Greetings and welcome to the Harte Hanks' First Quarter 2023 Earnings Conference Call. Please note this conference is being recorded. I will now turn the conference over to your host, Tom Baumann of FNK IR. You may begin.

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, May 2, 2023, 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 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. We anticipated a challenging first quarter for Harte Hanks, but macroeconomic headwinds were stronger than we expected. However, despite the revenue challenges, we continued to generate positive EBITDA, demonstrating that we have established a strong business poised to successfully navigate macroeconomic challenges. We maintain positive EBITDA despite lower revenue levels versus the year-ago period, which was artificially high as a result of a one-time product recall project and pandemic-related projects. The fulfillment and logistics segment continued to grow. However, the year-over-year growth was driven by lower-margin logistics revenue that was offset by reduced financial services revenue, resulting in a less favorable revenue mix and lower overall EBITDA margins during the quarter. Customer Care's first quarter results were impacted by the conclusion of our federal and state-funded pandemic-related projects that ended in the second half of last year. In addition, customer support for a few streaming clients experienced lower customer interactions and call volumes during the first quarter compared to last year. The revenue declines were offset by increased revenue from our InsideOut acquisition. Marketing Services first-quarter revenue was reduced versus first-quarter 2022, largely driven by the roll-off of legacy direct mail campaigns and reduced spend from B2B tech customers. Prior to the pandemic, our first quarter results were typically our seasonally lowest quarter of the year, but over the past few years, we benefited from pandemic-related projects, which muted the typical seasonality in our business. We have now returned to a more seasonally reduced activity in the first quarter. However, we remain cautiously optimistic with the number of opportunities in the sales pipeline for the second half of the year and into 2024. For the second quarter, we expect sequential improvement in EBITDA, but our year-over-year quarterly comparison of EBITDA will continue to be pressured by a shift in revenue mix. We have seen customers begin to reevaluate their marketing, sales enablement, and logistics spend, most notably in financial services and B2B tech verticals to address perceived weakness in the prevailing economic environment. We have limited visibility beyond the second quarter, and we have reevaluated our expectations for the year. So our previously shared expectations for fiscal 2023 are no longer relevant. However, we are focused on preserving our profitability and taking the appropriate actions to right-size our business and reduce discretionary spending in light of our first-quarter performance and limited visibility beyond the second quarter. Our balance sheet remained strong. Last year, we eliminated the dilutive impact of our preferred shares, reduced our pension liabilities, and improved our overall cash position. In the first quarter, we received a $5.3 million federal tax refund that further strengthens our cash liquidity. As a result, we are pleased to announce the Board of Directors has authorized an expansion of our capital allocation strategy to include a $6.5 million share buyback. This repurchase program represents approximately 10% of Harte Hanks common shares outstanding at the current market price. This action underscores the Board's confidence in the strength of our balance sheet, as well as our ability to execute our strategy to maximize shareholder value and deliver sustainable profits. Today we are sharing a large initiative designed to meaningfully strengthen our go-to-market strategy and improve our cost structure. We are combining our Marketing Services and Customer Care segments into one segment called Customer Experience. The combined segment will be led by Ben Chacko, who was previously responsible for our Customer Care segment. This segment will be organized into three key practice areas. One, professional services will include strategy, analytics, creative, and marketing technology. These capabilities will continue to be sold as a standalone offering with the intent of bundling and integrating these services into the other key areas listed below. Second, demand generation and sales strategies will be focused on engaging new prospects, scaling up lead qualifications, and accelerating lead progression. This practice area will include our lead generation capabilities, our data product, data view, audience finder, and our sales capabilities through our recent acquisition of InsideOut. The third area is BPO managed services, which will include our traditional people and process outsourcing, including our marketing-as-a-service offering, staff augmentation, and our contact center capabilities. This practice area will focus on our proven capability of driving improved performance through scalable and efficient operations management. Today we have more than 10 clients that leverage the combined strength and integrated capabilities of Marketing Services and Customer Care. We also have a handful of opportunities in our current sales pipeline, so we believe the integrated model will capture more wallet share and better position us for growth while improving our cost structure. We have seen that key decision-makers reporting into marketing and customer experience roles within our clients and prospects. Our clients are more aggressively seeking ways to improve the customer experience and, more importantly, monetize it by leveraging data we capture during customer interactions and our marketing technology. We bring an unparalleled ability to help our clients build loyalty and enhance growth. Additionally, with our InsideOut acquisition late last year, our digital and inside sales capabilities are improving our strategic positioning within our existing customer base and prospects. Importantly, this has created more holistic discussions about ROI from marketing through better sales conversion. Harte Hanks differentiated offerings have a unique ability to target customers showing intent and bring the targets through the sales funnel to improve our clients' return on sales and marketing spend. Capturing return metrics and analytics are the best way to measure and repeat success. The combined Customer Experience segment will be better positioned to bring a wider range of capabilities and accelerate our digital transformation to meet our customers' needs. Our investment in CRM technologies and automation, data view, audience finder, and telephony can further unlock opportunities to help our customers grow their business, improve their customer experience, and monetize loyal customers. We are a customer-centric organization, and we believe that the Customer Experience segment that is fully integrated up and down the value chain will improve our global delivery model as well as drive significant cost savings through overhead consolidations. For example, we will better leverage our talent in Romania and the Philippines to serve our clients more efficiently at a lower cost on a global scale. As we all navigate the challenging macroeconomic environment, our current and potential customers are looking for ways to reduce costs wherever they can. Our ability to evolve and reposition our offering, bringing lower-cost options to bear will benefit us, making us an increasingly attractive outsourcing option. The reorganized Customer Experience segment will have an improved cost structure, and we anticipate meaningful cost savings through the consolidation and optimization efforts, and this process will continue into the third quarter. Now, I'd like to turn the call to Lauri to cover the detailed financial results, and then I will return to cover new business and our sales pipeline.

Thank you, Brian. Turning to our Q1 results, revenues decreased 4% in the quarter to $47.1 million. Operating income decreased approximately $2.8 million or 73% compared to the first quarter last year. Our operating expenses for the first quarter were $46.1 million, up 2% from $45.2 million in the year-ago quarter due to the change in the revenue mix resulting in higher transportation costs in our Fulfillment & Logistics segment. Our EBITDA decreased to $2.1 million from $4.5 million in the first quarter last year. Net loss for the quarter was $0.8 million, or a loss of $0.11 per basic and diluted share compared to net income of $3.3 million last year or $0.40 per basic and $0.39 per diluted share. The net loss was impacted by a $0.9 million non-cash currency loss compared to a $0.4 million gain on currency in the year-ago quarter. Turning to our operating segments, Customer Care revenue decreased 18.8% from the previous year and year-over-year EBITDA decreased 41% to $2 million from $3.5 million in the prior year quarter. The revenue decrease was due to a rolling off of recall and pandemic-related project work as anticipated, but streaming customer interactions were lighter than anticipated in the quarter as well. Our InsideOut business performed well and it contributed $2.8 million in revenue and $0.5 million in EBITDA for the quarter. Fulfillment & Logistics revenue increased approximately $3.1 million or 16.7% compared to the first quarter last year, and EBITDA decreased slightly to $2.2 million. While we continue to expect operational leverage and further benefits from consolidating our operations into the Kansas City and Boston facilities, we have experienced EBITDA margin compression resulting from a higher concentration of growth in our lower-margin logistics revenue. Our fulfillment operation experienced reduced volumes in financial services during Q1. That said, we are onboarding new customers in both facilities and we anticipate continued growth in the Fulfillment & Logistics segment. Finally, we continue to invest in technology. Our order management and warehouse management systems will be modernized starting in the third quarter of this year, and we anticipate having the ability to onboard new e-commerce clients in Q1 2024. This project will drive future efficiencies in the business, including plant operations, client administration, onboarding, reporting, and analytics. Marketing Services revenue decreased 13% to $11.2 million, and EBITDA decreased to $1.2 million. 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 in the B2B tech vertical, and we continue to face challenges with growth given the macro environment. In conclusion, we believe we now have a sustainably profitable business model and multiple pathways for growth. We also believe that the combination of Marketing Services and Customer Care will improve our go-to-market offering, improve our delivery model, and further streamline our cost structure. Now turning to our balance sheet. As of March 31, 2023, we had cash and cash equivalents of $13.1 million compared to $10.4 million at December 31, 2022. Our combined long-term pension liability on the balance sheet as of March 31 was $36.8 million. As we announced in our Q4 earnings call, we are moving forward with the termination of our largest qualified pension plan. We are on track to have that completed in the first half of 2024. As of March 31, 2023, we had no debt and maintain a $25 million credit facility.

Now I would like to turn the call back over to Brian. Thank you, Lauri. We'd like to share our new business wins and report on our sales pipeline. The Customer Care pipeline includes opportunities for longer-term recurring revenue projects with current, new, and former customers, including inbound customer support for health care, pharma, government, and consumer product verticals. Additionally, as previously noted, we have many opportunities with outbound demand generation and inside sales services. New wins for the quarter included a direct-to-consumer streaming support project for a sports streaming provider; and second, customer support for the implementation and execution of the National School Lunch Program, which provides low cost or free lunches for children. Our Fulfillment & Logistics pipeline has opportunities with new clients in logistics, consumer brands, and financial services, and we have near-term expansion opportunities with existing clients in CPG and pharma verticals. New client wins for the quarter included a growing national printing company that subscribed to our Alllink pricing and supply chain management software. Our automated pricing software will provide transparency for our client and provide the option of placing loads to our carrier network. Second, an international swimwear manufacturer selected Harte Hanks to fulfill North American e-commerce orders. The client was impressed by our Kansas City operation and will improve its distribution costs from our central location. Our Marketing Services pipeline has near-term opportunities with modest deals in account-based marketing data and demand generation projects. We will benefit from a repositioned go-to-market offering and we will realign our resources, reduce our expenses, and invest in technology and infrastructure to better serve our customers. We remain focused on attracting new clients within prioritized market categories, including health care, pharma, financials, B2B tech, and consumer product verticals. A new business win in the quarter included a biopharmaceutical company focused on therapeutic solutions that has selected Harte Hanks to create and implement the strategic foundation of a global multi-channel patient support program. Where we sit today, I am cautiously optimistic about our business prospects for the rest of 2023, and I am confident in our ability to right-size our costs in light of our first-quarter results and tempered outlook for the second quarter. Although our revenue shifts this year are challenging, it has allowed us to reorganize the company to better serve our customers and invest in growth that is meaningful for our future cash flows and value creation for the company. With that, I want to open up the line for questions. Operator?

Thank you. I have a couple of questions. We anticipated that the first quarter would be challenging, but in your last call, you expressed a bit more confidence about the economy and mentioned that you felt you had some recession-resilient qualities. Now, it seems like the tone of your comments is indicating that you're beginning to feel the economic impact. I'm curious about what has changed. I understand the numbers tell a story, but what feedback are you receiving from your clients? Where are you observing the most significant effects? Could you provide some insight into the shift in the tone of your comments regarding the economy's impact?

Yes, hi Michael. This is Brian. Thank you for the question. It's a good question, and I agree that our tone has shifted somewhat. We've clearly noticed a slowdown, including delays in some projects. Several starts and new business opportunities that we expected in the first quarter have been postponed, reverted, or even canceled. While these aren't significant long-term recurring revenues, they are projects related to marketing and campaigns. I believe the tone reflects a level of uncertainty in the marketplace, and as of now, we lack clear visibility beyond the second quarter. That said, I believe we are in a strong position to endure these challenges and can adjust our cost structure to ensure we are set for future growth while also delivering positive bottom-line results.

Can you provide your thoughts on the second quarter and the tone of the business environment by segment in terms of revenues?

Yes. When we analyze each segment, Customer Care, for example, will still be impacted by pandemic and recall revenue in the second quarter, which poses a challenge since we will not have that revenue this year as we did in Q2 last year. This amounts to about $2.5 million in pandemic and recall revenue that will not recur. However, I believe we will see increased activity and streaming in the second quarter, complemented by our InsideOut initiative this year. In the first quarter, we generated $2.8 million in revenue, which gives us a perspective on expected revenue for the second quarter. Looking at Fulfillment & Logistics year-over-year, we anticipate a healthy increase in logistics revenue, even though it is slightly lower-margin revenue. There have been delays in a project or two from the first quarter, but we expect to see some revenue for fulfillment in the second quarter. Financial services in fulfillment are contracting a bit, which will present headwinds for that segment. Overall, we should still see year-over-year growth, but there is a challenge with the revenue mix. As for Marketing Services in the second quarter, we have a direct mail campaign that generated approximately $1.2 million in revenue, although the margins for direct mail are not as high as typical Marketing Services margins, so that will not recur in the second quarter. The B2B tech segment appears to be somewhat soft, as spending has decreased, but we do see opportunities there as well. Ultimately, I expect the revenue challenges for Marketing Services to primarily result from the discontinuation of direct mail.

Some of the costs in the first quarter were actually a little lower than I expected. Did you start reducing expenses in the first quarter, or are the cost-cutting measures you're discussing mainly planned for the second and third quarters?

Yes, I'd like to take credit for that, but the cost reduction measures we proposed mainly pertain to the second and third quarters. For instance, we have certain revenue types where we can significantly reduce direct costs in that specific quarter. However, we fully expect to become a bit leaner on the cost side in the second and third quarters, despite any minor restructuring charges we may incur.

Do you have any thoughts on how much annualized cost you would like to eliminate, or what your plans are at this point?

I would personally like to reduce the cost structure by more than a couple million dollars. We are still in the very early stages, so I prefer not to provide specifics at this time. However, I believe that by the next quarter, we will have a clearer understanding of what can be achieved and how we can streamline the Marketing Services and Customer Care segments into a more cost-effective delivery model. I see significant opportunities in this area.

It's impressive how your situation today differs from two years ago when facing economic challenges would have been more difficult. You are now in a much stronger position to withstand these challenges and are well-prepared for growth on the other side. Congratulations on getting your balance sheet in order and adjusting the business before this downturn. I commend you for navigating through that. That's all I have for now.

Thank you, Michael. I appreciate it.

The next question is from Julio Romero with Sidoti. Julio, please proceed.

Thanks. Hey, good afternoon, Brian and Lauri. Maybe if I could ask about the reduced client spend. If you could just talk about how sharp that drop-off in client spend was in March. Specifically, maybe the financial services portion of fulfillment. Did the regional banking crisis trigger that drop-off in any way?

So, Lauri, you may need to help me if we're talking specifically about the month of March, but I guess what I would say is we do have some regional banks that we service, but many of our clients are much bigger players. And I do think that the regional bank issue may have trickled throughout the financial services industry. And so, I think there is a little bit of greater tightening of the belt, so to speak, as it relates to multiple financial services clients for us. And that applies not only to Fulfillment but also Marketing Services as well. When I look at the full quarter, the impact of financial services for Fulfillment & Logistics, as an example, was north of a $1 million in the quarter.

Got it. That's helpful. Maybe if you could talk about the decision to combine the two segments into one. I know you've talked in the past about wanting to tighten that fabric between the segments. So just maybe speak to the strategic rationale and maybe walk us through an example of how that can enable you to grow some wallet share.

Yes. So, I think I've been thinking about this for quite some time. One of the things that we did last year in the second quarter is we put Ben Chacko over international operations. And part of what that allowed him to do was get a more holistic operational view of our footprint. Ben Chacko is the Customer Care lead and now will be the Customer Experience lead. So, that was one of the steps in the process. And then Stacey Greene was the leader of tech development in Customer Care, and she now oversees both Marketing Services and Customer Care. And we did that in the third quarter of last year with the idea that we believe we had resources across the globe and talent with CRM technology that perhaps were being underutilized. And so we're still getting our arms fully around the complete kind of tech development footprint and our capabilities, but we're seeing ways to leverage talent across both segments and certainly across the globe. So to me, CRM technology, both from a marketing and a call perspective is extremely relevant. I think that the integrated fabric that we now have and will continue to rally around will be a big asset and benefit for us because as we kind of begin to talk more and more with customers, and I was with a large health care system last week as an example, we do their inbound customer care for annual enrollment for a very large program. One of the comments that they made to us was we really need to be able to find ways to grow our membership. With this combined footprint, we already do that for a variety of health care systems. What’s nice now is they can kind of see the power of this combined business because we not only have the telephony in data and analytics to drive improved customer experience, but we also have access to information that'll help them drive membership growth. That meeting last week just opened my mind up to the additional opportunity that I truly see the power of this combined organization.

Okay. That's helpful. And then maybe on the share repurchase program, if you could maybe speak to the cadence of buybacks. How should we think about that, the deployment? How aggressive or conservative you think you'll be with the share repurchase program?

Yes. So obviously I think we have a belief that we're undervalued and we will certainly opportunistically buy back shares. There are rules and restrictions as a result of the size of our company. So, we will leverage as much as we can within the restrictions and guardrails set for a company of our size.

Got it. Thanks for the questions and I'll pass it on.

Thanks, Julio.

Okay. We have a follow-up coming from Michael Kupinski with Noble. Michael, please proceed.

Yes. Thank you. I just have a quick. How much did InsideOut contribute in the quarter? And can you just tell us how that acquisition is performing at this point?

Michael, I'll take the contribution part. So the contribution was $2.8 million of revenue for the quarter and $0.5 million of EBITDA from that business.

Okay. I'm sorry.

I'll just add. Obviously, if you just simply annualized that contribution, in my mind is a great success. I think the thing that you can't see right now, but as we reposition this customer experience business, we're going to be able to leverage the sales strategy and the digital sales transformation initiatives that InsideOut provides for its clients and apply it internally to Harte Hanks. So, they will continue to have a bigger role in the way we drive growth. And I'm excited about the ability to position the offering collectively and change the way we go to market. So I think the acquisition, albeit was small, certainly is a great contributor to Harte Hanks.

Got you. And then certainly I understand that you want to keep some liquidity on the balance sheet given the uncertain economic environment. But this InsideOut acquisition seemed like even though you said it was small, it seemed very compelling. Are there other acquisition opportunities that you see out there? Or is it likely that you're going to focus on buying back stock and maintaining a healthy balance sheet? Or can you kind of give us some thought about M&A?

Yes. I think obviously we're going to be opportunistic and we're open to anything that expands and complements our offering. That said, we're taking on kind of a reorganization that's going to require some focus and energy. And I think in the very short term, that's certainly where the focus of our business will be because it'll not only protect our bottom-line profits, but it'll position us well for growth. I think through that process, it will continue to kind of open our eyes to additional complimentary options out there that could be inorganic. And so, we'll continue to explore, but we'll be somewhat selective in the way we do it.

Got you. Thank you. That's all I have. Thanks.

Thank you, Mike.

We have no further questions in queue. We've reached the end of the question-and-answer session, and I'll now turn the call over to management for closing remarks.

Thank you for your time today, and I look forward to updating you in a few months with our second quarter results. Certainly, if you have follow-up questions after today's call, please feel free to reach out to Investor Relations and we'll schedule a time to discuss further. Have a good day.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.