Harte Hanks, Inc. Q1 FY2024 earnings call

• Launched Elevate program in October 2023 focusing on sales and marketing transformation, margin expansion, AI and data-driven decision-making, and customer centric culture.
• Sales and marketing transformation: Centralized sales organization, restaffed, expanded sales force, established strategic channels; marketing investment boosting digital presence and leads.
• Margin expansion: Identified $6 million immediate cost reduction by year-end with $16 million annual savings by 2025, working with Kearney for inefficiencies.
• AI and data-driven: Partnerships like with Amazon, exploring use cases to enhance customer experience.
• Customer centric: Establishing Chief Customer Officer role, expecting to hire by early Q3, focusing on customer experience and retention.

First quarter revenues were $45.4 million, a decline of 3.5% compared to $47.1 million in Q1 2023. Customer Care segment revenues were $12.4 million in Q1 2024 vs $11.6 million in Q1 2023. Sales Services increased to $4.7 million compared to $2.8 million in Q1 2023. Marketing Services revenues fell to $8.9 million in Q1 2024 vs $11.2 million in 2023. Fulfillment & Logistics revenues were $19.4 million in Q1 2024 vs $21.5 million in 2023. Operating expenses in Q1 were $45.1 million including $0.9 million in restructuring expenses, down from $46.1 million in 2023. Adjusted operating income was $1.8 million in Q1 2024 vs $1.6 million in 2023, and adjusted EBITDA was $2.8 million in Q1 2024 vs $2.7 million in 2023.

• Anticipate momentum to continue building in 2024 as pipeline growth scales.
• Expect to appoint Chief Customer Officer in early Q3.
• Pension 1 termination contribution of $7.5 million to be made in June 2024 without obstacles.
• Sales Services segment has growth potential with margin around 30%-35% and potential for $9 million new growth over next couple of years.

None explicitly detailed in the transcript beyond general forward-looking statement risks mentioned in the opening about actual results differing from projections.

Q: Congratulations on getting this company on track. Couple of questions. In terms of your European expansion, where are those operations located and can you kind of give us some sense of is the European operations profitable at this point or when do you anticipate that they'll swing towards contribution margin going forward?

A: So our beachhead in Europe is Portugal and we are ramping up the team there as we speak. And I'm sorry, what was the second part of your question? Michael Kupinski: I was just wondering if it's profitable already or when do you anticipate that we'll start to see contribution margin coming from your European operations?

A: Yes. So actually we're extremely proud of our European operations. From a delivery perspective, we are outperforming customer expectations. It's a profitable and growing geo for our company and we're very proud of the team that we have there. And I would expect that in the third quarter our additional sales efforts in Europe will start to be fruitful. We are developing a strong international pipeline at the same time we're doing as well as we are in the United States.

Q: And then thanks for breaking out the Inside Out acquisition into your Sales Service segment. Can you kind of give us a sense of what you anticipate this segment in terms of the growth potential? What type of revenues that you can expect we should look for here in terms of revenue growth and then also margin potential?

A: Sure. So I think this will be a margin business that will be around 30% to 35%. What we're doing right now is focusing intensely on onboarding and coming up the curve for a large client that we're very, very proud to have. It's a client profile that if we do an exceptional job has the capacity to invest more with us in the years to come. So it's a thrilling opportunity. I would also say that Kelly and Ron Lee, our lead in our inside sales or Sales Services business, have done some great work on a go-to-market strategy that is really going to be targeting the B2B marketplace in software and tech in particular, which is an area that we feel we can excel in delivery through our Sales Services division. So we actually will be launching this program in the next few weeks and I believe in August, we can give an update. But it's a business that we think out over the next couple of years could certainly translate to $9 million of new growth and that's apart from our regular pipeline sales efforts, which our Sales Services division is very much poised to benefit from. In fact right now when we think about our pipeline, there's a very good distribution between Marketing Services, Customer Care, Sales Services and Fulfillment & Logistics. So it's just as we would want to see it because as we bring in new business, it's nice that it's evenly distributed across the company because it emboldens our execution ability as opposed to if we had a super large new business buildup in 1 division or another and facing a backlog challenge. So so far, we're really very pleased with how Sales Services is doing and the new leadership there that Ron brings, but just also how well positioned we are to onboard and effectively deliver across all 4 segments.

Q: That's terrific. And in the Logistics division and pardon me if I got this incorrect, but I thought you meant you were getting a grocery store distribution. And I know that if I recall, you were seeking FDA approval to be able to provide services for food items in your distribution. Is that what you were talking about there or if you can just kind of add some color on that?

A: Yes. We have that capability already in our Fulfillment business, which is located in Kansas City. The reference that we made to the grocer comes with an emerging and fabulous relationship we have with a successful printing company that we've developed a good partnership with. And so as they secure large new printing clients where there's logistics arm for them and make sure that product gets delivered to many different destinations.

Q: Got you. And so in terms of your distribution for food items, have you been able to capitalize on that yet?

A: I just want to be clear. So, we definitely are capitalizing on distribution of products across the pharmaceutical complex. We're not doing a great deal in grocery right now, but we do have an FDA approved facility in Kansas City. I'm not sure what the capabilities are for how many different product lines it could handle, but for example we've handled baby formula efficiently out of that complex. So I could follow up with you on that. But I think right now it is well suited and outfitted to do food product distribution. We don't have a great deal of it right now, but we're growing in numerous other areas in that complex.

Q: Got you. One final question. You indicated in the past you were seeking partnerships and I know you spent a lot of time talking about how you've improved upon your sales strategy and your go-to-market products and so forth. I was just wondering in terms of partnerships that you highlighted in your last call in terms of improving your go-to-market product suite. Can you kind of give us an update on how those are performing? I know that you spend a little time on some of those, but I was just wondering specifically if you can point to specific partnerships that you developed that might be start to contribute as we go into the Q2 and Q3?

A: Yes. I think in August we'll be able to share some outcomes with our partnership strategy. In fact we just had a very, very deep dive this past week in our senior leadership team meeting where our Head of Partnerships walked us through at least a dozen. But one that I'm particularly excited about that looks like it's getting out of the gate well is our relationship with a company that does an exceedingly large amount of work in helping companies find good companies to handle customer care. And so this is an organization that does a strong business in that regard and we've been working with them for 3 or 4 months to obviously prove our abilities and capabilities and the geos that we can service effectively. And just this week we got our first opportunity with that company, but we expect that to be a very strong pipeline builder for us. And I'll also harken back to the very first partnership we established within my first 2 months here, which is with a business development company that enables us to be in front of Fortune 1000 type companies on a 2x to 3x a month basis and we've now developed a number of new customers through that pipeline. But we are looking at other partnerships particularly in the care area and I do believe we'll have some positive news to share on our next call in that respect. And really just to be completely transparent here, we have over a dozen conversations in scope right now to build this network and once we accomplish that, that will serve as a multiplier effect for us in addition to our team's acquisition efforts. So it's an important channel. I've commented previously that B2B companies can typically see 30% of their revenue coming from this source. It's de minimis for us today, but we are poised to make that a strong contributor over the next 6 months.