Q3 2019 Earnings Call
Please standby we're about to begin.
Good day and welcome to the Harte Hanks third quarter 2019 earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Mr. Rob I think that's H in K IR. Please go ahead Sir.
Thank you and good afternoon, everyone. Thank you for joining.
In the call today, our Andrew Harrison President Mark Downs Yours.
Before I begin I would like to tell everyone that the information provided during its.
May contain forward looking statements such as statements about the company strategy adjustments to its cost structure financial outlook in capital resources competitive factors business in industry expectations anticipated performance, an outcome future offensive acquisitions dispositions litigation.
Regulatory changes economic forecast for the marketplace or expect.
Expectation related cost saving measures and other statements that are not in store.
Actual results may differ materially from those projected worldwide. These days because of the various risks and uncertainties, including those described in the Companys Form 10-K , and then 10-Q <unk> other filings with the FCC cautionary statements in today's earnings release.
Paul May also reference non-GAAP financial measures. Please refer to the earnings press release that was issued after the close for reconciliations and other related disclosures. The company's earnings releases are available on the Investor Relations section.
Web site at Harte Hanks dotcom.
All that said I would now like to turn the call over to Andrew Harrison Andrew.
Thank you Rob and good afternoon.
This quarter was a quarter a significant progress for Harte Hanks, we achieved positive adjusted EBITDA, a full quarter earlier than we expected and continue to eliminate legacy low margin contracts and associated infrastructure, while pursuing and winning more value based engagements.
With healthy margins.
The year over year declines in revenue continued but the pace is slowing.
The trend will fluctuate from quarter to quarter based on seasonality and other factors, but overall, we expect the pace of declines to continue to narrow.
More importantly, we expect positive adjusted EBITDA in the fourth quarter and for the full year 2020 , we're expecting positive EBITDA, which suggests immaterial declining cash burn next year.
Our EBITDA, which includes the nonrecurring restructuring expenses and our stock based compensation was a negative 3.2 million. This is a significant improvement over both the first two quarters of 2019 and the corresponding quarter. In 2018. In addition, it continues our trend of improving our EBIT dollars.
For the past two quarters.
Obviously, a tremendous amount of at work and effort by many many people across the company was required to make this happened and I want to acknowledge the hard work that's the Harte Hanks team.
We will continue our focused efforts because we we realize there is more work to do.
But we're encouraged that the results so far and for being ahead of schedule in our turnaround plan.
Cost reductions weren't important part of our improved performance in the third quarter as we continue to adjust our operating cost to our revenue, but our execution is not one dimensional.
Other aspects of the efforts that are beginning to show positive returns include actions such as.
We significantly reduced a large vendor engagement there was negatively impacting performance and profitability that relationship that was once oversized and business impairing is now small unmanageable Mark will touch on on this some more.
We began the consolidation of several smaller production facilities into larger geographically strategic locations to create efficiencies into allow us to better serve our clients.
We strengthened our focus on account relationships retention of profitable revenue and account growth.
As a result, we began to see increased stability and profitable revenue and growth opportunities on several key accounts.
We adjusted our revenue in several areas shedding some work that required disproportionately large amount of cost to deliver.
Thereby resulting in little if any positive contribution.
We launched a lead generation team that is closely aligned with sales and business leadership to build a bigger and better pipeline of sales opportunities.
Our pipeline improved in the second quarter and held steady throughout the third quarter with new opportunities being added to replace those that were won or lost during the quarter.
We believe we can grow the park pipeline in coming quarters through our new lead generation efforts that are just beginning.
We closed additional new business deals from the pipeline efforts began earlier in the year and these new business wins are beginning to generate profitable revenue the new business. One in the third quarter is expected to generate an estimated $4.6 million of new revenue over the next 12 months. This amount is more than doubled to sales sales result.
During the same period last year.
The board has been engaged in an active executive officer search.
And expects to provide an announcement in the near future.
These things all indicate notable progress in the quarter and it's encouraging.
We will continue to press hard to retain high quality revenue control costs and add additional business from existing and new accounts. As these are all critical elements of our continued success.
All of these improvements are paving the way for Harte Hanks to build the overall business and add to our success Harte Hanks is in a handful of distinct businesses offerings are sold those independently and as part of coordinated solutions in aggregate as well as by segment Harte Hanks designs creates and delivers per.
Personalized brand connections that power sales and build loyalty.
We're successful at designing creating and delivering personalize brand connections through our proven expertise.
Applicable strategy creative problem solving talk to your technology and rock solid delivery of services.
By delivering the right message at the right time, we convert prospects in the customers and customers into repeat buyers.
We have a rich heritage in this space and many success stories of how Harte Hanks has been a terrific partner to our clients to connect them to prospects.
And to their customers in ways that grow relationships and power commerce.
I'm proud of the entire Harte Hanks team exceedingly appreciative of the efforts of everyone involved and excited to be part of the bright future I will now turn it over to Mark to walk through the details of our financial performance art.
Thanks, Andrew.
The company's cost reduction efforts continue to be reflected in our quarterly results as you may recall in the for first quarter 2019, our year over year operating expense decline net of restructuring and impairment cost nearly offset the full scope revenue declined during the quarter then in the second.
In quarter 2019.
Our year over year operating expense decline again net of restructuring and impairment costs exceeded our year over year revenue declined by 2.4 million.
We built upon this momentum in the third quarter with an operating expense decline of 16.8 million year over year compared to a revenue decline of 12.2 million. This resulted in our cost reduction outpacing our revenue declined by 4.6 million. We expect this momentum to continue in Q4 in next year.
In addition, our year over year revenue declined for the quarter was 12.2 million compared to a decline of 15 million in Q2 and 22 million in Q1.
We believe that this is reflective of our efforts to grow revenue from new customers and retain and grow existing client revenue.
The result of all the cost cuts and the improving revenue decline is that our EBITDA and adjusted EBITDA continues to improve.
EBITDA on the third quarter 2019 increased by 5.3 million compared to the same period last year and increased by 2.1 billion somewhat sequentially sequentially compared to Q2 of 2019.
In addition, our adjusted EBITDA, which adds back nonrecurring restructuring and impairment costs and stock based compensation increased by 6.9 million in the third quarter compared to the third quarter, a year ago and increased by 2.2 million sequentially.
As Andrew mentioned, our adjusted EBITDA was positive during the quarter at a $203000 a milestone we reached one quarter ahead of the guidance we provided.
On previous conference calls.
As our restructuring costs of reside in the coming quarters, we believe that we will be EBITDA positive for the full year 2020.
We ended the third quarter was 32 million in cash. This is down from 39 million at the end of the second quarter. The decline in cash is partially attributable to a decline in customer deposits for postage.
And the onetime investments made by the company to reduce recurring operating costs that we described on our previous conference call.
We continue to expect that these investments, which are part of the ongoing restructuring efforts carry attractive returns have a short payback period and will result in substantially reduce costs that will be realized over the next few quarters.
Also we continue to believe that our cash position combined with the remaining availability on our credit facility provides adequate liquidity to fund our turnaround plan.
Our restructuring expenses during the third quarter totaled 3.1 million.
The majority of this is comprised of severance charges for lease impairments and termination fees related to certain vendor agreements in the nine months ended September Thirtyth 2019, we recorded restructuring charges of 10.9 million, we expect to report declining restructuring charges over the next few quarters.
To date, there have been annualized savings identified of more than 21 million that are associated with these restructuring fees a.
A significant part of this has been focused on our vendor costs. In addition to the 11.7 million an annualized vendor cost reductions achieved in the first half a year, we reduced our annualized vendor related costs by an additional 1.7 million since the end of the second quarter. This brings our year to date annualized.
Vendor related savings to 13.4 million.
We continue to evaluate our vendor related costs and expect to realize additional savings in the coming quarters.
Turning to the third quarter results.
As mentioned earlier third quarter adjusted EBITDA improved to 206000 from a negative 6.9 million in the same period last year. Despite a revenue decline of 12.2 million.
Third quarter revenue was 51.4 million compared to 63.6 million last year for a year over year decline of 12.2 million were 19%.
For the quarter revenue was down in our B to B consumer financial services retail and transportation verticals compared to the third quarter 2018, offset by an increase in the healthcare vertical.
The largest decline among our verticals within retail, which was down $6.1 million 41%.
Or up our operating expenses for the third quarter of 2019 were 59.9 million compared to 73.9 million into Europe , a go quarter.
Decrease of 18 million or 24%.
We reduced our operating expenses, primarily in the areas of labor production.
And distribution and advertising selling general and administrative to offset the decline in revenue.
Excluding restructuring and impairment expenses, our operating expenses declined by 17.3 million in the third quarter compared to the third quarter ended September Thirtyth 2018.
Operating loss was 4.5 million for the third quarter 2019, compared to 10.4 million in the year ago quarter, and 6.6 million in the second quarter of 2019.
Adjusting for the nonrecurring restructuring and impairment expenses are adjusting adjusted operating loss was 1.1 million compared to a loss of 8.5 million in the year ago period, and 3.1 million in the second quarter 2019.
This reflects the massive cost cutting initiatives undertaken by the company in the face of revenue decline.
Net loss for the third quarter, 2019 was 6.1 million or 97 cents per basic and diluted share compared to a net loss of 10 million were 161 dollar and 62 cents per basic and diluted share in the third quarter of 2018.
Sequentially. The net loss declined from 3.9 million or a positive 63 cents per basic and diluted share mainly due to the inclusion.
Well the gain of $5 million due to the sale of Threeq digital in the second quarter of 2019.
Turning to the two our balance sheet and liquidity as I mentioned earlier as of September Thirtyth 2019, we had cash and cash equivalents of 32 million. This compares to a cash balance of 21 million as of the period ended December 30, Onest 2018, and 39 million.
And as of the period ended June Thirtyth 2019.
As of September Thirtyth 2019, we had 18.7 million in long term debt, which reflects the current draw on our 22 million dollar bank credit facility.
With that operator, we would like to open the call for questions and answers.
Thank you the question and answer session will be conducted electronically if he would like to ask a question. Please press star followed by the digit one if you are using the speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. Once again star one ml pause for just a moment.
And as a reminder, star one to ask a question.
And our first question, we'll hear from Michael Kupinski with noble capital markets.
Thank you for taking my questions and first of all congratulations on your hard work to turn the business around you end up for showing positive EBITDA <unk> earlier than expected.
So a couple of questions can you talk a little bit about the quality of revenues and in particular, while revenues were roughly in line with my expectations, you were able to nicely beat by cash flow assumption for the quarter.
No that some of that was flow through from some costs reductions earlier, but I was wondering in terms of how you're managing the business the decision to maybe.
Some of the revenues was it because you exited low margin revenue or is it just simply a product mix issue and so can you just kinda give a little bit more color on how you plan to manage revenues.
As you go forward.
Sure Yeah.
Yes, so thanks, Mike.
So there's certainly some just continuing as of low margin revenue, that's definitely taking place in our numbers.
Some of it by design some of it we welcomed but but that's not the only part of it.
We think that the new revenue that we are adding is coming at a higher margin and the overall margin of the company. So we think that new overall, new customer accounts have higher margins and then also the the accounts that we have added this year.
We'll also be higher margin and then one of our focus is also on retaining and growing our legacy higher margin accounts, while while also.
Shedding some of the lower margin cuts and then do.
If you look at what our pipeline at our pipeline, we're certainly seeing the most traction in our pipeline from our highest margin product offerings and that would be in our marketing services.
Business as well as our fulfillment business those are the two areas that we're seeing.
The most the most robust pipeline and they also happened to be our two highest margin businesses.
And so in terms of.
The pipeline of business.
I guess traditionally when Harte Hanks one account they typically showed losses as they kind of got those accounts up and running and then showed margins in future quarters can you just talk a little bit about how that pipeline a business actually trained how are you managing the margins.
Are they profitable from day, one or is it time to build the about that sort of thing I was just kind of tried to give an idea of the timing of how that business falls in.
Thats sort of thing.
Yeah, Mike.
We have taken some business in the past that was.
For the sake of revenues it had low or no margin attached to it that the.
Our business that we've got in our pipeline and that we're winning today is a business that is profitable from the beginning though it may take a period of time to get it ramped up and beginning to produce revenue from the date of the sale of the close a close of the sales so it made.
Take two weeks to two months before we begin to recognize some revenue after a sale is close but generally speaking that revenue as profitable from the from the wins that we're getting recently and what's in our pipeline today.
And I know that in the past you really didnt have much of a pipeline of business and so this is kind of relatively new for you guys didn't even have a pipeline, but can you.
Okay, a little bit about how.
Much pipe why in terms of revenues that you have this quarter versus let's say sequentially from the second quarter.
Yeah, we're we don't give the numbers that our pipelines improved from where it wasn't second quarter and we have for aggressively throughout 2019 delivered higher sales.
Results quarter over quarter, and we're optimistic that we'll be able to continue to do that.
And Mike we've been able to we've been able to grow that pipeline, despite winning new business. So as as new business is one and it comes out of the pipeline, we've been able to continue to grow that like the overall pipeline.
That's terrific and then with the negotiated vendor agreements does the company anticipate that there will be a loss associated with those screens or can you just kind of give us. The magnitude of you know you said that you're right sizing it versus what was it oversize relationship what is the magnitude of the decrease in losses.
From the vendor relationship.
So we were spending.
Well over $10 million a year on on on certain vendors.
And we believe that all of that.
Cost comes out of the business starting.
Almost all of it will be out by Q1.
And there have been some charges related to getting out of that but we have expensed all of those charges in our numbers already so.
They do fall under restructuring costs.
But they have.
And flowing through the Opex as the years unfolded.
It's a good positive and then in terms of the consolidation of the facilities was that in the third quarter or was that in the fourth quarter.
It began in the third quarter and it it will continue into the fourth quarter and then there may be some residual stuff in early.
Early.
2020, but the majority large majority of our restructuring cost will be behind us at year end.
And then in terms of the savings you anticipate from the consolidation. If you can kind of grains out a little bit in and it also will there be a revenue impact from the consolidation or is it very little revenue impact.
Yeah, I don't think we want to breakout specifically the savings from the consolidation I think we've sort of outlined.
The the various impacts of consolidation.
And vendor reductions as well as labor reductions. So we will we look at it holistically.
So I don't think we're we're going to break it out specifically, but ER and what was your second question.
I was just wondering if there was going to be any type of revenue impact due to the due to the facility consolidations.
I'm not material.
Okay. Good.
Well, that's all I have thank you.
Thanks, Mike.
And that will conclude the question and answer session and today's call. We thank you for your participation you may now disconnect.
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