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Epiq Systems, Inc. (EPIQ) Q3 2009 Earnings Call Transcript October 26, 2009 4:30 PM ET

Executives

Lew Schroeber – VP, IR

Tom Olofson – Chairman and CEO

Chris Olofson – President and COO

Betsy Braham – EVP, CFO and Corporate Secretary

Analysts

Tim Willi – Wells Fargo

Joseph Foresi – Janney Montgomery Scott

Richard Shannon – Northland Securities

Sean Jackson – Avondale Partners

Presentation

Operator

Good day, everyone, and welcome to the Epiq Systems third quarter 2009 conference call. As a reminder, today’s call is being recorded. At this time, I’d like to turn the call over to Mr. Lew Schroeber. Please go ahead, sir.

Lew Schroeber

Thank you and welcome, everyone. With me today to lead the discussion and address your questions are Epiq Systems' Chairman and Chief Executive Officer, Tom Olofson; President and Chief Operating Officer, Chris Olofson; and Executive Vice President and Chief Financial Officer, Betsy Braham.

Our earnings release was today at 3 PM Central Time and is available on our website at www.epiqsystems.com. The webcast will be available on our website until next quarter’s call, and a phone replay will be available through November 26th.

As always, we discuss our financial objectives and make forward-looking statements during this call. 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. These risks are included in our earnings release and also in our annual report on Form 10-K and the quarterly reports on Form 10-Q, which are filed with the SEC and available on our website or the SEC’s website. We strongly encourage you to review these risk factors.

It is now my pleasure to turn the call over to Epiq Systems’ Chairman and CEO, Tom Olofson.

Tom Olofson

Thank you, Lou. Good afternoon. Welcome to our Q3 earnings call. We are pleased to have you join us today. I’m very pleased to confirm that we had a solid quarter. We achieved our financial goals. We are especially pleased with the strength of the Bankruptcy business. We had a very, very robust performance throughout the Bankruptcy group in the quarter.

As you recall, in our last conference call, we talked with you about Q2 being a record. I’m pleased to say that Q3 is now a new record for the Bankruptcy business. On an overall basis, we saw the Bankruptcy segment increase 93% in terms of operating revenue. And this continues to be led by very strong performance in the Chapter 11 corporate restructuring group. For the first nine months of the year, revenue in Chapter 11 corporate restructuring is up 156%.

As Chris and I go through our comments today, we will talk with you in more detail about some of the dynamics taking place in the bankruptcy market. We are very, very optimistic that the strength will continue as we go through Q4 and, more importantly, as we go through the year 2010.

Let’s take just a quick look at some overall financial performance and then we will provide you with some insights into a little more detail as to what’s behind that performance. For the quarter, overall operating revenue for the company was $51.1 million. Now, within this revenue is reflected the following. As you recall from the last couple of calls, we’ve talked to you about the large analog to digital TV conversion contract in the settlements business.

As we pointed out previously and we confirm in this [ph] press release that contract was substantially completed during the second quarter. So, as of June 30th for our practical purposes, most of that revenue had been recorded. We are replacing that revenue with the growth in Chapter 11 corporate restructuring.

And as we’ve indicated to you previously, the margin in that corporate restructuring revenue is significantly higher than it was in the settlements revenue. So, while the quarter is flat, that was fully expected on our part. And the reason for that is what I have just reviewed with you. So once again, the large settlement contract is completed, and we are seeing significant growth to offset that in Chapter 11, but with a much more attractive margin.

In terms of cash provided by operating activities, and as you know, we always place a real focus on our cash results, we had a very strong quarter. Cash from operating activities was $6.5 million for the quarter. That showed a 123% increase versus prior year. On an YTD basis, $27.5 million, and that’s up 52%. So we are very pleased that the business is generating significant cash from operating activities.

We always review with you some key non-GAAP items. As you know from prior calls, if you look at the press release or the web report, we will always carefully define those non-GAAP terms and then give you a full reconciliation.

Looking first at non-GAAP net income, $6.8 million for the quarter. That was a 16% increase. It equals $0.17 per share. This was in line with our plan. So we did achieve our expectation in terms of financial performance for the quarter. On an YTD basis, the non-GAAP net income was $19.9 million, also a 16% increase, and that’s $0.50 for the first nine months of the year, which is right in line with our expectation.

Relative to our adjusted EBITDA, $16.1 million for the quarter. That’s a 10% increase. $47.1 million for the first nine months. That’s a 12% increase. So that’s a quick overview of some revenue, profitability and cash flow numbers. And I’m pleased to say that we did conclude a good, solid quarter.

As we always do, let’s take a quick look at the balance sheet. We feel the balance sheet continues to be very strong that provides us with a good bit of flexibility. Shareholder equity is now $320 million. We have no bank debt. We do have a fully available unused $100 million line of credit. We have our convertible note in place for $50 million that will appear in the debt section of the balance sheet.

As you recall, that convertible carries a 4% coupon. It matures in June of 2010. The strike price is $11.67. It would be our expectation at sometime between now and June of 2010. That convertible would simply convert to equity. So the balance sheet is in good shape, and we always work hard to keep it that way and place a priority on that item.

Chris and I will talk in detail about the segments as we go through our remarks. I’ll just make a couple of brief comments on some segment financial information. The Bankruptcy segment, once again, extremely strong. The revenue was $25.4 million. As I mentioned earlier, this was a 93% increase. On a year-to-date basis, just under $67 million, and that’s a 71% increase for the first nine months.

In terms of the EBITDA for Bankruptcy, while the revenue was up 93% for the quarter, the EBITDA was up 106% at just under $14 million. On a year-to-date basis, a 47% increase, but if you look at last year, you recall we had a one-time gain of $3.5 million on interest rate floors. So if you make an adjustment for that on a year-to-date basis, the EBITDA in Bankruptcy was actually up by 73%. And so we are pleased with the solidarity of those numbers.

With eDiscovery, the revenue numbers are down slightly. Chris and I will both talk about that. That ties to the general economy for the most part. And as we’ve covered with you, we’ve done some important but judicial investment spending in this business. The reason for that is we fully expect this business will have a much stronger 2010. And on a long-term basis, we continue to feel that this is a solid double-digit growth business in a multi-billion dollar market with some excellent international potential. So we feel good about eDiscovery on a longer term basis. And we will talk in more detail about that.

The Settlement revenue is down, but that ties specifically to the large analog-digital TV contract. That phased out on a very planned basis, and I covered with you just a few minutes ago. So the numbers in Settlement were precisely in line with our expectation.

I’ll come back in a few minutes and talk about Q4 and full year 2010. Let me, at this point, ask Chris to review with you his remarks of this call.

Chris Olofson

Good afternoon. Thank you for joining us. We had strong results for the quarter and year-to-date. We are on plan with our objectives in keeping our year-end objective in place. Regarding class action and eDiscovery, those segments performed basically in line with how we thought they would at the beginning of the quarter.

To take a moment on eDiscovery results, eDiscovery reflects both the conditions of the marketplace itself and how Epiq specifically has performed within that marketplace. Macroeconomic conditions have continued to result in reductions and delays in the usage of eDiscovery services industry-wide through 2009.

We believe that Epiq has fared significantly better than many competitors, and we do believe that customer usage will resume going forward, neither litigation nor regulatory compliance matters are going away. Because of this, we have continued to invest judiciously in eDiscovery during 2009, and our profitability for the eDiscovery segment does reflect this activity.

Looking into 2010 for eDiscovery, we do anticipate an increase in both revenue and profitability as compared to 2009. The Bankruptcy segment was clearly the highlight of the quarter and so far for the year, we had outstanding results. As Tom mentioned, it is the second sequential all-time record quarter. Q3 is our best ever results for Bankruptcy performance.

Corporate restructuring or Chapter 11 operating revenue engagement was up 156% for the first nine months versus prior year. That would compare, by the way, to be up 142% for the first half of 2009 compared to prior year, reflecting the strength of the third quarter. We have had extremely high market share on a year-to-date basis.

We have continued to be retained on new matters; just very recently, Capmark Financial Group, which is a top ten case of the year. Other new engagements include Samsonite Company Stores, Bashas', Basin Water, Luna Innovations, Finlay Enterprises, Holley Performance Products, and others.

Today, we at Epiq are working with virtually every major law firm that represents debtors. We are continuing to recruit talent into our corporate restructuring area. We are continuing to see an ongoing pipeline of new cases that are not yet filed, but that we anticipate we will file in upcoming periods. And I think one of the most important things to review with regard to the corporate restructuring business is the long-term multi-year nature of cases.

Inventory that we have now can be worked out in future periods. It provides increased financial visibility through 2010 and beyond. And looking ahead for the corporate restructuring business, we will continue to enjoy the benefits of significant momentum, significant new cases booked this year and last year. We see more cases coming next year and sustained growth from the corporate restructuring part of the Bankruptcy segment.

Turning to the trustee services side of the Bankruptcy business, we see similarly positive results. Our Chapter 7 and related revenue generating deposit portfolio is up slightly more than 25% year-over-year and is now at an all-time record level approaching $2 billion.

The growth in the aggregate deposit portfolio comes both from new customer engagements that have been booked and converted this year, as well as recent increases from existing customer balances showing how assets that are beginning to liquidate from recent increases in filing trends can translate into revenue in the Bankruptcy segment. We believe this trend will continue as existing customers begin and continue to liquidate from assets of recently filed cases and that translates into revenue.

Also important to note, our pricing formulas in trustee services that reference short-term interest rates, these have been at their floor levels throughout 2009. At some future date, when short-term interest rates increase, that will drop straight to the bottom line with increased profitability without any incremental cost for that element of the pricing formulas that reference short-term interest rates.

Bankruptcy filings generally are continuing to rise. We believe that most investors know we have ongoing ever-green relationships with our trustees for that trustee’s entire caseload, both the caseload at the time of the initial conversion and all future cases. Our Chapter 7 trustee relationships tend to be very sticky, very long-term client relationships. We have added additional sales staff in trustee services. We have announced a major new product version coming out in 2010 that has been well received in pre-production demonstrations.

And as we look at the trustee services side of the Bankruptcy segment and look at how are the variables lining up for 2010, we see a record deposit balance in the aggregate that is continuing to grow. We are increasing our market share. We are seeing filings go up. We have a brand new product version coming out, which usually stimulates increased prospecting in sales activity. And we stand poised to benefit from an increase in short-term interest rates whenever that may happen.

In terms of filing statistics, as reported by the Administrative Office for US Courts, and this will be referring to the 12-month period ended June 30, 2009, which is the most recent period for which data is available, filings were up 35% versus the same period in 2008. And then divided chapter-by-chapter, Chapter 7 filings were up 47%; Chapter 11 filings were up 91%; Chapter 13 filings were up 12%.

The quarter ended June 30 of 2009 represented the highest quarterly filing period since the legislative reform was enacted in 2005. So we are continuing to see heightened activity in bankruptcy filings generally. Remember that our most important client engagements are long-term, multi-year in nature.

For the Bankruptcy segment as a whole in 2010, we will enter the year with a very extensive portfolio of complex Chapter 11 matters. We also have an active pipeline of Chapter 11 prospective engagements not yet filed. I have just reviewed with you in the Chapter 7 side the record deposits, the growing caseloads, the future effect of a short-term interest rate rise, and we do expect that the Bankruptcy segment will grow and have a very strong 2010.

With those comments, I’ll turn things back to Tom and then we will be pleased to take your questions after that.

Tom Olofson

Thanks, Chris. It was important today that we give you some additional insight into our segments, especially Bankruptcy and eDiscovery. Chris has talked with you about both of those areas. In Bankruptcy, in particular, we were at a conference in New York just a couple of weeks ago, and there were a number of questions as to how strong would bankruptcy be in the next couple of quarters, did we think that any of that strength was beginning to dissipate. And so it’s very important to us today that we confirm with you that we see the Bankruptcy business staying very strong throughout all of 2010. And that means we look forward to some very robust results.

Keep in mind that unemployment continues to be very high. There are some very significant challenges in both residential real estate and commercial real estate. Debt levels generally, both on the business and consumer side of the economy, are staying high. And banking continues to be very challenging. When you put those ingredients together, it, we think, provides for an environment in which we will see a steady influx of filings going forward.

Chris mentioned that we were just retained in the Capmark case, which was on the front page of the journal today. Just a couple of days ago, we were retained in the Nortek [ph] case. Chris mentioned a series of other cases, and the filings have been very steady. Most of the people in the business look for some significant filings as we go through the balance of Q4, and in particular, as we go into the early and mid part of 2010. I think Chris covered thoroughly with you what’s taking place in eDiscovery. I think the key thing is that as we look at these businesses, we feel very optimistic relative to the levels of performance we will see in 2010.

Now, I think my concluding comments would be, and then we are happy to take any questions that you have, first of all, as we look at Q4, we expect that Q4 will be comparable or better than Q3. And that will put our full year 2009 performance comfortably in our objective range, which we have discussed with you throughout the course of the year. We anticipate some very solid performance in 2010. We feel that in Chapter 7, Chapter 11 and eDiscovery, we have some very, very nice opportunities for growth in 2010 over what we did in 2009 for the various reasons that we have talked about today. When we have our year-end conference call with you, we will talk with you about our quantitative objectives for the year 2010.

Now, with that said, we are happy to take any questions that you have. So I’ll call upon the operator to start the Q&A period.

Question-and-Answer Session

Operator

(Operator instructions) And we will go first to Tim Willi with Wells Fargo.

Tim Willi – Wells Fargo

Thank you, and good afternoon. Couple of questions, first on eDiscovery and then one on Bankruptcy. In the eDiscovery business, could you talk a bit about the pricing environment that you are seeing with what appears to be sort of a shrinkage in available business? And then the second part of my question on eDiscovery was relative to your investment spending and just how we should think about the expense levels in that segment as we model forward. Do you feel like you have a pretty sustainable level of investment spend in there that will not go higher or what it actually reverse itself potentially in coming quarters as you cycle through some investments?

Betsy Braham

Sure. Tim, this is Betsy. What I would tell you about the pricing environment within Electronic Discovery is that we have seen processing prices become much more commoditized. And so that is where we are seeing the largest pricing pressure within the segment. We have seen expert service prices go up or maintain their current levels. And we would expect these pricing levels that we are experiencing on a current basis to remain consistent as we go through the remainder of this year and looking forward into 2010.

The second part of your question asking about the investment spending levels and whether those are locked in, and the answer is yes. We do not expect, as you look at the expense base for eDiscovery, for that to change as we go into the fourth quarter other than some slight increases in variable expense that are anticipated for increases in specific business that has been one and in particular, our document review business.

Tim Willi – Wells Fargo

Okay. And just on the topic of the pricing, has it gotten worse as the year has progressed, as people struggled to stay afloat or chase any kind of business that’s out there? Or would you say that 3Q versus 2Q – how would you characterize the environment around the processing? Is that what your comments were referencing or are you thinking more year-over-year?

Betsy Braham

No. I would say that during the course of the year, we have continued to see pricing declines in the areas of processing, in particular, from the beginning of the year to the third quarter, and – as well as year-over-year.

Tim Willi – Wells Fargo

Okay. And then a question on the bankruptcy side was around the Chapter 7 deposit growth, which, as far as I can remember, if I’m remembering accurately, that’s probably the strongest I’ve heard you talk about deposit growth in that business. And – again, maybe I’m wrong, but just seems quite strong. So if you – I was curious if you have any thoughts around splitting that growth between market share and sort of the underlying growth of your existing trustee business? Any thoughts as to how that has played out?

Chris Olofson

This is Chris. You’re right. The increase is the highest percentage we have seen in sometime, particularly given the mature market share that we have across the limited number of trustees in Chapter 7. It is also true that the increase can be attributable to several factors, including both new competitive engagements that we have won from competitors and put in a replacement system as well as existing long-term clients simply experiencing an increase to their own deposit balances. And this has resulted from their ability to liquidate increased assets in new cases that are part of the recent filing increase. However, we do not have available the breakdown of those two specific variables for discussion on today’s call other than to say that both are factors in the increase.

Tim Willi – Wells Fargo

Okay. That’s very helpful. Thanks.

Operator

We’ll go next to Joseph Foresi with Janney Montgomery Scott.

Joseph Foresi – Janney Montgomery Scott

Hello. My first question is just sort of sticking with eDiscovery a little bit. Do you have any sense in general of what the timing of maybe a move to stability in that business or perhaps even an increase? Is it probably proper to link it to a general improvement in litigation? Just any color on sort of what your expectations are, obviously I think you’re clear on the end of the year, but heading into next year.

Chris Olofson

You know, as we go into next year, clearly litigation is not going away and discovery is the key component of litigation. Regulatory compliance is increasingly important to a lot of our corporate clientele, and similarly that is not going away. So I don’t think we are prepared to narrow to a specific quarter and certainly not a month when we anticipate seeing a material uptick in business volumes. However, we do believe that going into 2010, as the economic conditions are improving for many of our corporate clients and the law firms that serve them, we will see an uptick in business for our eDiscovery franchise. And we are expecting the 2010 results for revenue and profitability will be superior to those in 2009. That said, we are not prepared to narrow to a specific timeframe precisely when we see that happening.

Joseph Foresi – Janney Montgomery Scott

Okay. And just sort of moving on here, it looks like fourth quarter, if we stick with your annual guidance, implies maybe an uptick on the margin front. It sounds like that’s probably not the expectation in the eDiscovery business. Maybe you could just talk about where you are expecting to see the margin improvement and what would – maybe what segment would drive that.

Betsy Braham

Margin improvement will predominantly come from the Bankruptcy segment in the fourth quarter. We do anticipate seeing some improvement in the eDiscovery segment in the fourth quarter, although they will not be material in eDiscovery. We do expect that to come up slightly versus the third quarter. But predominantly our margin improvement is coming from the Bankruptcy segment.

Joseph Foresi – Janney Montgomery Scott

And I don’t think we have talked about it yet. Anything on the horizon and then – horizon in the Settlement business that would – anything large in the horizon or anything like that that might be a positive factor going forward?

Chris Olofson

Well, the number of engagements that are of the size at the analog-to-digital conversion project that we have described over the past year or two that has formed a highlight of financial performance for that segment are very, very few and far between. And we are not anticipating in the short-term identifying an opportunity of that scale within this particular segment. That could certainly change, but at this time, we have not banked on it. That said, as we look to the aggregate company results going into 2010, we are actually seeing an improvement in profitability because the profit margin associated with that very large analog-to-digital conversion projects segment is less than where we are seeing the majority of the revenue growth right now in the higher margin Bankruptcy segment. So when we put all of those factors together, that’s how we are looking into 2010 and how we would characterize the Settlement segment fitting into the overall corporate profit contribution for next year.

Joseph Foresi – Janney Montgomery Scott

I’m going to sneak one last question, just on the Bankruptcy side; I know you guys have been pretty clear about it. But if we were using sort of a baseball analog, what inning do you think we are in as far as the bankruptcy movement and the flow of that stuff? Thank you.

Chris Olofson

I think maybe the best way to answer that, and I talked about this at an investment conference a couple of weeks ago, because I had somebody ask the question, are you in the eighth inning or the ninth inning. And I said, no, we’re really not. We’re much, much earlier in the game than that. I think suffice it to say, you’ve heard us on this call, be very, very bullish in our comments about the balance of this year and the year 2010. And I think deliberately on this call, we’re not going beyond 2010 in any of our comments. But you clearly should look forward to a very solid bankruptcy year throughout all of 2010.

Betsy Braham

And to kind of elaborate on that discussion, the reason we are not in the eighth or ninth inning or much, much earlier is, the long-term nature of bankruptcies, whether it’s Chapter 7, Chapter 13, or Chapter 11, they take a very long time to go through the cycle. In Chapter 7, assets need to be liquidated and they stay in that portfolio until the very end of the bankruptcy. And so, because we are really at the beginning of the cycle in 2009 of filings increasing and we get the benefit going into 2010 of all filings for this year and even last year, as well as all of the new filings that we will have in 2010, it really sets us up and positions us very nicely for additional significant growth for 2010.

Tom Olofson

Yes. Keep in mind Chris’s comments earlier that in these large 11 cases, these are multi-year revenue assignments. A number of these large cases can go on for four and five years and even more. And in Chapter 7, we talked about how the deposits have grown. Keep in mind, in Chapter 7, that there is only one distribution at the very, very end of the case. So if you take up a large Chapter 7, a business case, let’s assume it has lots of litigation associated with it, those are clearly multi-year cases as well. And we have seen a number of those go on for four and five years. And then the distribution only takes place one time at the very end of the case. So when you look at those kinds of considerations, I think it helps to put in a better perspective the duration of these cases from a revenue generation point of view.

Joseph Foresi – Janney Montgomery Scott

Thank you.

Operator

We’ll go next to Richard Shannon with Northland Securities.

Richard Shannon – Northland Securities

Hi, everybody. I guess my first question will be on Electronic Discovery as well. It was already discussed about the pricing trends that you see there. I guess I’m curious about the volume trends as well. Have the growth in processing volumes continue to grow, especially in the third quarter? Did they dip in some way because of the economy or from summer seasonality, or can you discuss what’s going on the volume side as well?

Betsy Braham

Sure, Richard. This is Betsy. Relative to volume, volume in eDiscovery, as you know, is very driven from a processing perspective based on the startup of new cases. And Q3 typically is the quarter that will experience some summer seasonality, which we saw this year, very typical with what we have seen in the past several years. So we didn’t see a drop-off in seasonality that was really any different than what we would typically see. And as we’ve gone into Q4, we’ve seen kind of the typical pick-back-up of volume in Q4, that again we would see consistent with historical performance. So I would say Q3, from a volume perspective, was very consistent from a seasonality perspective with historical years.

Richard Shannon – Northland Securities

Okay, fair enough. And also on the eDiscovery, if I heard your comments collectively from all of you very precisely, your comments regarding a pickup in corporate cases, I guess I’m curious about your thoughts on the regulatory environment, especially with the new administration here. Is there any hope for an improvement in Electronic Discovery coming from the government or the regulatory side?

Betsy Braham

Well, clearly, that is one area that also requires Electronic Discovery services. And we would expect, as we continue through this administration, to see a pickup in those types of activities over the course of the next three years actually, yes.

Richard Shannon – Northland Securities

Okay. Let me jump over to the Chapter 11 restructuring business. In the last few months, we’ve seen a new competitor come in to the landscape here, kind of entering your duopoly you've had with another large competitor here. Kind of curious what you’re seeing – is there any impact on pricing as these new competitors come in? I mean, where do you see – where do you see your ultimate market share trend over the next few quarters?

Chris Olofson

Epiq Systems has held its pricing very constant. We are a premium provider. We specialize at the high end of our marketplace and focus on delivering best value for cost to our clients. There is some increased activity from a new competitor. It has not led to pricing changes from Epiq Systems. We believe we will continue to be the premier provider across the Bankruptcy segment with the top market share across the segment, based primarily on the subject matter expertise of what we perceive to be the best staff in the industry, an unmatched capacity to handle a large volume of complex cases simultaneously, and what we believe is the best list of historic retentions that is out there in the bankruptcy field. So, certainly we are always cognizant of competitive developments and monitor the situation carefully. But we have a very optimistic outlook on our go-forward prospects in the bankruptcy market and are certainly expecting very strong results from the Bankruptcy segment in 2010.

Richard Shannon – Northland Securities

Okay. And Chris, if I could follow up quickly on that, what’s your viewpoint on the landscape for larger bankruptcy filings? You obviously referenced Capmark, which looks like a very sizable filing. But other than that, we really haven’t seen much over the last two to three to four months or so. Are you seeing it in the backlog – or I guess not the backlog, but in the pipeline? As the restructuring advisors are working with those companies, are you seeing larger cases out there, you know, a good number of them that we can look forward to over the next few months?

Chris Olofson

Richard, the general feeling among the various professionals we deal with, in our own observation on the subject, is that there will be some substantial filings. And I mentioned earlier that as we conclude this year and go into early mid-2010, it is our feeling that not only will there be a number of filings, but there will be some substantive filings as well. And it would be for all the reasons that we itemized during the course of this call.

Richard Shannon – Northland Securities

Okay. I guess the last question from me, a very quick one for Betsy I think on the tax rates. We’ve seen quite a bit of a drop in the third quarter relative to the second quarter. And if I run my numbers for year-to-date, it looks like a rate of about 44% on a pro forma basis. How should we think about that going forward not just in the fourth quarter but beyond that?

Betsy Braham

We have to remember because of FIN 48 accounting that you will have a variability in your tax rate from quarter to quarter. So, as we go through the year, you should think about our tax rate as coming in at – give me one second and I’ll tell you what I think our tax rate for the year is going to be. Probably around 45.7% for the average for the full year.

Richard Shannon – Northland Securities

Okay, great. Thank you very much.

Operator

We’ll go next to Sean Jackson with Avondale Partners.

Sean Jackson – Avondale Partners

Just want to again dig a little deeper again in the eDiscovery side of things. I mean, the sequential drop was, I think, sort of surprising despite all the headwinds that you have there. The last part of ’08 was sort of understandable with a big drop in the economy, but that hasn’t really shown itself in the third quarter as much. So I’m just kind of curious as – that why the activity in litigation seem to – what is your take on that seeming to drop significantly in the third quarter versus, say, the second quarter or the first quarter when technically the economy was a little worse?

Betsy Braham

Well, I don’t think you can always draw a direct correlation to the economy and when a matter will start up from a litigation perspective. There is always some seasonality in the third quarter. And so I would attribute a component of the drop that we saw in the third quarter to – from the second quarter to normal seasonality. And again, we will always have variability from quarter-to-quarter just based on exactly when a particular case starts up. So, as we’ve looked in October, we’ve seen actually a – probably one of the highest months that we’ve seen in quite a long time in terms of the pickup of activity and the start of new cases, which again I can’t attribute right back to the economy.

It just happens to be when does a particular client have litigation requirement for eDiscovery that they cannot delay and they are not going to be moving into settlement. And a big component of what we’ve seen during the course of this year is more settlements that we would typically see and a delay in the startup of discovery than we would typically see. So we do anticipate that as we go into the 2010 timeframe, if in fact we’ve had clients that have been successful in delaying the startup of discovery that we may see activities pick up, as we look towards the latter part of ’09 or the early part of 2010.

Sean Jackson – Avondale Partners

So the pickup in October, do you sense it was something that perhaps folks just could not wait any longer, maybe there are some expectations that it could have been a September, but it moved over into the next quarter?

Betsy Braham

I think that there is some component of that. Some of it is new case wins that had quick timing in terms of start date. And so it is a wide variety. And I would tell you that if you look at the class action business and you look at the eDiscovery business, the nature of those businesses is when a matter actually starts and that can vary quite a bit in terms of what quarter it starts. And sometimes it can be delayed by two, three and four quarters even from when we anticipate a case starting from our very first discussion. So it is a little bit more difficult in those particular segments to be able to predict with a high level exactly when cases will start.

Sean Jackson – Avondale Partners

A good segue into the class action business, if you just exclude the big contract, has the demand characteristics mirrored that of eDiscovery through the year, meaning that it’s kind of been scraping along the bottom and then took another dip in the third quarter?

Betsy Braham

No. Again, the third quarter for the Settlement Administration business is the first quarter that reflects the conclusion of the analog-to-digital contract. As we look into the future for that particular segment, what we really expect for it is for it to look more similar to how it looked prior to that large contract when it was out with some potential growth obviously that has been built in over those timeframes.

Sean Jackson – Avondale Partners

Okay. Thanks. And on the Chapter 7 business, how close are you to coming off of the floor pricing, not necessarily from a timing perspective? I know that’s incredibly difficult. But just from the magnitude perspective, how close are you from coming off of the floor?

Betsy Braham

Basically, if there is a change in short-term interest rates, and this would predominantly be driven by the federal funds rate, if we see those types of changes, it will immediately begin to impact the pricing structure within the Chapter 7 business. And for each related changes that goes up, we would expect to see incremental improvements in pricing.

Sean Jackson – Avondale Partners

Is there much slack to that? In other words, would any change help you?

Betsy Braham

Any change will help us, yes.

Sean Jackson – Avondale Partners

Okay. Okay, thank you.

Betsy Braham

You’re welcome.

Operator

And that does conclude our question-and-answer session. I’d now like to turn the call back over to Epiq Systems’ management for any additional or closing remarks.

Tom Olofson

Thank you all for joining us. We hope you have a nice afternoon.

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Source: Epiq Systems, Inc. Q3 2009 Earnings Call Transcript
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