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Edited Transcript of HHS earnings conference call or presentation 8-Aug-19 8:30pm GMT

Q2 2019 Harte Hanks Inc Earnings Call

San Antonio Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Harte Hanks Inc earnings conference call or presentation Thursday, August 8, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew P. Harrison

Harte Hanks, Inc. - President, CEO & COO

* Mark A. Del Priore

Harte Hanks, Inc. - CFO

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Conference Call Participants

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* Michael A. Kupinski

NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst

* Rob Fink

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Presentation

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Operator [1]

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

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Rob Fink, [2]

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Thank you, and good afternoon, everyone. Thank you for joining us. Hosting the call today are Andrew Harrison, President; and Mark Del Priore, 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, 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, expectation related to cost-saving measures and the availability of a tax refund 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 earnings release.

The conference call may also reference non-GAAP financial measures. Please refer to the earnings press release that was issued today after the close for reconciliations and other related disclosures. The company's earnings release is available on the Investor Relations section of the company's website at hartehanks.com.

With all that said, I'd like to turn the call over to Andrew Harrison. Andrew, the call is yours.

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Andrew P. Harrison, Harte Hanks, Inc. - President, CEO & COO [3]

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Thanks, Rob. Second quarter for us was full of positive activity. We received a significant infusion of cash, we kicked off the next phase of our ongoing restructuring efforts, and we began to convert some of our sales pipeline to new business wins.

Our second quarter infusion of cash was from the receipt of a tax refund in the amount of $15.9 million and a $5 million contingent payment from the sale of 3Q Digital. These, added to the $4.6 million tax refund received in the first quarter, have contributed a total of $25.5 million to our cash position that at the end of the second quarter was $39 million. As a result, our liquidity is in a strong position. And we have the ability to fund our restructuring efforts, further advance business improvement initiatives and bolster our sales efforts.

During our first quarter earnings call in May, I stated our commitment to take the actions required to restore profitability at Harte Hanks and to create opportunities to grow our revenues over time. We want to emphasize how achieving these requires both stabilizing our revenue and also aligning our cost structure to our revenues and how we were pursuing both of these with urgency and priority.

Over the past 3 months, we've made significant progress advancing initiatives to better achieve these goals. Before I provide a highlight of this progress, it's important to note that our first quarter earnings call took place midway through the second quarter, and much of the benefit of the progress we've made during the past 3 months has little impact on our second quarter performance. Despite that, expense reductions in the second quarter nearly offset revenue declines, resulting in narrower net losses and improved adjusted EBITDA as compared to the same quarter 1 year ago. We expect our recent efforts to have an increasingly positive impact over the next several quarters as more of our actions begin to take effect. And further, we believe that based on our current plan, positive adjusted EBITDA is an attainable goal as early as the fourth quarter of this year, and we expect to have positive adjusted EBITDA for the full year of 2020.

Related to our cost reduction plan, we are actively involved in a well-coordinated and extensive restructuring effort. This is a named project managed by a full-time project leader with years of expertise in cost restructuring. We have established a task force of highly engaged business and functional leaders who work in close coordination with several skilled consultants and 2 senior and experienced board members who provide strong support. The combination of outside expertise, the board's engagement and internal efforts is yielding significant progress towards identifying opportunities in every area of the company to materially reduce our cost structure. This task force has been taking action on the identified opportunities and successfully converting them into future saving in every area of the company. To date, in 2019, we've identified over $20 million of additional annualized cost savings.

Few areas of noteworthy savings include corporate technology and related infrastructure, and vendor and third-party expenses. In addition, we're also finding savings opportunities in real estate, management, G&A and production. This is challenging work. I'm pleased with the results so far, and I'm very proud of the efforts of everyone involved.

During last quarter's call, I highlighted that we had strengthened our sales pipeline, and that pipeline has yielded 21 new business sales with wins in each of our major service line. Through the first half of this year, our teams have closed $6.2 million of sales, doubling the $3.1 million of closed sales during the same period in 2018. We're making additional investments to further strengthen our sales pipeline to boost new business opportunities for the future.

With that, I will now turn the call over to Mark Del Priore to provide a more detailed walk-through of our second quarter results. Mark?

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Mark A. Del Priore, Harte Hanks, Inc. - CFO [4]

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Thanks, Andrew. As Andrew mentioned in his comments, we ended the first quarter with $39 million in cash. During the quarter, we received a $5 million contingent payment related to the qualified sale of 3Q Digital as defined in the purchase and sale agreement dated February 28, 2018. Additionally, we received $15.9 million in federal income tax refunds associated with the capital loss we generated on the sale of 3Q Digital in 2018 and the restructuring of one of our foreign entities.

We believe that our cash position, combined with the remaining availability on our credit facility provides adequate liquidity to fund our turnaround plan. It has also allowed the company to further advance business improvement initiatives, some of which have and will continue to require upfront and onetime investments. We expect that these investments, which are part of the restructuring efforts described by Andrew, carry attractive returns, have a short payback period and will result in substantially reduced cost that will be realized over the next few quarters.

With $3.3 million in restructuring expenses realized in the second quarter and additional restructuring expenses expected over the next few quarters, the company has included in our earnings press release and we'll mention on this call non-GAAP financial measure, adjusted EBITDA, which serves as a supplemental measure of operating performance in order to provide an improved understanding of underlying performance trends. Please refer to our earnings press release that was disseminated today after the market closed for the definition of adjusted EBITDA and other disclosures.

The $3.3 million in restructuring expenses during the second quarter is related to the named restructuring project that Andrew discussed in his comments. This is comprised of charges related to customer database build write-offs, severance, asset impairment, facility lease expense and data contracts. In the 6 months ended June 30, 2019, we recorded restructuring charges of $7.8 million. The restructuring charges in the first quarter ended March 31, 2019, included a termination fee related to a contract with Wipro. We expect to report additional restructuring charges over the next few quarters.

To date, there have been annualized savings identified of more than $20 million that are associated with these restructuring. A significant part of this has been focused on our vendor costs. In addition to the $5 million in annualized vendor cost reductions achieved in the first quarter, we reduced our annualized vendor-related cost by an additional $6.7 million since the end of the first quarter. This brings our year-to-date annualized vendor-related savings to $11.7 million. Additionally, we are in the process of advancing initiatives to remove an additional $1.9 million in annualized vendor-related savings.

Turning to the second quarter results. Second quarter adjusted EBITDA improved to negative $1.8 million from negative $3.7 million in the same period last year despite revenue declines of $15.2 million year-over-year.

Second quarter revenue was $54.7 million compared to $69.6 million last year for the year-over-year decline of $15.2 million that I just mentioned, or 22%.

For the quarter, revenues were down in our B2B, consumer, financial services, retail and transportation verticals compared to the second quarter of 2018, offset by an increase in the health care vertical. The largest decline among our verticals was in retail, which was down $5.2 million or 33%, mostly due to a large customer loss in our contact center service line.

Our operating expenses for the second quarter of 2019 were $61.3 million, compared to $75.9 million in the year-ago quarter, a decrease of $14.6 million or 19%. We reduced our operating expenses primarily in the areas of labor, production and distribution and advertising, selling, general and administrative costs to offset the decline in revenue. Excluding the restructuring expense, our operating expenses declined by $17.9 million in the second quarter compared to the second quarter ended June 30, 2018, resulting in cost reductions that exceeded the revenue decline in the same year-over-year period by $2.4 million.

Operating loss was $6.6 million for the second quarter of 2019 compared to $6.3 million in the year-ago quarter. Again, adjusting for the nonrecurring restructuring expenses, our adjusted operating loss was $3.1 million compared to a loss of $5.6 million in the year-ago period. This reflects the massive cost-cutting initiatives undertaken by the company in the face of revenue declines.

Net loss for the second quarter of 2019 was $3.8 million or $0.63 per basic share and diluted share compared to a net loss of $6.9 million or $1.10 per basic and diluted share in the second quarter of 2018.

Turning to our balance sheet and liquidity. As I mentioned earlier, as of June 30, 2019, we had cash and cash equivalents of $39 million. This compares to a cash balance of $20.9 million on both December 31, 2018 and March 31, 2019. As of June 30, 2019, we had $18.7 million in long-term debt, which reflects the current draw on our $22 million bank credit facility.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Now we'll take our first question from Michael Kupinski of NOBLE Capital Markets.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [2]

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I know there's been a lot of heavy lifting that you guys are making a great deal of progress, so congratulations on that. So a couple of things. In terms of the revenues, obviously, it seems like the revenues are showing at least some moderation, but still down quite a bit. Can you give us a little bit of your thoughts on the revenue outlook for maybe the balance of the year, what visibility you might have? Certainly, I know that you have done a lot of cost-cutting to rightsize the business, and you seem pretty positive about the -- being positive EBITDA in the fourth quarter, but obviously you have to have some thoughts on what revenues are doing. So any visibility there that you can offer?

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Andrew P. Harrison, Harte Hanks, Inc. - President, CEO & COO [3]

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Yes. Mark, do you want to start on this one?

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Mark A. Del Priore, Harte Hanks, Inc. - CFO [4]

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Sure. Yes. So Mike, I think, obviously, and Andrew will talk about some of the initiatives and some of the things we're doing on the revenue side, but from a forward-looking standpoint, we're focused on driving new logo revenue from new customers as well as retaining our existing customers. And in terms of providing forward-looking information on that, I think we're going to just stick with what we said on EBITDA. There's a lot of moving parts on the revenue side and getting our cost structure in line with where our revenue is. And remaining nimble is very important and will allow us to get to being adjusted EBITDA positive later in the year and next year. But we're going to hold off on providing revenue guidance.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [5]

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That's fair enough. Can you just give me an idea, obviously, you indicated that some of the cost reduction efforts were kind of midway through the quarter of last quarter, any thoughts in terms of and maybe whether it'd be the cadence of the expense declines or any thoughts that you can give me in terms of what -- to what degree can we expect the cost reduction, particularly in payroll? I would imagine, and it looks like your production and distribution expenses, did you consolidate facilities, for instance? Did you go through that level yet? Or can you give me any more color on that?

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Andrew P. Harrison, Harte Hanks, Inc. - President, CEO & COO [6]

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Yes. So Mike, we've got -- as I said in my comments, we've got kind of an all-inclusive approach to our costs, and we're looking at both labor and nonlabor cost reductions. So on the labor side, we have made some changes and those will continue in part. So those will flow through and probably take effect somewhat in Q3 and more fully in Q4. And we do have a big focus on nonlabor-related cost reductions. Some of those has already began. A lot of those have been identified, taking action as quickly as possible. We've had a few that have started to flow through, but more substantially, as I said also, it will start to show up towards the latter part of 2019.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [7]

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The $25 million in additional cost cuts that you -- I believe -- I just want to make sure I heard that right, that you have $25 million more of cost cuts that are available that you think that you can make, is that in addition to the third-party vendor agreements? Did you change the $11.9 million or what that -- I think that's what you said or $11.7 million for this year. Is that inclusive of the $25 million or are there additional $25 million?

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Andrew P. Harrison, Harte Hanks, Inc. - President, CEO & COO [8]

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Yes. Well, let me say something right at the first, and then I'll let Mark kind of throw up the numbers here, but we said more than $20 million. So I don't think we gave $25 million specifically, more than $20 million have been identified in 2019. So we had a similar amount identified in 2018 as a part of the preliminary restructuring efforts. So this would be in addition to that, but more than $20 million includes what we've identified in the year 2019. And not all of those have begun to flow through, obviously, to the bottom line. Mark, if there's anything to finish, you can do that?

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [9]

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I'm sorry. So that $11.7 million so far was included and that's inclusive of the $20 million for 2019.

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Mark A. Del Priore, Harte Hanks, Inc. - CFO [10]

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That is correct.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [11]

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Okay. Yes. Okay. And then what is the plans for the debt? With the $39 million, you're just going to keep cash there at this point and try to manage through it? There's no interest in paying down debt at this point, is that right?

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Mark A. Del Priore, Harte Hanks, Inc. - CFO [12]

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Yes. We'll evaluate that as we go forward. No plans currently. And we're keeping up all options on the table regarding debt financing going forward. But we have plenty of runway. It doesn't expire until 2021.

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Operator [13]

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Thank you. And we have no further questions. So I'd like to turn the call back to you for any additional or closing remarks.

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Andrew P. Harrison, Harte Hanks, Inc. - President, CEO & COO [14]

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Okay. Well, I want to say thanks, everyone, for joining the call today, and we look forward to next quarter's call.

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Operator [15]

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Thank you. This concludes today's call. Thank you all for your participation. You may now disconnect.