Epiq Systems (NASDAQ:EPIQ)
Q1 2014 Earnings Call
April 29, 2014 4:30 PM ET
Lew Schroeber – VP, IR
Tom Olofson – Chairman and CEO
Christopher Olofson – President and COO
Paul Liljegren – SVP, Finance
Tim McHugh – William Blair & Company
Peter Heckmann – Avondale Partners
Good day, ladies and gentlemen, and welcome to the Epiq Systems, Incorporated First Quarter 2014 Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded. I would now like to introduce your host for today’s program Mr. Lew Schroeber. Mr. Schroeber you may begin.
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 Senior Vice President to Finance, Paul Liljegren.
Our earnings release was today at 3 p.m. Central Time and is available on our website at epiqsystems.com. The webcast replay of this earnings call will be available on our website until next quarter's call, and a phone replay will be available through May 6.
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.
Thank you, Lew. Good afternoon from Kansas City. Welcome to all of you. We are pleased to have you join us. We'll follow our usual earnings conference call format. I will begin the call and cover some highlight from Q1 I'll then review you with our thoughts on Q2 and the balance of the year. I'll turn the program over to Chris, Chris will provide you with his remarks. And then we're pleased to take your questions.
Let's begin with the first quarter results for the eDiscovery business. We had very strong operating revenues in eDiscovery for Q1, a 40% organic growth. We continue to take additional market share. We continue to submit our position of global leadership. We will speak more of that as we go through the call and Chris will have some additional comments on that matter.
On an overall basis, our operating revenue, corporate-wide was $116 million which was an increase of 13%. We are pleased with recognizing that we are in the down bankruptcy cycle.
We have had some timing issues with the settlement that we previously discussed with you. So both of those revenues will be down so for the total company it will be up double-digits. We are pleased with that and of course that’s driven by a very strong eDiscovery operating $81 million, up 48%.
Couple of other highlights and then we’ll turn to financials. We did complete a repricing of our $300 million term loan. We were pleased to have the opportunity to be able to do that with a window and we seized and we were able to reduce the interest rate on that $399 million by 50 basis points.
We declared our usual quarterly cash dividend of $0.09, on an annual basis that’s $0.36 of course that yields 2.5%, 2.6% in net vicinity. Our next dividend will be paid on June 4 to shareholders of record close of business on May 1.
In addition, our Board appointed Brian Satterlee to the newly created post of Independent Lead Director. Brian has been a director since 1997 when we completed our IPO. Brian and Ed Conley our two senior directors, Brian heads the Audit Committee, Ed heads the comp committee and we are very pleased that we designated Brian in the new position of independent lead director.
I am very pleased to confirm today and you’ll mostly likely seen the publicity on this, but we will retain in a major chapter 11 case. Energy Future Holdings which was once known as PXU Corp. This was announced this morning.
The assets in this case are approximately $36.4 billion. So it goes from a category of what we refer to as a mega case. Interestingly, I look at a report that was published this morning. It listed the top 34 chapter 11s going back to August of late last summer and it listed all of the cases that were $100 million or up in assets.
Now, I mentioned that this case was $36.4 billion to put that in perspective for you, if you take all 33 of the other cases and combine them, $98.5 billion. So this one case is almost double all of those are the 33 cases put together.
We specialized in the mega cases. We built a reputation in that area and we have excellent market share generally in chapter 11 in particularly in the mega cases. So I am pleased to confirm with you that that was a very favorable development that took place just today.
Let me now touch on some other financials. If we look at EBITDA, $23.5 million on the quarter and that was up from $22.4 million. Our non-GAAP EPS was right in line with consensus at $0.19. I’ve already mentioned the operating revenue at $116 million which was up 13%. Net, net we feel we had good solid Q1.
Looking at eDiscovery in particular just a few additional comments. I mentioned operating revenue at $81.2 million, up 48% and once again, that’s all organic growth. EBITDA 22.3 million up 36%. The eDiscovery business on a global basis now represents 70% of corporate revenues.
The split in the quarter between ESI and Document Revenue was, 55% ESI, 45% Doc Review. The international portion of the revenue was up 40%. We continue to have very strong growth internationally. The international revenue amounted to 60% of total eDiscovery revenue.
It’s my own personal feeling that that number will steadily grow over the next few years. We are absolutely a global business in eDiscovery and I think will become more so as we move forward. As I mentioned earlier, we took a global leadership position last year. We are continuing to invest heavily in the business. We are in the business long-term. It’s important we do invest heavily. We feel that will cement our leadership.
We did recently open our brand new primary U.S. datacenter which is located in Las Vegas. We feel this will provide us a number of advantages going forward. This was also a major financial commitment.
If we look at bankruptcy for just a moment, we all recognize that we continue to be in the low portion of the bankruptcy cycle. Revenue was $17.4 million for the quarter, which was down from $20.9 million a year ago. That’s right in line with our expectation. We expected revenues to be down just based on the lower filings at the cycle.
We clearly maintain our market leadership. We also feel as we look at leveraging at the system. We look at the future of interest rates. We feel that for a variety of factors were getting close to the beginning of the next robust bankruptcy cycle. We will be well positioned. We will take full advantage of that. It’s difficult to say with precision exactly when that will begin.
Many people in the business are thinking that we’ll perhaps begin to pick up even later this year or certainly in 2015 and once again I am very pleased to be able to speak with you about the major chapter 11 retention that filed today.
In regard to the settlement business or as we sometime refer to it Class Action mass tort business. Revenue as we expected was down, it came in at $17.7 million versus $27.3 million a year ago. But we have some timing issues here.
We’ve been retaining a very, very sizable anti-trust case. And in the first quarter a year ago that did generate some significant revenue. We expect that we are in the first quarter of this year and throughout this year, however the case is now on appeal we don’t control that kind of timing naturally and so, with that timing issue, we do expect that our revenue would be lower than originally anticipated and I spoke with you about in that the last conference call.
Other than that, our settlement business is solid. And as you know that’s a business that double in size in the two year period of between 2011 and 2013. And so we have full confidence in that group, but we do not control certain of the major timing considerations.
Now, relative to how do we look at Q2 and the balance of the year. Just a few brief comments. In regard to Q2 and I’ll just break out non-GAAP EPS on a quarterly basis. We achieved $0.19 which was in line with consensus, in line with what we thought we do for Q1.
I feel that we will do $0.21 and so that’s my goal in Q2. I feel that each quarter we’ll ramp up as we go through the year. So if we take $0.19 in Q1 and $0.21 in Q2 that gives us $0.40 for the first half. That would give us a 40% to 60% split between first half, second half and I feel like that we will ramp up in Q3 and ramp up in Q4.
Therefore for the full year, I am going to leave our objectives in place exactly as I discussed them with you on our last call. On an overall basis, I see operating revenue of $475 million. I feel very good about that number. I think we perhaps have an opportunity to see that number. I broke that out for you in the two segment’s $340 million for eDiscovery, $135 for combined bankruptcy settlement.
EBITDA, our objective continues at $106 million and then non-GAAP EPS for the full year at $1. Those are our objectives. That is a rundown on how we did for the first quarter.
At this point, I’ll turn things over to Chris for his comments and when Chris has concluded we will take your questions.
Good afternoon, starting with eDiscovery. The first quarter was our second $80 million plus revenue quarter and as Tom mentioned a 48% organic revenue growth year-on-year with 36% accompanying growth in the EBITDA. As such, it was the second best revenue quarter in the history of the eDiscovery business, following the very strong year-end results in the fourth quarter 2013.
Sales bookings ramp sequentially over each of December into January, February, and March and monthly revenue at the end of the first quarter exceeded that at the beginning of the quarter.
We saw major new engagements from each of North America, Europe and Asia including those merger clearance work, regulatory investigation and financial services and the usual mixture of litigation. It was a particularly strong quarter for our Hong Kong office that we opened initially in 2009. The Asia region remains the smallest of the three primary regions but it is growing and we have a long-term commitment to market leadership in Asia for eDiscovery.
We also witnessed year-over-year growth in all of U.S. ESI, U.S. document review and consolidated Europe and Asia revenue that we saw increased results in each of the three areas leading to increases in the aggregate.
Qualitatively, more recently we have expanded our Toronto office to full service offering. We opened this office in late 2013 with document review capabilities. We have now augmented those resources to include full service ESI capabilities performed in country.
We have worked for Canadian clients for several years now. We see an attractive opportunity for regional leadership by having a local presence and Toronto is the newest of the operating centers supporting our global eDiscovery business.
As has been the case for many years, w saw the continuing impact of declining unit prices, particularly in the United States for pre-filter processing and hosting services.
Turning to the bankruptcy and settlement division, results came in largely as expected. The bankruptcy and settlement division had $35.1 million in revenue this quarter compared to $48.1 million in the year ago quarter and fortunately a much narrower gap in EBITDA, $12 million this quarter compared to $14.6 million in the year ago.
The bankruptcy decision will continue to feel the impact of market condition. For the first quarter of 2014, total bankruptcy filings are down 12% versus the year ago quarter with commercial filings down 22% for the same period.
The bankruptcy, the American Bankruptcy Institute reports likely low filings continuing through the end of 2014 and the number of filings impact directly or indirectly the addressable market for all of the P&Ls in our bankruptcy business, chapter, 7,13, 11 and AACER.
Therefore our focus is on retention of existing relationships, maximizing market share in an environment where the addressable market size has some limitations as a natural byproduct of fluctuation and filings.
In settlement administration, as Tom mentioned, for a very large client engagement, that was a significant revenue contribution in the first quarter of 2013, that matter is on appeal and while we remain retained on that matter, there will be a delay in demand for services through 2014 and the significant contribution in the first quarter of last year will magnify the period-on-period comparison.
In addition, there are certain recent Supreme Court decisions that have not made it easier for plaintiffs to achieve class certification and this relates to the number of mattes available to pursue in the marketplace.
So again, we are very focused on cultivating our existing relationships maximizing market share and we have some very positive news to share in the bankruptcy settlement division in the energy future holding case that Tom mentioned earlier in the call measured by assets listed- most recent significant filing of the premier engagement in the corporate restructuring marketplace.
We are very pleased to have been selected and this will be an important matter in our portfolio going forward. In addition, you may have seen last week that we announced a service extension for the bankruptcy business by introducing Case File Pro, a web-based case management tool primarily for attorneys to prepare and notice multi-data filing.
But we do not anticipate the Case File Pro will create material standalone revenue in 2014. It does afford us new competitive differentiation in a very tight marketplace. It’s also the first offering we’ve had in the bankruptcy division focused primarily on pre-filing activities and also the first self-service product we’ve had for attorneys.
So going forward, we see this as a very attractive opportunity both standalone and for integration with our other bankruptcy business line in chapter 7, 13 11 and AACER.
So those are some operating highlights in the quarter. We were particularly pleased with results from eDiscovery. We are very pleased with the major corporate restructuring announcement of today and at this point, we would be happy to take your questions and we’ll ask the operator to open the Q&A period.
(Operator Instructions) Our first question comes from the line of Peter Heckmann from Avondale Partners. Your line is open.
Peter Heckmann – Avondale Partners
Thank you, good afternoon gentlemen. If a comment – couple follow-ups in eDiscovery with the Toronto launch in the first quarter – late in the fourth quarter I assume that there was a drag going into the first quarter there.
But, as we look out several quarters, I think you commented on the last call that you felt that we were stabilizing in terms of like, eDiscovery mix and then as well we – like we are going to start to see the maximum revenue leverage from those expenses. So, how do we feel for your margins in eDiscovery when compared with let’s say 2012? Are we seeing so far what we should see some stabilization? Or would we expect margins to be down?
Hey, Pete, this is Paul. I think the outlook on margins really has to do with the mix of the business if we factor in kind of the market demand and where we are going to get the mix of revenue and talk about some of the price impact that Chris talked about, I think the outlook and margin really depends on mix of business, from that standpoint there is a fair amount of pricing pressure in the industry. Those drives that ultimate results.
I think the other comment I think Pete is that, we clearly do see a ramp up in revenue in Q3 and Q4. That incremental revenue obviously was receivable for us. I think that we had a huge spike in doc review last year.
The mix has pretty well stabilized. We expect the mix will probably not changed dramatically, it didn’t changed dramatically when we first got the doc review business, but I think that there will be some stabilization there. Chris referenced pricing there has been some continuous pricing pressure.
But, I do feel quite good that in the second half of the year, especially with some incremental revenue, clearly it will drive some better EBITDA it will drive some better contribution to profits from the eDiscovery business and once again, we will continue to invest in the business.
So, you are going to see an increase in depreciation for example. That is received from some of the CapEx we’ve done, but the CapEx is a very important with the level of growth we’ve had. So that we really solidified the business for the long-term. But, we are confident, we are optimistic as we move through the balance of the year that eDiscovery will be strong.
Peter Heckmann – Avondale Partners
Okay and then, this is a question for Paul, but on the receivable side, it looks like, you had good collections sequentially DSOs were down. Do you think that, maybe it’s real hard to forecast given the growth of the eDiscovery business, but do you think it could be achievable to get DSOs down sustainably below a 100 days or we will (Inaudible)
I think it is, I think as you look at the sequential change as you move from fourth quarter to first quarter which is the drop in revenue impacted our DSOs. But, I think we are at a point now where we stabilized the DSO. We do think there is opportunity to reduce those further as we move through the year and sustain that
Peter Heckmann – Avondale Partners
Great, great, okay. That’s really helpful and then, just one follow-up question, I think roughly a year ago, Chris you had mentioned a bit of tether about if I am remembering correctly there was an opportunity in bankruptcy within regard with the Federal government or Sovereign Nation, is there a way that you could at this point provide any additional color as regard to that relationship and it’s not specifically naming it at least if some of the revenue is being recognized currently?
So, if I am recalling what you are referencing, there was a matter for a government entity on which we were receiving corporate restructuring. As it was the case then and it’s the case now that matter remains subject to confidentiality. Our work was extended and renewed and we have recognized revenue in the ordinary course over the life of that engagement. But we are not able to say more specifically based on the provision of the client’s contract.
Peter Heckmann – Avondale Partners
I’ll get back in the queue. I appreciated it.
Thank you. Our next question comes from the line of Tim McHugh from William Blair. Your line is open.
Tim McHugh – William Blair
Yes, thank you. Just want to ask on the energy futures recognizing maybe you don’t, you can’t say specifically that case what the revenue is but can you give us, help us in some context to think about what a mega case might do maybe in terms of the revenue contribution to that segment? Is it a couple 100 basis points or it’s not as meaningful even that as we think about the next year as that lands up?
You know, Tim, we have had a number of mega cases over the years if you will. I mean, range, Lehman Brothers Lehman SIPA, MS Global, et cetera. We do not ever project revenue streams on individual cases. But we’ve certainly said before that on mega cases, two things.
One, they go on for multiple years. You certainly record multi-million dollars in each given year for a period of time. But other than really put in that kind of a very general contract, these are multi-million dollar matters they go on for – in some cases, four, five, six, seven years.
We don’t really try to break it out further and we have to be very, very cautious about making any kind of additional comments. So certainly there will be a contribution to revenue and we will begin to see some revenue certainly beginning in the second quarter because always in the first couple of months after a case there is some work that we actually are engaged in. But other than that, we really don’t talk in more specific terms.
Tim McHugh – William Blair
Okay, and then on eDiscovery, just in terms of the margin, am I right, basically what you are describing for the second half is do you expect expenses to kind of flatten out and you expect the revenue to ramp up in the second half or, is there any of the spending in the short-term here that will – I guess kind of go away, or it’s temporary in nature?
Yes, I think, Tim, as you look at the first quarter anchor to that is our quarter and then think about where we are in the fourth quarter, we had a modest revenue decline from fourth quarter to first quarter that affected our margins.
If the case fix desirable cost, as we grow revenue which we expect to do each quarter, quarter-on-quarter and Chris talked through the momentum we saw in the business in the first quarter March is stronger than January in terms of revenue and bookings.
We expect that type of momentum continue throughout the year and yes, we will be leveraging our fixed cost investment. The other thing I’d point out is, we did open the Las Vegas datacenter. It went operational in March of this year. It will continue to go through set up of that datacenter in the second quarter, in the case of revenues grow during the – sequentially during the balance of the year. We will leverage our fixed cost and that will drive margin expansion.
Tim McHugh – William Blair
Okay, and then lastly just a comment pricing pressure, is the case of that getting worst or is it just ongoing what you’ve seen out there for eDiscovery?
I think it’s – this is a industry with a lot of price competition. We obviously provide value and service that is one we are focused on our cost efficiencies and productivity. I think if you have an industry where unit prices are declining as Chris mentioned, you got to work on cost and productivity and continue to service customers that’s what we are focused on.
The other thing, Tim, is that, we obviously are very – we are pricing, we are in a very low – various competitive situations in which we engage, we see the organic growth we are getting, but have limits on pricing. We certainly are not going to reduce our pricing to what we would think are unreasonable levels and that’s been the position that we’ve maintained and I think it’s the appropriate thing for a market leader like us will do.
Tim McHugh – William Blair
Okay, thank you.
Ladies and gentlemen, this now concludes the question and answer session. I would now like to turn the call back over to Chris Olofson for closing remarks.
Thank you all, very much, for joining us. We hope you have a nice evening.
Ladies and gentlemen, this now concludes today’s conference. Thank you for your participation. You may all disconnect. Everyone have a great day.
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