Harte Hanks, Inc.

Good day, everyone, and welcome to the Hart-Hanks second quarter earnings call. At this time, all participants are in a listen-only mode. Later, you'll have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing star and one on your touchtone phone. You may withdraw yourself from the queue by pressing star two. It is now my pleasure to turn the conference over to Mr. Tom Bauman of FNKIR. Please go ahead, Mr. Bauman.

Thank you. Hosting the call today are Brian Linscott, Chief Executive Officer, and Lori Kearns, Chief Financial Officer. Before we begin, I want to remind participants that during the call, management's prepared remarks may contain forward-looking statements that are subject to risks and uncertainties. Management may also make additional forward-looking statements in response to your questions today. Therefore, the company claims protection under the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from results discussed today, and therefore, we refer you to a more detailed discussion of these risks and uncertainties in the company's filings with the SEC. In addition, any projections as to the company's future performance represented by management include estimates as of today, August 11, 2022, and the company assumes no obligation to update these projections in the future as market conditions change. This webcast and certain financial information provided on the call, including reconciliations of non-GAAP financial measures to comparable GAAP financial measures, are available in earnings press release that was issued shortly after the market closed. A copy of that press release and other corporate disclosure is available on the investor relations section of Hart Hanks' website at harthanks.com. With that, I would now like to turn Nicole over to Brian. Brian, the call is yours.

Thank you, Tom, and good afternoon. The systemic changes we have made to Hart-Hanks are clearly paying off as we have delivered significant improvements in operating income and EBITDA, even as revenues modestly decreased, as expected due to runoff of some pandemic-related projects. This improved profitability is a direct result of our strategic decisions to implement an asset-light business model and focus on profitable business to drive higher margins. Our operating margins improved to over 8% compared to less than 3% in the year-ago quarter. Hart-Hanks is now sustainably profitable with a strengthening balance sheet and a business model that generates cash. Our restructuring is behind us, but we will continue to drive operational improvements and strive for continued expansion of revenues and margins. Entering 2022, we expected revenues to be in line with what we had experienced in 2021, given that there were a number of pandemic-related projects that we onboarded in 2020 and 2021 that would be concluding this year. The 1.4% revenue decrease in the second quarter, especially the $3.8 million decrease in customer care revenue, reflects this expectation. However, we have been successful in adding new customer relationships and expanding our work with our existing blue chip customer base. So even with the well-documented slowdown in the economy, we remain confident in our outlook with a clear path to grow our top line for full year revenues on a year-over-year basis. As an example, this month we have begun ramping up our customer care staffing to support the August 21st streaming release of the House of Dragons, the prequel to the Game of Thrones. This event, as well as a significant win in logistics and other new business wins, provide added confidence in our ability to exceed a strong third quarter comp we face against 2021. We will face a particularly challenging comparison again in the fourth quarter, but looking out into 2023, we believe we have ample opportunities to drive growth in all three business segments as we continue to invest in sales, marketing, and partnerships while expanding existing client opportunities. Deepening our existing customer relationship continues to be a key area of focus. Our offerings are in demand, and increasingly, we are expanding relationships beyond a single business segment. This is largely due to the sophisticated customers we work with and the fact that our customers view Hart Hanks as a valued and trusted partner. We focus on data-centric, industry-leading solutions to effectively enable and create optimal customer experiences. And increasingly, we are bringing technology solutions to drive improvement to our customers' workflows, further strengthening these relationships. We continue to invest in our business to drive growth, increase profitability, and maximize shareholder value. Hiring and retaining people along with improving our technology platforms and expanding third-party partnerships will improve our market opportunities and provide more cross-segment sales of our fully integrated offerings. We continue to believe these investments will drive additional revenue expansion through improved cross-functional leverage and additional growth within our customer base through deeper penetration and increased wallet share. We are focused on strengthening our balance sheet and leveraging our free cash flow in our capital allocation decisions. At the end of the second quarter, we reach an agreement to repurchase all preferred shares held by Wipro. The repurchase of the preferred shares will eliminate the dilutive impact to common shareholders and will give us greater flexibility with our capital structure going forward. Another more recent third quarter improvement to our balance sheet came as a result of our efforts to migrate to a cloud-based infrastructure platform. As part of this process, we identified more than 52,000 unused IP addresses purchased by Hart Hanks in the early 1990s. In July, we sold unused IP address blocks via a handful of transactions for proceeds totaling $2.5 million. Our third quarter cash and third quarter non-operating earnings will realize a one-time improvement of approximately 2.5 million from the IP address block sales. While our long-term debt as of June 30th was $10 million, as of today, we have no long-term debt and we are building cash. Now on to our results. As you know, our three segments are as follows. Customer care, which is focused on delivering full-service customer care solutions that are tech-enabled and people-driven. Fulfillment and logistics, focused on B2B product and literature fulfillment, B2C e-commerce and sampling, and end-to-end supply chain and logistics services. And third are 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. As a whole, revenues declined 1.4% in the quarter to $48.6 million. but operating income increased 2.6 million or nearly 180% compared to the second quarter last year. Our EBITDA more than doubled to 4.6 million from 2.1 million in the second quarter last year. Net income for the quarter was 4.5 million and Hart Hanks is now solidly profitable on a GAAP basis. We expect continued profitability both in terms of EBITDA and GAAP net income for each quarter of 2022. Each of our operating segments continued to perform well in the second quarter. Customer care revenue decreased 19.8% from the prior year and year over year EBITDA decreased 25.6% to 2.5 million from 3.4 million in the prior year quarter. The decrease was due to a rolling off of COVID related projects as anticipated. That said, we expect customer care to deliver strong sequential results in the third quarter as the business onboards agents to support the House of Dragons premiere and as the business grows new and existing clients. The customer care pipeline remains healthy with current, new, and former customers. Additionally, we are in discussions with customers to expand our offering beyond customer care into marketing services, fulfillment, and technology development. Customer Care continues to invest in sales and marketing campaigns, conferences, talent, and partnerships with the goal to enhance growth in 2023. New business wins for the quarter included one, an existing client that leveraged Hart Hanks for its back office ticket processing and ticket sharing capabilities awarded Hart Hanks all of its customer-facing functions, including phone, email, and chat. The growth with this client has been driven by consistent delivery, execution efficiency, and high customer satisfaction scores. Second, Hart Hanks was awarded new business by a leading employee screening services company to provide a wide scope of B2B sales and marketing support services. Hart Hanks was selected based on its strong track record of providing seamless support and integration with B2B sales operations seeking to accelerate their growth. As part of this program, Hardhangs will provide our clients' sales team with a range of services to enhance their B2B sales efforts, including new lead generation, appointment setting, education and nurturing, and sales performance tracking. On to fulfillment logistics, its revenue increased approximately 3.9 million, or 24.3%, compared to the second quarter last year, and EBITDA increased 91.7% to $3.2 million. We are realizing the benefits of consolidating our operations into the Kansas City and Boston facilities. The 16 plus percent EBITDA margin for fulfillment logistics was even better than anticipated. We are experiencing healthy demand for our fulfillment logistics services, even as large logistics players and e-commerce giants have announced slowing of logistics spend. We continue to win new contracts in both fulfillment and logistics, and our revenue opportunities remain strong. While we see opportunities for margin improvement, including investment in light automation in both the fulfillment facilities, Boston and Kansas City, we anticipate EBITDA margins will be tempered due to the resultant revenue mix driven by higher growth, lower margin logistics contracts. Early in the third quarter, we entered into an agreement to manage the middle-mile logistics for a platform provider of low-cost delivery services to retailers and brands. We anticipate significant growth in the total freight under management for Hart Hanks Logistics in the second half of 2022 and into 2023, and we expect continued year-over-year growth in our fulfillment and logistics business. New wins for the quarter included a leading branding company selected Hart Hanks Fulfillment to manage the mass production, kitting, and distribution of 600,000-plus holiday sample kits for a Fortune 50 retail partner. This new relationship has already led to multiple follow-on production runs across their kitting and fulfillment network, directly supporting additional retailers and national brands looking for innovative ways to get products into the hands of their customers. Second, an existing customer care client leveraged fulfillment expertise to build and deliver thousands of promotional kits to high-value customers, time to coincide with and promote their monthly televised events. Finally, on to our marketing services business. Its revenues decreased just slightly to $13.5 million, but EBITDA improved to $1.8 million from $1.7 million. in the quarter a year ago. We continue to drive improved profitability from the marketing services segment as we realign our resources, reduce our expenses, and invest in technology and infrastructure to better serve our customers. Continued focus on delivery model and operational improvements are driving the enhanced profitability. We made significant progress in enhancing our product offerings and marketing campaigns that highlight targeted solutions for demanding customers. We remain aggressively focused on attracting new clients within prioritized market categories, including healthcare, financials, B2B tech, and consumer products. And our marketing services revenue pipeline remains strong. To further drive growth, we have increased our marketing spend, and we are hiring sales and marketing talent for the marketing services business in the third quarter. A new business win for marketing services in the quarter included a regional bank that selected Hart Hanks to provide digital media planning and buying, creative strategy and content development, leveraging our strong category expertise, our effective creative product, and our ability to provide the full array of services the bank needed. In conclusion, Hart Hanks has clearly established a new profitable baseline and a platform for consistent growth. Our long-established relationships with blue-chip customers and our talented employees are key assets to our business. Our optimism for top-line growth has increased, and our confidence in sustainable profitability has grown, even as the macro environment has tempered. We expect continued positive net income, a significant year-over-year improvement in full-year EBITDA, thriving higher free cash flows, during 2022. With that, I turn it over to Lori.