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Harris Interactive, Inc. (NASDAQ:HPOL)

F1Q12 Earnings Call

November 01, 2011, 08:30 a.m. ET

Executives

Michael Burns - VP, IR and External Reporting

Al Angrisani - Interim CEO

Eric Narowski - Interim CFO, Principal Accounting Officer, and SVP, Global Controller

Analysts

Steve Kohl - Mangrove

Operator

Good day ladies and gentlemen and welcome to your First Quarter 2012 Harris Interactive Earnings Conference Call. At this time all participants are in listen-only mode. Later we will conduct the question-and-answer session and instructions given at that time. (Operator Instructions) As a reminder this conference call is being recorded.

I’d now like to turn the call over to your host, Mr. Michael Burns, Vice President, Investor Relations and External Reporting. Sir, you may begin.

Michael Burns

Good morning and thank you for joining us to discuss Harris Interactive’ first quarter fiscal 2012 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 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 provision under the Private Securities Litigation Reform Act of 1995. These statements include belief, predictions and expectations related to the company’s future financial performance of their 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 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. 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 with the add back or restructuring than other charges. These items are reconciled to GAAP financial measures in today’s press release 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 Q1. Q1 revenue was 38.3 million up 3% from 37 million for last year's Q1, excluding foreign exchange rate differences, Q1 revenue was up 1% compared with last year's Q1. Putting revenue for the quarter into context, in local currency we saw a 5% increase in U.S. revenue mainly as a result of product mix which resulted in projects with shorter delivery times when compared with last year's Q1. A 14% increase in Canadian revenue mainly as a result of the revenue impact of the large financial services tracking study, one in Q2 of last fiscal year.

A 31% decline in UK revenue mainly as a result of the revenue impact of a tracking study loss in the prior year and the effect of our restructuring activities and new focused sales approach in the UK. A 14% increase in France driven primarily by continued success in selling to new and existing clients across several sectors. A 27% increase in Germany mainly driven by success in selling to new and existing clients across several sectors in recent quarters. A 52% decline in Asia as a result of winding down our operations in the region throughout the quarter.

Our operating loss for Q1 was 5.9 million compared with an operating loss of 1.3 million for last year's Q1. Q1’s operating loss included restructuring and other charges of 6.9 million as a result of headcount reductions in the U.S. and UK, scaling down of our facilities footprint in Princeton, New Jersey; Rochester, New York; Brentford, UK; and Ottawa, Canada. And closing our operations in Asia. Q1 of fiscal 2011 had no restructuring and other charges.

Our net loss for the quarter was $6 million or $0.11 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 Q1.

At September 30, 2011 we had 12.4 million in cash and 9.6 million in outstanding debt, and we are in compliance with our financial covenants under our credit agreement. Cash provided by operations for Q1 was 175,000 as compared with 2.2 million used in operations for last year's Q1.

Non-GAAP adjusted EBITDA with restructuring and other charges added back was 2.8 million for the quarter compared with 867,000 for last year's Q1. Bookings for Q1 were 31.4 million down 11% compared with 35.4 million for last year's Q1. Excluding foreign currency exchange rate differences, bookings were down 9% compared with Q1 of last fiscal year.

Putting our bookings for the quarter into context in local currency, we saw a 6% decrease in U.S. bookings, the reasons for which Al will discuss in his commentary. A 43% increase in Canadian bookings mainly as a result of an early renewal of a large financial service tracking study. A 41% decrease in UK bookings mainly as a result of the effective restructuring activities and new focused sales approach in the UK. And 18% increase in French bookings mainly as a result of continued success in selling to our new and existing clients across several sectors. A 32% decrease in German bookings mainly as a result of timing difference and the conversion of bookings when compared to the same prior year period. And negative bookings of 718,000 in Asia as a result of sales that were reversed during the quarter in connection with closing our Asian operations.

Secured revenue at September 30, 2011 was 39 million down 10% compared with 43.3 million at September 30, 2010. Foreign currency exchange rate differences do not have a meaningful impact on secured revenue. The decrease in secured revenue was mainly due to the effects of bookings decline and revenue increase in the quarter that I discussed earlier.

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

Al Angrisani

Thanks you, Eric. Eric just covered the restructuring activities that took place during the quarter really impacted all of our numbers in some way. So, I’d like to try to focus now on what I think should be the key takeaways that you should focus on as it relates to the current state of the business and the turnaround.

Q1 is the first full quarter of our turnaround effort and as is normally the case in the early stages of any turnaround, it's a bad news with some good news message. First, the bad news. Sales or bookings continue to decline year-over-year as has been the trend at Harris for the last several years. Although, Q1 bookings were down year-over-year partially due to the impact of the closure of our Asia operations and the execution of our plan to scale back our UK business to focus on core markets and key solution areas. The sales decline in large part is attributable to systemic sales problems in certain areas of our business.

These problems are addressable, but they will take time to fix. And until they are fixed these problems will continue to be a drag on sales. Compounding the challenge or reversing the sales decline in Harris, is our need to move away from projects that do not produce sufficient profit margins. While this will likely cause a reduction in sales in the near-term, we believe the trade-off is required to restore the company’s business model back to liability.

Revenue. Revenue on a constant currency basis is basically flat, and we aid in to our secured revenue or backlog to stay flat, thanks in large part to a faster churn over from the selling of more retail or shorter duration projects in the U.S. We can’t expect revenue to remain flat or grow, if sales continue to decline. So, these two metrics are linked going forward.

Liquidity has improved as a result of what cash management efforts, and the amendment to our credit agreement which cured covenant defaults and reinstated our access to a portion of our revolving line of credit. But the need to service our bank debt and fund our restructuring activities, we will continue to make cash management a major challenge in the months ahead.

Now for some good news. When we add back to Q1 restructuring and other charges, adjusted EBITDA in the quarter improved because our rightsizing efforts has started to have a positive impact on the company’s cost base. These right sizing efforts will continue in to Q2 as we attempt to further reduce our cost base.

Management and employees of the company are committed to the successful execution of the turnaround and recognized the importance of the difficult actions we are taking. At the same time our clients remain supportive of the company and the actions that we are taking. As I said on the last earnings calls just 28 days ago, this will not be a quick or easy fix.

Back to you Mike.

Michael Burns

Thanks Al. And operator, if you could please now open the queue for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Steve Kohl with Mangrove. You may begin.

Steve Kohl - Mangrove

I have a few questions. Eric, just to give a little bit of color within the U.S. bookings number. I know you mentioned that as down and then in past your thought could provide a color by vertical. So, you maybe give us a little bit of the sense on what’s happening there, number one. And number two, Al, when you talk about systemic issues, obviously, as you know this company is down through somewhat turnaround initiatives over the last couple of years. What are you saying or doing to solve these issues, they have been, take your point they’ve been here for several years and whatever has to happen hasn’t and that your time is to change that now. Can you provide a little bit more color on that for these as well?

Eric Narowski

Sure, I’ll try Steve. I’ll start with this the later part first. The systemic issues are, there are several of them, but the most important ones we touched on, on the call. One of the problems is that, to put it simple terms keep it really simple, I mean there has been a lot. The sales program has historically been focused on driving the top line and almost without any discretion so to speak. And as a result of that over a period of years, and some bad habits developed. And one of those habits would be basically taking in projects or revenue, we call bad revenue that just doesn’t have satisfactory profit margins and example of the, not satisfactory profit margin, without getting too granular is something for example that doesn’t cover our overheads. It perhaps makes a contribution to overhead, but really doesn’t cover or exceeded to generate a margin on the bottom-line at an operating basis. Why is that bad, well you can say it's making some contribution to overhead, but in a service company, particularly a market research service company, your factory is we like to say is only so big, and that's your ability to put through work through your data processing through your programming units, through your research shop. And if you fill that factory up with low margin work than you basically you are doing at the expense of shareholders profits. And if you try, if you keep doing that and you have to expand your factory to grow, that which we are really doing is adding more fixed cost to the equation and it becomes a vicious circle.

So, you got to look at, you have to define your factory or your cost basis, we are doing right now, redefining it, and then you got to put a high quality of revenue through that meaning revenue with a high profit margin and then what you see is your revenue line stabilize at x and you see your profit margin stabilizes in acceptable margin. We are in the very early stages of correcting that systemic problem in a company which really comes down to project profitability, pricing and cost equation all balanced against what type of work we pursue and what type of work we don’t pursue. It's a fairly standard exercise, that’s the good news. The problem is it doesn’t happen quickly because what you really have to do is recycle out the bad revenue bringing new better revenues replace it and try to grow with the same time. And that's the proverbial changing the tire while the car is moving.

On the sector piece, I don’t know if we talked about this or not, I don’t believe we may have alluded to it in one of our filings or something. But we moved away from the matrix organization that was here before, where the company defined itself in horizontal and vertical business units and we moved to more of a solutions based approached organizing our business around product solutions where we add value in the marketplace. Where we believe we had value and where our value proposition is stronger. And that’s in our healthcare area SBU, our brand SBU, our corporate reputation SBU, our stakeholder SBU, and our Harris Poll SBU. And we organized that way right now in driving our revenues that way. So, we are no longer going to give segment information on verticals or horizontals. We will probably continue to give information geographically and that’s pretty much about it Steve.

Steve Kohl - Mangrove

Okay. Let me go back to very quick one, please state what you were saying about change the culture and how you have proper margins on some of these contacts that are too low. But how do you do that in terms of the sales, so how is the sales force compensated today? Are there call back provisions on the execution of contacts? And is that very quick, part of the (inaudible).

Eric Narowski

Great question, Steve, and basically the sales force is compensated right now based upon what it sells on the top line. And we are increasingly moving the sales force to a compensation program that involves both the top line and the gross margin line. And that is a work in progress exercise that we are taking on right now. We will bring more clarity to that sales compensation arrangement as we over the next couple of quarters better define what our priority sales targets are. And if you want to connect this all in one big circle, those sales target obviously will be fixed on us making some decisions about what is the quality revenue that we wanted to pursue, obviously the revenue with the highest margins. So, that is also a work in process effort we are undertaking right now, where we are reviewing each project in the company from a profitability standpoint and rolling that up into these solution buckets that we have and from that we will determine our selling priorities going forward. And from that we will determine what changes we need to make in our compensation system to get everybody aligned moving in the same direction.

Steve Kohl - Mangrove

I don’t think bidding I think one of the documents, I don’t think I have seen as many quotes who are increment their titles, is there any timetable on putting that out and we can remove in some and we can have full-fledged titles? Or what’s your thought process on that?

Eric Narowski

Yes, obviously started with me, right, I took on the interim title and I don’t really want to get the reasons on the phone as to why, but the board and I decided that was the right thing to do. And the team that I selected to be my front line team for the most part they all have the same interim title. And I guess it's a balancing act for the board between time and performance. And then trying to take a decision in the near future about the permanent status of each individual as it relates to the mission of the company, their performance, their role and that would include me and the company’s mission going forward. So, it really is fundamentally a board issue, which I don’t want to get into here, but I can assure you that interim in no way impacts the level of intensity that we are applying to the effort we are giving this 150% maximum effort and I don’t think of anyone is interim. I just think of them as on the job, trying to make this turnaround happen.

Operator

Thank you. (Operator Instructions) I’m showing no further questions at this time. I’d now like to turn the call back over to Michael Burns.

Michael Burns

Thank you. And thanks again to everyone for joining us this morning. We look forward to speaking with you again in early February when we release our 2 results.

Operator

Ladies and gentlemen, this concludes today’s conference. Thanks for your participation, have a wonderful day.

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