Harte Hanks Inc (HHS) 2007 Q3 法說會逐字稿

Good morning and welcome and thank you for joining the third quarter 2007 earnings release conference call. At this time all participants are in a listen only mode. (OPERATOR INSTRUCTIONS) Today's conference is being recorded. If you have any objections you may disconnect at this time.

Now I'd like to turn the conference over to Mr. Richard Hochhauser, President and CEO of Harte-Hanks. Sir, you may begin.

Thank you, and good morning, everyone. On the call with me today is Dean Blythe, our President and Chief Financial Officer; Jessica Huff, our Vice President of Finance and Controller; and Bryan Pechersky, our Senior Vice President, General Counsel, and Secretary. Before I begin my remarks, I'd Like Bryan to make a few statements.

Thanks, Richard. The comments we make on this call will include forward-looking statements. Examples may include statements about our strategies and initiatives, financial outlook, competitive factors, business and industry expectations, and other statements that do not relate to historical facts. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected or implied in the forward-looking statements. A description of some of the risks and uncertainties potentially impacting our business and future performance can be found in our most recent Form 10-K, and other documents filed with the Securities and Exchange Commission and in the cautionary statement in today's earnings release.

Our call may also include a discussion of certain non-GAAP financial measures. Please refer to today's earnings release for the required reconciliations and other related disclosures. Our earnings release is available on the Investor Relations section of our website at www.Harte-Hanks.Com. I'll now turn the call back over to Richard.

Thanks, Bryan. Our third quarter results reflect a continuation of the trends we've seen since the beginning of 2007, primarily the continued deterioration in shopper revenues. Our overall performance was obviously below our expectations. As a result we have taken and are continuing to take steps in both Shoppers and Direct Marketing to improve future revenue performance and reduce future expenses. Following this call last quarter, we announced the management succession and restructuring plan with Dean being named President and that he would become CEO in early 2008. And with Gary Skidmore being named President of our Direct Marketing business. Dean, Gary, and Pete Gorman at Shoppers are deeply involved in the restructuring actions that are being taken and lots of progress is being made.

You can see some of the results of this in our release and we'll hear more about this in Dean's remarks. I'll be letting Dean cover much of the materials I would have covered in the past and will be available to help answer questions. I believe the changes that are being made will not only improve short-term performance but serve us well in the future. Despite this difficult year we really believe in the strength and durability of the targeted marketing businesses we operate and we continue to be a leader in both Direct Marketing and Shoppers. Dean, over to you.

Thank you, Richard, and good morning, everyone. In this quarter, what the numbers say at the bottom line is that our earnings per share declined by $0.05 over the prior years third quarter period. This performance is certainly not of the type to which we are accustomed, nor is it of the type that is acceptable to us or any of our stakeholders. Behind the numbers, what we saw this quarter was better performance from our Direct Marketing business with very solid bottom line growth, and the continuing deterioration of revenues in our Shopper business. In addition in this quarter as I will discuss in more detail later in my comments, we incurred $4.6 million of expenses as part of the continuing restructuring of our businesses resulting in a $0.04 negative impact on earnings per share and at a tax rate that was 4% higher than this quarter than the tax rate in the third quarter of last year which resulted in a further $0.02 negative impact on year-over-year earnings per share.

Let's turn to some of the details starting with the Companywide overview. Revenue was down 2.7% for the quarter with revenue for Direct Marketing up 4.1% and Shoppers down 12.6%. Operating income was down 10.3% with Direct Marketing up 9.2% and Shoppers down 19.2%. Free cash flow for the quarter was 25.6 million down from 28.1 million and last years third quarter driven by lower net income in this years quarter.

Now, looking at each of the businesses, in the third quarter, Direct Marketing revenue was up 4.1% with EBITDA up 8% and operating income up 9.2%, with operating income margins up 70 basis points to 15.2%. Excluding the impact of the restructuring costs taken in the third quarter which I'll discuss in more detail later, the operating income margin would have been 16.1% or 160 basis point increase.

This is the strongest quarter we have delivered in Direct Marketing this year in terms of positive operating leverage and we are both pleased by this and encouraged by this demonstrated ability for this business to drive profitable revenue. We are, however, still short of our revenue growth rate expectations and we will be coming up in the fourth quarter against our strongest growth quarter in 2006. For our vertical markets in the third quarter of 2007, retail, the largest vertical was 27% of Direct Marketing revenue, high-tech telecom 26%, select markets 18%, financial 16%, and healthcare pharma 13%. Revenue in our high-tech Telecom vertical had double digit growth in the quarter, Select showed continued solid growth with revenue increasing in the mid single digits over the prior year and actually that revenue would have been up double digits absent the divestiture of a business that we did in 2006.

The healthcare pharma vertical was up in the low single digits and the retail vertical was essentially flat. The only vertical showing a revenue decline was financial which did show continuing troubles with double digit decline. Our top 25 Direct Marketing customers represented 43% of Direct Marketing revenue for the third quarter. Our largest customer in the quarter represented 8% of our total Direct Marketing revenue.

Turning to Shoppers, Shoppers had another difficult quarter. Revenue was down 12.6% to last years third quarter with an EBITDA decline of 16.4% and an operating income decline of 19.2%. As a result of expense actions we have taken this quarter, we were able to lessen the impact of the revenue decline on profit this quarter compared to the second quarter. In the third quarter, we lost $0.28 of profit for every $1 of revenue we lost compared to the second quarter where we lost $0.67 of profit for every $1 of lost revenue.

The revenue environment continues to be difficult and the rate of decline accelerated in this quarter from both the prior quarter and the first half of the year. Again, primarily attributable to the condition of the real estate and associated financing markets in the California and Florida geographies. As we did in the second quarter in shutting down 600,000 of circulation and reducing headcount, we took further action in the third quarter to reduce our operating costs. Included among these actions was restructuring our Shopper organization to move from six operating units, three in California, two in Florida, and a digital operating unit, to three units, a California unit, a Florida unit and a digital unit.

Other advertising related businesses that operate in these parts of the country have continued to report negative results out of these regions, and negative results disproportionately to results out of other parts of the country. We do not know when these markets will stabilize. It will certainly not be before this calendar year is over and with the accelerating rates of revenue decline throughout 2007, we know revenue comparisons in 2008, particularly the first half or three quarters will be difficult, but we also know that California and Florida are excellent long term markets and that the effectiveness of our product for our advertisers will serve us well in these markets.

In the press release, we mentioned that for the Company as a whole we had incurred $4.6 million of expenses in the third quarter related to actions that will improve short-term performance and set the stage for longer term growth in revenue and profits. In Direct Marketing actions in the third quarter were aimed at flattening the organization to improve our efficiency and bring our sales marketing and operations closer to our customers. In Shoppers, as I discussed earlier, we also streamlined our organization, improving efficiency and reducing cost. Year-to-date, we have incurred over $7 million of restructuring costs. These actions will generate future savings and will improve operating effectiveness. These expenses will exceed the savings that we will see from such actions in calendar year 2007. Taking into account the timing of all of these actions we expect the result of these actions will be to reduce our 2008 cost base by approximately $14 million. As I cautioned last quarter, however, these actions cannot be looked at in a vacuum. Our results will depend on lots of other things as well, including our ability to control and reduce expenses through measures that do not have associated costs and the revenue performance we will be able to deliver from our businesses.

Excluding the impact of the $4.6 million in restructuring costs incurred in the third quarter of 2007, EBITDA for the Company would have been essentially flat as well as operating income would have been flat to last years third quarter. This is on a 2.7% revenue decline, so we generated flat OI absent the restructuring costs on an $8 million revenue decline.

Our third quarter net effective tax rate was 39.8%, up substantially, 400 basis points from 35.8% in last years third quarter. For the fourth quarter, we expect our tax rate to be similar to last years fourth quarter rate of 38.6, which would result in the full year 2007 tax rate being higher than what it was for the full year 2006. The effective tax rate for 2006 was 37.6 by over 100 basis points. As previously discussed, most of the difference is a result of the favorable tax resolution of a state tax matter in the third quarter of 2006 lowering our effective tax rate for the prior years period.

On the balance sheet, at 9/30 we were showing a net debt balance of $193 million. Book equity at September 30, was $447.2 million, net accounts receivable $183.7 million, with day sales outstanding at September 2007 of 59 days against 57 days in September of '06.

Looking at our statement of cash flows, net cash provided by operating activities for the quarter was $37.6 million. In the quarter we repurchased 1.9 million shares. Since January 1997, the Company has acquired 55.4 million shares and spent almost $1.1 billion under our repurchase program including close to $175 million over the last 12 months.

As I mentioned at the beginning of my remarks our third quarter performance is not acceptable to us or any of our stakeholders. But we do believe in and are excited about the businesses we are in despite this difficult year. These are fundamentally sound and strong businesses in attractive markets. Shoppers has a unique, highly effective product that has delivered outstanding results for its advertisers for decades and continues to do so. We also remain confident that we have enormous opportunities to drive revenue in our Direct Marketing business given the cost effective and measurable results of programs we perform for our customers and the deep roster of blue chip customers that we have in this business.

We still have much to do and recovery will take time, but with the fundamental strength of each of our businesses we are committed to delivering improved performance. With that, we will open up, Operator, the call for questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Alexia Quadrani from Bear Stearns.

Hi, thanks. This is [Jonathan Buckholtz] for Alexia. A few questions on Shoppers. First, can you give us a sense of how much your volume may be impacted by the Southern California fires? And you mentioned that comparisons stayed tough for the first half of next year, maybe the first three quarters, and I can understand the first half as declines were in single digits but with Q3 close to a 13% decline, do you mean to say that's still a difficult comp, just want to try to understand how weak the Shopper revenues can get? And I have a follow-up. Thanks.

Okay, Jonathan, as far as the California situation, as you know, it's still an ongoing situation although it appears that the worst may be over. We were primarily impacted in the San Diego region. The impact we were able to distribute all of our publications in San Diego which is under 2 million circulation of our total of 13. To the post offices, we believe a large majority of that was delivered and will be delivered. There was not a lot of sales activity this week so we expect that the next week's publication will be significantly light on revenue but we're talking about a variance of well under $1 million. So while it's a tragic situation out there, we don't see any long term impact or very much short-term impact to the business as a result of the fires.

In terms of the comp, we have -- what we talked about was we have seen a continuing decline in acceleration of the revenue decline, certainly in the first half and into the third quarter. I think we're -- since we have not seen the end of that trend, I think what we are saying that certainly the first half it may leak into a little bit more than the first half that we will have difficult comparison.

Okay, so in this quarter, you saw revenues continuing to decline as the quarter progressed?

Yes. We were down 7.1% last quarter in Q2 year-over-year and we were down 12.6% this quarter.

Okay, thanks, and then finally, in light of the very weak share performance in Q3, do you have any plans to become more aggressive in your buybacks?

Well, we've bought $1.1 billion worth of stock over the last decade and I expect we will continue to be active buyers of our stock.

Okay, thanks.

Thank you. Our next question comes from [Esther Cheng] from Merrill Lynch. Your line is open, Mr. Cheng. Mr. Cheng? Please check your mute button. Your line is open. We'll go on to the next question, Mark Bacurin from Robert W. Baird.

Hi, Richard, hi, Dean. A couple questions. On the Shoppers revenue decline, is there any way, I know you obviously took some circulation out. Is there a way to say how much of this quarters revenue decline was self-imposed, meaning it's circulation that you took out, so obviously it was a profitability enhancer, but just wondering how much that 12% or so decline was because of your own actions?

The impact of the circulation shut down was a little less than 2%, of the 12.6, it was a little less than 2 points of that.

Okay, great. And then you mentioned the fires about $1 million or so of revenue in the current quarter. I guess that's still to be determined, but will you strip out for us in Q4 I guess what the actual impact would be on that so we can get a sense of--?

Will I?

Yes.

We obviously don't know yet, but our expectation is that it will not be significant.

Okay, great. On the Direct Marketing side obviously pretty good results there considering the environment that we're in. Can you talk about, I know you talked about the individual verticals but in terms of the products or the solutions that some of these verticals are using, are you seeing more robust growth on the digital side, the direct mail side, just trying to understand the kind of core demand drivers of that business?

Mark, I think we saw pretty steady performance across the various service line offerings. If you look at the verticals as a whole, however, we did have some good growth in our pharmaceutical business even though the pharma healthcare market didn't show the growth, the pharma part of that was up very strong and a lot of that was driven by some digital revenue and some digital projects that are new on a year-over-year basis. We continued to suffer in the Financial Services vertical. In that vertical, however, we're still coming against the loss of the large financial customer we talked about last year. We did divest a business last year that had a large financial services vertical revenue in it and replaced it with a business that had more high-tech business, so that also impacted financial, and we're seeing some softness in the credit card side of the business, and I think that's a spillover from the subprime mortgage issues.

Great. That's helpful. And then just on PennysaverUSA.Com, the digital platform, can you tell us any sort of metrics in terms of revenue contribution in the quarter? I know it's still a work in process in terms of trying to determine what the ultimate revenue models may be around that new service offering, but just looking for some more color there?

Mark, we don't -- it's still not a material -- does not have a material impact at the revenue side and it's still a business that is an investment, in other words generating a loss at the bottom line. But we are making good progress even though when you've talk about small numbers, percentages can fool -- you can fool yourself with percentages, but we're relatively satisfied with the progress that we're making and we hope that we can accelerate revenue growth from that side of the business in the coming year.

And I think Richard at one point talked about maybe 12 different potential revenue models out of that platform. What are the kind of, is it I assume right now it's largely kind of a banner ad driven?

No, it's actually not banner ad driven. It's actually charges to people on the website to have an enhanced presence on our website. We have a lot of small businesses that don't have their own website so when someone is doing a local search on Google they aren't going to show up, however if they get on our website we in essence will give them a surrogate URL, so that we'll start showing up on Google type searches and we charge them for that.

It's per click or it's just--?

No, it's per week.

Okay. Great and then just one final quick one. What was the actual dollar amount spent on share repurchase in the quarter?

Let me grab that. 45.3 million.

Great. Thank you.

Thank you. Our next question comes from Karl Choi from Merrill Lynch.

Hi, good morning. I have a few questions here. The first one is in your conversations with Direct Marketers, I think early in the year you mentioned some hesitancy to commit to spending. Has that gotten any better or any worse in your conversations with them? And then second question is I just want to clarify the $7 million of cost savings that you have realized year-to-date, is that a run rate figure or was it the actual dollar amount?

Okay, Karl, first of all the $7 million is not cost savings. Those are one-time costs that we have incurred to take ongoing costs out of the system. In other words, as an example, we had a lease in Ireland that we terminated and there was an expense associated with that but then that rev expense goes away in the future. People, we have had reductions in headcount and we've had severance costs associated with that. It is those costs associated with taking the costs out that equal $7 million.

Sorry, I misread that. Then what would be the savings amount that you think you have sort of you'll be realizing in 2007?

Well, if you look at 2007 expenses and 2008 expenses, the dollar number actions to date would be $14 million less expense in '08 than we experienced in '07.

And that's incremental year-over-year?

That's correct.

Great. Thank you.

Our next question comes from David Clark from Deutsche Bank.

Thank you, good morning. Dean, of the $4.6 million of restructuring in the quarter, I think you said in the press release and on the call here that $1.6 million was in Direct Marketing. Was the balance in Shoppers or was some of that in Corporate?

Some of that was in Corporate as well.

And the $14 million in savings, is the majority of that in Shoppers or is it also sort of the split between--?

You need to think of it was $14 million for Harte-Hanks.

Okay.

Some at Corporate, some at Direct Marketing and some in Shoppers.

Could we get for the third quarter the year-over-year change in FTE's for all of Harte-Hanks?

For all of Harte-Hanks?

Yes.

The year-over-year change for all of Harte-Hanks is not significant. The year-over-year change in Shoppers is significant. I think it's down 9, almost 10% year-over-year.

Okay. And then one final question. I know both Florida and California are tough markets. Is one of the other, was one of the other weaker in the third quarter than the other?

They were about the same performance.

Okay. Thank you.

Thank you. Our next question comes from Troy Mastin from William Blair & Company.

Thanks, good morning. You mentioned that in the third quarter you lost $0.28 of profit for every $1 of revenue lost in Shoppers. I'm curious if this is a reasonable expectation going forward? I'm sure it gets worse the worse revenue declines than if we saw similar sorts of trends, would that be a reasonable expectation and how sensitive is this to the degree of the declines in revenue?

Troy, it is sensitive to declines in revenue. I mean, we obviously took action that made it less bad in the third quarter than it was in the second quarter, we're continuing to take actions because we are continuing to expect year-over-year revenue declines. So I'm just trying to think here. I think in the near term, certainly we think we can deliver that and the question is, is how -- is the longer it goes, the harder it's going to be to keep that ratio in place.

Okay, and based on what you see now, do you see the need for any additional restructuring activities? If not, I guess this would be more specific to Shoppers. What would have to happen in order to consider more reductions? And in terms of circulation is that something that would be on the table?

I think we are continuing to review all facets of the organization. There will probably be additional costs on a going forward basis. They will not be of the magnitude they have been this quarter or close to the magnitude they have been this quarter, so I don't know if that answers part of your question, Troy. I guess the other part was what would have to happen to revenues for us to do more. Is that?

Yes, how much worse might things have to look in Shoppers for you to be willing to consider another drastic action and could that still include or could that include circulation, more circulation cuts?

We're going to review and we review circulation almost on a continual basis, certainly, if revenue gets worse that's one additional action we could take. Today we don't see the magnitude of the circulation that we took out in the second quarter that we could take out on a going forward basis, given today's environment. Obviously if the environment changes that could change but as of right now that doesn't look like it's in the cards.

Okay, and then is there anything that you can point to or look at that might be a light at the end of the tunnel for Shoppers just curious, are there any anecdotes you might be able to provide from the front line that can help illustrate the real challenges you're facing? And then is there something you can point to for us to provide evidence or at least some comfort that this is a temporary issue and not a long term secular issue? I know there's a lot of questions in there but.

Okay, let me start then. Anecdotes from the front line, we present to an advertiser who is a furniture dealer in Florida a program to try to help them accelerate sales that we will give them preferred position, we'll give them some free stuff if they do this and if they commit to us for a year. The response is, don't talk to me about a year. I don't know if I'm going to be in business in six months so those are anecdotes.

The markets are very tough right now. This is a business that has worked for our advertisers and for a lot of our advertisers it has been the primary advertising medium they have used and they've used it to drive traffic and drive leads. It is still performing well but is it delivering as many leads in traffic as it did two years ago? The answer is no, because the markets are down.

In terms of, you asked the question about why do we not think this is a permanent decline or a long term decline, this business for a decade between 1997 through 2006 grew at a compounded annual growth rate at the top line of over 7%, and that was virtually all organic. During that same period of time if you look at other media, certainly no one performed in those markets like we did and it was also very volatile whereas ours was right 6, 7, 8% each and every year for a decade. We started declining, we started getting a little soft in the third quarter of 2006. If you look at other media and they've been declining or rocky for a long number of years. The correlation between the softness in our business and what's happened in the housing market is one-to-one, so it is not a coincidence. The Internet did not start on October 1, of 2006. Craigslist did not start on October 1, of 2006.

We have a completely different business model than the newspapers. We have saturation delivery through the mail. We don't count on people buying the newspaper. People don't come to us. They come to us as a directory for their local markets. They don't come to us for news which is becoming increasingly irrelevant in the newspapers. I think the only thing that our Shopper business and newspapers have in common is that we both use news print. It's a targeted vehicle. It's a highly efficient and effective advertising vehicle for our advertisers, and it will continue to be and when these markets stabilize and these are great long term markets we're going to come out of this stronger than l when this started going down.

Okay, and then I also asked if there was anything you can point to that might be a light at the end of the tunnel?

Didn't I just do that?

Okay. Enough said. Thank you.

Thank you. Our next question comes from Michael Kupinski from Noble Financial.

Thank you for taking the question. In the fourth quarter 2006, Dean, I was just wondering, did you have a net positive impact on revenues with the acquisition of Aberdeen, netting out the divestiture? I was just wondering if -- or was that they basically netted out each other?

In the fourth quarter of 06, it was slightly -- we had slightly more revenue from the acquisition than we would have had in the fourth quarter of '05 from the disposed Company but total impact on Direct Marketing would have been well under 1%.

Okay, and then just following up on the circulation question in Shoppers. Can you tell me in terms of the added distribution that you had over the past 18 to 24 months, are those areas now, I would imagine they aren't profitable, right? But I was just curious in how they were trending. Were they trending well or are they just trending sideways or what -- can you just get any color on how the added distribution is kind of looking on the profitable standpoint of things?

Yes, so you're talking about the last two years of circulation?

Expansion.

Expansion other than obviously the ones that we shut down?

Correct.

Let me, if you can bear with me. They certainly are not performing -- listen, our entire business is down and it's certainly impacting our new expansions as well, but generally, the expansions that we've done in the last 24 months are all profitable other than the ones that we shut down.

Okay, great. And then I was just wondering about the Company's international plans. I was just wondering if you could just highlight your strategy there in light of some recent news there?

I'm sorry, Mike.

The international expansion of what your thoughts are in terms of--?

Are you referencing the option agreement that we entered into?

Correct.

We're continuing to look at international as an opportunity for us in the future. The options require a Company that was to -- it's a relatively small transaction that will provide a capability that we do not currently have on site in Europe.

Can you size the amount of the potential there of the option? Are we talking like 10 million, 20 million?

Oh, no. It's below $10 million acquisition, option acquisition price. It's a formula based option, so obviously, it could grow but the expectation is that it be below $10 million.

Okay, great. Terrific. Thank you.

Thank you. Our next question comes from Edward Atorino from Benchmark.

It has to do with this restructuring charge. Thanks for taking the question. I notice your Corporate jumped up a couple million bucks but would half of that be the restructuring allocation in Corporate or something like that?

Yes, I think, we filed an 8-K in August I believe, that detailed some of those restructuring charges and some of those were--.

I'll go look that up. Second question, there have been some articles here and there at (inaudible) and other places about companies that have used traditional medias looking to direct-to-consumer media which is sort of your business. Are you seeing noticeable increase in sort of new categories or CPG's moving to your business or anything that would suggest that there's sort of more of a movement toward the direct-to-consumer and away from the from the traditional media?

Well, that is a trend -- the trend away from mass media to targeted media is a secular trend that I think has been talked about--.

Oh, yes, right.

--over a number of years. I don't think, Ed, we've seen anything recently that we can point to as dollars moved from this budget to another budget. I think what you're going to see is over time you're going to look at growth in mass media versus growth in targeted media, and I think the growth in targeted media will exceed the mass media growth.

But no new guys showing up on the doorstep yet in a big way?

New categories you mean?

Yes.

No, not particularly.

Thanks very much.

Thank you. Our next question comes from Esther Cheng from Merrill Lynch.

Thanks, sorry about that earlier. I had some technical difficulties. Anyway just wanted to ask a little bit about Shoppers again on that acceleration and decline, and really what kind of magnitude we might see even in the fourth quarter. Could it be double digit in the fourth quarter given that you saw double digits here or the comparison last year fourth quarter, is easier since the slowdown already started, any sense of that at this point?

Well, Esther, I think you have, continue to have the impact of the circulation shut down in the fourth quarter so there's a couple of points of revenue out of there. We have seen an acceleration of the rate of decline throughout the first three quarters of the year. We're not going to, I'm not comfortable sitting here giving you a fourth quarter Shopper revenue number but we expect a continuing decline in that business in Q4.

All right that's fine. I guess on the Direct Marketing side, comparisons like you mentioned do get tougher. I'm wondering it's particularly tough in the high-tech telecom category. Can you really see some more wins there or is it existing client spending really increasing which is why you saw the strength in Q3 as well?

Are you talking about a Q4 over Q4 comparison?

Yes.

Well, I think some of the Q4 increase in high-tech telecom was based on an acquisition we made at the end of the third quarter last year. In other words we sold the business about the same time that had a heavy component of financial customers or services for financial customers, we bought a business that had a heavy component of services for high-tech customers. So a lot of the quarter-over-quarter growth was driven by the acquisition last year in '06. So I don't know if the high-tech telecom comparison and we still have that business going into the fourth quarter of '07.

And pharma also benefited last year from some Medicare changes and plan sign ups. Can this category see double digit growth or is it going to be more like the single digits that we're seeing now?

Well, remember, our category is healthcare pharma and I think our healthcare business have a lot of Medicare/ Medicaid revenue last year. We will not see that this year or we won't see it to the magnitude but the pharma part of the business has shown very nice growth and we expect that to continue. So it will certainly be dampened when you combine the two verticals together but the pharma business is growing quite strongly and the healthcare business will have a very difficult comparison in the fourth quarter.

Okay, great. Thank you.

Thank you. Our next question comes from Mark Bacurin from Robert W. Baird.

Yes, just one quick follow-up, Dean. On the $14 million of cost savings you're talking about coming out in '08, are you, are you basically saying it's -- obviously the $7 million of one-time charges in '07 don't recur in '08 so is that half of the 14 that you're picking up or is it incremental 14 even excluding the 7 that you've spent on one-time items?

Let me run you through an example of the calculation so that -- to answer your question. If there was a person making $200,000 a year and their position was eliminated and that position was eliminated on June 30, of 2007, we will have paid that person $100,000 in salary and let's assume the severance charge was $50,000. So in '08, we will have $150,000 of costs, less costs associated with that person, even though their annualized run rate was $200,000. So with a $14 million takes into account the one-time costs and the actual expense that we incurred for that person, activity, lease, whatever in 2007. So the year-over-year cost including the one-time charges is $14 million. The annualized run rate, however, is probably a little greater than $14 million, but the net impact between '07 and '08 will be $14 million.

Yes, great. That's helpful, and then obviously there will be growth in other areas of the business so it's not logical to assume that you would see an absolute reduction in expense of $14 million, '07, '08; is that fair?

That is correct. As I said there are other -- obviously we can't look at this in a vacuum.

Great, thank you.

Thank you. Our next question comes from Fred Searby from JPMorgan.

This is Jason for Fred. Just wondering what was organic growth in the quarter.

Organic growth in the quarter?

Yes.

For the Company?

For the Company as a whole.

I mean, basically what the reported number is.

Okay, no acquisition impact, okay.

No.

Thank you very much.

(OPERATOR INSTRUCTIONS) Our next question comes from [Avi Steiner] from KBC Financial.

Thanks for taking the question, guys. Several here. First off, did I hear correctly that San Diego is a one week impact and did I hear the number under $1 million and then I have got a couple of follows. Thank you.

Avi, the fires aren't out yet. The best -- to the best of our knowledge, we know that next week's revenue, because no one was doing much this week except evacuating their homes, will be significantly light of what the average week is, and the variance we're expecting to be under $1 million.

Thank you, and a couple other things here. Could you just talk about the financials and how we should think about that vertical going forward and can you also talk about if you have that available, how you performed or how the results were overall and maybe by the two silos in the last recession or last ad recession? And then I've got one last follow-up. Thanks a lot.

In the financial vertical, as we discussed earlier, this has been a vertical that has been challenging for us. In this quarter we certainly had some kind of, we're still fighting against the year-over-year loss of a large financial customer that we had talked about last year, that will still happen in the fourth quarter as well, we'll be coming against that.

When does that cycle through, I apologize?

That will cycle through at the end of this year I believe.

Okay.

We also, we do not have revenue out of the -- the acquisition -- the selling a business that had financial revenues, that goes away in the fourth quarter, but we are seeing some weakness in primarily right now the credit card business as a result of what's happening in the credit markets and the spillover from the subprime it's also now impacting credit card.

Okay, and then the recession question?

Recession, the last recession was at least the one I remember was 2001, 2002, into 2003. Our Shopper business performed as if no one told them there was a recession. We grew top line over 6% during that period of time and bottom line even greater than that. Our Direct Marketing business during the last recession, we did have revenue deterioration at the top line, about 9% from 2000, 2001 and another 4% from '01 to '02.

Okay, that's helpful, and then very last thing, somewhat bigger picture, so you clearly don't have a ton of leverage here, not a ton of debt and you've been buying back shares and paying the dividend. I'm wondering, do you look at or potentially consider acquisitions maybe to grow scale in either one of your two silos? Thanks a lot.

Yes, we certainly -- this Company has a history of acquisitions. We certainly continue to look at acquisitions. In terms of scale, our Shopper business is a local geographic business. We have scale in the geographic markets that we're in, so there really are no benefits of scale from acquisitions in the Shopper business.

How about moving into new markets or maybe looking at part of a business out of a [Velassis] or something like that?

New markets, we would certainly look at acquisitions of Shoppers and Shopper-like properties in new markets, if they were of a large enough size and they had enough of a franchise and a brand, we did buy Tampa about two and a half years ago, so yes, we'll look at those opportunities.

Okay, thanks a lot, guys.

Thank you. We have another question from Mr. Fred Searby from JPMorgan.

Thank you, Dean. A couple questions, just can you give us, I don't know if this has been asked but the interactive revenues for Shoppers and what the growth rate was there as a percent? And then secondly, just to drill down a little bit on the financial category, it wasn't great but it probably wasn't as bad as some people might have thought it would be. Can you give us some sense as to what really, which verticals in financial you're serving and what the trends are there?

Okay, Fred on the digital revenue side we have not reported what our digital revenue is. We're certainly tracking it internally but there are all kinds of questions. If you buy a print ad in our publications you get up on the website, some newspaper companies allocate a purchase price. We do not. We count it all as print revenue. So the only revenue we're counting is incremental revenue from upsells, so we have not disclosed the digital revenue. It is as I said earlier in the call that percentage increases can fool you so I won't tell you what the percentage increase, but we have good traction but they are very small numbers right now on this pure digital revenue. The second question, Fred, I think you asked about drilling down on the financial side of it.

Yes.

We had very little direct exposure to mortgage, so that really hasn't impacted us. I have mentioned a couple of times now the loss of the customer that continued to impact in the quarter, the sale of the business that impacted in the quarter and weakness in the credit card side of the business. We have shown some pretty good results out of the insurance side of the business.

And just on the credit card, I mean, everyone's talking about this, that there's kind of a freeze there. Can you give us a sense or do you have any indication from any clients when they will pick that up or is it like everyone else, waiting for the dust to settle, no idea whether that's in a quarter or two or a year or two from now?

Yes, let me tell you a couple of things. First of all of our financial vertical, credit card is well below half of the revenue and it's actually below a quarter of the revenue in our financial vertical, so certainly there's an impact, can be some impact there, but it's not one of our larger subcategories, if you will. But to answer your question, I don't know about what's going to happen specifically in that market in terms of the future.

Okay, thank you.

Thank you. Our next question comes from Troy Mastin from William Blair & Company.

Yes, hi. A couple quick ones. Can you give us an update on the search for your replacement , Dean, as

It is still ongoing.

Okay, nothing, do you have an expected timeline or anything or just stay tuned?

Stay tuned.

Okay, and what's your feeling on the leverage level you're comfortable with? You're still pretty lightly levered. You did say you continue to buyback stock. I'm just curious if that's changed at all? I've heard you talk about some numbers in the past. Do you care to comment there?

In terms of comfortable, we're certainly comfortable at our current leverage level and we would be comfortable at a higher one. We added about one turn of leverage over the past 18 months and we certainly would be comfortable adding that amount over 18 months or less. Okay, and then finally in terms of competition for Shoppers, have you seen any of the competitors in those markets falling away going out of business and what does that mean long term for the Shoppers business if you have seen it? There's a lot of churn in the competition. There are things that pop-up. There are things that disappear. These are primarily rack products or mailed four color glossy products. A lot of these are new businesses. We know the impact on us, the impact of new entrants is usually worse than that. We've got a business that delivered this quarter. We still got a business that delivered $105 million of revenue this quarter and $20 million of EBITDA, so this is a big, good business. Some of our competitors are much more thinly capitalized, and don't have that kind of scale.

Has there been a mass exodus or even a minor exodus from the business from what you've seen?

I certainly wouldn't characterize it as a mass exodus right now, but I think it's pretty confusing in the market right now.

Okay. Thank you very much.

Thank you. Now I'd like to turn the conference back over to Mr. Hochhauser for closing comments, sir?

Thank you, we appreciate all of your questions and Dean for those answers. Have a great day.

Thanks, everyone.