Good day ladies and gentlemen and welcome to the Fourth Quarter 2011 IHS, Inc. Earnings conference call. My name is Lacy and I will be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Andy Schulz, Vice President of Investor Relations. Please proceed.
Thank you, Lacy. Good morning and thank you for joining us for the IHS Fourth Quarter and Fiscal 2011 Earnings conference call. We issued our earnings release and a supplemental presentation earlier this morning. If you do not have the release and the presentation we issued today, you will find copies of them on our website at ihs.com.
Some of our comments and discussions on the quarter are based on non-GAAP measures. Our non-GAAP are adjusted numbers exclude stock-based compensation and other non-cash charges and other items. Our earnings release includes both our GAAP-based income statement and statement of cash flows and reconciliations to the non-GAAP measures discussed during this call. These reconciliation schedules can also be found on our website. The non-GAAP results are a supplement to the GAAP financial statements. IHS believes this non-GAAP presentation and the elimination of these items is useful in order to focus on what we deem to be a more reliable indicator of ongoing operating performance.
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, especially the discussion of our outlook 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 HIS’ 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?
Thank you, Andy. Good morning, welcome and a very happy New Year to all of our investors and to my IHS colleagues. It is a great pleasure this morning to share with you our outstanding results from the fourth quarter and for the full year of 2011. Before I do, I must begin with a real heartfelt thank you to my IHS colleagues around the world. The performance I am about to share with you is the direct result of the outstanding team work in collaboration displayed by each of my colleagues. I am very proud to be part of this team.
I will start with the quarterly financial highlights. Revenue was up 27% in the fourth quarter. Adjusted EBITDA increased by 33% and our adjusted EBITDA margin was 32.1%, the highest in our company’s history. The absolute dollar levels for Q4 revenue and profit were both company records. Q4 proved to be exactly what we thought it would be, accelerating organic growth on the top line, accompanied by meaningful margin expansion.
Our fourth quarter performance is a fitting capstone on a year characterized by focus and performance. In early November of 2010, we shared our vision for what we would accomplish in 2011. Since then, the world has seen many economic events that certainly have presented challenges for businesses around the world. Despite these global economic challenges we actively managed IHS to ensure that we continue to make the right investment decisions to drive strong profitable growth and to deliver ever better insight, information, and analytics to our customers around the globe every day. Therefore I am proud to share with you these annual results.
Revenue was up 25%. Adjusted EBITDA increased by 26% and our adjusted EBITDA margin was 30.2%, up from last year, despite the significant levels of investment in infrastructure that we have made during 2011. This performance is the direct outcome of the following.
A clear vision of what we are building and an intense focus on the four objectives we set for ourselves this year and relentless execution while adapting our priorities to changing market conditions throughout the year. Scott Key, our President and COO and Rich Walker, our EVP and CFO would provide more details shortly.
As you know, we have four company objectives, colleagues’ success, customer delight, profitable top and bottom line growth, and shareowner success relative to our peer group. Execution of these objectives drove solid results. The foundation of this performance is the engagement of our colleagues in the level of customer delight. During 2011, 97% of our colleagues participated in our annual engagement survey, providing us with a clear view of actions and experiences that most affect our commitment and performance at IHS.
Our colleague engagement score for 2011 was 59% and represents a recalibration of our baseline with a new third party survey firm that offers an excellent set of analytics and benchmarks as we move to a new level of excellence. We have achieved world class performance in a number of important areas including the value colleagues derive from their work and the freedom of flexibility they have in delivering value to our customers. Importantly, we saw best in class levels in impact that our colleagues are having with customers as a result of increased colleague collaboration at IHS in creating value.
We also achieved best in class levels in our focus on customers. This is not only correlated to our financial performance, it is tied to the highest level of customer delight since we launched this critical effort five years ago. This year, thousands of IHS customers provided their feedback and we were pleased with the results.
Here are the highlights, most global companies are scoring flat-to-down this year, but we achieved a four-point improvement to reach 63% customer delight. All three of our regions improved. A 100% of our product delivery showed improved customer delight because we achieved our improvement target, we awarded to each of our colleagues 50 IHS restricted stock units. This represents approximately $18 million in value. The shares will vest over the next 12 months. We award shares because the incentive directly drives the behavior we want and the results we enjoy. For example, in the fourth quarter we delivered the highest level of subscription based organic growth in ten quarters.
These results are directly connected to our overall performance and highlight the shareholder value we create in connecting colleague and customer metrics to shareholder returns for our stock-based incentives. We have driven substantial value for shareholder since our IPO with a compounded annual return of 32%, well above that of our peers in the overall market. This is a clear reflection of our focus on long-term profitable growth in our share-based incentive programs that directly link every IHS colleague to keep customer metrics and financial performances.
Now switching gears, we previously discussed the importance of strategic partnerships to our market growth and for new channel development. We continue to create the right partnerships to drive our long-term profitable growth. I am pleased to announce that IHS has signed a strategic alliance agreement with IBM. This agreement will enable us to help clients meet complex enterprise sustainability management (ESM) challenges by leveraging our combined strengths to provide the content software and expertise that our customers need. This alliance is another step forward in leveraging the growing opportunities in enterprise sustainability by offering IHS content and systems in combination with IBM’s expertise in technology implementation and integration. We will make it easier for our clients to turn traditional information management burdens into competitive advantages.
Organizations throughout the IHS and IBM customer base will have the opportunity to benefit from this new alliance. We are pleased that IBM has recognized the importance of the ESM market and our technology leadership in that space.
Let me wrap up with brief updates on our two major infrastructure projects, Vanguard and Newton. We have had another great success in the roll out of Vanguard. On December 5, we went live with the second release. This release included a significant part from our finance organization in customer care in EMEA and Americas. With this successful implementation of approximately 40% of our business is now being processed through the Vanguard system. In addition to the roll out of Vanguard, our EMEA and Americas Finance and Customer Care Centers of Excellence are now operational. And our APAC Center of Excellence opened December 5 and will continue to grow with the needs of our business.
My many many thanks and congratulations to the Vanguard team, to our finance and customer care teams and to all other colleagues from across the company who have worked diligently to ensure we remain on schedule. It is rare for any company to smoothly implement a global ERP, not to mention implementing a change that is replacing 40 plus legacy systems in counties all over the world. In parallel, we have gone live with our SFA worldwide, including our automated commission system. I am very grateful for this very impressive execution.
Our current plan calls for substantially all of our finance and lead through cash systems to be migrated over to Vanguard by the end of 2012 and we are right on track with that goal. Another high priority initiative to support our multi-year growth strategy is project Newton, which is addressing the issue of our multiple data centers in content management and delivery systems. We are making great progress here as we eliminate redundant activities and shutdown legacy data systems. With that it’s my pleasure to turn the call over to Scott.
Thanks, Jerre. I’ll give you an overview of our growth and progress during Q4 that helped to deliver the performance for the year, provide some overarching thoughts about the strategic development of the business as we close 2011 and look to 2012, and finally a brief update on SMT and our integration efforts.
Q4 was a quarter of improving profitable growth for IHS and a clear well executed step toward achieving our long-term profitable growth goals. Just about any way you look at the results, we saw solid growth in operational performance. Overall, we delivered 9.4% organic growth for the quarter and we delivered 8.7% for the full year. Absent the Boiler and Pressure Vessel Code, recall in Q3 2010, we had tried a new release of the BPVC, an engineering standard. All organic figures mentioned hereafter have been normalized to exclude the BPVC as applicable.
So our organic growth performance marks positive acceleration sequentially and year-on-year. Looking at it by geography, Americas grew 8% organically with strong positive improvement in EMEA, which also grew 8% organically and continued strong emerging market growth in APAC which grew 22% organically. As evidenced by the 6% sequential improvement in our APAC organic growth we continue to see above the average growth in the regions where we have made significant investments over the last 12 months like APAC and Latin America.
By end market, energy growth continues to be robust worldwide followed by solid performance in chemicals, transportation, TMT, and manufacturing. We also benefitted by our focus on managing our product portfolio and effectively aligning our resources in investment to areas of long-term double-digit growth potential. Perhaps, most importantly, we delivered meaningful profitable growth as our subscription business grew 9.1% organically up a 4 points sequentially and up 3 points over Q4, 2010.
Solid growth was also accompanied by significant adjusted EBITDA margin expansion. We delivered 32.1% for the quarter, the highest quarterly margin performance in our history. Not only was margin performance strong, but in terms of absolute dollars our quarterly adjusted EBITDA was also the best in the company’s history. Broadly speaking, we achieved this level of profit delivery by three means. First, robust topline growth especially organic. Strong profit performance always begins with terrific topline performance. Second, good cost control, as we continued to invest at historically high rates we very actively managed our spending rates and we are actively prioritizing where our dollars would be spent. Third, continued improvement in margin performance from our acquisitions. In Q4, our acquisitions collective margin exceeded our 32% overall margin. We remain extremely [ph] focused on our primary goal of long-term sustainable growth and are continuing to make the right strategic investments and acquisitions required to deliver for the long run.
We very actively managed our spending rates and we are actively prioritizing where our dollars would be spent. Third, continued improvement in margin performance from our acquisitions. In Q4, our acquisitions collective margin exceeded our 32% overall margin. We remain singularly focused on our primary goal of long-term sustainable growth and are continuing to make the right strategic investments and acquisitions required to deliver for the long run.
We have executed our disciplined strategy to invest in and have acquired the right assets in targeted high growth markets like chemicals, automotive, energy, and the supply chains across TMT. We have established leading information insight and analytics positions in each and are connecting capabilities across them to further enhance our leadership positions.
We are also strategically investing in our colleagues, operational processes, key platforms, and products. These investments are delivering scale, breadth, and depth. Scale to our delivery platforms, breadth to our offerings and market presence, and depth to our global talent pool. The right strategic investments and the judicious deployment and prioritization of our capital enable solid performance and growth in 2011 and other foundation for our profitable growth in 2012 and in the years to come.
Investment in our global infrastructure is key to our growth by delivering scale and efficiencies. As a result of focused investment over several years, we are now for the first time in a position to scale to over $4 billion in revenue in the future. We are also beginning to see the benefit on the topline from productivity gains than the bottom line from increasing efficiencies as we continue to successfully execute on investments in our infrastructures through Vanguard, Centers of Excellence, Sales Force Automation and Newton.
We have also continued to evolve our structure in operations to realize sales, product and market synergies, and have rapidly and fully integrated every acquired asset to ensure opportunity is translated into reality. The result is we will see introduced in 2012 the most new products in our company’s history. And as we discussed in our last call, we are working to rationalize our portfolio of products by vesting underperforming assets, while we invest further in those with the greatest long term potential. Continued performance in growth also comes from strategic partnerships that Jerre mentioned and we will continue this path in 2012 and build on 2011 performance.
As we continue strategic alignment to the highest growth potential, prioritization of assets in spend and continued development of global infrastructure and scale, we will also restructure and rationalize. You can expect us to continue this as we enter 2012 and continue to implement Vanguard and Newton and rationalize our portfolio. These will be important parts of our 2012 operating plan as we deploy new infrastructure, fully migrate to our three Centers of Excellence, and upgrade systems globally.
Before I conclude, let me provide you with an update on the terrific progress with the SMT acquisition, where our integration efforts have exceeded our expectations. We are ahead of schedule in nearly every area with integration essentially complete. We will see important Q1 upgrades to KINGDOM with seamless linkage to our highly valuable energy information offerings that will create significant efficiencies in customer workflows and provide them with expanded options and value.
Our reception in the marketplace has also been terrific. We stayed very close to our customers throughout the transition and they are very enthusiastic about the combination of IHS and SMT and our financial results reflect this. We are ahead of our initial projections and we enjoyed roughly 50% margins during our first full quarter of ownership. My sincere thanks to our SMT colleagues and all of those involved in the integration efforts for a job well done. Keep up the great work.
So, before I hand the call over to Rich, let me wrap-up 2011 by saying, we had a very good year. We enter 2012 with momentum, despite the headwinds, all of us are experiencing on the macroeconomic front. Our own experts do continue to view the macro climate soberly. We use their wisdom to plan for the future and it is reflected in our guidance.
Now, let me hand the call over to Rich.
Thank you, Scott. I will provide an overview of our results and an update to our 2012 annual guidance.
Let’s start with the revenue. Fourth quarter 2011 revenue increased 27% to $371 million. The growth in revenue includes 9.4% organic growth, 17% growth from acquisitions, and virtually nothing from currency fluctuations. The organic growth on subscriptions was 9.1% in the fourth quarter and subscriptions accounted for 74% of revenue during the quarter. This rate of organic growth is a sequential increase since the prior quarter and lifted us to 8.7 organic growths for the full year.
On the non-subscription businesses, they also performed well, growing at 10.4% organically. Consulting had a terrific quarter growing 16% organically, where we saw strong demand for our offerings particularly in energy, autos and chemicals.
Looking at regional and domain performance, revenue growth was robust and broad based as Americas grew revenue 23% all-in, with EMEA and APAC growing 26% and 49%, respectively. In terms of performance, EMEA was particularly notable. Its subscription business grew organically in the low double-digits for the quarter. It is really impressive performance in light of the broader economy.
Relative to revenue performance by domain, energy continues to be the stalwart performer. Energy was 45% of total revenue and was up 38% all-in for the quarter. Energy remained strong across most every offering in all three geographies and grew organically at strong double-digit rates.
Product lifecycle was 31% of revenue and increased 23% for the quarter. PLC benefited from the fourth quarter 2010 acquisition of iSuppli, which grew at a double-digit organic growth rate during the quarter. Security was 8% of revenue, up 2% all-in for the quarter. Solid subscription performance was partially offset by lower non-subscription results due to timing of sales. Environment was 8% of overall revenue, up 31% all-in for the quarter. Environment benefited from acquisitions and solid organic growth. The remaining 7% of revenue is in our macroeconomic capabilities, which were up 8% all-in for the quarter, almost all of which was organic growth.
Turning now to profit and margins. Fourth quarter adjusted EBITDA totalled a $119 million, up 33% from a year ago. To put this in context, this is only the second time in our company’s history we have generated more than $100 million in adjusted EBITDA in a single quarter, and up almost $20 million sequentially from the third quarter. Our adjusted EBITDA margin improved as expected and was 32.1% in the fourth quarter. This is a 150 basis point increase over last year. Strong organic revenue growth combined with good cost control added about 120 basis points of margin expansion in the quarter. The remaining 30 basis points came from acquisitions. FX had virtually no impact to margins during the quarter.
Moving down the P&L, adjusted EPS increased 24% to a record $0.99 per diluted share in the fourth quarter.
Regarding segment profitability, Americas’ adjusted EBITDA increased 27% to $86 million, while EMEA’s adjusted EBITDA was up 29% to $32 million and APAC’s adjusted EBITDA grew 60% to $15 million.
The reported GAAP tax rate for the fourth quarter of 2011 was affected by the fourth quarter implementation of our pension strategy. Excluding this impact, the tax rate was 24.2%.
Looking at the balance sheet, we ended the quarter with $235 million of cash and $803 million of debt. Deferred revenue at the end of the fourth quarter was $487 million, which represents a year-over-year increase of $95 million, or 24%.
Turning to cash flow. We generated $89 million of cash flow from operations and $80 million of free cash flow in the fourth quarter. In fiscal 2011, we generated $288 million of free cash flow and our ratio of free cash flow to adjusted EBITDA was 72%. As these measures suggest, we continue to generate strong cash flow despite higher levels of investment in the business.
One last item before I get to our 2012 guidance update. As I mentioned on our call in November, during 2011 we undertook a comprehensive review of our US pension plan designed to ensure we maintain market competitive employee benefits, while decreasing volatility. I am pleased to report we have completed our review, we have been proactive in our actions and believe we have made prudent business decisions with respect to these plans that position us well on a go forward basis. Many plan sponsors have employed similar steps to better manage their pension programs. These steps resulted in a one-time settlement of retiree pension obligations, a change to our pension plan investment strategies, a change in our pension accounting policy, and an accelerated funding of plan contributions. It is not our intention to discuss these actions in detail on this call. Alternatively, we have compiled a slide deck which explains in greater detail our objectives, the steps we have taken and their impact. This deck is posted on our website and also furnished earlier today to the SEC. We encourage you to review these materials and should you have any questions please give us a call to discuss further.
Now let’s go to 2012 guidance. Our guidance is on an all-in basis and assumes no further acquisitions, currency movements, mark-to-market pension adjustments, or unanticipated events. For 2012, we expect all-in revenue in a range of $1.50 to $1.55 billion, including 7 to 10% organic growth for the full year. All-in adjusted EBITDA in a range of $480 to $495 million; depreciation and amortization expense to approximate $112 million; net interest expense of roughly $17 million; adjusted EPS between $3.84 to $4.01 per diluted share; stock-based compensation expense to approximate $115 to $120 million and adjusted tax rate of approximately 27 to 28%; and fully diluted shares to be approximately $77 million.
A couple of additional items to note regarding guidance. As you consider our quarterly profit progression for 2012, remember that due to the seasonality in our business Q1 revenue and adjusted EBITDA tend to be lower sequentially relative to the fourth quarter. In fact, Q1 is traditionally our lowest quarter of the year for both revenue and adjusted EBITDA, both in terms of absolute dollars and as a percent of the annual totals. Moreover, this trend has been amplified going forward by the product mix from our 2011 acquisitions and the recent pension strategy implementation. To illustrate this point, please see the last slide in the supplemental deck posted to our website, which shows our 2011 quarterly profit distribution, adjusted as if we had made an $8 million pension expense similar to 2012. This slide highlights the fact that four quarter represented 30% of our 2011 adjusted profit, whereas the first quarter represented 21%.
Last, we expect CAPEX in 2012 to remain relatively flat to 2011 levels. Importantly, we expect CAPEX to decrease as a percent of revenue from 4.1% in 2011 to about 3.5% in 2012. Over the long run, we generally expect CAPEX to annually represent between 3% to 4% of revenue.
In summary, we saw accelerating top line organic growth, a resumption of meaningful overall margin expansion and robust cash flows.
With that, let me turn the call back over to Jerre.
Thank you, Rich. That’s a wrap on 2011, a remarkable year for IHS. We enter 2012 with great momentum and are looking forward to capitalizing on the many opportunities we have in front of us. Scott, Rich and I are ready to answer your questions. So, let’s start with the Q&A.
Please proceed Lacy.
Thank you. Ladies and gentlemen, please limit your questions to one question. Please re-enter the queue for any follow-up questions that you may have. (Operator Instructions).
Our first question will come from the line of Suzy Stein with Morgan Stanley. Please proceed.
Suzanne Stein - Morgan Stanley
Hi, good morning.
Good morning, Suzy.
Suzanne Stein - Morgan Stanley
So you saw a nice improvement in organic revenue growth, but how much of it is attributed to bringing in acquisitions that anniversaried and moving underperforming business to discontinued operations? I guess, what I am trying to figure out is how does the underlying business perform if you were to comp it to Q3 growth?
That’s a good question, Suzy. Scott would look forward to answering that.
Yes, sure would. Yes, Suzy -- we actually saw a very broad and shallow (inaudible) organic performance across the business and I will give you a few examples and it would be – we gave you the region numbers where you saw positive growth. Our subscription base really trended up and positively across the globe. In Americas, we saw a series of various double-digit organic growths in automotive, the transportation sector, core economics offering some – in our offerings in manufacturing and design and energy technical. We saw a really positive improvement in our strategically managed accounts that drove organic growth higher and we saw that in all regions. Real good progress of 3 to 5% points of additional above our average organic growth and strategically manage the accounts in the Americas, EMEA and APAC and then the other point of growth drivers. You heard Latin America, 20% plus and of course, APAC 20% plus. So really strong fundamentals. And I think the other point to mention is that was matched regardless of organic or inorganic on acquisitions. Acquisitions in general delivered about 16% year-on-year growth on average. So we really saw solid performance everywhere.
Yes, great question Suzy. Last quick comment on that, if you look, our fastest growing business continues to be the energy business in Q4, remarkable performance. There was no shift of – with the organic growth there, it did not include any acquisitions falling into Q4. So, just a really great quarter everywhere. Thanks you. Next question?
Our next question comes from the line of Manav Patnaik with Barclays Capital, please proceed.
Manav Patnaik - Barclays Capital
Hi, good morning gentlemen and happy new year to you too. In the light of the economic environment -- I just wanted to get a feel for visibility on your numbers and maybe an example being how percent of your renewals to your subscriptions occur, or have already occurred coming into 2012? And just somewhat related to that in terms of just again -- on the back of the economic environment, what changes if any are there to your appetite for M&A this year?
Great question. Let me pick that up and will start with that Manav, great. Actually you just tried to sneak in a second question, but I’ll probably respond to that quickly for everybody. A very good question. 32% of our renewals occur in Q1. Q4 is our second strongest and then the other two are a bit lighter. If you think about the fact that we are November 30th business, December is a big, big month for us as you would expect because a lot of companies that are on calendar year do renew them. So, 32%, I am going to have Scott give a little color on that in just a second. On your question B, we are feeling very good, continue to with the acquisition pipeline we have got, complementary fit our strategic goals and will fit going forward. So we feel very good about that. Before I color, Scott on Manav’s first question and Rich anything else you have got on M&A.
I was just echoing the renewal profile and it’s 60%, a third of it in the first quarter. So the visibility in how we exit the year gives us great confidence. The M&A pipeline in general, it remains very robust. Very pleased with the broad-based distribution of it, particularly the focus on emerging and growth economies and industries that we are keenly focused on.
Yes, and Manav, just in terms of – thinking about our subscription base. So as Jerre said it well, as we see it at this point, now we have visibility to about 60% of our renewal base, as Rich mentioned -- so 30% plus in Q1 and also a large portion in Q4. So, obviously we are working three, four, five months ahead with customers. So we really have great visibility to over 60% of renewal base as we sit here in early January, good view on the year, and obviously strong momentum coming out of the end of last year. The other thing to note is our renewals are still on average tend to be above 90% and really great discipline with new sales systems where you see first of all the timeliness to renewals at the highest levels ever in the company, and that’s just sales system we deployed over the last year, focused on the right structure in organization and sales, and of course, good global sales operations processes.
Thank you. Next question?
Our next question comes from the line of Eric Boyer with Wells Fargo, please proceed.
Eric Boyer - Wells Fargo
Hi, thanks. With you guys having the organic subscription revenue growth already over 9% and your organic (inaudible) being 7 to 10% for the year. I guess, the question comes – how are you feeling about the demand environments for the non-subscription business right now? And are you still pushing towards that 9% for the overall year?
Excellent question. As you remember, on our 2012 guidance call, Scott told us that his personal goal was 9% organic and your question is a good one, Eric, because an important part of that is the other category about 22-23% of the total. So, Scott a couple of pieces?
Yes, thanks. And what you saw in Q4 actually was those non-subscription areas are lifting the business and performing really positively. And I’ll tell you, we have spent, Eric, a lot of time over the last two years ensuring that those non-subscription parts of our business were tightly connected with the subscription part of the business and that is helping us drive growth. So I would tell you three things, one, part of those non-recurring businesses are connections, integrations and tighter value creation around our information for customers. And we have launched some electronic information management services over the last year which are growing above 20% and really tightly linked to our underlying information subscription base growth. So, really strong performance there in non-recurring that’s driving growth.
Then in terms of services, advisory services and consulting, we saw positive performance all through the year and ended the year in double-digit growth there in each region as a result of again tying our advisory services to our insight and analytics and really measured growth of that business. So we feel good about the level, where we have demand higher than we are able to fulfil, that’s a great place to be right now. And then the last piece that’s in that non-recurring area, of course, is some of our software and platform sales, both in energy and great workflow tools that tie our information with our analytics and of course in environment. So, all of those three areas of solid growth by region that we feel good about as we head into the year.
Thank you. Good question. Next?
Our next question comes from the line of Peter Appert with Piper Jaffray, please proceed.
Peter Appert - Piper Jaffray
Thank you. And Jerre, this is one question and it revolves around margins. And what I would like to know is as we think about 2012, what are the key drives of the margin improvement, how important are Vanguard and Newton to the upside you see. And can you talk a little bit about the seasonality in margins is it going to be as fourth quarter loaded in ’12, as it was in ’11?
Excellent question, Peter, thank you. I’ll work backwards on it. As you heard Rich talked just now, in that package -- it’s on our website, you will see, to make sure we see and help you with what goes on quarter-by-quarter, you will see that adjusted 2011 quarter-by-quarter, percent of revenue – percent of profit, 30% in Q4, 21% in Q1. So using that there is three key factors that have happened, one, we did want to give you that perspective because with the acquisitions we have actually seen a shift of an increase in EBITDA profit in Q4 and we got that built in. Secondly, we are feeling very good, I must say, about the amazing effort that has gone on with Vanguard, our Centers of Excellence, many other things at the same time.
Scott mentioned in his part of the prepared script the fact that we will also be introducing more new products in 2012 then we have a history of our business. So if you think about new products are taking a while to move in and take on the opportunity for growth, all of those drive us pretty clearly to that 30% that we say happened last year as one that we would expect to see continue as a model. I am going to ask Rich to pick up and Scott in just a second. But the other thing is think about – we felt very good all year long, I know many of our investors were wondering whether we would indeed deliver the 32% margin in Q4 that we were consistent about all year, we did that. We feel very good about where we are going into 2012, a lot of productivity improvements, Sales Force Automation, etc.
Equally important is to think through into 2013 because as we exit 2012, many of the benefits of scaling, as Scott mentioned in his call for the first time, will now be in place. So, increasing amount of confidence and our ability to give significant as Rich – Scott that was in his wrap up, margin improvement in 2011 Q4 more would come in 2012. Rich?
The next question is really critical to us, I think Peter, the acquisitions of SMT and the size of that and our new pension accounting going forward is rateably and it is included in adjusted EBITDA. So, the table is one we would encourage you to study and come back. Profit and margin profile is a function and it all begins with revenue. And we demonstrated it to you when we can grow the topline at a 8% to 10% level and aggressively manage the cost control, we can consistently deliver between 100 to 150 basis points of margin improvement and that’s a function of many things included, prioritizing our investments and I think we are keenly focused on doing that.
And Scott, wrap up on it, it’s a very important question.
Yes, a couple of things to realize. So 32% in the fourth quarter, and of course, our goal is to deliver that or better for the full year. So just think about where we are on that full year delivery, Peter. But also a couple of things that we mentioned, we have spent the last four quarters investing in scale. We now have three Centers of Excellence globally. We are rolling out Vanguard, almost half of the business right now in Sales Force Automation tools everywhere. So, connect to your question about how things grow in scale, what I mention is we are starting to see the benefit of those investments, significant ones over the last four quarters in the topline. So we are seeing it begin to drive our growth and we are going to increasingly see it drive efficiencies. So we will – we have another fourth quarter, as you know, of Vanguard deployment, Newton, and Sales Force optimization tools and processes. Those will help us all the way through the year, as Jerre said into 2013. So, we should expect to see the benefit of that scale, some additional efficiencies build through the year, so that’s what you should expect to see on our margin goals.
Thank you, Peter. Next question?
Our next question comes from the line of Michael Meltz with JPM, please proceed.
Michael Meltz – JPMorgan
Thank you. I have one question, one clarification, I am not sure which one is which here, so let me just start. On Peter’s question, so just to clarify the guidance for ’12, you are saying – you did 32% margin in the fourth quarter, the ’12 guidance is 32 or better. It is the expectation in Q1 or Q2 to be kind of down from the Q4, you just did, but still up year-over-year? I understand when you are talking about seasonality of the profit distribution, but can you talk more specifically about the expectation of margin ramp?
Yes, that’s a good question, Michael. The answer is yes to your question – yes, you are right. And if you do that analysis again using that 21% Q1 of our guidance, EBITDA 30% Q4, you will get there and you will see a number of that we will do our very best to deliver in Q4, that is a significant improvement. But, Scott’s point of 32% all-in year-over-year versus the 30.2 in 2011 gives you a pretty good thought, where that’s 180 basis points for openers. Now is the next clarification or your question?
Michael Meltz – JPMorgan
Yes, and I appreciate – yes, this might be the question. I appreciate the slides on the pension changes, can you – perhaps this is – it might be better offline, but the $57 million contribution or however you are defining it, is there – you talked about some buyouts other changes that might occur, is there an additional expectation of cash that will be done through ’12 in addition to that?
Actually, I’ll answer that only. Just so we are clear though and it’s a good question Michael, the answer is no to that question. So we are clear we are happy to take as much time afterwards on
So we are clear we are happy to take as much time afterwards on 1:1 calls or anything else that we need to do along with that deck that we put on the website, and we will also send that deck out to you, all of our investors right after we finish this call to make sure we do the clarification. Most important thing is that we have now really positioned ourselves to take any future risk of consequence off the table with the pension program. But that clarification question is a good one. Next questions. Thank you.
Our next question comes from the line of Kelly Flynn with Credit Suisse. Please proceed.
Kelly Flynn - Credit Suisse
Hey guys. Nice (inaudible). Sorry to waste my question on something kind of lame, but on the tax rate, I was wondering if you could just get into more detail on exactly what were the mechanics that drove the tax benefit and on the $0.99 adjusted earnings number, what is the tax rate being used to get to that number? Thanks.
That’s a good question, Kelly. Rich?
It’s a bit two part, Kelly. One, the fourth quarter rate is clearly an anomaly that’s driven entirely by the pension adjustment. I think if you normalize for that, the fourth quarter GAAP rate was 24.2% and an adjusted tax rate at about a 27-28% as well. So really, the combination of the discrete items for the total year and in the fourth quarter in particular created a lot of noise in that metric.
And let’s just be crystal clear that $0.99 was a solid impact that delivered the quarter that was not a onetime event of any part of taxes.
Correct. The totality of the pension adjustments act a good clarification to have. The pension adjustments were below adjusted EBITDA so the adjusted EPS of $0.99 is a clear clean number without any of the impact and that is traditionally a consistent metric from the tax rate perspective.
Thanks Kelly. Next question?
Our next question will come from the line of Bill Sutherland with Northland Capital Markets, please proceed.
Bill Sutherland - Northland Capital Markets
Hey, thanks a lot. Just noticing that very solid organic growth trend you guys generated in the EMEA in the quarter, particularly in subscription, can you give a little color maybe on some of the industry in vertical trends that you saw over there?
Yeah, good question Bill. And let me just go back. It was a shame on us or me in Q3. We actually had quite solid subscription based organic growth in Q3 in the EMEA, 6% plus. We didn’t do our colleagues justice there because it was the transaction stuff that pulled it down to the less than 2. So it was good and solid and significantly increasing in Q4 and Scott, you love giving them color on that.
And several things to realize, there are, just as we said it through the year of despite a challenging environment, we’re focused in the right markets and the right customers and in course of bringing a lot of value to their operations and we talked about the headwinds and really seeing the bottom in terms of for example defense and security and that’s what’s played out. So, really solid double-digit growth of subscription growth that is pretty broad based, Bill. Strong performance in energy, very good performance in terms of defense and security and then I would say, the other areas that really performed well, performed well globally.
So chemicals are performing very well, TMT supply chains around manufacturing are doing quite well, and then transportations in particularly autos and also we had really solid growth in the nonrecurring parts of the business in EMEA. And the last thing I would add is the strategically managed account program. We have had a lot of great wins across those markets in good performance as we are connected with very large customers well.
Thank you, Bill. Next question?
And our next question will come from the line of William Warmington with Raymond James.
William Warmington - Raymond James
Good morning everyone.
Good morning. How are you?
William Warmington - Raymond James
I am doing alright, thank you. Congratulations on the strong organic revenue growth and the EBITDA margins.
A two part questions borrowing from my peers, example, the first part is more about bookkeeping here. I know Rich you gave the deferred revenue growth in total. What was the organic deferred revenue growth on the balance sheet?
That’s a good question Will, I will give you.
And then the second part plus the construed to the second separate question. If you could talk a little bit about what kind of productivity improvements are being assumed for the Sales Force in 2012 to hit the 9% organic.
Let’s pick that up first, because that’s a really great question.
So several things are happening. We have talked in the past about inefficiencies as high as 30 to 40% in the Sales Force, so we will see several things happen. We’re shifting resource and focus within the existing sales force and our sales cost to emerging markets. And we saw that last year, we will see that continue to Latin America, as well as APAC, where we have high opportunity and high growth rates. We will also see Vanguard roll out through the year and what that does for us is that it starts to give us consistent view of customers globally and then connects with our Sales Force Automation, SFA tool. We’ve got about 95% of the sales force on SFA and almost 1.8 billion in sales opportunities flowing through that system.
Another thing that I’ll mention quickly is we got all three Centers of Excellence up and running in terms of order management, so “all the way through delivery” and we’ll see that make the sales force more efficient as we move through the year.
Probably the most of that benefit will start to come from the backend as we get Vanguard full deployed and we get people up in those centers and fully trained. So we will see the benefit continue, we saw it some in the last quarter, we will see it increase through the year and strong benefits in 2013.
Thanks Guys. And Rich pick up Bill’s first part on the differed organic.
So as you said, Bill, it grew to 487 million, that’s up $95 million, 24% in absolute terms, that’s about an 11% organic growth sitting underneath that.
Thank you, Bill. Next question.
Our next question comes from Brian Karimzad with Goldman Sachs. Please proceed.
Brian Karimzad - Goldman Sachs
Good morning. I guess related to that, you talked about the sequential quarter over quarter progression of the absolute numbers on revenue EBITDA, the seasonality that we are going to keep an eye on, but on the organic growth rate for revenue, is there anything technical that we need to be aware of as we head into 1Q and through the year that could cause that to accelerate or decelerate like, for example in 4Q, the anniversary effect certainly help, as I think about the (inaudible) to the acquisitions you had in the year you just completed, SMT was -- is by far the largest and so, should we be expecting an acceleration on your outlook in 4Q because of that.
Actually, a very good question Brian. I will start and have Scott pick up on that and I will go back to pick up a bit on Suzy’s too. We look at some thirty different product revenue basis, actually daily, weekly, monthly, and quarterly. If you remember Scott said in the last two calls that 85% of our revenue was exceeding 10%. It was actually in double-digit organic growth and that doesn’t include the acquisitions we have made, if you add those in, for their own internal organic growth is actually north of there.
Just for color to give you a view, we range anywhere from 22 to 23% organic growth in a given quarter on some product lines, to flat are there about negative on some of the other product lines. Scott mentioned in his call, on the formal part of the call what we are doing and having a continuing effort looking forward to those that are not meeting our double-digit goals on organic growth and how we will review those businesses and products either to increase spending to get amend double-digits or make other decisions. So with that as background pick up on the rest of the question.
And so obviously you saw the 9% in the fourth quarter which is our aspiration for the year within that 7 to 10 range. So Jerre has told you we have a great part of the portfolio that is in double-digit today. Well, you heard us say in terms of acquisitions that there are year-on-year growth rate on average is about 16%, so they are performing very well. What I would say is as we have said for the last few months, we feel good about the foundation of the business, we continue with the highest level of transformation as we continue to roll out Newton and staff our centers for order entry all the way through delivery. And we are mindful of the economy that we are sitting in. So we are balancing those factors with I think what is a strong foundation to the year and a plan that we believe we can deliver.
Thank you Brian. Next question.
Our next question comes from the line of Dan Leben with Robert W. Baird, please proceed.
Dan Leben - Robert W. Baird
Thank you. Good morning. Just wanted to ask a little bit on the cost side related to margins, particularly in the Americas region, you know margins down, take a little bit sequentially. Are there any one time factors in there that we should think about as we go into next year around, Vanguard or Newton, or any of these other projects with customer excellence centers that were more onetime in nature in the fourth quarter that held that down?
Actually, as usual, very thoughtful question, Dan. The answer is no, nothing in specific other than we did mention that we’ve now have fully running the Centers of Excellence in both the EMEA and in the Americas and that’s been an investment of significance in Q2, 3 and 4. And that APAC is now up and running as we begin the first quarter of 2012, and we feel very good about that progress. Nothing unusual at all though from a standpoint in the Americas, just a really great performance in total.
Our next question comes from the line of Robert Riggs with William W Blair. Please proceed.
Robert Riggs - William W Blair
Good morning. Thanks for taking my question. I think it still holds that roughly 70% of the revenue comes from the top 1000 customers. But you have also made the comment that they are relatively still under penetrated, maybe 25% penetrated. As we think about the product development over the next several quarters, will there be a focus on driving increased penetration among those top 1000 or are you maybe making some adjustments to appeal to the customers outside that 1000 or to look to bring on some brand new clients? Thanks.
Very good question, Rob. Scott?
And I’ll give you three things to think about there. We are relentlessly focused on those 1000 and as I said there is a difference of growth rate in those accounts, extra 6% of customer delight in those accounts and two or three points of organic growth in those accounts were expanded into 250. We have just made some changes as you see, announced the new global sales lead, a single global sales operations function and the goal there with SFA is to get laser focused on those 1000 accounts and to continue that momentum.
Now the other thing we are doing is the transactions part of our business all the way to the other end of the spectrum has been an under performer. We have got great and valuable information globally and so we are investing in that this year and in the middle what you have is inside sales and field managed, which we are looking at process and efficiency and so we are really going to focus on each but certainly laser focus on the top 1000.
Thanks Rob. With that we’ll wrap up. I just want to make one quick comment and then I will turn it over to Andy. This is the end of my 32nd year as Chairman -- Executive Chairman or CEO of public companies, never have I gone into a year as we are now into 2012 with more confidence about our ability to execute long term sustainable profitable growth. Because we have built an amazing team, we have got great processes and products in place, so I look forward to representing all of our colleagues around the world and our calls for the year, as we continue to make that progress. Andy?
We thank each of you very much for your interest in IHS. This call can be accessed to be a replay at 888-286-8010, or international dialing 617-801-6888, passcode 95966684 beginning in about two hours and running through January 13. 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 303-397-969. Thank you. We appreciate your interest and time.
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