Harte Hanks Inc (HHS) 2013 Q3 法說會逐字稿

Good day, everyone, and welcome to the Harte-Hanks third quarter earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Robert Munden, please go ahead.

Thank you, operator. Our call may include forward-looking statements, such as statements about our strategies, adjustments to our cost structure, financial outlook and capital resources, competitive factors, business and industry expectations, litigation developments and regulatory changes, economic forecasts for the 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 reference 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 the operator.

At this time, we'll have opening remarks from the Chief Executive Officer, Mr. Robert Philpott.

Thank you, Shalanna. Good morning, everyone. Happy Halloween, and welcome to Harte-Hanks' third quarter earnings call. Doug Shepard, our CFO, will join me on today's call and in a few moments, he'll take us through the detail of today's earnings release.

Now, let me start today's call by acknowledging that our third quarter performance was not what we would want it to be. We entered 2013 with a reasonable expectation of improving economic conditions and optimism in our markets based on our clients' projections for the year ahead. On that basis, we committed to some modest increase in investment in people and in infrastructure early in the year. By mid-year, we were seeing some softness in our plans. And this has accelerated in the third quarter.

Now the reasons for this are twofold. First, the global economic performance has been less robust than initially projected, a situation that frankly, was not helped by the recent budget wranglings in Washington. This alone would have weighed heavily on our short-term performance.

However, we also witnessed our clients' continued struggles to make practical sense of the myriad of new marketing channels and how to integrate these opportunities into more conventional marketing programs. There's no doubt that at a strategic marketing level, there are exciting times ahead. And these client challenges represent opportunities for us to engage with our clients in a more meaningful way.

However, at the immediate and operational level, at the project level, it means that continued volatility in clients' decision-making for the remainder of this year. For example, in direct mail, we have seen clients switch mail formats and volumes on very short notice in attempts to find the most cost-effective method of reaching customers. And we've also seen an uptick in piloting of marketing programs ahead of committing to final projects in order to experiment with new communication channels and techniques.

The combined net impact of the economic uncertainty and the fundamental changes in the operational dynamics for direct marketing activity have resulted in a significant deceleration in our revenues. Having made early commitments to some overhead increases, both as investment in resources for future growth, and for the maintenance of existing facilities, the impact of the reduced revenues has had a substantial effect on our operating income.

During the quarter, we also took some important corrective action in refocusing our business. I will provide more specifics of this later in our call. But the cost of these actions, together with adverse foreign exchange impacts, resulted in a further reduction in our profitability. Overall, therefore, we're presenting a challenging set of performance numbers today.

And I will now ask Doug to walk you through the details of that. Of course, I'll rejoin the discussion to conclude our announcement a little later on at this call. Doug?

Thank you, Robert, and good morning. This was an eventful quarter, culminating with the sale of our shoppers segment which closed on September 27. As a result of the transaction, the financial statements attached to our earnings release this morning show only our marketing service results. And all of the shoppers results have been netted into one line item, discontinued operations.

Revenues for the third quarter decreased 4.3%. Operating income decreased 22.7%, after excluding $3.7 million in charges for a trade name impairment charge, a client make-good payment and an increase in currency translation charges. Excluding these items, third quarter diluted earnings per share from continuing operations was $0.11 per share for 2013 compared to $0.14 per share for 2012.

First, I'll focus on revenue from our industry verticals where we had the following results. Our select markets increased 13.5% or $1.4 million. Automotive and consumer brands decreased 2.1% or $0.5 million. Our retail vertical decreased 4.6% or $1.8 million. Our pharmaceutical/healthcare vertical decreased 4.5% or $600,000. Technology decreased 6.9% or $2.2 million. And finally, our financial services vertical decreased 10.7% or $2.3 million.

Our select vertical markets increased for the quarter primarily due to a nationally recognized travel and resort company increasing their marketing activity. This was a test program for our client and is expected to continue for a short period into the fourth quarter ahead of anticipated programs.

The decrease in our automotive and consumer brands vertical was driven primarily by the decision to not renew non-core contracts, consistent with focusing on core services going forward, and reductions in agency work by an automotive client.

In the short-term, exiting these contracts will have a financial impact, but will allow us to focus solely on our marketing services going forward. These declines were offset by increases in contact center technical support by a large transportation and business services company.

Consumer brand marketers are continuing to focus on how to leverage the opportunity of new channel communication with consumers. At the same time, consumers' expectations for relevant messaging from these new channels continues to evolve. The environment is ripe for data-driven, multichannel marketing expertise and strong execution as we refocus. And we continue to see opportunity in the medium and longer term.

Our retail vertical declined 4.6%. Retail clients are moving marketing dollars around to reach more customers as their marketing budgets remain largely unchanged. We continue to see a trend with retailers changing to less expensive print formats. They, in turn, use the savings to mail higher quantities or add additional mailings to reach more customers. Advertising inserts, catalogs and other higher priced formats have been affected. We've seen catalog campaigns canceled and replaced with postcards. We've seen page counts for catalogs and inserts reduced, sometimes by half.

The pending postage rate increase remains a concern for retailers, as many are not increasing their marketing spend. The postage rate increase will drive retailers to less expensive formats, as well as to other channels, as they try to offset the impact of the rate increase.

While direct mail continued to be a focus for our retail customers and continues to be the best response channel, we expect the marketing dollars to continue to shift across channels such as e-mail and mobile, as retailers work to optimize their marketing efforts.

Our healthcare and pharmaceutical vertical continues to be affected by a longstanding client reducing the distribution volume of newborn baby kits. This decrease in activity is being offset by agency and contact center support help for healthcare companies related to the Affordable Care Act.

In 2014, we believe we will continue to see opportunity, as many of the healthcare providers who made decisions about how they were targeting customers and how they to need to analyze individual market results, identify gaps in their current process and formulate a strategy moving forward.

Turning to our technology vertical. The outlook for technology companies continues to be mixed. As the third quarter reporting season continues, some are reporting growth while others continue to struggle. Some of these variances are specific to the companies themselves. Others are generic -- continuing weakness in some emerging markets, the shift away from PCs and the growth in data flows and movement to the cloud.

Our Hanks client base is mainly in the very largest technology companies whose marketing efforts are evolving to cope with these challenges and new IT buying patterns. Our performance was affected by declines with our lead generation businesses and volume reductions for contact center support.

Our financial services vertical decrease was driven largely by losing a client whose new management made a vendor change and volume reductions in credit card solicitation.

Operating income, excluding the impairment charge, client make-good payment and currency translation costs previously mentioned, decreased to 22.7% during the quarter. Management continues to closely monitor its expense structure. The operating income decline was a result of revenue declines of businesses with labor cost that aren't variable in proportion to revenue changes. Labor investments in growth talent and first quarter decisions to support second-half revenue growth have contributed to this result. We will retain our confidence, continuing with new talent acquisition despite short-term earnings pressure.

Turning to the items below operating income. We experienced an increase in foreign exchange expenses for currency translation costs of about $0.5 million, which is reflected in other expenses below operating income. We were affected by changes to the American dollar from the British pound, the Australian dollar and the Philippine peso.

Our third quarter effective tax rate was 37.3%, which is consistent with our 36.7% in the third quarter of 2012.

Our net debt balance is $24.3 million versus $60.9 million at year-end, a reduction of $36.6 million.

We currently have $80 million available under our revolver, excluding outstanding letters of credit, in addition to a cash balance of approximately $76.8 million at the end of the quarter.

We continue to have a strong balance sheet with low leverage and plenty of liquidity.

For the quarter, we spent $3.6 million on capital expenditures, compared to $2.9 million in the third quarter 2012. This modest increase was largely for improvements and maintenance to existing facilities.

Finally, I'd like to address our expectations for the remainder of the year. Our business continues to be volatile, especially in the traditional marketing services we provide. We expect our fourth quarter revenue decline to accelerate from the third quarter and for operating income margins to be under pressure.

With that, I'll turn the call back to Robert.

Thank you, Doug. Now, while it seems abundantly clear that we've missed some important financial performance milestones, this does not tell the whole story of our business in quarter three. As I've settled into my new role at Harte-Hanks, I worked quickly with our management team to begin the process of refocusing our business.

As already mentioned earlier in the call, we completed the much-anticipated sale of our shoppers business in September. And I want to acknowledge here the work of both our finance and legal teams in accomplishing this task in a professional and particularly speedy manner. It really was a job well done.

During the quarter, we also recognized that we needed to address issues in some of our existing core business. The result was an impairment charge against our lead generation division. And just as importantly, it was the management's start on a long-term plan to return this business unit to health.

And we've begun the process of critically evaluating the contribution to performance from some of our existing contracts. And as Doug has already mentioned, we elected not to renew some of this work as it was not core to our business going forward.

Our actions are not limited to an internal examination of our operations. In late September, I appointed external strategic consultants, specializing in the marketing and data sectors, to assist us in our review of the business. This exercise will give us additional clarity in our planning for change.

The work is ongoing and we expect to report the outcome from this review to the Harte-Hanks board by year-end. We will continue to examine structural aspects of the business throughout the remainder of the year, so that we enter 2014 with a much more focused approach to our operations.

The first hundred days is often used as a point of reflection for new CEOs as they become familiar with their companies. And I want to use this milestone to update you on my progress. I've continued with my plan to visit all of our offices worldwide, including meetings with key clients and significant business partners.

Initially, as you know from the first earnings call I did, I focused on the North American business units. But I've now spent time with our teams across Europe and Asia as well. I'm excited by what I witnessed in terms of the way we're supporting clients and by the commitment that I saw towards Harte-Hanks.

I spent several days last week at our offshore call center in the Philippines. For your information, this is a state-of-the-art facility where we employ about 1,500 operators. And it handles some of our most prestigious clients and consistently delivers both value and quality. It's not surprising that our contact center division has seen growth this quarter.

And as we develop our strategic plan, I aim to ensure that we don't lose sight of the opportunities that exist around the world. But the overriding impression that I have of our business, having now spent significant time in the operations, is that Harte-Hanks has a strong heartbeat, a solid core, combining the depth of experience of our staff and the long-term relationships that we enjoy with some of the world's best-known brands in a wide variety of industries.

To illustrate this point, we've worked with 9 of our top 10 clients for more than a decade. And we're an embedded part of their marketing ecosystem. For the seventh consecutive year, our software business, Trillium, has been listed in the leader section of the Gartner Magic Quadrant for data quality. This is a great platform upon which we can build. But we must leverage the position more effectively than we are currently doing and, given the changes in the marketing industry, in a variety of new ways too.

During quarter three, we took an important step in signaling our intention to step up our marketing efforts. We unveiled a new branding for Harte-Hanks, which was shown for the first time at the Direct Marketing Association's conference in Chicago in early October. And I'm sure you've noticed the new logo on our press release this morning as well. Although rebranding will not in itself directly change performance, it nevertheless represents a rallying cry around which we can build change into our business model. It clearly signals our intention to our clients and to our staff.

So to conclude, it's clear that we still have a great deal of work to do. But this is a work in progress and we've just left the starting gate. But we do so knowing that the Harte-Hanks of tomorrow will be different from the Harte-Hanks of today, and that we have the skills to deliver against the demands from our clients.

That will result in some short-term unevenness in our financial performance. But these are steps that we need to take now in order to position ourselves for future growth. Rest assured that we remain conscious of the need to invest within our means and that our traditional values of thoughtful financial management are still intact.

Now with that, I want to thank everyone on today's call for your continued interest in our business and for your ongoing support to our ambitions.

And I'll now hand back to our operator, who will give you details of how you may participate in this morning's Q&A session with Doug and myself. Thank you.

(Operator Instructions) We'll have our first question from Michael Kupinski, Noble Financial.

Thank you for taking the question. And welcome aboard, Robert.

(Inaudible).

I was wondering first if you can break out for us your digital businesses versus your traditional businesses? And if there were any revenue disparities between those two?

I'll take the second part of that question to begin with. There's no real disparity in performance between digital and the traditional parts of our business. We find ourselves challenged on each side of that divide. We don't traditionally look at our business in a split between digital and conventional. It's not a definition that we work in our analysis. So I can't break out and do a contrast, for example, versus quarter three of 2012 on that number. But I do know that we are seeing challenge across all aspects of the business.

And it's more to do with the fact that our services tend to be project-led and have a strong operational focus. So that they're to do with very specific marketing activity measured in weeks and months rather than the long-term commitments.

And Robert, the weakness that you're seeing, it sounds like it's fairly across the board. There was not any particular -- and I know you do operate in a very highly fragmented industry. But there's no one in particular that might be taking some share from you or maybe getting some of this business outside of Harte-Hanks, just maybe a competitor or something?

We look very closely to see is it about losing clients? Are we losing bids, for example. And we really don't see that. We've highlighted one client, I think, where we have a client loss. But this is an agency-type business and that would be part of the nature of that business anyway. So there's nothing that's specifically noticeable about the trends there.

I think all that we're seeing is fluctuation, short-term, tactical decisions made by our clients, often in short notice. And we're seeing the volatility of that. And it's the balance of that against our desire to do a degree of longer term investment in the Company that causes the pressure for us in this quarter.

In terms of the Company's lead generation business, which typically I thought would have been probably your fastest-growing segment for the Company, do you believe that you need to make additional investments there or acquisitions in this segment to bolster your growth prospects? Or what do you look for from just that particular segment?

What we've done is, first of all, we've taken a prudent decision to take the impairment charge against that business. Because we don't have prospect of a quick turnaround or a quick fix to that business. So that's the first step that we took.

Second of all, we've given the management an element of time to come back with a recommendation on what they need to do to get us to a better long-term position with that part of the business. We're just entering our budgeting and planning phase for 2014 now. And we expect to hear from the management of that group literally in the next few weeks about what their solution might be.

I wouldn't rule out acquisition as a way to fix it. I don't think it's the only way, but we will be guided by our management team when they talk to us two, three weeks from now.

And if you just break out the Trillium business for a second. What did that business do in the quarter? And in particular, is that business being affected with all the turmoil going on out there as well?

It certainly has some turmoil. The nature of software business, I think, has more stability, particularly in the maintenance-type contracts on software. So we don't see just quite the same degree of instability. But I think it's fair to say that the quarter for Trillium was not one of their stronger quarters. Overall, the business is very solid for the year, but we did see a softer quarter for Trillium in the third quarter.

So the revenues were down?

Robert Philpott I think they were probably -- the revenues were stable versus the prior year. I think I'm right in saying -- Doug, and just keep me right on this -- the comparator for quarter three in 2012 was a strong comparator though.

Yes, they were up against a very strong third quarter in 2012. And Robert is correct, the revenues were stable.

Okay. All right. I'll let others ask questions. Thank you.

(Operator Instructions) We'll go next to Edward Atorino, Benchmark.

I haven't heard much about the cost structure. Do you need to do any significant cost structural changes?

Yes, we talked a bit a little bit about that, Ed, in that during the quarter, most of that was driven by labor with businesses where those costs aren't really variable in proportion to the revenue changes that are out there. We made some investments in growth talent. We also made some decisions earlier in the year to support the second half revenue growth that has not materialized. And so we will continue to invest and work with that growth talent that we need within the organization as we continue to go through change.

You don't think with the revenue base, you need to basically adjust the cost structure downward?

I think we're walking a balance between investment and talent that is required actually, by our clients as our industry is changing. There are parts of our business where it's easy to vary the cost base relative to the revenue. But there are other parts of the portfolio businesses that we have where it's not a simple case of doing that.

And as I said at the start of the answer to the question, we're going to continue to walk that line between investing in the knowledge of what our clients will require from us going forward. And short-term responsiveness in businesses where we have that capacity to do that.

Do you see a lot going to TV as opposed to just going back into company budgets?

No, that's not something that has come up in listening to both clients and our divisional leads. That's not something that has been highlighted to me.

Okay. Thanks very much.

(Operator Instructions) It appears we have no further questions in the queue at this time. I do apologize. We have a question from Dan Salmon, BMO Capital Markets.

Robert, I was just hoping to tease out a little bit more color, just referencing your background, which certainly is in the marketing area, but maybe a little bit more tilted towards maybe the information services side a little bit. And also, I know you have a good background in doing M&A.

So I was maybe a little bit more curious to see how you think about -- you highlighted Trillium as sort of a foundation asset. But whether or not that's something to build upon through M&A or to facilitate more information-services type of businesses. So just how you basically plan to bring your background, which is slightly different to Harte-Hanks?

Yes, I think the information that I can bring, or the experience that I can bring, to the Company will probably come to the fore a little bit more after we've completed the exercise of the business review. At this stage, we're getting our arms around what we have. We're taking some obvious early steps to get a refocusing within the business, largely done from just the internal reviews.

But once we complete that more fundamental review where the external strategic consultancy is helping us, then I can begin to apply my experiences to thinking of what we then do. So it's probably a little bit early in the on-boarding for me to greatly influence at this stage. I certainly remain very connected to the information and data industries. But I think that that's probably something that you'll see more impact from early in 2014.

Okay, great. And then just maybe one follow-up. The non-core contracts that you stepped away from, I think you made mention that they were more agency-oriented. But could you just maybe add a little bit of color there? And should we take that to mean that these are types of businesses you're going to move away from with other clients and reposition the offering over time?

Yes. Just to be clear, we didn't specifically say that they were agency-type clients. We've looked at these across the board. And we're not walking away, necessarily, from businesses. We're walking away from some contracts. It's kind of some odd business that sits around the edge of our core business. And we just think that it causes distraction for our management.

And what we want to do is to begin a process of clearing out some of that. It's almost like a spring clean, if you like, to the business. And it's an opportunity for me as a new CEO just to do the spring clean. I don't want to make too much of it because I don't want to suggest that this is the way in which we're absolutely going to drive focus. I think there are other things we'll be doing as well. But it is important to come in and tidy up a certain amount of activity. And that's all that this relates to.

Okay. Thank you.

And we have no further questions in the queue at this time. I'll turn the conference back over to Mr. Philpott to offer any additional or closing remarks.

Okay. Well, thank you, Shalanna. So once again, to everyone who joined the call this morning, thank you for taking the time to listen for us. I look forward to speaking to you all again at year-end. And it just remains for me to wish you a happy Halloween. Thank you and good morning.

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