Thryv Holdings Inc (THRY) 2014 Q1 法說會逐字稿

Good morning, and welcome to Dex Media's first quarter 2014 conference call. With me today are Peter McDonald, Chief Executive Officer and Dee Jones, Chief Financial Officer.

Some statements made by the Company today during this presentation are forward-looking statements. These statements include the Company's beliefs and expectations as to future events 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 to consider them in the light of 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 statements.

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 33613106. The replay will be available through May 20, 2014. In addition, a webcast will be available on Dex Media's website in the Investor Relations section at www.irdexmedia.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, CEO. Peter?

Thank you, Angie, and good morning, everyone. I will start today's call with comments about the quarter and then Dee will provide more details on the financials.

Less than a week ago we marked the one year anniversary of the merger that created Dex Media. We've accomplished a great deal over the past 12 months, and are realizing expense savings and now most of the integration action is behind us.

I am pleased with the way our teams tackled expense synergies, building a solid foundation for the future. There is still some work to do on systems and product integration, and we continue to advance in these efforts. We are now increasing our focus on improving the top line as evidenced by our steady progress in the first three months of 2014.

In the first quarter, we saw improvement in overall ad sales of more than 290 basis points over the same quarter in 2013. We generated $194 million in adjusted pro forma EBITDA with a margin of 39.9%.

Overall client retention remains at more than 80%, and that percentage is even better with our higher end clients. Bad debt is holding at around 2%. These numbers are indicative of our clients' satisfaction with the value of our solutions we deliver.

Free cash flow for the quarter was $97 million, and we paid down $74 million in debt. Dee will provide more color on these numbers in a few minutes.

The work we completed in the last half of 2013 to implement best practices laid a solid foundation for positive trends in both print and digital during the first quarter of 2014. Digital ad sales growth of 8.5% was driven primarily by our bundled solutions. As of the first quarter, digital sales accounted for 27% of our amortized revenue, as compared to 21% in the first quarter of 2013.

In addition, 36% of our clients, approximately 200,000, have a digital relationship with Dex Media versus 32% in the same quarter last year. When you consider that our digital clients spend an average of $2,500 to $2,600 annually, you can see the potential for continued improvement in digital sales remains strong.

Our bundled solutions are resonating in the marketplace with target customer segments and contributed to our solid growth in the first quarter. Flex Bundles and our guaranteed ad program are driving growth in mid size and larger client segments, and our smaller clients are seeing the value of a digital presence through our Start Smart solution. Overall, our clients see value and positive results when they choose a complementary set of solutions versus relying on a stand alone marketing solution.

We offer a complete array of advertising solutions local businesses are looking for, from search to optimization, to text, mobile, social, video, royalty and reputation management, to traditional media such as print and direct mail. Our simple solutions offer valuable combinations of our broad product set in easy to buy packages. By consolidating a variety of advertising approaches in one place and producing solid results, we are a one stop shop for local businesses.

We deliver solutions that help our clients get found, chosen, and talked about. So they are confident in their investment with us.

On the last call I mentioned encouraging results with our Start Smart Bundles, and the momentum continued into the first quarter. This entry level product combines a number of solutions designed to help local businesses establish a presence online; such as listed claiming, a website, mobile website, social media, reputation management, and call tracking as well as print. Simple to present and value-priced. Start Smart really solves our client's question of how to get their business found in the digital world.

Let me give you an example. One experienced optometrist has purchased print ads with us for several years. He has little knowledge of online advertising, but knew he needed to be there.

Our marketing consultants showed the doctor what potential patients saw online when they searched for optometrist, a listing that included only his name, address, and phone number. She walked him through the elements of the Start Smart Bundle, and he immediately recognized the value it offered for a very affordable price. She was also able to demonstrate how digital presence would enable him to track results he was getting for his marketing investment.

We were able to upgrade the eye doctor's marketing program from a relatively bland print ad with no tracking to an attractive new website, Google plus listing and mobile website where he can not only get found by potential patients, but also easily track his results. With a small investment to establish his digital presence, this client has received 57 calls and nearly 1,500 impressions in the first six months of his new program, at a cost per call of about $15.

He's also getting exposure on search engines, and can now manage how his practice appears online. With the Start Smart Bundle solution, this optometrist has made a positive entry into digital advertising and established a solid platform for the future growth.

We're also pleased to report that our Flex Bundle digital solution is also doing well. This offer gives our marketing consults the flexibility to design customized solutions to fit the specific needs and budget for each client. They get exactly the solutions they need for one bundled price.

Many of these businesses are confused of how to market the digital world and want easy solutions to enable them to track their results. Our simple approach to offering customized solutions is very attractive to local businesses and helps them see the value of their marketing investment.

One example of how Flex Bundles can make a difference for a client is an auto parts store that relied on only print ads to market their business. Our marketing consultant was able to show how upgrading their program to include a website, superpages.com listing and search engine marketing could positively impact the number of calls they received.

The auto parts store specializes in hard to find parts, and our team worked with the client to ensure keywords, highlighting this expertise was associated with the store's listings. Now potential customers can easily find and choose the specialty auto parts store when they search online.

Our support to the auto parts client continues long after the sale. Our internal optimizer teams proactively monitor and track auto parts store account by looking at how many days they're online, how many calls and other conversions they receive, and their average cost per call. As you can see on this slide, our auto parts client achieved solid results in the first three months of their new bundled program, with more than 9,900 impressions, 495 clicks, and 170 calls at an average of $2.18 per call.

We also support our clients by helping them monitor and track their own marketing program by providing easy to read written reports in terms they can understand. Customized to individual solutions they selected, the reports show clients how often they were getting found, chosen, and talked about online.

This level of transparency helps our clients see for themselves the value they're getting for their investment. We make it simple and easy for our clients to select the right marketing solution and deliver trackable results.

Essentially local businesses want leads, and with our digital solutions and patented technology, as well as our print products, we deliver the low cost effective leads they're looking for. Many businesses don't have the time or desire to become experts in search engine optimization, social media, mobile marketing, reputation management, video, text messaging or stay abreast of every new development in this rapidly changing space. It can be overwhelming for a business owner to keep up with and manage all the different emerging media in order to promote their business.

With Dex Media as their local marketing department, our more than 550,000 clients are better equipped to navigate the complicated world of promoting their business across digital media. They can choose from our comprehensive suite of multi-platform solutions with confidence, knowing that they have the right support in place to get found, get chosen, and get talked about.

We have amazing employees at Dex Media who are passionate about winning in this space. Our teams will continue focusing on top line growth while managing expenses and delivering great experience for our clients and helping local businesses grow. We're very proud of the momentum we achieved in the first quarter.

Our bundled digital solutions are resonating with our marketing consultants and getting results for our clients. We are confident in our ability to serve local businesses and very excited about the future. Thank you, and now let me turn it over to Dee.

Thank you, Peter. Good morning, everyone.

Before I provide the first quarter financial results I would remind you that some of the results I will be speaking to this morning are non-GAAP numbers. We have provided a reconciliation of GAAP to non-GAAP results in the appendix of this presentation.

Now, turning to first quarter 2014 financial results, total multi-platform ad sales for the first quarter declined 12.9%, as compared to the same period last year. Print declined 19.7% and digital grew 8.5%.

As Peter mentioned, we are pleased with the performance of our bundled solutions that help local businesses get more leads. Bundles such as Start Smart and Flex Bundles are providing results.

Our client relationships are a key element to helping them understand the value in our bundle solutions. It's about providing the right services for those particular businesses' needs, not just a do it yourself product. With most of the merger transition efforts behind us, we will continue to focus on client engagement and solutions to improve client value and our top line revenue.

For the first quarter, Dex Media reported pro forma combined revenue of $486 million, a 16.4% decline compared to the same period last year. Adjusted pro forma expenses were $292 million, and adjusted pro forma EBITDA was $194 million with a margin of 39.9%.

These results do include a one time credit to expense during the first quarter. The Company reported a $10 million credit to expense associated with the settlement of a liability relative to one of our publishing agreements. In addition, the Company realized favorability associated with the true up of certain operating tax liabilities.

The Company did incur $18 million of merger integration costs in the first quarter. With respect to margins, we continue to realize synergy and other cost initiative benefits. As Peter mentioned, we have made good progress with respect to our integration efforts, and have a good bit of that work behind us.

The margins for the first quarter reflect some of the synergy benefits associated with these activities, along with the benefit of other cost initiatives. These savings will continue to flow through the remainder of the year as the full annual effects are realized. While we believe there will be some overall margin contraction, as the transformation of the business continues, as we have stated and demonstrated in the past, we will continue to work to effectively manage costs through efforts such as product integration and simplification, rationalization of print costs, systems consolidation and numerous other initiatives.

Specific to our digital products, we continue to make progress in regard to incremental margin contribution. Our individual and overall digital solutions are profitable today, and we look to realize the benefits of further scale as this base of business grows.

Now, on to the debt payment activity for the first quarter. Our total debt balance at par for all four [silos] was $2.653 billion. Payments made in Q1 were $74 million coupled with an $8 million PIK associated with the bonds resulting in an overall net debt reduction of $66 million. We have provided debt balances at par and cash by silo located in the appendix of this presentation.

In the first quarter the Company generated free cash flow of $97 million, representing cash from operations of $100 million, less capital expenditures of $3 million. This includes merger integration cash costs of $16 million. Cash on hand as of March 31, 2014, was $179 million.

As I close the quarterly financial remarks, I would like to mention we will be posting the silo financial statements to the Investor Relations section of our website within a week. In addition to the normal postings, supplemental schedules relative to adjusted pro forma EBITDA by silo will also be provided. Operator, we are now ready for questions.

Certainly. (Operator Instructions). Your first question comes from the line of Tim Daggett with Citigroup.

Hi, guys, thanks for taking the question. Related to the below par tenders for the debt back in November, what's your appetite to do more of those over the next couple quarters in 2014?

Yes, Tim, appreciate the question. As always, we're interested in efficient deleveraging and will be evaluating that in the coming months. We've still got a few qualifying elements we've got to complete with respect to the filings with the agent. But after that's done, we'll have some measure of opportunity to step into the market, and we'll be looking at it seriously in the next month or two.

Any sense on what silo you would target in those purchases?

I think with trading levels and where we're at with respect to each of the silos, we'd have an interest in looking at all of the silos.

Okay, thanks.

Your next question comes from the line of Mark Hetrick with Wells Fargo Advisors.

Guys, great quarter. I love the growth trend for the digital and the fact that your print business is tracking less than expected. My question is last quarter you talked about hopefully working on a partnership for this year, and just curious to see how that's going.

Mark, it's Peter. There's a lot of activity in this area. We're going to continue to look for strategic partners.

There's nothing to report at this time. But it's on our radar. Let's just put it that way.

Your next question comes from the line of Jen Ganzi with HillMark Capital.

Hi, thanks for taking the question. With regards to the digital growth which has been a lot stronger than the past couple of quarters, is there a way to give us a sense of like if that 8.5% growth was similar across all silos, or did some show stronger growth trends surrounding the digital side?

Yes, there was a little variability across the respective silos, but we did show growth in all of our regions and we had meaningful growth within each of the respective silos. As you would expect, there's some measure of variability, but we were pleased with the trends in each of the silos.

Great. Thanks. That's helpful. And then just in terms of on the print side, again, is that pretty much similar trends across the silos in terms of that around minus 20%, or so down?

Yes, you've got a little variability there as well but I think it's order of magnitude, you're in the same ballpark.

Okay. That's helpful. Thanks. And then just maybe tell us a little bit more about margins. Obviously your margins improved since the last quarter. Since last few [oners] your percent in digital increased. I'm just wondering is margins on digital getting better as it becomes more significant part of your business? How should we think about that going forward?

Yes, as I mentioned, we're benefiting from synergies, and those synergy opportunities and the integration is in both the digital part of the business as well as the print part of the business. And so we're experiencing some of that, and some of those benefits are flowing through.

As we build scale in that digital business we'll look to take advantage of potential for improved margins in that regard. Certainly as the mix of products even within digital shifts and moves and changes it has margin implications, but I will say that we are incrementally profitable with respect to all of our digital solutions that we offer in the marketplace, and we're looking for continued improvement there. Certainly pressure in the marketplace and those elements will play in regard to that, but we do believe there's opportunity to provide meaningful and strong margins in the digital space as we move forward.

Okay. Great. And then just in terms of like on the digital competitive landscape a little bit more, do you find that as you guys build scale, are things getting easier or harder in terms of pricing power? Things like that. If you'd just talk a little bit more about that?

Jen, you asked a number of questions there, but on the competitive front with the digital, I think that the way I see the business is as we continue to get better and better each day. And as we said in the last couple quarters, we continued to improve our solutions to better fit the customers and the clients' needs.

So on a competitive front, we talked in the past about "that guy", as the guy in the garage out there as one of our key competitors, and I think our scale will be an asset and I think our services. And I did mention on the call today, I think that one of the things that we do that I think is rather unique is how proactive we are internally at managing the accounts and making sure our clients are getting results.

And I think this is one of the differentiators for us in the competitive market. So I see us getting better and better as we continue to roll these out, and improve in the training, the execution on all fronts of the business.

Jen, with respect to the pricing, the pricing power, the pricing aspect, we're always evaluating what we can command in the marketplace with the solutions. I think as the bundles continue to evolve and the solutions get broader and become more effective and more valuable even than they are today with respect to the advertisers, we'll look to look at that pricing opportunity and see where those opportunities lie.

And we're also looking to grow those clients' programs across the digital space, so average spend we would expect to move and trend in the right direction with respect to that. Having said that, there's always competitive dynamics that you have to take into consideration when you're looking at your pricing opportunities in the market.

Good. Thanks so much.

Your next question comes from the line of Chad Quinn with Bennett Management.

Good morning, guys. Dee, can you just comment on the timing and magnitude of the synergies to date and if they are meeting your original forecast at the time of the merger, the time the merger was announced?

Yes, Chad. Magnitude-wise you can run the math against the reduction in expenses. We are pleased with where we're at with respect to the synergies.

Obviously, the identity of synergies versus cost reduction and other cost initiatives is lost in regard to that. But relative to where we had anticipated being on the cost side of this business, I would say that we're ahead in that regard. I think we're ahead of schedule and pace as to the activities underlying those initiatives and activities.

And getting at the run rate necessary or that we had originally anticipated for this year, we feel good about where that's at. A good chunk of the activity and the implementation of the events that would give rise to the expense reductions are behind us in regard to most functions.

As an example, finances consolidated we're on a single system, et cetera, and we see that across a good number of the functions. The annual effect of that will continue to flow through as we move through the year.

Having said that as we would expect, systems is a little bit slower process and we have to be very mindful and methodical in consolidating systems so as not to create risks for the business. We're doing that and we're making good progress.

I'm not saying we're behind schedule by any means with respect to systems, but that's one of the elements where we still have activities left. And we're still looking at more complete product integration and simplification in that regard, so those are probably the two primary areas where we've still got integration efforts left to go.

Okay. And then, Dee, I just missed one of your earlier comments when you were reporting the numbers, but did you say there was a $ 10 million one time cost benefit that was related to a publishing agreement? If you could just comment on that?

Yes, there's some cautionary elements within our publishing agreements with respect to partners for legal reasons. I'm not looking to disclose the partner, but just suffice it to say we did have a favorable settlement with respect to some cost sharing elements that had been accrued across to our balance sheet.

That $10 million flowed into the income statement in the period, so it's a one off. There'll be disclosure around that in the Q.

Okay. Thank you.

Your next question comes from the line of Matt Kaplan with CIFC.

Hi. Just to follow up on some of the synergy questions, is there any way you can estimate how much of the $150 million of estimated synergies have actually been realized and are flowing through versus what is yet to come?

Like I said, a good bit of that activity is behind us. We do expect to continue to get at costs and see reduced costs going forward. We're not providing guidance in respect to the original elements.

But from a color perspective, suffice it to say our cost base will be less than that we'd originally anticipated a while back with respect to this. I think some of that is synergy, some of that's normal cost initiatives and other reductions that we're after. We are ahead of pace with respect to the timing of the synergies.

If I remember right, I think we had held out, $120 million to $150 million or so of synergies flowing into this year, and then in 2015 getting to the full annual effect. I think that we'll be ahead of pace with respect to the timing of that and you'll see a lower expense base. But it is, as you would imagine, as you bring to businesses together and you're reducing costs and getting at costs on a lot of different fronts, both synergies integration as well as other initiatives to effectively manage your costs, you lose identity of what synergy versus what is normal cost save.

Okay. And I'm trying to understand a little bit better how you price and how you sell. So it says average value per order is around $2,500 to $2,600. Is the average order for a year, or a certain shorter time period? How does that work?

The average value per order is an annual number, the number that we quoted is an annual number. We normally when we're working with a client we're pricing a monthly price, but in most cases, most products, we're selling on an annual contract, and so we quote annual average value per order.

So when you work with a client, say you found this new automobile client, automotive client, you typically will negotiate a contract for a few months?

No. It's normally an annual contract. I mean, we do have some exceptions, but the vast majority of our contracts are annual. Our pricing programs are established as if they're annual pricing programs.

Okay. And then just lastly, how do your prices compete to your competitors?

I think relative to the overall value price equated for us, we think we're effectively very competitively priced in the marketplace. Certainly there's differing price approaches in the marketplace, but we feel like we're effectively priced.

Okay. Thanks very much.

Your next question comes from the line of Stan Manoukian with Independent Credit.

Good morning. Thanks for taking my questions. To begin with, can you please tell us your average price of $2,400 or $2,500 per year for digital client, does it include web page development or this is just a combination of several fees, monthly fees?

Most of our pricing programs are billed out over a 12-month annual period. There's probably a few instances where we'll have an up-front fee, but for the most part we're pricing based on monthly billings. And some of our packages include a website or the development of a website, some of them don't.

It depends on what the client needs and what the bundle or package is that we're providing to him. But in most cases, even if we're developing him from scratch with a website, a mobile website and the other elements of setup, that's billed out within the month we rate. It's not billed up front or anything of that sort.

And the digital growth, does it derive mostly from new client developments or from preservation and developments of existing clients?

Now, when you look at the growth that we delivered in the quarter, there was a mix. But the bulk of what we're seeing right now with respect to the digital, is getting our print clients and converting our base from a print product or print centric solution to a multi-platform solution, and migrating them to a digital solution as well.

Flex Bundles, as Peter mentioned, was a major contributor to the growth aspect of the business in the quarter. With Start Smart, our lower end bundle, we are seeing some benefits with that with respect to new clients and bringing new clients into the business with those digital solutions. And we'll look to improve that as we move forward as well.

So we're encouraged by what we're getting with respect to those types of bundles, but the bulk of the growth in the quarter was driven by the Flex Bundles and the migration of clients from a print centric to a multi-platform solution. As you would expect. I mean, your base of client and base of relationships is one of the biggest assets we've got, and we're capitalizing on that with some meaningful solutions in the marketplace.

And how would you compare the average fees that you are getting from old clients, from those of new clients?

Well, as you would expect your average value per order for your existing clients and the ones that have been with you for a longer period of time are normally higher than your average value for a brand new client. I mean there is migration path for most clients as you move through that. So on an average value per order, a client that's been with you for five years is going to probably be spending more than a client that's been with you one year.

Okay. All right. Thank you very much.

Thank you.

(Operator Instructions).

Angie, did we lose you?

Your next question comes from the line of [Lanny Banson with Georgia Bank].

Hey, guys. It's [Sean] on with Lanny. Dee, just a quick question about other one time items. I know you mentioned the $10 million. You clarified it, I think in Chad's question earlier. Were there any other one time items away from that $10 million? And then I know the merger and integration costs which you guys break out. Anything else we should keep in mind?

I mentioned it in passing. I didn't give an order of magnitude around it because it was a smaller element, but we did have some operating tax favorability.

But we're always kind of looking at operating taxes and looking for some favorability in regard to that. So State and use tax type things. And we had a little favorability in the quarter with respect to that item, but order of magnitude wise it wasn't near what the one item was that I cited.

But other than that, you cited the integration cost aspect of things. But other than that, no, I wouldn't characterize anything as a one off type element within those pro forma results that we held out.

Okay. Well I guess it's on synergies, and more just generally on expenses, how are you guys managing the business? When you talk to -- whether it's regional managers or any salespeople, probably not getting on the salesperson level -- but are you driving them towards a synergy target and trying to capture synergies? Are you thinking about it at a higher level on a margin basis? Or are you thinking about it as a percentage change in year-over-year end costs?

How are you guys thinking about whether you are achieving --what are your goals on margins or synergies or costs? How do you drive the business, and get employees thinking that way?

Well, first and foremost, with respect to the field and those folks, we're driving top line. And driving to get at top line. And we're always looking for investment opportunities that are going to enhance top line, and ways we can deploy the resources more effectively or even deploy more resources if it's going to deliver a return in the form of top line and growth. That's first and foremost.

But secondly, with respect to the cost aspect of the business, we will focus on as effectively as we can deploying that sales force or deploying an operations unit and getting at costs relative to revenue and trying to manage as closely as we can the various aspects of the expenses. For example, in print, as print declines, we need to find opportunities to capture the cost saves with respect to that. To mitigate those declines as much as we can. As you would imagine with a declining base of business on the print front, we would expect some margin contraction there, but we're after as much expense opportunity as we can on the print front.

On the digital side and with respect to sales, we look at deploying that sales force in those markets where we can generate the biggest return. We're always looking at how we manage and go after that customer base, whether it's with telephone or premise or some other means, and managing the resources in that respect.

So there's not one answer to your question, it's not like we're out there targeting a percentage or a percentage reduction or something of that sort. It's about optimizing the expenses, identifying what we believe to be the optimal mix of resources in the marketplace, and chasing that cost element and those cost dollars that we can identify. But at the same time looking for investment opportunities to allow us to deploy resources and drive improved top line.

So just because you mentioned a couple different times around synergies and how they blend together with synergies and then just general cost reductions, so there really is no target for you guys as it relates to cost reductions. You're just trying to look at the cost base and saying where can we cut costs, but you don't have a target that you're managing the overall business to?

No, we have targets. We have targets in elements where we think the business should go. Now, as opportunities present themselves, plus or minus against those targets, we're absolutely going to get after them.

But with respect to the targeting, when we established our integration plan, those estimates in sizing around those synergies, but on top of that, as we worked through our respective budget process and outlook processes, we identified additional elements that fold into that. So, yes, we do have cost targets throughout the organization. But having said that, we're also looking at trying to manage the business day-to-day, to identify the opportunities to further reduce costs or be more efficient, or identify those opportunities where we can make an investment and grow the business.

Understood. That's helpful. I think the margins were definitely encouraging, I think. As we all think about the business going forward and just trying to model it out, I think as we get further away from the restructuring and obviously the plan projections that you guys put out, it gets harder for you guys and it gets harder for us to determine what's synergies and what's just general cost cuts. So thinking about targets around that, once we get further and further away from the synergies, would be helpful for us to all think about. So anything of that kind would be helpful.

Okay. Understood. Thanks.

Your next question comes from the line of Bob Konefal with Phoenix Investment.

Thank you. And my question is probably for Dee, and it's around [add back] covenants. As the covenants step down -- it's a two-part question. One is, are you allowed to add back some of the adjustments that you make to -- that roles up to the $194 million of adjusted EBITDA that you reported this quarter, or is the covenant measured off of an adjusted number? And then the second part of my question is, if there was a covenant default, are you allowed to use the discretionary excess cash flow to help cure it?

With respect to your first question and the calculation of the EBITDA, we speak to a more traditional pro forma adjusted EBITDA within these numbers, and $194 million was that calculation. There are tweaks and adjustments within each of the respective silos of debt to that explicit calculation.

I don't want to get into the technicalities here, but those calcs and those definitions are public out there with respect to the agreements. But there are adjustments and add backs that work against that in regard to those covenants.

As to the technicalities around a default with respect to a particular covenant there's various remedies, some of which might involve the discretionary cash or may not with respect to curing any kind of potential breach. And dependent upon what circumstance might be if we found ourselves in that circumstance, we'd look to those remedies.

But there's not an explicit remedy that says, okay, if you breach, then you go do X, Y, Z. That would have to be a debate with the agents and the lenders with respect to that particular situation.

Okay. So the banks would be using a lower than $194 million number, or the $194 million?

Well, first off, you've got to look to the silos, specific results in making those calculations, and there are some pluses and some minuses relative to those calculations. For example the integration costs flow in, you've got other elements that get added back. So there's pluses and minuses against it, and you have to make the calc at a silo specific level.

Okay. Thank you.

Your next question comes from the line of Seth Crystall with RW Pressprich.

Good morning. Just two quick questions. One, I guess during the conference call you said that you expected margin to contract, and I wanted to confirm that's because print is declining faster than you can take out costs. Is that all that refers to?

Well, as the mix shift occurs in the transformation of the business, as you guys know and as we've articulated in the past, the margins associated with print are higher than the margins associated with digital, at least at present. And as that migration and a greater mix of your business shifts into the digital realm, you'll see a lesser margin associated with that product than what we're experiencing today with respect to print.

At the same time, as the base of print contracts holding absolute margins in regard to that is a more difficult proposition, so you'll see some contraction associated with that. But the biggest shift is because the change in the mix of business. If you go back to margins that we held out a year or two ago, you saw that margin contraction forecast. And in large part, it's about the transformation and shift of the base of revenues amongst those platforms.

Okay. Great. In the fourth quarter you guys talked about your competition, or lack thereof in certain segments, or who is a competitor. Have you ever articulated what your addressable market really is in terms of a gauge? There's always wild numbers thrown out there in terms of local advertising, but have you really pinpointed what your adjustable market might be?

Well, I mean, we've talked in terms of whatever number you want to use from the marketplace, [11 million], small or medium size businesses; [5 million, 6 million] of those being in our territories and territories where we operate. The small or medium business space is what we tend to focus on, and I think that number of businesses is what we focus on.

Depending upon your definition of the advertising space and what you're after, you could get any number of sizings in that regard. We believe within our existing base of customers there's opportunity, and we believe that in our marketplace there's meaningful and significant opportunity beyond our present customer base.

We're looking to get after that. It's a big opportunity. There's a big space here.

Okay. Thank you.

Our final question comes from the line of Phil Pennell with Marineror Investment.

I just wanted to go back to Seth's question to a certain extent, and ask it a different way. If you look at the bundled product and what that entails for, obviously, digital uptake, especially in the richer, if you will, bundle.

How much of a cost impact does that have? In other words, if you're integrating website management, mobile management, plus the online offering for search, is that effectively a farmed out cost such that you're contracting with third-party providers to provide that service or are you providing it on your own? And if we get bigger uptakes on a go forward basis, what does that mean in terms of the overall cost associated with providing that service?

It depends on what's in the bundle. Some of those services on the digital front that you made mention of, we outsource, like the website development. We have web.com and Hostopia are both partners for us. We have good partner relationships with them, and when we have a new website to develop, the bulk of that work goes to them.

As far as the initial setup and gathering of data and gathering of information from the client, that's an internal element. If you've got an SEO program or SEM program depending on which market and what client base that you're in, that could very well be done by an internal resource. So there is a mixed bag with respect to that.

The bundle solution sale, while it may cause some contraction in margin -- and that's not always the case, it depends on what's in the bundle and it depends on what the existing pricing program is for a client with respect to their existing spend -- but some measure of that margin contraction is a simple shift between the two platforms and the costs associated with provisioning the value proposition underlying the digital space. But having said that, the longer term value proposition for that client, the longer term value proposition and profitability for our enterprise, because of the retention aspects and the growth opportunities with regard to those clients; total margin dollars, we have opportunity to ultimately grow with respect to that sale and that shift from a print centric client to a digital and print or digital only bundle.

We believe the long-term proposition with respect to that is strong with respect to the retention and the ability to grow those programs. And to the degree we're able to grow digital inside that bundle relative to the print, even within that first sale, absolute dollar amounts of margins with that individual client could very well grow, and in a lot of cases do.

So effectively, though part at least what I'm hearing you say of the cost associated with installing a new bundled client is going to be borne by the existing infrastructure that you guys would have used for doing the same exact thing for printing. Is that fair?

Yes, I mean, to cut to the chase; I think incrementally as we add base, as we add clients, as we migrate from print centric to digital, there is a measure of that will be absorbed within the base. And so we would expect that as we build size and scale that we will get some benefit relative to that.

That's not across all cost elements, but some measure of the cost elements within our structure and within our marketplace. Provisioning elements and fulfillment elements will get benefits from size in scale as we move forward.

From the customer standpoint they're simply facing the Company, correct? You're getting as you pointed out some of the, for example, web development from an outside third party, but they're simply facing DXM. They don't see anyone else?

Yes, that's basically correct. That's essentially correct. They see it as our product suite, and our set of product solutions that we're bringing to the marketplace. They know that some of this activity and some of the values being sourced via the Google search activity or our network of search partners, or other elements. But as far as the customer facing event, they see it as Dex Media.

Right, but if they have a service, issue, they call their DXM provider.

That's correct. Okay. Thank you. Operator? (inaudible -- whispering) I believe that was our last question, so thank you very much for your attention and your time this morning. Have a good week.

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