Andy Schultz – Senior Director Investor Relations
Jerre L. Stead - Chairman & CEO
Michael J. Sullivan - Chief Financial Officer, Executive Vice President
Ron Mobed - Co-President, Co-Chief Operating Officer
Jeffrey R. Tarr - Co-President, Co-Chief Operating Officer
Ashley Hemphill - William Blair & Company, L.L.C.
John Neff -William Blair & Company, L.L.C.
John Crowther - Piper Jaffray
IHS Inc. (IHS) F3Q08 Earnings Call September 18, 2008 5:00 PM ET
Welcome everyone to the IHS third quarter 2008 IHS earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Andy Schultz, Senior Director of Investor Relations.
We issued two news releases about an hour ago. If you do not have them you will find copies on our website at ihs.com In addition to announcing our third quarter and year-to-date results we also announced the signing of a definitive agreement to acquire, for $200 million, Global Insight, the worldwide leader in economic and financial analysis, forecasting and market intelligence for over 40 years. The deal is expected to close in the next month or so pending standard regulatory review.
Some of our comments and discussions on the quarter are based on non-GAAP measures. Our non-GAAP or adjusted numbers include stock-based compensation and other non-cash charges net pension income, restructuring charges, gains and losses on sales of assets and other items. Our earnings release includes both our GAAP based income statement and statement of cash flows and reconciliations to the non-GAAP measures discussed during this call. These reconciliation schedules can also be found on our website.
The non-GAAP results are a supplement to the GAAP financial statements. IHS believes that 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 web cast and is the copyright and property of IHS. Any rebroadcasts of this information in whole or in part without the prior written consent of IHS are prohibited.
The agenda for today’s call is as follows: Jerre Stead our chairman & CEO will provide highlights of the quarter and review our most recent acquisitions, including the purchase of Global Insight; Mike Sullivan our executive vice president and CFO will review the third quarter and year-to-date financial results, discuss some of the financial aspects of the pending global Insight purchase, provide an update to our outlook for fiscal 2008 and preview our 2009 guidance. After formal comments we will 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.
I would like to extend a special welcome to our soon to be new colleagues at Global Insight and our new colleagues at the acquisitions we have made since our last call. We have much to discuss today: continued strong operating and financial results, including record revenue, adjusted EBITDA and adjusted EPS; continuing progress on our internal initiatives; a change to our common stock structure with the conversion of all Class B shares to Class A shares and the associated elimination of the 10 to 1 voting structure; two closed acquisitions and the announcement of the Global Insight transaction, which is expected to close within the next few weeks.
First I want to express my sincere thanks to all of our colleagues for their continued hard work in delighting our customers and delivering these outstanding results for our shareowners.
Now let’s begin with our financial results.
Revenue for the third quarter was $207 million up 13% over last year. Adjusted EBITDA increased 28% or 320 basis points to a record $57 billion. Adjusted earnings per diluted share were $0.56, an increase of 30% over last year and we generated $40.3 million of free cash flow during the recent completed quarter.
Mike will discuss our financial results in further detail later.
At IHS our vision is to be the source for critical information and insight. When information and insight are mission critical to our customers achieving their business goals, we are the source they trust, rely on and come to first. Specifically we continue to improve our global leadership position for information and insight across four targeted information domains, energy, product life cycle, security, and environment.
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 shareowner 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. Our first strategy is to put customers first in everything we do. We set targets for improving customer delight each year and we benchmark our results through annual survey. This year’s customer first survey begins later this month. Our goal is to improve our customer delights score by at least 10% over 2007 results. Our second strategy is to create a best in class work environment that supports profitable growth. In order to create a better in class work environment, a best in class work environment, we must solicit input and feedback from our colleagues around the world. To that end, and similar to our customer first initiative, we also survey our colleagues annually with the goal to improve last years results by at least 10%. That survey is now under way.
Our third strategy is to achieve a leading position across all of our targeted information domains through organic growth and acquisitions. Our subscription-based businesses, which represented over 75% of total revenue in quarter three, continue to grow in the low double digits. Acquisitions play a key role in our growth strategies as they are integral to strengthening the offerings in our domains. Since we spoke on August 11, we have announced three acquisitions, two of which, Documental Solutions and the acquisition of certain assets of Divestco USA, have already closed. The third, Global Insight, just announced this afternoon, will close in a few weeks, subject to standard regulatory review.
I will come back to our acquisitions in just a moment, after covering our fourth strategy, which relates to improving margins and quality through operational transformation, as we continue to leverage our scalable business model. As we have stated previously, 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 third quarter 2008 margins of 27.6%, up 320 basis points compared to last years third 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 coat to cash systems; and purchasing savings. We are making good progress on all of these initiatives and we expect to see ongoing operational efficiency and resultant cost savings in the future.
On August 11 we announced the operational efficiencies and expected financial improvements identified thus far, from changes to our data accumulation processes and our regional realignment. As we discussed, the transformation of broad data to critical information and insight is a knowledge-based process. IHS colleagues have world-class domain knowledge and expertise. We make enhancements to every piece of information we collect, which includes sophisticated sourcing, matching, identification, and relationship definitions. To clearly reflect this transformation we’ve made to data management and the deep domain expertise in this shared service the DA team has been renamed Global Information Operations.
Our Global Information Operations creates enormous value in our critical information and insight products and services and is responsible for ensuring we continue to improve the high quality of our offerings.
Before I move on to acquisitions, I want to cover briefly the conversion of the Class B shares held by TBG to Class A shares, thereby leaving one class of common stock at IHS. As you may remember, there were two classes of stock issued at the time of the IPO with TBG holding the only Class B shares, which in turn had a 10 to 1 vote. That 10 to 1 vote was set to expire in November of 2009. Recent discussions with TBG have resulted in the immediate conversion of the Class B shares to Class A shares in exchange for an increase in registration rights from two to four. With this change TBG’s voting and economic interests have decreased from 74.4% to
23.6 %. Be assured that any sale of the TBG shares will be managed in a structured and orderly manner.
Now let’s move on to the exciting news of our acquisitions. Our acquisitions add capabilities to IHS which are highly desired by our customers. Documental Solutions is just such an example. Documental Solutions is a leading provider of market intelligence and analysis tools for the aerospace and defense industry. Its flagship product, DS Forecast, is the foremost electronic subscription tool that forecasts detailed defense equipment procurement ten years into the future. DS Forecast reduces the time it takes to gather data, thereby freeing up more time for its users to analyze the data and support the strategic decision making process.
Documental Solutions will be integrated and managed by our Jane’s team within the security information domain. We acquired Documental Solutions for about $24.5 million.
Acquisitions also filled gaps within our domains. The Divestco USA assets we recently acquired are a good example of this. The acquired assets enhance our existing products in the energy domain, add new product lines, and provide valuable exploration data for US fields. In particular we acquired very critical drilling information, something IHS did not have before.
We acquired the Divestco USA assets for approximately $3 million. Now let’s spend a few moments discussing Global Insight.
Global Insight is the recognized leader in providing the most comprehensive global macro economic information analysis and advisory services to businesses and governments around the world. Global Insight provides the most comprehensive economic, financial, and political coverage of countries, regions, and industries available from any source, covering over 200 countries and regions and more than 170 industries to more than 3,800 clients in business and government. Global insight met our rigorous acquisition requirements culturally, strategically and financially.
Mike will cover the financial details later, but it is very important to note that Global Insight is almost 70% subscription based. Global Insights unique combination of expertise, models, data, and software within a common analytical framework support customers in developing strategies, controlling risks and making key decisions. Global Insight provides analysis and forecasts that are updated daily to take into account political, economic, legal, tax, operational and security factors. Global Insight applies the insight and expertise of its forecasting and analytical services to advice on specific issues that effect competitive position, investment strategy and policy positions by leveraging a wealth of business, financial and economic information.
Global Insight founded the modern economic forecasting industry more than 40 years ago and today is recognized as the most consistently accurate economic forecasting company in the world according to surveys by the Wall Street Journal, The London Sunday Times, Dow Jones Market Watch, Roiters, USA Today and the Atlanta Federal Reserve.
Global Insight is head quartered in Waltham, Massachusetts and has approximately 700 employees and 25 offices in 14 countries. Over 325 analysts, researchers, and economists come from 16 countries and speak 23 different languages. With the acquisition of Global Insight, IHS will enhance the value of its products and services by adding critical economic focused offerings to the full range of our information and insights products and services. This will deepen our capabilities across our four information domains, energy, product life cycle, environment, and security and will establish economic forecasting and market outlook as a core competency of IHS.
IHS and Global Insight share a common excellence in translating information into insight for our customers around the globe. The combination of IHS and Global Insight puts IHS at the very center of today’s most critical business decisions.
Global Insight will be aligned with the other IHS Insight businesses to build an integrated research and operations capability leveraging the resources of Sarah, Jane’s, and IHS Herald to benefit customers across all four of our information domains.
Scott Key, IHS senior vice president and currently serving as president and COO of Jane’s will relocate to Waltham, Massachusetts and assume leadership of Global Insight upon closing of the acquisition. Scott will work to quickly integrate Global Insight with the other IHS Insight businesses to fully leverage the colleague information and customer resources to enhance IHS capabilities and expand our geographic scope and insight product offerings. Dr. Joseph Kasputys Global Insights highly respected chairman, president and CEO will join IHS as chairman Emeritus of Global Insight and chair an advisory board for all of our insight businesses.
So in summary, it was another strong quarter for us. We continue to implement our strategies and look forward to the many opportunities that lay before us.
Now it is my pleasure to turn the call over to Mike.
I will start by giving a review of our third quarter year-to-date results. I will then provide further details surrounding the global insight acquisition. Also, I will provide an update to our 2008 annual guidance and I will provide a preview of 2009 guidance.
Regarding the financial results for the quarter, let’s start with revenue.
As you recall, our Q3 2007 results benefited from the inclusion of the once every three year release of the boiler pressure vessel code. As a frame of reference, this timing issue held down our all end reported and organic revenue growth rates by approximately 4% for the third quarter. In order to have a meaningful conversation about our underlying results, the Q3 growth rates that we will be addressing have been normalized for the impact of the code where applicable: having said that, top line growth was 17%, driven by 7% organic growth, 9% growth from acquisitions and the rest from favorable 4X. Americas revenue grew 18%l, AMEA revenue grew 17% and APAC increased 8%.
Organic revenue growth was 7% overall with Americas and AMEA each growing 7% and APAC growing 3%. Excluding our consulting business, which represented less than 5% of revenue for the quarter, our organic growth rate was 10%, highlighting the continued momentum in our subscription-based offerings.
Revenue growth was broad based in nature with growth in all three regions and across both our critical information and insight offerings. In particular, Jane’s has now lapped its one year anniversary and we are delighted to report that we have brought Jane’s organic growth rate to 10% and expanded its adjusted EBITDA margins from 18% to 28% over the last year.
In terms of revenue performance by product line, critical information grew 11% and represented 75% of total revenue and insight grew 19% and accounted for 25% of total revenue. Lastly for the third quarter of 2008 revenue by demand was as follows: energy was 52% of total revenue and grew 15%; product lifecycle is 35%, it increased 6%; security was 10% up 30% over last year and environment was 3% of overall revenue with all its increase being acquisitive.
Looking at the rest of the P&L gross margins improved 130 basis points year-over-year to 56.0%. SG&A as a percent of revenue and exclusive of stock based comp improved 1.1% points year-over-year to 30.4%. As previously announced, we recorded a $12.5 million restructure charge in the third quarter of 2008. The charge resulted from operational efficiencies identified to date due to our regional realignment and changes to our data accumulation, now Global Information Operations.
Approximately 7% of the IHS workforce as well as certain contractor positions were impacted. We expect to realize an $8 to $10 million annual improvement to pre-tax income and adjusted EBITDA during the fourth quarter of 2008.
Adjusted EBITDA totaled $57.2 million including a $2.2 million contribution from our 50% interest in Lloyds Register Fairplay or LRF. Total adjusted EBITDA for IHS is up 28% versus a year ago. Adjusted EBITDA margin improved by 320 basis points to 27.6 from 24.4%, based on increased productivity and the continued double-digit growth in our subscription based business. Roughly 60 basis points of the adjusted EBITDA margin expansion is attributable to the way in which we report our earnings from the joint venture.
Adjusted earnings per share increased 30% to $0.56 per diluted share in the third quarter, up from $0.43 last year. This included a $0.05 per share tax benefit, which I will explain further in just a moment and we generated free cash flow of $40.3 million in Q3 up from $19.5 million the prior year.
Regarding segment profitability, Americas adjusted EBITDA increased 24% to $48.4 million in the third quarter, compared to $39.0 million in the prior year period. AMEA’s adjusted EBITDA was $18.1 million in the third quarter of 2008, up 75% from last years $10.3 million and benefited from the inclusion of the LRF profit and the Jane’s improvement. An APEX adjusted EBITDA was $4.2 million in the current quarter, up 26% versus last years third quarter.
The reported tax rate for the third quarter of 2008 was 18.75, significantly better than last years 30.6%. This lower tax rate reflects the benefit from the recent implementation of an inner company debt structure between two wholly owned subsidiaries. The cumulative year-to-date benefit is reflected within this quarter and totals approximately $3.1 million or $0.05 per share, as we mentioned.
Our forecasted third quarter and 2008 rate is expected to approximate 30%. This change results in a positive modification to our ongoing expected tax rate and a level of free cash flow generation which I will stand upon in our guidance section.
Stock based compensation expense increased by $1.2 million versus a year ago, but is down slightly since the second quarter of 2008 due principally to forfeitures. Adjusted net income for the third quarter of 2008 totaled $35.3 million up 31% from $26.9 million in the prior year.
Adjusted EPS increased 30% to $0.56 per diluted share versus $0.43 per diluted share in the third quarter of 2007. Please note that our earnings release provides the per share figures for a number of items that we exclude in measuring operating performance on the schedule attached to the release. This schedule will show you the detailed reconciliation of reported EPS to adjusted ePS.
Now let me briefly touch on year-to-date results. Reported revenue through Q3 of 2008 was up 25% versus a year ago. Year-to-date adjusted EBITDA for 2008 was up 38% versus the prior year and the resulting adjusted EBITDA margin increased 250 basis points to 26.3% from 23.8% last year through the first nine months of 2008.
Let’s move onto a few balance sheet highlights. We ended the quarter with cash of $87 million and $17 million of debt which pertains to the non-interest bearing notes issued in conjunction with the purchase of the 50% interest in LRF earlier this year. Deferred revenue at the end of the quarter was about $264 million which represents a year-over-year change of roughly $33 million or 14%. The organic growth rate inherent in this increase was 13%.
Turning to cash flow, third quarter 2008 free cash flow was $40.3 million compared to $19.5 million a year ago. On a trailing 12-month basis we have generated $178 million of free cash flow which represents a conversion rate of 84% of adjusted EBITDA.
Regarding our share repurchase program, during the third quarter of 2008 we repurchased approximately 578,000 shares of common stock worth $35 million or $60.60 per share. Year-to-date we have repurchased approximately 672,000 shares of common stock for $40.5 million or $60.236 per share. Additionally, as employee equity awards best and related tax withholdings come due, IHS withholds enough shares in treasury to cover the tax liability and makes a payment to the tax authority out of corporate cash. During the first nine months of 2008 IHS withheld approximately 262,000 shares or $16.3 million of treasury stock under this program.
Before we get to our guidance update, let me take you to three items which will likely impact our guidance: our tax rate, the effects of 4X on our business and the expected financial impact of the Global Insight purchase.
As stated earlier, our reported tax rate for the third quarter of 2008 was 18.7%, significantly down from last years 30.6%. Since the third quarter rate includes the year-to-date cumulative catch up of this change, it is not indicative of our expectation for the continuing tax rate of the company: having said that, the benefit derived from this structural change will endure for the foreseeable future. To that end we now expect our fourth quarter and full year tax rates to be approximately 30% and as you will hear in my 2009 guidance update we expect the 2009 rate to be even lower. This lower rate will also translate into lower overall levels of payments and hence even higher levels of free cash flow and conversion ratios.
Regarding 4X , some strengthening of the dollar has adversely affected our full year revenue expectations slightly. Recall that while the revenue line is subject to 4X movements, specifically a weaker dollar benefits our revenue and a stronger dollar adversely affects our revenue, our profit line is much more insulted to currency movements and hence we don’t expect material 4X impacts to our profit levels.
Building on Jerre’s strategic view of the Global Insight Acquisition, let me talk a little bit about the financial characteristics and expectations of this important addition to the IHS portfolio. We signed a definitive agreement to purchase the stock of Global Insight for approximately $200 million. The purchase price will be funded with 60% cash and 40% IHS stock and pending customer and closing conditions and the expiration of the regulatory waiting period.
The IHS shares issued as part of the Global Insight purchase will be subject to a lock up agreement. Under the lock up 10% of the shares are restricted from sale for a period of one year from the closing; 50% of restricted from sale for two years from the closing and the remaining 40% of the shares are restricted from sale for three years from the closing.
Regarding the financial characteristics, Global Insights current annual revenue run rate is approximately $120 million or about $10 million per month and is growing organically at roughly 10% per year.
In terms of margin Global Insight is currently operating at high single-digit adjusted EBITDA margins. Our expectation is to generate a high teens adjusted EBITDA margin for 2009 and to exit that year with a margin in the mid-twenties. In terms of valuation multiples the purchase price represents a nine to ten times multiple of expected 2009 adjusted EBIDTA.
Lastly, while we do expect this acquisition to be accretive to 2009 adjusted EPS by $0.02, we anticipate that it will dilute fourth quarter 2008 adjusted EPS by $0.03 due principally to the amortization of purchase price.
Now let me discuss our outlook for the full year ending November 30, 2008 and then I’ll give you a preview of 2009.
For both 2008 and 2009 our guidance is on an all in basis and assumes constant FX rates, the effective acquisitions completed to date and an estimated October 1, 2008 close for the Global Insight acquisition. We expect our all in 2008 revenue growth to be at the high end of our previously disclosed range of 21% to 23% despite 4X costing us a few points in Q4 or about a point for the year.
Relative to all unadjusted EBITDA, we are revising our annual guidance upward to grow 31% to 33% in 2008 from a base of $168 million in 2007.
Now let’s look at some other items of note incrementally.
Taking into consideration the expected funding of Global Insight in a few weeks, along with our significant Q3 stock repurchase, we now expect net interest income to be about $1 million for the full year 2008. As discussed earlier, we expect our fourth quarter and full year tax rates to be approximately 30%. We expect deprecation and amortization to be in the range of $41 to $42 million. This represents a $2 million increase from our last guidance update, reflecting the expectations of higher amortization from the three announced deals, including Global Insight, since then.
Remember our rule of thumb, that generally about 4% to 5% of an acquisitions purchase price affects the P&L annually in the form of purchase price amortization. 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 third quarter.
Our 2008 stock based compensation expense is expected to be in the range of $45 to $46 million. After considering the shares we expect to issue as part of the Global Insight Acquisition, we expect fully diluted shares to be approximately $63.6 million for Q4 2008 and $63.3 million for the full year 2008.
Now let’s get into 2009 guidance.
We expect our all in 2009 revenue growth to be 19% to 21% off the high end of our current 2008 revenue guidance of 21% to 23%, which in turn is off the 2007 base of $688 million. We expect our all in 2009 adjusted EBITDA to grow 21% to 24% off the high end of our current 2008 guidance of 31% to 33% which in turn is off a base of $168 million in 2007. We expect net interest income to be effectively nil next year. We expect our 2009 tax rate to be 28% to 29%. We expect depreciation and amortization to be $50 to $55 million in 2009. Our 2009 stock based compensation expense is expected to be in the range of $67 to $70 million and we expect fully diluted share to be about $64.6 million in 2009.
Again, both the 2008 and 2009 outlook assumes no currency movements, restructurings, unanticipated events, or additional acquisitions beyond the closing of Global Insight.
To wrap up, we are pleased that our underlying subscription based business continues to see strong double-digit organic growth as well as steady margin expansion. Our business model continues to generate significant amounts of free cash flow. We look forward to welcoming our new colleagues from Global Insight shortly and we are eager to get going on the related integration.
With that let me turn the call back over to Jerre.
We had a record-breaking quarter in many respects and as evidenced by the agreement to purchase Global Insight, we remained focused on delivering increased long-term value for all of our shareowners. We see much opportunity in the future and are very excited about what’s ahead for IHS.
Thank you for your time today. Mike, Jeff, and Ron are with me now and we would like to open the all for Q&A.
(Operator Instructions) Your first question comes from Ashley Hemphill from William Blair.
Ashley Hemphill - William Blair & Company, L.L.C.
I wanted to talk a little bit about the organic growth rate in the quarter. We were expecting a reacceleration of organic growth from the 9% in the past three quarters to double-digit organic growth and we thought that was sort of your expectation. We are just wondering if you could tell us maybe what has changed in regards to your prior assumptions if anything and if we should be looking at IHS more as a mid-single digit organic growth business or if you are still expecting a reacceleration into the double digits.
Let me start and then I’m going to ask Ron Mobed to pick up on an important part of it.
As Mike said, we actually grew 10.3% organic growth for the quarter if we adjust for the once very three year event that happened last year and take out the business that we talked about in Q2 consistently and have talked about in Q3 of wanting to make sure that any consulting that we did would pull through a significant amount of ongoing subscription based business. I will have Ron comment on that in just a moment.
Also as you all know the best way to think about our organic growth in the future is to look at the deferred revenue on the balance sheet. That was a little over 14%. Our organic growth was 13.4% of that deferred and that actually covered 77% of our Q3 revenue which was annual subscription based, so I feel very good about the ongoing strength of the annual subscription based business and look forward to seeing that kind of strength in the future.
I do want Ron to comment on what we’ve done on the consulting business and its impact.
We talked about consulting in the second quarter earnings call as well and what we have seen is that we’ve seen a decline in the consulting activity, some of which is related to our subscription business, but most of which is unrelated to our subscription business. As we’ve said before, we strive to look for consulting activity that supports our fiscal information and insight businesses and we are therefore in the act of moving our consulting business to a higher quality revenue stream, which obviously then has additional margin benefit as well.
Two other key points to think forward, the organic growth of the acquisitions, in other words those that are still in sight of the year one organic growth, are strong and will continue to be and as Mike said, the acquisition that we’ve announced and hope to close in the next few weeks with Global Insight, has been growing at about 10% organic growth too.
So, as you think forward, think of the comparables next year, where we would expect to see, and one other key point I want to make, for Q3 as I have said, the consulting business was actually a little less than 5% over our revenue, that is down from 8.5% of revenue a year ago, so as Ron and then in this case Jeff done a very good job of getting our arms around the consulting business and getting it focused on where we are going to go in the future with pull through, we will have very good comps in 2009 as we move forward with that.
So, in summary we are very pleased with the organic growth on an annual subscription basis, it is quite strong; like I said 13.4% deferred revenue organic. The acquisitions we have made, including the one we were delighted to have announced today has had good, solid, low double digits organic growth, and as we finish up the focus on the consulting business, I think we feel quite good about consistent low double-digit organic growth in the future.
Ashley Hemphill - William Blair & Company, L.L.C.
Can we talk about Asia Pacific? We know this is a high growth and priority area for you and we just wanted to know if you could give us sort of an update on the trends in the quarter and what you expect in terms of the growth in this region to look like over time.
Absolutely and I am going to have Jeff pick up on that in two seconds, but you are right, it is a high growth business. That particular region, as you will see, was most impacted of any of the regions for the agency business that we exited, as you will remember this last Q4 and Q1 and is still having some impact there. But, Jeff pick upon what you see and where we expect to go.
Factors in Asia Pacific, there are a number that impacted that growth rate in the quarter. The consulting business is a factor in Asia Pacific and [inaudible] with a strong third quarter in Asia Pacific for us so that there was an impact there, boiler pressure vessel code was a factor in Asia Pacific as well and finally, actually our business in China was kind of somewhat impacted by the Olympics, it actually delayed some large renewals in China because the small business with some large customers, the delay of renewals actually can impact that.
We still feel very good about the Asia Pacific business. We are investing in it. We have moved one of our top leaders over there to Asia Pacific who has relocated to Beijing to lead that. We are filling a number of key positions and like all companies facing a war for talent, in China in particular and other key Asia Pacific markets, but we are fighting that battle well and expect to bring in some key folks.
One of the things that we are really focused on is in the past historically, we have primarily sold products developed in Europe and in the US into Asia Pacific and a big change that we see that’s come from our customer focused geographic model is to really apply our resources to better understand the needs of our customers in that market, so we can develop products specifically to meet their needs. Now that will take time, but we are committed to it and it will affect the growth rate significantly on the upside over time.
The last key point on this I am sure you all observed, but our adjusted EBITDA as a percent of revenue is at 27.6%. A large part of that reason is that we are not and will not pick up the consulting business, which have been lower margins historically. So we will take the revenue trade off for the adjusted EBITDA profit , particularly at that kind of margin rates, and I hope then be able to grow the consulting business in a positive manner that creates more pull through in the future. But, we were very pleased with the ability to deliver the adjusted EBITDA in Q3.
Ashley Hemphill - William Blair & Company, L.L.C.
Okay, then in terms of Global Information, after the restructuring charge in the quarter where are you in terms of the total restructuring on a percentage basis. Sort of what kind of efficiencies and how extensive are you expecting these efficiencies to be as a result of the steps you have taken to date; and can you sort of quantify the improvement at this point? I know that we have, in the past, received information in terms of the number of different data sources and sort of how much of a cut down that has been and streamlined in terms of those numbers?
I have a couple comments on that and then I am going to have Jeff pick up on that too. One is as we stated on our call, when we talked about the restructuring, we do not foresee restructuring charges for the foreseeable future. We will self-fund continued improvement and I would say that the way to think about that is our target, as we have said, on an intermediate basis has been 30% adjusted EBITDA. We have made great progress towards that, just as a refresher. When we went public we were at 18.2%. This quarter is at 27.65 and we are well on track to see that continued improvement.
If you thought about that though as progress versus where we want to be, I would say on a scale of 1 to 10 we are about half way through the kind of productivity improvements we will get in total. Keep in mind a very large piece coming in the future is as we consolidate on our “to cash” efforts that, as we’ve consistently said, would result in productivity improvement in the latter part of 2010.
We will continue to see productivity and perhaps even more importantly quality improvements with our global information organization for the foreseeable future.
I will just simply add a few points here and that last one you mentioned Jerre is so important to quality. We look at this is quality and cost. We are very focused on doing both and believe that everything that we do can actually positively impact both our cost structure and the quality of our offerings. We are using a very disciplined five step process in everything we do. Looking across our business at how can we eliminate activities that don’t add value to our customers. How can we standardize our processes across the various parts of our business. The third step is then consolidation and then where it makes sense we look at automation and outsourcing.
So some processes get cost and quality benefits from the first couple of steps, some from all five, but that is something we are very focused on and we see this platform now that is global information operations platform as a place now where we really can drive significant improvements in quality without significant increases in cost.
The last key point on that, because it is such an important question. If you think about our goal of 30% adjusted EBITDAs and our intermediate goal, we would expect to see continued improvements partly because of the great business model we have for the foreseeable future past that. So as we continue to make the right kind of acquisitions, gain scale, we talked at a preliminary basis today of how Global Insight will certainly be an enhanced adjusted EBITDA as a percent of revenue business in the future and as we pull together our total insight businesses it gives us another great opportunity.
Ron you want to just pick up on that part for a second, of the global insight?
I think the treatments of our information activities through common process and using best in class managerial capability and rationalization can be equally applied to some of the other processes in the company and as we think about some aspects of our insight business, we see the opportunity to do similar things, so that gives us another ticket to our productivity while at the same time maintaining or in the case of what Jeff was saying, improving quality where we see shortfalls from what our customers expectations are.
So if you think about the progress now on almost the last three years since going public in November or 205, it is a very significant improvement from 18.2% to 27.6% and if you would think of the business model and the things we’re talking about today where I say we are probably on a scale of 1 to 10 about halfway through that. This company is blessed with great opportunities for continued revenue growth and for continued adjusted EBITDA improvement as a percent of revenue as we move forward.
Your next question comes from John Neff with William Blair & Company, L.L.C.
John Neff -William Blair & Company, L.L.C
Jerre you mentioned that with the acquisition of Global Insight that you are now establishing a market outlook and forecasting as a core competency. Can we call that a fifth domain?
That is a great question and if you had been here in the last five days you would have found out the answer is no. If you think about it, it applies to every domain and one of the things we’ll look forward to after closing and having Joe, as I mentioned, on the script call part of this call, work with a great team of people on an advisory board will strengthen every one of our domains up very significantly.
Global Insight has a good energy business. They have a very strong business that will fit in, as we talked about in ELC. They have a good security business that will fit from a domain standpoint and environment too and they bring together an opportunity that no company in the world has ever been able to do, which is provide one stop total stop on all four of those domains.
So where we think of it as much like remember we talked about Lloyd Registers Fairplay 50% acquisition we made of fitting in the middle of al four of those domains and having an influence on each of those, in this case it is a gigantic step forward of complimenting each of those domains for the foreseeable future, but a great question.
John Neff -William Blair & Company, L.L.C
Mike I think you had mentioned subscription organic growth plus 10%. Can you just refresh us on what the trends there have been the past couple of quarters?
Yes John, just to make clear the 10% was the organic growth rate in the subscription part of the business. There was a 13% organic growth rate in the change in deferred revenue. We have said, I think through out the year John that the core part of our business, our subscription based business, has been a double-digit grower. I think you see the deferred revenue change in line with prior quarters, so it feels very much like the continuance of current course and speed on that important part of the business.
John Neff -William Blair & Company, L.L.C
Jerre you mentioned in response to Ashley’s question that the organic growth for the quarter adjusted to the boiler code anniversary and was actually 10.3% and again, I only got a bit of an opportunity to skim the press release, but I guess the way I interpreted it was on a reported basis, because of the revenue from that boiler code update last year, that organic on a reported basis would have been 3% and that adjusted for that it was 7%. I just want to make sure I understood the 10.3 versus the way I initially interpreted it.
Let me make sure I am clear with what I said and I will have Mike pick up on it. You’re correct in what Mike said was the adjusted for boilerplate was 7.3%. I said excluding, as Mike did also, the consulting business we were at 10.3 organic growth for the quarter excluding those two key points. We excluded it so you could see, as I said, 77% of our total revenue for that quarter was on subscription based and so the 10.23 is the number that is the organic growth for the quarter on a subscription based, as Mike said, 13.4% is the growth on the deferred revenue organic for the quarter.
We pulled out so you could see, as I said during my talk, that 8.5% of our total revenue in Q3 in 2007 was consulting less than 5% in this quarter, which is part of the reason, and I think it is important you see that as we work through this, part of the reason we are able to enjoy the margin increase that we have. What you’ll see us do in the future is grow the consulting business appropriately as it creates pull through of our subscription base.
Your last question comes from John Crowther from Piper Jaffray.
John Crowther - Piper Jaffray
We have kind of seen oil prices retreat back to around $100.00 here. Do you guys kind of have a level that oil prices might fall to before companies start to consider or maybe postpone some of their long-term plans to increase capacity, which would potentially have them utilizing your services less?
The answer is no, the kind of services that we provided when we went public and the oil prices at 30 have grown since then. The kinds of services when the oil price is at 150 have grown since then, but I am going to have Ron pick up and carry it from there.
If you look at the situation with respect to our products and services, our customers buy the products in order to navigate through the opportunities available to them. When oil prices have been high, one of the aspects of high oil prices has been a lack of access to new opportunity for man of our customers, so when prices come down, the opportunity to increase their access to reserves tends to improve. So, we don’t really see a connection between the movement of the oil price from, and remember it has only been a relatively short period of time, just a few months that it has been above $100.00, to come back to where it is $100.00 to have a meaningful impact in our business and the decisions that our customers are making.
The final point I would make is that the customers that we serve in the upswing part of the business tend to make decisions on investments of the period of 10 to 20 years, the life of a field, and so they are taking a very long view of the return on that investment.
There are no further questions.
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