Harte Hanks Inc (HHS) 2005 Q3 法說會逐字稿

Welcome to the Harte-Hanks third quarter 2005 earnings release call. [OPERATOR INSTRUCTIONS.] Today's conference is being recorded. If you have any objections you may disconnect at this time. I will now turn the call over to Mr. Richard Hochhauser, President and CEO of Harte-Hanks. Sir, you may begin.

Thank you. Good morning, everyone. On the call with me today is our Chief Financial Officer, Dean Blythe; and Jessica Huff, our VP, Finance and Controller.

The comments we make on this call will include forward-looking statements. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially from those projected or implied in such forward-looking statements during this call. A description of some of the risks and uncertainties potentially impacting the Company's business and future performance can be found in the Company's filings with the Securities and Exchange Commission. After I make a few opening remarks, Dean will give some financial details, and then we'll take your questions.

We are pleased with the results our people delivered this quarter, particularly the bottom-line growth and overall margins. For the Company as a whole, operating income was up 11.7% on revenue growth of 7.3%, and operating margins improved 70 basis points. Earnings per share grew $0.34, from $0.29, up over 17%, our seventh consecutive quarter of double-digit year-over-year EPS growth. The third quarter, we generated $31.3 million of free cash flow -- which we define as net income plus depreciation and amortization -- less capital spending, compared to $26.8 million in the third quarter of 2004.

Direct marketing operations' income increased 12.3%, on revenue growth of 4%. We are again pleased with our margin improvement over last year, four of our five vertical markets had year-over-year growth, with two out of the five -- retail and healthcare/pharma -- up low double digits. Select market vertical delivered high-single-digit growth and financial vertical grew in the mid-single-digit range. After delivering mid-teens to 20% year-over-year revenue growth in each of the previous two years' third quarters, our high-tech/telecom vertical showed a high-single-digit revenue decline, and we expect this vertical to have similarly challenging comparisons going forward as we cycle against the extraordinary growth of the past two years.

Shoppers had another solid quarter, with operating income up 9.1%, on revenue growth of 12.1%. Both revenue and operating income growth were helped by increased ROP advertising and the Tampa Flyer acquisition that we completed in April. The operating income margin declined. When compared to the same period last year, it was also attributable to this acquisition. Absent the Tampa acquisition, revenue growth would have be in the mid-single digits and year-over-year operating income margins would have improved slightly.

We said on our last call that the robust revenue growth performance we had delivered in 2004 and the first half of 2005 would be more challenging to match in the second half of this year and early '06. Our third quarter results reflect this, but both of our businesses performed well, despite these challenging revenue comparisons, growing at the top line, and showing positive leverage at the bottom line.

The Hurricane Wilma impact on our Shopper business was mentioned in the press release, and Dean will be covering that in more detail. But before turning it over to Dean, let me make a few key points. One we're extremely pleased that we were able to deliver -- to continue rather, our trend of double digit EPS growth and improved margins that we have seen since the first quarter of last year. In direct marketing, we are again pleased to see the progress that we've seen -- that we've made on the margin side, and we're real happy about the revenue performance of four of our five verticals. We're pleased that our Shopper acquisition in Tampa is doing so well, both revenue and margins have grown according to plan, and we had a reasonably aggressive plan.

We remain committed to perform well in the fast-changing environment that we believe is the norm. This includes optimizing revenues and profits, as well as making investments to our future growth. We continue to feel quite good about the businesses we're in and the people who make it happen day in and day out. Thanks to everyone for what you did in quarter three.

Dean, over to you.

Thank you, Richard, and good morning. As Richard indicated, we delivered a very solid profit performance this quarter.

First, here is a Company-wide overview for this quarter compared to the same period in 2004. Revenue was up 7.3%, direct marketing revenue was up 4%, and Shopper revenue growth for the quarter was 12.7%. Operating income was up 11.7%. For the quarter, direct marketing had operating income growth of 12.3%, and Shoppers was up 9.1%. Earnings per share were up 17%, to $0.34 per share, from $0.29 per share. Free cash flow was 31.3 million, up 16.8%, or 4.5 million, over last year's Q3. Capital spending in the quarter was 5.4 million, down 6.8%, or $400,000.

And now turning to each of the two businesses. Our direct marketing revenue was up 4% and operating income up 12.3%, with operating income margins up 110 basis points year-over-year, to 15.6%. For our vertical markets in the second quarter, retail was our largest vertical, representing 28% of direct marketing revenue, followed by high-tech/telecom at 22%, financial at 20%, select markets at 18%, and healthcare/pharma 12%. International business represented 9% of our direct marketing revenue for the third quarter. Our top 25 direct marketing customers represented under 39% of direct marketing revenue for Q3. Our largest customer in Q3 represented approximately 8% of our total direct marketing revenue.

As we indicated in the press release and Richard mentioned in his comments, four or our five vertical markets grew on a year-over-year, basis, with the exception of our high-tech/telecom vertical, which was down in a high-single-digit range. During the past two years, this vertical grew 20% in Q3 2003 over Q3 2002, and 16% in Q3 2004 over Q3 2003. And in fact, the full 2004 year growth rate was over 20%. This quarter, revenue declined in this vertical followed these two years of tremendous growth, and we expect this vertical to show lower revenue on a year-over-year basis over the next couple of quarters as it cycles against this growth, particularly in the first quarter of 2006, as the comparison will be against the first quarter of 2005, in which we have the large one-time project that we discussed in connection with our first quarter earnings.

While we continued to see revenue from new business in this vertical in the third quarter, the size of the decline in spending from existing customers resulted in a year-over-year decline in revenue. Some of this decline in existing customer spending can be traced to a change in programs and initiatives of certain of our customers in this vertical from what they had been doing over the past couple of years. Some of the decline can be traced to parts of some business that we lost to certain customers, moved pieces of their business to different geographies in an effort to reduce their absolute level of spending.

Turning to Shoppers. Shoppers grew revenue by 12.7% in the quarter, with operating income increasing 9.1% compared to the prior-year quarter. The Tampa Flyer acquisition, completed on April 20, contributed approximately two-thirds of this growth. Operating income margins declined by 80-basis points, compared to the third quarter of 2004. This decline was attributable to the Tampa acquisition. When acquired, this business had lower margins than our Shopper average, and at the operating income level was further impacted by acquisition purchase accounting that resulted in additional amortization expense. Absent the Tampa acquisition, operating income margins would have been up slightly.

Absent the Tampa acquisition, Shopper revenue growth in the third quarter was lower than our long-term revenue growth target range of 6 to 8%. The decline in spending by the two customers with financial difficulties we discussed in connection with last quarter's results equaled more than two-thirds of the shortfall between the third quarter actual growth and our growth target range. This quarter, we were also faced with a comparison to a very strong third quarter of 2004, which had close to 10% organic revenue growth, above our long-term revenue growth target over the prior year's quarter.

Finally, while ROP, or in-book revenue continued to grow at the upper end of our 6 to 8% long-term revenue growth target, our distribution revenue declined. Some of this decline in distribution revenue we can directly attribute to the competitive marketplace in Southern California. Some we can attribute to customer-specific financial issues, including the ones I just mentioned. Some we can attribute to weakness in the automotive category, and some to a large distribution advertiser with distribution throughout all of California that moved to newspapers. Based on the strength of our Shopper franchise, as evidenced by the continued strong ROP revenue growth, we remain positive about the outlook for this business.

Given the very strong revenue growth seen in the fourth quarter of 2004, the year-over-year revenue comps in Q4 will be the most challenging we will have faced this year. We, however, also faced tough year-over-year comps in the third quarter in both direct marketing and Shoppers and we perform well, growing revenue and growing profits at an even faster clip.

We did mention in the press release, and Richard mentioned, the impact of Hurricane Wilma on our South Florida Shoppers operation. We do not yet fully know what the short-term financial impact from this hurricane will be. Let me tell you what we do know. Our facility did suffer some damage. The roof was damaged and will need to be replaced, and we suffered some water damage to any sales and administrative offices, but printing and other production equipment does not appear to have been damaged.

The main issue is electrical power. There is currently no power to large sections in the region. About 2 million of the 2.5 million Florida Power & Light customers in our three-county area of distribution are still without power, and it is uncertain as to when power will be restored. While we could shift some production to our new Tampa facility, until power and phone service to a substantial portion of the region is restored, it is unlikely that we will be able to distribute our Shopper, and we expect we will miss a minimum of two publication dates.

While this event is certainly significant to our Miami Flyer, this business represents than 3.5% of our total revenue, and less than 10% of our Shopper revenue. Our people are just doing a tremendous job working through this situation. And while there will certainly be some short-term negative impact on the Flyer in Miami, we are confident this business will fully recover as power and other services, including mail delivery in the region are restored.

On the balance sheet, at September 30, we were showing a debt balance, net of cash, of $29.5 million. During the quarter, we replaced our three-year 125 million credit facility with a new five-year $125 million facility. Book equity at September 30, 2005 was $575 million. Net accounts receivable were 170.3 million, and DSO at the end of September '05 was 56 days, against 63 days at September '04.

Looking at our statement of cash flows, net cash provided by operating activities for the quarter was 42.7 million. We repurchased 1.7 million shares during the quarter, spending $44.8 million. Since January 1997, the Company has acquired over 42 million shares and spent over $715 million under it's repurchase program.

With that, we'll be happy to answer your questions. Operator?

[OPERATOR INSTRUCTIONS.] One moment, please. Alexia Quadrani of Bear, Stearns, you may ask your question.

Hi, thank you. A couple questions. Looking at the strong retail growth we saw in the direct marketing business in the third quarter, visibility how that's tracking for the fourth quarter? And, then, how much of these -- anyway you could sort of give us color on how much of the high-tech/telecom business you -- I guess if you looked at the largest vendors in that area, I guess, how much of that market, or how much of those customers do you currently work with? I'm just trying to get a sense of is there opportunity for growth maybe outside of your existing customer base in terms of winning new business there?

Well, let me jump in, and Dean, you can figure out what I've missed. The second question first. There are -- we enjoy a good relationship with a lot of the high-tech customer -- companies in that field. There -- as you know, more of our revenue is in high-tech than it is in telecom, so there are a whole bunch of telecom companies that we could be doing business with that we're not. But even in the high-tech area, it's a pretty big area. There's a lot of mid-sized companies that are going to be very big in the not-too-distant future. And there's room for growth. And, in fact, we have written a fair amount of new business in the third quarter, which has helped offset some of the decline from the current customer spending.

Retail's sort of an interesting one for the first nine months of 2005 and the last half of 2004, the improvement in retail came principally from the incremental spending by existing customers. And while we're pleased with retail performance during this period, it's important to note that this is following a couple of years of weak revenue performance in that vertical. And since we also talked just now about high-tech, we're coming up against those very strong high-tech quarters, and as you can see, some of this cyclical. Some of this -- when you -- when it goes down, there's more opportunity for it to increase, and we expect to see that in the high-tech area over the course of the next few quarters.

Just a couple of follow-ups, could you give us what the international revenue was in direct marketing in the quarter? And, then, also on the -- in the Shopper business, the decline in spending by those two, I guess, troubled customers in Southern California, will that continue to hurt the quarter in Q4?

The international revenue was 9% of our direct marking revenue, Alexia.

Oh, actually, I'm sorry. I got that. I meant how was the growth internationally?

Okay. Let me answer your second question while I pull that number. I'm sorry your second question was about -- yes, the customers that we talked about in connection with second quarter that encountered financial difficulty, they -- their spending was -- was down significantly -- they spent very -- they spent some, but very little with us in Q3. That -- it will have a similar impact in Q4, to the extent -- because we had revenue from those customers in Q4, to the extent their spending does not return to prior-year levels it will have -- also have an impact on us.

And we're fully reserved there.

Yes. And we're fully reserved with respect to those customers. In terms of -- ?

Just the growth in international?

Growth in international was pretty good in the quarter. It was certainly above the growth rate -- the average growth rate in direct marketing.

Thank you.

Mark Bacurin of Robert Baird & Company, you may ask your question.

Good morning, gentlemen. Couple things. Could you talk about -- given the pending postal rate increase in January, have you begun having discussions with customers regarding price hikes and the -- for the Shoppers business?

We are -- that takes its natural course, and we're a little bit early to have those discussions, though, it is our intention to increase prices at about the same time as the postal rate increase, which we are today estimating to be in the 5 to 6 percentage point range, and -- percent range -- and effective sometime in the middle of January. That is -- this is a little bit of guessing, because you don't know until it's done, but that's what it seems like today.

Longer term, postage rates depend on a lot of different factors, and -- for example, fuel prices, which are so high will affect postal rates. Both FedEx and UPS have announced price increases based on this factor. So over the longer term, that environment is not quite as positive as it had been. But remember, also, that postal affects our two businesses differently. And I'm glad you referred specifically to Shoppers. Because on the direct marketing side, it is our customers who pay for postage, and we do not anticipate, if that is in fact -- the 5 to 6% range -- is what we see, we don't anticipate a material change in demand.

And is it fair on the postal -- on the price increase you would look at on the Shoppers business, that if you just simply tried to keep the same dollars of operating margin on that product, and I assume the rate hike you would pass along to customers would actually be less than the overall postal rate increase potentially?

We're not fully through that analysis, but -- but, clearly, a couple of percentage points of price increase deal effectively with a 5 to 6% rate increase. And it is our intention, probably, to do more than that in pricing. So we should have some pricing that more than offsets.

Yes, Mark, the -- our postage expense as a percent of revenue is under 25%. But if you take the upper end of that 6% range and the upper end of the 25%, you get a 1.5% yield price increase would keep you at the same absolute margin dollars.

Right. And I guess what I'm trying to drive at is -- Will postage -- will the postage rate increase be a point of pressure in terms of the percentage margin for Shoppers next year? And I guess that largely depends on how effective you are at passing through the price increase and what level that is?

That's exactly right. I think it's safe to say that the price increases we would go out with would preserve the margin, both dollars and the margin percentages, but the question could be how effective is the execution of the price increase going to be?

Okay.

And all of the other factors that we deal with in Shoppers, because -- if we're going to grow revenue at the high end of our range and even higher, which we have done, it sure makes it easier to deliver margins.

Okay. With regard to the soft -- and some of the softness in the Shoppers, I mean, obviously, there's been a general overall weakness in retail ad spending, but you also do face some heightened competition, I understand, in Southern California with ADVO and Tribune battling out there. Could you comment on where your pricing is on a CPM basis for your distribution product relative to, maybe, where a Tribune and an ADVO would be? And it -- just curious if the aggressive pricing by Tribune is having that big of an impact on you guys, or if it's really more a function of just the macro-environment and the softness there?

I'll just give you a couple of thoughts. First of all, remember Dean earlier said that two accounts accounted for two-thirds of the difference between our target and what we came in at. So that's sort of a point of reference. The pricing has had an impact. We are competitively priced for the targeting that we do. Our prices per zone, obviously, are higher than newspaper pricing, but you don't have to buy very many zones to get the needed coverage for an establishment, versus newspaper zoning, which is usually a lot broader than our ability at the 12,000 level. So pricing's sort of a funny thing because you can -- you can reach who you-- if you need -- if you're a Mona's Nails and you need to reach 5 or 6,000 homes, you can do that in one zone and not have to buy a broad range of geography, which is the way newspapers behave.

Right. Okay. And, then, one final one, Dean, I think you mentioned the households in the Miami Flyer region are about -- that's about 10% of total flyer -- or of Shoppers revenue. Would it also represent a comparable number in terms of margin?

It would be -- it would be a little less.

A little less than 10%? Okay.

With scale on some of the operations, you get a little more leverage.

Okay. And, so, the right to think about that is we want to do our own analysis and assume you lose two weeks, that's roughly two out of 13 weeks and you pull out something that's slightly less than 10% of the overall operating income prorated for two weeks lost out of 13?

I mean, Mark, as we said earlier, we're still assessing. But, obviously, if you're not sending a book out, you have 0 revenue, but you don't have as much expense because you don't have paper costs, you don't have postage costs, you don't have ink costs.

But there are some fixed costs you still incur. So the incremental margin hit's probably better than the -- ?

Yes, I mean, we -- our people are still on the payroll.

Yes. Okay. Great. Thanks.

Lauren Fine of Merrill Lynch, you may ask your question.

Hi. This is actually Hester Chang for Lauren. A couple questions. I wanted to dig a little bit more on direct marketing. Can you provide a little bit more of an update on the spending plans for some of these clients who are facing consolidation and reorganization? And, secondly, on margins, it improved nicely. Could you give a little bit more color on how you were able to achieve this? And, kind of, what you expect to see in terms of the next quarter, if you're able to see just as strong an improvement?

A strong an improvement? I can readily comment on that. We will not see as strong an improvement. We're hopeful to keep margins at this pretty high level versus historical numbers, and we're really happy about that. Also, as you know, measuring this by any given quarter is a really tough thing to do. But on balance, we're really satisfied with the program that we started, I guess, it was seven quarters ago when we said we really got to get to the margin part of this thing.

And we've delivered each of those quarters. In terms of consolidations, there have been some. We have been affected by some. There are others that are in front of us that we don't know what will happen, and so we're going to have to wait and see what the impact is on some future consolidations. But we've worked our way through some already. We've delivered some nice new revenue into our Company, which helped offset some of that. And there's a little bit more in front of us, but we'll see what happens. You just don't know until it happens.

Okay. Thank you.

And I'd just like to add that that "don't know" can be positive as well as negative.

Thank you, Dean.

Fred Searby of JPMorgan, you may ask your question.

Yes, thanks. How are you doing, gentlemen? Couple questions, some of them a little bit more esoteric than the others. But just -- can you give us some sense of Postfuture? I know you've -- you acquired a best-of-breed asset there, and how -- whether you're starting to see dollars? Where the dollars are moving to in e-mail marketing? And, obviously, interactive and paid search has been off the hook, but I'm wondering if you're starting to see a lift in e-mail marketing, and whether you think it's -- where you think it's coming from? I'm sure it's coming from traditional media and print and other things.

But -- and, then, pricing pressures in the past in the database marketing side were an issue. Your margins are coming up on direct marketing somewhat. Have you seen those abate? There's been, I think, excess capacity there. Are you seeing potentially -- actually pricing increase? Or -- and is it -- how critical an issue it is right there?

And I think you might have mentioned this, but you said you were waiting to see on some of these mergers, Banc of America, and others, is there any update there? You might have mentioned it, but I'm just curious as to how you think it will shake out for you? Thanks.

Yes, we answered that question -- at least I think we did just recently. But the other two, we have talked about pricing pressures now over the past three or four quarters, and have basically said the same thing, that it is part of our life, and we're going to deal with it. And the good news to report is that we have, in fact, been effectively dealing with it. As far as e-mail is concerned -- it's a reality in our life. We're really pleased with the acquisition we made.

The acquisition is not only being assimilated well, but we are doing the things with it that we had hoped to do. That is, one, take revenues that were subcontracted and bring them in house; two, expose our current client base to these new capabilities, and we're making some progress there. That always, by the way, takes longer than we always think it does, but we are making some progress. Three, be able to integrate e-mail into the offerings. Because at the end of the day, it's not about e-mail, it's about e-mail as a complement to all of the other ways of delivering targeted communication. That was the strategic reason we made the acquisition, and we're much better positioned today to effectively execute as a result of it.

Just a follow-up on that. Are the margins in the e-mail business -- I mean, at some point it's not only going to be complementary, but some dollars are going to move right out of direct mail. And I'm wondering, are the margins similar for you as they would be on a traditional direct marketing channel?

Dean, I don't know if we want to be talking about e-mail margins, are we?

Yes. Put it this way. It certainly -- we don't anticipate that it would be a negative to where we are today.

All right. Thanks, guys.

Troy Mastin of William Blair & Company, you may ask your question.

Thanks. First wanted to ask about the tech/telco vertical. I wonder if you can pinpoint, maybe, a little bit more deeply the cause behind softness in the vertical? If it's isolated to, maybe, a subsegment or a few customers, not asking for customer names, but any additional color you've got there?

Well, we talked about the multi-year strong growth which makes comparables more difficult to show continued growth. We also continue to bring new business in the door in that vertical, and that's pretty exciting. The year-over-year decline in revenue, which we expect will continue over the next quarter or two, there are some large programs that changed for various reasons. The issues we were helping our clients address were in large part resolved in one case. Priorities at some of our client's changed in another case, and that led to reduced revenues from some programs.

We also did lose a piece of business from clients who remain our clients today, but that one piece of business moved to a different geography in an effort to reduce some spending. We still have a great base of customers in this vertical, and we fully expect to return to good growth in this vertical once we cycle through some of these issues. And it is limited to your specific question.

Okay. So doesn't sound broad based. It sounds like there's a few specific customers that have resulted in this. Is that a fair assessment?

Fair assessment.

Okay. Next question -- Given your commentary on direct marketing margins, is there a natural limit to margins in both your businesses? If so, how close might we be currently?

I can answer the first question, Richard. If you'll answer the second.

Okay.

Is there a limit to margins, yes. Note, obviously, the limit is no business is more than 100% margin business. Our Shopper business has increased margins, I think, by close to 700 basis points over a seven-year period. That rate of margin improvement is not sustainable. But our Shopper business, we do believe that margins can improve over a period of time, and then you're going to have periods where you're going to be impacted by things like postal -- postage rate increases and like the direction of newsprint.

We -- it's really interesting, we have, probably -- I'd have to go back and check -- but, probably, for the past three or four quarters talked about likely margin, slight erosion in Shoppers. And, in fact, we have delivered slight margin improvement in Shoppers in each of those quarters. These -- the variations are not that big, and so it's easy to -- it's easy to miss that calculation by a little bit, but we're really pleased by the fact that we're able to continue to move the needle. I agree with Dean. We can't continue the pace that we had over that seven-year spurt period. But every time we say we're looking like it's at a peak, good things seem to happen.

We also have said in direct marketing that the margins that we had in '01, which were the highest point in our Company, as a result of a significant revenue decline, you may recall, is not really realistic, and we don't seek to have those margins again, and, yet, we wound up in this quarter relatively close to that margin level. So we're beginning to rethink the possibilities in the direct marketing business as well, but we're going to need a little bit more time, we're going to need a little bit more sorting out. We're going to need some successes in some areas. So, it's really hard to say right now. I don't think we're at our peak in either business over the long term.

And, then, finally, maybe one more quick one on the issue with the hurricane. The revenue that you would have had in these -- call it -- two missed dates -- I want to understand if you have very high visibility on that? Or if there's risk that we could see a third or a fourth date depending on the power situation? Is there any of this revenue that can be pushed into latter publications? Thanks.

To answer your question about -- there is uncertainty. We do not know when power is going to return, and it's more than just power returning to our facility. The mail is not being delivered because the post offices don't have power, and, therefore, they can't sort mail and they can't accept mail. So it's -- we do not know how long this is going to go on. We're tracking very closely. We've got contact with Florida Power & Light, but they don't know.

I mean, in some regions they're saying -- they have a map that you can access on their website. In certain regions -- the region where our plant is, as an example, they're saying that they're going to have power back on or before November the 8th. Well, our CFO, who I spoke with this morning, our Shopper CFO, who lives about 5 miles from the plant, got his light on last night at midnight, got his power on. If you stand in our parking lot, you can see down the street a couple of houses have their lights back on. So when power's going to be on, it's going to be spotty.

In certain parts they're saying in the north of our plant, which is about, kind of, halfway north-south in Dade County, north of there is more heavily damaged from a power perspective, and Florida Power & Light is saying that power will be restored by November 22nd in those regions, but that probably means the last customer, so there'll be people coming on. We don't know how long this is going to last. We don't know how many publication dates we're going to miss.

Can you push those revenues into other publications? And if so, do you have an idea how much?

Yes. I think the answer -- and, Richard, you can help me on this. We had some similar experience 13 years ago, now, in Hurricane Andrew. And, in fact -- that hurricane, while it was much more severe, it was also much more localized. It was about a 20 or 25-mile swath that it cut through South Florida and just devastated. This had much more -- while less damage, much broader impact, primarily driven by the power outages.

In Hurricane Andrew, after -- I think we missed two publication dates in 1992 -- I'm sorry -- is it '92 or '93, I can't recall. We missed two publication dates with respect to Hurricane Andrew. Our building was damaged back then. And, in fact, after we got back into our publication cycles, we saw a real acceleration of revenue in -- from that market, driven by pent-up advertising demand, because people hadn't been able to advertise, and also by the enormous amount of home repair business and roofers and those kinds of customers who are really -- form the core of our customer base, who are advertising because so much work had to be done.

There has been a significant amount of damage in South Florida with respect to roofs being blown off homes, our facility had roof damage. So when you say, can you push revenue into future periods? I think that, historically, we have seen a pick up in demand over where it had been before, driven by hurricane-related factors.

Okay. Thanks.

Paul Ginocchio of Deutsche Bank, you may ask your question.

Yes, this is Dave Clark for Paul. Just a couple of quick questions. First, in the direct marketing division, select markets was up high single digits, pretty good growth, but I think it's the slowest quarter since the first quarter of '04. And so I was wondering what subcategories decelerated -- in other words, brought down that growth rate? And, also, maybe what's doing well in that category? And, then, second, could you give us some color on the ROP category trends within the Shoppers? I guess, particularly the classified real estate and help wanted? Thanks.

The largest driver of growth in select markets in the quarter, in the last several quarters, actually, has been the manufacturing part, and it's now the largest segment within select markets. Long term, we continue to remain very optimistic about both that segment and the automotive segment, which has been a little bit soft this year. Dean, you want to handle the second part of that?

Yes, I mean, we had pretty decent revenue growth in our select markets. And I think if you look over the last couple years, it's -- I think you mentioned it was at a low point. I don't think that's the -- I don't think that's the case.

And the key here, really, is that to do this -- I mean, I know we have to report quarterly, and we're here on this call talking about the quarter, but the fact is that it's hard to do this quarterly because this is an overall trend. This is an overall thrust. And I can tell you that we are really pleased with the progress we're making in markets that we have, in essence, just entered over the past few years, and we've done it as a startup. And we're really pleased with the progress we're making.

Did we get all of your question?

Well, I guess, and the classifieds in the Shoppers?

Oh, yes.

Oh, the trends in ROP? We're seeing strong growth out of employment. Real estate remains up, but not at the pace we have seen it over the past year, plus. I think we -- we've seen some weakness in the automotive category.

Okay. Thank you.

But overall really good ROP growth.

Brandon Dobell of Credit Suisse First Boston, you may ask your question.

Thanks. Just a couple of quick ones. You talked and the growth in the different verticals, maybe some color on what kind of product bucket growth that you're seeing, outsized growth in certain types of offerings that you provide?

And kind of in line with that, as you think about the secular trends towards targeting, you guys have got a presence in the e-mail space, anything -- any kind of color on how we would think about being more involved on the -- on the Internet in general from an advertising and marketing perspective, whether it's, oh, different websites or running businesses for ad placement, kind of things like that, more of an agency role? And, then, finally, wanted to get an idea on -- in the release, you mentioned a couple of contracts for in-bound call centers and how you think about that from a margin perspective relative to the other parts of the business in direct marketing? Thanks.

Well, the digital area is an important area for us in both Shoppers and direct marketing, and we are making progress on -- in that area on multiple fronts. It an important one, and we're going to be big players in that because digital is part of our definition of direct marketing. We have talked about this probably now for seven years, and the message has always been the same. It's part of what we do. You're going to have to do the questions again, I'm sorry.

Sure no problem. I guess from the -- from a vertical perspective, you gave us growth rates or some color on some of the issues and opportunities. From a product perspective -- ?

Yes, the products, we have 20-plus service offerings. We used to -- we used to talk about marketing services and CRM. We don't do that anymore because they're so inextricably intertwined. But I can tell you that when we look at the detail, we grew our revenue in more than half of the categories that we look at. So we're -- in general, we're pleased with what we're seeing. In the high-tech area, where we -- high-tech/telecom area, where we lost some revenue, that came in a specific area of our Company, what we used to call response management, and, therefore, that area hurt the most. And one would expect that from knowing that the high-tech/telecom vertical was down in revenue.

Okay. And, then, finally, on the in-bound customer care call center business, how you guys think about that from an allocation of management resources or a margin profitability perspective?

First of all, it's a great business. It's changing. We're changing with it. It's a great business because it is a great entre for us to our B-to-B clients, many of them in the high-tech vertical. It allows us to get a foothold to do other things. And we have an ability in that business to add value in a lot of different ways. We've grown up in that business, we're really good at it. So we feel good about it. In terms of margins, it's probably not our highest margin business, but it's not our lowest margin business, so -- we -- that's the best I'll do for you.

Okay. Thanks a lot.

[OPERATOR INSTRUCTIONS.] Michael Kupinski of A.G. Edwards, you may ask your question.

Thank you. In your select market segment, can you remind me, is it domestic auto or foreign auto that you deal with? I think you were concentrated in one and not the other, if I recall.

Domestic.

Domestic?

Richard? Foreign.

I'm sorry?

I'm sorry. Domestic versus foreign?

Yes.

Our existing revenue?

Right.

Our existing revenue is primarily foreign.

Okay.

In automotive?

Yes, I was asking specifically about automotive.

I'm sorry. All right. Let's -- maybe we need to get the specifics of how Dean answered the question and how I answered the question.

Foreign manufacturers, U.S. operations.

Thank you.

Sorry.

Okay. Foreign manufacturers, U.S. operations. I was just wondering if -- in terms of what your plans are to target the domestic auto? If you have any plans there, and when you might, go after those guys? Since it represents an opportunity, it seems to me.

We're in the game.

Okay. And then, regarding your expansion plans in Northern California, have you slowed that expansion slightly? Are you still on target for your distribution there?

You might recall, we did 600,000 last year. We said we would slow our expansion down this year. And, in fact, through the third quarter, we really did just a little bit. I think was -- what -- about 70,000 in Tampa, putting us over the million mark there. We do have a little bit more expansion scheduled in the fourth quarter of this year, but still, clearly, when you add it all up, we'll be down versus that big number last year. Now, having said, we have some pretty aggressive plans going into next year. And we are on target to that goal that we had established early on of increasing our circulation by two million over a five-year period. We're well on the path to getting that accomplished.

Richard, if you can remind me, what was the reason why you slowed the expansion in Northern California this year?

Well, there's such a thing called digestion. And there are lots of chemicals involved in the digestive process. And we wanted to do some digestion. This is a people-intensive business. We wanted to make sure things were going as we had hoped they would go and make sure that the zones that we expanded into that were soft we were getting some improvement on. And, in fact, everything's going the way we had hoped it would go. And so we're getting ourselves prepared to do more. But it's not -- you just don't flip a switch and create circulation. It takes a lot of planning. It takes a lot of people. And you have to build those resources over time.

And, Mike, it's also coming off of a period in the prior year where we put up a lot more expansion circulation than we had originally planned. And so we said over this five-year period, it wasn't going to be a slight line about how much circulation we're putting on. We are still on track to hit our original goal of two million, but it's not going to be 400,000 a year over a five-year period.

And I know that you've gotten a lot of questions regarding this, but I want to ask a question a different way, I think. Can you -- on the competitive situation in Southern California, you indicated in a previous call that there would be pricing pressure until ADVO fills it's package there. And I was just wondering, I know that you guys look at their product and see what's going on there. I was wondering, do you have any sense where they might be and how much longer pricing pressure will persist there? And are you losing customers to them or just following the pricing downward to maintain customers?

Well, they've created a difficult competitive environment. We have said that. They are -- it doesn't appear that they're anywhere near breaking even on that second day a week. So that means that if they stay with it, that they're in it for a while, and we're in it for a while. We have not lost any mayor customers. And we're very excited about that. The progress that we're making in that part of our business is good. And we are cautiously optimistic, actually, about next year's performance in that area. So, on balance, we feel okay about all of it.

And the reason why you're cautiously optimistic is maybe that you're close to picking up an account from them, is that it? Or, because I know that there's some issues regarding restructuring and issues with one of their clients on there. Is that why you're cautiously optimistic?

We don't want to go there.

Okay. All right. I understand. Thank you, very much.

Edward Atterino of Benchmark, you may ask your question.

Hi. Good morning. I've got three questions. On the Shoppers, since you're sort of out of business in some areas, is there a revenue per week you could throw at us to give us an idea what kind of problem you're facing? Number one. Number two, is there a fixed-cost number -- obviously, without any shipments, you -- some flexible costs disappear. What will be a fixed-cost drag? And, thirdly, looks like direct marketing cost increases have slowed pretty nicely in the third quarter. Can you keep that kind of discipline going forward? And, then, fourthly, corporate was down year-over-year. Will that be repeated in the fourth quarter? In other words, will fourth quarter corporate be down from last year's corporate?

Well, the only one that I'll tackle is the direct marketing costs being down. And as I said earlier --

No, the rate of increase was down.

The rate of increase was down. And as I said earlier, the goal was to continue to keep our margins, which is directly related to that, our margins as high as we can. And I feel that we have succeeded in the margin improvement objective. And now it's a matter of, probably, some leveling out and some adjustments as we get ready for next year, and set ourselves yet another goal of slight margin improvement over the course of the year. Dean, you want to deal with the other questions?

Sure. Ed, we said -- we tried to give you some indication if you look at --

I might have missed it, I apologize.

No, but just let me -- I can -- let me help you walk through there. It's under 10% of our Shopper revenue in Florida, and if our Shopper revenues are $400 million, they're going to be more than that, but $400 million, so it's -- you can look at that as a --

Got you.

-- guideline to annual revenue and divide it by 52 weeks.

It looks like a little under 1 million a week. Okay.

Yes. It's under $1 million a week

Got you.

And, then, from a cost perspective, as I said, paper and postage --

Go away.

-- go away, but the people don't.

Right.

And --

Are people are about a third?

Yes, somewhere around there.

Got you. And corporate?

The -- your question was is our -- ?

Corporate was down year-over-year in the third, nice drop, and I think last year was 4 million corporate in the fourth. Are you going to be able to be down again in the fourth, I guess?

Well, Ed, to be honest, I -- just getting down to that level of detail, we expect our -- we try to watch our costs, and we certainly hope that we'll see similar results.

Got you. Thanks, very much.

At this time, we have no further questions.

Thank you, everyone. Appreciate your being on the call.

Thank you.