高德納諮詢公司 (IT) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Meta Group Second Quarter Conference Call. (Caller instructions.) As a reminder, this conference is being recorded today, Thursday, the 5th of August 2004. I would now like to turn the conference over to Alison Ziegler with the Financial Relations Board. Please go ahead.

Thank you. I’d like to welcome you to Meta Group’s Second Quarter 2004 Earnings Conference Call. Before we get started, I’d 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 future operating results, future strategic directions, and industry and customer demand trends. 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 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 10K for the year ended December 31, 2003, as amended. These forecasts are dynamic and subject to change. Therefore, these forecasts speak only as of the date of this webcast, August 5, 2004. Leading the call today for Meta Group’s Management Team are Herb VanHook, President and Chief Operating Officer, and John Riley, Chief Financial Officer. I will now turn the call over to Herb VanHook. Go ahead, Herb.

Thank you, Alison, and welcome to all of you who have joined us today for Meta Group’s Second Quarter 2004 Earnings Call. I’ll start today with a brief introduction to the quarter, and then I’ll highlight some significant accomplishments. John Riley will then review our financials in more depth. After that, I’ll provide more details on some of the initiatives that we have underway as well as the results that we are seeing. We will then open up the call for Q&A.

First, I want to address the Management changes that have recently taken place. As you know, Fred Amoroso resigned in June to pursue other opportunities. While we were all saddened by his departure, the Meta Group Executive Team remains committed to the Company’s strategic initiatives and we have no plan to depart from the direction that we had previously outlined for the Company. We continue to focus on building higher value relationships with our customers in expanding the traditional IT research provider model while managing our cost structure. Additionally, I am very pleased to be acting as President and COO and heading the strong team here at Meta Group.

As we mentioned at the beginning of 2004, we asked you to measure Meta Group relative to our progress toward profitable results. Our industry is evolving and Meta Group has positioned itself to lead this evolution, sitting at the intersection of business and technology with the right investments and capabilities, the best customer service, and the highest value trusted advisor relationships in the industry.

Before I turn the call over to John to detail our financial results, I would like to make a few observations on our performance. In particular, we are pleased with our growth in the quarter. Revenue increased 24 percent to $37.2m versus $30.1m in the second quarter of 2003. Our recent acquisitions of our global affiliates were a factor in achieving this growth along with improvements in ongoing operations. We are pleased to see continued positive momentum in Research and Advisory Services for the quarter.

Our cost control efforts also made progress in the second quarter as we achieved reductions in both selling and marketing and general and administrative costs as a percentage of revenue compared to our first quarter results. Our net income for the quarter was $448k compared to a net loss of $1.5m in the year ago period. This is an important indicator of the progress we are making toward our goal of consistent profitable growth. Earnings per share in the quarter were 3 cents per share compared to a loss of 11 cents per share in the year ago period.

I’ll provide some additional information on our execution later in the call, but right now I’d like to turn the call over to John Riley to discuss the financial results in detail.

Thanks, Herb. As Herb said, the Company announced a second quarter net profit of $448k or 3 cents per fully diluted share. This compares with the second quarter 2003 net loss of $1.5m or 11 cents per fully diluted share. Total revenues for the second quarter was $37.2m, up 24 percent from the year ago period. Revenues from international operations represent approximately 39 percent of total revenues in the second quarter of this year compared with 28 percent a year ago. An expected shift in our business is a byproduct of our distributor acquisition.

We had a lot of changes in revenue and expenses, separating foreign currency fluctuations in our continued international subsidiaries from our ongoing operations, which we measure on accounts and exchange rate. Research and Advisory Services revenue was $24.5m, up 27 percent from the year ago period of $19.3m. The increase in revenue was due to $2.9m of higher revenue from ongoing operations, incremental revenue of $2m due to the acquisition of subsidiaries in Italy, the United Kingdom, and Northern Europe in 2003, and the acquisition of our Middle East distributor in 2004, as well as a $400k favorable impact of foreign currency exchange rates on revenue.

Strategic Consulting revenue of $10.6m was 22 percent above the $8.7m in the second quarter of last year. This increase was principally due to incremental revenue of $1.8m due to acquisitions, as well as the $400k favorable impact of foreign exchange. These revenue increases were partially offset by $300k of reduced consulting revenues in ongoing operations.

Published Research Products revenue was $1.4m, the same as in the prior year. Total operating expenses of $36.7m increased 15 percent compared to the $31.8m in the second quarter of 2003. Cost of services and fulfillment, including reimbursable expenses, was $19.7m, an 18 percent increase from the $16.7m a year ago, and is primarily attributable to incremental costs of $2.4m associated with the acquisition, increased expenses of $300k in the ongoing operations, and the $300k impact of foreign exchange. Gross margin as a percentage of total revenues was 47 percent as compared to 45 percent a year ago. Selling and marketing expenses were $11m, a 25 percent increase from a year ago level of $8.8m. This increase was due to $2m of incremental costs associated with the acquisitions, $300k from the impact of foreign exchange, partially offset by $100k of lower selling and marketing costs in ongoing operations.

General and administrative expenses for the second quarter were $4.8m, a decrease of $200k from a year ago. This increase was due to $600k of lower general and administrative costs from ongoing operations, partially offset by $300k in incremental costs associated with acquisitions, and $100k from the impact of foreign exchange.

Other income was $21k during the second quarter compared to $350k last year, which had included a nonrecurring gain from liquidation of an investment.

The Company’s results for the six months ended June 2004 were a net loss of $1.1m or 8 cents per fully diluted share. This compares with the 2003 net loss of $1.4m or 11 cents per fully diluted share. Total revenues for the six months were $69.8m, up 20 percent from the year ago period. Revenues from international operations represent approximately 39 percent of total revenues in the first six months of this year compared with 28 percent a year ago. Again, an expected shift in our business as a result of distributor acquisition.

Research and Advisory Services revenue was $45.8m up 22 percent from the year ago period’s $37.7m. The increase in revenue was due to incremental revenue of $3.8m due to acquisitions, $3.3m of higher revenue from ongoing operations, as well as $1m favorable impact of foreign exchange.

Strategic Consulting revenue of $19.9m was 23 percent higher than the $16.2m last year. This increase was due to incremental revenue of $3.1m due to acquisitions as well as the $1.1m favorable impact of foreign exchange. These revenue increases were partially offset by $400k of reduced consulting revenue in ongoing operations.

Published Research Products revenue of $2.9m declined from the $3.2m in the year ago period due primarily to lower revenue from ongoing operations.

Total operating expenses of $70.8m increased 18 percent compared to the $60.2m in 2003. The cost of services and fulfillment, including reimbursable expenses, was $36.9m, a 16 percent increase from the $31.8m a year ago, and is attributable to incremental costs of $4m associated with acquisitions, $1m impact of foreign exchange, and increased expenses of $100k in the ongoing operations. Gross margin as a percentage of total revenues was 47 percent as compared to 45 percent a year ago. Selling and market expenses were $21.5m, a 32 percent increase from the year ago level of $16.3m. This increase was due to $3m in incremental costs associated with acquisitions, $1.5m of higher selling and marketing costs from ongoing operations, with $700k from the impact of foreign exchange. General and administrative expenses were $10.1m, an increase of $600k or 6.1 percent as compared to a year ago. This increase was due to $900k in incremental costs associated with acquisitions and $200k from the impact of foreign exchange, partially offset by $500k of lower general and administrative costs from ongoing operations.

Other income was $68k as compared with $700k last year, which included a nonrecurring gain of $350k on liquidation of an investment as well as a nonrecurring gain of $315k out of the final settlement of the Company’s investment in [Spikes Gavelle][ph].

I’ll now provide some comments on the balance sheet and cash flows. Our net cash position, defined as cash including restrictive balances, less bank debt and notes payable, decreased $9m to $13.3m as of June 30, 2004, compared to $22.3m as of March 31, 2004, reflecting seasonal billing cycles and payment of bonuses. During the six months ended June 30, 2004, the Company generated approximately $100k in cash from operations compared to $5.8m in the year ago period. A $5.7m decline in operating cash flow was due to a decrease in accrued liabilities relating to incremental bonus payments of $2m over the prior year level, a decrease in deferred revenue of $4.5m due to the way we invoiced multi-year contracts in the prior year, offset by an increase of $2m in cash collections year-over-year.

Total accounts receivable at the end of June was $29m, down 4 percent from last year. Day’s sales outstanding were 70 days compared with 89 days in the year ago period. Year-over-year deferred revenues have decreased 12 percent to $43.3m from $49.4m, primarily due to the way we bill multi-year contracts. Capital expenditures for the six months amounted to $666k compared with $322k a year ago, with the increase primarily due to investments in software and hardware as we continue to invest in our infrastructure on a global basis. I will now turn the call back over to Herb.

Thank you, John. This was an important quarter for Meta Group as we were successful in getting the Company back to positive operating results. As many of you on the call know, we made significant investments in recent quarters in acquiring our international operations and better aligning our research sales and consulting organizations. We are now seeing increased benefits from these investments, most directly in our abilities to provide consistent and greater value to our clients across the globe.

We saw a strong increase in revenues in the second quarter of 2004 versus the same period last year. The organic growth in our business in market share increases demonstrate that our higher value offerings are connecting with our customers. Our market share continued to improve relative to our largest competitors, rising to 12.4 percent in the second quarter compared to 10.8 percent in the year ago quarter. It is important to note that the direction we are taking in our business model and capabilities is in direct response to a shift in what our customers require from us.

As the industry evolves, there is still a need for objective research about IT hardware, software, and service alternatives, and Meta Group continues to meet that need. But our customers are increasingly seeking strategic advice on how to maximize the business value of IT as well as address the increasingly complex questions they face today. Questions such as, “How can a CIO manage near-term budget expectations while minimizing the impact on long-term strategic plans?” “How are businesses leveraging technology to respond to emerging compliance, governance, risk, and security challenges, and how do these demands change the IT organization?” “How do organizations ensure that technology environments remain stable while integrating and adapting to changing business requirements?” “How can an organization achieve success across the lifecycle of a sourcing decision, including strategy, procurement, benchmarking, and ongoing management?”

Increasingly, these are the types of strategic issues and questions that our customers are bringing to us and this is why Meta Group has invested in evolving the traditional IT research model to deliver on these complex requirements. By taking this approach, we are in fact building on Meta’s renowned strength and reputation for offering high quality advisory services that are in context with each client’s specific needs. Because of the changes we have made, we are now able to offer our customers a more flexible set of solutions.

We have integrated our Research Advisory Services with a range of action-oriented consulting capabilities from strategic planning to results analysis. Many of the major deals we captured recently are unique engagements that leverage this balanced brand of capabilities. As a result, we are being engaged much earlier in our customers’ planning efforts and ongoing through the lifecycle of their initiatives.

Meanwhile, our strategy of bringing our global affiliates into the unified Meta Group corporate organization is enabling us to offer more consistent service levels worldwide. We believe it is critical that Meta Group offer our global clients consistent guidance and coordinated services. They expect to have the same advice and capabilities wherever they do business and we can deliver on that expectation.

As we have mentioned in prior calls, we have distributors remaining in South Africa, Israel, and Argentina, and non-wholly-owned entities in Japan and Hungary. We continue to assess our ongoing strategy with regard to these relationships and I would note that we are in the process of transferring our ownership in the Hungarian entity and setting it up as an independent non-owned distributor. We expect to take a charge of approximately $400k in the third quarter associated with that transaction.

Now, the topic I am most excited about is our continued investment in our most important asset, our people. Our customers need much more than basic product research. They are looking to interact with experienced and highly capable advisors and consultants who can engage at the most senior levels, people who can provide objectives and trustworthy guidance on how the leveraged technology is a catalyst for business success within the context of their specific organization, markets, and business issues.

Meta Group has always distinguished itself by offering clients a high-touch model, based on interaction with our senior advisors. Clients value this model more than traditional commodity research and it is a value proposition that enables us to grow our business by meeting the increasingly complex strategic needs of our customers. To that point, we have continued to attract the best and the brightest. Many of our analysts and consultants have served as CIOs, CTO’s, and technology leaders within global organizations before joining Meta. For example, we recently added two analysts who collectively bring our clients more than 40 years of strategic insurance industry experience. When our clients engage with us they know they are getting industry leaders and seasoned professionals, well-versed not only in technology, but also in their business issues.

During the second quarter, we were again pleased with the expansion we achieved on a number of key accounts. For example, we expanded our relationship with one of the world’s leading financial services companies, which was worth about $800k in billings in the second quarter, by adding securities services and Meta Group’s strategic benchmarking capabilities to our existing portfolio of services that we have for that client. We continue to maintain a healthy balance of end-user and vendor clients with more than 70 percent of our Research and Advisor Services revenues coming from end-users. Nevertheless, our vendor business continues to show exceptional strength. For example, in the second quarter, we doubled our business with SAT with a retainer agreement that includes a full range of Meta Group’s capabilities and services.

As IT vendors continue to face market shifts and competitive pressures under higher cost scrutiny, they are turning more to Meta Group to understand what products and services, acquisition strategies, and market penetration approaches assure the highest degree of success in turbulent times. Meta Group’s ability to work with vendors on behalf of the end-user community ensures that vendor solutions remain market relevant. In our growing [Amia][ph] business, we had a $365k deal with one of Norway’s largest multi-national manufacturing firms, which enlisted us to help them create a global IT sourcing strategy. The initial phase of this project was successful and in our third quarter we won a $265k extension from this client to take the project to additional international business units. Again, these are just a few examples of the types of high value relationships we are continuing to build with our customers and our focus on providing comprehensive global solutions to the world’s leading organizations.

As we mentioned on the last call, we are driving our business model toward 10 percent earnings before interest and taxes. I’d like to give you an update on our performance relative to this target. The target is based on a cost of services and fulfillment of 48 percent to produce a gross margin of 52 percent. For Q2, we achieved a gross margin of 47 percent. This [inaudible] change from our Q1 performance and up 2 percent compared to the year ago period. Our selling and marketing expense target is 27 percent. For Q2, we achieved 30 percent selling and marketing expense, an improvement from 32 percent in the previous quarter. Our general and administrative expense target is 12 percent. For Q2, we achieved 13 percent G&A spending compared to 16 percent in the previous quarter. Our depreciation and amortization expenses target is 3 percent and for Q2 we met this target.

As you can tell from these numbers, we are moving in the right direction, but we still have some work to do to reach our goal. We will continue to measure ourselves against these expense levels in future quarters. Overall, I am pleased with the progress we have made in the quarter. Our industry is continuing to evolve, and I believe we have created a unique value proposition that is well suited to meeting our customers’ needs. I have been with Meta Group for eight years now and I have had many opportunities to engage with leading companies on the changing landscape of business and technology. We are entering an era where technology is not just a tool within the corporation, but it’s truly recognized as the backbone of business efficiency and innovation. The world is changing because of technology and I am proud to be a part of a company dedicated to providing in-context guidance so their clients can prosper during this era of change. With that, I’d like to open up the call to Q&A. Thank you.

Thank you, sir. (Caller instructions.) One moment, please, for our first question. (Caller instructions.) And we have a question from Steve Cohen with SoHo Partners. Please go ahead, sir.

Hi. Can you give an update on the 13D filing by Dale Kutnick?

Hello, Steve. This is Herb. Thanks for your question. Our Board is taking actions that we believe are appropriate under the current circumstances with respect to Dale’s filing. There are certain actions that have been taken, as many of you may have seen, such as Dale Kutnick’s recusal from the Operations Committee. We had a press release on that with the appointment of Gayl Doster to that Committee. There is also Dale’s recusal from Board consideration for any corporate transactions of the type referred in his Schedule 13D filing. Other than that, we are really not going to comment any additional information on the 13D filing of Dale or anyone else. Those are on public file.

Thank you.

And our next question comes from Brian Gunick with Corsair Capital. Please go ahead.

Hi. Along these lines of the 13D filing, have you formed a special committee to evaluate strategic alternatives? Have you hired an investment banker, things of that nature?

These are actions essentially that would have to be undertaken by the Board. This call, of course, is focused on the results of Q2 and the operation of the Company. You have probably seen that the Board of Directors has formed a Special Operating Committee to oversee the Company’s daily ongoing operations and we believe the Board is addressing the recent 13D filings appropriately, but I can’t comment on any actions they have taken.

Thank you.

(Caller instructions.) And we have a question from Mike Nera with Dewey Asset Management. Please go ahead.

Hi. Herb, I just wanted to mention that I really appreciated the way you ran through the various targets you have to get to a 10 percent operating margin, and then talked about where you were in progress towards them.

Thanks, Mike.

I thought that was great. What was CapEx for the quarter and what do you expect it to be this year?

John, can you talk to that?

Sure, if you can bear with me one second, Mike. CapEx for the quarter was three--just over $330k, bringing us to the $666k for the six months for the year. As I think we talked about last quarter, we expect the CapEx before capital leases to be approximately $1m for the year. As we said last quarter, that was--that’s up a bit when you include the cap leases as we’ve gone through a program to refresh our laptops and some other computer equipment this year.

Okay. And the charge for Hungary, is that non-cash?

Yes. We were--would expect that to be a non-cash charge, Mike.

Okay. Then the fully diluted share count in the quarter was up to 15m. Can you just talk about the change there between the first quarter and the second?

Sure, Mike, but--by going from a net wash to net income there is a variety of instruments in the accounting for the options that we’ve got outstanding. Once we turn to a profit we need to go through and make some assumptions about options being exercised and then how much of those options would come into play on a fully diluted basis. So that’s why you see the swing between the basic shares outstanding and the diluted shares outstanding. It disappeared with the profit.

Okay. Thanks.

You’re welcome.

(Caller instructions.) There are no further questions at this time. Please go ahead.

Well, John, do you have any closing comments?

Nothing I’d like to add, Herb.

Okay. With that, I’d like to thank everyone for taking the time to dial in, and I appreciate the opportunity to bring these results to you. With that, let’s close. Thank you.

Ladies and gentlemen, this concludes the Meta Group Second Quarter Conference Call. Thank you once again for your participation today. You may now disconnect.