Harte Hanks Inc (HHS) 2017 Q1 法說會逐字稿

Good day, and welcome to the Harte Hanks' First Quarter 2017 Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Scott Hamilton, Investor Relations. Please go ahead.

Thank you, Shannon. Good afternoon, everyone, and thanks for joining us for our first quarter 2017 earnings call.

Joining me on the call is our CEO, Karen Puckett; and our CFO, Robert Munden. Also in the room is our COO, Shirish Lal; and Controller, Carlos Alvarado.

Our call will include forward-looking statements, such as statements about our strategies, adjustments to our cost structure, financial outlook, capital resources; competitive factors; business and industry expectations; anticipated performance and outcomes; future effects of acquisitions, dispositions, litigation and regulatory changes; economic forecasts for the markets we serve; 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 our most recent Form 10-K and other filings with the SEC and in the cautionary statement in today's earnings release.

Our earnings release is available on the investor's section of our website at hartehanks.com.

And with that, I'll turn it over to Karen Puckett, CEO of Harte Hanks.

Good afternoon. Thank you, Scott, and thanks for everyone who's joining us today. I'd like to start by really acknowledging your patience as we work to get back to a normal reporting cadence. And we expect to release our second quarter results in late September or early October, and we anticipate getting current with the third quarter in November. So again, current financial reporting with our third quarter results that would be reported in November.

Today, I'd like to start by going over a number of factors impacting revenue in the first quarter, including improving customer satisfaction and new client bookings. Then, we'll talk about strategic investments and partnerships we're making to better position our company in growth areas of the market and improvement in our operations and cost structures as we continue our strategic turnaround. Robert Munden will then go through the financial results, and we'll finish up with questions.

From a revenue perspective, in the first quarter, our year-over-year revenue decline continued to slow, an early indication the turnaround we began 1.5 years ago. Revenues came in at on $94.9 million for a year-over-year decline of 4.7% versus last year at 8.9% decline in the first quarter. Our retail exposure and a former client loss was largely responsible for the revenue decline, offsetting improving performance in our other verticals. Operating loss was $6.3 million, a $2.2 million improvement from a year ago.

As I had mentioned, we continue to see improvement in client satisfaction. In fact, each quarter, we survey 1/4 of our clients and, currently, over 2/3 of our clients are extremely satisfied. This is up from 50% a year ago. We believe our operational performance improvement helped drive this increase. As a result, we've retained a number of large clients who had previously notified us of their intention to leave, representing $15 million in annual revenue.

On our last call, I think, we may have caused some -- a bit of confusion when we discussed our first quarter sales results, so to avoid the confusion this time around, I will refer to bookings when discussing new client wins and upsell. Remember, these are often relatively -- have little impact on revenue in the current quarter just due to the lag between signing the client and beginning services and billings.

Our Q1 bookings were healthy, and from a first half of 2017 perspective, we hit our internal bookings plan. I believe our reorganization and sales and marketing programs are really bringing us to better prospects that are interested in multiple services. I'd like to describe a few of our wins.

During the first quarter, we landed a new global IT services database client. This client will utilize our new Signal Hub platform from Opera Solutions. We believe strongly that this machine learning-enabled database will allow us to leapfrog the competition. When we own the database relationship with a client, we can leverage our strategic position to expand that relationship with follow-on services like analytics, direct mail strategy and creative, making us more important and a stickier partner to that client.

In addition to marketing new prospects, we are introducing the Signal Hub platform to existing database clients. Among the existing clients adopting the solution is a 14 -- is a Fortune 500 pharmaceutical company. We really feel it's important to get our database clients onto this new platform, where they can leverage the latest big data and analytics technologies to transform their marketing.

In addition to investments we are making in the database to improve our offerings, we are doing the same in areas such as data and partnerships. We are rolling out our third-party data platform called Global Dataview. In the past, what's different is we've brokered the data from third parties for clients, selling it into a one-time transaction with really just a very small broker's markup. With Dataview, we have onboarded house data filed from numerous data providers which enable us to help clients more nimbly acquire in a subscription model, the best data for their application and merge that with their own proprietary data to create the insights and decision information they need.

While I mention our partnership with Wipro on our last call, I'd like to reiterate that the partnership model is a key strategy going forward. Partnerships enable us to provide clients the benefits of increased capabilities without expending large chunks of capital. Wipro has helped us with several of our clients and brings more technical firepower than we had on our own.

I've also spoken about Nature Bounty (sic) [Nature's Bounty] on the last call. Since winning that account, we've added to the scope of that work, just proof that getting in the door and doing a great job allows us to potentially win more business with our strategy, and we see that really paying off. We're also very pleased with the progress we are making against our strategic initiatives, and we believe we're on the right track.

With that said, we continue to face headwinds in our retail segment due to large volume losses in direct mail for a major retail client, which will impact our growth overall for the rest of the year. And really, it's the mail and logistics practice area. With the volume challenges in direct mail, we're exploring partnerships to enable us to lower our fixed cost and allow us to make our cost model more variable, which will let us respond more quickly to changes in the market. This is work in progress, but we'll keep you apprised on that as it evolves.

Finally, I'd like to welcome Al Tobia and Mel Keating to our board, and look forward to working with them. And I'd also like to thank Steve Carley for his service on the board. He's been extremely helpful to me and, really, the whole team in providing helpful insights and guidance to the board.

We continue our work. We continue to see indicators that we are nearing an inflection point. We are challenged, as I said before, by the retail sector, but we are focused on profitability improvement and cash flow generation. I think we're in a very solid position to finish the year strong with good trajectories into 2018.

And now, with that, I'll turn it over to Robert.

Thank you, Karen, and good afternoon. Before I start my comments, I'd first like to turn the call to Shannon, who's going to give instructions for the question-and-answer session for analysts who have questions.

(Operator Instructions)

Thank you, Shannon.

Turning to our first quarter results. As Karen mentioned, our consolidated revenues were $94.8 million compared to $99.6 million of revenues in the first quarter last year. This represents a decline of 4.7% and a lower rate of decline than the prior quarter and year. Before I walk through the revenue results by industry vertical, let me begin by noting some adjustments to our verticals.

We've eliminated the other Select Markets vertical category, which was less than 10% of our revenue. We've re-categorized those customers into other verticals. We've also renamed the previously reported Technology vertical as B2B, and have added a Transportation vertical.

Our Financial vertical showed the strongest growth year-over-year, increasing 10%, driven by contact center work for a credit card service provider, database work for a national insurance company, and agency work for an automaker's finance company and a major U.S. bank.

We had a modest gain on our B2B vertical, driven primarily by increased spending from an entertainment network, a digital apparel market, and a global IT services firm.

Our Transportation vertical was flat last year.

Our Automotive & Consumer Brands vertical was down slightly year-over-year in the first quarter, showing the continued effects of an Asian automotive brand lost in the prior year and decreased marketing spend from a global consumer brand. These losses were largely offset by new work for a European luxury automaker and marketing programs performed for an association and a professional sports league.

Our Retail vertical remained our largest and it was also the largest contributor to our revenue decline for the quarter. This 11% year-over-year decline was driven by reduced logistics, contact center and mail volumes as well as database revenue declines from the final wind-downs from prior year's lost accounts.

As Karen mentioned, retailers are under increasing pressure and are cutting costs, giving us volume and rate pressures, which we expect to continue.

Our Healthcare vertical also declined significantly during the quarter and was the other significant drag on our revenue performance. This was driven by the continuing effects of the loss of a program for a pharmaceutical company and the loss of work for a home healthcare company.

Moving down the income statement. Please note that we are not providing an adjusted operating income this quarter, but we may do so in future periods, where doing so is helpful to better understand our results.

Our operating loss of $6.3 million was a $2.2 million improvement from the year-ago quarter. This is partially the result of benefiting from the full effects of the $25 million cost reduction initiatives we implemented last year and spoke to you about on our last call. Labor costs declined slightly and remained fairly in line as a percentage of revenue with the prior year period and reflect a full period of costs associated with the consulting practice we acquired late in the first quarter of 2016 as well as a large portion of the severance costs for the $10 million cost-reduction actions we announced earlier this year.

We ended the first quarter with a $43.6 million cash balance, which does not reflect the $34.2 million in tax payments made in the second quarter largely attributable to the taxable gain on the sale of Trillium Software.

At the end of the first quarter, we had no net debt. As you know, we have a new $20 million credit facility, which we'll continue to use to supplement working capital as needed.

For the quarter, we had an income tax benefit at an effective tax rate of 16.7%.

We anticipate lower customer losses and volume declines from increased customer satisfaction, an increase in bookings in the first half of the year and continued cost controls. As a consequence, we expect our cash flows will improve in the second half of the year. We believe that we have sufficient cash on hand and sufficient room in our credit facility to execute on our operating plans.

Regarding our second quarter results, we'll obviously announce those as soon as we are able, and we're hopeful that we'll be able to timely file our third quarter earnings release in November.

With that, Shannon, we'd like to open the call for questions.

(Operator Instructions) We'll go to our first caller, Michael Kupinski with NOBLE Financial.

First of all, I want to say that I'm pleased that the company actually hit our operating metrics, so I'm quite relieved about that. Secondly, I was just wondering in terms of the Q2. Obviously, your customer satisfaction's improving and your -- I was wondering if you're anticipating that -- following the first quarter that you're still anticipating that you will see moderating revenue trends continue throughout this year, and certainly, on a sequential quarterly basis. I was wondering your thoughts on that.

In general, Mike, yes. I think you know, obviously, the key focus for us right now is our -- just improving our profitability. But we are having strong, as I said earlier, not only first quarter but really, second quarter bookings. Not all of that revenue happens right away, but it does have an impact, and our client losses are declining. The challenge that we still have that we're very cautious and working hard on is just the retail volume ups and downs that we experience with our retail clients. And that's probably our largest strategic challenge. Other than that, we're feeling very well about the rest of the business and the inflection points that we're seeing there.

Got you. And since we're so close to back-to-school and it's such an important vertical for you in terms of retail, any thoughts on how the Retail vertical is looking at this point?

Yes, on the Retail vertical, we continue to see declines in volumes overall as their businesses have continued to see shifts in terms of their overall volumes. So we are seeing some impact overall, though that's pretty consistent with what we've seen in the past few years.

So it hasn't worsened, in other words?

Not at the individual customer level. We can't say that versus what we've seen in the past in individual customers, specifically, in general, is getting worse in terms of their volume trends, but they are -- we still continue to see trends going down.

And in terms of the previous thoughts that the management had, and certainly, I was just wondering if you were going to give us any updates on that guidance, I guess, was that the company believed that it could show revenue growth which was possible in the fourth quarter of this year. It sounds like you're still hesitant to kind of support that type of view and maybe looking towards the -- maybe, Karen, on your comments about the trajectory in 2018, I was just wondering if you -- your thoughts about when the company might have its inflection point towards revenue growth?

Yes. I would say that when you look at -- so we have revenue improvement, firstly, in nearly every vertical, but mail -- but Retail, which impacts our mail and logistics. However, there are things in our pipeline that we know about that likely could happen that could continue to change that trajectory in a positive way, but the cash flow improvement will continue also second half, and we'll be basically breakeven to positive for the year as we exit quarter 4.

On an adjusted EBITDA basis? Is that what you're talking about?

I'm sorry?

On an adjusted EBITDA basis, you're saying that you think you'll be cash flow positive for the year? I'm sorry. I just (inaudible).

Yes. We're probably -- hopefully using less adjusted EBITDA. But just in general, EBITDA or adjusted EBITDA, either way you want to look at it, yes. Absolutely.

And can you just talk about the thoughts in terms of the second quarter? Because obviously, in the second quarter, you'll still be cash flow negative in the second quarter. Do you have any thoughts in terms of where you might be in terms of your cash and debt at that point at the end of the quarter?

Well, yes, we're not going to disclose right now anything beyond what's -- unfortunately, what's in our filings. And like I said, we're going to try to get those Q2 results out as quickly as possible. So that's -- I don't want to give an incomplete picture by just giving that little snapshot.

Got you. Any thoughts on the prospective sale of 3Q? Anything that you can talk -- tell us maybe in terms of the level of interest in that business?

Things are progressing, and as we said before, we're not really going to give a lot of updates until we get near to more of a contractual process or done with the contract. But what I would say is 3Q continues to execute very well, both on the revenue and EBITDA standpoint, so very pleased about their performance and their focus, and things are moving along.

And is there any update in terms of the contingent liability related to 3Q? Is there any thought in terms of honing in on the number?

Not beyond what we've talked about on the prior call. No.

Okay. Are there other potential asset sales that the company's considering at this point? Or do you feel like you're going to sit tight with the assets that you have at this -- right now?

At this point, our focus is on executing on 3Q processes as we've announced and getting that done in a very timely and progressive way. So that really is our focus. There're no other asset sales that we're focused on at this point.

And in terms of the client wins that you were talking about, I would imagine that there's some level of investment that needs to be made with those new client wins. Is -- I was just wondering if that is factored in to your thoughts for the year in terms of the cash flow expectations.

Yes. I mean, we feel like -- in general, our cash -- yes, our cash flow expectation would have that accounted for in the cash flow as those clients come on board.

(Operator Instructions) The next question comes from P.J. Solit with Potomac Capital Management.

So you had previously announced 2 cost programs. One was $25 million, the other was $10 million. It sounds like the first quarter already reflects the full $25 million. I guess, number one, is that right? And number two, how much of the $10 million run rate have we seen in the first quarter?

So you're correct on the $25 million. And on the $10 million, we took those actions in the first quarter, so you're really not seeing that impact in the first quarter. You'll see that in coming quarters.

Okay, so if that was in place, you're essentially break even on the new cost structure since you lost about $2.4 million, I think, it was? I guess that's the right math. And that's your seasonally slowest quarter, the first quarter, right?

Yes.

Yes.

Okay. All right, good. Will we see the full impact then in the second quarter? Or not until the third?

You should see, if not all, almost all in the second quarter.

Okay. All right. And then, the strong bookings in the first half, can you quantify that at all or give a range or -- are you able to do that?

No. I think what I would say is that we had a plan, a budget with a quota assumption that we over-performed on, which I think is the first time in a long time in the company. So from our standpoint, that's very encouraging, and we are continuing to be encouraged by the pipeline for the second half of the year. So our plan is to exceed the budgeted quota that we have for the year.

Is the -- the $15 million of retained business that you previously thought you would lose, is that a big part of that bookings number? Or are you talking about things even outside of that?

No, no, no. When we say bookings, we're talking new services. It could be new to a new -- a brand new client and/or it could be new additional services to existing clients. But it's not part of the kind of retention calculation.

Okay, that's good. Okay, I would say, given -- as you think about this 3Q process, I mean, you've got a company that on a sum-of-the-parts basis and as you get to operating positive and potentially, growth later this year and into '18, I view as very mispriced. So to the extent that you get into the process with 3Q and buyers take the whole company valuation and try to use that as a leverage point, my two cents would be that if you're not getting prices that reflect what is a very valuable business in 3Q to not feel pressured to sell it at the wrong price. Just wanted to pass that on.

Appreciate that insight.

No further questions in queue at this time, sir.

Okay, very well. So thank you once again for joining us. If you have any questions, feel free to call me.

I'm sorry, sir. My apologies. I did have a late queuer. Would you like to take that now?

Yes, that would be fine.

Kelly Cardwell, Central Square Management.

Just real quick on the cost savings, the $35 million, could you just remind us how much of those savings came from cuts in executive compensation?

Could you repeat that? I'm getting background noise.

Just on the cost savings, the $35 million. How much of that came from cuts on executive compensation? It looked a little high a year ago that I noticed in [computation] of changes.

I would say that we've taken -- we've restructured our leadership executive team, so some of that did come from that cost savings.

Yes, but not -- I wouldn't say -- not a material part of the savings came from either cuts to executives or current executives' compensation.

Is that something that's being considered in the future?

That's -- I mean, that's a board and compensation committee matter of discussion just about every time they meet.

And we do have a follow up. Michael Kupinski, NOBLE Financial.

I just want to go back to your comments about the prospect of having roughly flat to slightly up cash flow for the year. Certainly, your fourth quarter is your seasonally strong quarter. And I was wondering if you're just being cautious related to the Retail in that type of guidance, and what your thought process is in terms of executing at all the cost-cutting metrics that you've already put in place because it seems like the full brunt of that should kind of largely fall, I guess -- especially with the $10 million additional cost cut that you have, should fall into the fourth quarter in that why wouldn't the cash flow number be a little higher?

Well, I think for the second half of the year, that will be higher than the first part of the year, so that's where you are getting the benefit. Yes, fourth quarter is strong for us, and yes, you will see the impact of the cost reductions that we continue to make. So without giving a specific number, we do believe that our cash flow will improve second half. And then going into '18, we're -- feel like we're in a really good position there.

And don't forget, we also had -- in the second quarter, we also made a sizable tax payment.

Right. I'm just trying to -- so do you think you're going to be cash flow positive in the third quarter? Or do you think it's still going to be negative in that mostly your fourth quarter's going to kind of offset the negative cash flow you had in the previous quarters? Is that the way to look at it?

I think you'll see improvement in the third quarter. It won't all just happen in the fourth quarter.

Yes, then you will be cash flow positive in the third quarter or just improvement over the $1.4 million loss in cash flow in the third quarter of last year?

Yes. I mean, we're -- again, we're sticking to slight positive or breakeven for the second half. And I don't think we're going to parse it by quarter at this point, unfortunately, Mike.

And there are no further questions.

Okay, I think we'll wrap it up, then. Thank you, again for calling. And once again, if you have any further questions, you're welcome to call me, Scott Hamilton. My contact information is on the press release. Thank you very much. Bye-bye.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation. You may now disconnect.