Harte-Hanks, Inc. (HHS)

HHS 
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Harte-Hanks, Inc. (HHS)

Q3 2008 Earnings Call

October 27, 2008 11:00 am ET

Executives

David Blythe – President, CEO

Douglas Shepard – Executive Vice President, CFO

Analysts

Matt Chesler – Deutsche Bank

Troy Baskin – William Blair & Co.

Townsend Buckles – J. P. Morgan

Daniel Leben – Robert W. Baird

Dan Salmon – Bank of Montreal

Michael Kupinski – Global Financial

[Andrew Cash – Point Clear Value Management]

Presentation

Operator

Thank you for joining the Q3 2008 earnings call. (Operator Instructions) Now I will turn the meeting over to Mr. David Blythe, President, and CEO of Harte-Hanks.

David Blythe

Good morning everyone. On the call with me today is Doug Shepard, our Executive Vice President, and Chief Financial Officer, [Jessica Huff] our Vice President and Financial Controller and [Brian Saturski] our Senior Vice President, General Council, and Secretary.

Before I begin with my remarks, Brian will make a few statements.

[Brian Satarski]

Our call may include forward-looking statements. Examples made include statements of our strategies, initiatives, and business plans, adjustments to our cost structure, financial outlook and capital resources, competitive factors, business and industry expectations, economic downturns in the U.S. and other economies and other statements that are not historical facts.

Actual results may differ materially from those projected or implied in these statements because of various risks and uncertainties including those described in our most recent Form 10-K and other documents filed with the Securities and Exchange Commission and the cautionary statement in today's earnings release.

Our call may also include non-GAAP financial measures. Please refer to today's earnings release for the required reconciliations and other related disclosures. Our earnings release is available on the investor relations section of our web site at www.harte-hank.com. I'll now turn the call back over to Dean.

David Blythe

As noted in the press release today, we released our second quarter results 90 days ago and we said that our customers were "becoming cautious with their spending plans in the face of extreme economic uncertainty."

Well, 90 days later the extent we have any lessening of uncertainty in the external economic environment has been replaced by bad news. Today, it is difficult to know with any degree of confidence what impact the current economic upheaval will have on our businesses for the remainder of this year and into 2009. Uncertainty is the prevailing description we are hearing from our customers regarding their spending plans in the coming quarter.

Our operating assumption therefore is that the revenue environment will be difficult and we will operate our businesses accordingly. We firmly believe in the fundamental effectiveness and efficiency our businesses provide. We provide tremendous value to our thousands of business customers whether they're Fortune 100 companies, midsize, private businesses, or small entrepreneurial businesses.

And these are across a wide range of industries that operate in our international market, nationwide, domestically and in local markets. Precisely because we operate across such a wide range of industries and sizes of customers, there is no doubt that the external economic environment will negatively impact our performance.

As for the length of this impact, we simply cannot predict this until there is a return to some stability in the markets. We do know that in direct marketing we saw some impact in the third quarter and that we will be impacted in the current quarter. Our expectation is that the environment will certainly continue into 2009.

This external outlook dictates our internal response. We are aggressively reshaping and reducing our infrastructure costs to reflect reduced levels of economic activity and we will relentlessly focus on flawlessly delivering our products and service to continue to provide value to our customers.

Doug will now give you some more detail on our results.

Douglas Shepard

Here is a company wide overview of the third quarter. Revenues decreased 5.9% for the quarter with an increase of revenues for direct marketing and a decrease of shoppers. Direct marketing revenue increased 0.7%. Shoppers' revenues decreased 17.1%.

Moving to operating income it decreased 21.9% for the quarter. The quarter's Direct Marketing had an operating income decrease of 3.9% while Shoppers declined 68.6%. Direct Marketing operating margin was 14.5% and Shoppers operating margin was 8.5% for the third quarter.

Free cash flow was $22.3 million versus $25.6 million in the third quarter of 2007. We spent $4.1 million in capital expenditures compared to $6.6 million in the third quarter of 2007.

Turning to our two businesses; for the third quarter of 2008, our Direct Marketing revenue increased 0.7% and operating income decreased 3.9% resulting in an operating income margin of 14.5% for the third quarter of 2008 which is a decreased compared to an operating margin of 15.2% for the third quarter of 2007.

In the third quarter, our retail vertical represented 26% of Direct Marketing revenue. High/tech Telecom was 26%, select markets were 22%, financial 16% and healthcare/pharma was 10%. Our top 25 direct marketing customers represented approximately 43% of direct marketing revenue in the third quarter. Our largest customer in the quarter represented almost 8% of our total direct marketing revenue.

Turning to Shoppers; our third quarter total revenue decreased by 17.1%, about half of the revenue decrease was attributable to abandoning circulation of approximately 250,000 in August. Operating income for the quarter declined 8.5% as compared with 17% with the third quarter of 2007. The decrease in operating income margin was primarily driven by a 490-basis increase in postage. Since postal costs are directly tied to circulation, the increases resulted in declining revenues; we saw a slight decrease in circulation in the third quarter compared to 2007.

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