Harte Hanks Inc (HHS) 2005 Q1 法說會逐字稿

Welcome to the Harte-Hanks first quarter 2005 earnings release call. All participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to introduce Mr. Richard Hochhauser, President and CEO of Harte-Hanks. Sir, you may begin.

Thank you. Good morning, everyone. On the call with me today is our Chief Financial Officer, Dean Blythe, and Jessica Huff, our VP of 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 material results to vary materially. After I make a few opening marks, Dean will give some financial details, and then we'll take your questions.

To say what we're excited about our performance in the first quarter would be a huge understatement. Our people delivered results that far exceeded our expectations going into the quarter. Overall operating income was up 34.1% on strong revenue growth of 13.6%. Earnings per share grew to $0.29 from $0.21, up over 38%. In quarter we generated $23.9 million of free cash flow, which we define as net income plus depreciation and amortization, less capital spending.

Direct Marketing operating income increased 57.6% on revenue growth of 17.4%, the third consecutive quarter of double-digit revenue growth. We're especially pleased with our significant margin improvement over last year.

As we have said over the last several quarters, continued margin improvement is a goal of our Direct Marketing business, and our people have responded with four straight quarters of improved margins. All of our vertical markets except pharma and healthcare had positive year-over-year growth with three of the five verticals, high-tech, retail, and select markets up double digits.

First quarter performance benefited from a large worldwide project that was launched and mostly completed for a significant existing customer in the quarter. Because of this one-time project and the fact that Direct Marketing is coming off against some difficult comparisons to 2004, we do not anticipate this type of revenue growth or margin improvement for the remainder of 2005.

Having said that, we're still really excited about the growth and revenue and profit, even without this one-time project, which came from an existing client and was based on the good work we had been doing for them.

Shoppers had another great quarter with operating income up 13.7% on revenue growth of 7.5%. Revenue was helped by circulation expansion that occurred in the last three quarters of 2004. We're especially pleased that we were able to improve margins, even with the expansion that has taken place.

Last week we completed the acquisition of the Tampa Flyer Shopper and we're really excited about the prospects and opportunities this will present to us in Florida. With these last four quarters' performance, we're seeing both of our businesses performing well, top-line growth, bottom-line growth and margin improvement.

Our Direct Marketing business is continuing to show strength. We are offering the vertical markets we serve the solutions they seek and need. And our Shoppers business continues to offer the unique combination of reach and frequency and targeting that delivers cost-effective results in terms of traffic and sales for our advertisers, with an increasing circulation base from our contiguous geographic expansion initiative.

Before turning it over to Dean, let me just summarize a few key points. First, both of our businesses built momentum in 2004, and we're extremely pleased that we're able to carry that momentum into the first quarter of 2005. The environment is the best we've seen for quite some time.

In Direct Marketing, we have had consistent revenue growth for a number of quarters now, and we're thrilled to see the progress that has been made in margin improvement as well. Also, double-digit revenue growth in three of our five verticals, including the largest two was really exciting.

We're building real value in our Shoppers business and our consistently strong performance suggests that our people is making it happen. Our goal is to keep getting better by meeting and exceeding the needs of our clients. We're excited about the new Shopper acquisition. I've said in past remarks that we really like this business, and this acquisition certainly underscores that point.

And finally, thanks again to everyone for the spectacular performance in quarter 1. Dean, over to you.

Thank you, Richard, and good morning. As Richard indicated, this was really just a great quarter. Here is a Company-wide overview. Revenue up 13.6%, with Direct Marketing revenue up 17.4% and Shopper revenue growth for the quarter 7.5%. Company-wide operating income up 34.1%, and in the quarter Direct Marketing had very strong operating income growth of 57.6%, and Shoppers was solidly up with 13.7%. Earnings per share up 38% to $0.29 per share from $0.21 in the first quarter of 2004. Free cash flow was 23.9 million, up 45% over the first quarter of last year.

Turning to each of the two businesses. Our Direct Marketing revenue, again, was up 17.4% and operating income up 57.6%. With this strong positive leverage yielding operating income margins up 370 basis points on a year-over-year basis to 14.4%.

Approximately a third of the revenue was driven by the large worldwide project for one of our large customers that was launched, and for the most part completed in the first quarter. Even without this project, and the impact of acquisitions completed in the last 12 months, Direct Marketing would have delivered double-digit revenue growth and strong margin improvement in the quarter.

For our vertical markets in the first quarter, high-tech/telecom was our largest vertical, representing 30% of Direct Marketing revenue, retail 23%, financial 20%, select markets 17%, and healthcare/pharma 9%. Net customer spending, again, was positively strong in the quarter.

Our international businesses represented approximately 10% of our Direct Marketing revenue for the quarter. Our top 25 Direct Marketing customers represented 44% of Direct Marketing revenue, and our largest customer in the quarter represented approximately 9.9% of our total Direct Marketing revenue.

Turning to Shoppers, Shoppers grew revenue by 7.5% in the quarter, with operating income increasing 13.7% compared to the prior-year quarter. And despite the impact of expansion circulation launched in the last three quarters of last year and continuing rises in newsprint prices, operating income margins improved by 110 basis points compared to the first quarter of 2004.

In addition to yet another strong performance by our Shoppers business in the quarter, we are excited about the acquisition of the Shopper in Tampa, Florida that we signed up in the first quarter and closed last week. This business had 2004 revenue of approximately $33 million, with circulation in excess of 900,000 in the Tampa, St. Petersburg, Metropolitan area.

Now the margins in this business are currently lower than our average margin in our existing Shopper businesses. There will also be some incremental acquisition-related intangible amortization expenses going forward. So for the remainder of the year, the impact of this acquisition will be a decline in total average shopper operating income margins from where they would have been without the acquisition.

We have talked in the past about plans for increasing the circulation and shoppers through contiguous geographic expansion, and our stated goal when this initiative was launched at the end of the third quarter in 2003 was to add 2 million in circulation over a five-year period.

Although we did not add any new circulation in this quarter, the total circulation added to date as part of this initiative is over 900,000, which is approaching half of our stated goal of 2 million circulation increase less than two years into a five-year roll-out plan. We still anticipate hitting the original plan of two-million circulation increase in a five-year roll-out period.

Turning to the balance sheet at March 31st, we were showing a cash balance of $38 million, book equity was $579 million. Net accounts receivable were 169.9 million with DSO at the end of March '05, 57 days against 56 days a year earlier.

Looking at our statement of cash flows, net cash provided by operating activities for the quarter was $38 million. We repurchased over 600,000 shares during the quarter, and since January 1997, we have acquired 40 million shares and spent $660 million under our repurchase program.

This was quite a quarter. Last year, our results improved as the year progressed, so our comparisons for the remainder of the year will be more difficult than what we saw in the first quarter. We are also not likely to have another project of the magnitude we saw in Direct Marketing in the first quarter.

But with this standout quarter behind us, and continued strength in each of our businesses, our original goal of delivering an earnings growth rate in 2005 similar to the growth rate we saw last year has slightly improved.

With that, we'll be happy to answer your questions. Operator?

Thank you. We will now begin the question-and-answer session. [OPERATOR INSTRUCTIONS] Alexia Quadrani of Bear Stearns, you may ask your question.

Good morning and congratulations on a really incredible quarter. My first question is really on this one-time project. I want to get an idea of what industry the client was in. And is this dollars that have maybe been earmarked to a different media, that maybe they were moving over to Direct Marketing, or is it just a long existing Direct Marketing client that just picked up their spending in this particular quarter. And then generally, on this type of one-time project, what is your visibility for these types of -- this type of work?

Those are two good questions, Alexia, and thank you for you compliment. It was in the high-tech/telecom industry. It was a Direct Marketing initiative. So it was not a share-taking kind of project.

And as far as visibility is concerned, this was the project that had been discussed for over a year, actually, and had several planned start dates. We don't believe business is business until it's signed and done, and we start, as you know, from prior conversations. And we really didn't know about this project until late January for sure. So while we knew it was in the pipeline, I can tell you today there is a lot in the pipeline. But we're just hopeful that those things materialize into actual work.

And then as just a follow-up question on the Shoppers business with the Tampa acquisition. I think Dean mentioned that we should expect some margin pressure for the rest of the year. How long do you think it will take, though, to get that business sort of up and running to comparable profitability levels of your existing Shopper business?

Well, I'm going to let Dean try to answer that. But it's really hard to tell. We've owned this property for a week. And so it may be a little bit premature to give you a definitive answer on that. Obviously, we've studied it prior to buying it. And we are confident that we can improve the existing margin of the business. But it's really hard to tell how long it will take. As you may know, the margins in all of our Shopper properties are different. So this being at the low end of it.

But there are a number of systems that we're going to put in place over time that will help. And there are a number of other issues that the way we run our business is slightly different than the way the prior ownership ran the business. So I think you'll see the margin improvement over time. And you'll see it getting closer to the norms that -- for example, that we see in the state of Florida. Dean, you want to add anything?

Yes. And, Alexia, yes, we do believe, and we have identified margin -- areas that we can improve margin in this business. I think one thing to keep in mind is that we're just now finishing up the purchase price allocation. And there will be some value assigned to intangibles that will amortize over various lives ranging from three to ten years. So as long as that particular amortization is hitting that particular P&L, it's going to keep that margin below where our other Shopper businesses are. However, we do see that margin improving over time.

Thank you very much.

Michael Kupinski of A.G. Edwards & Sons, you may ask your question.

I'd like to add my congregations as well. You're seeing strong revenue growth and I was just wondering -- on the Direct Marketing side, and I was wondering, is that from existing customers ramping up campaigns, or are you starting to see adding customers? And are you starting to take share from competitors? And I was wondering if you could talk a little bit about the pricing flexibility. Are you starting to see a little pricing coming into the Direct Marketing side? And I just have a couple of quick other -- a couple of quick other questions.

Michael, that's three questions.

I know. I'm sorry.

Thanks for your compliment again. I'm going to let Dean answer pieces of this. But it is driven more from existing customers than new customers. The share thing is very difficult to measure in our business, as you know, although we are certainly feeling comfortable with our growth vis-a-vis the growth of other companies that we look at. Pricing is pricing. I mean, we've talked about that on a lot of different calls. There is really not a lot that is changed with regard to pricing. It is a factor that is going to be with us for a long period of time. I don't think there is any turning back on the pricing sensitivity of our clients, although clearly as capacity is reached, pricing will get helped a little bit.

Okay. So it sounds like volume is the key here. What in terms of this worldwide project, you mentioned that you may started it last year, correct?

No, we didn't start. We knew about it last year. And there was some developmental work that started very, very late last year. But I can tell you from experience that these are the kinds of things that have funny lives to them. And we never know how real they are until the button gets pushed.

Right.

Which is the reason that we were not more aggressive, for example, in our thinking about the first quarter.

So you're not really cycling into any of the comps from this particular project this year?

No, we're not, Mike. This was around last year in terms of discussions with the customer.

Okay.

And planning, and planning with the customer.

And then on the Shoppers side I had a couple of quick questions. How are you fairing in Southern California with the competition of ADVO and Tribune in that marketplace?

And then I was wondering if you have any increased visibility on how the retail mergers may affect you later this year. I think that you may have mentioned that Federated-May was only like maybe 1% of your revenues combined. But I was wondering if you have any increased visibility on that front?

And then the final question is on the pharma/healthcare was down mid-single digits. Is there any particular reason that would have affected that vertical in the quarter?

Well, the easiest one perhaps is the pharma/healthcare one because, you have observed, as have everybody else on this call, the recall of drugs. And that, in fact, did not serve us well in the first quarter. And it will continue to not serve us well, although clearly there is a -- as somebody said earlier -- a pipeline. And we're hopeful to overcome the losses from some of that.

On the retail side, the answer is we do not know yet. Those are being sorted out as we speak. There is risks and there is opportunity there. And I don't know how that will fall.

You also asked a question about shoppers in Southern California and competition. And the only reaction I'll give you there is that the question is certainly an astute one, there is a lot of competition. It is heightened over the past quarter. We're doing our best to deal with that competition, and so far we're doing a reasonably good job dealing with it.

Great, thank you very much, and congratulations again.

Thank you.

Sarah Gubbins of Merrill Lynch, you may ask your question.

Thank you. The first question that I had related to Direct Marketing. Given your strong performance, do you get the sense that advertisers are shifting their spending away from traditional advertising and more towards marketing services?

You know, Sarah, I think that there is some truth to that. You folks have been saying it perhaps longer than we've been saying it. And it does appear that way when you look at the traditional media and their first quarter reports compared to the Direct Marketing companies, we have fared better. So I think that is true.

But these are shifts that take place all the time. And you just never know quite how long they are, whether it's a shift that is going to be with us consistently is something that obviously we're going to have to track. We're hopeful that that's the case. Obviously, back about ten years ago, we made a bet that it would be the case. But we don't know yet if it's one of those trends that stays with us or not. We're very pleased with the fact that it's here, though, today.

Great, thank you. And then second question that I had was about Shoppers. I just wanted to make sure that I understood as I think about margins for the rest of the year. Given the lower margins from the Tampa acquisition and the pressure from the expanded circulation, do you have a sense that margins would likely be down within Shoppers for the rest of the year, or is it more just that they would be flat to up, but not to the extent that they had been in the first quarter.

Dean?

Sarah, I think what we said going into the year was kind of the same thing we said last year in our Shopper business. And again, this is pre the acquisition of Tampa. I thin we said that margins -- with paper prices going up and with expansion circulation, those two were drags on margins. So we thought our margin for the year would kind of be where it was the previous year, up a little bit, down a little bit. Certainly in the fourth quarter we outperformed that, with margins up 110 basis points. But for the remainder of the year, absent Tampa, we kind of thought that margins would be about where they were last year. And Tampa will bring that down. So it's probably likely that margins will be slightly lower than they were last year for the remainder of the year.

Okay, got it. That's very helpful. And finally, just one last question. Can you talk about the acquisition pipeline in both Direct Marketing and in Shoppers?

Well, I'll just start in by repeating what we've said in the past. The Shopper opportunity came up. We said that if there was a large offer for sale that made strategic sense for us, we would take a close look at it. There couldn't have been a large Shopper opportunity that made more sense to us than the one that we purchased. So we will continue along that path.

But recognize that I believe we did the best possible deal with the one that we just did. And that's not to say there aren't others. But this was a really good one for us given the kind of Florida expansion potential that we have in the future. Direct Marketing pipeline, Dean, you want to give any thoughts about it?

Yes, I think Richard has addressed the Shopper pipeline in Direct Marketing. There continue to be a lot of things in the arena that are on the market and coming to market. We look at a lot of stuff, and there continues to be a good strain of things on the market. Obviously, there was a big sale of a company announced yesterday. But there are opportunities. And we'll be looking at those and careful about those.

And just one last question on that. Is pricing in terms of multiples, is there any change in that for potential acquisitions of indirect marketing?

I don't think there is a noticeable change over the last period of time, no. It's all across the board, depending specifically on what kind of business it is.

Okay. Thank you very much.

Thank you.

Mark Bacurin of Robert W. Baird & Company, you may ask your question.

Good morning, Rich. Good morning, Dean.

Hi.

A couple things. I know you probably don't want to comment specifically about pricing on the large project, but it was helpful to talk about the revenue impact. Could you give us some sense of what the incremental boost to operating income or margins was from that project?

Well, maybe I'll try to answer it in a way that would -- may even make more sense than looking at operating income. We beat the expectations by about $0.04. And we would have beaten the estimates that were given for our earnings per share even without the project. The project really helped. And it's hard to quantify. But we estimate perhaps about half of that $0.04 increment to come from the project, maybe a touch more. It's obviously very difficult to be exact on that. But that's our best guess on that.

All right. That's very helpful. And just curious, on the -- it looks like you still have pretty good growth in the select markets category. I know auto is a big piece of that. And just given the tough times that the auto industry is seeing, just curious to see how your continuing to put up pretty good growth there and whether or not you see the ongoing problems in that industry affecting the growth trends.

Well, automotive was not one of the drivers, interestingly of that growth, and it came from the manufacturing sector for us. As you know, what we call "select markets" is our very sophisticated phrase for "all other." And all other includes a lot of different categories. And one that has been growing now for a few quarters and continued to grow in the first quarter was the manufacturing segment not the automotive one. Although our pipeline for business is reasonably strong in automotive, so it's not that we're not optimistic about it.

Okay, great. And just a couple of nit-picky ones. Could you -- Dean, could you give us the actual dollars spent on share repurchase? And then what the post-Tampa Flyer, that balance is?

The post-Tampa net-debt balance is probably in the $25 to $30 million range. And we purchased, it was about a little over $17 million we spent in the quarter.

Great. And then you sound like you have identified what the intangible asset allocations would be. Can you give us some idea of what the ongoing amortization of the intangibles that will hit your P&L on a quarterly basis will be?

We have a range for what the amortization is. We're working with -- to finalize what the purchase accounting will be. But we don't have those numbers finalized yet. So I don't have an answer for you on that.

Okay, fair enough. Thanks, guys. Good quarter.

Thank you.

Fred Searby of J.P. Morgan, you may ask your question. Mr. Searby, your line is open. We'll move ahead to the next question. Paul Ginocchio of Deutsche Bank, you may ask your question.

Yes, hi there. Just a couple of questions, maybe for Dean. Corporate expenses seemed up in the quarter. Was that because of Sarbanes-Oxley? What does it look like year-on-year for the next quarters forward? Also, the postal rate increase was probably much less or much lower than originally expected. Can you talk about how that helps or hurts Shoppers next year. And finally, you talked about it's a lot of projects from your existing client base. Did the size of the projects there surprising you or just the number? Where is the sort of upside coming from? Thanks.

Okay, Paul, I'm sorry, let me start with your first question, which was corporate expense. I think there were probably two drivers of the increase in the first quarter. One was actually increased outside services, audit fees and Sarbanes-Oxley fees, higher this quarter than last quarter. Some of that also was some incentive compensation increase. If you looked at last year, the way the year rolled out, our performance improved throughout the year so as we were accruing for incentive compensation in the first quarter, our performance improved. Therefore, we had to catch up. So with a strong first quarter out of the box, obviously we're accruing at a higher rate on incentive compensation than we did a year ago at this period.

The last question I think you asked is, is the increase in Direct Marketing coming from more deals or bigger deals? Is that right, Paul?

That's correct.

I think there has been a trend over a period of time where deals are getting bigger. And kind of the -- there are bigger deals coming through the pipeline. But I think it's both a combination now of increased size and increased activity. And I'm sorry, Paul --

The last question was about postage and the rate increase looks like it's about 5.4%, although obviously we won't know until it's official. And it looks like it's going to come in the first quarter of next year, perhaps towards the end. We -- due to the structure that the drop ship discounts, there will be some variations on what this means. And we think that the postage increase will be slightly more than the average for Shoppers. But only slightly.

And what that means to us is, you know postage is expensive to Shoppers, and you know postage is paid for by our clients in Direct Marketing. But in general terms, this is the type of increase that we do not feel will materially impact our business. We were clearly more fearful six months ago about a double-digit increase, which would have been more hurtful to us.

Thank you.

Chris Owen of ThinkEquity Partners, you may ask your question.

Good morning, and congratulations. A quick question on your Direct Marketing growth expectations. You said you don't expect the usual pattern of increasing growth over the course of this year. Would you make the same statement if you adjusted this quarter's growth for -- if you excluded the large project this quarter?

Richard, let me kind of just give some numbers, Chris, to provide for that. If you looked at last year on a quarterly basis, and again, this is '04 compared to '03, our revenue in the first quarter was up 7.6%, in the second quarter up 8.9, third quarter up 9.7, fourth quarter up 11.9. So just from a pure comp basis as we go throughout the year, they're going to be tougher comparisons. I think that was the point we were making in our comments.

Okay. And then in terms of the financial services vertical, is there any color there in terms of why it's been a little bit weaker the last few quarters?

Well, you know that it's made up of a lot of different pieces. And some of those pieces continue to not do well for us. And one example of that is the mutual fund part of the business, which continues to be soft. So we -- I mean, we're happy to see that the revenue was up in financial. And there certainly -- there continues to be activity and lots of revenue-generating programs that we have going on in the financial market. But we have yet to crack into that consistent double-digit revenue growth area. And we are likely not to do that this year, though we hope we're laying some groundwork for that.

Okay. And one last question on the Shoppers business. Could you share sort of what the growth characteristics of the Tampa business was before you acquired it? And how soon do you think you would make decisions in terms of whether to integrate it into your contiguous expansion strategy, or just to pursue further growth on the West Coast?

Well, some of the growth characteristics were not terribly dissimilar to the kind of growth characteristics that we see in Harte-Hanks. They too have done expansions, and they've been reasonably successful with those expansions, particularly their recent ones. If you take a look at a map of Florida and you sort of look a third of the way up the coast on the west side, and you draw a circle there, and then you go to the bottom right-hand side, you draw a circle around there, you know that sort of in the middle are a bunch of alligators, you can pretty well pictures the directions you can go. You can go north from where we are, you can go south from Tampa, and you can go to the slightly northeast and get to one of the really big cities in Florida. And we have lots of alternatives now. As opposed to earlier, where the alternatives were a lot more limited.

So we're going to be assessing those alternatives. And again, the acquisition is a week old. So we're not -- certainly not in any position to talk about specifics. But we will be assessing them. It is clearly an opportunity for expansion. And it is clearly looking like the same map as we observed in California, where we put together an expansion program about a year and a half ago, where we said we want to add another 2 million in circulation. It's not terribly dissimilar to that.

Thank you very much.

Brandon Dobell of Credit Suisse First Boston. You may ask your question.

Thanks. Real quick one, Dean. Is there way to quantify if there was any impact what the Easter had for you guys this quarter. And then more of a general kind of strategic question, as you look at the customer base, gauging the level of crossover now, i.e., are customers buying more products from you guys now than they were six or nine months ago? And how much do you see the same customers buying base in Shoppers, and also doing projects in Direct Marketing? I'm just trying to get feel for what the same customer growth might look like or what the potential penetration for those customers might look like.

Brandon, I'm sorry. You cut out at the first question. None of us here heard it.

Okay, sorry. I'm just trying to be as obtuse as I can!

Well put!

I was wondering if there was any impact from the early Easter holiday on your Q1 results and if you could quantify how much that might have helped you?

I certainly am from the Direct Marketing side, I don't think there was a quantifiable impact. It may have driven some retail performance, may have. On the Shoppers side, I don't believe there is a, again, a quantifiable impact on it because of a calendar issue.

Okay, thanks.

Now I think your next question, you were asking about customer crossover. And were you talking about between Direct Marketing and Shoppers?

Both between Direct Marketing and Shoppers, but also within Direct Marketing, if you look at is there a -- the average customer buys x products, meaning one or two or three, or uses you for a number of different services. And how has that number trended, or is that something you guys can give us more color on.

Let me answer the Direct Marketing and Shopper one, and, Dean, maybe you can take the Direct Marketing one. We have no systematic program at Harte-Hanks to take a look at clients between Shoppers and Direct Marketing. That's not to say that we don't talk to each other, because we do. That's not to say that we don't look for opportunities for each other, because we do. But we know that fundamentally, they're different businesses. That is, the Shopper business is a local and regional business. The Direct Marketing business is a national and worldwide business. And because of those differences, while there are some commonalities between the customer base, the action really lies within the business rather than between the businesses.

Okay. Thanks, that's fair. And if you would look at the Direct Marketing part of it by itself.

Yes, and Brandon, we do look at service line offerings and which of our customers take how many in buckets of them, and we track that. Obviously, our larger customers tend to show up in more service line offerings, which makes sense. That generates more revenue. And I think, obviously, as the customers grow, some of that growth is driven by additional service line offerings. And we're penetrating different parts of that. And it's hard to measure, but I think the general trend line would be yes, there our customers are taking more of our service line offerings over time.

And kind of related to that question, are there service lines that people are asking for that at this point you guys can't provide, maybe it's along the interactive side, maybe it's something one of your competitors might do. And has that been a real hindrance to signing some of these bigger deals, or does it not matter that much and customers still like what they see with what you guys already have?

Well, we don't have everything, and we'll never get there. But clearly, our offering is as broad and as deep as any. And we're comforted by that. That's not to say that we don't continue to seek new offerings. And if you think about our most recent acquisitions, they represented new offerings. The software offering from a little over a year ago, and the e-mail offering that we -- that is what, about three or four months old now. Those are new capabilities that we have added. And we'll continue to look for that. But we are as comprehensive and under-one-roof offering company as I've seen.

Okay, thanks a lot.

[OPERATOR INSTRUCTIONS] Fred Searby of J.P. Morgan, you may ask your question. Paul Ginocchio of Deutsche Bank, you may ask your question.

Just a quick follow-up, if I may. Imitation is probably the nicest form of flattery, and I think there are others out there who have bought e-mail marketing and bought into being a full service provider instead of just providing data. Have you seen Acxiom more in pitches, I know it's probably too early, or have you been hearing clients talking that they're getting more material from them? Do you think they're going to be a more difficult competitor going forward? Thanks.

Well, I'll give you a couple of observations. First of all, we take all competitors seriously. Acxiom is certainly a significant competitor in the database arena. We have not seen them yet very much in the marketing services area, although they have made two plays now in that arena. They went through, at least as I recall in the early 90s, they went through a similar strategic approach. And they subsequently divested of their acquisitions. It's hard to know what they'll do this time, and what their level of commitment is. But we'll always be looking very carefully at our competition. Because as I said earlier, we take them seriously. We have not yet seen them. That doesn't mean we won't.

Great. Thank you.

Troy Mastin of William Blair & Company, you may ask your question.

Thank you. I wanted to ask about this large project in a little more detail and how you manage through this kind of a significant increase in revenue with regards to staffing the work that is necessary. Do you primarily use existing folks that work overtime, so to speak, or contract employees? And what does this mean for the incremental margins from this kind of a project?

Well, the last part of that statement I hope we have already answered by the comments about half of the EPS increase, we're attributing to that. The first part of it is that our people don't sleep very much. It was one of those intense projects where we really worked very hard to be prepared. A lot of our people were dedicated to it.

And having said that, we've also hired a lot of short-term people to participate in the project because it was a short-term project. So we had an unusually heavy hiring. And that was a worldwide project. So the hiring took place. And I don't remember now, Dean, was it seven or eight markets?

Yes, seven or eight different international markets.

So it's fair to say you didn't have to staff to an unusually high level that will carry forward into the future quarters in order to complete the project?

That's correct.

Okay. And then could you update your thoughts on the environment for a more deep penetration into overseas markets like Europe, if you see anything in that marketplace that interests you in terms of just the fundamentals or the opportunity there, any plans you've got with regards to expansion.

Well, it's a good market. We have a number of facilities. We have actually done, I think, a really good job in growing our European business. The fact that, I guess, Dean, this quarter was the highest percentage of revenue ever, wasn't it?

Yes. It's up a little bit over what it's been. I think it was close to 10% of our Direct Marketing revenue.

And so, we've always been committed to growing our businesses from within. And supplementing that with niche acquisitions for the most part. And as we see things, as we see opportunities, we will look at them carefully. Europe is an important market for us, and will continue to be.

But you've seen no significant changes in sort of the fundamental makeup of that market that makes it more or less interesting to you as a new opportunity?

Not fundamental differences. It's more the differences in our clients that continue to reach beyond the borders of the United States. And, in fact, it's driving us more than the marketplace itself.

Okay. Based on your commentary, I'm guessing I know the answer to this. But out of some maybe related players, not direct competitors of yours, there has been suggestions that there was a bit of slowdown in sales activity in March, or a longer sales cycle. Anything like that you're seeing?

Well, the sales cycle increased, I guess it was four or so years ago now, and has not really changed. It continues to be a pretty long sales cycle. The activity level, I don't think, Dean, have you seen anything that suggests any change -- it's so hard to tell when you look at things by month in our business. It really is. It's hard even to look at things by quarter. But certainly by month it's very difficult. So I think I'll pass on that question and wait until we see what the second quarter shows.

Okay, thank you.

Fred Searby of J.P. Morgan, you may ask your question.

Hey, Richard, how you doing? Good quarter. Not sure if there is anything that hasn't been asked. But, on the e-mail marketing side, you acquired that little company in Texas, neat little company. And I wondered to what degree are you seeing an uptick in client interest in the e-mail marketing business and pricing, and how much differentiation is there? I mean, some have argued that it's still much more of a commodity business. And are you seeing clients actually think you're pulling money out of direct mail, or is it typically coordinated with the other channels that you have? Thanks.

First, the differentiation. Thank you for your kind comments about the company we acquired. We feel the same way. And we also believe that we do have some differentiation that the product capabilities are unique and the breadth of them is also unique.

Our client base has a need to do -- to reach its customers through whatever medium is appropriate. And we -- it was very logical, as you know, for us to be in the e-mail business. In fact, we have been for quite some time. We just didn't own it.

With that ownership, there is an even greater commitment on the part of our Company to introduce those types of services to their existing client base. And that's happening as we speak. It's still a relatively young acquisition. I can tell you the activity level is very high. I'm optimistic about what's going to happen with that e-mail company within the structure of Harte-Hanks.

As far as how it fits, you go back and you look at history, and you look at the advent of radio and saying gee, it's going to replace newspapers, and it didn't. And television didn't replace radio and cable didn't replace television, and on and on and on. And e-mail is not going to replace the existing direct media. But it will certainly play an important role. It will certainly grow disproportionately fast, albeit on a small base. So we think it's an important component of what we do, and we're really happy that it's part of our offering today.

Are you seeing clients actually incrementally taking -- I mean, taking dollars out of direct mail, or has there been a real uptick in interest recently or is it still -- I know you have been involved for a long time, is there any inflection point?

There is some dollars, but it's not particularly significant. And there are new applications that come from e-mail that mail can't deliver on just because of the difference in timing, for example, between the two media. So it's partially incremental to the spend, and it's partially substitutive. But if you think about that, it's a small amount of money right now.

All right, thanks. Great quarter.

Thank you.

Larry Lee of CIBC World Markets, you may ask your question.

Good morning, everyone. Congratulations on the good quarter. Dean, I just wanted to ask one last question on the Shoppers margins in the quarter, and I apologize if you touched on this before. But given the expansion that you guys did last year, I guess I had been originally expecting margins to be flattish to down in the quarter, yet you managed to put through a nice margin improvement year-over-year. What do you think were the primary factors driving that?

And given the comments that you made on how the rest of the year would play out adjusted for Tampa, it sounds like things would be flat. Are some of those drivers going to moderate over the rest of the year? Thanks.

If you look at the -- over time what our Shopper business was doing, I think from 1997 to 2003, over a six-year period, Shopper operating income margins were up 600 basis points. So they were up 100 basis points a year on average. Circulation expansion does have a downward impact on that.

I think one of the things that happened is that the circulation that we added performed better than we expected. As we've said that the circulation would lose money in the first year, break even in the second year and start earning money in the third year. We beat our expectation on some pretty large expansion opportunities by one or two years. Came out of the box at break-even or even making money.

So I think that the expected negative impact on Shopper margins wasn't as great as we thought when we were discussing that. So I think that's probably as big a driver as there was.

Okay, thank you.

At this time, we have no further questions.

Well, thank you, everyone. Have a great day.

Thank you.