Harris Interactive F1Q08 (Qtr End 9/30/07) Earnings Call Transcript

Harris Interactive Inc. (HPOL)

F1Q08 (Qtr End 9/30/07) Earnings Call

November 2, 2007 8:30 am ET

Executives

Dan Hucko - SVP of IR

Gregory Novak - President, CEO

Ron Salluzzo - CFO

Analysts

Randy Hugan - Piper Jaffrey

Todd Van Fleet - First Analysis

Jim Boyle - CL King

Barton Crockett - JP Morgan

Presentation

Operator

Good day ladies and gentlemen and welcome to the First Quarter 2008 Harris Interactive Earnings Conference Call. My name is Talisha and I will be your operator for today.

At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). I would now like to turn the call over to your host for today Mr. Dan Hucko, Senior Vice President, Investor Relations. Please proceed sir.

Dan Hucko

Thanks Talisha. Good morning and thank you everyone for joining us. With me today are Mr. Gregory Novak, our President and Chief Executive Officer, and Mr. Ron Salluzzo, our Chief Financial Officer. At the conclusion of their formal remarks, Mr. Novak and Mr. Salluzzo will be happy to answer your questions.

A webcast replay of this entire call will be accessible via the investor relations section of our corporate web site later this morning and will be archived there for at least 30 days. However, no telephone replay of this call will be provided.

During this call, we will make a number of forward-looking statements. These statements are based on current expectations and are subject to known and unknown risks and uncertainties that could make actual results differ from those discussed today. Additional factors that could cause the actual results to differ from the expectations discussed on this call are readily available in the risk factors section of our latest annual report filed on Form 10-K with the Securities and Exchange Commission. The company assumes no obligation to update this information provided here today, and unless otherwise indicated, all results have been reclassified for continuing operations only.

Today in addition to discussing results by country, we'll also be reporting results of our three regions. North America, which is comprised of Canada and United States, Europe which is composed of France, Germany and the UK and Asia which is comprised of Hong Kong and Singapore. I would also like to mention that we will be discussing non-GAAP financial measures today. These items are reconciled to GAAP financial data in a press release we issued this morning and are also posted on the Investor Relations section of our website at www.harrisinteractive.com.

Now, I would now like to turn the call over to Gregory Novak, our President and CEO. Please go ahead, Greg.

Gregory Novak

Thanks, Dan. Good morning everyone, good afternoon to Europe and, good evening to Asia.

Q1 was a solid quarter, results were as expected. Now we have a strong base on which to build a good fiscal 2008. It was also a quarter that proved that our initiatives to improve the core business are working, and a quarter where we saw our global expansion strategy, begin to bear fruit. Although Ron will go through the details in a minute, I wanted to quickly hit on a few key points from our first fiscal quarter.

First, we saw good total revenue growth driven by strong results in North America. US core revenue was also up nicely to do some very solid growth from our financial services, our public affairs and policy, tech and telecom teams. And in Q1 for the first time in over a year, our US Health Care revenue increased despite continued bad news in the US big pharma sector. Our US business is solid, the actions we have taken over the last six to nine months, expanding our investment in sales, controlling overhead, managing utilization, deeper comp penetration and globalization are now delivering results, with sales, revenue, internet revenue, and profits all up nicely in the US for the quarter.

Second, our operating adjusted EBITDA, and net margins all increased over last year. At this revenue level, we now have enough critical mass to benefit from the leverage in our business models and grow revenue at a faster rate than we grow expenses.

As we continue to grow towards the $300 million mark and beyond, we expect to deliver even greater profit growth. Third, although strong performances in France and Germany drove European revenue growth 13% in the quarter, UK revenue was slightly down, which is what we had planned.

However, the UK business remains stable. The sales model there is working well, financial controls are in place and we are expecting UK to show revenue and profit growth for the fiscal year.

And fourth, our strategy to accelerate the competitive capacity of our acquired region of partners is already showing results. While it's too early, we have seen no significant revenue or personnel losses anywhere and in fact collaboration between our groups has already produced numerous joint opportunities, some significant wins and strong revenue in Germany. Clearly, our new global expansion strategy is working, and we plan to continue to expand, in order to remain competitive and serve our clients on a global basis.

And now I'm going to turn it over to Ron Salluzzo, our CFO, who will give you the details on the quarter.

Ron Salluzzo

Thanks, Greg. Good morning, afternoon and evening from me as well. I'm going to review the financial highlights for the quarter as well as make comment on specific items driving these results.

During this discussion, I recommend you refer to the financial statements and key operating metrics we included in this morning's press release. If you did not receive the press release this morning yet, then the updated key operating metrics table, are available on our website.

Looking first to bookings in the first quarter, we find bookings up at $50.8 million, up 18% from [$14.9 million] in the prior year. While our recently acquired operations in Germany, Canada and Asia have contributed significantly to year increase by $6.2 million, our organic bookings in our legacy units increased by 4%. These bookings are reflective of a continued emphasis on building and developing our professional sales team, increasing market support through increased activities and spend, serving a smaller group of clients more broadly and deeply and bringing to bear more of the Harris Solutions sets in each of these relationships as we sell across the stack of the things that we have developed and invested in over the last seven or eight years.

Our backlog as of September 30 increased to $67.4 million compared to $54.6 million at the same time last year for a total increase of 23% and again a legacy organic increase so they (inaudible).

Overall, sales and marketing spend was 10.3% of revenue in Q1, which is up compared to last year and last quarter. We continue to invest in sales and marketing in order to continue our sales growth and raise awareness of the Harris Interactive brand in the global marketplace.

We expect our full year marketing and sales spend to be in the 9.5% range, as volumes increased over the year and the fixed components of sales and marketing costs are spread over the larger base.

Our consolidated revenue for the fiscal quarter was $55.2 million up 17% from the prior year. Revenue from our recent acquisitions was $6.1 million and pro forma organic revenue increased 4% driven by an above 6% organic revenue growth in the US. As a note all pro forma organic growth numbers include the prior year amounts from the acquired companies to ensure comparability.

The North American highlights include first strong revenue growth in several US research groups, which Greg had referenced a moment ago including technology, financial services, public affairs and policy. Growth in these groups was mainly attributable to the deployment of additional resources into our key accounts, increased cross-selling of our loyalty solutions set, deeper account penetrations in several key accounts, more global projects in several of our industry groups and the favorable timing of our one large project.

Additionally, and again, as Greg, already mentioned our US Heath Care unit delivered both revenue and profitability growth in the quarter, in spite of a continuing difficult market.

We expected and we're getting synergies across North America. We expect to see continued significant revenue growth in Canada across several industries, including financial services telecom and tourism and gaming with heavily emphasis on loyalty solutions.

European revenue, which included a $0.8 million of favorable currency exchange rate, was flat on our pro forma organic basis. This is approximately on our plan, which included a quarterly revenue decline in the UK, but full year healthy growth.

We continue to take multiple actions to grow sales and revenue activity in Europe, which is a one of the stronger markets in which we participate, including recruiting sales staff, recruiting a UK marketing manager, expanding all requirements for our business development staff related to the activities and bookings targets, relocating two US Health Care researchers to the UK to share best practices globally and to put us in better position to compete on global studies. And we have successfully recruited solutions staff to support sales activity across Europe.

On a total basis, our Internet revenue was up 15% in the quarter on a year-over-year basis and European Internet revenue was 24% driven by strong contributions from Germany where approximately 90% of the revenue is Internet-based.

Operating income for the quarter was $1.6 million or 3% of revenue, up from $1 million or 2.2% in the prior year. Net income for the first quarter was $1.1 million or $0.02 per diluted share, up 23% compared to $0.9 million and $0.02 in '07.

Both operating income and net income increased, despite an increase in purchased outside services from last year and our overall profits -- excuse me -- were up despite increase costs associated with the recent acquisitions. These costs include $300,000 of increased amortization related to acquired intangibles and $400,000 of interest expense and the outstanding debt.

Our ability control direct labor costs plus increased utilization contributed to improve performance when compared to last year. Billable FTEs were up only 6% on a 17% increase in revenue, and we are seeing more productivity and efficiencies from our outsource labor. Investment in our panel was more appropriately planned to coincide with periods of higher volumes and profitability.

We gain some leverage in our general and administrative costs as they declined 3.5% as a percentage of revenue, driven first by a reduction in the unutilized time due to the better management of headcount as noted above, as well as the gain from a number of cost savings programs we initiated last year such as US facility integration, centralized travel management and streamline payroll administrative processes.

Adjusted EBITDA was $5 million or 9.1% of revenue, up 32% compared to Q1'07. Due to the increased costs associated with acquisitions, like interest on long-term debt and amortization of intangible assets, we believe that adjusted EBITDA is the best measure of the operating performance of the Company.

Turning to the balance sheet, for a moment, you will note that we have put in place credit facility as described in the previous filing. When we closed on the facility we gained -- and our facility with a total value of our $100 million, $25 million is a revolving credit facility and $75 million is a multiple advanced term loan. As of September 30, a total $34.6 million was outstanding under the term loans.

Our capital structure is now comprised of 14% debt and this balancing of debt and equity reduces our overall cost of capital by approximately 1%. And more importantly, this facility provides us with the capital, we believe will be necessary to continue to expand our global footprint and for other transactions that may are coming deploy. CapEx for Q1 was approximately $700,000.

Moving on to guidance and as mentioned in this morning's press release, we remain comfortable with our previously released guidance of revenue between $258 million and $265 million, adjusted EBITDA between $30 million and $31 million and earnings per diluted share of $0.17 to $0.18.

The first quarter results are aligned with our internet targets and the signs such as bookings, backlog and our assessments of market conditions, they give us visibility into forward-looking quarters indicate continued success throughout the remainder of the year.

Thank you. And now I'd like to turn it back to Greg.

Gregory Novak

Thanks Ron. Before we go to the Q&A, we will talk about the future and the unique opportunity that sits in the front of Harris Interactive. But first, we'll take a look at the past and the present. Harris Interactive was founded in 1975. It took 27 years until 2002 to reach $100 million in annual revenue. It took four years to hit $200 million and will probably cross $300 million in just three. This explosive growth has propelled us to become the fifth largest custom research firm in the US, with slightly more than 5% share of the custom survey market.

Our major competitors, the big five range from 7% to 10% share, with one of them in the area of 3%. There is very little difference in the scale and scope that we can project to our research clients in the US. However, we do the same comparison on a global scale. It's a very different story.

Harris Interactive has about 2% share of the global custom research market, while big five range from 6% to nearly 17%, and that' quite a difference. Because of our limited footprint, we've been historically shut out of much of the global research market. Before our recent acquisitions, we had access to only about half of it and the much slower growing half at that.

But I don't see our small size as an impairment. In fact, I believe its really huge opportunity, an opportunity that Harris Interactive has perfectly positioned to take advantage of for three reasons. One; remain in the front edge of the dramatic market shift and research. Inevitable conversion to Internet-based market research continues and Harris Interactive is acknowledged with Internet-based. We will be there to catch that wave.

We all know the markets are shifting and the growth rate of developing world is and will continue to exceed that at the west for some time. That economic growth is driving demands for products and services. And the race to fill those needs by the large multinationals is still in the demand for global research solutions delivered locally and Harris will be there to fulfill those needs.

Over the last seven years Harris Interactive has already demonstrated in the U.S. that our solutions, our platform, our people can gain market share in arguably this most demanding environment and we know that we can share those capabilities.

Most importantly Harris has a clean sheet opportunity to build an integrated structure comprised of regional firms that are located in the fastest growing areas of the world. And that are aligned with our philosophy and highly motivated to use our existing resources, our patent, our science, our technology, our solutions and brand to take market share. By combining these resources with already successful firms and their local market knowledge and capabilities, we can enable them to compete more effectively in their markets and grow our company organically from that new base.

This isn't what we are thinking we know this strategy works because we're already seeing a success. The time is right. We now have a great opportunity and by applying our proven solutions in these fast growth markets we can better leverage, integrate it, global research power house and quickly multiply the revenue, earnings and value of this firm.

Thank you very much. And now I'd like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Randy Hugan with Piper Jaffrey. Please proceed.

Randy Hugan - Piper Jaffrey

Hi, guys thanks. How do you see organic growth trending for the rest of the year, I know it’s a little bit below your full year target in the quarter?

Ron Salluzzo

Well the guidance Randy, that we've proposed or suggested that we're comfortable with at 6% to 9% organic growth, we are still comfortable with that. You need to remember that in the first quarter two of the acquired companies were in for two of the three months, and there in those organizations, it's fair to say that a significant amount of time was spent getting the acquisitions done.

So we're still comfortable in our early projections, and again the visibility we have based on backlog and sales, would say that 6 to 9 is so good number.

Randy Hugan - Piper Jaffrey

All right. And then I guess, what kind of impact, do you think that you would see if the economy does slowdown throughout the year?

Ron Salluzzo

We're certainly subject to that. It depends on what area is it slowing down in. A good example of that actually is we saw the disruption in pharma sectors pretty significantly last year and actually there is two things that happen to us.

One is the overall economic health in the markets we're in. The second is the shifting of economic power, which Greg referenced. And for instance as sort of a petri dish look at it, last year the U.S. Health Care spend for research, approximately 23% of that was shifted offshore.

If it shifts to where we are, we feel we can catch it. If it shifts to where we're not, we have greater risk. Because of the emphasis in the industries that we're in, it will depend on which industries are hit with the slowdown to predict where that's going to be.

Gregory Novak

Randy this is Greg. I'd add even in the U.S., our biggest business overall, in some respects because of the slowing of growth of Health Care, but also because of the more rapid growth in our other businesses, we're getting greater diversity in that business.

And therefore, we see a little bit more stability in the revenue growth numbers as we compete more effectively in a broader range of markets, and we're not so quite so dependent on that single Health Care power house.

Randy Hugan - Piper Jaffrey

And you've mentioned a couple of times now the shift in Health Care spending overseas, have you had any success so far in capturing that or do you need to still set up the European operations to capture that?

Gregory Novak

We have a small European operation right now actually UK operation to be more specific. We have actually moved several U.S. business leaders to the UK to help in building out that practice. The Health Care practice itself has focused on expanding its market opportunity in the U.S. We announced number of initiatives and in fact we are also working with our new Canadian partners to grow that marketplace.

So, we are taking the assets that we have with a tremendous intellectual and solution capital in the space and really expanding that sideways as well as globally. So, the benefits that we have seen in the Health Care numbers this quarter are really not European benefit, they are really a U.S. benefit of getting more horizontal with our offering. And rapidly turning on the dime we have to congratulate those managers for doing a good job in attacking those markets with what they have.

Ron Salluzzo

Randy, this is Ron; let me add something else there. Why we are building out the footprint there are some early indicators that are not in sales or revenue that would say that we are making some good moves, which is the shift that many of the Pharma supply chain organizations have made towards creating a preferred vendor list and obviously there are some ideas from the traditional strategic sourcing points of view and we so far have been included in each of the preferred vendor list, which is a qualification statement, as much as it is a cost statement. And one of the qualifications they are asking for is whether or not you have enough global footprint to service their specific needs. And that tends to be at the brand level not the corporate level and so far we have been successful in doing that. What that will translate into in terms of revenue, I don't know, but if we were not on the preferred vendor list, it would translate in zero revenue.

Randy Hugan - Piper Jaffrey

Alright and then just one more question on the tax-rate, it was a little bit low in the quarter. Are you still expecting something in low 40's for the year?

Ron Salluzzo

We're expecting 41.8% for the last three quarters. The reason it was low in the first quarter is that there were some changes in rates passed by some of the international governments and because of some of the deferred assets and liabilities are going to translate into tax at the lower rate. When they translate we had to take that adjustment as the rates have change.

Randy Hugan - Piper Jaffrey

All right, great, thanks and really great job on the expenses this quarter, guys.

Ron Salluzzo

Thank you.

Gregory Novak

Thanks Randy

Operator

And our next question comes from the line of Todd Van Fleet with First Analysis. Please proceed.

Todd Van Fleet - First Analysis

Good morning guys. I want to make sure; I understand correctly when you talk about the off shoring of a lot of what's happening in the Health Care vertical. I mean, there is a couple of different ways to think about it; one is they are off shoring because they want to save money on the work they pay or are accustomed to performing or sourcing, and then the other is they are off shoring more because that's where their markets are, that's where their customers are, they need to do research in geographies outside of North America, because they are planning to sell product there. It sounds like, at least my understanding is that it's probably the latter is what you are talking about more so effecting the Health Care industry, is that right?

Gregory Novak

Yeah, absolutely, this is Greg. You're on the right point I'll extend Ron's comment earlier even a bit further. I would not call it off shoring, I'd simply call it the brand managers for the major drugs have been in the market are pursuing worldwide markets for those solutions and then last year, we went through a shift of research out of the US into those other markets and today what we are seeing is a globalization of brand management where the Health Care concerns are moving into a CPG like structure and there are putting brand managers around the globe where they make the most [sets] and then they are pursuing research in those markets to sell those drugs. So you are absolutely right on the point and it's the research that's moving to address those markets.

Todd Van Fleet - First Analysis

Okay. So when Harris thinks about it's positioning within the Health Care industry over the course of next several years. Are your people saying that its just we still have a headwind in North America because of this globalization, if you will of the spending patterns of the pharma manufacturers and then if Harris is, I guess you guys, what you are trying to do is just respond to that globalization?

Gregory Novak

I think the statement would be correct but I would say it is actually two responses. We have the headwind in North America for the narrow market that will probably be the one or two supplier in and what we are doing in the US is extending horizontally offerings we provide to get into budget areas that we previously were not in and that's a bit of a success in the US. At the same time, we are scrambling fast to take the capabilities that we have that are really well recognized by those big global MR firms and make it possible to support them in Europe and in Asia and around the globe.

Todd Van Fleet - First Analysis

Do the generic manufactures not utilize marketing research in the same way the branded sponsors do, Greg?

Gregory Novak

Yeah. That's a great question and I know this they use a lot less of it and I do think that the answer is not very much the same. They work to get their prescriptions approved when it comes off of a [patent], so that doctors and HMOs drive the generic as opposed to the name brand product.

Todd Van Fleet - First Analysis

So, it's not necessarily a big opportunity for market research as in general, I guess to approach the brand, the generic folks to help offset some of these [losses] that they are seeing on the branded side?

Gregory Novak

I'll say no, at a great personal risk of actually not knowing what I am talking about. So, to be honest, actually it's a good question. I know that we don't do a lot of work with them, we don't chase them dramatically. We chase that product launch and management cycle that the big pharma guys run out there for 20 years or so, don't see a lot of research behind that generic as it is right now.

Todd Van Fleet - First Analysis

Okay. And let me ask about the average billable FTEs. Can you give us; let us know what your expectation is for average billable FTEs for the second fiscal quarter and maybe trending to the rest of the year?

Ron Salluzzo

Well, the good news I think, is that, we kept laid on incrementing those folks until we get the revenue -- are sure that the revenue coming in the door, we would expect it to ride up. One of our things, I'd be remiss if I didn't say it is, is quarter-to-quarter is a little bit more difficult for full year when we get a 12 months cycle, we have better visibility into what the business is going to be. But, for instance this, last year's second quarter was very strong, this year's first quarter earnings were quite strong and certainly the revenue that we produced on an organic basis was pretty much in line for us. Even though, you might say well, how its 4% in line with 6% to 9%, while the reality is we start with a much smaller base to begin with and we've got lots of folks who decide vacation is a good thing to do in the summer time, so we will grow the -- we expect to grow the FTE count at a rate slower than the growth in revenue.

I don't think it's going to be 17% growth in revenue and 6% growth in personnel for the entire year, but I don't expect in any quarter for the FTE growth to exceed the overall revenue growth. Certainly, one of the things that happened in this quarter was a lot of that revenue growth was acquired and so we are sorting out how we can share resources better and what we are finding, we expect to see some synergy between units where if A unit is down, for instance our Canadian units tends to be strong in its second quarter, so where we can move resources around the world to fulfill those needs will do better.

Gregory Novak

Todd, everything makes a difference. If we average 65% utilization for a full year that's really an average of 67% in our big quarters and 63% in our slow ones. If we can do what Ron just said, move the resources around when things are up and things are down, pickup a couple of points on the short side then the whole things moves up without anyone really working any harder than they do on average across the globe.

Shift changing our costs structures for our facilities, doing the travel management things that Ron talked about and starting to get leverage on our fixed overhead costs are all things that sound minor and mundane but make one heck of a difference in how much money this company makes. We can't let Ron to go and drive those things, or work with me to go out and drive the top line of the company.

Todd Van Fleet - First Analysis

All right. Thanks for that. When you think about the management; how you actively manage the business quarter-to-quarter. Would you say you tend to focus on utilization more than perhaps targeting the revenue per average billable FTE or do you kind of look at both that have targets for both quarter in and quarter out.

Gregory Novak

Actually, we're slightly different than either of those. The balance which gets us to the right spot, we think is a combination of realization and utilization. How much are we getting per hour, hour billed and are we billing enough hours per person. If you put those two things together, the math works out for revenue per employee, in pretty good shape.

Todd Van Fleet - First Analysis

Thanks.

Operator

And our next question comes from the line of Jim Boyle with CL King. Please proceed.

Jim Boyle - CL King

Good morning.

Gregory Novak

Good morning, Jim.

Dan Hucko

Hi, Jim.

Jim Boyle - CL King

Greg, the persistent price and pressure from the big five that’s hampered your revenue growth, is there any difference in that trend or maybe difference in the corporates that might be ease matters next year?

Gregory Novak

I am here, Jim. I don’t see any difference in the corporate. I mean, you know, you need to think of our competitive pricing issues in two different ways. First is, do we compete against that big five for custom research, which is the predominant share of our business. We face each other in front of clients. And we compete our intellectual capital, with relatively equivalent pricing, generally speaking, plus or minus 10%. It's about whose customer believed in deliver best on their behalf.

The other shifting piece is in Internet sample supply that, seven years ago, Harris was the only supplier. And today, there are lots of places you can go get sample. The quality of that sample, the management of that sample is a long-term settling out, it's happening in the industry today. If you pay attention to what's going on, you should learn debate about that sort of stuff. And that’s been the thing that I think has put more pressure on the industry over the last couple of years. And certainly, on Harris Interactive then the really full custom side of a business and that changes the nature of, for instance, our service bureau.

Service bureau is half a size it was a couple of years ago. And that's revenue we had to make up on the other side of the business. At the same time, it's a strategic decision. We deliver quality result to our client. And we're not going to go that direction, which in fact is what the debate is all about in the industry today.

Jim Boyle - CL King

But this might be a terrible thing to say about professional executives, but we do say Harris or some of the big five are the low cost providers.

Gregory Novak

I don't think. Actually, Harris and the big five are the high-class providers, I believe.

Jim Boyle - CL King

Okay. Ron, could you please update us with that.

Ron Salluzzo

Well, that was good or not?

Gregory Novak

It's a professional…

Ron Salluzzo

It's also with -- been contracts though, two-thirds of our business is consulting, one-third is data collection.

Gregory Novak

Yes.

Ron Salluzzo

So, you would expect that the cost to deliver a project to be relatively high versus a project that might have a larger proportion of it being data collection.

Jim Boyle - CL King

Okay.

Ron Salluzzo

Sorry, Jim you start to ask me a question.

Jim Boyle - CL King

Yes. Could you update us on the share buyback activity, whatever is left in the authorization, whatever was recently done, and now that HPOL does not have a cash surplus situation, what's possible going forward given the historically low back price?

Ron Salluzzo

Well, in the quarter we didn't do any buybacks, partly because we were in the midst of doing the acquisitions. We were redoing our facility and there were some things that felt like if we had purchased during the open window, we would have perhaps been doing it with unfair insider advantage.

So, unfortunately, that didn't match up with price being low. We still have 23 million in the program, and the program expires in December. And we're so being selective in terms of our acquisition -- excuse me, repurchase based on the other needs for the cash, just another point or fact for everyone is we expect at 30 or so million dollars of adjusted EBITDA for the year. We will produce about $15 million of net cash and, of course, its 15 versus the old 25 or whatever the numbers have been in the past because we've got that one-year debt, principal repayments as, I think, we disclosed the current sections about $6 million and a couple of million dollars of interest expense that we haven't had in the past.

So, we'll be selective. We are interested in continuing. We didn't consider in cancel the program. We are interested in seeing what makes the most sense within the program over the next few months.

Jim Boyle - CL King

So, are you willing to use some of that new credit facility for buyback, if it makes sense vis-a-vis the other options?

Ron Salluzzo

Sure, if it make sense. Yes.

Jim Boyle - CL King

Okay. And also, if you could give us any color quantification and then any changes of trends that you see on your win rate and pitch rate?

Gregory Novak

Our pitch rate is up on a global basis and up organically because we haven't certainly integrated all that information from the acquisitions yet. And our win rate is pretty stable or a dollar denominated basis.

Jim Boyle - CL King

And up organically, substantially, significantly, or just up?

Gregory Novak

Up definitely. And I guess, significantly, is not a missed definition of it, yeah, it's up pretty good.

Jim Boyle - CL King

And, finally, any other color on verticals of note besides Health Care?

Gregory Novak

I think that, you know, we are pleased that in the down market for Health Care, I mean, we saw the biggest indicator in the industry take a huge hit. We saw Moody's downgrade the whole sector. We are thrilled that Health Care did well. But the factor of the matter is financial services, public affairs and policy and top telecom teams all had tremendous growth in the U.S. in the quarter way over double-digits and so we are excited about them growing well so that being just starting to diversify the U.S. revenue base and having us to be much, much susceptible to Health Care going up and down.

Jim Boyle - CL King

Could you give us a feel for percentage wise, your top three verticals as a percentage of rev.

Gregory Novak

A Percentage of rev Ron's looking up growth as we speak.

Ron Salluzzo

Well as a percentage of revenues obviously Health Care is our largest.

Gregory Novak

Was it U.S…?

Ron Salluzzo

I thought he was talking U.S., I’m sorry.

Gregory Novak

That's alright. I mentioned its U.S. percentage of revenue.

Ron Salluzzo

Right, its Health Care is our largest; our second largest is emerging in general markets and out third largest is telecom and technology in telecom.

Jim Boyle - CL King

And could you actually give us some numbers?

Ron Salluzzo

Yeah, we've publish it.

Jim Boyle - CL King

A little bit more [math], yes.

Ron Salluzzo

You want the percentages or the broad numbers?

Jim Boyle - CL King

Percentage would be fine.

Gregory Novak

10% for Health Care Ron, I just did it out of U.S. I am sorry, I did that wrong.

Ron Salluzzo

I think we will calculate and come back to you.

Jim Boyle - CL King

Okay, thank you.

Ron Salluzzo

I don't have the percentage I got the wrong numbers.

Jim Boyle - CL King

Understood, thank you.

Ron Salluzzo

We'll answer the question before the call is over.

Jim Boyle - CL King

Okay, thank you.

Operator

(Operator Instructions) And our next question comes from the line of Barton Crockett with JP Morgan. Please proceed.

Barton Crockett - JP Morgan

Okay, great. Thanks for taking the question. Just, first on a number question. Ron can you tell us what the cash flow from operations was in the [estimated] cash flows for the quarter?

Ron Salluzzo

We are looking at about $1.5 million from operations.

Barton Crockett - JP Morgan

Okay.

Ron Salluzzo

We are still putting the Q together, but we'd expect it to be about $1.5 million. Now one thing that does affect Q1 both years of course, last year was actually $1.75 million, but we pay our incentive comp and over achievement of commissions that were approved at year end in Q1. So this tends to be a quarter that gets dampened in terms of cash production.

Barton Crockett - JP Morgan

Okay. And then secondly I was just wondering Greg if you could update us, have you had any more interactions with Bollore and I guess that [Zia's] investors just filed that they own 9% of the company, have you had any interactions with them. With Bollore, I am particularly interested in the context of this discussion you had about your global market share relative to your U.S. market share. I mean he has interest in Europe that considerably might help your business over there. I just wonder if you could update us a little bit?

Gregory Novak

Certainly first from an investor perspective, I speak to the Bollore folks and the [Zia] folks like I speak to any of you. Talk about business if they asked to talk and they make their decisions based on those conversations. From a business perspective, the research firm that Bollore owns in France and the media firm that they own around Europe are both partnership opportunities that have our European business leaders working with to see if there is some ways we can work together.

Barton Crockett - JP Morgan

Okay, so you are seeing if there are some ways to work together. Can you characterize what do you think, there is promise there or is it very early and no way to gauge it?

Gregory Novak

I think it's early, I mean its starts with people being interested and we have that and we know that their business could use internet data collection capability in France and that we may be able to supply that to them and there is a revenue opportunity. They have a massive media company that I think could use some of our media research as a support mechanism and we are going to want to speak to them about that as well.

Barton Crockett - JP Morgan

Okay. And then Greg, but your discussion about your share outside the U.S. versus a share inside the U.S., I am it gives the implication that you have an opportunity to grow your share outside the U.S. I was wondering if you could just flush out a little bit in terms of how you get there. I would assume that what you haven't mind is both organic and acquisition and the acquisition I think would have to be a particularly meaningful part of it to really move the needle. I was just wondering if you could comment on whether that's inline with your thinking and if it is kind of a skew towards the acquisition, if you could give us some sense of your criteria in terms of accretion or return on invested capital and timeframe?

Gregory Novak

Sure. First is how I see it is this; it’s a very fragmented market around the world. When you look and you understand that even most of the competitors will build through acquisitions no one has a dominant share anywhere in the world, and to me that there is an opportunity to grow share with great solutions. In fast growing and large markets all around the world, there are very competent firms in those locations. To compete, rather effectively and build businesses that are not $100 million but are not insignificant in size. Our goal would be to acquire them, partner with them and to give them the capabilities that we have; the internet panel, the internet technology, the science, the methodology and the solutions and allow them to really take advantage of first very dramatic, we are talking 20%, 30% growth rates in some of these countries in just the core research number and actually for them to take share and I think what will happen is, like happened in the United States, these capabilities are powerful enough to put them on par with the major competitors in those regions and once we get that platform in place they'll grow organically.

We have stated in the past, we have not left a dilutive acquisition completely off of the radar, but we haven't done one there. We [press] not to do one again in the near-term, but we will reserve the right if there is such a strategic application to go and get that done. We run a model -- strong financial model that, our goal would really be to pay upfront, but to have those leaders and those management teams to be long-term member of Harris Interactive. And what we really want from them is to, stay and manage their core businesses and then grow them dramatically after that and we are actually seeing that occur in the three acquisitions we've done so far.

So, I am, we are already in the next phase pretty aggressively, looking around the world and I'll be taking off on Monday to build the foundation for those next steps. So, you had a lot of questions, I think, I hope I answered most of them.

Barton Crockett - JP Morgan

You did, but just to follow-up just a little bit.

Gregory Novak

Sure.

Barton Crockett - JP Morgan

Do you guys have a return on invested capital criteria for acquisitions or is it just a different criteria that you look at?

Ron Salluzzo

Well, we actually look at an internal rate of return and we look at what EBITDA contribution would be from the acquisitions and we tend to think in terms of an EBITDA number that in the first full year -- there is usually a stop period for the 12-month window that we are working on, we expect to see it in the 12 range and in second year to 14, and then on an internal rate of return we think in terms of 22% as numbers. And we think of the acquisition revenue as being somewhere up to 1.2 times revenue, that doesn't mean that those guidelines won't be violated if we got good business reasons for doing it.

And a good example of that is, in Germany we bought substantial panel and technology, two separate issues that we would have paid significant amounts of money to build. So there's variance from that but we do have those as financial standards.

Barton Crockett - JP Morgan

Okay. And could you characterize the pipeline of available targets in terms of if there is interested selling at prices that makes sense to you, I mean does it look [reasonable] -- like there's a lot of possibilities out there, does it look a little bit tough right now?

Greg Novak

It's more positive everyday, the further we dig in to regions there is a long tail of available companies that continue to grow around the world after you count the Big Six, which would include Harris Interactive. We are in contact with dozens-and-dozens-and-dozens of them and we will continue to work aggressively and quite possibly more aggressively to add them to the Harris Interactive network.

I can tell you honestly that a year ago we proposed this strategy given the nature of the industry and given what's going on in the world markets. I mean listen, the developing world is growing much faster and the multinationals are chasing that so they can provide products and services and they are driving research. They want global research solutions, they want them delivered locally.

There is huge opportunity for Harris Interactive to go out and deliver on those. But most importantly I think that we have an acquisition model that, I have even more faith in today than I did a year ago. I believe we could bring people into the firm who saw the internet wave, and who saw that they could increase their capabilities to compete in their markets.

Today, the demonstration we're seeing from the most recent three transactions is, those folks fully believe in that, and they're behaving in the manner that says, after they join the firm, they'll actually grow organically.

And that's a great lift of the, kind of; market multiples Ron is talking about. We're just buying revenue and doing a roll up. We're really talking about a roll up that gets the right platform in place and then grows organically from there.

Barton Crockett - JP Morgan

Okay. That's great. That's very helpful. Thanks a lot.

Ron Salluzzo

Let me add one last thing to what Greg just said. That's why we see the second half is being stronger, because we're seeing ramp-up, and we got to get perhaps sometime. You know, the two months we had in this quarter with the acquired organizations were base lining for us, and we expect to see really dramatic growth. But it's going to push our hope, you know, through the year. And that's why the six to nine still fits.

Greg Novak

I mean you should know in all three cases, and I've really got kudos to our US and what I'll call our core business, our UK management team, everyone, working together, pooling in the right direction to move solutions, to move technology. And we're doing in a manner I think is particularly great.

We're taking the people who won those markets and fame, which of the portfolio of solutions technology or support infrastructure, best leverages your business, go ahead and select that. We'll help you in support that, and you run as fast as you can to grow those businesses.

We've seen Germany grow quickly. We know there is still some risk in small company, but Germany is now turning that risk around, and they are growing well. And we think that Canada and Asia are both poised to do the same thing for the remainder of the year.

Barton Crockett - JP Morgan

Okay. That's wonderful. Thank you.

Ron Salluzzo

Thank you. While we get a second, let me go back on Jim Boyle's question regarding the percentages of our revenue from our various industries? And the way we count this is the Solutions Groups that are delivered within the industry, that's part of these revenue numbers. Our Health Care for the quarter was 32% of US revenue, public affairs and policy were 16%, emerging internal markets was 19%, and telecom was 15%. Technology and telecom were about even with public affairs and policy.

Operator

And there are no further questions at this time. I would now like to turn the call over to Mr. Greg Novak, CEO for any closing remarks.

Gregory Novak

Thank you. I have to finish up simply by saying; we are going to do this. Harris is recognized as the leader in the fundamental science technology and methodology of Internet research. And that dramatic market shift will continue to sweep the globe and we'll be there to take advantage of it.

We are the world's only integrated multi-mode data collection platform that will support a 24/7 global enterprise. And we can gain significant leverage by exporting our full set of proven solutions. We have a compelling opportunity present to potential acquisition partners, so they may grow organically in their marketplace. And I will be leaving Monday to continue to lay the foundation of the next phase of Harris's development. Thanks for listening. And as always, thanks for your ongoing support.

Operator

This concludes your presentation. You may now disconnect and have a great day.

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Comments

[arminino:]

Zia..? I believe that is a connection to Sam Zell.? Interesting if he is in this name..

2007 Nov 02 02:33 PM