Thryv Holdings Inc (THRY) 2013 Q2 法說會逐字稿

Good morning and welcome to Dex Media's second quarter 2013 conference call. With me today are Peter McDonald, Chief Executive Officer, and D. Jones, Chief Financial Officer.

The statements made by the Company today during this call are forward-looking statements. These statements include the Company's beliefs and expectations as to future event and trends affecting the Company's business and are subject to risks and uncertainties. The Company advises you not to place undue reliance on these forward-looking statements, and consider them in light of their risk factors set forth in reports filed by Dex Media and its predecessor companies with the securities and exchange commission. The Company has no obligation to update any forward-looking statement. A replay of the teleconference will be available at 800-585-8367. International callers can access the replay by calling 404-537-3406. The replay passcode is 19149862. The replay will be available through August 21.

In addition a webcast will be available on Dex Media's website in the Investor Relations section at www.DexMedia.com.

At the end of the Company's prepared remarks, there will be a question-and-answer session. And now I would like to turn the call over to Peter McDonald, Peter?

Thank you, Paula, and welcome, everyone, to the second-quarter earnings call for Dex Media. I'll make some comments about the quarter and then D. will follow up with a review of the financials. We will then take your questions.

This was an eventful quarter with the completion of the merger between Dex One and SuperMedia on April 30. The combination of these companies is good for shareholders, lenders, our clients and the future of our employees. I again recognize and thank the Boards of Dex One and SuperMedia as well as our advisors, lenders and shareholders, for your support. We are now three months into integration and we have accomplished a lot.

While the merger was consummated four months later than originally planned, all of the planning that had been done prior to the closing date is paying off and we are seeing the benefits in best practices, strength of management teams, and synergies. I'm very pleased with how the teams are working together and I can say we're on track in that regard at this point. We have evaluated nearly all the jobs in the Company. We've made some tough decisions and have identified and put in place our top 127 managers in just the first two months of integration. It is interesting and significant that our management team consists of nearly an even split of people from both predecessor companies. I'm very pleased with the talent in the new Company.

It is important to get leadership teams in place so that we can make the decisions necessary to drive the business forward. This has been a distracting time as people needed to get the me-questions resolved. With nearly 5,000 people now in place and 135 locations, we are anxious to continue to make progress. The HR and legal teams have done an outstanding job of getting this work completed. With each of the functional departments, we have quality leadership in place and are moving forward each day to improve this business.

The marketing team is working on migrating the best products across the entire footprint, and leveraging best practices. The bundles Dex One used will be rolled out to the former SuperMedia footprint and the former SuperMedia digital bundles will be rolled into the former Dex One market. Over the second half of 2013 and into 2014, we look forward to rolling out additional products across our entire combined footprint. Getting all the systems ready to accommodate this new product is high on our list of priorities as we migrate our customer base to the digital world.

As we get deeper into this combination, it is clear that a lot of quality work was done in each organization prior to the merger.

Our technology and system teams are outstanding and are well on their way to integrating multiple systems to accommodate the products and changes made in integration.

Again, we are very pleased with the leadership and partnering that has taken place this quarter. The operations teams have played a large role as we continue to see bad debt decline and efficiencies improve. Everyone is participating in finding new ways to do business more effectively. In sales we have a very dedicated and quality team focused on our clients and their needs. We continue to build strong relationships as we retain our clients in the 80% to 85% range. With a combination of channels available and managers in place, we are working on our plans to improve the topline and attract more clients.

Recurring revenue on a dollar basis for our clients has been in the 70%, 80% range, which indicates they are receiving value and getting results from our products and solutions.

This year we have seen stronger recurring revenue among clients who purchased bundles last year. Our new business is in the 3% to 5% range and we see an opportunity to improve this. In terms of the second quarter, and year to date, sales trends are not what we would like or what we expect them to be once we completed the merger integration, and our teams products and processes are in place.

We continue to see increasing pressure on print, but combined sales trends across all product and markets over the past two quarters have remained consistent.

Meanwhile, digital sales growth has slowed in the first two quarters of the year. Three factors account for this trend.

First, we saw some weakness in the national channel for both print and digital. Particularly among clients that work through digital agencies. Second, the penetration growth of bundles in the former Dex One market has slowed. Bundling did help drive and establish initial digital relationships with many clients in the former Dex One markets.

Now our attention will turn to growing that relationship by upselling existing products like SEM or adding new products such as video or text marketing. And third and perhaps the most important, the merger and integration have caused some distractions. That impacted performance across the board. Although these factors cause digital growth to slow in the first half of the year, the digital business continues to move in the right direction as we create bundled solutions that are very attractive to local advertisers and lead to high retention rates. Our digital business has significant scale with over $260 million in ad sales in the first half of the year.

This quarter, I have been in the field to welcome new associates and make sales calls. I have been impressed with the people I have met and the sales calls that I have been on. We have improved our approach, skills, and knowledge in both former companies. On a call last week with a home improvement contractor in New Jersey, it was great to hear the client say to his marketing consultant, I trust you. He tracks every call to his business and our marketing consultant helps him see the business he gets from his advertising programs.

In Nevada with a dentist, I again saw the trusted relationship between the client and our marketing consultant. The dentist had doubled his business with the Dex One bundles and was very happy. We have a powerful platform with a combination of print, digital, bundles and the ability to track performance as well as our hundreds of thousands of client relationships.

Our patented technology merchant platform continues to give us an efficient way to distribute our clients' messages and get results that we track daily. Along with the algorithms of Dex Med, we can provide customized programs that track their performance. We have been committed to selecting the best people and best practices and we know this will pay off.

All the work in the next quarters will be designed to improve our sales trends and help us acquire more clients. With most of the people issues out of the way, our focus now is on building a solid foundation for 2014.

Over the next two quarters our teams will be devoting much of their attention to the markets that we will be launching in Q1 of next year. We have the people, we have quality products and solutions, we are increasing our focus on recruiting and training, and we look to implement more segmentation going forward. With initiatives like text marketing, our mobile solution that allows businesses to target their message by category and geography, we like the opportunities ahead.

Local businesses want a single point of contact in this complex digital marketing world, and that is what we do best. On the expense side of the business, D and his team have partnered very well. The finance team has done an excellent job in managing expenses and helping to drive a healthy 39% margins and strong cash flows that we used to repay over $200 million in debt in the first half of 2013.

Also I want to recognize Finance for the great job they have done in getting our quarterly financials out, given the complexities of the merger and the need to combine the financial reporting of two companies. I am pleased to report our integration process has been incorporated seamlessly into our normal business planning activities.

While our sales continue to lag expectations, we look to improve these trends as we employ best practices around across the combined footprint.

In closing I want to recap three points about the quarter. First, the combination of Dex One and SuperMedia that we closed at the end of April. We have completed the transaction that we believe will be good for all stakeholders involved. The merger creates a company with a strong platform to deliver marketing services to small and medium-sized businesses throughout the country.

Second, we have accomplished a lot of integrating two predecessor companies by building a foundation for the future for Dex Media. Our integration is on track and we have the right people and the right processes in place.

And third, sales trends are not yet where we want them or expect to be. But we have clearly identified the levers to drive improved performance. This will be our top priority for the second half of the year. We are excited about what is ahead and we look to make the most out of our opportunity.

We appreciate your support and interest. Now let me turn it over to D.

Thank you, Peter, and good morning everyone. I'd like to start by thanking the teams that are working hard on the merger integration. This is an exciting time for Dex Media as we put the foundation in place for the Company's transformation and future success.

While Peter gave you an overview of the operational highlights, I would like to review the financial results of the quarter. Before we begin, I will mention that some of the results I will be speaking to this morning are non-GAAP numbers. We have provided a reconciliation of non-GAAP to GAAP results in the Appendix of this presentation.

Moving on to the financial results. Total multiplatform ad sales for the second quarter declined 16% as compared to the same period last year. Print declined 22%, partially offset by digital growth of 6%. As Peter mentioned, local has performed better than overall ad sales in the first half of the year with national second-quarter results negatively impacting overall by 110 basis points, print was impacted by 40 basis points from the national performance, and digital was impacted by 240 basis points. These ad sales results reflect a standard reporting methodology for the combined company.

Reporting of print ad sales was pretty consistent across both predecessor companies as to timing and methodology. With respect to digital ad sales reflected here, the go forward methodology is more likely former Dex One bookings calculations.

As Peter mentioned, we are in no way satisfied with these topline results. As we bring the best practices and solutions of Dex One and SuperMedia together, we will be striving to improve these trendlines. We will have more to share as we move through the remainder of the year.

For the second quarter, Dex Media reported pro forma combined operating revenue of $568 million, a 17% decline for the quarter compared to the same period last year. Adjusted expenses were $344 million and adjusted pro forma EBITDA was $224 million for the quarter. For year to date, pro forma combined revenue was $1.149 billion, a 17.4% decline compared to the same period in the prior year. Year to date adjusted expenses were $695 million and adjusted pro forma EBITDA was $454 million. Adjusted pro forma EBITDA for the quarter and year to date excludes $28 million of net integration costs and $34 million of merger transaction costs.

We were able to maintain cost controls across all functions resulting in an adjusted pro forma EBITDA margin of 39.5% for the first half of the year, excluding the merger integration costs I just mentioned. Pro forma free cash flow for the six months ended June 30 was $176 million, which includes the cash impact of $50 million of integration and merger transaction costs.

In terms of the debt balance, year to date we have reduced our total debt outstanding by $201 million, leaving a debt balance at par of $3.287 billion and cash on hand of $244 million at the end of the second quarter.

Finally, the December 6 lender presentation released publicly included forward-looking financials and other metrics for the standalone and combined companies. We are not looking to update that information at this time. And at present it is not our policy to provide guidance.

With that, operator, we are ready for questions.

(Operator Instructions). Fred Taylor, MJX Asset Management.

Thanks for the presentation. I'm looking at slide nine which has the debt balances. Do you have the EBITDAs broken down by the five different borrowers for the quarter and the six months?

The silo-specific financials will get posted to our website a little bit later this month.

That's helpful. And how long do you expect to continue borrowing in silos as opposed to perhaps doing the refinancing at the parent level?

Refinancing opportunities are always market contingent, Capital Markets contingent and contingent on performance of the business. We are certainly going to evaluate any opportunity that might present itself in that regard, but it's dependent upon a lot of extraneous as well as performance factors for the enterprise. We will evaluate that as we move forward but I don't have a specific timeframe for you.

Thanks, that's all I had.

[Colin Wilson Murphy, Bowery].

Yes, hi. I was wondering when you expect you anticipate cash starting to flow from SuperMedia to the RH Donnelly silo?

There's been some tax aspects of that already transpire as we made our second quarter cash tax payments and calculations. A relatively small amount at that point. And then, of course the movement of cash across all of the silos occurs as a result of the various sharing agreements -- the cost-sharing agreements that are in place. It will move in standard course.

The primary movement I think you're making in reference to is between in regard to the tax aspect of it. We'll see smaller amounts as we move through the rest of the year, move in associated with the tax payments requirements that the SuperMedia silo, you'll probably see a little more of that as we move into next year.

Thanks, D.

(Operator Instructions). Chad [Quinn], Bennett Management.

D, I was wondering if you could remind me of what is the period over which ad sales amortize into revenue?

For the most part it's a 12-month period. A few exceptions but fairly minor. But pretty much 12 months.

And earlier in the call, when Peter commented on the integration and merger being on track, does that mean that the synergy forecasts that were provided in the 12-6 deck, is that on track as well?

We are not necessarily updating the 12-6 deck, but I will say that from a cost perspective, we do believe we are on track to get at the costs that were going to result from the merger as well as the ongoing cost reductions that we had looked at individually. And we'll continue to look for additional opportunities in the cost buckets as we move through over the course of the next year or so.

D, when you said you are not going to update those numbers this time, are those numbers -- does that mean you think you're still on track to achieve those numbers or you're moving off those numbers? I know you said you're not giving guidance, but I'm just wondering if you could clarify that statement about not updating the 12-6 forecast.

Yes. It's basically that. We are not updating one way or the other in regard to that plan of record at this point.

Okay. And then you mentioned the -- you have identified some performance levers to help drive sales in the future. I was wondering if you could just maybe elaborate on that a little.

This is Peter. One of the products, it's interesting that there's a lot of different products out there, and clearly they're not across both footprints. When we look at some of the channels we have, Dex One had Telephone Center, which as we look at our -- if we match kind of the client sets and opportunities out there, we look at the channels we have and we look at the products we have, we think there's ways of combining those to be more effective in how we go to market. That's just one example.

There's other things with training, and while I think as I look at the progress we've made in the last year, it's really remarkable in the field how quickly the teams have adjusted to not only print but the digital world and how comfortable they are now. It really is remarkable.

So there's a lot of opportunities between channels, between segments, between targeting and how we go to market in the bundles. We're -- clearly local businesses need to be able to get found in the digital world. And the more analysis and research we've done and the latest research has come out in 2013, really confirms a lot of our thinking, relative to how we approach these and execute going forward using the different levers we have to pull.

Okay, thank you.

Tim Daggett, Citigroup.

Can you talk about your appetite for below-par buybacks of the loans? And how much capacity you have and when you might think about starting to do that?

Yes. We are evaluating that right now. Still considering the -- making sure that we've got solid cash flow forecast in the elements so that we come out with, to the degree we do, come out with open market repurchases, we do it with the right amounts and in a thoughtful fashion. But I would expect to the degree we can get into the market and put some cash to work that we would be looking to do that in fairly short order. Anything else?

No, that was it. Thank you.

Samuel Sekine, ALJ Capital.

Most of my questions have been answered. Just one on the print side. Can you talk about the trends that you are seeing there, and is it kind of troughed? Do you guys see as negative 21%, 20% as kind of a go-forward rate?

We look at the print over the last couple of quarters and last few quarters and we are seeing the negative 21, negative 22 fairly consistently. As we look through the rest of the year, I'm expecting that we will probably see some similar results. As we move into next year and beyond, certainly we are looking, we would like to improve that trend and work to improve that trend as Peter mentioned. The bundled sales are an approach that helps retention and helps the delivery of the value proposition to the advertiser in a bundled concept.

I believe that also has the potential to help some with print as we retain not only more digital but also more print. But we've got to see how that goes and how it moves. I think the most recent trends in the 21%, 22% range is probably what we are looking at in the near term.

Of that 21%, 22%, how much of that is due to pricing versus customer retention?

We talk about customer retention in the 80%, 85% range. And so you can do the math as to the breakdown as to how much is decreased spend by individual advertisers. I wouldn't say it's necessarily just pricing, it's also the change inside the programs with customers you've retained as well as some pricing pressure as well as the discounting programs that we are putting in place around the various bundles. All of those contribute.

But like I say when you're looking at 15% to 16% type decline in clients that we've seen recently, you can do the math as to where the remainder comes from.

And lastly are you guys seeing any increase in just digital only customers or what's the mix between digital bundle and print only?

I won't segregate the individual clients. What we're seeing though is that the opportunities that -- and the approach in the marketplace from the former SuperMedia markets as we roll that across the Dex One markets we would look to see a step up there because that was some measure of the focus in the digital only clients, that was some measure of the SuperMedia approach in the marketplace.

And then on the Dex One side as we -- where the former Dex One bundles then approach in the marketplaces we roll that across SuperMedia markets, we will seek to improve the penetration of the existing client base. You've got both of those dynamics moving.

Certainly we are seeing increase in digital only clients, but we still need to take an additional step in that regard as Peter mentioned with a 3% to 5% new business growth we need to take an additional step in that performance and some of the bundles in the approach in the marketplace we are looking to roll, we are hopeful it will provide some assistance in that regard.

Parker Lewis, [Hayman] Capital.

I just had a question about the merger transaction, I think it's note 6 in the financials. Have all the costs specifically related to the transaction in professional fees been incurred to date and paid?

Yes. There may be dribs and drabs, but for the vast, vast majority of the transaction costs themselves, will have been paid.

Jen Ganzi, Hillmark Capital.

Thanks for taking my question. I was wondering, you mentioned in the digital sales growth slowing that you had some weakness in the national channel. In digital due to especially with companies working with digital agencies, can you elaborate a little bit on that, please?

Sure. On the national side, national customers actually are more sophisticated, have more resources. So the relationship we've had with many of our national customers has been through what we call CMR, certified marketing representative. They have really been the conduit and the relationship was really more of a print-centric relationship.

The national business for the most part isn't looking at a company like ours to say, we're going to go take our digital to SuperMedia or Dex Media. And so, we are seeing CMOs in the national community, as you might expect, say, we are going to be looking to do more digital and we are not the provider of choice at this point.

On the local side, we are seeing the bundles, and it's decreased because the penetration in the former Dex One markets, the penetration of the bundles has been terrific in the last year or so. But at some point that just slows down as you convert -- let's say the first set of customers in there and now the focus is going to be upselling those customers and converting the rest. So from a standpoint that's kind of job number one is to try to take as many of our existing clients, maintain that relationship, create bundles that allow them to do business with us and then track and show them the results and keep the high retention rates we have.

In the meantime, we are working on other channels to go drive additional new business with more specific [bundles] targeted for different levels of customers. And so the combination of trying to drive more of the products across more of the different footprint, for example the SEO product was in the Dex One footprint, it's not in the former SuperMedia footprint. And as we roll those out we expect to see improvement in the ad sales.

I would say with respect to the national, we do see certain opportunities and pockets there where we can improve the trend now with respect to national. While national advertisers may not be looking at us to manage their search program or manage their Google program or those sorts of things, we do have a network of partners including our own owned and operated traffic that does provide good leads and does provide good conversion. And there is an interest from the national client in regard to that base.

We need to formulate and adjust products there and adjust that approach to that market and that set of customers in a fashion to get that interest and drive revenue opportunity in that regard. And we will be looking to do that along with other things like franchise opportunities and evaluating the opportunity to greater penetrate the franchise space with those solutions as we move through the rest of the year.

Great, thanks so much. Just curious, I don't know if you break it out, maybe you could just give me a sense of what I guess sort of percent of your old-line print customers have converted to digital and what sort of growth rate has been over the last few quarters for those guys. Or if you break those out.

No, we don't break out specific segregation at the customer level between the print and digital. We've obviously seen increased improvement in the penetration levels of our existing print base with the digital programs. We don't isolate those particular statistics.

So you don't know like what percent of your original print customers have migrated to digital at this point?

We don't publicly disclose those elements. We are looking to provide total solutions here and we do think that penetration of that print client base is going to continue to move and evolve in the right direction, we think that's the right thing for the client, we think that's the right thing for retention and all those elements. When you look at the Dex One approach as they move through 2012 they took a meaningful step in regard to penetration of their base. And we had a penetration of multiproduct base in the former SuperMedia side as well.

As we cross-pollinate these, we would expect to see an increase in the penetration of that client base.

Great. When you say that retention was like 85%, is that just on the print side or is that overall print and digital?

We are talking in total retrospect our client base.

Great, thanks. Just one more question on expenses. It seems that they've gone up like sort of an absolute basis from last year, both in the quarter and the half. I'm just wondering if you could elaborate on why that's the case. Because you have operating revenue up in the quarter but EBITDA's down.

Yes. I think you're looking at the operating revenue from a -- you may be looking at the GAAP financials as opposed to the pro forma adjusted financials, so you need to focus more from -- to truly get a sense of the operation, you've got to focus on the pro forma adjusted results. The GAAP results are significantly impacted. Especially in the revenue line. But overall as well, because of fresh start accounting and acquisition based accounting that had to occur with respect to the SuperMedia piece of this transaction.

So in order to get a true sense of the operating -- the true operating results of the enterprise, you really need to look at the pro forma schedules. Those reconciliations are in the Appendix and in those schedules. And a greater description of all of that accounting aspect of things and those impacts will come out in the Q in the next day or so.

Okay, so I'll just look for that then.

All right.

Great, thanks so much. That's all.

Sam [Lonquin], Independent Research.

Good morning, thank you for taking my questions. I have a very specific question about changes that you guys are making or not making in instructions and policies that you are recommending to your salespeople or customer service representatives in light of declining digital sales.

Are you recommending that they don't push bundles as hard as they used to? And to what extent do you see the relationships between the digital sales decline and Facebook prosperity? Is there anything specific that drives these digital sales decline in your opinion, maybe competition, or the fact that your clients used to push bundles. What specifically in your view drives the decline in digital growth?

Let me take first crack at that and I'll pass it to Peter. First, let me clarify that there is dollar amount in percentage growth in the digital revenue line for us. And in the operations and in the sales results that we have reflected here. The growth rate itself has seen a decline in the first half of the year versus last year.

I think Peter mentioned several elements of that in his opening remarks when he talked about nationals causing a decline, I think I delineated some measure of that influence going on last year in 2012. We saw good growth as we built the base in the former Dex One market of digital clients with that bundle approach and that approach of the marketplace.

Obviously first year of that growth is going to be greater and more significant as you look at percentage growth. As we've moved into the first half of 2013, that rate of penetration has slowed. And then on the SuperMedia -- former SuperMedia markets, we are actually seeing improvement in the local sales and improvement in the growth rate in the local sales there. The national has drawn that down a little more.

As we look forward, we'll still continue to push bundles. We think the multiproduct relationship with those advertisers is absolutely important. Peter mentioned we're going to cross-sell the respective product solutions between those markets, and so bundles will continue to be a very strong focus with the salesforce as we move forward.

And then it will also be about enhancing the value proposition inside of that bundle so that we can upsell with respect to the folks that have already purchased multiproduct solutions for us. And then getting at the new business, getting at new business and enhancing that 3% to 5% we are getting out of new business. Those are the elements that we look to push.

But as far as direction and how we are driving that salesforce, that has not been adjusted as to the product solution sets that are in the bag. We are actually looking to enhance that with more digital solutions and what we are incenting them to do has not been an adjustment.

I will say the second quarter probably did see some measure of distraction because of the transaction and getting -- as Peter mentioned, the me-questions answered. But as we move forward we will be continuing to look to drive those multiplatform solutions across the customer base.

Right. And just a follow-up quickly if I may, I understand that your salespeople have experienced some distraction because of the technical issues and merger and stuff like this. But looking forward, can you explain maybe possibly how decisively you're going to increase the penetration into a new customer base with the existing salesforce? What specifically are you instructing them to do approach new clients? Because it's obviously easier sort of to reinstate revenues, renew them with existing clients and talk to people to business managers with existing relationships with them.

But getting to the new clientele with the same number of salespeople, I think it's kind of challenging. So maybe you can tell us what kind of tools they will be using and what specifically fuels your confidence that they will be competitive in their sales pitches?

Great questions. And Stan, just first we just -- I think just trying to get you on board or help people understand what's going on, we have recently just put all the management teams in place.

The teams currently are working on the new approaches as we combine these two companies. And a couple things. Segmentation will be a key driver of how we look at going forward, because you're right. We have to use our resources most effectively. So segmentation will be one, and more targeting of our clients. We can't do things the way we did them yesterday, we all realize that.

So the work that marketing is doing to make sure that we understand the opportunities in different segments will be part of it.

Second thing to think about would be the channels and what channels are more or less effective, given the identity of the segments that we talked about. So the channels and how we go to it or either I'll say the account exec type manager who handles large, complicated accounts down to the telephone centers where we can cover a lot of customers at the low end much more efficiently.

And third, I would say that one of the things that both companies have done is they've done a lot of work in the last couple of years on the products and on the bundles. And when we look at these products and these bundles, by matching the right products, the right bundles and improving them, with the right channels and with the right segments, we think that that's one of the ways that we can improve and lever the top line. So those are just kind of a high-level approach, but the teams are actually working on all that right now. And actually tomorrow, I'm going to get one of the readouts of where we stand towards their final plans. Good question.

Thank you very much, good luck. Thank you.

Colin Wilson Murphy, Bowery.

Yes, thanks for taking my follow-up. I understand the renewal rates, the overall renewal rates are between 80% and 85%. What are the renewal rates for the bundled products and the guarantee products?

We don't isolate those publicly by product set, but I will tell you that we see probably between 5% and 10% enhancement when we are selling a multiproduct solution as opposed to a single product solution to an individual client. Now you have to be careful with that as to the cause and effect aspect. But advertisers, advertisers and buyers buy.

But we do believe and we do know that the value proposition that delivered via these multiproduct solutions is enhanced when they are taking both platforms or the multiple platforms and multiple products that we offer. And that certainly contributes to the retention differential that we are seeing.

How are the out of market trials going selling those digital products?

We have -- prior to the merger in the former Dex One they had some out of market folks, but they had discontinued that channel prior to the merger. And at present we have fairly very limited out of franchise efforts and activities. We certainly do have clients that are out of franchise that are wanting to advertise in our markets, but as a focus and as a separate channel or distinct effort, those elements have been discontinued.

Okay, thank you. That's helpful.

This concludes today's question-and-answer session. Thank you for your participation in today's call. You may now disconnect your lines, and have a wonderful day.

Thanks everyone.