Thryv Holdings Inc (THRY) 2005 Q4 法說會逐字稿

Welcome to R.H. Donnelley's and Dex Media fourth-quarter and full-year 2005 results investors teleconference. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time.

Please note, today's conference is being recorded as well as webcast live over the Company's website at www.RHD.com. I would now like to turn the conference over to Mr. Jim Gruskin. Sir, you may begin.

Thank you and good morning, everyone. I'm Jim Gruskin, EVP Finance at R.H. Donnelley. Hosting the call today are Dave Swanson, Chief Executive Officer of R.H. Donnelley, and Steve Blondy, Executive Vice President and Chief Financial Officer. Also on the call are Peter McDonald, President Chief and Operating Officer, and Jeff Smith, 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 and full year ended December 31, 2005, and the two Companies' Form 8-Ks furnished to the SEC yesterday, February 22, all of which discuss the fourth-quarter and full-year 2005 results of both Companies.

We also encourage you to review both Companies' other periodic filings with the SEC, which set 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 will refer to certain non-GAAP financial measures in discussing both Companies' performance. You can find additional information about these measures and a reconciliation between these measures and the most comparably GAAP measures in the press release and related 8-Ks furnished on February 22.

The press release is available on our website and can be accessed by going to www.RHD.com under investor information. A separate 8-K filed on February 24, 2005, includes an explanation of the non-GAAP measures mentioned in connection with R.H. Donnelley's transaction with SBC.

R.H. Donnelley acquired Dex Media in a transaction that closed on January 31, 2006. Further details regarded the transaction are available in a registration statement on Form S-4 filed with the SEC, containing the definitive joint proxy statement and prospectus relating to the proposed transaction, as well as in the press release and related 8-Ks furnished on January 31, 2006.

Today, we will be referring to adjusted pro forma results, which, unless otherwise indicated, reflect either the combined results of R.H. Donnelley including the directory business acquired from SBC, or the combined results of Dex Media including the Dex West acquisition, assuming the transactions took place at the beginning of the periods presented.

Please review the risk factors described in the Safe Harbor language and where to find more information at the back of the related press release. Now I would like to turn the call over to Dave Swanson.

Thank you, Jim. Good morning, everyone, and welcome to the call to discuss both R.H. Donnelley's and Dex Media's full-year 2005 results.

The closing of the acquisition of Dex Media on January 31 represents an important milestone for our Company as well as for our investors, our advertisers, and users of our products. With this one event, R.H. Donnelley solidified its position as a leader in Yellow Pages and online local commercial search in the United States, with combined 2005 revenue of approximately $2.7 billion and over 600,000 advertisers buying print and Internet search products in markets across 28 states.

By combining operations, not only do we gain greater scope and scale, but we also unlock new opportunities that were previously unattainable when the two Companies operated independently.

Because we are reporting for both Companies and in the best interest of everyone's time here today, Steve Blondy and I will focus our comments on full-year 2005 operating and financial highlights. If you have any questions regarding the fourth-quarter 2005 results for either Company, information is included in the press release, or we can discuss them during the Q&A portion of the call.

During the call, you will hear a couple of themes that are an important part of the R.H. Donnelley success story in 2005. Number one, our print business remained very solid as people continued to turn to this content-rich medium to find businesses that offer the products and services they need.

Number two, the Internet is proving to be a very attractive medium for us to expand our business by delivering even greater value to existing advertisers and attracting new advertisers to our products.

Number three, the R.H. Donnelley management team, strengthened by the addition of key executives from Dex, has the experience and know-how to drive results in both the print and online categories.

Finally, we are a business that has a solid financial profile with a proven track record of generating stable revenue, with an extraordinarily high conversion to free cash flow.

Let's take a look at the operational highlights for 2005. First, Dex delevered 2.2% publication sales growth in '05, aided by the success of innovative new products and growing momentum of the DexOnline platform.

Second, R.H. Donnelley delivered 1.3% publication sales growth in 2005, driven by industry-leading results in the Sprint markets, offset by our resetting and construction initiatives in our AT&T markets that were acquired at the end of 2004.

Finally, we really hit the ground running with the process of integrating Dex Media. We recently announced a new management team, comprised of the strongest leaders from both Companies, to execute our R.H. Donnelley's strategy and business plan going forward, including achieving the synergy targets that were set back in October when the deal was announced.

To successfully complete the R.H. Donnelley and Dex Media transaction, while still executing up to our high standards, required significant effort; and I would like to take this opportunity and recognize the hard work of the employees at R.H. Donnelley and Dex Media who made it possible.

Now let's turn to full-year '05 operating results in a little more detail. The 2.2% publication sales growth in the Dex markets in 2005 was driven in large part by innovation, both in print and on online. Dex continued to roll out the Plus companion directories in the fourth quarter, bringing the total to 26 titles introduced in 2005. Consumer acceptance is proving to be strong, and third-party research is indicating that these products are driving incremental usage, which in turn generates more leads for our advertisers.

Dex also launched a number of innovative solutions to help advertisers leverage the Internet as a source for additional references. DexOnline.com remained number one in online local search in its 14-state region, according to comScore data, and traffic continued to grow significantly.

This DexOnline traffic, along with distribution agreements with Google, Yahoo, and others, has substantially increased the value that is delivered to advertisers. That growing value drove more than 100% revenue growth for Dex Internet products.

Our 4.5% pub sales gross for our Sprint business was once again tops amongst the U.S. incumbents. This solid performance was fueled by strong growth across nearly all major markets, as well as the broad introduction of our online search product in all markets.

I think the most significant highlight for the year was the dollars that were derived from strong advertiser renewal. It is important because it demonstrates the high level of satisfaction that advertisers have with their investment.

The fact that we are attracting new advertisers, as well as renewing and increasing spending from our existing ones, further validates that the actions that we have taken in the last 36 months, the attractiveness of our value proposition, and our unique ability to deliver large quantities of high-quality leads.

Traffic to our online search product in our Sprint markets, as measured by unique users, page views, and number of searches, increased sharply over the course of the year. We also saw a significant growth in online revenues.

But what is most important to us at this point is that 60% to 70% of our print display advertisers are buying online products from us. We are establishing ourselves with the small and medium-size businesses to be their trusted marketing advisor for advertising and promoting their business online.

In 2006, we will look at ways to extend Dex Media's online expertise into all of our other markets, creating a unified strategy that allows us to win a greater share of the local online commercial search market and deliver greater return for our advertisers.

In the AT&T markets, publication sales for full-year '05 declined 2.8% compared to the prior year, reflecting the ongoing impact of construction there. Performance was just ahead of our most recent guidance of minus 3%.

During the fourth quarter our AT&T markets continued to reflect the impact of the three primary actions that we have been taking to improve long-term results in that business. Just as a reminder, those are the removal of advertising from the covers of our directories to strengthen brand awareness, a move that will generate even greater benefits, we think, as AT&T continues with its nationally branded effort and '06, and our products begin publishing for the first time with the new AT&T logo on the cover.

Another is that we have been rescoping or changing the distribution and coverage area of some of our directories to better reflect changes in development and shopping patterns in those markets served. In some cases, this has resulted in the consolidation of publications. For some advertisers it's resulted in a reduction of the price that they pay. It's expected that these enhanced products will generate additional usage, stronger returns for our advertisers, and growth in customers and revenue for RHD in future years.

Finally, we have talked about the fact that we are enforcing tighter credit standards in the market to match the same discipline that we have employed in our Sprint markets. This was painful in Sprint markets initially as well. But it should translate to that lower bad debt expense and higher renewal rates over time.

As we said last October, these changes will continue to be a drag on sales in the first two quarters of 2006, as we work through the directory publication cycles with these changes. We still have a lot of work to do in Illinois, but we remain confident that by focusing on actions that drive consumer usage and advertiser value, that revenue growth will follow.

Furthermore, in many of our AT&T and Sprint markets, we will roll out some of the same innovative products that have been successful in Dex markets such as companion directories and Clicks products, which will deliver more ready to buy leads to our advertisers and allow consumers to select the products that best suit their individual needs. Across our entire business, we believe that the results we generate for advertisers are the most powerful driver of revenue over the long term, regardless of what platform they come from.

Switching to the integration front, since we announced the acquisition of Dex Media in October, the integration planning teams have put forth just an incredible effort to ensure a seamless and successful transition. Even though we are only a few weeks into the process, the new senior management team is in place; all integration activities are proceeding along as planned; and we're making progress on all fronts.

Before I turn the call over to Steve, let me highlight the key priorities that we have for 2006. First, we need to make significant progress with the smooth integration of Dex Media, which will help us achieve our financial and operational goals. Second, we need to finish the construction of a solid foundation in our AT&T markets from which we can build long-term sustainable and profitable growth.

Third is the advancement of a comprehensive local online search and digital products strategy for the combined enterprise. Finally, we need to maintain our focus on generating free cash flow, which we will use to repay debt and create value for our shareholders.

We look forward to sharing with you an in-depth look into our R.H. Donnelley at our investor day on March 22 in New York. More information regarding that event is available on the investor relations section of our website at www.RHD.com. Now I would like to turn the call over to Steve to discuss the financial results.

Thanks, Dave. Before discussing RHD and Dex Media's 2005 financial results in detail, let's briefly review our attractive deliver-and-delever investment dynamics.

The consistent and measurable ROE we deliver to our advertisers continues to support strong and visible recurring revenue and free cash flow. It is that steady and growing cash flow that allows us to delever and drive superior fundamental shareholder value. Collectively, RHD and Dex Media repaid over $830 million of borrowings during 2005 from continuing strong EBITDA and cash flow performance.

The figures discussed today reflect adjusted and/or adjusted pro forma results for all periods as thoroughly described in yesterday's earnings release and this morning's 8-K.

Dex Media pub sales growth of 2.2% in 2005 reflects strong performance from Dex Plus companion directories, DexOnline.com, and Dex Web Clicks. Using our new definition of advertising sales for 2006, top-line growth for Dex would have been around 1.7% last year.

2005 Dex revenue of $1.66 billion was generally in line with 1.65 billion in 2004. Operating expenses, excluding DNA of $758 million in 2005, increased just 1.3% from $748 million in 2004, reflecting strong cost controls and headcount reductions early in the year. 2005 expenses also included merger costs, a related stock option acceleration charge, and severance expense from earlier in the year.

2005 EBITDA excluding these items was $936 million versus $931 million in 2004. Total Dex interest expense of $446 million in 2005 included $37 million of deferred financing cost amortization and $49 million of accretion on Dex's 9% senior discount notes.

Dex free cash flow of $533 million helped retire $483 million of bank debt and fund $54 million in cash dividends in 2005. As a reminder, we plan to apply all free cash flow to debt retirement in 2006. Dex Media's net debt was just below $5.3 billion at 12/31/05 and carried a weighted average interest rate of 7.8%.

Now let's look at 2005 RHD results. Donnelley generated net revenue of $1.04 billion in 2005, generally in line with 2004, driven primarily by strong Sprint pub sales, but offset by our reconstruction in AT&T markets.

RHD operating expenses excluding D&A were $446 million compared to $417 million in 2004, reflecting deliberate investments in direct selling costs, advertising, and IYP operations.

Remember also that our 2004 expenses were derived from SBC carve-out financial statements that included $12 million of favorable bad debt true-ups taken by SBC before that deal closed, and did not represent the full cost of running that business in Illinois.

RHD 2005 EBITDA was $595 million. This compares to normalized EBITDA of $600 million in 2004, reflecting, among other things, our estimate of real operating expense not allocated to the SBC carve-out entity and removing our headquarters relocation costs for 2004.

Donnelley interest expense of $265 million in 2005 includes $25 million cash tender premium from our 8 7/8 notes retirements and $24 million non-cash deferred financing cost amortization.

Donnelley's free cash flow of $361 million, over $9 per share, helped retire $349 million of debt in 2005 and indicates a nearly 15% free cash flow yield on our current stock price. RHD net debt at year end was just under $3.1 billion, approximately 78% fixed, with a weighted average cost of 6.8%.

Next, let's discuss 2006 guidance. Beginning in 2006, we plan to report advertising sales to describe the total billable value of print and online products in the period when billing commences, replacing our historical pub sales metric. Therefore, RHD 2006 advertising sales will not be strictly comparable to aggregate Donnelley and Dex '05 reported publication sales.

Likewise, because Dex and Donnelley historically recognized revenue and expense using different line items and accounting methods, our 2006 adjusted pro forma results will not be strictly comparable to the sum of RHD indexed 2005 adjusted results.

The following 2006 guidance also eliminates the anticipated effect of new purchase accounting and assumes the Dex transaction closed on 1/1/06. With that that background, we expect to generate both advertising sales and revenue of approximately $2.7 billion in 2006, generally in line with 2005 results.

We also expect 2006 EBITDA margin in the 53% to 54% arranged before FAS 123, reflecting our first year of combined operations and year-one costs to achieve synergies.

We expect to generate 2006 free cash flow of more than $700 million after $75 million in capital expenditures. We also expect 73 million weighted average diluted shares during the year.

Upon closing the Dex transaction at 1/31/06, actual combined net debt outstanding was below $10.6 billion, approximately 78% fixed rates, with a weighted average cost of 7.8% before deferred financing cost amortization. With that, let's turn it back to Dave for some closing remarks.

Thank you, Steve. Before taking your questions, let me share two closing thoughts with you. First is regarding our 2006 guidance. This being our third acquisition in as many years, we have developed a very healthy respect for the complexities and challenges of integration, especially one this large.

In the first year, we just don't have the same level of visibility we normally would. We are still learning new things about the Dex business every day. While a 53% to 54% EBITDA margin may reflect a cautious approach to managing the business this year, we have learned that in year one it is better to err on the side of overstaffing and overspending a little, to ensure that we properly set up the new company to satisfy the ongoing needs and expectations of all of our stakeholders -- our shareholders, our advertisers, our employees, and the users of our products for years to come.

Our views about the longer-term growth rates and margins for or business have not changed. In fact, we are more enthusiastic about them than we have ever been.

Second, I just want to review with you RHD's four important themes for you to remember. First is our print business remains very robust with remarkably strong and stable usage, especially compared with other increasingly fragmented media.

Second, the Internet offers tremendous opportunity. Our online local commercial search business is growing rapidly, and we are uniquely positioned to monetize online traffic with our vast and diverse SME customer base and robust sales channel.

Third, our management team is the most execution oriented and, now with Dex, the most innovative in industry. Remember, we have a deep bench of executives that have both represented the telephone companies and competed against them. This explains our deeply competitive spirit.

Fourth, our compelling financial model, effectively a public LBO. Our strong and growing free cash flow driven by incredible margins, low CapEx, and enormous tax shield, allows us to drive shareholder value through EBITDA growth and deleveraging.

That concludes our prepared remarks. Operator, we are now ready to respond to questions.

(OPERATOR INSTRUCTIONS) Karl Choi with Merrill Lynch.

I have a few questions here. The first one is, I wonder if you can outline some of the major steps in the integration process. What sort of time frame are we talking about here?

Second, if you could give a little bit more color regarding the amount of transition costs or integration costs that you expect in the first year.

Peter, why don't you take that?

It's Peter. As you know, we have done integrations; now this is the third one for this team. It is actually becoming a skill set for us. Our team members, the team that we have involved, has done this as long as we have had some outside help, which we have used in the past.

So I think that the first thing to let you know is we have learned from the past. I think if I had to talk about this one, I would say we are probably easily in line and maybe ahead of what we have seen at the Sprint, which is probably the most comparable integration.

We break into a number of different phases. We have just completed phase II of these. It is -- we've got four different phases. As you know, each department takes a little bit more time; the most time obviously is in the systems area.

We feel real good because, first of all, they both come from Amdocs platforms, so the risk of that integration is somewhat minimized. But we also have an incredibly strong team integrating especially with the Amdocs platforms.

So over the next 18 months, you're going to see really different activities. But I think it's fair to say that the experience level, the quality of the team, and everything we see, we are right on track. So we feel real good about it.

Good morning, Karl. Steve. As far as the integration cost in the first year, what we have -- we really -- we are kind of where we said we would be, in terms of total synergies expected by the third year of $50 million, and total cost to achieve those synergies of about $75 million.

I guess what I could add to that today is maybe it's about half of those costs to achieve in the first year, and the synergies kind of find their way to us a little bit, on a little bit of a delayed basis. But we are confident of our initial guidance in that regard.

The other thing I would point out -- and I have actually read some of the notes that have come out from you and others this morning and last night -- is that just these accounting differences between us and Dex accounts, there is a significant impact on that.

Because the way that we have historically reported pub sales is a little different than the way Dex has. Donnelley historically has reported more categories of expense as incurred versus deferred and amortized, than Dex did in the past. That is driving some of the difference, that there has been a little bit of income overnight.

Great, if I can ask one last question. Some of your peers and/or competitors have sort of released results of the recent Knowledge Networks survey regarding Yellow Pages usage share. And I just wonder sort of can you discuss a little bit about the results in your market? Are you satisfied with them or not? Thanks.

I will take that one, Carl. No surprises for us on anything that has been released to date. They are absolutely consistent with what our own proprietary research was telling us in those markets.

It is interesting that some are electing to use selective market disclosure as a public relations campaign. You're not going to see us do anything like that. Every market is different, and in terms of satisfaction, I think it is kind of where we were before.

We have been saying from the beginning, and we knew before we made the acquisition, that we had work to do in that regard in Illinois. We're taking those kinds of actions and are working on that one. But again, no surprise and not really much impact that we have seen in our business in terms of reactions from CMRs, reaction of our advertisers, reaction of our salespeople.

Great, thank you.

Mark Bacurin from Robert W. Baird.

A couple things, Steve, I was hoping maybe -- the $2.7 billion of sales roughly guidance for '06, roughly flat with '05. Are there any accounting adjustments? I guess what I was hoping is that you could bucket for us maybe what is changes in accounting that maybe are driving some of that flatness. And then also maybe your plans with regard to rescoping directories, etc., that may also be a drag on the '06 performance.

Okay, well, what I said was generally in line with -- the challenge that we have is that there are a number of changes in the way we were accounting pub sales versus the way Dex was.

Just to give you an example, up until now, Donnelley's pub sales were based on when the physical directory was physical directory delivery was substantially complete. So, and that was the first month that -- that was the month we would record pub sales, and that was the month that we would start recording revenue over using our deferred and amortization method.

Dex did it a little bit differently. Dex called out pub sales in the month when delivery started. But Dex's didn't book revenue in the month when delivery started. In fact they had a so-called half-month convention, where they would on average -- some books would start delivery at the beginning of the month, some would start delivery at the end of the month. So they would just, in the month that they called pub sales, they would book half of the revenue in that month. That was a slightly different way of doing it.

But what we conformed their products to our process of booking it only when the physical delivery is substantially complete, that creates a bit of a drag on pub sales going into 2006.

The second thing I would say is with respect to the Internet products, our historical approach -- the Dex's historical approach was to record pub sales in the month when those products were sold, and with a different revenue actually tied to when it was actually billed, even though there was a delay between when it was sold, when the contracts were signed, and when it was subsequently billed.

We are changing that definition, including in ad sales, to call it when the billing starts. In the period when the billing starts, to conform all of our products to the same process, just to try to simplify. So that has got a little bit of impact on the overall result.

But the $2.7 billion is a small improvement on 2005 actual performance. Our description of generally in line with is because to make those same adjustments that I just described, about pub sales for 2005, would require us to go back and readjust the 2004 numbers as well, to get the right start values. We just didn't see that as a good use of our time, so.

That's fair. Can you quantify for us, though, your best guess as to what that Delta would be on the '05 base?

You know, we're really not going to go there, Mark. Because I just -- I can't reconcile it to a GAAP number, and that is really the standard that we are using. If we can't reconcile it to a GAAP number we are not willing to provide it to you guys.

Okay, that is fair. Then in that 2.7 billion are you projecting any rescoping of some of the Dex books that would also, similar to what you have seen in the SBC or slash AT&T, I guess, markets now? Where you have lost revenue there from taking ads off the cover, rescoping books etc.

It's Dave. In the Dex markets, we don't have any of that kind of stuff on the radar screen. We still have work to do in that regard in Illinois, and we will be doing some more of those in 2006 up there. We have also the still got some cleanup work to do in the Chicago consumer and B2B before we're out of the woods.

Okay, great. Steve, I think there was some confusion on the reported EPS number this morning. The interest expense that you guys reported for the quarter was substantially higher. I think I heard you say there was about $25 million of early debt retirement charges in that number. Was there anything else in addition to that in that interest expense number?

Yes, well $25 million was the tender premium. We refinanced our 8 7/8 notes. So I think we got like 95% or something like that of those. It was $325 million in notes we tendered for in the fourth quarter. That was part of our overall acquisition financing strategy.

That also required -- because we repaid those notes, we refinanced that with bank debt. But because we did that we had to also write-off the balance of the deferred financing costs associated with those. That was included in that $24 million number I mentioned to you. I think something like $7 million from the deferred financing cost acceleration in that, just from that one transaction.

But the 24 includes the 7 as well?

Yes.

The 24 is the only adjustment against that (multiple speakers) ?

The other thing I would point out is that the EPS number that you are citing, remember that we also simultaneously agreed to repurchase the balance of our Convertible Preferred Stock.

Under GAAP, it was deemed probable that that would happen whether the merger closed or not. In fact the contract with Goldman was to buy back that preferred stock whether the Dex transaction closed or not in the first quarter.

So the accountants determined that because it was probable that that preferred would be redeemed at market value, the difference between book value and market value was also put through as an expense that is reflected in our EPS number.

That expense showed up in the interest expense line as well?

No, it was not an interest expense. It was in between net income and income available to common.

I'm sorry, right, okay. I was just trying to get back -- it looked like your stock was down this morning. I am trying to figure out reasons why.

It looked like maybe part of it was that the reported EPS number, even with the adjustments, was below the consensus number. I think part of it is that extra interest expense. I just wanted to get clarification on that.

Just finally on the $700 million of free cash flow that you're saying for '06, we're basically just taking the EBITDA that is implied by the margin against the $2.7 billion revenue, and taking out cash interest expense, the $75 million in CapEx. Then what is the working capital assumption you're making?

Working capital, it really kind depends on how you define it, Mark. Working capital is basically a wash for 2006; maybe it is a very modest use of cash. What you've got to keep in mind is that because we raised this acquisition financing in January, and we did it in the -- something, $2 billion-plus dollars -- in the bond market, we will only pay one interest payment on that in July.

So the balance of that interest accrual during 2006 to be payable in January will appear to be a source of cash for working capital in the second half of the year.

Okay, and that is including that $700 million?

No, that is not. The $700 million number is the actual amount that we will expect to report in 2006. But what will happen is that there will be a source of cash from working capital associated with this one interest payment which is not payable until January.

Right, I am saying the $700 million includes that source from delaying the payment till January.

That is correct.

Okay, great. Then no cash tax expense in '06?

That's correct.

Thank you.

Peter Salkowski with Goldman Sachs.

Just a couple of quick questions on the Internet products that you guys are talking about. I know that you signed up with one of these sourcers, Interline I believe, that Dex was using for their Web Clicks product. If you could talk about whether or not you have started to roll some of that stuff out in the R.H. Donnelley territories.

Also, during the call you mentioned that you have been aggressive in terms of signing up new advertisers on the Internet and other places. Wondering if these are print only customers, or print and online, or online only type customers?

It's Dave. We have begun rolling out a Clicks product and a site creation and hosting product very similar to Dex's in some of the Donnelley markets. You will see us continue to do that throughout '06. So we are excited about that; and the early read on market acceptance has been very strong. They're actually really glad that there is somebody there to help them kind of understand that environment. So we will continue to do that.

Most of the Internet sales that we're making today and a lot of the revenue and customers that are coming there, Peter, are print customers. But clearly, we see as one of the longer-term opportunities for us is to really begin to migrate a deeper penetration strategy, by having products out there that will appeal to a segment of the market that the print product never appealed to.

Excellent, in terms of the -- I know Dex was running out the Web Clicks product for almost a year now in terms of their first couple of markets in Seattle and Omaha. Do you have any sort of data in terms of renewals with regard to those customers? Or any other data that Dex might have provided for the fourth quarter, in terms of how their Web Clicks sales were going then.

We have been told too soon on all of that stuff yet Peter. We need another quarter or two before there's enough kind of critical mass to draw down any conclusions.

In terms of your total revenues, the $2.7 billion expectations for '06, can you talk a little bit about that in terms of what you think local versus national; and then of course online, what percentage of revenues those might be? Or what kind of growth rates you expect for those categories?

As far as the local versus national, I know Dex had been disclosing that in the past. That is not something that we have historically disclosed, and not inclined to do that now either.

Likewise, with respect to the Internet, what I can tell you is that it is an increasing percentage of our revenue; and it's a meaningful percentage.

But as we have said in the past, we're focused on growing the whole pie, not growing one piece or another piece. Because it is too easy to kind of give you the old decoy strategy by saying, oh, this part of our business is doing really well when the other part is maybe not doing so well.

So we are focusing on the whole pie. We're very encouraged by what's happening with the Internet. But that is really where we are.

Then finally on the margin expectations, I know the guidance for '06 is for a 53% to 54% EBITDA margin excluding the FASB 123 charges. Two things. One, can you give us a sense of what the FASB 123 charges might be in '06? Then also expectations for margins in '07, do we see those margins coming back in sort of the mid to upper 50% range? Then that's it.

Yes, good questions, Peter. The FAS 123, we planned originally to adopt FAS 123 for 2005. We got through the first quarter and discovered that it was a little more complicated than we might have thought. We got to the second quarter, and realized it was even more complicated, and the rules kept changing. Then we got to the third quarter and we did the Dex transaction; it made no sense to go forward with it.

What is happening now is that, because Donnelley is absorbing all of the Dex options that were issued to Dex employees, we still have some work to do to fully quantify that number for 2006.

So we will be reporting on that with the first quarter. I think the most important thing to focus on is that it's a non-cash charge.

Likewise one thing I think a lot of people overlook is that the dilutive effect of that FAS 123, of the equity compensation, is already reflected in our share count. So to the extent that you put it in the numerator as well as the denominator, it seems like you are kind of double counting. But rest assured, it is in the 73 million share count that we are guiding to for next this year.

Okay, and then the margin expectations in '06?

As far as the margin expectation, look, it is really kind of early. We're just telling you what we think it is going to be for '06. I think that we do believe that the mid 50s is the right place for us long term. That is what we have been saying.

Last year, we had an extraordinary year in terms of -- on a number of fronts. But I think our margin was extraordinarily strong. I think that our style here is to manage this business for the long run, not to try to maximize margin in any particular year.

Likewise, and maybe different from some of our telco brethren, we are focused on reinvesting in the business, reinvesting in things that drive value for our advertisers, things like new products and advertising and promotion and Internet distribution, etc.

So we'll really not trying to maximize margins. But we think kind of that mid 50s is a good place to be.

Great, thank you very much.

Paul Ginocchio with Deutsche Bank.

Just on the revenue guidance for next year, could you maybe give us a view of whether AT&T and Dex and Sprint are accelerating, decelerating from '05?

Second, the numbers you gave us for deferred financing fees, should we assume the combined number for '05 is valid for '06? If I missed that I apologize.

Then just maybe talk a little bit more about Chicago. It looks like you're doing more rescoping this year than last. I think you are working on sort of 62 books in '06 versus maybe 20 last year. Could you just give us some metrics around how much work you're doing in Chicago this year versus last year? Then that is it, thanks.

Let me start with the last one. I didn't get all of those, so I am hoping these other guys wrote that. Let me start with the Chicago rescopings and resettings. There is quite a few that we have teed up. I think it is slightly more; I don't have the exact count in front of me.

But one thing is, I think we're getting a lot better at executing them as well. We learned some lessons in the early ones. We don't feel like we are going to have as much impact on that particular part of our plan for Illinois in '06 as we did in '05.

Let me just say something else about the rescoping. When we talk to users of the products and the advertisers, we consistently get the comments that we are doing the right thing and they like what we're doing.

I think, as Steve has mentioned before, what we continue to do is to drive the right product, which we think will drive the right values and then translate to revenue and cash. I think we're going to stay on that. We continue to improve in our execution in this marketplace.

Great.

As far as the other two questions go, the revenue guidance, one of the things that we cited as a strategic benefit of this whole Dex transaction was to diversify our revenue streams, and expanded breadth of our business.

So we are really disinclined to be talking about pub sales or revenue on a brand by brand basis anymore. So in the end of the day I think really what matters is that we're driving the overall top line and giving you a sense as to where that is.

As far as the deferred financing costs, I think the number is going to be a little bit lower in '06 than it was in '05 because we don't anticipate another acceleration on refinancing. To the extent that we do any one-off refinancings in '06, that will -- maybe it will be about in line with '05. But the rate that I gave you of average rate of 7.8% is excluding any deferred financing costs.

Does that you exclude the discount on the (multiple speakers)?

No.

It does not?

Does not exclude the discount.

It excludes the discount?

Does not exclude the discount.

Oh, it does (indiscernible); great, thank you. Can I just fall back up on how we are going to be able to measure the turnaround in Chicago if you do not provide any pub sales?

I think what we will do, we will give you some direction. When we are reporting out, we will kind of indicate where, what is driving the numbers, it is like without just having to give the specific of guidance as we have given in the past.

Great, okay, thank you.

We will indicate.

Douglas Arthur of Morgan Stanley.

Yes, just a broad question. Steve, you talk about mid 50s as an EBITDA goal. I mean, that is significantly below where RHD and Dex have been in okay years for pub sales. Obviously you have had great numbers in Sprint. So that seems like quite an adjustment once you get past the integration costs. And I think Lisa has a follow-up.

Okay, well, look, the numbers for '05 were kind of in the 56% to 57% range. I would say 56 to 57 would be included in the band of mid 50s. So I respectfully would disagree with you, Doug.

Okay, time will tell. Lisa has a follow up.

Not to beat a dead horse here. But, Steve, could you just elaborate a little bit more on why the new pub sales or advertising sales is below the revenues, revenue guidance, the pro forma revenue guidance for '06? I understand there was the impact of the change in the way the new pub sales were reported. But could you just elaborate on that a little bit more.

Then secondly, can you just remind us when Dex's agreement with Google is up for renewal? Thanks.

The pub sales amortizing in the revenue has got a bit of a lag effect on it. I think that the overall growth that we are guiding to on pub sales in '06 is lower than the growth rate that we delivered on pub sales in '05.

That is a contributing factor. I would not say that is the only factor; I think that is a contributing factor to the phenomenon that you're describing, that the revenue is actually higher than the pub sales in '06.

Lisa, on the Google arrangement we're going to have to get back to you on the specifics. But I do know that all of those agreements are relatively short-term agreements.

Okay, and just the reason for the -- I guess the moderation in growth in pub sales in '06 versus '05.

I think first of all in our Sprint markets, I think we had a banner year in 2005. You know, we have been accelerating growth rates in the Sprint markets, and we are just cautious about whether that is something we will be able to repeat. You know? We have got three years in a row where we have accelerated growth rates in those Sprint markets.

Illinois, we are hoping that it is going to be better in 2006, but we're not out of the woods yet. In Dex markets, I think Dex also had a very strong year in 2005, including the initial ramp up of both Plus and DexOnline and search engine marketing.

We are going back around, as we've talked about, for renewals in those products. It is kind of too early to say. What we do know it is that those people that bought last year, they won't represent as much of a growth opportunity this year as they would have last year; because last year we were starting from a zero base.

So I think we're just giving you the most realistic view we think we have got, and hopefully we will be able to beat it. But that is not where we are right now.

Thanks.

Michael Meltz of Bear Stearns.

Steve, just to get a little bit more clarity on the integration costs, if I look at your margin last year you said it was 56.5%; and where you’re guiding this year, and I know you're saying about $40 million of integration costs.

Can you quantify the accounting impact as well? Is that a similar amount? Just trying to get a little -- try to understand where you're pointing the margins to.

Secondly, following up on Paul's question on the non-cash; non-cash interest will be -- where is that in total including the accretion? Is that roughly $100 million this year? Then I have one follow-up.

Let me try to answer your first question. I'm not sure I understood the second one, but I will ask a clarifying point.

With respect to the integration costs, the vast majority of those will be expensed in 2006. Either expensed or there is a small piece that will show up in the CapEx line. So I don't know, call it 80% expensed and 20% in CapEx or something like that. So I'm not sure kind of whether that answers your question, Michael, but I think that does.

With respect to the cash interest, I told you 7.8% weighted average rate on just under $10.6 billion of debt. Remember that $10.6 billion is a January 31 number. The new acquisition financing that we did in the month January would not have attracted any interest expense in the month January.

So as far as cash goes, as I think I mentioned to Mark Bacurin earlier, the estimate of more than $700 million is the amount of cash --.

Steve, I understand that. I'm talking about the non-cash component of interest expense. So there is a Dex; there is accretion on discount notes; and then there's two tranches of deferred financing fees?

I'll tell you -- well, I said I wasn't quite sure I understood your question. The non-cash component I think in the Dex business of the 9% notes was about $50 million in 2005, $49 million in 2005; and it will be a little bit larger than that in 2006 because of the way that accretion works. Right? Because the principal balance on which the 9% rate applies will be growing.

The other discount notes that we sold in January, roughly I think it was $2.1 billion; of that we sold $900 million of discount notes at 6 7/8; and I think we sold them at 91 or something like that. So you can do the math.

Okay, and just on that margin question, let me just ask it this way then. You said there are accounting differences between Dex and RHD. By switching to RHD's accounting is there a dollar impact you can tell us that hits EBITDA in '06?

There is a double-digit millions of dollars impact in 2006. I don't want to get specific, because it is not as precise of a science as you guys and we would all like it to be.

Understood. Last question, Dave, at the tail end of your comments, you said your longer-term targets for top-line growth and margins have not changed. Can you refresh us as to what those are?

I think as I look at the portfolio of markets today, both Peter and I think that this is a 2% to 4% grower. As Steve talked about, I see no reason why we should not be operating in that mid 50s margin level, including what I foresee as continued significant investments on rolling out a multiplatform strategy in coming years.

Okay, all right. Thank you very much, guys.

Okay, if that wrap up the questions, I want to thank you all for your interest today as we kind of enter this exciting new chapter for the Company. We look forth to updating you on our progress as we move throughout the year. Have a good day.