IHS CEO Discusses Seismic Micro-Technology Acquisition Closing and Integration - Call Transcript

Aug.11.11 | About: IHS Markit (INFO)

IHS Inc. (IHS) Seismic Micro-Technology Acquisition Closing and Integration Conference Call August 11, 2011 8:00 AM ET

Executives

Andy Schulz – IR

Jerre Stead – Chairman and CEO

Mike Sullivan – EVP and CFO

Scott Key – President and COO

Analysts

Manav Patnaik – Barclays Capital

Suzy Stein – Morgan Stanley

George Tong – Piper Jaffray

Kelly Flynn – Credit Suisse

Dan Leben – Robert W. Baird

Dave Lewis – JPMorgan

Bill Warmington – Raymond James

Brian Karimzad – Goldman Sachs

Eric Boyer – Wells Fargo

Operator

Good day, ladies and gentlemen, and welcome to the IHS-SMT closing conference call. My name is Veronica and I will 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, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today’s call, Mr. Andy Schulz, Vice President, Investor Relations. Please proceed.

Andy Schulz

Thanks, Veronica. Good morning, and thank you for joining us for this special conference call. We issued two news releases this morning. If you do not have a copy of these releases, they are available on our website at ihs.com. As stated in the first release, IHS has completed the acquisition of Seismic Micro-Technology, or SMT, a market leader for geosciences software, for $500 million. The transaction is all cash and was funded by accessing a revolving credit facility. In addition, we issued a release announcing the departure for personal reasons of IHS’ EVP and CFO, Mike Sullivan.

The primary purpose of this call is to discuss the closing of the acquisition announced this morning. As many of you know, we are in the midst of our 2011 third quarter and it is not our intent to preview earnings. However, we will provide an update to the guidance we gave on our earnings call to account for the expected impact of the SMT acquisition as of the date of the close.

Some of our comments today are based on non-GAAP measures. Our non-GAAP or adjusted numbers exclude stock-based compensation and other non-cash charges, net pension expense, and other items. The non-GAAP results are a supplement to the GAAP financial statements. IHS believes this non-GAAP presentation and the elimination of these items is useful in order to focus on what we deem to be a more reliable indicator of ongoing operating performance.

We provide a reconciliation of non-GAAP measures on our website at ihs.com. As a reminder, this conference call is being recorded and webcast and is the copyrighted property of IHS. Any rebroadcast of this information in whole or in part without the prior written consent of IHS is prohibited.

Please keep in mind that this conference call may contain statements about 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’s filings with the SEC and on the IHS website.

After formal comments, we will open the call for Q&A. Jerre Stead, IHS’ Chairman and CEO; Scott Key, President and Chief Operating Officer; and Mike Sullivan, EVP and CFO; and Rich Walker, incoming EVP and CFO; are on the call and will also be able to answer questions.

With that, it is my pleasure to turn the call over to Jerre Stead. Jerre?

Jerre Stead

Thank you, Andy. Good morning and welcome to all of our investors and IHS colleagues on this call or webcast. I’d like to extend a special welcome to our new colleagues at SMT. I also want to express my sincere thanks to all of our colleagues who worked so hard on closing this transaction. It’s the largest in our company’s history. Our integration team has already begun its work, and we look forward to a fast and very successful effort.

I’ll provide additional color regarding the strategic rationale for this transaction as well as integration plans for this asset. In addition, I’ll spend a few moments reviewing the work we’ve been doing to ensure that we are executing all acquisition integrations with excellence. Then I will turn the call over to Mike to cover the financial characteristics of SMT and the expected impact on our financial results. We’ll wrap up by providing an update to our guidance. However, before I get into the discussion of SMT, I’d first like to thank and recognize Mike for 12 great years of teamwork and partnership.

Recently, Mike informed me of his desire to begin considering the next chapter of his life and to start by taking a few very well deserved months off. He has been CFO at IHS for 12 years, a long time for any executive, and has seen the company through a significant turnaround, a successful IPO, and now an ever stronger growth phase. He has been a strong and steady financial steward for our company and has delivered much value. He will leave with our respect and appreciation. And the entire IHS family wishes him only the very best in his next phase. Mike will be supporting us until the end of this fiscal year.

We are fortunate to have an executive leadership team with tremendous depth of talent and experience. And I’m pleased we are able to replace Mike by promoting Rich Walker from our team. Rich has filled a critical leadership position for IHS, is our Chief Strategy Officer and Head of our Corporate Development team. His experience and knowledge of our business will help drive the continued growth and success of the company.

Many of you spent time with Rich who has been with IHS since 2006. He has been instrumental in our driving our M&A program and our strategy. Throughout his career, Rich has accumulated a track record of success in strategy, finance, corporate development, audit, tax and Investor Relations. He has worked in many different industries, and before coming to IHS, Rich was Chief Operating Officer at Autobytel Inc. Rich is a strong leader at IHS, and I look forward to partnering with him as we continue to deliver profitable growth in the years to come.

Now, let me talk a bit about the acquisition we just closed. The closing of SMT is terrific news for both companies. And we’re thrilled to welcome SMT to the IHS family. In simple terms, SMT offers software and solutions to help customers across the globe find and develop new oil and gas reserves and to optimize production from new and existing assets.

SMT through its KINGDOM software covers many of the stages of the common geosciences workflow, with particular strength in geophysical interpretation. When paired with our PETRA offering whose strength is in the geologic interpretation part of the workflow, we believe we have a best-in-breed solution and offering an unmatched opportunity in the marketplace.

We acquired PETRA as part of our GeoPLUS acquisition in 2006. It’s proven to be one of our best performing acquisitions since our IPO. The PETRA acquisition really demonstrated the tremendous growth opportunities in combining information into workflow tools. We believe the conversions of information in analytics is the light of the future in the marketplace. And the combination of KINGDOM and PETRA seizes upon the significant growth opportunity. This combination will create an integrated solution, which will address many customer – current customer needs regarding ease of use, increased productivity, and increased accuracy.

Further, KINGDOM and PETRA are Microsoft Windows-based tools, which means they are the preferred technology platform for newer generations of geoscientists. Compared to competitive offerings, they are relatively inexpensive to acquire, easier to install, and get up and running. Both platforms have been growing in two ways; growing along with the overall high growth market and by taking market share from competition. We estimate that the geosciences software market is a $2 billion market today, likely to grow close to 50% by 2015. The combined offering of IHS and SMT represents a small fraction of the total available market. So the growth opportunity for us is enormous.

With thousands of geoscientists graduating annually, particularly in high growth markets such as Russia, India and China, we believe the IHS offering will become the workflow of choice for the profession over time. We plan to develop the mobile applications. Our customers are increasingly demanding, and the Windows-based technology lends itself to the staff. So it’s very much the right acquisition for us, and we expect integration to go quickly and smoothly.

Now, for a quick update on the integration of the other nine acquisitions we’ve done in the past year. Two of the nine were small asset acquisitions and were integrated months ago. We are approaching the first anniversary of three of the acquisitions, and these integrations are substantially complete and on target.

The remaining four acquisitions are progressing nicely and are on track to deliver the expected or better results. With these acquisitions plus the SMT transaction and important ongoing initiatives like our global centers of excellence, Vanguard and Newton, IHS is a very busy place. We remain very confident in our ability to execute and are pleased with the progress to date. And these investments have been part of our long-term plan for many years.

At the time of our IPO in 2005, we laid out a strategic vision, which included a multi-year plan to improve upon and optimize almost every aspect of our company. We’ve made tremendous progress relative to our initial plan. Operations have been streamlined; processes have been improved; and critical investments have been made in products, platforms and people. We have improved the company in every corner of the world. We have engaged – we have a very engaged colleague base, and we remain grounded by putting customers first in everything we do. We are building scale and capacity for our future.

We achieved all of this while driving consistent, strong top-line organic growth, expanding margins over 1,200 basis points and generating robust free cash flow. IHS is now mature to the point where the current level of activity is pretty much business as usual for us. Our colleagues are up to the task, and I’m so very proud of their continued efforts and superior results. And the good news is we have many more opportunities to use for improvement. For example, we’ve not done a formal and structured review of our product portfolio with the focus on assessing the strategic fit and growth profile of all of our offerings.

We are now in the process of conducting such a review. And we would expect to identify products and services that no longer make sense for us to continue supporting. Optimizing the portfolio from time to time will help us maintain our focus, it will keep us lean, it will reduce complexity, and it will drive resources to higher valued activities and enable strong organic growth for our core product set. We look forward to updating your on our progress when we complete our review.

And now, I’d like to turn the call over to Mike.

Mike Sullivan

Thank you, Jerre. Before I get into the specifics of the SMT financials, it’s my turn to say thank you to my colleagues and Jerre for 12 terrific years. We’ve built an incredibly strong finance team here at IHS, and I’m so proud of what we have accomplished and will look forward to watching their continued success.

The team is in terrific hands with Rich Walker, a guy with whom I’ve worked very closely over the years and for whom I have a lot of respect. Rich and I will work together to effect the seamless transition. I’m going to take some time off for the rest of the year and then begin considering the next phase of my career.

With that, let me talk about SMT and why we are so excited about acquiring this business. SMT is a high growth, high margin business. It’s been growing its revenue for the last few years at a nice double-digit organic CAGR. Being a software business, it generates high margins, well in excess of our current companywide adjusted EBITDA margin. We paid about 11 times forward EBITDA multiple.

And if you apply a 2% to 3% cost of money assumption and expect 5% to 6% annual purchase price amortization, the acquisition will be accretive to our 2012 adjusted EPS. SMT will also be accretive to our organic revenue growth rate and adjusted EBITDA margin in 2012. It goes without saying that we expect to generate a return well in excess of our cost of capital on this acquisition. On a standalone, pre-synergy basis, we are projecting SMT will generate about $90 million of revenue and about $45 million of adjusted EBITDA in 2012.

So now let’s move to an update on our 2011 guidance. We are updating our 2011 guidance solely to incorporate the inclusion of SMT. As always, this update reflects turn currency rates and acquisitions completed to date. For fiscal 2011, we are increasing both our revenue and adjusted EBITDA guidance and now expect revenue to be in a range of $1.303 billion $1.337 billion. We also expect adjusted EBITDA to be in a range of $399 million to $407 million.

We are maintaining our 2011 adjusted EPS guidance, which stands at a range of $3.33 to $3.43 per share. For the third quarter of 2011, given how late in the quarter we completed the transaction, we expect the SMT acquisition to push us toward the higher end of our previously announced adjusted EBITDA guidance range of $97 million to $99 million.

And now I’ll turn the call back over to Jerre.

Jerre Stead

Thanks, Mike. Great job. Let me wrap up by saying that in the midst of this unpredictable and unprecedented time in our global economy, it’s a great time for IHS. We continue to make quickly measurable progress on our many initiatives, and we’ve just closed one of our most acquisitions to date and can now move on to the integration phase. Thank you for your time. Scott, Mike, Rich are with me now, and we’re ready to open the call for Q&A.

Andy Schulz

Please proceed, Veronica. Thank you.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Manav Patnaik from Barclays Capital. Please proceed.

Manav Patnaik – Barclays Capital

Good morning, gentlemen.

Jerre Stead

Good morning, Manav.

Manav Patnaik – Barclays Capital

Good morning. First, I guess, congrats to Rich Walker and good luck to Mike as well on whatever you decide to pursue. I guess, through SMT, the standalone numbers that you gave for 2012, I guess that implies that in the margins around 38% to 40% EBITDA margins, I was just wondering, with the combination, I guess, all the integration you do with PETRA, what sort of margin upside are we talking or should we be looking to see based on the integration?

Jerre Stead

Great question. Let me just start by saying it’s actually 50% margin business. And we feel very good about that. It’s a wonderful margin business. We’ve got lots of integration work to do that we will provide increased top-line growth of consequence. So we want to be specific today. This is on a standalone basis, which is a pretty neat way to see. And as a reminder, I remind everybody, as Mike said, that means about – we paid about 11 times prior to in acquisition integration benefits going forward. Mike, do you want to add to that?

Mike Sullivan

I’ll just characterize that this business has many of the same margin characteristics as our business. And so, Jerre is right. The math is a 50% margin expectation next year, but we’re expecting solid top-line growth out of this business year-over-year. And it will contribute to the margin profile of the business for years to come as we, like our business, balance investment in products with the importance of delivering margin improvement.

Jerre Stead

The other thing, Mike, just while we’re on that, let’s help everybody know – this is a high cash flow business just like all of ours. And when you think about us typically running 70% of EBITDA as free cash flow, you can do that math pretty quick. But, Mike, if you use that chart that you used on Investor Day, this is probably a great time to tell people what it should provide on a cash flow basis.

Mike Sullivan

Right. So, we’ll talk about I guess EPS accretion dilution. We maintain the outlook for the 2011 adjusted EPS of $3 and – well, what we said in context of the script and we talked about the fact that we would expect a little bit of help on EPS in the years to come. The point Jerre is making is to recall that acquisitions are typically held with 5% to 6% annual amortization. So, on a $500 million deal like this, you are going to be reporting $25 million to $30 million of annual purchase price amortization – non-cash purchase price amortization, which is a $0.25 to $0.30 per share impact So if you just look at the adjusted EPS annually on a pre-amortization basis, we would be looking at $0.25 to $0.30 accretive deal even when the adjusted earnings per share is held steady.

Jerre Stead

Thanks, Mike. This is remarkable. It’s right in the sweet spot of that turf we use. Thanks, Manav.

Manav Patnaik – Barclays Capital

Thank you.

Operator

Your next question comes from the line of Suzy Stein from Morgan Stanley. Please proceed.

Suzy Stein – Morgan Stanley

Hi, thanks for taking my question. For SMT, is there any seasonality for the business? Can we just kind of break what you’re having for the quarters, or how should we think about that? And also, when will you disclose the full financials?

Jerre Stead

Great question, Suzy. I’ll start out and have Scott pick up on the piece. Full financials will come out with our 10-Q on a historical basis. Those will get registered.

Mike Sullivan

Actually, I think the 8-K filing will curve within 75 days after the 10-Q. They are historical financials –

Jerre Stead

Okay. So you’ll see that – now just to put that in perspective, that’s a year old information. And what Mike was doing is helping to set up where we’re going to be for the balance of 2011, and then we’ll report regularly on the numbers we just gave you for 2012. Scott, pick up on seasonality, it’s a great question.

Scott Key

Yes. Thanks so much, Suzy, for the question. Like IHS being a growth business and this one being a very strong growth business, of course we see the business build as we move through the year. And that’s been a characteristic of this business for many years now and one of the reasons why we’re so excited about it. We anticipate that growth to accelerate as we connect information more seamlessly, as we saw with PETRA, and expose SMT to our very large global energy customer base. So, growth drives us to an increasing performance through the year. But interestingly, this business has similar profile to IHS when you think about the back end of the year and the growth embedded in that, being in the 30% range as we close out the final quarter of the year. That’s a way to think about the business, but not too dissimilar from us. So you should see similar characteristics to what I just say [ph] every year.

Jerre Stead

And just one PS on that. We do have the anomaly that SMT has been a 12/31 business, and we’re a 11/30 business. So we’ll work through that in years to come. But good question, Suzy. Thank you.

Suzy Stein – Morgan Stanley

Thank you.

Operator

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

George Tong – Piper Jaffray

Hi, Jerre, Mike and Rich. This is George Tong for Peter Appert. Congratulations on closing SMT.

Jerre Stead

Thank you.

George Tong – Piper Jaffray

Could you give us a sense of what revenue and cost synergies on an annualized basis would be for SMT? And Jerre, to your personal goals of revenue growth and margins in 12 and 15 change given the acquisition?

Jerre Stead

I’ll work backwards on that one. The banner in my office for 2012, which we’ve put up in December 2008 with this acquisition looks even better than some of you have been thinking. So I feel pretty good about that one. As a reminder, when we did that, we said we’d do $1.5 billion in revenue and exit the year of 2012 with 35% EBITDA, and we look forward to delivering against that banner. Again, my personal projection. We’ll give you much more detail on the first part of your question in the call that we make September 17th – is that our Q3 call?

Mike Sullivan

It’s that week we’ll have our Q3 call, maybe September 19th.

Jerre Stead

We’ll give you more color with that. Our intent then is for annual guidance for 2012 will be in the November timeframe. There’s three or four events in New York, second week of November I believe it is, and we’ll give you the full guidance on that. As to the 2015 personal vision of mine of $2.5 billion and 40% EBITDA, this will help us move towards that and I’ll keep my hopes and dreams alive on those particular numbers. Thank you.

Operator

Your next question comes from the line of Kelly Flynn from Credit Suisse. Please proceed.

Kelly Flynn – Credit Suisse

Thanks. And I wanted to send my congratulations to Mike as well. I want you actually to go back to the fiscal ’12 comments. Sorry, I’m a bit confused by what you said. I think at one point, Mike, you threw out something about a few cents accretion and then when you’re talking about amortization you said $0.25 to $0.30. So, could you just clarify what you said there and I guess what accretion you’re expecting from this next year?

Mike Sullivan

Yes. I had mentioned that on an adjusted EPS basis, Kelly, that we were expecting this to be accretive in 2012. And then I was talking about cash EPS at $0.25 to $0.30 additional accretion. So the difference there is really the one item I was adding back a non-cash purchase price amortization from the acquisition expected to be $25 million to $30 million of annual charges. So, using that add-back was sort of a proxy for our cash EPS metric.

Jerre Stead

Does that help, Kelly?

Kelly Flynn – Credit Suisse

Yes. And just for the adjusted EPS, I mean, slightly accretive, can you give us anymore –?

Jerre Stead

We’ll give you a very crisp guidance on that in the November timeframe and we’ll give you a better update on our Q3 call. Because we wanted to demonstrate what a marvelous company we’ve acquired when we talk about that as a standalone business. As you heard with my script and what Scott and I talked about on the call at the time we announced the agreement, there is tremendous synergies when we put our PETRA and KINGDOM offerings together. We’ll give you more color and be pleased to report on that progress during the entire year in 2012. Thanks, Kelly.

Kelly Flynn – Credit Suisse

Thank you.

Operator

(Operator instructions) Your next question comes from the line of Dan Leben from Robert W. Baird. Please proceed.

Dan Leben – Robert W. Baird

Great. Thank you. Just wanted to understand a little bit of the growth story that Mike talked about SMT being kind of that nice double-digit grower. Just talk about some of the drivers behind that and help me understand if my math correct, with SMT in this year for about four months, it’s looking like kind of trailing revenue run rate would be somewhere around $70 million going to $90 million next year, anything specific kind of driving that plus-20% type growth?

Jerre Stead

Dan, as usual, you’re a great mathematician. I would say you to ground up that a little bit. Just remember, we’ve got a December-end historical base with SMT versus our November-end. So that is a way to think through the numbers you just analyzed. But it’s a good one. But Scott, pick up on the growth, because it’s a great story.

Scott Key

Yes. This is a key one and part of the strategy of course and why we’re so excited about this business. Of course, we’ve got great experience at driving synergies around strategic acquisitions that we target that are right in our sweet spot and even better experience here with PETRA that we acquired four years ago. And so your numbers are really a good basis, Dan, to think about this. So if you think about what we’ve done with PETRA, it gives you a really good idea of the growth drivers here. First, PETRA was 18% to 20% grower, so – when we acquired it.

Then you can think about accelerating that growth rate by 8% to 10%, and that comes from two very specific things. One, a very seamless and high volume connection of our critical information to the platform. And that’s about half of that growth in what we saw consistently over four-years-plus with PETRA. The other is connecting it to a very large global channel of existing energy customers that we already have. So that’s a significant component. And the third is what Jerre alluded to, is the combination of our really powerful workflow platform that will create, that seamlessly connects engineering capabilities, geologic capabilities, which is PETRA, and now geophysical capabilities to one work following work bench with seamless information connected to it. So that’s a third element actually beyond what we saw with PETRA. So your numbers are good and that gives you a sense of the drivers in the levels.

Jerre Stead

Thanks, Dan.

Operator

Your next question comes from the line of Michael Meltz from JPMorgan. Please proceed.

Dave Lewis – JPMorgan

Hi, guys. It’s Dave Lewis for Michael. Just a quick question on sales force capacity. I think you framed on the last call that the acquired business had four to five offices, but you didn’t get into the size of the sales force versus your existing sales force. Is that contributing to it as well or can you help us frame it in those terms?

Jerre Stead

Great question, Dave. I’ll start up and have Scott pick up on it. We also mentioned on the call at the time of the announcement that much of the international business success of SMT has enjoyed us through distributor chain. We’ll obviously strengthen that with our global sales reach and feel very good about instant integration of the SMT sales force into our global account leadership team. Scott, do you want to pick up?

Scott Key

Yes. And you’ve thought about this one well, and it delves on our comments that Jerre said previously. So, SMT and the great teams there are primarily centered in North America with some presence in Europe, but much more – much smaller and less significant presence in Latin America and in Asia Pacific where we see huge growth opportunity. Of course, in those markets we have a significant presence and a growing presence. So we will very rapidly, as Jerre said, work to ensure we have a strong channel in each market with the combination of both sales teams as well as support teams and services teams that really help customers get the most value out of these workflow tools and our information. So we’ll see that happen very quickly. In fact, we have the integration lead of SMT with IHS applications in Europe right now and we’ll see those teams in Asia quickly thereafter, and we have integration plans well underway as we start day one.

Jerre Stead

It’s a great question, David. And I’d just add one comment to that. We mentioned, again, on the first call what a really outstanding organization that SMT led by Arshad has brought to us, that certainly includes the sales force. So we’re keen to see this one there go for us. Thank you.

Operator

Your next question comes from the line of Bill Warmington from Raymond James. Please proceed.

Bill Warmington – Raymond James

Good morning, and congratulations on the closing of SMT and congratulations to Rich Walker and good luck to Mike. The question for you is, post closing of this transaction, you have another $300 million or more in availability in terms of your dry powder for doing additional acquisitions. What’s your appetite for doing those acquisitions, and in terms of being able to integrate them and then the sort of randomness at which acquisition opportunities can come up?

Jerre Stead

Great question. I’ll have Mike comment in just a second on the war chest capability of $300 million is a good place to start from for sure. As you would expect, on average, on a historical basis, we look at 150 to 160 companies a year. And we narrow that down realistically to the high teens. And on a historical basis, we’ve closed eight or nine a year. As a reminder for everybody, we did really no acquisition as a consequence for almost six quarters after we acquired Global Insight when the world went upside down. So that huge hits this year and last year of the opportunities to add these great acquisitions really was a catch-up period if you think about it for us. Our pipeline has still got good acquisitions in it. We hope that we’ll continue to make those in a measured process. As I mentioned, I feel really good and we’re 100% on the integration of the ones that we’ve been working on. So I feel great about that. Mike, do you want to just –?

Mike Sullivan

Yes. In terms of just financial flexibility in general on the war chest, couple hundred million at least left in terms of availability on the revolver of the credit agreement itself, Bill, and don’t forget that the business that on average right now is generating about $25 million or so a month of free cash flow. So the cash generation for the business continues to continuously replenish and restore the flexibility. And like we do constantly, we’ll continue to look at the capital structure in the months to come and consider whether the size of the existing flexibility is enough for whether we want to do something to term out some of that debt or do other things to restore some additional room in there.

Jerre Stead

Great. Thanks, Mike. Thanks, Bill.

Bill Warmington – Raymond James

Thank you.

Operator

Your next question comes from the line of Brian Karimzad from Goldman Sachs. Please proceed.

Brian Karimzad – Goldman Sachs

Good morning. If I were to think about your energy customers, I guess the few dimensions would be, on the one hand, the size of the customers, so you’d have your independence, your multinationals and then your nationalized oil firms. And then on the type of activity they are dealing with would be the unconventional, deepwater and maybe the carbonates. Can you give us a sense of where this over – under index is on your customer base today and the capabilities you have today? And then I have some more.

Jerre Stead

So we’ll go on the first one, Brian, and then as we tried to make clear, one question at a time. If you want to queue back up, you’re more than welcome to. It’s a great outline. Just for reminders, SMT brings 3,000 outstanding global customers to us. 2,100-plus are overlaps. So it gives us an opportunity for 800 to 900 new customers that will be complementary to us. And obviously with 2,100 overlap, it’s a great place to start. So, Scott, add the color to Brian’s question.

Scott Key

Yes. It’s a good way to think about the market, so you have large players, multinational or global players. You have the national oil companies and then very large independents that are regional and down into thousands and thousands of very small independents, all needing workflow tools. And that’s where you see the opportunity with a number of smaller customers in that market that brings new customers to us across the globe. But if you think about growth and you think about the customer base and segmentation, we’ve seen the opportunity to take a great flexible tool, connect information to it, and have it grow inside very large accounts on a global basis.

In fact, our great success with our PETRA growth is large – mid-size and large companies, global, national, realizing the value of a simple workflow tool, they can deploy simply across the globe, connect information. And so a lot of our growth has been driven by expansion in those accounts. SMT is seeing the same thing. When we connect this single workflow solution, we will see that accelerate. Also a more complete offering for the smaller customer base, thousands in Russia, in China, in Latin America, where there’s high production and a large number of wells. So I think you have a good sense of it. It’s growth and up-sell in existing accounts, both the usage and greater presence across the world and (inaudible).

Jerre Stead

Thanks, Brian. Next?

Operator

Your next question comes from the line of Eric Boyer from Wells Fargo. Please proceed.

Eric Boyer – Wells Fargo

Hi, thanks. Will (inaudible) and if so, where are you in that process and will the priorities be any different going forward?

Jerre Stead

That’s a great question. Actually, Rich will keep the M&A functions reporting directly to him in addition to all of the worldwide finance support service organization that Mike said that’s an incredible job leaving. We are actually going to have a young man that was on Rich’s team that has really – he joined us about two years ago, and Asaf will report directly to me, because I still think the CEO is probably supposed to be in charge of strategy. And so we’ll give Rich the time to make sure he nails all the things that Mike has done so well for so many years and have Asaf continue, who by the way has led very ably under Rich’s guidance the strategic plan cycle for the last years. Thanks, Eric.

Operator

Your next question comes from the line of Kelly Flynn from Credit Suisse. Please proceed.

Kelly Flynn – Credit Suisse

Thanks. I had another question. So, your guidance prior to today’s release implied some nice margin expansion year-over-year in the fourth quarter. And I know, Jerre, you mentioned that your acquisition integrations are going well and according to plan. But could you just address specifically whether or not your comments about the integration kind of imply that you are likely to get that type of expansion that you were expecting?

Jerre Stead

It’s a great question. And we feel very good about the integration. And yes, because we choose to give very specific guidance to make sure we’re all square on EBITDA in Q3. If you do the analysis that you’ve done, Kelly, you will see a good pickup in margins in Q4. So if you just think through the guidance we’ve given that we’ve just updated, I think you can have a pretty good degree of confidence and we’ll of course true that up for any changes with currency, et cetera, on our Q3 call. Mike, anything else to add on that? I think it’s pretty straightforward.

Mike Sullivan

Yes. The update particularly for this fiscal year we gave today, as we said, was really solely reflecting the addition of this acquisition. And there’s no fundamental change in the outlook for the what the core business would perform like over the balance of the year.

Jerre Stead

Clearly, Kelly, the 50% margin business that we just talked about is going to give us a good pickup on a going-forward basis. Thank you.

Operator

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

Manav Patnaik – Barclays Capital

Hi, thank you. Yes. I was just wondering if you could give us little more color in terms of the geographic breakup of SMT just for modeling purposes. And also I guess if it, just for this year, I suppose the ranges that you previously provided on D&A, stock comp and stuff, if there’s anything material to note there?

Jerre Stead

Yes, happy to. A great question, and we’ll give you pretty specific. Scott?

Scott Key

Yes. It’s a good footprint for us and a good one to drive growth. So if you think about North America, it’s roughly about 40% of their business today. And of course, that’s a large part of the independent market as well as a large part of global production, but pretty well balanced. So another 30% in Europe and into Russia. So, a good, but under-representative size of market and presence there for sure. And then Asia is about 20% today, and pretty small presence in the Middle East, only 3% revenues from the largest producing region in the world. So again, as we see production in Indonesia and through the Asia Pacific rim growth, and as well in Africa, we see a good opportunity to grow those rates. But that gives you a sense of the split (inaudible).

Jerre Stead

Thank you, Manav. Okay. We’ll wrap up. Again, I just want to thank you all for the participation today. We look forward to continuing the reporting on Q3 and year-end should be a good time as we continue to update you on the progress. Again, I want to thank and congratulate Mike for 12 years, hard to believe we’ve done that together for that long a period of time. And congratulate and welcome Rich in his new position as we do our best to continue to give great shareholder return.

Andy Schulz

We thank you each of you very much for your interest in IHS and your time today. This call can be accessed via replay at 888-286-8010 or international dial-in 617-801-6888, passcode 63496801, beginning in about two hours and running through August 18. In addition, the webcast will be archived for one year on our website at ihs.com. And as always, you can contact IHS Investor Relations with any follow-up questions. We can be reached at 303-397-2989. Thank you. We appreciate your interest and time.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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