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IHS Inc. (IHS)

November 03, 2011 8:00 am ET

Executives

Richard G. Walker - Chief Financial Officer and Executive Vice President

Andrew Schulz - Senior Director of Investor Relations

Scott C. Key - President and Chief Operating Officer

Jerre Stead - Chairman of the Board and Chief Executive Officer

Analysts

Manav Patnaik - Barclays Capital, Research Division

Peter P. Appert - Piper Jaffray Companies, Research Division

William A. Warmington - Raymond James & Associates, Inc., Research Division

Robert Riggs - William Blair & Company L.L.C., Research Division

Suzanne E. Stein - Morgan Stanley, Research Division

Kelly A. Flynn - Crédit Suisse AG, Research Division

Brian Karimzad - Goldman Sachs Group Inc., Research Division

Vincent F. Damasco - The Colony Group, LLC

Michael A. Meltz - JP Morgan Chase & Co, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the IHS to provide 2012 Financial Guidance Details Conference Call. My name is Letasha, and I will be your coordinator for today. [Operator Instructions] Would now like to turn the call over to Mr. Andy Schulz, Vice President of Investor Relations. Please proceed.

Andrew Schulz

Thank you, Letasha. Good day, and thank you for joining us for this special conference call. We issued our guidance news release this morning. If you do not have this release, it is available on our website at ihs.com.

Please note that we filed an 8-K and posted a presentation to our website, which we hope will be of use in summarizing some of the main takeaways from this call. The presentation is available under the Investor Relations tab at ihs.com.

The purpose of this call is to discuss our 2012 guidance. As you know -- as many of you know, we are in the midst of our 2011 fourth quarter and it is not our intent to discuss the current quarter's performance.

Some of our comments and discussions today are based on non-GAAP measures. The non-GAAP results are a supplement to our GAAP financial statements. Our website includes reconciliations of non-GAAP measures to their nearest GAAP equivalent.

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' filings with the SEC and on the IHS website.

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

Jerre Stead

Thank you, Andy. Good morning, and welcome to all of our investors and IHS colleagues on this conference call and webcast. We're pleased to have this chance to be with you as we close out a great 2011 for IHS. Let's talk a little bit about what we've achieved and the value we have created.

As we reported through Q3, we've grown revenue 23%, adjusted EBITDA 20% and adjusted EPS 15%. And since we first introduced 2011 guidance at this time last year, we've raised our outlook 4x, a rare accomplishment given the unstable economic environment of the past year.

Today, we're very pleased to provide you with our guidance for 2012. In 2012, we expect all-in revenue in the range of $1.5 billion to $1.55 billion and all-in adjusted EBITDA in the range of $480 million to $495 million. This reflects a margin of approximately 32% for the full year and meaningful expansion from 2011 expectations. We are very proud to be able to maintain the creation of consistent shareowner value as we continue to make major investments to support our long-term sustainable profitable growth goals.

Our own award-winning economists have been writing on and speaking of the uncertain global economy and the challenges it presents. And we see the news every day in the headlines. Despite the general economic uncertainty, we, at IHS, feel good about our prospects and opportunities as we head into next year.

Our underlying offerings are of a must-have nature and our primarily subscription-based business model and high rates of renewal give us better visibility than many other companies. Rich will give you more details, but at a high level, we're looking forward to next year and feel really good about capturing many of the opportunities available to us.

Now let me turn the call over to Scott who’s going to talk about our growth drivers and outlook for 2012. Scott?

Scott C. Key

Thank you, Jerre. We are focused on sustainable long-term profitable growth and are actively managing our portfolio, our priorities and the allocation of resources to high-growth opportunities for the long term. Despite a pretty challenging economy and current conditions, we continue to see positive organic revenue growth across our business. Our organic growth for Q3 was 9% in Americas, 5% in EMEA and 17% in APAC after the adjustment for both the Q3 2010 Boiler Pressure Vessel Code and the discontinued operations.

Remember, recurring subscriptions are roughly 80% of our business and our organic subscription growth through Q3 in the 3 regions was 8% in Americas, 7% in EMEA and 17% in APAC after normalizing for the items discussed above.

In total, our subscription base remained resilient throughout the first 3 quarters of 2011, growing 8% organically and improving as we entered Q4. You will see us continue to focus on management of our portfolio to long-term growth. Today, over 85% of the total portfolio is growing at double digits.

This current performance sets the stage for next year as we enter 2012 with economic uncertainty that is driving slowing and variable growth in some of our key markets. Although we see economic uncertainty around us, our low market penetration and high-value offerings provide IHS the opportunity to continue to outperform overall market growth rates.

Emerging markets will be part of this differential growth as we see in APAC and Latin America. Over the last 8 quarters, APAC GDP has grown 49%, while IHS has realized organic growth of 85%. In Latin America, GDP has grown 35% and IHS has grown organically 76%. We have made significant investments in sales and capabilities in both our Asia Pacific and Latin American regions to fuel our growth.

As we look at 2012, we'll continue to see these investments and we expect these regions will continue to provide double-digit growth for IHS with strength in many of our core vertical markets across all geographies.

Let's turn to our outlook for the key vertical markets. We see strength in our core markets where we will grow at rates above overall market growth as we continue to grow our presence, wallet share and bring new integrated products to market. Strong domestic demand and trade growth in emerging markets support a positive commodity price environment with natural gas volumes and prices providing strength in energy and chemicals.

Business spending and technology, as well as internal systems to help manage risks and to create efficiency resulting in enhanced margins also continues. The result is a solid outlook for growth on pace to current performance for IHS in energy, chemicals, transportation, TMT and discrete manufacturing.

We have spoken about weakness in government defense and security as a result of global focus on government debt levels. We believe we have seen the bottom of the impact on our revenues and growth in these markets in the last 2 quarters and remain watchful on the forward outlook for growth here.

We remain well-positioned for continued growth in these markets in 2012 as we provide solutions to guide our customers through a period of volatility and uncertainty. The foundation for our growth in these markets in 2012 will be the 4 growth drivers about which we’ve spoken: value realization, wallet share, new customers and new products. Our 2011 efforts in value pricing and discount management with implementation of global teams, systems and process will continue to create value in 2012 with a contribution of 3% to 5% to our growth.

With the full deployment of Vanguard, Sales Force Automation and Customer Centers of Excellence and with the expansion of strategic account management in 2012, wallet share growth in upsell and cross-sell will continue to deliver 2% to 3% to our growth.

We also see new resources deployed to new customer growth in developed and emerging markets and the highest level of new product introduction in our history as we benefit from the 2010 and 2011 restructure and reorganization of commercial teams to customer workflow orientations, driving additional growth of 2% to 4% in new products and 2% to 3% in new customers.

Each of these growth drivers helped to build a path towards my 9% organic growth total for 2012, at the lower end of the long-term 9% to 15% growth range. This reflects some caution due to the uncertain economic environment.

In summary, we have a focused 2012 growth plan with key operating elements that will deliver our growth. We built the 2012 plan that maximizes our growth potential, focuses early on resource allocation and priorities and ensures we have options in an uncertain economic climate. We are driving the highest level of transformation in IHS' history and we are deploying scalable systems, processes and organizational structures, all of which are the foundation for our 2015 aspirations.

We are prioritizing activity and resources with a focus on 6 primary vertical markets and 5 high-value customer workflows. We are also prioritizing capital deployment and acquisition opportunities against long-term strategic potential as we enhance our pipeline and maintain our focus on management of integration. We are aligning colleagues across IHS to common priorities and accountability, establishing global operating teams, as well as enhancing local leadership and communication. Despite the ongoing challenges in the economy globally, we have a disciplined and balanced operating plan that will continue to create strong return to shareholders.

With that, I would now like to turn the call over to Rich who will take you through the specifics.

Richard G. Walker

Thanks, Scott. Let me begin with the reaffirmation of our 2011 guidance. For 2011, we are reaffirming our revenue, adjusted EBITDA and adjusted EPS guidance and expect all-in revenue in a range of $1.307 billion to $1.337 billion, all-in adjusted EBITDA in a range of $399 million to $407 million and adjusted EPS in a range of $3.33 to $3.43 per diluted share. Our 2011 guidance is on an all-in basis and assumes no further currency movements or additional acquisitions.

Embedded in the guidance is the expected impact of discontinued operations in 2011. Recall that we discontinued 2 offerings during the second half of 2011 as discussed on our Q3 call. We are now in a position to give you further details on the impact to 2011 as well as 2012. Although there is no impact to our net income, we will, of course, present related revenue and profit as discontinued operations.

We also noted on our third quarter call the volatile FX environment. The combined effect of discontinued operations and unfavorable FX movement since our third quarter call results in an $11 million impact to revenue and a $3 million impact to adjusted EBITDA and $0.03 to adjusted EPS. Please take these items into consideration when analyzing our guidance.

Our guidance range includes these items and reflects our expectations for 2011. It is a good example of why we provide guidance ranges.

Let me move to 2012 guidance. For the year ended November 30, 2012, we expect all-in revenue in a range of $1.50 billion to $1.55 billion, including an organic growth expectation in the range of 7% to 10%; all-in adjusted EBITDA in a range of $480 million to $495 million; and adjusted EPS in a range of $3.84 the $4.01 per diluted share. The above guidance is based on current FX rates and assumes no additional acquisitions and discontinued operations. This guidance does reflect those operations discontinued in 2011.

To give you a sense of the impact of FX volatility since we began to build our 2012 operating plan in September, we estimate FX has decreased by $8 million to $10 million and decreased adjusted EBITDA by $1 million to $2 million, and this is reflected in our 2012 guidance.

Let me cover one additional item, which is reflected in the 2012 guidance I have provided you. We are performing a comprehensive review of our U.S. pension plan design to ensure we maintain market-competitive employee benefits, while reducing complexity and decreasing volatility. We plan to provide more details on the pension on our year-end call in January. One thing to note in the context of 2012 guidance is that we expect to contribute to our U.S. pension plan next year. Consequently, our 2012 adjusted EBITDA guidance reflects a $9 million impact. The combined impact of 2011 discontinued operations and the 2012 cash contribution to the U.S. pension plan to adjusted EBITDA is $11 million and to adjusted EPS is $0.11 per diluted share and is reflected in the guidance we’ve provided.

Now as you consider our quarterly profit progression for 2012, if you look back at the last 2 years, the 2 years in which we've held the CERAWeek conference in the second quarter, about 21% to 22% of profit fell in the first quarter, 24% to 25% fell in the second quarter and roughly the same amount again in the third quarter and 28% to 29% fell in the fourth quarter.

In closing, 2012 is shaping up to be an exciting year for us when you consider the benefits to be derived from the implementation of a scalable system like Vanguard, our ongoing and disciplined prioritization of investments and organizational structures, all of which will drive further efficiency and margin expansion in the business.

Jerre, back to you.

Jerre Stead

Thanks, Rich. Now let's open up for Q&A. As a reminder, in the interest of time, let's limit ourselves to just one question, okay.

Andrew Schulz

Letasha, go ahead and we're ready for Q&A, please.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Peter Appert with Piper Jaffray.

Peter P. Appert - Piper Jaffray Companies, Research Division

So Scott mentioned commodity price environment is something that weighs on -- potentially weighs on the fiscal '12 guidance. Can you give us more clarity on how important that is to the guidance? And how much variability that might create to the numbers next year?

Jerre Stead

Yes, we will. Peter, to be specific, it's positive. So not negative. Scott, please.

Scott C. Key

Yes, I think, Peter -- thank you. I think you're referring to, as we said, the commodity price environment and we it as a positive. We see good demand growth and we see that continuing, driven in good part by emerging markets. Low natural gas prices and the position globally in terms of great new resources in shales around the world has created really quite a positive position in chemicals. And of course, we've really put ourselves with great investments in the last year in a perfect position as a leader in that space, so we see it driving good demand growth there.

Operator

Your next question comes from the line of Suzi Stein with Morgan Stanley.

Suzanne E. Stein - Morgan Stanley, Research Division

Just wondering, what does your 7% to 10% organic revenue growth assume for the non-subscription piece of the business? And has there been any change in performance in that revenue stream since you reported last?

Jerre Stead

Suzi, good questions. Scott, you start. Rich, you give a little color, okay?

Scott C. Key

Yes, thanks, Suzi, and appreciate your concern. As we look at uncertainty in the economy, we might think that, that part of our business may be an early indicator of some weakness. But actually, we've scaled it to a point where we're actually resource constrained right now. We're mindful and watchful about the amount of expense we bring in to drive the nonrecurring business, particularly on the services side. But actually, we have more work than we can do in that area and we see it growing on par and in some places, for example, in chemicals, growing faster than the overall business. I'll give you another example, though. We're transforming that portfolio so we have a portion of our business that manages information for our customers, their proprietary information. And we're transforming that into an electronic management system, moving old physical documents to electronic, and we're seeing strong double-digit growth in that business globally. So our assumption is it's going to continue to grow on pace with the rest of the business with variability in various elements of it as we see opportunity.

Jerre Stead

Just before Rich starts, Scott, let's just give a little color on the where we -- as you said, we think we've seen the bottom of government security, too.

Scott C. Key

Yes, I had an opportunity actually before the call to talk to one of our leaders, sales leaders in Europe. And actually, the outlook there and our position in government and national security markets is really starting to look positive. The need for information there, reducing their spend on physical inventories, on equipment and they're increasing their spend on information security and risk around information. So we're actually seeing some positive benefit there and have seen the bottom, Jerre.

Jerre Stead

Rich, wrap this one up.

Richard G. Walker

Suzi, I'd remind you that 80% of the subscription base -- of the revenue base rather comes from subscriptions, which are today, growing greater than 8%. That alone drives 7% to 8% of our total growth. So some continued strengthening in our subscription base with the contribution from our non-subscription businesses gets you into that range. As a reminder, the third quarter deferred revenue was up 35% from a year earlier, about 12% to 13% of that was organic growth.

Operator

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

Brian Karimzad - Goldman Sachs Group Inc., Research Division

I guess on the, what you mentioned what you think is a bottom of the weakness in government and security, I can see how that would be the case for Europe because a lot of the measures they put in place started taking hold last year. But in the United States, I don't get the sense that we've actually seen cuts hit the budgets yet or even decisions being made yet. Have you baked in any assumptions with regard to the United States on that front?

Jerre Stead

Yes. Good question, Brian. I'll have Scott give color on that. As a reminder, that's a very small percentage of our total business. So, Scott?

Scott C. Key

Yes, and a good point there, Jerre. And Brian, another way to think about what we do for the government, a lot of it, in fact, the bulk of it is nondiscretionary. So we provide management with things like parts to keep that 15 fighters up in the air. We provide management solutions and systems, environmental ones, for the management of hazardous waste and materials across the Armed Forces. Those are things that are small in relation to very large government budgets and, of course, critical. And then the other thing we provide to them is information and insight in security and risk globally and that's been a multi-decade relationship and we're pretty core to their views.

Jerre Stead

Absolutely, and then the other place that continues to be helpful with us for the U.S. and state governments is on a lot of our energy forecasting, too.

Scott C. Key

That's right.

Jerre Stead

So hope that helps, Brian.

Operator

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

Manav Patnaik - Barclays Capital, Research Division

Just wanted to parse out the top line growth a little bit more. Of the 7% to 10% organic growth, I was wondering if there was a way to quantify how much iSuppli rolling into the numbers is really helping that, given the high growth there? And I guess, last year, you had provided sort of the breakout for the rest of the growth in terms of some of the key acquisitions you had made. I was wondering if you guys are willing to do that now as well?

Jerre Stead

Rich, go ahead, please.

Richard G. Walker

Aren't prepared to provide specific details. I would remind you in general that we talk about kind of an 8-quarter progression on our acquisitions. And by the time we've owned a business and it rolls into our organic and we've been able to extract and enjoy the synergies that we enjoy, they become highly accretive. So we've deployed over $1 billion of capital over the last 4 quarters and as those acquisitions come online, iSuppli being one of them, we expect that kind of contribution across-the-board as we execute well on those acquisitions.

Jerre Stead

And Manav, it's a good question. Let me remind or add a little color to that. As you heard Scott in his script talk, 85% of our businesses today are growing in double digits and that feels very good. Clearly, the acquisitions we've made like iSuppli, et cetera are part of that.

Operator

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

Kelly A. Flynn - Crédit Suisse AG, Research Division

I just wanted you to clarify what you're saying about the pension issue. Two things: One is can you clarify if you did or did not make a payment in fiscal '11? And then also for the total pension expense, can you just clarify is it going to be $9 million or is that $9 million incremental to an underlying expense? And then how does that compare to fiscal '11's expense? I think you said $11 million for fiscal '11, but could you just clarify that? Sorry, I threw a lot of questions in there.

Jerre Stead

That's okay, Kelly. Let's just step back. The shift is -- and in fact, if you go back, gosh, I guess 2, 3 quarters ago, at that time, Mike said and we actually put in one of our 10-Ks that we anticipated a payment being required in 2012. Facts are, as in Rich said his script, is there will be a $9 million payment. Therefore, it's real cash and the rules we've always used for reporting is the minute it becomes real cash, we take it above the line. So the impact is indeed a total of $9 million. There was no comparable in 2011 above the line and EBITDA and that is the number that will be in 2012. Does that help?

Kelly A. Flynn - Crédit Suisse AG, Research Division

Well, hadn't you guided, though, for fiscal '11 to an $11 million expense?

Jerre Stead

That was a charge, Kelly, below the line, not a cash payment.

Kelly A. Flynn - Crédit Suisse AG, Research Division

Okay, yes. So can you just talk about the total? I mean, are we going to have any below the line for fiscal '12?

Jerre Stead

The total is $9 million.

Scott C. Key

For fiscal '12.

Jerre Stead

Sorry if that wasn't clear. Good questions.

Scott C. Key

And Kelly, I'm happy to walk you through the tedium of the pension accounting, if you want me to.

Richard G. Walker

To clean up one of your initial questions, there is was no contribution in 2011 that wasn't included in adjusted EBITDA. We have some small plans outside of the U.S. No cash contribution in the U.S. There will be a cash contribution in the U.S., the $9 million we spoke about. And we will be providing additional information on the pension to perhaps clarify further in our January call.

Jerre Stead

But that is the single period adjustment, the $9 million moving above the line because that is the cash charge in 2012 that we anticipate.

Operator

Your next question comes from the line of Michael Meltz with JP Morgan.

Michael A. Meltz - JP Morgan Chase & Co, Research Division

One, I guess, clarification on Kelly's question and then my own question. So what you're saying though -- you're saying that this is a cash contribution, so you don't add it back to your EBITDA, but the amortized pension expense, you do. Or pension income, you add back to the EBITDA. The other one -- the cash contribution gets absorbed, is that what you're saying?

Jerre Stead

Well, let's be real clear. Actually that's a good clarification. Andy?

Andrew Schulz

Yes. Another way of saying it, Michael, our -- we've always, since we went public in 2005, included -- our adjusted EBITDA calculation was burdened by the cash portion of any pension and OPEB expense, right? And importantly, the cash contributions across our 4 defined-benefit plans have been very de minimis. Notably for the U.S. pension plan, our largest plan, we haven't had to make a cash contribution during the time we've been public because it was wildly overfunded. Obviously, the pension plan, like every other pension portfolio, suffered some losses during 2008 and given the heightened funding requirements passed by the U.S. government, I don't know, it was part of the 2006 pension act, we've had to make -- the time has come where we've needed to make a cash contribution and just wanted to give you a heads up that, that's occurring in 2012. And our adjusted EBITDA will be impacted by $9 million as a result and that is reflected in our guidance.

Jerre Stead

And just, yes. So that's actually a very good add-in question, Michael. Now you get your own.

Michael A. Meltz - JP Morgan Chase & Co, Research Division

Now I'll ask the bad one. So can you talk bit more about the margin expectation for next year? Can you maybe true up the 32% implied guidance? I guess, you're saying there's the pension drag. And Jerre, how does that compare to the 35% aspiration that you've been holding for a couple years now? And perhaps the answer lies in, or may at the EPS line, lies in some of the other line items like depreciation and tax rate. But on the EBITDA side, how should we be thinking about the margin?

Jerre Stead

A great -- actually, very good question. Let me go back to a key line in Rich's script. 29 -- about 29% of our EBITDA will be in Q4, it has been the last 2 years. If you think through that model where we've said that this current guidance for 2012 is 32% for the total year, think through things continuing to improve in margins with the acquisitions as Rich talked about, I think you're going to find, as you build your model, that what my expectation has been and my hope has been of a personal goal of 35%, I believe you'll find models, Michael, that we’ll exit Q4 at 35-plus percent.

Michael A. Meltz - JP Morgan Chase & Co, Research Division

Okay. And then the depreciation -- the other line items, Rich, can you help us with those please?

Jerre Stead

Good question, Michael. Then you're going to have to get back in the queue.

Richard G. Walker

We have provided the adjusted EPS numbers on this call, and intend to provide some of the additional component parts in January. But we did want to provide adjusted EPS at this time.

Operator

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

William A. Warmington - Raymond James & Associates, Inc., Research Division

Wanted to ask about the spending for Vanguard through 2012 and then also into 2013, if I might, and whether you expect to see a deceleration in spending for your infrastructure and if that is part of the margin leverage you see? And when do you anticipate that is likely to happen? Or does that just become part of the cost structure of the business going forward?

Jerre Stead

No, it's a very good question, Bill. I think 2 or 3 things just as a reminder. We expect to wrap up Vanguard by the end of 2012, including the things we've added that weren't in the original plan like automated commission, like pricing, tie into HRIS, the final conclusion of bringing our Sales Force Automation totally tied into the Vanguard platform. So actually, we'll exit 2012, which is very exciting for all of us with, for the first time ever for IHS, truly a great infrastructure, allowing us to scale up. That's the second point I want to make. With both Newton, which is bringing together the many different data centers, Vanguard, Sales Force Automation, et cetera, we’ve built, and third point is our Centers of Excellence that we've been spending money on this year and will in the first half of 2012, we've built capacity for the first time to be able to scale up at a much more cost-effective environment than we ever have. We have peaked with our spending from a Vanguard standpoint, both with capital and expenses. Todd Hyatt, Jo Moon and their team have done an incredible job. We'll go through most of 2012 at approximately that level. As we exit the year, it will come down in the second half. And going forward, it allows us significant opportunities with the 3 pieces together: Vanguard, Centers of Excellence and Newton to scale up at significantly increased margins over time. Now it's critical, and we've always done this and we'll try to continue to do it, is balance improvement year-after-year in top-line growth and organic growth and in margins with investments for the long term. Scott said this morning we're going to introduce more new products next year than we've ever introduced in our history. We've been spending money to make that happen. We'll continue to spend money in the future to evolve that as we go forward. But the way to think about it is the infrastructure we will have completed with Vanguard, Sales Force Automation, Centers of Excellence gives us good upside. And you should think forward, and we're not going to give guidance for 2013 at this point, but you should think forward for us being able to scale into the future in '13, '14 and '15. Does that help, Bill?

Operator

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

Robert Riggs - William Blair & Company L.L.C., Research Division

Scott, you laid out the components of the long-term organic growth across the value realization, upsell, cross-sell, new products, new customers. I also know that you're kind of going through the process of expanding your strategic approach to the sales force. Have you made or do you need to make any changes to the compensation incentive structure of your sales force to make sure that they're, I guess, pursuing accounts in the way that's going to get you to that breakdown that you laid out?

Jerre Stead

Rob, I'll start just as a reminder for folks what we've been doing the last 3 years and have Scott pick up. That's a very good question. Two years ago, we took sales commission programs from north of 70 to 4 basic programs. We delivered that with some fine tuning in 2011. And as we go into 2012, a very important step forward, which is as I said, we will have commission -- automated commissions on Vanguard going into our fiscal year of 2012. So Scott, then, give them the specifics of what we've done with those big changes.

Scott C. Key

Yes, it's important to realize a lot of this investment and reorganization of sales and focus is really about efficiency. It's efficiency in each of the growth drivers I talked about, visibility to cross-sell and upsell on an account level, visibility of our global accounts, where opportunity is within those, so the sales force is effective. So Jerre's talked about changes we made in account structure. To really get at the core of the question, I give you a little bit of color. Where we are today with the multiplicity of systems and have been in the past, our sales teams in recent meetings, I was on the East Coast, actually met with about almost half our sales force in the last 4 weeks individually. They'd estimate somewhere between 35% to 40% in efficiency today in terms of their need to help take things from order to delivery and follow up on those processes, to understand what's happening in an account and where there opportunity is, et cetera. So we really think we're in a great place in terms of management of sales commissions and cost. Really the opportunity is efficiency and productivity. So what you should see is that efficiency substantially being improved as we implement Vanguard and SFA. Remember, we got 95% of sales teams on our Sales Force Automation tool now. We'll complete the training with Vanguard rollout. We'll start to realize, take that 35% and realize that efficiency. So cost of sales for new revenue should actually be declining over the next 8 quarters as we see this unfold.

Operator

[Operator Instructions] Your next question comes from the line of Vincent Damasco with Colony Group.

Vincent F. Damasco - The Colony Group, LLC

Two follow-up questions. I guess, one on the funding status of the current U.S. pension plan. Where does it stand now after this $9 million payment?

Jerre Stead

I guess I need help on clarification of the question, Vince.

Scott C. Key

Yes, Vincent, the U.S. pension plan has been a little bit less than completely funded, I think, as of our last measurement date a year ago. I think all the greasy details are in the pension footnote from the 10-K. We do an analysis at the end of each calendar year. Historically, it had been wildly overfunded 6, 7 years ago and there's -- obviously, had some issues with the downturn from 2008. But it's in pretty good shape relative to most companies out there.

Jerre Stead

But just so we're crystal clear, the $9 million then is the required cash to keep it fully funded. We're not underfunded. So that's a freebie because it's a good clarification. Now you get to ask your real question.

Vincent F. Damasco - The Colony Group, LLC

Yes. Just on the discontinued operation, arguably small, but what's the top line impact for fiscal ‘12 as well as the EBITDA impact?

Jerre Stead

Scott, you want to pick that one up?

Scott C. Key

Yes. So first, we talk about 2 that we're discontinuing now and we also talked about an ongoing review of our portfolio. So as we think about what we've done this year, a couple of points to realize: A full point of organic growth improvement when we think about revenue for 2011 and so we see that benefit continuing to 2012. As we look at EBITDA, it's $2 million for 2012 is the total impact and we see revenue in the range of about $9 million. So that's how you think about 2012. But really the story here is about organic growth improvement. And so not significant in our portfolio, so $9 million on the top line, but really significant to this number of 85% of our portfolio going at double digits today. This is our careful management of small portions of our portfolio that are nonstrategic and we do not see a long-term growth potential in.

Jerre Stead

Rich, you want just add?

Richard G. Walker

Say clarification is just that. In 2011, about $8.5 million, call it $9 million of revenue, $2 million of EBITDA related to these businesses. Because they've been discontinued, we've simply provided that context to think about they're not going to be in existence and part of our portfolio going forward. So they shouldn't be considered as run rate or continuing revenue. So the numbers are identical in '11 and '12 just to give you context to remind you that they're no longer going to be in the portfolio of active ongoing products.

Operator

Your next question comes from the line of Bill Sutherland with Northland Capital Markets.

William Sutherland

I was curious, Scott, if you could give us some sense on the sales force, the plan there as far as expanding the number of folks. I don't know if you have a specific plan built in or not, but I'm just curious on that.

Jerre Stead

No, that's a good question, Bill. Scott, please.

Scott C. Key

So what we've said is we've been investing and expanding in emerging markets. So we've continued to invest and expand our capability across-the-board, but for sure on the sales side, both in Latin America and in Asia Pacific. So you'll see us continue to do that. If you listened to my last comment, we're really going to see the benefit of substantial productivity improvement in 2012 as we roll out systems. So I used the number of 35% productivity improvement. So you can start to think about the kind of sales capacity to growth we'll have with that level of improvement. So you should see our sales costs as a function of revenue actually come down as a result. But we will continue to invest in new customers in emerging markets and new opportunities, so you'll see us move our sales resource around to drive to our greatest potential.

Jerre Stead

And we really started that about, I guess, 6 quarters ago in that balancing and now it'll even speed up.

Operator

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

Peter P. Appert - Piper Jaffray Companies, Research Division

Okay, Jerre, I'm back. So these are 2 related questions. So it's really one. So deferred revenue growth has been something around 12% last 4 quarters. The guidance is for 7% to 10% growth, so I was hoping you could explain the disconnect. And then secondly, somewhat related, the $9 million revenue impact from the discontinued operations, that only gives allowance for the 2 things that you've done, right? So what is reflected in the $7 million, $10 million for next year in terms of any further changes? I assume there's no assumption about further discontinued operations in that or is there?

Jerre Stead

No, that's a great question. Let's take them backwards, Scott.

Scott C. Key

Yes, real quick on that one. So we said, we never, in our guidance, include future acquisitions or discontinued operations. You can think about the both of them the same. So no assumption. We'll always come back to you as we look at the small portion of our portfolio that we will high grade as we look at ensuring we're in long-term sustainable high-growth markets with the right product sets. So nothing assumed further, just the 2 as you've suggested. So then the other part, Peter, obviously, 2 things: The 7% to 10% growth rate that we're talking about next year, on the upside of that range is improvement from the exit rate we'll see now. So we’ve talked about growth rates in our subspace at 8% and we see a positive improvement there and we see that taking us into 2010. So we're trying to balance the current economic conditions with a sense of caution, but also optimism as we see strength in our business. No disconnect on the deferred, so I would not think about it that way. It's a broad measure of the forward pace of the business. And as you can see, our subscription basis growth organically has continued to improve throughout the year. And as you heard us in our comments, we see that improving into Q4. Broad measure, it's right in line with that improved organic growth in the subspace so we feel good about it.

Jerre Stead

And I'd just add one piece and, Rich, anything else you've got because it's important for us. 60% of our total subscription base is renewed in Q4 and Q1. So we well know by -- as we exit our first quarter at the end of February where we're going to be. If there's any uncertainty today, it would be more in the second half of next year, but really feel quite good about where we're at, where we're going in, for sure. Other point I'd add, Peter, is as Rich said, total deferred revenue on the balance sheet is up 35%, which is a very good number and one that will give continued pretty good guidance of what we're going to deliver from a total revenue standpoint in 2012. Rich?

Richard G. Walker

Well, you made 2 of my points, Jerre, well on my behalf so thank you. Maybe the only subtle clarification on that absolute increase of 35%, we do see embedded in there, Peter, about 12% to 13% organic growth. We've told you many times that, that's not a perfect correlation. There is some noise and impacts from timing of renewals and how things go in and out of that overall deferred revenue. But it is an important leading indicator and the relationship and the change and delta in that over time is a very good predictor of what we might anticipate in overall underlying subscription base growth.

Jerre Stead

And remember, Scott made a very specific comment about his 9% goal for 2012 and you got to make a little color on that and then we'll wrap up. Scott?

Scott C. Key

Yes. We see our business continuing to expand and perform well. And all of the metrics I gave you around our regional growth and year-to-date growth in the subspace and where we are as we finish the year, we have the subspace at 8 and moving forward. So we want to be reflective of the environment we're in. But as Jerre said, we’ve got a good headlight on the business. And so when you hear me talk about 9%, that means continued improvement in our business, but a range that reflects the fact that we're prudent in how we look at next year and realize that, that prudence extends to management of our cost base. So we're going to be very prudent in terms of our major levers, which is the largest people cost and our variable cost to make sure that we're delivering value to shareholders and maintaining and expanding our margins.

Jerre Stead

So we'll wrap up with this. I've got 2 quick comments to make. I'm going to ask Andy to make one and then we'll close off. The other thing that we haven't spent a lot of time talking about this morning, but Rich was very specific that the guidance for 2012 includes where we're at with current exchange rate impact. Just put that in perspective. In the last 60 days, the pound has weakened by 3%, the euro by 3% and the Canadian dollar by 5%. That's 95% of our total non-dollar volume sales. So we've built that in, too. A different way to think about it is -- and you can do that math pretty quickly, is that both revenue and EBITDA would be higher today if there had been no impact there. So when we report on January 10, I believe it is, our year-end 2011, we'll give you that update, too, as our guidance goes forward. Andy, because there were several questions that Kelly and others asked, just wrap up, if you would, to make sure we're crystal clear on the above-the-line EBITDA charge of $9 million.

Andrew Schulz

Yes, yes. Just first comment, if you have any questions about the pension and our calculation of adjusted EBITDA, please give me a call, I'm happy to take you through it step-by-step. But I think the punchline is, is that the GAAP expense for pension is not one-for-one with any cash contributions we make. We have always factored in cash contributions to benefit plans in our adjusted EBITDA calculation. And in 2012, we have this incremental $9 million impact and our guidance reflects that at the adjusted EBITDA level.

Jerre Stead

Thank you. And again we're happy to answer those questions. Actually, Andy’s looking forward to it later. Just to wrap up, we feel very good about a year of amazing progress in our company as we've spent a lot of expense money and capital money to provide the kind of scale for our future. We look forward to a really good performance in 2012. As we exit 2012, we'll be our strongest across-the-board of our entire company and we look forward to delivering great results for 2012.

Andrew Schulz

Thank you very much for your interest in IHS and your participation on this call today. This call can be accessed via replay at (888) 286-8010 or international dial-in (617) 801-6888, passcode 61799260, beginning in about 2 hours and running through November 10. 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) 397-2969. Thank you. We appreciate your interest and time.

Operator

Thank you for your participation in today's conference. This concludes the presentation, and you may all now disconnect. Good day.

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Source: IHS Inc., 2012 Guidance/Update Call, Nov 03, 2011
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