Good afternoon, everyone, and welcome to the Harte Hanks Third Quarter 2022 Earnings Call. It is now my pleasure to hand it over to your host, Tom Baumann of FNK IR. Tom, the floor is yours.

Thank you. Hosting the call today are Brian Linscott, Chief Executive Officer; and Lauri Kearnes, 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 disclosures is available on the Investor Relations section of Harte Hanks website at hartehanks.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 Harte 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 continued 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 Harte Hanks. The strategic shift to an asset-light model, the elimination of unprofitable contracts, and the meaningful cost-cutting measures have positioned Harte 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 large wins in logistics, evaluated kitting and packaging projects 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 Harte 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 us 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 leverage 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(k) 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 dilutive 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 a cloud-based infrastructure platform. As part of this process, we identified more than 52,000 unused IP addresses purchased by Harte Hanks 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 in 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 quick service restaurant work, and the 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 engaging Harte Hanks to provide call center and digital support agents with specialized foreign language skills, serving regions outside of the U.S. Second, Harte Hanks was awarded an outbound lead generation project. Our Marketing Services and Customer Care team will partner with a hospitality client to increase its international offering and accelerate growth. Fulfillment and 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 and 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 percentage compression due to the resultant revenue mix driven by high growth, lower margin logistics contracts. New business wins for the quarter include Harte Hanks Logistics winning a less-than-truckload (LTL) contract from a national logistics provider. The win has led to further opportunities with truckload (TL) lanes given our ability to secure competitive pricing with unparalleled service. Second, Harte 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 the 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 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, financial, 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 omni-channel 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, Harte 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.

Thank you, Brian. The third quarter was our sixth quarter in a row of positive EBITDA at $4.4 million. Additionally, we again delivered solid GAAP profitability. Our performance included new business wins as well as growth within our customer base. Each of our three segments are delivering positive operating income. I’d now like to walk through the results in more detail. Third quarter revenue was $53.9 million, up 8.7% or $4.3 million from $49.6 million in the same period last year. Revenue growth was led by our Fulfillment and Logistics segment, which was up $8.4 million or 55.6% year-over-year. Customer Care was down $2.4 million or 12.1% year-over-year, and Marketing Services was down $1.7 million or 11.6% from the prior year quarter. From a contribution margin perspective, our Customer Care segment delivered $3 million in EBITDA, down $1 million or 26%. Our Fulfillment and Logistics services segment delivered $2.8 million and EBITDA up approximately $1.1 million or 64% from the year-ago quarter. Marketing Services EBITDA declined by approximately $851,000 or 30.7%. We believe each of our three operating segments are operating efficiently and should generate positive EBITDA levels for the foreseeable future. Our operating expenses for the third quarter were $50.1 million, up 10.5% from $45.4 million in the year-ago quarter, due to the increased revenue and change in the revenue mix, resulting in higher transportation costs in our Fulfillment and Logistics segment. Operating income was $3.8 million, down $453,000 compared to operating income of $4.2 million in the year-ago quarter. This change is largely due to the revenue mix. With higher costs in Fulfillment and Logistics and increased stock compensation expense, we posted net income of $7.2 million or $0.87 per basic and $0.83 per diluted share in the third quarter, compared to net income of $4.4 million, or $0.54 per basic share and $0.52 per diluted share in the third quarter last year. We recognized a one-time gain of $2.5 million, or approximately $0.30 per diluted share related to the sale of unused IP addresses in the third quarter. And we also benefited from $2.8 million of currency gains in the quarter on our intercompany receivables. EBITDA for the third quarter was $4.4 million, compared to EBITDA of $4.8 million in the year-ago quarter. The main driver was an increase in stock compensation expense of $600,000. Now turning to our balance sheet as of September 30, 2022, we had cash, cash equivalents, and restricted cash of $9.2 million, compared to $15.1 million at December 31, 2021. During 2022, we have paid down $5 million on our line of credit and deposited $9.9 million in an escrow account based on the agreement to redeem our preferred shares. We anticipate the completion of the redemption to occur in the fourth quarter of this year. As of September 30, we have $5.9 million in net income tax receivable. This is due to our net operating loss carrybacks for 2020 of $7.6 million, which are partially offset with other tax payables. Our combined long-term pension liability on the balance sheet as of September 30, was $49.6 million. As a reminder, we have both qualified and non-qualified pension plans. We continue to monitor the impact of rising interest rates and changes in asset values that are impacting our pension liability. While the pension liability is formally revalued on the balance sheet only at year-end, we have evaluated our net pension obligation as of the end of October, and our net pension liability has declined approximately $18 million since a year ago in 2021. With the rise in interest rates, we are continuing to evaluate all strategic options available to us in regards to our future pension liabilities. Additionally, as previously disclosed, we reached an agreement with Wipro at the end of the second quarter, in which we will acquire all of the outstanding preferred shares for a one-time payment of $9.9 million and 100,000 common shares. Please note under GAAP at closing, this transaction will result in adjustments to our earnings per share, but not our net income. This is expected to close during the fourth quarter. The elimination of the preferred stock dividend and the earnings attributable to preferred shareholders will be offset by a one-time accounting charge based on the fair value of common shares. We funded the cash portion of the repurchase consideration with a combination of cash and cash equivalents on hand, and an additional $5 million borrowing under our credit facility that we have since repaid. As of September 30, 2022, we had no debt and maintain a $25 million credit facility.

Thank you. Our first question is from Michael Kupinski with Noble Capital Markets. Please go ahead.

Thank you and good evening. A couple of questions. First of all, congratulations on a solid quarter. I was just wondering if you can, you gave guidance for Q4 and indicated that Q4 revenue should look very similar to Q3. And I was just wondering if the segment components of that revenue is the mix about the same as well, with Fulfillment and Logistics performing very strongly, in the Customer Care still weak and then marketing services. And I was just curious if you can highlight marketing services for me in that question, because I did think that marketing services was going to perform a little bit better in Q3. But so I was just wondering, to kind of give us your thoughts about the outlook for Q4?

Hi Mike. Thanks for the question. We certainly are happy with the results, certainly in the third quarter. I will differ a little bit to Lauri on some of the specifics. But I think that the revenue mix in the fourth quarter, we would anticipate to be somewhat similar to the third quarter without getting too specific. And I do think that when you factor in the roll-off of some direct mail projects that ended in 2021 for marketing services, that’s the largest piece of the driver. We do anticipate continued improvement sequentially. But year-over-year I still think last fourth quarter was a pretty strong quarter. And so I would again expect kind of similar revenue mix in the third quarter. Lauri, any additional commentary there.

Yes. I mean I just want to clarify, I think Michael, you thought that we were seeing similar to Q3, but I think we are seeing similar to Q4 prior year. So, Q4 year-over-year should be similar. The mix still from Q3 this year to Q4 sequentially, I think the revenue mix is fairly well in line, although customer care did have the large House of Dragons project in Q3, that did kind of accelerate the Q3 number. And that obviously wound down after the launch of that piece.

Oh. Got it. Okay. Thanks for that clarification. So, you are saying that Q4 2022 should look similar to Q4 2021.

Correct.

Yes. Okay. Got it. Okay. And then, when you look at some of the expense lines, like, for instance, payroll labor, that was a little bit higher than I was expecting, it was certainly a little bit of a pivot from what we saw in Q2. With – and then, of course, the production distribution and that could have been just the Fulfillment and Logistics line being sort of much stronger. Can you kind of just give us your thoughts about how labor – pressure on labor expenses? Were there anything unusual in terms of was it related more so to the Fulfillment and Logistics business that you had, kind of give us some color on the expense line items?

Sure. So, definitely the production and distribution is related to the large increase, and especially with logistics. So, that’s where our transportation expense is showing. So, that’s why you are seeing such a large increase in those expenses. And in the labor year-over-year, relatively flat. But remember, we have got the large customer care program with House of Dragons in Q3, that definitely would have had a little bit of spike in labor. And that may be why you have seen that little bit of a difference there.

Yes. Do you have any thoughts about how we should look at that line item going forward, going into Q4?

Yes. I mean definitely, we are looking at a revenue mix change. So, as the Fulfillment and Logistics is stronger, you are going to see the production and distribution higher with I think labor staying, I would say more flat on labor. I don’t think there is anything particularly that we are seeing as far as like labor market pressures that we haven’t been seeing all along. Brian did talk about the fact that we did put our 401(k) back in this year. And then going forward to next year, we are going to increase our health benefits. So, you will see some of that in the labor line. And those were some things that we took actions, obviously, when we were going through restructuring and to get the company back in a better position that we are now giving those benefits back so that we can retain those employees.

And so Lauri, you insisted that there are some tax refunds and things like that, can you kind of give us a sense of what the balance sheet will look like, maybe by year-end, with the prospect of seeing some of these, the tax refunds and so forth, and maybe net after you purchase the preferred and so forth what the balance sheet is going to look like?

Right. So, currently, the $9.9 million that we put into the escrow for the redemption of the preferred is seeing our balance sheet and other current assets. So, you are going to see a change of that as that deal comes to completion. The other thing I would say is that, sorry, where was I going with that be, the taxes. So, we do have $7.6 million that we are expecting to receive. We are hoping anytime now, it’s been quite a while. But we are doing all that we can to continue to follow-up on that, we don’t have any concerns or any issues. I think it’s just timing with the IRS processing.

Got it. And then can you talk a little bit about since you are cash flow positive, and you have now cleaned up the balance sheet, and all these things. What is the best use of cash at this point? What is the capital allocation that you are focused on?

Yes. So, clearly, I think investing in tech is important to us, when I think longer term, we have clearly spent some CapEx this year as it relates to light automation and building out some of our Kansas City facility. So, those things are behind us. I do think some additional tech investment is required on a smaller scale. I do think we will clearly continue to look at tuck-in acquisitions, if it makes sense and bridges multiple segments and increases our compelling offering to the marketplace. And then our typical – we will continue to review meaning, who knows what pension plans look like. And as interest rate environment continues to increase. If we ever get asset values to come back a little, maybe there is a creative way to mitigate risk on the pension side. But it’s premature to think that all of these levers are on the table as we come together as a Board, quarterly and more frequent than that.

Alright. That’s all I have. I will let others ask questions. Thank you.

Thanks, Michael.

Thank you. Our next question is coming from Julio Romero with Sidoti & Company. Sir, please go ahead.

Thanks. Hey, good afternoon. To start, I guess on the Fulfillment and Logistics segment, the revenue was pretty strong. Just talk about what you guys are doing to drive the growth in logistics? And do you kind of see the business wins continuing there?

Yes. So, I think we have mentioned in the second quarter, we had a nice win and uptick on our logistics customer that really is continuing to accelerate. I think we will probably continue to have a little bit of an uptick in Q4. And a lot of that will kind of continue into the next year, which there is good and bad. The only downside is in logistics, some of it’s a little more margin pressure with the competitive landscape of logistics pricing. However, we are an asset-light organization. And we certainly can manage these transportation relationships and drive pretty comfortable margins from that business. So, I think I do expect continued growth in logistics as we look out into next year. We are also within the third quarter from fulfillment. We do have nice growth, as we have expanded into new logos that have really driven value-added fulfillment opportunities for us that are rather substantial. We do think that some of those can continue a lot of more project-based, but we have got a relationship with a new client that has repeated and continued opportunities quarter-over-quarter. And so as we continue to perform, we fully expect continued opportunities to be able to bid and grow with this new logo client. And then within existing customers, we have mentioned this before, we have got some great relationships with customers that really want to use us in a more significant way. And so we are investing in some tech and working through how do we make the relationship easier to expand and actually scale. And we are making some good headway on that front. So, I do – I am cautiously optimistic that we are going to continue to trend very favorably in our Fulfillment and Logistics business.

Great. Thanks very much for that color there. Obviously, in this quarter, one of the big bottom line drivers was the non-operating income, the currency gain due to the intercompany receivables. Have you seen any income from that, or do you expect any income from that in the fourth quarter?

Yes. I mean it’s really, purely driven by the change and the strengthening of the dollar. I have a hard time believing that the dollar can get stronger against some of these currencies. So, I am really not expecting that to re-occur in Q4, but we will see what happens.

Got it. Just as I am thinking it through, I guess it really just depends on what the dollar is at quarter-end I guess.

It is, yes.

Okay. And then on the preferred repurchase, how confident are you guys in the repurchase closing by year-end?

Very confident.

Okay. Got it. You have done a nice job maximizing some opportunities, the IP block sale, the sublease of Jacksonville. Any other further runway for opportunities similar to those two in the upcoming quarters?

I mean I would say with a couple of other leases that we are – that we have shrunk to kind of at the end of this year. So, maybe $200,000 to $300,000 more savings next year related to those decreases in that space.

Yes. No, the only other thing I think I have mentioned before is we still are holding on to a small block of IP addresses that if we sometime next year, I think we can monetize, probably third quarter somewhere around then. But it’s not going to be at the order of magnitude of $2 million to $2.5 million, it might be a $0.5 million or less.

Got it. And you mentioned, you went live with ERP this quarter, just talk about how the rollout has gone and what you kind of anticipate in terms of efficiencies?

Yes. So, actually went live, October 1st, so kind of right at the beginning of the quarter that we are in now. And as you know, it’s kind of the learning curve happening right now, which we expect to then get to the efficiencies starting early in 2023.

Perfect. I will pass it on. Thanks so much for taking my questions.

Thanks, Julio.

Thank you.

Okay, there appear to be no further questions in the queue. So, I will hand it back over to Brian for any closing comments.

Thank you and appreciate everyone joining and look forward to our call next quarter. Take care.

Thank you, ladies and gentlemen. This does conclude today’s conference call. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.