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Edited Transcript of HHS earnings conference call or presentation 12-Nov-19 9:30pm GMT

Q3 2019 Harte Hanks Inc Earnings Call

San Antonio Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Harte Hanks Inc earnings conference call or presentation Tuesday, November 12, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew P. Harrison

Harte Hanks, Inc. - Advisor

* Mark A. Del Priore

Harte Hanks, Inc. - Former 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;FNK IR

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Presentation

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Operator [1]

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Good day and welcome to the Harte Hanks Third Quarter 2019 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Rob Fink of HNK (sic) [FNK] IR. Please go ahead, sir.

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Rob Fink;FNK IR, [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 and capital resources, competitive factors, business and industry expectations, anticipated performance and outcomes, future effects of acquisitions, dispositions, litigation and regulatory changes, economic forecasts for the markets they serve, expectation related to cost-saving measures 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 press release that was issued after the close for reconciliations and other related disclosures. The company's earnings release is available on the Investor Relations section of its website at hartehanks.com.

With all that said, I would now like to turn the call over to Andrew Harrison. Andrew?

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Andrew P. Harrison, Harte Hanks, Inc. - Advisor [3]

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Thank you, Rob, and good afternoon. This quarter was a quarter of significant progress for Harte Hanks. We achieved positive adjusted EBITDA a full quarter earlier than we expected and continue to eliminate legacy low-margin contracts and associated infrastructure while pursuing and winning more value-based engagements with healthy margins. The year-over-year declines in revenue continued, but the pace is slowing. The trend will fluctuate from quarter-to-quarter based on seasonality and other factors. But overall, we expect the pace of declines to continue to narrow.

More importantly, we expect positive adjusted EBITDA in the fourth quarter. And for the full year 2020, we are expecting positive EBITDA, which suggests a material decline in cash burn next year. Our EBITDA, which includes the nonrecurring restructuring expenses, and our stock-based compensation was a negative $3.2 million. This is a significant improvement over both the first 2 quarters of 2019 and the corresponding quarter in 2018. In addition, it continues our trend of improving our EBITDA over the past 2 quarters. Obviously, a tremendous amount of work and effort by many, many people across the company was required to make this happen, and I want to acknowledge the hard work of the Harte Hanks team.

We will continue our focused efforts because we realize there is more work to do, but we're encouraged at the results so far and for being ahead of schedule and turnaround plan.

Cost reductions were an important part of our improved performance in the third quarter as we continued to adjust our operating cost to our revenue, but our execution is not one dimensional. Other aspects of the efforts that are beginning to show positive returns include actions such as: we significantly reduced the large vendor engagement that was negatively impacting performance and profitability, that relationship that was once oversized and business impairing is now small and manageable, Mark will touch on this some more; we began the consolidation of several smaller production facilities into larger, geographically strategic locations to create efficiencies and to allow us to better serve our clients; we strengthened our focus on account relationships, retention of profitable revenue and account growth.

As a result, we began to see increased stability and profitable revenue and growth opportunities on several key accounts. We adjusted our revenue in several areas, shedding some work that required disproportionately large amount of cost to deliver, thereby resulting in little, if any, positive contribution. We launched a lead-generation team that's closely aligned with sales and business leadership to build a bigger and better pipeline of sales opportunities. Our pipeline improved in the second quarter and held steady throughout the third quarter with new opportunities being added to replace those that were won or lost during the quarter. We believe we can grow the pipeline in coming quarters through our new lead-generation efforts that are just beginning. We closed additional new business deals from the pipeline efforts begun earlier in the year. And these new business wins are beginning to generate profitable revenue. The new business won in the third quarter is expected to generate an estimated $4.6 million of new revenue over the next 12 months. This amount is more than double the sales results during the same period last year.

The Board has been engaged in an active Executive Officer search and expects to provide an announcement in the near future. These things all indicate notable progress in the quarter, and it's encouraging. We will continue to press hard to retain high-quality revenue, control costs and add additional business from existing and new accounts as these are all critical elements of our continued success.

All of these improvements are paving the way for Harte Hanks to build the overall business and add to our success. Harte Hanks is in a handful of distinct businesses, whose offerings are sold both independently and as part of coordinated solutions. In aggregate, as well as by segment, Harte Hanks designs, creates and delivers personalized brand connections that power sales and build loyalty.

We're successful at designing, creating and delivering personalized brand connections through our proven expertise, applicable strategy, creative problem-solving, top-tier technology and rock-solid delivery of services. By delivering the right message at the right time, we convert prospects into customers and customers into repeat buyers. We have a rich heritage in this space and many success stories of how Harte Hanks has been a terrific partner to our clients to connect them to prospects and to their customers in ways that grow relationships and power commerce. I am proud of the entire Harte Hanks team, exceedingly appreciative of the efforts of everyone involved and excited to be part of a bright future.

I will now turn it over to Mark to walk through the details of our financial performance. Mark?

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

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Thanks, Andrew. The company's cost reduction efforts continue to be reflected in our quarterly results. As you may recall, in the first quarter of 2019, our year-over-year operating expense decline, net of restructuring and impairment costs, nearly offset the full scope of revenue decline during the quarter. Then in the second quarter of 2019, our year-over-year operating expense decline, again net of restructuring and impairment costs, exceeded our year-over-year revenue decline by $2.4 million. We built upon this momentum in the third quarter with an operating expense decline of $16.8 million year-over-year compared to a revenue decline of $12.2 million. This resulted in our cost reductions outpacing our revenue decline by $4.6 million. We expect this momentum to continue in Q4 next year.

In addition, our year-over-year revenue decline for the quarter was $12.2 million compared to a decline of $15 million in Q2 and $22 million in Q1. We believe that this is reflective of our efforts to grow revenue from new customers and retain and grow existing client revenue. The result of all the cost cuts and the improving revenue decline is that our EBITDA and adjusted EBITDA continues to improve. EBITDA in the third quarter of 2019 increased by $5.3 million compared to same period last year and increased by $2.1 million sequentially compared to Q2 of 2019. In addition, our adjusted EBITDA, which adds back non-recurring restructuring and impairment costs, and stock-based compensation increased by $6.9 million in the third quarter compared to the third quarter a year ago and increased by $2 million sequentially.

As Andrew mentioned, our adjusted EBITDA was positive during the quarter at $203,000, a milestone we reached 1 quarter ahead of the guidance we provided on previous conference calls. As our restructuring costs will decide in the coming quarters, we believe that we will be EBITDA-positive for the full year of 2020.

We ended the third quarter with $32 million in cash. This is down from $39 million at the end of the second quarter. The decline in cash is partially attributable to a decline in customer deposits for postage and the onetime investments made by the company to reduce recurring operating costs that we described on our previous conference call.

We continue to expect that these investments, which are part of the ongoing restructuring efforts, carry attractive returns, have a short payback period and will result in substantially reduced costs that will be realized over the next few quarters. Also, we continue to believe that our cash position, combined with the remaining availability on our credit facility, provides adequate liquidity to fund our turnaround plan. Our restructuring expenses during the third quarter totaled $3.1 million. The majority of this is comprised of severance, charges for lease impairments and termination fees related to certain vendor agreements. In the 9 months ended September 30, 2019, we recorded restructuring charges of $10.9 million. We expect to record declining restructuring charges over the next few quarters.

To date, there have been annualized savings identified of more than $21 million that are associated with these restructuring fees. A significant part of this has been focused on our vendor costs. In addition to the $11.7 million in annualized vendor cost reductions achieved in the first half of the year, we reduced our annualized vendor-related costs by an additional $1.7 million since the end of the second quarter. This brings our year-to-date annualized vendor-related savings to $13.4 million. We continue to evaluate our vendor-related costs and expect to realize additional savings in the coming quarters.

Turning to the third quarter results. As mentioned earlier, third quarter adjusted EBITDA improved to $206,000 from a negative $6.9 million in the same period last year despite a revenue decline of $12.2 million. Third quarter revenue was $51.4 million compared to $63.6 million last year for a year-over-year decline of $12.2 million or 19%.

For the quarter, revenue was down in our B2B, consumer, financial services, retail and transportation verticals compared to the third quarter of 2018, offset by an increase in the health care vertical. The largest decline among our verticals was in retail, which was down $6.1 million or 41%.

Our operating expenses for the third quarter of 2019 were $59.9 million compared to $73.9 million in the year ago quarter, a decrease of $18 million or 24%. We reduced our operating expenses primarily in the areas of labor, production and distribution and advertising, selling, general and administrative to offset the decline in revenue. Excluding restructuring and impairment expenses, our operating expenses declined by $17.3 million in the third quarter compared to the third quarter ended September 30, 2018.

Operating loss was $4.5 million for the third quarter of 2019 compared to $10.4 million in the year ago quarter and $6.6 million in the second quarter of 2019. Adjusting for the nonrecurring restructuring and impairment expenses, our adjusting -- adjusted operating loss was $1.1 million compared to a loss of $8.5 million in the year ago period and $3.1 million in the second quarter of 2019. This reflects the massive cost-cutting initiatives undertaken by the company in the face of revenue declines.

Net loss for the third quarter of 2019 was $6.1 million or $0.97 per basic and diluted share compared to a net loss of $10 million or $1.62 per basic and diluted share in the third quarter of 2018. Sequentially, the net loss declined from $3.9 million or a positive $0.63 per basic and diluted share mainly due to the inclusion of a gain of $5 million due to the sale of 3Q Digital in the second quarter of 2019.

Turning to the -- to our balance sheet and liquidity. As I mentioned earlier, as of September 30, 2019, we had cash and cash equivalents of $32 million. This compares to a cash balance of $21 million as of the period ended December 31, 2018, and $39 million as of the period ended June 30, 2019. As of September 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 questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question, we'll hear from Michael Kupinski with 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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And first of all, congratulations on your hard work to turn the business around and for showing positive EBITDA a little earlier than expected. So a couple of questions. Can you talk a little bit about the quality of revenues? And in particular, while revenues were roughly in line with my expectations, you were able to nicely beat my cash flow assumption for the quarter. I know that some of that was flow-through from some costs reductions earlier. But I was wondering in terms of how you're managing the business, the decision to maybe -- some of the revenues was it because you exited low-margin revenue or is it just simply a product mix issue? And so can you just kind of give a little bit more color on how you plan to manage revenues as you go forward?

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Mark A. Del Priore, Harte Hanks, Inc. - Former CFO [3]

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Sure. Yes, I'll take it. Yes. So thanks, Mike. So there's certainly some discontinuing of low-margin revenue that's definitely taking place in our numbers. Some of it by design, some of it we welcomed. But that's not the only part of it. We think that the new revenue that we are adding is coming at a higher margin than the overall margin of the company. So we think that new -- overall new customer accounts have higher margins, and then also the accounts that we have added this year will also be higher margin. And then one of our focuses is also on retaining and growing our legacy higher-margin accounts while also shedding some of the lower-margin accounts. And then if you look at what our -- at our pipeline, we are certainly seeing the most traction in our pipeline from our highest-margin product offerings, and that would be our marketing services business as well as our fulfillment business. Those are the 2 areas that we're seeing the most robust pipeline, and they also happen to be our 2 highest-margin businesses.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [4]

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And so in terms of the pipeline of business. I guess, traditionally, when Harte Hanks won accounts, they typically showed losses as they kind of got those accounts up and running and then showed margins in future quarters. Can you just talk a little bit about how that pipeline of business actually trains? How are you managing the margins? Are they profitable from day 1 or is it time to build that sort of thing? I was just kind of trying to get an idea of the timing of how that business falls and that sort of thing.

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Andrew P. Harrison, Harte Hanks, Inc. - Advisor [5]

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Yes. Mike, we had taken some business in the past that was for the sake of revenue that had low or no margin attached to it, that the -- our business that we're -- we've got in our pipeline and that we're winning today is business that is profitable from the beginning, though it may take a period of time to get it ramped up and beginning to produce revenue from the date of the sale of the close -- close of the sale. So it may take 2 weeks to 2 months before we begin to recognize some revenue after a sale is closed. But generally speaking, that revenue is profitable from the wins that we're getting recently and what's in our pipeline today.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [6]

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And I know that in the past, you really didn't have much of a pipeline of business. And so this is kind of relatively new for you guys. Do you even have a pipeline? But can you talk a little bit about how much pipeline in terms of revenues that you have this quarter versus, let's say, sequentially from the second quarter?

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Andrew P. Harrison, Harte Hanks, Inc. - Advisor [7]

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Yes. We don't give the numbers, but our pipeline has improved from where it was in the second quarter, and we have progressively, throughout 2019, delivered higher sales results quarter-over-quarter, and we are optimistic that we'll be able to continue to do that.

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Mark A. Del Priore, Harte Hanks, Inc. - Former CFO [8]

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And Mike, we've been able to grow that pipeline despite winning new business. So as new business is won and it comes out of the pipeline, we've been able to continue to grow that -- the overall pipeline.

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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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That's terrific. And then with the negotiated vendor agreements, does the company anticipate that there will be a loss associated with those agreements? Or can you just kind of give us the magnitude of -- you said that you're rightsizing it versus what was an oversized relationship, what is the magnitude of the decrease in losses from the vendor relationship?

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

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So we were spending well over $10 million a year on certain vendors. And we believe that all of that cost comes out of the business starting -- almost all of it will be out by Q1. And there have been some charges related to getting out of that, but we have expensed all of those charges in our numbers already. So they do fall under restructuring costs, but they have been flowing through the OpEx as the year has unfolded.

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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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That's a good positive. And then in terms of the consolidation of the facilities, was that in the third quarter or was that in the fourth quarter?

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

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It began in the third quarter, and it will continue into the fourth quarter. And then there may be some residual stuff in early 2020, but the large majority of our restructuring costs will be behind us at year-end.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [13]

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Got you. And then in terms of the savings you anticipate from the consolidation, if you can kind of grain that a little bit. And also, will there be a revenue impact from the consolidation? Or is it very little revenue impact?

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Mark A. Del Priore, Harte Hanks, Inc. - Former CFO [14]

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Yes. I don't think we want to break out specifically the savings from the consolidation. I think we've sort of outlined the various impacts of consolidation and vendor reductions as well as labor reductions. So we will -- we look at it holistically. So I don't think we're going to break it out specifically, but -- and what was your second question?

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [15]

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Well, I was just wondering if there was going to be any type of revenue impact due to the facility consolidations?

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Mark A. Del Priore, Harte Hanks, Inc. - Former CFO [16]

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Not material.

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Operator [17]

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And that will conclude the question-and-answer session and today's call. We thank you for your participation. You may now disconnect.