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Solera Holdings, Inc. (NYSE:SLH)

F4Q09 (Qtr End 06/30/09) Earnings Call

August 27, 2009 5:00 am ET

Executives

Kamal Hamid - Director of IR

Tony Aquila - Founder, Chairman and CEO

Dudley Mendenhall - CFO

Analysts

Peter Appert - Piper Jaffray

Tony Cristello - BB&T Capital Markets

Gary Prestopino - Barrington Research

Dave Lewis - JPMorgan

Franco Turrinelli - William Blair

Andrew Jeffrey - SunTrust

John Maietta - Needham & Company

Vincent Lin - Goldman Sachs

Colin McCue - Crystal Rock Capital Management

Operator

Welcome to Solera's Fourth Quarter Fiscal Year 2009 Earnings Call. Following today's remarks, we will hold a question-and-answer session. As a reminder, this call is being recorded and will be available for playback. Details for accessing the replay will be made available at the end of the call.

At this time, I would like to turn the call over to Kamal Hamid, Director of Investor Relations at Solera. Kamal?

Kamal Hamid

Good morning everyone. Thank you all for joining us on the today's call and welcome to Solera's fourth quarter fiscal year 2009 conference call. Today, on the call with me are Tony Aquila, our Founder, Chairman and CEO and Dudley Mendenhall, our Chief Financial Officer.

Tony will begin today's call with a summary of our financial results for the quarter and fiscal year ended June 30, 2009 followed by comments on the factors driving those results. Dudley will then comment further on our financial results for the fourth quarter and fiscal year and will by providing company's fiscal year 2010 guidance. We will then open up the call for questions and conclude with summary remarks from Tony.

Before we begin I would like to remind everyone that our remarks during this conference call will contain forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements are neither promises nor guarantees, but involve risks and uncertainties, that could cause actual results to differ materially from those set forth in the forward-looking statements including, without limitation, those risks detailed in Solera's filings with the SEC including our most recent quarterly report on Form 10-Q for the quarter ended March 31, 2009.

We disclaim any obligation to publicly update or revise any such statements to reflect any changes in our expectations or events, conditions or circumstances on which any such statements maybe based or that may affect the likelihood that the actual results will differ from those set forth in the forward-looking statements.

We also plan to discuss certain non-GAAP financial measures on this call. A reconciliation of these financial measures to GAAP financial measures is included in today's press release, which is available on the Investor Relations section of our company website at solerainc.com. When we refer to consensus during this call, we mean the consensus results of certain analysts that cover the company as reported on Thomson First Call.

We measure constant currency or the effect on our results that are attributed to changes in foreign currency exchange rates by measuring the incremental difference between the current and prior period results at the monthly average rates for the same periods from the prior year. Otherwise stated, our period-to-period revenue comparisons are on constant currency basis.

All information during this call and webcast is protected by United States copyright law and may not be reproduced, distributed, transmitted, displayed or published or broadcast without the prior written permission of Solera Holdings Inc.

I would now like to introduce Tony Aquila, our Founder, Chairman and CEO. Tony?

Tony Aquila

Thank you, Kamal. Good afternoon everyone and thanks for joining us. I'm pleased to report a respectable finish to our fiscal 2009. Despite the challenging global economy, we continued to generate growth.

Total revenue grew by approximately 13.6% in the fourth quarter and by approximately 12.9% for the full year over prior year period. Excluding HPI, our revenue for the full year was up approximately 8% and it was up 5.2% for the fourth quarter despite the following headwinds.

Our fourth quarter of 2008 benefited from severe conditions in several markets resulting in higher accident frequency rate that was not repeated in the fourth quarter of 2009.

Fewer business days in most of our EMEA countries because of the Easter holiday fell in the fourth quarter of 2009 and fell in the third quarter during fiscal '08 and of course the global economy which was negatively impacted our claims volumes in certain markets where we do business.

Helping to offset the above macro conditions has been our ability to consistently offer additional software services within our core offering, thus enhancing revenue per claim in the value proposition that we deliver to our customers. Therefore driving higher productivity and efficiencies in their businesses. For instance, fourth quarter fiscal year '09 revenue per claim compared to fourth quarter fiscal year '08 was up by 5.7% in the UK, 15.3% in France, 10.7% in Germany, and 9.1% in the Netherlands.

I am happy to report despite the global economy, nearly all of our mature markets generated growth in fiscal year 2009. We also maintain steady market penetration in our evolving and emerging Latin American and Central and Eastern European countries, which drove revenue growth of approximately 37.1% for the quarter, and approximately 36.9% for the year versus the prior year period.

The run rate for these groups of countries is now over 80 million on an annualized basis, up from around 40 million on an annualized basis just two years ago, and Romania was a standout in the fourth quarter of approximately 188% growth versus the prior year period moving in from an emerging market into our evolving category.

Again, despite the headwinds in the fourth quarter our constant currency adjusted EBITDA margin came in at 38.3%, 330 basis points ahead of last year, which represents 24.6% year-over-year increase in adjusted EBITDA and affirms our continued ability to scale our operating expense and our disciplined approach to our SG&A spending.

In fiscal 2009, we executed on approximately 10 million in waste reduction initiatives. For fiscal 2010, we are targeting initially $5 million in waste reduction initiatives.

Now, let me share with you some of the leading indicators we are seeing in our various markets. Large insurance companies are beginning to see a rise in claims frequency. We saw steady increase in recorded miles driven throughout the quarter.

The Cash for Clunkers programs put in place by many governments appear to have had a short-term positive market effect. Notably among these are Germany, Brazil and the US.

For example, OEMs in the US are increasing production levels and the seasonally adjusted selling rate for the new cars in the US rose to $11.2 million in July from $9.7 million in June. Therefore we now believe there is anecdotal evidence in some of our markets that part of the lower frequency reported by insurance companies, represents claims not yet made.

These rolling racks may represent some pent-up demand. In those markets we are beginning to see signs that this behavior may be reversing and this pent-up demand may lead to more claims in the future. Although we are beginning to see some positive leading indicators we remain cautious and are not including them in our initial guidance at this time.

Now, let me tell you about a few of our key priorities for fiscal year 2010. One, consummating strategic acquisitions that are active in our pipeline; two, continuing to increase the breadth and value of our core software offerings, allowing us to continue grow of revenue per claim; three, continuing to invest in targeted geographic expansion for our futures growth.

On priorities one and two, we view acquisition in product development in parallel as we evaluate the IRR of buy versus build. Our acquisition and new product development strategies are very focused on increasing the size and value of our core offerings, while delivering immediate ROI to our clients.

Regarding priority number three, despite the economic downturn, we are continuing to invest in geographic expansion, for example, in countries like Turkey, Australia and now Italy. Again we believe this to be an important component of our long-term growth strategy.

Therefore, as we look forward to 2010, our initial annual revenue growth target is 7% to 9%. Consistent with our past practices; we are taking a conservative approach to our initial guidance. It is early in the year and there are still many economic uncertainties.

As we progress through the year, we will revise our guidance on a quarterly basis that really would give you more detail on the specific adjusted EBITDA and EPS target corresponding to the new range in just a minute.

As we announced today, our Board of Directors has approved a quarterly cash dividend of $0.0625 per outstanding share of common stock and outstanding restricted stock units, which would equate to $0.25 per share or a unit on an annualized basis.

The dividend will be payable on September 28th to stockholders and restricted unit holders of record on the close of business on September 18th. The dividend initiation demonstrates the confidence in our growth prospects and the strength of our free cash flow.

I want to be clear that we view the dividend as an additional way to return value to our stockholders, while we continue to pursue our long-term growth prospects.

Before I turn the call over to Dudley, I'm happy to report that the CFO transition has gone very much according to plan and Dudley is now fully engaged in our business at all levels. With that, Dudley?

Dudley Mendenhall

Thank you, Tony. We are pleased with our fourth quarter fiscal 2009 results. Now let me review with you a few of our key growth metrics, all of which are on a constant currency basis excluding the results of HPI.

Our fourth quarter revenue increased by approximately 5.2%, our full-year fiscal year '09 revenue increased by approximately 8%. The EMEA reporting segment grew by approximately 6.2% in the quarter and approximately 9.9% for the year. The Americas grew approximately 3.5% in the quarter and approximately 4.8% for the year.

On a GAAP basis, our fourth quarter revenue decreased by approximately 1% and the full-year revenue increased approximately 3.3% due to the impact of unfavorable foreign exchange rates, which had a negative impact of approximately 14.6% in the fourth quarter and a negative impact of approximately 9.6% for the full-year.

In addition to the unfavorable foreign exchange trends in the fourth quarter, our revenues were negatively impacted by approximately three fewer working days in nearly of all of EMEA countries because of where Easter fell on the calendar. The impact of the large US customer that accelerate the transition of its business in the fourth quarter to another vendor. This transition is now complete and less severe weather versus the prior year period.

Turning to EBITDA, our constant currency adjusted EBITDA grew by 24.6% over the prior year fourth quarter and represented 38.3% margin. The year-over-year improvement in our adjusted EBITDA margin was driven by the leverage in our operating model, continued waste reduction as indicated by the following metrics on a constant currency basis.

Fourth quarter operating expenses were about 22.3% of revenue compared to 23.1% in the prior year, which demonstrates the continued scale in our business model. Fourth quarter system development and programming expenses came in at about 10.2% of revenue compared to 12.2% in the prior year fourth quarter. Fourth quarter SG&A expenses were approximately 28.9% of revenue in the fourth quarter compared with approximately 29.3% in the prior year period.

As Tony mentioned, we removed approximately $10 million in waste from our business in fiscal 2009 and have identified about $5 million in waste initially to eliminate this year. Part of these savings will come from synergies as we further integrate HPI.

During the quarter we took an approximately $3.6 million restructuring charge primarily related to the closing of our San Ramon office and we had acquisition related expenses of approximately $360,000 related to opportunities that we are pursuing.

Our adjusted net income at actual currency rates reflected the positive trends of adjusted EBITDA as evidenced by the following metrics. Fourth quarter adjusted net income of approximately $27.3 million was up about 22.8%. Full year adjusted net income of approximately $109 million grew by about 38.5%. Fourth quarter adjusted net income per diluted share came in at $0.39, up approximately 14.4%. Full year adjusted net income per diluted share came in at $1.61, up approximately 32.4%.

Now, turning to the balance sheet and cash flow. We continue to strengthen our liquidity and to reduce our debt leverage. Cash flow from operations was approximately $38.8 million for the quarter and approximately $125.4 million for the year. We are now on a quarterly run rate to generate cash flow from operations in excess of 25% of revenues and annualized free cash flow in excess of $100 million.

The strength of our free cash flow speaks to our ability to invest in growth and return additional value to stockholders through a dividend. We ended the year with approximately $234 million in cash and marketable securities, up about $84.8 million for the year.

Day sales outstanding came in at about 60 days which is within our range. Our consolidated leverage ratio pursuant to the terms of our credit agreement continued to improve from approximately 2.3 times at the end of the third quarter to 2.2 times. Capital expenditures were approximately $5.8 million for the quarter and approximately $21.9 million for the year.

Turning to our fiscal year 2010 guidance. As Tony mentioned, we are targeting growth of 7% to 9% in 2010, and we will continue to provide you with constant currency results, and we will breakout the results of any material acquisitions which today consist only of HPI.

For smaller acquisitions that are not material to our financial statements, we will no longer provide revenue or expense details, as one we view smaller acquisitions as a trade-off to our internal product development efforts, and as Tony mentioned, we would look at the most attractive IRRs of buy versus build.

In addition, we typically integrate these small acquisitions rapidly, with result that their independent performance becomes difficult to track. And finally this is consistent with out disclosures in our SEC filings.

I would like to emphasize within the past three years, since the formation of our company, we have generated significant total growth on a constant currency basis for both revenues and EBITDA.

Revenues have grown 9.5% on a compound average growth rate basis over the past three years. EBITDA has grown 24.8% on a compound average growth basis over the past three years.

For the full year, fiscal year 2010, we are setting initial guidance, and we estimate revenues of $594 million to $602 million, adjusted EBITDA of $229 million to $235 million, GAAP net income of $49 million to $55 million, adjusted net income of $124 million to $128 million, and adjusted net income per diluted share of $1.76 to $1.83.

We expect as well the amortization of acquisition-related intangibles to be approximately $67 million, capital expenditures were about $23 million to $25 million, and stock based compensation of approximately $8.5 million, and fully diluted shares outstanding for the year to be approximately $70.2 million.

Although, we do not provide quarterly guidance based on historic seasonality patterns, our largest quarters are Q2 and Q3 and our smallest are Q1 and Q4. As stated in the press release earlier today, these figures assume constant currency exchange rates from those prevalent today, no additional acquisitions and a 28% tax-rate to calculate adjusted net income.

Consistent with our guidance policy, we do not plan to update guidance during the quarter, but only at our regularly schedule quarterly or annual conference calls. To help those of you track and factor the impact of a strengthening or weakening dollar throughout the remainder of the year, we would approximate by using the following formula.

For each 1% change in the US dollar versus all the foreign currencies in which we transact business, the negative or positive impact to fiscal year '010 revenues will be approximately 0.7% and the negative or positive impact to EBITDA will be approximately 0.8%.

That concludes our prepared remarks. We will now take your questions and, Tony will provide a brief wrap up.

Question-and-Answer Session

Operator

(Operator Instructions). And, your first question comes from the line of Peter Appert with Piper Jaffray.

Peter Appert - Piper Jaffray

Thank you. Tony can you give us any additional color on revenue trends geographically and any early flavor for how would your line August to look?

Tony Aquila

Yes. Hey, Peter, first of all, it's Tony. What we're starting to see in July is we are starting to see things kind of firming up. We had kind of a scattering, the countries didn't, they kind of broke away from their pattern for a few months, as they were going through kind of the global issues out there in the market and we think it was to my comments earlier where people delayed claims and now they are feeling better being able to pay their deductibles and so we're now seeing July come in more consistent with what we expected and showing positive trends.

I would say that from a mature country's perspective it's a little harder for us to see in the evolving countries because we're penetrating and adding new customers right now and as you saw from some of the examples I gave like Romania and others, they're just kind of blowing right through this, we can't even see what the effects are of the economy.

Peter Appert - Piper Jaffray

This basically is the reason why you're still comfortable with the six to eight in the context of obviously less than that in the fourth quarter?

Tony Aquila

Yes, I mean we're just trying to figure out, we're not trying to time the recovery. We believe there are positive trends but we're going to take and really focus on what we know versus some of the things that we're traditionally used to.

Peter Appert - Piper Jaffray

Then Tony, any comments on the acquisition pipeline and probability that you're going to be able to close something here early in fiscal '10?

Tony Aquila

Yes, I think my comments there would be very much in line with what we said in the past and what we've done in the past. I think we are very targeted on our acquisitions, or pipeline is very active and I think within reasonable period of time, we will have some more details on that.

Peter Appert - Piper Jaffray

Okay and Dudley, now even at it for a little while, thoughts on further leverage in the margin story. Now you sort of backed away from giving specific margin targets on a go forward basis, but what's your comfort level in terms of the ability to take the margins into the 40% plus range?

Dudley Mendenhall

Well, we continue to say that we believe that we have one and a half time scale on our business, such that you take the percentage top line growth rate and we believe we can grow EBITDA one and a half times that rate, and if you look at the guidance that we gave you today, you are seeing that type of a 100 to a 150 basis point uplift, which follows that mathematical trajectory. So we continue to believe that particularly in operating expenses, you have seen them come down steadily as a percentage of revenues over the past years.

We continue to believe that we have good scale and cost of revenues. SG&A will grow in correlation with revenues but at a lesser rate than revenues, which was certainly the case on a constant currency basis in the last fiscal year.

Peter Appert - Piper Jaffray

Right.

Tony Aquila

I would add to that Peter that as you can see with some of the initial targets we have waste reduction, we still have a pretty good queue of some things and that coupled with as we add in the acquisitions ,we continue to melt those into the business pretty quickly and getting synergies out.

Operator

Your next question comes from the line of Tony Cristello with BB&T Capital Markets.

Tony Cristello - BB&T Capital Markets

Thank you. Good afternoon gentlemen. I guess one of the questions I had, when you look at the landscape and what you are seeing competitively. Can you talk about domestically some of the smaller customers? I think there's been continuation particularly on the collision repair shop side of things of consolidation in the marketplace and the largest shops getting bigger, the smaller ones sort of shrinking and going away. How does that impact your business, if at all?

Tony Aquila

Domestically referring to the US, there is some impact to us, because we are highly subscription base. In the rest of the world, it really doesn’t matter where the volume goes, because we are highly transactional, and so wherever the volume goes, whether two small shops go in and one shop gets bigger, we just get more volume, but in the US, we have had a little bit of softness there.

The good news is, the carriers that we have, have been very consistent with their DRP programs and those shops are pretty stable. They may loose a couple of [racks] here or there but they don’t go out of business. So, we haven't probably been hit as heavily as some people that are not weighted as much on the DRP side.

Anthony Cristello - BB&T

If you look back over the last 12 months, I remember the insures themselves at least domestically start to really complain about claims volumes dropping off significantly this time last year if I am not mistaking and that sort of carried through. Is it your expectation that claims volumes are still negative, or I should say claims still negative but not at the levels that they were last year debt, when you are referring to some firmness.

Tony Aquila

We are seeing that now consistently across the globe, Tony. So, we were a little more scattered throughout the quarters in fiscal '09. We're seeing it, it's tightened up quite a bit just as we launched in the '10, but we're still taking a pretty conservative view and we think that certain mature countries where deductibles are more prevalent in those markets, it'll take it longer to recover because the consumer just doesn't file the claim for a while, it kind of rolls around with the wreck when it's drivable.

Anthony Cristello - BB&T

Which, if you look at domestic versus EMEA or some of the other locations, who has a quicker snapback, which consumer typically would come back to prior level sooner and/or conversely which countries or geographies have a longer recovery time?

Tony Aquila

I think the lesser middle class environments take a little bit longer, because the impact of the deductibles are a little deeper into them, but the good news is, in most of the emerging countries, they really haven't hit a point where they are using deductibles, and if they are they are relatively small.

So, we probably have a different response to your question if those countries had matured out, but right now we're seeing the countries that lag a little bit in response are the US, UK, Spain and most of the other countries have bounced back not to the normal rate but the gap is closing. Did that answer your question?

Anthony Cristello - BB&T

Yes, I think so. When I'm looking at the EMEA, the organic growth rate in this quarter looked to be about 4.7% which was half of the organic growth rate that you had in the third quarter, and I think you talked a little bit about weather, you talked about holiday shift and some of those. Is that the primary reason or is some of the success you're having with HPI taking away some of that business that maybe would have prior been reflected in that EMEA organic growth rate?

Tony Aquila

Now I think what's happened is the claims process [long gain]. There was a pretty rough spot in Europe for about two, three months. That was pretty -- I did a road trip out there and there were a lot of countries, the people were just [frozen] and so we had some tightening. The good news is we were able to still grow. We had good queue of additional services we were deploying into the markets, but our traditional volume was a bit down and so, look it's early to say and that's why we took this initial guidance approach. July looks a lot, a bit better but we are just going to stay cautious.

Anthony Cristello - BB&T

The 7% to 9% if you assume that what the run rate of HPI would be for the two quarters you didn’t have it and then you stripped that out, it's going to maybe factor in, at least currency adjusted of a modest positive for you. It doesn’t reflect much organic growth, I think in that combined 7% to 9% number unless I'm looking at that incorrectly and is that a function of just conservatism and just not knowing the timeline of sort of how quickly things may come back?

Dudley Mendenhall

This is Dudley, just to clarify. The actual growth without HPI and EMEA in the fourth quarter was 6.2%, and then secondly we have generated fairly dramatic growth with HPI since the acquisition and so that growth factor, we do not take out when we take out HPI's results. We are taking out the baseline run rate of HPI at the time that we acquired them and taking the growth, for our growth because we really are driving them into several new markets.

Tony Aquila

Then the way I would describe that Tony is, the prior owner HPI was an insurance carrier. So we had other insurance carriers which weren’t really comfortable with using the product just because it belonged to one of their competitors. Because of who we are, the provider, with our reputation and relationship we have with those carriers, we've been able to grow that business. It's really helped the HPI management team to kind of push forward.

In addition to that, you had a market where there were no new cars being built and so there was a lot more used cars in the system and so there was a lot more demand for our HPI product, because of the history check. So kind of a bunch of different things going on there, but overall, you know consistent to what we've done in the past Tony, we're being cautious.

Operator

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

Gary Prestopino - Barrington Research

Tony, I was writing, trying to keep up with you. You gave some numbers, 80 million versus 40 million. Is that the run rate of revenue from the emerging markets for the year, year-over-year?

Tony Aquila

That's from a group of countries in the LatAM, Central Europe and Eastern Europe.

Gary Prestopino - Barrington Research

Okay, so that’s Central and Eastern Europe?

Tony Aquila

…and Latin America.

Gary Prestopino - Barrington Research

Latin America, okay. Good. Then, as far as your system development expenses go, they've been going, coming down pretty dramatically year-over-year. Is, some of that obviously could be function of currency but does a lot of that have to do with moving programmers to, moving programming to lower cost counties and can we expect that to continue?

Tony Aquila

Yes, I think you know, you're first question kind of in part answers your second one, because as you saw us grow in Latin America, Central and Eastern Europe, as we start to generate revenue we move jobs in those from mature countries into those countries, and naturally we get an arbitrage, plus we got the effect of some currency. In addition to that, we’re getting scale out of the business. So, put all that together, it gives us a pretty good tailwind.

Gary Prestopino - Barrington Research

What about in your overseas markets, are you seeing just more of an appetite for not only the schematics but your ancillary services? I’m sure the insurance companies there are going through the same thing we’re going through here, where they are trying to cut close however, and that would be personnel as well. So, are you seeing more of an appetite for your automated services because of what’s going on in the markets with the insurance companies?

Tony Aquila

I think behaviorally they are different markets. I think the US market, because it’s saw such trauma, insurance carriers kind of ceased up altogether on new initiatives or very cautiously implement them.

In Europe, because the insurance arms are either tucked underneath financial arms, those businesses didn’t look quite as bad as banks. So, those guys had a little more flexibility, and frankly were a bit more bullish on their businesses versus their big brothers, and continued to drive efficiencies through their businesses. Some of that’s cultural too, but does that answer the question for you?

Gary Prestopino - Barrington Research

Yeah, it does. What did you say your CapEx was this year? I didn’t get that either.

Dudley Mendenhall

CapEx this year is about $22 million.

Tony Aquila

It’s consistent with our discipline since we’ve owned the business, taken it down from about 27 to around the low 20s, which is consistent with what we’ve always told everybody, we’d get it in the range of.

Gary Prestopino - Barrington Research

I know you’ve got operations going in Australia. Where are you in Turkey and then it was good to hear that you mentioned something about Italy for fiscal ‘10?

Tony Aquila

We’ve been concentrating on the various countries, Turkey, Australia, Italy, and these are early stage activities we got going on. Although Turkey, we've got some good outlook, I’ll be over there next month. Australia, that market is starting to recover pretty quickly. The trends we’re seeing there, we've got some discussions going on with a couple of the large carriers. In Italy, we’ve been talking to the two largest carriers there and we got good dialogue, in fact, we’re even, they’ll be starting to pilot our application.

Gary Prestopino - Barrington Research

They’re going to do a pilot Italy this year?

Tony Aquila

That’s our current plan, yes.

Operator

Your next question comes from the line of Dave Lewis with JPMorgan.

Dave Lewis - JPMorgan

I just wanted to see if I can focus on the US market, just have a question or two. The first is, I believe CCC is rolling out a new product. I think it’s about a year or [while] so, but is there any threat at all there like that?

Tony Aquila

We view the US market as a highly competitive market and we always think there are threats there, but with respect to that, we don’t beat the drum as much on new product release stuff. We have a next generation application which is being rolled out. It's very light footprint. It moves away from CD based application. It’s all internet based.

It has a lower operating cost for both our customers and us. We believe we are being competitive. There are still some things I would like to improve in the US business that we plan to and there will be some kind of forthcoming announcements about that, but to your point, we view them very much as a meaningful competitor and we are focused on the US market as well.

Dave Lewis - JPMorgan

Okay. I guess related to that on talks with insurance companies in the US market. Is there any update there?

Tony Aquila

We have got some discussions going on. We have got some things in the pipeline, but, again to the comment, I made earlier, where US insurers are cautiously implementing new initiatives. We feel good about our pipeline from the long-term perspective, we don’t have anything in our guidance at this point and if something breaks, we'll adjust, accordingly you're announced appropriately.

Operator

Your next question comes from the line of Franco Turrinelli with William Blair.

Franco Turrinelli - William Blair

Good afternoon, everyone. A couple of questions for you, if I may, the first Tony you talked a little bit about the success of HPI. If I remember correctly, you were planning to rollout in part us to some other market as well and I'm just wondering, if you could give us an update on that?

Tony Aquila

Sure. We have successfully built the application. We are signing up vendors as we speak, we got a pilot launching. Actually it's been being used in Mexico, and we are pretty bullish about the success of that. We had carriers from Mexico over to Brazil to see and meet the participants of whether it would be body shops, vendors or insurance carriers and all that’s been going well pretty well in the fourth quarter and, after the holiday -- again we haven't put that also in our guidance but at the appropriate time we will adjust it.

Franco Turrinelli - William Blair

Yes, Tony, I mean it's easy to forget but a year ago you really haven't done any acquisitions and now you're sort of treating the acquisition strategy as being kind of a given, but it certainly seems like over the last 12 months HPI in part was your acquisition in Germany, all of those have delivered what you expected.

So, what I'm getting to is, is there any increased appetite or is there really any kind of change in how you're thinking about potential acquisitions, what you're willing to buy, what products you're willing to consider, what geographies you're willing to consider?

Tony Aquila

I think over the last year and a half since we really launched our M&A activities, we feel probably the best we have about our pipeline and the size of the companies within our pipeline and the geographies in which we will be deploying capital to increase our bundle offering in those markets. So, from that perspective I'd say, we're in a better state than we have ever been.

From an execution perspective, I think you'll find us as disciplined buyers as ever and we believe here you are only one bad acquisition away from messing up your track record. So, we're pretty sensitive to that.

Franco Turrinelli - William Blair

Well, I hope not to attempt a reverse question in 12 months time. Hey, Dudley a couple of, I guess it's a more kind of housekeeping items for you. Please just make sure that I understand everything correctly on a couple of the numbers that you threw out. So, I am trying to just reconcile the difference between the 6.2% constant currency internal growth for EMEA that you mentioned on the call and the 4.7%. I am assuming the difference is the growth that you got from HPI, but I just want to make sure that I understand?

Dudley Mendenhall

Correct, that's correct.

Franco Turrinelli - William Blair

So HPI is there. Okay, good. Then on the 7% to 9% revenue growth target, I think Peter in his first question said something about 6% to 8% internal being embedded in that. I just wanted to make sure that I understand that. So, if I back out the annualization of HPI, but also back out the customer loss here in the US, are we still in fact looking at a 6% to 8% constant currency internal growth or it's been something else that we should be adjusting for?

Dudley Mendenhall

Well, first of all we are no longer using that concept of organic growth, because again of the three acquisitions that we've done, only one was material and we are breaking that out for you, the other two were not material and we've rapidly integrated them and developed a number of new revenues that we can't track them anymore as an independent company and so you have in both that EMEA growth that you were just asking me about as well as in the America's [trend] part, that growth rate is now embedded in there as are what we call previously old organic growth, but we are no longer calling it that.

So the 7% to 9% is in effect moving up from the 6% to 8% organically that you listen to before, because we are really saying that these smaller acquisitions are in effect a trade-off to product development. It's a way to accelerate product development in many of these markets, but the dollar amounts for some of these smaller acquisitions are similar to what we might spend in a major product development initiative.

So that’s why we are getting away from that old organic approach that we took in the past, because it's problematic to truly demonstrate the truth, the true internal growth rate that we have.

Tony Aquila

I would add to that Franco that, we put a lot of pressure on our country indeed about integrating and powering up the bundle. Then you've been around us for a while, and you know we talk a lot about the bundle that they offer, and that proving successfully that we're doing.

In addition to that, we're getting pulled through to our core products. So you take in part and other things. We were able to win over some clients by taking a bundled approach, using the inpart solution. Same thing with UCS; very significantly with UCS.

So, our managers kind of started to push back, which we saw that was a very successful sign. So, on the smaller deals that just melt directly into the core, it just doesn’t make a lot of sense and that is the logic.

Franco Turrinelli - William Blair & Co.

That makes perfect sense [unless] you'd have to spend, very helpful. So the final question then Dudley is to just kind of make sure that I understand though. So what is the annualization impact of HPI? Is that the only one that you're saying we should consider separately right?

Dudley Mendenhall

Well right and we are breaking out that revenue number for you and so you can see exactly what it did contribute in the respective period.

Operator

Your next question comes from the line Andrew Jeffrey with SunTrust.

Andrew Jeffrey - SunTrust

Dudley, just so I can understand, maybe you can walk me through this. If I look at the constant currency revenue in EBITDA numbers for the full year fiscal '09 you included in your press release, it looks like you had about an adjusted EBITDA margin of about 39.2%, although you talked about, I think you tried a number on the call, 38.3. Could you just tell me which one is the right one to be focused on?

Dudley Mendenhall

Well, we use constant currency with the most recent years, our average currency, and then we apply that to the previous year; so that’s the methodology that we use, so I’m…

Andrew Jeffrey - SunTrust

Okay. So, is the right number to be thinking about 38.3 for the fiscal year ’09?

Dudley Mendenhall

That’s the way we track it. Correct.

Andrew Jeffrey - SunTrust

Okay. So, the guidance implies about 40 bps a margin improvement in '10. So, it’s just taking the middle of your guidance range. Could you just give us a sense of -- from your other commentary, I would have expected it to be more than that?

Dudley Mendenhall

So the guidance is as of today’s rates, and so it’s not adjusted apples to apple with the previous fiscal year ’09 rates that were in effect at that time. So say, you would have to carry constant rates either forward or backward to come up with an apples-to-apples comparison.

Andrew Jeffrey - SunTrust

Okay. If you do that just you know from my simple thinking here, can you give us a sense based on today's currency thereabouts, how much EBITDA margin you’re expecting in fiscal '10?

Tony Aquila

Well, we don’t think about it exactly that way and I can get back to you with a more specific answer, but I think that given where rates are today, you would still be in the plus 100 basis point range. Again, you have to be careful with which way you’re going on these rates, and I’d be happy to have a further discussion with you offline on that.

Andrew Jeffrey - SunTrust

Okay, but assuming that fiscal '10 is not a year marked by the kind of unprecedented currency swings we had in '09 we should see going forward, fiscal '10 or '11, say, and we should see going forward, 100 bps kind of annual sustainable EBITDA margin improvement?

Dudley Mendenhall

Right, so if you look at the actual fiscal year ’09, we came at, on an actual currency basis. We came at 37.4%.

Andrew Jeffrey - SunTrust

Right, right.

Dudley Mendenhall

So if you move back into our guidance, we’re a 100 to 150 basis points above that in our guidance.

Andrew Jeffrey - SunTrust

Right, okay.

Tony Aquila

Yes, I think institutionally, I would say, you have to think of us with that 100 and 150 basis points in mind.

Andrew Jeffrey - SunTrust

Okay, I mean, that’s really what I’m trying to get at because there is a lot of noise in these numbers now Tony. So I just wanted to kind of reaffirm that what you are looking at is fairly consistent with what you talked about historically. That sounds fairly…

Tony Aquila

Yes, absolutely.

Andrew Jeffrey - SunTrust

Not changed very much…

Tony Aquila

You have a point in this. That’s exactly, it’s a 100 to 150 basis points.

Andrew Jeffrey - SunTrust

Okay, when I look at Romania, you called that out as a pretty clear success story. Is that a template for what we could possibly see in a market like China or India? I mean, is that something we could get excited about, should get excited about, or is it too for, I mean you got the infrastructure built so how should we start to consider the potential for other maybe, more meaningful markets in Romania from a long-term contribution standpoint, potentially ramp for you?

Tony Aquila

Yes, I think we got a few countries that have performed at the potential of Romania. Although Romania is now the model that we’re seeing from an emerging country moving to an evolving and the adoption rate, the penetration rate. Basically what happened there is once we got everybody to see the power of the offering and we got them through sampling it. The top insurance carriers all wanted to roll it out at once, because they had so much severity problems and our solutions help them deal with that.

So, we literally had to muscle our way through that, and of course we were grateful for the timing in which that happened and the way our team executed it. There are potentials in various countries for that to happen. So I think our conservative approach of adoption and penetration is the way we will continue that to leave in the model.

So there is always the potential that this will happen, this will repeat itself. I would not set the expectation that that would be the way China or India will adopt.

Andrew Jeffrey - SunTrust

Is there is something structurally different in those markets.

Tony Aquila

There is a lot culturally different in those markets and the geography to size. If we got hit with that rapid rate of adoption, the amount of reinforcements we would have to send in to do that would be something that would cause us to hit the strategy table pretty hard.

Andrew Jeffrey - SunTrust

I can appreciate that. All right. The last I thing I had for you is now it's totally something in my mind. To the extent that July and maybe the early part of August represents, let's say just for the sake of argument a sustainable improvement in volume.

Should we expect that the incremental profitability or the profitability of any incremental revenue that results from a true claims volume recovery would be sufficient to really drive the consolidated profitability of the business or would you reinvest it or is that just a bad assumption?

Tony Aquila

You kind have to make that call but when you run a business with 53 theaters of operation, the only way you can really answer that - I can answer it directionally, but at the time the call is made could be a little different. So, I'll just give you that disclaimer.

So, I would say directionally, yes. We're going to get a little better flow, because of the fact that we accelerated some waste product. You guys saw how we dealt with the currency headwinds that we had and how we accelerated our waste reduction queue, concentrated on markets where we saw growth, batten down the hatches where we saw some headwind and how we managed our way through that.

So naturally we feel like for the good of our business we learned some things as well. Those things will be attributable to the bottom line, but I don't know anybody who is wise at this point predicting when this recovery is actually recovered if you will.

Andrew Jeffrey - SunTrust

So theoretically much of any incremental revenue pickup should fall to the bottom line?

Tony Aquila

In certain countries we will get better flow, no doubt, but we may invest some of that, in some other areas where we have, Romania starting to break this.

Operator

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

John Maietta - Needham & Company

Tony, I didn't hear you talk about it in this call, but last call you had mentioned that you felt like, particularly in Western Europe that you were taking some share from some of the small competitors that there was a flight to quality. Is that something that's persisted through the current day?

Tony Aquila

Yes, we had some wins, again, consistent with, I forget you asked the question about one of our competitors talking about a product they're going to release a year from now. We generally don't say much about stuff like that, but we had some customer wins which had softened some of these macro conditions. We haven't really said much about them. I will in my closing statement make a comment about one that is relatively meaningful overtime, but yes we've continued to take some share. In fact that the stability of the way we brand the business, the power of our balance sheet, the safety we give insurance carriers, that got tested through this downturn where a lot of vendors kind of got in trouble and had to kill initiatives, we didn’t. So its allowed us to get into not only some new markets for the future, but also really strengthened our value proposition, we believe.

John Maietta - Needham & Company

Okay and the eBay Motors deal, is that still tracking for a kind of year end release?

Tony Aquila

Yes. That is on schedule and again we just tend to not talk a lot about those things.

John Maietta - Needham & Company

Then a last question Dudley just to see back up of Franco's question this 7% to 9% organic constant currency excludes HPI obviously does it. Does that normalize for the loss of a large customer or did you not adjust for that?

Dudley Mendenhall

That is not adjusted for that.

Operator

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

Vincent Lin - Goldman Sachs

Thanks for taking my question. Dudley, first of all, I didn’t really catch the amortization expense expected or that's baking into your FY'2010 outlook.

Dudley Mendenhall

It's about $67 million of non-cash purchase accounting amortization.

Vincent Lin - Goldman Sachs

$67 million got it, okay, correct. Then I know it's probably not the entirely aligned with the way that you guys are looking at the business, but I just wanted to if you can talk about pricing a little bit, especially from some of your large insurance carrier clients whether you're seeing customers coming to you asking for a pricing relief or concessions and whether that trend has any differentiation in terms of what you're seeing here domestically versus the EMEA?

Tony Aquila

We have included in the way we've dealt with the fourth quarter, we have given some relief to a few clients that had some difficulties and had to downsize. We stand by our clients for the long-term. So those are all on an individual basis based on what that client is going through, but there hasn’t been a broad based attack on our price. We believe the value proposition that we deliver and the way we price our solutions are a win-win and I think its held up pretty darn well considering what we've been through the last year.

Vincent Lin - Goldman Sachs

All right, is it fair to say that the kind of pricing relief that you're, or the concessions that you are seeing from your customers right now, like the trend is pretty normal or stabilizing and you're not seeing any incremental pressure versus the last couple of quarters?

Tony Aquila

Yeah, we've seen a stabilization of requests.

Kamal Hamid

Operator, we're pretty close to top the hour. We'll take one more question please.

Operator

So your last question comes from the line [Colin McCue] with Crystal Rock Capital Management.

Colin McCue - Crystal Rock Capital Management

Hi guys. Sorry if I missed this but can you give us the organic revenue growth in the quarter adjusted for the fewer selling days and the customer loss.

Dudley Mendenhall

As we articulated in our opening comments, we are no longer using the traditional organic growth rate that we used in the past simply because it has been our practice in the past and we expect it to be in the future to have a preponderance of our acquisitions that are going to be going to be small acquisitions. We integrate those very quickly and quickly lose meaning in terms of trying to track those as independent entities.

So we have moved to a total growth concept, and are guiding to 7% to 9% going forward and we'll only exclude or breakout for you material acquisitions, which today, the only material acquisition would be HPI.

So what we said is that in the fourth quarter on a constant currency basis, we grew about 5.2% excluding HPI and for the year we grew about 8% excluding HPI, and are guiding to total growth going forward of 7% to 9%.

Colin McCue - Crystal Rock Capital Management

I guess what I'm trying to get at is, what was the impact of the fewer selling days in customer loss in the quarter?

Dudley Mendenhall

About 1% approximately.

Operator

At this time, I'd like to turn the call back over to Mr. Tony Aquila for any closing remarks, sir.

Tony Aquila

Thank you. Our fourth quarter results showed continuing strength in our revenue growth per claim and the penetration rates in our evolving and emerging markets. Despite the global economic slowdown, to this end we recently signed another international cooperation agreement with one of our large multinational insurance company customers, designed to further align our business pursuits globally with this important customer.

With $234 million in cash on the balance sheet and low debt leverage, we are well positioned to continue growing our business and delivering returns to our stock holders through the dividend.

Lastly, I want to thank each and every one of our 2,200 associates for their continued hard work, support and dedication and a year well done. Thanks again for joining us on the call and we look forward to speaking with you next quarter.

Operator

A replay will be available until midnight on September 10, 2009. To access the replay, dial 888-286-8010 or from outside of US 617-801-6888 and enter the following access code when prompted 44885806. You may now disconnect and have a great day.

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Source: Solera Holdings, Inc. F4Q09 (Qtr End 06/30/09) Earnings Call Transcript
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