Q3 2024 Harte Hanks Earnings Call
Operator: Good afternoon and welcome to the Harte Hanks third quarter 2024. At this time, all participants are in a listening mode. and we will open for questions following. anyone should require operation.
Good afternoon, and welcome to the Harte Hanks third quarter 'twenty 'twenty four earnings call. At this time all participants are in a listen only mode and we will open for questions. Following the presentation.
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Tom Baumann: Please note this conference I will now turn the conference over to your host, Tom Baumann, FNK Investor Relations. Thank you.
Please note. This conference is being recorded I will now turn the conference over to your host Tom Bauman F N K Investor Relations Tom the floor is yours.
Tom Bauman: Thank you.
Tom Baumann: Hosting the call today are Kirk Davis, Chief Executive Officer, and David Garrison, Chief Financial Officer. Before we begin, I want to remind participants that during the call, management's prepared remarks may contain forward-looking statements that are subject to risks and uncertainty. Management may also make additional forward-looking statements in response to your questions today.
Tom Bauman: Hosting the call today are Kirk Davis, Chief Executive Officer, and David Garrison Chief Financial Officer.
Tom Bauman: Before we begin I want to remind participants that during the call management's prepared remarks may contain forward looking statements that are subject to risks and uncertainties.
Tom Bauman: Management May also make additional forward looking statements in response to your questions today.
Tom Baumann: Therefore, the company claims protection under safe harbor for forward-looking statements obtained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from results discussed today, and therefore, we will refer you to a more detailed discussion of these risks and uncertainties. The company's filings with the Securities and Exchange In addition, any projections as to the company's future performance, represented by management, include estimates as of today, November 14, 2024. The company assumes no obligations to update these projections in the future as market conditions.
Therefore, the company claims protection under Safe Harbor for forward looking statements.
Tom Bauman: And in the private Securities Litigation Reform Act of 1995.
Actual results may differ from results discussed today, and therefore, we refer you to a more detailed discussion of these risks and uncertainties in the company's filings with the Securities and Exchange Commission.
Tom Bauman: In addition, any projections as to the company's future performance represented by management include estimates as of today November 14th 2024.
Tom Bauman: And the company assumes no obligations to update these projections in the future as market conditions change.
Tom Baumann: This webcast and certain financial information provided on the call, including reconciliations of non-GAAP financial measures. The Comparable Gap financial measures are available in the earnings press release that was issued shortly after the market closed. The copy of that press release and other corporate disclosure is available on the Investor Relations section of the Harte Hanks website at hartehanks.com.
Tom Bauman: This webcast and certain financial information provided on the call, including reconciliations of non-GAAP financial measures to comparable GAAP financial measures are available in the earnings press release that was issued shortly after the market closed a copy of that press release and other corporate disclosure is available on the Investor Relations section.
Tom Bauman: The Harte Hanks website at Harte Hanks Dot com.
Tom Baumann: With that I would now like to turn the call over to Kirk. Kirk, the call is yours.
Tom Bauman: With that I would now like to turn the call over to Kirk for the Call's yours.
Kirk Davis: Thank you, Tom, and thank you to all of our participants for joining our call. Over the past year, Harte Hanks has been committed to transforming our business, building a path towards sustainable growth, and optimizing free cash flow. In Q3, we reported a 1.1% year-over-year revenue increase. and improvement from the negative 16.6 percent revenue decline on a comparable basis, so adjusted for required revenue, that we reported in Q3 2023. Moreover, we are showing improvement compared to the results of the previous six quarters, during which revenues declined by an average of negative 8.8 percent on a cumulative basis, also adjusted for acquired revenue.
Kirk Davis: Thank you Tom and thank you to all of our participants for joining our call.
Kirk Davis: Over the past year Harte Hanks has been committed to transforming our business building a path towards sustainable growth and optimizing free cash flow.
Kirk Davis: In Q3, we reported a one 1% year over year revenue increase an improvement from the negative 16, 6% revenue decline on a comparable basis. So adjusted for acquired revenue that we reported in Q3 2023.
Kirk Davis: Moreover, we are showing improvement compared to the results of the previous six quarters.
Kirk Davis: During which revenues declined by an average of negative 8.8% on a cumulative basis also adjusted for acquired revenue.
Kirk Davis: However, we want to set realistic expectations by acknowledging that our revenue turnaround won't follow a perfectly straight upward path. Instead, we anticipate some natural fluctuations and occasional declines as part of our journey to sustainable growth.
Kirk Davis: However, we want to set realistic expectations by acknowledging that our revenue turnaround wont follow a perfectly straight upward path.
Kirk Davis: Instead, we anticipate some natural fluctuations and occasional declines as part of our journey to sustainable growth. We will see that in Q4, we expect a low to mid single digit revenue decline.
Kirk Davis: We will see that in Q4, where we expect a low to mid-single-digit revenue decline.
Kirk Davis: Our strategy is focused on creating lasting value, which sometimes requires periods of investment and recalibration. We are proactively addressing longstanding challenges that have impacted our company, positioning ourselves for a more resilient future. Our focus remains on growing free cash flow as the transformative changes in our sales, marketing, and now including our customer organization continue gaining traction.
Kirk Davis: Our strategy is focused on creating lasting value, which sometimes requires periods of investment and recalibration. We are proactively addressing longstanding challenges that have impacted our company positioning ourselves for a more resilient future.
Kirk Davis: Our focus remains on growing free cash flow as the transformative changes in our sales marketing and now including our customer organization continue gaining traction.
Kirk Davis: As we approach 2025 and with the recent addition of our company's first Chief Customer and Data Officer, we are much better positioned to seize key growth opportunities through our newly established Customer Excellence and Growth Division, CEG. Under our CEG vision, our customer experience and sales and marketing teams are united in creating a positive, consistent, end-to-end customer experience. Our team is focused on uncovering the key drivers of Harte Hanks' customer loyalty, as well as to identify the root causes of client revenue shrinkage and attrition, devising actions to more effectively preserve our revenue base. Our CEG division will also take the lead in shaping our product strategy and development.
Kirk Davis: As we approach 2025 and with the recent addition of our company's first chief customer and data officer, we are much better positioned to seize key growth opportunities through our newly established customer excellence and growth.
Kirk Davis: Division C G.
Kirk Davis: There are C. G vision, our customer experience and sales and marketing teams are United in creating a positive consistent into and customer experience.
Kirk Davis: Our team is focused on uncovering the key drivers of Harte Hanks customer loyalty as well as to identify the root causes of client revenue shrinkage and attrition devising actions to more effectively preserve our revenue base.
Kirk Davis: R E. G Division will also take the lead in shaping our product strategy and development through this we aim to leverage our advanced data solutions unit to strengthen our value proposition using data and AI as unique differentiators across each business segment product offerings.
Kirk Davis: Through this, we aim to leverage our advanced data solutions unit to strengthen our value proposition using data and AI as unique differentiators across each business segment's product offering. Our goal is to develop integrated data and AI capabilities that meet the increasing demand for data intelligence and technology solutions from our clients. This approach is especially advantageous as our data solutions have a shorter sales cycle, yield strong margins, and offer a timely opportunity to enhance the value of all services we deliver across the company.
Kirk Davis: Our goal is to develop integrated data and AI capabilities that meet the increasing demand for data intelligence and technology solutions for our clients.
Kirk Davis: This approach is especially advantageous as our data solutions have a shorter sales cycle yield strong margins and offer a timely opportunity to enhance the value of all services, we deliver across the company.
Kirk Davis: In recent months, we have secured a number of new clients, as well as having won expansion programs from highly satisfied existing customers. I'd like to highlight a few of our recent success stories, and as well, commend our employees company-wide for their hard work. Beginning with a new customer in our fulfillment practice, we recently added a new client that operates a dynamic design marketplace that connects independent artists and designers with consumers seeking unique personalized products, including high-end greeting cards. In Q4, we anticipate producing approximately 2.5 million holiday postcards on their behalf. We are well-positioned for year-round custom opportunities with this impressive growing company.
Kirk Davis: In recent months, we have secured a number of new clients as well as having one of the expansion programs from highly satisfied existing customers.
Kirk Davis: To highlight a few of our recent success stories and as well commend our employees company wide for their hard work.
Kirk Davis: Beginning with a new customer in our fulfillment practice, we recently added a new client that operates a dynamic design marketplace that connects independent artists and designers with consumers seeking unique personalized products, including high end breeding cards in Q4, we anticipate producing approximately.
Kirk Davis: $2 5 million holiday post cards on their behalf.
We are well positioned for year round custom opportunities, but thats impressive growing company.
Kirk Davis: In Q4, we onboarded a top 15 financial services client that sought to outsource its fulfillment operations for the first time. This new customer is poised to spend $2 million annually handling printing and fulfillment fund-related collateral for the firm, including fund sheets, prospectuses, and annual supplements. We have current customers in financial services, so this represents a nice expansion in a space in which we perform well.
Kirk Davis: In Q4, we on boarded a top 15 financial services client that sought to out for outsource its fulfillment operations for the first time this new customer is poised to spend $2 million annually handling.
Kirk Davis: Printing and fulfillment.
Kirk Davis: The related collateral for the firm, including Bunge sheets, Prospectuses, and then youll supplements with current customers.
Kirk Davis: In financial services. So this represents a nice expansion in the space in which we performed well.
Kirk Davis: Shifting to sales services, we landed a new client this month in the global luxury automotive industry headquartered in England. The team we are deploying for this brand will interact with enthusiasts and clients, qualifying, scheduling, and coordinating dealership test drives, event attendance, and play a key role for the brand in driving qualified prospects and revenue to dealerships.
Kirk Davis: Shifting to sales services, we landed a new client this month and the global luxury automotive industry headquartered in England. The team. We are deploying for this brand will interact with enthusiasts and clients qualifying scheduling and coordinating dealership test drives event attendance.
Kirk Davis: And play a key role for the brand and driving qualified prospects and revenue to dealerships.
Kirk Davis: In shifting to customer care, in late October, we began providing customer care for one of the most prominent global resale marketplaces in the world for luxury goods. As a result, we have established a regional presence in Dallas to support this exciting client, which we are well positioned to expand with.
Kirk Davis: And shifting to customer care in late October we began providing customer care, but one of the most prominent global resale market places in the world for luxury goods. As a result, we have established a regional presence and Dallas to support this exciting client, which we are well positioned to.
Kirk Davis: Expand with.
David Garrison: I will now turn the call over to David Garrison to review our financial performance and discuss our cost reduction program, Project Elevate. Thank you, Kirk. I will review the third quarter consolidated results, including revenues for each business segment. The revenues in the third quarter were $47.6 million, which grew by 1.1% when compared to $47.1 million for the third quarter of 2023. Growth in Customer Care and Sales Services segments were offset by declines in the other two segments. Revenues in customer care segment were $13.1 million in the third quarter of 2024, compared to $11.8 million in the same quarter prior year.
Speaker Change: I will now turn the call over to David Garrison to review, our financial performance and discuss our cost reduction program project elevate.
David Garrison: Thank you Kirk.
David Garrison: I'll review, the third quarter consolidated results, including revenues for each business segment.
David Garrison: The revenues in the third quarter were $47 6 million, which grew by one 1% when compared to $47 1 million for the third quarter of 2023.
David Garrison: Growth in customer care and sales services segment segments were offset by declines in the other two segments.
Revenues and customer care segment.
David Garrison: $13 1 million in the third quarter of 2024 compared to $11 8 million in the same quarter prior year.
David Garrison: multiple customers in the entertainment industry expanded workloads driving the revenue increases for this quarter. sales services increased to $4.2 million compared to $2.2 million in the third quarter of 2023. The increase of volume from a large client was the majority of this increase.
David Garrison: Multiple customers in the entertainment industry expanded workloads driving the revenue increases for this quarter.
David Garrison: Sales services increased to $4 2 million compared to $2 2 million in the third quarter of 2023.
David Garrison: The increase of volume from a large client was the majority of this increase.
David Garrison: the marketing service. segment, revenues fell to $9.1 million in the third quarter of 2024 compared to $10.6 million in the prior year. customer budget reductions, and the end of certain programs account for the decrease in the segment year over year. Fulfillment and logistics revenues were $21.3 million in the third quarter of 2024, compared to $22.5 million in the prior year. The decrease was the result of lower logistics volume and rates.
David Garrison: The marketing service.
David Garrison: Segment revenues fell to $9 1 million in the third quarter of 2024 compared to $10 6 million in the prior year.
David Garrison: Customer budget reductions and the end of certain programs account for the decrease in the segment year over year.
David Garrison: Fulfillment and logistics revenues were $21 3 million in the third quarter of 2024 compared to 22 5 million in the prior year. The decrease was the result of lower logistics volume and rates.
David Garrison: not being outpaced by new and expanded programs in the fulfillment operation. operating expenses in Q3 were $45.7 million, including restructuring expenses of $836,000. This is compared to $44.2 million in the same period of 2023. Project Elevate resulted in a cost of $836,000 of restructuring charges for the quarter. We expect to incur additional expenses in the execution of Project Elevate during the remainder of the program, ending in Q4 of 2025. These expenditures related to the operation of Project Elevate and costs associated with the termination of contracts and reductions in work. We are on plan for $6 million of in-year EBITDA improvements.
David Garrison: Not being outpaced by new and expanded programs in the fulfillment operations.
David Garrison: Operating expenses in Q3.
David Garrison: <unk> 45 7 million.
David Garrison: Including restructuring expenses of 836000, this is compared to $44 2 million in the same period of 2023.
David Garrison: Project elevate resulted in a cost of 836000.
David Garrison: Restructuring charges for the quarter we.
David Garrison: We expect to incur additional expenses in the execution of project elevate during the remainder of the program ending in Q4 of 2025.
David Garrison: These expenditures related to the operation of project elevate and cost association associated with the termination of contracts and reductions in workforce.
We were on we are on plan for $6 million of in year EBITDA improvement.
David Garrison: The $6 million of cost savings came from the optimization of personnel for $3 million concentrated in the marketing services operation. streamlining contracts and back office operations yielded $2 million and improved warehouse operations for another million in fulfillment and logistics. Some of these improvements in cost structure were consumed by the expansion of the sales team and non-capitalized technology improvements in our fulfillment operations.
David Garrison: The $6 million of cost savings came from the optimization of personnel for 3 million concentrated in the marketing services operations streamlining contracts and back office operations yielded $2 million and improved warehouse operations for another million and fulfill.
David Garrison: And logistics some of these improvements in cost structure were consumed by the expansion of the sales team and non capitalized technology improvements in our fulfillment operations.
David Garrison: quantify the company has invested in the sales and marketing team. by doubling the size of the sales team and spending 40% more than prior years. Management's focus with Project Elevate is to improve the profitability with these cost reductions and increase free cash flow. The operating income in Q3 2024 was $1.9 million compared to operating income of $2.9 million in the third quarter of 2023. When adjusting for stock compensation, severance, and restructuring charges, the adjusted operating income in the third quarter of 2024 is $3.1 million compared to $3.2 million in Q3 of 2023.
Speaker Change: Quantify the company has invested in the sales and marketing team by.
Speaker Change: By doubling the size of the sales team and spending 40% more than prior years.
Speaker Change: <unk> focus with project elevate is to improve the profitability with these cost reductions and increased free cash flow.
Speaker Change: The operating income in Q3, 2024 was $1 9 million compared to operating income of $2 $9 million in third quarter of 2023, when adjusting for stock compensation severance and restructuring charges. The adjusted operating income in the third quarter of 2024 is $3.
Speaker Change: $1 million compared to $3 2 million in Q3 of 2023.
David Garrison: The Adjusted Operating Margin. is 6.5% in Q3 of 24 compared to 6.9% in the same quarter of 2023. The third quarter of 2024 had an EBITDA of $2.9 million compared to an EBITDA of $3.9 million in the same period of 2023. When adjusting for stock compensation, severance, and restructuring expenses, the adjusted EBITDA was $4.1 million in Q3 of 2024 and $4.2 million in the same period of 2023. Turning to the balance sheet, as of September 30, 2024, we had cash and cash equivalents of $5.9 million compared to $13.3 million as of September 30, 2023.
Speaker Change: The adjusted operating margin.
Speaker Change: Is six 5% in Q3 of 24 compared to six 9% in the same quarter of 2023.
Speaker Change: The third quarter of 2024 had an EBITDA of $2 9 million compared to an EBITDA of $3 9 million in the same period of 2023.
Speaker Change: When adjusting for stock compensation.
Speaker Change: <unk> and restructuring expenses, the adjusted EBITDA was $4 1 million in Q3 of 2024% and $4 2 million in the same period of 2023.
Speaker Change: Turning to the balance sheet.
Speaker Change: As of September 32024, we had cash and cash equivalents of $5 9 million.
Speaker Change: Compared to $13 3 million.
Speaker Change: As of September 32023.
David Garrison: at October 31-24. Our cash on hand was $9.89. Our current $25 million line of credit, which was extended until June of 2025, has not been drawn against and the company has no debt.
Speaker Change: At October 31 24.
Speaker Change: Our cash on hand was $9 8 million.
Our current $25 million line of credit, which was extended until June of 2025 has not been drawn against and the company has no debt.
David Garrison: The pension plan was terminated during June of 2024, and as a reminder, let us walk through the timeline of this process to the termination of the pension and its impact on our financial statement. In June, the assets of the pension were liquidated into cash in order to purchase the equivalent annuity product from an insurance company for the pension participant. This product would contractually replace the company's obligations related to the pension. and relieve our respective liabilities. For the purchase to occur, the pension assets required an additional cash contribution from the company in June of $6.1 million.
Speaker Change: The pension plan was terminated during June of 2024, and as a reminder, let's walk through the timeline of this process to the termination of the pension and its impact on our financial statements.
Speaker Change: In June the assets of the pension were liquidated in the cash in order to purchase the equivalent annuity product from an insurance company for the pension participants.
Speaker Change: Participants.
Speaker Change: This product would contractually replaced the companys obligations related to the pension.
Speaker Change: And we leave our respective liability.
Speaker Change: For the purchase to occur the pension assets required an additional cash contribution from the company in June.
Speaker Change: $6 1 million.
David Garrison: This contribution allowed for the formal termination of Pension Plan 1 and its obligations as of June 30, 2024. The annuity provider required 60 days to onboard the pension participants. As a result, during the third quarter, the company contributed an additional $1.1 million for the final onboarding pension expenses and government filings associated with the termination process. Note that in December of 2023, the Pension Plan 1 liability was moved into other current liabilities on the balance sheet. That line at December 31 was $9.5 million. In June, this account balance was reduced by the $6.1 million cash contribution mentioned above, resulting in a current balance as of September 30 of $3 million.
Speaker Change: This contribution allowed for the formal termination of pension plan, one and its obligations as of June 32024.
The Inuit provider required 60 days to onboard the pension participants as a result during the third quarter. The company contributed an additional $1 1 million for the fund final Onboarding pension expenses and government filings associated with determination.
Process.
Speaker Change: Note that in December of 2023, the pension plan one liability was moved into other current liabilities on the balance sheet.
That line at December 31 was $9 5 million.
Speaker Change: In June this account balance was reduced by the $6 $1 million cash cash contribution.
Speaker Change: Mentioned above resulting in a current balance as of September 30 of $3 million.
David Garrison: During the second quarter, the pension accounting expense was included as a part of the $27.6 million reduction to the accumulated other comprehensive loss account in the equity section of the balance sheet. The results. was a pension charge of $38.2 million in June, which is partially offset by a tax benefit of $10.1 million. On the balance sheet, the remaining qualified pension liabilities refer to the liability of Pension Plan 2, while the non-qualified pension liabilities is in reference to the Restoration Plan.
Speaker Change: During the second quarter the pension accounting expense was included as a part of the $27 6 million reduction.
Speaker Change: Two the accumulated other comprehensive loss account in the equity section of the balance sheet.
Speaker Change: The result.
Speaker Change: Was a pension charge.
$38 2 million in June, which is partially offset by a tax benefit of $10 1 million.
Speaker Change: On the balance sheet, the remaining qualified pension liabilities refer to the liability of pension plan too while the nonqualified pension liabilities is in reference to the restoration plan.
David Garrison: One final note. as part of our Project Elevate initiative. and specific to our cost reduction efforts, we have made the decision to allow our research agreement with Noble Research to expire effective immediately. As an alternative, Kirk and I are focused on building relationships with the goal of securing non-sponsored research coverage. We think traditional unpaid research coverage is more appropriate for where Harte Hanks is going. Thank you for all your support.
Speaker Change: One final note.
Speaker Change: As part of our project elevate initiative.
Speaker Change: And specific to our cost reduction efforts, we have made the decision to allow our research agreement with Novo research to expire effective immediately.
Speaker Change: As an alternative Kirk and I are focused on building relationships with the goal of securing non sponsored research coverage. We think traditional unpaid research coverage is more appropriate for where harte Hanks is going.
Speaker Change: For all your support I would like to turn the call back over to Kirk.
Kirk Davis: I'd like to turn the call back over to Kirk. Thanks, Dave.
Kirk Davis: Thanks, Dave before we conclude I want to thank all of you our investors employees and partners for your continued support and commitment as we look forward. We are focused on growing our free cash flow and enhancing our ability to adapt grow and lead in our segments by prioritizing innovation and our customers.
Kirk Davis: Before we conclude, I want to thank all of you, our investors, employees, and partners, for your continued support and commitment. As we look forward, we are focused on growing our free cash flow and enhancing our ability to adapt, grow, and lead in our segments by prioritizing innovation and our customers' evolving needs. This time, we'd be happy to take any questions.
Volume needs at this time, we'd be happy to take any questions.
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Operator: Thank you for joining us. Thank you for watching.
Speaker Change: We have not seen anyone come into the queue just on the mainland.
Operator: Thank you.
Speaker Change: Okay, I will now hand back over to Cook for his closing remarks.
Kirk Davis: Okay, I will now hand back over to Kirk for... Thank you for joining our call. We appreciate it.
Speaker Change: Okay.
Cook: Thank you for joining our call. We appreciate it we wish you a good evening and we look forward to keeping you apprised of our company's developments as we move forward. Thanks very much.
Kirk Davis: We wish you a good evening and we look forward to keeping you apprised of our company's developments as we move forward. Thanks very much. Thank you very much everybody.
Speaker Change: Thank you very much everybody. This does conclude today's conference you may disconnect. Your phone lines at this time and have a wonderful rest of the day. Thank you for your participation.
Operator: This does conclude today's conference. You may disconnect your phone lines at this time and have a wonderful rest of the day. Thank you for your participation.
Okay.