Solera Holdings' CEO Discusses Q1 2012 Results - Earnings Call Transcript

Nov. 3.11 | About: Solera Holdings, (SLH)

Solera Holdings (NYSE:SLH)

Q1 2012 Earnings Call

November 03, 2011 5:00 pm ET

Executives

Kamal Hamid - Vice President of Investor Relations

Tony Aquila - Founder, Chairman of the Board, Chief Executive Officer and President

Renato C. Giger - Chief Financial Officer, Principal Accounting Officer, Treasurer and Assistant Secretary

Analysts

Peter P. Appert - Piper Jaffray Companies, Research Division

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

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

David M. Lewis - JP Morgan Chase & Co, Research Division

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Anthony F. Cristello - BB&T Capital Markets, Research Division

Vincent Lin - Goldman Sachs Group Inc., Research Division

Operator

Good afternoon, everyone, and welcome to Solera's First Quarter Fiscal Year 2012 Earnings Call. [Operator Instructions] As a reminder this call is being recorded and will be available for playback. Details for accessing the replay will be made available at the end of the call. At this time, I would like to turn the call over to Kamal Hamid, Solera's Vice President of Investor Relations. Kamal?

Kamal Hamid

Thanks Tahisha. Good afternoon everyone. Thank you all for joining us, and welcome to Solera's First Quarter Fiscal Year 2012 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 ended September 30, 2011, followed by comments on the factors driving those results. Starting with this quarterly conference call, and in an effort to streamline our prepared remarks, Renato will provide you with an update to our fiscal '12 guidance, and then give you more information about our financial results that is not described in today's press release. We'll then open up the call for questions.

I would like to remind everyone that our remarks during this 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. Without limitation, those risks detailed in Solera's filings with the SEC, including our most recent quarterly report on Form 10-K for the year ended June, 30, 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 statement may be based or 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 solerainc.com.

When we refer to analyst consensus during this call, we mean the consensus results on an actual currency basis of certain analysts that cover the company as reported on Thomson First Call.

We measure constant currency, or the effect 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 multi-average rates for the same period from the prior year. Unless otherwise stated, all period-to-period revenue, adjusted EBITDA and margin comparisons are on a constant currency basis.

When we refer to run rate, weight savings or synergies, we mean savings to be realized over each 12-month period following the execution of these efforts. When we refer to material acquisitions, we mean companies acquired during the last 12 months with selected financial results individually disclosed in our quarterly or annual reports filed with the SEC.

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

Now I'd like to introduce Tony Aquila, our founder, Chairman and CEO.

Tony Aquila

Thank you, Kamal. Good afternoon, everyone, and thanks for joining us today. I'm pleased to report a good start to our fiscal year that was in line with our expectations. We exceeded consensus estimate for revenue, adjusted EBITDA and cash EPS.

Excluding the effect of material acquisitions, revenue growth in the first quarter was 5.1%. We generated total revenue growth of 18.5% versus the prior-year period, this is the highest quarterly growth since fiscal 2007, and well above our targeted total revenue growth of 7% to 9%.

Our adjusted EBITDA margin came in at 45%, up about 310 basis points sequentially and about 120 basis points year-over-year. This is the highest adjusted EBITDA margin in any quarter. We achieved this margin as we absorbed recently completed acquisitions and increased investments by 25% plus year-over-year in new products and geographic expansion. Roughly 2/3 of this increased investment in the quarter drove the development of new products that power up our bundle in the advanced markets. The other 1/3 drove our combined -- our continued penetration in the emerging markets such as China, Italy and Chile to capitalize on these market opportunities.

This growth in profitability and investment in our business is the result of our consistent execution on our 3 growth levers. One, claims penetration. Today, we process over 50% of the world's electronic auto insurance claims, which is only about 28% of the world's total auto insurance claims. Two, revenue per claim has increased over the last 3 quarters by an average of 8.7% compared with our historical average of 4% to 6%. And three, geographic expansion. Today, we are focused on growing and enhancing our leverage in the 24 countries we have entered since April, 2006.

Since our investors have asked how conditions around the world, especially in Europe, have affected our business, here's some information.

Due in part to moderating fuel prices, first quarter claims volumes picked up modestly year-over-year against relatively flat year-over-year performance in the fourth quarter of fiscal 2011. Despite the macroeconomic challenges in Portugal, Greece and Italy, our revenue in these countries grew by approximately 13%, 24% and 160% in the first quarter respectively, validating the need for our services and the good timing of our entry into Greece and Italy.

Notwithstanding the above, we are maintaining our cautiously-conservative stance and have made no changes to our key country recovery index. To remind you, our challenged countries are: the U.K., Spain, the Netherlands, Austria, Romania and Switzerland. Our accelerating countries are: France, Germany, Belgium, Poland, Russia, Brazil and Mexico.

Turning to our second and third growth levers, first quarter revenue per claim grew by 7.3% through the continued adoption of additional high ROI software and services in our transaction-driven markets. This marks the third consecutive quarter our revenue per claim growth exceeded our historical range of 4% to 6%.

Regarding geographic expansion, our main focus is on developing our priority countries. Revenue in these countries more than doubled in the first quarter compared to the prior-year period. We believe these emerging markets have a total addressable market of $300 million to $400 million in annual revenue based on the current carpark. Today, our penetration of these addressable markets is only in the low-single digits, hence, our current focus. In addition, we continue to evaluate new markets that leverage existing relationships while developing new ones.

M&A continues to be an important component of our growth strategy and compliments our internal investments to strengthen and expand our product core. The 5 transactions we have completed in this calendar year are examples of us executing on our strategy to power up our product core and enhancing profitable innovation for our customers and stockholders.

Our Solera principles, cultures and values are the foundation of our success. I am particularly excited about our recent investment in our people through the creation of the Solera Institute. The mission of this Institute is to accelerate the adoption of our principles and drills throughout our global operations and further develop our next generation of leaders in the Solera way. The first class of 80 people graduated recently and we are target -- training 300 associates annually through the institute.

We remain diligent in our efforts to achieve our mission of $1 billion in revenue and $450 million in adjusted EBITDA by fiscal 2014. Please be advised, we will be rolling out details of our next mission in the coming quarters so stay tuned for what's beyond $1,450,000,000 in adjusted EBITDA.

Now, let me turn the call over to Renato for some more details.

Renato C. Giger

Thank you, Tony. As Tony mentioned, we have had a good start to fiscal 2012. Turning to our updated fiscal 2012 guidance, we estimate revenue of $804 million to $810 million, and adjusted EBITDA of $354 million to $358 million. The highly volatile currency markets have negatively impacted revenues in adjusted EBITDA guidance by $23 million and $11 million respectively, since we provided initial fiscal growth guidance in August.

However, our updated guidance implies only a $20 million impact to revenue and only a $6 million impact to adjusted EBITDA. Our ability to absorb the impact from currency demonstrates the power of the operating discipline, culture and values that Tony spoke about earlier.

In each of point of this guidance implies the 44.1% adjusted EBITDA margin, up from 43.8% when we last provided guidance. It also implies 100 basis points of the year-over-year margin expansion despite the continuing 50-basis-point headwinds due to the strengthening of the Swiss franc, which we anticipate to remain volatile in the year remaining.

We achieved approximately $1 million in run rate waste reduction in the first quarter and are on track to achieve our targeted run rate waste reduction of $5 million in fiscal year '12.

Our tax rate in the quarter was 27.8% in line with our pro forma tax rate of 28%. Day sales outstanding was 54 days for Q1, which we managed down by 4 days from last quarter. Our strong adjusted EBITDA drove our consolidated leverage ratio down 20 basis points to 2.5x from approximately 2.7x at the end of the fourth quarter fiscal year '11, which included the impact of our $450 million bond offering.

Excluding $6 million we paid in Q1 2012 for fixed assets we purchased in Q4 2011, capital expenditures came in at $3.6 million. We paid $8.7 million related to acquisitions, the majority of which was a successful earnout payment to an acquisition we completed several years ago.

Consistent with our guidance policy, we do not plan to update guidance during the quarter, but only on our regularly scheduled quarterly or annual conference calls. To help those of you who track and factor in 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 the foreign currencies in which we conduct business, the negative or positive impact to fiscal year '12 revenues will be approximately 0.5% and the negative or positive impact to EBITDA will be approximately 0.6%. Kamal?

Kamal Hamid

I'd like to thank everybody for joining us on today's call. As you can tell from Tony and Renato's comments, we're very excited about our growth opportunities. Between now and the end of the year, we'll be very active on the conference circuit, so I look forward to seeing many of you.

With that, we'll now take questions. Operator, would you open the call up, please?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes the line of Andrew Jeffrey from SunTrust.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

So Tony, when I look at the business, it would appear to be pretty stable, FX notwithstanding. And I know you're calling out the higher-than-trend-line revenue per claim growth. As I recall last quarter, part of the -- or the last couple of quarters, part of the benefit has been from sort of a geographic cross-pollination of new products. I wonder if you could elaborate on the progress in that regard? How much longer do you think you can trend 7%, 8% revenue per claim growth? And specifically, what types of functionality seem to be gaining the most traction?

Tony Aquila

Yes, sure. First of all, we talked about this a little bit in the last quarter, I remember. And it's kind of the same thing. I mean, we've been investing aggressively in additional services. Now, we've layered in something a little more than what's been going on in the past, and we're starting to see some through to that. So we've got these innovation centers throughout the world and they're cross-pollinating product lines. That is continuing to accelerate and gain traction amongst our operating entities. In addition to that, our core development functions in the database area and other parts of our application layer are also starting to bring some innovation to the market. So we've got a bit of a fly wheel going there, as well as the acquisitions we're bringing to the table are also spinning out. We plan to add a couple more innovation centers as we're gaining more traction in these markets and also working the arbitrages in those markets as we transition some knowledge. So I'd say, we're continuing to execute on the mission and adding more and more diversity in there where we can.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And when I look at your cost structure, the callout in cost to revenue is the increase in operating expenses. And maybe you alluded to it on the call, is that primarily database buildouts or other product innovations or is there something else going on there?

Tony Aquila

Well, it's kind of -- there is just kind of a little bit of some stuff going on in different areas. But yes, we are beefing up our database. As you see in some of the comments we talked about that we are investing more in database for some of these markets we're entering. So we've got some stuff going on there. And plus, we have the impact of Explore coming into the system. And of course, we've had a good short period already going on with margins improving there, but there is some additional work to be done to actually bring that more into line, let's say, with the Solera way, the leverage perspective.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Okay. So but -- there's good fixed costs scale, it would appear, so is that kind of the relationship we should think about for the balance of the year and maybe a little lower gross margin, but more fixed cost leverage?

Tony Aquila

Yes. I would say, yes. Overall, 80-20, yes.

Operator

Your next question comes the line of Dave Lewis from JP Morgan.

David M. Lewis - JP Morgan Chase & Co, Research Division

Tony, I was wondering if you could just help us a little bit with the revenue per claim expectations going forward? Those above-average increases, are those more transactional or subscription or -- and should we think when the comps toughen in 2 quarters, should we think of some potential pressure there? Or so, I guess the first question is it more subscription-related or transactional-driven?

Tony Aquila

Yes, it's significantly transactional. However, we are getting some traction in the subscription components of our business through the powering up of the bundle. And kind of to the earlier question, we're adding more and more innovation and diversity points. I mean, profitable innovation is a very big focus for us. We think this is a big time for us to differentiate and deliver a lot of high-value firepower to our customers. And we're concentrating on that. Look, we're very focused on making it a sustainable execution, similar to the things we do. And we're sensitive to the macro conditions as well and trying not to put too much software out there. We're starting to get some momentum in the factory, so we got to kind of balance that. You can put too much out there and not get paid for it. So we're trying to kind of diversify it out around the world, giving up components, power up the bundle and be sustainable at above the 4% to 6% range, obviously. That will likely raise it.

David M. Lewis - JP Morgan Chase & Co, Research Division

And then one more for me and then I'll hop off then. With regards to, I think, insurance companies, that number on a constant currency basis, I think it was up 3, in the quarter, decelerated a little bit. Is there anything there? Or what are you seeing with insurance companies right now in terms of their headcount and in terms of their willingness? You just touched on that, but was there anything more to that number in insurance for the quarter?

Tony Aquila

Yes, I wouldn't say that there's any overall global pattern. I would say that there's probably some more country-specific patterns that are erupting based on the pressure of premiums. But overall, I think insurance carriers are trying to leverage technology because they see a very -- with more transparency with the Internet, they're very worried about premiums, which means they have to be very cost-effective on processing the $0.70 on the dollar of claims. And that's where we come in, and I think that's why you're seeing adoption, because these carriers are normalizing to the macro condition. They're saying, "Hey, this is a great yield, why aren't we taking advantage of it?" And then we charge it to them on a transaction basis, so that's good. But overall, I'd say that the insurance carriers in the quarter look relatively quiet, and volume was a little off in the U.K. and Spain. So that took some -- that took us down a little bit.

Operator

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

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

I just had a couple of questions around acquisitions. First, could you just provide a little more detail on the deal you announced yesterday? And if there's kind of opportunities to expand that offering across the rest of the business? And then what would be kind of the priorities on a go-forward basis in terms of the acquisition?

Tony Aquila

Yes. Most of the questions we're answering today are kind of pretty consistent with everything we've been doing. There's not a lot has changed, we're just really concentrating on the execution of it. With regards to the acquisition we announced yesterday, it's part of our powering up the bundle in the NGAS region, which is Netherlands, Germany, Austria and Switzerland. Obviously, we believe, similar to the comment we made about the successful earnout on the Inpart one which has been focused on the [indiscernible]. We think the same with this acquisition will occur, where we'll be able to cross-pollinate this across the Dutch and Germanic speaking nations, and maybe potentially beyond. Nothing to that -- of course, none of that is factored in. As far as our M&A pipeline goes, it's very concentrated by geography, where we want to make investments, where we want to power up the bundle, where we think there is adoption, good timing to adopt some new services. So there's a lot of factors going on when you're running a 60-country portfolio. But M&A is one course, we've added people in the last year into that group, and we continue to develop that with more emphasis and more expectation on output.

Operator

Your next question comes the line of Gary Prestopino from Barrignton Research.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Renato, I may not have gotten this, but can you just give us the euro and pound peg -- that your pegging your guidance off of for this quarter?

Renato C. Giger

So from this quarter, we used to have EUR 1.44 when we put together the guidance. And the quarter ended was EUR 1.42.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

That's for the pound?

Renato C. Giger

That was for the euro.

Tony Aquila

Euro.

Renato C. Giger

And the pound was about the same. It was GBP 1.60 on this period and it closed about the same.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Okay, that's fine. And then in terms of your interest expense and your intangible amortization, what percentage of that right now is denominated in either -- in most probably euro, because you're saying that it's going to have a positive impact?

Renato C. Giger

Well, the euro-related debt is around EUR 200-ish million, and the rest is denominated in U.S. dollars.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

And then on the amortization expense? Is that mostly domiciled over in Europe?

Renato C. Giger

No, I would say -- so that the latest -- the biggest piece came in when we acquired Explore. From the original part, I would say, it is -- from the rest, it is probably 2/3 coming from Europe and the rest is coming from the U.S.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

1/3 Europe, okay. And then Tony, you didn't really talk too much about what went on in the quarter in Latin America and South America? Could you maybe just give us a quick spin on what was -- what the markets were doing there?

Tony Aquila

Yes, I just recently came back from there. Mexico is doing an incredible job accelerating. And as you noted, I put both Brazil and Mexico in our accelerating countries. Brazil is ahead of plan. Mexico is ahead of plan. We just met with a bunch of our people, our customers, and they're just not feeling the same pain a lot of other people in the world are feeling. And penetration is still relatively low and the carpark is growing and the middle class is growing. So we like all those dynamics. And it's a big focus for us.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

What about in the old Central and Eastern Europe? Are the same kind of secular drivers still there? And also in Europe, can you just give us an idea of -- with all the headline risk that we're seeing or headline news that we're seeing, how, if any, is that impacting your business? Or is just basically still the miles-driven dollar cost of gas, that's the biggest impact?

Tony Aquila

Yes, we got some yin-and-yang going on over there from my perspective. We just recently -- I don't know, maybe a few weeks ago, we also toured African nations as well, which we see a nice growth cycle emerging there. But in the Eastern part or, if you will, Central Europe, what we see is kind of a shotgun effect. You've got some countries that are doing very well, like Poland. And then you've got some that are sputtering a little bit, like Romania. For us, Italy and Greece, we made good timing. Obviously, if people are rioting in the streets, it's actually kind of good for business, because they tend to kick a few doors while they're running down the street on cars. So for us, we've got some good timing, we didn't enter those markets till now. So as they do work out their issues, we've got a good growth cycle there as well. I'd say for us, as we look at Central Europe, we watch each country now much more individually than we do as a bucket, unlike we do with the Latin countries, we tend to look at them more like a bucket right now, because the trends are consistent. Western Europe, the Germans are performing very strongly and have managed gas prices and productivity and things of that nature very well, much better than the British have. The Spaniards are little anemic right now, so you got -- that's the power of our portfolio though, as we got other things we can concentrate on, which is why we've been very focused on the countries we've entered. Rather than over-expanding we're trying to moderate expansion. At the same time, get penetration, so we continue to drive that leverage, which allows us to expand profitably.

Operator

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

Anthony F. Cristello - BB&T Capital Markets, Research Division

Question. When you look at what you've accomplished through the acquisitions to date, and globally, with the initiatives with HEMI and NGAS, can you talk a little bit about -- in this environment on a global basis -- I know you've highlighted some emerging market growth and such, but what happens to the adoption or penetration rates on initiatives that you have ongoing when things soften or slow a bit?

Tony Aquila

Well, it depends on a couple of things. One is if we got the ROI, and we have a drill about that we only deliver essential software not discretionary software, so we can literally say, "When you pay us x you get y." That helps us reduce the risk in difficult periods. However, if there's a seizure beyond the departments that we deal with the insurance companies, it is a seizure. And so, you can have it happen. I think people are much more conditioned now and have defined their budgets better with the right kind of flexibility because ROI is a huge issue for companies as they've now normalized in a macro, difficult period. So I think that I think we're seeing a better behavior than we did in 2009, as far as the ability to get some wallet. So in addition to that, we use our firepower to strategically acquire things that allow us to have a discussion about the bundle and the service we're offering. So it opens up that door and allows us some flexibility that others may not have.

Anthony F. Cristello - BB&T Capital Markets, Research Division

If you look at the trends here in the States and with respect to miles-driven, we typically see several months now of miles-driven decline, and really not a great a period of miles-driven over the last few years. Can you give us an update on what's going on with miles-driven in many of your international markets, one? And two, did the miles-driven matter as much on a transaction basis in those segments as you would think they should or is the growth opportunity more with just the bundling and it's got enough to offset any potential declines, you might see?

Tony Aquila

Yes, it's a good question, because we were studying this a lot right now. I would tell you that what we know today. What we know today is that in certain countries, like the U.K., miles-driven does impact. The small country, mobility is integrated and they have a good alternative public transportation system, and so you could get a flow. And we do not know whether or not in the returns -- we're certainly not modeling in that everything will go back to where it was before in the U.K. However, we have a different view in Spain. Spain is a country that has a lot more geography, the cities are a lot spread out, and mobility is key and the public transportation isn't exactly stellar. So there's other -- there's a lot of factors. We do believe miles-driven in the U.S. will be kind of anemic and kind of consistently flat to down. But the good news for us in that one is, is we're subscription. And two, significantly, in transaction whether total losses, but in addition to that, most of the accidents happen close to home, which isn't an impacted zone in that -- in those countries like the U.S. In addition to our view in the Latin countries, we think mobility is just entering like Mexico and Brazil, as that becomes a great way for the middle-class to increase its income. We feel the same way in the Asia countries. We feel the same way in a handful of the large Eastern countries, and we have a somewhat unclear view with the smaller Central European countries because we just haven't figured it out yet. That make sense?

Anthony F. Cristello - BB&T Capital Markets, Research Division

It does. And along those lines, I think that one of the things, I think, at least here, domestically that we've seen has been a much more aggressive approach by the insurance carriers to retain customers and lower costs at the same time. And part of it is because fewer accidents or with down miles-driven or fewer new vehicle sales or whatever the reasons may be. Is that also a consistent theme that you see internationally as well?

Tony Aquila

Only in a few -- the U.K., I would say, yes. And I think that it poses a really good opportunity for us in the technology sector because they're going to have a huge problem with premiums for a period of time. As they're getting it on both ends, they're getting it from the fact that people are able to shop more aggressively in a -- using the power of the Internet. In addition to that, you've got a reduction of miles-driven, you've got some other factors that seem to put pressure on the premium side. Which is why in those countries, we've diversified. That was henceforth one of the reasons why we chose diversification in the U.S. to buy Explore, so we can come up with a bigger bundle, a better diversification, and be able bring analytics to the market, which will be key for those who want to have sustainable profitability. So there's some countries that have those similar patterns, we're monitoring those. And then there's those that are just so early, it's just not relevant. And so we're trying to make sure we distribute the right amount of technology at the right time and at the right price.

Operator

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

Peter P. Appert - Piper Jaffray Companies, Research Division

So Tony, I'm hoping you could give us just maybe a little more color on how you're feeling about the Explore deal in terms of what you're doing to integrate it into the business. Are you still seeing the teens revenue growth out of that? Do you still think $0.15, $0.17 accretion is a good estimate for the first year?

Tony Aquila

Yes, maybe we might have a little lower target on that, but not much. We're very -- we like what's going on with the team. Margins are up already. They're adopting the Solera way, we like everything we've seen so far [indiscernible] rollout, let's say -- our first year, we tend to kind of listen and learn before we start acting. And we've got some suggestions for them that can improve their performance. And they're a great team and we really like having the diversity in the portfolio and we see sustainable growth in that model. Not only do we see it there, we think that, over time, as markets mature and those that line up very similar to the U.S. will be able to expand that offering.

Peter P. Appert - Piper Jaffray Companies, Research Division

So the growth offering for the Explore is really geographically-driven then?

Tony Aquila

No, it's -- we've got 12 states in the United States that we can do some things. In addition to that, we're rolling out some new products. We're enhancing their product innovation strategy as well as, we think, geographic. Now I'd say we've got a multi-pronged view on that asset, similar to what we've been doing with other ones like Inpart and a lot of our other acquisitions.

Peter P. Appert - Piper Jaffray Companies, Research Division

Right. And the -- my recollection is that was already a really high-margin business to begin with, so the incremental margin is just a function of cost synergies and combining it with Solera?

Tony Aquila

Yes, I think right now the -- we still believe there are more synergies. We've only scratched the surface, from our perspective. But a lot of it comes -- they're adopting the Solera way and they're using -- the benefits that are coming right now are coming within the 4 walls of Explore by them adopting the Solera way. We've yet to let them access some of the other Solera assets that would reduce their costs even more. So that's going to come in the second phase. We'll address that at an appropriate time and we may just keep that as some dry powder in the event that we need it for any macro issues or anything like that. So we're just -- typical to what we do, Peter, is we like to have multiple avenues to deal with things and specially in uncertain times like today.

Peter P. Appert - Piper Jaffray Companies, Research Division

Got it. And then on a different topic, Tony or Renato, hoping you can help me with a little arithmetic here. So the revenue per claim up 7%, which is really impressive, a little bit of growth in the revenue volumes, and I think you said, if I got this right, about 5% underlying revenue growth x Explore x FX. So is the implication then that the subscription-based businesses are growing maybe sort of low single-digit kind of rates?

Tony Aquila

Yes, roughly. It's right. It's also -- some of what's gone on is because we're concentrating on entering some of the newer countries and penetrating the bundles a little lighter. So the -- and then we've got the carrying cost, and some of the impact on incremental margin, but that's one of the reasons why we want to beef those things up, get those things really humming, managing our cycles, if you will.

Peter P. Appert - Piper Jaffray Companies, Research Division

And anything new or different, Tony, in terms pricing issues related to the big insurance carriers? I know they're always pressuring you, obviously, but anything unique or different?

Tony Aquila

We try to have a value discussion rather than a price discussion. We've really got the innovation machine, it's really starting to get more and more optionality in it. And we also think that with everything that's going on, on the premium side. It just gives us a chance to bring some more high ROI services to market, so I'd say, where there is some price pressure, we're making it up with a better bundle, and we're adding 7%, as you saw the growth per transaction, that's offsetting any pressure we took. We did take some pressure in a few spots.

Operator

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

Vincent Lin - Goldman Sachs Group Inc., Research Division

Tony, maybe a question on margins. I'm just wondering about the leverage of the model in terms of continuing margin expansion. Is it more important for you to have sustained revenue per claim increase to drive ongoing margin expansion? Or do you actually need to see kind of the peak coming in terms of claims volume? I'm just wondering, out of these 2 factors, which one is more important in terms of sustaining margin expansion?

Tony Aquila

Yes, it depends. So when you're in an advanced market, what you care about is dropping more services, because as markets advance, the volumes decrease, because the infrastructure and the driving skills of that population base become better. And so -- but that shrinkage is very small if you're bringing innovative services to the market. Because you don't take price pressure, you don't take volume pressure. If you're not bringing in innovation in those markets, you're going to take both. And what we've done, very successfully over the years, is built up an emphasis around deploying a bigger bundle into those offerings, so it offsets. So we have a kind of a net discussion with those customers. So I think we've got enough markets going on we kind of understand those inflection points. Now in the evolving markets, it is a volume discussion because the more volume you get, the greater the incremental flow in those particular ones, because you're deploying already developed technology and you're reducing your operating expenses in those entities. And then of course, the emerging markets you've got to carry the cost to develop the databases to operate a very localized system. And so, we're balancing all those things. And if you think about it, we're actually running a business that's performing better at 45% EBITDA margins, we're just managing it to get a long-term yield between the revenue growth we want that doesn't distort the EBITDA expansion we want to continue. Does that make sense?

Vincent Lin - Goldman Sachs Group Inc., Research Division

Yes, definitely. And then maybe, just quickly, any update in terms of your effort in China. Obviously, there's a lot of going on right now in terms of what's happening on the macro environment? I'm just wondering if there's anything changing in terms of -- that you're seeing in terms of insurance carriers' behaviors and kind of the marketplace?

Tony Aquila

Yes. Well, look, I think everybody who hasn't gotten some form of a strategic relationship in China is scrambling right now. I mean, I just came back from North and South Africa, I mean the Chinese -- they're crawling all over the continent over there. They're expanding, they're expanding quietly. In addition to that, our operations in China are -- we're generating revenue. We're entering a profitable state actually. We're managing the increase on investment as well as balancing getting a return in yield. We've only scratched the surface there, but I think our team is expanding in the right way so that it's not all about growth. We've been studying companies that are there in China. In addition to that, we have some aspirations to expand outside of the area. But today, if you look at our portfolio of countries, based on today's carpark, we have our base on the ground where 80% of the carpark is. And we've got a good tilt to where we believe the carpark expansion is over the coming years.

Kamal Hamid

Okay. I think we'll wrap it up with that. So thanks, everybody, for joining us on today's call.

Operator

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