高德納諮詢公司 (IT) 2002 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the META Group Third Quarter 2002 Earnings Call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. If anyone needs assistance at any time during the conference, please press the star, followed by the zero. As a reminder, this conference is being recorded today, Wednesday, November 6 of 2002. I would now like to turn the conference over to Mr. Peter Ward, Director of Public Relations. Please go ahead, sir.

Thank you. Welcome, everyone, to META Group's Third Quarter Earnings Conference Call. And with me today from META Group's management team, Fred Amoroso, President and Chief Executive Officer, and John Piontkowski, Executive Vice President and Chief Financial Officer.

I'd like to remind you that this conference call contains forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including forward-looking statements regarding the Company's credit facility, information technology spending, demand for information technology research, advisory and consulting services, changes in the information technology industry, the strength of the Company's research engine, general economic conditions, and timing of a recovery and effect of the same on results, investment decisions by customers, market share, revenues, shift in revenues, international revenues, EBITDA, profitability, operating efficiencies, cost controls and cost-reduction efforts, foreign acquisitions, goodwill, effective reorganization, operating expenses, effective sales commissions on expenses, capital expenditures, capital requirements, capital losses, cash flow and cash balances, borrowing capacity under credit facility, bank waivers and compliance with covenants, strategic directions for product service development and introduction, international operations and distributors, and customer service capability.

These statements are neither promises nor guarantees but involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including, without limitation, risks detailed in the Company's filings with the SEC, including those discussed in the Company's Annual Report filed with the SEC on Form 10-K for the year ended December 31, 2001.

I'd now like to turn the call over to Fred Amoroso.

Thanks, Peter, and welcome to all of you who've joined us for META Group's Third Quarter 2002 Earnings Call. As this is my first formal earnings call with the Company, you may see differences from the past. What I generally like to do is give a brief description to the quarter and some significant attainments. After that, John Piontkowski will review our financials in more depth, and I would like to go through some of the transformation steps we are taking, what we've accomplished relative to that in the quarter, and then, finally, we'll have a Q&A session.

Financially, we attained revenue at 27.2 million in the third quarter of 2002, a decrease of 600,000 from Q3 2001. We had a net loss of 20.4 million, the largest portion of which related to a $12 million income tax charge and adjustments of 6.4 million made in the third quarter, that John will also explain later. Moreover, we generated an increase of 2.5 million in our net cash position, 500,000 cash from operations. As you can see from the results in our top line, we are continuing to see intense scrutiny of IT expenditures across most enterprises. In fact, our recent research shows that most CIOs are still focusing primarily on cutting costs, and there appear to be no signs of increased IT spending in the near term. As a result, demand for traditional IT research and advisory services continues to be negatively impacted. I am encouraged, however, by a number of recent business wins that were signed in the third quarter.

Though I won't go into specifics of each win, we have seen significant activity, winning over competition, winning new customers, and deepening our relationships with existing customers. For example, in several, we saw some customers consolidate their research relationship with META Group, eliminating others that they had previously also used.

In particular, in one of the larger U.S. government agencies, the customer was spending about $240,000 per year with one of our competitors and moved their research advisory relationship completely to META Group and increased their spending with META to 345,000, spending over 40 percent more. It certainly shows that some customers are not looking to just cut costs but to increase the value of their research and advisory relationships.

In other examples, we have increased our relationships with our customers, extending core research and advisory relationships into significant consulting relationships as customers look to extend the application of our research into specific transformation areas of their own businesses.

Relating to vendors, they represent slightly less than 30 percent of our business overall. Because we have such deep insight into their customers' needs and wants and spending patterns, many of them have not only used our research insight but employed our focused vendor consulting practice to help them define better and more targeted marketing and profiling programs to increase their value to their customers. So overall, we've seen a lot in this quarter.

I will get more into our transformation steps after John describes more fully our financial results. John?

Thanks, Fred.

As Fred mentioned earlier, today the Company announced a third quarter net loss of 20.4 million, or $1.56 per fully diluted share on total revenues of 27.2 million. This compares with the third quarter of 2001 net loss of 3.7 million, or $0.29 per fully diluted share, on total revenues of 27.8 million.

During the third quarter, the Company changed the manner in which reimbursable expenses are reflected in the statement of operations as required by Emerging Issues Task Force Issue Number 01-14. Reimbursements, including those related to travel and out-of-pocket expenses and other similar third-party costs, are now included in revenues with an equivalent amount also included in operating expense. For comparative purposes, all prior-period financial statements have been reclassified in this way, with no impact on the bottom line.

Total revenues for the third quarter were 27.2 million, down 2 percent from the year-ago period, reflecting the continued general softening in the technology sector and continued decrease in IT spending which began in 2000.

Third quarter revenues include the positive incremental impact of the December 31, 2001 acquisition of a majority interest in the Company's German distributor, META Group AG, and the establishment of the France subsidiary in September 2001, which collectively I'll refer to as the "acquisitions." Impact from the acquisitions on third quarter 2002 revenues was an increase of approximately $3.4 million.

The mix between domestic and international revenues changed, with international revenues representing approximately 23 percent of total revenues for the third quarter this year, compared with 17 percent a year ago, mainly due to the impact from the acquisitions.

Research and advisory services revenue was 18.8 million, down 4.6 percent from the year-ago period's 19.7 million. Favorable impact on research and advisory revenues resulting from the acquisitions amounted to approximately $800,000. At September 30, contract value, the value of retainer subscription services contracts in force at a given point in time without regard to the duration of the contract, was approximately 70 million, up 1 percent sequentially from 69 million at the end of the second quarter and down 15 percent from approximately 83 million at September of 2001.

Strategic consulting revenue was 7.1 million, up 500,000, or 7.8 percent from the third quarter of last year. Approximately 2.3 million in consulting revenues results from the impact from the acquisitions. Domestic consulting revenues have declined due to lower headcount of 58 domestic consultants in the third quarter of this year, compared to 69 consultants a year ago.

Published research revenue was 535,000, down 47 percent from a year ago. The decrease largely relates to the third quarter reclassification out of revenue of certain first-half 2002 intercompany charges and recording them in third quarter as a reduction in expenses, and this had no bottom-line impact. This is partially offset by 105,000 favorable impact from the acquisitions.

Total operating expenses were 33.7 million and include a provision for loss on facility -- facilities leases of 2.2 million, a 1.2 million charge for goodwill impairment related to current-year activity in the consulting and publications segments, 2.2 million of other charges, comprised of 1.1 million in charges relating to bad debts from certain independent distributors, together with estimated accruals regarding certain legal matters with the former distributor, 900,000 in non-income-related taxes and 140,000 in severance accruals for the German subsidiary. This compares with 30.1 million of total operating expenses in the third quarter of last year. The impact from the acquisitions added approximately 3.8 million in total operating expenses.

Consolidated headcount is 661 at the end of the third quarter, up 45 from a year ago. The acquisitions added approximately 125 positions when compared with the prior year. Without the effect from the acquisitions, headcount would have been reduced by 80, or down 13 percent from last year's level.

Our cost of services and fulfillment was 14.5 million, a 4-percent increase from a year ago. The impact from the acquisitions was an increase of 1.5 million in cost of services.

Gross margin as a percentage of total revenues, inclusive of the reimbursable expenses in both the revenue and cost of services, was 44 percent, as compared to 48 percent a year ago.

Selling and marketing expenses were 7.9 million, an improvement of 2.5 million, or 24 percent, from a year ago. The majority of the reduced expense levels arise from lower provisions for bad debts of approximately 1.1 million, along with lower commission expense. These reductions were partially offset by an approximate $800,000 increase resulting from the acquisitions. Selling and marketing expenses as a percent of total revenues have improved from 38 percent a year ago to 29 percent for the third quarter of 2002.

G&A expenses for the third quarter were 5.4 million, an increase of 2.1 million from a year ago. Approximately 1.3 million of the increase relates to the impact from the acquisitions, with the balance relating to the non-income tax-related charge of 946,000.

The above-the-line goodwill impairment charge of 1.2 million relates to the write-off of the 2002 additions to the consulting and publications goodwill, primarily related to the acquisition of the additional interest in META AG that occurred in September 2002, and, to a lesser extent, related to the required payment of additional earn-out consideration to [Ruben][ph] Systems, Inc. that had occurred earlier in 2002. Three hundred sixty-nine thousand of that earn-out was paid in common stock, and 569,000 was paid in cash.

The ownership of the German subsidiary is now at 95.9 percent. The total consideration for the incremental acquisition of Germany amounted to approximately 1.9 million, consisting of 400,000 in cash, 425,000 representing the fair market value of options granted, and notes payable in the amount of 914,000, of which approximately 330,000 is payable in January of 2003, with the remainder payable over the next four years. The Company intends to pursue the acquisition of the remaining minority shareholders in Germany for an estimated additional cash consideration of approximately $100,000.

Turning to the other expense – other income expense line, the third quarter's results include an $800,000 impairment loss on investments, reflecting further impairment to several of the investments, primarily test coms, like [Scavell] [ph] and [Syndicated Research Group]. This write-down is due to the decline in market values of these companies as a result of the general economic and market conditions.

The income tax provision includes 12.2 million charge relating to the establishment of the valuation allowance for deferred income tax assets. In view of the Company's historical losses over its recent history, a determination was made that a valuation allowance should be established for the full amount of recorded deferred tax assets until the Company returns to consistent profitability.

The third quarter's pro forma EBITDA, as defined in the supplemental information contained in today's press release, is 718,000, compared with 1.3 million a year ago. Last year's pro forma EBITDA excludes the 1.5 million charge relating to the termination of the France/Belgium distributor.

I'll now provide some comments on the balance sheet and cash flows.

Our net cash position, defined as cash plus marketable securities less outstanding bank debt and notes payable, was 16 million at the end of the third quarter, compared to 6.3 million a year ago, and this represents a 2.5 million sequential improvement from the second quarter.

Cash flow from operations was approximately 500,000 in the third quarter, compared with 1.7 million a year ago, with the decrease due primarily to the increased losses experienced by the Company in 2002, as compared with last year.

Total accounts receivable at September 30 was 26.7 million, down 29 percent from last year. Day sales outstanding were 88 days, compared with 124 days of the year-ago period. After adjusting for those accounts receivable with future payment terms, related primarily to multi-year contracts, DSOs were 46 days, compared with 80 days a year ago. This represents an 11-day or 19-percent sequential improvement for the second quarter.

Deferred revenues had declined 21 percent from December 31. While a portion of the decline is attributable to the normal seasonality from last year's fourth quarter activity, the pressures faced in this difficult environment with lower IT spending and pricing pressure also contributed to the decline.

Total bank borrowings amounted to 6.8 million at September 30, down 15.1 million from a year ago and down 4.1 million from December 31. The Company is in violation of its financial covenants with its lender as of September 30 and is currently negotiating waivers of such defaults and amendments to the existing credit agreement. There can be no assurance that such waivers or amendments will be attained or such amendments will contain favorable provisions. Capital expenditures for the third quarter amounted to 114,000, compared with 315,000 a year ago.

Let me briefly speak to the year-to-date performance.

For the nine months of 2002, the Company reported a net loss of 43.7 million, or $3.36 per fully diluted share, on total revenues of 86.8 million. This compares with a net loss of 4.6 million, or $0.39 per fully diluted share for the first nine months of last year.

During the third quarter of 2002, the Company completed the adoption of Financial Accounting Standards Statement Number 142, entitled "Goodwill and Other Intangibles." The Company determined that both the consulting and publication segments of our business were impaired as of December 31, and as a result, the Company reported a goodwill impairment charge of 22.2 million, or $1.71 per fully diluted share. The goodwill impairment charge was reported as a cumulative effect of a change in accounting, which is reflected in the Statement of Operations for the nine months ended September 30.

Year-to-date research and advisory service revenues of 57.9 million have declined 10.7 percent from the prior year, due primarily to the continued decreases in IT spending and the general economic conditions. The acquisitions contributed approximately 2.3 million to the research and advisory revenues for the nine months.

Strategic consulting revenues of 23.4 million for the nine months were up 23 percent from a year ago, primarily as a result of the acquisitions. Without the impact of the acquisitions, strategic consulting revenues declined 12 percent, primarily due to lower domestic consulting headcount.

Office research revenues were 3.6 million on a year-to-date basis, down 2 percent from a year ago. The acquisitions contributed approximately $165,000 in incremental revenues in the publications line item during the nine months ended September 30.

Gross margin, calculated with reimbursable expenses at both revenues and cost of sales, has remained flat with the year-ago period of approximately 47 percent.

Total operating expenses of 94.1 million are down 1 percent from the year-ago period, and the acquisitions contributed approximately 11.8 million in incremental total operating expenses for the nine-month period.

The goodwill impairment loss that is included in operating expenses for the nine-month period of 2.6 million relates to the 2002 activity related to the acquisition of the additional interest in META AG and contingent earn-out consideration required to be paid to [Ruben][ph] Systems and the [Verdi][ph] Group.

Last year's other income included a gain of 2.6 million from the sale of an investment in [Intermediate][ph] Group. The pro forma EBITDA for the nine months is 5.2 million, compared with 2.5 million last year.

I'll now turn the call back over to Fred.

Thanks, John. At this time, we'll limit our guidance to just the fourth quarter.

For the fourth quarter 2002, we currently expect total revenues to be approximately 27 to 29 million and an operating income of approximately breakeven. For the full year 2002, we currently anticipate total revenues to be in the 113- to $115-million range and the operating loss to be in the 7- to $8-million range.

The overall state of the IT industry continues to be hampered by cost cutting and delays in spending. In fact, our recent research shows that most CIOs are still focusing primarily on cutting costs. While we're disappointed that revenues were slightly down in the third quarter, we believe that META Group is solidly positioned to lead what we believe is a transformation currently taking place in this industry. Most enterprises can no longer justify purchasing traditional research simply as an insurance policy. They are demanding a much higher value proposition from their providers to efficiently and effectively apply their IT assets to achieve their overall business objectives.

As I alluded to earlier, I am extremely encouraged by recent sales successes that we're seeing across our research advisory services and other parts of our business. I believe these successes reflect our strategic positioning and our understanding of our customers' needs for a higher-value IT research service provider. I truly believe that META Group is best suited to fill this customer need.

Just this week, we sold out of our fall CIO Boot Camp event in Phoenix. We normally limit attendance to 55 CIOs and CTOs, although we capped this event at 76 people due to increased demand. We've also reached capacity for our Infrastructure Conference slated for next week in New Orleans. These are great examples of how corporate information technology leaders are seeking our proven methods for maximizing their IT investments, even in the face of continued cost-cutting pressures.

Internationally, we are continuing to break new ground, as well. We recently signed up our first retainer services client on the Chinese Mainland. But as I said earlier, our industry is in a state of transformation. Our seminar industry have driven the value proposition to the customers on a more commoditized approach, pricing on a per-seat basis, or offering research products in ever-thinner slices of technologies. I fundamentally disagree with this approach as our customers do not implement technology in thin slices but aggregate technologies to accomplish broader business goals and objectives.

So let me describe briefly some of what we've accomplished in the last 90 days, my first 90 days with the META Group. Now, to be accurate, some of these changes did not all occur in the third quarter but through the end of October.

First, as you just heard, we critically assessed the carrying value of goodwill and deferred tax assets and took the appropriate write-off this quarter. Also, in the interest of being on the leading edge of the new regulations, we increased our focus on disclosure, internal controls, business ethics, and management attention to these controls across the entire senior management team. This is a situation where continual improvement is our mantra.

Second, in the quarter, we emphasized expense management. Some actions I took were more for effect, such as we cancelled free coffee and other [indiscernible]. The Company had a history of flying all employees and significant others to Stanford for a Christmas party. This could typically cost between 400 and 500,000 a year. The Christmas party is cancelled this year. Additionally, where we had a number of members of the management allowed to fly business class, we cancelled all business class travel for everyone, including me. Now, I'm also sensitive to the right type of environment we're creating at META, and it should be noted that so far I believe the morale of the organization is quite good. I received many notes of support on the cuts and the changes that we've made and are making.

Third, since we are focused on increasing the effectiveness and efficiency of our customers' use of information technology to accomplish their business goals and objectives, it is important for us to be able to seamlessly and uniformly provide our insight on topics worldwide. For example, I was speaking with a large global consumer products company that said that they have certain actions that they may take globally, such as architecture. And, yet, there are other actions that they take that are driven in a very much decentralized fashion; for example, implementation of that architecture. They want to be able to work with a company that they know will give them the same opinions, whether their team is in Sydney, Hong Kong, New York, or London. This is representative of many others I've spoken with concerning the same topic. So this spawned two actions for us:

(A), we need to operate uniformly around the world. And while some of our competitors are shedding global operations, we're bringing them together, tighter, into our family. On September 30, as John mentioned, we formally acquired over 95 percent of the shares of our AG distributor, giving us now control over Germany, Austria, Switzerland, Spain and Eastern Europe. We have work now going on to acquire the remaining 5 percent of the shares that were allowed under German law.

(B), we developed an organization to make sure that we leverage uniformly all of our IP across our various fulfillment mechanisms – publications, research services, industry services, executive directions, enterprise architecture and consulting, as well as focus on product management across the organization, as well as efficient research operations. It will be a big factor to increasing the value that we can provide to our large customers.

Lastly, and most importantly, we're changing the culture of the team. While the contention-driven approach is very valuable to debate issues among the analysts and refine our insight and come up with quality counsel and customer recommendations, that type of management system does not work well across the entire organization. I disagree with some of our competitors' views that a customer should have the opportunity to engage with different analysts from the same company that have differing opinions about the technologies. In that case, it is the customer that must decide who is right, and I believe we diminish our value to our customers. If we're the experts, then we should be providing consistent and confident advice and counsel. So we moved away from silo-style management, where individuals were spending more time internally focused, and getting ourselves to focus more on the customer and the value that we bring to our customers, more attention on execution and getting things done quickly and efficiently and more attention on teamwork.

I'm excited about what we've accomplished in the short term and even more excited at the opportunities that lie ahead of us. A word of caution, though. These changes did not transform our company or our industry in 90 days. We're here for the long term, and we're in the process of building a great organization with the goal of simply being the leader in our field. We have the team to do it and the motivation and passion to do it. In an industry that often copies each others' offerings, our success will be squarely based on our ability to execute.

With that, I'd like to open up the call to Q&A and turn it back over to [Mysea][[ph].

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you have a question, please press the star, followed by the one, on your pushbutton phone. If you would like to decline from the polling process, press the star, followed by the two. You will hear a three-tone prompt acknowledging your selection. Your questions will be polled in the order they are received. If you are using speaker equipment, you'll need to lift the handset before pressing the numbers. One moment, please, for the first question.

As I go through and we're waiting for the questions to be polled, I think it's important to note that as we see this business transform and as we look for the opportunities to lead that transformation, it's exciting to note that we have a lot of the components that I believe are core for our success as we go forward. At the core, we are a research company. We have a tremendous amount of intellectual property that's driven through our analyst community and insight on what's going on in technologies, vendors, products, as well as trends, and it's the opportunity for us to really leverage all of that core research to the advantage of our customers and bring it to life for them.

Do we have any questions, [Mysea][ph]?

Yes, the first question is [Mike Narry][ph]. Please state your company name, followed by your question.

Hi, [Narry][ph] Asset Management. A couple questions. First, Fred, glad to see you bought some stock at, you know, two seventy-five, I think, and hopefully you'll get the chance to buy additional stock over the years at higher prices as you execute your plan.

Hi, Mike. Actually, it was two seventy-four.

Two seventy-four.

And I did – for those who probably didn't see it, I don't know if it was the 8-K, I actually bought 125,000 shares of the stock, and we had two other board members who similarly acquired stock as part of that transaction.

Great. Well, I think that's fantastic. A couple questions. Can you – can you provide a little more detail on the bad – the distributor bad debts? And just – and also the non-income-related taxes? Just really, what are those and, you know, are you confident that you won't get those types of charges in the future? Or why did you break these out separately?

Hi, Mike. This is John. In terms of the bad debts in terms of the distributor, as we went through the process a year or so again, we had our French/Belgium distributor that went into the equivalent of a bankruptcy. And as you can understand, when you go through those types of things, that there's a lot of diligence that comes out through that court process, and we became aware of some exposures related to that. So that's part of it.

The other part is dealing with the – in terms of the tax issues, it's not income taxes, but it's dealing with – some sales-tax issues. And I think that we've done a pretty thorough job of getting our arms around it and making the appropriate accruals.

Okay. And these were primarily for the French/Belgium distributors then?

Well, the sales tax issues are more domestically.

Okay.

There are some that are international, but primarily domestically.

Okay. And can you talk a little bit about – you know, Germany's pretty much done now, and did those options for that hit in the quarter and the cash charge hit in Q3 for that?

That's actually a good point. The – I think the transaction was basically –

It's sort of straddled.

Right --

What ended up happening -- what ended up happening is that the cash – the actual cash outflow took place in October, but we ended up signing the agreements, accruing for the note payable, dealing with the investments on the other side of the equation, making our investment in Germany, and also taking the charge with respect to the valuation of the options that were granted.

Okay. So the – so the – it hit your balance sheet, but the options will still – will show up in Q4 and they didn't show in Q3. Is that right?

Well, the options, Mike – the options won't show on the balance sheet at all.

Right, no, I understand.

But if we were to have disclosure similar to the note disclosure at year-end, you're right that it would be reflected as a fourth quarter event.

Okay. And Norway, just – can you talk – how many more of these international distributors do you have to roll out? I know you want to control your distribution, Fred, and I think that's the right strategy. How many of them are left to do?

Well, we have – just going around the world, we have Northern Europe, which is actually comprised of Denmark, Sweden, Norway, a little bit in Finland. We have the U.K. as a distributor. We have a distributor in South Africa. We have a distributor in Italy. We have a distributor in Japan. I think the rest of the places in the world are pretty much 100-percent owned. I might be missing one. What am I missing? Latin America. I'm sorry. Latin America is another distributor. And some of these do make sense to be in that domain.

But when we talk about really servicing our customers, I mean if I could – if I could just spend a minute on this –

Please do.

-- you know, the whole notion for me is if you look at this as a research product company, then what we would do is we would set up the notion that our core expertise is just creating product, and then we distribute that product through a whole series of distributors, literally around the world. But I happen to take a different view. I believe what's going on in technology now is it's even more of a requirement today for companies to figure out how do they employ the technology to drive their business.

And part of our customers, yes, part of our customers very much use our research as an education and training vehicle for them, and we do sell access to our research as part of our relationships with customers, and they use it as part of their organization to train and educate their team. But broadly – much more broadly – the opportunity is to develop a very tidy, significant relationship with our customers where we become their trusted advisor to leverage our capability to help them drive their business. And we're seeing, Mike, that as we do that, we have significantly deeper relationships with our customers.

So one of the things, for example, that I know is asked in lots of earnings calls is, "Well, what is your renewal rate?" Well, the renewal rate really doesn't provide significance to what's going on because if I give you a number that says, all right, whatever the renewal rate is across the board, it belies the fact that, you know, I'm probably losing some of the very low-end customers who are buying much more of a commoditized approach towards research, and I'm able to retain much better customers -- as a matter of fact, I think the numbers we showed that at customers that spend over $80,000 a year with us, we have over an 80-percent renewal rate. We have our executive directions team, which encompasses also enterprise architecture, growing on a year-on-year basis the revenue that we're providing for them. Our industry services group have renewal rates of somewhere between 78 and 88 percent. And consistently as we're working more and more senior in the organization, those relationships turn out to be much deeper, much more broader, much more informative about how we can help our customers. And so I'm a little bit [indiscernible] to just deal with statistics on this because it belies the real issue of what's going on in our industry.

Okay. Can you – in terms of the distributors, there was something in your last Q about Norway, I guess that's Northern Europe. Is that going to happen here in the back half of the year, the 800,000 there?

Well, it was a – a seven, eight hundred thousand dollar payment for Northern Europe that was – I'm sorry, for Norway, that was part of the discussions, and [we] have done or will be done.

Yeah, it will be done in this quarter.

Okay. And just a couple other questions. Depreciation, [D&A] in the fourth quarter, what's that number?

[D&A] in the fourth quarter?

Mike, I said we're not really doing much in terms of – I'd use the same number that we have for the Q3.

Okay.

[A] much a good enough indicator.

Okay. So, you know, you mentioned you think you'll be breakeven in the fourth quarter, so EBITDA for the year on the pro forma numbers that you give, you know, whether you think you should exclude those charges or not, but, you know, is about six eight, 6.8 million or so for the year. Just kind of a bigger-picture question, you know, relative to your stock that's still pretty attractive but, you know, some of your competitors are coming out with their numbers. Gartner came out – their EBITDA margins are 17 percent, Forrester, 20 percent, even [Loligiga][ph], who we're a lot bigger than, has an EBITDA margin of 10.5 percent. We're down at six. Can you – why is that? Can you talk about is the model broken? Do you have EBITDA goals going forward? What do you do to make the company more profitable?

Well, it's a good question. I'll make a comment, and then I'll let John make a comment, because it deals both broadly as well as – as well as the specific financials.

You know, look, Mike, a lot of the things that are going on right now is we're getting our hand around what – where are we, what are we doing, what is the opportunity in the market space, what do we need to define ourselves to be, what changes do we need to make in our organization, etcetera. I'm actually cautiously optimistic about how things are going in this quarter from a sales perspective and – and we are right in the process now of going through our 2003 planning exercise with the management team. I've been giving the team targets in terms of what I'd like to see them grow at, and we're starting to roll that up into an overall corporate model, so it's a little premature for me right now to say, you know, what the model will show next year, and it's also why I decided we wouldn't produce 2003 guidance because we really have that work going on right now. Do you want to add anything to that, John?

No, I think that's a good point, Fred. The one thing, Mike, that as Fred indicated, we are going through – and the industry is going through – a transformation, and we're trying to walk the fine line in terms of making sure that the infrastructure's in place to deal with the rebound and the recovery that will come at some point, and I think our longer-term goals would be to obviously to get into a higher and double-digit perspective. But I think for right now, we're assessing the situation.

Well, yeah, but let me – let me close our response to you with this. I mean I don't view that our current EBITDA level is acceptable to us, and I certainly am in sync with your question looking to move it up and to be much more aggressive at driving it, and we have the resolve to make the appropriate decisions that we need to on a company based upon, you know, how we perform. We are going in and are in the fourth quarter, which is our heavy renewal period, so, you know, we'll see as we progress where things are, but we certainly will have actions to improve us from where we are right now.

Okay, great. Thanks, guys.

Thank you, Mike.

Thanks.

Thank you. Ladies and gentlemen, if there are any additional questions, please press the star, followed by the one at this time. As a reminder, if you're using speaker equipment, you'll need to lift the handset before pressing the numbers. One moment, please, for the next question.

The next question's from [George Walsh][ph]. Please state your Company name, followed by your question.

I wonder, Fred – how're you doing?

Hey, George, how are you?

Good. I'm kind of new in catching up to the story, so I might be covering things that other people might be familiar with. So I just have a couple of general questions. As you're in this environment, you do have a balance sheet that's in pretty good shape and you have the cash. What helps you going forward? Is it a matter of just restructuring and waiting for the recovery? Or working within the recovery as it improves and trying to, you know, improve your revenues as the environment improves? Or, you know, can you go out there with, you know, 16 million in cash and try and make some acquisitions? Or is it just a matter of growing the organic business?

That's a great question, George, and, you know, the answer's yes, yes, yes, and, you know, yes. Let me parse it a little bit.

First of all, you know, look, the 16 million in cash is, you know, certainly a significant improvement over where we were last year. I would actually like to be in a much better position that that because it gives us, obviously, much more latitude to do the things that we want. If you were to follow what we did with AG, I mean certainly, you know, we already had a 40 – a 51-percent ownership of AG, so we were consolidating. We did have some debt as part of that. We assumed some of the debt that AG had as part of its relationships with some of the people that it had previously acquired. So what we were doing basically is now being able to much more uniformly drive the consulting practice and the – and the research practice on a uniform basis for our customers worldwide.

The net effect, by the way, just to go through that, they had roughly 155,000 shares that they owned of META, Inc. stock in their business. That was actually what I and some of the board members used to acquire the stock from. So we gave them the cash that went into part of the distribution. The net cash after that was only about $70,000 for us so we were able to do it on a quite appropriate basis plus the 280,000 options, and we valued those options at a black [shoaled][ph] basis that came up with a total cost of the acquisition. So I think it was certainly commensurate with where our own stock is, as well as the appropriateness for where the business was.

Now, as we go forward, and as Mike mentioned earlier, you know, we had some conversations about Northern Europe. We do have interests in continuing to bring our distributors into our family, as I mentioned in my comments. If we had more cash, it would give us the ability to do that perhaps, but there are other ways of driving that. We've just got to make sure we do it in the most cost-effective fashion and -- as well as appropriate without significant dilution to, you know, to the Company in terms of doing it. It gets a little bit harder, but we'll drive down that path as best as we can.

As far as, you know, do we sit back and wait for the economy to turn around, our current view is that the economy, based upon the surveys that we've done with CIOs and IT spending, the economy's probably not going to be significantly turning around until, you know, mid to third quarter of next year. So we've still got a long way ahead of us. We're not going to sit back and wait. We believe, as I've mentioned some of the examples earlier, that we can deepen our penetration and relationships with customers that would drive more consulting for our analysts, will drive more consulting for our consulting group, and would drive broader and deeper relationships. So we're going to take those actions and continue to create efficiency in our business.

And then, ultimately, yes, I mean it would be wonderful if we can get to a position where the wind is not constantly in our face, as it is for not just us but all IT companies, but get a little wind behind our backs and push us along as a general economic improvement would increase the IT spending and will cause the value for what we do to our customers to increase and broaden more – more broadly within their organizations. So it's really, George, a combination of a whole lot of things. It's not – not one thing that we're going to drive to

All right. If I could move a little bit to the other side of the coin on that, in – with a company this size, you do have a balance sheet that can get you through a tough period here in terms of the market, but could the problem be more not so much getting through the tough period but really getting through the recovery? Meaning that will there be consolidation? You'll be facing bigger competitors, and where it's going to be a much tougher competitive environment there, and do you have to think in a different way or at least one of your strategies that you consider being part of a bigger company?

Well, certainly from, you know, look, my responsibility is to our shareholders to make the appropriate decisions for the Company. And in that responsibility, I and our board will evaluate all of the appropriate actions for the Company that – that are important for us as we go forward.

The issue, George, is interesting and perhaps a little bit peculiar to this industry. So if you were to look at, for example – and by the way, one of the things I just want to point out is, is while Gartner is the large player in the space, and I don't know what their revenue is now, 850 to 900 million, something in that – in that ballpark, and we are roughly about 120 million, 118 million, the – you know, we are – I think with where we've performed and the others have performed, that we are in a number-two position. Giga and Forrester are certainly a little bit below us but right around where we are, some a little bit further than others.

As you look at consolidation then in that part of the industry, the thing you have to take into account is what is the revenue implications if you were to combine businesses, and the notion that if you were to run through the model is that there is a likelihood that a significant revenue falloff could occur because a number of companies, both vendors, as well as end-users, employ multiple companies as part of its research. Now, we see that changing over time. As a matter of fact, some of the examples I saw, companies are no longer looking to just have multiple relationships. They're looking to get deeper relationships with one company that they have more confidence in. That was the – that was genesis of the government agency discussion I had. So if you follow that theme and said, okay, if there was some consolidation and that consolidation would result in – could be as much as 40 or 50 percent of vendor spending being cut and perhaps 15 percent of end-user spending being cut, then you have roughly the need to take out, you know, maybe a 30-percent or more reduction in revenue that would cause you to spend or take out 30 percent to 35 percent of expenses, and it gets into a very, very difficult and unmanageable situation that you could cut that much expense out of the acquisition or the merger and, oh, by the way, have us continue to focus our management attention on the transformation and the goals that we have in front of us. So – so it's, you know, it's problematic as you look at things, but if the right situation, you know, develops or comes along, you know, it would be appropriate for us to – to make those considerations.

Well, I'd just take that thought a little bit. Does that mean with those redundancies that, you know, even though you have a shrinking market a bit, I mean is it smaller than it's actually said to be? I mean are there redundancies that you think will actually come out of the market over the next several years and it's a smaller market than projected?

Well actually, what we're trying to do, George, is to define a different market. So let me just describe very briefly that. The notion of every professional services organization is that you have intellectual property. And that intellectual property is leveraged through very talented people and customer relationships, right? And if you look at META Group and others in our industry like that, then you come up with a model and a business model that will take us in a certain direction. If you look at ourselves as just a product company, where we just create product, research product, and sell that research product to others, then it would put us in a different operating style. And so if you – if you were to look at Accenture or IBM Global Services or KPMG or any of the major SI organizations, a lot of them, just like us, have intellectual property that they leverage and sell through talented people into customer relationships.

I believe, though, George, that we are unique from the standpoint that there's very few companies like us that really have the depth of insight, the understanding, the insight of technologies, of the executive portfolio management, the CIO management process, the enterprise architectures, etcetera. And so what I'm looking for is an opportunity to define a new industry that substantially leverages the value in the assets and the capability that we have for substantially deeper relationships with companies.

Now, part of the way we would do that is through selling publications. Part of the way would be doing it through selling publications with some analyst services. Part of it is to sell it on a retained-service basis. I like the whole notion of retainer-based services. We would also sell it with [guru][ph] or analyst consulting. We would also sell it with executive consulting and coaching. We'd develop infusion programs. And so there's lots of different ways to leverage it, and we're going to go target and attack all of them.

Okay. All right. Thanks, Fred.

Thank you, George.

Thank you. The next question is from [Kyle Krieger][ph]. Please state your company name, followed by your question.

[Apollo] Capital. Hi, Fred.

How are you?

All right. Question for you on – as you move up the value-added services food chain, so to speak, do you expect to be able to do that with your existing personnel? Or will there be a significant hiring requirement and expense associated with that endeavor?

It's a very good question, Kyle, so let me – let me describe philosophically where I am on some of this.

First of all, I don't believe that – and nor, I think, has history proven that the irrational exuberance of dot-com or that business model is appropriate. So I don't think that we create a lot of investment in search of revenue growth or market share gains and then lose our way to fortune, so we'll be very cautious. We do have a specific focus on expense management and expense reductions, and the team has the resolve to make the appropriate decisions relating to our expenses in light of the question I got earlier on EBITDA as appropriate. So we'll invest in the talent and in the – and in the quantity as well as quality of our resources based upon our ability to succeed in our transformation and our ability to drive significant customer relationships.

Now, we're already doing that. There's tremendous number of examples where we've taken customers that, for example, have a couple of hundred thousand or less – in one case, $150,000 retained services relationship with us – and we're doing about $790,000 worth of overall work with them. And there's other examples very similar to that. So that means that we do have the talent in the company now to leverage and to do that.

Obviously, you know, as – you know, I’m here now for 90 days. We go through our transformation. I'm quite pleased with our management team, but I'm going to reserve the right to make whatever adjustments in whatever areas that I need to in order for us as a company to be successful.

And then following up on Mike's question from earlier about the margin differential amongst the competitors in the industry, and you've pointed out that there's some expenses that you're able to, you know, cut out pretty much immediately, my question is as you look at your $120 million revenue base, is the path to profitability a – or greater profitability a cost issue or is it a revenue issue? I mean is there – and you were talking about attrition rates amongst, you know, low margin or clients that weren't generating acceptable profitability. Is the, you know, real revenue rate or real revenue run rate to get to, you know, 15-percent EBITDA margin 75 percent? Or are there – is it a combination of revenue attrition and expense reduction that is not a negative impact on your current revenue base?

I actually think it's a combination of both, Kyle, and so let me just describe just briefly. I think, you know, this is not a situation where we can just save our way to prosperity without focusing programs and relationships and driving our business to increase our revenue. It's not a model in my mind that we just reduce expenses, drive the bottom-line profitability, let revenue continue to [attrite][ph] and wait until the economy improves. I don't have that model.

I think it is, in fact, though, making sure that we are efficient. So one of the changes that I made in the organization, that was announced recently, was a new team to drive fulfillment commonly and seamlessly, leveraging our IP across all of the different ways that we bring that to our customers – publications, etcetera, etcetera. We want to make sure that we have an efficient research organization. We used to have two components of research. We used to have the infrastructure and operations team, as well as the applications solutions team, and we combined those into one technology research team to try and drive, you know, more efficiency and effectiveness in the way we're managing our resource. So part of that is for us to be efficient, making sure that we are efficient.

And then another part of this is very much client focused and sales focused to drive increased revenue with our customers. One of the programs, for example, I didn't mention earlier is we had a specific program put in place last quarter and as well exists this quarter on competitive win-backs, where we're approaching the customers with key value propositions to – and I shouldn't say win-back. Win-back means we lost it -- but to win customers to new META. They couldn't have been previous META customers so that we can try and demonstrate to customers a new value proposition that we could bring to them and how we're different than some of our competition. So far, that's proven to be quite effective. We've generated a number of – of new customer relationships as part of that. So it's really both.

Fred, what percentage of the customer base have you had an opportunity to meet with personally in the short period of time that you've been there?

It's a very, very small percentage, Kyle. It's a great question. So assuming I have 3,500 customers, it's a small percentage. But let me suggest to you that I am very customer focused. My first – I think it was the third day in the company I went out and I attended a CIO boot camp. I met with 47 of our customers. I had an opportunity to go speak with them. I had an opportunity to listen to them. Two of them said to me, "Fred, we just switched to META, and the reason why we switched is because we know that when we talk to your analysts, we will get their opinion. We won't get what you think we want you to say to us or what you think we want to hear, but we'll get a true objective and independent opinion." And that's core to us. We want to be objective. We want to be independent. We want to be viewed that way.

I'm going next week to New Orleans, where I’m going to be addressing our Infrastructure and Operations conference. I've flown over to Europe, where I spent time meeting not only with our entire team, but I met with a number of customers at a conference that we had there, a Munich conference. So there were, what, 200 people, I think, at that conference in the audience, and so I had an opportunity to meet many of them one on one and dialog with them. So, actually, if I add up the numbers, it's actually quite a bit now. Maybe it is a bigger percentage than I thought. But I'm very focused on not just using my own intuitions and perceptions of what we're doing and where we are, but validating what our customers' needs and requirements are as part of our overall strategy in getting to personally dialog with them.

Okay. I appreciate that. And then my last question is, as a result of the restructuring actions that you took, will you get any cash back out of that in future periods, tax refunds or anything like that?

Well, the tax – the tax thing, yeah, John, why don't you go through that?

Yeah, Kyle, in terms of taking the charge for the valuation on the tax act, we still have the NOLs, and as the Company turns to – returns to profitability, those NOLs will be utilized and, therefore, we'll be able to bring back the profits, you know, cash and tax free. So in that regard, yes, it will be available to us.

Okay. Thank you.

Thank you, Kyle.

Good luck.

Thank you.

Thanks. We can use it. Appreciate it. Ready?

Gentlemen, there are no further questions at this time. Please continue.

Well, that's great since it's roughly about six o'clock. We've gone about an hour. I do appreciate the interactions, the questions from everybody. Let me just summarize by saying, look, we have a very excited and a very motivated team. I'm really pleased with the things that have gone on, my own reception within the organization, the support I've gotten from everybody inside META and the numbers of people and customers that I've spoken to outside. I continue to reaffirm why I came here. I think it's a great quality organization. I think we've got great people. We have wonderful analysts. We develop core terrific research products. We have great consultants. We have wonderful counseling relationships and senior relationships with our customers, and it's a matter of getting us focused on customer value, getting us focused on execution, getting us focused on teamwork, and going to drive the business. And so I look positively to the future.

But at the same time, this is not a 90-day turnaround. It's not a 90-day transformation. There's -- you know, there's things that we've got to do that will pay off in the short term, and there's things that we'll do as we continue to transform ourselves in this industry.

And so we appreciate your investment in the company, your interest in the company, and your continued support. Thank you.

Thank you, sir. Ladies and gentlemen, this concludes the META Group Third Quarter 2002 Earnings Call. If you would like to listen to a replay of today's conference call, please dial 800-405-2236 or 303-590-3000 with access number 506524. Once again, if you would like to listen a replay of today's conference call, please dial 800-405-2236 or 303-590-3000, with access number 506524. You may now disconnect, and thank you for using AT&T Teleconferencing.