Harte Hanks Inc (HHS) 2014 Q2 法說會逐字稿

Good day and welcome to the Harte-Hanks second-quarter earnings conference call. Today's conference is being recorded.

At this time I would like to turn the conference over to Mr. Robert Munden, General Counsel. Please go ahead, Sir.

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, anticipated effects of litigation and regulatory changes, economic forecast 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 tab at our website at hartehanks.com.

I'll now turn the call back over to the operator.

And we will now turn the conference over to Mr. Robert Philpott, CEO of Harte-Hanks. Please go ahead, sir.

Thank you, Jimmy, and good morning, everyone. And welcome from me to the Harte-Hanks second-quarter earnings call.

Now as usual, Doug Shepard, our CFO, joins me on the call today. In a few moments he will take you through the detail of our earnings release.

As I think has become customary now, I will present to begin with some opening comments followed by Doug and the detailed financial update and then I will give some further insight to our business operations. And obviously at the end of the call there will be at opportunity for you all to ask questions.

Now as you are all well aware, we are now at the implementation stage of our new strategic plan. And the impact of this has been felt right across our business.

I will comment on the progress on the strategy in more detail later in today's call. But I want to highlight now that the implications of that strategic review reaches far as our results announcement today.

For the first time we are providing specific financial performance information including historic comparisons for our software business, Trillium Software. Going forward we will continue to provide separate insight for both of our divisions, customer interaction and Trillium Software.

So let me start today by focusing on the overall performance for the Harte-Hanks business. In the second quarter results have brought further confirmation that our commitment to top-line growth is delivering results.

We are also certainly pleased by the revenue growth we announced in quarter 1. I am delighted to report that we backed this up with further revenue growth in quarter 2. And we have not had consecutive quarters of growth since early 2011.

Looking at our revenue trend we eliminated the revenue decline in late 2013 and have now begun to deliver against our clearly stated goal of achieving consistent sustainable growth in the business. The markets in which we operate continue to offer us opportunity and we are certainly determined to seize our share of this.

The revenue growth also confirms that our clients are supportive of the path that we are taking at Harte-Hanks. They continue to see us as a trusted business partner and have demonstrated a willingness to invest in their relationship with us. And this backs up the informal feedback that I get each month when I am in front of many of our key clients.

But the positive story on revenue growth goes beyond this even. It gives us further confidence to continue investing in the activities and the resources to accelerate the growth. And it provides us with reassurance during a time of significant change in our business.

In late June and early July Doug and I embarked on a series of investor meetings. And in fact many of you on the call today took time to meet with us then, and thank you for that. And this gave us an opportunity to share our strategic vision for the Company and to get your feedback on this.

Now of course everyone listened politely as we told our story but I did since a degree of wait-and-see from some. I think that is understandable, and whilst stick I don't need today's (technical difficulty) results to act as a validation of the strategy direction we have chosen, it is a clear signal that we have chosen a path that offers growth and that we can deliver against the commitments made in our plan.

And I am very pleased with the progress we have made even at this early stage. There is, however, still a great deal of work that needs to be done in getting our cost base back into shape. Progress has been made here too but there is more to come.

During the last earnings call I said that we would take corrective action on our cost base but that I expected these actions to continue for some months and that is exactly what has happened. We continue to challenge our cost base and have sought immediate change where costs do not follow revenue performance. But as you can imagine this is a somewhat iterative process especially at a time when we are balancing short-term performance against longer-term strategic goals.

Let me reemphasize the point that I expect corrective action on costs to continue for the foreseeable future. A quick word of caution here, however.

We need to be thoughtful in our expense management initiatives as we have many significant clients who require support during times of peak activity. And in the retail sector in particular we need to have sufficient resources available to meet peak client demands around key marketing periods such as back to school, the period we are just entering now, and then the holiday period, the traditional holiday period in November and December.

Finally for now I want to highlight that we made some important investments in our business during the second quarter. And these relate primarily to talent acquisition at the leadership level.

In April Rick Carbone joined the senior leadership team of Harte-Hanks to lead customer delivery. And Rick now has responsibility for all the units under customer delivery including fulfillment, logistics and mail services.

Rick spent a large part of his career in the marketing services sector and has held senior financial and upper operational leadership responsibilities. And one of Rick's first priorities in his new role was to complete a full review of these businesses and to implement changes to bring these units to a position of sustainable growth. These actions are currently underway as we speak.

Then in late May Phil Galati joined Harte-Hanks as CEO for Trillium Software. In this role Phil provides leadership for Trillium Software strategy, for its customer offerings and for execution across all Trillium Software offices. His background is in software technology and management consulting, which are crucial skills for the growth and ongoing success of the Trillium Software business.

Phil most recently served as Executive Director of SaaS services and customer success for IBM. And during his tenure there he was instrumental in leading the business transformation of IBM SaaS business and helped launched IBM's Smarter Commerce Organization.

Phil brings to Harte-Hanks much-needed commercial technology expertise specifically to Trillium's Software division. He has a track record of scaling software businesses and a reputation for establishing key alliances. And under Phil's experienced leadership I expect Trillium Software to capitalize on its fundamental strength in the data quality and data governance markets.

Now before I get into more specific comments on our second-quarter performance let me first have Doug walk you through the detailed financial results. And then I will rejoin the discussion a little later.

Thank you, Robert, and good morning. During our Investor Day at the end of May we announced our new strategic direction.

At the same time we announced that we have organized our operations in two distinct groups and consequently began reporting results for two segments, customer interaction and Trillium Software. Within the tables to this morning's earnings release we added a page showing the quarterly results for the two segments for 2012 through the 2014 second quarter.

As a review the customer interaction results include all marketing service products we sell including digital, agency, database, lead generation, loyalty, customer relationship, mail and contact center. Trillium Software revenue consists of software license sales, annual maintenance fees, and professional service revenues typical for a software company. The line item for corporate within our segment reporting primarily represents charges for defined benefit pension plans related to legacy businesses the longer a part of Harte-Hanks for our newspaper, radio and television employees.

Turning to our second-quarter results, our consolidated revenues increased 0.1% during the quarter. This is the second consecutive quarterly revenue increase reported by the Company marking further progress towards our 2014 goal of returning the Company to sustained revenue growth.

Let me walk through the results from each of our industry verticals, which I remind you are reported on a consolidated basis. Select markets increased $6.8 million; growth was primarily due to a sizable new client win related to support for online streaming services and expansion of mail relationships with existing clients.

This new client win also contributed to a strong first-quarter result for this vertical. The new client win had some implementation services during the first half that will not repeat for the remainder of 2014.

Automotive and consumer brands increased $0.7 million primarily from the increased contact center services and headcounts from a worldwide transportation and business services company. Technology increased $0.4 million from a new client win related to cell phone support and expansion of services with an existing client.

Retail declined 15% and financial services 9%. The retail decline was primarily driven by clients continuing to change to lighter and less expensive print formats in response to the Postal Service rate increase in January.

Our financial vertical continues to be impacted by a 2013 client loss. Financial services were also impacted by Trillium Software license sales during the quarter.

Customer interaction revenues increased 0.3% during the quarter. Our Trillium Software revenues increased 4.3% through the first half of this year with a decline of 1.2% in the second quarter and an increase of 10.1% in the first quarter.

Software revenues will be volatile between quarters dependent on when license sales occur. The annual software maintenance renewal portion of Trillium revenues are very stable with high renewal rates and predictable revenue streams.

Operating income for the quarter was $11 million compared to $12.4 million for the same quarter last year. Excluding $1.8 million of initiatives comprised of strategic investment and cost elimination efforts leading to, for example, severance and lease surrender costs, the underlying operating income improved $0.4 million for the quarter.

Operating income for customer interaction was $9.2 million, a decline of $0.9 million. Excluding the previously mentioned $1.8 million of charges, customer interaction operating income improved 8.5%, or $0.9 million for the quarter.

Trillium Software operating income was $2.7 million, a decline of $700,000. This was due primarily to the timing of software (technical difficulty) license revenues as the cost basis in the software business is primarily fixed.

Moving down the income statement, our second-quarter effective tax rate was 39.3%, which is lower than our 40.1% in the second quarter of 2013. The decrease in effective tax rate is primarily due to a slight decrease in the state income tax component of our tax expense. We still expect that for 2014 our overall effective tax rate will be in the 38% to 40% range.

Second-quarter diluted earnings per share to continuing operations were $0.12 compared to $0.13 in 2013. Excluding for 2014 the investments previously mentioned and foreign currency translation charges and for 2013 adjusted for charges related to our CEO's retirement.

Moving to the balance sheet, our net debt balance is $14.9 million versus $10.4 million at the end of the first quarter, an increase of $4.5 million. We currently have $80 million available under our revolver excluding outstanding letters of credit in addition to a cash balance of approximately $77 million at the end of the quarter.

We continue to have a strong balance sheet with leverage and plenty of liquidity. During the quarter we repurchased approximately 273,000 of our shares for about $2 million under our stock repurchase plan. For the quarter we spent $2.2 million on capital expenditures compared to $4.5 million in the second quarter of 2013.

At the start of the year we stated one of our 2014 goals was to return the Company back to sustainable, consistent, long-term revenue growth. Our revenue performance in the first half gives us the confidence we can deliver against that commitment.

We are headed in the right direction and there will always be revenue volatility between quarters. We have a healthy pipeline of sales activity in our business and we have not experienced any major client losses for the first six months of the year. We expect our revenue for the remaining six months of 2014 to be consistent with the first-half results resulting in modest growth for the full year.

We will continue to manage our ongoing expense base while investing in the execution of our strategy. With that I will turn the call back to Robert.

Okay, thank you for that, Doug. Now let me try to add some color to my earlier comments and to the analysis that Doug has just shared with you.

First I want to again highlight the excellent contribution from our contact center services within our customer interaction division. Over the last 12 months or so I have often heard challenges that the contact center industry is a commoditized space and indeed there is some truth behind that. However, we've found a niche in the industry where we can offer call center services to clients who place a premium on their brand experience for their customers rather than just focusing on transactional execution.

And the more progressive of our clients are also using customer support programs in our contact centers to discern more user-type information about their customers. This information can then be used as additional input for their customer market databases. Meaning that subsequent marketing campaigns then benefit from being able to draw on this customer experience information.

As Doug mentioned earlier, we had no major client defection in the first half of the year. Indeed the second quarter is perhaps most notable for the high rate of client renewals in the business.

These projects rarely make the same headlines of course as new logo wins. But as an example of what we have been able to achieve, I can point to one of our larger retail clients, Lord & Taylor, who have just extended their database contract with us not for the original 6-month period but for 15 months.

One of our core action points in the development of our plan to drive revenue growth is to ensure that we reduce or eliminate client loss. And our sales force has been particularly successful on this front during the quarter.

With several major marketing seasons coming up, particularly back to school during August, we are seeing no signs of clients pulling back from their marketing plans at this stage. However, it remains to be seen how the volume of work from these clients will develop over the remainder of the year.

In retail there was a somewhat sluggish start to 2014. And we expect a degree of catch-up in activity in the second half of the year.

But I don't want to leave you with the impression that we have had no new business success in the quarter. Indeed, I have been impressed with the way our people are effectively combining their talents to offer a broader customer engagement solution to our clients. And that's exactly in line with our strategy.

During the quarter we saw new business wins for the global hygiene company, SCA, where we combined agency and database offerings, and for Hyundai, where we combined the agency with our contact center. Earlier in the call I mentioned investments in new senior talent. We plan further action to strengthen the leadership team at Harte-Hanks and we are now in the final stages of appointments for two key roles -- Head of Sales, a position that is critical to the continuation of our drive for revenue growth, and Head of Corporate Development, a role much needed to support our strategic ambitions especially in the area of acquisitions.

That's a good segue for me to give you an update on the progress on strategy. Many of you attended our Investor Briefing in New York in late May when we unveiled our plans for the transition of Harte-Hanks into a dominant force in customer interaction.

We are now actively involved in the rollout of the strategy across our business. This is being led be a specific project management office headed up by one of our senior executives, Kyle Kennedy.

We currently have initiative teams looking at everything from our revised organizational structure to a review of our product portfolio. We expect to begin implementing these recommendations from these teams as early as September. We are of course taking care to phase these changes into the business in a way that does not jeopardize the delivery of our 2014 plan.

But nor can we delay the need for change in the business. It's a balancing act, I know, but we are totally committed to our strategic vision and we've made a great start to the change process.

In Trillium Software, I'm now working closely with Phil Galati to map out a strategic plan for this business. Obviously we have a very strong positioning in the enterprise data quality market but there are evolving opportunities in the wider field of data governance too.

And in the latest Forrester Wave report on this sector, we are identified as a key player in this space. But we have the potential to build an even stronger position as data governance 2.0. And you know I have barred that jargon from Forrester to describe the next generation of data governance opportunities, as 2.0 becomes a reality.

Looking ahead to the remainder of 2014, Doug has already indicated that we are on track against our 2014 plan. Our focus will continue to be on revenue growth combined with direct actions on our cost base where we feel that these are out of line with top-line performance.

On our last call I commented that quarter 2 would show a truer picture of our performance than quarter 1. That is the case, and I am confident in saying that I expect quarter 3 to show still further progress.

I reiterate our view that we expect to meet our full-year goals of modest sustainable growth whilst balancing investment to support this growth and in eliminating costs. And with that I want to thank everyone for joining today's call, for your continued interest in our business and for your ongoing support to our ambitions at Harte-Hanks.

And with that I will hand you back to our operator who would now give you details of how you can participate in the Q&A session with Doug and myself. Jimmy?

(Operator Instructions). Michael Kupinski, Noble Financial.

Good morning, this is actually Juan Bejarano in for Michael Kupinski and thank you for taking my questions.

Just as far as acquisitions, do you have anything on the pipeline there? If not can you speak on the timing? Can we expect something by the end of this year?

Sure. Let me comment on where we are on our progress on acquisitions. Let me say to begin with that we would never comment prematurely on any specific acquisition that we would be in discussion with but we are in the early phases of developing our acquisition pipeline.

I have been very pleased that since we announced the strategy that we have built up our pipeline of potential acquisition targets quite significantly and that we are seeing that pipeline being filled not just as a traditionally had been from banking sources. But our own businesses are bringing opportunities to the table and in fact one or two businesses have reached out directly to us.

I expect progress to accelerate further in this area once we have our Head of Corporate Development on board. I'm very hopeful that we can get that person on to our team by end August, early September depending on competitive contracts but we are making progress there.

The pipeline is filling up. We are having discussions with companies and I am satisfied with the progress we are making.

Okay, thank you. And as far as your stock repurchase authorization, maybe how much is left of that and do you have any plans on increasing?

We have about $1.5 million left on our authorization at this point. And we have historically supported our shareholders with share repurchases and dividends.

We said during the strategic plan when we announced it in May that we believe strongly in a balanced use of capital between acquisitions, dividends and share repurchases. So we expect to continue to support our shareholders through an appropriate balanced use of capital going forward.

Thank you. Sorry if I missed this, as you look to Q3 can you maybe speak about retail and how back to school is shaping up?

It's still early. As you know, in our business the retailers make decisions actually very close to the period itself.

So what I said earlier in my comments was that we have seen nothing at this stage that indicates that the retail clients that we support are pulling back from any of their marketing efforts in this area. Now there is some -- there still remain some at the volumes but they may shift during that period.

We've seen the effect of the postal rate increase on volumes, our weights of material already earlier this year. But I'm not hearing anything that indicates that the major retail clients that we have are pulling off of their plans for back to school.

Okay, thank you. That's it for me.

(Operator Instructions). And at this time there are no further questions.

Just give it a moment, Jimmy, in case anybody is compiling two or three.

Dan Salmon, BMO Capital Markets.

Hey, guys. Good morning. I had two questions.

Robert, first thanks for breaking apart the Trillium business and giving us a little bit more visibility into it. Can you maybe tell us a little bit more about -- you have talked a little bit about the separate client basis for it sometimes with the customer interaction business, but can you give us a little background on the back office, how connected the two businesses are? Do they share resources and if they do do you see them separating apart a little bit more as part of your restructuring work?

And then the second question was more a top-line issue and it was about you talked a little bit about at the Investor Day bringing up the amount of work where it is maybe a bit more deeper relationships, retainer-based relationships. Maybe just some high-level strategic points on how you execute that as the CEO.

Is it about keeping discipline on new business and not taking project work, is it having conversations with your current clients? I'd just like to hear a little bit more about that.

Okay, well let me take them in the order that you asked him. First of all you are right. We listen hard to people saying to us that they wanted to see the Trillium Software business split apart.

And when we did the strategic review of the business, in fact that backed up that essentially this was somewhat largely independent of the customer interaction division. So it was a relatively straightforward step then to take to begin to talk about these two divisions in separate terms and to provide separate financials.

The only real back office support or commonality between Trillium Software and customer interaction are around the sort of standard corporate support functions, things like the accounting function, taxation, legal, even down to HR. The rest of back office if you are talking about sort of their technology development and client teams and suchlike, there really is no attempt to do a single back office in those sorts of areas. These businesses operate in separate spaces.

Occasionally and increasingly it is more by coincidence than any design, they cross each other's space. And therefore we intend to allow them to have full operational independence from one another just with those corporate functions at the background.

Let me talk then a little bit about your second question, which was about building the depth of the relationship with key clients and going just beyond being seen as executors of specific projects or having clients pick point solutions from us. Some of the way in which we are doing that is by getting our teams much more connected. And as I mentioned in my commentary a little earlier, we are seeing some good progress on the way in which our agency team's working with the database group, the contact center's working with the agency team, there are lots of examples of us now trying to think of a solution for the clients, or being a solutions partner for the client's marketing activity rather than just going in to respond to an RFQ for a particular package.

It means when we go in front of our clients we need to be joined up, we need to be familiar with each other's services within the businesses and connect those into something that is more programmatic rather than a specific solution. And we are also increasing the expertise that we have around particularly industry segments so that we go in with knowledge of the techniques that we have, an understanding of the industry that these clients work in and then the thing that we are famous for, which is our absolute ability to execute flawlessly. And it's combining those and being seen as a joined up organization rather than one which has separation as its theme which is allowing us to win the extended relationship contracts.

That's great. Thank you.

Adam Peck, Heartland Funds.

Hey, guys. Thanks for taking the question.

And I will echo my thanks for breaking out Trillium as well. So two quarters of consecutive revenue growth but this is really the first quarter of growth for customer interaction in a while, correct?

Yes, that's right. This is the first real quarter of growth for them for quite some period of time, actually.

And so you really attribute most of that growth to the client renewal rate?

I think that has helped. We've had new business wins as well. And as Doug had highlighted, it is the growth comes in certain sectors.

There isn't an absolute consistency across all of the verticals that we talk about at this stage. And that's why we don't think that -- we think that we are some way down the path but we know there is still much more work to do until we can claim to have really gotten ourselves into a position of -- a strong trend of growth. We've got good progress but we have lots of work still to do.

What do you think is driving the change in the renewal rate?

I think first of all it's getting focused on the fact that we want revenue growth, that we are proactive about renewing contracts. I think we're going in now to tell a story that is much more connected about the way in which we run and think about our business.

We are being seen as partners as opposed to point solutions. And I think that's exactly why somebody was prepared to commit to us for 15 months and not 6 months.

So I just think that there is a different perception about what Harte-Hanks represents now and the role that we play. We don't fix single problems, we are a business partner offering sustained solutions across a host of issues for our clients.

And as far as the second-half guidance with upward bias for revenues, if you can continue to chip away on the cost side is it fair to say that operating margins should see a little bit of an uptick?

I think it's fair to say that there may be some cost associated with some of the corrective action that we are taking. But if you go to the underlying performance in the business, if you look at the core of that business I believe that you will see an improving picture.

Okay. And now that we have the Trillium numbers broken out, it looks like you guys have consistently been in the mid to high 20% operating margin area but this quarter you did see a bit of a drop down. Is that just a temporary blip there?

Yes. I wouldn't read anything into just this quarter itself.

I think we've tried to highlight that our view is that that's primarily timing. And there's nothing that we are seeing in that business at the moment that makes us think, or would give rise to us to issue caution about the performance of Trillium Software.

All right. Great. Thank you very much.

(Operator Instructions). It appears there are no further questions.

Okay, Jimmy. Well, thank you for your help with that. Thank you to everybody for joining the call this morning.

As usual I'm sure you all have Doug and my contact details. Feel free to reach out to us. We will continue with our program of communicating with our investor base particularly as we get the strategy work -- as we get deeper into that strategy work.

And of course we will see you all back in the same place for our earnings -- third-quarter earnings call, which I think from memory is right at the end of October. Thank you again. Have a great morning.

Thank you for your participation. This does conclude today's call.