Harte Hanks Inc (HHS) 2006 Q2 法說會逐字稿

Good morning and thank you for standing by. Welcome to the Harte-Hanks second quarter 2006 earnings release call. [OPERATOR INSTRUCTIONS]. I would now like to introduce Mr. Richard Hochhauser, President and CEO of Harte-Hanks.

Thank you and good morning, everyone. On the call today with me 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. Those 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 the 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 form 10-K and other documents filed with the Securities and Exchange Commission.

After I make a few opening remarks, Dean will give some financial details and as usual after that we'll take your questions. We started the year knowing it would be challenging, especially given the difficult comparisons to last year's strong first half performance. And the second quarter was a tough one. Reported second quarter EPS was up $0.03 over the prior year. Excluding the benefits of the contract termination fee described in our press release and the $1.9 million of stock-based compensation expense, EPS would have been up $0.01. The contract termination fee was related to merger activities we've talked about now for the past year and specifically resulted from the acquisition earlier this year of one of our direct marketing financial customers.

While we did not expect this termination and are not pleased with the loss of the contract, we did have in place contract provisions that protected our investment in this program, which resulted in a positive impact on this quarter and this year's earnings. Absent the contract termination fee, direct marketing performed reasonably well at the bottom line and improved margins, excluding stock-based compensation expense. On the revenue side, as we discussed, we are facing difficult comparisons as a result of the strong first half of 2005, which had year-over-year revenue growth of over 13%. As we look back to the remainder of 2006, we do expect to see a better revenue growth picture than we've seen in the first half of the year.

While all of our vertical markets are not where we'd like them to be, we're really proud of the performance of our pharma and health care vertical and the high single digit growth in our retail vertical. After eight consecutive quarters of strong growth in the select vertical, it was flat in the second quarter on a year-over-year basis, but we continue to have confidence in the prospects for this vertical. Our high-tech telecom vertical has now cycled through some challenging comparisons and customer-specific revenue issues and is poised to return to growth. We continue to underperform in our financial vertical and expect this one to be challenging as we work to improve our efforts in this area.

Shopper had quarter of mixed results with good revenue growth of 7.7% but operating income growth of just under 1%, excluding the impact of stock-based compensation expense. Dean will give you additional details on our shopper performance, but in the first quarter of 2006, our shopper margins were impacted by the inclusion of stock-based compensation expense. As always, there are a number of factors that affect margins. Some out of our control, such as postage and paper, and some in our control, such as expansion, other investments, and operational issues.

We have absolute faith in the long-term value creation of our expansion program and will launch two significant expansions in the third quarter. In one of the investments on which we are aggressively focusing is our shopper web presence. The results so far are exciting, as we've doubled most of the metrics we measure in the last six months. While business conditions were better than last year, we remain -- I'm sorry, were better last year than they are now, we remain positive about the business and the markets we're in. And the outlook for the targeted marketing industry in general and Harte-Hanks in particular.

Before I turn it over to Dean, let me once again say thank you to the people in Harte-Hanks who make it happen for our clients and our stake holders every day. Dean?

Thank you Richard, and good morning, everyone. Here's a company-wide overview of our second quarter. Company-wide revenue was up 5.1% for the quarter with revenue up 3.2% in direct marketing and 7.7% in shopper. Operating income was up 7.8% with direct marketing up 14.4% and shoppers down 0.9%. These comparisons versus operating income levels in the second quarter of 2005 were impacted by the inclusion of stock-based compensation in 2006. Excluding this expense from the '06 numbers, operating income comparisons would be total company up 11.8%, direct marketing up 18.4%, and shoppers up 0.9%.

Free cash flow in the quarter was strong at $32.8 million, up from $28.8 million in last year's second quarter. We have adjusted our free cash flow definition by adding back tax-effective stock-based compensation expense to both periods to make the periods comparable.

Turning to each of our two businesses, for the second quarter of '06, direct marketing revenue was up 3.2% and operating income was up 14.4% with operating income margins of 16.4%. These results were impacted by the receipt of a fee from the termination of a three-year are the described in our earnings press release. Absent the one-time termination fee and the impact of stock-based compensation, direct marketing revenue would have been down slightly, under 1%, and operating income would have been flat.

For our vertical markets in the second quarter of '06, retail, our largest vertical represented 26% of direct marketing revenue, high-tech telecom 21%, financial 23%, select markets 18, and health care pharma 12%. Our health care/pharma vertical had strong double digit growth in the quarter with revenue up more than 20% and our retail vertical had growth in the high single digits over the prior year. Our select markets vertical was flat during the quarter and the financial vertical, excluding the contract termination fee and the high-tech telecom vertical reached down in the low double digits.

International business in the quarter represented 9% of our direct marketing p revenue. Our top 25 direct marketing customers represented 42% of direct marketing revenue for the second quarter, and our largest customer in the sector represented less than 7.5% of our total direct marketing revenue.

Turning to shoppers, shoppers grew revenue by 7.7% in the quarter. Operating income decreased 0.9%, or adjusting for stock option expense, up 0.9% compared to the prior year's quarter. Revenue performance overall remained quite positive. ROP advertising continued its growth and distribution revenue had its best year-over-year performance in almost two years.

The strong revenue performance was not matched at the bottom line, which was negatively impacted by several factors. First, as mentioned earlier, the impact of the inclusion of stock-based compensation in second quarter '06 results, which had a 40 basis point negative impact. Other factors impacting margin performance in the quarter were new expansion, with circulation up 600,000 -- circulation on a year-over-year basis and start-up costs in the second quarter for two large expansions that will or -- that have or will launch in the third quarter. Continuing double digit year-over-year paper price rate increases, and the January 2006 postage rate increase.

Our second quarter net effective tax rate was 39.8%. This was up 1.7% from the 38.1% and last year's second quarter due to the favorable resolution of certain outstanding tax issues in the prior year's quarter. For the full-year 2006, we expect our tax rate to be approximately what it was for the full-year 2005 and the effective tax rate for 2005 was 38.6%.

On the balance sheet, at 6/30 we were showing a net debt balance of $43.1 million. This is a $10 million increase over the net debt balance at March 31, '06, driven principally by increased share repurchase activity for us in the quarter. Book equity at June 30, 2006, was $556.2 million, net accounts receivable were $171.2 million, and day sales outstanding at the end of June '06 was 53 days against 55 days at June 2005.

Looking at our statement of cash flows, net cash provided by operating activities for the quarter was $42.6 million. We repurchased 1.5 million shares during the quarter. Since January 1997, the company has acquired 45.9 million shares and spent over $820 million under our repurchase program.

After completion of the first half of the year, we stand by our original commentary on outlook for 2006 EPS. That looking at 2005 and 2006 on a comparable stock option expense basis, in other words, subtracting from our reported 2005 EPS results, the amount of stock-based compensation we expect for 2006, which is $0.06 per share, our goal is to deliver good earnings per share growth in 2006 in the high single digit or better range.

With that, operator, we'll be happy to answer questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Paul Ginocchio with Deutsche Bank. Your line is open.

This is actually David Clark for Paul. Two quick questions. One, on the revenue growth in the shopper division, was there a full quarter of revenue from Tampa in 2Q '05? My recollection is that deal actually closed in April at some point, maybe the middle of April? And if that's the case, if you could give us an organic or pro forma growth for division, that would be great. And second, just a clarification on the full-year EPS goal of high single digits or better, does that include the $0.03 from the termination fee this quarter? Thank you.

On the Tampa question, we acquired Tampa on April 20, 2005, so there were 2-3 weeks, it was under 2% in terms of impact on that stub period, under 2% impact on the overall revenue growth.

And the answer to your second question is yes.

Okay, thank you.

Our next question comes from Alexia Quadrani with Bear Stearns.

Thank you. Just looking for a little bit more detail by vertical in the direct marketing business. A couple questions on that front. First, in the, I think you said, you mentioned the tech and telecom business looks like it's getting a little bit better in the second half, if I heard correctly. How about the financial services business? Do you think we'll see continued negative revenue growth in the second half given the loss of the client? And then on the retail side, you saw very good growth in the quarter. Any sense that might be softening given some of the disappointments we've seen by retailers recently?

If you take the last one first, retail has done really well for us on balance over the past two, three years and we're really excited about it. It's pretty hard to tell, particularly going into the second half, because retail promotional activity increases a lot. So a lot of that stuff sort of comes on you. As we look at it now, we're sort of in the same shape as we were last year, so I'm getting that it will be okay. But it's really hard to tell from this perspective.

On financial, you are correct that we've not done a particularly good job in this vertical and we're just not doing particularly well. I don't see that changing for the rest of the year. You're also correct on high-tech. We have now worked our way through the really difficult comparable, a lot of good things are happening in that vertical and I think the curve is going to be in the absolute right direction starting in the third quarter.

And then anything particular on the select area that caused it to come in flat? And how does that look for the second half? And then just a question on the shopper business, is Tampa coming in versus where you expect it to be in terms of profitability?

Dean, you can answer the select question, but the Tampa profitability is coming in as we expected, and as it did last year, is exceeding our expectations.

Yes, and Alexia, on the select vertical, as Richard mentioned in his comments, this was at over 8 consecutive quarters of just very strong growth. Some of this is just coming against some difficult numbers. A couple of things happening within the customer base, but overall still very positive on this vertical and the growth prospects of this vertical over the longer term going forward. In any one quarter, you're going to have -- you're going to have a comparison that looks difficult, but the trend for this vertical continues to be good for us and the outlook continues to be positive.

Thank you.

Our next question comes from Troy Mastin with William Blair & Company, your line is open.

You may have touched on this in the first couple minutes of the call, because I was on a bit late, but regarding the contract termination, did you have visibility on this last quarter, and did this impact your revenue in the quarter? So had it not terminated, if it impacted it, how much was the impact roughly?

Troy, I think the two questions, did we have visibility on this last quarter? The answer is no, other than the visibility that we knew there was a customer who had gone through an acquisition. But we certainly did not have visibility on the contract termination. In terms of the revenue impact in the quarter, I think we spiked that out in the press release, it was $7 million.

Well, I don't mean the positive impact, I mean, had you done work for this client throughout the quarter, would that have contributed or maybe offset the $7 million benefit for the termination?

No, I think the -- Troy, I'm trying to answer the question. The incremental revenue impact in the quarter was $7 million.

Okay, good, good. And then regarding shopper's margins going forward, you laid out three items that were a drag on margins there. Can you give us a perspective on how many fully impacted those might be in the second half of the year?

Troy, I think you're going to see just in terms of, as an example, the impact of a postage rate increase, you're going to have a similar impact in the second half of the year since the postage rate increase occurred in January of 2006. Similarly with respect to paper prices, I think the year-over-year increases in paper prices in the second half of the year will be about the year-over-year increases as a percentage in paper prices in the first half of the year.

The converse of that, when you're doing expansions, which create value in the long-term, as we've said before, they have lower margins up front. And another investment such as our shopper web presence also creates value in the long-term. In the course of business, we always have areas where we feel we can do better and there are some areas where we can improve performance. That addresses all of the pieces, I think, of the comments we made.

Regarding the expansion, since you are expanding next quarter, it's fair to say that drag from expansion might be comparable as well going forward, at least for a couple quarters.

Troy, that -- I don't mean to be cute here, but that may or may not be the case, because you've got expansions in the pipeline that are aging and as they age, are improving in value. And so to a large extent, it's going to depend upon how these expansions come out the door. Our typical model is they come out the door losing money.

Now, several of our past expansions have beat this, several of our past expansions have hit this model. And we have a pretty good idea within a narrow band of where these things are going to come out the door, but part of it is going to be the success of these expansions, one of which has already launched and has come out the door quite positive, and another one that's scheduled to come out the door within the next 30 days.

Okay, great. If you could give some insight on the web presence that you've been working on. I'm not sure if you can share with us some of the metrics that have been doubling, but give us some framework of specifically the things you're working on there?

Well, you're right. We're going to sort of not talk in a lot of detail about it, because it's so new. But looking at the past six month page views as an example, they've gone up more than two-fold. Looking at the visits to the site, those have nearly doubled. Looking at some of the content metrics, such as car inventory and those kinds of things, that particular one has gone up almost 400%. And we have lots of these. We're not going to get into a lot of details and specific numbers because we're so early in this thing. What I want to try to communicate is we're really pleased with where we are. We set as an objectives to have these metrics move forward at a pretty fast clip and they are in fact are.

And then one final one regarding the finance vertical. Sounds like you're a little frustrated there, Richard. Are you doing anything to change this, making any significant changes internally or on the sales side you can speak to?

Certainly none that I can speak to, but I can tell you that I think you know the approach we take to life and when things aren't working, we've got to fix them. And they're not working as well as we want them to and there are plans that are being developed. In fact, I'm going to be revealing one of them next month and we are going to launch some new activities. These things take time, but you're right. We are frustrated.

Okay, thanks a lot.

Our next question comes from Lauren Fine with Merrill Lynch. Your line is open.

Thank you. Just a couple of quick questions. Just to go back to some things that have been asked, but to get more explicit. On Tampa, the margins there, where are they relative to your segment average in terms of how far below are they and when do you expect them to be comparable? And then within select, could you comment as you typically have in the past on the performance of auto?

And then finally, I'm not sure I understand exactly how the contract termination works. What were the annual revenues of that client, because while I understand the net incremental benefit of $7 million in the second quarter, I would like to understand how it might negatively impact comparisons in the second half and thereafter.

Lauren, this is Dean. Let me describe this was a three-year contract. We were in the first year of the contract. On an annual basis, the revenue from this contract was well under 2% -- I'm sorry, it was under 1%, well under 1% of our direct marketing revenue.

Okay.

If you think about Tampa, Tampa is not yet at the average of our shopper group. You don't build it in a day and I can assure you that we are very excited about the improvements in revenue and margins in Tampa. They are exceeding our goals.

But can you be more -- a little bit more specific about how far below it is?

No, we don't go into the individual operations, Lauren. It's -- we give you general guidelines that we bought a company that had below average margins and we set an objective to improve them and we're achieving that objective. In fact, we're exceeding our goals.

A time frame?

Lauren, one thing can I tell you is obviously I've talked about in the past, if you're looking at operating income margins, you've got the drag from the purchase accounting. So if you look at EBITDA margins, which we don't describe in our materials anymore. First of all, when you look at our shopper across our geography, the larger operations tend to have higher margins. Because there is some scale in this business. And Tampa is a relatively smaller operation when you compare it to our southern California operation.

It's also younger, and that matters.

Yes. So in terms of getting the margins up and the issue with the timeline, Lauren, as much as anything is, we have talked about expanding in the state of Florida. And to the extent we're expanding in Tampa and we're going to -- that's going to be within our Tampa P&L, that's going to have a downward impact or at least will prevent the rise of margins in Tampa as fast as we have seen. We've seen a significant improvement in margins since we've acquired the business. I think we're ahead of where we had planned to be. I think it's been a very positive 12 months for us.

Okay, auto and select? [MULTIPLE SPEAKERS]

Auto was -- had the largest growth and select markets for the quarter, I think it was the largest segment. The largest decline, which offset that growth, was in the manufacturing segment.

Great, thank you.

Our next question comes from Kevane Wong, JMP Securities. Your line is open.

How you doing. I've got a few for you. First, I wondered if you could help us understand a little bit as far as what you're seeing on direct marketing trends. In the press release, you backed out that you didn't have that client, you would have been down 1% on growth for that segment. Have things gotten worse, is there something else that's happening that's pulling that down? Can you give us a feel as for how we should be feeling about the market trends?

Well, we have said that the first half of the year was going to be challenging from a comparison perspective. We also said that we don't think that things are as robust this year as they were last year and finally we've said that, however, it doesn't mean that things are in bad shape. So we're sort of coming off of a robust time and we're still in a growth period. I think we suffered from the comparables and those are behind us now and we're going to see some change in the momentum of this company, I believe, and it is certainly our goal to see that. So I'm not down on the economy, I'm not just as up as we were last year.

Is your feeling about how things are different now than just a quarter ago, or is that basically for the same feelings -- [MULTIPLE SPEAKERS]

I don't think it's very different than a quarter ago. The events that take place in our lives, the war in the Middle East and to the extent that there are those kinds of things that influence elements of our economy, those are out of our control, so when they happen, you feel differently every day, particularly given the pace of those events. But other than those things, it feels about the same.

Okay. On the step up software acquisition, what are the annual revenues that that would have and what was the contribution in the quarter?

Kevane, there was virtually no contribution in the quarter, this occurred late in the quarter. This was a relatively small acquisition. It was affiliated with our Trillium business and a good deal for us, but will not have any material impact on our numbers.

Got you. Two other things. On the termination fee, I'm trying to back it out, it looks like there were expenses associated with it. Am I doing something wrong or why would there be expenses associated with that fee?

There were expenses associated with that fee and that's one of the reasons we had the contractual provisions in place, there were investments made under that contract that in essence we were going to recoup over the life of that contract. When the contract was terminated, we had various hardware and software investments that were in essence written down and expensed and we also had certain infrastructure and employee expenses associated with that termination.

Are there any of those expenses that would carry forward, or is that all taken at the same time.

That's taken out.

For the most part.

Got you. And then, on the online efforts, I understand you don't want to get too much as far as metrics, because it's still smallish. Give it a shot, if you can give us some sort of sense on sizing. The other thing I was hoping you can maybe help us understand, the number of relationships you now have with other shoppers? It seems like it's a particular thing that's helping grow it, just sort of wondering if there's some sort of metric we can get to get a gauge as to how that's going.

Let me give you a qualitative answer. It's going well. There are a lot of relationships that we have established you're going to see over the course of the next weeks, some announcements of some of those, not all, but some of those relationships where we are gaining momentum and we feel really good about it. We said at the beginning of the year that we didn't want to comment on any of this until midway through the year and even now this is a pretty young initiative for us. But we had some goals, the goals were to establish those relationships. We are achieving those goals, we're gaining momentum, and we feel good about it.

Got you. Okay, excellent. Thank you.

Thank you. Operator? Okay. Operator, you can take it off mute.

Our next question comes from Mike Kupinski with A.G. Edwards and Sons.

Can you hear me now?

Can I hear you.

Richard, I was wondering you've had a long career in direct marketing business and the cycle has been very unusual. I was wondering, direct marketing in the past has certainly been immune from economic vagaries and we saw the cycle. Is there anything you can derive from past experience of how direct marketing business might perform in the later stage of an economic cycle that we might be entering into here? It would seem like the business could do better as companies shift towards promotion. Are you starting to see that, or what are your thoughts on entering the later stage of the cycle here?

Well, first of all, thanks for making me feel old. I'm not sure I agree with the immunity you've talked about because during the last recession, the direct marketing business was hurt.

Certainly this past cycle, but in --

Yes, right.

Since 1976 or so, we haven't seen it.

But it was a really young business and the business really took off a lot during the 90s. So the most recent example was probably the most relevant one, although I believe that the return to direct marketing, the change in thinking about measurable media during that difficult period will help us and we will not -- my instincts are we will not see the same kind of significant decline during a recession as we did during the last one. I think we're a little bit better protected because people came back -- flooded back to it so quickly. But I don't think still immune is the right word.

Okay. Can you give us some thoughts on the prospect of postal rate increases next year? I know this largely directly affected the shopper business, but it adds to the cost of for advertisers for direct mail. Do you have any thoughts on the type of postal rate increases you're currently anticipating, what you think that this might have an effect on your direct marketing business and on margins on the shopper business.

You know there's been a postage rate case filed and any increase at this point looks to go into effect in the middle of the year, 2007. For our shopper business, the proposal would be for an increase of slightly less than 3%. If we move to individually-labeled product. Without that, the increase would be in the low to mid-teens. So if the rate increase shakes out this way, we would move to the individually-labeled product and of course, that's going to require some changes in what we do.

In the direct marketing business, have you tended to see advertisers tend to pull their advertising in advance of postal rates, so is it something we should anticipate, like maybe a quarter or two in advance of the postal rate increase that you'll start to see a little bump?

When the rates increase, if you go back two decades when the rates then increased whatever it was, 17%, we did see that phenomenon. In fact, we saw a spike in mailing just prior to the postage increase and then a lull and then things gradually got back to normal. The increases, though, the past increase and the expected future increase were -- I'm sorry, the past two increases and the expected future increase really are not high enough to make that such a big deal. And so we really haven't seen a lot of that. A little bit, but not a lot of it.

Do you have any thoughts on the changes in the competitive landscape in southern California on the shopper's business? Any thoughts on the potential impact on the merger? Could there be any way that you could maybe see some incremental benefit in the shopper's business from that?

Well, if you look at the -- an Advo announcement regarding the distribution agreement in southern California, first of all, it hadn't gone into effect yet, they said it would start in August. We had strong distribution revenue this quarter, including the geographies covered by Advo's second day a week distribution. And we were really excited about that.

When the arrangement becomes effective, we believe it will further rationalize the market taking some of the unused capacity out and we're excited about that, we've said that before. And having said that, we're going to continue to compete vigorously to retain the business we have and to secure new customers. Regarding the Valassis announcement, we don't really see very much of an impact from that transaction. It's really more what I already talked about that will have the effect.

Great, thanks.

Thank you.

Our next question comes from Steven Barlow, Prudential Equity Group. Your line is open.

Thank you. Could you just give us some geography as to where these expansions are taking place in the shopper's business? And secondly, is there a way to size the number of deals or the revenue of deals that are similar to the one that was terminated? Trying to figure out how many contracts you have that are of three-year in nature and you have a clawback if they get canceled.

One the expansion, one is in Florida and one in California.

Northern?

Depends on your --

Well, not the L.A. basin, I guess.

Yes, between the two.

Between the two, okay.

But that answers where the expansions are occurring. And your question about how many other contracts do we have that have clawbacks like this?

Yes, as a with a way to size the revenue. To me it seems a little unusual, but I don't know if that's the case or not.

What seems unusual, Steve?

The length of the three-year contract and you very specifically had it gained that if for some reason it got cancelled, you were going to get these filing fees back to cover some of your costs and some of the revenue you were losing. Is that a common kind of contract, I guess is the question?

No -- I -- let me answer this. We have contracts on virtually all of our businesses and they differ. When we have a contract or a piece of business like this piece of business, where we are making an investment up front that we expect to receive a return on over the life of the contract, we work very hard to get contract provisions that protect us. In this case, it was a database deal where we were investing in some up front expenses, we were investing in some hardware and software that we were going to make a return on over the three-year period.

So we got a contract provision that said if you terminate it in advance, here's what the fee is owed. We have other contracts -- and in the database arena, that is not atypical to have. We have some other contracts where we may be making other kinds of up front investments. For instance, we're going to undergo a train to part of our workforce and the customer is not going to pay us for that, and we're going to, quote, eat those training costs, but if the contract doesn't go a particular period of time, they're going to have to repay us, or have to pay us for those training costs because we haven't had the business long enough to amortize over the course of it.

So the type of contract we saw terminated today is a little bit atypical from what we have. We do have contracts that have what I'll call protection clauses to protect us and to protect our investment in our businesses.

Thank you, that's helpful, Dean. And Richard, on the financial services, I want to get back to the financial vertical, it sounds like you're concerned about Harte-Hanks' performance and sounds like the industry is doing better on that vertical. Are there a bunch of contracts up for renewal that you will be attempting to get or how does the prospect look to get more business in that area? Are there annual or biannual contracts that you know are coming up that you're going to be fighting for?

There are always existing contracts that are up for renewal. We have a big base of business. There's a wide range of new proposals that we have out there that we expect to get some proportion of those as we always do. We haven't given up on this vertical, but we're not the kind of folks that sit back and like to see declines over periods of time. That's what we've seen and we're working really hard to figure out how to fix it.

Fair enough. Thank you.

Our next question comes from Mark Bacurin with Robert W. Baird & Company. Your line is open.

Dean, Was all the stock-based compensation in the payroll expense line?

Yes.

Great. And then, second, as you look in the back half of the year, seems like last year there were some disruptions given the heavy hurricane activity that was hitting Florida. Could you give us any idea of what the -- what you're facing in terms of year-over-year comparisons both in Q3 and Q4 on the shopper's business specifically as it relates to loss to any opportunities last year because of hurricanes?

Mark, the hurricane, the primary hurricane -- I'm trying to remember the name of them, there were so many last year, I think it was Wilma. That was actually in October. So the financial impact was a fourth quarter financial impact in October.

So there's no real comparisons to worry about in Q3?

I don't believe so.

Okay. And just finally, it's exciting to hear about the online strategy as it relates to shopper's business. Particularly hearing a lot of noise about things like Craigslist. Just wondering, Richard, if you could comment about what, if any, impact you are seeing on the ROP side of shopper's business and more specifically as it relates to classifieds and how classified specifically within ROP are doing for you guys?

We said, I think it was on the last call, that we were really excited that despite the trends toward online that we were actually growing that part of our shopper business. We continue to do that. So we are treating this web initiative as an aggressive, positive one, not a reactionary one. We're treating it -- it's not that we're losing anywhere. That may happen one day, I don't know, but I can tell you right now, we're going after this, as just a new opportunity and we see lots of them around the corner.

Great. And then these shopper's partners that you're bringing into the online property, are there revenue benefits that you accrue from that, or is it really just getting the content there to grow overall visitors to the site?

Well, this is the risk of talking about something that's so new, because at the end of the day, we're going to get measured on revenues and profits and that's the way it should be. I can tell you that we're not thinking a lot about that yet. We put in place or we're putting in place some areas that we're going to identify revenue opportunities for. We're pretty excited that we're going to be able to make revenue happen, because when visits go up and eyeballs go up and all those sorts of things, it gives you more opportunity for revenue. But we're really not and probably won't be anytime this year in a position to talk about that part of it. We just knew we had to do some building prior to be thinking about the financial part of this thing. That's why I'm so excited because the building part that we knew was necessary is actually happening.

That's great. Thanks for the additional color.

[OPERATOR INSTRUCTIONS] Our next question comes from Brandon Dobell with Credit Suisse.

Leveraging an earlier question about expansion to shoppers, how do you think about the IRR on those projects and has there historically been a whole lot of variance around that kind of a metric? Does it really depend on the economy, or is it really just based on how big you try to get it first or second year kind of time frame?

The IRR on these projects are incredibly high. We are again leveraging an existing production facility, and obviously, you get into questions about allocation, but we're leveraging production capacity, we're leveraging our distribution network, we're leveraging our system of sales offices for the most part in these territories. So while you have some up front expense in terms of launching, you've got payroll of salespeople before you've got revenue in. The investment is pretty small. And our history with these expansions have been very good. While they may lose money in the first year, again, that's a relatively small amount of money. When they turn the corner, the IRR looks pretty nice over a five-year period of time.

How much variance do you think is or could be driven by a tougher ad spending environment to Richard's earlier point about what the cycle may or may not look like. Do you take that into account when you're talking about expansion. You look out a year and say, maybe we're going to hold off a little bit because expanding in the space of a downturn in ad spending might not be the best use of our capital. How should we think about your perspective there?

There's so many variables. Clearly the economy is a variable and we would feel that it would be a little bit steeper climb for us if the company wasn't good to go into a new area. But it depends so much on the area. Is it an area that is already familiar with the shopper that we have? Is it an area where people have moved to from existing geographies that are already familiar with it. If so, we may do better in a down cycle as we did during the down cycle of the last recession. So a lot of its dependent on the geography and the brand that we have in that market.

And Brandon, we have faith and believe in the long-term nature that our shopper business is a great business. And if we're going to go expand in an area over time, that is going to create a huge amount of value for our company and our shareholders. And because the advertising environment may be slightly soft, we're not going to not go into an area. Certainly, we might moderate things depending upon results, but this is not about capturing revenue in the next six months. This is about building long-term franchise value for our shoppers.

And it's so unique to this medium that we have as a core business. It's so -- it's almost impossible to do in newspapers and any of the other traditional media. And so we feel blessed that we have this opportunity to be able to do it.

Okay, that's helpful. I might have missed this in your opening comments, but the pharma vertical, was the solid growth there, was that a collection of a lot of same customer improvements or was there a big new customer that signed on that was made an easy comp from last year and how should we think about that momentum in that vertical going into the back of the year?

Some of it was from part D and some of it was from the pharma companies themselves, a combination of new customers as well as existing customers spending more, making up the increase.

Yes. The growth was good in both health care and pharmaceutical, which is what that industry is. And again, it was a combination of existing customers growing. And then when you get into this business, while we may work for a particular company, we really only work for a number of brands. So some of it doing work for brands that we've been doing work for, some of its acquiring work for new brands.

At this time, we have no further questions.

Thank you, everyone, for your time.

Thank you.

Have a great day.