Harte Hanks, Inc. Q3 FY2023 earnings call

Management Statement and Operational Highlights

• Kirk Davis' Remarks: Highlighted the need to address marketing and sales opportunities, as customers aren't fully aware of Harte Hanks' capabilities. Hired Kelly Waller as Senior Vice President for sales and marketing, acquired Inside Out in December 2022, appointed Ron Lee as Senior Vice President of Inside Sales, and engaged Kearney for Project Elevate to improve cost structure and profitability. Mentioned strong cash position, no debt, positive operating income and EBITDA, and plans to reduce pension liabilities in H1 2024.
• David Garrison's Remarks: Reported Q3 revenues of $47.1 million, down 12.6% y-o-y but flat q-o-q. Operating expenses decreased, operating income was $2.9 million, net income was $600,000, EBITDA was $3.9 million, and adjusted EBITDA was $4.2 million. Each segment delivered positive contribution margin and EBITDA, and Project Elevate is expected to positively impact all operating segments.

Segment Performance

• Customer Care: Revenue decreased 19.4% from the previous year and sequentially decreased by 18.7%. EBITDA decreased year-over-year by 33% to $2 million. The reduction relates to decreases in streaming services, conclusion of specific projects, and a reduction in budgets in consumer products.
• Fulfillment and Logistics Services: Revenue decreased 4.1% to $22.5 million from the previous year but sequentially increased by 15%. EBITDA increased 2.8% to $2.9 million from the previous year while it increased 48% over the second quarter of 2023. Increased logistics work from the largest customer and expansion of work with a large retail company contributed to the sequential increase.
• Marketing Services: Revenue decreased 18.6% to $10.6 million from the previous year and sequentially decreased by 3%. EBITDA decreased 21% to $1.5 million from the previous year but sequentially increased by 15%. 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.

Guidance

• Project Elevate, in collaboration with Kearney, is expected to positively impact all operating segments.
• Targeted adjusted EBITDA margin north of 10% as a first milestone, with more visibility on further improvements after Kearney's analysis.
• Encouraged by stability in the customer base heading into next year and plans to balance CapEx with revenue opportunities, with more details to be shared next quarter.

Risks

• No specific risks detailed in the transcript beyond general disclosures about forward-looking statements being subject to risks and uncertainties as per the Private Securities Litigation Reform Act of 1995.

Question and Answer

Q: 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.

A: Kirk Davis responded that the inside sales division (acquired last year) is an extraordinary opportunity. Investment will be measured, with visibility on savings opportunities from Kearney by mid-January. Partnerships and international expansion are also key opportunities, and the company aims to balance revenue investment with profitability.

Q: In terms of driving efficiencies and target margins, 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?

A: Kirk Davis said getting north of 10% would be the first milestone, with more visibility on further improvements after working with Kearney, and details to be shared next quarter.

Q: As we look into Q4 and 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.

A: Kirk Davis mentioned stability in the customer base heading into next year is encouraging. While there's softness in financial services and technology, the initiatives around Project Elevate and sales transformation are expected to drive progress. The company is encouraged by the organization's momentum and plans to be well-positioned even in a potential recession.

Q: Have you given any thought in terms of CapEx, how are you going to allocate CapEx at this point?

A: Kirk Davis stated they will take a measured approach to CapEx to maintain a strong financial position, with more details to be shared next quarter as they identify projects that could unlock revenue opportunities.