Maxar Technologies Inc.
Q4 2007 Earnings Call Transcript

Published: 28 Feb 2008

[Operator:]

Good afternoon ladies and gentlemen. Welcome to MDA’s preliminary fourth quarter 2007 results conference call. This conference call may contain statements that are forward-looking and subject to risks, uncertainty and assumptions. The results or events predicted in the forward-looking statements may differ materially from actual results or events. MDA assumes no obligation to publically update or revise its forward-looking statements even in experience or future changes make it clear that any projected result expressed or implied here in do not materialize. For a description of risks that could actual results or events to differ materially from current expectations please refer to MDA’s most updated management discussion and analysts. I would not like to turn the meeting over to Mr. Dan Freeman, President and CEO. Please go ahead Mr. Freeman.

[Daniel E. Friedmann:]

Good afternoon ladies and gentlemen and thank you for joining us today for MDA’s preliminary unaudited fourth quarter 2007 and year end 2007 conference call. With me is Anil Wirasekara our Chief Financial Officer. Due to the announced transaction whereby we are selling our information systems and our Geospatial Services operation, our fourth quarter 2007 and year end audited financial results have been delayed until March 26th. Rather than waiting until then to have this call we decided to stick with our regular schedule and provide you with the best information we have at this point. Anil and I will be covering preliminary unaudited 2007 MDA financial statements preliminary unaudited MDA post transaction pro forma financial information and North America products update and United Kingdom product update and a short update on our pending transactions. In late March we realized the audited financial statements for 2007. Anil will now take you through the preliminary unaudited financials by referring to a power point presentation that can be accessed on the MDA website. After his presentation I will take you through the other topics and then we’ll open the line to your questions.

[Anil Wirasekara:]

Good afternoon ladies and gentlemen. As Dan mentioned there are a few charts on our website in a power point presentation I will be referring to these charts as I proceed. So if you haven’t got them please feel free to go to our website and pull those charts up. I’m very pleased to provide you with of outlook for MDA’s expected financial results for the fourth quarter 2007 and our year end 2007. Please note that the financial information provided are unaudited. We will be releasing our audited financial statements on the 26th of March 2008. The financial information labeled pulse transaction is pro forma to represent MDA’s forced transaction business going forward. Despite the slowdown in the property and lending markets in both the US and the UK in 2007 I’m very pleased to report that MDA has continued to extend its long standing record of growth and profitability. The yearend 31st December 2007 MDA’s revenue are expected to increase by $152 million or 14% over 2006 reaching $1.2 billion. MDA’s net earnings for the year is also expected to increase by 14% to $95 million or $2.18 per diluted common share. The growth in our revenues and earnings in 2007 is reflected of the robustness and diversity of our business. I will now discuss the preliminary results of our year end 2007 in greater detail and then discuss the fourth quarter results. Results of the year; consolidated revenues for 2007 is expected to be $1.2 billion, an increase of $152 million over 2006. On a segmented basis, information products revenue for the year is expected to increase by an impressive 23% to $845 million up from $686 million reported a year ago. This represents approximately 70% of our consolidated revenues for the year. Operating EBITDA for the products business was $130 million versus $115 million in 2006. Information systems revenue I expected it to be $359 million compared to $367 million for the prior year accounting for 30% of consolidated revenue. EBITDA for our systems business was $75 million for 2007 versus $66 million in 2006. If you look at Chart One of our financial information charts available on our website. These provides a further breakdown of our revenues and is consistent with revenues related to our announced sale of our systems business and the MDA post transactions go forward business. You will not from the chart for year end 2007 that our systems business revenue for the year was $259 versus $367 in 2006. The Geospatial services business revenue for the year was $72 million versus $73 million in 2006. These two businesses the systems business referred to in the chart and the Geospatial services business referred to in the chart will be included in the transaction with ADK. Property information revenue for the year was $773 million or $613 million in 2006. This will be the MDA go forward post transaction business. The annual effective global income tax rate for 2007 was 27%. The effective income tax rate was lower than the Canadian corporate statutory income tax rate of 34% and our 2006 rate of 29%. Backlog on the 31st of December 2007 was $641 million. Long term debt on the 31st of December was $377 million resulting in a debt to operating EBITDA of less than two times. The company has to date repurchased approximately $60 million of MDA shares by the NCIB. Shares outstanding as of December 2007 were 40.8 million versus 41.2 million at December 2006. On a diluted basis shares outstanding as of December 2007 was 43.6 million versus 42.8 million in December 2006. I will now discuss the expected results for the fourth quarter. In the fourth quarter consolidated revenues are expected to be $294 million compared to $288 million in 2006. Net earnings in the fourth quarter is expected to be $30 million compared to $22 million in 2006. Diluted net earnings for common share in 2007 is expected to be $0.70 for the fourth quarter compared to $0.51 in the fourth quarter of 2006. On a segmented basis revenues for our information products business is expected to be $203 million an operating EBITDA of $34 million. This compares to revenue of $207 million an operating EBITDA of $34 million in 2006. Our information systems revenues are expected to be $91 million and EBITDA of $37 million compared to revenues of $80 million and EBIDA of $15 million in 2006. Also in chart one you will see a further breakdown of revenue for the fourth quarter similar to the one that we have for year end. During the fourth quarter MDA completed a major phase of the RADARSAT-2 program with the launch employment of the RADARSAT-2 satellite in mid December 2007. The launch and deployment was an outstanding success and more importantly was completed within our revised schedule and budget. The fourth quarter financial results represent the successful close out of the construction phase of the program. As the result all risks and costs related to the construction phase of this program have now been retired. Also in the fourth quarter HIP in England and Wales became a reality with the roll out to include all properties in England and Wales. HIP related expenses in the fourth quarter were lower than in the previous quarters. It is important however to note that many start-up and roll out expenses will flow into 2008. Also due in the fourth quarter our lender services business in the US finalized a transaction with one of our customers for increase in scope from the use of our data. The resulting revenues in margin were all recognized during the fourth quarter. I will now discuss some pro forma financial information related to our forced transactions business. Quarterly 2007 information for MDA’s post transaction business is presented in Chart Two. So in Chart Two we have presented the post transaction business of MDA on a go forward basis on a quarterly basis for 2007. As you can see revenues in North America have been consistent across the quarters at approximately $60 million a year. This is despite a softening of the market in the second half of 2007. Our operating EBITDA as well continued to grow from the first quarter to the fourth quarter despite an increase in the exchange rate used to convert these from US into Canadian whereas in the first quarter the Canadian dollar was worth $1.17 times and in the fourth quarter it was worth .98 times. So the increase in Canadian dollar had slightly material impact on both the revenues as well as on our earnings going from the first quarter to the fourth quarter. Another important point to note is that we managed to sustain our margins consistently over the fourth quarter. The fourth quarter numbers do include the completion of the transaction that I referred to earlier, where all the revenues and the margins of that transaction approximately $5 million of revenue at a 50% margin was booked all in the fourth quarter. So the fourth quarter does include the transaction that I referred to earlier and that’s in the North America business. Going into our UK and European business you would note that our fourth quarter revenues were about $20 million lower than the average of the previous three quarters and there are a couple of reason for that one, is exchange rate once again where the Canadian dollar decreased from 2.29 in the first quarter to 2.01 in the fourth quarter and that impacted the fourth quarter results by about one third of the difference so about $7 million or $8 million was a result of just foreign exchange. Some of the others issues to note that happened in the fourth quarter, as you may recall in our last conference call we said that there was a trend of some of our searches moving from CON29 searches to personal searches and in this context there’s a reduction in revenue but not so much a reduction in margin. So there was a decrease in our revenues but not a decrease in our margins and as you note our margins in the UK, our operating EBITDA in the UK is pretty consistent over the four quarters and the decline in the fourth quarter over the average off the previous three quarters is not as significant as it was on the revenue side. So one of the reasons is foreign exchange, certainly accounted for about one third. The other was the shift from CON29 searches into personal searches that impacted revenue but not so much the margin. On our lender services business our evaluation business there was a decrease in mortgage activity. However, that was to a certain extent offset by increase in our EPC activity within this business so that offset the margin but not so much the revenue. The other thing you need to note that in the fourth quarter pretty much half of December, the second half of December the UK shuts down and that has a slowdown in the fourth quarter when you compare it to the other three quarters. So those are some of our observations when you look at the four quarters in 2007. If you look at Chart Number Three, now in Chart Number Three what we try to do here is present to you the trends, the annual trends in the business from 2004 to 2007 both broken up between North America and the UK and Europe. In the North American business you would note that our revenue moved from $176 in 2004 to $254 in 2008. A slow but steady growth in both our revenues as well as our margins and part of that is deliberate as we spent most of our energy and most of our time concentrating on growing our UK business during that period. We’ve maintained steady margins during this period and if you look at even the percentage margins right across from 2004 to 2007 that has been very consistent year-over-year. The UK on the other hand has been certainly the growth end of the business growing from $146 to $507 million between 2004 and 2007 and our margins going from $9 million in 2004 to almost $55 million in 2007. And the other important thing to note there is percentage of margin going up from 6% to almost 11% in 2007 and when you look at margins as a percentage what is important to note especially in the UK that the margin increase has happened despite having to recognize many flow through costs on many of our products which increases our gross revenue. On a combined basis when you combine North America and UK our post transaction business going forward revenue was $762 in 2007 and that’s grown from $322 in 2004 and a combined EBITDA is $119 million in 2007 up from $52 million in 2004. I have also shown that the HIP expenses for both 2006 and 2007 as you know we expensed all HIPS related expenses. All startup expenses have been expensed $3.6 million in 2006 and $12.9 million or $13 million in 2007. You will also note in the fourth quarter of 2007 we generated about $10 million of HIPS related revenues. Capital assets amortization and total amortization has increased from $13.3 million 2004 to almost $22 million n 2007. We have broken this down between amortization or depreciation of capital assets versus depreciation or amortization of acquired tangibles and those are intangibles that have been acquired as a result of business combination or M&A activity and these that are amortized do not have to be replaced at the end of its use for life and you can see that that consistently coming down are mostly from 2006 to 2007 or from 2005 down to 2007. That as a result of most of these transactions becoming fully amortized as we move forward. So that gives you some color as to what the pro forma MDA post transaction business is going to look like both from a 2007 quarterly standpoint as well as from an annual trend standpoint. So in closing you know once again I’m very pleased with our financial performance across all of our businesses in 2007. We have worked hard to establish a solid foothold in the information products market across the British Isles and are well positioned to take advantage of the opportunities including HIP that this market will provide in the future and Dan will discuss more about this in his discussion. In the US acquisition announced today of certain lender services businesses of TransUnion significantly enhances our offshoring in the lender services business and this couple with our strong franchise in the US property insurance market we’re certainly excited about our future growth opportunities in the US as well and this is as we continue to strengthen our strategic position in each of our market sectors. Our financial resources remain very healthy and supported by extremely reliable cash flows from operations and as always we are committed to delivering excellent value to our shareholders and our customers. I will now pass you on to Dan to give you a business update.

[Daniel E. Friedmann:]

I will now provide you a brief update on MDA post transaction business. Starting with North America, our insurance related products in the United States showed continued growth in base currency revenue and earnings in 2007 despite the fact that hurricane related revenues were lower than in past years due to a more moderate hurricane season. New product introduction continued for example we recently began delivering our interchange data base into policy quoting and issuance systems for improved point of sale processing. Interchange solved an important data collection problem for our property insurance customers. Moving on to our lender services and general property information business in the United States. Although mortgage originations dropped approximately 20% in 2007 versus 2006 according to the Mortgage Broker Association statistics our revenues decline by only half that level due to a robust product mix. Furthermore, our ability to tightly manage variable cots reduced the impact on earnings even further. MDA made two strategic moves to strengthen its business in the US product sector. The company today entered into an agreement to acquire certain lender solutions businesses from TransUnion. The acquired business provides solutions that drive delays in efficiency and risk out of the residential lending cycle. It includes collateral evaluation solutions, property title search solutions, mortgage credit solutions, closing solutions and flood compliance solutions. The business generates approximately $130 million of revenue per year with approximately 450 employees. The company also entered earlier a strategic partnership with US based ValueScape, an emerging leader of alternative property evaluation solutions. ValueScape offers a range of property evaluation services including a unique product that combines the advantages of validated tools and techniques using automated evaluation models with the expertise of a professional appraiser to better judge each individual situation. These two moves increased our lender customer base and round out our capability as full service provider of residential property information solutions to lenders in the United States. Our PC online operation continued at steady growth in both revenues and earnings in 2007 due to the increasing adoption of new products and an ongoing strong housing market in British Columbia. Looking now at the United Kingdom; market activity indicates that over the second half of 2007 home listing as well as mortgage originations in England and Wales were down approximately 15% when compared to the prior three year average for the same period. Although in our evaluation business this market down draft caused reduced revenues from the minority subset of our customers relying on mortgage backed securities our overall revenues and earnings for this business were robust due to the addition of new customers, the increased adoption of our other products like the Conveyancing Portal and the successful introduction of our Energy Performance Certificate Exchange product in the second half of 2007 in conjunction with home information packs. Looking at our search business in England and Wales our search revenues reached an all time high in the first half of 2007 due to a growing market share and a robust market. In the second half however revenues dropped back as a result of the overall market decline in this period as mentioned earlier. Starting in the New Year in addition to market fluctuations we’re continuing to experience a shift from electronic to personal searches as a result of the HIP market taking hold. Combined analysts or electronic searches and personal search volumes are running today at 9,200 search sets per week comprised of approximately 6,500 house searches the rest being personal searches. This 9,200 compares to total searches last year of 9,600 of which 8,600 were house searches. In addition MDA has renewed its license for the National Land Information system for England and Wales until 2019. Although we’ve been working on this for a long time we just managed to get it signed today and this is the largest provider of official local authority, her Majesty’s Land Registry, Call Authority and Thames Water Searches and was established seven years ago as a private public partnership with investment from MDA. This renewal assures stability in the electronic supply of search information in England and Wales for the coming years and secures MDAs position as they electronic provider of official search information to the United Kingdom property search market. As show in the pro forma financials and as Anil discussed our HIP business started to gain momentum in Q4 2007 as a result of HIPS becoming mandatory for three bedroom homes and larger. In September since HIP compulsion was extended to all homes in December we have seen activity levels more or less double. The next milestone to watch for in the development of this new market are the HIPS becoming mandatory for new homes in April for which we’re comparing as we speak and the first day marketing requirements taking effect hopefully in June. In Ireland the weaker housing market there did have an effect on our search revenues. In Scotland however the effect on revenue for weaker market was partly offset once again by adding customers and by uptake of our new online products. In addition, we’re very excited that the Scottish Executive recently announced that by December 2008 home sellers will have to obtain a mandatory home report before marketing a home. This home report contains a full survey including evaluation an energy performance certificate and a property questionnaire. We have anticipated this event and our getting ready to offer this product to our very large solicitor customer base the majority of who are also estate agents. That completes our information products update. Moving on to the transaction to seller information systems and geospatial operations to ADK we can report the following

[Operator:]

We will now take questions from the telephone lines. (Operator Instructions) Our first question will be from Steve Arthur from RBC Capital Markets. Please go ahead.

[Steve Arthur:]

First off, I’d just like to elaborate a little bit more on some of the dynamics in the UK market. I understand your comments before and when we look into the forecasts over there now, seem to be numbers 15, 20, 25% decline kind of numbers in expected transaction volumes this year. I guess, is that consistent with what you’re seeing so far and what your outlook is for the year and as importantly would you expect the same kind of mitigating circumstances to lessen the impact for you this year?

[Daniel E. Friedmann:]

Yes, we are seeing data a little bit better in the fourth quarter on our trends, both in the mortgage side and the search side. So there’s no evidence of things going down further at this point. They seem to be either steady or rising. There’s very strong mitigating circumstances on the search market in that there is still a lot of homes that are closing without a HIPS from the past year and therefore ordering a search, there’s of course all the new HIPS searches that are happening and it’s too early to tell, but early indications are that a very significant number of solicitors receiving a HIPS are redoing the search which is not included in our forecast. We saw a fairly robust market almost consistent with last year’s volumes and last year was a record year in the first half despite the drop in the market. On the mortgage side, if you break down our business we get about 10% of our business from what would we would call wholesale banks which basically get mortgage back securities. That business went almost to zero in the fourth quarter and it’s remained there. However the retail banks have continued to grow unabated, there’s no evidence of a slow down at all through the first quarter and into the first half of this year. Our conveyancing porto is growing nicely, our EPC porto is growing nicely and in fact we are planning a number of e-conveyancing related products which is of course the end game for us in the UK, hopefully some of those will come out this year. We’re seeing some good trends at this point in terms of our business.

[Steve Arthur:]

$ Okay, thanks, good comments. I’m just elaborating a little bit further as well on the search business, quite a shift from endless searches over the personal searches. It said in some reports I guess over the last year that more specifically over the last month or so from DCLG about leveling the playing field in terms of the search operation, are you seeing anything from that over the next near to mid-term or shifting back towards endless or do you see this trend continuing towards personal searches or any implications for you guys there?

[Daniel E. Friedmann:]

The reality of the situation today is that 90% of searches and HIPS are personal searches. We have yet to see the reality of what people do with those HIPS but as I mentioned a minute ago, early indications are they might redo the searches. In terms of the government activity they have issued a consultation paper about a month ago which basically is very positive towards leveling the playing field which is good for endless and good for the market in general. However that is a consultation report, it has to be accepted and a lot of us are putting input into it and it has to be acted on. When and if that will happen is another story. The government I think intends to do it by the summer and that would strengthen our endless business if it did but we’re not counting on that. Our focus right now is on building up our personal search business.

[Steve Arthur:]

One final one, then I’ll pass the line. Just changing gears to the acquisition today. Any comments on just the acquisition price, the profitability of that business or any parameters around that?

[Daniel E. Friedmann:]

Yes, we paid $42 million US all cash, no earn out and it’s a very, very robust business. You have seen in the press releases the kinds of products it produces which rounds us up significantly. It includes a number of acquisitions we wish we had made over the last five years that they made that we couldn’t get ourselves to pay that value for at the time when the market was peaking. It is over 60% valuation related business which is what our main focus is in the US lender side, in the UK lender side, in Germany and soon in other places. It traditionally has some outstanding customers, the customer list was the Who’s Who of the banking industry in the United States, all names people would recognize. It has had a very strong record of profitability in past years and of course it has been in a decline in the last 18 to 24 months. We believe the business has been cut to the right size now. We’ve been working with them for the last four or five months and that 08 will be a good year for the business. It has been profitable in all the past years and we’re very confident profitability will increase much more in 09 after we work in putting this together with DataQuick and MindBox and synergizing on the cost and the customer and the offering side. So in 08 we’re going to need six to eight months to work through those issues. We will still be accretive, we will still be very profitable but in 09 we should see a significant difference in that business.

[Operator:]

Our next question will be from Paul Steep from Scotia Capital. Please go ahead.

[Paul Steep:]

Just to maybe carry on on the same vein so that we sort of close that off. Obviously you don’t want to give specific numbers but in terms of the long term, Anil or Dan, how should be think about that business in terms of sort of EBITDA, operating margin, profitability? At the same level as a regulated business is or at the same level as MSB or somewhere in the middle?

[Daniel E. Friedmann:]

I think it’s best to think about at the same level as a regulated business and the reason for that is not that it’s regulated, it’s actually a similar kind of margins to our typical US businesses like MSB in a number of product lines. However as I mentioned about 60% of its revenue is from valuations and the majority of that revenue is dollars not necessarily transactions, it’s from actual physical valuations with about 50 contractors that go out and do the valuation and that pass through cost of that because we’re not in that business itself, is very significant. So it looks more like the [inaudible] business in the UK and that reduces the percent margin over revenue but it’s very good for us because it became crystal clear all over the world that we cannot be a top player and just focus on automated valuations. Maybe in five years, but today we have to offer our customers the full suite of products, completely manual assisted manuals, we’re trying to push very hard because that’s the mood in the market and automated and we need to be a full service supplier or we will be a second tier. With this operation we become a first tier, but for the foreseeable future we have the pass through of the manual valuations which reduces the percentage margin.

[Paul Steep:]

Okay, that helps, that’s great. The last two quick ones on that and then we can leave Trans Union behind. First one would be, you’ve said it’s been cut to the right level, have we sort of stabilized at sort of the run rate revenue base where we’re at now? As best you can tell given that the market is still moving, but does that sort of feel comfortable to you or do we think we need to take the top line down a little bit more?

[Daniel E. Friedmann:]

Of course you can never predict the future, but this is a very, very good company, it has some very strong franchises and some interesting new product ideas and a lot of possibilities with DataQuick and MindBox. We believe it’s been sized to the right level as far as we can tell. We’ve talked to most of the big customers and we have their forecast of what’s going to happen and we hope that it’ll grow from here, but if the market doesn’t turn out to be near the bottom at this stage we know what to do.

[Paul Steep:]

We move on to endless, just in terms of the deal you signed today, are there any significantly new or different terms that really change the makeup financially of the deal or is it effectively an extension of what we had to date?

[Daniel E. Friedmann:]

It’s effectively an extension. We’re very excited that they UK government has continued in the spirit of the public private partnership. We believe that any changes have been more to evolve a little more power to the private side, that’s us, to make more investments as required and grow the business more and make it part of our overall plan to move to e-conveyancing eventually in the UK. But by and large it’s a renewal and it’s for the maximum extent allowed by law and we’re very excited about it.

[Paul Steep:]

And just a clarification, it was obviously related to the hub. Anything about the channels or just sort of how we should be thinking about the channels into the future that sort of has implications out of this deal?

[Daniel E. Friedmann:]

The regulator has to first of all extend the hub so it knows what’s happening. So the channels also run out in 2009 and I don’t know what the regulator’s plan is in terms of if they’re going to extend those for three years at a time or what, but they’re clearly all going to be extended more or less on the same terms, at least our channel. But that’s the next round.

[Paul Steep:]

Just timing on that? Any sense?

[Daniel E. Friedmann:]

No. We’re not to worry about that part.

[Paul Steep:]

The last one and I’ll let it go here. Anil, just on – not that the quarter matters that much, but on the $0.70 how much of the sort of one time and nature was it related to the release of the RADARSAT-2 reserves? I got $0.04 on the special one time deal that you did. How much more in terms of earnings for the reversal?

[Anil Wirasekara:]

On RADARSAT-2 it was approximately $5.5 million, but we don’t view these as one time benefits because every year we do have some material transactions that result in certain ups and downs. Most often these offset over the years. The difference in 2007 was that most of our downs, if you recall, we had a $3 or $4 million write down on HIPS in the second quarter. We had to write down our investment in the [inaudible] program and RPK the third quarter. We took a provision on RADARSAT-2 in the first quarter, so all the downs came in the first, second and third quarter. And the ups, the two ups, came in the fourth quarter which is kind of a unique thing that happened. But generally what happens is every year we have these ups and downs and they kind of even off. If you look at the upsides over the years, we had data this year, there was the California fires last year and Katrina the previous year and the tsunami the year before that and Iraq for three years here. So every year you have these things and it just kind of evens out.

[Operator:]

Our next question will be from Jeff Rath from Canaccord Adams. Please go ahead.

[Jeff Rath:]

Just a couple of questions, the first is I wonder if you could help me on the funding of the acquisition that you’ve just announced from Trans Union, what you’ve said is your divestiture will close in the second quarter, if my notes are right, the acquisition you’ve announced from Trans Union is all cash and it’ll close in the first quarter. My understanding, Anil, and this is why I’m asking the question is, your bank lines are in the process of being renegotiated as part of a new package post-divestiture. So with a bunch of moving parts there we don’t have the privilege of the year end balance sheet or cash flow statement, so I’m wondering if you could elaborate a little bit on just where the funding is coming from for this acquisition in light of a bunch of moving parts?

[Anil Wirasekara:]

Today we have about $500 million of spare facility in our existing facility and no doubt the facility expires and rolls over into a new facility when the transaction, when the system says the transaction closes. So until such time as the system says transaction closes we still have a facility and we are complying with all the covenants and that facility goes on. The facility what we will do when we close our main transaction is we will take the money from our main transaction and immediately pay off whatever is outstanding in our facility and then negotiate or sign up another facility that will provide us with additional funds over and above the cash we have to fund our business going forward.

[Jeff Rath:]

Another question if you could help me, this is the first time that you’ve given us some granular, I guess it’s first quarter if you will that you’ve recognized revenue on HIPS and there’s a staging process of various compliance and some milestones you’ve talked with us about. Can you share with us any more granularity on a couple of issues which is your transaction volumes, what you’re expecting to and ramping for in 2008 and also how you recognize revenue in that segment? Because it appears to me that there’s a number of different treatments on how you can recognize revenue based on the sources. Is it net revenue, is it gross revenue? Any details around that would be helpful.

[Anil Wirasekara:]

Okay, so why don’t I take the revenue part and Dan will take the transaction part. I would agree. The revenue is very complicated especially since we provide a lot of the content as well for these HIPS. So one of the things we have to do is in regard to when we look at HIP and if we are providing the content, then we need to make sure that eliminate all the content. There is another scenario where our customer provides the content and we compile the HIP. But the content that they provide us is purchased indirectly from us and we have to then figure out what that content is and then you’ve got to eliminate that. So when it comes to the whole inter-company elimination as far as HIPS are concerned, there are a lot of issues that we need to deal with. The second issue when it comes to HIP is we recognize revenue only once the HIP is delivered so until such time as the HIP is delivered this thing is all in inventory. In the fourth quarter of this year that was a small amount and it was negligible but as HIPS roll forward each year with all the new transactions coming in and the new houses coming in we’ve got to manage the whole thing and there will be a fair amount of inventory or work in progress on the HIPS that have not yet been delivered. So, yeah, in some cases we take it as full gross or we have to take it as full gross. Some are taken as net. It just depends on the type of transaction and what our customers want and what they supply. It’s not just a clear kind of rule, it just depends on the configuration of each transaction or each order.

[Jeff Rath:]

Now for the purposes of thinking about this business for modeling purposes, will you be breaking this out post-transaction like you’ve done I guess on Chart 3 here or will that simply be folded into the UK and Europe and how should we think about contribution margins going forward? Because presumably there’s going to be a scale element to this before margins. Should we think about this as a regulated business as far as EBITDA margins or how should we -- because you’ve provided some great segmented information that we haven’t had before. I wonder if you can give us some of the – now that you’ve got your first quarter of revenue recognition, you’ve got some better visibility on what the government’s going to do here, you’re watching the markets unfold, can you give us any more color on your expectations there?

[Anil Wirasekara:]

From a segmented standpoint going forward we will segment these things between North America and UK and Europe. I don’t believe we’re going to further break down the segmentation. We did it this way on this – as I said this is a pro forma management analysis of our business going forward. Now we may in our MB&A discuss certain analysis our products but in our financial statements, the segmentation of our financial statements at least for the time being is going to be North America and Europe, we’re not going to further segment it because you get all these rules on segmentation. I’ll let Dan take some of the other questions that had, Jeff.

[Daniel E. Friedmann:]

Let’s work from front to back. In terms of modeling I think the simplest way to think about this is that we have three different businesses that relate to the UK. We have a search business and we try to encourage as many of our searches as possible into each HIP although our customers have the right to include their own searches if they want and the search revenue is taken by the search business. If we sell a search to our self the search revenue is taken by the search business. If that’s a personal search it has a certain margin percentage. If it’s an [inaudible] search you have the more regulated margin percentage. However the margin in pounds is more or less the same. We then have an EPC business and by the way the search business supplies to 17 other HIPS suppliers other than our selves. Same with that EPC business. We have an EPC business that’s in part of [inaudible]. Again, do you know the kind of margins we do there? Because we basically have contracted all the labor out to inspectors and we handle the electronics. When you get down to the HIP business alone it is an assembly business where we assemble other pieces and therefore it has that kind of margin, but the other pieces we’re assembling in a vast majority are from MDA. So I think that’s the best way to model it. In terms of volumes and expectations I have the privileged position of being the only HIP competitor in the market that has these calls and I just have to not release this competitive information unless everybody else wants to release it to me from my competition. Until things stabilize we, are contrary to popular belief, this is a start-up operation. The government did not turn the switch on June 1, create a worldwide miracle and we jump to a million transactions and we live happily ever after as with models. This is a start-up business. The government’s turning the switch on one piece at a time. The market is responding one piece at a time. Some people are responding, some people are not responding and enforcement is still not 100% there. It is a start-up operation just like our endless operation was and it’s a very, very exciting long term business and we are focused right now on quality, service, market share, market share and market share. That’s what we’re doing and I really don’t want to release numbers, they’re changing on a daily basis. New homes are coming live. In April we run 100 HIP tests in just one day on Friday for a new customer that does new homes. New homes are a good 10% of the UK market and continue to be strong, contrary to popular belief. First day marketing is a major issue, it’s scheduled to come in on June 1. We are preparing to increase our volume because first day marketing changes the game quite a bit and we’ll get to Scotland later. But Scotland is a piece of our HIP business in Scotland. So this business is ramping up in transactions. Our product is being evolved as we get market feedback, as we adapt it to new homes which is different than existing homes and we’re just not ready to unveil every last detail about the business except that it’s exciting, it’s growing, it’s challenging and we intend to come out the top player.

[Jeff Rath:]

One last question and I’ll pass it on and it’s a follow up to Paul’s on endless. You basically articulated your view and I’m trying to understand a little bit without having the intimacy of the contract negotiations, you’ve basically said that it was renegotiated under the extent that the law could extend it and part of the rationale presumably for the government to extend it to that level would be a view that you, as a company, need to make continued investments to expand the service and then I think I’ve heard you actually use e-conveyancing as a – maybe I missed it – but for the first time as part of the hub. So have I misunderstood that? Is part of the investment that you’re making or the planned investment that roadmap here for endless renewal to go out that long, is this taking on a broader scope now to include e-conveyancing? I wonder if you can speak to that or have I simply misheard it?

[Daniel E. Friedmann:]

You haven’t misheard it but it’s two separate issues. There’s no relation between the hub and e-conveyancing. I’ll get back to that. In terms of the hub, the fundamental thing is that if we didn’t have stability in terms of that business our decision was pretty simple – abandon it and get on with personal searches and official electronic searches are history. That’s what the market is driving. By having a 10 year stability and a deal with the government and hopefully channel licenses soon we will continue to hold on to a fairly good market share and fight our way through to continue that share and hopefully increase it over time. So the market requires stability and in fact it would have been better if this had been done a year or two ago, it would have made a difference to the whole situation with HIP. Having said that, it’s done and we’re moving ahead. E-conveyancing is basically the one word summary for our business in the end. Everything we’re doing relates to some part of the housing process, prepare the HIP, get the valuation, get the EPC, do the search and so on. In the US of course we go quite a bit further. We today through the hub and our channel connect solicitors and all the key legal data in the United Kingdom. Through our valuation exchange we connect the key banks and all the key surveyors in the United Kingdom. Through our conveyings exchange we’re allowing the lawyers now to talk to the banks and to the official data. So we are building all the highways, electronic highways, that connect all the key people. And of course with HIP we connect all the estate agents into everywhere. So if you look for a company in the United Kingdom that has the largest share of the key highways, every single key electronic highway that’s required to process a conveyance, it’s MDA. In the end we will try to bring e-conveyancing forward where the paper and all this will happen automatically via computer, that’s our long term goal. At first we’re going to work on e-filing. With e-filing in British Columbia it’s growing nicely, we don’t do that in the United Kingdom. We are working on a number of other projects in the UK to facilitate interaction between the banks and the solicitors. So we’ve got the banks connected to the surveyors, we’ve got the solicitors connected to data, we don’t have the solicitor and the bank connected so they don’t know what’s going on when they’re trying to conveyance the home at the last minute. So we’re trying to put that together this year in new products and eventually we will bring that together, that’s our business plan.

[Operator:]

Our next question will be from David Mcfadgen from Comark Securities. Please go ahead.

[David Mcfadgen:]

I have a number of questions. Anil, in the presentation you have page 5, you give the HIP expense in 2007 of $12.9 million. Could you give us that by quarter because I’m just trying to reconcile the quarterly numbers with this additional disclosure that you provided and I’m just having a tough time doing it? Would you have that by quarter you could give us?

[Anil Wirasekara:]

I don’t have it with me offhand, David, but I can try and see whether we can pick that up.

[David Mcfadgen:]

Okay. So a couple other questions then. The US contract, you said you recognized this big contract all in the fourth quarter. You said it was $5 million in rev and it had a 50% margin on it. Correct?

[Anil Wirasekara:]

That’s correct.

[David Mcfadgen:]

And then in terms of the transaction that you announced today even if you assume a low EBITDA margin, let’s call it 10%, you’re still works out to say an EBITDA amount of about four times, that’s pretty low. Is the margin lower than 10?

[Anil Wirasekara:]

Well you have to – there have been years it has been 20 in the past?

[David Mcfadgen:]

Yep.

[Anil Wirasekara:]

We’re forecasting lower than 10 in 08, yes and hopefully we’ll be back at 20 one day. It’s how the market cycles.

[David Mcfadgen:]

Okay, so if you look at – what was the drop in EBITDA from 06 to 07 in that business?

[Anil Wirasekara:]

It was a division of a division of a division but it came down by about a factor of two.

[David Mcfadgen:]

So cut in half you mean?

[Anil Wirasekara:]

Yeah.

[David Mcfadgen:]

And is it a transaction based business or a subscription based business?

[Anil Wirasekara:]

It is predominantly a transaction based business as I mentioned, a good half of the business is property valuations and although we have long term contracts with the top banks in the United States those contracts, the volume that comes through depends on how many mortgages they approve. So we sell a bunch of business for example when they try to at first look at whether they’re going to do a mortgage. That business has dropped somewhat because the number of applications that come down. We sell the majority of our product at the approval point and that business of course has dropped. Although we haven’t lost any customers, in fact we’re ramping up with a very exciting large bank right now as we speak, going to have significant growths on that this year. But the other customers are approving a lot less mortgages this quarter than two years ago, so we’re dropping volume. We haven’t dropped any customers, we haven’t changed any contracts but we’re dropping volume.

[David Mcfadgen:]

And why is Trans Union selling?

[Anil Wirasekara:]

You have to ask them, but they have done a complete evalution of their business over the last couple of years. We, by the way, have been pursuing this for three years pretty steadily. They have done an evaluation of their business over the last year and a half, they’ve decided this is an excellent business but it just doesn’t fit their core business plan and they’re not going to invest in it and they’re not going to back wire other things and so on and so forth whereas we are. And therefore it makes much more sense to be housed in a company that’s very excited about the business. When the transaction was announced at 1 o’clock today the manager in charge got a standing ovation from the employees.

[David Mcfadgen:]

EBITDA was positive in 07 at this business, wasn’t it?

[Anil Wirasekara:]

Yes.

[David Mcfadgen:]

The other question I have is on endless, you announced the renewal to 2019. It’s the same terms, correct?

[Anil Wirasekara:]

Well I think I answered that question. By and large it’s the same terms, yes.

[David Mcfadgen:]

So on the hub side, it’s an exclusive. Correct?

[Anil Wirasekara:]

Correct.

[Operator:]

There are no further questions registered at this time. I’d like to turn the meeting back over to Mr. Friedmann.

[Daniel E. Friedmann:]

Okay, well thank you very much for attending and we look forward to issuing our financial statements at the end of March and then updating you at our Q2 call. Thank you. Good evening.