Greenfield Online Inc. Q4 2005 Earnings Conference Call Transcript (SRVY)

Greenfield Online Inc. (SRVY)
Q4 2005 Earnings Conference Call
February 9th 2006, 5:00 PM.

Executives:

Cynthia Brockhoff, Vice President, Investor Relations
Albert Angrisani, President, Chief Executive Officer
Robert Bies, Executive Vice President, Chief Financial Officer

Analysts:

Kyle Evans, Stephens Incorporated
Matthew McCormack, Friedman, Billings, Ramsey
Barton Crockett, JP Morgan
Doug Anmuth, Lehman Brothers
Todd Van Fleet, First Analysis
Colin Gillis, Canaccord Adams
Brett Manderfeld, Piper Jaffray
Derek Brown, Pacific Growth Equities

Presentation

Operator

Good evening, ladies and gentlemen, and welcome to the Greenfield Online Investor Conference Call. At this time, all participants are in a listen-only-mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press '*' '0' on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Ms. Cynthia Brockhoff, Vice President of Investor Relations for Greenfield Online. Thank you Ms. Brockhoff, you may begin.

Cynthia Brockhoff, Vice President of Investor Relations

Good afternoon everyone, and thank you for joining us. Welcome to Greenfield Online’s Fourth Quarter and Full-Year 2005 Results Teleconference. On the call with me today are Albert Angrisani, President and Chief Executive Officer and Robert Bies, Executive Vice President and Chief Financial Officer. The format for today’s call will include formal remarks by both Al and Bob on the state of the business and on our fourth quarter and full-year performance. Thereafter, Al and Bob will be available for questions.

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 predictions and guidance related to the Company's future financial performance, other business and operating metrics, and involve a number of risks known and unknown that could cause actual results, performance, or achievements of the Company to be materially different from the 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. The forward-looking statements made herein are only made as of the date of this presentation and the Company undertakes no obligations to publicly update them to reflect subsequent events or circumstances.

I would also like to mention that the assets that we will be discussing non-GAAP financial measures today including adjusted EBITDA, excluding the fourth quarter restructuring charges and free cash flow from operations. These items are reconciled to GAAP finance stated in our press release that we issued today. I’ll now turn the call over to Greenfield Online’s President and Chief Executive Officer, Al Angrisani. Please go ahead, Al.

Albert Angrisani, President and Chief Executive Officer

Thank you, Cindy. Good afternoon everyone and thank you for joining us today. The fourth quarter was my first full quarter Greenfield Ciao and I believe we accomplished many things during that period. I continue to believe we still have a long way to go. As I said during our November 9th Investor Call, many of the Companies issues are related to self-inflicted wounds. We’re still putting programs in place to repair those wounds and reinvigorate the growth of our business especially in North America. However, there are no quick fixes. This continues to be work in progress turnaround. And I believe it will take us to the remainder of 2006 to work through the many of these issues.

That said, everyone at Greenfield Ciao is firmly believed in this business and we’re going to fix it. Before I go for a broader picture of my thoughts on the current state of the business, I’ll review a few of the fourth quarter’s highlights.

Overall, revenue was a little better than we anticipated at 24.5 million, and was up 6% sequentially from 23.1 in the third quarter. North American revenue was slightly higher than the third quarter, up approximately 2%. In Europe, Ciao marketing research revenue was a little softer than anticipated for the quarter, up 11% sequentially. Ciao comparison shopping was strong, and up 36% sequentially. And please note that going forward in 2006, we’re going to report on the Company in the financial and operating perspective as three distinct businesses. North American Marketing Research (1), European Marketing Research (2), Comparison Shopping (3).

Moving forward, overall gross margins were strong, a 75.4% compared to 71% for the third quarter. This too was slightly higher than we anticipated, and I’ll talk a little more about our new approach to COGS or Cost of Goods Sold in a few minutes. Overhead and operating expenses in non-COGS areas were on target, post rightsizing, if not slightly below what we anticipated. However, the full effects of rightsizing will continue to be realized during 2006. You will recall from our December announcement that we eliminated 39 positions in North America, and projected approximately 7 million in reduced operating cost in 2006, as compared with our third quarter 2005 annualized operating expense run rates.

Moving forward, operating margins for the fourth quarter were 10.8% of revenue, excluding the Q4 restructuring charges. Adjusted EBITDA, a non-GAAP financial measure was 5.7 million, or 23.3% of revenue excluding the Q4 restructuring charge. In addition, we delivered approximately 7.6 million in operating cash flow this quarter, as compared to 7.2 million in operating cash flow in the third quarter. As we mentioned in December rightsizing press release, during the fourth quarter we undertook our annual review of our goodwill and intangible assets under FASB 142, FAS 144. As a result of this fair value analysis, we have reported a charge for the impairment of goodwill at our Ciao subsidiary of 89.4 million, and a written-down certain intangible assets associated with the Ciao acquisition by approximately 1.5 million. These are non-cash charges.

In addition to FAS 142 and FAS 144 analysis, we also recorded a charge related to our previously announced rightsizing initiative of approximately 400,000. We refer to the combination of the FAS 142 and FAS 144, and rightsizing charge at the Q4 restructuring charges. Now, Robert Bies will provide more details about these charges in a few minutes.

Like hundreds of other public companies, at the end of the year we also announced the accelerated investing of certain out-of-the money stock options. The estimated impact of the implementation of FAS 123R on our operating margins is reflected in charges outlined in the 2006 guidance section of today’s press release, and which we’ll discuss in just a few minutes also.

Finally, in the last date of 2005, we paid-off our bank facility and still ended the year with approximately $21 million in cash, reflecting further improved accounts receivable, day sales outstanding on working capital management by Robert Bies and his team.

To be clear, beyond normal short-term obligations and capital lease obligations, we have no outstanding bank debt. These numbers tell the story of our performance for the fourth quarter. But what they don’t do is establish trend lines going forward to reveal the challenges we face in 2006 to effectuate this turn around.

Let’s talk about those trends. For the next few minutes, I’ll discuss the trends I see and what I believe to be our challenges this year.

For a change, let me begin with European Ciao. In Europe, and as I briefly mentioned earlier, Ciao marketing research revenue was softer than anticipated in Q4 as competition became more intense. We believe pricing pressure may become more of a factoring Europe throughout 2006, as competitors who are now better funded through IPOs and venture capital have refuelled to become more aggressive.

Accordingly, we’ve taken the following actions to reinvigorate sales growth. One, as I mentioned previously in 2006, the Ciao P&L will be more clearly divided into marketing research and shopping business P&Ls, providing both greater visibility into results and increasing accountability in the organization. Speaking of accountability, Gunnar Piening, the Managing Director of Market Research to Ciao has taken over direct responsibility for managing our European sales managers and for the overall marketing research sales organization in Europe.

In addition, I authorize the expenditure of additional marketing resources to more aggressively tell the Ciao marketing research to Europe in the face of stiffer competition. In contrast, the Ciao comparison shopping business exceeded our expectations. As you know, Nielsen/NetRatings rank Ciao as the most popular comparison shopping site in Germany.

Going forward, I am pleased to announce that Max Cartellieri, Co-Founder of Ciao will take a more direct role in the strategy, planning, administration, marketing and oversight of the comparison shopping business with its new and distinct P&L. Also Fred Paul, Co-Founder of Ciao will focus on future technology developments for the shopping business. Daniel Keller and Stephan Musikant will be elevated in the organization structure to help manage and drive the business. We believe Ciao shopping is a growth opportunity and we are lining additional resources to take advantage of the opportunity we see in that market. For example, during Q4 we also announced a new comparison shopping site in the Netherlands.

Let’s move on to North America’s trends. While I was confident to say that North America revenue did not decline Q3 to Q4 regrettably two quarters do not really established a trend. In addition, Q4 is traditionally our strongest quarter. And we typically see revenue increase appreciably over Q3. However, this did not occur in 2005 as it has in prior years. I strongly believe that a considerable amount of works still needs to be done to rebuild the North American marketing and sales infrastructure to the end of fueling growth in North America revenues quarter-to-quarter in 2006. I think this is further evidenced by our weak first quarter backlog number.

Here is an update on what happened in North America from an overall sales perspective in Q4. First, based on the results of the mystery shop pricing study we conducted in North America during the fourth quarter, we appear to be in acceptable position relative to the competition. And this is even in the face of what I call unsustainable called “loss leader