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Executives

Al Angrisani – Chief Executive Officer (interim)

Eric Narowski – Chief Financial Officer (interim)

Michael Burns – Vice President, Investor Relations

Analysts

Donald Wang – Tocqueville Asset Management

Harris Interactive, Inc. (HPOL) Q4 2011 Earnings Call October 4, 2011 8:30 AM ET

Operator

Good day ladies and gentlemen and welcome to the Harris Interactive Q4 and Full Fiscal Year 2011 Harris 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. Should anyone require technical assistance during today’s conference, please press star then zero on your touchtone telephone. As a reminder, today’s conference call is being recorded.

I’d now like to turn the conference over to your host, Mr. Michael Burns, Vice President of Investor Relations. Please go ahead.

Michael Burns

Thank you. Good morning and thank you for joining us to discuss Harris Interactive’s fourth quarter and full-year fiscal 2011 financial results. With me today are Al Angrisani, our interim Chief Executive Officer, and Eric Narowski, our interim Chief Financial Officer. The format for today’s call will include a brief recap of the quarter and fiscal year by Eric, followed by Al’s commentary. After the formal remarks, both Eric and Al 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 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 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 herein by reference 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. 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 made only as of today’s date and the Company undertakes no obligation to publicly 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 items are reconciled to GAAP financial measures in our press release from last week and are posted on the Investor Relations section of our website.

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

Eric Narowski

Thanks, Mike. Good morning everyone and thank you for joining us. Let me give you a brief overview of our financial performance for Q4 and our full fiscal year 2011.

First, for the quarter – Q4 revenue was 45.2 million, up 4% from 43.6 million from last year’s Q4; however, excluding foreign exchange rate differences, Q4 revenue was down 1% compared with last year’s Q4. Our operating loss for Q4 was 4.7 million compared with an operating income of 186,000 for last year’s Q4. Q4’s operating loss included restructuring and other charges of 4.3 million as a result of post-employment obligations to executives exited from the business, headcount reductions in the U.S. and the U.K., and scaling down of our facilities footprint in the U.K., Norwalk, Connecticut, and Portland, Oregon. Q4 of fiscal 2011 had no restructuring or other charges.

Our net loss for Q4 was 5.1 million or $0.09 per fully diluted share, driven in large part by the restructuring and other charges I just mentioned, compared with a net loss of 1.3 million or $0.02 per fully diluted share for last year’s Q4. Bookings for Q4 were 34.6 million compared with 35.7 million for last fiscal year’s Q4. Excluding foreign currency exchange rate differences, bookings were down 10% compared with Q4 of last fiscal year.

Non-GAAP adjusted EBITDA with restructuring and other charges added back was 1.5 million for the quarter compared with 2.3 million for last year’s Q4. Cash provided by operations for Q4 was 2.9 million as compared with 4.5 million provided by operations in last year’s Q4.

Now for the full fiscal year. Revenue for fiscal 2011 was 165.3 million, down 2% from 168.4 million for fiscal 2010. Excluding foreign exchange rate differences, fiscal 2011 revenue was down 3% compared to fiscal 2010. Fiscal 2011 operating loss was 7 million compared with an operating loss of 523,000 for fiscal 2010. The operating loss for fiscal 2011 included restructuring and other charges of 5.4 million as a result of post-employment obligations to executives exited from the business, headcount reductions in the U.S. and the U.K., and scaling down of our facilities footprint in the U.K., Norwalk, Connecticut, and Portland, Oregon. During fiscal 2010, our operating loss included 623,000 in restructuring and other charges.

Our net loss for fiscal 2011 was 8.5 million or $0.15 per fully diluted share, driven in large part by the restructuring and other charges incurred during the fiscal year, compared with a net loss of 2.2 million or $0.04 per fully diluted share for fiscal 2010. At June 30, 2011, we had 14.2 million in cash and 10.8 million in outstanding debt. We’ve reduced our amount of our outstanding debt by 4.8 million during fiscal 2011; however, at the end of fiscal 2011, we were not in compliance with certain financial covenants under our credit agreement. On September 27, 2011, we amended our credit agreement and received a permanent waiver of such non-compliance. We noted in our earnings release further details regarding our amended credit agreement and waiver can be found in the 8-K that we filed with the SEC on September 28, 2011.

Secured revenue at June 30, 2011 was 45.9 million compared with 44.9 million at June 30, 2010. Excluding foreign currency exchange rate differences, secured revenue was down 2% compared with the same prior year period. Non-GAAP adjusted EBITDA with restructuring and other charges added back was 6.5 million for fiscal 2011 compared with 8.9 million for fiscal 2010. During fiscal 2011, we generated 4 million in cash from operations compared with 6.5 million generated from operations in fiscal 2010. More details regarding our financial performance for fiscal 2011 can be found in our Form 10-K filed with the SEC on September 28, 2011.

Now I’d like to turn the call over to Al for his remarks.

Al Angrisani

Okay, thanks Eric. As I said in the earnings release, it’s been about 100 days since I took on the role of interim CEO, and turning around Harris Interactive is not going to be a quick or easy fix. The results you just heard from Eric were the product of an attempted turnaround effort over the last few years that was not successful; so in effect, what we’re trying to do here now is we’re attempting to execute a turnaround on top of a turnaround, which is extremely challenging.

The good news is that the Harris brand is still strong from what I can see. The executive team, our skilled researchers, and the employees are 100% committed to the challenge, and our clients have been very supportive over the first 100 days of my tenure as interim CEO.

The bad news is that as part of the turnaround, we have to address many elements of the current business model and fundamentally change them. The good news is that I’ve done this before – several times in fact – and have a specific roadmap that I follow which will help facilitate our efforts throughout this turnaround process.

Again, the bad news is that shareholders, clients and employees need to be patient because a turnaround of this magnitude takes time, and the uncertain economy that we’re in today is not going to be a helpful factor.

To end my comments on this first press call – and they’re brief comments – to end them on a positive note, I’m pleased that we’ve been able to stay current on our bank loan payments, as Eric referred to, to reduce some debt and to cure our covenant defaults, and keep our term loan and revolving line of credit in place. It’s going to be extremely helpful to us as we go forward.

Those are my comments on this first earnings call – not very long, and I think I’ll turn it back to Mike and take some questions if you have them.

Michael Burns

Thanks, Al. And Operator, if you would now please open the queue for any questions that we might have.

Question and Answer Session

Operator

Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, if you have a question, please press star then one on your touchtone telephone.

Our first question comes from Steve Cole. Please go ahead.

Steve Cole

Yeah, good morning Al and Eric and Mike. First of all, I can appreciate, Al, that you’re coming into a difficult situation, as you point out. I guess I’m a little curious on what you’ve seen in the first 100 days, aside from the fact that the Harris name hasn’t been compromised and still has value. I know you have a roadmap; I guess I’m just curious on how do things typically work, what are you focusing in on in terms of the core strengths of Harris. I know you’re exiting Asia, or already have exited Asia; but what is Harris going to look like looking out six months or even 12 months from now, from what you can see? And is it going to be a much more streamlined, focused organization on really narrowing down the number of verticals, for example, that you’re targeting?

Al Angrisani

Right. Well as you know, Steve, we can’t forecast anything going forward; however, I can give you some commentary on the priorities that we’re focusing on today as part of the turnaround process, and the principal one of those is the business model itself. You know, the results pretty much speak to the fact that a company doing $165 million of revenue is losing money, and there’s plenty of revenue there to generate a profit. And what we’re really focusing on is streamlining the expense structure, focusing in on the winners in terms of our products versus the products that are actually not producing sufficient amounts of profits, and trying to reshape the model in a way where at this level of revenue, we can generate an acceptable profit. That’s number one.

Number two, from a shareholder value perspective – and those are the two key drivers in any turnaround, the business model and shareholder value – we’re really focusing on trying to bring the Harris brand, which is still good, forward and to bring our product strategy around that. Without getting into too much detail, those are the two principal drivers of the strategy at the early stages here.

Steve Cole

So when you look at what you’ve seen, Al, and obviously you know this company well. You were with Total Research, which by the way I was a shareholder back some years ago, and we also are holders of Greenfield, so I’ve come across your career in a couple of vantage points here. I’m just curious – you know it well. What needs to happen and what’s a realistic timetable to get this back to earning a reasonable return? As you know, there was a time when Harris generated reasonable profits, reasonable return on capital, and reasonable cash flows; and the former management that was going through the turnaround set out some targets, obviously, that it never hit. And you’re history is that you don’t do that, and I guess that’s why you’ve had the success that you have, I think in part, that you do tell it as it is. And I guess I’m curious whether the business model has changed to a point—whether we can get to those types of numbers that we saw three or four years ago, or five years ago. What do you see that can give us some comfort that we can generate those types of returns, or some reasonable return here?

Al Angrisani

Well I wish I could give you comfort, because I’d like to do nothing more than that; but as I’ve said – and I chose my words very carefully – this was not going to be a quick or easy fix. I mean, there’s an awful lot to address here, as the numbers indicate. I also can tell you that every turnaround is different, whether it’s Total Research or Harris the first time, or Greenfield or any of the other ones that I’ve been involved in. The core thesis is the same in terms of what you have to do and how you have to do it, from the right-sizing phase of the business to selecting products that deliver a higher quality of revenue, on through optimizing your business model right through the new product phase. They’re all the same but they’re all a little different. You know, the elements come together differently, and one of the things that I’m not sure about right now – it’s only been 100 days – is how those pieces come together. Depending on how those pieces come together, you will define the upside of this; and to be really honest with you, I just don’t know right now. It’s going to require another quarter or two before I have some comfort of my own that I can pass on to shareholders.

Steve Cole

Okay. Well, I’ll get out of the queue and let somebody else come in, but certainly I appreciate you taking the challenge here, Al.

Al Angrisani

Thank you, Steve.

Operator

Again ladies and gentlemen, if you have a question, please press star then one on your touchtone telephone. Our next question comes from Donald Wang of Tocqueville Asset Management. Please go ahead.

Donald Wang – Tocqueville Asset Management

Hi Al. Could you just comment on three things –first, in terms of the headcount reductions, the 50-some odd people between the U.K. and the U.S., as well as the rent savings that will come from the Connecticut, U.K. and Oregon offices. Can you just quantify how much benefit we will get in fiscal ’12 from those actions? Second, could you just describe from a customer’s point of view, what they will see differently in either a go-to-market approach and panel design and study design that would make them want to do business with Harris? And then third, can you just comment, are there any significant tracking studies that were performed in fiscal ’11 that will not be performed in fiscal ’12, a la the ones you allude to in the U.K. of—I guess there’s going to be a several million dollar loss of not having that tracking study in the U.K. Thanks.

Al Angrisani

Yeah, I’ll work backwards and then let Eric sort of pick up the run rate savings from the changes that were made before. First of all on the product design, obviously I’m not anxious to give any competitors any secrets on the phone here, so I’m not going to be too specific with you; but we are definitely looking at our product suite and I don’t think it’s going to surprise anybody, when you look at the financial results, to say that there’s some winners and there’s some losers in that. And what we’re really focusing on is feeding the winners and slowly phasing out those losers. I think the end result of it will be, without being too crystal clear on the phone, is that we’ll have a much better definition to our product offering in the marketplace. I think we’re trying to evolve it now as we’re working on it to position it so that it is a better value proposition for our customers, so that it is not in the competitive strength zones of the much bigger market research companies. You know, there are three or four that sit on top of the industry now as it’s consolidated that have several billion dollars of revenue, and it’s difficult for Harris and just about anybody else to compete with their global reach and their ability to effectuate pricing to win work. So we’re not going to try to take those guys on; we’re going to try to define our own niche around our own winners.

The good news is that, again, back to the Harris brand – the Harris brand is strong and underneath that brand there are a number of products and services that I can see that are winners, and we’re going to do our best to make sure that those are the products that we present to the market and give people a compelling reason to buy from us, based upon the value that those products contribute to their businesses.

In terms of the tracking studies, I don’t really want to comment on specific tracking studies. I can tell you the tracking studies are an important part of our business, that quite frankly we’re working very hard to keep them as part of our business. And from what I can see so far, we’re being able to make the necessary adjustments in how we service those clients and how we price those tracking studies to be able to keep them as an important part of our business going forward. So they do play into our—what I call our winner strategy.

Donald Wang – Tocqueville Asset Management

Just to interrupt you for a second, Al – so is the only major tracking study lost the one that was referred to in the 10-K, where it says 8 million of revenue in the U.K. is going to go away?

Eric Narowski

That was our largest one in the U.K. We’ve had some smaller ones as we’ve noted in some of our sectors within the U.S. Given the custom nature of our business, we have tracking studies coming and going at all times; but there was a couple others in the U.S. during last fiscal year.

Donald Wang – Tocqueville Asset Management

So if you just took them in aggregate, how much would the loss of those contracts impact fiscal ’12?

Eric Narowski

Probably slightly north of $10 million, I’d say.

Donald Wang – Tocqueville Asset Management

Okay. And then I’m sorry – on the expenses?

Al Angrisani

Yeah, the run rate on the expenses from the headcount savings?

Eric Narowski

Yeah. If you look—let me just clarify again. When we’re talking right now clearly about our fiscal ’11 results, the restructuring charges that we had there – for the facilities, we have about half a million dollars run rate savings for the facilities that we did impair through the regions that we noted; and also with the severance, there’s approximately 4 to $500,000 of annualized salary savings related to that. You probably also have noted that subsequent to year-end, we filed a few other 8-Ks as it relates to additional facilities restructuring, and we’ll talk more about those annual savings when we get to our Q1 results in November.

Donald Wang – Tocqueville Asset Management

So just to recap, then – so half a million on the lease announcements that have been announced, so Connecticut, U.K., Oregon; and half a million on the 50 people that have been severed in the U.K. and U.S. But it does not include, I presume, the Asian closures you’re referring to?

Eric Narowski

Correct. Correct.

Donald Wang – Tocqueville Asset Management

So $1 million in totem would be the savings annually?

Eric Narowski

Correct.

Donald Wang – Tocqueville Asset Management

Thank you.

Operator

I’m showing no further questions at this time. I’d like to turn the call back over to Mr. Michael Burns for any closing remarks.

Michael Burns

Thanks again to everyone for joining us today, and we look forward to speaking with you at some point in November when we release our Q1 results.

Operator

Ladies and gentlemen, this does conclude today’s conference. You may now disconnect and have a wonderful day.

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