Q4 2023 Harte Hanks Inc Earnings Call
Participants
Tom Baumann; Investor Relations; Harte Hanks Inc
Kirk Davis; Chief Executive Officer, Director; Harte Hanks Inc
David Garrison; Chief Financial Officer; Harte Hanks Inc
Michael Kupinski; Analyst; Noble Financial Capital Markets
Presentation
Operator
Good afternoon, everyone, and welcome to the Harte Hanks fourth-quarter and full year 2023 earnings call. (Operator Instructions).
It is now my pleasure to turn the floor over to your host, Tom Baumann. Sir, the floor is yours.
Tom Baumann
Thank you. Hosting the call today are Kirk Davis, Chief Executive Officer, and David Garrison, Chief Financial Officer.
Before we begin, I want to remind participants that during the call, management's prepared remarks may contain forward-looking statements that are subject to risks and uncertainties. Management may also make additional forward-looking statements in response to your questions today.
Therefore, the company claims protection under safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from results discussed today, and therefore, we refer you to a more detailed discussion of these risks and uncertainties in the company's filings with the SEC.
In addition, any projections as to the company's future performance represented by management include estimates as of today, March 14, 2024, and the company assumes no obligations to update these projections in the future as market conditions change.
This webcast, and certain financial information provided on the call, including reconciliations of non-GAAP financial measures to comparable GAAP financial measures, are available in the earnings press release that was issued shortly after the market closed.
A copy of that press release and other corporate disclosure is available on the Investor Relations section of the Harte Hanks website at hartehanks.com. With that, I would now like to turn the call over to Kirk. Kirk, the call is yours.
Kirk Davis
Thank you, Tom. To our listeners, good afternoon, and thank you for joining our call. With me today in our Chelmsford, Massachusetts office is David Garrison, our Chief Financial Officer.
Today, I'd like to focus on elevate our end to end transformation program, which has been my primary focus since joining Harte Hanks in June. The program is anchored by our intent to achieve sustained profitable growth, expand our relevance to operate more efficiently and attract talent, which we all know is easier when you're growing.
We're also focused on the transformative opportunities enabled by burgeoning AI capabilities. Last August, we commenced a comprehensive review of our sales and marketing organization and our go-to-market strategy. It was evident we were functioning with an antiquated strategy and ineffective structure and investing too little in marketing and demand generation.
In October, we welcomed a new Senior Vice President for Sales and Marketing, Kelly Waller, who has modernized and expanded our marketing and sales organization. She has just completed our restaffing and reorganization by hiring the sales executive to lead international expansion and another to establish our partnership network.
It's not uncommon for B2B companies to generate as high as 30% of their revenue through partnerships. Partnerships will be a material growth driver for us long term.
Other sales channels we're capitalizing on include our participation in high profile business development events, engagement with business development companies and the creation of our own dedicated inside sales team focused exclusively on our offerings. We've swiftly developed a smart go-to-market strategy and attracted a larger, highly talented staff that will position Harte Hanks for sustainable growth.
Last October, we appointed a new interim CFO, David Garrison, who has subsequently become permanent in the role we've had some early successes amidst Dave's transition. He's a welcome addition to our team.
Our last earnings call I explained we were committed to developing a comprehensive understanding of our potential to optimize our cost structure and better leverage technology investments. In October, we engaged the currently organization an international global consulting firm that specializes in business transformation to augment and accelerate our efforts, executive and middle management team leaders have done an extraordinary job engaging with currently and investing their time in over 200 diligence and discovery sessions.
As a result, we have identified approximately $16 million in cost reductions to implement over two years, of which an estimated $6 million will occur in 2024. To sustain and drive this effort, we recently announced the creation of a transformation office to be led by David Fisher as Chief Transformation Officer.
David will oversee all elevate initiatives aimed at achieving our cost capture opportunity, maximizing our return on invest to save projects. Our enterprise-wide AI roadmap and ensuring our highly valued employees are engaged and aware of what we're working toward and why it is important to enable project element Elevate. We've taken a restructuring charge of $5.7 million in 2023, which David Garrison will elaborate on as we are early in '24.
I would like to provide a glimpse of what we are focusing on with in our specific business units. Our care group, led by Ben Choco, along with our technology leaders, are focused on leveraging our Amazon Connect cloud-based technology to begin provisioning, customized AI-enabled solutions for existing and prospective customers. Our care division should be a strong beneficiary of our focus on establishing new partnerships and sales services under new leadership.
As of November, we have entered our second full year post acquisition of inside out through this division, we can drive performance for companies by providing outsourced demand generation and sales. We are anticipating a rebound in revenue in 2024 in Sales Services through our marketing services division, we offer a variety of marketing capabilities and services ranging from strategy, creative content development, account-based management and digital marketing.
We also offer marketing as a service whereby we recruit and deploy staff to support major companies with their internal marketing and digital services in vision, a highly transformative year in our agency services segment. Our business plan and strategy are areas we are currently focused on this segment could become a growth catalyst for us.
When we're involved in strategic planning with clients, it is our first and best opportunity to provide a wider range of services to the clients. So we look forward to developing our plan to reposition and grow this division in our Logistics division, which is led by Patrick O'Brien.
We anticipate a stable to up year and plan to focus on expansion through strategic partnerships and margin improvement. Our fulfillment division also led by Pat with major facilities in Massachusetts and Kansas City is poised to capitalize on several trends in 2024 that we are leaning into such as value added fulfillment, where we are seeing success in custom sellable kits.
We are packaging for major retailers. We expect growth year over year from a variety of prestige US retailers seeking to market seasonal beauty and care boxes, influencer seeding, where in one example, we are supporting a fast-growing agencies, customers, outreach to everyone from high audience influencers to smaller audience.
Higher buying and creators are mine loyalty, gifting and sampling a trend we are benefiting from as we focus on brands served by our agency partners who are seeking to expand or create employee incentive or loyalty programs, utilizing major retailers that we engage with.
And last, I will mention that we are seeing some smaller brands back from mega companies ecosystem as their end to end supply chain becomes more costly and brands seek external fulfillment partners to support physicians, portions of their inventory that are seeing cost escalation while still maintaining the benefit of selling merchandise on a major platform.
I'd like to mention a few additional developments before I turn the call over to Dave. In August, we guided Q3 and Q4 revenue to approximately what we reported in Q2, which was $47.8 million. Combined Q3 and Q4 revenue exceeded that guidance by $1.1 million. In December, we extended our $25 million line of credit with Texas Capital Bank to June of 2025. We have no debt our plan to terminate pension plan one this spring is on track. We are committed to leveraging technology solutions currently.
This includes leveraging Net Suite and evaluating partnerships to leverage emerging technologies. Additionally, we are recruiting for key a few key roles to expand our AI data and predictive analytics expertise.
Our focus on our accounts receivable, payment terms, optimization and billing resolution efforts contributed to our year end cash position of $18.4 million. We ended 2022 with just over $10 million in Q3 2023 with $13.3 million. This has been a company-wide effort, and we've done a good job. Last November was my first earnings call and which I had served to CYO. throughout the reporting quarter. So today's discussion surrounding Q4 reflects my second full quarter.
We're executing on our commitments project Elevate. While challenging has been a unifying endeavor thus far for our senior leadership team and the leading indicators, albeit early are very encouraging. I am bullish about Harte Hanks future because I am confident we have created a growth system.
This is the story with a substantially new sales organization and a modern go-to-market strategy, we are confident will accelerate our pipeline growth, which will bode well for the second half 2024 and the years ahead.
Our cost capture opportunity is significant approximately $16 million. We can invest where we need to, but also ensure we're more profitable. I see a significant opportunity here. I'm thrilled to be here and to be working with the senior leadership team we have.
It's a privilege to lead Harte Hanks and it's 101st year. But what sustains me is my desire to build a much larger much more profitable company to the delight of our employees and our shareholders. We are on that path.
I'll now turn the call over to David Garrison, and I'll be happy to take your questions thereafter.
David Garrison
Thank you, Kurt. I will now review the fourth quarter consolidated results, including revenues for each business segment.
Fourth quarter revenues were $49.5 million a decline of 9.7% compared to $54.8 million in 2022. Growth in customer care segment was offset by declines in the other two segments compared to third quarter revenues of $47.1 million. Q4 revenues were up 5% or $2.4 million sequentially. Revenues in the customer care segment were $17.7 million in the fourth quarter of 2023 compared to $16.7 million in the prior year and 14 million in the third quarter of 2023.
Sales Services increased $1.4 million compared to 2020 to the Marketing Services segment revenues, we're $10.5 million in Q4 of 2023 compared to 13.6 million in the prior year and $10.6 million in the third quarter of 2023. Specific customer reductions and PROGRAM conclusions made up the decrease in this segment year over year.
Fulfillment logistics revenues were $21.3 million in the fourth quarter of 2023 compared to $24.5 million in the prior year and $22.5 million in the third quarter of 2023. The decline in revenue was related to lower volumes in Q4 and the completion of holiday programs during Q3. These declines are not expected to continue into 2024.
Operating expenses in Q4 were $51.8 million, including restructuring expenses of $5.7 million compared to $51.3 million in the same period of 2020 to Q4. Operating expense was a 17% increase versus Q3 operating expenses of $44.2 million. However, without the restructuring restructuring expense, operating expenses only creep increased by 4.2% less than the quarter over quarter. Growth in revenues.
The commencement of project elevate resulted in the $5.7 million of restructuring expenses for the quarter. These expenses included $4.6 million of optimization consulting to help identifying and formulate the plan for the $16 million in cost reductions, $798,000 related to the impairment of unused real estate and $310,000 related to other costs associated with these efforts, we expect to continue to incur expenses estimated at $3.5 million in executing the project elevate savings plan during 2024.
The operating loss in Q4 2023 was $2.3 million compared to an operating income of $3.4 million in 2022 and an operating income of $2.9 million in the previous quarter when adjusting for stock compensation, severance and restructuring charges, the adjusted operating income for the fourth quarter of 2023 is $4 million compared to $4.2 million in Q4 of 2022.
The adjusted operating margin is 8.1% in Q4 2023 compared to 7.7% in the same quarter of 2022. The adjusted operating margin is higher in the current quarter, despite the 9.7% higher revenues in the fourth quarter of 2022.
Fourth quarter of 2023 had a negative EBITDA of $1.1 million compared to an EBITDA of $4.4 million in 2022 and an EBITDA of $3.9 million in the previous quarter. When adjusting for stock compensation, severance and restructuring expenses, the adjusted EBITDA is $5.2 million in Q4 of 2023 and the same for Q4 of 2022.
Now for the year-over-year results, revenue for 2023 was $191.5 million, a 7.2% decline from the 2.206 $0.3 million in 2022. Revenues in the customer care segment were $63.3 million in 2023 compared to $67.2 million in the prior year, a decline of 5.8%.
Sales Services added revenue of $8.7 million excuse me, $8.7 million revenue increase offset decreases in the call center revenues as programs were reduced or concluded compared to 2022 Marketing Services segment revenues were $43.2 million in 2023 compared to $53 million in the prior year, a reduction of 18.4% specific customers reductions in marketing budgets drove a decrease in this segment year over year.
Fulfillment & Logistics revenues were $85 million in 23 compared to $86.1 million in the prior year, a decline of 1.3%. Operating expenses in 2023 were $188.1 million, including restructuring expenses, a 1.6% decrease from 591.2 million for the year ended 2022. With the efforts of project Elevate, we expect operating expenses as a percentage of revenue to decline in 2024 compared to 2023.
Operating income in 2023 was $3.4 million compared to $15.1 million in 2022 when adjusting for stock compensation, severance and restructuring expenses, the adjusted operating income for 2023 was 12.2 million compared to $17.8 million in 2020 to the adjusted operating margin is $6.4 million in 2023 compared to 8.7 and so 6.4% in 2023 compared to 8.7% in the same period of 2022.
The adjusted operating margin is expected to grow with gains from the cost reduction program project elevate in 2023, there was an EBITDA of $7.6 million compared to an EBITDA of seven 17.8 million in 2022 when adjusting for stock compensation, severance and restructuring expenses, the adjusted EBITDA in 2023, it's $16.8 million compared to $20.6 million in 2020 to now a few points on the balance sheet. As of December 31st, 2023, we had cash and cash equivalents of $18.4 million compared to $10.4 million at the end of 2022.
And our current $25 million line of credit was extended through the end of June 2025. Currently no funds have been drawn on this line and the Company has no debt. The to terminate pension one in the spring of 2024 continues without any obstacles. Management expects a pension termination contribution of $7.5 million at the end of the second quarter.
With that, I turn it back over to the operator for questions. Thank you.
Question and Answer Session
Operator
At this time, we'll be conducting a question and answer session. (Operator Instructions) Please hold while we poll for questions.
Michael Kupinski, Noble Capital.
Michael Kupinski
Thank you and good afternoon. Good evening, I guess in some places. First of all, congratulations. I mean, you beat revenues, you beat adjusted EBITDA and your cash is much bigger than I expected. And so good job on a couple of questions.
I wanted to go back because you talked about, you know, these are partnerships and some of us that have been following the story for some time have had know about some of the partnerships in the past that didn't work out so well. And I was just wondering if you can maybe elaborate a little bit on the significance of the partnerships that you're looking for, how do they work? How do you get paid? And just kind of give us a little color on those?
Kirk Davis
Sure. This is Kirk. And thanks for the question, Michael. So as I mentioned in the script, B2B companies can typically see 30, honestly as high as 40% of their revenue and directly coming from partnerships. I'm aware of some of the investments that we've had in the past here and in outcomes that weren't necessarily as promising as hoped.
I want to reassure these partnerships are really all based around a few guiding principles. I'd say those are really competitive differentiation in scaling and scaling and growth, enabling that and being in alignment with our product strategy and we have a person dedicated to this practice area has experienced in it, and we're prioritizing that. I'll give a couple of examples of the types of partnerships that we're looking at. But they really there are really potentially a dozen.
And one that we're working on and have been been nurturing for a few months is to is to really exploit some of the capabilities we have as a result of having invested in our platform with AWS Connect and that that creates interoperability with some of the evolving JNI tool site tool sets in in other platform use cases across customer experience or financial services or global supply chain. So we were piloting a partnership with an enterprising VC firm that has an intriguing mobile wallet.
That includes a automated customer experience. They managed it millions of members per year across health care, government services. And as a side note, the VC firm has very, very deep history in contact center investments and such so they're able to capitalize on call center automation and call flow technology directly via our capacity investment with the with AWS.
So we're developing a joint pipeline across technology and agent spend. Some we look to partner, you know, via strategic go-to-market motions laws, both organizations to usher in a new connected customer experience across a number of channels enable I bought economy of intelligent automation services and UM and front end, really the traditional call center agent business.
So we see a sizable pipeline opportunity we can then can incubate new business models with with the partnership without cannibalizing the traditional business and an jointly win business together that spans data capture, CX automation and agent services outsourcing.
So we've actually just in a span of 10 days, we'll have presented together two or three different large enterprises on our joint capabilities. So if I just pick one more I would say, and there's a whole economy of companies that are helping organizations with their sales journey from idea to execution, you know, the we think we can be part of an end to end solution that that combines a diagnostic strategy, technology and sales and acute execution.
And we think we can be the execution arm for a lot of these consultancies and sales improvement, sales assessments, sales enablement organizations through our sales services division. And so whether we're augmenting another organization's sales organization or they're doing A/B testing to see how different scrips or approaches work, our ability to create demand and to affect sales ARM is very attractive. And so there's a number of companies that we're already in discussions with in that area so all these things are really just a different way to think about scaling and growing besides what our in-house sales organization is doing.
Michael Kupinski
Got you. Thanks for the color.
And then you talked a little bit about international expansion. You know, it's interesting that management previous management always talked about the prospect of international expansion, but never really followed through with it. What are you seeing in terms of the opportunity in developing business internationally in short?
Kirk Davis
So first of all, we execute well in Europe. Our whatever past departures, you know, surrounding Harte Hanks highs and lows. We're really proud of how we're executing in Europe, and we have some an opportunity there to build a sales organization, particularly inside sales organization that are we thinking capitalized.
And we've coupled that up very early on to get some early momentum by being out and participating in some very high profile conferences where we're getting a chance to spend one-on-one time with, you know, as many as 16 different companies over a couple of days, we started our first journey down down this particular path in Europe, attending several events and we're able to develop a very, very rich pipeline for that, that new team.
So I think the combination of the staff we have there in the U.S. All under centralized leadership is going to make that be a big win for us over the course of 2024.
Michael Kupinski
And my final question is that you have your three different segments. What do you think has the biggest opportunity in 2024 to surprises on the upside?
Kirk Davis
Great question. I would say I'm confident we're going to have a growth year a rebound in our sales services. So that's what I have high confidence in. But it's also the smaller of the areas that I highlighted in my remarks.
And you know, at this moment, I think it's going to be between care and and our UM and our fulfillment logistics division, both I think, are executing well right now. Both have dedicated leaders that we've had for years, and we're proud of them.
You know, the answer to the question, given that I think we execute well in both areas is really how the pipeline falls and we're early in scaling the pipeline, I think probably next call, which is what in May we'll be able to talk about some of the early wins we've had and where the momentum is coming from. So it's really it's really in how the sales organization that we have and how their leads flow from in some of the inbound leads we're getting now as a result of enhanced marketing efforts.
And so it's really I mean, I would say probably by I mean, by a little bit into the fulfillment logistics business, that's a that's been performing very well for us. But I think both divisions across the year, all four divisions are going to see some growth compounding as we get into the second half of the year.
Michael Kupinski
Great. Thank you. That's all I have. Thanks.
Kirk Davis
Thank you.
Operator
(Operator Instructions) Please hold while we poll for questions.
Thank you. That concludes our Q&A session. I'll now hand the conference back to Kirk Davis for closing remarks. Please go ahead.
Kirk Davis
I want to thank everybody for joining the call. I think you know it all starts with the team. I'm grateful for the team we have. Obviously, we've made some changes, but we're on we're all working exceedingly well together on. We just talked about a couple of channels within the sales ecosystem we have, but there is palpable sales momentum evident here.
And when we all inside the company are aware of it. It's an exciting time, but you do have a sales cycle to work through and an onboarding process to work through when you land new business. So it does take a little time, but it's all about pipeline and conversion, and we're very happy with our progress there.
But we also are focused on being more profitable and that's the $16 million of approximate cost savings we've identified. And I was pleasantly surprised by that estimated maybe a little bit less of an opportunity. So that was that was exciting for me, and we're only a couple of months away from being able to talk again about the progress we're making and share some some more insights about the sales momentum.
So appreciate the support and look forward to speaking with you again in May.
Operator
Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.
