HHS Q3 2018 Earnings Call

Operator: Ladies and gentlemen, good day. And welcome to the Harte Hanks Third Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Rob Fink of Hayden, IR. Please go ahead, sir.

Rob Fink: Thank you, and good afternoon, everyone. Thanks for joining us. Hosting the call today is Harte Hanks' Chairman Al Tobia; and CFO, Jon Biro. Before beginning I would like to everyone that the information provided during this call may contain forward-looking statements, such as statements about the company strategy; adjustments to its 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 they serve; expectation related to cost saving measures and the availability of 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 SEC and in cautionary statement in today's earnings release. The call may also reference non-GAAP financial measures. Please refer to this morning's earnings release for the required reconciliations and other related disclosures. The company's earnings release is available on the Investors section of its website at hartehanks.com. With all that said, I'd like to now turn the call over to Al?

Alfred Tobia: Thank you, Rob. Many of you know I was appointed as a Director of Harte Hanks in July of 2017. Earlier this year, we - elected Chairman. Since that time aggressive actions have been taken to address the core issue that is for far too long eroding Harte Hanks performance, our brand equity and our shareholder value. As part of this effort, we replaced the entire independent board with easing directors who bring relevant experience across all areas of our business. This includes experience in the traditional Harte Hanks service lines that have not received the organizational attention and support that they deserve. The new Board is aligned with the strategic objective to return Harte Hanks to profitable growth, create expanding opportunities for a great team of employees to deliver increasing value to our clients. We believe that capitalizing on these opportunities will in turn create value for our stockholder. As a first step towards accomplishing this goal, we replaced our CEO and CMO by establishing the office of the CEO during the third quarter. The Board and the office of the CEO are committed to return the company to positive results and to create a strategy that is clear and achievable, all while building some trust and confidence among our employees, our clients, our valued partners and our shareholders. The office of the CEO which leverages its executive leaders within the organization, along with the recently appointed directors who have served on experience was established to provide operational and strategic direction as we search to identify a candidate with the right experience and leadership skills to be the CEO of Harte Hanks. The office of the CEO is squarely focused on returning Harte Hanks to profitability and we expect to achieve this generating positive quarterly EBITDA during the second half of 2019. Better position the company to achieve this goal, the office of the CEO refocusing attention on the traditional Harte Hanks service line, namely our direct mail, logistics and fulfillment service lines which remain profitable, valuable components of the company. Previously, these service lines were not provided the attention, support and investment necessary for them to perform at their potential. The office of the CEO is working to correct this mistake and reinvigorate these service lines. We have fantastic people working in all parts of the company, and they do great things every day. We want them to recognize how much we appreciate their efforts and contribution and feel supported and equipped to grow, contribute and take care of our client. The new Board and current leadership team recognizing that the deteriorating performance and lack of stability of the business during recent years has caused some concerns about our liquidity and sustainability. I am here today because I believe we have the foundation in place to restore growth and profitability to Harte Hanks. Eventually, we expect to generate positive EBITDA in the second half of 2019, and that we have sufficient cash, ample working capital and more than $19 million on an undrawn revolving line of credit, which will provide the necessary runway to achieve this goal. In addition and as Jon will discuss in a moment, we have tax refund receivables which we are eligible for to provide additional liquidity and further bolster our balance sheet as we work the transition and profitability. In its first 60 days, the office of the CEO with help from a small group of talented individuals across the organization has taken swift action to reduce corporate spending and eliminate ineffective corporate marketing expenses. During the third quarter, annualized fixed cost has been reduced by more than $6 million heading into the fourth quarter, we are working with leaders across each of our business lines to identify additional areas for potential cost savings. Based on the initiatives we are working on today, I believe there will be meaningful opportunities; and we continue to streamline our organization. In summary, I believe there is significant unrealized value within Harte Hanks. The new Board and current leadership team are aligned and laser focused on stabilizing the business, while building upon the strength of a full client offering to unlock value for all shareholders. I am confident that we have the balance sheet and resources needed to restore profitability to Harte Hanks and ultimately revitalize growth. I'll now turn the call over to Jon Biro, our CFO for review of the quarterly results. Jon?

Jon Biro: Thank you, Al. Good morning, everyone. As a reminder, I'll be comparing the quarter results for the three months ended September 30th, 2018 to the same quarter of 2017. Third quarter revenue was $63.6 million compared to $94.4 million last for a year-over-year decline of $30.8 million or 32.7%. I should note that last year's results included $9.4 million of revenue from 3Q digital, a business we sold at the end of February, 2018. Adjusting for the 3Q digital revenue, the revenue decline was $21.4 million or down 25%. Revenues were down in all of our verticals with the largest decline in consumer brands, which was down 43% largely due to customer and volume in our contact center service line, as well as the sale of 3Q digital. The other big decline was within our retail vertical which was down about 39% due to customer and volume losses. I should also note that the sales of 3Q digital had a largest impact on the B2B vertical reducing it $4.9 million year-over-year, as well as the consumer brands vertical reducing that vertical by $2.5 million year-over-year. As I'll mention in response to the revenue declines, we are refocusing attention on the traditional Harte Hanks service lines, which remain profitable while eliminating certain unprofitable ancillary functions with a particular focus on corporate marketing and certain marketing services functions, as well as certain international operations and underperforming partnerships. Adjusted operating loss was $8.5 million compared to adjusted operating income of $1.8 million a year ago. While revenues declined $30.8 million, we were able to reduce operating expenses by $19.5 million overcoming some of the revenue decline. Labor expenses were the most significant decline in operating expenses as we managed headcount down. Also note that selling 3Q digital during the first quarter negatively impacted operating income by $1.4 million compared to the prior year. During the third quarter, the current Harte Hanks leadership acted to reduce annualized expenses by approximately $6 million per year. The company expects these actions would result in annualized labor cost savings of approximately $3 million. In addition, the company plans to reduce certain other non-labor discretionary expenses by the beginning of 2019, which will reduce expenses by approximately $2 million a year. Last, we impaired certain internally developed software during the third quarter taking a $3.8 million charge. This will result in future annual depreciation expense being reduced by approximately $1 million. Beyond these actions, we are identifying significant unnecessary expenses for elimination including within marketing services and administrative and other areas. This work is happening now and this is a fourth quarter initiative. Through this working as Al said earlier, we believe we have a pathway to generate positive quarterly EBITDA at some point in the second half of 2019. Net loss attributable to common shareholders was $10.1 million or loss of $1.62 per basic and diluted common share. Turning to our liquidity position. We ended the quarter with zero debt, zero drawn on our $22 million bank credit facility with $19 million available under the credit line. We also had $10.4 million of cash on hand. Our cash balance declined $9.8 million during the quarter and this was primarily the result of our cash operating loss, along with a modest increase in working capital. Looking forward, we believe our cash burned peaked in the third quarter of 2018. In the fourth quarter of 2018, we expect the usual seasonal pickup along with the benefit of the cost reductions we have discussed, will narrow our cash operating loss. While the season will pick up in the fourth quarter will likely drive some investment in working capital, on a net basis we expect to be better off from a cash burn standpoint. We also believe that the chances are good that a $4.6 million income tax receivable we are due will be received in the fourth quarter of 2019. Regarding the tax refunds were due; these items include a $4.6 million tax receivable related to our 2017 net operating loss for tax purposes I just mentioned. A $9 million tax refund we expect to receive in the second half of 2019 due to the capital loss we generated on the sale of 3Q Digital in February of 2018. And last, we're also working on some other tax planning initiatives, we expect will provide other sizeable cash tax benefits in 2019. With our cash on hand availability under our credit facility and the tax refunds were due; we believe we have adequate liquidity to fund our turnaround plan. With that operator, we're now ready for questions-and-answers.

Operator: [Operator Instructions]

Jon Biro: Okay. Well with that any investors who would like to follow up with questions, please feel free to contact me or Rob Fink of Hayden, IR. We thank you for your time today. And look forward to speaking with you on our next quarterly conference call. Thank you.

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