Harte Hanks Inc (HHS) 2012 Q1 法說會逐字稿

Good day, and welcome to the First Quarter 2012 Earnings Conference Call hosted by Harte Hanks. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Larry Franklin. Please go ahead, sir.

Thank you and good morning. On the call with me today is Doug Shepard, our EVP and Chief Financial Officer; Robert Munden, Senior Vice President and General Counsel; Jessica Huff, Vice President of Finance, Controller; and Gary Skidmore, EVP 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 and regulatory matters; economic conditions in the United States and other markets; and other statements that are not historical facts. Actual results may differ materially from this, projected or implied in these statements because of various risks and uncertainties including those described in our most recent Form 10-K and other filings with the SEC 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.

Thanks, Robert. Before we talk about the individual businesses, just a couple of comments about Company results. Revenues decreased 2.6%; operating income was down 9.7%; net income was down 14.2%; and earnings per share, $0.11, down 8.3%. And I'll add some detail about the performance as we talk about the two businesses. And then when I'm finished, Doug will provide some additional detail.

Let's look first at Shoppers. As we celebrate our 50th anniversary at the PennySaver this year, we remember the significant accomplishments and the many people who have contributed to our success over our 40 years in that business. And we continue to look for new and better ways to connect buyers and sellers at the local level.

Shopper revenues of $55.7 million for the quarter was down 5.9%, the lowest decline we've seen in the past four quarters. The first quarter is usually the lowest revenue quarter for our Shopper business during the year. OI for the quarter was down $1 million, and we'll add some color to that decline in just a moment. But, first, looking at the revenues and looking at the most important business sectors that we serve.

Real Estate, while still down low double digits was slightly better than the previous quarters, and this was the fifth quarter of slight improvement. The broad Services category decline was greater than the previous quarters because of reduced spending in Health Services, a sub-category that had grown very well for many quarters. And also Educational Services are also down double-digit from cutbacks from some of the schools.

Consumer spending showed growth in the quarter for the first time in several quarters on the strength of Home Furnishings, Automotive was up single digit, the best performance in several quarters, with dealers and repairs and services both doing well.

Communications showed growth for the first time in four quarters. Territory sales, both in book and in distribution products are performing reasonably well, while inside sales continue to struggle. This is the group that sells primarily to the Real Estate and Real Estate Services categories as well as Educational Institutions.

We experienced some decline from last year in the average weekly territory accounts, but we had an increase in revenue per account. This was the first quarterly increase that we had seen in revenue per account for several quarters.

Power sites, the centerpiece of our Web strategy, have continued to show good revenue growth, and also to grow in popularity with our Internet users, and they are providing a lot of results for our customers as we see each week in our weekly testimonials.

The rate increase that we implemented in Q1 is contributing to our revenue growth. We are consistently selling over 6,000 PowerSites per week, almost 50% of our customers are buying PowerSites..

Turning to the cost -- increased postage from the 2.1% rate increase in Quarter 1 and paper price increases that we experienced throughout last year were up 11% in the first quarter. And then we also had some bad debt expense in Quarter 1. The combination of those three costs was $1.4 million up from last year, which was more than the $1 million decline in our operating profit.

The expense savings from the actions that we took in 2011 more than offset the OI impact from the $3.5 million of reduction in revenue. And, as I said, Quarter 1 is our lowest revenue quarter.

We talked last quarter about our audited verified delivery test -- that's delivery outside the US Postal System. We are currently at 80,000 circulation in Florida. We are carefully monitoring delivery quality and customer reaction and are optimistic about our prospects for the alternate delivery.

The magnitude of the changes that our Shoppers incurred in the last four months of 2011 was enormous. Just again, briefly, the order entry system that was in four places last year is now in one. Free Press has consolidated, inside sales consolidation. We are currently realizing the expected $7 million to $8 million of savings that we talked about in 2011.

With all these changes and those that we continue to look at and for and the intense sales focus, we believe we're building a solid foundation for our Shopper business, going forward. None of us underestimates the job ahead, but I am confident in our leadership group and people's ability, dedication and determination to show improved profit in 2012.

Next, direct marketing. Direct marketing had a solid first quarter. Revenues down 1.2%; operating income down 2%. As we said in the press release, revenues for the quarter were in line with our expectations and operating income slightly exceeded our expectations given the Penney's marketing strategy change that we've referred to many times and on our last call. Penney's remains a significant and important customer for us, and I've added back some work since the initial decision to change strategy.

During the quarter, we had terrific performance for our agency businesses driven primarily by digital work for customers in the consumer brands, pharma, and technology markets. We also had good performance in our contact center on the strength of the consumer electronics customers. Last summer, you may remember we disclosed the onboarding challenges that we had with a large new client. We are now benefiting from the work for that customer, and the results continue to improve.

As I said in our Q4 call, in this era of big data, no company is better prepared to help clients with their data challenges than Harte-Hanks. We continue to win with Trillium, the world's leading data quality software platform. Trillium had a very good start in our partnership with Microsoft Dynamics CRM, winning some new deals and having a really good pipeline.

We are having great initial reception to Trillium's claims, data quality solution for the insurance industry, which combines Trillium Software's industry-leading data quality platform with years of insurance consulting and subject matter expertise to provide a solution that enables the insurance claims professionals to automate the assessment, measuring, and monitoring of key claims data.

As reflected in the highlight section of the earnings release, we added four new multi-channel engagements for the quarter -- two global tech companies, Luxottica Eyewear US and a pharmaceutical eyecare company. We also won three new database deals in the quarter for a global semiconductor company, pharmaceutical companies US market, and a leading cloud-based business software firm. And we also expanded our work for one of the world's largest banks and one of the fastest-growing cloud computing software companies.

In February, at our company-wide leader meeting, we launched a suite of new insight-driven digital and direct marketing bundled solutions rather than individual channel solutions, and these are under the brands of Consumer Connectioneering, which is for the retail and consumer products markets; brand-focused relationship marketing for the pharma and health care markets; Consumer Engagement Management 2.0 for the financial services market; and an enhanced Demand Curve solution for the global tech market.

Each of these solutions include strategy, insight, database, analytics, and multi-channel direct and digital marketing solutions. And each has had good customer feedback from the presentations that are being made.

Looking to the remainder of 2012, we said in our last call that we continue to expect operating income to be flat to slightly down in the first half, but we do expect to show OI growth for the year and to show revenue growth for the year. We are and will continue to invest in services and solutions that add value to our customers, and we have the people to execute our insight-driven multi-channel, digital, and direct marketing strategy.

After Doug makes some comments, we'll take your questions.

Thank you, Larry, and good morning. Here is a company-wide overview of the first quarter. Consolidated revenues decreased 2.6% for the quarter; direct marketing decreased 1.2%, and Shoppers decreased 5.9% for the quarter. Consolidated operating income decreased 9.7%. Direct marketing declined 2%, while Shoppers decreased $1 million. Consolidated operating income margin was 6.6% below last year's first quarter of 7.1%.

For the quarter, our free cash flow was $9.9 million versus $9.6 million in 2011. We spent $3.1 million on capital expenditures compared to $4.4 million in the first quarter of 2011.

Turning to the two businesses -- in the quarter, direct marketing revenue decreased 1.2% and operating income decreased 2%. Operating income margins were relatively flat at 11.2% compared to a margin of 11.3% in the 2011 first quarter. With the reduced spending from the major retailer that changed its marketing strategy, this performance exceeded our expectations.

Consistent with the fourth quarter, our agency and contact center businesses had a strong quarter again partially offsetting the impact of the reduced spending from a large retailer.

In the quarter, our retail vertical market represented 26% of Direct Marketing revenue. High tech was 25%; select markets were 25%; health care pharma was 11%; and financial was 13%.

Our top 25 Direct Marketing customers represented 40% of direct marketing revenue in the quarter.

Shoppers' first quarter revenue decreased 5.9%, and operating income decreased $1 million. Our OP revenues decreased more than distribution revenues, and we experienced a bigger decrease in the number of accounts we published than in the revenue per account.

Our first quarter effective tax rate was 39.8%, which is consistent with 2011 tax rate. For 2012, we expect our effective tax rate to be approximately 38% to 40%.

On the balance sheet, net accounts receivable were $133.8 million versus $156.4 million at year-end 2011. Day sales outstanding at the end of March was 63 days compared to 65 days at December 2011.

Having retired one of our term loans during the quarter, we've reduced our total debt balance by $61.5 million to $117.9 million compared to $179.4 million at the end of 2011.

Our net debt balance was $87.5 million versus $92.7 million at 12/31/11, a reduction of $5.2 million. We currently have $70 million available under our revolver, excluding outstanding letters of credit in addition to a cash balance of approximately $30 million at the end of the quarter.

With that, Operator, we'll open the call for questions.

Thank you. (Operator Instructions). Alexia Quadrani, JP Morgan.

Hi, thank you. Just a couple of questions. First, could you give us a sense what the growth would have been in the Direct Marketing segment if you took out the JC Penney hit? And the second question is if you could just give us some sense on what advertisers are saying against staying on the direct marketing side about their spending plans for the rest of the year. Are you feeling any more sense of optimism or is it more of the same?

Okay, on the JC Penney question, I think you asked about the revenue impact -- it would be probably --

Two to three points.

Two to three points difference. And on the conversations from the advertisers, Gary?

Our customers are, I would say, are slightly more optimistic but still very cautious. We see plans changing frequently as customers approach new campaigns. So I would say that there is some optimism but it's very, very slight.

And where you're not seeing, necessarily, a pickup in spending, or you're not seeing real growth, is it a decision to maybe move away from a direct marketing vehicle? Or is it more just let's be cautious with our budgets given the environment?

The sense I get from talking to our people is that it's more just the cautiousness. It's not moving away. There's still people that are moving their budgets around some. But we haven't seen, in the change from the Penney's strategy of moving away from mail to broadcast -- that's not been the case with our other clients, isn't that right, Gary?

That's correct.

Carter Malloy, Stephens.

First of all, so if we're -- interesting that JC Penney is actually coming back a little bit, at least, and you certainly got some impressive new wins inside of your direct marketing business. Is it safe to assume that we turn that back up to a little bit growth, going forward? Or should we remain cautious in our outlooks?

No, because -- well, we're happy, certainly, with the wins that we're getting. But, as we said, as we look to the year, we expect revenues to be slightly for the year. Because while Penney's added back some business, it's still a -- well, just with the 2% to 3% -- figure that out. It's still significant revenue growth -- revenue loss. But we expect to have revenue growth for the year.

Got it, okay. And then on the cash flow statement side, can you talk a little bit about CapEx and working capital, going forward, and what that impact is on your free cash flow outlook?

Yes, at the end of the year, last call, whenever that was, the end of January, 1st of February, we said that our CapEx for the year we expect to be in the $20 million range. We're still comfortable with that, and just reiterate that. And working capital, things of that nature, nothing unusual. We should follow historical patterns and flow through from that perspective.

Don Salmon, BMO Capital Markets.

With your leverage now coming down to a fairly light level here, just around one time and some considerable paydown in the quarter. I'm just wondering if you are thinking bigger picture around some larger dry powder opportunities, whether it's acquisitions, accelerated buyback, but you've always had a strong balance sheet and it's at perhaps its strongest level of the past few years and would seem to offer some opportunity for some bigger opportunities. And just interested to hear your thoughts on that.

Well, it is. The balance sheet is very strong, and we continue, as we say each quarter, to look at opportunities in all those areas. We've got to find opportunities that we think adds to our capabilities but also has a good business model. And we see a lot of deal opportunities, and we continue to look at them, but not to the point that we can project that we're going to do anything differently than we've been doing over the last few quarters except that we feel very good that we paid down that last debt without having to use any of our revolver.

So, you're right. We've got the capacity to look at all the acquisitions and other opportunities to use our cash, for sure.

(Operator Instructions) Edward Atorino, Benchmark.

Larry, are advertisers putting the money back into the budgets or moving to television? Do you have any idea what the dynamic is in terms of spending patterns -- and the economy is sort of iffy, and they're just hanging onto the bucks or putting them someplace else?

There are some selected movements of dollars among the various channels, but -- and as Gary said, it's a little more optimistic but still cautious.

And it varies by industry.

Yes.

Some industries are a little more optimistic than others, and some are very cautious.

Are the retail related to cautious people?

Retail customers are always cautious people.

Okay, thanks.

And conservative.

And it appears there are no further questions at this time. I'd like to turn the conference back to our speakers for any additional closing remarks.

Okay, thank you very much for your questions and your time and support for the Company and for all of our people that are listening, let's make quarter 2 a good one, thanks.

That concludes today's conference. Thank you for your participation.