Pearson PLC (PSO) 2005 Q4 法說會逐字稿

At this time, I'd like to welcome everyone to the Interactive Data fourth quarter and year end conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

Mr. Kramer, you may begin your conference.

Thank you very much, operator. Good morning, everyone, and thank you to all for participating in Interactive Data Corp.'s fourth quarter and year end 2005 financial results conference call. Joining me are Stuart Clark, the Company's President and Chief Executive Officer and Steven Crane, our Chief Financial Officer. As mentioned in our news release this morning, we're presenting a limited number of slides as an optional, visual accompaniment to our remarks. You can download and print these slides from our website to follow along or you can view in advance the slides through the webcast viewer if you are listening to the call over the Internet.

We will follow an agenda as seen on page 2 that is similar in format to our prior calls. I will now recite the Safe Harbor statement on page 3.

This conference call will contain forward-looking statements within the meanings of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and Federal Securities laws including statements regarding the Company's future financial performance, future operating results and plans and expectations and other statements that are not historical facts. These forward-looking statements are based on management's current plans, expectations, and assumptions. They are subject to known and unknown risks, uncertainties, and other factors that may cause the Company's actual results to be materially different from those contemplated by the forward-looking statements. The Company undertakes no obligation to update these forward-looking statements to reflect subsequent events.

For further information on risk factors that may affect these forward-looking statements and the Company's business please refer to the press release issued by the Company today as well as to its most recent annual and quarterly financial reports filed with the SEC, both of which are made available on the Company's website. An audio replay of this call will also be made available on Interactive Data's website and on StreetEvents.com.

Furthermore, during this conference call, management may make references to free cash flow, organic revenue growth, adjusted revenue, and adjusted cost and expense amounts all of which are non GAAP financial measures. The reconciliation of these measures to GAAP measures are set forth following the financial tables in our earnings release or in the slides relating to this conference call, both of which are posted on the Company's website located at www.InteractiveData.com under the heading, Investor Relations.

With that said, I will now turn the call over to Stuart.

Thank you Andy. Good morning, everybody, and thank you for joining us. As Andy mentioned we have some visual accompaniments to our remarks and I will be sure to indicate which slides we are referring to as my commentary progresses. In keeping with our tradition, I will briefly review our full year and fourth quarter 2005 results and provide a quick update on market conditions.

I will then detail both quarterly and recent highlights by business unit and for Interactive Data as a whole. After my remarks, Steve Crane will provide more detail on the financial results and outlook.

To begin on slide five, I've described 2005 as an excellent year highlighted by record financial results and important accomplishment and progress across our organization. In 2005, we reported service revenue of $542.9 million, up 12% over 2004 as we pushed well beyond the $500 million milestone for annual service revenue. This represents a compound annual growth rate in service revenue of more than 11% since 2000, which reflects positively on our ability to expand the business organically as well as bring new businesses into the organization through acquisitions.

Just as important, we delivered another year of record earnings with net income of $93.9 million or $0.98 per diluted share in 2005, a 16.9% increase over 2004 net income. Our free cash flow was once again impressive, with approximately $104 million in free cash flow in 2005, which we used to fund acquisitions, our stock buyback program and a special cash dividend.

Overall, our accomplishments and progress in 2005 and our activity thus far in 2006 leave us well positioned for future growth.

Turning to slide six, Interactive Data's total service revenue for the fourth quarter of 2005 was $136 million, an 8.7% increase over the fourth quarter of 2004. This performance was in line with our expectations for that quarter.

As detailed in our news release there were a number of unusual factors that make comparisons with the fourth quarter of 2004 somewhat complicated. First, our fourth quarter 2004 service revenue includes a two-week contribution from the IS.Teledata business that we acquired in mid December 2005. Second, our fourth quarter 2004 service revenue reflects the previously disclosed reversal and deferral of $8.1 million in service revenue into the first quarter of 2005.

Steve will remind you of the detail on this during his remarks.

Third, our Interactive Data business reported an exceptionally strong 2004 fourth quarter which included a number of one time revenue items in Europe.

Fourth, eSignal's fourth quarter 2004 results included service revenue from a future source distributor partner who, as expected, terminated the relationship in early 2005.

Net income in the fourth quarter of 2005 was $24.6 million, or $0.26 per diluted share versus $21.1 million or $0.22 per diluted share in the same period last year. Our net income performance this quarter is primarily due to higher service revenue, disciplined spending, higher interest income and a decrease in our effective annual tax rate for 2005.

Our view of the market conditions in the fourth quarter of 2005 for our institutional businesses is that they remained unchanged. Overall renewal rates of businesses across our institutional services segment remained at approximately 95% during the fourth quarter of 2005. Although our customers remained focused on containing costs, they're open to working with us to identify areas in which we can bring more value to their business.

Moving onto slide seven, let's begin this review of our institutional services segment starting with our FT Interactive Data business. FT Interactive Data reported fourth quarter 2005 service revenue growth of 1.6% to $89.2 million. FT Interactive Data's business remains very healthy although our fourth quarter 2005 gross appears subdued due in part to the benefit of one-time revenue items in Europe in the fourth quarter of 2004.

In addition, usage revenue, which is a variable component to our revenue model was not as robust in the U.S. as it was in the fourth quarter of 2004. In the U.S., FT Interactive Data's fourth quarter 2005 service revenue increased 3.8% over the same period last year, despite lower usage revenue. This growth reflects good client retention and new sales throughout the year.

FT Interactive Data's European business in the fourth quarter of 2005 was down 5.7% versus last year although up slightly excluding the impact of foreign exchange. As mentioned previously, part of the reason for this performance stems from one time revenue item that contributed to a very strong fourth quarter last year. I'm sorry, in 2004.

And in Asia-Pacific, fourth quarter 2005 service revenue was up year-over-year by 3.7% or 5.4% before the effect of foreign exchange. In terms of new sales, it was a very strong quarter for FT Interactive Data in both the U.S. and Europe, which bodes well as we move through 2006.

As we look forward, we believe our FT Interactive Data business is well positioned for another year of service revenue growth as we invest in expanding our range of high value services. A key element in bringing new services to our customers is an alliance we announced in January 2006 with the Markit Group, a specialist provider of over the counter derivative valuation and other related services. Interactive Data will work with Market to broaden our coverage of complex derivative securities and enhance certain areas of our fixed income evaluations.

As we've mentioned on prior calls we see significant demand within our customer base for pricing data on credit and full swap and other derivative instruments. We plan to use this source data from the credit market within certain FT Interactive Data fixed income evaluation models. By doing so, we believe we can further fortify our leadership position in evaluating pricing with back office applications and begin to target new applications in the middle and front office. In addition, FT Interactive Data will redistribute Markit Group's credit full swap and related content to our customers.

As we continue to strengthen our evaluated pricing methodology we further believe we will be in an excellent position to address emerging regulatory challenges that our clients face to substantiate the valuation used for thinly traded fixed income securities. We are now investing in the development of new tools which clients, including their compliance departments, can use to identify how the valuation for a particular security was determined.

Our view is that the provision of pricing data on derivatives, expanding our fixed income evaluations into the middle and front office and developing tools to assist with evaluation determination and regulatory compliance represents in aggregate a sizable growth opportunity for FT Interactive Data over the next three to five years. We expect to begin introducing this derivative content and enhancement to our fixed income evaluations models later this year and we would expect a modest contribution to service revenue during the latter part of 2006 and really scaling up from there in 2007.

That concludes the update on FT Interactive Data. I'd now like to move onto slide eight to review ComStock, our real-time data fee business.

For the fourth quarter of 2005, ComStock reported $19.2 million in revenue, a 70.2% increase over the same period last year or 74.4% before the effect of foreign exchange. This increase reflects $8.1 million that was reversed and deferred in the fourth quarter of 2004 and subsequently recognized in the first quarter of 2005.

ComStock has continued to make good progress expanding its business with institutional clients although this progress has been masked by expected cancellations associated with the final phases of integrating the HyperFeed clients we acquired in late 2003 onto the ComStock platform. With that integration complete and as the institutional sales pipeline at ComStock continues to build, we believe this business is well positioned for gradual improvement in its service revenue growth during 2006.

A major highlight for ComStock occurred in December 2005 when we completed our acquisition of IS.Teledata AG. We currently own approximately 98% of this business. We believe that IS.Teledata can serve as a great example of how moving into an adjacent market sector can unlock new growth opportunities and further strengthen our core businesses. IS.Teledata provides financial institutions and infomedia portals with managed market data solutions that aggregate and customize the display of proprietary and third-party financial content, such as real-time data from Comstock.

By aggregating content, customizing this content to the exact needs of its clients and then hosting the application on its infrastructure, IS.Teledata represents a very compelling alternative to more expensive, inflexible desktop terminals and it's highly complementary to our ComStock and e-signal businesses.

With IS.Teledata’s offerings, ComStock cannot only sell a raw data feed for institutional trading applications, it can also provide managed market data solutions that are designed to cost-effectively utilize this content. The acquisition of IS.Teledata also helps us further expand our presence in continental Europe and gain us better balance between our businesses in the United States and the rest of the world.

IS.Teledata, based in Germany, brings an installed base of 200 customers throughout continental Europe. IS.Teledata's sales and technical operations throughout Germany, Spain, Italy, Switzerland and Finland, provide interactive data with an excellent new beachhead through which we can begin cross-selling our services. IS.Teledata contributed $2 million in service revenue in the two weeks following the completion of the acquisition in 2005.

We believe IS.Teledata is well positioned for growth in 2006, even as we begin the process of integrating this business into our organization.

Moving onto slide nine, the third business in our Institutional Services segment is CMS BondEdge, which reported fourth quarter 2005 service revenues of $8.2 million. This represents a 1.4% increase over 2004. CMS BondEdge's fourth quarter 2005 performance was highlighted by seven new client installations and additional purchases by existing customers.

Although CMS BondEdge's growth has been limited over the past few years due primarily to consolidations within its customer base, there are a number of products and business development activities underway that we believe can contribute to expanding this unit's growth going forward.

Let's move onto slide ten so that we can discuss our second business segment Active Trader Services, which is home to our eSignal business. eSignal, which provides real time streaming market data and decisions to active traders, individual investors and investment community professionals, reported fourth quarter 2005 service revenues of $17.4 million, which is a decline of 3.2% over the same period last year. Continued growth in the eSignal's subscriber base was more than offset by the expected cancellation of its distribution agreement for FutureSource-related services at the beginning of 2005.

On February 1, we announced a definitive agreement to acquire the assets of Quote.com and certain other related assets from Lycos. We believe this acquisition brings with it three primary benefits. First Quote.com's Qcharts and LiveCharts services nicely round out eSignal's portfolio of market data platforms and decisions support tools, and add over 14,500 subscribers to eSignal's customer base. With the addition of these offerings, eSignal will be able to market a broader array of services at varying price points to address the needs of novice traders, active traders and investment community professionals alike.

Second, we are also adding two popular financial websites, Quote.com, and RagingBull.com, to strengthen eSignal's presence on the web. Combining these sites with eSignal's existing web portals, the newly launched MarketCenter.com and FutureSource.com positions eSignal to build a growing new revenue screen to online advertising across all of its online properties.

Third, we believe this is a very natural bolt on acquisition for eSignal, with attractive operating synergies that should enable us to further improve the profitability of our eSignal business over time. We expect to complete this acquisition by the end of the first quarter of 2006, subject to customary closing conditions.

Before I conclude on the business update, let's move to slide 11. I'd like to offer a brief update on our infrastructure transformation efforts. In particular, we continued to make progress on our data sense of consolidation initiative. This is a three-year project to collect seven separate data centers and ticker plants in the U.S. into two facilities, one on each coast.

We are now entering the final phase of this project as we migrate our Harrison, New York operation to our West Coast facility. We expect to conclude this project in early spring.

This project has already delivered a number of important benefits such as simplifying our operations, improving our cost structure, enhancing our disaster recovery capabilities, and providing a scalable platform for our future growth. Overall, we are creating a truly world-class technical infrastructure.

Moving on to our cash position and outlook on slide 12, we ended 2005 with cash and investments totaling $172.4 million and no debt. We moved forward with the strong financial foundation required to continue investing in initiatives that will expand our business and bring value to customers, business partners, employees, and shareholders.

Before I conclude my remarks, I would like to offer a few thoughts on 2006. Our acquisitions during the past several months, combined with our organic growth initiatives, have set the stage for accelerated service revenue growth in 2006, continued profit growth and another excellent year of free cash flow.

That concludes my opening remarks. I'd now ask Steve to begin his review of our financial results. Steve.

Thank you, Stuart. Let's begin on slide 14. For the fourth quarter of 2005 total service revenue increased 8.7% to $136 million versus the fourth quarter of 2004 and 10.2% before the effects of foreign exchange. As Stuart mentioned there were a number of unusual factors that make comparisons with the fourth quarter of 2004 somewhat complicated. The largest of these factors was the reversal and deferral in the fourth quarter of 2004 of $8.1 million in service revenue, $6.7 million in direct SG&A costs, with an associated $1.4 million in income from operations. These amounts were primarily attributable to ComStock-related services delivered to one international customer.

The reversal and deferral was due to the fact that while we were providing services to and receiving payment from the customer, there was no definitive service contract in place. A definitive contract was executed with this customer in the first quarter of 2005 and, thus, the service revenue that was reversed and deferred in the fourth quarter of 2004 was recognized in the first quarter of 2005. This adjustment did not have a material impact on our prior period results.

Cost of services increased by 1.6% from $42.3 million in the fourth quarter of 2004 to $43 million in the fourth quarter of 2005. The increase primarily reflects the inclusion of IS.Teledata cost partially offset by favorable movements in expenses denominated in foreign currencies. Cost of services as a percentage of service revenue was 31.6% in the fourth quarter of 2005, compared with 33.8% in the fourth quarter of 2004.

SG&A expenses increased by 17.5% from $40 million in the fourth quarter of 2004 to $47 million in the fourth quarter of 2005. This increase essentially reflects the reversal and deferral of $6.7 million in direct SG&A cost during the fourth quarter of 2004 associated with the ComStock adjustment that I just reviewed.

Excluding the impact of the IS.Teledata costs, the impact of foreign exchange, and assuming the reversal and deferral had not occurred in the fourth quarter of 2004, SG&A cost would have increased by $493,000 or 1.1%. In terms of Sarbanes-Oxley, we spent the total of approximately $900,000 on Sarbanes-Oxley and other regulatory compliance-related activities during the fourth quarter and a little more than $3.7 million for 2005.

Since we now have two years of this regulation behind us, we will no longer break out this expenditure as we now consider it to be part of the ordinary course of business.

Total SG&A expenses as a percentage of service revenue increased from 31.9% in the fourth quarter of 2004 to 34.5% in the fourth quarter of 2005.

Depreciation expense increased by 1.2% from $4.8 million in the fourth quarter of 2004, to $4.9 million in the fourth quarter of 2005. The increase primarily reflects depreciation expense related to the IS.Teledata acquisition.

Amortization expense decreased by 4.4% from $5.6 million in the fourth quarter of 2004 to $5.4 million in the fourth quarter of 2005. The decrease was due to the scheduled expiration of useful lives associated with acquired intangible assets, partially offset by amortization relating to intangible assets from the future source and IS.Teledata acquisition.

Income before taxes increased by 11% over the prior year to $37.2 million in the fourth quarter of 2005, reflecting higher income from operations and higher interest income. The Company's effective tax rate in the fourth quarter of 2005 was 33.9%, which is lower than the 37.1% effective tax rate we reported in last year's fourth quarter. Our full year tax rate of 36.9% for 2005 was lower than the 37.5% tax rate in 2004 due to benefits associated with our UK tax structure, a one-time tax valuation allowance reversal, and higher tax-exempt interest income from our investments in certain marketable securities.

On a more normalized basis, the effective tax rate was approximately 38.5% for the full year.

The Company generated net income of $24.6 million or $0.26 per diluted share in the fourth quarter of 2005 compared with net income of $21.1 million or $0.22 per diluted share in the fourth quarter of 2004.

I'd like to quickly review Interactive Data's financial results for 2005 compared with 2004, which you'll see on slide 15.

We reported 2005 service revenue of $542.9 million, a 12% increase over $484.6 million in 2004. Our service revenue growth in 2005 primarily reflects the organic growth of each of our core businesses, as well as the timing of our acquisitions of FutureSource and IS.Teledata combined with the effects of foreign exchange that impacted the previously mentioned, ComStock-related accounting adjustment.

Total cost and expenses for 2005 were $398.7 million, an increase of 11.2% or $40 million, over 2004. This increase primarily reflects total cost and expenses associated with the acquisitions of FutureSource and IS.Teledata, the impact of the ComStock-related accounting adjustment and prudent spending across the organization.

Income for income taxes increased 15.9% from $128.4 million in 2004 to $148.9 million in 2005. Net income for 2005 increased 16.9% to $93.9 million or $0.98 per diluted share from $80.3 million or $0.84 per diluted share in 2004. This represents our fifth consecutive year of double-digit net income growth.

Turning to slide 16. With regards to our balance sheet, our financial position remains strong. At the end of 2005, we had no outstanding debt and cash, cash equivalents and marketable securities totaling $172.4 million. During 2005, we returned a total of approximately $105 million to our investors through the special dividend paid in July and our stock buyback activity throughout the year. This is a total that exceeds our free cash flow for 2005.

As Stuart reviewed earlier, on February 1st, 2006, we announced an agreement to acquire Quote.com and related assets from Lycos, for $30 million in cash. We expect this transaction to close during the first part of 2006, which would impact our cash position accordingly.

Slide 17 provides an update on our existing one million share stock buyback program. As of December 31st, 2005, there were a total of 552,000 shares acquired since the current program was launched in June 2005. This leaves 448,000 shares available for repurchase under the current program. We will continue to be opportunistic about the repurchase of our common stock and carefully weigh the use of our cash for such purposes against other alternatives, such as strategic acquisitions.

Moving to our outlook for 2006 on slide 18, we anticipate similar conditions in 2006 to those that we experienced in 2005.

As Stuart described, customers continue to focus on cost containment which we believe will constrain overall spending. Based on the acquisitions we have completed and their organic expansion of our business, we currently expect that 2006 service revenue growth will be in the mid-teens. We expect that 2006 net income on a GAAP basis will decline slightly versus 2005 as a result of $8 to $10 million, anticipated after-tax, stock based compensation expenses associated with the adoption of Financial Accounting Standards forward statement No. 123R.

Our effective tax rate for 2006 is expected to be in the range of 38 to 39.5%. We anticipate that non GAAP income from operations, which excludes the impact of FAS 123R, will be in the high single digit to low double-digit range.

2006 capital expenditures are expected to be in the range of $40 to $43 million. This includes capital expenditures of approximately $10 to $12 million associated with the planned relocation of Interactive Data's corporate headquarters in Bedford, Massachusetts and ComStock's Harris, New York facility during the year. Approximately 50% of the capital expenditures associated with these facility activities will be reimbursed by the landlords of these facilities during 2006.

That concludes my remarks on the financial results. I will now turn the call back to Stuart so we can begin the Q&A session. Stuart.

Operator, would you like to open the call up now for questions?

(OPERATOR INSTRUCTIONS) Brett Manderfeld from Piper Jaffray.

Good morning. Couple of questions. First, Steve, can you remind us what the one-time revenue items in Europe were for Q4 last year and how much they impacted the P&L, please?

Yes it was -- we mentioned it in the fourth -- in the press release about a year ago and there was some credit adjustments that were made that were just around $600,000 in total, Brett.

600,000?

Yes.

Great. Then within your guidance for revenue growth I believe you mentioned mid-teens in service revenue. Does that include Quote.com as well?

Yes, I'm glad you asked that question just to be clear. We don't include Quote.com in our guidance just because we haven't closed on it yet. But we don't think it's going to be significant or material for the overall guidance that we've given for this year. Q1, assuming we close, we will update that accordingly.

Very good and related to that, what kind of organic growth do you have embedded within that 15% revenue growth?

Our thought was if you looked back over the year, organic growth was coming in just over 6% for the year. Our expectation is that we will continue at those levels. So that's in our guidance for revenue growth.

Very good. And one final question, the IS.Teledata business. Can you talk a little bit about the margin structure there? And then related to that, I'm assuming that like other acquisitions that you'll need to do some investments in that business. So should we kind of build that into the model as well?

Yes we should. The Teledata business is a business that is currently generating around a 9 to 10% EBITA. And as you know, Brett, and you were right to point out, we always end up spending money on integration expense. We will have to upgrade it from a SOX compliance perspective so our anticipation is that, as we said before, that this business really for '06 will be GAAP net income neutral, and then accretive to earnings in 2007.

Very good. Thanks much.

Chuck Ruff, Insight Investments.

Congratulations on another good quarter and year. Can you describe a little further what your current coverage is regarding derivatives and what the expanded coverage will entail?

At the moment, Chuck, we cover listed derivatives. So we cover all the option markets and futures markets where they are listed. What we're talking about here is moving into the OTC market and particularly the credit default swap market, which we don't cover at all in terms of providing pricing data. And it's an area where we've got some significant demand within the customer base.

There are also other loan derivatives and other types of OTC derivatives that we are going to be adding to our pricing services. And so you can think of this as an expansion on the high-value side of what we do in the pricing area, really to complement the thinly traded pricing activities that we already undertake.

The other thing to say about that, though, is we're using that same content to reengineer some of our evaluation methodologies, because there's much more now going on in the derivatives, the credit side of the market, than on the cash side of the market which is traditionally how we price fixed income securities. So we think that through the availability of the derivatives content in our service, it both bolsters what we can provide to customers and enables us to make significant changes in the way we evaluate prices on some categories of fixed income instrument.

And did I hear correctly? That you expect that alliance to start having some revenue impact near the end of '06?

Yes. In fact, we are looking to actually bring the first products to market in the second quarter, 1st of April this year. So we will be expecting to be testing with customers the availability of this data and so we are really looking for revenues to start building up during the second half of the year.

And on the third quarter call you talked about important new product offerings in FT coming. Is there some things coming beyond this derivative offering?

The other thing we're working on, which we are very excited about, but it's got slightly more -- a longer development cycle is the idea of tools that we use to open up our evaluation methodologies to customers, so that they can justify how particular valuations have been arrived at for thinly traded securities. We are calling this a transparency tool internally and this is something that probably is going to take us the bulk of the year to get complete or at least to get to a point where we will be starting to generate serious revenue.

But it's -- we think if we can come up with the right, we can execute on this idea effectively, it's something that you can imagine every compliance department, in every mutual fund where they are interested in these type of instruments as having an interest in this type of product.

In as far as organic revenue growth I'm a little confused. Steve I think you mentioned 6% type level for the past year but I thought per the press release, you had 8.6% last year.

That would, Chuck, been -- what would be the organic calculation in the press release is -- reflects the impact of the reversal and deferral of the -- of that occurred in the fourth quarter.

Now that obviously got put in '05 but even with that in '05, we are talking about organic growth of approximately 6%.

That's correct.

Can you kind of break that out a little bit by division? What kind of organic revenue growth you expect?

I don't have that right at my fingertips that I could get to but you can take the (MULTIPLE SPEAKERS).

-- FT Interactive Data was running close to 7% throughout the year and ComStock was down in the low single digit.

They did a thing we even said in the press release they were about 1.1% or something. (MULTIPLE SPEAKERS)

I don't mean for last year. I'm talking about your expectations for the divisions for '06?

I think that's a difficult one for us to break down here.

And your CapEx up around a net 36 million for this year. How much of that should we consider kind of one-time? Is it just the net six for the headquarters move or is there more kind of one-time type CapEx in there?

I think, right now, it is probably that, Chuck. That CapEx will put an end to helping to build the infrastructure for these new higher value-added products and services that we've been talking about. I think that will probably go on for a little bit. So at this point in time, I'd say that it pulled out the relocation-related CapEx and that's probably a good prospect for the moment.

And where do you expect depreciation and amortization to come in this year?

I think right now, again, prior to quote, depreciation will be coming in around $24 million and amortization will be up around 25.

And that is prior to Quote.com as is the CapEx in revenue numbers? All your projections for '06 do not include Quote.com?

That's correct. But as I said I don't think it's going to be material but there will be some changes there.

(OPERATOR INSTRUCTIONS) Sir, you have no further questions at this time.

If there are no further questions, I would like to thank everybody for participating in the call. We've had a lot of activity in the last quarter and we are looking forward to updating you at the time of our next conference call on the progress that we expect to be making.

So again, thank you for attending the call and I think that concludes it.

This concludes today's conference call.