Harte Hanks Inc (HHS) 2015 Q2 法說會逐字稿

Good morning, my name is Anastasia and I will be your conference operator today. At this time, I would like to welcome everyone to the Harte Hanks Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Robert Munden, General Counsel, you may begin your conference.

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 acquisitions, 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 Web site at hartehanks.com. I'll now turn the call back over to the operator.

Thank you. I will now turn the call over to Doug Shepard, CEO of Harte-Hanks. Please go ahead.

Thank you Robert, and good morning everyone. Thank you for joining us for our earnings conference call. By now you've had a chance to review our second quarter results and the full earnings release we issued earlier today. Before I get into the results, I'd like to take a moment to discuss the leadership change we announced earlier this month and elaborate on our strategy and game plan going forward. I'll then walk through the second quarter in more detail and we'll discuss our expectations for the remainder of the year. I'll end by opening the call up for questions.

As you know on July 9, we announced that Robert Philpott left the company as President and CEO. We are very appreciative of Robert's efforts in the strategic direction , he helped to define and implement. Little over one year ago, we outlined our plan to be a leader in providing smarter customer interactions. Robert let us do that process in the management team and our Board of Directors continue to support that long-term vision. The Board just formed an operating committee shared by Karen Puckett, former Chief Operating Officer of CenturyLink and a six-year member of our Board.

This operating committee is actively supporting management and me in running the business during this transition period. The Board has also formed a search committee to identify a successor CEO. We will communicate further details or updates on the search when it's time we like to do so.

We remain acutely focused on achieving our vision of returning to profitable revenue growth and becoming a leader in smarter customer interactions. Our business strategy of being a trusted business partner, delivering impactful customer interactions, differentiated through our expertise and execution remains unchanged.

We will continue to leverage our existing strengths, coupled with an acquisition strategy that will augment our capabilities to meet the needs of existing clients, as well as potential clients in our targeted market verticals. Although we've struggled to grow revenue this year, we have established a solid foundation to build upon and have the financial resources necessary to acquire talent, develop market-leading products to better connect clients with their customers and build tools to provide the world-class support our clients deserve and expect. While management and the Board believes in our strategy, transforming a company had its challenges. To tackle them head-on, we have created action plans to address four strategic priorities. Growing profitable revenue, improving customer satisfaction, achieving operational excellence and engaging employees.

Let me walk you through those steps and some of the actions that we're taking in those areas. Generating profitable revenue is our first priority. As part of our smarter customer interactions approach, we believe our customer's value proposition increases meaningfully, when they use our multi-channel solutions, enabling them to leverage cross-channel touch points. As a result, our sales approach shifted to being focused on bundle solutions, which brings with them large deal opportunities, but also a long and more complex sales cycle.

Our focus will continue to be on providing bundle solutions. However, we will also pursue individual marketing channel sales for those clients who make marketing thin decisions in that manner and with the opportunity to expand across our solution set over time. In fact, we are already seeing early indications of success here since our recent refocusing.

Turning to improving customer satisfaction, customers are our life-blood. We are committed to acting as a trusted partner in providing exemplary service. We have a long history of strong relationships with our top customers. In fact of our top 50 customers, about 35 have been with us over ten years; about 10 have been with us over five years.

As we have previously discussed, when we implemented our strategy, we split our customer interaction business into two groups, sales and operations. We needed to invest in our sales and marketing efforts and wanted to further streamline our operational efficiencies. However, there were some short-term disruption around customer touch points and levels of service. We're assuring those up in increasing our focus on client services.

Turning to our third priority, we understand the need for operational excellence. Our ability to deliver high quality products on time is very important to our clients. This is one of the cornerstones of what we do and why we have many long-term relationships with our customers. It is impaired as we focus on growing profitable revenues and improving our customer satisfaction that we continue to provide the same high quality product our customers have come to rely on us for.

Finally, we are taking steps around employee engagement. We are implementing more regular employee meetings and management communications to keep employees involved and motivated into increasing exchange of ideas throughout the organization. Our employees possess many talents and bring our clients a wealth of knowledge and experience across the industries we serve. We have exceptionally smart, creative, and thoughtful employees who have a lot to offer the company. We want to make sure we are supporting a culture of innovation. Having engaged, motivated, and excited employees leads the innovation and greater customer service as a building block for revenue growth. Those are the four key areas we'll be focusing on as we continue to execute on our strategy. And we believe the plans we have outlined will help us achieve our vision returning to profitable revenue growth, becoming a leader in smarter customer interactions and delivering value to shareholders. We will keep you updated accordingly.

Now let me talk about the second quarter. Operating revenues were $122.3 million compared to $140.3 million in the second quarter of 2015. Our revenues from 2015 wins are up over historical trends and we signed a healthy number of new logos in the first half of the year. We are seeing the benefits from the investments we made in our sales and marketing efforts. This has confirmed support for our strategy and the direction of the company. However these new logo wins were not enough to offset some losses we incurred from existing clients that have cut back their programs or did not expand their relationships with us as we anticipated.

Some of this was due to customers facing tough business environments, were cutting costs within their own organizations. This can bring both challenges and opportunities for us. However, we can't deny some of the loss has stemmed from the short-term disruption in client service that I spoke about earlier.

Again, I believe we are taking the appropriate steps to ensure we are delivering superior client service in achieving high levels of client satisfaction. But it's going to take few quarters before we start seeing the improvements. Clients continue to buying into our strategy as evidenced by new business engagements with a large network security firm to provide extensive support for its use of a marketing automation platform. These services include campaign design and architecture, campaign execution and campaign analysis. Client joins a list of firms have chosen Harte Hanks to guide them in deriving value from the investments they made in marketing, technology, relying on Harte Hanks proven shared services model for best practices in standardized deliverables and drive costs out of clients' marketing operations.

Also, we've recently won a five year renewal and expansion of our prior relationship with BlueCross, BlueShield Association, wherein we will provide a variety of marketing services in support of its annual enrollment program, as well as ongoing member communications and support. Blue Cross, Blue Shield Association is one of several Blue's organizations who have chosen Harte Hanks for a specific expertise in life sciences, healthcare practice underscoring the value of our vertical focused go-to market model.

For the second quarter, Trillium returned to revenue growth. This growth was aided by a one-time software license event and SaaS revenues. We recently renewed with a large telecommunications company for a three year SaaS agreement that allows our client to match global name and addresses in geocoding including deduplication. It's part of a large multi-partner supply chain in logistics management solution.

Also, we've recently released Trillium Software Solution Version 15.1, which included new business rules interface, expanded data quality for big data capabilities and an improved restful API architecture. Over half of Trillium's revenues are international related and during the quarter, we introduced Dave Robinson as a Managing Director of EMEA. Dave has extensive experience building and leading international sales and software organizations with prior experience at Sterling Commerce, IBM and Axway.

Another bright spot in the quarter was the success of our recent 3Q acquisition. As a reminder, 3Q offers expertise in search marketing execution, primarily in paid search but also including paid social, paid mobile and search engine optimization. We purchased this company because of their wonderful digital services and management talent. They participate in a high growth channel within marketing services, and their year-over-year growth continued during the second quarter.

We continued to identify and pursue joint selling opportunities. During the second quarter, their year-over-year revenue growth rates exceeded our expectations. We could not be more pleased with their success and conversations, their capabilities allow us to have as clients. Our acquisition of 3Q is a great example of our acquisition strategy and the growth we can attain from new capabilities in management talent.

Now let me walk you through the financials in more detail. For the second quarter, customer interaction revenues declined 14.3%. About a third of this decline is from a tough comparison to last year's contact center implementation of online streaming activities for a large entertainment client, consistent with our first quarter and the negative effects foreign currency. During the quarter, our rate of revenue decline improved each month.

Let me walk you through the results of this business segment by industry vertical. Our healthcare and financial verticals delivered revenue growth during the quarter. The Financial vertical increased from the addition of a new client using our analytics database creative services along with mail activity. We previously mentioned this large financial services customer in the third quarter conference call last year. Our healthcare vertical grew from the win of contact center pharmaceutical client, delivering support for a high-end drug. Consistent with our first quarter results, our select markets vertical declined primarily due to the contact center program I just mentioned.

This event resulted in about a quarterly customer interaction decline. Select markets would not have decreased if not for this implementation project last year. Our retail and auto consumer brand verticals declined from clients changing their mail solicitation processes and agencies, along with their data related requirements. Most of the decline in our technology verticals are related to the sale of our B2B research businesses in early April. Excluding that transaction, the technology vertical declined from the loss of outsourced agency related work.

Trillium Software revenues increased about $200,000 or 1.4% versus last year. As previously mentioned, the increase came from a one-time software license event as well as growing SaaS revenues. Trillium introduced the SaaS product earlier this year to the market and we're starting to see sales success. This increase was offset by a decline in our maintenance and professional service revenues during the quarter.

Operating income from the quarter was $8.1 million compared to $11 million for the same quarter last year. Reductions in labor, production, in selling SG&A offset the decline in revenues. Operating income for customer interaction was $5 million compared to $9.2 million in the same period last year. Reductions in severance, outsourced costs, and consulting fees were offset by an increase in sales and marketing expense related to additional sales force personnel. Trillium Software operating income was $4.6 million compared to $2.8 million in the same period last year. Operating income benefited from lower payroll costs and a decrease in severance expense.

Moving down the income statement, excluding the impact of the sale of our B2B research businesses in discrete items, for second quarter effective tax rate was 41% which is higher than our 39% in the second quarter of 2014. The increase in the adjusted effective tax rate is primarily due to the impact of the non-deductible interest associated with 3Q earn out.

Moving to the balance sheet, our net debt balance remains low at approximately $42 million. We currently have $80 million available under our revolver, excluding outstanding letters of credit in addition to a cash balance of approximately $31 million at the end of the quarter. During the quarter, we repurchased $2.4 million worth of stock on 370,000 shares and have about $13.7 million remaining under our current authorization to further repurchase stock. Looking forward, I believe we have the solid strategy in place to return to profitable revenue growth and establish ourselves as a leader in smarter customer interactions. I'm confident that we have created action plans around our four areas of focus that will be effective and will yield results. That being said, progress I believe we are currently making and will make in the second half of the year, will not be enough to offset the client reductions and spend we are experiencing.

Our re-balancing of point solutions in addition to bundled solutions is expected to help reduce the rate of revenue decline in the second half of the year. With third quarter revenue decline expected to be slightly improved over the second quarter and the fourth quarter having better revenue comparisons than the third quarter. I appreciate your continued support of Harte Hanks and returning value to shareholders remains our ultimate goal. I will now open the call for questions. Operator?

(Operator Instructions) Dan Salmon, BMO Capital Markets.

Hi, Doug. Good morning. Two questions. First, just in light of the change in leadership, should we still consider the M&A targets that were laid out at the Investor Day a little over a year ago to be intact? And then second, I just want to clarify a comment you made about client work that's a little bit more channel specific. One of the themes at that Investor Day and since then under Robert had been focusing more on growing more recurring revenue streams. I'd interpreted that more as sort of ongoing relationships and I just want to make sure I understood properly, did you suggest that, of course, I'm sure you want to continue to grow that type of business, but that you may also be open to more single-channel type of work. I don't know if project-oriented work is the right way to describe that. But I just wanted to understand that comment a little better.

Okay. I'll address your last question first and then we'll get to the M&A stuff. We are more than happy and yes we are still focused on providing solutions to our customer problems. If that is a bundled set of the channels that we provide and then we sell more customers, we're more than happy to sell and provide that to a customer along with a single or individual point solution that may solve the customers' problem. The bottom line is working with the customer, satisfying the customers need, solving whatever problem that they have. We would still prefer, we are still focused on recurring projects, those build the best relationships between us and our clients where we can provide the most value. So there is no shift or change in that direction or emphasis, it's more towards solving customers' problems, be it through either a bundled solution or a single point channel solution. And yes, we would still prefer recurring projects, recurring type of work. Those type of things again lead to a stronger relationships between us and our customers and allow us to provide more value over the long term.

On the M&A side, our strategy is still intact. We have a healthy pipeline right now of transactions and things that we're working through and working on. We as a company, as I've said, the Board and management still believes very strongly in the strategy that we laid out little over a year ago. There will always be a need for the company to continue to evolve its products to stay current in the marketplace. That's why this is a 90-year old company. Harte Hanks has gone through many transformations, it has changed over time, we will continue to change over time, we have to, to stay relevant and current for our client needs.

And on the M&A activity -- M&A, that's a part of our strategy will have to happen in order for us to satisfy our client needs and continue to transform throughout the marketplace. Now the rate and the specific numbers that we put out there in that plan, I would say the longer term vision is still very viable, hitting that short-term number that we put out there and spending a couple of $100 million in the first couple of years versus two years, we're already a year into it. It's possible, I guess, I will say we may get close, we still got another 12 months for that first acquisition spend goals that we put out there. We'll see where we end up, but the pipeline and the activity in the things that we're working on have not stopped and it's a part of continuing to evolve our services and staying relevant in the marketplace.

(Operator Instructions) Daniel Baldini, Oberon.

If I go back over the last, I don't know, nine years or so, at the beginning Mr. Hochhauser was the CEO and he retired and or announced he was going to retire and the Board got together and decided to appoint Mr. Blythe the new CEO. Now he lasted about, I don't know, a year and a half and departed abruptly. And Mr. Franklin came, stepped back in and took over for a while. And then the Board got together and appointed Mr. Philpott, and he lasted, I don't know, a year and half, two years and then disappeared quickly. So my question is, here we are and why should we believe that the Board will be any more successful identifying a capable CEO this time around than they were the last few times?

Pretty easy. I mean we have an experienced Board. We have several folks who are active CEOs, Chief Operating Officers within their organization. They understand our market and our company like any company that has gone through some transformations we've had folks with very long tenure. So, if you want to go back nine years, you can go back 15 years or so and Mr. Hochhauser may have retired but that was age-related. He served as a CEO for I believe, six or seven years, and he reached his mid-60s and he retired. Same thing with Mr. Franklin. They had a succession plan in place. They had a strategy they knew what they were doing. And then, age wise, Larry got into his late '60s, early '70s and he decided to retire. But he served I believe it was four years in his second go around as the CEO. So, like any company we've had some long tenured -- over a time period, some long tenured CEOs. We've had others with shorter tenures. And now, the Board will use its resources both internally and externally with the search committee that it has formed and we have faith that they will identify, select the right candidate. They definitely have the expertise and the resources to do that.

Okay. Well, good luck.

Thank you.

Thanks.

There are no further questions in queue at this time, I'll turn the call back over to the presenter.

All right. We appreciate everybody's time this morning. Again I want to reiterate that we have a focus on four primary areas of returning to profitable growth, increasing our profitable revenue growth, increasing our customer satisfaction, operational excellence and improving employee engagement. The company has a wonderful customer base out there, it has a strong balance sheet, and now we appreciate your continued support. We are focused on creating and returning shareholder value to our shareholders, and at this time, we'd like to thank you all for joining the call. Thank you, operator.

This concludes today's conference call. You may now disconnect.