Epiq Systems, Inc. Announces Second Quarter 2007 Results

Epiq Systems, Inc. (NASDAQ: EPIQ) today announced results of operations for the second quarter of 2007 with operating revenue (total revenue less operating revenue from reimbursed direct costs) of $38.2 million compared to $35.1 million for the first quarter of 2007 and $94.1 million for the same period last year. June 30, 2007 year-to-date operating revenue was $73.3 million compared to $126.7 million for the prior year. The second quarter of 2006 and June 30, 2006 year-to-date revenue reflects the recognition of $60.1 million and $53.6 million, respectively, of revenue which had been previously deferred. An expanded discussion of operating revenue is provided below. Net income for the second quarter of 2007 was $1.8 million, or $0.06 per share compared to $0.2 million or $0.00 per share for the first quarter of 2007 and $36.3 million or $1.06 per share for the year ago quarter. The second quarter of 2006 reflects the recognition of $60.1 million of revenue which had been previously deferred. June 30, 2007 year-to-date net income was $1.9 million, or $0.06 per share compared to $34.5 million or $1.01 per share for the prior year. June 30, 2006 year-to-date net income reflects recognition of $53.6 million of revenue which had been previously deferred. These items are included as adjustments for the non-GAAP profit measures provided below. Second quarter 2007 net cash provided by operating activities was $6.0 million compared to $8.9 million for the first quarter of 2007 and $12.7 million for the year ago quarter. June 30, 2007 year-to-date net cash provided by operations was $14.9 million compared to $18.3 million for the prior year. A condensed consolidated cash flow statement is attached. Epiq Systems’ management also evaluates the following non-GAAP financial measures: (i) non-GAAP operating revenue (operating revenue before reimbursed direct costs adjusted to include deferred revenue accounted for under SOP 97-2, "Software Revenue Recognition,” in the period in which the services were provided and to exclude the revenue in the later period in which the deferred revenue is recognized), (ii) non-GAAP adjusted EBITDA (net income before interest/financing, taxes, depreciation, amortization, share-based compensation, and acquisition related expenses, adjusted to include deferred revenue accounted for under SOP 97-2 in the period in which the services were provided and to exclude the revenue in the later period in which it is recognized) and (iii) non-GAAP net income (net income before amortization of acquisition related intangibles, share-based compensation, acquisition-related expenses, the effect of tax adjustments which are outside of our anticipated effective tax rate, capitalized loan fee amortization, and embedded option mark-to-market expense/convertible debt accretion, adjusted to include deferred revenue accounted for under SOP 97-2 in the period in which the services were provided and to exclude the revenue in the later period in which it is recognized, all net of tax). Reconciliation statements for non-GAAP operating revenue, non-GAAP adjusted EBITDA, non-GAAP net income and non-GAAP earnings per share are attached. Non-GAAP operating revenue for the second quarter of 2007 was $38.2 million compared to $35.1 million for the first quarter of 2007 and $34.0 million for the same period last year. Non-GAAP operating revenue for the second quarter of 2006 excludes $60.1 million of revenue earned in previous periods but recognized during the quarter. June 30, 2007 year-to-date non-GAAP operating revenue was $73.3 million compared to $73.0 million for the prior year. June 30, 2006 year-to-date non-GAAP operating revenue reflects the exclusion of $53.6 million of revenue that was earned in previous periods but recognized during the year-to-date period. Second quarter 2007 non-GAAP adjusted EBITDA was $12.3 million, compared to $11.3 million for the first quarter of 2007 and $10.4 million for the year ago quarter. June 30, 2007 year-to-date non-GAAP adjusted EBITDA was $23.6 million compared to $22.8 million for the prior year. Non-GAAP net income for the second quarter of 2007 was $4.2 million or $0.12 per share, compared to $3.5 million or $0.11 per share for the first quarter of 2007 and $3.1 million or $0.10 per share for the year ago quarter. Non-GAAP net income excludes a non-cash mark-to-market expense for an embedded option for our convertible notes, which decreased $1.0 million compared to the first quarter of 2007 and increased $0.2 million compared to the same period last year. June 30, 2007 year-to-date non-GAAP net income was $7.7 million or $0.23 per share, compared to $7.6 million or $0.23 per share for the prior year. June 30, 2007 year-to-date non-GAAP net income excludes $1.6 million in non-cash mark-to-market expense compared to $0.3 million for the prior year. Operating revenue for Electronic Discovery for the second quarter of 2007 was $12.2 million, a 21% increase compared to the first quarter of 2007 and a 67% increase compared to the year ago quarter. June 30, 2007 year-to-date operating revenue was $22.3 million, a 42% increase compared to the prior year. New client engagements combined with expansion of work for existing clients contributed to the increase in operating revenue for the second quarter of 2007. Non-GAAP adjusted EBITDA for Electronic Discovery was $6.5 million, a 24% increase compared to the first quarter of 2007 and a 115% increase compared to the year ago quarter. June 30, 2007 year-to-date non-GAAP adjusted EBITDA was $11.7 million, a 46% increase compared to the prior year. Non-GAAP operating revenue for the Bankruptcy Trustee business for the second quarter of 2007 was $8.3 million, compared to $8.3 million in the first quarter of 2007 and $8.6 million for the year ago quarter. June 30, 2007 year-to-date non-GAAP operating revenue was $16.6 million, compared to $17.4 million in the prior year. Changes in revenue are related to ordinary fluctuations in total bankruptcy deposits and caseloads across all clients. Retention of existing clients remains extremely high and we closed a variety of new client engagements during the second quarter. Non-GAAP adjusted EBITDA for the Bankruptcy Trustee business was $5.8 million compared to $5.7 million in the first quarter of 2007 and $5.9 million for the year ago quarter. June 30, 2007 year-to-date non-GAAP adjusted EBITDA was $11.5 million, compared to $11.8 million in the prior year. Non-GAAP adjusted EBITDA fluctuations between the quarters are primarily related to the quarterly fluctuations in operating revenue. Operating revenue for Settlements & Claims (which includes Chapter 11 bankruptcy, class action and related business) for the second quarter of 2007 was $17.6 million compared to $16.7 million in the first quarter of 2007 and $18.1 million in the year ago quarter. June 30, 2007 year-to-date operating revenue was $34.3 million, compared to $39.9 million in the prior year. Non-GAAP adjusted EBITDA for Settlements & Claims was $5.0 million for the second quarter of 2007 compared to $5.0 million in the first quarter of 2007 and $5.3 million for the year ago quarter. June 30, 2007 year-to-date non-GAAP adjusted EBITDA was $10.0 million, compared to $10.3 million in the prior year. Tom W. Olofson, chairman and CEO, and Christopher E. Olofson, president and COO of Epiq Systems, stated, "We have had strong results for the first half of the year, highlighted by 42% operating revenue growth and 46% EBITDA growth in electronic discovery, compared to the first half of 2006. We continue to receive significant repeat business from existing clients alongside the establishment of brand new relationships. In the second quarter, we introduced a major new version of our DocuMatrix software and integrated new features to help attorneys review large document sets more efficiently. On the bankruptcy front, with escalating debt levels in both the consumer and business sectors of the economy, it is likely that bankruptcy filings will return to more robust levels during the balance of 2007 and into 2008. We are well positioned to take advantage of this possibility in both our corporate restructuring and bankruptcy trustee businesses.” Recent key events include: The company further established its technology leadership in the legal market with: (i) a major software release in June of DocuMatrix™, our flagship eDiscovery platform, (ii) the announcement of the integration of a new near-duplication detection service for DocuMatrix™, and (iii) the release of major upgrades of our TCMS® and TCMSWeb products, the company’s Chapter 7 bankruptcy trustee case management software. Our electronic discovery business has grown the number of customer relationships in 2007 by 40% since the end of 2006. A 3-for-2 stock split was paid June 7, 2007 to shareholders of record as of May 24, 2007. All share and per share amounts have been adjusted retroactively to reflect this stock split. In April, the holders of record of the outstanding $50.0 million principal amount of our contingent convertible subordinated notes elected to extend the maturity of the notes from June 15, 2007 to June 15, 2010, in accordance with the terms of the notes. All conditions to the permanent termination of the limited price protection relative to the purchase of nMatrix have been satisfied, and, accordingly, the company’s obligations under the limited protection provision have terminated. The company made no payments under this provision. 0.7 million bankruptcies were filed in the U.S. Court for the twelve month period ended March 31, 2007. The Federal Reserve reported that both corporate debt and consumer credit increased compared to the prior year, reaching $5.8 trillion and $2.5 trillion, respectively, as of March 31, 2007. Conference Call The Company will host a conference call today at 3:30 p.m. central time to discuss these results. The Internet broadcast of the call can be accessed at www.epiqsystems.com. To listen by phone, call 800-690-3108 before 3:30 p.m. central time. The archive of the Internet broadcast will be available on the company’s website until the next earnings update. A recording of the call will be available through August 31, 2007 beginning approximately two hours after the call ends. To access the replay, call 877-519-4471 and enter pin #9010980. Company Description Epiq Systems is a leading provider of integrated technology solutions for the legal profession. Our solutions streamline the administration of bankruptcy, litigation, financial transactions and regulatory compliance matters. We offer innovative technology solutions for electronic discovery, document review, legal notification, claims administration and controlled disbursement. Our clients include leading law firms, corporate legal departments, bankruptcy trustees and other professional advisors who require innovative technology, responsive service and deep subject-matter expertise. For more information, visit us online at www.epiqsystems.com. Forward-looking and Cautionary Statements This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act, including those relating to the possible or assumed future results of our operations and financial condition. These forward-looking statements are based on our current expectations and may be identified by terms such as "believe,” "expect,” "anticipate,” "should,” "planned,” "may,” "goal," "objective" and "potential.” Because forward-looking statements involve future risks and uncertainties, listed below are a variety of factors that could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. These factors include (1) any material changes in our total number of client engagements and the volume associated with each engagement, (2) any material changes in our client’s deposit portfolio or the services required or selected by our clients in engagements, (3) material changes in the number of bankruptcy filings, class action filings or mass tort actions each year, (4) risks associated with handling of confidential data and compliance with information privacy laws, (5) changes in pricing structures and arrangements, (6) risks associated with the integration of acquisitions into our existing business operations, (7) risks associated with our indebtedness, (8) risks associated with the application of complex accounting rules to unique transactions, including the risk that good faith application of those rules and audits of those results may be later reversed by new interpretations of those rules or new views regarding the application of those rules, and (9) other risks detailed from time to time in our SEC filings, including our annual report on Form 10-K. In addition, there may be other factors not included in our SEC filings that may cause actual results to differ materially from any forward-looking statements. We undertake no obligations to update any forward-looking statements contained herein to reflect future events or developments. EPIQ SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited)   Three months ended Six months ended June 30, June 30, 2007   2006   2007   2006     REVENUE: Case management services $ 23,702 $ 18,182 $ 44,534 $ 37,083 Case management bundled products and services 6,733 67,009 13,412 67,694 Document management services 7,736   8,929   15,321   21,904   Operating revenue before reimbursed direct costs 38,171 94,120 73,267 126,681 Operating revenue from reimbursed direct costs 6,035   6,376   12,068   12,033   Total Revenue 44,206   100,496   85,335   138,714     OPERATING EXPENSES: Direct costs of services 10,415 10,752 20,746 25,128 Direct costs of services - bundled 898 980 1,784 2,015 Reimbursed direct costs 6,010 6,447 12,032 12,167 General and administrative 15,252 12,359 28,177 24,058 Depreciation and software and leasehold amortization 2,837 2,494 5,798 4,791 Amortization of identifiable intangible assets 2,352 2,878 4,876 5,645 Acquisition related -   250   -   250   Total Operating Expenses 37,764   36,160   73,413   74,054     INCOME FROM OPERATIONS 6,442   64,336   11,922   64,660     EXPENSES (INCOME) RELATED TO FINANCING: Interest income (25 ) (42 ) (32 ) (88 ) Interest expense 3,345   3,382   8,447   6,692   Net Expenses (Income) Related to Financing 3,320   3,340   8,415   6,604     INCOME BEFORE INCOME TAXES 3,122 60,996 3,507 58,056   INCOME TAX PROVISION 1,328   24,704   1,563   23,513     NET INCOME $ 1,794   $ 36,292   $ 1,944   $ 34,543     NET INCOME PER SHARE INFORMATION: Net income per share – Diluted $ 0.06   $ 1.06   $ 0.06   $ 1.01     WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – DILUTED 31,980   34,507   31,458   34,738   EPIQ SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited)   June 30, December 31, 2007 2006 ASSETS ASSETS: Cash and cash equivalents $ 3,776 $ 5,274 Trade accounts receivable, net 37,980 33,066 Property, equipment and leasehold improvements, net 29,086 23,153 Goodwill 261,243 260,609 Other intangibles, net 38,964 43,840 Other 16,619 16,278   Total Assets $ 387,668 $ 382,220     LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES: Accounts payable $ 13,229 $ 7,930 Indebtedness 139,357 154,361 Other liabilities 41,130 35,750 STOCKHOLDERS’ EQUITY 193,952 184,179   Total Liabilities and Stockholders’ Equity $ 387,668 $ 382,220 EPIQ SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)   Three months ended Six months ended June 30, June 30, 2007   2006   2007   2006     CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,794 $ 36,292 $ 1,944 $ 34,543 Non-cash adjustments to net income: Depreciation and amortization 5,189 5,372 10,674 10,436 Other, net 1,403 24,330 2,869 22,689 Changes in operating assets and liabilities, net (2,387 ) (53,324 ) (624 ) (49,342 ) Net cash provided by operating activities 5,999   12,670   14,863   18,326     CASH FLOWS FROM INVESTING ACTIVITIES: Cash paid for business combinations, net - (3,335 ) - (3,485 ) Other (3,846 ) (2,589 ) (7,062 ) (6,511 ) Net cash used in investing activities (3,846 ) (5,924 ) (7,062 ) (9,996 )   CASH FLOWS FROM FINANCING ACTIVITIES: Net payments on indebtedness (9,320 ) (7,008 ) (17,932 ) (16,720 ) Other 6,010   248   8,633   1,640   Net cash used in financing activities (3,310 ) (6,760 ) (9,299 ) (15,080 )   NET DECREASE IN CASH AND CASH EQUIVALENTS $ (1,157 ) $ (14 ) $ (1,498 ) $ (6,750 ) EPIQ SYSTEMS, INC. AND SUBSIDIARIES RECONCILIATION OF OPERATING REVENUE TO NON-GAAP OPERATING REVENUE (In thousands) (Unaudited)   Three months ended Six months ended June 30, March 31, June 30, June 30, June 30, 2007 2007 2006   2007 2006   OPERATING REVENUE BEFORE REIMBURSED DIRECT COSTS $ 38,171 $ 35,095 $ 94,120 $ 73,267 $ 126,681   Less: Deferred revenue (SOP 97-2) - - (60,085 ) - (53,647 )   NON-GAAP OPERATING REVENUE $ 38,171 $ 35,095 $ 34,035   $ 73,267 $ 73,034   Note: The adjustment reverses the effect of deferred revenue related to a specific 36 month Chapter 7 bankruptcy arrangement spanning October 2003 - September 2006. Throughout the 36 month fixed term of the arrangement the company provided services to clients and received ordinary course cash payments each month. However, based on the structure of this arrangement, SOP 97-2 required the deferral of substantially all revenue from the arrangement to the final two quarterly periods. A deferral of $66.1 million of revenue was reported through the first quarter of 2006, of which $60.1 million was recognized in the second quarter of 2006 and $6.0 million was recognized in the third quarter of 2006. Although revenue from the arrangement was deferred, under generally accepted accounting principles the related costs were not deferred but rather recognized as incurred. Revenue for arrangements in periods prior to October 2003 and for the current arrangement, which began October 1, 2006, are recognized in the period the services are provided. EPIQ SYSTEMS, INC. AND SUBSIDIARIES RECONCILIATION OF BANKRUPTCY TRUSTEE OPERATING REVENUE TO BANKRUPTCY TRUSTEE NON-GAAP OPERATING REVENUE (In thousands) (Unaudited)   Three months ended Six months ended June 30, March 31, June 30, June 30, June 30, 2007 2007 2006   2007 2006   OPERATING REVENUE BEFORE REIMBURSED DIRECT COSTS $ 8,329 $ 8,266 $ 68,731 $ 16,597 $ 71,090   Less: Deferred revenue (SOP 97-2) - - (60,085 ) - (53,647 )   NON-GAAP OPERATING REVENUE $ 8,329 $ 8,266 $ 8,646   $ 16,597 $ 17,443   EPIQ SYSTEMS, INC. AND SUBSIDIARIES RECONCILIATION OF NET INCOME TO NON-GAAP ADJUSTED EBITDA (In thousands) (Unaudited)     Three months ended Six months ended June 30, March 31, June 30, June 30, June 30, 2007 2007 2006   2007 2006     NET INCOME $ 1,794 $ 150 $ 36,292 $ 1,944 $ 34,543   Deferred revenue (SOP 97-2) - - (60,085 ) - (53,647 ) Acquisition related expense - - 250 - 250 Depreciation and amortization 5,189 5,485 5,372 10,674 10,436 Share-based compensation 703 311 562 1,014 1,092 Expenses related to financing, net 3,320 5,094 3,340 8,415 6,604 Provision for income taxes 1,328 235 24,704   1,563 23,513   10,540 11,125 (25,857 ) 21,666 (11,752 )   NON-GAAP ADJUSTED EBITDA $ 12,334 $ 11,275 $ 10,435   $ 23,610 $ 22,791   EPIQ SYSTEMS, INC. AND SUBSIDIARIES RECONCILIATION OF SEGMENT PERFORMANCE MEASURE TO BANKRUPTCY TRUSTEE NON-GAAP ADJUSTED EBITDA (In thousands) (Unaudited)   Three months ended Six months ended June 30, March 31, June 30, June 30, June 30, 2007 2007 2006   2007 2006     SEGMENT PERFORMANCE MEASURE $ 5,792 $ 5,735 $ 65,959 $ 11,530 $ 65,493   Deferred revenue (SOP 97-2) - - (60,085 ) - (53,647 )   NON-GAAP ADJUSTED EBITDA $ 5,792 $ 5,735 $ 5,874   $ 11,530 $ 11,846   EPIQ SYSTEMS, INC. AND SUBSIDIARIES RECONCILIATION OF NET INCOME TO NON-GAAP NET INCOME (In thousands) (Unaudited)   Three months ended Six months ended June 30, March 31, June 30, June 30, June 30, 2007   2007 2006   2007 2006     NET INCOME $ 1,794 $ 150 $ 36,292 $ 1,944 $ 34,543   Plus (net of tax): Deferred revenue (SOP 97-2) - - (35,764 ) - (31,985 ) Amortization of acquisition intangibles 1,423 1,527 1,741 2,950 3,415 Share-based compensation 444 221 367 665 717 Acquisition related expense - - 151 - 151 Effective tax rate (2 ) 67 - 65 - Loan fee amortization 216 238 220 454 441 Non-cash embedded option charges 314   1,295 110   1,609 273   2,395   3,348 (33,175 ) 5,743 (26,988 )   NON-GAAP NET INCOME $ 4,189   $ 3,498 $ 3,117   $ 7,687 $ 7,555   EPIQ SYSTEMS, INC. AND SUBSIDIARIES RECONCILIATION OF EPS TO NON-GAAP EPS (Unaudited)   Three months ended Six months ended June 30, March 31, June 30, June 30, June 30, 2007 2007 2006   2007 2006     EPS (on a diluted basis) $ 0.06 $ - $ 1.06 $ 0.06 $ 1.01   Plus (net of tax): Deferred revenue (SOP 97-2) - - (1.03 ) - (0.92 ) Amortization of acquisition intangibles 0.03 0.05 0.05 0.08 0.10 Share-based compensation 0.01 - 0.01 0.02 0.02 Acquisition related expense - - - - - Effective tax rate - - - - - Loan fee amortization 0.01 0.01 0.01 0.01 0.01 Non-cash embedded option charges 0.01 0.05 -   0.06 0.01   0.06 0.11 (0.96 ) 0.17 (0.78 )   NON-GAAP EPS (on a diluted basis) $ 0.12 $ 0.11 $ 0.10   $ 0.23 $ 0.23   EPIQ SYSTEMS, INC. AND SUBSIDIARIES NON-GAAP REVENUE (In thousands) (Unaudited)   Three months ended Six months ended June 30, March 31, June 30, June 30, June 30, 2007 2007 2006 2007 2006   Electronic Discovery $ 12,224 $ 10,112 $ 7,318 $ 22,336 $ 15,692 Bankruptcy Trustee 8,329 8,266 8,646 16,597 17,443 Settlements & Claims 17,618 16,717 18,071 34,334 39,899   NON-GAAP OPERATING REVENUE BEFORE REIMBURSED DIRECT COSTS $ 38,171 $ 35,095 $ 34,035 $ 73,267 $ 73,034 EPIQ SYSTEMS, INC. AND SUBSIDIARIES NON-GAAP ADJUSTED EBITDA (In thousands) (Unaudited)   Three months ended Six months ended June 30, March 31, June 30, June 30, June 30, 2007   2007   2006   2007   2006     Electronic Discovery $ 6,454 $ 5,210 $ 2,995 $ 11,665 $ 8,007 Bankruptcy Trustee 5,792 5,735 5,874 11,530 11,846 Settlements & Claims 5,033 4,986 5,292 10,017 10,310 Unallocated (4,945 ) (4,656 ) (3,726 ) (9,602 ) (7,372 )   TOTAL NON-GAAP ADJUSTED EBITDA $ 12,334   $ 11,275   $ 10,435   $ 23,610   $ 22,791   EPIQ SYSTEMS, INC. AND SUBSIDIARIES EPS CALCULATION (In thousands, except per share data) (Unaudited)   Three months ended Six months ended June 30, March 31, June 30, June 30, June 30, 2007(a)   2007(a)   2006 2007(a)   2006     NET INCOME $ 1,794 $ 150 $ 36,292 $ 1,944 $ 34,543 Interest expense adjustment for convertible debt -   -   301 -   600   ADJUSTED FOR DILUTED CALCULATION $ 1,794   $ 150   $ 36,593 $ 1,944   $ 35,143   DILUTED WEIGHTED AVERAGE SHARES 29,848 29,266 29,082 29,559 29,005 Adjustment to reflect stock options 2,132 1,514 1,139 1,899 1,447 Adjustment to reflect convertible debt shares -   -   4,286 -   4,286   ADJUSTED FOR DILUTED CALCULATION 31,980   30,780   34,507 31,458   34,738   NET INCOME PER SHARE - DILUTED $ 0.06   $ 0.00   $ 1.06 $ 0.06   $ 1.01 (a) Convertible debt is antidilutive and therefore excluded from EPS calculation.