鐵山公司 (IRM) 2010 Q3 法說會逐字稿

Good morning.

My name is Bonnie and I will be your conference operator today.

At this time, I would like to welcome everyone to the Iron Mountain third quarter 2010 earnings call webcast.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions) Thank you.

I would now like to turn the call over to Stephen Golden, Vice President of Investor Relations.

Mr.

Golden, you may begin your conference, sir.

Thank you.

Welcome everyone to our 2010 third quarter earnings conference call.

After my announcements this morning, Brian McKeon will review our financial results, followed by Bob Brennan, CEO remarks.

When Bob is finished with his comments, we'll open up the phones for Q&A.

I would like to take this opportunity to thank everyone who attended our 13th Annual Investor Day in New York earlier this month.

We are pleased with the turnout and hope you found the presentations informative.

As always, we appreciate your support.

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

Referring now to slide two, today's earnings call and slide presentation will contain a number of forward-looking statements.

Most notably, our outlook for our 2010 financial performance.

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

Please refer to today's press release, the Safe Harbor language on this slide or our most recently filed annual report on Form 10-K for discussion of the major risk factors that could cause our actual results to differ materially from those contemplated in our forward-looking statements.

As you know, we use several non-GAAP measures when presenting our financial results.

Adjusted OIBDA, adjusted EPS and free cash flow before discretionary acquisitions and investments among others are metrics we speak to frequently.

And ones we believe to be important in evaluating our overall financial performance.

We provide additional information and the reconciliation of these non-GAAP measures for their appropriate GAAP measures as required by Reg G at the Investors Relations page of our website as well as in today's press release.

With that, I would like to introduce our CFO, Brian McKeon.

Thanks, Stephen.

Good morning, everyone.

Slide three highlights the key messages from today's review.

We continue to drive strong financial performance in the third quarter.

Reported revenue growth for the quarter of 2% was in line with our outlook.

Results were supported by solid gains in our international physical segment, strong growth in hybrid services and benefits from higher recycled paper prices.

Revenue growth continues to be constrained by economic factors which contribute to very soft core service activity this summer.

Adjusted OIBDA came in above the high end of our guidance range driven by continued benefits from productivity initiatives and lower incentive compensation accruals.

Adjusted OIBDA increased 13% in Q3 and 11% year-to-date versus the prior year.

Adjustments to incentive compensation accruals added about five points of growth in Q3 and four points of growth on a year-to-date basis.

Adjusted EPS for the quarter was $0.35 per share, an increase of 39% compared to the same period last year.

Our reported EPS was a loss of $0.76 per share including a $1.24 per share after tax charge for the digital goodwill impairment.

As we proactively advance changes to improve performance in our digital business, we evaluated our digital business caring value resulting in $255 million estimated goodwill impairment charge.

We'll finalize the amount in the fourth quarter and record any adjustment if necessary at that time.

It is important to note that this charge does not impact revenue, adjusted OIBDA, adjusted EPS or free cash flow.

Both Bob and I will discuss this more fully later in our remarks.

Also included in reported EPS were benefits for the impacts on other income and our effective tax rate related to the weakening of the US dollar within the quarter.

And the gain on the sale of our domain name management product line.

For the full year, we're raising our adjusted OIBDA outlook reflecting strong year-to-date performance and benefits from lower incentive compensation accruals.

We're also raising our full year cash flow outlook to reflect lower capital spending projections and expected benefits from recently enacted US tax legislation.

We're refining our revenue outlook as well to incorporate current internal growth trends and foreign currency exchange rates.

Let's now turn to slide four and begin our review of the third quarter results.

Slide four compares our results for this quarter to the third quarter of 2009.

Q3 was another solid of quarter financial performance.

Enterprise revenue growth was 2% in line with our outlook with overall gains constrained by continued softness in core service activity.

Continued strong profit performance was supported by gross margin gains and benefits from lower incentive compensation accruals.

From a segment perspective, North American physical posted 2% internal growth supported by strong complimentary service revenue performance including benefits from higher paper pricing and hybrid service revenues.

Storage internal growth was 1% in Q3.

North American records management volume growth moderated as continued higher outgoing volumes offset new sales gains.

As expected, there was some moderation in average net price gains which are now trending in the 2% range for records management.

Due in part to lower CPI levels.

Episodic destructions in our physical data protection business constrained growth in the service line and also contributed to lower storage revenue growth.

Core service revenues declined this summer consistent with overall soft economic conditions.

Our international physical segment generated 5% internal growth.

Storage internal growth was a solid 6% supported by strong performance in the expansion markets.

Reported revenues for this segment were 3% including the impacts of foreign currency exchange rate changes.

In our digital segment, reported revenue declined 1% in the third quarter as gains in back-up and archiving services were offset by the divestiture of our domain name management product line and continued pressure on eDiscovery revenues.

We expect continued pressure on digital revenue growth in the near term as we work through comparisons to stronger prior year growth in areas such as eDiscovery.

We continue to translate moderate overall revenue growth into strong gross profit gains.

Gross profits increased 6% versus the prior year yielding a 220 basis point margin improvement.

Higher storage gross margins particularly in the international segment are supporting these gains.

Continued benefits from productivity initiatives drove higher service margins which were also a key contributor to our improved performance.

Adjusted OIBDA grew 13% to $254 million.

This increase was driven by gross profit gains, controlled SG&A spending and lower incentive compensation expense which added about five points of growth in the quarter.

These gains were partially offset by Mimosa integration costs and targeted investments in growth initiatives.

Below the adjusted OIBDA line, depreciation was $77 million and amortization was $10 million in line with our forecast.

Other income for the quarter was $9 million including a $7 million gain on the sale of our domain name management product line and a $4 million gain related to foreign currency rate changes in the quarter.

These were offset by an early debt extinguishment charge of $2 million.

Adjusted EPS for the quarter was $0.35 per share, an increase of 39% compared to the prior year reflecting strong operating performance combined with lower interest expense.

Reported EPS for the second quarter was a loss of $0.76 per share including the impact of the $255 million noncash charge for the digital goodwill impairment.

The structural tax rate for the third quarter was 38% in line with our expectations.

Including the impact of discreet tax items, primarily related to the impairment charge, the effective tax rate for the quarter was minus 16%.

There was minimal tax benefit associated with the goodwill impairment charge as the majority of goodwill associated with our digital business is non-deductible.

Also, included as discreet tax items were the reversal of worldwide tax reserves due to lapses of statute of limitation periods and settlements with taxing authorities and the positive impact of foreign exchange rate changes in the quarter.

These benefits more than offset a charge to establish evaluation allowance reflecting recently enacted US legislative changes, impacting the expected utilization of foreign tax credits.

We expect the structural tax rate for 2010 to be 39%.

Let's now take a closer look at our revenue growth on slide five.

Slide five breaks down our overall revenue growth.

It shows internal growth by major service line as well as the impact of acquisitions and foreign exchange compared to our 2010 full year outlook.

Total internal growth for the quarter was 2% consistent with the prior quarter.

Economic factors continue to constrain service activity levels and storage growth.

Core activity correlates with employment and general economic trends and has remained soft in recent quarters.

The internal growth rate for core storage revenues was 2% in the quarter.

Records management volume growth moderated slightly as continued higher outgoing volume levels in North America offset new sales gains and solid momentum in international markets.

Storage revenue growth also reflected moderated average net pricing gains in North American records management.

And episodic destructions in the physical data protection business.

We expect storage internal growth for 2010 to be in the 2% to 3% range.

Core revenue internal growth was 1% in the third quarter primarily reflecting lower core service activity levels.

We're planning for continued weakness in core service revenues until we see clear signs of improvement.

For the full year, we expect core revenue internal growth to be in the 1% range.

Solid growth in our complimentary service revenues was supported by higher recycled paper prices and strong gains in hybrid service revenues.

These gains were partially offset by lower eDiscovery revenues and the lapping of a large European project.

Overall, revenue growth trends remain relatively consistent.

Incoming volume growth is stabilizing and we're seeing some improvement in new sales.

Offsetting these trends are continued weakness in core service activities and moderated net average pricing in the North American box business due in part to lower CPI rates.

As a result, we expect full year internal growth to be in the 2% to 3% range.

At recent exchange rates, we expect the FX impact to increase revenue growth this year by about 1%.

Acquisitions net of the domain name product line divestiture are expected to add less than 1% to total growth.

Let's now turn to slide six to review our year-to-date performance.

Slide six shows our year-to-date operating performance compared to the first nine months of 2009.

Despite the ongoing economic factors that are constraining revenue growth, we continue to drive strong profit and cash flow performance.

Gross profit increased 9% to $1.4 billion yielding a 220 basis point improvement in gross margin for the first nine months of 2010 compared to the same prior year period.

These results are supported by continued benefits from North American productivity initiatives, solid international operating performance and higher recycled paper prices.

Gross margin gains are sustainable and position us well for flow-through benefits from higher growth when economic conditions improve.

Adjusted OIBDA grew 11% for the first nine months of 2010 compared to the same period in 2009.

Strong gross margin gains controlled overhead spending and lower incentive compensation expense which added about four points to growth drove the increase.

Solid underlying operating performance and lower interest expense drove a 24% increase in adjusted EPS compared to the first nine months of 2009.

Disciplined capital spending combined with strong operating profit gains drove a 12% increase in year-to-date free cash flow compared to the same prior year period.

Let's move now to slide seven for a year-to-date review from a segment perspective.

Slide seven shows key metrics for each of our four segments compared to the first nine months in 2009.

The strength of our business portfolio is enabling strong sustainable financial performance.

Our year-to-date results reflect solid gains in our North America and international physical business segments.

North America, our largest segment continues to post solid revenue growth while driving higher profits and strong cash flows.

As highlighted at Investor Day, we're capitalizing on our leadership in this segment to expand our services and drive the strong returns that flow from our recurring revenue model.

Our international segment is delivering solid revenue gains supported by strong growth in the expansion markets.

Select costs accrual impacts have lowered international segment adjusted OIBDA by about $8 million year-to-date.

Excluding these effects, the segment is driving solid comparable margin gains and strong profit growth.

These gains reflect benefits from driving operational excellence initiatives in the developed markets and from building scale across our business.

Continued benefits in these areas are expected to be a key contributor to our overall profit performance going forward.

In our digital business, we continue to work through economic impacts that have pressured this business in recent quarters.

As Bob will discuss in more detail, we're actively advancing efforts to better integrate our digital services into Iron Mountain to accelerate growth and cost efficiencies.

As noted earlier, we proactively reassessed the value of our digital goodwill in Q3.

This resulted in a $255 million impairment related to our worldwide digital segment and $1.24 reduction of reported EPS.

This impairment reflects a combination of factors including recent economic pressures on the digital business and specific recent challenges related to our eDiscovery business.

At a higher level, it is taking longer than originally anticipated to build this business towards higher scale and profitability.

We're taking proactive steps to improve performance in digital, including changing leadership, integrating sales efforts to drive higher growth and integrating elements of support operations to drive cost efficiencies.

Digital services are an important part of our integrated value proposition and our long-term potential.

We'll continue advancing positive steps to strengthen our sales performance and returns in this business.

Let's turn to slide eight for a more detailed look at our capital spending and free cash flow.

Slide eight summarizes our capital spending and our free cash flow on a year-to-date basis.

We continue to drive strong cash flow performance through a disciplined approach.

Total capital spending was about $174 million for the first nine months of 2010 including $7 million for real estate.

We remain focused on driving efficiencies in our capital spending while supporting key growth initiatives and projects that help drive long-term return improvement.

As a result of higher operating profits and lower capital expenditures, free cash flow before acquisitions and discretionary investments in real estate was $260 million for the first nine months of the year.

A 12% increase over the same prior year period.

We remain solidly on track for record performance in both capital efficiency and free cash flow.

For 2010, we're increasing our expectations for free cash flow before acquisitions and discretionary investments in real estate to approximately $350 million to $380 million.

This reflects our strong year-to-date performance, expected benefits from recently enacted US tax legislation and updated projections for capital spending in the $270 million range.

Our strong operating cash flow allows us to invest toward long-term growth in our business while supporting shareholder payouts.

In the third quarter, we acquired 1.8 million shares of our stock for approximately $40 million.

As of September 30, we have acquired four million shares for approximately $95 million year-to-date.

As we announced at Investor Day earlier this month, our Board recently approved a $200 million increase to our existing share repurchase program.

This authorization is in addition to the $150 million authorization announced earlier this year which, as of September 30, had approximately $55 million remaining.

This leaves us a balance of $255 million for additional share repurchases.

Let's now turn to slide nine for a review of our key debt statistics.

Our strong performance -- financial performance and focusing on cash management continues to strengthen our balance sheet.

Our debt portfolio at September 30, 2010, remains long and fixed.

Our weighted average interest rate is 6.9% and we're 87% fixed.

Maturity is 7.1 years with no meaningful repayment obligations until 2014.

Our consolidated leverage ratio decreased to 3.0 times.

Currently, our consolidated leverage ratio is at the low end of what we feel is a very manageable three to four times leverage level for our Company.

During the quarter, we used excess cash to fund a $200 million partial redemption of our 7.75% senior subordinated notes due in 2015.

This transaction reduces our annual interest expense by about $16 million.

We're also well-positioned in terms of cash and financing capacity.

Liquidity is more than $945 million with $145 -- $184 million in cash and $762 million in additional borrowing capacity as of quarter end.

This concludes our review of the Q3 2010 results.

While the digital asset impairment impacted reported profit results, our underlying operating profit and cash flow performance remains strong, reflecting our disciplined management approach and strong business foundation.

Let's now turn to slide ten to discuss our financial outlook.

Slide ten summarizes our full year 2010 and Q4 guidance.

We remain on track for strong financial performance this year.

For 2010, we now expect revenue to be in the range of $3.12 billion to $3.14 billion.

At the lower end of our prior guidance range.

This represents reported revenue growth of about 4% including internal revenue growth of between 2% and 3% and 1% to 1.5% of combined acquisition growth in FX benefit.

We're increasing our profit outlook, reflecting productivity gains, controlled spending and benefits from lower incentive compensation accruals.

We expect adjusted OIBDA of $940 million to $955 million, up 8% to 10% versus prior year.

Adjusted EPS is now projected in the $1.12 to $1.16 range or growth of 14% to 19%.

As noted, we're increasing our free cash flow outlook to $350 million to $380 million, reflecting the flow through of strong operating performance, expected benefits from recent tax legislation and projections for capital expenditures of about $270 million for the year.

The capital outlook includes about $15 million for real estate.

As noted earlier, the digital asset impairment has no impact on revenue, adjusted OIBDA or EPS or free cash flow.

For Q4, we're projecting revenue of $780 million to $800 million and adjusted OIBDA in the $233 million to $248 million range.

Thanks and now, I'd like to turn the call over to Bob.

Thanks, Brian.

Good morning, everyone.

The third quarter was another quarter of solid operating performance for Iron Mountain as we benefited from our strong business foundation combined with our commitment to operational excellence and global service expansion.

I'll discuss this more fully later in my remarks but I want you to know that we're taking proactive steps to address the challenges currently facing our digital business and get it back on track.

This on-going review has resulted in a $255 million impairment charge that Brian described in his comments.

First, I will briefly review our current business performance and talk about what we're doing to continue delivering solid financial results.

I also want to reinforce the key messages delivered at our recent Investor Day held earlier in the month.

Specifically, that we have a strong, sustainable business foundation.

That we continue to deliver excellent financial performance and improved returns.

That we're focused on improving our growth trajectory through targeted strategies and that we intend to create long-term value as a leading information management services company.

Let's first discuss our Q3 results and current business trends.

As we discussed at Investor Day, we continue to work through the challenges of a tough economy that are moderating our revenue growth.

As recently as 2008, our internal growth rate was 8%.

Since that time, we've moderated to the 2% to 3% range where we are currently.

The most important change in our growth rate is the decrease in core service activity levels driven by the economy.

In Q3, we saw continued pressure on these core service activities reflecting impacts from high unemployment, excess office space and generally lower levels of spending.

We've also seen moderation in storage revenue growth.

Trends have been stabilizing on this front and in Q3, records management volumes globally were up about 1%.

This is down slightly from Q2 growth as solid international growth and momentum in new sales were offset by sustained higher North American destruction and withdrawal levels.

As expected, we've also seen some moderation in average net price gains in our North American records management business.

From the 3% range to the 2% range, reflecting business mix impacts and effects from currently low inflation.

In other areas, such as tape vaulting, we've seen impacts from episodic customer reductions in container storage which constrained gains in the quarter.

Again, we see these impacts as primarily economic in nature and our current outlook incorporates our expectation for the continued effects from these types of factors until we see a clearer sign of improvement in economic conditions.

Despite these impacts, we're driving positive revenue gains and we continue to advance our long-term growth agenda.

International growth remains solid with sustained 6% growth in storage revenues and strong performance in the expansion markets.

For example, in Spain, we'll manage active medical records at hospital group [Sagra] and extend our services to other hospitals in that group during 2011.

In Germany, we added [Santander] Bank to our list of new records management customers and in the Czech Republic, we've added recurring storage and service revenues at OBI.

We continue to drive new sales initiatives to strengthen our North American core volume growth.

During the quarter at Target, we added secure shredding to the hard copy and tape vaulting services we've been providing for them for the past decade.

At [Excelon], we've added records management, data protection, and secure shredding to an existing vital records program and at Shands Hospital, we added release of information, shredding services and special project work to their existing records management program.

As I mentioned at Investor Day, we added FedEx as a new customer where we've really been deploying a comprehensive shredding solution to 1,800 retail locations in one month's time.

We also continue to build momentum in our hybrid services, with double digit gains that help support strong complimentary service revenue growth during the quarter.

In just a couple of weeks' time, we closed a $0.5 million litigation support project with a leading sports retailer and as in most hybrid projects, this will likely lead to additional work.

We're also making progress in developing technology services as part of an integrated value proposition.

Under Harry Ebbinghausen's leadership, we're advancing tighter integration of our digital services into Iron Mountain's core operations to accelerate revenue growth and cash for cost efficiencies.

While areas such as eDiscovery remain constrained by legal cost pressures, we continue to make solid progress expanding our industry-leading PC back-up and email archival solutions.

During the quarter, we closed a substantial PC back-up and email archiving management deal with [Varian] Semiconductor.

In several deals closed with our Mimosa acquisition as a result of an integrated value proposition including sales with Select Medical, [Erie] Insurance and Sears.

We're also refining our product strategy by divesting nonstrategic offerings such as our data domain business which we sold during the quarter.

As I noted at Investor Day, our digital business is facing some important challenges and has been impacted recently by execution that's below our high standards.

A tough economy, shortfalls in the eDiscovery business.

Significant shortfalls.

We're being proactive to address these challenges in our digital business.

I've made significant leadership changes.

We're strengthening the points of integration with our core business and we're more sharply focused on advancing the growth of our industry-leading services through our enterprise sales force.

Now, as part of this on-going review, we look closely at the carrying value of the business and determine that a reduced value is more appropriate under the current circumstance.

This resulted in the $255 million impairment charge that Brian described.

I want you to know that technology services remain an important part of an integrated value proposition at Iron Mountain and I want you to remember that we have leading businesses in PC back-up, in intellectual property management, in email archiving.

And that we're taking steps to improve our execution in this business and get it back toward higher growth and profitability.

So, while we aggressively meet these challenges, we're faced with and we meet them head on, we also continue to deliver strong financial results driven by our focus on operational excellence and global service expansion.

We continue to drive higher profits and improved capital efficiency and this has led to significant increases in our free cash flow and to strengthen balance sheet.

Let me sum up Q3.

We continue to deliver solid, positive revenue gains.

We translated these gains into strong profit and cash results that are keeping us on track towards strong full year operating performance.

We're confident in our ability to address these opportunities that are within our control while we deliver strong profitability and cash flow performance.

As we work through the immediate term environment, we remain highly energized by the tremendous potential for Iron Mountain over the long-term as we pursue the strategy I outlined for you at Investor Day.

As we discussed at Investor Day, our primary goal is to bridge towards higher revenue growth by pursuing three areas.

First, strengthening our go to market effectiveness where we're taking a very targeted low risk approach to improving our sales capability.

Second, through international expansion where the international markets are inherently attractive to us as a selling platform and where we have a proven approach.

And third, through the expansion of new services.

In both the digital and hybrid markets, we're leveraging the power of Iron Mountain to capture significant long-term growth opportunities in large, fast-growing markets.

So, it's go to market, international expansion and the development of new services.

That's our agenda.

We'll pursue this agenda within the context of delivering strong financial performance and improve returns as we continue to focus on operational excellence.

We're on track toward delivering 8% to 10% adjusted OIBDA growth and record cash flows in 2010.

This builds on the strong record of performance we've achieved over the past four years.

It reflects the strength of our underlying business and the capability and discipline of our team.

We look forward to reporting on our continued progress in developing the potential and power of Iron Mountain.

Thanks.

Now, we would like to take your questions.

(Operator Instructions) Our first question comes from Vance Edelson of Morgan Stanley.

Hi.

Thanks for taking the questions.

Could you discuss current trends and destruction activity levels?

Any change so far in the fourth quarter and what's the immediate outlook?

Do you expect activity to remain somewhat elevated through year end?

Vance, thanks.

The trends in the quarter were relatively similar.

We saw in North America continued higher outgoing volume in total.

We saw some increase in permanent withdrawals, the overall volume growth in records management was in North America was relatively flat.

That offset some progress we've been making on the new sales front and solid gains in international, on balance the records management volume trends were relatively similar and that's what we're projecting in the near term.

Obviously, we're advancing the new sales initiatives that we expect to have -- benefit for us as we go into 2011.

New sales performance, Vance, remains strong.

I've got it.

Similarly, the gains and back-up in archiving services that you noted, did that momentum continue into the fourth quarter?

We're not reporting on the fourth quarter today.

But we have had solid gains in back-up in archiving services and that has offset the pressure that we've highlighted in areas like eDiscovery and the digital business.

Okay, I've got it.

Last question for me, just wondering about the pricing trends for eDiscovery, the volumes are understandably weak.

What's the competitive environment like and how is that affecting pricing?

So, pricing is the key contributor here, Vance.

The price per gigabyte and price per, matters come down and essentially because of the secular pressure on the legal sector, they're trying to cull the amount of day to day review.

It is a significant price drop that's driving a lot of the pressure that we noted and a central part of the reason behind the impairment.

Okay.

I'll leave it there.

Keep up the good work, thanks.

Thanks, Vance.

Thank you.

Our next question comes from Andrew Steinerman of JPMorgan.

Hi, there.

I heard you just mention permanent withdrawals in the context of the continued higher outgo of volumes.

Just to be clear, is that a competitive dynamic or is this -- kind of an internal customer dynamic when we're talking higher outgoing volume levels.

Is this something that you highlight against new or the same as what you've been saying?

More similar, Andrew.

It does vary quarter to quarter.

The biggest competitor for us remains people doing this in-house, Andrew.

That's fundamentally when it comes to outgoing volumes or the fact -- it takes longer to move somebody in, it is a function of them doing it themselves.

Generally speaking versus that of a particular competitor.

We do track this.

That's what we hear back from customers is the larger factor on the permanent withdrawal front is people deciding to bring it in-house.

There are competitive dynamics.

It is again more similar than different than we do see quarter to quarter fluctuations.

The key theme to hear is it has remained high in North America and in international markets, we're seeing positive trends.

So, net, it is similar trends, more similar than different.

We continue to see a relatively higher level of outgoing volume which is constraining overall volume growth.

Right.

Just to square the point away.

When you say in-housing or competition versus in-house, you mean on a partial basis.

You don't mean that there's customers actually changing their mind of using an outside vendor.

No.

Yes.

So, this is very much on the margin.

We track it pretty granularly by region, by reason.

If you zoom way out, it is essentially very similar as Brian said.

No, we don't see -- I don't know of any customer that's decided to move everything that was outsourced to an insource basis.

Okay.

Thanks for the time.

You're welcome.

Thank you.

Our next question comes from David Gold of Sidoti.

Hi, good morning.

Wanted to get a little bit more color on the issues particularly on the eDiscovery side.

A couple of things.

One, the pricing drop that you're pointing to, best we know has been going on for a long time.

Is there something that happened recently?

Has there been a large drop of late.

And trying to get a sense for basically what the catalyst was for reviewing let's say right now and making the decision for the write-down.

Let's look at it from a market perspective.

Fundamentally, the law firms are getting squeezed very hard by their corporate customers to lower their prices and that leads to a trend toward legal process outsourcing.

There's -- in the attempt to lower cost, they're trying to do a lot of the culling of data themselves.

Which means smaller matters.

And the price per gigabyte has dropped precipitously over the last year.

And that's what's driving this from a market perspective.

Customers are just not willing to pay what they were paying for their law firms.

The law firms are not willing to incur the costs associated with eDiscovery and they're trying to drive down the size of the matter.

Our cost to serve remains high even though the size of the matter is lower.

So, what you should hear from that is that our -- a goal of ours is to drive down the cost of offering that service.

That's something we're getting on.

Just in terms of the second part of your question, we -- as we've been highlighting, we've been proactively working on a number of fronts and improving performance in the digital business and looking at this in more detail.

We've very recently had a change in leadership.

We've highlighted the pressures in areas like eDiscovery.

We made a decision to divest a part of the business recently, the domain name business and that led us to accelerate looking at the carrying values and to assess the carrying value to goodwill.

We decided to take that step and to record the impairment this quarter.

It is part of this overall proactive effort we're taking to get the business on track.

David, want we want you to hear is that it's taking longer than originally anticipated to build scale but fundamentally, we have strong services that we're focused on improving our performance.

Okay.

And just part two of that.

If I can add.

I guess many of the competitors that we've seen have developed new products in the last few months in order to do something called quick culling basically to reduce the cost, the services.

I guess just out of curiosity, are you guys similarly -- it sounds like it may force you to develop a product similar to that or purchase something?

Well, no.

We have it.

We've developed it internally.

It is called eVantage.

It is an early case assessment tool.

It is just getting to the market now.

So, it is not offsetting the pressures that we've described.

But it is a lower cost alternative so that the law firms can do their culling on premise earlier in the cycle so we're very much on that.

It is internally developed.

It doesn't represent an area that we have to fill in either organically or inorganically.

Perfect.

Just one last one, if I can.

Incentive comp.

Can you give us a sense for how much the pullback helped in the quarter?

We did quantify that.

So, it was about five points of the OIBDA growth which was -- I believe that's $12 million year on year.

Keep in mind that a fair amount of that is we're catching up, if you will, for a year-to-date accruals and reflecting our most recent views.

So, as we highlighted at Investor Day, David, we're having low incentive compensation payouts this year for the full year, it will probably add about three points to our growth rate and in terms of our forecast and as we look forward to next year, we'll plan for normal accruals and that is on a comparison basis, it will -- provides a drag to our OIBDA growth rate.

But we are not achieving our revenue growth goals this year and it has been areas like service trends have been a real challenge for us.

And that's being reflected in low incentive compensation payouts this year.

Perfect.

Thank you both.

Thank you.

Thanks, David.

Thank you.

Our next question comes from Gary Bisbee of Barclays Capital.

Hi.

Thank you.

I guess the question is how often do you think the purchasing manager for the digital services would be the same as the historical person you've had a relationship with for physical and to the extent it does happen for a lot of these maybe other than the hybrid you talked about at the Investor Day to be someone in the IT department, how do you improve your performance there based on what I assume it is developing a totally separate relationship.

Gary, it is really the synergies between our data protection business and our digital business, calls on the same decision making stack within IT.

That's where we're combining our sales forces between digital and data protection in really affecting what is the same decision making stack.

The folks who do tape vaulting are the same folks in the same decision area that drive decisions around archival, around data protection, around data recovery.

So, that's where the synergy exists.

The periods of synergy, if you look at records management, shredding, those are very synergistic, calling on the same decisionary, data protection and digital, very synergistic.

Where we sell across the product line it's in the enterprise accounts and then the smallest accounts.

Okay.

That makes sense.

Thank you.

Thank you.

Thank you, our next question comes from John Mirshekari of Fidelity.

Hey, John.

Thanks for taking my question.

What kind of opportunities do you guys have to refinance your debt, given how low interest rates are currently?

We have been taking steps last year, we did a major refinancing of a new bond issuance and achieved longer term on high yield bonds and we achieved some efficiencies there.

We've done some paydowns.

We have, within our longer term bonds, obviously prepayment costs associated with some of the longer maturities and we basically paid down the things that make sense to pay down in the current environment.

We have as noted, we don't have anything really coming up soon and we have some British Pound based bonds that make sense for us to -- that have a low interest rate and make sense for us to retain from a hedging point of view.

We look at that all the time and it is -- we evaluate that and we've been paying down everything or refinancing the things that make sense.

With interest rates lower now than a year ago, do you think you have room to bring down the average cost of that which is 6.9%?

I think in terms of -- we could look at areas in terms of fixed and floating mix over time and that could help us and that's something that we're evaluating.

We're relatively fixed right now and that, I think, would be probably the primary area that we could achieve some efficiencies.

Thank you.

Thanks, John.

Thank you, our next question comes from Scott Schneeberger of Oppenheimer.

Thanks.

Could you just start out, I guess discussing in the core storage verticals and customers that you serve and industries, trends that you're seeing amongst your largest ones, thanks.

So, from a vertical perspective, Scott, healthcare is doing very well.

Legal faces the same pressures that really across their business that we have highlighted in eDiscovery.

Financial services remains are strongest segment and an area that we continue to drive more and more vital importance to that business where we're seeing very strong growth from a hybrid perspective.

In our core business and good progress on the digital front as well.

So, vertically, financial services remains number one.

Healthcare is moving along well.

Legal is under pressure.

But nothing more to report really.

Okay.

Thanks.

Could you give us an update on the Mimosa integration and also customer's reception to that integrated offering?

Thanks.

So, we actually just announced this week a sweet offering with Mimosa.

I'm very pleased with the quality of the product and we're beginning to receive accolades from the analyst community as it relates to NearPoints, Mimosa's NearPoint solution and the fact that it is further out in front of the competition in terms of market capability.

From a selling trajectory, I mentioned Sears and Varian Semiconductor in my remarks.

We're starting to bring down some big names.

The fact is that it is a product that many of our customers need.

I'm pleased with the asset.

The integration of the team has gone well.

[TM Robby] is in a senior marketing role for us.

We have a good part of that team that's firmly embedded in our digital business.

So, I feel very good about the potential of that acquisition.

Great, thanks.

One more, if I could.

Should we anticipate in the near term additional divestitures, just thoughts on will there be some more culling with regard to you looking internally at some of your business units.

Thanks.

We're constantly looking at our business and understanding what's core and what's context.

It resulted in the sale of the data domain business where the domain name business where it just really wasn't core from the standpoint of our customer's needs and that resulted in the divestiture.

At this point, we feel we've got the right asset base and to focus on making sure that we drive results from that asset base.

Thanks for taking all my questions.

Thank you.

(Operator Instructions) Our next question comes from Kevin McVeigh of Macquarie.

Thanks.

Hey, Bob, Brian, Stephen.

I wonder if you could walk through the free cash flow which looks good, particularly the full year guidance.

If I did it right, it looks like the year-to-date CapEx is $174 million but the full year is about $270 million.

Is there going to be a $100 million spike in the fourth quarter and if so, what does that relate to?

There will be higher spending in the fourth quarter and that is typical for the business.

We tend to have a number of our capacity expansion projects that are planned earlier in the year and executed later in the year and so if you look back in time, Kevin, we've had a pretty typical pattern of heavier spending later in the year.

Just in terms of how we plan the capacity additions within the physical business.

That's the key driver.

Great.

Thanks.

And then just -- I know you kind of -- any initial thoughts on 2011 relative to the Analyst Day.

Or are we still pretty much in line with where we're framing out?

I'm glad you asked.

We obviously put out preliminary numbers in terms of growth rates and outlook.

Our outlook for revenue growth and adjusted OIBDA growth are on track for what we had talked about and the 2% to 4% growth in revenue and the 0% to 3% in adjusted OIBDA.

Again, I just want to reinforce that some of that -- the adjusted OIBDA, we're working through the lapping on the incentive compensation issues.

That's an underlying growth of three to six on an operating basis.

And we'll work through refining areas like free cash flow and EPS but we're on track toward what we had talked about.

No changes to note today.

Great.

Thanks.

Then just real quick, Brian, if you could, I know you kind of talked about incremental spend at Mimosa.

Some targeted growth initiatives then a pick up on the comp accrual.

Do you have any sense of what the net impact overall was to SG&A from those three items?

We did highlight the incentive comp piece.

I'm sorry, the other pieces you had mentioned were --

I thought there was some incremental spend from Mimosa and then some targeted growth initiatives as well.

I don't have that right in front of me on the Mimosa increment.

I apologize, Kevin.

I don't want to estimate the number without having that right in front of me.

Okay.

We'll get it later.

Thanks.

Thanks.

All right.

Those are the questions in the queue.

We very much appreciate your attention this morning.

We also appreciate those of who you attended Investor Day a few weeks back.

Again, driving our -- the fact that we have a strong, sustainable business foundation continue to drive solid performance.

We are very much focused on improving growth.

And are mindful of our -- why we're here which is to create long-term value.

We appreciate your support.

Enjoy the rest of your day.

Thanks.

Thank you.

This concludes today's conference call.

You may now disconnect.