Good day, everyone. Welcome to the Harte-Hanks Second Quarter 2012 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Larry Franklin. Please go ahead.

Good morning. On the call with me today is Doug Shepard, our Executive Vice President and Chief Financial Officer; Robert Munden, Senior Vice President and General Counsel; and Jessica Huff, Vice President of Finance and Controller. Before I begin, Robert will make his remarks.

Thanks, Larry. Our call may include forward-looking statements. Examples may include statements about our strategies, adjustments to our cost structure, financial outlook and capital resources, competitive factors, business and industry expectations, litigation developments or regulatory changes, the economies of the United States and other markets 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 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 harte-hanks.com. I'll now turn the call back over to Larry.

Thanks, Robert. Before talking about the individual businesses, a couple of comments about company results. Revenues decreased 6.5%, operating income was down 10.3%, earnings per share was $0.13 compared to $0.15 in the second quarter of 2011, excluding the impairment and restructuring charges. I'll add some details about our performance in the discussion of the business -- each business, and then Doug will then provide some additional detail on the overall results. First, Shoppers. Shopper revenue of $56.3 million for the quarter was down 6.6%, OI for the quarter was $600,000 excluding the impairment charge and the restructuring charge. Looking at some of our more important industry segments, real estate, while still down low double digits, was slightly better than the previous quarter. The broad services category decline was greater than the previous quarter because of reduced spending in Health Services and Educational Services or schools. Educational services has been adversely affected by changes in government regulation and the California student aid commission cutting grants. Consumer spending showed growth in the quarter for the second consecutive quarter on the strength of home furnishings and building materials and garden supplies stores, those came from some wins in the previous quarters. Automotive was up high single-digit, the second consecutive quarter and the best performance in several quarters with dealers, repairs and services all showing good growth. Communications grew in the high teens. ROP or the in-book advertising, was down low double digits and distribution revenue, the products inside the book, were -- just fell very slightly. Territory sales both in book and distribution products year-over-year softened a bit in Q2 compared to Q1. And that's due to a couple of things coming against some wins in the second quarter last year and reduced spending from the schools or Educational Services that I…

Thank you, Larry, and good morning. Here's a company-wide overview of the second quarter. Consolidated revenues decreased 6.5% for the quarter, Direct Marketing decreased 6.5% and Shoppers decreased 6.6% for the quarter. Consolidated operating income, excluding the impairment and restructuring charges, decreased 10.3% for the quarter. Excluding charges, Direct Marketing declined 13.7%, while Shoppers, excluding one-time charges in 2011, decreased $1.1 million. Also excluding charges, consolidated operating income margin was 7.5%, slightly below last year's second quarter of 7.8%. For the quarter, our free cash flow was $11.1 million versus $8.8 million in 2011. We spent $2.6 million on capital expenditures compared to $7 million in the second quarter of 2011. Turning to our 2 businesses. In the quarter, Direct Marketing revenue decreased 6.5% and operating income, excluding charges, decreased 13.7%. Excluding charges, operating income margins decreased to 12.3% compared to a margin of 13.3% in the 2011 second quarter. About half of the revenue decrease was due to the JCPenney change to its marketing strategy. Revenues from our pharmaceutical vertical decreased in the high teens as a percentage compared to the second quarter of 2011. Our high tech vertical experienced a revenue decline in low double digits and our financial vertical declined in the high single digits. Our select vertical was flat compared to the prior year quarter and our Retail vertical declined in the mid-single digits. The Retail vertical continued its strong first quarter performance when you consider how much it should have declined after the JCPenney impact. Our businesses supporting high tech clients primarily drove the decrease in operating margins because of their cost structures are less variable than our high transaction traditional Direct Marketing services. In the quarter, our Retail vertical market represented 27% of Direct Marketing revenue, high tech was 23%, select markets were 27%, health care pharma was 9%, and financials 14%. Our top 25 Direct Marketing customers represented 42% of Direct Marketing revenue for the quarter. Turning to Shoppers. Shoppers' second quarter revenue decreased 6.6% and operating income excluding impairment and restructuring charges decreased $1.1 million. ROP revenues decreased more than distribution revenues and the decrease in the number of accounts we publish and then the revenue per account was about the same. Postage rates increased a little over 2% for the quarter and newsprint rates increased about 4% during the quarter. And also some comments on taxes. The impairment charges make our effective tax rate for this quarter very unusual. After excluding the impairment charges, nothing has changed in: one, the general trend of our effective tax rate; two, cash that will be used to pay taxes; or three, our full-year tax rate projections. Our second quarter [Technical Difficulty]

And we have lost audio at this time, you might bumped the handset.

I'm sorry. I'll start over again at top. I understand I got cut off there, so I will go back and start over on where I hope we got cut off on taxes. The impairment charges make our effective tax rate for this quarter appear unusual. After excluding the impairment charges, nothing has changed in: one, the general trend of our effective tax rate; two, cash that will be used to pay taxes; or three, our full-year tax rate projections. Our second quarter effective tax rate was a benefit at 28.7%. The tax benefit was due to our impairment charge and flows through our deferred taxes, resulting in no cash impact. Our effective tax rate for our operating income, excluding the impairment, was 39.4% for the second quarter. The impairment charges were taxed at 29.5% because some of the goodwill was not tax-deductible, which were the result of stock acquisitions. For 2012, we still expect our effective tax rate, excluding these impairment charges, to be approximately 38% to 40%. On the balance sheet. Net accounts receivables were $129.6 million versus $156.4 million at year end 2011. Days sales outstanding at the end of June was 60 days compared to 64 days at year end 2011. Our total debt balance has been reduced from year end by $63.1 million to $116.4 million compared to $179.4 million at the end of 2011. Our net debt balance was $82 million versus $92.7 million at 12/31/11, a reduction of $9.3 million. We currently have $70 million available under our revolver, excluding outstanding letters of credit, in addition to a cash balance of approximately $34 million at the end of the quarter. We have a strong balance sheet with a low debt leverage ratio and plenty of liquidity. With that, operator, we will turn the call over for questions.

[Operator Instructions] We'll take our first question from Carter Malloy with Stephens.

On the Direct Marketing side of the house, can you help tease out JCPenney there and what type of headwind that is? Ultimately, when we lap that business and then maybe beyond that, what additionally it takes to get Direct Marketing back in the growth mode?

The decline again in January, the first 2 quarters of last year, I believe, this is where the revenues where higher than the next 2 quarters. The difference will be the decline between this year and last year will be less in the third and fourth quarters than they were in the first and second quarters. But still, possible. Does that answer...?

I believe so. And then beyond that, what ultimately does it take to get Direct Marketing back into a real and sustainable growth mode?

It takes -- the headwind that we have now and what we experienced in second quarter, as Doug pointed out, were driven by 3 verticals, right? Pharma, some reduced volumes from a client in that particular vertical and high tech. We had reduced volumes again, the uncertainty, because a lot of our high tech business is international business, so there's a lot of uncertainty there. There are delays in programs, there are cutbacks in programs. And then also affecting that vertical was one of our domestic call center clients with reduced volumes and some of that went to a consolidation of vendors. The financial vertical, as Doug said, was in the credit card solicitation business. So what we have to see to get those back to growth and we're -- obviously with our guidance, we're not expecting to have in the second half. But with this new structure, I'm convinced that we will be able to present additional opportunities to prospects and existing clients with a more coordinated approach than what we may have been able to do in the past. We have a terrific client list with long history, terrific products and services that address specific needs, that's a good thing. What we need to be able to do better and we're doing it in our multichannel go-to-market strategy with new clients. But we just got to get a better coordinated approach with the way we present our capabilities to clients and prospects, so that we can grow those businesses. But there are some natural economic uncertainty, there are the -- all the things that we all know that are causing us some difficulties. But we will see improved performance over the next few quarters, I believe.

Okay. And I know you guys aren't giving guidance for '13, but bigger picture, should we expect Direct Marketing and/or Shoppers to be positive growth for the full-year next year?

We're not far enough along in our planning and thinking for that.

Okay, that's fine. And then one last one, I'll jump off here, but you guys continued to have a good cash flows and build up cash there, very reasonable leverage. Can you give us any additional insight into your plans for capital allocation? Are you continuing to pay down debt or are you guys looking more at considering a buyback here? Considering where your valuation sits today?

It's something that we discuss every board meeting. And at the point where -- I mean, at this point, we're accumulating cash and we've got all the options that you said, but it's a discussion at every Board meeting.

Okay. And what are the arguments against at this point buying back, just looking at a 5x or sub5x EBITDA multiple? What would be the reasoning for continuing to build as opposed to buying back a little more aggressively?

Well, we could -- it's a conversation that takes place when we look where we are, where we're going and what we think we might use of our cash is. It's not something that is totally off the table by any means, but they're just -- we believe obviously the stock are at good value where it is, but it's something that we consider.

And we'll take our next question from Dan Salmon from BMO Capital Markets.

Larry, I have 2 questions. The first is with your stepping in to head Direct Marketing role. How are you thinking about your personal time commitment today? I know you've also been involved with reorganizations and Shoppers, but maybe how you would look at your role going forward and your time split up between Direct Marketing, Shoppers then just sort of broader corporate responsibilities? And then the second, I just wanted to ask a little bit more, you mentioned this idea of addressing the fragmentation of your delivery models and coming to market with a bit more of an integrated approach. Is that more around merging product and services teams, is it a different selling proposition? I was just hoping you could add a little bit more color to that.

Okay. On the -- my time, my time will be -- I was asked how are you going to do 2 jobs? The answer is I don't intend to. This restructuring allows -- my responsibility, obviously, ultimately responsible for Direct Marketing. But with this team and this new structure, the number of people that report to me, the number of functions, the number of things that I think about are very differently -- are very different from what Gary had to deal with when he was there because he has a lot more people reporting to him. So as to the amount of time that it will take, it will take some, obviously. But this is a strong group of leaders that we've got, and they've got some really good people in the organization that are going to support them. We're all going to be spending fair amount of time over the next few to several months, continue to look at the way we go to market. And so that will give us the opportunity to maybe even further refine the way the structure is working. The amount of time between Shoppers and Direct Marketing, I don't know how it will split, but Shoppers -- that's the business that I know well, that Doug is deeply involved in and Mike Paulsin is a terrific leader. So where we are there, and its structure and restructuring is we're in reasonable shape. As you see each quarter, that group continues to look for ways to be more efficient, to get the expenses more in line with the new realities of revenue. And then the last question was about more coordination, the way we go to market? What was...

It was a product and services, the fragmentation.

The answer is, that it is all of those things. We are looking at the integration of functions, the combination of functions, the services that we provide, how we go to market with those, where we have the advantages that we need and where we need to add additional services. So it truly is all of the above.

We'll go next to Michael Kupinski with Noble Financial.

Just a couple of quick ones and then I have some housekeeping questions. What do you attribute the reasons that you're shuttering your daily deals and your mobile apps in the Shoppers 2? Was it just management distraction or -- what were the other reasons there?

We weren't getting the traction on the revenue side that we thought we would when we implemented those. And then another point that you made is a very good one, is that our web products and services are sold by our territory sales and our inside sales forces. Well, with our national sales force as well, but all of our sellers. And it is a more natural sell with the PowerSites to those local customers and that these sellers have a tremendous relationships with than was "the daily deal sell" or some of the other apps. So from that perspective, it was a distraction to our sales force and it just made sense based on, again, the revenue and the cost that we have there to close those. As have a number of other daily deal sites in California and Florida been closed.

And then in terms of your alternative delivery plans, it seemed like there was a terrific prospect for a meaningful cost savings in that -- in doing that. I was just wondering if you can add a little bit more color why -- what were the types of issues that you're facing there?

The issues were, in case of Florida, 37 years of being in the mail and selling the advantages of that and perceptions, but probably a realities well of -- in the early going, if you will, the effectiveness for the advertisers was less, somewhat less, and so the decision was made that we were going to absorb the extra cost between the alternate delivery price and the U.S. Postal Service. We know that Postal Service or the postage rates will continue to increase and it will add cost, but we truly believe it will result in more revenue as well.

And then just a couple of housekeeping things. In terms of guidance for the Shoppers, which you're anticipating operating income growth. I just want to clarify and just make sure that you're referring to growth year-over-year or are you referring to growth over the first half of this year?

We're referring to...

Keep things [indiscernible] Mike, modest.

Yes, modest. I heard that part.

In the second half.

Was that year-over-year though, Larry?

Yes.

Okay, all right. And then the corporate expenses were just a little bit higher than I was thinking, just by a few hundred thousand, obviously. But any thoughts on the run rate? Is that a good run rate for the rest of the year?

It's fairly consistent, yes.

And then D&A, was there anything in that quarter that was unusual in those numbers as well? Because that was a little higher, too.

Yes, that includes some of the restructuring charges related to the Shoppers group and the websites and so forth, so our historical run rates are probably a little bit more reflective of what you would see in the future.

We'll move on to Edward Atorino from Benchmark.

The JCPenney, is this sort of a permanent reduction, so that it's not going to come back or this was a temporary cutback by JCPenney? And any other customers either thinking or indicating that they might be shifting use of you versus somebody else?

On the first part of the question, they have actually added back some revenues from what we expected and they told us at the beginning of the year. So there's some add back, a few million dollars. But it's still a significant reduction from last year. And we've got some of our other retailers, we've got growth in some of our major retailers, in our mail and mail-related services and -- so I'm sure that, just like all the -- everybody out there watching very closely what's happening, what happens to JCPenney and we'll adjust accordingly. We know that over time, while direct mail is still growing, there will be shifts in revenue and we intend to be where those shifts are going.

Is the decline in pharma just due to the reduction in new drugs and stuff? Pharma seems to be down across most, I guess, marketing categories, is it a product issue.

In our particular case, the first half decline some more volume related to one of our major customers, where they're just not sending out as many kits, et cetera to their customers. And one of the programs that they had some reasonable expectations for didn't quite meet those expectations, so that cut back the volumes a little bit more. We'll continue to have headwinds in the pharma for the rest of the year, as there's a lot of uncertainty there, as you well know.

One last question. If you look at Shoppers, the last 3 quarters have been around $56 million. I mean, it's the first time that 3 quarters with that kind of "stability," are we on the bottom there? Are you at the bottom there, you think?

We would sure want to be.

But it was a "but"?

We did say that the rate of decline we believe would be slightly less. So we're just kind of silly.

[Operator Instructions] And we have no further questions in the queue at this time.

Thanks a lot. Appreciate your time and your interest.

And that does conclude today's conference. We thank you for your participation.