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Dolan Media Company (NYSE:DM)

Q1 2008 Earnings Call

May 6, 2008 4:30 pm ET

Executives

Haug Scharnowski - Director of Investor Relations

James P. Dolan - Chairman of the Board, President and Chief Executive Officer

Scott J. Pollei - Executive Vice President and Chief Financial Officer

Analysts

Peter Appert – Dolan Media

Randy Hugen – Piper Jaffray

Bob Evans - Craig-Hallum Capital

Robert Evans – Craig-Hallum Capital

Michael Weisberg - ING

Peter Appert - Goldman Sachs

Operator

Good afternoon ladies and gentlemen and welcome to the first quarter 2008 conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded. I would now turn your call over to Mr. Haug Scharnowski. Mr Scharnowski you may begin.

Haug Scharnowski

Thank you Gretchen, good afternoon ladies and gentlemen and welcome to Dolan Media Company’s first quarter 2008 conference call. On the call today from the Company our Jim Dolan, Chairman, Chief Executive Officer and President and Scott Pollei, Executive Vice President and Chief Financial Officer. By now everyone should have had access to the first quarter 2008 earnings release, which went out today at approximately 3 pm Central Time.

In case you have not seen our release investors will be able to find it on the Investor Relations section of Dolan Media Company’s website at www.dolanmedia.com. Additionally, this call is being webcast and the replay will be available on the Company’s website approximately one hour after the completion of the conference call and will be made available for a period of 21 days.

Before we begin we would like to remind everyone of the Safe Harbors Statement under the Private Securities Litigation Reform Act of 1995. Today’s prepared remarks contained forward-looking statements and management may make additional forward-looking statements in response to your questions. The words expect, believes, anticipates, estimates, continue, plans, see, will, outlook, and similar expressions are intended to identify forward-looking statements.

These forward-looking statements are based on information currently available to us and are subject to a number of risks, uncertainties and other factors that may cause our actual results, performance, prospects or opportunities to be materially different from those expressed in or implied by these forward looking statements.

For more detailed discussion on the factor that could cause actual results to differ materially from those projected in any forward-looking statements we refer you to the risk factors contained in Dolan Media Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2008. Except as required by Federal Securities Laws Dolan Media Company assumes no obligation to revise or update any forward-looking projections that may be made in today release or call.

Please note that on today’s call in addition to discussing the GAAP financial results and the Company’s outlook. The Company will discuss adjusted EBITDA, which is a non-GAAP financial measure. An explanation of Dolan Media’s use of non-GAAP financial measures in this call and reconciliation between GAAP and non-GAAP measures required by SEC Regulation G is included in today’s earnings release.

The non-GAAP information does not substitute for any performance measure derived in accordance with GAAP and the use of such non-GAAP measures have limitations, which are described in more detail in the Company’s press release and with that I would now like to turn call over to Jim Dolan.

James Dolan

Thank you Haug, and thank you all for joining us today. On our call today I will discuss our accomplishments during our first quarter of 2008 and provide an update on our strategy and our acquisition pipeline and then discuss our guidance. Scott will review our first quarter financial results and finally we will open the call for questions.

I will begin by saying that we are pleased with our start to the year 2008. Dolan Media Company continues to demonstrate balanced revenue growth and remains well positioned with revenue drivers tied to both cyclical and counter cyclical economic conditions. We believed that our high growth, high margin, recurring revenue business model continues to position us very well for the current economic environment and for achieving the goals we have set for this year.

For the first quarter of 2008 our financial results reflected many of the positive trends of previous quarters. Our revenues for the quarter increased 16.3% to $41.5 million. Our adjusted EBITDA increased 25.7% year-over-year to $13.5 million and our adjusted EBITDA margin increased 240 basis points year-over-year. These results were driven by revenue growth in both of our divisions, business information as well as professional services.

Specifically, our mortgage default service business American Processing Company or APC showed strong first quarter growth, so did our public notice advertising. During the first quarter we also demonstrated solid year-over-year organic revenue growth of approximately 12%. Our organic revenue growth was primarily attributed to our mortgage default processing and public notice advertising revenues.

It’s important to note that we benefit from foreclosure activity not only in the States and which we provide mortgage default processing, but also in the 13 States in which we carry public notices. In the first quarter the Professional Services Division revenue grew 15.6% year-over-year. Our division consists of two operating units APC, which provides mortgage default processing services to attorneys practicing foreclosure law in three States and Counsel Press, a National business serving the appellate bar.

For the quarter APC reported year-over-year revenue growth of 23.8%, resulting from foreclosure file volume increases as well an increase in the fee per file charged to Trott & Trott and Feiwell & Hannoy. During the quarter APC service 36,600 case files for our law firm clients. This represented an increase of 21.6% from the 30,100 case files we serviced in the first quarter of 2007.

During the last five weeks of the quarter Wilford & Geske referred to APC approximately 1600 foreclosure related case files in Minnesota, a 33% increase in files that Wilford & Geske processed themselves during the same period of last year. Sequentially, quarter-to-quarter APC file volume increased 5.4% including the files referred by Wilford & Geske.

We believe that we see a change in the foreclosure trends in these three states and I will talk to you a little bit about what we see. In the past two quarters we have seen banks and loan services extended the period before a delinquent mortgages is referred to begin the foreclosure process and totally we are hearing in the marketplace that banks and loan services are showing a little more patients with delinquent loans holding them a little longer beyond the previous 90 days before referring to law firms closure.

Nobody ever is eager to foreclosure and we believe that lenders are giving borrowers a little more time. Another factor we believe maybe lender and servicer efforts to award foreclosures to a loan modification or other loan restructuring programs. While we read much in the news about these loss mitigation efforts by lenders we also are hearing that the net results still is foreclosures delayed rather than foreclosures awarded.

We believe that these factors probably will somewhat reduce the spike in the foreclosure volume but also probably will extend the foreclosure volume more into the future. In other words the foreclosure volume graph may change from radio tower to a bell curve with a longer cycle ahead of us. Based on industry research from hosing experts we still anticipate an increase in the number of sub-prime adjustable rates mortgage foreclosures starting in the third and fourth quarter of 2008.

We expect this to have a direct effect on our file volumes during the later half of 2008 and into 2009. Our Counsel Press appellate services company was down during the quarter primarily due a 6% year-over-year decline in case volume. Though Counsel Press file volume growth has historically been fairly stable, we believe that declining economy be having an effect on filing of appellate cases. Appeals are expensive to pursue, the higher the court the higher the likely cost.

We continue to be the largest player in this sector and we believed any weakness in the industry could lead to market share gains for us. We also continue to be very pleased with the results of our Business Information Division, which year-over-year grew well and by almost 17% to $22.8 million in the first quarter. This at a time when many other media companies are reporting revenue declines. Revenue growth in this division was driven by a 40.6% increase in public notice advertising.

During the quarter we closed two previously announced acquisitions, one each in our two divisions. In our Business Information Division we acquired The Mecklenburg Times, an 84-year old twice weakly court and commercial publication in Charlotte, North Carolina. It joins our other legal publications in the Carolina’s including the statewide North Carolina lawyers weakly. The Mecklenburg Times is qualified to carry public notices in both Mecklenburg and Union Counties. With this acquisition we now are qualify to carry public notices in 13 markets.

In our Profession Services Division we acquired the mortgage default processing services business in Wilford & Geske and Minnesota law firm. This furthers our expansion into other markets and into our already established operations in Michigan and Indiana. In conjunction with this acquisition we entered into a 15-year services agreement under which Wilford & Geske will use APC for all of the law firms mortgage default processing.

The agreement also has two ten-year renewal options. Since this announcement we have begun the reengineering of the Minnesota operation including installation of our proprietary workflow software and systems to help achieved future efficiencies. As I described in our last conference call our acquisition pipeline in both of our divisions remains very strong. At this time we have prioritized our acquisition and do diligence activities on mortgage default processing business opportunities.

We remain confident in our ability to close a deal within previously announced timetables. Let me remind you of what I have been saying about the balance in our business and how it helps us during these recessionary times, if you take mortgage default processing from one of our divisions and public notice advertising from the other of our divisions. These are our counter-cyclical growth drivers. These two business lines and aggregate saw revenue growth of 30.3% year-over-year during the last quarter.

Now I’d like to turn to guidance. Based on the businesses that we own to date and our outlook for each of our divisions we’ve reiterate our previously provided full-year 2008 guidance as follows. For the full-year 2008 excluding future acquisitions, we continue to expect revenues to be in the range of $168 to $178 million. Adjusted EBITDA, again excluding future acquisitions is expected to be between $50 and $55 million. Our effective tax rate for 2008 is expected to be approximately 41%. We expect our 2008 capital expenditures to be between 3.5% and 4.5% of 2008 revenues. Now I will turn the call over to Scott.

Scott Pollei

Thank you, Jim. Total revenues for the first quarter of 2008 were $41.5 million, a 16.3% increase over the same period last year. For the first quarter, the business information division revenue represented 54.9% of total revenues compared to 54.6% in the prior-year period. Professional Services Division revenue represented 45.1% of total revenues from 45.4% for the prior-year period.

This revenue rebalance is mostly due to very strong performance of foreclosure related public notice advertisements in our Business Information Division. Let's breakdown that total 16.3% growth rate, total organic revenue growth in the first quarter was approximately 12% and acquired revenue growth was approximately 4.3%. The acquired revenue growth resulted from the acquisitions of the Mortgage Default Processing business of Wilford & Geske, The Mississippi Business Journal, and The Mecklenburg Times.

Our operating expenses for the quarter were $33.3 million or 80.2% of total revenue, an increase of 17.4% from $28.4 million which was 79.5% of total revenue for the same period last year. Direct operating expenses for the quarter were $13.9 million, an increase of 11.6% from $12.4 million in the prior-year quarter. As a percentage of revenue, our direct operating expenses in the quarter decreased 150 basis points to 33.4% compared to the same period last year.

The increase in direct operating expenses consisted of an $800,000 increase in our business information division and a $700,000 increase in our Professional Services division, which were largely due to annual salary increases and other increase personnel costs including $100,000 of stock-based compensation expense recorded in the three months ended March 31, 2008.

Selling, general and administrative expenses for the quarter were $16.1 million, an increase of 20.8% from $13.3 million for the prior-year period. The increase resulted from increases in overall wage costs, including a $300,000 of stock-based compensation expense recorded during the quarter and $300,000 in public company expenses, including the costs we incurred as we prepared to comply with Sarbanes-Oxley Act.

Additionally, the company incurred $200,000 related to audit and other professional services expenses related to an acquisition we are no longer pursuing because we determined during our due diligence that the target to down align with our acquisition objectives at this time.

Depreciation and amortization expenses for the first quarter increased 27.7% to $3.3 million from $2.6 million for the prior-year period. The increase is the result of amortization of finite life intangible assets acquired in the February 2008 acquisition. Operating income for the quarter was $9.8 million or 23.5% revenue, an increase of 18.5% from $8.2 million, which was 23.1% of revenue in the prior-year period.

Operating income for the quarter 2008 and 2007 included equity and earnings of Detroit Legal News Publishing of $1.6 million and $900,000 respectively. Adjusted EBITDA, which we define as net income or loss before non-cash interest expense, interest expense net, income tax expense, depreciation and amortization expense, non-cash compensation expense and minority interest in net income of subsidiary, and after the minority interest distribution paid for the first quarter of 2008 was $13.5 million or 32.5% of revenue an increase of 25.7% from $10.7 million or 30.1% of revenue in the prior year period.

Again for reconciliation of adjusted EBITDA to GAAP, net income or loss please refer to today's earnings release. Net interest expense for the quarter was $2.5 million compared to $2 million for the prior year period. The interest expense increase with the result of $1 million of increased non-cash interest expense in connection with the interest rates swaps. This was due to a decrease in interest rates. This increase was somewhat offset by decreased interest expenses $600,000 as our average outstanding borrowings under our bank credit facility declined.

Net income for the first quarter was $4 million or $0.16 per share and 25.2 million weighted average diluted shares outstanding compared to a net loss of $27.8 million or a net loss of $2.98 per share, a 9.3 million weighted average diluted shares outstanding in the first quarter of 2007. Net loss for the first quarter 2007 included non-cash interest expense of $29.9 million related to our redeemable preferred stock.

In connection with the Company's initial public offering the Company converted and redeemed all of its outstanding preferred stock, including accrued dividends on August 7, 2007. As a result the company did not record non-cash interest expense related to preferred stock since August 7th of last year and does not expect to record this expense for future period. Also included in our first quarter net income was a minority interest charge of $600,000 versus minority interest charge of $900,000 of the same quarter of last year.

The decline of the minority interest expenses primarily attributed to our increased membership interest in APC in 2007. I would now like to briefly review the first quarter result of our two business divisions. Our Business Information Division revenues for the first quarter increased 16.9% to $22.8 million from $19.5 million for the prior year period. As Jim indicated, growth in the division was driven by 40.6% year-over-year increase in public notice revenue.

Display and classified advertising revenues also increased at a rate of 8% year-over-year as a result of our Mississippi operations, which we acquired in March 2007. Revenue growth in the business information division was offset slightly by $200,000 decline in circulation revenue. Total direct operating expenses for our Business Information Division increased 11.1% to $7.6 million from $6.8 million for the prior period.

The increase was primarily the result of increased overall wage cost including annual salary increases and increased stock-based compensation expense and other operating expenses such as postage and printing, including $200,000 of increased cost due to our operations in Jackson, Mississippi and Charlotte, North Carolina, which we did not own during the first quarter of 2007.

Selling general and administrative expenses for the division increased 19.6% to $9.6 million from $8 million more than the third of which was due to our operations in Mississippi. The balance of the SG&A increase was due to higher wage cost. Our Professional Services Division revenues for the first quarter increased 15.6% to $18.7 million from $16.2 million in the prior year period.

Of the 15.6% year-over-year revenue growth in the Professional Services Division 11.7% was a result of organic growth. The division's revenues increased was attributed to a 23.8% increase in our mortgage default processing services revenues, which benefited from a 21.6% year-over-year increase in the number of mortgage default case files serviced by APC for clients.

Mortgage default processing services revenues also benefited from a fee increase charged to Trott & Trott and Feiwell & Hannoy. Counsel Press revenues declined 9% in the quarter as we experienced a 6% year-over-year decline in the number of appellate cases handled. In addition Counsel Press faced difficult year-over-year comparisons as the subsidiary held two very large cases in the first quarter of 2007.

Total direct operating expenses for our Professional Services Division increased 12.2% to $6.3 million from $5.6 million for the prior period. Approximately, 80% of this increase was due to increased personnel costs at APC, related to staffing requirements to meet the growth in the number of files processed. The remainder of this increase is due to the addition of the mortgage default processing business of Wilford & Geske.

I would now like to discuss a few highlight from our balance sheet. We continue to be pleased with the strength of our balance sheet. At the end of the first quarter, we had $1 million in cash, down slightly from $1.4 million at the end of the same period last year. Accounts receivable increased $9 million year-over-year or $5.8 million sequentially and was primarily attributed to the extension of payment terms moving from 30-days to 45-days to Trott & Trott in connection with their revised fees structure. These changes in payments terms and fees structure took effect January 1st, of the first quarter.

Total debt at quarter’s end with $74.7 million down from $95 million of total debt till March 31, 2007, during the quarter we borrowed $19.5 million from our $150 million of revolving credit facility to help fund the purchase of our acquisition. These borrowings were offset by $5.9 million in debt repayment.

Also in accordance with our credit agreement, in March we converted a $25 million of debt under of revolving credit facility to our term loan facility. As a result of this conversion on March 31, 2008, we had $73.1 million outstanding under the term credit facility, and zero dollars outstanding under our revolving credit facility.

The company continues to maintain a $200 billion senior credit facility composed of a $125 million revolving credit facility and a $75 million term loan facility and with that, I’ll turn the call back over to the operator, so we can take questions.

Question and Answer

Operator

(Operator Instructions) Our first question comes from Peter Appert from Dolan Media. Peter please go ahead.

Peter Appert – Dolan Media

I’ve been promoted to working at Dolan Media that’s excellent news.

James Dolan

We are honored to have you Peter.

Peter Appert – Dolan Media

The question Jim as you mentioned on the call already the issues around unit volume at APC and lending institutions holding on longer to files obviously, but can you dig a little further into that just in terms of -- it does feel a little bit like there might a bit of a disconnect between the statistics we see in terms of foreclosure rates particularly, in Michigan, Indiana versus the roughly, I guess it was 16% unit growth rate X acquisition you did at APC. So that was question one and then question two, can you just remind us what the level of the price increase was?

James Dolan

Let's take a look at price increase first. Scott, will you take that?

Scott Pollei

Yes, by contract in the Indiana our price increase there goes up by CPI, which in Indiana was around 4%, we scale that back just a little bit and then in Michigan it’s negotiated and it was a little less than that so, overall between the two, it’s between 2.5% and 3%.

Peter Appert – Dolan Media

And did you, give the better terms to the folks in Indiana also or just to Trott & Trott?

Scott Pollei

No, no they got the – it was a similar kind of deal.

Peter Appert – Dolan Media

Okay.

Scott Pollei

No, wait, you were talking about that the payment term?

Peter Appert – Dolan Media

Yes.

Scott Pollei

No, no that was only in Michigan, and the reason for that is Indiana already is a judicial state and under our original deal there we bill that in two increments. Half the fee gets billed up front and then the other half gets billed when the file gets completed depending on the type so, is was a different issue there.

James Dolan

First of all your question about the timing of foreclosures and foreclosure volume and that sort of thing. This is a little bit of a lumpy situation in that, we are dealing of course not directly with the clients, it’s the attorneys who are dealing with their clients and they are the ones who are talking to clients and experiencing, whatever is the experience. The decision to slowdown on foreclosure referrals is client specific and some firms are not changing what they do and are referring although 90-days they always have -- other firms are not, other firms are saying let’s wait a little bit longer. Its part of the organized program, it’s really is client by client and so a client would say 15% of the volume of a law firm, could make quite a difference in the flow of foreclosure referrals. We look at all the metrics we can get at every step along the way and we don’t see any change in the flow of delinquencies, but we do see these -- the delay in referrals to us. So that’s where their conclusions began to form in our minds about, the clients are holding it longer. Eventually they can't hold them very long because they do pile up, they are piling up behind them and so we’ve come to a conclusion this is a timing issue more than it is a ultimate volume issue. Does that answer your question?

Peter Appert – Dolan Media

Yes, I think so. The related issue is you are -- I guess implicit in that you are feeling relatively comfortable that Trott & Trott, Feiwell etc are not loosing relative market share in their markets?

James Dolan

No, not at all, in fact might be opposite.

Peter Appert – Dolan Media

And then unrelated issue the -- on the BIF side classified and display advertising up 8% is noteworthy relative to what we are seeing in the industry, anything particular driving that?

Scott Pollei

Let me dive in there Peter, I would point out that most of that not only increase the 8% increase came from our Mississippi operation which we bought at the end of March last year. Kind of an organic comparison of what we owned both periods, it was relatively flat, slightly positive but it was not negative.

Peter Appert – Dolan Media

No better – no better that the industry.

Scott Pollei

Well if you do a dive into the numbers what you see is, I guess we've been -- I guess we are producing this for a while is that advertising growth began to flatten our some and now it's pretty flat organic year-over-year and we do expect that to decline a little bit going forward and some of the money will shipped in a local budget to events and events are nice strong performance right now, but even that will weaken to as the recession does what recessions do as it deepens. For us this is more than replace by public notice revenues so we are okay with it, but this is a predictable curve we've seen through the past two recessions and I guess in a way to be comfort about that we understand the trends and we see them again.

Peter Appert – Dolan Media

One last thing and I will let someone else get on. Your showing some nice aggregate margin improvement in the context of revenue growth that is good, but the organic revenue growth maybe isn’t quite as robust as folks had anticipated a quarter or two ago. Does this suggest possibly then that there might be more upside in the margin story here than we had been thinking, are you re-thinking longer-term what your margin targets might be?

Scott Pollei

Well, the we benefited greatly this quarter from the uptake in public notice revenue, which was as you recall is our highest margin revenue of any of the various lines and that was really strong. We continue to think that, we ended the -- end of last year a little below 30% on an overall EBITDA margin. We think that will continue to grow up incrementally. We want to point out that the fourth quarter is typically a lower margin because that’s only book our year end bonuses and things like that. So, I don’t want anybody to think that it's going to go to 32 or 34 to 36 because that's not how it will work but, we are certainly hopeful about the continuing leverage we can drive through the business.

Peter Appert – Dolan Media

But not specific in terms of margin target

Scott Pollei

Not, no

Operator

Thank you. Our next question comes from Randy Hugen from Piper Jaffray. Randy, please go ahead.

Randy Hugen – Piper Jaffray

On public notices obviously very strong growth there. Should we expect any seasonality on that line or should we see sequential increases as we move through 2008?

James Dolan

The public notice is much like mortgage default revenue in the specific states that we operate and it will track the mortgage foreclosure volume. So, as you look at that --those indicators on one side of the business they also have an indication on the other side as well. There is not much seasonality we anticipate that will continue to be a strong line throughout the course of the year.

Randy Hugen – Piper Jaffray

And then was there anything behind declined in subscriptions or is that just basically a function of the slowing economy?

James Dolan

Well, we’ve come to a conclusion it is a slowing economy. We had refined our subscription files before to make sure that our profitability for circulation remained high, we've done that and then even when that’s done we see some shrinkage in the bases of circulation, not a lot not a big percentage but some. It is getting harder to sell high-priced subscription which is what we do and again this is a recessionary pattern, it’s hitting a little later than we expected at this time, we saw other recessionary indicators first before we saw this.

Randy Hugen – Piper Jaffray

And is that having any impact on your – I guess online data subscriptions as well?

James Dolan

Well, I mean we are constantly experimenting with a mix of where to grow the line between free content and pay content and that’s being adjusted almost daily at our local operations. We haven’t found the magic line yet, we haven’t found the right mix that we say applies everywhere. Some of our local operations are comfortable with where they have drawn a line. For a journalistically driven organization, it’s sometimes painful to come with a story you’re really proud and then put it up there for free. You are comforted than more people see it, but you also give up revenues to, so there is a tension there that I think is always going to be with us.

Randy Hugen – Piper Jaffray

All right and then one more, I always talked a lot about the opportunities in the mortgage default space. Are you currently spending much time exploring other legal outsourcing opportunities and is there a chance that you might get into another area in the foreseeable future?

James Dolan

Well, for quite some time now, we’ve been looking at the legal profession as a whole and we have ideas for a long time about where to look for growth opportunities and we have found a number of interesting, some of them exciting areas that we find very intriguing and I think its safe to say that someday we will do something there, but I am currently unable to say when.

Operator

Thank you. Our next question comes from Bob Evans from Craig-Hallum Capital. Bob, please go ahead.

Bob Evans - Craig-Hallum Capital

Good afternoon everyone and thanks for taking my call. First, can you comment on the rate swap, the expense for this quarter, I assume this is going to be one time in nature, this is not recurring?

Scott Pollei

Well this is the same, the two swaps we’ve had in place for a number of years now and we had the same kind of non cash interest expense last quarter. The two swaps are at $40 million and nominal value -- notional value I am sorry and with the drop in of variable rates, they go the wrong way. Assuming that rates turn around and go the other way at some point, we will be the beneficiaries as those mark-to-markets change. I guess the point I would make is that this interest expense, it’s a valid mark-to-market, but it’s not real because we intend to have these swaps continue until they are fully termed out in a number of years and so our cash interest rate is really locked in as described in our notes.

Bob Evans - Craig-Hallum Capital

Sure, so as we look at this kind of -- say going forward to next quarter given the rate environment, you are probably going to have a penalty there as well?

Scott Pollei

Well, I am not sure how much lower they can drop the rates.

Bob Evans - Craig-Hallum Capital

Right , Right. No, I understand that but--

Scott Pollei

To the extent they raise rates, we’ll actually be the beneficiary and we’ll record non cast interest income.

Bob Evans - Craig-Hallum Capital

And can you comment a little bit more in terms of how should we think about Q2 sequentially from a seasonality standpoint with your businesses given that we don’t have maybe as much background with the businesses, even that you're newly public?

Scott Pollei

Last year we saw an up tick in the business information line. We had some events planned that happened in the second quarter last year, those should repeat again this year. Counsel Press has historically had some follow-up in the second quarter and that is directly seasonal and related to the summer calendars that courts have. They slow down in their filings this quarter because the courts are -- take time of 90 days later again in August and on the default processing, we’ve also seen historically a slow down in the second quarter that corresponds to the income tax refunds that folks get back and are able to apply that cash to their debt payments. So it’s a slight dip, I guess kind of in the processing division units then -- and not on the other business information side.

Bob Evans - Craig-Hallum Capital

And from margin standpoint there shouldn’t be anything that would be meaningfully different…

Scott Pollei

No

Bob Evans - Craig-Hallum Capital

From a sequential stand point. Okay, and also could you just comment further Jim as a list to the acquisition pipeline, opportunities, size of opportunities, give us a little bit more color there?

Jim Dolan

Yes, in every part of the business we have a pretty full pipeline, in the processing side a very full pipeline and in a way the stories unchanged from the last time we talked about this in the last earnings calls. We are able to find very attractive thinks to do and we are able to do them at very attractive prices and we are being careful and through, but only hope not slow about these things. We hope to buy these things forever, so we want to make it a come out right, we have thorough due diligence. The environment for sellers and mortgage default processing as gotten a little more severe, but volume has increased that much more in the last three months. The stresses in the law firms are that much greater and I think their interest in doing a deal period is higher -- their interest at doing a deal at given price is little lower. They are more flexible on price for what we can tell.

Robert Evans - Craig-Hallum Capital Group

Okay, and is it -- can you give us some color in terms of, do you have more than one process from the amount of multiple processes?

Jim Dolan

We have many conversations underway, we have several processes underway. This in itself is the process, so you don’t just do one and then think, what do I do next? So the pipeline is sequential and has lots of work for us ahead.

Operator

Thank you. Our next question comes from Michael Weisberg from ING. Michael, please go ahead.

Michael Weisberg - ING

Thank you. I just have a couple of smaller item. I might have missed it, but did you put in the absolute SG&A expense in professional service you had -- you showed the increase, I didn’t see if there was a dollar number.

Scott Pollei

Let me pull that out here Michael.

Jim Dolan

While Scott looks for that, Michael did you have a second question we can deal with while he?

Michael Weisberg - ING

Yes, exactly. I was going to ask that how may -- Peter might have done it -- is the estimate correct 16% organic growth in APC in the quarter, which excludes Counsel Press that the right number?

Jim Dolan

16% organic growth, is that the right number?

Michael Weisberg - ING

Yes, I thought -- I was going to ask you and Peter sort of through that out there.

Scott Pollei

No, it was 12%.

Michael Weisberg - ING

I thought that was for the whole division not just APC was that wrong?

Scott Pollei

I’m sorry for APC the organic growth was 19%.

Michael Weisberg - ING

The APC organic growth was 19%.

Scott Pollei

Correct.

Michael Weisberg - ING

Is it possible to specify how much of revs you got from acquisition – how much did Wilford add in the quarter?

Scott Pollei

1.6 million.

Michael Weisberg - ING

Wilford --

Scott Pollei

I am sorry 0.6 million.

Michael Weisberg - ING

Wilford add --

Scott Pollei

It was 1,600 files. It was only the last five weeks of the quarter so --

Michael Weisberg - ING

It added $600,000 in revs is that right.

Scott Pollei

A little lower, yes.

Michael Weisberg - ING

Great, as I understand your swap –the swap laws. If rates stay where they are for the June quarter versus March, do you have to take that the same kind of non-cash charge or would there be no charge if there is no chang in rates?

Scott Pollei

There would be little or no charge in fact I guess that if rates didn’t change it all and in the term, shortens up my guess is that we would to have a slight pick up in income.

Michael Weisberg - ING

So, no change in rates you would eliminate, than with eliminate the--

Scott Pollei

The non-cash charge that’s correct

Michael Weisberg - ING

What’s the rate you are paying on the term loan?

Scott Pollei

Well, we paying LIBOR plus on a variable portion, which is not covered by the swap we pay LIBOR plus 150 our weighted average rate all in it is 5.7%.

Michael Weisberg - ING

5.7 weighted, I got it. Thanks so much. Did you – were you able to get the SG&A expense?

Scott Pollei

You know what Michael we don’t break that out, however I can tell you how to get there [Cross Talk]

Michael Weisberg - ING

Hooked it out for the other division, didn't you?

Scott Pollei

No we didn’t, if you look in the release -- I don’t think we did

Michael Weisberg - ING

Okay I thought you just read.

Scott Pollei

My mistake than, let me just pull that out again.

Michael Weisberg - ING

SG&A was up 19.6% to 9.6 million in business?

Scott Pollei

It was 16.1. It increased from 13.3 in professional services.

Michael Weisberg – ING

16.1 Versus 13.3

Scott Pollei

That’s correct.

Operator

Thank you and our final question comes from Peter Appert. Peter, please go ahead.

Peter Appert

Jim, just back on the acquisition for sec, can you speak to the competitive dynamics in terms of what you are seeing other players in the marketplace, weather that it has any implications in terms of ability to get deals done and valuation?

James Dolan

We are aware of a few other competitors out there. We are watching what they are doing it -- frankly we seen no effect at all on what we are doing. The several are -- there is a thing called MR processing, which has change its name to Prommis, I think its PROMMIS, I think which is venture backed firm that has operations, little bit in California mostly in Georgia. We have not seen that on the acquisition trail for more than a year and we don’t know why, we don’t know what’s going on there, but they seem not to be growing that way. There is a think called FT ventures, which is in itself a financial institution supported venture firm that has made acquisitions in Colorado and in Arkansas and they are buying partial interest in the operation, they are not changing management, they have no technology and apparently they plan to develop technology on the fly. That’s not good information, but it’s a best we have been able to get. We were not in any of the conversations in which they have executed deals, so it’s not been a head-to-head situation with them either and that’s really about it we don’t anyone else out there.

Peter Appert

The transaction that didn’t close, that involved some charge in the current quarter. Can you give us any color on that?

James Dolan

It was a very attractive business with some very attractive management and we looked at other timetables in which we could execute the deals and we look how it fit into our long-term vision for the business and decided we should use our time with the capital elsewhere and it was in no way a reflection on the business itself, it was just a fairly matter of fit and not to say that some day there might be a fit with us, but for right not there just isn’t and we have so much to going on and there is so much work and so many acquisitions we wanted to do. We have begun to, if you will thin the herd a little bit, this is really one of those cases.

Peter Appert

Was that a transaction processing business?

James Dolan

That was on acquisition, that’s really all I’m going to say.

Peter Appert

And then lastly the – should we read your comments to be an indication that you are focus is very much on trying on the APC side at least to focus on a fairly large state here in near-term?

James Dolan

I’m focusing my time on where I can get the big bank for the buck as far as adding value, as well as scale to our business so that’s how I would described what I’m doing. We do have acquisitions underway that are smaller that are in various other parts of our business. The best use of my time is on the bigger deals with the more pop.

Operator

Thank you and we do have a follow-up question from Bob Evans. Bob, please go ahead.

Robert Evans – Craig-Hallum Capital

Hello, again. Do you have any data you could give us as it relates to delinquencies in Michigan and Indiana? I know you had reference before that, the defaults may be delayed, but just wondering if you have any kind of leading indicator type data?

James Dolan

Well, leading indicator. I mean we have the MBA stats that we look at the 90 day delinquency rates there which we found to be a pretty good downstream indicator of what’s likely to happen. That’s what we have been looking out as our primary source. Now we are beginning to do other research, but it is really not fully baked yet. So that’s now we ate sharing

Scott Pollei

And the thing about the MBA, there is a most recent stat that are – that is out is the 1231.

Robert Evans – Craig-Hallum Capital

And that’s what I was wondering – I was wondering if you had any fresher data in terms of giving, talking about Q1 trans yet?

James Dolan

No. The MBA stats I believed were out for the first quarter, they should be out June 14 to 15th. So that’s we mark down on our calendar, that’s very important to us, but that’s all we got now as -- our data end of December 2007.

Robert Evans – Craig-Hallum Capital

Okay, just checking. Thank you.

Scott Pollei

I would point out though that, it’s not only the three states where we do mortgage to fall processing that we have follow these foreclosure points, because in the other 13 states that we do public notice advertising, this data is also very relevant.

Robert Evans – Craig-Hallum Capital

No, no good point. I know we are focus on the mortgage default processing, but point taken. Thank you.

Operator

Thank you and we have one follow-up question from Michael Weisberg. Michael, please go ahead.

Michael Weisberg - ING Investment Management

Yes. Hey Scott, I hare to be picking here, but the SG&A number you gave me it was the total SG&A. I just -- because the way we do it -- I just wanted the professional SG&A, because you gave it for business services and I know you have some corporate overhead type SG&A.

Scott Pollei

It is 4.7 million Michael.

Michael Weisberg - ING Investment Management

4.7 million, for profession services

Scott Pollei

Correct.

Operator

Thank you. We have no future questions at this time.

James Dolan

Thanks everybody, thank you for participating and for watching our covering.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating, you may all disconnect.

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Source: Dolan Media Company Q1 2008 Earnings Call Transcript
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