Harte Hanks, Inc.
Q1 2021 Earnings Call Transcript

Published: 19 May 2021

[Operator:]

Good day, and welcome to Harte Hanks First Quarter 2021 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.

[Sheila Ennis:]

Thank you, and good afternoon, everyone. Thanks for joining us. Hosting the call today are Andrew Benett, Executive Chairman and CEO of Harte Hanks; and Lauri Kearnes, CFO. Before I begin, let me remind you 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 forecasts for the markets they serve; expectations related to cost-saving measures and the availability of tax refunds and other statements that are not historical facts.

[Andrew Benett:]

Thank you, Sheila. I want to start by thanking our team for their continued hard work on behalf of all of our clients. This past year’s challenges have forced us all to navigate our daily lives with both grace and grid. And I want to express my sincere appreciation for our Harte Hanks employees who have approached each day with just that. I hope that everyone on the call has similarly managed through the year and could take comfort that we’re hopefully nearing the end of the tunnel. We had a strong first quarter. We showed year-over-year improvements in the business and delivered further cost reductions and streamlining of the organization. I look forward to walking you through the progress we’ve made, and then Lauri will take you through the detailed financials. As we shared last quarter, we’ve organized the company into three operating segments that each compete in large addressable markets. Customer Care, focused on tech-directed omnichannel customer care; Fulfillment & Logistics, focused on B2B and B2C e-commerce fulfillment services; and Marketing Services, focused on CRM services. Our segment reporting is designed to provide transparency into the company’s financials and visibility into the value and dynamics of each business. I’d like to focus on three indicators of our progress

[Lauri Kearnes:]

Thank you, Andrew. We achieved our first quarter of year-over-year revenue growth since 2014. But just as important, we have steadily reduced our operating expenses, and the March quarter was our fourth quarter in a row of positive adjusted EBITDA with $2.2 million posted. While the potential effects of the pandemic continue to be unpredictable, we are encouraged by new business wins and growth in areas where we have invested, including our pharmaceutical and consumer packaged goods verticals. We are continuing to focus on streamlining and optimizing the business to meet the needs of the market today, and we are encouraged by our results. I’d now like to walk through the details in more – the results in more detail. First quarter revenue was $43.8 million, down $3.2 million sequentially from the fourth quarter. This is up, however, from $40.5 million in the first quarter last year for a year-over-year revenue increase of $3.4 million or 8%. Revenue grew across our Customer Care segment in the quarter. Our Customer Care segment was up $8 million year-over-year or 100% as a result of several large projects that, as Andrew noted, we expect to wind down over the course of the year. We are pleased with the positive momentum we have achieved and have the rightsized cost structure to meet our target goals for the full year 2021. EBITDA for our Fulfillment & Logistics Services segment increased $1.9 million on a revenue decrease of $4.2 million. This segment benefited from a favorable litigation settlement of $750,000 during the quarter. As we have eliminated the underperforming direct mail locations and consolidated fulfillment facilities, we expect to see continued improvement in EBITDA as we complete our facility consolidation in Q2 of this year. Marketing Services saw a slight decline in both revenue and EBITDA at $600,000 and $500,000, respectively. As Andrew stated, we continue to see a softness in client marketing spend in the early part of the quarter due to the pandemic. So we are encouraged by new wins and increases in client spend we saw in March and moving into Q2. Our operating expenses for the first quarter were $44.6 million, down from $45.6 million in the year ago quarter. We reduced our operating expenses in all areas, except labor and restructuring costs, which remain elevated. Operating loss was $884,000. This is a major improvement from the $5.1 million operating loss in the year ago quarter. This improvement is attributed primarily to our sustained aggressive cost efficiency efforts and also to revenue growth. We posted GAAP net loss of $1.8 million or $0.28 per diluted and $0.28 per basic share in the first quarter. We reported first quarter 2020 GAAP net income of $5.1 million.

[Operator:]

And we start with our first question from Michael Kupinski, NOBLE Capital Markets.

[Michael Kupinski:]

Well, first of all, congratulations on a great start to the year. Kudos to you guys in terms of both revenue and on the expense line, obviously, a surprise on both. A couple of questions. First of all, as we go into the second quarter, I know you gave us a lot of data, and I really appreciate all the added color. And Andrew, I think you said that we should use $40 million as the base to look for on a quarterly basis. So are you kind of telecasting that you think that revenues are going to be at least $40 million per quarter throughout the year? Or I guess I’m just trying to understand what that comment meant?

[Andrew Benett:]

Yes. Thanks, Michael. So we see that as a baseline, so we’re telegraphing is that it should be at least that on a go-forward basis.

[Michael Kupinski:]

Got you. And so in terms of – obviously, you said that the restructuring costs are going to start to wind down. I would assume then that a lot of labor – what we we’re likely to see is a little bit more increases in labor expenses. Am I right to assume that? Or how should I look at labor expenses going forward?

[Andrew Benett:]

We will see some increases – and Lauri, I’m going to hand over to you in a second. We will see some increases in labor going forward. Part of that is, as we adjust with our Customer Care business to a work-from-home environment, just as you see in the challenges in the broader labor market in the U.S. right now, we experienced labor challenges as well for that segment. So we do forecast and anticipate that labor costs will go up, that being one of a few factors. And Lauri, if you want to kind of add to that. Beyond that, Michael, I would say, if it’s – we’re in the mode of rightsizing labor for – against benchmarks for each of these businesses, labor cost against the revenue that we discussed.

[Lauri Kearnes:]

Yes. And I would add to that, as we’ve discussed earlier, Michael, that depending on the mix of our revenue, obviously, our Customer Care segment has a higher percentage of labor to revenue. So that’s certainly driving some of the higher labor right now based on the strong results from that segment.

[Michael Kupinski:]

And Lauri, I think you mentioned in the last call that Customer Care was actually performing well because of some of, I guess, you would have to say COVID-related business that came in that’s not likely to continue in the second half. Do you have a viewpoint of how strong the revenue might be in Customer Care in Q2? And what you’re least anticipating in how much of that will trail off in the second half of the year?

[Lauri Kearnes:]

Yes. I mean I would say we have fairly good visibility into Q2 that we’re going to maintain a run rate. But I think when you get to the second half of the year, it’s very difficult to have that visibility. Obviously, things change very quickly, especially with services that are COVID-related, as we all know, we hope we’re coming out of this, which certainly impacts that project revenue.

[Michael Kupinski:]

And I’m sorry if you may have mentioned this, but the $18.5 million in long-term debt, did that include the PPP loan forgiveness? You had a PPP loan, right?

[Lauri Kearnes:]

Yes, that includes a portion of that. There’s some in short term, and then there’s some in long term, depending on the timing of the payments, which you should see that.

[Michael Kupinski:]

Okay. How much of that $18.4 million, how much do you have left on the PPP?

[Lauri Kearnes:]

So we had $17.1 million of that is our Texas capital line of credit, and the rest of that was a PPP – the rest of the PPP is in short term.

[Operator:]

It appears there are no further questions. At this time, we would like to conclude today’s call. Thank you for your participation, and have a nice evening. You may now disconnect.