Harris Interactive Inc. (NASDAQ:HPOL)
F2Q2012 (Qtr End 12/31/2011) Earnings Call
February 2, 2012 05:00 pm ET
Michael Burns - VP, IR & External Reporting
Eric Narowski - Interim CFO, Principal Accounting Officer & SVP, Global Controller
Al Angrisani - Interim CEO
Julian Allen - Spitfire Capital
Good day ladies and gentlemen and welcome to the second 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 will be given at that time. (Operator Instructions) As a reminder this conference call is being recorded.
I’d now like to turn the conference over to Mr. Michael Burns. Sir, you may begin.
Good afternoon and thank you for joining us to discuss Harris Interactive’ second 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 Relation 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 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. The forward-looking statements are only made as of the date of this call 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 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 Eric Narowski. Eric?
Thanks, Mike. Good afternoon everyone and thank you for joining us. Before I review the quarter, I’d like to remind you that while our Asian operations ceased in September 2011, the results of those operations are still included in our prior-year numbers. We expect that our Asian operations will be reclassified as discontinued operations no later than the fiscal quarter ended June 30, 2012 once all residual cash disbursements and receipts have been substantially completed.
Let me now give you a brief overview of our financial performance for Q2. Q2 revenue was $39.1 million, down 13% from $44.9 million for last year’s Q2. Foreign currency exchange rate differences did not have a meaningful impact on revenue. For comparative purposes, it is important to note that last year’s Q2 included $1.4 million revenue contribution from our Asia operations.
Putting the revenue for the quarter into context, in local currency we saw a 4% decrease in US revenue mainly as a result of the revenue impact of the bookings decline in our US operations throughout the first half of fiscal 2012. A 1% increase in Canadian revenue essentially flat with last year’s Q2, a 48% decline in UK revenue in large part attributable to the expected impact of our restructuring actions to scale back our UK operations to focus on core markets and key solution areas, a 26% increase in France driven primarily by continued success in selling to new and existing clients across several industry sectors and a 3% decrease in Germany driven primarily by the revenue impact of the bookings decline in our German operations throughout the first half of fiscal 2012.
Operating income for Q2 was $2.1 million, compared with $874,000 for last year’s Q2. Q2’s operating income included a credit and restructuring and other charges of $57,000 compared with $679,000 in restructuring and other charges for last year’s Q2.
Net income for Q2 was $1.6 million or $0.03 per fully diluted share compared with $343,000 or $0.01 per fully diluted share for last fiscal year’s Q2. At December 31st, 2011, we had $14.1 million in cash and $8.4 million in outstanding debt and were in compliance with the financial covenants under our credit agreement.
Cash provided by operations for Q2 was $3.3 million, consistent with $3.3 million for last year’s Q2. Non-GAAP adjusted EBITDA with restructuring and other charges added back was $3.8 million for the quarter compared with $3.7 million for last year’s Q2.
Bookings for Q2 were $45.2 million, down 18% compared with $55.3 million for last fiscal year’s Q2. Foreign currency exchange rate differences did not have a meaningful impact on bookings. For comparative purposes, it’s important to note that last year’s Q2 included a $930,000 bookings contribution from our operations in Asia.
Putting our bookings for the quarter into context, in local currency we saw an 8% decrease in US bookings, mainly as a result of sales challenges which Al will discuss in his commentary, along with the impact of the continued efforts to move away from projects that do not produce appropriate profit margins.
A 45% decrease in Canadian bookings, mainly as a result of a timing difference in the booking of one large study, the expected cancellation of another and declines in our Service Bureau business. A 22% decrease in UK bookings, a large part attributable to the expected impact of our restructuring actions to scale back our UK operations to focus on core markets and key solution areas. A 6% increase in French bookings mainly as a result of continued success is selling to new and existing clients across several industry sectors and a 28% decrease in German bookings mainly as a result of delays in spending on market research by number of our German clients.
Secured revenue at December 31st 2011 was $45.1 million, down 16% compared with $53.7 million at December 31st 2010. Foreign currency exchange rate differences did not have a meaningful impact on secured revenue. The decrease in secured revenue was mainly due to effects of our bookings decline I discussed earlier.
So as a reminder, the second quarter of our fiscal year has historically been one of our strongest quarters in terms of financial performance along with the fourth quarter. As many of you know, we have historically seen some drop off in performance from Q2 to Q3 due to the seasonality of our business. So I wanted to give you the appropriate context around our Q2 results and Q3 expectations. I would like to now turn the call over to Al for his remarks.
Thanks Eric. Okay, so I will be a little less formal than Eric in my commentary today and I basically wanted to a do six-month update for you. It is six months into our fiscal year and quite frankly it is six months into the turnaround effort. So I think it is important for you to understand the key takeaways of not only our performance to-date but the key benchmarks that we are working on here in the formal turnaround process.
First and foremost we saw our profitability improve as shown by the jump in our operating income in Q2, which was a continuation of good operating performance in Q1 and our improved adjusted EBITDA. Our improved profitability reflects basically the positive impact from our efforts to right-size the company, cross base, specifically our reduction of US and UK headcount, the exit of a certain leased office space in both countries and the closure of our operations in Asia, as well as our focus on controlling our overhead or G&A.
However, going forward we must continue to carefully monitor our cost structure, the hard work’s not over quite yet when it comes to right-sizing and cost reduction, we need to control it to ensure that it remains aligned with the needs of our business and to eliminate unnecessary expense that's still in the system.
Next, from the standpoint of performance benchmarks our liquidity has also improved as a result of our continued cash management efforts and the paying down of our debt. We now have approximately $8.4 million of outstanding debt as of December 31, 2011. However, the continued need from a cash perspective to service our bank debt and to quite frankly support the restructuring obligations that we've encumbered the balance sheet will cause cash management to be a continued area of focus and challenge. I think one of the things that we are happy about here is that we've been able to finance the restructuring charges without having to borrow any money and that's quite an accomplishment in a turnaround effort.
However, despite this progress, we continue to see a downward trend in revenue. This is largely due to decline in the UK which were planned when we right-sized that business, as well as the revenue impact of booking declines in the US operations.
Let me pause, let me highlight what is the major driver of the decline in US bookings today. As I’ve mentioned previously and this is a very important point, we are in a early stages of our efforts to begin moving away from projects that do not produced a appropriate profit margins. Until we successful in replacing those projects that we are making a conscious decision to turn away, we expect to see downward pressure on both sales and revenue.
Simply put, its the policy of the company right now and a driver of the turnaround efforts that we will not and do not want to sell work that is unprofitable, as unfortunately has been the practice in the past. This information is the good piece a good segway into where we are in the turn around model. And a number of investors have asked that a numerous occasions, so I though I would just take a few more minutes than I normally do on these calls and bring you up today up in terms of where we are in the process.
As I mentioned in my first call I have a model that I follow and its been published. So its out there for any one that wants to go on to the company website or my website and you can see the model, which is a triangle and it has basically five pieces to it. Turnarounds take roughly 18 to 24 month. So depending upon the challenge in any particular box or area of the turnaround you can sort of case the amount time it takes.
Right now we are working our way through the first box, which is the right-sizing of our business. We are not gone but we have made a really big impact on that and we have taken substantial amount of expense out of the business, as you can see from the operating results. It’s okay to parallel a process year to be working in one box and moving to the other. So we are sort of leaving our rearguard behind.
We are still working on expense and that’s largely going to come out of [workshop]. That is what I referred. Eric often used the real guard, but in this case he is going to continue to work on driving our expenses down while we may, rest of the organization begin to focus on the second box which is essentially improving the our operating cross model or operating and delivery system cross model. That’s the work in how we do the work in our projects and then at the same time looking at our sales and marketing program, our sales and marketing delivery system and starting to improve that. That work in the little more than the planning stages. It is beginning to move into the execution stages.
The operating and delivery system is further ahead of sales and marketing but we are actively moving into that in the third quarter and fourth quarter. Our major objective is to get both of those particular aspects of our business fixed and under control, so that we can move into next year not only with a properly sized cost structure but with an operating and delivery system that is highly productive and efficient and sales and marketing organization that is capable of driving new business.
After that the third box which is essentially the addition of new product ideas, ideation, innovation to the core business model. We are not quiet working at anything in that area but we are thinking a lot about it and we won’t get serious about that until we get at least to the end of the third quarter. And then the fourth box of the pyramid is when you pull all those things together optimization and that’s several quarters away, and the last box of course is maximization for shareholders, which can come in a variety of forms.
So, we’re tracking pretty nicely with what the model is. I mean, everyone in these turnarounds has different challenges to it. They are never all the same and there is some unique challenges here at Harris that are different than the other turnarounds that I’ve done. And we will just have to see how they play out and one of them clearly is the sales and marketing challenge that we have here at the company which, shows in our results. But it’s now time to begin to think about that, address that and we’re working on it.
So for all of you, those that have asked in certain emails about where we are in the process, that’s sort of where we are and I thought that that will be a good way to bring you up-to-date at the mid-point of the year, sort of half-time year.
With that, I’ll turn it back over to you Mike.
Thanks, Al, and operator, if you can now open the queue for questions.
Thank you. (Operator Instructions) Our first question comes from Julian Allen from Spitfire Capital.
Julian Allen - Spitfire Capital
I have two quick questions. The first is, Al, what do you believe, based on what you know now is the gross or operating margin potential of the business, assuming you’ve optimized the sales strategy as you’ve outlined?
That is a great question Julian and every one of these businesses are different right this business is different than the date of collection business but they are all in the market research food chain. I guess if you went to the public information that is out there about the other public custom market research companies you feel that, depending on how their cost structure is you probably see that the EBITDA range runs somewhere from 8% to 12% and on the gross profit range it is probably something that is there for 25% to 35% and I am not sure where we are going to cut out on that continuum, because it is driven by a lot of variables but I would say those are pretty much the standards in the publically available information.
Julian Allen - Spitfire Capital
Got it okay. And second question I went back to the 8K that was filed last summer when you joined the company and I noticed that the there is a date in the 8K which I think if I describe it as March 31, 2012 by which time you and the company should have agreed or not to serve as President and CEO as opposed to an interim position. I was wondering if you or someone else on the call could give us an update on the current status of that discussion and your plans with respect to, relative to the company. Thank you.
And that is a fair question. It was disclosed in the 8K that I have until March 31st, myself and the Board has it, until March 31st to make a decision whether I will convert from interim department and I will say something and maybe Marc Levin our general council wants to add anything to that and I mean after I did have conversation with the Board of Directors on how to do that, I would say that there is no predictable decision to reveal at this point in time one way or another, but they were in active negotiations and conversations and by the time we get to the next earning call, we will have to make a decision. And Mark says that’s good and I have cleared, so I have been blessed.
(Operator Instructions) Our next question comes from [Mark Spiegel from Central Capital].
First one is how much would you say normalized CapEx is going forward in opening today you anticipated $2.5 million to $3 million this year, is that a normal number or sort of a catch-up number?
I’ll comment on that Mark and maybe Eric wants to take it too. In most companies of this size that I have run normal CapEx is anywhere between $3 million and $5 million for $150 million to $200 million public company with these types of requirements. But Eric, I don't know historically what the company’s CapEx has been; you may want to comment on that.
Yeah historically we have spent you know for say $3 million to $4 million in the last few years given the struggles of the company and cash flow. We’ve kept that number down. I would anticipate that we’re going to still in the very near term here do that as well as you know Al mentioned in his commentary about our monitoring cash, but I mean we will spend some amount of money this year on CapEx. I wouldn’t say that it’s going to be upwards of $2 million for this year; yeah $1 million to $2 million is probably the range for this year.
So your prediction is okay, in case of $2.5 million to $3 million, that’s on the high side for this year, but it sounds that if it’s sort of on the low side going forward once you are sort of got things straightened out?
Correct. Yeah, we will have, yeah.
Second question and last from me; it’s one of those sort of just had a curiosity questions, everyday I see you know two or three four polls from you guys that release all kinds of different topics I would say, you know obviously hard to do just ballpark, I mean how much revenues does each one of those polls generate, can you talk about that?
Historically, we don’t segment that type of revenue in the public domain Mark for a lot of competitive reasons. I think I can tell you this though that if you were listening when I went through the process you know the turnaround process, when I got to that area of new products and new services, I mean we intend to make better use going forward of that product platform and we’re hopeful in the future that we will be driving more revenue from that than we are today.
Our next question comes from [Brian Horefan, Erlian Management]
Can you tell me what the level of the accrued restructuring charges is on the balance sheet at this point?
That sounds like an Eric question.
Yes, and so it will be out in our Q and we have right now $5.7 million of the remaining accrued restructuring charges at December 31st.
And generally how long do you think it will take to pay those out; is that like the next 12 months, 18 months?
Its going to be over a more projected period of time; most of that there is about $100,000 from severance in there. They will be over a shorter period of time; the lease commitments which is the larger component will go over the next several years depending on what’s the lease facility is. So it’s hard to say right now, but it’s clearly two to three, four year period that that was the tale on that would be.
Have any of those spaces been sub-let or are they just vacant?
They are vacant right now, but we are actively, I am trying to sublet them out.
Can you talk about, you said that, you’ve made a lot of progress in terms of cost side, but there was probably more work to do? Can you give us some sense of how much more OpEx you think you need to take out?
In general, sort of a sizing it, I don’t want to talk about specific dollars, because what happens is when you talk about certain dollars, people plug it into their models and they come up with the wrong extrapolations. So say that with a standpoint of it, a normal turnaround process that you know depending upon the situation; you’re going to end-up taking out anywhere between 5% and 15% of the cost base to bring the business back in equilibrium and there are also lot of counterbalances to that. You know the quality of the revenue etcetera, how much profitability you can drive from the revenue base.
And I would said that you know without getting into the exact amount of cost that we need to take out of the company, it will probably be 75% of 80% of the way where its in terms of where we need to be. We still have another 20% that will come out, but it will come out more as scalpel than it will, the way we’ve done this before. It will be more along the area of, as we re-define our business going forward, improve our operating model, our delivery systems and our products, it will be more in the area, but coming out of the places we want to de-emphasize the products, the services, the projects etcetera. So it will be more scalpel and it will probably quite frankly run its way through the next two quarters, the remainder of this year where we will sort of slowly weed it out of the system.
And then the next question was, can you give us some sense as to what portion of revenue stream do you think still at risk in terms of your effort to weed out the for the less profitable business and beyond that, maybe can you expand a little bit on, in terms of, you know, competitively where do you think you have advantages where you can leverage your existing cost structure and skill-set and what are the areas where you, you know, you are not as competitive that you’re heading to move away from?
You know, that’s a big question, right? I mean, basically Harris is $150 odd million company and I am not going to give you specific amounts, but I will reinforce what I’ve said in the public domain; way too much of it over the last several years has been worked, has been sold under the minimum price profitability targets that we need to earn acceptable profit on a dollar of revenue.
What that becomes; if you’re an economist or work as your CFA, but that really comes down as a classic trade-off analysis, right; you can’t do that in a vacuum. You can’t say okay extra set of my revenue is unprofitable based upon the minimum profitability standards that we need to achieve against our existing cost structure. So I am just going to stop doing it tomorrow, because if you did that, you collapse your revenue streams and you still have overhead and fixed cost effects.
But this is classic changing of the tire while the car is moving, which means you got to sort of take it down in step functions against your strategic plan of, I want to take it out, first out of the product areas, I don’t want to emphasize. So that’s the process we’re in. We’re step functioning it down and we’re trying to replace that bite that we just chewed, we’re trying to digest it while we’re actually trying to sell an equal amount and more if we can of highly profitable revenue.
And I don’t know where that equilibrium points going to settle in here in this company, because quite frankly, we’re just really getting to the depths of detailed project profitability analysis. So as we get smarter about what projects you’re making and relationships you’re making money, mean obviously the first way we try to attack those is by adjusting the price mechanism. But if we can’t adjust the price mechanism then we have to make a really hard choice about whether or not we want to continue with that work or not.
And then the third piece of that is we don’t, we have to be able to quite frankly replace it before we decide to you know or either bid on that work or not or walk away from that projects. So it’s a very delicate analysis, extremely difficult to do and the staff is doing a great job by being the head of our business units and my direct reports are doing a great job on walking that fine line. So systems and process are being patient and quite frankly like I said, it’s not a quick or easy fix, its going to take the rest of this year and quite frankly good chunk of next year to get that equilibrium in place.
So is it possible to generalize it all about the types of revenue that you’re thinking, you know as more profitable and that is more likely to stick long-term. I know there are certain buckets that look like they are keepers or they are going to contribute to the profitability of the business in a way that the others won’t?
Yes, and the good news is that I think we’re getting very comfortable with what the buckets are where we actually can make a lot of money and we’re getting pretty comfortable with the buckets where we know that no matter what we do because of the legacy cost systems, the devaluation of the product in the marketplace; its not something that Harris does well and wants to do more; it doesn’t mean we’re going to knock you any of it; it just doesn’t mean we’re going put out sales force and our sales dollars at that attack point. The bad news is, I can’t tell you where the buckets are. I just don't like that market. I don't want that information in the competitive marketplace, but we know what they are.
And do you feel like from a cost accounting standpoint that you guys have a good handle on what it costs to deliver a particular service or engagement or is that part of the process that you are going through.
Yeah I am really proud of the progress that the financial team, the accounting team and our profitability analysis team have made in getting, starting to get their arms on project profitability. You know we are working from the back end, you know sort of the exclusionary work, what's the really bad stuff. But we are getting it and it’s getting itself ingrained in the culture of the company, the culture of the sales force, the culture of the project management force, the culture of the research force. So the whole company is sort of I think rallying around this and I think it’s really becoming a team effort. So I am confident we are going to solve that problem.
Thank you. (Operator Instructions). I am showing no questions at this time. I would like to hand the conference back over to management for any closing remarks.
Okay, well, thanks again to everybody for joining us this afternoon and we look forward to speaking with you in early May when we release our Q3 results.
Thank you. And ladies and gentlemen thank you for participating in today's conference. This concludes our program for today. You may all disconnect and have a wonderful day.
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: firstname.lastname@example.org. Thank you!