Thryv Holdings, Inc. (THRY) Q3 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to Dex One Corporation's Third Quarter 2012 Results Conference Call. [Operator Instructions] 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.

Thank you, Sandy, and 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 quarter ended September 30, 2012, and the company's Form 8-K furnished to the SEC this morning. These documents discuss third quarter 2012 results, as well as full year financial guidance and ad sales guidance for the fourth quarter. The 8-K includes the results package, which provides additional information pertaining to our 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. 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 reflect items, such as stock-based compensation and long-term incentive program expenses, gain on debt repurchases and merger transaction and integration expenses. 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 expressed consent of the company is strictly prohibited. I would now like to turn the call over to Alfred.

Thank you, Tyler. Good morning, everyone, and thank you for joining us to review our third quarter 2012 financial results. I'll start by reviewing the strategic and operational progress we have made at Dex One during the quarter. Greg will then walk you through the key metrics and financial results and I will wrap up with an update on our proposed merger with SuperMedia. I'm proud to report that the transformation we began a little over 2 years ago is generating positive financial and operational results. Once again, the company posted solid digital performance from a bookings perspective, we remain on target to record digital bookings growth in excess of 30% by year end. We generated adjusted EBITDA of $137 million in the third quarter and $428 million in the first 9 months of the year. Adjusted free cash flow was $95 million for the quarter and $247 million for the first 9 months of the year. We completed negotiations with our 2 unions and have ratified multiyear agreements. We remain on track to achieve our 2012 guidance, although we continue to operate in a challenging economy. Small and medium-sized businesses have not yet returned to pre-recession revenue or spending levels. Some geographic markets and industries are doing better than others, but overall local business owners are spending less and looking for ways to optimize their marketing dollars. The most recent small business optimism report from the National Federation of Independent Businesses shows weaker sales and slower job creation is forcing many of our customers into a maintenance-mode mindset. That being said, we do believe customer sentiment could improve next year based on some recent polling. The NYSE Euronext recently asked local business owners and entrepreneurs to rank their top 3 areas for increased investment in 2013. Finishing third was technology, specifically investments in equipment to help them automate their operations and improve productivity. The second investment priority was customer relationship management. This includes securing the capability to capture and manage information to improve support and service. But more importantly, the top investment priority for this sector was marketing, branding and PR, to improve their ability to reach, attract and keep customers. This is very encouraging news for our marketing consultants. We also received some good news out of Seattle last week. The Ninth Circuit Court of Appeals struck down the directory distribution ordinance adopted by the Seattle City Council in 2010. This ordinance required us to obtain a license to distribute directories, pay a fee for each book distributed, participates in the city's redundant opt-out registry and advertise the city's registry on the front of each directory. This outcome is good for our customers, good for Dex One and good for our entire industry. Now let's look at some performance highlights for the quarter. Digital bookings increased 26% as compared to the third quarter last year. The increased penetration of bundles continue to contribute to our digital performance. The success of bundles is partly due to our ultimate bundle, Dex Guaranteed Actions, or DGA. DGA remains a very successful program, particularly with our largest customers. Bundles continue to be a critical component of our portfolios. I've said many times before that Bundles make it easier for us to sell and easier for the customer to buy. They have helped to improve retention, increase billing and create the opportunities to provide more services to customers as we roll out new digital products. In the last year, we have almost doubled the penetration rate for bundles. Clearly, Dex One's transformation is well underway and our results to date validates our strategy of expanding Digital capabilities, investing in our sales force, enhancing our product portfolio and expanding our partner ecosystem. We understand that our sales force is our most important asset and have made the necessary investments in recruiting, training, tools and technology to build a digitally savvy sales force that understands the market, their customers and products. We have improved the productivity and skill level of the sales organization. Our team has increased the frequency of customer interactions by more than 25%. Our sales team has also become more proficient by using technology to sell our solutions. Sales force automation tools are changing the way we sell and how we reach our customers. We're using the iPad, web conferencing, customizable digital sales collateral, online assessment tools and other methods to reach new customers and add services to existing accounts. We have deployed salesforce.com to approximately 50% of our marketing consultants and expect to bring the other half of the sales organization onto the platform between now and early next year. This automated selling capability helps improve sales rep productivity by compiling multiple pieces of customer data, automating the sales core prep process and tracking customer interactions. As part of our initiative to deliver superior solutions and service to our customers in a cost-effective manner, we have adopted a team-selling approach. We are pairing a local marketing consultant with a client solutions specialist in one of our call centers to jointly support our higher value customers. This approach should provide a superior level of support and service, improve retention and allow more opportunities to upsell the customer. In addition, the shift with selling cycle from an annual event to a year-round opportunity. All these actions to transform the sales force were necessary to respond to the secular shifts in our industry, declining print sales and macroeconomic conditions. Turning to top line performance. Overall bookings declined 13% and ad sales were down 14%. Results in the quarter were impacted by a 22% decline in print bookings, partially offset by the positive digital bookings performance we discussed earlier. While print remains under pressure in some of our larger, wired markets such as Seattle, it continues to generate the lion's share of leads for many of our customers and cannot be underestimated. Bundling is critical. It helps us capture the shift in spending as dollars move between our prints and digital offerings, but more importantly, extends the life of print. With that, I will turn it over to Greg. I will then wrap up, and we can answer your questions.

Good morning, and thank you, Alfred. I want to start by discussing our updated financial guidance and highlighting a few key developments during the quarter. First and foremost, we remain on track to achieve our guidance for the year and have narrowed our guidance range. We are now projecting adjusted EBITDA of between $535 million and $565 million, with attended net revenue of $1.275 billion to $1.3 billion. We expect to deliver full year 2012 adjusted free cash flow in the range of $320 million to $350 million. We are pleased with the digital bookings growth of 26% in the third quarter. This was the first full quarter where we sold against bundled sales from the previous year. We remain on track to post digital bookings growth for 2012 in excess of 30%. Bundles continue to perform very well. They accounted for 66% of total bookings in the quarter and 55% for the first 9 months of 2012. When combined with Dex Guaranteed Actions, with that level of bundle penetration, we experienced more than a 12% increase in overall bookings. Further, we estimate that for each 10% of additional bundle penetration, we will receive an additional 2.5% increase in bookings. Although we devoted attention to merger-related activities during the third quarter, we continue to efficiently run the business. We've actively managed expenses and delivered an adjusted EBITDA margin of 43% for the quarter despite top line pressures in the ongoing transformation of the business. Total expenses for the third quarter were $183 million, a reduction of $31 million or 14% from the same quarter a year ago, with production and distribution, selling and support and G&A all declining. Bad debt continued to compare favorably to prior periods and declined only 2.6% of revenue in the third quarter. Many of our less creditworthy customers are now out of the system, so we believe this current bad debt level is sustainable. We have retired $545 million of debt year-to-date through September and expect to reduce net debt to under $1.9 billion by year end. Now, let me turn it back to Alfred, who will provide a short update on the proposed merger with SuperMedia.

Thanks, Greg. We are well underway to delivering on our top priorities for this year, improving the quality of our solutions and the performance of the marketing consultants, growing digital and transforming the business and reducing debt and strengthening the balance sheet. The merger of Dex One with SuperMedia will accelerate the transformation of both companies. We continue to believe our merger with SuperMedia will benefit our customers, our shareholders and our other stakeholders. Our pre-merger integration planning has confirmed our belief that a combination is positive for all stakeholders, and that the synergies and other operational and financial benefits of the merger are at least as significant as we expected when we began the process. The 2 companies continue to negotiate with the lenders to reach agreement on amendments to the parties' respective credit agreements. The companies are also considering alternatives to the current transaction structure to obtain the necessary lender consents. Thank you, everyone, for joining us today. Operator, we are now ready to take questions.

[Operator Instructions] Our first question comes from Lance Vitanza from CRT Capital Group.

My first question is, the trends in digital bookings, they're still strong but they look softer than they've been, I guess, at anytime really over the past several quarters. Should we be concerned about that?

Lance, that's a wasted worry. As far as the trends in the bookings go, we're well on track to exceed 30% for the year-on-year growth, and that was the market we set down for this year, that was -- and we're comfortably exceeding that number. When you look at the performance in digital bookings this quarter, you need to take a look at the denominator. The third quarter last year was the first chance we had to run with the expanded digital portfolio. It was the first quarter where we started selling the bundles. And so, third quarter last year was a big performance quarter. And so, for us to outperform that by another 26% this year is no mean feat.

Okay. So plus 30% for 2012, is it realistic to think you can sustain that pace throughout 2013?

Well, it's -- if you go to the lender deck, you'll see we put a marker down there of 25% for the year next year.

Okay. Speaking of the lenders, can you give me a sense for what the pushback is here? Is this strictly related to the economics of the proposed amend and extend, or has there been a pushback with respect to the synergies themselves?

Well, first of all, I wouldn't characterize it as pushback. I mean, these are honest, good-faith negotiations between all parties. We have -- [ph] the lender committee constitute it. It's a joint lender committee from -- with parties representing all of the various debt silos. We're working with a large group of lenders. This is a complex capital structure. The lender discussions are very complex, and it just time -- it takes time to work through silo-specific issues. But that said, we're confident that we'll get to a satisfactory conclusion on that, and we'll come out with conclusion that works in the best interest of all the parties, but also gives the company sufficient flexibility going forward to be able to grow the business and improve the profitability.

That makes sense. I don't doubt that at all. But just on the off-chance that the merger were called off for whatever reason, if I remember correctly, if the merger goes through, you'll be relinquishing the CEO position. If the merger were called off, can we be assured that you would remain at the helm of Dex One?

Yes, we all remain committed to Dex One. First of all, both management teams are committed to get this transaction completed, and that is our #1 priority. In the event that something unexpected happens, then me and my management team remain committed to the company for the foreseeable future. We're a loyal and dedicated team.

Our next question will come from Colin Wilson Murphy from Bowery.

I was wondering if you could give us an update on the tax sharing survivability of the entities undertake a pre-packaged restructuring?

Colin, this is Greg. The tax assets, we believe, would not be impacted if there was a pre-packaged bankruptcy scenario.

Okay, that's very helpful. And how would the Dex One subnotes be treated in such a pre-pack?

Well, let me say that it's our current expectation, that if we avail ourselves of the use of a pre-packaged approach, it will not impact the stockholders of the company nor the Dex One noteholders. That's our current expectation. The objective of the pre-packaged bankruptcy is really -- if the focus is with the company secured lenders, and it simply intended to assure that all lenders are party to the credit agreement amendments.

Our next question comes from Sam Sekine from ALJ Capital.

Just a couple of questions on cost cutting. You guys have been doing a great job so far. Can you guys just give us a little more detail in the types of cost cuts that have made -- maybe just the number of layoffs, or different measures you guys have taken? And also, just how much more can you guys actually cut costs without this merger?

I didn't catch your name, but this is Greg. Let me take the answer there. When you look at where the cost cutting is coming from, the overall expenses are obviously favorable, both quarter-over-quarter and year-over-year. Production and distribution is the largest element, and that continues to come down. As we -- as the top line pressures continue, we actually unlock an ability to go after cost that previously were fixed. And so, roughly fixed variables half-and-half, but as the top line continues to decline, what used to be considered fixed is you can now attack. So production and distribution has come down, selling and support has come down. We had -- we've done I think a very good job of repositioning the sales force and realigning it, along with the new structure and the new go-to-market approach that we've outlined. And the G&A continues to come down. So virtually, across all of the parameters, it has come down. And I'd expect that to continue going forward.

So when you say that when top line comes down, fixed cost becomes unlocked. Can you just give me an example of what or how that exactly works?

Yes. So an example there would be on a per-book basis, whereas you might -- you would take the -- where -- if you had a book that was fully subscribed, then as you lost revenue, you'd still have the cost of producing the book. But as the book started to become unprofitable, you would stop producing the book.

Yes, we tried to run the books by book P&L and book cash flow. We have over 800 publications at the moment. In the last 12 months, we've set about doing some consolidation of books and the elimination of nonprofitable books. We've taken out just over 20 this year. And we're going to continue to manage print on a book-by-book basis, looking at rescoping consolidating, combining books in order to continue to get the cost out and get more of it of the variable cost as opposed to a fixed cost.

Okay. And also, if you can kind of comment on just different geographies and maybe if you're seeing different trends in different markets...

Can you repeat that?

Can you just comment on geographies, what you guys are seeing in terms of trends that Dex East, Dex West, RHDI, bigger markets, rural markets, can you comment on that?

Yes, okay. Well, obviously, in terms of the rate of decline of print, it tends to be greatest in the major metro in the West where we have heavily wired cities that are leading a more pronounced digital lifestyle, and so Seattle, Portland would be good examples there. And if you look at the rates of decline in print, it really -- when we look at all our markets from major metro to Tier 1, Tier 2, Tier 3 and rural, we see a similar decay curve but on a time lag. So what hits in major metros is several years away from hitting in Tier 3 and rural. So it's a cascade, if you like. And we're seeing the accelerated decline in the major metros, and now, to some extent, in our Tier 1 cities.

Got it. So do you see that time lag kind of collapsing, I mean, with would just kind of the rapidness of the digital adoption? I mean, so you're seeing between the rurals -- between the metro markets a few years, but how do you see that trend going forward?

Well, that is precisely why we adopted the bundling approach. Left unchecked, meaning we look at the last 5 years, our industry has been almost on a straight-line decline in the 18% to 20% range. And we see that maybe ticking up a few points over time. But the approach to bundles is to actually get a hold of that print rate of decline. We're finding that the bundles are taking 2 or 3 points off that relative to the performance when people buy print à la carte outside the bundle. And so that has been a major help. And as we get into renewing the bundles, I think that will -- the stickiness of the bundle is further going to help us in getting after those print declines.

That was our final call for today. I would like to turn the call back over to Alfred Mockett.

Well, thank you, Sandy. In closing, let me share 3 final quotes: firstly, our transformation efforts are generating positive results; secondly, we remain on track to achieve our 2012 guidance; finally, the proposed merger with SuperMedia will accelerate the pace of transformation, improve our financial position and generate benefits for all our constituencies. Thank you again for joining us, and have a nice day.

Thank you. That does conclude today's conference call. Thank you for participating, and you may disconnect your lines at this time.