Thryv Holdings Inc (THRY) 2010 Q4 法說會逐字稿

Thank you and good morning. I'm Tyler Gronbach, Senior Vice President of Communications for Dex One Corporation. Reviewing our fourth quarter and full-year 2010 results, are Alfred Mockett, Chief Executive Officer and Steve Blondy, Executive Vice President and Chief Financial Officer.

Before we kick things off, a few housekeeping issues to get out of the way. Number one, please set your cell phones to [stun] or silent this morning. Please note that today's presentations are being distributed via a live webcast and this is also being recorded. Copies of the presentations in the earnings news release are also included in your investor packets so if you are looking for a copy they are in there.

And this is important, this morning we're going to have dedicated Q&A sessions on specific topics. So what we would ask that you to do is hold your questions to that period and then we will be able address them at that time.

I would also like to remind you, now for the fun stuff, that we will be making certain statements throughout the rest of the day today that may be forward-looking as defined by the Private Securities Litigation Reform Act. We call on your attention to the news release for the first -- for the quarter fiscal year ended December 31, 2010 and the Company's form 8-K furnished to the SEC this morning. These documents discuss fourth quarter and full-year 2010 results. We also encourage you to review the Company's other periodic filings with the SEC which set forth certain risk factors and other important information that could cause actual results to differ materially from those contained in or suggested by any forward-looking statements.

Copies of Dex One's SEC filings may be found by going to the Investor Relation section at our website at DexOne.com or by visiting the SEC website at SEC.gov.

The news release and related results information package are also available on our website and can be accessed by going on the Investor Relations tab at Dex.com.

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 operational 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 11 months. We will be referring 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 items exclude -- including impairment charges, reorganization costs, stock-based compensation, long-term incentive and program expenses, fair value discount and the impact of fresh start accounting.

Additional information about non-GAAP financial measures as well as a reconciliation between these items and the comparable GAAP measures can be found in the news release in the related 8K furnished to the SEC.

One final reminder, this material discussed and presented at this event and the webcast are the property of Dex One Corporation and any retransmission or broadcast without expressed consent of the Company is strictly prohibited.

Now, we got that we've got that happy and satisfied the lawyers, let's shift gears and move on with the meeting. Today we're going to look at the full-year fourth quarter results.

And as you know, Alfred Mockett was named Dex One CEO in September of last year. He has held a number of executive leadership positions at leading technology, telecommunications, professional service companies such as American Management Systems, Motive, BT Group which is formerly British Telecom. Alfred is a proven business leader and change agent. And I speak from personal experience when I say that he has challenged all of us to think differently about how we attack our work at Dex One.

I'm confident you all will agree that he can provide the bold, decisive leadership and return Dex One to growth.

Ladies and gentlemen, Mr. Alfred Mockett.

Well, thank you, Tyler. Good morning, everyone and thank you for joining us. When I joined Dex One in September, I knew coming in that it would require transformational change -- a vision, a strategy, and a plan of action. After spending a great deal of time gathering input from investors, customers, employees, consumers, we have crafted a compelling and comprehensive strategic plan. Later this morning, we will review in detail these plans to win in the marketplace.

While developing the go-forward strategy, we have delivered on a number of notable initiatives in the closing months of 2010. We launched our new mobile app, providing consumers with detailed local business information. This app is also an important element of our bundled offering and helps generate new leads for our customers.

Against our strategic plan, we have identified a range of opportunities in our cost base and have put in place aggressive action plans to deliver more than $100 million of cost savings in 2011.

To better compete in this fast-paced ever-changing environment, we have realigned organizational roles and responsibilities. The resulting reorganization is designed around two key principles. We are a marketing-led sales driven organization and time to market and cost to market are critical success factors.

So with those highlights in fourth quarter in mind, I would like to turn it over to Steve, who will review the financials for the fourth quarter of 2010 and the full-year results.

Steve, over to you.

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

Once again, we delivered strong EBITDA and free cash flow in the quarter and the full year. We also repaid over $1 billion of debt during the year. And we accomplished this in spite of continuing sales pressure.

Now to the details. Q4 ad sales moderated their rate of decline by eight points to 14% from 22% in Q4 '09. Likewise, Q4 2010 bookings declined moderated by three points to 16% versus 19% in Q4 '09. Full-year 2010 bookings declined 15% versus 20% in '09, while full-year ad sales declined 16%, compared to a 20% decline in '09.

Q4 and full-year bookings and ad sales declines were driven by lower customer counts, reductions in average spend, and the impact from a single troubled CMR agency representing national advertisers. Absent this CMR impact, Q4 bookings would have been 1.8% better and Q4 ad sales would have been 1.5% better or a 10 point improvement versus Q4 '09.

Similarly, full-year 2010 bookings and ad sales would both have been 0.7% better. So full-year 2010 ad sales would have declined just 14% versus 20% in 2009.

Perhaps of some interest before leaving ad sales are a few stats about our regional performance during 2010. For the full year, ten out of our 30 sales divisions achieved single digit declines, setting the pace as strong role models for our other divisions.

Likewise, during the second half of 2010, two of our five sales VPs also achieved single digit declines. As we extend this performance improvement to become a trend across our footprint this year, that will indicate our return path to growth.

Turning now to the financials, Q4 deferred and amortized revenue of $427 million declined $74 million or 15% from Q4 '09, reflecting lower ad sales during the intervening periods.

In each quarter, 2010, we improved our revenue decline rate starting from 22% in Q1. For the full year, revenue declined $420 million or 19%. Q4 expenses of $262 million included a $19 million restructuring charge associated with RIF actions during the period. Absent restructuring costs in both quarters and removing the $39 million benefit of retiree medical curtailment in Q4 '09, we actually reduced operating expenses by $23 million or 9% in Q4 versus '09.

Full-year expenses of $974 million also included the $19 million restructuring cost. And again, absent restructuring in both years and the retiree medical benefit last year, in 2010, we lowered expenses $149 million or 13% versus 2009, and that was helped considerably by lower bad debt.

Our 2010 bad debt expense of $65 million was down $81 million or 55% versus '09. At 3.7%, our bad debt rate remains best-in-class. Not only does bad debt substantially improve cash flow, it also means that our customers meet our credit standards, leading to stronger renewal rates in the future.

All other expenses were down $68 million in 2010. And at year end, total headcount of 3,200 was down 240 or 7% versus September 30, including a 16% decline in G&A employees, and a 10% decline in operations.

Including the restructuring charge, Q4 EBITDA of $165 million represents a 39% margin. Absent the charge, Q4 margin was 43%. While full-year EBITDA of $808 million exceeded the high end of our guidance range by $8 million, our Q4 restructure actions consumed just $19 million out of our $30 million to $50 million program, with the balance still to come in 2011. Full-year 2010 EBITDA margin was 45%. Absent restructure, margin was 46% and that is compared to 50% in 2009.

Q4 free cash flow of $106 million was 58% of EBITDA but only burdened by $1 million of restructure payments in the quarter. We also made $45 million of interest payments and $11 million of CapEx while working capital consumed $3 million in Q4.

Full-year free cash flow of $572 million handily exceeded the high end of our $500 million to $525 million guidance range, largely due to the timing of restructure payments as I already noted. Free cash conversion for the full year was 70%, with interest payments of $198 million and CapEx of $38 million consuming the balance of EBITDA.

Networking capital was neutral to cash flow for the year while cash taxes were under $1 million. Speaking of taxes, the results in this morning's earnings release are presented pre-tax as we finalize our tax accounting before filing our 10-K shortly.

We repaid $126 million of debt in Q4, bringing total debt repaid since January to a $557 million. Coupled with our $511 million emergence payment, we repaid over $1 billion in 2010. As of December 31, net debt of $2.7 billion carried a weighted average interest rate of 7.3%.

Now before taking your questions about 2010 results, let's quickly review our remaining KPIs. Year-over-year change in active customers was down 10% in 2010, with active customer count of 435,000 at year end.

The reason for declining customer counts is largely driven both by difficult local business conditions and secular challenges, particularly in the major metro markets. Fully 40% of total customer account loss is due to involuntary causes such as going out of business or not meeting our credit standards.

Average sale per customer, or ASC, was $3,900, down 7% from the prior period primarily driven by churn as new customers tend to spend less than existing ones.

Regarding ad sales to existing versus new customers, Q4 ad sales to existing customers represented 81% of the previous year's contract value. Said another way, we lost 19% of last year's ad sales to defecting customers and net decreased spending from retained ones.

New business represented 5% of Q4 ad sales. The 19% decline offset by the 5% gain in new business comprises the net 14% ad sales decline in Q4.

We need to improve both churn and ASC going forward. Therefore, our initiatives are keenly focused on stemming the decline in customers, arresting the print declines as quickly as possible and expanding the breadth of services and solutions we offer, all expected to improve bookings to new and existing customers.

Now back over to Alfred.

Thanks, Steve. As we close the book on 2010, I would like to share one final thought with you. I am confident we can transform Dex One and return the Company on a path to growth.

We are at an inflection point in our business sector, a period of discontinuity with the past. Rapid technological advances are encroaching on our business on many fronts. Changing demographics are bringing different propensities to embrace and use technology. The intersection of these two forces produces discontinuous change.

Now with discontinuous change comes a tremendous opportunity if you get it right. And that's why we are here today, to start getting it right, to capitalize on that period of discontinuous change.

Now, in conducting my own personal due diligence prior to joining Dex One, I focused on three inherent stores of untapped value -- deep domain expertise in small and medium business; a rich database of local business information and the principle asset, a 1,500 person sales channel with strong bonds, many years in the making, to the local businesses they serve.

I also concluded that everything we must do as a Company must have a business to business to consumer consideration. Now while I think we've been strong in the business to business proposition, we will need to incorporate a compelling proposition for the consumer in our outlook.

I believe the strategic plan we will review with you today allows us to unlock these stores of value and return Dex One on a path to growth.

Now we are happy to take your questions on 2010 and the fourth quarter. Tyler?

Thank you, gentlemen. Appreciate that. And now we were going to take Q&A on the fourth quarter and full-year results. What I would like to ask is we have some microphones in the room if you would please raise your hand if you have a question, wait for the microphone to arrive for the benefit of the folks on the webcast so they can hear your question. And we would ask that you also let us know your name and Company before asking your question.

So, first question?

Good morning. Charles Laughlin, BIA/Kelsey. Couple of specific questions. I have to ask -- the CMR, are you going to disclose who the CMR is?

We are not planning to disclose who the CMR is. That's really not our privilege but what I would say, there was some confusion I think about the way we described the instance in the press release this morning.

Just for those people not so familiar with the CMR, the national advertisers use an ad agency to purchase directory advertising. What's happened is that the national advertisers paid the CMR, the agency but the agency hasn't paid us.

So our view is that we have to back that out of ad sales and we have to back that out of revenue going forward, we had to back it out of ad sales in the past and we actually had a $5 million bad debt write-off in the fourth quarter that you will see in the 10-K when it's filed.

Okay. My other question was about new customers. Is there anything different about the 5% new you just referred to, is there anything different about the profile of a new customer coming into the Company now in terms what they are buying, what the profile of the business is, what kind of Company they are? Is there any trend in -- meaningful trend in that respect?

First of all, a new customer initially tends to buy a lot less than the old customer we've lost because we have worked with those for many, many years and built the level of confidence and the level of spend up. So we generally start with a much smaller initial opportunity.

In terms of the profile of those new customers, a lot of it is win-back, and some of it is customers that have been out of our book for a couple of years for credit reasons and are now in good standing and can come back in.

But I must tell you in the small and medium business, we are not seeing them participate in the recovery. They are at the tail-end of the recovery and at the moment, we're not seeing any new business creation or any new --- any hiring of that level.

Thank you.

Thank you, Charles. Next question in the back there, thank you.

Jonathan Levine from Jefferies. I was just wondering if you could give a little bit more color in terms of the bookings and the relation to the forward ad sales. It looks like the trend even on an adjusted basis is not really proving as you had hoped. And so I'm just trying to understand a little bit better in terms how we should think of those bookings and how they translate into the forward ad sales? Thanks.

Thank you, Jonathan. So the best way to think about bookings is year-over-year change more so than sequential change and you've got to look at both, right? Because you want to see a sequential improvement over time, but you really need to look at year-over-year change in order to get a good picture so that you are looking at the same markets. And on a year-over-year basis, bookings actually improved meaningfully.

So as far as the impact that has on forward ad sales, we're going to talk about that later this -- in the program.

Good question, Jonathan. Thank you. I think we had one over there.

Scott Vogel from Davidson Kempner. You talked about a 19% decline in ad sales showing that 81% number and you said that was due to both client spending less and churn. Can you help break those two things out?

So the client spending number, the average client spend in the quarter was [$3,900] -- actually, that's a rolling four-quarter number, and so that was down 7% versus the previous quarter. Does that answer your question?

Was that 7% apples to apples relative to the 19%?

The 19% was the lost revenue from existing customers. And then we had 5% of ad sales that represent new business in the quarter. So you take the 19% lost from returning customers or existing customers or what we are calling churn and then you offset that by the 5% new business to get a net 14% ad sales decline in the fourth quarter.

But you are saying that the ad -- the decline of 19% was due to both lost customers and customers spending less.

Yes.

So if you are looking at -- so is that 7% down for the spend and then 12% down -- 12% churn? Is that the right way to look at it?

Yes.

Thank you.

Thanks, Scott. Next question, please. Here in the front, please.

Dennis Leibowitz, Act II Partners. Can you talk about how much of the sales were digital? I know you do a lot of bundled sales and how much was -- I guess you've given it in the past, print only or if there is any digital only?

Okay. In the fourth quarter, we discontinued operations for BDC. When we reverse that out, that gives us a mix of probably about 90% print, 10% digital having excluding the BDC operations.

Thanks, Dennis. Next question, please?

Thank you. John Slater, Paulson. Could you talk us through how the restructuring expense that you took this quarter is different to typical ongoing cost reduction expenses and actions? And also talk us through how the -- or the reasons behind the margin differential between Q3 and Q4 -- have any new investments begun to take place that would account for that?

John, hold on to that mic. We probably want to take that question in pieces. So Steve, you got the first part?

So the restructure charge was -- probably 90% severance and you heard that we were down 240 heads between September 30 and year end. And so that's what it's due to.

That was cash?

No. In fact, as I mentioned, $19 million was the charge. We only paid out $1 million. Just actually, just under $1 million and you can see that in the schedules to the press release in cash and so the cash payments are coming still in 2011. I'm going to get into that later when we talk about guidance. So I think you will --.

John, could you repeat the second part?

The second part was any other reasons for the margin differential between Q3 and Q4?

Yes. So Q3 to Q4, the -- in Q4 we ended -- this I mentioned, we ended up taking a $5 million bad debt write-off associated with the CMR. We also had, I think about $5 million of advertising more in the fourth quarter.

Our advertising programs tend to be back-end loaded in the back half of the year. And we have some level of discretion over when we're going to invest our advertising dollars. As we manage our P&L to make sure that we are hitting our EBITDA targets, that number can go up and down and so we ended up putting some of that money to work in the fourth quarter.

All right. Thank you.

Thank you, John. Got time for one more question.

Hi. [Will Palmer] with [Brem Corp.] Can you talk about what you are seeing in the different markets? It sounded like you had some very impressive statistics in terms of top sales reps and different markets that were outperforming the broader averages? I wonder if you couldn't just talk about the color in terms of the individual markets?

Yes, certainly. Well, obviously we have secular and cyclical impact, difficult to isolate completely the two impacts. What we can say is that in the larger Tier 1 cities, the secular impact seems to be more pronounced and also in the heavily wired cities like Seattle.

When it comes to the impact of the economy, we benefit from the 28 state patch that has a higher concentration of Tier 2, Tier 3 cities and rural communities, which are much less wired.

40% of the patch there doesn't have broadband connection. And so from that perspective, I think it's a little bit more of a resilient base. Now that said, we aren't seeing the rebound yet because they're just not participating in the recovery because for them, there is no recovery.

We expect that situation to improve there, probably in the second half of this year. I mean, there was the Obama $40 billion stimulus bill for small and medium business to open up the credit. I mean, these guys are literally starved for credit and that's not going to start coming through until mid-year.

That's great. All right. Gentlemen, thank you. We appreciate the discussion. And we will move to the next phase of the meeting. So thank you, guys.