高德納諮詢公司 (IT) 2003 Q4 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the Meta Group fourth quarter 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 Thursday, February 5th of 2004. I would now like to turn the conference over to Mr. Peter Ward, Vice-President of Corporation Communications. Please go ahead, sir.

Thank you. I'd like to welcome everyone to Meta Group's fourth quarter and year end 2003 conference call. Before we get started, I would like to remind you that this 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 expected future results associated with our acquisition, integration of our international operation, future impact of marketing initiatives and future impact of cost reductions in the organization.

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 relating to the integration of our acquired operations, success in international markets, success of our marketing efforts, efficiencies associated with our cost reduction efforts 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-KA for the year-ended December 31, 2002.

Leading the call today from Meta Group's management team is Fred Amoroso, Chief Executive Officer, and John Piontkowski, Chief Financial Officer. And so now, I will turn the call over to Fred.

Thank you, Peter; and welcome to all of you who joined us for Meta Group's fourth quarter 2003 earnings call. I would also like to make sure I introduce John Riley, who as you remember was on our last call, currently the controller of the business. And we'll be talking with John a little bit later as well.

I'll start today with a brief introduction for the quarter and I'll highlight some of the significant accomplishments that we've made in 2003. John Piontkowski will then review our financials in more depth and I'll provide a more detailed update on some of the initiatives that we have underway. We will then open the call for Q&A.

First, we are pleased with our revenue growth in the quarter. The revenue increased 17% to 34.9 million versus 29.8 million in the fourth quarter of 2003.

Organic growth was 6% in the quarter, including some benefits with exchange rates, and we saw 11% improvement from acquisitions. We are particularly pleased to see continued positive momentum in Strategic Consulting, and gains in research and Advisory Services revenue in the quarter, up 25% and 14% year-over-year, respectively.

Customer retention continued to improve, and we also saw a 4% year-over-year increase in contract value. In addition, we continue to penetrate a number of key new customer accounts. Fourth quarter also marked the first full quarter of consolidated results from our UK and our Northern European distributors, helping drive the 11% gain in revenue from acquisitions.

We reported a net loss of $969,000 in the quarter, which included higher operating expenses associated with the integration of our international subsidiary, as well as 1.4 million in severance and $743,000 idle facilities costs. This compares to the net income of 2.3 million in the year-ago period.

And while a net loss was an improvement over the 1.9 million net loss in the quarter, we continue to focus on integrating our international operations to drive greater efficiencies across the organization and generate profitable growth in 2004. Our net cash position was 14.1 million in the quarter compared with 14.4 million in the year-ago period.

As expected, net cash was down from 16.9 million in the third quarter of 2003,, primarily due to the seasonality in our business.

Overall, we're pleased with our progress. As I stated previously, 2003 was a year of strategic investments, which we believe has positioned META Group for long-term success. Ila provide more details later in the call but now I'd like to turn the call over to John to discuss the financial results. John.

Thanks, Fred. As Fred just mentioned, today the company announced fourth-quarter net loss of $969,000 or 7 cents per fully diluted share on total revenues of 34.9 million.

This compares with a year ago's net income of 2.3 million or 17 cents per fully diluted share on total revenues of 29.8 million. Total revenues for the quarter were 34.9 million, up 17%, from 28 -- from 29.8 million in the year-ago period.

When the quarter ended December 31, 2003, international revenues represented approximately 38% of total revenues, compared with approximately 25% a year ago.

Around 40% of the growth is due to -- to organic growth, including the favorable impact of foreign exchange and our international business. The remaining 60% is the impact of the acquisitions. Research and Advisory Services revenue was 21.9 million, up 14% from the year-ago period's 19.2 million.

At December 31st, 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 73 million. This is up 5% from 69.6 million at September 2003, and up 4% from 70.2 million in the year-ago period.

Strategic Consulting revenue was 10.8 million, up 25% from the fourth quarter of last year, with the increase largely attributable to the 1.6 million benefit from the acquisition. Published research revenue remained relatively constant with the year-ago period, at 1.4 million.

Foreign operating expenses were 35.8 million compared to 27.4 million in the prior year. Included in this quarter were charges of approximately 1.4 million in severance and 743,000 for idle facilities in our Stanford office. The acquisitions contributed an additional 4.7 million in operating expenses with the weaker U.S. dollar in the global market causing a 1.4 million increase in operating expenses.

A year ago, in the fourth quarter of 2002, the company made a decision to reduce its bonus accrual for the quarter by approximately $1 million. Our cost of services as a fulfillment, inclusive of reimbursable expenses, was 17.7 million, an increase of approximately 2.9 million.

The acquisitions contributed 2.4 million, and there was an increase year-over-year in the bonus expense of $1 million, offset by a decrease in outside consulting fees. Gross margin as a percentage of total revenues, including the reimbursable expenses in both revenue and cost of services, was 49% compared to 51% a year ago.

Selling and marketing expenses were 8.5 million in the quarter, an increase of 1.9 million compared with the same period a year ago.

This increase relates primarily to 800,000 of incremental expenses associated with the acquisition, and $300,000 of costs associated with the company's marketing and branding campaign, and the fact that a year ago, commissions were favorably adjusted in the fourth quarter.

G&A expenses were the for quarter were 6.2 million, an increase of 1.6 million or 34% from a year ago. Most of the increase relates to 1.1 million of incremental expenses from the acquisitions and the impact of the weaker U.S. dollar, principally in the Euro markets. Included in operating expenses are $700,000 dollars in provisions for idle facility leases, principally in the Stanford, Connecticut offices. I will now provide some comments on the balance sheet and cash flows for the year-end period and the quarter.

Our net cash position, defined as cash on hand plus restricted cash, less outstanding bank debt and notes payable, was 14.1 million as of December 31, 2003, compared to 14.4 million a year ago. 5.4 million cash was used in operations in the fourth quarter, principally due to the net loss and the typical seasonality with the end-of the year sales activities.

This compares with the 716,000 use of cash in operations a year ago. Accounts receivable in aggregate at December 31, 2003 was 38.9 million, up slightly from a year ago. Day sales outstanding improved 13% to 101 days, compared to 116 days in the year-ago period.

After adjusting for those accounts receivable with future payment terms related primarily to multi-year contracts, DSOs were 69 days compared with 58 days a year ago. With the change in the manner in which multi-year contracts are billed, which we discussed in our first-quarter call, we expect that the net DSOs will continue to grow as the mix of current and future receivables change.

Total deferred revenues increased 2% from December 2000 -- from December 2002 to 49.4 million, at the end of 2003. Capital expenditures for the fourth quarter amounted to 348,000, down from 426,000 a year ago.

Let's look briefly at the year-to-date performance. The company reported a loss before the cumulative effect of the change in accounting principles of 4.3 million, or 32 cents per fully diluted share.

This compares to the loss before the change in accounting principle of 19.3 million, or $1.47 per share for fully diluted share for the year-ended December 31, 2002. For the year-ended December 31, 2003, the company reported total revenues of 122.5 million, a 5% increase over last year.

Acquisitions contributed 3.7 million of the revenue increase, with currency effects contributing 4.4 million of the revenue growth. Research and advisory revenues of 78.3 million increased by 1.1 million from the prior year, with the acquisitions contributing 1.6 million.

Strategic Consulting revenues of 35.7 million increased 3.7 or 12% in the previous year. And the acquisitions accounted for 1.8 million of the increase, or half the growth, with the balance of the increase relating to the favorable effects from foreign currency, along with higher utilization experience within the consulting practice.

Published research revenues increased 1 million to 6 million from 4.9 million a year ago. Gross margin declined to 47% from 48%.

Total operating expenses were 127.3 million, compared to 121.5 million last year. Included in operating expenses a year ago were a goodwill impairment charge of 2.6 million, 2.2 million in provision for losses uncertain of the company's facilities leases, and $362,000 in severance.

Included in operating expenses for this year, the year-ended December 31, 2003, are charges of 1.6 million in severance and 1 million for idle [PHONETIC] facilities. A year ago in the fourth quarter of 2002, the company made a decision to reduce its bonus accrual for that quarter by approximately $1 million.

And I want to point out that the acquisitions that took place this year added 4.8 million to operating expenses, while the other operations -- operating expenses -- increased by 1.9 million, principally due to growth in the existing international operations; and we also had the impact of the foreign currency, which increased expenses by 4.6 million.

2002 operating expenses include charges of 1.1 for distributor bad debts and 900,000 for non-income related taxes. 2003 operating expenses were reduced by reversing $600,000 of provisions for distributor bad debts and $400,000 of other accounts receivable provisions.

Other income for the year principally relates to gains recognized upon liquidation of two of the company's investments affiliates earlier in the year. I will now turn the call back over to Fred. Fred?

Thanks, John. So 2003 marked an important turning point for Meta Group. At the start of 2003, we set out to create a culture that focuses on delivering added value to our customers through a dedication to both team work and execution.

We enhanced the synergies between our research and consulting groups by aligning their coverage areas along common customer issues and topics, as well as by setting shared metrics for success. I believe this increased focus on customer value is now paying off, as our customers continue to tell us that we are different, that we understand their unique issues and that we bring an unique value proposition through our integrated research and consulting capabilities.

Bottom line, pragmatic advice and help. To support this synergy between research and consulting, we refocused our sales organization toward more solution selling, to continue to move away from the traditional transactional selling approach within the IT research and Advisory Services industry, and more toward a bundled services approach based on developing a trusted adviser relationship with our customers.

We added solutions specialists to help drive this approach deeper into our organization, and we are now seeing the benefits of this through some key trusted adviser relationship,s which I will discuss later in the call. 2003 was also a year when we needed to make sure we had the proper organizational structure in place.

To that end, we put new experienced leaders in place to run our consulting marketing sales and Asia Pacific operations. We now believe we have a strong management team in place to lead us to profitable growth in 2004.

We also focused on acquiring and ind grating a number of our international operations in 2003. With the acquisition of our distributors, northern Europe, the UK, and Italy, we now have direct control over substantially all of our operations in Europe.

This will help serve to enhance our customer experience, give us a larger global footprint and create more uniformity in our service offerings and customer interactions.

Additionally our international revenues represented 38% of our revenue in 2003. It is important to note that while we now receive all of the revenues from our international subsidiaries, we now also recognize 100% of their costs.

As we continue to integrate our subsidiaries, we will have a particular focus on cost-cutting and driving greater efficiencies across the organization in 2004.

I am pleased with all of these changes and I believe they are paying dividends in terms of improved customer retention with new customer wins and with increased contract value. In the fourth quarter and in 2003, overall we are very pleased with the penetration we achieved and to a number of key global accounts, companies where we had limited exposure or where we had yet to even engage them with our unique value proposition.

But, again, by developing a trusted adviser relationship with them, companies such as Banc of America, where in the fourth quarter we secured more than $1.2 million in business from the Banc of America, which is a two-case study of team work among our global research consulting and sales teams, and it speaks to increased customer demand for global consistency in their IP research provider.

This is a great example of the higher value we bring to our customers through the seamless integration of our research and consulting capabilities worldwide. Also, companies such as American Express, where we now do more than $1 million in Advisory Services and consulting business, representing a greater than 150% increase in billings over the previous year.

Or Met Life, where we did a few thousand dollars in business in 2002, and now approaching half a million in business, half of which came in the fourth quarter of 2003.

Or Abbott Labs, who have increased their business with us to more than half a million dollars or [INAUDIBLE], where we had delivered penetration to 2002, and are now approaching the half a million dollars in business which we all secured in the fourth quarter.

With companies such as Blue Cross and Blue Shield, and RWE systems, where globally we have grown the business by almost 200% and add to that more than half a million dollars of business with each of these accounts.

And on the vendor side, we signed global relationships with computer associates. And this particular relationship represents the vision for how we want to support vendors in the future.

It is a global relationship, across the world, North America and Asia Pacific, and the solutions set that is made up of research services, publications, strategic consulting and events. It cited our own matched level of client service, along with world-class analysis and increasing voice in the market,as the reason for 59% year-over-year increase.

Validating their commitment with the fact that they signed a two-year deal. These wins represent just a few of our successes in the fourth quarter and in 2003 overall, and are representative of the types of relationships we are continuing to develop with customers.

We believe that they demonstrate the real business value that we consistently provide, which has been key to our revenue growth in 2003.

And this is why for the full year 2003, we improved our market share against our two largest competitors to 11.1% versus 10% a year ago. We are dedicated to continuing this focus on customer value as we drive toward profitability in 2004. Our 2003 branding campaign with the tag line return on intelligence really drove home our value proposition.

That we are an independent and objective third party services provider, that we deliver the best customer service in the industry and that we provide a higher value proposition and solution. And we help our customers more efficiently and effectively deploy technology to achieve their overall business goals and objectives. Our mission statement.

It's now time to focus our marketing efforts on driving greater awareness for our individual research and consulting capabilities. We're seeing excellent traction value added services, such as measurement and benchmarking, our IT operations and process refining capabilities, and our comprehensive enterprise security offerings that are truly unique offerings in the marketplace.

We have shifted our marketing focus in order to more aggressively drive demand -- excuse me -- for these and other core research and consulting capabilities. We are also continuing to improve and enhance our global events for the benefit of our customers.

Our events have a strong reputation for facilitating one-on-one meetings between our customers and our analysts and consultants. This is a critical value proposition for us, and we are continuing to develop ways to drive quality interactions with our customers at these events.

I would like to now take a moment to comment on an organizational change we announced in our press release this afternoon. First and foremost, I really want to thank John Piontkowski for the very significant contributions that he has made to the company since joining it as CFO in October of 2000.

For some time now, John and I have been talking about the ambition to become a contributor for the revenue-generating part of the organization rather than just counting the revenues that others generate. I look forward to working with John to help us drive value to our customers.

John will be joining an important research practice area for us, one that focuses on helping companies with Sarbanes-Oxley other regulatory compliance issues.

With John's background at CFO and his vast knowledge of compliance issues, he brings a unique blend of skills to help drive increased value to our customers.

Effective immediately, John Riley, VP and Controller for Meta Group, will take on the role as interim CFO. I am pleased that we have this depth of strength within our finance organization so that John Riley can seamlessly step into this interim role.

And as you know, John was with us on the third-quarter earnings call, and I look forward to continuing to work with him.

So in closing, I'm actually quite pleased with our performance in 2003. We accomplished many of the goals and objectives that we set out to do, but frankly, I'm not satisfied with our profitability.

I appreciate the confidence of Meta Group's investors and the market value that this confidence has produced, increasing our market value by more than three times the overall growth in the market last year.

However, as we turn the page to highlighting our unique differentiators amid a contracting market, we will be putting significant focus and drive towards continued growth and profitability in 2004.

As you know from our previous conference calls in 2003, we began developing a culture of Meta Group that is focused on customer value, team work, and execution and in 2004, it will be all about execution and driving to produce profitable results for our shareholders.

Therefore, as we get into this year, you should measure us in our quest to accomplish these goals. I'd like to take a moment before Q&A and just pass the platform, if you will, to John Piontkowski and then John Riley, if you'd like to make any comments.

Well, thank you, Fred. As Fred mentioned, Fred and I talked maybe about a year -- or a year or so ago talking about a transition into a different type of role as I spent a dozen or so years with Price Waterhouse in a bag-carrying type role.

I'm actually quite excited about the opportunity to take on a different role within the -- within the company. You know, we've accomplished a lot.

There's still a lot that needs to get done, but this transition is going to be a fun transition and I'm truly looking forward to -- to taking a different -- a different branch in the trail.

And I'm sure John Riley is not going to have any problems with revenue recognition in your practice area this year. John?

Thanks, Fred. I'm excited at the opportunity to step into this role and to have the opportunity to continue to work with Fred and the rest of the management team at Meta, and I also look forward to the count John Piontkowski's revenue as he generates them.

Great. So [INAUDIBLE], Stephanie, we can open up the call for Q&A now and we'll be responsive to any questions you have.

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'd like to cancel your request for a question, please press the star followed by the two. You will hear a three-tone prompt acknowledging your selection.

Your questions will be polled in the order they are received; and if you are using speaker equipment, you will need to lift the handset pressing the numbers. One moment, please, for the first question.

Actually while we're waiting for the question, one of the things I just wanted to highlight was this notion of contract value which we've been reporting on now for a few quarters.

I want to make it clear -- I didn't particularly state it in my comments but, you know, contract value for us has no effect of the acquisition, since the contracts are actually on our books.

So the percentage increase in contract value that we had over the course of the year is actually reflective of true 100% organic growth in contract value year-over-year. So any questions, Stephanie?

Yes. The first question comes from Robert Manning with Janny Montgomery Scott. Please go ahead.

Hi, Bob, how are you?

Hi, just fine, thanks. On the market-share gains, I wonder, uh, how we can separate out what's organic and what's acquired. Your largest competitor was up 6% year over year in the last quarter, you're up 17% overall and 6% organic. Can you give us any color on which of those comparisons is more relevant?

Yeah.

If you know, they don't disclose the organic, so maybe we just don't know.

Well, I -- you're right, Bob. So I can't give an exact comparison against our competitors, Gartner, in terms of their revenue growth, or Forester in the other case. But -- so I can't comment on theirs, and therefore it's hard to do the comparison.

But we did disclose, which is important, on why the 17% growth was 11 due to acquisitions and 6% organically.

So, you know, the -- the only thing I can say is that I guess, you know, we matched Gartner 6% growth organically with their business and then if they happened to have anything that reflects inorganic growth in their business, then I guess we organically grew faster than them, so I can't tell you which it is, though.

Yeah. The other thing, it hooks as though you acquired a little bit more in expenses than you did in revenues as you made the acquisitions, and I'm sure that that won't last forever. I wonder what color you can give us on that?

That's an outstanding question and I'm glad you brought it up. I -- the issue for us, if you remember, the way we deal with the distributors is we get royalties on distributor business.

And so the royalty -- a contract that the distributor would sign, uh, in research, for example, we would get 40% royalties on that. We'd get roughly 80% royalties on group consulting and we would get 10% royalties on consulting.

So now when we consolidate, we actually already have the benefit of those royalties that are represented in our books, so we really only have a -- an impact to revenue of the counterbalance of the royalties.

So in other words, 6% in research, etc. But we are acquiring 100% of the expense. So that's why when you look at the impact of G&A, for example, you will see a larger increase in cost and a less increase in -- in the revenue side.

And so what it means, Bob, is that it's incumbent upon us to absolutely have laser focus on reducing our G&A, not only in our distributors but in fact we have a laser focus on reducing our G&A across the entire company as we go out into 2004.

Does that suggest that they were losing a lot of money? I mean, they -- presumably their expenses are the same as the ones you're acquiring and yet they have to pay a big share of their revenues to you in royalties. They must have been really hemorrhaging.

No actually not. And the reason for that is that they don't have any of the cost of fulfillment, right, that they would bear in fulfilling the contracts.

Those are just really our costs of fulfillment. What it does mean, is that -- so if you take away those royalties, they have -- and let me go back. I shouldn't say that. So in the research side, they don't have the cost of fulfillment. On a consulting side, they did have the cost of fulfillment.

But then on research, for example, or in consulting, they did have 100% of the costs associated with selling expense. And then their own G&A infrastructure to support their business, but since they were relatively small distributors in countries, the -- the G&A expense was reasonably corresponding to their -- to their revenue net royalty.

Okay.

Was that clear, did I answer it well?

Yes. Thank you.

Okay. Thank you, Bob.

Thank you. The next question comes from Chris Ward with Criterion Capital Management. Please go ahead.

Hey,Chris, how are you?

Good, how are you guys?

Not bad.

I have a couple questions, if you don't mind -- real quick ones. Have you acquired all your international distributors now?

No. And so I'll tell you -- specifically, we have, uh, current distributors in -- that are outstanding -- in Israel, South Africa, Latin America and the Middle East and, um, Japan. Around 20% of Japan.

Now, our intention is not to acquire every single one of those distributors, um, and -- but some we actually are in discussions with now and -- and working on. But substantially, you know, most of the distributors we have acquired.

Okay. And then you didn't give any guidance in the press release or on the call, either for the March quarter or '04, is that intentional?

Yes, it's not an oversight. We're better than that. I didn't give guidance last quarter or the quarter before.

That's fine. You would have beat everything if you did.

You got a softball there?

You know, was it -- can you help me understand the proforma net income issue after the -- before the charges, the one-time charges?

Regulators are kind of discouraging having proforma results, so we really only described GAAP and then, uh, we'll provide color, which what we did is disclose, uh, what are ostensibly [INAUDIBLE] charges.

One-time charges were --

Chris, you know, we've got the 1.4 million severance or the restructuring charge.

Right.

And the 740,000 facilities loss.

Right, okay.

So there -- you know, that's two points.

Now this -- let me go through the -- the components of the severance. The components of the severance, some of them are associated with just the natural integration of some of the distributors, okay?

Some of them are -- and fact is, we are eating our own cooking. So, for example, some of the process improvement actions that we give to our customers and we're actually applying those to ourselves, and so we changed our contracting process and we're changing some of our other infrastructure processes in order to enable us to operate more effectively and reduce overall or cost of sale and G&A cost.

And then we're just -- look we got a laser focus on different parts of our practice and making sure that they're producing at the levels we want and if we're not we make appropriate adjustments.

Okay. So then what was the true operating cash flow? Is it really -- is it negative 4 million, is that right?

Negative 5.4 on seasonality, but in last year it was less than a million dollars negative.

Well, not cash, that's different than the charges.

Yeah I think he's talking about cash flow from operations.

Yeah, you said negative 5.4, yeah, for the quarter versus about 800,000 use of cash in the year-ago period. You have to go through the same calculation in terms of -- primarily the loss --

I got you. So what -- So what's your -- what -- what revenue level are you going to be operating cash flow break even at or GAAP break even?

I mean, we were cash flow break even last quarter, and, uh, actually we had operating income, cash flow from operations last quarter.

That's what I remembered, okay.

So the issue -- the issue, Chris, is look, our big renewal period is in the fourth quarter and, in fact, to -- you know, it is -- it is centered very much around December, that's the typical seasonality of our business.

So in the fourth quarter and in December specifically, this is the low cash point where, you know, contracts are running out and we haven't renewed and the cash comes in in Q1.

So if you would compare us -- I think you weren't an investor back then -- but if you were to compare us in terms of our cash Q1 last year, we had a reasonably significant growth in cash Q1 year-over-year.

Okay.

Quarter-over-quarter.

Do you set the [INAUDIBLE] in cash to be low point in cash?

Yes. Okay. Just last -- last -- first quarter last year, cash grew 11 million.

All right. Okay. Okay. And then, um, do you have a target gross margin? You guys had gross margin 49% this quarter, is that sustainable?

We have a target gross margin level, yes.

Is it higher than 49%?

I'm not going to comment.

Are you pleased with 49%?

We're not providing guidance, Chris.

Are you pleased with 49%?

No.

Okay. Great. I'll turn it over. Thank you.

You're good.

Thank you. The next question comes from Mike Erie with Erie Asset Management. Please go ahead.

Hi, good. Couple questions. So cash was down 300,000 year-over-year, how much did you spend on acquisitions total?

Good question. So if you look at -- I think we commented on this in Q3. Cash flow over the course of the year actually included $6 million paid down in debt, which I think is in the numbers, right? And then 5.2 million in acquisition costs.

5.2 million, okay. Great. And those acquisitions added I think you said 3.7 million in terms of revenue total for the year, is that right?

Mike, you were asking about the revenue impact? For the -- for the year the acquisitions contributed 3.7 million.

Okay. Great. And, you know, you mentioned your stock price doing really well this year, I think I'd just like to point out that, you know, Meta's now valued at 0.4 revenue compared to Gartner at 1.4 and Forester at 1.8.

Mike, I need to interrupt you because I want to make sure that I'm clear on this, and I apologize. But I'm not pleased with our valuation.

All I was commenting on is the growth in -- in our stock price over the last year, which was 207% in the calendar year 2003.

But I am not pleased with our current valuation; and absolutely, you're bringing up, you know, differences that would say we -- we are certainly -- the market will determine where we are, but, you know, I'm not pleased with that part of it.

Well, the key to getting a better valuation seems to be what you talked about briefly in the press release and a little bit on the call, you know, in terms of improving the profitability of the business.

Those two companies have far better margins than we have. Can you talk about, you know, kind of what your strategy is for that next year? I know you don't want to give specific forecasts, but can you talk a little bit about the profitability of the business.

It's -- I will. So, look. 2003, if you remember the early calls and what I was talking about, it was all about how do we differentiate Meta in a down market and my belief that while companies were struggling, it -- this was the time to really create -- while the market was struggling, this was the time to create differentiation and as customers scrutinize more of the decisions than the partners that they want to drive relationships with and where they expect to drive value.

And so I didn't want to constrain the differentiation last year with a quest for profitability, because I would not have been able to make the investments that I needed to in order to do the things that we did, which ultimately achieved 6% growth organically and ultimately the 17% growth overall in our business in the quarter.

So in 2004, I will tell you the theme across the company is a focus on execution. Next week, I am bringing the entire middle-management team into headquarters here where we are going to spend several days talking about what execution means, what our business model is, what are the things that we need to do to be able to not only demonstrate to our shareholders but to absolutely drive our plan, which is growth profitably.

And all of the attendant efforts of what profitability really means to us, which is improvement in margins, reductions and G&A costs, driving success and efficiency and the productivity of our sales team, making sure we got utilization at the right levels in terms of our consulting business, that will drive the right margins for consulting and that we ultimately would measure ourselves on a -- on an overall revenue per head count relating to analysts in terms of support and profitability.

We have created a balanced score card across our business that -- that will enable us to really measure at both leading indicators and lagging indicators to see if we have progress. And I'll just highlight one of the things I talked about changing in the processes.

One of the things, Mike, that we're doing is, for example, we looked at the way we sell contracts and our discounting process. And the company has a certain discount level of experience across the -- across the board, and typically there are discount levels that are -- you know, have various levels of approval.

So the rep has a level or the district directors have a level, the RVP's have a level and then they have to go to corporate for levels.

My sense and my philosophy on this, to be quite frank, is people in corporate don't have a clue as to what the right gain is being played in the marketplace and the competitive challenges and things like that. So the people that have the best insights in terms of pricing are those that are actually in the field and dealing with the situation every day.

So as opposed to having that type of structure, I want to put the decision closer to the customer. And we've challenged sales management to improve the discounting levels, to reduce discounts across the board, but give them the latitude that say, you know where we have the opportunity to premium price, value price, because we are providing enormous amount of value to our customers, then go ahead.

And where we need to price because of significant competitive issues, then let's not be losing business just because of that -- within reason, obviously. So -- so the fundamental issue is, I think we can improve our overall results and take our discount levels from where they are now to lower numbers by managing this more effectively in our business.

Okay. And -- and when -- when should we start looking for, you know, results on the profitability side from the company, just in terms of margin movement and things like that?

I said 2004, you know, overall and I'm not going to get into specific guidance, as much as you guys would like us to and I understand your interest in it.

But I would suggest that you measure us in 2004 in terms of each quarter, how successful are we, and moving that needle and driving the profitability.

Okay. In the first quarter, not talking about quarters, you're going to be laughing a little bit more difficult comparisons just simply because of the fact that you have these distributors integrated now and you have 100% of their costs now which you didn't have in the first several quarters of last year.

Exactly right. It's going to be a -- hard to compare.

Cap Ex for next year, what are you looking at there?

Our Cap Ex this year has been about the same as it was a year ago, a little bit over a million dollars. And I would say it's going to be in that same neighborhood.

We don't see any big significant Cap Ex items on the horizon.

Okay. Great. Thanks, guys.

Thank you, Mike.

Thank you. The next question is a follow-up from Chris Ward. Please go ahead.

Hi, Chris.

Hi. I think it was -- oh yeah, one company made -- you mentioned a contracting market. Were you referring to last year's market or did I --

Yeah, it was the experience that we -- that last year had and our ability to grow in a contracting market which was in fact the -- you know, obvious last year's position. So it was a look at Gartner and Forester and Meta, which basically when we talk about market share, we rate ourselves against those two principal competitors.

The revenue declines that each of our -- our competitors had on a full-year basis, coupled with our revenue growth, actually had a -- a shrinking market overall and we grew in the face of a shrinking market.

So I look at 2004, perhaps to lead to your question, we do see 2004 IT spending increasing somewhere between a -- you know, 4.5 to 5 per cent, and actually, as we see it going on, there's increasing confidence in the IT spend going up into 2004.

And does your end market usually grow in line with IT spending or does it -- does it fluctuate or faster slower?

It's interesting. There's different parts of the business that react differently. So there's some customers where some of the project activities -- it might be a little lagging in terms of actually making purchase decisions and things like that.

But there's an awful lot of other customers who are -- who are looking at putting planning in place and wanting to make determinations as to what they should be doing, which could be leading. So overall, it might balance out a little bit.

Okay. Great. Thank you.

You're welcome, thank you.

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 your handset before pressing the numbers. One moment, please.

So the other thing that's important to us is how we look at our sales, and one of the things I tried to highlight in the customer experience is, look, there's really very simply three things relative to how we manage customer and growth. First and foremost, we got to put focus on retaining our existing customers.

The second thing is, we've got to identify how we take our existing customers and improve our valued relationship with them to the extent that they have more opportunities where we can help them, and thus we're growing our existing customer base.

And I did highlight a number of those in my call. And then the other thing is to put focus on just how do we establish new customers. And so in that regard, we've actually developed a sales approach and compensation approach in 2004 that all relates on net contract value increase and measuring ourselves on that basis. Any other calls, Stephanie?

Not at this time but id a he like to give everyone an additional moment to register any questions they have. And if they do have a question they may press the star followed by the one. And there is a follow-up question from Robert Manning. Please go ahead.

Could you go over just again a little bit the impact of the -- on the costs of acquiring the -- the distributors? I mean, I understand that you picked up all the expenses and you don't get all the revenues because you're already getting some of them.

But what I don't understand is you say the distributors had some of the fulfillment costs. If you're acquiring several million dollars of losses on a quarterly basis, I don't understand how that could be the case if the distributors were not getting those same losses when they were independent.

Okay. So let me try again and I'll ask my cohorts here for help if I -- if I don't answer it fully. The -- the -- the thing is that if you separate the two parts of the business just generally -- let's say there's three.

You've got costs of sales and marketing, you have cost of services and fulfillment and you have G&A, just roughly. So the G&A costs, we had zero G&A costs in our business from distributors because they bore all of that and all we were doing was consolidating and dealing with royalties and contracts, okay.

Okay.

That was already in our numbers. On the fulfillment -- I'm sorry, cost of sales and marketing -- the distributor bore 100% of the commissions and marketing expense for their particular regions and geographies.

So we absorb 100% of those costs. And now when you get into the third part, which is cost of services and fulfillment, or research and advisory services, we did not allow our -- our distributors to have their own analysts, because that would not have allowed us to maintain consistency in our IP or relationship with our customers.

So all of the analysts that do fulfillment on the research contracts and the distributors are Meta-burdened and expensed analysts, we pay for those analysts and so our cost of service and fulfillment is already in Meta. However, the -- so if you look at it from a research side only, the only cost the distributor had in research was sales and marketing expense and G&A expense.

Uh-huh.

And on a consulting side, they actually had consultantants on their books, and so they bore the cost of the consultant as part of their service and fulfillment cost.

But in recognition of that, that it wasn't our labor going into fulfillment, they were only giving us a 10% royalty for the value of the Meta brand, as well as our practice aids and methodologies. But all of the people doing fulfillment consulting were theirs.

Uh-huh.

So that's how the different is sort out of how much cost we were bearing and the differences between the costs that the distributor was bearing, which allowed them if they did a good-enough job, if they had the right sales compensation model, and they had the right, you know, consulting utilization and ran a good consulting business, they could be quite profitable; and in fact many of them were, some weren't.

So got into trouble. But -- but we -- we -- a lot of the distributors had good leaders and took over and ran good businesses.

The other thing, Bob, is that some of the seasonality that comes into play, as well. As we stated, the fourth quarter is a slower time -- particularly when you get into the consulting models with the holidays and all of that. It is a little bit slower.

And, uh -- that had some impact and these acquisitions were -- all took place primarily with the largest impact in the fourth quarter, very little in the third quarter.

Uh-huh. Going forward, we're looking at year-over-year compares now, Q1, Q2, Q3, in effect from having acquired the distributors we're way behind where we were a year ago starting off on the P&L,, is that correct or not?

All right. So the P&L on a year ago, let me highlight one of the things. We are off on that. And there is a number of reasons.

I think we had in the press release a statement that said in last year's P&L, we had a reversal of expenses of about a million dollars because last year as we were looking at 2002, we fundamentally took out a million dollars of reserves that had --

No, I understand -- I understand that issue. Maybe I'll understand this better if we just looked at Q4. But we -- I wrote it down here somewhere, but from memory I think we had 8.4 million in extra expenses against 5.1 million extra revenues.

So that -- that difference is 3.3 million. Now, from that you subtract the fact that there was a bonus reversal last year, and, uh -- and the severance. So we can take out 2.4 million of that swing, that still leaves us with a negative swing of 900,000, and actually that becomes a million one because the IO facilities charge last year was greater than this year.

Now, maybe that was due to other things in the acquisitions, but it looks as though -- if everything else was even year to year, we took a million one hit because of having made the acquisition. Is that -- have I got that right, or is there -- is that a recurring -- or nonrecurring issue?

Because you have a lot of expenses just from -- you know, from the integration. Or are we really carrying a 1.1 million quarter negative forward into this year to be overcome before we get back to where we were a year ago?

I think if we -- if we take out the charges that we took in Q4, we actually had a -- we would have shown a positive income.

We would have a positive income, but comparing a year-over-year, uh, we would have been down. I'm not looking at, you know, zero income, I was looking at the year-over-year comparison.

Right, and that's why the comparison has a lot of the ins and outs. It's certainly a lot more because of the acquisitions, but it's also the one-time charges of the severance this year and the -- and the facilities charge, you know, going one way offset by the million dollar reversal of bonus last year, which ultimately reduced expense last year.

Yeah. I guess what I'm just looking at is going ahead, if Q1 is exactly equal to -- Q1 '04 is exactly equal to Q1 '03 except for the acquisition. Are we going to -- are we going to lose a million bucks in -- are we going to be a million dollars behind this year?

When -- we're not going to give that level of -- of guidance. And I -- I honestly don't have in front of me what Q1 of '03 was.

I'm just trying to get -- to get a feel here for what was the magnitude of the acquired continuing losses as a result of acquiring the distributors, if any?

It may be that all this fourth-quart quarter stuff was one time and nonrecurring but I understood in response to your request or your -- in earlier question that they're going to be tough compares because this year we have the negative impact of the companies we acquired.

You're asking two questions and I honestly don't know if I have -- and if we cut the information, detailed enough to give you the answer.

I'm not looking at a -- you know, slicing the [INAUDIBLE] real thin here or not. Are we going to be losing something in the magnitude of -- do we acquire something in the order of a million dollars per quarter in continuing losses?

No. No. And that's a point that -- you're asking for, which I'm trying to respond to is, there's two parts of the acquisition of the distributors, the one part which we said is we're taking additional G&A cost into the equation that we got to take out over time, the other one is --

Right.

-- that some of these are just less profitable and so we assume losses in addition as part of the acquisition.

Uh-huh.

In fact, we didn't cut the numbers, and I can't tell you which of the -- which is which and how much is each. We obviously have the expense side, which is what we told you.

Sure, yeah.

So -- so, um --.

But it sounds as though you acquired losing operations, uh, with obviously the hope that will be turned around and ultimately be more profitable than if you hadn't acquired them, but on balance it sounds as though we acquired losing operations.

All right.

Have to be straightened out.

To be frank there, there were a couple of distributors, Italy and the UK specifically, that we had loss operations at the time that we turned them over.

Each of those have new management that we have put in place as a result of the acquisition, and -- and we are in a turnaround in those two countries.

Yep.

And Northern Europe, on the other hand, was actually a very successfully run distributor, and we do not have losses there and we are continuing to see gains in both revenue and profits in -- in Northern Europe.

So -- so you're exactly right, I mean you -- we've got a couple of distributors that we're in turnaround modes, and there's a couple more that we are fueling and growing.

Uh-huh, uh-huh, uh-huh. Okay. I'm still not quite clear, though, on whether going forward the net of the acquisition of the distributors is going to make '04 to '03, a tougher compare than it would have been otherwise. But I guess we'll just sort of have to wait and see.

Well, since we're not providing guidance, that's probably right. Um, but I will tell you that, you know, there is -- there's enormous focus in the company on execution -- and execution to me means running the business effectively, running the business efficiently and driving profitability.

So the -- you know, the issue is not lost and it is quite a component of our whole planning process at the end of 2003 that we ultimately put together in our company plan for 2004, and it's got an over [INAUDIBLE] emphasis on profitability. So last year was about differentiation in growth, and this year is about growth profitably.

Great, okay. Thanks a lot.

Thank you, Bob.

Thank you. And gentlemen at this time there are no additional questions, please continue with any further comments.

I appreciate everybody participating in the call, I appreciate the depth of the questions and really a desire to understand the underlying factors of the business. Again, I'm pleased with a lot of the things that we accomplished in 2003.

We did the things that we said we were going to do, which is to focus on differentiation and increased value and growth, which I think we have accomplished, and it is all about now focusing in on execution and proving to each of you that we can not only grow, but that we grow profitably.

So thank you all, and we look forward to talking with you next quarter.

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