Harte Hanks, Inc.
Q3 2021 Earnings Call Transcript

Published: 11 Nov 2021

[Operator:]

Good day, ladies and gentlemen, and welcome to the Harte Hanks Third Quarter Earnings Call. At this time, all participants have been placed on the listen-only mode and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Rob Fink of FNK IR. Sir, the floor is yours.

[Rob Fink:]

Thank you, operator. And thank you everyone for joining us today. Hosting the call today are; Brian Linscott, Harte Hanks’ CEO; and Lauri Kearnes, Chief Financial Officer. Before we begin, I would like to remind everyone that the information provided during this call may contain forward-looking statements such as statements about the company’s strategy, financial outlook, business and industry expectations, anticipated performance and outcomes and other statement that are not the historical facts. Actual results may differ materially from those projected or implied in these statements because of the various risks and uncertainties, including those described in the company’s Form 10-K and 10-Q and other filings with the SEC and the cautionary statement that was included in today’s earnings press release. The call may also reference non-GAAP financial measures. Please refer to the earnings press release that was issued after the close today for a reconciliation of – and other related disclosures. The company’s earnings release is available on the Investor Relations’ section of its website at hartehanks.com. With that said, I’d now like to turn the call over to Brian Linscott. Brian, the call is yours.

[Brian Linscott:]

Thank you, Rob. Thank you and good afternoon. This was another strong quarter for Harte Hanks, demonstrating that we have turned the corner and are delivering improved financial results, both on the top and bottom lines. Today, Harte Hanks delivered differentiated and highly sought after solutions for a top tier customer base. We enable optimal customer experiences in a variety of ways using sophisticated industry-leading solutions. I want to thank our employees who passionately serve our clients every day. Their commitment and dedication to our clients and Harte Hanks, is the key driver to our long-term success. And you can see the progress already in our financial results. Since our last earnings call, we have been investing in the business to drive future, profitable growth. Four specific examples within, are investments, included the following. One, at the end of the third quarter, we executed a long-term lease to occupy 100,000 square foot expansion in Kansas City. Going forward, Harte Hanks will occupy the entire 400,000 square foot facility as we continue to see growth opportunities within our Fulfillment & Logistics segment. Earlier in Q3, we selected NetSuite as our cloud-based enterprise resource planning system and retained in implementation partner to work alongside our Harte Hanks’ team, as we realign our system architecture and continue to redesign workflows that simplify, standardize and centralize how it works. We expect this result in meaningful cost savings over time. Last month, we hired Elliott Peterson as Chief Technology Officer, his role is critical and will focus on leveraging best-in-class technology to most effectively serve our customers and grow our business. Earlier this week, we hired Frank Sands as our Chief Strategy Officer in Marketing Services. Frank’s vast experience in marketing strategy and analytics are critical to growth and client execution as we continue to strengthen our capabilities and position in an ever changing marketing landscape. In early October, we filed our application to uplist onto the NASDAQ global markets. We anticipate uplisting in the coming weeks. Now, onto our results. We had a strong third quarter with year-over-year improvements across all operating segments of our business. I will walk you through the progress we have made and then Lauri will walk you through the detailed financials. Our three segments are as follows. Customer Care, focused on delivering full service Customer Care solutions that are tech-enabled and people-driven. Fulfillment & Logistics, focused on B2B products and literature fulfilment, B2C E-Commerce and Sampling and end-to-end Supply Chain & Logistics Services. And third, Marketing Services, focused on strategic planning, data-driven insights, performance analytics, creative design, technology enablement and program execution to drive business outcomes and optimize customers’ ROI. Our segment reporting is designed to provide transparency into the company’s financials and visibility into the value and dynamics of each business, we delivered another strong, with improved financial and operational results. Q3 revenue is $49.6 million versus $47.7 million for the quarter a year ago or a 4% increase. EBITDA for the quarter was positive $4.8 million, which is an improvement of $3.3 million over the prior year. We expect continued year-over-year momentum in the fourth quarter and we anticipate operational improvements implemented this year will flow through to deliver EBITDA improvement in 2022. Financial and operating performance is improving each of our operating segments. Customer Care revenue increased by $1.8 million from the previous year and year-over-year EBITDA improved to $4 million from $3 million in the prior year quarter. The COVID-related project revenue and work remains strong, and we anticipate reductions in this project work throughout the first half of 2022. In 2022, our Customer Care cost structure will benefit from expiring leases in the US, as we continue to operate in a work from home environment. Customer Care has maintained exceptional performance standards working from home, and we have been vested in technology that enables success against our high Harte Hanks’ performance standards. We recognize and are adapting to the wage pressures in today’s labor market, but our recruiting flexibility in a work from home environment allows us to mitigate some of the wage pressures. New business wins for the quarter included a healthcare insurance provider, needing a partner to provide year around Customer Care Services for their members. The customer chose Harte Hanks based on our extension – extensive experience supporting annual enrolment and our ability to consistently exceed standards established by Centers for Medicare and Medicaid Services. Now, onto our Fulfillment & Logistics business. Revenue increased approximately $0.5 million, compared to the prior year and EBITDA improved to $1.7 million from $0.3 million in the prior year. With the consolidation of our Fulfillment operations into the FDA approved Kansas City facility, we anticipate continued margin improvement in the 2022. As previously mentioned, we expanded our Kansas City footprint by an additional 100,000 square feet, the additional operating capacity of Kansas City will serve increased organic client growth and further consolidation of offsite Fulfillment operations. After completing the racking installation in the expansion area in Q1 of 2022, we anticipate increased warehouse capacity of nearly 50% from today’s capacity in the Kansas City. The greater Fulfillment opportunities will also result in more opportunities in our client controlled production areas. Global supply chain challenges have impacted the marketplace for the last year and a half, but Harte Hanks’ Fulfillment has only experienced limited impact in warehouse inventories, largely due to the critical nature of our stored products and the sales enablement material is critical to our client’s success. Further, the continued tightening of transportation and oil markets have increased cost of transportation. However, our longstanding and deep relationships in the transportation and trucking industry has created additional opportunities and our logistics operation has been able to meet the demand from our clients. New business wins for the quarter included an international financing company, launching our US business to consumers. Harte Hanks will fulfill point of purchase displays, printed sales materials, new customer welcome kits and trade show equipment. Finally, onto Marketing Services. Marketing Services’ EBITDA rose by $1.6 million compared to the same quarter last year. We have driven improved profitability from the Marketing Services’ segment as we realigned our resources and invested in technology infrastructure to better serve our customers. We continue to focus on building deeper relationships with an existing customers, by expanding our engagements across client brands, products lines, geographies as well as expanding our capability mix within the clients. We are also aggressively focus on attracting new clients within prior – prioritized market categories. We’ve made significant progress building capabilities needed to deliver, integrated CRM solutions, a large and growing market with high margin profiles. New business wins for the quarter included a leading health insurance provider, the customer selected Harte Hanks to provide strategy analytics and creative services to accelerate its membership growth. In conclusion, we delivered a very strong quarter that reflects momentum in the business. Topline and new business revenue are all performing well. We have right-sized our segments and we have a seasoned team to lead our businesses. We remain optimistic at our ability to continue to drive increased profitability. And with that, I’ll turn it over to Lauri.

[Lauri Kearnes:]

Thank you, Brian. We achieved our third quarter in a row of year-over-year revenue growth, and delivered strong operating income of $4.2 million. The September quarter was our sixth quarter in a row of positive adjusted EBITDA at $6.1 million. We continue to be encouraged by the new business wins and strong bottom line improvements. As Brian mentioned, we have continued to be focused 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 you through the results in more detail. The third quarter revenue was $49.6 million, up $0.3 million sequentially from the second quarter and up $1.9 million or 4% from $47.7 million in the same period last year. Revenue growth was led by our Customer Care segment which was $1.8 million year-over-year, or 10% as a result of several large projects that we expect to wind down over the first half of 2022. Fulfillment & Logistics Services was up $0.5 million or 3.8% and Marketing Services was down $0.5 million or negative 3.2%. We are pleased with the positive momentum we have achieved and have right-sized our cost structure to meet our target goals for the full year 2021. Customer Care EBITDA improvement of $1 million or 33% was driven mostly by increased revenue as well as decreased costs with a closure of one facility. EBITDA for our Fulfillment & Logistics Services segment increased $1.4 million or 518%. The large EBITDA improvement is driven by the consolidation of facilities that we completed this year, resulting in an improved efficiencies. Marketing Services EBITDA grew $1.6 million or a 129%. These results reflect that was done previously to right-size the cost structure in this business. Our operating expenses for the third quarter were $45.4 million, down from $46.9 million in the year ago quarter. We reduced expenses in production and distribution as well as in restructuring costs. Operating income for the quarter was $4.2 million. This is an improvement from $785,000 in the year ago quarter. This improvement is attributed primarily to our revenue growth and sustained expense management efforts. We posted net income of $4.4 million or $0.52 per diluted and $0.54 per basic share in the third quarter. EBITDA for the third quarter was $4.8 million compared to $1.5 million in the year ago quarter. Now turning to our balance sheet. As of September 30th, 2021, we had cash and cash equivalents of $16 million. This compares to a cash balance of $29.4 million as of the period ended December 31, 2020. As of September 30th, we have $7.5 million in income tax receivable due to our net operating loss carryback for 2020. We expect to receive these funds in late 2021 or early 2022. As of September 30th, 2021, we have $13.1 million in long-term debt and no short-term debt. With that, I will turn it back over to the operator to take your questions. Thank you.

[Operator:]

Ladies and gentlemen, the floor is now open for questions. We have a question coming from Michael Kupinski. Please announce your affiliation, then pose your question.

[Michael Kupinski:]

I’m with Noble Capital Markets. First of all, congratulations on a really solid quarter. I know there was a lot of work that went to that quarter. A couple of questions. The Customer Care obviously was a lot stronger than what I expected. It sounds like the COVID-related business that you had didn’t fall off as much as you expected that it might. And I was wondering if you can kind of give us some thought on what were the factors that led to such a strong increase in revenue growth for that quarter? Was it largely because that customer didn’t fall off or were there other things that were moving the revenue line? Can you just give us a little color there?

[Brian Linscott:]

Sure. This is Brian, and Lauri, you feel free to chime in. the reality for us is yes in fact that we’ve extended the COVID-project kind of based revenue longer as well as expanded into some additional COVID-related project opportunities. So, rather than shrinking in the third quarter, we actually had a nice uptick. We also had another very large customer that experienced some unique situations in the third quarter that led to additional call volumes that you know are somewhat one-time in nature. But the Customer Care business as a whole is just operating very well right now and we’re excited to see the continued great performance.

[Michael Kupinski:]

And so kind of give me in terms of how we should view the business going to Q4, particularly in Customer Care or it sounds like from your commentary that, maybe this Customer Care related or COVID-related business may not fall off until the first part of next year. So just wondering if you can kind of give us a sense on maybe what the pacings look like for Q4 or if you could just give us a sense of maybe impact of the revenue contributions are getting from the COVID-related business into the fourth quarter?

[Brian Linscott:]

Yeah. So, I think you said it well, Michael in the sense that, that we see the COVID-related projects continuing at a relatively nice clip in the fourth quarter and I think the phase out of some of the project-related revenues going to happen more in the first and second quarters of next year.

[Michael Kupinski:]

Okay. And then if you could just give us a sense you know with the thought process was that, the Marketing Services might perform more strongly and offset some of the weakness that we were largely anticipated as the COVID-related business fell off in Customer Care. But yet Marketing Services I guess didn’t perform ad strongly I mean it was still a decent number, but not as strongly as maybe one would have hoped if that was the case as we kind of gauge the ability to offset the net loss as we go into 2022. Can you kind of give us a sense of Marketing Services revenue as you kind of go into the fourth quarter and how if you think that is a business that could actually perform better as we go into 2022?

[Brian Linscott:]

Yeah. And I think I guess I’d first say that, having a $1.6 million increase year-over-year in EBIT is a fantastic performance. But I do recognize and appreciate your question on revenue. One other things that I think what we’re seeing is a little bit of a shift change in the revenue mix and so some of the revenue declines you know over a $1 million was related directly to us managing the outsourced direct mail footprint. And so, you know we managed campaigns for our customers and I think what you see is, a little bit of revenue shift out of certain areas, but we’re moving into more highly profitable, higher margin segments within the Marketing Services business. And so, I think we are positioned well to experience certainly some modest growth as we cycle out with some of the more legacy outsourced print management and direct mail that we’ve done in the past largely.

[Michael Kupinski:]

Got you. And just a couple more questions if you may – if I may. Obviously you had some duplicative costs in the Customer Care in the quarter. I was wondering if you can just kind of gauge for us what level those costs were, because they obviously probably are not going to happen as you go into next year. And then also if you can just give us a sense of whether or not from these levels that you are continuing to reduce cost then maybe if you can kind of gauge what those cost reductions might be on an annualized basis if you go into 2022?

[Brian Linscott:]

Yeah, so I’m sorry, if you could restate the first part of the question for Customer Care, you mentioned – redundancy?

[Michael Kupinski:]

Yeah, yeah redundancy and so forth because of operating I think in the quarter I think you were still had some redundancy in cost with the other facilities and some further consolidations that you’re doing there. I was just wondering if there were duplicative costs in the third quarter and if you can kind of give us a sense of what that might be in terms of impact on the quarter?

[Brian Linscott:]

Yeah. And I’m assuming we’re largely talking about the Fulfilment & Logistics business with the multiple facilities or are you talking –

[Brian Linscott:]

Yeah –

[Lauri Kearnes:]

Let –

[Brian Linscott:]

I’m sorry, yeah.

[Lauri Kearnes:]

Me – okay.

[Brian Linscott:]

Yeah, sorry about that. That yeah – no that’s. Yeah so no, there is some lingering kind of consolidation whether it’s the modest duplication of cost in the third quarter, but the largest part of the redundancies kind of cycled through at the end of the second quarter with our Fulfillment – multiple Fulfilment locations that said, there’s some still minor leases that were occupying and working our way out of in the fourth quarter.

[Michael Kupinski:]

Okay. And then just your general thoughts on the cost cuts from these levels.

[Brian Linscott:]

So, Lauri, I don’t know if you want to kind of take some of the larger chunks. I know that you know that one of the references that we make specifically as it relates to Customer Care. We know some of their operating leases, locations that will runoff next year are going to generated you know a $1 million or more of cost savings, I think what we cautionarily make sure that everyone knows that depending on pressures of the labor market will not sure to fall those flow straight to the bottom lines given the challenges with the labor market. But we do anticipate certainly further reductions in cost next year.

[Lauri Kearnes:]

Right. And I would also say that, you know we don’t anticipate those restructuring costs next year as well, so we’ll have some savings on that going into next year. But as Brian mentioned, right, we have you know some price pressures or some cost pressures and other areas whether that be labor or some supply chain issues that could cause you know some minor offset to those savings.

[Michael Kupinski:]

And thank you for that. And then, Brian you’ve mentioned that you’re expecting revenue momentum going into the fourth quarter. What did you mean by that? Were you anticipating that revenues would be an increase from the third quarter? Are you looking – I’m just trying to understand what you meant by the term revenue momentum?

[Brian Linscott:]

Yeah. I – hopefully if I didn’t state it, correctly, I apologize. But if year-over-year momentum, so I – we anticipate certainly continued year-over-year momentum on revenue in the fourth quarter.

[Michael Kupinski:]

And meaning that, you were up in the fourth – in the third quarter of 4% and your year-over-year momentum means that you would anticipate to be have an increase in revenues year-over-year in fourth quarter, is that what you mean by that? Maybe just want to clarify.

[Brian Linscott:]

Yeah, that’s correct.

[Michael Kupinski:]

Got you. And then in terms of you – in a much better financial position that you’ve been in quite some time. And I was just wondering where are you on the possibility of obtaining more conventional financing for the company’s debt?

[Brian Linscott:]

So you know we’re – go ahead, Lauri.

[Lauri Kearnes:]

Yeah I would say I mean, we’re certainly in the process of evaluating that to look at something that’s more conventional on the debt side and you know over the next few months that will be something that we’re in the process of working on.

[Michael Kupinski:]

All right. I’ll let others ask questions. Thanks so much for taking the time for me.

[Brian Linscott:]

Thank you.

[Operator:]

There are no more questions in queue. I would now like to turn the floor back over to Brian.

[Brian Linscott:]

Thank you, and we appreciate your time this afternoon and thank you all for joining and till next time, have a good evening.

[Operator:]

Thank you, ladies and gentlemen. 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.