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Harris Interactive (NASDAQ:HPOL)

F3Q08 Earnings Call

May 2, 2008 8:30 am ET

Executives

Dan Hucko – Senior Vice President of Investor Relations

Gregory T. Novak – President and Chief Executive Officer

Ronald E. Salluzzo – Executive Vice President, Chief Financial Officer, Treasurer and Secretary

Analysts

Mark May – Needham & Company

James Boyle – CL King & Associates, Inc.

[Tyler Monterain] – Piper Jaffray & Co.

Todd Van Fleet – First Analysis

[Charles Rupp] - Insight Investment

Operator

Welcome to the third quarter 2008 Harris Interactive earnings conference call. (Operator Instructions) I will now turn your call over to Dan Hucko, Senior Vice President of Investor Relations.

Dan Hucko

With me today are Mr. Gregory Novak, our President and Chief Executive Officer, and Mr. Ron Salluzzo, who is our Chief Financial Officer. At the conclusion of their formal remarks Mr. Novak and Mr. Salluzzo will happy to answer your questions.

A webcast of this entire call will be accessible via the Investor Relations section of our corporate website 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 on the call today.

Additional factors that could cause the actual results to differ from the expectations discussed on the call are readily available in the Risks Factor section of our latest annual report filed on Form 10-K with the SEC. 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.

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 the press release we issued this morning and are also posted on the Investor Relations section of our website at www.harrisinteractive.com.

I would now like to turn the call over to Gregory Novak, our President and CEO.

Gregory T. Novak

Our third quarter certainly has its positives and its negatives. Although there a number of good things that happened, we cannot deny our disappointment with the overall results. The quarter’s poor performance was caused primarily by a significant revenue shortfall in our US Healthcare business. A shortfall which was mostly but not entirely offset by good performances in our other businesses and regions.

We are encouraged by those performances and we are encouraged by the aggressive actions we have taken to stabilize our Healthcare business and return it to growth and profitability.

On a year-to-date basis we see very strong organic revenue growth in Asia, moderate growth in Europe, and a slight decline in North America. Again, driven primarily by the large year-over-year revenue drop in our US Healthcare business. We call it Healthcare but the reality is it’s our big Pharma business.

To re-energize this business we completed a long list of improvements across a wide range of areas, from staffing and real estate to operations and the back office. We have adjusted our variable operating costs to match near-term revenue and we have made significant leadership changes to our US Healthcare business.

Specifically, in February we replace our US Healthcare sales leadership with an experienced executive, Bill Romania, the former CEO of TNS Healthcare Group, N.A., and in March we replaced the US Healthcare business leader with another experienced executive, Dr. Rick Millard, an insider who not only has 25 years of experience conducting healthcare research worldwide, but most recently turned around our financial services, public affairs and policy, and CPG research practices.

Rick and Bill have already been hard at work revising Healthcare business to match the short-term revenue outlook and are currently busy refocusing the combined intellectual assets and experience of the tremendous people of the Healthcare team on the broader opportunities of the sector, including new markets, globalization, and selling more of our solutions to our existing clients.

The healthcare industry is undergoing rapid change and we need to change as well. We do have the luxury of a wait for market dynamics to resolve themselves in our favor. We must change our strategy and move quickly. That’s what our best leaders do and I am confident that Rick and Bill and the talented people of the Healthcare team, who have demonstrated great success in the past, will accomplish much success again in the future.

Turning to other matters. We are reasonably proud of our overall success in many areas of the company in such a volatile economic environment while we conduct the additional work required to harmonize with our new units around the world. We are pleased with the organic growth of the acquired entities in the period, year-to-date and on a full-year basis.

Our strategy to share capabilities and assets across the enterprise is working. Asia, Germany, and France have performed well all year. Canada had a tremendous third quarter, setting them up for a good finish to the fiscal year. We are pleased with their success and look forward to it continuing.

One way to ensure that success continues is by adding good talent, which we have been doing in Europe. In May the former head of Marketing Science of one of our major competitors joins as head of Branded Marketing Communications Research for Harris Interactive Europe.

In addition, we will add a former commercial research head as a senior consultant for media in the UK. And finally, in London we will add a new sales head, which will be announced shortly. In France we add our first business leader focusing on the healthcare business who was a leader in one of our competitor’s businesses in the region. And finally, a former methodologist for several French health research firms, which will all help us move up the value chains with our clients.

As I said earlier, talented people and talented leaders lead to success. And we are thrilled to have all of them join us. Our ability to recruit these people is in no small measure due to the turnaround in our UK and European business.

Concerning North America, those of you who have followed us for a while will remember that not too long ago our US Financial Services, Loyalty Technology and CPG Groups, was struggling to grow. By applying new strategies, new directions, new products, and unfortunately sometimes, new leadership, we have reversed those trends. We now expect to see full-year growth in all these businesses and amazingly it looks like our financial services business will grow the most.

This shows, quite counter-intuitively, that selling into a market that has experienced what has to be the most severe economic shock in half a century can happen when talented people focus on the proper opportunities and properly leverage the full assets of Harris Interactive. It can be done when we focus our powerful brand, our technology, our science, our solutions, our databases, and most importantly, our people, in the proper manner. Our offering can and will be continue to be well received in the market and we can and will continue to grow.

And while we’re keeping score, it’s important to understand our harmonization process is truly blending us into an integrated global company. European Business growth is a combination of France plus Germany plus the UK’s collective sales and execution efforts. Some of Canada’s success can be linked to the new relationships around the world. And Asia can thank our US solution leaders for their intellectual transfer and client support.

And many of our other US business leaders have expended significant effort to transfer our capabilities, assist with global clients, share revenue, and incur costs for the benefit of Harris Interactive worldwide. We acknowledge you efforts and encourage you to continue in that teamwork.

In closing, we have taken the necessary actions to both resize our business and to position our company for future growth and profitability, remain positive about the opportunities, and will continue our efforts to grow this business.

I will now turn it over to Ron Salluzzo for a review of the financials.

Ronald E. Salluzzo

I am going to start with sales and then I am going to walk through the Consolidated Statement of Operations, which is Page 6 of our press release results posted on our website.

Sales for the quarter are at, and we always measure sales against revenue, and the sales for the quarter are at 107% of the revenue produced. That’s usually an early indicator that the following quarter, in this case Q4, will be strong and that’s a positive indicator for us.

We also, on a trailing 4-quarters basis, find revenue and sales to be about even, which is in large part the stabilization that Greg just referenced in many of our business units, and in spite of a significant drop off in our US Pharma business. Pharma backlog at March 31, 2008, is $76.9 million and that will translate into revenue over the next four quarters because we only book sales for a four-quarter period.

Now going to revenue, and this is again, Page 6 of the press release, our as reported revenue increased 11% in Q3 and it’s up 13% through nine months. One of the bright spots in our revenue area is that our acquired units and the units being harmonized show pro forma growth of 26% in Q3. This includes Asia, Canada, France, and Germany.

For the quarter we did experience favorable currency exchange of $1.2 million of revenue, but even without the foreign currency lift, the organizations being harmonized would have gone up approximately 20%. This growth, we think, is driven by the continued success in expanding our solution sets into those parts of the world that include all of the Harris portfolio, as well as cross-border cooperation of all of our professionals.

Our total pro forma organic revenue was down 4% with the continued challenges we see in healthcare in the US, and for the quarter we had some challenges in the UK. Some of the bright spots, more specifically, in the UK or instance, is that the backlog going into Q4 is strong, it’s up 13% over last year and it bodes well for solid revenue production in Q4.

During the melt-down in the financial industry our Financial Services group has rebounded from a very difficult Q2 to show a 7% gain in Q3 with further growth expected in Q4, which I think is consistent with Greg’s comment about good leadership driving forward our business.

Our Loyalty Group, which supports the industries and are included in our industry numbers, on a stand-alone basis grew in excess of 40% in the quarter and it will drive total growth for the year in the group by 20%. We think that this is a proof point that the Harris solutions are well accepted in the market and our cooperative and consultative model is effective.

As Greg noted and is noted in our press release, the Healthcare issues have disappointed us but we are confident that the actions we have taken will move Healthcare to a positive track. From a revenue growth perspective these initiatives include expanding the exposure of our solution sets to more Healthcare clients, strengthening our global positioning to the addition of people, and most importantly, improving leadership.

With where we are today we recognize that the results from the fix will take some time to show up in our numbers, but as with other initiatives, we have the willpower to stay the course and we believe the recovery will be reflected in our numbers by Q3 2009.

At the gross margin line the margin improved in the quarter by 0.7% and we are now 0.6% behind last year. The biggest influencer of the year-to-date difference makes us behind in 2008 versus in 2006 has been an increase in our need to purchase outside on-line samples, particularly in countries where we have not developed adequate Harris panel.

This results from the significant increase in global studies we’ve been asked to do by so many clients. Our remedy for this has been more aggressive panelist acquisition, both through acquisition of panel companies as well as targeting panelists in selected countries.

We are spending more in 2008 on panelists and would expect to continue to do so and we’re doing more detailed screening of our panelists to ensure fuller utilization of all the capabilities that the panelists present to us, as well as consolidation of our global panels.

An additional remedy is our constant review of our pricing models to ensure that we have appropriate margins built into the projects as we bid them.

From an operating expense perspective, sales and marketing is at 10.1% for the quarter as a percent of revenue versus 10.9% last year. We have seen some improvement but it continues to be higher than our 9.5% target, partly due to the increased effort required in this marketplace to bring opportunities to closure.

At the G&A line, our total G&A, which of course is an amalgamation of many things, is at 36.9% versus 32% last year for the quarter. For the full 9 months it’s 34% versus 33.1%. For the quarter the main drivers of the difference in the increase, and the increase is 4.2% are due to 1.4% due to retirements that are charged there and not through the restructuring charge, an increase in unutilized time accounted for 1.4%, which is a result of not being able to get labor adjusted quickly enough as revenue was falling, and our rental costs in our facilities around the world were 0.6% higher, for a total of 3.4% in those three categories of the 4.2%.

The retirement costs are non-recurring, which again was 1.4%, the unutilized time will diminish with the actions that we have taken that I am going to talk about in a minute, and rent is being driven down as we re-examine and adjust leases, some of which has been completed as we finished Q3.

Depreciation and amortization comprises 4.4% of revenue, up from 3.1%, affecting earnings, of course, by the difference of 1.3%. The increase is substantially from the incremental amortization of acquired, identifiable intangibles and represents a fixed cost. The good news is as revenue grows that will become a diminishing portion of earnings.

Now let me talk about the total charges associated with cost actions, charges that you see as restructuring charges, and in addition to that we have some retirements that are included in G&A of about $800,000, resulting in a total charge of $1.9 million in the quarter. You will recall, I believe, at the last earnings call that we said we expected to take a charge of approximately $1.5 million in the quarter and that has turned out to be $1.9 million.

Secondly, we’re going to take another $400,000 charge in Q4, bringing the total charge for the second half of 2008 to $2.3 million. These actions will increase next year’s operating earnings and adjusted EBITDA by $9.4 million.

Let me give you some detail and color on the $9.4 million. And this is compared to this year’s ending results. The charge itself, which is $2.3 million won’t repeat, so that would be an increment. The savings from personnel changes will be a total of $3.2 million. The gross cost reduction from discontinued businesses will be $1.1 million.

Real estate, which has a very long tail, will benefit us, with the actions taken so far, by about $100,000 next year. And other operating improvements, most notably a change in our High Points program and certain policy and procedural changes related to operations, will garner $2.7 million in 2009.

From a tax perspective we have a couple of anomalies that have occurred which is changing our effective tax rate for the full year to 62%. Our planned tax rate was 43% and we see it going back to 43% to 44% and is our expectation next year. There’s two things that drive that tax rate in this year and in this quarter. One is that we had a reversal of the benefit of a net operating loss in the quarter, and secondly, the permanent differences between tax accounting and GAAP accounting get exacerbated as earnings fall.

Going to the balance sheet for just a minute, which is Page 5, just looking at the balance sheet, it obviously remains strong. Cash is neutral and through nine months our cash from operations is up slightly from the prior year. It will be $13.4 million versus $13 million in 2007.

Firm section strengthened from $1.33 million to $1.62 million. And we are comfortably in compliance with all the covenants associated with our syndicated loan agreement.

Let me finish with guidance results also included in the press release. Revenue for the full year we expect to be in the $237 million-$242 million. Adjusted EBITDA will be $17 million-$19 million. Fully diluted earnings per share will be $0.01-$0.03.

And with that, what I would like to do is turn it back over to Greg.

Gregory T. Novak

Ron spoke a lot about the performance of the business. Some very bright spots followed by some lapses and some challenges. We have demonstrated that we can sell and grow even in difficult economic environments. We are willing, as leaders, to pragmatically assess the market situation, match Harris Interactive resources and capabilities to the opportunities, and drive rapidly and aggressively toward our goals.

Great people and great leaders make all the difference and we’re excited about the changes to our business and about the opportunities ahead of us.

Now I would like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mark May - Needham & Company.

Mark May – Needham & Company

If you exclude the Pharma business, can you tell us what the growth would have been, both total and in the US market? And then the second question is what is your best guess at what the industry growth is in terms of the Pharma/Market Research sector?

Ronald E. Salluzzo

In North America without Healthcare we would have been organically up 2%.

Gregory T. Novak

Mark, the most recent information we have, we have not seen a new update other than the 23% down and then more recently IMS had cut their spending in the business by about 10% because of business changes to their business.

Remember, we are unnecessarily narrowly focused on a very narrow sector of the Pharma space, and in fact, I’m aware of other businesses who are focusing in other areas of the overall healthcare space that are actually growing.

And so realistically the changes we have made are in a large part driven by we have assets that we can use if we’re willing to turn those assets and use them. So, that’s about all the market information. But big Pharma spending on new product introduction will refocus, has been down pretty dramatically for a bit now in the US.

Operator

Your next question comes from Jim Boyle - CLK.

James Boyle – CL King & Associates, Inc.

Could you speak about the CostEx in the second half of the calendar 2008 for some of the other verticals that are important to you? And second, could you tell us any status update on the pricing pressure that has afflicted you in the past. Has it gotten any worse or better as recessionary times hit?

Gregory T. Novak

A couple of things for the remainder of the calendar year, if you turn to Page 4 of the press release we give you the metrics on sales to revenue ratio so you see us with a little bit of a backlog build in the quarterly numbers, the 1.07 and you see us with a 4-quarter look which we think is a stable one that says at 1.0 you can expect flat growth for the next couple of quarters.

As we get more sales ahead of revenue in incoming quarters we will see that turn back up. So we might expect to be flat for a couple of quarters. It really depends. That Healthcare is a big nut and the guys are in there doing their thing. How quickly they turn that around and how fast the other guys can go. We don’t expect that the other teams, we’re pretty comfortable with those other teams leadership and what they’ve accomplished and how they’re moving their businesses.

And another comment is we will UK have a really strong quarter, maybe a record setter, in the fourth, which we’re pleased about.

Ronald E. Salluzzo

The key to the other US units, when we look at trailing 4-quarter sales and compare them to trailing 4-quarter revenues, every other custom unit in the US is positive by no less than +3% and as high as 11%, so we feel pretty good about the prospects.

The thing that is a little tricky is each unit has a longer duration for the length of the conversion. That bodes well for the last half of our calendar year. As Greg had said, Healthcare is right on that number and we’re working hard to make sure that we harvest the best amount of profit that we can out of the appropriate businesses there and then grow from that stable base.

Gregory T. Novak

I have some additionally to say. That 6% to 11% by everyone else, if we can accelerate that will offset the Healthcare challenges faster, work Healthcare recoveries faster, and we will know more in another 30 to 60 days on that subject.

As you turn to pricing, pricing pretty stable. I think that there’s a bit more competitive environment. It’s taking a little longer to close jobs. Some of that is about more competition and some of that’s about people slowing down in this difficult environment, but that’s pushed out a little bit.

The pricing issue is complex. There’s a lot of differential things going on with small and limited panels. And in fact that’s driven a little bit of our challenge with panel in the UK. They grew Internet revenue I think 50% year-over-year and having the panels in place was what Ron talked about hurting our margin a bit.

James Boyle – CL King & Associates, Inc.

Which is your second largest vertical now?

Ronald E. Salluzzo

Technology.

James Boyle – CL King & Associates, Inc.

And how is that doing, looking forward?

Gregory T. Novak

I think telecom looking really good at 13% growth in the quarter and has good prospects going forward, in large part driven by new leadership. But if you remember, our Loyalty group launched some new product about 18 months ago and that participation is driving that business.

Ronald E. Salluzzo

For tech they’re at 109. And the reason I hesitated, by the way, is I wanted to process your question as being just US or worldwide. Because UK is actually larger, as a group. The answer we’re giving you is on a US basis.

James Boyle – CL King & Associates, Inc.

And finally, since you had mentioned it in a past quarterly call, Greg, have there been any more visits to Rochester by Mr. Boliel’s representatives and when you visited Paris did you have a meeting with them and did it produce any business?

Gregory T. Novak

Well, we certainly are producing business with them. We’re still a supplier to them. As always, like with you, we talk to all our investors on their schedule.

Operator

Your next question comes from [Tyler Monterain] - Piper Jaffray.

[Tyler Monterain] – Piper Jaffray & Co.

You said there was some growth in Financial Services this quarter. Was that in the core business or was that from the, I know you had mentioned there were some initiatives last quarter to expand some of the channels there. Could you give a little color on that?

Ronald E. Salluzzo

The growth is in the core business but it’s with different clients than we suffered with in Q2.

[Tyler Monterain] – Piper Jaffray & Co.

How are the initiatives playing out there? I know you mentioned a few of the other areas you were going to go into. Any progress there?

Ronald E. Salluzzo

Yes. We’ve had good progress across the board. The positive thing has been the drive of the Harris solutions set into the business where the penetration is rising, which means that we’ve got more to offer across our stack and when we offer more across the stack we bring more value to the client.

Gregory T. Novak

It’s a really great question because that Financial Services is in part two layers of new leadership in the last year and a half or so, so folks are thinking about it the right way. A diminution of traditional revenues in the sector because of what was going on but the beauty of what they’ve done is they said, “Okay, what is the sector worried about?” That’s what drives research and certainly marketing.

And so they have shifted and they have gotten more business, gotten some brand business, some communications business, that is really flowing through to those customers, solving the customer business problem. So if you focus it right, even in that market, those folks have made a difference. We’re real proud of them.

[Tyler Monterain] – Piper Jaffray & Co.

Last quarter you mentioned something about there was zero attrition among your employer base. How did that shape up this quarter? Outside of the new additions and etc.

Ronald E. Salluzzo

I think we made the reference that we lost no key client-facing people in our acquired units. And I believe that’s still true.

[Tyler Monterain] – Piper Jaffray & Co.

I know the market sales expense, you mentioned it earlier. When do you see that coming back down to the 9.5% target there? Early next year? Or when do you see that happening?

Ronald E. Salluzzo

Well, we’re targeting next year’s planning at 9.5% and we think we can get there as the units balance a little bit. One of the things that’s interesting about our sales model is as we become more successful the sales people move on to other things and the account leadership, management people take over, which drives down our cost for renewing work.

The key to that is making sure we have a stable of offerings that we provide to that individual client so that there is a series of things we’re doing for them on a project basis. So the whole sales issue has always been strategically to move us to account management and to move us to a point where we are getting a larger share of the wallet spend for market research in those particular clients. So we are targeting next year at 9.5%.

[Tyler Monterain] – Piper Jaffray & Co.

Any more color on the market research moratorium in Canada? I know it’s a small part but I was wanting an update on that.

Ronald E. Salluzzo

What you’re referencing, I think, is the moratorium that was applied by one of the political parties to the ruling party that said that they were spending too much on market research. That moratorium came off fairly quickly after it was put on because there’s also a law that says in Canada you have to do a satisfaction-type survey, a polling of the people affected by laws.

So what we think the long-term effect is, is that there will be modulation in the spend so that we won’t see growth in that area, we’ll probably see declension. And we will suffer from that because we are a big provider in that area.

I don’t know the number, but let’s assume for a minute that the drop will be 10% to 15%.

Operator

Your next question comes from Todd Van Fleet - First Analysis.

Todd Van Fleet – First Analysis

If we go back to last quarter, I can’t remember if it was on-line or off-line, but I think we had a reasonably lengthy discussion about the logic behind sticking with the revenue guidance that you had stuck with for a couple of quarters. I think your most recent revenue guidance prior to this quarter was $258 million to $265 million.

And I think you had said at that time that you were shooting for the low end of your guidance, that you thought that that was within reach. And now we see here, a quarter later, that the low end of that guidance range is now $21 million lower for the rest of the fiscal year from what it was, implying about $10 plus million a quarter.

So having come through that, I’m wondering if there’s any thing that’s changed, either philosophically with respect to management and how you think about providing guidance with respect to revenue and expenses moving ahead, or if there’s been any changes fundamentally in your ability to forecast the business, quarter-in and quarter-out, moving ahead? I’m trying to understand if there have been any changes on either of those two lines over the course of the past 3 or 6 months.

Ronald E. Salluzzo

Let me start with replaying the history just a bit. When we got to Q3 we could significant slides and it was particularly around the Healthcare group and we didn’t change guidance because, I will be honest with you, at the point it was sliding so badly we weren’t sure what to tell you. So what we said is we’re not going to update it and we’re going to do our best to get to the bottom of guidance.

I don’t believe we’ve changed our philosophy, although I will say we went to annual guidance this year thinking that a 4-quarter look would be more of a stable look at things than quarter-by-quarter. The issue of where we go with this going forward I think will be a question we haven’t really gotten to. We have no change yet. We’ll debate it as we close up the year and go into next year.

But I want to be careful. The $258 million was what we were going to shoot at. At the time we said that we thought we had a shot at getting there, but we were uncomfortable because of the slide. And, in fact, the slide occurred at a much higher rate in Healthcare than we expected.

By the way, Healthcare for the first five months, as with the whole US business, was up 5% organically, year-to-date through five months. The slide started in December and it was so significant that we were really concerned about where that would play out over the next six months.

And in some senses our worst fears have been realized, but when we saw the slide starting and hitting us in December, we started moving to make the changes that we’ve now made. We need to give the folks that are now leading that group the opportunity to find the floor and to establish the operating model to go forward with.

And that’s why I said earlier that we were going to not look at growth necessarily in Healthcare until we got out into Q3 of 2009. So, we’re looking to stabilize that business, we’re looking for significant growth in the other businesses. And the other businesses, as they get bigger, will have a bigger influence on the overall results.

Todd Van Fleet – First Analysis

Let me ask one more then, Ron, with respect to your comments on the purchase on outside sample. Are we ramping in terms of Harris’ need and requirement for outside sample? Is this a growing need on the part of Harris? If you could talk about the timing of that ramp, we saw a partial impact of that in the March quarter, will we see a heavier impact of that in June, and even perhaps a greater impact of that in the September quarter? And if you could talk about the geographies that we’re looking at here.

Gregory T. Novak

I’ll let Ron get to the ramp portion. That is, at least in part, driven by the business that we win from our clients and whether or not we have panels in those areas. Not just regionally, but in the types of folks we are targeting. So that will be a little difficult.

Second is, we’ve taken a number of actions to take it from a variable cost, which causes that ramp to move it inside. We recently actually purchased a panel in the UK to catch up with that tremendous growth in the UK Internet. And they’re really flipping from b-to-b, from business to consumer business, in the region and we need to support them with spend that is reusable that helps our margin.

Ronald E. Salluzzo

And a lot of what we’re talking about is location of where the panelists need to be. But having said that, it’s also specific types of panelists. And right now we’re in the midst of a study that says of the amounts that we bought this past year, can we break them into categories. And right now we’re calling them controllable and non-controllable.

Non-controllable would be an odd study where we would use the panelist once. It doesn’t make sense to go recruit sizeable panelists with that characteristic if, in fact, we don’t think there’s repeat business.

Controllable are things that say, “Gee, if we had little better timing, or if we could correlate studies being done in groups a, b, and c, they would need the same person. And oh, by the way, if we did a better analysis of the person’s demographics and [inaudible] that panelist may fill more needs than we presently have today.” That part of it is the part we’re addressing.

Now if we can move forward and get a profile of what we need, then we will be in the marketplace either buying panelists individually, or looking for panel companies that took a profile. And our expectation is as globalization has increased, and by the way, we have increased our panel quite a bit over the last couple of years. We have spent a significant amount money.

But it’s clear that the addition of our new units has put incremental pressure on it all at once as opposed to building it slowly as it would have done if we were just organically moving forward. So we’re moving to address that now. What it means for next year, I don’t know. We’re in the middle of planning that now. But clearly, if we had had those panelists in-house, it probably for the year is a couple points of margin to us.

Gregory T. Novak

The other point is we have taken a couple of initiatives on the operating side to change the cost structure of managing the panel. And those are already in place. So that would part offset next year.

Ronald E. Salluzzo

What Greg is referencing is we’ve changed our Harris Interactive Points Program, Rewards Program, to function far more efficiently and that’s in the $9.4 million that I had referenced as savings. It’s about as big as $1.1 million of that. And the reason we’re very comfortable we’re going to capture is because it’s contractual with our supplier. Some of that we will use to improve our panel purchases and give us a little stronger taste in places in the world where we’re not there yet.

Todd Van Fleet – First Analysis

So if I understand you right, it’s more acquiring a certain type of panelist, at this stage, rather than buying panelists in certain geographies?

Ronald E. Salluzzo

It’s both. The geographies are important but not just general panelists in most of those geographies. It’s panelists with specific characteristics in specific geographies.

Todd Van Fleet – First Analysis

And these geographies, do they coincide with the recent acquisitions? So, Asia and Germany, Canada?

Gregory T. Novak

A little yes and a little no. We’re doing a number of studies; I think our largest right now is a 27-country study. That correlates strongly with the customer demand. So in some of those countries we won’t even attempt to do it on the Internet. So we’re not just building panels for the acquisitions; I would say it’s being driven more with the client demand for the regions than where we have a new location.

Ronald E. Salluzzo

It’s the global aspects of the studies and what’s happening is, a good example is, healthcare, we mentioned earlier, shifted 23% of its research somewhere else. So somewhere else is where we’re trying to track. There’s been tremendous growth in the interest in buying habits in Asia and South America. Look, those are huge populations and it’s not surprising that we’re moving there. Those things need to be covered by [inaudible] panel.

Operator

Your next question comes from [Charles Rupp] - Insight Investment.

[Charles Rupp] - Insight Investment

Can you tell us what percentage of your business is in the Healthcare vertical in let’s say the second half of this fiscal year?

Ronald E. Salluzzo

Let me tell you the full year. It runs about 21% of our consolidated revenue. Do you have another one? Go ahead and let me do the math on that and I’ll come right back to you.

[Charles Rupp] - Insight Investment

I read recently that Taylor Nelson is in talks with JFK in Germany about the possible merger. I’m wondering if you have any thoughts on what impact, if any, that would happen assuming that merger does go through?

Gregory T. Novak

Well, certainly the release would indicate they’re pretty far down that path. And I’m going to look to suppose they get that completed. Now lots of different issues and possibilities. They become the biggest custom research firm by far, in the industry. They get close to Nielsen, quite honestly. They will expand their global coverage, which they already had a lot of. I suspect they expect a significant cost opportunity in that merger because they might also anticipate some integration challenges with a merger that big.

So in a narrow Harris Interactive sort of thinking, we think there is one less supply sider in every bid because two of the big players have combined. And we think that in the near-term we might find an opportunity to find great people. This is always a dynamic environment for this change and those people might come freed up. And I talked a bit about the folks we need and the folks we’ve gotten in Europe and in the United States and we see lots of good talent out there and we’re happy to bring them into our firm.

[Charles Rupp] - Insight Investment

I certainly understand that and the idea that there will be one less bidder and those are both positive things. The negative is they will be, I would be, a much tougher competitor. As you say, their cost should be lower and they should have even better geographical coverage.

Gregory T. Novak

I’m not convinced, I haven’t seen the view of cost structure changes. They have a particular part of their business, which is managing a really huge consumer panel, where we don’t compete, that they should see some cost synergy in. To be frank, there’s not great leverage on the custom side of the research business so I don’t know how fast or how much they will change their approach.

The question more importantly in something like this is how well will they be able to hold on to all of their revenues as they bring together one person’s communication group and another. But they will be a big company.

Ronald E. Salluzzo

21.1% as opposed to 21%. Now one thing I will caution everybody on the phone. I’m giving you the percentage against consolidated revenue. Last year in our annual report Healthcare was 26.9%. Now they’ve clearly had some fall, but the biggest shift is that we have new units in this year’s number that weren’t there last year.

[Charles Rupp] - Insight Investment

21.1% is what’s expected in this fiscal year.

Ronald E. Salluzzo

The full year, correct.

[Charles Rupp] - Insight Investment

So right now, the run rate, if we look for example at the second half of the fiscal year, can you give us a bigger-than-a-bread-box feel for what the run rate is now? Is it down a couple percent or much more?

Ronald E. Salluzzo

Oh, much more.

[Charles Rupp] - Insight Investment

Can you give us a range?

Ronald E. Salluzzo

Yes, they’re going to be down for the year, we expect them down 12%.

Gregory T. Novak

They were down 18% in the quarter.

Ronald E. Salluzzo

And this goes back to a previous question that was asked, on where you are at guidance. That 18% drop in Q3, the full year drop of 12%, after the first five months of them being up, it was pretty hard for us to add visibility and say we are comfortable this is the number.

Gregory T. Novak

It happened in December and was still going on in January. So we finally got it stabilized. Keep in mind, there’s been a bit of confusion whether Harris Interactive is going down. We’ll have sequential growth this quarter to next, just like we do every year. We really see the healthcare business as moving down for a couple of more quarters as that sales short fall moves through the system and then coming back up the other side.

Operator

There are no more questions at this time.

Gregory T. Novak

Thank you for listening and thank you for the questions. We are pleased with a lot of good things going on in the business where we’re pleased that we’ve gotten the Healthcare situation in hand and we expect a turnaround. That’s going to have to move through the system.

Believe we found the bottom. Cash generation is good. The acquisition strategy is working. We expect forward sequential growth and we have a limited number of other negative issues to deal with as we manage this business so we’re hopeful, we’re positive, we think we’ve got things moving in the right direction.

We thank you again for your time and your interest and your support. We will continue to do everything in our power to drive this business forward.

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Source: Harris Interactive F3Q08 (Qtr End 03/31/08) Earnings Call Transcript
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