Harte-Hanks Reports First Quarter Results

Business Wire, April 30, 2007

Note: Harte-Hanks will hold a first quarter earnings conference call on April 30, 2007 at 10AM CT. The number is 800-988-9498 domestic or 210-234-0029 international, pass-code 121693. The conference call will also be audio Webcast. To access, please go to https://e-meetings.mci.com, conference number 6815268, pass-code 121693. There will be an audio replay available shortly after the call through May 4, 2007. To access, please call 866-475-1459, pass-code 121693.

SAN ANTONIO -- Harte-Hanks, Inc. (NYSE:HHS) today reported first quarter 2007 diluted earnings per share of $0.27 on revenues of $283.0 million. These results compare to diluted earnings per share of $0.29 on $278.4 million in revenues for the first quarter of 2006.

The following table presents financial highlights of the company's operations for the first quarter of 2007 and 2006, respectively. Full financial results are attached.

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In the discussion below, the company intends to provide investors with a better understanding of the operating results and underlying trends to assess the company's performance and liquidity. Harte-Hanks evaluates its operating performance based on several measures, including the non-GAAP financial measures of free cash flow, defined as net income, plus depreciation and amortization, plus stock-based compensation (tax-effected), less capital expenditures, and EBITDA, defined as net income before interest, taxes, depreciation, and amortization. Harte-Hanks believes that free cash flow and EBITDA are useful supplemental financial measures for investors because they facilitate investors' ability to evaluate the operational strength of the company's business. Free cash flow and EBITDA, however, are not calculated in accordance with GAAP and they should not be considered substitutes for net income as an indicator of operating performance. A quantitative reconciliation of free cash flow and EBITDA to net income is found in the tables in this release.

Commenting on the first quarter 2007 performance, Chief Executive Officer Richard Hochhauser said, "While we knew and communicated that the first half of this year would be challenging, we are nevertheless not pleased with how this year has started. We did, however, generate $23.7 million of free cash flow in the quarter, 7% higher than our free cash flow in the first quarter of 2006, and we have made and are continuing to make adjustments to our cost structure."

Discussing the performance of individual business segments, Hochhauser said, "Direct Marketing revenue grew 4.2% over the prior year's first quarter. Operating income was essentially flat - up less than 1% - primarily attributable to higher depreciation and amortization expenses associated with our Manila operation that was opened in last year's second quarter and our September 2006 acquisition of Aberdeen. Absent the growth in depreciation and amortization, EBITDA growth was 5.6% compared to the first quarter of 2006, and EBITDA margins improved 30 basis points. Our high tech/telecom vertical had year-over-year double-digit revenue growth in the quarter, and our select vertical had growth in the high single digits over the prior year. Our retail and financial verticals were each up in the low single digits. The only vertical showing a revenue decline was pharma/healthcare, which was down mid-single digits - the pharma portion of this vertical showed strong growth, while the healthcare portion was facing difficult comparisons to a very strong first quarter in 2006."

Turning to Shoppers performance, Hochhauser said, "Shoppers had a difficult quarter, with a revenue decline of 1.9% from the first quarter of 2006. While we are taking steps internally to address our top-line performance, the general economic conditions - and particularly the real estate and associated financing markets - in the California and Florida geographies in which we operate also contributed to our revenue softness. Operating income declined 14.5%. Along with the revenue decline, operating income margins continue to be negatively impacted by the large circulation expansions we completed during the last three quarters of 2006, our continued investment in our Internet presence, and higher rates for newsprint and other paper. We will be cycling through these issues as the year progresses and our outlook for the second half is stronger than for the first two quarters."

Concluding, Hochhauser said, "While we knew the beginning of the year would be more difficult, we did expect stronger performance than what we achieved. In Shoppers, the revenue softness has been more pronounced than we thought it would be but has followed the trend line of the fourth quarter 2006 shopper revenue performance. In Direct Marketing, certain new revenue has been slower and more costly to onboard than we had planned. We have responded and plan further actions to adjust our cost structure in both businesses. The associated expenses of our quarter one actions negatively impacted an already weak first quarter. While we are committed to operating our businesses in an efficient and effective manner, given our first quarter performance it will be more difficult to achieve our stated goal of similar EPS growth in 2007 as we saw in 2006 (over 8% adjusting for stock options).