Harte Hanks Inc (HHS) 2015 Q3 法說會逐字稿

Good evening. My name is Nicole and I'll be your conference operator today. At this time, I would like to welcome everyone to the Harte Hanks Third 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, 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 forecasts for the markets we serve and other statements that are not historical facts.

Actual results may differ materially from those projected or implied in these statements because of various risks and uncertainties, including those described in our most recent Form 10-K and other filings with the SEC and in the cautionary statement in today's earnings release.

Our call may also reference non-GAAP financial measures. Please refer to today's earnings release for the required reconciliations and other related disclosures. Our earnings release is available on the Investor tab of our website at hartehanks.com.

I'll now turn the call over to our new CEO, Karen Puckett.

Thank you, Robert, and good afternoon everyone. Thank you for joining us on our earnings call. I'm very pleased to join Harte Hanks as CEO and I'm excited about the opportunity to speak with you today and in the future. By now, you've had a chance to review our third quarter results and full earnings release we issued earlier today.

We delivered third quarter operating revenues of $122 million compared to $134 million in the third quarter of 2014. Consistent with the expectations we shared with you last quarter, the rate of revenue decline improved compared to the second quarter of 2015.

Doug will walk you through the financials in more detail in a moment, but I would like to spend my time discussing my observations from my first month and a half as CEO of Harte Hanks and elaborate on our areas of focus going forward. As a member of the Harte Hanks Board for the past six years, I am familiar with our business and I support the strategic vision we announced last year, to become a leader in smarter customer interactions. Our overall business strategy 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 both existing and potential clients.

Moving from a Board member to the CEO role has given me more opportunities to engage with our talented employee base. We have smart, creative and loyal people who bring knowledge and expertise across our business practices in all industries we serve. I'm very pleased to be leading such a great team and I'm focused on employee engagement, improving collaboration and creating opportunities for development. Delivering on our vision to be a leader in smarter customer interaction will position us well in today's rapid changing marketplace.

Customer engagement is emerging as a new growth sector. With the proliferation of devices, digital touch points and data sources introduce new marketing complexity. Brand will be challenged to meet the expectation of their customers and drive revenue growth. As suggested by Forrester Research, we are in the age of customer engagement agency. The race is on for digital capabilities, data insight and seamless multi-channel communication.

With digital disruption, consumers have more control than ever before. Brands need sophisticated tools, advanced analytics and higher levels of expertise to engage customers across multiple channels and devices. Clients need marketing partners who are agile, understand how to optimize the latest tool and technologies and drive sophisticated data insight that fuel meaningful interactions.

Harte Hanks is positioned in this market place to be a leader and innovative force. We have demonstrated our ability to provide operational excellence across complex multi-channel programs and we continue to expand our digital platform by acquiring best-in-class talent and capability. As we innovate and evolve our expertise in data analytics, multi-channel services, we will remain in a strong position in the market and provide a competitive advantage to our client.

In addition to my own observation, I have heard direct feedbacks from our clients around the strong efforts our employees are contributing towards helping them achieve their goals. Let me share some of these examples of some of [successes] we are having with our customers. In this quarter, we added a new entertainment client, who chose Harte Hanks to offer multi-channel customer support for the launch of its newest award winning product.

Our customer experience support team works side-by-side with members of the client team to develop and improve customer support through data analytics, data insights and training. We also has a new tech logo win supporting the clients demand generation program across Europe, Middle East and Africa. Our relationship started with data analytics and agency created services which will enable the execution of a multi-channel program to provide product education, promotions and qualified [sales leads]. We will begin delivering of these services before year-end.

And with existing clients, a leading beauty care client came to us needing idea to maximize the results of the upcoming holiday shopping season, which of course is an essential part of their business year. We developed an approach to identify targeted customers a unique social campaign and special offers to drive incremental business. In fact, they plan to acquire holiday program ideas across their marketing plan for 2016. We are excited about the potential additional opportunities to provide campaign strategy and execution in addition to the R&D data analytics, data strategy and marketing databases support that we provide today.

In addition, we are also pleased to share a win for a Silver 2015 International ECHO Award in the IT category for our consumer social campaign, #NoteMyDay, which played a big part of our global launch of Samsung's Note 4 smart phone. DMA ECHO Awards recognize the premier achievements in data driven marketing by the most strategic and creative talent. This was a huge win for our Harte Hanks creative services team. It demonstrates that we are for our clients highly engaged in modern creativity. I want to personally congratulate our team also on that win, it was awesome.

While these client examples we've illustrated have a solid foundation in place, it is clear from our third quarter result that there are still much work to be done. Our main priority is not only returning the Company to profitable revenue growth, but also to strategically position ourselves to capitalize on the large opportunity that is in front of us. Our clients and prospects need tools, advanced analytics and higher levels of expertise to engage customers across multi-channels and devices. I believe this presents growth opportunity for Harte Hanks.

With [this golden mine] however, we are focused on three near-term key areas; number one, extending revenue churn by improving customer satisfaction; number two, enhancing our go-to-market strategy to drive awareness of our capabilities and highlight Harte Hanks as a leader in smarter customer interactions; and number three, focus on innovation to deliver impactful market leading products that better connect our client and our customers.

Let me walk through the steps we are taking to achieve each one of these areas now. Beginning with extending revenue churn, while our new global sales in the first nine months of the year have been very strong, these new wins were not enough to offset the losses we incurred from existing clients. We have a long track record of strong relationship with our customer and are committed to acting as their trusted partner.

As I have started to visit with our customers, I've learned just how much are our key customers dependent on our services and how strongly they believe in what we do for them. Despite this, there are elements of our account management and delivery that we need to strengthen.

Our team in focused on leveraging Harte-Hanks' data expertise along with the client services. In client services, we want to improve in a couple of areas around quality, accountability and commitment. We realized we must deliver the solutions we have agreed upon with the client on the agreed timeframe and ensure client satisfaction of these solutions.

We must also restore our position as a trusted partner and thought leader to our customers in designing and implementing data market strategies for the rapidly evolving world of multi-channel marketing. We will achieve this by the introduction of new and innovative capabilities through internal development and acquisition.

Our second area of focus is enhancing our go-to-market strategy and messaging to position Harte Hanks as a leader in smarter customer interactions and drive awareness of our platform. Last week, we made an important step in strengthening our go-to-market capabilities and announced the appointment of Frank Grillo as our Chief Marketing Officer. Frank is a marketing leader with more than 25 years experience leading companies of all sizes.

Most recently, Frank [was at the] Enterprise Marketing at CenturyLink. He brings a successful track record of helping guide organizations through periods of significant change, innovation and disruption in the marketplace. In addition, Frank is a data-driven marketing leader and has extensive expertise in defining customer segmentation to identify the most optimal areas for success in the market, an area we have some previous success and needed to leverage further to achieve our goals.

Another key area of growth opportunity for us exist in the new market space. Customers [of this size are needing] to be rapidly enhance their existing marketing practices to take advantage of the multi-channel customer contact strategy. They need strong partners who can help them build the data analytics to understand their customers' behavior and translate that understanding into the optimal tactic to most effectively reach customers. We believe Harte Hanks' portfolio of capabilities make us the ideal partner to these customers. Expanding into mid market space will be a key area focus as we enter 2016.

In addition, innovation is a major priority for us. By broadening the strength in our data interactive capabilities we can deliver more effective market leading products to better connect our client with customers. With that in mind, you should expect us to continue to invest in this area going forward and we have recently made some exciting solution announcements.

Total Customer Discovery and Data Refinery are examples of our commitment to lead and provide innovative solutions in today's marketplace. These are two new cutting-edge solutions for gathering, synthesizing and leveraging customer data in ways never available before. To target customers on a personal level, you must first be able to identify them as individuals.

Total Customer Discovery tracks behavior and identifies customers across digital devices and social platforms, ensuring the consistency of messages across multiple channel. Total Customer Discovery allows clients to interact with customers in a more meaningful way, improving campaign performance based on real-time insight and connect digital activity to all client sales to target customers each phase of the buying journey both online and offline.

Digital channel proliferation has driven an exponential increase in available data and the number of sources from which it can be obtained. Our data refinery platform-as-a-service solution manages and enriches large volumes of data in any format across multiple sources in near real-time to create an integrated comprehensive customer review.

Data refinery allows clients to seize an opportunity in near real-time by infusing digital and social attribute. This shortens the window between when a customer engages to, when a marketing actions can be placed, reducing sales cycle by increasing customer engagement.

During the quarter, we launched the latest version of our Trillium Software system product suite which contain several key enhancements and new product. We plan to launch Trillium sales force to the market in the fourth quarter. This will be our first product targeted at the sales force CRM marketplace and is in line with our strategy to expand our capabilities around data quality solutions for CRM.

Our product roadmap for Trillium is build upon key tenants leveraging and build up on the brand equity we have developed as a market leader for data quality solutions, deliver greater value to customers by extending the capabilities we provide to include data governments and data preparation and accelerate our ability to scale the business by capitalizing on high growth market trends of big data [SaaS] service in cloud.

Innovation comes organically but it also comes through acquisitions, which is an integral piece of our business strategy. As you will remember, we acquired 3Q in March to expand our digital capabilities. There is still work to do to leverage their office across Harte Hanks but the reception of the broader platform has been very good. So we will focus on our joint sales and showcasing our full suite of product portfolio to our customers.

As you can see, there is a lot to be excited about at Harte Hanks, but also a lot of work to be done. Looking forward, I believe that we have the right strategy in place to return to profitable revenue growth, position ourselves for future growth opportunities and establish ourselves as a leader in smarter customer interaction. I appreciate your continued support of Harte Hanks and returning value to shareholder remains our ultimate goal.

Now let me turn the call over to Doug to walk through our third quarter results.

Thank you, Karen, and good evening. The quarter included two significant events. First, Karen was appointed as our CEO in early September. Second, during the third quarter, as a result of sustained decline in our market capitalization below the book value of our equity and recent operating performance of the Company, we had a trigger event for goodwill impairment. As a result, we've performed an analysis to estimate the fair value of each of our reporting segments.

Based on our analysis, the fair value of our Trillium segment was estimated to be more than the book value of its equity, requiring no goodwill impairment charge for it. However, we estimate that the fair value of our Customer Interaction segment to be less than the book value of its equity and consequently determined that we should take $209 million goodwill impairment charge for this segment. This is of course a non-cash charge based on future projections that are heavily influenced by recent performance and does not impact how we operate our business. Most of our goodwill balance accumulated from business acquisitions made in the late 1990s.

Also we had now owned 3Q Digital for two quarters and they continue to outperform both the search market and our anticipated revenue growth. 3Q is driving strong results and we are starting to experience growth in social marketing where the trend is for clients looking for assistance in using data to place and target ads on social sites such as Facebook. 3Q's reputation is helping us to grow our sales pipeline, resulting in more deals. As a part of Harte Hanks their average deal size is now larger than historically seen in 3Q.

Turning to our third quarter results, our consolidated revenues were $122 million compared to $134.1 million of revenues in the same quarter last year. Customer Interaction revenue declined 6.3% after adjusting for the sale of our B2B research businesses in early April. Let me walk through the results of this business segment by industry vertical.

Our healthcare vertical declined with a client database win and a contact center win for support services for a pharmaceutical company offset by the loss of creative work for health care and pharmaceutical companies. Our select markets in retail verticals declined from clients producing mail volumes and data based clients not renewing business with us.

Our financial vertical was impacted by the loss of a mail client and our agency services client offset by the win of the new client announced last year using our solutions for analytics, data base, creative and mail services. Our auto & consumer vertical is influenced by the loss of a large luxury auto manufacturer consolidating its work amongst vendors and reductions in work from mail clients.

Turning to Trillium, Trillium Software revenues increased 1.1% to $13.2 million compared to $13 million in third quarter of 2014, driven by increased software licenses in software-as-a-service revenue. Software-as-a-service continues to grow as part of Trillium's revenue mix. We formally introduced our SaaS offering earlier this year, allowing us to eventually have more predictable revenue replacing the lumpiness of licensed software sales.

Also, our SaaS offering gives us access to new clients and markets by allowing us to be more competitive in the mid-market area. We expect our SaaS revenues to continue to grow during 2016 as new and existing customers elect SaaS arrangements over license agreements. To drive this result, we are investing in mid-market direct sales team and are expanding our reseller partner channel. The full breadth of the Trillium product portfolio will be available to our mid-market customers, with particular focus on profiling, CRM data quality and [software] service solutions.

Moving down the income statement, adjusted operating income, which excludes $209.9 million of goodwill impairment and $3.1 million of CEO transition charges, was $7.6 million compared to $10.5 million for the same quarter last year. Reductions in labor and production costs were offset by an increase in selling, general and administrative costs and lower revenues.

Trillium Software operating income increased to $3.5 million compared to $3.3 million in the same period last year. Operating margins increased to 26.6% from 25.4% during the quarter due to strong expense management. Operating income benefited from increases in software licensing and software-as-a-service revenue as well as lower payroll costs offset by increased consulting expense.

Customer Interaction operating income adjusted for the previously mentioned charges was $4.5 million compared to $7.6 million in the same period last year. Reductions in labor expense from lower headcount, outsourced costs and facility related expenses were offset by an increase in sales and marketing expense related to employment of additional sales force personnel.

Our expense management has continued to be strong in this period of revenue decline. In last 12 months to 18 months, we have reduced headcounts, closed several facilities, reorganized our operating structure after our strategy implementation, offshore parts of our technology development staffing and sold our B2B research businesses. These actions have allowed us to maintain our operating income during a period of revenue decline.

Our third quarter effective tax rate was 41.5%, which is higher than our 38.7% in the third quarter of 2014. The increase in the effective tax rate is primarily due to the impact of non-deductible interest associated with the 3Q Digital [earn out]. As a result, third quarter 2015 adjusted diluted earnings per share (technical difficulty) impairments, CEO transition charges compared to $0.10 in the same quarter of 2014.

While our revenue performance during the quarter was disappointing, we are pleased that our expense management allows us to maintain solid earnings per share performance compared to this time last year. In addition, Trillium's operating margins have grown both during the quarter and for the full year.

Moving to the balance sheet, our net debt balance remains low at approximately $51.2 million. We currently have $73 million available under our revolver excluding letters of credit, in addition to a cash balance of approximately $24.7 million at the end of the quarter.

For the third quarter, we generated $4 million in free cash flow, inclusive of spending $2.4 million on capital expenditures. Our third quarter capital expenditures were primarily related to Trillium Software. Year-to-date, we have generated almost $17 million in free cash flow.

With that, operator, I'll turn the call back over to you for questions.

(Operator Instructions) Michael Kupinski.

In spite of the extremely challenging quarter, it seems like you guys managed to beat my numbers, which is a good thing. And so I did wanted to ask you a little bit about some of the trends in the business, particularly those that you indicated that most of it was because of the volume declines in your Customer Interaction business and I was wondering if you lost any clients in the quarter and if, as we head into the fourth quarter, are you seeing any traction in that, are we still anticipating the prospect of seeing a deceleration in the rate of decline in the fourth quarter as well and when do you think that you might even turn the corner towards revenue growth in the Customer Interactions space?

Yes, there were one or two lost clients. A majority of the revenue decline from the lost clients end point, actually the bigger impact was from clients lost earlier in the year, that has also been offset by a higher amount of wins that we have gotten from clients than we have historically had in the last two or three years, which is a result of some of the new products that we've rolled out and the additional sales force emphasis that we've put on sales and marketing that we've talked about for the last several quarters. So we are and we have been seeing some successes is coming out of that investment and commitment to bringing in new clients, new logos and new businesses. So we're glad to see the rate of decline in the third quarter to be less than what it was through the first six months of the year. Obviously lower than what it was through the end of the second quarter and that's what we thought we would see and (inaudible) seeing that to this point.

Would you anticipate that you're going to see similar trends like that in the fourth quarter?

I don't know that it will be as much. We primarily expect the fourth quarter to be consistent with the third quarter performance from a revenue standpoint.

And Doug, in terms of the issues with the consolidation among luxury European auto manufacturer into one vendor, what was it that you weren't able to provide that lost that business?

That business was primarily related to them selecting a much larger agency that specialize solely in services to the auto industry. And from a competitive standpoint, that's not unusual, it was an automobile industry specialist.

Now that you're introducing new products in Trillium, has it turned the quarter towards sustainable revenue growth at this point?

Yes, we believe so. We're very happy to see -- we've got a couple of quarters of revenue growth behind it. There is a nice cycle as you can see of product innovation, new products rolling out and that's starting to take hold in the marketplace. And we're starting to see some results from that.

Could this be the time to start considering maybe selling that asset, given the fact that now that if we are turning the corner toward sustainable revenue growth then maybe this gets better price for that valuable asset? I was just wondering if you could give us your thoughts on that.

At this point, it's way too early to commit or make that kind of a decision. It is performing well. We still believe that the industry that it participates in, is growing faster in higher rate and what Trillium has done for the last couple of quarters and there is a lot of potential upside in valuation or performance that both Harte Hanks and its shareholders can participate in.

It seems like the phases of acquisitions are falling a buck behind the level indicated by the Company's promise to double the Company's revenues. I believe it was over a five-year period at that point and Karen, you indicated that you plan to continue the strategy that the Company outlined in terms of the acquisition growth, are there any specific areas that strategically you may tweak or reasons why may be that the Company hasn't really fulfilled a much more aggressive acquisition strategy behind the 3Q investment?

I would answer it this way in terms of the first half supportive of the strategy, coming from a world where I had to deliver every quarter, the numbers every quarter, I understand the complexity of the environment, the marketing environment is changing so dramatically. So, the great news is it's wonderful to be in a area where there is growth potential, because any time there's disruption and changes in opportunity and that's really what's happening in the marketing landscape.

Same as when we came out with the strategy and talked to all of you about that relative to capabilities in acquisitions, I would say that we are going to do acquisitions just because we put a number out there, we got to do the right acquisitions, which I think is what our shareholders want us to do, and furthermore, we have been very clear when we acquire a company that we not only know and we know the growth of that company as a standard alone but we have to have an integrated go-to-market capability, a unified approach to the customer to the marketplace. So it can't be just a stand-alone, we have to be able to take that capability and apply it to existing customers or a new sub-segment that we haven't served before.

I think that's the power of the opportunity if I look at -- we are continuing, we've got someone full time is focused on acquisitions and development, very intrigued with just data and data analytics, it's foundational to what we do and we have to ensure that we have the best both capability and talent around that. I think that's an area that we just have to drive a lot more focus and attention to. So you'll probably see more in that area.

I'm sorry. I'll ask the final question again. I guess I give out this question asked a lot, obviously Harte Hanks is never cut its dividend over the course of its history that I recall and the yield is obviously quite extraordinary. I know the Company is generating free cash flow and so forth, but in the light of the investments that are needed, acquisitions and investments into the Company, do you feel that there is any prospect that the Company will cut the dividend to accelerate maybe some investments into the Company?

The whole strategy with use of cash (inaudible) is always discussed with the Board and we'll continue to keep all of you posted but right now, we're very committed to current strategy that we have and will continue on with.

(Operator Instructions) There are no questions at this time.

I am going to conclude our earnings report tonight. I do appreciate the time that you have taken with us today and I think you realize through our earnings and what you've heard today that we do have some work to do, but I'm very confident and excited about our future.

We have experienced and loyal employees which is very, very important. I'm so impressed with our employee base and the loyalty and just their commitment to the Company. An impressive global client list that includes renowned brand names and a deep and growing product portfolio and it consistently generates significant levels of cash flow. I believe that we have a strong and effective strategy to return to profitable revenue growth, position ourselves for future opportunities and established ourselves as a leader in smarter customer interactions.

I look forward to updating you on our progress and would also like to thank our employees for their continued hard work and thank all of you again for your time today. I appreciate your support of Harte Hanks and we'll speak with you again soon. Good night.

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