Harte Hanks Inc (HHS) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2013 conference call hosted by Larry Franklin. As a reminder, today's call is being recorded.

At this time it is my pleasure to turn the call over to Mr. Larry Franklin. Please go ahead, sir.

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; and Jessica Huff, controller.

And before I begin my remarks, Robert will make comments.

Thanks, Larry. Our call may include forward-looking statements, such as statements about our strategies; adjustments to cost structure; financial outlook and capital resources; competitive factors; business and industry expectations; litigation developments and regulatory changes; the economies of the United States and other markets we serve; 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 now turn the call back over to Larry.

Thanks, Robert. Before I talk about the individual businesses, just a couple of comments about company results, and then following my comments Doug will add some color and detail.

Revenues for the quarter decreased 4.1%, operating income was down 27.2%, and income from continuing operations was down 10.3%; with earnings per share from continuing operations at $0.11, and that compared to $0.12 from continuing operations in the first quarter of 2012.

Shoppers. Shopper revenue of $46 million for the quarter was down 1.3%, which is a much smaller decline than we had experienced in the past years. OI for the quarter was $800,000, compared to $1.2 million in the same quarter of last year.

Some very brief comments about the industry SI codes that we serve. Real estate continues to decline high single digits. There's been reported actual home prices increasing and these are trending up, but the for sale inventory is declining and there are low rental vacancy rates.

The broad services category declined low double digits; though a smaller decline than from the previous years, it's still a decline. The majority of that, as we've commented on for the last several quarters, is from schools. In the fourth quarter -- or sequentially, quarter four to quarter one -- schools were flat. So we think that may be an improving trend.

Consumer spending, which includes building and hardware and home furnishing stores, increased low double digits. That's the second consecutive quarter that we've done that. This growth comes from increased spending from existing clients as well as new clients this quarter versus the same quarter last year.

Automotive dealers continued to have good results and continue to grow. Eating and drinking places declined slightly. Communications grew mid-single digits. And if you look at revenue by revenue category, our in-book advertising, our ROP, was down. That was mostly offset by increase in distribution products, which led to the 1.2% overall decline.

Major accounts, or our large accounts, continue to grow very nicely, with high single digit growth in the quarter. Territory sales overall, results declined slightly. Our PowerSites, which is an important component of our services, were down slightly. We sold through our territory sales force and inside sales force an average of about 5,200 sites per week. In addition to those that we sold in quarter one, we hosted about 500 PowerSites a week for the Florida operation previously owned by Harte-Hanks. And we continue to look for ways to make these PowerSite products even more integrated into the clients' business through additional enhancements and training.

Turning to cost, expenses were down very slightly. Labor costs were down due to the expense reduction in all phases of our business since the first quarter of last year. The USPS raised postage rates 2.8% in last January. Newsprint prices are down about 1.8%. Our outsourced printing for the distribution products that we do not print increased, obviously, and that's the result of the increased revenue.

This week we began producing a portion of our northern California circulation in one of our southern California plants. We announced in the fourth quarter of last year that we were closing the northern California facility. The plans are in place to move the northern California press lines to the southern California facilities, and we expect this production transfer or move to be completed by the mid-third quarter.

Concluding, on Shoppers, as we said in the press release, we're excited about our Shoppers first quarter results, and while early, recent revenue trends are encouraging as well. We continue to expect Shopper revenue and operating income for 2013 compared to 2012 to be down slightly, which again is a significant improvement in trends compared to experience we've had in the past few years. Our people continue to look for ways to make our products and services more effective for advertisers and to deliver those services more efficiently, and I cannot be more proud of our people.

Looking at direct marketing, the reorganization -- first, the results. As we said in the press release, revenues were down 5.1%; OI declined 18.1%. That was below our expectations, even though we expected to be down in the quarter in the first half. In Doug's remarks he'll provide some color on this performance as he discussed the revenue performance in each vertical and the overall profit performance.

But before he does that, a couple comments, first on the reorganization. Our direct marketing restructuring is going well, with people beginning to settle into their roles around the new organization of customer engagement strategy, customer solutions, and customer delivery. I'm pleased with the way Jeannine, Tony, Brian, and Andrew are approaching the transformation and the way that our people have embraced these changes which are being woven throughout the organization.

As this quarter indicates and as we expected, it'll take time for the changes to be reflected in the results, but we're beginning to see signs which increases our confidence that these changes will positively influence performance in the second half of '13 and into '14.

Some of the signs that I'm referring to are mentioned in the highlights section of the release and some were mentioned actually on the last call we had; for example, in the highlights section, the National Vision win, which was led by the agency inside. In that win we will provide an integrated set of solutions around the strategy to provide more effective customer engagement focused on retention and repeat business. This relationship includes a wide range of our services and is, I believe, a good example of our simplified structure around roles, responsibilities, and resources being more closely aligned to the way we interact with our clients and the way they buy our services and grow their businesses.

Also in the highlights there was a comment about the high-speed digital print technology. This technology gives our customers the ability to create highly variable, customized content offers that allows them to quickly and easily and economically give customers personalized offers which will increase direct mail ROI. This service will also be a part of the National Vision relationship that we mentioned above.

There are a number of initiatives being developed in our recently-formed product development R&D group. One is Trillium Links, also in the highlights. This is a new offering that takes advantage of a new relationship with outside data sources, allowing Harte-Hanks to link the individuals and members of households together and use it to provide in-depth analytic and reporting capability. This all creates tremendous value through significant marketing efficiencies for our clients.

We also mentioned last quarter the development of a new reporting platform for our database build processes. This is under development and will be finished this year.

We also had another good quarter on new digital assignments. Again, as in the past, the vast majority of these are to existing clients, reflecting the breadth of value that we provide to those clients; although there are some new client assignments as well that reflect going-forward opportunity.

And so over the last year we've talked about JCPenney and their changes to their advertising and marketing programs. We have maintained, and I believe actually strengthened, our relationship with JCPenney during this period of time with continued excellent execution of the programs and projects that we were executing for them. And while very early with the recent announcement, there will be additional changes but we do not know the magnitude of those changes on our business. We do, however, expect them to be positive and we will strive and will deliver continued excellent service.

In the quarter we also announced the appointment of two new directors, Steve Carley, CEO of Red Robin Restaurants, and Scott Key, COO and recently-named CEO of IHS. Both bring excellent experiences and skills to our company and will provide a lot of additional value.

Doug?

Thank you, Larry, and good morning. Here's a companywide overview of the first quarter.

Consolidated revenues decreased 4.1% for the quarter. Consolidated operating income decreased 27.2% for the quarter. Consolidated operating income margin was 5.7%, below last year's first quarter of 7.5%. For the quarter our free cash flow was $7.7 million versus $9.9 million in 2012. We spent $4.6 million on capital expenditures compared to $3.1 million in the first quarter of 2012.

Turning to our two businesses. In the quarter, direct marketing revenue decreased 5.1% and operating income decreased 18.1%. As you have probably noticed in our earnings release support, we have created another vertical because our select vertical, or other, was a large part of our total revenues. Therefore, we have created a new vertical called auto and consumer brands. All of the revenue we are reporting in this vertical has been directly moved from our select vertical and did not come from any of the other vertical.

In the quarter, our retail vertical market represented 28% of total direct marketing revenue. High-tech was 24%; financial services were 16%; auto and consumer brands were 16%; healthcare/pharma was 8%; and select markets were 8%.

Direct marketing revenues reflects the impact of a 32% decline in revenues from the pharmaceutical vertical, including the effect of volume reductions from a longstanding fulfillment customer in the previously discussed loss of an agency-related pharmaceutical customer in the third quarter of 2012.

The passage of the Patient Protection and Affordable Care Act has accelerated migration of B-to-B to B-to-C marketing across the entire healthcare landscape, and has also made visible the strategic marketing vulnerabilities of healthcare insurers and providers of care as they vie for their share of the soon-to-be-insured population beginning in October; at the same time, continue to compete vigorously for the Medicare population for less reimbursement.

The challenges before health plans provides opportunity for Harte-Hanks. Health plans need to differentiate themselves in the market with key target populations and clearly communicate the benefits of complex solutions effectively, while differentiating themselves against competitive plans.

Our financial vertical increased 19% and is benefitting from marketers trying to deliver tailored messaging, product offers, and solutions that best meet specific consumer needs and interests. In the first quarter we experienced increased bank credit card solicitation and assisted a retail bank with getting customers to adopt a new checking account product.

Our largest vertical, retail, increased 1% during the quarter. We benefitted from a new client we signed during the quarter that is referenced in the highlights section of the earnings release -- National Vision. We'll be delivering integrated strategy, analytics, direct mail, digital mail, data services, and database development to help National Vision evolve a more effective customer engagement strategy, focused on customer retention and repeat business. We have also annualized the marketing changes made at JCPenney in late 2011 and early 2012.

Our high-tech vertical decreased 7% during the quarter compared to the 2012 first quarter. The impact of cloud computing is affecting our clients and their decisions processes. We believe cloud computing will continue to be an increasing factor across the various segments of tech, including storage and hardware. Europe continues to be very weak for our clients. All of our technology clients are still cautious, but the rollout of marketing automation platforms and increased focus on lead nurturing gives us future opportunities.

The newest vertical, auto and consumer brands, decreased 12% due to reductions in supply chain activity for two of our clients. As a reminder, we perform marketing services for foreign auto brands and currently do not have any domestic auto clients. Our consumer brand clients include names such as Anheuser-Busch, the cosmetic company L'Oreal, and FedEx. We are seeing an increase in demand for things like customer journey mapping and customer experience design. Consumer brands are trying to keep up with changes in consumer behaviors. We see this as a good sign.

Additionally, the art and science of digital analytics and insights are moving. In today's omni-channel world, consumers are not static. They're mobile and engaged around the clock and they receive an open email -- often the same one -- across computers, tablets, smartphones and other devices.

Operating income margins decreased to 9.7% compared to a margin of 11.7% in the 2012 first quarter. Labor as a percent of direct marketing revenues increased 80 basis points as a result of the high fixed cost nature of the expenses associated with the revenue decline in our high-tech lead generation business. Our top 25 car direct marketing customers represented 43% of direct marketing revenue for the quarter.

Turning to Shoppers. Shoppers first quarter revenue decreased 1.3% and operating income decreased $500,000. ROP revenues decreased and were offset by an increase in distribution revenues. Our ROP revenue per account was basically flat compared to the 2012 first quarter, and we experienced a decrease in the number of accounts we publish for. As stated in the earnings release, the Shoppers' relatively flat first quarter revenue performance extends the revenue trend started in the fourth quarter last year.

Below the operating income line we had other income of approximately $1.2 million for a line item that is normally expense. During the quarter we closed on the sale of our Belgium facility, which was one of our two owned facilities. The gain from that sale, along with the gain from exchange rates resulting from a strengthening dollar, created income this quarter for us.

Our first quarter effective tax rate was 37.2%, which was below the 2012 tax rate of 39.7%. For 2013 we still expect our effective tax rate to be approximately 40%.

On the balance sheet, net accounts receivable were $126.6 million versus $141.3 million at year-end. Days sales outstanding at the end of March were 66 days, compared to 64 days at December 2012. Our net debt balance was $46.2 million versus $60.6 million at year-end, a reduction of $14.4 million. We currently have $70 million available under our revolver, excluding outstanding letters of credit, in addition to a cash balance of approximately $60 million at the end of the quarter. We continue to have a strong balance sheet with low leverage and plenty of liquidity.

Finally, we have purchased approximately $1 million of stock in 2013 through today. We have about $4.6 million remaining under our 2012 stock repurchase plan authorization. We will update you on our activity during our next earnings call at the end of July.

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

Thank you. Ladies and gentlemen if you'd like to ask a question you may signal to do so by pressing the * key followed by the digit 1. If you have joined on a speakerphone, please make sure that your mute function has been turned off to allow your signal to reach our equipment. Again, that is *1 for questions.

And we'll hear first from Dan Salmon with BMO Capital Markets.

Hey, good morning, guys. I just wanted to follow up a little bit on one of the vertical, financial services, which was pretty strong there, just understand a little bit better. I know you've rolled out some products to help a lot of large financial institutions with greater compliance, regulations. How much of that is driving that segment versus maybe longer-term relationships that are coming onboard there?

As of now through the first quarter -- because you're right; we recently rolled out the banking stuff, compliance modules, things of that nature through Trillium; a lot of discussions with clients; a lot of RFPs being answered, being dealt with. But that was not a large driver, really didn't contribute much to the financial vertical performance in the first quarter. It's still, as we said, primarily retail banks driving credit card solicitation and doing things such as one of our customers who was converting existing customers to a new checking account product.

Okay. Great. So it does sound like that's a bit more of the traditional work.

And then, Larry, just one quick follow-up. You mentioned how the leadership team at direct marketing continues to work through and evolve the business. I just want to make sure, you still formally the head of the organization? Do you expect that to stay in place if so?

Yes. I am formally and informally the head of the organization and I expect to continue to be until it's announced otherwise.

Okay. Great. Thank you.

Again, ladies and gentlemen, please press *1 if you'd like to ask a question.

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

All right. Thanks, and thanks for taking the question. Just a couple things.

In terms of the retail vertical, as you mentioned it increased as a percent of the total. I may have missed this, but did you say that JCPenney spending was up year over year in that quarter or no?

We didn't. But it just slightly, though; not much. We're still, with their changes, still very early in the process; they are very early in the process. Great relationships, lot of communications, lot of things going on. But I think they're way too early in their process to know what the future looks like on a real concrete basis right now.

I see. And in terms of the Shoppers business, on a pro forma revenue basis what was the second quarter revenue that you're working off of for 2012?

You're talking about basically -- two seconds here, Mike. It is about $47.5 million.

Okay. And you're saying that in terms of trends right now, it's probably going to be down but it seems like it's stabilizing more in this range right now where we're at in terms of the first quarter?

Yes.

All right. And then in terms of kind of looking forward in Shoppers as it relates to California, given the fact that the state has allocated $30 million towards marketing for these insurance exchanges and things like that, do you anticipate that there's going to be any benefit from maybe the mandates in the healthcare area that are coming in 2014? I mean, are you seeing any indications that you might benefit from that?

You're talking about from direct marketing, right?

Well, I'm just thinking that if it would be in direct marketing or in the Shoppers business -- you know, any indication. Because I know that Trillium has been trying to get into the healthcare area. If you could just give us some color on whether or not we might see an increasing from that category.

On the Shopper part we don't have high expectations. But every time there's a need for an insurance company or a healthcare provider to reach targeted customers, then the Pennysaver is obviously an excellent way to do that. And then the direct marketing sector, Doug was commenting on some of the changes that are taking place that should and will, we believe, benefit direct marketing in particular.

We have a number of prospects that are in that space, in the healthcare area. We have good expectations in direct marketing for the latter part of the year and certainly into next year.

Larry, in the past you indicated that the success of Harte-Hanks and its growth will be dependent upon the company's digital transition and ability to compete for business in that space. I was just wondering if you could kind of reflectively maybe talk about your thoughts on that transition and if you're meeting the company's targets and how you feel your positioning going forward.

I feel good about the positioning, and I mentioned very briefly in passing the product development group and also an innovation council that we have that's looking at a number of different ways that we increase our ease of delivery regardless of the source of the data that we're delivering, or that we're bringing together, to develop a marketing campaign. That's working well.

That plus the integration of Trillium into a number of our organizations, with its technology strength and advantage of being able to real-time handle structured and unstructured data, we've got I think a really good opportunity to play and win in that particular area.

And you see there's a lot of publicity, particularly in the data analytic space these days, the business intelligence space. And the more of the big data that are being used in the analysis process, the more important it is to be able to know the quality of the data that's being analyzed. And I think we've got a terrific competitive advancement there, again, with our Trillium software.

And one thing that is really refreshing is that the -- we mentioned this during the restructuring -- was the simplification of the structure is bringing together in a meaningful way the people in our company. And there are many of them that have good new product development skills. But we're combining them in a way that we're looking for a solution that fits a number of the parts of our business.

So early in the game, important part of the restructuring; the whole product development and product review groups that are involved today, it's very encouraging.

Thanks for the color, Larry. Appreciate it. Thanks.

Again, ladies and gentlemen that is *1 for questions.

We'll move next to Adam Peck with Heartland Funds. Please go ahead.

Good morning, gentlemen. Thanks for taking the questions.

Is there any way you could walk us through what the growth rate of Trillium has been over the last few years; not quantitatively, just qualitatively?

Yeah. We don't comment, haven't disclosed the individual financials of the pieces of the direct marketing business.

And with that said -- and it's true -- as you know, the Trillium product has been a software product obviously highly recognized in all of the analyst literature; sold primarily into the IT departments until, oh, I guess a couple of years ago when there was some startup of some solutions being developed and getting outside of just the technology part and more into the solutions.

And as we've been in this process now for actually I guess a little over two years with some very specific areas where we're going to develop and are developing and have developed some specific solutions for, that get outside just the technology piece, we think we can accelerate the growth rate. We have some signs that it's working. It's taking a while but we should have some good growth in Trillium going forward. More importantly, we think it can drive some growth into the rest of our company as well.

Well, it's great to hear you guys use the term "growth" in direct marketing. It's fantastic to see the stabilization in Shoppers. And you combine that with the continued free cash flows that you guys generate, looks like the balance sheet is probably in the best shape it's been in -- looking at line numbers -- probably at least 9 or 10 years. So my question is if hopefully the business is inflecting latter half of this year, maybe next year, with the balance sheet where it is, why wouldn't it be in shareholders' best interest to significantly step up the buyback?

You know, it's a good question, and it's a question that is discussed and it's a question that will continue to be discussed as we put together our overall plans for the continuing to roll out the transformation. And that's all I can really say at this time.

Well, seems like a great price to do it. Thank you.

Again, ladies and gentlemen, that is *1 if you'd like to ask a question. Again, that is *1. And we'll pause for a few moments.

There are no questions at this time.

Okay. Thank you very much for your time and we appreciate your support of our company. And to all of our employees, we appreciate what you do.

Thanks. Have a great day.

Thank you, ladies and gentlemen. That will conclude today's presentation.