August 13, 2022

Earn Money

Business Life

Edited Transcript of HHS earnings conference call or presentation 12-Mar-20 8:30pm GMT

San Antonio Apr 14, 2020 (Thomson StreetEvents) — Edited Transcript of Harte Hanks Inc earnings conference call or presentation Thursday, March 12, 2020 at 8:30:00pm GMT

* Andrew B. Benett

Harte Hanks, Inc. – CEO & Executive Chairman

Harte Hanks, Inc. – CFO

* Michael A. Kupinski

NOBLE Capital Markets, Inc., Research Division – Director of Research and Senior Media & Entertainment Analyst

Good day and welcome to the Harte Hanks Fourth Quarter and Year-End 2019 Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Rob Fink of Hayden IR. Please go ahead, sir.

Thank you and good afternoon, everyone. Thank you for joining us. Hosting the call today are Andrew Benett, Executive Chairman and CEO of Harte Hanks; Laurilee Kearnes, CFO.

Before I begin, I would like to tell everyone that the information provided during this call may contain forward-looking statements such as statements about the company’s strategy; adjustments to its cost structure, financial outlook and capital resources; competitive factors; business and industry expectations; anticipated performance and outcomes; future effects of acquisitions, disposition, litigation and regulatory changes; economic forecasts for the markets we serve; expectations related to cost-saving measures; and the availability of tax refunds and other statements that are not historical facts.

Actual results may differ materially from those projected or implied in these statements because of the various risks and uncertainties, including those described in the company’s Form 10-K and 10-Q and other filings with the SEC and cautionary statement in today’s earnings release.

The call also may reference non-GAAP financial measures. Please refer to the earnings release that was issued after the close today for reconciliations and other related disclosures. The company’s earnings release is available on the Investor Relations section of its website at hartehanks.com.

With all that said, I’d like to turn the call over to Andrew Benett. Andrew, welcome to Harte Hanks.

Andrew B. Benett, Harte Hanks, Inc. – CEO & Executive Chairman [3]

Thank you, Rob, and good afternoon, everyone. As most of you know, this is my first quarterly conference call with Harte Hanks, having joined the company in November. The last few months have been extremely productive. My first task was to assess the operations and the business lines at Harte Hanks, performing a top and bottom line review and building off the work previously by the Board and prior leadership. Following this review, I worked with new and existing leadership who thought a clear and accelerated path forward.

A few high-level observations to ground my comments and the plan I’ll share. First, under prior management, Harte Hanks operated in silos. But our people are highly collaborative and when Harte Hanks was performing at its best, it operated fluidly and collaboratively. In returning to a collaborative way of working, we expect to bring better service to clients in a much more efficient organization.

Second, when the business was in cyclical decline, there was little focus on growth. We addressed these issues in our new structure and our plan, and I will talk to specifics in a moment.

And lastly, we believe we have a highly differentiated offer, as seen by the work we do for the world’s leading companies. Harte Hanks is in a very desirable position within the digital and direct marketing category. We’re highly focused on high ROI marketing activities, like social, e-mail, direct marketing and customer care. It’s important to note that businesses like ours have traded at high premiums and are considered to be where the market is going due to strong delivery from marketers.

Now how we’ll achieve our goal? Our plan has 3 fundamental pillars. The first is to optimize the business and the way we work. The second is to grow our current services with existing and new clients. And the third is to transform our business for the future. I’d like to highlight our progress on each.

Within the first, optimizing our business and the way we work. While we have made efforts to integrate our businesses in the past, Harte Hanks was largely run as a holding company. We’ve quickly and completely changed this, integrating our activities and reorienting our operations, putting the customer at the center of everything we do. This better enables us to offer valuable and differentiated solutions to our customers, making us more integral to their operation. This also reflects a new and improved operating model for Harte Hanks which is fully operational today. The net result of this model should be a leaner and more profitable enterprise.

To enable this, we’ve made the following moves. We’ve promoted Keith Sedlak from Head of Sales and Marketing for Marketing Services Group to Chief Growth Officer for the entire organization. Keith will be responsible for driving organic growth from our existing portfolio, adding new logos and working with the team to develop new products and services for our clients.

In addition, we promoted Dana Adams to the role of Chief Client Officer, integrating client service across the organization and our practice lead within the organization. We believe this will allow seamless delivery for our clients as well as better operating margins.

And finally, last week, Gretchen Ramsey joined Harte Hanks as Head of Strategy, where she’ll work with Keith and Dana to deliver strategic excellence and help develop new products and services.

In addition to our operating model, we have numerous initiatives focused on efficiency underway. These include investing in our fulfillment technology infrastructure to more efficiently and effectively service our customers; consolidating our data centers and migrating applications and data to a cloud-based environment; optimizing and upgrading our leased offices to best serve customer needs; moving our Austin contact center to a more modern and cost-efficient location; realigning key performance indicators, pricing metrics and management accountability to focus on profitable growth; and lastly, we anticipate shedding a fair amount of low-margin legacy revenue during 2020, expanding our margin profile across our businesses.

Our second pillar, profitable growth. With this, and with the new model of leadership, we’re focusing our teams towards driving significant and sustained profitable growth. To do this, there are a few aspects underway. First, new business acquisition. Our new operating model is delivering promising early results. Our weighted pipeline to date is $22 million and unweighted is $55 million. To hit our plan for the year, our target is $13 million. To date, we’ve secured $3 million in new business. This year-to-date includes a leading financial services brand, a leading technology brand, a fast-growing consumer DTC company, biotech company and a telco company.

Please note, this is the largest and most diverse new business pipeline that we’ve seen in the past few years. In fact, these engagements represent both categories we are focusing on, health care, consumer DTC, technology and financial services as well as more of the work that we will do for clients like this. In each of these engagements, we are working with these clients from building and enhancing their data through to the strategy and implementation in the market across digital, direct and social.

The second area that I’d like to highlight is business unit focused. In order to grow at a significant pace, we’re focused on driving our high-margin, cash-generating business lines. Our marketing services and fulfillment businesses as such are both high-growth potential, high-margin businesses. In fact, today, they represent approximately 60% of our current sales pipeline.

Importantly, these 2 businesses contribute positive and growing EBITDA to our consolidated results with room for improvement and scale. We clearly define value propositions for these businesses as they integrate into the Harte Hanks business, and this is resonating in the marketplace.

Our contact center business is having a very strong start to the year, providing solid contribution margin to help drive stability and strategic investments in our business. We will also be building out a business intelligence service at the back end of our contact center to add further value to our clients.

And lastly, although our print business continues to face headwinds, to help address this in 2019, we closed 2 locations, have reduced additional costs as well over the last 4 months. We’ve now completed the rightsizing of this business and are considering all strategic options.

And the third pillar of our plan, transforming our business. When you look at the Harte Hanks business as a whole, we believe that we’re extremely well positioned to drive innovation by expanding our current service offer and creating new lines of revenue. To that, by the second half of 2020, we will launch 2 new service offers.

The first is a DTC, direct-to-consumer, sampling business powered by our data expertise. This is enabled by marrying our marketing services business and our best-in-class data capability with our fulfillment business. Interestingly, we’re already well established in the B2B sampling category working for blue-chip clients across consumer packaged goods and consumer DTC. We see further opportunity across health care, auto and other categories that are both enabled by data and looking for a high-touch consumer experience.

The second is a managed marketing services business. This offer focuses on expanding the current work that we do for major blue-chip B2B tech players and creating an integrated offer to perform day-to-day marketing support duties, either on a client’s location or in ours. This work ranges from data operations, analytics and business intelligence, marketing automation and other high time intensity, lower value functions for our clients’ organization.

It’s important to note that much of the in-housing market today is being conducted and — is being conducted by big global consulting firms or low-cost BPOs. We see an opportunity to be well positioned in the middle, especially given our 200-plus person data and development center, which is world-class located in Iasi, Romania. The plan I just discussed will coalesce during 2020, and we expect to see growth from new customers hoping to eliminate the revenue attrition Harte Hanks has experienced over the past few years.

When we consider our new operating model, business line focus, new service offerings and new business decline, we expect to generate positive EBITDA for the full year of 2020 and anticipate narrowing our cash burn throughout the year, ultimately achieving free cash flow by mid-2021.

Operationally, we anticipate announcements about new products and services as well as continued initiatives to improve our efficiency. We continue to consolidate our footprint and cut duplicative and unnecessary costs. Specifically, our Austin lease, which I previously mentioned, we’ve exited several facilities, including Wilkes-Barre, Fullerton and our Jacksonville fulfillment facility, reduction of our data center footprint, optimizing staffing and reductions in licensing and vendor spend. In aggregate, we anticipate these cuts will yield $3 million to $4 million in incremental savings realized this year beyond the cost reductions implemented last year.

Much of my prepared remarks thus far have focused on near and longer-term future of Harte Hanks. It’s important to note progress that we’ve already made. The fourth quarter was the second quarter in a row that Harte Hanks achieved positive EBITDA. For the quarter, we generated positive income from operations. Our cash balances remain strong and we have the necessary liquidity to execute our turnaround plan. Indeed, the fourth quarter of 2019 was the best quarter for Harte Hanks since 2017. And with substantial work completed in 2019 to reduce our cost structure, the management team as well as members of the Board were to identify restructuring opportunities and take appropriate action, afterwards resulted in over $22 million of annual savings.

I’d like to talk now about segment reporting last, and through this, we will be transitioning to segment unit reporting. This will enable better visibility into the business and we hope, fuller appreciation of the value that exists in the company. We’re targeting the second half of 2020 to roll this out.

And lastly was obviously on everyone’s minds today, the coronavirus, and how it is impacting our business. Harte Hanks is closely monitoring the impact of COVID-19. Our top priority remains the health and safety of our employees, our customers, our partners and the communities in which we work. We’ve taken steps to eliminate travel to foreign countries and reduced domestic travel to essential travel only. We’ve updated our internal employee website to include up-to-date information regarding COVID-19.

Most businesses are facing the impact of the virus. This risk we see lies more in the marketing spend decline and items specific to our business or our operating model. While all client categories vary, our portfolio is highly diversified, and we believe that serves as somewhat of a hedge against what is happening in the market today.

Since the news of COVID-19, over the past few weeks, it has been challenging for everyone. As a team, we’re doing everything to make sure that our employees are safe. As of today, there are no reported cases that an employee has contracted or has been exposed to the virus. This is, however, an appropriate time for everyone to stay informed and prepared and we’re doing exactly that. We have teams working throughout the company, updating our contingency plans for our business and our people. We’ve also created a site on our own — our own internal site to make sure that our employees and customers have access to all this information.

I have also tasked leaders of our company to evaluate alternative work arrangements with us to make sure that jobs that are essential to the operation and maintain in the event that a location or an area is declared a local state of emergency.

In this rapidly evolving situation, we continue to monitor it daily. As an example, Romania has mandated work from home, and we’re implementing our plans there to do exactly that. Massachusetts declared a state of emergency on March 10 and as such, we are complying with that as well. Rest assured, we’re in the process of taking the appropriate action as quickly as possible and are trying to stay ahead of it.

Regarding business impact, like others in the marketing services industry, we expect to see some impact to the business. To date, our work with our clients has remained steady, and we’re doing all we can to help our clients’ businesses during these times. I’m extremely proud of the Harte Hanks team, exceedingly appreciative of all the efforts with everyone involved and very excited to be a part of this bright future.

I will now turn it over to Laurilee to walk through the details of our financial performance. Laurilee?

——————————————————————————–

Laurilee Kearnes, Harte Hanks, Inc. – CFO [4]

——————————————————————————–

Thanks, Andrew. The company’s cost reduction efforts continue to be reflected in our quarterly results. As you may recall, in the first quarter of 2019, our year-over-year operating expense decline, net of restructuring and impairment costs nearly offset the full scope of the revenue decline during the quarter.

Then, in the second quarter of 2019, our year-over-year operating expense decline, again, net of restructuring and impairment costs exceeded our year-over-year revenue decline by $3 million. We built upon this momentum in third quarter with an operating expense decline of $17.3 million year-over-year compared to a revenue decline of $12.2 million. This resulted in our cost reductions outpacing our revenue decline by $4.6 million.

And most recently, in the fourth quarter, our operating expense decline of $22.5 million outpaced the revenue decline of $17.9 million by $4.7 million. We expect this momentum to continue into 2020.

Turning to our fourth quarter results. Fourth quarter revenues were $52.3 million compared to $70.2 million last year or a year-over-year revenue decline of $17.9 million or 26%. For the quarter, revenues were down compared to the fourth quarter of 2018 in all verticals with the exception of the Consumer Brands vertical. The largest decline among our verticals was in retail, which was down $9.7 million or 50%, mostly due to losses in our mail and logistics business.

Our operating expenses for the fourth quarter of 2019 were $51.9 million compared to $74.5 million in the year-ago quarter, a decrease of $22.6 million or 30%. We reduced our operating expenses in all areas, including labor, production and distribution and advertising, selling, general and administrative to more than offset the decline in revenue. Our restructuring expenses during the fourth quarter totaled $932,000. The majority of this is comprised of severance, facility charges and termination fees related to certain vendor agreements.

For the full year 2019, we recorded restructuring charges of $11.8 million. We expect to record declining restructuring charges over the next few quarters. To date, we have identified annualized savings of more than $20 million that are associated with these restructuring charges. A significant part of this has been focused on our vendor costs. We estimate our annual vendor-related savings to be approximately $14.5 million. We continue to evaluate our vendor-related costs and expect to realize additional savings in the coming quarters.

Operating income was $422,000 for the fourth quarter of 2019 compared to an operating loss of $4.3 million in the quarter — in the year-ago quarter and an operating loss of $4.5 million in the third quarter of 2019. Fourth quarter adjusted EBITDA improved to $3 million, up from negative $1.6 million in the same period last year despite a revenue decline of $17.9 million.

Adjusting for the nonrecurring, restructuring and impairment expenses, our adjusted operating income was $1.7 million compared to a loss of $3.1 million in the year-ago period and a loss of $1.1 million in the third quarter of 2019. The improvement reflects substantial cost-cutting actions taken by management in light of declining revenues.

Net loss for the fourth quarter of 2019 was $2.9 million or $0.49 per basic and diluted share compared to net income of $1.6 million or $0.21 per basic and diluted share in the fourth quarter of 2018. Sequentially, the net loss improved from $6 million or $0.97 per basic and diluted share, mainly due to lower operating expenses in the fourth quarter.

Turning to the full year results. Revenues for 2019 were $217.6 million compared to $284.6 million last year for a year-over-year revenue decline of $67.1 million or 24%. For the year, revenues were down in all verticals compared to 2018 with the exception of our health care vertical. The largest decline among our verticals within retail, which was down $25 million or 38%, mostly due to losses in our mail and logistics businesses.

Our operating expenses for the full year 2019 were $239.2 million compared to $310.7 million in 2018, a decrease of $71.5 million or 23%. The $71.5 million decline in operating expenses more than offset the $67.1 million decline in revenues, building momentum for improved financial results. We reduced our operating expenses in all areas, including labor; production and distribution; and advertising, selling, general and administrative expenses to offset the decline in revenue.

As I mentioned earlier, our restructuring expenses for the full year of 2019 totaled $11.8 million. Operating loss was $21.6 million for the full year 2019 compared to an operating loss of $26 million in 2018. Adjusted EBITDA for the full year 2019 improved to a loss of $3.4 million compared to a loss of $14.3 million in 2018.

Adjusting for the nonrecurring, restructuring and impairment expenses, our adjusted operating loss was $8.7 million compared to a loss of $21.7 million in 2018. Net loss for the full year 2019 was $26.3 million or $4.26 per basic and diluted share compared to net income of $18 million or $2.39 per basic share and $2.38 per diluted share in 2018. Net income in 2018 includes a $30.1 million gain on the sale of 3Q Digital, which we completed in February of 2018 as well as an income tax benefit of $18.1 million.

Turning to our balance sheet and liquidity. As of December 31, 2019, we had cash and cash equivalents of $28.1 million. This compares to a cash balance of $20.9 million as of the period ended December 31, 2018. As of December 31, 2019, we had $18.7 million in long-term debt, which reflects the current draw on our $22 million bank credit facility.

With that, operator, we would like to open the call for Q&A.

================================================================================

Questions and Answers

——————————————————————————–

Operator [1]

——————————————————————————–

(Operator Instructions) We will now take our first question from Michael Kupinski of NOBLE Capital Markets.

——————————————————————————–

Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division – Director of Research and Senior Media & Entertainment Analyst [2]

——————————————————————————–

First of all, the advertising and SG&A expense was significantly lower than expected. And I know that you’ve been cutting cost, but that was the biggest variance to the upside cash flow estimate that I had. I was wondering if you can give me a sense of the run rate for that line item going forward. Were there any particular things in the fourth quarter that maybe were onetime statements or true-ups or whatever. Just kind of give us a sense of what that looks like going forward.

——————————————————————————–

Laurilee Kearnes, Harte Hanks, Inc. – CFO [3]

——————————————————————————–

Sure. Yes, there were actually some onetime savings in Q4 that we don’t expect going forward. I expect those to be closer to the run rate of Q3, but they should still be down due to the savings that we have on some of these vendor-related contract changes.

——————————————————————————–

Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division – Director of Research and Senior Media & Entertainment Analyst [4]

——————————————————————————–

And what were some of the onetime savings? What was in the number?

——————————————————————————–

Laurilee Kearnes, Harte Hanks, Inc. – CFO [5]

——————————————————————————–

So there were a couple of things that we had. One item that we had was a settlement on an old insurance claim that came in higher than we expected. The demand accounted for a piece of that.

——————————————————————————–

Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division – Director of Research and Senior Media & Entertainment Analyst [6]

——————————————————————————–

Got you. And then given the fact that you plan to exit low-margin or money-losing revenue, can you give us a sense of now the revenue that this may affect? And then also, there was an acceleration in the rate of decline in revenues in Q4 and albeit, that was right in line with my expectations. But I was wondering if you can give us a sense of how revenues appear to be pacing in Q1? Are you expecting moderating revenue trends beginning in the first quarter? Or when can we assume — or what should we assume in terms of revenues throughout the balance of the year?

——————————————————————————–

Laurilee Kearnes, Harte Hanks, Inc. – CFO [7]

——————————————————————————–

Yes. I mean, we expect that the pace of the revenue declines will slow. Now obviously, we’re in some unprecedented times. So there’s some — of course, some uncertainty. We believe, though, that we have a strong position for our services, and we haven’t seen any declines yet with our customers and most services. We do expect that we will have some year-over-year impact from customer losses that we had earlier in the year, but we do expect the leveling out of the revenue.

——————————————————————————–

Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division – Director of Research and Senior Media & Entertainment Analyst [8]

——————————————————————————–

Got you. And then you’ve indicated that a lot of the vendor contracts have been renegotiated, but that there were still some that you felt that you could renegotiate further. Are these projects that we negotiated last year and just looking for better terms? Or are these additional vendor contracts that have yet to be renegotiated?

——————————————————————————–

Laurilee Kearnes, Harte Hanks, Inc. – CFO [9]

——————————————————————————–

I think most of these are additional vendor contracts that we’re looking at. So we have — as you know, you have contracts that come off at different cycles. So as each contract comes up, we’re doing a deep look at every contract that comes up for renewal, evaluating whether it be licenses — license count or any terms in the contracts and renegotiating them.

——————————————————————————–

Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division – Director of Research and Senior Media & Entertainment Analyst [10]

——————————————————————————–

Got you. And then can you give us a sense of how much revenue the print business generates? And is that generating positive cash flow? And then I think you indicated that this is a business that you’re evaluating strategic options. I was just wondering, is this the only business that you’re evaluating at this point? Or are there other businesses that might not be performing in line with how you plan to reshape the company and that there might be other options going forward?

——————————————————————————–

Andrew B. Benett, Harte Hanks, Inc. – CEO & Executive Chairman [11]

——————————————————————————–

Yes. I mean this is a business that’s been, as we said, the hardest hit and where the majority of our declines have come from and thus the need to look at all options. We are looking at the business as a whole. As I mentioned earlier, we do have multiple high growth, high EBITDA businesses that we believe primarily need to scale because the businesses themselves, both from the offer that they have to clients as well as how they’re managed and how the operations flow, do play well.

——————————————————————————–

Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division – Director of Research and Senior Media & Entertainment Analyst [12]

——————————————————————————–

Can you give us a sense of what the annual revenues for this particular portion of the business — do you plan to look at options that it generated in 2019?

——————————————————————————–

Laurilee Kearnes, Harte Hanks, Inc. – CFO [13]

——————————————————————————–

Yes, it’s a smaller percentage of the total. It’s approximately 15% of the total revenue.

——————————————————————————–

Andrew B. Benett, Harte Hanks, Inc. – CEO & Executive Chairman [14]

——————————————————————————–

And that (inaudible) obviously represented more.

——————————————————————————–

Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division – Director of Research and Senior Media & Entertainment Analyst [15]

——————————————————————————–

And in terms of the long-term debt, do you anticipate kind of getting up to the $22 million? Or do you think that given the fact that you do have your cash that you plan to manage debt at current levels going forward because you have a little room under your revolver, I guess, right?

——————————————————————————–

Laurilee Kearnes, Harte Hanks, Inc. – CFO [16]

——————————————————————————–

Yes, we don’t expect to increase that debt level.

——————————————————————————–

Operator [17]

——————————————————————————–

And there are no further questions at this time. So that now concludes the call. Thank you for your participation. You may now disconnect.

Source Article