Verisk Analytics Inc (VRSK) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Verisk Analytics fourth-quarter and full-year 2009 earnings results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions). As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to your host, Ms. Eva Huston, Head of Investor Relations. Please go ahead.

Thank you, Ally, and good morning to everyone. We appreciate you joining us today for a discussion of our fiscal 2009 and fourth-quarter financial results.

With me on the call this morning are Frank Coyne, Chairman, President and Chief Executive Officer; Mark Anquillare, our Chief Financial Officer; and Scott Stephenson, our Chief Operating Officer. Following comments by Frank and Mark highlighting some of the key points about performance, we will open the call up for your questions.

The earnings release referenced on this call, as well as the associated 10-K, can be found in the investors section of our website, Verisk.com. The earnings release has also been attached to an 8-K that we have filed with the SEC.

A replay of this call will be posted on our website and available by dial-in for 30 days until April 9, 2010. And finally, as set forth in more detail in today's earnings release, I need to remind everybody that today's call may include some forward-looking statements about our future performance. Actual performance could differ materially from what is suggested by our comments today. Information about the factors that could affect future performance are summarized at the end of our press release, as well as contained in our recent SEC filings.

With that, I will now turn the call over to Frank Coyne, Chairman, President and Chief Executive Officer.

Thank you, Eva, and good morning to all. I will start by saying we are very pleased with the results for 2009. It seems like a long time ago, but besides navigating one of the toughest economic environments in recent history, we have prepared for and completed the largest IPO in many months and still, we delivered profitable growth. I believe this says a lot about our business model and the quality of the leadership throughout our enterprise. I congratulate all of our employees on growing our business to over $1 billion in revenue and thank them for their hard work.

We have discussed before our ability to deliver both growth and strong margins. Our revenue growth for the year of 14.9%, with organic revenue growth of 11.2% and adjusted EBITDA margins of 43.6%, are proof of this.

Many of our investors have been asking us about the prospects for growth in the face of a challenged market for some of our customers who are primary P&C insurers and represent about 60% of our revenue today. There are a couple points I would like to make.

First, our solution is to deliver value for our customers by allowing them to outsource vital functions to us at a significantly lower cost, while benefiting from the quality resulting from the breadth of our industry data and the deep knowledge of our staff. Our customers are willing to pay for this value.

Second, premiums written are only one factor in our customer invoices. Another factor is delivering enhanced value to our customers and including the value-adds in our invoices.

Lastly, I think that sometimes people take insurance-related solutions as a shortcut to mean only our Risk Assessment businesses. You should remember that we have other insurance-related businesses in Decision Analytics, such as claims and repair cost estimating and extreme event modeling. We continue to see growth in these areas. While we remain excited about our prospects as an analytically-driven service provider to primary P&C insurers, we are also driving additional growth in the 40% of our business that is not primarily P&C-related.

The growth in our Decision Analytics business continues to be impressive, with revenue growing near 30% total and about 20% organic, led by our fraud identification and detection solutions. We remain positive on the opportunities in the mortgage fraud analytics space, both on the front-end screening of mortgages before they are underwritten and also on the back-end audit and analysis of loans after they have closed. Whether the mortgage origination market declines and defaults continue to grow or if the opposite happens, our business is a solid and well-diversified.

In healthcare, while there is uncertainty around what shape reform will take, it is clear that fraud prevention and data and analytics are key to managing nationwide healthcare expenses, and these are themes that will benefit our business.

As you have seen, we recently made a small, yet strategic, acquisition in this segment, Strategic Analytics, which is a leading provider of credit risk and capital management solutions to both customer lenders and to mortgage lenders. The strategic rationale for this acquisition was strong. First, it is a pure play in risk analytics. Second, it strengthens our mortgage position and expands our footprint. Third, it supports our expansion into capital markets-related risk solutions, including credit. And fourth, it has a contributory database of retail loans.

While what is going to happen to the growth of overall insurance premiums in 2010 remains uncertain, we are quite certain that the fundamentals of our business remain strong and able to grow. We run our business for the long term and as such have talked about our long-term financial targets with our investors.

I know some of our investors are seeking clarification on whether we remain confident in our long-term targets of 10% to 12% organic revenue growth. Let me be clear. We remain confident in all of the financial targets we discussed at the time of the IPO.

We appreciate the continued interest in our Company from both existing and new investors. Thanks all who joined us a week and a half ago at our first investor day, despite the snowstorm. We hope that those who came in person and those who listened to the webcast were able to take away a deeper understanding of our businesses and to see the depth of our team and the deep domain knowledge we have.

With that, I will turn it over to Mark Anquillare, our Chief Financial Officer, to go through more details around 2009.

Thank you, Frank. I would like to echo Frank's comments about this being a very strong year for us. We delivered 14.9% revenue growth for the full year and 11.2% organic growth, which is right in the range of the long-term targets we have discussed previously. To remind you how we look at organic revenue growth, we exclude any acquisitions that were not owned in comparable periods, meaning a full year in 2008 or 2009.

For the fourth quarter, revenue growth was 14.5% total and 10.9% organic, very similar to the full year. To break down the growth of it, our Decision Analytics segment continues to lead, with 29.3% growth and 20.8% organic growth for 2009. For the fourth quarter, Decision Analytics grew 26.9% and 19% organic. I will note that the adjustments to get to organic growth excluded recent acquisitions of AER, D2Hawkeye, TierMed and Enabl-u.

We are pleased with the performance of all of our businesses in Decision Analytics, and the organic growth in fraud identification and detection stood out at 27.6% for the year and 29.9% for the quarter.

We've talked to you about the growth of our Mortgage Analytics solutions, and that continued to be significant. I know that some of you have asked about the potential slowdown in originations and how we might be impacted. We expect to continue to grow through increased penetration at the front-end origination side and a combination of penetration and volume on the back-end forensic auditing. Customers in the mortgage sector now represent approximately 12% of our revenue.

In loss prediction, the organic growth was 9.7% for fiscal 2009, and we are pleased with that, particularly in a year where some reinsurers, brokers and primary insurers are rationalizing their use of tools for catastrophe modeling.

For loss quantification, we grew organically 15.8% for the year and 2.5% for the fourth quarter. The growth in the fourth quarter was really double digits if you were to exclude the bump in revenue due to some incremental professional services we provided to a large customer in 4Q 2008. Loss quantification continues to be an important part of our growth in Decision Analytics, and we saw some promising cross-selling success there, as well as other parts of Decision Analytics.

Neil Spector, our Head of Sales, discussed a few of these on investor day, including both an expansion of services to a large customer, as well as a -- Verisk displacing a competitive product at another large customer.

Turning to Risk Assessment, we grew revenue at 3.9% for the year and 4.2% for the quarter. We had some special projects in the fourth quarter that gave us a little lift in actuarial and stat agent services. We know a number of you have asked about growth in Risk Assessment given the current premium environment. As a data point, this 3.9% for 2009 was achieved despite a 0% growth in commercial premiums in 2007, which is one input into our 2009 billings.

We have already sent out our first-quarter 2010 invoices, and are receiving our normal prepayment for services to be provided in the upcoming quarter, which would give you a good sense of our visibility into our revenues. We feel good about our growth aspects, even in light of the backdrop of a challenging economic environment, which is affecting the property and casualty insurance market.

Moving on to adjusted EBITDA, these numbers are outlined in Table 3-A in our press release. We define adjusted EBITDA as EBITDA plus ESOP expenses that are unrelated to our 401(k) and profit-sharing plan, plus the costs related to our IPO on October 6. The ESOP expenses which flow through our income statement are non-cash. If you remember, we discussed at our third-quarter call the $57.7 million charge related to the acceleration of a significant portion of shares that remained in the ESOP at the close of the IPO. Details of how this charge is reflected in our income statement are available on the supplemental data in our press release.

A portion of this expense related to the ESOP will not occur after 4Q 2009, and we think it is appropriate to add it back. The portion of the expense that remains unallocated will fund 401(k) match and profit sharing into the future. The 401(k) and profit-sharing plan will not be a part of our expenses on a go-forward basis -- excuse me -- will be a part of our expenses on a go-forward basis. Additionally, with the IPO behind us, we will not add back IPO-related costs going forward.

Adjusted EBITDA increased 13.4% for the year to $447.5 million, representing an adjusted EBITDA margin of 43.6%. For the fourth quarter, we had 21.5% increase in adjusted EBITDA and the margins expanded to 45.5%. Although I will call out a few items that increased that margin higher than its run rate, including an insurance recovery of $2 million and a temporarily lower 401(k) match expense of about $1.8 million.

Additionally, while our business has significant operating leverage, we intend to continue to invest to enhance future growth. As a result, we expect our overall EBITDA margins to remain in this annual range over time, and EBITDA margin expansion in areas where our business has scale will likely be offset by incremental investment in areas where we find opportunities to grow the business.

To break down adjusted EBITDA further, I will discuss it by segment. Adjusted EBITDA margin was 38.6% for Decision Analytics and 48.4% for Risk Assessment for the full year. The Decision Analytics segment is the area we are making a majority of our investments, largely expensed through our P&L, and making acquisitions as we grow our business.

The expansion in our Risk Assessment margins was strong, although I will remind you of the benefits of the insurance recovery and reduced 401(k) expenses I mentioned earlier. We are pleased with the margins, but we do not expect them to continue to expand at the same pace.

Two items I will note in the other income/expense row are the loss gains on securities and interest expense. In the loss on the securities, $2 million of that relates to the impairment of a minority investment in a telematics business we have on our balance sheet. While we haven't typically made minority investments, this small one was made for 2008 as a way to invest in product R&D in an area we believe may play an important role in the insurance market in the future. The company is gaining traction, but we wanted to be conservative.

On the interest expense side, our costs have increased versus 2008 due to higher interest rates and higher average debt outstanding throughout the year. And I would like to highlight that our debt ratio of 1.3 times debt to trailing 12 month EBITDA is down from a year ago. We are comfortable with this level and we believe over the long term we will maintain investment-grade type leverage. We also believe that we have room to finance acquisitions with debt while maintaining that discipline.

Our reported effective tax rate was 52% for the year. This rate is higher than the statutory rate primarily because of the ESOP costs, including the $57.7 million acceleration and IPO-related costs, both of which are not tax-deductible. We expect our normalized rate to be around 41.75%, consistent with what we discussed in our third-quarter call. We are in high tax jurisdictions, and we would expect our rates to remain around this level for the foreseeable future.

Coming down to net income, where we will be focusing on adjusted net income, a non-GAAP measure which we define as net income plus acquisition-related amortization expense plus the IPO-related costs plus ESOP allocation expense minus the income tax effect on that amortization. We have also adjusted in this quarter for the valuation impairment on our telematics investment.

Our adjusted net income increased 13.6% to $221.1 million for the full year, in line with our adjusted EBITDA growth. Adjusted EPS on a fully-diluted basis was $1.21 for the fiscal year 2009 and $0.32 for the fourth quarter, an increase of 18.6% and 28%, respectively, versus the same periods in 2008.

Turning to our balance sheet, as of year-end, our cash and cash equivalents were at $71.5 million, up $11 million from last quarter, after our reduction in total debt of $65.2 million. Accounts receivable were $89.4 million at year-end, at the end of the period, and DSO declined by approximately one day over prior year as we continue to optimize our cash management.

Total debt, short-term and long-term, totaled $594 million at year-end, a decline of $76 million versus December 31, 2008. We have strong liquidity, as illustrated by [saleable] committed lines of $420 million and by our total debt to trailing 12 month EBITDA ratio of 1.3 times.

Free cash flow, which we define as cash from operations less expenditures, was $283 million for all of 2009 and increased $16 million, or 32%, versus 2008. Most of this growth is attributable to our underlying operating performance, with some additional benefit from working capital in the absence of a 27th pay cycle in 2009.

For the full year, capital expenditures remained a small percentage of our revenue at 40.3%, highlighting the low capital intensity of the business. We continue to expect to deploy free cash flow, first through our disciplined program of acquisitions; second, for share repurchases to limit our shareholder dilution from options and other share issuances; and third, for potential future dividends.

A quick note on Strategic Analytics acquisition, which Frank discussed earlier. As I discussed at investor day we set high targets for growth, profitability and return on investment for acquisition, and this acquisition met those as well as our other criteria. We believe there exists a continuing opportunity to deploy free cash flow in the areas that grow our business, including acquisitions, and as such, we do not have a plan for a current dividend, although we will continue to evaluate the best way to deliver returns to shareholders. The M&A pipeline continues to give us confidence in our assumptions.

I will conclude by saying that 2009 has been a very good year for us, but that was not surprising. We have great visibility into our businesses, given that subscription and long-term contracts account for about 71% of total revenue. Our revenue growth of 14.9% for 2009 is one from which we will continue to build. As we have discussed, our asset mix today, both diversified and existing solutions and new opportunities, is much stronger than five years ago.

We remain excited about the prospects for the overall business and consider ourselves fortunate to have developed a unique business that provides both growth and significant cash generation.

I will ask the operator to open up the line for questions.

(Operator Instructions) Suzi Stein, Morgan Stanley.

I know you alluded to the value-add in the Risk Assessment business, but can you be a little more specific on what you are seeing in pricing trends? And I guess if you can't get specific on a percentage basis, can you just talk about how it compares with previous years?

I guess let me try to take that. What we have -- what we have seen in our Risk Assessment business for 2010 mirrors and feels very similar to what we've done in the past.

We have put out our invoices. We continue to receive those prepayments. We see growth as kind of we had expected. And to the extent that you think about the hard market and the soft market, with regard to things like property-specific type of unit billings, we saw a little bit of an uptick, as you probably noted, in the fourth quarter itself. But it is probably too early to tell if that is a trend or just a little uptick in fourth quarter.

So I think that we remain feeling good about the growth prospects there. I'm not sure we can really draw any strong conclusions about 2010 around the unit billing and other transactional items.

Okay. And then just on the M&A pipeline, you seem very optimistic about it. But can you just talk maybe specifically about where you see the most opportunity now and what you are seeing as far as asset prices for potential targets?

Let me observe on both of your questions. With regard to the property-casualty insurance market pricing, having spent a fair amount of time with senior officers of many of the largest companies in the US and international companies and some regional over the last 30 to 60 days, I come away with a fair degree of confidence that our industry has got the discipline that it needs for me to have -- see the glass as half-full as opposed to some folks are seeing it half-empty going forward. So I feel good about the P&C marketplace.

With regard to acquisition pipelines, we have more opportunities now than we have in the past. We are going to continue to be selective. The properties that we are interested in are things that have unique value, so we are not seeing that they are discounted. And most we're not interested in, but we are seeing some interesting things. Most of them are in mortgage or healthcare, and we expect that is where most of the opportunities are going to be. But we continue to look for opportunities in the P&C space as well.

Okay. Thank you.

Jim Kissane, Bank of America.

Mark, even if you adjust for the two items, it seemed like the Risk Assessment margins were somewhat better than at least what we were modeling. Did you take some cost out there? What do you think the factors were that drove the margins much stronger?

We did relatively light expenses in the fourth quarter. Some of that is headcount-related, as we think about where we were, as an example, in fourth quarter 2008 versus fourth quarter 2009, we kind of reinvested and reallocated resources to more investment areas. And that is true, we did have a good fourth quarter, and expenses were lighter, beyond the couple items that we highlighted in our discussion today.

Just to follow up on that -- and I think that probably most of the folks on this phone know that our team really focuses on certainly growing its business, but never takes its eye on efficiently running every aspect of their operations. And you see a special focus on that when you go through difficult economic times, when the pressure on the top line is a little bit more than might be normal. So I think you are seeing that in the margin expansion that we had.

Okay. So not to put you on the spot, but is, say, a 50% adjusted EBITDA margin kind of the new right level for Risk Assessment? And I would assume -- just to follow on -- over time, as you scale Decision Analytics, and just given the inherent leverage in some of those businesses, Decision Analytics margins can move higher. Is that the right way to think about it?

Well, I think we would continue to look to invest wherever possible. And I know that our plans continue to include significant investment in both segments so that we are most focused on future growth. So as I said, we have typically seen margin expansion in our existing businesses, but that could and probably will be somewhat offset by our investment. So I would be cautious with regard to how much expansion you're thinking about there.

Okay. I appreciate that. And just last question, any seasonality in the business, and maybe in particular, Xactware? Would that be a little bit slower just in the December quarter normally?

If you actually would think about the Xactware business, there is a piece that relates to a customer -- and whether it is an insurer, contractor, licensing some of the products and services. But it also includes transactional, where every claim comes through as a transaction.

Typically -- it doesn't have to be a catastrophe. Big storms does have some impact on those transactional pricing. And we saw what was a pretty heavy storm outlook back in fourth quarter of 2008. It was very quiet in 2009. So those are the type of things that -- underlying some of the transactions -- have affected the fourth quarter specifically of 2009.

Got you. Great job. Thanks.

Michael Meltz, JPMorgan.

Just on Jim's question there, Mark, can you just clarify that you expect versus the 43.6% margin you did in 2009, you expect that to be flattish in 2010? And then I have a follow-up.

Let me just go back to square one, just so I make sure I understand the question. We've always talked about 43% to 45% across both segments, because we feel that our existing businesses, there is natural scale, but at the same time, we are going to be investing. So we want to make sure that is factored in.

Was your question specific to Risk Assessment, Michael?

No, my question is do you expect margins to be up or down or flat in 2010?

I think we will continue to talk about in the range of 43% to 45%, and our hope is that we can invest, because investment means that we are optimistic about finding the right opportunities to grow in the long term.

Okay. And then the pension costs incrementally were a $15 million hit in 2009. What is the expectation in 2010?

Yes, thank you for bringing that up. It is a little too early to tell. We do know that the cash funding, as you probably noted in the K, is about $21 million. That cash funding is up from $5.5 million this past year. As you think about the actual expense and the hit on the P&L, the investment returns in the portfolio were strong. It is little too early to tell. We would expect the expense to be down in 2010.

Can you quantify that?

A little too early to tell right now, but as I said, we are hopeful (inaudible).

And last question for me. Were your healthcare revenues up or down organically in the fourth quarter?

Let me answer the question you've mentioned organically. When we think about the D2Hawkeye acquisition, it would be out. So that is the one thing that would be excluded from our healthcare operations. We continue to have strong results and continue to have strong growth and healthcare continues to take up a good portion of our overall revenues, and I think we remain very optimistic about healthcare.

All right. Thanks for your time.

(Operator Instructions) Ed Ditmire, Macquarie.

I had a quick question on the premium based business. It is my understanding that most contracts, as you guys mentioned at your investor day, are three-year contracts. Does that imply that only say one third of the contracts would be up for repricing in one given year?

So, Ed, let me describe that a little bit more. First of all, when we talk about long-term contracts or the high recurring aspects of our business, there is subscriptions, which typically come due annually, and then there is a piece that is a more longer-term contracts. And yes, those are on average about three years.

That piece of the business, it is not probably a third, a third, a third; there is probably some cycles in there. But if you were to think about how much would typically come due, I would guess probably a third would be the easiest way to model that out, if that is what you are thinking about.

And if you think of the premium based business being maybe 30% of your revenues, which proportion of that do you think is in the one-year contracts versus the three-year contracts?

When we think about the subscription business, a majority of that would be the annual subscription.

Okay. Thank you.

I am showing no further questions at this time.

Great. I'll turn it over to Frank to wrap up the call.

Thank you for the questions, and I would like to thank everyone for joining us today for the 2009 results. We have the intellectual capital, the client-centric solutions and the long-standing industry experience that positions Verisk for future success.

We thank you for your support and look forward to speaking with you again next quarter, and thanks again to all of our employees for delivering these excellent results. Have a good day.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect, and have a wonderful day.