Harte-Hanks' Q2 net income down 29.7% year-over-year to US$9.4M with restructuring charges; operating revenues up 2.6% to US$213M with increases in direct marketing offset by Shoppers segment revenue

SAN ANTONIO, Texas , July 28, 2011 (press release) – Harte-Hanks, Inc. (NYSE: HHS) today reported second quarter 2011 diluted earnings per share of $0.15 on revenues of $213.0 million. Excluding $2.8 million of net charges described later, second quarter 2011 diluted earnings per share would have been $0.18. These results compare to diluted earnings per share of $0.21 on $207.6 million in revenues for the second quarter of 2010.

The following table presents financial highlights of the company’s operations for the second quarter of 2011 and 2010, respectively.

(In thousands, except per share amounts) Three Months Ended March 31,
  2011 2010 % Change
Operating revenues $ 213,047 $ 207,609 2.6
Operating income 16,546 22,573 -26.7
Net income 9,425 13,416 -29.7
Diluted earnings per share $0.15 $0.21 -28.6
Diluted shares (weighted average common and common equivalent shares outstanding) 63,703 64,183 -0.7

For the three months ended June 30, 2011, the company generated free cash flow (defined below) of $8.8 million, down from $15.4 million in the prior year’s second quarter.

Commenting on the second quarter performance, Chairman, President and Chief Executive Officer Larry Franklin said, "Shoppers again heavily influenced our quarterly performance. The Shoppers revenue decline of 9.5% was similar to the first quarter 2011 decline. Included in the Shoppers operating loss of $1.1 million are $2.8 million of net charges from steps taken to significantly reduce costs and increase productivity going forward. We expect these charges will result in annualized savings of approximately $7-8 million. We are continuing our digital strategy investments, where we see good revenue growth and are adding capabilities that increase value for our readers and advertisers. As we continue to implement our multichannel strategy, our Direct Marketing business had good revenue growth for the fourth consecutive quarter and the operating income growth is the first in several quarters."

Discussing the performance of individual business segments, Doug Shepard, Executive Vice President and Chief Financial Officer, said, "Direct Marketing revenues and operating income increased 8.4% and 1.8%, respectively. Revenue increased in four of our five verticals during the quarter led by an increase (as a percentage) in the high teens from our select vertical compared to the second quarter of 2010. Our retail and financial verticals experienced revenue growth in the low double digits, while our healthcare vertical was up slightly. Our high-tech vertical declined in the low single digits. Operating income increased 1.8% to $20.4 million compared to the second quarter of 2010.

Shoppers revenue decreased 9.5% in the second quarter compared to the second quarter of 2010 and operating income declined $3.6 million excluding charges. During the second quarter, we incurred $3.3 million of charges related to our efforts to reduce expenses in the Shoppers business, primarily through organizational restructuring and headcount reductions. The charges consist of severance, including the recently announced retirement of our Shoppers President, Pete Gorman, and miscellaneous facility reductions, which were offset by an expected refund of $0.5 million related to the 2009 legal settlement. Excluding these charges would have resulted in a $0.03 increase in the diluted earnings per share we reported."

Franklin said, "In Shoppers we made significant progress on many fronts in the second quarter. We are putting in place the new Shoppers leadership after Pete’s long and distinguished career. We continued a number of cost reduction initiatives that were under way from the first quarter and earlier and accelerated additional consolidations and further reductions. We are confident these changes will lead to excellent profit improvement as well as drive improved revenues and we will continually look for additional ways to become more profitable. However, we see no meaningful economic improvement in California and Florida, or any catalysts for improvement over the next few quarters.

Turning to Direct Marketing, except for the fourth quarter 2010 when we reported 14.2% revenue growth from the special project that spanned the third and the fourth quarters, the 8.4% growth in the second quarter was the best revenue growth we have reported in several years. While the return to revenue and operating income growth was a positive development during the quarter, we are not satisfied with the margin decline compared to last year’s second quarter. Our margin was influenced by a number of factors, including consolidation of two of our international businesses, increased costs associated with new and expanding contact center accounts and additional resources for our global database suite of products and services to support existing and new multichannel marketing clients. Some of these will continue at least into the next quarter and will likely cause our margins for 2011 to be slightly below last year. We are convinced that the steps we are taking to execute against our multichannel strategy will lead to improved revenue and profits in the coming quarters."

Selected Highlights:

Harte-Hanks completed the open market repurchase of one million of its shares under its share repurchase program, and paid a dividend of 8.0 cents per share, marking 65 consecutive quarterly dividend payments since the first quarter of 1995.

Harte-Hanks Shoppers began a leadership transition, as Pete Gorman retires as President of Harte-Hanks Shoppers in August after more than 32 years with Shoppers. Mike Paulsin (currently President of California Shoppers), a 22-year Shoppers veteran, will continue to lead California Shoppers in addition to assuming the role of President of Harte-Hanks Shoppers.

Loren Dalton (President of the Shoppers digital business), a 24-year Shoppers veteran, recently assumed the additional role of Senior Vice President, Sales and Marketing for California Shoppers. So Young Park has been elevated to Executive Vice President and General Manager of the Shoppers digital business, in recognition of her demonstrated digital marketing expertise.

The Agency Inside Harte-Hanks™ was awarded two prestigious Benjamin Franklin Awards ("Bennys"), given annually by the Philadelphia Direct Marketing Association for outstanding direct marketing campaigns: one for "Best Multi-Media Acquisition Campaign" for our 2011 Hyundai Sonata Launch Campaign (which included social, email and mail marketing), and an honorable mention for "Multi-Media Acquisition Campaign" for our 2010 Sony Holiday Campaign (which included email, Web, mail and FSI marketing).

Harte-Hanks Trillium Software® announced an alliance with the Microsoft Dynamics CRM team to provide integrated data quality services for customers using Dynamics CRM, and another alliance with Software AG to provide embedded data quality services functionality for master data management customers.

Trillium Software presented with its customer Wales & West Utilities at the annual Smart Utilities conference in London to highlight its use of data quality services and software to ensure utilities regulatory compliance, including identifying pipe and asset candidates for replacement to ensure safety.

Trillium Software had numerous large wins in the quarter:

The Trillium Software System® was selected by a large credit card company to verify, standardize and enrich payment worldwide transaction data in connection with the client’s fraud detection, marketing and business intelligence efforts.

A large healthcare data provider also selected the Trillium Software System to displace incumbent providers, providing the data quality management component of this data-focused company’s new CRM system.

PricewaterhouseCoopers, a leading provider of audit, assurance, tax and advisory services, selected the Trillium Software System for the data quality management component of its CRM system in the UK.

Trillium Software also secured several large expansions with clients in the insurance and retail sectors, as well as a new client in the internet gambling business.

Harte-Hanks released the Postfuture Index™ 2009-2010, a comprehensive study of email marketing and messaging metrics for nine industries, analyzing email messages sent across nearly 100 companies in 2009 and 2010 using the Postfuture email platform. The Postfuture Index reports and examines metrics for deliverability, open rates, click-through rates, and opt-out rates, both overall and for nine specific markets: automotive; entertainment; financial services; government; insurance; pharmaceutical; retail; technology; and travel/hospitality, almost wholly in the U.S. marketplace.

Mason Zimbler™, Harte-Hanks’ B2B digital agency, signed Computer Sciences Corporation as a new customer, and will provide CSC with Demand Curve™ services, such as marketing automation platform and management, as well as contact center services. Mason Zimbler’s services will support CSC’s Cloud Group that sells cloud-based services to large enterprise companies.

Harte-Hanks Direct Marketing was selected by a major international beverage company to establish multichannel relationship marketing capability. Harte-Hanks will design and host a customer database it will then leverage for analytics and segmentation, allowing Harte-Hanks to rapidly develop and deploy multichannel marketing programs for customer engagement, new product awareness and customer acquisition, retention and cross-selling across the client’s various global brands.

Harte-Hanks Direct Marketing was selected by a leading virtualization and cloud-computing software company to build and host the company’s global marketing database using the Trillium Software System for data integrity. Harte-Hanks will also develop and employ analytics models for this client, allowing the client to gain key marketing insights from a single customer view of its accounts, regardless of location.

Mason Zimbler was selected by Fujitsu to provide Demand Curve services in support of its growth initiatives in North America. Leveraging insight gained from its proprietary CiTDB business data source, Harte-Hanks will analyze Fujitsu’s current market position, target appropriate market segments offering the best growth potential, and develop and execute ongoing outbound demand generation and appointment setting programs for the client.

The Aberdeen Group® was selected to expand its sales enablement and high-quality lead-generation services for a leading global enterprise application vendor. Aberdeen will develop a customized interactive demand generation and lead assessment capabilities for its client that will leverage Aberdeen’s proprietary research for digital and content marketing programs, as well as other sales enablement solutions.

The Agency Inside Harte-Hanks was engaged by Blue Cross of Northeastern Pennsylvania to provide multichannel agency and contact center lead generation support services to reach both consumer (individual) and small group markets. The Agency Inside™ will provide direct mail creative for the individual market, then production, search engine marketing (SEM), internet microsite, radio, contact center support and response management and reporting for both the individual and small group market.

Harte-Hanks Direct Marketing added substantial new lines of business for its contact center support service engagement with Barnes & Noble to provide technical support for both customers and store personnel for its Nook® electronic book device.

About Harte-Hanks:

Harte-Hanks® is a worldwide direct and targeted marketing company that provides multichannel direct and digital marketing services and shopper advertising opportunities to a wide range of local, regional, national and international consumer and business-to-business marketers. Harte-Hanks Direct Marketing helps its clients obtain insight about their customers through database and marketing analytics. Based on that insight Harte-Hanks Direct Marketing designs, implements and executes multichannel marketing programs on behalf of its clients using direct and digital communications. Harte-Hanks Shoppers is North America's largest owner, operator, and distributor of shopper products which bring buyers and sellers together at a local level though its proven multichannel offerings, including targeted print, digital advertising, and classifieds. Its print publications are zoned into more than 950 separate editions and reach 11.2 million addresses each week in California and Florida. Shoppers also provide advertisers with PowerSites™ to help small- and medium-size businesses establish a web presence and improve lead generation, PowerClick™ SEM services, and mobile distribution of their ads and coupons. For consumers, PennySaverUSA.com™ and TheFlyer.com™ offer local online and mobile classifieds for garage sales, pets, used and new cars, real estate, as well as thousands of coupons and business listings. Visit us at http://www.PennySaverUSA.com, http://www.TheFlyer.com, and http://www.PowerSites.net.

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