Thryv Holdings Inc (THRY) 2007 Q2 法說會逐字稿

Good morning and welcome to Idearc's second-quarter 2007 earnings conference call. At the end of the Company's prepared remarks, there will be a question-and-answer session.

Some statements made by the Company today during this call are forward-looking. These statements include the Company's beliefs and expectations as to future events and trends affecting the Company's business, and are subject to risks and uncertainties. The Company advises you not to place undue reliance on these forward-looking statements and to consider them in light of the risk factors set forth in the reports filed by Idearc Inc. with the Securities and Exchange Commission. The Company has no obligation to update any forward-looking statement.

At this time, I would like to turn the call over to Mr. Dee Jones, Senior Vice President of Investor Relations. Please go ahead, Dee.

Good morning, everyone. Thank you for joining us today. With me today are Kathy Harless, President and Chief Executive Officer, and Andy Coticchio, Executive Vice President and Chief Financial Officer.

We will refer to some non-GAAP measures that exclude one-time costs related to the spinoff and other special items that are intended to present our quarterly and year-to-date financial results as if we had been a stand-alone entity at the beginning of the periods presented. Given that our spinoff from Verizon occurred in November of 2006, management believes these non-GAAP measures provide investors with a more meaningful view of our performance and a better benchmark to compare future performance. We have provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures on our website at idearc.com, under the Investor Relations tab.

Please note that an archived version of this call will be available on our website at idearc.com under the Investor Relations section. Additionally, a replay of this conference call will be available through August 16th by dialing 888-203-1112. International callers should dial 719-457-0820. The replay access code is 4808510.

Now, I would like to turn the call over to Kathy Harless, our President and Chief Executive Officer.

Thank you, Dee. Good morning, everyone, and thank you for joining us today. As we discuss our 2007 second-quarter earnings results, I would like you to take away four important points from this call. First, our multi-product revenue growth is positive at 0.4%. Second, our Superpages.com revenues grew 33%. Third, our adjusted pro forma OIBITDA grew 3.4%. Fourth, our strong cash flow will fund another quarterly dividend to stockholders. Andy will provide financial details about all four of these points shortly.

Overall, these are strong second-quarter results, with contributions from across our multi-product revenue base. Superpages.com, in particular, remains in high gear. We also continue to make the investments that allow us to unleash the full potential of our multi-platform strategy across the country.

We believe that the success of our strategy to drive revenue and references across all media continues to be apparent in our solid second-quarter results. That's why we have been able to maintain steady improvement in revenue trends. As of today, August the 9th, we are reiterating our full-year guidance, noting close to flat multi-product revenues and only slightly OIBITDA margin contraction from 2006 adjusted pro forma results.

Now, what you'll hear today is a story of consistency. We are exactly where we expected to be, and our execution on strategy is working. Customer loyalty continues to be strong, and our sales productivity is in line with what we expected for the quarter.

Our Superpages.com story continues to build on its impressive performance track record. Superpages.com revenue grew 33% in the second quarter over the same period last year. In the second quarter, we launched a number of robust initiatives to continue delivering high-quality leads and references to online references. This further underscores our ability to act as a local business partner for our small to medium-size businesses, from florists to landscapers to restaurants.

Now, one of the most exciting initiatives is our introduction of video advertising clips. Video clips will help in our quest to appeal to the broadest set of advertisers possible as we bring the small and medium business customer online. Our Internet sales channel is now selling the product as a trial in our Seattle, Los Angeles and San Francisco Bay markets. Local video clips give small to medium-size merchants the opportunity to showcase their business products, services, specialties and personalities on Superpages.com. Consumers can view these video clips and get an up-close look at a business before making a buying decision. I would encourage you to view our video clips offers at video.superpages.com.

Now, another second-quarter initiative was the launch of a new relevancy-based sorting algorithm that pairs the highest-quality advertisements with consumer search queries. Superpages.com advertisers are rated on a set of criteria that includes relevancy, performance and bidding. Our sales reps work closely with their advertisers to be sure their ads are rich in content and include information that will result in more valuable leads generated through our array of distribution. Superpages.com continued to drive more traffic by placing advertisers' content across multiple channels including Internet, mobile, instant messenger, directory assistance and other local search vehicles.

Now, to this end, the Company signed a distribution agreement with V-ENABLE, Jingle Networks, Multiplied Media, HappyMedian, DirectoryM, Neighborhood.com, Intellistrand and YellowUSA. Along with Superpages.com, Google, Yahoo and MSN, our advertisers' content can appear on more than 250 other Internet sites.

Now, just this past month, we announced a strategic alliance with Jingle Networks, operator of the 1-800-FREE411 directory assistance service. This agreement allows us to place our advertisers in front of millions of people who access free directory assistance, whether by mobile phone or traditional land line. Again, this is another means of increasing references to our advertisers.

To capitalize on the vast opportunity with niche websites, we launched our LocalServe affiliate program. Website publishers can include a Superpages.com branded search module that allows users to find local content. Our advertisers' content now appears on news, lifestyle and service-based websites such as Pegasusnews.com, Lynxxusa.com, Huntlocal.org. You can see that we have and will continue to work diligently in the transformation of Superpages.com into a major player in the local search space.

We also have been working steadfast on driving references to our print product. In the second quarter, we continued to develop and introduce new features in the Verizon Yellow Pages, such as the Underground Shopper content in the Dallas and Fort Worth-Arlington directories. This editorial-driven shopping section is aimed at increasing consumer references and retention.

Our companion directories continue to be successful, and are an essential part of our strategy for increasing consumer references. As we mentioned last quarter, and I really think it's worth repeating again, we publish more than 170 companion directory titles, more than any other company. This is important. In fact, the industry expert Dennis Fromholzer's recent report showed that companion directories deliver about 40% additional costs to advertisers.

In addition to creating innovative features in the Verizon Yellow Pages, we continue to expand our print product offerings. We sell and publish direct mail packages in select markets as well as the new Solutions at Home magazine, which is a targeted home improvement publication. In the second half of the year, we plan to expand our Solutions family of direct mail products in additional markets. These products include Solutions at Hand, Solutions at Home, Solutions on the Move and Solutions Direct.

Now, with that, I would like to turn the call over to Andy Coticchio, our Executive Vice President and Chief Financial Officer, to give you financial details about our multi-product revenue improvement, Superpages.com continued revenue growth, adjusted pro forma OIBITDA growth and another quarterly dividend to our stockholders.

Thank you, Kathy, and good morning, everyone. First, I need to mention that we will refer to GAAP and non-GAAP results, so that you can readily adjust second quarter 2007 for comparison to 2006 adjusted pro forma results.

Here are the financial headlines. One, we experienced continued improvement in multi-product revenue, as adjusted pro forma multi-product revenues grew by 0.4% in second quarter 2007 compared to the same period in 2006. Two, we delivered strong revenue growth in Superpages.com. Three, adjusted pro forma OIBITDA grew by 3.4% for the second quarter. Four, our continued strong cash flow enables us to declare a quarterly dividend to be paid in the third quarter.

Before we delve into the financial results, I need to note that during the second quarter we adopted a change in accounting methodology associated with the recognition of sales commissions. Sales commissions were previously recognized as incurred. We are now deferring sales commissions and recognizing these costs over the life of the product.

This methodology more closely aligns expenses with revenue recognition, and is consistent with policies of of others in the industry. Prior-period financial information has been adjusted to reflect this accounting change, as reflected in our current report on Form 8-K filed with the Securities and Exchange Commission this morning. As I discuss our financial results, please note that our positive operational performance is evident with or without this accounting change.

Now, to the financial results. On an adjusted pro forma basis, second-quarter multi-product revenues were $805 million, an increase of 0.4% compared to the same period in 2006. This was driven by improved print revenue trends and strong growth in Internet.

Superpages.com continues to be a phenomenal story. Internet revenue was $73 million in the second quarter of 2007, a 33% increase compared to the same period in 2006. On an adjusted pro forma basis, year-to-date multi-product revenues were $1.61 billion, an increase of 0.2% compared to the same period in 2006. Year-to-date adjusted pro forma Internet revenue was $141 million, a 32% increase compared to 2006. Superpages.com's performance was driven by solid growth from all sales channels, increased traffic and contribution from both fixed-fee and pay-for-performance product offerings.

After giving effect to the accounting change, we reported OIBITDA of $364 million for the second quarter of 2007. On an adjusted pro forma basis, excluding nonrecurring costs, OIBITDA was $391 million, an increase of 3.4% compared to the same period in 2006. Adjusted pro forma OIBITDA margins of 48.6% in the second quarter of 2007 improved as compared to 47.1% in the same period in 2006. This improvement was due to the increase in revenue, along with reduced overhead expenses, partially offset by Internet-related expenses associated with Superpages.com's growth and additional selling expense.

When you look at results on a sequential-quarter basis, comparing second-quarter 2007 adjusted pro forma OIBITDA to first quarter 2007, we reported an increase of $12 million or 3.2%. On a year-to-date basis, reported OIBITDA was $718 million. On an adjusted pro forma basis, year-to-date OIBITDA was $770 million, compared to $780 million in the same period in 2006. The change in year-to-date adjusted pro forma OIBITDA was driven by the first-quarter impact of the Company's investment in additional sales representatives and other strategic initiatives implemented in 2006.

To give you a clear picture of our second-quarter operational performance and results, let's take a look at what these results would have been, had we not implemented the accounting change I mentioned earlier. Excluding the accounting change, second-quarter OIBITDA on an adjusted pro forma basis would have been $385 million, an increase of $19 million or 5.2% over the same period in 2006. Year-to-date adjusted pro forma OIBITDA would have been $766 million, an increase of $1 million or 0.1% over the same period in 2006.

Now, let's take a look at some other components of our financial results. We reported net income of $109 million or $0.75 per diluted share for the second quarter of 2007. Adjusted for nonrecurring costs, as shown in our financial schedules, Idearc's adjusted pro forma net income for the second quarter was $127 million or $0.87 per diluted share. This is an increase of $17 million or $0.12 per diluted share on an adjusted pro forma basis over the same period in 2006.

Year-to-date reported net income was $212 million or $1.45 per diluted share. On an adjusted pro forma basis, year-to-date net income was $246 million or $1.69 per adjusted share, an increase of $11 million or $0.08 per diluted share over the same period in 2006.

In moving from OIBITDA to net income, I want to call out three items. Our net interest charges in the second quarter were $167 million, including amortization of non-cash debt issuance costs of $3 million. Depreciation and amortization were $22 million and taxes were $75 million.

With respect to interest expense, the second-quarter adjusted pro forma results reflected $9 million of favorability in net interest expense relative to 2006. This favorability resulted in part from improved interest rates in 2007 versus 2006, as well as the impact of interest rate hedge transactions placed in 2007. As of the end of the second quarter, the Company hedged a total of $4.4 billion of its tranche B loan facility, with two transactions at a positive carry of 20 to 40 basis points to the existing floating rates. This brings the Company's overall debt structure to an 80% fixed-rate level. In addition to the positive impact from interest rates, we also realized some measure of favorability due to interest income associated with our cash balances.

The end result of our strong OIBITDA, improved interest expense and favorable taxes was that free cash flow for the six months ended June 30, 2007 was $116 million, based on cash from operating activities of $138 million less capital expenditures of $22 million. Free cash flow included the cash impact of $34 million associated with one-time transition costs.

Our strong cash flow again allowed us to declare a quarterly dividend. Yesterday, August 8, 2007, the Idearc Board of Directors declared a quarterly dividend of $0.3425 per outstanding share to be paid on or about September 7, 2007 to our stockholders of record at the close of business on August 20, 2007.

Turning now to ad sales for the second quarter 2007, multi-product advertising sales were down 0.6% compared to the same period in 2006. On a year-to-date basis, multi-product advertising revenues were down 0.4% compared to year-to-date in 2006. These results show the value of Idearc's multi-platform strategy, including improved trends in print products, another strong performance of Superpages.com.

In closing, Idearc is reiterating 2007 guidance as of August 9th, noting close to flat multi-product revenues expected for the year and only slight OIBITDA margin contraction from 2006 adjusted pro forma results, due to continued changes in the Company's revenue mix.

From an overall perspective, these results reflect the investments we are making in the business, including new Internet initiatives and new print product innovations. Again, as Kathy mentioned, we continue to make investments that allow us to unleash the full potential of our multi-platform strategy across the country. The bottom line is our strategy is working, and we believe our strong second-quarter results position us well as we look forward to the remainder of 2007.

With that, I would like as the operator to open to call up for questions.

(OPERATOR INSTRUCTIONS). Anthony DiClemente, Lehman Brothers.

So it does seem as though the strong strength in your online business did offset declining ad sales in the print business, which I think was likely expected. But I've just wondering, with the reaffirmation of your guidance for the full year, can you just speak to whether or not you think that the trend in the print ad sales number in 2Q is higher or lower or indicative of what we're going to see in the back half of the year for the print number?

Then secondly, kind of as a corollary to that, your competitor R.H. Donnelley did mention some isolated weakness in real estate and financial services in some local markets that they publish books in. I'm wondering, on the print side, if you're seeing any of that or anticipate any of that as we head into the order cycle towards the end of the year?

Regarding ad sales, we really do look at our ad sales on a multi-product basis. We think that's the appropriate way to look at our business. That's the way our strategy is designed, and we are right on target where we expect to be and having our multi-product product revenues come out close to flat.

The print sales and the mix of the print sales and the electronic sales for the first half of the year -- we're expecting that to continue through the second half of the year, and the combination of those multi-product ad sales driving the revenues, the multi-product revenues close to flat for the year.

Regarding weakness in real estate markets, the way I look at us, we're a very diverse customer base, very diverse geographic base. I can't say I see specifically anything that I can point to the real estate market weakness in any areas. We're strong as far as the revenues in California and Florida compared to our total revenues, but it's right in line with the GDP that you see in those areas for the country.

So we don't think we're overweighted in one particular geography compared to the GDP for the nation. So we are comfortable that we're going to stay on track with our guidance and deliver the revenues that we have been talking about all year.

Peter Salkowski, Goldman Sachs.

I want to look again at the ad sales number for the print products and kind of look at that a little closer, if you could give me any sort of indication. What is driving, I guess, the down 3% in the second quarter? Would it be something from the independent print products, or is it [heading] specific, or territories? Anything you can kind of give on that, just specific color?

No. I've talked before about we do think we see some lumpiness quarter to quarter. I know there is some softness on a sequential basis in the print sales, first to second quarter. But we're looking at the entire year. We're right in line with where we think we need to be, and multi-product ad sales are up over 100 basis points versus the same quarter in 2006, and we really do focus on this as a multi-product strategy. We're not overly concerned at the underlying print piece, because we do look at it with print and Internet together, and we're very comfortable where that is.

Kathy, maybe you could talk a little bit about the new sales force? I think you mentioned a little bit in your prepared comments about the productivity of them. Give us some sort of sense on how they are doing relative to more seasoned sales force people, and if there's an expectation of maybe adding more salespeople at this point or not. Sort of what's your thought on that?

I'm very pleased with the sales force, being out with them periodically and seeing how they are growing in their knowledge of the business, as well as the products and their ability to really be able to sell this multi-platform, multi-product that we have in the marketplace. They are doing as I expected on their productivity.

They improve every day, and they really understand the need that our customer -- we will let the customer decide if they want the print, electronic or both. It really depends upon that small-medium business desire or what they are trying to accomplish in the marketplace.

I just feel very comfortable that, with all of our diverse markets, with all of the multi-platform strategy we have, we're really seeing it work and starting to take off. So I think, as time continues, we will put additional salespeople, as I said before, where we believe that there's market capacity. Our training is working. We're seeing the results from these multi-product revenue sales. As Andy mentioned, we have 100 basis points improvement from this time last year.

So any plans in the second half of the year to add to the sales force, then?

We will always add some additional sales people in different areas. To greatly increase that, we will probably continue to where we are today, with some in certain areas where we will be increasing.

In the independents or on the incumbent side? Any sense of that?

Actually, in both.

Finally, just on the separation costs, Andy, any sense on the second half of the year where you are going to be spending? Are you pretty much in line on your targets for that, for this year?

We're still comfortable with the overall annual targets. The spend is occurring as we expected, and we're on track to finish the majority of the work up in 2007. So I don't have any changes to make to those targets.

(OPERATOR INSTRUCTIONS). Paul Ginocchio, Deutsche Bank.

The cost trends improved from here. I think you've cycled the major increase to your sales in the second quarter. So I'm just wondering, if we look at the third, if the selling costs improved from the 10% gain.

Then, second, it looks like in the second quarter free cash flow was relatively weak, a pretty big outflow relative to a year ago. Is that because of the accounting change? I'm just trying to figure that out.

As far as cost trends, Paul, you're right; we are cycling through a full year of having those additional sales reps in our cost structure. But as we move into the second half of the year, we're still investing in Internet. We're still investing in the business. I think the rep cost flattens out, but they're still going to be investing for growth as we move through the back half of the year. So I can't say things are going to flatten out or you are going to see year-over-year improvement; I think we're going to do what we need to do to keep the revenue trend moving along.

As far as free cash flow, what we are going through this year is a number of transition items. We're getting off the Verizon billing platform, so there's some working capital transition issues we're working through on that.

We are rebranding as Idearc, so there were some transition issues to work through with that. We're comparable that the operational cash flows are in line with where we expected them to the, and as we work through these transition issues, that period-over-period starts to clear up as we move through the back half of the year.

The accounting change is really a non-cash item. It didn't really drive anything on cash flows, and you'll see in the schedules in the 8-K the GAAP impact of making that change.

The accounts payable sort of spiked. So is that the transition, just a season -- we'll clear that up in the third or fourth quarter?

Yes, I think that's just timing. There's nothing else going on there but just timing of AP payments. (multiple speakers).

Any way to give us the second half of 2006 or on the historical numbers, the impact of the change to accounting on selling expenses? I think you've given us the new numbers for the first and second quarters. Is there any way to give us the impact?

Yes. I think as we look at the full year last year, it was probably about $24 million difference with the accounting change and $15 million of that in the first half. So about $9 million for the back half of 2006 for the effect of the accounting change.

Any reason you've made the decision to change the accounting policy now instead of maybe at the time of the spinoff?

I think, at the time of the spinoff, with everything else we had to do between reporting our results as a stand-alone and picking up historic results that Verizon also had to report, it was viewed -- us making an accounting change required Verizon to flow those changes through their results, and we just deemed that that wasn't something we could really pull off at the spin time. So we continued to study it, and said second quarter is the right time to do it.

Jake Newman, CreditSights.

A few questions -- one, bad debt expense. Can you say what it was in the second quarter and how it compared, second quarter and year to date, to last year?

Sure. We're running in the low 4% range for the first half of the year, which is right in line with how we finished up the full year last year. So, looking at the six months compared to the prior-year 12 months, it's running about the same low 4% range.

On customer loyalty, can you speak to renewal rates in the quarter on multi-platform sales?

Yes, let me talk about the customer loyalty. We have seen improvement in our customer loyalty. We just got through with some surveys, and that has improved and going up in the right direction. We're very pleased with that, and the retention as well is improving. We believe that our companion directories are having a great impact on that. As I mentioned earlier, they have proved to be very successful in the marketplace with our customers.

On the new affiliates, can you speak to the economics of the distribution here? Are you paying for the distribution? How does it work?

With respect to that, for competitive purposes, we don't disclose a lot of details around those particular agreements. But they are essentially typical distribution agreements in the Internet space, where you are either sharing the revenue or paying for traffic.

On the direct mail, the Solutions suite, can you talk more about where that's going, how big it can get, what markets you're in now and how you might expand into additional markets?

Yes. Let me just discuss that a little bit. When we roll out products -- and you all have heard me talk about this before -- we actually go and will trial a product in certain parts of the country, in certain markets. That's usually the first year, and the second year or the next six months after that, we go ahead and roll it out across the country in areas that we know it will be very receptive. Then the third year, we do a penetration strategy and penetrate the depth into the products. We have been piloting that up in the Northeast in, I'd say, the old NYNEX properties and the old mid-Atlantic properties. They have been going very well, and we had great reception with those.

For many years, our advertisers have told us that in the Yellow Pages that one of the issues was the fact that it only came out once a year, and they wanted to have advertising more frequently than that. So these products are a solution to the demand from our advertisers, where they would like to be able to advertise monthly and/or quarterly. So with these products, that is what we're doing. It's too early, probably, yet to see exactly how big that will be across the country. But we're seeing some great results and great demand from the advertisers, so we will continue to roll that out as long as that's there.

Jeff Shelton, Bleichroeder Investment Bank.

I was hoping you could talk about some of the trends that led to the 33% year-over-year Superpages.com growth, what percentage of your advertisers are now taking the fixed-fee product, what percentage are taking the SEM product and how has average spending trended recently?

Let me just tell you -- I mentioned in my remarks that we have really been rolling out some different initiatives in the Superpages.com and really transforming it into a local search engine, that some of the things that we have been doing on the algorithms that I mentioned -- as you know, this is a different business model from just [IWATI].

This is a business model that is a search engine model. We're seeing some great results from that. The fact that we have signed so many distribution agreements, of course -- we're seeing the ability to be able to monetize the demand from our advertisers there as well, the different products that we're starting to roll out on the video advertising clips.

Now, also, from a pricing perspective, as you know, in March of this past year we rolled out some additional products and bundling with our pay-for-performance products, and that seems to be going very well. We are increasing our average value of order in that area.

So all of those things combined are really showing that our advertisers -- they want the product, we're able to sell it and we're able to fulfill it. We have been able to run the 33% over the last couple of quarters, and I expect to see that continue and grow as we move forward.

What do you plan to charge for the video product?

Well, that is in a beta trial right now, and those are the things that we are testing. So I would prefer to let us finish getting those results in, but it will be very reasonable for our advertisers. They are very excited about being able to have a video clip as a product in the marketplace.

With respect to that, that will be a pay-for-performance or a pay-per-click, as each time that a consumer clicks on that video ad, it will be on an activity basis type charge, is what we're anticipating at this point.

As Kathy mentioned, our AVOs, electronics are going up, penetration of the print customers is going up. Both the fixed fee and the performance-based products are growing. The performance-based is growing at a faster clip, but we're very pleased, just across the board, with the performance in all our elements of our Internet platform.

Now, I'd like to turn the call back over to Kathy Harless for closing comments.

Thank you. To close our call today, I'd like to note that the key to our continued progress is the ability for us to identify and capitalize on profitable growth opportunities. Our strategy for identifying and exploiting these opportunities is captured in our priorities for 2007, which include continuing to drive multi-product sales and maintaining healthy margins. So I appreciate your continued interest in IDEARC, and thank you for joining us today.

This concludes today's conference. We thank you for your participation. You may now disconnect.