HARTE HANKS INC Q4 FY2022 earnings call

Management Statement and Operational Highlights

• 2022 was a milestone year for Harte Hanks, celebrating 100th anniversary; the business was stabilized with sustainable profitability and a shift to an asset-light model.
• For 2023, expected continued growth despite Q1 challenges due to non-recurring projects in 2022; high-single digit annual revenue and EBITDA growth anticipated.
• Eliminated unprofitable contracts, strengthened balance sheet with over $10 million in cash and no debt; pension liability decreased by nearly $15 million.
• Completed acquisition of InsideOut in December, which is accretive to earnings and provides short-term revenue growth; anticipates cost synergies from the acquisition.
• Invested in technology for marketing services and Customer Care, expanded client relationships, and added new sales team members.

Segment Performance

• Fulfillment & Logistics: Q4 revenue increased $6.3 million or 34.4%, EBITDA increased 5.9% to $2.3 million. Full year revenue was $206.3 million, up 6% from $194.6 million, and EBITDA was $17.8 million, up 75% from $10.2 million.
• Customer Care: Q4 revenue declined 12.9%, but EBITDA increased 24.4% to $3.2 million. Full year revenue was up 6% and EBITDA was up 75%.
• Marketing Services: Q4 revenue decreased 6.8% to $13.6 million, EBITDA decreased to $2.1 million. Full year revenue was up 6% and EBITDA was up 75%.

Guidance

• Expect modest year-over-year revenue growth in Q1 with a drop in EBITDA due to revenue mix changes.
• Anticipate high-single digit annual revenue and EBITDA growth in 2023.
• InsideOut acquisition is immediately accretive to earnings and provides short-term revenue growth opportunities, with cost synergies expected to drive post-acquisition valuation to 3-4 times EBITDA.

Risks

• Macro-economic headwinds that could impact business performance.
• Fluctuations in pension liability due to interest rate changes and asset value movements.
• Dependence on key clients and projects reaching end of life, which could reduce revenue.

Question and Answer

Q: Maybe to start on the quarter, if you could maybe talk to what drove the strong margin and Customer Care and how much was the improved operational efficiencies versus maybe some other factors? And then secondly, how much of that good performance is sustainable into 2023?

A: Brian mentioned revenue mix driven by rolling off lower margin pandemic projects and pivoting to more full-time employees; Lauri agreed Q4 was unusually strong but expects margin improvement to continue generally within a percentage or two of current performance.

Q: Maybe turning to the guidance and the commentary you gave there, just any sense on how much EBITDA should be expected to be down in the first quarter? Any more you have on the mix changes expected in the first quarter? And then secondly, if you could talk about the full year cadence of revenue and EBITDA as we progressed throughout the year?

A: Brian stated Q1 2022 had high margin one-time projects, and 2023 Q1 has higher Fulfillment & Logistics revenue (lower margin), leading to double-digit EBITDA decline; expects improvement from Q2 through Q4.

Q: You mentioned looking at potential M&A, but obviously in a disciplined manner. If you could just speak to the pipeline of deals you're looking at and should we expect something above, you're looking at things of similar size to InsideOut or maybe would you be considering something on the larger side?

A: Brian said directionally tuck-in acquisitions of similar size to InsideOut are easier, but larger acquisitions with right capabilities and tech profile would be evaluated.

Q: First of all, I have a comment that 2022 in my view was kind of like a watershed year for you guys because coming off of a strong 2021, you showed growth which was great and I think of it to that degree, I look at your confidence in 2023 and looking at growth obviously is, I just love the confidence that you're exhibiting there. Was just wondering if you can just talk a little bit about what is baked into your expectations, whether they be macroeconomic view or whether it be specific business trends that you're seeing that you can, that adds the confidence to show not only revenue growth, but adjusted EBITDA growth and even earnings growth for 2023?

A: Brian mentioned inorganic growth from InsideOut acquisition, opportunities in demand generation, inside sales, and partnerships; Lauri discussed pension liability and tax refund expectations.

Q: And do you think that you'll have growth in each of your segments?

A: Brian expected heavier growth in Fulfillment & Logistics, with growth in Customer Care and cautiously optimistic about Marketing Services.

Q: And then of course not just a year or two ago, investors were concerned about the unfunded pension liabilities, and now it seems like you are addressing that even further. I was just wondering if you can talk a little bit about what might be the unfunded pension liability as of first quarter. And then given the fact that we're probably looking at another interest rate increase, do you have thoughts about where the unfunded pension liabilities might be at the end of this year?

A: Lauri said Q1 doesn't have full restatement of pension liability, but with interest rate changes, expected some decrease in unfunded liability by year end.

Q: The InsideOut acquisition, can you give us a sense of what the annual revenue run rate might be and maybe even adjusted EBITDA, if it's accretive since you're anticipating some cost synergies there? Any color on that acquisition in terms of revenues and EBITDA?

A: Brian said trailing 12 months before acquisition was ~$11 million in top line and $1.5 million in EBITDA, expecting growth and more than $1.5 million EBITDA contribution.

Q: And then outside of the non-recurring projects you had talked about in the first quarter, can you talk about maybe if you factored that out, what the underlying revenue trends were in the first quarter? I believe you are talking specifically about Customer Care, right, over there from a year ago?

A: Lauri said trend continues with largest growth in Fulfillment & Logistics, and Customer Care expected to grow modestly in 2023.

Q: In terms of just capital allocation at this point has the company considered looking at returning to capital to shareholders or other options at this point? Or can you just talk a little bit about capital allocation?

A: Brian said capital allocation includes potential acquisitions, technology investment, pension funding, and discussion of stock buyback or return of capital to shareholders, with no decisions made yet.