Thank you for standing by. Good day and welcome to the Harte Hanks Second Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Sheila Ennis. Please go ahead, ma'am.

Thank you, Paula. And good afternoon, everyone. Thanks for joining us. Hosting the call today are Andrew Benett, Executive Chairman and CEO of Harte Hanks; and CFO Lauri Kearnes. Before I begin, I'd like to tell everyone that the information provided during this call may contain forward-looking statements such as statements about the company's 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, disposition, litigation and regulatory changes; economic forecast for markets served, expectations related to cost savings measures, and the availability of tax refunds and other statements that are not historical fact. Actual results may differ materially from those projected or implied in these statements because of various risks and uncertainties, including those described in the company's forms 10-K and 10-Q and other filings with the SEC and the cautionary statement in today's press release. The call may also reference non-GAAP financial measures. Please refer to the earnings release that was issued after the close for reconciliation and other related disclosures. The company's earnings release is available on the Investors section of its website at hartehanks.com. And with that, I'd like to now turn the call over to Andrew Benett. Andrew, the call is yours.

Thank you very much, Sheila. Before we get started, I want to express my sincere hope that everyone on today's call is being safe and healthy during these challenging times. I also want to thank the entire Harte Hanks team for their professionalism, resiliency and constant drive to serve and support each other and our clients. Our culture and commitment are among the key assets that attracted me as a company. Our employees' response to the upheaval of the last several months only amplified these attributes, and I couldn't be prouder. As we operate through the pandemic, we're carefully evaluating expenses and business functions to ensure we add value to our customers and to position Harte Hanks for sustainable profitability. As we've explained over the past year, we continually evaluate expenses and improve -- to improve operational efficiency. Although the pandemic creates new challenges, the process for operational efficiency and excellence has not materially changed, and we're well on our way to create a more relevant, efficient and streamlined Harte Hanks. Before commencing our second quarter update, I want to take a moment to look at what we accomplished during the first half of 2020. To begin with, we believe we've stabilized our quarterly revenue run rate. We implemented cost reductions across every aspects of the company, reducing overall costs in 2020 by over $20 million. We enhanced our management team, bringing industry-leading talent and promoting internal talent. We are focused on engineering cost savings and engineering growth. To that end, we moved swiftly to significantly reduce real estate footprint that is aligned with our go-forward strategy. We're also beginning to recognize incremental revenue from new products and services in our efforts to productized, how we go to market as we discussed on last call. Through these efforts, we remain…

Thanks, Andrew. I'd like to first emphasize Andrew's point that despite the challenges we faced as a result of COVID-19, we are winning business and see growing demand in our B2B vertical, specifically with our contact center services. And we expect this vertical to continue generating growth in 2020. COVID-19 has presented our business with near-term headwinds, yet we have continued focus on streamlining and restructuring the business to meet the needs of the market today. And we are beginning to see stabilization and growth in the business lines where we're investing. In comparison to the year-ago quarter, we cut expenses by nearly $14 million. And our spending was down over $38 million for the first half of 2020 versus the same period last year. The cost cutting, coupled with our revenue growth this quarter over last quarter, are reflected in our positive adjusted EBITDA in the quarter, up $2.25 million from negative $1.77 million we posted a year ago, a clear sign that we are successfully executing our turnaround plan. I'd now like to walk through the results in more detail. Second quarter revenues were $41.6 million, up over $1 million sequentially from last quarter. This compares to $54.7 million last year for a year-over-year revenue decline of $13.1 million. We expected a more pronounced COVID-19 impact on our earnings this quarter versus Q1, but are encouraged by recent business wins. Revenues grew across our B2B and consumer brands verticals in the quarter. Our B2B vertical was up $3.1 million or 28.2% due to the increased demand for our contact center services. Similar to last year -- to last quarter, the largest decline in dollar terms was retail, which was down $7.3 million, mostly due to impacts from COVID-19. The largest decline on a percentage basis was in our…

Thanks, Lauri. In summary, although we are facing near-term challenges, as with everyone, as a result of the pandemic and declining client marketing spend within our category, we're well in the process of modernizing our business through our existing client relationships as well as new relationships as we've discussed. Companies are undergoing accelerated digital transformation in the face of the pandemic, and we're making changes now that we believe would place us at a competitive advantage and position for the long term. While we're committed to continuing to align our expenses with expected near-term revenue levels, we're also making important progress towards aligning our capabilities with emerging customer needs. We've strengthened our cash balances, and we believe we have the necessary liquidity to execute our turnaround plan and regain our position as a leading customer experience company for years to come. With that, operator, if you could please open the line for questions. Thank you.

[Operator Instructions] We'll go to Michael Kupinski with Noble Capital Markets.

First of all, congratulations on achieving positive adjusted EBITDA in the quarter. I think that was the first time you had positive cash flow in the second quarter since at least 2017. So congrats on that. Revenue showed sequential improvement from the first quarter. This was a little bit better than what I was thinking for. And I was just wondering if you can add a little bit color on that because you did say you had some client wins. But did the pace of client losses year-over-year decrease as well? I'm just trying to understand that. And then since July is already over, could you talk about how you started the third quarter? And then maybe if you anticipate that there will be sequential improvement in revenues from the second quarter and the third quarter as well?

Yes. Thank you. Thank you, Mike, for the question. So I'll start and Lauri can add as well. So first part of the question in terms of revenue, as I mentioned upfront, we believe we stabilized the top line. And so as you know, we're up versus Q1. Just marrying that second part of your question with regards to July, we are seeing strength come back in areas of our business that had softened due to COVID. So we have seen as we've mentioned before, softening; not client losses, but softening of volumes in our fulfillment business. Or within our marketing services business, a delaying of activities from clients because everyone was working out what the messaging would be and how they would interact with consumers, customers, et cetera, during COVID. So from an overall revenue, top line revenue standpoint, we feel very good that we're at a pretty solid run rate at this point. With regards to where that's coming from and how -- where the growth in the quarter, the sequential growth is coming from, and also back to your question about July, we are seeing it in -- as Lauri said, we are seeing an increase in our contact center mainly due to COVID-related services that we're providing. So we're seeing a spike there. But we're also seeing, as I mentioned, an increase not just in new business activity and pipeline, but in conversion. So we're starting to see a pickup in new business activity. And I would say that that's happened or has been happening over the last 6 weeks. The cycle time is taking longer because of COVID, as you can imagine, the selling cycle. So things take longer. It's a little bit shorter and a little bit more efficient when we're growing our services within existing clients in general, but also due to COVID. But we're starting to see fruits of that labor. And the last point that I'd make is consumer being up and our focus on broadening and deepening into B2C, we are seeing early signs of success and wins there. So the sampling program that I talked about for a top 3 CPG company is a perfect example of that. Lauri, is there something, anything you'd like to add?

No. I mean I think you've covered it. I mean we definitely see some increased business with our contact center, specifically COVID-related as well as entertainment services-related. And the other part of your question, Michael, we have seen certainly a decrease and as we said, stabilized the revenue, so we're not seeing those same customer losses that we were experiencing previously.

Great. And then in terms of the $13 million in annualized savings, is that for the full year 2020? Or what time frame are you talking about in terms of the $13 million?

In terms of the $13 million...

Yes, the $13 million is...

Go on, Lauri. Go on.

Okay. It's really hard when we're not together. It's really an annualized savings. So we're not going to achieve all of that in this year, but that $13 million is we're getting a good chunk of that savings during this year.

And can you break that down by quarter? Is that possible? I mean of that $13 million, did you see some of that already in the first quarter? And how much was achieved in the second quarter?

Yes. I would say that it's probably more started in the second quarter. So you're going to see it across the second, third and fourth quarters. It's going to be at a higher level in the third and fourth quarter.

Okay. And then in terms of the sequential higher employee expenses, I know that you've gone through these cost reductions, but -- and certainly, production costs were lower than expected. But as a percent of revenues, we saw some sequential increases from what we saw in the first quarter and, of course, year-over-year. And I was just wondering were there some special things in the second quarter under the employee expenses? Or is that a big run rate? How should we look at that line item going forward?

Are you looking at labor, Michael?

Yes. Yes. Yes. I was looking at labor.

So I just want to make sure I’m on the right-- on the labor line.

Yes, I'm sorry.

Yes, I mean some of the increase that we've had of revenue in our contact services business, that is -- I mean their labor is a higher percentage of revenue with some of the other businesses. So you see some increase there, where some of the other businesses may have higher production and distribution costs.

Okay. And then in terms of...

Revenue, it's a revenue mix.

It's just a revenue mix. Okay.

Yes.

And so as you kind of look into the second half, would we look for increases? Because you're indicating that your contact center is being a higher level. So we should actually model into looking at this current run rate or higher? I'm just trying to understand the nature of where that number -- that line item should go.

Yes. I think in Q3, you're going to see about the same percentage. And in Q4, it will probably dip slightly.

And There are no further questions. I'd like to turn the conference back to Mr. Benett for any additional comments.

Perfect. Well, thank you all for joining the call today. We appreciate your time and do stay safe. Thank you.

And that does conclude today's conference. We'd like to thank everyone for their participation. You may now disconnect.