高德納諮詢公司 (IT) 2003 Q3 法說會逐字稿

(Audio joined in progress) are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. All forward-looking statements are subject to risks and uncertainties which could cause actual results to differ from the forward-looking statements made during this call, and may affect the Company's prospects in general. For a summary of such risks, please see the Company's periodic reports and other filings with the Securities and Exchange Commission.

And now I would like to welcome you to META Group's third-quarter earnings conference call. And with me from META Group's management team, Fred Amoroso, Chief Executive Officer; and John Riley, who's Vice President and Controller, and who is sitting in today for Chief Financial Officer John Piontkowski. So I'll now turn the call over to Fred.

Thank you, Peter. And welcome to all of you who joined us for META Group's third-quarter 2003 earnings call. I would like to start by introducing John Riley, META Group Controller. John will be sitting in for John Piontkowski, our CFO, who is tending to a family matter and unfortunately, is not able to join us. We wish John and his family well, and we expect to have him back soon.

I'll start today with a brief introduction to the quarter and I'll highlight some significant accomplishments. John Riley will then review our financials in more depth; then I'll come back and provide a more detailed update on some of the important issues that we have underway. We then open up the call for Q&A.

Revenues for the third quarter were 29.3 million, which was slightly higher than the high end of our previous guidance. This compares to a Q3 2002 revenue of approximately 27.2 million and represents a greater than 8 percent improvement -- a good showing, given that the current industry environment is weak, and moreover, of the 8 percent revenue increase, approximately 1.5 percent was due to the effects of our acquisitions, yielding approximately 6.5 percent of organic growth in our core business. We reported a net loss of 1.9 million, which was greater than our previous guidance. A significant portion of this loss was due to one-time charges. Our net cash position was 16.9 million in the quarter, down from 20.5 million in the second quarter of 2003, primarily a result of cash payments of 5.2 million to fund acquisitions of our distributors in the UK and in northern Europe. However, we did generate $1.8 million in positive cash flow from operations. Year-over-year, our net cash position was up from 16 million in the year-ago period.

We were particularly pleased to see continued positive momentum in Strategic Consulting revenue in the quarter, which was up 24 percent over Q3 2002. In addition, Research and Advisory Services held steady despite the economy. Overall, we are pleased with our progress. As I've stated throughout the year, 2003 is a year of strategic investments which we believe is positioning META Group for long-term gains. I'll discuss this in more detail later in my comments. As we have discussed in prior quarters, we undertook a major branding and advertising campaign the first quarter and continued this through the third quarter. We have now successfully acquired the majority of our foreign distributors, and more recently we initiated a sales program called "Experience the Difference."

We continue to experience improvement in our market share versus our two largest competitors, which has now increased for five consecutive quarters, rising nearly 2 percentage point year-to-date from 9.5 percent to 11.4 percent, for a 19 percent gain in market share. I'll discuss a number of these developments later in the call, but right now, I'd like to turn the call over to John Riley to discuss the financial results in more detail.

Thanks, Fred. As Fred stated earlier, today the Company announced a third-quarter net loss of $1.9 million, or 14 cents per fully diluted share, on total revenues of $29.4 million. This compares with a third quarter 2002 net loss of $20.4 million, or $1.56 per fully diluted share, on total revenues of $27.2 million. Total revenues for the third quarter were $29.4 million, up 8 percent from $27.2 million in the year-ago period. For the quarter ended September 30, 2003, International revenues represented approximately 28 percent of total revenues, compared with approximately 25 percent a year ago. Approximately half of this growth is due to organic growth in our International business.

Research and Advisory Services revenue was $18.7 million, essentially flat with the year-ago period's $18.8 million. At September 30, 2003, contract value, which is the aggregate annual value of retainer subscription services contracts in force at a given point in time, without regard to the duration of the contract, was approximately $69.7 million. This is up 2 percent from the $67.9 million at June 30, 2003, and substantially flat with the $69.8 million in the previous year.

Strategic Consulting revenue was $8.8 million, up 24 percent from the third quarter of last year. The increase was largely due to a 29 percent increase in consulting revenues in the Americas, while we experienced 17 percent revenue growth within our other regions. In particular, the increases were in the Company's benchmarking and operations improvement practices.

Published Research revenue was $1.3 million versus $0.5 million in the prior year. You may recall that in the third quarter of 2002, the Company reclassified $525,000 of certain first-half intercompany charges out of Published Research revenue and into cost of services and fulfillment. Excluding the impact of this reclassification, our Publications revenue still increased approximately 27 percent year-over-year. Total operating expenses were 31.3 million, compared with 33.7 million in the prior year. Our cost of services and fulfillment was $16.5 million, a 5.1 percent increase. As previously mentioned, this is exclusive of the third quarter 2002 reclassification.

Additionally, the Company incurred higher personnel costs, primarily salary and related benefits, during the quarter ended September 30, 2003 versus the same period in the previous year. This was primarily the result of an increase in the number of fulfillment personnel to support the growth in Strategic Consulting, and, to a lesser extent, due to $350,000 of incremental expenses associated with the acquisitions during the third quarter. Gross margin as a percentage of total revenues, inclusive of reimbursable expenses, in both revenue and cost of services remained flat at 44 percent in the third quarter versus the same period in the previous year. Selling and marketing expenses were $7.9 million, essentially flat from a year ago.

G&A expenses for the third quarter were $5.8 million, an increase of 6.8 percent from a year ago. The increase relates to approximately $200,000 of incremental expenses from the acquisitions, $150,000 in incremental cost associated with the establishment of new offices in the Asia-Pacific region, $250,000 in higher personnel costs in the Americas, and $200,000 in higher professional fees and taxes. These expense increases were offset by a decrease of approximately $400,000 that we recognized in the quarter resulting from our ongoing efforts to drive efficiencies within our overall G&A expenses. Included in operating expenses in the previous year were goodwill impairment charges of approximately $1.2 million, as well as $2.2 million in provisions for facilities leases. The prior-year income tax provision includes a $12.2 million charge related to the establishment of a valuation allowance for deferred income tax assets, which consist primarily of net operating loss carryforwards.

I'll 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 $16.9 million as of September 30, 2003, compared to $16 million a year ago. The net cash position decreased $3.5 million from June 30, 2003, due principally to $5.2 million in cash spent during the quarter to fund the acquisitions of our distributors in the UK and Northern Europe. The cash outlay for the acquisitions was partially offset by the generation of $1.8 million in cash from operations, compared to $500,000 of cash provided by operations in the year-ago period.

Total accounts receivable at September 30, 2003, was $26.5 million, down 1 percent from last year. Days sales outstanding were 81 days compared with 88 days in the year-ago period. After adjusting for those accounts receivable, with future payment terms related primarily to multiyear contracts, DSOs were 48 days compared with 46 days a year ago. This is a slight improvement from the second quarter of 2003, which was 54 days. While deferred revenues decreased 8 percent sequentially due to normal seasonality and customer renewals, deferred revenues increased 12 percent from September 30, 2002, to $42.9 million from $38.4 million. Capital expenditures for the third quarter of 2003 amounted to $350,000 compared with $114,000 a year ago, due almost exclusively to our investment in new budgeting and planning software.

I will now speak briefly to the year-to-date performance. For the nine months ended September 30, 2003, the Company reported total revenues of $87.6 million, representing a 1 percent increase over the same period last year. The Company reported a loss before the cumulative effect of the change in accounting principle of $3.3 million, or 25 cents per fully diluted share. This compares with a loss before the cumulative effect of the change in accounting principle of $21.5 million, or $1.65 per fully diluted share, for the nine months ended September 30, 2002.

Research and Advisory revenues of $56.4 million declined 2.5 percent from the prior year, due to economic conditions and their impact on our industry. Strategic Consulting revenues of $25 million increased 6.8 percent from the previous year. Published Research revenues were $4.5 million on a year-to-date basis, an increase of 26.6 percent from the previous year. Gross margin, calculated with reimbursable expenses in both revenue and cost of services, declined to 45.7 percent from 46.8 percent. Total operating expenses were $91.5 million, down from $94.1 in the year-ago period. Included in operating expenses for the nine months ended September 30, 2002, are a goodwill impairment charge of $2.6 million and $2.2 million in provisions for losses on certain of the Company's facilities leases. Excluding these two charges, operating expenses for the nine months ended September 30, 2002, were $89.3 million versus $91.5 million in 2003. The increase is due primarily to increased costs throughout our international subsidiaries and costs associated with the Company's marketing and branding campaign. Other income represents the gains recognized upon the liquidation of two of the Company's investments in affiliates. I'll now turn the call back over to Fred.

Thanks, John. As I've stated many times before, META Group at our core is a research company. This notion is underscored by the fact that Research and Advisory Services continues to make up roughly two-thirds of our overall global business. And in the Americas in particular, research represents greater than 70 percent of our total business. This is an important barometer for us, as our strong research foundation is what fuels the other components of our business.

At this point, I'd like to update you on what we're doing in our various geographic regions. As we continue to manage our business across three distinct regions, we will begin providing regional views into our business on our quarterly earnings calls. As we have discussed, we've been actively acquiring our international distributors. In the third quarter, we completed the acquisition of our Northern Europe and UK distributors, which now gives us direct control over substantially all of our operations in Europe. This will serve to enhance our customer experience, give us a larger global footprint and create more uniformity in our service offerings. This has also meant that international revenues are becoming a larger part of our revenue mix -- 28 percent in the third quarter versus 25 percent in the year-ago period. We also showed sequential improvement in our contract value in the quarter, which is a strong indicator that we are increasing our penetration into our existing customer base. We are also pleased to see a slight increase in our renewal rates in the quarter.

I'll start with a discussion of our business in Europe, Middle East and Africa. Overall, we are pleased with our results in EMEA, as we continue to increase revenues year-over-year by 18 percent, 5.1 million versus 4.3 million last year. We did see increases in operating expenses in EMEA as well, which was expected, as we create more regional management and infrastructure. The EMEA results also reflect the consolidation of all operating expenses for those newly-acquired subsidiaries that we consolidated in the third quarter -- in other words, excluding Northern Europe, while reporting only a percentage of their revenues. While we previously received royalty income from the now-acquired distributors, we now recognize 100 percent of their revenues, as well as 100 percent of their costs. For a year-over-year comparison, these increased revenues are net of royalties previously received from these distributors. We are continuing to focus heavily on achieving operational efficiencies within this important region.

We are also pleased to see a slight increase in revenues from our Asia-Pacific region in the third quarter, a 10.6 percent increase -- 1.3 million versus 1.2 million year-over-year. Again, we did see increased operating expenses in this region due to start-up costs associated with our operations in the Philippines, Hong Kong and South Korea, as well as an increase in head count throughout the region. We have been aggressive in terms of strengthening our revenue centers in these regions, adding primarily research analysts and sales staff over the last few quarters. As you may have read in the recent press release, we're pleased to bring on Mary Ann Maxwell as the new Managing Director for the AP region. Mary Ann brings a wealth of executive experience to the position, and she will direct our continued efforts to drive operating efficiencies in this region as well.

In the Americas region, we are pleased with the traction we gained across many of our core offerings. At the base, of course, is our high-value research and IT advisory services. More and more, clients are looking to META Group for our ability to provide a unique value proposition to help them more efficiently and effectively employ technology to achieve their overall business objectives. We had a number of important Research and Advisory Services renewals and early renewals in the quarter, continuing to validate the strength of our core offerings. We had big renewals from the U.S. State Department, despite strong competition; Xerox; State of Ohio, where we displaced a competitor and sold increased levels of services; Owens Corning; Accenture, which also increased its services; Allstate; United Airlines; R. R. Donnelly; United Healthcare; S.C. Johnson; and Kaiser Permanente to name a few. We also had a number of new account wins in the quarter, including Wyeth Pharmaceuticals; Armstrong; Raymond James; John Deere; and Anthem Inc., where we also displaced a competitor, to name a few there. Many of these new accounts were the result of an aggressive sales program, which I'll discuss momentarily.

Turning to META Group Consulting, we gained particular momentum with our consulting business in Americas. We saw great traction, as we've seen over the last few quarters, with our comprehensive benchmark offerings and our operations focus consulting capabilities. We secured many client wins in the quarter for our price benchmarking, cost benchmarking and competitive intelligence benchmarking in particular. We believe this bodes well for this important component of our business. We have true differentiated in our benchmarking consulting offerings and our clients continue to confirm this with us.

Our IT vendor consulting practice also gained momentum, with a number of important wins in this quarter. Our vendor customers are increasingly recognizing our insights into customer needs and the critical perspective that we can provide them in their go-to-market strategies. We continue to see strong gains in our executive and industry focus services, and saw particular traction in our federal government focused work as well. We recently strengthened our sales capabilities around the federal space, and are continuing to focus on this burgeoning part of our business. Specifically, we secured a number of new federal government accounts in the quarter, including some critical competitive takeaways, showing the strength of our benchmarking enterprise architecture and portfolio management offerings, in particular at the U.S. Mint, the IRS, and two new Air Force accounts.

Our branding and advertising campaign, which began in the first quarter, is built around our tag line, "Return on Intelligence." It was created to really drive home our unique value proposition and it's continuing to resonate with our customers. The overall message, that we deliver a unique research-based value proposition to marketplace, is built around two simple concepts -- that META Group provides the best customer service and highest value relationships in the industry, and that META Group is truly an objective third-party adviser. To really drive this message home and to help companies better understand how we differentiate ourselves, we undertook an important sales program in the third quarter entitled, "Experience the Difference." The program is based on a notion that when we have the opportunity to demonstrate our value proposition to prospective clients, having them truly experience the META Group difference, we believe that we will gain them as customers. We are (indiscernible) to report that this program has been very well received by prospective customers.

Beginning last year, on my very first earnings call with META Group, I spoke about an industry in transformation, and how META Group was positioning itself to lead this transformation through our higher valued offerings. We're showing a net increase in revenues and we're dramatically increasing at our market share at a time when our competitors are experiencing double-digit revenue declines and we're experiencing balanced revenue growth around the world. We believe we have a unique value proposition based upon objectivity, independence, consistency and high value, and that we have developed very strong research processes in place to ensure that we retain this unique positioning. In fact, a recent survey of 600 customers showed that they reviewed (ph) META Group to be more objective by more than 3 to 1 over our competitors, and that they valued our customer service by more than 2 to 1 over our competitors. These findings are extremely important to us, particularly in light of the scrutiny that some of our competitors are facing around their objectivity and independence.

We initiated actions to better balance our resources in order to contain our expenses. For example, in the third quarter, we took actions to realign our expenses and incurred severance charges. As I have said in many previous calls, 2003 is the year of investment. It is the time to improve our position in the marketplace, to enhance our brand positioning, to focus on enhancing our customers' experience. As we position ourselves for the future and 2004, it's now a time to turn our attention to the bottom line, as we maintain our focus on revenue growth. So, our priorities are to continue to grow our revenues, to contain expenses, and to drive the Company towards profitability.

I'll close today with a brief discussion of our views on providing fourth-quarter guidance. After a great deal of thought internally, our current view is to refrain from providing guidance at this time. We've executed on a number of important issues this quarter, including several new key additions to our management team and acquiring a number of our distributors. Therefore, at this point, we believe an assessment of how well we're executing on our strategic initiatives, which we've talked about this afternoon, is a better indicator of our future success than a short-term forecast in revenues and operating results. With that, I'd like to open the call up to Q&A.

We will begin the question and answer session. (OPERATOR INSTRUCTIONS) Mr. Mike Neary. Please state your company name followed by your question.

You would have disappointed me if you didn't ask a question.

That's why I asked one -- I really don't have a ton to ask.

How are you?

Good. This was an excellent quarter. You guys are really knocking the ball out of the park in terms of revenues. And I was glad to see that deferred revenues were up too -- it's fantastic. Can you talk a little bit about -- you mentioned some of the cost moves you made in the quarter -- can you give a little more color on those? And also, just talk a little bit more about the focus on profits for next year.

I will, without providing guidance. What we did is -- I hope those of you who have been on a number of these calls recognize the consistency. I have said from the very beginning that in a down market, this is a time that I believe we should be making investments to differentiate ourselves. We spent almost $1 million in advertising branding, etc. A lot of that was to create a broader awareness for who META was. That was one of the biggest things that I think we were missing. We have a great value proposition. We are viewed as a quality organization. And the survey we did reinforced all that. So that's what the investments were.

We were acquiring distributors. When I first came to the Company, we were running the business based upon U.S. and then had all of the other countries -- I think there were 34 at the time -- that were directly reporting into a person in charge of International, and that was, in my mind, no way of properly guiding and managing the country entities. So we've changed our infrastructure, we've changed our organization. We've put EMEA infrastructure in place. We have managing directors over these broad regions. We put financial management in these organizations, and we have created better management reporting and infrastructure there. So those were important investments that we needed to make.

As we have done that, and we've actually recognized -- I mean, I'm very pleased with the 6.5 percent organic growth in revenues, especially on a competitive comparison, but now I recognize that, look, as we go out to 2004, this is all about putting the fundamentals in place in making sure that we drive to profitability. And so we see ourselves maintaining our focus on revenue growth, but also making sure that we contain our expenses as we go into 2004. So in 2003, we did start in activity where we are looking at our resources and the balance of our resource and revenue, and identifying what should be the right levels. We took in Q3, about a little over $400,000 of severance payments as part of that work.

We have continued work going on to reengineer our business in different areas to make sure that we are being efficient in how we manage. To be very frank, we are actually applying some of our own counsel and advise that we give to our customers inside the Company about efficiency of organization and resources. We also have initiated campaigns to make sure that we're focusing in, for example, on procurement, on travel expense and other programs that drive a very efficient and lower-cost operation as we look going into the future. I don't want to go into a whole lot of details on that, because a lot of this work is in progress. But we did start to focus on expense containment and will maintain that focus going into Q4 and next year.

I'd just like to say as a shareholder, I'm not at all impatient on that. At some point, you do have to drive the profits, and that's very important to focus on. But you've done a great job just sticking to the plan that you laid out -- acquiring your distributors, growing the revenues -- you're doing a fantastic job.

In terms of the cost levels and the profitability of the business, in the preliminary review, is there any -- are you discovering any major competitive disadvantage with META versus your competitors in terms of the profitability that you think the Company can generate?

When you look at the profitability -- look, if I were in your shoes and looking at this as an investor -- and candidly I am -- and if I look at as management, I would look at the same things. I'm being very frank -- our G&A costs are too high; it's roughly over 18 percent. I would like to have a significantly lower G&A cost; that's part of what we're looking at as we reengineer our business. We want to make sure that we have both expenses in the right areas, but we also want to make sure we have the right structure and cost structure. We're living in a Sarbanes-Oxley environment now -- audit, tax, some of the legal costs because of the actions we've taken in certain areas are higher. Some of those -- matter of fact, a lot of those are one-time charges that we reflected in Q3 that we don't expect to reoccur as well.

I am focused -- just at the top line, I will tell you, I'm actually pleased with how we're looking and managing our capacity in research. We are driving to a margin in consulting -- we saw that improve this quarter. Our G&A costs are too high; we have to get those lower. I'm looking at our cost of sales and cost of marketing to see if they are in fact where they should be on a comparative basis. We did make investments in both of these areas, so our costs are a little higher because we reflected the investments, and that is shown in revenue improvements. So they've paid off, those investments. So generally, those are the areas I'm focusing on.

Great, thanks.

You're welcome.

Robert Manning (ph).

Janney Montgomery Scott. Could you tell us a little bit more about the one-time charges in Q3. Your revenues were better than guidance, but you missed the profit guidance by 1 million 4, and I'm just curious as to what you can tell us about the onetimeness of that?

How are you doing, Bob?

Hi. Good, thanks.

I think we actually commented in our script. I just want to go back and --

The $400,000 severance you mentioned, and I didn't get the rest. It was related to charges bringing in the overseas subsidiaries. But if it was quantified, I missed it.

We had about $400,000 of severance charges, which I mentioned, and those span across a couple of different areas. There were one-time charges -- we actually took an accrual -- we received notice in Asia-Pacific for taxes that were due that we're not sure of. We're going through a review of that right now. But on a very conservative basis, we decided to take a provision for that. That amounts to about $720,000 just in itself. Those were the two biggest ones that -- one-time charges in this quarter.

Okay, yes.

So that's about -- what is it, almost one million 2 right there.

Right. Thanks.

(OPERATOR INSTRUCTIONS)

Overall, I'm pleased with the progress on revenue in the quarter. It was one of the key things that we were driving. I will tell you that the customer program, "Experience the Difference," actually went over very, very well. Just to give you a flavor, we achieved 22 new customers just through that program this year, and so we decided to actually continue that focus in that program. So we're maintaining our focus on top line growth; we're turning our attention, as we said we would, to making sure our costs are contained and in balance and that we're efficient in the way we run the business. And so, that will have our focus as we go into Q4 and this planning horizon. Dan, are there any other questions?

Sir, there are no more questions.

I appreciate everybody calling in for the call. I appreciate your investment and your confidence in the Company. I look forward to meeting with you and continuing to show results for you. Thank you very much.

Ladies and gentlemen, this concludes the META Group third-quarter conference call.