Harte Hanks Inc (HHS) 2017 Q4 法說會逐字稿

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

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

Thank you, Ashley.

Good afternoon, everyone, and thanks for joining our fourth quarter 2017 earnings call. Joining me on the call today is our CEO, Karen Puckett; and Jon Biro, our new Chief Financial Officer, who joined Harte Hanks in November.

Our call will include forward-looking statements, such as statements about our strategies, adjustments to our cost structure, financial outlook and 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 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 Investor Relations section of our website at hartehanks.com.

With that, I will turn the call over to you, Karen.

Thank you, Scott, and good afternoon, everyone.

I'm pleased that for the second quarter in a row, we generated positive adjusted operating income. In the fourth quarter, adjusted operating income was $1.7 million despite the revenue challenges we have experienced all year. Through today, we have dramatically improved our balance sheet and enhanced our liquidity. We've improved customer satisfaction, introduced new database services and added a new sales channel with our Wipro relationship. I believe these developments have put us in a much better position to continue our strategic turnaround. Jon will talk about it more, but at the end of 2017, we were debt free and had $8.4 million in cash. And that is before the 2018 transaction, including the preferred stock investment of almost $10 million and the sale of 3Q, which relieved us of a $35 million earn-out liability. I now feel we have a solid financial base we can use to build upon.

We also improved customer satisfaction, which we measure on a quarterly basis. These satisfaction surveys, along with direct client feedback, show us that we are continuing to make progress. Since we've begun surveying customers in 2016, we've seen our satisfaction response scores steadily increase. We believe we're well positioned to take advantage of some significant trends taking place in the marketing world.

Customers, whether they are a consumer or a business, are expecting marketers to understand them beyond the basic demographics of age, income, geography or vertical. In the evolving world of the -- what is called hyper-personalization, customers are demanding that marketers not only understand who they are but also understand why they are with [indiscernible] specific [buyer] journey. Customers expect the message they receive to be relevant and meaningful to them as individuals.

Technology increasingly enables this kind of hyper-personal marketing. However, technology deployed without an equally evolved understanding of the customer and the strategy just leads to more and faster bad marketing.

CMOs and marketing leaders are struggling with this challenge. Large amounts have been spent on deploying marketing technology, but the results in the form of more customers and revenue are not matching these investments. That's where Harte Hanks has the opportunity to excel by helping clients evaluate and optimize their technology and bring it together with the analytics and strategy to make their marketing feel generally more personable and generally more human.

We are enthusiastic about the expanded partnership with Wipro, which now affords us a third go-to-market channel to offer our capabilities to prospect and, to clients. Through Wipro broad -- through Wipro's broad sales organization and existing client relationships, we will have access to more C-suite conversations than we had on our own. Combined with our existing business development and client services channels, we believe we are better positioned to offset revenue losses. Additionally, all 3 channels are now aligned under one single leader to drive more focus and management efficiency.

In 2017, we invested in developing our Dataview and our next-generation Database service, driven by the Opera Signal Hub platform. This has allowed us to offer what we believe are marketing-leading solutions.

Dataview is our next-generation data service that we make commercially available in the fall. It aggregates multiple third-party sources and merges them with clients' existing data to allow true personalization in an omnichannel marketing campaign. In short time since its introduction, we have already signed 6 customers on to the service and are receiving very positive feedback. Our Database offering built on Opera's Signal Hub platform is a big data analytics capability that leverages machine learning and prebuilt signals that allow for rapid deployment and the use of advanced analytics. We believe the platform is industry leading in its ability to provide, predict -- provide predictable insights to marketers as they evolve to more personalization in every aspect of marketing. We have introduced these offerings to both our existing Database clients and new prospects. We announced our first logo win the fourth quarter and have already had 2 existing clients who have agreed to migrate.

I mentioned our enthusiasm over our relationship with Wipro. That -- this extends beyond our joint ability to reach clients and extends well into what we can offer them. This unique combination of Wipro's technology, capability, their scale and reach with Harte Hanks' deep understanding of marketing strategy and customer engagement makes us an ideal partner to our clients. We are using our collective capabilities to shape client-specific offerings to help these customers -- these end companies maximize their technology investment and turn their investment into the best of modern marketing. We are also working with Wipro to add marketing to their technology demonstration centers, where we will be highlighting Dataview and Signal Hub, enabling clients to come and experience the capabilities of these platforms. This is a great partnership and one that we're very excited about.

While we are encouraged by seeing -- by what we are seeing in our 3 sales channels, and they are key to driving the strategic turnaround at Harte Hanks, we continue to face some challenges. We're seeing continued revenue headwinds in a number of our industry verticals that primary impact our more traditional services of direct mail and logistics in our contact centers. While we look to gain new clients, we are -- we'll also work hard to reduce costs throughout the business to better align our costs with revenues.

Once again, I'm pleased that we have improved our balance sheet liquidity, generated adjusted operating income in the fourth quarter and improved customer satisfaction in 2017. Our Dataview and Signal Hub products are so far being well received in the market, and we believe our partnership with Wipro is opening up more client opportunities. These factors provide us the opportunity to execute as we continue to work to reduce costs and improve profitability.

And now I'm going to turn the call over to Jon.

Thank you, Karen. Good afternoon, everyone. It's great to be here for my first earnings conference call.

For the fourth quarter of 2017, sequential revenue growth was 5.8% due to seasonal factors. On a year-over-year basis, fourth quarter revenues were down 9.3%, with retail down significantly and B2B, consumer and health care down to a lesser extent.

Fourth quarter 2017 adjusted operating income was $1.7 million compared to $4.4 million in the year-ago quarter due to lower revenues, partially offset by lower labor costs due to headcount reductions and lower production costs, mostly within our direct mail and logistic service area.

Operating loss in the quarter was $33.7 million and included a goodwill impairment charge of $34.5 million. This compares to an operating loss of $34.5 million in the year-ago quarter, which also included a goodwill impairment charge of $38.7 million. Note that we have now written off 100% of our goodwill.

Full year 2017 revenues were $384 million compared to $404 million in 2016, representing a 5.1% revenue decline. Revenues declined in our retail vertical and, to a lesser extent, in our health care and B2B verticals primarily due to reduced direct mail volumes, partially offset by an increase in agency services in our financial vertical.

2017 adjusted operating loss was $3.7 million, an improvement compared to a $12.5 million adjusted operating loss in 2016. Despite revenue declines, the adjusted operating loss improved due to lower labor expenses due to headcount reductions and lower production expenses as a result of direct mail volume declines. Last -- lower advertising, selling, general and administrative expenses also contributed to the improvement largely due to a decline in employee-related expenses.

As Karen mentioned, we expect to continue to experience revenue pressure in 2018 due to anticipated client losses and volume reductions in traditional service areas. We expect to partially offset the operating income impact of these revenue losses with cost reductions. As of today, we have already targeted approximately $10 million in 2018 cost reductions and will be looking for more while maintaining our ability to pursue new business opportunities. At the same time, we'll be working hard to develop new business from new and existing clients through all 3 of our sales channels that Karen discussed earlier.

Now turning to the balance sheet.

As Karen mentioned, we ended the year with no debt and $8.4 million in cash, and we have improved on that so far in 2018. We currently have no debt, and with the sale of 3Q Digital and the preferred stock investment of $9.9 million in early 2018, we have added cash to our balance sheet. And importantly, we have eliminated a $35 million 3Q Digital earn-out liability that would have been due in April of next year. Ultimately, we expect to receive an estimated tax refund of between $8.5 million and $10 million due to the tax loss generated on the sale of 3Q. We anticipate that we will receive the refund after we file our 2018 federal tax return.

Also during the first quarter, we extended and modestly increased the size of our covenant-light credit facility. All in all today, we have much more financial flexibility than we did at the beginning of 2017.

During the fourth quarter, we reduced our debt, net of cash, as we moved from approximately $600,000 in net debt at the beginning of the quarter to a cash position of $8.4 million with 0 debt. This cash generation was driven by an improvement in working capital and, in particular, good accounts receivable collections. Effectively managing our working capital will remain one of our key priorities going forward.

In summary, 2017 was a challenging year for the company with many distractions. While we lost some traditional services business, particularly in our retail vertical, we have taken cost actions to help lessen the blow, and we'll continue to adjust costs as necessary.

Early in 2018, we've significantly improved our balance sheet, and increased liquidity and our new product and service offerings, along with our new Wipro partnership, should present opportunities as we move forward.

And with that, operator, we're now ready for questions and answers.

(Operator Instructions) And our first question is from Michael Kupinski with NOBLE Capital Markets.

First, I was wondering if you can give us the pro forma revenues for the first quarter 2017 for 3Q. I assume that you're going to treat that as discontinued operations in the first quarter of 2018.

We actually, Mike, haven't determined that definitively. Our inclination is that we will not treat them as a going concern -- or as a discontinued operation. You can see, though, the pro formas that we filed in the 8-K in early March shows you the 9 months' revenue. And if you divide that by 3, that will give you a pretty good sense of the quarterly revenue.

Got you, okay. And then I was wondering, in terms of the -- your headcount at the year-end versus the year earlier period, what was the headcount, the FTEs?

We -- at the end of the year, I think we were about 5,400. I don't recall what it was the previous year, but it's definitely down because it -- that was a big driver of the cost reduction year-over-year.

Got you. And I thought...

You'll be able to see that in our 10-K.

Okay. I would have thought that maybe payroll expenses would have been a little bit lower in fourth quarter. Were there any special things going on in the fourth quarter that would have -- because you had -- the pace and cadence of the decreases in payroll expenses seems like it lessened in the fourth quarter. It was down 8.2%, I believe, in the third quarter.

Yes. The payroll, it did move up. There was a little bit of leverage on the payroll expense. We -- our revenues did increase 5.8%, and I think our labor was up a little bit less than that. So it's revenue related.

And can you give us a flavor of -- for the current tone of business and as you head into the first -- as you're in the first quarter, whether the cadence of the declines in revenue will moderate? And heading into the first quarter, any thoughts on that?

No, I think we're going to continue to have some headwinds when you -- we think about the top line. I mean, we mentioned the retail vertical is certainly going to be a concern. We also have some weakness in our contact center service line. I think the pressure is going to increase as we progress throughout the year. But as I said, we're going to be very aggressive in taking costs out as the top line is under pressure.

And if I just could...

And this is Karen.

Okay.

Yes, I was just going to add that what John said is correct. And then obviously, we'll continue to focus on new services that we have, the opportunity. And we're early in the year, so we'll -- [I think] we have an opportunity to continue to drive that.

And if I go to -- I'm looking at this correctly, if you look at the fourth quarter, the decline in retail revenue was about $7.6 million, down like maybe 23%. And if you look at your fourth quarter year earlier, $110 million. The $7.6 million largely is from retail. That accounts for the biggest portion of the decline. Can you give us a sense of what retail -- how that looks into the first quarter? I mean, because obviously, the variance in terms of retail is kind of the big driver to the declines in revenue that we're seeing so far.

Yes, look, I think we're going to continue to see pressure again on the retail vertical. In the fourth quarter, we did see a pretty big decline sequentially. And so again, we're not going to give a forecast, but we're probably going to see another sequential decline, I think, as we move into the first quarter, especially due to the fact that Q4 tends to be seasonally strong.

Right, but I'm -- all I'm asking is if retail is declining at the same pace that we've seen in the fourth quarter, is that showing signs of moderating?

Yes, I wouldn't throw out a forecast, Mike. There's just too much uncertainty right now. All I can say is you can count on us to get aggressive taking out costs if we see the trend continue here. I mean, we hope it's going to moderate, but it hasn't for a while. So making predictions at this point, I think, is not something we want to do.

(Operator Instructions) .

So it appears...

And we have no further questions at this time.

Okay. Well, thank you very much for joining us. Once again, if you would like to schedule a meeting with myself and management, please feel free to get a hold of me, Scott Hamilton. My contact information is on the press release. Thanks, everyone, for joining.

This concludes today's call. Thank you for your participation. You may now disconnect.