Harte Hanks Inc (HHS) 2008 Q1 法說會逐字稿

Welcome and thank you for joining the Harte-Hanks Q1 2008 earnings 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 will turn the meeting over to Mr. Dean Blythe, President and CEO of Harte-Hanks. Sir, you may begin.

Good morning. On the call with me today is Doug Shepard, our Executive Vice President and Chief Financial Officer; Jessica Huff, our Vice President, Finance, and Controller; and Bryan Pechersky, our Senior Vice President, General Counsel, and Secretary.

Before I begin with my remarks, Bryan will make a few brief statements.

Thanks, Dean. Our call will include forward-looking statements. Examples may include statements about our strategies, initiatives, and business plans, financial outlook, competitive factors, business and industry expectations, and other statements that are not 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 these risks and uncertainties 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 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 will now turn the call back over to Dean.

Thanks, Bryan. Much like 2007, the first quarter of 2008 was a tale of two businesses for Harte-Hanks. Our Direct Marketing business continued its steady top-line growth in the quarter, and profits grew in line with this revenue growth.

For anyone who can read, has an Internet connection, or owns a TV, it's no surprise that the external environment is confusing and gives plenty of pause for caution. While we have maintained a very steady revenue growth rate in Direct Marketing for the last eight quarters, we are seeing certain customers, particularly in the retail and financial verticals, pull back on planned spending.

Growth from other customers and in other categories, however, has more than offset these reductions. We continue to view our Direct Marketing business as a market-leading vibrant business with very positive long-term potential.

Our Shoppers business continues to be under extreme pressure. It is well documented that California and Florida where we operate have been devastated by the collapse of the residential real estate markets. Consumer spending in these markets has now slowed significantly, impacting virtually every category of advertiser we have.

This has been a long and steep decline for Shoppers. But with our unique, highly-effective product that has delivered outstanding results for advertisers for decades, we believe in the fundamental long-term strength and franchise value of this business and that this business will show its resiliency when the conditions in the California and Florida markets stabilize and subside.

Given the deterioration in Shoppers' results and the overall general uncertainty, we're continuing to focus on removing costs from our businesses. At Shoppers in the first quarter we reduced the workforce by a further 5% for a total year-over-year headcount reduction of over 12%. We're also reviewing our cost structure in Direct Marketing, and have already taken some actions, and will continue to look for other places to reduce costs.

The fundamental services we provide in each of our businesses are essential to customers in any economic environment and even more so in the uncertain economic times that we are facing. We will aggressively pursue market opportunities that we generate and discover, and continue our vigilance to anticipate and respond quickly to market conditions.

While the external environment is nerve-wracking and our Shoppers business continues to decline in the face of terrible local market conditions, we believe that Direct Marketing and Shoppers are valuable, fundamentally sound businesses.

Doug Shepard will now give you some more detail on our results. Doug?

Thank you, Dean. Good morning. Here is a companywide overview of the first quarter. Revenue decreased 5.1% for the quarter, with an increase in revenues for Direct Marketing and a decrease in Shoppers.

Direct Marketing revenue increased 4.6% for the quarter compared to 4.2% in the first quarter of 2007. Direct Marketing revenues has increased 16 of the last 17 quarters. Shoppers revenue decreased 20.1% for the quarter.

Moving next to operating income, it decreased 28.5% for the quarter. For the quarter Direct Marketing had an operating income growth of 4%, while Shoppers declined 58.9%.

In February, we incurred approximately $1.4 million of severance costs within our Shoppers division as we removed over 100 associates. Shoppers' operating income was 8.6% for the first quarter; and adjusted for severance costs, our operating margin would have been 10.2%.

For the first quarter, our free cash flow was $16.7 million versus $23.7 million in the first quarter of 2007. We spent $6.7 million in capital expenditures compared to $7 million in the first quarter of 2007.

Turning to our two businesses, for the first quarter 2008 our Direct Marketing revenue increased 4.6% and operating income increased 4%, resulting in an operating income margin of 11.9% for the first quarter of 2008, which was the same operating margin as the first quarter of 2007.

In the first quarter, our high-tech telecom vertical market represented 30% of Direct Marketing revenue. Retail was 22%; select markets were 19%; financial was 17%; and healthcare pharma was 12%.

Our top 25 Direct Marketing customers represented approximately 42% of Direct Marketing revenue in the first quarter. Our largest customer in the quarter represented almost 7% of our total Direct Marketing revenue.

Turning to Shoppers, our first-quarter revenue decreased by 20.1%. Operating income margin for the quarter declined to 8.6% as compared to 16.8% for the first quarter of 2007.

Our first-quarter effective tax rate was 36.8% compared to 38.7% in the first quarter of 2007. We recognized some state tax benefits which reduced the effective tax rate compared to the first quarter of 2007. We anticipate our effective tax rate for the remaining quarters of the year will be comparable to the 2007 quarterly effective tax rates.

On the balance sheet, at March 31 we were showing a debt balance of $321.3 million and a cash balance of $27.6 million for a net debt balance of $293.7 million. Net account receivables were $171.5 million versus $199.2 million at December 31, 2007. Days sales outstanding at the end of March 2008 was 59 days, a slight increase over the 57 days outstanding at March 2007.

Looking at our statement of cash flows, net cash provided by our operating activities for the quarter was $37 million compared to $43.2 million in the first quarter of 2007.

We repurchased 4.9 million shares for $76.6 million during the quarter. We have approximately 10.5 million shares remaining from a repurchase authorization as of March 31.

In March, we announced we entered into a $100 million term loan facility. Our new term loan is a four-year facility at an all-in rate of LIBOR plus a range of 50 to 100 basis points based on our leverage ratio. Upon issuance of this facility, we retired a $50 million bridge revolver dated January 18, 2008.

In summary, as of the end of March our debt facilities consisted of a $125 million revolver, an $185 million term loan, and a new $100 million term facility. As of March 31, we had approximately $89 million in available borrowing capacity under our revolver and the $100 million term loan.

With that, operator, we will turn the call over to questions.

(OPERATOR INSTRUCTIONS) Troy Mastin, William Blair & Company.

Thank you. I'm curious why the high-tech telecom vertical was so strong in the quarter in Direct Marketing. If there was a particular customer there, a new business win, or maybe a subcategory that was strong.

Troy, this is Dean. From a category perspective, it was the high-tech sector that drove that, and the high-tech sector is a larger part of that. There were probably about four to six big customers that had good growth. So it was more -- it was widespread, it was existing customer spending growing in that vertical.

Is this the kind of growth that can continue? Or do we have a tough comp coming up? I am just thinking about Direct Marketing growth going forward. If this verticals stays strong, maybe you can kind of hold in similar growth rates going forward. Or if you have got a tough comp, is there a risk of a deceleration here?

Are you talking about the vertical, Troy, or the overall?

Well, it seems like that vertical drove most of the growth of the overall business. I don't know if you have got a tough comp that we should be thinking about, or if there is some reason these clients might not grow as robustly to where you might face a deceleration in Direct Marketing business in the next few quarters.

Yes, certainly high-tech was the driver of the growth in this quarter. I don't anticipate that we have any particularly tough comps coming up. But obviously to generate growth longer-term, we need to have more players contributing to that growth rate. So we do need to get some of the other verticals growing in order to generate sustained growth over time.

Okay, good. Then, on the Shoppers business, it seems like others -- maybe some newspaper companies and other media companies -- have suggested that things deteriorated a bit through the quarter. I'm curious if you saw the pace of business through the quarter get worse, and how it has looked so far in April.

Well, Troy, the business is seasonal; and first quarter and fourth quarter are the weaker quarters of the four. January particularly is always a very weak month. So there is seasonality within the business.

We did -- while our revenues were down in the quarter, the seasonality within the quarter did reflect what we have seen historically. I'm not suggesting that means that we have turned the corner by any stretch of the imagination, but March -- there was more revenue in March than there was in January, which typically is the case.

In terms of year-over-year, though, performance, if you think about it on a monthly basis, was there much variation through the quarter?

There really was not, no significant trend throughout the quarter.

Okay, good. Then as you think about circulation in Shoppers, I don't think you have announced any additional cuts follow-on to the ones you did last year.

Is that something -- I am sure it is in the consideration set. But what might need to happen in order for you to consider or to actually act on another circulation cut? And what might that mean for margins if you were to do another cut?

I'm sorry, Troy, so you said circulation?

Right, you cut circulation last year in Shoppers. I'm sure you would consider it again if you needed to. I am just curious what would have to happen for you to consider another circulation cut and what that might mean for margins.

Well, we evaluate circulation on a continuous basis. You have to remember that there is certainly -- there is more profitable and less profitable circulation, and we still have certain areas that are unprofitable in circulation.

But you're not always going to have 100%. We have over 1,000 zones. You are not always going to have 100% of your circulation making money.

So we're going to consider circulation; but I do not anticipate that we will take any further circulation reductions this year of the magnitude that we took last year.

Okay. Then on your severance in Shoppers, it sounds like that all hit in the Shoppers unit. I just want to confirm where it hit on your P&L as you reported, if it was all in payroll or if some of it landed in SG&A.

It's all in the labor line.

Okay, and what about cash versus noncash?

I'm sorry, cash versus noncash?

Was it all cash incurred in the quarter? Or were there are some reserves that (technical difficulty) . Did it all hit the cash-flow statement, the (multiple

Yes, yes.

Okay. Is there additional severance probable in the next couple of quarters in Shoppers? How much further might you be able to go before you start to cut into the muscle and bone of the organization?

You know, Troy, we're going to operate the business in the most efficient and effective manner we can. We're going to -- the revenue picture will determine some of that, so there may be additional severance as we move forward, and performance will dictate that.

You know, the revenue performance will also dictate how much more we can operate. There are still things that we can do and still have a vibrant business.

Okay, good. I will let someone else ask questions. Thanks.

Karl Choi of Merrill Lynch.

Hi, good morning. I have a couple of questions. One in Direct Marketing. I am curious about something that you have in the press release talking about maybe having a better margin performance going forward. Just wondering if that is related to some of your cost reduction efforts that you recently took.

Should we -- sort of similar to Troy's question -- should we expect severance in the Direct Marketing business in the second quarter?

You know, we have taken -- we have looked at our business in Direct Marketing. We have taken some actions. Some actions were actually taken after quarter close, and there are expenses associated with that in terms of severance.

Those actions and others that we will review and take as we go forward we anticipate will lead us to deliver greater profitability on our revenue. So yes, I do think we will see improved margins based on specific actions we're taking.

Any way to size the amount of severance that will be coming?

Really at this point, no. It will probably be of a magnitude in the vicinity of where we saw in the Shoppers business or less, I would guess.

In Q1?

Correct.

Okay. Doug, in the Shoppers business, could you remind, refresh our memory, how quickly you are going to be seeing the impact of the recent paper price increases? I see to recall it hits your results with a little bit of a lag.

And also just want to confirm that postage will also rise by 3% for you.

Yes, postage does -- is increasing May, end of May, I believe, in that range.

Your other question about paper prices, yes, we do -- some of our contracts with vendors there is somewhat of a lag in paper prices. But we do expect paper prices to begin impacting us in Q3, if not a little sooner.

Great, thank you.

Paul Ginocchio of Deutsche Bank.

Thank you. I think McClatchy said that they were looking for in the second quarter similar declines in the first quarter. They've got a lot of Florida and California exposure. Do you think that is possible with the Shoppers division? Or I guess what is the outlook right now? Thank you.

This is a business we have Friday deadlines, and so next Friday I will tell you -- I will know what the revenue is for this week. Or for next week, this coming Friday. Visibility is difficult in the business and predicting revenue going-forward basis is very difficult.

I would certainly hope and expect that we can firm up some revenue as we move through the year at least on a comp basis as we face easier comps.

Thank you.

Alexia Quadrani of Bear Stearns.

Dean, just following up on that question right there, I guess what you have seen in just the first couple weeks of April, we should assume then that what you've seen so far in Q1 is sort of trending into April, and understanding that obviously we don't have that much data about Q2 yet.

Are you talking about on the Shoppers' business, Alexia?

I'm sorry, yes, the question's [just] on the Shoppers' business.

Yes, I mean, you know, let's put it this way. We haven't seen anything that is a marked change from what's gone on up through the first quarter.

Then California versus Florida, are they trending pretty similarly? Or is there one market worse than the other?

From a revenue perspective they're trending similarly.

Then just changing gears looking at Direct Marketing for a minute, you've obviously had some very good solid growth in that market, in that segment, despite what is going on externally.

Would you just give us a bit more color whether the type of work you're doing for your clients in Direct Marketing has changed at all over the last several quarters as the economy has gotten worse?

Or in terms of which elements of Direct Marketing they tend to be using more than others. I'm just trying to get a sense of whether or not your clients have sort of adjusted their marketing plans for this environment, or have not yet done so yet.

As I mentioned in my remarks, we clearly have seen some financial customers adjust their anticipated spending and what they're doing. I think a lot of the acquisition work has declined in that vertical.

Retailers? Again, you've seen a lot of -- in the market, a handful of bankruptcies already in 2008 and rumored or projected bankruptcies in that market.

So I think those two we're see the most impact in terms -- not impact. The most activity in terms of marketers adjusting to the environment.

But I guess the other core has been more of the same, just maybe --?

Are you talking about service lines?

Yes, I am talking about service lines.

We always have variations in service lines revenue from quarter-to-quarter, but no marked trends over the last two or three quarters.

Okay, thank you.

Edward Atorino of Benchmark.

Thank you. First, what were those shares at the end of the quarter? (inaudible) the average shares for the quarter, what were the shares at the end of the quarter?

I'm sorry, Ed. It was the actual shares -- you want diluted?

Both would be good.

Okay, 63 -- it's a little over 63 million.

Diluted?

Actual shares.

Actual, and then fully diluted would be a couple more? Whatever. I will figure that out.

Second, it looks like the costs in the Direct Marketing were up about 5% for the quarter. Is that a little bit higher than I would have thought, I think. Is that a number that you can't bring down a little bit? Or can we hope to see a little better cost management going forward?

You will see better going forward. It was under 5% increase.

I guess my calculation was wrong. Anyway, sorry.

It was about 4.6%.

That's right, 4.6%. I was looking at the wrong one.

Some of that was -- we also had an acquisition in there which had basically a little lower margins. That was a couple of technical point.

But yes, as I said, both in the press release and in prepared remarks and in response to a question, we are looking at all of our businesses given the uncertainty. We have taken action, and we do expect to be able to drive improved profitability on that business.

Okie-doke. Thanks.

Dan Salmon of BMO Capital Markets.

Great, thanks for taking my call. You guys have been very upfront about the lack of visibility in the Shoppers business, and rightfully so.

On the Direct Marketing side, not to say that there is necessarily a lot more visibility there, but are there any certain catalysts you can point us to on how that business -- although it has been doing quite well consistently -- could perhaps move up even further?

Then the second question, obviously strong share repurchase this quarter. How should we think about where you start to max out on that in terms of leverage levels? Okay? Thank you.

Okay, Dan, just to make sure that I got it, the first question was -- did you have a Shoppers question or was it a Direct Marketing question?

No, on Direct Marketing, anything that you could point to for us to understand how that business would not only continue consistently well, but perhaps even perform a little bit better.

From a top-line perspective?

Mainly, yes.

You know, well we can -- you know, we do have better visibility in that business, somewhat. Just the business itself has better visibility than our Shoppers' business because of the business model.

But the visibility is not -- it's based on conversations with our customers and plans that our customers have, which can change over time.

Right.

In fact, actually we had some revenue declines in 2001. We had visibility and what we saw were customers changing plans as they moved forward.

So our visibility today looks good, but we're obviously cautious given when you pick up the paper every day, when Starbucks is saying coffee sales are down because of the housing market, as I said, it gives pause for caution.

We can certainly -- our revenue growth is a combination of existing customer spending and new business that we bring in. I don't really know -- and it would be a combination of those, particularly if we can get more -- looking for more growth out of our existing customer base to drive performance above and beyond what we've been seeing.

Okay, and on the share repurchases?

We did -- we repurchased 4.9 million shares, I believe in the quarter. You know, we believe, given the current prices that we're seeing in the market, there's probably no better use of our free cash flow.

The financing markets are very difficult right now. So it's not a -- sometimes it's less a question of leverage than it's a question of credit availability out there in the market, on terms that you want to sign up for, for a longer-term period.

But we do believe use of our free cash flow to buy back shares is appropriate given current prices.

Okay, thank you. That is very helpful.

Michael Kupinski of Noble Financial.

Thank you for taking the question. Can you remind me how much of the revenue decrease in the first quarter in Shoppers was from circulation cuts last year?

I think it was about 2%, Mike.

Okay. Then, Direct Marketing, I know a lot of people have been trying to ask questions about what your thoughts are going into the second quarter. Direct Marketing faces an easier comp in the second quarter given a termination fee in 2006.

Can you give us some color on how business is pacing in the second quarter? Is it in line with the first-quarter growth?

Okay, Mike, you've grown me on the comp question, I'm not sure I --

I was just saying that the second quarter is facing an easier comp. You posted like 4.6% revenue growth in the first quarter versus 4.2% a year earlier. I was just wondering, are you pacing at the level of the first-quarter growth going into the second quarter? Are you seeing stronger growth?

Well, we don't -- I'm not here to project revenue for Q2. I just want to caution, though, that absent the termination fee in '06, which was two years ago, our revenue growth in Q2 was similar to the -- in '07 was similar to the revenue growth in Q1. So I don't think --

Right, I think I had it as a core like 5.3% core growth.

Yes, I was going to say somewhere in the 4% range, and we had 4% -- I think it was basically the same -- '07 revenue growth adjusting for that onetime fee was the same in Q1 as it was in Q2.

I'm just saying we don't necessarily view that as, quote, an easier comp.

Okay. There was a significant acceleration in the rate of growth in the first quarter from the sequential growth from the fourth quarter. Typically I think that you guys do sell some software sales in the fourth quarter. Is that right? Like the Trillium software sales, doesn't that usually fall in the fourth quarter?

Okay, I'm sorry, Mike, again the percentage growth rate in Q4 was 4.1% and the percentage growth rate in Q1 was 4.6%.

Right, so it's --

The absolute dollars declined by $25 million.

Right.

(multiple speakers) seasonality.

Yes, (technical difficulty) seasonality, right?

Yes, that's all seasonality, because primarily driven by retail in the fourth quarter versus Q1.

Right. I guess my question is -- were there any extraordinary items in the first quarter like software sales, things like that, that would have kind of accounted for a little bit of that boost in revenue growth in the first quarter?

Well, we did have an acquisition that added about a point or so of growth in the quarter. But other than that, no.

Okay, all right. Thank you very much.

(OPERATOR INSTRUCTIONS) Mark Bacurin of Robert W. Baird.

Good morning. Most of my questions have been answered. But I guess to dig in on the high-tech telecom vertical for a second, if I'm doing the math correctly, it looks like that business was up something north of 20%. I know you said it was pretty broad-based with five or six customers.

But I was hoping maybe you could drill down on specifically within that vertical where the demand is coming from. Is it wireless carriers, is it PC?

And then the nature of the work in terms of is this recurring once a month type mailings that you're doing, or is it more project based, building databases etc.?

Mark, as I said earlier, it's more in the -- it's in the high-tech side as opposed to the telecom wireless side. Well, actually, there is a little bit of both that we've got there.

It's a mixture of work in terms of it's related -- there is some wireless in there. There is some gaming in there. There is some infrastructure vis-a-vis routers and things in there. There is a mixture of stuff from the type of business that we're doing within that vertical. I'm sorry, Mark, what --?

Yes, the other was just the nature of the types of projects. Is it kind of front-end project (multiple speakers)?

(multiple speakers) This is more recurring type of work as opposed to onetime work.

Okay, perfect. Then within the healthcare pharma vertical, obviously seeing I guess a drop-off there. Is that a nature of some tougher comps from last year? Or are you actually seeing contraction in spending among some of your bigger customers there?

Again, I think it was said in the release that it's driven by -- the decline was primarily driven by the healthcare side of that. You know, the work we primarily do in that relates to membership and enrollment work. That has taken a decline for a variety of reasons including customers spending less, including some lost customers, including some declines in work.

You know, on the pharmaceutical side was better in the quarter. That was a mixture of customers up and down. Some impact of some recent news in terms of drugs has impacted some of the revenue in that vertical. But over time, we still feel good about that vertical, that it did have a difficult quarter.

Great. Then I guess just finally, I know you don't want to give specific guidance. But I'm just -- as you are looking at the margins both in Direct Marketing and then Shoppers, are there specific levels at which -- obviously the revenue side is a bit unclear at this point. But are there targeted margin levels that you're hoping to achieve? Where -- I guess thinking about taking more aggressive cost actions to get margins to a certain level if revenue trends continue to deteriorate beyond where they are today.

I think I made comments about Direct Marketing margins. If you look historically at our margins in Direct Marketing, Q1 historically has been the lowest level throughout the year, given the way the revenue lays out over the year and the seasonality of the business.

The Shoppers business, obviously, we have had a significant amount of margin deterioration. We're taking -- we have taken actions that will hope -- will alleviate some of that. But a lot of that will depend upon the rates of revenue decline and whether those start to lessen and eventually go to flat.

Is there any reason to think that business long-term can't get back to a 20-ish-%-type operating margin? Obviously not over the next year or two, probably, but --

You know, fundamentally, yes. If we can get back to the revenue levels we've seen, fundamentally we can get back to those margin levels. We can probably get back to those margin levels with less revenue as we move forward, but we're going to have to see revenue stability first and then revenue growth in order to achieve those margins.

Okay, thanks.

Edward Atorino of Benchmark.

If you look on a sort of a quarter-to-quarter basis, you have been taking out about $11 million, $12 million, $13 million in costs per quarter now for the last three quarters in the Shoppers business.

Are you getting sort of near a point where you have hit sort of a bottom in terms of the ability to take out costs? I mean, you are running fourth quarter $83 million; first quarter $80 million; so you're sort of in that $80 million range.

Is there more room to take costs out of the Shoppers business? I presume there is; I'm trying to guess how much more room.

Ed, there is certainly room to take more costs out, and we're continuing to work on things, both productivity enhancements as well as other variable costs that we have.

I don't think it answered. Can you take out $12 million more per quarter?

$12 million more per quarter?

Yes, if you look at $80 million cost -- actually I think I took out the onetime. No, roughly $80 million. Well, you got a little charge in there.

So if you take the charge out, it's actually down about the first-quarter '08 $80 million in operating expenses versus $93 million a year ago and that included the $1.7 million. So you've done a remarkable and tremendous job in getting costs out. I'm just wondering if that can go on.

Ed, obviously over time it gets more difficult, but we're still working on the problem. Some of the cost is variable associated with the revenue.

Oh, yes.

So you have paper costs, you have some postage costs that is variable in terms of overweight postage. To the extent that we have less revenue, then we publish fewer pages, which means we have less (multiple speakers).

Save some paper, right. Let me ask the question a different way. If I look at the -- I mean, can you run this business to a 10% margin even in dire top-line circumstances?

Yes.

Okay, thanks.

Troy Mastin of William Blair & Company.

You may have kind of answered this in the last question, but I will ask it anyway. So it looks like by my math you lost about -- if you look at your revenue decline in Shoppers year-over-year, about 40% of the revenue decline you lost in operating profit.

Is that a reasonable expectation at least for the nearer term, that for every lost revenue dollar in Shoppers you will lose about $0.40 in operating profit, say over the next year or so?

Look at the last five quarters. Q1 of '07 we lost $1.05 for every $1.00 of revenue. Q2 we lost $0.68. Q3, I think we got it down to about $0.30. In Q4, about $0.28. It bumped back up to about $0.43.

So don't -- it's going to bounce around and it is going to depend on the absolute rate of revenue differential, of revenue variance. But yes, I would -- our goal is to get that number down as low as possible, and it is going to depend upon the rate of revenue variance.

But if you're in a similar range of revenue declines for the next few quarters, those are reasonable numbers. I mean, it's going to bounce around, but those are reasonable numbers that you just gave. Fair statement?

Well, I just gave you a range between $1.05 and $0.28.

I am ignoring the $1.05. How about between $0.68 and $0.28?

Yes.

Okay. Then on Shoppers, how is pricing and how is the competitive landscape there?

Well, in a market where our competitors as best we can tell are not doing any better than we are -- and we know some of them are doing worse -- you can imagine there is -- obviously the competition for revenue is intense. We are seeing -- we are having -- part of the margin decline is related to pricing in Shoppers.

We are, particularly in the distribution side of the business where there are more direct competitors, we are seeing pricing impacted on that level more than the ROP side. But yes, the competition is fierce.

Can you give some order or magnitude maybe for the whole portfolio of how much price is down versus other factors?

In terms of --? There is too much movement and variability within that. It's the volumes, it's revenue volumes that are going down, impacting our performance much more than pricing. But there is an element of pricing in there.

I guess there is probably not precedent for this, but I'm curious how -- if the environment gets better, how easy it might be to get price back. How easy you think it might be.

You know, Troy, we'll worry about that when that happens, and that will be a good problem for us to solve.

There are too many variables to predict how that will happen in terms of pricing. But I suspect there will be -- when this is all over, and it will end, there will be fewer competitors out there than there are today, which may have a positive impact on pricing.

Okay. Then a final one on the Direct Marketing business. You mentioned the retail and financial verticals pulling back. Those two segments were flat in the quarter. I'm curious if you can give some order of magnitude of how much of a pullback there its.

So there must be some new business in there or there must be some organic growth among other competitors, those that aren't pulling back. Just some idea of how much of a pullback we are seeing in some of yours that are pulling back.

As you said, those verticals were flat. While we have seen some customers change their spending, we have seen others within those verticals grow. We have gotten some new business in both of those verticals, and they have offset the declines.

You know, as I said, it's the acquisition people primarily. The interesting thing about our financial vertical is that we haven't -- we've struggled in that vertical for a number of years, I guess. When we looked at -- when everyone else in financial was doing really well, it was being driven by mortgage and credit card.

Today -- and we never were big players in the mortgage and relatively not very big players in credit card as well. So as those are the two hardest hit in the financial, so I guess we're benefiting. We didn't participate in the upside of that, and we're benefiting today that we don't have a lot of that business that we're losing.

Okay, thanks.

Rajat Sethi, Newbrook.

Going back to the margin question, can you tell us why the margins went down year-on-year basis in Direct Marketing?

They didn't. They were at 11.9% in Q1, 11.9% in Q1 of last year.

So if I'm looking at the EBITDA margins for the charges, what is the EBITDA number in Q1 of '07?

It was higher than it was in Q1 of '08. (multiple speakers)

So you have seen the margins actually went up on a year-over-year basis?

(multiple speakers) talking about the OI margins. I was --

The EBITDA margins.

I'm sorry?

The EBITDA margins.

Right.

It seems like they went from 16.2% to 15.7%.

Yes, they did.

And why? And how should we think about margins going -- why did that happen and how should we think about it going forward?

As I talked earlier, thinking about it on a going-forward basis, we are looking to drive improved profitability in that business. We're taking action and I anticipate more leverage out of the revenue are seeing on a going-forward basis.

Great. Why did the margins go down again on an EBITDA basis?

Well, because we had more expense that we -- had more expenses than we should have.

Okay, thanks.

Karl Choi of Merrill Lynch.

Hi, just want to follow up on the question on share buyback, knowing that you intend to use if not all, most of your free cash flow towards buyback at this point, given where the stock prices are.

But should we expect the pace of buyback at least near term to be similar to the first quarter, given where your stock price is?

Karl, I mentioned about the financing side of the equation as opposed to the leverage side of the equation. I think Doug gave you a recap of where our financing is.

So you probably on a going-forward basis, until the credit markets stabilize, I'd probably -- we probably won't see the level of repurchase that we've seen over the last few quarters.

But I did mention kind of our use of free cash flow now as a way for us to buy back shares, whereas over the past several quarters we have used both free cash flow and some increased leverage to do that.

Right, so we should expect you would not be necessarily borrowing to buy back shares, but just using your free cash flow basically?

I think so, yes, at least in the near term.

Okay, great. Thanks.

I would now like to turn the call back over to Mr. Blythe for closing comments.

That's all. Thank you all everyone.