S&P Global Inc. (SPGI) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2012 IHS Incorporated Earnings Conference Call. My name is [Cheynnelle], and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Andy Schulz, Vice President of Investor Relations.

Thank you, [Cheynnelle]. Good morning. And thank you for joining us for the IHS fourth quarter and fiscal 2012 earnings conference call. We issued two press releases earlier this morning. If you do not have these releases, you will find copies of them on our website at ihs.com. Some of our comments and discussions on the quarter are based on non-GAAP measures. Our non-GAAP or adjusted numbers exclude stock-based compensation and other non-cash charges 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 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. 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’ 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?

Thank you, Andy, and good morning. Welcome and happy New Year to all of our investors and to my IHS colleagues. It’s a pleasure to be with you this morning to share our results from the fourth quarter and for the full year of 2012. Before I do that I want to cover one important thought now that we’ve wrapped up 2012. When I think of a business, I consider it in the context of what I call the four Ps. Does the business have the right people, platform, processes and products. For the past several years, I’ve had the distinct pleasure of being able to update you frequently on our progress as we’ve invested heavily in our people, our platforms, our processes and our products. Simply put, this has been the largest transformation and value creation exercise in our company’s history. It is the foundation for long term profitable growth for IHS. This past year was notable as we marked the highest level of investment and greatest progress achieved in these critical areas. If I can leave you with one thought to take away from this call and webcast, it is this: We have never been better positioned as we enter the year than we are today, because we now have the right people, platforms and processes and products. 2013 will be another year of significant investments in challenging economic conditions. However, we are in a better position to succeed than we have been at any point in our company’s history and it’s only growing to get better. I could not be proud of every IHS colleague. Now under the quarterly financial highlights, revenue was up 12% in the fourth quarter. Adjusted EBITDA increased by 17% and our adjusted EBITDA margin was 33.8%, the highest in our company’s history.…

Thanks Jerre. We are pleased to have delivered on our commitments we made to our shareholders as we began the fourth quarter and updated our outlook for 2012. Despite the swelling in business decision making globally, we continued to deliver solid performance well above market and economic growth rates. In the fourth quarter, we delivered total organic revenue growth of 4% despite very strong comparable metrics previous year and slowing customer discretionary spend. Q4 subscription organic growth was 7% compared to a very strong 9% Q4 2011 which represented our strongest performance since the Great Recession in 2009. This was solid subscription performance despite economic and new business spending headwinds. It means we sustained organic subscription growth at 7% or higher for 10 quarters in a row. This performance also provides a good beginning as we enter 2013. As we are still early in our new product introduction process and we are not yet complete the transformation initiatives that will fully enable our sales force and maximize sales efficiency. As we closed 2012 we were also pleased to see very positive contribution from cross selling as we realized the benefits of our systems and process investments. It's what is reflected in slightly higher Q4 selling costs and a moderate impact on the solid Q4 margins as we will outline in a moment. We delivered Q4 revenue and performance sales growth at the higher end of our Q4 expectations as our results benefited materially from existing account growth due to cross-selling success. While this success drove higher commissions in the period due to the 2012 cross-selling incentives we had in place for our sales teams globally, we were pleased to see the performance in these key growth metrics as we closed the year despite the roughly 20 basis point impact to…

Thank you, Scott. I’ll provide an overview of our results and an update to our 2013 annual guidance, let’s start with revenue. Fourth quarter 2012 revenue increased 12% to $414 million. The growth in revenue includes 4% organic growth and 8% growth from acquisitions, FX was flat for the quarter. The organic growth on subscription was 7% in the fourth quarter in our tenth consecutive quarter of 7% or higher organic subscription growth. Our non-subscription businesses declined 4% organically, very similar to the third quarter and full year performance. Diving deeper within non-subscription revenue, our consulting and services revenues was a nice contributor for organic growth performance offset by continued headwinds and transactions, software license sales and other non-recurring revenue. Looking at regional performance, Americas had strong subscription organic of 8% and 3% overall. Despite really tough condition, EMEA grew 6% organically with really terrific performance in non-subs business in particular as our customers sought our advice amid very turbulent markets. APAC grew 9% organically led by double-digit organic growth in both subscriptions and transactions. Turning now to profit and margins, Q4 adjusted EBITDA totaled $140 million, up 17% versus a year ago. That’s a $21 million increase over last year’s fourth quarter. Our adjusted EBITDA margin improved as expected and was 33.8% in the fourth quarter. This is a 170 basis point increase over last year and the 240 basis point increase sequentially, right in line with the 200 basis point expansion we signaled in the third quarter and very good performance given the current lower growth environment. Moving down the P&L, adjusted EPS increased 22% to a record $1.21 per diluted share in the fourth quarter. Regarding segment profitability, Americas adjusted EBITDA increased 17% to $101 million while EMEA’s adjusted EBITDA was up 20% to $38 million and…

Thank you, Rich. That concludes 2012. We entered 2013 well positioned for success and are looking forward to capitalizing on the many opportunities we have in front of us. Scott, Rich, Todd and I are now ready to answer your questions. So let’s start the Q&A. In the interest of time, please limit yourself to just one question.

(Operator Instructions) Our first question comes from the line of Eric Boyer, Wells Fargo.

Hi. Thanks. Can you give us some more commentary around the uncertainty you are seeing with the new energy customers in terms of what products and surfaces are being impacted the most? And has that level of uncertainty picked up since your guidance call? Thanks.

That’s a good question, Eric. I’ll have Scott comment in just a second, just for reminder our guidance call was December 12th, not quite a month ago. Scott, pick up on that?

Yeah. Thanks Jerre. Eric, great question. And we -- as we came towards the fiscal cliff as the year ended, there was certainly a lot commentary about higher corporate tax and particularly in the energy segment. So over really the last four to five months, Eric, we saw increasing tentativeness as energy companies in the U.S. thought about their spent patterns and thought about level of tax and of course their own earnings. And as we all saw many -- we had a tough quarter in Q4. So I think the uncertainty, where all tax and what level of spent should they put, where and how would it impact their performance, questions are on their minds. The good news for us is our subscriptions are part of ongoing operations and we saw great strength there. In fact, we ended the year in double digits in our core energy information offerings and many of our insight and research offerings as people try to understand the landscape. But what we saw was one-time spend discretionary items particularly around some software purchases and the question will be how quickly will that be resolved this Congress gets their head around what the final tax rates will be.

Just to add one comment, Scott, let’s remind the investors where we ended the year of total revenue that was double-digit organic growth. We again as I said accelerated to the higher end of our guidance in the fourth quarter and saw nice uplifts in cross selling across the business and that put us roughly, Jerre, almost 80% of the business growing just shy of 10% organically, of course, representing a lot of our core subscription offerings and services.

Yeah. I think it was 9.8% to be precise. Thanks Eric. Next question.

Our next question comes from the line of Peter Appert, Piper Jaffray.

Thanks. So, Jerre, I guess expanding on the last question, I am hoping you or Scott could give us a little more color on the other operating segments and maybe specifically some metrics around the organic growth you’re seeing by segment and some color on commentary by segment?

No, absolutely. I’ll have Scott picked up on that in just a minute. A couple of comments, we were talking about it here at our worldwide sales meeting yesterday. One of the remarkable accomplishments was the EMEA region continuing with very strong organic growth compared to the world we’re living in. But give in color by region, Scott and also certainly by our major business units.

Yeah, thanks Peter. And a good question, because it’s a dynamic environment we have around us today. We saw pretty good balance just regionally, pretty good balance in APAC between subscription growth and the non-recurring growth and pretty solid performance. They’re of course below what we have seen, we have been used to high-teens organic and the slowing in Asia has brought that down but this is still pretty solid levels. As Jerre said, we saw good strengths in organic growth in EMEA and interestingly, they did well in the non-recurring area as customers actually were driving to us to understand uncertainty and understand markets as they enter 2013. And I will pick up on that. We had a number of areas of very strong growth for that region, double digit in our commodities pricing and purchasing offerings and subscription accelerating into the end of the year actually into the mid teens as we closed the final period in that area. Autos continue to be very strong and we had well above double digit growth, actually 30% to 40% organic growth in autos in some of our subscription offerings. We saw a great strengths in economics consulting as you could imagine in risk, country risk offerings, so both subscriptions around the economics and risk offerings and growth there was well into the double digit for the fourth quarter and as we close the year. Energy continued to be a double digit grower with real strengths in coal globally as people try to understand supply and demand particularly in the Asia. Our maritime offerings were also double-digit and as we said a number of really important studies released in the fourth quarter drove strong performance. So that gives you a sense of the spread of things across the business regionally.

Our next question comes from the line of Bill Warmington, Raymond James.

So couple -- one question and then a couple of parts. First, it’s to ask about the organic deferred subscription revenue growth and how that’s been trending, and the second is to ask about the whether the 4% total growth that you saw in the fourth quarter whether that would be kind of a good target for us to expect for the first half of ‘13, and another way to say that as growth picks up in the second half as that would be above that?

Yeah let’s take those separate. Well I will have Scott comment on the last one of the 4% organic growth versus what we have given for a full year of 2013 guidance including some of the color we gave you, first half, second half, and then I will have Rich pick up on the deferred organic which is what he says, we’ve talked about a good headlight of the direction of our business, Scott.

Yeah, thanks a lot, Bill. Appreciate the question, as you look at the full year we were up 5%, I think we have to also realize that as we compare ourselves to Q4 2011 we had an overall organic growth rate of nearly 9.5% in the fourth quarter. Subscriptions was above 9% and actually non-recurring tying its 10% a year ago. So part of the growth rate you’re seeing Bill is we ended the year it’s associated with really strong comparables, the full year rate of 5% is kind of at the lower end of the range, we talked about it at our guidance call for the full year 2013. So we’re seeing at the end of the year kind of at the level with some improvement in the second half that puts us right where we want to be right now.

As a reminder, when we gave the guidance in December for 2013, we talked about the midpoint being 5% to 7% all in organic. I’d be thinking about that certainly as Scott said the strengthening in the second half but pretty rock solid compared to the rest of the world in the first half.

And Jerre, we had also said subscription organically expected to be 6% to 8%.

Yeah.

And of course, right in the center of that range was again a very strong comp to a year ago.

Thanks Scott. Rich picked up on deferred organic.

Sure. Thanks Bill. I would importantly reiterate Jerre’s comment here. The metric is lumpy year on and even over time but is an indication to be aware of and one metric to monitor. I would say that like in the third quarter the 10% organic growth is certainly consistent with our expectations given the macroeconomic backdrop and uncertainty that we saw in the late third quarter continuing in the fourth quarter and as we talked about in the first half of 2013.

Thanks Bill. Next question please.

Our next question comes from the line of Andrew Steinerman, J.P. Morgan.

Hi there gentlemen. Jerre, could you just make a comment that your long-term growth aspirations, is it still 9% to 15% and when do you think we could get into that range?

Happy too, Andrew and it is indeed 9% to 15%. I’ll have Scott add color on that in a minute but just as a reminder, I think of the four buckets we’ve talked about consistently, value realization, if you will, like 4% to 6%. Cross selling as Scott mentioned how good we all felt with that increase year-over-year and we expect a lot more of that going forward particularly with the introduction of IHS connect and the other platforms that will change our selling motion entirely. So that one should be a 3% to 4% organic. New customers, Scott will give you color on that because that’s a huge new effort we’ve undertaken, which is to shift an additional 350 focused accounts which should really be in our 1,000 largest accounts and that should be 1.5% to 2.5% growth and new products 1% to 2%. So if you add those up, we’re still 9% to 15%. And as I said I have Scott give color but I think as we exit 2013, if the economies of the world stabilize as our expert expect us to, you will see us with all those things kicking in, moving into -- certainly into that range at the bottom and moving up including the things we expect to come out of our GlobalSpec acquisition.

It’s total organic, right, Jerre?

Total organic. Scott?

Yeah. Thanks Andrew. And the right question is we all look at uncertainty in front of us. So a couple of things as you know and we highlighted. The next two quarters are pretty important in building out our infrastructure to create a lot more efficiency. I’ll talk about sales contracts and contracting, and administration simplification. So really simplifying processes for our sales teams to allow them to spend more time selling the same with our customers and push this out regionally. So we really speed the process and reduce inefficiencies. That happens at the same time as we continue to release the right platforms and new products. And so if you think about our subspace right now in the 7% to 8% range, a lot of efficiencies happening in new platforms. These are the things that will then start to take the sub base up a point, two points and three points into that long-term aspirational range. And of course, we would then as Jerre said, the economy starts to stabilize, expect our non-recurring business to be a contributor to that overall growth. So you can think about the right structural things happening in the first half of this year for us and that gives us great momentum as we come into 2014 with all the right things in place.

Okay. And as just to wrap it up now, thanks Andrew. Scott commented a couple of minutes ago that comps of non-sub base in Q3 and Q4 this year are going to be quite favorable because of the global uncertainty we experienced in 2012. Thank you. Next question.

Our next question comes from the line of Dan Leben, Robert W. Baird.

Good morning. But first just clarification on one of the earlier questions, what was the impact of the renewal timing on the deferred organic growth. And then my question is just with SMT moving to November fiscal year end, had incentive in place last year didn’t have those this year. How much of an impact did that have on that piece of the business?

Great question, Dan. We will take in two pieces, take the SMT first Scott and then pick up the second. Scott Key Yeah we saw a couple things positively actually. Nice margins in SMT and the profile of acquisitions that became organic. And so all of those things actually are contributing nicely to our overall percentage of subscription revenue and upward pressure on margins and margin expansion for us. We also saw really strong momentum in the subscription to the portion of SMT. So remember about 60% of that business is actually subscription and we talked about bundling it more effectively with our information offerings. So had really strong momentum there as we ended this year, so I felt good about it as it came into organic. The other question that you asked Dan, I will jump on is that deferred, as Rich said on a like by like basis we are kind of at the same 10% level as we exited Q3. I talked about change in contracting and contracting process, we had about five accounts where we had the timing of contracts and billing cycles that’s just slightly associated with the SAP implementation and that was about two points around those five accounts, some of our energy customers but really just a notional change. We’ve gone to a single system of timing of contracts at the end of the year and billing cycles.

Scott, that does give us an opportunity to talk about our new sales cause and the contracting process as an efficiency basis.

Yeah, this is a byproduct of actually something pretty exciting.

Exactly.

I mentioned this briefly in my comments. We have substantially streamlined how we contract globally and think about our IP distributed across the world and legal entity complexity, as you know Dan from the acquisitions we’ve made, we’ve now created a single regional contracting process and entity. So sales can now simply sell on a single contract for every products going forward within their region. And what that allows is amazing streamlining in the timing of closing and processing and then the simplicity for customers in what they see in our contracts. Probably I think Jerre, we’ve been working towards this for about five years. And at this sales conference it is probably the biggest hit in terms of excitement of unlocking value for people.

Between that and what Todd and Jo Moon and others have with infrastructure, sales force automation et cetera the energy level of -- where we thought to be with 1500 folks we’ve got here, thanks Dan.

Our next question comes from Bill Sutherland, Northland Capital Markets.

A quick question on the -- free cash flow in the quarter was obviously year-over-year, just some commentary in terms of what’s happening directionally and as percentage of EBITDA it was lower than historic range.

Yeah, no, good question. I will have Rich comment in then just a second, Bill. As you know our target is 70 plus percent of EBITDA, we expect to do that going forward. We actually as you will remember in Q3 for the first time into that north of $5 a share of free cash flow per share target we set five years ago. For sure we expect to see that one goal well past that number. If you think through what we will be doing in 2013 certainly if you take the midpoint of the guidance of EBITDA I think 70 plus percent. Rich, just give them a quick color on what went on Q4 and the impact that will have in Q1 and Q2.

Exactly, as indicated in the comments, Bill, we really got hit by some unfavorable working capital impact in the fourth quarter that we think was our key focus on collections and utilization and implementation of the systems anticipating a good collections in the first half. There were a few items, unusual items adjustments, in particular a large restructuring charge which did have an impact but the conversion factor on a comparable basis is right at the level, Jerre talked about, it’s 70% and feel good about the focus going forward to continue to enjoy that conversion rate.

Great. Its good question, Bill, thanks, Rich, and I’ll just wrap up with one other comment on that. The working capital comment that Rich made is an interesting situation we had. We actually pull down quiet well the long-term past dues, say over 90 days lowest we’ve been. The impact was the short-term if you were receivables partly due of course to the timing of the way the contracts came in at the end of the year. Like Rich said, watch that in Q1 and Q2, we expect to see really good numbers. Good question, Bill. Thank you.

Thank you

Our next question comes from Kelly Flynn, Credit Suisse

Thanks. A couple of quick ones, the -- you talked about EMEA non-sub growth being a significant driver, can you tell us what the subscription growth was in EMEA and how that compared to the third quarter? And then also, any comments on SMTs revenue growth rate weather or not, it’s still 20 percent-ish plus, that would be very helpful? Thank you.

Yeah. No. Good question, Kelly. Scott, take it backward?

Yeah. Kelly, thank so much. So, we saw pretty consistent performing on the -- performance on the subs base in EMEA that we’ve seen in the last couple of quarters. So what did left then was strengthen in the non-recurring and a little bit surprising to us but actually not solid, if you think about who we are and what we do, and so that about mid-single digits organic rate overall was combination of, again it continued pretty solid EMEA subs growth. And the other thing that we said in our Q3 call and we saw again was our core accounts, the renewal rates were right on track, no cancellations, any higher than we expected and we continue to see good performance, as I say in cross sale within existing accounts.

And before you count on our SMTs, Scott, just as a reminder for everybody, of course Q4 and Q1 for us are the very strong renewal quarters, feel very good about as Scott has said, renewal beat so far and expect to see that through Q1. SMT, Scott?

Yeah. Again, I said a moment ago, we’re doing a couple things importantly to continue to have that be a great growth engine for us and one is, expanding our sale force in emerging markets, particularly in Russia, across Asia and in Latin America. And that will be a drive of continued organic growth as we bring new software and great new tools, we had a couple of great releases this year, which integrate our information and bundle it tightly with the SMT platform. So that starts to give us the past bundle information in software and new subscription offering, and as I said, great progress and then converting to long-term recurring on the SMT core base, which grew pretty substantially through the year.

And last quick comment on that, I want to general as we now are 100% on sales force automation and can see the pipelines yesterday when I was in the sale leadership meeting. The pipelines in all of the net sub, our categories are up again quarter-over-quarter rock solid certainly including SMT on their technical software, so just a really good.

And just to be clear, Kelly, both in APAC and in EMEA we saw a subs and a non-subs organic growth rate, they were about the same. So 6 on both sides in the non-recurring and recurring, so good solid performance and I guess reflective again, people coming to us in uncertain times in both regions.

Thanks.

What did you just say, I just want to make sure, capture that at least 6 on both side?

6 and 6, yeah.

In EMEA

In EMEA.

And APAC was 9 and 9.

Yeah. Same in APAC

You are saying EMEA was 9 and 9 some…

No, no. Let’s try it again, APAC, Kelly, 6 and 6 in EMEA, 6 non-subs, 6 sub, 9 and 9 in Asia-Pac, 9 sub, 9 non-sub. Okay.

Okay. Perfect. Thank you.

Yeah. Thanks. Good question.

Our next question comes from Keane McCarthy, William Blair.

Hey guys. Thanks for taking my question. Maybe just an expansion of what Scott was talking about in previous line of questioning. As the next several quarters are pretty active for you guys in terms of contract renewals and now with these new sales force process improvements in place, just wondering how that’s impacting the renewal process?

Yeah. I was just commenting. And your questions are good one. Thanks. How important Q4 and Q1 are? It’s almost -- its little better than 60% actually of our total renewal cycle. Scott picked up on Q4 and actually a little color on what we’re seeing because it’s -- in this crazy world we’re living in economically, I couldn’t feel better about it.

Yeah. And it’s a good question because it also underlies the massive transformation we’ve had gone until last six quarters. So we realize as we simplify we’ve actually been re-tapering customers across the entire company all year and that’s part of this administrative burden on our sales team actually as we begin to implement Vanguard and streamline contracting in legal entity structures. And so to add in the rollout of our sales force, our automation tool and much better tools for pipeline management but a new requirement, all of these things have added administrative burden on the sales team. And I think that’s why we’re talking about the first half of this year being so important for us as we get all of our revenue and contracts upon with a single system and complete this process of migrating our customers. So that kind of is what drives the first half of the year. We’ve got the rest of that process with this last big release, one more in March. And what it’s doing is this, it’s simplifying going forward the renewal process. As you know in the first two three release in Vanguard, we covered a large portion of our revenue, those were all done now and actually energy was done a year ago. That’s a big part of our Q1 renewals. So what I tell you is we’re seeing a good momentum in the renewal process and great progress. And of course, this gives us our headlight into the full year which is why we’re giving you the guidance we have.

Thank you. Next question?

Our final question comes from the line of Suzi Stein, Morgan Stanley.

Thanks. I just made it. With the debt ceiling conversation taking place and potential for government spending reductions including in defense, how should investors think about the potential impact of spending cuts on your business. And has any level of conservatism related to this been factored into your guidance.

That was a two-prater Suzi. A great way to wrap up. Thank you. Let’s take it backward Scott. Any conservativism and then her question which is a very good one on the government, defense and where we’re at.

And just as we think about our whole business. It is a good question. So that sector has been in kind of a structural restructuring and a tightening growth almost two years now. In fact a year ago, we said we felt are probably at the bottom that was Q3 a year ago, actually 2011, kind of, the impact to us. Now, what you should realize is part of what’s happening in defense particularly for governments and then suppliers as a structural shift. From hardware to intelligence and actually that’s a structural shift in our favor as information and intelligence become of more important part of the defense infrastructure and platforms. So it has continued to be one of the slower growers in our portfolio and of course it’s fully contemplated in the guidance we’ve given you. But we do see that we are making improvements. We saw commerce in Q4 in EMEA actually but we don’t see further negative impact beyond where we’re sitting today in those markets.

Thanks Suzi. And with that, I’ll wrap up and turn it over to Andy. I started our presentation today by saying that I’d like to leave you with one thought if I could, takeaway and it’s this. We’ve never been better positioned as we enter a year than we are today because we do have the right people, platforms, processes and products in place. 2013 will be a record year for us in so many ways. I just want to thank everybody around the world that IHS for the progress we’ve made and where we’re going to go in the future. Andy.

I thank each of you very much for your interest in IHS. This call can be accessed via replay at 888-2868-010 or international dialing 617-801-6888, pass code 95921192. Beginning in about two hours and running through January 15. In addition, the webcast will be archived for one year on our website at ihs.com. And as always, you can contact IHS Investor Relations for any follow-up questions. We can be reached at 303-397-2969. Thank you. We appreciate your interest and time.

Ladies and gentlemen that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.