Harte Hanks, Inc.

Robert Philpott - Chief Executive Officer and Director Douglas Shepard - Chief Financial Officer, Principal Accounting Officer and Executive Vice President Robert Munden - General Counsel

Michael Kupinski - Noble Financial Group, Inc.

Thank you, Glenn. Our call will include forward-looking statements, such as statements about our strategies, adjustments to our cost structure, financial outlook and capital resources, competitive factors, business and industry expectations, anticipated effects of acquisitions, litigation and regulatory changes, economic forecasts for the markets we serve 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 filings with the SEC and in the cautionary statement in today's earnings release. Our call may also reference 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 Investors tab at our website at hartehanks.com.

I'll now turn the call back over to Glenn.

Thank you, Glenn. Good afternoon, everyone, and welcome to Harte-Hank's fourth quarter 2014 earnings call.

Doug Shepard, our CFO, joins me on today's call, and in a few moments, he will take you through the details of our earnings release. This call will obviously focus on our performance in the final quarter of last year, but I'll also take the opportunity to review Harte Hanks performance for full year 2014.

In our news release earlier this afternoon, I described 2014 as a transitional year for the business. So let me explain what I mean by that and during the course of our call today, I'll also provide more information on the latest steps and initial results of the transformative actions we have taken.

This time last year, I said that we were entering 2014 with a degree of optimism and that I was confident that we could arrest the decline in our business. Looking back now on 2014, I believe that we were inconsistent in our delivery of these commitments, but that we have made much more progress than anticipated in building a robust foundation to our business for 2015.

But first let me deal with the prior quarter performance and I’ll start here with the top line. Revenues fell short of prior year levels, explained to some degree by a shortfall in Trillium Software revenue performance.

This quarter was always going to be a challenging one for Trillium because as most of you will remember, we had two very significant wins in the business right at the end of 2013 and in the early days of 2014. In addition, our international network of resellers for Trillium had a tough final quarter, which is consistent with the wavering economic performance of economies in Europe and Asia.

But overall, Harte Hanks new business pipeline have strengthened during the course of the year and we can report no major client losses during quarter four. Our goal of course was and still is revenue growth.

And in the periods during 2014 we achieved this, but we still need greater consistency. I'm confident that the new sales organization that we have created within Harte Hanks led by Joe Voica for customer interaction and John Ross at Trillium Software, both of whom joined in the second half of 2014, that they will deliver a more stable top line performance.

They both quickly established a sales culture in our organization, which is something that's been missing from our business for quite some time. The big story of quarter four 2014 is however the very significant progress we have made in completing the restructuring of our business, so that its appropriately organized and resourced for the level of business we generate.

If you remember last quarter, I mentioned that we were fully in execution mode to make the changes demanded by our strategy. And after intense efforts from senior leaders and support from everyone in the business throughout the closing months of 2014, we have now completed the vast majority of these changes.

We've begun 2015 with a much leaner organization, with clearly defined and distinct sales, marketing and operations functions. We've eliminated much of the duplication of work and complexity within our business.

It's important to remember too that these are not short-term cost-cutting measures. The actions we took towards the end of last year addressed long-term costs, delivering performance that will endure on creating a solid platform for future growth.

I’m delighted that our fourth quarter operating income performance provides evidence of this great progress that we've made and I expect the benefits from some very tough decisions to continue to accrue to our business throughout 2015. Although we have achieved the changes we set out to make, constant challenging all the cost lines in the business will become part of our everyday business practice.

We now have a right sized labor force, with flexibility of capacity to deal with fluctuations and work volumes and we’re continuing also with our plans to develop our own captive offshore resource center to support further efficiency initiatives and to supplement ongoing product development work. Our real estate footprint has shrunk and will shrink further.

And our operating systems are being streamlined around core platforms, which is already improving efficiency and will underpin the quality of delivery that our clients know us for. We have invested in our business too, and a little later in the call I'll provide details of some very positive steps we've taken to keep pace with the requirements of our clients.

Before that, however, let me now hand over and have Doug walk you through the detailed financial results and then I will rejoin the discussion a little later.

Thank you, Robert, and good afternoon. In our last earnings call, we discussed our plans to close consolidate six facilities, along with taking actions to align our organization around our revenue base and strategy.

The results in the fourth quarter show the evidence of these actions. While we had disappointing revenue performance in the business during the quarter, expense action allowed us to improve our operating performance compared to this time last year.

Both quarters in 2014 and 2013 had $2 million to $2.5 million of charges related to various actions I'll explain in a minute. Turning to our fourth quarter results, our consolidated revenues of $146.5 million were 3.7% below our $152.2 million of revenues in the same quarter last year.

Let me walk through the results of Customer Interaction by industry vertical. Customer Interaction revenue declined 2.6%, several verticals delivered revenue growth during the quarter led by our financial vertical, which increased 13.8% or $1.9 million primarily due to regional banks increasing their credit card solicitation activity.

Our select markets vertical also had $1.9 million revenue increase during the quarter or 23.1%, driven by continued contact center support provided to an online streaming client won earlier in the year. Our technology vertical increased $1.8 million or 5.7% due to cell phone support for a new client, along with the expansion of contact center services for an existing client.

Automotive and consumer brands declined $1.2 million or 5.3% from reductions in mail volumes and agency services provided to auto manufacturers. Healthcare decreased $1.7 million or 11.1%, primarily due to decreased affordable care act implementation efforts compared to the fourth quarter of 2013.

Retail declined 14.8% or $6.2 million, primarily driven by clients continuing to change to wider and less expensive print formats in response to postal service rate increase as well as client losses in our mail and database products and reduced contact center support services from an online retailer. These were offset by mail volume increases with an office supply chain and a home goods retailer.

Trillium revenues declined $2.1 million or 13.1%. This was primarily from a strong prior year fourth quarter in which we sold two large software licenses for the financial solutions module released in the market several years ago.

The renewal rate of our maintenance agreements remained strong and maintenance revenues were flat for the quarter. While we had a disappointing revenue performance in the business during the quarter, expense action allowed us to improve our operating income performance compared to this time last year.

Operating income for the quarter was $14.7 million, an increase from $12.5 million for the same quarter last year. Fourth quarter 2014 operating income includes $2 million of charges related to facility consolidations I just mentioned and fourth quarter 2013 operating income includes approximately $2.6 million of charges related to the legal settlement and professional services fees.

Operating income for Customer Interaction increased $11 million compared to $9.4 million. This operating income improvement was driven by expense management and labor and selling and general administrative costs were reduced as the company gained efficiencies across the business.

Trillium Software operating income was $3.7 million compared to $4.4 million in the same period last year. This decrease was due primarily to the reduction in timing of software license revenues as most of our costs in this business were fixed.

Moving down the income statement, our fourth quarter effective tax rate was 29.8%, which is lower than our 39.3% in the fourth quarter of 2013. The decrease in the effective tax rate is primarily due to the non-recurring impact of a state income tax planning strategy implemented during the quarter.

We expect for 2015 our overall effective tax rate will be in the 37% to 39% range. Fourth quarter 2014 dilutive earnings per share from continuing operations increased $0.16 compared to $0.11 for the same quarter in 2013.

After excluding the aforementioned charges, fourth quarter 2014 dilutive earnings per share from continuing operations increased to $0.18 compared to $0.14 in the 2013 fourth quarter. Moving to the balance sheet, our net debt balance remains low at approximately $26 million.

We currently have $80 million available under our revolver, excluding outstanding letters of credit, in addition to a cash balance of approximately $57 million at the end of the year. During the quarter, we repurchased 380,000 of our shares for about $2.5 million under our stock repurchase plan at an average price of $6.62 per share.

For the quarter, we spent $4.7 million on capital expenditures, compared to $3.1 million in the fourth quarter of 2013. This increase was to support real estate consolidations, to utilize inefficient space in existing facilities and system implementation.

With that, I'll turn the call back to Robert.

Okay, thank you for that, Doug. Now, earlier on the call, I talked about investments on our business and one of the most important was the news release yesterday by Trillium Software of Trillium cloud.

This is a new service platform that provides our clients with a richly featured enterprise data quality solution, consumable via a managed public cloud environment. With this new cloud solution, we can help our clients implement a complete data quality solution within 30 days, with less of the overarching infrastructure costs and management of our data quality competitors.

Trillium cloud is available globally and brings our client offering right up to date with the needs of today's marketplace. Obviously it's too early yet to report performance, but I can tell you that initial discussions with key clients through our client user groups have been very supportive.

The cloud also addresses a gap at our go to market story when attempting to secure new clients. When I am on this subject of Trillium Software, I'm delighted that we have once again been positioned as the data quality leader by independent analyst firm, Gartner.

In the Gartner Magic quadrant for data quality tools for 2014 [indiscernible]. Since this report's inception in 2007, Trillium Software has been recognized as one of the industry leaders in data quality tools.

In addition, Gartner forecasted this market's growth will accelerate during the next few years to almost 16% annualized by 2017, bringing the total value of the data quality sector up to about $2 billion. This market is amongst the fastest growing in the enterprise software sector and I'm confident that Trillium Software with its unique positioning and our new solutions delivery platform will take a substantial share of this projected growth.

Switching topics now, we continue to reinvest in talent at Harte Hanks, but we needed to bring consistency and efficiency across our many locations in the US, Europe and Asia. Until recently, Harte Hanks handled its HR benefits and talent management with numerous processes, including a legacy human resources system, spreadsheets, and manual time and labor administration.

Our talent leadership team headed by Gavin Pommernelle is now implementing a solution to enhance the employee experience, providing centralized as practices, enabling a range of time and cost savings and to enable the HR function to get fully involved in organizational effectiveness. This in turn drives performance and is developing an outcome based culture in our company.

It's an excellent case study of how we've significantly upgraded our business, stead focused on the importance of talent and eliminated risk. On the same theme, we've now implemented a companywide collaboration system connecting our 5000 plus employees on a single knowledge sharing social networking platform.

Enhanced employee engagement is where the real story lies here. For example, the user participation has exploded from 679 instances of collaboration at launch in November 2014 to more than 12,000 collaboration initiatives by the year end.

This shows that employees across Harte Hanks are using our connection system to proactively share and consume knowledge, laying the seeds for much more efficient teamwork across the enterprise. Moving on, I want to provide an update on our corporate development activities.

Keith Metzger, who leads this activity, has been hard at work building our pipeline of acquisition targets. This is now in a healthy state and we will continue to search for appropriate additional acquisition targets.

Our focus remains on digital agencies and analytics companies, who can support our strategy of leadership and customer interaction. Harte Hanks currently captures a relatively small proportion of digital marketing budgets, primarily on email.

Our acquisitions will quickly allow us to build revenue from digital related customer engagements. And these acquisitions will fill capability gaps in the Harte Hanks digital agency competency and in combination with Harte Hanks' existing agency capabilities around traditional customer engagement will help to round out a more complete agency offering.

In recent months, I have spent time with a number of really exciting businesses and had the pleasure of meeting ambitious and engaging management teams. They are equally enthusiastic about the opportunity to contribute to the redefinition of Harte Hanks.

We will make acquisitions in 2015, always consistent with our strategic plan. You may also have noticed that we've added a new face, Sarah Fay, to the Harte Hanks leadership team.

Although Sarah contributes on a part-time basis, she will provide industry expertise on Harte Hanks' digital strategy. In addition to her role in support of the leadership team, she will also work extensively with Keith on the corporate development team on the identification and integration of acquisitions and partnerships in digital marketing.

Over the course of her career, Sarah has become a well-known voice in the marketing industry on the topic of digital marketing and media integration. She helped to build one of the most recognized digital companies in the world Isobar through a combination of acquisitions, new business wins, and organic growth.

I've worked with Sarah before and I know that she will be a major asset for the Harte Hanks business. There are some parts of the business that I again want to single out for specific mention.

Our customer experience support business, which operates our contact centers, has had a standout year and delivered impressive top line growth. This was a mix of additional volume commitments from key clients such as Samsung and FedEx, plus new business wins, for example from Adweek.

This business continues to demonstrate that we find a unique positioning in contact centers, which takes as away from the high volume low cost commoditized core of that industry. Our clients recognize that we have a distinctive high contact and high quality solution, which is entirely consistent with the goal of providing end to end customer interaction.

Our financial services team made a breakthrough with one of our largest clients late in 2014. For many years, we've been a partner to that client in supplying direct mail solutions and we have now secured that customer email marketing program with an excess of $3 million annually.

Right apart from the new revenue stream that this produces, it's confirmation from the client side that our goal of providing expertise and capabilities across all direct channels is bearing fruit. While I'm on this subject of client success, it’s sometimes too easy to forget the value of the retention of clients and renewals rarely get the same headlines as new logo wins.

As we transitioned this business in quarter four, it was vital that we secured existing contracts and our teams have done an excellent job in this area. Towards the end of 2014, we were able to get firm commitments from multi-million dollar contracts from a range of clients such as HP, Bed Bath & Beyond and Blue Cross Blue Shield.

Looking ahead to 2015, the goal of Harte Hanks leadership team remains consistent revenue growth and that's our Holy Grail. We made progress in 2014 but not consistently.

Our markets continue to offer opportunities, especially in the US and while we direct our attention to our sales effort, our 2015 operating income will enjoy the full year benefit of the tough decisions we took in 2014. So in summary, our report card for 2014 would indicate steady progress in delivering a major transformation of the business.

I'm pleased with where we are right now, but I would also a reference the potential to deliver more and I accept that challenge. We have the platform now to build from and we have a team that is committed to deliver.

Our cost base is in excellent shape, with still some further potential to deliver increased efficiency. Our sales pipeline is developing and this will be enhanced further by the product development at Trillium Software and the broadening of our capabilities in customer interactions via our acquisitions.

I started the call today talking about confidence and optimism. And for 2015, we have reason to be both optimistic and confident again, based on the results of our efforts in 2014.

And with that, I will allow hand you back to our operator, Glenn, who will give you details of how you can now participate in the question and answer session with Doug and myself.

Thank you for taking the questions. I was wondering if you guys can just give us a little bit more of color on the acquisition prospects.

I know that you are hopeful to have a couple of them announced by the end of last year and I was just wondering how the pipeline is looking may be if – maybe are you kind of resetting the timetable in terms of acquisitions? And I'm sorry if you addressed this question before, I joined the call little bit late, so sorry about that.

No problem. It’s Robert, Michael thank you for the question today.

Obviously, we can't comment on the specifics of any particular acquisition that we are discussing. But the overall question of like where we would set timelines for that, we had hoped to complete an acquisition before the end of 2014.

That didn't happen although that was not for a lack of effort in the closing stages of 2014. We're confident that in 2015 we can keep pace with the acquisition targets that we've defined in our strategy and all I can say is watch this space.

And in terms of the prospect of repositioning your existing portfolio, can you talk a little bit about the prospect of asset sales may be, are there things that you may want to get out of in maybe help pay for some of the acquisitions, any thoughts on that?

At this point, Mike, there is nothing to comment on. We talked about this when we did our strategy out, everything is always constantly under review, considered, things of that nature.

Obviously the final answer is what our client is buying, what’s in demand in the marketplace. Of our product lines, we have some that are in very high growth markets, we have others that are in lower growth markets, but everything is in a growing sector within the marketing and advertising area.

But as you know from Harte Hanks history, there are always – we’ve built this company through acquisitions in evolving from a 90 year old company. In addition, that involves making changes over time.

So there will be changes as we move forward.

And I noticed that obviously with the new Trillium cloud-based software that you're implementing, you made some investments in Trillium. In terms of the R&D budget, what does it look like in terms of spending more capital on Trillium versus some of your other initiatives that you might have?

It’s a relatively consistent with what they’ve done in prior years. Overall, the total Harte Hanks capital expectation is in the $15 million range for Harte Hanks, Trillium has the same share of that they have had in the past, but I will say that, as Robert commented on a little bit, that there is under this management team are very defined product portfolio roadmap that’s out there that they are executing against as evidenced by the cloud announcement yesterday.

And so there is functionality development and things of that nature to keep the product as one of the top rated products that Gartner has done for eight straight years in a row. And that does mean that you invest back in the product and keep it up-to-date so that it stays with that top ranking.

If I could circle back real quick on the acquisitions, what was the, what was the hold up in terms of making acquisitions, was it more of a price situation or was it just the valuation. If you can just give me some thoughts on what has been the hang-up or the biggest obstacle that you guys have had in completing your planned acquisitions?

If somebody wants to describe this whole idea of making acquisitions as not this similar, trying to get married, it’s very difficult to set yourself a timeline and be accurate even to within one or two months on it. The other thing that took place that would have caused us to rethink what we are doing in acquisitions, I think it’s just a case that it takes time to sit down with management teams, look at opportunities, make sure that both sites are fully committed to what’s going on.

And in some cases some of the deals are competitive than we’ve got to run against the process timeline that’s driven by investment bankers. So you should read nothing into the fact that we are a couple of months behind where we would have liked at being at this stage other than that’s the way things happen with acquisitions.

Has anything that you guys have looked at that have been sold that you can comment on to kind of give us a flavor of some of the things that maybe you have kind of looked at that you would have liked to have had?

No, I don’t want to comment on any other deals that are out there other than to say we used some of those just to make sure that we are understanding things like valuation levels that are in the market right now that gives us a sense of the sorts of commitments that are being made in some cases by competitors. So we’ve used it for a little bit of intelligence, but it’s not determining what we’re going to do.

We are really defined from our strategy and the types of businesses and the sorts of services that we want to have to build out our portfolio.

Okay, that's all I have. Thank you.

Okay, thanks for the questions.

Okay, thank you everybody, thanks everyone for joining today’s call. Thanks also for your continued interest in the business and for your ongoing support for our shared ambitions.

I look forward to seeing many of you again during the course of this year when Doug and I will again be on the road with our investor roadshow. Talk to you again soon.

Thank you.