鐵山公司 (IRM) 2007 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2007 Iron Mountain earnings conference call.

My name is Tanya, and I will be your coordinator for today.

At this time, all participants are in a listen-only mode.

We will conduct a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS) as a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr.

Stephen Golden, Vice President of Investor Relations.

Please proceed, sir.

Thank you and welcome everyone to our third quarter 2007 earnings conference call.

Following my announcements this morning, Richard Reese will have some opening remarks after which Bob Brennan will discuss the Stratify transaction we announced this morning.

Bob will then turn the call over to Brian McKeon for the financial review and we will follow this up with Q&A.

Before we get started, I'd like to thank all of you who took the time to come and see us at our 10th Annual Investor Day on October 2nd in New York City.

Hopefully, everyone found the presentation interesting and informative, and again, we sincerely appreciate your continued support.

For our custom, we have a user controlled slide presentation on the Investor Relation page of our website at www.ironmountain.com.

Referring now to Slide 2 of that presentation, today's earnings call and slide presentation will contain a number of forward-looking statements, most notably our outlook for our 2007 financial performance.

All forward-looking statements are subject to risks and uncertainties.

Please refer to today's press release with the Safe Harbor language on this slide for discussion of the major risk factors that could cause our actual results to be materially different from those contemplated in our forward-looking statements.

As you know, operating income before D&A or OIBDA and free cash flow before acquisitions and investments are metrics we speak to frequently and ones we believe to be important in evaluating our overall financial performance.

We provide additional information and a reconciliation of these non-GAAP measures to the appropriate GAAP measures as required by Wright G at the Investor Relations page of our website as well as in today's press release.

With that, I'd like to introduce Richard Reese, our chairman and CEO.

Good morning.

And thank you, Steven.

Good morning everybody and I hope you have a happy Halloween.

As you can see from our press release, we had a good quarter and a continuation of, frankly, a good year, as 2007 is shaping up to be a good year for Iron Mountain.

Our business is performing well in the fundamental level and I think our organization is executing well.

So it's -- things are going pretty well all around for us.

Revenue and OIBDA went up 18 and 28% respectively for the quarter.

Internal growth was 12% for the quarter and 10% year-to-date.

This was built on storage growth of 8% and services growth 16%.

The storage internal growth is likely to move back and forth between 8 and 9% based mostly on rounding in any given quarter but any way you cut it, it was strong performance and unusually good services growth.

The 16% service growth was driven by unusually strong complementary services and in line core services for growth.

Complementary services make about 15% of our total revenue mix, and as we get larger, we seemed to be seeing more opportunities for large projects and, therefore, for this opportunity to have this kind of impact.

This quarter's large products North America and Europe, as well as recycled paper, both volume growth coming from our growing shredding business and a continuation in high paper prices we have seen all year contribute to most of this complementary services growth.

On a year-to-date basis or OIBDA is up 17% and of course earnings and free cash flow are also up substantially.

The fundamental strength of the business were helped by both these complementary services and some other macro factors such as foreign exchange and recycled paper prices.

It is not likely that all the macro factors will continue to be positive every quarter so you can expect some fluctuations.

However, the organization is executing well against a large market opportunity and our business is running at the high end of our forecasted ranges.

We expect the balance of the year to remain strong and of course without predicting the impact of the macro factors.

You know, assuming they hang in, roughly where we are now, we expect the year to really finish in really great shape, and Brian will update you on our outlook and guidance as we positive about where we are today.

Today, also we announced the acquisition of Stratify as part of our growing digital business.

In a moment, Bob will take you through this transaction in more detail but let me comment at a higher level about acquisitions to date, in Iron Mountain.

It's been a large year, as you can tell, our spend of nearly half a billion dollars, which is a higher spend rate than our trend of the last few years.

Of course, relative to size of the business, it's actually not higher, but in absolute dollars.

So far this year, these deals, three large deals, are relatively large deals, comprised about 80% of what we invested.

That was the ArchivesOne acquisition, the MRS acquisition and of course, Stratify which we announced today.

The [balance] is 14 transactions all spread across seven countries.

The spread of the transactions both organizationally and geographically and the fact that the large ones all fit into different parts of our organization, meaning that the integration channel challenges are manageable and our performance to date is showing the results of good integration implementations, so the team's doing a good job on this front.

As I've said many times, we don't expect to keep this kind of burning pace, although we will continue to look to invest as our business is running well, our fundamentals are strong and we want to take advantage of the opportunities we see out there.

Another thing I want to comment on for the first time is Iron Mountain really involves its digital business.

We held an IT Analyst Day last week.

As you know, we've held an Investor Analyst Day for some years but this is the first time we've actually organized an all-day event for our IT analyst community.

We had approximately 30 analysts from all the top firms attend in Boston and quite a few members of the team really presented and we had discussions with the analysts.

We delivered a few key messages which frankly were well-received by that community.

One of those messages is that the digital business is really an integral part of our strategy and not just a project or something we we're playing around with.

We're serious, it's important to our customers and it's important into our business.

In addition, Digital is not just a technology company but rather it's a services company that uses technology in which is one of the things that really differentiates from the other competitors who are trying to solve these same problems.

In addition, we spoke about our product offerings and how they're being successful in the marketplace, and our extent and our plans to extend our lead in storage as a service for backup and archives.

Last, we explained how we will arrange successful additional by leveraging Iron Mountain, that's our storage, the relationships we already have, our brand, our strong distribution, and our expertise.

All these messages were well-received and we got some great feedback from the analysts.

We received affirmation that we're working on the right problems and, in fact, there are indeed a large opportunities.

We got positive feedback on our strategies and interest in helping us implement these strategies that we outlined.

So all in all, it was a great day and we learned a lot and I think we did a good job of really getting the analysts to understand the entire Iron Mountain suite of products and how digital fits and what it means to our strategy, and the feedback, as I said, we got was we are on a right track.

Our customers are calling them saying they want more and, in fact, what we've got to do is a better job of getting that message out to our customers, all the capabilities we can have - we already have and things we can do.

At our Annual Investor Day in October, if you remember, Bob Brennan outlined in a high level our common value propositions for both our physical and digital storage data services businesses, and in that, he outlined that we capture information, we store and protect it, and we provide services that enhance the use of the information.

The Stratify acquisition that we announced this morning fits into that last bucket of use, and now I'm turning it over to Bob who will review this transaction in more detail and then he'll go to Brian, who will talk about the performance in more detail, then we'll come back and take your questions.

It was interesting, you said -- thanks, Richard -- at the Analyst Day, we were also being encouraged to be more aggressive than the eDiscovery space, which we weren't in liberty yet to tell them.

(Laughing).

It was a hard meeting to sit there and hold our tongue, but I think we did a good job.

So, we are very pleased today to announce the signing of the definitive agreement to acquire Stratify for approximately $158 million in cash, as of course subject to customary closing conditions.

Stratify is the leading pure-play electronic discovery provider.

They're headquartered in Mountain View, California with approximately 185 employees, half of which are actually in Bandalore, India.

We expect them to do approximately $30 million in revenue this year and we expect revenue growth to be in the 20% to 30% per-year range going forward.

Stratify is a solidly profitable company.

Profit margins in the 20% range today.

We expect that profitability can improve over time and it is a low capital intensity business.

We do expect limited profit accretion in 2008, because of one-time deal related costs and we will incorporate our outlook for Stratify into our updated 2008 guidance at year-end.

Having Stratify join the team of Iron Mountain represents a great opportunity for us to add new important services in our targeted digital markets.

If you remember at Investor Day, just over a month ago, we talked about the importance of establishing digital leadership in our targeted markets and this will actually bring Iron Mountain Digital to approximately $225 million in revenue upon close of the acquisition, keeping it in the pull position, in Number 1 position in leading storage as a service.

It also actually bridges a gap between our physical and digital businesses and that this, as Richard said, is the part that's making useful if you have capture, store and make useful as your three components, being able to sift through the archival data that we have so that we can provide analytics and discovery tools for our customers in particular use to them.

It also follows the strategy that we outlined for Iron Mountain Digital itself where we talked about we have an approach of build, buy and partner, and it was upon our partnership that we had with Stratify that was very young that we realized just how strong this company was and just how much pain there was in the market for this kind of solution.

The pain is really a function of our customers, especially our largest customers being sued at an ever increasing pace.

Litigation and regulation has been building for years.

It then got really really propelled last year with the advent of Rule 26 which essentially said companies had to get ready fast in the discovery process but they couldn't use the delay tactic if we can't find the information.

So then general counsels had to really take control of this.

We're in a particularly good position because we already have much of their storage regardless of format or location.

We're in a trusted adviser and authority to them on issues like retention and destruction and having taken an approach to discovery.

It's just a natural step in filling in on an end-to-end approach to information protection and storage services.

By all estimates, the multibillion dollars market opportunity, it depends on whose estimates you go with but it ranges from $4 to $12 billion in the coming years.

We're seeing it vis-a-vis the relationships we have with top law firms, as well as global 2000.

This is a real point of pain that is actually interesting.

Richard and I were sitting with a top executive team just a couple of weeks ago and we were really talking about the opportunity to get more of their storage budget, and this fellow looked back at us and said, "Guys, we've got thousands of lawsuits going on right now.

Let's forget about the storage for a second, see if you can help me out with this problem.

It's all about getting through the information so that we can be ready for litigation."

So, the products that Stratify bring to bear on this solution is really three key products.

Stratify Legal Discovery, essentially lowers the cost and generates speed around having the ability to get at information quickly so the product essentially provides a complete eDiscovery application combining advanced organizational capabilities with search and contextual review to provide review rates where you can get up to between 300 and 500 documents per hour, and you don't have to convert the customers' documents into any kind of different format.

We do it in the native format.

They also have a product called Visual E-Mail Analytics which, think of it as taking all the e-mail communications that exists under anything that is in investigation.

Clustering that communication in a way that makes sense and creating a visual map about the relationships that exist between the different parties that were subject to the investigation.

It essentially drives consistency in the discovery process, allows you to take a more compliant approach to discovery and makes it a whole lot faster to get ready for potential litigation.

And then the third product that Stratify brings is a Digital Repository, the Stratified Digital Repository which really give us you one place to manage the litigation amongst multiple constituents.

This plays straight to Iron Mountain's strength.

This is a small revenue component for Stratify.

We expect it to become much larger at Iron Mountain because what we do is to create repositories.

So the combination of their process, technology, recurring revenue, one-time revenue, software sale and project work is a very natural fit for building out our digital leadership in our targeted markets.

As we mentioned before, customers have been asking us for this.

We're a natural player and have permission to play in this market.

We know that because we're receiving requests for information, requests for proposal from some of our largest customers, and Iron Mountain and Stratify together can reduce the cost, complexity and drive compliance in what we -- what is largely believed to be a white hot market and very fast-growing.

Any technology acquisition also comes with an acquisition of a team.

We're particularly proud of the team that we have acquired - that we are acquiring with Stratify.

Ramana Venkata, the CEO, has been very successful in building a tight-knit low turnover team since 1999.

These guys are very smart, have really built some great technology, then realized that they could focus that technology on solving practical problems and grind it out in this market, and then over the past couple of years really built themselves the leading pure-play solution in this very important problem area.

It plays directly into our tragedy of Iron Mountain's leadership and our targeted markets as we noted before.

This will make Iron Mountain digital a force to be reckoned with and we continue to crawl at that footprint.

Similar business model in that it's a hosted play, it combines technology and process, same exact value proposition as Iron Mountain digital for all of its product which is the lower cost, we drive out complexity and we increase your compliance as we go.

So we're very, very happy to have Stratify as part of the Iron Mountain team.

It's a great market opportunity.

We are acquiring the best products in the space as well as the best process in the space, and our customers really, really want us to solve this problem.

Now I'll turn it over to Brian McKeon, our CFO, who will cover our financial performance in detail.

Thanks, Bob.

Good morning everybody.

Q3 was another strong quarter for Iron Mountain, keeping us on strategic this year for results consistent with our long-term financial goals.

In terms of the agenda today, we'll start with the review of our Q3 and year-to-date P&L results.

As part of that review, we'll examine the key drivers of our performance to date as context for updated full-year outlook.

We'll review our cash flow performance, capital spending trends and the status of our capital structure.

Finally, I'll walk you through our Q4 and updated full-year 2007 guidance.

While we won't be providing an update to our 2008 guidance until our year-end conference call, we will provide some preliminary estimates for the impact of the Stratify acquisition on next year's results.

Slide4 highlights the key messages for today's review.

As noted, we exceeded our forecasted ranges for both revenue and/or during Q3.

Again, the primary driver of our financial upside was strong revenue growth.

Internal growth increased to 12% reflecting balance gains across our key business units.

We continue to see have strong growth in service revenues, particularly in North America and Europe and we achieved our 75th consecutive quarter of increased storage revenues.

Strong OIBDA growth in the quarter was supported by revenue gains, moderate gross margin improvement and solid SG&A leverage.

Please note that our reported OIBDA for Q3 includes a $5 million or $0.02 per share gain on disposition of assets resulting from insurance proceeds received during the quarter related to the London warehouse fire.

Reflecting our strong year-to-date performance, we're raising our guidance for the full year with an updated outlook for 15% to 16% revenue growth and comparable OIBDA gains in a similar range.

Let's move onto looking at the details of our performance on Slide 5.

Slide 5 compares results for this quarter to Q3 of 2006.

Overall, we had another solid quarter supported by balanced growth across our key business units which drove an 18% overall increase in revenue.

Our largest segment, North America physical, posted 15% growth overall.

Internal Revenue growth remained at 10%, supported by consistent storage and core service revenue growth, strong special project revenues, and higher recycled paper revenues.

Q3 also benefited from the ArchivesOne and RMS acquisitions.

Our international physical business was up 27% overall.

International internal growth was 15% driven by solid core revenue gains and high levels of complementary service revenue growth, including benefits from two large public sector contracts; one of which was completed in Q3.

The international segment also benefited from select acquisitions that are strengthening our global footprint, and from favorable foreign exchange changes.

Together, these factors added 12% to international revenue gains.

Our digital segment also continues to perform well with both core and complementary services showing improvement in Q3.

Digital performance continues to be supported by strong growth in storage revenues, particularly in PC and distributed server backup.

These gains are upsetting expected impacts this year from declining market demand for data restoration projects.

Revenue gains helped drive a strong 19% year-on-year improvement in gross profit.

Gross profit margins were up moderately for the quarter compared to the same prior-year period.

Key factors driving this improvement are increases in recycled paper sales and high margin project revenues in Europe.

These benefits were -- were partially offset by dilutive impacts from some of our recent acquisitions, and lower storage gross margin in North America.

Storage gross margins this year have been impacted by an increase in real estate as well as increases in property insurance and other occupancy costs.

Larger margin improvement was also supported by cost leverage.

SG&A growth was 15% in the quarter below the rate of revenue growth which yield an improvement of 70 basis points versus prior year levels to 27.4% of revenues.

Some of this improvement is related to project timing with expectations for increased phasing of this spending towards the fourth quarter.

Overall, OIBDA grew 28% including the $5 million gain on asset dispositions associated with the July 2006 warehouse fire in London.

Absent this gain, OIBDA growth would have been 25%.

Depreciation was 56 million, and amortization was 7 million, consistent with expectations.

Slide 6 breaks down our overall revenue growth showing internal growth by major service line as well as the impact of acquisitions in foreign exchange, which have added about 6% to our year-to-date growth rate.

On a year-to-date basis, our core and total internal growth rates are tracking solidly within our forecast ranges.

Storage internal growth continues as expected, with a slightly lower growth rate in Q3.

Impacted by somewhat softer than targeted performance in our UK business.

Our service remains strong led by year-in-year improvements in our North America physical segment, including solid revenue growth and our shredding service revenues.

Complementary service continues to track well above the high-end of our range, which contributed to overall internal growth performance above our target ranges this quarter.

These results are driven by a couple of key factors, the first relates to relatively high level of special project activity in Q3 across key geographies.

In Europe we expect to realize about $25 million in revenues this year from two large public sector projects.

One of these projection was completed in Q3, and the other project will be winding down in 2008, which will set up some lapping challenges as we head into next year.

As we've noted in the past, these types of changes can lead to larger swings in complementary revenue performance.

We continue to target solid complementary service growth from special projects but given these changes, we expect growth rates on this front to moderate going forward.

The second key factor impacts complementary service revenues is the benefit we're seeing this year from increased recycled paper revenues.

We'd like to briefly discuss trend on this front, and potential future impacts from this variable for our business performance.

Slide7 highlights recent trends in a market for recycled paper since the end of 2003.

As you can see, there's been a significant increase in the price for recycled office paper over the last year with rates up about $54 per ton, or 43% since the end of 2006.

This build on stronger pricing trends that began in 2005 resulting from increased demand for recycled paper and major markets such as China, India and the Middle East.

Combined with core volume growth in our shredding business globally, recycled paper revenue which is realized at very high margins is up over 100% year to date.

As such, this has contributed favorably to top and bottom line performance this year.

History would show the paper market can be volatile and is sensitive to changes in the economic environment.

We've seen paper prices level off over the past few months and have planned for relatively stable pricing through 2008.

However, the inherent volatility of this commodity could impact our reported results.

A 10% change in prices from their current level could need a change in revenue and OIBDA of more than $5 million in 2008.

Should there be changes to macro factors such as this, we can and will adjust our operational plans appropriately but it's important to recognize the growing size of our shredding footprint globally does introduce the potential for meaningful impacts should recycled paper market conditions change.

Moving on with the review of our Q3 P&L performance, Slide 8 bridges our Q3 operating income to net income and EPS results.

Operating income for the quarter increased 33% to $129 million.

Our Q3 interest expense increased compared to Q3 2006 as expected, given primarily by increased debt for acquisitions, most notably ArchivesOne and RMS.

We expect interest expense will be in the range of 60 million in Q4.

Other expense increased to $9 million or $0.03 per share in Q3, primarily reflected losses related to foreign exchange rate fluctuations, as we marked our enter company debt to market.

Income and EPS growth were supported by significant decline in our effective tax rate in Q3 to 17%.

This reduction in our effective tax rate increased our reported Q3 EPS by about $0.06 per share.

As projected on the last call, our estimated structural tax rate for Q3 was approximately 37%.

We also note that had we'd likely see continued variability in the effective tax rate related to FX changes and other discrete items such as tax law changes and changes to our tax reserves.

That was the case in Q3.

Foreign exchange impacts reduced our quarterly effective tax rate by about 13%, as background each quarter our subsidiaries mark-to-market debt instruments that are denominated in nonfunctional currencies.

With the implementation of our new global treasury program, there are now significant differences in tax rates across our legal entities.

In Q3, we recorded FX losses and higher tax jurisdictions and offsetting gains in lower tax jurisdictions.

The net effect was an $8 million discrete tax benefit in the quarter.

Benefits from our discrete tax items reduced our Q3 effective tax rate by about 7%.

These impacts were primarily related to a tax rate change in the U.K., and decreases in our state tax reserves.

Excluding impacts from discrete factors we continue to estimate our tax rate for the fourth quarter to be approximately 37%.

Turning to Slide 9, let us look at our year-to-date performance.

You can see that our Q3 results build on the solid performance we posted in the first half of 2007.

Overall, balanced growth across key business and service lines as well as favorable benefits from macro factors this year is supporting solid mid-teens revenue in OBIDA gains.

We're very pleased with this performance which is on track for our strategic and financial goals for this year.

Let's shift now to reviewing drivers of our cash flow performance.

Slide10 summarizes our capital spending for the year.

It highlights our full-year outlook which remains largely consistent with our previous guidance, although we've lowered our range by about 10 million to reflect updated estimates for real estate acquisitions.

Our year-to-date spending is $256 million including $28 million for real estate.

As you know, our capital spending is not spread evenly throughout the year.

We expect our capital spending to increase in the fourth quarter this year, reflecting the timing of our investments primarily in storage systems to increase our physical capacity.

Capital spending for IT should also increase a bit in the fourth quarter due in part to work starting on our new data center.

At these levels of spending, it's likely we'll see a moderate reduction in capital spending as a percentage of sales this year.

Performance is consistent with our longer term financial objectives to increase capital spending efficiency.

Slide11 highlights our cash flow performance.

For the first nine months of 2007, we generated $95 million of free cash flow before acquisitions and discretionary investment in real estate.

This year-on-year increase in cash flow reflects profit gains about $29 million of insurance proceeds related to the London fire and relatively lower net CapEx spending at this point in the year.

Free cash flow will likely decrease moderately in Q4 2007 due to the additional CapEx spending slated for the next few months.

Overall, we expect free cash flow from acquisitions and discretionary investments to be between $70 and $90 million this year.

This is up about $30 million from our last forecast and reflects our strength in profit performance and lower estimates for 2007 capital spending.

Now, let's turn to Slide 12 to review our debt statistics.

As discussed in detail on our last call and most recently at Investor Day, we've advanced a broad global treasury program over the last year that's yielded a number of benefits.

These include better aligning our treasury operation and capital structure with our global footprint, creating a more flexible structure that's increased our liquidity and extended our maturities, and finally, lowering our costs.

The benefits of which can be seen in our improving structural tax rate.

As we have completed, the major stages of implementation of the new treasury program, we feel we're well protected against some of the recent fluctuations seen in the credit markets.

Here, you see our key debt statistics as of the end of Q3.

Interest is stable at 7.6% and we're 78% fixed, consolidated leverage is at 4.4 times within our target range, and maturities now at 7.6 years with no meaningful repayment obligations until 2012.

As of September 30th, 2007, we had over $275 million available under our revolving credit facility plus excess cash.

A few weeks ago, we began the process of exercising the accordion feature embedded within our senior credit agreement.

We have investor commitments that will enable us to increase our senior credit by $300 million with the split between revolving credit and senior term to be determined.

These funds will support our acquisition of Stratify and provide increased flexibility to support our growth strategy.

Turning to Slide 13, to summarize, we're pleased with our performance for the year to date and believe we're on track towards delivering against our business objectives this year.

We're raising our full-year guidance to reflect our year-to-date results and our continued outlook for strong full-year performance.

Recall that in Investor Day earlier this month, we only adjusted our guidance issued on our last earnings call for the impact of the RMS acquisition.

We're now raising our 2007 revenue outlook to $2,700, 000,000 to $2,715,000,000.

This increase versus our previous range primarily reflects a flow through of year-to-date results.

We now expect operating income to be between $456 and $463 million and project depreciation amortization to be about $247 million this year.

This would imply an OIBDA range of $703 to $710 million, our expectations for Q4 performance are shown here as well, which implies revenue growth of 14% to 17% and similar levels of comparable OIBDA growth.

Note that we expect to see an additional 2 million in gains on asset dispositions from the London fire in Q4, which are incorporated into these estimates.

As mentioned, we've also modestly reduced our outlook for our full-year capital spending.

Due to the uncertainty around the timing of the closing of the Stratify transaction we're not updating our guidance for that specific transaction at this time.

In any event, Stratify will not have a material impact in our 2007 results.

For 2008, as Bob mentioned, we're targeting strong growth in Stratify revenues.

We anticipate that this transaction will have limited accretive impact on overall Iron Mountain profits next year, however, given one-time transitional impacts.

We'll provide a more detailed update on our guidance for 2008 on our year-end conference call.

Thanks and we'll now open the phones to take your questions.

(OPERATOR INSTRUCTIONS).

Our first question comes from the line of Michael Schneider with Robert W.

Baird.

Please proceed.

Good morning, guys.

Nice quarter.

Good morning, Mike.

Thanks.

Maybe first just domestic pricing, we've talked now at the Analyst Day and even the last two quarters about the rising cost of taxes and security, especially domestically.

Have you given any thought to trying to recoup that in pricing more aggressively then?

Yes, Mike, it's Bob.

We're very careful to take a segmented approach to how we'll get price over time.

We understand the flexibility that we can have with our customers, but we're looking at it over a period of years and we're looking at it by segment, and taking a very careful approach across the most mature businesses, specifically North America and the UK.

Okay and then secondly, just internal growth, I guess, if you were to adjust for some of the special projects, what would domestic growth have been?

Extra special projects have been international as well?

Because it sounds like it added bigger addition in third quarter overseas as well.

Trying to reference some numbers, I think the -- on the international front, we're going to see about $25 million in revenue from a couple big public sector projects and so that's having a meaningful impact on our overall growth for the year-to-date.

It's about 3 points of the growth in comp service for the company overall.

And, you know, as I mentioned, one of those projects wrapped up in Q3 and the other one's winding down in '08 so we'll see some -- definitely moderated growth on that front going forward.

Recognize, Mike, the 12% internal growth rate, I haven't looked back but probably the highest internal growth rate we've posted 5 to 7 years and so, you know, don't get too excited about it.

Business is running well but, you know, we're not going to post -- we might post another 12 here and there, but we're not forecasting it.

Okay and then SG&A expenses is the final topic.

It's nice to see two back-to-back quarters where you've leveraged SG&A by about 70 basis points as a percent of sales, and I guess it was a little surprised on that line positively, but surprised in that, I guess, for last quarter and at the Analyst Day you were talking about a little bit of a ramp in SG&A spending in Oracle and overseas during the second half.

Did that not occur or is it a case where you just had stronger revenues, stronger profitability and we just aren't seeing it?

It's the latter.

We had an increase in our rate of spending, we were up about 12% on SG&A, in Q2, up 15% in Q3.

I mentioned we did have some phasing of some of the projects that will move into Q4 but we're executing against our investment plans, we continue to plan on doing that.

That's-- we had the benefit this quarter of some very strong revenue growth, and you know, consistent with what we said you will along, we're going to be investing and taking advantage of those opportunities to go to the long term.

So we are increasing our spending, but you know we're able to see good results in the bottom line because we're driving the top line well.

And would you expect that leverage to continue into early '08?

We have the same goals going into '08 or same long-term goals, and we'll be balanced about how we look at our investment spending and our revenue spending, and you know just want to reinforce, we're tracking against the same things we talked about at [ I day.]

Okay.

Thank you.

Thanks, Mike.

Our next question comes from the line of Andrew Steinerman with Bear Stearns.

Please proceed.

Hi, gentlemen.

Could you go through a little more detail of your gross margin comment about storage?

I think you said real estate expenses or something along those lines were higher?

Yes, we mentioned this theme.

Year-to-date, we've had some dilutive impacts on gross margin related to more new real estate being brought online and we've had some our occupancy costs and tax costs have been up.

In Q3 that was more than offset by some very good service margins, and some of the these projects that we've been highlighting as well as benefits from paper prices, which have been a positive factor throughout the year.

Right.

And if you were going to just kind of isolate kind of outside of paper prices, you know, how are gross margins for the kind of full suite of services doing?

We're continuing to see some pressure on our storage gross margins.

I think overall given the factors that we noted, we expect to see some relative improvement on that as we increase our capacity utilization.

It's a bit below our target range and we'll see some improvement on that.

And Andrew, you're saying on the real estate side, that what you're seeing is just a confluence of opportunities and taking new space around the world, and likely you'll see that cycle back over the next few quarters, and the next year, meaning that utilizations come down, it will come back up.

The prices will come up.

Right, I got it.

And just storage-related services or core services, how are the gross margins doing there directionally?

Our margins are consistent and in line with our goals.

So I think we're pretty much on track.

Keep in mind one factor will impact us, has been impacting us and some of the acquisitions are somewhat dilutive on our margins, so - you know, on balance, we think we're managing it reasonably well and this going to be consistent with how we expect it to direct.

Sounds good.

Thank you so much.

Our next question comes from the line of Scott Schneeberger with CIBC World Markets.

Please proceed.

Thanks, good morning and congratulations.

Morning.

Good morning.

Following up on the special projects, the two major ones in Europe that have such a large contribution.

It sounds like one is winding down this quarter and one will wind down in early '08.

Could you talk a little bit more about the nature of what those projects are and also you're alluding that, you know, we should look for a little step-down because they were so big, but will you see more of these type projects?

Do you think coming up [sure place] in the future?

Thanks.

Yes, these are government contracts that take place over a long period of time, and sometimes simply cycle to an end of life, which is the case in one of these projects that's going to wind down quickly this year, and another next.

We do have been a execution plan and a team that's focussed very much on building out that business.

You win it over a very long sales cycle and then you tend to keep it for a very long time, and then it falls off very quickly.

It is spiker than our typical business but it's something that we think we can manage, especially if we take a long view but will go through some valleys and we'll go through one next year.

For that reason, [Mike] remember we've seen this pattern before and this government space particularly, in the UK, where we've had some unusually good years which gives you, as Brian says the lapping problem or bad comp the next year.

You know, this is one of those and some of the dynamics for that are - if the government gets close to the end of a budget year and they've got work to do and they got money, they tend to spend it, and we've been the beneficiary of that a couple times and then the next year they won't have any money and they cycle that way.

It's not much you can do to stimulate the demand.

If you have the relationship, they've got the money, you'll get the business.

Thanks so much.

And kind of shift in gears a little bit, three big acquisitions in the past few quarters, should we look for a bit of a step down now, a digestion period or are you guys still putting the pedal to the floor?

First, these are in three distinct spaces, our healthcare business is able to absorb RMS, we're very, very excited to have the RMS team and we consolidate leadership in file room management for the healthcare segment, which is distinctly different than our Mid-Atlantic region having absorbed ArchivesOne, and we're very, very happy with that acquisition which is again distinctly different than the digital business in integrating Stratify, which in many respects we intend to, you know, keep running as Stratify within Iron Mountain Digital.

That is a quick way of saying that if, you know, opportunities of that quality present themselves, we want to be ready to be able to take advantage of them and as long as they didn't jump on top of one of those businesses which are still in integration, we'd consider it.

You know, we'd pause if it was right on top of Iron Mountain Digital, right on top of the Mid-Atlantic region or the healthcare business right now, but outside of that, we're comfortable acquiring.

All right.

Thanks very much.

Our next question comes from the line of Michel Morin with Merrill Lynch.

Please proceed.

Good morning, Richard, I just wanted to reconcile the comment you made in your prepared remarks.

I think you said as you grow your better position to pick up additional special projects, I think on the flip side you're saying these are pretty lumpy, hard to predict, but it also seems like you're saying longer term we should be able to pick up more of this kind of business going forward?

Yes, I think that's been our pattern.

Special projects, if you listen to us, is something we always seem to be talking about, they're either coming or they're going.

And our pattern is, as we get bigger, the more geographic footprint, and as customers really are trying to invest in cleanup a lot of sense in the past in certain cases or improvement of quality, you know, cost savings and everything on their programs in other cases, it presents this opportunity to us.

We've gotten better about selling them, and better about delivering them.

So, I think you will see more of that.

It's just - It's very hard to predict., and as you know, we live in the world where the balance of - bulk of our revenue we can predict on a very, very fine number, and by the way, this is not like most other businesses.

They just have 90% of their revenue in this category.

We've got 15% and even within the 15, most of it comes back, just in different forms, but, yes, I think we probably will see it but it might create some quarter-to-quarter lumpiness, so to speak.

Right, and is it fair to assume that this kind of work is higher margin for you?

Higher value add which should drive more margin for us on a -

On a service basis.

Sometimes it enhances storage, sometimes it's a precursor to getting more storage, sometimes it adds value to stuff we already store.

The real common denominator is it almost always or almost never has any significant capital investment.

Right.

This is primary labor and expertise investment.

Okay great.

(Inaudible) acquisition, it's another reason that you want to have more of your storage with us because we're in a better position to sort through it, classify it, render it back, be ready for you when you're put into trouble.

So it benefits the business in aggregate.

Right.

And then on the $25 million that was mentioned, I'm sorry if I might have missed this, but is that the year-to-date number in '07?

How do we need to think about that number.

Year-to-date's about 20, we're expecting about 5 million in Q4.

So full year this year there will be about $25 million combined from those projects, and there will be winding down in '08, so that would be the lapping challenge, I referenced.

Great, if I may switch gears quickly on Stratify, can you talk us through the competitive landscape a little bit, kind of how you see the size of that market, who the key other players are that you're competing in that space?

Sure, it's by enlarge, it's a very fragmented market.

You know, when a $30 million company essentially the leader in the space, it reflects that there is an awful lot of scrimmaging going on right now in the space.

You'll see some of the largest names in technology begin to steak out offerings that they have in this space.

We believe we're uniquely positioned simply because we are the custodians of the information today.

It makes it a lot cheaper for us to do the work.

It's very hard.

This is -- absolutely sits between the physical and the digital, and it's hard to do this work without understanding records management, without understanding the life cycle and without being able to leverage the physical information, which is as subject to subpoena as any digital information.

So we think we're uniquely positioned to fragmented market, and we've got the leader.

Great.

Thanks very much.

Our next question comes from the line of David Gold with Sidoti & Company.

Please proceed.

Hi, good morning.

Good morning, David.

Just another question on Stratify.

Was that an area that, you know, as you think about it, you sort of naturally planned to expand through or was it more opportunistic given all the noise, I guess, that we've heard over the last couple weeks about the real active sales process and some of the competitors that had serious interests in that business?

Very natural extension for us.

We have the benefit of being able to look back on slide, we're going back 18 months where this is an important space for us.

We began evaluating it in earnest around 15 months ago and in talking with Stratify, it became clear that they were very much like connected (inaudible) acquisition, but our customers have been leading us to this place because they are faced with more and more litigation.

If there was a turbo charging effect, it happened late last year with the advent of Rule 26, where companies couldn't hide the ball and say you know - we can't find the information.

You know, the law stated very clearly that you have to get ready inside of a certain time frame.

And that really did hasten our interest in the space, but it's an area that we knew we were going to have to get into and that's why we started with the partnership with Stratify.

They quickly proved themselves and it became very apparent it was going to get white hot, and we thought it was best for us to acquire earlier in the partner cycle than we're used to, but having gotten comfortable with the Stratify team, the process that they use and the technology that they bring to bear.

And given how fragmented that business is these days, would it be fair then to expect some further acquisitions to build it ow or do you think you grow it organically?

Right now, we think about it organically.

And the Stratify teamwork closely with us to understand how -- what are the areas that they expected to fill in, are there areas that we're better off partnering as opposed to building, and that could lead to tighter partnerships in the future but nothing on the near term radar.

Very good.

Thank you so much.

Thank you.

Thanks.

Our next question comes from the line of Chris Gutek with Morgan Stanley.

Please proceed.

Thanks, good morning, guys.

Nice quarter.

Hi, Chris.

Just two questions.

Could you comment on roughly what the sales force headcount growth is both in North America and Europe and what the plans would be going forward in terms of getting maybe a bit more leverage conversely continuing to invest.

We're digging out the number.

Fundamentally, our focus is on yield, Chris, and seeing that we can get more out of our sales force.

We're actually -- Stratify hastens [inaudible] me, that I spoke to last month, which you know, the platform that we have to access a 100,000 customers and really leverage our services across that customer base.

Our core customers in our core business need the Stratify solution.

We also know that they will benefit from more of our electronic vaulting solutions, so being able to drive more yield across that sales force is crucial.

Having said that, Chris, as Bob, said we're focussed on yield, the interesting and good problem we're creating for ourselves is you can get yield a couple ways.

You can hold your headcount and sales force investment down, and drive revenue through it.

The trouble is we're generating more product opportunity sets faster than you can do it that way.

So what we're going to wind up doing is continued invest in the sales force but demand and drive more revenue through and because of the broader products that Stratify brings a sales team with it (inaudible) and you know, we want to build on that and so forth.

What we're focusing on is getting more and more of our new products and services through our core sales teams which is the real leverage in doing that.

It's too early to tell what the headcount is next year because we haven't finished our budgets but that's the strategy and financially, we're looking to drive leverage.

We've had a high single-digit increase in sales headcount globally, similar rates in the U.S., and it's probably a reasonable range in terms of how we think about it going forward.

With the comments focussed on increasing leverage, how do you think about the opportunity and then the time frame to get to get the international physical business contribution margins up in the mid to high 20, more in line with the North American margins?

We've really bolstered that team and we recognize that we have some execution issues there.

We're focussed on that execution from an account manage and from a selling perspective as well as we've had some destruction activity.

The key here is to separate the United Kingdom from the content of Europe.

The United Kingdom is where we believe we can really improve that execution.

The continent of Europe is really right now about driving share, not driving margins, same is true for Asia, drive share, and it's in the U.K.

where we have an opportunity to improve our execution and financial performance.

We talked about that in some depth at I day, talked about our long-term objectives.

Just want to reinforce that we're marching against those same objectives.

So, we talked about overall international profit growth in the 10% to 14% range, that balances improvement in margins and core markets while we're investing in expanding in emerging markets and continue to invest to grow across the portfolio.

So I just want to reinforce we're pursuing a balanced approach and looking to drive solid profit growth in international, and that's how we're looking at it in terms of how we're thinking about investing.

Great.

And a final question, in terms of the comment about the putting aside paper prices, the core North American storage gross margin under a little bit of pressure, is there anything to read between the lines in terms of competitive landscape?

What I'm referring to specifically is rambles, kind of put more focus own accelerating growth with the recall business and if you're seeing any signs of that from a competitive perspective.

How we feel from a competitive perspective - we feel as good as we've felt.

Customers are really seeing the usefulness of our footprint, both in terms of geographic footprint but as well as the services that we're offering on an end-to-end basis.

We're standing pretty firm in competitive situations and feel comfortable with the share that we're getting.

Okay.

Great.

Thanks.

Our next question comes from the line of Edward Atorino with Benchmark.

Please proceed.

It's been answered.

Thanks very much.

Thanks, Ed.

All right.

Our next question comes from the line of Leone Young with Citigroup

Good morning, just a housekeeping question.

What did you say your acquisition spend was so far this year?

I said it was 500 million, that would include the Stratify deal, assuming it's closed.

I think about 340 year-to-date.

It would be 500 after you know, including the announced deal.

Terrific.

Thank you.

You're welcome.

There are no further questions at this time.

I would now like to turn the call back over to Richard Reese for closing remarks.

Thank you very much.

As I said, at the top of the order, it was a good quarter and it's going to be a good year.

I'm just looking at my watch, it looks like we're going to meet our deadline and objective of being done within an hour.

We remain committed and we've stated this before but I want to state it again and again, to a few principles, one of them is consistent strong performance in the financial track, in context of continue to invest against a strong market opportunity.

Our goals, revenue of 8% to 13%, OIBDA growth of 10% to 15%, and 15% to 20% incremental return on invested capital.

We believe if we can deliver this and we believe we can, otherwise we wouldn't have said it, that will deliver total shareholder returns on a compounded basis of at least 15% a year for a long period of time and we're playing for the long haul, nothing has changed in that perspective, and I don't expect it ever will change because it's a great business.

We think we can make it happen so why not.

So thank you again for your support, thanks for coming today, have a good Happy Halloween and we'll see you in a few months.

This concludes the presentation.

You may now disconnect, and have a great day.