Thomson Reuters Corp (TRI) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Information Holding's 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 formal presentation. If anyone (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Vincent Chippari, CFO of Information Holdings. Thank you, sir. You may begin.

Thank you. Good morning, everyone, and welcome to Information Holding's fourth-quarter conference call. Joining me today is IHI's President and CEO, Mason Slaine. And before we began, as usual, I would like to read the standard safe harbor language.

Matters discussed in this conference call may contain comments and forward-looking statements based on current plans, expectations, events and financial industry trends which may affect the Company's future operating results and financial position. Such statements involve 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. The historical results achieved are not necessarily indicative of future prospects of the Company, and for additional information, please refer to our filings with the SEC.

Today, Mason will begin our call with the review of the overall financial position and operating highlights of the business, then I will comment more specifically on our fourth-order results, and then we will wrap up with a question-and-answer session. And with that, I will turn the call over to Mason.

Thanks, Vini. The fourth-quarter culminated (indiscernible) important and successful year for IHI, both with respect to earnings performance (indiscernible) strategically positioned the Company for the future. During the fourth quarter we completed the disposition of our Transcender business, following the sale of CRC Press earlier in 2003. These divestitures leave IHI position as a more focused business as a premier provider of intellectual property and regulatory information and services.

During the fourth quarter, we also completed the acquisition of CDC Solutions, further strengthening Liquent's as a leading position of regulatory information solutions for the life science industry. I'll discuss the CDC acquisition in great in greater detail later in the call.

We generated strong earnings growth in the fourth-quarter, and had significant earning momentum as we begin this year. Earnings from continuing operations are 10 cents per share and the fourth-quarter represents a 36-percent (ph) increase over the prior year. Even after incurring one-time expenses of approximately $750,000 (ph) or 2 cents per share related to the integration of CDC Solutions.

During the fourth-quarter Liquent generated significantly improved earnings compared to recent quarters and prior year, while our data businesses -- MicroPatent, Master Data Center and IDRAC -- continued to generate significant growth in both revenue and profits. In total, our data business has generated 20 (ph) percent revenue growth and over 40 percent EBITDA growth in the fourth-quarter.

For all of 2003, earnings from continuing operations increased approximately 24 (ph) percent to 25 cents per share. We currently expect further earnings growth in 2004, with estimated earnings from continuing operations more than doubling to a range a 55 to 65 cents per share.

Overall, we enter 2004 in a very strong position. Our data businesses continue to generate strong growth and impressive profits, while our life science business completed an important acquisition and generated significantly improved earnings. We are focused on generating growth in intellectual property in regulatory information services and maintain a very strong financial position.

In addition to a significant expected earnings growth this year, we expect to exit the first quarter with approximately $150 million in cash and no debt.

Turning to specific developments in the individual business units -- in December our Liquent unit completed the acquisition of CDC, a Company that provides business solutions to the life science industry, and facilitated preparation and submission of regulatory filings -- primarily new drug applications or NDAs. Initial net cash consideration approximated $19 million, and future consideration is currently expected to range from 5 million to 15 million, depending upon future operating results of combined Liquent/CDC business.

CDC, which had revenues of approximately $12 (ph) million in 2003, has been successfully integrated with Liquent from an operational perspective. We expect the acquisition to be accretive to earnings immediately, and expect that incremental EBITDA resulting from the acquisition will meet or exceed our stated target, that being consideration equal to 6 to 8 times (indiscernible) EBITDA.

The acquisition of CDC strengthens Liquent business in a number of ways. While Liquent has demonstrated success with top-tier life sciences businesses, CDC has successfully penetrated a broad base of small and medium-sized life science businesses.

Where Liquent is based in the U.S. it generates the majority of its revenues here, CDC is based in Europe and generates the majority of its revenues from Europe and Asia.

Liquent and CDC (technical difficulty) two primary providers of business solutions, related to NDAs; and, together with our regulatory data provided by IDRAC, offer the most complete suite of products related to NDAs on a worldwide basis.

We will also realize (technical difficulty) major cost benefits by integrating CDC and Liquent. (technical difficulty) will drive improved profit margins in the (ph) combined business. And importantly, CDC provides a customer base that will allow for global introduction of Liquent's major new enterprise software called InSight.

So, in addition to the positive financial and operational impact of the CDC acquisition, this year we will also benefit from the introduction of InSight. This new suite of products is designed to (technical difficulty) life science business to manage regulatory documents and regulatory submissions on an enterprise-wide basis, and on a basis compliant with new regulatory initiatives.

The first InSight product, which is called Foundation, was in fact launched late last year, and we expect to generate revenues beginning this quarter.

A more significant product, called InSight Manager, is expected to be available for sale early in the second half of this year; in reaction to (indiscernible) among the (indiscernible) customers has been excellent. And we expect InSight Management to be a significant revenue growth factor going forward.

From an earnings perspective, Liquent generated $1.4 million in EBITDA (ph) in the fourth-quarter after incurring charges of $750,000 relating to the integration of CDC. This is a very significant improvement from recent quarters, based on a number of factors including improved license sales, cost containment initiatives and a positive contribution from CDC. So, we look forward to an excellent year from the combined business.

Moving to our data segment, they had another excellent quarter with revenue growth of nearly 20 percent and earnings growth in excess of 40 percent from the prior year.

Overall, data businesses generated EBITDA of approximately $23 million in 2003.

MicroPatent results showed very strong growth over the prior year, fueled by (indiscernible) growth in the Internet base subscriptions. MicroPatent achieved record profitability in the fourth-quarter, and we expect very strong earnings growth in 2004.

We will continue to leverage our intellectual property content and technology through a series of new product initiatives and product enhancements which are being delivered currently and prospectively over the course of the year.

Master Data Center continues to generate significant growth, fueled both by increases in the number of patents under management and improved pricing on our patent annuity services. MDC now has approximately 375,000 patents under management, with expectations of reaching 400,000 very shortly.

There is potential for significant additional growth in MDC in terms of expansion, both in Asia and in Europe. These are major markets where we have a relatively small penetration; and in fact, in Asia and we are currently putting significant resources in place in Japan and expect to secure significant accounts later this year.

At IDRAC, we continue to generate very strong growth in revenue and profit in the quarter, based on higher levels of subscription sales. We expect this business to show strong, predictable, double-digit revenue growth prospectively, while maintaining EBITDA margins in excess of 40 percent.

Moving to our patent prosecution business, which we call LPS, we continue to make major progress in our (indiscernible) case, which is scheduled for trial this summer. While we have no idea what the final results will be, there are significant expenses be made and expenses being undertaken towards prosecution of this case.

Moving on to potential acquisitions, we continue to target acquisitions at (indiscernible) multiples of forward EBITDA -- but importantly, trying to find businesses that can grow in double digits on an organic basis. We are currently evaluating opportunities, primarily in areas where we have leveraged expertise in the assets of our existing businesses.

So, in summary, during 2003, we completed a series of transactions that leave us positioned as of (indiscernible) provider of IP and regulatory information and services. Our data businesses are generating very strong revenue and profit growth, with EBITDA margins approximating 40 percent overall.

Our Liquent unit completed an important acquisition and generated significantly improved earnings in the fourth-quarter and positioned itself to generate strong revenue and profit growth this year. We expect to end the current quarter with approximately $150 million cash and investments, and no debt, and we continue to generate new cash at an increasing level.

We continue to evaluate investment opportunities to increase shareholders' value and, based on the above, we currently expect earnings from continuing operations to approximate a range of 55 to 65 cents per share this year, compared to 25 cents in 2003.

So, now I will turn the call over to Vini for a review of fourth-quarter financial results, and then we will take your questions. Vini?

Thanks, Mason. First of all, the results discussed, unless specifically referring to discontinued operations, include operating results of CRC Press and Transcender from both 2003 and 2002. Segment references are those introduced in the third quarter of 2003, with the data segment being comprised of MicroPatent, Master Data Center and IDRAC, and the software segment being Liquent.

Starting first with revenue, fourth-quarter revenues, overall, approximated $23.1 (ph) million compared to revenues of $20.7 million in fourth-quarter 2002. Revenues in the data segment increased $2.5 (ph) million or 20 percent to $15.2 (ph) million. The strong areas in the data segment for the quarter included patent subscriptions of (technical difficulty) MicroPatent, patent trademark management services at Master Data Center and data base subscriptions at IDRAC.

Software revenues increased $1.6 (ph) million or 25 percent to $7.9 million. Software license revenues improved in the quarter, due to a combination of improved Liquent sales and the impact of the acquisition of CDC. And service revenues (technical difficulty) down from prior levels, increased over third-quarter levels.

Other revenues decreased by $1.7 million in the quarter, due to patent licensing activities at LPS (ph) in the fourth-quarter of the prior year. LPS had no licensing revenue in the fourth-quarter of 2003.

With respect to gross margins, overall gross margins were 6 9 (ph) percent compared to 71 percent in the prior-year quarter. The decrease relates primarily to lower gross profits at LPS, which has (indiscernible) patent licensing yields (ph) in the prior-year (indiscernible) just mentioned.

Software gross margins increased to 68 percent from 67 percent, due primarily to improved review performance and cost-containment initiatives, and gross profit margins in the data segment increased to 70 percent from 69 percent in the prior-year period.

Under the requirements of SEC Regulation (indiscernible) we will provide information on both operating income and EBITDA, and a reconciliation of EBITDA to income from operations was included in last night's press release.

Income from operations increased to $1.9 million from $1.8 million in the prior year. Current-year earnings do include a charge of approximately $750,000 from Liquent/CDC integration costs mentioned earlier by Mason.

Operating income in the data segment increased by $1.2 million to 3.1 million. The increase is due primarily to the profit contribution from increased revenues, partially offset by (indiscernible) increase in tangible amortization.

Operating income in the software segment increased by 0.6 million to 0.7 million after consideration of the integration cost of 750,000. The increase reflects operating leverage associated with increasing license revenues and a positive contribution related to the CDC acquisition.

Other operating income, which is comprised of corporate expenses and LPS, had a loss from operations of $1.9 million in the fourth-quarter of 2003 compared to a loss of (indiscernible) -- .2 (ph) million in the prior-year period. The prior-year loss was unusually low because LPS generated 1.5 million in operating profit in the prior-year period from the patent licensing activities.

Corporate operating expenses approximated $1.8 million in the quarter. That is a bit higher than our normal run rate (indiscernible) based primarily on expense (indiscernible).

EBITDA increased by 0.8 million to $5.3 million, up from (indiscernible) --.5 (ph) million dollars in the prior-year period. The data segment EBITDA increased by 1.7 million to 5.6 million. Data business EBITDA margins in the quarter were 37 percent, which (indiscernible) at about 39 percent overall. And the quarterly EBITDA margins (technical difficulty) of 37 percent compares to 31 percent in the prior-year period. The most significant increase there was coming from MicroPatent.

We currently expect that this segment will consistently generate EBITDA margins approximating 40 percent.

Software EBITDA increased by 0.6 million to $1.4 million, and again the loss includes -- the change includes the integration costs of 750,000 at Liquent (indiscernible). Excluding integration costs, EBITDA margins in the quarter to 27 percent compared to 12 percent in the prior-year quarter, and we currently expect this segment to generate EBITDA margins of 25 to 30 percent, respectively (ph).

Our overall EBITDA margin was 23 percent for the quarter, (technical difficulty) 26 percent if you excluding integration costs of Liquent. And we continue (technical difficulty) overall EBITDA margins for the business of approximately 30 percent.

Moving down to net income from operating income, from (indiscernible) income of $1.9 million we have interest and other income of 0.9 million, and total pretax income to $2.75 million for the quarter. Our tax (technical difficulty) in the quarter was $0.7 million, leaving us with earnings from continuing operations of 10 cents per share.

During the quarter (technical difficulty) the impact of intangible amortization net of tax approximated a charge equal to about 8 cents per share. Intangible amortization was slightly higher than normal, due primarily to foreign currency translation of our IDRAC intangible asset in France.

Discontinued operations generated a loss of 18 cents per share in the quarter. That reflects the disposition of the assets of Transcender. There are (ph) some final disposition adjustments (ph), primarily for severance costs and vacated real estate related to Transcender. These will be recorded in the first quarter of 2004. And we currently expect that these charges will equal (technical difficulty) approximately 5 to 6 cents per share, and those will be recorded as discontinued operations.

(indiscernible) diluted share account for the quarter was (technical difficulty) And our year-to-date diluted share account was 21 million (indiscernible). That completes the financial review, and I'll turn the call back over to Mason.

Okay, thanks, Vini. So, in summary, in 2003 we completed (indiscernible) divestitures of CRC and a Transcender. We entered this year as a business focused on intellectual property and regulatory information and services.

We completed the acquisition of CDC Solutions in December and have successfully integrated the business of (indiscernible) Liquent unit. The acquisition of CDC, (indiscernible) operating improvements at Liquent and significant new product releases this year, leaves Liquent well-positioned to generate significant growth in revenue and profits.

Our data business continues to generate strong revenue growth with EBITDA margins approximating 40 percent. And these businesses enter this year with positive momentum and very good visibility, and further revenue and profit growth.

We (indiscernible) very strong financial (technical difficulty) position, expecting to exit this quarter with $150 million in cash and (indiscernible) debt, so we remain committed to increasing shareholder value. And I'd be happy to answer any questions. (indiscernible)

(OPERATOR INSTRUCTIONS). Cliff Greenburg (ph) of Faron Capital (ph).

A couple questions. Is there any tax liability that the Company has after the sale of the assets last year (indiscernible) figured in the 150 million of cash your have, or (ph) expecting after the first quarter?

The total tax bill on CRC would have been about $16 million. We will basically have to pay in none (ph) of that. During the year, we paid an about $11 million of that amount, and we filed for a quickie refund and expect to have that $11 million back by the end of the first quarter.

Okay. So that is why cash was up?

That is the big increase from the year-end balance.

On a go-forward basis, what is the depreciation and amortization that you could be running through the income statement, and what is cash capital expenditures that you need for the Company on a go-forward basis?

Cliff, I don't really want to give specific guidance on (indiscernible) depreciation and amortization numbers. We are still finalizing valuation on things like CDC intangible assets and things like that.

But recurring capital needs have never been particularly large, you know -- in few million-dollar area, and we don't expect any major change in the capital profile of the business.

But is the fourth-quarter depreciation and amortization expense --

The fourth-quarter depreciation and amortization number did have some -- in (ph) respect to the intangible amortization, was several hundred thousand dollars higher than normal. And the reason is because we had to do some foreign currency translation of the intangible assets of our French business, following the decline in the value of the dollar against the Euro.

So that number could bounce around a little bit, depending on how the dollar moves against the Euro. But obviously, that is not an asset we are replacing; it's just a matter of the translation of it. So the number is probably high by 2, $300,000 even after consideration of the fact we will have some additional amortization related to CDC.

And go-forward, do you expect or is a reasonable to think that your data businesses can maintain the growth rate that they had in the fourth-quarter?

We expect between 15 (ph) and 20 percent on the topline in revenue and earnings growth.

Can margins expand, or are they -- I know they are high already, but if you do get 15 to 20 percent cash revenue growth, wouldn't the cash flow grow faster than that?

We are investing significantly in the businesses this year, in MicroPatent, and MDC's patent, (indiscernible) we are building on our Asian operations. We are adding significant staff in European offices, and we're introducing several new products.

So, the margins may increase -- I don't know. But we are in a year of major investments (indiscernible).

(OPERATOR INSTRUCTIONS). Lavan VonLevine (ph) of Hockey Capital (ph).

What is the tax rate expected in 2004?

We are still working on (indiscernible) foreign tax planning items, so I don't have an exact number to tell you. The fourth-quarter rate was a little bit low, because of some of the foreign tax items we've been working on. We are probably (indiscernible) going to be in the mid 30s, (indiscernible) -- 35, 36 or 37; I'm not sure. But probably in the mid 30s.

(OPERATOR INSTRUCTIONS). Gentleman, we are showing no further questions in queue at this time. I would like to turn the floor back over for any additional or closing comments.

Well, thank you all for participating. And we look forward to keeping you updated as the year moves forward. And we appreciate your continued support and interest in Information Holdings. Have a great weekend.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.