Good morning and welcome and thank you for joining the second quarter 2009 earnings call. At this time, all participants are in a listen-only-mode. (Operator instructions) Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the meeting over to Mr. Larry Franklin, President and Chief Executive Officer of Harte-Hanks.

Thank you and good morning. On the call with me today is Doug Shepard, our Executive Vice President and Chief Financial Officer; Jessica Huff, our Vice President of Finance and Controller; Brian Pechersky, our Senior Vice President, General Counsel, and Secretary. And before I begin my remarks, Bryan will make a few statements. Bryan?

Thanks, Larry. Our call may include forward-looking statements. Examples may include statements about our strategies, initiatives and business plans, adjustments to our cost structure, financial outlook and capital resources, competitive factors, business and industry expectations, the economic downturn in the U.S. and other economies, and other statements that are 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 documents filed with the Securities and Exchange Commission and in the cautionary statement in today's earnings release. Our call may also include 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 Investor Relations section of our website at www.harte-hanks.com. I'll now turn the call back over to Larry.

Okay, thank you, Bryan. Our second quarter results reflect the continuing difficult environment. These results also reflect the tremendous way in which our people are dealing with that environment. And before I comment on what’s happening in each business, as a Company, we came into the year knowing this will be a very challenging year for our customers and for us. We knew that our customers would be managing their marketing spend very tightly, and they have, as that would inspire revenue. And we also knew that we would have to manage our expenses very tightly. And our people have done that and it shows in this report. And I am very proud of all of them. In Direct Marketing, all verticals experienced reduced and delayed events and programs, lower transaction volumes, and reduced discretionary spending. Our clients are challenging us to help them generate revenue now and at a better value. Doug will talk about the individual verticals, but I want to once again point out that we have a long list of the best companies in the world as clients in each of these verticals, and many of them have been clients for many years. And while several have reduced their spending, we are developing new, innovative approaches for them to more efficiently reach their customers. These additional channels and programs broaden and strengthen our relationships. Our Direct Marketing employees have aggressively executed against our reduce cost initiative. To have a 4.7% operating income decline on 20.2% revenue decline is tremendous. This is only possible by carefully managing all cost while changing the way we do things and adjusting our structure. By doing this we are able to provide better value to our clients and reduce the impact of lower revenue on our bottom line. Again, just a…

Thank you, Larry, and good morning. Here is a companywide overview of our second quarter. Revenue decreased 21.5% for the quarter. Direct Marketing decreased 20.2% for the quarter. Shoppers revenue decreased 24% for the quarter, in 20.1% circulation during the same period for the second quarter of 2009 and 2008. Operating income decreased 28.2% for the quarter. For the quarter, Direct Marketing declined only 4.7% while Shoppers declined $8.6 million. For the quarter, our free cash flow was $19.4 million versus $22.9 million in 2008. Our net debt, total debt less cash, declined $32.3 million during the quarter. We’ve reduced our capital expenditures in the quarter to $1.7 million compared to $5.3 million in the 2008 second quarter. Turning to our two businesses, in the quarter, Direct Marketing revenue decreased 20.2% and operating income decreased 4.7%. Operating income margin increased to 17% compared to 14.2% in the second quarter of 2008. The improvement in operating margins is due to our across-the-board expense reduction initiatives. In the quarter, our high tech/telecom verticals market represented 30% of Direct Marketing. Retail was 24%, Select Markets were 22 %, Financial was 13%, and healthcare/pharma was 11%. For the six months ended June 30th, our high tech/telecom vertical market represented 30% of Direct Marketing revenue, Retail was 24%, Select Markets were 21%, Financial was 13%, and healthcare/pharma was 12%. All vertical markets experienced revenue declines in the second quarter compared to the second quarter of 2008. Our pharma/healthcare and high tech/telecom verticals experienced revenue declined in the low teens. The Retail and Select Market vertical revenues each decreased approximately 20% while the Financial Services vertical revenue declined 37% for the quarter. Our Top 25 Direct Marketing customers represented about 43% of Direct Marketing revenue for the quarter. Our largest customer in the quarter represented approximately…

(Operator instructions) Our first question comes from Alexia Quadrani from JPMC.

Thank you. A couple of questions. The first one, I know you commented that you don’t expect the revenue environment to improve in the second half of the year. Are you seeing any signs of a maybe some stabilization or the rate of decline maybe leveling off a little bit? I guess any color you can provide us on any verticals or any – and particularly in the Shoppers business anything you are seeing that might give us some hope that at some point we are going to hit a bottom here. And then I have a followup.

Okay. In the Shoppers business, if you look at the details behind the numbers, on a sequential basis, our – and booked ads may have stabilized somewhat albeit at a reduced level from last year and earlier this year. The customers, as I said in my remarks, we have fewer customers, and they are continuing to manage their spend very carefully and they do that by either, again, the size of ad or the search. If you look at the sectors that we service, our primary (inaudible) categories, if you will, real estate as a category is down less than the total and it’s improved over the last two quarters. The improvement is in agents, brokers, and property management. Anything related to building, construction, or specialty contractors, still way, way, down. On the services side, overall pretty much reflects the overall performance for the Shoppers except for educational services. And that’s about flat, I guess. Consumer spending, again, as a total, about the same as the total. Grocery and eating and dining are performing than the category and better than the overall. Automotive, with special deals way down, that’s actually gotten worse over the last six months. Communications is doing a little better than – actually performing pretty well. So, it’s – Alexia, it’s hard to draw major conclusions all of that. Also, our larger accounts, we call them major accounts and (inaudible) national accounts are doing better than the local business. And that has been the case, so I think, Doug, for the last couple of quarters, right?

Yes.

So, that’s the color on the Shoppers business. in Direct Marketing, I guess in a general sense the tone may be a little better as customers are beginning to talk more about maybe adding a few things. But even though there is some talk about that, implementation has been slow because there is just a significant wait-and-see and decisions being made at the last moment. Doug talked about the verticals. FMOs, financial markets obviously is very hard hit. And that’s primarily or the biggest part of that is from credit card and what we call diversified. Little bit of a better performance in the mutual fund side. And pharma/healthcare was the – as Doug pointed out, was one of the better-performing verticals and pharma was the better part of that. And that’s where we are providing some bundled services and – to our pharma clients that has worked really well for them and for us. Retail, we’ve got a few customers that are actually performing very well and those are overshadowed by reduced volumes from some of our really good long term customers. Those are transactional volumes and mail volumes. What am I missing? Select market, which includes automotive where we’ve had some good database wins and some real success stories with fully integrated solutions. Although we primarily service the U.S. market for non-U.S. manufacturers. The category has still suffered as you are all aware and we are no exception. And then our other piece in there that’s government, not-for-profit, it reflects what’s going on in the not-for-profit market. So, as they are – is there are stabilization, is there flattening, I think we are still going to see over the next few quarters our revenue performance pretty similar to what we’ve had.

How about on the margin side. You’ve done just a great job in the Direct Marketing segment, can we continue that in the back half of the year given the cuts you have made?

Just one other I guess little comment back to the revenue side. The high tech in the – I think they are probably little less in the second quarter than in the first quarter. The—can we maintain the margins, what we are now, 17%, which I think as we look back, it was one of the best second quarter margin that we’ve had in a long time, if not forever. And as you know the – as you go through the reduced revenues and we kind of adjust expenses accordingly it gets more difficult obviously as we go through that process. But I will also tell you that in both of these businesses -- and certainly the expense structure has been reduced very dramatically and in our Shoppers business. Our people are committed to continuing to look for ways to get cost out of the system. And you do that a number of different ways. In the Shoppers part of our business, we’ve consolidated production facilities. We are still not operating at the same level of efficiency as we are in some of our other places and that’s simply because we did that in a five-month period and so we have got some continued room there. As we’ve restructured from those our – our management structure from those combinations, actually you get it done and you operate and you go back and look and see where do we have more opportunities to right-size the organization, right-size the cost structure particularly at the managerial level and we are in the process of doing that. On the Direct Marketing side, the – I mean the performance in the quarter I thought was just spectacular. And there is not that much left. There is not the same amount left as we saw in that quarter. But we will continue to look at it and I know as we combine the way we manage some of our similar businesses that will give us some more cost savings as we look at with the new level of revenue what functions can be down-sized from where they are today, given the new level of revenue. And then we are looking at everything we buy and are having some success in managing our cost from the people who – from our suppliers. And we’ll continue to do that with a vengeance. So will we maintain those margins? I doubt it, but we will have, I think, some good margins.

And just last question on your cash balance. Is it too early to assume you might come back in the market for a buyback?

At the moment and through the rest of this year, our plan is to keep our cash until--

Thank you very much.

Until we see some further stabilization. And then we’ll decide what’s the best opportunities are for the use of that cash.

Thank you.

Our next question comes from Michael Kupinski from Noble Financial.

Thank you for taking the question and congratulations on your quarter. Larry, I know this is a difficult environment, but you guys are just doing a fabulous job.

Thank you.

Did the company make any additional distribution cuts during the quarter in the Shoppers business, and if so what type of revenue impact might that have on a quarterly basis.

No, we did not.

Okay. And in the Direct Marketing business, has the company been able to quantify the amount of revenues that are deferred rather than cancel projects? Any thoughts on whether advertisers are shifting budgets towards other mediums given that there might be a better value or better cost like for instance may be using some cheap television advertising or radio, for instance?

No, we haven’t. I mean it’s that we are going it’s not noticeable enough for us to quantify. And the – in this kind of environment Direct Marketing is the best value there is out there. So – but no, I don’t know. I know the delayed project – in this environment when we get projects delayed, we almost assume that that will be reduced spending somewhere down the road. Now there are cases where it may slip a month or two, but our clients are looking at their revenue streams the same way as we are looking at ours. And we are staying really close to them and I think have – with our tremendous relationships we have a good sense of what they are thinking. And I don’t think there is a lot of delay that’s going to therefore push revenue into the back half of the year or in the fourth quarter. I think they are still trying to decide what the holiday seasons are going to be like and they are certainly waiting to make decisions based on the latest possible day.

And Larry I know that back-to-school is important to the retail vertical and Direct Marketing, which may give you some insights into the holiday season and obviously your comment, I just want to see if you have any color, because typically don’t they – at this time you have a little bit of visibility in the retail sector. How is that vertical performing heading into the holiday season then?

Well it’s interesting because you are right, it is an important season. And this is a case where they are truly waiting. I mean it’s just – and you know we are almost there, obviously.

Right.

But we don’t see any great volume increases at this time.

How much lead time generally do you get for a program like that, I mean is the lead time like just weeks or is usually a month or two?

You know it depends on what service it is obviously. And so we can react to our retailers very quickly particularly in the mail and related services area. And there is a -- one of our significant clients has said that it started off a little better than they had expected. But we’ve got so many clients. I don’t know if that’s going – that’s a data point of one.

Right. And in terms of the Shoppers – this is my last question, I promise – in terms of the Shoppers you indicated that national seems to be picking up a little bit better and that’s what we are hearing pretty much across the board that national advertisings – it looks like it is pacing a little bit better than local. In your experience in the past does national typically lead out of – before local starts to pick up?

See, when I – Michael, when I talk about national in our Shoppers business, these are our large customers. They are not national customers as you would – as you were referring to and it’s the way we used to track (inaudible). They are just our larger customers that are in and throughout the geography where we serve, obviously California and Florida.

I see.

And they are – well, what I said or meant to say was that their performance is better than the local and the performance of our local advertisers at this point.

Okay. Perfect. Thank you very much for answering the questions.

You bet.

Our next question comes from Dan Leben from Robert W. Baird.

Great, thanks. Could you – on the Shoppers business, are you guys looking at additional circulation cuts or is that pretty much bottomed where you feel comfortable with it?

We are not looking at any at this time.

Okay. And then help us think about the margins, when we do get through this, and start to grow the top line, help us think about how the margins are going to flex. Are there a lot of cost that you kind of need to bring back in the business to support a higher levels of growth, or are we going to see pretty significant leverage when we do get to the end of the rainbow?

Dan, we are talking about Shoppers, right?

Shoppers and Direct Marketing, both.

Okay. On the Shoppers side, we have a lot of capacity. And so when the revenues turn, we should see some good upside leverage, just like we are seeing the downside leverage today. The – as you know, the cost structure in our Shoppers business is postage which – what some of the percent of earning – 30% to 35%. That’s fixed as long as we maintain the same level of distribution. Paper is somewhere between 10% to 12% and then our production cost, there is some variability there. But we have the capacity to generate a little higher or to deliver a lot of revenue though the cost structure that we have without significant increase. On the Direct Marketing side, the same thing is true. We have a lot of capacity where we can move volumes and a lot of revenue without a significant increase in -- particularly in structure and some of what you would think about as being if not fixed cost on the way up and/or down. I think when we see the – in your terms the end of the rainbow here, we ought to see some good upside leverage on this business. Now, with that said, we had fabulous margins in Direct Marketing in the second quarter.

Yes. Absolutely. The other question I had that you brought up on the postage side is what are you seeing there in terms of costs?

It’s tied to the CPI [ph] so I think it went up 2% or so, 3% may be in May. And that will – that should be it until next year.

And is your expectation that the postal service some of the pressures they are under from various areas, do you think there is an opportunity – there is a possibility that they try to pass on higher than seek higher increases?

I don’t know Dan. We -- obviously the postal services is very important to our – well, both businesses, actually. And we haven’t heard that and I doubt if they would. Their volumes are down pretty dramatically as well. And that’s a good way to get them down further. Same price -- price is more. So, it’s not in our plant that way. But we do spend a fair amount of time again thinking in – and I guess the right word is worry a little bit about them. The postal service.

Okay great thanks.

Our next question comes from Dan Salmon from BMO Capital Markets.

Hey guys. Thank you for all the detail and for taking my questions. I just want to followup on a couple of previous answers. Larry, you mentioned that in the Shoppers segment you’d seen business from the auto dealers actually getting worse in the last six months. Does that imply that you are not seeing any uptick from the Cash for Clunkers program or is simply that that’s too recent and we may see a little bit more in the third quarter from that perhaps?

Yes. It’s too recent to know and the auto dealers are not going – they are not getting out ahead of them. So it’s only anything at the moment. And can I add just another comment about postals, back to Dan’s last question. We work very closely with our large customers in Direct Marketing and with them and the postal service in looking for ways to reduce their postage cost through the delivery sequencing and some technology and so we are well connected to the – to postage – to the postal service because we are a large client there and there are opportunities to influence it somewhat. And every dollar we can save, our client -- is a dollar to us. On the – I am sorry, I kind of lost track. On the Clunkers it’s just too – it’s too early.

Okay. Then does that imply that one would see no impacts from that in the second half or might that be a little bit of a catalyst for the dealers business in Shoppers?

Obviously, we don’t know. But any piece of good news for one of our clients is really important because in just having – having spent the first three days of this week in California, the people there are just – they are very nervous. I know all of the statistics, leading indicators and lagging indicators and – but when people – when more people are not working today than they were yesterday and the prospects of there being more tomorrow, everyone is extremely cautious. And until we get a little bit of confidence back in that marketplace in people I don’t think they are going to spend those – are going to aggressively increase their spending. Now the – just what a little bit I’ve heard about the clunker program it’s being looked [ph] at if there is a good enough value there. Might be that people will go out and buy a car. So, that could maybe create a little bit of a hope in some peoples’ eyes. Now, the California economy and the California budget is likely – are going to have some impact on employment, a further reduction of employment through state employees. And so that’s – we’ll have to work our way through that new piece of bad news, although I guess they already had the bad news because they didn’t have a government – I mean they didn’t have a budget and they were getting out of use. So, maybe it clarifies one, I don’t know.

Okay. And then just one more followup on a previous answer, you mentioned that in Direct Marketing, some of your clients are starting to pick up the conversation if not the commitments just yet. Are they looking at anything, any certain disciplines that are particularly different from the past or is it simply a matter of positioning themselves for hopefully increasing budgets across the board, going forward?

Well I think it’s – I think more depends on our reflex, but they are doing and have been. And I can tell you that in this environment we are more – when we can combine our services to create a bundled solution, which is what we do in our agency and our database and then some of our software businesses, those are the areas where we are performing better today. But when it gets to – when I am talking about people at least not as negative as they were generally it’s about the broad line of services that they have to use and that we’ve been working on with them during this time. Multi-channel, the whole multi-channel area is being discussed more and more and I think in our first quarter call when I talked about some of the successes that we had in the “digital” area where they were combined and were actually programs with our existing clients. And we had some -- obviously continued to have some success in the second quarter. Those are not big dollars, but they are big impact dollars because they strengthen and increase our relationship with our clients. And they are an added source of whatever lead communication that the clients are trying to have with either prospects. Our clients are different demographics in the mobile marketing world. They are trying to connect to the younger audiences. And where it’s a very efficient way for appointments to be set, reminders to be sent. Then it has far greater impact than just the dollars that they come from that.

Okay great thank you very much.

(Operator instructions) John Hays [ph], a private investor, you may ask your question.

Hello.

Hello.

Yes. I am a retired circulation director (inaudible) sectors and I’ve started buying newspaper stocks in the spring of this year. my question is, what did you foresee (inaudible) and it’s future in the newspaper industry? Do you still see it as an arm of something that will – it will be profitable for you – I know this, in our local Springfield inserted paper advertising seems to be picking up in the last two or three months.

We were in the newspaper business for – from 1922 until 1997 and we got out and – I truly don’t spend a lot of time thinking about it other than only think that I will offer is that I truly believe that the strength of our two businesses is that we are able to target and saturate and we can target on a number of different variables and that’s the difficult thing I think for newspapers. But I truly – I am sorry but I can't add a lot of expertise to your question.

One quick question and I will get off a bit. Like I believe you should be owning your newspapers. Who would you have sold it to, would you know?

Yes. We sold it to E. W Script.

Okay good thank you very much.

Thank you.

I would now like to turn the call back over to Mr. Larry Franklin for closing comments.

Okay. Thank you all for your questions and your interest in our Company. And I want to just one more time thank all of our people for the way they are helping us and our clients navigate through this difficult environment, for the tough decisions that you have made, and I know that you are committed to continue. And also not just the decision that you are making, but they way you are making them. And, again, thank – I thank all of you and appreciate your time.