Harte Hanks Inc (HHS) 2018 Q4 法說會逐字稿

Good day, and welcome to the Harte Hanks Fourth Quarter and Full Year 2018 Earnings Conference Call. Today's conference is being recorded. (Operator Instructions)

At this time, I would like to turn the conference over to Mr. Rob Fink of Hayden IR. Please go ahead, sir.

Thank you, and good afternoon, everyone. Thank you for joining us. Hosting the call today is Harte Hanks' Chief Executive Officer, Bant Breen; and CFO, Mark Del Priore.

Before we begin, I would like to tell everyone that the information provided during this call may contain forward-looking statements, such as statements about the company's strategy; adjustments to its cost structure; financial outlook and capital resources; competitive factors; business and industry expectations; anticipated performance and outcomes; future effects of acquisitions, dispositions, litigation and regulatory changes; economic forecast for the markets they serve; expectation related to cost-saving measures and the availability of tax refunds and other statements that are not historical facts.

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

The call may also reference non-GAAP financial measures. Please refer to the earnings release that was issued after the close for the reconciliation and other related disclosure. The company's earnings release is available on the Investors section of Harte Hanks' website.

With all that said, I'd like to turn the call over to Bant.

Thank you, Rob, and thank you, everyone, for joining us for today's earnings call. I'm excited to be hosting my first earnings call as CEO of Harte Hanks. As many of you know, I joined Harte Hanks as an independent director in May of last year and took on the role of CEO on January 4, 2019. My appointment was accompanied by the promotion of Andrew Harrison to the role of COO and President and was quickly followed by the announcement of Mark Del Priore as our new CFO.

Earlier today, we announced the appointment of Evan Behrens as an independent director to our board. Evan replaces Martin Reidy, who after serving as an active member of the Office of the CEO, shifted into an operational role within the organization to oversee our marketing services business unit. In his operational role, Martin no longer could maintain his independent status on the board, and as such, he stepped down and shifted into the operations team. We are fortunate to have Evan join us and to have Martin continuing with us as a key member of our operational team. The new and experienced leadership team at Harte Hanks is highly focused on maintaining the best of the heritage of this company and blending it with present and future market opportunities.

As a member of the Board of Directors, I gained an appreciation for the company's technology assets, solutions and capabilities as well as the challenges that have impacted the company's operations. Based on this, I determined that there was an untapped value at Harte Hanks and, more importantly, that there was a clear fit between my experience at the nexus of media, marketing and technology and the company's needs.

The results we are reporting today, which Mark will discuss in detail later on this call, demonstrates some of the cost reduction efforts of the Office of the CEO over the last 6 months of 2018, but they do not reflect the new strategic initiatives that will be pursued by the leadership team. I want to begin today's discussion by reviewing at a high level the core competencies of our organization and my preliminary agenda as the CEO.

In my first 8 weeks, I have visited with our team in our offices across the country and have met with several of our clients. I have been impressed by Harte Hanks' breadth of capabilities and depth of Fortune 500 client relationships.

The fuel that powers this company is customer data. We offer clients around the world the strategic guidance they need across the customer data landscape as well as the executional know-how in database build and management, data analytics, data-driven creative, digital media, direct mail, customer contact, client fulfillment and marketing and product logistics.

I think the investment community may have a general misperception that Harte Hanks is an organization embedded in old-world marketing services. In reality, we are an organization with an infrastructure of service line unlike any in our industry, which can support most direct-to-consumer organizations from the fastest-growing online platforms to the largest brick-and-mortar organizations. We implement data-centric solutions that use experimental marketing and new strategies designed to address pressures from the old and new competitors.

When I say we deliver logistics, I'm referring to our virtual network of over 15,000 independent truckers and corporate freight carriers that are accessed via our proprietary technology that enables price comparison, real-time tracking and tightly scheduled deliveries that carry our printed direct mail as well as the printed mail from many other printers. We are the engine that drives direct-to-consumer delivery for some of the largest manufacturers, retailers and fastest-growing companies in the U.S.

All of this work is supported by our logistical technology called Allink 360 that is designed to get our customers' products to its destination on time and on budget. We believe this advanced logistical capability is undervalued, and that a wide range of businesses are looking to outsource this service.

When I say we deliver data management and analytics, I'm referring to the build-out and management of some of the largest customer databases in the world that power direct customer relationships for our clients. When I say we deliver fulfillment, I am referring to our temperature-controlled, FDA-approved and geographically convenient warehouses that support clients and are connected by our proprietary next-touch technology platform.

If you received a customized printed financial prospectus for a mutual fund or ETF, it could well be from Harte Hanks. Price that new SUV on an automaker's website and ask for more information, it's likely we printed it and sent it to you. And if your child participated in a recent New York City Road Runners' race or marathon, we made sure they received their swag.

And when I say we deliver contact, I'm referring to customer support via phone, social, message platforms or websites. We have the technology and teams to make sure all of your inquiries are answered.

In short, today, we are an impressive company that designs and builds solutions that activate buyers, delivers product and supports customers. We are known for our innovative strategies, our tried-and-tested best practices and commitment to real results, our creative problem solving and having the talent that rolls up its sleeves and truly can make things happen.

Over the last 90 years, Harte Hanks stewarded clients through the development of the customer data world. We believe that we are on a -- we are at one of the most exciting inflection points in terms of customer data and how it's utilized from a marketing perspective. We see a perfect storm of privacy regulation, technological possibility with machine learning and cloud-based infrastructure.

We believe these factors, combined with an emerging customer base that understands the value exchange between themselves and companies, places Harte Hanks in a powerful position to assist companies' transition into this opt-in omnichannel world where direct customer relationship and first-party data matter more than ever.

Also, over the last 90 years, Harte Hanks shepherded print and product across the country. In fact, Harte Hanks was instrumental in drafting the laws that govern shipping and fulfillment today. Harte Hanks has the real knowledge and expertise to help enterprises succeed as we shift to a direct-to-consumer or D2C world, where consumers shop and buy directly from brands via platforms such as Amazon and Jet, and still purchase and experience products in retail as well. We have the capabilities to assist clients as they deliver marketing in the new economy.

Our reinvigorated story is showing some promise as we welcomed new logos to our roster in the first quarter and expanded engagements with key clients. Over the next several quarters, we are focused on honing our capabilities, facing our challenges and, most importantly, building, as we always have, a customer data-driven world.

In summary, I am encouraged with the core competencies that Harte Hanks brings to today's evolving marketplace. We will focus our energies and our resources on the areas where Harte Hanks can add demonstrable value to customers. The new management of Harte Hanks is committed to implementing a strategic plan that leverages the breadth of our business capabilities. We are focused on reestablishing profitability, revitalizing growth and unlocking value for customers and shareholders.

I would now like to turn the call over to Mark Del Priore to provide a financial update and walk you through the fourth quarter and full year results. Mark?

Thank you, Bant. I joined Harte Hanks back in October after the Office of the CEO hired me to work on various finance-related projects associated with the restructuring. This interim step provided me the unique opportunity to familiarize myself with the company's capital structure, its operating model and gain an appreciation for the opportunities and challenges facing the company before being offered and accepting the CFO position. I was encouraged with what I saw during this time and believe that we have a significant opportunity to drive shareholder value going forward.

Harte Hanks has made great progress and effort to cut costs as we rationalize expenses in light of a lower revenue base. Year-over-year, expenses are down more than 35%, and this has resulted in a significant narrowing of our operating and net losses. More importantly, I believe we are now in a better position to return Harte Hanks to profitability, and achieving this will be one of my primary goals in 2019.

Simultaneously, I'm focused on preserving and strengthening our balance sheet. Subsequent to the end of the year, we received a $4.6 million tax refund. We also maintain an income tax receivable of approximately $9 million for a tax refund that we expect to receive in the second half of 2019 as a result of the capital loss we generated on the sale of 3Q Digital. Together, these 2 items will significantly bolster our liquidity. I'm confident we have the sufficient liquidity to execute our near-term and intermediate-term strategy.

Turning to the specific financial results. Fourth quarter revenue was $70.2 million compared to $99.9 million last year for a year-over-year revenue decline of $29.7 million or 30%. I should note that last year's results included $9.7 million of revenue from 3Q Digital, which we sold at the end of February 2018. Adjusting for the 3Q Digital revenue for a better aligned comparison, the revenue decline was $20 million or 22%. Revenues were down in our B2B, consumer, Financial Services, Retail and Transportation verticals, while the Healthcare vertical saw an increase of 2% compared to last year. The largest decline among our verticals was in Consumer Brand, which was down $10.5 million or 50%, mostly due to a large customer loss in our contact center service line.

Our operating expenses for the fourth quarter of 2018 were $74.5 million compared to $133.5 million in the year-ago quarter, a decrease of $59 million or 44%. Net of the 3Q Digital expenses from the fourth quarter of 2017, operating expenses were down $50.3 million or 40%. We reduced our operating expenses, primarily in the areas of labor and advertising SG&A cost to offset the decline in revenue. There was also a large decline in our impairment of assets expense of $33.4 million year-over-year that impacted these results.

Operating loss was $4.3 million for the fourth quarter of 2018 compared to $33.7 million in the year-ago quarter. The loss was driven primarily by the decline in revenue. The 2017 operating loss included an asset impairment expense of $34.5 million.

Our operating expenses included nonrecurring expenses of $1.2 million in the fourth quarter of 2018. Adjusting for these nonrecurring expenses, our adjusted operating loss was $3.1 million compared to adjusted operating income of $1.7 million in the prior year period. Net income for the fourth quarter of 2018 was $1.6 million or $0.21 per basic and diluted share compared to a net loss of $29.3 million or $4.73 per basic and diluted share in the fourth quarter of 2017.

Now let me turn to our full year results. Operating revenues for the full year of 2018 were $284.6 million compared to $383.9 million for 2017. The year-over-year decrease of 26% reflects the impact of declines in all of our industry verticals. The sale of 3Q Digital in the first quarter of 2018 led to $29.2 million of the revenue reduction from 2017 to 2018 and primarily impacted our B2B and consumer vertical.

Our revenue broken out by vertical market is as follows. Retail revenue, which is our largest segment at 23% of total revenue, was $66.5 million, down 30% compared to 2017. B2B revenue was $64 million, down 23% compared to 2017 and represented 23% of our total revenue. Consumer Brands revenue was $58.4 million, down 34% compared to 2017, and this represented 21% of our total revenue. Financial Services revenue was $53.9 million, down 10% compared to 2017 and represented 19% of our total revenue. Healthcare revenue, our smallest vertical, was $19.9 million, down 14% compared to 2017 and represented 7% of our total revenue. And finally, revenue from our Transportation segment was $21.8 million, down 35% compared to 2017 and represented 8% of total revenue.

Total operating expenses for the full year 2018 were $310.7 million compared to $424.8 million in 2017, a decrease of $114.1 million or 27%. This decrease was the result of the sale of 3Q Digital, which accounted for $26.8 million of the reduction in operating expenses as well as lower expenses across the board in labor, production, distribution -- production, advertising and SG&A as we continue to take actions to align our cost structure with revenues and demand for our services.

In addition, depreciation, software and intangible asset amortization expense was lower compared to 2017, primarily due to lower capital expenditures and the elimination of the intangible assets upon the sale of 3Q Digital.

Operating loss was $26 million for 2018 compared to an operating loss of $40.9 million in 2017. The improvement was driven primarily by a decrease in operating expenses that was larger than the decline in revenue. For the full year of 2018, we had an income tax benefit of $18.1 million compared to an income tax benefit of $9.9 million for the full year of 2017.

Net income for 2018 was $17.6 million or $2.38 per diluted share compared to a net loss of $41.9 million or $6.76 per diluted share in 2017. The improvement was primarily the result of the $31 million pretax gain recognized for the sale of 3Q Digital in February of 2018.

Turning to our balance sheet and liquidity. As of the end of 2018, we had cash and cash equivalents of $20.9 million compared to $8.4 million at the end of 2017. Subsequent to year-end, we received a $4.6 million tax refund related to a 2017 net operating loss carryback. We had previously anticipated that this tax refund would be received in December of 2018, but instead, it was received in February of 2019.

As of December 31, 2018, we had an income tax receivable of approximately $9 million for a tax refund we expect to receive in the second half of 2019 as a result of the capital loss we generated on the sale of 3Q Digital.

We ended the year with $14.2 million drawn on our $22 million bank credit facility for total long-term debt outstanding of $14.2 million. With the cash on our balance sheet, availability under our credit facility and the tax refunds we are due, we continue to believe we have adequate liquidity to fund our turnaround plan.

With that, operator, we would like to open the call for Q&A.

(Operator Instructions) We'll now take our first question from Michael Kupinski from NOBLE Capital Markets.

Just a kind of a little bit of a softball question before I have a couple of others. I know that the management team's new to the company, and I was just wondering -- it's good to have fresh eyes, I suppose, if you want to look at it that way.

Can you just tell me what you've learned about the company that maybe you're excited about? Where do you see that maybe you're going to have to focus your efforts a little bit more intently? And just kind of give me your feeling about the -- just the general feeling about the company. Let's start there.

Yes. Great. And thank you for the question. This is Bant Breen. So it's really interesting. Harte Hanks -- I've spent my whole career working in the marketing and advertising industry. And Harte Hanks has always been a company that I've known, I've competed against, I've admired and has played a key role in really kind of that direct customer marketing relationship solutions area.

When we look at Harte Hanks today, we see that, as I stated up front, it's a company that has its core, it's kind of the thing that powers the company, is customer data. And that's actually something that's not only powering the -- maybe the marketing world that Harte Hanks came from, but it is actually at the center of where we are going in the marketing world. As we've seen with companies like Acxiom and others, this is a critical area for us.

But we also see that some of the infrastructure pieces that the company has seem to be critically helpful for new economy companies as well. And so marrying that data knowledge with solutions that are appropriate for these new economy businesses is really where I get excited and where we'll be focusing our efforts.

Got you. And when does the company cycle against the Consumer Brand customer that it lost? And adjusting for that client loss, has the base of customers stabilized now?

So I spent the first 8 weeks traveling and meeting with a lot of our core customers. And I would say, I see really great work that we're doing with customers, and we still have a very strong base of businesses that we work with across all major sectors. And as I stated up front, we see that we are now, I'd say, attracting new logos, going out and building bigger bases in some of these verticals as well.

And can you talk a little bit about the Wipro contract and whether there are opportunities there for a renewed relationship with them?

So we -- as you know, Wipro is a shareholder of the company, and we continue to work with Wipro on several areas of the business, on the infrastructure of the business as well as on several client relationships, and that continues on an ongoing basis.

Yes. I'll add to that. Wipro is obviously a key vendor of ours, and we continue to talk to them about ways that we can work better together as well as rightsize the agreement to better reflect our current revenue stream. So...

There are no further questions in the queue at this time.

All right. Thank you, everyone, for joining us today.

Cheers.