Harte Hanks Inc (HHS) 2003 Q4 法說會逐字稿

Good morning and welcome to the fourth quarter and year-end 2003 earnings call for Harte-Hanks. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to one of your speakers for today, Mr. Richard Hochhauser, CEO for Harte-Hanks. Thank you sir, you may begin.

Thank you, and good morning everyone. With me today are Dean Blythe, our CFO, and Jessica Huff, our Vice President of Finance and 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 I make a few opening remarks, Dean will give some financial details, and then we'll take your questions.

2003 was another difficult year, though the second half was a lot better than the first. In the string of challenging years, we have faced the difference between 2003 and the past few years is that we were successful in stabilizing revenue and direct marketing early in the year and saw some growth in the second half. We're encouraged by this improved performance and continue to see strength in our Shoppers business. As a result, we're more optimistic going into 2004 than we have been for a long time.

We're also pleased that we were able to meet our goal of increased earnings per share of 97 cents versus 96 cents last year, and we generated 85.5 million in free cash flow, higher than we guided. We defined free cash flow as net income plus depreciation and amortization less capital spending.

As we've previously discussed, we have invested in a number of strategic initiatives in both direct marketing and Shoppers, and when the economy and our performance was at a low point and impacted our cash flow and earnings. But we feel these investments were the right thing to do, and even in retrospect we believe that our timing for doing them was right on.

We were satisfied with our performance in the fourth quarter, with EPS coming in at 28 cents at 2cent improvement over Q4 2003. We saw a continuation of strong Shoppers performance and direct marketing and reasonable revenue growth for the second quarter in a row. Direct marketing operating income declined 1.8% on a 3.8% increase in revenue, and we're disappointed in that decline in operating income and expect improvement in 2004.

New customer revenue continues to be strong, and we saw a net increase in existing customer revenue for the second quarter in a row. As you may recall, this was the key indicator for us when revenue declined, so we're pleased with the continued positive trend here.

Revenue grew in all of our verticals for the quarter, except retail which continues to show signs of weakness. We were especially pleased with the mid teens increase in financial services. This is the first year of the year growth for our financial services market since late 2000. Shoppers had another terrific quarter with operating income up 10.7% on a 12.1% revenue increase. The Shoppers results were impacted by the once every six-year occurrence of one extra publication week in the fourth quarter.

As we said last quarter, new circulation does not have the same margins as more mature circulation and often start out as a loss. Over the past year, we've delivered our Shoppers product into 345 additional homes in new areas. This expansion coupled with the investment in our new building in northern California negatively impacted Shopper's bottom line in the fourth quarter. We're feeling better about going into 2004 than going into 2003 at the same time a year ago.

Last year at this time, I said we had the challenge of stabilizing direct marketing revenue and setting the stage for future growth. We achieved that goal in the first half of 2003, and the second half, we had revenue growth, and now we need to bring more to the bottom line in 2004. We expect Shoppers strong performance to continue, but temper that with the difficult comparisons to prior year, and I sure have said that a few times, and the negative impact expansion has on margins. Before turning this over to Dean Blythe, let me tell you some of the key points that I'd like to make.

In direct marketing, we're seeing the light at the end of the tunnel in all but the retail market, and we're forging ahead, building on some key wins late in '03 and early in '04. We'll manage our business around all of the environmental issues of pricing, competition, lengthy contract windows -- all of which are today's realities. We will deliver reasonable profits regardless of the environment.

We have made great progress in growing Shoppers circulation over the past year and have even more significant expansion plans for 2004. We have the financial strength to continue to invest in its people, products, and services and to make prudent capital expenditures, share repurchases, acquisitions, and paid dividends. As stated in our release, our goal for 2004 is to deliver improved earnings per share growth.

We are very excited about the future, and for the first time in a while, I mean the relatively near term future. I'm proud of our people who make it happen for all of our stakeholders. Dean, over to you.

Thank you Richard, and good morning everyone. As Richard indicated, 2003 was a challenging year, but we're encouraged by second half performance. Here is a company-wide overview. Revenue up 6.8% for the quarter and 3.9% for the year with revenue up in both direct marketing and Shoppers. Shoppers had strong revenue growth for the quarter, up 12.1% and 7.4% increase for the year.

As Richard mentioned, revenue performance and Shoppers for both the quarter and to a lesser extent, the year, was enhanced by this once every six-year occurrence of the extra publication week in the fourth quarter or 14 weeks in the fourth quarter. Direct marketing revenue was up 3.8% for the quarter and 1.9% for the full year.

Operating income was up 3.7% for the quarter and down 2.5% for the year. For the quarter, the increase was driven by our Shoppers business, which had a 10.7% increase at the operating income line, which was also impacted by the 53rd (ph) week while direct marketing was down 1.8%.

For the year, Shoppers operating income was up 4.6%, and direct marketing declined 8.6% in large part due to the difficult first half of the year. For the quarter, free cash flow, which again we defined as net income plus depreciation minus capital expenditures, was $25.8 million versus $26.7 million in the fourth quarter of '02.

For the year, free cash flow was $85.5 million, versus $106 million last year. The decline in free cash flow was driven primarily by return to a more normalized level of capital spending in 2003, whereas the capital spending that we did in 2002 was significantly below prior year's levels. We ended up the year with $31.9 million in capital spending, compared to $17.4 million in capital spending in 2002.

As we talked about in prior calls, in 2003, we had actually planned to spend more on capital but did come in at a lower level because of the timing of the implementation of certain projects. The role-in effect of this in 2004, coupled with continued investment and Shoppers expansion and direct marketing initiatives, will likely lead to a somewhat higher level of capital spending in 2004, above the level we had projected for 2003 of $35 million.

Now looking at each of the two businesses. In the fourth quarter, direct marketing revenue up 3.8%, operating cash flow down 4.7%, and operating income down 1.8%. Margin decline in directing marketing in the quarter was primarily driven by higher production and distribution costs in the quarter.

On the favorable side, operating income margins were helped by lower depreciation costs resulting from the relatively lower levels of capital spending in 2002 and to a certain extent 2001. For the vertical markets in the fourth quarter, retail largest vertical represented 30% of direct marketing revenue, high-tech telecom 22%, financial 20%, select markets 15%, and health care forma 13%.

As Richard mentioned, net customer spending or existing customer spending more minus existing customers spending less was positive for the second quarter in a row after a long period from the fourth quarter of 2000 through the second quarter of 2003 of this number being negative.

International business represented 9% and 8% of direct marketing revenues for the fourth quarter and the year respectively. Top 25 direct marketing customers represented 42% of direct marketing revenue for the fourth quarter and 39% for the year. Our largest customer in the fourth quarter represented approximately 9% of total direct marketing revenue, and 8% for the year.

Now turning to Shoppers, again we had a 12.1% revenue growth in the fourth quarter and 7.4% for the year. The impact of this additional revenue week that both Richard and I mentioned, excluding that additional week, Shoppers revenue would have increased 6.7% for the quarter and 6% for the year. The revenue increase in the quarter was once again driven by strong growth in ROP.

For the quarter, operating cash flow in Shoppers increased 10.6% while operating income increased 10.8% compared to the prior year quarter. In line with what we said at the beginning of '03, margins did decrease modestly in the quarter, in the fourth quarter, by 30 basis points and 60 for the year at both operating cash flow and operating income lines.

In the quarter, margins were impacted by a number of factors in Shoppers including the cost of moving into the new facility in northern California, higher employment-related costs such as health care and pension expenses, expansion circulation open during the course of the year, and the 53rd publication week which had revenues and correspondingly margins below an average week in Shoppers.

We've talked in the past about plans for expanding circulation and Shoppers through contiguous geographic expansion. 345, 000 in circulation was added in 2003 through geographic expansions by adding new zones in southern California and Florida. Again, newer zones initially tend to contribute less from a revenue-per-thousand perspective than existing zones and, in fact, are typically expected to lose money at the beginning of the expansion.

On the balance sheet, at December 31, we had a net cash balance of 27 million, book equity was 556 million, net accounts receivable was 153 million versus 138 million at December 31, 2002, and DSO at the end of December was 54 days versus 53 days at the end of '02.

Looking at our statement of cash flows, net cash flow provided by operating activities for the quarter was 33.7 million, and 121.6 million for the year. During the quarter, we repurchased 300, 000 shares and 4.2 million shares for the entire year. Since January of 1997, the company has acquired 35.7 million shares and spent over $557 million under its repurchase program.

Finally, yesterday, we also announced that the board of directors declared a regular quarterly dividend for the first quarter of 4 cents per share, an increase of one-third over the prior dividend level. This is the ninth time the dividend has been upped in the past nine years, and this increase represents the largest absolute increase of the ninth (ph). With that, we'll be happy to take your questions. Operator?

Yes, thank you. [OPERATOR INSRUCTIONS] Our first question comes from Mark Bacurin. Thank you. Your line is open.

Good morning, gentlemen. A couple questions Richard, I know the financial services vertical has been one that's been weak as you indicated and nice to see a rebound there. Could you talk about where the demand came, whether it was on the mutual fund or credit card or specifically kind of what drove that increase year over year?

It was actually all of the areas in financial, mutual fund I believe was up a little bit, not as much as some of the others, we're going it check that as I talk. But all of them did reasonably well. It was a nice performance throughout that sector.

And would you characterize the improvement as just broad-based improvement in demand or have you done anything specifically internally in terms of kind of changing your incentive comp and I think may be drove some of those results

Well, there are a couple of reasons. You have to start with the basic one that when you're down it's easier to be up. But I'm really pleased with the fact that the way you know, there's been new management in that financial group, and it's working really well. There's a lot of excitement building. And external demand is increasing as well. So it's a combination of all of those factors.

Great. And in terms of sustainability, I mean, anything on the horizon you see -- I mean was there anything special in the quarter that drove that result, or you think this is something we can work off going forward?

Well, you know, I'm not sure that near 20% growth is something that's sustainable, but we are feeling comfortable with the pattern of growth in financial moving forward.

Great. And Dean, you talked about the jump in production distribution costs. Was there a mix shift in the quarter to more fulfillment type business in the direct marketing group that maybe caused a bump up both in the revenue and cost side or is there any other dynamic driving that jump in production cost?

No. Obviously production distribution expenses are to a certain extent variable with the revenue but no, I don't think it was what you called a mix shift to more fulfillments that drove that. It was more just across the board.

Mark Bacurin I guess I'm looking at production distribution costs on a year over year basis grew north of total revenue growth and I'm looking whether there were some items that maybe caused that cost to exceed the revenue growth.

I don't think, you know, it was a number of factors Mark, I don't think there was any, you know, one particular factor or trend that we saw that drove that.

OK, great. And then finally, obviously very strong free cash flow Outlook. And obviously you've pretty much eliminated your debt at this point. Any planned uses for free cash flow? I know you continue to buy back stock but is there anything else on the horizon we can look toward?

You know, in addition to some minor increase increases in paying dividends we're always looking for acquisitions. It's our highest priority. As most people on this call know, we've -- it's been two years since we made one, and that's longer I think that's longer than pretty much ever in the history of Harte Hanks as a public company.

So, you know, we're anxious to do that but we're going to do it our way and we're going to continue the discipline that we have in getting it done. And we're going to buy back stock, we're going to continue to buy back stock, because what else are you going to do with cash until you're waiting for those acquisitions to come along.

And Richard, is valuation still the primary impediment to getting something done there?

It's a combination of things. Valuation sometimes. You know, sometimes it's a product that was not as good as we thought it was and sometimes it's a company management team that was not as robust as we first thought, or sometimes it's a set of numbers that turn out to be not quite what we thought they were going to look like. There's no one factor that's determining this, but valuation certainly is one of them.

I think also with given the last three years and the economy in our industry, it's certainly been more difficult to look at companies and judge what their outlook is going to be. Hopefully with some economic improvement, your ability to judge what the future results might be gets a little better and so hopefully maybe that will lead to more transaction activity.

Great, that's helpful. I'll yield the floor to someone else.

Our next question comes from Lauren Fine. Thank you, your line is open and please state your company name.

Merrill Lynch. Thank you. I guess following up on that, when you look at the margins in direct marketing recognizing the pricing, it sounds like it's still an issue in the industry. Do you have any sense of whether you would expect margin improvement in 2004 and do you have any change and sort of your thought on what the long-term margins could be in this business? And then, I guess secondly, you know, given now the implementation of the do not call list, are you seeing any money coming out of telemarketing into other areas of direct marketing where you're a beneficiary?

First, to your first question, you'll recall that if you go back to the year, I think it was 2001, where our revenues declined fairly significantly, and we had a significant spike in margins as we controlled our costs, when we're expecting to get back to those levels of margin. But we are expecting to get back to the pre, if you will, 2001 levels, and our goal in 2004 is to improve margins, over the course of the year. We believe we can do that. You know, all of the factors -- and you mentioned pricing, there are a number of factors. They're all real, they're all part of what we live with and you know, we've accepted it and we're moving on. We just got to deal with it, be more efficient and more effective at what we do.

Second part of your question was -- you know, dot not call thing, everybody talked about that yielding more revenue to the mailing community, for example? And we have really not -- we haven't seen it. There may be decisions being made that we just, you know, don't attend to, and therefore we're on the receiving side of good things we don't know why, but we have not seen that as the explanation.

All right, well, thank you very much.

Thank you, Lauren.

Your next question is from Alexia Quadrani. Thank you, your line is open. And please state your company name.

Bear Stearns. Hi. Good morning, just to follow up on that previous question about pricing. Have you seen it, is it still getting worse? Is it sort of flattened out? Is it getting better? Can you comment on that a little bit?

Well, you know, I think I'm going to repeat myself, Alex yeah and I apologize, but you know, it's been a bunch of years since pricing has been an issue and we're just sort of digging in our heels and accepting it as a reality of life and having to deal with it. We, you know, we're trying to add value everywhere we can and therefore minimizing the issue of pricing, but competition causes pricing and capacity causes pricing, and we're not out of either of those situations, so pricing issues will continue to exist. But we're dealing with it.

Has the competitive dynamic meeting changed a little bit? We're hearing a lot about the agencies trying to give more integrated sketches, trying to get the direct business along with the creative work. You seen any of that change in competitive dynamic?

I actually think that somebody could have made that statement in probably five years ago when that was a thrust of many of the agencies. We've seen that as a goal of many of the agencies. We've not seen it in terms of execution. Every once in a while we come up against the direct part of an agency in a competitive situation. The most recent one was I believe we announced in the fourth quarter a big win, was that -- was this quarter that we announced it? Was it in this press release?

In this press release we announced a big win, and one of those companies that we want to -- we went against was a traditional competitor and one was an agency. A named -- an agency that you would have heard of. And so we do see them, but it's not frequent. We just don't see them as much as the traditional competitors.

And just one last question on the Shoppers side. Could you remind us again of the timing of the completion of the expansion, when we would expect some of the margin pressure to ease up?

You know, we've tried to model this and the reason we try to model is because you know that the expansion that you did in 2003 over some period of time will become profitable. The expansion that we do in 2004, we do not expect to be profitable, but as the years progress, that expansion will be more profitable. In no case near term will it be as profitable as our base circulation, because we've been in this business for 30 years and 30-year-old shop certify just more profitable on average than younger ones.

So that pressure is going to continue to exist but we saw some reasonable signs in 2003 a little bit better than we expected, still clearly represented margin attrition but a little better than expected so we're encouraged. Also, near term in the expansion in the northern California will probably do what we hope will be the easier areas initially, and so the margin compression there will be a little bit less than it would have been as we roll it out, but then if you move forward three years then the stuff we did four years prior to that is going to kick in a little bit. So we start to try to lionize in a way that we're not going have any unusual hurts.

It will take four to five years to complete what we're trying to do.

Yeah, Alexia, this is over a five-year period and we're still in the first year of that, and then you know, you ever you have your impact on margins and then officer that period it would ease somewhat.

But over the longer term you could see margins eventually surpass the margins you had last year?

Really good margins.

I mean, Richard, you mentioned earlier that you may not once again hit the direct marketing margins of '01 but is there a similar ceiling here?

You have to remember that there has been a favorable environment in kind of newspapers and in our business where paper prices have been declining relatively stable. Postage has been flat, which are big, both big cost increases; so future margins aren't impacted by those two variable expense items that we don't have crystal ball on.

OK, thanks very much.

Our next question comes from Fred Searby. Thank you, you may ask your question and please state your company name.

Thank you. I'm with JP Morgan. A couple of questions. One, can you just tell us which on Shoppers, I mean you've had some really stellar growth and I guess it's been also mirrored by pretty substantially strong numbers from the newspapers in the preprint side and I wonder, what categories, I mean real estate has been strong but where do you see the incremental dollar coming from, or is it just expanding geographically? If you're going to maintain that growth rate.

And then secondly, Richard, you said we've seen -- we're seeing light at the end of the tunnel on direct marketing and a number of the publishers have said they've gotten off to kind of a slow start in January and February. Can you just comment on what your clients are telling you about the first half of this year, what your sense is and how you've come out of the box?

I'll do second one, and then Dean will do the first one. You know, we're really encouraged by the fact that we had two quarters in a row of what we're calling reasonable revenue growth. We're hopeful that will continue. You know, we're always very cautious about these things and we don't find trends until they're a couple of years old. And we're not a couple years into this thing yet. But we're optimistic about revenue growth.

We have done reasonably well in a few contract situations that is we feel good about entering the quarter. But there are also some signs of weakness out there, and you know what they are, you read the same newspapers as I do, and you're probably closer to it from the competing media than I am. So, I'm going to need to temper my enthusiasm, but we're encouraged about the direct marketing side of -- in 2004, and we think we can keep up the same or maybe higher levels of revenue growth that we've seen in the past few quarters. And that should get us to a nice place.

Fred, on the Shoppers, I think you were asking what was driving the growth. Obviously, we talked-

No, I'm actually saying what incrementally where you're seeing the growth, which categories do you still see growth in real estate or do you think going forward more than looking back?

Well, I guess just historically and through end of the year, I mean I think we showed strong growth across a lot of categories, including real estate, actually including employment, which was a nice surprise for us. I think you've said was the growth from more households, well, I mean the base business, we're still growing revenue in what we call our base business. You know, on a going forward basis, obviously real estate, the real estate advertising market does have interest rate sensitivity but we are seeing encouraging signs in the employment area as an example. But it has been pretty much growth across the board.

And we're also seeing encouraging news in Shoppers on the readership side, which sure shouldn't surprise us given the financial performance. We expect probably it's the readership that caused that financial performance, but its it's nice to see independent audit studies continue to support growth in readership and in a number of our markets and we're really pleased with that.

OK, thank you, gentlemen.

Our next question comes from Bill Warmington. Thank you, your line is open and please state your company name.

Bill Warmington with SunTrust Robinson Humphrey. Good morning, everyone. Question for you first on thoughts on overall company revenue growth and EPS growth for '04.

Bill, I think we've said in the press re release and kind of looking at the trends in our business and everything that's going on, that we believe we are going to have improved EPS growth in 2004. We've talked about kind of Shoppers revenue trends, and at least the trends in direct marketing.

Right.

So I think we see revenue growth in both of those businesses. But you know, given where we are in the cycle, given the starts and stops that have happened before, you know, beyond that I don't think we're really talking about any specific numbers.

OK. I was hoping to get at least some sort of a range or some indication on a more quantitative level. Is that going to be possible or?

You know, at this point -- no, I think the answer is no.

Then I would ask you, if you would comment on the attractiveness of the acquisition market from your perspective and somehow your pipeline of acquisition that is you're looking at currently?

You know, I mean, even during the dry spell of the last two years, there was no shortage of properties to look at. It was hard to figure out whether there were real businesses there or not, and valuation issues were tough, and as I mentioned earlier, it was difficult to know what their outlook would be, so much of what your pricing is what you think the business is going to do in the future. So there's still no shortage of opportunities out there.

I think, as things become more clear, we may be able to sort through some things. I mean, the outlook, we actively look at them, whether we get deals done is very hard to predict. But it is -- it's a focus for us, and we think the right deal is a good use of our financial capability and our free cash flow.

And then final question on number portability, have you guys seen any sort of benefit from that over the last couple of quarters?

On the cell phone number portability is that what you're talking about?

Yes.

No, we've not seen, nothing that we can recognize is helping us.

All right, well, thank you very much.

Chris Owens, you may ask a question and please state your company name.

Yes, ThinkEquity Partners. Good morning. I was wondering if you could just provide a little more detail on some of the other verticals in direct marketing. For instance, could you comment on whether your retail vertical improved and why it appears your high-tech telecom, vertical may have decelerated slightly sequentially?

Well, retail was a soft vertical for us and high-tech telecom, you know, if you go each quarter and you try to figure this stuff out, it becomes really hard. We think that it's, that it's had a terrific year and we are cautiously optimistic that we're going to have another good year in high-tech telecom. We don't feel that way as much about retail, retail is a more difficult market and has been for a while. Obviously, we're excited about financial, seeing that first level of movement up and it was up significantly, which is even more exciting. Dean, do you want to add anything to that?

Yeah, I mean, I think, unknown, I mean, high-tech telecom verticals was up and, I mean, it's had some pretty long string of pretty significant growth. I mean, it's still solid. You know, it's hard to keep compounding those percentage growth increases.

Great. On the retail vertical, did you see an improvement in what's usually a stronger quarter in? In the fourth quarter?

It's a strong quarter, every quarter, every year, so you know, you come up against last year's strong quarter and so you can see a sequential improvement but you won't see a year to year comparison improvement.

It is the most seasonal. It has the most seasonality among our verticals.

Right. And can you comment on, it sounds like you have increased CAPEX for '04, what is driving that now that the Shoppers plan is complete?

Well, you know, the plant in northern California for the most part is complete, although there's still a little bit of stuff to be done there. But we're looking at another large project; I think we alluded to this in a prior conference call. We're looking at another large project in Shoppers to put complete our current initiative in the state of California and that's a pretty expensive project.

The reason we're doing that is that the measurements that we've made of the initial color projects have proven to be -- I mean, they've been strong. The results have been strong and so it's a logical for us, as we see improved revenues from color, improved leadership from color, to continue to invest in color and use that as an enabler for future Shopper growth. And that's a big project. So you know, it's sort of the same as last year, plus we have a couple of new ones in Shoppers.

And actually, you know, we'll spend more in CAPEX in Shoppers in 2004 than we spent in 2003. The color project that Richard talked about in southern California, which actually additionally gives us extra capacity because of faster presses, is about the same amount that we're spending on the northern California facility and we are not done with capital for the expansion. I mean, this is a 20% circulation increase over time that we're talking about. So, we'll have to add additional capacity over time. So, you know, that is the driver of some of the higher capital spending expected in '04.

And did you make any comment in terms of your '04 free cash flow expectations?

No. No, we really didn't. You know, we're, we expect to, you know, again we define as how we define free cash flow. You know, our goal certainly is to have free cash flow improvement. We have a lot of financial flexibility. Some of it is going to be dependent upon the opportunities that present themselves in terms of expansion opportunities and revenue opportunities, you know, when it's variable with the level of capital spending. So, you know, we expect improvement in 2004 from the level we are in, we came in 2003.

Thank you very much.

Our next question is from Michael Kupinski. Think, your line is open and please state your company name.

A.G. Edwards. Thank you. Most of my questions have been answered but just touching back on the retail vertical, a number of other mediums are seeing better retail pacings in the first quarter. Has retail turned around in the first quarter? I know it's seasonally not as strong for you but I just wonder if you've seen a turnaround there. And if there are any particular verticals that are pacing differently than the fourth quarter going into the first quarter. .

The answer is no, retail has not changed in as we're, you know, getting a glimpse of the first quarter. And financial rolling into the first quarter appears to be pretty good as it was in the fourth quarter. So, we're not seeing, you know, it's pretty early but we're not seeing anything that would change the profile of what we've reported in the fourth quarter yet.

OK. And can you determine how much the impact of the extra publication we get on the Shoppers expense line in the fourth quarter and what are the pacings looking like so far in 2004? In particular, too, is there any impact from grocery strike? Probably not very much but, I was wondering if that has an impact on you.

Yeah, on the grocery strike, obviously that strike now has been going on for four months, I think?

Right.

So, you know, any impact which we, there probably is some impact, but obviously, we've lived with it for at least a quarter. I don't think we see any growing impact from where it was. The question, Mike, you had about the impact on the 53rd week of expenses, you know, I think I mentioned in my comments, it's a lower revenue week and therefore it's a lower margin week. I mean, because, you still have all your basic variable costs associated with that and you still have fixed costs to cover during that period.

Right. You mentioned that the CAPEX was going to be above 35 million. Is there a range that you think CAPEX will be in 2004, and what do you think it will be in 2005?

Well, when you get to 2005, you got a whole bunch of other variables that we're going to have to have to start looking at a whole lot more carefully, and there's potential for consolidation, opportunities, and there's a lot of capital that would be tied to that. We're just not ready to talk about that, and it's a big variable so it would be misleading for us to give any guidance there. As far as 2004, I think Dean answer the question.

Yeah, you know, we do have this roller impact from '03 from capital projects in the pipeline. Some of the capital, you know, that we are looking at in '04 is really variable depending on certain things, like particular areas of revenue coming to provision. So we plan for that and it depends whether it happens, I think I said we expect to be above, somewhat above the area where we projected in '03 of $35 million. At this point, because of the variables and contingency that really don't have a range for you, but just I would say point slightly above or somewhat above the 2003 projected level of 35.

How significant was the announcement that Oracle now supports the Trillium software? Does that affect a particular vertical versus all that you have? Have you seen any increase in software sales because of this integrated functionality? And then, secondly, some of the Trillium software sales I know fall into the fourth quarter numbers. How significant was software sales in the fourth quarter in the direct marketing numbers? Was it up from last year as well? .

Well, as to the significance of Oracle, it's pretty new so it's hard to make judgments. When we have certification for other software vendors or we link our software with other software suppliers, the more of that we do, the more revenue we get. So we're optimistic about what we've done with Oracle and they're certainly a big player in this business. So it was encouraging to see this. We finished the year in Trillium pretty close to double-digit growth. It was down a little in the fourth quarter mostly due to the very strong fourth quarter that we have last year. But we're encouraged that it was pretty close to double-digit growth for the year.

Great, thank you very much.

Brandon, you may ask your question and please state your company name.

Hi, I'm from Credit Suisse First Boston. Now look back to an earlier question for a little bit more color on what the addition of a new color facility might do in terms of your ability to charge better prices or increase margins, attract different kinds of vertical. Just trying to get an overall sense of how much of an advantage adding color into our product suite would give you and what kind of time frame that advantage would roll our and somewhat similarly on the dreams part that you announced, I want to get an idea of what the roll-out schedule for that product might be, you know, how you look at pricing or margin on that product over the course of, you know, kind of 2004-2005.

Let me take the second one first, and then we'll do with color. Dreams are a new product, like most new products had its start-up ups and downs. We think we're pretty close to a break-even point now with it and hopeful that over the course of the year we start to generate some profits for it. I mean, it just won't be a material change to our overall performance. But what we're trying to do is we're trying to just add other products to our Shopper group.

With color, you know, common sense tells you that people like it better, they read it more, and data that we have received suggests the same thing. That people are more into it, and show our readership scores are higher. I can certainly tell you that we're able to price it higher. And so, we know there's a return to the project, and we don't expect, though, in the year 2004, to see any return from the color in southern California, because it takes a long time for that project to be complete. So, that project in and of itself won't contribute to 2004. That's a 2005 contributor. .

And also just be clear, we're talking about more color because we already have color capability.

Right.

And we do have more color in other parts of our Shoppers business, so we do have data that support the incremental color is beneficial from terms of pricing and additional revenue.

And Tom on the same vein, have you noticed any change in customer behavior with regards to color? Did people cut back in '01, '02 and are they coming back to using color now? Are they still trying to say I would like to spend a lot of money but I want to get more pages or issues, and I'll stick with the black and white for the time being to put on color until I feel more comfortable about how the economy is going or the color so compelling that it makes more sense to do that right now but it before.

If you look at our revenue growth rates, I mean to the extent there was sometimes people shift money around but obviously we think that any of the impact was positive, so I don't think we saw any trends of people, you know, going to color, but spending the same amount of money just at a higher rate. So I don't think -- we didn't see cannibalization, if that's what you're looking at.

OK.

And even if there was, and of course there's some clients that do behave that way, but even if there is, if color is working for them, and they're getting a return from it, let's say they reduced the number of zones they advertise in so they can spend more money for color, the next thing that happens when it works better is they start expanding their circulation over time.

Right.

So, you know, over time it's going to work for us really well, if in fact color works and we know it does.

OK, thanks a lot.

Our next question comes from Troy Mastin. Thank you, you may ask your question and please state your company name.

William Blair. This is Wes Stocky for Troy. Most of my questions have been answered. A quick follow-up on retail, I know you guys were hoping for a stronger fourth quarter in retail, I think you mentioned that the last call and third quarter and looks like that didn't really pan out with flat growth in retail. It looks like retail is coming up against probably some easier comps, in 2004. And I know you've already kind of commented on, you know, doesn't look like there's been a whole lot of attraction in the first quarter but you know , if you are modeling out, you know the retail vertical, do you expect flat or maybe some growth in 2004, given it's kinds of coming up against some easier comps?

Well, you're right, we're coming up against easier comps, but we're not optimistic. You know, what we read in the paper is that -- and there are a number of retailers that fit this description. Either their performance is soft, there are cut backs in general terms. Their Cutbacks in marketing, I mean, there have been two press releases in the past week that say that for two of the large retailers in the United States. And so we just, we just don't have enough data to be optimistic about 2004 in the retail.

OK, thanks, guys.

[OPERATOR INSTRUCTIONS]. And our next question comes from Mark Bacurin. Thank you, your line is open and please state your company name.

Robert Baird. Just a couple of quick follow-up, Being on the depreciation line, you guys commented 2000-2001 CAPEX was below normal levels and obviously given that, the depreciation number has continued to decline, I guess sequentially over the last several quarters. When would you expect that we see a bottoming of that and depreciation starting to creep back up? Is that; Are we close to that point now?

Part of it depends upon the you know, the '04 number and when we bring things on in '04, as I said there's contingencies right out there, which is why I haven't given a range other than it will be above the $35 million level. And also, I mean when you start looking at the types of projects we've had, the northern California facility which is coming on line, I mean those are longer lived assets shall, than certain other purchases, which have a three or five-year life. Obviously, with the higher levels of capital spending at some point you will see a turn, but I don't think you're going to see a significant turn in '04.

So the 7 million or so in December is a reasonable run rate to use going toward?

You know, it might, for the year, might trend upwards.

OK. And then Richard maybe to follow up on Mr. Warmington's question, I know you don't want to comment specifically on what the year over year EPS growth guidance implies, but you know, presumably 99 cents would achieve that goal and I think consensus is right some where around the $1.8 range. Could you give at least us some comment on how aggressive or conservative you think the current consensus expectations, that are out there for '04 might be, at 1.08?

No. Mark I do, remember what we said, we expect improved earnings growth.

I think it was 1% this year to 99 cent would do that. I'm just trying to get a sense of how aggressive we, as analysts are being in your eyes.

You know, Mark, as I said, we're coming out of three difficult years, and I think we're seeing positive signs going forward. And I can look at a crystal ball or look at a budget and see how many things are going to go right and go wrong and we didn't feel positive and we thank our you know, our earnings growth rate is going to accelerate obviously where it's been. But at this point we are not comfortable giving a range.

All right, fair enough. Thanks.

Kevin O'Brien, you may ask a question and please state your company name.

Two separate questions. Number one, you know, we hear all about the movement to India and elsewhere of call centers, just wondering if that's affecting your business and you have anything in the works for that. The second for your in bound telemarketing. The second question is do you ever get any kick from the presidential campaign in your direct marketing business?

To the answer of your second question, we get a kick but it's mostly more laughter than it is Business. There's certainly that we -- it's not a vertical of ours. Sorry, I amuse myself so much I forgot your first question. The offshore, the answer is that we are doing work in three different countries offset. We're experimenting in all three of them. We are finding that some clients are reluctant to do that work offshore and want to continue to do it in the U.S. The wave of sentiment to doing more work offshore at a lower cost is lessening. That doesn't mean going away, just lessening a little bit for us. But we are committed doing our work, some of our work off offshore and we continue to make progress in working with our partners.

I take that to mean that you have not lost significant business because you were not doing something offshore and somebody else was?

That's correct, because we can do the work offshore.

OK.

We can be competitive that way if that's where the work wants to go from the client perspective.

Got it. Thank you.

You're welcome.

Michael Kupinski, you may ask your question and please state your company name.

Sure. AG Edwards. I had a follow-up. The expense growth in direct marketing, I was wondering if you give color in what that's going to look like in 2004 particularly because in my experience, that expense growth line is a function of some investments that you make in trying to build out verticals and so forth. And then also, can you talk about FTEs in direct marketing, were they up in the fourth quarter, if so, how much? And what are your expectations for FTEs in 2004?

Well, they did I think the FTEs were relatively flat. There was not a big variance in the quarter. There is -- yeah, I mean, it was down slightly from the prior year quarter. You know, part of it is there is -- there is a variable labor component on some of our revenues, so obviously what's going to happen to FTEs will depend upon revenue growth rates. And when the revenue comes and what service line offering it comes in and I think your other question was what did we think that the rate of expense growth would be in 2004?

Right.

Obviously, our goal is to improve margins, and so that would imply that that rate would be below our revenue rate.

OK.

[OPERATOR INSRUCTIONS] Our next question comes from Larry Lee. Thank you.

I'm with CIBC World Markets. I wonder if you had any comment on what, if any impact you would expect to see from the ongoing consolidation in the financial services call and then as a follow-up on the verticals, in select markets, did you see any particular strength or weakness out of some of the smaller verticals that you guys target? Thanks.

The consolidation in the financial markets, obviously to some extent it depends on which side you're on. That is which client you have, if you have either one of them in a merger. We do a little bit of merger and acquisition business, and to the extent that the mid sized deals get done a little bit more, we'll probably be benefitting from that. But we don't know -- we're not sure about the bigger deals and whether they'll help us or hurt us. It really depends on which side. So far they've not hurt us this year. They have hurt and helped us in the past again depending on which side we're on. The smaller markets, Dean, do you have information on that that?

Yeah, I guess -- I think you're asking about our select markets group as a whole, and then kind of categories within there, I think is at least the way I interpret your question, is that correct?

Right, right.

Select markets was up for us, the growth rate was lower than it has been, so I don't think we saw as much strength in the quarter among any of those areas. But the larger groups in that area continue to be automotive and government, nonprofit. We are actually seeing -- I don't want to call it a trend but some wins in an area that is in select markets that is more, we call it manufacturing but it's kinds of consumer durable good stuff.

The problem is select markets in and of itself is not one of the big verticals and then you start breaking it out into six or seven or eight subvert calls and you have one win in the quarter and it materially affects the number, so I'm not sure that looking at these things individually by quarter is going to be as important that is trend lines and what it's going to look like for a full year.

OK, thanks.

At this time there are no further questions.

Well, thank you very much. Everybody have a good day.

Thank you.

Bye bye.