Earnings Labs

Harte Hanks, Inc. (HHS)

Q1 2024 Earnings Call· Thu, May 9, 2024

$2.86

+3.25%

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Transcript

Operator

Operator

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.

Tom Baumann

Analyst

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.

Kirk Davis

Analyst

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.…

Kelly Waller

Analyst

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…

Kirk Davis

Analyst

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?

David Garrison

Analyst

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…

Kirk Davis

Analyst

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

Operator

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

Michael Kupinski

Analyst

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?

Kirk Davis

Analyst

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?

Michael Kupinski

Analyst

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?

Kirk Davis

Analyst

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.

Michael Kupinski

Analyst

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?

Kirk Davis

Analyst

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.

Michael Kupinski

Analyst

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?

Kirk Davis

Analyst

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.

Michael Kupinski

Analyst

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

Kirk Davis

Analyst

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.

Michael Kupinski

Analyst

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?

Kirk Davis

Analyst

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

Operator

[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.