Good day, everyone, and welcome to the Harte Hanks First Quarter 2016 Earnings Conference Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Robert Munden, General Counsel. Please go ahead, sir.

Thank you, operator. 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, the future effects of leadership changes, acquisitions, 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 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 tab at our website at hartehanks.com. I'll now turn the call over to our CEO, Karen Puckett.

Thank you, Robert, and good morning, everyone. Thank you for joining our earnings call this morning. By now, you had a chance to review our first quarter results in the earnings release we issued earlier today. We delivered first quarter adjusted revenues of $111 million compared to $117 million in the first quarter of 2015 after adjusting for 2015 B2B divestitures. Our first quarter revenue rates declined close to 5% on a constant currency basis. While first quarter demonstrates progress towards our goal of stabilizing revenue and continuation of improving the rate of decline from prior quarters, there is still work in front of us. As I mentioned on the last earnings call, we really are in a turnaround situation. In the first quarter, we made a number of changes within the organization in order to stabilize revenue and drive consistent performance. We are seeing improvement based on our actions, but we are also well aware we need to continue to drive growth of sales pipelines, convert the sales to revenue quicker and change our delivery approach and cost structure as we continue to refine our go-to-market. Coming out of first quarter however, we have taken expense actions to improve our cost structure. At the beginning of the year, I said we were going to focus on four things. One was around establishing our platforms' core success. This included aligning our sales, marketing and client services function on driving growth that are core market segments and increasing market awareness throughout the leadership and competitive positioning in the market. Secondly, to capture new growth by capitalizing on client and prospect needs to shift and transition in this changing marketplace. For us, that means helping our CMO clients achieve a customer-centric view of the customer journey. Thirdly, refining our operating model to…

Thank you, Karen, and good morning. We continued to make progress in stemming our revenue declines in our efforts to stabilize the top line are taking hold. Simultaneously, we remain focused on expense management. During the first quarter, we incurred some additional expenses primarily related to non-recurring delivery problems for a client. We believe we are moving past this issue, but believe there are some additional steps we need to take to better manage our expenses to our revenue run rate. I will expand on this in a moment. Turning to our first quarter results, our consolidated adjusted revenues were $111 million, compared to $121 million of adjusted revenues in the same quarter last year. This represents a decline of 5% year-over-year. First quarter 2016 adjusted diluted loss per share was $0.03 excluding the B2B research business sale and normalized effective tax rates compared to income of $0.03 for the same quarter in 2015. While we expect Q1 to be a seasonally weak revenue and profit quarter, we strive to do better. Customer interaction revenue declined 5% on a constant currency basis and after adjusting for the sale of our B2B research businesses. One of our goals continues to be to reduce our clients in revenue churn and we have been able to slow the amount of revenue lost from existing accounts compared to the first quarter of 2015. Let me walk through the results of this business segment by industry vertical. Our auto and consumer brands benefited from the implementation of a new entertainment client engaging us to provide multi-channel contact center support along with the expansion of services with an existing client. Our select markets vertical benefited from new business with a new grocery store chain, a real estate marketing company using our mail supply chain services, these…

Thank you. [Operator Instructions] And we’ll go first to Michael Kupinsky at Noble Financial.

Thank you for taking the questions. So in Trillium, it looks like the Company had a step back, we saw some progression in revenues in the third and fourth quarters of last year, I think even the second quarter saw some progression. And this looks like it's a step back, can you kind of add a little bit more color on why we're seeing a little bit further weakness in Trillium at this point, are we seeing some cannibalization of some of the business – as some of these customers may move to a SaaS model, which might be a little bit lower revenues in some ways, can you just kind of add some color on what's going on there?

Yes, Mike. I don't know that we consider it a worst performance. It's been somewhat consistent with what we delivered throughout 2015 where we had essentially one growth quarter in the second quarter of last year and everything else was various declines. We are working through the transition as we've discussed, we see our SaaS revenues in our monthly recurring revenue that comes out of those contracts are continuing to grow that base of business and that revenue mix is continuing to aggressively move, a larger piece of what we sell and what we do, but there's also no doubt as you said that and we're seeing some of this where customers – essentially new customers who are about to buy Trillium make a decision upfront that they want to pay for a perpetual license or do they want to enter into a SaaS arrangement and I think that's in the technology industry and everything that's going on in corporate America, most companies these days are choosing for that three-year monthly SaaS arrangement as opposed to a perpetual license.

At this point, I know that you may have lost customers in their customer interaction business last year. Are we seeing any sequential decline in the number of customers or is it just the volume of business in the customer interaction business that is affecting you at this point?

No, we are seeing a decline in the number of customers. We are also seeing a decline from existing customers who have cut back and those are great to see. And we've talked about it, we talked about it at the end of last year, we've got some of those resigned middle of last year, et cetera, that we're working through, which is why we anticipated this revenue performance right now, but you are correct from a number of clients standpoint and from existing clients who are cutting back in spending, we are seeing reductions in those areas.

Doug, I understand that, that to be year-over-year, but the question is are you seeing a sequential decline from the fourth quarter as well.

Yes, so I think that's fair to say. I'm actually take – I’m going to take you back about two quarters and say from second, third, fourth to this first quarter, yes.

Both the sequential decline and year-over-year decline in customers?

Yes.

Okay. And in terms of the number, I know that you guys have increased the number of sales people and so forth, where do you stand on that right now in terms of the number of sales people that you have?

We are significantly above where we were at this point last year and where we were several years ago. And that from a headcount standpoint is stabilized, is flattening and we have to get more productivity, we want to have some revenue results et cetera, before we commit to further expansion and get production out of the investment that we've made so far before we make any additional investment in more sales and marketing personnel.

So going back to your thoughts on the year, what gives you confidence that you're able to deliver the prospect of having improved revenues and cash flows and earnings as you get through the balance of this year, given that we're still in that mode of losing customers and so forth?

Yeah. The confidence comes from or losing less customer we've addressed the churn rate, we can see from our existing sales folks what they're working on and the opportunities that are out there that there is an increase in that type of work and the opportunities that they're bringing in for us to address. So from those standpoints, we still remain optimistic that we're addressing our revenue decline and that – by the end of the year, we're hoping that we will have turned the Company back to revenue growth.

And Mike, this is Karen, [indiscernible] that is right. I think we talk about these initiatives and there is a lot of work going on to that work ultimately hopefully become you monetize that. But to Doug's point, the pipeline and the mix of services is very different. It's increasing the velocity of getting through the pipeline and once we have a contract getting that back to revenue. So it's not just the pipeline, it really is that sales to revenue conversion and that's what I believe that [indiscernible] in the seat now, we'll get some acceleration there and in the quality of our delivery because as you know, last year we had issues and we've been very open about that. I think it'll bring that improvement to the quality of the delivery of services that we're in a more economical way. So there is quite a few levers there, we've just got to get them pulled in the right way at the right time.

In terms of the pipeline, when you have to have these customers onboard kind of like in the second quarter, so that by the fourth quarter, they become profitable, because I understand there are usually some investment spend that needs to happen when you once – when you first bring a client on. Can you just kind of give me the progression of that pipeline and why you're – why you would have to have some visibility into the second quarter in order for that for the fourth quarter to show some profit contribution? So, can you talk a little bit about that?

Yes, Mike, all of that has to do with the solution that we sell to the client. What the client – because remember, part of our go-to-market strategy and what we do when we talk to clients and we sell our services, we have to address what their problem is, and obviously it comes back to who is the client's demographics, who are they targeting, all those type of things. And our product line, we're not selling a product line forcing the product on the customer, it's solving their problems first, and then deciding what channels will address what the client's problem is. So, when you then get into the different solutions and channels that we have, that's where you get into revenue timing and how long it takes onboard a client. A lot of the traditional type channels and work that we do, call center, mail type activities, can be very quick from that. And when I say quick, 60 days to 90 days from when we talk to a customer to when we start delivering services. You may have to train contact center personnel, you may have to design, set up mail pieces something of that nature, but at least in our industry and in our product lines that depending on how quickly the client wants to move their sense of urgency, things of that nature that could be relatively quick. You get into some of the professional services, where we're doing campaign strategy, digital programs, building a database that can vary widely, again, doing a creative campaign or maybe even a campaign strategy that might only be 60 days to 75 days, but actually implementing that into an active campaign can be anywhere from three months to six months. If they need us to build a database and then they want us to provide the analytics and the actions based off of what's going on in the trends, and what we see within that database, that can be a six-month to nine-month process. So it's a hard thing, and I understand what you're looking for in trying to get some comfort on, but as we look out over call it the next 6 months to 12 months, the mix of services in the types of channels that we deliver to customers can greatly influence the speed to revenue for us.

Yes, I would say that further deep you get into a year as, CMOs are making [indiscernible] numbers. To Doug's point, the tactical kinds of services become a sense of urgency for a company or a client's CMO who didn't have it on the radar because they are not making their numbers, so they are – I'd say they are panic that they are willing to get going [indiscernible] So I think the closer you get towards year-end and numbers are off that requires some urgency on both sides.

Okay. Thanks. That’s all I have for now. Thank you.

Thank you.

And we’ll go next to Greg Eisen at Singular Research.

Good morning, and thanks for taking my questions. You said earlier that the number of sales people has increased year-over-year from this time last year. Can you describe what the time frame is for those people to ramp up to some level of efficiency, is it a quick ramp, immediate three months whatever?

They are on a ramp quarter ramp, but typically you're looking for proof point in three months, six months and then nine months. But six months your ramp and hopefully you are over-performing in the 9 months to 12 months category, but that's an area of key focus and refining our what we call sales motion is critical and that's because the most efficient way to use [indiscernible] sales resource versus other resources in the organization and I can tell you from prior experience in a prior life, that can make a big difference. So we have a specific focus around this concept of the sales motion which drives the economic, who placed when, who should be involved in what discussion and we believe that will help us even ramp our reps sooner.

Okay, okay. And if I could expand upon, maybe ask a simple question that maybe you tried to answer for the previous questioner in a more detailed manner, if you could describe how long is the sales cycle for the customer interaction business in total, is there a single range of six months to nine months so you could say as that's the sales cycle in total or is it really there is no one answer?

It's really the service that they are wanting to purchase. I mean we have some that are less than 30 days, more likely 60 days, 90 days and then some that fall into a three months, six months category. I've recognized what we are trying to do here is make sure that you have a pipeline at certain time, what's your year will be, but clearly we [indiscernible] are going to be delivered very quickly, because they have that sense of urgency, given their conditions of their numbers.

Okay. Turning again into the customer interaction business. You've had a decline in the number of customers, you've lost some business, but you mentioned in your prepared remarks that you have resigned some accounts. When you resigned accounts in the customer interaction business, how long is that normally for?

It depends on the contract, it's typically no longer term contract. It's over a year I would say kind of average three-year – two-year to three-year contract.

Okay. I get that. I get that. Turning to the Trillium business, can you describe how far along the shift has gone? Let's see, you were selling perpetual licenses, so all those licenses there, the horse is out of the barn. Now you've got starting this quarter, you're giving customers a choice of perpetual license or buying SaaS where they pay monthly. Can you describe what percentage of new sales have gone to the SaaS model versus the perpetual? Or is this not a good quarter to describe that, because you just started it up?

I would say – I'd just let Doug analyze that. But it really is around what the customers are attempting to do, what the application for the data quality problem they are solving for, and is it enterprise-wide or not. I think as you'll see, the great thing about the UNIFi and this Trillium Refine is that you will see that this tool be used, the point is outside of IT, so that now business – business lines of businesses and companies, business analysts can grab this tool and have a way to do analytics, again like they never have before. So, unlike saying that, I'd just say that that's probably likely more software-as-a-service, but the good news is the market broadens, it's not just in IT, but it broadens to line of businesses within companies. So I think as you see us changing how we market, how we're going to market and the messaging, you'll see that shift over to software-as-a-service. Doug, you want to add to that?

Yes. I'll just about – because there appears to be some question or confusion, about a year ago is when we introduced the product to the market and sales started kicking and roughly third quarter, some in the second quarter obviously, second, third, fourth quarter and from a sales and revenue standpoint, it has been ramping up since then and as you get, obviously more and more activity and things that are going on, you're seeing more and more where – and we've got more proof points for clients, new clients make that decision, do they want a monthly SaaS arrangement under a three-year agreement or do they want a perpetual license.

Okay. You anticipate at a certain point you will reach kind of a saturation level in terms of the percentage of SaaS clients versus perpetual license clients, where it just becomes a steady state of – you've already gotten the SaaS penetrated as far as it will penetrate?

I think that, yes, we have determined, only because I do feel that these tools and this capability going outside of IT is a big deal. And so therefore – let's get a little time under our belt with – working with line of businesses, [indiscernible] there is kind of concept to better answer that question, because I do think the market is widening.

When you say going outside of IT, if someone buys perpetual license, it has to go through the IT department of the firm, which can get to be a black hole at times, but the SaaS product essentially is web based, am I correct?

Essentially, yes, but what we're really getting at and we've talked about it in the past that, over the last 10 years, Trillium was sold primarily to the IT department. He was an IT decision maker, he was involved in a stack implementation, something of that nature and it was pretty much an IT buy. We have seen in the last year or two, and it is a new industry trend also that more and more of our sales pitch is, more and more of our inquiries either go directly to a line of business manager, somebody a retailer trying to deal with a merchandise issue or whatever the data quality is, somebody in the marketing department trying to deal with their loyalty database. Five years ago, you rarely saw that line of business manager in the room or initiating the contact. That is happening more and more today. IT is still involved, because they're going to install it and it's got to work nicely with everything else that that company has and is operating, and procurement will be involved, but the new trend, I hate to call – hesitating to call it new because it's been going on for a couple of years now, is that there is an increasing visibility, increasing involvement from a line of business decision maker.

Okay. Got it. When you're selling the SaaS service on a three-year contract, I think you said is that generally is the length of time?

Generally, yes.

Would you expect given that software changes so much and IT products change so much, do you expect that you would actually recover the same equivalent amount of revenue over a three-year contract as you would hope for a perpetual license?

Yes. I mean they're close, but that is correct.

Okay. Moving on, you acquired the Aleutian business this quarter, was the contribution meaningful that you could call it out as part of this quarter's revenue and can you disclose that?

No, we wouldn't and it is from a total company standpoint, very small.

Okay. Going to the cost side of the business, you are targeting reducing essentially your fixed cost or variable costs that are fixed in any quarter. What kind of run rate are you targeting for your quarterly overhead, let's call it, it was $117 million this quarter, some of those – some of that $117 million in the P&L was non-recurring, I get that. But is there a run rate that you're targeting and how long would it take for you to get there?

We are working through that right now and we definitely have some internal goals and are working through those, but we will push that and describe and disclose that more in our second quarter earnings call.

Okay, so next quarter. Okay. Your tax rate was much lower this quarter than last year, was there anything – having that within the 10-Q yet, anything special we should know about, does this say anything for an annual rate?

No, we still – nothing special. We still expect an annual rate in, call it the 38% to 40% range.

Okay. That’s it for me right now. I’ll let someone else go. Thank you very much.

And ladies and gentlemen, this does conclude today's question-and-answer session. I'd like to turn the conference back to today's presenters for any additional or closing remarks.

Thank you. I've got a few closing remarks, just appreciate everyone's participation today. And again with all turn-around situation the world must continue and the team must stay focused, I'm confident that we have the right areas of focus. Yes, sometimes progress maybe uneven. But I do feel that the shift is turning and we just need to stay the course and stay focused on just driving the sales and pipeline conversations we're having and the improved margin is a very high priority in our business. You have my commitment that we have a leadership team that will continue to drive for success in 2016 and thank you for your time today and I look forward to reporting our second quarter successes in a few months. Have a good day.

And ladies and gentlemen, this does conclude today’s presentation. We thank everyone for their participation.