Harris Interactive Inc. F2Q09 (Qtr End 12/31/08) Earnings Call Transcript

| About: Harris Interactive, (HPOL)

Harris Interactive Inc. (NASDAQ:HPOL)

F2Q09 (Qtr End 12/31/08) Earnings Call

February 06, 2009; 8:30 am ET


Kimberly Till - President & Chief Executive Officer

Deborah Rieger-Paganis - Interim Chief Financial Officer, Treasurer

Mike Burns - Vice President of Investor Relations and External Reporting


Todd Van Fleet - First Analysis

Mark May - Needham & Company


Good day ladies and gentlemen and welcome to the second quarter 2009 Harris Interactive earnings conference call. My name is Dan and I’ll be your coordinator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the call over to your host for today’s call, Mr. Mike Burns, Vice President of Investor Relations and External Reporting; please proceed.

Mike Burns

Thank you, Dan and good morning everyone. Thank you for joining us to discuss our results for our second quarter of fiscal 2009. With me today are Miss Kimberly Till, our President and Chief Executive Officer and Ms. Deborah Rieger-Paganis our Interim Chief Financial Officer. At the conclusion of their formal remarks, Kimberly and Deb will be happy to answer your question.

A webcast replay of this entire call will be accessible via the Investor Relations section of our corporate website later this morning and will be archived there for at least 30 days; however, no telephone replay of this call will be provided.

During this call, we will make a number of forward looking statements. These statements are based on current expectation and are subject to known and unknown risks and uncertainties that could make actual results differ from those discussed today. Additional factors that could cause the actual results to differ from the expectations discussed on the call, are readily available in the risk factors section of our latest annual and quarterly report filed on Forms 10-K and 10-Q with the Securities and Exchange Commission. The company assumes no obligation to update the information provided here today.

I would also like to mention that we will be discussing non-GAAP financial measures on this call. These items are reconciled to GAAP financial data in the press release we issued this morning and are also posted on the Investor Relations section of our website at www.harrisinteractive.com.

I’d now like to turn the call over to Kimberly for her opening remarks. Kimberly.

Kimberly Till

Thank you Mike and good morning everyone. When I last spoke with you, I said that we needed to focus our initial efforts in two areas; analyzing the business to determine the right cost and organization structure; and augmenting the strong talent we already have with the top talent from outside. We’ve acted quickly and decisively in both areas.

In December we realigned our cost structure by reducing our U.S. headcount by 51 employees. This is an addition to the reduction of 27 employees in the U.S. that occurred shortly before I arrived. We reorganized the U.S. business unit into integrated vertical teams to concentrate more resources on client issue, deliver stronger insights and create greater value for our clients. We have also formed centers of excellence to develop and deliver cutting edge products and solutions into the marketplace.

The cost reductions we made this quarter were a critical first step to restoring profitability in the business and enabled us to reorganize our business structure to support the strategic initiatives we plan to undertake. We anticipate that these actions will result in approximately $9.5 million in annualized savings.

On the recruiting front we have been very active in the marketplace and I expect to have several key hires in place by the end of the fiscal year. I am very pleased with the caliber of talent that is attracted to Harris Interactive as we begin to implement our new vision and strategy.

We spent the past few months working with our management team and employees around the world to craft our go forward vision and strategy. I have also validated this strategy with numerous clients. I will share elements of the strategy with you today, but before we talk about where we are going, Deb will give us a financial recap of the quarter.

You will note that we have taken a number of charges in this quarter to streamline the business and position ourselves for growth. As you may be aware, Deb has only been with us since mid December and we are very grateful for her efforts during this transition period. Deb.

Deborah Rieger-Paganis

Thank you, Kimberly and good morning everyone. As you have seen from the press release, this has been a challenging quarter for us, largely due to the economy. Our revenues for the second quarter was slightly higher than our first quarter, but were lower than our second quarter fiscal 2008.

These declines in revenue are across nearly all of our geographic regions and were primarily due to macroeconomic factors, including foreign change fluctuation. On a consolidated basis, our revenues dropped $12.1 million or 19.2%, compared to the second quarter of fiscal 2008. Foreign exchange fluctuations accounted for $3.9 million or 32% of this drop.

On a geographic basis, our revenue was down 21% in the U.S., 26% in the U.K., 36% in Germany and 20% in Canada, all on a US dollar basis; however, in local currency the picture is somewhat different. On a local currency basis U.K. and Canadian revenues declined only 4% and 2% respectively and revenue in Germany declined 29%.

On a more positive note, our two bright spots were Asia and France. Their revenues were up 83% and 20% respectively. Our French operations continue to experience growth within the healthcare industry. Additionally, we are seeing positive results from our investment methodology and advanced analytics being used to develop innovative and new solutions in France. Our focused marketing efforts are also helping to foster brand expansion and market share growth.

In Asia, our growth was primarily attributable to new opportunities in the pharmaceutical and telecommunication industries and increase business with our clients in the financial services sector. In previous releases, we have provided the details of the portion of our revenue that was internet-based. Since, we were recently one of the few providers of internet-based market research; we believe this metric provided an understanding of our growth prospects by measuring the speed of conversion of our clients to the internet.

This method of data collection is now widely used and internet-based revenue as a percentage of our total revenue has stabilized in the 60% to 70% range. Accordingly, we will no longer reporting on this metric. Going forward, we plan to leverage all technology platforms to service our clients.

Our booking for the three months period were $48.6 million, down from $68.2 million in the prior year. We ended the quarter with the sales backlog of $58 million compared to $72.8 million in 2008. Our operating loss for the quarter was $45.9 million. Embedded in this loss is $46.1 million in charges related to actions taken to restructure the business and the impairment of our goodwill.

Given the drop in our stock price over the past few months and the decline of the company’s market capitalization below the carrying value of its net assets, we performed an interim assessment of our goodwill to determine whether or not goodwill was impaired at December 31. Based on this assessment, we recorded a non-cash impairment charge of $40.3 million. We also performed an assessment of our other intangible assets and determined that no impairment charges were required.

Restructuring and other charges included in our operating loss, included three significant categories; (1) severance related to our U.S. reduction force of 78 full-time employment and senior executive departures of $3.9 million; (2) cost associated with base reduction in the U.S. of $859,000; (3) fees based performance improvement consultants of $1.1 million.

Our sales and marketing and our general and administrative expenses, both decreased during the quarter from prior year level, but were higher as a percentage of revenue. In certain of our costs such as depreciation and amortization objects, they negatively impact our operating expense percentage to revenue when revenues declined.

While we have taken actions to reduce certain variable costs, specifically labor reduction, the full benefit of these actions will not begin to be realized until the third quarter. On an annualized basis, we expect to realize savings of approximate $9.5 million, almost all of which relates to payroll and benefit savings. While we believe the actions we have taken during the quarter bringing our cost structure into appropriate alignment with our revenues, we will continue to proactively monitor our cost on an ongoing basis.

Our net loss for the quarter was $65.6 million or $1.23 per share. As you will note, we have a significant increase in our tax expense. During the quarter, we assessed the realize ability of our deferred tax assets; the majority of which relate to our U.S. operation. The assessment, which was done in accordance with the applicable accounting literature placed a significant weight on historical results such as operating losses we have experienced in the last three quarters, rather than the projected future results.

Accordingly, we recorded a non-cash valuation allowance of $18.9 million at December 31, against the net deferred tax assets of our U.S. operations. We strongly believe our U.S. operations will return to profitability and we will be able to utilize the tax benefit to offset our required cash tax payment in the future.

Our bank covenants contain a measurement of adjusted EBITDA for the trailing 12 month against our debt levels and interest expense. Our second quarter adjusted EBITDA was a negative $2.7 million. The definition of adjusted EBITDA in our credit facility allows for the add back of certain non-cash charges, such as the goodwill impairment charge and stock-based compensation, but does not allow the add back of the restructuring and other charges we took related to severance, lease reduction and consulting fees as previously mentioned.

Accordingly, at December 31, 2008 we were not in compliance with our debt covenants. However, we did make our scheduled debt payment on December 31, of $1.7 million and obtained a 30 day waivers from our lenders on February 5. We are in active cooperative discussions with them and expect to have amended facilities in place by the end of the waiver period. We believe these facilities will be sufficient to meet our future financing needs.

Our interest expense was also impacted as a result of our covenant violation. We determined that the interest rate swap we have in place was not an effective cash flow hedge, at December 31, 2008 and accordingly recorded a charge of $961,000 as interest expense. This non-cash charge is equal to the change in the swaps fair value during the second fiscal quarter. Please refer to our 10-Q, which will be filed on Monday for additional details.

At December 31, our debt balance was $26 million, roughly equivalent to our $26.1 million in cash and marketable securities. While we believe, we have sufficient liquidity to meet out operating needs and execute the strategy Kimberly will share with you in a few moments, completing the credit facility amendment, still fundamental to our future growth and liquidity.

Given the continued uncertainty as a result of macroeconomic conditions for the remainder of fiscal 2009, we do not believe that it’s prudent of provide guidance on our full year results.

I’ll now turn it back over to Kimberly, to discuss our strategy for the future. Kimberly.

Kimberly Till

Thanks Deb. As Deb indicated, we have taken a number of charges this quarter. If these were excluded, we would have been roughly breakeven in this quarter. The charges related to goodwill and taxes were non-cash and our cash position remained strong. We will also continue to very carefully monitor our cost structure. We are optimistic that the initiatives that we’re putting in place will have a positive impact on both our cost structure and our revenues overtime.

As I mentioned, we’ve been working quite a bit on developing our global strategy and plans and we are beginning to roll those out. They will focus on four key areas; the first is, delivering superior client insides and services by creating client teams with specialized expertise. For example, this includes expertise by special audiences such a Hughes and Hispanics. We’ll also be providing exceptional client service from start to finish.

The second key area is leveraging technology. We’ll be leveraging it internally to lower our cost, increase our speed and improve our overall quality. We’ll be leveraging it externally by integrating data and analysis from multiple platforms and sources to deliver new products and solutions and as Deb mentioned, we want to exploit all technology platforms to better serve our clients.

The third areas is creating a seamless global platform and strengthening our global presence and the fourth is developing new products, both by innovative thinking, but also through strategic alliances that will offer high value added solutions to our clients.

By successfully executing this strategy, we believe we can continue to grow our market share even in these difficult economic times. As I mentioned, I discussed key elements of our strategy with numerous clients and it seems to really resonate with them. So, I’m very optimistic about Harris’s ability to rebuilt revenues and profits overtime.

So, now we’d be happy to take our questions about any of the financial comments that we made or about the strategy.

Question and Answer-Session


(Operator Instructions) Your first question comes from the line of Todd Van Fleet from First Analysis. Please proceed.

Todd Van Fleet - First Analysis

Good morning. I was just hopping maybe you could give us the dollar figures attached to revenue for the various markets, U.S., Canada, Germany etc?

Mike Burns

Actually Todd, that’s posted on our website.

Deborah Rieger-Paganis

I have it in font of me.

Mike Burns

And Deb has it as well, okay.

Deborah Rieger-Paganis

U.S. $31.9 million, Canada $5.2 million, U.K. $8.2 million, France $2.3 million, Germany $1.3 million and Asia $1.8 million, a total of $50.7 million.

Todd Van Fleet - First Analysis

Great thanks for that, and what was the impact of currency on the bookings activity in the quarter. So if you were to use the exchange rates from a year ago rather than 48.6, do you have a sense for what that number might have been or would have been?

Deborah Rieger-Paganis

I’m sorry, rather than the 40.6?

Todd Van Fleet - First Analysis

The 48.6?

Deborah Rieger-Paganis

Its $3.9 million as I mentioned for revenue, I did not have that for the bookings number, but I can get that for you.

Todd Van Fleet - First Analysis

Okay I’ll follow-up with you on that. With respect to the headcount, where I think the average FD’s were about 714 I think in the quarter. Kimberly do you have a sense for kind of are there certain metrics that you’re really focused on in terms of how to manage the business or once you’re managing the business by in particular over the course of the next couple of quarters. When you think about, the organization restructuring and having the cost kind of match the revenue or be appropriately sized relative to the revenue and there certain metrics that you’re focused on?

Kimberly Till

Yes, so we’re focusing on the number of hours that you need to deliver the business that we’re projecting; it’s one of the key metrics and how that converts to the FTEs that are required to service the clients.

Todd Van Fleet - First Analysis

Okay, given where the revenue has gone. I think over the course of the past couple of quarters in terms of the decline and you match that up relative to where the FTE levels have gone. It would seem to suggest that perhaps maybe there’s a little ways to go in terms of FTE’s, some further declines there. Is that a fair statement or no?

Kimberly Till

I mean we are carefully monitoring exactly where we think the business is headed and we are very aggressively aligning the cost structure to match that. In addition as I mentioned, we just put a new, much more integrated organization structure in place in December, which I think is going to better service clients, because it brings our solutions groups and our industry experts together in united teams. I would anticipate some additional cost savings coming out of that after we fully implemented that.

Todd Van Fleet - First Analysis

On the top-line, is it your expectation moving forward Kimberly that it’s going to be kind of tough to hold the top-line where it’s at, at this stage or do you think that maybe we haven’t quite seen the bottom just yet, but you expect that maybe some of the measures that you’re putting in place today will kind of bear fruit, maybe a couple of quarters out.

I’m just trying to get a sense. I know you’re not providing guidance, but I’m just trying to get a sense for how you’re thinking about the top-line and the likely hood of sustaining the top-line given all the initiatives that you have in place?

Kimberly Till

Right, I mean as you know in this economy, nobody can predict exactly what’s going to happen in ’09 and ’10 and we’re carefully monitoring that, but we are putting in place a number of measures that are going to enabled us to take share and we build revenue. The cost measures that we put in place are obviously going to have a more immediate impact than the revenue rebuilding.

I do anticipate overtime the revenue rebuilding initiative will have a positive impact on revenue too; but as we said, my understanding and sense from talking to other players in this field as well as a number of clients is that, it’s going to be a very difficult market for market research in 2009.

Todd Van Fleet - First Analysis

Just one more if I could forego, Kimberly is it your expectation that Harris can become a meaningfully profitable company, that is from a margin standpoint and have margins approach kind of what you see amongst some of the larger pears in the marketplace? Is it your expectation or your belief that the company can become more meaningfully profitable on a smaller revenue base?

Kimberly Till

Yes, I definitely believe the company can become more profitable. Some of the technology things that we are putting in place are going to give us a significant cost advantage, efficiency advantage, higher quality. So yes, I would anticipate that we can get to the industry levels of margins.

Todd Van Fleet - First Analysis

Could I ask you just to kind of talk about maybe a couple of those initiatives, those technology initiatives?

Kimberly Till

Well for one we are completely streamlining our IT and operations workflow and infrastructure, automating a number of manual processes, putting in a lot of automated quality checks, which reduces rework which is expensive and a number of other initiatives like that, along with the workflow in the backend, including off shoring and other things. So, I think all of those are going to have a positive impact as I said in three years, on the cost side, on the speed side and on the quality side.

Todd Van Fleet - First Analysis

Thank you.


Your next question comes from the line of Mark May from Needham & Company. Please proceed.

Mark May - Needham & Company

Thank you. I think I had two general questions and the first one I think is for Kimberly on strategy. While I understand that all four of your strategy plans or areas of focus, whatever you want to call them, are important, I’m trying to just focus on the ones that could have the greatest impact going forward. So, I’m wondering can you talk about the one or two of the four where you think Harris has the greatest story for improvement.

Kimberly Till

Well, so one is its whole teams and expert. So, its not just experts as you see in the market research industry now, where someone has brand and communication or stakeholder expertise. We are going much, much deeper in developing experts that can advice clients on very difficult business issues and opportunities.

So for example, we have one of the largest panels in the world and we have a number of hard to find respondents that are identified on that panel. That could be people with certain social demographic characteristics or people with certain illnesses, whatever.

Being able to leverage those specialty panels and insights from those and having experts on those special kind of sub-segments of the market, we think it’s going to be very, very attractive to a large number of our clients and also strengthening our expertise in some of the market research solutions. So, in the areas of brand and communication, new product development, stakeholder management, developing expertise that is much more action oriented and not as much as simply reporting back information.

Another major area where we’re focusing and have already started implementing this in the U.K. and we are extending that to other countries. Now it’s partnering with people that have other types of data. So for example, purchase behavior data that comes from a customer loyalty card.

If we take purchase data and add to it our attitudinal and behavioral data, you get a much better picture of what the consumer is and what their likely behavior will be for purchasing new products, competitive products and so forth. So, it’s really moving the company in deeper levels of insights, but also combining various sources of data to get better answers to clients.

Mark May - Needham & Company

Okay, great. That’s very interesting and helpful and then I guess looking back a question maybe more for Deborah, is just wondered if you could dive a little deeper into the key drivers of the results in the most recently reported period.

Maybe if you could talk about pricing trends and how that impacted the results versus the number or size of projects or maybe talk about it from a client or client segment perspective and the dynamics within different segments? Just wondering if you could dive a little deeper into the key drivers of revenue?

Deborah Rieger-Paganis

Well, actually in terms of the pricing start working that we are comfortable sharing with the market. I can talk a little bit about the different industries groups. One of things I said was that we actually are down across all of the industries groups from our revenue perspective. We are anywhere from 14% to 44% down, the only place that we saw any up-tike at all which was basically flat to last year in comparison to the other industries within the public affairs and policy. Everything else was really being hit about the same.

Mark May - Needham & Company

Okay. Great, thanks.


(Operator Instructions) At this time, there are no further questions in the queue. I would now like to turn the call back over to Ms. Kimberly Till for closing remarks.

Kimberly Till

We’re favorable, thank you everyone and we look forward to updating you again this spring.


Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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