Solera Holdings F2Q08 (Qtr End 12/31/07) Earnings Call Transcript

| About: Solera Holdings, (SLH)

Solera Holdings Inc. (NYSE:SLH)

F2Q08 (Qtr End 12/31/07) Earnings Call

February 6, 2008 8:30 am ET

Executives

Kamal Hamid - Director of IR

Tony Aquila - Chairman and CEO

Jack Pearlstein - CFO

Analysts

Peter Albert - Goldman Sachs

Fred Searby - JP Morgan

Gary Prestopino - Barrington Research

Franco Turrinelli - William Blair Company

Operator

Good morning, everyone, and welcome to Solera's second quarter fiscal 2008 conference call. Following management's remarks, we will hold a question-and-answer session. As a reminder, this call is being recorded, and will be available for playback. Details for accessing the replay will be made available at the end of this call.

At this time, I will turn the call over to Kamal Hamid, Director of Investor Relations.

Kamal Hamid

Good morning, everyone. Thank you all for joining us on the call today, and welcome to Solera's second quarter fiscal year 2008 conference call. Today on the call with me are Tony Aquila, our Founder, Chairman, and CEO, and Jack Pearlstein, our Chief Financial Officer.

Tony will begin today's call with the summary of our financial results for the quarter ended December 31, 2007, and provide the recap of our recently concluded Solera Global Leadership Meeting. Jack will then comment further on our financial results for the second quarter, and conclude with an update of the Company's fiscal year 2008 guidance. After our prepared remarks, Tony and Jack will be available to take your questions.

Before we begin, I'd like to remind everyone that our remarks during this conference call will contain forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are neither promises nor guarantees, but involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including, without limitation, those risks detailed in Solera's filings with the SEC, including our annual report on Form 10-K with the year ended June 30, 2007, filed with SEC on September 17, 2007.

We disclaim any obligation to publicly update, or revise any such statements to reflect any change in our expectation or in events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements. We also plan to discuss certain non-GAAP financial measures on this call. A reconciliation of these financial measures to GAAP financial measures is included in today's press release, which is available on the Investor Relations section of the Company Web site at solerainc.com.

When we refer to consensus during the call, we mean the consensus results of certain analyst who cover the company as reported on Thompson first call. All information discuss during this call and webcast is protected by United States copyright laws and may not be reproduced, distributed, transmitted, displayed, or published, or broadcast without the prior written information of Solera Holding Inc.

I would now like to introduce Tony Aquila, our Founder, Chairman, and CEO.

Tony Aquila

Thank you, Kamal. Hello everyone, and thanks for joining us. I am pleased to report that our second quarter fiscal year '08 exceeded our previously announced guidance, and consensus for both revenues and earning. Our revenues at $132.1 million were up nearly $16 million, and 13.6% over the same period in the prior year. The strong revenue growth was due to exceptional performance in a number of countries and regions across our portfolio, with special mention to France, Mexico, South Africa, and Central and Eastern Europe.

Due to the diversification of our global portfolio, significant operating leverage in our business model, and certain realized savings from our continued focus on eliminating ways, approximately $10.5 million of the $16 million revenue increase, slowed through to the adjusted EBITDA line. This resulted in an adjusted EBITDA margin of 34.1%, and nearly 500 basis point increase over the prior year period. Our cash EPS came in at $0.29 per share on a diluted basis, up $0.06 over the prior year period and $0.04 ahead of consensus. Jack will give you more detail regarding our financial results in just a moment.

A few weeks ago, we held our Solera Global Leadership Summit in New York City. The summit provides the forum for us to bring our top managers from around the world to share best practices to the group, collaborate on key initiative and refocus our competitive efforts on our 80/20 initiative. Our meetings lasted one-week, and concluded with our bell ringing ceremony at the New York Stock Exchange. I came away from the Solera Global Leadership Summit extremely proud of our progress and excited on a number of fronts.

The first is our progress being made by our associates, in adopting a drive towards higher-bar, higher-performance culture. As you can see it's starting to clearly flow into our performance, momentum, and future prospect for continued strong growth. Especially, it is clear to see this quarter, in Central and Eastern Europe as well as throughout Latin America. New customer acquisitions, and solid demand for our services, resulted in Q2 revenues being up over 40% year-over-year in Mexico, and 122% and 280% respectively in Russia and Romania in Q2 versus the prior year period.

Second, we have made steady progress in establishing our Asia-Pacific region. We increased revenue from insurance carriers and their trading partner in India and China during the second quarter. Although, it's a small market today for us, we see a positive trend for long-term potential. In fact, in 2007, China surpassed Japan to become the world's number two for new car sales, with 8.8 million new cars sold, up 22% over 2006.

Third, we are seeing progress with our launch into the Australian market, with clients expecting a pilot program for our service later this year. And lastly, I am pleased about the continued progress we are making on the product and services innovation front in many of the markets we serve.

As an example in the UK, we introduced a new claims management, and improved upon our estimating workflow solution, that delivers a suite of services designed to enable measurable performance improvement for our customers. The solution provides a range of new functionality, tools, model selection, management information, and claim status data. This is a model we intend to replicate in other market as applicable, and we hope this will drive additional value to our customers, and ultimately to our shareholders.

I'd now like to turn the call over to Jack, who will provide further details on our financial results, following Jack's comments, we will open up the call for question, and then I'll return for a brief summary remarks. Jack?

Jack Pearlstein

Thanks, Tony. As was mentioned at the top of the call, and in our earnings report released earlier today, that second quarter was another strong quarter for the company, with total revenues coming in at $132.1 million. This is a 13.6% increase over the prior year period in fiscal year '07. This revenue growth was driven by solid performance in both our EMEA and Americas segment. Approximately half of this quarterly growth was organic, and the remainder the result of currency benefit.

Our Q2 '08 adjusted EBITDA came in at $45.1 million or 34.1% of revenues, an almost 500 basis point improvement over the prior year quarter and an 80 basis point improvement over 1Q fiscal year '08. We continue to stay focused on managing steady operating margin improvement, by balancing the level of investment in new geographies, and back into our business with savings achieved through our waste reduction effort.

GAAP net income for the second quarter was $11 million, or $0.17 per share on a fully diluted basis. Adjust net income for the second quarter came in at $18.7 million, up nearly 185% over the prior year quarter. And adjusted net income per share on a diluted basis was $0.29 during the quarter, versus $0.23 in the prior year period.

EMEA revenue for the second quarter was $80.9 million, an 18% increase over the prior year period. America's revenue for the second quarter was $51.2 million, a 7.4% increase over the prior year period. As Tony mentioned previously, the year-over-year performance in EMEA was led primarily by exceptional growth in France, South Africa, and Central and Eastern Europe. And the year-over-year performance in the Americas was a result of solid North American performance, coupled with exceptional growth in both Mexico and Brazil.

We ended the quarter with approximately $108 million in cash, essentially flat to our cash position at September 30, 2007, and we had total debt outstanding of approximately $626 million versus total debt outstanding of approximately $628 million at September 30, 2007. Cash flow from operations was $21.7 million for the quarter, and we paid down approximately $14 million of debt.

Our accounts receivable at quarter end was $80.9 million, which translates to DSOs of roughly 55 days and approximate seven day improvement over the immediately preceding quarter. CapEx for the quarter was approximately $6.7 million, which included $2.8 million of payments on assets refinanced. We continue to expect total fiscal year '08 CapEx to be in the $20 million to $22 million range.

Restructuring charges during the quarter were less than 50K, and were primarily related to onetime, employee termination benefits. Consistent with our previous guidance, we expect to incur $1 million to $1.5 million of additional restructuring charges, and our acquisition related costs over the remainder of fiscal year '08, although, we are evaluating several additional initiatives that could increase these figures.

In this morning's earnings release, we raised our fiscal year '08 guidance to incorporate our Q2 results and a slightly more positive outlook for the remainder of the year. We raised our fiscal year '08 revenue guidance to a range of $515 million to $520 million. We raised our adjusted EBITDA guidance to a range of $166 million to $170 million.

We raised our net income guidance to a range of $15 million to $20 million, and we raised our adjusted net income guidance to a range of $68 million to $72 million. At the midpoint of our new guidance ranges, this represent slightly better than 9.6% year-over-year top line growth and approximately 16.6% year-over-year adjusted EBITDA growth.

That concludes the financial portion of the call. So, we’ll now turn it over to the operator to take a few questions, and then Tony will comeback and wrap up the call, operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Peter Albert from Goldman Sachs. Please proceed.

Peter Albert – Goldman Sachs

Thanks. Jack or Tony, what's left to do on the cost side of the equation you've made progress here obviously over the last several quarters. Do you see substantial margin leverage coming just from cost reduction efforts, that's number one. And then, number two, I guess related to that, if I'm doing my arithmetic right, the guidance you are offering implies that the second half margins were actually be at a bit of a lower level than we saw, the adjusted EBITDA margin, that we saw in the first half of the year. What would explain that?

Tony Aquila

Hey Peter, this is Tony. I'll go ahead and start out. Well, first of all on the waste reduction front, it's a very continuous effort, and I think you've got to know the company a bit. We have a culture that we are establishing and we still see quite a bit opportunity in waste reduction initiatives, and we will be giving more information on those as the quarter kind of comes forward, but we see some opportunity to expand margin there. And I think on the other point, Jack maybe you can.

Jack Pearlstein

Yeah, I mean I think obviously there are still a bunch of variables left in the year, but I think you've seen our approach to giving guidance over the last couple of quarters. And I think we're just trying to maintain a consistent approach to giving guidance.

Peter Albert - Goldman Sachs

Okay. Fair enough. Have you rethought your longer-term expectations in terms of where you think you can take the business from a margin perspective?

Tony Aquila

Yeah, I'd tell you as consistent -- this is Tony, Peter. As consistent with what we said all along that the present focus is to drive to 35% margin, and once we get a little further on in the year, we'll announce what we're focusing in on next.

Peter Albert - Goldman Sachs

Great, thank you. And then last thing, just any color you can give us on any contract renewals or new client wins in the quarter that might be relevant?

Tony Aquila

We still have the one big renewal by our standards, which is a little less than 1.25% of revenue. We are working our way to that, nothing really more to report on that since last quarter. In addition to that, we have had a customer due and extension early and that's the top 10 clients.

So, we batted down hatches as we said in the last call and we have really been focusing on leveling out the renewals. So, we are not [toped] in any one year, kind of preparing for the opportunity to be more offensive as our competitive renewals for our competitors start to come up for bid.

Peter Albert - Goldman Sachs

Got it, great. Great, thank you. Congrats on the good quarter.

Tony Aquila

Thank you, Peter

Operator

Your next question comes from the line of Fred Searby with JP Morgan. Please proceed.

Fred Searby -JP Morgan

Hi, thanks guys. Congratulations, Tony and Jack and a good quarter, couple of questions for you. One I wondered, if you could just tell us, which markets you're going to rule out the claims, you see, you alluded to that. And I wondered, what the schedule looks like which, what you have on the docket there.

And then secondly, if you could tell me what was the $4.6 million loss in other income. What exactly was in that account that was added back and then finally just, what is the US versus, you can looking at the Americas, the growth was pretty good. And I'm just wondering what the US as a component of that versus the kind of hyper growth markets that you're seeing in Central and Latin America, thanks.

Tony Aquila

Okay. Thanks, Fred. Well, first of all with the market that we are rolling into, I think we talked here about we are getting some and it's consistent with what we have been saying all along about the target markets. We're targeting Australia and the various Asian countries and expanding into those, with respect to the GCC comment that, which is the name for an offering that we've launched in the UK. Our focus on this kind of the – we kind of hybrid it between the mature markets and the evolving markets.

We tend to try to keep it simple in the emerging markets for obvious reasons with the market adoption that we just kind of work through the high potential markets that are either a need of a better bundle and to our evolving markets that are ready to adopt more services as we move through the portfolio and as you can see that, kind of working not only from a revenue perspective, but also from a possibility perspective. You don't want to get ahead of your markets and I think the second point on the $4.6 million, Jack can you answer that.

Jack Pearlstein

And Fred that’s actually $4.6 million of income and that the three big components there are Forex interest income and then the change in a currency hedge that was in place before we went IPL. Those were the three elements that were primarily driving the $4.6 million of other income. And in terms of US growth rate quarter-over-quarter it was approximately 5%.

Fred Searby -JP Morgan

So that's picking up and I just use that picking up on the back of new contract wins or new services you say you have added some ancillary services the boats and motorcycles and things like that. What's driving that market share just…

Tony Aquila

Yeah. As far as the US, what we're getting is we're getting a little bit more of flow through from that DRP strategy, that direct prepare program strategy, where we're concentrating on our top carriers and helping them get the network effect. As a result of that, some of our top clients are adding shops into their repair networks and -- which is driving up demand for our services because we are the provider of choice. And so, significantly coming from there, additionally, there some other things going on, some better bundling of value which is also giving us some revenue lift and retention rates are doing well.

Fred Searby -JP Morgan

All right. Good. Thanks a lot.

Operator

Your next question comes from the line of Gary Prestopino with Barrington Research. Please proceed.

Gary Prestopino - Barrington Research

Good morning, Tony, Jack. How are you doing?

Jack Pearlstein

Very well.

Tony Aquila

Very well

Gary Prestopino - Barrington Research

Can we talk a little bit about little drill down on China and India, can you give us an update on what you are seeing in both markets, maybe it pertains to new wins, things like that?

Tony Aquila

Yeah. Sure. So kind of start with India, where we now have a quorum of the majority of market share leaders in India with alignment on, kind of, standardizing the claims process. Obviously, India is as probably many of you know a little bit of a slower moving adoption market. And so we -- well, it's pretty insignificant in our revenue forecast. We're making good business progress.

We don't generally like to disclose names on accounts because sometime accounts are sensitive to it. The important thing in India is we have the quorum of the market share leaders and now we're kind of working with them to figure out how the process is implemented and what are the elements to the process in the first phase, kind of learning from our various mature markets.

Moving on to China, which is, I'd say has much more mature behaviors for an emerging market. We see that the activity is primarily being driven by the premier vehicle providers, OEMs in particular, which are bringing their cars to market. So, the BMWs of the world and et cetera, are working with us and we're generating revenue now.

Additionally, we've got a couple of carriers that we are in the phases of kind of working with them, essentially on working out how they will allow the services. China is like United States, you can describe the United States as 50 countries under a flag and currently you would describe China very similarly with its provinces.

Gary Prestopino - Barrington Research

Okay. And then in terms of what you said as far as new customer acquisitions Mexico, Russia, Romania -- refresh my memory, that would be driven by the insurance companies, correct? So you are actually signing up new insurance companies there?

Tony Aquila

Their market -- you've got a couple of markets mixed in there. So there are some idiosyncratic activities that occur, but we're seeing them mature out at a faster pace than we saw in the United States, which is very good for us. And as you saw that the growth is coming up and network effect is kind of starting to happen in there, where you get -- once you start pick-up one carrier you get another one coming in shortly and then that creates a network effect around the body shops. And we're also targeting our enhanced relationship with the OEM car manufacturers.

So in Russia, we are just getting a tremendous amount of network effect on the body shops and we're dealing with that. And then in Romania, we've got a couple of the top carriers that kind of wanting to standardize the process around us. And the third market you said again was….

Gary Prestopino - Barrington Research

Mexico.

Tony Aquila

Mexico is a market that we are really again getting the core on the insurance industry and that of course is playing with just exceptional growth because they are pushing all their claims from paper to electronic standardizing on our platform.

Gary Prestopino - Barrington Research

Okay. And then how many countries, you are operating in there, Tony?

Tony Aquila

We were doing a count yesterday, and I think we had 52.

Gary Prestopino - Barrington Research

So, that's up from 49 last year somewhere around there.

Tony Aquila

Yes, it's up.

Gary Prestopino - Barrington Research

Okay, thank you.

Tony Aquila

Thank you.

Operator

(Operator Instructions) And your next question comes from the line of Franco Turrinelli With William Blair Company, please proceed.

Franco Turrinelli - William Blair Company

Jack, Tony, good morning, how are you?

Tony Aquila

How are you?

Franco Turrinelli - William Blair Company

Yeah, thank you. Congratulations on a great quarter. Most of my questions have been asked but I was reading in Collision Week that there are some legislative initiatives in Missouri and Kansas that sort of require insurance companies to use all elements of an estimating system. I guess I don't understand if it's significant development something that may be can help you sell additional modules into your insurance company customers. Could you just help me understand this a little better? Thanks.

Tony Aquila

Yeah from time to time you see various state adoptions and it's generally trying to correct some kind of behavior that has occurred within that geography. It does help. It actually calls for, it proves to the insurance industry that a third-party provider like ourselves needs to be there with a standardized method that is available and not being guided by an interested party so to speak and it needs to be done by a disinterested party.

And so it does help us. It just helps strengthen our value proposition and we've an entire regulatory team that goes around the United States. I think we are probably one of the few in the world that actually has a team of attorneys and people that go around and help the insurers work through those issues.

Franco Turrinelli - William Blair Company

Does this kind of superior workflow functionality kind of help in addressing some of these concerns?

Tony Aquila

I think what it really helps with is in our record of being so clean with the [DOIs] on some of the things that some of our competitors in the past haven't been so clean on.

Franco Turrinelli - William Blair Company

Interesting. Tony, I mean, it's really in a sense, the Americas sort of being the biggest positive surprise for us apart from maybe in complete understanding of the dynamics of the industry. Can you just drill down a little bit on North American to help us understand why it's doing so well?

Tony Aquila

I think if you just put it into simple terms, we think of the U.S. like the "Rock'Em Sock'Em "game, You got to get out there and you got to slug it out for the business. And we are everyday getting the organization more fit to fight. And I think we've proven that we can perform a little better than expectations. I'm certainly not up to our expectations yet. But where we really concentrated on the box them in strategy is where we really dominated into a leading market position in Canada, Mexico, Brazil, Latin America [Norte] we're going to draw the party lines in the United States and kind of deal with it there.

Franco Turrinelli - William Blair Company

Yeah, terrific. Impressive, thank you

Tony Aquila

Thank you.

Operator

(Operator Instructions)

Tony Aquila

Okay. I think that what we are going to do is we are going to wrap it up from here. So, I would like to say thanks to everyone. We had another great quarter. We continue to leverage the strength of our global portfolio to develop innovative solutions and to increase throughput, while eliminating waste.

This provides our customers with the highest level of product and service value, which in turn we hope to convert into increased shareholder value. We still got a lot of things to do, as we said on this call and in some of the questions and we are very focused on doing that. So, thank you very much.

Operator

A repay of this call can be accessed until close of business on February 20, 2008 by calling 888-286-8010 or 617-801-6888 and entering access code 24747443.

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