Q2 2019 Earnings Call

The second quarter.

Today's conference is being recorded.

At this time I would like.

Please go ahead Sir.

Thank you and good afternoon, everyone. Thank you for joining us.

Hosting the call today are Andrew Harrison, President and Mark Belfiore CFO .

Before I begin I would like to tell everyone that the information provided during this call may contain forward looking statements such as statements about the company's strategy adjustments to its cost structure financial outlook capital resources competitive factors business and industry expectations anticipated performance and outcomes future effects of acquisitions disposition litigation and regulatory changes economic forecasts for the markets. They serve expectation related cost saving measures and the availability of a tax refund and other statements that are not historical facts.

Actual results may differ materially from those projected or implied in these statements because of the various risks and uncertainties, including those described in the company's Form 10-K , and 10-Q and other filings with the FCC and cautionary statement in today's earnings release.

The conference call May also reference non-GAAP financial measures. Please refer to the earnings press release that was issued today after the close for reconciliations and other related disclosures.

The company's earnings release is available on the Investor Relations section of the company's website at Harte Hanks dotcom.

With all that said I'd like to turn the call over to Andrew Harrison, Andrew The Call's yours.

Thanks, Rob.

Second quarter for US was full of positive activity, we received a significant infusion of cash we kicked off the next phase of our ongoing restructuring efforts and we began to convert some of our sales pipeline to new business wins.

Our second quarter infusion of cash flows from the receipt of a tax refund in the amount of $15.9 million and a 5 million dollar contingent payment from this this sale as Threeq digital.

These added to the 4.6 million dollar tax refund received in the first quarter has contributed a total of $25.5 million.

To our cash position that at the end of the second quarter was $39 million.

As a result, our liquidity is in a strong position.

And we have the ability to fund our restructuring efforts further advance business improvement initiatives and bolster our our our sales efforts.

During our first quarter earnings call in May.

I stated our commitment to take the actions required to restore profitability at harte Hanks and to create opportunities to grow our revenues overtime.

I went on to emphasize how achieving these requires both stabilizing our revenue and also aligning our cost structure to our revenues and how we were pursuing both of these with urgency and priority.

Over the past three months, we've made significant progress advancing initiatives to better achieve these goals.

Before I provide a highlight of this progress it's important to note that our first quarter earnings call to place midway through the second quarter. So much of the benefit of the progress we've made during the past three months had little impact on our second quarter performance.

Slide that expense reductions in the second quarter, nearly offset revenue declines, resulting in narrower net losses and improved adjusted EBITDA.

As compared to the same quarter one year ago.

We expect our recent efforts to have an increasingly positive impact over the next several quarters as more of our actions begin to take effect.

And further we believe that based on our current plan positive adjusted EBITDA is an attainable goal as early as the fourth fourth quarter of this year.

We expect to have positive adjusted EBITDA for the full year 2020.

Related to our cost reduction plans, we are actively involved in a well coordinated and extensive restructuring effort.

This is a named project managed by a full time project leader with years of expertise in cost restructuring.

We've established a tax that task force as highly engaged in business and functional leaders, who work in close coordination with several skilled consultants into senior and experienced board members, who provide strong support.

Combination of outside expertise the board's engagement and internal efforts is yielding significant progress towards identifying opportunities in every area of the company to materially reduce our cost structure.

This task forces then taking action on the identified opportunities and successfully converting them into future savings in every area of the company.

To date in 2019, we've identified over $20 million of additional annualized cost savings.

Few areas of noteworthy.

Savings include corporate technology, and related infrastructure and vendor and third party expenses.

In addition, we're also finding savings opportunities and real estate management DNA in production.

This is challenging work I'm pleased with the results so far and I'm very proud of the efforts of everyone involved.

During last quarter's call I highlighted that we have strengthened our sales pipeline and that pipeline has yielded 21, new business sales with wins in each of our major service lines.

Through the first half of this year, our teams have closed $6.2 million of sales doubling the $3.1 million as close sales during the same period in 2018.

We're making additional investments to further strengthen our sales pipeline to be new business opportunities for the future.

With that I will now I'll now turn the call over to Marc Delpriore to provide a more detailed walk through of our second quarter results Mark.

Thanks, Andrew.

As Andrew mentioned in his comments, we ended the first quarter was $39 billion in cash.

During the quarter, we received a $5 million contingent payment related to the qualified sale the threeq digital as defined.

And the purchase and sale agreement dated February 28 2018.

Additionally, we received $15.9 million in federal income tax refunds associated with the capital loss.

We generated on the sale of free to digital in 2018, and the restructuring of one of our foreign entities.

We believe that our cash position combined with the remaining availability on our credit facility provide adequate liquidity to fund our turnaround plan.

It has also allowed the company.

To further advance business delivered mid.

Business improvement initiatives.

Some of which have and will continue to require upfront one time investments. We expect that these investments which are part of the restructuring effort described by Andrew carry attractive returns that short Tbas short payback period and will result in substantially reduced cost that will be realized over the next few quarters.

With 3.3 million in restructuring expenses realized in the second quarter, an additional restructuring expenses expected over the next few quarters. The company has included in our earnings press release and will mentioned on this call non-GAAP and non-GAAP financial measure adjusted EBITDA, which serves as a supplemental measure of operating performance in order to provide an improved understanding of underlying performance trends.

Please refer to our earnings press release that was disseminated today after the market close.

For the definition of adjusted EBITDA and other disclosures.

The 3.3 million in restructuring expenses during the second quarter is related to the name restructuring project that Andrew discussed in his comments.

This is comprised of charges related to customer database build write offs severance asset impairment facility lease expense and data contracts.

In the six months ended June Thirtyth 2019, we recorded restructuring charges of 7.8 million restructuring charges in the first quarter ended March 30, Onest 2019.

Included the termination fee related to a contract with web browser.

We expect to record additional restructuring charges over the next few quarters.

To date, there have been annualized savings identified of more than $20 million that are associated with these restructuring.

A significant part of this has been focused on our vendor costs.

In addition to the 5 million in annualized vendor cost reduction.

Achieved in the first quarter.

We reduced our annualized vendor related costs by an additional 6.7 million.

Since the end of the first quarter.

This brings our year to date annualized vendor related savings to $11.7 million.

Additionally, we are in the process of advancing initiatives to remove an additional $1.9 million in annualized vendor related savings.

Turning to the second quarter results.

Second quarter, adjusted EBITDA improved to negative 1.8 million from negative $3.7 million in the same period last year. Despite revenue declines of 15.2 million year over year.

Second quarter revenue was $54.7 million compared to 69.6 million last year.

For the year over year decline of 15.2 million that I, just mentioned were 22%.

For the quarter revenue revenues were down in our BT consumer financial services retail and transportation verticals compared to the second quarter of 2018.

Offset by an increase in the healthcare vertical.

The largest decline among our verticals was in retail, which was down $5.2 million or 33%, mostly due to a large customer loss in our contact Center service line.

Our operating expenses for the second quarter of 2019 were $61.3 million.

Compared to $75.9 million in the year ago quarter, a decrease of $14.6 million or 19%.

We reduced our operating expenses, primarily in the areas of labor production and distribution and advertising selling general and administrative costs.

Offset the decline in revenue.

Excluding the restructuring expense, our operating expenses declined by $17.9 million in the second quarter compared to the second quarter ended June Thirtyth 2018, resulting in cost reductions that exceeded the revenue decline in the same year over year period by $2.4 million.

Operating loss was $6.6 million.

For the second quarter of 2019 compared to $6.3 million in the year ago quarter.

Again, adjusting for the nonrecurring restructuring expenses, our adjusted operating loss was $3.1 million compared to a loss of $5.6 million in the year ago period.

This reflects the massive cost cutting initiatives undertaken by the company in the face of revenue declines.

Net loss for the second quarter of 2019.

Was $3.8 million or 63 cents per basic share and diluted share.

Compared to a net loss of $6.9 million or $1.10 per basic and diluted share in the second quarter of 2018.

Turning to our balance sheet and liquidity.

As I mentioned earlier as of June Thirtyth, 2019, we had cash and cash equivalents $39 million.

This compares to a cash balance of $20.9 million on both December 30, Onest 2018 at March 31 2019.

As of June 32019, we had $18.7 million in long term debt.

Which reflects the current draw on our $22 million bank credit facility.

With that operator, we would like to open the call for Q1 day.

Thank you I would like to ask a question over the phone you may signal by pressing star one on your telephone keypad.

Using a speaker phone. Please make sure your mute function is turned off to know your signal to reach our equipment again, that's what I wanted to ask a question.

Well take our first question.

Comes from Michael Kupinski of Noble capital markets. Please go ahead.

Thank you and thanks for taking the questions I know there's been a lot of heavy lifting that you guys are making a great deal of progress so congratulations on that.

So a couple of things in terms of the revenues, obviously seems like the revenues are showing or at least some moderation, but still down quite a bit can you give us a little bit of your thoughts on the revenue outlook for maybe the balance of the year what visibility you might have.

Certainly yeah, I know that you have done a lot of cost cutting to right size the business and you seem pretty positive about the.

Hi, being positive EBITDA in the fourth quarter, but obviously you have to have some thought on what revenues are doing so.

Any visibility there that you can offer.

And Mark you want to start on this one.

Sure Yeah, so Mike.

I think.

Obviously, I and Andrew will talk about some of the initiatives and some of the things we're doing on the revenue side.

But from a from a forward looking standpoint, you know we're focused on.

Driving new logo revenue from new customers as well as retaining our existing customers.

And in terms of providing forward looking information on that I think we're going to just stick with what we said on EBITDA.

There's a lot of moving parts on on on the revenue side and.

Getting our cost structure in line with where our revenue is remaining nimble is very important and will allow us to get.

To being adjusted EBITDA positive later in the year next year, but.

We're going to hold off on providing revenue guidance that's fair enough.

Can you just give me a <unk>.

You know obviously you indicated that some of the cost reduction efforts were kind of midway through the quarter of last quarter.

Any thoughts in terms of maybe whether it be the cadence of the.

Expense declines or any thoughts that you can give me in terms of.

What what Kim with to what degree can we expect the cost reduction.

Similarly in payroll I would imagine that it looks like your production and distribution expenses did you consolidate facilities for instance, you go through that level yet or.

Can you give me any more color on that.

Yes, so Mike Weve got as I said in my comments, we've got.

Kind of an all inclusive approach to our costs and we're looking at both labor and non labor cost reduction so.

On the labor side, and we have made some changes and.

Does it continue.

Pardon.

So those will flow through and probably take effect.

Someone in Q3 and more fully in Q4.

We do have a big focus on non labor related cost reductions. Some of those has already began a lot of those have been identified and we've taken action as quickly as possible.

I had a few that have started to flow through that.

More substantially as I said also that will.

Start to show up towards the latter part of 2000 2019.

The 25 million in additional cost cuts that you would like.

I believe I, just want to make sure I heard that right.

That you have $25 million more a cost cuts that are available that you think that you can make.

Is that in addition to the third party vendor agreement did you change the $11.9 million or what that.

I think Thats, what you said $7.7 million for this year is that.

Inclusive of the 25 or are there additional 25 million.

Well, let me, let me say something right at the first and then I'll, let I'll, let mark tenant.

Trip the numbers here, but.

We said more than 20 million said I think we gave 25, okay Pacific at more than $20 million had been identified in 2019. So we had a similar amount identified in 2018 as apart.

The preliminary restructuring efforts. This would be in addition to that the fed more than 20 million.

Hi includes what we've identified in the year 2019, and not all of those and begin to flow through obviously to the bottom line and Mark if there is any so finished you do that.

I'm, sorry, so that 11.7 million. So far was included in that that that inclusive of the 20 million for 2019.

That is correct.

Okay, Yeah, okay.

And and then what do you what is the plans for the debt with a 39 million just going to keep cash there at this point and tried to manage through it there's no.

Interest in paying down debt at this point is that right.

Yeah, well, we will evaluate that as we go forward.

No plans currently and we're keeping all options on the table.

Regarding debt financing going forward, but we have.

Plenty of runway runway.

It doesn't expire.

Until 2021 so.

Got you Okay. That's all I had thank you.

Thanks, Mike.

Thanks, Mike.

Thank you.

No further questions I would like to turn the call back to you for any additional or closing remarks.

Okay.

Well I want to say thanks, everyone for joining the call today, and we look forward to next quarter's call.

Thank you. This concludes todays call. Thank you all for your participation you may now disconnect.