Harte Hanks Inc (HHS) 2010 Q1 法說會逐字稿

Welcome, and thank you for joining the Harte-Hanks first quarter 2010 earnings call. (Operator Instructions.) Now I will turn the meeting over to Mr. Larry Franklin, President and CEO of Harte-Hanks.

Thank you and good afternoon. On the call with me is Doug Shepard, our Executive Vice President and Chief Financial Officer, our new Senior Vice President, General Counsel and Secretary Robert Munden, and Jessica Huff, our Vice President of Finance and Controller. Before I begin with my remarks, Robert will make a few statements.

Thanks, Larry. Our call may include forward-looking statements. Examples may include statements about our strategies, initiatives, business plans, adjustments to our cost structure, financial outlook and capital resources, competitive factors, business and industry expectations, legal settlements, the economic downturn in the United States and other economies 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 documents filed with the Securities and Exchange commission, and in the cautionary statement in today's earnings release.

Our call may also include 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 harte-hanks.com. I will now turn the call back over to Larry.

Thank you, Robert. We have said on these calls for the last two quarters that we are beginning to see signs that the economy is improving slightly, and that's even more evident today which pleases us. I am also just very pleased with our first quarter performance. While our revenues were down, the 8% decline is the lowest rate of decline since the third quarter of 2008. I will talk some more about that in just a minute. We continue to closely manage our expenses, but we -- and that's reflected in the bottom line performance that we have, but we are also making investments in both of our businesses that we believe will have terrific long-term returns. In the quarter we added $13.9 million to our cash balance bringing the balance as of March 31, 2010 to $100 million.

Since January 1 of 2009 we have increased cash $70 million. This gives us flexibility in a number of areas. A quick look at each of the businesses, first direct marketing. The 8.4% first quarter revenue declined. Our rate of decline was the lowest since Q4 2008, and the rate of decline was less each month. Some of this improvement obviously comes from easier year over year comp, but really it is the performance and it reflects on improving environment and also wins with our existing and new customers. The tone of the market has improved, but our customers are still somewhat cautious. Their decisions and plans about their marketing programs change frequently both up and down . Lately it is more up than down. I mentioned earlier we are investing in each business. In direct marketing we are adding some people, especially in sales, digital and analytics and insight.

We continue to add to our capabilities in social and mobile offerings, and we are investing in technology and equipment. These investments allow us to better serve our customers through our multi-channel offerings. We are also increasing our marketing span with our website redesign, increased webinars, increased P&R and activities with industry analysts. In the highlights section there are examples of these investments. The highlights section also includes some of the wins and renewals from the first quarter. Finally we always mention our account base because it is a terrific asset, an opportunity for us as we continue to implement the multi channel strategy.

For Shoppers ,even though the economy is improving, the economic climates in California and Florida remain very difficult. Unemployment in both states is in the mid 12% range and slightly increased during the quarter. But with that said, I am very encouraged by our first quarter performance, and without question it was our best Shopper performance in several quarters. Our [same circ] revenue decline of 6.6% was the lowest we've had in over two years, and on a sequential basis we had our first quarterly revenue increase since the second quarter of 2008.

The quarter did benefit from expanded spending from two of our major accounts. And while they continue to be very good customers, they are not currently spending at the same level they were early in the quarter. There are early signs of improvement in our account penetration. This has been and will continue to be a key area of focus for us in shoppers. Looking at revenue from the more important [FIC] that we serve, real estate continues to be a challenge with a decline for the shoppers as a whole, although it is slightly better than the decline in Q4.

High occupancy rates caused property management, which had been showing excellent growth, to slow some. In the service areas we have some good improvement, particularly in the repair services, health services, personal services, and continued excellent growth in educational services. The consumer spending categories were much improved . High occupancy rates caused property management, which had been showing excellent growth, to slow some. In the service areas we have some good improvement , particularly in the repair services, health services, personal services and continued excellent growth in educational services. The consumer spending categories were much improved. Automotive remains a challenge and communications had excellent growth.

In Q1, we again made outstanding progress in all areas of our digital initiative, in account growth, increased penetration of our print advertisers, particularly with power sites, increased revenue, product improvement with new features, site redesign and much more.

As indicated in the highlight section, we added people with extensive experience in the key areas of our digital strategy including power site product management as we continue to enhance the product, application development management, user interface design, project management, and on-line marketing. These people join a very capable team with strong leadership, and we will continue to invest in all areas of this strategy.

It works for our existing clients and attracts others to both the print and the digital products. I am extremely pleased with the Shopper bottom line performance. Operating income for the quarter was $4.2 million compared to a $2.5 million loss in the first quarter 2009. In the first quarter of 2009 , we had $3.5 million of charges with none in the current first quarter which certainly helped the profit and comparison. But excluding the charges, profit was up $3.3 million. We are also keeping a close eye on shopper expense, but again we are investing in the business that we are convinced will payoff in the future. This was a great performance by our shopper people. These are exciting times. The environment is improving, but we are very aware of the uncertainty in the business environment.

We have to continue the intense focus on day-to-day execution of the basics that drive value for our customers, and at the same time we see tremendous opportunities to build on the strong foundation we have in each business and to provide even more value to our existing and new clients. And it is happening. We believe the current trends will continue, but it's difficult to predict when we will see consistent quarter over quarter revenue growth. I'm confident our people are capable and committed to delivering short

Thank you, Larry. Here is a Company wide overview of the first quarter. Consolidated revenues decreased 8% for the quarter to $200.2 million. Direct marketing decreased 8% for the quarter, and shoppers decreased 7.3%. Consolidated operating income increased 33.1% for the quarter to $18.3 million. Direct marketing operating income declined 12.3% while shoppers in increased o $4.2 million dollars. Excluding $5.4 million of 2009 first quarter charges, first quarter 2010 consolidated operating income would have decreased $800,000 or 4.4%. Consolidated operating income margin improved to 9.1% for the quarter versus 6.3% last year or 8.8% excluding the $5.4 million of 2009 first quarter charges.

For the quarter our free cash flow was $13.4 million versus $14 million in 2009. We ended the quarter with $3.9 million in capital expenditures, $1.8 million more than the $2.1 million spent in 2009. For all of 2010 we expect our capital spending to be approximately $15 million. Turning to our two businesses, in the quarter, direct marketing revenue decreased 8.4% and operating income decreased 12.3% resulting in an operating income margin of 12.5% compared to 13.1% in the first quarter of 2009.

Charges of $1. 9 million were taken in the first quarter last year. Removing this charge would have resulted in an operating income margin of 14.4% for the 2009 first quarter. As Larry has previously mentioned the rate of decline and revenues improved each month during the quarter. Our high-tech telecom vertical market represented 29% of direct marketing revenue. Retail markets were 23%, select markets were 22%, financial was 15% and health care pharma was 11%. Our top 25 direct marketing customers represented 42% of direct marketing revenue and our largest customer represented approximately 6% of revenues.

Shoppers first quarter revenue decreased by 7.3% and based on circulation distributed for the same time period in the first quarter of 2010 and 2009, declined 6.6%. This was Shoppers' best revenue performance since the first quarter of 2007. Shoppers operating income for the quarter improved to $4.2 million compared to a loss of $2.5 million in last year's first quarter. Operating income margin was 6.3%. Charges of $3.5 million were taken in the 2009 first quarter. Excluding those charges would have resulted in 2009 operating income of $1 million and operating margins of 1.4%. The hard management decisions made last year resulted in Shoppers' increasing operating income with a revenue decrease this quarter. Our first quarter effective tax rate was 40.1% which was higher than the 2009 first quarter rate of 37%. Higher state taxes drove the increase .

For the full year we expect our effective tax rate to be approximately 37% to 38%. On the balance sheet, net accounts receivable were $129.4 million versus $140.1 million at December 31st, 2009. Day sales outstanding at the end of March was 60 days compared to 59 days outstanding at December 2009. At March 31st, we have a total debt balance of $228.6 million dollars compared to $239.7 million at the end of 2009. Our net debt balance as $128.2 million versus $153.1 million at December 31st, a reduction of $24.9 million. We ended the quarter with a leverage ratio of 1.8 times versus a covenant of three times and an interest coverage ratio of 20.7 times versus a covenant of 2.75. We currently have all $125 million available under our revolver, excluding issued letters of credit, in addition to a cash balance of $100. 5 million at the end of the quarter compared to $86.6 million at the end of 2009.

With that, operator, we will turn the call over for

(Operator Instructions.) Our first question comes from Alexia Quadrani, JPMorgan.

Thank you. A couple of questions . First on the Shopper side of the business, you gave some great detail on the revenue trends in the quarter and indicated there may be some headwinds in the second quarter like the two clients that aren't spending as much now. Do you think the positives of the recovery will offset those headwinds and growth should continue to improve in the second quarter in the Shopper

To the extent, Alexia, that we can determine that, yes, we think the trends will continue.

And then any idea where the margins can ultimately return the Shopper business? I'm talking several years out. Is there any structural reason they can't get close to where they were in the past that you can see?

I don't spend a lot of time thinking about the margins getting back to those levels. The improvement process is what we are really working on, and we are going to be investing in this business. We are going to be, and as you well know, postage is a big fixed cost for our Shopper business. So in any year when postage rates move up or down more than the previous year, they are going to have impact on our margins. We definitely believe that we can continue to move the margins up, but I doubt that we will get back to the highs that you and I both remember.

And then if you can talk a bit about the margins in the direct business a little bit. I remember at the last recession you guys did an excellent job of keeping margins -- even I think improving them in the direct business. And I think we saw the same kind of resilience this time around. Yet coming out of the recession there was a bit of a give back on the profitability. And I think we saw a bit of that in this quarter. Is that just investment spending back in the business to grow in a better economy? Or is there something else that plays into that margin pressure late in the cycle?

Well we said this last quarter and in the previous quarter that our people did an outstanding job on the cost side early in our direct marketing business. And so when we were having double-digit revenue declines and single digit margin declines, we said you can't keep doing that indefinitely. When the revenues actual turn positive as opposed to declining less, then I think we have the opportunity to improve the margins from where they are now. But at the same time, we're going to be investing in this business too as we point out in the release. Particularly as we continue to build a multi channel capability and then staff appropriately for those new products and services.

So the little bit of give back that you mentioned in the quarter was of no surprise to me. And then we went through some periods where we had some pricing concessions and helping our customers work their way through that difficult economic environment that we were in. We will cycle again just like we cycled against volume decline and that sort of thing. The margins, direct marketing and Shoppers, over time, there is room for improvement.

And last question is just I guess on your outlook for use of cash in the buy back.

Buy back is not in the plan at the moment. Nothing is forever off the table, but investments, opportunities to acquire, we are managing our cash against our debt structure. It gives you the net debt numbers, but we think it gives us a lot of flexibility.

Thank you very much.

And our next question comes from Michael Kupinski with Noble Financial.

Thank you and congratulations on your quarter. I know it is a difficult time period, but you guys did a great job managing your expenses and so forth. Good job.

Thank you, Michael.

You indicated that direct marketing had a month to month improvement in the trends. I was just wondering if you can give us the month by month comparisons in the quarter, and if you also maybe could give us a little read, if possible, on what you might be seeing in April if you have those numbers?

Excuse my abrupt answer. No.

Okay.

And now let me -- and you know it is a trend that we watch, but when you think about any month to month there can be swings. But we track and have been tracking these monthly trends for some time, but again I don't want us to put extraordinary focus on them other than to reinforce the trend or the idea that the market is getting better and we are participating in that.

No, I understand. I simply asked the question because you mentioned it two times in your presentation. So I thought it was fair game.

It was. It was fair game.

Your SG&A expenses was a little higher than I expected. I suppose then it might be related to some bonuses and things you might have needed to accrue up. Was there any extraordinary things in that first quarter, or should we be able to use that as a run rate? Or what are your thoughts about the SG&A expense?

Actually we did have a one-time event in that we had two bad debt expenses up because we had two customers file for bankruptcy, so that primarily drove the increase in SG&A. There is some employee travel and that sort of stuff that slightly increased as activities increased in the market place with clients and RFP's and that sort of thing. But there is kind of a one-time event in there that we really haven't experienced that primarily drove that increase.

Can you quantify that, Doug?

Yeah, it is less than $1 million in total.

Okay, and I guess if we just factor that amount out, would that be a good run rate then for the balance of the next -- for the couple quarters here?

Yes. I mean, obviously SG&A is driven -- has got other factors that drive it. Like I said, as activity increases or decreases with clients, etc., you will see SG&A go up and down. But that's fine.

And also I was just wondering since this has been a really tough environment for most companies in the direct marketing side of the business, has the state of the competitive nature of that business, has that improved for you? Have you seen a number of your peers go out of business? I know it is still a highly fragmented market, but can you just give me some sense of your competitive stance in the marketplace these days?

I think there are definitely competitors who are less financially sound than others, and there may have been a few that have pulled back, way back or merged or got bought or something on the smaller scale. But the competitive environment, it is still a competitive environment out there. It has always been, it will always be. And we truly believe that our account base and our relationship with those customers will serve us well as the economy recovers. But we and everybody else were and are going after business very aggressively.

I think you mentioned in previous calls that you felt that the competitive environment was -- that since there were so many that were struggling you were seeing pricing pressure. I was just wondering if the pricing pressure has kind of abated a little bit?

It may have a little. Well, from where it was this time last year, yes, absolutely.

Okay.

Absolutely.

Okay, perfect. Thank you very much. Appreciate it.

Our next question comes from Dan Leben from Robert W. Baird.

Great, thanks. Could you help us understand kind of the impact of those two large customers that increased if you kind of exclude their spending from the Shoppers' business, what was the performance in the rest of the business like? How did that trend improve versus the fourth quarter?

It would probably be about like -- we still would have had an improved first quarter trend, just not to the extent that we did. Because the fourth quarter was done on the same (inaudible) revenue -- was down like 12.5%?

Right.

And this is 6.4%?

Right.

So yes, it would have been better than the 12.4% (sic) for sure.

And the first quarter is always seasonally a little bit weaker. So it was in spite of the seasonally weak trend things did firm up in the business and develop to what you would have expected.

Yes.

Now help us understand if there is any costs coming back into the payroll area in terms of any merit increases or bonds accruals or any of those types of things as we go through the year.

There will be increased bonuses and overtime, certainly merit increases and as I said we are hiring some people, but yes there will be costs coming back into the business.

Okay. Now help us understand kind of the approach to managing margins in the near term versus making some of these key longer term growth investments. Is the bias to kind of lean toward the investments versus the cost side or just help us think about how you are looking at that.

What we are trying to do is, and we will focus intensely on this, we want to do both. We want to continue to look for ways that we can improve the processes that we have and the way we approach our business. And I know we have done that and we have had terrific success over the last five quarters at that. But that's a task never done. At the same time we will be looking to invest in the businesses. So there's going to be a dual focus here. That's the way we have run the business for a long time.

Great. And then one area that you may see that would be on the acquisitions front, are there particular areas where you feel like the offering could use some bulking up or you would look to potentially do some acquisitions or create additional products?

We look at whatever we can, whatever comes our way, and we get a lot of opportunities to look. What we would be looking more at is how do we add a service or capability to an existing service or a new one that would help us to grow our relationships with our client. And if there were an opportunity for (inaudible) acquisition for some of our existing services, we would look at that as well. We are focused on continuing to develop each of these service lines in the multi channel platform, and at the same time grow. Our traditional services are doing reasonably well. And we know how to run those services extremely well. So there are opportunities throughout the organization, throughout the Company.

Great. And then last one for me, on the direct marketing business, could you help us understand some of the different drivers among products in terms of say direct mail fulfillment versus call center work versus some of the things you are doing on the digital side? Which ones are better than the overall growth rate, which ones are worse? And just give us some sense of the trends there.

Again, this is where you get looking at a specific quarter versus what the overall trends are. In the first quarter in our call center area there was one client, a great client, that actually made a decision last year they were going to bring in house some of their customer service work. That was because they had excess capacity given the environment and also some jobs issues. And so in that business which is not, quote, declining rapidly by any means, and that was in the high tech areas, so that's where you are seeing some of that in the high-tech. But our business of high-tech is good.

And the same thing is true in telecom where we had a client last year that was aggressively marketing to the HDTV business. Obviously they didn't do that this year, so that vertical and those services, the performance this quarter against last quarter, or same quarter last year reflects that negative, if you will. But those businesses are still extremely good. Our software data business our mail business, we had -- the agency did well given other than what I was talking about where there were those specific instances, it was pretty much across the board where if you look underneath some of those individual client performances.

Okay, great.

The wins that we are listing -- what is exciting about this is that a lot of those wins are multi channel wins. They are every aspect of the digital spectrum and some of the traditional businesses. So we're seeing some really good traction across all of our service lines.

Great, thanks, guys.

(Operator Instructions.) Our next question comes from Dan Salmon with BMO. Go ahead. Your line is open.

Good afternoon, guys, thanks for taking my questions. First, in Shoppers, was there any impact on the top line from an early Easter?

Oh, there may have been a little, but our business there is driven by services and some of the other categories, it wasn't noticeable.

Okay, and then on the cost side, I guess this applies to both segments, but I was hoping to get Doug's insight into pension expense this year, and then secondly it sounds as if a lot of your hiring and investment is focused on the digital side, and we've heard from other marketing services, companies, that labor costs continue to be challenging there as there is a relatively small pool from which to hire. Is that a concern of yours as you begin to ramp up?

On the digital side? You mean the labor on digital?

Yes.

Well, there are talents that we have to have to execute the strategy. We've been extremely happy with the people that we have hired. We continue to interview for those. That's not just the Shopper side, but also in the direct marketing side as well. So, you know, the labor cost is real, but so are those revenue opportunities that are out there in those areas. On the pension -- Doug?

The pension, I'm not sure exactly what you're asking or after, Dan. We will make a cash contribution this year to that plan, and the expense quarter over quarter is down over where it was last year.

Last year it was up dramatically from the prior year, right?

Yes. It was up in Q1 of 2009 because of the stock market performance the previous year, and then of course the general market was way up in 2009 for portfolio, the retirement was up and therefore the expense is down year over year.

So you would on a year over year basis -- 2010 versus 2009 it sounds as if you would expect a lower number?

In expense, yes.

Okay. And then the last question, you announced a partnership with VeraCentra Software as a service provider and I would just like to hear a little bit more about how that fits your strategic focus going forward.

Gary Skidmore who is President of Harte-Hanks Direct Marketing is on the phone and I will let him answer that.

They are a technology partner. You may have seen the release for our marketing portal technology which allows our customers who sell to branch locations, resellers, to do localized marketing, multi-channel, localized marketing using marketing assets that can be controlled by corporate marketing departments. And there is so much great technology in the market that we feel that we can form these partnerships to drive these new products in that way instead of reinventing that technology.

Great, thank you.

I would now like to turn the call back over to Mr. Larry Franklin for closing comments.

Okay. Thank you very much for all of you who joined the call. We appreciate your interest and support in the company and to all of our Harte-Hanks people who are on the phone or listen to the call later, we really continue to appreciate all that you do and the way you do it. Thank you very much.

That concludes today's call. Thank you for participating. You may disconnect at this time.