Harris Interactive Inc. (NASDAQ:HPOL)
Q3 2011 Earnings Call
April 28, 2011, 5:00 PM ET
Michael Burns – Vice President, Investor Relations and External Reporting
Kimberly Till – President and CEO
Pavan Bhalla – Executive Vice President, Chief Financial Officer and Treasurer
Eric Narowski – Principal Accounting Officer and SVP, Global Controller
Good day, ladies and gentlemen and thank you for standing by. Welcome to the Third Quarter 2011 Harris Interactive Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions)
I would now like to introduce you to our host for today, Mr. Michael Burns, Vice President of Investor Relations and External Reporting. Sir, please go ahead.
Good afternoon and thank you for joining us to discuss Harris Interactive’s third quarter fiscal 2011 financial results. With me today are Kimberly Till, our President and Chief Executive Officer; Pavan Bhalla, our Executive Vice President, Chief Financial Officer and Treasurer and Eric Narowski, our Principal Accounting Officer and Senior Vice President, Global Controller.
The format for today’s call will include formal remarks by both Kimberly and Pavan on the state of the business and our performance for the third quarter. After the formal remarks, Kimberly, Pavan 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 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 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, particularly under the risk factors section of the company’s most recent annual report on Form 10-K, as updated quarterly in our quarterly reports on 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’ll 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 the reconciliation is posted on the investor relations section of our website.
I’d now like to turn today’s call over to Harris Interactive’s President and Chief Executive Officer, Kimberly Till. Kimberly?
Thank you, Mike. Good afternoon everyone and thank you for joining us. As many of you will recall, we said in our last earnings call that Q3 has historically been one of our weakest quarters from a seasonality standpoint. However, even considering the seasonality impact, our performance for the quarter was very disappointing.
Pavan will cover our Q3 results in more detail later, but let me briefly provide an overview of our financial performance for the quarter. Our consolidated revenue for Q3 was down $3.8 million or 9% in the quarter compared with last year’s Q3 excluding foreign currency exchange rate differences due mainly to declines in the U.K. of $2.9 million or 42% and the U.S. of $1 million or 4% in constant currency.
The large U.K. decline was due in large part to the revenue impact at the loss of a multimillion dollar tracking study due to a client’s consolidation of seven trackers into one as discussed on the last earnings call.
This loss will have an annual revenue impact of $7.7 million which is difficult to immediately replace. However, we do believe that we can replace this loss revenue overtime. The U.S. revenue decrease was due primarily to a $1.3 million revenue decline in our healthcare sector.
Our consolidated bookings for Q3 were down 13% compared with Q3 of last year excluding foreign currency exchange rate differences, driven primarily by declines in the U.K., U.S. and Canada. The decline in Canada was predominantly due to the early bookings in Q2 of two large tracking studies.
Our operating loss for Q3 was $1.9 million compared with a $943,000 operating loss for last year’s Q3. This operating loss included $448,000 in restructuring and other charges compared with 92,000 in last year’s Q3. So on a normalized basis Q3 fiscal 2011 operating income was $587,000 less than the same period last year. Our increased operating loss is largely explained by the decline in U.K. revenue.
Q3 adjusted EBITDA with the add back of restructuring and other charges was $555,000 down from $1.4 million for last year’s Q3. With the loss of the large tracker in the U.K. in Q2 and a weak Q3, we are reducing our cost base to keep it in line with expected revenues. Accordingly, in Q3 we reduced U.S. costs by $2.5 million and U.K. cost by $0.2 million, both on an annualized basis.
In Q4 we expect to reduce our costs in the U.S. by an additional $1.3 million and by $2 million in the U.K. for a total of $3.3 million on an annualized basis. Our cost reductions in Q3 and Q4 primarily involve offshoring and outsourcing a number of positions and head count reductions.
I will now turn the call over to Pavan Bhalla, our CFO to provide further details on our Q3 results. Then I will share with you my perspective on the numbers and where we are headed. Pavan?
Thank you, Kimberly. And good afternoon everyone. Consolidated revenue for Q3 was $38.1 million down 8% when compared with $41.2 million for last year’s Q3. Excluding foreign currency exchange rate differences consolidated Q3 revenue was down 9% from the same prior year period. To better understand Q3 revenue, we’ll now look at it geographically and in local currency compared with last year’s Q3.
U.S. revenue was down 4% driven mainly by revenue declines in our healthcare and technology, media and telecom sectors of 16% and 8% respectively. The revenue decline in healthcare was due primarily to reduced spending at certain key clients.
In technology, media and telecom, the revenue decline was driven mainly by the loss of a large tracking study. These declines were partially offset by a 15% increase in our business and industrial sector, primarily driven by increased spending on stakeholder and repetition solutions by existing clients in the sector.
U.K. revenue was down 42% driven in large part by the impact of the large tracking study last year in Q2 as discussed earlier, as well as challenging market conditions across several sectors. French revenue was up 13% and German revenue was up 3%, in both cases due to continued success in selling to new and existing clients across several sectors.
Canadian revenue was up 2%, driven largely by the bolster impact of a large tracking study won in Q2. Asia revenue comprised of Hong Kong and Singapore operations was down 27%, driven primarily by the impact of bookings declines during the first half of fiscal 2011 as a result of rebuilding the Asian sales team.
Our consolidated bookings for Q3 were $40.9 million, down 9% when compared with $44.9 million for last year’s Q3. Excluding foreign currency exchange rate differences, bookings were down 13%.
To better understand Q3 bookings, we’ll now look at them geographically and in local currency compared with last year’s Q3. U.S. bookings were down 6%, driven mainly by declines in our technology, media and telecom sector, financial services sector and healthcare sector. As we have previously shared, we’ve recently invested in additional sales resources across many of our sectors and believe we will soon begin to benefit from these investments.
U.K. bookings were down 29% driven primarily by challenging market conditions accounted across all industry sectors.
French bookings were up 17% due primarily to continued success in maintaining and growing tracking studies of the existing clients, while also selling increased levels of ad-hoc work to both new and existing clients.
German bookings were up 79% due primarily to continued success in selling to new and existing clients across several sectors.
Canadian bookings were down 37% driven primarily by the early booking of two large tracking studies during this year’s due to -- we should not book until Q3 of last year.
Asia bookings comprised of our operations in Hong Kong and Singapore were down 23%. We are in the process of rebuilding our management and sales team in Asia and believe that we will have adequate resource in place shortly.
Secured revenue at March 31, 2011 was $56.5 million, up 7% when compared with $52.9 million at March 31, 2010. Excluding foreign currency exchange rate differences secured revenue was up 5%. This increase is due primarily to significant sales growth in Canada during the second quarter as well as strong sales performance throughout the year in France and Germany.
Our operating loss for Q3 was $1.9 million compared with an operating loss of $943,000 for last year’s Q3. The increase in our operating loss was driven mainly by the revenue declined for the quarter, included in Q3 operating income was $448,000 in restructuring and other charges compared with $92,000 for last year’s Q3.
Our net loss for Q3 was $2.3 million or $0.04 per diluted share compared with a net loss of $1.6 million or $0.03 for fully diluted share for the same prior year period.
Non-GAAP adjusted EBITDA with restructuring and other charges added back was $555,000 or 1.5% of revenue for the quarter, compared with $1.4 million or 3.3% of revenue for last year’s Q3.
Cash provided by operations in Q3 was $65,000 compared with 880,000 for last year’s Q3. As of March 31, 2011 we had cash of $12.5 million and $12 million in outstanding debt and made $3.6 million in debt principle payments during the first nine months of the fiscal year.
We continue to believe that we have sufficient liquidity to meet our current operating needs as well as our debt service requirements and are in compliance with all of our debt covenants including minimum cash balance and our total consolidated leverage and interest coverage ratios.
I will now turn the call back to Kimberly. Kimberly?
Thank you, Pavan. Our results for Q3 are clearly disappointing. However, we are taking steps to address areas where we believe improvement is needed. We have recently made a number of changes in our U.S. healthcare sector. Under new sector leadership, they have renewed their focus on consolidated selling and aligned research resources with critical client engagements.
The healthcare sector has refined its go-to-market strategy and significantly improved its sales process by tightly focusing on key client relationships and selling across the total Harris suite of solutions. These actions have contributed to a strong sales pipeline, which we see as a leading indicator of improved sales and revenue performance over the coming quarters.
Our situation in the U.K. is different. As I shared on the last earnings call, our U.K business has been in decline for the past four to five years. There were some fundamental problems in the structure of the business and the go-to-market strategy given the maturity and competitiveness of that market.
So in January, we appointed Nathalie Perrio-Combeaux and Patrick Van Bloeme, the co-heads of France to manage both France and the U.K. They bring a very strong track record of revenue growth and high profitability to their new management responsibilities. They have been tasked with completely restructuring all aspects of the U.K. business and repositioning this business to focus more on Harris’s competitive advantages of leveraging technology for operational efficiencies and new product innovation. They also will focus on raising the profile of the brand through the use of the Harris poll product innovation and marketing activities.
While they have made great progress over the past few months in developing the plans to accomplish all of the above, it will naturally take some time to get the new structure and products in place. As you know, we all have an extraordinary sense of urgency in making these plans become reality in the U.K. as quickly as possible.
Many other areas of the business are moving in the right direction. For instance, Canada is performing significantly better under the leadership of Dan Kirkland through the first three quarters of the fiscal year showing improvements in bookings, revenue and profitability versus the same year period. Also Germany and France are continuing to have very strong years. However, we acknowledge that we have more work to do to achieve acceptable operating performance.
To that end we are in the process of thoroughly reviewing our operations and business model to identify the changes, we need to make to address this problem. To assist in this review, we have engaged the services of Angrisani Turnarounds, LLC led by Al Angrisani, who previously served as the President and Chief Operating Officer of Harris Interactive and Chief Executive Officer of Greenfield Online until its 2008 sale to Microsoft. Al has made specific recommendations that we are currently evaluating as part of our efforts to improve the company’s operating profitability.
Now, Pavan, Eric and I will be happy to answer any questions that you may have. Operator?
(Operator Instructions) And I see no questions from the phones.
Very good. Well, thanks again everyone for joining us today. We look forward to speaking with you again in August when we announce our fourth quarter and full-year fiscal 2011 results.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may now disconnect. Everyone have a good day.
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