Harte Hanks Inc (HHS) 2014 Q3 法說會逐字稿

Good day, and welcome to the Harte Hanks Third Quarter Earnings Conference. Today's event is being recorded. I will turn the event over to Mr. Robert Munden, General Counsel for Harte Hanks.

Thank you, operator. Our call will 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 Investors tab of our website at hartehanks.com.

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

Thank you. I will turn the conference over to Mr. Robert Philpott, Chief Executive Officer.

Thank you, Felissa. Good morning everyone, and welcome to Harte Hanks third quarter earnings call, coming to you today from our offices in London. As usual, Doug Shepard, our CFO joins me on today's call. And in a few minutes, he will take you through the details of our earnings release.

And as now become customary, I'll present some opening comments, followed by Doug with the detailed financial update and then I'll give you some further insight to our business operations. And then at that point, it will be your opportunity to ask questions. Our performance update today is a story of positive momentum on both the top and bottom lines. And this is incredibly heartening for everyone involved with our Company, because we are now seeing the reward for the tremendous changes that we're implementing across the business.

On previous calls, I've talked extensively about the adoption of our new strategy, particularly as that relates to driving the top lines or sales. And I've spoken at length too about our plans to get to grips with aligning our cost base with our revenues. But today I'm able to focus my attention on telling you about the impact of these changes, because we've now moved well beyond design and implementation to the execution stage.

We're already beginning to function on a daily basis as the new Harte Hanks and we've begun to see the benefits of that. Our leadership is [in part] and they're making tough decisions to drive performance into their business operations. Our teams are systematically breaking down barriers that prevented us working across our business, something that clients already tell us will be a key differentiator in the market. And whilst I won't claim at this stage that our transition is complete, we are now well down the road to our goal of leadership in Customer Interaction. And I'll comment on the strategy progress in more detail later on today's call.

But let me continue today by focusing on the signs that performance of improvements are happening in Harte Hanks. For those of you on the call who have become familiar with my style of leadership, you will know the huge importance that I attach to the sales performance. Convincing our clients to [invest] their work to a Harte Hanks team, especially when there are alternatives in the market, is the purest form of competitive benchmark. And in the past 30 days or so, two new clients, in particular, have placed their faith on Harte Hanks as their customer interactions partner.

In the US, a combined effort from our agency, database and customer delivery deems one subject as usual to the paperwork being completed, the single largest new piece of business that we've seen in the last five years. By working with the single Harte Hanks team emphasizing our integrated thinking across all our areas of expertise, we were able to show this financial services client the value that we'll bring to their business. And in return, our client has awarded us with a multi-year contract with a value proposed at more than $20 million with the potential to grow that relationship even further.

And in the UK, where, as I mentioned already, Doug and I are today, we've had further great news. In this case, our agency team in Bristol was appointed as agency of record to a division of one of the largest telecom groups in Europe. And although the specifics of this project are still being developed with the client, we already know that the first year's revenues alone will likely exceed $2 million. Again, there's lots of scope for expanding that relationship with the client. Expect to see the impact of these wins on our revenue lines in 2015 primarily, although there will be some small revenue impact, positive impact in the fourth quarter. Both of these huge new business wins are examples of our strategy and action.

Turning now to the bottom line, to operating income, you'll hear shortly from Doug about the growth we've seen there during the past three months. And important as these absolute numbers are, the most pleasing aspect of the result is how we've achieved that. Once all the non-recurrent charges are removed and you look purely at the underlying performance comparisons, including looking back at prior quarters, it's clear that our effort to drive out costs in the business are having the desired effect.

The cost base in our business has declined by 4.5% in the past three months alone. Most of this reduction has occurred because we're now monitoring closely our staff efficiency ratio, that's a measure of our headcount required to support forecasted revenue. And each part of our business has been set clear targets for this critical performance measure. The challenge to achieve these targets is continuing and some of you may be aware that we've announced further reductions in our workforce this week. We're examining staff efficiency across the entire organization. And this most recent action is targeting efficiency gains in corporate functions, as well as in the business units themselves.

We've made solid progress in addressing a large fixed cost line item too, that's real estate. In the past few months, we closed one facility and are combining offices or production facilities in four or five further locations. And please bear in mind that this has been achieved, whilst our revenues have remained at or above 2013 levels. So it's a clear underlying real estate efficiency game.

Furthermore, we've been able to address a cost item, which is usually considered a fixed cost with long-term and escalating commitments in our business model. You'll appreciate that the impact of these changes will take a little longer to become evident in our financial results, especially as we absorb moving our exit costs upfront. But there's already some impact in the quarter three results and this will only increase in subsequent quarters. And I'll talk more about the specifics of these moves later this morning.

At this point, let me ask Doug to walk you through the detailed financial results. And then I'll rejoin the discussion a little later to give further color on our quarter three performance.

Thank you, Robert. Good morning. In the earnings release and in Robert's comments, we have discussed the actions that we have and will be taking to realign our cost base to both our revenues and our strategy announced this May. During the third quarter, we announced the consolidation of four facilities and the closure of a fifth. There are expenses associated with the closure of those facilities, such as lease, exit cost and severance. Because of these actions span the quarter end, our third quarter results reflect several hundred thousand dollars of expense related to those decisions and we will incur more expense in the fourth quarter for these actions. These actions will result in $7 million to $10 million of labor and real estate realized savings in 2015.

Turning to our third quarter results, our consolidated revenues of $134.1 million were relatively consistent with the $135 million of revenues in the same quarter last year. Let me walk you through the results from Customer Interaction by industry vertical. Overall, Customer Interaction revenue was essentially flat with the third quarter of last year. We saw strength in several verticals, including financial services markets, which increased $1.8 million. Growth was generated from increased credit card mailing solicitation and home equity line of credit loan generation mailing activity from regional and national banks. These were offset by a 2013 client loss.

Our technology vertical increased $1.7 million from a new client for cell phone support. In addition, an existing client grew from increased digital agency services and expansion of contact center services. Automotive and consumer brands increased $1.1 million, primarily from the increased contact center services and headcounts from a worldwide transportation and business services company.

Select markets increased $0.5 million. Growth in this vertical, consistent with prior quarters, is primarily due to a sizable new client win related to support for online streaming services and expansion of mail relationships with existing clients. Offsetting this growth was retail, which declined 17% during the quarter. The decline was primarily driven by clients continuing to change to wider and less expensive print formats in response to the Postal Service rate increase in January and reduced contact center support services for an online retailer.

Operating income for the quarter was $10.6 million compared to $8.4 million for the same quarter last year. Third quarter 2013 results included a $2.8 million impairment charge related to the Aberdeen trade name. Operating income for Customer Interaction was $7.6 million compared to $5.6 million or $8.3 million after adjusting for the previously mentioned 2013 impairment charge.

Trillium Software operating income was $3.3 million compared to $3.9 million in the same period last year. This decrease was due primarily to the timing in software license revenues, as most of our costs in this business are fixed. Severance charges increased $2 million over the same quarter last year as management aligned expenses with revenues through headcount reductions.

Moving down the income statement. Our third quarter effective tax rate was 38.3%, which is lower than our 39.3% in the third quarter of 2013. The decrease in the effective tax rate is primarily due to a slight decrease in the state income tax component of our tax expense. We still expect that our 2014 overall effective tax rate will be in the 38% to 40% range.

Third quarter diluted earnings per share from continuing operations were $0.10 compared to $0.07 in 2013. Third quarter 2013 diluted earnings per share from continuing operations included a $0.03 per share charge related to the Aberdeen trade name.

Moving to the balance sheet, our net debt balance is $20 million versus $9.3 million at the end of 2013. 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. During the quarter, we repurchased 479,000 of our shares for about $3.3 million under our stock repurchase plan. For the quarter, we spent $2.2 million (sic - see press release, "$2.3 million") of capital expenditures, compared to $3.6 million in the second (sic - see press release, "third") quarter of 2013.

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

Okay. Thanks, Doug. Now just quickly looking at our revenue trend, it would have been nice to talk about a third consecutive quarter of growth and we fell just short of that target. However, it is still clear from our performance that we have eliminated the persistent and significant revenue declines of the past few years and that we are continuing to make progress in delivering against our clearly stated goal of achieving consistent, sustainable growth in the business. The markets in which we operate are still growing and we're determined to seize our share of this opportunity.

I spoke earlier about our property portfolio, so now let me expand a little on those actions. First, we've announced the closure of offices in Cincinnati and in Sydney, Australia. Second, we consolidated or are in the process of consolidating sites in Texas, Maryland, California and Pennsylvania. On an annualized basis, this will result in property savings of approximately $2 million. Although some of these actions are driven by short-term performance challenges, it's part of a much wider [cast] of relocating our business to sites appropriate for the types of service we perform and which allow us to be in close proximity to clients and talents. We're taking the opportunity too to ensure that space is appropriate for our forecasted business performance and that we build a much higher degree of flexibility into the longer-term fixed commitments usually associated with property.

Now for an update on our progress in staffing to support the strategy. We've made two further significant appointments to our senior leadership team. In mid-September, Keith Metzger joined Harte Hanks as our Head of Global Corporate Development. And Keith is leading our acquisition activity based on the strategic priorities for both Trillium Software and for the Customer Interaction division. Working closely with Doug Shepard and me, he'll evaluate potential areas for acquisition or investment.

Keith comes to Harte Hanks with more than 12 years of experience, most recently as a Mergers & Acquisition Advisor, serving clients such as Acxiom, Rocket Fuel and Dentsu. As the former Global Head of Corporate Development for Razorfish, Keith is intimately familiar with the digital marketing environment. Our acquisition pipeline has already been boosted significantly by the knowledge of opportunities, which Keith has brought to Harte Hanks. Rest assured that all potential business opportunities are being tested against the strategy and against our solutions portfolio requirements.

The second new appointment brings leadership to our all-important sales function. In early September, Joe Voica joined us as our Head of Sales. Joe has taken direct leadership on all sales activity within Customer Interaction. Joe brings to us over 25 years of experience in senior management and executive sales roles within various industries. Most recently, he was SVP of Global Sales at MasterCard International with global responsibility for leading sales, sales support, training, delivery, pricing and quality assurance activities to teams in the US, Canada, Brazil, UK, Dubai and even Singapore.

Joe started his career with IBM, but he's also held a number of other roles, including sales turnaround leadership for some leading venture capital firms and also the building of a new market sales team at Experian. One of Joe's main priority since joining is to finalize the structure and resourcing of a new fit-for-purpose sales organization in our Company. These two senior hires now largely complete our lineup for the leadership of the organization.

All this talk of sales allows me to transition nicely into some further insights to our recent business development activities. I've already spoken about two important strategic wins, but there's much more to our sales story than just that. Let me now take a moment or two to talk about other new business wins, some significant renewals and, as customary, in the agency world a few lost accounts. First off, a global technology services provider has awarded us a $1.5 million contract to profile their customer database. This is a broad-based sales that includes work from our contact centers, our creative teams and from folks in data analytics too.

Second, one of the world's largest computing and consulting companies has confirmed its 2015 work schedule valued at close to $20 million. This consists of database services and contact center work provided through our Manila and Romanian locations. But what's most notable about this renewal is the fact that it represents growth in the relationship of more than 10% year-over-year. And finally, a software and technology group awarded Harte Hanks an initial $1.4 million project assigned to redesign and execute a multi-channel brand awareness program associated with their digital advertising work.

On a less positive note, we lost two major projects, one in automotive and one in technology, in the quarter, both of which are with clients who have nevertheless retained us on other lines of business. In this marketing world of [account] gains and losses, our gains still easily outstrip losses in the quarter.

I'd now like to address some of the ongoing challenge in our Trillium Software division. We were disappointed to miss our revenue growth targets for the quarter, when several clients delayed their purchasing decisions for new license agreements. This was particularly the case with the Trillium business in Europe, where the major economies are experiencing renewed uncertainty about future growth prospects and where clients' decision making for major purchases is again being delayed to the last possible moment. And, of course, due to the accounting conventions in software, any delay in sales has an immediate dramatic impact on revenue and profitability.

We still expect some of these delayed purchasing decisions to take place in the fourth quarter, but I do not anticipate us making up all of the lost ground, especially if the continued uncertainty remains in the European economic region. Phil Galati, who heads up Trillium Software, has recently invested in some further new leadership talent as well to drive forward our development of alternative Trillium services, in particular, a new client-based solution and to continue to build on the progress we are making in the emerging data governance field.

Now looking ahead to the remainder of 2014, I'm confident that we will remain on track against our 2014 plan. Our focus will continue to be on the sales and revenue growth, consistent with the opportunities identified in our strategic plan. There'll also be further clear actions taken to realign costs in the fourth quarter and we expect to incur further costs associated with terminations, office closures, et cetera during the period. Our aim is to get the majority of the corrective actions completed by year-end.

Despite the slight softness in revenues in quarter three, our prediction of quarter three, which show a truer picture of our performance than either quarter one or quarter two, is still largely accurate. I'm never confident in saying that I expect our last quarter in 2014 to show still further progress. I continue to believe that we'll meet our full year goals of eliminating that persistent revenue decline that has impacted the business over the last few years. And I'm now more optimistic that costs can be brought into line faster than anticipated, which will both support our growth and deliver increased profitability.

With that, I want to thank everyone on today's call for your continued interest in the business and for your ongoing support to our ambitions. I'd now like to hand back to our operator, who will give you details of how you may participate in a Q&A session with Doug and myself.

Thank you. (Operator Instructions) Dan Salmon, BMO Capital Markets.

Very good morning, guys. Robert, maybe, could you just expand a little bit on what you finished up with there about, cost savings coming online a little bit faster than expected, it sounded you gave a great amount of detail on particular some of the real estate issues. Is that what it largely is that you've managed to address something as you noted that usually is a little bit stickier and a little bit more difficult to address or are there other areas that you point to, in particular? And then just the second one for Doug, is there any additional commentary or color you can give us around the charge that we should expect in the fourth quarter?

Morning, Dan. Thanks for joining our call today. I think the increased optimism, if you like, or why I think that our cost savings are coming through faster than I might originally have anticipated is a combination of the fact that we've been able to find some good solutions in reducing property costs, things that I would have believed initially were more difficult to achieve. So, for example, the consolidation of some of the sites, we've just been far more aggressive on that. And, in fact, some of our clients have helped us and given permission to move work from one location to another even more readily than we might initially have thought.

There's always a bit of trepidation around closing or consolidation of locations, but our teams have gotten to it, we've come up with creative solutions and it's happening faster than you might have expected with a long-term traditionally fixed cost. But we're also becoming more aggressive on our people costs too, the introduction of efficiency ratios and targets set for the business. That was a big step forward for us to get to grips with that and when we do our business reviews on a month-by-month basis, that's one of the first line items that we go to. So I think our team leadership is becoming more accustomed now to making sure that we consistently and effectively challenge the cost base, whether it's people or property. I hope that had answered the first part. I'll pass across to Doug to answer the second part of your question, Dan.

On the second part of your question, Dan, and to elaborate a little bit on your first part in Robert's response. In my comments, when I say that we're -- these actions are going to give us realized savings in 2015 of $7 million to $10 million, the bigger piece of that is related to headcount and labor management, a couple of million of that is related to the real estate piece, which, as you noted, is the fixed piece and my target piece to deal with and manage through. As far as the fourth quarter charge amount in the range, obviously, we're evaluating things and working through that. They'll be in the range of several million dollars.

Great, thanks. If I could just ask one quick follow-up on Trillium, Robert, you mentioned that you came in a little light versus plan. How should we think about the business in terms -- I think typically most people would see a business like that being a bit more consistent with revenue growth, but should we anticipate a bit more lumpiness as you begin to apply some new strategies across the business?

I think there will be lumpiness as you -- if put it there for the next couple of quarters with that business. I mean the fundamentals of the business are still really fine and we still have a fantastic installed base, the clients that we have, it's just fantastic for us. But I think there are changes taking place in that, we recognize as being just in enterprise data quality itself that that -- that the market is developing or emerging, particularly as I've mentioned in this call and the previous call around this area of data governance. And, therefore, we need to -- well, our plans -- our strategic plans are starting to take note of that. It's also the fact that the platforms that we're working on are changing, with clients now talking to us about client-based access to our capabilities and that's going to take a little time just to develop that. We have new people on board who are specifically tasked with that. But I think that there will be a degree of lumpiness over the next couple of quarters.

Okay, great. Thanks guys.

Thanks, Dan.

(Operator Instructions) Michael Kupinski, Noble Financial.

Thank you. I'm pleased that you guys actually over-delivered on my revenue estimate. On the earnings line, I assume that the $0.10 included the severance cost, is that right?

That is correct.

And so how much of the severance costs were in the quarter, given that the press release indicated that the severance cost of $2 million was an actual increase over the year-earlier period. So how much was the total severance cost in the quarter?

A little over $2 million.

So actually backing out severance cost, you probably would have beat my $0.12 EPS estimate, is that right the way it looks at?

That's correct.

Yeah. So in terms of -- regarding the upcoming quarters, it sounds like you guys are feeling like you're going to get back on track with some modest revenue improvement that you exhibited earlier in the year. I just want to clarify that and just as you look into the fourth quarter, particularly.

Yes, I think we describe our expectations, on the top line still is fairly modest for the last quarter. The important thing is not to slip back into significant decline. I'm delighted that we're still beating your expectations on that and I hope to do that again for the fourth quarter. We're probably a little more bullish on the way in which we tackle the costs, now that what we've seen, particularly over the last 30 or 45 days that we're -- yes, we're modest on our expectation on the revenue side of things and we'll continue to push very hard to deliver results in the fourth quarter.

Historically, when you are paying new clients -- and congratulations on those major wins. I think that's very significant. But historically, when you are paying new clients, there usually are some costs associated with that initially, will margins be impacted in the fourth quarter or in the very near term related to that?

Mike, it depends, it's very dependent on the nature of the services that you sell to the clients. So I believe what you're remembering and referring to are some wins that we had a couple of years ago that required a lot of employee training and on-boarding before we can deliver the services to those clients. The nature of this sale does not appear to be -- have that type of activity associated with it. The major difference though is, because this is a different type of service, more customer engagements type activities and involve some technology of the commitment, contract, everything are signed and upfront, but the way the accounting works when you deliver a database and some of that information, some of that revenue may not show up immediately.

What is the current headcount versus last year?

And I'm only hesitating because it's a kind of a tough question to answer, we obviously have the numbers in that. A large part of our organization is mail plan and contact center employees, so that's a lot of variable labor that moves up and down with the marketing seasons, with the holiday season as opposed to the summers or early spring when you don't have as much activity going on in some of those areas. And others have more of a professional base, such as the agencies and the database and the Trillium type stuff.

So when you take out, what I'm going to call, the bigger variable, which is really the contact center, we're down several hundred employees over this time last year, really in the 400,000 to 500,000 range and the total employee base is about 5,500.

Okay. And in terms of the office consolidation and staff cuts, it sounds like you said that that's kind of a farther along than you had thought. Does that change your view on possible margin compression, excluding acquisitions, in 2015?

At this point, it does not. We're still executing against our strategy. These are the type of actions that we contemplated and position us to deliver and we're starting to see some of those results in the sales commitments that we're getting out of customers. So I think in our view right now, we are where we want to be on delivering our strategy and executing those strategy commitments.

Interesting that you have already begun conversations with folks regarding your acquisition plans. Can you talk a little bit about the progress that you're making on that front and how far along are you on maybe making an acquisition?

Well, obviously, Mike, you'll understand that we can't go into some of the specifics on this, but let me just talk around the subject a little to say that [exactly] since Keith has come on board, first of all, the quality of our pipeline has picked up significantly. We've gone very much from a situation where we would be contacted with businesses that have put themselves on the block, we're now more likely to be talking to companies where we are approaching them and suggesting that there might be opportunity for us to acquire them or for them to link to us in some way. So the nature of the initial contact has changed.

Second of all, the quality of the companies, I've probably spent in the last month something close to week-and-a-half of various other road shows with companies, particularly in the digital agency space and in analytics. And the quality of those companies is high. They're generally relatively young management teams that are aggressive, they've got good growth in those businesses, and I've been very impressed with the opportunity that exists there.

I'm encouraged too by the fact that those companies have expressed such a desire to be part of the story that we have at Harte Hanks. We spent a long time initially talking about what the strategy is at Harte Hanks and these are the organizations, which have now indicated a willingness to get on board with us. They see the opportunity. We're further along with some than we are with others. I believe our ambitions are still to deliver against the acquisition time scales that we'd indicated during the strategy presentation at the Investor Day. And I think it's something that is reasonably imminent. We've indicated that growth, for example, in 2015 during our Investor Day, we indicated that that was going to come largely from acquisitions. So we want to get some of these deals done. And I just -- I didn't make sure that we clarified too that acquisitions are not just on the Customer Interactions division, but there is acquisition activity for Trillium as well. So hopefully that gives you a little bit more flavor.

Perfect. And just one follow-up question on Trillium. The $2 million contract win, was that related to Trillium or was that outside of the Trillium business?

That was outside of the Trillium business, yes.

Okay.

Yes, the agency business in the UK that won that project is really the creative digital agency, that's our team this time in Bristol and led by Susie McFarland.

Okay, perfect. Thanks for taking the questions.

That will help. Thank you.

Gentlemen, currently there are no further questions in the queue. I'll turn the conference back to management for any additional remarks.

Okay. Well, again, just a final thank you from me to everybody who joined the call and we look forward to talking with you with our year-end summary early in the new year. Thank you, and good morning.

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