Harte Hanks Inc (HHS) 2019 Q1 法說會逐字稿

Good day, and welcome to the Harte Hanks First Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Rob Fink of Hayden IR. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. Thank you for joining us. Hosting the call today are Andrew Harrison, Harte Hanks' President; Mark Del Priore, its CFO; and Jack Griffin, Vice Chairman of the Board of Directors.

Before I 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, litigations and regulatory changes; economic forecasts 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 reconciliation and other related disclosures. The company's earnings release is available on the Investors section of the website at hartehanks.com.

With all that said, I'd like to now turn the call over to Jack Griffin. Jack?

Thank you, Rob. And thank you, everyone for joining us for today's earnings call. Since the creation of the Office of the CEO last fall, the Board of Directors has worked closely with the executive team at Harte Hanks to fine-tune senior leadership team and structure amidst a period of organizational change. As Vice Chairman of Harte Hanks and Chair of former Office of the CEO, which oversaw the company's transition during the last 4 months of 2018, I have been particularly involved in this process. Earlier today, Harte Hanks issued an 8-K announcing that the company has a new leadership structure. I joined today's call to provide a more thorough explanation of the changes and why the board believes the company is now set up to move forward in an efficient and successful way.

Our new structure is an operating-focused model, overseen by strong leaders who have valuable experience at Harte Hanks. Andrew Harrison, who has been with Harte Hanks for 24 years and who was promoted to the role of President in January, has been appointed as the Principal Executive Officer of the company. Operationally, Martin Reidy, who served with me as part of the Office of the CEO, will continue to oversee the strategy and turnaround of our marketing services business. Rick Kegley will continue to run print, mail and logistics. Rusty Langford and Ben Chacko, who have each been with Harte Hanks for more than 20 years, will continue to manage our contact center. And Jeanne Shaunessy will continue to oversee our fulfillment business, a position she has held since 2012. All of these division leaders will report into Andrew. Our CFO, Mark Del Priore, who oversees our finance department and who is leading our financial restructuring, will also report to Andrew, as well as to the Audit Committee of the board. This experienced team has the board's full confidence and support. And while there is still much work to do, we believe the company's bright future will come into sharper focus as we progress through 2019. I would like to thank Bant Breen for his service on the board last year and for stepping in as CEO this year at a critical time.

With that, I'd now like to turn the call over to our President, Andrew Harrison.

Thanks, Jack. I can tell you from my 24 years with the company and from my experiences over the last year that the Harte Hanks team is resilient. Our organization is made up of talented individuals who have an unwavering commitment to drive value for our customers. Every day I step into one of our offices, I am impressed and encouraged by the team we have in place, and I also take great comfort in knowing that I have an experienced board with significant operational experience overseeing and supporting our efforts.

During the first quarter, our team banded together and faced challenges that impacted our quarterly results. Since the start of the year, we've made some important and necessary operational improvement. As an organization, we are moving forward with a view to ultimately restore our profitability and to create opportunities to grow our revenues over time. Achieving these requires both stabilizing our revenue and aligning our cost structure to revenues. We are pursuing both with urgency and priority.

Since the results we're reporting today, which Mark will discuss momentarily, do not yet reflect this progress, I'd like to highlight a few notable areas where we've made tangible progress. In the first quarter of 2019, on a year-over-year basis, revenue declined $22 million, and operating expenses declined by $16.1 million. More telling of our efforts, however, is that revenue, excluding the results of 3Q Digital, which was sold in February of 2018, declined $15.1 million. We are operating with discipline and rigor, and as a result, on the same basis, again, excluding the results of 3Q Digital, the company reduced cash operating expenses by $14.1 million, nearly offsetting the full scope of our revenue decline. We are working to bolster new business efforts to stabilize our revenue.

Entering 2019, our pipeline of new business opportunities was weak and strengthening the pipeline was a focus during the first quarter. Over the past 90 days, we took targeted actions to strengthen our pipeline of sales opportunities in all areas of the company. Examples of such actions include: adding sales talent, more clearly defining our sales strategies and restarting marketing activities in parts of the company that have had such activities shut off over the past few years. As a result, I believe Harte Hanks will be better positioned beginning in the second half of 2019, and make meaningful progress towards healthier and more stable financial performance. The other vital factor to our success is aligning our expenses with our revenue run rate.

Related to this, during the first quarter, we identified meaningful opportunities to further reduce our expense structure. To date, in 2019, we have reduced our vendor costs by more than an estimated $5 million on an annualized basis and are in a process of advancing initiatives to remove an additional $3 million in annualized vendor-related savings. Moreover, subsequent to the end of the first quarter, we reduced the size and expense of our executive team. Going forward, we will maintain our aggressive pursuit of further cost-cutting opportunities throughout the organization.

We addressed fundamental internal control weaknesses that had been identified in conjunction with our integrated audit in 2016. There were originally 9 material weaknesses identified and all but 2 of these were remediated by the end of 2018. We have also made significant progress toward remediation of final 2 material weaknesses and expect to complete remediation in 2019. We made important operational progress during the first quarter, and while there is still a lot of work to do, we have a talented and dedicated team across Harte Hanks who are advancing initiatives that are critical to our success. It's such a team that every day makes great things happen for our clients, and it's this team that will pull together to confront the challenges before us and see us through to stability and health.

With that, I will now turn the call over to Mark Del Priore to provide a financial update and walk you through the first quarter results. Mark?

Thanks, Andrew. We ended the first quarter with more than $20 million in cash, and we successfully extended our current $22 million credit line by 12 months to April of 2021. During the first quarter, we received a $4.6 million tax refund, and we expect to further bolster our balance sheet with approximately $16 million of tax refunds that we anticipate receiving as part of our 2018 tax filing.

Subsequent to the quarter-end, we received a $5 million contingent payment related to the qualified sale of 3Q Digital as is defined in the purchase and sale agreement dated February 28 of 2018.

Turning to the first quarter results. First quarter revenue was $59.1 million compared to $81.2 million last year for a year-over-year revenue decline of $22.1 million or 27.2%. I should note that last year's results included $6.9 million of revenue from 3Q Digital, which we sold at the end of February of 2018. This will be the last quarter that our year-over-year comparisons will include contributions from 3Q Digital. Adjusting for the 3Q Digital revenue for a better-aligned comparison, the revenue decline was $15.1 million or 20.4%. For the quarter, revenues were down in our B2B, consumer, financial services, retail and transportation verticals compared to the first quarter of 2018, while the Healthcare vertical saw an increase of 12% compared to last year. The largest decline among our verticals was in Consumer Brands, which was down $5 million or 29%, mostly due to a large customer loss in our contact center service line. Our operating expenses for the first quarter of 2019 was $70.1 million compared to $86.2 million in the year ago quarter, a decrease of $16.1 million or 18%.

Net of the 3Q Digital expense from Q1 2018, operating expenses were down $10.4 million or 13%. We reduced our operating expenses primarily in the areas of labor and advertising selling G&A, to offset the decline in revenue. Operating loss was $10.9 million for the first quarter of 2019 compared to $5 million in the year ago quarter. Our operating expenses included onetime nonrecurring expenses of $4.4 million in the first quarter of 2019. Adjusting for these onetime nonrecurring expenses, our adjusted operating loss was $6.6 million compared to a loss of $5 million in the year ago period. Excluding 3Q Digital's impact on Q1 of 2018, our adjusted operating loss increased by just $425,000, despite the revenue decline of $15.1 million. This reflects the substantial cost-cutting initiatives undertaken by the company in the face of revenue decline.

Net loss for the first quarter of 2019 was $13.5 million or $2.18 per basic and diluted share compared to a net income of $32.6 million or $5.24 per basic and $4.67 per diluted share in the first quarter of 2018.

Turning to our balance sheet and liquidity. As I mentioned earlier, as of March 31, 2019, we had cash and cash equivalents of $20.9 million, a slight increase compared to our cash balance at the end of 2018. During the quarter, we received a $4.6 million tax refund related to a 2017 net operating loss carryback. As of March 31, we had income tax receivable of approximately $16 million for the tax refunds that we anticipate receiving as part of our 2018 tax filing. The tax refunds are a result of a capital loss we generated on the sale of 3Q Digital in 2018, and a restructuring of one of our foreign entities. Do not confuse the tax refund from Harte Hanks' sale of 3Q Digital with the $5 million contingent payment received -- recently received from 3Q Digital. The $5 million contingent payment is additive to the tax refund we expect to receive later this year.

As of March 31, 2019, we had $18.7 million in long-term debt, which reflects the current draw on our $22 million bank credit facility. And as I mentioned earlier, we have extended this loan by 1 year to April of 2021. With the cash on our balance sheet, availability under our credit facility and 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 go first to Michael Kupinski with NOBLE Capital Markets.

First, the first quarter numbers were -- it seems like in the ballpark of my expectation, so that's a good thing. Definitely, there's been some positive signs on the cost cutting. And I was wondering if you can -- you kind of alluded to maybe the prospect of additional cost cutting throughout the year. But just wondering if you can just give us some thoughts on that progress of further cost cuts. And whether you are still holding to the thought that you could be EBITDA-positive by the end of the year.

Sure. Mike. Yes, so on the cost-cutting front, we will continue to adjust our cost structure to reflect our revenue base. We think we've done a very good job of that going -- so far and going forward, we will continue to do so. Regarding your question on EBITDA, we don't want to give forward-looking information, but we did say in our comments that we anticipate having the cash and -- with the tax refund and the availability in our bank line, we said that we would be able to adequately fund our turnaround plan. So that's really all we are saying to -- at this point.

Got you. And the $5 million from 3Q was a nice surprise. And in -- so can you give us a little bit of thought? I know we're waiting for the $16 million. Is that still going to be your thought process there a 3Q event or a 4Q event? And at least now we have another $5 million gives you enough liquidity to kind of have a little buffer there, I suppose, through the balance of the year. Is that right?

Yes. So it's actually 2 different refunds. The first, we think, will be a 3Q event related to 3Q coincidentally, the 3Q Digital sale. And the other part of the tax refund has to do with the restructuring that we think will occur later in the year, and we're hopeful that it comes in this year. But we're very confident that we'll be receiving both of those, and they're both related to our 2018 income tax filing, which we are hustling to get filed in the coming weeks.

And then in your press release and you even indicated about some movement on vendor agreement. And indicated that there might be a benefit to the tune of about another $3 million or so. Do you think that these -- any revision that you might have with the vendor -- with these vendor agreements in itself could swing the company towards positive cash flow? Do you think that there's more behind that prospect to kind of help that -- push that along?

So we're going to continue going through all of our vendors and seeing where we can save money. But yes, obviously, if we can save an additional $3 million in vendor costs, that will get us closer to profitability.

And then can you talk a little bit about the business pipeline and how that's looking? Obviously, in the past, we hadn't really talked about that, but you brought it up as something that is kind of building. Can you give us an idea and the framework of how big is the pipeline? And how much of the revenue that is in the pipeline can you anticipate kind of acting upon, and how quickly that we can start seeing that flow through the P&L?

Yes. Mike, the -- so you heard my remarks. And as of late last year, we had what we considered a pipeline that was too weak. And so we restarted some efforts to get our marketing going and target our sales. We also took a hard look at the pipeline, how we tracked it, what was in there, how we evaluated those things and those opportunities and we've measured it over the first quarter. And so we're not going to report the exact numbers on that or get into the details of how we track it. We've got a discipline wrapped around it now. And we have seen that through those marketing activities and through some focused sales and the addition of a new salesperson in the area that in some of these areas of the company certainly, our sales pipeline has reached almost 2x what it was when the year began. And so from my perspective, that creates -- I'm encouraged by that.

Got you. And is the -- I'm sorry, go ahead.

I said, ultimately, we've got to convert those sales, right? But it is an encouraging sign. And we are seeing some of those opportunities, just to kind of follow on to the part of the question that you asked. We are seeing those activities; we're tracking them through the pipeline. So we've done the typical segmentation, and we watch those deals move through, we track them carefully. And we're encouraged by seeing some of them that are meaningful to us move their way through the pipeline and become closer to sales that we're optimistic, could close.

Got you. And then you did have some promising results out of some of your verticals. You mentioned Healthcare, I think, was up 12% in the quarter. Can you just kind of give us an idea of what is going on in the Healthcare area that accounted for the growth? And is there anything there that's kind of -- can help boost some of the other verticals and promise that you might have to turnaround those other verticals?

Yes. I mean, we've got -- Healthcare is a vertical we serve in several different parts of the company. The contact center does quite a bit of healthcare work, and we have seen some of that work pick up and some of our existing accounts have increased some of the work that we do that carryover from fourth quarter. And that's helped us a little bit. And we've also had a couple of sales opportunities and marketing services related to Healthcare. So we're optimistic; we continue to pursue it as one of our target vertical.

And it appears there are no further questions at this time. This does conclude today's call. Thank you for your participation. You may now disconnect.