Harte Hanks Inc

NASDAQ:HHS

Earnings Call Transcript 2023-Q3

[Operator]

Greetings, and welcome to the Harte Hanks Third Quarter 2023 Earnings Call. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to your host, Mr. Tom Baumann, Investor Relations. Tom, over to you.

[Tom Baumann]

Thank you. Hosting the call today are Kirk Davis, Chief Executive Officer; and David Garrison, Interim 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, November 9, 2023, 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, executive]

Thank you, Tom, and good afternoon, everyone. It's a privilege to be here. After my remarks, I'll introduce David Garrison to cover our financial results.

This is my first full reporting quarter with Harte Hanks. Despite my short time here, I'm confident in what we need to do. I see Harte Hanks as competitively positioned in the market with differentiated offerings and the expertise to assist global brands to better identify, engage and service their customers. However, I'm finding that customers and, importantly, prospective customers aren't generally aware of everything we can help them with. That's a marketing and sales opportunity we'll certainly address.

And I share this from first-hand experience. My commitment when I joined the company was to be a customer-facing CEO. Our team appreciates my interest and desire to assist in bringing new customers on board or to help troubleshoot a customer concern. I've participated with staff on over a dozen meetings we've had with potential clients, essentially one every week over the past 3 months. I've also pitched in to help resolve an at-risk customer's concerns in which we were able to resolve.

The strength here is that our customer retention is strong, although we obviously experienced spending fluctuations based on a variety of factors. And customer retention will strengthen further as we expand the services we're providing to customers. That can serve as a hedge in instances when a customer's needs change and we lose a portion of their business, yet retain the customer due to other services we provide for them.

Our company experienced this shortly before I arrived. A long-standing financial services client in-sourced services we had been providing for many years, which was a setback, yet the customer continues to utilize us for other services today. The key is to stay close to our customers and anticipate their needs, and that philosophy will embody our culture.

Beyond solidifying and deepening existing customer relations, I see our best and most immediate opportunities being related to our marketing and sales organization, which I'll detail in a moment. Our employees take great pride in consistently meeting and usually exceeding the service levels expected by our clients.

As for changes we've begun making, I sense our employees are energized and appreciate that we have embarked on an exciting new era. Ideas are flowing. And as an aside, one of our valued employees led development of an AI-driven tool to assist the sales organization. He just took it on himself.

So we're off to a productive start. Be assured Harte Hanks has a spirited workforce and has significant potential. To be sure, I inherited a challenging situation, which has been a theme in my career. We faced difficult comparisons with limited immediate sales momentum. We are adapting to a new post-pandemic revenue baseline, which has exposed gaps in our new business and pipeline development.

But that will change. Again, I want to recognize the well-deserved pride that surrounds the extraordinary services we provided and accompanying pandemic-related revenue lift we realized. While those gains are entirely behind us, there are enduring benefits we have realized from the past few years of hard work, which include our strong cash position, having no debt, along with generating a positive operating income and EBITDA and our $25 million credit facility, and we also plan to reduce our pension liabilities in the first half of '24.

Moving forward, our sales and marketing organization is where we need a turnaround. Our lead generation and pipeline development programs, along with our sales conversion results, are insufficient. These challenges reflect an underperformance, strategic gaps and, to some extent, inadequate investment. We've completed a thorough assessment and marketing audit of what we need and what we need to do differently.

You may recall, I introduced several immediate steps we needed to take on our August 10 earnings call. I'd like to revisit those commitments. First, I highlighted that we expected to recruit a new Corporate Senior Vice President for Sales and Marketing before year-end. In October, we announced that Kelly Waller, a proven executive with a diverse track record of sales leadership success, was appointed to the role.

Ms. Waller comes to us from Finastra, a global provider of financial software applications and marketplaces, with $1.8 billion in revenue where she served as Global Vice President of Mid-Market. Kelly's ideas for growing our business were clear differentiators among several very strong candidates.

In August, I expressed my enthusiasm for the acquisition we completed last December of InsideOut, an inside sales company that is capitalizing on the evolution underway in sales organizations. Not a breakout year for us in '23, but we've learned much, and we believe this division will become a strong growth driver for us in 2024. We are taking immediate steps to scale the business.

To fuel our growth ambitions, on Monday, we announced the appointment of Ron Lee as our Senior Vice President of Inside Sales. Ron is an experienced sales executive with a proven track record of driving revenue growth and operational improvement through talent development, leveraging analytics and innovating. Prominent in Ron's background are the 10 years he spent at ADP, developing and executing ADP's global inside sales strategy.

Together, they will bring an immediate focus on improving our existing marketing and sales organization. We are also in the process of cross-training our sales staff to be enterprise-wide sales representatives. In August, I also spoke about a partnership we plan to initiate with a highly regarded business development firm in which I have collaborated with in the past. The engagement with landmark ventures has already resulted in over a dozen high-level conversations with wonderful companies and which we expect will very affordably enrich our pipeline for 2024.

There are several additional steps we are evaluating to improve our sales and marketing performance. We are evaluating an opportunity to expand our international sales coverage. This would facilitate larger scope deals. We do not currently have a dedicated sales team in Europe. We also plan to utilize our inside sales division to service our own company. And I'll add that we are pursuing strategic partnerships as an important untapped opportunity to boost indirect sales that's straight out of a B2B company sales playbook.

Finally, on our last call, I reinforced that we were committed to formally assessing our full potential to achieve a material improvement in our cost structure, and thus, we would explore how we align our company around that objective because costs represent important opportunity too. We recently announced to our employees worldwide that we are incorporating all our '24 ambitions into a comprehensive, highly actionable plan that balances all of our objectives as we begin our second century of continuous service.

I'm pleased to share that we've launched Project Elevate, a transformative plan to elevate our performance, efficiency, growth, profitability and employee experience. We see a path to balancing growth investments in conjunction with implementing cost and process improvements that will result in increased profitability.

To augment and accelerate our efforts, we engaged the Kearney organization, a leading global management consulting firm that works with 3/4 of the Fortune Global 500. I hired Kearney in a prior CEO role that resulted in a highly successful rebalancing of that company's organizational reporting structure, growth strategy and cost structure.

Here, with Kearney as the partner, Project Elevate will target a lower cost structure and higher profitability, inclusive of a reallocation of some of our savings to increase our investment in sales and marketing. Also, better leveraging our existing technology infrastructure, along with identifying new technology solutions, are also in scope with Kearney.

An added benefit of our collaboration with Kearney is the access we'll have to Silicon Foundry, a Kearney company. Silicon Foundry can help us align with the best partners and technologies to evolve our business models and create our road map for a rapid AI deployment. We expect to conclude our engagement with Kearney sometime in January, at which time our Project Elevate playbook for 2024 will be developed and will be in full execution mode.

Obviously, the tone at the top is key to our success, and I'm grateful to the talented senior leadership team we have at Harte Hanks for embracing this pivotal opportunity. I emphatically believe in Harte Hanks. I'm excited we've made such a huge stride in our sales leadership so quickly. In my first call, I said that Q2 revenue represented a near-time baseline -- a near-term baseline. As we look to the second half of the year, that remains applicable.

Despite the constant change that surrounds our business segments, we continue to be trusted and relied on by our customers representing world-class companies from across the world. With the success we expect from Project Elevate, we view 2024 as a company-defining year in which we will position our sales and marketing organization to achieve sustainable growth.

Now I will turn the call over to David Harrison -- sorry, David Garrison, our newly appointed interim CFO, to walk through our results. I want to welcome David to the team. He joins us at an important point in our evolution and brings more than 20 years of public company experience as a CFO. David also brings expertise in cost containment, process improvement, deep ERP experience and more.

David, welcome to Harte Hanks.

[David Garrison, executive]

Thank you, Kirk. I'm excited to be part of Harte Hanks. Although only joining Harte Hanks a couple of weeks ago, I appreciate the warm welcome and collaborative team that has diligently worked to educate me in my first days. Working with Project Elevate is a unique opportunity to leverage the creative strength of this organization, and I am eager to contribute to that good work across all business segments.

Now turning to the quarterly results. Third quarter revenues were $47.1 million, down 12.6% compared to $53.9 million last year and effectively flat when compared to the second quarter of 2023. This includes $2.2 million in revenue associated with the InsideOut acquisition during the third quarter.

Our operating expenses for the third quarter were $44.2 million. This was a 4% decrease on a sequential basis and an 11.8% decrease from the year-over-year quarter due to cost reductions prior to the commencement of Project Elevate.

Operating income was $2.9 million compared to $3.8 million in the third quarter last year and $1.7 million in the second quarter of 2023. We reported positive net income of $600,000 or $0.09 per basic share and $0.08 per diluted share compared to net income of $7.2 million or $0.87 per basic share and $0.83 per diluted share in the prior year.

Keep in mind, the third quarter last year, Harte Hanks reported $2.5 million in other income related to the sale of unused IP addresses. Net income was sequentially flat compared to the prior quarter.

Our EBITDA was $3.9 million compared to $4.4 million last year and $2.7 million for the second quarter of 2023. Adjusted EBITDA was $4.2 million compared to $4.5 million last year and $4.4 million in the second quarter of 2023.

From a segment contribution margin perspective, our Customer Care segment delivered $2 million in EBITDA, our Fulfillment & Logistics Services segment delivered $3.9 million in EBITDA and our Marketing Services segment delivered $1.5 million in EBITDA.

Turning again to those operating segments. Customer Care revenue decreased 19.4% from the previous year and sequentially decreased by 18.7%. The reduction relates to decreases in streaming services, conclusion of specific projects and a reduction in budgets in consumer products. The EBITDA decreased year-over-year 33% to $2 million. Management is confident in the long-term growth opportunity as we work to expand this customer base into new verticals.

Fulfillment & Logistics revenue decreased 4.1% to $22.5 million from the previous year, but sequentially increased by 15%. Increased logistics work from our largest customer, while fulfillment expanded its work with a large retail company contributed to the sequential increase. EBITDA increased 2.8% to $2.9 million from the previous year, while it increased 48% or $900,000 over the second quarter of 2023.

Marketing Services revenue decreased 18.6% to $10.6 million from the previous year and sequentially decreased by 3%. The largest driver of revenue declines relate to direct mail campaigns not continued into the current quarter and the completion of project work for a large financial services client.

EBITDA decreased 21% to $1.5 million from the previous year, but sequentially increased by 15%. Each of our 3 segments continue to deliver positive contribution margin and EBITDA. Management is confident that Project Elevate will positively impact all operating segments.

Now turning to the balance sheet. As of September 30, 2023, we had cash and cash equivalents of $13.3 million compared to $10.4 million at December 31, '22. Our combined long-term pension liability on the balance sheet as of September 30, 2023, was $35.9 million. And as previously announced, we are on track with the termination of our largest qualified venture plan, and we expect that to be completed in the first half of '24. As of September 30, 2023, we have no debt, and we continue to maintain a $25 million credit facility.

With that, I turn it back over to the operator to take your questions. Thank you.

[Operator]

[Operator Instructions] Your first question is coming from Michael Kupinski of NOBLE Capital Markets.

[Michael Kupinski, analyst]

Just a couple of questions here. Where do you feel that you need to have the most focus in terms of driving revenue at the company? Is there a particular segment that you feel has the biggest opportunity? And will you see more investment in that particular segment than others? And just kind of give us a flavor of the level of investment that you're anticipating.

[Kirk Davis, executive]

Michael, thanks for the question. This is Kirk. I would say in the near term, we, as evidenced by some of our hires, we see an extraordinary opportunity with the acquisition we did late last year. That would be the inside sales division. Although we are seeing a general lift in our pipeline development compared to earlier in the year, so that is heading towards an even distribution of, I think, opportunities. But in particular, we have some good discussions going on with potential clients, and inside sales is a great opportunity for Harte Hanks.

In terms of the investment, that will be measured. We expect to have good visibility by mid-January on our savings opportunities with Kearney's assistance. And as I reiterated in my remarks, we have the ambition of improving revenue, investing more in revenue, but we are also committed to driving our profitability up. So we can implement our sales transformation plan in steps to make sure that we're balancing all those objectives.

But partnerships is a really interesting opportunity for us. We don't have anybody that focuses on that, referencing the international expansion is a good opportunity. So I look at the opportunities we have in the pipeline for building our sales and marketing practice to be world-class as very, very rich, and we'll pursue that in lockstep with aligning costs in the company and getting a stronger bottom line.

[Michael Kupinski, analyst]

And I was just wondering, in terms of -- you mentioned driving efficiencies and so forth, and I assume that you might have some ideas in terms of the target margins and so forth. Do you have any thoughts in terms of adjusted EBITDA margins that you feel the company is capable of or where you'd like to see those margins being sustainable? Or just can you give us an idea of what you anticipate in terms of how we should look at and benchmark your strategy here?

[Kirk Davis, executive]

What we've said, I think, on the last call that we thought getting north of 10% would be our first milestone. And I think how much better we can do beyond that would be something we'd have more visibility on when we get into the full scope and analysis with Kearney. I'd say early on, our sense is we're very encouraged by what we're going to find there, but we'll give a more in-depth report on that next quarter.

[Michael Kupinski, analyst]

Got you. And then as we kind of look at Q4 and then maybe the next few quarters, can you give us a sense in terms of the tone of the market, the business environment, just any additional color that you can have in terms of how the business is pacing as we look into the balance of the year and into the first quarter?

[Kirk Davis, executive]

Well, it's a time of year where not only are we starting to think about our plans for next year, but also many of our customers are. And the stability we sense heading into next year is encouraging with our existing customer base. So that's very positive.

We aren't feeling or we certainly aren't really concerned about the economy per se. We've seen some softness from financial services. We've seen some softness from technology companies. But when I look at the opportunities we have and how quickly we're organized to start improving the way we go to market and our conversion success accountability, I'm just pretty encouraged about how I think we'll do.

Now I know there's a lot of speculation about the economy and rates and whether we're likely to see a recession next year. We certainly right now are very encouraged about the signs we're seeing and the initiatives we have. And if we do encounter something like that, then the work we'll have done and the urgency in which we're pursuing it with Project Elevate will be all that more beneficial and well timed.

So we're just feeling almost by the week that we're getting better organized and more conviction around these revenue initiatives. And hopefully, it was apparent that what we talked about doing last quarter, we've hit on all cylinders within the past few months of putting those in place. And I think that's what you're going to find from this management team.

[Michael Kupinski, analyst]

Awesome. And final question. I know as you indicated that you're just going through your budgets for next year, have you given any thought in terms of CapEx and how are you going to allocate CapEx at this point?

[Kirk Davis, executive]

We have not. We have some exciting opportunities. I think there's going to be opportunities that will be evident in the work we're doing on Project Elevate that would unlock additional savings, and we'll balance those. But we'll take a measured approach to CapEx to make sure that we stay in a strong financial position. And we'll have more to share on that as well next quarter because there are a couple of projects that we're looking at that we think would unlock a lot of revenue opportunity.

But as you can sense, we want to take a measured approach into the year. We realize that we're a new team, and we want to establish our credibility. And hopefully, that's evident in at least how we've gotten started.

[Michael Kupinski, analyst]

Got you. Well, you've assembled a great team. Good luck to you, guys.

[Kirk Davis, executive]

Thanks, Michael.

[Operator]

Well, that appears to be the end of our question-and-answer session. I will now hand back over to the management team for any closing remarks.

[Kirk Davis, executive]

I just want to thank everybody for joining the call today. Hopefully, it's apparent that we're laying out a plan in consistently delivering on the major objectives of our sales transformation. That's the key. And we're really excited and look forward to talking to you next quarter and showing continued follow-through. So thank you very much.

[Operator]

Thank you very much, everyone. 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.