Harte Hanks, Inc. (HHS) Q2 2024 Earnings Report, Transcript and Summary

Greetings. Welcome to the Harte Hanks Second 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; 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 Securities and Exchange Commission. In addition, any projections as to the company’s future performance represented by management may include estimates as of today, August 8, 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. Welcome to our Q2 2024 earnings conference call. Last year’s Q2 earnings call was my first since joining Harte Hanks. Although I had only been with the company for 7 weeks, I seized the opportunity to outline my vision for revitalizing our business and shared specific actions we needed to take. Now, a year later, I would like to review the commitments we made and the progress we have achieved. 1 year ago, revenues were declining, and there was not a prevailing strategy to expect otherwise. All we could commit to was that we believed the revenue we reported last year in Q2 2023 would serve as a baseline for Q3 and Q4, which we went on to modestly outperform. More importantly, we had 4 months remaining in 2023 to address the state of our marketing and sales organization. And I knew already that the organization needed improving. Leadership is key, and in my assessment, it was clear that we first needed to recruit a new corporate executive to lead sales and marketing. Further, we needed to empower that individual by centralizing oversight of our sales organization rather than having sales staff reporting into our business units. The legacy structure resulted in a siloed approach to selling and an informal process for managing and evaluating the performance of staff. Our structure made cross selling more difficult. In contrast, today our sales staff works closely with our business units leaders. We have developed company-wide standards for what we expect performance-wise. Additionally today, our corporate SVP of Sales is directly involved in helping to close new business across all of Harte Hanks. Our previous structure also lacked essential sales channel experts and roles crucial for business development, expanding partnerships and enhancing our international sales presence. We needed to modernize how we approached and leveraged industry conferences. Finally, our digital strategy needed optimization with higher quality original content. Now 1 year later, we can confidently review our achievements and more accurately project their impact rather than just discussing our plans. In November, we welcomed Kelly Waller as our new Corporate SVP of Sales and Marketing. She spearheaded a comprehensive redesign and expansion of our sales and marketing organization. Last quarter, we featured Kelly on this call to highlight many early new account wins that will contribute to revenue growth as the year progresses. Last August, I discussed our engagement with a business development company I had previously collaborated with to initiate opportunity discussions for us, targeting both Fortune 500 firms and well-funded startups. In late July, we closed a significant new marketing services account that originated from this partnership. After 10 months of collaborating with this prospective client to formalize our relationship, we have done so successfully. We will begin work later this month for one of the world’s leading global automotive manufacturers with annual revenues exceeding $170 billion. We are extremely excited about this new opportunity. Partnerships are a key contributor in building B2B revenues, which is why we now focus on this channel. And again, it is why we now have a new logo opportunity with a Top 50 Fortune company. This recent win, which took 10 months of focus to bring to fruition, underscores the dedication we bring to every opportunity. Although this project exceeded our normal sales cycle, it is an example of why some new clients have extended sales cycles. The complexity we can encounter in navigating compliance and legal hurdles, when applicable, is counterbalanced by the more turnkey opportunities we create with existing customers. Turning to our pipeline. Our sales pipeline continues to grow and is well ahead of where it was when I arrived last year. That’s a healthy indicator for an improving revenue backdrop. In August last year, I shared my excitement about the potential of a small tuck-in acquisition our company completed in December 2022. When I joined, it was clear we were on track to experience a significant decline in our first year ownership, 2023. However, through close collaboration with the former owner of the business and the strategic hiring of a new SVP of Sales Services last November, we achieved notable growth this year. We have several pilot programs in place now and expect several will carry over into 2025. Additionally, we recently introduced a product offering for small and medium sized businesses called Demand Generation in a Box. This innovative product, a blend of our existing services tailored to SMBs, was recently launched at our inaugural Harte Hanks ENABLE360 conference in London. One benefit of this product is that we can activate the buy for a customer faster than most of our other services. Reflecting on other key developments over the past year, I am energized by our senior leadership team. We have successfully integrated seasoned Harte Hanks executives with new leaders in corporate finance, sales marketing, sales services and our transformation office. Last quarter, I announced our intention to recruit a visionary executive to develop and implement data-driven, artificial intelligence-powered solutions aimed at enhancing client experiences, driving growth and reinforcing customer retention. Today, I am thrilled to introduce that we have hired our first Chief Customer and Data Officer. I will provide more details on this exciting appointment later in the call. As you may remember, in November 2023, we introduced Project Elevate to our employees and investors, highlighting a company-wide initiative we were undertaking to achieve many objectives. Lowering operating costs to fund growth was a key component, but we also envisioned reengineering workflows, assessing resource allocation, establishing a culture of continuous improvement, instilling greater accountability, evaluating purchasing practices, better understanding customer profitability and proactively investing in technology to expand our capabilities and efficiency. Partnered with Kearney, a renowned global consultancy with which I have had significant success in the past, a huge shout out to our executive team for their dedication to the 4-month program. Consequently, we have developed a comprehensive 2-year road map to reduce costs tied directly to specific initiatives. Our success in executing these cost programs is providing us with the flexibility to invest where we see opportunities and in activating new customers while also focusing on margin improvement. We are also making strategic investments beyond our sales and marketing organization to facilitate growth and improve our competitiveness. A notable example is how we have been investing in our Fulfillment segment. In the spring, we embarked on a migration to a best-in-class warehouse and order technology suit – suite, which will avail our company and customers of many benefits as we achieve various milestones. Some of the benefits include a modern modular infrastructure that empowers us to streamline and expedite integrations with our clients, thereby reducing the implementation cycle and accelerating the time to market for their products. Continuing our tradition of exceeding customer expectations, our technology improvements will enable us to deliver an array of options, including flexible order management and storefront feature sets as an a la carte scaled offering, as well as custom development and consultation for unique requirements. Enhanced client inventory visibility throughout the product life cycle and revamped multi-site inventory capabilities for our e-commerce customers. Finally, our cloud-based infrastructure is designed to seamlessly scale, unlocking new possibilities for both future acquisitions and organic expansion. This flexible, rapidly deployable solution ensures that we can swiftly adapt to new locations and opportunities as they arise. Turning to our longstanding fulfillment facility in East Bridgewater, Massachusetts, which we have utilized for 25 years, both our customers and valued employees are witnessing transformative changes within the facility, laying the foundation for a new era of operational excellence. Coinciding with the extension of our lease, we repurposed approximately 50,000 square feet of previously suboptimal space, repurposing it for expanded production and additional storage. Moreover, we are undertaking a major transformation in one of our largest production areas there, raising the roof to double our capacity in a portion of the facility, which affects about 30% of our entire space. Additionally, we have launched a beta version of a standalone microsite for our Fulfillment & Logistics segment, designed to enhance our discoverability online and display our full range of capabilities and competitive advantages. Our sales and marketing strategies for next year will be augmented to seize on these opportunities, ensuring that we remain a leader in delivering value and innovation to our clients. We are positioning our company to fully capitalize on the growth opportunities in the direct-to-consumer segment in 2025, which as we all recognize as consumers ourselves, is rapidly growing. To sum it up, we are increasingly encouraged by the progress we are seeing to revitalize our business. Before I conclude my opening remarks, I want to emphasize a core commitment shared by our entire management team and Board. For over a century, Harte Hanks has been a leader in customer service, partnering with the world’s most ambitious companies. As we continue to prioritize our customers and drive their success in an ever-evolving marketplace, we are confidently setting the stage for the next decade of growth and achievement. This commitment led us to hire our first Chief Customer and Data Officer, taking a significant step towards revitalizing and realizing our vision for the future. As I have assessed our company’s evolution in customer service, it has become clear that we must transcend traditional customer service and strive to embody true customer-centric leadership. This means not just meeting the needs of our customers, but anticipating them, guiding them through their journey and setting new standards for customer experience. We all understand that data, technology and artificial intelligence are pivotal in this transformation. Leveraging advanced analytics and artificial intelligence, we can gain deeper insights into customer behavior, preferences and needs. This will allow us to create highly personalized and seamless experiences, forging stronger connections and fostering greater loyalty. By harnessing the power of these innovative technologies, we can stay ahead of the curve, continuously improving and innovating to lead our customers into the future. These ambitions require that we strengthen and embolden our customer organization. We are pleased to announce that Sharona Sankar-King has been named Chief Customer and Data Officer for Harte Hanks effective September 4. The Sharona joins us from Bain & Company, where she excelled as a partner and a key member in their customer, advanced analytics and financial service practices. With over 3 decades of experience in the analytics domain, Sharona is a renowned expert in customer value optimization and generative AI value creation. Her deep knowledge and strategic acumen will be pivotal in advancing our customer-centric initiatives. Sharona’s impressive career includes executive roles at top tier agencies and data companies, such as Executive Vice President and Head of Marketing Science at BBDO, which is now part of Omnicom, and Managing Partner, North American lead for digital media optimization and advanced analytics at MEC, which is now part of WPP. Her academic credentials are equally stellar with a master’s degree in applied statistics from Columbia University and a BS in quantitative psychology from Penn State. Sharona also holds certifications in chief data officer from Carnegie Mellon University, digital marketing strategies from Kellogg, and Python programming from the University of Michigan. Additionally, she has received advanced training in large language models and generative AI from Bain Advanced Analytics and is pursuing certification and gen AI development for business. We are excited about Sharona’s appointment and confident her expertise will propel our company and our customers toward enhanced business insights and outcomes through the power of generative AI, data and analytics. Our leadership is dedicated to making our customers’ journey with us exciting, rewarding and next level. I would now like to turn the call over to David Garrison, our Chief Financial Officer. 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 second quarter consolidated results, including revenues from each business segment. As a reminder, starting in 2024, we began reporting four segments instead of three. The additional segment is referred to as Sales Services and relates to the InsideOut acquisition made in 2022. Second quarter revenues were $45 million down by 5.7% compared to $47.8 million for the second quarter of 2023. Growth in Fulfillment & Logistics and Sales Services segments was offset by declines in the other two segments. Revenues in the Customer Care segment were $12.4 million in the second quarter of 2024 compared to $14.9 million in the same quarter prior year. This was related to the timing between quarters of a surge in volume with a large customer. Sales Services increased to $4.4 million compared to $2.3 million in the second quarter of 2023. The increase in volume from a large fintech client was the majority of the increase. The Marketing Services segment revenues fell to $7.7 million in the second quarter of 2024 compared to $10.9 million in the prior year. Customer budget reductions and the end of specific programs account for the decrease in this segment year-over-year. Fulfillment & Logistics revenues were $20.5 million in the second quarter of 2024 compared to $19.6 million in the prior year. The increases were the result of new and expanded programs with existing customers. Operating expenses in Q2 were $43.7 million, including restructuring expenses of $427,000 compared to $46.1 million in the same period in 2023. The operating income in Q2 2024 was $1.4 million compared to the operating income of $1.7 million in the second quarter of 2023. When adjusting for stock compensation, severance and restructuring expenses, the adjusted operating income in the second quarter of 2024 is $2.5 million compared to $3.4 million in Q2 of 2023. The adjusted operating margin is 5.6% in Q2 2024 compared to 7% in the same period in 2023. The second quarter of 2024 had an EBITDA of $2.4 million compared to an EBITDA of $2.7 million in the same period in 2023. When adjusting for stock compensation, severance and restructuring expenses the adjusted EBITDA is $3.6 million for 2024 and $4.4 million for the same period in 2023. Turning to the balance sheet. As of June 30, 2024, we had cash and cash equivalents of $11 million compared to $18 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. Pension Plan I was terminated as planned during June of 2024. Let’s walk through the timeline of the progress to terminate the pension and its impact on our financial statements. In June, the assets of the pension were liquidated into cash in order to purchase the equivalent annuity product from an insurance company for the pension participants. This product would contractually replace the company’s obligations related to the pension and relieve our respective liability. For the purchase to occur, the pension assets required an additional cash contribution from the company of $6.1 million. This contribution allowed for the formal termination of the pension and its obligations as of June 30, 2024. The annuity provider requires 60 days to onboard the pension participants. During the third quarter, the company will contribute an additional $1.3 million for the monthly pension payments and final government filings associated with the termination process. The financial impact to the second quarter income statement is dramatic. Pension accounting requires the reversal of the equity balance of the accumulated other comprehensive income associated with Pension Plan I. This results in a pension charge of $38.2 million. This charge provides a tax benefit of $10.1 million, resulting in a net loss of $27.8 million for the quarter. It is important to note that without the pension charge and tax benefit the company would have had a net income of $300,000. Thank you for your continued support. And I’ll turn the call back to Kirk.

Thanks, Dave. Before we move to the Q&A session, I want to emphasize that Harte Hanks is amid an exciting turnaround. Our sales transformation is complete, and we are embarking on a new era of growth and success. With the recent appointment of our Chief Customer and Data Officer, our senior management team is now fully assembled and committed to driving shareholder value. The cost objective of our Elevate program is on track. Our sales pipeline well exceeds what I inherited and continues to grow. Additionally, we successfully terminated Pension Plan 1 in June, fulfilling our commitments in this area, as David outlined. We closed the quarter with $11 million in cash and cash equivalents, and again, we have no debt. Clearly, our year-to-date revenue performance does not mirror the promising outlook we hold for our business. It is important to recognize that we are in the final stages of overcoming the challenges posed with an outdated approach to scaling. However, we are confident in our strategy and excited about the future. Dave and I are happy to answer your questions. Thank you very much.

Thank you. [Operator Instructions] And the first question today is coming from Michael Kupinski from NOBLE Capital Markets. Michael, your line is live. Please proceed.

Good afternoon, everyone. Thanks for taking my questions. Kirk, as you mentioned, you recently centralized your sales staff and reporting structure and restaffed and expanded the staff. When do you think that this new structure and sales expansion will be kind of hitting its stride in terms of accelerating revenue generation and possibly improve efficiency? I was just wondering if you can just add some more color there.

Sure, I’m happy to. And nice to hear from you. I think at this point, our pipeline is at a really strong level compared to prior year. We’re learning a great deal and how effective our go-to-market strategy is. We continue to make tweaks. We’re optimistic as we go through the balance of the year that we’ll continue to see improvements in our conversion rates, and we’ll see more efficiency in our sales cycle. We’re anxious to integrate the role of our new Chief Customer and Data Officer into conversations that we’re having with clients, because it’s becoming increasingly apparent to us that there are avenues we could be pursuing that will certainly enhance our prospects for closing more business. There’s great interest right now in data. There’s great interest in analytics. There’s great interest in gen AI. And I think better – being better able to articulate the unique value we bring will be very, very helpful. So I would say our organic lead generation efforts are an area we still want to expand more. And I’d say that we have a promising outlook as we proceed through the balance of the year and especially as we think about 2025. So we’re really pleased with the way the organization has come together. We’ve retained all of the folks we initially hired but made some selective choices to change out staff, which is not uncommon when you build a new organization, and it’s very performance based. We definitely are focused more on generating our own leads. And so we’re really deeply moving the needle in our digital presence because that’s where we have the best chances for conversion. And I say that with respect to depressing our involvement or reliance on RFP processes and such. We have such a good value proposition, which I see only getting stronger, and that we want to generate more of our own leads and that’s happening. And so I think this is going to prove to be a game-changing transformation that we’ve accomplished here. And I think the evidence of that will be playing out the balance of the year and into next year.

Thanks, Kirk. And then I know that on top of everyone’s mind is the economy. And I was just wondering if you look at this quarter, I know some of the issues affecting this quarter were kind of already in play in the quarter. But I was just wondering if any of what we saw in terms of weakness in some of your segments were related to the economy. And if you think, as we kind of see the weakening economy in the second half here, was wondering if you can kind of give us your thoughts on how your business will fare in kind of more of a lackluster economic scenario that we might have.

Yes. Thanks for that. I’m very aware. And I fully appreciate what a slowing economy means. I’ve run companies during some of the most notable slumps in recent decades. So very attuned to that. Frankly, there’s so much untapped potential here. It’s not a prevailing concern of mine right now. I think we need to hustle and obviously start closing on many of the opportunities in our pipeline. We’re aware of how our customers can sort of elect lower cost alternatives, if that’s important to their business. We’ve seen labor arbitrage a factor in customer care. Clearly, companies can dial back marketing investments if they’re concerned and managing earnings as such. However, that’s rarely a good idea. And in some cases, maybe to fund more investments in technology. It certainly is a year for that. But at this moment, honestly, I believe our potential to organically attract business far outweighs any economic concerns at the present time. We’re really positioned on both sides of the ledger. We’ve talked about Project Elevate. So we are equally focused on costs that aren’t going to be limiting factors toward our growth programs. We think our fulfillment business is positioned exceedingly well as we head into the second half of the year. Much of that work, whether it’s for back-to-school, even doing kitting projects right now for major retailers is really a back-to-school and almost holiday story as it stands here right now. So that’s not to say that 2025 can’t hold surprises, but we have good visibility into the second half of the year. When I think about the pharma work that we do in the company, it’s primarily necessities related. And we’re actually currently pursuing some attractive additional pharma opportunities. I think about all of our high volumes of digital printing and mailings, that’s driven by regulatory requirements. That’s must-do work late in the second half. So overall, I feel we’re in an envious position to be as clear as a company can be on what we need to do and get done. And we’re still feeling positive about the outlook, and at this moment, wouldn’t blame anything on the economy.

Kirk, I just have two more questions. You mentioned about the visibility into the second half. I was wondering if you can kind of give us your thoughts. And certainly, we know that customers can cancel or postpone campaigns and things like that. But do you anticipate that you’ll see sequential quarterly improvement in revenues in the second half? Or do you think that that’s more 2025 situation?

The unpredictability in that is really in the sales cycle. And when we make a call on assurances of revenue growth in Q3 or Q4, it has to be that the stage we’re in across our sales cycle, particularly the contracting and legal stage, is where we have the see-through. I would say at this point, it’s too early to make a call. We’ll do another call obviously in November. And I expect our visibility obviously at that stage will be vastly enhanced. So we have a lot of activity, and we have a very robust pipeline, but I would want to stop short right now of making a call on the quarter specifically. Typically, we have better seasonality in Q4. Right now, I would say apart from the seasonality, our new business outlook is stronger there as well. So we’ll see, but we’re quite optimistic.

My final question is about your marketing services. Obviously, this has been probably your more problematic segment. I was just wondering, you had – you faced some unique challenges there. I was wondering if you can just kind of give us your thoughts in terms of the strategy and how you’re approaching kind of getting that back on a revenue growth trajectory. And then just was wondering if you can just quickly talk a little bit about your expansion plans internationally as well. And that’s all I have.

Sure. So agree. Marketing services has been a weakness. And that really originates back to last spring and summer. And we did see some customers leave, and that – and they were setbacks morale-wise and obviously economically. And we’ve been retooling since. But I would tell you that I am still quite optimistic about that segment. It’s going to be a major focal point in 2025. I’m very excited that Sharona, I think, will bring a lot of value and concentration to this segment early on as well. I think we’re going to bolster our sales support for marketing services in 2025, and we’ll onboard one or two more resources for that in late Q3. I think there are some new services that we could look at packaging in our marketing services business that we’re hearing from customers that they have a great interest in. Those examples would be in research, in data and tech services. And those are not services today, with the exception of data, that we aggressively market. But even data isn’t really today involving us getting involved in anybody’s data practice or helping them improve their data practice. It’s really the sale of data that we really leverage today. So I think when I talk about customer leadership and customer retention, which obviously takes some of the pressure off how much new business we need to generate, it’s in these areas. And marketing today is becoming increasingly more marketing science oriented. And I think you can see we’re bolstering up our resources there. We will name somebody to lead that division for us in 2025. We’ve been doing some restructuring in there right now. We’ve been analyzing the capability gaps that we have to be more competitive. Although that notwithstanding, the large customer that we just signed was in our Marketing Services segment, and that customer will begin in the next few weeks. So, got it. It has been a weakness here. It’s an area where I’ve had a deep experience myself in my career building digital agencies and such. So I’m very committed to the segment. And I think the problems were internal, and we’ll have them fixed and it will be a strong contributor in 2025. And then on the international side, the real gap there is that we have opportunities to expand U.S.-based clients into Europe. We have the opportunity to do more lead gen work specifically in Europe. We’ve got a couple of staffers there who are outstanding. But that division and the brilliant way that they execute warrants more sales pressure because we execute exceedingly well in Europe right now. We have great teams. Obviously, it’s a smaller part of our company than our domestic operations, but we think we can be very, very successful there. We have a strong team. We’ve started building really strong leads. And so stay tuned. But I think Europe specifically will be a growth driver for us in 2025.

That’s all I have. Thank you, guys. Good luck to you.

Yes. Thanks so much. I appreciate it.

Thank you. And there are no further questions in queue at this time. This does conclude today’s conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.