Harte Hanks Inc (HHS) 2018 Q1 法說會逐字稿

Good day, everyone, and welcome to Harte Hanks First Quarter 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Scott Hamilton, Investor Relations. Please go ahead, sir.

Thank you, Christy. Good afternoon, everyone, and thanks for joining us. On the call with me are CEO, Karen Puckett; and CFO, Jon Biro. 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 forecast for the market reserve; 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 hartehanks.com.

Operator, Christy, will you please explain the procedure for asking a question.

(Operator Instructions)

Thank you. Karen, why don't you go ahead?

All right. Thank you, Scott, and good afternoon to everyone. We got 2018 off to a solid start from the perspective of establishing a solid foundation to build upon. We ended the quarter with no debt and a $22.8 million of cash on hand. Along with continued cost reductions, we have implemented a number of actions to improve our balance sheet, including solidifying our Wipro partnership, with their $9.9 million preferred investment in Harte Hanks; we extended the term of our credit facility; and we sold 3Q Digital. This provides us a strong foundation upon which to execute our strategic transition.

From a revenue perspective, it is clear that we have work to do. Our exposure to big-box retail has clearly been an issue. And unfortunately, as I discussed during our last conference call, we anticipate that we will continue to see top line pressures during 2018 in our more traditional services, including mail logistics and the Contact Centers Services. Therefore, closing new business bookings to increase revenue remains a primary focus today.

Just as important, we believe we are gaining traction with our new data and database capabilities, Dataview and Signal Hub. Those are getting positive reviews from our clients and prospect as several existing data customers will likely migrate to these platforms. Gaining traction, selling Dataview and Signal Hub is an important for three reasons: first, it really solidifies the database customer relationship and improves retention in this key service area, which has been under extreme pressure for many years. We are hopeful we will migrate clients representing a substantial portion of our current database revenue by the end of the year as we offer a competitive database solutions rightly aligned for our new customers to go after acquisitions, personalization and reach.

Additionally, when we migrate these clients, we have the opportunity to eliminate and reduce spend that we're spending with existing legacy vendors that provide services for the legacy database, so that's a real opportunity for us.

Secondly, the new platform has vastly improved strategic capabilities. For example, enabling clients to enrich records and develop actionable insight to guide marketing activities so that they can drive new business. And while some of our clients may not start using these advanced capabilities right away, we really do believe that they will be exposed to these valuable opportunities and we have significant opportunities to up-sell through these integrated solution.

And the third thing is that our data -- our new data offering, which is Dataview, is really a higher-margin, recurring revenue versus what used to be our legacy model of a broker data from third party, which we were selling at really as a onetime transaction with a small brokers' markup. With Dataview, we have on-boarded data files from numerous data providers, which enables us to help clients be more nimble to acquire in a subscription model the best data for their applications and merge their own proprietary data to create insight into decisions and information they need.

Our Wipro partnership is an important aspect of improving our bookings. I'm encouraged that we are seeing an increase in pipeline from the introduction by Wipro. These opportunities tend to be larger deals with longer sales cycle and we are usually coming in at a more strategic level, working with C-Suite rather than a more tactical level lowering the organization.

Before I turn the call over to Jon, I like to reiterate my belief that our recent improved balance sheet, our cost reduction, improved capabilities, our committed employees and the Wipro partnership places us in a position to win in the marketplace and do a great job in serving our customers and ultimately will determine our success.

At this point, I'm going to turn this call over to Jon. Jon?

Thank you, Karen. Good afternoon, everyone. Before I get started, let me say that I will be discussing the quarterly results for the 3 months ended March 31, 2018, and the changes compared to the same quarter of 2017. Revenue for the first quarter was $81.2 million compared to $94.9 million last year for a year-over-year revenue decline of 14.4%. The decline was partially due to having only 2 months of 3Q Digital revenue in this year, due to the sale of this business, versus last year's 3 months. 3Q Digital revenue was $6.9 million in this year's quarter compared to $8.2 million last year for a decline of $1.3 million. Along with this change, revenues were down within all of our verticals, with the most pronounced impact being in our retail vertical, which was down $7.6 million largely due to a loss of business from a large retail client along with demand declines within other accounts.

Last year during first quarter, we adopted the new revenue recognition standard, ASC 606. As a result, we had a $589,000 positive impact on our revenue line in the first quarter. Note that there is quite a bit of disclosure on the adoption of this accounting standard in our 10-Q, which will be filed tomorrow.

Adjusted operating loss was $4.5 million versus $5.9 million a year ago. A significant improvement was -- this significant improvement was due to broadly lower operating expenses, which were down $50 million compared to last year. We lowered expenses principally through lower payroll, lower production and distribution expenses, and lower general and administrative expenses. Again, the 2018 first quarter results included only 2 months' results with 3Q Digital, up until the date we sold them. Excluding the gain on sale, 3Q Digital generated $1.1 million in operating income in the quarter. In the first quarter of 2017, 3Q's operating income was largely breakeven.

Last note, the implementation of the new revenue recognition standard increased our operating income by about $565,000. GAAP operating loss was $5 million, a 21% improvement from the year-ago period. Net income available for common shareholders was $32.6 million or $5.24 basic earnings per common share and diluted earnings per common share of $4.67. Net income included the $31 million gain on the sale of 3Q Digital and an $8.8 million tax benefit. Included in this tax benefit is recognition of $9 million for an expected federal tax refund driven by the capital loss we generated when we sold 3Q Digital. We anticipate that we will receive this refund as we file our 2018 federal tax return in 2019. As Karen mentioned, we ended the quarter with no debt and $22.8 million cash on hand. During the quarter, as I mentioned, we sold 3Q Digital for an after-expense pretax proceeds of about $3 million. And as we previously mentioned, we'll have an opportunity to earn another $5 million if 3Q is later sold. Importantly, we have also eliminated a $35 million 3Q Digital earn-out liability that would've been due in April of next year. We also have our undrawn $22 million bank credit facility.

Now as long as revenue pressures continue, which is likely for the balance of the year, cost control will be one of our top areas of focus. As I stated during our last conference call, 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.

In closing, there is no question 2017 was a difficult year. Our SEC reported (inaudible) and financial challenges surely cause concern for many customers and vendors. Today, we are in a much better position than we were a year ago. And now we can focus our energy on getting on a better, more sustainable path.

With that, operator, we're now ready for questions.

(Operator Instructions) First we'll take Michael Kupinski from NOBLE Capital Markets.

I was just wondering if you can kind of give us some thoughts about the trends going into the second quarter. Are you starting to see a little bit of moderation in some of your revenues going into the quarter? It looks like retail was down -- I -- it looks like 32% in the quarter. And you indicated that retailers had cut back on services, and, typical, it's not like you lost a retailer. I was wondering if you can give us some color on that. And just your thoughts in general about moderating trends throughout the year on -- in revenues?

Yes, Mike. As you know, Q4 is our seasonally strong quarter, particularly for retail. So that's one reason why the retail revenues are down so much sequentially. As far as the second quarter is concerned, it's a little early to talk about trends there. Certainly, the retail client that is giving us much less business, that's been an issue for the past 2 quarters and that's another reason why we've seen the retail revenues decline. But in general, the retail pressure has been there for quite some time and it's hard to say whether it's going to moderate, except for the fact that we did take the big hit late last year.

Got you. And can you give us some idea about how much revenues Wipro is generating? Just kind of give us some thought about -- I know that you're starting from small base this quarter, but can you give us some thought about how that business is looking?

Yes, Mike, Karen. Let me clarify, when you say Wipro revenue is generating. You mean the benefit from a revenue standpoint we've received from Wipro? I mean, because there's -- think about in 2 parts of how we would get revenue. One, which it would be where we are pitching a solution and we have, let's just say, the marketing services or the Contact Center piece of that. We will directly book that revenue. That doesn't go through Wipro. Now there could be situations where Wipro needs work done for a client where we would be like the sub-contractor. So there is direct revenue or -- so it's either a prime or a sub. Think about it that way. At this point, we have not closed any significant deals through the Wipro relationship. However, I believe that we're very -- hopefully very close to being able to announce those. But I can't think of any as we are on the phone right now. It would be premature.

Yes, I would add, Mike. Yes, I mean, the pipeline with Wipro is robust, a lot of activity right now. And as we mentioned, with Wipro we're getting into very, very good levels within the organizations that we're pitching to.

Yes. And I think the difference is even, Mike, even in retail where we may have a direct mail relationship in very different kind of relationship. We have gone in through the Wipro relationship in a much different capacity and a different decision maker that allows us to get the -- more opportunity -- data opportunities, marketing services, data opportunities in front of these clients that typically we would have a hard time doing on our own. So, the pipeline continues to increase. We do have 3 focused areas with them to just to try to keep up with all the activity. And I believe that, hopefully, we'll be able to talk about some more shortly.

Got you. And in terms of the -- it looks like the operating cash flow loss was actually lower than I expected. And I was just wondering, do you have any thoughts in terms of just where you think you might be by full year? Do you think you'll be positive EBITDA? I mean, any thoughts in general about how your cost containment and opportunities might -- there might be there in light of the challenged revenue [right now].

Yes, look, we're working very, very hard to generate free cash flow this year. We're not going to forecast a free cash flow number or this -- you may be talking about an EBITDA figure for the year. But you can rest assured that we're trying to keep our results as good as they can be while maintaining the ability to go after this new business and we're also going to be focusing on managing the balance sheet and working capital, so that we can generate some free cash flow for the year.

And final question. At this point, you guys are just planning on sitting on the cash? And -- or are there opportunities out there that you think that you might want to use to deploy some of the cash? What are your thoughts?

Yes. I think at this point we're very focused on executing with what we have. That doesn't mean that if something -- some opportunity or we had a need that we felt like we needed resolved, we would get that done or maybe a solution or an enhancement to a solution that we haven't and may not be -- obviously not be an acquisition. But we've got to execute on what we have right now.

(Operator Instructions) We have no further questions in the queue, I'll turn it back to you for any closing comments.

Okay. I guess we'll wrap it up. Thank you, again, for joining us today. If you have any questions you would like further follow up, please contact me, Scott Hamilton. My information is on the press release. Thank you all very much for joining. Good-bye.

And that concludes our conference today. Thank you for your participation. You may now disconnect.