Thryv Holdings Inc (THRY) 2010 Q3 法說會逐字稿

Good morning and welcome to Dex One Corporation's third 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.X1.com. I would now like to turn the call over to Mr. Tyler Gronbach

Thank you and good morning everyone. I am the Senior Vice President of Administration and Communications at X1 Corp. Hosting the call today are Alfred Mockett, 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 ended September 30, 2010, and the Company's Form 8-K furnished to the SEC this morning. These documents discuss third 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 decks one's SEC filings can be obtained by contacting us, visit our website at visit our website Dexone.com, or visiting the SEC's website@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 the investor relations tab.

Commencing on February 1, 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 period presentation. In addition 2010 GAAP year-to-date figures only include results from the most recent eight months.

During the call 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, now, I'd like to turn over to Alfred.

Thank you, Tyler. Good morning, ladies and gentlemen. I am delighted to join you in my inaugural investor call with Dex One. I'm going to start by explaining why I am here. Then talk about what I've learned so far, and finally set some expectations for the future.

I've never had the privilege nor perhaps the misfortune of managing in the steady state environment and Dex One is no exception. Our Company and the industry are at an inflection point, we are operating at a period of discontinue and change. The opportunity in front of us requires a new way of thinking, big bold ideas that support step function change. This is the kind of work I thoroughly enjoy and was a major reason why I decided to come on board. I believe I can help transform this business and generate value for our shareholders.

To succeed, we need to consistently exhibit three behaviors. First, we must be realistic. Second, be decisive and third be bold in all our actions. Acting in this manner we will be able to arrest the customer loss, invigorate the sales effort, flex the business strategy, attack the cost base, and ultimately put the Company back on a path to profitable growth. I spent the majority of my career leading such activities. And the Dex One opportunities and issues are very similar to the circumstances I have been able to capitalize on overcome throughout my career.

At British Telecom I helped transform a government utility into a global technology company that operated in 30 companies and 24 time zones. I ran several operating divisions including oversight of their business indications and global Internet and broadband communications divisions. During my time there we remove more than $1 billion of cost, rationalized a disparate set of assets down to a core group of profitable businesses, employed a build, buy or partner approach to expansion and rightsized the workforce within a bargain for environment.

At the software development and systems integration company American Management Systems I directed a business transformation effort that overhauled the operations, flattened the management structure, refocused the sales force on recurring revenue opportunities and increased the breadth and depth of our solutions suite. Ultimately we eliminated more than $300 million in costs, doubled the share price and positioned the business to be acquired by CGI Group. Most recently at motive I narrowed the focus of the enterprise to concentrate on mobile and high speed Internet software services for the communications sector. Optimized its limited resources and aligned its topline opportunities with areas of higher profit potential while overseeing an inherited seven year financial restatement. 2.5 years into the turnaround with the Company and a solid operating position our channel and development partner Alcatel-Lucent purchased the company for integration into its digital home strategy . So I am confident that my background is well-suited for the opportunity that is before us.

I have learned over the years that before you can successfully transform a business, you must actually understand what is at the core, the underlying value that must be unlocked. I see three primary stores of value at Dex One. First, our deep domain expertise in the realm of local business. We not only know how to help our customers businesses grow but we also understand their issues and common business challenges. Our second advantage is our database, a comprehensive, robust and accurate collection of business information within our markets. This is critically important to consumers, who need great search results and for partners who want to better monetize traffic to their sites originating from our markets. Finally the strong connection our 1300 plus marketing consultants have with local businesses in our 28 state region is arguably our most important competitive advantage.

This market is very difficult to penetrate and no one today has more relationships with small and medium-sized businesses within our market than we do. This is my eighth week on the job and I spent most of that time connecting with customers, employees and investors. I asked the people with whom I met what are we doing well? Where do we need to raise our game, and what are the things you'd most like to see changed. Within each group there are common themes. Customers value our marketing consultants for advice. They want to see even more of the hard data and science behind our recommendations. They also told us that we could be easier to do business with and stressed the importance of offering a more robust digital solution. I couldn't agree more on that last point and understand the importance of improving and diversifying the way consumers access our local business information.

Employees want to win. Want to be successful as part of a team. They are looking for a compelling vision, a clearly defined strategy, and a decisive leadership team. Our investors are keenly focused on understanding how we plan to arrest the print decline, expand our digital sales, grow customer accounts and manage long-term margin levels. They are also very interested in understanding our vision, strategy and underlying business plans. We will be reviewing these areas of interest in greater detail at our investor day we plan to hold in New York City in the first quarter of 2011.

I've also heard from a number of investors who want us to better set expectations and avoid surprises whenever possible. Stated simply, earn back your trust. That starts today and from this point forward. There is no more important capital to me personally and professionally than credibility capital. We will start by introducing new operating metrics. The first of these are key performance indicators that are designed to measure the state and health of the business based on our critical success factors. In addition, we will be providing transitional KPI's that measure the progress we are making stabilizing our existing customer base, attracting new customers, and offering new services and solutions. All of these metrics must be tied to our vision, strategy and business plans which will be completed before year end.

So, on these matters metrics are currently a work in progress but based on what I have learned so far we have identified five KPIs that Steve will be talking more about in a few minutes. So, in the first eight weeks, thanks to significant input from customers, employees and many of you on the call today, I've drawn some initial conclusions which will influence the development of the Company's vision, strategy and underlying business plans. So from my perspective, Dex One is a multi-local information business with several access technologies. Print, online and mobile. Print has a longer life than many expect particularly in the smaller markets which make up the majority of our footprint. We are a B2B2C Company that has done a decent job on the B2B side of the equation but we must improve on our consumer experience. We must unlock the three stores of value, our business expertise rich database of local business information and strong connection between our marketing consultants and the local businesses they serve.

With this in mind, our plans must stand the declining customers, arrest the print decline as quickly as possible and identify midlife kickers to enhance the offering. Expand the breadth of interactive services and technology solutions we offer, embrace partnerships to accelerate our time to market and focus on profitable opportunities and make cost reductions a way of life. While we are still working on how best to capitalize on our opportunities, it is abundantly clear we need to become more efficient. We have set ourselves a target of reducing the cost base by $100 million or a little over 10% in 2011. We will provide more detail at our investor day.

Before I turn it over to Steve, I want to make one final point. I clearly understand and do not under estimate the scale and scope of the challenges we face. We know that we will only be successful if we have a dramatic rate from our past. As I said earlier, we will be realistic, decisive and bold. I came here because I am confident that we can put Dex One back on a path to profitable growth. I will be working diligently to finalize our future plans and look forward to sharing them with you early in 2011. And now I'd like to turn the call over

Thanks, Alfred. Let's start with Q3 headlines. First, add sales declined 15%. Driven both by declines in customer accounts and reductions in average spend. Second, bookings a new top line metric reflecting current sales activity were down 14% consistent with the decline in Q2. Third, EBITDA and free cash flow remain strong in Q3. And fourth, due to our stock price decline we booked a noncash impairment of $390 million. This charge does not impact the Company's current or future cash flow, compliance with debt covenants, cash attributes or management's outlook for the business.

Now to the details. Q3 deferred and amortized revenue of $435 million declined $99 million or 19% from Q3 '09. Reflecting lower ad sales in the intervening periods. Q3 expenses declined $34 million or 13% versus Q3 last year including $5 million lower production and distribution costs, $10 million lower selling and support costs and $19 million lower bad debt expense. Q3 bad debt was 3.3% of revenue, approximately three points better than Q3 '09. This trend demonstrates our continued strong credit and collection policies, which have delivered improved receivables quality and underpin our best in class bad debt rates. Which in turn helps drive strong cash flow. Q3 EBITDA of $200 million represents a 46% margin. While free cash flow of $145 million boasts a 73% conversion of EBITDA. The other 27% of EBITDA covered $68 million of interest payments plus $10 million of CapEx partially offset by a source of $23 million in working capital which was largely timing related.

During the quarter, we repaid $127 million of debt comprised of $42 million it of mandatory repayments and $85 million of prepayments. Since February 1, we have repaid $430 million of debt. Coupled with our $511 million emergence payment we've repaid close to $1 billion in 2010. As of September 30, net debt of $2.8 billion carried a weighted average interest rate of 7.3%.

Turning to our full-year outlook, we now expect 2010 ad sales to decline between 15.5% and 16%. This modest change reflects refinements of third party estimating tools supporting a performance-based product trial which reduces 2010 ad sales by approximately $10 million. Absent this adjustment, we would likely have achieved previous guidance albeit at the bottom of the range. While this change impacts ad sales it does not impact any GAAP, adjusted or combined adjusted figure in any period. Updated quarterly ad sales figures appear in the slides and the release schedules.

Although we already boast the best margins among our peers, in order to better position the business for profitable growth we are presenting -- we are presently finalizing restructuring plans that will result in a Q4 pretax restructuring charge of between $30 million and $50 million. These plans will realign internal resources to better support our base of business and ensure our organization structure is optimized to compete in a rapidly evolving marketplace. We will start the restructuring activities as soon as possible to expedite their impact on associated cost savings. Including the impact of this restructuring charge, guidance for EBITDA and free cash flow remain unchanged at $775 million to $800 million and $500 million to $525 million respectively.

As Alfred mentioned earlier, we are introducing five key performance indicators that will better anticipate the future state of our business. The first KPI is our year-over-year change in active customers. Which is down 10%. Active customer accounts at the end of Q3 was approximately 445,000. The reason for declining customer counts is driven both by difficult local business conditions and secular challenges. Particularly in major metro markets. 40% of total customer loss is due to involuntary causes such as going out of business or not meeting our credit standards. Our second KPI is the year-over-year change in average sales per customer or ASC. ASC represents ad sales generated over the most recent four quarters divided by the number of active customers. Q3 ASC was approximately $3900 down 9% from the prior period driven by both reductions in spending by existing customers and churn.

Our third KPI is the year-over-year change in bookings. Bookings is a new top line metric that measures the contract value signed in the period. The year-over-year change in bookings compares the contract value in the current period to the purchases made by the same customers in the prior year. In the third quarter, bookings were $389 million down 14%. The majority of this quarter's bookings will become ad sales in the next two quarters. We have provided more information on the relationship between bookings and ad sales in the slides that we distributed today. Our fourth KPI is the year-over-year change in ad sales. As most of you know, ad sales reflect the same store value of products and services published or fulfilled in the period. Ad sales in the period were $338 million down 15% from Q3 '09 driven by both the change in customers and average spend. Q3 ad sales were also impacted by a heavier weighting of Metro markets.

The last KPI is a transitional metric. A breakdown of ad sales to existing versus new customers. Q3 ad sales to existing customers represented approximately 81% of the previous years contract value. Said another way, we lost approximately 19% of last year's ad sales via customer churn and net decrease spending from retained customers. Ad sales generated by new customers or presented approximately 4% of Q3 '09 sales. The 19% decline in recurring sales offset by the 4% gain in new business comprised as the net Q3 15% ad sales declined. Better trends with churn and ASC will benefit asked all aspects of the business, therefore our initiatives are keenly focused on spending to declining customers, arresting the print declines as quickly as possible and brightening our services and solutions all expected to improve bookings to new and existing customers.

Operator we are now ready for questions.

Thank you. (Operator Instructions) Jonathan Levine with Jefferies you may ask your question.

Yes, thanks. You mentioned heavier weighting of the Metro markets. Can you talk a little bit more in terms of what you're seeing in both the Metro and the more secondary tertiary market group?

Certainly, Jonathan. Our nine major metro areas account for approximately 40% of our business. In that 40%, they are probably operating at about 5 points worse on average versus the overall market and obviously we are showing a little bit better performance in our tier 2, tier 3 and rural areas where there is a much greater reliance on print where they are less digitally connected.

And as far on the digital side can you talk about the percent of your revenues now that are moving at this point towards digital?

Jonathan, that is not an unreasonable request, though at the moment I would rather not give you a number than risk giving you a bad number. A lot of our products are bundled and in fact, some our hybrid products were we provide combinations of lead for interactive products in print. I want to make sure we can separate those on a consistent basis and give timely and accurate reporting. So you can look for that metric in the future but at the moment it is a work in progress.

Okay just one more. In terms of the restructuring, can you give any details in terms -- I appreciate that you guys said you hope to achieve $100 million in savings can you give detail in terms of what line items and where you expect to achieve that?

Yes. Let me say that first of all given the current operating environment, it is incumbent on us to exercise cost leadership and we will leave no stone unturned in looking at how to get costs out of the business. The fact is that we will be looking at every single cost line, we will be working with suppliers, working with partners, working with employees. We will be looking hard at cost of sales and see if we can get more variability in that. I think there's lots of areas of improvement particularly in looking at things such as trim sizes to reduce costs, reserve inventories for second distributions. I think there is a wealth of opportunity in getting to that $100 million.

Okay. I'll go back into the queue and let other people ask questions. Thanks.

Thank you, Jonathan. I appreciate your questions

Andrew Peranick with BTIG.

This is Andrew Peranick, thank you for taking my call. A few questions, relative to the 15.5%, 16% adjustment on net sales ad books for the year, does that have to do with -- the way I read the press release basically worse than expected adoption of a new product that you are rolling out?

Yes, this is Steve, Andrew, hi. It is not the worse than expected adoption but rather just our estimating tools that we have used to anticipate the number of calls that would come in from some of our performance based initiatives and trials. We have refined our methodologies and the adjustment in ad sales reflects that.

Okay, great. And the fourth quarter restructuring charges that you spoke about, do you have any idea of whether they will be all cash or a split between noncash and cash incentive?

Yes, it's a bit premature to give you that split. We will provide details of that with the fourth quarter results.

Okay. I would assume though that those expenses are costs associated with getting the majority of the $100 million of cost saves you're targeting in fiscal year 2011?

Well, clearly it is associated with it but not necessarily exclusively.

Okay. Thank you and just one final question I guess qualitatively can you speak at all as to the success you are having in pitching the bundled products that you spoke about previously? Some of those people who may be -- are going to go to all digital and maybe can use that to stem some of the secular declines?

Surely, in fact the best proof point I can give you there is to state that all of all the new customers we have taken this year 85% or more of them are buying print and digital. So that shows first of all the power of print. Secondly, the power of the bundle, and we are only at the moment between 10% and 15% of naked digital only customers.

Great. So when you say new customers you mean that 4% that offset the 19% in ad--?

Yes. 4% in value but near 9% or 10% in customer count.

Great, one final question just to follow-up on that. Can you comment at all as to those 4% of new customers whether you are seeing those in the major metro markets or if they are in your secondary markets?

That is actually across-the-board. In fact, we have -- in addition to our new customer initiatives we have win-back initiatives as well.

Great. Thank you very much.

Thank you

[Shacar Mincove] with JPMorgan

Hey, guys good morning. Most of my questions are done, just a little bit of clarity around something that you had mentioned around the EBITDA. You talked about this restructuring charge of $30 million to $50 million and it sounded like you said that would be inclusive in the $775 million to $800 million of guidance. So if I think about that on a more one-time basis and applying that in the fourth quarter it actually sounds like your real guidance is more of a like an $805 million to $850 million?

That is a good way to think about it Shac.

Okay. So that actually would imply a positive year-over-year gain potentially -- I'm sorry EBITDA comp in the fourth quarter.

If that's how the numbers work out.

Potentially. And then the other thing was I think you guys had talked about a lot of your -- some investments. I think you had talked about something to the tune of, I recall that $30 million for the back half of the year? Can you just talk about how that's run through? The third quarter and if you expect to see that in the fourth quarter?

Can you just repeat the question please?

You had talked about -- I don't know if you've used your mind numbers but you talked about some investments for example the smartphone programs and things like that rolling out digital. Can you just talk about how much you've spent so far and how you expect that to roll through the fourth quarter?

There will be some increased investment in the fourth quarter in that regard. Not wanting to be specific about it at the moment. I'm just looking back at your previous question about Q4 '10 EBITDA possibly beating Q4 '09 EBITDA. And I don't think that is the case. Q4 '09 I think we reported--.

I was looking at the wrong numbers, excuse me. My mistake.

Okay. So -- but as far as the investments, there will be some modest increase in investments in the fourth quarter relative to the prior quarters for the year.

Can you quantify a little bit?

Can't really do that.

Okay. Thanks.

Todd Morgan with Oppenheimer.

Good morning. Thank you. I guess two questions. The first one really dealing with the EBITDA guidance for the year. I think you had changed the guidance or raised the guidance in the middle of the year. And it looks like ex the one-time or at least the restructuring charges it looks like you're going to probably exceed the high end of that. Can you just give us a sense of the thinking of how your view of EBITDA has evolved during the course of the year where you started out and where you have ended up here because it still looks like even in the middle of the year it looks like you're probably going to be well ahead of the high end number ex the restructuring charge.

Yes, that is true. We started off the year with a $750 million I guess it was $750 million to $775 million range and then we upped it to $775 million to $800 million. And we are -- absent the restructuring charge we would exceed that range. It is really cost control, and I think bad debt is a surprise for us how favorable it has been, we are pleased by that. I think we have also been pretty disciplined as it relates to our other costs. One item for example is our headcount. We had initially expected that headcount would go up during the year and it stayed pretty flat throughout the year. Right around 3400 since emergence. So there is a couple of components for you.

Okay. And then the second thing I'm looking at the slide -- the updated ad sales page, where you talk about the impact from the estimated tool refinements. I guess I'm trying to understand a little bit. It looks like the number has grown -- the adjustment number has grown during the course of the year. I am assuming that that's because the activity level for those volume-based pricing programs is probably larger; is that the right way to think about that?

That is true and you see it come down again in the second half of this year as we have improved our estimation of the calls generated from those performance based products.

I guess in general though it looks like that you were previously overestimating the actual volume by a little bit anyways; is at the right way to interpret this?

That's right.

And do you have any sense of the reasons for -- what has changed or what are customers doing to potentially not be calling as often as the advertising plans have envisioned? Is that just an estimator tool or was there a difference in the outcome from your expectations?

Yes Jonathan let me take the question. Todd, rather. There are two elements to it. We were using estimating tools that were very good at estimating gross number of calls but getting from the gross calls to the billable calls needed some improvements and refinement to the logic. So that was one element. Secondly, the estimate in tools that although they are applied industrywide have different effects vertical by vertical. So we had to tailor them to the specific verticals that make up our business base. So now we've gotten much better at it. The overall adjustment was only $10 million, which in the grand scheme of things looking at total add sales is not material, but we felt it was important to restate and let you know about that because the small percentage change just pushed the outside range rather than inside range on the previous guidance.

Great. That's helpful then. Thank you and good luck.

Okay.

Our last question comes from [Stan Mankukien] with Independent Research.

The first question relates to the strategy. I was wondering if you guys see any major feedback from existing clients? You have mentioned that new clients are buying -- 85% of them are buying a combination of digital -- digital and print products. What kind of feedback your salespeople are hearing from existing customers? Are they going to sort of -- well, is there any buyers towards digital? Can you elaborate on this, please?

Certainly. First of all, the healthy feedback from our customer base is that print is still alive and well and with us for a long time. Now, that said, they are looking not to go digital but to get a blend of digital offerings plus print offerings and also they're getting a sense that more of the leads are going to come from mobile over the time, which is why I'm glad we're able to release three apps last week covering the major technologies for smartphones. In terms of the digital, quite frankly, we have to take the criticism. The customers are saying that probably we don't have a fit for purpose suite of digital offerings to narrow, but then you get greater bread, and so we are working diligently on that as we speak. Other than that, I think it's incumbent on us to continue to demonstrate to the customer the power of print as a way of generating business. Quite frankly, they rely on us to make the phone ring, and I'm just very encouraged that outside our Metro areas we're seeing some strength in print.

And just to technical questions. What is your expectations on the -- rating your per customer -- average ticket per customer. It has been increasing over the last couple of years. Do you plan to increase the average ticket in the future? And second, what's your average sales commission rate?

Yes. So if you go back and look at the slides on slide four you see that the actual average sale per customer was down 9% in the third quarter. Now, the rate of decline is improving but it's still down. So -- and that's partially due to what's happening in the economy and also our actions to improve value to our customers.

Okay. And what's your average commission rate for salespeople? I remember a couple of years ago it was 23% if I'm not mistaken?

No. The commission's rates vary by the type of sale but it ranges from 6% to 12% in that range.

Okay. That's all I have. Thank you very much. Thank you for taking my questions.

Well, thank you for joining us today. Rest assured we're working diligently to finalize our vision, strategy, and plans. Based on all that I've heard, learned and experienced so far I'm encouraged by Dex One's opportunity and look forward to leading us back on a path to growth. As I mentioned earlier, print is a longer life than many expect, particularly in smaller markets which make up the majority of our footprint. This provides a stable base on which to build our business transformation, increase the value we create for local businesses and liberate the stores of value in Dex One for the benefit of our investors. As I said earlier, I do not underestimate the scale and the scope of the challenge we face. We must focus our energies on efforts to put the Company in the strongest operating position. Thank you for joining us today. Good bye.

This concludes today's conference call. Thank you for attending. You may disconnect at this time.