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Harris Interactive Inc. (NASDAQ:HPOL)

F2Q10 Earnings Call

January 26, 2010 5:00 pm ET

Executives

Michael T. Burns – VP, IR and External Reporting

Kimberly Till - President and Chief Executive Officer

Eric W. Narowski - Interim Chief Financial Officer

Analysts

Jacques Soenens – Great Gable

David Hodges – Barrow Hanley

Operator

Good day and welcome to the Harris Interactive Q2 fiscal 2010 earnings conference call. Today’s call is being recorded. At this time I would like to turn the call over to Michael Burns.

Michael T. Burns

Thank you very much. Good afternoon and thank you for joining us to discuss Harris Interactive’s second quarter fiscal 2010 financial results. With me today are Ms. Kimberly Till, our President and Chief Executive Officer and Mr. Eric Narowski, our Interim Chief Financial Officer.

The format for today's call will include formal remarks by both Kimberly and Eric on the state of the business and our second quarter performance. After the formal remarks, Kimberly 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 web site 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 the transcript of this call as soon as practical after the call.

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 provision under the Private Securities Litigation Reform Act of 1995. These statements includes 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 operation.

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 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, particularly under the Risk Factors section of the company’s annual report on Form 10-K and our quarterly reports of Form 10-Q to reflect additional material risks.

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 presentation and the company undertakes no obligation to publicly update them to reflect subsequent events or circumstances.

We will also be discussing non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA with the add-back of the restructuring and other charges. These items are reconciled to GAAP financial measures in today's press release, and are posted on the company's web site.

I will now like to turn the call over to Harris Interactive's President and Chief Executive Officer, Kimberly Till.

Kimberly Till

Good afternoon everyone and thank you for joining us and for your interest in Harris Interactive. On today’s call I’d like to cover two main areas. First I'll provide highlights of our second quarter results and then Eric Narowski, our Interim Chief Financial Officer will follow with a more detailed report of our quarterly results. I will then provide a roadmap of the three phases of growth we have planned for the company.

So now let’s turn to our quarterly results. The results of our second quarter demonstrate that we are continuing to make progress in improving the strategic and financial performance of the company. Highlights include our consolidated global revenue for the quarter was down 12% compared with the same prior year period, but increased by 15% compared with Q1 of this fiscal year.

This is consistent with our historical revenue trends prior to the global recession. Our consolidated global bookings for the quarter grew by 10% compared with the same period in the prior fiscal year, showing comparative growth for the first time in 5 quarters.

Looking to our US business, we’re up by 3% compared with last fiscal year’s second quarter, showing comparative growth in US bookings for the first time in 9 quarters. Our consolidated global operating and net income were positive for the first time in 7 quarters. Our US operations were profitable with positive operating income for the third consecutive quarter and our cash position remains strong with $15.1 million of cash as of December 31, 2009.

I’m pleased with our results for the quarter and believe that the numbers are starting to reflect the many initiatives that we have put in place to grow bookings, revenue, and profits.

In addition to the improved quarterly financial results, we continue to attract top talent. We have recruited some excellent market research leaders as well as talent outside our industry who bring client industry specific experience. Those that have joined us over the past few months include Art [Coles], who was at Harris for several years previously and returned to Harris this past October to head our Global HealthCare Practice. Art has had a very immediate and positive impact on retention and recruitment of talent, engagement with clients, and rebuilding the sales pipeline for our healthcare practice. We’re delighted to have him back at the company.

Jeni Chapman is our new head of Global Brand and Communications Consulting. Jeni was a senior executive at NFO Ross Cooper Lund which was acquired by TNS. She later led TNS’ US Brand and Advertising Practice and served on its Global Brand and Advertising Board. More recently, she was an EVP at Perception Research Services, International.

Matt [Connect] is our new SVP and stakeholder. I worked with Matt and TNS where he most recently headed their North American Stakeholder practice and was a member of the Global Leadership Team for Stakeholders. He brings very strong selling and consultative skills to Harris.

Gwen Santer, who will lead our US Healthcare practice on the west coast. Gwen brings very strong sales and global industry experience including key roles at Baxter, Emjen, and Astra-Zeneca.

Sharon Polanski is a senior consultant in Brand and Communications. Sharon has brand experience gained at Media Mark Research, Total Research, and Gallup, as well as client side experience with [Jim] Star, TV Guide, and [inaudible] in operations research in our international businesses.

I am a firm believer that having very talented and motivated people makes a significant difference in the performance of a business. I am very pleased with the caliber of talent that we have here at Harris and that we’ve been able to attract in the past year. I also am very pleased by the level of enthusiasm and support of our strategy demonstrated by our employees. Their hard work and dedication are much appreciated.

Our goal at Harris is to provide increasing value to our employees, clients, and shareholders. One measure of this is the value of our stock. As of today’s close, our stock has risen over 700% since March 2009 when the stock was at an all-time low in the midst of the “Great Recession” yielding roughly $69 million in increased shareholder value.

Now I’ll turn the call over to Eric for more details on our quarterly results.

Eric W. Narowski

Thank you Kimberly and good afternoon everyone. I’d like to take this opportunity to provide you with more detail on our financial performance for the second quarter. Our consolidated revenue for the quarter was $44.6 million, a decrease of $6 million or 12% when compared to last fiscal year second quarter.

While revenue was down for the same prior year period, largely as a result of the timing of the Global Recession, the rate of decline has slowed significantly from what we’ve seen in recent quarters. As Kimberly noted, we saw a sequential increase in revenue of 15% from this fiscal year’s first quarter consistent with historical trends.

For the quarter, while revenue from our operations in North America, Europe, and Asia are down compared with the same prior year period, revenue for each of those operations increased sequentially for Q1 of this fiscal year.

Due to the stabilization in our business, we expect that revenue for the second half of the fiscal year will reflect historical seasonal trends prior to the Global Recession. Historically, Q3 is typically slightly less or even with Q2 and Q4 is typically our strongest quarter.

Our consolidated bookings for the quarter were $53.2 million, an increase of $4.6 million or 10% when compared to the second quarter of last fiscal year. To better understand our performance for the quarter, it is helpful to look at bookings by geographic region compared with the second quarter of last fiscal year.

In North America, which is comprised of our US and Canadian operations, bookings for the quarter were up 9% compared to the same prior year period. This increase is primarily driven by increased bookings from our US Healthcare sector and deeper account penetration with existing clients in Canada.

In Europe, which is comprised of our operations in the UK, France, and Germany, bookings were up 20% with the same prior year period. This increase was primarily due to the improvement and coordination of our selling efforts in the UK and sales to new clients across several industry sectors in France and Germany.

In Asia, which is comprised of our operations in Hong Kong and Singapore, bookings were down by 50% compared to the same prior year period. With new leadership in Asia, we are confident that performance will improve during the second half of this fiscal year.

Our operating income for the quarter was $594,000 compared with a $45.9 million loss for the second quarter of last fiscal year. Included in this year’s Q2 operating income was $383,000 in restructuring and other charges compared with $46.1 million for the same prior year period.

We continue to ensure that our cost structure is appropriately aligned with our current and expected revenues. As Kimberly mentioned earlier, we have now seen operations in the US for the third consecutive quarter and in Europe for the first half of the fiscal year. While our businesses in Canada and Asia are underperforming, we are taking steps that we believe will enable us to restore profitability to those businesses.

Our net income for the quarter was $1.3 million or $0.02 per fully diluted share compared with a net loss of $65.6 million or $1.23 per fully diluted share for the same prior year period. Net income for the quarter includes an income tax benefit of $1.1 million that arose from a tax law change enacted during the quarter. Non-GAAP adjusted EBITDA with restructuring and other charges added back, was $3.2 million, consistent with $3.2 million for the first quarter of last fiscal year.

As we end the first half of the first fiscal year, our cash position remains strong. As of December 31, 2009, we had cash and marketable securities of $15.1 million and $19 million in outstanding debt. Cash from operations from Q2 was $2.6 million up 14% for the same prior year period. We expect that our cash position will continue to improve as our revenue rebuilds over time.

For the second half of fiscal 2010, we expect to be in compliance with all of our debt covenants, including minimum revenue, total indebtedness to EBITDA, and interest to EBITDA coverage ratios. Since the pace of the economic recovery is uncertain, we do not believe that is prudent to provide guidance at this time.

I will now turn the call back over to Kimberly.

Kimberly Till

Thanks, Eric. Now I’d like to share with you the road map for Harris Interactive that we have planned for the next few years. There are three phases to our plan. The first phase is a turnaround phase. We believe we are well along the way in the turnaround of the financial and strategic performance of the business.

We have made considerable progress in the last year in reducing our cost base and putting in place detailed plans to grow bookings and revenue and to reduce our cost of doing business.

The bookings revenue and operating income numbers in Q2 are starting to reflect some of the benefits of these plans and actions. We still have a considerable number of initiatives underway that should further improve our performance in the coming months.

As stated earlier, we have returned to our largest business, the US business, to profitability for three consecutive quarters and we are seeing improvement in the performance of our European businesses. For example, in Q2, bookings and revenue in France were up 25% and 39% respectively versus the same period last fiscal year.

Although our Canadian business started the fiscal year off slowly, the business has shown signs that there are signs of improvement as evidenced by an increase in bookings of over 30% in Q2 versus the same period last fiscal year.

Our business in Asia currently represents a relatively small percentage of our overall business but it is a strategically important region for us. We have commenced exploratory steps to acquire a license to operate a business in China and are developing plans to introduce research methodologies in China that generally are not being utilized there.

As I mentioned during the last earnings call, we have a new managing director of Asia with a strong track record of growing technology-based services businesses. Through his leadership we are anticipating that the Asia business will show improved results in the next few quarters.

Once all of our individual businesses are performing well, we will move from the turnaround phase to phase II, which is about moving towards a leadership position in the market research industry. We are planning to do this in two ways, through innovation and economies of scale. Innovation is about introducing into the market place new differentiated products that add value to client insights and decision making.

We anticipate that these products will be able to command premium pricing. We have several new products planned for commercialization this spring and summer that we believe fall into this category, some of which involve social media, mobile. The economies of scale part of phase II is designed to deliver cost savings, faster turnaround of client work on a global basis, and higher quality.

As I’ve indicated before, one of the key elements of our strategy is to leverage technology, not only for product innovation, but for creating operational efficiencies. We are currently investing and upgrading our infrastructure, particularly in the areas of panel and sample management and survey programming and design to drive more efficient internal operations.

By doing so, we believe we will be in a much better competitive position in terms of pricing, speed of delivery, and quality. After we have a seamless global research platform that delivers high quality, fast, and efficient research operations, we plan to add scale. We believe that initially we will be able to add scale through organic growth as our financial position continues to improve. We also will look to add scale through strategic acquisitions that are well planned and have the potential to yield cost and growth synergies.

Phase III is expanding into both new and related market segments. After we’ve completed the first two phases, we would like to expand into new and related market segments, ideally with higher margins than traditional custom market research. We know from research that the Harris brand is one of the strongest and most highly recognized brands in the industry. We believe we have the brand strength and depth to provide the brand umbrella for several businesses. We plan to identify businesses that relate to our core business of providing market information and insight and/or leverage our brand equity technology expertise and other competencies to successfully expand into other market segments.

In sum, we believe we are coming towards the end of the first phase of our growth, the turnaround phase. Nevertheless, we intend to maintain our intense focus on improving the business performance of every single business unit as a company. At the same time, we are beginning to put in place the plans that will take us into the next phase, moving towards a leadership position in the industry.

Once this is accomplished, we intend to remain at the forefront of the industry by remaining focused on innovation and delivering high quality, fast, and efficient research operations.

We look forward to continuing to share with you our progress including upcoming product news in the coming months.

Now I’ll turn the call back over to Mike and the operator for questions.

Michael T. Burns

If you’d open up the queue for questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jacques Soenens – Great Gable.

Jacques Soenens – Great Gable

I have a couple questions. My first question relates to bookings. An impressive rebound, 63% quarter-over-quarter, 10% year-over-year. You provided some color into your bookings number but perhaps if you could give some more color as it relates to what sectors did well, perhaps what service offerings did well. It seems like there was a pick up in activity in the September quarter that benefitted your December quarter and finally what can we expect for the next quarter?

Eric W. Narowski

Similar to what we’re seeing with revenue, we’re starting to see a stabilization of the raise and decline of our secured revenue. The secured revenue is down 12% for the quarter compared to last year’s Q2. While we’ve seen much larger comparative declines in prior quarters, for instance in Q1, we were at a 29% comparative decline so we’re starting to see a stabilization of that and within there, we’re starting to see the secured revenue flows along with our sales growth, so again, our European sales growth and we’re also seeing within the US nice growth within our health care unit which is building into our secured revenue.

Jacques Soenens – Great Gable

What about other sectors that you’re, perhaps the financial or consumer products?

Eric W. Narowski

Those sectors are staying… we’re still working on those. Those are still seeing – we’re flat in those right now so we’re seeing most of our growth in our largest sector right now, healthcare, but we’re starting to see some positive signs in the other ones as well.

Jacques Soenens – Great Gable

What percent of your revenues and bookings given that you’ve seen some nights rebound which is great to see in your healthcare, but what percent of your revenues and bookings were healthcare related?

Eric W. Narowski

Healthcare right now is about 30% of our US business. We saw about a 16% growth in our healthcare bookings for the quarter.

Jacques Soenens – Great Gable

Turning to your balance sheet and your bank covenants, thank you for sharing some color into that which essentially echoed I think what you said last quarter and given this quarter’s results, it certainly seems like you are exceeding those comfortably and of course I understand the visibility in the economy precludes you from giving guidance but any more thoughts on covenants? It seems this quarter’s results were giving you a little bit more cushion on that side.

Eric W. Narowski

Correct. We are in compliance with our covenants for the quarter and we do expect for the rest of the fiscal year to remain in compliance with all of our covenants so I guess we are pleased with it.

Jacques Soenens – Great Gable

Another question on the covenant side, again it seems like you’ve done a good job in sticking to the scheduled payments to pay down your debt. Any changes, looking forward to that or sticking to the plan of attack?

Eric W. Narowski

We continue to plan on making our quarterly debt repayments and we expect to be able to do that for the rest of the fiscal year and beyond.

Jacques Soenens – Great Gable

Thank you for sharing some of the key hires that you’ve made over the last 6 to 12 months. It seems like it’s translating into some nice results. I know that you cut a lot of costs in the past and you were allocating some of the cost cutting to your hiring plans. You’ve hired a bunch of key people. Are there any future hiring plans that we should be on the look out for?

Kimberly Till

We have hired a fair number of people as you know, upgrading certain parts of the company. We’re pretty much finished with all of that now. We have pretty much all of the key leadership divisions filled, as well as positions at other levels of the company, so I would not anticipate very many additional new hires.

Jacques Soenens – Great Gable

Also on that topic, Eric, the title Interim CFO, any more background or color on your ongoing efforts on the CFO hunt?

Kimberly Till

We’ve made quite a bit of progress on that. We have a very, very strong pipeline. We’ve been doing very in-depth interviews and we’ve got some very, very strong people so I would expect we would be able to make an announcement on that in the coming weeks.

Operator

Your next question comes from David Hodges – Barrow Hanley.

David Hodges – Barrow Hanley

My question has to do with the Supreme Court decision that was handed down a few days ago. I’m curious if you could talk to us about how much exposure you have to the political side of things and what you think the impact may be of the removal of the caps on corporate spending on campaigns.

Kimberly Till

Our public affairs and policy sector is the one that would cover government, non-profit groups, and other entities that would fall into that general category and we do not do a lot of business with companies that we think would be impacted by that. I don’t anticipate that it’s going to have much of an impact on our PAP sector.

Operator

There are no other questions at this time. I’d like to turn the conference back to our speakers for any closing remarks.

Michael T. Burns

Thank you very much to everyone for joining us today and we look forward to speaking with you again in April when we announce our third quarter results.

Operator

Thank you everyone. That does conclude today’s conference. We thank you for your participation.

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Source: Harris Interactive Inc. F2Q10 (Qtr End 12/31/10) Earnings Call Transcript
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