Harte Hanks Inc

NASDAQ:HHS

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and welcome to your Harte Hanks First Quarter Earnings Call [Operator Instructions] At this time, it is my pleasure to turn the floor over to Tom Baumann of FNK IR. The floor is yours.

[Tom Baumann]

Thank you. Hosting the call today are Brian Linscott, Chief Executive Officer; and Lauri Kearnes, 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 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 12, 2022, 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 disclosures are available in the Investor Relations section of Harte Hanks website at hartehanks.com.

With that, I would now like to turn the call over to Brian. Brian, the call is yours.

[Brian Linscott, executive]

Thank you, Tom, and good afternoon. This was a very strong start to 2022 with growth across all 3 of our operating segments and meaningful improvement in profitability, including $0.39 of fully diluted earnings per share.

The results validate our shift to an asset-light model, shedding unprofitable offerings and instead focusing our resources on the business offerings that provide our company and its shareholders with the highest potential return. With our restructuring fully behind us, the new Harte Hanks is much more efficient, highly profitable and well positioned for growth. The solutions we provide our customers are in demand, leading to opportunities with new and existing customers.

While the last of our pandemic-related projects conclude, we are increasingly confident in our growing pipeline and in our project opportunities. We anticipate 2022 to be a year of healthy margin expansion, and we remain cautiously optimistic that 2022 will be a year of flat to modest revenue growth, noting our revenue growth is likely to be weighted to the first part of the year.

Harte Hanks has integrated relationships with sophisticated customers, especially in health care, B2B tech, CPG and streaming categories. We are increasingly focused on data-centric industry-leading solutions to effectively enable and create optimal customer experiences.

Our offerings are in demand and Harte Hanks as a valued partner built into customer workflows and not easily replaced. Beyond the sticky revenue and long-standing customer relationships, we are bidding on and winning incremental opportunities. with customers to attract, retain and service their clients. We are poised for sustainable, profitable and long-term growth to maximize shareholder value, and we continue to invest in our business. These investments include, but are not limited to, hiring and retaining talented people, improving our technology platforms and expanding partnerships to enhance market opportunities, which will allow us to better cross-sell our fully integrated service offerings. We believe these investments will fuel margin expansion through improved cross-functional leverage and incremental growth within our new and existing customer base through deeper penetration and increased wallet share.

In the short term, during 2022, we expect to deliver margin expansion and greater profitability. Longer term, we believe we can sustain solid revenue growth while expanding the bottom line. As an example, Harte Hanks Fulfillment & Logistics fulfills various consumer products for a customer out of our FDA-approved Kansas City facility. After one of this customer's products experienced an issue with production, Harte Hanks was retained to isolate the product stored in our facility and to facilitate mailings from our East Bridgewater facility to end users, notifying them of the product-related issue.

In addition, Harte Hanks customer care team proactively onboarded over 200 agents to assist our customer with end user questions and to facilitate product returns. Our Harte Hanks team worked around the clock on an expedited basis to effectively respond to our customers' needs. For this effort, I want to thank our Harte Hanks team for developing real-time creative solutions to a time-sensitive business issue.

The [ packaging ] focus we have for our customers and our ability to rapidly implement solutions to business problems is a large reason why we have long-standing relationships, and we are growing our pipeline. This proven ability to develop and execute comprehensive fully integrated programs and solutions makes us an ideal partner for sophisticated organizations to best service their clients and to address our customers' ever-evolving business needs.

Separately, our data collection and analytics capabilities are increasingly important. We view this area as a catalyst for growth. We are investing in technology across our organization to expand this differentiator with the goal of enabling us to work smarter and faster and to give our customers new ways to utilize and analyze data that we uniquely possess. Harte Hanks' technology, analytics and reporting expertise creates better clarity for our customers' business needs and provides deeper insights into their clients.

Under Don Aicklen's sales and marketing leadership, Harte Hanks is expanding our marketing campaigns, SEO and paid search, conference participation and channel partnerships. As part of our investment in sales and marketing, we have significantly grown our pipeline. We have reengaged with former customers, former employees and engage with new prospects to expand our opportunities. Understanding sales cycles vary by segment. We remain cautiously optimistic about our growth opportunities in spite of the challenging economic environment.

Now on to the results. Our 3 operating segments, each delivered growth and expanded contribution margin in the first quarter. Our 3 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 product and literature fulfillment, B2C e-commerce and sampling and end-to-end supply chain and 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 our 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. To begin, the first quarter of 2022 included a 12% year-over-year growth in revenue to $49 million and a more than $5 million positive swing in quarterly net income. Harte Hanks is now solidly profitable on a GAAP basis.

Net income for the quarter was $3.3 million, and EBITDA for the quarter was $4.5 million, which is an improvement of $4.7 million over prior year first quarter EBITDA. We continue to expect profitability both in terms of EBITDA and GAAP net income for each quarter of 2022. We continue to drive financial and operational improvements in each of our operating segments.

To start with customer care, our revenue increased 7% from the previous year-over-year and year-over-year EBITDA improved 33% to $3.5 million from $2.6 million in the prior quarter. We continue to benefit from COVID-related project work, albeit at a much lower run rate. And during the quarter, we benefited from the emergency work related to a client consumer product issue.

We expect reductions in the COVID work as we move through the first half of 2022, but we anticipate replacing much of this revenue loss, the Customer Care revenue pipeline remains strong with near-term opportunities to expand our demand generation services and further penetrate the B2B tech, CPG and streaming verticals. We also expect further reductions in our customer care cost structure with our asset-light operating model and work-from-home environment.

We recognize and are adapting to the wage pressures in today's labor market, but our recruiting flexibility in the work-from-home environment allow us to mitigate some of the wage pressures. In addition to the new business win described earlier on our call, customer care secured additional new business wins, including a premium television network, expanded its services with Harte Hanks Customer Care, from an event basis to serving ongoing steady-state work. This transition of work was enabled by the consistent delivery and strong customer satisfaction performance, led by our Harte Hanks team in the Philippines.

On to Fulfillment & Logistics, revenue increased approximately $4 million or 28% compared to the first quarter last year, and EBITDA doubled to $2.4 million, with the consolidation of our fulfillment operations in the Kansas City facility, we anticipate continued margin improvement throughout 2022.

We remain optimistic about our pipeline in the Fulfillment & Logistics, including growth opportunities in CPG, financials, travel, health care and retail verticals in spite of inflationary and supply chain challenges. New business wins for the quarter included a large nutritional CPG partner engaged Harte Hanks to fulfill and distribute custom sample kits of their top-selling nutritional drinks to key customer demographics.

Second, a growing e-commerce alternative to Amazon hired Harte Hanks to manage all Middle Mile freight for dozens of top-selling brands. Harte Hanks was selected to manage this multimillion dollar accounts on our competitive pricing, technology platforms and comprehensive service. Lastly, Marketing Services, revenue increased slightly to $12.9 million, but EBITDA improved by nearly $900,000 or 151% to $1.5 million.

As previously stated, we have driven improved profitability from the Marketing Services segment as we realigned our resources, reduced our SG&A expenses and invested in technology and infrastructure to better serve our customers. We remain aggressively focused on marketing efforts and attracting new clients within prioritized market categories, including health care financials, B2B tech and consumer products.

Our Marketing Services revenue pipeline remains strong and includes diversified opportunities with data and analytics, agency services and campaign design and execution. New business wins for the quarter included a targeted health care marketing platform for the pharma industry, selected Harte Hanks and our data solutions team to secure and enhance targeted lists with a wide array of health conditions to enable our clients to provide disease state and therapy specific educational content that powers more productive patient-physician dialogues at every step of the patient journey.

Second, a global technology manufacturer chose Harte Hanks for our proprietary knowledge to expand its customer base in North America and identify those customers who have an imminent intent to purchase. Using our expertise, we identify individuals as they digitally search for products and services, and we assist our clients to deliver on-target product messaging. Harte Hanks was selected because of our wide variety of data and predictive modeling solutions which are essential to the execution of targeted marketing campaigns.

In conclusion, this was a strong start to what we -- be a breakout year for Harte Hanks. Our optimism for top line growth has increased, and we are confident in our ability to deliver sustainable profitability. We expect continued positive net income with a significant year-over-year improvement in full year EBITDA, driving higher free cash flows during 2022.

And with that, I will turn it over to Lauri.

[Laurilee Kearnes, executive]

Thank you, Brian. As Brian said, this was a strong start to the year for us. We achieved our fifth consecutive quarter of year-over-year revenue growth and our improvements in operating income, EBITDA and net income clearly showed that we have successfully built Harte Hanks' earnings power. The March quarter was our fourth quarter in a row of positive EBITDA at $4.5 million. And perhaps more importantly, we are delivering solid GAAP profitability with fully diluted earnings per share of $0.39 compared to a $0.28 loss per share in the first quarter last year. This GAAP result does not include any nonrecurring adjustments for benefit.

Our performance included new business wins, growth within our customer base and the benefits of our asset-light model. Our focus for 2022 is to maintain revenue and expand margins. Longer term, we have a solid platform with differentiated offerings that should enable sustainable growth and solid profitability. The large nonoperational restructuring charges are now behind us.

I'd now like to walk through the results in more detail. First quarter revenue was $49.1 million, up $5.3 million or 12.1% from $43.8 million in the same period last year. Revenue growth was led by our Customer Care and Fulfillment & Logistics segment. Customer Care was up $1.2 million or 7.2% year-over-year. Fulfillment & Logistics services was up $4.1 million or 28.4% and Marketing Services was up by $46,000 or 0.4%.

From a contribution margin perspective, our Customer Care segment delivered $3.5 million in EBITDA, up $864,000 or 33.2%. Our Fulfillment & Logistics services segment delivered $2.4 million in EBITDA, up over $1 million or nearly double from the year ago quarter.

Marketing Services EBITDA grew by $879,000 or 151%, validating the steps we took during 2021 to rightsize this business. We believe each of our 3 operating segments are now appropriately sized for current volumes and should operate at positive EBITDA levels for the foreseeable future. In addition, as leases begin to expire, we believe there is additional leverage we can take advantage of in our cost structure.

Our operating expenses for the first quarter were $45.2 million, up just 1.2% from $44.6 million in the year ago quarter due to increased revenue and the absence of $2.2 million in restructuring expense in the first quarter last year. Operating income was $3.9 million, up $1 million sequentially and a positive swing of $4.8 million compared to an operating loss of $884,000 in the year ago quarter. This improvement is attributed primarily to our revenue growth and sustained expense management efforts.

We posted net income of $3.3 million or $0.40 per basic and $0.39 per diluted share in the first quarter compared to a net loss of $1.8 million or a $0.28 loss per basic and diluted share in the first quarter last year. EBITDA for the first quarter was $4.5 million compared to a loss of $186,000 in the year ago quarter.

Now turning to our balance sheet. As of March 31, 2022, we had cash and cash equivalents of $9.7 million compared to $11.9 million at December 31, 2021. As of March 31, we have $6.8 million in net income tax receivable. This is due to our net operating loss carrybacks for 2020 of $7.6 million, which are partially offset with state tax payables. We received a portion of our net operating loss carryback in the first quarter and anticipate additional funds during 2022.

As of March 31, 2022, we have $5 million drawn against our $25 million credit facility. Our combined long-term pension liability on the balance sheet as of March 31 was $51.3 million based on a year-end valuation. As a reminder, we have both qualified and nonqualified pension plans, which were frozen many years ago. The nonqualified pension plan relates to contracts with previous senior management of the company and does not require investment asset funding but rather it provides for an ongoing monthly payment obligation to participants.

Our qualified pension plans have funded assets to support our plan obligations. We are required to make minimum funding contributions on these qualified plans until such time that the asset balance is sufficient to support the ongoing obligation. Our cash funding requirement for all plans remains at approximately $3 million per year for the next few years. Finally, as a result of rising interest rates and changes in asset values, we evaluated our net pension obligation on our balance sheet.

As of the end of April, our net pension liability has declined approximately $10 million since year-end 2021, which includes accounting for the rise in interest rates and reduced asset values. With that, I will turn it back over to the operator to take your questions. Thank you.

[Operator]

[Operator Instructions] We'll take our first question from Michael Kupinski with NOBLE Capital Markets.

[Michael Kupinski, analyst]

Well, first of all, congratulations. I mean, I know there was a lot of heavy lifting, but what an improved outlook and a difference a year makes. So congratulations to you and your team. So great numbers in the first quarter. I was just wondering -- I have quite a few questions here. Can you quantify the amount of COVID-related work in your customer care that you kind of expect or is contracted for this year? And if you can just kind of remind us of what it was last year to kind of give us the cadence or the variance that you are -- that you have to replace, I guess, this year or that you're planning on to replace this year?

[Brian Linscott, executive]

Thank you, Michael. I appreciate the comments. So from COVID, and I'll let maybe Lauri chime in if she has greater specifics. But -- if I look at last year, we had substantial COVID-related revenue probably upwards of $10 million directionally. And this year, we anticipate that to be half or less as it rolls through the year. Now I think we've kind of cited that with other projects and opportunities, we certainly feel a lot more comfortable that we're replacing a decent portion of that COVID-related revenue that's kind of trailing off.

[Michael Kupinski, analyst]

Got you. And in terms of the -- you made mention of the pipeline, and I know I asked this question before. Can you talk about the percent of the pipeline that tends to turn into revenue, the time line for that revenue recognition. And I know that, that might be different for each one of your segments. And I was just wondering if there are more lead times with the pipeline versus other -- within your other segments. So if there's any difference there, I'd like to -- if you can flesh that out for me and add a little bit more color.

[Brian Linscott, executive]

Yes. So obviously, our pipeline conversion differs by, I mean -- substantially the offering, if you look at customer care as an example to go out and achieve new work where you're trying to unseat someone, right? You have to generally find a way in and wait for a contract to expire. So the sales cycle in those cases might be extended, right? If you look at certain project opportunities that we get when received from data and analytics and list in data augmentation and growth, those are projects that can come through the pipeline within a couple of months and it can convert from a lead to a qualified lead to a opportunity to closing and actually generating revenue that could be booked within a quarter or 2 quarters out.

Some of the larger agency opportunities, again, would be a longer sales cycle because agency of record work might take a bit longer as there's unseating incumbent is usually a little bit harder. So I guess I'm not really being as specific as perhaps you'd like, but I think the reality is we've got unique project opportunities that we think we can close in the short term, and that includes marketing services, logistics, some opportunities in fulfillment and customer care. And we've done a real nice job of closing our pipeline and customer care with new and expanded customers this year.

And then there's some that we've got our eye out such as customers we lost before. And we know in the next year and 2 years, we're keeping those contacts warm and really making sure that people are aware of the new Harte Hanks and our ability, capability and interest in servicing those customers once again as an example.

[Michael Kupinski, analyst]

And many media companies have indicated that national advertising is weak. Of course, that's -- we're talking more on the television side and so forth. Just wondering how the -- how your business is pacing, I guess, as we go into the second quarter, if you're noticing any changes from what we've seen in terms of your nice performance in the first quarter. Any concerns that you're hearing from advertisers or whether or not the business is being booked late or there's any hesitancy on advertiser standpoint? just kind of give us a flavor of the tone of the current marketplace.

[Brian Linscott, executive]

Sure. As it relates to a lot of our marketing services customers, we have long-standing sticky relationships. And so there's a nice consistent revenue source just from partnering with existing companies. That said, I think when people talk about expanding new launches and media buying, there might be some caution and hesitancy. We certainly have those opportunities in our pipeline. Periodically, someone might pause and delay. But for the most part, the opportunities we are seeing are converting relatively quickly, and we remain cautiously optimistic that we're positioned well for continued growth.

[Michael Kupinski, analyst]

Got you. And then you mentioned about the goal to improve margins. Do you have target margins -- maybe a target in place for your margin goals? And what are they?

[Brian Linscott, executive]

So yes, we definitely have individual margin goals for each of the segments and Harte Hanks as a whole. When I think of this year, we want to get the overall Harte Hanks margins into the high single digits. And obviously, as you kind of look at our performance in Q1, I think we did a pretty good job of that. But I do think, longer term, we have further margin growth opportunities. And one of the larger projects that we're implementing this year is this technology investment, both from ERP consolidation of technology applications and modernizing our platforms will provide additional cost savings in the future as well as fund future growth or at least provide opportunities for additional growth.

[Michael Kupinski, analyst]

Got you. And then just kind of going back to the debt. Obviously, you guys are really could pay off the revolver that you have. What is your thoughts about where you would like to see the capital structure of the company, if you kind of give us your thoughts on what the plans are from here in terms of that structure.

[Brian Linscott, executive]

Yes. So I mean I feel great with the way our balance sheet sits right now, right? Obviously, we don't have substantial debt. I'd love to continue to build that cash, pay down some debt. And further explore opportunities to improve the balance sheet, right? I mean creative ideas around a good energy -- a good focus and energy for us as well as exploring are preferred. And then more broadly, with capital allocation, I think our continued investment in technology is going to be a recurring kind of theme because I think that's going to be the longer-term differentiator of why we're successful. And then we'll perhaps be a little more selective on tuck-in acquisition opportunities we have, and we'll continue to review and evaluate situations where we think there's a complement of marketing technology and/or capabilities that complement our existing portfolio.

[Michael Kupinski, analyst]

And one final question. Lauri, you mentioned about the prospect for leases coming up. I was wondering if you can give us a time line what the prospective savings might be from these leases as they come up. Do you have any thoughts about that?

[Laurilee Kearnes, executive]

Yes. I mean we do have leases coming up over the next several years. So I would say that there's one or more each year. And as each of those come up, we evaluate the space needed, what kind of work-from-home model we have for the business. So we have a couple coming up this year, and we'll continue to look at those. And we made the larger changes, I would say, up until now, but there are still a few more leases out there that we have yet to evaluate as those come up.

[Michael Kupinski, analyst]

And one, I guess, I do have one more question. A number of companies have indicated that they're having issues with hiring talent, particularly salespeople. And I was just wondering in terms of where -- given the labor shortages and so forth, are you seeing that? Does this impede any of your growth prospects by maybe if you have problems in hiring and so forth? Maybe just kind of give us your thoughts about your hiring plans whether or not you are having difficulty there and if that might affect your growth trajectory in terms of your performance going out -- going forward?

[Brian Linscott, executive]

So I think our experience to date, just the marketplace that we're in and the talent we've been trying to make sure we attract is around technology and data analytics and certainly, there are heavy demand for those types of resources. So we've had to make sure that we meet the market and secure the talent and resources that we need. So I'm cautiously optimistic that we've been able to execute as needed on that front. With respect to sales, we've really been leaning into -- with the exception of hiring Don Aicklen back in January, we've been really trying to bolster and build out our marketing capabilities and lean on our existing sales force as well as incent and motivate our mainline business account directors to go further expand growth opportunities. And we've also engaged with existing customers, quite frankly, to expand our relationship and work that channel partner concept, which is obviously opening more doors for us.

Now as I look out into Q2 and the second half of 2022, we certainly will be in the marketplace to grow and expand our sales force. And I guess, circle back then, and I'll let you know how that's going.

[Michael Kupinski, analyst]

Okay. Fair enough. Again, congratulations on a great start. Great quarter. Yes, that's all I have.

[Brian Linscott, executive]

Thank you, Michael.

[Laurilee Kearnes, executive]

Thank you.

[Operator]

There appear to be no further questions at this time. I would now like to turn the call back over to Brian for closing remarks.

[Brian Linscott, executive]

Yes. Thanks, everybody, for joining. This is a great first quarter. We're excited about 2022, and we'll talk to you in a few months. Take care.

[Operator]

This does conclude today's conference. We thank you again for your participation. You may disconnect your lines at this time, and have a great day.