Harte Hanks Inc (HHS) 2014 Q4 法說會逐字稿

Good day, and welcome to the Harte-Hanks Fourth Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Robert Munden, General Counsel. Please go ahead.

Thank you, [Glenn]. 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 acquisitions, litigation 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 Investors tab at our website at harte-hanks.com.

I'll now turn the call back over to [Glenn].

Thank you, Mr. Munden. I will now turn it over to Robert Philpott, CEO with Harte-Hanks. Please go ahead sir.

Thank you Glenn. Good afternoon everyone and welcome to Harte-Hanks's fourth quarter 2014 earnings call. 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. This call will obviously focused on our performance in the final quarter of last year. But I'll also take the opportunity to review the Harte-Hank's performance for full year 2014.

In our news release early this afternoon I described 2014 as a transitional year for the business. So let me explain what I mean by that and during the course of our call today I'll also provide more information on the latest steps and initial results of the transformative actions we've taken. This time last year I said that we were entering 2014 with the degree of optimism and I was confident that we could arrest the decline in our business.

Looking back in 2014 I believe that we were consistent in our delivery of these commitments, but we have made much more progress than anticipated in building a robust foundation to our business for 2015. First let me deal with the prior quarter performance and I'll start here with the top line. Revenues fell short of prior year levels, explains to just some degree by a shortfall in Trillium software revenue performance.

This quarter was always going to be a challenging one for Trillium because as most of you will remember, we had two very significant wins in the business right at the end of 2013 and then the early days of 2014. In addition, our international network of resellers for Trillium had a tough quarter, which is consistent with the wavering economic performance of economies in Europe and Asia. But overall, Harte-Hank's new business pipeline has strengthened during the course of the year and we can report no major client losses during quarter four.

Our goal of course was and still is revenue growth. And the periods during 2014 we achieve this, but we still need greater consistency. I'm confident that the new sales organization (inaudible) and so, we have created within Harte-Hanks led by (inaudible) for customer interaction and John Ross at Trillium Software. Both of whom joined in the second half of 2014. But they will deliver a more stable topline performance. They both quickly established a sales culture in our organization, which is something that's been missing from our business for quite some time. The big story of quarter four 2014 is however, a very significant progress we have made in completing the restructuring of our business.

So that it's appropriately organized and resourced from the level of business we generate. You remember last quarter, I mentioned that we were fully in execution mode to make the changes demanded by our strategy. And after intense efforts from senior leaders and support from everyone in the business throughout the closing months of 2014, we have now completed the vast majority of these changes. We have begun 2015 with a much leaner organization with clearly defined and distinct sales, marketing and operations functions.

We've eliminated much of the duplication of work and complexity within our business. It's important to remember too, that these are not short-term cost-cutting measures. The actions we took towards the end of last year addressed long-term costs delivering performance that with endure and creating a solid platform for future growth.

I'm delighted that our fourth quarter operating income performance provides evidence of this great progress that we've made, and I expect the benefits from some very tough decisions to continue to accrue to our business throughout 2015. Although, we achieved the changes we set out to make constant challenging all the cost line is in the business will become part of our everyday business practice.

We now have right-sized labor force with flexibility of capacity to deal with fluctuations in where clients in work volumes and we are continuing also with our plans to develop our own captive offshoring resource center to support further efficiency initiatives and to supplement ongoing product development work.

Our real estate footprint has shrunk and will shrink further and our operating systems are being streamlined around core platforms, which was already improving efficiency and will underpin the quality of delivery that our clients know us far. But, we've invested in our business too and under the call, I'll provide details of some very positive steps we've taken to keep pace with the requirements of our clients. Before that, however, let me now hand over and have Doug walk you through the detailed financial results and then I'll rejoin the discussion a little later.

Thank you, Robert and good afternoon. In our last earnings call, we discussed our plans to close consolidate six facilities along with taking actions to align our organization around our revenue base and strategy. The results in the fourth quarter show the evidence of these actions, but we had a disappointing revenue performance on the business during the quarter, expense action allowed us to improve our operating performance compared to this time last year. Both quarters in 2014 and 2013 had $2 million to $2.5 million of charges related to various actions I will explain in a minute.

Turning to our fourth quarter results, our consolidated revenues of $146.5 million were 3.7% below our $152.2 million of revenues in the same quarter last year. Let me walk you through results from customer interaction by industry vertical. Customer interaction revenues declined 2.6%. Several verticals delivered revenue growth during the quarter, led by our financial vertical, which increased 13.8% or $1.9 million primarily due to regional banks, increasing their credit card solicitation activity. Our select markets of vertical also had $1.9 million revenue increased during the quarter, were 23.1% driven by continued contact center support provided by an online streaming client one earlier in the year.

Our technology vertical increased $1.8 million or 5.7% due to cellphones support for a new client along with the expansion of contact center services for an existing client. Automotive and consumer brands declined $1.2 million or 5.3% from reductions in mail volumes and agency services provided to auto manufacturers.

Health care decreased $1.7 million or 11.1% primarily due to decreased Affordable Care Act implementation efforts compared to the fourth quarter of 2013.

Retail declined 14.8% or $6.2 million, primarily driven by clients continuing to change to wider and less expensive print formats in response to the postal service rate increase as well as client losses in our mail and database products and reduced contact center support services from an online retailer. These were offset by mail volume increases within office supply chain in the home goods retailer.

Trillium revenues declined $2.1 million, 13.1%. This was primarily from the strong prior year fourth quarter in which we sold two large software licenses for the Financial Solutions module released in the market several years ago. The renewal rate of our maintenance agreements remains strong and maintenance revenues were flat for the quarter.

Well, we had a disappointing revenue performance in the business during the quarter, expense action allow us to improve our operating income performance compared to this time last year. Operating income for the quarter was $14.7 million, an increase from $12.5 million dollars for the same quarter last year.

Fourth quarter 2014 operating income includes $2 million of charges related to facility consolidations I just mentioned and fourth quarter 2013 operating income includes approximately $2.6 million of charges related to a legal settlement and professional services fees.

Operating income for customer interaction increased to $11 million compared to $9.4 million. This operating income improvement was driven by expense management and labor and selling, general and administrative costs were reduced as the company gained efficiencies across the business.

Trillium software, operating income was $3.7 million compared to $4.4 million in the same period last year. This decrease was due primarily to the reduction in timing in software license revenues as most of our cost in this business were fixed.

Moving down the income statement. Our fourth quarter effective tax rate was 29.8%, which is lower than our 39.3% in the fourth quarter of 2013. The decrease in the effective tax rate is primarily due to non-recurring impact of the state income tax [claiming] strategy implemented during the quarter. We expect for 2015, our overall effective tax rate would be in the 37% to 39% range.

Fourth quarter 2014 diluted earnings per share from continuing operations increased to $0.16 compared to $0.11 for the same quarter in 2013. After excluding the aforementioned charges, fourth quarter 2014 diluted earnings per share from continuing operations increased to $0.18 compared to $0.14 in the 2013 fourth quarter.

Moving to the balance sheet, our net debt balance remains low at approximately $26 million. We currently have $80 million available under our revolver, excluding outstanding leverage of credit, in addition to our cash balance of approximately $57 million at the end of the year.

During the quarter, we've repurchased 388,000 of our shares for about $2.5 million under our stock repurchase plan and an average price of $6.62 per share. For the quarter, we spent $4.7 million on capital compared to 3.1 million in the fourth quarter of 2013. This increase was support the real estate consolidations to utilize an efficient space in existing facilities and system implementation.

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

Oay, thank you for that Doug. Now, early on the call I talked about investments in our business and one of the most important was the news release yesterday by Trillium software of Trillium cloud. This is a new service platform that provides our clients with the rich feature enterprise data quality solution, consumable via a managed public cloud environment. With this new cloud solution we can help our clients implement a complete data quality solution within 30 days with less of the overarching infrastructure costs and management headaches of our data quality competitors.

Trillium cloud is available globally and brings our clients offering right up to date with the needs of today's marketplace. Obviously it's too early yet to report performance, but I can tell you that initial discussions with key clients through our client user groups have been very supportive. The client also addresses a gap in our go-to-market story when attempting to secure new clients.

On the subject of Trillium software, I'm delighted that we've once again being positioned as a data quality leader by independent analyst firm, Gartner. And the Gartner Magic Quadrant for data quality tools for 2014 research by report. Since this report's inception in 2007 Trillium software has been recognized as one of the industry leaders in data quality tools. In addition, Gartner forecast this markets growth will accelerate during the next few years to almost 16% annualized by 2017, bringing the total value of the data quality sector up to about 2 billion.

This market is amongst the fastest growing in the enterprise software sector and I'm confident that the Trillium software with its unique positioning on our new solutions delivery platform will take a substantial share of this projected growth. Switching topics now we continue to invest in talent at Harte-Hanks. We needed to bring consistency and efficiency across our many locations in the US, Europe and Asia. Until recently Harte-Hanks handles its HR, benefits and talent management with numerous processes, including a legacy human resources system, spreadsheets and manual time and labour administration.

Our talent leadership team headed by Gavin Pommernelle is now implementing a solution to enhance the employee experience providing centralized best practices, enabling a range of time and cost savings and to enable the HR function to get fully involved in organizational effectiveness. This in turn drives performance and is developing an outcome based culture in our Company. It's an excellent case study of how we've significantly upgraded our business stead focused on the importance of talent and eliminated waste.

On the same thing, we've now implemented a Company-wide collaboration system connecting our 5,000 plus employees on a single knowledge sharing social networking platform. Enhanced employee engagement is where the real story lines here. For example the user participation has exploded from 639 instances of collaboration at launch in November 2014 to more than 12,000 collaboration initiatives by the year end.

This shows that employees across Harte-Hanks are using our connection system to proactively share and consume knowledge laying the seeds for much more efficient team across the enterprise. Moving on, I want to provide an update on our corporate development activities. Keith Metzger (inaudible) activity has been hard at work building our pipeline of acquisition targets. This is now in a healthy state and we will continue to search for appropriate additional acquisition targets.

Our focus remains on digital agencies and analytics companies, who can support our strategy of leadership in customer interaction. Harte-Hanks currently captures a relatively small proportion of digital marketing budgets primarily on email. Our acquisitions will quickly allowed us to build revenue from digital related customer engagement. When these acquisitions will fill capability gaps in the Harte-Hanks' digital agency competency and in combination with Harte-Hanks existing agency capabilities around traditional customer engagement will help to round out a more complete agency offering.

In recent month, spend time with the number of really exciting businesses that had the pleasure of meeting ambitious and engaging management teams. They are equally enthusiastic about the opportunity to contribute to the redefinition of Harte-Hanks. We will make acquisitions in 2015 always consistent with our strategic plan. You may also have noticed that we've added a new face, Sarah Fay to Harte-Hanks leadership team. Sarah contributes on the part-time basis. She will provide industry expertise on the Harte-Hanks digital strategy. In addition to our role in support of the leadership team, she will also work extensively with Keith on the corporate development team on the identification and integration of acquisitions and partnerships and digital marketing.

Over the course of her career, Sarah has become a well-known voice in the marketing industry on the topic of digital marketing and media integration. She opt to build one of the most recognized digital companies in the world, Isobar, through a combination of acquisitions, new business wins organic growth. I worked with Sarah before and I know that she will be a major asset for the Harte-Hanks business.

Now there are some parts of the business that I again want to single (inaudible) for specific mention. Our customer experience support business, which operates our contact centers has had a standard here and delivered impressive topline growth. This was a mix of additional volume commitments from key clients such as Samsung and FedEx plus new business wins for example from (inaudible). This business continues to demonstrate that we signed a unique positioning in contact centers, which takes us away from the high-volume low-cost commoditized core of that industry. Our clients are recognized that we have a distinctive high contact and high quality solution which is entirely consistent with the goal of providing end-to-end customer interaction.

Our financial services team made a breakthrough with one of our largest clients (inaudible) in 2014. For many years, we've been a partner to that client and supplying direct mail solutions, but we've now secured their customer email marketing program with an excess of $3 million annually. But apart from the new revenue stream that this produces, its confirmation from the client side that our goal of providing expertise and capabilities across all direct channels is bearing fruit.

Well, I'm on the subject of client success, it's sometimes too easy to forget the value of the retention of client and renewals rarely get the same headlines as new logo wins. As we transition this business in quarter 4, it was vital that we secured existing contracts. And our teams have done an excellent job in this area. Towards the end of 2014, we were able to get fair commitments from multi-million dollar contracts from a range of clients such as HP, (inaudible) Blue Cross and Blue Shield looking ahead to 2015, the goal of Harte Hanks' leadership teams remains consistent revenue growth, and that's our fully growth. We've made progress in 2014, but not consistently. Our markets continue to offer opportunities, especially in the US. And while we director our attention to our sales effort, our 2015 operating income will enjoy the full year benefit of the tough decisions we took in 2014.

So in summary, our report card for 2014 would indicate steady progress in delivering a major transformation of the business. I'm pleased with where we are right now. But it'd also reference the potential to deliver more and I accept that challenge. We have the platform now to build from and we have a team that is committed to deliver. Our (inaudible) is in excellent shape with still some further potential to deliver increased efficiency.

Our sales pipeline is developing and this will be enhanced further by the product development of Trillium Software and the broadening of our capabilities in customer interaction via our acquisitions. At start of the call today talking about confidence and optimism. And for 2015 we have reason to be both optimistic and confident again based on the results of our efforts in 2014.

With that, I'll hand now hand you back to our operator, Glenn, who will give you details of how you can now participate in a question-and-answer session with Doug and myself.

(Operator Instructions) At this time, we'll go to Michael Kupinski with Noble Financial.

Thank you for taking the questions. I was wondering if you guys can just give us a little bit more of color on the acquisition prospects. I know that you are hopeful to have a couple of them announced by the end of last year and it was just wondering how the pipeline is looking may be if -- maybe are you kind of re-setting the timetable in terms of acquisitions? And I'm sorry if you addressed this question before, I joined the call little bit late, so sorry about that. This is Rober Mike. Thank you for the question today. Obviously, we can't comment on the specifics of any particular acquisition that we are discussing. But the overall question of like where we would set timelines for that, we had hoped to complete an acquisition before the end of 2014. That didn't happen although that was not for a lack of effort in the closing stages of 2014. We're confident that in 2015 we can keep pace with the acquisition targets that we've defined in our strategy and all I can say is watch this space.

In terms of the prospect of repositioning your existing portfolio, can you talk a little bit about the prospect of asset sales maybe, you know are there things that you may want to get out of and maybe help pay for some of the acquisitions, any thoughts on that?

You know, at this point Mike there is nothing to comment on. We talk about this when we put our strategy out. Everything is always constantly under review, consider things of that nature. Obviously the final answer is what out clients buying, what's in demand in the marketplace. Of our product lines, we have some that are in very high growth markets. We have others that are in lower growth markets, but everything is in a growing sector within the marketing and advertising area.

But as you know from Harte-Hank's history there are always, we have built this Company through acquisitions and evolving and has become a 90-year old Company. In addition that involves making changes over time. So there will be changes as we move forward.

And I noticed that obviously with the new Trillium cloud-based software that you're implementing them, you made some investments in Trillium. In terms of the R&D budget, what does it look like in terms of spending more capital on Trillium versus some of your other initiatives that you might have?

It's relatively consistent with what we've done in prior years. Overall, the total Harte-Hank's capital expectation is in the 15 million range for Harte-Hanks. Trillium has the same share of that that they've had in the past, but I will say that as Robert commented on a little bit that there is, under this management team a very defined product portfolio roadmap that's out there that they're executing against as evidenced by our cloud announcement yesterday and so there is some functionality development and things of that nature to keep the product as one of a top-rated products the Gardner has done for eight straight year in a row and that doesn't mean that you invest back in the product and keep it up to date, so that it stays with that top ranking.

If I could circle back real quick on the acquisitions, what was the, what was the hold up in terms of making acquisitions. Was it more of a price situation or was it just the valuation. If you can just give me some thoughts on what has been the hang-up or the biggest obstacle that you guys have had in completing the, in completing your planned acquisitions?

You know, somebody wants to describe this whole idea of making acquisitions as not the similar trying to get married. It's very difficult to set yourself a timeline and be accurate even to within the one or two months on it. Nothing typically if that would have caused us to rethink. What we're doing in acquisitions? I think it's just a case that it takes time to sit down with management teams to look at opportunities to make sure that both sides are fully committed to what's going on.

But in some cases some of the deals are high competitive and we've got to run against our process, timeline that's driven by investment bankers. So you should read nothing into the fact that we are a couple of months behind where we would have liked to been at this stage, other than that's, that's the way things happen with acquisitions.

Has anything that you guys have looked at that have been sold that you can comment on to kind of give us a flavor of some of the things that maybe you have kind of looked at (inaudible) that you would have liked to have had?

Yes, I don't want to comment on any other deals that are out there other than to say, we used some of those just to make sure that we're understanding things like valuation levels that are in the market right now. It gives us a sense of the sorts of commitments that are being made in some cases by competitors. So we used it for a little bit of intelligence, but it's not determining what we are going to do. We are really defined from our strategy in the types of businesses and the sort of services that we want to have to build out our portfolio.

Okay, that's all I have. Thank you.

Okay, thanks for the questions.

(Operator Instructions) (Operator Instructions) And with no other questions. I'd like to turn the conference back over to Robert for any closing remarks.

Okay. Well, thank you everybody. Thank everyone for joining today's call. Thanks also for your continued interest in the business and for your ongoing support for our shared ambitions, look forward to seeing many of you again during the course of this year when Doug and I will again be on the road with our investor road show. Talk to you again soon. Thank you.

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