高德納諮詢公司 (IT) 2003 Q2 法說會逐字稿

Good evening, ladies and gentlemen. And welcome to the Meta Group second quarter conference call. At this time all participants in 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 a 0 for an operator. As a reminder this conference is being recorded today, Thursday, August 7, 2003. I would now like to turn the conference over to Mr. Peter Ward, Director of public relations. Please go ahead, sir.

Thank you, and welcome, everyone to Meta Group's second quarter earnings conference call and with me today from Meta Group's management team is Fred Amoroso, Chief Executive Officer and John Piontkowski, Chief Financial Officer. Before we get started I would 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 expected third quarter 2003 results of operations, effects of changes within the company's organization, and strategic initiatives for the company. These statements are neither promises nor guarantees but involves risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. Including without limitation, risks relating to changes in the spending patterns of the company's target clients, including but not limited to decreases in I.T. spending or decreases in demand for the company's products and services. General economic conditions, changes in the market demand for I.T.. research and analysis, and competitive conditions in the industry. The inability of the company to increase its penetration of existing customers, and/or to expand to additional customers. The timing and successful execution of the company's strategic initiatives including timely and successful product and service development and introduction, and other 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, 2002. And with that, I will now turn the call over to Fred Amoroso.

Thanks, Peter. Appreciate it. And welcome to all of you who've joined us for Meta Group's second quarter 2003 earnings call. I will start today with a brief introduction as I have in the past to the quarter and highlight some of the significant accomplishments and John Piontkowski will review our financials in more depth. I will then provide a more detailed update on some of the important initiatives that we have under way and open the call for Q&A. Financial revenue was in line with our expectations with $30.1 million in the second quarter of 2003, compared to our Q2 2002 revenues of approximately $30.7 million, and up sequentially from $28.2 million in the first quarter of 2003. I am unhappy, however, that we reported a net loss of $1.5 million this quarter compared to net in come of $169,000 in Q2, 2002.

I think it is very important to understand two of the major reasons for the loss. A, the increased amount of incentives we accrued, and B, the addition of up front granting and advertising expenses in the second quarter, both of which I will discuss later in the call. Our net cash position wat $20.5 million in the quarter down from $25.7 million in the first quarter of2003, due to seasonal billing cycles and to a lesser extent from the investment in our advertising and branding campaign. However it is worth noting that the net cash position saw significant improvement from $13.5 million in the year ago period. We are pleased to see some positive momentum in strategic consulting and research publications in the quarter. Up 4% and 12% year over year respectively. Sequentially, we saw a 5% increase in research and advisory services, and a 17% gain in strategic consulting. As many of you know, some revenue improvement from Q1 to Q2 is normal in the industry. I would also like to point out that for the first half of 2003, we saw a slight overall revenue decline of less than 3%. While I'm never satisfied with any revenue decline I think it is important to view this in the context of the rest of the industry.

We're pleased that this marks the fourth consecutive quarter where we have shown an improvement in gaining market share. We've increased market share from 9.5% to 10.8% in that period which is approximately a 14% improvement overall. I would also like to point to the stabilization we're seeing in overall contract value. Again, we're by no means satisfied with keeping contract values flat, but the fact that it has fluctuated by less than one percent sequentially and less than 2% year over year is something we view very positively in relation to the rest of the industry. And lastly, we're seeing some improvement in renewal rates which is not the case for many of our major competitors. We were particularly pleased to see that we've retained 19 out of our 20 largest accounts over the past year. Having said that, I don't expect that we will begin reporting on contract value and renewals going forward but I felt it was particularly relevant in this quarter.

As stated our overall operating results were below our expectations as I pointed out above however we are pleased with our progress in the quarter particularly given the continued tough industry environment. As I stated throughout the year 2003 is a year to make strategic investments which we believe will be critical in positioning Meta Group for the long term success. And help us to differentiate ourselves in the market. We are pleased at the overall developments we achieved in this area. I will provide more detail in these developments later in the call. But now I would like to turn the call over to John and discuss the financial results in more detail. John?

Thanks, Fred. As Fred mentioned earlier the total revenues for the second quarter were $30.1 million. Down 2% from $30.7 million in the year ago period. The second quarter net loss was $1.5 million or 11 cents per fully diluted share as compared with the second quarter of 2002 net income of $169,000, or 1 cent per fully diluted share. Research and advisory services revenue was $19.3 million, down 5% from the year ago periods, $20.4 million. The decrease from a year ago was largely attributable to overall economic conditions, which have impacted our retainer service billings. Additionally, the company has experienced a decrease in its guru consulting which generally is half day briefings with the company's analysts which compliment the deliverables underlying the company's advisory services.

The decrease in advisory services revenue was partially offset by an increase in conference revenues as a result of the company's securing additional vendor sponsorships at our conferences. Conferences -- conference revenues for the quarter were positively impacted with $600,000 dollars in vendor sponsorships versus approximately $400,000 dollars a year ago. At June 30, contract value was approximately $67.9 million, down less than 1% sequentially, from $68.7 million at the end of the first quarter and down less than 2% from $69.6 million a year ago. Strategic consulting revenue was $8.7 million, up 4% from the second quarter of last year. This increase came primarily from our remedia consulting practice partially offset by a decrease in the Americas region. Published research revenue was $1.4 million. Compared with $1.2 million in the prior year. Total operating expenses were $31.8 million. Compared with $30.1 million in the prior year. Our cost of services and fulfillment was $16.3 million a 5.4% increase from a year ago. This increase was largely attributable to the provision for the 2003 employee incentives recorded during the quarter. And to a lesser extent higher salary costs. These costs increases were partially offset by a reduction in outside consultanting fees during the quarter as compared with the prior year. As a consequence, gross margin was 46% as compared to 50% a year ago.

Selling and marketing expenses were $8.5 million, an increase of $1.2 million. The majority of the increase relates to additional costs related to the company's marketing and branding campaign, launched in March, 2003. Furthermore, there were increased personnel costs in particular increased salary and commission expenses compared to the previous year. G&A expenses for the second quarter were $5.7 million. An increase of $1.3 million from a year ago. Largely a result of the higher domestic personnel costs. Combined with increased G&A costs internationally, as we added additional management to personnel within the international operations. Additionally, there were incremental costs associated with the establishment of entities through the Asia Pacific region which includes Korea, Hong Kong and the Philippines. And also during the second quarter, of 2003, the company recorded a 300,000 dollar provision for vacant space on its Stanford, Connecticut and German facilities leases.

Turning to other income and expense line, the second quarter's results includes a $300,000 gain from the sale of one of the company's investments, where as the prior year's amount reflects interest expense related to the company's then outstanding borrowings. I will now provide some comments on the balance sheet and cash flows. Our net cash position, defined as cash on hand plus restricted cash, less outstanding bank debt and notes payable, was $20.5 million, as of June 30, compared with $13.5 million a year ago, a $7 million dollar improvement. Sequentially, net cash decreased $5.2 million from the first quarter, reflecting the general seasonality of the company's billings and cash collections. And to a lesser extent cash payments made during the second quarter relateing to the marketing and branding campaign that I mentioned. During the second quarter, the company used $4.5 million in cash in the operations, compared to $500,000 in cash used in operations in the year ago period.

Year over year reduction from cash flow from operations this quarter compared to a year ago, was due to the overall decrease in billings that have occurred over the past 12 months, and to, as mentioned, a lesser extent, the cash payments for the marketing and branding campaign. Total accounts receivable at June 30 was $30.3 million, down 1% from last year. Day sales outstanding improved to 89 days compared with 91 days from the year ago period. After adjusting for those accounts receivable, with future payment terms, related primarily to multiyear contracts, day sales outstanding were 54 days, compared with 57 days both in the prior year, as well as the previous quarter. Deferred revenues have increased 8% from June 30 of 2002, to $46.9 million from $43.3 million. Capital expenditures for the quarter were less than $100,000 dollars. Approximately $50,000 dollars. Let me speak briefly about year to date performance. For the first half, the company reported a net loss before the cumulative effect of the change in the accounting principle of $1.4 million or 11 cents per fully diluted share on total revenues of $58.2 million. This compares with a net loss before the cumulative effect of $1.2 million or 9 cents per fully diluted share for last year.

Research and advisory services revenues were $37.7 million. A decline of 3.5%. Strategic consulting revenues were $16.2 million. And declined 1% from the previous year. While published research revenues of $3.2 million essentially were flat with the year ago period. And gross margin declined 1 basis point from 48% to 47%. Total operating expenses for the first half were $60.2 million. An improved a slight improvement from $60.4 million in the year ago period. The change in the year to date operating expenses over the prior year is attributable to the provisions and employee incentives made in the second quarter of 2003, as well as charges relating to our marketing and branding campaign. While I will point out that the prior year numbers including the $1.5 million dollar goodwill impairment charge taken a year ago. Other income represents the gains recognized upon the liquidation and sale of two of the company's investments during the first half.

Let's look ahead briefly to the third quarter. We currently expect total revenues to be between $28 and $29 million. Which is a 5% sequential decline that reflects typical seasonality. But is 5% ahead of our third quarter 2002 revenues. We expect an operating loss of less than $500,000 dollars, which shows significant sequential improvement through better cost management. I will now turn the call back over to Fred. Fred?

Thanks, John. I will take a moment to comment on the results John outlined and activities in the quarter and then I would like to discuss some of the specific initiatives we're taking and show examples of the traction that we are continuing to gain in the marketplace. As we pointed out, we did show a net loss in the second quarter which of course we're disappointed with. However I stated earlier that two of the major reasons for the loss were due to increase in incentive accruals and costs associated with our planned brand name advertising campaign. For the incentive accrual, the increase was essentially a result of a methodology change for accruing the incentives and due to this change we will accrue a lesser amount than otherwise would have been occurred or planned in the third and fourth quarter this year. So in essence we accelerated it. . And the difference of our loss this quarter, from the expectation is largely attributed to this change in methodology.

The other major reason for the loss in quarter was due to the increase in operating expenses for planned advertising and branding campaign that we launched in March of 2003. While the campaign continues through this year, and beyond, incurred a number of upfront costs associated with getting the campaign off the ground. I would like to take a moment to reiterate the importance of the campaign to the company, as well as to our long term success. The advertising and branding campaign with a theme on return on intelligence is built around three simple concepts. That Meta Group delivers the highest value research and guidance, second that Meta Group is truly an objective third party advisor and third, that Meta Group provides the best customer service in the industry. While we consciously decided not to spend money on measuring the effect of the campaign, we have numerous antecdotal indications in the marketplace that the campaign is having the desired effect.

We strongly believe that as companies experience Meta services they get to experience the difference in value that we provide from others in the industry. And improving our brand awareness is a key component for them to experience that difference. I would like to update everyone on our progress positioning Meta Group to better compete and win in today's marketplace. Specifically I will address some additional key areas which we're focusing. The first is our high value I.T. research and advisory services. As I have been saying over the last few quarters the key to our future success will be our ability to continue to create and drive a compelling differential value proposition to our clients and our research and advisory services is an absolutely critical part to this. More and more, clients are looking to Meta Group for its ability to provide a unique value proposition to help them more efficiently and effectively deploy technology to achieve their overall business objectives. Our focus on research is reinforced by the fact that Meta Group has one of the highest percentages of revenues from research and advisory services relative to our major competitors, 64% overall.

And in addition, we continue to see that more than 70% of our revenues are from end user customers, and slightly less than 30% from the vendors. Talking to our clients at the May's sold out metamorphosis plus conference in Chicago I was extremely pleased to hear such positive feedback about the quality of our research and the value our clients get from interactions with Meta analysts, in fact the post conference survey of attendees, showed that among other things attendees placed great value on one on one meetings with our analysts and the content provided is more actionable and pragmatic enableing them to make better I.T. decisions. Our ability to sell out an event of this size in the current market environment clearly shows that our mission of bringing objectivity, intimacy, and actual research and guidance is striking a cord with business and I.T. leaders. Further the composition of this conference is composed of 20% of the attendees, CIOs and 40% of the attendees, CIO, or their direct reports.

A major difference from others in the industry. The next area I would like to discuss is our I.T. vendor offerings where we continue to see traction in the second quarter. Our vendor customers understand the need to begin investing in their go to market strategies as well as market positioning. Particularly given that the key influences for purchasing their products and services is shifting, shifting within the I.T. organization, as well as moving outside the I.T. organization into other lines of business and business management. Meta Group's I.T. vendor consulting practice has a major unique offering to address these issues. And while the I.T. industry is under pressure, nevertheless, we are experiencing an increase of up to 47% year over year in this part of our business.

I would like to now discuss some important wins we secured in the second quarter in the first half of the year. We successfully grew a number of existing advisory services relationships and scored some major wins with brand new clients as well. For example we secured renewals with the large professional sports association the NBA as well as global chemical manufacturing company, international flavors and fragrances, both in the face of stiff budget cuts. We also won a new account with a major investment bank in the second quarter, bear sterns, beating out several competitors to do so. We also gained traction in our benchmark data services, closing several important, significant service deals in the second quarter. And we've seen several successful consulting wins in addition, first half of the year, with a number of global organizations, including United Airlines, PWC audit, Merrill Lynch, Abbot labs, just to name a few. These are just a few of the examples to show there are still opportunities and funding for major products that demonstrate real business value to organizations in a marketplace where budget cuts are under continued scrutiny, these important research and consulting wins further demonstrate Meta Group's strong value proposition to its customers. As I stated earlier, revenues for the first half of this year are only down about 2% $58.2 million versus $59.6 million compared to the first half of 2002 which is significantly better than our major competitors results. This is not surprising given the strong renewal rate in our top tier clients and the major wins we achieved to date.

In June, we acquired our distributor in Italy and although this had no impact on the second quarter earnings, we expect it to show in the third quarter. We announced our intention to acquire a distributors in the U.K. and northern Europe and should complete those as planned. These investments will now give us substantially control over -- substantially over all of our operations in Europe and we believe will enhance our customer experience. We are continuing to shift, to see a shift in the revenue mix toward larger representation of international revenues. As we continue to acquire international distributors we expect this mix to continue to evolve. This has been part of our strategy since I came on board as we recognize the importance of expanding Meta Group's footprint around the globe and our customer's need for uniformity from their I.T. research partner. Overall, we are pleased with our growth and progress within our international operations.

Having realigned our technology research services in the first quarter, to promote a higher level of collaboration, among both our research and consulting units, we also continue to strengthen our senior management team in the second quarter, with two key additions. First, Phil Ash was brought on as senior vice president of global marketing. Under the marketing leadership of Phil we expect to further build our Meta Group coporate brand and channel development strategy. Second we also hired Hank Statuswait as senior vice president of global consulting. Hank has an extensive background in building successful consulting organizations. And together with Mike Peterson, managing director of the Americas consulting, he will help achieve even more synergies among research, consulting and benchmarking. The critical components to Meta Group's higher value solutions.

Additionally, I will soon be announceing our new senior VP of global sales in a few week, this transition has afforded me an opportunity to take over sales for a few weeks, and see the opportunity firsthand regarding our sales operations and gain insight into the perspective and value that we are bringing to our customers. I am pleased we see an increase in market share as well as an increase in sales activity, we will continue to balance costs against our investments, as a result our goal would be to improve our operating results over the next two quarters. I want to spend a moment to talk about the I.T. industry outlook overall since it is an important concern with many of you. So far, you've heard me discuss the importance of investing in strategic initiatives in a down economy. Both for our customers as well as ourselves. In light of the varying I.T. market forecast you may have heard from recently I would like to spend a few minutes updating you on Meta Group's latest research in I.T. spending. Basically our research does not show, does not show any recovery in I.T. spending at least for the near term. In fact, our recent spending survey data shows that I.T. spending across 21 different sectors has reached a 12-month low. We see I.T. spending as a percent of revenue at just about 3%.

We also found that approximately 40% of companies we surveyed expect to keep their I.T. spending flat this year, and roughly 30% expect to reduce their spending so I'm not sure that there are truly any signs of a turn around for the near term. Having said that, I think it is important to understand the impact this is having on many large enterprises. And I.T. vendor organizations. In some organizations, the short answer is there is nothing left to cut. I.T. cost reductions have hit the wall and our latest numbers show that more than 66% of I.T. budgets have already focused principally on running the business, and running I.T. activities.

For many of these organizations, this is strongly impacting their operating expenses, and their overall productivity. We continue to warn companies you cannot cut your way to prosperity, that you must continue to invest in strategic growth business activities if you want to ensure long term success. Yet for those companys who haven't yet achieved the efficiency of operations necessary, we have major projects continueing and opportunities developing to help them reduce expenses and drive value from their existing I.T. investments. The good news is that our message is resonating well with our customers in the marketplace as we pointed out today. We look forward to updating you on our progress in the quarters to come. With that I'd like to turn the call over to the operator to open if up for q-and-a.

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 push button phone. If you would like to decline from the polling process, please press the star followed by the two. You will hear a three-tone prompt acknowledging your selection and your questions will be polled in the order in which they are received. If are you using a speaker equipment, you will need to lift the hand set before pressing the numbers. One moment, please, for our first question. Rob Fullomyer with RWC research, please go ahead.

Hello, Rob.

Good morning, guys-- good afternoon, guys. Just a couple of quick questions, I do have a follow-up, on the first thing is, looking at the services, retainer-based services it looks like you're not taking share, but you are kind of holding -- holding the share against your biggest competitors. I wonder if you think I have that correct and do you have any plans or do you see any possibility of that showing any growth in the near future?

Well, one of the things that we haven't done is -- and I will go through this explicitly, we haven't gone through and we don't report on billings overall but I will tell you that actually billings overall is up over a year over year basis on research advisory services. There is a component of research advisory that is actually what we term inside of Meta, group consulting, which is actually individual analysts consulting. That is the only part of the business that actually appears to be down on a -- on a year over year basis. Both in revenue and in billing. So we're actually seeing deeper customer relationships. Now, in the I.T. vendor side, on the guru consulting, analyst consulting, traditionally, that has been something very much driven toward the vendor community, vendors would engage analysts on strategic positioning et cetera, et cetera, strategies, product developments, and one of the interesting parts is that seems to be changing and there is more end users actually engaging in the analyst consulting to help them with the operations. So on a long-term subscription research basis we're actually pretty comfortable, we got one segment that we're really focusing on which is how do we get our analyst consulting up.

Fred, that leads to the second question. Which will give me a third one, unfortunately. [ Laughter ] The second question is, you've made a lot of major -- pretty impressive and a lot of good hires in the consulting organization. Do you -- does this reflect some increased interest? I know you -- I know they're both your two favorite children. I hate to give you a salomesque question. But do you see this -- this means more of a push? Do you think there is a bigger opportunity in consulting versus the retainer based?

Rob I tell you that is a great question. You are a wonderful straight man. So let me, if you will, let me stake take that and run with it a little bit. Look, I know I have a consulting background and I know our competitors are out there saying well Metas a consulting company, et cetera, and one of the reasons to be Frank that I said early on in my opening remarks, was that 64% of our services, our revenue overall, is research services revenue. As a matter of fact, it is much larger, a component of our business, than our major competitors' business. My belief is it will stay a very major part of our business. Now, let me speak to international. You've seen international grow, it's growing as a percentage of our overall revenue, matter of fact, it is about 30%-32% this quarter. Now, the international, because of the way it was established and distributed, et cetera, had a natural tendency to have more consulting than research as a mix of their business, as they operated as distributors. What we're actually seeing is after we take these entities over from the -- from being a distributor now being run as a wholly owned subsidiary a part of Meta is that the research service component of their business is growing even faster than consulting in those areas. So we're actually -- I'm actually very pleased that as we bring these units and these entities on board, we're seeing a very, very strong shift in the way the business is going, they're still driving consulting, don't get me wrong, but we're actually leveraging more from consulting into research.

So at the core, we are a research company. And we will always be a research company. Because it is the research, it is the content that gives us the ability to leverage and deepen the penetration of relationships that we have with our customers to be a trusted advisor in all of the decisions that they make -- that they may have. And then what we've done is we've actually linked consulting, and I think we're the only ones that have done this. We have linked consulting offerings directly with all of our research service areas, so that as -- as a customer wants to take from a research content discussion, into perhaps a workshop or an assessment on where they are relative to a best practice, in a particular area, whether you talk about infrastructure, or operational excellence, or security, we can then go from research to a workshop to an assessment, to consulting, seamlessly in front of the customer all leveraging the same practice aids, approaches and methodologys. It's one of the core foundations of our value proposition.

Okay. So --

Sorry for going on but it was an important point.

Okay. Thanks. This next question is a little bit tougher, maybe, but it is -- it come to me and I just wanted to bounce it off you. And you know, in an FD regulated forum here. There has been some story floating around that the relationship between Meta Group and First Albany is -- how shall I put it? Changing. Is there anything to that? A and what would be the impacts to your financials if there is such a change in the wind?

That's a great question. And I will tell you, you know, in a public forum it is just -- we don't comment on specific customer engagements so I'm just not going to get into that. I've been talking, George McNamee is on our board, we've been talking with First Albany about the value of the relationship and how we bring value to them but that's about all I am going to say.

Okay. That's it for me.

Okay. Thank you.

Our next question comes from Mike Narey with with Narey asset management.

Hello, Mike, how are you?

Hi, good. Couple questions. In your third quarter outlook, you think revenues will be up 5% year over year. How much of that is from the consolidation of the European distributorships and what would it be without those?

it is zero, actually. And I shouldn't say that, Italy. But Italy is the minimast, isn't it?

Yeah there's nothing of any substance that is from the acquisitions built into it, Mike.

Okay. So that's 5% core growth. And I think Gardner projected down 9% and Forester, if you include gig; down 16 so it does seem like you're taking share and you think that is primarily due to the fact that you're more practically oriented basically you have a better value proposition?

Well, it is -- yes, it is the latter of what you said. I basically believe that we have a better value proposition, our customers are telling us we have a better value proposition, you know, look, when I came into the company, one of the observations I made is that we had great quality, we had great value, one of the big components, and problems we had was that nobody knew who Meta was. I shouldn't say nobody. We weren't as well known as we needed to be in the marketplace. So it is really looking at putting a whole approach towards turning around our business and our position in the industry. That's why even in the face of a difficult economy, my belief is investing in marketing and advertising and general corporate brand development and awareness will give us greater visibility as companies make tough decisions on who they want to partner with for their -- their research and advisory services. And then fundamentally, what we have seen, and it's an important consideration, Mike, is that when customers do experience Meta, invariably, they feel and can see the difference in the value that we bring to them. And so we've got to get customers to experience us more. That's the big thing that we're driving to. And if they do, they will become long-term clients.

Well that will be nice if you start growing while the industry is still declining.

It is my goal.

And in terms of the cost, it seems like quarter to quarter, there is a lot of variability, in terms of the costs. So third quarter versus second quarter costs will be down somewhere in the order of a $1 million bucks. Is that right?

Yeah, now remember, I said that this change in incentive accrual, basically comprised most of the change in the -- in the loss we had from what our expectation was. Now, obviously, taking it in this quarter means that we won't be taking as much of it in Q3 and Q4, depending upon our financial results. And that to some extent is a contributing factor to lower costs in Q3.

Okay. But for the whole year, your overall cost structure is going to be a little higher this year than last primarily because of the branding campaign?

Well, let me address that. It is certainly associated with the branding campaign. But at the same time, I want to be absolutely fair and open with you. I did go out and we created a game plan where while most of our competitors have cut heads significantly over the last year or two, I -- RK head count flat or actually grew it in Q2 in anticipation of a better growing revenue stream. Now, to be frank, I invested a little bit more in the head count than we were able to actually achieve in the revenue which attributed to some of the costs as well, but I was making that bet. I do believe, and I said in multiple earnings calls, don't look for this year, to be at the traditional ebit numbers that this is the year that we need to invest to make sure that we create the differentiation win customers in tough economies, and then drive our success for next year and that's what we're doing.

Okay. And last question, is with regards to -- I had asked you for in the past about options and restricted stock and things like that. You know, some companies, Microsoft, for instance, is moving more towards a restricted stock model. Have you guys looked at that at all? And what are your thoughts in that regard?

It is actually a topic that we have discussed among management. We've discussed amongst the board. We have not made any conclusions or decisions on what we're going to do. We understand that there is a -- what do you call it, John? A pronouncement advisory a PAS-B statement that says by Q4, the ability to take it retrospectively as opposed to prospectively changes so it's something that we're going to be addressing over the last half of the year. We do not know if we will make a change or not.

Okay. Everyone has their own opinion on this. As a shareholder, I prefer restricted stock simply because you typically have to issue fewer shares in order to get your employees to feel like they got something of value.

I got to tell you, you're very consistent in your opinions on this. [ Laughter ]

And if your stock is undervalued like I think yours are it makes sense to issue fewer shares as opposed to more.

I understand your perspective and honestly I can't say that I disagree with you but again it is just something that we haven't as a company really exercised yet. And we know we have to.

Understood. Great, thank you.

We will take your comment into our discussions. Thanks, Mike.

Our next question comes from Richard Boone with Falron capital.

Hello, rich, how are you?

Good, how are you doing?

Great.

Couple of questions first, just housekeeping, what was the renewal rate in the quarter?

We actually don't release the renewal rates but since we want to give you some clarity to that. What is the number? I can't read it?

65%.

65%. It is actually up a couple of points quarter to quarter.

Okay. Great. And then a couple of questions about the competitive situation. How much of your use sales are billings, is coming from taking business away from competitors? Versus business from clients who don't have a pre-existing relationship or business from existing clients?

Well, that is a great statement. I will tell you that you will hear occasionally that the customer who in the greatest downsizing that has gone on in I.T. over the last three years, as a matter of fact there was one large customer I won't mention the name, this quarter, who just, you know, they completely eliminated all of their I.T. research providers over the last -- a year ago, actually. So this is 2003, so in 2000 -- early 2002, they canceled all of their contracts and they went naked for a year. And they came back and resigned up with meta and we were the only ones that they signed up with. So I don't know. How do you count that? Is it a customer win back or a new customer? So you get some of those. In almost every case, honestly, it is a competitive situation. This isn't an industry that I believe is -- has got a tremendous number of companys who have absolutely no research and advisory space and that's why I think it is an important consideration for us to show higher value, against the competition, because that's what customers are looking for.

Given the competitiveness, how important is price right now to customers? And generally, what is happening to pricing in the industry?

Good question. Pricing varies by type of customer. So let me describe a couple of the phenomenon that we see. First of all, look, priceing is always important. Right? You can maybe establish some premium over competition on value, but there is always a limit to that, and we recognize that. So we've got to make sure that we can keep our costs in line with our pricing. And make sure that it balances out. We look at customers on an overall basis for interactions, we look at our interactions in our increase which creates a capacity view to our analysts in making sure that we are providing sufficient service to our customers, in acceptable response times to them on the questions that they have, and we believe we have the right number of analysts to support that, so our -- so our interrogations are increased -- are correct. At the same time, we see a lot of customers who aren't just chasing price. They do want value. And the ones that are coming to us are coming to us because of the value of our research.

The improvement in our customer service over what they're experiencing. And the fact that we have more actionable pragmatic advice. Now as a part of that, we are actually seeing a movement away from discrete services and by discrete services I mean customers who only have one or two services that they would buy, an infrastructure service or an enterprise architecture service. And we're seeing more and more customers going towards blended products. And aggregation of services across the entire technology portfolio. That is obviously good for us because it gives us an ability to interact broadly with our customers. The companies that really look at research as content only, or the ones that just want to have read-only research, that is an enormously commoditized business. We have low price points for that, we can compete with those in the marketplace, but to be very frank, that is not our focus point. We added as part of our offering, and as a accommodation to our customers but our real focal point is the higher valued relationships.

What percent of the industry do you think is looking for the higher value add versus the commodity research reports.

I think a very large portion of the industry is looking for the higher value relationships. Certainly the large companies, the global 2000s are absolutely in the camp. While there is much less investment in I.T. in fact, that is what's making some of the commissions that customers have to deal with even more complex. Less money to spend. They have to be more accurate. They have to drive value with limited budget. And it is hard to make those decisions. So they are looking for value. That is not diminishing at all.

Okay so given that, it sounds like pricing is somewhat stabilizing in the industry?

I don't know if I would go that far. You can jump to that conclusion. I wouldn't jump there yet. But I'm comfortable where our priceing is.

Okay great. 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 are using speaker equipment you will need to lift the hand set before pressing numbers. One moment please for our next question. We have a follow-up from Rich Boone with Falron Capital.

Hello, rich.

I guess there is no one else. Two quick questions. One are you seeing any market impact from Forester, are you getting together yet, and then the second, looking into your crystal ball, I think one of your competitors earlier this week agreed that 2003 was going to be weak. But was pretty bullish about '04. Do you have any preliminary thoughts about '04?

We see, you know, look, our horizon, what I commented on, was actually near term. You know, I don't know about 2004. There is -- there is an expectation that it could see a little improvement. Certainly I'm hoping for that. I don't have data, frankly, to give me quantitative assessment that that is in fact the case. Now I'm not saying we don't have it. I just don't have it available to me right now. As you look at the integration of Forester and Giga, you know, we track our market share pretty close and the way we look at the numbers is if you take and combine a Forester revenues and the Giga revenues we see them down about 18% year over year in the quarter. I said in the beginning that, you know, while I respect both firms very, very much, that the integration of these businesses were going to be a challenge. I think George announced that they were combining sales teams a little bit earlier than they thought. And we, you know, we see some challenges. I'm very comfortable in our ability to compete in that environment and against them as a competitor.

Great. Thank you.

Thank you.

Gentlemen, at this time I show we have no further questions. Please continue with any closing remarks you would like to make.

I appreciate everybody joining us for the call. I appreciate the questions, and the interest in the company. And your confidence in the company and in the investment. I do have -- I think we're absolutely exercising on a plan that we put in place. We are continuing to drive our value and our differentiation in the marketplace. We're in this for the long term. We see ourselves growing market share. Which is an important consideration. I recognize immensely that we have to manage our costs, commensurate with our ability to drive revenue and you have my commitment that we will do that and I look forward to getting together with you in the next call. Thank you all.

Ladies and gentlemen, this concludes the Meta Group second quarter conference call. If you would like to listen to a replay of today's conference, you need to dial 800-405-2236. Or 303-590-3000, followed by an access code of 547101. Once again, to listen to a replay of today's conference please dial 800-405-2236. Or 303-590-3000. Followed by an access code of 547101. Thank you for your participation. And you may now disconnect.