Greenfield Online, Inc. Q1 2006 Earnings Conference Call Transcript (SRVY)

Greenfield Online, Inc. (SRVY)
Q1 2006 Earnings Conference Call
May 8, 2006 5:00 p.m. EST

Executives

Albert Angrisani - President and Chief Executive Officer
Bob Bies - Executive Vice President and Chief Financial Officer
Cynthia Brockhoff - Vice President - Investor Relations

Analysts

Doug Anmuth - Lehman Brothers
Barton Crockett - JP Morgan
Todd Van Fleet - First Analysis
Matt McCormack - Friedman Billings Ramsey
Brian Gonick - Corsair Capital

Presentation

Operator

Greetings, ladies and gentlemen, and welcome to the Greenfield Online investor conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star-zero on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Cynthia Brockhoff, Vice President of Investor Relations for Greenfield Online. Thank you, Ms. Brockhoff, you may begin.

Cynthia Brockhoff

Good afternoon, everyone, and thank you for joining us. Welcome to Greenfield Online’s first quarter 2006 results teleconference. On the call with me today are Albert Angrisani, President and Chief Executive Officer, and Bob Bies, Executive Vice President and Chief Financial Officer.

The format for today’s call will include formal remarks by both Al and Bob on the state of the business, and our first quarter performance. Thereafter, Al and Bob will be available for questions. We would 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 predictions and guidance related to the company’s future financial performance, other business and operating metrics, and involve a number of risks, known and unknown, that could cause actual results, performance, or achievements of the company to be materially different from the 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’s press release as well as the company’s SEC filings.

The forward-looking statements made herein are only made as of the date of this presentation and the company undertakes no obligation to publicly update them to reflect subsequent events or circumstances.

I would also like to mention at the outset that we will be discussing non-GAAP financial metrics today, including adjusted EBITDA, operating margins -- excluding the Q1 restructuring charges -- and free cash flow from operations. These items are reconciled to GAAP financial data in our press release issued today.

I will now turn the call over to Greenfield Online’s President and Chief Executive Officer, Al Angrisani. Please go ahead, Al.

Albert Angrisani

Thank you, Cindy. Good afternoon, everyone.. I am pleased to say that in the first quarter, we started to see some of the fruits of our labor earned from the last six months of hard work. However, don’t let your expectations get out ahead of reality -- Greenfield/Ciao is still a work-in-progress turnaround with a considerable amount of hard work in front of us, particularly in North America.

With that cautionary note, let me review our first quarter results. You will recall that due to our limited visibility, we did not provide Q1 guidance, and at this time, we still have no plans to begin issuing quarterly guidance.

The first quarter results, as promised, this quarter and for the first time, we are breaking out our results by the following business segments: North America Internet Survey Solutions, Ciao Internet Survey Solutions, and Ciao Comparison Shopping. We are providing you with this new level of detail because we believe it will give you a better understanding of the evolving nature of our business. I am going to provide the financial highlights, and Bob will take you through the full financials and segment reporting in a few minutes.

Our total reported revenue for the first quarter was $21.5 million. Total gross profit was $16 million, or 74.2% of revenues. Operating income for the first quarter totaled $1.3 million, including a small restructuring charge of $168,000 related to the right-sizing announced the fourth quarter of 2005. Non-GAAP adjusted EBITDA was $5.2 million excluding the restructuring charge I just mentioned. Finally, total cash flow from operations was approximately $5 million.

Let me now provide some insight into these financial results and the key drivers of our financial performance in the first quarter. First, the new supply chain management program I introduced at the start of 2006, combined with excellent oversight by Nicholas [Metzka] and the entire Cogs team, as we call it, have brought gross margins in above our expectations at 74.2%. This compares with 75.4% in the fourth quarter.

Next, the fourth quarter right-sizing, combined with rigorous daily oversight by Bob Bies and the North American and European financial teams, enabled us to bring operating expenses in below our expectations. For example, we continue to make progress eliminating costs that bring little or no value to our customers, reducing North American G&A expense by approximately $1.2 million in Q1 as compared with Q4, or 6% of total company first quarter revenues.

Another good example of our rigorous oversight of expenses is headcount. Headcount declined by an additional 29 positions in the first quarter, on top of the 39 we reduced in the Q4 right-sizing. What you are seeing here is managers responding to my call for greater efficiency.

The new Ciao Comparison Shopping management team came out of the starting blocks fast, with excellent revenue and profitability results. We’ve computed an organic growth rate for the Ciao Comparison Shopping business of 55% year over year.

As you will recall, Max [Cartoliari] and Fred Paul changed their status mid-Q1 to part-time employee and consultant, respectively. Filling their shoes is a big job, but based upon Q1 results, Daniel Keller and Stephan [Mousikant] are off to a really good start. In the first quarter, Ciao was once again ranked as the most visited shopping guide website in Germany.

Moving on, after a soft January, survey solutions sales teams in North America and Europe rallied, and delivered much stronger results in the back half of the quarter. In addition, targeted promotional activities helped to generate bids from a meaningful number of new clients, as well as reengaged disaffected clients from a not-so-happy period in the past.

That said, we’ve computed the year on year pro forma organic growth rates for these segments. First, the good news. The good news is that the organic growth rate for the Ciao survey business was 28% for the first quarter, and we are very pleased with the manner in which the whole Ciao team is responding to a more competitive marketplace in Europe.

The bad news is that the North American survey business declined by 17%, primarily for two reasons. First, after purchasing [Go Zing!], Rapid Data, and Ciao, the North American survey business was unable to retain a significant portion of the revenue during consolidation.

Second, worldwide revenue from our Q1 2005 pro forma top 20 clients also declined on a same-store sales basis in the first quarter of 2006 as a result of a vertical integration in the industry and greater competition.

Rest assured -- and let me say that again -- rest assured, we are working aggressively to reverse this trend as part of the overall turnaround program.

Back to comparison shopping, not only did the business perform well in the first quarter, but last week we announced a new technology platform upon which Stefan and Daniel will run the business. This new platform offers a substantially faster search capability that will benefit users and merchants alike.

The new back-end technology platform for search is one part of our long-term product technology and investment strategy for this important business segment.

Next, several very important initiatives are being completed in the survey solutions business. David St. Pierre, our chief technology officer and his team, completed and launched the new version of the UPS technology platform. Now today, 80% of the North American survey production volume is flowing through this platform. This is a major milestone as another example of fulfilling our commitment to invest in a long-term global technology strategy.

Next, the launch of the new version of this UPS succeeded on all four goals that we established, and they’re worth mentioning here:

1. The first goal was to build a platform upon which we could improve the quality of the panelist experience;
2. Ensure the system would help us improve cycle times;
3. Help us lower the unit cost of production; and
4. Advance our competitive position through increased client satisfaction.

We have succeeded on all of these fronts, and are very happy with the competitive position that UPS has put us in.

Moving on, you will recall that in January, we announced the launch of our Asian panels in Japan, South Korea, and China. We only began recruiting respondents a few short months ago, and combined, today the panels total almost 150,000 respondents. This is very important development for the company.

We are seeing demand for Asian sample from our clients in North American, Europe and Asia. During the first quarter, we completed approximately 30 revenue-producing projects using these panels. In April, the number of projects in China and Korea exceeded all of those in Q1. These panels lay the groundwork for our future expansion into the Asian marketplace. We have clearly started to penetrate the Asian market and we expect to have dedicated resources on the ground in late 2006 or early 2007.

Next, in terms of highlights, [John Tan], head of our quality program, has expanded his role to manager our newly formed North American top 25 account group. John will be reporting to Keith Price and Andy Ellis for this new very important assignment, and is charged with maximizing service quality at our largest clients.

The good news for the first quarter, our average overall customer satisfaction scores, or CSAT, as we say, were 95.6%. This is one element of our plan to stabilize the revenues from our top 25 North American clients that I alluded to a few minutes ago.

On March 30, 2006, we purchased all of the equipment under lease and retired all of our capital lease obligations originated through Somerset, for a payment of approximately $4.1 million. We are now virtually debt-free, ending the quarter with approximately $21 million in cash.

Finally in terms of highlights, our Q2 backlog, as of today, is $19 million. You will recall our Q1 backlog as of February 9th was approximately $16 million. While the backlog appears relatively strong, we caution investors that at this point in the turnaround, survey solutions revenue is still unpredictable, so again, we encourage a conservative view on revenue for 2Q.

That rounds out my comments on the highlights of the quarter. Let me now outline what I believe are the challenges still facing this company in Q3 and in the quarters ahead.

First and foremost, we need to counter the downward trend in North American revenues by executing several key actions. As I have mentioned previously, increased senior management focus on our top 25 North American accounts is already happening.

Next, on the pricing front, we need to further lower the costs of production at Greenfield/Ciao to be able to respond to the continued pricing pressure in the marketplace while still maintaining our very high profit margins.

Next, we need to increase our promotional activities to regain top-of-the-mind share with key clients and the marketplace in general.

Next, we need to develop new revenue streams in North American from an expanded product offering.

In the area of international expansion, we are laying the groundwork and expect to enter Australia and Asia with dedicated resources on the ground in the back-half of ’06 and ’07. We see Asia as a major long-term growth opportunity for Greenfield/Ciao.

Next, on the cost reduction front, specifically in the area of G&A, we will continue to look for ways to drive G&A down as a percentage of revenues, and scale it against increasing revenues in the future. We continue to make progress on this front.

Next, technology and automation. We will continue to increase our investment in technology that will enable us to increase automation on a global basis, while continuing to provide the highest quality of service to our clients. I believe this one element is the key to differentiating between the winners and the losers in our industry long-term.

Next, with regard to our supply, we continue to invest, and in Q2, we expect to increase our investment by an additional 20% in building our panels to ensure we have the adequate supply of respondents to meet client demand. This includes investments in both our panels as well as in the river.

Finally, quality is job one at Greenfield/Ciao, and even with customer satisfaction scores reaching 95% last quarter, we are not satisfied. Our goal is to be 100% perfect.

Turning to guidance, we did make a lot of progress in Q1, but we are still in a turnaround mode with quarters to go in this process. I believe that short-term revenue predictability compounded by a very dynamic marketplace will challenge us for the next few quarters. Therefore, we are still not planning to provide quarterly revenue guidance.

For the full fiscal year 2006, with the exception of the effective tax rate, we are reaffirming the guidance ranges previously provided on February 9, 2006. Effective tax rate is being adjusted due to reassessment of the projected jurisdictional mix of pre-tax income for 2006. Our guidance remains as follows: total revenue, $88 million to $95 million; gross margins, 68% to 70%; non-GAAP adjusted EBITDA, 19% to 21%; depreciation and amortization, $13 million to $13.5 million; expected changes related to stock-based compensation, $3 million to $3.5 million; effective tax rate, 23% to 29%.

With that, I will turn the call over to Bob to provide you with more details on the first quarter financials and the break-out of our business segments.

Bob Bies

Thanks, Al. Good afternoon, everyone. There is a lot to go over in the financials today. I will take you briefly through the consolidated financials and then I will review the numbers on the three segments -- North American Internet Survey Solutions, Ciao Internet Survey Solutions, and Ciao Comparison Shopping.

Although the first quarter comparisons to the prior year are in the press release, I am not going to dwell on them here. We are a completely different company a year ago prior to the acquisitions, and as such, we believe the year on year comparisons are not particularly relevant.

Regarding the consolidated financials on the revenue front, as Al previously mentioned, total net revenue for the first quarter of 2006 was $21.5 million. Representing approximately 84% of total company revenue on a global basis, first quarter survey solutions revenue was 47% full service, and 53% sample only.

Going forward, we will no longer break out tracker revenue, as it is less meaningful as a percentage of total revenue. Revenue from tracker is split almost evenly between full-service and sample only, and going forward it will be included in these percentages.

Turning to gross profit, gross profit was $16 million, or 74.2% of revenue. We were all pleased with the performance of the supply chain management team during the first quarter and the favorable impact on gross margins that they had. We do believe that it is the nature of our business model for gross margins to move around, and in some cases materially, as a result of shifts in project mix from quarter to quarter and other factors.

In addition, we continue to be in a general environment of competitive pricing pressure in the survey solution segments. This is offset somewhat by our rapidly growing comparison shopping segment, which has very attractive gross profit margins.

As Al mentioned earlier in his guidance discussion, we urge investors to continue to maintain a conservative view on gross profit as we navigate through the next several quarters.

Regarding SG&A, SG&A expense for the first quarter of 2006 totaled $9.5 million, as compared to $10.9 million in the fourth quarter of 2005, including an increase in stock-based compensation expense of $373,000 from 4Q 2005 to 1Q 2006. This computes to a decline in SG&A of $1.8 million, from 4Q 2005 to 1Q 2006, exclusive of the stock-based compensation expense, or $7.2 million on an annualized basis.

Of this $1.8 million, approximately $1.2 million is related to North American G&A expense reductions.

The right-sizing program, which was initiated in the fourth quarter of 2005, is beginning to show dividends in the first quarter of 2006. We have favorable variances in every expense category in G&A. All significant expense categories are down sequentially from the fourth quarter of 2005, and we have redirected these savings into strategic sales and marketing initiatives to drive demand, investment in our panel to improve supply, and an R&D to automate and improve our operating systems.

As Al has mentioned, we continue to apply significant pressure on all G&A costs, and invest strategically to drive revenue and operating free cash flow.

Panel acquisition expense -- for the first quarter of 2006, panel acquisition expenses totaled $1.7 million. We increased our investment in the panel in the first quarter and we expect further investment in this area in the second quarter as well. Our panel spend enabled us to exceed our first quarter recruiting goals.

Turning over to depreciation and amortization, “DA" expense totaled $2.3 million. There is additional “DA" however, in cost of revenues and panel expense related to internal use software and acquired panel assets. In total, “DA" amounted to approximately $3.1 million for the quarter. We expect this to increase in future quarters as we invest in new technology, both internally developed and purchased and, as Al had mentioned, “DA" will come in line with the original guidance estimates for the year.

Turning over to R&D, R&D expense was $941,000 for the quarter, or approximately 4% of revenue. This was also in line with our expectations and we will continue to invest in developing our core operating systems in the internet survey solution segments as well as in the comparison shopping segment.

Operating income -- total operating income for the first quarter was $1.3 million, or 6% of revenue. As Al previously mentioned, this includes $168,000 of restructuring charges related to office closings in San Francisco and Durham, and employee costs from the company’s fourth quarter restructuring.

Turning over to adjusted EBITDA, for the first quarter 2006 adjusted EBITDA, a non-GAAP financial measure, was $5.2 million, or 24.2% of revenue, excluding the 1Q restructuring charge.

Net income for the first quarter 2006 was $841,000, including the 1Q restructuring charge.

Turning over to cash flow, cash flow from operations for the first quarter of 2006 was approximately $5 million. As I mentioned in our last conference call, we expect cash flow from ops to track closely with adjusted EBITDA in future quarters, in the absence of any significant changes in our working capital components.

Non-GAAP operating free cash flow was $4.2 million for the first quarter of 2006, excluding the buy-out of the [Somerset] capital leases which Al mentioned.

Turning over to the balance sheet, we ended the quarter with a cash position of approximately $21 million. We improved our working capital and current ratio from the fourth quarter of 2005. Receivables DSO’s also showed improvement over the fourth quarter of 2005. We expect that the balance sheet will continue to improve throughout the remainder of 2006 as we drive operating free cash flow.

Looking at our backlog and other statistics on the quarter, as of today, second quarter backlog -- defined as signed contracts for online survey projects and comparison shopping services and advertising that we expect to be completed and delivered to clients during the three months ending June 30, 2006 -- is approximately $19 million. This compares favorably with the first quarter backlog reported on February 9th of $16 million.

Bid volume for the three months ended March 31, 2006 was approximately $155 million. This also compares favorably with the bid volume of $130 million in the fourth quarter of 2005.

In the first quarter of 2006, revenue from our global Top 20 group of Internet survey solutions clients represented approximately 51% of survey solutions revenue.

Finally, in 1Q, we completed 2,536 survey projects for 461 clients.

Finally, turning over to the segment information, let me begin by explaining the level of detail we plan on providing each quarter. We will provide revenue, operating income, and non-GAAP adjusted EBITDA, excluding restructuring charges for each of the three segments. We do not plan to provide gross margins or details on the line items in the operating expense area. Also note that each of the segments excludes unallocated corporate expense. Finally, revenue transactions between segments are recorded at amounts similar to those charged to our large clients. These inter-segment transactions are eliminated in consolidation and are reconciled in a table in today’s press release.

With that as an introduction, let’s start with the North American Internet Survey Solutions segment. First quarter 2006 revenue for the North American survey segment came in at $13.8 million and got off to a slow start in January. The sales team picked up steam in the back-half of the quarter to produce much better results than we anticipated. The North American survey segment reported operating income of $242,000 in the first quarter of 2006. First quarter 2006 non-GAAP adjusted EBITDA, excluding restructuring charges for the North American survey segment, was approximately $3 million, or 21.7%.

Turning to the Ciao Internet Survey Solutions segment, first quarter 2006 revenue for this segment was $5.7 million. Like North America, sales in the quarter were skewed towards the back-half. A good portion of the revenues in this segment, approximately $1.2 million, were related to samples supplied to North American customers through our North American survey segment. A significant differentiator for our North American survey business is our international capability provided to us by the Ciao survey segment, and it did a wonderful job in the quarter of servicing our North American customers.

The Ciao survey segment reported operating income of approximately $1.3 million in the first quarter of 2006. First quarter 2006 non-GAAP adjusted EBITDA for the Ciao survey segment was approximately $1.9 million, or 33.3%.

Finally, turning to the Ciao Comparison Shopping segment, first quarter 2006 revenue for this segment totaled $3.4 million. The Ciao Comparison Shopping segment reported operating income of $1.1 million in the first quarter of 2006. First quarter 2006 non-GAAP adjusted EBITDA for the Ciao Comparison Shopping segment was approximately $1.6 million, or 47.1%.

With that, I will turn the call back over to Al.

Albert Angrisani

Thank you, Bob. In closing, I am pleased with the progress we are making in the turnaround, and I am particularly pleased with the comparison shopping segment’s performance in Q1.

As I have said before, turnarounds take time. I believe we have quarters to go before we can declare victory, but I am confident we will get there.

With that, I will turn the call back to Cynthia.

Cynthia Brockhoff

Thank you, everyone. Operator, we are ready to start taking questions.

Operator

Thank you.

(Operator Instructions)

Our first question comes from Mr. Doug Anmuth with Lehman Brothers. Please proceed with your question.

Doug Anmuth - Lehman Brothers

Thank you. My question is regarding your gross margins for the quarter, which came in at 74%. I am just trying to think in terms of the drivers here that really drove that a little bit higher than certainly we expected, and it sounds like higher than what you expected as well. I am hearing supply chain management and then more revenue obviously coming from the Ciao Comparison Shopping business, but I am also wondering if the Asian panel build-out helped there, and also perhaps pricing pressure was not quite as strong as you expected. Could you break out what drove the upside between those four and anything else that I am missing there? Also, why keep that outlook at 68% to 70% for the year? Thank you.

Albert Angrisani

First and foremost, the supply chain management system that we are putting in, what it really comes down to is A, we are getting a handle on where our demand is coming from. We are basically pinpointing the type of demand for supply, which as you know is sample, from our clients much better than I think the company has ever done before. So at the beginning of the quarter, we have a pretty good idea where that is coming from. That allows us, on the other side of the equation, on the supply side of the equation, to basically buy outside sample faster, better, and cheaper. It allows us to monetize our river more intelligently against that demand, and most importantly, it allows us to use our panel less frequently and more efficiently than we’ve done before. That matching, that oversight, that management detail is providing us with just more efficiency in the way we run our cost-of-goods sold capability.

Asian panels, not really, not at this point in time. It’s too early a factor in the process to say it’s driving anything, but clearly we are in the beginning stages of that phenomenon, and we will have to see how it plays out.

Pricing pressure has not changed in my opinion. It is there, particularly in North America. We are just doing a better job of dealing with it. We are passing on the stuff that we should not be taking into the shop, that is really low-margin work. We are providing better quality to the work that we bring in the shop at the higher margins, and that is causing customers to come back to us with work that fits our business mix better than it did in the past, and as we say, work that runs through our factory more efficiently.

So Doug, it is a lot of little things that are pushing that up. To change the guidance right now, it’s too early to tell. Any one of those things could reverse on us in the next quarter. We are still early on in the process of this turnaround. It has only been six months, and I think that it is just prudent to stay with our existing guidance and see how things go for the next couple of quarters.

Doug Anmuth - Lehman Brothers

Thank you, that’s great. You mentioned the river in there as well. Could you also provide an update? That is something that you have talked a little bit about in the past. We have not gotten a lot of detail on how that is rolling out. Can you tell us any more at this point?

Albert Angrisani

The river is part of our supply chain system and basically it is a complementary aspect. The panel is the key driver, along with outside sample, and the river complements that. It is contributing in a meaningful way, and it’s a very efficient purchase of sample for us. At some point in time probably down the road we’ll be considering breaking that out in a little more detail, but right now, we are still in the infancy stages of the river.

Doug Anmuth - Lehman Brothers

Great, thank you.

Operator

Thank you. Our next question comes from the line of Mr. Barton Crockett with JP Morgan. Mr. Crockett, please proceed with your question.

Barton Crockett - JP Morgan

A couple of questions here. First, with the backlog growing $3 million sequentially, I know you were cautioning about the outlook for revenues into the second quarter, but I just want to see if I can gauge a little bit better the level of your caution. With that rising $3 million sequentially, would it be unreasonable to assume that the second quarter revenue top line should be at least $3 million bigger than the first quarter? Or does your caution suggest that maybe we should not go that far? That is one question.

The second thing is the EBITDA contribution that you are breaking out from Ciao Comparison Shopping and the margin there, very healthy at 47%, the top line growth there very strong, and much better than the other segments you are reporting.

How long do you think it might be before the EBITDA contribution from Ciao is a majority of your reported EBITDA? It seems like just looking at this trend it should not be that small on a revenue base. The EBITDA contribution is close to half at this point. So those two things, and I’ll leave it there. Thank you.

Albert Angrisani

Barton, let me take the first one. Visibility is the key word to answer why we are being cautious on backlog. We are still learning a lot about the mix of business. We are still learning a lot about what we are selling. We are still making some decisions on what we want to sell.

We are rebuilding the entire North American sales staff, basically, below the senior levels, and we still have question marks on conversion rates. There isn’t much historical data there, with a lot of new people coming in to determine how and what they are going to do. So we have to report the absolute number, but at this point in time, to say with any confidence that we can answer those other variables that drive what backlog is going to translate to in, still too early.

We need a couple more quarters before we really get comfortable with what our execution capabilities are on the sales side, particularly in North America. North American sales are very much a work-in-progress effort right now. We started with costs and right-sizing and profit models and expense controls and G&A and all that, and very rapidly we are moving towards driving greater efficiency out of our sales staff.

We do not have answers to that yet, so it is just prudent not to read too much into that, and just see how it runs for a couple of quarters. I’ll let Bob handle the second question.

Bob Bies

Sure. Obviously the component of the comparison shopping, its percentage of the total company reported EBITDA in the future is going to be dependent on the revenue growth that we experience in that division. Right now, it is growing nicely, we are very happy with it, and we are focusing more and more of our energy and focus on this particular segment, so we are actually looking at various investment scenarios in this segment that could actually change the sensitivity of the growth rate of the revenues, and it is actually all being calculated right now. It will be discussed with senior board members within the next two or three weeks, but it really is all contingent on what the revenue growth is, and the revenue growth is contingent on how much we want to invest in that segment. So I think we are probably going to have to wait another quarter or so until we get this analysis completed to give you a better sense of how the revenue is going to grow moving forward.

Barton Crockett - JP Morgan

Okay, but when you say you are evaluating investment scenarios, is that something where you contemplate investing at a level that maybe EBITDA would go down or be negative for some period of time, or is it really just a question of whether it is going to be at profitable level X or profitable at a much-higher level Y.

Bob Bies

It would probably be more operating free cash flow near term could be negatively impacted. EBITDA would not be impacted. It is more internal use software development, technology development that will make us more competitive in the market in that particular segment. So it really would not have a lot of EBITDA drag, but near-term operating free cash flow, some drag and then theoretically goes the other way in the out-quarters.

Barton Crockett - JP Morgan

Just on that, there has been a lot of concern about the competitive environment for comparison shopping, pricing competition, you guys facing some big rivals over there. Could you give us any color on what you are seeing in your confidence, your ability to maintain the pressing level you are at right now?

Albert Angrisani

I am very confident, as I mentioned in my comments, with the new management team that we have, we are very confident, and the entire team there and their ability to compete. The fact that they are big players and just like E-Bay and others, just is a bigger challenge for us that we are embracing. We believe there is plenty of room in the marketplace. We believe there is particularly a lot of room for companies like ours that are innovative and aggressive and willing to invest in new technologies, like the new technology platform that we just brought to bear.

So we are very positive on our ability to go into that space and compete, and to compete in a way where we can maintain our margins and manage our way through the pricing issues there just like we are managing our way on the market research side.

Barton Crockett - JP Morgan

Okay, that’s great. Thanks a lot.

Operator

Thank you. Our next question comes from the line of Mr. Todd Van Fleet with First Analysis. Please proceed with your question.
Todd Van Fleet - First Analysis

Do you guys have a new sales bookings figure for Q1?

Bob Bies

Sure, Todd.

Todd Van Fleet - First Analysis

I guess while you are fishing for that, if I could throw another one out there. I am thinking about Ciao research business, and it sounds like it grew pretty nicely year on year. I think you said 28% or so. I guess based on the current quarter sales result of $4.5 million, it implies about $3.5 million in sales last year. I believe you split out Ciao research revenue in Q’s 2 through 4 for the prior years, so based on the figures that you gave today and you’ve given previously, it would seem to say that Ciao research revenue went from $3.5 million in Q1 last year to $5.8 million in Q2 -- a pretty big, sequential bump -- and then just kind of trailed off, or at least flattened out at that point, and now here, on a sequential basis, anyway, we are seeing the Ciao research revenue being down about $1 million I think relative to Q4. So just having a bit of trouble kind of deciphering how to think about the state of the Ciao research business, up 28% over prior year but kind of leveling off and now down from a revenue standpoint, at least on a sequential basis. Can you help us assess how we should think about the prospects for Ciao research?

Albert Angrisani

Let me take it from 30,000 feet, and I’ll let Bob address your quarter-to-quarter segment question. We are very happy with what we saw this quarter at the Ciao market research side of the business in addition to comparison shopping. As we mentioned in the call, both North America and Europe got off to a slow January, but then they had great back-half’s of the quarter, and Ciao Europe in particular came through at the very end with some nice numbers.

But I am equally impressed with the way it’s coming together as an organization from an operations standpoint, and the great work that is being done over there by the Ciao management team on the market research side.

So I think I am feeling better. Remember, I am here two full quarters and I am getting a feel for everything. I am getting a much better sense of their ability to go in and compete with the new competition in the marketplace, and to compete successfully. I think that is the real issue here, because for a long time, Ciao was the principal player in that market, and still is, but they did not have as much competition. And that new competition has been forcing some business model adjustments, and I think the team there has been able to tackle that and this quarter is the beginning, I hope, of a story where we are able to show an adjustment in our business model, our ability to adapt to the competitive environment in the market, and to go in there and succeed.

So from that standpoint, from a managerial standpoint, I think this quarter pointed to a lot of good things and a lot of good signs out of the Ciao market research business.

Bob, is there anything on the quarter-to-quarter adjustments that you…

Bob Bies

Yes, let me answer the first question on the sales bookings. The first quarter bookings for the Internet Survey Solutions worldwide was $20.95 million.

Todd Van Fleet - First Analysis

So about flat sequentially then, Bob?

Bob Bies

Yes, that is correct. Now, it is interesting what we are finding with the Ciao Europe survey business. We have sold a fair amount of product in the U.S., serviced by the Ciao segment. So the way we look at it, there is a component that is sort of North American customers buying the Ciao data from the Ciao entity, and then there is the intra-Europe customers. The split is about $1.2 million U.S. in North America, and the remaining amount is intra-Europe.

So it really remains to be seen where the growth is going to go. That is why we are really hesitant about giving near-term guidance. But Gunnar and Alberto are very positive about being able to grow both intra-Europe, competing with the new competitors in Europe, as well as supplying high service levels to the U.S. customers.

So there is really two markets that are showing some nice growth. One is the intra-U.S. market buying Ciao data, and then there is the intra-Europe segment as well.

Todd Van Fleet - First Analysis

Has your sales headcount changed for Ciao research at all?

Bob Bies

It’s about flat.

Todd Van Fleet - First Analysis

It’s about flat from prior quarter, or maybe six months ago, or…?

Bob Bies

Yes, it’s about the same, yes.

Todd Van Fleet - First Analysis

Just one more quick one, if I could, regarding the back-half strength of Q1 in terms of the revenue production. It sounds like it was both North America and Europe. Anything specific surrounding that back-half strength? Was it kind of industry-wide in your observation? What drove that?

Albert Angrisani

Better execution, more intensity I would say are the two drivers. More accountability.

Todd Van Fleet - First Analysis

All right, thank you.

Operator

Thank you. Your next question comes from the line of Mr. Matt McCormack of Friedman Billings Ramsey. Please proceed with your question.

Matt McCormack - Friedman Billings Ramsey

Hi, along the lines of the strength in the back-half of the quarter, you did mention that you had been providing incentives and that kind of got you in good graces with previous customers and brought in new customers. Could you speak to that strategy a little bit? Were you kind of offering just a generic kind of sample and then possibly cross-selling something a little more sophisticated?

Albert Angrisani

I think maybe the thing to do is to clear up what the purpose of the promotions is. It is a part of our marketing campaign that we believe is important to particularly Greenfield North America which, as we say in not so happy times, had taken a step back relative to the competition, and now we have a much better story to tell. The quality is up, we are more competitive. As you can see, things are moving in the right direction, but as you know, there is always a lag in the minds of the client, because they are never really as close to the situation as we are. So the promotions are intended, as I said in my comments, to basically move top-of-the-mind, to get more mind-share with these very important customers that have in some cases not done work with us for at least 12 months, and in some cases need a little bit of encouragement to come back and try the product again.

I am pleased to say that the first promotion was I think a reasonable success. It accomplished that. We have just gone out with another promotion this week, which we are having equal success with. We will continue to do this selectively until we feel that we have control of our marketplace again.

Matt McCormack - Friedman Billings Ramsey

Okay, and so this momentum that you speak about, does that continue in April?

Albert Angrisani

The sales momentum?

Matt McCormack - Friedman Billings Ramsey

Yes.

Albert Angrisani

I think the best thing I can say is that April met our expectations.

Matt McCormack - Friedman Billings Ramsey

Okay. In terms of your gross margins, I believe you changed the accounting for the unclaimed incentives. Did that have any benefit in the quarter?

Bob Bies

Yes, it did.

Matt McCormack - Friedman Billings Ramsey

Can you quantify that at all?

Bob Bies

It will be quantified actually in the 10Q that is coming out on Wednesday, so if you look in the MD&A section, you will be able to get a good view on what the drivers are and the cost of goods.

Matt McCormack - Friedman Billings Ramsey

But less than a percent, more than a percent?

Bob Bies

It’s more than a percent.

Matt McCormack - Friedman Billings Ramsey

Two percent, three percent?

Bob Bies

Matt, I would just say have a look at the 10Q. It’s in the MD&A.

Matt McCormack - Friedman Billings Ramsey

Thank you.

Operator

Thank you. Our next question comes from Mr. Brian Gonick of Corsair Capital. Please proceed with your question.

Brian Gonick - Corsair Capital

Good evening. Could you explain your reasoning in paying off the capital leases and in going through that analysis, did you consider buying back stock?

My second question is, can you tell us what the tax-basis is in the Ciao comparison shopping business? Thank you.

Bob Bies

We basically did a traditional IRR analysis on the cash in-flows and out-flows for the capital leases, and we came up with about a 12% IRR on a net basis. So on that basis, we are piling cash every quarter on the balance sheet at this point. We do not have any near-term strategic uses for the cash. We felt that paying off the debt, eliminating the interest expense is probably a wise thing to do, short balance sheet.

Brian Gonick - Corsair Capital

But what about buying back stock as an alternative? Did you consider the alternative?

Bob Bies

At this point, the board has not considered that.

The tax basis for the Ciao acquisition is about $154 million. That was the purchase price.

Brian Gonick - Corsair Capital

Is there any way to split it between the two businesses?

Bob Bies

No.

Brian Gonick - Corsair Capital

Thank you.

Operator

Thank you. Our next question comes from Mr. Todd Van Fleet of First Analysis. Please proceed with your question.

Todd Van Fleet - First Analysis

During the quarter, the $1.2 million G&A reduction in North America, can you give us a sense of where that came from? What areas of the business?

Bob Bies

Personnel, lease-holds, [sar-bins] fees, audit fees, travel, food and lodging -- it is really a kind of across-the-board reduction.

Todd Van Fleet - First Analysis

Any one expense item or line item have the majority of that, or people, or…?

Bob Bies

I would say people was a big piece of it.

Todd Van Fleet - First Analysis

Okay, and just thinking about the unallocated costs that you broke out, or at least identified during the quarter, $1.3 million. I guess that included the charge of $168,000. How should we think about what is included in those unallocated costs, just in terms of how much we might expect those to fluctuate quarter to quarter? Can you tell us what types of expenses are included in that figure?

Bob Bies

I would consider it a fixed cost. It is basically nine senior people that are in the company and the public company expenses that we incur that aren’t really associated with operations of the segment, so we pulled them out. I would say that you are probably looking at pretty much a level-loaded, maybe slight uptake as you go further through the year, but it is more fixed-cost than anything.

Todd Van Fleet - First Analysis

Thank you.

Operator

Thank you.

(Operator Instructions)

It appears there are no further questions at this time.

Cynthia Brockhoff

Thank you, Operator.

Albert Angrisani

I just want to say in closing, before Cynthia cuts us off here, thank you for joining us and we look forward to chatting with you in another quarter. If you have any follow-up questions, we are here to help you when and where we can. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today’s teleconference. You may disconnect your lines at this time.

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