Harte Hanks Inc (HHS) 2010 Q2 法說會逐字稿

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

Thank you very much and good morning. On the call with me today is Doug Shepard, our Executive Vice President and Chief Financial Officer; Robert Munden, Senior Vice President and General Counsel; Jessica Huff, Vice President, Finance, and Controller; and also with us today is Gary Skidmore, Executive Vice President and President of Harte-Hanks Direct Marketing. Before I begin 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 and 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. I'm pleased with our second-quarter performance although revenues are still down. The 3.7% decline is the lowest rate of decline since the fourth quarter of 2007. And while we continue to closely manage our expenses, we're making investments in our two businesses that we believe have terrific long-term returns, and we'll talk some more about those a little later.

Just a quick look at the two businesses. First, Direct Marketing, the 3% second-quarter revenue rate of decline was the lowest since the third quarter of 2008. These results reflect a mix of some exciting wins from existing and new customers and reduced activity from some of our current clients. I mentioned earlier the investments that we're making in each business and Direct Marketing. We're adding some people in two key areas vital to our clients' success. The first is delivering customer insight as a part of every assignment. In the highlight section of the press release, you'll see a reference to the recently formed team reporting to Jeff Simpson and his role as Senior Vice President of Marketing Strategy and Customer Insight.

This team includes a number of very talented and experienced people from within the Company and some newly added external talent. These people are helping our clients build that bridge between data to decisions and we're already seeing the benefits from the focused approach.

We've also added people at our agencies, the agency inside Harte-Hanks and Mason Zimbler, to deliver services for new clients, to continue to develop our digital capabilities and to deliver new digital engagements to existing clients. We're excited about the progress and the team. We've also added some people in sales, including [Charlie Simpson], our sales leader who comes to us with terrific leadership capabilities and a proven record of success in our industry.

And we're committing additional resources to marketing to create opportunities for our full suite of multichannel offerings. During the quarter, we launched our new website which was created by our own digital team, and as we announced, marketing is now lead by Brian Dames. The highlight section of this press release has examples of these investments and some recognition of our new products and services.

Let me talk just a little bit more on the focus on delivering insight. We strongly believe that our customers' success will be determined not only by how good their tools are, but how well we help them use the tools to analyze and understand their customers. When this happens, our customers are able to develop a strong and enduring emotional connection with their customers including their shopping and purchasing behavior across all channels. We're making excellent progress in this regard.

However, there is continued uncertainty about the general economic climate, which we believe will continue for the remainder of the year, and this causes some of our clients to be cautious with their spending plans.

Now, for our Shoppers, as I said in the release, I am pleased with Shopper progress on all fronts, especially the overall financial performance. This was our Shoppers' best performance in several quarters. Our same-circ revenue rate of decline of 5.2% was the lowest that we've had since the first quarter of 2007. We had another good quarter in our larger accounts that we call nationals. They perform better than the Shopper overall performance.

Account penetration, which we've talked about on the last several calls, and is a significant focus for us, is improving in both California and Florida, although California is performing better than Florida. Account penetration has been and will continue to be a key area of focus.

Looking at the revenue from the more important industry SIC codes we serve, real estate continues to be a significant challenge with the decline in the second quarter, the worst in four quarters and I believe reflecting the reality of the housing market. Occupancy rates has caused property management, which had been showing excellent growth, to slow some. In the service area, we saw good improvement in several categories with some small ac-- with a small actual overall growth and growth in some categories. The overall growth was influenced, to some extent, by some new businesses. Consumer spending categories were worse than the last quarter, automotive improved some, communications continues to do very well.

In Quarter 2, we again made outstanding progress in all areas of our digital initiative, including account growth, increased penetration of our print advertisers with power sites, increased revenue, product improvement with new features and new services. Digital is the area in Shoppers where we are, and will continue, investing. We mentioned last quarter, the people that we had added due to the team and we just recently added an online content and community manager who has a terrific background in that area.

We continue adding capabilities and we'll be adding some additional services over the next several months. As I said, we will continue to invest in the digital strategies. It provides compelling results for our existing clients and attracts new ones to both the print and digital product.

Now, for a note about some costs. The postal service has announced a proposed rate increase averaging about 5.6%, that if it were approved, it would be effective in January 2010. We are actively involved with the efforts to reduce or totally eliminate the proposed increase, as we are convinced that it would negatively impact postal revenues and certainly our clients. Again, this was a terrific performance by our Shopper people.

While we're excited about the future, we are painfully aware that the economic climate in California and Florida remain turbulent with unemployment in California still over 12%, and California holding at over 11%. There's little, if any, encouraging news in the real estate markets and the states have serious budget issues, especially California. Even so, these are exciting times. We'll continue the intense focus on day-to-day execution of the basics that drive value for our customers, and we see tremendous opportunity to build on the strong foundation that we have in each of these businesses to provide even more value to our existing and new clients. That's why we are investing in these businesses.

But the leadership challenge is to invest and at the same time-- at the same time that we carefully manage every single thing we do. I'm confident that our people are capable and committed to doing just that. And now I'll turn it over to Doug before we take your questions.

Thank you, Larry, and good morning. Here's our company-wide overview of the second quarter. Consolidated revenues decreased 3.7% for the quarter to $207.6 million. Direct Marketing decreased 3% for the quarter and Shoppers decreased 5.2%. Consolidated operating income decreased 9.5% for the quarter to $22.6 million. Direct Marketing operating income declined 19.1%, while Shoppers increased 66.2%.

Consolidated operating income margin declined to 10.9% for the quarter versus 11.6% last year. For the quarter, our free cash flow is $15.5 million versus $19.4 million in 2009. We ended the quarter with $4.3 million in capital expenditures, $2.5 million than the $1.8 million spent in 2009. Turning to the businesses, in the quarter, Direct Marketing revenue decreased 3% and operating income decreased 19.1%, resulting in an operating income margin of 14.2% compared to 17% in the second quarter of 2009.

Operating income decreased 19.1% due to higher mail supply chain costs and higher outsource costs. Our High-Tech Telecom vertical market represented 27% of Direct Marketing revenues, Retail Markets were 26%, Select Markets were 23%, Financial was 14%, and Healthcare Pharma was 10%.

Our top 25 Direct Marketing customers represented approximately 42% of Direct Marketing revenues and our largest customer represented about 6% of revenues. Shoppers' first-quarter revenue decreased by 5.2% and operating income increased 66.2%, resulting in the operating income margin of 7.9% compared to 4.5% in second quarter of 2009. This was Shoppers' best revenue performance since the first quarter of 2007.

Revenues were positive in Communications and the Services sectors. These were offset by declining performances in Real Estate, Grocery and Restaurant. Circulation curtailments and expense reductions made last year resulted in Shoppers increasing operating income with a revenue decrease this quarter.

Our second-quarter effective tax rate was 38.9%, which was slightly higher than the 2009 second-quarter rate of 37.2%. 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 receivables were $133.5 million versus $140.1 million at December 31. Day sales outstanding at the end of June, was 59 days compared to 60 days outstanding at March 2010 and 56 days outstanding in June 2009.

At June 30, we have a total debt balance of $217.6 million compared to $239.7 million at the end of 2009. Our net debt balance was $133.7 million versus $153.1 million at December 31, a reduction in $19.4 million. We ended the quarter with a leverage ratio of 1.8 times versus a covenant of 3 times, and interest coverage ratio of 28 times versus a covenant of 2.75 times. We ended the quarter with cash of approximately $84 million. With that, operator, we'll open the call for questions.

Operator?

Operator, we'll open the call for questions.

(Operator Instructions). First question comes from Alexia Quadrani from JPMorgan. You line is open.

Thank you. Just circling back on your comments on the Direct Marketing segment and the profitability there, you mentioned obviously a ramp up in investment spending, I was wondering if you could give us any color and (inaudible) how long do you think you might see pressure on the Direct Marketing margins, given this investment spending? I know it's difficult to predict the revenue outlook but sort of--

Right.

-- assuming the same sort of trends you're seeing, how long do you think we should see pressure?

Well, it's-- you're right, it's hard to predict the revenue streams, but we're-- as we look at the investments that we're making, the dollars of-- our expense dollars are in the range of $3 million to $5 million, and additionally that's not all Direct Marketing, there's some of that that's in Shoppers as well, but the majority of it is Direct Marketing. And then we're adding a couple of million dollars to our capital and more of that is in the Shopper side of the business.

And as we're-- as we go through the next two to three quarters, we're going to carefully monitor what kind of returns we're getting. We know that it takes time and we're going to give it time to work because we've (inaudible) pressure on the Direct Marketing side, if you will. It is just the-- some of the wins that we've had recently, we've hired to execute against those wins, and the expense starts immediately and the revenue obviously doesn't.

So as to how long we'll see some pressure on the margins, I don't know how to predict that but it will be a couple, three quarters I would assume.

So it's possible we could see margin expansion again next year though?

Yes.

And then on-- staying on the Direct Marketing business for a minute, the areas where you are seeing the segments where you're seeing a pick-up in revenue year over year, are you seeing a bit of easing on the pricing pressure in those segments or is it just really a broader scope of work?

It's-- there's still pricing pressure. It is far less than it was. And I think it's leveling if-- we're certainly not raising rates and don't intend to try at the moment. But there's less pressure than there was, for sure.

And just last question, I know it's not a big portion of your portion of your business, but can you touch on how the International segment is doing?

International segment in the second quarter was down-- and some of that is currency so-- do you know what the currency--

The currency impact was very minimal on us. But overall International is roughly 10%. We have a lot of global large clients, primarily comes out of inner-- our high-tech base where it's primarily concentrated, but overall for the Company it's roughly 10% of our revenues.

Okay. Thank you.

Next question comes from Michael Kupinski from Noble Financial. Your line is open.

Thank you and congratulations on your quarter. I just have a couple of housekeeping questions. The SG&A expenses, is that a good run rate for the third quarter?

It-- yes.

Okay.

Yes.

And the depreciation and amortization expenses were a little lower than I was looking for on the depreciation, are-- if you're making some investments there, what-- is that a good run rate going into the third and-- the second half of the year, as well?

I think some of the decline has to do with last year's acceleration where we closed a production facility in--

In Miami.

-- in Miami.

Consolidated into Tampa in conjunction with reduced capital expenditures over about a two-year period.

Right. So these-- we'll-- we're spending, obviously, more capital dollars this year than we did last, so that will flow into the--

The third to fourth quarter?

-- (inaudible) but it's not a-- I don't think it's enough to dramatically (multiple speakers) change it (inaudible).

Okay. And I know that, Larry, you constantly warn us about investing in the business and I know that you did that in the last quarter as well and you kind of warned us not to take out a lot of the labor expenses, but yet you seem to ov-- be able to over-deliver and do a much better job in managing the labor expenses and now it looks like it's about 47.5% of total revenues. I was just wondering if you can talk a little bit about your FTEs and the changes you might have made in terms of the FTEs, quarter over quarter, and what-- is-- what we are to anticipate in terms of labor expenses going into the second half of the year?

Okay, there's the two businesses are two totally different stories, obviously.

Um-hmm.

And there were declines or decreases in head count in the Shopper side because we had a reasonably significant, I think, reduction toward the end of last year--

Correct.

-- in Shoppers. Now, this quarter versus last year, there was not any noticeable change there. So for the rest of the year, they will track below last year and in line with what-- the comparisons with the second quarter. On the Direct Marketing side, we added a few people, I think the total was less than 50 or so, because when we say we're adding people in these areas of investment, that doesn't mean that we're not continually looking at the other parts of our business where we can change some-- continue to change, even with all we've done over the last two years, the way we do business and try to reduce the overall head count.

We don't intend to ramp up overall head count significantly in either of these businesses until we see a little more. These are going to be very targeted, very selective hires in key strategic positions.

Thank you for that additional color. And I was just wondering, one last question, in terms of looking at the revenue trends here, they seem very encouraging. It's still down, but the trends are pretty positive, and if you look at some of the seasonality that you typically have in this business, do you think that you might be able to swing towards inc-- some revenue growth in the third quarter?

We don't give up guidance and I'd rather report that to you in about three months.

Okay. It was try anyway. Thanks very much.

Uh-huh.

(Operator Instructions). Our next question comes from Mig Dobre from Robert W. [Braid] & Co. Your line is open.

Good morning. This is Mig Dobre with Robert Baird for Dan Leben this morning. Couple of questions for us. First, could you comment a little bit on the tone progression is-- for the customer throughout the quarter and kind of what are you seeing in 3Q up to now?

It's a really good question and it's-- as the numbers are reported, meaning the consumer confidence, what's going on in housing, what's going on in finance, you see some reasonable swings in our customers' attitude. We were together with a group of-- sizeable group of our people two weeks ago, I guess, or a week ago, and talked at length about what they're hearing from their customers. And almost without exception there's some caution because they-- there's so much uncertainty in the overall economy. At the same time, I think there's evidence that things are getting a little better. I mean, do you hear anything differently, Gary?

No there is confidence, but very guarded, that things are improving. Customers are changing their programs almost on a daily basis if they get news about results.

Um-hmm. Okay, thank you. And can you provide any sort of commentary around oil spill impact, particularly for your business down in Florida?

It's not-- it doesn't affect it at this point and I don't think it will, other than the fact that anytime tourism is down or people change their plans they-- expense dollars or revenue dollars are not spent. But to date it hasn't been. I think it's just another one of those things that adds to the general overall uncertainty.

And one last question from me surrounding the postal increase, and you've addressed it in your initial remarks, but I guess I'm wondering, and this could be speculation, but what do you think the overall impact would be on customer demand, if indeed the 5.6% increase passes?

Well, obviously we don't know except in-- and it's different in our Shopper business from our Direct Marketing business. We know whatever it comes out to be in Shoppers, and I think the average, if it were passed as it is, and we have some expectation that it may not be, it would be about 4-- little less than 5% on the Shoppers side and that's-- what is it, thirty-something percent of our cost.

On the Direct Marketing side, while we, Harte-Hanks, we don't pay the postage, it obviously is a very significant piece of the cost of a mail program for our clients. So our expectation, and that's why we're trying to convince the postal service and the Congress and anybody that will listen to us, that it's not going to address their problem. Well, it's going to address it but it's going to be negative. So we really don't know, to answer your question.

Okay. Thank you.

Next question comes from [Shahan Rawad, CM News]. Your line is open.

Hi, it's actually Shahnaz Mahmud from DM News. Yes, I was just wondering if you could elaborate a little bit on the additional services you said you're going to be investing in digital strategies.

On-- in the--

Direct Marketing.

-- in Direct Marketing? Go ahead.

Good morning. Thanks for the question. A lot of our focus on investment is both in-- in both businesses and certainly in Direct Marketing is on creating and enabling better digital capabilities.

Okay.

We had a great quarter, more than 15 wins for digital services, most with-- in fact all, I think, were with current customers and they run the range from e-mail, e-mail creative, websites, landing pages and a lot of activity around social programs.

Okay.

So there's a lot of-- there's a lot of interest from our customers, a lot of activity in that area.

Okay, great. Okay, that was actually my only question then.

Next question comes from Dan Salmon, BMO Capital Markets. Your line is open.

Good morning, guys. Thanks for taking my question. I apologize, I hopped on a little late but I caught the details on investment and digital and Direct Marketing, and a little bit in Shoppers more broadly. I just wanted to see though, you've been fairly conservative with your cash and your free cash flow through the crisis and with hopefully and end in sight to that.

I was just wondering, Doug, are you looking to deploy free cash flow in any ways here soon, you've still got a pretty healthy cash balance, be it perhaps in the form of share repurchase or otherwise?

At this point, we still don't have any activity to restart the share repurchase activity or program. We're still planning on managing our cash conservatively and building it up, and we find the appropriate opportunities like some of the investments that we've talked about on this call within the business, we'll take advantage of those. But, generally, we will be conservative with our cash management.

Okay. Thank you very much.

We show no further questions. I would now like to turn the call back over to Larry Franklin for closing comments.

Okay. Thank you very much for your interest and for your questions and we appreciate the support and we'll talk to you next quarter. Thank you.

At this time, that concludes today's conference. You may now disconnect at this time.