Harte-Hanks' CEO Discusses Q1 2014 Results - Earnings Call Transcript

May. 2.14 | About: Harte Hanks (HHS)

Harte-Hanks, Inc. (NYSE:HHS)

Q1 2014 Earnings Conference Call

May 1, 2014 11:00 AM ET

Executives

Robert L. R. Munden – Senior Vice President, General Counsel and Secretary

Robert Philpott – Chief Executive Officer and President

Douglas C. Shepard – Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Michael A. Kupinski – Noble Financial Capital Markets

Dan Salmon – BMO Capital Markets

Operator

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

At this time, I would like to turn the conference over to Mr. Robert Munden, General Counsel. Please go ahead, sir.

Robert L. R. Munden

Thank you, operator. Our call may include forward-looking statements, such as statements about our strategies, adjustments to our cost structure, financial outlook and capital resources, competitive factors, business and industry expectations, anticipated effects of litigation and regulatory changes, economic forecasts for the markets we serve, 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 filings with the SEC, and in the cautionary statement in today's earnings release. Our call may also reference 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 Investors tab of our website at harte-hanks.com.

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

Operator

Thank you, Mr. Munden. And at this time, I would like to turn the conference over to Mr. Mr. Robert Philpott, CEO. Please go ahead, sir.

Robert Philpott

Thank you, Janine. Good morning and happy May Day to everyone on our call this morning. Welcome to Harte-Hanks first-quarter earnings call. As usual Doug Shepard, our CFO, joins me on today's call and in just a few moments, he'll take us through the detail of our earnings release.

Now, as has become somewhat customary, I'll present some opening comments for you, followed by Doug and the detailed financial update, and then I'll give some further insight into our business operations. And obviously, at the end of the call, there will be an opportunity for you all to ask us some questions.

Let me start today’s call by saying immediately that the first quarter of 2014 has brought some welcome news on business growth. Today we're reporting our first revenue growth since 2011, and whilst one quarter will never make a trend, it does demonstrate that our commitment to address growth for our business is beginning to have an impact. On our last quarterly call back in February, I commented that we were optimistic about our revenues as we entered 2014.

And obviously, I'm very pleased that that outlook has materialized. Recently I've spent time with our largest clients, and they, too, are talking positively about the outlook for 2014. Marketing budgets now seem somewhat more secure than last year, although there remains the transition or extension of campaigns to more digital formats in many of our industries.

But when I talk to the clients and when they describe their budgets, these clients are now more focused on how they can deploy their marketing spend to drive their own growth rather than simply trying to defend against broad-based cost-cutting efforts in their businesses. Of course, competitiveness in the marketplace has remained a constant, and Harte-Hanks remains well positioned to demonstrate our delivery of consistent ROI for our clients.

However, as Doug will describe in a few moments, our growth was inconsistent across our various divisions this quarter, with some businesses reporting a substantial uptick in revenues, whilst others still had single-digit revenue decline. However, we're still encouraged by the overall positive development in the top-line performance.

Now, this is tempered somewhat by the challenge that persists in getting our cost base back in line with these revenues. I'm pleased that substantial corrective action has been taken during the quarter, and I certainly foresee this activity continuing over the next few months. I'm confident that the action taken, which Doug will give you further detail on momentarily, will enable us to strike a more appropriate balance between our increasing revenues and our costs in the coming quarters.

So, before I go into more specific comment on our first-quarter performance, let me first have Doug walk you through the detailed financial results, and then I'll rejoin our discussion in a moment, over to you, Doug.

Douglas C. Shepard

Thank you, Robert, and good morning. Revenues for the first quarter increased 0.3% which is our first quarterly revenue increase since the 2011 third quarter. And as Robert mentioned, we're pleased to return to modest levels of growth.

Let me briefly walk through the results from each of our industry verticals. Select markets increased 30%, or $3.1 million. Growth was primarily due to a sizable new client win related to support for online streaming services and expansion of relationships with existing clients. The new client win had some implementation services during the first quarter that will not repeat for the remainder for the remainder of 2014.

Healthcare insurance increased 24%, or $2.4 million. A new mail program from an existing client, along with new business from various state Blue Cross and Blue Shield organizations, contributed to this revenue increase. Automotive and consumer brands increased 14%, or $2.9 million, primarily from the increased call center services from a worldwide transportation and business services company.

In addition, a Trillium software license was sold to a large logistics and shipping company. Retail declined 8%, or $2.9 million. This was primarily driven by an online retailer experiencing volume reductions for contact center support services. Clients continue to change to less expensive print formats in response to the Postal Service rate increase in January. Technology declined 9%, or $3 million due to a drop in our agency work and volume reductions for contact center support.

Finally, financial services decreased 10%, or $2.1 million, due to the consumer lending client loss we had previously discussed. Also of note, our Aberdeen group and market intelligence businesses introduced new data-related products and sold more strategic-related products compared to the same quarter last year that resulted in about $0.5 million to $1 million of incremental deferred revenue because call our clients access and utilize the data.

We are pleased with these product launches, and if not for the required revenue deferral treatments, we would have experienced a larger quarterly revenue increase. Our Trillium software products enjoyed a good first quarter, with 10% revenue growth. We continued our success with our insurance and financial market products, along with selling to our traditional data quality and data governance user base.

Operating income was $4.6 million compared to $9.4 million in the same quarter last year. The decline was a result of an increase in outsourced revenues and expenses associated with changes we are making in the business, along with investments in key personnel.

Labor costs increased from investments in key individuals to generate revenue growth, as well as continuing headcount reductions, resulting in approximately $1 million of severance. Production costs increased as a result of higher expenses related to the increase in outsourced revenues, other general business expenses flat. As a reminder, the first quarter is our seasonally lowest revenue quarter which also impacts operating income.

Moving down the income statement. Our first quarter effective tax rate was 41.7% which is higher than our 35.8% in the first quarter of 2013. This increases due primarily the state tax law changes; we are still expect that for 2014 our overall effective tax rate will be in the 38% to 40% range. Excluding the severance refer to in the earnings release. In the 2013, gains from the sale of land and currency exchanges, first-quarter diluted earnings per share from continuing operations with $0.04 for 2014, compared to $0.08 in 2013.

Moving to the balance sheet. Our net debt balance is $10.4 million versus $9.3 million year end and increase of $1.1 million. Currently have $80 million available under our revolver excluding outstanding letters of credit, in addition to a cash balance of approximately $84.5 million at the end of the quarter. We continue to have a strong balance sheet with low leverage and plenty of liquidity. For the quarter, we spend $2.7 million on capital expenditures, compared to $4.7 million in the first quarter of 2013.

Finally, I would like to announce we will host an Investor Day in New York City on the afternoon of May 29. We will use that time to update you on our business and discuss our new strategy. We expect to announce the exact location and time details shortly. To register please contact me directly, you can find my email address on today’s earnings release.

With that, I will turn the call back to Robert.

Robert Philpott

Okay, thank you Doug. First let me return to the positive news on our revenue performance during the first quarter. Now, Doug has given you the specific of how that occurred, but when I stand back from the detail, it's evident that we have achieved this growth through a combination of efforts – some major new business wins, the extension of existing relationships with key clients, and the introduction of several new products as well. And it's this broad-based approach to our top-line growth that underpins our confidence that our leadership actions are having the desired effect on our top line.

Now, I've heard others in our industry refer to choppiness in the marketplace, and we concur with that. Quarter-by-quarter, I wouldn't really be surprised to see some volatility in top-line performance. But over the course of the year, we expect that this will iron itself out. We remain on target to achieve our full-year goals. And just to recap on those, we said on our last earnings call and I will repeat again here, that we're committed to sustain a consistent top-line growth in 2014, balanced by a restructuring of our cost base to support to our ambitions.

On a more qualitative front, I continue to see and hear feedback which reaffirms the strength of our relationship we enjoy with our most significant clients. Just this past week, I attended a client review meeting with one of our largest financial clients, where we have continued to raise the bar in terms of the quality and consistency of our campaign execution.

On top of that, we've recently been recognized with a prestigious European award for supplier quality from a major IT multinational. This award is bestowed upon the few suppliers who demonstrate outstanding performance across a range of strategic criteria, such as quality, the application of new technology, responsiveness, and environmental and social responsibilities, too. I would like to highlight the sales success we're having internationally.

To give a sense of the progress we're making here, I would point to a recent significant win in our U.K. agency business, which brings together all the ingredients of a successful growth strategy. We have the right product, it was based on a deepening client relationship which was bringing additional work, and of course, there was the committed team of Harte-Hanks professionals.

In this case, Harte-Hanks' digital agency, Mason Zimbler, secured a digital video content project worth about $1.5 million to promote Samsung Mobile's latest flagship handheld device. This is part of a strong and growing relationship between Harte-Hanks and this prestigious Korean brand that covers a breadth of insight-driven direct channels, including telemarketing, mail, social media, and digital media and content.

Earlier in the call we mentioned investment in new talent, and this is particularly the case with some senior leadership positions. In the past month, Rick Carbone has taken the helm at our customer delivery portfolio businesses, which include mail, logistics, and fulfillment. Coming from his most roles as CFO at Lieberman Research Worldwide, Rick spent a large part of his career in the marketing services sector, where he has held senior financial and operational leadership positions.

And he's built a reputation for developing well-run businesses that deliver aggressive growth and exceptional profitability. One of Rick's first priorities will be to complete a full operational review of these units and to propose and lead changes to bring these units to a position of sustainable growth.

We're nearing the conclusion of our search for a new CEO at Trillium, too. Our external search yielded a stellar short list of candidates, all intimately familiar with data quality or data governance, and each with extensive experience of running successful international software businesses. And we’re in the final stages of discussions with these individuals. I expect – I fully expect a new leader to be in place late this quarter or early next quarter.

Whilst I’m on the topic of Trillium, I want to acknowledge that our team was recently showcased by Bloor Research as a data quality and data governance champion in two recent Market Update research reports. So that's the Bloor Research Market Update on Data Quality and the Bloor Research Market Update on Data Governance.

Based on Trillium Software's favorable placement in the research, Bloor sees us as the clear leader amongst major Data Quality providers in terms of offering marketing valuable and specialized solution that positively impact the business operations results of our clients. You'll also recall that Trillium had been positioned as Data Quality on the independent analyst firm, Gartner, in the Gartner Magic Quadrant for Data Quality Tools back in 2013.

And there's no doubt that this continued industry leadership recognition contributes to the double-digit revenue growth that Doug referred to earlier. In last quarter, I talked about investments to support the long-term growth of the business and I specifically mentioned Aberdeen's launch of content access, which was a new subscription-based product to address high-tech and business-to-business markets' increasing demand for relevant, high-quality, and impact marketing content.

The sales of this new service continue to exceed expectations, with more than 20 new subscriptions already this year. The revenue model for this new product spreads the effect of these sales over the subscription terms and increases our visibility as we benefit from the strong base of secure revenue which will flow through the P&L during the remainder of the year.

As Doug had mentioned, a similar situation occurred with the new product launches at market intelligence. The first quarter of 2014 again saw increased business in our contact centers. In particular, we executed a very substantial client project to support streaming content being viewed on an array of Web-connected devices. Our team Harte-Hanks, together with a number of external partners, handled more than 1.25 million customer interactions across four channels phone, social media, email, and chat.

Although a large element of this project is of a non-recurring nature, we will continue to provide ongoing support to the client. Whilst this project had a positive impact on the revenue line, it also distorted our business mix in the quarter. External partnerships required to execute the contract drove our outsourced revenues beyond our planned levels, and this in turn reduced our operating margins in the quarter.

I want to stress that this is not indicative of a more fundamental weakening of margins, despite the competitive nature of our markets that I referred earlier. During the quarter we also made a number of structural changes to our business. Following evaluation of changes in our project mix, we announced the closure of our contact center in Kansas City.

This move is simply a shifting of our contact center footprint to better serve the needs of our customers and to focus our resources in a smaller number of larger call centers. I expect the review of our physical footprint to be ongoing, and as leases expire or business mix changes; we will react to locate our resources appropriately.

I would also like to take a moment to update you on the progress we are making in the development of our strategic plan; Doug talked about it earlier. Both the initial business review and now the strategic plan have been completed. The strategic plan was discussed with my Board colleagues in early April and has been accepted as our blueprint for the continued development of Harte-Hanks.

We’ve just now begun the process of rolling out the strategy details across our various business units, beginning obviously with our leadership teams. I believe that all of the investment organizations on the call today will by now have received an invitation to join us in New York for our Investor Day at the end of this month, where we'll provide a deep dive into our business and include the details of our strategic plan.

We've been able to complete this work slightly ahead of our previous projections, which will allow us to start the implementation process sooner, too. However, I'll resist the temptation to provide a soft launch of the strategy on this call, but I'll just say that we expect the strategy to have a positive impact on 2014 plan.

Looking ahead now to the remainder of 2014, the goal of the Harte-Hanks leadership team is to continue our core focus on revenue growth, combined with directed actions on our cost base, where we feel these are out of line with the top line performance. Whilst we have experienced an imbalance in our phasing of revenue and cost side in the first quarter, which remembers, is seasonally our smallest quarter, we expect to see a truer reflection of performance emerge during quarter two.

And I reiterate our view that we expect to meet our full-year goals in 2014. Of course, none of the team is happy with the bottom line we're presenting today. We acknowledge the challenge that this presents for our shareholders, and we accept responsibility for this, but it doesn't reflect the step changes we're making in the business fundamentals at Harte-Hanks. We've made solid progress in our plans to overhaul our day-to-day operating model, but it is a work in progress, and we're ahead of our plans for the strategic review. We are laying the foundations in business to position ourselves for further growth.

And with that I want thank everyone for joining us on today's call, for your continued interest in our business and for your ongoing support to our ambitions. With that, I'll hand you back to our operator, Janine, who will give you details of how you can now participate in a Q&A session with Doug and myself. Back to you, Janine.

Question-and-Answer session

Operator

Thank you, Mr. Philpott. (Operator Instructions). And we’ll take our first question from Michael Kupinski with Noble Financial.

Michael A. Kupinski – Noble Financial Capital Markets

Thank you. Thanks for taking my question. You indicated that you lost some clients in some key verticals. Were those client losses related to planned or strategic decisions, or did you lose clients to competitors? Any color there?

Douglas C. Shepard

It's a little of everything, Mike. Some of it was internal decisions; some of it was pricing pressure and competitiveness in the marketplace. I don't know that there's one single factor that you would point to, but it's across the board. And as you would expect, and the marketing industry as fragmented as it is, competitiveness is always out there. Pricing pressure is always out there. You win some business; you lose some business.

Robert Philpott

Mike, I think it's fair to say that this churn in marketing business is a natural course of trading, and what we would have seen in this quarter is that there was nothing untoward in the churn rates that we were seeing across the majority of our businesses.

Michael A. Kupinski – Noble Financial Capital Markets

Okay. It sounds like you've added personnel in some areas and cut in others. What was the headcount in this last quarter, and what was it at the year earlier?

Douglas C. Shepard

From a true headcount standpoint, we're up. But that is related to – we're up this quarter compared to same quarter last year. That's primarily related to, though the additional volume work that we referenced had occurred to support that growth and work that occurred with the select markets business. The rest of our changes and so forth, there are some additions and subtractions and investments in key people, key functions, as you would expect any company to be going through and doing, and especially us as we're dealing with strategy changes and our focus on returning the Company to topline growth.

Michael A. Kupinski – Noble Financial Capital Markets

Doug, the variance in capital expenditures – are those apples to apples year-over-year comparisons? And any update on your capital expenditure plans for the balance of the year?

Douglas C. Shepard

Yes, we're still expecting to spend what we've previously said, somewhere in the, let's call it – I'll make the range a little bit wider $15 million to $20 million. Nothing should be read into the first quarter capital expenditure level, that's just timing. No changes to our plans or trends have occurred.

Michael A. Kupinski – Noble Financial Capital Markets

And in the first quarter, it seems like there was a little bit better growth out of Trillium. Were the margins substantially lower, or was that just lower-margin business? Any color on what is going on at Trillium?

Robert Philpott

At Trillium, yes, we had good growth in the quarter at Trillium. I think that was a number major contracts that we had been working on for a considerable period of time towards the latter half of 2013, and they came to fruition early in the year. But also, I would say that it's just a more focused concentration on getting topline growth, and it's in Trillium and it's across all of our business verticals.

Michael A. Kupinski – Noble Financial Capital Markets

And was that an area where you've actually added personnel in that segment?

Robert Philpott

I don't think there's anything that's really outstanding in my mind about adding personnel to Trillium at this stage. One of the things that I'm being very careful not to do is to make too many dramatic decisions in that business. Whenever we're hiring with a new CEO, we want some new ideas coming into the business. We've got an existing team who are very capable, but I don't think it's the time for me to make any major decisions. We'll let our new CEO have the opportunity to take that business forward.

Michael A. Kupinski – Noble Financial Capital Markets

Okay, fair enough. Thank you for taking all the questions.

Robert Philpott

Thank you, Mike.

Operator

Thank you. And we’ll take our next question from Dan Salmon with BMO Capital Markets.

Dan Salmon – BMO Capital Markets

Hey, good morning, everyone. Just maybe to follow up a little bit on the leadership front at Trillium, is it just maybe broadly, some of the – if you could tell us a little bit more about the parameters that you're looking for in a new leader there. You obviously mentioned leadership of a global software business, but in terms of maybe domain expertise around marketing, specifically, or anything else that particularly matters for you in the leadership there. And then just in terms of the uses of your balance sheet and free cash flow, I'm guessing that at this stage, if we haven't had any detailed update on that, could we expect a little bit more on that at the Analyst Day at the end of the month?

Robert Philpott

Dan, I'll take the first part of the question on Trillium, and then I'll pass the second part across to Doug. The leadership that we're looking for, for Trillium, there are a number of clear attributes that we're trying to add to the leadership team via the CEO role. First of all, as you say, domain expertise is a given in there, but not just on data quality. We're looking at data governance as well, and that's a broadening definition that's in there.

International expertise, I believe, is something that is an opportunity that we need to build upon, and whilst we have a good network of resellers in some key markets, it's somewhat inconsistent. And I believe that if we bring in a leader who has experience in running an extensive global network of resellers, that that will serve us well.

And with a product that has been around for some time, there are clear questions around the operating model, software as a service, the whole idea of where cloud computing is going and how we take advantage of that, so we're looking for someone, again, who has really up-to-date knowledge on that sort of technical expertise.

And then, of course, it's the usual characteristics. It's leadership, it's certainly given the conversation we've just been through, we want somebody who has a track record of growth for the business. Trillium's in a fantastic position. I think we've now been nine out of nine times in the Magic Quadrant we've been rated there, and that's something that we want to build on. And our new leader has a great platform to take that forward. Over to you, Doug, on the second question, then, about the use of capital.

Douglas C. Shepard

Yes, and Dan, you're correct. We've talked about it on these previous calls. We have a lot of balance sheet flexibility. Robert has acknowledged that as we defined this strategy, it was attractive to him when he joined Harte-Hanks, knowing that we have the flexibility and liquidity to execute on that strategy going forward.

So yes, as we have Investor Day, we will explain a little bit more during those presentations our priorities and emphasis on the products and channels going forward – that would be an obvious piece of your strategy – and get into some of the M&A discussions and strategy that needs to occur by either adding new channels or products that we don't have today, and/or enhancing some of our existing capabilities.

And of course, all that's driven by the marketplace, client needs, client feedback, those type of things. So there will be more detail and explanation at the end of May during the Investor Day. That's what we're planning to do now.

Dan Salmon – BMO Capital Markets

All right, good. Well, I'll look forward to the to-be-continued part.

Douglas C. Shepard

Thank you.

Robert Philpott

Thanks, Dan.

Dan Salmon – BMO Capital Markets

Thanks guys.

Operator

(Operator Instructions) And it appears that we have no further questions for you today.

Robert Philpott

Okay, well, I'd just like, then, to thank again everyone for joining our call this morning for your continued interest in the business. I look forward to seeing many of you in person in New York at the end of May, when we'll have a much longer time period the business and where we'll bring you that new strategy. So have a great day, and talk to you all again soon. Thank you.

Operator

Thank you. And again, this does conclude today's Harte-Hanks first quarter earnings conference call. We thank you again for you participation. And you may now disconnect.

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