Thryv Holdings Inc (THRY) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the R.H. Donnelley's first quarter 2006 results investor teleconference call. 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 this conference over to Mr. Jim Gruskin. Mr. Gruskin, you may begin.

Thank you and good morning, everyone. I am Jim Gruskin, AVP of Finance at R.H. Donnelley. And hosting the call today are Dave Swanson, Chairman and Chief Executive Officer of R.H. Donnelley; Steve Blondy, Executive Vice President and Chief Financial Officer; and Peter McDonald, President and Chief Operating Officer.

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 31st, 2006, and the Company's Form 8-K furnished to the SEC yesterday, May 3rd; all of which discussed the first quarter 2006 results. We also encourage you to review the Company's 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. Copies of R.H. Donnelley's SEC filings may be obtained by contacting R.H. Donnelley, its' website or the SEC website at www.sec.gov.

This transmission is the property of R.H. Donnelley Corporation. Any retransmission or broadcast without the expressed consent of the Company is strictly prohibited.

During this call today we will refer to certain non-GAAP financial measures in discussing the Company's performance. You can find additional information about these measures and a reconciliation between these measures and the most comparable GAAP measures in the press release and related 8-K furnished on May 3rd. 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 24th, 2005, includes the explanation of the non-GAAP measures mentioned in connection with the SBC transaction.

R.H. Donnelley acquired Dex Media in a transaction that closed on January 31, 2006. Further details regarding the transaction are available in the 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 and the press release and related 8-Ks furnished on January 31st, 2006.

Today we will be referring to pro-forma adjusted results which, unless otherwise indicated, reflect the results of Dex Media under its accounting policies for the month of January 2006 and the adjusted results of R.H. Donnelley for the entire first quarter of 2006 under it's accounting policies. Combined adjusted results which, unless otherwise indicated, reflect the adjusted results of R.H. Donnelley in the first quarter of 2005 under it's accounting methodology, and the results of Dex Media in the first quarter of 2005 under it's accounting methodology. Please refer to 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.

Thank you, Jim. Good morning, everyone, and thank you for joining us this morning. R.H. Donnelley had a very productive Q1, posting strong cash flow and making great strides towards the Dex integration. With one quarter under our belt, we remain on track to achieve our full-year guidance.

I'm going to start my comments today bringing you up to speed on the progress of the integration; what we're feeling particularly good about and what's posing us some challenges. Over the last 90 days, we spent considerable time carefully reviewing our products, systems, processes and people in light of the Dex acquisition. We're encouraged by what we see and what's been accomplished to date, having achieved a number of key milestones.

Upon closing, on January 31st, we immediately appointed a new leadership team, drawing upon talent and experience from both businesses. From there, we moved quickly to select and organize our functional teams who have been leading the charge on the next phase of the integration. While job reductions are never a pleasant part of the process, our teams are now working to deliver results and not worrying about their future. This is also causing us to both act and feel more like one company every day.

We're introducing best practices in sales, operations, marketing, and particularly in the products we offer to advertisers. For example, we're beginning the roll out of plus or mini companion directories and Clicks search engine marketing products in some of our legacy RHD markets, leveraging the learning that's gone on in Dex. In the Dex markets, we've begun introducing several components of the RHD business process, including our rigorous market investment planning process and sales training programs.

Peter McDonald has spent the majority of his time this quarter in the Dex sales offices; meeting with employees and customers, evaluating our processes, our products, the environment and the morale of the people. Peter and his team continue to be impressed with what they see; great markets, very strong products with great consumer usage, and really, really good people. These are the things that attracted us to Dex because they're the things that drive long-term sustainable growth and we haven't been disappointed.

The biggest challenge we've experienced in the integration has been the status of the Dex systems and their ability to support that business to RHD's high standards. As a reminder, Dex installed a new publishing and billing system in '04 and '05 and as different components of that system have been brought on line over the last few months, it has caused a fair amount of disruption to business processes, data accuracy and advertiser confusion. As a result, Dex is currently experiencing an abnormally high number of advertiser billing errors, publishing errors, sales rep commission errors and other process-related issues. As a result, our people are spending way too much time fixing these kinds of things and not enough time out selling.

Now, I would like to note that every single publisher that I'm aware of has had these kinds of issues when they've been converting from their legacy publishing platforms and we anticipated some of this in our guidance. The good news is the systems team at RHD is the most experienced in our industry and have managed several of these conversions in the past. They've seen and dealt with very similar issues and they have the resources and action plan to get us back on track. We just have to work our way through it. So all in all, while we do have some issues to manage, we're feeling great about the integration to date and are tracking well to achieve our synergy targets.

Now I'll turn to some of the operating highlights for the quarter. Advertising sales in the first quarter were in line with expectations, at about $707 million. On a same-store, same-accounting definition, this would be about flat to last year. The results reflect strong performance in the Sprint markets, transition to the Dex business and the continuation of our turn-around initiatives in Illinois.

First quarter ad sales in Dex markets were essentially flat, reflecting the unavoidable distractions that came with the pending acquisition, as well as the impact of some of these system issues that I referenced earlier. Most of the advertising sales for the quarter were generated during sales campaigns that took place in the second half of 2005 prior to the acquisition. But we expect that similar integration distractions and the effects of system clean-up will likely affect second and third quarter results, as well. Again, these were anticipated and are baked into our guidance.

Our AT&T markets in Illinois were down in the quarter, as they continued to be impacted by the implementation of our new business policies and practices designed to improve usage and value for our advertisers and deliver richer shopping content to consumers. We've got one more tough quarter to go through as we work through this cycle of change. But we expect to begin seeing the benefit of these investments and some modest improvement in results in the second half of 2006.

Meanwhile, we continue to enjoy solid sales growth in the Sprint, territory driven in large part by good performance in our major markets. This part of our business remains extremely healthy and reflects the kind of stability and quarter-after-quarter sustainable growth we're working to achieve in our other brands.

Turning to online, Simon Greenman and his team are working diligently to move RHD and Dex to a unified digital strategy and brand. We'll have more to report on that front in the coming months.

Dex online continues it's reign as the leading local commercial search site in the 14 state Dex region. And our other sites are experiencing very rapid growth in traffic. A strong indication that consumers will migrate to where they can find the most complete and accurate content available when searching for who sells the products and services that they seek in their local area.

We've also recently launched a very exciting business-to=business and industrial search site for the greater Chicago area. This site uses our latest search features and technologies to help business and industrial buyers find who sells the unique kinds of products and services that they need; things like trucking companies and pallet manufacturers and crane companies and accountants and many, many more. The site deploys our next generation map-based search functionality that allows users to move around the map by dragging it, a functionality made very popular by Google, or map an itinerary based on several stops. The site also introduces our new comparison shopping feature that let's you select a handful of suppliers from your search results and compare information about them side by side. I would encourage you to visit and play with the site at www.chicagob2b.com, and that's B, number 2, B. It will give you a great sense of where we're headed with online search at R.H. Donnelley.

Finally, we've also begun to introduce the Dex Clicks product into a few of the Sprint and AT&T markets. After monitoring the results of this product in the Dex markets for the last few quarters, we're convinced this is a very complimentary product to our other products and services, and it's something that advertisers want us to help them out with. And we will continue to roll it out in other markets over the next four to six quarters. We're taking a measured approach to the roll-out to ensure that we can manage the work flow and fulfillment of these Clicks packages for our advertisers. One of the lessons learned from Dex was that you've got to manage the work flow from this product as it scales up, because of limitations on inventory and our vendor's ability to satisfy the Click orders on a timely basis.

So to wrap up, while this is going to be another busy transition year for us, we're very excited about what's happening at R.H. Donnelley. The integration is going well and we're thrilled with the markets, the products, and the people that have come to us from Dex. And the integrated marketing solutions that we're offering today with our core Yellow Page products, mini companion products, internet Yellow Pages and search engine marketing services, position us to be the leading provider of marketing solutions for the small and medium-sized business owner for many years to come. I look forward to updating you on our continued progress.

Now before I turn the call over to Steve, I wanted to personally acknowledge George Burnett's decision to leave the RHD board to spend some well deserved time with his family and focused on the next chapter of his professional career. His support over the last several months with the merger integration process has been very much appreciated and we wish him continued success in his next endeavor.

Now, I'll turn the call over to Steve.

Thank you, Dave. Good morning everyone. The new RHD generated $232 million of adjusted free cash flow from $376 million of adjusted EBITDA in Q1, including Dex January results. We're continuing to improve our capital structure and we're pleased to confirm 2006 guidance.

Let's review these three items in greater detail. Q1 pro-forma adjusted free cash flow of $232 million includes $46 million from Dex in January. EBITDA of $376 million includes $75 million from Dex in January before $27 million of debts accrued transaction expense and excluding a $16.5 million FAS 123 charge. Free cash flow conversion exceeded 60% of EBITDA, again demonstrating the superior value of our EBITDA compared to other companies. Q1 pro-forma adjusted revenue of $677 million was consistent with expectations and generally in line with last year.

Pre-FAS 123 margins, EBITDA margins was 55.5%. While our EBITDA certainly exhibits less seasonality than cash flow, the timing of costs to achieve synergies will be weighted toward later in the year, foreshadowing modestly lower margins for the balance of the year, consistent with our full-year guidance for 53 to 54%. About half of Q1's FAS 123 charge relates to change in control provisions from the Dex transaction. For the rest of 2006, FAS 123 expense should run around $9 million per quarter.

Q1 cash interest payments were $132 million, while pro-forma adjusted interest expense of $213 million reflects accruals for Q2 and Q3 payments, plus deferred financing cost amortization, minus purchase accounting credits from the fair value adjustment. Q1 free cash flow includes $243 million of operating cash flow and CapEx of $11.5 million. One caveat here, the first $90 million interest payment on our new hold co-notes is due in July.

Even adjusted to reflect a quarter's worth of this payment, our Q1 free cash flow conversion would have been 50% of EBITDA. Let's switch to capital structure. Net debt at the end of Q1 was just below $10.5 billion, having repaid over $150 million during the quarter. We borrowed $2.5 billion in Q1 to fund the cash portion of the Dex acquisition, to refinance Dex's 5 7/8 notes, which were put following the change in control, and to redeem our convertible preferred stock, thus reducing diluted common shares by 5.2 million. At the end of the quarter, Dex entities also drew $141 million on revolvers to prefund their share of corporate interests and operating expenses for the next several quarters. Our $331,200 million cash balance includes this amount plus cash flow generated during the quarter that was not yet applied to debt service.

Upon closing the Dex transaction, we recorded Dex bonds trading above par, with an initial fair value adjustment of $225 million, as required by purchase accounting. This adjustment has no impact on principal obligations or interest payments and should be excluded from leverage calculations. Amortizing this fair value amount will credit GAAP interest expense, while those bonds remained outstanding, including a $6 million benefit for two months in Q1.

In April, we also amended our credit agreements to reduce rates on more than $3 billion of bank debt and to conform pricing across the facilities. These rate reductions should save us $8 million annually. At March 31st, our weighted average cost of debt was 7.75%, including this amendment, and 80% of our debt was fixed rate.

This morning, we're also pleased to confirm 2006 guidance. As Dave mentioned earlier, our integration is in full swing, we're on track to achieve first year synergy targets, free cash flow should approach $10 per share and we're building a foundation for sustainable 2 to 4% growth.

One last housekeeping matter before closing; this year we present pro-forma adjusted figures for 2006 and combined figures for 2005, spelling out our assumptions in the footnotes to yesterday's earnings release. All prior period combined numbers simply add together last year's reported figures for RHD and Dex with no pro-forma adjustments. We provide these data to save you the trouble of preparing them, but we urge you to read the footnotes carefully to clearly understand the limitations of using these figures for analysis.

That concludes our prepared remarks. Operator, we're now ready for questions.

Thank you. [OPERATOR INSTRUCTIONS] Mark Bacurin of Robert Baird & Company, you may ask your question.

Good morning, everybody. Good quarter.

Thank you.

A couple things -- Steve, thanks for the breakdown on the debt -- fixed versus variable. Could you also tell us what specifically -- just the debt issuance amortization charges were in the quarter?

The deferred financing cost amortization?

Right, exactly. Not the fair market value.

I think that was high single digits, like between $8 and $10 million -- something like that, Mark.

We're going to -- our 10-Q is going to be filed next week and we'll break all that out in detail. I think it's something like $8 to $10 million.

Okay, great. And a couple of, I guess, more strategic questions -- I noticed lately seeing a lot of television advertising out of Yellow Book. Just wondering if you're seeing any impact in your ongoing renewals, in terms of -- either more pricing pressure or issues in terms of less -- lower renewal rates, given the more aggressive advertising activities by them.

Mark, it's Peter. I think Yellow Book has always been aggressive with their advertising. They're doing a little bit more brand advertising these days. And I think that we've been consistent over the last three or four years, that competitors in the marketplace have different strategies they've employed and we remain confident in our abilities to compete in the marketplace. And I don't see that this is any different pressures than we've seen in the past.

Okay. And then, Dave, it sounded like -- with one more quarter, now, of the tough comps in the AT&T market, it sounds like you're at least optimistic we might see that advertising sales number you now report moving to the plus category, is it moving to the back half of this year? Is that a fair assessment?

We're working at it, Mark. We're clearly -- it's still a little bit early for us to know unequivocally, but clearly Q3 is performing better than the last several quarters that we've reported on. And I think we'll have pretty good visibility for you on the Q2 call, whether it breaks through, finally, into the positive reporting side.

Mark, let me just make a couple comments. One, when we look at Illinois and we're looking -- we're working at it pretty hard. We see new accounts increase -- and increase their spending. I think the AT&T brand ,which is one of the issues that we had up there, as it changed brands for so many times in the last 10 years -- the AT&T brand has really turned out to be a real good positive for us. We've been attacking the receivables and we're actually seeing real good signs with the receivables. And I think what's really most important is the reaction that we're seeing from the customers and from the sales force about putting in the products that make sense there. And I think that the energy we see there. It's -- we're not going to declare victory yet, but I have to say there's a lot of clear positive signs we're seeing.

Great. And then the systems change at Dex -- can you give us any sense of what -- what incremental costs you may be bearing related to that? What impact you think that's having in terms of the year-over-year sales trends? Just trying to get some color on how big of an impact this is and is it -- is this something that we see tailing on -- it sounds like at least for the next couple quarters. Just wondering how that may reflect on the guidance as you move into the back half of this year.

Yes, Mark, I don't think it's really different. I don't think it's going to have a negative impact on our guidance. I don't really see any material incremental change in cost. It's just working it through. Just a great example is -- and again, I want to just preface this with -- we went through this in the 1997 time frame, when we came off our legacy systems, as well. So I can empathize a little bit. But the -- when you have these problems, particularly with billing errors and things like that -- when our salespeople are out talking to these advertisers, they're having to spend an inordinate amount of time helping them get their billing straightened out and things like that, and not spending as much time talking about, how we can help their business. And that's the biggest nuisance of all of this, as we go through it right now.

Is there any way to quantify what percentage of your -- of the Dex customer base ended up getting -- having billing errors or publishing errors? Are we talking, this is -- ?

I don't know how to give you a percentage, but let me just give you a -- to kind of help dimensionalize this for you a little bit. Generally, in the R.H. Donnelley legacy business, we have about 77 or so advertiser complaints in the queue being resolved at any given point in time. As a result of this -- kind of build-up associated with this, we're dealing with -- in the neighborhood of 13,000 to 15,000 of these backed up in the Dex business. So, we're working through it.

Okay. And just finally, I think the [Wells, Carson and Carlisle] stock -- the Dex stock that was converted is probably now unrestricted. Any sense what their thinking is, with regard to that stock? And I understand it's probably their decision on what to do with that, but I didn't know if you had any color on that for us

Yes, the lock-up expired -- I guess it was earlier this year, Mark. It's really -- they get to decide when they want to do it. They've got registration rights and we've got agreements to help them sell the stock, if they should decide to sell it. My read on the situation is that they're not sellers at the current price. So I think that it's not likely to come any time soon unless the stock starts to run. So -- but it's really going to be up to them. I think that, generally, they're in the private equity business, not the public equity business. So I think it's fair to assume that ultimately they'll sell, but my sense is that they're going to be pretty patient about it.

Great, thanks a lot.

Thank you, Mark.

Lisa Monaco of Morgan Stanley, you may ask your question.

Hi, yes. Could you just give us a little bit more color on the Dex markets -- how you're approaching those markets as you're going in to do some of the process reengineering, what markets are you targeting first? And if you can give us a little bit of color on -- some markets are performing better than others within the Dex group?

And then secondly, can you just give us an update on how you're approaching the [Amdocs] integration. Has that begun already? My understanding is it's still going to take about 18 months to integrate that. And which platforms are you using to -- in the integration process? Thanks.

Lisa, I'll start -- this is Dave -- I'll start with the Amdocs question and I'll give -- turn it over to Peter for the Dex market questions. We're still in the -- there's a lot of planning -- forward front-end planning that goes on in these system integrations and we're still working through that plan between the two systems and working very closely with Amdocs in coming up with the right answers. So we are not to execution stage on that yet. We're still doing all the forward work.

When do you envision being in the execution stage?

I think some parts of it will begin to start towards the latter half of this year -- of '06

Lisa, it's Peter. I've spent the last 50 days or so in the field in Dex almost exclusively. And a couple of things -- as Dave said, having seen almost every market in the country, these are terrific markets, terrific people. And I think to answer your question, the first 50 days, really, is to -- I think you get a different level -- or perspective when you actually are in the field talking to the customers and seeing their reactions. And the customers are just amazing with some of the terrific reactions of not only the brand, but the product and the results. So very encouraged with that.

And then we've implemented -- really, I think I'll start with the first one. We've accelerated what we call the MIP process, the market investment plans. And this is a market-by-market investment process and in the first 50 days, we've probably attacked almost $500 million worth of markets; which is one of RHD's business process where we really go in and look at each market on a very individual basis to determine how we're going to invest into these markets. It's a combination of sales and finance and marketing and training, et cetera. Very encouraged with how well they're doing with the process to start out.

And when it comes to -- I'll give you one other process, the training process is another one that we're looking at which RHD feels very strong about, kind of impacting the point of sale. And I think that we're making steps to implement our RHD training process there, which is an eight-week process versus a three-week process for people coming in. As well as, I'd say, pretty rigorous relative to anything else they've ever seen. And it's really driven by people who are proven top performers in the industry versus, I think, Dex and many other models had people in there who were good trainers but not necessarily from the industry. And there's a dramatic difference we see in the type of results that we can derive from that. So those are two highlights, but very, very encouraged after the first 50 days.

Can you, Peter, just give us an idea which markets you think have the most up side?

Well, it's -- there's a lot of great markets out there. I mean, and candidly, we're -- part of our guidance number is built into there -- we're seeing new competition in some of our marketplaces. But relative to -- I don't want to say that Sprint or whatever had terrible markets, cause they don't, but there's a lot more growth in some of the southwest parts of the country. And you look at the vitality factors of like a Salt Lake or a Phoenix or a Tucson or Albuquerque or these different -- they're tremendous markets. And when you have that kind of growth in markets, we feel real good. And if you look at all the vitality ratings, which we look at in the market planning process, you have to feel real good about these.

Okay, thank you.

Karl Choi of Merrill Lynch, you may ask your question.

Hi, good morning, a couple of questions. The first one -- I just want to clarify, was any severance or integration costs included in the operating costs in the quarter? Or was everything included in the $16 million charged to that, I presume they were capitalized as part of the purchase price?

And second was, did bad debt provision go up meaningfully as a result of some of the systems issues that you identified over at Dex?

Okay, Karl, good morning. As far as the severance costs, I don't think there was any of that included in the $16.5 million. That's all related to equity-based compensation. And as far as the amount in the first quarter kind of cost to achieve synergies, if you will, I think in the expense phase, it was like $1 million bucks or something --

Okay.

-- in the first quarter. Because we're just -- got our control of the business on February 1st. And remember now -- well, today, it's May 4th or whatever it is, we're reporting on Q1 results, so that's really February and March. And that's why I think that -- one of the reasons why the EBITDA margin was a little stronger in the first quarter than our guidance for the rest of year.

The second question -- sorry. Remind me what your second question was?

Bad debt.

Bad debt. Really not much of an impact from the Dex markets in the first quarter. I think if anything, it's going to have more of an impact on the claims rate, which is something that we report between gross ad sales and net revenues, so you wouldn't necessarily see it in the P&L because we report revenue net of claims.

Okay.

We're seeing a little bit of impact on that line.

Okay. And just to follow-up, could you update us on your outlook for integration costs over the next couple years?

We've set $75 million of costs to achieve synergies over two years, in order to get to $50 million of synergies. And I think that's as good a number as we have. One thing I'll clarify, though, is that that $75 million will show up both in the operating expense line and in the CapEx line. So it's not going to all hit the P&L. Some of it will show up in CapEx. And I think in particular this year, you'll see a number included in CapEx that's going to be in the kind of -- I don't know, I'd call it mid to high teens or so of CapEx this year would be really considered -- should be considered costs to achieve synergies.

My last question, D&A and tax rate in the quarter, are these good run rate figures to use for the rest of the year?

Pretty much. The effective tax rate, I think, ended up at 38%. I think that's -- that was both on a GAAP basis and on an adjusted basis. I think those are good numbers.

And the D&A number -- actually, I know several of you were asking questions about that last night. Good number for us to use for the year. When you look at the adjusted numbers, remember the GAAP number is going to only reflect the acquisition for two months --- and just to point out -- we'll give you more detail about this in the Q next week. But we, as part of purchase accounting, had to review the overall nature of the intangibles and assign new asset lives to the various intangibles. So it's not going to get you to the right answer if you just look at what Dex reported last year as amortization and what we reported and add it together. That's not going to work because we had to revalue all the intangibles, establish new lives based on a new study of all those assets -- and we'll give you all that detail in the 10-Q next week.

Thank you.

Thank you, Karl.

Peter of Appert of Goldman Sachs, you may ask your question.

Yes, good morning. It's actually [Peter Zolkowsky] in for Peter Appert. A couple of questions on the online world. First of all starting with the web Clicks products. I know that Dex had rolled this out to a lot of their markets in the beginning of 2005. I'm just wondering if you had any data as to how that's going, with regards to current sales, as well as renewals of customers that may have signed up early last year.

Hi, Peter, it's Dave. Clicks has proven to be a really good product. It's still a little bit early and hard to get a complete read on it because as -- maybe you picked up on my comments, Dex sold quite a lot of Clicks last year, and in fact, sales and demand for the product began to exceed ability to fulfill on the product in a timely basis. So we've had to kind of slow it down a little bit, especially as we've rolled it out across the RHD legacy markets. as well. But renewal rates are pretty good,especially given that we didn't do good a job in getting the Clicks fulfilled for some of the customers as we would have wanted to. But this clearly appears to be a product that has legs and will be kind of a permanent part of the integrated marketing solution that we're going to offer.

Excellent. And then you basically slowed it down when you took it over this year, Dex wasn't doing that last year?

Well, it all kind of came -- this all kind of occurred right around the January time frame, where it just -- because they -- it was a little chunky, the way that they were selling it, too, and the way that they deployed. It wasn't coming in smooth. So it got a little chunky towards the end of the year. And it just, based on watching what happened with them -- again, we're -- it's a new product, so we're learning. You've got to kind of manage -- it's like a smooth work flow with that, you can't just drop a bunch of it in at one time.

Got you. On other online initiatives -- basically, you have, obviously, the -- all the URLs from the Dex and the legacy RHD products. Wondering your philosophy with regards to RHD going it alone versus the partnering strategy that Dex had with Google and Yahoo and some of the other online search portals. What your feeling is with regards to both of those situations? I know that the Dex situation still exists with Google and Yahoo. And you guys haven't announced, in terms of what you're doing there, with the legacy RHD products.

And then on top of that -- your philosophy with regards to going into a national strategy, possibly with AT&T on the Yellow Page --- or at this point, AT&T and Bell South, on the Yellow Pages.com strategy of just having one URL for the incumbent industry across the country to compete against maybe a Yell that's kind of getting a more national footprint.

Yes. On the latter question -- I can't speculate on what we would or wouldn't do. It's like with someone like YellowPages.com, although it's -- clearly, we acknowledge that there's a tremendous amount of industrial logic to the concept.

On the collaboration with Google and Yahoo, we've gotten comfortable that that kind of -- those types of relationships are going to be important on a go-forward basis to provide value to our advertisers and more usage to our advertisers, again, through our integrated marketing solution strategy. We're working on ways to expand those further.

Excellent. I love the industrial logic term. That's a very good one. On the AT&T market -- just two last questions -- on the AT&T market, can you give a little bit of sense on how -- what sales were down in that market in the first quarter? And do we kind of look at that as being sort of a bottom for that business and then picking up as we get into the second half of '06?

Peter, it's a really small quarter, first quarter, and we don't comment on specific markets. But there really isn't much in that first quarter. And the other thing, Q2 is going to be a tough one, too. We're -- we've still got a lot of work to do. A lot of the heavy lifting is hitting us in Q2, there, as we finish cleaning up the things that we were doing with covers and bad debt and all of those kinds of things. So -- but hopefully ,that's the bottom -- Q1 and Q2 are the bottom.

And then lastly, I think someone asked you earlier about the lock-up expiration on the financial sponsors from Dex.. It would be my understanding that if the lock-up expired -- I think it was May 1st, May 2nd, something like that -- that because you're reporting earnings today that there would be an extension to that. Is that true? Or did it really expire on May 1st, 2nd, in that range?

No extension.

No extension? Okay, great. Thank you very much.

Thank you, Peter.

Paul Ginocchio of Deutsche Bank, you may ask your question.

Great, two questions. First, sounds like with Bell South moving to Tallahassee, they've slowly been expanding their footprint in Florida where they were not the local exchange carrier. Can you talk about how much more revenue in Florida -- of your total footprint, how much much revenue that you have in Florida that Bell South is not in?

And then second, I know you changed your rates -- I think on your consumer book. In Chicago, you reduced it closer to your realized rate. What kind of impact did that have on the sales process in Chicago? Thanks.

Paul, on the first one, on how much of our revenue in Florida we don't compete with Bell South, I don't -- I really don't know. Half, maybe.

Yes, I think that's a decent estimate, half. Maybe it's even two-thirds that we don't.

Yes.

And how long -- how much of that of the total portfolio -- ?

Orlando is the place we really compete with them.

Orlando, Ft. Walton and Tallahassee -- so kind of from the central part up we compete and in the southern part, we don't.

And we've been competing for years in Orlando and --

What was the second part of the question, Paul?

Well, just to finish that one up -- somewhat your expectation that they would move into the rest of your markets, based on their history?

I guess -- Paul, it's Peter. I don't -- I think their contiguous markets, there, versus the Naples market or south is a little bit distant. And I think that we've competed with Bell South for years and years. And we're very comfortable -- we've done well in Florida and we expect to continue to do well.

So these are the contiguous ones with their current local exchange [inaudible]?

And Paul, I think our core strategy is, we will be the product of choice in that marketplace. And that's driven by great usage and great content. And as we continue to focus on that, we deliver the product of choice. And we've found that to be very successful.

Great. Just the second question is -- I think it was -- you lowered your rate on your main Chicago book. I wondered what the impact was with clients and what you're seeing?

Right. As we kind of restructured the entire Illinois footprint to make things simpler, that's the whole thing, and get closer to the real rate and get out of the discounting type of approach to sales.

I'll just add, Paul, that whole Chicago MSA is a really complicated marketplace. There's a tremendous amount of product around there, and it had gotten -- the pricing plans there had gotten so complex -- it's like with discounting -- that our research was telling us, clearly, that advertisers weren't -- were having a tough time figuring it out anymore. So this was just another one of the things that we had to do to kind of clean-up the mess up there.

Just for clarification, when was that implemented? And I guess it's too early, probably, to say what the positive impact is?

Well, I think it's been in the last couple of quarters we started to attack it. And as Dave said, we think that the bottom is at the end of the second quarter.

But for that specifically, Paul, I'd say I think that's more -- we see the positive impacts of things like that the following year, not the year that we do it.

Okay.

Our final question comes from Maurice McKenzie of Friedman Billings Ramsey.

Good morning, thanks for taking the question. Just a few. The first is, how much flexibility do you have to repurchase shares, given the current share price? And as a follow-up to that, can you update us on your target leverage and the future outlook for dividends, once you reach it?

Okay. Good morning, Maurice. It's Steve. At the moment, we have very little flexibility to repurchase shares, which is unfortunate for us, because we think that the stock looks pretty attractive right now. But as -- based on our -- there's really two restrictions; one is from our credit agreement and the other is just in terms of getting cash upstream through restrictive payment baskets. And the credit agreement does give us some flexibility, once we reduce our leverage down below 6.5 and then I think there's more flexibility when we get down below 6, et cetera. So I think that's going to be more relevant next year than this year.

As far as our target leverage, I think we have not changed those levels -- kind of mid fives, I think is perfectly comfortable for us. And once we get there, which our expectation is we get to mid fives, really, three years out. Whether we'll implement a dividend or buy back stock or exactly what we'll do with our excess cash flow, it's kind of hard to say at this point. Historically, we have favored share repurchases over dividends. But we hear from shareholders, some of whom believe dividends are more attractive and others feel share repurchase is more attractive. So we'll continue to evaluate that, but it's not something that we spend a lot of time thinking about right now. We're focused right now, from a financial point of view, of repaying our debt and getting the leverage down to our targets.

Thanks, Steve. One more. Can you refresh us on the [quest take-or-pay]contract? When you see those dollars coming in in 2006?

The contract is for $20 million a year, in terms of cash payments independent of how they actually spend the money, and the cash actually comes in erratically throughout the year. So as far as their spending itself goes, I'm not sure where it is right now. The first quarter might be -- I'm not sure what it is, but I think it's -- from a cash impact, it's really pretty consistent.

Thanks for the update.

Thank you, Maurice.

That concludes today's question-and-answer session.

All right. I'd like to thank everyone for their continued interest. If there's any follow-up questions, please feel free to contact Jim Gruskin. And have a great day.