高德納諮詢公司 (IT) 2002 Q4 法說會逐字稿

Good Afternoon, ladies and gentlemen and welcome to the META Group Fourth Quarter of 2002 Conference 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, Thursday, February 13, 2003. I would now like to turn the conference over to Peter Ward, Vice President of Corporate Communications. Please go ahead, sir.

Thank you very much. Again I'd like to welcome you to META Group's Fourth 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 labors and amendments of the Company's credit facility, the effects of improved operating expense levels and future operating results, trends in information technology spending, expected first quarter 2003 results of operation, the effects of changes within the company's organization, including changes in the company's research services organization and in the company's international infrastructure, on the company's results of operations, demand for information technology research, advisory and consulting services, the strength of the Company's research engine and the Company's ability to drive value to its customers, IT budget and investment decisions by customers, and strategic directions for the Company's product/service development and introduction. 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 our press release earlier today and 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, and in the Company's quarterly reports on Form 10-Q for the quarters ended March 31, 2002; June 30, 2002; and September 30, 2002. And I will now turn the call over to Fred Amoroso.

Thank you Peter and welcome to all of you who have joined us for META Group's Fourth Quarter 2002 Earnings Call. I like to start the call with a brief introduction to the quarter and highlight some significant attainments and after that John Piontkowski will review our financials in more depth. I'd like to then come back and provide an update to some of the transformation steps that was outlined in our last quarter's call and also highlight some additional initiatives that we believe position us quite favorably against our competition and finally as usual, we'll just open it up to a Q&A session.

Financially, we attained revenue of $29.8m in the fourth quarter of 2002, slightly ahead of our expectations of $29m and with operating income of $2.4m compared with breakeven expectation. As expected there was no real turnaround in IT spending in the fourth quarter and that continued to impact revenues across the IT services sector. We are however quite pleased with the progress we've made in the fourth quarter, particularly our reduction in operating expenses and our improvement in pro forma EBITDA over the fourth quarter of 2001.

Due to the state of the economy and the IT spending in 2002, we believes these improvements as well as a number of others, which I will cover later hold well for us in our core strategic directions in 2003 which is to continue developing higher value relationships with our customers, to help them achieve a return on the intelligence that we provide them. In addition, in a recent survey we conducted, we found that most IT organizations plan to keep their IT budgets flat for 2003 who will be looking instead a gain a return on their existing IT investments by stepping up their integration efforts through the use of IT metrics, analytics and portfolio management techniques. We develop leading edge capabilities in all of these areas and expect to continue driving value for our customers in the coming year through this program. We also undertook a number of strategic initiatives in the fourth quarter, which we believe are critical to continuing our transformation out of the commodorized IT research market into higher value strategic advising consulting. I will discuss these transformation steps also in more detail after John takes us through the financials. So, John.

Thank you Fred. Good afternoon. As Fred mentioned earlier, today the company announced fourth quarter net income of 2.3m or 17 cents per fully diluted share on total revenues of 29.8m. This compares with fourth quarter 2001 net loss of 13m or a dollar and one cent per fully diluted share on total revenues of 30.8m. During the third quarter of 2002, the company changed the manner in which reimbursable expenses are reflected in the statement of operations as required by Emerging Issues Task Force, Issue No 0114 . Reimbursements including those relating 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 quarter were 29.8m, down 3.3 percent from the year ago period reflecting the continued decline in IT spending, which began in 2000.

Fourth quarter revenues include positive incremental impact of the December 31, 2001 acquisition of the majority interest in the company's German distributor Meta Group AG. The impact from the acquisition on fourth quarter 2002 was an increase in total revenues of approximately 3.3m. The mix between domestic and international revenues continues to change with international revenues representing approximately 26% of total revenues in the fourth quarter of this year compared with 18% a year ago, mainly due to the impact from our acquisitions. Research and Advisory Services revenue was 19.3m, down 6.9% from the year ago period is 20.7m. The favorable impact on Research and Advisory revenues resulting from the German acquisition amounted to approximately $800,000.

Strategic consulting revenue was 8.6m, up 9.9% in the fourth quarter of last year. Approximately 2.4m in consulting revenues results from the impact of the German acquisition. Domestic consulting revenues have declined due to lower headcount with 63 domestic consultants in the fourth quarter of this year compared with 66 consultants a year ago along with the general decrease in IT spending. Although research revenue was 1.4m, down 23% from year ago, this decrease largely relates to the decrease in IT spending as a result of the general economic condition as well as the decrease in the number of personnel in the company's inside sales channel have primarily sold the company's published research products. Total operating expenses were 27.4m and it includes $760,000 in provisions for employee severance cost as well as $130,000 in asset impairment charges within our German operation.

This compares with 38.4m of operating expenses in the fourth quarter of last year. The impact from the German acquisition added approximately 4.6m to the fourth quarter operating expenses. Consolidated headcount is 643 at the end of the fourth quarter, down 97 from 740 at the end of 2001, a 13% decrease. Our cost of services and fulfillment including reimbursable expenses was 14.5m, a 14.3% decrease from a year ago. The impact from the Germany acquisition was an increase of 2.5m in cost of services. Gross margin as a percentage of total revenues inclusive of reimbursable expenses was 51.1% as compared to 44.8% a year ago. Selling and marketing expenses were 6.7m, an improvement of 8.4m or 56% from a year ago. Majority of the reduced expense levels arise from lower provisions for bad debts and other charges relating to both the company's former and current international distributors of 4.5m along with 2.4m in lower commission expense. These reductions were partially offset by an approximate $600,000 increase resulting from the German acquisition. Selling and marketing expenses as a percent of total revenues had improved from 49% a year ago to 22% for the fourth quarter of 2002.

During the fourth quarter, the company made the determination that bad debt expense will be reflected as a selling and marketing expense. Previously, the company recorded bad debt expense associated with its domestic accounts receivable as the general and administrative expense, while the bad debt expense associated with international distributors were recorded as a selling and marketing expense. All prior periods have been restated to confirm to the current presentation. Accordingly, the company reclassifies 622,000 of expense out of general administrative and put it in to selling and marketing during the fourth quarter of 2001. G&A expenses for the fourth quarter were 4.6m, an increase of 267,000 from a year ago. The German acquisition added 1.4m of general administrative expenses during the quarter. During the fourth quarter of 2001, the company reported 610,000 provisions for vacant space on its Stanford Connecticut facility. Fourth quarter's pro forma EBITDA as defined in the supplemental information contained in today's press release is 5m compared to 0.6m a year ago. For the current quarter pro forma EBITDA excludes 761,000 of severance cost, a 134,000 of asset impairment charges and a $112,000 of additional cost associated with anticipated losses related to certain of the company's leased facilities.

Last year's pro forma EBITDA excludes $610,000 of losses on vacant facilities, $200,000 of employee's severance and 5.4m of charges related to bad debts and impairment charges associated with certain receivables and assets of the company's current pro forma independent sales representative organizations along with the minor provisions for non-income related taxes. I'll now provide some comments on the balance sheet cash flows. Our net cash position, defined as cash plus marketable securities, less outstanding, bank debts, and loans payable was 14.4m as of December 31st, compared to 10.6m a year ago. Sequentially, the net cash position decreased 1.6m from September 30. During the fourth quarter, the company used 1.2m of cash in operations compared to 4.9m of cash generated from operations in the year ago period. A reduction in cash flow from operations in the fourth quarter of 2002, when compared to the year ago period, was primarily due to the significant efforts made a year ago in reducing our accounts receivable to enhanced collection efforts. As a result, we have successfully reduced our day sales outstanding to more normal levels.

Total accounts receivable at December 31st, was 38.3m down a 11% from last year. Day sales outstanding were 116 days compared with 118 days in year ago period. However, after adjusting for those accounts receivables with future payment terms related to our multi-year contracts, day sales outstanding were 44 days, compared with 74 days a year ago and a slight improvement from 46 days in the third quarter of 2002. Deferred revenue have declined 2% from December 31st, 2001 to 49.8m from 50.6m. The decline is attributable to the pressure states in this difficult environment with lower IT spending and pricing pressures. All bank filings and monitor 6.2m at December 31st, down 4.7m from the year ago. The company is in violation of it's financial problems with it's lender as on December 31st, 2002 and is currently negotiating waivers of such default that are managed to the existing credit agreements. There can be no assurance as such waivers or amendments will be attained or such amendments will contain favorable provisions. In January 2003, the company paid down the remaining 6.2m outstanding under it's facility as of December 31st 2002.

Capital expenditures for the fourth quarter amounted to $436,000 compared with $110,000 a year ago. Let me briefly speak for the year-to-date performance. For the year ended December 31st 2002, the company reported the net loss before the cumulative the effect of the change in the accounting principle of 19.3m or $47 per diluted share on total revenues of 116.5m. This comparison with the net loss before the cumulative of the effect of the change in the accounting principle of 17.6m or $47 for fully diluted share for the year ended December 31 2001. The full year 2002 revenues include the positive incremental impact of the December 2001 acquisition of majority interest in the company's German distributor. And the establishment of the META Group France operation in September 2001. Research and advisory revenues of $77.1m decline 9.8% in the prior year, the acquisitions contributed approximately 3.1m revenues for the full year. Strategic consulting revenues of $32m were up 19.2% from the year ago primarily as a result of the acquisitions. With out the impact from the acquisition strategic consulting revenues decline 14%, primarily due to lower domestic consulting head health throughout 2002. Publish research revenues were $4.9m on a year to date basis down 9% from the year ago, the acquisitions contributed approximately 183,000 and the revenues during the year ended December 2002. Gross margins for the year calculated with reimbursement expenses in both revenues and cost of services has increased from 47.9% from 46.1%. Full year operating expenses of $12.5m are down 8.9% from the year ago period.

The acquisitions contributed approximately $16.4m in incremental pro-operating expenses. The full year operating expenses include the following items. A $2.2m charge related to vacant space in certain of the companies domestic and German leased facilities, $3.6m in other expenses comprising $1.1m and charges relating bad debts from certain independent distributors together with estimated approvals regarding certain legal matters with former distributor a 900,000 non income related charge for non income related taxes. $1.1m in servants cost in the US and German and 500,000 of other charges related to our international operations. The about the line goodwill impartment charge of $2.6m relates to the 2002 editions to the consulting and publications goodwill, primarily related to the acquisition of the additional interest in META AG that incurred in September 2002 and to a lesser extend related to the require payment of additional earn out consideration to Rubin systems that occurred earlier in 2002, 369,000 of which was in common stock and 569,000 was in cash. A consideration for the incremental acquisition of META AG amounted to approximately $1.9m consisting of 400,000 in cash, 425,000 representing the fair market value of options granted and those payable in the amount of $914,000 of which approximately 330,000 was paid in January 2003 with the reminder payable over the next four years.

During the year ended December 31st, 2002 the company recorded a $1.1m impairment charge relating to its investment and third party affiliate companies. Due to the continued decline in market values within those companies. And during the third quarter of 2002, as we announced last quarter, the company completed the adoption of the Statement of Financial Accounting Standard No. 142, goodwill and other intangibles. The company determined that both the consulting and publication segments of the business were impaired as of December 31st 2001. As a result, the company recorded a goodwill impairment charge of $22.2m or a $1.70 per fully diluted share. This goodwill impairment charge was reported as a cumulative effect of the change in accounting, which is reflected in the statement of operations for the year ended December 31st, 2002. Last year's other income includes a gain of $2.6b from the sale of an investment in Intermedia group. Pro forma EBITDA for the year ended December 31st 2002 is $10.2m compared with $2.9m last year. I will now turn the call back over to Fred. Fred?

Thanks John. I would now like to discuss some of the transformation steps we undertook in the fourth quarter as well as a number of the strategic business wins that we achieved, some of the positive signs for the company. First, perhaps most importantly, we made some key changes within our Research Services organization designed to provide a better level of service to our customers around the world. You will recall that in Q3, I spoke about how we had begun changing culture of the team, developing a culture that is based upon focusing on the customer and customer value on execution, and on teamwork. In Q4 we continued the realignment of our research organization by consolidating all of technology services under Dave Yockelson and strengthening our product management, research operations as well as fulfillment organization under Herb VanHook. These enabled us to better leverage the value of our intellectual capital across all other fulfillment areas of META Group. Secondly, we continued to improve our international infrastructure across the Americas, EMEA and Asia Pacific regions by putting additional management in place to execute more effectively on regional and global issues.

From a sales perspective, we had some significant Q4 sales successes across our advisory services and consulting offerings. We believe that these key wins speak to global end user and IT vendor organizations need for a higher value IT research services provider. One of these large end users recently signed on with META Group and is now spending nearly $750,000 with us for a strategic consulting engagement. In another instance we went head-to-head with our competition for an advisory services relationship with a large food manufacturer. Ultimately we closed the deal for nearly $150,000. We also recently closed an important deal with a large vendor's IT department for nearly $300,000 and this customer had previously subscribed to our competitor's offering and we were able to show that META Group's unique value proposition ultimately gaining them as a very important customer.

On each of these incidences, our customers were not looking to just cut costs but to increase the overall value of their research and advisory relationships, and as I have stated many times before, this is where we feel we are uniquely qualified relative to our competitors, at our core we are research company, the intellectual property that we developed through our service areas combined with the talents of our individuals and our people and coupled with our consulting capability really provide a continuum stream of capability to help our customer solve the business goals and objectives more efficiently, effectively, and timely deploying information technology to solve their needs. On an event perspective, we're also encouraged by continued strong attendance and other positive customer experiences at our competition events in 2002. In 2002, we entered our seventh year running our enterprise architecture conference. We are pleased to have graduated over 4000 attendees from this important event. In September, we also rolled our 800 attendees in our enterprise architecture emerging workshop. In November, we had more 300 attendees in our annual infrastructure conference and also in September we graduated our 700 attendee for our intensive CIO Boot Camp program.

I would like to now speak a bit more about the consolidation and transformation taking place in our industry. In the third quarter conference call, I alluded to this transformation and spoke about how some firms have driven the value propositions to their customers on a more commoditized approach. Pricing on a per se basis or offering research products never been the slices of their technologies. We will continue to dismiss ourselves from this approach for many of the initiatives that I have already outlined. And totally we received a number of very positive responses from customers, which serves to reinforce our strategic direction toward higher value relationships. One recent end user client stated that she could see Meta groups vision and how that vision aligned perfectly with this strategic direction of our organization. Other results from a recent customer increase survey that we conducted showed consistently high level of satisfaction with the information our customers receive in our meetings with our analysts. I reiterate my statement for last quarter. These changes do not transform our company or industry in 90 days.

We are very pleased with accomplishment we have made in the last three to six months, but our future success will continue to be based on our ability to execute. And finally we have taken a very long-term view of Meta group. We believe we have a unique inter-differentiable approach to the market, as well as a strong reputation as it is built on a quality of our people, the quality of our research and most importantly, how we bring these together for the value that we bring to our customers. As we see the market, discontinuity is developed for some more competitive as well as economic perspective. We believe that we are in a strong position to take advantage of this discontinuity. But to do this, to do this we must build and invest in a company that developed the proper infrastructure to operate effectively. We must work diligently to create the right value proposition and ultimately to create a true differentiation in the market. As we continue to transform our selves in this new market place, it is this value proposition that will be the key to fueling our growth and increasing our revenue and earnings. As a result we are refraining from forecasting full year revenues and profit. However perhaps differently from our competitors who are forecasting lower revenues for the first quarter. We currently expect total revenues to be flat with the first quarter 2002. Revenues of approximately $29m and breakeven operating results. With that I'd like to turn the call back over to the operator and open up the call for Q&A. Thank you,

Thank you sir. Ladies and gentlemen, at this time you begin the question and answer session. If you have a question, please press the star followed by the one on your push button phone. If you would like to decline from the polling process, press the star followed by the two. If you are using speaker equipment you will nee to lift the handset before pressing the numbers. One moment please for the first question. Our first question comes from Cameron Hussein with K Finances . Please go ahead.

Hello Cameron.

Hi Fred.

Yep.

How are you?

Very well and you?

Good. Thanks. I have a question for you first of all for John. For concerning merit management restructuring in the past quarter, how does this relate or how this is similar to our earlier restructuring, restructuring by other companies in this place for the past couple of years. Are you including your competitor up in Norwel , is it something similar, are we seeing a pattern here?

Cameron, I am not sure exactly what the restructuring that our competitors have done, so it's hard for me to describe, but let me describe what our actions have been Cameron, and what we are doing.

I was, I can clarify, just clarify

Okay.

This is specifically, this when Mr. Gartner at Giga (ph) our [Inaudible] Operational CEO, took as role as chairman, brought in Bob Whyler, which then [Inaudible] you know, their consolidation you are referring to with the [Inaudible]

Great.

Ideal, so and, you know, Bob Wilder came into sell a company, you are an ex-IBMer right?

Well, among, you know, I have actually spent a lot more time in other companies than IBM, but [Inaudible] .

That's good, because there are many who can describe those conspiracies there about them, because anytime you bring an IBM executive into an under-valued company, then they are going to tell us how to sell it to IBM.

Well, so let me comment on that since you have brought it up. You are right, in my back ground was, I was an IBM executive as part of the turn-around from, I came to IBM at the end '93, I stayed there through the end of '99, I had a great time at IBM, we changed a lot, it was my group that worked on developing the I-issues and creating a value for opposition moving IBM from a product company to a solutions company, I ran a global insurance side [Inaudible] for a few years, I was on the management committee of IBM, and then the last part is, I lived in Tokyo and ran services across Asia-Pacific working directly for San Palmasano, I had about a $7 billion business. The notions though, okay, so then and after that to complete the picture, after that I went to as the CEO Cosvo software (ph) and we had it, we took them public and in November '99, I am sorry, In January of 2002, I sold it to IBM.

But that achieved the [Inaudible] conspiracies right?

There's no conspiracy what was happening, I will tell you the reason, and it was a very prudent view of the market both from a J2E design technology as well as a marketplace perspective of how the software business was evovling, the re-aggregation of the software stack and what the market-place was looking, the notion that I thought separate individual EAI companies should exist on a long-term basis was remote. So, we leveraged the value of the company for somebody really wanted to be there and you could see what IBM has done at distancing themselves from their competition by taking cross worlds and bringing it into the further development of WebSphere business integration.

Now, I don't want to talk about IBM, but the notion that I am here is largely because I love the opportunity of taking an industry that's in transformation and participating in that transformation and taking a company and finding opportunity to substantially create value prepositions and growth opportunities in that differentiated market. The likelihood that IBM would buy META Group is zero

Zero

Zero, exactly and the reason why is because we cover IBM, I mean, we provide council and insight to thousands of customers on IBM's products and there is no economic way that we would be part of the IBM company. So--

I'll get right through it, but then with the market cap hovering in the range of about 35 to about that as high as 50m today and based on the current evaluation from [Inaudible] . What do you see, how quickly do you see META Group achieving it's desired or optimal mark account?

Well, you are making a presumption Cameron that after finding market capital that I want to get to and stop. Let me just tell you that's not the added to that I have in the pump company--

No, I don't think you are going to fall, I saw the plan, I think it's great, I just-, I want to know how quickly you are going to get back to the optimal market cap. What do you think it's worth now?

Well, here, the market is an efficient market and so the investors have purchased the company's stock and I am comforted that they believe that we have a lot higher market cap than where it was and I believe there is a lot more value in the company that's not reflected as yet, but look, my view is the following. Let me just describe, kind of, my overall approach Cameroon. I think that we have an enormous opportunity to quite frankly define the unique value preposition in the space that some more slightly different than the way other research and advisory farmers have positioned their capability. I came to META Group because I thought uniquely, the META Group analyst and the META Group people were a higher qualities and as other ones that I had dealt with when I was on the vendor side myself.

I think, you are absolutely right about that Fred, I mean, I have always impressed by META research. Fred, this is a very quick follow up, I don't want to stop explaining [Inaudible] , but the head count being down 13%, what's percentage of that were analysts?

Actually, very few were analysts, the most of the head count was consulting head count that was taking out and Cameroon from that perspective one of the major impacts for this is that this value proposition, let me define it this way and I have this statement with our customers.

Sure.

The value proposition that I believe is that if look at the product, their intellectual capital which is research, as the real component of what we are all about, when you become a product company, you look at organizing, you look at managing, you look at driving the company from a product perspective and an IP perspective. My belief is that at, at our core, we are research company and it is in the value and talent of our people that we too put the content, the intellectual capital in the context of the customer. It is in the interactions of the people that we drive value. It's in the interactions of our analyst and our consultants with our customers that we can help them solve their business, clause, and objectives and that's on the line, the transformation we are making in our team, in our research organization, making research and consulting close together and driving a value for our customers that we believe is unique and unbeatable in the marketplace. So, I firmly believe that our value is released and emulated from the talent of the people that are inside the company and I want to drive that value proposition because I think that's where the economic value will ultimately be driven. At the same time, we have to make sure, we can execute, so, some of the transformation we've made, for example, in adding infrastructure capability management capability in the media by putting General Manager in the EMea by putting a CFO across the entire media organization enabling us to manage the company, not just as domestic, but international but across three regions Americas, EMEA and Asia Pacific all strengthen our ability to serve our customers globally as well as strengthen our ability to execute more effectively. Note all that the investments --.

Great, META has always had a problem with execution, so I am glad to hear you are focusing on that, that's sounds great. I don't want to monopolize your time, but one quick question for John, if I may?

Okay, sure.

John, you mentioned a lot about the German acquisition and a lot about international numbers, are you counting on international business for growth, while the US is declining?

But now that we consolidate Germany and France, we pick up an additional amount of top line revenue as well as the other expenses.

But again you will be looking to execute well to integrate all those firms, because it is not organic, right?

Well, let me describe, look we have put a plan together, our plan our sales plan is already out to the teams, the code has been assigned, customers have been assigned and this is the first time, I think in history the company that we are actually executing is as quick as we are in this year and we have driven aggressively from an organic prospective, but one of the things Cameroon I said, in one of the earlier earnings calls, is that I believe a distributor model doesn't support our ability to drive global consistency and to drive consistency of consulting and services and so I have an interest in acquiring our distributors, I have not been sigh about making that statement as a core component of our ability to execute not as just a way of driving growth in the company.

Well, I said it sounds great, I mean it's all become [Inaudible] to execute right now, but I like those, I like this detailed stuff and the numbers in the account, sounds like we are back in the right track, which leads me to, a very last question, where is Dale and what's he doing?

Dale, we just left him at about 2:30, he is the Chairman of the Board, he is, -- Dale and I would get together monthly, I seek his counsel and I revise some things, Dale spoke at our Metamorphosis in San Diego, he spoke at Metamorphosis in Orlando, he will going to Barcelona in Sidney and speaking there and meeting customers and so, while Dale is not sitting at the management table executing, Dale is very much a valued member of the whole support mechanism in governance and guidance and advice for Medigroup.

Oh, good great to hear. And is he still a largest shareholder?

He is.

Okay, great well, Pin, John thanks, I appreciate your time out, I want, I will let others speak.

Thanks Cameroon.

Our next question comes from Mike Neary with Neary Asset Management, please go ahead.

Hello Mike, how are you?

Hi, good. I do want to say good quarter, but I think, I have to.

Come on Mike, go-ahead. We will tease it out of you a little bit.

Quick couple of questions. First, the CAPEX, what do you expect it to be next year and what's the NOL position now?

Well the from the CAPEX perspective, you know, we are probably going to be do -- making as fast as the probably going to be making some additional infrastructure investments in terms of systems and also some integration efforts with the acquisitions strategy, but, I don't think it's going to be at this point, absent the actual physical acquisitions, it's probably not going to be that significantly different from where we are currently.

Mike, we have driven two major things relating to our infrastructure. Number one is we are standardizing our Siebel would be our system. We have projects going on, we will roll it out in March first, part of it is to support our products, part of it is to support our overall approach to our service fulfillment, entitlement, and consulting and then we have standardized on Lawson, everybody in the company will be on Lawson. So that we can more easily integrate and manage the financial function. We do need to get in to a budgeting implanting, get that module into our business. We don't have that now, so that we could go through a much better, more effective linkage of all of our books into our financial planning process for next year. So, there are some investments that we do need to make in our infrastructure that will drive. Now the other think you need to obviously be sensitive to is the whole Sarbane-Oxley discussion that are going on are creating important demands relative to our controls process that has to be absolutely completed by December 31st. So, they will likely require not only internal focus on part of the management team across the Board, but probably some infrastructure developments still yet to completely defined.

Okay.

And then Mike from an NOL perspective, the federal NOLs are at around $19m or so and international NOL, approximately $5m.

Okay. And, you know, you mentioned some of these things coming up in terms of expenses. Do you expect operating expenses 27.4 in the fourth quarter? Will they be substantially higher in the first quarter and then what is driving that?

As we talked about in terms of the guidance, but the revenues being relatively flat with last year, that depends upon a $29m revenue. So, that would - your expenses are going up a little bit higher. There is couple of different points. One is in terms of a program that we are undertaking and in terms of our marketing efforts.

So there is two things in general, comment on the other, the marketing. We have decided that is part of this value proposition. We need to increase the brand awareness of META Group; we've put that into our budget for this year. That's an increase in expense over what we have last year. The other component is look just for me, bonus perspective that company didn't hit the targets on a full year basis, that it did and so, part of what happened in fourth quarter is we were worst while in a part of an accrual, got a million dollars of accrual we had, previously on a books to paid bonuses that went back into income and reduction in expenses. So, that creates a little bit of a distortion on the quarter-to-quarter basis as well.

Okay.

Exactly.

Okay. Great. And just last question, three times revenues would you not got the cash, figure Giga is trading 1.4 times revenue, even after this most recent move in our stock, we are still down around 0.3 times revenue. And my question is with regard to the options program, and I guess the question part is one, how many options are we issuing, going to be issuing in '03? And then the second part of the question is, if our stock is substantially undervalued still, which I think it is, then we have some cash. Are we issuing any equity at the current prices?

No, Mike I was going to call you on this one, because I know you had an interest in this question before. So, let me give you my opinion. Number one is, I don't have a list of options that we are giving out to people. I will tell you that we have created a compensation model at the board, it's in the process of reviewing, the compensation committee is in the process of reviewing that actually, more standardized at least initially domestically US, how we pay people by salary grade, how we put people in the salary grades and what we believe equity components would be to their compensation by salary grade. I view options very much as they were tension vehicle, not a reward vehicle. And so, as we build the team and bring on management in key positions, my expectation, not my expectation, my requirement is that, we will be having to provide options as part of the overall program to attract as well as retain those individuals, and options is not a reward. I agree with you, if you want to deal with rewards, we created bonus programs associated with that. But if you want to talk about attracting and retaining individuals, that's were I believe options play. But we haven't come up with anything relating to what we believe we will do from an option perspective. The compensation committee and management is discussing both the directors options programs, and as well as the overall options pool and the program and making determinations that obviously if anything is going to be done will come into to the annual shareholders meeting in May.

Okay, okay. And then, and obviously you know much better than I do, how the best incentive wise in retaining people. Giving away, I was simply approaching it from; I would like to dilute ourselves as little as possible.

I certainly understand and look our, as you would expect both I as well as the entire board has very much shareholders interest in heart. We spent, to be frank, a lot of time talking about this today to make sure that we are balanced in how we look at managing our equity components, the options, in the interest of the shareholders as well as giving management the tools that we need in order to properly track and retain the individuals in the company, because as I said earlier, you know, it's not just the IP or assets walk out of the door every night, and so people are very important to us. We are very proud of the work that they do and we want to make sure they feel proud of the company that they are part of and feel attracted to it.

Okay, great, thanks guys.

Thank you, Mike.

Thanks, Mike.

Our next question comes from George Walsh with Gilbert Securities. Please go ahead.

How are you George?

Good, Fred. I wonder if you could just go over the -- you have mentioned the violation of the continent, just what issues were involved there, I mean there is a lot of progress, certainly, you have made in terms of trying to control expenses, so were these revenue statement issues or balance sheet issues or cash flow statements?

I will let John talk about it but I will just tell you I don't think the company was ever in agreement of the covenants that we had in our loan agreement, did we?

George, this is John. The violations were technical violations in terms of financial covenants that one achieved. We were in violation over several periods in the past and this was in the third quarter and feeling with the EBITDA targets and fix charge ratio, but it's all related to the plans that have been set forth when the loan agreement was set in place.

We are working through these, George.

Okay, so, there is nothing -- you don't seem too concerned over this issue and you're -- you'll be able to give me some kind of agreement, you know, by the end of the quarter or sooner?

We have made very good progress in the discussions with the bank and I feel confident in this area.

Okay, I wonder if you could -- you did mention the expense issues there a bit, but I wonder if you could just review again, I know you did this on the last call, I think I asked the same question, but you know you had those -- the most dramatic reductions have been in selling and marketing, I wonder if you could just go through again what are the elements there that have caused the dramatic reduction there and then you do mention you're revamping up a bit and just if you could go in a little more detail about what are areas where you want to be soft in terms of increasing business.

George from a selling to marketing perspective. If you look at the quarter - fourth quarter we see that the expenses are down 8.4m. There are two large components that make that up. The first part is that last year there was a significant amount of international bad debt charges that were taken associated with our French Belgium subsidy or distributors that were -

One of the considerations. Just like everything else.

Right. Okay. And to talk more detail what you mention the increase in the brand awareness and increasing some expenses there. Could you give a little more detail about what you are going to be doing there and may be some number in terms of type of increase we are looking at. I am kind of guessing - I guess it would be if that a million or two in the quarter?

Well, it won't be that much in a quarter. We are trying to be diligent. We don't have all of the money that some of our competitors have. But we do want to increase our recognition in the market place. I prefer if I can ask it. I don't do this often George, but I prefer to be able to comment on this in the next earnings call because there are some things that repeat up. I just rather not talk about a little bit perspective rather than retrospective.

Okay.

And George the - I think, then if you look inside the largest piece of the change from sequentially from Q4 in to Q1, would be the fact that from Q4 we took back about a million dollars in terms of bonus reductions, bonus accrual reductions. That doesn't occur in the following, in the sequential quarter, in first quarter of this year.

I don't want to get any body to feel, I mean, I feel good about the progress we have made. But this is still a tight economy. Things are tough. And research advisor, in particular is in tough space. I feel good about our position. To be frank, I have said this to a number of people. You may on the phone think I am crazy but I don't really want to see the economy improved dramatically because at least for the next quarter or two because I think in the tough time customers really scrutinize their purchasing decisions much more and when they scrutinize the reasons why they are selecting their research advisory firm, I think our value proposition comes out higher. That's why we are seeing customers who had been competitors not come to Meta a lot of times because of they are looking for more value, not because its a pricing issue but it's a value statement and so we are working this difference hard and aggressively in a tough market, which is the reason why we are making - make any investments that we want to and why we are not forecasting huge growth in earnings because this is the time for us. I believe to make the investments in the infrastructure, to make the investments in the company, to really differentiate and help us grow and execute effectively.

Alfred, what is the real areas because when you do mention integration but what are the problems is that you get buzzwords in this business and all of a sudden everybody says they are in the integration business. So, what are the real features that the customers are looking for and that you can provide that -- just so we can get a better feel, a little more specifically what -- integration is sometimes a very general term, and like I say, everybody says it, but -- ?

That's not integration, George. It is a big question. And so, let me just touch it. I know, I will develop it more and more on each earnings call. The whole notion is that research and advisory services as an industry had been previously looked at as, a kind of an insurance policy. A lot of customers would have relationships with Gartner then have relationships with META as well with Giga or Forrester and they would go out and they would get the opinions on multiple different analysts and different companies and try to get a sense as to what's going on and it is found that they draw their conclusions about what are the things they want to go.

Fundamentally, that's changing and it is changing for two reasons, George. Number one is the economics. The companies just don't have the wherewithal anymore to spend money on multiple different advisory services companies. The second thing is, it is not an insurance policy anymore. Companies are struggling to derive the right strategies to help them transform their business and continue to react to downward pressure in their own budgets and I believe that what they are looking for is a relationship with a company that can really help them to be much more dynamic, that can put the content or IP in the context of the customer, which is why, I believe, our customer interactions are so important. Why we are not reducing the analysts to really drive a very important value proposition, we have weekend work with our customer and be close to advising them, not just providing a view of a vendor, but advising them on their strategies, on the approaches to transforming their business, on enterprise architecture, on portfolio management, on the whole executive management program of CIO function. That's why 800 people who graduated from the CIO Boot Camps. That intimate relationship is what they are looking for, which has more meaning for them and has more value for them and that's what we do. We are creating a capability inside of META group to not only respond to that but to define to drive that value proposition. That's what I mean by value.

Okay.

Thanks, George.

Thanks, Fred.

Our next question comes from Rob Goldmeyer with Hypen Capitals. Please go ahead.

Hello, Rob.

Hi. Thanks a lot. The kind of a question is you've talked around a little bit that just trying to chunk this revenue opportunity. Do you see, obviously you need to do [Inaudible] which it seems like just looking at the numbers that you've done a pretty good job at. But then trying to grow the business, it seems like you could give some more services to existing customers, people who look at one aspect to the IT environment. Now, they've got to look at other aspects and you come in. I don't think this is true, but maybe the ability to actually raise the price for some people and take that revenue away? Where do you see more opportunity and how would you still characterize the potential of these prices?

I don't think that we can raise prices quite in this economy. So, leave the other two that says, can I continue to penetrate deeper into existing customers? Yes. The answer to that is absolutely I believe we can and in fact we are and we are seeing increasing engagements with customers where they are deepening their spend with META group and we are helping them from a research perspective, but then having them buying fusions and having them help us drive, adaptive infrastructure, we have been doing a lot of benchmarking. Benchmarking is a very strong part of our business and so we continue to drive increased penetration and increased business with our existing customers. But as I said in my comments, we are also seeing that this is very much acquiring new customers. Now, if you think the research business is somewhat of a saturated business which you should assume. Then, it's an opportunity for us to - look I don't buy that you use market share as away of saying that even if revenues are down year to year that my growth in market share is really good. I don't subscribe to that. I really wanted to have absolute growth in terms of what we are trying to do in our business. But, you know we've got here a roughly 70% market share and $900m and META group now at $116m. Actually, that creates a pretty good opportunity for us to do some things.

Just that real quickly. Do you have a--- let met ask two question. The quick question is do you have a current program a giga-takeaway program, kind of Oracle has done this a lot where they have come out with these? Yet often, the format is gone, by our database now. They got the conversion, the great conversion project. And secondly, if you look at how you would expand, do you feel that are you in any way capacity constraint? And I realize the other side that's sort of do you have any place you can cut back if you don't grow? Did you see that you need to add either in the service, cost if it is to grow or the sales cost? One of those, each of those we've talked about tends to weigh one more than the other, I would think given the META model of the analyst-client ratio and all that?

Yeah. There's two aspects to that Rob. Your first question was, Yes we did put formal programs in place not only for Giga but actually for Gartner. Those programs have been in place during the heavy renewal seasons that started last quarter and then more recently with Giga as part of their merger announcements, so yes we did. Look, we're labor-based business, so the notion that if I am going to increase revenue I must increase capacity is absolutely true. The challenge for management is to make those investments commence with the ability to see results not be so far ahead of the curve that we go build ahead a lot of capacity with just an expectation, so going to be on a common and it will develop. So, this is the management challenge this is ours, this what John and I and the rest of the executive team spend a lot of time doing make sure that we got the right capacity, but before we built capacity we see, we see growth and that's kind of the discipline we're trying to create in the company.

What do you think you would need to favor, given going forward in terms of which would, over the year, let's say that there was some growth in the business, where do you think we would see the pick up and commence were to expense, to feel, give more constraints on the research component or on the sales component?

You got to break up, that's actually three. You got sales, research, and consulting. Consulting is very much a labor-based model that it doesn't drive both over retained services, so we have reasonably good ability to see the growth in that business and how we need to add capacity commence what with, what we're driving in terms of business. The research side is actually reasonably comfortable. We got great people - - we got great people in the entire company and have been really impressed with the groups. We have great analysts and our ability to leverage the analyst to meet our customer's demands right now is, I feel very comfortable with that. Everybody is working hard granted, but I feel good about that. We have changed our sales organization, we have moved some people around and so that's area that actually we've had more focus on right now just from a people and account management prospective than anything else.

Okay, thanks.

You're welcome.

Our next question comes from Kyle Klusner with Apollo Micro Cap partners. Please go ahead.

Nice quarter, congratulations. I now got kind of a couple high level question for you Fred. As you look down the road, you know, Ken over the intermediate term and, with all of the necessary carry off associated with that, but as you put your strategy into place, what are the attainable margins as you see it from where you're sitting now?

How do you define intermediate?

Over the next two to four years.

Okay.

Operating margin attainment.

Okay. Yeah, look, overall, I am glad that you put that in intermediate. If you would have framed intermediate in terms of the next quarter or so, I don't see it and to be frank, my view is that we are going to make the investments in the Company this year in 2003 in order to position us better in the longer term. So, a different parts of our business, we had like a 50% margin in consulting or service, you know, the operating income-, where we see a normal operating income that would be reflective after we make the investments of managing the business, be roughly in that ball park.

So, between 5?

Yeah.

Okay. Fair enough. And since you have gotten there now you have had a chance to explore the depths of the organization, I mean, what surprises have you found, if any, both positive and or negative?

Actually run out of time, didn't we--

Yes, it's a good question and has to sit back and reflect. What have I found, what surprises? Let me just right off the top of my head, I didn't think about this and obviously I don't have it scripted. The top of my head what I have really didn't please with is, I said it early, we got some great people, I will tell you all of the interactions I have, with not only the analysts but with our consultants and our internal team have been topnotch. So, I feel really good. These areas that always require improvement as you would expect have changed individuals here and there, making sure that as we focus on execution, execution for me is all about accountability and holding people to deliver on results and where people can't deliver on results, then we manage amount. But generally I feel positive about the talent. Secondly, what I really feel god about is the management team. Lot of the changes we are making in research and consulting and other areas, I mean, this is-, this is not me just driving it uniformly. I am, kind of, opening up and leading an opportunity but the management team has really done a great job, driving change, transforming and bringing the whole team along.

I will tell you that the morale I believed is very good, probably the best that it's been in the Company for couple of years. One of the things I will share with you just about my philosophy is, you know, we cancelled the Christmas party last year, I did a lot of things I cancelled the business class travel for everybody, I have put the clamps and kabashs on a lot of things. Some people may be think I am a little bit of a pain, but on the other hand people have been supportive of managing down to the right expense level, not withstanding our economic costs, next week, we are bringing, probably 70% or more of the company into Stanford here for a meeting because I want them all at one point in time to hear what 2003 is all about, what our program is, what we got to do, where we are driving the company, how consulting and research are working together, what sales and research need to do. It is a weeks' worth of meetings to train and develop our team. How our sales guys are going to be moving more from product to consultative sales approaches, the whole account management process for us so that we don't take six months to roll this out over the course of the year. We execute right away and people leave at the end of next week and we all know what we need to do and can do it quickly and effectively.

On a downside, there is something that the company did in the past that position us differently that, you know, we are working our way out of. We didn't invest a lot in the infrastructure and my kudos to the finance team. You look at the numbers of what this team did in terms of cleaning up our days outstanding and the accounts receivable. It is Herculean effort to get a lot of stuff with -- not a lot of management and systems tools. So, you know, the disappointments are that we got to go in and put a lot more into our infrastructure and our capability so that we can execute more effectively and put ourselves in the platform that makes it better for us, you know, as we go forward that will make it easier for us to accommodate the growth rather than have cracks in our system. We move into Seeble . We have a lotus notes data base contract system that we are using now. We got to get off the lotus notes and then into Seeble . We are doing that in March 1st. So like the things in that regard on a negative side that we are working on.

And Fred as you move the company or transform the company up the value food chain and you know penetrate deeper into your customers as you talked about earlier, at what point could we expect to see organic growth arise out of that. Deeper penetration within the customer set.

If I told you that now I have be giving you the forecast for what we going to do and I already said that the only forecast I am giving you is for Q1. So there is a lots of things that are hanging in the balance on this. You know, the whole geopolitical situation of the world and what is happening is not the best environment. The economic environment is still tough and right now, I really like to refrain from giving you the forecast on what we are going to grow? What revenue in billings are going to be as we go further out. I got my target set on Q1. We got the team focused on Q1 and I would like to get to that stage right now.

And what matrix are you focused most heavily on or should we focus on to give us an indication that your succeeding with sort of the move up the value chain?

Revenue and earnings.

Yeah, okay.

That is what I would think.

My mind is, look let's get back to fundamentals. This is not a market share gain. One of the problems in the dot.com arenas you counted all the more customers in the customer market share, as a way of determining what the value for the company was. The fact of the matter is, while you had market share, there was no value to the customers. So, the whole thing was you got to create value to customers, the only reason we are in business is to create value for our customers and if we do it right that value will come back to us in terms of increase in earnings.

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 will need to lift the handset before pressing the numbers.

Operator, I will assume that since it's five after six. The questioning has been excellent, it gave management an opportunity to not only to respond to the investors' questions and insights, but I think it was an opportunity to further describe some of the things that were important to us and actions that we are taking. So, we got a lot work to do, we got lots of things that we have to focus on for the quarter. January is behind us, we are almost half way through February, and as I have said jokingly, but not jokingly to my entire team, this quarter is the most important quarter in the company's history. I happen to say that every quarter and every quarter it's true. So, we will talk to you at the end of next quarter and talk about what we were able to do in Q1. Thanks all for your time and most importantly thanks for your confidence in the company and investing in it. Thank you.

Ladies and gentlemen, this concludes the META Group fourth quarter of 2002 conference call. If you would like to listen to a replay of today's conference call, you may dial 303-590-3000 or you may dial 1800-405-2236 and enter the access number of 525641. Once again, if you would like to listen a replay of today's conference call, you may dial 303-590-3000 or you may dial 1800-405-2236 and enter the access number of 525641. Thank you for participating, you may now disconnect.