Harte Hanks Inc (HHS) 2012 Q2 法說會逐字稿

Good day, everyone. Welcome to the Harte-Hanks second quarter 2012 earnings conference call. Today's conference is being recorded. At this time I would like to turn the call over to Mr. Larry Franklin. Please go ahead.

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; and Jessica Huff , Vice President of Finance and Controller. Before I begin, Robert will make his remarks.

Thanks, Larry. Our call may include forward-looking statements. Examples may include statements about our strategies; adjustments to cost structure, financial outlook and capital resources; competitive factors; business and industry expectations; litigation developments or regulatory changes; the economies of the United States and other markets; 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 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 relation section of our website at harte-hanks.com. I'll turn the call back over to Larry.

Before talking about the individual businesses, a couple of comments about Company results. Revenues decreased 6.5%. Operating income was down 10.3%. Earnings per share was $0.13 compared to $0.15 in the second quarter of 2011, excluding the impairment and restructuring charges. I'll add some detail about our performance and the discussion of the business -- each business, and then Doug will provide additional detail on the overall results.

First, Shoppers. Shopper revenue of $56.3 million for the quarter was down 6.6%. OI for the quarter was $600,000, excluding the impairment charge and the restructuring charge. Looking at some of our more imported industry segments, real estate, while still down low double digits was slightly better than the previous quarter.

The broad services category decline was greater than the previous quarter, because of reduced spending in health services and educational services or schools. Educational services has been adversely effected by changes in government regulation and the California Student Aid Commission cutting grants.

Consumer spending showed growth in the quarter for the second consecutive quarter on the strength of home furnishings and building materials and garden supply stores. Those came from some wins in the previous quarters. Automotive was up high single digit, the second consecutive quarter in the best performance in several quarters, with dealers, repairs and services all showing good growth. Communications grew in the high teens.

ROP, or the end-book advertising, was down low double digits, and distribution revenue -- the products inside the book -- fell very slightly. Territory sales both in book and distribution products year-over-year softened a bit in Q2 compared to Q1. That's due to a couple of things coming against some wins in the second quarter last year and reduced spending from the schools educational services that I mentioned. Inside sales performance slightly worse than quarter one, also influenced by the schools and educational sales.

PowerSites revenue was up 21.5%. This is the centerpiece, as you know, of our web strategy. They've continued to grow, with customers getting excellent results. The rate increase that we implemented in quarter one is contributing to the growth as well. We have averaged over 6,800 PowerSites per week in the quarter. That's up 5%. After a good deal of evaluation of shop -- SaverTime, our daily deal initiative, and two mobile apps, we've decided to discontinue all three of those and focus our energy and resources on continuing the PowerSites products and results for our customers.

Turning to costs. Excluding the impairment and restructuring costs, operating expenses decreased $4.5 million. Postage rates added $450,000 of additional cost in Q2, and newsprint process prices -- price increases added about $200,000. Labor expense was down $4.8 million, or $2.1 million excluding last year's one-time charges.

While we continue testing AVD, or distribution outside of the postal service, throughout the quarter -- quarter two -- in July we decided to move the test circulation back to postal delivery after listening to feedback from readers, advertisers and our people. This will put about 85,000 circulation back in the mail. And with postage at $145 a 1,000, will add incremental costs of $2,000 a week.

Unemployment remains high, although we have seen some very slight improvement. Of all things -- while there are signs of slight improvement in the economies of Florida, California has a serious budget problem, well documented in the media, in which it doesn't really appear to us to being addressed. As he said in the press release, we expect to see some slight rate of revenue decline reduction during the second half, and expect some modest profit improvement.

HDM -- Direct Marketing -- had difficult quarter, with revenue down 6.5%. Operating income down 18.6%, or 13.5% excluding the restructuring charge. Doug will add more color on each of those declines. During the quarter, as you see in the highlights, we continue to sell multi-channel deals, with many having strong digital components.

During the quarter our agency businesses, both B2B and B2C, continue to win digital work, primarily from existing customers brand and technology markets. Our Inside group and digital team are adding significant value to our new clients and new prospects.

We continue to have good performance in the quarter in the contact center business. Over the past several quarters we've talked about investments being made in database services. We're seeing good revenue growth of database clients use analytic service. This analytics growth we believe this is an indicator that our consultative approach with our customers is paying off, as are the investments we're making and will continue to make in the database services business.

While we mentioned the softness in Trillium revenue, we remain optimistic about the new Trillium solutions; the insurance claims data quality, a portfolio data quality banking solutions, and our Microsoft relationship where we are the enabling partner for providing data quality within Microsoft Dynamics. The revenue has been slower to develop than we expected, but the pipeline gives us confidence that these will be successful.

As we said in the press release, we expect Direct Marketing revenue for the second half to decline 4% to 5%, and that for OI to be down slightly -- be down less than the revenue decline. I want to talk about our new Direct Marketing leadership team. Yesterday we announced the promotion of four very capable individuals who are reporting to me and will lead our Direct Marketing business. We realigned roles, responsibilities in our businesses in four areas; customers solutions, customer strategy and engage, customer delivery, and people. Each of the four is an EVP of Direct Marketing and Vice President of Harte-Hanks.

Brian Dames will lead the customer solution area, which includes an addition to his responsibility for database services, Trillium Software international operations, Aberdeen Group, our technology market solutions, and other business to business marketing. Brian has been with Harte-Hanks for five years, and he has performed exceedingly well and has unique skills to lead these businesses.

Jeannine Falcone will lead the customer strategy and engagement area, which includes in addition to her responsibilities for the agency inside its digital business, she'll also have responsibility for contact center business, strategy and insight team, as well as national sales and marketing. Jeannine has been with Harte-Hanks for 20 years. She was at the agency when we acquired the business back in 1996. Jeannine has a strong blend of strategic and operational focus and a deep understanding of multi-channel marketing.

Tony Paul will lead the customer delivery, which includes our direct mail, mail supply chain, and fulfillment businesses. Tony has been with Harte-Hanks for two years. He has unique capabilities in developing strategy, diversifying offerings and leading change. His deep in traditional expertise of our direct mail marketing and execution of related services remains a critical function for us and for our clients.

Andrew Harrison, EVP of people, has been with Harte-Hanks for 17 years. He will continue in his leadership role for the human resources, and will be deeply involved in organizational transformation, change management, business performance improvement. Andrew has been a strong contributor to Harte-Hanks for years, and he'll even be more valuable in this new structure. This is a terrific team, supported by very capable people throughout Harte-Hanks, who will see that we capture our very exciting future.

Some have asked me what will be the difference in this management team in structure? It's a simpler structure, quicker business decisions. Roles and responsibility for each leader more closely reflect how our customer relationships evolve. Removes some of the structural elements that at times may have caused us to seem fragmented in our delivery model.

It'll provide more cooperation within the related businesses. It will allow us to take a fresh look of our go to the market strategy in certain areas; increase clarity for our people, customer and prospects; provide the opportunity to capitalize on further synergies and efficiencies within our businesses, and we're convinced it will drive growth. It's a great team. I'm pleased to be involved with them in direct marketing. Doug?

Thank you, Larry, and good morning. Here's a Company-wide overview of the second quarter. Consolidated revenues decreased 6.5% for the quarter. Direct Marketing decreased 6.5%, and Shoppers decreased 6.6% for the quarter.

Consolidated operating income, excluding the impairment and restructuring charges, decreased 10.3% for the quarter. Excluding charges, Direct Market declined 13.7%, while Shoppers, excluding one-time charge in 2011, decreased $1.1 million. Also excluding charges consolidated operator income margin was 7.5%, slightly below last year's second quarter of 7.8%.

For the quarter, our free cash flow was $11.1 million versus $8.8 million in 2011. We spent $2.6 million on capital expenditures compared to $7 million in second quarter of 2011.

Turning toward businesses. In the quarter, Direct Marketing revenue decreased 6.5%, and operating income, excluding charges, decreased 13.7%. Excluding charge, operating income margins decreased 12.3% compared to margin of 13.3% in the 2011 second quarter. About half of the revenue decrease was due to the JCPenney change to its marketing strategies.

Revenues from our pharmaceutical vertical decreased in the high teens as percentage compared to second quarter of 2011. Our high tech vertical experienced a low revenue decline in double digits, and our financial vertical declined in the high single digits. Our select vertical was flat compared to the prior year quarter, and our retail vertical declined in the mid single digits. The retail vertical continued its strong first quarter performance when you considered how much it should have decline after the JCPenney impact.

Our businesses supporting high tech clients primarily drove the decrease in operating margins because their cost structures are less variable than our high transaction traditional direct marketing services. In the quarter our retail vertical market represented 27% of Direct Marketing revenue. High tech was 23%, select markets were 27%, healthcare/pharma was 9%, and financials 14%. Our top 25 Direct Marketing customers represented 42% of Direct Marketing revenue for the quarter.

Turning to Shoppers. Shoppers second quarter decreased 6.6%, and operating income, excluding impairment and restructuring charges, decreased $1.1 million. ROP revenues decreased more than distribution revenues, and the decrease in the number of accounts wepublished in revenue per account was about the same. Postage rates increased a little over 2% for the quarter, and newsprint rates increased about 4% during the quarter.

Now some comments on taxes. Impairment charges make our effective tax rate for this quarter appear unusual. After excluding the impairment charges, nothing has changed in, one, the general trend of our effective tax rate; two, cash that will be used to pay taxes; or three, our full year tax rate projections. Our second quarter --

We have lost audio at this time. You might bumped the handset?

I'm sorry, I'll start over again at the top. I understand that I got cut off there, so I will go back and start over on where I hope we got cut off on taxes.

The impairment charges make our effective tax rate for this quarter appear unusual. After excluding the impairment charges, nothing has changed in, one, the general trend of our effective tax rate; two, cash that will be used to pay taxes; or three, our full year tax rate projections. Our second quarter effective tax rate was a benefit of 28.7%. The tax benefit was due to our impairment charges and flows through our deferred taxes, resulting in no cash impact.

Our effective tax rate for operating income, excluding the impairment, was 39.4% for the second quarter. The impairment charges were taxed at 29.5% because some of the good will was not tax deductible, which were the result of stocks acquisitions. For 2012 we still expect our effective tax rate, excluding these impairment charges, to be approximately 38% to 40%.

On the balance sheet, net account receivables were $129.6 million, versus $156.4 million at year end 2011. Day sales outstanding at end of the June 60 days, compared to 64 days at year end 2011. Our total debt balance has been reduced from year end by $63.1 million to $116.4 million compared to $179.4 million at the end of 2011.

The net debt balance was $82 million, versus $92.7 million at December 31, 2011, a reduction of $9.3 million. We currently have $70 million available under our revolver, excluding outstanding letters of credit, in addition to a cash balance of approximately $34 million at the end of the quarter. We have a strong balance sheet with a low debility ratio and plenty of liquidity.

With that, operator, we'll turn the call over for questions.

(Operator Instructions). We'll take our first question with Carter Malloy with Stevens.

Hey, guys. Thank you for taking my questions. On the Direct Marketing side of the house, can you help tease out JCPenney there and what type of headwind that is? Ultimately when we lap that business, and then maybe beyond that what additionally it takes to get Direct Marketing back into growth mode?

The decline again in January, the first two quarters of last year -- I believe this is right, Doug -- the revenues were higher than the next two quarters. The difference will be -- the decline between this year and last year will be less in the third and fourth quarters than they were in the first and second quarters. But still sizeable. Does that answer it?

I believe so. And then beyond that, what ultimately does it take to get Direct Marketing back into a real and sustainable growth mode?

It takes -- the headwinds that we have now and what we experienced in the second quarter, as Doug pointed out, were driven by three verticals, right? Pharma; reduced volumes from a client in that particular vertical. In high tech, we had reduced volumes again. The uncertainty, because a lot of our high tech business is international business, so there is a lot of uncertainty there. There are delays in programs. There are cut backs in programs. And also effecting that vertical was one of our domestic call center clients with reduced volumes, some of that went to a consolidation of vendors.

The financial vertical, as Doug said, was in the credit card solicitation business. So what we have to see to get those back to growth -- and we're obviously with our guidance we're not expecting it to do that in the second half. But with this new structure, I'm convinced that we will be able to present additional opportunities to prospects and existing clients with a more coordinated approach than what we may have been able to do in the past.

We have a terrific client list with a long history, terrific products and services that address specific needs. That's a good thing. What we need to be able to do better -- and we're doing it in our multi-channel go to market strategy with new clients. But we just got to get a better coordinated approach with the way we present our capabilities to clients and prospects so that we can grow those businesses. But there's some natural economic uncertainty. There's all the things that we all know that are causing us some difficulty. But we will see improved performance over the next few quarters I believe.

Okay, and as -- I know you're giving guidance for 2013, but in the bigger picture, should we expect Direct Marketing and/or Shoppers to be positive growth for the full year next year?

We're not far enough along in our planning and thinking for that.

Okay, that's fine. One last one, and I'll jump off here. You guys continue to have good cash flows and build up cash there, very reasonable leverage. Can you give us any additional insight into your plans for capital allocation? Are you going to continue to pay down debt, or are you considering a buyback here, just considering where your valuation sits today?

It is something that we discuss at every Board meeting, and at this point we're accumulating cash, and we've got all the options that you said at a discussion at every Board meeting.

Okay. And what are the arguments against, at this point, buying back? Just looking at a five times or sub-five time EBITDA multiple, what would be the reasoning for continuing to build as opposed to buying back a little more aggressively?

Well, if we could -- it's just the conversation that takes place when we look at where we are, where we're going, and what we might use for our cash. It is not something that is totally off the table by any means, but there are just -- we believe, obviously, the stocks are at a good value where it is.

Right.

But it's something that we'd consider.

Okay. Thanks so much.

And we'll take our next question from Dan Salmon from BMO Capital Markets.

Good morning, guys. Larry, two questions. The first is with your stepping in to head Direct Marketing role. How are you thinking about your personal time commitment today? I know you've been involved with reorganizations and Shoppers. Maybe how you would look at your role good forward, and your time split up between Direct Marketing, Shoppers and then just broader cooperate responsibilities?

And then a second, I just wanted to ask a little bit more. You mentioned the idea addressing the fragmentation of your delivery models and coming to market with a bit more of an integrated approach. Is that more around merging product and services team? Is it a different selling proposition? Just hoping you can add a bit more color to that.

Okay. On the -- my time? My time will be -- I was asked how I was going to do two jobs? The answer is I don't intend to. This restructuring allows my responsibility -- obviously, I'm ultimately responsible for Direct Marketing. But with this team and this new structure, the number of people who report to me, the number of functions, the number of things that I think about are very different from what Gary had to deal with when he was there, because he had a lot more people reporting to him.

So as for the amount of time that it will take, it will take some, obviously. But this is a strong group of leaders that we've got, and they've got some really good people in the organization that are going to support them. We're all going to be spending a fair amount of time over the next few to several months continuing to look at the way we go to market. And so that will give us the opportunity to maybe even further refine the way the structure is working.

The amount of time between Shoppers and Direct Marketing, I don't know how to -- how it will split, but Shoppers are -- that's a business that I know well, and that Doug is deeply involved in, and Mike Paulsin is a terrific leader. So where we are there in its structure and restructuring is we're in reasonable shape. As you see each quarter that group continues to look for ways to be more efficient to get the expenses more in line with the new realities of the revenue.

And then the last question was about the more coordination of the way we're going to market?

Was it products and services fragmentation?

Oh. The answer is that it is all of those things. We are looking at the integration of functions, the combination of functions, the services that we provide, how we go to market with those, where we have the advantages that we need, and where we need to add additional services. So it truly is all of the above.

Great, thank you.

We'll go next to Michael Kupinski with Noble Financial.

Thank you for taking my questions. Just a couple of quick ones here, and then a housekeeping questions. What do you attribute the reasons that you're shuttering your daily deals and your mobile apps in the Shoppers to? Was it just management distraction, or what were the other reasons there.

We weren't getting the traction on the revenue side that we thought we would when we implemented those. And then another point that you made is a very good one; is our web products and services are sold by our territory sales and our Inside sales forces. Well, with our national sales force as well. All of our sellers, and it is a more natural sell with the PowerSites to those local customers that these sellers have tremendous relationships with, than was, quote, the daily deal sell or some of the other apps. So from that perspective it was a distraction to our sales force, and it just made sense, based on, again, the revenue and the cost that we had there to close those. As having a number of other daily deal sites in California and Florida [been] closed.

And then in terms of your alternative delivery plans, it seemed like there was a terrific prospect for a meaningful cost savings in that -- in doing that. I was just wondering if you could add more color why -- what were the types of issues that you were facing there?

The issues were, in case of Florida, 37 years of being in mail and selling the advantages of that, and the perceptions -- but probably realities as well -- of in the early going, if you will, the effectiveness of advertisers was less, somewhat less. And so the decision was made that we were going to absorb the extra cost between the alternate delivery price and the US Postal Service. We know the Postal Server -- or the postage rates will continue to increase, and it will add cost. But we truly believe it will result in more revenue as well.

And then just a couple of housekeeping things in terms of guidance for Shoppers, which your anticipated income growth. I just want to clarify and just make sure that you're referring to growth year over year, or growth in the first half of this year?

We were referring to modest --

Yes, modest. I heard that part.

-- growth in the second half.

Was that year year-over-year, Larry.

Yes.

All right. And then the corporate expenses were higher than I was thinking, just a few hundred thousand obviously, but any thoughts on the run rate? Is that a good run rate for the rest of the year?

Um, it's fairly consistent, yes.

And D&A, was there anything in that quarter that was unusual in those numbers as well? Because that was a little higher too.

Yes, that includes some of the restructuring charges related to the Shoppers group and the websites and so forth. So our historical run rates are probably a little bit more reflective of what you would see in the future.

Okay, great. That's all I got. Thank you.

We'll take our next question from [Jean Shaughnessy] with Harte-Hanks. Your line is open. [We're unable to hear you.] You might try pressing your mute button.

Operator, can we can move on to the next caller?

We'll move on to Edward Atorino from Benchmark. Edward Atorino: The JCPenney, is this a permanent reduction, so it's not going to come back? Or this was a temporary cutback by JCPenney? And any other customers either thinking or indicating that they might be shifting use of you versus somebody else?

On the first part of the question, they have actually added back some revenues from the -- from what we expected and they told us at the beginning of the year. So there is some add back; a few million dollars. But it's still a significant reduction from last year. And the -- we've got some of our other retailers -- we've got growth, and from some of our major retailers in our mail and mail-related services. I'm sure that, just like everybody else, they're watching very closely what's happening -- or what happens to JCPenney and will adjust accordingly. We know over time, while direct mail is still growing, there will be shifts in revenue, and we intend to be where those shifts are going.

Is the decline in pharma just due to the reduction in new drugs and stuff? Pharma seems to be down across most marketing categories. Is it a product issue?

They -- in our particular case the first half decline is more volume related to one of our major customers, where they're just not sending out as many kits, et cetera, to their customers. And one of the programs that they had some reasonable expectations for didn't quite meet those expectations, so they cut back the volumes a little bit more. We'll continue to have headwinds in the pharma for the rest of the year, as there is a lot of uncertainty there, as you well know.

Yes. One last question, if you look at Shoppers, the last three quarters have been around $56 million. I think this is the first time that three quarters with that kind of, quote, stability. Are we at a bottom there -- are you at a bottom there, you think?

We sure would like to be.

Thanks a lot. But there's with a "but"?.

We did say the rate of decline, we believe, would be slightly less, so [the word decline is still there].

I got you. Thanks a lot.

(Operator Instructions). And we have no further question in the queue at this time.

Thanks a lot. Appreciate your time and your interest.

That does conclude today's conference. We thank you for your participation.