Thomson Reuters Corp (TRI) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Information Holdings fourth quarter earnings conference call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Vincent Chippari, chief financial officer. Thank you, Mr. Chippari, you may begin.

Thank you. Good morning, everyone. Welcome to IHI's fourth quarter conference call. Joining me today is IHI's president and chief executive officer, Mason Slaine.

Before we begin the actual conference, I need to read the following Safe Harbor statement. Matters discussed in this conference call may contain comments and forward-looking statement, based on current plans, expectations, events, and financial and industry trends which may affect the company's future operating results and financial position. Such statements of all risks and uncertainties which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed. Historical results achieved are not necessarily indicative of future prospects of the company.

For additional information, please refer to our filings with the SEC. Mason will begin today's call with a review of our financial position and operating highlights, and then comment on the agreement to sell CRC Press. And then I'll comment on our fourth quarter operating results in a bit more detail, and we'll conclude the call with a question and answer session.

And now I'll turn it over to Mason.

Thanks, Vinny.

Earlier this morning, we reported fourth quarter earnings of 14 cents per share, excluding an impairment charge relating to our Transcender unit. Results were at the high end of the range provided earlier this month. We also announced that we signed an agreement to sell our CRC Press business to Taylor and Francis (ph), the U.K. publishing company for a cash consideration of $95 million.

I will comment on our operating results first, in all instances excluding the impairment charge and then review the CRC transaction.

Our revenue for the quarter exceeded $38 million and EBITDA was approximately 9.3 million. EPS excluding intangible amortization, our most meaningful EPS measure was 22 cents in the quarter. Our fourth quarter results represented a significant improvement over the prior year and the third -- in the third quarter, and we continue to make progress on our major development initiatives. Our Intellectual Property Group (ph) had approximately 20% EBITDA growth in the quarter and continued to position itself for the strong growth in 2003. Our IP Group EBITDA margins reached 30% in the fourth quarter, up from 27% in the prior quarter.

Our I.T. learning business had continued sub-par revenue and EBITDA. While our business remains profitable, generating 20% margins, overall I.T. market conditions remain difficult. We are hopeful that product cycles improve with anticipated releases in the Microsoft .net service certification series over the next several months, and with some gradual improvement in the I.T. market.

As disclosed earlier this year, the continued difficult conditions in the I.T. market and the sub-par performance of Transcender resulted in our taking an impairment charge in the fourth quarter which Vinny will discuss in greater detail later on.

CRC had a strong fourth quarter and completed a successful year in 2002. The business has generated interest from a number of large publishers over time. And we reached an agreement last night to sell CRC Press to Taylor & Francis, the leading STM publisher located in the U.K. We believe the timing is right for IHI to exit this segment, allowing us to focus on our high-growth businesses and providing us with significant financial flexibility going forward.

Our business overall remains healthy. We ended 2002 with $67 million in cash, no debt, and strong operating cash flow.

In discussing operating highlights this quarter, I'll start with progress made at MicroPatent. While results of MicroPatent did not meet our expectations for the year, we believe the actions taken in the past several months provide MicroPatent with a strong base for growth in 2003 and beyond. In particular, MicroPatent has made significant progress on its major development initiatives. In December, we launched the MicroPatent patent index or MPI as we call it, which we believe is the most advanced patent searching product available anywhere.

Over three years in development, it is designed to use our vast database and state of the art technology to compete with a far more expensive manually abstracted and indexed products. We expect this to be a very successful product this year and beyond. We also launched the next generation of Origin's Eureka (ph) online service. This Eureka version is a major upgrade to the system used by Origin's existing corporate clients and a major advancement for this product line.

We also continue to make progress in development of the first enterprise IP asset management solution in the marketplace. This product combines the extensive content of MicroPatent, the sophisticated analytical tools of Origin and the patent management tools of Master Data Center. We believe this product will be completely unique with major competitive barriers to entry. We are working diligently on the product and expect to have it released around the middle of the year.

These development initiatives have taken more time and planning that originally anticipated last year and that had negative impact on our results in the second half of last year. A lot of what we believe the payoff in this year and beyond will be well worth our efforts.

As far as our other IP businesses, Master Data Center continues to generate strong growth and we believe that having combined its resources with MicroPatent will enable us to better exploit strong synergies between these two units. Liquent completed a successful year in 2002 our first year of ownership. It has been integrated with IDRAC, another business that we acquired the year before, and together the businesses had a very strong year. In fact, Liquent had a major turn around from losses prior to acquisition to strong operating profits in 2002. Our license sales with Liquent improved from the third quarter, but we're still below the potential of this business, which we think is enormous.

We continue to be encouraged by the business environment for Liquent and we believe our product development initiatives in this area will leave Liquent well positioned to expand its market-leading position. Liquent is in fact making excellent progress in the development of Insight (ph), its next generation software products. Insight will incorporate advanced technology and features that will address the life science regulatory environment on an enterprise-wide basis. We expect to have initial version of this product available in the second half of this year. As far as our I.T. learning segment, Transcender saw further declines in revenue and EBITDA due to continued difficult market conditions and product release cycles.

Our fourth quarter earnings in the segment were weak and we currently do not see significant improvement in the near term. While product release cycles remain difficult, particularly in light of the delays in the release of Microsoft.net service certification, we believe these certifications will be released in the next several months and will provide a basis for improvement in our marketplace.

During this time, we have continued to manage costs closely in this environment, and have maintained reasonable profitability in this segment. We believe the business can maintain profitability in this environment and can improve profitability significantly with any improvement in product cycles or market conditions.

With respect to the CRC transaction, we have agreed to sell this business for $95 million. Completion of the transaction is subject only to routine U.S. regulatory clearance and we expect to close the transaction during the second quarter of this year. While CRC performed well last year, it does not have the long-term growth characteristics of the rest of our business. With the sale of CRC, we'll be able to increase focus on our highest growth areas and we'll have the financial capacity to exploit opportunities as they arise.

As far as our financial position we're able to significantly improve operating results in the third quarter to the fourth, despite the earnings decline at Transcender and the transitional issues at MicroPatent. We believe our continued operations are well positioned as we enter 2003 with the sale of CRC allowing us to focus more on the most significant growth opportunities.

As I indicated before, we have approximately 67 million dollars in cash and we remain debt free.

Now, I'll turn the call over to Vinny for a review of the fourth quarter financial results and then we'll take your questions. Vinny?

Okay, thanks, Mason.

First thing I'd like to do is address the non-cash impairment charge recorded in the fourth quarter and then focus the discussion on results excluding the charge. During the fourth quarter, we recorded a pretax impairment charge of approximately 36.2 million, representing a reduction in the carrying value of the intangible assets of Transcender. Because of the difficult I.T. market conditions, operating results have declined at Transcender, resulting in re-evaluation of goodwill and other intangible assets. These accounts are written down to estimated fair market value during the fourth quarter.

Moving on to operating results and starting with revenue, our fourth quarter revenues increased by 8.9 million or 30% reaching 38.2 million for the quarter. Revenues in the IP group increased 8.4 million dollars or 69% to 20.7 million dollars. Strong product areas in the quarter included patent subscriptions, patent and trademark management services and licensing revenue. Our variable demand business such as downloads and file histories, which had declined in the third quarter, improved a bit in the fourth quarter and was flat with the prior year. I.T. learning revenues decreased 2 million dollars or 45% due to 2.3 million dollars due to the difficult market conditions and products release cycles that Mason discussed earlier. And our scientific information revenues in the quarter at CRC increased 2.4 million dollars or 18% to 15.2 million dollars.

Turning to EBITDA, excluding the impairment charge, EBITDA increased 1 million dollars or 15% to 9.3 million dollars. IP group EBITDA increased 1 million dollars or 20% to 6.2 million. Our EBITDA remained below expectations at MicroPatent due to the transitional issues we've been discussing, but we expect a notable improvement in MicroPatent's EBITDA levels beginning with this quarter. Our IP group EBITDA margin was 30% in the quarter, that's up from 27% in the third quarter and equal to the margin expectations we discussed after that third quarter. We believe that margins in this segment will exceed 30% in 2003.

Our I.T. learning EBITDA decreased 1.4 million or 75% to 500,000 dollars. I.T. learning EBITDA margin was 20% in the quarter, down from the prior year due to the revenue decline.

We continue to monitor our cost structure here closely and we believe that the business is operating efficiently based on current revenue levels and we're hopeful that Q4 represents a low point of EBITDA margin in the segment. Our scientific EBITDA increased 2.3 million dollars or 120% to 4.2 million dollars. But I should point out that the prior year quarter included some unusual charges that equaled about $1 million.

Our overall EBITDA margin for the quarter was 24%, and EBITDA margin for the full year for the IHI overall turned out at that 26%. Moving down from EBITDA to net income, our EBITDA of 9.3 million dollars in the quarter from that we had impairment charges, and depreciation/amortization of 5 million dollars - the impairment charges were 36.3 million. That gave us an operating loss of 32 million dollars in the quarter. Our net interest income in the period was about 100,000 dollars. So we had a pretax loss of 31.9 million dollars.

We did record a full tax benefit for the losses in the quarter. Those amounted to 12.4 million dollars, which gave us a net loss in the quarter of 91 cents a share. Excluding the impact of the impairment charge, earnings per share approximated 14 cents in the quarter, or approximately 22 cents excluding amortization of intangible assets. During the quarter our balance of cash and investments increased from 58 million dollars to approximately 67 million dollars. We had no acquisitions in the period with generating 9 million dollars in free cash -- free after tax cash flow.

With respect tour share buy back program, which we started back in third quarter of last year, the company has purchased a total of 382,000 shares at a total purchase price of 5.2 million dollars.

That completes the financial overview and I will turn the call back over to Mason.

Thanks, Vinny.

To summarize, we improved operating results in the fourth quarter and positioned ourselves for a strong growth year in our continuing operations. We have agreed to divest our interest in scientific publishing, choosing to focus on our businesses with the highest long-term growth potential. We're extremely well positioned from a financial perspective and we'll generate significant proceeds from the sale of CRC. While (inaudible) of the CRC transaction, we will move forward as a business with high margins, robust growth potential, strong cash flow and significant financial resources to capitalize on growth opportunities.

We'll now be happy to answer any questions. Operator?

Excuse me, ladies and gentlemen. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. To remove your question from the queue, please press star two. If you're using speaker equipment it may be necessary to pick up your hand set before pressing the star keys.

Our first question is from Douglas Arthur from Morgan Stanley. Please state your question.

Hi, it's Lisa Monaco for Doug. If you could just talk a little bit about any potential impact of Thompson's (ph) acquisition of Delphion (ph) at the end of last year on your IP business and also just kind of what your thoughts are now with the cash from CRC as far as any potential acquisitions in the IP area? Thanks.

We haven't seen any impact at all from the Thompson acquisition of Delphion and we don't expect to see anything negatively from that. As far as our cash, we just signed a contract a few hours ago so we haven't really given a lot of consideration what to do with it and it won't close for another month or two, so we don't have any answer to that question.

Is Delphion a different business than your IP businesses? I mean, -- I think they have a database of patent information as well, similar to your business, so why wouldn't there be any impact?

Well, it's a low-end competitor. It was out there competing with us before and it will continue to compete with us as part of Thompson. So I don't think there's any impact on the -to us and I don't think Thompson adds any particular value to it. We haven't seen it in the marketplace.

Great. One last question. If you could just elaborate on the improvement you're seeing at MicroPatent in the first quarter? Thanks.

Our subscription sales have increased very significantly, starting actually in December, far above I think we have ever seen before. A lot has do with the new MPI product that we released in December, as well as a general upgrade of our subscription product, as well as improvement in our sales force and other things going on operationally. So I think we'll have a very good year at MicroPatent this year.

Okay. Great. Thank you.

You're welcome.

Just a reminder, to ask a question, please press star one on your telephone keypad.

Our next question is from David Sax (ph) with Hockee (ph) Capital. Please state your question.

Regarding the transaction with CRC, could you walk through the after-tax proceeds for that? Is there a tax shield built in prior, or do you get any credit for the write down of Transcender against the gain you're going to book?

Nominally there's about a $20 million tax. We're working on different ways to eliminate or minimize that which I can't go into right now.

To the extent you sell an asset with a higher basis and book a loss, you should be able to offset that, I gather?

That's one of many, many ways.

Okay. Then as far as the share repurchase program, given the current liquidity plus the projected future liquidity are we anticipating stepping up the pace, or that's more of an opportunistic program?

I'm sorry, step up the pace on what?

Repurchasing shares.

That's a board decision which we haven't made yet.

As far as the management changes that went on in your IP division, could you kind of go over what you've done with Jay and his responsibilities, and how many other segments are reporting to him and, you know, sort of how that transition has been going? Sounds like from the look of things from operations obviously better, but just sort of walk us through that a little bit.

Well, Jay Nadler (ph) was president of Intellectual Property Group, which included MicroPatent, Master Data Center, Liquent and IDRAC. And in October, he changed that. So he is the president of MicroPatent and Master Data Center and his objective is to have those two businesses work together in an integrated basis to go to market as one company and to work together (inaudible) product integration, and importantly to develop the IAM product, which is an enterprise product combining those two businesses. He's made significant success from that. He's brought in some new people also. And I think the results demonstrate his success. As far as the Liquent and IDRAC, they're run by Rick Duol (ph), who reports into me directly now, and that's the change we made.

And then as far as your relationship with LexisNexis and where do we stand in terms of that becoming a significant revenue generator for IHI, and do you anticipate a change in sort of the projection of that revenue to you this year?

Yeah. We think it will be significantly higher this year, and we're also expecting to put up another major database in the May or June time frame.

Are they fully in a position to be selling your product? As I remember correctly, you launched but they didn't have all the other databases they were including in the portfolio ready to go and they didn't market it. Is that behind us?

No, they still don't. This product that's going to put up in May or June is very important. They're going to launch that at an industry show.

Okay. Great. Thank you.

Our next question comes from Anthony Kingsley (ph) with Sidley Park (ph). Please state your question.

Yes. This is Charlie Park actually of Sidley Park, and Anthony Kingsley here. The first question is to do with -- you've taken this 36 million amortization -sorry, impairment charge for amortization. Can you tell me what your total goodwill was and what the impact is on your after-tax cash flow number is from that sort of write down in amortized - in the impairment charge?

Sure, Charlie. Let me -- if you just give me 30 seconds to open up a file here, I can get a little bit better detail. The -- we wrote down goodwill. The write down included two components. Around 30 million dollars or --close to 31 million dollars of goodwill and around 5 million dollars of other intangible assets, things like trade names and databases, stuff like that. And so the total charge was 36 million dollars for the two components.

As for the -- what was the rest of your question, Charlie?

Well, I guess what I'm trying to get at is that, some of the investors always looked to you as this sort of -- on a free cash flow multiple, but the free cash (inaudible) multiple has mostly gone up as you've written off the goodwill.

Well, most of the goodwill was not being amortized under U.S. accounting regulations. Some of the intangible assets were being amortized and I think the impact on - and we report a number of EPS excluding amortization of intangibles anyway. That won't change. That won't change at all as a result of this transaction.

But after tax cash flow multiple effectively, including some of that -- so you're saying all we have to worry about is the 5 million of other intangibles that you -

Right. And the impact of that is not particularly significant. It might work out to be a penny a quarter or something like that in terms of earnings.

Okay. And can you just give us a bit better feel on the -- I missed that last question -- on the --what you think the growth in the IP business -- revenue growth for the IP business might be for this year, given the fact that it looks like most of the growth is just coming from acquisitions there. You know, (inaudible) to coming to some sort of organic growth rate for what the IP might grow at?

Charlie, I would start with saying that the business has generated actually significant organic growth in every year and that's been supplemented by growth from acquisitions. What we said fairly consistently is that the businesses in the group are generating, you know, 15 to 20% kind of organic revenue growth and we would have that kind of expectation for this year also. And in fact, with that kind of revenue growth, we also expect to be able to improve the margins there a little bit.

And the last question is just on the EBITDA for the last year for the IP businesses and, you know, for the entire Intellectual Property businesses, what was that?

24.3 million dollars for the year.

Right. Thanks very much.

Sure.

Gentlemen, there are no further questions at this time.

Okay. Well, thank you. And we will keep you updated as the year goes along. And thank you for your support and continued interest in Information Holdings. Thank you.

This concludes today's teleconference. Thank you for your participation.