ICG Group's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.20.14 | About: Actua Corporation (ACTA)

ICG Group, Inc. (ICGE) Q4 2013 Earnings Conference Call February 20, 2014 10:00 AM ET


Karen Greene - Managing Director, Investor Relations

Walter Buckley - Chairman and Chief Executive Officer

Kirk Morgan - Chief Financial Officer


Scott Berg - Northland Capital Markets

Jeff Van Rhee - Craig-Hallum


Good day, ladies and gentlemen and welcome to the ICG Fourth Quarter and Full Year 2013 Financial Results Conference Call. My name is Matthew and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

And now I would like to turn over the call to Karen Greene, Managing Director of Investor Relations. Please proceed, ma’am.

Karen Greene

Thank you and good morning. This is Karen Greene with Investor Relations and I want to welcome you to ICG’s fourth quarter and full year 2013 conference call. I’d like to remind everyone that we are going to be using presentation slides to accompany our prepared remarks today. These slides can be found on our website at icg.com. Go to the Investor Information tab and you will see an icon for our fourth quarter conference call. The slides can be accessed through that icon. For those of you without immediate access to our website, the conference call and presentation slides will remain on our website and be available for future reference.

On the call this morning, we will be discussing certain non-GAAP financial measures. For additional information on these non-GAAP financial measures, including a reconciliation of these measures to the most comparable GAAP measures, please refer to the press release we put out this morning, including the attachment to the press release. The press release is also available on our website, which again is icg.com. To access the press release on our website, go to our home page and select the February 20, 2014 press release. The attachments to the release can be accessed by clicking on the PDF file contained within the release itself.

Before we begin, I would like to briefly review our Safe Harbor language. The statements contained in this press release that are not historical facts are forward-looking statements that involve certain risks and uncertainties including, but not limited to, risks associated with the effect of economic conditions generally, capital spending by our customers, our ability to retain existing customer relationships and secure new ones, our ability to compete successfully against alternative solutions, our ability to timely and effectively respond to technological developments, our ability to retain key personnel, our ability to have continued access to capital and to deploy capital effectively and on acceptable terms, our ability to maximize value in connection with divestitures, and other risks and uncertainties detailed in ICG’s filings with the Securities and Exchange Commission. These and other factors may cause actual results to differ materially from those projected.

With that, I will turn the call over to Walter Buckley, ICG’s Chairman and CEO.

Walter Buckley

Thanks, Karen. Welcome and thank you for joining us this morning. Today, I will provide an overview of ICG’s performance for 2013 and Kirk Morgan, our Chief Financial Officer, will follow up with ICG’s financial results for the fourth quarter and full year.

Now, turning to Slide 5, 2013 was a momentous year for ICG in many ways. Certainly, the sale of Channel Intelligence to Google and the sale of Procurian to Accenture were important developments. But the real highlight of 2013 was ICG’s emerging as a pure-play vertical cloud company posting strong growth across our cloud businesses and shining a light on the tremendous opportunity to generate long-term revenue and in-time earnings growth as we transform the industry-specific vertical markets that we serve today.

Underscoring our enthusiasm through this opportunity, one of the highlights of Q4 was that we increased our Bolt ownership from 53% to 70%. We were also pleased with the strong organic revenue growth we achieved in ‘13 as we exceeded our guidance for Q4 and close to 38% organic revenue growth for the year compared to 2012. Finally, we successfully closed the Procurian deal in mid-December realizing $328 million in cash, $16.5 million of which is being held in escrow.

Now, from an operational perspective, we continue to aggressively pursue our key growth initiatives. As you heard from us throughout the year, we made measurable investments to accelerate growth and broaden our overall addressable market. We spent $28.1 million on sales and marketing during 2013 as compared to $12.4 million in 2012. And we think these investments were key contributors to helping us achieve our 38% organic growth for the year.

Now, turning to Slide 6, our public sector business GovDelivery had an exceptional 2013 exceeding our expectations in many counts including revenue growth of 13%. We added 94 new customers in 2013, growing the base of recurring revenue contracts and growing our footprint in the European and federal markets. Another key accomplishment over the course of the year included the validation of our ability to serve some of the large programs in both the U.S. and UK including the rollout of ACA.

Now heading into 2014, we are starting with a strong pipeline that looks similar in makeup to the record opportunities we had in front of us when we entered 2013, but with a greater number and wider diversity of account prices. And serving well over 1000 government agencies and more than 60 million stakeholders who receive regular communication updates from the government through our platform, up from 39 million a year ago.

Continuous growth of our customer base and subscriber reach further enhances our network effect in the public sector. We are the largest driver of targeted traffic and social media engagement for many of the largest government agencies in the U.S. which clearly demonstrates that our unique ability to help organizations to reach more people and drive them to action is being recognized.

Now turning to Slide 7, our compliance business MSDSonline also had a strong 2013. Growing revenue 33% over 2012 MSDSonline added over 1900 new customers to the platform, a 43% increase over the prior year bringing total customers to a little over 8600. We expect this type of growth to continue as a very large addressable market of approximately 600,000 targets remains. We continue to aggressively build out our sales and marketing resources to go after this market opportunity increasing sales and marketing spend in 2013 over 45% compared to dollars spent in 2012 and adding 26 sales people during the year. With over 100,000 leads coming into the platform search terms, targeted demand generation and sophisticated in-house sales program, the growth opportunity ahead of this business in 2014 remains strong and compelling.

Now moving on to Slide 8, our insurance business, Bolt continued to experience very strong revenue growth in excess of 50% for the year. Bolt added two significant platform customers during the year, one of them a top 200 carrier as well as Citizens Property Insurance of Florida, bringing the total number of full platform customers to four. And just to remind everyone Bolt serves two large classes of customers, one top 200 carriers as well as insurance agencies. So today in addition to the four platform insurance carriers that they have there are over 2100 agencies that now use the Bolt platform.

Now, the launch of the citizen state-mandated clearinghouse on January 27 was a major milestone and we are pleased to report that it was a successful launch. The clearinghouse is performing exactly as planned with volume well ahead of plan. And in just two weeks has already started to reduce the liability on the Florida tax payers, the ultimate goal of this program. The Clearinghouse went live with four carriers and six more expected to be added over the next five to six weeks. In all, 20 carriers have signed contracts to join in network and we expect to have them all up in running by the end of the third quarter. And over the next 12 to 18 months this should translate to over $1 billion of premium running through the platform, highlighting the key role that the Bolt platform will play in the Florida property insurance marketplace. The successful launch of the state-mandated clearinghouse is very impressive given the complexity of the problem it solves, initial perspective of many state industry participants that it couldn’t be done and the extremely short timeframe of only five months from contract signing to launch.

Now we are continuing to invest aggressively in the Bolt business both in terms of additional R&D for the Bolt platform and expanding the sales force from one team to four teams. A sales team is comprised of a sales lead and accounting executive, a software engineer and then shared resources of half a dozen sales support people. We also made two key hires in the fourth quarter 2013 for Bolt an experienced CFO and a senior executive to lead professional services, both broadening the bench of talent on the management team.

Now, against the backdrop of strong growth, market leadership and large addressable markets, we are very enthusiastic about the future opportunity of our cloud businesses. We intend to see this opportunity by continuing driving growth aggressively. At an organic level, we will continue to spend aggressively on sales and marketing as long as we see the corresponding ROI on the customer acquisition side as measured by customer acquisition costs or cash. We will also make measurable investments in product and technology developments to augment our differentiation in the market, increase our ASP, or average selling price and expand the total addressable markets that we serve. We will also drive growth through tuck-in acquisitions to expand our footprint in our existing markets.

And finally, with our foundation of deep expertise and building vertically-focused cloud businesses and reinforced by a strong balance sheet, we are excited to enter new markets. We have a proven ability to drive growth in these types of businesses and we have deep experience in helping them attain and retain little bit shift as part of the ICG network. We are closely evaluating a number of cloud businesses with profiles that are similar to those of the businesses we own today and in markets that meet the criteria that we have previously laid out. We intend to enter one or two markets through acquisition over time.

And in summary, I think 2013 was a transformational year for ICG. We experienced record revenue growth in all areas of our business, reflecting accelerating customer adoption as a result of our investment in sales and marketing and technology development. Looking forward, we are enthusiastic about the significant growth potential that lies ahead of us as we continue to leverage the cloud to transform vertical markets. All of which would continue to drive revenue and earnings growth in 2014 and beyond.

And with that, I will turn it over to Kirk.

Kirk Morgan

Thank you, Buck. 2013 was a great year for ICG as highlighted on Slides 10 and 11. For the fourth quarter of 2013, revenue came in at $17.7 million and adjusted net loss of $0.09 per share was an improvement from adjusted net loss of $0.16 per share in the 2012 quarter. As you know, we recently closed our sale of Procurian to Accenture. Accordingly, the revenue and results of Procurian are recorded as discontinued operations for all periods presented. So Procurian’s revenue has been removed from our 2013 and 2012 GAAP amounts.

On Slide 12, full year 2013 revenue was $59.2 million, an organic increase of 38% compared to the full year of 2012. 87% of our 2013 revenue was recurring and our annual recurring revenue retention rate was approximately 95% in 2013. Now, as you look at these two metrics, it’s important to remember that they work in concert and we really focus on the mix of the two. Adjusted net loss per share for the year totaled $0.41 per share, an improvement over 20% from 2012’s adjusted net loss of $0.54 per share.

Now moving down our 2013 annual income statement, gross margin percentage improved nicely from 2012 to 2013. Sales and marketing expenses increased significantly as we added sales reps and invested in other non-headcount sales and marketing initiatives. Technology development, or R&D expenses, also increased from 2012 to 2013 as we continue to broaden our product offerings. We continue to see leverage in the G&A line as a decrease as a percentage of revenue from 2012 to 2013. We also see the significant gains rolling through discontinued operations, which relates to the Procurian sale in Q4 and the Investor Force and Channel Intelligence sales in Q1 of 2013.

The income tax benefit you see in Q4 and the year-to-date 2013 was all non-cash and is just a required re-class out of discontinued operations into continuing operations. As a reminder, there were no cash taxes due for the Procurian, Investor Force or Channel Intelligence sales in 2013 and we still have approximately $250 million of NOLs available at December 31, 2013.

From a balance sheet perspective on Slide 13, we ended the year with over $335 million in cash, $12 million of debt at the business level and a book value of over $12 per share. Now, this cash excludes $24 million of escrow proceeds we expect to receive in 2014 related to prior dispositions. In 2013, we received a total of $385 million from dispositions including $307 million from the Procurian sale. We deployed almost $28 million to increase our ownership in our companies including $11 million to increase our ownership in Bolt to 70% during the fourth quarter of 2013 and we repurchased 906,000 shares for $12 million in 2013 and that includes 265,000 shares for $4.6 million in the quarter.

Now let me turn to our 2014 guidance. As Buck said, our overarching goal for 2015 and beyond is to grow our leadership position in the multi-vertical cloud market by increasing our revenue and earnings over time. We expect to do this both organically and by acquiring one or more vertical cloud platforms.

Now focusing on the details of Slide 14, we expect revenue to increase from $59.3 million in 2013 to between $78 million and $80 million in 2014, an expected increase in the range of 31% to 45%. On Slide 15, we expect adjusted EPS to improve from the loss of $0.41 per share in 2013 to a loss in the range of $0.36 to $0.41 per diluted share in 2014. In arriving at this guidance we assumed our weighted average diluted shares on an annual basis for 2014 will be about $37.5 million. Now, we expect 2014 to be a strong revenue growth year with smaller sequential revenue growth from the fourth quarter of 2013 to the first quarter of 2014 and then accelerating sequential growth as the year progresses. From the EPS standpoint the investments we are making in sales and marketing and technology will be front loaded in the first half of 2014 so the EPS improvement we are expecting will occur in the second half of the year.

Now from an operational standpoint on Slide 16, we expect our gross margins to improve modestly in 2014 as we continue to see some leverage there. We expect to add approximately 50 new sales and marketing people in 2014 increasing our investment in this area to almost $40 million, up from $28 million in 2013. We expect overall G&A to decrease in absolute dollar terms in 2014 from 2013 and significantly as a percentage of revenue, while our spend on technology development should increase as well.

We are seeing particular improvement in G&A as we are reducing headquarters expense by approximately $4 million in 2014 from 2013. And from my perspective one of the most encouraging aspects of our 2014 plan is that while making significant investments in sales and marketing and technology development given our overall reduction in G&A line we expect to improve EPS over 2013.

In conclusion as we look ahead to 2014 and beyond, our strong balance sheet will allow us to execute on the following growth initiatives. Expanding our markets through sales and marketing investments, innovating and scaling our solutions through product development and R&D, owning more of our markets and expanding our markets through tuck-in acquisitions, pursing new vertical markets and executing on our share repurchase authorization program.

With that let me turn over to Buck for a few closing remarks before we open the line for questions.

Walter Buckley

Thanks Kirk and now we would like to open up the line to questions.

Question-and-Answer Session


Thank you. (Operator Instructions) And your first question comes from the line of Scott Berg of Northland Capital Markets. Please proceed.

Scott Berg - Northland Capital Markets

Hi Buck and Kirk congratulations on both the nice quarter and the transition of the model with the sale of Procurian.

Walter Buckley

Thanks Scott.

Scott Berg - Northland Capital Markets

Couple of questions, first of all talk about – Kirk can you talk about use of cash in ’14, obviously earnings are going to be at a net loss given the investments in the business which I think we are comfortable with obviously, but how should we view cash burn in the year both on maybe an operating cash flow basis and then free cash flow between all businesses in the aggregate?

Kirk Morgan

Yes, I think from an operational standpoint, again we are looking at – with the EPS from $0.36 to $0.41 that will represent a roughly $13.5 million to $15.5 million sort of net burn from an operation standpoint. I think cash should be better than that. Obviously, given the deferred revenues, so I would think we would probably have that in terms of our cash burn. And then why don’t I let Buck talk about from an acquisition standpoint?

Walter Buckley

Yes, I think from a strategic use of cash, I think our primary focus in 2014 is driving growth, first, organically. And I think we outlined the goals there from that perspective and then I think tuck-in acquisition certainly is a second key criteria, where we are working with all three platforms as we speak creating market mass and identifying what we think are strategic tuck-ins that broaden the platform potentially increase – out to increase the move to adjacent markets. And then I think the third would be to acquire a new platform, much longer criteria that we talked about vertical marketplace, where there is limited automation to-date, $1 billion plus in size where there is limited penetration in the platform we are acquiring is a leader or is emerging as a leader in that space. And then finally, we will be opportunistic on share repurchases. So I think from a priority standpoint, that’s how we look at it. And I think we are excited about where we are from the three platforms we have today, no, they are all I think a very good position. And we are seeing some interesting opportunities on a new platform perspective.

Scott Berg - Northland Capital Markets

Fantastic. And then I want to talk about deferred revenues a little bit, obviously part of the transition to a pure SaaS model, deferred revenues are an important metric that most investors use as can you talk about how maybe billings worked individually from the three customers and how we should view deferred revenue growth going into ‘14? Obviously there is a bill-ahead feature for, I know MSDS is at least on an annual basis and there is partially to GovDelivery, but how does that work I guess with regards to Gov – excuse me to Bolt in their billing terms? And then that growth is kind of looking at from annual versus quarterly billing just trying to better understand that going forward?

Walter Buckley

Yes, I think it’s you hit it over the head with Gov and MSDS. There is going to be some lumpiness in the quarterly build there, Scott, because Gov clearly with the government, their third quarter build in deferred revenue is pretty substantial. So I think that’s part of the reason why you are seeing somewhat of a downtick from Q3 to the end of the year. MSDS for the most part is a pretty straightforward build throughout the year. And Bolt is really sort of the wildcard a bit on the deferred revenue side that’s just depending on what their mix of revenue build goes in ‘14 but I don’t – as I model things out, I don’t think of that as a huge deferred revenue build at Bolt given the nature of the business.

Scott Berg - Northland Capital Markets

Okay, great. And then last question for me, Buck, is as you look at sales and investments into ‘14, you are adding I believe the number was 50 sales heads across the platforms. Can you talk about the growth opportunities for each of the three platforms moving into ‘14? Do you see comparable growth opportunities of 30, 30 and of 50 between the three platforms kind of respectively with Bolt at 50 or should we see the opportunity to change one of those meaningfully going into the year?

Walter Buckley

Scott, it’s a very good question. I think as we think about it, all three companies are I think building out their sales teams specifically. And I think on the GovDelivery side, the GovDelivery has really refined their and focused their value proposition on going after large government marketing programs, where large dollars are being spent. And they can help drive reach and then action. And I think that takes a senior executive from a sales perspective and the team supporting them. And I think we are excited about that direction. We think it’s the right direction. It leverages their platform with building out some additional capabilities from a platform perspective to allow it all to work, but I think the rollout, the shuffle rollout we have had with ACA with the healthcare initiative really I think validated the GovDelivery platform and our ability to serve very large customer providing very large programs. I think that’s a huge initiative and we see 200 plus large programs currently to go after. So it’s a very large addressable market from our perspective.

I think MSDS we should continue to see the continuing growth that they are doing. They have 600,000 potential targets, we are looking at – we are churning through 100,000 leads as we speak. So that company should continue to grow at that rate. And Bolt is I think a little bit of a wildcard. I think the good news here is we probably have the best pipeline from a new platform perspective than we have had since we made the original acquisition in Bolt. And we would expect to see at least two new platforms this year and could be more just based on where we are with the pipeline of lot of mature, large deals. And we are going from one to 14 sales teams and I have outlined what a sales team is, it’s a senior accounting exec, senior lead accounting exec, a software engineer and then sales support underneath them. So I think that that company has the ability to continue to grow at a very fast rate and exactly how fast is impossible to determine. It’s a matter of when you sign a contract and begin to recognize revenue all of which is not completely in our control. But I will say the overall momentum in the business is very good. So that is a little bit long-winded, but I will try to give you some color.

Scott Berg - Northland Capital Markets

Sounds great, thank you. I will jump back queue. Congrats again.


Thank you for you question. Your next question comes from the line of Jeff Van Rhee of Craig-Hallum. Please proceed.

Jeff Van Rhee - Craig-Hallum

Thank you. Number of questions, guys, first in terms of the growth you have commented a lot about the sort of how to think about sequential, as we look at the year-over-years and how the year-over-year growth rates will progress through the year, can you flesh that out a little bit, you have got this 31% to 35% annual growth, how do you think about the year-over-year growth rates progressing in Qs 1, 2, 3, 4, we see acceleration sort of steady state throughout the year specifically with the investments upfront just curious how that plays out?

Walter Buckley

I think a quick – it’s really and I think it’s important not to look at it on a quarter-to-quarter basis. There are one-time things in each quarter that can affect things a couple of points one way or another. But I think as we see the business, we see it I would say very consistent with the slight acceleration. And one of the issues is rolling out Citizens. Citizens began January 27. We really did target in January – to rollout January 1 or 2 or 3, but its going extremely well. And as that rollout continues to gain momentum and traction that’s going to have a significant impact just on our overall growth rate on both sequential and on an annual basis. But it’s fairly consistent and we – our goal is to meet and beat our guidance and so that’s how we think about it.

Jeff Van Rhee - Craig-Hallum

And then along the lines of growth, can you talk about the acquisition pipeline, obviously you are always looking for the bolt-ons and platforms, it sounds like some of those discussions are little more mature, can you share a little bit about what the growth profiles are of the entities that you are looking at just give us a sense of what the consolidated impact would be or I guess the size of what their impact would be if you followed through?

Kirk Morgan

Jeff, that goes for tuck-ins and new or just for tuck-ins?

Jeff Van Rhee - Craig-Hallum

Well mostly for the new I mean the tuck-ins I imagine are hard to gauge the immediate impact, but the newer platform purchases I was speaking?

Kirk Morgan

Sure, I think the criteria we have outlined and I think correspond to the discussions we are having, companies in that $13 million and north size growing north of 20% in vertical markets where they have emerged as a leader, a market that’s $1 billion in size or more, it’s primarily on automated, obviously, less than 10% penetration. And I think the dialogue and discussions we are having with several opportunities sort of sitting exactly in that framework. And I think in our – from our perspective we decided how much can we – what type of model does it have and what are the long-term sustainable growth rates. And here is a business that we think we can really help fundamentally build into that leading player. And I think the good news from an overall perspective is that I think it is the unique time in the market where there are a number of cloud-based – vertical cloud businesses that sort of meet that criteria and I think it allows us with our balance sheet to capitalize on it. So I think it’s an interesting time overall and I think we are in a good position.

Jeff Van Rhee - Craig-Hallum

Okay and just one housekeeping you have got, I think you had mentioned this 50 sales and marketing heads intended to be added in ’14, what was the adds for ’13?

Walter Buckley

We added about – just adding them up here. I think we added probably about 25 to 30 Jeff on that for ‘13.

Jeff Van Rhee - Craig-Hallum

Okay, got it. Okay, great. Thank you.


Okay, thank you for your questions. I would now like to turn the call over to Mr. Walter Buckley for the closing remarks.

Walter Buckley

I would thank all of you for joining us this morning. And we look forward to reporting first quarter results in early May. Thank you.


Thank you for joining today’s conference call. Ladies and gentlemen, this concludes the presentation. You may now disconnect. Good day.

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