IHS Inc. F2Q08 (Qtr End 05/31/08) Earnings Call Transcript

IHS Inc. (IHS)

F2Q08 Earnings Call

June 18, 2008 5:00 pm ET

Executives

Andy Schulz – Senior Director of Investor Relations

Jerre L. Stead - Chief Executive Officer and Chairman

Michael J. Sullivan - Chief Financial Officer

Ron Mobed - Co-President and Co-Chief Operating Officer

Jeffrey R. Tarr - Co-President and Co-Chief Operating Officer

Analysts

Peter Appert - Goldman Sachs

John Neff - William Blair & Company

Patrick Burton - Citigroup

Presentation

Operator

Welcome to the second quarter 2008 IHS, Inc.’s earnings conference call. (Operator Instruction) I would now like to turn the presentation over to your host for today’s call, Andy Schulz, Senior Director of Investor Relations.

Andy Schulz

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, excludes stock-based compensation and other non-cash items, gains and losses on sales of assets and other items. Our earnings release includes both GAAP-based income statement and statement of cash flows and reconciliations to the non-GAAP measures discussed during this call. These reconciliation schedules can also be found on our website.

The non-GAAP results are a supplement to the GAAP financial statements. IHS believes this non-GAAP presentation and the elimination of these items is useful in order to focus on what we deem to be a more reliable indicator of ongoing operating performance. As a reminder, this conference call is being recorded and webcast and is the copyrighted property of IHS. Any rebroadcast of this information in whole, or in part, without the prior written consent of IHS is prohibited.

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. Mike Sullivan, our Executive Vice President and CFO, will review the second quarter and year-to-date financial results and provide an update to our outlook for fiscal 2008. After formal comments, we’ll then open the call for Q&A, at which time we will be joined by Ron Mobed and Jeff Tarr, Co-Presidents and Co-COOs of IHS.

Please keep in mind that this conference call, especially the discussion of our outlook, may contain statements about expected future events that are forward-looking and subject to risks and uncertainties. Factors that could cause actual results to differ and vary materially from expectations can be found in IHS’s filings with the SEC and on the IHS website.

With that, it is my pleasure to turn the call over to Jerre Stead, IHS Chairman and CEO.

Jerre L. Stead

Welcome to all of our investors and IHS colleagues on this call or the webcast. The second quarter of 2008 was a continuation of the strong operating and financial performance we have delivered since going public two and a half years ago. In particular, we achieved record results for revenue and adjusted EBITDA in the second quarter. I want to thank all of our colleagues for their continued hard work in delighting our customers and delivering these outstanding results for our shareowners.

Let me begin by reviewing the highlights of the quarter, first our financial results. Revenue for the second quarter was $207 million, up 34% over last year and surpassing the $200 million quarterly mark for the first time. Adjusted EBITDA increased 49%, and 260 basis points, to a record $53.0 million.

Adjusted earnings per diluted share were $0.46, an increase of 25% over last year, and we generated a record $60.0 million of free cash flow during the recently completed quarter.

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 is 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 domains: Energy, Product Lifecycle, Security, and Environment.

As we have stated before, our strategies to drive profitable growth are directly linked to four objectives that include committed annual targets for customer delight, colleague success, profitable top and bottom line growth, and share owner 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.

Now I will comment on our progress. Our first strategy is to put customers first in everything we do. One of the action plans for development in our customers-first initiative is new product development, and one of our IHS values is innovation. Our new commercialization process draws on these two important concepts to ensure that we successfully partner with our customers to develop the new products and services they require and to do so as quickly as possible.

One of the programs we launched in Q2 to help us with this effort is called IHS Innovate, which has been successful in capturing the knowledge and ideas of our IHS colleagues around the world. Since IHS Innovate launched nearly three months ago, colleagues around the globe have contributed hundreds of unique and innovative ideas.

We aggregate these ideas each month and follow up with internal domain experts for evaluation. Once submitted, the very best ideas become a starting point to test new product concepts with customers to determine which ones make sense for us to take to market. IHS Innovate is just one of the many ways we are working to bring the customer perspective into our new product development process.

Our second strategy is to create a best-in-class work environment that supports profitable growth. While our company has been successful in building a profitable business, through our Energy and Engineering operating segments, it is time for the next step in the evolution of our business, to ensure that we meet our goals of customer delight and colleagues and share owner success. Our strategy is to focus from the outside in on what our customers need and to provide them with the information and insight products they want, across four interrelated domains: Energy, Product Lifecycle, Environment, and Security.

To align our structure with our new strategy, at our Investor Day held on April 30 of this year in New York, we announced the next logical step in our organization’s structure. We’ve created three customer-targeted regions, each providing the full range of IHS products and services across our four domains, developed by global critical information and insight teams and all supported by corporate shared services.

This new regional structure makes it easier for our customers to do business with us by bringing us closer to their needs and providing a more cohesive, consistent, and effective sales and marketing approach in each region. By structuring our business around our critical information and insight for the four domains we are expanding the solutions we offer to meet the unique needs of our customers, both globally and in local markets, and we will manage our information and insight activities using the best practices of each.

For our colleagues, the new organization structure will provide more opportunities with expanded roles for some along with more diverse career paths. For example, offering the complete range of IHS products and services to our regions will support greater development opportunities for sales and marketing colleagues. For product management colleagues, forming global product teams will provide a broader view of IHS products that could lead to a corporate or global development opportunity.

This new structure revolves around our customers and provides a solid foundation for growth in each market for all IHS capabilities. It allows us to bring new IHS products and services to customers more efficiently, and supports growth in existing accounts as well as with new customers and markets.

As a reminder, this is the last quarter in which we will be reporting our financial results for our historical Energy and Engineering segments. Beginning in Q3 we will report our financial results on a regional segment basis. As promised, we will provide comparative historical information and we plan to hold an investor conference call during the third quarter to review the changes and to answer questions. More details about this will be forthcoming in the next few weeks.

Our third strategy is to achieve a leading position across our targeted information domains through organic growth and acquisitions. We have completed 14 acquisitions, deploying almost $0.5 billion of capital since the start of 2007. We were very busy during the just completed second quarter closing and integrating four acquisitions and our acquisition pipeline continues to be robust.

Our recently appointed SVP of Acquisition and Integration is now focused full time on ensuring that all of these acquisitions are integrated smoothly, with their products and services available to our customers as quickly as possible. Mike will add more detail in his remarks, but acquisitions are adding capabilities to IHS that are highly desired by our customers, as well as driving profitable growth.

In the second quarter the organic growth rate for our businesses acquired in the last 12 months was in the double-digits. Additionally, our basket of recent acquisitions generated an adjusted EBITDA margin in excess of our overall adjusted EBITDA margin.

Our fourth strategy relates to improving margins and quality through operational transformation as we continue to leverage our scaleable business model. As we’ve previously stated, our intermediate term goal is to improve our adjusted EBITDA margins to the 30% range. We are making steady and significant progress towards that goal, as evidenced by our second quarter of 2008 margin of 25.7%, up 260 basis points compared to last year’s second quarter.

Much of the margin 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 on all of these initiatives and we expect to see cost savings in the future as a result.

We’ll be happy to take questions on any of the initiatives, but I want to comment about two of these initiatives this quarter: data accumulation and product development.

Our data accumulation initiative is progressing as planned. To date, we have combined our multiple data accumulation operations into a shared service that is divided into six work streams, making it easier to use common systems across all geographies and to share best practices. Also, we have intensified our focus on worldwide data quality improvements by partnering with Info Tech, a leading company in quality and process improvement. These are two important steps in a series of endeavors to improve the overall quality of our data, the item of foremost importance on the minds of our customers as based on our 2007 customer survey.

Regarding product development, we just announced the release of the newest version of our energy mapping and browsing software, Enerdeq Desktop v1.5, for international markets. It was announced at well received at the European Association of Geoscientist and Engineers Conference in Rome the week of June 9. This release is the best way to view and access, as a single source, our international energy information for critical decision-making, and it includes many new features and functions. This product release reflects the importance of the relationship between our product management and product development organizations and their mutual commitment to building and delivering world-class products.

In summary, it was an excellent quarter for us. We continue to implement our strategies and to capitalize on the many opportunities that lay before us. And now, Mike will review our financial results in more detail.

Michael Sullivan

I’ll start by providing an overview of our second quarter year-to-date results. I will then address additional disclosures that we have included in our earnings release, regarding our joint venture. Finally, I will provide an update to our annual guidance.

Now on to the highlights of the quarter starting with revenue, top line growth of 34%, driven by 9% organic growth, 23% growth from acquisitions, and the rest from favorable FX movements. Energy revenue grew 23% and engineering at 48%. Organic revenue growth was 9% overall with Energy growing at 10% and Engineering at 7%.

This quarter’s Energy organic growth rate reflects the comparison to an unusually high growth rate in the consulting portion of our business in the prior year. Energy’s core subscription-based business continues to perform very well. As anticipated, Engineering’s organic growth rate has strengthened, as the underlying subscription-based business continues to perform well. Additionally, the organic growth rate inherent in our acquired businesses was in the double digits for the second quarter of 2008.

In terms of revenue performance across the three layers of our pyramid, critical information grew 29% and represented 65% of total revenue. Decision-support tools grew 46% and represented 18% of our total revenue, and services grew 38% and represented 17% of total revenue.

Beginning with our third quarter, in addition to replacing our legacy Energy and Engineering segments with regional segment reporting, we will replace our critical information, decision-support tools, and services revenue breakdown with revenue for information and insight, each divided into the categories of products and services. As Jerry alluded to earlier, we will hold a conference call for investors during the third quarter to discuss these changes in greater detail.

Turning to the rest of the P&L, gross margins declined 130 basis points year-over-year to 55.0%. The decrease was attributable to the near-term impact of recent acquisitions which, while dilutive at the gross margin levels, were accretive to adjusted EBITDA margins.

SG&A as a percent of revenue, and exclusive of stock-based compensation expense, improved 2.3% year-over-year to 30.4%. Adjusted EBITDA totaled $53.3 million, including a $2 million contribution from our 50% interest of Lloyd’s Register-Fairplay, or LRF. The total adjusted EBITDA for IHS is up 49% versus a year ago.

Adjusted EBITDA margin improved by 260 basis points to 25.7% from 23.1%. Roughly 60 basis points of the adjusted EBITDA margin expansion is attributable to the way in which we report our earnings for the joint venture, which requires us to record our portion of IHS profit but not our share of its revenue.

Adjusted EPS increased 24% to $0.46 per diluted share in the second quarter, up from $0.37 last year and we generated free cash flow of $60.2 million in Q2.

Regarding segment profitability, Energy-adjusted EBITDA increased 36% to $43.1 million in the second quarter compared to $31.8 million in the prior year period.

Engineering-adjusted EBITDA was $23.7 million, up 80% from $13.2 million in the second quarter of 207.

The reported tax rate for second quarter of 2008 was 31.9% approximating last year’s 32.4%.

Stock-based compensation expense increased by $4.3 million, versus a year ago, to $10.4 million in 2008.

Adjusted net income for the second quarter of 2008 totaled $28.8 million, up 32% from $21.8 million in the prior year.

Please note that our earnings release provided the per share figure for a number of items that we excluded 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 touch on year-to-date results just briefly. Revenue for Q2 of 2008 was up 32% from a year ago. Year-to-date adjusted EBITDA for 2008 was up 45% versus the prior year and the resulting adjusted EBITDA margin increased 2.2% to 25.6% from 23.4% last year to the first half of 2008 with roughly 30 basis points attributable to joint venture accounting.

Now let me move to a few balance sheet highlights. We ended the quarter with cash of $105.0 million and $25.0 million of debt. Of note, the $50.0 million of acquisition-related debt that we borrowed in early March has now been paid in full.

Deferred revenue at the end of the quarter was about $288 million, which represents a year-over-year change of roughly $69 million, or 31%. The organic growth rate inherent in this increase was approximately 12%.

Turning to cash flow, second quarter of 2008 free cash flow was a record $60.2 million, compared to $42.3 million a year ago. Although the second quarter benefited from one fewer U.S. payroll, year-to-date 2008 cash flow includes the same number of payrolls as the prior year period. On a trailing 12-month basis our free cash flow at the end of Q2 of 2008 represents 79% of adjusted EBITDA.

Regarding our share repurchase program, during the second quarter of 2008 we repurchased approximately 28,000 shares of common stock for $1.7 million, or $60.00 per share. Year-to-date we repurchased approximately 94,000 shares of common stock for $5.5 million, or $58.88 per share.

Since we’ve referenced it a few times, just let me remind you how the equity method of accounting manifests itself in our results. We are accounting for Lloyd’s Register-Fairplay as an equity method investment and reporting it as a single line item on our balance sheet. We are not consolidating any revenue from the JV, but we are including our share of JV net income within a non-operating income item on the P&L and our proportionate share of the JV adjusted EBITDA in our computation of IHS adjusted EBITDA.

In order to enhance the visibility of the financial impact of this change, we have included abbreviated results for Lloyd’s Register-Fairplay and our reconciliation from its net income to its adjusted EBITDA in the supplementary schedules to our release. These additional tables show the calculation performed to arrive at our 50% proportional share of LRF’s adjusted EBITDA, as well as a summary stand alone P&L for LRF. We hope you will find these tables helpful.

Now let me discuss our outlook for the full year ending November 30, 2008. Our guidance is on an all-in basis and assumes constant currencies as well as the effect of the acquisitions completed to date. We expect all-in 2008 revenue to be in the range of 21% to 23%.

Relative to all-in adjusted EBITDA, we are revising our annual guidance upward to grow 28% to 30% in 2008 from a base of $168 million in 2007.

When considering the growth rates in the second half of the year embedded in our annual guidance, keep in mind three items: first, in Q3 last year we recorded a one-time $2.8 million FX gain; second, Q3 of 2007 included the results of the once every three year release of the boiler pressure vessel code; and thirdly, in the first half of this year change and other acquisition from last summer were purely additive to our overall growth rate but recently lapsed to one-year anniversaries.

Thus, in the second half of the year, while these acquired businesses will contribute to and support our expectations for organic growth, they will no longer be purely additive to our growth rates.

We continue to expect our full-year tax rate to be approximately 33% and our 2008 stock-based compensation expense to be in the range of $45 million to $50 million.

We expect depreciation and amortization to be in the range of $39 million to $40 million. In addition, please note that purchase price amortization for Lloyd’s Register-Fairplay is not included in these estimates, but must be considered in arriving at our income from equity method investment. Again, see the tables included in the back half of our release to get a sense of this calculation for the second quarter.

We expect fully diluted shares to be approximately $63.1 million and net interest income should be approximately $2.0 million. The reduced net interest outlook reflects a change stemming from the issuance of roughly $20 million of non-interest bearing notes related to the acquisition of the JV. Specifically, while the notes are non-interest bearing, U.S. GAAP requires that we discount the face amount of the notes and accrete an interest burden as if the notes actually did bear interest. This accounting requirement has no economic impact on the investment.

This outlook assumes no additional acquisitions, currency movements, restructurings, or unanticipated events.

To wrap up, our business continues to perform very well, particularly our underlying subscription-based business, which is driving top line growth, margin expansion, and $60 million of free cash flow. Of note, we have invested almost $500 million of capital since the beginning of 2007 and remain in a net cash position.

Second quarter of 2008 was a record quarter for us in many respects and we remain committed to expanding our capabilities across the four domains through acquisitions and organic growth.

Now, let me turn the call back over to Jerry.

Jerre L. Stead

In closing, although we are most pleased with the results from the first half of 2008, we are firmly focused on continuing to execute. We feel like we are just getting warmed up. Thank you for your time today.

Mike, Jeff, and Ron are with me now and we’re ready to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Peter Appert - Goldman Sachs.

Peter Appert - Goldman Sachs

I was hoping you could maybe give us a little more color on the drivers of organic growth within both the Energy and Engineering segments, in particular a better understanding of the product mix or new product offerings, geography, pricing, just something to help us better understand what drives the organic growth rates, and in particular, the acceleration in growth in Engineering and the deceleration in growth in Energy, if there’s anything beyond on what you mentioned in the call.

Jerre L. Stead

We have said consistently that we expect to operate with double-digit organic growth through 2008. Feel that way and it’s based in our guidance that Mike just provided you on revenue.

Secondly, we’ve been consistent with saying that 35%-40% of our organic growth was coming through enhanced price realization. 30%-35% is through gaining a larger wallet-size share of our customers, existing customers. And the balance of organic growth would be coming from new products and/or new customers.

I would say just two or three things and, as I said, we’ll start out with a little more detail of the two soon to be historical reporting segments.

We’ve worked very hard and are tremendously very proud of Ron and his Energy team and Jeff and his Engineering team in going through and pruning out businesses that were not profitable. As an example, we’ve covered that in some detail in the past with things, everything from non-profitable service businesses and other things that didn’t provide really critical help for our customers. And Engineering has really wrapped that up.

We’ve also said consistently that we would not grow consulting business in any of our domains or in our historical Engineering and Energy businesses unless they created pull-through. To just put that in perspective, on a year-to-date basis, we are now under 7% of our revenue in total for consulting. So that gives you a pretty good feel, down from previous numbers. And we will continue to do that when we gain our ability to pull through subscription based.

Perhaps most importantly, the good guide for everybody and one of the blessings of our company is the deferred revenue. And there we had deferred revenue 12% organic growth that you could pick out of the deferred revenue number, despite and of course it being much higher than that because of the acquisitions included. So, feel very good about all of that, too.

We’re pretty excited about where the domains intersect. Our ability to provide solutions do two things: increase the potential wallet size of each of our thousand largest customers, where we’re very focused today. And then increase our share of that potential increased wallet size. That’s a very big deal.

Point two, recent acquisitions have brought new customers with them and we feel good about that and we will penetrate them in the future. And point three is we roll out the new products that we touched on today and start to see in the future the result of the innovation effort that I highlighted today. I think we’ll see an increasing shift of adding new customers as well as new products.

Ron Mobed

Jerre, Mike alluded to the organic growth and I think there’s not much to add to that except to say that last year was a very, very high consulting year. The mix of our revenue growth between pricing, product, and geographies has been very steady over the last two years. 2008 looks like essentially more or less the same, good sizing ability, introduction of new products.

We mentioned earlier on the deployment of Enerdeq Desktop v1.5 in our international arena. We’ve also been expanding the range of our cost products beyond the upstream and into other parts of the Energy spectrum as well. And in the jobs we continue to see very strong growth in the areas that we talked about before with national oil companies. We picked up yet another national oil company in the Middle East that’s a million dollar cost subscription during the quarter.

And I think I would like to add to that the increasingly large opportunity and capturing that opportunity around cross selling our products and services. The new regional structure is designed to help us to do that and even aside of that, we’ve been seeing a lot of activity around cross selling products from within the IHS family, and especially those newly acquired companies.

Jeffrey R. Tarr

I’m really proud of what the team’s done to transform the Engineering segment into a higher-growth, higher-margin business, less dependent on third party content with leading positions in three of our four domains.

If we look at growth, the 7% organic growth that we’re now reflecting in our reported numbers is actually in line with the subscription growth that we’ve been seeing in the business for quite a few quarters and that we’ve been sharing each quarter.

In terms of the drivers of that, I point to Standards Expert, which has been a very successful product deployment, expansion of our parts database with a particular focus on adding environmental attributes, which we’re doing at a rapid clip, leveraging our resources in India. And we have an account management program which is allowing us to more deeply penetrate all of our large accounts, and specifically some of our large Energy accounts.

I also want to add that organic growth inside the acquisitions and stuff is really exciting to see in both the security domain acquisitions, Jane’s, Lloyd’s Register-Fairplay, and our three environmental acquisitions are exhibiting organic growth in excess of the segment and actually the organic company growth overall.

Jerre L. Stead

Feel very good about the ongoing double-digit organic growth, feel good about the way we’re attacking it. We’re eager, as we move to the three region reporting to show you, as we’ll start talking about at the end of next quarter, to show you where we think the biggest opportunities exist in each of those regions going forward.

Peter Appert - Goldman Sachs

I think in the past, Jerre, you’ve talked about maybe mid-teens organic growth in Energy, high single-digit in Engineering. Is that how we should be thinking about it?

Jerre L. Stead

I think over a long period of time that’s a very good way to think about it, but the most important way to think about it is in total, because it is really important to recognize what we’re now moving into. The four domains that we operate in and the products we sell, including the solutions of those four coming together, will result in solid double-digit organic growth.

And so I would focus on those numbers, and very much on the regional numbers, where you can see our potential going forward. From a historical point of view, absolutely in agreement with what you said, Peter. If anything over time, if you were to include the historical Engineering and adding into it Security and Environment, you would see it as I told, as I’m pretty sure I said last quarter, second half double-digit growth in those areas, too.

Peter Appert - Goldman Sachs

From the margin perspective, and again, because you’re not going to report this way going forward, it will be less relevant, but I’m just wondering, as you approach a 40% EBITDA margin in the Energy business, is there a natural cap to where you can go and are we close to it?

Jerre L. Stead

We’ll never be close to a cap. Because if you think about it from the standpoint of the ability to see significant cost improvements as we enhance our data accumulation, as we gain our savings on purchasing, as we start to reap the benefits of quote to cash, all of those impact both businesses in a great deal. So, the way to think about that is in Energy, without those internal enhancements, we might be approaching a cap. But we have huge potential coming as we deliver those improvements going forward. So those four things I just mentioned will continue to move us. There is no cap, let’s leave it at that.

Peter Appert - Goldman Sachs

You’ve gone almost three months without an acquisition, Jerry, so should we look for some action in the third fiscal quarter?

Jerre L. Stead

We’ll be happy to announce them when they happen, Peter.

Operator

Your next question comes from John Neff - William Blair.

John Neff - William Blair & Company

You’ve got, this last quarter, 260 basis points adjusted EBITDA margin expansion on 9% organic revenue growth. You’ve talked pretty consistently where you had expected around 160is basis points of adjusted EBITDA margin expansion on that level of organic growth. So you’re 100 basis points ahead of that.

As organic growth accelerates in the second half of 2008, should we expect higher rates of adjusted EBITDA margin expansion or is there something that has been inflating the rate of margin expansion we’ve had in the last couple of quarters that you would think is not necessarily sustainable?

Jerre L. Stead

As a quick reminder, in my earlier overview I mentioned that the acquisitions we have are actually operating with adjusted EBITDA at a higher level than the 25.4%, so that’s important to keep in mind. And we expect we are going to continue to see that so that’s important.

Two is the investments we’re making, and will continue to make, start to pay back, quote to cash, data accumulation, etc., etc., etc. we’ll see, and expect to see, improved adjusted EBITDA margins as a percent of revenue over time.

Michael J. Sullivan

Yes, John, obviously we’re showing a leverage ability to model the last several quarters. But do keep in mind this quarter we referenced the one-legged chair, which is the JV accounting, where we had about 60 basis points of that 260 basis points to be attributed to showing profit without revenue.

And if you normalize bringing half the revenue from the JV in, you’re looking at a business that probably generated just shy of 200 basis points on the 9% growth. Certainly it’s still good leverage out of the commitment we’ve made, and I think I would just echo Jerre’s comments around the future and continuing to balance the need for investment with the need for margin improvement.

John Neff - William Blair & Company

An interesting scenario to think about how the different domains come together, but the IDE report, talking about $45 trillion dollars of investment through 2050, in order to halve CO² emissions from current levels, how do you think about how IHS can play in that opportunity? Obviously it’s a very big picture question.

Ron Mobed

It’s obvious, John, we like to think we’re going to gain a modest but meaningful percentage of that $45 trillion. But the reason we think that this is a trend that we’ve been aware of some time, is John, CERA has been looking at the level of investments in the energy sector for quite some time and has been looking at some of these numbers for the infrastructures required to maintain the supply of energy across the board. When you nail in the concerns that have been emerging over the last few years, once again CERA had written about extensively over the last few years, we can see that rise of investment.

The types of products that we are deploying in that area cut across all of the four domains. If you think about the Energy products that traditionally we’ve been deploying, those are relevant to these discussions. If you think about the PLC, there’s much more detail on that. They are relevant. If you think about Security and Energy, they are relevant. And in particular, it goes without saying; the Environmental domain is extremely relevant.

So, the positioning we have across the four domains I think is very well suited to assist the people in the deployments of that level of investments over the next few decades.

Jeffrey R. Tarr

I thought Ron gave a great overview and just a few specifics, if you want a little more detail on some of the specific products that we offer. Inside the Product Lifecycle domain, for example, we have proprietary design methods which are used across many industries to help improve efficiency, likewise, environmental standards. Inside of what we are calling our Environmental domain, our acquisition at ESP is enabling customers to track and reduce CO² emissions across their plants and their entire operations.

And even if you look inside our Security domain where we have our Lloyd’s Register-Fairplay acquisition, one of the key trends in managing and reducing CO² emission is to look beyond just the use of a particular asset to actually the production and transportation of that asset, in other words looking across the full supply chain.

Case in point, the CO² emissions in the manufacturing and transportation of a PC, or a laptop, actually exceeds greatly the CO² emissions through the use of that particular device. And that’s pretty common across many industries and products, and we are, and intend to continue, help our customers with those challenges.

Jerre L. Stead

And the deep thing as Ron and Jeff just covered, again, it’s where those four domains intersect, that we supply solutions that no company in the world has the insight and information that IHS has today in total there.

John Neff - William Blair & Company

There seems to be a little bit of a change in tone, Bush recently talking about pushing to expand offshore and other kinds of drilling in the United States. McCain is now talking about adopting that pro-drilling stance, a reversal on his part. Is there some change in the air in terms of levels and urgency to explore new energy opportunities, especially domestically and what opportunities are there for you?

Jerre L. Stead

As we mentioned, we’re so blessed have the CERA week each year in February and you get a very good view of what’s going on in the world, not just from our Energy customers, but from the governments around the world. Two years ago, frankly, things were much different and in fact there was very little talk about the environment at that point in time or anything else.

This year it was very clear that there was a heightened concern, which I would say has significantly increased, only four months later, on alternative fuels, on environment, and how to become quicker, as a nation, in responding to the needs of our country. That’s clearly at point today.

Ron Mobed

I think one of the things to note is that activity domestically has been rising over the last couple of years, outside of the discussions that you were mentioning. In other words, the land-based exploration production, particularly for gas, in the United States has been rising quite significantly and we see the effect of that here in Colorado and areas in Texas capturing, I think we mentioned before, the [inaudible] shale.

So that’s some exploration activity around land that has been available for some time, has been growing. The new piece is the potential opening of new areas that previously had been closed by legislation to exploration activity. And it’s not just in the United States, it’s happening in all countries around the world as people think about where opportunities for additional hydrocarbon exploration production might be available.

And we’re very well placed to capture that. We continue to help governments hold their licensing realms and encourage investments into these new areas in different countries around the world. And that space clearly is opening up potentially in areas that have previously been closed. That will give rise, if it happens, to additional activity and of course we would expect to capture some of that.

Jerre L. Stead

And just to expand a bit on that, actually at our July board meeting, which will be held in Calgary, we will be spending the next day visiting the Alsands area of Canada, which you may well know on the call, is another huge opportunity rapidly expanding with investments today to meet that changing need for North America.

Operator

Your next question comes from Patrick Burton - Citigroup.

Patrick Burton - Citigroup

Last quarter you mentioned there were some deferrals on international subscriptions. Did that get taken care of this quarter?

Michael J. Sullivan

Yes, Pat, we were just referencing that I believe last quarter the organic growth rate and deferred revenue had dipped down. It is a little bit of a choppy statistic that was the reason it had dipped down. And obviously with it coming back in line with historic norms at 12% year-over-year change, we did see those contracts come to successful resolution.

Jerre L. Stead

So that’s why I commented earlier, Pat, about the question on organic growth having the great headlight that provides its share owners and all of us of having a 12% organic growth and the deferred revenue for the quarter is very helpful for us.

Patrick Burton - Citigroup

Can you talk about the Security expertise domain and maybe the potential there and maybe additional acquisitions and where all that is going to go?

Jerre L. Stead

We’re very pleased, obviously, with the Jane’s and the Lloyd’s Register-Fairplay. I will tell you, from my view, they created a situation for us that we will for sure grow profitably with in the near future and if and when we find the appropriate acquisitions we will move towards those.

As you think of the domains, no domain offers more potential for us across the other domains than security.

Jeffrey R. Tarr

First of all, we don’t often call off the names of specific colleagues here on this call, but I would be remiss to not say that Scott Key and his team have done just an extraordinary job over the last 12 months taking Jane’s and transforming that into a high-growth, higher-margin business that’s got a terrific trajectory to it and is well ahead of all of our acquisition models.

If we look at it, some of that is coming from new products, a lot of it’s coming from new customers, and it’s coming from effective integration of that business into the rest of IHS. Some specific products I think are worthy of mention, we’ve leveraged IHS technology and capability to launch with the Jane’s team some map-based offerings, so our customers can actually track terrorist insurgencies across the globe.

We have put in place other IHS technologies to help customers manage the data behind the firewalls, which is very important for Security customers. We’ve launched new multi-client studies using capability and know-how within our CERA business, such as a multi-client study around new treaties and regulations around cost ammunitions, leveraging CERA forecasting capability to improve our regional forecasting and launch multi-client study that will refer to a 15/15, 15 regions over 15 years.

So lots of opportunities here, wins within our Energy accounts. I could go on and on about the great work that’s being done there. Layer on to that Lloyd’s Register-Fairplay and work that’s now being done to actually take the Lloyd’s Register-Fairplay offerings more deeply into the defense department accounts around the world that we have within Jane’s [inaudible], and we are really pleased with the pipeline of acquisitions that is developing and ROS was our second acquisition in that space and we feel good about the future.

Jerre L. Stead

It is so important to understand how much Security brings potentially to Energy.

Ron Mobed

I think the way I would position it is in ACOR this year we held the second annual symposium in London for IHS and what was really interesting was that we had 200 clients looking at the energy world, but from the perspective of the impact on the energy world across each of our four domains. And the play on Security was a very important one there and the way that energy security would be able to thrust, is replicated, whether it’s in Houston or other customer interactions that we hold.

Each one of the four domains interacts in these discussions. The Security can plug itself in. Environment plugs itself very attractively. One of our speakers was climate change experts that they were able to reference Lord [inaudible] of the UK was one of the speakers there, so we were able to combine each of those four domains within an Energy discussion and Security was one of the foremost.

Patrick Burton - Citigroup

And again, without giving any specifics in terms of your acquisitions, Jerry, would this be the area of Security or Environment where we might expect to see some more?

Jerre L. Stead

We looked at all four domains, Pat, and will continue to because we see so many opportunities to blend them together into solutions and as I said at the beginning of my overview, our pipeline is full of good potential acquisitions in each of those domains.

Operator

There are no further questions in the queue.

Andy Schulz

We thank each of you very much for your interest tonight. This call can be accessed via replay at 888-286-8010 or international dial-in, 617-801-6888, pass code 88854517, beginning in about two hours and running through June 25. In addition, the webcast will be archived for one year on our website at www.ihs.com. And as always, you can contact IHS Investor Relations with any follow-up questions. We can be reached at 303-397-2969. Thank you. We so appreciate your interest and time.

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