'll open it up for Q&A. As we go through the presentations, we would appreciate that we hold all the questions until the Q&A period right at the end. During these presentations, we will be discussing our financial objectives and providing some future guidance information, and we remind you that forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those indicated. At this time, I'd like to turn the meeting over to our Chairman and CEO, Tom Olofson.
Tom W. Olofson
Good morning, everyone. Welcome to our Investors Day. We're pleased to have you. We'll provide you with an executive overview of the company today, talk about the business generally, some financial insights. As Lew indicated, we're very happy to field any questions you have. So we ask you to think about whatever you'd like to ask in the way of questions at the end of the meeting. We'll take whatever time you'd like on that portion of this morning's meeting. Let me introduce, first of all, some of the key Epiq associates who are with us this morning. I'll start with Chris Olofson. Chris is our President and Chief Operating Officer. Chris will follow me in the presentation and provide you with his insights into our business operations, talking about our domestic, international operations, the various business segments that we're in and to give you give a good overview of the company. Betsy Braham is our Executive Vice President and the Chief Financial Officer. And Betsy, right before the Q&A session, will give you some insights into historical financials and then also talk about our objectives for 2013. Brad Scott in the first row is with us. Brad is our Senior Vice President and Chief Human Resources Officer. Brad joined us recently when we acquired De Novo, and you recall, that was an eDiscovery acquisition that we did about a year ago. Laura Kibbe. Laura Kibbe is one of our Managing Directors in the eDiscovery portion of the business, a real subject matter expert. Laura will speak with you about eDiscovery and that scenario that she's been involved in for many, many years. And Andrew Shimek. Andrew heads up our Class Action Settlement business, which is headquartered in Portland, Oregon. And Andrew will make some comments on Bankruptcy as well as Class Action.
Let me just provide you with a few comments relative to Epiq in terms of how the business started and how we've grown it over the years just to bring you up-to-date very briefly.
I bought the company in July of 1988. I'd spent a number of years in different management positions with Xerox and then different senior executive positions with Marion Laboratories. Marion is now part of Sanofi-Aventis, and in the '80s, I did a number of investing activities and got involved in more entrepreneurial-type ventures, and that led me to acquire Epiq in July of '88. At that time, the company was in the Bankruptcy Trustee business only. We ran it as a private business for 9 years until 1997. February of 1997, we did an IPO, small IPO but a highly successful one. And we did that because we thought it would give us additional financial strength and flexibility, allow us to take the company more smoothly to the next level. And as I say that, I think, worked out really well for us.
We have today just under 1,000 full-time associates. We are headquartered in Kansas City. We've always maintained our headquarters there. That's not our largest location, but it's worked out very well to keep the headquarters in Kansas City. In fact, we're just going through a major facilities expansion there. But we have corporate offices there. We have the original Bankruptcy Trustee business there. We've done a lot of centralization of our IT people in Kansas City, and that's worked out nicely for us. Actually, in terms of people, our largest location is right here in Midtown. The eDiscovery business is headquartered here. Corporate Restructuring is headquartered here. We have a number of executive offices here as well. So New York City is a very key part of our overall operation. We have several other major facilities domestically. They would be Phoenix, which is an eDiscovery facility that we acquired when we bought Encore a couple of years ago. Portland, Oregon, as I mentioned, with Andrew and that's where the Class Action Settlement business is headquartered. We then have a series of what I call satellite offices in major cities around the country where we do a great deal of business and we have a lot of business potential. That would include places like Los Angeles, Chicago, Miami, Washington, D.C. The international business is headquartered in London. That is a very, very rapidly growing business. It's been very, very successful. It's principally eDiscovery. The Asian headquarters is in Hong Kong. Likewise, that's growing very rapidly. Hong Kong reports into London. And you may have seen the press release recently where we just launched the Japanese business, which is headquartered in Tokyo. And the international part of Epiq is doing very, very well.
Let's talk now just a little bit about the business. When you look at Epiq, I think a couple of things stand out. Number 1, we view ourselves as a growth company. When you see the chart that Betsy will show later in the meeting, you'll see some very interesting double-digit growth statistics as you look back over the last 5 years. And we typically measure ourselves in operating revenue, non-GAAP EPS, EBITDA and cash from operations. Those are really the 4 areas that we're really focused on. And you'll see in Betsy's presentation that we have some very nice double-digit growth on a very consistent basis in all of those areas. We also launched a dividend program, and Betsy will talk more about that. We did that in 2010. We've increased that a couple of times. We also did the special dividend last year. So what we want to offer to investors is the combination of a growth story, as well as a very nice dividend yield. At $14, which was the closing price of the stock yesterday, the yield is about 2.6%. And you'll always find that we -- we're a growth business, so we certainly look for the top line to grow very steadily, but we'll always zero in on margins, cash flow and profitability. One of our sayings is that we're in the business of quality revenue. Quality revenue will always bring cash and profitability with it. So we're not just in the business of revenue for the sake of revenue, but we find that the cash flow will really give us the financial strength and flexibility that we want.
We offer, we think, great technology. Chris will talk about this. We are clearly in the client service business. We're also in the relationship business. To do what we do for a living successfully in the niche markets we're in, you really have to excel at relationships. A good example is, you're not going to be in the restructuring business, get retentions like Lehman Brothers if you don't have the right kind of relationships. So we place a great emphasis on that, and I think that works well for us. Now, I mentioned the business started in the Bankruptcy trustee area. We then expanded into corporate restructuring. That is now the largest part of Bankruptcy. I'm sure Chris will touch on some of these things in more detail. We then, through an acquisition of Jupiter a few years ago, got into the creditor business. But we're a real market leader in Bankruptcy in all of those different parts of Bankruptcy. The Class Action business has done very, very well. Andrew will touch on that. We've had some really attractive growth there, especially in recent years. We're getting some nice market share, taking that away from competitors. You've heard us talk about large retentions, the BP Deepwater Horizon matter, more recently, the very large MasterCard Visa matter and these are really significant pieces of business in the Class Action Settlement area.
We entered Class Action in 2004. We entered corporate restructuring in 2003. Now relative to eDiscovery, we made a key strategic decision to enter that business in 2005. We really like the eDiscovery business for several fundamental reasons. In multibillion dollar market, some of the other niche markets we're in, while we do very well in them, they're more finite in size and we really like the multibillion dollar size of the eDiscovery market. It's truly a global business that was very attractive to us. And I've already referenced a couple of times the international growth and the future opportunities we have there. It's a market that affords us a very nice profitability and cash flow. The eDiscovery business, we felt, was a very good fit for us. And so we strategically entered it in '05, and we've done very well. Our objective has been very simple: To be on a global basis the market leader, and we've made great strides toward accomplishing that objective. So we'll talk with you today about eDiscovery, Bankruptcy, Class Action Settlement, and some overall things relative to Epiq.
This will just give you a brief look at the kind of clients that we have throughout the business. I'm not going to go through all of them but the names will pop out. Obviously, you'll be aware of retentions like Lehman Brothers, Enron, Wilcom. You'll see some of the major law firms on there. [indiscernible], et cetera. There's a number of Class Action and eDiscovery clients there. But as you look at those names, it gives you a feel for the kind of clients we deal with and this is just a very, very small number out of the overall total. You'll also see, and I think this is a very interesting statistic, we deal with 48 of the top 50 law firms in the world. And once again, that ties back to relationships and really dealing with those kinds of clients on an international basis. And the top 50 law firms in the world, of course, include what we call the big 5 in London. They are referred to as the magic circle firms. I think we deal with 4 of those 5. And so 48 out of the top 50. So when I see Chris in morning, I say, gosh, Chris, that's great. What happened to the other 2? So one of these days, we'll be able to tell you we deal with all 50. But this is a really, really nice group of clients. It also includes most of the large Bankruptcy trustees around the country, many large receiverships and people like that. So with that said, I wanted to just give you a feel for the business, a little bit of the history. Chris is the Chief Operating Officer, runs the entire business. Chris is in charge of day-to-day operations for all the business units domestically, internationally. Chris has been with the company since I acquired it in 1988. Part-time for a few years and then full-time since 1993 as I recall. So he spent a lot of time with Epiq, knows the business very well, and Chris, I'll turn things over to you at this point.
Christopher E. Olofson
Good morning. Thanks, everybody, for coming. As Tom mentioned, I'm Chris Olofson, I'm the President of Epiq Systems. I have a general responsibility for our different lines of business and have been in this role since 1993. Andrew and Laura are going to give a more detailed presentation on some of the particulars in our business line: Settlement Administration, Bankruptcy, eDiscovery and they'll talk in more tangible, more concrete terms about precisely what are the products and services, how do they do, what do they function as. So what I'd like to do is tee up those subjects that will be more detailed and more concrete with some overarching themes and comments that encapsulate the company as a whole that will then lead into the more detailed presentation.
The tagline for Epiq Systems, if you look at our literature and you look at our website, is "managed technology for the global legal profession." So a good place to start I think might be to dissect that a little bit, talk about what's underneath it and think about how those subjects relate to the different businesses that we are in. I'll start with technology.
We are a very technology-driven, software-driven company across all of our business lines. And our technology strategy includes both the proprietary component and utilization of generic, or in some cases, more specialty third-party tools, created by outside licensed source. I'll start with proprietary. Proprietary software development is really in the fabric of the whole company. We believe it's quite essential in the specialty markets where we compete. It keeps us relevant in those markets. It puts us in a position of control in those markets. And it establishes very important competitive differentiation in each of the business lines that Andrew and Laura will be describing. We have a fully formed internal onshore software development team. Most of those staff are in Kansas City. They support all of our business lines.
A lot of the software that we developed, almost without exception, is delivered in a hosted environment. So it's quite rare for us to drop software in a client site and leave. We really do not do that in the majority of our business. And our Epiq Systems staff consumes our proprietary software as much as our end-user clients do. So software-as-a-service that is consumed not only by the end user client but also consumed quite heavily by our internal staff who are supporting clients, and really all of our software products are accompanied by a high level of value-added services that we provide. So don't think of Epiq Systems as simply providing a technology platform that leaves the client on its own. That's really not what we do. We have technology platforms that clients consume, but in addition to that, we provide a lot of value-added services and our staff will be in the software as much, or in some cases, more than the clients. And rounding that out, and I'll talk in a moment, all sorts of value-added services that we provide in addition to providing the software itself.
Select the examples of our proprietary products and again, Andrew and Laura will talk in more detail about our proprietary document review platform called DocuMatrix, that is a cornerstone of our eDiscovery business. ClaimsMatrix, which is the proprietary platform that is the cornerstone of our Settlement Administration business; DebtorMatrix, that is the keystone of our corporate restructuring business; and TCMS, Trustee Case Management System in trustee services. In addition to those proprietary products, part of the company's technology strategy includes leveraging third-party tools. This is a very cost-effective way for us to deliver the end product client without having to reinvent certain wheels that are not core, that are not needed for competitive differentiation. The combination of proprietary and third-party software together really is a good way to look at the technology strategy of the company. And in certain markets, for example, eDiscovery, there are clients who have a established preference to use third-party tools that they know can be sourced or can be supported by suppliers beyond Epiq Systems. And we see no reason to walk away from those revenue opportunities, while it remains very important to us to invest in our proprietary products and keep them in leading positions in their various spaces.
So another dimension beyond software of the company's technology strategy is its IT infrastructure. We operate full data centers in: The United States; New York, Kansas City, Phoenix; in London, in Hong Kong and soon to open, in Tokyo. We're able to use those data centers and leverage them across our businesses. And one of the things we like about our business is that, that fixed infrastructure can be spread across multiple business lines and can support future business lines from the existing investment. Right now, as I think is the case in so many managed IT business, is information security is a very important part of that strategy for our IT division. And we have continued to invest and bolster and round out the IT security dimension of our technology strategy and see that as a point of competitive differentiation, particularly against some of the much smaller standalone category competitors that we might encounter in Bankruptcy or eDiscovery or Settlement Administration. So with the software and the IT sitting side by side, the last thing I'll use to round out technology strategy is a high-capacity fulfillment capability that we have to round out client engagement. So we have very sophisticated in-house capabilities for print mail, for call center support and for disbursement function of cash or securities disbursement that round out the services that we provide from the technology platform. And having all of those assets in a single support environment is a key point of competitive differentiation that we use across our different business lines. So managed technology for global legal. That talks a little bit about the technology, that talks a little bit about why it's managed and how we look at the management of those functions. The markets that we are in are highly specialty, niche markets. They are markets that are distinguished by very particular trade practices, they are markets that have high barriers to entry, they are markets that require a significant subject matter expertise for success. So that's another integral component of the company's overall strategy. Technology by itself does not turn into success in Class Action or eDiscovery or Bankruptcy. It is the value-added subject matter expertise that is paired with the technology that leads to that success. Most clients who come to us, whether it is an eDiscovery matter or a Class Action matter or a Bankruptcy matter, are in some sort of reactive mode. They need assistance with some problem that has surfaced. They need subject matter expertise that they may well not have in-house or that they simply need to supplement, and they certainly may not have the capacity in-house to address the scale of matter that they would typically have at hand. In our client engagements across the various businesses, we are almost always working with moving targets, and we quite frequently sort of insert ourselves into a chaotic situation that our client is facing. And part of the value that we bring to bear is the experience that we have and the subject matter expertise to lend structure and an orderly approach, whether it's a Bankruptcy, a Settlement or an important eDiscovery undertaking. On the Epiq Systems staff, alongside the technologists that you would associate with software engineering or IT or information security, is a whole slate of lawyers and subject matter experts. So Epiq Systems is not a law firm. We couldn't be if we wanted to be. And we do not, therefore, provide legal advice. However, a lot of people on our staff, including both of the executives who will present business lines, are attorneys by background. They come from a litigation background. They may have been a practicing bankruptcy attorney. They may have a very specialty skill set in information governance. And then that we use that expertise to reach out to our clients who are almost always lawyers and use this as a point of competitive differentiation. And we have both an internal staff that is largely staffed by those of a legal background and a field consulting workforce, many of whom are attorneys that will go to client sites all over the world, whether for a Bankruptcy or eDiscovery or another type of matter, and provide services at the client site or at the client's law firm site.
So managed technology for global legal profession. I'd like to talk about global legal profession and how that fits into the company's positioning and strategy.
So Epiq Systems, we compete at the top end of our marketplaces. We go after, and our specialty is, the largest cases, the most high stakes engagements, matters requiring the top level of capacity and subject matter expertise. We certainly work on garden-variety, smaller-scale matters every day of the week for clients around the world. But we have a particular capability, and I think a reputation in our markets, for capacity and ability to address the high end of the market. As Tom mentioned, our largest commercial office is here in New York City. The U.S. workforce rounds out in Kansas City, which is our corporate headquarters, Phoenix, Portland, a variety of satellite offices and then major international sites in London and Hong Kong. And again, as Tom mentioned, Tokyo opens this spring. We are very much in the relationship business. We seek repeat business models, we put a tremendous effort in investing in long-term relationships, both with law firms who in turn bring us into engagements involving their end clients. So, for example, to cite a bankruptcy instance, oftentimes, a client, an end-user client facing a Bankruptcy will retain counsel. That client has probably not been in Bankruptcy before, has a very tumultuous situation at hand, and will seek advice from its outside counsel as to who to bring in for the technology-related administration services required. So we as Epiq Systems, cultivate referral networks with leading bankruptcy firms and that's a very important channel through which we receive business.
As Tom mentioned, we work with top-end law firms, we work with the magic circle firms in the United Kingdom and increasingly, we work with corporate legal departments directly, primarily for large global companies who are frequently in litigation.
The eDiscovery component of our business is certainly the most global. It's a worldwide business. However, Bankruptcy and Settlement Administration, while generally focused on U.S. law, have non-U.S. capabilities and in fact, non-U.S. experience. For example, our Bankruptcy department supports the wind down of the Icelandic banks. Our Settlement Administration practice has supported cases in Europe where a model of Class Action is developing. So Bankruptcy and Settlement are largely, but not exclusively, U.S.-facing businesses. eDiscovery is a global business. So managed technology for the global legal profession, I hope that's provided some insight into how we look at that, some characteristics that unify our different businesses. And today, if you take a snapshot of Epiq Systems, one of the things that we like about the company is today, we have a portfolio of business lines that experience different economic cycles. So Bankruptcy experiences a different economic cycle than does eDiscovery and Settlement Administration yet again. So that creates the effect for us of not having all of our eggs in one basket, not being subject to the variability that naturally occurs in any one siloed business line and we further seek to be large enough and have enough scale in each of those business lines that we minimize and contain the exposure to any one large matter, because we do tend to get hired on large matters and like all matters, they have beginnings, middles and they do have ends. So by having spread the eggs across multiple baskets, having enough eggs in each basket, this is the strategy that we have adopted to achieve a consistency of results over a long period of time in markets that ebb and flow, like many markets, and in instances where we have cases that can be very large that have beginning, middles and ends.
So looking forward, Epiq Systems has grown to this point through a combination of organic development and acquisition. And we see that trend continuing. Growth continues from organic development and from acquisition. The last time we entered a brand-new marketplace, as Tom mentioned, was in 2005, when we entered the eDiscovery space. Since that time, we have grown that business quite dramatically, both organically and through complementary acquisition. But as we look into the next phase of the company's growth, we would anticipate at some future date, investing in yet another line of business, both to continue the diversification of the company, which we think is sound judgment, as well as to ensure continuing headroom and opportunity for ongoing growth. Some of the characteristics that we would look for in screening a strategic acquisition candidate in addition to their financial complexion, which would have to satisfy a variety of criteria and be complementary to the finances of the company today, certainly specialty markets having managed technology requirements. That is something that would be very logical going forward. A focus on the legal market, not a must-have, but something that would certainly continue the line of investment we have made thus far.
Proprietary technology. Something special, something that is distinguished in a competitive landscape.
An opportunity for market leadership. We would not seek to go into a market and be a second-tier player. We would seek to go into the market and do what we have done in Settlement, in eDiscovery and Bankruptcy and be either the player in that marketplace or a generally acknowledged, very top-tier competitor in a small bracket of other companies.
Bundling product and service together is something we do very well. So again, our software products are not simply left in the customers' hands, but they're rounded out. They're complemented. We have revenue streams attached to them with all of the value-added services that we provide.
And we have a particular interest in revenue models that include some sort of recurring component. While it is true that there are project-based orientations in many of our markets, these are -- can be very long-term projects that have recurring revenue every month over the course of a long-term customer engagement.
So those are some characteristics that encapsulate the company as a whole. I'd now like to introduce my colleague, Laura Kibbe. Laura has been with Epiq Systems here in New York since 2009. She is a Managing Director for Expert and Professional Services in our eDiscovery division here in New York, and she's going to tell us a bit more about the eDiscovery business in detail.
Thanks, Chris, and good morning, everyone. I'd like to talk to you today about our eDiscovery business generally and why we believe it's such an exciting time to be in the eDiscovery market.
In addition to our traditional -- what I'll call traditional eDiscovery projects, the litigations, the investigations, the second requests, where our clients are charged with gathering large amounts of data and sifting and sorting through it to get the documents that they need to produce to a regulator, to an opponent in court or to the government to get a merger or sale approved,
we are seeing a whole new opportunity in the marketplace as well. I recently heard an analyst describe our market as previously in its infancy, and now it's in toddlerhood. And it is in toddlerhood approaching maturity. And I actually thought that was a really great analogy because, think about it, when you're a toddler, you're learning the basics. You're getting the groundwork in place. You're learning how to do all the basic skills. As you start to mature, you take all those skills, and you start weaving them in different baskets, expanding your reach. And that's exactly what we're seeing in the eDiscovery market today. We're seeing a broader use for our traditional tools and services that are really the same package, just a little bit different flavor with a little bit different audience. And that means tremendous growth opportunities for us as well as more solutions that we can offer to our clients.
The information management piece, this -- the growing globalization of the business, the data proliferation that we're seeing all over the world, is really what's fueling this. So the needs are growing every day for our clients in the traditional sector and in new ways. And I think that's evidenced by the recent research analysts who look at the industry and say, "You know, we're really looking at strong, double-digit growth through 2017. And we're looking at a $10 billion market." That's a huge marketplace for us to play in with all kinds of different needs to meet. And it's a very exciting time to, as Chris said, have our proprietary and our best-of-breed, third-party tools to be able to create the solutions that our clients are going to need in the years to come.
Why are we in this mess? It's easy, very easy. Big data. It's all the buzz lately. There have been reports about it in the newspapers and the magazines. And I would like to bring it back to us individually. Look at your own email box. How many emails do you get every day? Are you deleting them? Or are you, well, yes, I read them and you never really get that time to go back and clean up the email? Well, that's exactly what's happening everywhere in the world in all of our clients today, law firms, corporations everywhere.
So when -- just a few years ago, it would not be uncommon for us in a litigation setting to get in emails from a particular custodian that had to be sorted and sifted and that's 3 gigabytes of data plus 18,000 emails from them. Now it is not uncommon for us to see 30 gigs of -- 30 gigabytes of data coming in per custodian. That data proliferation with no underlying records management is the reason that the challenge is growing daily, because we have to manage that big data. If -- once you take it outside, okay, it's a small -- it's the lawyers' problem in litigation. They'll have to deal with it if and when we ever get sued. Now it's gone beyond the walls of the general counsel's office. Now it's a huge problem for IT infrastructures, for -- think about the large corporation, or I don't know if any of you have an email archive in your offices. But email archives are exploding. The data management is becoming now not just a general counsel's problem but a front-line business leader, IT, CFO problem, trying to get their arms around it. It's costing a ton of money to manage this data just in the normal course of business. Forget when -- the litigation hits or the investigation.
Plus, we're getting hit with tons and tons of new technology. And I love this next slide because it's already out of date -- it's already outdated. Technology in an Internet minute. When I started practicing a billion years ago, there were no computers. I sifted through paper boxes if I wanted to find the story of the day. Now we've got Facebook, we've got Twitter. As my children tell me, now we have Instagram and Pinterest and more and more technologies developing that, that is how people do business on a daily basis. That technology is created and driven by our desire to work in the marketplace. No one is saying, as they're looking to create the next Pinterest, oh, those poor lawyers will have to do something on the back end to help them out so that they can get this stuff out when they need to give it to a regulator. So that's our challenge, is to deal with all of this new information. And the more we get and the more people are texting and using Instagrams and Pinterests and that's where the fabric and the facts of a particular case are found, they're going to have issues with managing it, and they're going to look to somebody with the tools and the services and expertise to help them manage that a little bit better.
We also have the cyber security issues. I mean, it's in the news every day, some kind of data breach, some kind of privacy issue, some kind of foreign government trying to get into the system. As you have more and more big data, the security, the information security network and infrastructure that you have in place around your data becomes even more key because the more you have, the more vulnerable you are to attack.
Getting your arms around all of that is the way corporations are now looking at it as a way of reducing risk. Sure, I can do a lot of the traditional legal things and trying not to get into "trouble" from a litigation perspective or an investigation perspective in the first place. But now I have to really kind of shift my thinking to the front end, to the information governance side of things, and saying, well, what kind of trouble can all this data, unmanaged, get me into? Forget about the litigation. What other kinds of things put me at risk? And that's what brings the general counsel, the CFO, the business leaders and the IT organization together saying, "hey, we have a problem."
Epiq is very uniquely positioned to help across that spectrum. So we've got all of our traditional projects, your litigations, your investigations, your merger clearance with the government agencies. We're also starting to go back and look at some of their other ways of handling data. There's a growing move to cut costs inside the corporation. Now there's -- old, added storage is cheap, well it's not so cheap when your email volume is doubling, more than doubling every year. And all of your structured data needs and all of the complex information that you need to run your business are just proliferating at a rate that you can't keep up with. Corporations are looking and saying, well, "You know, I can't just bring in another system. I can't devote the 3 additional FTEs that I need to bring on and won [ph] a new piece of software to control my legal holes. How am I doing it?" There was a rush back in probably 2003, '04 for companies to do litigation readiness assessments. Are we ready? If we get sued, how are we going to respond? Now we see companies going back and saying, "Okay, plans been in place for a few years. How's it doing? Uh-oh, it's actually causing us to hold more data than we wanted to. Maybe we need to look at it. Maybe we need to revamp that program."
And in addition to our proprietary litigation tools, Epiq can also bring legal hold consulting and technology in a hosted fashion to our clients. So instead of having to buy a new system, implement it and use it inside, Epiq can host it for them, Epiq can help them manage it if they don't have the full-time employees to do it, or we -- they can administrate it themselves. We can also go in when companies are looking to do that data cleanup as much as they can using our eDiscovery technology tools to go in and say, hey, there's a big information store. Maybe it's your email archives. Maybe it's a big file share with a bunch of employees' office documents on it. We can take the technology and treat it just like it was a litigation and help corporations sift, sort, understand what they have, put it into the right buckets and, most importantly, get rid of the stuff that they don't have to keep. And that's the perfect example of the combination of technology and services, because you can't just throw technology at it. You have to throw technology at it and implement it with a very reasoned, defensible plan so that these corporations can start afresh, can save their email archives from blowing up, can save their data center strategy from exploding all over the globe, along with the kind of cleanup inside the house.
And I'm sure you've all seen this. A lot of moves to the cloud. Lots of very public announcements lately about so and so company is moving all their email to Google. Everything is going to be outside. And that sounds all well and good because there's a certain amount of predictability and cost savings associated with getting it outside your firewall. But when you do that, there's also a certain amount of risk that you're willing to take when you do something like that, and Epiq can help in that space, too. How can we do that? Well, we can help with the corporation that says yes, I want my email outside. We can consult with them and say, okay, well, have you thought about how you're going to get all of this back when you hit a litigation or an investigation? Help them put programs in place, protocol to get the information back out. Help them establish service-level agreements. We hear it all the time in discovery. "Oh, well, our email is outsourced, and the outsource provider says it's going to be 2 weeks until they can get me the email." The court doesn't understand that at the end of the day. The court doesn't -- "Oh, sure, whatever your email provider says, you can get them to us." There are deadlines, and we can sit there with our clients and help them put the initial plan in place to make it easier for them.
Law firms, many, many law firms over the years, built large litigation support operations. Some of them are now sitting down, looking and saying, "Oh my gosh, I have 75 terabytes of client data. Not my data, all my clients' data. That's probably not the business as a law firm that I want to be in." So they can call Epiq and say, okay, well, here's this litigation store. I'm really in the business of law and counseling. I'm not really in the big data kind of management business. Can we shift that infrastructure over to Epiq? We can still operate keyboards, if you will, but the infrastructure is removed from their operations. That's our managed service offering, and we're spending more and more time talking to law firms about the right amount of data that they should be managing and when they should be kicking it over the wall to an expert.
And the globalization. Chris mentioned this. So our global footprint is expanding, because our clients' needs are expanding globally. As people start looking to do things like outsource email, they start looking worldwide to see, how can I achieve cost savings? What's the best way for me to organize my business? Forget geography. If there's a specialty, something in a country, maybe I should have that piece of my business there. What that means is now literally, there's data being generated on every continent. And when you have that legitimate business request for the information, could be just a business question, not a litigation or anything requiring a production of documents per se, you can't find the information because it's global. And unlike the United States, most of the countries outside the United States have pretty severe privacy and data protection laws that we have to comply with. And you can't just go and get data as much as we would like to think in the various countries and start moving it all over the world. So that challenge of negotiating how to get the data from one country to another is something that Epiq can bring to the table. We can take our technology. We can mobilly jump into certain countries. We can do the processing on-site. We can move the data back to our strategically located regional hubs and help our clients navigate that framework of all the global privacy laws. Just last year alone, we did on-site operations in over 50 countries, and that's growing.
And on the traditional litigation front, we're also seeing a renewed interest in doing things smarter and get -- lawyers are finally at the table saying, okay, I'm a trial lawyer, I've been doing this for 20 years. But even I recognize this big data problem is making me think differently. I can't just start at box 1 and go to box 1,000. I'm going to miss something or I'm not going to do it fast enough. But because the legal profession, particularly litigators, are preachers of precedents, they like things that happened back in the 1800s, bringing new technology to the market and helping them understand how it works, how it's actually going to be defensible in their practice, is scary to some of the lawyers.
Recently, we've had a huge win in the fact that several courts have endorsed the use of the predictive coding technology. So Epiq has had the predictive coding technology in its toolkit since 2009 when I joined the company. But lawyers, being a little reticent to adopting new technology, wanted to say -- get a court to say, hey, I can do this. And we had that in 2012. We had a court right here in the Southern District of New York saying, "Yes, go ahead. Not only can you use it, you should use it because it's a smarter way to get through all this data." And then we had this -- a state court in Virginia say, "yes, me, too. That's global aerospace. You should definitely think about using this technology." That, in combination with all of the other traditional review accelerators and -- that are incorporated into our proprietary and third-party software is the way you're going to get through this faster and do it quicker.
But they need some hand holding. They are not going to -- as Chris said, we're not going to hand them a [indiscernible] through their software and say, have a nice day. We're going to say hey, we'll walk you through it. We'll sit there with you through the process, we'll help you create a plan that works for you. We'll help you implement that plan. And then at the end of the day, if the court wants to know why you did that or how that works, we will be there, too.
And that's the other, I think, significant change, at least on the litigation side of things, is the new rules changes. For those of you who've been following Epiq for a number of years, you know that there was a big to-do in 2006, new federal rules changes. Again, lawyers, being creatures of habit, they don't like new rules.
We are, in 2013, looking at a number of new rules, not earth-changing or earth-shattering rules to the discovery profession and rules but things designed to say work smarter, work better, just don't work longer. And it's in light of these rule changes where Epiq services, Epiq software and really the Epiq expertise and having that person that you can stand arm in arm with in court talking to your opposition and saying, "Well, this is really how that really works. And you don't have to worry about it because here's the process we're going to follow." It's going to be key. And that's global. It's not just in the United States with the new federal rule changes or some of the circuit court pilot programs but also over in the U.K. with the Jackson reforms. And that's going to require lawyers to say, okay, "I need some help. I need a partner that's going to help me through this maze." With our suite of services and expertise, we're uniquely positioned to be that partner.
So when you look at it across-the-board, starting with our consulting and our forensics and collections operations, whether it's a big data problem generally or a big data problem in a litigation or investigation or a merger, fast forwarding through our processing and our hosting services and our review capabilities, what we now have is a solution stack. And we can combine any, all, some of that technology and services and create a customized solution for our clients in or outside the litigation context that can be created, implemented and then defended for them. And that's really where our sweet spot is, taking and blending all of those technologies together and using the right people, the right process and the right technology for your matter.
Thank you very much. And now I'm going to turn it over to Andrew, who's going to talk a little bit about Bankruptcy and Settlement.
Thanks, Laura. Good morning. I am here to walk you through some of the particulars for our Bankruptcy and Settlement Administration division. And I'll start with Bankruptcy. As Tom mentioned at the outset, we're the largest Bankruptcy provider, and we're situated with solutions in both markets that we serve. We're really positioned as the only provider with solutions for all the stakeholders in a bankruptcy proceeding, which includes the debtor's attorney, the creditors and the trustees.
Let's start on the debtor's attorney side in the Corporate Restructuring Chapter 11 division. That is the largest division that we have in the Bankruptcy segment. While Chapter 11 filings represent the smallest percentage of filings as between 11, 7 and 13, they are the most complex engagements. And that presents a significant opportunity for Epiq to provide administrative support and professional consulting in a Chapter 11 engagement.
So we'll talk a little bit about the solutions that we provide in the Chapter 11 market. On the front end, we provide consulting services where we can sit down with the debtor-in-possession, outside counsel, the financial advisers to prepare the necessary court filings. We also have a legal notification division, which includes in-house fulfillment capabilities. We have a large print mail center so that we can notice creditors via email, U.S. mail, FedEx, UPS, really any way they need it. That group also includes a media component, where we have a media team that secures and executes some placements in The Wall Street Journal, New York Times and other periodicals and intended to reach creditors.
As we move on to the notification group, we have a technology overlay, which Chris mentioned earlier, which is DebtorMatrix. This is a proprietary database that we constructed and really overlays the value-add service we provide throughout the proceeding. And DebtorMatrix houses the proof of claims that are received in a matter and other critical documents relevant to the bankruptcy proceeding.
On the service side, we have a case management team that communicates with various parties throughout the matter. They intake and supervise the processing of the claims. And then we have a disbursements group, which is a team of experts that calculates and process payments to creditors at the appropriate intervals.
On the Chapter 11 consulting side, we also have a team of experts that do financial balloting and solicitation, and then they'll calculate the various results of 1 or more proposed reorganizations under a plan.
As we move -- sorry about that. As we move on to the trustee side, we provide a TCMS, which is a case management solution for 7 and 13 trustees. And this solution is intended to help them manage really their entire portfolio of cases, to report back to the judiciary and also to process payments to creditors at the appropriate intervals.
The client in this division is really the trustee. And so our team's ability to develop deep relationships with trustees is what enables us to really hold and advance our market position. So we have a team of case managers that help onboard new trustees and ensure that existing trustees have all their needs met.
Under our Trustee Services model, Epiq makes money through a combination of basis points on trustees' deposits on hand and also the bank fees that are assessed to each of the individual trustee's accounts.
I'll talk to you a little bit about the bankruptcy market. As you can see from the chart here, we're in a current down cycle in 2012 and 2013. But what we expect to see as the leveraged loans outstanding become due in 2014 and beyond, is a significant uptick in bankruptcy filings. Now, of course, a lot of this debt will become restructured. But that said, with more loans becoming due, we expect to see a related uptick in filings, which really will result in an increased demand for all of the solutions across our bankruptcy proceeding.
Okay, so let's move a little bit now to the Settlement side, which is the division that I lead. We really have, in the last 36 months, reinvigorated our market position and our reputation because of some of the retentions that we've been hired on. And Tom mentioned at the outset our work on the BP Deepwater Horizon oil spill and the Visa, MasterCard payment case. So they're 2 of the largest settlements that have happened over the last 24 months. And on BP in particular, we were appointed by the court as the database administrator, which involves aggregating claims from several sources and basically hosting them in one central repository where the various parties of interest could have access, come in, view their claims and apply the necessary work product. Our legal notice group was also retained in that matter to develop and actually [indiscernible] on the notice plan intended to reach all class members who may have suffered economic loss because of the oil spill or personal injury either now or injuries that could manifest in the future.
I'll touch on some of the other matters we're administering. The payment card interchange case is the largest private antitrust settlement in U.S. history. It's a $6 billion-plus settlement. Essentially, it involves all merchants who swiped Visa or MasterCard over the last several years. And we're just wrapping up the notice portion of that case. So in a few short months, we'll move on into the claims processing.
In the antitrust side, we're also working on launching a notice program right now related to freight forward services. This matter involves price fixing allegations for all the large freight forward providers really across the world, and the class members are shippers all around the world. So that notice campaign is about to kick off. It's a $100 million-plus settlement involving most of the freight forward service providers in the country.
On the consumer finance side, we work on engagements really across-the-board, including managing consent decrees between federal agencies like the Federal Reserve bureau, the OCC and large financial institutions. A lot of those recently have involved the mortgage crisis. And on the consumer finance side, we will -- we're working on a series of cases related to checking account overdraft charges, which really involve most of the banks in the country today.
Laura mentioned information security, and that is a primary area of our practice as well. We are the leading data breach settlement administrator, and we've administered most of the large data breaches as measured by class size, including TJ Maxx, Countrywide, Veteran Affairs and Certegy.
When we look to the securities of class action settlements, although securities is in a current down cycle in terms of filings and settlements, those represent some of the largest matters in the market. And in the recent past, we've been retained on some the largest settlements, including Toyota, Merck, Schering and the Apple securities case.
Now let's move to some of the services that we provide in this division. Like Corporate Restructuring, we have a legal notice group. We have a state-of-the-art print mail facility, and we're actually the largest mailer in the state of Oregon. We've mailed 30 million notices so far this year. And we have a team of experts that sit inside that group that will develop notice plans intended to reach the eligible class members. And this is a clear differentiator for us in the market because if a settlement is going to implode, typically it focuses on the notice portion. Because of the finality in class action, it's critical that the parties engage -- leverage all resources to notify eligible class members in a settlement, because if you don't participate in a settlement, you can't later sue separately. So that's a lot of due process considerations around this. And this part of the settlement process receives the greatest scrutiny from the court.
So we have a team of experts that put these matters together. They'll go into court and testify on the adequacy of the plan. And again, that really sets us apart from our peers in the market. It's worth noting that our experts' plans have never been deemed inadequate by a court of law.
Moving into the claims management piece, we have an in-house claims management team that is responsible for in-taking and processing claims that we receive in various ways. We receive claims, believe it or not, that are faxed to us, emailed, sent through the U.S. mail. And also, class members are able to file claims electronically in Web sites that we develop for each individual matter.
We leverage technology to develop various ways to communicate with class members throughout the proceeding. Some may have questions about whether they're eligible to receive a remedy, whether -- what's the status of their claim. These channels include a state-of-the-art call center, which houses 200 agents in-house in our Portland facility. We also leverage technology for click-to-chat, email and really communicating with class members in various ways.
We have an in-house disbursements team that's responsible for calculating and processing the remedy in a settlement, which typically includes money today. And that remedy can be delivered via check, wire transfer, ACH deposit. There also can be coupon settlements or payment cards that we're positioned to issue as needed for a particular settlement.
While our role is really -- we're appointed by the court, and our role is to effectuate the terms of a settlement agreement, we're typically awarded the work by either class counsel on the plaintiff side, outside counsel on the defense side or the corporation if they're not deferring to their outside counsel and making decisions directly. And there are occasions where we're awarded the work directly from the Federal Government, as is the case with our work with the the FTC, the SEC and the USDA. That said, we've spent a lot of time upgrading the talent and the size of our sales team, which really is a team of former practicing attorneys or legal professionals that build relationships with all of these groups: plaintiff counsel, defense counsel, in-house corporate counsel and federal government agencies. And that's what's been critical for us to maintain and advance our market position over the past few years.
So with that, I am going to turn it over to Betsy Braham, our Executive Vice President and Chief Financial Officer, to walk us through the financial profile.
Elizabeth M. Braham
Thank you, Andrew. So I will wrap up today with just a few comments on some financial topics. First, I would like to look at the evolution of our revenue over the last several years, because it has changed dramatically and it's been very purposeful in terms of the changes that we see. So if we go back to 2005, that is when we entered the eDiscovery marketplace. That was a really critical year for us because, prior to that, Epiq was basically a bankruptcy company and a settlement administration company.
And in 2005, the eDiscovery business we purchased was a $20 million revenue business. We grew that business organically over the next several years to $49 million, and it became 1/3 of our operating revenue in just a few short years and bankruptcy slipped to 40%. We entered the eDiscovery marketplace because of this huge potential and the large size of that marketplace. As Laura said, it is predicted to now be a $10 billion marketplace, and Epiq has very purposefully gone through a change in eDiscovery from a $20 million business in 2005 to a $200 million business in 200 -- 2012, representing now almost 60% of our business last year. This has been very deliberate as we look at that evolution. In 2010, we had grown to $80 million in eDiscovery business. That was all organic. So we went from $20 million to $80 million over just a few short years.
But what we did know was that we still didn't have the critical mass that we really needed to be the leader in the eDiscovery marketplace. So we did 2 acquisitions in 2011 that really added strategic strength to our eDiscovery business. We acquired Encore first. And we have looked at that business and we said, strategically, we have the best proprietary product in the eDiscovery marketplace. But the market had shifted and had begun using a third-party tools that, while not as strong as our proprietary products, for simpler cases, they were much easier for and much more broad stream for attorneys to use. And we wanted to be able to participate in that part of the market. They also were West Coast-based, and we were more of a East Coast-based business. And we were able to double our sales force size with that acquisition. We also acquired De Novo towards the end of 2011 to strengthen our Document Review business.
Today, Epiq is now a leader in eDiscovery and is well positioned on a global basis to presume the top spit -- spot in -- as the eDiscovery leader as we look to the future, and that really is our objective. Chris stated it in terms of when we enter a marketplace, we enter it with the objective of being a leader. Now when we acquired a $20 million business in 2005, we knew we were going to have to do some specific things to move to leadership, and we have gone through, over the last several years, and executed on that to become a leader in what is a very significant market that has a 15% growth predicted for it over the next several years.
As we also look at the long-term financial performance of the business, one of our objectives has been to consistently deliver double-digit growth. We always look at, and Tom said this during his presentation, 4 financial metrics. They've been the same 4 financial metrics since I started 10 years ago: operating revenue, EBITDA, non-GAAP EPS, cash flow from operations. We look at and manage to these financial metrics every year. And we look at this slide and we're very pleased that we have, over a 5-year timeframe, been able to deliver double-digit growth on every single one of those metrics and it is our objective, as we look at our metrics for 2013, to continue with that tradition of delivering double-digit growth.
As we wrap up, we think about the financial strength of Epiq. As Tom said, again, we don't want revenue growth for the sake of revenue growth. It has to be quality revenue that brings profit with it and cash flow. We manage to those metrics. I would guess that we're the only CEO and CFO around that look at cash every single day. We know what we owe, we know how much cash got collected and we care about cash a lot. And I always -- my son just graduated a year ago from his M.B.A. program and I said, as far as I'm concerned, the most important financial statement is the cash flow statement, because that really tells you how a company is performing. And I would say I think that is actually our strongest financial metric that we deliver on consistently year-over-year.
But we also have done a lot of work to have a strong operating margin. While we have acquired these businesses, we have very deliberately moved to shared services operations for things such as technology. They are very core to our business. But to streamline them and to move them into one organization, where we can hire the best experts and leverage those experts across every single one of our businesses versus having them individually in each business, has served us very well, and it has helped us to control our cost structure for not only technology but also for our legal team and finance team.
Our board instituted a quarterly dividend in June of 2010, and we have grown that dividend 157% since it was initially -- in June of 2010 initiated. And today, it delivers a yield of 2.6% based on the current price. We look at Epiq and, today, we are able to continue delivering double-digit growth to our investors, as well as a very strong dividend.
We look at how we have positioned ourselves and where the markets are today. So eDiscovery, we are now a leader in that particular marketplace. We have positioned ourselves globally. As Laura said, we've done work in over 50 countries last year. We have expanded our operations into London, Hong Kong and now Tokyo, and we really are positioned to drive the leadership in this industry as we move forward. As we look at the bankruptcy cycle, getting ready to move from a down cycle to an up cycle in the latter part of 2013 or 2014, we'll begin to see growth in the marketplace that we haven't seen growth in the last several years. And we have been positioned very strong under Andrew's leadership in Settlement Administration and have also been growing in that marketplace and believe that we have established ourselves as a leader in that marketplace also. So we're looking at 3 markets that look to be growing over the next several years. Epiq has established leadership positions in those markets. And we think the outlook, as we look to 2014 and beyond, is very good for Epiq and a great opportunity for our investors.
So with that, we will wrap up, and we will move to the question-and-answer portion of our meeting. Thank you to all of our presenters today. Karen has a microphone and will come around. So if you have a question, please raise your hand. We would just ask that you state your name and the company that you're with and we will then direct your question to one of the presenters.
Peter J. Heckmann - Avondale Partners, LLC, Research Division
Pete Heckman with Avondale. I had a question on eDiscovery. One of the things that I think the market struggles with is the visibility of revenue sometimes, and is there a way that you can talk about either bookings or backlog in eDiscovery that would give us a better idea of -- because we can see how fast this grew last quarter, but then trying to figure out, okay, next quarter, it's going to grow 10, 15, 20. Is there a metric like that, that you maybe track internally that you may be able to share with us externally to provide more visibility into that business?
Elizabeth M. Braham
Well, clearly, our eDiscovery business has both a recurring component to, which is primarily in the form of hosted revenue, as well as project-based revenue, which is Document Review and processing and production revenue. The hosting revenue we can provide visibility very easily because it's fairly consistent from period-to-period. The project revenue is a little bit more difficult to do with very specific amounts, because we don't control how quickly data comes into us and the deadlines and the direction from our clients. And that's what provides us with the most difficult challenges internally in trying to look at what the revenue projections will be for upcoming quarter. So I think that we typically try to provide some qualitative direction as to where we think a particular business unit is going to be going, that I don't see us moving to provide quantitative projections in the future. Thanks, Pete.
Delroy Warmington - Delwar Capital Management
Del Warmington from Delwar Capital Management. I'm not sure if you mentioned exactly your market share in eDiscovery today. And going forward, could you discuss the landscape in terms of competitors and, in exchange, your next 24 months line of credit?
Elizabeth M. Braham
Chris or Laura, you guys want to answer that?
Christopher E. Olofson
So eDiscovery remains a highly fragmented market. Geography by geography, we can encounter a different slate of competitors, whether they're national competitors here versus U.K. or whether they're regional competitors in the primary U.S. markets. We would certainly say qualitatively that Epiq Systems is in the highest tier of market share and of presence in this space. We would be regarded as a top competitor amongst the global providers, some of which do not report either because they're privately held or because they're divisions of larger company, specific eDiscovery financial information. So it's a little bit difficult to calculate market share with precision. But qualitatively, we are a top-tier participant in the marketplace. Laura, would you like to talk about the competitive landscape and how we see ourselves situating there?
Sure. Well, as I explained with the issues related to big data and, I think Tom mentioned earlier, there are some large barriers to enter to play this technology game effectively going forward. So the market entrants are probably on the down -- or on the down cycle right. Some of the existing players are trying to expand technology. But it is really a function of having all the pieces, the technology, the information security. So from our perspective, I don't see the players changing dramatically, which focus and which priorities they focus on within this space may change.
Raman Brar - CIP Capital
I'm Raman Brar from CIP Capital. On eDiscovery, you guys mentioned you have relationships with 48 out of the top 50 firms. Where does the typical relationship sit? Is it with the lawyer or is it consolidated within the firms and how do you see that shifting of clients driving more and more, telling the law firms which kind of provider to pick. And even within the law firm, is it changing more towards consolidation, or are they still sticking with they're own preferred vendors?
Elizabeth M. Braham
I would tell you that our shift in revenue from law firm to corporate has shifted dramatically over the last several years. So in 2005, when we entered the business, it was about 80% law firm revenue and 20% corporate. And today, it's about 60/40: 60% corporate, 40% law firm. And it's continuing to move in that direction, which is actually, our preferences is to have the relationship with the corporation versus the law firm. So there is a movement in that direction. Laura, Chris, do you have anything else in there?
I would just add that the larger corporations tend to be the ones that manage the relationship. The small to midsized are still very much looking to their firms as a trusted advisor and for a recommendation on where to go.
Elizabeth M. Braham
So we sell to both, inside counsel, as well as law firms. Because as Laura pointed out, they -- law firms still have influence for corporations that don't consistently need eDiscovery services. But if you're in an industry, such as a financial institution, pharmaceuticals, insurance, that consistently needs eDiscovery services, you know how to buy them and you're going to collect your eDiscovery providers yourself.
Jonathan Buba - Nantahala Capital Management, LLC
Jonathan Buba from Nantahala Capital Management. My question with regards to eDiscovery is how do you guys think about the business cycle in terms of the ebbs and flows of the legal matters that you're reviewing. How should we think about where we are right now within that cycle?
Well, because we have so many different facets to eDiscovery, so the litigation cycle is generally pretty consistent. We have usually a slow start to the year, uptake in the spring of litigation activity, a little slower in the summer and then with a lot to spend the budget dollars at the end of the year. The second request is a merger piece of the equation. We tend to follow more of a political channel. So we didn't see a huge amount of second requests in the electioneer last -- in the election year last year. What have we done? 10 -- 8 or 10, just in the first quarter this year. So it's kind of that combination of the litigation will follow this cycle. The second request will follow this cycle. And then we'll kind of overlay it all with that information, governance, housekeeping piece that are all having the same tools at it, at the -- in the market, so that we'll have a pretty consistent activity level throughout the course of any given year, but the composition of it is mixed.
Elizabeth M. Braham
One of the larger variations that we will see from year-to-year will be around second requests for antitrust filings. So as Laura said, last year was a very slow year because it was an election year. The year before was actually a record year for us, relative to second requests work. And this year, we're off to a really strong start. So that's where we see the most variation relative to project work.
Michael Braner - Sagard Capital
Michael Braner with Sagard Capital. I have 2 questions, one in eDiscovery. Can you talk about the mix of the baseline services versus your active services, like the hosting that you're doing and the data storage services that you're providing versus the reacting to a specific request? And then the second is for both businesses. Can you talk about how much you've been growing your sales force, as in what do you expect that to look like in each business in, say, 3 to 5 years from now?
Christopher E. Olofson
The primary revenue line in eDiscovery are: hosting services, which, as Betsy mentioned, is more of a recurring component that happens month by month where we have more visibility; nonrecurring project-based or processing services; and then professional fees, which is the smallest. So those 3 things, in the aggregate, are the primary metric in eDiscovery revenue. Where we have the most visibility is hosting. Where we have less visibility is the nonrecurring processing-based. On the sales side, we have invested in expanding the sales force across-the-board in each of Bankruptcy, Settlement, eDiscovery and I think, today, have the largest and most geographically dispersed sales organization that we've ever had across those 3 businesses.
Michael Braner - Sagard Capital
Christopher E. Olofson
I would expect modest incremental growth. We have the sales distribution capacity in place now that is baked into our corporate objective for the year. So we will opportunistically bring in talent that we see come on the marketplace. We will see some gradual intentional growth of the sales division. We are not anticipating a material change in the size of those divisions in 2013.
Elizabeth M. Braham
I will say that the sales organization has changed, though, dramatically from 2010. And the size of our sales force in 2010, in eDiscovery, I should say, was much smaller than what it is today. And that was one of the purposes of the acquisition was to give us the critical mass, both from an operations perspective, as well as from a sales reach perspective. So we're really pleased with where our sales organization sits today, and we believe it has -- it sits at the right size and of the right strength to be able to enable us to achieve our financial objectives that we've laid out for ourselves.
Hendi Susanto - Gabelli & Company, Inc.
Hendi Susanto from Gabelli & Company. A question for Betsy. Betsy, would you describe your capital allocation strategy, specifically in terms of dividends, paying down debt and then building up more cash flow acquisitions?
Elizabeth M. Braham
Absolutely. So as we look at our uses of capital, we obviously have our working capital requirement. Our primary investment for internal capital goes to 2 places. That would be software development. Our software development investment have stayed fairly consistent over the last several years, and we expect that to remain consistent as we go forward. It also is the -- the second-largest investment that we make is in IT, servers primarily that go into our data center. Those are the 2 primary internal uses of capital besides just normal working capital. Primarily then we have dividends and paying down debt. And as Chris indicated, from an acquisition perspective, we would look at acquisitions and if we found something that was of the right financial nature and strategic nature, we would look at future acquisitions. But short of being able to find an acquisition, it would basically be working capital or internal capital requirements and then dividends and paying down debt.
Tom W. Olofson
The only thing I'd add is we always like to have plenty of flexibility with our bank lines of credit. So that when we find an opportunity, we can move on it very quickly. We always like to have the banking relationships in place, so that they're there, they're available. And if we find something that we need to move on, we can do it. And so we always keep our banking relationships on a very current, up-to-date basis in terms of the availability of lines of credit and that sort of thing. I just want to touch on one other thing that I think we haven't had a question on it yet, but I think it's an important topic and Andrew touched on it. It relates to the Bankruptcy business. Always remember, Bankruptcy correlates with debt. And when you looked at that one chart that Andrew had up, it showed a significant increase in the maturity of debt as you go out over the next couple of years. 2014, there is a tremendous amount of debt in the system, which becomes due. We, and other experts in the field, think it is not possible that, that is all going to be extended, it's all going to be restructured or, as they say, that the can gets kicked down the road. There's too much debt, and there's too many challenges in the economy. So we think that in the bankruptcy field and, in particular, in the corporate restructuring market, we have large corporate bankruptcies, is that there will be probably an increase in filings and probably a very robust Bankruptcy market, which, perhaps, may start later this year or in the 2014 timeframe. But I think we should touch on that in the meeting because that is perhaps the most important thing to say about the Bankruptcy part of our business as we look to the near future.
Peter J. Heckmann - Avondale Partners, LLC, Research Division
Just a follow-up to that, it's Pete Heckman again. Within Bankruptcy, just a quick review suggests that you had very, very solid retentions in the first quarter of '13 after a relatively slow 2012. Have you changed how you address the market, or is this the result of marketing efforts that have occurred over the past 12 to 18 months?
Tom W. Olofson
We have significantly beefed up sales and marketing, as Chris alluded to earlier. We continue to further expand what we regard as extremely important senior-level relationships. Those relationships are exceptionally important in that particular market. As you know, Pete, there's always going to be some timing fluctuations, because you can have a flurry of cases that come in, then you might have a period of time where that slows down. That's just really a function of things that we don't actually control. But you are right that in recent months, there has been a nice influx of business. The other thing you've seen, even in a slow market, because we've said several times that the Bankruptcy market is in a low cycle right now, as we all know, the very large matters of several years ago have continued to generate very important sources of revenue. And for those of you in the audience that may not be familiar with this -- I mean, Lehman is a good example. Lehman filed in '08, as I recall. And just this very month, as I remember, we had major distribution activity in Lehman Brothers. And so the message is that those kind of cases go on for 5 and 6 and 7 years and provide very, very attractive influx of revenue for us. So it's not a business where you get a big filing, you get a nice chunk of revenue and then it's over. To the contrary, you get a major filing, and the business goes on for quite a few years. Icelandic banks would be another good example. That came up in Andrew's comments. Those banks are in the moratorium, which is the language they used some years ago. There's 3 major banks. We've worked with them all closely for a number of years now. We continue to work with them. And so that has worked well for us. That even though the cycle is down, we've had business from prior cases. But the important thing going forward is that we see the cycle pick back up, and we think we're probably getting close to that.
Peter J. Heckmann - Avondale Partners, LLC, Research Division
Okay. And then just one follow-up for Betsy. The -- when you talked about 2013 guidance, it implied relatively flat margins with 2012 revenue and adjusted EBITDA going at about the same percentage rate. And that seemed pretty strong, given the revenue mix towards Settlement. Sounds like Settlement will have some nice margin expansion year-over-year. But as I'm -- developed on those Bankruptcy comments, should we expect -- and I know you're not giving multiyear guidance. But to the extent that Bankruptcy starts to tick up again in late '13 and into '14, potentially, we see Class Action fall, because you have this positive mix shift towards higher-margin revenue streams and potentially see some additional margin expansion into '14 and '15.
Elizabeth M. Braham
I do believe that number one, we don't expect Settlement to fall. We will expect it to continue growing, Andrew, and we've seen a lot of strength in that marketplace. I do believe that the Bankruptcy for everybody is our highest-margin business. However, as it does shift to becoming a smaller percentage of our overall business, as we look to 2014 and without having the specific model in front of me to see how all of the businesses and the product season within those businesses will look, draft laid out to 2014, we try very, very hard to not let our margins erode, if we can. This is a particularly difficult year because with Bankruptcy being our highest-margin business and it not growing and potentially actually coming down and we actually have shifts within our eDiscovery business, where our Document Review is growing at a faster rate than we assign, it's a lower-margin component of that business, it has been particularly difficult for us to get the model put together this year to say how we're going to deliver. But we're really pleased. Because as we've looked at all of it and our expense management and where we're looking at, this year, our objective has been to keep our margins consistent with where they were in 2012. As we look at 2014, they practically would increase if the mix of everything stayed the same within eDiscovery. And I think that until we know where the mix is moving in eDiscovery, it's difficult to say whether it would stay the same or go up a little bit.
Tom W. Olofson
Yes. You are right though, Pete. And Betsy said it, Bankruptcy has always had, as you know, the highest margin. It's just the nature of the business. And so assuming you see a pickup in the Bankruptcy cycle and that favorably reflects in the Bankruptcy numbers, that always has a positive impact on margins. So that's an easy statement to make.
Herbert C. Buchbinder - George K. Baum & Company, Research Division
Herb Buchbinder from Wells Fargo. You mentioned that you're looking at going to a new line of business at some point. What kind of capital requirement would that indicate? And are there some limits as to what you could spend for an acquisition, given where your debt is right now? And are there some things out there where you may be excluded from because it's just too big a commitment?
Tom W. Olofson
I make a couple of comments, and then Chris and Betsy may want to chime in as well. Chris talked, first of all, about the criteria, which is very important, because the key in the acquisition game is you don't want to make any big mistakes. What you buy needs to really fit and it needs to work. There's nothing worse in a company than to have bad acquisitions. We've been really fortunate in our acquisitions. They really worked out very well, but we do a great deal of due diligence and we try to be very, very selective. Chris and Betsy and I have pointed out many times in previous meetings is we walk away from many, many deals versus what we buy. For every deal we do, we might walk away from, at least, 1/2 dozen that we really looked at very carefully. So the financial criteria is very important. It has to be accretive, Herb. We don't buy dilutive things. We don't buy turnarounds. We don't buy things that lose money. We just won't do it. So it needs to be very solid financially, meet all the points in that financial criteria. And then naturally, it needs to be a really, really good strategic fit. Now as Chris pointed out, we don't have to confine our interest to Class Actions, Bankruptcy or eDiscovery. We certainly may buy other things in those areas as we have done in recent years in eDiscovery, and we very carefully picked those particular eDiscovery candidates because they thought they would fit very well with what our needs were looking for the future. If we go outside of those areas, which we certainly could in the future, it would simply need to be something that was -- I typically use the term in an adjacent market, something next door, if you will, not something totally removed that we would not be comfortable with. We never do that. We have to feel very good in our skill sets. We'd be very compatible with something that we would buy that would be in an adjacent market. From a size point of view, I mean, you know historically what we've done. We've done deals that have very, very frequently been in the $50 million to $100 million, maybe to $125 million range. Those were easy deals for us to do. We have that money available this afternoon if we wanted to spend it. We don't have anything we're in the process of doing right now. We are certainly proactive in looking, but we don't have anything that is lined up. But to do something in that size range would work for us very easily. It would not impede our efforts in any of the other things we do, investments, dividends, et cetera. And that's another reference I made, to always having bank lines of credit available over the bulk of money we generate in the business. Could we do something larger than that if it were just a letter perfect fit? We can do something a bit larger than that if it was just a great fit, but we'd be very, very careful. You also know historically that when we borrow money, then we typically will begin paying that down from cash flow. In the early days, we had some equity deals issued out. We would not do equity today because we think the price of the stock is still far too low by our standards to do that. So equity, we have no interest in on a current or a near-term basis. But the banking relationships are very solid, and that gives us ample flexibility.
Herbert C. Buchbinder - George K. Baum & Company, Research Division
I'd like to go back to the eDiscovery competitive situation. Can you talk about what your project win rate is? And when you lose, when you do an analysis of why you're not winning, what those gaps are?
Christopher E. Olofson
Yes. If we -- our win rate in eDiscovery engagements has been growing against the competitors that we're monitoring most carefully. We have not published and really do not intend to put out quantitative data into the marketplace about that. We feel we are extremely well positioned in the competitive marketplace. As Betsy mentioned, for example, in these early days of the new year, our M&A work in the form of second requests, which are some of the most prized engagements in the competitive marketplace, we have had tremendous leadership in the eDiscovery space. So I think that would be a very current qualitative snapshot of win rate on highly competitive engagements, but we have not quantified that in public at further length.
Elizabeth M. Braham
And I would just expand on that to make sure that everybody understands the complexities and of the sales relationship to the law firm or to the corporate client. So we will have corporate clients where we consistently do a significant amount of their eDiscovery work. And so for those types of clients, the win rates are very high because of the long-standing relationships that we have, either with the law firm or with the corporate client. And then as Chris was saying, you have engagements where they're much more highly competitive, especially around things like second requests, where we're -- we believe we probably have one of the better win rates within the industry. But just like in the Settlement Administration business and the Bankruptcy business, a large component of that is around the overall relationships that we have with the law firm or the corporate client.
Well, it looks like we are wrapping up with questions. Thank you very much for your participation today. We really appreciate you coming out and spending this amount of time with us. And if you have any follow-up questions, please feel free to touch base through Lew Schroeber, our Vice President of Investor Relations.
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