Solera Holdings, Inc. F3Q08 (Qtr. End 03/31/2008) Earnings Call Transcript

| About: Solera Holdings, (SLH)

Solera Holdings, Inc. (NYSE:SLH)

F3Q08 Earnings Call Transcript

May 8, 2008 5:00 pm ET

Executives

Kamal Hamid - Director of Investor Relations

Tony Aquila - President, Chief Executive Officer and Director

Jack Pearlstein – Chief Financial Officer

Don Tartre - Senior Vice President of Finance

Analysts

Stephanie Withers - Goldman Sachs

Gary Prestopino - Barrington Research

Patrick Burton - Smith Barney

Franco Turrinelli - William Blair & Co.

Jim Young - West Family Investments

Jim Baugh - Criterion

Roux Cardozo - KBS Capital Management

Operator

Welcome to Solera’s third quarter fiscal year 2008 earnings conference call. (Operator Instructions) At this time I would like to turn the call over to Kamal Hamid, Director of Investor Relations for Solera.

Kamal Hamid

Welcome to Solera’s third quarter fiscal year 2008 conference call. Today on the call with me are Tony Aquila, our founder, chairman, and CEO; Jack Pearlstein, our Chief Financial Officer; and Don Tartre, Senior Vice President of Finance. Tony will begin today’s call with a summary of financial results ending March 31, 2008 followed by an update on our global business. Jack will then comment further on our financial results for the third quarter, and conclude with an update on the company’s fiscal year 2008 guidance. We will then open up the call for questions, followed by concluding remarks by Tony.

Before we begin, I would like to remind everyone that our remarks during this conference call will contain forward-looking statements made pursuant to the Safe Harbor Provisions contained in the Securities Exchange Reform Act of 1995. These statements are neither promises nor guarantees, but involve risks and uncertainties that could cause the actual results to differ materially from the forward-looking statements, including without limitation those risks detailed in Solera’s filings with the SEC, including our most recent registration statement on form S1 and our 2007 annual report on Form 10-K. We disclaim any obligation to publicly update or revise such statements to reflect any change in our expectations, or events, conditions, or circumstances on which any such statements may be based, or that may effect the likelihood that actual results will differ from those set forth in the forward-looking statements.

We also plan to discuss certain non-GAAP financial measures on this call. A reconciliation of these measures to GAAP financial measures is included in today’s press release which is available on the investor relations section of our company website at solerainc.com. When we refer to consensus during this call we mean the consensus results of several analysts that cover the company as reported on Thompson First call. All information discussed during this call and webcast is protected by United States Copyright Law and may not be reproduced, distributed, transmitted, displayed, published or broadcast without the prior written permission of Solera Holdings, Inc.

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

Tony Aquila

Once again our financial results for third quarter fiscal ‘08 were ahead of consensus for both revenue and earnings. Our third quarter revenues of $138 million were up more than $16 million, and 13.4% over the prior year period. These results were driven in part by notable strength in two of the brick countries; Brazil and Russia, as well as in France, the U.K. and South Africa.

We grew our revenue by more than 20% in Brazil while revenue in Russia more than doubled. Our central and eastern European countries were again stand-outs as revenue grew by over 30% over the prior year period, enhanced by growth in the number of new car sales and continuing adoption of electronic claims technology. In the third quarter new car registration in Poland was up 20% while registrations in Romani and the Czech Republic were up 24% and 10% respectively.

We have also seen significant new car sales in a number of countries within the Americas. In 2007 new car registrations grew by 6% in Brazil, and 12% in Argentina. Due to the significant operating leverage inherent in the business and our focus on eliminating waste our flow-through on the $16 million increase in revenue was 57%.

As we reported approximately $9.3 million of adjusted EBIDTA versus the same period a year ago, our third quarter adjusted EBIDTA margin of 34.9% was up 300 basis points year-over-year and four hundred basis points year to date.

Our EPS came in at $0.32 per share on a diluted basis which was $0.04 ahead of consensus. Jack will give you more detail on the numbers in just a moment. I would like to now update you on a ton ten U.S. insurance carrier contract that has been up for renewal. While our customer win-loss ratios have improved since we have claimed the claims services business from ADP in 2006, we were notified by this customer that it will not renew.

We are working with this customer to transition to another provider, and we expect the transition of occur during the fiscal year 2009. We do not expect the nonrenewal of this contract to have a significant impact on our earnings or on our long-term growth rates we have established for the company because of and in part our focus on waste reduction and other wins. In fact, across our markets generally our competitive position remains strong, with wins during the third quarter from a top ten insurer in each Canada and the U.K, and growing momentum in a number of our markets.

As many of you know, our two U.S. competitors CCC and Mitchell recently announced that they have signed an agreement to combine their companies in a merger of equals. CCC and Mitchell are both privately held companies and there is not much more additional public information at this time. We continue to monitor developments on the proposed deal, including its review by the federal government and the developments in the marketplace including insurers and repair facilities. At this time, however, we do not have any comments about the proposed combination.

Before I turn the call over to Jack, I would like to give you an update on our ongoing waste reduction efforts. Since the acquisition in 2006 we have taken a net of approximately $10 million in annual waste out of the company while continuing to grow the business. Immediately after the acquisition we had operations in just over thirty countries, approximately 2200 employees and our pro-forma revenue in that year was $430 million.

Today, just twenty four months later, we are active in over fifty countries. We expect to have approximately $100 million more in annual revenue and 10% fewer employees. As part of our ongoing efforts to improve efficiency, we have identified additional opportunities to improve in a number of geographies and have begun to make changes that we estimate will take an additional $7.5 million in waste out of our expense base over the next twelve to eighteen months.

I now would like to turn the call over to Jack who will provide further detail on the third quarter financial results following a Q&A. I will return for a brief summary remarks and open the call to questions.

Jack Pearlstein

As mentioned at the top of the call we are pleased to report on our third quarter fiscal year 2008 results. Our revenues of $138 million were up 13.4% over the prior year period. Approximately half of this growth was organic after adjusting for the loss of our shared services contract during the prior year period. Our Americas revenues grew 5.5% to $52.1 million, while our EMEA revenues grew 18.8% to $85.9 million with contributions from a broad range of geographies.

The robust performance in EMEA was paced by strong growth in central and Eastern Europe, which was up over 30%; France which was up over 25%; and South Africa which was up more than 15%. The solid performance in the Americas was driven by better than 20% growth in both Brazil and Mexico.

Our 3Q08 adjusted EBIDTA came in at $48.1 million, representing a 34.9% margin, up nearly 300 basis points over the prior year period and up nearly 80 basis points sequentially. As we have previously discussed this margin expansion was driven by both the inherent leverage in our operating model and our focus on eliminating waste and improving operational efficiencies. SG&A costs during the quarter were up $3.4 million sequentially; approximately $700,000 of this increase was due to increased stock comp charges, and approximately $1.9 million was due to increased Sarbanes-Oxley related costs.

A portion of the remaining increase was a result of our execution on rounding out our corporate management team. We ended the quarter with approximately $139 million in cash, and we had total debt outstanding of approximately $648 million. We paid down $8.4 million in debt during the quarter. Total leverage as defined by our credit agreement was 3.3x at March 31, 2008. We anticipate that we will get below 3.25x leverage at some point in Q1 of FY09 which will result in a 25 basis point decrease in our applicable margin.

Cash flow from operations during the quarter was $32.7 million. Our accounts receivable at quarter end was $91.1 million which translated to DSOs of roughly 59 days. CapEx for the quarter was approximately $44.1 million which included $0.9 million of payments on assets we financed. We continue to expect total fiscal year ‘08 CapEx to be in the $20 to $22 million range.

Consistent with our disclosure on the last conference call we incurred restructuring charges of $1.2 million in the third quarter, primarily related to one time termination of benefits. As Tony mentioned in his portion of the call we have a number of additional operational improvement opportunities. Depending upon the timing of several of these waste reduction initiatives we anticipate incurring between $2 to $7 million in recurring charges during the fourth quarter.

In today’s earnings release we provided updated fiscal year ‘08 guidance. We raised our FYOA revenue guidance from $515 to $520 million to $530 to $532 million. We raised our adjusted EBIDTA guidance from $166 to $170 million to $179 to $181 million, and we raised our full-year net GAAP income guidance from $15 to $20 million to $21 to $25 million. Additionally we increased our full year guidance for adjusted net income from $68 to $72 million to $74 to $76 million which equate to full-year cash EPS of between $1.14 and $1.17 per share.

The mid-point of our updated guidance now implies fiscal year ‘08 revenue growth of 13% and Fiscal year ‘08 adjusted EBIDTA growth of 25%, and results in FYO8 adjusted EBIDTA margins of 33.9% versus an adjusted EBIDTA margin of 30.5% in fiscal 2007.

That concludes our prepared remarks. We will now take your questions, and then Tony will provide a brief wrap-up.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Stephanie Withers - Goldman Sachs.

Stephanie Withers - Goldman Sachs

I wonder if we could get a little more color on the top ten carrier contract that will not be renewed? Can you give us an idea of about how much revenue you were getting from this carrier and what the reasons were for the loss?

Jack Pearlstein

Yes, it is about 1.5% of revenue, and this was a renewal that was hanging since the acquisition actually and when we got here there was a little bit of a technical need that the client had that the ADP firm had not invested in since the acquisition. We invested in it, and I think that just the timing of that and the delivery just kind of drove a decision of their urgency and at the end of the day they decided to move to the competition.

Stephanie Withers - Goldman Sachs

Speaking of competition, do you see any opportunities with the competition merging to gain share or pick up any contracts there?

Jack Pearlstein

At this time we really don’t have any comment on that.

Stephanie Withers - Goldman Sachs

How about just talk a little bit about the long-term margin outlook. You talked a lot about the drive to $35 and you are rapidly approaching those levels. Are you re-thinking the long term outlook for margins in the business?

Jack Pearlstein

The way we are executing is the drive to $35 is defined by consistency. Once we feel that the consistency is in place on the drive to $35 we will then set the next target.

Operator

Your next question comes from Gary Prestopino - Barrington Research.

Gary Prestopino - Barrington Research

Jack, a couple of questions on some numbers, how much did currency benefit you this quarter?

Jack Pearlstein

I think when you adjust for the shared services contract that basically it was in last quarter’s numbers and the prior year quarters numbers. You have a little bit less than half of the 13.4% coming from organic growth, and the rest came from FS.

Gary Prestopino - Barrington Research

You gave us some goals on where you want to be in terms of waste reduction efforts for next year, but what did you pull out of it this quarter? Could you give us a number there?

Jack Pearlstein

This quarter was very little actually because if you go back and look at our track record you will see that we execute in a quarter, we are sizing in the next quarter, we are executing in the quarter after, so they are kind of leap-frogging. This last quarter was nothing really significant.

Tony Aquila

And I think that is why the inherent operating leverage that we have is probably what drove mostly this quarter.

Gary Prestopino - Barrington Research

In terms of the SG &A expenses with the increased expenses for stock ops should it run between 28% to 29% of revenues in Q4, and is that a pretty good run rate for 09’?

Jack Pearlstein

I don’t want to go out and specifically talk about what it is going to be in Q4 or beyond that, because I don’t think we tend to give guidance there. I would probably comment and say that it is from a stocks perspective, I don’t anticipate big increases from here in terms of quarterly cost.

Gary Prestopino - Barrington Research

It seems like you are getting some good traction in some of these evolving markets. But you have plans to start up operations in Italy and Turkey this year, just give us an overview of what is going on there, and naturally there is a lot of interest in India and China as well.

Jack Pearlstein

I would tell you that we are making very good progress on our strategy for Italy. We are working with some pretty important market players there and that is all we are prepared to say at this time. And with Turkey, the in-roads are going as planned. We have our partners that we are working with there. We are feeling pretty good about that as well as alignment with some other parties in the market. And with China and India it is pretty much going similarly to the other two. Did you have any other countries you wanted to ask about?

Gary Prestopino - Barrington Research

Would it be safe to say that Italy and Turkey would be more of a 2009 event in terms of contributing any revenue?

Jack Pearlstein

I think Gary when we have talked I told you that we take a very conservative view on those countries and we don’t predict when they come online. We don’t factor them in if you will.

Operator

Your next question comes from Pat Burton - Smith Barney.

Pat Burton - Smith Barney

I don’t know what you can say about this or not Tony, but you have two competitors who are both highly leveraged, and they are obviously merging to try and take costs out to sustain their operations given their leverage. Isn’t there a competitive opportunity for Solera there?

Tony Aquila

I would love to comment about that but at this time we really don’t have any comment.

Pat Burton - Smith Barney

I don’t mean to be difficult. Obviously you will be contacted by the FTC and people like that through this. When you are done with that will you have some sort of comment for investors and analysts as to your position on your two competitors merging?

Jack Pearlstein

I imagine that once things settle down we will have plenty to say.

Tony Aquila

There will be an appropriate time at some point in the future.

Patrick Burton - Smith Barney

EMEA, how much of the 18% growth was currency in that segment? I assume that is the one that benefits the most?

Jack Pearlstein

I think that is the segment that benefits the most. I think there you have we will call it “high single-digit organic growth rates” and the rest coming from currency. A bit more than half in the EMEA segment.

Patrick Burton - Smith Barney

On the balance sheet, the growth in goodwill from quarter to quarter, what is driving that?

Jack Pearlstein

That is driven by currency as well.

Operator

Your next question comes from Franco Turrinelli - William Blair & Company.

Franco Turrinelli - William Blair & Company

I certainly don’t want to focus on the only possible negative in this release, but can we go back to that top-ten people, and I just wanted some clarification to make sure that I was scribbling correctly. I think Tony in your prepared remarks that you said that you did not think that it would have an impact on your earnings in 2009, and I think you mean fiscal 2009?

Tony Aquila

Yes, that is what I mean, just to be clear.

Franco Turrinelli - William Blair & company

Obviously this is a reasonably significant amount of revenue you have talked about the positive leverage on the upside to revenue. Can you help us understand what you are going to be able to do to avoid any negative leverage on the downside?

Tony Aquila

I think you also have to focus on all of it so to speak, we also said we had some wins as well. When you have a portfolio as big as this one you have some puts and takes that go on across it and on a net basis we are pretty prudent guys and we are watching out in the future and we deal with these things. I think we have always sized this one in the risk category, and if you go back on prior earnings calls you would see us take a relatively conservative view to it. And so that caused us to be prepared for it. That is just the way we do business on those things.

Franco Turrinelli - William Blair & Company

Was this decision made before or after the announcement from your competitors, and is there any appeal opportunity here?

Tony Aquila

It was done before. We were notified before. I can tell you that we haven’t worked through a plan with this client yet at this time. We have a lot of respect for them and it is tough to comment on things until things settle down.

Operator

Your next question comes from Jim Young - West Family Investments.

Jim Young - West Family Investments

Can you give us a sense as to the range of EBIDTA margins that you realized in various markets? For example, you mentioned that Brazil is up 20% in revenues, but what kind of an EBIDTA margin are you realizing in that market, and likewise the same for Russia, Poland, Romania, and any other markets you can give us a feel for?

Jack Pearlstein

We generally do not give out profitability or EBIDTA margins by specific geography like that. I think what you will see in the Q as it unfolds in the upcoming days as in the prior Qs and Ks is some additional information underneath our segments of Americas and EMEAS. And you are basically going to see our “ten per centers” so to speak, and our countries like the Netherlands, the U.K. Germany, and the U.S. So there you will get a picture of some of the profitability in those markets, but we just did the policy.

Don’t give out the profit margins by specific geography if you don’t have to, and really the primary reason for that is one of competition. It really doesn’t make sense for us to share what we charge because one can figure that out, and share what kind of money we make, because one can figure that out with the competition.

Operator

Your next question comes from Jim Baugh - Criterion.

Jim Baugh - Criterion

My question is really related to your interest income. I missed your comment about the debt rates. Could you tell me if anything has changed on your debt cost, or interest income on your cash balance?

Jack Pearlstein

I think that there has not been a change other than the movement to LIBOR and EUROBOR throughout the quarters that roll by. I think the one thing that I was referring to is that we have a step-down per the terms of the credit agreement once we get below 3.25x leverage. Where today we ended the quarter in March at 3.3x and what I was referring to was the step-down to 25 basis points, probably in the first quarter of the next fiscal year.

Tony Aquila

I heard from my people in China that you made a visit out there.

Jim Baugh - Criterion

I was excited to see the progress being made there. On this lost customer, for modeling purposes I am thinking about whether it should come out of the EMEA market or the Americas market. Or is both? Is it a global client?

Tony Aquila

It is out of the Americas segment.

Jim Baugh - Criterion

And it is 1.5% of the total revenue, right?

Operator

Your next question comes from Roux Cardozo - KBS Capital Management.

Roux Cardozo - KBS Capital Management

If you look at the Americas, it showed some very strong growth in Brazil and Mexico and I guess the rest of Latin America might be strong as well, but that implies that growth in the U.S. and probably Canada was a lot slower. Can you give us a sense of what types of investments you are making there to try and get that higher, or is it just managing data and growing internationally? Do you think you can accelerate the growth here in North America?

Jack Pearlstein

I think our view in the long term is that we will be turning the corner as well in the other markets in the Americas. Since we got here we have been investing in shoring up some functionality that referred back to the top ten that we had talked about earlier. So we were feeling pretty good about where we are heading in the long term, and we are pretty bullish on the entire region.

Roux Cardozo - KBS Capital Management

Are we going to see any major product launches, or is it just business as usual, upgrading as things go and [inaudible] your client base?

Jack Pearlstein

We don’t make big product launches from that perspective. We kind of ramp them in with our clients so we don’t have any kind of lumpiness. So even if we add a lot of functionality we ramp it in. Which is one of the things that we do world-wide.

Operator

Your next question is a follow-up from Gary Prestopino - Barrington Research.

Gary Prestopino - Barrington Research

Just a shorter-term question in terms of the car market, you cited a bunch of countries where the new car registrations were up pretty significantly. Yet in the United States we all know what is going on in the market here. Is any of that you feel with what is going on in the U.S. with the economy going to translate into what is going on in some of these markets where you are growing very rapidly?

Jack Pearlstein

The price of these cars in some of these markets is adjusted for getting people in the market. The Europeans and in many of the countries are used to higher gas prices, so if you just look at San Paolo City in Brazil; with present conditions in gas and other things they are putting 4,000 new cars on the market every week. Just look at Volkswagen and Toyota and all of those guys what they are writing about what is going on in those areas. I think it is going to stay pretty steady because people who are entering the market for the first time, they are entering it knowing that gas is at that price and they are still buying the cars; and second of all those cars are lower horsepower cars which get better economy. My view is that I think things are going to continue to be pretty good in the car because people are very focused on mobility in these markets.

Operator

Your next question comes from Peter Park - Park West Investment Management.

Peter Park - Park West Investment Management

I just wondered to what extend weather played an impact on the March quarter?

Jack Pearlstein

It really didn’t, the only time weather really does is when it is highly fluctuating. When weather stays relatively stable it pretty much is what it is. That is the only time when you have a lot of catastrophes. We didn’t see a lot of catastrophes.

Operator

Your last question is a follow-up from Franco Turrinelli - William Blair & Company.

Franco Turrinelli - William Blair & Company

As your competitors focus inward a little bit, any comment that you can give us about international acquisition that you may be more focused on?

Jack Pearlstein

I can tell you that as we announced in our last earnings call that we were building our corporate development team. That team is now in place. We are looking at some deals. At the appropriate time we will talk more about them.

Franco Turrinelli - William Blair & Company

Are these more market-share or are they more new product functionality?

Jack Pearlstein

If you look back at some of our earnings discussions or our discussions with various people out there, we have always focused on the tuck-in, accretive additive to our portfolio. We are pretty disciplined on that so I think at this point in time that is exactly the kind of stuff you are going to be hearing about.

We had another strong quarter, the opportunities presented to us in the fifty+ countries around the world are many and we have demonstrated good performance in the quarter. We are capitalizing on the opportunities because of our culture of focusing on increasing efficiencies. We believe we are well-positioned to invest a significant portion of those incremental dollars in securing a continued growth in all of our markets including the U.S. market, which is a mature market, with the ultimate goal of always providing high value to our customers and increasing shareholder value.

We appreciate all of you attending this call and we look forward to talking to you throughout the quarter and on next quarters earnings call. Thank you very much.

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