Harte Hanks, Inc. (HHS) Q1 2024 Earnings Report, Transcript and Summary

Greetings. Welcome to the Harte Hanks First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Tom Baumann of FNK IR. You may begin.

Thank you. Hosting the call today are Kirk Davis, Chief Executive Officer; Kelly Waller, Senior Vice President of Sales & Marketing; and David Garrison, Chief Financial Officer. Before we begin, I want to remind participants that during the call, management's prepared remarks may contain forward-looking statements that are subject to risks and uncertainties. Management may also make additional forward-looking statements in response to your questions today. Therefore, the company claims protection under safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from results discussed today and therefore, we will refer you to a more detailed discussion of these risks and uncertainties in the company's filings with the SEC. In addition, any projections as to the company's future performance represented by management include estimates as of today, May 9, 2024, and the company assumes no obligation to update these projections in the future as market conditions change. This webcast and certain financial information provided on the call, including reconciliations of non-GAAP financial measures to comparable GAAP financial measures, are available in the earnings press release that was issued shortly after the market closed. A copy of that press release and other corporate disclosure is available on the Investor Relations section of the Harte Hanks website at hartehanks.com. With that, I would now like to turn the call over to Kirk. Kirk, the call is yours.

Thank you, Tom, and good afternoon, everyone. I appreciate you joining our Q1 2024 earnings conference call. Joining me today from our Chelmsford, Massachusetts office are Kelly Waller, our Senior Vice President of Sales & Marketing; and David Garrison, our Chief Financial Officer. Kelly and David were the first 2 new executive appointments I made last fall. We are fortunate to have assembled an exceptionally strong leadership team. Our team comprises both seasoned executives who have been instrumental to our company for many years and new leaders we've recruited to lead sales, finance and our newly established transformation office led by David Fisher. Later in the call, we will delve into our first quarter performance in much greater detail. However, I want to highlight upfront that on a same-store basis, Q1 was our company's best revenue performance in the past 5 quarters at minus 3.5%. We are confident we are developing a durable growth engine for our company. More broadly, I'd like to review the progress we are making on our Elevate program. Launched last October, Elevate aims to propel us towards greater agility, innovation and organic growth and customer centricity ensuring that we exceed the expectations of our stakeholders. Our Elevate program continues to evolve and revolves around 4 key areas and work streams. The first is our sales and marketing transformation. While there's no finish line in sales, we have nearly completed the restructuring and expansion of our sales and marketing organization. Under the leadership of Kelly Waller, we have centralized our sales organization, undergone significant restaffing and structural changes, expanded our sales force and established strategic channels; all of which are currently fueling strong pipeline growth year-over-year. The caliber of talent we have attracted and the quality and composition of our sales pipeline have outpaced our expectations. Today, Kelly will highlight some of the early successes we have already had. Our increased investment in marketing is also yielding positive outcomes by bolstering our digital presence and creating better and more innovative content to drive website traffic and enhance our social activity, we are effectively boosting brand awareness, traffic and generating more organic leads. The second key area of Project Elevate is our focus on margin expansion and business optimization. We are in the early stages of a multiyear program. As we previously shared, we established a transformation office to thoughtfully execute our plans. We embarked on an effort with the Kearney organization, an acclaimed global consulting firm to catalyze our efforts in pinpointing inefficiencies and cost saving opportunities that would not jeopardize our customer delivery capabilities. This entailed exhaustive benchmarking against industry peers and best practices coupled with a meticulous look at how technological advancements could streamline operations. As a result, we have identified an immediate opportunity to reduce costs by $6 million by year-end with a 2-year forecasted annual savings of $16 million exiting 2025. Our third strategic focus area centers around harnessing artificial intelligence and data driven decision-making. Our foundational efforts here involve rigorous due diligence, experimentation and learning. Through this process, we have pinpointed numerous practical use cases to leverage AI to enhance customer experience, fortify our value proposition and contemplate new business models. Highlighting the pivotal role of partnerships in our evolution, a standout example is our alliance with Amazon. In 2023, as part of our ongoing efforts to modernize and transform, we made a significant investment in our partnership with Amazon Web Services. Presently, we are collaborating with AWS' generative AI experts on initiatives aimed at revolutioning our Customer Care business. These initiatives involve integrating AI and machine learning capabilities to streamline customer issue resolution. We are developing use cases focused on addressing our clients' most intricate challenges. These endeavors will help us in provisioning new business models across different use cases. We also believe these advancements will embolden our efforts to win new business initially for Customer Care, but inevitably throughout all of our services. Our fourth major initiative involves creating a more customer centric culture. In a quest to redefine our operational framework with an unwavering commitment to elevating customer experience, we are investing in a pivotal new role within our executive leadership team, a Chief Customer Officer. This strategic appointment will signify our dedication to placing the customer at the forefront of every decision and action we undertake. As retention plays a pivotal role in our success, having a dedicated focus on enhancing our customer experience will serve to enable net growth more quickly from our sales development efforts. Additionally, emphasizing our commitment to evolving alongside our customers, understanding their journey and prioritizing the voice of the customer will undoubtedly strengthen our position during both the customer acquisition phase, but also in our ability to expand relationships. Especially key, we expect to hire a visionary executive who excels at envisioning and implementing data driven and AI powered solutions to improve our clients' experiences and results and drive growth. This individual will play a pivotal role serving as the heartbeat of our organization, fostering a culture where each team member is deeply committed to delivering unparalleled service to our customers. We expect to name a Chief Customer Officer in early Q3. I would now like to introduce Kelly Waller, our Senior Vice President for Sales & Marketing. Kelly joined Harte Hanks from a $1.8 billion FinTech company where she spearheaded global sales efforts. The remarkable pace and caliber of the sales transformation she is orchestrating is truly exciting and it is energizing our entire company. In my career, I've seldom seen an executive have such a profound impact in such a brief span of time. Kelly will delve into the strategies she has employed and showcase some of the recent victories our team has achieved. Kelly?

Thank you, Kirk. As you know, I'm happy to be here and quite proud of the team that we have built. Our relentless efforts have transformed our sales and marketing division from an underperforming entity into a sales force capable of driving organic growth. Through the implementation of new and pivotal go-to-market strategies, we've created a robust action plan aimed at realizing our growth objectives. Central to our strategy is geographic expansion with a keen focus on better penetrating the European market and venturing into the SMB segment for the first time. We're proud to report significant strides in this direction with the establishment of a dedicated European sales team and the imminent launch of a compelling SMB product pilot beginning next month. This product, a comprehensive suite of B2B marketing and sales services, marks a milestone in our journey towards expansion. Additionally, we have fortified our sales and marketing teams by introducing 2 new units, the partner sales team and an inside sales team, to complement our existing field sales team and client services team. By augmenting our workforce and bolstering our marketing campaigns, particularly in digital channels such as SEO, Google, social media and personalized events, we have achieved strong pipeline growth over the last couple of months. Obviously this leads to our focus on conversions in which our sales organization is highly incentivized to achieve. The growth in our pipeline is beginning to yield results, which we anticipate will scale. We are having success in expanding our relationship with existing customers. Taken together, we believe this is the outset of our upward ascent. So I'd like to share some examples of the early successes we're seeing in both new customer acquisition and expansion. In our Fulfillment & Logistics segment led by Patrick O'Brien, we are progressing well as we expand our partnerships with existing clients, which is a major opportunity for us. For example, we have an established robust partnership with a prominent agency through our kitting capabilities. Our specialization in kitting, particularly for retail and e-commerce, involves bundling related products into packages or kits for distribution as a unified entity. This is an exciting and expanding service we offer. Our kitting capability is in demand and we expect continued growth especially in the second half of the year. The growth should compound nicely. Also within our Fulfillment & Logistics segment, we have secured a new client through our established partnership with a prominent procurement and creative production firm. This partnership has connected us with 1 of the world's most innovative pharmaceutical companies entrusting us with the delivery of B2B and B2C literature and samples as well as providing kitting services. These services are set to commence, which bodes well for the second half of the year. Additionally, another opportunity arose from our longstanding quarter century partnership with a leading medical device and health care company. This partnership has presented an opportunity for us to step into the fulfillment arena with the client effectively serving as its e-commerce hub. Our onboarding process is underway and we will be fully operational by Q3. Shifting focus to Logistics. As a preferred logistics partner for a rapidly expanding printing company in the Midwest, we are privileged to partner alongside them as they expand. Alongside them, we recently onboarded a national grocery client. Our intensified digital marketing efforts have yielded many leads and results already in our Customer Care segment, which is led by Ben Chacko. We have attracted a reputable managed health care system client from California seeking assistance during the open enrollment period. This opportunity has proved beneficial in Q2 and presents additional growth opportunities. Furthermore, our Customer Care segment has successfully secured a new client that specializes in technology driven vehicle safety devices. Under this collaboration, customers seeking support for the product will be direct to our dedicated Harte Hanks Customer Care team. This new addition to our client portfolio is set to commence operations with Harte Hanks soon transitioning from a self-managed team to our specialized Customer Care services. In Marketing Services, 1 of our existing clients, a global leader in the beauty industry has engaged us to expand marketing support to include a well-established moisturizer brand within its consumer products division. Also in Marketing Services, with a tie-in with our Sales Services division, we are thrilled to be expanding our relationship with a leading international travel agency who has entrusted our team to help them engage property owners and consumers with their platform and is now expanding utilization of our services for a new division focused on reactivating their B2B database and intensifying new prospects in the U.S. The project is expected to roll out in the coming months. Lastly, I want to highlight a client testimonial we received that opens new opportunities for Harte Hanks. Recently our strategy team played a pivotal role in aiding a health insurance client to chart a strategy to overcome longstanding perceptions about its offering and brand. The response we received from the client following the conclusion of the initial engagement inspired everybody involved. The client wrote, we are destined to do something great with this. Thank you all for your dedication to this process. What we produce here will inspire thousands of employees and nearly a million members. Powerful stuff. As a result, we are now expanding our work with this client. I'm sure you can appreciate how this type of feedback motivates us all. There are additional wins of course, but we are anticipating much more new business as the year progresses. I'd like to conclude my remarks by sharing some personal reflections on my journey with our company thus far. What's truly thrilling to me is the remarkable transformation we have accomplished in standing up a reimagined and expanded sales and marketing organization. We successfully revitalized and expanded our team, welcoming many talented individuals in key sales, marketing, partnership and training roles. We're launching our first Harte Hanks Global Marketing and Sales Services Conference Enable 360 in late June in London. It's truly an exciting time to be part of the organization and thank you. I'll pass the call back to Kirk.

Thank you, Kelly. In addition to strategies Kelly outlined, we also have reinvigorated another sales channel in our company to cultivate new clients. In December 2022, our company acquired a premium sales enablement agency, which brought us experience and capabilities to enable clients to pilot outbound sales programs to forge new customer relationships among other services. In late 2023, we made additional strategic investments in this business that spanned leadership, expanding our sales team and adding training resources. This commitment coincided with the onboarding of a new global FinTech client. Presently, we are deeply immersed in training our sales force on the client's offerings, pricing structures and packaging options. Our collaborative efforts aim to ensure a successful pilot with the client. Reflecting on our first quarter, we are excited about our progress. And I want to reiterate in Q1, we had our best same-store comparison to prior year that we have reported in the past 5 quarters. I joined Harte Hanks in late June of last year. During my first conference call in August, I related that our revenue in Q3 and Q4 of 2023 would approximate what we reported in Q2. Taken together, Q3 and Q4 revenue surpassed that expectation, which was gratifying only from the perspective that we understood our trend and risk factors at the time. We had not yet hired Kelly so the transformative changes we knew were needed were not yet in scope. We understood the transformation of our sales and marketing organization would require some time. We wanted to do it right and we have. Fast forward we have now progressed to where we are nurturing a notably stronger pipeline, already negotiating some deals and anticipating momentum will continue building as we progress through the remainder of 2024. I would now like to turn the call over to David Garrison, our CFO. Thereafter, I have some closing remarks. And then David and I will be happy to take your questions. David?

Thank you, Kirk. I will now review the first quarter consolidated results, including revenues for each business segment. Please note that starting in 2024, we begin reporting 4 segments instead of 3. The newest segment, as discussed in our 10-K, will be referred to as Sales Services. It relates to the Inside Out acquisition made in 2022 and has been separated from the Customer Care segment. First quarter revenues were $45.4 million a decline of 3.5% compared to $47.1 million for the first quarter in 2023. Growth in the Customer Care and Sales Services segment was offset by the declines in the 2 other segments. Revenues in the Customer Care segment were $12.4 million in the first quarter of 2024 compared to $11.6 million in the same quarter prior year. Sales Services increased to $4.7 million compared to $2.8 million in the first quarter of 2023. Growth in these 2 segments were the result of expansion with existing clients and the first quarter of a new FinTech client in Sales Services. The Marketing Service segment revenues fell to $8.9 million in Q1 of 2024 compared to $11.2 million in the prior year. Customer budget reductions and a program conclusion account for the decrease in this segment year-over-year. Fulfillment & Logistics revenues were $19.4 million in the first quarter of 2024 compared to $21.5 million in the prior year. The decrease in revenue is related to cost compression in the logistics space as costs shrink from reductions in overall market demand. Operating expenses in Q1 were $45.1 million including restructuring expenses of $0.9 million compared to $46.1 million in the same period of 2023. The commencement of Project Elevate resulted in $0.9 million of restructuring expenses for this quarter. This expenditure related to staffing reductions completed in the first quarter leading to a $2.3 million annualized expense reduction that will improve EBITDA. We expect to incur additional expenses estimated at $2.5 million in executing Project Elevate during 2024. The operating income in Q1 2024 was $0.4 million compared to the operating income of $1.1 million in the first quarter of 2023. After adjusting for stock compensation, severance and restructuring expenses; the adjusted operating income in the first quarter of 2024 is $1.8 million compared to $1.6 million in the first quarter of 2023. The adjusted operating margin is 3.9% in Q1 2024 compared to 3.4% in the same quarter in 2023. The first quarter of 2024 had an EBITDA of $1.4 million compared to an EBITDA of $2.1 million in 2023. When adjusting for stock compensation, severance and restructuring expenses, the adjusted EBITDA is $2.8 million for Q1 of 2024 and $2.7 million for the same period in 2023. Turning to the balance sheet. As of March 31, 2024 we had cash and cash equivalents of $11.5 million compared to $18.4 million at the end of 2023. Our current $25 million line of credit, which was extended until June of 2025, has not been drawn against and the company has no debt. Target to terminate Pension 1 during June continues without any obstacles. As a reminder, the long-term pension liability on our balance sheet is $28.6 million as the termination funding requirement is listed as another current liability. The pension termination contribution of $7.5 million will be made in June. Thank you for your support. And I'd like to turn the call back over to Kirk.

Thank you, David. In closing, I'd like to underscore our unwavering focus on our customers in their journey. Through extensive engagement with both our customers and prospective clients, I've had the privilege of gaining profound insights into their needs and aspirations. Our aim is to translate these insights into tangible enhancements across our organizational framework, incentive plans and by improving the caliber of thought leadership we offer. Through in-depth dialogs with employees and clientele alike, we have identified compelling opportunities to bolster our customer acquisition endeavors and fortify our frontline teams in their mission to elevate the customer experience. It will be an exciting milestone for Harte Hanks to appoint a Chief Customer Officer, which we believe will be a strong brand differentiator. As we progress through this transformative period, I'm inspired by the enthusiasm and dedication demonstrated by our employees. While we deeply value our century old legacy, we're equally thrilled about forging a new chapter for Harte Hanks, one that's responsive to the changing business environment and focused on providing outstanding customer experiences. We thank you for your ongoing support. We look forward to updating you on our progress in August. Thank you very much. And at this time, we would be happy to take your questions.

[Operator Instructions] Our first questioner is Michael Kupinski with NOBLE Capital Markets.

Congratulations on getting this company on track. Couple of questions. In terms of your European expansion, where are those operations located and can you kind of give us some sense of is the European operations profitable at this point or when do you anticipate that they'll swing towards contribution margin going forward?

So our beachhead in Europe is Portugal and we are ramping up the team there as we speak. And I'm sorry, what was the second part of your question?

I was just wondering if it's profitable already or when do you anticipate that we'll start to see contribution margin coming from your European operations?

Yes. So actually we're extremely proud of our European operations. From a delivery perspective, we are outperforming customer expectations. It's a profitable and growing geo for our company and we're very proud of the team that we have there. And I would expect that in the third quarter our additional sales efforts in Europe will start to be fruitful. We are developing a strong international pipeline at the same time we're doing as well as we are in the United States.

And then thanks for breaking out the Inside Out acquisition into your Sales Service segment. Can you kind of give us a sense of what you anticipate this segment in terms of the growth potential? What type of revenues that you can expect we should look for here in terms of revenue growth and then also margin potential?

Sure. So I think this will be a margin business that will be around 30% to 35%. What we're doing right now is focusing intensely on onboarding and coming up the curve for a large client that we're very, very proud to have. It's a client profile that if we do an exceptional job has the capacity to invest more with us in the years to come. So it's a thrilling opportunity. I would also say that Kelly and Ron Lee, our lead in our inside sales or Sales Services business, have done some great work on a go-to-market strategy that is really going to be targeting the B2B marketplace in software and tech in particular, which is an area that we feel we can excel in delivery through our Sales Services division. So we actually will be launching this program in the next few weeks and I believe in August, we can give an update. But it's a business that we think out over the next couple of years could certainly translate to $9 million of new growth and that's apart from our regular pipeline sales efforts, which our Sales Services division is very much poised to benefit from. In fact right now when we think about our pipeline, there's a very good distribution between Marketing Services, Customer Care, Sales Services and Fulfillment & Logistics. So it's just as we would want to see it because as we bring in new business, it's nice that it's evenly distributed across the company because it emboldens our execution ability as opposed to if we had a super large new business buildup in 1 division or another and facing a backlog challenge. So so far, we're really very pleased with how Sales Services is doing and the new leadership there that Ron brings, but just also how well positioned we are to onboard and effectively deliver across all 4 segments.

That's terrific. And in the Logistics division and pardon me if I got this incorrect, but I thought you meant you were getting a grocery store distribution. And I know that if I recall, you were seeking FDA approval to be able to provide services for food items in your distribution. Is that what you were talking about there or if you can just kind of add some color on that?

Yes. We have that capability already in our Fulfillment business, which is located in Kansas City. The reference that we made to the grocer comes with an emerging and fabulous relationship we have with a successful printing company that we've developed a good partnership with. And so as they secure large new printing clients where there's logistics arm for them and make sure that product gets delivered to many different destinations.

Got you. And so in terms of your distribution for food items, have you been able to capitalize on that yet?

I just want to be clear. So, we definitely are capitalizing on distribution of products across the pharmaceutical complex. We're not doing a great deal in grocery right now, but we do have an FDA approved facility in Kansas City. I'm not sure what the capabilities are for how many different product lines it could handle, but for example we've handled baby formula efficiently out of that complex. So I could follow up with you on that. But I think right now it is well suited and outfitted to do food product distribution. We don't have a great deal of it right now, but we're growing in numerous other areas in that complex.

Got you. One final question. You indicated in the past you were seeking partnerships and I know you spent a lot of time talking about how you've improved upon your sales strategy and your go-to-market products and so forth. I was just wondering in terms of partnerships that you highlighted in your last call in terms of improving your go-to-market product suite. Can you kind of give us an update on how those are performing? I know that you spend a little time on some of those, but I was just wondering specifically if you can point to specific partnerships that you developed that might be start to contribute as we go into the Q2 and Q3?

Yes. I think in August we'll be able to share some outcomes with our partnership strategy. In fact we just had a very, very deep dive this past week in our senior leadership team meeting where our Head of Partnerships walked us through at least a dozen. But one that I'm particularly excited about that looks like it's getting out of the gate well is our relationship with a company that does an exceedingly large amount of work in helping companies find good companies to handle customer care. And so this is an organization that does a strong business in that regard and we've been working with them for 3 or 4 months to obviously prove our abilities and capabilities and the geos that we can service effectively. And just this week we got our first opportunity with that company, but we expect that to be a very strong pipeline builder for us. And I'll also harken back to the very first partnership we established within my first 2 months here, which is with a business development company that enables us to be in front of Fortune 1000 type companies on a 2x to 3x a month basis and we've now developed a number of new customers through that pipeline. But we are looking at other partnerships particularly in the care area and I do believe we'll have some positive news to share on our next call in that respect. And really just to be completely transparent here, we have over a dozen conversations in scope right now to build this network and once we accomplish that, that will serve as a multiplier effect for us in addition to our team's acquisition efforts. So it's an important channel. I've commented previously that B2B companies can typically see 30% of their revenue coming from this source. It's de minimis for us today, but we are poised to make that a strong contributor over the next 6 months.

[Operator Instructions] We have reached the end of our question-and-answer session today and with it, the conclusion of today's conference call. You may disconnect your lines at any time and thank you for your participation.