Harte Hanks Inc

NASDAQ:HHS

Earnings Call Transcript 2021-Q4

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Harte Hanks Fourth Quarter and Full Year 2021 Earnings Call. [Operator Instructions]

It is now my pleasure to turn the floor over to your host, Rob Fink. Sir, the floor is yours.

[Rob Fink]

Thank you, operator, and thank you, everyone, for joining us today for the Harte Hanks Fourth Quarter and Full Year 2021 Earnings Conference Call. 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 about the company's strategy, financial outlook, business and industry expectations, anticipated performance and outcomes and other statements that are not based on 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 will also reference non-GAAP financial measures. Please refer to the earnings press release that was issued after the close today for a reconciliation of these and other related disclosures. The company's earnings release is available on the Investor Relations section of the Harte Hanks website at hartehanks.com.

With that said, I'd now like to turn over the call to Brian Linscott. Brian, the call is yours.

[Brian Linscott, executive]

Thank you, Rob, and good afternoon. 2021 was a significant turning point for Harte Hanks. We completed our restructuring; implemented our asset-light operating model; and with a more efficient significantly more profitable company, we listed our shares on the Nasdaq Global Market. We entered 2022 with a proven, profitable business model; a portfolio of loyal Tier 1 customers; and a business built upon value-added service offerings that our customers demand. We are poised for profitable long-term growth, and I want to commend and thank all of our employees for the professionalism and passion from which they serve our clients every day. It is because of them that Harte Hanks is a stronger company.

Since our last earnings call, we've continued to invest in our business to maximize profitability and drive growth. These investments involve hiring the right people, expanding our tech capabilities and cross-selling our fully integrated service offerings. In early January, we hired Don Aicklen as Senior Vice President of Sales and Marketing. Don started his career with Harte Hanks, ultimately leading our national sales organization and established a new presence in automotive and consumer durables market. Today, Don is driving our marketing campaigns in a variety of verticals and leading our sales efforts across all 3 segments. We are excited for him to return to the company in a senior leadership role. In February, we announced our expanded health care practice under the experienced leadership of Janel Harris. Janel will be charged with expanding our practice of providing world-class service for our clients in the pharmaceutical, wellness and health care industries.

Over the past few years, we have built a robust health care practice, including relationships with top-tier customers like Abbott, GSK, Pfizer and other national and state health care systems. Our proven ability to provide and execute comprehensive and fully integrated programs, including patient insights, strategy, data analytics, marketing campaigns, customer care, member support, fulfillment and logistics, make us an ideal partner for health care organizations to accelerate growth and best service their customers.

Our expanded health care practice is already delivering results. We were recently awarded a multiyear contract by a national health care organization to provide new mothers with products including breast milk pumps and health-related materials. Our Customer Care segment will engage with its members and address inbound inquiries, and our Fulfillment & Logistics segment will distribute the breast milk kits to program participants from our new 410,000-square-foot FDA-approved facility in Kansas City. This contract is connected to the component of the Affordable Care Act designed to improve newborn nutrition and wellness. In the first year alone, the program is expected to deliver over 100,000 breast milk kits and materials to new and expecting mothers covered under the program. This win is a prime example of our comprehensive fully integrated approach to serving our customers in a cost-effective way.

Where previously Harte Hanks provided services within discrete business silos, today, we are bringing a multidisciplinary approach to satisfy our clients' complete customer engagement mission. We were selected by this large health care company based on our unique ability to provide end-to-end, single-source solution that includes everything from customer service and member engagement to product sourcing, inventory management, fulfillment and distribution of wellness and nutrition kits. For the same health care system, our Marketing Services segment provides strategy, analytics, campaign execution for the health care organization in select states, helping our clients grow its membership base.

Overall, this project truly touches every part of our organization, taking full advantage of our differentiated capabilities. It is a model for future large-scale engagements in health care and other industries. To facilitate such future engagement, we are investing in technology across our organization, enabling us to work smarter and faster, improving our data and analytics capabilities. In addition, these investments will allow us to eliminate manual processes and simplify and standardize how we work. We view our data and analytic expertise as a growth catalyst for Harte Hanks as customers increasingly look to better utilize data to grow and improve their efficiency. We have significant capabilities in B2B tech, auto, consumer products and retail, and we are investing to expand this area of our business.

Another growth catalyst for Harte Hanks is in the financial industry. We have proven ability to provide a robust CRM agency solution and campaign strategy particularly with respect to mid-market banking segment. Our offers involve solutions such as campaign strategy, design, digital delivery, execution as well as printing and digital delivering of customized financial reports to customers. This growth area leverages several areas of expertise, including data and analytics, where our proven expertise with data privacy and our ability to cleanse, enrich and augment data to enable data analytics predictive modeling is of significant value to our customers.

Now on to our results. Our 3 operating segments delivered solid results particularly in terms of contribution margin in the fourth quarter. As I've described before, our customer -- 3 customer segments include: number one, Customer Care, focused on delivering full-service customer care solutions that are tech-enabled and people-driven; Fulfillment & Logistics, focused on B2B market and literature fulfillment, B2C e-commerce sampling, and end-to-end supply chain and logistics services; and three, Marketing Services, which is 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.

To begin, we ended the year with a strong fourth quarter with revenues increasing over 10% to $52 million. More importantly, we moved from an operating loss in the fourth quarter of last year to profitability this year. EBITDA for the quarter is a positive $3.5 million, which is an improvement of $3.1 million over the prior year. Going forward, we anticipate positive EBITDA for each quarter of 2022.

We continue to drive financial and operational improvements in each of our segments. Customer Care revenue increased by 12.7% from the previous year, and year-over-year EBITDA improved 2.4% to $2.6 million from $2.5 million in the prior year quarter. We continue to benefit from some COVID-related project work albeit at a lower run rate. We anticipate reductions in this COVID work as we move through the first half of 2022. As we have said, we also expect further reductions in our Customer Care cost structure as our leases are expiring and we benefit from the work-from-home environment. We recognize and are adapting to the wage pressures in today's labor market by recruiting -- by our recruiting flexibility in the work-from-home environment, which is allowing us to mitigate some of the wage pressures we see.

New business wins for the quarter include: number one, a regional sports network to support customer interactions for their direct-to-consumer product launch. Harte Hanks will build the self-service solution and support phone, e-mail, chat and text customer interactions as we leverage our streaming industry experience. A company with advanced e-commerce social part also selected us to invite its customers into their transaction experience. Harte Hanks will assist customer interactions and digital ticket distribution as we leverage our experience handling sports and entertainment customer experiences. And third, we were hired by a consulting company's government practice, and they selected Harte Hanks to support unemployment interactions and claims processing for a state government. Harte Hanks was selected due to our top performance in their vendor network.

Fulfillment & Logistics revenue increased approximately $3.6 million or approximately 25% compared to the previous year, and EBITDA improved to $2.1 million from essentially breakeven the prior year quarter. With the consolidation of fulfillment operations in our FDA-approved Kansas City facility, we anticipate continued margin improvement into 2022. And we have added approximately 100,000 square feet of operating capacity to serve organic client growth as well as new business. We continue to grow in spite of supply chain challenges largely due to the critical nature of stored products in our facilities and the sales enablement materials to our client -- critical to our clients' success. The additional capacity in our locations also serves as growth opportunities. In addition, we have been largely successful in mitigating the impacts of higher transportation costs due to long-standing and deep relationships in the transportation and trucking industry.

New business wins for the quarter included: one, expanding our partnership with a health care and nutrition company, winning a $1 million-plus program to fulfill prebuilt sample kits to pediatrician offices nationwide; and two, a long-standing retail customer selected Harte Hanks to manage and deliver time-sensitive print materials on additional distribution lanes due to our on-time performance and low-cost pricing.

Marketing Services EBITDA rose by $0.5 million or about 26% compared to last year. As previously stated, we have driven improved profitability from Marketing Services segment as we have realigned our resources, reduced our SG&A expenses and invested in technology and infrastructure to better serve our customers. We remain aggressively focused on our Marketing Services -- our marketing efforts to attract new customers within prioritized market categories, including health care, financial, B2B tech and consumer products. We have made significant progress in our marketing -- our product offerings, including strategy, data analytics, CRM agency services, and marketing enablement capabilities.

New business wins for the quarter include: one, a global multinational technology manufacturer chose Harte Hanks to implement and execute a full-service omnichannel demand generation program. Harte Hanks was selected because of its wide variety of solutions and services required to execute the campaigns. The program leverages analytics, creative, marketing services, media buys, and outbound calling lead generation; and second, an existing client that distributes salon professional products, where we provide data-driven marketing strategy to drive top line sales through customer loyalty in B2B beauty space. We increased our existing strategy and analytics remit after we helped them achieve $1.4 billion in annual sales.

In conclusion, this was a strong and productive and encouraging year, reflecting significantly improved operating efficiency and continued momentum in the business. Recent new business wins and a strong and growing pipeline of vetted near-term opportunities give us confidence that our revenue level will remain in line with 2021. More importantly, we remain optimistic in our ability to continue to drive increased profitability. We expect continued positive net income and significant year-over-year improvement in full year EBITDA, driving higher free cash flows during 2022.

With that, I turn it over to Lauri.

[Laurilee Kearnes, executive]

Thank you, Brian. As Brian said, this was a strong end to a momentous year for Harte Hanks, and we entered 2022 in our strongest financial position in years. We achieved our fourth consecutive quarter of year-over-year revenue growth, and our operating income of $2.9 million was a $3.2 million positive swing. The December quarter was our seventh quarter in a row of positive adjusted EBITDA at $5.3 million. Our performance included new business wins and the benefits of our asset-light model. We continue to focus on streamlining and optimizing the business to meet the needs of the market today, and we are encouraged by our results. That said, the large nonoperational restructuring charges are now behind us.

I'd now like to walk through the results in more detail. Fourth quarter revenue was $52 million, up $2.4 million sequentially from the third quarter and up $4.9 million or 10.4% from $47.1 million in the same period last year. Revenue growth was led by our Customer Care and Fulfillment & Logistics segments. Customer Care was up $2.2 million or 12.7% year-over-year as a result of several large COVID-related projects that we expect to wind down over the first half of 2022. Fulfillment & Logistics services was up $3.6 million or 24.5%. And Marketing Services was down $0.8 million or negative 5.4%.

From a contribution margin perspective, our Customer Care segment delivered $2.6 million in EBITDA, up $0.1 million or 2.4%. Our Fulfillment & Logistics services segment delivered $2.1 million in EBITDA, up significantly from $30,000 in EBITDA in the year ago quarter. And our Marketing Services EBITDA grew by $0.5 million despite lower segment revenues due to our efforts to rightsized the cost structure of this business. We believe each of our 3 operating segments is 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 fourth quarter were $49.1 million, up from $47.4 million in the year ago quarter due to increased revenue. We reduced expenses in advertising, selling, general and administrative costs by $1.3 million.

Operating income was $2.9 million, up from an operating loss of $0.4 million in the year ago quarter. This improvement is attributed primarily to our revenue growth and sustained expense management efforts. We posted net income of $1.8 million or $0.20 per both basic and per diluted share in the fourth quarter compared to net income of $1 million or $0.12 per basic and $0.11 per diluted share in the fourth quarter last year. EBITDA for the fourth quarter was $3.5 million compared to $0.3 million in the year ago quarter.

Our progress is even more impressive when looking at the full year financial results. 2021 revenue was $194.6 million, up 10% from $176.9 million last year. Our operating expenses for the year were $187 million, down from $187.5 million last year. Operating income was $7.6 million, up from an operating loss of $10.6 million last year, a positive swing of more than $18 million. We posted net income of $15 million or $1.85 per basic and $1.76 per diluted share compared to a net loss of $1.7 million or $0.34 per basic and diluted share last year. Our net income for the year benefited from a onetime gain on the forgiveness of our PPP loan. However, the prior year benefited from a similar-sized tax benefit. So the significant improvement in our net income compared to net losses last year largely reflects true improvement in our business. To further validate this point, EBITDA for the full year 2021 was $18 million compared to $3.2 million in the full year 2020.

Now turning to our balance sheet. As of December 31, 2021, we had cash and cash equivalents of $11.9 million. This compares to a cash balance of $29.4 million as of the period ended December 31, 2020. As of December 31, 2021, we have $7.5 million in net income tax receivable. This is due to our net operating loss carrybacks for 2020 of $7.8 million which are partially offset with state tax payables. We expect to receive the funds for our net operating loss carrybacks in Q1 of this year. As of December 31, 2021, we had $5 million drawn against our $25 million credit facility.

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

[Operator]

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

[Michael Kupinski, analyst]

I was wondering if you can just kind of give us an outlook in terms of the tone of the market in general especially now with the market environment that we're seeing. I was wondering if you can do that.

And then also, I know that the company has gone through a lot of expense cuts in light of inflationary pressures and things like that. If you can kind of just kind of give us an expense outlook as we go into 2023.

[Brian Linscott, executive]

Sure. Thanks, Mike, for the question. So I think the market environment -- obviously, today was probably not the greatest day to have an earnings call given the kind of turmoil in Ukraine. That said, I will say that we've had a lot of positive momentum with a growing amount of opportunities that we are pursuing. And so I'm optimistic about our short-term prospects and excited about continued improvement on the revenue side.

And then with respect to the cost side, it's very clear that we're through the restructuring efforts and we've got a much improved cost structure poised and set for going into 2022. And so it's exciting for me, and I think that we've got great opportunity on the revenue side, and we're a leaner and meaner organization on the cost side, which I expect to continue to generate some improved bottom line EBITDA as a result.

[Michael Kupinski, analyst]

I know that the company was thinking about looking at more conventional financing terms and things like that. And I'm sorry if you addressed this earlier. I got late on the call. Where are the prospects in terms of maybe doing a refi? And then you obviously have a building cash flow situation. What are the prospects of -- or what are you thinking in terms of capital allocation? And maybe if you could talk about whether or not you're looking at M&A and that sort of thing as well?

[Brian Linscott, executive]

Yes. So thanks for the question, Mike. I'll try it and Lauri can chime in as well. But in December, we -- actually, we got a more -- a traditional credit facility of $25 million in place. And so where we're at right now at the end of the year, I think as Lauri had mentioned, is $5 million drawn on that $25 million credit facility. So we're in a conventional lending agreement. And as far as use of cash, as we come in and hopefully continue to generate positive free cash flow and build some cash, in the short term, our objectives are really to pay down so that we're debt-free, number one; and number two, continued measured investments in technology in some areas that we find for organic growth. And then if there are selective inorganic opportunities that come our way, we're always open to kind of reviewing and looking. But our first priority now is pay down the debt and the second in continued investment in our people and our technology.

[Operator]

[Operator Instructions] Thank you. There are no further questions in the queue. I will now hand the conference back to Brian Linscott, CEO of Harte Hanks, for closing remarks. Please go ahead.

[Brian Linscott, executive]

I just want to thank everyone for joining us this afternoon. I certainly look forward to our next earnings call. Have a good evening.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.