Thryv Holdings Inc (THRY) 2010 Q2 法說會逐字稿

Good morning, and welcome to Dex One Corporation second quarter 2010 results 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 www.dexone.com.

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

Thank you Sandy, and good morning everyone. I am the Senior Vice President of Administration and Communications at Dex One Corporation. Hosting the call today are Steve Blondy, Executive Vice President and Chief Financial Officer, and Kurt Liddell, a member of the Executive Oversight Committee and interim Principal Executive 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 ended June 30th, 2010, and the Company's Form 8-K furnished to the SEC this morning. These documents discuss second quarter 2010 results, and the 8-K also includes the results information package, a presentation that contains information pertaining to the quarter. We encourage you to review these materials and the Company's other periodic filings with the SEC, which set forth important risks and other 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, electronic versions of Dex One's SEC filings can be obtained by contacting us, visiting our website at dexone.com, or visiting the SEC's website at sec.gov. The press release and results information package are available on our corporate website and can be accessed by going to dexone.com and clicking on the Investor Relations tab.

Commencing on February 1st, 2010, the Company adopted Fresh Start accounting as required under GAAP, which had a significant impact on the reported results of operations. These reported results are not indicative of our underlying operating and financial performance, and are not comparable to any prior-period presentation. In addition, 2010 GAAP year-to-date figures only include results from the most recent five months. During the call today, we will refer to certain adjusted and combined adjusted figures that are non-GAAP financial measures, such as revenue, expenses, EBITDA, free cash flow, and net debt. Some of these exclude items such as impairment charges, reorganization costs, stock-based compensation, and long-term incentive program expenses, fair value adjustment, and the impact of Fresh Start accounting.

Additional information about the non-GAAP financial measures, as well as a reconciliation between these items, and the comparable GAAP measures can be found in the press release and related 8-K furnished to the SEC. 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, I would now like to turn the call over to Kirk. Kirk?

Thank you, Tyler. Good morning everyone, and thank you for joining us today. As some of you know I joined Dex One as the lead Director upon the Company's emergence from bankruptcy a little over six months ago. When Dave Swanson retired after 25 years of dedicated service in May, the Board formed a three-member Executive Oversight Committee, consisting of Directors, Jonathan Bulkeley, Mark McEachen, and me. I became the interim Principal Executive Officer, and to preserve independence stepped down as lead Director. I also came off of the Audit and Finance Committee. Al Schultz became the non-executive Chairman of the Board, and he, Gene Davis, and Dick Kuersteiner, became members of the newly formed CEO search committee.

The three of us on the Executive Oversight Committee together serve as the interim CEO. We have three primary responsibilities. First, to assure that the business continues to run smoothly during the transition. Second, to increase the scope, quality and pace of the Company's ongoing product and process initiatives. And third, to review all aspects of the business for the benefit of the new CEO, so that he or she will be able to assess the situation, and transition into his or her new role as quickly as possible.

Jonathan, Mark, and I all have solid management and leadership experience, and we bring complementary skills and perspectives to the Committee. In particular, Jonathan and Mark have a wide and current understanding of the interactive and mobile space,knowledge of the media industry, and solid financial acumen. And I have more than 20 years of leadership experience as a CEO, particularly in the areas of sales operations and human relations.

As a team, the three of us are able to dedicate more time to the Company, accomplish more, and achieve better outcomes than any of us would be able to do individually. While we on the EOC are focusing the bulk of our attention on Company operations, the Board CEO search committee has been concentrating its attention on identifying and engaging a first-rate business leader, with are a forward-looking vision and solid management skills. Working in conjunction with a major search firm, the Committee has identified several strong candidates who share our excitement about Dex One's future.

We are moving this process forward as rapidly as possible, with the caveat that we intend to take whatever time is necessary to find the right candidate for the position. We are actively interviewing and doing research on the top current applicants, and we will have additional updates for you as matters progress. I am pleased to report that the Board of Directors, the Executive Oversight Committee, and management have developed a solid and effective partnership during this transition period. We are moving forward well together, and in the process have further confirmed and reinforced our views about the Company's future prospects.

In particular, two very positive things about the Company are clear. First, that Dex One is a financially strong, well-established, and capable organization, with many talented, hard-working and positive people, effective controls, and good systems. And second that Dex One is extremely well-positioned to provide added value to small and local businesses in an increasingly complex and fragmented marketing services marketplace. In short, this is a Company with a lot of promise, and I am excited when I think of the times that lie ahead.

And with that, let me turn it over to Steve to talk more about the quarter and the rest of 2010.

Thanks, Kirk. Our second quarter results demonstrate resilience to stubborn unemployment, scarce local credit, and local property values. With Q2 ad sales decline 910 basis points better than last year, and 550 basis points better than Q1. Still, ad sales of $449 million declined 13.4% from $518 million in Q2 last year. And we are updating ad sales guidance to the bottom, or possibly just below our previous range.

On the other hand, our bad debt write-offs continue to improve, and supported a healthy 47% EBITDA margin in Q2. We repaid $150 million of debt in the quarter from robust cash flow. Net debt now under $3 billion with an average rate of 7.4%. While it is clear we are on a slower recovery, and customers remain cautious about advertising investments, we continue to focus on strengthening Dex One's leadership in the local marketplace, to better position us to capitalize on future improvement in local economic conditions. Four reasons support our optimism that will remain at the heart of local commerce.

One, feet on the street. Our 1,400 local marketing consultants have trusted, long-standing and personal relationships with nearly half a million local advertisers. Two, broadest reach. We help these local advertisers reach more active shoppers than any other media, including newspapers, search engines, and magazines. Three, we simplify the increasingly complex local advertising landscape. We help local businesses get found where active shoppers choose to search. Media fragmentation and technology innovation make local marketing more complex, rendering self-service models impractical for most local advertisers. And four, strong cash generation. We are reinvesting our robust cash flow to bolster the fundamental value we deliver to local businesses and consumers, reinforcing these valuable, trusted relationships.

Now let's turn to the Q2 performance details. Number one, ad sales declined 13.4% in Q2, continuing the constructive sequential path to top-line stability since Q4 last year. Number two, strong free cash flow funded $150 million of debt repayments. And number three, updated 2010 guidance puts ad sales near the bottom of our previous outlook, but we are raising EBITDA and free cash flow targets.

During the second quarter, we also booked a non-cash goodwill impairment of approximately $750 million, triggered by the decline in the market value of our debt and equity securities. Such impairments do not impact the Company's current or future cash flow, compliance with debt covenants, tax attributes, or management's outlook for the business. Q2 ad sales reflect slow recovery in several underlying trends.

For example, advertiser churn declined to high-single digits in Q2, reflecting our strengthening customer and receivables portfolio. Reoccurring revenue exceeded 80% for the first time in 18 months, comprised of renewal at 70%, an increase at 12%. While While new business improved sequentially and year-over-year, it contributed just 5% to our net result, reflecting the lethargic local economy.

Peeling back the onion one layer, it is instructive to consider sales trends by market size. Our nine largest urban markets account for nearly 40% of annual ad sales, and are expected to perform around 5 points worse than total 2010 sales. On the other hand, smaller markets also represent 40% of total sales, and should perform 5 points better than total sales for this year. To address this trend, we are aggressively pursuing new go-to-market tactics in our metro markets, including new product rollouts and solutions bundling. Likewise it is instructive to consider results by client spending levels.

In 2010, we will retain 90% of advertisers investing at least $30,000 per year who comprise around 30% of total sales. We expect sales to these larger customers will decline around 4 points worse than the total this year. By contrast, clients that spend under $6,000 per year also represent about a third of total sales, but should outperform total sales by 5 points, even though we will retain fewer than 80% of them. Part of this performance discrepancy is because new clients typically don't invest $30,000 per year with us. So the opportunity to offset large customer decrease or defection is very limited. What this also highlights is our requirement to add more new customers at lower average revenue per advertiser to return to aggregate sales growth.

Turning now to Q2 financial performance, our deferred and amortized revenue of $452 million declined $114 million, or 20% from 2009, reflecting lower ad sales. Excluding the one-time FAS 106 benefit in Q2 last year, our second quarter expenses declined $46 million, or 16% in 2010, coming from $32 million of lower bad debt, $10 million of lower production and distribution costs, and $6 million of lower selling and support costs. Q2 bad debt expense of $11 million was just 2.5% of revenue, this was $32 million, or 5 points lower than Q2 2009, and $11 million, or 2 points lower than Q1. This improvement reflects improving write-off experience driven by robust credit and collection references, and our improved AR portfolio quality. Although strict credit policies may have constrained ad sales, particularly as the economy deteriorated last year, the benefits of our strong customer base and Receivables portfolio are clearly evident in recent write-off trends.

Year-to-date bad debt expense of $33 million represented 3.6% of revenue, versus $81 million, or 6.9% of revenue in the first half 2009. We currently expect full year 2010 bad debt expense of around 4%. Continued sales and operations productivity leadership, as well as disciplined overhead efficiency also contributed to a healthy $212 million of Q2 EBITDA and a 47% margin. Year-to-date EBITDA of $443 million represents a 48% margin.

Q2 free cash flow of $140 million represented 66% conversion of EBITDA, with $50 million of cash interest paid, $9 million of CapEx, and $13 million of working capital and other uses. Year-to-date free cash flow of $321 million represented 72% of EBITDA, with $85 million of cash interest, $17 million of CapEx, and $20 million of other uses, including just $2 million in cash taxes. We applied all free cash flow plus $10 million of cash on hand, to repay $150 million of debt during Q2. Resulting net debt of just under $3 billion represented leverage of 3.8 times.

Turning now to our updated 2010 outlook. Local selling conditions are slowly improving. However, local business owners confidence remains cautious, as measured by the NFIB's small business optimism index. Aggravating this problem is the persistent lack of liquidity. Outstanding loan balances to small businesses declined $40 billion between mid-2008 and early 2010. Together with 10% unemployment rates, and housing prices near 2003 levels, local business conditions remain quite challenging.

Our Q3 and Q4 sales campaigns reflect these conditions, with particular challenges in Las Vegas and Seattle. As a result, we are revising 2010 ad sales guidance to decline between 14.5% and 15.5%, which is at the bottom, or perhaps slightly below our previous guidance of minus 12% to 15%. However, improvement in bad debt and disciplined cost management should lead to stronger 2010 EBITDA and cash flow. Our outlook for EBITDA is now between $775 million and $800 million, up from $750 million previously. And we now expect free cash flow of between $500 million and $525 million, up from $450 million previously. While our lower second half margins reflect some operating leverage on lower revenue, they also anticipate meaningful investment programs to drive sales.

In closing, our high-service relationship-driven business model solves local business owners marketing problems, and represents an important differentiator for us. Local business owners do not have the time, interest, or expertise to create their own high-impact integrated marketing campaigns, especially as online spending levels increase. Therefore self-service via web-based tools is not a viable option. Significant local market penetration requires strong relationships. Our business model becomes increasingly relevant, as consumer fragmentation and technology complexity elevate the need for service, expertise, and the customized cross-media solutions that we offer.

Operator, we are now ready for questions.

Thank you. (Operator Instructions). Our first question comes from Jonathan Levine from Jefferies. Sir, your line is open.

Great. I was wondering if you could give a little bit more color in regards to the ad sales rates for the full year, and a little bit more in terms of what you are seeing in Las Vegas and Seattle, The two markets you mentioned?

Yes, hey, good morning, Jonathan. We are saying that the performance in those markets is kind of worse than planned, but we are really not prepared to provide specific performance metrics by market. So should we take that you are implying that the rate that you guys saw this quarter, we are going to see an uptick in the third and the fourth quarter in terms of the year-on-year declines? Yes, well, we are really not offering guidance on a quarterly basis. You can see on our slides the range does imply that is a possibility that Q3 ad sales performance is slightly worse than Q2. That is a possibility. With slide number four, I guess it is, so you can see that. The other thing I think you can kind of derive is if we are saying that Vegas and Seattle are performing worse than plan, that those markets are likely performing worse than overall ad sales.

Right. Okay. Just turning over to the costs, obviously between the first and second quarter, you guys said you had a benefit of about $11 million and a reduction of your bad debt expense. When you look at that going forward, what other opportunities do you see, in terms of streaming additional costs from the current run rate out of the business?

Yes, just in terms of the bad debt rates, we are seeing a continuing improvement in bad debt, which is very encouraging. As I mentioned that maybe a little bit to the detriment of the ad sales number, so we are looking at what that means for kind of credit policies, et cetera. But as far as the other expenses, I think the opportunities in G&A and other support services, and that we are planning to reinvest dollars back in our selling infrastructure, and our cost of sales in areas that will support ad sales growth.

Okay. Great. Thank you.

Our next question come from Zachary Glazer from Davidson Capital. Your line is open.

Hi, guys, good quarter. I was just looking at some of the expense, some of the total expenses you have there, I notice that it ticked up about 300 basis points sequentially. Without seeing sort of the individual line items, could you talk a little bit to sort of what is driving that?

Total expenses up sequentially.

So total operating expenses were about 51% of sales in Q1, and in Q2 they were 54%.

Right. Okay. Well that is really due to the lower revenue more than it is due to the increase in the spending. I think actual expenses are down, and like I said in my remarks primarily driven by bad debt. On slide number six, you can see expense is $238 million in the first quarter, $240 million in the second quarter, but revenue is down from $469 million to $452 million.

Sure. I guess I am asking where is the sort of de-leveraging occurring in terms of your expenses? Like in other words, it is production and publication? I mean even if it stayed fixed, some of them had to have come down, some of them probably stayed flat.

Yes, I tell you what, let me get back to you after the call, and we can kind of run through with you specifically the cost structure.

Sure.

And you will be able to see a lot more of that in our 10-Q filing, which is likely to be early next week.

Alright. One more quick question. In terms of thinking through cash flow, obviously it is very helpful that you guys provide the income statement pro forma for Fresh Start accounting, but what was going on with working capital for the quarter, if you try to think about that on a pro forma basis?

Working capital in the second quarter consumed cashof $13 million, but the specifics of that I don't have at my fingertips.

No, that is exactly the number I was after.

Okay.

Alright. I will let somebody else have a chance. Thanks a lot, guys, I appreciate it.

(Operator Instructions). Please hold a moment for the next question. Our next question comes from Todd Morgan from Oppenheimer. Your line is open.

Thank you. Good morning. I am looking at the slide that has the advertising sales indices. I think it is slide number five or so. If we were to look back in time or potentially even look forward at the components of the 87% in Q2, what would some of those levels, those various percentages look like in a growing environment, or where could, for example, the new business area trend to, or where has it been in the past? And then secondly on the renewal side, the 70% number? How does that number look if you go back in time?

Hey, good morning, Todd. Yes, well those are the right questions to be asking, and the renewal numbers used to be breaching 80% not that long ago. But I think that in order for us to get back to top-line growth, I think that we are going to need to increasingly rely on new business, and I have challenged the team here, well what if 80% is the new norm for recurring revenue, and what are we going to do about it? So we are looking at new opportunities to increase our market penetration.

Okay. And then I guess just secondly, if we think about, you talked a little bit about credit policies and it sounds like maybe the tightness that you have had potentially hurting the sales trends recently. Can you talk about, what kind of examples occur, if someone is in arrears on paying, and it is time to renew their ads, what is the evaluation you make at that point?

Well, if they are not current on their past-due bills, we won't let them back in, and the one exception that we have been willing to make is what we call a prepay in full, so if they are willing to prepay us in advance the full amount of the following year's advertising, we are taking their money, but with the commitment that they are going to get current on their past-due bills. One of the concerns we have is, well, what happens next year, when they still haven't gotten current? Are we willing to take their money again when they haven't paid their back bills, so it is just a question about how fair do we need to be with respect to those advertisers who are remaining current?

Right. I mean, is there any way to think about what portion of advertisers are kind of in that state as you look at that earlier slide, that slide six that talks about the renewals? I mean, how much of the non-renewal is due to that kind of event?

We refer to advertisers with that characteristic as hot accounts, and that number, I think, is down below 10% now. So it is actually as low as it has been in I don't know, probably two years. But I think that what we are seeing is not only due to tight credit policies. I think what has happened is that those companies that have staying power are continuing to advertise with us, and the overall customer portfolio has improved. Some of the smaller customers who might have been more marginal in terms of their financial stability have gone out of business, and so I expect that we are going to see this bad debt rate remain favorable here for the next few quarters.

Okay. That is helpful then, thanks.

Thank you.

Our final question will come from Matt Aronsky from Citigroup. Your line is open.

Hey, guys, how are you? Just a general question in terms of the fourth quarter, which major markets report in the fourth quarter are part of the sales in the fourth quarter? I know Vegas is third. Are there some major ones in the fourth?

Yes, I don't have those at my fingertips, though, so let us get back to you about that.

Okay. Just another follow-up, you said in terms of client spending that you are retaining 90% of advertisers who spend $30,000-plus a year, are you seeing spending go down from those customers, those largest customers, or is that kind of staying stable?

No, spending is going down from those customers.

Okay. Is there any way you can quantify that?

What I said was we are retaining 90%, but those customers are performing about 5 points worse than the average.

Okay.

You can take the total ad sales and assume that the larger customers are about 5 points worse.

All right. That is helpful.

Great. I am getting told here the big fourth quarter directories are Salt Lake, Tucson, and Spokane. To answer the first part of your question.

Okay. Steve. Thanks for your questions and interest in Dex One, everyone. To wrap up, when the new Board members joined the Company in February, we all believed that Dex One had great potential, and since that time our convictions have grown even stronger. We have been impressed with the people from top to bottom, and the existing pipeline of process improvements and growth initiatives.

As Executive Oversight Committee members, we have had the opportunity to learn first-hand much more about the Company, its environment, and its leaders, than we ever would have if we had remained solely in our capability as Directors. This together with all of the other capabilities and positives that we see, make us optimistic about our collective ability to achieve on the Company's full potential, and substantially increase shareholder value in any months and years to come.

We thank you for joining us, if you have any further questions, please reach out to our Investor Relations department, and have a great day.

Thank you. That does conclude today's conference call. Thank you for participating. You may disconnect at this time.

??

??

??

??