Thryv Holdings Inc (THRY) 2011 Q4 法說會逐字稿

Good morning, and welcome to Dex One Corporation's fourth-quarter and year-end 2011 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 Mr Tyler Gronbach. Sir, you may begin.

Good morning, everyone and thank you for joining us today. We will begin this morning with comments from Dex One Chief Executive Officer, Alfred Mockett and Chief Financial Officer, Greg Freiberg. Following their comments, we will then have time for some of your questions. I would like to remind everyone 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 fourth quarter and fiscal year ended December 31, 2011, and the Company's Form 8-K furnished to the SEC this morning. These documents discuss fourth-quarter and full-year 2011 results, as well as guidance for 2012. The 8-K also includes the results information package, which provides additional information pertaining to the discussion this morning.

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. Electronic versions of Dex One's SEC filings can be obtained by contacting us, visiting Dexone.com, or visiting the SEC's website at SEC.gov. Copies of the news release and results information package can also be found under the Investor Relations tab at Dexone.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 in that year. These reported results were not indicative of our underlying operating and financial performance and are not comparable to any prior or subsequent period presentation.

During the call today, we will refer to certain adjusted figures that are non-GAAP financial measures, such as expenses, EBITDA, free cash flow, and net debt. Some of these exclude items such as impairment charges, stock-based compensation and long-term incentive program expenses, fair value adjustment, 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 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.

I would now like to turn the call over to Alfred.

Thank you, Tyler, and good morning everyone. We are pleased to share with you our full-year and fourth-quarter results. Entering 2011, we identified several key areas of focus, and we have made significant progress on each of them. First, as part of our effort to establish a 21st Century sales force, we completed a major sales refresh by replacing approximately 40% of our sales force with digitally savvy individuals who can sell integrated offerings.

We established the Dex One Sales Academy with a continuous learning digital curriculum, online training, podcasts and other e-learning tools, and recruited, trained and deployed digital-only sales teams in our major markets and in two pilot markets outside of our footprint. Second, we expanded our partnership network and struck alliances with 11 leading local, social, and mobile players. These agreements are helping to support our $200 million digital business with bookings growth of 34% in the fourth quarter, well ahead of the industry peer group. Third, we simplified how we bring solutions to market, with the introduction of service bundles that are easy to sell and easy to buy. Customers have responded favorably to this new approach. In just six months, we sold 34,000 bundles and in the fourth quarter, bundles represented 40% of total bookings.

Fourth, we continued to exercise prudent financial discipline and reduced costs by more than $120 million in 2011, bringing the 3-year cumulative expense reduction to $420 million. Lastly, we strengthened the capital structure by reducing net debt by $385 million. The actions we took during 2011, directly led to today's announcement that we are pursuing amendments to our credit agreement to enable the Company to repurchase outstanding loans below par. While we are pleased with our progress, we must stabilize the top line by effectively managing the decline in print and accelerating the growth of our digital business.

Ad sales in the fourth quarter were down 13% within the guidance range, results were impacted by weaker print sales, which were down 18%, but offset by the very solid digital growth I referenced earlier. Digital services now represent 19% of total bookings. Recent industry reports indicate print advertising revenue will continue to decline at approximately 20% per year for the foreseeable future. While we expect to generate print performance a couple of points ahead of the industry in 2012, digital sales will not overcome print declines.

That being said, we expect to maintain our industry-leading margins in part by driving more profitable leads from our owned and operated properties, and leveraging Dex net sophisticated algorithms to cost effectively buy leads in the market. We focus on the three Ps, people, partnerships, and packaging, to help us capture a greater portion of the rising investment in digital local marketing. We took important steps in each of these three areas in 2011. People -- we recruited 850 new employees to Dex One in a significant skills refresh, while reducing overall headcount by more than 500 in 2011.

As part of this effort, we modified our recruiting profile to search for qualified digital professionals who have a proven track record of success, as well as demonstrated initiatives, achievement, and resiliency. More than 750 of these new hires are in sales, digital support, and marketing. Approximately 100 of these new hires are part of our new Dex Digital group. These Digital specialists are focused solely on helping local businesses get online and leveraging our Digital services. Early indications point to increasing digital penetration rate, as well as growing share of customer spend.

We opened the Customer Contact Center, improving marketing consultant's efficiency and productivity by centralizing staff and eliminating telesales at a dozen locations. The 350-person center allows us to more efficiently allocate resources to specific market campaigns and digital sales initiatives. We will open two smaller centers in the Western US by the second quarter of this year. We established the Dex One Sales Academy. We improve live and online training. Our entire sales force has completed advanced digital services training and Google AdWords certification. But just as importantly, it facilitates the management of digital learning that increases speed to market and maximizes the time market consultants have in the field.

Partnerships -- during 2011, we entered into 11 new agreements with leading companies, specifically Bing, Gigya, Google, Postopia, PaperG, StudioNow, Telemetrics, xAd, Yahoo, YellowBot and [Y E P]. Our bias towards partnerships allows us to preserve capital, reduce risk, increase speed to market and more effectively deliver more high quality leads. Throughout the year, we worked with our partners to develop a series of new digital products and services in 2011, including digital display, reputation management, internet videos, mobile websites, web hosting, as well as website development, and high end search engine marketing.

Packaging -- finally, we took steps to simplify the selling and buying processes with our new service bundles. Customers no longer need to worry about how to allocate their marketing investment. Our marketing consultants can recommend a package that is the right mix of print and digital products to generate high quality customer leads. To support this effort in the fourth quarter, we put the finishing touches on our proprietary bundle builder iPad app and trialed it in a few of our markets. We are now in the process of rolling it out to all of our markets. Customers and Dex marketing consultants were both equally impressed with its ease of use and interactivity. We have now begun full phase deployment of this sales app and plan to introduce additional features, including signature capture and ad layout capabilities later this year.

In summary, considerable progress was made in 2011 and we must maintain this momentum in the face of a relatively weak local business conditions. While there are encouraging signs of consumer confidence and economic stabilization, there is a lag between when consumers spend more and when the majority of local business regain their confidence to invest in marketing. With this in mind, we have identified a short list of priorities for this year that we believe will drive greater investor returns over the long-term. Our priorities for 2012 are -- grow digital bookings by approximately 30%; increase bundles to more than half of bookings; reduce annual costs by $120 million, focusing on print-related expenditures; and continue to reduce debt; and opportunistically manage the balance sheet.

The 2011 results and our 2012 priorities reflect a business that continues to transform in the face of a challenging and ever-changing market. Nevertheless, I see great progress and future potential. We continue to improve efficiency, reduce costs, and manage our balance sheet. Digital marketing is a large and growing sector. Local business needs a partner to help them succeed in this complex and fragmented landscape. No company in our space, no company, is in a better position to succeed than Dex One.

And with that, I'll turn it over to Greg.

Good morning, and thank you, Alfred. My comments today will focus on our full-year results, with some discussion of quarterly data where appropriate. During 2011, we met all financial guidance metrics, laid the groundwork for today's announcement regarding the launching of the credit agreement amendments and made significant progress in reducing our cost base. Responding to your requests, we have begun to provide a print and digital breakout on a bookings basis, which means that they are reflective of the changes in contracts signed in the period compared to the prior year. This methodology best captures the productivity and effectiveness of our marketing consultants. It's more aligned with the flexible sales timing and contract length of digital, and is also the most forward-looking top line metric.

Net revenue for the year was $1.48 billion, down 17% from 2010, and consistent with guidance. On the expense side, bad debt for the year came in at 3.5% of revenue, consistent with our expectations. Expenses were $852 million, a reduction of $122 million, or 13% from 2010, in line with the target we set in July. These savings were primarily generated by lower print-related costs, and more focused digital operation. Putting the numbers together, we achieved $629 million of EBITDA, in line with guidance, and representing a 42% margin, after deducting full year cash interest of $204 million, CapEx of $28 million, cash taxes of $11 million, and $1 million for use of working capital, we generated $385 million of free cash flow, again, meeting our guidance target. This represents a cash flow conversion of over 60%.

Full-year EBITDA and free cash flow as reported were both burdened by our previously announced restructuring initiative, EBITDA by $25 million, and cash flow by $32 million. At the end of 2011, net debt was $2.3 billion. Leverage was 3.5 times, and weighted average cost of debt was approximately 7.7%. Looking forward to 2012, we will continue to drive change, find efficiencies, and improve top line results. We are pleased to launch amendments today, which subject to lender approval, will allow us to buy loans in the open market at each of our three subsidiaries. And we now have the ability to repurchase Dex One Corporation's subnotes. Through a combination of bank debt and note repurchases, we are targeting the retirement of approximately $200 million of total debt, capturing the discounted value for our shareholders.

In terms of guidance, we expect the year-over-year change in ad sales in the first quarter to be down 16% to 17%. While this is below the recent performance trend, first quarter results are seasonally impacted by the larger concentration of major metro markets. More specifically, we expect print to be the Q1 drag, while we expect digital sales and the number of customers buying bundles to continue to grow rapidly. 2012 net revenue, a reflection of 2011 and 2012 ad sales, is expected to be between $1.23 billion and $1.3 billion. Ranges for adjusted EBITDA and free cash flow expectations are $500 million to $575 million, and $300 million to $375 million respectively. A 42% margin is implied by the midpoint of the ranges, consistent with our performance in 2011 and evidence of the continued focus on expense management.

So to wrap things up, we made a lot of progress in 2011 and expect the same in 2012. Thank you.

Thank you, Greg. Before we open the lines up for Q&A, we want to point out there is a lender call later today to address specific questions regarding the amendment. We would like to focus this morning's Q&A on the fourth-quarter and full-year results. Operator, we are now ready to take questions.

(Operator Instructions) Donna Jaegers, DA Davidson.

I was just curious if you could comment a little -- obviously you've added a lot to your sales force and you've done a lot of training with them as well. Can you talk about how long -- what the ramp in productivity is for the new sales people?

Yes, in fact, we've shortened that ramp. Probably I would say three months up to full productivity. We're really leveraging the online training tools and online certification. They are doing training in the car with audio tapes, they're doing podcasts at home, they're doing computer-based training from home, and we've really shortened the face-to-face classroom from probably what was eight weeks initially now to probably two to four.

Great.

What that does, it gives them a lot more days in the field, more face-to-face selling. That's what it's all about.

And when should -- so how long do you give them now to make their quota? What's the timing on between when they're fully trained and then when you expect them to make quota?

Well, they are, they have got to be on pace to make quota within the first four to five months.

Great, and any -- can you give us just a range of what the quota typically is?

Oh, it depends. Face-to-face sales is going to be a $1 million plus. And telesales, probably about 50% of that.

Great, and that's on a monthly basis, or --

That's annual.

Annual.

Chad Quinn, Bennett Management.

I saw on one of the slides that there was a $6 million restructuring expense in the fourth quarter. Is that included in the EBITDA of $150 million that you reported?

Hi, Chad. It's Greg. Yes, $6 million in the fourth quarter, that's primarily upfront severance costs. And EBITDA as reported is burdened by that $6 million. So it's been consistent with how we've reported it all of 2011.

Right. Just wanted to double-check that. And you also just commented that the net leverage was 3.5 times. Yet you said you have the ability to repurchase the bonds, I thought that was subject to a leverage check of 3 times. It would seem that you don't meet that test, could you comment on that?

Absolutely. So there was an ability to use what's known as the borrower's portion of excess cash flow to buyback the Dex One Corp bonds, if the leverage was below 3 times. That's what you referenced. That's not the clause we're going to use. There was also a clause that said for cash already up at the Dex One Corp, we could begin doing those buybacks after the expiry of two years. That two years expired on January 30. So cash sitting at Dex One Corp, we're now able to go ahead and commit with buybacks.

Okay, and how much cash is up there?

At the end of 2011, we had $28 million up at Dex One Corp.

Okay. And just one final question, what percentage of the revenue for the quarter and year was from digital?

Right. So digital percentage in the quarter and the year were running $200 million -- Alfred mentioned, the $1.481 billion for the year. So that gives you about 13% or so for the full year and it's obviously higher in the quarter, because we've been accelerating.

Okay, thank you.

I'm sorry. Let me correct myself. Fourth quarter is about 19%, so you can see it's accelerated quite a bit from the full year results.

(Operator Instructions) [Hando Sun] Cetus Capital.

In terms of rolling out the digital strategy, where are you in terms of geography and how quickly do you think you're going to go nationwide, or what's the pacing for that at this point?

Okay. Well, first of all, we -- the digital strategy is rolled out footprint-wide throughout our 28-state patch. We have two pilots running at the moment, one in Philadelphia, one in Atlanta. And we're going to need a quarter or two under our belt to evaluate those results before we extend the rollout.

Got it. And Alfred, could you talk a little bit about the number of partnerships. You made some progress. In terms, how specifically what they allow you to do in terms of marketing to your customer? What kind of products and leverage that allow to give you to make a more compelling sales pitch?

Oh, my goodness, yes. Certainly, if I just go down the list, Gigya; we're using their tools for social registration, which allows people to use Facebook credentials to log on to Dexknows.com and bring all their circle friends with them. That's a big uplift there as we start exploratory work in social media and how to monetize social media. Google is pretty straightforward with a SEM partnership. And they are providing leads and clicks for us. Hostopia they do the website development, the mobile website and the web hosting for our customers. PaperG is display advertising creation. StudioNow custom video services. And xAd is doing the mobile advertising network for us as we extend our reach there. And Yahoo and Bing are more SEM-type plays and we're looking for best of breed and then we wrap that up with the Dex best of breed packaging and so we selectively put these into bundles to provide compelling value propositions, which take all the problems away from the small to medium business. In terms of -- you don't want somebody installing mufflers during the day and coming home to do ad work buys at night, do you?

Right, right. And, Greg, I know that there's going to be a lender call later in the day. I was curious, on the comment of $200 billion (sic) of debt retirement or buyback, is that over the anticipated two-year period, or what's the sense, or what's the timing on that amount?

Right. Thanks for that. That would actually be the target that we want to commence after receiving approval on the amendments. I hate to look too far ahead because I want to respect that process. But that's the amount we're targeting shortly after we expect to receive approval on that amendment.

Jonathan Lavine, Private Investor.

Just a quick follow-up. The $200 million, was that face?

That is correct. That's face value.

Okay, and then just in terms of your cost reduction plans for this year, can you talk a little bit more detail in terms of timing and it sounds like you guys are going to continue focusing on the print side.

Yes. Thanks for that. I'll take that. That's the amount of expense reduction over the course of the full year. Some of that, we've already got locked in. Actually, a fair bit of it, just given the run rate nature of how this works if I was still trying to chase it in February. It's hard to land still within the year. So I've got a lot of that locked in already. It is targeting on print-related costs. I'll just give you a little more flavor of that production and distribution. Then obviously the support and admin aspect related to that. But it's what you would expect.

What percent of that would be headcount?

I'm not going into that level of detail, because the way we look at this is more on that production side.

Okay, and then just one last question, in terms of the jump in digital over the last two quarters, can you just give a little bit more color? Because obviously in fourth quarter last year, it was, high double-digit and trended down. But if you could just give a little more color, what really drove it in the --

Sure. It's, first of all, it's getting a highly trained and skilled sales force that knows how to sell digital. Secondly, it's rounding out the product portfolio. Quite frankly at this time last year, you could have characterized it as being product poor. We have a very rich and wholesome portfolio that we brought to market. This quarter, we're rounding out the proposition with a full blown SEO product, high end SEM and digital ad display and it's getting well received in the marketplace. And also the bundles are getting us to do some traction. The bundles not only reduce the rates of decline of print, but they also stimulate up sell on the digital side of the house, and then of course we get to our ultimate bundle, the Dex guaranteed actions bundle, which is accounting for more than 10% of the bundles and that's where we get a lock-in with some of the more challenging customers.

Well, thank you for all your interest in Dex One and for your questions. I would like to close with the following observations. Small and medium business has yet to participate in any meaningful economic recovery. Our market conditions remain very challenging. Industry forecast anticipate print declines to continue at a similar rate to that experienced in recent years. We will address the print declines by taking adds and an additional $120 million of cost in order to maintain margins.

We now have a much more competitive and complete digital product portfolio. Our digital bookings in the fourth quarter grew at 34%, bringing digital bookings to 19% of the total. We anticipate digital will continue to grow at 30% throughout 2012. Print digital bundles have been well received in the marketplace, are selling well and now account for 40% of bookings. We plan on actively and opportunistically strengthening our balance sheet, as evidenced by today's bank amendment announcement. Meanwhile, we enjoy significant near-term liquidity, continue to post industry-leading EBITDA margin, and have valuable tax attributes to help deliver excellent free cash flow conversion. Thank you all for joining us.

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