Harte Hanks, Inc. (HHS) Q1 2018 Earnings Report, Transcript and Summary

Good day everyone. And welcome to the Harte Hanks' First Quarter 2018 Conference 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.

Thank you, Christy. Good afternoon everyone and thanks for joining us. On the call with me is our CEO, Karen Puckett; and CFO, Jon Biro. Our call would 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 forecasts 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 Investor's section of our website at hartehanks.com. Christy, will you please explain the procedure for asking a question.

Certainly. [Operator Instructions]

Thank you. Karen, why don't you go ahead.

All right. Thank you, Scott, and good afternoon to everyone. We got 2018 off to a solid start from the perspective of establishing a solid foundation to build upon. We ended the quarter with no-debt and a $22.8 million of cash on hand. Along with continued cost reductions, we have implemented a number of actions to improve our balance sheet, including solidifying our Wipro partnership with their 19.9 million preferred investment in Harte Hanks. We extended the term of our credit facility, and we sold 3Q Digital. This provides us the strong foundation upon which to execute our strategic transition. From a revenue perspective, it is clear that we have work to do, our exposure to big-box retail has clearly been an issue, and unfortunately, as I discussed during our last quarter conference call, we anticipate that we will continue to see topline pressures during 2018 in our more traditional services, including mail logistics and the Contact Centers Services. Therefore, closing new business bookings to increase revenue remains a primary focus today. Just as important, we believe we are gaining traction with our new data and database capability, DataView and Signal Hub. Those are getting positive reviews from our clients and prospects in several existing data customers will likely migrate to these platforms. Gaining traction selling DataView and Signal Hub is an important for three reasons. First, it really solidifies the database customer relationship and improves retention in this key service area, which has been under extreme pressure for many years. We are hopeful we will migrate clients, representing a substantial portion of our current database revenue by the end of the year, as we offer a competitive database solution rightly aligned for our new customers to go after acquisitions, personalization, and reach. Additionally, when we migrate these clients we have the opportunity to eliminate and reduce spend that we’re spending with existing legacy vendors that provide services for the legacy database. So that this real opportunity for us. Secondly, the new platform has vastly improved strategic capabilities. For example, enabling clients to enrich records and develop actionable insights to guide marketing activities, so that they can drive new businesses. And while some of our client’s may not start using these advanced capabilities right away, we really do believe that they’ll be exposed to these valuable opportunities and we have significant opportunities to up-sell through these integrated solutions. And the third it says is, our new data offering, which is DataView is really a higher margin recurring revenue versus what used to be our legacy model of a broker data from third party, which we were selling at really at a one-time transaction with the small brokers to market. With DataView, we have on boarded data files from numerous data providers, which enables us to help clients be more nimble to acquire in a subscription model the best data for their applications and merge their own proprietary data to create insights and decision information they need. Our Wipro partnership is an important aspect of improving our booking. I’m encouraged that we are seeing an increasing pipeline from the introduction by Wipro. These opportunities tend to be larger deals with longer sales cycle and we are usually coming in at a more strategic level, working with C-Suite rather than a more tactical level lowering the organization. Before I turn the call over to Jon, I like to reiterate my belief that our recent improved balance sheet, our cost reductions, improved capabilities, our committed employees, and the Wipro partnership places us in a position to win in the marketplace and do a great job of serving our customers and ultimately will determine our success. At this point, I’m going to turn the call over to Jon. Jon?

Thank you, Karen. Good afternoon everyone. Before I get started, let me say that I will be discussing the quarterly results for the three months ended March 31, 2018 and the changes compared to the same quarter of 2017. Revenues for the first quarter was $81.2 million, compared to $94.9 million last year for a year-over-year revenue decline of 14.4%. The decline was partially due to having only two months of 3Q Digital revenue in this year, due to the sale of this business versus last year's three months. 3Q Digital revenue was $6.9 million in this year's quarter, compared to $8.2 million last year or a decline of $1.3 million. Along with this change, revenues were down with all of our verticals, with the most pronounced impact of being in our retail vertical, which was down $7.6 million, largely due to a loss of business from the large retail client, along with demand declines within other accounts. Last year during the first quarter, we adopted the new revenue recognition standard ASC 606. As a result, we had 589,000 positive impact on our revenue line in the first quarter. Note that there is quite a bit of disclosure on the adoption of this accounting standard in our 10-Q, which will be filed tomorrow. Adjusted operating loss was $4.5 million versus $5.9 million a year ago. This significant improvement was due to broadly lower operating expenses, which were down $15 million compared to last year. These lower expenses principally include lower payroll, lower production and distribution expenses, and lower general and administrative expenses. Again, the 2018 first quarter results included only two months results for 3Q Digital, up until the date we sold them. Excluding the gain on sale, 3Q Digital generated $1.1 million in operating income in the quarter. In the first quarter of 2017, 3Q's operating income was approximately breakeven. Last note, the implementation of the new revenue recognition standard increased our operating income by about $565,000. GAAP operating loss was $5 million, a 21% improvement from the year ago period. Net income available for common shareholders was $32.6 million or $5.24 basic earnings per common share, and diluted earnings per common share of $4.67. Net income included the $31 million gain on the sale of 3Q Digital and an $8.8 million tax benefit. Included in this tax benefit is recognition of $9 million for an expected federal tax refund driven by the capital loss we generated when we sold 3Q Digital. We anticipate that we will receive this refund after we file our 2018 federal tax return in 2019. As Karen mentioned, we entered into the quarter with no debt and $22.8 million in cash on hand. During the quarter, as I mentioned, we sold 3Q Digital for an after expense, pre-tax proceeds of about $3 million. And as we've previously mentioned, we will have an opportunity to earn another 5 million if 3Q was later sold. Importantly, we have also eliminated a $35 million 3Q Digital earnout liability that would have been due in April of next year. We also have our undrawn $22 million bank credit facility. Now, as long as revenue pressures continue, which is likely for the balance of the year, cost control will be one of our top areas of focus. As I stated during our last conference call, we have already targeted approximately 10 million in 2018 cost reductions and will be looking for more while maintaining our ability to pursue new business opportunities. In closing, there is no question 2017 was a difficult year, our SEC reported delays [ph] and its financial challenges surely caused concern for many customers and vendors. Today, we are in a much better position than we were a year ago and now we can focus our energy on getting on a lot better more sustainable path. With that, operator we're now ready for questions.

Thank you. [Operator Instructions] First, we will take Michael Kupinski from Noble Capital Markets. Your line is open.

Thank you. And thanks for taking the questions. Good afternoon. I was just wondering if you can give us some thoughts about the trends going into the second quarter? Are you starting to see a little bit of moderation in some of your revenues going into the quarter, it looks like retail was down, it looks like 32% in the quarter, and you indicated that retailers had cut back on services, and typical, it sounded like you lost a retailer and I was wondering if you can give us some color on that? And just your thoughts in general about moderating trends throughout the year in revenues?

Yes, Mike afternoon. As you know, Q4 is our seasonally strong quarter, particularly for retail, so that is one reason why the retail revenues are down so much sequentially. As far as the second quarter is concerned, it is a little early to talk about trends there. Certainly, the retail client is giving us much less business. That’s been an issue for the past two quarters and that’s another reason why we’ve seen the retail revenues decline, but in general, the retail pressure has been there for quite some time and it’s hard to say whether it’s going to moderate except for the fact that we did take the big hit late last year.

Got you. And can you give us some idea about how much revenues Wipro is generating, just kind of give us some thought about, I know you're starting from a small base this quarter, but can you give us some thought about how that business is looking?

Yes. Mike, Karen. Let me clarify when you say Wipro revenues generating, you mean the benefit from a revenue standpoint we’ve received from Wipro?

Right.

Speaking about it in two parts of how we would get revenue. One, would be where we are pitching a solution and we have, let's just say the marketing services or the Contact Center pieces of that. We will directly book that revenue. It doesn't go through Wipro. Now, there could be situations where Wipro needs work done for a client where we would be like the subcontractors. So, there is direct revenue or a sub contract. So, it is either a prime or a sub, think about it that way. At this point, we have not closed any significant sales through the Wipro relationship. However, I believe that we’re hopefully very close to being able to announce those, but I can’t because as we are on the phone right now, it would be premature.

I would add, Mike, I mean the pipeline with Wipro is robust, a lot of activity right now and as we mentioned with Wipro we getting into very, very good levels within the organizations that we're pitching through.

And I think the difference is even like even in retail where we may have a direct mail relationship and very different kind of relationship. We kept on in through the Wipro relationship in a much different capacity and a different decision maker that allows us to get the more opportunity, data opportunity, marketing services data opportunities and certainly declines that typically we would have a hard time doing on our own. So, the pipeline continues to increase. We do have three focus areas with them, but just to try and keep up with all the activity. And I believe that hopefully we’ll be able to talk about some more shortly.

Got you. And in terms of the, it looks like the operating cash flow loss was actually lower than I expected, and I was just wondering, do you have any thoughts in terms of just where do you think you might be by full-year, do you think you will be positive EBITDA, I mean any thoughts in general about how your cost containment and opportunities might – there might be there in light of the challenged revenue [indiscernible]?

Yes, look, we're working very, very hard to generate free cash flow this year. We're not going to forecast free cash flow number or you may be talking about EBITDA figure for the year, but you can rest assured that we are trying to keep our results as good as there can be, while maintaining the ability to go after this new business and we’re also going to be focusing on managing the balance sheet and working capital so that we can generate some free cash flow for the year.

And final question, at this point you guys are just planning on sitting on the cash and or are there opportunities out there that you think that you might want to use to deploy some of the cash? What are your thoughts?

I think at this point we are very focused on executing with what we have. That doesn't mean that it is something, some opportunity or we had a need that we felt like we needed results. We will get that done or maybe a solution or enhancement to a solution that we haven’t may not be – obviously not be an acquisition, but we’ve got to execute on what we have right now.

Got you. Alright thanks. I appreciate for taking all the questions. Thank you.

Thanks Mike.

Thanks Mike.

[Operator Instructions] We have no further question in the queue. I’ll turn it back to you for any closing comments.

Okay. I guess we'll wrap it up. Thank you, again, for joining us today. If you have any questions you would like further follow up, please contact me, Scott Hamilton. My information is on the press release. Thank you all very much for joining. Good-bye.

And that concludes our call for today. Thank you for your participation. You may now disconnect.