Harte Hanks, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Hart-Hanks Third Quarter 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Tom Bowman of FNKIR. Sir, the floor is yours.

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, November 10, 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 the 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 the call over to Brian. Brian, the call is yours.

Thank you, Tom, and good afternoon. This was another strong quarter for Hart Hanks. We entered the year expecting revenues to be generally flat to slightly down as pandemic-related projects ran off. However, our new business efforts have been successful. We have expanded existing client revenues and added new logos over the past few months. The recent wins have more than offset the project's reaching end of life, and as a result, we continue to grow. While most of that growth has been in our fulfillment and logistics segment, which has resulted in modest margin compression, we continue to generate significant profitability and free cash flow, enabling us to strengthen our balance sheet. The financial improvements are due in large part to systemic changes we have made at Hart Hanks. The strategic shift to an asset-light model, the elimination of unprofitable contracts, and the meaningful cost-cutting measures have positioned Hart Hanks for sustainable operating income and EBITDA generation. Our restructuring is behind us, but we will continue to drive operational improvements and strive for continued expansion of revenue and margins. Revenue increased nearly 9% for the quarter, and we are up more than 6% year to date. Again, this is encouraging considering two things. First, last year in Q3, customer care experienced significant revenue from its state unemployment projects tied to the pandemic. And second, last year in Q3, our marketing services segment realized favorable revenues from less profitable direct mail projects that concluded in 2021. Our fulfillment and logistics segment grew nearly 56% in the quarter, including a large win in logistics, a value-added kitting and packaging project for a Fortune 50 retailer, and increased programs from an existing pharmaceutical company. While Q4 2021 was one of our strongest revenue quarters in recent history, and despite the macroeconomic environment, we think Q4 2022 Hart-Hanks total revenue will look similar to last year. Moreover, we have ample opportunities to drive growth in all three business segments in 2023. While others in the industry are facing headwinds, we provide offerings and services that are essential to the long-term success of our loyal Blue Chip customer base, and we remain cautiously optimistic that we will organically grow customer revenue. In addition, our proven stable earnings performance and our investment in technology has opened more opportunities within our current and former client base and our unique and compelling cross-segment capabilities position as well for increasing wallet share within our existing customers. Further, our marketing services segment provides performance-based digital marketing solutions and outsourced managed marketing services that are critical for customers as they look to optimize results and reduce marketing spend in a tough economic environment. We continue to invest in sales, marketing, and partnerships while expanding client opportunities. During Q3, we added a salesperson in marketing services and we are in the process of hiring a salesperson in customer care to expand our inbound and outbound call center opportunities. Our sales pipeline remains strong. When compared to the start of 2022, our pipeline has nearly doubled in size. While the sales cycles vary by segment, we remain excited about our cross segment selling opportunities from customers in streaming, pharma, travel and leisure, and B2B tech verticals. Some of the cross sale opportunities will be realized in Q4 this year, but most of the opportunities we expect to materialize in 2023. Additionally, we see demand in the marketplace for lead generation campaigns, which leverages our cross segment capabilities in marketing services and customer care to drive compelling ROI for our customers. We continue to invest in our business to drive growth, maximize profitability, and increase shareholder value. Hiring and retaining talented people is a key area of focus. and we are simultaneously improving our technology platforms to enhance market opportunities and sell our fully integrated service offerings. We went live with our new ERP system this quarter, and as we integrate more functionality over the next year, we anticipate efficiencies within our segments and overhead departments. The investment is an example of building a foundation for long-term scalable growth. While the job market has created substantial challenges for many businesses, including higher salary costs and benefits, we have remained competitive while improving our bottom line. At the beginning of 2022, we brought back our 401 match for our U.S. employees while improving labor efficiencies and the bottom line EBITDA. In 2023, we are improving the healthcare benefits for our employees to retain and recruit talented people. We continue to believe these investments will drive additional opportunities and incremental top and bottom line growth. A continued focus for our team is to strengthen our balance sheet. Three areas I'd like to highlight include first, as mentioned previously, at the end of the second quarter, we reached an agreement to repurchase all preferred shares held by Wipro. The repurchase of the preferred shares will eliminate the diluted impact to common shareholders and give us greater flexibility with our capital structure going forward. We anticipate the final conclusion of this matter to occur in the fourth quarter. Second, another more recent third quarter opportunity came as a result of our migration efforts to cloud-based infrastructure platform. As part of this process, we identified more than 52,000 unused IP addresses purchased by Harrod Inks in the 1990s. In July and August, we sold the unused IP address blocks via a handful of transactions for proceeds totaling $2.5 million. And third, in the third quarter, we subleased a large portion of our direct mail facility in the Jacksonville, Florida area through the end of its term in July 2024. Monetizing the exited Jacksonville lease will generate additional cash flow of approximately $750,000 in 2023, and it will result in improved P&L performance as well. Now on to our operating segment results. Customer care revenue decreased by 12% from the previous year, and year-over-year EBITDA decreased 26% to $3 million from $4 million the prior year quarter. A large driver of the decrease was the rolling off of COVID project-related work as anticipated. And last year's Q3 revenue was also driven by a one-time customer support project. These declines were partially offset by new wins with a streaming company, social ticketing app, a demand generation client, expanded QSR work, and successful launch of our House of Dragons project for HBO Max. The customer care pipeline remains healthy with current, new, and former customers, including but not limited to outbound demand generation and inside sales services. The pipeline is strong for inbound services, including entertainment, streaming, pharma, healthcare, and technology verticals. Customer care continues to invest in sales and marketing campaigns, conferences, and partnerships, and as previously mentioned, is actively recruiting another salesperson to drive further growth in 2023. New business wins for the quarter include an existing fulfillment and logistics customer in the beverage and spirits industry, engaged Hart-Hanks to provide call center and digital support agents with specialized foreign language skills serving regions outside of the U.S. Second, Hart-Hanks was awarded an outbound leaded generation project Our marketing services and customer care team will partner with a hospitality client to increase its international offering and accelerate growth. Fulfillment logistics revenue increased approximately $8.4 million, or nearly 56% compared to the third quarter last year, and EBITDA increased 64% to $2.8 million. We are realizing the benefits of consolidating our operations in Kansas City and Boston and further integrating our supply chain and logistics segment into our fulfillment process. We continue to win new contracts in both fulfillment logistics and our revenue opportunities remain strong, even as large players in logistics and e-commerce areas have announced slowing logistics spend. While we see opportunities for margin improvement, including investment in light automation at both of our fulfillment facilities, we are experiencing EBITDA margin percent compression due to the resultant revenue mix driven by high growth, lower margin logistics contracts. New business wins for the quarter include Hart-Hanks Logistics I a less than truckload or LTL contract from a national logistics provider. The win has led to further opportunities with truckload or TL lanes, given our ability to secure competitive pricing with unparalleled service. Second, Hart Hanks Fulfillment is partnering with a new client to execute an employee recognition program for a large retailer. The program includes digital printing, and fulfilling personalized awards and certificates along with promotional products, depending on the level of achievement. Marketing services revenue decreased nearly 12% to $13 million, and EBITDA decreased to $1.9 million from $2.8 million a quarter a year ago. Our Q3 2021 result was an extremely strong comp with large campaigns during the period last year. The largest driver of the year-over-year revenue decline relates to direct mail campaigns not continuing in the current quarter. We also had project work conclude last year, but growth in financial services, B2B tech, and CPG clients have replaced this revenue. We continue to drive sequential improvement in 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. Our recent enhancement of our product offering and expansion of our go-to-market marketing campaigns is working to expand our sales pipeline. We remain aggressively focused on attracting new clients within prioritized market categories, and our pipeline continues to grow with near-term opportunities in healthcare, pharma, financials, B2B tech, and consumer product categories. To further drive growth, we have increased our marketing spend and, as mentioned before, hired a new salesperson to focus on growing select verticals and expanding our B2C marketing opportunities. New business wins for the quarter included, as mentioned above, in customer care. We were selected by a market leader in the hospitality industry, to implement an international omnichannel campaign to increase its offering in the marketplace and accelerate growth. The campaign will cover direct mail, telemarketing, email, and social channels. Second, our marketing services team has expanded their program footprint beyond annual enrollment periods to include Affordable Care Act strategy work for a major health plan client. The expanded partnership further solidifies our position in this important category within healthcare. In conclusion, Hart Hanks is in a stronger position today than it has been in years. And with sustainable, profitable business model and multiple pathways for growth, our long established relationships with blue chip customers and our talented employees are key assets to our business. We expect continued positive net income and significant year-over-year improvement in full-year EBITDA, driving free cash flow higher during 2022 and beyond. And with that, I turn it over to Lori.