Forrester Research Inc (FORR) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Forrester Research second quarter 2004 financial results 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 star zero on your telephone key pad. As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Kim Maxwell, Director of Investor Relations for Forrester Research. Thank you, Ms. Maxwell, you may begin.

Good morning and thank you for joining our second quarter 2004 conference call.

With me today are George Colony, Chairman and Chief Executive Officer, and Warren Hadley, Chief Financial Officer.

A replay of this call will be available until Tuesday, August 3rd, and can be accessed by dialing (877)660-6853. Please reference the confirmation I.D. 111623, and the confirmation account, 2147. This call is also available via webcast and will be archived in the investor section at Forrester.com until Tuesday, August 3rd.

Before we begin I would like to remind you that this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as expect, believe, anticipates, intends, plans, estimates, or similar expressions are intended to identify these forward-looking statements. These statements are based on the Company's current plans and expectations and involve risks and uncertainties that could cause future activities and results of operations to be materially different from those set forth in these forward-looking statements. Some of the important factors that could cause actual future activities and results to differ are discussed in our reports and filings with the Securities and Exchange Commission. The Company undertakes no obligate to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Now I would like to turn the call over to Warren.

Thanks, Kim, and good morning.

Over the next several minutes I'll review Forrester's second quarter results, the balance sheet at June 30th, our second quarter metrics and the outlook for business in Q3 and 2004. Please note that the income statement numbers I'm reporting are pro forma and exclude the following items; amortization of intangibles and integration costs related to acquisitions, nonmarketable investment gains and impairments, and reorganization costs related to office space consolidations.

In Q2 we sublet and fully wrote off our San Francisco lease which made up 5.1 million of the 6.8 million reorg charge. The remainder of the charge was due to finalizing our lease consolidation in our Amsterdam and London offices. We do not expect to incur any further reorganization costs in the near future. Also we have booked an effective tax rate of 35% for pro forma purposes. The anticipated actual effective tax rate for 2004 is 33.5%.

I am pleased to report that Forrester's second quarter results met guidance we provided on our first quarter conference call. Forrester's second quarter revenue increased 3% to 34.9 million from 34 million in the second quarter of last year. Net income increased 20% to 3 million and earnings per share were up 18% to 13 cents on diluted weighted-average shares outstanding at 22.6 million, compared with 11 cents and 22.7 million shares outstanding last year. Second quarter research services revenue decreased 11% to 23 million, from 25.9 million last year, but were flat sequentially. Research services revenue comprised 66% of total revenue for the quarter. Second quarter advisory services and other revenue increased 46% to 11.9 million from 8.1 million in Q2 of 2003, and comprised 34% of total revenue for the quarter. The increase in advisory services and other revenues is due to high demand for advisory services and our holding three events in Q2, 2004, compared with two events in Q2 of 2003. We expect advisory and other revenue to comprise approximately 30 to 35% of total revenues for Q3 and 2004. We are holding one event in Q3, our consumer forum in New York.

On a geographic basis, 32% of Forrester's second quarter revenue was derived from international sales compared to 29% in Q2 last year. The increase is primarily attributed to Europe which made up 22% of our revenue in Q2, compared with 18% in Q2, 2003. The European revenue increase was due to our acquisition of Giga Group S.A. in France in Q4 of last year as well as a positive impact from currency translation. We expect international revenues to comprise 30 to 34% of total revenue in 2004. Operating expenses for the quarter were 31 million, flat year over year, and in line with our planned expenses for Q2. Operating income was 3.9 million, or 11% of revenue compared with 3 million, or 9% of revenue last year.

Turning to Forrester's year to date results, total revenue through June 30th increased 14% to 66.7 million, from 58.5 million in the same period last year. Net income increased 11% to 5.5 million, from 5 million last year, and earnings per share for the six months ended June 30th were 24 cents, on diluted weighted-average shares outstanding of 22.7 million compared with 22 cents and 22.8 million shares last year. Operating income for the six months ended June 30th was 7 million, or 11% of revenue, compared with operating income of 5.2 million, or 9% of revenue for the same period last year.

Now I'd like to review the balance sheet. We continue to maintain a strong cash position. Our cash and marketable securities at June 30th were 125.1 million. During the second quarter we used 3 million of cash to purchase shares on the open market pursuant to our stock buy back program. To date we have used 41.5 million to purchase a total of 2.5 million shares. Our stock buy back program authorized up to $50 million to purchase shares. We plan to continue to buy back shares on an accretive basis in the third quarter of 2004.

We generated 9.7 million in cash from operations year to date. We expect to generate a total of 10 to 15 million in cash-flow from operations for the full year. Accounts receivable at June 30th was 26.1 million, up from 25.3 million at the end of Q1. Our days sales outstanding at June 30th was 75 days, up from 63 days last June 30th, but down from 84 days at the end of Q1. And A/R over 90 was 12%, up from 8% last year and down from 13% at the end of Q1. The increases in A/R over 90, the increases in A/R over 90 and DSOs were primarily due to increasing proportion of our business in southern Europe where payments typically are made more slowly.

Net property and equipment decreased to 5.6 million at June 30th from 8.3 million at the end of 2003. Our capital spending in the second quarter was approximately 750,000, bringing year to date CapEx to 1.3 million. Our capital spending plan for 2004 is 4 million. Deferred revenue at June 30th was 63.9 million, up 9% year over year. Future accounts receivable, or amounts to be build in the future for clients with two-year deals or scheduled payment terms was 17.1 million at June 3oth, compared with 13.1 million at June 30, 2003.

And now, I will review Forrester's second quarter metrics. Agreement value, which is the total value of all contracts from research and advisory services in place without regards to the amount of revenue that has already been recognized or is yet to be recognized, was 119.5 million at June 30th, a 3% increase from last year; and down 1% sequentially from March 31, 2004. Forrester's retention rate for client company's increased to 74% at June 30th. Our dollar retention rate increased to 85% in Q2. Both rates are calculated on a 12 month rolling basis and both are back within our target ranges for the first time since the first time since Q4, 2000.

At the end of the second quarter our total for client companies is 1,817, up 11 from Q1, and up 40 from Q2 of 2003. For headcount at the end of the second quarter Forrester had a total staff of 545, down from 561 at the end of Q1. Current headcount includes a research staff of 192, down 5 from 197 at the end of the first quarter, and sales staff of 171, down 6 from 177 at the end of Q1.

The last I would like to cover for today is business outlook for Q3 and full year 2004. Our pro forma guidance for Q3 and full year 2004 excludes the following: Amortization of identifiable intangible assets which we expect to be approximately 1.4 million in Q3, and 6.5 million for the full year 2004; All gains and impairments of nonmarketable securities and previously recorded reorganizational charges. For Q3 we are aiming to achieve total revenues of approximately 32 to 34 million, and operating margin of 12 to 14%, interest income of approximately 650 to 700,000, a pro forma income tax rate of 35% and pro forma diluted earnings per share of approximately 13 to 15 cents. For the full year 2004, we are reaffirming our previous guidance of total revenues of approximately 133 to 138 million. Pro forma operating margin of 11 to 13%. Interest income of 2.7 to 2.9 million. A pro forma income tax rate of 35%. And pro forma diluted earnings per share of 52 to 57 cents. We are providing guidance on a GAAP basis for Q3 and full year 2004 in our press release and 8(K) filed earlier this morning.

Thank you. I will now turn the floor over to you, George.

Thanks, Warren, and good morning, everyone.

I will summarize activities in the second quarter followed by an outline of our plans for Q3. After my remarks Warren and I will take questions.

Business continues to improve. As Warren mentioned, we are pleased to report that our client company retention rate has returned to 74%, squarely in our historical target range. We showed solid dollar retention of 85% in the quarter. New business is increasing. New client companies in the quarter included Axiom, Boston Scientific, JetBlue, Open Text, Host Italiana, and Thermal Electron. Fine company renewals included AAA, Credit Suisse First Boston, FedEx, Lands End, Proctor and Gamble, Texas Instruments and Toro Company. And finally win backs included Citadel Investment Group, Hartford Financial Services, Jay Sandsbury's and Web MD.

I've been in the bay area in the last few weeks visiting with clients and technology vendor executives. And I'll tell you that in my meetings with Andy Grove at Intel, (INAUDIBLE) at Yahoo, Chuck Phillips at Oracle and others, there was definite optimism about tech expenditures for 2004. Silicon Valley is regaining confidence as venture capital spending, hiring, and company creation return. So while we are not back to double-digit spending increases as yet business at cross tech is definitely rebounding.

I would now like to move to the second quarter and I will begin by reviewing the Oval program, our boards business. This new product area for Forrester is showing solid success. The CIO Group, our network and technology leaders added new members in the quarter ending with a total of 150. Technology counsel's, our board for technology titled below the CIO, now at a total of 128 members. Analyst relations and marketing counsel added members for a total of 98. And so for these 5 Oval programs now have a total membership of 376. Members are from a wide range of 1B+ companies including Bell Canada, Fujitsu, General Motors, Harmon, Honda, and Oracle.

During the second quarter we hosted over 120 Oval members at round tables in Orlando and Barcelona, Spain. We held 12 client directed conference calls. The application development counsel outlined solutions for improving portal UI design. The enterprise architecture counsel's working session focused on corporate governance of the central enterprise architecture group. Then finally, the security and risk management counsel developed what they are calling a role based security framework. In addition to client directed research the Oval staff completed 130 customized benchmarks for members. This is another example of the proprietary data that differentiates Forrester's boards from competitive offerings.

Finally cross-selling between Oval and Forrester's other research programs continues to build. On the events front, we hosted three forums during Q2, both Gigaroll's IT forum, and Gigaroll's IT Forum Europe, focused on creating business value with IT. The forums each featured more than 100 interactive sessions. (INAUDIBLE) forum is held in New York City in June. Outside speakers included David Potrick, now the former President and CEO of Schwab, John Brennan, Chairman and CEO of the Vanguard Group, and Arcadia Coleman, Chairman, CEO and President of ING Direct. WholeView 2 (ph) continues to progress as-planned. Launch distractions of the first quarter have dissipated. As of June 30th we had registered 27,000 users of WholeView 2. Customer satisfaction measured through Forrester's semi-annual survey of clients is high.

I can now turn to our plans for Q3. Today we announced the launch of an innovative new offering in the market research business, Forrester's Ultimate Consumer Panel. As you know Forrester has served marketers at leading companies for years. Ultimate is a key addition to our product set for this community. Ultimate is an optimum panel in electronically captures online and off-line behavior for more than 10,000 U.S. households. Ultimate doesn't ask panel members to estimate on life purchases or credit card activity. We have actual data from credit card transactions, wireless plans, brokerage activity and other sources. Using this information we are able to answer marketers toughest questions about their customers with very high accuracy. Charter plans include Household Credit Card Services, Master Card and Wells Fargo Company.

We are launching Client Choice this quarter. This is an enhancement of WholeView 2. Under Client Choice, Forrester clients will choose and direct the topics of 5 to 10% of our WholeView 2 research. This initiative accomplishes 3 goals. Number one, it increases the relevancy of our research. Number two, it extends the responsiveness and service quality, and three, it differentiates Forrester as we continue to evolve toward becoming a push plus poll research company.

As announced in our press release this morning, we have launched three Oval for marketing title (INAUDIBLE) companies. The CMO Group is a board of 1B+ marketing executives focused on the changing consumer, multichannel marketing, governance, worldwide branding, marketing ROI and customer segmentation. The EU marketing counsel and the database marketing counsel focus on functional executives reporting to the CMO Marketing Oval members will have access to Forrester's world class proprietary consumer research including data on 220 major brands. Twelve 1B+ company's have already joined the marketing Ovals including 1-800 Flowers, Send It, Charming Shops Inc., Lands End, Panasonic, and Thrifty Rental Cars. We will host one event during the third quarter, the consumer forum will be held in New York City in September. The event will focus on teaching company's how to extends brands across digital and physical channels. Our speakers include Brian Becker, President and CEO of Clear Channel Entertainment, David Neilman, Chairman and CEO of JetBlue and Jim Donald, President of Starbucks Coffee.

So to conclude, all of us are excited about the Company's position and our prospects. WholeView 2 had strong traction and we are adding additional value for our clients via Ultimate, our new marketing boards, and Client Choice. The tech economy showed modest growth and his should continue to help Forrester in the second half of the year. We're looking forward to seeing many of you while we are on the road this quarter. Warren and I will be presenting at the Americas Growth Capital conference and the Adams Harkness symposium this next week.

Thank you for listening in. Warren and I will now take questions.

Thank you. Ladies and gentlemen at this time we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A conformation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment it may be necessary to pick up your handset before pressing the star key.

Our first question comes from Mr. Fred McCray with Thomas Weisel Partners. Sir, please state your question.

Good morning, everybody.

Hi, Fred.

George, maybe you could walk us through a little bit in terms of bookings during the quarter and your overall thoughts there in regards to your plan going into the quarter?

It's a big question. I mean, the quarter flowed in a bit of a strange way for us. It sort of moved to June and away from April and May. In the middle of May we were sort of feeling okay, but then the quarter really improved in the middle of May to the end of June. So, you know, it went according to plan, essentially.

Okay. And then maybe if you could talk a little bit about, was there a skew one direction or another between up selling from existing customers relative to new business? And did you expected one to come out.

Higher than the other one.

Higher than the other, and was that - - did it come in line with your plan or was there some skew that you hadn't expected in that direction?

No, I would say it spread just the way with expected. New business is not raging, Fred, but we are showing you kind of quarter to quarter improvement here. Did you have any other thoughts?

No, I was just going to say, we are very pleased with the retention rates getting back to 74 and 85% of the client companies in dollar rates. We hadn't planned exactly to the get there by Q2. We thought we would get there later in the second half of this year, so we are pleased to be there this soon. But new business is still - - we are incrementally getting better and better I think each quarter as we move along through the year.

Yeah, that brings up a good question. And my next one was, given the fact that we have gotten to this place where we have gotten back on the target range on the renewal side. What - - is that typically what you would have expected the first thing before you started seeing nice sequential improvements on the agreement value line?

Yeah, I think you need to see, you know, the rates back to the normal targets as they are now. We still need a little bit of improvement on the enrichment side although we are getting very close there.

It's a new business game.

Maybe.

So just kind of looking at it, Fred, what we are focused on now is driving enrichment and of course driving new business to build up space.

On the enrichment side can you give us a little color there?

Yeah, we were actually up to at 160% (SPEAKER TO FAR FROM MIC) on a per quarter basis.

What was the reported number in Q1?

99%. A good improvement there as well.

But not at the 110, 120%, which is where we would like to be in that range.

You remember the old business was, originally 115 to 120 and then new business on top of that. We are moving in that direction.

Okay. Perfect. Then in terms of the events, three this quarter. Q1?

No events in Q1.

There are no events in Q1.

Okay. And then expectations, you said 1 in Q3 and then 4 in Q4 for a total of 8. How does that stack up to last year?

Very similar.

I think we are down 1, from 9 to 8.

Perfect. I will pass it along.

Thank you, Fred.

Thank you.

Our next question comes from Ms. Laura Lederman with William Blair. Please state your question.

Yeah. I have a few questions.

One, can you talk about that 46% increase in advisory services and other, and how much of that was events versus how much of it was underlying demand for service? And also can you talk a little bit about cash flow, why you are taking expectations down a little bit for the full year?

Sorry, I have a frog in my throat. Thank you.

On the advisory line we were up 40% quarter over quarter. I would say about two-thirds of that really came from (INAUDIBLE) advisory (INAUDIBLE) about a third of that came down from the fact demand for advisory (INAUDIBLE). (SPEAKER'S DISTANCE FROM THE MIC CHANGES) Then as far as cash-flow, we (INAUDIBLE) earlier in the year about 15 to 20 million. We're still thinking we may be able to get to 15 million, but it's in the 10 to $15 million range right now.

Really, as our business has shifted a little bit more internationally and we are doing more business in Europe, and especially southern Europe, what we are finding is that they tend to be slower payers in general. They are good for the money, it's just you have to wait 4, 5, 6 months instead of, you know, getting it in 1 or 2 months. As a result of our forecast for cash flow is down a little bit.

Shifting gears a little bit, we's like your opinion on sort of what happened in software this quarter. And since you are out there all the time talking to customers, talking to CIOs, it was just a terrible quarter at the end with so many software companies missing, 24 I think? What's your view on the IT environment out there? Are companies spending? Did they hold off a little bit at the end of June and why? Kind of what's going on out there more broadly than Forrester?

As you know every four months now we are doing surveys of 1B+ companies, lowering their tech spending. We have very good data. We actually did not see the software drop in spending for Q4. And our look into Q3 and Q4, is that, that was some strange anomaly which we couldn't pick up and will not continue into Q3 and Q4.

The CIO confidence poll which just came out in late June basically showed CIO confidence in continuing to increase. 55% of CIOs expect that they will spend their budget this year, and that's up from like 25% last year. So all the signals are pointing to higher spending in the year. Much higher confidence, higher spending, budgets being spent, all of our data shows it will be, it's not going to be a double-digit year in spending, but it will be in the 5 to 6% range of increasing spending for the year.

Alright. Final question.

Look at your business on the long-term, what would you expect it to grow? In other words, moving out of this year just longer term on a 3 to 5-year basis. And I realize it's just a guess, but just what's your feelings of the growth rate of the underlying businesses? And in parts, sorry.

Good question. We are doing, actually our planning kicked off last week for next year so we are looking at- - looking up the numbers. You know, you are going to get a little more optimism from me than Warren but those are our rolls in life. I think that in the 20 to 30% range, Laura is probably going to be the organic growth over 5 years. However, I mean, I can see us as high as 40% depending on the tech environment. Warren is going to give you a different answer.

(INAUDIBLE) on the table here. But we think most conservatively, at least I think anyway that 15 to 25% is a range that we could achieve in the next 3 to 5 years. On an annual basis going forward.

And Warren, what would that break out be between the different revenue lines and how much of that would be coming from Oval? To give us a little bit of granularity?

Oval will make up about 4 to 6% of our revenue this year and we would like to see that over 10% next year, up to 10% next year, and perhaps even 20% in about 3 to 4 years. So that would be a big part of it. That's obviously being recorded on a our research line. So I think we would keep the same split, you know, somewhere in the 70/30, 65/35, as far as the break out between the two revenue lines that we have on our income statements.

Okay. Thank you.

You've got some products like Ultimate which we announced today, Laura. We really don't know how fast that product can grow. It's an extraordinary proprietary pool of data. We look out at marketers and see a lot of potential demand out there, but we just don't know yet. So it's to be determined.

Thank you.

Thanks.

Our next question comes from Mr. Charles Trafton with Americas Growth Capital. Sir, please state your question.

Hi, thanks. Are you making money on the Oval products that you roll-out immediately or within six months? What's your view on how much you invest there up front?

Sure. Overall we are making money on Oval today. As we invest or as we launch, rather, new Ovals, it takes about 6 to 9 months to get them to be break even and they are profitable after that. It feels a little bit like the old research business, Charles, the way it was 5, 6 years ago. We would launch a service and go positive within 6 to 9 months. We are feeling the same economics in the Oval business.

Do you think that now that you've anniversaried Giga that you should have year over year positive growth rates in research going forward?

Certainly as we get into 2005 years, for the remainder of 2004, probably on the research side down a little bit in Q3, and, you know, maybe very close to flat in Q4. We are wrestling with this, Charles. Will research grow at fast rates again? When we look at our planning sessions that's what we are focused on right now.

Did you say down year over year in Q3 and then flat in Q4?

Correct.

Okay. And any comment on pricing generally and whether you think about that differently in Europe versus the States right now?

We actually do have some differential pricing in Europe on research. The euro does some of that. But there is some regional pricing going on.

I mean overall for pricing we look at average discounts and what's to be discounted on a quarterly basis and really the trends over the last three quarters has been pretty consistent. There hasn't been a huge movement in either way, either more discounting or less discounting. It's been a little statistic here over the last few years.

When you say price differential in Europe, do you mean better or worse over there?

Well we just price. We have a price list that's in euros.

Oh, right.

Well, but you are also going to get less discount if your' over in Europe. Robert Davidson is the President of Europe. They just have a different strategy over there.

Do you have any foreign exchange cost this quarter?

I'm sorry.

Any foreign exchange.

Not really expenses. Again, we are fully hedged in that we invoice and pay our invoices over there in euros.

Right. Okay. Great. Thanks.

Thanks, Charles.

Our next question comes from Ms. Sandra Notardonato of Adam Harkness & Hill. Please state your question.

Hi.

I have a follow up to Charles' question on the core research growth. George, you said that it's something that you are trying to assess in your meetings in terms of where research, if research is going to start growing at the rates that it did before. What does that say about the reception of research in the marketplace today in comparison to a couple of years ago? What's changing?

Well, there are a lot of factors at work here. One is the utilization of our world where in light of [inaudible], googlization of our world where a client might say, I don't need you to research, I can put CRM into google and out will come some free research or free information. That is certainly going on. As we found a year ago, clients want to talk. They want to connect. They want to engage with Forrester.

And WholeView 2, as you know is designed to do that, because the inquiry is built into WholeView 2. The events are built into WholeView 2. The fortells are built into WholeView 2. So I think if you can build a product which has obviously terrific core research and is also connected to an engagement, can engage with the client, then I think you are going to see some very good potential growth rates here, Sandy. And, again, we have a high satisfaction with WholeView 2. We think that's because of the engagement aspect of the product. You can't just sell bare research any more. There has to be a connection as well. As Dan Mahoney, our head of research says, you can't talk to Google!. You can talk to Forrester. You can talk to Forrester analysts. I think if you can build that in the right mix, I think you can grow it at healthy rates again.

Okay. Can you give a little bit more detail around the Ultimate Consumer panel? I'm trying to understand. Is this something that would essentially compete with a Greenfield online, even though your target market is different? Or how should I be looking at that business?

This is, it's rather revolutionary for us. Because as you know when we gather data we pay for data. We have outside panels that we use. But this is the first time that Forrester has ever built its own panel. So those 10,000 American consumers, we actually own that panel. That is fully proprietary to us. That's the breakthrough there.

And what's amazing about this panel and again, it really is rather revolutionary. We are actually getting from those panelists all their credit card transactions, all their bank account information, all their brokerage transactions, all their - - excuse me - - cell phone transactions. So it's not like we are asking them, hey, how much did you spend on cell phone last week, we know, we actually have that data. So it's rather revolutionary. And actually you can't get this data anywhere else. When we approach clients, they say, you guys can do this? You are really doing this? Wow!

Now that all being said, we are just getting started with this. It's been a big investment to build this panel. And the bookings are ramping a little bit slower than we had expected, but the clients we have like Master Card are thrilled with this data.

So just so I understand are you selling the data or are you selling the data as well as some analysis around the data?

Both. Both. We would never sell raw data. It would always be data plus analysis.

And so does this augment your technographics business or is it completely separate?

It's completely separate business. And these are very, very big deals, these are multiple hundreds of thousands of dollars deals. So Ultimate, if you look at Ultimate 3 years from now there will be 35 or 40 clients paying us a lot of money for that data.

Okay. So help me understand how this is sold. It's not a monthly fee that people are paying. They are buying a contract from you for a couple hundred thousand dollars, right?

Yes.

And so this is no longer part of the core business, right? This would fall under more advisory services?

Some of it will be research services will fall into that plan. They will subscribe for a full year and get the data and analysis in certain areas for that one-year period.

It's actually a very syndicated little product.

oh, good. You are a member, you paid for an annual?

Right.

And maybe I'm asking two too many questions on this before you really get it out there. What does an annual contract look like? Is that the couple hundred thousand?

Yes, exactly.

It can range from 75 to $500,000.

Okay. The other question I have is and I'm not sure if you said this on the call, but can you break out the advisory and the events business, what they were specifically?

Yeah, we have not done that in the past so, the events is less than 10% of our total business, 4, 5% of our total business. We just don't break out the raw number.

But it looks like advisory services is growing faster.

It is, yes, definitely faster.

So what does that do longer term to your operating margins potential? And how are you tracking analyst time, analysts that are spending space time versus writing research? How are you managing that rate?

I mean that's being managed by Dan Mahoney, the VP of research as well as all the regional directors here. We do have an internal system that we're using to manage the number of days of advisory that they do, so that we've got that under control.

We are watching the physics very closely.

We are watching the physics very closely. As far as the impact that it might have on our overall margins, it potentially I think it might drop the margin half a point or a point from a leverage standpoint. But it's still highly leveraged advisory that we are doing. Again, it's based on the research that we have already done. The knowledge comes from that research base and it's really just being applied on a customized basis to our clients that ask for it.

We are actually, we P&L all the products, Sandy, we are watching the profit margins in all of these businesses, and if it turns out that advisory business is running at a very, above, very healthy profit margin.

Okay. At what point, though, do I start to worry that you are moving too far down the line of a consulting company?

I don't think, we are never going to go - - I think this business is going to stabilize in a 70/30, 65/35 range. That's what we are planning for. And that's just where we are going to head, Sandy.

Okay. So you haven't moved away from that?

No.

Okay, great. Good. Thank you.

Once again, to ask a question, please press star 1 on your telephone keypad. Please keep in mind that if you are using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

Your next question comes from Terry Lowrey with Kraemer Rosenthal. Please state your question.

I thought I had used the CRM so you could Google! us, George. I wanted to follow up a little bit more on the new products. I think you are just going through the Ultimate Consumer panels. It seems like these are big ticket deals. What would you expect the sales cycle there to be?

It's long. It's been especially long in the first 6 months selling the product. Because a lot of these consumer companies are saying, "Hey, we just don't believe you can do this." We had to actually build the panel, get 2 quarters of data and really show them we can do this. So I'd say it's been easily a 6 to 9 month cycle to begin. I think as the data begins to flow, Terry, and has cause to renew it still will be longer than research but it's going to be 4, to 5 months, somewhere in that range.

How is the current pipeline? And secondarily you talked about the cost to build this out to get this panel built. What did it cost you and what will be the ongoing costs?

I will go to pipeline first. Very healthy pipeline.

This is, I won't get into expenses, this is an R&D efforts. We are taking some risks here. It's never been done before. It's not just another Oval we are launching having it's a very new business for us. But again, bookings, charter bookings have been good. Pipeline is actually looking quite good and as far as cost to launch.

Yeah, from an investment standpoint it's about 1.2 million to 1.6 million per year on annual investment at this point.

That's all running through.

The P&L.

The cost of services and fulfillment programs.

Right, it runs through the cost of services and fulfillment.

If you swing over to the Oval board, it sounds like you are already profitable on the tech boards. What individual board level, what type of membership do you need to cross that break-even point?

It's in the, depending on whether it's a counsel or whether agents group, the groups are the high level boards. It's going to be between 50 and 75 members.

Okay. Then the incremental margins, just a scale above that?

There's a lot of - - I mean, yeah, you are seeing so much competition.

Now you are making the move into marketing. Do you see this being any different in terms of your approach to it, your ability to, the scale, the 3 new marketing boards?

I would say that, you know, our greatest strength is with on the technology side, the CIO side but the second greatest strength is marketing, Terry. We have been servicing these guys for 7 years, technographics is now 7 years old. Products like Ultimate, we have Ultimate proprietary data which we can feed right into the board, to the board members. It's kind of a natural, you know, second move for us. But it's a little bit removed from the technology side.

Your expectations would be different, I mean on the technology side you pretty quickly got to say 100 out of the gate.

We will ramp up a little bit slower here.

Would the break-even point be similar?

Yes.

Great. Thanks.

Thanks, Terry.

Gentlemen, there are no further questions at this time.

Thank you for joining our conference call. We look forward to seeing many of you on the road this quarter.

Thanks very much.