Welcome to the Harte Hank's Fourth Quarter and Full Year Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over Mr. Robert Munden, Senior Vice President, General Counsel and Secretary. Please go ahead, sir.

Thank you, Don. Our call will include forward-looking statements such as statements about our strategies, adjustments to our cost structure, financial outlook and capital resources, competitive factors, business and industry expectations, anticipated performance and outcomes, future effects of acquisitions, litigation and regulatory changes, economic forecast for the markets we serve and other statements that are not historical facts. Actual results may differ materially from those projected or implied in these statements because of various risks and uncertainties, including those described in our most recent Form 10-K and other filings with the SEC and in the cautionary statement in today's earnings release. Our call will also reference non-GAAP financial measures. Please refer to today's earnings release for the required reconciliations and other related disclosures. Our earnings release is available on the investor tab of our website at hartehanks.com. I'll not turn the call over to our Chief Executive Officer, Karen Puckett.

Thank you, Robert and good morning everyone. Thank you for joining our earnings conference call. By now you've had a chance to review our fourth quarter and full year results in the earnings release we issued early today. We delivered fourth quarter adjusted operating revenues of $131 million compared to $139 million in fourth quarter of 2014 after adjusting for 2015 B2B divestitures. Our fourth quarter revenue rate of decline slowed to 5.8% on a constant currency basis. While this should progress in our goal of stabilizing revenue and as a continuation from prior quarters of improving the rate of decline which is encouraging, we still have significant work to be done. We're in a turnaround situation and I do feel we're entering the inflection point and our plan is to deliver flat revenue for 2016 as compared to the year-over-year decline of 10.5% we experienced in 2015 and begin revenue growth in 2017. In the second half of 2015, we did improve the rate of decline, now revenue stability is our key focus. We anticipate our margin will be flat to showing slight improvement in 2016. I want to share with you to deliver on these plans a few of our 2016 key objectives and focus areas. First to deliver a flat revenue, we're creating a platform that enables us to deliver more consistent revenue performance. At a high level, execution on our traditional marketing services such is mail, fulfillment contact center is foundation of why we smartly transition to our integrated solutions' targeted new and existing clients. During the first half of 2015, we took our eye off our traditional marketing services by not pursuing sales and focusing less on renewals while at the same time experiencing some quality challenges caused by the organization changes we undertook. During…

Thank you, Karen and good morning. In this morning's earnings release, there is language discussing adjusted revenues and adjusted operating income; in the table supporting the earnings release, we have reconciled GAAP revenue and operating income to adjusted revenue and adjusted operating income. For the 2015 fourth quarter, there are two primary reconciling differences; one is for the impact of foreign currency on our revenue results and the other is the removal of the B2B research businesses we sold in April 2015. Because of the nature of the B2B research product we sold, they had an unusual amount of seasonality every fourth quarter resulting in almost a third of their revenues in substantial profits during 2014 fourth quarter. Turning to our fourth quarter results, fourth quarter 2015 diluted earnings per share was $0.07 excluding the B2B research business sale and normalized effective tax rates compared to $0.14 for the same period in 2014 adjusted for the 2014 facility closure expenses. Our consolidated adjusted revenues were $131 million compared to $139 million of adjusted revenues in the same quarter last year. This represents a decline of 5.8% which continues our trend of reducing our rate of revenue decline from its peak earlier in the year. Customer Interaction revenue declined 6% on a constant currency basis after adjusting for the sale of our B2B research businesses. One of our goals is to reduce our client losses and revenue returns showed signs of improvement during the quarter, along with our success of winning new logo clients in 2015 compared to last several years. Let me walk through the results of the business segments by industry vertical. Our Select markets vertical benefited from the addition of a new grocery store chain client using our mail supply chain services and the timing of mail programs…

Thank you, Doug. In closing, we're excited about 2016 and the opportunities before us. We believe we're at an inflection point and have plans in place to deliver flat revenue and flat to consistent margin growth in 2016. We went through the pain of the reorganization and changes in 2015 and now we believe we're on the upside of benefiting with our model. Our organization is aligned around a set of priorities and initiatives to execute on our plans, we invested in our sales and marketing capability in 2015 and believe we're getting traction. We have the option to tap new growth by targeting companies and their CMOs navigating the changing marketing landscape, while we continue our focus on important traditional marketing services. We see the focus of our customer journey as an important differentiating factor across all of our customer verticals. We the opportunity for Harte Hanks to be uniquely position to deliver on the complexity of marketers today and to be the solution for any organization looking for a better customer journey that drives brand engagement and marketing returns. I look forward to updating you in the coming months on our progress. And with that, I am going to hand it back to the operator to open it up for Q&A.

[Operator Instructions]. And we will go to our first question to Dan Salmon with BMO Capital Markets.

Karen, could you comment a little bit on your priorities for free cash flow, the Company has a very healthy dividend and always has. But the prior administration also had some big goals for M&A and I'd be just interested to hear your outlook there and then Doug, could you remind us the rough ratio fixed to variable costs for each of the two business segments, thanks.

Dan, on the cash flow, getting revenue stability is really foundational to the cash flow, we do believe and we're very often focused on cost structure and things that we can do differently or stop doing. So, we've got very dedicated plans around that and then this is the year to execute, right. So in terms of acquisitions, we need to execute on what we have, I don't think you're going to see us doing any large acquisitions, you may see a few small ones, but nothing significant. I'm pretty happy with the capabilities we have, we can accomplish some of the augmentation we need to do on certain capabilities by partnering with others. So there is other ways to get the capabilities that we need that's not just an acquisition. And frankly, we need to execute and stabilize revenue first is how we think about that.

Dan, on your question about variable versus fixed costs on the two business segments and those type of things, Trillium is the higher piece because it's a software development type function and its labor is roughly 50% of the cost base which moves up and down, obviously, as you have the large license sales and the recurring revenue piece of the business, the maintenance contracts, things of that nature are in the 80% range of the revenue base. So those license sales can cause lumpiness between the quarters and when you have a high labor base that's fairly fixed in a software development business, it can cause high leverage up or down depending on where the revenues are going. On the Customer Interaction side, most of that basis on a fixed basis is probably the ops and it's roughly 25% to 30% of the expenses on Customer Interaction businesses overall. I would consider fixed, rest of it is primarily labor and is variable depending on the volume and client activity.

We will go next to Michael Kupinski with Noble Financial.

Couple questions, can the Company identify how much of the revenue weakness in the fourth quarter was self-inflicted by the organizational changes rather than just general industry softness?

I'll give you my perspective and Douglas will give you probably more detail there but really we didn't lose any significant customers in the fourth quarter, so that's the good, encouraging news. The decline we experienced was the realization of customers that we lost in the prior quarters. So you are going to see that play out, but no major customer issue. In terms of softness, I've been out with customers, I'm very linked into our sales organization, client services organization and for the most part we have not seen any major shift right now in the clients, in fact the finishing, the work that we're doing is critical because it really is around how do you deal with - the data you need both online, offline to deal with this multi-channel and where do I make my investment. So from a pipeline perspective, I'm going to tell you I'm encouraged. And our pipeline is higher starting first part of the year than it was last year. Of course, we were going through a lot of change last year and we're really traction with this integrated positions' approach. The marketing team led by Frank Grillo that we brought on fourth quarter has made really good progress around the execution framework of our go-to-market and we're all getting a line around that. In the meantime, we've got instead a dozen or so CMOs that we're working with on this concept and we're really encouraged. So Doug I'll let you give more detail around the softness in the fourth quarter and about Trillium too.

Yes, as we pointed out in the release, a decent amount of the earnings decline from our revenue standpoint is foreign exchange and the sale of the B2B business that essentially cut the quarterly decline in half, when you look at those two, has a bigger impact on Trillium because they have a decent size of their business that is foreign based or has foreign clients that's exposed to foreign currency. As far as the reasons and things behind that being economic or industry as opposed to our reorganization and the changes that go on there. We've obviously spent a lot of time, dug into those details, we know that we did some of this to ourselves and some of this is just the normal movement among clients and things of that nature, in where we had some weaknesses such as, as we've talked about we've introduced new products like the Data Refinery and Total Customer Discovery, they came out in the fourth quarter. And we're continuing to refine and upgrade our product line, keep it current and the integration with 3Q Digital in the services that they are bringing to our existing clients and attracting new clients is something that we're very excited about.

And Doug in terms of Trillium, I know that there is a big foreign exchange component there, but there is also I think a fairly high component of software sales in the fourth quarter and that can influence the quarterly results as well. Was any of the weakness in revenues there reflective of some push forward in sales or anything like that as well or no?

It is the normal what I consider or we would consider the normal fourth quarter activity in that the SaaS product is continuing to sell well, we have a high renewal rate that we have maintained on our maintenance agreements. And the lumpiness that comes out of Trillium as it has always been is in software license sales. And that's what happened in the fourth quarter, we had some that moved to early 2016. But they're not lost deals, they are not lost clients or anything of that nature. It's timing of decisions from the technology or whoever is buying the product from us.

Doug, is the Company is still viewing Trillium as of non-strategic asset?

No, I don't think we've ever come out and said that Mike, it is a separate segment but from a strategic standpoint, there is overlap, there has always been overlap between our marketing clients and our Trillium clients. They are both dealing with data, the data quality that Trillium deals with and is an expert at is important to our marketing database clients and in general to our marketing clients. So the only thing we did and I really want to make sure it's not misconstrued, it is important to Harte Hanks, we separated it out as a different business segment because it is run and sold as a software license and not as a traditional marketing product. But in no way should it be construed as not being strategic to Harte Hanks.

Yes, Mike, I would just add to that, it's very important to our overall capability in the market and as Doug said on the data quality side. But also data quality is something now that happening outside of traditional IT CIO organization, it's important for a CMO, sometimes it's important to a CFO. So within our client bases and as we go to market and it's a more integrated solution, you are going to see the Trillium as a critical enabler for that.

And then if you could talk a little bit about what is the number of sales associates that the Company has versus a year ago?

Yes, we've roughly doubled it. Coming out of the financial recession in 2010/2011, we had made a lot of changes in the sales and marketing area. When we did our strategy work in 2014 and announced that in summer of 2014, we had realized that we had under invested in our sales and marketing initiatives and we have rebuilt that to the point that today we have probably doubled the sales staff, that we had 15 months to 18 months ago.

Yes, a couple of things on the Customer Interaction side, we have gone back to the vertical so that we have that really expertise that we need and we've got the client services and the Self under one leader as I said earlier which is important because it's not just held itself in revenue. We're trying to sell into the revenue and then the renewal piece. On the Trillium side, the expansion has been in mid-market. That really happened late in the year for 2015. So there is a big focus on getting that team really scaled up to a level they need to be. We're very focused on both sides, on the pipeline the metrics, the deal sizes, the [indiscernible] still that we need. And so that should further be improvement just on the focus and the metrics that we have around that really didn't exist so much before.

Doug, you don't happen to have the number of the sales associates off hand or maybe I can just call back and get that from you. Because at one point, I know that your high is 90 went down as low as 18, I was just wondering where you are at now specifically?

Yes, I'll have a look that up and give you an exact number, but you have the rough numbers correct.

Okay. And then can you identify how much of your revenues for 2016 are already accounted for?

No, not with any precision that we want to talk about publicly and I am answering that way differently because most of our relationships and contracts are price guarantees without volume commitments and our comfort comes in of our top 50 customers roughly 35 of them have been with us over 10 years, 10 of them have been with us over 5 years and five of them with us less than five years. So it's a very stable strong relationship that we have with our top customers who generate most of our revenue but they do have the flexibility and it's just the nature of this industry, depending on the economy how their ultimate consumers react they will change their marketing spend for back-to-school, for the Christmas season and to ask somebody at this point in the year to give you a firm commitment for what they're going to spend in the 2016 holiday season between November 1 and December 15, it is too much of a commitment to get out of a client.

Final question, the Company pays a pretty hefty dividend and you talked a little bit about your allocations of free cash flow and so forth and certainly with your guidance, your kind of tentative guidance which you are giving there, it looks like you're going to be able to cover the dividend and so forth. What is the commitment to the hefty dividend that you have?

Mike, we have always supported our shareholders. And we believe very strongly in a balanced capital allocation philosophy between share repurchases, dividends, in acquisitions and obviously debt service, so as we balance all those needs and commitments and keeping our product line up to date, things of that nature, we will make those decisions as we go throughout the year, but we have exhibited our belief through our actions over many years that we will support shareholders.

[Operator Instructions]. We will take our next question from [indiscernible].

Most of my questions have been asked, but just a couple more. Can you give us an idea about how much or what percentage of your Customer Interaction revenues came from 3Q Digital?

Yes, I mean we have given a range and told folks that in total the 3Q acquisition is slightly less than 5% of our total revenues.

Okay. With the significant growth that you're seeing in 3Q Digital and combined with some decline in the Customer Interaction revenues. I'm assuming has it gone over 5% or is it still below 5%?

It's right there in that range and you're correct, as Karen said in her comments that, the product and the Company has performed very well, continues to perform very well and we expect that mix will change over the next year or two and we've been very happy with the results that they have delivered and with the reception that they're getting from our existing clients and ability to - integrated solution to bring in new clients.

Yes, I would say, yes, the integrated solution really just coming around 3Q, I guess the acquisition was done at the end of last March. So really in fourth quarter there was a focus and we started getting some traction and learning the rhythm within the organization where our clients are looking for and very good reception. So those plans are built into going into 2016 and the pipeline is growing, we're very encouraged.

So with that said and combined with what you said earlier, I think you said that you'd like to basically work with what you have currently, you are not as aggressive as you were previously in terms of making acquisitions. I'm assuming 3Q Digital is the primary growth driver for you guys in 2016?

Yes, I would say that 3Q, as well as the data analytics piece of that is key for us. I believe that, we all believe, that we need to execute well and get this 3Q capability integrated into our go-to-market before we go off and acquire anything as large as that. And again it's about better execution. I think right upfront here. And then we'll see where we're at.

And then going to Trillium what percentage of Trillium's revenues was recurring or SaaS based?

Well, two different answers. I'm not sure which are you asking because there is a piece that sell a perpetual license with annual maintenance agreements and they have the SaaS product. The maintenance agreements are roughly - the recurring type nature of that stuff is roughly 80% of the revenue base. The SaaS related product line right now is a little less than 5% of their revenue base.

5%, okay. And then the last question.

Before you get your last question, I also want to make sure because I know you're relatively new and make sure we introduced the SaaS product in about this time last year. So that growth has all come in the last 10 to 11 months.

Right. And with SaaS growing although it's still as you said below 5% of total licensing revenues. And given the assumption that the higher percentage of operating cost for Trillium is fixed. Again with SaaS growing, that impacts at least in the short to medium term your good margins a little bit more. Correct. So as SaaS grows to be a higher percentage of your total revenues, we should expect even further margin expansion let's say close to the end of 2016 and then 2017 going forward.

That's correct, later you get into this cycle. You're correct.

Okay. And then the last question is simple. What was the CapEx in Q4?

Roughly, I believe, about $2.5 million.

We will take our next question from Daniel Baldini with Oberon.

I'm curious did you buy back any shares during the fourth quarter or has this continued through the first quarter?

We bought back a small amount of shares during the fourth quarter. But it's small compared to our activity in the early part of the year.

And in the first quarter so far this year?

We'll update everybody on our first quarter activity after our first quarter earnings call.

This concludes today's question-and-answer session. It also concludes our conference. Thank you for your participation, you may now disconnect.