Harte Hanks Inc (HHS) 2020 Q1 法說會逐字稿

Good day and welcome to the Harte Hanks First Quarter 2020 Earnings Conference Call. (Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Rob Fink with FNK IR. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. Thank you for joining us. Hosting the call today are Andrew Benett, Executive Chairman and CEO of Harte Hanks; and Lauri Kearnes, CFO.

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, disposition, litigation and regulatory changes; economic forecasts for the markets they serve; expectations related to the cost savings measure; 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 statement in today's press release.

The call may also reference non-GAAP financial measures. Please refer to the earnings release that was issued after the close for reconciliation of other related disclosures. The company's earnings release is available on the Investors section of its website at hartehanks.com. With all that said, I'd now like to turn the call over to Andrew Benett. Andrew, the call is yours.

Thank you, Rob, and good afternoon. Before we get started, I want to express my sincere hope that everyone on today's call is staying safe and healthy during these challenging times. I also want to take a moment to thank the entire Harte Hanks team for their professionalism, their resiliency and endless drive to serve and support our clients and each other. The culture and commitment embedded within our organization is one of the key assets that attracted me to the company. The value of these attributes has been amplified by the response in addressing the upheaval of the last couple of months, and I couldn't be prouder. Our teams from the Philippines, Texas, Europe and the U.S. have all done a herculean effort, and our clients appreciate it and they're sharing that appreciation with us.

The health and safety of our employees, our customers, our partners and our communities has always been our top priority, and this is important now more than ever. We have transitioned to a fully work-from-home environment with the exception of our operations capability, eliminated travel and are following best practices guidelines placed by the World Health Organization, the CDC, federal and state officials. We're taking precautions and providing our employees up-to-date information through the internal corporate website.

As we operate through the pandemic, the quarantine and the resulting business realities, we're carefully evaluating expenses and business functions to ensure that we're adding value to our customers and positioning Harte Hanks for sustainable profitability. However, the process of evaluating expenses and improving operational efficiency is something that we've been focused on for over a year, and we're making strong progress on that. Although the pandemic creates new urgency, the process hasn't materially changed, and we're focusing on ways to create higher, more relevant value and a streamlined Harte Hanks.

Back in March, when I hosted my first earnings call as CEO, I spoke about the priorities of this new leadership team following an intensive and thorough evaluation of our organization. As part of this, I outlined our 3-pillar strategy to return the company to profitability and to growth: first, optimize the business and the way we work; second, grow our current services with existing and new clients; and third, transform our business for the future. I'd like to highlight the progress we've made across each of these areas during the first quarter.

First, optimizing the organization. As I mentioned on the last call, despite efforts made to integrate our various businesses in the past, Harte Hanks was still largely run as a diversified holding company with little connective tissue. We have quickly and completely changed this, integrating our activities and reorienting our operations and our people. We put the customer at the center, delivering unique solutions, which is at the center of everything that we do. This reflects a new and improved operating model for Harte Hanks, which has enabled us to offer valuable and differentiated solutions to our clients, making us more integral to their operations. Over the past 6 months, I believe this model has been delivering extremely well. In the last quarter, we continue to streamline our organizational structure and continue to work hard on engineering growth. I'll cover this later in my remarks.

As well on the last earnings call, I shared that we were exploring strategic options for our print business, and in 2019, as you know, we exited the direct mail operations in Wilkes-Barre and Fullerton, and earlier this year, we exited our direct mail operation in Grand Prairie. We have culminated our review and we have determined the best way to support our clients is to exit the direct mail operations effective June 30 and to enter a strategic partnership with Summit Direct Mail based in Dallas. Our partnership with Summit will allow Harte Hanks to continue to manage services for our customers while reducing the high fixed cost to support in-house printing operations. With these expanded capabilities, Harte Hanks will provide the full suite of marketing solutions within the direct mail space and more efficiently allocate resources to our marketing services, fulfillment and contact center businesses, where we see opportunities to leverage competitive differentiators to drive our growth.

To further drive efficiencies, we've collapsed our remaining operationally oriented businesses, fulfillment, contact center and logistics, under Brian Linscott, our Chief Operating Officer; and our marketing services business, under Dana Adams, our Chief Client Officer. This will facilitate greater efficiency and collaboration across our business. In addition, under Keith Sedlak, our Chief Growth Officer, we've accelerated our sales and marketing efforts. We've moved from selling siloed services to a product solution selling approach and are experiencing early signs of success, which I'll touch on more in-depth later. We've also created a product development function, and I'll talk about 2 new offerings that we'll be launching this year.

Second, I spoke about the importance of and the focus of profitable growth. With a new operating model and realigned leadership, we're focusing our team towards driving significant and sustained profitable growth. As we continue to focus on our core business, we're looking to both improve each business as well as identifying bigger, broader opportunities for our clients by creating integrated solutions. With the exit of print mail, we're continuing to pursue our asset-light strategy, reducing our physical footprint.

With regards to new business, our revised operating model and growth engineering continues to gain momentum and deliver promising results. Our current weighted pipeline is $19 million and unweighted is $48 million. To hit our plan for the year, we need to close $13 million of new business.

As of quarter end, we have secured $4.6 million in new business. These wins include a major financial services brand, a leading high-tech company, 2 Fortune 50 pharma companies, a biotech company and a national retailer. We believe our new business pipeline remains healthy and diverse, and we continue to develop new product offerings, which we're taking to market across both our existing portfolio and net new logos for increased growth. It's also important to note that many of our services are or will be in greater demand due to the COVID crisis. I will talk about this later when I talk about our call center and fulfillment businesses.

We continue to make efforts to enhance our team, onboard new customers and specifically focus on the categories that we've outlined before: health care, consumer DTC, technology and financial services.

The third pillar of our plan is transformation for growth. A key part of business transformation for Harte Hanks is to make our offerings more relevant and to better communicate the significant return on investment our offerings can provide to current and prospective customers. I'd like to spend some time here as I think it illustrates well our ability to build new revenue streams on top of our existing business. As we develop new products, our team is focused on listening to the customer, leveraging our expertise and our assets, both fixed and variable, and looking to provide relevant product to clients, especially useful in the era of COVID.

On the last call, I spoke about the initiation of these efforts, specifically our ability to build sampling or an activation business built off of the asset base of our fulfillment operations; and a marketing as a service business or an outsourced marketing business built off our marketing services infrastructure. Both of these opportunities are stealing share from -- are focused on stealing share from large addressable markets, and both will be implemented with 0 incremental investment beyond limited time of existing staff. We've made strong progress with each, and I'd like to expand on each of these opportunities as they're both proving to be relevant to where marketing services as a category is going as well as having heightened relevance for today.

First, on our sampling or activation business. As I mentioned on the last call, this is enabled by marrying our marketing services business and our fulfillment business. As our teams have been working on making this offer relevant and talking to our customers, we realize that we had a unique opportunity to create a new channel to reach consumers and customers. We believe that this offering is especially relevant during and in light of COVID.

By marrying our world-class scaled fulfillment and on-demand printing capability with a full-service marketing service offer, we have the unique ability to leverage our core delivery from our fulfillment business, the Box, to people in home or at work. So essentially, we're broadening our core fulfillment business by delivering experiences in a box. We've just launched this new offer over the last few weeks, and we've already delivered 2 back-to-work employee programs for 2 major pharma companies as well as a conference in the box marketing program that will extend through the year for a Fortune 50 financial services company. The application for this is broad, from supporting brand marketing efforts for brands looking to reach consumers through direct-to-consumer activation, employee engagement programs, virtual event conference support, customers looking to reach markets at home or at work, sales enablement and so on. We believe this product taps into many trends, such as consumers wanting experiences, brands needing to deliver more value, a trend towards DTC, especially among the consumer packaged goods category, as well as the disruption happening in the area of virtual events at home and specifically in the era of COVID today. This new offering will support loyalty and brand-building, sampling, acquisition marketing, customer engagement enabling -- enablement, employee engagement and much more, and it's made possible by combining Harte Hanks' highly differentiated and long-standing capabilities with data, digital direct and fulfillment.

Harte Hanks will target 2 key segments: first, large enterprises directly with an agency-led approach, current -- similar to what we do today, using existing relationships and agency marketing, digital, social, direct mail, as an example; and second, we'll target B2B enterprises, meaning enterprises with 500 to 2,500 employees and revenue of $50 million to $1 billion through a new brand that will be launched this quarter. We'll focus on how we solve core, midsized B2B enterprise challenges as well as employee experiences, growth business acceleration, transformation, through a unique boxed-up solution, ideal for working with midsized workforces, focused on customer bases large and as well focused on prospect pool. This new brand is under development and will be accompanied by a pilot launch campaign, including both digital and direct, followed by a full launch and an always-on digital and direct marketing effort.

The second offering I'd like to talk about is our marketing as a service business. This offer focuses on expanding the work we do for major B2B tech players today and creating an integrated offering to perform day-to-day marketing services support, either on location, meaning on our location -- on client location or remotely. This work ranges from data operations, analytics and business intelligence, marketing automation and other high-time, lower-value functions. It's important to note that much of the in-housing market today is being conducted by the big consultancy firms as well as by low-cost BPOs. We see an opportunity to establish Harte Hanks in the middle given our 200-plus person data development center in Iasi, Romania. This opportunity is also relevant to what clients need today, efficiency and cost savings while also being very relevant to the new world, given the fact that most client organizations today are looking to streamline costs.

Marketing as a service is an innovative, flexible outsourcing marketing operations solution that works as a highly integrated cost-efficient extension of the clients' marketing. It's a unique blend of the best of an agency and BPO approaches and skills, both areas which we know well and currently operate in, combined to operationalize, control and deliver high-performing data operations marketing, technology and demand gen. It solves the outsourcing dilemma faced by large and midsized B2B and consumer-focused enterprises and works equally well, supplementing in-housing of marketing through in-sourced resources or as an alternative to conventional outsourcing, BPO or agency partnership models with other hybrid resources. This solution leverages our unique combination of resources, geographic footprint, technology and processes built over 20 years of data-driven marketing science delivery and services and proven with long-standing marketing operational support for several of the world's largest technology, financial and automotive brands. Engagements range in 10 to 200 staff plus associated processes and platforms. Harte Hanks is targeting procurement for this service as well as client marketers within a mix of large and midsized enterprise across B2B, tech, financial services, distributors and in consumer, direct, financial, health care, automotive, online and retail. Harte Hanks is also offering a marketing assessment and blueprint to map out marketing and sales enablement to jump start. Hopefully, that gives you an update on our business strategy and on the progress that we're making.

Regarding our first quarter performance, our contact center had a strong start to the year, and we expect that momentum to continue in future quarters. We're ramping up significantly for new clients in the streaming space, and we've seen overall increased demand, both from existing clients and new clients coming in, in inbound requests. We expect this trend to continue through the year.

Our marketing services has had a slow start on several programs as our clients were evaluating their established budgets for the year. This work picked up towards the end of the quarter and we expect that it will be maintained going forward.

Our fulfillment, mail and logistics businesses have had some impact in the quarter due to COVID-19, as Lauri will touch on later. We are now seeing order volume in those businesses improved. In addition, we're seeing strong initial demand for the new offerings that I spoke of. I believe that our focus on productizing our offer to make Harte Hanks more valuable to our clients, innovative -- innovating by creating relevant new products and solutions will both enhance our growth and help to deliver our goal of delivering positive adjusted EBITDA in 2020 and being free cash flow positive by the second half of 2021.

In summary, like most businesses, we're facing near-term challenges as a result of the COVID-19 pandemic, and client marketing spend has declined across the board in the category. Although we expect to see a more pronounced impact in the second quarter as a result of customer delays and volatility in the macroeconomic environment, we believe new opportunities will emerge as customers look to outsource certain marketing functions that we provide on a more cost-efficient basis. With near-term uncertainty, we will continue to advance our efforts to align our expenses with our expected revenue levels, which was already a top priority of this management team. We've strengthened our cash balances, and we believe we have the necessary liquidity to execute our turnaround plan. Stimulus programs introduced in April to provide relief in response to COVID-19 will help us get through this difficult period and, combined with our long targeted cost-cutting and restructuring, have strengthened our cash position and we believe will help to transform the company to best compete going forward. I'll now turn it over to Lauri to walk through the details of our financial performance.

Thanks, Andrew. I'd like to first underscore a point Andrew mentioned early in his remarks. While COVID-19 is presenting our business with significant near-term headwinds due to reduced client marketing expenditures and requiring us to take a hard look at cost, we're redoubling our efforts to streamline and restructure the business. This is best highlighted by the $21 million reduction in expenses excluding restructuring charges and depreciation, including a $10 million decline in labor, which more than offset the decline in revenue in the quarter.

I'd now like to walk through the results in more detail. First quarter revenues were $40.5 million compared to $59.2 million last year for a year-over-year revenue decline of $18.7 million or 32%. We estimate that COVID-19 cost us approximately $2 million of revenue in the quarter, and as you know, we are still cycling over client losses from 2019 that weigh on our year-over-year growth rate. We are now seeing client wins in the business that will generate revenue in future quarters.

Revenues declined in all vertical markets in the quarter. The largest decline in dollar terms was retail, which was down $7 million, mostly due to losses in our mail and logistics business as well as a change in a contract requiring us to record on a net rather than a gross basis. The largest decline on a percentage basis was transportation, down over 80% due to a loss of program last year for a contact center client.

As Andrew mentioned, we have signed an agreement to fully exit our direct mail production business by the end of June. We anticipate recording a noncash impairment charge related to closing our Jacksonville facility during the second quarter. This transition is expected to eliminate just under $1 million in quarterly losses related to this business, primarily fixed costs. We will have variable costs based on print volume going forward in line with our asset-light strategy.

Our operating expenses for the first quarter were $45.6 million compared to $70.1 million in the year ago quarter. We reduced our operating expenses in all areas, including labor, production and distribution and advertising, selling, general and administrative. Operating loss was $5.1 million for the first quarter, less than half the $10.9 million operating loss in the year ago quarter. Adjusting for the nonrecurring restructuring and impairment expenses, our adjusted operating loss was $3.5 million compared to a loss of $5.9 million in the year ago period. The improvement reflects substantial cost-cutting actions taken by management in light of declining revenues.

In the quarter, we recognized an $11.3 million onetime tax benefit mainly related to NOL carrybacks. The Coronavirus Aid, Relief and Economic Security Act, referred to as the CARES Act, allows corporate taxpayers to carry back net operating losses originating during 2018 through 2020 for up to 5 years and also eliminated the 80% of taxable income limitations with respect to NOLs. We expect to receive $8.8 million in tax refunds during 2020 related to our 2018 and 2019 NOL carrybacks.

Inclusive of this benefit, we generated GAAP net income of $5.1 million or $0.68 per basic and $0.67 per diluted share in the first quarter. This compares to a GAAP net loss of $13.5 million or $2.18 per basic and diluted share in the year ago period.

First quarter adjusted EBITDA was negative $2.4 million compared to negative $4.4 million in the same period last year, a significant improvement when we consider the lower revenue levels.

Turning to our balance sheet and liquidity. As of March 31, 2020, we had cash and cash equivalents of $23.5 million. This compares to a cash balance of $28.1 million as of the period ended December 31, 2019. As of March 31, 2020, we had $18.7 million in long-term debt, which reflects the current draw on our $22 million revolving credit facility. On May 11, we extended the revolving credit facility through April 2022 and reduced the amount to $19 million.

Subsequent to the end of the first quarter, we participated in stimulus programs introduced to provide relief in response to COVID-19, which will help us to maintain our employees as we navigate through the present and future challenges as well as being focused on delivering our turnaround plan. With that, operator, we would like to open the call for Q&A.

(Operator Instructions) Today's first question comes from Michael Kupinski with NOBLE Capital Markets.

So the revenues came in better than what I was looking for in the quarter and is somewhat surprising given the mitigation efforts of COVID, which began in March, and you said that you feel like that had about a $2 million impact in the quarter. I was wondering, where were you seeing strength in the quarter? And then it sounded like you were pretty optimistic about how things are shaping up in subsequent quarters, given that some of the clients that you have are actually stepping up campaigns in light of COVID. I was wondering if you could just add a little bit more color on that, what you're seeing there.

Yes. I can start, Lauri, and then you can jump in. So maybe I'll do the reverse. With regard to clients, I think what we're seeing across the board is, first of all, where, as you know, we play is bottom-of-the-funnel marketing, so more performance-oriented, ROI-oriented marketing. So generally, what you see in economic times like this and in general, where marketing -- where the numbers will just show is headed is in that direction in a significant way. So I think that's what it -- what has muted it a little bit for us in terms of across the board, specifically, on the first part of your question, where we've seen increased demand, as I mentioned, significant increased demand in the contact center, and that's a combination of 2 things: new business wins that had happened before that we were then ramping up for; new business wins that happened before COVID, which we were then finalizing and getting ready to ramp for; and then COVID, where, as you can imagine, and everything that has happened with that, a contact center service is of great demand and great value. And so we also were receiving and continue to receive very strong inbound request for our services from major companies and clients. So specifically, contact centers where we've seen -- it has kind of outpaced, if you will, for the quarter. And as I mentioned, marketing services got a slower start. And then where we did see the impact was primarily in our fulfillment and our mail business, and that was more specifically a reduction of demand than client loss.

Got you. And then in terms of the savings in the quarter, I know that you had renegotiated a number of vendor agreements from last year, and I was just wondering if you can kind of frame how much of that was in the quarter. What -- can you kind of give us some sense of the dollar value of those renegotiated vendor agreements from last year?

Yes. Lauri, you want to give a sense of that please?

Sure. Sure, Mike. So I mean, there was several agreements. I would say that the major agreements, we had a $3 million to $5 million of savings in this quarter alone regarding those agreements. I don't think I have the tally of all of them for the quarter, but that's a good range.

Right. And then is that where some of that goes in the production and distribution expenses because that was a little bit lower than what I was expecting?

Yes. Certainly, some of it is in there. There's also some outside labor. So there's some of that that's rolling into the labor section as well.

Got you. And then can you just kind of give us a sense of -- because of all the issues with COVID going to Q2, which is, admittedly, probably the biggest hit for any particular quarter, but you have so many mitigating factors of some of your clients that are actually showing -- giving you business in this environment, can you kind of give us a sense of what the revenues kind of are pacing or looking like in the quarter? Because obviously, we were looking for moderating revenue trends as you kind of cycle through the lost account from last year. I was just wondering if you can kind of give us a sense of what the revenue's kind of pacing.

Yes. I mean, so as you know, through the beginning of this year, we still cycle through losses from last year. So there will obviously be a component of that. I would say with regards to demand in Q2 thus far, we see the same trend that we saw in the end of March with regards to our businesses, contact center, others, as we spoke of. What we've also seen, though, is that many, many clients have started to pick up activity. They just reoriented it. So many of our financial services clients are reorienting, as you'd imagine, all of the messaging and the work that we're doing, and that's part of what caused a pause or lower than our expectation for that business for the quarter. So I think the one bit that no one knows, obviously, is what the overall impact on the economy will be to consumer sentiment, consumer shopping, business sentiment, all, obviously, very much related to the services we provide. So short of that event and not knowing that, we feel that we're tracking well.

And final question. You mentioned that you have a pipeline of business of $19 million. How do we look at that pipeline in terms of when we model the revenues or when we expect to model that revenue?

Well, if I understand -- can you explain that a little bit? I'm not sure I understand.

Yes. I'm just wondering in terms of how -- when you mentioned the pipeline of business that you have, what is that -- how far out into the future are you modeling that expected pipeline? And over what time frame do you expect to, I guess, convert that to revenues?

Yes. Yes. Okay. So it's generally a 90-day pipeline, meaning what's in it is active for 90 days. Things can take longer. It could go out 120 days. But you're looking to either close or things won't get closed. They won't be won through that process. So we feel good when we went into the quarter because last year in Q4, and I talked about this in the last call, we really ramped up the pipeline, especially more of the longer-term part of that. And so we're seeing some of that and then we're seeing some of the effects of having a strong pipeline of activity in January and February. That has quieted, meaning activity on that, as you can imagine, during COVID and changed, and now we're seeing things just in terms of how one goes out to sell, improve as the market, in general, improves in terms of interacting with one another. So I think in terms of looking at it, hopefully, the timing gives you some context and then obviously, the targets that we lay out for it, which obviously is against our plan, but you can see how we're cycling against target.

And just a follow-up on that.

Mike.

Yes. Sorry, go ahead.

I would say, I would add to that. I think what you're trying to understand, too, is just that pipeline, how long does it take to recognize the revenue from that pipeline once we do close the deal. I would say there's a mix of shorter-term projects as well as some that might be a year-long contract. So it's a little bit of a mix. It's not all going to be recognized on a very short-term basis but it's not all over a year either.

Got you. And just one quick follow-up. Is there a number in terms of the pipeline that you anticipate or would like to have as you enter into another quarter, like 50% of the revenues or 35% of the revenues? Is that one way to look at it? Like if you set benchmarks or targets for building out that pipeline?

We do. So basically, to get to the $13 million, we need essentially -- and obviously, there's always a quality of the pipeline, which we put a great amount of -- a great deal of rigor to. But generally, we would need, on average, between $40 million and $50 million to convert to get to about $15 million.

Okay. Got you. Okay.

Unweighted. Sorry, that's unweighted funds.

Yes, unweighted. Right. Yes. Okay.

And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to Andrew Benett for any closing remarks.

I'd just like to thank everyone who joined us today. Thank you for your time. Thank you for listening. Stay safe. And I'd also like to, once again, thank all of our employees and our team members who really are doing so much for each other and for our clients. And with that, thank you very much.

Thank you, sir. This concludes today's conference call. Thank you for attending today's presentation. You may now disconnect your lines, and have a wonderful day.