IHS Inc. (NYSE:IHS)
F1Q12 Earnings Call
March 22, 2012 8:00 a.m. ET
Andy Schultz - VP IR
Jerre Stead - CEO
Scott Key - President and COO
Richard Walker - EVP and CFO
Eric Boyer - Wells Fargo
Brian Karimzad - Goldman Sachs
Suzi Stein - Morgan Stanley
Peter Appert - Piper Jaffray
Michael Meltz - JPMorgan
Gary Krishnan - Credit Suisse
Bill Warmington - Raymond James
Daniel Leben - Robert W. Baird
Robert Riggs - William Blair
Good day, ladies and gentlemen, and welcome to the First Quarter 2012 IHS Inc. Earnings Conference Call. My name is Kim and I'll be your coordinator for today. (Operator Instructions) As a reminder, this call is being recorded.
I will now turn the call over to your host for today's conference, Mr. Andy Schultz, Vice President Investor Relations. Please proceed, sir.
Thank you, Kim. Good morning and thank you for joining us for the IHS first quarter 2012 earnings conference call. We issued two news releases and a supplemental presentation earlier this morning. If you do not have the releases and 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 or 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 IHS's 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, and good morning, everyone. Welcome to all of our investors and to our IHS colleagues, especially our new colleagues from Displaybank, CAPS Expert and IMS Research. There's much to share with you today, so let's get to it.
I'll start with the quarterly financial highlights. Revenue was up 17% in the first quarter. Adjusted EBITDA increased by 20%, second highest EBITDA quarter in history. And notably our adjusted EBITDA margin was 30.2%. As these metrics suggest, we are indeed tracking to our full year guidance, which we are also increasing today.
This reflects our continued view of strong performance this year. We have issued a short supplemental deck to further illustrate key elements of our revenue and profit delivery on a historical quarterly and annual basis. Scott Key, our President and Chief Operating Officer, and Richard Walker, our Executive VP and CFO, will provide more details shortly.
My many thanks to my colleagues for their hard work, diligence and performance as we are investing at the highest levels in our history. We're deploying new systems, implementing new processes and putting in place the right teams and structures as the foundation to a very bright future.
The great work our team is doing today is all about two things, delighting customers and enabling our ability to deliver sustainable, profitable growth well into the future. I believe that two to three years from now, we will look back at what we accomplished in 2012 and consider this time period as the most notable period in our company's history. For sure, the last 90 days has been a great example of this activity.
Many of the scalable platforms we have been diligently building over the past few years are being implemented and utilized across the company. Consider, this is the first time our sales force started the year with the sales force automation tool for their use. Sales force productivity gains will be realized over the next year as our colleagues gain experience with the system and learn how to optimize it.
About 40% of our business is now being processed through our Vanguard system. Given that the Vanguard project was originally conceived in 2007, we're now more than 80% of the way for its completing the foundational implementation. Perhaps most notably, IHS Connect Oil and Gas, our new workflow platform for the energy vertical market was launched January 23 and has been very positively received by our users. Designed for the strategy, planning and analysis professional, IHS Connect Oil and Gas represents the tip of the spear for new products and product enhancements that are being introduced throughout 2012.
These are important milestones for delighting customers and enabling our ability to deliver sustainable, profitable growth over the long term and there's much, much more to come in 2012.
We’re making great progress on our two major infrastructure projects, Vanguard, Newton. 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. This is a very important enabler to all aspects of our business and performance and future growth.
Project Newton addresses the issue of our multiple data centers and content management and delivery systems. We are making excellent progress as we eliminate redundant activities and shut down legacy data centers. These efforts are providing the path to building our capacity, lowering our incremental cost and improving our delivery systems and quality.
I strongly believe that 2012 will prove to be a turning point for IHS as we continue to invest at the highest levels in our history and we begin to see the benefits. In the midst of all this foundational infrastructure work, we kicked off our second quarter in style with the 31st edition of IHS CERAWeek in Houston. The event is the premier executive gathering for the energy industry and one of the top annual executive gatherings in the world. This year's conference focused on the future of energy, security and economic growth. We brought together a global group of industry, policy and financial leaders to speak to, to listen to and to share ideas important for our customers.
Topics like energy, security, economics, sustainability and supply chain were all highlighted. The speakers and participants were from many industries and from every corner of the world with 54 countries represented. We were honored this year to be joined by the leaders of governments and companies around the world. Conference clearly reinforced that IHS offerings are fundamental to our customers' core workflows and are used every day to help our customers advance decisions that are advancing the world.
This year's conference topics, attendance and discussion reflected the critical connections IHS is making across the key capital-intensive industries that drive global supply chains and economies and it highlighted the impact that IHS has as we bring information, expertise, insight and analysis to customers' critical decisions. This year's conference was our best yet and we see even more opportunity next year.
Let me switch gears and provide a quick update on our efforts on customer delight as we've recently wrapped up our first survey of the year. Placing our customers first is core to who we are at IHS. We now survey our customers on a quarterly basis. Highlights from our first quarter survey include the following. Information and analysis quality is the most mentioned and most improved area of focus in Q1. Customer comments were focused on the currency and correctness or accuracy of our information and analysis.
Positive comments increased 6% to a score of 77%. We also got very rich feedback in the area of product innovation. 40% of the comments indicates needing improvement. These were focused on customers' experience with our product's interfaces. We knew this was an area needing work and we've been very busy building new products and platforms and will continue this work throughout 2012 and beyond.
In the area of customer experience, we know that response time and first contact resolution continues to drive the customer experience. Customers give the highest marks if issues are resolved the first time into their expectations. Two years ago our first contact resolution was 48%. Today, it is 74% and world class is measured at 70%.
The build-out of our customer care centers of excellence is one of the primary actions helping us to drive improvement in these scores. We've made excellent progress on this important dimension.
Now a quick update on our Q1 acquisitions, all of which are great examples of the tuck-in type of acquisition we have integrated so successfully over the years. Displaybank was announced a few weeks ago and is our first acquisition based in Asia. It's an excellent example of our plan to extend our supply chain offering particularly in the technology vertical market. Displaybank delivers a portfolio of products and services focused on serving the global flat panel display industry.
The company offers a strong research footprint in Asia and also offers us a growth opportunity for semiconductor-specific Asian research capabilities.
We also acquired the CAPS database, which is a leading source for identifying specific electronic components based on engineering specs. It combines information on more than 200 million physical devices along with intuitive tools for integration into engineering design processes and application. It includes comprehensive and current information for electronic and electromechanical components to support engineering selection and procurement decisions for military and commercial applications.
The CAPS database applies to both our supply chain and product engineering workflows. Next is the energy database we acquired from Hill Technology. It is a digital oil and gas pipeline and infrastructure information business, which meets a critical need for energy producers and refiners in North America. Offering pipeline infrastructure information for (inaudible) strategic planners, gas marketers and refiners. The information is updated daily and available on a national, state and county level. We will integrate this capability into the existing IHS midstream essentials product.
This morning we announced the acquisition of IMS Research, which is an important expansion of our supply chain offerings with significant synergies to the assets and teams we have developed over the last two years. IMS brings new subscription-based research offerings in technology and key electronic components that are important to customers across our transportation, manufacturing, government defense, security and technology markets.
To wrap up, we continue to invest in our future and we will see the benefit of a lot of the hard work we've put in over the last few years.
With that, it's my pleasure to turn the call over to Scott.
Thanks, Jerre, and good morning to all on this call and webcast. This morning I want to offer some color on our growth and progress during Q1, give some over-arching thoughts about the strategic development of the business and the primary drivers of our performance in Q1 of 2012 and finally provide an update on SMT and our integration efforts.
IHS has been and always will be a company focused on providing sustainable, profitable growth over the long term. We are strategically developing the business and continuously making decisions and trade offs that will maximize that long-term performance. Therefore, we believe strongly that our business is best viewed in the context of annual performance and while performance in any given quarter is important, we consider primarily in the annual context.
We are fortunate to have a terrific business model, rooted in must-have offerings developed primarily on a subscription basis. About 75% to 80% of the business is subscription based. It was this way at the time of our IPO over six years and it is still true today. In fact, it was 80% of total revenue in Q1. What is different since the time of our IPO is that we're now creating additional value for customers and significant growth for shareholders by seamless integration of information, workflow technologies and software tools, deep industry expertise and subscription-based research and analytics.
The services, workflow tools and technology that represent the remaining 20% to 25% of the business, which is sold on an non-subscription basis also delivers substantial long term value as we converge our information, analytics and expert analysis into seamless customer workflow and industry solutions. Let's spend a moment looking deeper into the subscription-based performance.
Subscription revenues expanded by $40 million in total to $273 million in the quarter representing 17% growth and 8% growth organically in Q1. This means growth at 8% or higher for five quarters in a row despite varied and challenging economic conditions and our continued pace of integration and transformation. Non-subscription revenues expanded by $10 million to $69 million in the quarter representing 17% growth in total despite the 12% decline organically during Q1.
This compares to a very strong Q1 2011 where the non-subscription business grew 18% organically. It's important to understand that our non-subscription business benefited by solid performance in our individual client consulting and service offerings, which grew organically at 13% in the quarter. Significant to our non-recurring weakness in the quarter was the elimination of an event, which had been held in Q1 2011 and which we did not hold this year because it was both unprofitable and non-strategic.
The elimination of this event impacted non-subscription revenues by $2.5 million and our non-subscription organic growth by 4%. As you think about the scale and impact of our non-recurring business quarterly realize that this single event is nearly 4% of the organic non-subscription revenue base in the period. As has been stated many times before, this part of the business is lumpy and must be viewed in the context of full-year performance.
A great example of quarterly volatility masking the trend was found in 2011. On a quarterly basis, growth in our non-recurring business ranged from 4% to 18% last year. After adjusting for the BPBC and discontinued operations, and for the full year organic growth in the non-recurring business last year was then 10%. This underlies our consistent focus on annual performance in which the scale of a number of our core workflow technology and non-recurring license sales can range from $2 million to $6 million and represent up to 10% of the non-recurring revenues in any given quarter.
As we look at the full year we see good development of our forward pipelines and strong connections in these with our core subscription information and research offerings. Let's spend a moment looking at the core drivers of our organic performance.
The pace of product development and launch in Q1 was higher than at any time in our company's history. We will see the momentum and value creation from these primarily subscription offerings in new revenues and enhanced up sell and cross sell throughout 2012 and into 2013 as we renew and up sell the existing subscription base.
We are also relentlessly focused on sales force productivity, sales process and tools as we continue to upgrade and transform in each of these areas. Performance of our strategically managed account program also shows the benefit of this focus. During 2011, the strategically managed accounts grew 13% organically far outpacing the rest of the portfolio as a result of focus, process new tools and great up sell and cross sell as we deliver integrated offerings and workflows.
We are continuing to expand this program in 2012 as we bring this focus to over our 1,000 largest accounts. We will also add approximately 100 global, regional and high potential accounts to the program this year.
Let me talk a little bit about how our market and sectors look today. Although we see mixed economic conditions globally, slow recovery and modest growth continues. These conditions will allow IHS differential growth as reflected in the 8% organic expansion in our subscription base globally. Let me spend a moment looking at growth and performance drivers in our key markets and core industries.
By geography, America's subscriptions grew 6% organically with strong positive improvement in EMEA where subscriptions grew 10% organically and continued strong emerging market growth in APAC where subscriptions grew 13% organically and benefited from our focus and investment in our high potential markets.
By broader end market trends, energy growth is robust worldwide with double-digit organic subscription growth. Chemicals, transportation and technology offerings are also growing at very healthy rates. Manufacturing, government defense and security continue to see some market headwinds with IHS organic subscription growth above the overall market growth rates in the mid to high single-digits.
We continue to see the benefit of the strategic expansion of our business with strong performance in the assets acquired over the last four to six quarters where integration at all levels has been accompanied by double-digit revenue growth during that time.
Another example of strategic expansion is the partnership we announced this quarter with OSIsoft. This partnership allows us to connect critical operational information with IHS enterprise environmental health safety and sustainability workflow tools to create a rich analytical platform that is decision-critical for customers. In this case the convergence of information, software tools and analytics creates new growth in each offering and unique value for customers.
Finally, we also delivered positive adjusted EBITDA performance and margin expansion where margins expanded 80 basis points to 30.2%. Before I conclude, just a quick update on our SMT acquisition. We are on track toward our 2012 performance goals. Importantly, Q1 brought significant upgrades to KINGDOM with seamless linkage to our highly valuable energy information offerings that will create efficiencies in customer workflows and provide them expanded options and value in new ways not previously possible.
We look forward to demonstrating the power of this integration during our upcoming Investor Day on April 11 in New York.
In conclusion, we are building a company for the long haul, one which can deliver sustainable, profitable growth over the long term. Our expanded guidance today reflects our outlook for solid performance in 2012 as we continue the critical transformations that will enable us to achieve the organic growth guidance of 7% to 10% in 2012 with organic subscription growth at 8% to 9% and solid progress towards my personal aspiration of 9% organic growth for the year.
We are also doing all the right things that will enable our long-term organic growth to the 9% to 15% range that reflects the continued potential for the business. We have confidence in our ability to execute and we look forward to sharing more about our company with you at the webcasted investor day.
Now, let me hand the call over to Rich.
Thank you, Scott. I'll provide an overview of our results and an update to our 2012 annual guidance. Let's start with revenue. First quarter of 2012 revenue increased 17% to $343 million. The growth in revenue includes 4% organic growth, 14% growth from acquisitions and virtually no impact from currency fluctuations.
The organic growth on subscriptions was 8% in Q1 and subscriptions accounted for 80% of revenue during the quarter. Importantly, at the end of Q1 2012 positive renewal momentum and our cancellations are at the lowest levels we've experienced over the last five quarters.
With regard to our non-subscription businesses, Scott already spoke extensively about the implications and impacts to overall organic growth from the various components of these non-recurring businesses. As he indicated, our non-subscription businesses declined 12% organically in this quarter. To provide further context for you, we have posted to our website some supplemental materials, which give additional detail on the historical trends in our non-subscription businesses.
You will see in those materials that our non-recurring businesses have historically fluctuated from quarter to quarter more than the subscription part of the business. We manage our company with a goal of never delivering negative organic growth in any part of the business and despite the decline in the non-recurring this quarter, we are tracking to our full-year guidance.
In January, we provided a supplemental chart, which laid out the historically spread of EBITDA. This quarter you will see that we added the historical revenue spread as well. Since we are long-term-focused and believe the company is best viewed from an annual perspective, we give only annual guidance. But the context of this quarterly spread is important when building a quarterly analysis.
The supplemental information shows Q1 has historically delivered 22% of the year's revenue and 21% of the year's adjusted EBITDA. And our Q1 performance was right in line with those metrics for our original guidance, which gives us confidence in the balance of the year.
Looking quickly at regional performance, revenue was broad-based as America's revenue grew 15% all-in with EMEA and APAC growing 18% and 24% respectively. In terms of performance, EMEA was particularly notable. Its subscription business grew organically in the low double-digits for the quarter.
Turning now to profit and margin. Q1 adjusted EBITDA totaled $104 million, up 20% versus a year ago. Our adjusted EBITDA margin improved as expected and was 30.2% in Q1. This is an 80 basis point increase over last year.
Moving down the P&L, adjusted EPS increased to $0.77 per diluted share in the first quarter on an adjusted tax rate of 29.8%, appreciably higher than our full year expectations. We believe this higher tax rate created a $0.03 per share drag on the adjusted EPS for the quarter, absent which our adjusted EPS would have been $0.80 per share. To be clear, we still see a full-year adjusted tax rate of 27% to 28% as this is a timing issue only. We should therefore realize the benefit of lower adjusted tax rates in the next three quarters.
Regarding segment profitability, America's adjusted EBITDA increased 20% to $79.7 million, while EMEA's adjusted EBITDA was up 24% to $25 million. APAC's adjusted EBITDA was flat to last year due to ongoing investment in colleagues, infrastructure and capabilities in this fast-growing region.
We reported GAAP tax rate for the first quarter of 2012 was 22.6%, up a point from last year's 21.6%. Looking at the balance sheet, we ended the quarter with almost $300 million of cash and $869 million of debt. Deferred revenue at the end of Q1 was $572 million, up 19%.
Turning to cash flow, we generated $90 million of cash flow from operations and $76 million of free cash flow in the first quarter after excluding the one-time pension deficit funding. On a trailing 12-month basis, our ratio of adjusted free cash flow to adjusted EBITDA was 72%.
As these measures suggest, we continue to generate strong cash flow despite continued higher levels of investment in the business. Before I move on to guidance, I wanted to note that we did report a restructuring charge during the quarter as we consolidate positions and legacy data centers and other operational efficiencies identified as part of our Vanguard, Newton and Centers of Excellence initiatives. This has resulted in a restructuring charge of approximately $7.5 million.
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 $1.525 billion to $1.575 billion including 7% to 10% organic growth for the full year.
All-in, adjusted EBITDA in a range of $488 million to $504 million and adjusted EPS between $3.84 and $4.01 per diluted share. I mentioned earlier the supplemental information that we've posted to our website. As a reminder, we have included a slide, which lays our the quarterly distribution of our 2011 revenue and EBITDA. We believe this provides important context and insight when considering the quarterly spread of our annual guidance for 2012.
In summary, we saw solid subscription-based organic growth, continued margin expansion and strong cash flow generation. With that, let me turn the call back over to Jerre.
Thank you, Rich. We're very pleased with our progress as we continue to invest in our long-term profitable growth establishing the leadership, the capacity and the critical infrastructure systems and processes that are the foundations of our performance for years to come.
We are on track to deliver a very solid year and our updated guidance reflects this. We look forward to seeing you all on our April 11 Investor Day. Scott, Rich and I are ready to answer your questions. So let's start the Q&A.
We're ready, Kim. So please proceed.
(Operator Instructions) And your first question comes from the line of Eric Boyer with Wells Fargo. Please proceed.
Eric Boyer - Wells Fargo
Hi. Thanks. Could you just talk about how the results compared to your internal expectations around organic growth for the quarter? And then walk us through the path of being able to hit the 9% internal target for organic growth that Scott gave us last quarter.
Yes. I'll start and then Scott will pick up on it. Great question, Eric. If you look at the guidance we've laid out including the 7% to 10%, it won't surprise you and also if you look at the historical quarter-by-quarter revenue and EBITDA, you'll see as Rich mentioned, we exceeded both of those in this Q1 compared to history. Therefore to put it in context and Scott will give you great color, Eric, we felt very good about where we were internally.
One other important thing to note, our deferred revenue on the balance sheet is up in fact $100 million and it's just a great position to be in. Rich mentioned that cancellations were the lowest we've ever seen. So, Scott?
Yes. Thanks, Eric, and the right question. So as Jerre said, think about the deferred balance up 19% and roughly $100 million. Think about cancellations the lowest levels we've seen in quite some time. And think about a good portion of our subscription base renewing in the first quarter and then think about the 13% growth in our strategically managed accounts.
So what we're seeing is a good momentum and good discipline and when we're very focused, we're seeing good returns and that momentum in our subscription base. And particularly in areas where we have large growth potential, so our largest accounts. And it's important to realize that we have got renewal rates in the 90s and then those relationships, we maintain them for decades.
And then we have a very focused program for up sell and cross sell in those accounts. So these are long-term annuities we're building and you see that in the deferred balance. So we feel like a very positive start to the year. We're already at a nice 8% organic growth rate and we're investing in the right things. New products will be a part of that along with emerging markets. So new auto insight product. We aggregated all of our auto capabilities. IHS Connect Oil and Gas launched.
Interesting stat there. We are adding between 50 to 100 new users every single day over the last 30 days. Over 500 customers now on the platform with 3,000 users on an ongoing basis. We've got IHS Chemicals now that we're preparing to launch. So just good solid momentum. So we feel like we had a great start to that 9% goal in organic for the year.
And just a couple of quick comments on the lumpy 20% that we talked about. We were 80% of total revenue for the quarter as we said on our sub base. Feel great about it. Part of what we need to be thinking through and do and that’s why we feel so good about the guidance we're now providing from an organic growth standpoint is that EHS and S is a good example of that. We've got the best pipeline that we've ever had in our history.
That's the good news. And we track each of those major projects better than we ever did before thanks to having our sales force automation tools in place. However, on any given one of those major projects they may move quarter-by-quarter-by-quarter, I'm not going to name any names, but we actually have one that we thought perhaps would book in Q4 of last year. Then we thought Q1. Then we thought Q2 of this year. Probably a 90% probability of Q2 or Q3.
We will see that but you can bet when we thought through the increase in the guidance we gave you today on revenue, we looked at those very carefully. So I think we have a better position and better visibility than we've ever had before, Eric, and I think you can just do the math. That means you should see acceleration for us to hit the kind of guidance we're giving you quarter-by-quarter.
Scott? One last on this?
Yes. And the other thing, Eric, realize that for the first time our sales force started the year with a new set of tools. They're now trained on those tools. We spent the first quarter getting them rolled out. Using them as the basis for forecasting. We've been talking about this for a couple of years. We're really at the point of starting to have realization of sales force efficiencies through this year and into next year.
So all of these are things that give us confidence.
Your next question comes from the line of Brian Karimzad with Goldman Sachs. Please proceed.
Brian Karimzad - Goldman Sachs
Hi. One just clarification, did you provide the organic deferred revenue growth number. And then, Scott, to follow-up on what you were just talking about, the sales force automation. It sounds like there's a learning curve here before any productivity is realized and it may be even there's a sense that there may actually be some negative kind of productivity for a period as they ramp up on this thing. Can you give us some color on how that may have impacted things during this quarter? And when will we actually start to see the true 30% productivity from that system?
So that was very well done, 1(a) 1(b), Brian. So I'll start with the deferred. Rich, pick that up because it's a great question. And then Scott and I will give you the color on your good question, Brian, on sales force automation.
Thanks, Brian. Deferred revenue year-over-year up 19% in total. We gave you that number. Embedded in that is an organic growth rate of 11%. So that continued positive correlation is still in place.
So here's what to think about from my view and Scott and I spent a lot of time talking with our sales folks. It's an amazing accomplishment of what we got done in the first quarter. They've been impacted with as we said for the first time full capability, sales force automation. A lot of training there. We now have them all live on automated commissions. A lot of training there.
We had a one-week sales meeting in January. A lot of learning and time together there with over 1,000 people. And on top of all that, the changes we've made during the first quarter with our quote through cash as we move forward with Vanguard, also required a lot of training.
So I believe that it was – my hat is off to every person throughout IHS but particularly to the sales force and sales force support teams for getting done what we did do while all of that learning was going on. Scott, pick up on Brian's part on the 30%.
Yes. You mentioned negative productivity. Think about 49 financial systems and sales and customer systems for the last few years. We've had negative productivity for about three, four, five years now and been delivering really solid growth.
So you're right that we have a team that in the first quarter we – December is our first month of our year and of course we work with customers through the holidays. We then spend time in January getting everyone prepared for the training. New systems, commissions as Jerre said. We have our first forward sales forecast on a global basis from a single system in the last couple of weeks.
But I would say, Brian, also think about the seasonality that we've always talked about. That's one of the reasons – that combination confluence of factors is why we often see the 21% of revenue in the first quarter and we build through the year. So we hope to unleash all of the positive productivity over the next three, six and eight quarters. We've got a global sales force that's focused on it and I'll say one more thing. The great progress and the lowest cancellations that we've seen in some time is evidence that our sales force is working hard and our offerings are positively received by customers.
Great question, Brian. That’s why we've got the confidence as we said of what's coming for 2012, 2013 and 2014. Next?
Your next question comes from the line of Suzi Stein with Morgan Stanley. Please proceed.
Suzi Stein - Morgan Stanley
Hi. I know you mentioned the single event in the non-subscription part of the business but I'm just wondering if you still have confidence that that part of the business won't be a drag for the remainder of the year? And wondering how much visibility you have on this. And also why was EPS guidance not raised just given that revenue and EBITDA guidance were both raised?
That was an (a), (b) too. Very well done, Suzi. I'll pick up with Scott on the first part and then Rich and I will cover the second one. In fact, Scott, it's yours for openers and I'll give the color on you this time.
So, thanks, Suzi, and it's exactly the right question. So a couple of things to just give you some context. We are always looking at the portfolio and making sure it's performing the way we want it to do and as Jerre said and you heard us talk about our non-subscription offerings are tightly bound and linked to this integrated value proposition.
But we track those pipelines very well. You'll see as my comments said last year a lot of movement but solid 10% growth for the year. We have really good pipelines forward in the biggest parts of those businesses. So we had a single event, which was a chemicals conference that we exited. We have another great one actually coming up next week in Houston, that'll be quite positive in the swing there between the two one is $5 million.
So think about that $60 million non-recurring base in a quarter and these are really positive and high valued offerings and those are what drive – the timing of those drive this fluctuation. But as Jerre said, pipelines across the board are strong. Our individual consulting business that's part of that consulting number you see, is also very strong. Grew in the quarter at 13%.
When you look at that overall consulting number realize there's some multi client studies that we did in the past, we're moving those to subscription now. So that's a very measured and managed process to create long-term value. So we feel good about the visibility in the pipelines. We feel good about the year. Great track record last year and good momentum.
And I'd just add one thing, great comment, Scott. If you look at all four of those pieces, as Scott was saying, certainly the software sales we've got total visibility. The only question there is the timing of the event. Consulting, we're really proud of. We were looking at where we were in 2009 yesterday and Kevin and his team have done an incredible job. Events, you'll see the news of course in Q2 as Scott was just talking about.
And I'm actually optimistic in the one part that tends to track economies worldwide transactions. Got a great new leader there. He's laid out an excellent plan and I'm willing to bet that kicks up in the second half of this year. So great question. Confidence I would say is very high on our ability to deliver that. It will not be a drag in our view in 2012.
Rich, do you want to pick up on part (b) on why we didn't change the guidance?
Yes. Thanks, Suzi. We've given a couple of good case examples of how an acquisition progresses in a six to eight quarter basis. And one of the important criteria is that every acquisition has the potential to be accretive. And we've given some of those examples, whether that be on the top line, EBITDA and earnings.
One benchmark we've given you is that about 6% of the purchase price is a good proxy for annual depreciation. So that's one component in the consideration. And then the final point I'd make is we believe the range we've given you on EPS guidance is why we give a range and is supportive of anticipated results.
Good answer, Rich. Stay tuned on that one, Suzi. Next? Thank you.
Your next question comes from the line of Peter Appert with Piper Jaffray. Please proceed.
Peter Appert - Piper Jaffray
Thanks. So, Scott, you talked about 10% organic revenue growth I think in the energy business. Can you talk about the organic revenue growth in the other segments and I ask this in the context of trying to understand, it looks like the security and environmental businesses are relatively soft. So I'm wondering what's going on there.
Thanks, Peter. So energy continues to be a double-digit grower and we continue to see those kind of rates in the other sectors that I discussed where we see strength. So technology, transportation, chemicals, all of those very positively performing. Also what you heard us say is acquisitions over the last four to six quarters, those are all growing at very solid double-digit rates on an annual basis. So we see some strength there.
The other color we've given you in the past and I'll give it to you again now. We've got between 70% and 80% of our subscription base right now growing in double-digits. So again we see good momentum in the bulk of our business and then you're right, some headwinds in a few areas where the markets are actually flat to declining and IHS is growing in the 5%, 6%, 7%, 8% range.
So that's important to understand. Specifically in environment actually, the subscription base there continues to be in good shape. And you'll see that as we progress through the year. We've got some large contracts and other things that have timing attached to them. But again, good momentum there. So with the exception of security and government, defense in some cases, little more specifically in EMEA, where there's some headwinds in those markets the bulk of the portfolio is performing real well.
And, Peter, great question. Thanks. As we move forward and as we get more and more implemented with Vanguard, we'll be able to give much more color in the future on the six vertical markets that we're focused on worldwide and the five functional or work stream areas. So that's going to let all of us and certainly starting with you, Peter, look very carefully at what's going on and again, we'll always report from a financial standpoint by region.
So much more to come on that. Thanks, Peter. Next question.
Your next question comes from the line of Michael Meltz with JPMorgan. Please proceed.
Michael Meltz - JPMorgan
Hi. Thank you. I'll take the (a) and (b) as well. And the first is just to Suzi's question, can you tell us specifically I think on the last call you gave us line item guidance for D&A and interest expense. And it sounds like those are the deltas here I guess on EPS. So where are you tracking now for the full year? And then I have a follow-up.
So on that one just to be specific, we're still within the range that we gave last time, Michael, on both of those.
Michael Meltz - JPMorgan
I thought you gave hard numbers last time, didn't you? So D&A of $112 million, interest expense of $17 million.
Sorry. Yes. But staying in the range on the adjusted EPS even with those changes and by the way, on the acquisitions we just made we've not even been able to finalize those numbers at this point yet. So that's why I was saying to Suzi, stay tuned on that. That we will give quote specific numbers if they change by any consequence, Michael, once we get those locked down.
Michael Meltz - JPMorgan
Okay. And then just maybe, I don't know, Jerre, if you want to take this one or Scott. I remember a few years ago when gas prices got beat down you had talked about some headwinds you saw and some customers who just kind of left the market. Can you talk about what you're seeing now in that area?
Yes. Great memory, Michael. That was actually about 600 speculators and natural gas before really the shale gas breakthrough. They came in in 2005, 2006 and 2007 and were – sorry, 2006, 2007 and 2008 and were gone, boy, really quick, end of 2008 and 2009.
Because we are now – actually it's a very interesting situation, Michael, where the price on natural gas today is lower now than it was then. But what's different, Scott?
Yes. And it's an economic driver and we see it across the business so those prices are creating a boom globally in the chemicals business. We had the CEO at Dow at CERAWeek, they've got a $4 billion capital program targeting North America because of those prices. So we're seeing a range of things happening across industries.
This is the primary economic driver of the US right now in jobs. So think about from our lens economics, infrastructure across chemicals and then the ripple affect that's going to have through automotive and electronics. So we're helping customers the full breadth of them understand and the value creation. So it's really creating quite a lot of economic activity. Significant amount of additional investment and then we've got a series of studies from jobs and economic growth at the state level with the American Natural Gas Association to methane analysis around unconventionals to helping the chemicals infrastructure plan surface facilities.
So it's really quite a positive for IHS despite the fact that some natural gas producers are suffering a bit with what they have in the ground.
Thanks, Michael. Good question. Next?
Your next question comes from the line of Gary Krishnan with Credit Suisse. Please proceed.
Gary Krishnan - Credit Suisse
Hi. Thank you. I guess a broader macro question. Given what seems to be at least improving economic data worldwide notwithstanding I guess this week's data, how should we think about organic growth rates across your geographies for the rest of the year? Are there any trends, any visibility you can give us on it?
Yes. No, great question. Our organic growth with our subscription base has very little to do fortunately with global economic change. I will give you a couple of views on that from what we think is the world's best economic team led by our Chief Economist (inaudible). Last year's actual worldwide GDP was 3.1%. This year as you know with China slowing down, Europe in a recession, US probably equal at best to 2011, our current total global forecast is 2.6%. Down 5/10 of a percent.
And if you remember what Scott said, the headwinds, the only headwind we're seeing really is in the government defense, which of course impacts our security business. But the reason you're question is a very good one is, if you think about uncertainty and if you think about what we provide for the six vertical markets that we're focused in, which has been something north of $16 trillion a year, and making capital decisions the impact is a long-term impact that really drives our business.
There will always be pieces like government and defense, like the transaction business we talked about earlier that'll have an impact. But the correlation without a massive collapse like the world saw in 2009, as you all know the worst recession some people will say in the history of the world, certainly since 1929, even then knowing that you're new with us, even then we stayed on the upside with subscription-based organic growth.
And I'd add one more thing to that, Jerre, is we were so underpenetrated globally. As Jerre talked about $16 trillion. Just to give you an example, 10% of our business, roughly about 11% in APAC today so there's billions and billions in infrastructure going into APAC in the sectors that we focus on. And we've got roughly $150 million in revenue there.
So – and that's why we've seen five years of double-digit growth. So we remain critical and then significantly underpenetrated on a global basis relative to the spend at customers.
Thank you. Next question.
Your next question comes from the line of Bill Warmington with Raymond James. Please proceed.
Bill Warmington - Raymond James
Good morning, everyone.
Bill Warmington - Raymond James
You've talked at length today about the strength you're seeing in the business that's setting up for organic growth of the say 9% to 10% in 2012. I wanted to ask about what you're seeing in the business that's giving you confidence that you're going to be able to move that the 12% to 15% level let's say in the 2013 to 2015 level. And then my part (b) would be if you could talk a little bit about – well I've got to sneak that in.
Bill Warmington - Raymond James
The part (b) would be if you could talk a little bit about the SPERA [ph] program and when do you expect to launch that and what it could mean for the EHS and S [ph] effort?
Oh, SPERA [ph]. Okay. Got it. You bet we will, Bill. As I said when we were together recently my first focus and all of us it to get to the 10% to 12% into the future consistently. And what it'll take to move from there, Scott will talk about in just a second. Here's what to think about. It's a very good question.
As Scott said today and I touched on, we're introducing more new products and platforms than any time in our history. Those platforms will help us on cross selling and selling new products, i.e. true new products we've build or true new products we've bought into our customer base than ever before.
So feel really good about that. Scott, do you want to pick up because it's a good one to think about?
You're right on it, Bill, because this is the foundation of our future and it's how we think about growth in the company. So first, common platform, so (inaudible) areas, thinks like IHS Connect we're collapsing dozens of previous products onto common platforms to make it easy for our sales force and customers. Then common sales force tool. So we finally have everybody migrated onto a system that gives them full visibility into every account.
And then how we manage those accounts. So 1,000 accounts is 70% to 80% of revenue. We've got about 200 of those deployed in the strategically managed account program and that's where all this up sell and cross sell happens. 13% growth last year in just those 200. We're expanding by another 100. So if you think about core product platforms, make it easy to sell, easy for customers. Sales now trained on common systems, visibility with good tools on how to up sell and cross sell. And then a focus on high value accounts where we're well underpenetrated, all of the things are coming together now after several years of work to create this momentum into this year as we get all these up and going.
So really it's the foundation for the future that we've built and we're now starting to implement.
And just to add a little bit on how excited you and I both were when we saw the result of those focused account teams last year.
Yes. We added an additional 100 accounts last year to that program and those actually grew between 15% and 20% organically. And these were regional, large regional and a few of the globals. And so think about what we did. We took very diverse sales teams that were doing product selling, we gave them the tools to strategically sell and then we focused on how we enabled those customers.
So in one year we took those 100 accounts and we drove 15% to 20% organic growth. Now we've going to expand another 100 this year. So this is really just about IHS great confidence, capability and skill set and systems to do that across of course the globe and our entire portfolio.
So point (b), SPERA [ph], on track for beta into Q2. Full release into Q3. A little color on it, Scott?
So this really – think about what I just said around common platforms. We have the best set of solutions in the world and that's recognized by the fact that we win every day against all of our competitors. But imagine what we're taking customers through. They've got to buy five, six, seven systems. Deploy them. They have to log into them independently. They're not always connected. What SPERA [ph] does is create a single platform, enterprise-wide EHS and S and risk.
So suddenly the kind of analytics and the OSIsoft partnership we announced is part of that, seamlessly connecting information, these enterprise tools with analytics for the first time. So really ease of sale. Ease for customers. Significant new value creation. And we'll see that really as we exit this year and into next year as we really get that system out into the market.
Thank you, Bill.
Bill Warmington - Raymond James
Your next question comes from the line of Daniel Leben with Robert W. Baird. Please proceed.
Daniel Leben - Robert W. Baird
Hi. Good morning. For my housekeeping question, America's organic subscription growth and for my real question, talk about the drivers behind SG&A. Big increase, $10 million sequentially and stock comp a little larger then that decrease on the cash side to help us understand what was driving that.
So go back to the housekeeping one.
So organic growth, America's as we talked about is a mirror of the industry growth rate. So what we saw in America's was a little bit (inaudible) organic growth than we've seen in the last few quarters. But again a large part of that base is renewing and a large part of that – of our up sell and cross sell efforts coming to fruition over coming quarters. So nothing unusual there in terms of the quarterly performance but got through renewals, got sales on common systems. Our biggest renewal period, lowest cancellations. So that kind of 6%-ish trend that we saw, we feel good for building for the year.
I'd just – a little color on that. I talked to Mark Rose who runs the America's for us last night and he's feeling, his words, the best he's felt in three or four years with everything that's going on today and feeling very good about the strength of our renewals. So let me – if you'll just repeat, Dan, so –
Daniel Leben - Robert W. Baird
Stock comp jumped up about $10 million sequentially above the kind of annualized rate that you had in the guidance. Just understanding that. And then what happened on the rest of the SG&A expenses, down about $13 million sequentially. Just what were the drivers outside of a little bit of seasonality.
That’s fine. Rich, do you want up on the stock?
Stock-based comp, almost – key driver of that is the issuance of shares and the price in which they're issued and that becomes a basis on which over the vesting period that we amortize that stock-based comp. So that's the key driver of that component part.
In terms of some of the investment parts in the key growth markets we alluded to it. It's infrastructure. It's colleagues. It's capabilities. And it's the facilities to support that growth and what is clearly our highest growth region including the opening and continued expansion of our Center of Excellence in Penang.
And in terms to the expense, Dan, despite the headlines you might have seen this morning, unbelievable expense discipline in the business and actually we're seeing the value and the drivers of leverage already in this quarter. So we're seeing expense declines in many areas as we realize the value of systems we're deploying and we get the leverage of both new systems and tools and we get the right people in the right places around the globe.
So our margin story this quarter on our lowest watermark on revenue really tells you what we're doing with the expense base and the leverage we're creating in the business. So we couldn't feel better about the second strongest EBITDA performance in our history and a great margin performance on our low watermark on revenue for the year. So it really tells you that we're starting to see the leverage that we've been talking about.
And back on your – great questions, Dan. Back on the stock-based comp, just – we'll be talking about this and sharing some slides with everyone on our Investor Day. Our overhang as we exist today, including the new grants that Rich talked about is 5.7%. We’ll be pleased to show you where that sits with the guidance compared to our peer group.
On average excluding acquisitions we're granting about 2% of our total outstanding a year. As a reminder for everybody, about 40% of those are at risk. Those are three-year cliff [ph]. The way we report of course which is fine exhumes that those grants will pay out to fruition. So feel very good about what we're doing.
One other quick comment with that as you would expect because share price has gone up nicely for everyone, we are granting fewer shares year-after-year than we have before. Again, excluding acquisitions because that's the value that gets calculated for the grant. So great question, Dan.
Your final question comes from the line of Robert Riggs with William Blair. Please proceed.
Robert Riggs - William Blair
Good morning. Thanks for taking my question. Just wanted to go back to CERAWeek and from your own experiences or maybe what you heard from your IHS colleagues there, what did you take away as the biggest opportunity specifically for your business? And I guess what would be my part (b) is there any challenges that surprised you or anywhere where you might be a little bit disappointed where there's more work to do? Thanks.
Great question, Rob. Scott, start it.
The biggest and we alluded to it a minute ago, the unconventional revolution and the connection of industry. So the connection in energy of chemicals as the fundamental supplier of all industries and particularly those that we are focused on. This is going to have a ripple affect globally through the manufacturing base and we're going to see it. It starts in energy and it moves to chemicals and then we're going to see it across the spectrum of automotive, shipping, aerospace, and into technology.
So that connectedness and the momentum there, Robert, I think is what we saw. It was great to have you there as well. The one thing that I would say though that we are challenged on and it's really our story of investment and growth is our ability to connect all those dots today for customers. Even though we're – despite the new platforms coming out, we just have a long way to go to connect value for them. We have our biggest chemical's conference next week. We have over 1,000 executives showing up in the exact same place that we had CERAWeek in Houston and that is a perfect example.
Imagine the feedstocks from energy to chemicals if we'd have had all those executives in the same week talking about this revolution that’s happening in manufacturing globally because of gas. So even the separation of those events tells you the potential we have that we've yet to capture, Robert.
That's a great question, Rob. I'd just add to it and then we'll wrap this part up and look forward to seeing you at our Investor Day and delivering the results that you should expect for the balance of this year.
I had breakfast each day, Tuesday, Wednesday, Thursday, with a small group in my room of CEOs from all over the world. If I'd have had the same breakfast with those same people two years ago, the word sustainability would not have come up. It came up in every breakfast, which I must say we were happy to be able to respond to.
So that shift is amazing to me. In every speech that was given transparency was brought up. Sustainability was brought up. The ability to make sure that the environment was quote balanced with the need for the energy industry to provide more energy than ever before. And we didn't create any of that. We just felt very good about it and looked forward to that.
If I thought of one thing that we listened to our colleagues a lot about it, it was their excitement about all of the work that we've done and the new tools we're providing. Scott, Rich, I, everyone else are so eager to go back to CERAWeek next year. IHS CERAWeek. And be able to say now we can look back. Now we can look at the things we've been investing in and the tools we've provided.
And that's just a very good feeling. Andy?
Thanks to each of you for your interest in IHS. This call can be accessed via replay at 888-286-8010 or international dial-in, 617-801-6888, pass code 73862371 beginning in about two hours and running through March 29. In addition, the webcast will be archived for one year on our website at ihs.com.
And as always you can contact IHS Investor Relations with any follow-up questions. We can be reached at 303-397-2969. Thank you. We appreciate your interest and time.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.
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