IHS Inc. (IHS)

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IHS Inc. (IHS)

Q3 2012 Earnings Call

September 20, 2012, 08:00 am ET

Executives

Andy Schulz - VP, Investor Relations

Jerre Stead - Chairman & CEO

Scott Key - President & COO

Rich Walker - EVP & CFO

Analysts

Manav Patnaik - Barclays Capital

Toni Kaplan - Morgan Stanley

Eric Boyer - Wells Fargo Securities

Kelly Flynn - Credit Suisse

Peter Appert - Piper Jaffray

Brian Karimzad - Goldman Sachs

Andrew Steinerman - JPMorgan

William Warmington - Raymond James

Dan Leben - Robert W. Baird

Presentation

Operator

Good day ladies and gentlemen and welcome to the Q3 2012 IHS earnings conference call. My name is Alex and I'll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to hand over to Andy Schulz, Vice President of Investor Relations. Go ahead please.

Andy Schulz

Thank you, Alex. Good morning and thank you joining us for the IHS third quarter 2012 earnings conference call. We issued our earnings release earlier this morning. If you do not have the release we issued earlier today, you will find a copy of it on our website at ihs.com.

Some of our comments and discussions on the quarter are based on non-GAAP measures. Our non-GAAP or adjusted numbers exclude stock-based compensation and other non-cash charges and other items. Our earnings release includes both our GAAP based income statement and statement of cash flows and reconciliations for the non-GAAP measures discussed during this call. These reconciliation schedules can also be found on our website.

The non-GAAP results are supplement to the GAAP financial statements. IHS believes this non-GAAP presentation and the elimination of these items is useful in order to focus on what we deem to be a more reliable indicator of ongoing operating performance.

As a reminder, this conference call is being recorded and webcast and is the copyrighted property of IHS. Any rebroadcast of this information, in whole or in part, without the prior written consent of IHS is prohibited.

Please keep in mind that this conference call, especially the discussion of our outlook, may contain statements about expected future events that are forward-looking and subject to risks and uncertainties. Factors that could cause actual results to differ and vary materially from expectations can be found in HIS’ filings with the SEC and on the IHS website.

With that, it is my pleasure to turn the call over to Jerre Stead, IHS Chairman and CEO. Jerre?

Jerre Stead

Thank you Andy and good morning and welcome to all of our investors and to my IHS colleagues. After providing an overview of our performance for the quarter, I’ll give you an update on the multiple investments we continue to make in our business.

Regarding our financial results, revenues was up 14% in the third quarter including solid organic growth of 8% in subscription base and 5% overall. Adjusted EBITDA increased by 21% and our adjusted EBITDA margin was 31.4% an increase of 190 basis points over 2011. Scott Key, our President and Chief Operating Officer and Rich Walker our Executive VP and Chief Financial Officer will provide more detail shortly.

Our subscription business representing approximately 80% of revenue remained strong as it grew 8% organically for the seventh consecutive quarter. With existing customers, we continue to experience good price traction in renewal rates consistent with our plan. Yet, in late Q3, our non-subscription based business saw a rapid weakening in key markets as customers put capital decisions on hold in these uncertain environments.

This trend impacted Q3 performance and we anticipate that it will continue into Q4. Consequently, our Q3 non-subscription organic performance was significantly impacted by the abrupt slowing of customer decisions creating a disproportionate impact on our overall business and growth rates. We're seeing a slowing in economic growth globally as our economic forecasting teams continue to revise downward or outlooks with particular weakening in EMEA and APAC that is impacting supply chains of business spent.

The resolving impact on our growth is reflected in the Q3 performance we announced today and in our updated guidance for 2012. Overall, our growth remains well above economic growth rates in each of our end markets and our pipelines continue to grow. Scott will address the specifics of our growth and the key drivers and Rich will outline our updated guidance and full year outlook for 2012.

We continue to expand margins meaningfully and generate robust free cash flow. We added 190 basis point of margin versus a year ago. Our free cash flow conversation was 72% on a trailing 12 month basis. The result is adjusted EBITDA and free cash amounts at historic levels.

Let me switch now to an update on a few of our important focus areas. This quarter, we continued the significant implementation of new products, new platforms and new processes to position our company for long-term sustainable profitable growth. We continue to move quickly and deploy new systems and processes across every aspect of our business to capture scale efficiencies and to enhance the effectiveness of our global sales force. This is the largest transformation in value creation project in our history.

The third release of our Vanguard program was implemented in the first part of Q3; we now have approximately 60% of our revenue flowing through a common financial, sales and over through cash system. We are working to carefully and quickly convert our remaining business over the next three quarters. This transformation gives significant levers to provide future organic growth, margin expansion and delivery of increasing free cash flow as we realize these synergies over the next four quarters and into 2014.

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