Harris Interactive Inc. (NASDAQ:HPOL)
F3Q13 Earnings Call
May 2, 2013 5:00 PM ET
Michael Burns – VP, IR
Al Angrisani – President, CEO and Vice Chairman
Eric Narowski – CFO, Principal Accounting Officer, and Global Controller
Brian Horey – Aurelian Management LLC
David Hodges – Barrow Hanley
Good day, ladies and gentlemen, and welcome to the Harris Interactive, Inc. Third Quarter 2013 Earnings conference call. At this time, all participants are in a listen-only mode. Later, we’ll have question-and-answer session and instructions will follow at that time. (Operator Instructions).
I would now like to turn the conference over to your host for today, Mr. Michael Burns, Vice President of Investor Relations. Sir, you may begin.
Good afternoon, and thank you for joining us to discuss Harris Interactive third quarter fiscal 2013 financial results.
With me today are Al Angrisani, our President and CEO; and Eric Narowski, our Chief Financial Officer. The format for today’s call will include Al’s commentary on the quarter, Eric’s financial recap, and then Al will come back and give 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 accessible via the Investor Relations section of our corporate website later this evening 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 are able after the call.
We like to take this opportunity to remind you that certain statements made during this conference call are forward-looking statements for purposes of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. These statements include beliefs, predictions and expectations related to the Company’s future financial performance, other business and operating metrics, as well as statements regarding the company’s future plans and operations. They involve a number of risks, known and unknown, that could cause actual results, performance and/or achievements of the company to be materially different from the beliefs, predictions and expectations discussed on this call.
Factors that could cause the company’s results to materially differ from the forward-looking statements made today and which are incorporated by reference herein are more fully described in today’s press release as well as the company’s SEC filings, 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 will also be discussing non-GAAP financial measures including adjusted EBITDA with the add back of restructuring and other charges. These items are reconciled to GAAP financial measures in today’s press release and that reconciliation is also posted on the Investor Relations section of our website.
I’d now like to turn today’s call over to Al. Al?
Thank you, Mike, and good afternoon everyone. Let me begin by saying that for the fiscal year to date as well as fiscal Q3, I’m generally pleased with the overall financial performance of the company.
Our improved profitability has been largely due to improvement at our business model and the progress and our turnaround effort. As you can see from the updated financial guidance, we’ve achieved a very high level of operating efficiency at our current revenue levels.
To provide a realistic expectation of where revenue for the full fiscal year will end up, I thought it was important for Eric to provide the revenue guidance that was issued today in addition to the adjusted EBITDA guidance we’ve been providing since last quarter.
Frankly, at this stage of the turnaround, sales should be trending up over prior year. But this turnaround is unique in that strong, global, economic headwinds are making sales growth a challenge. However, on the positive side, essentially flat year to date sales versus the first nine months of the last fiscal year are an indication that we are making progress with sales.
When one looks deeper into our sales numbers, one can see that we have isolated the sales challenge to three specific areas of our company, our US healthcare business, our business in the United Kingdom and our Canadian business. I want to make it clear that some of the declines in these three businesses were planned for the specific purpose of improving profitability. And that these declines have been somewhat offset now by the gains in our custom solutions business, our Harris Interactive Service Bureau, our Harris Poll business, our German business and our French business.
Let me stop there and after Eric gives you an overview of the quarter in more detail and the fiscal year to date, I’ll come back and comment more specifically on some of the trends in each of these businesses.
Eric, I’ll turn it over to you.
Thanks Al. Good afternoon. Recapping the third quarter, revenue was $33.6 million, down 2% from $34.1 million for the same prior year period. Excluding foreign currency exchange rate differences, revenue was down 1%. Bookings were $34.4 million, down 13% compared with $39.5 million for the same prior year period. Excluding foreign currency exchange rate differences, bookings were down 10%. The decrease was driven by bookings declines in our US healthcare and international businesses.
Our operating income was $1.1 million compared with an operating loss of $371,000 for the same prior year period. Our net income was $953,000 or $0.02 per fully diluted share compared with a net loss of $323,000 or $0.01 per fully diluted share for the same prior year period.
Cash provided by operations was $5.5 million compared with $100,000 in cash provided by operations for the same prior year period. The increase in cash provided by operations was mainly due to timing differences and accounts receivable during Q2 of fiscal 2013 that were subsequently collected during Q3 as well as the impact of our improved financial performance.
Non-GAAP adjusted EBITDA with restructuring and other charges added back was $2.7 million compared with $1.5 million for the same prior year period.
Here’s where we stand for the first nine months of the fiscal year. Revenue was $103.7 million, down 7% from $111 million for the same prior year period. Excluding foreign currency exchange rate differences, revenue was down 6%. Bookings were $116.1 million, down 1% compared with $116.8 million for the same prior year period. Excluding foreign currency exchange rate differences, bookings were essentially flat compared with the same prior year period.
Our operating income was $6 million compared with an operating loss of $2.3 million, which included $5.3 million in restructuring other charges for the same prior year period. Our net income was $5.6 million or $0.10 per fully diluted share compared with the net loss of $4.7 million or $0.08 per fully diluted share for the same prior year period. Cash provided by operations was $7.4 million compared with $3.6 million in cash provided by operations for the same prior year period.
Non-GAAP adjusted EBITDA with restructuring and other charges added back was $11.1 million, up 32% compared with $8.4 million for the same prior year period.
At March 31, 2013, we had $14.9 million in cash and $2.4 million in outstanding debt and were in compliance with our financial covenants under our credit agreement. Secured revenue at March 31, 2013, was $55 million, up 9% compared with $50.5 million at March 31, 2012. Foreign currency exchange rate differences did not have a meaningful impact on secured revenue.
The increase in secured revenue was mainly due to timing differences compared to 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.
While the results in any one quarter are important, they should always be viewed within a broader context of the fiscal year. This is why we have decided to issue our financial guidance on a full fiscal year basis rather than focused on any one quarter. Based on our current market conditions and forecast for the fiscal year ended June 30, 2013, we are projecting revenue will be between $139 million and $141 million and adjusted EBITDA will be between $14 million and $15 million.
I’d now like to turn the call over to Al for his update on the performance of its business. Al?
Okay. Thanks, Eric. As I’ve done on recent calls, I’d now like to give you a sense of where we are with each of our businesses based on the expectations I set for each for each business on our fiscal year end conference call.
To remind you, I noted that on the call that from a year over year sales standpoint, I expect certain things from each business. I expected moderate growth from our Custom Solution Group, a maintenance outcome from our healthcare research group, an aggressive growth outcome from both the Harris Poll and our Harris Interactive Service Bureau also known as HISB, and a growth outcome from our international businesses subject to the impact of the economic events underway in Europe.
To bring you up to date, our Custom Solutions Group continues to perform consistent with my expectations of moderate growth. Year to date, the group has been able to achieve moderate growth largely due to its success and securing renewals and winning new work its elite clients while settling priority products and services to non-elite clients.
As for healthcare, despite experiencing a decline this year fiscal year to date, our healthcare research group is beginning to benefit from an infusion of new talent and a more focused product and service strategy around key accounts. As a result, I believe a maintenance outcome for the business is achievable.
Our Harris Poll Group continues to perform to plan, largely due to its success selling publicly these studies, which they’re doing by leveraging Harris’s strong brand and reputation for credible, accurate research and to remind you to Harris Poll had an aggressive growth goal.
Through the implementation of new sales and delivery channels, our Harris Interactive Service Bureau bolstered by our new sample only beginning of business is beginning to exhibit sign that is capable of aggressively growing according to expectations.
And lastly, our international businesses consisting of our UK, Canada, France and German operations continues to largely perform to plan from a year to date standpoint despite challenging Q3 for a variety of reasons.
I think that gives you a pretty good feel for the general movement of our businesses. And as Eric and I have laid out in our preliminary comments where we stand in Q3 and year to date, and I think with that, we should just turn it over and take some questions. Mike?
Yes, that sounds good. Operator, if you could please open the queue for questions.
Certainly. (Operator Instructions) We have a question from Brian Horey from Aurelian Management. Your line is open.
Brian Horey – Aurelian Management LLC
Thanks for taking my question. Al, last quarter I asked you to share your thoughts on how far you thought we were from being able to kind of step on the gas and accelerate growth and I think at that time, you said things are getting better but you’re not quite there yet.
And so I was just wanted to kind of re-ask that question and see if that point in time as kind of closer and focus now than it was then and switch the level of confidence that you’ll be able to sustain growth, consistent basis going forward and maybe put some more resource behind the growth efforts.
Okay, I remember the question, Brian, and thanks for asking this again because it allows me to showcase the key point of this earnings call that we’ve been trying to make. And early on, when I took over the turnaround, we talked about systemic sales challenges across the entire business. I think we’re sort of gone out of our way with Eric’s comments and mine to make it pretty clear to the investor community and people listening that we believe that the sales challenge is now isolated into just a couple of our businesses as oppose to the entire business.
So where we are right now in terms of hopes and expectations about growth going forward in the businesses that I just spoke to where I thought that things were improving and we were actually getting some upward momentum in sales. I mean, we’re hopeful that that continues while we end those businesses that I mentioned, our health care business, our UK business and our Canadian business that we can begin take, well, we are actually doing it right now, that the actions we’re taking right now will position us for better things next year.
So it’s a bit of a growth story that tends to now evolve more around the performance of the individual business units and then how they roll up to the entire company. So there isn’t one answer that says, no, I’m optimistic about the whole company growing. I think I have to look at it at the business unit level. And of course the best result is at some point in time for all of the businesses to be moving forward.
So it’s still very much is a challenge. And I use that word several times. It’s a challenge that is manifested by, quite frankly, slow economic growth and client’s budgets that are not growing aggressively, growing at all. And it’s a challenge globally where we have parts of the world that are growing less than the US.
So therefore, we’ve decided not to try to tackle this from a global perspective in the company. We divided our business into we think our logical business units and we’re attacking each of those markets in a way where we think we can win at the business unit level.
I think quite frankly the guys around here say that I’m a glass that’s half empty or half full guy, the glass is always empty with me. I think that in terms of me feeling pretty good about the four business units that I sort of mention were moving in the right direction and the three that we have some work to do I think that’s a fairly positive statement about the progress that we’ve made. So I would say this is still, Brian, very much work in progress on the sales and growth side but we are making progress.
Brian Horey – Aurelian Management LLC
Okay. I appreciate the fact that you’ve got kind of a differential conditions in the different business units. It sounds like the bar was highest from a growth standpoint, for the Harris Poll and the Interactive Service Bureau, which it sounds like they’ve largely met. So given that in those particular units, are you inclined to kind of increase the investment level so to speak in growth for, let’s say, in the coming year?
Well, yes, it’s a great question, too. I mean those are obviously two of our smaller businesses. So the fact that we are feeling good about and they are executing on their growth plan that they’re doing that is good. But it’s not enough to offset as we indicated in our comments, some of the declining patterns and, for example, healthcare.
So yes, we are looking to, in next year’s budget, invest in those areas and give them a greater opportunity to grow but numbers are the numbers and until we can get the three businesses, Canada, the UK and the healthcare business, which are big chunk of our revenue growing, I’m not sure that those other businesses are going to be enough to move the top line numbers where we would all like them to go.
So we sort of have to mix and match and see how that turns out but the short answer is, yes, we have a little thing that we say around here, feed the winners and starve the losers. We are feeding our winners.
Brian Horey – Aurelian Management LLC
Yes. Okay. And then lastly, you referenced economic headwinds and the fact that things are still relatively difficult from a budget standpoint. Would you say this quarter relative to last quarter is an uptick or a downtick with respect to client budgets, willingness to commit to programs and so forth?
Yes, I mean, I can only give you anecdotal comments on this. I don’t have empirical data that looks at every customer’s budget, but I do talk to our business leaders a lot. And Todd Myers who runs our US business and I communicate quite frequently on this subject. And we work very closely with our customers and we know widgets are being handed down to them.
And I’d stay that still on our industry, our clients are asking us to do more with, quite frankly, the same amount of budget authority and not growing and are not declining, that’s my take on it. And that’s really consistent with the GDP that’s out there around 2%, 2.5% and only we’re not knocking to cover off the ball economically and our customers are being careful with their money as we are. I mean, we’re doing the same thing our clients are doing.
Eric and I are being very careful with how we spend money. So I’d say that’s just a symptom out there, a general business environment with your Harris Interactive or your General Electric, you’re trying to manage your way through.
And just to add to that, Q3 is our lowest sales in the revenue quarter given that that’s the first quarter of the calendar year, lot of clients, lot of larger clients are going through their budgeting processes similar last year and somebody else commentary goes back to flowing this and making decisions that we can see with those clients around there, clearly a factor of the economy and such. So it’s normal to see our revenue coming being at a lower point in Q3.
Brian Horey – Aurelian Management LLC
Understandably. Okay, well, congrats on continued progress with the turnaround and we look forward to what you have to say coming in the next few quarters. Thanks.
Thank you. Our next question comes from David Hodges from Barrow Hanley. And your line is open.
David Hodges – Barrow Hanley
Good afternoon. Thanks for taking my call. And first off, let me just say congratulations on a fantastic job so far. Al, I know you aren’t declining victory here but it’s pretty darn impressive what you’ve done so far and it’s appreciated.
My question actually goes to the long game here. And I know that you’ve perhaps touched on the long game in the past but would you mind revisiting that for us? I know that the next stages get back to growth, but in the long run not only for the company but for yourself, do you see this playing out as a green field online type situation, or do you see it playing out more like your first step with Harris?
Well, I haven’t thought that. Well, first of all, thank you, David, for the kind comments not just me but the whole team has really, really worked hard the last 18 or 19 months to get us to the point that we could deliver this type of result which I would characterize as a significant improvement and profitability of the balance sheet and just general health of the company.
And as I mentioned on the sales side, what appears to be sort of the beginning of the bottoming out of the revenues and sales declines of the past. But long game, I mean, in this world here of public companies, more cap public companies, long game to next quarter, right?
So when we leave here today, we go back and we start worrying about the next quarter. I’d say the tune of to be consistent with all of my previous commentary, our goals were to become – we had a chance to remake the balance sheet, to remake the income statement and to become a company that has certainly the highest profitability standards in the industry. We talked many times about making sure we weren’t selling bad worked and that what the team, the business unit leaders and all of our sales people focused on with selling good quality work that we could make a profit on.
And I think when you look at the improvement of our EBITDA, we’re pretty much executing on that as we see gradual, steady improvement in our gross profit on each job. So I think we’re there. As Eric said in his commentary we’re on fast to pay off our debt by the end of the fiscal year. So that was another objective. I think we’re going to be able to check that box.
And the last box we’re working on which is to get this company growing profitably at an acceptable rate with a lot of factors because this is a funny type of business to run. You just don’t grow when you grow it to people business, you got to add people, when you had people, got to make sure that you’re growing in a way where you’re not sacrificing your EBITDA. So we want steady profitable growth.
And we’re working on it and we’re slowly getting there. That’s really the end game right now. In terms of me personally, I’m under contract to the public information for one more year. And I fully intend to honor that commitment and complete this turnaround and maximize shareholder value in whatever way is best for the shareholders over the next 12 months. I know I could be more specific than that.
David Hodges – Barrow Hanley
That’s great. Thank you very much.
Thank you. (Operator Instructions) I see no further questions at this time. I would like to turn the conference back to Mr. Michael Burns for closing remarks.
Well, thanks again to everyone for joining us today. We look forward to speaking with you in mid-August when we release our Q4 and full year fiscal 2013 results.
Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. And you may all disconnect at this time.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!