HHS Q2 2018 Earnings Call

Operator: Good day, and welcome to the Harte Hanks Second Quarter 2018 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Scott Hamilton, Investor Relations. Please go ahead, sir.

Scott Hamilton: Good afternoon, everyone. Thanks for joining us. On the call with me today is our President and CEO, Karen Puckett; and our CFO, Jon Biro. Our call will include forward-looking statements, such as statements about our strategies; adjustments to our cost structure; financial outlook and capital resources; competitive factors; business and industry expectations; anticipated performance and outcomes; future effects of acquisitions, dispositions, litigation and regulatory changes; economic forecast 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 the 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. Please refer to today's earnings release for the required reconciliations and other related disclosures. Our earnings release is available on the Investors section of our website at hartehanks.com. After Karen and Jon’s prepared remarks, we will take Q&A. Andrew, would you please explain the procedure to ask a question.

Operator: Yes, we’ll do. [Operator Instructions]

Scott Hamilton: Thank you, Andrew. I will now turn the call over to Karen.

Karen Puckett: Thank you, Scott. Good morning, everyone. I appreciate you joining us this morning. We had a number of accomplishments during the quarter, including completing a refresh of our Board of Directors. We believe that the quality and the level of experience of the new members makes the effort worthwhile, and we and I look forward to working with them. We recently signed our first three clients with the partnership with Wipro. These are initial engagements that offer us an opportunity to expand the relationship over time. So we believe that we’re now learning how to best position our capabilities into the Wipro relationship, essentially we are going to be landing initial engagements and expanding into the accounts over time. A couple of examples of these fall into B2B clients, example, there, they are trying to establish direct relationships with their consumers to augment their existing channels. And that was a B2C client and then B2B client, they're actually trying to move their sales funnel with refined data-driven account-based marketing, both represents good opportunities. So those are examples of two use cases on B2C and B2B. Another area of opportunity, but also some short-term challenges is with the data security and privacy. Our customers and many of our large global customers are adjusting to EU's General Data Privacy Regulation and California's new data privacy laws. This has really extended our sales cycle for database and data sales as customers are accessing how they are going to react to new requirements and what processes and procedures are setting up within their own organizations. So while we believe we are as well positioned as ever, it is taking a bit longer to close some of these data day-to-day sales as with the scrutiny of our data privacy. There are opportunities with these companies, especially as I mentioned the global and multinational companies as they're rethinking of validating their data strategies, we're actually being asked to consult with several companies to help them formulate their plans, and we think that's an opportunity going forward. Additionally, we have developed a preference center that complies with GDPR and enables customers to sort through their preferences. So this is a tool that's really needed for multi-global company in terms of interfacing with their customers and how their customer and user wants their data to be used. We are entering a data stage. We will provide updates as this product becomes commercially available. Additionally, we continue to focus on our client satisfaction to increase retention. One area, we have been working hard, as you know, is the migration of our clients from the legacy Database platform to the Signal Hub platform. This is an area we have significant customer loss over the years due to under-investing. We're beginning to migrate clients now which is fairly evolved, fairly complicated task, but we believe that the improved performance will be worthwhile. Migration temporary increases are expenses due to running duplicative systems, but in the long term should increase customer satisfaction and protect revenue. It really puts us in a better position to offer additional services like more advanced analytics and other capabilities that we currently weren't able to in the old environment. We expect to migrate most of our Database clients by mid-2019. So it's kind of work going on there from the team. From a revenue perspective, we have work to do. We had declines in our consumer brands and transportation vehicles really impacting the Contact Center volumes and revenue. We believe the majority decline occurred – has occurred in the middle second – in the middle of the second quarter. So we should see the full impact of these rejections starting in the third quarter. We have unique position, our contact center space with solid expertise and experience in providing support for digital streaming platforms and interconnected devices. We are launching some – we've launched some new marketing programs to increase our sales effort that companies in these segments – related to those support need – to backfill some of this business loss. With the improvements we've been able to drive in our balance sheet in the last two quarters and our emphasis on cost control, we do have a financial flexibility to do what we need to do, and we believe the strategy of improving customer satisfaction with our new database and data solution with the addition of the Wipro partnership will help us to turn around revenue trends. We do feel like we got capability to be competitive. We've made investments in our thought leadership to demonstrate our expertise to clients and prospects and in products like Data and Databased offerings to make them more viable in today’s markets. We have executed changes in our client services and business development organizations to improve their ability to serve clients and position us for growth and increase their sales platform. All this combined with learning how best to go to market with Wipro and encourages us about the prospects of successful stabilizing our revenue. And now, with that I will turn it over to Jon.

Jon Biro: Thank you, Karen, and good morning everyone. As a reminder, I'll be comparing the quarterly results for the three months ended June 30, 2018, to the same quarter of 2017. Second quarter revenue was $69.6 million, compared to $94.7 million last year for a year-over-year revenue decline of $25.1 million, or 26.5%. I should note that last year’s results included $8.9 million of revenue from 3Q Digital, which we sold at the end of February 2018. Adjusting for the 3Q Digital revenue, the revenue decline was $60.2 million or 18.9%. Revenues were down in all of our verticals with the largest declines in consumer brands and retail, which were down 34% and 31%, respectively. Financial services was down only slightly. I should also note that 3Q Digital had the largest impact on the B2B vertical, reducing it $4.8 million year-over-year in the quarter as well as the Consumer Brands vertical reducing that vertical by $2.1 million quarter-over-quarter. In response to revenue declines, we've been working very hard to mitigate the bottom line impact by reducing cost, especially labor cost within our Contact Center operation. As a percentage of revenue, production and distribution expense was up significantly in the quarter and broadly, this was due to a mix change. We have proportionally lower revenue this year from services that have low production and distribution costs like 3Q Digital, Contact Center and marketing services and more revenue proportionately from direct mail and logistics where production and distribution costs are much higher than as a percentage of revenue. Adjusted operating loss was $5.6 million compared to a loss of $1.3 a year ago. Again, while revenue declined $25.1 million, we were able to reduce expenses by $20.6 million, overcoming much of the revenue decline. Also, note that selling 3Q Digital during the first quarter negatively impacted operating income by $1.2 million. During the first quarter of 2018, we adopted the new revenue recognition standard, ASC 606. As a result, during the second quarter, revenue and operating income were both negatively impacted by approximately $300,000. As I mentioned during our first quarter call, we are targeting to reduce our expenses by $10 million in 2018 in addition to the expenses that naturally decline when revenue declines. While we believe we are on track to achieve this reduction target, primarily through headcount reductions, lower employee benefits cost and other employee-related expenses and by lowering miscellaneous overhead expenses. Net loss available for common shareholders was $6.9 million loss or a loss of $1.10 per basic and diluted earnings per common share. We ended the quarter with 0 debt and 0 drawn on our $22 million bank credit facility and $20.2 million of cash on hand, meaning that we used about $2.6 million of cash in the quarter. I'll also remind you that we generated a large capital loss when we sold 3Q Digital and expect a $9 million tax refund in late 2019. In closing, and to reiterate what Karen said, with our strength in balance sheet, the investments we are making in our data and database offering and our Wipro partnership, we feel we are in a much better position to turn around the trends and get the company moving in the right direction. With that, operator, we’re now ready for questions and answers.

Operator: [Operator Instructions] We will now take a question from Michael Kupinski from NOBLE Capital Markets.

Michael Kupinski: Yeah, thank you. I was wondering if you can just talk a little bit about the relationship with Wipro. How is it developing? What were the revenues in the quarter from Wipro and is the – has the relationship developed as you expect?

Karen Puckett: Really there was minimal revenue, these are current sales that we spoke about. The relationship, I think, we are learning how to best position ourselves with them and vice versa. So we have a feel for some of the better use cases that seem to be working. I would say, many of these clients are interested in, like I pointed, just a proof-of-concept. They're looking at data, and they're looking for specifically ways, many of these want more direct engagement with their end user clients. So looking for engagement strategy opportunities from that perspective. So we are – we’re encouraged, and I think you'll see us continue to make these kinds of announcements at each quarter in terms of a continued progress we've made with Wipro.

Michael Kupinski: In terms of the verticals, obviously, you're significantly down and virtually across the board with the exception of financial. Can you talk about the verticals that were not impacted by 3Q like healthcare and transportation? And what was going on in some of those verticals that it caused them to be so weak?

Karen Puckett: Yes, and in – Jon, you can come in, but I think in transportation, it was a – that is a contact center client, we talked about it before, they're taking some of their services internal, not all of them. So we’re navigating through that. 3Q has just a bit of the business in healthcare, but not a lot from that standpoint. Some of that impact was that last year in 2017, there was an additional period for the healthcare enrollment that we don't have this year, just from – truly from a calendar standpoint. So basically a whole period that was available in 2017 that wasn't available in 2018. So that's nearly all that impact and that’s starting to – just typical, they're all starting to ramp back up into 2018, but that’s what we anticipate.

Michael Kupinski: And then consumer brands just look like even if you adjustment the $2.1 million from 3Q Digital, you're still down probably about $5 million or over $5 million in revenues from that particular category. What do you see going – happening in there, and any visibility? And if you could just talk a little bit about visibility for any of these categories as you go into the third quarter, what – are we expecting similar trends through the second quarter or what – any stabilization that you're seeing from any of the particular categories, can you just kind of run through the categories for me?

Karen Puckett: Yeah, the major impact on consumer was, again, a contact center client, who had gone with a globalized vendor strategy. So that’s mainly what you see there from a – it wasn't much 3Q in that particular one. And what was your other question Mike, just in terms of the overall…

Michael Kupinski: Just in general, like how the third quarter is looking in terms of, if you want to call it pacing, and if you want to talk about whether it would be in categories and where there might be some revenue visibility that has improved or is it still hasn't improved across the board, just kind of any color on how that's shaping up?

Karen Puckett: Yeah, I would say in 3Q, you're going to continue to see some of the contact center pressure that we spoke about. I relative to – as we've talked about before, it's going to be hard for us to outpace in the third quarter. I think you’re start to seeing some trajectory improvement into the fourth quarter.

Michael Kupinski: Got you. And in terms of the contact center, so are these profitable at this point?

Karen Puckett: Pardon me, excuse me, are they what?

Michael Kupinski: The contact centers, are they profitable?

Karen Puckett: They're profitable. The team has done a really extraordinary job of getting the cost out ahead of the revenue decline. So from an EBITDA standpoint, they're doing – they’re actually doing very well and leveling that out. And we are working with other stream video clients, which we think is a great opportunity in terms of our current capability as well as some healthcare opportunities that we have. So you will see us move the needle there, it's just we've got another couple of headwinds in front of us in terms of working through the revenue declines from those two clients.

Michael Kupinski: How has the pipeline look – what is that looking like? I know you mentioned in previous calls about the pipeline, how is that looking? Are you seeing pipeline kind of starting to build or kind of giving you a little bit of comfort into maybe the fourth quarter showing better sequential improvement?

Karen Puckett: Yeah, I think I am not going to put a number on it, of course, but second half of the year, we have good visibility to – down in the pipeline, so things that you are either – we have verbal's or pitching. So we feel good about our line of sight and our metrics that we have and looking at those. And we'll be able to talk about some of those coming into the third quarter when we report.

Michael Kupinski: Got you. And just a follow up question, you’re ability to cut expenses, particularly on the production and distribution side. And whether or not you think that you'll be cash flow positive in any – in one of the quarters in the second half?

Jon Biro: Yeah, in terms of the production and distribution expenses, don't see – I don't see a whole lot of room to cut those expenses if the revenue levels stay where they are. Those expenses are directly related to the revenues that we're generating in the specific businesses that I mentioned. There are a few projects that we're working on from a procurement standpoint that may reduce those expenses slightly, but big picture, they're fairly proportional to the revenue that we're generating.

Michael Kupinski: And what about the prospect of the company, you'll be able to cut – yeah…

Jon Biro: The prospects for cash flow, definitely not going to provide a forecast, but what I will say is that, as you know, Q4 tends to be our strongest quarter, and we are working extremely hard to position the company to generate free cash flow in that quarter. I do think as we've seen here recently that working capital has contributed to generating some free cash flow for us. And so, we’ll continue to drive very hard, and ensure that, that continues to be the case as we see the revenue is stabilizing here.

Michael Kupinski: Got you. All right, that’s all I have. Thank you.

Jon Biro: Thanks, Mike.

Karen Puckett: Thanks, Mike.

Operator: [Operator Instructions] There are no more questions queued at this time.

Jon Biro: Okay, well, thanks everybody for joining us. We will look forward to updating you after our third quarter. Thank you very much. Bye-bye.

Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.