HARTE HANKS INC Q2 FY2023 earnings call

Management Statement and Operational Highlights

• Kirk Davis joined as CEO 8 weeks ago, noting the company has a world-class team, solid balance sheet, and profitable EBITDA-generating basis. He plans to evolve the organization for long-term growth.
• The business faced pandemic impacts but picked up projects to help customers; runoff from pandemic-related growth has fully wound down. Macro pressures have led to modest revenue headwinds.
• Focus on rejuvenating sales and marketing, including reallocating costs, hiring a new Senior Vice President of Sales, cross-training the sales team, and launching a partnership with a business development company for Fortune 1000 clientele. Also, highlighting the acquisition of InsideOut and its role in end-to-end revenue generation.
• Aim to lower costs without hindering customer delight, with targeted cost-out efforts like converging Customer Care and Marketing Services segments and reducing customer churn costs. Plan to provide an update on cost structure initiatives next quarter.
• Recognize generative AI as an opportunity, leveraging investments from market leaders like Microsoft and Amazon.

Segment Performance

• Customer Care: Revenue increased by $1.8 million or 11.9% from the previous year, with EBITDA of $3 million, up 18.3%. InsideOut contributed $2.3 million in revenue and $246,000 in EBITDA. The pipeline is improving with opportunities in verticals like pharma, government, etc., and new business wins include a multinational pharmaceutical company and a major consultancy firm.
• Fulfillment & Logistics Services: Revenue was $19.6 million, with EBITDA of $1.9 million, down $1.2 million or 39% year-over-year. EBITDA margin compressed due to higher lower-margin logistics revenue. New business wins include a major international manufacturer and a leading branding company.
• Marketing Services: Revenue decreased 18.8% to $10.9 million, with EBITDA decreasing 27% to $1.3 million. The largest driver was direct mail campaigns not continuing. New business wins include a major insurance carrier and a large online travel agency.

Guidance

• Expect third and fourth quarters of 2023 to look like the second quarter in revenue.
• Aim to work toward a 10% margin in the business.
• Plans to rejuvenate sales and marketing functions, with benefits expected in 2024.
• Potential for strategic acquisitions, with immediate focus on aligning costs and rejuvenating revenue operations.

Risks

• Macro pressures leading to spending slowdown and program re-evaluations from customers.
• Revenue runoff from pandemic-related growth has fully wound down, impacting revenue.
• Operational challenges in segments like Fulfillment & Logistics due to margin compression from lower-margin revenue growth.

Question and Answer Q: Julio Romero asked about strategy and the response from the team.

A: Kirk Davis stated the focus is on aligning costs to achieve a 10% margin, with a growth mandate, and the team has shown energy and response to the growth push.

Q: Michael Kupinski asked about cost cutting.

A: Kirk Davis mentioned a deep dive into the business to prioritize services with best trajectory and margins, aiming for a 10% margin, with no specific division singled out, and the process will take a few months.

Q: Michael Kupinski asked about the sales development partnership and Customer Care trends.

A: Lauri Kearnes explained the partnership is incremental with commissions and not a large fixed cost like past arrangements. Customer Care benefited from InsideOut acquisition and a ramp in May, with seasonality expected in Q3 and Q4 with health care open enrollment.