Harte Hanks Inc (HHS) 2011 Q1 法說會逐字稿

Welcome and thank you for joining the first-quarter 2011 earnings call. At this time, all participants are in a listen only mode. (Operator Instructions). Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the call over to Mr. Larry Franklin, President and CEO of Harte-Hanks.

Thank you 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, General Counsel; Jessica Huff, Vice President of Finance and Controller, and Gary Skidmore, EVP and President of Harte-Hanks Direct Marketing. Before I begin my remarks, Robert will make a few comments.

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; economic conditions in the United States and elsewhere; 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'll now turn the call back over to Larry.

Thanks, Robert. Quarter one was a challenging quarter. Revenue was flat. Operating income was down 21.8%. Net income down 26.5% and earnings per share down 29.4%.

Shopper revenues was down 9.8%, which was double the rate of our 5% decline in the fourth quarter of 2010. Shoppers accounted for $2.9 million of the $4 million reduction in operating income across Harte-Hanks.

Our Direct Marketing business had good revenue growth, up 4.9%, our third consecutive quarter of growth and building on the growth that we had in the third and fourth quarters last year, which included the large non-recurring project from one of our pharmaceutical clients.

We continue in Direct Marketing, and their operating income was down 5.2%. We are continuing to invest in the multi-channel strategy that we have talked to you about on each of the last few quarters, and we're also taking steps to reduce the cost of doing business, which will improve our profitability in future quarters.

First let me have some color to the Direct Marketing and when I finish with both businesses, then Doug will add additional comments.

I'm pleased with our Direct Marketing first-quarter revenue growth. Trillium, our data quality software company, had on performance in the quarter. We had another good quarter at our B2C agency, the agency inside Harte-Hanks and Mason Zimbler, our B2B digital agency.

Our direct-mail business, which is primarily retail and financial and our fulfillment business, which is primarily financial in form, have both had good revenue performance, which shows the continued importance of the more traditional channels.

Plus we are having success adding new channels for customers for these type of services. For example, we have added digital print on demand for many of our fulfillment customers. This eliminates inefficiencies by replacing traditional fulfillment and warehousing with high-quality, personalized print on-demand.

In the prior quarters, we talked about the investments that we're making to support the multi-channel strategy. We are continuing to make those investments, which include a client insight team that's comprised of over 20 multi-channel consultants engaging with many companies that are split about 75/25 between existing clients and new opportunities. These consultants are focused on winning new business, providing new insight, and additional value to our existing clients.

We continue to add resources to product management, which allows us to more quickly and consistently deliver solutions to our clients. These people also help support sales and the own boarding of new customers.

A couple of examples of some of these solutions are Momentium and QuickStart. Momentium, which is built on technology that was developed by our research company, Aberdeen Group, and is being delivered by our insight team, benchmarks a company's multi-channel execution and compares it to the best in breed for their particular industry. And although only available since Q4 2010, the demand for this product has been very strong.

We're also offering, under the Momentium brand, marketing opportunity analysis, MOA, which provides key insights into our clients' and customer behavior; recommends marketing programs to leverage high-yield opportunities; and integrates those into the customer's marketing plan in the form of a 12-month marketing road map.

Another solution is QuickStart, which we began to offer about six months ago. QuickStart compiles an accurate and efficient collection of customer information that is necessary to create a single customer view. A QuickStart engagement is delivered rapidly without a large capital investment, while developing powerful insights into customers and their buying behavior. In the first quarter, a number of QuickStart engagements lead us to full-service database wins, which will be the platform for additional multi-channel offerings.

We continue adding people in our agency to develop and deliver digital solutions and to onboard those that we have already won. We sold 36 new digital projects this quarter. Most of those were to existing clients. And as we have said before, most of these are not big dollar deals individually, but are very important to the long-term relationships with our clients. And as our customers allocate spending to digital, we will get those dollars.

We continue to evolve our go-to-market message, emphasizing our multi-channel approach, building on all the capabilities that we have. For example, for our B2B customers, we leverage Aberdeen and Mason Zimbler, Information Arts, which we acquired in 2010 and Market Intelligence.

For our B2C customers, The Agency Inside Harte-Hanks integrates all that we offer to our customers. Database services in Trillium are core offerings that we provide to both B2B and B2C customers. We believe these more digital capabilities, coupled with our best-of-breed traditional services, give us an opportunity to deliver on our insight (technical difficulty) driven multi-channel, direct and digital solutions.

Direct Marketing operating income declined 5.2% in the quarter, resulting in 11.3% operating income margin compared to 12.5% in quarter one 2010. Doug will provide some additional details about the margins in his comments, but just a couple of comments on some steps that we are taking to improve profitability in Direct Marketing.

While we are and will continue, we want to emphasize, to invest in the multi-channel strategy, at the same time, there are several initiatives underway that will result in reduced costs by changing the way we do business.

A couple of examples -- Brain Dames, who leads our database business; Jeannine Falcone, who leads The Agency Inside of Harte-Hanks; Tony Paul, who leads our Production Services; and Andrew Harrison, our HR leader are working together to develop a more effective and efficient customer-facing organization across all of our capabilities. The outcome will be an improved structure with the right people supported by the right training.

Additionally, we are providing lean manufacturing training for all levels of management in our production businesses, and this will lead to improved efficiency while increasing capacity and quality.

Also, all marketing initiatives throughout Direct Marketing have been consolidated under the leadership of Len DuBois, who has been successfully leading marketing for our Trillium organization for many years. This allows us to leverage the marketing expertise that exists within our individual business units across the whole company and improve the marketing process. Our Direct Marketing team has accomplished a lot, and the good thing is that there's a lot more to be done and a lot more opportunity.

Now for shoppers, our shopper performance was disappointing with revenue down 9.8% and operating income down, as I mentioned earlier, $2.9 million. We had account growth in the quarter, an initiative, as you know, that we've been working on for the last several quarters, but revenue per account continued to decline. Our ROP, which is our in-book advertising, was down, but with the accelerated decline was driven largely by distribution revenue, which are the inserts in the books, and from our larger accounts.

To look at the revenue from the more important industry FIC codes we serve, real estate continues to be a significant challenge with no real sign of improvement. In the services area, where we have seen growth in the past three quarters, was flat with health services still the bright spot. And educational services that had been showing good growth declined slightly. This is the fourth quarter - consecutive quarter -- that consumer spending categories declined from the previous quarter. Groceries show the biggest decline, reflecting the loss of a large account, with retail showing good growth.

Automotive had good growth, driven by dealers. Communications was down for the first time in five quarters. That decline reflects a couple of things.

In our first-quarter call in 2010, we talked about two large accounts that had been spending at accelerated levels, but slowed in the second quarter of last year, but still good customers. This year, those accounts are generally running less circulation with a few exceptions, but still a good customer base.

There have been some positives with new accounts and customers spending more and some recent wins and some good prospects.

In Q1, we, again, made outstanding progress in all areas of our digital initiative. We averaged over 6400 PowerSites per week, an increase of over 45%. Within the last few days, we launched the SaverTime site, and while it's very early, obviously, We believe our advantages in the social couponing space are the fact that we are more local than most other daily deal sites; our demographics where we target every customer; and then it plays to our strength, which is leveraging the core competency of the PennySaver that has been in these markets for almost 50 years. And then certainly a real strength is the sales staff that has long established relationships with all our local businesses. As I said, it's very early, but we're excited about the prospects.

And then if we aggressively address the shortfall on our shopper performance, we are going to continue to invest in the digital strategy, both in terms of people and capital. We continue to see nice revenue growth, and most importantly, we're adding tremendous value to our customer.

And while we do not expect to see noticeable improvement in the economy in the near term, and we're experiencing cost increases particularly in the printing, we are taking a number of steps to reduce cost. We are making staff reductions. We are consolidating some production functions using systems that have been in development over the last few years, and we are looking at structure, ways to leverage our talent and reduce our cost.

It's too early to provide numbers that will result from these actions, but our people are committed to improving performance and positioning ourselves well for when the recovery comes.

In concluding, Direct Marketing revenue performance is good. We are taking steps to improve profitability and our shopper products work and our digital strategy is exciting. And while I'm disappointed in our first-quarter performance, our people in both of these businesses are making the necessary changes to capture the exciting future that we see. Doug and then we will take your questions.

Thank you, Larry, and good morning. Here's a company-wide overview of the first quarter. Consolidated revenues were flat compared to the first quarter of 2010. Direct Marketing increased 4.9% for the quarter and shoppers decreased 9.8%. Consolidated operating income decreased 21.8% for the quarter. Direct Marketing declined 5.2%, while shoppers decreased 70.1%.

Free cash flow was $9.6 million versus $13.4 million in 2010. We ended the quarter with $4.4 million in capital expenditures, about $100,000 more than the $3.9 million spent in the first quarter of 2010. For 2011, we expect our capital spending to be approximately $20 million.

Turning to the two businesses, in the quarter, Direct Marketing revenue increased 4.9%, and operating income decreased 5.2%, resulting in an operating income margin of 11.3% compared to a margin of 12.5% in the 2010 first quarter. Our margin decline was primarily driven by the investment in product management and inside staff that we made in 2010, and an increase in our mail supply chain expense.

In the quarter, our select retail and high-tech vertical markets each represented 25% of Direct Marketing revenue. Financial services was 15%, and health care/pharma was 10%.

Our top 25 Direct Marketing customers represented 42% of total Direct Marketing revenue.

Shoppers first-quarter revenue decreased 9.8% and operating income for the quarter decreased 70.1% to a margin of 2.1% as compared to a margin of 6.3% for the prior-year quarter. Revenues are a challenge as the economies in California and Florida continue to struggle.

Revenues from our inserts product declined more than revenue from our [ROP] product. Our first-quarter effective tax rate was 39.6%, which was consistent with our 2010 first-quarter effective tax rate of 40.1%.

For 2010, we expect our effective tax rate still to be approximately 38% to 39%. On the balance sheet, net accounts receivable were $142.9 million versus $151 million at year end 2010. Days sales outstanding at the end of March was 65 days versus 60 days at the end of March 2010.

At March 31, we reduced our total debt balance by $13.8 million to $179.3 million compared to $193 million at the end of 2010. We currently have $70 million available under our revolver, excluding outstanding letters of credit, in addition to a cash balance of $63.1 million at the end of the quarter. Our debt consists of two terminal loan facilities, one that matures in September of this year and one that matures in March of 2012. Between our cash on hand, cash generated by operating activities, and our unused revolver, we have sufficient liquidity to meet our 2011 obligations. We anticipate restructuring our term loan facility this summer. With that, operator, we will turn the call over for questions.

(Operator Instructions). Carter Malloy, Stephens.

Thanks for taking my questions. Just curious within the Shoppers business, you called our real estate. How -- I know it was a much more important driver in the past, but at this point, how big of a driver or how much of revenues within Shoppers is real estate?

Well in the real estate and related service areas, let's see, just a second.

It's slightly over 10%.

Okay, and what was that at the peak?

Well, at the peak, let's see, just a second. I don't know. I'll have to --

Okay; that's no problem. I can get that from you guys later.

And then on the digital side of the business, can you call out how much of Direct Marketing is digital? And then as well in the Shoppers business, how much of that business revenue is driven by the website -- by PennySaverUSA.com and the PowerSites?

Yes; on the Direct Marketing digital and the way we define it is [et cetera], we talk about traditional versus nontraditional. And traditional services comprise of a little less than 60% and the nontraditional, or digital type stuff, is slightly over 40%.

Okay. Thanks. And what about on Shoppers?

In Shoppers, it, again, is a growing piece of the business and it's -- less than 5%.

With an opportunity, obviously, to become much larger as a contributor there?

Correct, [it is].

Okay. Thanks, guys.

Alexia Quadrani, JPMC.

Thanks. This is Townsend Buckles for Alexia with a few questions. First, for Shoppers, you mentioned some of your larger customers cutting back their spend. Do you have a sense of whether this is going to other channels or more budget cuts?

The tracking that we do -- it's where they are buying less circ, and it is -- it appears to be consistent across all of their budgets. Now, in all, I think there was one or two cases where a couple of our clients moved some money to TV early in the quarter. But, it's -- it appears to be just related to the economy and their marketing dollars in that particular -- in those two particular states. Do you have any different?

No, it's very much tied to what's happening in California.

And as you look at the operational structure of the business, what could be some possible steps you could take? Would these be more circ cuts or even looking to exit some of the larger geographies?

Circ cuts are not on the table. And when I say not on the table, obviously, that means now and we don't have any plans in the near term to do that at all.

But we are in the process of consolidating free press functions in California, and there could be an opportunity to consolidate free press and further consolidate free press in Florida as well. And we will be -- this will be in stages. And then there are probably two stages to the consolidation of the free press functions.

And then the other is just which of the support functions in our Shopper business can we leverage across a bigger part of the business where we would have had market specific support in the past? It's not different from, and in the whole of the telemarketing part of the business, the commercial. There's some opportunities that we're looking at there as well. So there are a number of different triggers that we are focusing on.

And to the question just a minute ago about real estate, it's 11%, roughly 11% or 12% now. And in 2009, I don't have with me anything beyond 2009, but it was 15% then, so that gives you some order of magnitude.

And shifting to Direct Marketing, can you give a sense of the revenue environment you are seeing into the second quarter and maybe later into the year? And are you anticipating any disruption from Japan such as in your auto or consumer electronics clients?

Gary?

Townsend, no; we don't expect any impact from what's happened In Japan with our customers at this point. In terms of the revenue environment, we see our revenue for the balance of the year being -- the growth being close to what we had in the first quarter.

Okay. And finally, on your cost initiative in Direct Marketing, can we expect margins to expand going forward on a year-over-year basis, or might it be a few quarters before these improvements take hold?

Well, as we said on this call in January -- and you can add here in a minute or correct me -- we believe that as we go through the year, that our margins will improve, and as we go into next year. But exactly which quarter and when and how much -- we expect to improve the profitability of the Direct Marketing business over the next few quarters, yes.

Okay. Thanks a lot.

Michael Kupinski, Noble Financial.

Thank you and thanks for taking the questions. I was just wondering if you can talk about the sequential performance month by month in the Shoppers business, if that's possible. And then, if you could just kind of -- if you can provide some color on how April has gone so far; particularly I was just wondering if the new norm is a level that we saw in the first quarter in terms of the level of decline and where we are at or if we are actually seeing some stabilization in revenues.

Through the first three months of the year, the decline accelerated. Now, we don't think it's going to continue at the rate that we are seeing coming out of the first quarter because we had -- in the first quarter of last year, we had some pretty good spend from some of these communications companies. So that can move it a point or 2. But the market is -- it's pretty -- it's kind of -- it's volatile.

And how is April shaping up?

It's -- based on the first -- updates I guess is what it would be now. The trend would be a little better than what we saw in the first quarter, but not noticeably.

Okay. And then in terms of the structural changes you plan in Shoppers and you indicated that you're going to do this in stages, do you have a sort of timeline mapped out? And what type of impact that we will start to see in the margins going forward?

Yes, that's the right question and a good question, but for a number of reasons, we are not ready to talk about all of the specifics of the actions. We can tell you that the savings that we will realize in 2011 will likely be less than the costs, the charges to get there. And that's not dramatically, but that's simply because, you know, you make the changes in stages and we already four months into the year. And, so the associated savings that we would get through the year will -- as we go to the year, we will give you more specifics about that, but the savings will be substantial going into -- in future years.

Okay. And then in terms of Direct Marketing, it sounds like the growth there is accelerating. You had some significant client wins and so forth. I was just wondering if you wanted to add any color in terms of what -- we saw almost 5% growth in the first quarter. Is it accelerating faster than what we saw in the first quarter as we go into the second, third and fourth? Or if you can just add a little bit more color there.

I think Gary said that he was expecting something similar to what we had. And we've got to keep in mind the -- as we get to Q3 and Q4, those large one-time -- we call it one time? (multiple speakers)

Non-recurring --

The large nonrecurring event with one of our pharma clients, we will have to cycle against that. But the trends that we saw in the first quarter appear to be holding.

And in terms of your thoughts about the margins in Direct Marketing, you said that they should be improving. Were you saying -- was that year over year or just improving from the second -- from the first quarter -- just the sequential improvement in the quarter or were you talking quarter -- a year-over-year margin improvement?

You know, there's obviously seasonality to the margins.

Right.

And so we're really talking about as we go through the year, compared to last year, but that over -- for the full year of 2011, we should see slight margin improvement. And, that should be better going into next year, again, depending on what happens to the revenue environment.

Okay, perfect. Thanks. And then the last question is Doug, any thoughts in terms of the restructuring of the loans? It sounds like you said in the summer.

Any early thoughts on rates or how you plan to, at this point, structure the loans? Are you looking at two tranches? Are you looking at just kind of bundling it? How would you characterize what your negotiations are if you can add any color?

I really can't add much color, other than we are listening to the banks who obviously have their own proposals. And you do need to keep in mind that the agreements that are expiring were done at the height of the good credit markets back in '05 and '06. So, market conditions have obviously changed, and that will come out in the new agreements. But as far as the structures and is it going to be two tranches, one tranche and that type of stuff, we're looking at what would give us the most flexibility at the lowest cost.

Okay. Fair enough. Thank you very much.

Dan Leben, Robert W. Baird.

Thanks. Good morning. First, in the Direct Marketing business, could you talk a little bit about what you are seeing from a pricing standpoint across the various pieces of business, agency, database, film, et cetera? And also at the same time, your ability to use that to add -- bring clients in and add additional pieces of the offering.

Regarding pricing, it's still very competitive. Procurement is still very much a part of the equation in negotiating final prices, and we are seeing that pricing pressure across all of our services.

Our ability to sell additional services to existing customers -- we're having very good success there. Because we have a wide range of services and because we have invested heavily in both insight and digital, we're seeing good acceleration of cross-selling existing customers those services.

As Larry said, digital engagement on a project basis tend not to be very large, but they are very important to our customers. It makes us more valuable to our customers and it creates future opportunity for us, sending shifts into newer channels.

Okay, great. And then speaking of those newer channels, obviously, we are seeing a lot of Groupon, Living Social, Daily Deals offers, etc. in the local advertising market. Was that one of the factors in the accelerating declines in Shoppers in the quarter as those start to gain more traction?

Not really. When we -- when you look at the offers that they are making, they're not as directly targeted to our territory structure or our account base is. Now, does it have some impact on it? It very well may, but I don't think that's what is driving our performance at this point.

Can you see any customers -- small businesses especially, they kind of have their marketing budget and don't want to budget off from that. Do you see them pulling out of the base there for a week to try Groupon and then coming back, that type of thing, to where it doesn't impact the aggregate, but you are seeing some of that kind of noise, I guess?

Not really, no.

Okay. Great. And then just touch -- if you could talk about pricing on the Shoppers side, and kind of specifically if you could talk about the grocery account that was lost, kind of what were the dynamics there and what alternative did they go to?

Pricing continues to be aggressive with our larger distribution accounts. And, customers move back and forth and generally price is a part of that. A big part.

And then the large grocery customer? Was that a price situation?

Yes.

And did they -- when they are moving out, are they typically going to a newspaper or are they completely scrapping the product and doing TV instead? Or how -- what's the situation, like --?

It's going to a similar kind of product. Do they do some in newspapers? Not that particular one. It may be a little -- maybe a slight amount, but it's -- no. Because it is a distribution vehicle.

Okay, great. Thanks, Larry.

Edward Atorino, Benchmark.

Hi, Larry. You mentioned the big improvement in top-line growth there. Are subsequent quarters staying in that mid-single digit range? Any big variation going forward, do you think?

No, except 4. Except for Q3 and Q4 where we have the --

The extra stuff, yes.

Yes, right. But no.

Pricing? How is pricing holding up? I might have missed that.

Yes, it's -- we talked earlier about it, but it's still competitive. It's -- you know, are we getting closer to the bottom, obviously, because prices have been competitive now for a while, but I think we're going to have to -- we're -- the way we're going to increase our relationship with our clients and get more revenue is going to be through additional services and bundling of services and -- as opposed to in the olden days quote, raising the prices. No.

You have to be -- you know, you have to know what your costs are and where your prices are and where there are opportunities and where there are not. Gary, do you got any different view of --?

It's exactly what we face. It's very competitive. There's a big capacity in every market in every service we provide. And combined with the involvement from procurement, it's very competitive on pricing.

Is there much difference say between the direct-mail business and the telemarketing business and the analytics business? Is it any one area better or worse than others?

You would think that the higher-valued services that there would be less price pressure, but even with those services, there's enormous price pressure, just like there is on what you think is perhaps more tactical services. There's overcapacity in virtually everything we do.

Not just us; I mean in the industry.

Yes, all of the other -- all of our competitors face exactly the same thing.

Okay. Thanks.

(Operator Instructions).

Okay. Thank you very much. Appreciate the questions and talk to you next quarter.

Thank you. That does conclude today's conference. Thank you for your participation. You may now disconnect from the audio portion.