Epiq Systems' (EPIQ) CEO Tom Olofson on Q2 2016 Results - Earnings Call Transcript

| About: EPIQ Systems, (EPIQ)

EPIQ Systems, Inc. (NASDAQ:EPIQ)

Q2 2016 Results Earnings Conference Call

August 09, 2016, 04:30 PM ET

Executives

Kelly Bailey - Manager of IR

Tom Olofson - Chairman and CEO

Brad Scott - President and COO

KJ Tjon - EVP and CFO

Analysts

Operator

Good day, ladies and gentlemen, and welcome to the EPIQ Systems, Incorporated Second Quarter 2016 Conference Call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions follow at that time. [Operator Instructions] As a reminder, this conference call may be recorded.

I would now like to turn the conference call over to our host of today’s call, Miss Kelly Bailey. You may begin.

Kelly Bailey

Thank you and welcome everyone. With me today to lead the discussion and address your questions are EPIQ Systems' Chairman and Chief Executive Officer, Tom Olofson; President and Chief Operating Officer, Brad Scott; and Executive Vice President and Chief Financial Officer, KJ Tjon.

Our earnings release was today at 4:00 PM Eastern Time and is available on our website at epiqsystems.com. The webcast replay of this earnings call will be available on our website until next quarter's call and a phone replay will be available through August 16.

As always, we discuss our financial objective and make forward-looking statements during this call. We remind you that forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those indicated. These risks are included in our earnings release and also in our Annual Report on Form 10-K and the quarterly reports on Form 10-Q, which are filed with the SEC and available on our website or the SEC's website. We strongly encourage you to review these risk factors.

It is now my pleasure to turn the call over to EPIQ Systems' Chairman and CEO, Tom Olofson.

Tom Olofson

Thank you, Kelly. Good afternoon. Welcome to our Q2 call. We’re pleased to have you join us. We’ll provide you with a brief overview of Q2 performance and then we’ll touch bases [ph] on some overall corporate matters and as usual leave room for Q&A session at the conclusion of the call.

I’ll provide a brief overview on results for the quarter. Operating revenue came in at $131 million; this was in line with our expectation. It was exactly the same as a year ago. We did see a positive impact from the Iris acquisition. We also had some very strong results in Europe from our Germany operation and in Asia from Japan.

We had solid adjusted EBITDA performance, $28 million, up 15%. Likewise, we had solid adjusted EPS performance, up 17% at $0.21. Adjusted EBITDA and adjusted EPS were also up sequentially from the first quarter.

Net, net we felt good about the quarter. We continue to place a priority on efficiency and the productivity along with cost containment. So as we gain market share and we place emphasis on the revenue growth we are also really continuing to work very diligently with efficiency productivity, cost containment so that we increase margins and profitability.

Relative to the full year 2016, we're going to leave our guidance exactly the same. We think that we’ll perform during the balance of the year as we’ve previously discussed with you. Revenue would be in the $520 million to $540 million range. Adjusted EBITDA, we are looking at $112 million to $118 million and adjusted EPS $0.87 to $0.90.

As I mentioned, Brad will provide you with some additional details here momentarily, and operating performance in both of our segments. Relative to the strategic review, as we announced on July 27, that we discussed further in the annual shareholders meeting Epiq agreed to be taken private by two private equity firms OMERS Private Equity and Harvest Partners and following that transaction to be combined with DTI currently and OMERS Portfolio Company and we think the combination Epiq and DTI will be very successful going forward and allow us to have a really top flight global legal process outsourcing company.

This was a $1 billion deal including the assumption of net debt. It was priced at $16.50 per share. And as I discussed at the annual meeting it was the best and highest deal that we were able to achieve in the strategic process and that we were very pleased to conclude the process on that note.

We are now moving forward relative to closure. As we said at the annual meeting, we would anticipate this would most likely take place early in the fourth quarter. We have started the regulatory approval process and this afternoon we have filed our preliminary merger proxy statement and when you review that and that is subject to SEC review of course. But when you review that, you will find a very thorough history of the entire strategic review and you’ll be able to read about the background of the transaction with OMERS and Harvest.

Now with that said, let me call upon Brad to make his comments and then we’ll see if there are any questions for us to address.

Brad Scott

Thank you, Tom. Good afternoon everyone.

Epiq met our revenue expectations for Q2 despite some macro headwinds, that affected the document review business along with a generally soft market for eDiscovery in the U.K. and bankruptcy services in the U.S.

Over the past year we’ve been laying the ground work for revitalized organization in terms of technology and leadership. We are confident these organizational changes, improved workflows, and relentless focus on our clients will combat price compression in certain areas and improve overall margins and profitability in 2016. And this is not withstanding the benefit and synergies when we recently announced transaction with OMERS and Harvest and its subsequent combination with DTI as Tom has discussed.

As we look at the balance of this year, we continue to expect rising global demand for our eDiscovery capabilities. Our second quarter 2016 results reflect modest, domestic and international growth from diverse matters which was driven largely by our ESI business, improved quarterly technology segment adjusted EBITDA margin reflect success in combating ESI pricing pressures in North America by continuing to invest in and grow our higher margin international operations, improve margins in our documentary review business and rationalize our overall cost structure.

On the international front, our operations in Europe and Asia continue to grow. International eDiscovery operating revenue increased 28% to$24 million compared to $19 million in the prior year quarter.

As a reminder, realized margins from international eDiscovery are materially higher than in North America. Market analysts also forecast the faster growing rate for international eDiscovery versus the U.S. due to increasing cross-border litigations, wider acceptance of eDiscovery practices and overseas, judicial court systems and changing international regulatory requirements around data.

Building on the momentum of Q1, 2016 we saw a repeat in Q2 of succession in Frankfurt, and Frankfurt has become our fastest growing new market in terms operating revenue. Even though we've seen a dip in revenue in the U.K. we are well positioned to handle the legal and regulatory work of our clients in the wake of Brexit.

Our Frankfurt office and data center along with our mobile development options truly distinguish us from the competition in this regard. We're also seeing great results from our Asia offices. Our Tokyo office in particular has picked up tremendous momentum in operating revenue from both Frankfurt and Tokyo is exceeding expectation.

With respect of Iris, operating revenue from Iris transactional ESI and managed service engagement are now integrated into the broader Epiq service line and those results are reported within the technology segment.

We no longer breakout Iris results separately. Iris certainly has contributed as Tom has said significantly to the operational revenue that has positively impact our technology segment's Q2 results.

Turning to the bankruptcy and settlement administration segment, our bankruptcy solutions business continues to generate a steady stream of corporate restructuring work from large cases that have and will continue to run for several years.

In Q2, Epiq achieved a new Chapter 11 claims administration retentions for Atlas Resource Partners, Ultra Petroleum and Halcon Resources. That said, revenue across the board in this segment was down slightly year-over-year as noted in today's press and due to lower levels of active matters in our corporate restructuring in Chapter 7 service lines.

A decrease in revenue from AACER Bankruptcy Services and a decrease of legal noticing that comes out under our settlement administration also added to that factor. We expect to return to meaningful growth in our settlement administration business especially if the trend towards additional data brief response engagement continues.

And Epiq has built a reputation as a market leader in Data Breach response using the same principles that make us successful in other business areas, and namely our reputation for problem solving and proactive service and on a large scale.

So, in Q2, 2016 technology segment operating revenue was $96 million and adjusted EBITDA was $29.2 million for an adjusted EBITDA margin of 30% compared to 20% -- 25% margin, excuse me, in 2015 Q2.

The margin improvement stemmed in part from an increased in higher margin ESI versus document review work and increased contribution from an international operations.

Quarterly operating revenue for our bankruptcy and settlement segment was $34.6 million and adjusted EBITDA was $10 million for an adjusted EBITDA margin of 29% compared to 25% in Q2, 2015.

The margin increase was in part the results of the shift in the mix of revenue in this segment away from settlement administration and towards bankruptcy. So the combined adjusted EBITDA margin for our two reporting segments of 30% exceeded the prior year quarter of 25%, and met our internal objective of 30% margin or higher for 2016.

As Tom mentioned earlier, a detailed preliminary proxy pertaining to the recently announced matter with OMERS and Harvest has been filed with the SEC and is available to review on investor page of the Epiq website.

A thorough history of this strategic review included in that document. The Board of Directors believes this transaction is in the best interest of current shareholders and the management team is happy to answer your questions to the best of our ability after all interested parties have had a chance to digest this proxy.

This next chapter in the history of Epiq would not be possible without our talented and dedicated associates across the globe. They have clearly propelled the Epiq brands through some challenge conditions in the markets which we served.

In any event we will continue to run the business with conviction and discipline before and after shareholder vote this fall. eDiscovery clients are embracing our proprietary business intelligence dashboard called DMX which is built on our proprietary review and processing product.

We continue to invest in our bankruptcy technology solutions such as a product later this month to be launch which is Unity, our new browser based case administration product for our Chapter 7 trustees. With our vertically integrated technology and product organization, we believe we have exactly the right resources in place to extend our market leadership and remain the legal professions preferred strategic partner for large and complex matters.

And with that, we'll open the call for analyst questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions]

Tom Olofson

This is Tom. We did have a number of questions at the Annual Shareholders Meeting which we just held the other day. So, if there are anymore questions we're happy to take them today. I think we've covered most of them the other day at the meeting. So, if there are no questions, operator, are you showing anything in the queue.

Operator

I'm showing no questions. I'd now like to turn the call back over to Tom Olofson.

Tom Olofson

Okay. Well, thank you all very much. As I mentioned, I think we answered all your questions at the Shareholders Meeting the other day. The call today was intended to give you a brief update on current performance. As we've mentioned, the merger proxy is now filed. We would encourage you to review that. And thank you all very much for attending the call today.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. And have a wonderful day.

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