HHS Q3 2017 Earnings Call

Operator: Good day everyone. And welcome to the Harte Hanks' Third Quarter 2017 Earnings Conference. Today's call is being recorded [Operator Instructions]. And now I would like to turn the conference over to Mr. Scott Hamilton, Investor Relations. Please go ahead, sir.

Scott Hamilton: Good morning everyone. Thanks for joining us for our second [sic] third quarter 2017 earnings call. Joining me on the call today is our CEO, Karen Puckett; our CFO, Robert Munden. Also in the room is our Controller, Carlos Alvarado. Our call will include forward-looking statements; such as statements about our strategies, adjustments to our cost structure, financial outlook, capital resources, competitive factors; business and industry expectations, anticipated performance and outcomes, future effects of acquisitions, dispositions, 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. These refer to today's earnings release we refer and reconciliations and other related disclosures. Our earnings release is available on the Investor's section of our website at hartehanks.com. I'll now turn the call over to Karen Puckett, our CEO. Thank you.

Karen Puckett: Thank you, Scott, and good morning everyone. I want to thank all of you for joining us here this morning. I'm going to start with a few comments on our ongoing strategy and our performance in the quarter and then I'll turn the call over Robert to go through the financial results. And then we'll get into questions you may have. First I would like to say that I'm glad we are back on a normal earnings announcement schedule, I know that feels very good and I'm sure most of you are happy about this is well. And as you may have seen we have received notice from the New York Stock Exchange that we are now in compliance with respect to our stock price. Moving on to the quarter, I think our third quarter results highlight the actions we have taken on our turnaround. Robert will go into more details, but our revenue decline continue to moderate and we trend more than $8 million in expenses which gave us $5 million year-over-year improvement in operating income, coming in about $1 million. The $8 million of expenses was made up of $6 million of operating expense and $2 million from the effective litigation accrual in the prior period last year. Like the second quarter, the results were in line with our internal plan with respect to revenue, new sales bookings and profitability. We continue to see and expect to continue to see softness in the retail vertical, which impacted our revenue in third quarter and will have the fourth quarter and will have an impact on the fourth quarter likely even more. On the new bookings front and again new bookings with the sales to new clients or new types of work for existing clients, we continue to meet our internal plans. We believe that our increased lead generation and discipline about improving the quality of our sales [indiscernible] in meaningful improved closed rates compared with a year ago. And this is also helping us in a number of ways, because we're not wasting time and resources until that we're not well positioned for and it's also improved our ability to forecast our sales bookings. In fact our bookings per sales person or double what they were a year ago and we're pleased with the productivity improvements we have been able to achieve. I'm going to now mention a couple of notable wins for the quarter and new wins. On the existing client side, we are expanding an email program that we run for a very large global bank by more than a half million of dollars annually. And new logo, our new client side we won several large interesting engagements for example and retail we're working with the global game in electronics retailer to drive more food traffic into their stores. We have signed a five year multi-dollar contract that cruise line supporting two audiences both consumer and the travel agent audience. In Europe, we won a large outbound demand generation engagement with a global specialty B2B technology company. And finally we won a logistics and fulfillment deal with a global customer electronics company. All-in-all we had a good mix of engagement agency and traditional service wins. In the previous quarter, we discussed our retail revenue challenges, because fourth quarter is traditionally strong, retail we will see, we will likely see, we anticipate seeing larger year-over-year revenue decline in the fourth quarter, though with our continued cost control we expect positive operating income in fourth quarter. Before turning the call over to Robert, I'd like to reiterate that we are pleased to be meeting or exceeding our internal plans with respect to new business bookings and most importantly profitability. I'm pleased also to be able to say that I believe we continue to make progress in our transformation. I'd also like to thank Robert for his willingness to step up and assume the CFO role these past nine months, leading our Finance and Accounting groups through what has been a very challenging time. We look forward to our new CFO John Biro, joining us after we file our 10-Q in the coming days. So we can benefit from his experience in transforming companies and improving profitability. Now we'll turn the call over to Robert.

Robert Munden: Thank you, Karen. It's been a meaningful challenge and I join you in welcoming John to the team. Good morning everyone. Our consolidated revenues for the third quarter were $94.4 million compared to $97.4 million in revenue for the third quarter last year. This 3.1% decline is slightly higher than last quarter, but it's quite bit lower than the rate of revenue decline we showed in the same period last year. Looking at our performance within industry verticals, financial services was our strongest vertical growing $1.2 million or more than 8% year-over-year. This was driven by strong increases across several clients which overcame a multi-million dollar loss from a large wholesale credit card client. Our healthcare vertical revenue declined year-over-year by about 2.7% due to the continuing effects of the loss of large medical insurance client and a medical device services company. We continue to do well in the non-regulated pharma sub-segment providing both contacts and our fulfillment services to clients as we refocus our efforts for this sub-segment. In B2B revenue declined by just over $2 million driven by program and volume declines for agency rather for engagement agency and contact center services for a variety of clients, including telcos, transportation and high-tech. And in our retail vertical revenue declined by $1.7 million or 6.4% mainly due to the loss of marking programs we had with several big box retailers across a variety of service lines. This was as expected and in line with what we've communicated to you. These declines were partially offset by strong growth of logistic services for another retailer. Labor was down as a percentage of revenue both sequentially and year-over-year due to reductions in most areas of labor partially offset however, by increases in template in consultants primarily in our tech development. Production was essentially flat as a percentage of revenue, while SG&A was down as a percentage of revenue. Our focus on expense control led us to improved operating income. We posted approximately million dollars of operating income which is an improvement of $5 million from the third quarter of 2016. Although, we have made gains and profitability, we expect our revenues in the coming quarters. We'll be challenged by continuing declines in our retail vertical. We will continue to benefit from the reduced cost base from our actions affected in the last year which will enhance our financial flexibility to effectively run the business. With that operator, we would like to open the call for questions.

Operator: Thank you. [Operator Instructions] We'll turn first to Michael Kupinski with Noble Capital Markets.

Michael Kupinski: Thank you and congratulations on positive EBITDA. In terms of the [indiscernible] 09.26 in the quarter, can you give us what the second quarter, what it was in the second quarter versus the third quarter, is headcount still coming down?

Karen Puckett: Yes, we'll have to final up a specific headcount, but I'll tell you it's coming down as well as when we likely are downsizing sometimes the higher paid employees are being replaced with lower paid employees. And then of course with our Wipro outsourcing agreement that's allowed us to bring our cost structure down also.

Robert Munden: The other thing to remember is beginning in the third quarter we started some ramp up programs for, in our contact center service line. So the some of the cuts we make maybe offset by those.

Karen Puckett: Yes, and Michael I would just add that, by kind of practice area we call them, we've been very focused on making sure that our utilization rates are where we want them and they have significantly improved year-over-year that's the key focus that we have as an organization to continue to increase our profitability.

Michael Kupinski: So payroll expenses as a percent of revenues came down in the third quarter, but I would given, there is obvious reasons seasonality you just mentioned in the contact centers that you are hiring. Can you give us some thought about what the payroll expenses look, would look like in the fourth quarter?

Karen Puckett: Well we'll have season, we'll continue to have some seasonality obviously in our, during by a retail sector mainly in our logistics and in the contract center we're still, working through the lot of the healthcare customers that we support on the medical insurance.

Michael Kupinski: Did you expect that payroll expenses will be down kind of similarly what we saw in the third quarter?

Karen Puckett: I think they are going to up over third quarter, because of the higher seasonality, but they are going to be down, they are likely to be down year-over-year. Yes, does that…

Michael Kupinski: Okay, on a percentage base it will be down. Yes, and then in terms of production and distribution expenses, I would have thought that maybe we would have gotten a little bit, well can you just tell what's going on there, because I would have thought that given the lower volumes and so forth that we're seeing across the board and, in retail and so forth that number might be down a little bit more. Can you give us a little thought about how that looks going into the fourth quarter?

Karen Puckett: Well it is down and year-over-year as you said; I guess you thought it would be done more. We continue to have some reduction based on the volume in terms of, it is being offset by some unfavorability in the, just the transportation cost with some of the vendors. But we've been doing a very good job, because we have a good network to be able to diversify that.

Michael Kupinski: Got you, and then the…

Karen Puckett: I would say the same trend in fourth quarter; I don't see anything dramatically different there.

Michael Kupinski: Got you, and then the advertising SG&A expense is that a good run rate for the fourth quarter as well?

Karen Puckett: That's probably a fairly good run rate there may be a few things on the G&A side that come up, but from what we anticipate is.

Michael Kupinski: Okay, and then if you can just give us a little bit more color on what you're seeing in retail in the fourth quarter, what type of how much is it pacing to that, I believe that most of the retailers already kind of largely been should have lot of visibility, I guess in that category, can you just kind of give us some thought about what it looks like in pacing in terms of the fourth quarter?

Karen Puckett: Yes, I would just say that, some of our key customers are volume is going to be down and we've anticipated that as we've talked about where we're at in the third quarter you see some of that shift in third quarter you are going to see also that show up in fourth quarter, but we've planned for and we've got our cost structure aligning around that. So, you are going to continue to see improvement and profitability. And that's really our focus as we talked about all year.

Michael Kupinski: And then in terms of that debt levels in where you might expect those to be by maybe by the end of the year and if those are going to go into the first quarter where I think you are negative cash flow seasonally in the first quarter. So, can you give us some idea of how much might be into your current facilities those would go into next year?

Robert Munden: Well, we typically don't disclose that and certainly we wouldn't give a forecast, what I would say is that we you're right, seasonally we are lowest in the first quarter and we believe we have enough room in the facility from our operating activities to do what we need to do with the business.

Michael Kupinski: And then finally are there any updates on the perspective sale of 3Q digital?

Robert Munden: No none that we can get, its consistent with prior quarters, when we're able to announce something we will.

Michael Kupinski: Okay, that's all I have for now. Thank you.

Robert Munden: Thank you, Mike.

Operator: Thank you. [Operator Instructions] We'll turn next to [indiscernible] with NR Management.

Unidentified Analyst: Good morning. First of all congratulations on the steady progress, appreciated as a shareholder. Just can you just drill again the retail, it seems like some of the bigger box retailers, actually just may go away soon, J C Penney, Bed Bath and beyond, I can envision them just not being right over at some point. Are you bracing for that, have you, do you think you have the ability to weather that storm?

Karen Puckett: Well, what I would say on the big box is that we are in a very interment, we have a very good long relationship with these retailers and we are working with them from a strategic standpoint as well as the tactical standpoint, I can't predict what loans are going to make it and what loans are or certainly I think we all personally believe there is a place for a large box. The question is number of stores and such, but we are spending a lot of time with these clients and obviously so are others helping them think differently. And they are going to continue to work their model. So, at this point we are very focused on the retail that we have and the understanding on each one to the best of our ability what could happen and planning around those items.

Unidentified Analyst: Okay.

Karen Puckett: Now and also just continue to diversify, I don't want to say out of that segment, because not every retail there is some good opportunities in retail more direct to consumer like, but really diversifying our client base as a key focus that we have and we can really guide that with our demand generation that we've feel like is been really fruitful for us this year and its going to give us some good traction going into 2018 in terms of our sales pipeline that we have good, good visibility into.

Unidentified Analyst: Okay, and one other thing I, on the nego shares, stock split, so essentially regain and why as the listing, so that's off the table now?

Robert Munden: No we're proceeding with the reverse split procedure. We'll have our special meeting in December on the 14th. The Board at that time could elect not to proceed with effect the reverse split if the stock price is at a level that the Board thinks makes that advisable. But we will proceed with the special meeting and seek approval for that.

Unidentified Analyst: But in other words if you are over a dollar, you are still going to go ahead with it or you don't?

Robert Munden: The Board will make that determination at that time, there are other advantages obviously to having a bigger buffer then whatever our current trading prices to the dollar threshold that the markets that's.

Unidentified Analyst: Okay, thank you so much.

Robert Munden: You're welcome. Thank you.

Operator: [Operator Instructions]

Robert Munden: Well, Laura, looks like no more, nobody else in the queue. So, I think we will wrap the call up. Thank you everybody for joining us. If you would like to reach out to me for further information, please do so, my contact information is on the press release. Thank you again for joining us. Bye.

Operator: With that, we will conclude today's conference. Thank you everyone for your participation.