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Executives

Karen Greene - Manager, IR

Walter Buckley - CEO

Kirk Morgan - CFO

Analyst

Matt Williams - Evercore

Jeff Van Rhee - Craig-Hallum

Scott Berg - Northland Capital Markets

Jeff Houston - Barrington Research

ICG Group Inc. (ICGE) Q2 2014 Earnings Conference Call August 7, 2014 10:00 AM ET

Operator

Good day ladies and gentlemen, and welcome to the Second Quarter 2014 ICG Earnings Conference Call. My name is Simi and I’ll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, conference is being recorded for replay purposes.

I’d now like to turn the conference over 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 second quarter conference call. I’d like to remind everyone that we are going to use 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’ll see an icon for our second 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 this press release.

The press release is also available on our website, which again is icg.com; and to access the press release on our website, go to our home page and select the August 7, 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’d 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 accessible terms and our ability to maximize value in connection 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 and good morning, and welcome and thank you for joining us this morning. Today, I will provide an overview of ICG’s performance for the second quarter 2014 and Kirk Morgan, our Chief Financial Officer, will follow up with ICG’s results for the first quarter.

Now turning to slide five. Our results for the second quarter were strong and we remain on track to achieve our goals for the year. We are excited to announce MSDS’s acquisition of KMI, a global environmental health and safety platform based in Canada. The addition of KMI enhances the MSDS platform for future capabilities, specifically around incident management and reporting.

This ultimately allows us to better serve the chemical compliance needs of our customers and expand our footprint in this sector. I’ll provide further details in just a few minutes.

On the sales front, our pipelines grew significantly across all our businesses, especially at Bolt, adding a large number of new prospects and seeing meaningful movement towards late stage discussions. We increased sales and marketing and R&D spend each by almost 50% compared to Q2 2013 and these investments should enable us to continue to drive strong growth and platform expansion going forward.

Finally we received shareholder approval to change our name to Actua and we're very excited to launch our new brands, as we continue to person the vast opportunity to transform cloud-based vertical markets. Now from an operational perspective we continue to aggressively pursue our key growth initiatives.

Turning to Slide 6, in our quest to drive market share -- to drive market adoption and attain market leadership we added 25 new sales people in the second quarter. We believe this investment is setting us up for continued growth into 2015 and beyond. We are seeing specific proof points in each of our businesses.

At GovDelivery, revenues grew 20% this quarter compared with Q2 2013 and is up 24% year-to-date. As a reminder, GovDelivery signed our largest customer in Q2 2013 which generated a significant amount of non-recurring revenue and therefore impacts our year-over-year quarterly comparison. In terms of new clients, we added 32 new customers this quarter, 22 coming from state and local and 10 from the UK. We are pleased with the momentum we are seeing in these markets and most of our recent wins are a direct result of additional resources we apply to those markets.

In the federal market, we remain focused on large program opportunities to accelerate growth, but we do not see any closure during the quarter. We are building a strong pipeline and have a number of pilot programs in place today. These opportunities take time to mature and we believe over the next several quarters we will begin to see these investments pay off.

Now turning to Slide 7, at MSDS, we added over 500 customers in the quarter, bringing the total customer count to approximately 9,500. We experienced 36% year-over-year revenue growth along with a 40% increase in our pipeline. As part of our plan to continue building out the sales team, we hired an additional 12 sales people in the second quarter, ending the quarter with 132 sales and marketing personnel.

Turning to Slide 8, Bolt saw revenue growth of 60% in the quarter and was very active from a both a sales and development perspective. During the quarter Bolt successfully launching Progressive. Even though this is a seven figure annual deal, this initial phase represents a small part of the opportunity with the Progressive platform. The goal over the next six to 18 months will be to significantly expand the overall relationship. Bolt continued to see excellent results at Citizens. Powered by Bolt the Citizens clearing house in Florida continues to garner success and momentum with over $1.4 billion of potential risk redirected to other carriers, a huge benefit for the tax payers of Florida.

Additionally, the most important phase of this relationship, existing Citizens’ customers using the clearing house to renew their policies is now scheduled to start in early September and will significantly increase the level of activity through the clearing house. We also launched a partnership during the quarter with Assure Start, a Seattle based small business insurance broker backed by American Family which is using the full platform to provide small business commercial solutions to its customers.

Finally, we are in late stage discussions on four multiyear multi-billion million dollar platform deals, two of which are now in contracting stage. Based on this activity as well as the kickoff of our renewals on the Citizens’ platform, we continue to expect to see accelerating software growth at Bolt in the second half of the year.

Turning to Slide nine, we were busy on the development front this quarter as well increasing R&D spend to $3.5 million in the second quarter from $2.3 million in the second quarter of 2013. At GovDelivery we are continuing to develop new functionality that we believe can further strengthen our ability to bring our clients additional reach. At MSDSonline we have reached chemical mapping functionality to enable businesses to easily see and manage their chemical inventories, a capability we believe that is critical and that is critical in managing environmental health and safety in a real time fashion.

We have just begun selling this functionality and are enthusiastic about the market response thus far. At Bolt year to date we completed the successful integration of 688 new carrier connections onto the platform, bringing the total number of carrier connections to almost 2,600. We also made key enhancements to the platform through partnerships with DocuSign enabling e-signature on the platform and each value which allowed for Web based homeowner replacement cost calculations.

In addition to driving organic growth at our existing businesses, we continue to look for ways to expand our market reach through tuck-in acquisitions. As I mentioned at the beginning of the call, MSDSonline acquired KMI subsequent to quarter end. Based in Oakville, Canada with offices in the UK and Australia KMI offers environmental health safety and sustainability software that helps companies to gain centralized visibility, risk control and proved performance scenarios of incident management and compliance.

KMI bring 40 experts in the EH&S compliance area that are serving close to 100 customers worldwide. We are excited to leverage our sales and marketing engine to immediately expand their addressable market by selling these products and services into the MSDS existing customer base. We estimate 50% of MSDS customers are potential prospects for the KMI solution. We view KMI as a great proof point on who to effectively deepen our domain expertise and expand our market footprint, thereby reinforcing our barriers to entry.

Now from a platform perspective we also evaluating a number of very interesting cloud businesses with profiles that are similar to those of the businesses we own today. These opportunities are in markets that meet the criteria laid out on Slide 9. We believe following the first horizontal wave of cloud software that transform functions like CRM, human resources, accounting and other disciplines, the next big wave of transformation will come from the proliferation of vertical or industry specific cloud based platforms. We believe that combining these cloud based platforms with our proven expertise and building leading vertical base business creates a winning combination. Our goal is still to enter at least one new market in 2014.

That said we remain disciplined in our approach to entering a new vertical market and have a high hurdle rate in terms of the criteria that must be met for us to move forward. We will continue to keep you posted on our progress on this front as the year unfolds.

As I mentioned in my opening remarks ICG’s shareholder approved to change our name to Actua. We are also changing our ticker symbol from ICGE to ACTA. This rebrand, including a new Web site reflects ICG’s evolution and our pursuit of the best opportunity to transform industry specific vertical markets. The name and ticker symbol changes will go into effect on September 3rd. And as part of our brand launch we are also hosting an investor conference on September 24th in New York City focusing on how Actua transforms markets and the customer experience.

In closing, our results for the first half of 2014 set us up for a strong second half of the year. We’re enthusiastic about the growth we saw at our business pipelines, especially Bolt and are excited about the new platform opportunities we are evaluating. Fortified by the strength of our balance sheet and the growth of our businesses, we are eager to capitalize on the continued migration of business processes to the cloud, which we believe will continue to drive revenue and earnings growth in 2014 and beyond.

And with that, I'll turn it over to Kirk.

Kirk Morgan

Thank you, Buck. Let me walk through our quarter and year-to-date results, discuss our cash and cash flow and now review our forward-looking guidance. Turning to Slides 11 and 12, revenue was $19 million for the second quarter of 2014, up from $13.5 million for the second quarter of 2013. Net loss for the second quarter of 2014 was $12.9 million or $0.35 per share compared to net loss of $0.19 per share for the second quarter of 2013.

Adjusted net loss was $4.3 million or $0.12 per share for the second quarter of 2014 compared to $3.7 million or $0.10 per share in the comparable 2013 quarter, with the increase being reflective of the investments we are making in sales and marketing and technology.

Moving to Slide 13, revenue was $37.5 million for the first six months of 2014, up from $25.5 million for the comparable period of 2013. Net loss for the first six months of 2014 was $23 million or $0.62 per share compared to net income of $0.33 per share for the comparable period of 2013, which was driven by gains from the Channel Intelligence and Investor Force sales.

Adjusted net loss was $7.9 million or $0.21 per share for the first six months of 2014, compared to $8.9 million or $0.24 per share in the comparable 2013 period. Importantly, year-to-date bookings defined in this example as revenue plus the change in deferred revenue are up 47% over the 2013 year-to-date period.

Moving down our income statement, gross margin for the quarter was 71%, bringing our year-to-date performance to 72%, a solid improvement over last year’s periods. Gross margin will be a bit lumpy from quarter-to-quarter depending on the mix and we continue to expect an annual improvement for 2014 over full year 2013’s 70%.

Sales and marketing expense increased almost 50% over the 2013 quarter as well year-to-date, demonstrating the investment we are making there. Technology development expenses increased almost 50% as well over the 2013 periods. Moving to Slide 14, the metrics, recurring revenue represented 87% of our Q2 revenue and dollar-based recurring revenue retention rate `was approximately 95%.

From a balance sheet perspective as noted on Slide 15, we ended the quarter with $310 million in cash after repaying essentially all of the debt which totaled $12 million at GovDelivery and Bolt. During the quarter we received $3 million of proceeds mostly escrows and continue to expect to receive an additional 22 million of escrowed proceeds in the remainder of 2014 related to prior dispositions. This amount is not included in a $310 million of cash at June 30. Operating cash used during the quarter was $2.6 million, an improvement over the cash use of $4.2 million in second quarter of 2013 and a significant improvement over the cash use of $9.7 million in the first quarter of 2014. We continue to expect to generate cash flow from operations in the fourth quarter of 2014.

Before I move on, let me provide some details on the KMI acquisition of MSDSonline. MSDSonline paid approximately $10 million in cash at closing and will pay up to an additional $2 million subject to KMI’s performance over the next two years. KMI was breakeven on approximately $4 million of GAAP revenue run rate that is before any deferred revenue adjustment for purchase accounting and growing at approximately 25%. And just to demonstrate the power of the MSDS model, the $10 million paid was all generated by MSDSonline over the last two years.

Now let me turn to our 2014 guidance on Slide 16. Results for the first half of the year, the growing pipelines of our companies in a traditionally stronger second half of the year puts us in a good position to meet our original guidance of $78 million to $80 million. The KMI acquisition will add approximately $1 million of GAAP revenue for the rest of 2014 after reducing for the estimated impact of deferred revenue purchase accounting. Adjusting for the acquisition, we now expect annual revenue to increase from $59.2 million 2013 to annual revenue in the range of between $79 million and $81 million in 2014. And we are focusing on delivering on that.

On Slide 17, we continue to expect annual adjusted EPS to improve from a loss of $0.41 per share in 2013 to a loss in the range of between $0.36 per and $0.41 per diluted share. While we have made significant investments in sales and marketing as well as product development, the KMI acquisition is expected to be neutral to our 2014 EPS guidance.

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

With that let me open the line for questions.

Walter Buckley

Thanks Kirk. We’ll now open it up to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Kirk Materne with Evercore. Please proceed.

Matt Williams - Evercore

It’s actually Matt Williams in for Kirk. Just a few quick questions from me. I guess first of all on GovDelivery, as we look out over the back half of the year, could you just talk a little bit more around similar dynamics around sort of the federal year end and I know you talked about some opportunities there. But how should we be thinking about growth in that business over the back half of the year? And is it fair to assume some acceleration after the end of the year and after the end of their fiscal year when budgets sort of reset?

Walter Buckley

It’s a good question, I think from a GovDelivery standpoint we were very pleased with what we saw in the state and local and international levels both sort of record quarters from that perspective. And on the federal side Q3 is a big quarter from a booking standpoint and I think as we mentioned we’re pleased with what we’re seeing from a pipeline expansion. Obviously we’d like to see the deal close faster. But we think we’re setting ourselves up for an accelerating growth from a second half perspective and also a lot of that will move into 2015. And so and I think our view is you will see accelerating growth in the second half but the federal program and the results there I think will really begin to kick in 2015.

And also one last thing, I think from a year-to-date profits like 24% and this quarter was adversely effected by the win of ACA, the ObamaCare rollout and where those significant amount of non-occurring revenue. And I think that sort of skews Q2 specifically but I think the 25% is a better number to think about.

Matt Williams - Evercore

Okay, great. That’s helpful. And then maybe just one follow up from me and you touched on it a little bit in your comments. But with the acquisition of KMI through MSDS, could you just talk a little bit more around sort of how you’re thinking about revenue synergies there and consumer overlap and just I guess over fit with what you’ve already got with MSDS?

Walter Buckley

Yes, we really think it strengthens and broadens our platform significantly, both from a functionality standpoint, incident management. It's really an enterprise solution to they’ve built, and also from a global perspective where they’ve got strong capabilities in Canada, the UK and Australia. So, it’s an area that we have functionality but it really takes it to the next level from our perspective in terms of the suite and we really think they are the leading cost based player in incident management and recruiting area.

And just from a customer perspective, I think all 100 customers of KMI our potential prospects for MSDS, but more importantly we think of the 9,500 customers at MSDS 4,000 are prospects for KMI solution and that’s a great way to leverage our customer base. And so we do it both from a strategic standpoint but also from an operating perspective as well.

Operator

Our next question comes from Jeff Van Rhee with Craig-Hallum. Please proceed.

Jeff Van Rhee - Craig-Hallum

Let’s see, a number of questions guys, first I guess but maybe you could touch on Bolt. You talked about a very strong pipe and some mature deals fairly late in the cycles. You mentioned seven figure deal. Can you expand a little more on those deals and what they’re telling you, either where they are falling? Are these state type deals are they -- can you just give us a little more sense of where these deals are coming? And then also as it relates to seven figure deals, are you talking seven figure annually? Maybe you could give us a little better indication of size?

Walter Buckley

Sure. Yes, there is seven figure annual deals, four of them in late stage and I can say we’ve never had that level of activity and I really do think it’s a result of the investments we begin to make in the sales and marketing side in the second half of 2013. As we know these type of sales cycles take time. And so I think we’re very encouraged by what we’re seeing. They’re all insurance carriers. Two are very large and two are sort of mid-sized. And as I mentioned in the script, two are on contracting phase. Now obviously we know the target would be exactly when these types of deals will close but I think we believe we’ll see at least two close this year and hopefully we’ll see more. But obviously it’s not fully in our control.

Jeff Van Rhee - Craig-Hallum

Is the two that are contracting, are they one mid-sized one big, which are in contracting?

Walter Buckley

Yes. That’s a good way to characterize so.

Jeff Van Rhee - Craig-Hallum

And the two very large, any incremental there? Are we talking are these as big or bigger than your largest deals to-date or any sense on a relative scale how large is very large?

Walter Buckley

One is in that same range as our large one and one is still in the formal stage in terms of the size and there is a lot of variability in these deals but I think -- as we think about it, it even progresses from our perspective even though it’s not a large seven figure deal today, the opportunity is significant. And so our view is let’s get in, get our platform and implement and up and running, show the value of the platform and then expand. But obviously I think with these types of carriers the long-term opportunity is significant.

Jeff Van Rhee - Craig-Hallum

And then shifting gears over to Gov, the broader campaigns that they are pursuing, sounds as though they are working through the pipes. Any concerns there or any experience thus far of losses on those deals? Mainly they are choosing other vendors in the interim or just a little bit sense of the progression of the pipeline in those campaign-type deals?

Walter Buckley

That’s a great question. It’s really not a loss to other customers. Primarily it’s actually changing the way, the government has been operating frankly, primarily in an offline way, primarily in a non-automated fashion and so you're bringing technology platform with automation and Citizen reach and just getting the buyers comfortable with the value proposition and the ROI and so it’s really changing human behavior. So as we know it takes a little longer than we would like. But I think that the opportunity is as compelling today as we thought it was, if not more so six to 12 months ago.

Jeff Van Rhee - Craig-Hallum

And then along the lines of the pipelines, it sounds like good improvements. Is there any way to sort of see through any of the acquisitions or bolt-ons and get any semblance of sort of your feel for the growth rates in organic pipeline year-over-year and I guess the question there is, are the pipelines on an organic basis painting a picture of organic revenue acceleration or a continuation of current growth? How do you see that?

Walter Buckley

Obviously I think in three different stories in the sense but the organic pipeline growth is accelerating significantly faster than the businesses today. And probably obviously the most extremely examples, Bolt, just because of the size of the opportunities; but I think MSDS is pretty consistent at 40% growth level which is a little -- is a cut faster than their growth rate and I think Gov platform is growing just because of the size of the programs that they are talking about. And obviously then there is Bolt which is in order of magnitude faster. But obviously it takes time.

Jeff Van Rhee - Craig-Hallum

And Kirk on the cash flow, you are still on track you mentioned for cash flow positive in Q4. I realize you've not given out your guidance yet but is there anything in that Q4 to suggest that's seasonal or unusual? Mainly, should we think of that cash flow going back to burn in the forward years? I know these models all have the potential to throw off just tremendous cash. I'm wondering if we are going to see a fairly linear sort of stair-stepping into the positive or if we should still think of it with some significant seasonality.

Kirk Morgan

It’s still going to lumpy just quarter-to-quarter. I think that the trend clearly will show an improvement in full year ’14 over ’13 and I think that trend for ’15, there was nothing in the model that suggests that that should not continue. But as you think of quarters in '15 in the out it’s still going to be a bit lumpy.

Jeff Van Rhee - Craig-Hallum

On the KMI, is that right now -- what’s the mix of the revenue stream? Is this prem-hosted multi-tenant? What’s the architecture of the revenue stream?

Walter Buckley

It’s recurring. Just think of the pretty much same along the lines of MSDS, roughly same gross margin, same percentage of recurring revenue, and so just a small version.

Jeff Van Rhee - Craig-Hallum

Just to be clear the architecture is multi-tenant cloud. So there is no significant sort of rewrite on the architecture front.

Walter Buckley

I think there is maybe a couple of instances out there that are better unique but the platform itself is multi-tenant.

Kirk Morgan

And there will be some investments we make that adjust by [multiple speakers].

Jeff Van Rhee - Craig-Hallum

And I guess just one more and I'll let somebody else jump on. As it relates to buybacks, conceptually -- obviously the shares have come in here, but with you guys looking at -- it sounds like you’ve got a platform that’s late stage and is sort of right in your crosshairs, the bolt-on here from MSDS looks like it’s spot on and pretty good cross selling opportunity. When you look at your valuation on eb to rev ex-cash and then you look at the acquisitions, when you consider buybacks, do you -- is the process to compare the two opportunities mainly what you can buy yourself or versus what you can buy other companies and that's sort of the cut and dry decider or just give us a little more color on buybacks. I get a lot of questions along those lines?

Walter Buckley

Sure. And I really think it’s a good question. It’s something obviously we talk about on a continual basis here. Our focus is really on building the business and it really starts with investing in the sales and marketing side from an organic perspective tuck-ins and obviously we think that it was unique time in the evolution of this market from a new platform opportunity standpoint. And I think there's ability to really build -- acquire and build leading players in vertical markets and really own those markets and that’s our strategy.

That said, we’ve historically been and will be opportunistic on the share buyback, but I’m going to obviously, I think our bias and our focus is on building versus buying back shares but obviously we have been historically opportunistic and we will remain so.

Jeff Van Rhee - Craig-Hallum

I am sorry, I lied. I'm coming back with one more. On KMI, just what is the ASP there? Can you just give us a little better sense of what the cross sell opportunity is?

Walter Buckley

It’s a bit higher obviously given they have more modules than MSDS currently has. They go after larger enterprises. So their ASP is closer to $40,000 right now.

Operator

Our next question comes from Scott Berg with Northland Capital Markets. Please proceed.

Scott Berg - Northland Capital Markets

Congrats on a good quarter, couple of questions here. Kirk as you look at what Bolt is doing today you have obviously progressive in a couple of other large platforms -- large companies on the platform. But how should we think about the leverage that the Bolt platform is going to gain in terms of gross margins and cash flows. Is this a platform that’s going to require 2, 3, 4, 5, 10, more, of these platforms on to start seeing some of that leverage in those financial areas? And then secondly Buck at what point does this become a platform that all these other large vendors in the space just have to get there going forward?

Kirk Morgan

I think from a platform standpoint, it’s a bit challenging model that out knowing these are complex transactions and it really is sort of difficult to model that out. But as I think about it, as we look into ’15 I mean probably all else stays the same. Adding maybe four or five of these I think puts us in a very different position for Bolt than where we are now.

Walter Buckley

And what the second part of the question just I couldn’t hear it first?

Scott Berg - Northland Capital Markets

As you think about these other large vendors in the space, that go in the platform, at what point do they have to say oh, I need to be on that and kind of accelerate that we should bring?

Walter Buckley

I think really we do look at it from a couple of different perspectives. One I think we’re closing in this 55-60 carries on the platform. We talked about the number of connections being 2,600 which is really beginning to talking about building the most out and in connection just as a carrier line of business and stage just to frame it from that perspective. And I think we had sort of -- its sort of late, shades of gray but somewhere between 80 and 100 carries on the platform gives out critical mass and a new customer can sort of hook into the platform and have almost instant access to all or most of the carriers or lines that they want. So I think that’s one element and two and obviously we’re I think coming -- business is making great progress there.

And we’re changing, as we talked about before behavior and this has been really an offline activity by agents and insurance brokers and now we’re automating and giving a power of the platform to really enable them to select insurance off outside of their own carrier. And so you’ve got -- you need to get critical mass on both the carrier side which I think we’re well on our way to doing and I think then changing behavior. And so our view as you’re changing you’re really changing an industry and it takes time. It’s just not easy as we’d all like it to be. But I think the opportunity is as big. It's not bigger than we thought it was even 12 to 18 months ago.

Scott Berg - Northland Capital Markets

And I guess moving onto MSDS, is your -- your revenue growth seems in that business seems almost to be linear relationship with the sales ads that you’ve been able to add to that business, sales have ads over the last couple of years. How do you gain more leverage out of the sales that you’re doing or is it purely going to be a function of adding adds to sustain the growth?

Walter Buckley

Well, it’s an important question and obviously adding sales head is important and out of 12 [ph] this quarter, we're at 132 probably, slightly ahead of our plan just because we're the opportunities there. But more importantly adding product like KMI to the MSDS platform is really the way to drive additional leverage. And when you think about the KMI platform as Kirk [indiscernible] 40,000 on average, obviously there is variability ability there but taking that capability to our 9,500 customers and specifically 4,000 that probably meet a lot of the criteria and needs the KMI solves; it is a huge way to leverage the platform and obviously we’re not predicting accelerating growth tomorrow but as we implement and coordinate and begin to execute again from a sales standpoint I think we will see real leverage in the business.

Operator

Our next question comes from Jeff Houston with Barrington Research. Please proceed.

Jeff Houston - Barrington Research

Starting off with management compensation, could you talk a bit about how management compensation has changed from the old ICG and into the new rebranding and are any of your current portfolio companies tied to incentive compensation fee for investment performance or is that a thing of the past? Just some color there would be great?

Walter Buckley

The first part of the question, compensation is really at three levels; one monthly salary, two bonus and then long-term equity. As we think about it, salary structure hasn’t changed here in a long time. Our view is every dollar we can spend in sales and marketing or R&D is a dollar we should invest.

From a bonus standpoint, I think a significant change has been that management has elected to receive their bonuses if achieved going forward in the next three years in stock, which I think is really a clear indication of our views of potential value creation over those three years. And the board, in terms of 2015 and beyond, are taking their fees in stock.

So that has changed and I think it really winds up with driving long-term shareholder value creation. From a long-term equity perspective, it’s really tied around specific stock grants and large majority of that’s based on share price appreciation and that’s changed significantly in the last -- that's happened in the last six to 12 months and that is a big change from five years ago and I think a good one and aligns up well with our goals and our mission. From a business management team perspective, they are primarily compensated on the performance of their operating businesses and that’s where we think it makes the most sense.

Jeff Houston - Barrington Research

And switching gears a bit into M&A. It seems like the KMI acquisition was pretty smart. As you look at the acquisition pool of candidates how does it kind of divide up between the three different business units? Are there more prospects in MSDS for example versus GovDelivery or Bolt or should we expect a pretty equal balance of tuck-in acquisitions across the three units?

Walter Buckley

It’s a great question and first just to step back for a second, what we do with all three businesses is clear a market map in terms of the markets that they're try to find the potential competitors/partners and then adjacent markets. And then prioritize, go out and meet with each and every one of those this businesses you've prioritized in term of how we can [indiscernible] strategically with those businesses and KMI, that’s how KMI sort of rose through the process and then we will work with those only with the company in terms of negotiating and then obviously financing it.

I think each of the businesses have multiple opportunities from a tuck-in perspective and it’s aligning that opportunity with also what’s going in that business and I think the experience we’ve gained over the last decade is that tuck-in acquisitions can be very successful but also can be very time consuming from a management bandwidth perspective. And so it’s bouncing. We’re doing a tuck-in, creating that leveragability like we did at KMI without -- MSDS with KMI. But we don’t want to do and Bolt I think the good example is bringing the acquisition and really distract the team in terms of I think which is of their doing from an operating perspective day in day out. And so it’s balancing that. So all three businesses have a number of opportunities and so it is timing that with sort of management bandwidth and making sure that we don’t interrupt sort of the regular day in and day out operations.

Jeff Houston - Barrington Research

And then digging a bit deeper into KMI, I think you mentioned earlier about roughly 4,000 of the 9,500 MSDS clients are -- meet the criteria for KMI. Could you just provide some more color on that? What is the criteria that those 4,000 have that the rest of MSDS clients don’t have and does that make them great for us.

Walter Buckley

I think MSDS, you can be a school or university or a local government, when you have 100 or a 1,000 chemicals in terms of just cleaning and sort of ancillary operations, I think incident management is really for those industry -- heavy industry opportunities in the oil and gas, drilling, mining, steel where there's real worker accident opportunity -- there-s really opportunity for accidents and spills and developments like that. And it's really the MSDS customer base that is subject to real incidents happening on a day in and day out basis. And the rules and regulations around incident management reporting are increasing in complexity each and every day. The fines are increasing, the insurance requirements are increasing. So this is becoming a larger and larger pain point and I think you’re going to see additional regulation coming down the pipe. So this is an area that it’s new in some ways but also I think going to gain significant traction going forward. The government thinks rightly or wrongly that the number of incidents reporting, if government has reported significantly underreporting what’s actually happening in the marketplace and they want to change that.

Operator

We have no further questions. I would now turn the call back over to management for closing remarks.

Walter Buckley

I’d like to thank all of you for joining us this morning and look forward to reporting Q3 results early in the fourth quarter. Thank you.

Operator

This concludes the presentation. You may now disconnect.

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Source: ICG Group's (ICGE) CEO Walter Buckley On Q2 2014 Results - Earnings Call Transcript

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