Harte Hanks Inc (HHS) 2002 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Harte-Hanks quarter three 2002 conference call. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Richard Hochhauser. Mr. Hochhauser you may begin.

Thank you. Good morning. With me today are Larry Franklin, our Chairman, Jacques Kerrest, Chief Financial Officer, Dean Blythe, V.P. Legal, Jessica Huff, Corporate Controller. The comments we make on this call will include forward looking statements that involve a number of risks and uncertainties which can cause actual results to vary materially. After my comments, Jacques will give some financial details, and then we'll take some questions.

We had hoped that things would be better, and the key word here is hoped, because we are running the business using different criteria than hope. We were encouraged though by a few things, we continue to improve the trend, albeit slightly, in year over year revenue comparisons. We had higher revenue than the prior year quarter for the first time since the first quarter of '01.

Our EPS at 24 cents is flat with last year. We continued strong free cash flow of 24.8 million dollars, a competitive advantage in these tough times. We continue to deliver reasonable profits in a prolonged difficult environment. These achievements are testimony to the continued commitment of our management team, and all of the people who make it happen at Harte-Hanks.

We're disappointed that EBITDA margins have declined somewhat, caused by pricing pressures, difficult comparisons to last year, business mix and some investments we're starting to make in a range of strategic initiatives. While we're making selective hires, we also continue to reduce our work force overall. Jacques will provide more details in a moment, but it's fair to say that we are once again, able to report awesome shopper performance, 6.1 percent revenue growth, and nearly 10 percent EBITDA growth.

As the press release mentioned, we're expanding shopper circulation. We're also making a commitment to an expanded facility in northern California. This will give us the ability to grow circulation in the north, where expansion potential is significant. Though in the short run it will be costly, and then extra circulation with be dilative.

As mentioned in the last quarter conference call, we still do not see any fundamental change in the behavior of our direct marketing clients. Caution, price consciousness and uncertainty continues to describe their behavior. The period to period comparisons in direct marketing revenue by industry showed some encouraging signs in the automotive sector of our select market group, with double digit growth. We continue to view this area as one of high potential for the company. Unfortunately, financial services continued its double digit decline.

A high tech market, which includes Telecom, was marginally up, while retail, still the largest market, was off a little. Other than for the momentary highs of a new business win in direct marketing, we remain very cautious about the economy. While still early in the planning cycle for next year, we feel better about '03 than we did about '02 at the same time last year.

And for '03 we are committed to stronger relative performance than observed in the prior two years. And shoppers are thinking and actions are aimed at growing this impressive franchise, and in general, delivering reasonable profits during these tough quarters, is our ultimate commitment. Jacques Kerrest will make some additional remarks.

I thank you Richard, and good morning. As a reminder, the numbers reported reflect the adoption effective January 1st, 2002, of SFAS 142, which eliminated good will amortization. We have excluded good will amortization from both years, but the numbers are comparable. Here are the highlights. One, revenue for the company, direct marketing and our shopper units, was up one percent for the quarter, thanks to our shopper units, and as Richard stated, EPS was flat.

Number two, for the quarter, operating cash flow and operating margin decline 190 basis points, and 170 basis points respectively. But as we have mentioned in the past, we should look at the margin over a longer period of time. Year-to-date, operating cash flow margins have decreased only 42 basis points, and operating income margins have decreased 53 basis points.

Number three, for the quarter, free cash flow was 24.8 million, defined as net income plus depreciation and amortization and less capital expenditures. Here is some information on our two businesses separately. First, direct marketing. For quarter three, 2002, revenue on the reported basis for our direct marketing operations was down 1.8 percent, while operating cash flow and operating income decreased 19.2 and 24.3 percent respectively. As in the past quarters, revenue was impacted positively by sales reports, a few percentage points and this is the last full quarter impact of this acquisition. Income decline was due to higher production and distribution cost, and GNA cost. Production and distribution costs were higher primarily due to business mix where we had more lower margin outsource work.

We also experienced higher production material cost in some one-time items. GNA costs were higher due to higher professional services, employee expenses, and insurance expenses, primarily caused by difficult comparison to last year cost containment measures. We are continuing to closely monitor our cost structure, and will continue to take action to reflect the weak business conditions. We have taken action already in Q4 and there are more schedules.

Our margins in direct marketing have deteriorated this quarter, but we have always said that we look at these margins over a longer period of, over a longer time period than a single quarter. Although the margins have eroded year-to-date, the margins remain for opening cash flow, at 19.32 percent for opening income at 14.32 percent. Let me now give you some detail about our vertical markets for the quarter in direct marketing.

The largest industry we served was the retail industry, 30 percent of total revenue of the 141 million. Followed by the finance industry, which includes diversified finance, credit card, non-bank finance, insurance, retail banking and mutual fund, 23 percent of total. The high second Telecom industry together totaled 21 percent. Healthcare and pharmaceuticals, 10 percent of total revenue, and select markets, 17 percent of total revenue.

Of, of, for Q3, um, for Q3 of this year, our international business represented six percent of our total 141 million dollar revenue of direct marketing. The declining revenue and operating income in our international business disproportionately impacted our overall direct marketing results. For this quarter our services offered by our direct marketing units were broken down between CRM 63 percent, and marketing services 37 percent.

Our top 25 customer represented 41 percent of our 141 million dollars of revenue in direct marketing for Q3. And our largest customer in Q3 represented approximately eight percent of our total direct marketing revenue, and this is less than five percent of the total company revenue. Turning to shoppers, we had strong revenue growth of 6.1 percent for the quarter. This was primarily due to strong equal growth in both distribution and ROP product.

Operating cash flow increased 9.8 percent for Q3, compared to Q3, 2001, on 6.1 percent revenue growth. Margins continued to improve, increasing 90 basis points for the quarter at the operating cash flow level, and 100 basis points at the operating income level. On the cost side of shoppers, paper costs decreased 16 percent in Q3, compared to 2001, and overall postage cost increased seven percent due to rates and volume.

I'd like to make some comments about our free cash flow and our balance sheets. Our free cash flow defined as net income, plus [Inaudibl] minus CAPEX was 24.8 million for the quarter. For the last 12 months, ending September 30th of this year, we generated 109 million dollars using the same definition. You might recall we had a target of 100 million dollars for calendar 2002.

The question has also been asked before, what about cash flow from operations, i.e. including changes in working capital. For the last 12 months ending September 30th of this year, we generated 118 million dollars, including work, work, working capital changes and after capital expenditures.

We were showing a net cash balance of 10 million at the end of September, our book equity was 562 million. Our net accounts receivable were 139 million, compared to 134 million, on June 30th, and 138 million on September 31st, 2001. Our DSO at the end of September was 56 days against, against, against 59 days at the end of Q2 this year, and 60 days at the end of Q3 last year.

Finally, we spent 22.8 million dollars to repurchase 1.2 million shares during this quarter. This concludes our prepared remarks. We'll be happy to now answer your questions. Operator?

Thank you. If you have a question at this time, press the one key on your touch tone telephone. If your question has been answered, or you wish to remove yourself from the queue, please press the pound key. Again, if you have a question, press the one key. One moment for questions. Our first question is from Michael Kupinsky.

Hi, Michael Kupinsky, A.G. Edwards. Um, I was wondering if you could give uh, me, a month by month read on the revenue trends in the third quarter, uh, in the direct marketing side. And uh, in the past you've kind of given us a little bit of um, um, more color on uh, the, the, the categories and what you might be seeing in the upcoming quarter. Um, could you break out the categories where you might be seeing a little bit of strength.

Um, I know that your guidance is that you're not really looking for a lot in terms of uh, direct marketing, but can you just add a little bit more color than what you have in the press release?

Um, month by month it's very difficult, Mike, to give you a senses of, I mean, I have the numbers obviously in front of me. You know, some programs come into one month, and some others will flow into another month. I mean, there's no real trend, looking at the uh, third quarter month by month. Um, what was the second part of your question?

Um, I was just wondering if you could add a little bit more color other than what's in the press release, where you might be seeing strength in certain verticals that you might have.

One of the things that we're seeing, and I'm not sure I would use the word strength, but we have had some consecutive double digit declines in our, uh, financial markets for quite some time, and, and uh, we're hopeful that some of the signs that we're seeing point to, to that not continuing going forward. Um, but you know, these things all depend on you know, the next job and the next sale, and uh, it's, it's just hard to predict it. That's, that's the one we're most hopeful about.

Clearly our select markets are where we've pointed out that we have seen some growth uh, and the automotive part of that in particular, has, has been strong, and we're excited about that.

Um, in terms of uh, retail, um, the number of uh, other mediums are showing very strong, uh, or, or at least a, a meaningful pickup in retail advertising. Um, what, do you feel that the other, that the retailers right now are scheduling budgets, um, kind of following maybe their competition to maybe television, radio and other mediums, maybe even newspapers at this point, and uh, and not following along the direct marketing side of the business? I mean, is there anything that you could tell me there?

And then secondly, um, what in terms of uh, margin, uh, margins going forward, because um, if you um, look at the margins, uh, even if you anticipate some sort of a pickup there, what type of margin potential do you have in the direct marketing side um, going forward? I mean, do you have any, any areas where you can actually cut costs further at this point, or is it just a function of revenues?

Let me address the first part of the question. Uh, in, in um, questionable economic environments, such as the one we're in, we have always seen the large retail client experimenting with different programs and, and uh, I agree with you, as uh, we've seen some shifting taking place and they're thinking about uh, TV, and maybe to a lesser extent, newspapers. And we're seeing some of that among our client base, as well.

The thing we don't know and, and we've said this before, is when somebody experiments with another medium what happens and, and do they return to their tried and true. Uh, but this kind of environment lends itself to experimentation and yes, we are seeing it.

Uh, regarding the margin, uh, Mike, I mentioned in my remarks that if you uh, look at year-to-date uh, in terms of direct marketing margins on operating cash flow, we are at 19.32, 19.32 percent margin for operating cash flow. And this is higher than it was in 2000. Um, we obviously believe that we will finish the year better than this. Um, you know, you have to look at it on a longer time period than just a single quarter, and obviously this quarter was not a good quarter in terms of margin and direct marketing.

We acknowledge this but um, we still believe over time, and it's over a cycle that we are improving and we will improve our margin in direct marketing.

Okay, thank you.

Our next question is from Eve Glatt.

Hi, it's Eve Glatt from Merrill Lynch.

Yes, good morning.

How are you? Um, a couple questions. One, uh, on the new business wins that you all announced, uh, in your press release this quarter, can you give us some sort of sense of what an annualized run rate revenue contribution those might um, contribute during uh, this next year?

And then, I guess, actually, Richard, in that same vein, I'm curious, we calculated an organic growth decline of 3.8 percent on the direct marketing side in the quarter. Can you sort of give us a sense of how that breaks down between current client spending declines and then, sort of, contribution on the new business front?

Um, to your last question, uh, we have seen over the past few quarters, uh, some, some improvement in the current client spending and that has continued uh, in the third quarter. On the new uh, revenue uh, announcements that we've made, uh, some of them are, are pilot projects that have uh, fairly significant potential on rollout. And, and I should say on and if rollout, because in the pharmaceutical business, pilots don't necessarily turn into rollout, and when you sign a uh, contract with a large company, it doesn't mean that you have a specific dollar amount that you're going to receive.

In fact, in one of these deals, uh, we think the potential is uh, reasonably significant but we don't have any indication that it will be that significant. We just know the potential is there with that signed contract. So uh, they vary a lot. Um, none of these contracts are in the significant dollar amount area, but have the potential to be that.

Okay, and then when you say current client spending has increased in Q3 or over the last couple months, I mean they're still, they're still declines, they're just declining less?

Yes.

Eve Glatt. Okay. Well I guess, in the same vein though, how does your organic growth generally break down between current client spending and then new business? Or maybe new businesses just slower rather than in prior years?

Um, new business, you know, new accounts, um, well, it's about, it's just slightly slower than, than last year, but it's not meaningful in terms of the variance between last year and this year. Uh, the key is what we talked about before, is the net between existing clients spending less, and existing clients spending more. As Richard indicated this trend is, is going the right direction. We indicated this in the second quarter.

Uh, we, but it's still negative, i.e. there is more existing client spending less than existing clients spending more. Uh, but it's certainly going in the right direction.

Okay, and then Jacques, uh, on CAPEX expectations for the years, what, what is that number now, since CAPEX has come in a lot lighter than we had expected?

Yeah. Year-to-date, we spend uh, close to 12 million dollars in CAPEX. I had said in the second quarter that we uh, expected to be for the full year, between 20 and 25 million. We still expect to be in that range, maybe at the lower end of the range.

Okay, thank you very much.

Thank you.

The next question is from David Doft.

Good morning. I have a couple questions. One just uh, continue on something that Eve was talking about. Were there any material client losses in the quarter?

No, no material client losses in the quarter.

Okay, so it's basically existing guys spending a little less still.

Yes.

Okay. And then, can you break out for us to remind us what uh, sectors are included in the select markets at this time, and it seems like that number has grown nicely at the percent of total. Are there any that might be broken out soon?

Well the, the select market group was created because we see uh, a lot of opportunities in areas outside of the verticals that we, that we report on. And the largest part of select market, the, the largest individual segment within it, is automotive. It is uh, we're not breaking it out yet. Uh, has, certainly has the potential to be, if it continues to show the kinds of uh, improvements that we've seen over the last few quarters.

Uh, but it's, it's the world. It's the, it's the big basket of opportunity for us and, and we're putting some extra focus on that now.

I mean, just to give you an indication, some other uh, uh, kind of vertical markets in there are not-for-profit manufacturing, publishing, travel and leisure.

Okay. And um, it, what is the minimum size of, an industry needs to be of total revenue, for it to be broken out?

Uh, there are a lot of criteria that we use. Uh, some of it's size, some of it's the number of clients. Some of it's trend. So I don't think there's a magic formula here.

Okay, great. Uh, and in a little bit different direction, uh, Jacques, you indicated that you're already taking some incremental cost savings uh, in the fourth quarter here. Can you lay out where you see opportunity. Is it head count, is it advertising and marketing, product development, you know, anything like that?

Um, it's basically on the payroll side, to align the payroll with the uh, revenue stream. Uh, we've indicated that the uh, P&D side is more of a variable nature, and a one-time nature for this quarter, but, so we continue to look at our labor force, and that's where it's primarily going to be in Q4.

How much did P&D swing this quarter?

Uh, it's, as you can see we've only give the number for the uh, the total company.

Right.

It, it, it went up five million uh, for the total company.

Right, okay.

And part of this, obviously, is shoppers and the numbers and there was an increase in postage costs and shoppers, so it will be reflected in this. But obviously the direct marketing side had a uh, a, an increase in production and distribution costs.

Okay. Um, and, and then the last thing is, how much more room do you think you have on the cost savings side, or does it continue to be variable with revenue?

I think it's variable with revenue.

Great. And then last question, uh, are you seeing your historical seasonality going into the fourth quarter?

On the direct marketing side, yes, we believe uh, I mean, fourth quarter is usually a stronger quarter than all the other quarters in direct marketing. Uh, I also would remind you that in shoppers, it's the other way around. The third quarter is the uh, is the highest. So fourth quarter will not be as high as the third quarter.

Great. Thank you very much.

Thank you.

The next question is from Alexia Quadrani.

Hi, good morning. On the shopper side, could you give us a bit more detail in terms of the investments you eluded to um, to expand that business, and how that will impact if at all, the uh, the margin targets for shoppers for next year?

Well, one of the things that I mentioned uh, was, was northern California. Uh, our expansion potential in the state of California where we currently distribute to over 80, uh, 70 percent of the households is, mostly lies in the north. And uh, and so we're uh, embarking on a path in, in the plant and equipment arena, to allow us to do some more expansion. So that's one area.

Uh, circulation has always been, and contiguous circulation in particular, has always been an area of opportunity for us. But there are also some other strategic initiatives. Uh, I'll give you one or two examples of them. And, and I think they, they are just color to what can happen in that, in that uh, in that business.

Uh, we've identified uh, potential for increasing travel and leisure revenue, and we're currently uh, putting together an initiative in, in four different additions of our shopper publications. The northern California uh, central and south, and as well as southern Florida, to establish uh, travel and leisure initiatives. And what's exciting about that is that they're all going to do it slightly differently, and then they're all gonna come to the table and, and we'll establish some best practices from that.

Uh, we hope, if in fact, the potential is as large as we think it is, that we'll be able to, to launch a separate section one day in that arena. Another area of opportunity, just because of where we distribute, is Hispanic marketing. And uh, that's an initiative now that we're following up on, and, and uh, it's a little bit outside of our mainstream, but we can remember, identify Hispanic households by zone, and identify those zones that are disproportionately uh, Hispanic.

So we think we have some potential there to sell what is uh, increasingly an important market segment to advertisers.

Is the investment that you're making in this area, um, gonna be significant enough to impact the margin, or at least your longer term margin goals?

Uh, all new circulation has an effect on margin. It, it, we had it in the third quarter in a small way, because the amount of circulation increase was relatively small, and we have it every quarter that we increase circulation. So the answer is yes for circulation, and the answer is yes as well, as we um, move to a larger facility because they're, that has an impact as well.

Okay. And I think I, you may have mentioned this and I missed it, did you talk about the, uh, the healthcare of the pharmaceutical vertical, is that relatively flat in the quarter, on the direct marketing side?

Uh, no, it was uh, uh, slightly down for the quarter.

Okay, thank you.

Thanks.

Next question is from Michael Power.

Hi. Yeah, forgive me if I missed it, but uh, could you provide some kind of top or bottom line outlook uh, for next quarter or next year?

Uh, you didn't miss it.

You didn't miss it, because we didn't give it. But um, we, uh, the only guidance that we have given uh, Mike, is for the year uh, for this year 2002, to have EPS higher than 2001. There's only the fourth quarter left, so you can imagine since year-to-date, we are flat with last year what it means for fourth quarter.

That is the only guidance we have given. We have not given guidance for new [inaudible].

Thanks.

Next question is from Susan McGarry.

Hi.

Hi.

Jacques, were any reserves or adjustments, any significant adjustments made during the quarter?

Such as?

Um...

I mean, the answer is no, but I'm trying to figure out what exactly...

Well, in the receivables or any other significant accrual?

No, no. No, no.

Okay. And uh, could you go through the head count growth or, or um, reduction by division?

Uh, we really don't uh, publish these numbers. Um, I'm not quite sure what exactly you, you're looking for.

What was the total head count then?

Oh, the total head count for the company at the end of uh, September uh, full time, was exactly six point, 6,400 and uh, including part time, would be a little more than 7,000 people. That's, that's shoppers and direct market.

And how do those compare to June 30th?

Uh, it is slightly down from June 30th.

And, just so I'm clear about the shoppers, is, is the company planning to build a, a whole new facility in northern California?

Um, we are, uh, we are planning to uh, occupy a, a larger facility in northern California that will enable us to grow in the north. Uh, it will be adjacent to our current facility, and that's good news because that suggests that we will minimize all of the, the difficult components, uh, that one has when you move any facility. And we're in the middle of making these decisions as we speak.

Okay. And, and when you talked about uh, travel and leisure as an opportunity, um, you were talking about the shoppers' business, is that correct?

Yes.

And, and could you give a little bit more detail about that? Would they be local providers of, of travel, or national providers or...

Yes. And, and regional as well.

Okay. And uh, just in terms of the um, capital expenditure, year over year um, Jacques, what are the, what are the biggest changes um, in capital expenditure? Where are you investing significantly less? Could, could, is there any more detail you could give about that?

Well we, I mean, overall, for the total company as I indicated, we are year-to-date at 12 million dollars, compared to more than 23 million dollars last year. The big, in fact, swing, was a uh, a smaller amount of capital expenditure this year in direct marketing. And in fact, the higher amount in shoppers uh this year compared to last year.

Um, I, I, I think you know, you really, it's also very difficult to look at these numbers quarter to quarter, but um, you know, we had a budget established for the year, and uh, we spent appropriately, depending on how we feel the business is going and, and where we feel we need to invest. So um, as I said before, we expect to be in the 20 to 25 million, maybe, at the lower end, end of the range, for the full year. Um, and that's um, as I said, it's um, it's, it's more, our capital expenditure for shoppers this year than it was last year, and less than direct marketing.

Okay. And I just have two more questions.

Sure.

Um, are there any uh, trends or changes in terms of the competitive landscape that uh, that you're observing?

Uh, competition is difficult. Uh, prices, as we've pointed out, in our quarters, uh, is an ongoing factor in uh, new work, and in existing work. Um, we sort of thought that some of the competitors uh, wouldn't be around anymore by this time. That, that, while that has happened a little bit, it hasn't happened as much as we had hoped.

Um, but it's very real. Uh, the more difficult the environment is, the, seemingly the more difficult the competitive environment is as well.

And are there any um, particular areas within direct marketing um, where the pricing pressure is more intense?

We're seeing it, we're seeing it across the board.

Okay, thank you.

Thank you.

Once again, if you have a question, press the one key. We have a question from Fred Searby.

Hi, uh, this is Fred Searby from J.P. Morgan. A couple questions for you guys. Technology, I was somewhat surprised that you said that that was up. I mean, can you, that doesn't completely square with the ongoing deterioration or blood bath we're seeing in technology, and I just was curious whether that was kind of a, an anomaly or there's some discernible trend there.

Well first of all it's uh, just to make sure the facts are right, we're talking about on balance um, flat. It was up marginally.

Okay.

You have to remember also that high technology includes tele[inaudible].

Okay. And what's, why is that, I mean, that's flattened out? It's, it's, most industries it's still declining, but is that somehow related to wireless and the heavy promotional spin there, or...

Where, where is, you know, we, we've had a couple of nice account wins, and in a market that was certainly hit pretty hard last year, those account wins are beginning to show up in a leveling fashion. And that's really what we're reporting.

Okay. And this, in dissecting the strength in shoppers a little bit more, can you, I mean if you look at classifieds, real estate and some of these other things, where is the real strength coming from and, and where, I mean, how sustainable is, is the growth pattern? I mean, we've been expecting kind of, it to moderate.

Well the, there, the two types of revenue that we look at, uh, are, in the, in the book revenue we call ROP, and is insert revenue. And both of them grew about the same amount in the quarter, uh, which, I think suggests that the strength that we've been observing in shoppers is really continuing. You know, the readership product is an awfully important part of who we are, and the fact that the in-the-book advertising is increasing, enhances our image as a readership product.

I mean, because there's so many things that are not perfectly comparable but look similar, where we've seen a real slow down.

Uh, we're winning.

And what percent is, is of, is it at real estate classifieds?

It's a small percent, uh, we've said in the past that real estate has been doing well this year, and it continues to do well.

Okay. And then just finally, I mean, I know you can't really answer this so it's an inane question to some degree, but I'll go ahead. I mean, you keep buying back shares, your shares aren't particularly liquid now. Uh, we applaud the fact that you've returned capital shareholders. But I'm just, you know, what are the, what's the, I mean, are, are you still, are there any acquisitions in the pipeline, I mean, are you still looking at them, or is this something that you're not even...

Yes, we are looking at acquisition. Um, in fact, we're spending uh, two days out of the next uh, two weeks, to look at acquisition. Uh, we can't, as you know, we can't predict if we will do any acquisition, but our first um, our first priority is to look at acquisitions. And, and we will spend our money buying back shares when we think the price is appropriate.

And if you can give us any on the inbound you know, Telecom business, and uh, and what you're seeing there, and some of the you know, so there's been some concern on outbound. Clearly, I know that's small for you guys, but...

Outbound is, is relatively small and the inbound work that we do tends to be uh, reasonably niche-oriented. It tends to have a fulfillment component to it where we have some strength as well. It tend to, tends to be industry focused which is part of the niche definition. So uh, while there are pricing pressures there like there are in so many parts of our business, um, I, I think we may be a little bit different looking, perhaps, than the larger uh, telemarketing companies that you may follow.

Alright. Thank you.

Next question is from Bill Warmington.

Good morning.

Hi.

The uh, question for you on uh, the, or a comment that shoppers for the first time went over 50 percent of operating profit, and just wanted to ask if, if we could have some color in terms of the revenue mix issues at direct marketing and shoppers that are, that are driving that.

Well I think it's the seasonality, well it's the fact that direct marketing this quarter had a bad profitability quarter. Uh, that's the first reason. Number two, there's seasonality in each of these businesses, and as I indicated before, shoppers, usually the strongest quarter for shoppers during the year is the third quarter, um, so it's not uh, you know, it's, it's in the pattern that we have seen over the last few years.

Um, we don't, we expect in the, the fourth quarter to be stronger in direct marketing as it is usually the case. Uh, so I wouldn't uh, try to predict some trends here, uh, going forward.

And then the uh, what, what percentage of shoppers' revenue in the quarter is coming from ROP verses insert?

60, 60-40, roughly. I think it's 56 if I remember correctly. I looked at it the other day.

56 percent ROP?

Yes.

And then uh, I, I have to ask that given, given the cost cutting that you guys have already done, and given the, the revenue outlook which, outlook which we know is uncertain uh, will, will you be willing to venture sort of a, a range in terms of your, your expected EPS growth that you're looking to deliver for '03?

Uh, Bill, we, we have not started our budget uh, review, and we will be starting this in two weeks. Uh, we intend to give more guidance towards the end of, or the middle of December if we can, as we did last year. But at this time, uh, we are not ready to uh, do anything.

And we didn't give the range for this year, either.

A guy's gotta ask so uh, I had to try.

You're welcome.

Um, well thank you very much.

Thank you, Bill.

The next question is from Todd Lauden.

Good morning, guys. Um, just a couple of uh, quick housekeeping questions here. Could you say again, I'm sorry I missed it, the shares, the number of shares you bought back during the quarter and what you spent, and then what the CAPEX figure was for the quarter.

Uh, yeah we, we bought back uh, 1.2 million shares, and we spent 22.8 million. And the CAPEX for the quarter was over five million dollars. 5.4 million dollars.

Okay. The, thank you, the, the second question um, shoppers' standard circulation, I believe in the press release that the standard circulation is 75,000. Is that correct?

Yeah, that's an increase over the prior quarter. That's not an increase over the prior year.

Understood. Okay. Is that uh, sort of circulation expansion on track with uh, planned expansion for those contiguous 2 million households that you talked about before?

Actually that was in a different area.

Oh, okay. Alright, so that's not related to, that's sort of separate from the two million uh potentially captureable households?

Well you know, we, we think of the two million as the total, and so it's not separate from it, but we have different geographies that we have the potential to expand in. And even in the north when you look at the north, because that's the area that I said we would be doing more expansion over time. Uh, there are different ways to do that expansion. And we're, we're in the middle of those planning processes right now.

Okay, can you, last question, uh, and you may have covered it and I have probably missed it, but can you give some indication of what services and direct marketing may have found, within the direct marketing, may have shown some strength, or sighs of life, or an upward trend?

Uh, in a, from a service perspective, uh, we didn't see, uh, you know, we didn't see any spiking going on, any unusual activity. We, we think, uh, from a market perspective, the, uh, we are seeing growth in the, as I pointed out earlier, in the automobile, uh, sector. Uh, so that was an encouraging sign for us. And, and the fact that, as somebody pointed out earlier, uh, we're holding our own in the high tech telecom is, is also encouraging.

Okay great, thank you.

Thank you.

There's a follow up question from Eve Glatt.

Hi there. I was just wondering if you could just give a little bit more color on the mix shift that lead to the margin decline in direct market. And if you expect that to continue into Q4, and if that was a result of some of the pricing pressures you talked about earlier.

There, there are a couple of, of, as Jacques is always fond to point out at any given quarter, um, is not necessarily indicative of the total. And that was the case here. There were, um, there were a number of start ups of some client work, and whenever we have start ups, uh, we have learning to do. And some of that learning, unfortunately this quarter, uh, was some increased costs. Uh, I think you need to come, if you look at what we do, uh, when we do full service work, uh, we have a, a lot of the up front planning. We have a lot of the data processing and database work. We develop, uh, after analyzing data we develop programs. And when you put all those things together, particularly on the execution side, you're never quite sure about how that execution is going to, uh, wind up being done. If you're going to switch more dollars to telemarketing or to mail. And if the mail's going to have a larger print component to it.

And so all those are variables. And, and, and we had a, a higher cost component in the third quarter.

So the mix shift didn't, was exasperated by sort of pricing pressure?

Well to some extent it was. And pricing pressure is, is real.

Okay, thank you.

We now have a follow up question from Mike Kupinsky.

Um, yeah, in the past, uh, Richard and Jacques you, uh, basically have talked about, um, the expansion of Northern California as being the, the real opportunities being about a million homes if I recall. And, um, my question really goes towards, uh, it sounds like you're planning to be a little bit more aggressive and then, uh, than what you have been in the last couple of quarters regarding the, the expansion. You know, for instance, the last, uh, last quarter was only 75 thousand homes.

Um, if you were to expand, let's say more aggressively, and it sounds like you plan to. And you might want to correct me if I'm wrong there. But, um, you would look for a margin erosion probably in the first couple of quarters going into next year. I would, I would suspect that they would have some margin pressure on you, mainly because there would probably be a lag time before you can actually sell that, uh, sell those, um, those expanded homes. So that you wouldn't see for, um, look for margin expansion probably until the fourth quarter of next year? Am I correct?

I, I think that's a reasonable observation on, we just don't have the same margins in, in, uh, new zones as we do in well established zones.

Right, and the question is, um, how aggressively do you plan to expand those, uh, those homes? Because 75 thousand really didn't give you a lot of margin pressure because the business environment was so strong. What would you say in terms of future quarterly expansion of homes? Would it be more like 250 thousand?

We can't comment on that, because we've really not finalized our plans. As Jacques mentioned, we're going into our planning cycle. Uh, we're very excited about, about the north as I mentioned to you, and it's potential. But, but we don't have definitive numbers yet. We, we just, and when we do, we'll comment on them.

Okay, alright, thank you.

I show no further questions at this time.

Thank you.

Thank you very much.

Bye.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, you may disconnect at this time, and have [inaudible].