Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Solera Holdings (NYSE:SLH)

Q4 2011 Results

August 24, 2011 5:00 p.m. ET

Executives

Kamal Hamid - Director of IR

Tony Aquila - Founder, Chairman and CEO

Renato Giger - CFO

Analysts

Andrew Jeffrey - SunTrust

Gary Prestopino - Barrington Research

Tony Cristello - BB&T Capital Markets

Dave Lewis - JPMorgan

Peter Appert - Piper Jaffray

Robert Riggs - William Blair

Vincent Lin - Goldman Sachs

Operator

Good afternoon everyone, and welcome to Solera’s fourth quarter and fiscal year 2011 earnings call. [Operator instructions.] At this time, I would like to turn the call over to Kamal Hamid, Solera’s vice president of investor relations. Kamal?

Kamal Hamid

Good afternoon everyone. Thank you all for joining us and welcome to Solera’s fourth quarter fiscal year 2011 conference call. With me here today are Tony Aquila, Solera’s founder, chairman, and CEO, and Renato Giger, Solera’s chief financial officer.

Tony will begin today’s call with a summary of our financial results for the quarter and fiscal year ended June 30, 2011, followed by comments about the factors driving those results. Renato will then comment further on our financial results and finish by providing the company’s fiscal year 2012 guidance. We will then open up the call for questions.

I would like to remind everyone that our remarks during the conference call will contain forward looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are neither promises nor guarantees, but involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements including, without limitation, those risks detailed in Solera's filings with the SEC, including our most recent quarterly report on Form 10-Q for the quarter ended March 31, 2011, and our periodic reports on Form 8-K filed with the SEC on June 7, 2011.

We disclaim any obligation to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions, or circumstances on which any such statements maybe based but that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

We also plan to discuss certain non-GAAP financial measures on this call. A reconciliation of Solera’s non-GAAP financial measures to GAAP financial measures is included in today's press release, which is available on the Investor Relations section of our company website at www.solerainc.com. When we refer to analyst consensus during this call, we mean the consensus results of certain analysts that cover the company as reported on Thomson First Call.

We measure constant currency or the effects on our results that are attributed to changes in foreign currency exchange rates by measuring the incremental difference between translating the current and prior period results at the monthly average rates for the same periods from the prior year. Unless otherwise stated, all period-to-period revenue comparisons are on constant currency basis.

When we refer to run rate, waste, savings, or synergies, we mean savings to be realized over each 12-month period following the execution of these efforts. Amounts and percentages throughout our [unintelligible] reflect rounding adjustments.

All information discussed during this call and webcast is protected by United States copyright law and may not be reproduced, distributed, transmitted, displayed, published, or broadcast without the prior written permission of Solera Holdings Inc.

I would now like to introduce Tony Aquila, our Founder, Chairman and CEO. Tony?

Tony Aquila

Thank you Kamal. Good afternoon everyone and thanks for joining us today. I’m pleased to report a solid finish to our fiscal 2011, driven mainly by additional growth in revenue per claim in our advanced and evolving markets through our delivery of additional high-value services and continued claims penetration in our evolving markets.

Our GAAP revenue grew 17.7% in the fourth quarter, and 8.4% for the fiscal year 2011. On a constant currency basis, our quarterly and full year revenue growth was 8.1%, in the middle of our target range for total growth of 7-9%.

Our adjusted EBITDA margin was 41.9% in the fourth quarter and adjusted EBITDA was $2.4 million ahead of consensus. Renato will give you more color in a few minutes. Our adjusted EBITDA for the full year grew 12.8% to $295.3 million, representing a 43.1% margin, up 165 basis points year over year, exceeding our targeted annual growth range of 100-150 basis points.

The further delivery and rollout of additional essential services drove an 8.9% increase in revenue per claim in our transaction driven markets during the fourth quarter. As we continue to focus on the size and value of our software bundle, this increase exceeded our historical range of 4% to 6% in our transaction driven markets for the second consecutive quarter.

Total revenue in our evolving markets grew 34.5% in the fourth quarter over the prior year period and these markets are now generating annualized revenue of approximately $104 million versus $77 million a year ago and $65 million in fiscal 2009. While our evolving markets reproduction about 14% of revenue for the fourth quarter, they generated about 24% of our revenue growth, consistent with their contribution of revenue growth throughout fiscal 2011.

One of the proven strengths of Solera’s business model is our diversification across many geographies, with stronger performance in some countries countering weakness in others, especially during challenging times across the globe.

As we anticipated on last quarter’s conference call, certain of our markets faced challenges in the fourth quarter from continued very high gas prices and fewer miles driven. In addition, some of our European markets experienced unusually mild weather, resulting in fewer claims.

Furthermore, increased global economic uncertainty has increased the volatility or negative impact of the short term outlook for car sales in markets around the world. As a result, we have decided to strengthen our cautiously conservative stance until macro conditions improve, consistent with our historical approach during highly volatile periods.

To better reflect these increasingly volatile conditions, we have revamped our key country recovery index. We now classify our key transaction-based countries as either accelerating or challenged, rather than recovered, stable, or challenged.

Our index now consists of 7 accelerating and 6 challenged countries. Among our challenged countries, Spain and Audatex UK continue to underperform and Romania was added to the challenged countries. This underperformance was offset by new customer wins and increased penetration in Germany, Russia, Brazil, and HPI in the UK.

Based on our experience during the economic crisis in 2008 and 2009, where we saw claims volumes flattening or slightly declining, we have increased our focus on innovation to drive additional value into the software and services bundle that we deliver to our clients. This focus has increased revenue per claim, which had been and continues to be a critical part of our win-win strategy with our customers.

Taking a look at the impact of our strategy on our performance from fiscal 2008 through fiscal 2011, we have 1) grown GAAP revenue at an 8.2% compound annual growth rate, from $540 million to $685 million, 2) grown adjusted EBITDA more than twice as fast as revenues at a 16.7 compound annual growth rate, 3) expanded our adjusted EBITDA margin from 34.4% to 43.1%, 4) completed 9 accretive acquisitions that have strengthened our high ROI product and services offering. These acquisitions are expected to contribute approximately $200 million to our revenue in fiscal 2012.

We believe our growth has been driven by our operating discipline, the leverage in our business, and our geographic diversification. Last week we announced a 33% increase in our annual dividend, a reflection of our steady growth and confidence in our ability to continue executing.

We believe our near and long term growth opportunity is supported by the growth in the global car park and our expanding global footprint. Here are some figures. Recently, industry sources reported that the number of vehicles in operation worldwide surpassed the 1 billion mark in 2010 for the first time ever.

The number of vehicles worldwide is expected to double to 2 billion by 2030. The majority of this growth is obviously expected to occur in evolving and emerging markets with accident frequencies that are twice as high as frequency rates in advanced markets, meaning that global claims volumes are projected to grow faster than the growth in vehicles on the road.

As you know, we recently completed our acquisition of Explore. We are very excited about the opportunity to help our insurance customers generate additional premium-based revenue through the application of Explore’s decision support technology. The Explore acquisition over time will become a more-integrated part of our offering in the U.S. market and potentially abroad.

As in the past, we will continue to execute our strategic M&A opportunities that meet our MMC (Management Margin Core) criteria and allow us to strengthen our high-ROI products and services offering. To our 2,300 associates across the 59 countries in which we operate, including our new colleagues from Explore, I want to say thank you. Your dedication and focus enables us to continually prove our customers with high value, innovative products and services in the past and in the future.

Thank you very much. With that I will turn the call over to Renato.

Renato Giger

Thank you Tony. We are pleased with our first quarter and fiscal 2011 results. Here are a few key growth metrics, all of which are on a constant currency basis.

Our first quarter revenue increased 8.1%. Our full year fiscal ’11 revenue also increased 8.1%, excluding Explore and AUTOonline, our full year revenue grew 5.8%. The EMEA reporting segment grew 6.4% in the quarter and 8.9% for the year. Excluding AUTOonline, EMEA revenue grew 6.1% for the full year.

The Americas reporting segment grew 10.4% in the quarter and approximately 7% for the year. Excluding Explore, the Americas revenue grew 5.5% for the full year. On a GAAP basis, our fourth quarter revenue increased approximately 17.7% and the full year revenue increased approximately 8.4%.

Excluding Explore and AUTOonline, full year GAAP revenue increased approximately 6.3%. Foreign exchange rates had a positive impact and value of 9.6% in the fourth quarter and a positive impact on revenue of 0.3% for the full year.

Our adjusted EBITDA margin in the fourth quarter was 41.9% compared with 42% in the prior year period and our adjusted EBITDA margin for the full year was 43.1%, up 465 basis points over fiscal year 2010. The fourth quarter was impacted by several investments we made in the quarter, including recruitment [unintelligible] to continue to build our leadership brand, relocation fees and travel expenses related to the Explore acquisition, and purchase price financing.

In aggregate, these expenses impacted the fourth quarter adjusted EBITDA margin by about 150 basis points. Fourth quarter operating expenses were approximately 19.9% of revenue compared to 20.6% in the prior year, which reflects the continued scale in our business model.

Fourth quarter systems development and programming expenses were approximately 10.6% of revenue, up slightly from 10.2% in the prior year period. Fourth quarter SG&A expenses were approximately 28% of revenue in the fourth quarter compared with approximately 27.4% in the prior year period.

We achieved approximately $10 million in run rate waste reduction in fiscal ’11 and will continue our relentless focus in this area with an initial waste reduction goal of $5 million in fiscal year ’12.

During the quarter, we took an approximately $4.9 million restructuring charge, primarily related to our EMEA 2011 restructuring plan and [unintelligible]-related liability for our [unintelligible] facility. We are now fully accrued for our remaining obligations on the [unintelligible].

Our adjusted net income in actual currency [unintelligible] reflected the positive trends in adjusted EBITDA as evidenced by the following metrics. Fourth quarter adjusted net income of $44.2 million grew 18.5%. Full year adjusted net income of $173.5 million grew 16.6%. Fourth quarter adjusted net income per diluted share was $0.62, up 17%. Full year adjusted net income per diluted share was $2.46, up 15.5%.

Now, turning to balance sheet and cash flow metrics, cash flow from operations was approximately $48 million for the quarter and $211.5 million for the year. We ended the year with approximately $371.1 million in cash and cash equivalents, up about $130.6 million year over year. Days sales outstanding were 58 days, which is within our range.

Our consider leverage ratio pursuant to the terms of our credit agreement came in at about 2.7 times, up from 1.3 times at the end of the first quarter due primarily to our acquisition of Explore and the Explore purchase price financing of $460 million [unintelligible] completed in [unintelligible].

Capital expenditures were approximately $5.6 million for the quarter and approximately $19.5 million from the year. Beginning with the fourth quarter of fiscal 2010, we now report capital expenditures exclusive of the acquisition of intangible assets. The acquisition of intangible assets was approximately $2.2 million in fiscal year ’11.

Turning to our full fiscal year 2012 initial guidance, we estimate revenues of $822 million to $832 million, adjusted EBITDA of $360 million to $365 million, GAAP net income of $116 million to $121 million, adjusted net income of $204 million to $208 million, and adjusted net income per diluted share of $2.85 to $2.90.

This guidance includes approximately 110 basis points of negative impact to our adjusted EBITDA guidance due to the strengthening of the Swiss franc. In Switzerland, our expenses incurred are substantially greater than our revenues. It is the only country where we are not naturally hedged. As you know, since June 30, 2010, the Swiss franc has appreciated by about 37% versus the U.S. dollar.

The fiscal year 2012 outlook above assumes constant currency exchange rates from those currently prevailing, no acquisitions of businesses, and an assumed 28% tax rate to calculated adjusted net income. We expect depreciation and amortization to be approximately $104 million, of which about $74 million is amortization of intangibles related to completed acquisitions, capital expenditures of about $25 million, stock based compensation of approximately $14 million, and fully diluted shares outstanding for the year to be $71.5 million.

Consistent with our guidance policy, we do not plan to update guidance during the quarter, but only at our regularly scheduled quarterly and annual conference calls. To help those of you tracking and factoring the impact of the strengthening or weakening dollar, throughout the remainder of the year, we would approximate by using the following formula. For each 1% change in the U.S. dollar versus all of the foreign currencies in which we conduct business, the negative or positive impact of fiscal ’12 revenue would be approximately 0.7%. The negative or positive impact to EBITDA would be approximately 0.7%.

As announced on August 15, 2011, Solera’s board of directors approved the payment of a quarterly cash dividend of $0.10 per share of outstanding common stock and for outstanding restricted stock units. The board of directors also approved a cooperative stock dividend equivalent of $0.10 per outstanding restricted stock unit [unintelligible] to certain of our executive officers during fiscal year 2011 and 2012 in lieu of cash dividend, which dividend equivalent will be paid in restricted stock [unintelligible] as a restricted stock unit [unintelligible].

The dividend is payable September 20, 2011 to stockholders and restricted stock unit holders of record at the close of business on September 8, 2011.

That concludes our prepared remarks. We will now take your questions. Operator, please open the call for questions.

Question-and-Answer Session

Operator

[Operator instructions.] Your first question comes from the line of Andrew Jeffrey with SunTrust. Please proceed.

Andrew Jeffrey - SunTrust

Tony, a couple of great quarters on revenue per claim gains, and it sounds like a lot of this is consistent with the company’s specific efforts to improve the software and services bundle. Are we now looking at what you would view as sustainably higher level of yield enhancement as we go forward?

Tony Aquila

I think if you’ll remember back in the beginning of the crisis, we had a cycle there where we were more aggressive on the revenue growth per transaction, because of the additional services we offered. It takes a little while to develop the products and services. Right now we have a pretty good cycle ahead of us. So I’d say we have some more runway there that will probably be at the top end of that range and above. And that’s just because we view the heightened sensitivity around the value we add versus price discussions. And that has positioned us very well. So it’s been a very specific strategy. We’re going to stay focused on that and I’d say our intention is to perform at the higher end of that range.

Andrew Jeffrey - SunTrust

It almost sounds like it’s a response to the environment though, rather than something that’s structural. How should I think about that as far as, let’s say the economy really rebounds nicely globally? Are we going to see a different kind of ROI proposition to your customers, which results maybe in higher volume, but less revenue per claim? Or is that not the right way to think about it?

Tony Aquila

I think what you see us doing is responding to the macro conditions. So your view on it is accurate. We are accelerating the value we’re delivering. In some cases, the bundles are a little bit higher, probably, than they have to be. We’re very focused on a win-win strategy with our clients in the difficult periods. And that’s been working very well. How it all plays out, and how long it lasts, you’re kind of horse trading in time. So I think right now we feel really good about the cross-pollination of services. We’ve got a whole bunch of countries now innovating on the software front and then they’re giving that software to other countries. So if everything continues to hold, I think we’re going to have a pretty good cycle of additional services going to the market.

Andrew Jeffrey - SunTrust

Okay, but no reason to think that by pulling forward some of those gains that it changes your ability to sustain longer term above average revenue per claims growth, even if it’s not maybe quite at the level we’re seeing at this point in the cycle?

Tony Aquila

You know, with us really penetrating the evolving markets, the runway there is so long, plus the accident frequency in the emerging markets that we’re starting to pick up traction. As evidenced by the dividend and everything with all that’s going on in the world, we obviously feel we’re in a very sustainable position. Now, you know we’re cautiously conservative guys. So we don’t want to say this is the new mark until we’ve had multiple consecutive quarters of it.

Andrew Jeffrey - SunTrust

And then one more if I might. It sounds like there are some moving parts around the EBITDA margin. Should we still think about 45% as being the target over a 2-3 year period?

Tony Aquila

Absolutely. The $1 billion, $450 million is the mission. We feel very solid about that mission. However, what you see us doing is managing EBITDA on an annual basis and whenever possible we want to get out ahead of investments. In the fourth quarter we saw that in our fiscal fourth quarter. We saw that as an opportunity to accelerate some of the areas where we want to drive more innovation and geographic expansion, so we increased our hiring efforts. And those things cost about 150 bps. We could have managed that down, but we elected to accelerate those because we feel good about the position we’re in.

Operator

Your next question comes from the line of Gary Prestopino with Barrington Research. Please proceed.

Gary Prestopino - Barrington Research

First of all Renato, you went through a lot of numbers real quickly. Could I trouble you to give me what the capex expectations are for this year coming up? And the stock comp expectations? And then depreciation and amortization as well?

Renato Giger

Yeah. The depreciation and amortization is about $104 million of which $74 million is amortization, the capital expenditure is about $25 million, stock based compensation is approximately $14 million, and the number of diluted shares is about 71.5 million.

Gary Prestopino - Barrington Research

Tony, it sounds like, just from what you’re saying here, you’re comparing ’08 to this period here. It sounds like very quickly, as we’re all experiencing, things got rather tumultuous but I guess the question I would have is maybe I’m looking into this negatively but how bad is it relative to what you guys saw in 2008? I assume this is all going on in Europe?

Tony Aquila

Well, actually we’ve got a few spots in Europe that we would say - that’s why we ratcheted down to either accelerating or challenged. Because Spain is having a very tough time. The UK on our Audatex side is continuing its difficulty. While it’s not as dramatic as the volatility in Spain. And our HPI business in the UK is performing above expectations.

So we’ve got some puts and takes going on and we’re just cautiously conservative. It’s better to be that way and we view EBITDA as the ultimate mission and we’re driving a lot of value to our clients right now. We’re very focused on innovation, and we’ve got countries like Germany, which performed very well.

You look at Germany, Germany was the only country in the quarter that managed to actually have a decrease in gas prices. How they did that I don’t really know. They’re working in arbitrage very effectively. The performance in Germany for us overall was very positive in the quarter.

So I think what you see is heightened volatility. We see a lot of people gun shy and a little bit in the panic stage, and so we’re adapting to the conditions.

Gary Prestopino - Barrington Research

Can you give us an idea in your transaction oriented markets what the overall claims growth was overall, and then break it out mature, evolving, and emerging? Or is that not something you want to share with us?

Tony Aquila

Yeah, I really don’t want to do that. But obviously in the evolving markets it’s pretty hot. Overall, though, I would say that if you really pause and think about everything we’ve said, what you’re going to realize is that we’re really driving a lot of additional services right now more than we’re driving volume on a net basis across the world. And some of it is macro related but some of it is just evolutionary for us, because right now we’re in a phase in the evolving countries where now that we’ve got the base application or platform, they need additional services. And so we’re very focused on those additional service rollouts. And that’s just something that naturally happens, if you kind of think back to some of the discussions we’ve had over the years.

Gary Prestopino - Barrington Research

But as far as the evolving markets with the services and all that, is it safe to say you’re probably in the second or third inning of what you could do?

Tony Aquila

I’d say we’d maintain our comments from last quarter of, let’s say we’re in the fourth quarter. We’re in the fourth inning of the game there. We’re really starting to get them to adopt some additional services now. During the beginning of the crisis, they really seized up. Now they see the ROI. They get the value of our software in these countries and now they want to roll it out more. Large carriers that are making acquisitions across Europe, they really need to use us to get those combined ratios down, which are over 100 in a lot of those markets.

Operator

Your next question comes from the line of Tony Cristello with BB&T Capital Markets. Please proceed.

Tony Cristello - BB&T Capital Markets

Question on China and India. Can you maybe give a little update on how those initiatives are progressing and are they still sort of on track or has what we’ve seen with your cautionary tone reflective of those emerging markets as well?

Tony Aquila

China has been a relatively bigger focus for us. We see it being a little more resilient and a little more culturally aligned to the way our product offering is working right now. So we’ve been accelerating our efforts there. We’ve been increasing our staff, deploying expats, driving additional services. We’re ahead of plan in China. We really didn’t want to say much about that right now because it’s early in the year. We’d like to get a little more wind under our sails in China. But we’re feeling good about that.

India I would say is kind of at expectation to slightly below. Some of that’s driven by our own shift in focus towards China a little more than India, and that’s because of the opportunity base issues. And Russia has been a big area of focus. We’ve been shifting expats and resources in there and obviously Russia was one of the big outperformers in the quarter as well as pretty much throughout most of the year.

Tony Cristello - BB&T Capital Markets

When you look at sort of the bigger picture, the insurance carriers, obviously we see very aggressive practices with advertising. And maybe that’s simply a function of uninsured motorists or some of the other negative headwinds that you’re facing here, at least in North America. Are you experiencing any different practices internationally relative to what we see here? And how does that impact the business on a subscription versus what you would find on a transactional basis today in this marketplace?

Tony Aquila

Look, my view is that the European market behaves very much differently than the U.S. market. And I think that there’s a difference in behavior as most Western Europeans are finding out, in the Central European or Eastern European community. It behaves differently. And a lot of this has to do with the age of vehicles on the road and the repair techniques that are present and the amount of insurance coverage that’s on a vehicle. So you’ve got a bunch of moving pieces.

I think China probably demonstrates a little more similarity to the U.S. market behavior on a long term basis. But it still has the influence, I’d say, at the 20% level, to the European market, which means that the Chinese market is probably much more of a subscription type market in the long term than it is a transaction market like you see throughout Europe.

Overall, I would say people are jittery. Gas prices are high. We said last quarter that as we really analyzed things we saw that if gas prices increased over 8% from let’s say the average few year prices, people have a different behavior. And that is consistent across the globe. We saw that. And ironically, the only country, as I said earlier, was Germany, that decreased its gas prices in the quarter. It was an outperformer for us. So that kind of strengthens our view about gas prices opposed to double-digit increases.

Tony Cristello - BB&T Capital Markets

Okay, and maybe on resources. You talked about 150 basis points potential impact of new hiring. Can you maybe give us a bit more color on the deployment? Was it the result of your realignment of HEMI? Was it related to Explorer? Was it related to initiatives across the board?

Tony Aquila

I’d say that we’ve been shifting resources for a few quarters. We accelerated that based on some of our long term view. Some of that was this creation of [unintelligible] as a result of the Explore acquisition. We moved resources into China. We moved resources into Russia. We moved resources in the markets where we saw more growth coming from and where they were making an evolution. It basically impacted us for about 150 basis points. And again that was a conscious decision. So just reiterating. Nothing’s changed in our thrive at 45 mission. And by the way, one last thing I would say is nothing changes in our discipline of kind of 100-150 basis points expansion as we step into that 45% EBITDA goal.

Operator

Your next question comes from the line of Dave Lewis with JPMorgan. Please proceed.

Dave Lewis - JPMorgan

Just a couple quick questions. First, Tony when you talk about increasing the conservatism slightly, how is that impacting expansion into new markets? And I’ll point to Latin America as an example. And where do you stand with the hiring of operational leaders right now?

Tony Aquila

We’re becoming a bigger company. We’re preparing for that billion in revenue, $450 million in EBITDA. To get a Solera qualified leader out there, alpha leader, running these countries, it takes us some time. We’ve learned how to produce those people, and we’re now in a process. If you look at some of our announcements throughout the year, you’ll see the executive pre-deployment and we’ve got quite a few people going through the qualification process. Now, not all will make it.

We’ve increased our recruitment because we plan to deploy in more geographies. With respect to Latin America, we feel very strongly about our teams throughout that region and South America and we’re continuing to strategically execute our expansion. Now, there are some targeted areas that we’ll probably pause a little bit on, as we did in 2008 and 2009, until we feel a little more - what we’ve learned is that whether you go this month or you go three months from now, when things are volatile, you really don’t get revenue generating any differently.

And so that’s kind of been the way we’re looking at things. We’re continuing our Asia expansion. We’re eyeballing some countries, and I’d say the Latin and Spanish-speaking countries and the Chinese speaking, Vietnamese, Korean, Singaporean, Malaysian, all those markets are very important areas of focus today.

Dave Lewis - JPMorgan

And one just quick one, housekeeping. Renato, can you just remind us, Swiss francs, the currency exposure there? What’s the absolute number we’re talking about?

Renato Giger

If you use today’s exchange rate, our [expenses] are around $65 million.

Operator

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

Peter Appert - Piper Jaffray

Tony, do you have any early color you can share with us on the Explore deal, how the integration is going, how you’re seeing the leverage play out?

Tony Aquila

This next week I have an operational review with the Explore management team, but as you probably remember with us, we kind of take the reverse view on acquisitions. Our first step is listen, learn, and then act, rather than act, listen, and then learn, on integration. And so what with tend to do is observe the businesses for somewhere between 2 and 3 quarters and then we really very strategically and very targeted focus around waste reduction and integration opportunities. We already have joint sales efforts going on for the power of what we believe will be a very valuable future bundle as well as some new products that will come between those two companies. But today we’re not taking anything in the $5 million that Renato reflected on, there’s no synergies or integration at this point in time in the outlook. Those are things that we’ll work with the Explore team, which by the way we think very, very highly of their capability as a management team to expand that business.

Peter Appert - Piper Jaffray

And then in conjunction with the borrowing for Explore, you took down a little extra I guess in terms of the proceeds. So what should we read into that if anything in terms of how you’re thinking about the M&A market on a near term basis or actions in fiscal ’12?

Tony Aquila

I think what you should take away from that is some of that’s financial, our cautiously conservative view. We believe long term rates are going to go up. We like the cost of that money. There was so much demand for our offering and it just made a lot of sense to put some low cost money on a long term basis in there with a lot of flexibility from an operating perspective. So we went ahead and did that. I think that was the right thing to do. Today we have about $400 million in cash, so it’s almost we’re pre the acquisition, which means we’re in a very good position to continue to execute on the M&A activities as we have in the past. And consistent with that, we tend to do things around the globe rather than just pile on one thing in one area, because we are very concerned about the distribution of our risk, which obviously you saw helped us positively perform throughout all this volatility.

Peter Appert - Piper Jaffray

So we shouldn’t assume that you step back a little bit from an M&A standpoint, just in the context of Explore being historically a large deal for you?

Tony Aquila

Well, you know what we do. We did AUTOonline, for example. We took a breather. Like I said on the integration efforts, we tend to watch and listen and learn. And then we focused on the integration, which means we’re not going to be biting off giant deals. However, we have an active pipeline, and if one of those deals gets to a price and to a timing and we believe we can execute on it, we would do so.

Operator

Your next question comes from the line of Robert Riggs with William Blair.

Robert Riggs - William Blair

Just kind of drilling down a little bit more on Explore, at the time of the acquisition, I think the fact that they were heavy analytics was something that you’re really excited about and again being cognizant that it’s still early days, but is that something that you still see an opportunity to leverage across the rest of the business?

Tony Aquila

Two days ago I was with a customer, a very large insurer, that we don’t do business with on either the Audatex side or the Explore side, and 80% of the discussion with the customer was just the power of the data that we have, and how what they use the data for and what we use our data for, how they could cross-pollinate to give them better decision support information to learn a better insurance policy management. So absolutely, that is a very core tenet of how we see value coming out of the acquisition that would give us a competitive advantage.

Robert Riggs - William Blair

Great. And sorry if I missed this, but did you give us an update on what you’re seeing with the parts business, either through acquisitions or internal investments?

Tony Aquila

You know, we’re feeling pretty good about our internal strength there. The [In Part] acquisition - you talk about revenue growth per transaction going on here. [In Part] has been a very successful acquisition for us. We had some offshoots of that technology being done organically and we’ve got a few other targets we’re looking at in the area. But we like the space. I will tell you we don’t see anything really big that we really like, but we continue to monitor the space.

Operator

Your next question comes from the line of Vincent Lin of Goldman Sachs. Please proceed.

Vincent Lin - Goldman Sachs

I just had a quick question on the phasing of the market trajectory into fiscal ’12 relating to the level of investments you’ve made this quarter. Should we expect the level of investments to be sustaining into the next couple of quarters and then tail off into the back half of the year? Or should the trajectory be a little bit more linear than that? Any color would be very helpful.

Tony Aquila

First of all the fourth quarter is always our softest quarter, so when you accelerate investments, obviously that speaks to your outlook. Our view is as the revenue continues to strengthen and the productivity starts to come from these additional investments obviously we feel very good about our continued execution of margin, margin expansion, of the drive to 45. I would just say think of us as you always do, and when we say something like this, usually we’ve thought through it and we’re executing our plan.

Vincent Lin - Goldman Sachs

And maybe just a quick followup in terms of the competitive landscape in your North American business. Anything change on the margins in terms of pricing or competitive behavior?

Tony Aquila

Obviously you see us bringing more and more value to the market, the power of innovation machine now working in a lot of different countries, so our cost to deploy that software in other countries is lower and our incremental margin is in the 60-70% range in spite of our acceleration of the bundle. We see this downturn as a big opportunity for us to solidify ourselves as the most stable provider for these insurance companies, because we’re accelerating investments while most of our competitors are pausing, because they have a problem. And we think this is the time to do that. That’s why we accelerated in the fourth quarter and we accelerated honestly in the third quarter. Because now’s the time to demonstrate that.

Operator

Your next question is a follow up from the line of Andrew Jeffrey with SunTrust. Please proceed.

Andrew Jeffrey - SunTrust

Tony, maybe I’ve missed it in the past, or maybe the characteristics of this cycle are a little different than what we saw in ’08 and ’09, but it sounds to me like you’re putting kind of a lot of emphasis on gas prices as sort of the causality of some of the more challenging results you’re seeing in certain markets. What about a scenario in which we see gas prices decline due to global economic disruption or a recession in Europe, or some other event in Europe, which might otherwise normally be good for miles driven and claims, but in this case reflects a weaker economic outlook. Can you get stuck in a double-whammy situation in that regard, where you might not get the tailwind you might expect from lower gas prices and also have kind of a soft transaction environment? Is that kind of baked into your big picture thought process when you look at ’12?

Tony Aquila

I think that’s a good observation in the sense that we’ve heightened our cautiously conservative stance. Some of you remember when we maintained our cautiously conservative stance people were saying, hey, the recovery is deep underway. We believe there is a recovery underway, but people are gun shy.

In some of these markets, they’re paying nearly $10 a gallon for gas. Would you be driving as much as you normally would at those kinds of prices, particularly if you’re a middle-class family? The amount of discretionary income can only support so much activity, and it’s an impact. You’ve got gas prices up in the United States from $3 to $4 over the last year. It does have some impact.

We believe that that threshold is around 8% increase in a quarter, and if it’s sustained, we see the claims activity to be relatively consistent with that. We do think that’s a key indicator with the amount of shock. However, we do believe that once they get used to those gas prices, mileages go up. People have to adjust. It takes a little bit of time. And then they get rid of whatever discretionary expenses. It doesn’t affect their mobility.

We believe that gas prices will eventually come down as you get the Middle East and some other activities going in a positive direction, but we are running the business such that we’re not counting on that. We’re prepared for the worst. If something better happens, then it will flow through in our numbers as well.

Andrew Jeffrey - SunTrust

Okay, so the takeaway, gas prices still more important than maybe overall level of economic activity at the margin.

Tony Aquila

Think about it. It is the most important daily investment in mobility. And that’s why we key on gas prices.

Operator

Your final question comes from the line of Gary Prestopino with Barrington Research. Go ahead please.

Gary Prestopino - Barrington Research

Just real quickly, what is your all-in rate on your debt now, Renato?

Renato Giger

It is between 5% and 6%. Because it’s the euro, which we always calculate the euro side and then the U.S. side, and the note. So [unintelligible] three quarters and the other two are lower.

Gary Prestopino - Barrington Research

And then Tony, can you just very quickly, nobody’s asked about some of the new endeavors in Italy, Greece, and I believe Turkey. Are you still going into those markets full-bore? Or have you pulled back a little bit given the uncertainty of the markets now?

Tony Aquila

We’ve found great demand for our products and services in Greece, for example, but nobody has any money to pay us. So we deemphasized that a little bit in the last few quarters. Italy we are maintaining our execution where we’re getting more and more penetration every month. We think that’s a $4 million to $5 million a year market. Very focused on that. Turkey is a market that has continued to be a top performer as far as opportunity. They’re not feeling the pain that the rest of the world is. I’ll be back over there in a few weeks and see what this latest global impact has been, but we see good opportunities there and our business has steadily been growing.

Operator

A replay will be available until midnight on September 7, 2011. To access the replay, dial 888-286-8010, or from outside the U.S., 617-801-6888, and enter the following access code when prompted: 46925351.

Thank you for your participation in today’s conference. This concludes the presentation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Solera Holdings' CEO Discusses Q4 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts