Harte Hanks Inc (HHS) 2004 Q4 法說會逐字稿

Good morning and thank you for joining the Q4 year end 2004 earnings release call. At this time all participants are in a listen-only mode. After the presentation we will conduct a question-and-answer session. [Operator Instructions]. Today's conference is being recorded. If you have any objections please disconnect at this time. Now I'll turn the meeting over to Mr. Richard Hochhauser, President and CEO of Harte-Hanks. Sir, you may begin.

Thank you and good morning everyone. With me on the call today are Dean Blythe, our CFO, and Jessica Huff, our VP-Finance and Controller. The comments we make on this call will include forward-looking statements that involve a number of risks and uncertainties which can cause actual results to vary materially. After I make a few opening remarks Dean will give some financial details and then we we'll take your questions.

2004 was a special year for Harte-Hanks in many ways. We went from slow growth in direct marketing revenue to double-digit growth in the fourth quarter. We said our goal was to translate increased revenue to the bottom line and we achieved that. And we had another terrific year in shoppers. Last year at this time we said that going into 2004, we were more optimistic than we had been in a long time. That optimism was well founded and our achievements went beyond financial performance.

But first the financials. Earnings per share hit $1.11 versus $0.97 last year. We generated 91.2 million in free cash flow, higher than we guided. We define free cash flow as net income plus depreciation and amortization, less capital spending. We were very satisfied with our performance in the fourth quarter with earnings per share coming in at $0.32, a $0.04 improvement over quarter four, 2003.

Direct marketing was a strong contributor to the quarter and even shoppers had growth despite the one fewer week we had in December. For the quarter direct marketing income increased 26.9 percent on an 11.9 percent increase in revenue. New customer revenue continues to be strong and we saw a net increase in existing customer revenue for the sixth quarter in a row. Revenue grew in all of our verticals for the quarter except financial. We were especially a pleased with the double-digit increase in retail revenue. This is the first double-digit revenue growth quarter for retail since the second quarter of 2000. And for the year all of our verticals grew, with high tech and telecom leading the way.

Shoppers had a good quarter with operating income up 3.6 percent on 2.8 percent revenue increase. The Shopper results were impacted by the comparison with the once every six-year occurrence of one extra publication week in the fourth quarter of 2003. Over the past year we expanded shoppers into new geographies, adding approximately 600,000 in new circulation. We're pleased that we added so much to an already strong franchise and that we did not suffer on the profit line.

While there are some issues we face going into 2005, such as increased paper costs, we're feeling pretty good about the year. We expect shoppers strong performance to continue, but temper that with the difficult comparisons to the prior year and some new initiatives we're starting in 2005. And we expect direct marketing to continue the momentum we established in the second half of 2004.

Before turning it over to Dean let me state some key points about 2004. When he a wonderful year and built a base for continued growth in both businesses. In shoppers we achieved significant expansion without undue risk to margins. New circulation does not have the same margins as the more mature circulation and often starts out at a loss. We made three acquisitions, all niche-oriented and strategic. We grew revenue and direct marketing at a pace even faster than we expected and saw growth in all markets. We translated that growth into improved margins, something we said we would do. And we made structural changes and hired important new talent into the organization. And I'm proud of our people who contributed so much in 2004, as we continued to make it happen for all of our stakeholders. Dean, over to you.

Thank you, Richard, and good morning, everyone. As Richard indicated, we had a strong finish to an overall very positive year at Harte-Hanks. Company-wide here's the overview.

Revenue was up 8.5 percent for the quarter and 9.1 percent for the year, with revenue up in both direct marketing and shoppers. Direct Marketing revenue was up 11.9 percent for the quarter and up 9.6 percent for the full year. Shopper revenue growth for the quarter was 2.8 percent, comparing against the fourth quarter of 2003 which had 14 publication weeks versus 13 weeks in the fourth quarter of 2004. For the year shopper revenue was up 8.2 percent-- 8.2 percent, again coming against the extra week in 2003. Operating income was up 13.6 percent for the quarter and 12.8 percent for the year, company-wide. For the quarter, direct marketing had very strong operating income growth of 26.9 percent and shoppers, with the impact of the extra publication week in 2003, was also up 3.6 percent. For the year, direct marketing operating income was up 18.5 percent and shoppers up 10.1 percent.

For the year free, cash flow was 91.2 million versus 85.5 million last year. We ended the year with 35.1 million in capital spending compared to 31.9 million in 2003. And, as in the prior year, in 2004 we had planned to spend more on capital, but came in at a lower level because of the timing of certain projects. This role in effect in 2005, coupled with continued investment in shopper capabilities and direct marketing initiatives, will likely lead to capital spending in 2005 in the area of $40 million. Now turning to each of our two businesses.

For the fourth quarter in 2004, our direct marketing revenue was up 11.9 percent, operating income up 26.9 percent. With this positive leverage yielding operating income margins up almost 200 basis points year-over-year in the quarter to 16.5 percent. For our vertical markets in the fourth quarter retail, our largest vertical, represented 30 percent of direct marketing revenue. High tech telecom, 25 percent; financial, 18 percent; select markets, 15 percent; and healthcare-pharma, 12 percent. Net customer spending, or existing customers spending more minus existing customers spending less, was positive again in the quarter and for the year. International business represented 9 percent of our direct marketing revenue for both the fourth quarter and the year. Our top 25 direct marketing customers represented 42 percent of direct marketing revenue for the fourth quarter and 39 percent for the year. And indirect marketing, our largest customer in the fourth quarter represented approximately 8 percent of total direct marketing revenue and the same percentage for the year.

Turning to shoppers, earlier I mentioned the impact on the fourth quarter year-over-year growth rate for the one extra publication week in the fourth quarter of 2003; 14 weeks in '03 versus 13 weeks in '04. Even in the face of this tough comparison, shopper grew revenue by 2.8 percent in the quarter and 8.2 percent for the year. Excluding the extra week from the 2003 comparison numbers, shopper revenue would have shown an 8.3 percent increase for the quarter and 9.7 percent for the year. For the quarter in shoppers, operating income increased 3.6 percent compared to the prior year quarter; and for the year was up 10.1 percent. Despite the impact of expansion circulation and rising newsprint prices, operating income margins improved modestly in the quarter and for the year.

We've talked in the past about the plans for increasing circulation in shoppers through a contiguous geographic expansion. We added approximately 600,000 in new circulation in 2004 through geographic expansion by adding new zones in northern California, southern California and Florida. This brings the total circulation added as part of our initiative to over 900,000, which is approaching one half of our stated goal of a 2 million circulation increase; but has been achieved less than two years into a five-year roll-out plan. While we still anticipate hitting the original plan of 2 million circulation increase in a five-year roll-out period, because the pace of expansions in the beginning has been so rapid, we will likely moderate the pace of expansions in 2005; having some impact on revenue growth in the coming year.

On the balance sheet, at December 31 we were showing a net cash balance of 29 million. You might have also noticed on the balance sheet that the outstanding amount at 12/31/04 under our credit facility of $10 million is classified as a current liability as opposed to a long-term liability in the past. This is because our existing three year credit facility will expire in October, 2005. We will be putting new financing in place sometime during the first three quarters of this year. Book equity at December 31, 2004 was 572 million. Net accounts receivable were 168.8 million versus 152.7 million at December 31, 2003. DSO at the end of December was 55 days against 54 days at the end of '03, and this DSO number is also down 8 days versus the DSO at 9/30/04.

Looking at our statement of cash flows, net cash provided by operating activities for the quarter was 68.9 million and 0153.3 million for the year. We repurchased a half million shares during the quarter and 3.6 million shares for the year. Since January, 1997, the Company has acquired 39.3 million shares and spent over $643 million under our repurchase program. We also announced today that the Board of Directors declared a regular quarterly dividend for the first quarter of 2005 of $0.05 per share, an increase of 25 percent over the prior dividend level. This is the tenth time the dividend has been upped in the past decade.

We are very pleased with the results we were able to deliver in 2004. As Richard indicated in his comments in the press release, not including the impact of stock option and other equity expensing that will begin in the second half of this year, the challenge we have set for ourselves in 2005 is to deliver similar growth this year as we achieved in 2004. With that we'll be happy to answer your question.

[Caller Instructions]. Lauren Fine, Merrill Lynch.

I'm wondering if you could help in the direct marketing area, given some of the acquisitions, if you could help us know what the organic revenue growth was there; or, if you're not comfortable quantifying that, maybe in terms of the improved momentum over the third quarter was any of that incremental from acquisitions? And then to that same end, you did make an acquisition very recently of an e-mail based company and I'm wondering if you could give us a little bit more of a description of that company and how you plan to integrate it? And then I have a follow up.

Lauren, on the acquisition, the acquisition revenue was--was around 1-- contributed about 1 percent of the 11.9 percent for the quarter.

Okay, great. And then if you could discuss the acquisition you just made in a little bit more detail?

Well you know, one of the-- you-- as part of this question you mentioned, and what are you doing to integrate it. And one of the really neat things about the acquisition is not only will it fit into our strategy which is to be a multichannel marketer in direct marketing, this being a clear direct channel. But also we have a number of products where the output can as easily be e-mail as it is mail. And--and in fact the press release talks about the integration of the capabilities of post-future into a number of those products.

And we have started already down that path. And it's really a pretty exciting one. So basically what this means is that our offering becomes yet more seamless to our customers. Now we also think it'll be better because we like the capabilities and the skills of what have we bought, but it's also more seamless.

Great. And then I'm just wondering if you could talk about, as you look at some of your '05 assumptions, if there's anything you could share in terms of impact of higher paper prices, expectations for future share repurchase activity, any sort of big items beyond the CapEx figure that you already gave us?

Well, we do expect paper prices to edge up further. They're already higher than they've been, as you know, in quite sometime. The-- you have the overall capital number, and I mean other -- Dean, do you have anything? Anything more specific to add?

No--no, we have been a purchaser of our stock at current stock price levels and would anticipate continuing that. And, obviously, we'll be opportunistic and look at where we are from a stock price perspective. But we would assume that we would continue that in '05. Richard mentioned, we have taken into account the paper price increases which primarily is a shopper issue, in terms of the expense structure.

And acquisition activity, are you seeing-- I know you can't comment on anything specifically, but are you still seeing a lot of opportunities?

Well, there are opportunities. The rate of availability of opportunities is probably growing each quarter a little bit. That doesn't mean necessarily that the quality is growing, but there clearly are opportunities. And, as we've stated in the past, we see one of these a week and we go through our tiered structure of figuring out whether it's strategically appropriate for us and, once we pass that screen, whether it's logical for a whole bunch of other operational reasons and once we pass that screen; we go do you understand that process.

Great.

We continue to look at it and there continues to be a pipeline.

Troy Mastin, William Blair & Company.

Wanted to ask about your outlook for 2005, I guess specifically how the tone of business from your client feels versus where it was last year. You said that you expect similar performance, but does the tone feel the same as it did 12 months ago?

Well, it feels a little bit better, but we also are coming up against a lot stronger numbers than we did last year when we talked about it. So we felt good going into last year. We feel good going into this year. We actually feel a little bit better on an absolute basis, but on a relative basis we're coming up against higher numbers.

Okay. And then with regards to the outlook for '05, by business line it sounds like, given the moderation and expansion at shoppers, that, if you were to have the same growth rate in '05 as in '04, that it might be a bit stronger in direct marketing versus the '04 numbers and little bit weaker shoppers. Is that the right way to read your outlook?

Well, I'll make just one comment and Dean can also address it. That it's probably a true statement in general terms. But, remember that '04 when compared to '03 had one fewer week. So we have that advantage. We're not coming up against an additional week. And we're--we continue to be very bullish on our shopper business. Like any business, we have our challenges every year; but we continue to be bullish.

On the shoppers business, could you help us understand your strategy of expansion there? What I'm wondering is, you've been pretty successful I think this year in expanding shoppers at the pace that you've been going. Why moderate that pace to stay in line with your goals for five years rather than accelerating your expansion opportunity, or expansion plans? Are the opportunities more limited or are you trying to preserve margins? Can you just help us understand that strategy a bit more?

Well, you know, it's really easy on a call like this or in a personal conversation to talk about 100,000 here and 200,000 there, and last year 600,000. Operating, though, is the challenge and every time you take on big chunks of geography, as we have, we have to deal with the operational issues. This is a finite proportion of our total circulation-- what happened last year and so part of it is a little bit of a-- of digestion. Part of it is, as you suggested, trying to get the margins up for what you've already done, what you've already accomplished. So it was a good catch on your part. But it's managing a business. And we're going to do the logical things. If we feel we're ready we'll do more.

Deans comments didn't definitively say we're not going to expand. But we're going to deal with it in as judicious a fashion as we have in the past. And all we're really saying is we had a big chunk last year. We measure years January to December and had we had some other cycle of measurement we might not be talking this way, because the expansion that we did last year might have been in this year's year. So it's just-- it's just a timing issue.

Okay. And then finally, if I could, one more. On your capital spending plans, can you characterize your CapEx outlook, which is a fair amount higher in '05 than '04, into 2 categories, kind of investments for growth versus maintenance CapEx? And is there an unusual amount in one of those two buckets versus what's typical.

Dean?

Yes. Certainly part of the capital anticipated is to support new revenue growth that we-- that we see coming down the pike, and part is what I'd call maintenance capital. From the perspective of quantifying those two buckets, it really depends on the year, I think. But I would say that 75 percent or so would be in the maintenance side.

That's-- I would've -- I don't have the number in front of me, Dean, but I would've thought that it was more tied to new revenue than that. Thinking about projects, for example, related to color for shoppers and some of the new things we're doing next year. And also in direct marketing we spend capital that is specifically revenue related.

Yes. And, again, I think part of it depends upon what year you're looking at because we spent 35 million-- in '04, 31 million in '03, and the we've said somewhere in the $40 million range. And so that percentage can vary depending on which of those three years because your base is different. But, yes, I mean I would say that a majority of it is maintenance, then-- and then the rest is to support anticipated new revenue.

Alexia Quadrani, Bear Stearns.

This is Julia Choi for Alexia. Two quick questions if I may. The first one is, could you just comment on your ability to raise prices on the direct marketing side? And the second is on the competitive front. Are you seeing more holding companies involved in pitch activity, more so, let's say, than last year?

Pricing, the answer is pretty much the same as it's been. There is certainly not a ton of pricing flexibility. Obviously in the higher value-added parts of our business, pricing is a little bit easier. But, in general terms, we've not come out of the more tight-fisted approach to business. And it's part of who we are today, as we've said in the past, and how we're going to deal with life.

On competition, we-- we are-- I don't think we're seeing a significant change in who we see out there. There are always new players coming in. Sometimes they come in and go away very quickly. But you asked specifically about larger holding companies. And I don't think we're -- Dean, have you seen anything that suggests that?

Julia, I'm not sure-- you say-- I didn't quite hear your question.

On the competitive front--

Did you say something about holding companies--

-- when you're going out for pitches, are you seeing more units of the advertising holding companies for the specific direct marketing units? Let's say, for example, maybe a Wunderman over at WPP Group becoming more involved in pitch activity in the arena that you're involved in?

I have not noticed any change or increase.

I think-- if there is an increase it may have to do with what we're going after versus what they're going after.

Michael Kupinsky, A.G. Edwards.

You had you some nice margin improvement in direct marketing, up 50 basis points, and I was just wondering if you think the business has changed having gone through a really tough downturn? And do you think that margins in the business can get back to historical levels, or even improve from there? And what do you think might be the achievable margins for this business? then I just have a couple of quick questions after that.

Well, in general terms, our goals are to improve margins in direct marketing. We saw that we were able to achieve that in 2004 as the year progressed. And our goal remains to continue to show year-over-year margin improvement over time.

Okay. Can you talk about how much Federated and May might account for your direct marketing revenues in light of the fact that there might be some sort of merger? What do you think might be at risk, or do you think that you might even gain some business out of a merger?

I -- I personally don't know enough about that. There is a piece of--there's a piece May business, and it's not really-- May, it's the individual units in addition to May; that we-- that are clients of ours. And if the buying gets done differently, there's always risk, but I would say there may be as much opportunity as there is risk.

Okay. That's kind of what I was thinking. And in terms of payroll expenses, up 17 percent for the year, I would imagine a lot of that coming from sales commissions and so forth. How should we look at that going forward in '05? Are we cycling any of that big increase or do you think that-- what type of increases in payroll should we look for? and then finally, my final question is, are you hearing any more about postal rate increases and if you can talk about how this might affect, particularly, your shoppers business in '06?

Richard why don't you let me address, I think, Mike's first questions about the payroll line.

Go ahead.

Mike, I think, as we've mentioned in-- I believe in the prior quarter call, much of the increase that you're seeing, or the comparative increase you're seeing is-- is incentive compensation, or performance based bonuses, that hit in '04 and did not hit in '03. So if you look at it that way, then we actually have positive leverage on our payroll line. In other words, revenue increasing greater than--at a greater percentage rate than payroll.

What was the second question, Mike?

On postal rate increases, are you hearing anything on that front and what it might do to your business in '06 in the shoppers particularly?

Well, we-- we certainly have not heard anything unusual recently. We fully expect there to be a postal increase at the beginning of next year and we think that increase will be higher than it's been in some of the past increases. In shoppers, what we have observed over time is that when the increase is in the single-digits, particularly the mid-single-digits, we're able to overcome that increase in a relatively short period of time. When the increase gets to the high single-digits into the double-digits, it takes a little bit longer to work our way through the increase; just because there's just so so much we can pass on to our customers. The good news in shoppers, though, has been, historically, that our clients do understand when postage rates go up, because the stamps that they use go up just like the postage that we use goes up. So that understanding helps a little bit as we're talking our way through the reasons for price increase.

Also many of the larger companies that are mail products have the same issues as we have. ADVO is an example of that. But there are many others in the markets we serve. And so we are able to pass along increases, but obviously the larger ones are harder.

How much is the postal rate for in the shoppers, I mean what number or percentage of expenses is postal?

I'm sorry, Mike? You cut out a little bit there.

The percentage of-- of our revenue that's postage.

In shoppers it's in the 20, 25 percent range.

Chris Owen, ThinkEquity Partners.

Just some questions on shoppers. It looks like you have another tough comparison in the first quarter although it's not related to the calendar. Would that-- would you still feel comfortable in your 6 to 8 percent revenue growth range? And then also for the full year, given the slowing of the contiguous expansion strategy, where would you place your expectations within that range for revenue growth?

That is the range that we feel comfortable with, that 6 to 8 percent range. If you pinpoint us to any given quarter that becomes a little bit harder, obviously, because the exigencies of the quarter sometimes take to you different places. But, on balance, 6 to 8 percent is, in fact, what we-- what our guidance has been and continues to be.

So there wouldn't -- it wouldn't be reasonable to think you'd be on the lower ends versus what you've achieved in the past based on the slowing of the contiguous expansion?

You know, it's-- it's-- Dean and I were talking before the call and-- and it's-- we've said for the last three or four years now that we've had difficult comparisons. Each year we do well and we talk about how hard it is to grow those numbers and we've managed to do nicely in each of the past three or four years using that as the starting point. And so-- I -- I still feel really good about the growth opportunities in shoppers. Can we pinpoint it exactly? No. And that's why we use a range of 6 to 8 percent.

Great. And then just one follow up on the margins. You've done a great job of increasing them despite the strategy. Is it reasonable to think that you could increase them on the shoppers side by the level of this year at least, based on your growth expectations?

Yes. Again, in terms of margin, we talked a little bit about the pressures on margin in terms of newsprint prices. We talked about we have-- circulation which will be rolling in, since not all the circulation started January 1, 2004. You do have the rolling impact of circulation which is going to moderate margins. We-- we were up in margins in-- from '03 to '04. Our goal is certainly to hold that margin or improve it slightly. But there's a lot going on in the business in terms on the cost side.

[Caller Instructions]. Brandon Dobell, Credit Suisse First Boston.

Yes, it's actually Chris Pitt for Brandon. You guys talked about the retail consolidation, the potential for consolidation and the effect of the business there. I wonder if you can extend those comments to the telecom vertical as well as the financial services vertical? Is the reason financial services is kind of flattish, is that kind of the follow through of big mergers from last year? And then I have a follow-up question?

Well, consolidation always impacts us and sometimes it helps and sometimes it doesn't. But the fact is that there is a lot of opportunity independent of these larger companies buying each other and it's our job to go after that opportunity. So there continues to be opportunity in each of our verticals.

Okay. The follow-up question is, with the strength in direct marketing, are you seeing any trends within that business towards any particular type of activities? Is it-- do you see a shift towards customer acquisition activities or are you seeing still a lot of retention marketing activities? Or otherwise?

I think the pendulum swung more toward retention and we have not seen that materially change. It's obviously-- it's a balance kind of thing. Companies need to do both and are doing both. But the emphasis that was placed on retention awhile ago is probably still there for us and we expect to continue, certainly through 2005.

At this time we have no further questions.

Well, thank you, everybody. Have a good 2005.

Thank you