Harte Hanks Inc (HHS) 2017 Q3 法說會逐字稿

Good day, everyone, and welcome to the Harte Hanks' Third Quarter 2017 Earnings Conference. Today's call is being recorded. (Operator Instructions)

And now I'd like to turn the conference over to Mr. Scott Hamilton, Investor Relations. Please go ahead, sir.

Good morning, everyone. Thanks for joining us for our second quarter 2017 earnings call. Joining me on the call today is our CEO, Karen Puckett; our CFO, Robert Munden. Also in the room is our 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 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 call may also reference non-GAAP financial measures. Please refer to today's earnings release for the required reconciliations and other related disclosures. Our earnings release is available on the Investors Section of our website at harte-hanks.com.

I'll now turn the call over to Karen Puckett, our CEO. Thank you.

Thank you, Scott, and good morning, everyone. I want to thank all of you for joining us here this morning. I'm going to start with a few comments on our ongoing strategy and our performance in the quarter. And then, I'll turn the call over to Robert to go through the financial results. And then, we'll get into questions you may have.

First, I'd like to say that I'm glad we are back on a normal earnings announcement schedule. I know that it feels very good, and I'm sure most of you are happy about this as well. And as you may have seen, we have received notice from the New York Stock Exchange that we are now in compliance with respect to our stock price.

Moving on to the quarter, I think our third quarter results highlight the actions we have taken on our turnaround. Robert will go into more detail. But our revenue decline continued to moderate and we trend more than $8 million in expenses, which gave us $5 million year-over-year improvement in operating income, coming in about $1 million. The $8 million of expenses was made up of $6 million of operating expense and $2 million from the effect of litigation accrual in the prior period last year.

Like the second quarter, the results were in line with our internal plans with respect to revenue, new sales bookings and profitability. We continue to see and expect to continue to see softness in the retail vertical, which impacted our revenue in third quarter, and we'll have the fourth quarter -- and we'll have an impact on the fourth quarter likely even more. On the new bookings front and again new bookings would be sales to new clients or new types of work for existing clients, we continue to meet our internal plans. We believe that our increased lead generation and discipline about improving the quality of our sales (inaudible) has resulted in meaningful improved closed rates compared with a year ago.

And this is also helping us in a number of ways because we're not wasting time and resources on deals that we're not well positioned for and it also improved our ability to forecast our sales bookings. In fact, our bookings per sales person are double what they were a year ago, and we are pleased with the productivity improvements we have been able to achieve.

I'm going to now mention a couple of notable wins for the quarter, new wins. On the existing client side, we are expanding an e-mail program that we ran for a very large global bank by more than $0.5 million annually.

A new logo, our new client side, we won several large interesting engagements, for example, in retail, we're working with the global game and electronics retailer to drive more foot traffic into their stores. We have signed a 5-year multi-dollar contract with major cruise line, supporting 2 audiences, both consumer and the travel agent audience. In Europe, we won a large outbound demand generation engagement with a global specialty B2B technology company. And finally, we won a logistics and fulfillment deal with a global customer electronics company. All in all, we had a good mix of engagement agency and traditional service wins.

In the previous quarter, we discussed our retail revenue challenges because fourth quarter is traditionally a strong retail, we will see -- we will likely see or we anticipate seeing larger year-over-year revenue decline in the fourth quarter. Though with our continued cost control, we expect positive operating income in fourth quarter.

Before turning the call over to Robert, I'd like to reiterate that we are pleased to be meeting or exceeding our internal plans with respect to new business bookings and most importantly profitability.

I am pleased also to be able to say that I believe we continue to make progress in our transformation. I'd also like to thank Robert for his willingness to step up and assume the CFO role these past 9 months, leading our finance and accounting groups through what has been a very challenging time. We look forward to our new CFO, Jon Biro, joining us after we file our 10-Q in the coming days. So we can benefit from his experience and transforming companies and improving profitability.

Now we'll turn the call over to Robert.

Thank you, Karen. It's been a meaningful challenge, and I join you in welcoming Jon to the team. Good morning, everyone. Our consolidated revenues for the third quarter were $94.4 million compared to $97.4 million in revenue for the third quarter last year. This 3.1% decline is slightly higher than last quarter, but it's quite a bit lower than the rate of revenue decline we showed in the same period last year.

Looking at our performance within industry verticals, financial services was our strongest vertical growing $1.2 million or more than 8% year-over-year. This was driven by strong increases across several clients, which overcame a multimillion dollar loss from a large wholesale credit card client.

Our health care vertical revenue declined year-over-year by about 2.7% due to the continuing effects of the loss of a large medical insurance client and a medical device services -- and services company.

We continued to do well in the nonregulated Pharma subsegment, providing both contact center and fulfillment services to clients as we refocus our efforts toward this subsegment.

In B2B, revenue declined by just over $2 million, driven by program and volume declines for agency -- rather for engagement agency and contact center services for a variety of clients, including telcos, transportation and high tech.

In our retail vertical, revenue declined by $1.7 million or 6.4%, mainly due to the loss of marketing programs we had with several big box retailers across a variety of service lines. This was as expected and in line with what we've communicated to you. These declines were partially offset by strong growth of logistic services for another retailer.

Labor was down as a percentage of revenue, both sequentially and year-over-year due to reductions in most areas of labor partially offset, however, by increases in temp labor and consultants, primarily in our tech development.

Production was essentially flat as a percentage of revenue, while SG&A was down as a percentage of revenue. Our focus on expense control led us to improved operating income. We posted approximately $1 million of operating income, which is an improvement of $5 million from the third quarter of 2016.

Although we've made gains in profitability, we expect our revenues in the coming quarters will be challenged by continuing declines in our retail vertical. We will continue to benefit from the reduced cost base from our actions affected in the last year, which will enhance our financial flexibility to effectively run the business.

With that operator, we would like to open the call for questions.

(Operator Instructions) We'll turn first to Michael Kupinski with Noble Capital Markets.

Congratulations on positive EBITDA. In terms of the HCs in the quarter, can you give us what the second quarter -- what was in the second quarter versus the third quarter is headcount still coming down?

Yes, we'll have to follow up a specific headcount, but I'll tell you it's coming down as well as when we likely are downsizing, sometimes the higher-paid employees are being replaced with lower-paid employees and then, of course, with our Wipro outsourcing agreement that's allowed us to bring our cost structure down.

Yes. The other thing to remember is beginning in the third quarter, we start some ramp-up programs for -- in our contact center service line. So the -- some of the cuts we make may be offset by those.

Yes. And Mike, I would just add that by kind of practice area, we call them, we've been very focused on making sure that our utilization rates are where we want them and they significantly improved year-over-year. So that's the key focus that we have as an organization to continue to increase our profitability.

So payroll expenses as a percent of revenues came down in the third quarter, but I'd -- given there is probably some seasonality and you just mentioned contact centers that you are hiring. Can you give us some thought about what the payroll expenses would look like in the fourth quarter?

Well, we'll have -- we'll continue to have some seasonality, obviously, in our -- driven by our retail sector mainly in mail and logistics. And in the contact center, we're still working through the lot of the health care customers that we support on the medical insurance. So...

Would you expect that payroll expenses will be down kind of similarly what we saw in the third quarter?

I think they're going to be up over third quarter because of the higher seasonality, but they're going to be down -- they're going to -- they're likely to be down year-over-year. Yes.

Okay, on a percentage base, it'd be down, yes. And in terms of the production and distribution expenses, I would have thought that maybe we would have gotten a little bit -- well, can you just tell me what's going on there because I would have thought that given the lower volumes and so forth that we're seeing across the board and retail and so forth that, that number might be down a little bit more? Can you give us a little thought about how that looks going into the fourth quarter?

Well, it is down year-over-year as you said. I guess, you thought it would be down more. We continue to have some reduction based on the volume. In terms of -- it has been offset by some unfavorability in the -- just the transportation cost with some of the vendors, but we've been doing a very good job because we have a good network to be able to diversify that.

Got you. And then...

I would say the same trend in fourth quarter. I don't see anything dramatically different there.

Got you. And then, in the advertising SG&A expenses, is that a good run rate for the fourth quarter as well?

That's probably a fairly good run rate. There maybe a few things on the G&A side that come up, but from what we anticipate, yes.

Okay. And then, if you can just give us a little bit more color on what you're seeing in retail in the fourth quarter? What type of -- how much is the pace, because I believe that most of the retail is already kind of largely been -- you should have a lot of visibility, I guess, in that category. Can you just kind of give us some thought about what it looks like in pacing in terms of the fourth quarter?

Yes, I would just say that some of our key customers are volume is going to be down, and we've anticipated that as we talked about where we're at in third quarter. You see some of that shift in third quarter. You're going to see also that show up in fourth quarter. But we've planned for it. And we've got our cost structure aligned around that. So you're going to continue to see improvement in profitability, and that's really our focus as we talked about all year.

Okay. And then, in terms of the debt levels and where you might expect those to be by -- maybe by the end of the year? And as you -- because you're going to go into the first quarter where, I think, you're negative cash flow seasonally in the first quarter? So can you give us some idea of how much might be into your credit facilities as you go into next year?

Well, we typically don't disclose that and certainly we wouldn't give a forecast. What I'd say is that we -- you're right, seasonally, we are lowest in the first quarter. And we believe we have enough room in the facility and from our operating activities to do what we need to do with the business.

And finally, are there any updates on the prospective sale of 3Q digital?

No, none that we can give. It's consistent with prior quarters. When we're able to announce something, we will.

(Operator Instructions) We'll turn next to Nick (inaudible) with [NR Management].

First of all, congratulations on the steady progress. Appreciated as a shareholder. Just to drill down again on the retail. It seems like some of the bigger box retailers actually just may go away so, JC Penney, Bed, Bath and Beyond. I can envision them just not being around at some point. Are you bracing for that? Have you -- do you think you have the ability to weather that storm?

Well, what I would say on the big-box is that we are in a very intimate -- we have a very good long relationship with these retailers, and we are working with them from a strategic standpoint as well as a tactical standpoint. I can't predict what ones are going to make it and what ones aren't. Or certainly, I think we all personally believe there is a place for a large box. The question is number of stores and such. But we are spending a lot of time with these clients, and obviously so are others, helping them think differently. And they are going to continue to work their model. So -- I mean, at this point, we are very focused on the retail that we have and the understanding on each one to the best of our ability what could happen and planning around those items. Now -- and also just continue to diversify, I don't want to stay out of that segment because not every retail, there is some good opportunities in retail more direct-to-consumer like, but really diversifying our client base is a key focus that we have. And we can really guide that with our demand generation that we feel like has been really fruitful for us this year and it's going to give us some good traction going into '18 in terms of our sales pipeline that we have good visibility into.

Okay. And one other thing on the reverse shares stock split. So since you've regained NYSE listing, so that's off the table now?

No, we're proceeding with the reverse split procedure. We'll have our special meeting in December on the 14. The board at that time could elect not to proceed with effect the reverse split if the stock price is at a level that the board thinks makes that advisable, but we will proceed with the special meeting and seek approval for that.

But another words if you are over $1, you're still going to go ahead with that or you don't?

The board will make that determination at the time. They are other advantages, obviously, to having a bigger buffer than whatever our current trading price is to the dollar threshold that the market sets.

(Operator Instructions)

Looks like there are no more -- nobody else in the queue. So I think we will wrap the call up. Thank you everybody for joining us. If you'd like to reach out to me for further information, please do so. My contact information is on the press release. Thank you, again, for joining us. Bye.

With that, we will conclude today's conference. Thank you, everyone, for your participation.