Thryv Holdings Inc (THRY) 2009 Q4 法說會逐字稿

Good morning and welcome to the Dex One Corporation Fourth Quarter and full year 2009 results investor Conference Call. All participants are in a listen only mode. Please note that today's call is being recorded, as well as Webcast live over the Company's website at DexOne.com.

I would now like to turn the call over to Mr. Tyler Gronbach. Sir, you may begin.

Thank you and good morning, everyone. I'm Senior Vice President of Administration and Communication at Dex One Corporation. Hosting the call today are Dave Swanson, our Chairman and Chief Executive Officer and Steve Blondy, Executive Vice President and Chief Financial Officer. I would like to remind you, certain statements made today may be forward-looking as defined by the Private Securities Litigation Reform Act. We call your attention to our Press Release for the quarter and Fiscal Year ended December 31, 2009, and the Company's Form 8-K furnished to the SEC this morning. These documents discuss Fourth Quarter and full year 2009 results and the 8-K also includes a set of slides that correspond with the information we'll be discussing on this morning's call. 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. In addition, please review the Risk Factors described in the Safe Harbor language. Copies of Dex One's SEC filings maybe obtained by contacting Dex Corporation, searching its website at DexOne.com or visiting the SEC website SEC.gov.

During the call today we will refer to certain adjusted figures such as expenses, EBITDA and free cash flow. Some of these exclude items such as impairment charges, restructuring costs, reorganization costs, employee incentive expenses and restricted stock unit costs related to prior acquisition. Some of these items we will be discussing are non-GAAP financial measures. Additional information about the non-GAAP financial measures as well as reconciliation between these items and the comparable GAAP measures can be found in the Press Release and related 8-K furnished to the SEC. This Press Release is available on our corporate website and can be accessed by going to DexOne.com and clicking on the Investor Relations tab.

One final reminder, this call is the property of Dex One Corporation and any retransmission or broadcast without the express consent of the Company is strictly prohibited. With that, now I'd like to turn the call over to Dave.

Well, thank you, Tyler, and good morning, everyone and thanks for joining us today. This is our first call since completing our financial restructuring. A process that established a more sustainable capital structure, solidified our financial foundation, and was overwhelmingly supported by our creditors. I'd like to take this opportunity to welcome our new shareholders and to thank our nearly half a million local business clients for continuing to work with us throughout this process, the consumers who used our products over 1.5 billion times last year to find local businesses to buy goods and services from, and finally, our employees. We asked a lot of these 3,500 people and they demonstrated an unbelievable amount of poise and professionalism. They clearly understood what mattered most during this process -- staying focused on providing outstanding service and support to our clients. And given our 80% client retention rate in 2009, I'd say they did a pretty darn good job of it.

Since some of you are likely new to our story I thought it would be helpful to provide a brief overview of our operations and how we're transforming to tackle the secular changes in our industry as well as the cyclical challenges this economy has imposed. Following the overview, Steve will provide a deeper dive into our financial performance and outlook for 2010. Dex One is a leading marketing solutions and marketing services provider to approximately half a million local businesses in more than 400 markets across 28 states. Our products include our market leading yellow and white pages. We delivered more than 70 million directories in 2009, co-branded with the local incumbent telephone companies, Qwest, AT&T and CenturyLink. DexKnows.com, our nationally scoped hyper-local online search site with information on over 11 million businesses across the US. DexKnows mobile, our mobile search application for the iPhone, Android, BlackBerry, and other Smartphone devices that allows you to efficiently and effectively search for businesses, products and services anywhere in the US from the convenience of your favorite mobile device. 1-800-CallDex, our voice search application for the 14 Qwest states. DexPages.com, our searchable, digital replicas of all 700 yellow page titles we publish across the US. Dex Net, our search marketing product designed to efficiently extend the reach of our advertisers' message to major search engines, Internet Yellow Pages and other local search destinations. And finally, business.com, the largest business-to-business ad network helping clients reach ready to buy business prospects wherever they are online.

So, as you can see, from a product standpoint, Dex One has evolved far beyond its Yellow Pages roots, and while Yellow Pages remains a significant part of the product mix and will for some time, it is only one of seven platforms we're using today to generate leads for our clients and revenue for the Company. Equally important is that products are only part of the story here. We provide hands-on help to our clients enabling them to attract the right kind of ready to buy shoppers. We assist them with the creation of ads and messages, search engine optimization, keyword optimization, development of their websites, creation of videos, provisioning of coupons, and on and on. We then arrange for distribution across our owned and operated platforms as well as across the platforms of a broad network of leading local search partners including major search engines. We call our strong distribution capabilities the Dex Advantage and it differentiates us from virtually everyone we compete within our markets.

This high touch, local approach is critical because the vast majority of our clients are small and medium sized local businesses. They need help generating the phone calls and clicks they need to maintain and grow their businesses. Now, more than ever, our clients need to focus on what they do best which is running their businesses and this is precisely why our value proposition remains so relevant. They don't have the time, the expertise or interest in securing and understanding the research on what ad media their prospects tend to use. They also don't want to learn how to create, set up, and manage a high impact integrated marketing program to get their message distributed everywhere consumers search today from Yellow Pages to YouTube. By partnering with Dex, our clients not only get found by actively shopping consumers but we help them get chosen over their competitors.

One of our key competitive advantages and differentiators comes from our 1,300 marketing consultants whose job it is to build trusting relationships with these hard to reach local business owners. Our marketing consultants live and work in the market and they're responsible for thoroughly understanding each of our clients' businesses and for making it as easy and efficient as possible for them to do business with us. We work with clients to answer important questions such as -- who is their target market and what is their most profitable type of customer? What differentiates them from their competitors? How should they position their business? What messages will resonate with their prospects? What keywords are consumers most likely to use to find them online? And what media and what search products are consumers actually using when looking for information on where to buy the products and services these clients provide. Most local businesses are not marketers and do not have marketing employees. They need trusted expert advice to address these complicated and time consuming issues. Given the quickening pace of technological change and increasing media fragmentation, this need is only going to grow. Our vision and strategy at Dex One is to simplify this complex task of local search marketing for these businesses, by providing a one stop shop and the kind of hands-on help they need. So that's a little background on who we are and what we do.

Let me now move on to 2009 ad sales and provide some color on what we're seeing in our markets. As a reminder, ad sales are a type of same-store sales comparison based on year-over-year performance, and they're a leading indicator for our reported revenue which is an amortized view of ad sales. In 2009, ad sales were down 20%, primarily due to what was the worst selling environment that we've ever seen. The challenging market conditions affected the entire advertising industry, both online and offline. To provide some context, total ad spending in the US in 2009 declined approximately 15% according to Magna Global. The local ad segment in the US, which we participate in, fared even worse dropping more than 20% this past year. The difference can be explained in large part because local advertising is comprised of these small and medium sized businesses, which have been disproportionately impacted by this recession. So while our sales results are clearly disappointing, they largely reflect current market realities and the challenges local businesses have been facing.

So what did we do in 2009 to help improve results and position the Company for long term sustainable growth? Well, first, we successfully completed our recapitalization and formally emerged at the end of January of this year. We came out as a stronger Company, better able to serve the needs of our clients and better able to sustain a slow economic recovery. The reorganization culminated in our adoption of our new name, Dex One. We chose this name because it combines the promise of our Dex market brand to be local business' trusted marketing partner and our ability to be the one place clients can go to satisfy all of their local search marketing needs. Reorganization also paved the way for our return to the New York Stock Exchange under our new ticker, DEXO. We also advanced the business during the reorganization process by delivering more value to our clients via new products, partnerships and services. We rolled out our new DexKnows mobile application, launched our rebuilt DexKnows.com website, extended our voice enabled search application, made the deal with Yelp to increase the number of ratings and reviews on DexKnows.com and broadened our distribution network of premier internet partners on our Dex Net platform, increasing the reach of our clients.

2010 will bring more of the same as we focus our efforts on five key imperatives. First, generating more consumer usage to our owned and operated products; second, continuing to expand our distribution network and the calls and clicks that we generate outside of our own products through high quality partners; third, we're continuing to develop unique and differentiated content as a competitive advantage; forth, continuing our work in process efficiency and effectiveness and becoming a highly client focused enterprise through use of the Baldrige process; and five, being the best in the world at monetizing the local search opportunity in the markets that we serve. Our business model and strategy is primarily a merchant centric one. They are the ones who pay the bills. While we will continue to create, publish, and improve upon our consumer products and destination platforms, we will also continue to buildout relationships with others that have proven that they can generate high quality traffic in our markets. More and more of these partners and potential partners are realizing that generating traffic is one thing, but profitably monetizing that traffic is quite another. Our sales channel and unique access to the local businesses in our markets offers a great opportunity for them to improve their own profits while allowing us to generate and monetize even more high quality leads for our clients.

With that, let me turn it over to Steve.

Thanks, Dave. Good morning, everyone. Let's start with the headlines.

First, we beat our 2009 EBITDA and cash flow forecast in spite of the distraction from our bankruptcy proceedings. Second, on January 29, we consummated our recapitalization, eliminating nearly $6 billion of debt, lowering future interest by $500 million, extending maturities on our remaining debt, and preserving valuable tax attributes while also simplifying our corporate structure. Third, we negotiated favorable contracts with landlords, vendors and labor unions while in Chapter 11. And fourth, this morning, we're offering 2010 guidance for ad sales, EBITDA and cash flow generally consistent with the forecast we published in our disclosure statement. Let's discuss each of these headlines in more detail.

Net revenue of $2.2 billion was down $415 million or 16% versus '08, as declining advertising sales amortized into GAAP revenue. This was right in line with our disclosure statement forecast. EBITDA of $1.15 billion was down $265 million or 19% versus '08 but over $100 million better than forecast and $150 million better than the decline in revenue primarily due to our effective cost containment programs. We delivered a robust EBITDA margin of 52%. Total operating expense of $1.05 billion declined $150 million or 12% versus '08. We lowered selling and support costs by $78 million or 15% in '09. Once again, we operated the most productive sales channel in the business with average revenue per marketing consultant of $1.6 million and averaged 350 clients per rep. We also lowered production and distribution costs by $39 million or 9% and G&A costs by $40 million or 30%. 2009 G&A costs benefited from a one-time curtailment gain of $52 million consequent to our retiree medical phase out for unionized employees. This compares to a $40 million similar credit benefiting 2008 G&A costs for non-union employees. Net of these credits, G&A costs were down $29 million or 17% in 2009.

Bad debt expense of $147 million was up $8 million versus '08 and represented 6.7% of net revenue versus 5.3% in '08. As we reported to our banks in the fall, we started to experience improved bad debt trends -- from $74 million or 5.8% in the second half of '08 to $81 million or 6.9% in H1 '09 to $66 million or 6.4% in H2 '09. Now, this trend benefits us in two important ways. Not only do we collect more dollars from our customer billings, but it also foreshadows better renewal trends because we only renew advertisers that are current on their receivables. While strict credit policies during tough times might dampen ad sales, focusing on cash receipts as our primary objective has proved a winning formula during past recessions so we're sticking with that. In a stronger economy, our benchmark has been a 3% bad debt rate by comparison.

While we achieve meaningful efficiencies during 2009, we also invested strategically in numerous initiatives that outlined earlier. We expect these investments will generate improving customer and revenue trends in 2010 and 2011. Particularly once economic conditions improve and Small businesses regain optimism. 2009 free cash flow $571 million was actually $61 million or 10% better than 2008 and $76 million better than disclosure statement forecast, largely due to better EBITDA. Cash interest payments of $388 million during restructuring process were $358 million lower than 2008. While we continued to make all bank interest and principle payments during bankruptcy, we suspended bond coupons in April. Other significant components of free cash flow included $33 million of Capital expenditure, only $8 million of cash taxes, $50 million of pension funding, $26 million consumed by accounts receivable aging, $26 million paid in swap terminations, $18 million lower accounts payable as we reduced cost base and paid critical vendors punctually during bankruptcy.

Before turning to the other headlines, on the accounting front, we recognized a $7.3 billion intangibles impairment to properly reflect our recapitalized enterprise value in Q4. This non-cash expense did not impact cash flow compliance with debt covenants or tax attributes.

Turning now to our new capital structure. Post-emergence, total debt of $3.4 billion includes $3.1 billion in remaining bank debt, carrying average floating interest rates currently around 7%, including the LIBOR floors. Plus a new $300 million 12% subordinated holdco note. Breaking it down further, our bank debt now consists of $1.2 billion at RHD, Inc. with a 6% spread and a 3% LIBOR floor, $900 million at DexWest with a 4.5% spread and a 3% floor, and $1 billion at DexEast with a 2.5% spread and no floor. Upon closing, we held $189 million of cash including a $64 million holdback earmarked for professional fees, Q1 banking amortization, pre-petition vendor payments, and pension funding. Net cash of $125 million reflects our operating liquidity needs, as our previous revolvers were termed out. Net debt of $3.26 billion on emergence represented 2.8 times 2009 EBITDA, dramatically improved versus our year-end '08 net debt of $9.4 billion and leverage of 6.6 times. Apart from reducing leverage, our recapitalization achieved other critical goals including extending our bank debt maturities until 2014, lowering annual interest payments by $500 million, maintaining favorable interest rates all in below 8%, and preserving over $2 billion of tax attributes, having net present value north of $500 million or $10 per share. Furthermore, we also took the opportunity to simplify our corporate legal structure and to consolidate our public reporting into a single SEC filer.

Turning to the third headline. During our bankruptcy and/or upon emergence, we paid all trade vendors in full. However, we also negotiated new agreements with many vendors to shed fixed costs and to improve contract terms. While we won't go into great detail for competitive reasons, this included office leases, paper suppliers, IT and network distribution partners to name a few. For example, we reduced our total office footprint 18% from 1.35 million square feet to 1.1 million square feet and lowered our annual rent by $4 per foot. Likewise, we consolidated paper suppliers, from three to two vendors, and we expect to achieve 20% ongoing cost savings for this essential raw material over the next few years. We also successfully completed selective bargaining agreements, with both the IBEW and the CWA, which established competitive compensation programs while freezing defined benefit pension plans and phasing out expensive retiree medical benefits as described earlier.

Our fourth and last headline about 2010 guidance. Before taking your questions, let's take a minute to cover that. We currently expect ad sales to decline between 12% and 15% this year, reflecting the delayed participation of small businesses in our economic recovery. While this represents less of a decline compared to 2009, it's also well short of our growth objectives once the local business environment improves. Our disclosure statement identified risks to our 2010 minus 12% forecast should the economy stagnate this year. Our current ad sales guidance range acknowledges that ongoing risk. We expect net revenue of approximately $1.8 billion, down another $400 million or 18% versus '09 reflecting amortization of both '09 and 2010 advertising sales. After expenses of $1.1 billion, our current outlook for EBITDA is approximately $750 million. Subtracting $200 million for cash interest payments, $50 million for CapEx, and $50 million for other items, results in our current free cash flow outlook of $450 million. With 50 million shares outstanding, the per share math is simple. That's $9 per share of free cash flow representing a 30% yield on our recent stock price. Alternatively, our stock price implies a free cash flow multiple of just 3.3 times.

In closing, we accomplished a great deal during 2009. Operating results reflected our nation's broad economic challenges and their magnified effect on local businesses. Yet we took decisive action to address the challenges within our control, establishing a strong foundation on which to rebuild our Company once the economy recovers. Let me take this opportunity to also thank my fellow employees at Dex One for their outstanding contribution during 2009.

Operator? We're now ready to take your questions.

Thank you. (Operator Instructions) Our first question comes from Mr. Todd Morgan of Oppenheimer & Company.

Thank you, good morning.

Good morning.

If I look at the slide deck that you sent out, it says that there was about 110,000 clients that left in 2009. That's about the same number as 2008. Can you talk a little bit about the shifts -- any shifts in the reasons for leaving? For example, how many of these losses this year relate to the cash flow constraints versus going out of business, for example?

Yes, hi, Todd it's Steve. Good morning. So we estimate -- and it's really not better than an estimate -- but we estimate about two-thirds, somewhere between half and two-thirds of the 110,000 were related to going out of business or we locked them out because they didn't meet our credit standards or they just -- they went out of business, and then the other third to a half represented what we call patron request where we estimate that they put the money back in their pocket.

Interestingly, you didn't ask this but we also attracted 45,000 new clients in 2009 and generated $100 million of new business in 2009. So $100 million of new advertising that we sold in our footprint in 2009 I think is a pretty impressive figure.

Sure, and again, comparing that to 2008, can you give us a sense of what the shifts in those various categories might have been for the reasons for coming or going?

Yes, I think the bankruptcies and the failure to meet credit standards is up from 2008. I don't have a precise number for you about that, but clearly, that's an increasing reason.

Great. Well that's what I had. Thanks.

Our next question comes from Mr. Avi Steiner of JPMorgan Chase.

Thank you for taking the question. Just as a follow-up, on those client wins that you referenced, are they taking a print package, an online package, a combo and then I'll have one more, thank you.

Yes, hi, Avi, it's Dave. We no longer offer a print only solution. These are -- all of these are a multi-platform solution that these new clients are buying.

Okay, and then maybe going back to Todd's question again. Do any of the clients tell you that when they leave that they've gone to a competing online platform? Is there any way to track that at all?

We do track that. We do have some callback surveying and some online surveying that we do back to clients that have left us -- that didn't leave us because of out of business or bankruptcy or past due -- and it is a surprisingly low number that claim they have gone to another -- either online print or any other local media. It is -- what we've really seen is these local businesses putting the money in their pocket.

Excellent and I'll squeeze one more in if I can. Any differences geographically you can talk about? I know certain markets that historically were weak. Have they shown any signs of improving at this point, maybe Orlando or anything else? Thank you.

No, Avi. We have not seen a real recovery begin in those problem markets of Southwest Florida, Nevada, Arizona. They remain pretty challenged.

Thanks for taking the questions.

Yes.

Our next question comes from Mr. Scott Vogel of DK Partners.

Hi, thanks for taking the call. It sounds like you guys were pretty successful in cutting a bunch of operating costs while in bankruptcy. How were the results of that compared to your expectations when you went into bankruptcy?

When we decided to pursue this course, we established a pretty aggressive game plan and we basically came up with a kitchen sink list of all of the things we ideally would like to accomplish. Not knowing for sure what was realistic and it turns out that was a pretty good approach because we accomplished virtually all of our objectives.

And can you quantify some of those operating cuts?

Well I went through that a little bit.

You talked about it qualitatively but when you think about that in the aggregate.

Well as I said, we managed to reduce expenses by about -- I said $150 million -- you've got to be careful with that because in both cases -- in '09 and '08 we had a curtailment gain associated with the phase out of retiree medical. In '09, the gain was $50 million and in '08 the gain was only $40 million so if you net that out of both years the total operating expense decline was about $140 million and as I mentioned, $78 million from selling before costs, $39 million from a production and distribution cost, and then $29 million from other G&A and overhead.

Okay.

And as I said in the contract phase section there that we also negotiated more favorable rent and reduced square feet and consolidated paper suppliers, etc., that are going to have ongoing cost benefits -- that are not reflected yet in the 2009 numbers.

Sure, so if you look at where margins came in in 2009, it looked like it was north of 55%. How do you explain almost such a dramatic drop in margins in your 2010 and go forward projections?

Okay, well that's a good question too. 52% was the margin that we delivered in '09 and that includes the $50 million one-time curtailment gain associated with the retiree medical. That's not going to repeat itself in 2010 so that's one big item.

But there's also diminishing returns from cost savings. We can't save our way to success. Our objectives are to focus on growing the top line and there are investments that we believe are critical to support the value to our advertisers in this economy that we believe will pay off when the economy recovers and those clients start to participate in that recovery.

Okay, but you came out with projections in May -- for 2010 which are essentially almost implying or it sounds like you think the projections you came out in May are in line with what you expect today -- but you were ahead of expectations on your cost cutting opportunities, so that doesn't seem to jive in my mind. Could you try to walk us through that?

Well, you know what? We're trying to make sure that we're supporting our advertisers with all of the various initiatives that I outlined before. It's really, it's a business decision. Do you want to take the money to the profit line or do you want to put the money back to work to support advertiser value? We're deciding to put the money back to work to support advertiser value.

Scott, it's Dave. To help a little bit with that too is as Steve said, some of this -- a lot of this -- is reinvestment back into sources of leads -- either traffic through new network deals or enhancements in investments that we're making in our owned and operated digital products. So it's a give and take of -- which has been for several years -- of reducing operating expenses where we can. It's like particularly on the legacy platforms reinvesting in the things that we need to do to ensure that we continue to provide value through this balanced product solution.

Okay, thanks, very nice quarter.

Thanks.

Our next question comes from [Mr. Alex Singer of Smith Management].

Hi guys, congratulations on coming out of Chapter. First thing I was going to ask is have the management options been struck yet?

Yes, Alex. I believe it was just Monday, March 1, on what we call the emergence equity grant that was struck.

Okay, and so I assume we're going to see that coming up in some Form 4s over the next couple weeks, right?

Yes, they were filed this week.

Perfect, and just following up, I guess across the same line, when these projections were made which was May of last year, the world I think was a significantly different place. So I'm trying to reconcile why your guidance is still exactly the same as what you did last May which I guess wouldn't agree with most of what we're seeing out of all of the other advertisers around. I think what I'm trying to tell you is it seemed like you guys are being very conservative.

Yes, Alex, it's Steve. We're actually feeling pretty good that we were able to have the foresight to anticipate the 2010 performance as long ago as last May. And that we've held that number unlike some of the other advertising companies out there which have seen deterioration since then. And as I mentioned in my remarks, what's happening is that our small business clients are not participating in the recovery consistent with the national averages or the major media companies and so that's what we're experiencing.

Okay, all right, thank you.

Our last question comes from Mr. Rakesh Patel of Goldman Sachs.

Hi there. Just one quick question if I may. Could you talk us through your offerings in terms of print and digital and the kind of declines that you saw there in the Fourth Quarter and how the guidance actually shapes up, just picking those few apart. Thanks very much.

I didn't catch all of that. There was some interruption on the line there. Could I get you to repeat that one more time?

Sure. Just a quick question. Could you walk us through the print and digital declines that you saw in the Fourth Quarter and what your thinking is on that in terms of your guidance for the coming year? Thanks.

Yes, I'm trying to recall exactly what the -- I don't have the Q4 number, Steve, you may have. What was Q4 ad sales? Down 21?

It was down 20.

Yes, Rakesh, Q4 was somewhere, we're trying to find it here.

Down 22. It was 21.9.

Yes, so Q4 was down 21.9 and that's on an all in multi-platform, both print and digital combined, the total solution. So obviously, that's where we hit bottom. And remember these are -- our Q4 ad sales, are ad sales that we were out selling to customers on a Q2 and Q3 of 2009. So there's always a -- at least a quarter lag there -- so it gives you a little perspective of what the environment was like there. Obviously as you can tell from our guidance, we feel like that we've -- that Q4 -- Q3, Q4 we hit bottom -- and we're expecting some improving results as we go through 2010.

Okay. What I was trying to drive at is how much were the declines due to print and how much was due to your online digital offering?

Yes, again, good question. We don't differentiate between print and digital. We don't have an offering anymore that is just a print offering or just a digital offering -- because the position that we take in the marketplace -- and the way we advise our clients is -- we know for a fact that active buying consumers are using all of these platforms and media. And so is there a particular class of active shopping consumer for your product and service that you don't want to have your business exposed to -- and the answer is universally no. They want to be exposed to all of these active buying shoppers.

So again, our solutions are geared that way. We advise our clients that they need to be on all of these platforms, not one or the other.

Okay. Thanks very much. That's quite clear.

Okay, just to wrap up, I want to thank all of you for joining us this morning.

I just want to share a couple of the reasons why I believe that we are so well positioned to serve the needs of the local businesses in our market. Because nobody in our markets today can better serve as the one partner advertisers need to get found and be selected by active consumers, than Dex. Due to the fact of our locally based knowledgeable marketing consultants who provide high levels of service and advice for these businesses, our vast and growing portfolio of owned and operated local search products and services, that provide our clients with high volumes of unique, high quality and ready to buy consumers, our exclusive and non-exclusive partnership agreements that provide incremental reach for our clients marketing messages, and finally our agreements with the telephone companies that provide the trust, credibility and validation that local businesses are looking for.

If you have any additional questions please contact our Investor Relations department. Have a great day.

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