Title: IHS Inc F1Q11 (Qtr End 02/28/11) Earnings Call Transcript
Symbol: IHS
Call Start: 17:00 ET
Call End: 18:30 ET
IHS Inc (IHS)
F1Q11 (Qtr End 2/28/11) Earnings Call
March 17, 2011 5:00 pm ET
Executives
Andy Schulz—VP, IR
Scott Key—President and COO
Jerre L. Stead—Chairman and CEO
Michael J. Sullivan—EVP and CFO
Analysts
Brian Karimzad—Goldman Sachs
Robert Riggs—William Blair and Company
Jonathan Maietta—Needham and Company
William Sutherland—Boenning and Scattergood
Daniel Leben—Robert W. Baird
Kelly Flynn—Credit Suisse
Suzanne Stein—Morgan Stanley
William Warmington—Raymond James
David Lewis—JPMorgan
Peter Appert—Piper Jaffray
Operator
Good day ladies and gentlemen and welcome to the first quarter 2011 IHS Inc. Earnings Conference call. (Operator Instructions) I would now like to turn the call over to your host for today, Mr. Andy Schulz, Vice President Investor Relations. Please proceed Mr. Schulz.
Andy Schulz
Thanks Jeff. Good afternoon and thank you for joining us for the IHS first quarter 2011 Earnings Conference Call. We issued our earnings release about one hour ago. If you do not have the release that we issued today, you will find a copy 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, net pension expense, gains and losses on sales of assets and other items. Our earnings release includes both our GAAP-based income statement and statement of cash flows and reconciliations to the non-GAAP measures discussed during this call.
These reconciliation schedules can also be found on our website. The non-GAAP results are a 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 copyright and 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 results 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 IHS’s filings with the SEC and on the IHS website.
With that, it is my pleasure to turn the call over to Jerry L. Stead, IHS Chairman and CEO. Jerre?
Jerre L. Stead
Thank you Andy. Good afternoon and welcome to all of our investors and to my IHS colleagues. This afternoon I’ll provide an overview of our quarterly performance, discuss IHS CERAWeek, and update you on some of our most important initiatives which will drive profitable growth for years to come. We got off to a great start to fiscal 2011. Revenue was up 23% for the first quarter. Adjusted EBITDA increased 22% for the quarter and we delivered $0.75 of adjusted EPS for the quarter; Mike will provide more details shortly.
One year ago our organic revenue growth had slowed to its lowest point since the time of our IPO. At that time we said we expected to see our organic growth rates grow and they have done just that. Within the 80% of our business that is subscription-based, organic growth rates have now increased for four consecutive quarters, and this has happened while we continued to stay focused on margins, generate significant cash flow and invest heavily for our future.
I’ll touch more on our investments in a moment. First, I’d like to thank my colleagues for their continued fine work. I’m very proud of our IHS team that continues to deliver strong results in this still difficult environment. Before I move on I do want to comment on the tragic situation in Japan. When we are faced with very difficult times such as these, we are reminded that the global market in which IHS operates is a true community, where we come together to support each other while navigating unexpected challenges and devastating hardships.
We are so grateful that all of our colleagues in Japan have been accounted for and are safe. Our thoughts and prayers are with all of the people affected by this tragedy. At this point, we do not expect much of a financial impact on our performance in 2011. Last week was the 30th IHS CERAWeekxxxxxxxxxxxxxxxxxxx—our best IHS CERAWeek conference ever. The event is the premier executive gathering for the Energy Industry and one of the top annual executive gatherings in the world.
Since much of the world’s energy infrastructure that will be needed in 2030 has yet to be built, this year’s conference focused on how the energy system will evolve to meet the needs of a growing world and the resulting multiple demands, risks and possibilities. This conference brought together an international group of industry, policy and financial leaders to speak, listen and share ideas on topical items at the top of our customer’s mind; topics like energy, security, economics, environment and supply chain.
The speakers and participants were from every corner of the globe and from many industries. We were honored this year to be joined by the Chief Executive of many many energy company as well as leaders from other industries. Speakers included; Robert Dudley, Chief Executive with BP; Andrew Gould, CEO of Schlumberger; Steve Palmer, CEO at Microsoft; Former Secretary of State, Henry Kissinger and Presidents Bill Clinton and George Bush.
The conference we enforced that our HS offerings are fundamental to our customer’s work flows and are used everyday to help our customers advance decisions that advanced the world. A great example is the CERAWeek launch of a new online subscription product for all executives with the focused on energy issues. This new web based subscription and daily alert is called IHS, Energy Executive Insider and it offers a concise morning briefing on the energy issues of the day and important business implications. It can be accessed via any internet connected device including smartphones and tablets, giving executives on demand, key industry information and analysis that they need to make critical business decisions.
Feedback received last week, confirmed we need to provide more information and insight ever faster and ever more accessible. This feedback reinforced how important it is that we continue to invest in our business.
So let me talk about some of the investments we are making starting with investments in our sales force. Last year, we expanded our sales force and our operations in key emerging markets, which is APAC, the Middle East and Latin America. This year, we’re building out our strategic account management program. You’ve heard us talk about our dams and sands and these global teams are the foundation of this program. With our largest clients, the teams consisted regional, industry and product specialist, led by our proven, strategic account sakes executive.
Currently, more than 170 of our largest clients are being served by these teams. They are great example of how we strategically sell internet account through the right channel they send the size of the customer. These accounts represent over $400 million of revenue and importantly, within these accounts, both organic growth and customer [??] is higher than our company average. Our goal is to provide the strategic approach to our largest 250 accounts by the end of 2011 into our largest 1,000 accounts by the end of 2012.
Another important investment relates to our data centers. Similar to the situation with our billing systems, we have multiple data centers. Through our multi-year initiatives that we call project Newton, we are reducing the number of our data centers from 46 to three global centers. This project is well underway and will continue through 2012. The benefits will be reduced cost in greater efficiency. Most importantly, Newton provides the platform for us to scale our business in the coming years without adding significant cost, thus, creating further margin potential.
During the last 15 months. We’ve been investing in a complete redesign of ihs.com., our corporate website. This site is the single, largest interaction with our broad basis stake holders. The redesign will allow us to leverage millions of touch points annually with current and potential customers, the media, perspective hires, emanate targets and you, our investors. With the launch of this new website, we will take a giant step forward in several areas: Communicating our brand; positioning and capabilities; building customer relationships and conversations; enabling revenue growth and driving business leads; and leveraging usage and analytics to create business efficiencies.
We spent the past months in performance and functional testing and are now at final completion and launch. Finally, our cover Vanguard—our business transformation initiative to consolidate and standardized our sales force automation—lead to cash on all supporting systems. This program is a key enabler to support the IHS growth strategy providing improved business performance management, process efficiency and standardization in a scalable platform to support our future growth.
The Vanguard program continues to make significant progress towards replacing our multiple billing systems in general ledgers with the single global system. And we remain on track to meet our goal live date for release one in the second half of 2011. For this release, we have completed systems configuration and have kept also successfully tested our data conversion objects. We have started our test cycles as well as user acceptance and performance testing. We’re taking a phase implementation approach and we’re very being methodical in testing the complete system before we go live.
A very important part of our Vanguard program is sales force automation, which is nearing roll out completion and will resolve in sales force productivity improvements. I look forward to providing continuing updates on our progress in the coming quarters. These initiatives are just a sample of the investments we’re making this year. We’re also investing a product development and many other critical aspects of our organization. Ensuring we can deliver profitable growth in both the short and the long term as our objective.
With that, it’s a pleasure to turn the call over to Mike.
Michael J. Sullivan
Thank you Jerre. I’ll provide of an overview of our first quarter result and an update to our 2011 annual guidance. First, let’s begin with revenue. this quarter, 2011 revenue increased 23% to $295 million. The 23% of growth in revenue includes 9% of organic growth, 13% growth from acquisitions and virtually no impact from FX.
Overall, subscriptions accounted for 79% of our revenue in Q1, in the rate of organic growth, on subscriptions improved for the fourth consecutive quarter to over 8% in Q1. Relative to the non subscription part of the business, we delivered ten points of organic growth in the quarter, driven by a solid consulting performance which benefited in part from a year-over-year comparison. Importantly, all three components of the non-subscription business posted positive organic growth in the quarter. Furthermore, this is the third consecutive quarter of organic growth for our non-subscription businesses, and encouraging trend to see.
Turning to regional performance, revenue growth was broad based as America’s revenue grew 8% organically, while EMEA and APAC grew 9% and 15% respectively. Our energy domain and our subscription-based revenues were key drivers of this growth in each region.
Turning now to domain revenue, all domains grew organically with energy and environment leading the way. Energy was 41% of total revenue, and was up 11% all in for the quarter highlighting the continued overall traits of this domain across most every offering and in all three geographies.
The product Lifecycle was 35% of revenue and increased 36% for the quarter due in part to the Q4 acquisition of I Supply.
Our POP domain continues to be a very steady performer. Security was 9% of revenue, up 6% all in for the quarter. Although security is not growing as quickly as some of our other domains, the top line is healthy despite more end-market exposure to government, and the aerospace and defense industries.
Our maritime offerings are a particular strength in this domain. Environment was 7% of overall revenue, up 87% all in for the quarter due to 20% organic growth and acquisitions. The remaining 8% of overall revenue is our macro economic capabilities which were up 22% all in for the quarter.
Turning now to profit and margin, Q1 adjusted EBITDA totaled $86.5 million, up 22% versus a year ago. Our first quarter adjusted EBITDA does exclude roughly $3.3 million worth of acquisition related expenses, primarily consisting of severance and lease-hold abandonment costs of our recently-acquired assets and we have reported these costs separately in our PNL for Q1.
Recall a year ago, when we discussed certain changes to GAAP, which require us to expense acquisition-related cost versus capitalizing these costs as part of purchase price. These changes became relevant to us during the first quarter as we incur integration expenses stemming from our fourth quarter acquisitions. To be clear, prior to the changes in GAAP, these costs would all have been considered part of the underlying purchase price of the assets acquired and not charges to the P&L.
Now to margins, adjusted EBITDA margin was 29.3%, effectively flat to last year. Consistent to last year’s performance, the acquisitions we completed in Q4 suppressed margins by about 150 basis points to Q1. After adjusting for this impact, our operational margin expansion was roughly 140 basis points, right in line with the 100-150 basis points of annual margin expansion to which we have consistently guided. And, while we’re making progress on raising the margins of our recent acquisitions, we do expect these acquisitions and the current currency environment to suppress our overall margins, although we do expect higher margins for the balance of the year.
Moving down the PNL, adjusted EPS increased 21% to $0.75 per diluted share in the first quarter up from $0.62 last year. Turning now to segment profitability. American adjusted EBITDA increased 19% to $67 million. EMEA’s adjusted EBITDA was up 20% to $20 million and APAX adjusted EBITDA grew 31% to $8 million.
The reported tax rate for the first quarter of 2011 was 20.9% compared to last year’s 26.1%. The 2011 effective tax rate reflects the benefit from a tax election made during the second quarter of last year and the positive impact to our tax rate is sustainable.
Now lets move on to the balance sheet. We ended the quarter with $252 million of cash and $298 million of debt. Deferred revenue at the end of Q1 was about $480 million which represent the year-over-year increase of $103 million or 27%. Your organic growth rate inherit in this increase was 14%. Recall of this metric is a directional and not a precise indicator of future revenue performance.
Turning to cash flow: We generated $79 million in cash flow operations and $64 million of free cash flow in Q1 up 43% and 32% respectively. On a trading 12 month basis, a ratio of free cash flow to adjusted EBITDA was 73%. Looking ahead, we expect 2011 CapEx to be approximately $40 million.
Now let’s turn to 2011 guidance. Our guidance is on a all in basis and assumes no further acquisitions, currency movement, restructuring or unanticipated event. For 2011, we expect all in revenue to increase to a range of $1.23 billion to $1.26 billion. Implicit in our four year revenue guidance is organic growth expectation of 7% to 10% and a slight lift from forex. All [??] adjusted EBITDA in a range of $378 million to $388 million which is 18% growth at the mid point.
Depreciation and amortization expense to approximately $75 million; net interest expense of roughly $7 million; stock base compensation expense to be approximately $82 million; net pension expense to be roughly $11 million; an adjusted tax rate of approximately 28% and for diluted shares to be roughly $66 million.
To wrap up, Q1 was a solid start to the year. We were able to increase the rate of top line organic growth, grow margins on a normalized basis, generate robust free cash flow and continue to invest in our future and with that let me turn the call back over to Jerry.
Jerre L. Stead
Thank you Mike. The first quarter was an excellent start to what we believe will prove to be another great year for IHS. Now we’re ready to open up the questions for Mike, Scott Key, our President and Chief Operating Officer and myself.
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen (Operator Instructions) Our first question comes from the line of Suzanne Stein with Morgan Stanley. Please proceed.
Suzanne Stein—Morgan Stanley
Hi. First question is just the revenue and the energy demand you mentioned was strong year-over-year across geography. I’m just curious, are you seeing a lot of new customers or is it more higher sales to existing customers? Where is the space really…?
Jerre L. Stead
It’s a great question, Suzy. I’ll let Scott take the credit for what I know he’s going to say, please.
Scott Key
Thanks so much for the question. We saw strength across all regions and that was buoyed by a lot of investment in our sales force as well as integrating information to new products, strengthening in our services lines as we connect information and insight to those products and customer need. So we’ve—as we’ve said and Jerre highlighted—focused on strategically managed accounts. We find these in energy all across the globe. Some of the largest energy producing regions in Latin America, emerging markets like Middle East and of course in Asia, large consumers globally.
So that strength is really driven by a focus on accounts, a focus on white space in those accounts, focus on connecting information, insight and services in our full capabilities. I would also say that it’s driven by effective cross-sell. We’ve acquired some fantastic assets, all of them critical to energy consumers and energy producers and important to their capital decisions.
Suzanne Stein—Morgan Stanley
Just one more question maybe? You talked about Vanguard and sort of where you are in terms of milestones, but can you just address where it is from a cost perspective? Is that more or less in-line with what you expected?
Jerre L. Stead
Yeah, I know that’s also a very good question. The answer is yes, very much so. You know we’ve been investing and continue to in so much infrastructure systems, it will give us the long-term sustainable profitable growth that we expect. You’ll see that, of course, Mike just gave you a guidance of about $40 million on capital this year. A little higher than normal because we usually say 2.5% to 3%, that’s on the edge of 3%. That is a fair part of Vanguard and some of the sales force automation investments I also talked about. However, we’re spending significant expense money in 2011 and we’re actually right on target under a great leadership by Todd Hyatt and his team.
Suzanne Stein—Morgan Stanley
How big of an expense is the reducing the number of datacenters; is that material?
Jerre L. Stead
The answer is twofold; yes, it is over time. Most importantly, the way to think about it is that once we’ve got that done and have those three global centers in place, you should assume that the cost that we’re currently operating with are 46 centers. It will stay at above that level and we’ll be able to grow to $2.5 to $3 billion or more revenue with very little, if any, additional cost. Secondly, and really important for us, it’ll quadruple our ability for output and input.
So good as I mentioned, good margin improvement opportunity, particularly as we scale up. We’re doing more today than ever before of providing platforms that allow us to scale up much quicker. And very critical for us—Newton and Vanguard will both—is give us the ability to integrate even quicker our acquisitions when we make them. We’ll then deliver the expected margin improvements faster with acquisitions.
Suzanne Stein—Morgan Stanley
OK, thank you.
Jerre L. Stead
Thank you.
Operator
Our next question comes from the line of Peter Appert with Piper Jaffray. Please proceed.
Peter Appert—Piper Jaffray
Thanks. So, Jerre, the first quarter margin relatively flattish year-to-year. Does that cause you to rethink at all your aspirational goal of the 35% margin for next year?
Jerre L. Stead
Not a bit. That’s a good question, Peter. But as Mike I hope did a pretty good job of, that really all in was 140 basis points if we took out the fourth quarter acquisitions.
Now, I want to use a couple examples, and I’ll ask actually Mike to add to this, as could Scott. So think back when we acquired [Janes], it’s about a 15% EBITDA business. We said we’d get it to 25% to 26% in five quarters and we did that.
This quarter, we had four acquisitions actually that we made late, late Q3, early Q4 that had, you can do the math, 150 points, we said in the fourth quarter, 100 points negative, 150 points negative impact in Q1. What you should think about is how well we do that integration. So, you’re going to see as we exit the year with those four acquisitions, somewhere between, for the acquisitions, 15 to 20 per points, 200 points of basis improvement. Because Scott and his team have it right on track. Mike, please.
Michael J. Sullivan
It’s an important point to make. First and foremost, the basket of acquisitions we did in Q4 are contributing EBITDA dollars. We just have today some margin inferiority to the near 30% that the company overall is running at. I think we’ve got a history and credibility built that we’ve been able to create value through driving margins as Jerre referenced in acquired assets. I think if you look at that basket of acquisitions in Q4, you’ve got a lot of capabilities in those businesses and assets that have helped us drive the higher rates of top line growth.
Lastly, you saw us take a charge here this quarter that really starts putting these [??] structures on a little bit better margin profile for the quarters to come.
We expect to keep finding opportunities to serve more revenue with at least similar levels of [??] in those assets and grow into the margins, and as always, keep leveraging the platform here at IHS to continue the story as well.
Jerre L. Stead
If you just think about it, Peter, and I think that Mike did a great job of explaining that, as we roll those acquisitions in place, I’m so proud of the operating team that Scott leads to be able to do that. So on a hypothetical basis, in the first quarter, those acquisitions contributed 12% to 13% EBITDA margins. They’ll exit the year double or more than that, 26% to 30%. You can just do the math and think them through, and we do those day after day.
Peter Appert—Piper Jaffray
Got it. Just as a follow-up to that, Jerre, can you give us a little color on what you’re seeing currently from an acquisitions standpoint, what we might expect from the balance of the year?
Jerre L. Stead
Yeah, I will. Very full pipeline. In a really attractive potential assets, we’re busier than we were ever been before. We look forward to seeing a successfully, concluding some of those with time. One word of caution, there has been an example of, in our belief, very, very high premiums paid some of the properties that we were not chasing but it happened. You all know how tough we are. We’ll continue to be on the discipline and patience we have. If you think about that couple of things first acquisition have to fit strategically and culturally. We got a pipeline of those to do that. Well secondly, we got to meet the financial criteria that we’ve laid out including [??] annual subscription based, overtime meeting, exceeding our EBITDA margin revenue growth margin organically, good returns from free cash flow standpoint in [??] in terms. We are going to enjoy the opportunity to bring new in assets at the continued fair value. Mike, do you want to add anything to that?
Michael J. Sullivan
No, I think, [??]. We feel busy as ever. We went to that period of time where there was a relative period of inactivity because of differential and purchase [price] expectations. We’re back to [??] pipeline robust and full strategically good things. There’s plenty there that we think we can come into terms with principles that allow a win-win situation. We can create value per shareholders. And people are happy with the prices they can attract to the assets they spend in many cases, most of their lives building and developing.
Jerre L. Stead
That’s well said. One last quick comment. As you all know, we will not play the game of auctions so we’re happy to pay full and fair value to get the kind of return to make a win-win as like Mike’s talking about.
Peter Appert—Piper Jaffray
Jerre, good. Just one more thing on the, you [start to talk] about the 79% organic growth for the year you are at the high on that range in the first quarter. Any reason to think that the organic growth might slow as the year progresses?
Jerre L. Stead
Great question. It was actually 7% to 10% that Mike said, Peter. I would use the word that we always try to think through at this early part of the year as prudence guidance.
Peter Appert—Piper Jaffray
Very good. Thank you.
Operator
Our next question comes from the line of Kelly Flynn with Credit Suisse. Please proceed Ma’am.
Kelly Flynn—Credit Suisse
Hi. Couple of questions, first relates to the margin, seems like everyone asking about the margin and they soon be moving around so much because of acquisition. I just want to be clear. Were your expenses any higher than you expected and also were there any one off the expenses in the quarter expect would not occur as we progress to the year?
Jerre L. Stead
Good question. Mike?
Michael J. Sullivan
I get the last piece first, Kelly. There weren’t any one time expenses. We don’t expect to [yield] occur if you are modeling the actual cost base [??] conference in Q2 that have some dedicated investment in sales and marketing for the CERAWeek event. But in Q1 it was a cost structure that largely is with us and is structural. I think we’re doing a nice job. You heard a lot of Jerry’s discussion today talk about the element of investment and really funding three or four fairly significant initiatives through our company right now. We’re trying to as always to balance the future of the business with the margin delivery to shareholders.
As a matter of fact it’s easier to do that on the billion two of revenue that is our base business. And we buy company and assets that are good add-ons. At times they dilute margins for the near term. So we think we’re bringing a lot transparency by isolating out the effect of the near term acquisitions. On the one hand we don’t like to see them pull margins down. But on the other hand these tend to be the kind of assets where we’re able to create the most value for the future.
Jerre L. Stead
And just one quick comment to the first part of your question where you run a pretty darn tight ship on budgets and there was no exceptions or surprises. In fact I would say Scott’s first full quarter as Chief Operating Officer if there were any surprises it was good cost control, not surprises.
Kelly Flynn—Credit Suisse
Sorry, sorry about that. I muted my phone by mistake. Relative to Q4 were the investments you talked about a source of incremental income statements expense basically? I’m trying to figure out what you guys layered on vs. Q4 in expenses.
Michael J. Sullivan
Yes, if you walk across sequentially I think you would see increases in cost structures. And those increases tend to come from three different sources. We buy companies that have cost structures that become ours. We have a little bit of currency pressure on cost pushing revenue up at least as much but pushing some of the cost structures up as well. And third we’ve got organic sequential growth. You know we’re largely a people and technology business. Our people cost do tend to want to grow sequentially at merit rates and things of that sort. So there’s those types of things that are constantly in our cost structure that we manage sequential growth. But yes, we do have some sequential organic growth in the sales and marketing and G&A cost structures of the company.
Jerre L. Stead
Can I just add one comment to that? As you remember when I mentioned the work we’re doing with IChest [SP].com as you would expect as you get ready to ramp things up like that there are incremental expense costs that once we get it coming and going we’ll either invest elsewhere or deliver increased margins.
Kelly Flynn—Credit Suisse
OK. And I just have a couple of more quick ones. With the tax rate it was lower than I was modeling. Can you explain that?
Michael J. Sullivan
Yes, I can. First of all just be informed that there is the gap tax rate we refer to here, the 20.9% and the adjusted tax rate that effectively gets applied to our adjusted EBITDA is six or seven points higher than that. It’s running about 27% for the quarter; we guided to 27% to 28%. The tax rate is better than it was last year. We finished last year just a smidge under 24% on a GAAP basis and we’re obviously projecting a full year GAAP rate more in the 21% to 22% range for this year. So we do have better tax rates that we expect for the year. We’ve referenced one particular item, a structure that we put in place relative to the funding of our non-US acquisitions in the middle of last year, that will get a full year of benefit out of this year and we had a happier benefit out of last year. The most important thing about that is it’s a sustainable position. So there is nothing about the tax rate in this quarter that reflects discrete quarter benefit. It’s a good sustainable estimate for both the GAAP and the adjusted rate.
Kelly Flynn—Credit Suisse
OK, great; and then finally on the non-subscription revenue. Can you give the organic growth rates for the consulting and the transaction areas?
Jerre L. Stead
It was 10% overall. We haven’t provided in the script or in the details of the exact. Andy is flipping quickly to the back of the earnings release, he’s got some…
Kelly Flynn—Credit Suisse
Oh is it in there?
Andy Schulz
Yeah, it’s on page 8. Subscription was 8%, consulting was 14% organic, transaction 7% organic and other 10% organic.
Kelly Flynn—Credit Suisse
Sorry, that was a rookie question.
Jerre L. Stead
Oh, it’s okay. We’re glad you’re back. Let me just say though that let’s all focus on 80% of the business which is the annual subscription base. I think we’ve done ourselves a bit of injustice by splitting out 18 to 19% and [inadible] some detail. So we’ll provide it because we always have, but make sure that we all focus on that great deferred revenue in our backlog in the efforts, because most of growth we’re going to see with Scott and his team as he exits this year—with the 250 account managed organizations and 1,000 next year—that will stay at the 78% to 80% annual subscription base. We’ll keep the others humming and matching over time the growth rates organically of the subscription base.
Kelly Flynn—Credit Suisse
Sounds good. Thanks a lot.
Operator
Our next question comes from the line of Bill Sutherland with Boenning & Scattergood. Please proceed.
Bill Sutherland—Boenning and Scattergood
Thanks for taking the questions guys. Wondering if I could get a little more color on what’s happening in the aerospace vertical as you get just sort of feel from the sales force et cetera, as to how the clients are talking about their plans and how that may impact your business there?
Jerre L. Stead
Yeah, good question, Bill—Scott let her rip.
Scott Key
Yeah, thanks Bill. Interesting we talked as Mike presented slightly slower organic growth rates when we talk about government and aerospace and defense. What we’re seeing globally—and I think we’re all reading in the papers everyday—is governments managing their budgets. Of course there is a portion of aerospace and defense primes who are highly dependent on that spend. So that is a headwind for our business.
We’re also seeing opportunities though where governments themselves are shifting from large capital programs, hardware platforms to a more nimble and a different set of unilateral threats, which is around information, strategic management of the globe. That’s actually creating opportunities for us for growth that’s offsetting some of those headwinds and it’s an uncertain environment right now, so we continue to manage very well.
We’re managing our account teams to bring a combination of capabilities to the aerospace and defense market. To give an example, we just brought iSuppli in, significant element of planning around supply chains and electronic components, our fair play offerings and in shipping critical to security aerospace and defense globally. Strong growth there and also as we focus on heavy asset industries, our environment tools and solutions, environmental health, safety and sustainability are key as they start managing those assets and are part of the heavy emitter markets. So we are seeing headwinds in some areas. We’re reacting quickly, still seeing positive growth and working it every day.
Bill Sutherland—Boenning and Scattergood
Great. Thanks for that color. One more if I could. As you get the same kind of feedback related to the natural gas clients, what does that feel like on a go-forward basis? Is there a sense of stability or actual improvement now?
Jerre L. Stead
Bill, a very good question and Scott will respond, but let’s make sure we do it on a global basis because last week it was the single most talked about subject at the CERAWeek conference.
Scott Key
Yeah, and I know you’re referring to relatively depressed natural gas prices here in North America, which have a number of natural gas investors and producers struggling with conventional assets. Now that same low price environment is a boon for those in oil sands who see that as feedstock and critical to investments in growth in the northern parts of North America.
But Jerre’s right, it’s a dynamic global gas environment and in fact for IHS as we think about the outlook, significant transformation in reserves space through tight shales, tight reservoir gas production actually adding orders of magnitude to U.S. reserves in Europe, in China. We’re launching a suite of new products around unconventionals that is . . . we’ll see hundreds of billions of investment in transactions globally; investment by the Chinese on a global basis, investment by U.S. companies internationally to take advantage.
So we’re actually have launched a series of new products, reorganized our teams to take advantage of that seeing really strong growth there. That’s also what natural gas producers in the U.S. environment are responding too as well and looking at their opportunities in these new plays.
Bill Sutherland—Boenning and Scattergood
Great. Thanks again Scott.
Operator
Our next question comes from the line of Michael Melz with J.P. Morgan. Please proceed sir.
David Lewis—JPMorgan
Hey guys, good afternoon. It’s Dave Lewis for Mike. Hey Mike, I just want to ask a quick question on the list in the revenue guidance. I think there’s a swing there in currency. Was that the primary contribution to the modest lift in 2011 guidance?
Michael J. Sullivan
Well I think it’s all due to two things, Dave. You saw us bring the bottom end of the range up, and you saw us well the whole range up you saw tightened guidance. So we were at 6 to 10 organic. Now we’re at 7 to 10. So I think we’re acknowledging that we don’t think the year’s going to develop to a 6 point year for organic. So we further clarified organic to the higher end of the previous range. And we acknowledge a little bit of lift we’re going to get from Four X which did help bring the top end up above the previous top gun.
David Lewis—JPMorgan
Thanks Mike. And then last one I know Scott addressed the oil price question last call and that you guys run a diversified energy business and customers have a long term focus. But just curious to follow-up do you see any change in the business from higher oil prices coming out of Sarawi [sp]?
Michael J. Sullivan
Interesting and again it’s something we address often. Energy is important to us inside the energy industry and all those energy consumers. Our core customers across many industries are focused on energy and energy costs. We had Jeff Smeisic, CEO of Continental United at Sarawi and it was interesting. He told us essentially that his business is not the airplane business it’s the energy commodity business. He’s one of the largest single users of energy in the world. So we provide information around changing markets and market volatility. You know when prices get really tight and margins get squeezed and energy customers themselves are really worried about their cost structures we see some pressure on price increases and other things. On the converse when things move people need information. Rapidly changing markets mean rapid need for information and that’s always good for our business. Whether it’s moving up or moving down. So we see an interesting environment with a lot of disruption internationally but all of that and we’re helping customers wade through.
David Lewis—JPMorgan
Thanks Scott.
Michael J. Sullivan
Thank you.
Operator
Our next question comes from the line of Bill Warmington with Raymond James. Please proceed.
Bill Warmington—Raymond James
Good afternoon everyone.
Jerre L. Stead
Hi Bill. How are you?
Bill Warmington—Raymond James
All right, thank you. I wanted to ask you delivered some impressive organic growth and I wanted to ask about the sales force compensation structure as it relates to the organic growth and cross selling.
Jerre L. Stead
Yes, I’ll start that and absolutely have Scott add some color. As a reminder to everybody in 2010 we reduced from dozens of programs for our field sales to three. And actually turned out to be very successful. A very important part of that was significant opportunity on commissions for cross selling as well as value or price realization. And this year we’ve kept the same program in place. We look forward to doing that next year. One thing we’ve done this year is we provided a quarterly true-up for all of our sales folks and giving them the opportunity to sell ever more on a cross selling basis.
So the commission programs that are now into year two are clearly having an impact. If you think about a major change like we did last year, I was and I think I speak for Mike, Scott, myself everybody; we were very pleased with that big a change, with the results we ended up with. It’s really year two and three that when commission changes kick in that we start to see in it. You should give some color on it, Scott.
Scott Key
Yes, a very focused and directed incentive program and as Jerre said, as we brought our sales teams together organized by industry by geography with a focus on core customers we contact and their workflows; we have incented very specific behaviors. So first, we want to be very clear about, and are built into the commission structures; a focus on discounting and removal of discounts and price uplifts; a focus on renewal rates and cancellation reduction; a significant focus with very targeted and well defined incentives around cross sell so we can take advantage of this great set of assets that we continue to add to all the time.
The other thing that we do and ensure the teams are delivering, it ties with organic growth. We incent them on an annual basis and we incent them on a quarterly basis. We insure that there are significant incentives when they hit homeruns. So when they drive above our plan, we incent them to that both quarterly and annually and again then reward them well when cross sell works.
So we feel good about the programs we have in place to drive ever increasing growth and rewarding our sales team while when they do it.
Michael J. Sullivan
One thing I’d just add to that. We also have in place for all of us that are on annual bonus program, a kicker in place on organic growth. We’ve done that to make sure we give everyone a clear focus on supporting our field sales organizations for organic growth.
Bill Warmington—Raymond James
One question for you then on Vanguard, just wanted to ask whether on the ERP side, whether that was still on track to go live in second half of 2011? And on the SFA side, whether the things were on track to transfer over the remaining 15% of the sales force?
Jerre L. Stead
The answer to the first part of that question is absolutely on track. Feel very good about that, second half of 2011. Feel very good—I actually am a 100% current on that—with the SFA program because I just talked, and so did you Scott, Todd Hyatt, who is doing such a great job leading our Vanguard SFA effort, and the answer is yes, we’re very much on track.
I’ll give you just one example: one of our top sales VPs told me last week when we wrapped up CERAWeek, because of having SFA now, Burt is tracking everyone of the potential agreements or additions that got started during CERAWeek on our SFA, and has assigned those times, dates and responsibilities. I can tell you, or Scott could, prior to SFA this year, that would have been notes in the back pocket or spreadsheets or e-mails; so a massive step forward.
Scott Key
We’re an inch away from 100% rollout as well.
Jerre L. Stead
Yeah.
Bill Warmington—Raymond James
Well thank you very much for the color.
Operator
Our next question comes from the line of Dan Leben with Robert W. Baird. Please proceed.
Daniel Leben—Robert W. Baird
Great. Thank you. First can you just talk about what some of the opportunity is, in terms of give us some clarification of magnitude within legacy pricing, any opportunities there as this new sales compensation has come in place?
Jerre L. Stead
Happy to do it. Scott, let her rip, you live that every day.
Scott Key
As you know we talked about many quarters we put a very structured program in to address pricing across every portion, every one of our domains and every area of pricing on subscription and non-subscription products. We started a year ago, focused on the big areas of business and the large subscription products, so in energy and in product life-cycle. So through that analytics both on discount levels, the efficiency and consistency of our pricing frameworks, and then gaps and near-term and long-term growth in our pricing effectiveness; we’re implementing those this year.
So many started actually being implemented in the latter parts of last year in Q3 and Q4—to give you some sense for what that is—moving to a common global pricing basis for our energy information within that a measurement and assessment of discounting, discount offer rate-card and the path to that for every single account. In product life-cycle starting with our transactional business and our retail products, looking at competition and efficiency on a global basis of those pricing structures and implementing price increases to drive those.
What you’ll see us doing this year is taking the next big piece of our revenue structure, our remaining $300 million or so in our in-site businesses and research businesses and looking for common, global effective and efficient pricing structure, so very focused on it every day.
Daniel Leben—Robert W. Baird
If you could just help give us a magnitude of what that would mean to the business if you were able to get everything up to a common list pricing?
Jerre L. Stead
A lot. Go ahead, Scott.
Scott Key
Well, we’ve sized it in the past. The size of the opportunity for us over the long run as we look at discount ineffectiveness is between $100 and $200 million, so you can think about the 10% to 20% over a period of years of our total revenue base. Now we’re in the process of whether that is realizable and over what time frames, but we’ve talked about two to three points of growth around pricing discount management and price realization, value realization, and we’ll see that this year and for many years to come just in efficiency and effectiveness.
Daniel Leben—Robert W. Baird
Great. And then last one for me, just on Project Newton, could you give us a sense of are the investments for that already flowing through the P&L or is this more of a CapEx situation where we’ll start seeing the D&A roll through in 2012?
Jerre L. Stead
A great question, actually very little CapEx. This is pay-as-you-go expense base and it’s right . . . Mike?
Michael J. Sullivan
Yeah, I think most of the investments that Jerre referenced, they all share lots of these common features where they’re all about building the leverageable platform to support scale on a larger business, and they all are leading to P&L charges today that will lead to P&L savings tomorrow. Now, tomorrow isn’t tomorrow; it will be few quarters out in some cases a couple of years out, but really just absolute enablers to the growth that we’re aspiring to see here over the next several years, and we clearly are funding these expenses in the current P&L, Dan.
Daniel Leben—Robert W. Baird
Great. Thanks guys.
Operator
Our next question comes from the line of Robert Riggs with William Blair and Company. Please proceed.
Robert Riggs—William Blair and Company
Hi and thanks for taking my question. Just real quick, in terms of the length of the sales cycle for the core 80% of the business that is subscription. I know it’s really tough to split out the benefit from the economy and the things that you talked about with sales force automation and the focus on the gams and the sams, but can you just provide a general sense what that’s done to the length of the sales cycle? Is it going from 15 months down to 12, any detail there?
Jerre L. Stead
Well that’s a good question Rob. Scott?
Scott Key
Good question. First understand global business subscription across 16 core industries that we focus on and we of course serve customers at all ranges and scales. So in general, in information we see sales cycles in smaller companies that are measured in days and weeks all the way up to multimillion dollar deals. Sale cycles are measured weeks, months and in some cases in complex sales up to a half a year. We are seeing, as the economy has recovered and business has improved and you see it in organic growth rates, those sales cycles shrink. I’d say in some cases we saw them 30% to 40% longer in 2008, 2009. So you think about a couple of months moving to three, four and in some cases five. But we’re seeing those comeback to more normal cycles based on the market and customer that we’re focused on.
Jerre L. Stead
That’s a good question.
Robert Riggs—William Blair and Company
And maybe one just quick follow-up being cognizant that the gams and the sams, those tend to be a little larger deals. But when you’re selling—if you think about selling them a new domain as kind of a new sales, order of magnitude are those kind of half as long or is it just kind of a similar case by case situation?
Scott Key
What’s interesting, you know one of the greatest assets that IHS has is an installed and agreed contract basis terms and conditions with nearly 40,000 customers globally that are our existing customer base today. And that installed base of agreed terms and conditions for information offerings makes it very simple for us to expand across domains and add new products.
So in some cases—and that’s what enables cross sell—we are not negotiating new contracts and new terms. So they can actually be measured in the course of days. They’re additions as people look at budgets for next year, we start to work with them on what they can bring and new capabilities and it happens quite quickly.
So let’s give you an example: PLC and things like iSuppli that have come in, we measure a sales cycle for those in existing customer base measured on a week to a couple of weeks as we bring engineering, products, product design, manufacturing capabilities, those can be for an existing energy customer for example, aerospace and defense, measured in a weeks to a month. But instead of installed base to the relationship that makes [inaudible] additions quite simple.
Robert Riggs—William Blair and Company
Thanks. That’s very helpful.
Operator
Our next question comes from the line Jon Maietta with Needham & Company. Please proceed.
Jonathan Maietta—Needham and Company
Hi and thanks very much. The question that I had was around the product roadmap and the new services roadmap and as you think about allocating that investment. I was wondering if you could provide some color, Scott and Jerre, as to how you’ll allocate that investment across sort of the core legacy business and then versus some of the more recent acquisitions and maybe where will most of the heavy lifting take place?
Scott Key
Great question. Jon, you have to think about IHS as having an $800 million investment base every single year, which is every single colleague who is working on new concepts, additions to existing products and of course a core of a great set of software developers and engineers. So we’re always allocating that Jon. We spend a lot of time with prioritization, allocation of resources to our greatest opportunity. So a lot of the investment in our product roadmap is really inherent in our P&L everyday and is around allocation and capacity to the best use; and you’ll see that in the releases we announced.
At our sales meeting we said 49 days from now as CERAWeek launches, we’re going to launch a new mobile application that brings together Insight and reallocate our resources, brought teams together and 49 days later had a very successful launch. I think you need to think about our product roadmaps in those ways. When they are substantial we’ll bring additional investment beyond and above what’s in the P&L and that’s a portion of what we do, but we get a lot of investment done out of the core expense base.
Jerre L. Stead
Scott, just add to that if you would, the great work that in the last couple of years, you and Dave Carlson have done of focusing and prioritizing all of our R&D if you will, development and spending it much more productively.
Scott Key
Yeah, and it’s a great point. So it gets back to this idea of effective capacity planning. So we think about all of the acquisitions we’ve made, we could have 70 development teams globally pursuing 8 to 10 to 15 to 20 projects each. We operate now as a single . . . it’s this idea of functional scale; we do it in all parts of our business. In development, we take 300 or so developer base and we think about the 10 to 15 most important projects that we put most resources against. So it’s really a very and effective and efficient utilization to the greatest opportunities and that is something we’ve developed just over the last three to four quarters and is in place now.
Jonathan Maietta—Needham and Company
That’s helpful. Thanks very much.
Operator
Our next question comes from the line of Brian Karimzad with Goldman Sachs. Please proceed.
Brian Karimzad—Goldman Sachs
Hi there. Well I guess related to products, but also using the acquisitions for value creation. It’s done like a CERA, you heard some feedback from your customers that they may want some things that are maybe more timely and maybe do a better job of tying things together. You launched the Energy Newsletter Subscription service during the week and I have been receiving and looking at it. It’s nice, and it works well for an energy executive, but it seems very energy-focused and where it’s drawing its content from.
I happen to receive [Stat Forum] not to put names out there or anything like that, but that’s just kind of an interesting example because it seems to combine the elements of energy, security, economics that all influence geopolitics in a pretty pithy and time sensitive fashion. You guys have [inaudible], global insight all under the roof for quite some time now and I’m curious where is there in the prioritization for products that really, truly tie together all of IHS and not just within the domains.
Jerre L. Stead
Well, Brian, you’re comparing apples and oranges for openers and I want to make sure everybody in the hall is clear with that. We’re giving a daily update today on that product that you’re looking at. We’ve been doing what you’re talking about with the other name for years. In all the other businesses that we provide we give daily, hourly, weekly, and monthly updates in 182 vertical markets in 204 countries by the hour, by the day. You’re welcome to subscribe to those and then we’ll talk about it on the next quarter call but Scott you please pick up on it.
Scott Key
Thanks for the question because it’s an example of a very targeted release of a very specific value proposition. As Jerre said as we’ve integrated we’ve brought teams together so we have a single security and country intelligence team that integrates all aspects of what was part of [James Fairplay, Global Insight] to bring a single country intelligence and security view. That’s a product that has been in the market for some time for our customers. We’ve also brought together economics with aerospace and defense, energy, automotive to a global scenario but it actually has an umbrella of global macroeconomics that then drives down to every vertical (inaudible) global integrated team of economics and industry experts.
Interestingly, and what you’ll see, is it’s all about scale and connecting capabilities to new value, and you pointed that out. We’re doing that everyday as we realize the benefits of scaling our organization and transforming to a functional organization tied to our customers. What you’ll start to see is our product is at the core of that. We have five functional areas that represent our core customers that we’ve talked about. Strategy planning, environmental health safety and sustainability, energy, technical product design and engineering, and of course supply chain.
We’re bringing all of our assets together to common products to serve those customers. That’s what you’ll see (inaudible) is tied to strategy and planning. Where, to your point, we actually bring together everything a strategy planner or analyst would need across all of our capabilities tied directly to their work flow. We’re start with energy then on to aerospace and defense and automotive. We’re doing those things, have been as we’ve transformed the company, and you’ll continually see us releasing products around those areas.
One last thing, realize that our product teams are also organized that way. They’re not organized by product, they’re organized by work flow. We completed that as of December 1st, 2010. What that enables us to do is exactly as you said, combine our capability in a series of releases of new products and offerings. And you’ll see those over the next six to eight quarters.
Brian Karimzad—Goldman Sachs
OK. And you’ll tend to brand things a bit more IHS centrally, because the way a lot of it is now, it still tends to be, ‘How is legacy,’ where it had been with the core domains, but as you go in across that sort of thing you’re trying to bubble some things up, I’m assuming?
Scott Key
Significant investments in brand and again, those legacy brands don’t exist as organizations and you’ll see ISH out in front of every single one of them. Of course, teams organized now to bring the power of IHS, all of our assets and acquisitions, to single products and work-close solutions. So, for sure, that’s what you’ll see.
Brian Karimzad—Goldman Sachs
OK. Thanks.
Andy Schulz
Thank you.
Jerre L. Stead
We’ll wrap up now with just a couple comments by me and then turn it over to Andy. If you think about the themes we’re talking about today, we are now at a point where our investments are providing scale for the future. We use to play catch-up and responsiveness we are now making investments that allow us to double, or triple, our growth in the future with the same platform. So it’s a really big deal. I’m very proud of that. And finally, you’ll find it on our website. When Andy? Now!
Andy Schulz
Folks have been very interested in the relationship to our deferred revenue organic growth rate relative to the performance of these subscription-based organic growths.
We’ve gone ahead and posted to our website, underneath investor relations in the non-GAAP financial section of the Menu on the left-hand side, a chart that has this relationship—the actual reported growth rates for each of those two metrics going back by quarter to Q1 of 2007. We’re hopeful you’ll find that of assistance.
And, thank you very much for the questions and support. We look forward to seeing you all at our Investor Day, which is May 4th. As Scott was telling you, we’ll give you some more fun views with where we’re at and where we’re going for years to come.
Thanks very much for your interest in IHS and your time and attention beyond the call. This call can be accessed via replay at 888-286-8010. For international dialing it’s 617-801-6888. Pass code: 52246477. Beginning in about two hours, I’m running through March 24. In addition, the webcast will be archived for one year on our website at IHS.com. And as always, you can contact IHS Investor Relations with any follow-up questions. We can be reached at 303-397-2969. Thank you.
Operator
Ladies and gentlemen, that concludes today’s conference. And thank you for your participation. You may now disconnect. Have a wonderful day.
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