A Baseline Quarter

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Harte-Hanks Inc.

Investment Appraisal
The company&#8217;s second quarter was notable for several reasons. First, the company overachieved our cash flow expectation. This indicated that the company has made substantial progress in turning the corner toward profitability. The management team indicated that there are further actions that it will be taking for additional cost savings going forward. Second, management indicated that the business seems to have stabilized and that there is a building backlog of business. And, finally, the company had $39 million in cash, which was recently bolstered by a $15.9 million tax refund. All combined, we believe that the company appears to be on the mend and that the fundamental outlook got brighter for 2020.&nbsp;
Second quarter revenues were a little light, but we did not have a lot of confidence in our estimate largely due to the lack of revenue visibility. Second quarter revenues were $54.7 million versus our $58.5 million estimate. Importantly, the company made substantial progress in right sizing its business. Expenses were down 23.4% in the quarter, well above the 13% decline we were expecting and allowed the company to over achieve our cash flow expectation. We would note that much of the company&#8217;s cost cutting initiatives were not fully implemented and did not significantly impact the second quarter. This provides some encouragement in the coming quarters that the company will be able to turn the corner toward positive cash flow by the end of the year. Operating cash flow (adj. EBITDA) loss of $1.7 million was substantially lower than our $5&nbsp; million loss estimate.
While we are encouraged by the significant operating cash flow beat, we are not flowing through all of the second quarter upside to our full year 2019 estimates just yet. In an effort to be conservative and recognizing that revenue visibility, while improving, is still low, we are tweaking lower our second half cash flow estimates. Overall, however, we are lowering our full year 2019 adjusted EBITDA loss estimate from a loss of $8.9 million to a loss of $6.4 million. We are encouraged that the company indicated that there is a building backlog of business and we believe that there is positive upside surprise potential.&nbsp;
The company successfully renegotiated some of its vendor agreements. In our view, there are more to come. Management identified that to date, cost cutting actions and renegotiation of vendor agreements saved the company $11.7 million in annualized costs. There are roughly $1.9&nbsp; million in additional annualized savings to come from additional vendor re-negotiations. But, we do not believe that the management team will stop there. In our view, there are additional opportunities that the company will focus on in coming quarters.&nbsp;
Importantly, it seems that the business has stabilized and that the company is winning business again. The company identified 21 new product wins through the first half of the year. In addition, the company closed $6.2 million in new sales. We believe that the improving business pipeline is a function of the company&#8217;s investment in its sales staff and renewed focus on its client relationships. Given the prospect of stabilizing revenue trends in 2020 and benefit from cost reduction strategies, we believe that the company will be adjusted EBITDA positive for the full year 2020 at $6.4 million. This estimate could be conservative should the company continue to improve its business pipeline and if there are future opportunities to reduce costs.&nbsp;
We believe that the company has significant runway to turn it toward profitability, bolstered by a strengthened balance sheet. As of June 30, the company had $39 million in cash and $18 million in debt. The large cash position benefited from a $5.0 million contingent payment related to the sale of 3Q Digital. In addition, the company benefited from a tax refund of $15.9 million. In our view, the large cash position provides the company will significant flexibility to invest in business development and sales infrastructure. In addition, we believe that the company&#8217;s cash position will be a favorable selling point to win future business.
In summary, there was substantial progress made in the second quarter. In our view, the company&#8217;s cost reduction actions were not fully implemented in the second quarter, which provides the prospect for positive upside surprise potential in coming quarters. Finally, revenues appeared to have stabilized and that there is a building backlog of business. This increases the likelihood that the company will return toward profitability in 2020.&nbsp;
We believe that the HHS shares are an option on the prospect that the company will return toward profitability. In our view, the HHS shares are among the few publicly traded independent marketing services companies in a consolidating industry.&nbsp;

Harte-Hanks Inc. (HHS)

Substantial Progress Made

Fundamental Analysis:

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A Baseline Quarter (HHS)

Begins A New Chapter (HHS)

A Change In Tone; Initiates Share Repurchase Authorization (HHS)

Anticipating Another Good year (HHS)

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