IHS' CEO Discusses F1Q 2014 Results - Earnings Call Transcript

Mar.20.14 | About: IHS Markit (INFO)

IHS, Inc. (IHS) F1Q 2014 Results Earnings Conference Call March 20, 2014 8:00 AM ET

Executives

Eric Boyer - VP Investor Relations

Scott Key - President and CEO

Todd Hyatt - EVP and Chief Financial Officer

Analysts

William Warmington - Wells Fargo Securities

Paul Ginocchio - Deutsche Bank

John Crowther - Piper Jaffray

Gary Bisbee - RBC Capital Markets

Andre Benjamin - Goldman Sachs

Hamzah Mazari - Credit Suisse

Joseph Foresi - Janney Montgomery Scott

Andrew Steinerman - JP Morgan

Jeff Meuler - Baird

Andrew Jeffrey - SunTrust

Jeff Silber - BMO Capital Markets

Brandon Dobell - William Blair

Shlomo Rosenbaum - Stifel

Ryan Leonard - Barclays

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2014 IHS, Inc. Earnings Conference Call. My name is Adrian and I’ll be your operator for today. At this time, all participants are in listen only-mode. We will conduct the question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. And now I would like to turn the call over to Eric Boyer, Vice President, Investor Relations, please proceed, sir.

Eric Boyer

Good morning, and thank you for joining us for the IHS first quarter 2014 earnings conference call. We issued our first quarter earnings release earlier this morning. If you do not have a copy of this release, it is available on our website at ihs.com.

Some of our comments and discussions on the quarter are based on non-GAAP measures. Our non-GAAP or adjusted numbers exclude stock-based compensation, amortization of required intangibles and other items. Our earnings release includes both our GAAP-based income statement and statement of cash flows and reconciliations to the non-GAAP measures discussed during this call. These reconciliation schedules are included in our release and can also be found on our website.

The non-GAAP results are a supplement to the GAAP financial statements. IHS believes this non-GAAP presentation and the exclusion of these items is useful in order to focus on what we deem to be a more reliable indicator of ongoing operating performance.

As a reminder, this conference call is being recorded and webcast and is the copyrighted property of IHS. Any rebroadcast of this information, whole or in part, without the prior written consent of IHS is prohibited.

Please keep in mind that the conference call, especially the discussion of our outlook, may contain statements about the expected future events that are forward looking and subject to risks and uncertainties. Factors that could cause actual results to differ and vary materially from expectations can be found in IHS' filings with the SEC and on the IHS website.

After our prepared remarks, Scott Key, IHS’ President and CEO; and Todd Hyatt, EVP and Chief Financial Officer, will be available to take your questions.

With that, it is my pleasure to turn the call over to Scott Key. Scott?

Scott Key

Thank you, Eric. Good morning everyone, and thanks for joining. It’s my pleasure to be with you to share our results from the first quarter of this fiscal year and provide an update on the progress we have made on key initiatives.

Just a reminder that we will be holding our annual Investor Day on Tuesday April 8th in New York so we will keep this call brief. We hope that you all consider joining us in person but the entire event will also be webcast and available on our website. Paul will provide you with the specifics of our financial performance for the quarter, but I wanted to make a few comments as we get started.

Overall we were pleased with our Q1 performance as we delivered results as expected and see the year developing as we discussed on our January call. First quarter represents a solid start to the year and consistent with our expectations for the continued development of organic growth, adjusted EBITDA, margin, free cash flow and earnings for 2014 and into 2015. We have strong revenues of $524 million in Q1 up 37% from 2013 including Q1 subscription organic growth of 5%. And this was inline with our expectations as we built to our full year goals for 2014. We also improved our non-subscription business delivering positive organic growth of 3% and we continue to expect this part of our business to be neutral to positive for the full year. The result was a solid total organic growth of 5% driven by our subscription growth performance. Adjusted EBITDA was $156 million for the quarter up $38 million from Q1 2013, and this strong profit performance delivered solid free cash flows in the period.

We believe that the free cash flow is a core value creation metric for IHS and is a key metric we use to measure ourselves. Positively, our free cash flow is allowing us to quickly and effectively delever from our Q3, 2013 acquisition of R. L. Polk. I want to thank my IHS colleagues for their tremendous focus and commitment to delivering on their 100 day plans. This helped us achieve the results we’re reporting today and helps set a solid foundation for the year.

Every IHS leader and colleague continues to have two clear priorities directly linked to our performance, operational excellence and commercial expansion. Operational excellence represents the work we’re doing to capitalize on our completed infrastructure investments to allow IHS colleagues do their jobs even more simply and effectively and importantly enable every IHS colleague to more efficiently engage and support new and existing customers.

During Q1 we made great progress and delivered the key milestones in core process and system enhancements that will allow us to meet our goals. Commercial expansion defines the key platform and account growth initiatives that are the foundation of the organic growth path we outlined at Investor Day roughly one year ago. These two clear initiatives consist of first, new customer workflow platform releases, and second account development and growth which includes target 1,000 accounts field sales in our 20 key geo markets globally and leverage of insight sales in our 3 centers of excellence in the Americas, EMEA and APAC.

The development and rollout of our common workflow platforms has gained momentum in the first period of 2014 and we are building on 2013 milestones and achievements.

IHS workflow platforms are tied directly to our customers’ key decision processes and daily workflows across each of our core industries. They provide a common point of access for customers to the full breadth and depth of IHS solutions, while we also simplify the selling motion, enable cross-sell and upsell opportunities and support solution selling. All of which are positive drivers of future organic growth for IHS. We are placing a high priority on investment in these platforms over the next couple of years. And we continue to make very strong progress on the development and rollout through the first quarter. We will go into a lot more detail on our Investor Day including an update on the progress we’ve made and what you can expect going forward. Importantly, we remain on track with these key commercial initiatives.

For today, let me provide just a few highlights, as we look through more detailed review in a few weeks. We successfully delivered planned commercial releases of IHS Connect during the quarter as we expanded solutions and usage on the platform for energy and our economics and country risk research and analysis, which was also positively reflected in building sales pipelines. We also remain on track to launch IHS Connect for [common pulse] and we have just began that launch this week.

We completed two commercial releases of the engineering workbench and continue to see good market reception as we achieved key sales goals. We also completed further development and planned releases of our energy platforms, IHS Meridian and Vantage, as well as IHS Sphera, our operational excellence and risk management enterprise platform. For each, we continued to see solid customer reception engagement and adoption.

More to come on each of these in a few weeks but good progress through our first quarter. Account growth and developing high opportunity accounts and geo markets is the other primary element of our commercial extension opportunity. This includes a focus on our target 1,000 accounts of large existing customers and large high potential customers, and fully leveraging field sales, inside sales and e-commerce to drive new business potential globally.

With regard to our account growth initiatives, we were on track through Q1. This included continued development of the target 1,000 sales executive team, with 32 now on board, targeting 157 accounts across 25 countries. We also made good progress moving lower value accounts to our higher touch inside sales environment. And we now support nearly 10,000 customers globally through our three regional centers of excellence.

As planned, we launched our new IHS e-commerce site as we closed Q1with an initial focus on a portion of our transactional offerings in aerospace, defense, energy, and maritime sectors as we execute a phased roll out over the next four quarters.

And finally, let me touch on demand generation, as we are seeing the benefits of integrating our marketing efforts unchanged globally and focus coordination with sales regionally. As we close Q1, we saw solid year-on-year growth in qualified lead volumes globally and marketing driven sales pipelines.

Again, we are on track with planned progress in Q1 on account growth initiatives. And Brian Sweeney, our Global Head of Sales and I look forward to providing a more comprehensive update for you in a few weeks at Investor Day.

I would also like to provide an update on the R.L. Polk acquisition. We continue to be very pleased with the performance of R.L. Polk and we remain on plan with our objectives for this acquisition. Through Q1, we completed the integration of the core Polk team with IHS Automotive to create a single IHS Automotive organization. Importantly, this included a full integration of sales teams, and we are now going to market with our full automotive offerings globally.

CARFAX performance also continued to be solid. And we are realizing new growth opportunity as planned with the launch of the used car listing service that is targeting our core dealer customer base. This service leverages existing vehicle history report information to provide new value to customers. And we expect this to contribute to expanding growth in the automotive sector. So, we feel good about our progress with R.L. Polk from organizational, operational and financial performance perspectives as we create important scale in this industry and create new value for customers.

Before we go on, I did want to take a moment and provide some commentary on what we are seeing in each of our three regions and across our core industry sectors as we build performance across IHS. In Americas, we delivered organic growth that was solid in both subscriptions and non-subscriptions, and we saw continued build in our sales pipelines as we ended the quarter.

In EMEA organic growth is benefiting from the build out over the last two years in sales leadership, field sales teams and our inside sales infrastructure and capability. This was reflected in very strong subscription organic growth and continued development of the non-recurring business. And finally, in APAC, we had a slower start to the year in subscriptions that reflects timing of some subscription renewals, and non-subscription growth with comparisons to very significant organic growth in Q1 of last year.

Despite recent economic news and a slowing in some APAC economies, we see positive growth in performance for the full year as we remain very underpenetrated in this large market and now have strong teams and substantial infrastructure in place. APAC remains a solid 2014 and long term organic growth contributor for IHS.

And now for our core industry sectors, resources, which includes our energy and chemicals teams performed well organically for subscriptions as we rolled out IHS Connect and with strong consulting and non-recurring organic performance in pipelines across both energy and chemicals sectors. Across our industrials teams, which includes automotive; technology; maritime; and aerospace and defense, we had continued solid growth in autos, while in technology and maritime we are seeing improving growth trends into 2014 that are building from the lower growth performance we experienced in 2013. And finally in aerospace and defense, we are seeing early signs of improvement in select geographies which is encouraging.

As we began our second quarter, we held our largest industry event and kicked off the 33rd IHS Energy CERAWeek in Houston. IHS Energy CERAWeek is the leading gathering of senior energy decision makers and business leaders from around the world. This year featured presentations from over 300 speakers including senior industry executives, government officials and thought leaders, and was attended by nearly 3,000 participants, which represents our largest energy event ever. The conference also featured IHS experts, research and analytics and energy and in key energy supply chains in end markets that included chemicals, maritime, automotive and aerospace. This broad coverage reinforced the scale, breadth and depth of IHS offerings in these very connected supply chains, which are fundamental to customers’ core workflows and are used every day to drive key capital and operating decisions.

In addition, the event was covered extensively by journalists and media from around the world that included live global coverage and reports from CNBC and others. As a result, the event generated more than 2,000 media mentions globally with lead stories in key publications that included the Wall Street Journal, New York Times, Financial Times, Associated Press and Reuters among many. Importantly, we were pleased to see a financial performance for the event that was in line with our expectations and consistent with full year performance outlooks and guidance. We’re also looking to a similar success for the 29th Annual IHS World Petrochemical Conference to be held next week in Houston.

In summary, we had a strong start to our 2014 fiscal year and we see the rest of the year developing as we had expected. We continued to make good progress on the development and roll out of common workflow platforms in the new account initiatives that are important enablers of new growth this year and beyond. We continued to utilize enhanced visibility in the pipelines, new opportunities and sales performance to drive our organic growth performance as we began the year. And we had solid execution from leaders at every level within IHS. This execution was against a very clear strategy and very clear sets of priorities and goals.

And with that I’ll turn the call over to Todd.

Todd Hyatt

Thank you, Scott. Let’s start by reviewing some of the financial highlights for the first quarter. Revenue was $524 million, an increase of 37%. Adjusted EBITDA was a $156 million, an increase of 32%. Adjusted EPS was a $1.28, an increase of 19% and free cash flow was a $129 million, an increase of 15%. Relative to revenue performance, revenue increased a $142 million to $524 million. This included 5% organic growth and 33% growth from acquisitions with the minimal drag from FX. As expected, subscription organic growth was 5% due in part to a difficult comparison versus the prior year. On a normalized basis, the organic subscription would be slightly higher as we discussed on our most recent call.

Consistent with the prior year, first quarter subscription represented 80% of total revenue as Q1 is seasonally our lowest non-subscription revenue quarter. Also, as expected, our non-subscription business has moved into positive territory this quarter with an organic increase of 3%. This growth was driven in large part by strong consulting and services performance. As we look forward, we are encouraged by our consulting and services backlog and the strength in our sales pipelines.

Looking at regional performance, growth was strong across all three regions due impart to the inclusion of R.L. Polk and anchored by steady organic subscription revenue growth.

Americas overall revenue increased 53%, organic growth was 5%, acquisitions added 48% primarily due to R.L. Polk’s significant U.S. presence and FX was an adverse 1% impact. Americas organic subscription revenue growth was a solid 5% and non-subscription growth was 8%.

EMEA's overall revenue growth was 16%. Organic revenue growth was 5%, acquisitions added 9% and FX added 2%. EMEA's organic subscription revenue growth was 7% and non-subscription growth was minus 1%. We continue to see improving revenue trends in our EMEA region.

APAC overall revenue growth was 7%, which included acquisitions growth of 8%, flat organic growth and 1% adverse FX impact. APAC's organic subscription revenue growth was 3% with the total organic revenue impacted by negative 9% non-subscription revenue due to a difficult comparison versus Q1 2013 in which we reported 35% non-subscription organic growth. Our APAC subscription organic growth was also impacted by several past due renewals. As Scott indicated, we expect to see improvement in future quarters and solid full year APAC performance.

Across the regions, Americas continues to anchor our organic subscription revenue growth with very stable performance. We see solid organic revenue improvement in EMEA and expect to see improving revenue growth in APAC for the balance of the year.

Finally, as discussed on last quarter's call, we plan to provide additional revenue color to supplement our regional revenue reporting. We will preview this information with you at our upcoming Investor Day.

Turning now to profits and margins, adjusted EBITDA totaled $156 million, up $38 million or 32% versus a year ago. Our adjusted EBITDA margin was 29.8% inline with our expectations. We expect to see improving margins throughout the year, as we realize operating efficiencies and improved margins of acquired entities.

Regarding segment profitability, Americas' adjusted EBITDA increased 32% to $124 million and benefited from the inclusion of R.L. Polk. EMEA's $32 million adjusted EBITDA increased 34% over last year and benefited from revenue growth on the scaled infrastructure we have deployed globally over the last three years. And APAC's adjusted EBITDA was $11 million versus $10 million last year.

In the quarter, we also recorded a $2.8 million loss on the disposition of non-strategic asset. This is consistent with our continued effort to rationalize our portfolio and focus on the disposition of a limited number of non-strategic or underperforming assets as we build consistent long-term organic growth and margin expansion.

Turning to adjusted EPS, Q1 increased to $1.28 per diluted share, a $0.20 or 19% improvement over the prior year, reflecting the stronger accretive benefit of the R.L. Polk acquisition, as well as operational improvement.

Our GAAP effective tax rate was 20%. And as included in our prior guidance, we expect the full year rate to track to 20% to 22%. Our adjusted tax rate was 30% and is trending towards the high-end of our guidance range of 28% to 30%. The adjusted tax rate is derived based on our GAAP tax rate and our tax rate on adjusting items. Note that the tax rate on our adjusting items approximates 35%, as these are primarily adjustments in the higher tax jurisdictions. The full year earnings guidance that we provided and continue to track to is predicated on this adjusted tax rate and the corresponding 35% tax rate on adjusting items.

Turning to free cash flow, as we’ve discussed in the past, this is the primary internal performance metric, as well as the primary measure value creation for our business. During the period, we generated free cash flow of $129 million, a 15% year-on-year increase. Our trailing 12 month free cash flow was the strong $422 million and represents a 70% conversion rate.

We are pleased with this conversion and the continued strong cash generation attributes of our business model as it provides us great operational and capital structure flexibility and allows us to rapidly delever. As we discussed in our last call, we are expecting free cash flow conversion in the mid 60s in 2014. This conversion reflects increased interest expense and an increase in our cash taxes.

Turning to the balance sheet, our year-end debt balance was $2.03 billion which represented a gross leverage ratio of 3.2 times. In the quarter, we reduced our debt balance by $145 million and also closed the quarter with $205 million of cash. We continue to make good progress on our delevering plan and remain focused on driving to our target leverage ratio.

In summary, our first quarter performance was solid and inline with our expectations. We are reaffirming the full year guidance range as we provided on our year-end call. Similar to past years, we expect our growth rates, revenues, profit and earnings to build from Q1 as we move through the year with Q4 being our strongest quarter.

With that, let me turn the call back over to Scott.

Scott Key

Thanks Todd. We were pleased with the solid start to 2014 and are confident in the foundation that’s build for the remainder of the year. We made good progress on our key initiatives and have the full engagement of more than 8,000 colleagues around the world who were focused on starting the year with strong execution against their 100 day plans. We like our position as we close the first quarter of our fiscal year. We look forward to sharing with you a deeper dive on our business, our strategy for growth and the opportunity ahead as we meet in a few weeks time at our Investor Day on April 8th.

Todd and I are ready to answer your questions so let’s start the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of William Warmington of Wells Fargo Securities. Please go ahead.

William Warmington - Wells Fargo Securities

Thank you very much. And congratulations on the strong quarter and congratulations to Eric on his new position.

Eric Boyer

Thank you.

Scott Key

Thanks Bill and glad (inaudible) you might have changed bank.

William Warmington - Wells Fargo Securities

That’s like - again what’s that…?

Scott Key

I am glad to have you.

William Warmington - Wells Fargo Securities

Good to be here. So question for you on the renewal season, how that’s been going and really in the context of when you think you’re going to see a pick up in the or the timing of the pickup in the organic subscription growth that you’ve been talking about?

Scott Key

Yes, thanks, appreciate that. And as we talked about in January, first we had a very strong Q1 subscription growth rate organic rate a year ago and so we’re comparing to that and as Todd said -- and there is notice here just for that and think about our first quarter of the year we’re really in a great place as we renew a good portion of our subs base.

In the quarter renewal rates were strong and they were in line with what we’ve seen historically but also importantly tracking positively to uplift associated with new platforms and sales initiatives and we track each one of those. So all of these things tell us that we see a strong build and I just say quickly. If you look at the last 3 quarters we’ve essentially, we don’t give quarterly guidance, but if you look at the last 3 quarters, we’ve been essentially at a 6% organic subs growth rate in Q3, Q4 and then here in Q1 effectively. And that’s the bottom of the 6% to 7% we talked about for the year.

William Warmington - Wells Fargo Securities

Right.

Scott Key

And so we see everything Bill, in our renewals that gives us confidence that we’re going to build into that as the year progresses.

William Warmington - Wells Fargo Securities

Got you. Then one housekeeping question if I may. The organic deferred revenue growth?

Scott Key

Yes, and as we said the last few quarters. We expected to be in line with our subscription organic growth rate and it has been, so it’s been tracking right to it, if not slightly above it, so we're right where want to be, and not the best indicator, in our view of forward and that’s why we're excited actually as we get to Investor Day to give you some other revenue color that gives you, a view into the business.

William Warmington - Wells Fargo Securities

Great. Looking forward to that. Thank you.

Scott Key

Thanks Bill.

Operator

Next call comes the line of Paul Ginocchio of Deutsche Bank. Please go ahead.

Paul Ginocchio - Deutsche Bank

Thanks for taking my question, just I know it’s early in the process of the new IT and sales platform, but can you talk about growth rates on that platform relative to the rest of the company and it’s about 20% in revenues currently in the platform, is that correct? Thanks.

Scott Key

Yes, hey Paul thanks for the questions. So as we said, progress on releases across the business, IHS Connect supports strategy, planning and analysis and that workflow is fully about a $1 billion, the Connect platform itself directly supports about a $0.5 billion in revenue. We are very advanced with that one as we said in January. Good momentum, we have nearly -- as we sit here today nearly 100,000 users on that platform and of course everything in energy economics and country risk is now on it, and we're just launching chemicals.

So we are building, we see good pipeline build upsell and cross-sell on that platform. The next one we talked about was our engineering workbench which is our product design workflow. And roughly a $0.5 billion there, of that platform is supporting today about 70% of that revenue and we had releases through the back half for this year and into this year as we said and that’s commercial in the market and we're seeing really good momentum as we said in sales pipelines and are delivering to the sales goals we have for it through the last couple of quarters.

And then we have obviously the operational excellence and risk management work flow about a $150 million there and that's Sphera and that's progressing well and in the market. And then of course our core energy information Vantage, Meridian and that's about $0.5 billion to a bit more than that, that are coming into the market now. So across each of the platforms, really supporting all of our revenue, we've got a range of things in the market and we're seeing good build, really good adoption and improvement in usage and good uplift in cross sell and up sell.

Paul Ginocchio - Deutsche Bank

Great, you can -- I appreciate the color. I mean can you talk about some kind of quantifying the impact to the growth rate from before and after moving to the platform?

Scott Key

Well, sure at Investor Day a year ago, we talked about a 150 basis points of organic growth expansion for three years and that was going to be 450 basis points of organic growth expansion from the levels that we are sitting right now. The platforms are roughly half of that. So, we would expect around 70 to 80 basis points per year on average over three years, but to build.

So, it's a ramp this year and we're seeing that ramp in our pipelines, we're seeing that ramp in usage. So to quantify it, in the range of kind of 70 bps a year on average, but we build into that over this three year period. Hope that's helpful Paul.

Paul Ginocchio - Deutsche Bank

Thank you.

Operator

The next question comes from the line of Peter Appert with Piper Jaffray. Please proceed.

John Crowther - Piper Jaffray

Yes, you have got John Crowther on for Peter. Just want to talk just briefly about the APAC region. And maybe I've heard obviously a lot of news about difficulties in emerging market economies here recently. And you are obviously echoing some of that with current performance in past due renewals there, but just wondering if you could speak to sort of your confidence there, it sounds like you feel like that is going to get better through the year?

Scott Key

Yes. Thanks Jack. And you are going to have to tell Peter that we missed him this morning, but give him our best. Yes, what we say is -- a couple of things. One, as we told you and if you look at last year, APAC is a little bit of variability quarter-to-quarter as we deliver the full year rates and that’s really because of individual deals from quarter-to-quarter can materially move the organic growth rates.

We had posted last year this time a 35% non-subscription organic growth rate, so an incredible comparison that obviously depresses how that looks for the quarter, and then we talk about the timing renewals. You saw this last year. Some renewals in the region progressed more slowly than they do at say in the developed markets. But these are long term customers, and over the full year we delivered to the performance.

So we feel good about APAC for the full year, we will see those renewals and we are actively looking them now come to close in the current quarter as we build the year. There is concern about emerging markets. And we see China, Japan and other emerging economies come to high single digit economic growth rates, but we are still underpenetrated in this very large market. We have invested for three years, have great teams and infrastructures, and really are in a good position to build our growth for a long time to come.

So, we feel good about consistent high single digit organic growth rates in APAC as we have seen for a long time in the past.

John Crowther - Piper Jaffray

Great. And then maybe if I can just ask one quick follow up here; obviously, very strong free cash flow and delevering from the R.L. Polk acquisition. Maybe you could just speak to -- as you move through the year what your appetite might be for further acquisition activity?

Scott Key

Thanks. Well, obviously focused on delevering and getting down our leverage ratio. We are pretty excited that from 3.7 times, just in the Q3 of last year or just about now under 3, so it tells you the strength of our business model and free cash flows. What that is allowing us to do right now is start to look at these large pipelines and list of great assets that might join us in prioritizing those for potential acquisition in the tuck-in and kind of medium size asset range that we have done in the past, potentially as we get into the middle and back half for this year. So, we are prioritizing now looking at those assets in the $30 million to $50 million revenue range plus the small tuck-ins and you should see us as we delever, start to build in those areas again.

John Crowther - Piper Jaffray

Great. Thank you.

Operator

The next question comes from the line of Gary Bisbee of RBC Capital Markets. Please proceed.

Gary Bisbee - RBC Capital Markets

Hi, guys. Good morning. I guess a two part question on M&A strategy and success. Can you just give us a quick update on Polk and how that is trending versus the plans you laid out; is it better which I think you might have said a quarter ago or sort of in line? And then maybe more importantly, given the acquisitive nature of the business, I feel like we hear a lot about the strategic potential of the acquisitions and then the first year performance, but yet you’re sort of then on for the next one, and we literally get longer term updates on how past acquisitions have done. So, I just pick quick one. I wonder if you could, two years in, and give us some update on GlobalSpec and how that’s trending towards the very bullish outlook you had for that. And maybe as part of that, if we look at the last 5 years, 8 years, broadly are you in line with plan, ahead of plan with the portfolio of acquisitions you’ve done? Thanks.

Scott Key

Thanks, a healthy question Gary and great to have you this morning. Let me start with a broad statement about value creation. So, we’ve integrated everything. And when you see energy, for example a $1 billion energy business that’s growing in high single-digits, we’ve integrated everything to what is a single IHS energy, performing successfully and growing healthy. Chemical is the same way. IHS Chemicals ranges assets over the last 4 to 5 years and fully integrated, great operating teams and really driving solid growth.

So we’re delivering value and organic growth every day from acquisitions. Another thing that Todd and I were talking about recently IHS IPOed at about $900 million market cap; we deployed about $4 billion in assets cash to acquisitions; and we now have a market cap over $8 billion. So, we’ve created a substantial amount of value around the capital we’ve deployed and that’s been reflected in our growth rates, growth in free cash flow. And that really is the combination of all of these assets as you’ve spoken off.

To be specific though, Polk being scaled and again Todd this was our discussion on the tour assets that we’ve leveraged into our business quite effectively because of the maturity of the teams and systems there. And so, it’s been a head of our plan, modally ahead pleased us with the opportunities for new commercial integrated commercial offerings that are now underway as I spoke to. So, it continues to track slightly a bit ahead of what we thought, integrating ahead in terms of expensed synergies, our profit development, margin development as we get it accretive, so feel good about Polk. And I think the scale of it helps us integrate effectively. Then in terms of things like GlobalSpec, when we announced the engineering workbench and we announced these commercial releases of 95 million engineering documents and meeting our sales targets, this is the combination of acquisitions of GlobalSpec, Invention Machine, caps and our expensive engineering, Expert Standards business, a $400 million business now that we are driving in really exciting ways. GlobalSpec is part of this engineering workbench. So this is an integrated effort, all brought together and I think we're seeing good progress. Hope that’s….

Todd Hyatt

And Gary just to add a couple of things from a finance perspective, we do track cash return on deployed capital and we're certainly well ahead of the IRRs and value creation metrics that we identify for the acquisition portfolio. The other thing I would add is relative to revenue, I do think there continues to be future revenue opportunity on acquired assets which has really deployed the strategy; when we talk about the platforms, when we talk about the Target 1,000 that’s really directed at how do we continue to exploit and drive additional revenue opportunities from the acquired assets.

Scott Key

Yes. And then the couple of those we brought together. So a good question Gary, I appreciate it.

Gary Bisbee - RBC Capital Markets

Thank you.

Operator

The next question comes from the line of Andre Benjamin from Goldman Sachs. Please proceed.

Andre Benjamin - Goldman Sachs

Hi, good morning. To follow-up a bit on Gary’s question on R.L. Polk assets, when you spoke about the acquisition initially, you talked about plans to upsell the downstream data to upstream customers, you also talked about expanding the CARFAX brand and distribution of that upstream content internationally. Could we hear a little bit specifically on where you stand with some of those processes and any update on that strategy and how much it could contribute?

Scott Key

Yes. Thanks Andre. And you will see at Investor Day a lot more in this, we’ll go into some specifics, but I gave you a few highlights, but it's a great question. A big part of CARFAX was CARFAX's inherent growth and the way it leveraged this existing significant database that they built over many years. And we just announced a new product launch just a few weeks ago, which is an example of that.

So the first three or four things in terms of growth opportunity at CARFAX were the ability to leverage as you said this incredible information base into CARFAX’s existing customers and then more broadly into automotive. So we are making great progress with new products and releases in growth at CARFAX.

And then what's really exciting and again you'll see this at Investor Day is we're finding even more opportunities to integrate data upstream and downstream to new offerings and new analytics to automotive OEMs and suppliers. And we've got several of those already in market now and others are being rapidly developed.

And so this really is the core of what will elevate the Polk organic growth rates from the mid single-digits up to where IHS automotive is in the higher single-digits. And we're seeing great progress and momentum there.

So, all of these efforts and the teams are fully integrated now and they are focused on these combined capabilities through a single salesforce as I said. So, good progress and we're seeing the value of that. And that's a part of what's giving us the performance just a little bit better than what we might have thought when we first brought Polk in.

Andre Benjamin - Goldman Sachs

Thank you. And just one follow-up; based on what you've seen from the global account executives that you have in place so far, if I heard correctly, I think you said near about 32. Any update on what the appropriate size of that team should be relative to the 100 that you talked about before and how big the overall salesforce should be?

Scott Key

Yes, thanks. And you have it exactly right. We said about 100 as we build that team towards this high potential with currently low revenue, large corporations that are in our core markets. So we have about a third of the executives on board and about a third of the accounts targeted.

Also, and we’ll talk about this Investor Day, we are really looking at this idea of Target 1,000 being a mix of these high opportunity accounts plus our largest customers which are our greatest opportunities for upsell, cross-sell and growth.

So good progress, both teams trained with strong [quarters] that they are carrying and ready to go out and help us build the year and we are seeing sales opportunities building our sales pipelines from those teams. So this is part of the expanding organic growth that we see this year along with the platforms and into next year.

Andre Benjamin - Goldman Sachs

Thank you.

Scott Key

Thanks.

Operator

The next question comes from the line of Hamzah Mazari of Credit Suisse. Please proceed.

Hamzah Mazari - Credit Suisse

Good morning. Thank you. Just wondering if you could give us a sense of the work that you’ve done on the non-subscription piece of the business and what maybe yet to come? You spoke a bit about the e-commerce rollout on the transaction side. Maybe give us an update on what’s remaining there, what you’ve done, what’s behind us?

Scott Key

Sure. Thanks Hamzah. So first, we have teams now dedicated in owning both subscription and non-subscription around the customer [value] industry and those teams are executing well together. We’re fully into our second year, both teams in place, good systems in place. And so what you are seeing is just solid integrated execution, subscription and non-subscription together research analysis services software with our largest customers. So that’s why we are seeing the improvement and then e-commerce, yes, we launched it very small portion of the total revenue. We talked about 60ish million in total. So the platform is out there we have got our first sales order over the last couple of weeks and it’s a fourth quarter rollout so very small amount of the total revenue now, but that will build through this and in the next year. Thanks Hamzah.

Hamzah Mazari - Credit Suisse

And just a follow-up on the EMEA region, any particular reasons for the strength in organic growth or is that pretty broad-based across your verticals? Thank you.

Scott Key

Pretty broad-based, really the driver is a great leadership, a strong team we’ve built over the last year, they are benefiting from the systems and the structure and everything we’ve done. This infrastructure that we talk about, here is a team it’s just even though challenged economic market we are under penetrated and they are just executing well pretty broad-based. Thanks.

Hamzah Mazari - Credit Suisse

Thank you.

Operator

Next question comes from the line of Joseph Foresi of Janney Montgomery Scott. Please go ahead.

Joseph Foresi - Janney Montgomery Scott

Hi, good morning. I was hoping we could switch gears a little bit here and talk a little bit about the margin profile. How do you see the margin profile building throughout this year?

Scott Key

Yes. Thanks and appreciate it. So as you know, first off, our margin builds. So Q1 is our lowest revenue quarter and it builds through the year and as a result margins build through the year as well. We are also making continued improvement in 2013 acquisitions as we bring them to accretive margins and to IHS levels. And then I would just say, remember we have committed to this 100 bps of annual margin expansion a year and this hasn’t changed. So we are balancing new investment to our growth and you will see margins progress through the year, but a good solid start in Q1.

Joseph Foresi - Janney Montgomery Scott

Okay. And you mentioned the non-performing asset, what asset was that and will we see more divestitures?

Scott Key

We have talk about this for a number of years, a small portion on a $2 billion plus business around $50 million or so that we have talked about in non-strategic assets, this one was measured in the single million, so really not material in total. But remember, none of these are acquired assets, these are legacy things we have had for decades in those cases. And you saw us divest a small one about a year ago this time and other one here. You will see us do that when it makes sense, but not material to the business other than our growth rate which is a plus.

Joseph Foresi - Janney Montgomery Scott

Okay. And then the last quick one from me on the APAC side, how much of that was a surprise and how much you think is captured in guidance as you look throughout the year or was it all captured in guidance?

Scott Key

Not really surprise at all in guidance, you know as I said is variability given the size of deals relative to total revenues in APAC now the team is doing well making good progress and we see a solid year. Thanks.

Joseph Foresi - Janney Montgomery Scott

Thank you.

Operator

Next question comes from the line of Suzi Stein of Morgan Stanley. Please proceed.

Unidentified Analyst

Hi, this is [Danny Glendale] on for Suzi today. I just had a quick question delving back into the margin issue, the Americas margin was a little bit lower both q-over-q and year-over-year. When will we expect to see that start to be kind of a positive comparison on a year-to-year basis? You mentioned the 100 bps for the year, the corporate level, but when will we start to see kind of, I guess as the Polk improvement start coming through kind of when during the year should that happen?

Scott Key

Yes. I will just make a quick comment and hand it to Todd. But I think you just said it there, Polk primarily impacts the U.S. and of course we are developing that margin, so that’s the biggest part of the story, but Todd?

Todd Hyatt

Yes. I would just, Polk and several of the other acquisitions that we talked about last year have certainly -- they are heavily Americas-based, so you do see more of the margin impact in Americas. And as we see margin improvement through the year of that margin improvement we would expect would be disproportionally weighted toward Americas.

Unidentified Analyst

Great thanks.

Operator

Next question comes from the line of Andrew Steinerman from JP Morgan. Please proceed.

Andrew Steinerman - JP Morgan

Hi there. Could you just talk about your energy technical business? Is this a good environment to be selling energy technical products and how is energy technical doing right now?

Scott Key

Yes, thanks Andrew. So continues a 10 year history of high single-digit organic growth and we see that continuing. There is a lot of movement happening in the energy business today, we see U.S. with incredible and differential and competitive energy prices, LNG moving around the world, capital being deployed in different places and ways as companies look at their portfolios and all of that benefits IHS. We help energy companies that use our information to make these capital decisions that are huge and of course we help them support the production from every well and every field, every day. So good performance [since] we started the year, good expectations for the year and we're a small piece of a huge capital and operating expense market in energy and so it’s a great opportunity for us.

Andrew Steinerman - JP Morgan

Great. And just one clarifier, on non-subs you mentioned that services was doing well; I just don’t know what that refers to?

Scott Key

Well, we have -- as you look at our non-subscriptions, we have consulting which is a portion of it. We have services which are support services to our largest customers, deployment services around our software, we help with information management courses. So, we’re world’s leading information manager. So, a range of services in our largest accounts and then of course software is part of that non-subscription. So, pretty good strength, that’s why we said, a pretty good strength across the non-recurring portfolio. And then we’re excited to have our e-commerce platform out in the market, because that’s another piece of that that will build over the year and in the next year.

Thanks, I appreciate it Andrew.

Andrew Steinerman - JP Morgan

Thank you.

Operator

Next question comes from the line of Jeff Meuler of Baird. Please proceed.

Jeff Meuler - Baird

Yes, thanks for taking the question. So, it seems like your larger businesses or larger vertical served are those that are getting the fastest growth out of in terms of some of the smaller verticals. I’m wondering that from your perspective is it end market weakness that’s accounting for the slower growth or is it that this kind of plays in your strategy of becoming the scaled player and that’s some of those businesses maybe you need to do a larger transaction, that’s a bit more transformational like you did with Polk; and then when you get to a scale position, that should lead to accelerated organic growth rate.

Scott Key

Well, I like the question Jeff. And I think you’re right. As we build scale, it creates an opportunity for broader up-sell and cross-sell in that vertical, but then across. So you’re right and we have seen that. Our scale in energy has helped us drive growth, our scale in chemicals is helping us drive growth, our scale in automotive is helping us drive growth; and then horizontally, our scale in operational excellence risk management and in product design around engineers. But I would say that 5% all in organic growth for IHS, which is a sequential uplift, is a pretty good place to be in global markets that are struggling to grow at one.

Our differential in EMEA to economic growth is at 6, 7 point. So even in this smaller verticals or less scaled ones, we do have an opportunity to grow and grow accretively to economic rates and you will see that. What is exciting for us is what is going forward, platforms coming out that allow us to bring these things to customers easily and getting into underpenetrated high opportunity account, so that will benefit the entire portfolio.

Jeff Meuler - Baird

Okay, and then just a follow up on that platform roll out, just to make sure I have this rights. It sounds like the customer adoption is tracking well, the usage is tracking well and in terms of the cross-sells, its’ kind of slowing in the pipeline now and it probably just takes time, but everything is on plan but you’re not really getting the revenue benefit quite yet that should come in the next couple of quarters or start to come in the next couple of quarters?

Scott Key

I couldn’t have said it better myself. So, as we are now renewing and engaging with accounts, we are driving as you said, uplift and cross-sell from those platforms in the bundles on them into our existing subscriptions. So, yes.

Jeff Meuler - Baird

Perfect. Thanks.

Scott Key

Thanks.

Operator

Next question comes from the line of Andrew Jeffrey of SunTrust. Please proceed.

Andrew Jeffrey - SunTrust

Thanks. Good morning guys. Thank you for taking the question. It sounds like a lot of the improvements in the growth rate you’ve anticipated are materializing. If you look -- and you have highlighted some of those drivers, I appreciate it. If you look across all of your assets and all your businesses, Scott, where do you think the greatest opportunity is for improvement that perhaps you haven’t highlighted in recent performance in the near term outlook? In other words, is it Asia Pac, is it better execution in your target 1,000, is it a faster pace of hiring? I am trying to get a sense of where you think that maybe one or two discrete levers are that you can pull that might create, if not a step function, maybe a noticeable incremental acceleration in your growth?

Scott Key

Well, I would say that first is just operational tightness accountability and visibility we have across the business. Mature teams now with financial systems and sales systems and ownership and all of our incentives are set up that way and those teams are really starting to operate well. So I would say that’s probably the single most important underlying factor and why you are seeing our non-recurring business do well as these teams execute well. Then, I think you’ve laid out a couple of others. We have got multiple initiatives all around our commercial expansion that are all starting to gain traction. And each of those are going to contribute, platforms is important, existing accounts and as you said high opportunity to plans. And we have got traction on all of those. So we’ll see modest and moderate and linear progression at least this year on each of those and then we’ll start to see a bit of a build and hopefully momentum as we are in 2015. But I wouldn’t -- I would say all of those -- Todd, all of those seem to be operating well.

Todd Hyatt

Yes, I agree, I do agree that the operational tightness, the organization maturity certainly saw that in EMEA in the quarter and I think a lot of focus around the platforms.

Andrew Jeffrey - SunTrust

Yes. Thanks.

Eric Boyer

Thank you.

Operator

Next question comes from the line of Jeff Silber of BMO Capital Markets. Please proceed.

Jeff Silber - BMO Capital Markets

Thanks so much. In your comments when you talked about the non-subscription business, you also highlighted the consulting area; are there any specific industries where you are seeing greater growth there?

Scott Key

Yes. We are seeing strength in energy, certainly in chemicals, certainly in automotive, economics and country risk horizontally and then services around our operational excellence and risk management platform Sphera. So, and then services supporting energy broadly. So those are the areas that are doing well, Jeff.

Jeff Silber - BMO Capital Markets

I guess what I am trying to focus on is relative to prior quarters because it did seem to pick up a bit?

Scott Key

And I would say in all of those relative to prior quarters. We have really solid teams as we said and they’re looking at the value we provided to customers and that’s both research, services, consulting, subscriptions and we’re just seeing them help customers more effectively across the spectrum.

Jeff Silber - BMO Capital Markets

All right great. Thank you.

Scott Key

Thanks. I appreciate Jeff.

Operator

Next question comes from the line of Brandon Dobell of William Blair. Please proceed.

Brandon Dobell - William Blair

Hi, right at the end here. I’ll keep quiet or keep it short for you guys. I want to focus on sales force productivity, if you could give us some color on how maybe the -- what you consider the more mature sales people, how they’re tracking relative to their quarters, your expectations and how maybe some of the newer hires have acted? And I guess as part of that I know there is always a base level of attrition within a sales organization. Can you speak to that and how that’s impacted kind of the -- let’s call it first couple of years of sales force productivity?

Scott Key

Thanks Brandon and good to hear from you. I’d say first, we’ve got several things going on building of inside sales and that’s starting to mature and we’re expanding those teams. That’s freeing up our field sales force. And I think that’s where we’re seeing some good new strong people come into the business and then those that are learning how to focus more aggressively on new business.

And then in our large accounts, all of those that we’re bringing in, as well as great sales executives that have been in IHS pretty mature leaders. So, the productivity is mostly coming from enhanced systems. Every quarter we have new releases of SAP and SFA designed to make it simpler for sales people to do their job less administration. So the productivity is probably happening most from not only good people, good mix of people, but then with systems that are supporting them and also reducing the administrative burden, Brendon, and we’re seeing that in pipelines now.

Brandon Dobell - William Blair

Okay. And then one quick follow-up; you said that improving trends in EMEA comments, I know you mentioned execution there. Feedbacks from your customers, are they feeling better about the visibility they are having on budgets that they can allocate to products like yours or is it just same commentary you’re just making more progress with the same kind of budget constraints you’ve had the couple of years from EMEA companies?

Scott Key

Maybe, three quick things. First of all, we are a cost reduction lever at IHS, we help people lower their cost by providing them information to understand how they become more efficient and reduce their internal spend. Secondly, we help them plan their strategic positioning whether it’s cost reduction or expansion. So, we do well regardless of the environment can, if we execute well.

Lastly, I’d say, what I’m seeing, a lot of CEOs I’ve talked to from Davos to our events over the first quarter and in meetings, there is a lot of positive view about where the world is headed, corporations and their plans to grow. And I think that’s reflected as well.

Brandon Dobell - William Blair

Okay, great. Thanks.

Operator

Next question comes from the line of Shlomo Rosenbaum of Stifel. Please proceed.

Shlomo Rosenbaum - Stifel

Thank you very much for taking my question and squeezing me in over here. Just a little bit from a ground level view; you talked about a new database in Polk, can you talk about what exactly that database does and how it expands the market? And then as, when you follow-up to that, just in the last quarter, can you talk about the opportunity that you’re seeing to expand the market as you get further and further into the Polk data integrating with IHS data?

Scott Key

Yes. And the database first is IHS’ production data and then Polk point of sale data and registration data. The combination of that allows us to do incredible things to help OEM and suppliers plan from recalls to loyalty to analytics around their dealer networks and how they become more effective and drive their margins up. So, these are the new four, five capabilities that we’re bringing combine the analytics together across data and also bringing CARFAX data from the used markets into that.

So that’s where we see opportunity. And as we think about the longer term, it is really just leveraging that core existing content and the teams are all over it and working hard to it.

Shlomo Rosenbaum - Stifel

Okay. And can you talk a little bit more about that asset valuation database that you guys are building? And when do you expect that to be really a scaled product that you’re going to be able to take to market?

Scott Key

Good progress, early adopters, some of the largest energy companies in the world, excited about it and supporting it and it will be fully matured by year-end. So data releases, full coverage in a couple of countries in the North Sea, offshore Brazil and we’ll be at full content up by the end of the year and be commercial as we start next year, but we got early adopters and good momentum.

Shlomo Rosenbaum - Stifel

I appreciate it.

Scott Key

Thank you, Shlomo. Great to have you.

Operator

Your next question comes from the line of Manav Patnaik of Barclays. Please proceed.

Ryan Leonard - Barclays

Hi, this is actually Ryan Leonard, pinch hitting for Manav here. Just real quick; you mentioned M&A might start to come back in the second half with some tuck-in and medium size, is there a particular focus on that whether it’d be geography wise or in certain verticals?

Scott Key

Well, building on our strategy, it is really scale. We’ve got scale in automotive for sure and in energy for sure and across the rest of both the horizontal products, as well as verticals, we have a pretty good pipeline. Want to continue to invest and grow in Asia in the emerging markets, great long-term opportunities there. So, it will be a mix of those and it will be those things that are the best. We’ll prioritize those that have the best returns to the capital that we deploy and can accelerate our growth.

Ryan Leonard - Barclays

Great, thanks.

Scott Key

You got it. Thanks so much.

Operator

Ladies and gentlemen, that concludes your question-and-answer session for today. I would now like to turn the call back over to Scott Key for closing remarks.

Scott Key

Thank you so much. I appreciate the patience. We were just trying to ensure that everyone got a chance to ask as many questions as they had as we feel really good about the start to our year. We are thrilled about the prospect to expand organic growth; delivering right on plan; and we see the year developing just as we had hoped. So feel very good about where we are and excited to see all of you in a few weeks at Investor Day where we will talk more extensively about the strategy, give you detailed updates on what we gave you last year and the organic growth development of IHS. And we feel we are on track for that and look forward to seeing you there. So thank you so much for your time today.

Eric Boyer

We thank each of you for your interest in IHS. This call can be accessed via replay at 888-286-8010, or international, dial in 617-801-6888, passcode 11572918, beginning in about 2 hours running through March 27th. In addition, the webcast will be archived for one year on our website at ihs.com. Thank you. We appreciate your interest and time.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

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IHS (IHS): FQ1 EPS of $1.28 beats by $0.03. Revenue of $524M (+37.0% Y/Y) beats by $9.71M.