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Harris Interactive Inc. (NASDAQ:HPOL)

F1Q2013 Results Earnings Call

November 13, 2012 5:00 PM ET

Executives

Michael Burns - Vice President, Investor Relations and External Reporting

Al Angrisani - President and CEO

Eric Narowski - Chief Financial Officer

Analysts

Operator

Good day, ladies and gentlemen. And welcome to the Harris Interactive First Quarter Fiscal 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions)

I would now like to turn the call over to Michael Burns. Please go ahead, sir.

Michael Burns

Good afternoon. And thank you for joining us to discuss Harris Interactive’s first quarter fiscal 2013 financial results. With me today are Al Angrisani, our President and Chief Executive Officer; and Eric Narowski, our Chief Financial Officer.

The format for today’s call will include Al’s commentary on the first quarter, Eric’s financial recap for Q1 and Al’s update on the business. After the formal remarks, both Al and Eric will be available for questions.

A webcast replay of this entire call will be accessible via the Investor Relations section of our corporate website later today and will be archived there for at least 30 days. However, no telephone replay of this call will be provided. We’ll post a transcript of this call as soon as we’re able to after the call.

We’d like to take this opportunity to remind you that certain statements made during this conference call are forward-looking statements for purposes of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995.

These statements include beliefs, predictions, and expectations related to the company’s future financial performance, other business and operating metrics, as well as statements regarding the company’s future plans and operations.

They involve a number of risks, known and unknown, that could cause actual results, performance, and/or achievements of the company to be materially different from the beliefs, predictions, and expectations discussed on this call.

Factors that could cause the company’s results to materially differ from the forward-looking statements made today, and which are incorporated by reference herein, are more fully described in today -- in our earnings release from November 1st, as well as the company’s SEC filings, particularly under the Risk Factors section of the company’s most recent annual report on Form 10-K.

You are urged to consider these factors carefully in evaluating such forward-looking statements and are cautioned not to place undue reliance on them. The forward-looking statements are only made as of the date of this call, and the company undertakes no obligation to publicly update them to reflect subsequent events or circumstances.

We also will be discussing non-GAAP financial measures including adjusted EBITDA with the add back of restructuring and other charges. These items are reconciled to GAAP financial measures in our previously released earnings release and are posted on the Investor Relations section of our website.

I’d now like to turn today’s call over to Al. Al?

Al Angrisani

Okay. Thanks, Mike, and good afternoon, everyone. Our performance in Q1 reflects continued progress in our turnaround program. However, despite some positive challenges remain in the area of sales and revenue growth.

But first the positives, our profitability improved as we achieved operating and net income along with an improvement in adjusted EBITDA, due largely to the stabilization of our U.K. operations and the benefits from right sizing our structure throughout fiscal 2012.

Next, our liquidity remained stable and we were able to fund both our quarterly debt payment and employee bonuses from internally generated cash.

And Harris entered into a strategic partnership with Google, whereby Google consumer surveys and the Harris Poll are developing and bringing to market products that allow businesses both large and small to compare themselves industry benchmarks had a fraction of the cost of traditional market research. As we are in very early stages of this initiative we are not yet able to quantify the expected financial impact of this venture.

Now for the challenges that remain, while our bookings were up compared with last year’s Q1. We continue to face sales and marketing challenges across several of our business units.

Specifically, in our Healthcare business, we are seeing changes in the pharmaceutical industry, which I will discuss a little later. But as a result, we are in the process of developing a sales and products strategy to meet this changing healthcare landscape.

Another area of challenge is in our international business, although, performance to date has been satisfactory, clients in generally are reluctant to commit to large projects in the face of an uncertain economic environment, particularly in Europe. With respect to our Canadian operations, we are experiencing a slowdown on the service bureau side of the business of late.

And then finally and perhaps most importantly, the overall market research industry continues to be very price-sensitive and we are finding that we have very little pricing power across all of our business units.

With that being said, I’ll turn this over to Eric now to cover the financials and then I’ll come back to give you a sense of where we are with each of our business units in some more detail and some perspective on Q2. Eric?

Eric Narowski

Thanks, Al, and good afternoon. Recapping the first quarter, revenue was $33 million, down 13% from $37.8 million for the same prior year period. Excluding foreign currency exchange rate differences revenue decreased by 11%. This decrease was mainly driven by declines in the U.S., Canada and U.K.

Our operating income was $1.8 million, compared with an operating loss of $4.3 million for the same prior year period. Last year’s Q1 operating loss included restructuring and other charges of $5.4 million. No such charges were included in this year’s Q1 operating income.

Our net income was $1.7 million or $0.03 per fully diluted share, compared with a net loss of $6 million or $0.11 per fully diluted share for the same prior year period.

Cash provided by operations was $306,000, compared with $175,000 in cash provided by operations for the same prior year period.

Non-GAAP adjusted EBITDA with restructuring and other charges added back was $3.5 million, compared with $3 million for the same prior year period.

Bookings were $33.9 million, up 6%, compared with $32.1 million for the same prior year period. Excluding foreign currency exchange rate differences, bookings were up 4%. This increase was mainly driven by increased bookings in Germany.

At September 30, 2012, we had $10.6 million in cash and $4.8 million in outstanding debt, and were in compliance with our financial covenants under our credit agreement.

Secured revenue at September 30, 2012 was $43.4 million, up 11%, compared with $39 million at September 30, 2011. Foreign currency exchange rate differences did not have a meaningful impact on secured revenue. The increase in secured revenue was mainly due to the increased bookings and timing differences compared with the same prior year period.

I’d now like to turn the call over to Al for his closing commentary.

Al Angrisani

Okay. Thanks, Eric. As I said that I would on our last earnings call, I want to start giving you a sense of where we are with each of our five business units. The Custom Solutions group, the Healthcare Research group, the Harris Poll, the Harris Interactive Service Bureau, and our International business group.

First, the Custom Solution group, the Customer Solution group is performing according to plan and it’s on focusing on areas where we have unique expertise and competitive advantage. For example, as a result of this focus we experienced continued growth in our corporate reputation practice.

As I mentioned earlier, with regard to our Healthcare business, due to changes in the pharmaceutical industry we are in the process of developing a new strategy in our Healthcare Research group that enables us to take advantage of these changes.

Although, these changes have and will continue to impact our Healthcare Research group’s revenue, we believe these changes afford us an opportunity to improve the profitability of the group as much of the traditional large scale pharmaceutical work is at lower margins in part because of significant incentives paid to physicians to participate in the studies. In that regard we are focused on expanding our consumer based Healthcare Research, particularly in the managed care area, where we have had some early success.

Our third business group the Harris Poll is performing according to plan and I say according to plan I mean as of Q1 both for Custom Solutions group and the Harris Poll. Specifically, we are having success selling our research for public release studies, where the highly regarded Harris Poll brand provides us with a significant competitive advantage in the marketplace.

Our fourth business group, the Harris Interactive Service Bureau known as HISB is slightly behind plan at the end of Q1. But the newly launched sample-only offering is starting to gain traction both with other market research companies and our corporate clients, and we have confidence that the HISB business will perform to expectations over the remainder of the year.

And the finally, our International Business performed ahead of plan in Q1 due in large part to the strong performance out of Germany. I’m also very pleased that our restructuring in the U.K. business in early fiscal 2012 has been a success. The overall strategy of focusing on core markets and key solutions has allowed the U.K. to reduce their expense structure, target their resources and become profitable.

However, as I said earlier, due to the economic environment in Europe and the slowdown on the service bureau side of our Canadian business there is some uncertainty as to whether the International business will continue to be form at this level for -- throughout the remainder of the year.

And then finally, with regard to some view towards Q2, while we are very pleased with our Q1 overall financial performance, Q2 is off to a slower start than expected that we want, this is due in part to two things. Number one, no doubt, disruption caused by Hurricane Sandy is effective not only us but all of our customers and we’ve seen that in the early part of the Q2 numbers.

And then the second piece of that is that our product mix is changing a little bit in Q2 in ways that we didn’t quite anticipate and we are not sure whether that temporary or permanent, but that is having some impact on Q2.

So, in summary, while it’s still too early in Q2 to fully quantify the impact of these items, at least wanted to provide you with a sense of what we are seeing so far in Q2.

And so with that, we’ve concluded our presentation and we will -- Mike, open up this to questions. Back to you?

Michael Burns

Thanks, Al, and Operator, if you could please open the [floor] for question.

Question-and-Answer Session

Operator

(Operator Instructions) And sir, it appears to be no questions. I would like to turn the call back over to the presenters.

Michael Burns

Very good. Well, thanks again to everyone for joining us this afternoon and we look forward to speaking with you in early February when we release our Q2 fiscal 2013 results.

Operator

Ladies and gentlemen, that thus concludes the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.

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