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Harris Interactive (NASDAQ:HPOL)

F4Q08 Earnings Call

August 22, 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

Todd Van Fleet – First Analysis Corp.

Unidentified Analyst – Needham & Company

Randy Hugen – Piper Jaffray

James Boyle – CL King and Associates, Inc.

Mark May – Needham & Company

Operator

Welcome to the fourth quarter in fiscal year of 2008 conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call Dan Hucko, Senior Vice President of Corporate Communications and Investor Relations.

Dan Hucko

Thank you for joining us for our fourth fiscal quarter and full fiscal year 2008 earnings call. With me today are Gregory Novak, our President and Chief Executive Officer, and 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 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 the 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 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.

And now I'd like to turn the call over to Greg Novak, our President and CEO. Please go ahead, Greg.

Gregory T. Novak

When I look back at 2008, I have to acknowledge my disappointment with the overall financial results of the company. Yet when you peel back the layers, you find good overall specific performance that, when measured against aggressive business goals and tremendous economic headwinds, demonstrates the strength of this company and its people.

Fiscal 2008 started very well. We demonstrated strong organic revenue growth for the first five months of the year. We completed two new international acquisitions that expanded our global footprint in Canada and Asia, we continued the integration of our recently acquired German business, and we successfully continued the brand and promised repositioning of our French location. We experienced few of the challenges that had previously plagued acquisitive strategies and moved rapidly to share resources, knowledge and experience for the good of the entire company, its shareholders, and its people, growing relationships, growing revenue, profits and opportunity for both our clients and our employees.

Then unfortunately economic conditions in North America deteriorated rapidly. First our pharmacentric health practice was negatively impacted, driven in large part by spending freezes and cuts at Big PhRMA. Canada experienced both temporary halts to governmental research spending and data collection volume declines, driven by exchange rate fluctuations. And finally, the financial markets collapsed and our overall bookings and revenue slowed, particularly in North America.

From December to July we moved rapidly to reorganize, restructure, and right size the company in the U.S. and in the U.K. to match projected revenue and to maintain margin. We changed our healthcare leadership and expanded the opportunities for those very talented people to access a broader market, leveraging their excellent skills.

We closed our last U.S. phone center and continued our ongoing profitability enhancement and cost reduction plans  productivity, utilization, real estate, travel, outsourcing, and many others - and all the while continuing our commitment to expanding the client base and the product offering globally.

When the dust settled, we'd achieved roughly half our growth initiatives for the year despite the economic downturn and the PhRMA issues, and excluding just PhRMA, grew our business, including all three acquisitions, organically. That's quite unlike past performance and behavior.

Unfortunately, the increased fixed costs burdens, including the amortization of the acquisitions against lower than planned revenues and charges to restructure the business, severely impacted our operating profits for the year. And yet, there were many, many bright spots for the year and particularly for the fourth quarter where, in the fourth quarter we had record sales revenue and Internet growth in Europe continues to demonstrate the success of that strategy and the success of that team.

In addition, the rest of our U.S. business held firm while our healthcare team pivots to a broader strategy to reestablish and rebuild revenue growth for the future.

And finally and most importantly we're generating cash - $16 million worth in fiscal '08 with $33 million on hand. We're paying down our debts, we have our costs in line for a more modest revenue expectation in the face of these unsettled economic times and are positioning our company, ourselves and our teams for better performance in 2009.

And I'll speak a bit more on that in a moment, but now I'm going to turn it over to Ron to discuss the financials in more detail.

Ronald E. Salluzzo

Let me focus on 2008 with a bit more color on the comments that Greg just provided to you. And clearly 2008 was a challenge. We do believe we've finished the year a bit more lean, more efficient and positioned to face the challenges that we expect to face in fiscal 2009.

When the financial climate began to deteriorate in late calendar 2007, as Greg mentioned, we began repositioning the company and took action that significantly affected our earnings and the second half of our fiscal year. We'll continue to reposition the company and stabilize operations throughout fiscal '09 as we see in the rest of this calendar year headwinds, particularly in the U.S., that need to continue to be addressed.

The continuing economic headwinds in the PhRMA area are clearly front and center for us, but we feel comfortable that with the leadership in place that they understand the problem, they understand each of the client issues that they face and are working now to reinvigorate that practice area. And the problem for us, of course, is that when you take an action early in a period, it takes some time for it to work its way through. We have confidence that the actions we're taking now are going to help us.

Let me briefly highlight the larger issues affecting 2008. Forefront in these issues, of course, as I just mentioned was the U.S. PhRMA area, which caused a consolidated organic pro forma revenue decline of 1%. That translates from a 4% decline in the U.S. And the decline in healthcare specifically in revenue for the year was 11%. Excluding health care, our U.S. revenues were flat and consolidated pro forma organic revenue was up 2%. As Greg had mentioned, we had grown excluding healthcare.

Conversely, we saw a growing European pro forma revenue of 6%. The relatively unexpected and rapid decrease in revenue in the U.S. created a cost imbalance in the last half of the year and the need for us to reposition and stabilize the company as we have mentioned. When we look forward to repositioning, we always have to be mindful that every business unit employee is a revenue producer and part of our revenue generation portfolio. Therefore, whenever we think about personnel changes we are always mindful of the impact it may have on other revenue streams.

Second big set of issues affecting 2008, in addition to the external factors and cost alignment issues are three unusual items that affected us. Let me briefly cover those.

First, as you note in the press release and in the financial statements attached to that release, we recorded a goodwill impairment charge in Q4 of $123 million which is the result of performing our annual analysis which indicated the fair value of the company was less than the carrying value at that point in time. This amount is an estimate and as we finalize this analysis we will update this amount prior to filing our annual report on Form 10-K. But at this point we believe it is a fair estimate of the impairment following all of the appropriate accounting literature. Of course, this has no impact on cash nor on our banking covenants and realistically does not influence our core business.

Second, we incurred a $1.6 million charge in legal, accounting, banking and other costs in connection with a review of the company's strategic initiatives.

Third, we recorded $2.3 million of charges related to severance and restructuring. In addition to that and included in our general administrative is another $800,000 of charges related to the retirement of a senior officer.

And now I'd like to give you a brief financial perspective on a region by region basis as well as our administrative costs.

In the U.S., as we previously mentioned, healthcare has been the issue that we're working with and we saw bookings for the year fall by 25%, resulting in the previously mentioned revenue decline of 11%. This was offset by solid bookings and growth in a majority of our other units, including technology and financial services. And financial services is a good example of the changes that we have made in the business when we saw issues with the entire financial services industry, and yet financial services sales increased for the year 21% and revenue was up 12%. Our public affairs and policy and consumer goods groupings as well improved. In total, we ended with a 10% bookings and 4% revenue decline.

In Canada, the Decima Company, which we acquired 11 months ago, experienced 8% growth in bookings and pro forma organic revenue growth of 4%. The profits that we expected did not materialize as a result of two key issues that Greg mentioned earlier.

First was the decline in U.S. phone work, particularly in Q2, as a result of unfavorable exchange rates which made their prices more expensive on a relative basis for a short period of time but a significant amount of revenue.

And secondly the Canadian government declared a market research moratorium. It's now been lifted, but in the period of time that it was there it cost us some revenue and when the moratorium was lifted, it was lifted with a decline in the total budget available for these activities. Since we're the market leaders in providing those services to the Canadian government, it had a bigger affect on us than perhaps others there.

Moving to Europe, the U.K.'s bookings were down slightly and revenue flat for the year. We restructured operations in June, took a charge of approximately $500,000, and we'll save in excess of a million dollars in 2009. That restructuring charge should give us the ability to strengthen our client facing staff, it should help us with our hiring and training, and it has compressed some layers of administration to make us more efficient.

The U.K. had a great Q4, with sales up 28% and revenue up 9%. The most encouraging, perhaps, piece of business in Europe is the growth of the U.K. Internet revenue, almost doubling for the year.

France showed a sales increase of 33% and revenue of 17%, and the unit is well on its way to moving from being a principally data collection company to a full service market research company, and we intend to continue investing there.

Germany, which was also acquired 11 months ago, had a sales increase of 33% and a revenue increase of 37%. Internet revenue in Germany comprises 90% of their total revenue base, one of the many reasons this was such an attractive acquisition candidate for Harris.

Now moving to Asia, sales in Asia were up 24% and revenue grew 16%. And for the year we had an operating loss, driven by the investments we're making as we enter that region in a forceful way to be successful there.

On the administrative side, we saw no increase in administrative costs in our legacy units in 2008 and on a pro forma comparative basis - on an as-reported basis, all of the net increase of $11.5 million resides in the recently acquired companies. Our G&A costs, I'll remind you, also include our non-utilized time related to our direct labor force, which increased $3.1 million principally from the acquired units that were not part of the company in 2007. And last I will mention that this line also includes the charges related to the retirement of a senior officer, which added $800,000 to costs for the year.

On the balance sheet, Harris continues to be a strong cash generator. We finished the year with almost $33 million in cash and $3.5 million in net cash. Our ending debt is a total of $29.4 million and our debt to equity ratio after recording the goodwill charge is a very manageable 0.47 to 1.

I'll discuss '09 in a minute, but first I'd like to turn it back to Greg who will talk about his views of '09 and beyond.

Gregory T. Novak

Looking forward, 2009 will be a year of positive change and significant improvement in our business. We expect to see continued growth in all of our acquired units, and our overall European and Asian businesses will grow as well.

The great majority of our U.S. and Canadian units will grow despite these economic headwinds. This is possible when the right people with the right solutions focus on the right clients and the right business issues.

The improvement in our healthcare business will be more rapidly evident in our sales figures before we see it in the revenue numbers. We anticipate the 2008 sales shortfalls will continue to flow through to the first half of 2009 revenues. We hope to see very positive signs within that unit, that leadership team and those people.

Around the world, we continue to invest in our people and our services, whether it's through training, internal solution development, or solution transfer. These actions have driven our success and will continue to grow our revenues and profits for the future. Specifically, the European business will take advantage of solution development and solution transfer to grow their client relationships across geographic boundaries, as well as their revenues and their profits. They will continue the successful launch of many new activities from this year.

The U.S. will continue to grow the majority of the business, while increasingly focusing on the right customer relationships at the right level and expanding the portfolio of offerings with more integrated solutions at the highest level. U.S. healthcare will continue to build on an expanded client portfolio and offering, and Canada will look to increase its integration with the rest of the business to improve both revenues and profits.

In summary we expect opportunities for growth and some general signs of strength, balanced by the remaining healthcare shortfall, for a few more quarters.

Turning to profits, as we plan 2009, we can expect to deliver both increased operating margins and cash flow from the business. Our current structure matches our size to a more modest revenue expectation and hopefully a less volatile, yet admittedly slowed macroeconomic environment will work to our benefit on the margin side of the business. We should avoid significant challenges affecting our operating profits and on that basis alone will deliver better results.

In addition, with regard to our acquisitions, with approximately 15 months behind us we are a more integrated business in our second year of working together, reducing frictional costs and increasing the cross border revenue growth opportunities. As I mentioned earlier, we've aggressively engaged with both operating performance and market consultants to help us drive both new product ideation and innovation and discreet performance improvement around the company.

I'm very excited about the opportunities we see ahead of us for improved margin enhancement above what we are currently planning, giving us increased opportunities in the second half of 2009 and moving into 2010. All in all, we expect the increased margins and cash flow ending 2009 healthier than 2008 overall.

Now I'd like to turn it back to Ron, who will discuss our outlook in detail for 2009.

Ronald E. Salluzzo

Let me start by saying that due to the volatility in the marketplace we believe prudence dictates delaying the issuance of guidance for 2009, however, our highlight of broad expectations for 2009 include the following:

First, we expect our fiscal first quarter to be affected by the ongoing economic difficulties in North America and lingering revenue erosion in our PhRMA business. Second conditions, we believe, will improve in the second half and growth from our many business units, especially those outside U.S., should offset declines and keep revenue at least flat for the year. Benefits from our previous cost cutting actions should drive significant profit growth.

Our ability to generate cash will enable us to reduce debt and invest in innovative growth opportunities around the world. We have undertaken an extensive operating performance improvement program and preliminary results are encouraging. And last, we did take a $4.6 million of charges and severances related to retirements in 2008 which we do not expect to repeat in 2009.

A bit more specifically, looking ahead in the U.S., the new healthcare leadership has begun to make changes that will stabilize the healthcare business and better equip us to respond to the ongoing changes in the marketplace. We expect revenues in this group will stabilize by the end of the calendar year, with a possible uptick in the last half of our fiscal 2009.

We are working with and cooperating with a performance improvement consulting firm on a very collaborative basis, who's helping us work through many of the identified process improvement activities that we started in 2008. We're assessing our operations in order to align our costs with our revenue expectations better and to find efficiencies throughout the organization.

We're expanding our relationships with our key accounts in the U.S. We're rationalizing our sales and marketing costs. We're increasing our panel investment to offset costly outside sample acquisitions, and this is particularly important as the globalization of our studies continues. And last, we're assessing our delivery methodologies for our technology services. In Canada, we have plans in place to reduce operating costs in '09 and a corresponding restructuring charge may be incurred, which has been planned. Plans are underway to grow the Internet research and complete the harmonization process to create a true, integrated North American organization.

In Europe, we are investing in innovation and new solution development as well as media research practices in the U.K. In France, we're building our CPG and healthcare practices, and throughout Europe we're continuing to expand the brand through aggressive sales and marketing efforts. We'll strengthen our European presence and improve our operating efficiencies by harmonizing our European panel practices, by leveraging the German panel practices, by investing in methodologies and advanced analytics in innovation and new solution development, including importing those that fit that have already been deployed in the U.S. And we're implementing central systems to insure strong corporate efficiency and one look to the market throughout the European region.

All this will result in improved leverage on fixed operating expenses as we grow revenue, and on the administrative side, we continue to control administrative costs with an expectation of reducing this cost area as a percentage of revenue in 2009. We expect to reduce those costs as we improve productivity and implement process improvements.

Now what I'd like to do is turn it back to the operator, so we'll take questions from the people that are on the line, please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Todd Van Fleet – First Analysis Corp.

Todd Van Fleet – First Analysis Corp.

You know it's a pretty difficult story, I think, still for us to kind of get our arms around. You're talking a couple different things. You're saying that, you know, we're going to rationalize the expense structure, we're going to take strides to kind of reduce costs to improve the margin. At the same time you're making a lot of investments in various initiatives. So I'm just kind of wondering what the overriding kind of set of initiatives will be. I think our assumption is that the cost reduction efforts are going to outweigh the expenses associated with any investments  investment initiatives.

So, you know, if I just pick one metric as an example, if I take a look at, you know, where the full-time equivalent, the billable full-time equivalent headcount is at this stage, it's stayed relatively flat for the past, you know, three quarters or so. Should we expect that number to kind of trend downward as you kind of rationalize for the revenue outlook? Help us understand that please.

Ronald E. Salluzzo

Well, Todd, let me start with that metric. What you're looking at are average for the quarter metrics or the 12month would be the average for the 12 months. The actions we took in the U.K., for instance, were done at the end of the quarter so they're not reflected in those numbers because the people were with us till almost the end of the quarter. And that represented 15 people. Fifteen FTEs could come off that number starting our first quarter of '09. Secondly, some of the actions we took in the U.S. were taken in the middle of that quarter as well, so they're - half, in effect, of the people we took out in the U.S. would come out as well.

We also have - and this is an important point - we're being a bit more strategic in terms of where we make the investments. The investment in people is in the areas where we're seeing substantial growth. And right now we've grown our numbers in Asia, France and Germany in order to match our very significant, double-digit revenue growth expectations for those units. And they tend to balance out the amounts that you're seeing as total.

Todd Van Fleet – First Analysis Corp.

So Ron, what are your expectations, then, regarding headcount for Q1? Should it be down, you know, 2%, 3% sequentially then, the average billable headcount?

Ronald E. Salluzzo

Well, the head count is down more than that right now. As we come out of Q1, there's a natural tendency for us to be growing headcount a bit because Q2 is a much bigger revenue quarter for us.

But as we look forward, we've done a couple things, and this is, maybe, more a better metric to look at. As part of the whole process in the U.S. of looking at what the headcount needs to be, we've also reexamined our productivity measures, and we've applied some new productivity measure that should make us a bit more efficient.

The second piece is that, you know, our sales activity, about 40% of our sales activity in the U.S. is produced by our direct labor force, and we have to be sure that we have enough time for them to spend building our backlog and our pipelines. So we not only have reshaped the chargeability piece – the utilization piece, excuse me - that you see, we've also been working on re-shifting the mix of the labor force in order to make sure we have enough time to produce the backlog that we need to succeed.

So while the head count is the publicly available information, we also worry about the mix of people underneath that.

Todd Van Fleet – First Analysis Corp.

If I strip off kind of the one-time items in Q4 and for some of the other quarters this year, I look at your operating margin as about 2.5%, I think, for the full year. I don't know if that sounds right to you, Ron, but, you know, can you just give us an understanding as to how much improvement is out there for 2009? How much is possible in your view?

Ronald E. Salluzzo

Well, that's a tough question cause it gets awfully forward looking, but I will say that we're obviously completely unhappy with 2.5%. Historically, we capped - I think our highest point, and I don't have it all here, was about 5.8% for a full year. And our goal is to see, as a step forward, what can we do to get as close to that 6% barrier or, not barrier, 6% target as we can.

Whether we can get there entirely this year or not is certainly the challenge, but we do believe that, you know, 2.5% is way too low; 6%, at least with where we are today, with the kinds of margins we get - remembering that twothirds of our business is consultative, would be a target that we're, not publishing or saying we're going to, but we would look at.

Todd Van Fleet – First Analysis Corp.

. Let me ask one more if I could regarding the strategic review process. $1.6 million in charges in the quarter, trying to understand what those charges were for. Is it primarily due to the goodwill write down and all the accounting work behind that? And then you talk about actually reviewing the strategic alternatives - it says the company employed services of an investment bank - if you could talk a little bit in detail about what's going on from a strategic review process standpoint, that would be great. Thanks.

Ronald E. Salluzzo

Okay, well let me declare the goodwill write-down was completely unrelated to the strategic review. And when we looked, the Board of Directors made a decision to investigate our strategic alternatives that were available to the company. We did retain an investment bank to assist in the process, and we considered the results of its investigations and the Board determined it was in the best interests of the stockholders at this time to discontinue the process and to focus the company's attention on operational improvement and growth.

Operator

Your next question comes from Unidentified Analyst.

Unidentified Analyst – Needham & Company

I was wondering, maybe, we've heard that, you know, the economic environment in Europe has been slowing as well. Just wondering whether you guys have seen any ill effects of that and what are you guys doing to kind of weather that situation?

Gregory T. Novak

We have seen and it's been reported by our management team there, particularly in the U.K., a general feeling, slowdown, kind of moving from the United States to the U.K. Part of the larger unplanned charge in the guidance was our management team said let's get ahead of that and position ourselves and readjust our staffing levels there. And that, as Ron said, will reflect in the next quarter as a sequential down in headcount. I do want to make clear to any employees listening, there's not a planned headcount reduction. It's just the way the numbers roll out.

That said, we made some adjustments in the U.K. because they're seeing it. On the other hand, they manage our business like a European business and they push things back and forth between the units. And because of some very excellent solutions in sharing and capability, we're seeing our German business and their predictions for our German business and our French business to grow very aggressively next year as they move yet one more step from being just technology based into solution oriented, really leveraging up the capabilities that we have and leveraging across the globe.

So I think we'll see the continent itself - and we'll talk about Europe as a continent for us - growing next year despite what we think is going to be some headwinds in the U.K. And the U.K. is doing a pretty good job with products on their own, growing their business.

Ronald E. Salluzzo

Let me add to that - and this does not push through the whole year because our duration of projects is short  but for the quarter the U.K. had a sales growth increase of 28% over the prior year, so they start the year in strong shape. Now how long that will hold I don't know.

And I'd have to say the second advantage we have is that the U.K. is probably five years behind the U.S. as far as conversion to Internet revenue, and they're going to catch up quickly. The good news is our U.K. unit is well positioned to pick up some of that. And the fact that they almost doubled their Internet revenue in 2008 over 2007 also is an encouraging point. Now if in fact they hit the same wall that we hit in the U.S., then it will clearly become a challenge. But right now we see two data points that give us a lot of confidence there.

Gregory T. Novak

What we like about improving margins year-over-year is the U.K. has already positioned themselves for what might be a slower environment for them from a staffing standpoint.

Unidentified Analyst - Needham & Company

Then in terms of the lifting of the market research moratorium in Canada, what kind of lift can we expect to see from that?

Ronald E. Salluzzo

Let me get the growth number out for you.

Gregory T. Novak

While Ron's digging out the number, that event was a turn off-turn back on that impacted the year. They're moving at a slower level, the government, but they're no longer shut down entirely. And the data collection piece was a pretty big hit. We had for about a quarter the exchange rate going at 1.2 or 1.25, 1.10 - I'm sorry, the wrong direction - which has kind of resolved itself, and business has picked back up for data collection there. So we're anticipating growth in Canada next year.

Ronald E. Salluzzo

And we're scheduling growth in the high single digits for Canada.

Unidentified Analyst - Needham & Company

And in terms of cash generation, what was it during the quarter?

Ronald E. Salluzzo

Oh, for the quarter. Well I will say that what will be in the 10-K is $18 million will be cash from operations for the year. For the quarter - hold on, I've got to look that one up.

Unidentified Analyst - Needham & Company

I can do the math. Thanks.

Operator

Your next question comes from Randy Hugen – Piper Jaffray.

Randy Hugen – Piper Jaffray

Are any of the consulting projects still ongoing and should we expect to see any short term financial impact there?

Gregory T. Novak

Randy, we've been working those projects, and we've implemented several of those changes in the U.S. And we expect that as sales turns to revenue as we make improvements on those consulting projects, that we start to pick some of that up, you know, maybe a little bit in the second fiscal but certainly in the third fiscal quarter. And then that improves our outlook for margins as those changes take hold.

Randy Hugen – Piper Jaffray

So are some of the expenses still going to impact you in the first half of the year or are those rolling off now?

Ronald E. Salluzzo

The expenses will still impact – the expenses for the consulting will still impact. That's part of the reason why we're not seeing the flow through.

Randy Hugen – Piper Jaffray

And going back to Europe, you know, you've obviously already made some changes there, talked about some of the secular drivers, but if we really see a broad-based slowdown across Europe in late 2008 or early 2009, do you still feel comfortable with your expectations for a second half, your fiscal year, pickup or could that be at risk if we really do see a broad-based slowdown?

Gregory T. Novak

Well, it's really a balance in my view. [inaudible] seeing a bit of the slow down already in the U.K. The situation, you know, we've clearly seen is our - when we have a smaller unit, easier to grow and take share. You know, Ron mentioned our financial services unit. When you're a big piece of the share in a region and there's an economic slowdown you obviously take a bit of a harder hit.

The U.K. is not a small business in the region and so they'll suffer some pressure more than the others. But France and Germany have got a lot of running room in those regions, and there's some great leadership there and we'll turn to them to pour it on as fast as they can.

And George will manage resources across the region to help us grow wherever we can.

Operator

Your next question comes from James Boyle – CL King and Associates, Inc.

James Boyle – CL King and Associates, Inc.

It was noted that pharmaceutical will still be challenged in fiscal Q1. What about the other top three, four categories?

Ronald E. Salluzzo

The challenge for PhRMA for 2009 is we're still dragging along the sales shortfall from fiscal '08, quarter three and four. We see the PhRMA business turning very positively. We've got great leadership and some great folks, and we're hoping to find the sales bottom here real soon. And it's going to take about five, six months for all that to move through, and we should start to see it rebound in the second half.

Most of our other units, positioned pretty well for growth in the United States, have modest plans even in the face of pretty challenging still economic conditions, and believe they can get it done.

James Boyle – CL King and Associates, Inc.

Asia had a tough fiscal Q4. Why was that and will it continue in fiscal Q1?

Ronald E. Salluzzo

When we look at Asia for a moment, one of the things we did was put quite a lot of emphasis on growing our Asian regional business by acquisition, and we worked with the management team there. I may have told you at one time or another, we probably looked at several, at least 160 opportunities in the region. And, you know, it's a small business, and that management team put a lot of their first half efforts into that. When the economy turned bad and, you know, we had to do some cash conservation, we asked them to return their activities to just organically running the business, at least until we got a hold on our core business here in the United States. And so just some sales short falls from their focus in another part of the region.

And frankly, we put in some costs preparing to have a much bigger business in Asia. We hired some financial folks to globalize the systems in the region. We put in some staff to grow organically and that impacted their costs. They've pared some of that back but not all because we still want to grow organically and as things improve around the world, and we sort of wait for things to stabilize though we still hold out the hope and vision that we'll be moving into other regions there as we feel more comfortable about the business.

James Boyle – CL King and Associates, Inc.

Well, you're talking more about investments and expenses. I was talking more about the 0.9 to 0.7 pro forma organic revenue drop off.

Ronald E. Salluzzo

On the organic revenue, the two leaders in Asia are in many ways the primary sales agents in the region. They spent a goodly part of their time in the first half working on the acquisitive strategy and that's what led to the sales drop off. We should see a very high double, maybe even triple-digit growth of revenue in Asia in 2009 organically.

James Boyle – CL King and Associates, Inc.

With the modest cash surplus at year end, if Harris does not find any likely geographic tuck-in deals, is it possible that the Board might decide to buy back some of its stock below $2 a share?

Ronald E. Salluzzo

I would say it's very possible.

James Boyle – CL King and Associates, Inc.

Recently one of your large shareholders, Mr. Bollore, bought a few shares. Has there been any contact with Mr. Bollore in the last couple of months?

Gregory T. Novak

To my knowledge, no. Actually the answer is no, not in the last couple of months. He continues to be an investor and interested in the space, and having apparently just bought some shares in the last couple of days, feels it's a good investment.

Returning to that question you had a moment ago, Jim, on the stock buyback, I want to point out you mentioned $2 a share. We had a Board meeting a couple of days ago, and the Board gets some of their compensation for working with us on a share basis but what they decided to do - and I think is appropriate and commendable behavior  they valued the shares that they would be given, which get divided into a targeted dollar amount, at $3 not at $2. And there actually will be an 8-K filed about that coming out in a day or so.

Operator

Your next question comes from Mark May – Needham and Company.

Mark May – Needham & Company

I just had a couple of questions about the healthcare business. I wondered if you could give us a sense of what you think industry wide growth has been for health care-related market research industry wide and maybe, you know, give us a sense of the source of the weakness that harasses it - how much is related to market share losses versus just, you know, a general weakness in the industry spending as a whole?

Gregory T. Novak

Okay, first let's start with industry wide healthcare spending, I think, would be a less-reduced number on growth than our healthcare because our healthcare was really PhRMA. PhRMA spending, Big PhRMA spending, down anywhere from 10% to 30% in the United States, where they were launching drugs and they're not anymore. It's down, and it's also moved - we've seen Big PhRMA spending on product launch across the top 15 clients in some cases down 40%.

That said, that market issue certainly drove into our PhRMA business, some unsettling of our staff and our employees. And we probably took some of that and made it a bit worse by not moving fast enough to change and spread our business and give our people an opportunity to use their talents and skills in other areas, as we kept on doing the same thing we'd always done in a declining market.

So a portion would be lower. Recent statistics, IMS, I think, took down their number by 10%. They were a little bit broader of an indicator across the market place. And I saw something the other day, but the number doesn't pop into my head.

Mark May – Needham & Company

So it sounds like if you lost any market share in the U.S. Big PhRMA, it was modest?

Gregory T. Novak

No, I think we lost some. No, truthfully, I think we lost some share. I think there's a big, big spending decline, but I think we also lost some share because when the decline happened, you know, we lost some people, too. As Ron said earlier, people tend to move. And while they won't take all of that revenue with them, they will take a portion of that revenue. And we can point at some of that, we believe, that happened when that business got itself so roiled, quite frankly.

Mark May – Needham & Company

And what about specific customers? I recall that, you know, the business specifically with Pfizer had been quite weak going back a year ago. With that particular client, have you seen any return of business with Pfizer?

Gregory T. Novak

Pfizer turned back on. If you remember the numbers, Ron, go ahead. We just saw that two days ago.

Ronald E. Salluzzo

No, I don't remember the numbers. But I was going to say, broader, was we had reported in, I believe, the second quarter, that out of our clients over - we looked at a review of all of our clients over 100,000, and we'd lost over $16 million of revenue in a group of those clients replaced by $8 million from others. So that $8 million hole, that was not recovered in the year.

But what I wanted to say is that every client is its own case, you know? So you might say Pfizer, you might say someone else, but the reality is that one of the initiatives that we're undertaking now is to broaden our presence at those clients. And this is an internal issue. As market share changes at particular clients, if you only have one offering at that client and the offering goes away, like drug studies, then you're exposed.

And one of the goals of the group has been to expand our solutions offerings into our PhRMA clients, and we've done that by moving some of our healthcare people into the solutions groups and making them responsible for bringing those solutions back into healthcare. So that is a critical restructuring activity for us, and that's one of the reasons we say in the second half of our fiscal year we believe we have an opportunity for some uptick.

Gregory T. Novak

We've used that technique with great success to grow share, even in a down economic environment, around the business and there's lots of examples of it from Europe to the financial services sector. And that was the huge internal operational weakness. We're way too focused on just one narrow portion of that industry. And Dr. Millard and his entire team has, you know, done a good job of replacing some of that revenue, but also in making sure that we focus much more broadly to rebuild those revenues.

Ronald E. Salluzzo

Mark, we can also hook you up with - we can actually talk about specific clients. We just a presentation the other day about where they're at, if you want to follow around later on.

Mark May - Needham & Company

Who was the investment bank that you engaged for the strategic review?

Gregory T. Novak

I don't think that's part of our disclosure.

Operator

You have a follow up question from Todd Van Fleet – First Analysis Corp.

Todd Van Fleet – First Analysis Corp.

First, Ron, could you give us again the operating cash flow for the company in the quarter and then the Capex as well, please?

Ronald E. Salluzzo

I didn't give the quarter because I actually didn't do it. I gave $18 million for the full year, and the Capex for the full year is $3.7 million.

Todd Van Fleet – First Analysis Corp.

What was the tax impact on the goodwill impairment if any?

Ronald E. Salluzzo

Well, it's interesting. There's a small tax advantage because we did a couple of asset deals a few years ago, but that is only for book purposes. For tax purposes, the recovery of those will run out as they always have. So there's no cash impact, if you will, of any of it, but virtually all the goodwill has no tax implications.

If you're trying to reconcile the tax number, it is significantly and unusually high in '08 because of several other factors, the most significant of which was - and I think we told you a couple years ago that we were investing in some securities in order to recover a long-term capital loss on the disposition of our Japanese unit from several years ago - during the year, and I think we mentioned this in Q3, we withdrew from that investment because our advisors suggested that there was potential credit risk and so we stopped doing that. And that forced us to put back the valuation allowance on the taxes. That is a significant one-time item for us. So the tax rate looks dramatically higher than it would be on a go forward basis.

Todd Van Fleet – First Analysis Corp.

What do you expect the tax rate to be on a go forward basis, kind of normalized?

Ronald E. Salluzzo

Normalized for us right now - and this depends on what happens with where the profits come from around the world; we could have the same number in profit and a dramatically different rate - but if you're modeling taxes in the mid-40s, 43, 44, 45, you're about where we are.

Todd Van Fleet – First Analysis Corp.

I guess rather than just go back and ask you offline I'll just ask you now since I have you here but, I mean, the strategic review, the Board considered it, you hired a bank, went through a process, decided to not proceed, for the moment anyway. I mean, can you help us understand the line of thinking there? Is it that the company you felt like just wasn't in the best position to go out at that point? You wanted to do some more work and then maybe as you work through the current macro environment and make the changes that are necessary to the business that you'll consider it down the road? Can you kind of give us some insights as to why they decided not to proceed?

Gregory T. Novak

Listen, we're not going to talk a lot about that. It's behind us. But, you know, we've said to you for as many years as we've known you, you know, this management team and this Board's about shareholder value. And if proceeding down that path in the future makes a difference, you know, we're for sale on Wall Street every day. And we're for sale on a regular basis, and we tell our people that. So this one's behind us, and we're moving forward running the business.

Ronald E. Salluzzo

Let me add something to that, though. We're always, because we're publicly held, we're for sale. We're always in the market looking for strategic buys, and we're always looking at how we go forward. And I don't think it's fair to say we made the decision to do something different based on a particular factor. I think we looked at a whole series of factors, including our financial strength - which is pretty formidable - and the question is, can we put the power of that strength to work better? And that's what we're in the middle of doing now.

Todd Van Fleet – First Analysis Corp.

Just speaking generically about the market research industry at this stage, would you characterize the, let's say, consolidation activity in the market place, you know, at the smaller end of the market, middle of the market, you know, however you want to look at it, is consolidation activity in your view on the upswing now relative to where it was say, maybe, 12, 24 months ago or, you know, how do you view it - flat, improved, or kind of declined?

Gregory T. Novak

I would say that, certainly for the last eight months anyhow given, you know, financial asset availability, I think things have slowed down a touch. That is offset and heavily weighted by mega mergers that, if they occurred, would make all of the numbers totally disappear. But I think that things have just slowed down for financial market reasons.

Operator

You have a follow up question from James Boyle – CL King and Associates Inc.

James Boyle – CL King and Associates Inc.

Ron, stripping out the impairment charge, what would be the cash EPS in Q4 as well as fiscal year?

Ronald E. Salluzzo

Well, cash for Q4 would - sorry, EPS prior to all the charges would have been $0.02, which is right in the middle. We had guided $0.01 to $0.03. Excuse me, that would have been for the full year. So that would have put us about even for the quarter.

By the way, revenue is right in the middle of guidance.

EBITDA if you add back the strategic analysis charge would have been right in the middle of guidance as well.

James Boyle – CL King and Associates Inc

So that was roughly flat in fiscal Q4?

Ronald E. Salluzzo

Roughly.

Operator

There are no further questions at this time.

Gregory T. Novak

Thank you again for joining us today. Allow me to wrap up by saying Harris Interactive remains strong and capable. We continue to win business around the world even in the face of very challenging economic conditions. Our solutions and our people are world class, and our clients recognize it. A majority of our North American business portfolio grew last year and will continue to grow next year. Our healthcare unit is on the mend and moving in the proper direction under new leadership.

Our European business unit is strong and growing. You'll remember that, just two years ago, it was shrinking and losing money - a testament to our strategy, a huge success for that entire business team and they are to be congratulated and all of those people, a demonstration that we can wrap our arms around a challenged business and implement the strategies and processes to make it successful.

Asia will invest and grow dramatically this year. We've already adjusted our cost base to these new economic conditions in the near term that will help our operating profits next year.

We're investing in new business innovation and new revenue streams while at the same time improving our processes to enhance shareholder value. We've made great progress in bringing together the best of our acquisitions and Harris Interactive around the world. We're generating cash, we have a strong balance sheet, and we'll do even better in 2009.

We thank you for your continued support. I'm looking forward to a much improved 2009, as I hope you are as well. Thank you and have a good day.

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Source: Harris Interactive F4Q08 (Qtr End 06/30/08) Earnings Call Transcript
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