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Harte-Hanks Inc. (NYSE:HHS)

Q4 2008 Earnings Call

January 30, 2009 11:00 am ET

Executives

Larry Franklin - President and CEO

Bryan Pechersky - SVP, General Counsel and Secretary

Doug Shepard - EVP and CFO

Analysts

Matt Chesler - Deutsche Bank

Alexia Quadrani - JPMorgan

Edward Atorino – Benchmark Dan Salmon - BMO Capital Markets

Andrew Cash - Point Clear Value Management

Brenton Flynn - Robert W. Baird

Michael Kupinski - Noble Financial

Operator

Welcome and thank you for joining the fourth quarter and year-end 2008 earnings call. (Operator Instructions).

Now, I'll turn the meeting over to Mr. Larry Franklin, President and CEO of Harte-Hanks. Sir, you may begin.

Larry Franklin

Good morning. On the call with me today with us, is our Doug Shepard, our Executive Vice President and Chief Financial Officer, Jessica Huff, our Vice President, Finance & Controller, and Bryan Pechersky, our Senior Vice President of Counsel and Secretary. And before I begin with my remarks, Bryan will make a few statements. Bryan?

Bryan Pechersky

Thanks, Larry. Our call may include forward-looking statements. Examples may include statements about our strategies, initiatives and business plans, adjustments to our cost structure, financial outlook and capital resources, competitive factors, business and industry expectations, the economic downturn in the US and other economies and other statements that are not historical facts.

Actual results may differ materially from those projected or implied in these statements, because of various risks and uncertainties including those described in our most recent Form 10-K and other documents filed with the Securities and Exchange Commission and the cautionary statement in today's earnings release.

Our call may also include non-GAAP financial measures. Please refer to today's earnings release for the required reconciliations and other related disclosures. Our earnings release is available on the investor relations section of our website at www.harte-hanks.com.

I'll now turn the call back over to Larry.

Larry Franklin

Thank you, Bryan. As we mentioned in the press release that you received this morning, the fourth quarter was one of the most difficult that our company has faced. The overall economic climate and more specifically, the fourth quarter financial market events dramatically influenced business and consumer confidence affecting our customers' marketing plans, which impact on our direct marketing revenue.

We mentioned on this call in October that uncertainty and caution were the prevailing themes that we were hearing from clients regarding future spending plans, and that caution became even more pronounced throughout the fourth quarter, resulting in program and volume reductions and delays in spending by our clients.

While our spending decreased across all our vertical markets, it was most pronounced in financial, pharma and healthcare and the retail verticals. In shoppers the negative trends and economic conditions that we've seen since 2007 in California and Florida continued.

Going into the fourth quarter, our operating assumption was that the revenue environment would be difficult and we've not seen any fundamental changes that would indicate that that outlook should be any different. As a result of difficult economic environment, which impacted shoppers throughout 2008 and direct marketing in late 2008, we continued and accelerated our actions across the company in the fourth to adjust our expense base to the new economic realities.

Those actions are outlined and some detailed in the press release and Doug will add some additional details to it in his comments. However, I will say that I am pleased and impressed with the way that our leadership and all of our coworkers have responded to this rapidly changing environment that none of us have participated in before.

And before I turn it over to Doug, I want to make these three or four points. This global business climate and reduced consumer confidence, weakened demand, and disruption in the credit and financial markets, makes it extremely difficult for us to have any real visibility on when things will improve and obviously affects the visibility of our revenue.

I believe there is a bright future for data driven targeted marketing solutions that deliver value and achieve results for our clients. And both of our businesses provide services and products that are even more necessary in this environment, because we help our clients talk directly to their customers and generate revenue for them now.

We also remain focused on conservatively managing our balance sheet and cash flows and we are committed to emerging from this recession as an even stronger company and leader in an industry with great opportunities for long-term success.

And I can't say too much about our coworkers and leadership, because they face some very challenging and difficult decisions, and we'll have more of those. And they have responded with resolve and dedication, because our mission, our vision is clear. We remain intensely focused on keeping our existing customers and adding customers, reducing our costs and conserving our cash, and because of these people at Harte-Hanks I am confident that we will succeed.

Doug, do you want to provide some more details?

Doug Shepard

Thank you Larry and good morning. Here is a companywide overview of fourth quarter and full year 2008. Revenue decreased 11% for the quarter and 6.9% for the year. Direct Marketing decreased 8.1% for the quarter and was flat for the year. Shoppers decreased 17.2% for the quarter and 18.7% for the year.

Operating income decreased 46% for the quarter and 28.9% for the year. For the quarter, Direct Marketing declined 19.2%, while Shoppers declined $14.7 million. For the year, Direct Marketing decreased 5.2% and Shoppers decreased 63.4%. For the quarter our free cash flow was $20.9 million versus $29.9 million in 2007. For the year, free cash flow was $82.8 million as compared to $105.4 million in 2007. We ended the year with $20 million in capital spending; $8.2 million less than the $28.2 million spend in 2007. For 2009, we currently expect our capital spending to be in the area of $10 million to $15 million.

Turning to our two businesses; in the quarter, Direct Marketing revenue decreased 8.1%, and operating income decreased 19.2% resulting in an operating income margin decreased 15.6% compared to 17.7% in the fourth quarter of 2007. During the quarter, October revenues were consistent with the overall third quarter trends, but November and December decreased sharply.

A charge of $2.8 million was taken in the fourth quarter related to headcount reduction as a result of adjusting expenses to the revenue decline. Removing this charge would have resulted in operating income margins of 17.1% for the quarter. For the year, operating income margins finished at 14.1%, a decrease from 2007 margins of 14.9%.

In the quarter, our high tech/telecom vertical market represented 29% of Direct Marketing revenue; retail was 28%, select markets were 19%, financial was 12.5%, and healthcare/pharma was 11.5%. For the year, high tech/telecom represented 28% of Direct Marketing revenue, retail was 25%, and financial was 15.5%, select markets 20%, healthcare/pharma 11%. Our top 25 Direct Marketing customers represented approximately 44% of Direct Marketing revenue for the quarter and 41% for the year.

Turning to Shoppers, our performance for the quarter and year was disappointing. Shoppers' fourth quarter revenue decreased by 17.2% and 18.7% for the year. As we discussed in last quarter's call, due to calendar shifts, we had one extra week of publication in the fourth quarter of 2008 versus 2007. The 53 week has historically been marginally profitable, and in 2008, it was a small loss. The extra week caused an approximate four point increase in quarterly revenues and a one point increase for the year. Circulation curtailment negatively impacted the quarter by one point and the year by 1.2 points.

Shoppers operating income margin for the quarter declined to negative 1.2% as compared to 14.1% for the prior-year quarter. And for the year, operating income margin was 7.4% as compared to 16.4% in 2007. Responding to the worsening economic environment, our Shoppers leadership took aggressive additional steps to reduce cost, which resulted in $2.1 million of fourth quarter charges. Towards the end of the quarter, approximately 500,000 circulation was closed in Florida.

In California, we will close approximately 700,000 circulation in three areas early in the first quarter of 2009. The Florida circulation curtailment will allow us to consolidate two production facilities into one facility. The expected 2009 savings from the consolidation which will be completed by the end of the first quarter will be offset by the 2009 first quarter charges previously outlined.

Most of the charges we discussed in the press release impacting the first quarter of 2009 relate to lease exit cost and accelerated depreciation from the production facility consolidation. Removing the fourth quarter Shoppers charges would have resulted in a small amount of operating income.

These 2008 fourth quarter and 2009 first quarter payroll actions will result in reduced 2009 Direct Marketing expenses of $22.5 million along with $6.1 million of Shoppers expenses. Our fourth quarter effective tax rate was 35.6% which was slightly lower than the 2007 fourth quarter of 36.6%. Lower state taxes drove the decrease. Our 2008 effective tax rate was 38.2%, which was 50 basis points down from our 2007 effective tax rate. For 2009, we expect our effective tax rate to be approximately 35% to 36%.

We estimate the fourth quarter charges outlined in the press release, which include the CEO transition in December, negatively impacted fourth quarter earnings by approximately $0.055 per share. On the balance sheet, at December 31, we were showing a net debt balance of $240.5 million versus $273.5 million at September 30, a reduction of $33 million.

Net accounts receivable were $169.4 million versus $199.2 million at year end 2007. Days outstanding at end of December, was 58 days, a decrease compared to 60 days outstanding at December 2007. We ended the quarter with leverage ratio of 1.7 times versus the covenants of 3 times and interest coverage ratio of 11.2 times versus a covenant of 2.7 times. We currently have all $125 million available under our revolver. We believe that our conservatively leveraged balance sheet and free cash flow provide us good operational flexibility.

With that, operator, we'd like to turn the call over for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions).

Our first question comes from Matt Chesler from Deutsche Bank.

Matt Chesler - Deutsche Bank

Good morning. Thanks for taking my call.

Larry Franklin

Good morning.

Matt Chesler - Deutsche Bank

You said that the declines in direct marketing accelerated throughout the quarter, with November and December softer than October. As you're headed into January what can you say about the declines you've seen in January versus December?

Larry Franklin

Well we actually don't have the January results yet, but we expect it'll be similar to where we ended the year.

Matt Chesler - Deutsche Bank

Is that based off of anecdotal comments that you've had with your managers?

Larry Franklin

Yes.

Matt Chesler - Deutsche Bank

So, is it similar to the way December ended or similar to the quarter?

Larry Franklin

The way December and November ended.

Matt Chesler - Deutsche Bank

Okay. In direct marketing, I was somewhat encouraged to see how quickly you reacted to the slowing demand by adjusting your cost structure. Is it a safe statement to make that you felt there were some excess fat in the division, I was too curious to know if you agree with that assessment?

And can you quantify in terms of the rough number of people or a percent of headcount, that the payroll actions that you have taken, and besides actions other than headcounts, where there any other actions such as office closures are that the focus of your efforts in the division?

Larry Franklin

You are talking about in direct marketing?

Matt Chesler - Deutsche Bank

Still in direct marketing.

Larry Franklin

Okay. No I don't think it was addressing fat. I think it was addressing more the, just the realities that the world faces today after what took place and what we had expected to be happening in the fourth quarter anyway, but what was really precipitated, dramatic changes in November and December that you see and read about and hear about everyday in the business. Now, what we did and you're right, the management and the people in the direct marketing really did take some actions that we believe will position us well as we go through 2009.

We are not forecasting, not even attempting to forecast improved business we are just managing and running the business the way we see the environment today. Throughout the year we closed a couple of call centers and moved them into an existing call center. We moved one distribution center from New Jersey to suburban Boston. What's interesting is, when you see the one time event and there are actually, obviously, charges associated with that, with severance and lease terminations and those sort of things.

What you don't see is the intense, when I say intense focused on how we are running this business and our people are doing a marvelous job there. They make decisions every single day that influence not just how we do business, but the cost of that business, and where we see the business going. So, there were other actions taken and we will continue to look at where the business goes, but you are right and they were quick to respond and no it was not taking fat out of the system.

Matt Chesler - Deutsche Bank

Can you comment on your pharma vertical in particular? Do you see any changes in the big composition of the major pharmaceutical companies that will adversely impact your business?

Larry Franklin

We obviously see the changes with what's been announced, but we don't know any reason to think that it would affect our clients or maybe a little. Every time there is a merger there are two things that can happen, you can win and you can lose. Rarely does everybody stay the same. So, where we are right now is that we're maybe a little optimistic there. But in the performance for the pharma and healthcare vertical, the insurance, healthcare insurance part that was driven by some reduced volumes in mail that impacted that vertical the most.

Matt Chesler - Deutsche Bank

Thanks Larry.

Operator

Our next question comes from Alexia Quadrani from JPMorgan

Alexia Quadrani - JPMorgan

Hi, thank you. Just starting-off on the Shopper business and the obvious weakness there, you've been very aggressive in cutting back circulation to help preserve profitability. I guess my question is, after this sort of next tranche in the first quarter is completed, are there any areas within the markets you operate in that or are still operating it probably lower than average profitability that you feel that you can still cutback more if this downturn prevails?

Larry Franklin

Well, Alexia, yes there are areas that are operating at below the average. What we've done at this point is and are about to do with the California curtailment in early February is, we will be removing the circulation that we think is a drag on us for the foreseeable future. If you look back a little bit it at our Shopper circulation expansion between 2004 and 2006. That was the most aggressive expansion period that we had ever had. I think we added I don't know close to $2 million circulation and then we obviously also bought Tampa which added about 900,000 circulation.

With the 2007 closure and then the ones that we've announced and the little one's that we did earlier, we will have closed about 2 million circulation. A lot of that was the recent circulation. For example, I think it was in the Florida fourth quarter closure where 250,000 of that circulation, we had expanded in 2006 just before the market hit the wall.

And the same thing is true in California, and the remainder of the circulation in Florida, most of it was in the 2004 to 2006 expansions with the exceptions of maybe 300,000-400,000 that had just been chronically weak, but it was in areas that was in the contiguous areas that we wanted to keep the circulation but we've taken it out. We continue to look at the circulation and will have for years, but there is none planned at this moment other than into February.

Alexia Quadrani - JPMorgan

Okay. And then Larry if I remember correctly, in your previously 10 years as CEO, you've made some strategic changes to the business which you know in hindsight look as clearly being very positive for the company, exiting some businesses and getting into others. And I guess I know you said some positive things that the Shoppers business when you started-off the call, but if its downturn continues for longer than we can see, do you feel the shopper business is something Harte-Hanks needs to be involved in longer term?

Larry Franklin

Yes.

Alexia Quadrani - JPMorgan

Okay. I guess you're pretty clear there. On the Direct side of the business, just a quick follow-up question on the select and tech/telecom verticals that did relatively well, can we assume that that relative outperformance will continue in the first quarter?

Larry Franklin

It's hard to say what's going to happen in the first quarter. A lot will depend on what happens to those customers. We know of nothing at this point that would say that it's going to be down or up. What we do have is a very diverse customer base. We have terrific relationships with these clients. Alexia, it's hard to know until our clients make their final decisions on where they are going to spend their money.

Alexia Quadrani - JPMorgan

Okay. And then just on the softer segments, the financial, retail and pharma, I believe at least in retail you had one bankruptcy among your clients. Were there other sort of onetime things that you think negatively influenced those results as well?

Larry Franklin

Not really. No. But we are in fact obviously watching receivable balances rather carefully.

Alexia Quadrani - JPMorgan

Okay. Thank you.

Larry Franklin

Thank you.

Operator

Our next question comes from Edward Atorino from Benchmark.

Edward Atorino – Benchmark

There are plenty of questions I wanted to ask, but on the receivables, how are your collections come along?

Larry Franklin

What's happened with the days sales?

Doug Shepard

The days sales outstanding have slightly decreased. They've comedown a couple of days. We've put in some additional oversight management procedures and obviously retail is one of our largest verticals on the Direct Marketing side and for Christmas season we were anticipating they would build-up their balances, but like I said, we've put in some additional oversight and currently we are not experiencing any significant issues.

Edward Atorino - Benchmark Company

You mean January, most of people are saying it's just been a disaster, is there any sign that your January maybe something like a bottom or whatever?

Larry Franklin

I would expect to ask you that question and you to get me advise Ed.

Edward Atorino - Benchmark Company

Okay well. I thought January was a bottom.

Larry Franklin

I mean it's hard to.

Edward Atorino - Benchmark Company

I just thought I should ask.

Operator

Our next question is from Dan Salmon

Dan Salmon - BMO Capital Markets

Good morning, guys. Thanks for taking my questions. First of, in the press release you noted that you had some low single digit growth in select markets vertical and I know in the past you've mentioned that some of your foreign auto clients in particular have been relatively strong and also noted the Agency of Record Agreement with Hyundai. Any comment there on some of the broader trends?

Larry Franklin

It was driven in Q4 by auto.

Dan Salmon - BMO Capital Markets

Okay.

Larry Franklin

And so far that's doing well.

Dan Salmon - BMO Capital Markets

Okay. Does that go across more than just Hyundai or are there other folks there that are helping that?

Larry Franklin

Yes.

Dan Salmon - BMO Capital Markets

Okay. And then secondly, one other things you mentioned here in the press release, one of the new initiatives the Power Sites initiative to help establishing web presences for small and medium sized businesses. Can you explain the rationale of launching that on your own versus say partnering some of the established online marketing services companies out there that focus on the local market like Marchex?

Larry Franklin

And that is in our Shopper business, and what Power Sites, they are in essence web sites for our advertisers, complete with the URL that also allows us to do call tracking, where these smaller customers and many of them don't have their own website, and even though that do are more just for information. What this allows the smaller clients to do is to really understand who is calling and what they are asking for and its just more lead generation.

Our desire to "to do it on our own" and we are obviously, hiring and have people from outside the Shopper business is that we think the real value here is for us to attach the web initiatives, the power sites to our in-book advertisers, and so that we have got an advertiser that's in the book and when you go out and talk to these small businesses they have grown their business through the penny saver and flyers in those markets and they know they need to be in the book, but they are also looking at how do we know which of our ads are working and which are working best.

This call tracking piece of the Power Site allows them to determine that and give them that web presence and combining the web with the print then our overall franchise value increases. We are going to do a web initiative that's going to replace some of the advertisers that are leaving "the print product". Could we have done it with some other outside vendor? I assume we could have, but I am really pleased with the traction that we are getting and in this environment I think it will accelerate.

Dan Salmon - BMO Capital Markets

Okay. That's helpful. One last one; considering the revenue pressure and then obviously the offsetting cost savings, any comments on your dividend and what are your plans for that in 2009?

Larry Franklin

It's not on the table to look at.

Dan Salmon - BMO Capital Markets

Okay. Thanks very much, sir.

Operator

Our next question comes from Andrew Cash from Point Clear Value Management.

Andrew Cash - Point Clear Value Management

Good morning. I was wondering in very rough terms if you could tell me, what would you say, how many of your customers could be at risk because of question of balance sheets and question of all our cash flows?

Larry Franklin

I truly don't know how to quantify that, because we have 3000 to 4000 customers. We have the best of the best in each of those verticals, but we sure don't underestimate the pressure that all businesses are under today.

Andrew Cash - Point Clear Value Management

I was wondering maybe if you took a look at some of your biggest customers, do you feel any risk that maybe six months down the road or 12 months down the road they maybe out of business?

Larry Franklin

No.

Andrew Cash - Point Clear Value Management

Okay.

Larry Franklin

No we don't.

Andrew Cash - Point Clear Value Management

So generally you feel pretty good about your customers ability to continue to do business with you if they choose to do that?

Larry Franklin

Yes.

Andrew Cash - Point Clear Value Management

The second question I had and maybe this is sensitive topic, but I would like some color on Dean Blythe's departure.

Larry Franklin

Yeah. You know as we said in the press release, the view was that given the environment we're in that we all agree that it was our advantage to make a change and that's what we did.

Andrew Cash - Point Clear Value Management

Okay. If I could just ask you again, what are your plans? Are you looking for someone to come in from outside or from the inside?

Larry Franklin

I will not be doing this 10 years from now.

Andrew Cash - Point Clear Value Management

Okay. But, you are there to get us back on the road to recovery.

Larry Franklin

Yes.

Andrew Cash - Point Clear Value Management

Okay. Thank you very much.

Larry Franklin

Thank you.

Operator

Our next from Brenton Flynn from Robert W. Baird.

Brenton Flynn - Robert W. Baird

Hi, this is Brenton in for Dan Leben. I just wanted to get a little bit more color on the auto vertical. Are you seeing some of your foreign clients changing their approach to become more aggressive given the problem we are seeing in Detroit?

Larry Franklin

I have not heard our National Markets people say that. So I do not think so.

Brenton Flynn - Robert W. Baird

Okay.

Larry Franklin

Some of them have their own challenges. But we really like where we are in that vertical.

Brenton Flynn - Robert W. Baird

Okay. And then moving on, did you quantify your largest customers as a percent of Direct Marketing revenue?

Larry Franklin

I don't think we did but I think it was 8%?

Doug Shepard

Yes, it is in the 8% neighborhood.

Brenton Flynn - Robert W. Baird

Okay, thank you.

Doug Shepard

Which is historically where it's been.

Operator

(Operator Instructions). Our next is from Michael Kupinski from Noble Financial.

Michael Kupinski - Noble Financial

Thank you for taking the question. I was wondering if you can quantify the revenue impact you are expecting from the Shoppers shuttering the 500,000 circulation in Florida and 700,000 in California. Can you quantify what the revenue impact might be there?

Larry Franklin

Doug isn't it about $17 million, $17 million of revenue that we had in '08 from the circulation that we have and will close in February.

Michael Kupinski - Noble Financial

Okay. And was that circulation then reflecting a loss or was it just modestly profitable?

Larry Franklin

No. It was couple of million dollars of loss.

Michael Kupinski - Noble Financial

Okay. All right. And Larry you've been in the past just an extremely good manager, particularly in a very tough period back in the 2001 which I remember, the Direct Marketing faced double-digit revenue declines and you had very aggressive expense cutting opportunities back then. I was just wondering if there were any differences in terms of shifts in contributions from verticals that may not allow you to cut cost as aggressively as you did back then.

Larry Franklin

Gary Skidmore who runs shoppers and Pete Gorman who run Direct, I got them backwards there. I just switch the two. Gary who runs Direct Marketing and Pete who runs Shoppers have been with us for a long period of time, and there have been changes being made as we have gone through the cycle, particularly in Shoppers that started in 2007 and Direct Marketing which we were expecting in the second half and which actually arrived with greater with than our expectations of what was going to happen in the fourth quarter. So a lot of the changes that we've been talking about on these calls for the last or they've have been talking about in these calls for last few quarters, those are being accelerated.

I think the question was, are there costs that can continued to be looked at, and if that is the questions the answer to that is, yes. Now, what we are doing which is what I emphasized in the closing comment in my remarks. Again, because of the lack of visibility on our businesses, then we are working extremely hard. We always have, but we're redoubling our efforts at servicing our existing customers in uncommon ways. And then we've got intense focus on how we right size our cost, and as these businesses becomes smaller, whether it's a vertical or whether it's a territory or a part of our Shopper business, how we reflect that reduced size in the structure and in the people cost that we have? And that is where a lot of the initiative was toward the end of last year and in the first part of this year.

And we've got just many, many things happening in our company and I'm just amazed at the attitude and dedication of our people to look at every single thing that's going on and saying is that adding some value to our customers today and will it tomorrow? And if it's not, we ask why aren't we doing it? And that's the thing that gives me encouragement about it, and when we come out of this recession, whenever that happens to be, I truly believe we are going to be in marathon shape.

Michael Kupinski - Noble Financial

Larry, in terms of my question it was more of, back in 2001 I think the retail vertical was much larger component of total revenues than it is now and you have telecom being a much more significant now. I was just curious in terms of the verticals, does it necessarily mean that you have more cost cutting opportunities or less cost cutting opportunities then you did back there?

Larry Franklin

Yes, the high tech/telecom is the bigger part. And I don't think it's the verticals that's driving the ability to cut cost up.

Michael Kupinski - Noble Financial

And your Direct Marketing business seems to be a little slower to show the signs of weakness, of course the general advertising market environment really deteriorated, particularly even for retailer. Most of the retailer's scaled back way early in terms of you just announcing it in the fourth quarter, I was just wondering if newspapers have indicated they are seeing some signs of, some have at least, some signs of stabilization in the first quarter in the retail category. Can you talk a little bit about what that particular vertical is looking like as you go into the first quarter?

Larry Franklin

Well, not so much going into the first quarter, but, when you said ours was a little slower. We've have had some really good, really high quality customers that have increased business with us. So, as the environment has driven the retail revenue down we've got some clients that are spending more. So that's the positive thing. As to have we seen stabilization. I don't think we have seen yet the results of what these customers are reporting in the fourth quarter. Meaning, how they are going to respond to where their business is. And again, that's why we have a hard time with commenting on visibility of the revenue.

Michael Kupinski - Noble Financial

Great. Thank you for that color. I appreciate it.

Operator

And our next question comes from Ed Atorino from Benchmark.

Edward Atorino - Benchmark

Hi, Larry. Direct Marketing as a group of businesses, is there much difference say between the call centers, the direct mail, internet business or is it pretty much across the board?

Larry Franklin

In terms of change you mean?

Edward Atorino - Benchmark

Yeah. Whether the weakness is concentrated in any part of the direct marketing business or is it pretty much across the board?

Larry Franklin

People are not so much cutting on programs, but they're reducing volumes of mail, but at the same time some of the dollars, and this is hard to track as you know from your history and just knowledge of this industry is, as people take money out of the mass media, the mail is a measurable service. So you're getting some of that switched, and I can't quantify, and don't know how widespread it is or deep it's going to be, but what have has happened is the reduction of volumes and it's been in the mail part of the business.

Edward Atorino - Benchmark

Okay. Thanks very much, I appreciate it, Larry.

Operator

Our next question from Matt Chesler from Deutsche Bank.

Matt Chesler - Deutsche Bank

Hi. I have a quick follow-up on the earlier question about your commitments of remaining in the Shoppers business, and I'm following not because you answer wasn't clear, but only because it's been so long that we've been seeing these large declines in the business that sometimes I need a reminder of why it's an attractive business to be in, longer term?

Larry Franklin

Well, if you look at the geography and you say California and Florida, and I don't know the exact statistics, but I feel California is like in the top 10 largest economies in the world or something. I am not sure that would be the case today, but it's a very attractive market. Those two markets have been very hard hit.

The reason that I say we want to be in that business and need to be in that business is, if you go to those markets as I do, and if you ride with our sales people, and you listen to the stories of these small businesses and how they reached their customers, this product moves merchandise for those customers. We will always have, albeit smaller today, we will always have a significant number of small businesses, entrepreneurial business, and this product and I think again the ability to link this directly with the web, and I just think it's a good business. Now, you know, if California and Florida are still hard hit five years, 10 years from now I guess you can never say never, but I mean it's not on the radar screen at the moment.

Matt Chesler - Deutsche Bank

Would you feel the same way you do then about the business as you do now, if as we emerge from this cycle and the business didn't produce the same profitability characteristics, let's say that it emerged generating single digit margins rather than the historical double digits ones?

Larry Franklin

Does it have to get back to where it was when we had 25%? I don't know what was their high watermark in margins, now going from where it is to eight to 10 to12 to 14 I mean that progression would be really, really great. Do I think it will get back to 25% margin? I don't spend anytime really thinking about to be honest with you. What I do spend time thinking about is, overtime is it a business that will stay in the mainstream of how our small to medium sized customers go to market to get their client. To me, certainly at this point, there is nothing to indicate that that's not the case now, but directly does it have to get back to 25% margins? No. Will it? I don't know. I would say probably not, but I don't know.

Matt Chesler - Deutsche Bank

Okay. All right. Thank you. That's all I have.

Operator

At this time, we have no further questions. Now, I would like to turn the call back over to Mr. Larry Franklin for closing comments.

Larry Franklin

Okay. I just want to again reemphasize to everyone on the call and I really appreciate the questions, but we've got a group of people that have made Harte-Hanks successful for many years and are as convinced or more convinced, and as committed or more committed than they've ever been for making this a great company, and keeping it a great company, and making it a great place to be. So to them, I just want to say, thank you. Thanks for the call. Thanks for the questions.

Operator

This concludes today's conference call. You may disconnect at this time.

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Source: Harte-Hanks Inc. Q4 2008 Earnings Call Transcript
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