Anticipating Another Good year

Trends Appear Favorable

An Acquisition That Appears Attractive, InsideOut

Demonstrates Its Ability To Grow

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Harte-Hanks Inc.

Investment Appraisal
The company reported a solid second quarter with results in line with expectations. Importantly, there were some strong under currents in its segments, which give us a more constructive view for the company&#8217;s second half, discussed later in this report. In the second quarter, the company reported total company revenues of $48.5 million, a tad below our $49.3 million estimate. The second quarter total company revenues were down a modest 1.4% from the prior year, which was a difficult comp. Figure #1 Q2 Variance Chart&nbsp;highlights the quarterly results compared with our estimates. In the prior year period, the company benefited from Covid related business, which did not repeat this year. This was reflected in its Customer Care segment which reported a 20% revenue decline. The company&#8217;s Fulfillment &amp; Logistics Services segment largely offset the revenue weakness in Customer Care, with revenues up 24%. Given the company&#8217;s revenue mix and earlier cost cutting, Adj. EBITDA was $5.2 million, up a strong 18% year over year, slightly better than our $5.0 million estimate. Notably, Adj. EBITDA margins improved to 10.6%, up from 9.7% in the first quarter.
The company has significant contract wins in the second half. Customer Care, while still cycling against tough year earlier comps, will benefit in Q3 from business related to the premier of the House of the Dragons, a prequel to the very popular Game of Thrones program on HBO. In addition, the company has a significant win in its Logistics business. The company consolidated facilities into its Kansas City and Boston properties, both facilities can support significantly more business. Furthermore, the Fulfillment &amp; Logistic Services business generated 16% plus EBITDA margin. As such, the company was sanguine about exceeding the company&#8217;s difficult year earlier third quarter comparison. As such, we are raising our Q3 revenue and Adj. EBITDA expectation, reflected in Figure #2 Second Half Revisions.&nbsp;
Figure #3 Full Year 2022 &amp; 2023 Revisions highlight our views for the remainder of 2022 and into 2023. As highlighted in our previous charts, we anticipate favorable fundamental trends in the second half of 2022. This outlook is in spite of the macro economic headwinds. Notably, our upwardly revised full year 2022 Adj. EBITDA estimate of $21.5 million was our original full year 2023 estimate. Using 2022 as a base year, we are revising our full year 2023 estimates, which are highlighted in Figure #3. Our estimates anticipate improving margins related to the favorable revenue growth outlook. Given the sanguine outlook, we believe that it was fitting for management to take a victory lap in describing its future. &#8220;Harte Hanks has clearly established a new profitable baseline and a platform for consistent growth.&#8221;&nbsp;
Certainly, the company is in a sound financial position. As of June 30, the company had $10.6 million in cash and $10 million in long term debt. Since the end of the quarter, the company repurchased the preferred held by WIPRO for $9.9 million and 100,000 shares. This move puts a nail in the money losing relationship with that company. Management indicated that it ended all third party vendor agreements with WIPRO last quarter. It also sold a basket of IP addresses that it held for $2.5 million. Notably, the company has additional IP addresses that it may sell. Notably, following all of these moves, the company now has no debt and maintains a comfortable cash position. Furthermore, the company is expected to receive a tax refund of $7.5 million, likely by year end.&nbsp;
Finally, as mentioned in our previous reports, rising interest rates have decreased the company&#8217;s unfunded pension liabilities. As of June 30, unfunded pension liabilities were roughly $50 million, significantly lower than the $68 million at the end of 2020. We believe that rising interest rates will have a favorable impact on unfunded pension liabilities more than offsetting the decrease in asset value. As such, we believe that investor concerns over the unfunded liabilities will be assuaged given the current rising interest rate environment.&nbsp;
Given the improved financial position, we are raising our financial assessment from 3.5 to 4.0. In our view, the company appears to be in a solid financial position to fund its revenue growth initiatives. In addition, we believe that the company may consider tuck in acquisitions to enhance its longer term revenue and cash flow growth prospects.&nbsp;
In the latest quarter, the HHS shares have outperformed its Marketing Technology peer group, up 68%, as highlighted in our quarterly industry report dated July 25, 2022 entitled Digital, Media &amp; Entertainment report. Figure #4 Stock Chart. the HHS shares are up 85% from the beginning of the year. We view the move as well deserved, especially given that the increase was from depressed values. While it may be likely that the largest portion of the upside in the shares was achieved since the beginning of the year, we believe that there is headroom for further stock appreciation.&nbsp;
Despite the recent stock move, near current levels, the HHS shares trade at 6.1 times Enterprise Value to our upwardly revised 2023 Adj. EBITDA estimate. The Enterprise Value takes into account the current $50 million in unfunded pension liabilities. We believe that the unfunded pension liabilities will become less of an investor concern as interest rates rise and as the company reflects a solid cash flow generation footing. The Enterprise Value anticipates $7.5 million in a tax refund, expected by year end. Excluding the unfunded pension liabilities, the HHS shares trade at a modest 4.0 times Enterprise Value to our 2023 Adj. EBITDA estimate. Both multiples are far below the company&#8217;s double digit Adj. EBITDA growth potential.&nbsp;
We are raising our price target on the HHS shares from $20 to $22 to reflect our upwardly revised 2023 Adj. EBITDA estimates. Our revised target maintains our target multiple of 8.4 Enterprise Value to our 2023 Adj. EBITDA estimate. This Enterprise Value reflects the full value of its current unfunded pension liabilities at $50 million. Excluding the unfunded pension liabilities, our target multiple is 6.5 times. Notably, the multiple does not fully reflect, in our view, the double digit cash flow potential of the company. In our view, there are multiple catalysts toward higher stock valuations which included positive upside revenue and adj. EBITDA potential, lower unfunded pension liabilities as interest rates rise, improving fundamentals that put the company on a solid cash flow generating position, receiving the $7.5 million tax refund, as well as proceeds from additional sales of assets (notably, IP addresses). Near current levels, there appears to be near 60% upside appreciation potential. As such, we believe that there is a favorable risk/reward relationship and maintain our Outperform rating.&nbsp;
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Figure #1 Q2 Variance Chart
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/hhsq2chart.jpg" style="width: 431px;height: 816px">
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Figure #2 Second Half Revisions 
 

<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/hhs2Hupdate.jpg" style="width: 475px;height: 681px"> 
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Figure #3 Full Year 2022 &amp; 2023 Revisions
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/hhs2023modelrevision.jpg" style="width: 528px;height: 723px"> 

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Figure #4 Stock Chart
 

<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/hhsstockchart2.JPG" style="width: 610px;height: 258px">
Source: Yahoo Finance

Harte-Hanks Inc. (HHS)

A New, Profitable Baseline

Fundamental Analysis:

Rating: Log in to view

Anticipating Another Good year (HHS)

Trends Appear Favorable (HHS)

An Acquisition That Appears Attractive, InsideOut (HHS)

Demonstrates Its Ability To Grow (HHS)

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