Thryv Holdings Inc (THRY) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, welcome to R.H. Donnelly's first quarter 2003 results investor teleconference.

At this time all participants are in a listen only mode. Later we will conduct a question and answer session.

Copies of R.H. Donnelly's SEC filings may be obtained by contacting the company. It's website or the SEC website at www.sec.gov. This transmission is the property of RH. Donnelly Corporation.

Any retransmission without the express consent of the company is strictly prohibited. Please note that today's teleconference call is being recorded, as well as webcast live over the company's website at www.rhd.com. I'd now like to turn the call over to Mr. Frank Colarusso, Sir you may begin. Thank you, and good morning everyone.

I'm Frank Colarusso, Vice President and Treasurer at R.H. Donnelly. On the call today are Dave Swanson, Chairman and Chief Executive Officer, Steve Blondy, Senior Vice President and Chief Financial Officer, and Bill Drexler, Vice President and Controller. Certain statements made today may be forward looking within the meaning of the Private Securities Litigation Reform Act.

We call your attention to our press release for the quarter ended March 31, 2003, and our 8- K, both filed yesterday, May 1.

We also encourage you to review the company's other periodic filings with the SEC, which sets forth important factors that could cause actual results to differ materially from those contained in or suggested by any forward looking statements.

During this call today, we'll refer to several non-GAAP financial measures in discussing the company's performance. You can find additional information about these measures, and a reconciliation between these measures the most comparable GAAP measures in our 8-K ton website under investor information. With that said, I'll turn the call over to Dave Swanson.

Thank you, Frank. Good morning everyone, and welcome to R.H. Donnelly's first quarter investor call.

I'm going to take the next few minutes to provide you with a brief review of our first quarter performance and operational highlight, as well as some background on the progress with the integration effort. Then Steve Blondy will take us through the company's first quarter reports in detail and confirm our 2003 guidance. We'll be happy to answer your questions following our prepared remarks.

For those of you new to R.H. Donnelly, let me start by saying we are a dramatically different company than we were just a few months ago. On January 3, we closed the acquisition of Sprint Publishing and Advertising. The acquisition creates new opportunities for our company that should positively affect our underlying operational and financial performance, and generate sustainable gains in shareholder value. To that end, I'm pleased to say we're making significant progress with our integration effort.

For the first quarter, our business performed much as we expected. With adjusted EBITDA of $98.6 million and adjusted first quarter net income of $18.4 million, or 57 cents per share. We reported adjusted cash earnings of $1.19 per share and free cash flow of $2.18 per share. All indications are that we're firmly on track with our business plan to meet our full year performance targets. Later on, Steve will run through all the numbers.

With the Sprint Publishing and Advertising acquisition, we're now the official phone book in 18 states and all markets where Sprint operates as the local telephone provider. R.H. Donnelly now publishes 260 Sprint branded directories with a total circulation exceeding 18 million copies, servicing 160,000 local and 4,000 national advertisers.

Publications sales for the first quarter Sprint branded directories was $145.1 million, a 1.4% increase. These publications, which were sold primarily in the third and fourth quarters of 2002, benefited from increased advertiser renewal rates and solid performance in our larger Nevada and Florida markets. The overall increase was held down by weaker performance in smaller, Midwestern and eastern markets where economic growth continues to lag the South and West.

Sales into directories that will publish in the second quarter are likely to show only modest growth, as they were affected by the pre-war and materially war sentiment. We also have several markets in the second quarter that contain military bases, such as Fort Bragg, Fort Hood.

All of these are second quarter publications, so personnel were being shipped out while we were trying to sell advertising. Our timing was rather unfortunate in those campaigns and needless to say, we didn't have strong showings in these markets and they make up nearly 25% of our second quarter revenue.

Now let's review our progress with the integration. First of all, there have been no surprises. The integration is proceeding as planned and our entire management team is very pleased with the results so far. Our long standing relationship with Sprint Publishing is helping to facilitate an efficient transition with minimum integration issues. Over the last 90 days we've begun to consolidate our prepress publishing, information technology, and corporate functions.

Head count reductions have begun and will continue over the next 15 months, dictated largely by publishing and information system migration activities necessary to put us on one common platform.

In late February, we announced plans to consolidate the majority of the company's publishing operations into our Raleigh, North Carolina facility and to close a facility in Tennessee by the end of the year. As we've said, the net of all these actions should reduce annual total operating expenses by approximately $20 million, a run rate we expect to achieve by the second half of 2004. Our first hundred-day plan for the sales operations has been to visit this time various acquired sales offices and assess the talent, the market environment and the operating processes.

Over the next two quarters we will begin implementing a standard set of processes over the entire footprint. This combined with some modest updraft in the economy lead us to expect improved performance later in the year. I'll remind that you the company will not begin to realize the impact of these process improvements on publication sales until late 2003, nor on reported revenue until 2004, due to the deferral revenue method.

Also remember, approximately 45% of 2003 publication sales were already serviced by the time we closed the acquisition. And by the close of the first quarter, approximately 70% of 2003 publication sales had been serviced. So, again, by time we get the process improvements in place, we'll be working on 2004 publications.

Now let me provide you with some operational highlights for DonTech, our perpetual partnership with SBC Communications, selling yellow pages advertising in Illinois and Northwest Indiana. For anyone new on this call, RH Donnelly does not report revenue from DonTech only our share of DonTech's income plus revenue participation income from SBC, which are both based on DonTech's calendar sales.

Calendar sales represent actual sales contracts signed in the quarter. Because DonTech is a sales agent versus a publisher, they areearn commissions on calendar sales instead of when the directory is published. For the first quarter 2003, calendar sales at DonTech were $85.3 million, up 4.3% compared to last year. This growth was driven largely by timing, and reflects an increase in the amount of advertising that was serviced in the quarter.

As a result, we expect lower servicing and calendar sales in Q2 as that timing adjusts. The increase in first quarter calendar sales combined with DonTech's continued efforts at cost control contributed to an operating income increase of 7.8%.

The outlook for DonTech is mixed. Two of our most significant leading indicators write-offs due to nonpayer of the advertising and days billing outstanding are showing the best trends at DonTech that we've seen in four years.

That would indicate that we will experience fewer cancellations as we move forward into the year. We had anticipated this and you're pleased to see it moving in that direction. On the flip side, however, new business startups, an important leading indicator for new business sales remains well below normal. And that likely means that new business sales will remain soft, and not improve to the extent that we had hoped.

As a result, we continue to expect flattish calendar sales and operating income from DonTech for the year. In summary, we are on track with the progress we've made this quarter in integrating the acquisition, reducing expenses, and growing the business.

And we're on track with your overall business and financial plan for 2003 and beyond, as we work to secure R.H. Donnelly's future in the leader in the attractive yellow pages industry.

Before turning the call over to Steve, I'd also like to report how delighted we are to welcome Nancy Cooper and David Viet to our Board of Directors. Nancy has business experience serving in senior management positions over the past 27 years with IMS Health, IBM, General Atlantic Partners, and Pitney-Bose. David has a keen understanding of the publishing and media industries, and adds an important set of experiences to our board.

He's served in senior management positions for many years as Pearson and Lazar. Both bring a fresh perspective and invaluable expertise to our company. Now, over to Steve.

Thanks, Dave. There's a few new people on the call so allow me to make some opening remarks before reviewing the quarter in detail, then we'll take your questions.

As a result of the SPA Acquisition, and the associated financing and accounting, there are dramatic differences between 2003 and 2002 GAAP results. Accordingly, we're presenting adjusted 2003 and adjusted pro forma 2002 results in order to better communicate underlying operational and financial performance for the company.

However, and let me emphasize, due to differences between Legacy, Sprint, and RHD accounting policies, adjusted 2003 performance is not strictly comparable to adjusted 2002 pro forma results on a quarterly basis.

Most noteworthy among the adjustments is removing the effects of purchasing accounting on our P&L. Our adjusted 2003 first quarter results include $131.6 million of deferred revenue and $26.6 million of deferred expenses, with respect to directories that were published prior to the acquisition, but due to purchase accounting, were not reported in our GAAP results.

The adjusted results also exclude the final noncash BCF charge of $38.3 million, related to the preferred stock issued as part of the acquisition financing. You can study the details of all adjustments in our 8-K filing yesterday.

Now, let's review our performance in the quarter. While our SPA integration activities have certainly required intense management focus, we're also pleased with first quarter operating performance. As Dave mentioned earlier, adjusted first quarter EBITDA was $98.6 million. During the quarter, the company also generated free cash flow of $86 million after Capex of $2.5 million.

Q1 cash flow was favorably impacted by the absence of bond interest and tax payments, which are due in the second quarter and later in the year. Net cash flow used in investing activities was approximately $352 million, besides Capex, this includes 2.24 billion of SPA purchase consideration, minus 1.89 billion of financing raised prior to year end and released from escrow in January.

Net cash provided by financing activities was $267 million in the quarter. This includes $587 million of proceeds from debt and convertible preferred stock, acquisition financing in January, net of $333 million of debt repaid in the quarter, of which $243 million was preacquisition debt refinanced in January, and $90 million was acquisition financing repaid from cash flow generated in the quarter.

Proceeds from stock option exercises were $12.8 million and at the end of the quarter, net debt was 2 billion $233 million. Adjusted revenue in the quarter was $143.5 million, down 0.8% from $144.6 million of adjusted pro forma revenue in last year's first quarter, largely reflecting the expiration of a previously announced third party prepress contract. Adjusted operating expenses in the quarter were $84.5 million, a decrease of 6.8% from $90.7 million adjusted pro forma expenses for the first quarter last year.

This decrease is largely due to the timing of expense recognition caused by the difference between Sprint and RHD accounting policies, but also reflects operating efficiencies, lower bad debt expense, and lower paper costs. Adjusted operating income before DonTech was $59 million, up 9.5% from adjusted pro forma, $53.9 million last year, largely due to the timing of expenses. Total partnership income at DonTech was $23.6 million, up 7.8% compared to $21.9 million for the first quarter last year.

The favorable results to prior year realized in the first quarter are also largely due to timing of campaign schedules in the first quarter. Turning now to our 2003 guidance, we continue to expect sales growth of approximately 1% for the Sprint branded directories, which should translate into flat revenue for the year.

At DonTech we expect calendar sales and income for the year to be flat. We continue to expect total consolidated EBITDA before purchase accounting adjustments of approximately $400 million, and adjusted operating income of approximately $335 million after depreciation and amortization expense of $65 million.

For the year, we still expect to generate cash flow from operations of $170 million and free cash flow of $150 million after capital expenditures and software investment of approximately $20 million. We anticipate cash interest expense of approximately $185 million, cash taxes of approximately $30 million, and working capital [inaudible] of approximately $15 million.

Assuming all free cash flow is used for debt repayment, at the end of 2003, debt should be under $2.2 million or less than 5.5 times 2003 EBITDA. On a per share basis, we still expect adjusted cash EPS for the year of $4.50 per share. We also estimate free cash flow per share of approximately $3.80.

That concludes our prepared remarks, so let's turn it over to the operator for your questions.

I apologize, Sir. At this time, if anyone on line has a question, please press star one on your touch-tone phone. Your line will be placed into queue. After you hear your name announced you may ask your question. If you someone in the queue has already asked your question, and you'd like to remove yourself from the queue, you may do so by pressing the pound sign. Steve Weiss with Bear Stearns.

Good morning. Just first a question on the trends of DonTech. I guess is the timing difference you're referring to in your initial comments here, does that relate to some of the previously deferred sales activity that you alluded to in the past?

Yes, Steve, it's Dave. That would be some of it. You know, the timing of servicing is very hard to predict, and some of what we're seeing is the flow through from the Q3 and Q4 that we delayed the servicing on so that we could see these people closer to when those publications came out.

But, you know, I also want to kind of caution you on that, because we see this as just a good business practice. And we kind of permanently shifting business each quarter out, quote, on these outlying directories or nonprimary directories so that people can make those decisions closer to when they actually publish.

In general, an you give us an overall sense of what you're hearing from your advertisers and their commitments going forward, you know? I know that they take a much longer term view of this product relative to other media.

D Yeah, well, I think the best way to characterize it, Steve, is today, you know the conversations we're having the advertisers today are better than they were in that kind of pre-war early war environment. We'd actually seen kind of business attitudes go backwards a little bit in that period of time, and there seems to be, you know, more optimism.

The wallets aren't flying open at this juncture but it's definitely better. We're hearing about some updraft and a few of the other local media which is kind of a good indicator for us, takes us a little longer to get there, but, you know, there's more good signs than bad right now.

Okay. And then just lastly. You mentioned some more favorable trends, bad debt wise, I think at DonTech, which I think the issue there is capped for you guys anyway. Can you speak to where it stands, maybe, in the SPA directories and if you can refresh us on what your goals are there?

Yeah. Both at SPA and DonTech, we're seeing the bad debt trends kind of coming down to what we would consider more of a pretty -- fairly close to a near normalized level, which is really a good sign. So both of those look to be in pretty good shape. As you know, it's like at SPA there's a direct P&L impact to that expense.

While you're right, at DonTech there isn't a direct P&L impact because of the cap, but it does have an impact on, you know, advertiser renewals, and so we're glad to see DonTech kind of coming into, you know, down into that more normal range, as well, because that should -- that should bode well for renewal rates as we look later in the year.

Okay. Is there a way -- are we talking mid-6's or so on the SPA books?

We're not providing specific numbers, but I think in the past we've talked about, you know, levels like that.

As to what normal means.

We're not giving specific guidance with respect to information with what actual bad debt rates are.

Okay. Fair enough. Thanks.

Thank you, Steve.

Ken Silver with CRT Capital, your line is open.

Good morning it's Ken Silver at CRT capital.

You mentioned earlier that new business startups were, you know, weaker than normal. I was just wondering what you were using for normal, what sort of period of time was it?

Ken, it's Dave. I'm looking back at the 2001 Numbers, and this is the way we measure this is service order activity that comes over to us from the telephone company for new line installs. And it's -- it's down about 14% off of 2001. The good news is, it's fairly stable to last year so it's not getting worse but, unfortunately we're not seeing it get better.

Okay. And was 2001 down a lot versus like, you know, the late '90s?

I don't -- I think it was -- 2001 was still a fairly normalized number. I don't think that that would have been down a lot out of the late '90s, Ken.

Okay. There were some bad debt expense numbers in your prospectus, right? 7% plus or minus? I saw these numbers somewhere.

Right.

But going forward, you're not going to be disclosing bad debt expenses, is that what you're saying?

That's right. You know, we don't think that it's a level of detail that is necessary for us to provide but we are, you know, we'll continue to talk about trends as far as them going up or down.

Okay. All right. Thank you very much.

Mr. Van Howett your line is open.

This is actually Eric Lee stepping in for Andy.

What was LTM leverage?

LTM leverage?

Yeah through the --

-- total debt to EBITDA on an adjusted basis?

Well, you're saying year end -- quarter end leverage, net debt was 2233.

Right.

LTM EBITDA, you know, it's in the order of 55 and change, 554. Yeah, it's in that vicinity. We have a little, as we talked about, the timing of expenses in the '02 so some of the '02 LTM EBITDA numbers are a little bit higher, so 5.5.

It's a little higher than 5.5.

A little higher. Okay. And then my second question is just with regards to kind of your 2003 outlook and I just wanted to see if you could kind of help me kind of understand the EBITDA guidance of 400 million. EBITDA is obviously up on an adjusted basis in the first quarter, and so kind of based on our numbers, you know, it's kind of a round kind of 405 right now on an LTM basis.

And I just was kind of curious to see, you know, with the expected cost savings down the road with bad debt coming down and paper costs coming down, is that 400 million just really a reflection of just being conservative or, you know, I would imagine that after your first quarter EBITDA performance, your year end '03 EBITDA could be higher than 400? So I just wanted to kind of understand the dynamic around the guidance.

Sure. First of all, I think it's in print in our 8 K that we filed with our report, last year pro forma 2002 EBITDA, excluding the reversal of a restructuring and charge was about 407 last year in a pro forma basis.

Right.

So -- but -- and this year our 400 guidance is really kind of where we are, you know, there are some differences in the accounting policies last year versus this year, and so really 400 is a good number to be working with. As far as the impact on some of the cost savings, et cetera, I mean to the extent that we're achieving cost savings, those are being offset by the costs to achieve those synergies this year.

Okay.

So that kind of helps you out?

Okay. Can you just in terms of maybe this question for Dave, just in terms of kind of additional steps in integration process? Is there really anything kind of left that you need to do to really be fully integrated at this point? Do you feel it's pretty much complete?

In fact, Eric, most of the heavy lift something still in front of us. We have -- the biggest challenges associated with integration revolve around the, you know, the getting everybody on the same systems, both for publishing of the directories, as well as all of the sales support components of those systems, and that's still a work in progress.

So you know, we got a lot of work to do. We're very comfortable. It's going very well. We've got a good handle on it, but we're going to be hard at it throughout the whole entire year.

Okay. So guess it sounds like, you know, kind of a lot of the heavy lifting will still probably take another call at 12 months or the remainder of '03?

Definitely the remainder of '03 and there will be be some spill-over into '04.

Great. Thanks, guys.

I would like to apologize at this time for the delay. We had some technical difficulties earlier. Arnie Ursaner from CJS Securities.

First thing I'd like to say is a suggestion, to the extent you can provide all of your investors with pro formas historically by quarter, I think would make the building of future models a heck of a lot easier, so I would strongly suggest you consider that if you could.

Well, as I mentioned, Arnie, we actually went through a process and -- looked at that. The -- we have a limited access to all the Sprint information from last year in the level of detail, which would give us a sufficient level of confidence to be able to provide that information to you on a quarterly basis. We have a higher degree confidence on the annual basis so we decided not to provide that.

To the extent you have to provide it at some point each quarter going forward anyways.

As I say if you can, I think it would be a very useful process for all. I'd like focus on schedule 5 and then work back to schedule 4, if I could. In schedule 5, which I think was page 12 of your press release, you have a pretty detailed break down of your operating dash flow or net cash provided by operating activities, and you have two line items that I'd like to you spend an extra minute on, cash in excess of partnership income and changes in working capital. And then work back to schedule 4 where you had a 25 million or so decline in your asset partnership investment. I have a funny feeling the two go hand in hand, but could you walk us through both of those items, if you could?

Well, let me start with the changes in working capital because that -- that number does stand out and I would imagine that you're not the only one that has a question about that. If you look at schedule 5, the net loss number of $41 million is a GAAP number and remember that, therefore, does not include that 130 million odd adjusted revenue that we were not able to report due to purchase accounting.

But remember, that we did buy the receivables and we did collect the cash and so if you think about adding that adjusted -- adjustments to remove the effect of purchasing accounting, if we were to do that and present cash flow on an adjusted basis, you'd see a much larger -- you'd see a net profit number and then you'd see a much lower impact from changes in working capital as a result of that. So if you think about that 130 some million of revenue that we did not book, consider that we effectively collected similar amounts, I think that's the easiest way to get your arms around that number.

Okay.

As far as the cash in excess of partnership income goes, you know, we collect cash from DonTech and SBC in a fairly level basis -- throughout the course of the year. There's not a lot of seasonality to that. Whereas in the income side, there is some seasonality, and so to some extent that $11 million there reflects the seasonality. It also reflects a rebate that we got because, remember, not only are we capped in respect of bad debt at DonTech, we're also capped in respect of advertiser claims and the advertiser claims at DonTech have been running very favorably, and so that $11 million reflects an amount that we received in cash from SBC as a rebate against claims performance.

Okay. Going to schedule 4, would that have impacted the asset partnership investment, as well?

That would take the $11 million, drop that partnership investment, the other piece of that is at the end of 2002 we had the send-on investment, which we acquired through the acquisition. So that was written off in purchasing.

Got it. Okay. Second question I have is you've given us quite a few numbers for the full year, but the problem is I think I'm missing something or you're being pretty conservative. You've given us operating income, you've given us interest expense, I'm looking right at my model, 335 of op. income, 185 of interest expense. I have nothing in there for interest income or other income.

That gives me a pretax number, leaves me a net income number of 90.5 million on an adjusted EPS basis that leads to a dramatically higher number than 210 and then, also, building in your EBITDA, the cash EPS number works out to a heck of a lot more than 450, so either you're being conservative or there's some -- frankly it can't even be other income and it's got to affect EBITDA. There's got to be conservative, or there's a tax item that I'm not aware of.

There is no significant other income item. I'm not sure kind of where you're headed with that. But there is nothing to speak of there. You know, we believe that at this point it's too soon for us to be considering any changes to our guidance and that's kind of where we are. You know, we've only owned the business for four months and we're -- we've got a lot of work to do still. So you know, as far as -- as far as the specific numbers your model I don't have that in front me, so I have a hard time kind of confirming, you know, your specific numbers.

I think just plain mathematically it appears you're being quite conservative in your guidance for cash EPS and adjusted EPS. That's it for me. Thanks.

Next question is from Todd Morgan with SIBC World Markets. Go ahead, please.

Thank you, good morning. .

I think first of all you guys have to win the award for most footnotes in a press release. We appreciate your attempts at trying to explain what is going on. I was hope you could comment a little bit more on DonTech. Specifically, could you give us a sense for the calendar sales trends without the -- same of a same store kind of number?

Yeah, well, first on calendar sales, I think that we're we've been coming out is -- we still see a pretty flat environment for DonTech calendar sales for the year. There's -- we're just not seeing anything that would make us believe that we should be getting more aggressive than that at this point. Again, calendar sales, Todd, aren't the best same store sales metric. Publication cycle sales are a little better same store sales metric. Unfortunately, they are a bit of a lagging indicator. And as you saw in the release, pub cycle sales for the first quarter were down, reflecting sales that were made in Q3 and Q4 of last year. As a result of the lower Q1 pub cycle sales number, we kind of see an environment where pub cycle sales for DonTech will likely finish the year down slightly.

Okay. I guess that is a little bit helpful. The other thing is I guess is there any reason to expect the free cash flow numbers you talked about, Steve, and, you know, assuming you were to use those for debt reduction for you to get to the leverage numbers you talked about, is there any reason to think there would be any other use of that cash other than that?

Nothing that we envision at the moment.

Okay. And I guess --

We publicly stated our goal is to try to get leverage down to four times by 2005. So we're, you know, we're aiming at that and we've got our focus on that.

Okay. And you guys have talked a lot about the integration process, and it sound like it's an important source of cost savings. Is there any way we could sort of track or understand that, you know, short of actually seeing the run rate savings show up in the income statement? Which it sound like it's going to be fairly far after the actual events that are going to lead to those savings. Is there any way of kind of tracking that progress short of, again, seeing it in an income statement?

Well, I mean, Todd, one thing, it's not easy because there's a lot of moving parts in that integration and synergies. One indicator and, you know, I'll say use this cautiously, however, you know, would revolve around our head count reductions, and we are to date at about 1507 I believe was the last number I saw. We started at around 1600.

Well thanks a lot. Good job.

Thanks.

Bryon Watson of Cenfield Capital, you now have the floor.

B What was your revolver balance at the end of the quarter? What was the breakout between the term loans? I know what the sub notes and senior notes are at, but what was your term loan balances?

The revolver balance at the end of the quarter was zero.

The term loan A was up just a little more than 400. Term loan B was just a little under 900 and the bonds are 946.

Okay.

That also we had, I think it's on the schedule 12 million of cash, so that's how -- those are the components of the 2233.

Okay. Could you explain to me? I'm a little new to the company, but the DonTech relationship? As far as you report operating income, your share in operating income from that partnership. Can you clarify the difference between the calendar sales versus the sales when if books are actually sold?

Well, calendar sales are actually when the books are actually sold.

When the advertising is actually sold, that's what we recognize or that we report as calendar sales.

That's not a GAAP number. That's just telling you as the campaigns are going, and so that number is affect bid the timing and the scheduling of campaigns. As opposed to publication sales, which are reported when the books actually get distributed into the market place.

Our revenue method with respect to DonTech, we don't recognize revenue, because it's a 50/50 partnership between us and SBC, so we only recognize our share of the economics and that takes two forms. One is our -- 50% share in the profits of DonTech itself as the sales agent, and the other is a revenue participation income payment that comes from SBC directly.

)) But both of those are based on calendar sales.

Okay.

So there's a revenue component and an income component?

We get a participation in revenue but we don't recognize revenue from DonTech. We recognize it as our equity income.

Okay. Thanks.

Next question is from Bob Kricheff from CSFB. Go ahead please.

A couple questions about competition, you note again that there's some competition in the Chicago market. I'm wondering if you can talk about the Chicago market, and if you're seeing competition in other markets, how it's impacting the ability for you to raise rates to go around and sign up new customers. Also if you're starting to see any other competition to come into markets. Notably Verizon or anybody else that's worth mentions.

Bob, this is Dave. A couple things. There is plenty of competition in the directory business these days. As we've stated, over the last ten years it's really migrated from a monopoly to a duopoly environment. We're really fully engaged in every market we do business there is a competitor in there. It doesn't really have any impact on our pricing power. What tends to happen, it's -- is that when a new competitor enters a market, the marketplace is disrupted for a couple of years, there's confusion, there's some market expansion, there's -- all -- kind of things happen. But then, traditionally, we grow at the similar rate to what we grew at before the competitor came in. Pertaining to Verizon,Verizon has, in an attempt to try to shore up or improve their directory revenues, has entered some -- a handful of markets across the country competing with the incumbent publisher. We have seen them show up in one or two of our 260 markets. But it's -- what's occurring there, Bob, it's what's occurred just about every time we see the third competitor try to enter a market, it just doesn't really have much impact.

Has Verizon shown up in any of your major markets or is it more tertiary or secondary markets?

They have shown up in southern Florida, that Naples, Marco Island down there, which is a pretty significant market for us.

Okay. Great. Thank you.

.

Adam Rashid with M&S Capital.

Just a question on the synergies. I think you mentioned a synergy number of $20 million by the end of '04. I had previously thought that the synergy target was 30 to 35 million. Maybe you can clarify that for me.

Sure. You know, we've talked in the past about total costs improvements in the 30 to $35 million range. We've -- we've sort of distinguished between what we call hard synergies, which is cost savings as a result of the integration activities that we're undertaking, which we estimate in the 20, $21 million range. From operating efficiency which would include improved sales productivity or improving on, you know, certain third-party contracts or, you know, managing our bad debt more efficiently and stuff like that, which we don't call synergies, per se, but would give you the balance of that amount.

Okay. And for '03, the explanation is that the cost to achieve some of these synergies or efficiencies would largely offset the synergies and efficiencies, so net zero?

That is correct.

How does that play out through '03?

Well, one thing I can just highlight for you is that our Capex in the first quarter was only $2.5 million, relative to our expectation of 20 million for the year. And that's -- Capex and software investment and a lot of the cost to achieve involves software investment to develop software to allows to manage integration process that's happening later in the year.

Okay. So the synergies may boost EBITDA, but the cost to achieve those should boost Capex so on a free cash flow basis --

Again, I'm not sure that's right. If the cost to achieve synergies, there's also costs to achieve synergies in the expense items. Things like severance and you know, cost of moving people around and stuff like that. Certain conversion activities, et cetera. And some of that is in our P&L in addition to the Cap Ex numbers, that is offsetting the amount of savings that we're getting from it this year. And those costs are one-time costs and those savings are ongoing.

Right. Are those costs more weighted toward the early part of the year, or are they sort of spread out evenly throughout the year?

They are really spread out throughout the year. I think, you know, Q2 and Q3, I think you'll start to see some of that step up a little bit more.

And just on the EBITDA guidance of 400 million, in the first quarter you generated 98, $99 million of EBITDA. So your annualizing it at almost 400, and the first quarter's typically a seasonally light quarter for DonTech income. So since you're almost at that 400 level, and DonTech should pick up somewhat, I guess why wouldn't the full year EBITDA be more than 400?

Well, again, you know t number we're -- we're guiding to is 400. And you know it's still early in the year with respect to the Sprint activities. There's a lot of hard work we have to do still in the year. So -- and I think that the -- the comparison versus last year really doesn't shed much light on it. So --

Well the DonTech comparison is still valid.

That is true. That is true.

Okay. Then -- okay. Thanks.

Howard -- I'm sorry Howard Bryerman with Deutsche Asset Managements, your line is open.

Good morning, gentlemen.

Howard.

Can you expound a little bit on the comment you made earlier about 25% of your revenues coming from, I guess, jurisdictions that are near or around military bases? I am trying to understand, I would assume that some of that population is transient and has no impact on your business, and the remaining part of it is when troops are shipped out they would probably leave their families there and, therefore, that would be a steady customer base for you. So I'm trying to understand -- I guess the question is, are you -- are you inferring that second quarter sales are going to be below expectations as a result of this?

Howard, I think the way to think about it is two questions. Second quarter pub cycle sales are lower than they would have been if we had not had the war and had we not had so many of the military markets actually in the second quarter. And the phenomena that happens, this is I'd call to what happened in materially '90s, is that when these guys ship out, in many cases their families that are left behind go home, because they don't know how long that these guys are going to be gone. So if wives and children will go back to family, et cetera, and these markets tend to get in a -- kind of a, all right, let's be conservative. We don't know how long this is going to last. It's not a great environment for trying to get people to increase their advertising. The good news is, you know, they've been through this before and we don't see a lot of cancellations of advertising. We just don't sell as much in those markets because they know the economy won't be as vibrant during these periods of time.

All right. And then just on the Capex front. I think when you guys did the road show, everyone was modeling in about 5 million per annum. I realize that a lot of that is software costs now. Can you split the 20 million between Capex and software, and shall we be building in software costs going forward?

Well, we have said that a more sort of normalized Capex number is in the $10 million, 10 to $12 million range, something like that. And that includes software, as well. That's not a hard -- we don't have a whole lot of hard assets. We have some computers, printers - PC type printers, not big yellow page printers. But so most of that is really capitalized software.

Both the normal as well as the incremental.

So more normalized number would be between 10 and 12?

That's a good number to use.

Then, just finally, could you comment on the internet? Any initiatives that you have with the internet and how the internet general affects your business? For example, someone looks at yahoo would look up names on yahoo if that has any impact on your business?

Yeah, Howard, as we commented a few times. For our business the internet has not had a significant impact. I think the reason is a lot of the traction that's occurred in the internet is more product specific types of searches. And yellow pages revenues are primarily made up of service type businesses, your carpet cleaners and landscapers and plumbers and remodelers kinds of things. So, answers to date, still not a lot of traffic going to the internet for those kinds of services. That being said, you know, we believe it's like that over time there will be, you know, a ramp up of that. We don't know how fast. But we are -- will begin some initiatives in 2004, as we've said before, where we have developed a -- are going to be launching a very low cost complimentary internet product to go with our print products, and we'll be rolling those out in 2004 and 2005.

Okay. Great. Thank you very much. Nice job and I appreciate the full disclosure.

Thanks, Howard.

And Ken Silver with CRT capital.

Just a couple quick follow-ups. People may know this already, but on DonTech, when you book your share of the net income on your P&L, are you receiving cash of the same amount?

Well, we receive cash from SBC and DonTech, basically a year in arrears, but because of the relatively low growth in the business, it turns out that the cash receipts are equivalent -- virtually equivalent, except for this one item we discussed a little earlier about cash in excess of partnership income or in some cases it's income in excess of partnership income in excess of cash. That's where you can see the difference between them.

Okay. Great. Thank you. And during the quarter at the sprint business, SPA, was the number of customers higher or lower versus a year ago?

We are not getting in the habit of disclosing specific customer counts.

I think that it's kind of hanging steady by and large.

Okay. All right. Thank you. Good luck.

Mr. Swanson, there are no further questions in queue. I'll go ahead and turn the conference call back over to you.

I would like to thank you all for joining us today. Please, any further questions, please contact Steve Blondy or Frank Colarusso.