Dolan Media Company Q2 2008 Earnings Call Transcript

Aug.10.08 | About: Dolan Co (DOLNQ)

Dolan Media Company (NYSE:DM)

Q2 2008 Earnings Call Transcript

August 7, 2008 4:30 pm ET

Executives

 

Haug Scharnowski – Director, IR

Jim Dolan – Chairman, President and CEO

Scott Pollei – EVP and CFO

Analysts

Peter Appert – Goldman Sachs

Randy Hugen – Piper Jaffray

Bob Evans – Craig-Hallum Capital

Michael Weisberg – ING

Operator

 

Good afternoon, ladies and gentlemen, and welcome to the second quarter 2008 conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. At this time I would like now to turn the call over to Mr. Haug Scharnowski. Mr. Scharnowski, you may begin.

Haug Scharnowski

 

Thank you, Teresa. Good afternoon, ladies and gentlemen, and welcome to Dolan Media Company’s second quarter 2008 conference call. On the call today from the company are 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 second 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. In addition, a slide presentation supplementing this conference call also is available on our website. This call is being webcast, and the replay and slide presentation will be available on the company’s website for a period of 21 days.

Before we begin, we would like to remind everyone of the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Today’s prepared remarks, including guidance, contain forward-looking statements and management may make additional forward-looking statements in response to your questions. The words expect, believes, anticipates, estimate, 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 factors 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. We also refer you to Item 1A of the company’s quarterly report on Form 10-Q for the first quarter filed on May 8, 2008, and the company’s quarterly report for the second quarter on Form 10-Q filed in the next few days. 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’s 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 and cash earnings per diluted share, which are non-GAAP financial measures. Today’s earnings release contains an explanation of Dolan Media’s use of the non-GAAP financial measures discussed in this call. It also contains a reconciliation between GAAP and non-GAAP measures required by the SEC in Regulation G. The non-GAAP information does not substitute for any performance measure derived in accordance with GAAP. The use of non-GAAP measures also have limitations, which are described in more detail in the company’s press release.

And with that, I would now like to turn the call over to Jim Dolan.

Jim Dolan

 

Thank you, Haug, and thank you all for joining us today. On our call, we will begin with Scott providing a brief discussion of our results for the second quarter of 2008. After our financial review, I would like to discuss the company’s strategy.

Last week we announced the signing of a purchase agreement with National Default Exchange, also referred to as NDEx. This announcement is transformational for our mortgage default processing services business and we plan to discuss the benefits we expected to provide our business after closing. We also will discuss our revised and increased guidance for the full year 2008 as well as initial revenue guidance for 2009. After our prepared remarks, we will open the call for questions. And now to Scott Pollei.

Scott Pollei

 

Thank you, Jim. I’ll begin by saying we are pleased with our second quarter. Dolan Media Company continues to demonstrate balance revenue growth and remains well positioned with revenue drivers tied to both cyclical and countercyclical economic conditions. Given this balance, we believe that we continue to be well positioned to perform during the current economic environment.

As many of you know, from a financial reporting standpoint, the second quarter is the seasonally weakest quarter of our year. Historically the sequential decrease in mortgage default file volume from the first quarter to the second quarter is closely tied to income tax refunds received by individuals during the second quarter. Also appellate case filings by Counsel Press typically will decrease sequentially as appellate filings slow in preparation for a lighter court docket during the summer months. Once again, this pattern held during this year’s second quarter.

Despite this seasonal pattern, we demonstrated solid year-over-year growth for the second quarter of 2008 in both divisions. Our revenues increased 12.1% to $41.6 million. Adjusted EBITDA increased 18% year-over-year to $11.9 million. Just over half of our total revenue growth or 6.9% was organic. This does not include growth from acquisitions except those that we do not report separately for internal financial purposes.

Our results were driven by solid revenue growth in both our divisions. Professional Services Division, which consists of American Processing Company, or APC, and Counsel Press, grew its revenues 17.2% year-over-year. Organic growth for the division was 8.4%. Within the division, APC achieved solid year-over-year revenue growth of 23.1%. A little over half of APC’s growth was organic. The remainder was due to our February acquisition of the mortgage default processing services operations of Wilford & Geske in Minnesota.

The June quarter was the first full quarter of revenues from the Wilford & Geske acquisition. During the quarter, APC serviced 36,700 case files for our long-term clients, about 10% of which were referred from Wilford & Geske. The 36,700 file total represented an increase of 23.7% from the 29,700 case files we serviced in the second quarter of 2007. At Counsel Press, revenue was down 3.6% during the quarter, primarily due to 8.3% year-over-year decline in case files.

In our Business Information Division, revenues increased to $23.4 million, up 8.5% compared to the second quarter last year. Revenue growth in the division was driven by a 36.9% increase in public notices. Circulation revenue also contributed to the division’s growth, increasing 8.3% year-over-year despite a modest decline in subscribers. Our growth was offset by an almost 10% decline in display and classified advertising. Specifically we experienced a decline in our non-endemic advertising as these customers tightened discretionary spending. Display and classified advertising revenue growth is closely correlated to cyclical economic trend. As the economy continues weaken, we expect advertising revenue to decline as well.

Fortunately, the balance in our Business Information Division helped to offset this decline in the second quarter, as public notice revenue growth more than offset declines in display and classified advertising. This is a typical recessionary pattern that we’ve experienced in previous economic downturns.

Our consolidated operating expenses for the quarter were $34.8 million, up 13.2% from $30.7 million last year; expenses for the quarter representing 83.8% of total revenue. For the same quarter last year, it was 80.3%. Most of the increase in operating expenses comes from three class categories. First, our direct operating expenses were up 18.3%. Second, our amortization expense primarily related to intangibles from acquisitions was up 23.9%. And third, our depreciation expense also primarily related to acquisitions was up 33.9%.

Here is a breakdown of the increase in total direct operating expenses between our two divisions. In Professional Services, direct operating expense increased $1.2 million year-over-year, which is 22.1%. This is mainly related to operating the acquired processing business from Wilford & Geske and also increases in APC personnel expenses. The personnel costs were directly related to new hires as a result of growth in processing value.

Business Information direct operating expenses increased $1.4 million or 15.5% year-over-year. This is primarily due to acquisitions completed in the first quarter this year, increased public notice advertising, newly launched publications, and a greater focus on events. All of these activities brought higher production related costs such as printing, postage, delivery, and event costs.

Our consolidated selling, general, and administrative expenses for the quarter were $16.7 million, an increase of 6.8% from $15.7 million for the prior year period. Operating income for the quarter was $8.2 million or 19.7% of revenue. That is up 7.4% from last year’s $7.6 million, which was 20.6% of revenue in the prior year period.

Adjusted EBITDA for the second quarter was $11.9 million, an increase of 18% from $10.1 million in the prior year period. Our adjusted EBITDA margin increased 140 basis points year-over-year to 28.7%. For a reconciliation of adjusted EBITDA to GAAP net income or loss, please refer to today’s earnings release.

Net interest expense for the quarter was $287,000 compared to $1.4 million for the prior year period. Our net interest expense was lower due to the decreased average outstanding borrowing, the drop in interest rate, and the increase in the fair market value of our interest rate swaps. Approximately $600,000 of the change as caused by the lower borrowing and reduced interest rate. Another $600,000 was caused by the non-cash interest income caused by the positive change in fair value on our interest rate swaps.

Net income for the second quarter was $4.4 million or $0.17 per share on 25.3 million weighted average diluted shares outstanding. This is compared to a net loss of $21.9 million or $2.34 per share at 9.3 million weighted average diluted shares outstanding in the second quarter of 2007. Net loss for the second quarter of 2007 included non-cash interest expense of $26.3 million related to our redeemable preferred stock. This stock was redeemed on August 7, 2007 in connection with our initial public offering and we have not recorded this non-cash interest expense since that time.

We continue to be pleased with the strength of our balance sheet. At the end of the quarter, we had $2.6 million in cash, up from $1.6 million at the end of the same period last year. Total debt at quarter’s end was $73.8 million, down from $93.2 million on June 30, 2007. The company continues to maintain the $200 million senior credit facility. This includes $125 million revolving credit facility and a $75 million term loan facility.

At quarter’s end, the company had a leverage ratio of 1.44 times the last 12 months’ adjusted EBITDA. Subsequent to the quarter’s end, we amended our credit agreement. Under the new terms, our lenders approved the acquisition of NDEx and waived the requirement that we use the proceeds from the equity private placement to pay down debt on our credit facility. In addition, our maximum allowable senior leverage ratios decreased from 4.5 times to 3.5 times, and we increased the interest rate margins charged on the loans under the credit facility.

And with that, I would like to turn the call back over to Jim.

Jim Dolan

 

Thank you, Scott. Last week we announced that we signed an agreement to acquire National Default Exchange or NDEx, as we call it. I’m going to take a moment to discuss how the acquisition of NDEx will benefit our company. As we mentioned, we expect the transaction to be accretive to GAAP earnings and cash flow within the first 12 months of our ownership. It also is very complementary to our APC mortgage default processing operations.

Since our announcement, we’ve begun pre-closing integration efforts and we are now even more excited than before about the strategic financial and operational benefits that NDEx provides. Scott and I were in Dallas yesterday meeting with the senior people of NDEx. I think it’s fair to say that the team in both NDEx and APC are more than eager to begin working together.

With this transaction we double our geographic footprint by adding California, Texas, and Georgia. These three states are large and have active mortgage delinquency markets. After the NDEx deal closes, we estimate our national market share will increase to more than 10%. Our size, coupled with our superb technology, allows us to offer more services while leveraging economies of scale. The NDEx transaction helps us to reach critical mass in our mortgage default processing services business in order to take advantage of the opportunities in the industry.

For some people the bigger footprint in six states is the big headline, but we think there's something even bigger. And it’s this. This acquisition transforms our strategic approach to growth in the mortgage default processing market. In the past, we have pursued a single way to enter a new state, which was by acquisition. I think we all know that so long as you pick the right party to deal with, an acquisition is an ideal way to enter a market with significant market share right away. It is however very capital intensive. And deals take time to negotiate and to close.

NDEx brings us an important new capability for entering a new market. We now will be able to launch into new states, and using the knowledge and experience developed by Mike Barrett and his NDEx team to do it efficiently and effectively. In the last year and a half, NDEx has launched operations in California and in Georgia. Launching is much less capital intensive. Based on NDEx’s experience, we anticipate a launch typically costing between $1.5 million and $3.0 million. The timing and location of launches will be determined in consultation with law firms and their mortgage service for clients. As always, the clients’ needs will be uppermost in our minds.

Now, this doesn't mean that we will not do any more acquisitions. Of course, we will. And we will launch as well. We now have two excellent and complementary ways to grow. We will use them thoughtfully tailoring our growth tactics to match unique characteristics of each state. Shortly after our announcement last week, we made our federal Hart Scott Rodino filing. Our friends at the Federal Trade Commission and the Justice Department are in their review period. We still hope to close the NDEx deal by beginning of September.

And now I’d like to discuss our revised financial guidance. Today we are increasing our 2008 financial guidance to incorporate the NDEx acquisition. This updated guidance assumes the NDEx transaction closes in September 2008. So this guidance figures include about a quarter of the year with NDEx and the family. Other than NDEx, this guidance does not include the effect of any future acquisitions. Including NDEx and assuming a September 1st closing, we expect 2008 revenues to be in the range of $188 million to $192 million, and adjusted EBITDA to be in the range of $55 million to $59 million. Our effective tax rate for 2008 is expected to be 41%.

I should point out that we are assuming no bottom line contribution from NDEx in September. So the real contribution to this year’s earnings from NDEx will be for the fourth quarter. Also, the company continues to expect full year 2008 capital expenditures to be between 3.5% and 4.5% of projected 2008 revenues.

At this time, we also introduce cash earnings per diluted share to our regular disclosures and to the guidance that we provide. To be clear, let’s walk through how we calculate our cash earnings. We start with the GAAP net income and we add back five things; amortization of intangibles, amortization of Detroit Legal News Publishing intangibles, non-cash interest expense related to the change in fair value of our interest rate swaps, non-cash interest expense related to redeemable preferred stock, and finally the income tax expense related to these other four items. The sum of this calculation equals cash earnings. We then divide cash earnings by the weighted average diluted shares outstanding to reach cash earnings per diluted share.

For the full year 2008, including NDEx, we expect the cash EPS to be in the range of $0.86 to $0.88 per share. As we said in this afternoon earnings release, our cash earnings in the second quarter of 2008 were $5.3 million. Our cash EPS in the second quarter of 2008 was $0.21 per share. You can expect to see cash EPS numbers from us from now on. Normally we wouldn’t provide any guidance at this time for 2009, but I realize that we are changing our Professional Services Division pretty significantly with the NDEx deal, so I’m going to make a few comments now about next year.

We expect Business Information revenues at the division level to grow at about 9% to 11% year-over-year. We expect appellate services revenues to grow about 6% to 8% year-over-year. And we expect mortgage default processing revenues to grow about 15% to 18% year-over-year. These growth rates are consistent with what we’ve been saying since the initial public offering.

We expect our expenses will continue in line with our present operations. We do not anticipate near-term margin expansion. In 2009, we expect NDEx to generate revenues between $75 million and $85 million, and EBITDA between $26 million an d$28 million. Our interest expense is expected to be 7.5% and our amortization expense is expected to increase by $2 million per quarter as a result of the NDEx transaction.

And with that, now I’ll turn the call over to the operator so that we can take questions.

Question-and-Answer Session

 

Operator

 

Thank you. (Operator instructions) Our first question comes from Peter Appert from Goldman Sachs. Please go ahead.

Peter Appert – Goldman Sachs

 

Thank you. Jim, just some – a few questions. But first on the cost side of the equation for the BIS business in particular, the cost increases seem a little bit out of line with the revenue growth. Can you just speak to that?

Jim Dolan

 

Yes. Scott may have some details there. There is a big picture aspect I’d like to speak to you, and that’s that we typically – and unfortunately this is not our first recession. We typically go into a recession planning for the recovery and how we are going to do post recovery. And at this time, we begin investing in some new products that we want to have properly positioned. In this case, emphasizing events, which are more important to us now than they have been because they are nice profit generators, and investing in sales staff and training and things that mean that we are able to hire and to be very well prepared at the right time when other media companies seem to be laying off and then starting to recruiting. So that’s kind of the larger aspect of what’s going on. Scott, are there details?

Scott Pollei

 

In addition to that without getting into specifics, Peter, we’ve also been increasing our spending this year, particularly IT area and the web development section really into business information, as people transition away from plant into web based products. And as Jim said, we are taking some of the opportunity provided by the public notice revenue to take some of that money and invest in the web to continue those product developments as well.

Peter Appert – Goldman Sachs

 

Should we anticipate that the – some rough calculation here. It looks like the operating margin, which obviously is inclusive of D&A, went from something like 28% closer to 23%. Is there a level of margin that you’d feel comfortable sharing with us in terms of where you’d like to run that business?

Scott Pollei

 

I think we consistently said that in the low-20, from 20% to 24%, 25% is where we aim to run the business information on a long-term basis. So, the 23% is not yet normal.

Peter Appert – Goldman Sachs

 

Okay. And then on the Professional Services business, it looks like I think if you’ve done the arithmetic right, you got about 11% file growth, ex the acquisition. I don’t have the MBA data obviously for June. So how does that measure against your understanding of market growth? Do you think you are sustaining your market share?

Jim Dolan

 

We do, yes. We track carefully all the external factors. Of course, we have our own. So we are holding or slightly increasing market share everywhere.

Peter Appert – Goldman Sachs

 

Okay. And then Counsel Press, Jim, in the second quarter the numbers haven’t looked all that impressive. Something going there beyond just seasonal and cyclical factors?

Jim Dolan

 

Well, two quarters, we can’t call it seasonal. There has been a general slowdown in the quote system that’s been going on for some months. I will tell you that we feel more confident about quarters you haven’t seen yet, because we have access to some of the numbers you don’t see. But again, the steady state normal flow of case files here has been very slowly – I guess slowing down is the right term for it, all of this year.

Scott Pollei

 

The other point I would make, Peter, is that they have a bit of a difficult comparison last year because it was the best year they ever had. And so that makes a little difficult as well.

Peter Appert – Goldman Sachs

 

Okay. And Scott, the DSOs, receivables up pretty significant amount, what’s going on there?

Scott Pollei

 

Actually I think it’s fairly consistent with the first quarter. It’s up significantly year-over-year. If you recall, in January 1st when we renegotiated our – not renegotiated, we amended, move forward on our pricing with the services agreement in Michigan with APC. We increased our per file fee, as you call, but we also moved out our payment terms there from 30 to 45 days. The law firms were getting some push from there. They service our customers with the volumes that they needed to stretch out their payments a little bit, and we helped – I guess tried and tried at times. So that’s really the big change. From first quarter to this quarter I don’t think there was much.

Peter Appert – Goldman Sachs

 

Got it. Okay. And then last thing I’ll ask and let someone else jump in. Jim, the expectation of no margin improvement, I understand there is upfront cost obviously in terms of building infrastructure and in terms of expanding the operation, but the context of all the incremental unit volume you are bringing on particularly in these faster growth markets, I might have thought that perhaps you would be a little more optimistic in terms of the potential for margin upside. So could you just speak for that for a second?

Jim Dolan

 

We do. There is some immediate remedial spending that we want to do with the NDEx system and technology. We are – because of our experience in the past with previous departments we have not owned for few years, we have a lot of experience in developing bulletproof technology, business continuity, a lot of the things that we think are important to clients. And taking that framework, that sort of criteria and applying it to NDEx, there are some things we want to do right away just to make that as bulletproof as APC’s technology is too. That really accounts for a lot of it right there. And there are some – I don’t know if they are normal, there are some one-month kind of one-off things related to transactions that we’ll not recur, but they are in there for the first period.

Peter Appert – Goldman Sachs

 

Got it. And then actually I lied before about no more questions. One other, it looks like the rough calculations on revenue per file, it looks like the revenue per file is basically flattish on a year-over-year basis even in the context of the price increase you announced. So what’s the dynamic behind that?

Jim Dolan

 

What happens there, Peter, is a bit of a mix change. As you recall, in each of the states where we are prior to NDEx, we have at least four and sometimes six or seven different revenue opportunities depending on the types of work that we are doing with the law firm. And they carry very different, different rates, if you will. And what happened in this case when it stayed flat, given the increase – I mean, some of those lower rated services took kind of higher percentage of the mix.

Peter Appert – Goldman Sachs

 

I’ll let someone ask questions. Thank you.

Operator

 

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

Randy Hugen – Piper Jaffray

 

Thanks. Have you started to see a sequential increase in foreclosure volumes in the third quarter and you expecting a ramp on ARM resets there?

Jim Dolan

 

Do we disclose that? I don’t know. We are not ready to talk about the third quarter yet, Randy. We are wary of forward disclosures like that. I don’t think we’ve done it before.

Randy Hugen – Piper Jaffray

 

Okay. I guess, is there any reason to think that the ARM resets in the second half of the year that you guys have talked about previously might flow through differently than before given some of the regulatory changes and other noise that’s come out of the banking system over the last quarter?

Jim Dolan

 

No. I would say no. Nothing that we haven’t talked about for at least several months. We’ve talked a lot about, with every about the regulatory efforts to slow the growth and foreclosures. Nothing new has happened, nothing has changed our views. We still expect a crest later this year.

Randy Hugen – Piper Jaffray

 

Okay. And then, advertising circulation trends, is it reasonable to assume that the trends there I guess continue to follow the overall economy and are weaker until we start to see a recovery?

Jim Dolan

 

Well, on advertising, the endemic advertisers that we have are hanging in there as they have in past recessions and we’d hope they would this time and they have. It’s the not endemic ones, the ones who just wanted to reach lawyers because they have money rather than to sell professional things to lawyers, where the drop-off has occurred. We have seen a drop-off. It’s not nearly as steep as anyone else has seen, but it has started now. We expect that to continue for the time being and to follow past recessions and then continue into the recession as well.

Randy Hugen – Piper Jaffray

 

Okay. Does the economic slowdown give you better opportunities for M&A on the business information side?

Jim Dolan

 

I think it gives us more opportunities in every part of the company. I think that there are – at any given time, a number of people are deciding that they are tired or want to retire or there are various reasons crop up to sell the business. And so there is an accumulation of those people and fewer buyers out there able to close deals. So, yes, it’s been good for us.

Randy Hugen – Piper Jaffray

 

Okay. And then one more back to the expectation for no margin improvement I guess in ’09, are the underlying margins improving excluding the impact from acquisitions?

Jim Dolan

 

Well, over time, yes, but there are some mitigating factors here. I would point out that NDEx has a business line that tidal work, that is somewhat lower margin than the rest of the processing activities. So that’s going to change the mix going forward into 2009 for the acquired properties. So that’s a factor I should point out.

Randy Hugen – Piper Jaffray

 

All right. Thanks a lot.

Operator

 

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

Bob Evans – Craig-Hallum Capital

 

Good afternoon everyone. To follow up with the last question, as we look at kind of corporate expenses ’09 versus ’08, I would assume that our G&A, I would assume that we are not going to see as fast a growth rate as you had discussed for the other business segments. Is that a fair statement?

Jim Dolan

 

I think that is true, Bob.

Bob Evans – Craig-Hallum Capital

 

Okay. And as it relates to – looking at ’09, I think you said the rate would be about 7.5%, but to make sure I understand how you are looking at that. In terms of incremental debt from the transaction, if you use the proceeds from the equity raise, and what I understand as a cash transaction, to make sure you use around $100 million debt net-net incrementally or – I know you are going to generate free cash flow as well. So, trying to get your sense of what the additional net debt should be.

Jim Dolan

 

I think the additional net average debt for the next year is probably 95, absent any other transactions. We are going to borrow about $105 million here at closing. And then our scheduled amortization over the next 12 months is going to be roughly $5 million a quarter. And so the $20 million of repayment over the next year would say that the average is 10. So – and the average is $95 million.

Bob Evans – Craig-Hallum Capital

 

Okay. And sorry if I’ve missed this, but on the organic growth, not file growth, but revenue growth for APC this quarter was?

Jim Dolan

 

About 11.9%.

Bob Evans – Craig-Hallum Capital

 

Okay. And you view that is in line with kind of market growth during the quarter?

Jim Dolan

 

We do, yes.

Bob Evans – Craig-Hallum Capital

 

Okay. And can you elaborate on the second half, again I think earlier in the year you had commented you expected kind of seasonal strength with Alt-A loans increasing in terms of foreclosures. Do you still expect that, kind of a seasonal strength, if you will?

Jim Dolan

 

We do expect that in the third and fourth quarter. And in fact, I think if you saw the Wall Street Journal article today, they have talked about – nationally obviously it is different in each individual market, but they talked about the – it’s not over yet, and there has been surprising weakness in current origination. So –

Bob Evans – Craig-Hallum Capital

 

With that – I’m glad you brought [ph] the article you saw as well. But if you – what's your view in general of how far away we are from peak and how long it might take for things to get back to even this level, because I think there is an investor uncertainty in terms of how quickly this rises and then how quickly it moderates back.

Jim Dolan

 

We read the Journal this morning and we read the front page of the New York Times a few days ago, which pretty much said the same thing. And we said to ourselves, we’ve saying this for 15 months, now to a lot of people. We think it’s 18 months to two years of things getting worse before we hit the worst point in the foreclosure boom. Best point for us, I admit, but worst point for the economy and for the country. It’s got a longer growth cycle ahead of it than a lot of people think. And as the stories we read in the papers indicated, it’s – this is the year for subprimes to peak, but all days are peaking behind that one. There is a third peak coming with primes peaking. So we’ve got a long run out there. It’s at least 18 months, quite possibly two years.

Scott Pollei

 

And internationally, as we said on our call last week for NDEx, we think that that window actually is longer in California, which is specifically important to – obviously to us and to NDEx.

Jim Dolan

 

Right. And just to be clear, that’s not two years until it’s over, that’s two years until it stops getting worse and then the curve starts back the other way.

Bob Evans – Craig-Hallum Capital

 

Okay. So in terms of where the things get moderate back to “normal,” how far off do you think that might be?

Jim Dolan

 

Well, I think as a country, it’s anywhere from three to five years. It’s hard to tell how long, but it’s not going to be any shorter than three years back to normal. And for some individual states, particularly California, it’s going to be a lot longer than that, beyond 2020.

Bob Evans – Craig-Hallum Capital

 

Okay. But if you look at your business, I mean do you view your growth more so as market share growth or do you view your business more so as rate of how the overall foreclosure rate is going, and maybe elaborate kind of how big your opportunities are in both California and Georgia?

Jim Dolan

 

Well, we started talking about national market share with this release because that’s how we think about it. And it’s how – we think that’s the right way to think about it. So we certainly are trying to get as much business as we can in each state and in the additional states where we are doing business as soon as possible. But for us the long-term strategy is to grow the market share beyond 10%, beyond 20% to as high as we can get it and keep the top line growing that way. But you asked about Georgia and about California. Georgia doesn’t have quite the long road of pain ahead of what the California does. It’s got a year to maybe 18 months before it begins to return to normal. It’s somewhat like many other states. California is off the charts though. California will have many, many more times foreclosures just in absolute numbers. And it’s a mountain range going up now for the next probably two years, maybe a little bit longer than that. And it’s a long, long tail out before it gets back to normal. And normal actually looks like 2026 [ph] to us. It’s hard to call something that far out, but it’s a very, very long time out there.

Bob Evans – Craig-Hallum Capital

 

Okay. Thank you. I’ll let others ask questions.

Operator

 

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

Michael Weisberg – ING

 

Yes. Hello, everyone. A few questions if I could. First, is it reasonable to expect within the APC business that Seawell [ph] is growing a little faster than the Michigan business because that’s sort of market share is less and has more room to grow. Was that your experience?

Jim Dolan

 

I think you’ve got – if you are looking at drivers of growth, there is external environmental growth in files and there’s market share growth. True, Michigan has greater market share. So that growth factor you think would be greater in other states, less so in Michigan. In the environmental situation, I think Michigan and Indiana are really not far apart in their environmental growth rate as far as foreclosures. Michigan is a bigger state, has more numbers of foreclosures, but the growth rates are not the similar.

Michael Weisberg – ING

 

Okay. Are you – so does that mean your growth rate in the two states is similar?

Jim Dolan

 

Yes. Roughly, yes.

Michael Weisberg – ING

 

Okay. So Seawell is growing about the same as the Michigan APC business?

Jim Dolan

 

Roughly, yes.

Michael Weisberg – ING

 

Got it. Did you give a – did you give a forecast – did you put out or could you a overall revenue forecast for the Professional Services business in ’09? I guess one of the things that I think we’d be interested in is sort of what the growth would be excluding NDEx.

Jim Dolan

 

Well, we are trying to give that, Michael, with the percentages that we talked about earlier. And we will be giving more specific growth in dollar terms later in this year. But we tried to give you a little flavor on that already with what we gave out earlier today.

Michael Weisberg – ING

 

If I understand it, the – I think you used – did I get it right at 15% to 18% growth in the mortgage default business in ’09?

Jim Dolan

 

That’s correct.

Michael Weisberg – ING

 

But that would include 12 months of NDEx versus four months.

Jim Dolan

 

Well, no, what we are saying is that we would expect the kind of the overall business had we owned NDEx from January 1 through the end of this year.

Michael Weisberg – ING

 

Okay. So that would be the pro forma growth assuming NDEx was in for the whole year?

Jim Dolan

 

No, no, I don’t want – make sure we don’t make this – nobody misinterpret this. We were saying 15% to 18% for the base business, if you will. It grew by – for instance, this quarter it grew by 11.9%. We are seeing – and last quarter it was up I believe higher than that. I don’t have the number right in front of me. We continue to see that 15% to 18% of growth in the base business and then you layer NDEx on top of that.

Michael Weisberg – ING

 

Okay. So that would be an acceleration of the base business from what you saw in the second quarter?

Jim Dolan

 

That’s true. But – yes, that is true.

Michael Weisberg – ING

 

Okay. So again, that’s without NDEx?

Jim Dolan

 

But remember that the second quarter is historically – I realize it’s a year-over-year comparison, but it’s the weak quarter of the year.

Michael Weisberg – ING

 

Right, okay. Now that’s –

Jim Dolan

 

And Michael, I should also interject. If you are looking at the NDEx additions and their growth rates, you might think off Georgia as having normal growth rate compared to the rest of the states. California has an abnormally high growth rate. Texas would have an abnormally low growth rate. It is growing. Texas is a large state with lot of foreclosures, but its economy is relatively strong because of energy right now. So the Texas growth rate is below average if you are ranking it against other states.

Michael Weisberg – ING

 

Right.

Scott Pollei

 

The reason we try to give you some absolute dollars here was, you didn’t have a base of comparison to move forward. So –

Michael Weisberg – ING

 

No, that’s very helpful. The BIT [ph] was running 21% EBITDA margins, did I hear that that’s sort of a good range to use going forward?

Jim Dolan

 

What we said was that business ought to be in the low to mid-20s.

Michael Weisberg – ING

 

Okay, great. And when you talk about flat margins in ’09, that was inclusive of NDEx?

Jim Dolan

 

Yes.

Michael Weisberg – ING

 

Okay. And what about in ’08?

Jim Dolan

 

We don’t see much change from them for the balance of the year.

Michael Weisberg – ING

 

Okay. Margin should be about the same. Great. The non-cash income, because of the value of the swap to 1.1 million, how does that work going forward because that was a big change. What should one expect in that going forward?

Jim Dolan

 

Let me correct you for one thing there, Michael. It was $600,000. The net change was 1.2 million, but 600,000 there was caused by the mark-to-market on the swaps. Do be honest, I don’t know. We got whipsawed in the first quarter where it was a big negative. We got the benefit in the second quarter when it was a positive. We don’t forecast I guess interest rate moves and the impact on the swap because we are not smart enough to do that.

Michael Weisberg – ING

 

Great. Thanks a lot.

Operator

 

Thank you. Our next question comes from Peter Appert from Goldman Sachs. Please go ahead.

Peter Appert – Goldman Sachs

 

Jim, just one more follow-up on the guidance. The 9% to 11% you are talking about BIS in ’09, it seems pretty optimistic in the context of what’s happening in the end market. How do you come up with that?

Jim Dolan

 

Public notice. That’s really about as simple as that. Now there are some other things that are showing continued hopeful signs. Our event revenues are good. We’ve been able to price our circulation – our subscription products upward nicely and show some dollar growth there. But public notice is really the big engine there.

Peter Appert – Goldman Sachs

 

And then just a follow-on to the prior question, the 15% to 18% guidance on the Professional Services for the base business would be a pretty meaningful acceleration relative to what we're seeing currently. And is that basically just an expectation that these mortgage resets will trigger a significant step-up in foreclosure activity versus sort of the trend line we’ve been seeing?

Jim Dolan

 

Well, I think for us the big factor is California. That changes the mix with an upward pressure.

Peter Appert – Goldman Sachs

 

Okay, all right. So then I guess I don’t fully understand.

Jim Dolan

 

Let me – you are right there, Peter, because the – we’ve given you the number for California already, that’s in the NDEx. So we shouldn’t confuse that. But we continue to see the subprime reset, the Alt-A reset coming and we don’t see it peaking yet.

Peter Appert – Goldman Sachs

 

Got it, okay. So that would be the driver of the uptick here?

Jim Dolan

 

Yes.

Peter Appert – Goldman Sachs

 

Okay, thank you.

Operator

 

Thank you. (Operator instructions) And there are no further questions at this time, sir.

Jim Dolan

 

Okay. Thank you everybody for participating in this call and we look forward to speaking with you again soon.

Operator

 

And thank you, ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.

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