Q4 2019 Earnings Call
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The last seamless delivery for our clients as well as other operating margins.
Finally last week, Gretchen Ramsey joined Harte Hanks as head of strategy, where should work that Keith and Dana to deliver strategic excellence and help develop new products and services.
Addition to our operating model, we have numerous initiatives focused on on efficiency underway. These include investing in our fulfillment technology infrastructure to more efficiently and effectively service our customers consolidating our data centers and migrating applications and data to cloud based environment optimizing.
And upgrading our least offices to best serve customer needs.
Moving our Austin contact center to a more modern and cost efficient location realigning key performance indicators pricing metrics and management accountability the focus on profitable growth and lastly, we anticipate shedding a fair amount of low margin legacy revenue during 2020, expanding our margin profile across our business.
Yes.
Second pillar profitable growth.
With this and with the new model of leadership refocusing, our teams trend towards driving significant and sustained profitable growth to do this there are few aspects underway first new business acquisition, our new operating model is delivering promising early results are weighted pipeline to date is 22 million and.
The weighted is 55 million to hit our plan for the year. Our target. This 13 million to date, we've secured 3 million in new business. This year to date includes leading financial services brand, leading technology Grand fast growing consumer DTC company biotech company and a telco company. Please note. This is.
The largest and most diverse new business pipeline that we've seen in the past two years. In fact these engagements represent both categories. We are focusing on healthcare consumer DTC technology and financial services as well as more of the work that we will do for clients like this in each of these engagements we are working with these clients.
From building and enhancing their data through to the strategy and implement Kate implementation in the market across digital direct and social.
The second area that I'd like to highlight this business unit focus in order to grow at a significant pace, we're focused on driving our high margin cash generating business lines, our marketing services in fulfillment businesses as such our both high growth potential high margin businesses in fact today they represent approximately 60%.
Our current sales pipeline importantly, these two businesses contributed positive and growing EBITDA through our consolidated results with room for improvement and scale.
We clearly defined value propositions for these businesses as they integrate into the Harte Hanks business and this is resonating in the marketplace. Our contact center business is having a very strong start to the year, providing solid contribution margin to help drive stability and strategic investments in our business. We will also be building out a business intelligence.
Service at the back end of our contact center the add further value to our clients and lastly, although our print business continues to face headwinds.
As to help address this in 2019, we closed two locations have reduced additional costs as well over the last four months. We've now completed the rightsizing of this business and our considering all strategic options.
And the third pillar of our plan transforming our business.
When you look at Harte Hanks business as a whole we believe we're extremely well positioned to drive innovation by expanding our current service offer and creating new lines of revenue to that by the second half of 20 to 20.
By the second half of plenty funding grew launched two new service offers the first is a DTC direct to consumer sampling business powered by our data expertise. This has enabled by marrying our marketing services business and our best in class data capability with our fulfillment business Interestingly were already were.
In the beat up the sampling category working for Blue chip clients across consumer package goods and consumer DTC, we see further opportunity across healthcare auto and other categories that are both enabled by data and looking for a high touch consumer experience.
The second is a managed marketing services business. This offer focuses on expanding the current work that we do from major Blue Chip you to be tech players and creating an integrated offer the performed day to day marketing support duties either on a client's location or in ours. This work ranges from data operations.
Analytics and business intelligence marketing automation and other high time intensity lower value functions for our clients organizations. It's important to note that much of the in housing market today is being conducted and and.
That being conducted by big global consulting firms or low cost echoes, we see an opportunity to be well positioned in the middle, especially given our 200 plus person data and development Center, which is world class located in Yasir, Romania.
And I just discussed will coalesce during 2020, and we expect to see growth from new customers, helping to eliminate the revenue attrition Harte Hanks has experienced over the past few years, when we consider our new operating model business line focus new service offerings and new business pipeline, we expect to generate positive EBITDA for the full year.
20, and anticipate narrowing our cash burn throughout the year ultimately achieving free cash flow by mid 2021.
Operationally, we anticipate announcements about new products and services as well as continued initiatives to improve our efficiency. We continued to consolidate our footprint to cut duplicative and unnecessary costs, specifically are often lease which I previously mentioned.
We've exited several facilities, including Wilkes Barre, Fullerton, and our Jacksonville fulfillment facility reduction of our datacenter footprint optimizing staffing and reductions in licensing and vendor spend in aggregate. We anticipate needs. These cuts will yield three to 4 million in incremental savings realized this year the.
And cost reductions implemented last year.
Much of my prepared remarks, thus far have focused on near and longer term future of Harte Hanks. It's important to noted to note progress that we've already made.
The fourth quarter was the second quarter in a row that Harte Hanks achieved positive positive EBITDA for the quarter. We generated positive income from operations. Our cash balances remained strong and we have the necessary liquidity to execute our turnaround plan did the fourth quarter 2019 was the best quarter for Harte Hanks since 2017.
There was substantial work completed in 2019 to reduce our cost structure, our management team as well as members of the board were identified restructuring opportunities and take appropriate actions efforts resulted in over $22 million of annual savings.
I'd like to talk now about segment reporting laugh and to this we will be transitioning to segment unit reporting this will enable better visibility into the business and we hope Fuller appreciation of the value that exists within the company. We're targeting the second half of 2020 throw this out.
Lastly, what is obviously on everyone's mind today, the Corona virus and how it is impacting our business our tankers closely monitoring the impact of coded 19, our top priority remains to health and safety of our employees, our customers partners and the communities in which we work we've taken steps to eliminate traveled to foreign countries and reduced the.
Domestic travel to central travel only we've updated our internal employee website to include up to date information regarding cope 19.
Most businesses are facing the impact of the virus. This risk we see lives more in marketing spend declined an item specific to our business or operating model for all client categories very our portfolio is highly diversified and we believe that serves as as somewhat of a hedge against what is happening in the market today.
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Since the news of Copas 19 over the past few weeks. It has been challenging for everyone has a team we're doing everything to make sure that our employees are safe as of today. There are no reported cases is in play has contracted or been exposed to the virus. This is however in appropriate time for everyone to stay informed and prepared and we're doing.
Exactly that we have teams working throughout the company updating our contingency plans for our business and our people. We've also created a site on our own our own internal site to make sure that our employees and customers have access to all this information of also task leaders of our company to evaluate alternative work arrangements.
With us to make sure that jobs that are essential to the operation can maintain any event that will location.
We're in areas declared a local state of emergency.
In this rapidly evolving situation, we continue to monitor it daily as an example, Romania has mandated work from home and we're implementing our plans there to do exactly that Massachusetts declares a state of emergency on March 10, and as such we are we're combined with that as well rest assured we're in the process of taking the appropriate action as.
Quickly as possible and trying to stay ahead of it.
Regarding business impact like others in marketing services industry, we expect to see some impact to the business to date or work with our clients has remained steady and we're doing all we can help our clients businesses. During these times I'm extremely proud of the Harte Hanks team exceedingly appreciative of all efforts.
When involved and very excited to be part of this bright future. We'll now turn it over to Lori to walk through the details of our financial performance for free.
Thanks, Andrew.
The company with cost reduction efforts continue to be reflected in our quarterly results. As you may recall in the first quarter of 2019, our year over year operating expense decline net of restructuring and impairment cost nearly offset to some scope of the revenue declined during the quarter.
And in the second quarter at 2019, our year over year operating expense decline again net of restructuring and impairment costs exceeded our year over year revenue declined by three nelliana.
We built upon this momentum in third quarter with an operating expense decline of 17.3 million year over year compared to our revenue decline of 12.2 million.
This resulted in our cost reductions outpacing our revenue declined by 4.6 million.
And most recently in the fourth quarter operating expense decline of 22.5 million outpaced the revenue decline at 17.9 million by 4.7 million.
We expect this momentum to continue into 2020.
Turning to our fourth quarter results.
Fourth quarter revenues were 62.3 million compared to 70.2 million last year for a year over year revenue declining at 17.9 million or 26%.
For the quarter revenues were down compared to the fourth quarter 2018, and all verticals with the exception of the consumer brands protocol.
The largest decline among our verticals within retail, which was down 9.7 million or 50%, mostly due to losses in our now logistics business.
Our operating expenses for the fourth quarter of 2019 were 51.9 million compared to 74.5 million in the year ago quarter.
Decrease of 22.6 million or 30 percents.
We reduced our operating expenses in all areas, including labor production and distribution and advertising selling general and administrative to more than offset the decline in revenue.
Our restructuring expenses during the fourth quarter totaled 932000.
The majority of this is comprised of severance facility starches and termination fees related to certain that direct green lights.
For the full year 2019, we recorded restructuring charges of 11.8 million.
We expect to record declining restructuring charges over the next few quarters.
Today, we have identified annualized savings of more than 20 million that are associated with these restructuring charges a significant part of that since been focused on our vendor cost we estimate our annual vendor related savings to be approximately 14.5 million.
We continue to evaluate our vendor related costs and expect to realize additional savings and the coming quarters.
Operating income was 422000 for the fourth quarter of 2019.
Compared to an operating loss of 4.3 million in the quarter in a year ago quarter, and an operating loss of 4.5 million in the third quarter 2018.
Fourth quarter, adjusted EBITDA improved to 3 million up some negative 1.6 million in the same period last year. Despite the revenue declined 17.9 million.
Adjusting for the nonrecurring restructuring and impairment expenses.
Our adjusted operating income was 1.7 million compared to a loss of 3.1 million in the year ago period, and a loss of 1.1 million in the third quarter of 2018.
The improvement reflects substantial cost cutting actions taken by management in light of declining revenues.
Net loss for the fourth quarter of 2019 was 2.9 million or 49 cents per basic and diluted share count.
Compared to net income of 1.6 million or 21 cents per basic and diluted share in the fourth quarter of 2018.
Sequentially. The net loss improved from 6 million or 97 cents per basic and diluted share mainly due to lower operating expenses in the fourth quarter.
Turning to the full year results.
Revenues for 2019, one or 217.6 million compared to 284.6 million last year for a year over year revenue decline of 67.1 million or 24%.
For the year revenues were down in all verticals compared to 20 team with the exception of our healthcare vertical.
The largest decline in month, among our verticals within retail, which was down 25 million or 38%, mostly due to losses in our non logistics businesses.
Our operating expenses for the full year 2019 were 239.2 million compared to 310.7 million in 2018.
A decrease of 71.5 million or 23%.
$71.5 million decline in operating expenses more than offset to 67.1 million decline in driving is building momentum for improved financial results.
We reduced our operating expenses in all areas, including paper production distribution and advertising selling general administrative expenses to offset the decline in revenue.
As I mentioned earlier, our restructuring expenses for the solid year 2019 totaled 11.8 million.
Operating loss was 21.6 million since all your 2019 compared to an operating loss of 26 million 21 team.
Adjusted EBITDA for the full year 2019 improved to a loss of 3.4 million compared to a loss of 14.3 million in 2018.
Adjusting for the nonrecurring restructuring and impairment expenses, our adjusted operating loss was 8.7 million compared to a loss of 21.7 million in 20 team.
Net loss for the full year 2019, that's 26.3 million or $4.26 per basic and diluted share compared to net income at 18 million or $2 and turning it sounds per basic share and $202 from 38 cents per diluted share in 2018.
Net income in 2018 includes 3.1 million dollar gain on the seller streak to digital which we completed in February of 2018, as well as an income tax benefit of 18.1 million.
Turning to our balance sheet and liquidity.
As of December 31st 2019.
We had cash cash equivalents of 28.1 million. This compares to a cash balance of 20.9 million as of the period ended December 31st 20 team.
As of December 31st 20 nights, when 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 Q and [noise].
Thank you ladies and gentlemen, if he was shot for the question over the phone signal by pressing star one again, not a star one ask a question.
We've been they take our first question from Michael Kupinski Nobody comes from I guess.
Go ahead your line is open.
Thank you and thanks for taking my questions.
First of all the advertising it SGN expense was significantly lower than expected I know that you've been cutting costs, but that was the big experience to the upside <unk> cash for what's left but I'd say I was wondering if you can give me that the run rate for that line item going forward were there any particular bank during the fourth quarter.
Her that maybe were one time saving for true ups or whatever just kinda give a sense of what that looks like going forward.
Sure and yes, there were actually some one time savings in Q4 that we don't expect going forward I expect sounds to be closer to the run rate of Q3, but they should still be down to the savings that we have on somebody's didnt related contract changes.
What were some of the one time savings what what was in the number.
So there were a couple of things that we had one item that we had was a settlement from an old insurance claims that came in higher than we expected.
But in the accounted for a piece of that.
Gotcha, and then given the fact that you plan to exit a low margin or money, losing gravity. It can you give us itself.
Now the revenue that that may affect and then also there was an acceleration in the rate of decline in revenues in Q4 day, albeit that was right why with my expectations, but I was wondering if you can give us a sense of how revenues appear to be paid to late Q1 are you expecting moderating revenue trends beginning in the first quarter or.
We kill me, that's true or what should we assume in terms of.
Revenues throughout the balance of year.
Yeah, I mean, we expect that the pace of the revenue declines.
Hello, now obviously, we're in some unprecedented times. So there's some of course some uncertainty we believe though that we had a strong position far surfaces and we haven't seen any declines yet with our customers had no services.
We do expect that we will have.
For the year over year impacts from customer losses that we had earlier in the here. So we do expect a leveling out of the reference.
Gotcha, and then you've indicated that a lot of the vendor contracts again really renegotiated, but that there were still from a bit you felt that you could we negotiate further our these contracts that we negotiate last year. This looking for better terms or are these additional vendor contracts that have yet to be.
Renegotiated.
I think most of these are additional vendor contracts that were looking at so we have you know as you know you have contracts to come up that different cycles. So as each contract comes off were doing it.
Look at every contract that comes up for renewal evaluating whether it be licenses license count or you know any terms in the contract in renegotiating them.
Okay, and then can you give us a sense of Bob how much revenue the print business generates a is that generating positive cash flow. There I think you indicated that this is a business that you're evaluating strategic options. I was just wondering if that's the only business that you're evaluating at this point or there other businesses that might not be before.
Let me get like that or.
How you plan to reshape the company and that there might be other options going forward.
Yeah I mean this is the business that's been as we said the hardest hit.
And where the majority of our declines have come from and the need to look at all options. We are looking at the business as a whole because as I mentioned earlier, we do have.
Multiple high growth high EBITDA businesses.
We believe you know primarily meet the scale because the businesses themselves both from the offer that they have to clients as well as how their managed and and how the operations flow.
Do quite well.
Can you give us a scope of what the annual revenues for.
This particular portion of the business that you pointed to look at options for the generated on 2000 I too.
Yeah, it's it's a smaller percentage that's a total it's approximately.
By 15% of the total revenue.
Okay.
And that.
Obviously represented more.
Okay and in terms of the long term debt do you anticipate kind of getting up to the 22 million or do you think that dog given the fact that you do have your cash that you plan to manage the data at current levels going forward because you have little room on your revolver gets right.
Yeah, We don't expect we don't expect increased at that level.
Archer.
All right that's all the questions I got thank you.
Thank you.
And there are no further questions.
That concludes the cool thank you for your participation.
You may now disconnect.
Yeah.
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Oh.
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