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Edited Transcript of HRTH.PK earnings conference call or presentation 12-Nov-20 9:30pm GMT

·17 min read

Q3 2020 Harte Hanks Inc Earnings Call San Antonio Nov 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Harte Hanks Inc earnings conference call or presentation Thursday, November 12, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Andrew B. Benett Harte Hanks, Inc. - CEO & Executive Chairman * Laurilee Kearnes Harte Hanks, Inc. - CFO ================================================================================ Conference Call Participants ================================================================================ * Michael A. Kupinski NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst * Sheila Ennis ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, everyone, and welcome to the Harte Hanks Third Quarter 2020 Financial Results Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Sheila Ennis. Please go ahead. -------------------------------------------------------------------------------- Sheila Ennis, [2] -------------------------------------------------------------------------------- Thank you, Christie, 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'd like to remind everyone that the information provided during this call may contain forward-looking statements, such as statements about the company's strategy, adjustments to 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 served, expectations related to cost savings 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, included those described in the company's Form 10-K and 10-Q and other filings with the SEC. And in the 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. -------------------------------------------------------------------------------- Andrew B. Benett, Harte Hanks, Inc. - CEO & Executive Chairman [3] -------------------------------------------------------------------------------- Thank you, Sheila. Before commencing our third quarter financial update, I want to take a moment to recap what we've accomplished during the first 3 quarters of 2020. We are laying a strong foundation from which to grow, and the results are beginning to show, both in terms of traction with existing and new customers as well as in our financial results. This quarter was the second consecutive quarter, posting both revenue and adjusted EBITDA improvements, and we feel confident that the business is now poised for continued performance. We have implemented cost reductions across every aspect of the company, reducing overall costs in 2020 by over $20 million. We enhanced our management team, bringing in industry-leading talent and promoting internal talent. We are focused on engineering cost savings and jump-starting growth. We are encouraged by the acceleration we've seen and the uptick in new and enhanced services, among both our existing clients and new clients. I'd like to share highlights of the quarter that illustrate successful execution of our growth and turnaround strategy despite the challenges of COVID-19. First, top line revenue was $47.7 million and adjusted EBITDA this quarter was $3.2 million, up from $203,000 in the third quarter a year ago. Note this profit has delivered off lower revenue than we posted in a year ago quarter, which was $51.4 million. Lauri will cover this more in depth. However, I wanted to note how proud I am of the team and what is accomplished in such a short period of time. Through these efforts, we remain confident that we will be adjusted EBITDA positive for the year. Even in the face of continued uncertainty and with the pandemic, we had a strong new business quarter with wins, including new business from a large B2B tech firm, which I'll talk about later, a large retailer and the midsized pharma client and net new rings from the CPG and financial services clients. I will elaborate a bit more on this in a few moments. With respect to new business, I'm pleased to report that our current weighted pipeline is $14 million, an increase of $3.7 million from the second quarter. Our unweighted pipeline was $42 million, an increase of $10.9 million compared to the second quarter. As we've discussed previously, hitting our plan for 2020 requires $13 million of new business sold and delivered in the calendar year. And as of quarter end, we've secured over $13 million in new contract signings and are working hard to ensure delivery by end of the year. As I've outlined in the past, we're focused on a 3-pillar strategy to return the company to profitability and growth: first, optimizing the business in the way we work; second, growing our current services and enhanced services with both our existing and our new clients; and thirdly, transforming our business for the future. With regards to optimizing our business. Capitalizing on Harte Hanks' unique asset base that combines marketing services, fulfillment and customer care services is critical to our successful transformation. We are aligning our overall cost structure across the company to maintain industry benchmarks, while thoroughly modernizing our Harte Hanks at the same time. I would now like to highlight a few areas. Firstly, our IT infrastructure strategy calls from moving to the cloud to enable value-added data-driven services. The Harte Hanks' IT team continues to streamline our IT infrastructure and upgrade software tools to improve connectivity and security that ensures continuity and superior client service in this work-from-home environment. We have completed a review of our application systems and data needs and reduced our servers' data and information storage requirement by over 50% when compared to 2019. And we anticipate moving out of our Pennsylvania data center to a cost-efficient private cloud environment by the second quarter of 2021. We anticipate finalizing our IT transformation efforts by the second quarter of 2021 as well with approximately $3 million in annual savings, while delivering new mission-critical services to our customers. We are also optimizing our footprint to align with customer requirements and align for future growth potential. During the fourth quarter of 2020, we will be consolidating 3 locations into our 300,000 square foot facility in Kansas City. This consolidation initiative and move to the geographic center of our country will allow for significant operational efficiencies within our fulfillment business and will provide improved shipping time and cost for our customers. In addition, it will allow the company to grow -- in addition it will allow the company to grow deposit offerings and expand our FDA-approved operations across the U.S. Further investments in technology and light automation will position us to best serve our current and future customers. Through consolidation of operations into the Kansas City location, subleasing exposed facilities, terminations of leases and optimization of our current operating footprint, we continue to expect to achieve annual savings of over $4 million in lease and facility operating expenses. And lastly, we're optimizing our labor force to drive profitable growth. Throughout 2020, we've reviewed our IT team, assess the talent and skill sets through detailed and rigorous assessment of operating performance throughout the organization and realigned all of our resources to facilitate better collaboration, communication and efficiency. Something noted before, which will be key to our success. We improved the capture of time by function and by customer to better allocate resources. Because of these efforts, our businesses and segment leaders can now use this data to optimize the labor cost of their businesses across the company. We continue to consolidate function, streamline management and migrate certain functions to lower cost resources. We anticipate over $13 million in cost reductions, excluding variable labor costs as a result of these 2020 initiatives. With regards to our second pillar, we continue to make strong progress, growing our current services and enhanced services with existing and new clients. As I noted earlier, we're pleased to see our Q3 new business activity and positive momentum continue to build with new assignments across both existing clients and new business wins. This momentum is a positive sign that our newly consolidated sales and marketing organization working under one leader and as one team, expanding our entire business is proving effective. The new alignment has resulted in an increased awareness of an execution of cross-selling opportunities across the business. We also continue to invest in our sales and marketing team with new hires to build the momentum and to drive more activity in the upper funnel of the business as well as throughout all aspects of how we go to market. In September, we're pleased to announce that we brought on board, [Jeff] , as Marketing Director. Jeff is in new position and will focus on marketing, managing our PR and supporting our new business team in the development of how we grow the market. Most recently, he worked at Arc3, one of the leading agency search consultancies, where he had multimillion-dollar agent researches on behalf of this client. We're pleased to welcome, Jeff. Our third strategic pillar is to transform our business model. As previously mentioned, we believe there's tremendous untapped value in cross-selling our services to both our current clients and the prospect. I'd like to share 2 new wins that give you a sense of how we're doing it and what you can expect in the future. The first example involves one of the world's largest home appliance manufacturers, as a $40 billion multinational conglomerate that were challenged with their ability to monitor and respond to bad reviews across multiple e-commerce platforms. Negative reviews correlates directly to lost sales, and they needed to quickly streamline their approach to customer care, respond to reviews quickly and aggregate and learn from all the data available about how their products are being received by the market. This presents as an opportunity to integrate our new social media and e-commerce capabilities to improve our customer care offering. This innovative program will teach agents how to quickly respond to reviews and improving response time. Our agents will use our proprietary Harte Hanks behavioral index data, teaching our teams to be more culturally connected and human in their handling of complaints and issues. With the talent of our strategy team and our proprietary intelligence, we're transitioning our call centers into market-leading customer care teams to be more impactful and understand the influence of responding, negative and positive comments quickly and effectively. This initial assignment will be in the high 6 figures with the opportunity to expand significantly. Another recent win is first, the top 3 global CPG companies and actually a current clients. As I've shared in the past, Harte Hanks has recently bought in recent expansion, the role of preferred sampling provider for this company. I'm pleased to share that we've now successfully expanded our relationship to provide marketing services. These new services proved strategy, design and development of the new data based solutions to better manage their medical marketing initiatives, targeting physicians. With the addition of these services, we will now be responsible for the entire medical marketing program end-to-end from data strategy management to deliver samples and our other marketing materials directly from our fulfillment centers. This is another example of how we're able to add value to our clients by connecting the depth and breadth of our marketing services to the flawless execution of our Fulfillment Services all under one roof. As I hope you can see in these 2 examples and in our financial results, we're seeing important indicators that we are more effectively selling our existing and enhanced offerings. With 3 quarters now under my belt, I'm more convinced than ever, the breadth and depth of Harte Hanks services will enable us to compete favorably in the multiple addressable markets that we serve in. I'll now turn it over to Lauri. -------------------------------------------------------------------------------- Laurilee Kearnes, Harte Hanks, Inc. - CFO [4] -------------------------------------------------------------------------------- Thank you, Andrew. First, as Andrew shared, adjusted EBITDA this quarter was $3.2 million, up from $203,000 in the year ago quarter when we posted slightly higher revenue. We've cut expenses by nearly $9 million in comparison to the year ago quarter. And our spending is down over $47 million for the first 9 months of 2020 versus the same period last year. This cost cutting, coupled with the continued sequential revenue growth are key contributors to the positive and growing adjusted EBITDA. While the potential effects of the pandemic continues to be unpredictable, we are encouraged by new business wins and growth in our B2B and consumer brand verticals. We are continuing to refocus on streamlining and restructuring the business to meet the needs of the market today, and we are encouraged by the stabilization and growth in the business lines where we're investing. I'd now like to walk through the results in more detail. Third quarter revenues were $47.7 million, up over $6.1 million sequentially from last quarter. This compares to $51.4 million last year for a year-over-year revenue decline of $3.7 million. Revenues grew across our B2B and consumer brand verticals in the quarter. Our B2B vertical was up $5.8 million or 51% due to the increased demand for our customer care services. And consumer brands was up $2.9 million or 26%. A portion of the revenue in Q3 was related to short-term projects. Our operating expenses for the first quarter were $46.9 million, down from $55.9 million in the year ago quarter. We reduced our operating expenses in all areas, including labor, production and distribution, advertising and selling, general and administrative. The largest decreases were driven from reduction in transportation and facility expenses as well as labor and production expenses related to the closure of our mail facilities. Operating income was up nearly $6.7 million from last quarter, when we posted an operating loss of $5.9 million. This was a major improvement not only from last quarter, but also from the $4.5 million offering and loss in the year ago quarter. This improvement is attributed to our aggressive cost efficiency efforts. We generated GAAP net loss of $1.6 million or $0.27 per diluted and basic share in the third quarter. This compares to a GAAP net loss of $6 million or $0.97 per basic and diluted share in the year ago period. Third quarter adjusted EBITDA was $3.2 million compared to $203,000 in the same period last year, a significant improvement when we consider the slightly lower revenue level. Turning to our balance sheet and liquidity. As of September 30, 2020, we had cash and cash equivalents of $29.3 million. This compares to a cash balance of $30.1 million as of the period ended June 30, 2020. As of September 30, we had $20.4 million in long-term debt, which reflects the current draw on our $19 million revolving credit facility as well as the long-term portion of our PPP note. We believe we have sufficient balance sheet strength to continue executing on our transformation plan and fund future growth. With that, I'll turn it back over to the operator to take your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And we'll go to Michael Kupinski from NOBLE Capital Markets. -------------------------------------------------------------------------------- Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [2] -------------------------------------------------------------------------------- And first of all, congratulations on your quarter. You beat my estimates, but I can't recall the last time you guys actually showed sequential quarterly improvement in revenues. It's been a while. So congratulations on that. I was just wondering, if you could just give us a little sense about how Q4 is shaping up? Because typically, we do get some seasonality in revenues. And you indicated that you have a building pipeline. So should we see some sort of further improvement into Q4, if you kind of give us a sense of how things are shaping up there? -------------------------------------------------------------------------------- Andrew B. Benett, Harte Hanks, Inc. - CEO & Executive Chairman [3] -------------------------------------------------------------------------------- Yes. I'll start and then give it to you, Lauri. So with regards to Q4 seasonality, one thing that we've discussed in the past is as our share -- and that was driven largely by retail and the work that we did out of our print business. So as that work has declined, there is less seasonality in the business. So you wouldn't now see going forward any seasonality of Q4 spike due to that. With that said, and I'll let Lauri elaborate as well. The only other point that we noted was that we did have some one term project -- or onetime projects within Q3 that contributed to the results. -------------------------------------------------------------------------------- Laurilee Kearnes, Harte Hanks, Inc. - CFO [4] -------------------------------------------------------------------------------- Yes. Right. I agree. But I think that the price in Q3, Michael, is higher than we expected due to the short-term project. But we'll continue really into Q4, but not at the same level that we had in Q3. -------------------------------------------------------------------------------- Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [5] -------------------------------------------------------------------------------- Got you. And then you outlined several cost initiatives, one being some infrastructure cost and then, of course, you have been cost-cutting quite some time. How should we look at these costs? Like when do you start cycling some of the cost initiatives and cost that you made earlier? Is it -- how can -- can you lay that out for me like by quarter, what you're expecting in fourth quarter? And then maybe what you're expecting for full year 2021? -------------------------------------------------------------------------------- Andrew B. Benett, Harte Hanks, Inc. - CEO & Executive Chairman [6] -------------------------------------------------------------------------------- Yes. Lauri, I think if you can elaborate on that, please. -------------------------------------------------------------------------------- Laurilee Kearnes, Harte Hanks, Inc. - CFO [7] -------------------------------------------------------------------------------- Okay. Yes, Michael, some of the cost savings we have already started to realize those cost savings. So of the -- I think we've given you about $20 million of cost savings. I would say, a good chunk of that has already been recognized. We're already realizing those savings. And we still have some additional efforts to do, and we should have fully realized those savings probably by Q3 of next year. -------------------------------------------------------------------------------- Andrew B. Benett, Harte Hanks, Inc. - CEO & Executive Chairman [8] -------------------------------------------------------------------------------- The only other thing that I would add is these were cost savings that are being implemented, in some cases, if it's IT and infrastructure driven because we're following more -- we're following our asset-light strategy. And so we're realizing savings from that. And in other cases, it's labor, as I discussed. That we believe there will be continuous cost savings going into 2021 as we look at how we optimize, how the businesses work together and just how we're working within the businesses. So we don't see that it's a kind of onetime and we're concluded within the end of this year. -------------------------------------------------------------------------------- Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [9] -------------------------------------------------------------------------------- Got you. And then can you just remind me, I know that there were some opportunities that have some additional funds coming through the prospect of maybe the 3Q digital sale or resale. And then maybe some available further tax refunds, are those all kind of embedded into the numbers for the third quarter? -------------------------------------------------------------------------------- Laurilee Kearnes, Harte Hanks, Inc. - CFO [10] -------------------------------------------------------------------------------- Yes. So the additional funds that we have come in from 3Q were already received. There's nothing left on that. And you will notice on the balance sheet that there is some receivable on the taxes, but it's all embedded into the quarter. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- And we have no further questions in the queue. I'll turn it back to you for any closing remarks. -------------------------------------------------------------------------------- Andrew B. Benett, Harte Hanks, Inc. - CEO & Executive Chairman [12] -------------------------------------------------------------------------------- Well, thank you very much for joining us, and we appreciate the time and stay safe. Thank you very much. -------------------------------------------------------------------------------- Laurilee Kearnes, Harte Hanks, Inc. - CFO [13] -------------------------------------------------------------------------------- Thanks. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- And that does conclude our call for today. Thank you for your participation. You may now disconnect.