IHS, Inc. (IHS) F1Q08 Earnings Call March 19, 2008 5:00 PM ET
Jerre L. Stead - Chief Executive Officer and Chairman
Michael Sullivan - Executive Vice President & Chief Financial Officer
Jeffrey R. Tarr - Co-President & Co-Chief Operating Officer, IHS Inc.
Ron Mobed - Co-President & Co-Chief Operating Officer, IHS Inc.
Deb Kelly - Investor Relations
Peter Appert - Goldman Sachs
Randy Hugen - Piper Jaffray
Anurag Rana - Keybanc Capital Markets
Patrick Burton - Citigroup
John Neth - William Blair
Good day, ladies and gentlemen, and welcome to the first quarter 2008 IHS. earnings conference call. My name is Denise and I’ll be your coordinator for today’s conference. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Ms. Deb Kelly, head of IR. Please proceed, maam.
Thank you, Denise. Thank you for joining us for the IHS first quarter earnings conference call. If you do not have the News Release we issued today, you will find a copy on our website at www.ihs.com. Some of our comments and discussions on the quarter are based on non-GAAP measures. Our non-GAAP or adjusted numbers exclude non-cash items, gains and losses on sales of assets 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 financial statement. 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.
The agenda for today’s call is as follows. Jerre Stead, our Chairman and CEO, will provide highlights of the quarter and review our strategies including. Mike Sullivan, our Executive Vice President and CFO, will review the first quarter financial results, recap certain financial aspects of our recent acquisition, and provide an update to our outlook for fiscal 2008. After formal comments, we’ll then the call for Q&A at which time we will be joined by Jeff Tarr and Ron Mobed, Co-Presidents and Co-COOs of IHS. Please keep in mind that conference call , particularly 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.
Thank you, Deb, and welcome to all of our investors and IHS callings on this call or the webcast.. The first quarter of 2008 was a great start to what I believe will be another very successful year for IHS. I want to thank all of our colleagues for their excellent performance in delighting our customers and delivering these outstanding results for our shareholders. Let me begin by reviewing the highlights of the quarter.
First our financial results. Revenue for the first quarter was $199 million dollars, up 30% over last year, including 9% organic growth. Normalizing for a transition out of a non-strategic agency business, overall organic growth in the first quarter was in the low double digits, with engineering organic growth in the high single digits. This significant transition is now substantially complete. Mike will give you the details in his comments. We’re providing this transparency to demonstrate the significant improvement in engineering from a business that was in decline a few years ago to one that is currently delivering high single digit organic growth and improvement margins. We expect continued improvement with engineering’s organic growth moving toward a run rate of low double digits later in the year. Mike will share with you in his comments a sense of the organic growth inherent in our acquired businesses so that you can see how these strategic additions to our domain capabilities will support future profitable organic growth.
Our acquisitions in total are providing profitable growth with Janes and Enviromax, exceeding thus far in 2008. Adjusted EBITDA increased 41% to $5.8 million dollars in the first quarter of 2008. Our adjusted EBITDA margin improved 200 basis points to 25.6% from 23.6%. Adjusted earnings for diluted share were .45 cents a share, up 18% over last year, and we generated $29.4 million dollars of free cash flow. We accomplished all of this while we continued to drive the business forward to achieve our vision to be the source for critical information and insight. When information and insight are mission critical to our customers achieving their business goals, we are the source they trust, rely on, and come to first. Specifically, we continue to improve our global leadership position for information and insight across four targeted information domains. Energy, product lifecycle, security, and environment.
As we stated before, our strategies to drive profitable growth are directly linked to four objectives that include committed annual targets for customer delight, success, profitable top and bottom line growth, and shareholder success as measured by margin improvement relative to our peer group.
Consistent implementation of our strategies for profitable growth continues to create value for all of our stakeholders. Let me comment briefly on our progress. Our first strategy is to put customer first. We’re building a culture that starts from the outside in and sees the world through our customers’ eyes. The best way to do this is to ask for feedback and to listen to what our customers say. A recent example of this occurred at our annual worldwide sales conference held this past January in Denver. At this gathering of over 500 IHS sales people, a representative of a large multi-national energy company shared with us what we are doing well and what we could be doing better. This not only created a chance for our colleagues to learn about this customer’s business challenges, successes, and view of IHS, but also gave IHS the opportunity to demonstrate the full breadth of our information and insight products and services and thereby helped us to begin to expand our wallet share with this valued customer.
Our second strategy is to crease a best in class work environment that supports profitable growth. Our acquisition activity over the last 12 months has made it essential that we have a world class process to integrate each one thoughtfully and successfully. As part of our acquisition process, we recently created a new position built internally by Mark Kelly, a senior member of the finance team, to ensure that we have an even stronger integration process to compliment our best in class acquisition process.
Our third strategy is to achieve a leading position across our targeted information domains through organic growth and acquisition. As you know, we have targeted four specific information domains, each of which represents a significant opportunity globally where IHS has the best opportunity to be the source for critical information and insight.
More importantly, we feel we have a unique competitive advantage with the information and insight we can provide at the intersection of these domains. Today, customers are buying and utilizing information and insight, products and services that cross two, three, or all four of these information domains; however, our greatest opportunity lies with the vast majority of customers who still buy from only one or two of the domain offerings. This opportunity was highlighted at Sara week in February. For those of you who don’t know, Sara week is an annual executive conference that has addressed the challenges faced by international energy markets and companies for more than 25 years and is widely considered to be the most influential meeting of its kind.
This year’s conference focus, the quest for security, attracted almost 2,000 of the energy industry’s leading executives and delegates from more than 50 countries. These participants were interested in hearing more about our energy security, which literally represents the intersection of our energy security and even product lifecycle domains. For the first time, this year’s program included speakers from our Janes business. In addition, most presentations included discussion of environmental issues and needs.
As we think about expanding our leadership position across the four domains we regularly face may provide decisions that will strengthen and expand our information and insight in products and services. Integral to that process is our robust pipeline of potential strategic acquisitions.
Since our yearend earnings call in January, we’ve completed four acquisitions deploying almost $125 million dollars in capital in the process. Of these four acquisitions, three added to our information capabilities and they included ESP, a leading provider of sustainability solutions related to greenhouse, gas, air, water, and waste in environmental compliance. Dolphin, the leading provider of chemical lifecycle management information and support tools. And announced just last week, JFA International based in the U.K. JFA provides energy exploration tools that enable customer investment decisions. We acquired JFa for approximately two million pounds or roughly $4 million dollars. In the insight space, we acquired Prime, which owned 50% of Lloyd's Register-Fairplay, a leading provider of maritime critical information and insight essential to the global transportation of goods.
Mike will review the evaluation, financing, and disclosure aspect of these transactions in his comments. I’ll recap our strategy. First, each of these acquisitions met the rigor of our requirements for strategic financial and cultural fit with IHS. All of them, including McCluskey, which we are so pleased to have acquired last December, increased the depth of our information domains and enhanced our portfolio of products and services to drive customer delighted value. Lloyd's Register-Fairplay, in addition to being a leading provider of shipping information, and exclusively managing the international maritime organization, ship numbering system for the U.N. is a natural compliment to IHS across all four domains. One example I gave on our March 3rd call is the real time tracking and monitoring of energy shipments combined with monitoring vessel status, port conditions, environmental compliance, and security threats. Our goal with this acquisition and in general is to develop new products and services across the four domains not available anywhere else. That will grow relationships and wallet size with existing customers and reach new customers. The acquisition of ESP and Dolphin, together with last year’s acquisition of Enviromax, strengthened our growing position in our environment domain. We view this domain as having several primary areas of focus, including climate change and chemical lifecycle management. ESP and Dolphin significantly expand our capability in this arena with their best of breed offerings.
Our pipeline of targeted strategic acquisition opportunities across all four domains continues to be robust. The pipeline includes smaller tuck-ins as well as larger acquisition opportunities. As we review potential acquisitions, we are always mindful of two things. First, when possible, to reinforce our recurring revenue business model, and second, to consistently follow our disciplined end-to-end acquisition process.
Our fourth strategy relates to improving margins and quality through operational transformation as we continue to leverage our scaleable business model. As you’ve heard us say, we have an intermediate term goal of improving our adjusted EBITDA margins to the 30% range. We’re making steady and significant progress towards that goal with our first quarter 2008 margin of 25.6%, up 200 basis points compared to last year’s first quarter.
To a great extent, this margin and opportunity is driven by the successful implementation of our key initiatives, including seizing the Asia-Pacific opportunity, customers first in marketing excellence, global customer focus teams, data accumulation, IT and product development, consolidating our quote to cast system, and purchasing savings. We’re making good progress in all of these initiatives, each of which is led by a member of our senior management team.
We’ll be happy to take questions on any of the initiatives, but I do want to comment briefly on two of them. The data accumulation shirred service initiative, our manufacturing plant if you will, continues on track to improve data quality, as well as significantly reduce our data accumulation costs as a percent of revenue, the latter starting in the first half of 2009. This effort is closely tied to our customer first initiative as data quality ranked highest in importance by our customers surveyed last year. We recently agreed to an additional outside partnership with a leading provider in this area, Info Tech, to help us achieve our goals.
We are making steady progress in building our global account management teams, which are already demonstrating solid results and we believe will improve our sales productivity starting in 2009.
In conclusion, I am very pleased with our first quarter results and the outstanding progress achieved by our colleagues thus far in 2008. There continues to be so much opportunities in this business and we’re working hard for all of our stakeholders to capitalize on the potential. Before I hand the call over to Mike to give you the details of our financial results, I want to welcome our newest board member, Brian Holme. We are very pleased to have Brian join the board. He most recently served as Vice Chairman at Thomson and he brings a wealth of experience to an already exceptional board. Now, I’ll turn it over to Mike.
Thank you, Jerre. I’ll begin with an overview of our first quarter results and also briefly recap the details of our recent transactions and then provide a high level outlook for the full year 2008. Here are the highlights of the quarter, starting with revenue. We delivered top line growth of 30%, driven by 9% organic growth, 19% growth from acquisitions, and the rest from favorable FX movements. Energy revenues were 27% and engineering at 34%. Organic revenue growth was 9% overall with energy growing at 15%, including a very successful Sara week and engineering at 2%. As Jerre mentioned earlier, excluding the transition out of our largest agency relationship, engineering’s organic revenue growth was in the high single digits for the first quarter.
As we have discussed with you in the past, we have been improving our portfolio over time, especially in our engineering business to eliminate non-strategic products and services. Instead, focusing our resources on opportunities where we add value across our four domains. As part of this process, we have transitioned out of a significant portion of our agency business, where essentially we have been a reseller of information collections that were not aggregated within our bundle of standard frames. The impact of this transition was to reduce organic growth for engineering and the company overall in Q407 and Q108. Excluding this impact, overall organic revenue growth was in the low double digits in the first quarter and organic revenue growth for engineering was in the high single digits. The transition out of this business was substantially complete during the first quarter of 2008 and we expect engineering report organic growth comparisons to improve beginning in the second quarter.
Additionally, we will soon lap the one year anniversaries of Janes and other 2007 acquisitions, which will contribute to higher organic growth for engineering and support our expectations of low double digit organic growth for IHS in 2008. In fact, we’re providing an additional metric, the organic growth rate inherent in our acquired businesses, which in the first quarter of 2008 was in the low double digits.
Finally, related to revenue, critical information were 28% and represented 64% of total revenue. Decision support tools were 37% and represented 16% of our total revenue. Services grew 32% and represented 20% of total revenue.
As we’ve said previously, beginning with our second quarter, we will be moving away from our legacy energy and engineering segments, replacing this with regional segment reporting, as well as providing our revenue breakdown in terms of information and insight, each divided into the categories of products and services. Be assured that when we make this change, we will provide a parallel view of the results, as well as historical information for comparative purposes.
Turning to the rest of the PNO, gross margins declined 180 basis points year-over-year to 55.1%. This decline reflected a realignment of certain costs from SG&A to cost to goods sold and the transition out of the agency business, which was low margin but appeared as margin enhancing, because of the presentation on a net revenue basis in the financial statements. As with organic revenue, gross margin comparison should improve with the transition behind us.
SG&A as a percent of revenue and exclusive stock base compensation expense improved 350 basis points year-over-year to 29.9%. Adjusted EBITDA totaled $50.8 million, up 41% versus a year ago. Adjusted EBITDA margin improved by 200 basis points to 25.6% from 23.6%. Adjusted EPS increased 18% to .45 cents per diluted share in the first quarter from .38 cents last year and we generated free cash flow of $29.4 million in Q1.
Regarding segment profitability, energy adjusted EBITDA increased 45% to $43.2 million in the first quarter compared to $29.7 million in the prior year period. Engineering adjusted EBITDA was $19.0 million, up 32% from $14.4 million in the Q107. The reported tax rate for first quarter of 2008 was 33.1% approximating last year’s 33.0%.
Stock based compensation expense increased by $5.4 million versus a year ago to $12.7 million in 2008. Adjusted net income for Q108 totaled $28.4 million, up 29% from $21.9 million in the prior year. I should add that adjusted EPS increased less than adjusted EBITDA, mainly due to the purchase price amortization related to our acquisitions. Please note that our earnings release provides the first share figures for a number of items that we exclude in measuring operating performance on the schedule attached to the release. This schedule will show you the detailed reconciliation of reported EPS to adjusted EPS.
Now let me move to a few balance sheet highlights. We ended the quarter with cash of $139.1 million and virtually no debt. We did borrow approximately $50 million from our credit facility early in the second quarter to finance a portion of the three acquisitions announced on March 3rd; however, we expect to pay that balance down over the next quarter or two, assuming we do not complete any further acquisitions in the interim.
Deferred revenue at the end of the quarter was about $283 million, which represent the year-over-year change of roughly $61 million or 27%. The organic growth rate inherent in this increase was approximately 8%. This is lower than our recent trend line and was adversely affected by the timing of a few international renewals, which suppressed this measure by a few percentage points. As we discussed in the past, this measure can be choppy from quarter-to-quarter and we still expect to approximate our organic growth expectations in the low double digits.
Turning to cash flow, Q108 free cash flow was $29.4 million compared to $19.8 million a year ago. Free cash flow increased despite the impact of higher bonus disbursements, substantially all of which are paid in Q1, as well as one additional US payroll in this year’s first quarter. Here again, the trends can be a bit uneven quarter-to-quarter, but we expect consistently high annual levels of free cash flow conversion. On a trailing 12 month basis, our free cash flow at the end of Q108 represents 77% of adjusted EBITDA. As a reminder, this high rate of cash flow conversion remain the hallmark of our economic model and is enabled by the following characteristics. First, low levels of required CapEx. Second, our subscription business does not require builds and work in capital to support growth. Third, our cash for tax rate continues to trend below 30%. Fourth, a well capitalized balance sheet. The enduring nature of these features provides the basis for our projection of a 75% or better conversion rate from adjusted EBITDA of free cash flow.
Regarding our share repurchase program, during the Q108 we repurchased approximately 67,000 shares common for $3.9 million dollars or 58.41 per share. Additionally, as employee equity work best and related tax withholdings come due, IHS withholds enough shares in treasury to cover the individual’s tax liability and makes a payment to the tax authority out of corporate cash. During the Q108, IHS withheld approximately $13 million dollars of treasury stock under this program.
Now let me revisit some of the details related to our March 3rd acquisitions. IHS acquired Prime, the 50% interest in Lloyd's Register-Fairplay, for approximately $38 million pounds or roughly $75.5 million dollars. This represent the multiple about 11 times our share of expected adjusted EBITDA during our first 12 months of ownership. Lloyd's Register-Fairplay has a strong track record, growing revenue in high single digits with margins currently greater than IHS adjusted EBIDTA margins.
December is our reporting for this JV, based on our 50% ownership, we will account for our investment as an equity method investment and will report the investment as a single line item on our balance sheet. We won’t be consolidating any revenue from the JV, but we will include our share of JV net income within a non-operating line item in our PNO and our proportion of share of the JV adjusted EBITDA and our computation of IHS adjusted EBITDA, we will also provide, along with our news release, an abbreviated income statement for Lloyd's Register-Fairplay, as well as a reconciliation to adjusted EBITDA. In calculating net income for the JV, please keep in mind our rule of thumb of approximately 5% annual purchase price and amortization.
Lastly, we expect JV to be approximately break even to IHS adjusted EPS in 2008 and accretive in 2009. Regarding EPS and Dolphin, as we said in our March 3rd call, we deployed about $43.5 million in capital for approximately $20 million of expected annual revenue. These businesses are experiencing strong growth and our expectation is to accelerate this growth and achieve margins in line with overall IHS margins within 24 months.
Finally, JFA. As Jerre said, we deployed approximately $2 million pounds or roughly $4 million dollars. This was small but strategic tuck-in to our energy domain. As a reminder, we will be including the results of all four acquisitions - Lloyd's Register-Fairplay, ESP, Dolphin, and JFA for the remaining nine months of fiscal 2008 and as with Lloyd's Register-Fairplay, we expect all of these acquisitions to be break even to IHS adjusted earnings per share in 2008 and accretive to 2009.
Now let me discuss our revised outlook for the full year ending November 30, 2008. Our guidance is on an all basis and assumes constant currencies, as well as the effect of the five acquisitions completed to date to 2008. We have increased our guidance and now expect all 2008 revenue growth to be in the range of 21 to 23% from a base of $688 million in fiscal 2007 and all adjusted EBITDA to grow 26 to 28% from a base of $167.6 million in fiscal 2007.
We continue to expect our full year tax rate to be approximately 33% and our 2008 stock base compensation expense to be in the range of $45 to $50 million. We expect depreciation of amortization to be in the range of $39 to $40 million and fully diluted shares to be approximately $63 million. And that interest income should be approximately $3 to $4 million, reflecting a cost of financing the acquisition announced to date. This outlook assumes no additional acquisitions, currency movements, restructurings, or unanticipated events.
In summary, during the Q108, we continue to drive strong top and bottom line growth, expand margins and deliver high levels of free cash flow. As Jerre said, we’re off to a good start for the year and remain committed to expanding our capabilities across the four domains through acquisitions and organic growth.
Now, let me turn the call back over to Jerre.
Thank you, Mike. We look forward to an in-depth discussion with you about our business on our investor day on April 30th in New York. We will provide more detail about our future plans, give you the opportunity to talk to our management team, and to see some of our products. Thank you for your time today. I look forward to seeing many of you in person on April 30th.
Mike, Jeff, and Ron are with me and we’re now ready to open the call for Q&A.
(Operator Instructions) Your first question comes from the line of Peter Appert from Goldman Sachs.
Peter Appert – Goldman Sachs
Thank you. Mike, I was hoping you could help me understand better the margin leverage implications of accelerated organic growth rate over the balance of the year. I’m thinking intuitively that this might imply that we should see even greater margin improvement as the year progresses. How do you think about that?
Peter, certainly higher organic revenue growth comes with the greater opportunity for margin expansion. I think one of the things you ought to keep in mind are the investments that we’ve been articulating need to be made in a business to support long-term growth and we’ll continue to balance that in with the deliver of the margin expansion we promised.
Can I just add to that, Peter. If you do the math as I know you already are of our guidance of revenue and adjusted EBITDA during the year, you’ll see that number pretty strong as the year continues.
Peter Appert – Goldman Sachs
Jerre, the extent that you’ve used a good portion of the cash balances at this point, do we assume that perhaps the acquisitional activity flows on the near term basis and maybe you could just chat generally.
That’s a great question. We have not consumed a lot of our cash. As you might have heard Mike say we expect to pay back that $50 million probably this quarter or most of it in the next two quarters and you also heard him talk about the 77% delivery of free cash flow this quarter and our expectation that we’ll continue 75% for the balance of 2008. So feel good about that. Would like to comment that as you remember we were able to receive and negotiate at $375 million dollar line of credit at very attractive rates, 3.25%, which is very good investment basis today. So we feel very good, Peter, about our ability to continue to make strategic acquisitions. As I mentioned, both the top ends as well as the ones that will fit all four complimenting our domains with a particular focus to the kind that touch in the middle of those four domains, like we were fortunate enough with Lloyds Register-Fairplay.
Peter Appert – Goldman Sachs
The last thing and I’ll let someone else speak. Can you give us any, and maybe this is a question for Jeff, on the drivers of improved organic revenue growth within the engineering business, specifically what product lines. What areas are driving it and again does that translate into some measurable leverage in terms of margin over to the engineering business specifically where the margins have been sort of flat as recently.
Let me start, Peter, because I want to take the opportunity and then I’ll turn it over to Jeff to answer the question. As I said, I really want to emphasize this. This ending Q1 completes the transition that’s gone on for the last three plus years in engineering. From a business that was going south, both from a revenue gross standpoint as well as a margin standpoint, I am really proud. We all are of the engineering team and their accomplishments, where we’re now, as you heard Mike say, in a position if you normalized of 7.7% something like that, first quarter, internal organic growth, low double digits and the balance of the latter part of next year. We’re also very pleased that we’ve accomplished all this without any restatements or anything else. We’ve done this as we’ve worked through major changes. So I just want to, thanks for giving me the chance, Peter, but I really want to compliment the whole team. By the way, in the meantime, engineering has continued, as Ron reminded us this morning, to double their operating earnings every couple years. So that is also not lost on our behalf. But Jeff, if you’d like to pick up specifically with Peter.
Sure, terrific. Thanks, Peter. So I’ll give you two ways to think about the sources of the growth in the business. One is to think about it in terms of subscription, non-subscription. The subscription growth has continued to be in the mid to high single digits. Actually trending up a bit over recent quarters. With the obviously an offset over the last few quarters coming from the non-subscription businesses, including the agency business that Jerre referred to. Another way to think about the organic growth of the business, we can think about it in terms of about one third coming from the parts business. About two thirds coming from that historic standards business. The part, the standards business is about half from new business, about half from pricing. Now when we look forward at our growth and look at it overall, we can’t forget the acquisitions and the organic growth that’s inherent in the acquisitions that we’ve done that is quite strong and also adds to our confidence that with this agency transition behind us, we should see acceleration in the segments growth.
In terms of operating leverage, one of the other elements of this transition that’s taken place over the last three years is a shift from a business that was primarily based on third party contents to one that today with the addition of our security business, our environmental business, and the portfolio changes we’ve made is primarily based on proprietary content and tools and inherent to propriety content and tools is a reasonable expectation of improved operating leverage.
So that’s a very complete and thorough answer, Jeff. Thanks. One thing I want to add to that is that we worked through all of this before we made any changes in our reporting. As you heard Mike comment, we’ll be providing that transition during the second and third quarter, providing all of our investors great insight of how the transition will happen from a financial standpoint as well as historical. We wanted to make sure that we provided 100% transparency, invisibility with all changes. That’s why it’s so critical that we get this behind us. Now move to what we believe is a much more efficient structure that allows us, as we talked before, maximize the investments that IHS Inc level into four domains that provide us very significant profitable growth opportunities. So you’ll see us now make that next move, but again, my hat’s off to our entire organization for getting us to where we’re now going to move forward from. Thanks, Peter.
And your next question comes from the line Anurag Rana from Keybanc Capital Markets. Please proceed.
Anurag Rana - Keybanc Capital Markets
Good evening, everyone. Congratulations on a good quarter once again. Could you give us a little more information on this Info Tech. Using a third party at this point it seems to reduce some cost. Could you give us an idea as to what they would be doing for you and what level of services are they providing and what kind of cost savings can we expect from that?
That’s a very good question. Info Tech is a successful public company, has a fairly significant presence in the US as well as abroad. They specialize in high quality data accumulation efforts, much like ours. They’re one of actually four outside partners. They’re a significant addition for us that we will use to compliment the really critical inside work that we from an editing and publishing and providing significant insight to our current data accumulation effort. They’re right now, as we speak, in working with our colleagues around the world to figure out how we can maximize if you read the data accumulation. If you remember, we’ve talked about the fact that we have had over 1,200 people, 28 locations, 10 different operations working. You’ll also remember that we set the highest opportunity for our improvement in customer delight was to improve the timeliness and quality of our data accumulation. They bring very good quality metrics with them and I look forward to reporting more in detail as we move forward in the second and third quarter with their progress with us. I would encourage anybody to go on their website with interest, because they’re a find partner that we’re very pleased to have.
Anurag Rana - Keybanc Capital Markets
Thank you. We haven’t heard much lately about the royalty based business and where the rates are nowadays and is there any sensitivity at this point, any increase or decrease?
That’s a great question. I’m going to let Jeff answer that for sure, but I will tell you that’s one more thing we’re very pleased with. Jeff?
The royalty rates have been stable in the business now. Every quarter, now pushing more than two years. So we feel that we have that well in hand. I would also add to the fact that moved the business to one that is now primarily based on proprietary content and tools also mitigates that risk in the business.
One of our critical targets as we work through all this transition was to get us positioned to where 20% or less of total IHS revenue was on a royalty basis and we are now at that point. So feel great about that. You would expect as time goes along and we see the organic growth we’re talking about in additional acquisitions that will become a ever smaller percentage of our total, but in great shape as a valued part of meeting our customer needs.
Anurag Rana - Keybanc Capital Markets
Thank you and just one more. Are we looking at any major acquisitions this year? I would quantify that, $100 million dollars and above?
As I mentioned before, we always have some large potential acquisitions, like the one we did with Janes is a very good example, but as you also remember that one we identified four year ago and it took us that long. So there are always acquisitions and particularly now as we look at the domains that are potential significant that would compliment the business that we’ve got, but we are and we’ll continue to be a very patient acquire to make sure that we give the share owner return that you and all the rest of us deserve.
And from Piper Jaffray, your next question comes from Randy Hugen. Please proceed.
Randy Hugen - Piper Jaffray
Thanks. Do any of your recent acquisitions have any seasonality we should take into account when we’re doing our models?
That’s a very good question. The answer is none of significance. One of the things that’s happened as we’ve made these acquisitions is there’s less and less seasonality in the business, particularly if you go back four or five years ago when over 50% of our revenue was coming out of royalty base. So Mike, pick up with a little more specifics for us.
Yeah, I think Jerre is right on, Randy, with the fact that there’s not significant seasonality. I think one other thing to keep in mind is that the businesses we acquire we tend to look to strengthen as time goes on. So we look out first year, second year, we see businesses where there’s accelerating top line growth and profit delivery and way to think about spreading that in your model…
And one of the things I’d ask, because it’s a great question. In the March 3rd call, we said that Lloyds Register, for example, over 80% of their revenue is subscription based business and when you put the two environment acquisitions together, they’re at 60% plus and we’ll drive those up to the 75 or 80% subscription base that we enjoy and as they’re spread out over a broad customer base, it will continue to evolve a time of less seasonality.
Randy Hugen - Piper Jaffray
Thanks. The economic outlook certainly hasn’t gotten any better since your last call. Are you seeing any sort of impact? Do you still feel that you’re pretty insulated from any economic downturn in the US?
As you know, Randy, well over 50% if we counted user base revenue is outside of the US. We’re very well balanced with critical information and insight. The customers need an upside-downside of economic needs. I could actually make a case where a bunch of our revenue base is more important with people that are looking at critical decisions today than if things were a bit easier. So I think I would say we feel very good. We’ve got great balance. If you think about things that we’re providing our customers today, environment has nothing to do with economics. Security has nothing to do with economics. Energy, and we need to remember when we talk energy we’re not just talking cost per barrel; we’re talking about everything that happens with energy on a global basis and energy will continue. Product lifecycle is the place where you can make the greatest case of them needing particularly our parts critical information and insight to make longer decisions. So we feel pretty good about where we’re at today. Clearly, if we had a much higher percentage of consulting, we would have a concern that I am sure some people that are primarily in the consulting business of those domains today do have.
Randy Hugen - Piper Jaffray
Perfect. And then, you’re obviously getting good visibility with energy clients from Sara week. Could you comment on the traction you might get from the event from some of the non-energy offerings?
Oh that’s great. I’d like Ron to pick up on this. Non-energy offerings based on Sara week and what we’re seeing, because Ron was in the thick of that for five days.
Yes, thanks Jerre. As Jerre mentioned earlier, one of the things that we did this year is we introduced Janes into the discussion and the big theme coming out in this year’s Sara week really around the interface between energy and security and the interface between energy and the environment, in particularly with climate change. So when we look at the expansion in those domains, notably security and environment, we can see factually what we’ve been talking about, which is the confluence of those four domains in front of what we think is one of the most important discussions going on today.
Your next question comes from the line of Pat Burton from Citigroup.
Patrick Burton - Citigroup
Congratulations on the quarter. A two-part question. On Lloyds, do you have the option to buy in the other 50% at some period of time? Then my second question is the growth opportunity in some of the areas such as alternative power or green initiative. Can you talk about IHS is positioned there?
Yeah, I’ll have Ron and Jeff, starting with Jeff, pick up on the second part of your question. We do not have an option today to acquire the Lloyds Register 50% of that joint venture. Two quick comments. It’s a seven and a half year old JV. So this is not acquiring or creating a JV, it’s acquiring very successful one. Point one. Point two, I’ve had conversations with my counterpart at Lloyds Register and I would say Richard Sadler is as enthused as I am. I’ll be meeting with him in April, next month, to see how much opportunity we have. If you want to get excited, read Lloyds Register’s last year’s annual report and see how much is in there that could potentially partner with us, whether it’s a joint venture or whatever, because there’s a lot of things we look forward to complimenting in the future. Jeff?
Thanks for the question. This is obviously an area we’re very excited about, one that is critical to the vast majority of our customers and with the recent acquisitions plus what we have already in the business, we’re very proud of the breadth of our environmental offering today. It might make sense to run through a few of them. So our first acquisition was Enviromax, which enables the department of defense to manage hazardous materials throughout the supply chain. ESP builds on that capability and leverages it across a commercial customer base. Dolphin is critical to bringing initiatives in that it enables manufacturers and retailers to bringing their supply chain to essentially evaluate the products in that supply chain based on their toxicity and how green they are and make choices with that as a critical attribute. All of this builds on offerings that we’ve had for quite some time. Environmental standards plus critical tools and content that electronics manufacturers use to ensure that they’re minimizing the lead, the chromium, in their offerings. So we feel that we have a very powerful offering today for our broad customer side and then we can’t forget CO2.
You see how those four domains relate when you pick up on what Jeff’s been saying with respect to the impact of product lifecycle, production processes on the environment, and then you move across to the impact of hydro carbon extraction and power generation from hydro carbons on the environment through CO2 missions. We’ve been working quite a lot on that. Recently Sara produced a study called “crossing the divide” that looks at the way in which the power industry needs to move from its current base, mostly in fossil fuel for power generation into a more low carbon world. I mentioned earlier that a large part of the discussions around Sara week were in front of what the industry needs to do in this environment. We’ve been working on the data side as well, because we think having foundational data is going to be critical in this discussion to remove some of the speculative discussional punditry that tends to go along with it. To that end, for example, we built a renewable power map for Europe which traps every single winds farm, nuclear power plant, and hydro electric power plants in Europe with that power generation capacities. Recently, with the acquisition of McCluskey, we’ve got a very strong handle on the largest source of power generation and carbo emissions, which is coal, from the leading commentator in that space. So I think we’re working on multiple dimensions here, making sure that we bring both foundational reliable and accurate information and also the insights that flow from that.
Great answers, guys, and a very thoughtful question.
Patrick Burton - Citigroup
Jerre, one quick follow up on that. How about from a consumer of power perspective? You know, industries that use a lot of power like chemicals. Is there an opportunity for you guys to get a lot more revenue out of maybe some newer industries outside of the actual energy companies?
Very good question. I’ll start and I’d like both Ron and Jeff to add on that. If you step back just for a second, the recent environment acquisitions we made touch a whole new area of customer base, including retail and more chemical producers than we’ve ever had. Then take it all the way back to our traditional information, we provide the creators of all gas, energy, electrical, and now add to that the Lloyds Register as we are able to give the kind of information I talked about during the presentation today. So we really are now moving toward a total supply chain information avenue across all four of those domains and nobody has had prior to that. Ron?
In respect to the companies that tend to be very high power users, such as smelting companies and others, we’ve had penetration in those industries for some time already, particularly with the center of research that helps companies plan for what they see is the energy makes in them, the likely trends in fuel costs. On top of that, we’re also working with companies that depend on our influence by changes in fuel prices, particularly automobile companies and selling to them the same thing. Information and particularly insight run the directions of fuel mix and energy prices. So we’re in that mode already and I think as you point out, that there is opportunity to continue to offer products and services that slice into our information insight in ways that are more relevant to those communities.
Building on that, if we look at our customers in our product lifecycle business, which is where these consumers of energy exist, many of them exist, they’re the largest consumers of energy in the world. For example, US Department of Defense. If we think about the aerospace industry and our large customers. Our customers include just about every large aerospace company in the world. Energy consumption, fuel efficiency are critical to them and we’ve been providing them services like our design methods and we’ve been building on that intensively over the last year or two.
And last quick comment on it, because you’ll hear us talk more and more as we move forward. 90% of the world commerce has moved today by its…and the other huge user of energy of course is maritime. So we have the opportunity to take your question many steps forward. Great question. Thanks.
And from William Blair, your next question comes from John Neth. Please proceed, sir.
John Neth – William Blair
I just want to make sure I understand when you talk about the discontinuation of the agency business. Can you just give us a little more color on what that means? I just want to make sure that we shouldn’t interpret that as the loss of a relationship with an SDO?
For certain, the answer is no, but what more color would you like? That is not to be confused. What more color would you like, John. I know Jeff would be happy to add.
John Neth – William Blair
What constitutes the agency business versus the standards business?
The agency business, which now is quite small, down to less than 1% of revenue at this point, significantly less than 1% of revenue, is a business where we just distribute third party offering. We don’t do a lot of it. There are only a few, but where we add no value. The third party manages the product, delivers the product, and leverages our channel, and we determined that is just not a strategic fit with where we’re going. It’s not efficient use of our resources. It’s not the business that we want to be in.
And Jeff answers it perfectly, John. There was no added value from us to the customer and as we think through all the strategic things we’re trying to do, we want to make sure that we not only help our customers be successful, but that we do it in a way that allows us to bring true insight to compliment our data. It’s exactly as Jeff described.
John Neth – William Blair
This might be a fine point again, but I was just wondering if you could comment in terms of the nature of two of your acquisitions, specifically Lloyds and Janes. There’s a distinct media component and McCluskey too. There’s kind of a media component to it in that they’re publishing periodicals. Can you sort of talk about when you’re looking at an acquisition or thinking about the long-term strategy, sort of differentiating between becoming a media company versus a data and insight company.
Yeah, that’s a great question, John, and I’ll have Jeff start, then Ron. You’ll see and we’ll be happy to make that public how much of Lloyds Register-Fairplay, for example, is already moved to the online insight business that is so complimentary to our existing business.
When we looked at these acquisitions, what we focused on was the electronic data bases that they have and the tools that fit on top of those data bases. Like, for example, in Janes, the ability to monitor and track insurgencies around the world and plot those in ways they’re very useful to our customers. That’s what we look for. Now, it just so happens that some of these companies come from originally a more traditional publishing background and have retained some level of traditional publishing revenue. That is not what we’re acquiring for. That tends to be significantly less than half of the revenue base with a shift toward the electronic, and where we do have traditional print publishing elements, they do bring value in that they do put a powerful brand statement on the desks of C level decision makers. So to that extent, there’s actually some value for us in those traditional elements of what are today no longer traditional publishers.
I think one thing that we’d like to point and I support what Jeff said about the interest is generally around the information and the insight. Some of the information and insight we provide needs to be provided on a high frequency basis, whether it’s daily or hourly or whatever, and therefore, that lends itself to some extent of some kind of newsletter publication, which takes sometimes the foundational data that changes on a daily basis and adds a certain amount of editorial opinion or insight comment on top of it. That forms part of the offering. Having said that, inside that there remains a foundational data stream, which aggregated builds up a huge amount of value for us and for our customers. Aside from that, there’s also an insight component that’s more reflective. It starts to look at trends as well. So if you look at the Sara business and also the McCluskey business to which Sara is actually running the McCluskey business operation inside our organization, we have now the ability to look at very high frequency daily decision information insight. We stretch back to something on a lower frequency, but longer term trend analysis and then we look right away out into the macro studies, which as you know can go out as far as 25 years. So we get that entire coverage now.
Good question, John.
John Neth – William Blair
Last one I guess if I could and maybe another kind of complicated one, but as we think about the integration of the Dolphin acquisition, the ESP acquisition, and Environmax. Can you give us a road map for the integration of those different platforms or even if there is going to be one. I guess I’m trying to think if you’re trying to build a single sort of environmental management information solution platform, which one of these platforms is going to be call it the database of record.
As a quick reminder, we already provide a lot of data, compliance as an example, on environment that’s in existing databases throughout our organization that would be both in what we call our historical PLC business like Jeff mentioned, electronic parts, as well as compliance information in other parts of our business. So those are well at hand and you should be thinking about our ability to literally customize the needs of the different databases to meet our customer needs. But your question is a great one.
There are three elements of integration. So let me hit all three really briefly. First, and the easiest, is back off assentegration. So that’s a critical element of what we do. The second is at the product level and our ESP and Enviromax offerings have similarities and we’re already working to integrate that functionality to create a more robust offering for both our military and our commercial customers. Dolphin is a somewhat different offering, but does have a very robust database of chemical information. So that’s one where we don’t see the same integration in terms of the platform, but the integration of the database that exists in Dolphin into that ESP and Enviromax offering. That’s the second level of integration. Third level of integration, critically important, front-end sales side and our global account managers are critical to that in the whole program that we put in place to drive revenue growth.
That’s a great way to wrap it up. If you think about our global account management teams, I have a vision, a dream, and an expectation that we will be at a point in the very near future, partly with Mark Kelly’s leadership and others. The day we announce a new transaction, new acquisition, our global account teams will have a specific time for training. They will have a specific expectation from us with increased expectation of performance for the year, an adjustment to their objective measure and reward system to drive the behaviors that we got with our great sales organization evermore outside-in. That we provide the total package that any one of our customers anywhere in the world need. So you can see hope from today’s discussions. The good progress; however, perhaps much more exciting is the implementation that we now have well underway with much more to come. Thanks, John.
We have no further questions in the queue. I will now turn the call back over to Deb Kelly for closing remarks.
Thanks, Denise, and we thank you very much for your interest tonight. This call can be accessed by a replay at 888-286-8010 or international dial-in 617-801-6888, pass code 97299290, beginning in about two hours and running through March 26. 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 again. We so appreciate your interest and time. Good afternoon, everybody.
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.
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