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Executives

Michael T. Burns – Vice President-Investor Relations and External Reporting

Albert A. Angrisani – President, Vice Chairman and Chief Executive Officer

Eric W. Narowski – Principal Accounting Officer, Global Controller and Chief Financial Officer

Analysts

Julian Allen – Spitfire Capital

Richard Johnson – Emerging Growth Equities

Brian T. Horey – Aurelian Management LLC

Harris Interactive Inc. (HPOL) F2Q13 Earnings Call February 6, 2013 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Harris Interactive Second Quarter Fiscal 2013 Interactive 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 T. Burns

Good afternoon, and thank you for joining us to discuss Harris Interactive’s second 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 second quarter, Eric’s financial recap, and then Al will come back and provide an 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 available via our 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 will post a transcript of this call as soon as we can after the call.

We like to take this opportunity to remind you that certain statements made during this call are forward-looking statements for the 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’s earnings release as well as the company’s SEC filings, particularly under the Risk Factor 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 publically 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 are items are reconciled to GAAP financial measures in today’s press release and are posted on the Investor Relation

section of our website.

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

Albert A. Angrisani

Thanks Mike, and good afternoon everyone. I am pleased to report that our turnaround program is progressing on schedule. As many of you know, we announced full fiscal year earnings guidance today specifically they’re based on current market conditions and forecasts. We expect between $13.5 million to $14.5 million in adjusted EBITDA. That represents a significant improvement over fiscal 2012 and the strong indication of our progress.

Another strong indication of our progress is our improved profitability in the quarter, which as allowed us to continue to deleverage our balance sheet and position ourselves to payoff all remaining bank debt by fiscal year end.

This quarter, we also achieved year-over-year growth in bookings. But I am cautioning investors that we still need to strengthen our sales engine in order to ensure consistent growth of sales. We plan to address this consistency challenges recall it, by continuing to invest in our sales engine and better focusing our product offerings to align with our strengths, the needs of our clients and the marketplace in general.

I will now turn it over to Eric to cover the financials and then I will come back to give you a sense of where we are within each of our business units. Eric?

Eric W. Narowski

Thanks Al and good afternoon. Recapping the second quarter, revenue was $37.1 million, down 5% from $39.1 million for the same prior-year period. Foreign currency exchange rate differences did not have a meaningful impact on revenue. The decrease was driven by the U.S., Canada, and UK, primarily as a result of the revenue impact of bookings declines and those operations that are in the later part of fiscal 2012.

Our operating income was $3 million compared with operating income of $2.3 million for the same prior year period. Our net income was $2.9 million or $0.05 per fully diluted share compared with net income of $1.6 million or $0.03 per fully diluted share for the same prior year.

Cash provided by operations was $1.6 million compared with $3.3 million and cash provided by operations for the same prior year period. The decrease in cash provided by operations was mainly due to timing differences related to accounts receivable, which in large part has been singular.

Non-GAAP adjusted EBITDA with restructuring and other charges added back was $4.8 million compared with $4 million for the same prior year period.

Bookings were $47.8 million, up 5% compared with $45.2 million for the same prior year period. Foreign currency exchange rate differences did not have a meaningful impact on bookings, the increase was driven by increased bookings in the US, Canada and France.

At December 31, 2012 we had $11.1 million in cash and $3.6 million in outstanding debt and were in compliance with our financial covenants under our credit agreement. Secured revenue at December 31, 2012 was $54.1 million, up 20% compared with $45.1 million at December 31, 2011. Foreign currency exchange rate difference 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 period. As a reminder projects included in secured revenue at the end of our fiscal period generally convert to revenue during the following 12 months.

I’d now like to turn the call back over to Al for his update on the performance of each of our businesses.

Albert A. Angrisani

Okay. Thanks Eric. As promised, I’d now like to give you a sense of where we are within each of our businesses based on the sales expectations I set for each of them on our fiscal year end conference call. To remind you, I noted on the call that I expect moderate growth from our custom solution group, a maintenance outcome from our healthcare research group, aggressive growth from the Harris Poll group and the Harris Interactive Service Bureau and a growth outcome from our international business, subject of course to the impact of the economic events underway in Europe.

First our largest business, the Custom Solutions Group continues to perform according to plan by going deeper into their elite client relationships and emphasizing products and services where we Harris have a competitive advantage. I remain confident that this group CSG can achieve modest growth, the modest growth expectations we have for them in this fiscal year.

Our second U.S. business, Healthcare Research continues to perform according to plan by having mostly a more focused product and service strategy around our key accounts. Our next U.S. business, the Harris Poll Group continues to perform according to plan primarily due to the success it’s having selling public research, also by leveraging the Harris Poll brand and our unique expertise in conducting this type of research.

Our final U.S. business the Harris Interactive Service Bureau also known as HISB is behind plan at the mid point of the year. But we continue to develop the sales and delivery channels required to meet our growth expectations throughout the remainder of the year.

And finally, our international business consisting of our UK, Canada, France and German operations, is largely performing according to plan at the midpoint of the year, primarily due to good sales performance from our French and German operations. That being said our, European operations faced a difficult economic environment, so there is some uncertainty as to whether this performance will continue.

Now in closing, let me remind you that at the outset of this call, I said we were making good progress in the turnaround. However, in order for us to successfully complete the turnaround, which we are now 18 months into we need to achieve steady sales performance across all of our business units for an extended period of time. I wanted to remind investors about that.

Okay, so now let's open it up for questions. Mike, back over to you.

Michael T. Burns

Thanks Al. And operator if you could please now open the queue for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We do have a question from Julian Allen from Spitfire Capital.

Julian Allen – Spitfire Capital

Hi good afternoon. Thanks for taking my question. Al, I think in the past, you’ve mentioned a target adjusted EBITDA margin of around 10% and obviously the business is performing slightly ahead of that. Have you changed your view of the margin potential of the business?

Albert A. Angrisani

Maybe both Eric and I should comment on that. I will start by saying that no, I think the market research industry is the market research industry. There are always some unique aspects to what one company would do versus another. I think I’d like to say that I am pleased that we are approaching that 10% threshold at this stage in the turnaround. So I think it’s rather than change my expectations, I’d rather use it as sort of an indication that we’ve properly right sized our cross model. We have business unit leaders focused on selling profitable work, we’ve eliminated awful lot of the bad revenue that was in the system and I think it’s steady as you go on profits while we try to maintain those margins as we grow the business.

Eric, I don’t know if you add anything to that.

Eric W. Narowski

I agree with that, Al. I think, yes, we’ve had a good start to our first half of the year. Remember that you have to look at our business more on a calendar year basis versus just that first half basis. So we do see some seasonality in our margins and then goes through different quarters and such, but we continue to work on that EBITDA and try to drive on as much as we can.

Julian Allen – Spitfire Capital

Great, second question, could you comment a little bit about the seasonality in the business. In fiscal 12 obviously there was a very weak fiscal fourth quarter. Was last year something of an aberration or what can you tell us about first half versus second half in a typical year?

Albert A. Angrisani

We have seen some movement in that and historically if you go back a few years, fourth quarter was always a very strong quarter, our strongest quarter, then it’s leveled out more in the last couple of years. Our first quarter given there is a slow down in the business, a lot of clients are on vacations, and such things slow down. Q2 has picked up pretty heavily for us, lot of calendar year clients are working on finishing up their business. And then in the first quarter, we normally see a little slow down in the business. And we’re getting back into things and then get back into the fourth quarter. So it’s kind of hard to say because there is inconsistency between the quarters, and part of that’s related to clients, the mix of our revenue, the rate of our revenue and how that comes in. I just caution people that looking at any one quarter is hard, you should look at it more over a longer period of time.

Julian Allen – Spitfire Capital

And then my last question is with the balance sheet now relatively clean and with no debt that expected by fiscal year-end. What are your thoughts with respect to capital allocation going forward? Thanks very much.

Albert A. Angrisani

Capital allocation or use of the cash?

Julian Allen – Spitfire Capital

Yes exactly.

Albert A. Angrisani

Yes it's a good question. I think right now we are focused on generating more cash from our business as the margins improve. Eric and the financial team are focused on their goals to start building cash for the business, I'd say right now it's a moment and we can always change our mind. I think our goal is to build cash and to put a decent amount of cash on that balance sheet to try to help us as we look at what is the best way to drive shareholder value. So I think as we move to the turnaround and again stay focused on the sales challenge, which is job number one at Harris to get consistent sales growth that at the right profit margins. If we do that the cash will come and we’ll collect it and we'll build it. But I think truly the answer to your question Julian it really all comes down to after we are sort of little more comfortable with that and this is happening a little more automatically with not as much handholding as we have to do at the moment to do it. We would then really sit down and seriously look at how that cash could be used to drive shareholder value. That is the only expectation we have for cash.

Julian Allen – Spitfire Capital

Great thanks very much guys.

Operator

(Operator Instructions) The next question comes from (inaudible).

Unidentified Analyst

Hi guys, excellent quarter. My only question goes to cash generation and Eric touched on this but I looked at your adjusted EBITDA number – your target. I think you talked about CapEx being a couple of million dollars this year words in your mouth. Then I look you have an NOL and the only other thing is sort of working capital. I am trying to, can you guys feel like the business requires an investment in working capital or is that something that might be neutral just to give me a sense of the ability of the business to generate cash because it looks like given the adjusted EBITDA numbers, the CapEx and the NOL because that should throw out quite a lot of cash?

Eric W. Narowski

Yeah, it’s a good question. Yeah, we did touched on cash generated (inaudible) reason, you get different timing differences and the receivables for this quarter that has been subsequently collected. So we reflect a little bit more cash, but it came in outside of the quarter, but from a very high level yes, when you look at our EBITDA we are still on a quarterly basis and on it as we currently stand at $1.2 million interest. We still have some restructuring, if we go into our filing, you will see that we do have some restructuring their specifically related to some facilities that we impaired over the prior year that we are still paying off this coming out of our cash generation. And the CapEx rate now – our number is about $1 million to $1.5 million, that on a full year basis we just spend around $300,000 so far through the first half of the year, and those are really the main factors that come into either our cash uses. Working capital does fluctuate and it fluctuates a little bit just based on the timing of and the seasonality of the business, but over a longer period of time, I don't view anything going down and that it should affect the longer term cash.

Unidentified Analyst

So you don’t need to – I am sorry, go ahead.

Albert A. Angrisani

I just want to add one thing to that, Eric got it exactly right, but just on perspective, remember and just in terms of turnaround, it’s perfectly acceptable and appropriate to be building cash, but this turnaround is a little different than the other ones only because all of the restructuring charges have been fining, and that has internally generated cash. And this company tended to have legacy real estate expense that was out of the ordinary in terms of the size and scope of it, which Eric and Mike Burns and Marc Levin are working on for the remainder of the year to try to push that cost, that expense down. So I just want to give you a sense of that everything Eric said is right and in addition to that, we are driving an anchor from….

Unidentified Analyst

Yeah, the cash – the restructuring charges you guys have funded, I am asking the cash generating ability of the business, which I am hoping is if things continue along, it will start to become more evident to people and I think clearly very impressive. Question for you Al, have you – are there organic projects that are out there that you could deploy cash into at high rates of return that you kind of uncovered, you sort of said that turnaround is potentially an asset like, at least on the internally project, any ability to use the cash at some point in time to drive the sales with organic projects?

Albert A. Angrisani

Well, I think that said, I mean as I said on my call, we are trying to solve this sales challenge that we have which is more now one of generating continuous performance to get across all the business units for an extended period of time by making some investments. We’ve made some of those investments already and the fact that we've now been able to attract some better sales talents at the company. And whenever we find good sales talent, we are certainly bringing them on board.

But I think that was the vision of our, at the moment that’s the parameter's of our vision about investment, that and possibly strengthening up some of our IT infrastructure with some under investment over the last few years, but beyond that in terms of other things, we are not there as a company. We are not ready to start looking at high return items that we can put cash into that might move the bottom line. We are still ways away from that and we can't go there until we solve the contiguous suspended sales challenge I mentioned. Eric, if you want to add to that.

Eric W. Narowski

No, I agree with that – I agree. We are just evaluating those as we go on.

Unidentified Analyst

Well I'll just congratulate you guys on the job, you’ve done so far and I think your strategy of de-risking the balance sheet and just piling up cash because we never know what’s going to happen and every amount on the cash you put on the company just gives you more options and protects the franchise. So keep up the great work.

Eric W. Narowski

Thank you.

Albert A. Angrisani

Thanks.

Operator

The next question comes from Rick Johnson from the Emerging Growth Equities.

Richard Johnson – Emerging Growth Equities

Hello Al and Eric, a nice quarter gentlemen. What are the check, Al you had mentioned in your prepared remarks or actually in the press release that you talked about new product offerings and how they may contribute moving forward. Can you talk about any new product offerings that are out there and whether they contributed in the most recent quarter?

Albert A. Angrisani

Well, it's a great question Rick and thank you. What we are doing in each of our business unit is if we go back to where we start in the turnaround, back I get into the exact amount of products that were being sold through the various business units, but they were quite numerous. And each of our business unit leaders is doing a very good job identifying what it is, they do best whether it's in our Custom Solutions Group or in our Healthcare Group or in our Harris Poll group or in our service peer, we are looking at what is it with that Harris value proposition it is second to none in the industry and where we could sell more of the deeper and declined relationships and that’s hit the core of our products strategy.

Now that also means that some things we stopped selling, right. Those are the unprofitable things. The work that was being done with no margin, that’s what we call bad work, trying to get all that bad work out of our system, but it also means that – also that product discipline, whatever it might be that we’re trying to tactically improve the products.

So our product innovation is at this point mostly tactical and probably don’t want to say too much more about it than that since it’s a public call and competitors are listening. We are sharpening the focus of our core product, strengthening the delivery, strengthening what they do for clients, improving the value proposition and thinking about strategic versus tactical new products that we can add to our business next year, but that is a long wedding process. And the way we are going to do it is that it’s got anything that we move into the areas of new products, it’s got to have that strong ROI component, that’s measurable too. So we are being very careful about how we approach that because as you know we can spend awful lot of money there and you will not get much back.

Richard Johnson – Emerging Growth Equities

Right, right, okay. And the second thing I was going to ask was about your DSOs and also you had a big jump in accounts receivable and Eric kind of paid down some of that during the call, I was just curious to see if there was anything, any major issues there moving forward whether it was just the kind of one-time event?

Eric W. Narowski

Yeah, it really was a one-time event. It was specifically just related to some tiny differences, nothing in terms of anything that’s bad receivables or anything of that nature. It was just timing with the clients and meeting those payments and as I mentioned in my call that the majority of that was received during January or back in January, so we should see that coming through in our Q3 numbers.

Richard Johnson – Emerging Growth Equities

Great, okay. Well keep up the great work guys. Thanks.

Eric W. Narowski

Thanks Rick.

Operator

The next question comes from Brian Horey from Aurelian.

Brian T. Horey – Aurelian Management LLC

Thanks for taking my question. Can you give us a little color on your HISB growth efforts and are there any particular segments you're targeting and can you talk about you mentioned trying to enhance the delivery capability and maybe you can just expand on that a little bit?

Albert A. Angrisani

Sure Brian, I mean, this is one of the new initiatives that we started a year ago, because we felt that we had a core asset in the Harris Poll that was being underutilized, I am sorry, the Harris Panel, not the Harris Poll, that was being underutilized, I mean we firmly believe that Harris has the very best panels in the industry, which means it has the very best survey takers of the highest quality and that’s always in a premium.

We use that panel to take care of our own work and it does equate well on our customer. However we have access panel, because people want to belong to the Harris Panel and so we started to figure out how to monetize that through the service bureau in a product called Get Sample. We're working on that right now and there are a couple of different ways to do that; there is the – we hired some sales people to go out and sell it into a retail channel where you go to customers and sell it project by project and now we're working on the development.

Todd Myers is working on this, our Chief Operating Officer for the U.S. business is working on developing wholesale channels where we could sell it in bulk and both of those are sorted in their infancy. As I mentioned on the call we are a little behind plan there, that’s one of the areas that is not consistent and is dragging our sales performance down, but I believe we are doing all the right things and it's a matter of timing to get that sales momentum we are looking for in that business.

I know the business fairly well, I ran one of those companies before Harris Company called Greenfield Online and I know that there isn’t a reason why Harris Interactive should not be successful in that business, it's just a matter of putting our infrastructure and getting our product proposition right and our pricing right. So, we're going to be patient with it and hopefully it will come around for us fairly soon.

Brian T. Horey – Aurelian Management LLC

Okay. Is that a business which should have higher margins once you kind of get it to scale?

Albert A. Angrisani

Eric?

Eric W. Narowski

Yeah, sure, it's a very non-labor-intensive part of our unit and also then we'll utilize one of the assets as Al mentioned our internal panel. So it is one of our higher margin units and will be.

Brian T. Horey – Aurelian Management LLC

Okay. And then my other question was, I appreciate the desire to kind of walk before you can run in terms of having consistent sales performance before you kind of step on the gas in terms of investment, but how many more quarters of consistent performance do you think you need to see before you get to that point, I mean, is that six months, is that a year, can you just give us some general sense as to what’s your thoughts are?

Eric W. Narowski

Well, first of all that bell you hear ringing in the back I mean view that as price Brian, because we were wondering who is going to ask that question. It’s the $64 billion question right, how much more, it’s not an exact science to be able to answer that, it’s more of an art form and it’s the same in every turnaround. I usually know when our business unit leaders are able to put the resources that we put into their sales operations when they are able to steadily sell work at or slightly ahead of budget without it being what I call episodic meaning that you are down to the last minute and your organization stress then, if you close this deal, you hit your number and if you don’t close this deal, you don’t. It should be moving fairly steadily at a growth rate that reflects somewhat where the market is.

My personal judgment is and I went to great (inaudible), you could see in the call as highlight, you can actually use the word caution to investors, because investors would want to tend to get ahead of this issue and it’s the last thing to come together in the turnaround and of course it’s the most difficult. And my caution is that we are not there yet, we are in my mind at least several quarters away from we being able to go to bed at night and saying, I am pretty sure that this thing is operating at a non-episodic manner. Here, we are going to need a couple more quarters, we feel comfortable with our ability to steadily deliver sales across all the business units on a regular basis.

Brian T. Horey – Aurelian Management LLC

Okay, fair enough. Thank you.

Operator

The next question comes from (inaudible) from DCM.

Unidentified Analyst

Hi thank you for hosting the call. I appreciate the opportunity to ask the question. I am curious to learn more about the global association, any comments how it progressed overtime and then how should I appropriately think the global relationship in the right context? Thank you.

Albert A. Angrisani

Yeah, I mean visible relationship is a valued relationship, we do a lot custom work for the Google, we're working with them and trying to figure out some creative ways for them to help us with a variety of our products and yes, I would call it a sort of work in progress type of arrangement between the two of us, where I can tell you unequivocally that in the numbers that Eric and I have just expressed and working going forward, that we are not building any financial impact into those numbers at the moment, because it's too early in the scheme of the relationship to know whether it's going to be a contributor or not.

We're hopeful that there will be a couple of things that we can do with Google through, particularly for our Harris Poll area, but that will go where it’s going to go but it's a very minimum, we view Google as a value customer and on our custom market research side and like everyone one of our customers, we hope that they do a lot more business with us. I can't be any more specific than that, but there is no financial impact attributed to the Google venture in any of these numbers or any numbers going forward.

Unidentified Analyst

Okay, thank you.

Operator

(Operator Instructions) I'm showing no further question, I would now like to turn the call back over to Michael Burns.

Michael T. Burns

Well, thanks again to everyone for joining us this afternoon and we look forward to speaking with you in early May when we release our Q3 fiscal 2013 results.

Operator

Ladies and gentlemen, that does conclude the conference for today, again thank you for your participation. You may all disconnect.

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