infoGROUP Inc. F3Q08 (Qtr End 09/30/08) Earnings Call Transcript

infoGROUP Inc. (IUSA)

Q3 2008 Earnings Call

October 28, 2008 8:30 am ET

Executives

Lisa Olson - Senior Vice President

Bill Fairfield - Chief Executive Officer

Stormy L. Dean - Chief Financial Officer

DJ Thayer - President of the Small Business Group

Analysts

Kyle Evans - Stephens

Brett Buckley - Dolphin Partners

Robert Kirkpatrick - Cardinal Capital

Tasha Sullivan - Franklin Templeton

Gary Steiner - Huber Capital Management

Presentation

Operator

Welcome and thank you for standing by. At this time all participants are in a listen-only mode. After the presentation we will conduct the question and answer session. [Operator Instructions]. Today’s conference is being recorded. If you have any objections you may disconnect at this time.

I’ll turn the meeting over to Lisa Olson, Senior Vice President for infoGROUP.

Lisa Olson - Senior Vice President

Good morning and thank you, Chanel. Thanks for taking the time to join us this morning. I’m the new coordinator for investor relations at infoGROUP and I am pleased to be a part of this company. Joining me this morning is Bill Fairfield, our new Chief Executive Officer and Stormy Dean, our current Chief Financial Officer. Remember today’s call is being recorded. Our comments include forward-looking statements and I ask that you refer to the cautionary language in the earnings release for additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements.

We also ask you refer to the documents the company files from time to time with the Securities and Exchange Commission. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projects or forward-looking statements.

With that being said let’s get started on what you all called in for today, our 2008 third-quarter earnings. We will have question and answer session at the conclusion of the remarks.

It is now my pleasure to introduce our new CEO, Bill Fairfield. Bill?

Bill Fairfield – Chief Executive Officer

Thanks Lisa and good morning everybody. I’ve had the pleasure of meeting with a few of you and chatting with others on the phone and I’m extremely happy that you’re joining us this morning.

I have been on the job for just over eight weeks and needless to say it’s been an exciting time. The good news is we have a tremendous amount of tenure and talent here at the Company and they have done a terrific job of keeping their eye on the ball during what can only be referred to as turbulent times.

The good news is that we are in the finals stages of closing this chapter of our company’s history and moving the company forward. This quarter’s earning will reflect that. The lawsuit is coming to a close with our court date set for early November. In addition we have been focusing our efforts on instituting the governance policies as indicated in the settlement agreement.

Some highlights on that. You met Lisa Olson, we committed to creating a new investment relations program with the new head of Investor Relations and Lisa has got us off to a good start in that arena. We also indicated that we were going to have a significant change in the Board, I’m pleased to announce that last Friday at the Board meeting, we nominated and elected Gary Morin to the Board. Gary was most recently the Executive Vice President and Chief Financial Officer for Lexmark International. He retired from Lexmark in September of 2005 and in addition to his corporate finance functions he was responsible for Lexmark’s Investor Relations, their corporate communications, strategy and development and internal audit. Gary currently serves on the Board of Directors of Sealy Corporation, a New York stock exchange company and Citrix Systems Inc., a NASDAQ company.

We also are continuing our search for Executive Vice President of law and compliance. That search is going very well. I fully expect to be able to make announcement on that if not this week perhaps next week. We are also in the process as you know of recruiting a new Chief Financial Officer. We have our top candidate in here tomorrow to visit with several of the directors and myself and key members of management. So, as you can see, we’ve taken all aspects of the settlement extremely seriously. Now we can fully concentrate our efforts on moving the Company forward.

And moving forward includes, number one, being transparent and communicating with all constituents; two, accelerating our organic growth; and three, improving our financial foundation, which ultimately will increase shareholder value. Now that we’ve talked about how we’ve been getting our house in order, let’s talk about the actual financial results, and for that I’ll turn it over to Stormy Dean. Stormy?

Stormy L. Dean - Chief Financial Officer

Thanks Bill. During the third quarter revenue was $181.9 million versus $185 million for the same period in 2007 and that’s a decrease of 2%. However, if you exclude the Naviant lawsuit revenue of $9.9 million that we included in the third quarter of 2007, revenue actually increased 4%. For the third quarter, the Data Group revenue was $74.4 million versus $92.7 million for the same quarter last year. The third quarter 2007 Data Group revenue included that $9.9 million for the Naviant lawsuit as well as $3.6 million in revenue that was associated with the First Data Resources license agreements that were not renewed in 2008.

The Services Group revenue for the third quarter was $42 million versus $36 million for the same period last year. That’s a growth of 16%. Revenue for the marketing research group was $65.5 million compared to $56.3 million an increase of 16% for the same period last year. For the third quarter we had an operating loss of approximately $1.7 million versus $31.4 million of income during the corresponding quarter of 2007.

The third quarter of 2008 operating loss includes $21.6 million in unusual charges, this includes $10.2 million in severance payment primarily to the former CEO as outlined in the stipulation of settlement entered to on August 20, 2008 and $7.1 million in legal expenses and professional fees related to the Derivative Litigation and the Special Litigation Committee’s investigation, for a total of $17.3 million of non-recurring charges.

Also during the quarter we recorded $4.3 million of unusual charges which included $2.5 million in non-cash accounting adjustments primarily for the write down of assets and $1.8 million for cost associated with closing facilities. The 2007 operating income includes one time operating income of $9.2 million from the of Naviant settlement net of expenses. Excluding these charges in the third quarter of 2008 and excluding the Naviant settlement in the third quarter of 2007 our operating income would have been $19.9 million and $22.2 million respectively. For the third quarter we had a loss per share of $0.07 versus earnings per share of $0.31 in 2007.

EBITDA for the third quarter of 2008 was $9.2 million compared to $43 million in the third quarter of 2007. As of September 30, 2008, the company has incurred $19.7 million in legal expenses and professional fees related to the Derivative Litigation and the Special Committee’s investigation, This includes $3 million spent in 2007 and $16.7 million for the nine months ended September 30, 2008.

I will I will now turn the call back over to Bill Fairfield.

Bill Fairfield – Chief Executive Officer

Thanks, Stormy. I will, with your blessing, I’ll make a few other prepared remarks and then we’ll open it up for Q&A. I just want to stress a couple of the things that Stormy mentioned. If you look at the quarter and again, if you exclude the 2007 Naviant lawsuit settlement, revenue increased approximately 4%. And in today’s environment with the headwinds that we’re facing out there, we were not displeased with that.

Also as Stormy mentioned, while we did have an operating loss in the third quarter of approximately $1.7 million, that included $21.6 million in unusual charges. Some of those charges, as Stormy outlined, were restructuring charges. We had some disposition of assets, some governance changes. And I don’t think what we did talk about is when those are taken into account, we’ve taken something on the order $7 million to$8 million worth of costs permanently out of the system. So, as discussed before, a tremendous amount of effort has gone into getting our house in order, if you will. And now is the time to move forward and take an in-depth look at the business and the programs and determine where we need to go, which we’ve already started to do.

We have efforts moving forward to optimize the allocation of funds to spur organic growth within the Company. We’re working as we speak to rationalize the business structure and streamline our go to market strategy. We have begun in a number of our operations to consolidate back-office operations and we expect to see cost savings from that. And we’re working to improve our efficiencies within the IT area.

Now, we’re very mindful that there are a lot of headwinds out there in the economy and we would be naive not to believe that at some point those won’t impact us. The good news, as I said in the press release, is we’re fortunate not to be dependent upon any particular sector, nor do we have a high concentration of customers in any one area. I think our largest client is probably less than 2% of our revenues. So, our customer base is broad and it’s spread across all industry sectors and sizes, and we think that offers us some cushion.

The other thing I think is important to note is that approximately 85% of our revenue comes from relationships that we have a view into. And by that, I mean these are relationships that are either subscriptions or they’re licenses, or they’re contracts that may range from three months to multiple years. Now that doesn’t mean that business can’t be affected by the economy, but it’s unlikely that we’ll get surprised, that we’ll have an early warning, if you will, if we begin to see any of those drop off. So, we are re-preparing contingency plans for these uncertain times, but we feel confident in our position. All the initiatives that we talked about will help us get to where we need to be and, of course, increase shareholder value.

In closing, I’d like to thank each of you for weathering the storm with us. This is, in my opinion, a terrific company with a very positive future and you have my commitment of open and honest dialogue as we move this Company forward. We will endeavor to manage expectations and empower our colleagues to do what is right for you, our shareholders. I look forward to working together and leading the Company in this next chapter. It’s going to be a good one in my opinion. So let’s get started on answering questions. Chanel, we’re ready.

Question-and-Answer Session

Operator

[Operator instructions]. Your first question comes from the line of Kyle Evans of Stephens. Please proceed.

Kyle Evans

Hi good morning everybody.

Bill Fairfield

Hi, Kyle.

Kyle Evans

Thanks for not doing the call on a Friday afternoon. I appreciate that

Bill Fairfield

You’re welcome.

Lisa Olson

We listened.

Kyle Evans

So I have a long list of questions. I’ll get started and maybe I’ll ask a few and then I’ll hop back in queue in case there’s others behind me. Can we start with organic growth for the Company overall and then perhaps look at organic growth by segment during the period?

Stormy L. Dean

This is Stormy. And year to date, our organic growth has been really 1% to 2%. During the third quarter we actually saw the growth decelerate a little bit so we had probably 5% or so negative organic growth in the third quarter in the Database Group and relatively flat organic growth in the Services Group. And then the Market Research Group grew about 5% organically.

Kyle Evans

Okay. Within Services there, I’m assuming that well, I’m reading that your e-mail continued to do well there. Which parts of the Services Group were soft and contributed to the flatness on organic growth?

Stormy L. Dean

This is one of the things that Bill touched on, and I think the strength of our Company right now is that we have a portfolio of businesses that tend to be reacting in different ways to the headwinds that Bill talked about. So, in the Services Group, the parts of our business that are directly associated with direct mail if they are doing data processing or selling, brokering lists for companies that are using direct mail in their direct marketing activities, they are getting hurt. They’re getting hurt in that the amount of volume that’s being mailed out in the traditional snail-mail way is actually declining. However, that being said, they’re still spending money and they’re spending it with interactive services, e-mail, retention campaigns, e-mail acquisition campaigns. So, yes mail is really our flagship product in the e-mail retention business is doing quite well. They are managing to keep pace with the losses in the other divisions, which has really drawn us even. To the extent that our list brokerage and list management companies are able to make that transition to become more interactive to become more digital they are growing as well and at this point, Edith Roman and Walter Karl, in particular, have converted so that there, about 50% to 60% of their business now is digital in nature.

Kyle Evans

Great and the declines that you’re seeing in volume and snail-mail is that what’s contributing to that negative 5% in data?

Stormy Dean

Yes.

Kyle Evans

If you gave in the release or you mentioned it in the call, I missed it could you give us a cash flow from operations CapEx and free cash flow in the period?

Stormy L. Dean

Sure. Actually, I think part of that is in there. But cash flow from operations in the third quarter of 2008 was about $12 million. And that compares to $31 million in the third quarter of last year. You have to make those adjustments. You’ve got to take that $10 million of receipts on the Naviant side out of there. And then, the difference actually becomes the change in net income, which is related to all of the payments that we made, roughly $22 million worth of charges that we took in the quarter for legal fees, severance payments, remediation efforts, all those things.

Kyle Evans

But not the write-down of assets and we are talking about cash flow from operations, right?

Stormy Dean

That’s right.

Kyle Evans

Okay.

Stormy L. Dean

And then, free cash flow year to date has been about $22 million versus 38 last year. And once again, the difference is just the amount of spend that we put into the legal fees and all the associated costs with the investigation and all that.

Kyle Evans

What was the CapEx in third quarter?

Stormy Dean

25 -- year-to-date it was $25 million.

Kyle Evans

Okay and when we are going into kind of do these apples to apples adjustment, appreciate that we have the operating income that you guys have for the Naviant revenue. What would you say we should use for the EBIT contribution on the FDR revenue in the 3Q ‘07 period? That $3.7 million that we don’t have this year. Was that almost pure margin?

Stormy Dean

That yes, that was pure margin, actually.

Kyle Evans

Okay.

Stormy Dean

I there was even selling costs associated with that.

Kyle Evans

Okay. And for Bill, it’s good to hear that $7 million to $8 million in expense is kind of gone permanently out of the business from a structural standpoint. When we look back historically at the ad dollars that have been spent by this organization, it went from roughly $29 million in 2005 to $40 million in ‘06 to $46 million in ‘07. With that as a backdrop, could you talk a little bit more about the long-term opportunity and I’m not asking you to quantify it to the decimal point, but just give us some sense for the range of costs you think you can take out over the next 12 to 18 months?

Bill Fairfield

Specifically related to advertising?

Kyle Evans

Overall, but then also I mean advertising, just not doing a Super Bowl ad seems like a really easy way for you to avoid spending $6 million?

Bill Fairfield

And as you know, Kyle, we’re not doing the Super Bowl ad. And I would guess in terms of total costs, that’s probably somewhere between $8 million to $10 million of spend by the time you include production and placement of the ads. And frankly, gearing up internally to respond to calls. So yes, that’s by the wayside. I don’t know what the exact number in 2009 is going to be in advertising, but I can tell you that it’s going to be substantially less than we’ve incurred in 2008. We’re not going to stop it. Obviously, advertising is important in a number of parts of our business to generate volume, and we are in the sales business, so we will continue that. But I think it’s fair to say that it will be substantially decreased from what we’ve seen in 2008.

With respect to other operating costs, I can’t begin to quantify it for you, but one of the things we’re looking very hard at in all of our businesses is sort of rationalizing our internal structure. We’ve got 31 plus different business units. And that approach has been very successful of the Company in the past. Having said that, it does create a lot of inefficiencies and added costs, not only in the go to market strategy but in the back office operations. And we’ve got an example in our Services business right now where Ed Mallin has taken very proactive steps to consolidate the accounting and IT functions in part of our services area, and that’s going to create substantial savings for us. So we’re very focused on improving the financial foundation of the Company and getting some efficiencies where they can be found.

Kyle Evans

Great. Two more questions for you, Bill. Looks like we ended the period with about $300 million in net debt. What is your view on use of cash going forward?

Bill Fairfield

Well, I think our top priority is to bring the debt level down to be real honest with you, particularly in today’s environment. And with the bulk of the costs associated with the legal activities over the last quarter and years behind us, I’m very hopeful that we can start to see that cash going towards debt repayment as opposed to other activity. So that is in my view the top priority.

Kyle Evans

Okay. And the dividend you’ve been kicking around the idea of a more regular, quantifiable dividend for shareholders. Any further thoughts?

Bill Fairfield

Well, I can only give you my personal thoughts, and keep in mind, that’s what they are. In the end, the Board has to decide on this. I think what I heard when I’ve been out talking to our shareholders is that it’s probably wise to keep some dividend payment active. What I heard from many of them was they wouldn’t have a problem with reducing that for a couple of years. I think everybody, if we continue with the dividend, I think everybody is of a mind that it should be a more normal quarterly dividend. But these are my opinions and a reflection of what I’ve heard talking to many of our investors. I want to emphasize again that that’s really an issue that the Board will take up at its meeting in January.

Kyle Evans

Okay. Lastly, you use the words cautiously, optimistic in the press release. I think you used them again in the call. Which pieces of the business are you particularly cautious about and which are you particularly optimistic about?

Bill Fairfield

Well, I think Stormy verbalized that very well. We’ve got this broad portfolio of businesses. Many of them are what I’ll call more traditional, more mature businesses as it relates to traditional Direct Marketing, where we’re using sort of non-digital delivery mechanisms. Those businesses, I don’t think they’re going to go away, but as we’ve indicated, I think people are just going to back off in terms of the number of folks they are mailing to and the breadth and depth of their marketing. So, I think those will be impacted negatively. I think we could see positive growth from those delivery mechanisms where we’re tying into the Web and other digital mechanisms to deliver the services that we provide. So, I think we’ve got the good fortune of having some balance there. We have to make sure that as we try to spur organic growth that we’re putting our investment funds into those businesses that have growth opportunities, and that’s what we’re focusing on.

Stormy Dean

I’d like to kind of add onto that a little bit. The research segment actually is doing quite well. We’ve seen that the backlog from our Macro International or our social research group that does primarily business with the federal government has seen their backlog increase substantially. From the end of 2007, it was roughly $300 million and now it’s significantly north of $400 million in terms of, that’s work that they have yet to perform.

So, we’ve got visibility in that piece of business that’s going out for 2.5 or three years and we see it doing very well. It’s consistent business. It gives us consistent 10%, 11% operating income margin. And, then the rest of the market research, even as they went into the summer, their sales, if you will, bookings, were higher than they were in 2007, which at least bodes well for the rest of the fourth quarter and into even the first quarter of 2009 as they go through that work. Now, it’s yet to be determined how their sales effort goes in the fourth quarter and the first quarter of 2009. But once again, we’re very optimistic about that.

And I think that really talks about the strength of the Company, the fact that we’re spread over these different sectors and we’ve got different business units reacting differently to the marketplace, which really insulates us from any kind of dramatic falloff. It also precludes us from having dramatic growth. But it makes us a very steady-state company. And if, we do the things that we’re talking about, we can enhance organic growth and profitability dramatically going forward.

Kyle Evans

Great. Thanks a lot, guys.

Operator

Your next question comes from the line of Brett Buckley of Dolphin Partners.

Lisa Olson

Good morning Brett.

Brett Buckley

Good morning guys. How are you Lisa?

Lisa Olson

Good.

Brett Buckley

You all just covered quite a bit of ground with Kyle there and touched on the first topic that I wanted to deal with, and that was the cost savings that you highlighted. I guess in part just to get it straight here, Bill had mentioned there’s $7 million to $8 million of permanent cost saves coming out of the system, and I’m inferring that that’s from the initiatives and achievements of the Special Litigation Committee.

Specific to that bit, if perhaps you guys could perhaps break out where that’s coming from and also when that kicks in if it hasn’t already kicked in. Then also, I just want to make sure, I think I heard that the Super Bowl ad spend from beginning to end, if you will, is an additional $8 million to $10 million, which I guess obviously immediately comes out. I know that you touched on IT and back-office cost saves and that you mentioned that that was something under review. So, I can understand if you don’t have that here today. But perhaps, maybe, if you could touch on the company has I want to say $6 million to $8 million in restructuring charges that I would guess I’d call non-recurring, recurring items. My impression is that has largely come from the historic strategy of the company that it has been rather acquisitive. And I get the sense that the Company is not going to be so acquisitive on a going forward basis. If that sense is correct, can you sort of give me a timeframe or maybe how much those restructuring charges might be able to come down?

Stormy Dean

I’m a little -- this is Stormy and I’ll try and -- that’s a multifaceted question there. So of the $7 million to $8 million of charges that we -- the expense reductions that we see on an annual basis, about $6 million of that comes from the closing of several facilities. We shut down about 11 offices in the third quarter, so we will see those cost savings of over $500,000 a month effectively right now, immediately. There were costs associated with -- we sold the interest in two airplanes. We sold the yacht. We laid off several people. We shut down some consulting arrangements. Taking all those things into account, that’s primarily where that comes from. So we don’t have maintenance fees on the airplanes, for example. We don’t have the monthly maintenance on the yacht. We don’t have these consulting agreements. And so that’s primarily where those cost savings, and all of those are effective immediately. We will see those in full force in the fourth quarter.

Brett Buckley

I’m sorry, Stormy. So success closing facilities. And then, 7to 8 another one to two is from the airplanes, the yacht and all the other stuff?

Stormy Dean

That’s right.

Brett Buckley

Okay. Sorry to interrupt.

Stormy Dean

So having said that, those happen right away. You hit upon the Super Bowl. We’ve looked at some advertising in the fourth quarter. We’re going to take a hard look at that. Typically, if you go back historically, we’ve been aggressive advertising in the first two quarters of the year and then we’ve backed off pretty dramatically in the fourth quarter. And we will continue to do that. So, you’ll see advertising expenses dip dramatically in the fourth quarter, and then we will look and see what we need to do in the first quarter. We don’t want to seize up the business.

We’re going to do what we need to do to make sure that we continue to grow. As far as these restructuring type of charges, the way I looked at it was we had about $21.6 million in unusual charges. The way that the -- I guess the accountants and the lawyers made us characterize that is $17.3 million of it was really the true non-recurring charges and those were litigation fees. Those were severance payments and things directly related to the remediation that was effective and be done. The others, like closing offices, writing down some assets, all those things, while they are I guess unusual items and really non-recurring on a regular basis, I guess we’ve done that before, so they said you have to -- you can’t say that they are nonrecurring because they could, in fact, recur again. So I think your characteristic of calling them recurring/non-recurring charges is sort of a good way to look at it. But, there’s roughly $22 million of expenses in this third quarter that don’t really relate to the operations of the business.

Brett Buckley

No, I understand. That $17.3 million and I guess the balance that gets you to $22 million, that included this write-down. And then what’s left was I guess referred to as restructuring?

Stormy Dean

Sure.

Brett Buckley

What I was referring to was that bit that’s left over that seems to recur $1 million or $2 million per quarter and so like on an annual basis, maybe $6 or $8 million roughly year in, year out. That bit is what I was referring to.

Stormy Dean

Okay, that bit really, when we call that restructuring, basically, whenever we have a layoff or we have reorganization within the organization and we have to pay severance, we typically treat that as restructuring. Some of those relate to changes in management at acquisitions. For example, we had some pretty good restructuring in the second quarter. We made some changes at Guideline, for example, and we went in and changed the management around a little bit. We had to pay severances. We had to honor some contracts and those kind of things went into the restructuring. I think that one of the final parts of your question was acquisitions. The last acquisition we did was really effective in January of 2008 and that was Direct Media. We haven’t done more in the sense. So next year as we go into 2009, a lot of this -- it will be much more clear you know what’s organic growth, what’s not and everything, because at that point it will all be organic growth.

Brett Buckley

Right I got it. I guess heard that the priority with cash flow was more about paying down the debt, so that’s good to hear. So you know lets get to here – so, if I get this right and then I’ll hop off, it sounds like there is in the zone of immediate achievable cost saves let’s call it 16 odd million, and it sounds like there’s more there that’s under review presently. If I take out all the unusual items the way I kind of look at the company is it’s got about 120 to 125 million of EBITDA with respect to sort of run rate and then you know if one could add 16 or more million to that, that gets you in the zone of about $140 million in EBITDA, sort of normalized run rate and that’s not bad. Okay, right thank. Okay. I’ll jump back.

Stormy L. Dean

Thanks Brett.

Operator

Your next question comes from the line of Robert Kirkpatrick of Cardinal Capital.

Bill Fairfield

Hi, Rob.

Robert Kirkpatrick

Good morning and thank you for taking my question.

Bill Fairfield

Sure.

Robert Kirkpatrick

Can you explain for me where the three groups of charges are in your income statement are they taken care of in the SG&A line, the cost of services of line and are they detectable for tax purposes?

Stormy L. Dean

The answer is SG&A is yes.

Robert Kirkpatrick

Okay. Thank you, Stormy. And secondly, CapEx was higher in this quarter than in some time for the quarterly period was there anything secular that caused that to be at about $10.5 million?

Stormy L. Dean

Yeah, there were actually probably two major items. We bought a printer and put in our Carter Lake facility that it will help us reduce the printing cost associated with whatever directories we are doing at this point, we’ll probably have an ROI on that or a of payback on that of a couple of years. We also spent about $2 million purchasing a search software that we are going to use in the Database Group, which will enhance the capabilities on our website, and then we also had continual spend as we got down to the wire with our infoUK. All in we probably spent $5 million so far we are ready now to actually have infoUK up and running we’ve got a marketable product. We started to get some revenue in the third quarter, we’ve got websites up and ready to go. So, we are looking forward to the revenue start to match the spend on infoUK and then we’ve had an ongoing effort to change our data processing move away from the main frame environment to a more distributed systems environment and that spend has been ongoing. We will take a hard look at capital expenditures going forward trying to make sure that we are spending money appropriately but having said that we still have to make sure that we are investing in technology and investing in the infrastructure that we need to transform our business and we’ve – whether we like or not you know, there is a huge technology component to our business and if we don’t stay current and keep investing, we will quickly fall behind the power curve and then it’s very difficult to catch up.

Robert Kirkpatrick

Okay. And amount of money that you would expect to spend in Q4 on CapEx items would be an equivalent amount, around $10 million or will that back down, do you think?

Stormy L. Dean

That will back down to a more normalized -- probably the level that it was in the first half of the year, maybe a little less.

Robert Kirkpatrick

Okay, thank you. When do you think you will be able to do an earnings release Bill, that includes the segment breakdown that is available in the 10-Q, is there any reason that can’t be done in time for the earnings calls?

Bill Fairfield

I’m looking at Stormy from an accounting standpoint and closing standpoint. But it’s -- I think we can do it.

Stormy L. Dean

Yes, we can do it if we had the earnings call closer to the 10-Q.

Bill Fairfield

No, I think it’s something that we can strive to do. I think the information, obviously, is all there. It’s a matter of compiling it, putting in there and vetting it, to make sure that we’ve got the buy in from the accounts in time. Part of the hurdle that we have, obviously, as we get through each quarter is having the accountants and the audit committee and everybody do the thorough review that they need before we release the earnings. And so the earlier you try and release earnings, the less time there is to do that. There will still be ongoing work. Between now and the time the Q is released. But we think we substantially have captured everything.

There is one outstanding item we addressed it in the press release. It hasn’t came up yet, but there is we have an open issue that won’t be resolved until November 7, and the court has to decide how much legal fees are reimbursed to the plaintiffs in the derivative suit. And at this point, we don’t know what that is. We can’t estimate it. We don’t have a feel for it. So, it is unaccounted for, actually in this earnings release. So, once we find out what that number is we will add that in there. And then that will have an impact, a detrimental impact to the third quarter results.

Robert Kirkpatrick

Okay. I would argue to be able to move towards doing the earnings releases in a way that you can have the discussion with the segment breakdown as it is discussed in the Q. Moving to one of the areas that traditionally there has been a second half seasonal pickup in Service Group business. And I believe that’s because of your list business being more second half weighted than first half weighted. Did that occur again this year and. if so, to what degree?

Stormy L. Dean

It did. And the real sweet spot is September, October, November for that group. Having said that, once again you got to put it into context of the overall market, what we’ve seen over the past couple of years, is that the Yes mail and the interactive pieces have maintained their momentum all the way through the end of the year. Three, four years ago, Direct Marketing actually sort of died off in December. People would have organized themselves, have put their direct mailing pieces together, figured out what their campaigns are going to be. And they would have done all that stuff by November to set up for their mailings and campaigns in December. Well, with the advent of e-mail marketing and more interactive services, they’re able to change their campaigns on a dime. They’re able to come up with a new campaign in a day. So, last year for example, Yes mail saw its heaviest volume of the year on the days between Christmas and New Year as companies were scrambling to try and figure out promotions and programs, after Christmas sales, pre New Year’s sales, all that kind of thing. And so, we think that that will continue and we think that the net effect will actually be pretty positive and similar to what we’ve seen in the past, in that you’ve got a spike up in revenues and a corresponding up tick in operating income as a result.

Robert Kirkpatrick

Okay. And if we look at the whole services business today, you talked about the difference between the traditional direct-mail side of the business and the digital side. On an overall basis, what’s the mix today between digital and non digital? And how does that compare with one and two years ago?

Stormy L. Dean

Well, if I had to it’s about 50% now on the services side. And two, three years ago it was probably closer to 25% or 30%. We’ve seen dramatic growth in our Yes mail business over this period of time and we have not seen dramatic growth in the traditional list brokerage, list management companies. Walter Karl and Edith Roman have been doing pretty well. Edith Roman, in fact, has grown double digits ever since we bought them. And they really were the first list broker to embrace acquisition e-mail campaigns and really make that transition to digital. So, we see a continual migration in that group from traditional to more digital and we think that that really bodes well for us in the future.

Robert Kirkpatrick

Okay. Bill, you, in the press release, decided to withdraw the guidance due to the costs associated with the complexity or the complex costs associated with the shareholder litigation and winding all that up. Would you care to comment at all on the revenue side since those obviously should not be affected by the settlement of the litigation?

Bill Fairfield

Yes, Rob, let me just say this. I’m not prepared to give any guidance at this stage of the game either for the fourth quarter or certainly not for ‘09. We want to get into a position where we can give appropriate guidance, but I’m just not ready to do that yet. We’re going through a process internally of both a top-down and a bottoms-up budgeting process. That’s well underway. My intent is to develop a reasonable budget with appropriate contingency plans both on the upside and the downside, and present them to the Board in early December. But until we get through that process, I just don’t feel comfortable giving guidance.

Robert Kirkpatrick

So conceivably by the time the year end conference call comes around, we would be able to expect some sort of directional guidance from you at the very least?

Bill Fairfield

Well, you should be able to expect some directional guidance. I don’t want to make promises I can’t keep in terms of the timetable. But I think we’ll be in a position sometime around the end of the year, first part of next year, to do that.

Stormy L. Dean

But I think that for your modeling purposes, even as you just look at the first three quarters of the year, part of the reason that we put the disclaimer in there about the guidance is the guidance originally did not include all these add backs, as we didn’t know what the special litigation charges and all these different charges would be. So, I think you could make your own judgment easily enough if you take a look at what the revenue has been through the quarter, three quarters and given the statements that we’ve made; and then also, take a look at the EBITDA that we have. And then, when you consider all the add backs and adjustments that we made, you can compare that to the guidance that we gave in April and you can make your own judgment about where we’re going to be relative to that.

Robert Kirkpatrick

Okay.

Lisa Olson

Hey, Rob, this is Lisa. Would it be okay if we got to some of the other questions and then came back to some of your other ones?

Robert Kirkpatrick

Yes. Thank you.

Lisa Olson

All right thanks Rob.

Operator

Your next question comes for line of Tasha Sullivan, Franklin Templeton.

Tasha Sullivan

Hi, most of my questions have been answered, but just a couple on gross margins. Wondering if the third quarter level is sort of what you’re looking at going forward? And then also, I know the Company has made a lot of acquisitions, but how did the business do in the last downturn?

Stormy L. Dean

All right as I can we stated earlier, most of the or almost all of the charges that were special went through the SG&A line, so if you’re talking about gross margin being revenue less the cost of sales, I think you can expect that to be a relatively comparable number going forward. Over the years, as we’ve added the research companies, which their main cost is cost of goods sold, it’s changed that mix, but we, as we went through 2008, haven’t acquired any new research companies, so the numbers that you see there should be pretty normalized. And what was the last question with regard to acquisitions?

Tasha Sullivan

Oh, just how the business did going through the last downturn?

Stormy L. Dean

Well, it’s hard to say. It’s hard to say because the last downturn in my mind was in 2000 and 2001 and were a dramatically different business. We did experience some downturn there, but I think that being a different business where we have these different components, the interactive piece in all of our both the database and in the Services Group, and then the market research actually gives us. A hedge against all that. It seems to be that companies are spending more money on market research and the government is actually spending more money in terms of social research, which helps prop up our top line and lessens our vulnerability to the downturn.

Tasha Sullivan

Okay.

Operator

[Operator Instructions]. Your next question comes on the line of Brett Buckley of Dolphin Partners.

Brett Buckley

The topic that we had touched on little bit at the shareholder meeting a few days ago. With some market value of the Company trading at what I want to say is roughly the amount that we had paid to acquire the market research businesses, Bill is hopeful that you could perhaps address in this forum and develop your thoughts as to what is the process the Company is going through to determine how to best optimize shareholder value.

Stormy L. Dean

Well I’ll try to hit the high points, Brett. And I’ll put them in multiple categories. The first category is, as we’ve said, to get our house in order, and that means two things. One is making sure that we, for lack of a better term, rationalize the business we have, make sure we understand which of our businesses are sort of the cash cows for lack of a better term. We like those kind of businesses that throw off a lot of cash. Then we have to make sure that we’re good stewards of that money in terms of either reinvesting in other parts of our business or paying down the debt. We, as part and parcel to that, is we want to, as I have said over and over of that barrier, but we really want to focus on the organic growth of the business and see if we can’t reduce that a little. I believe we do have cost efficiencies over and above what we’ve talked about. I can’t quantify those for you today, but I think our first order of business is to get the business as we know it today hitting on all eight cylinders, for lack of a better term.

In parallel with that, what we’re doing as we go through that process is obviously forming some views as to future strategy and where we take the business, which can be either through internal growth or in the future through acquisitions. I think part and parcel to that its incumbent upon me to take to the Board what we think the business mix ought to look like down the road, and if that means getting out of some businesses, then that would be a recommendation I would make to the Board. I’m not forecasting that, but I think we have to consider whatever is in the best interest of enhancing shareholder value here, and that obviously is reflected in the stock price. So we’re going to look at both the tactical aspects and the longer-term strategic aspects and try to do what’s right.

Brett Buckley

I hear you and thank you for your thoughts and comment. Just the debt level something you said is an important thing to address and certainly in this environment and paying it down. Are there any thoughts of what is at the appropriate debt level to maintain?

Bill Fairfield

No, I don’t have any preconceived notion. I think it’s just incumbent upon us given the environment and given the likelihood that down the road we’re going to want to pave anything I’m predicting, but we might want to make some bigger moves in certain parts of our business, and I’d like to be in a position to have some flexibility to do that.

Brett Buckley

I hear you. Just to concur with some of your thoughts, the in this environment you know lower debt levels and businesses that are cash cows, if you will, are likely going to be the most attractive investments in the stock market?

Bill Fairfield

Yes.

Stormy Dean

And we haven’t said that. Where we are at with our current debt level, we’re roughly at $312 million. We’re well underneath our covenants at this point. But we are cognizant of the fact that if we were to do any sort of a deal that caused money or wanted to be able to have to go and increase our debt level regardless of what the acquisition opportunity or investment opportunity might be, that at this point, it would be very expensive for us because we’ve got a great deal in the marketplace. We’re at roughly LIBOR plus 1.75% to 1.2%, so our Intel tells us if we were to do a new deal, even just trying to expand our existing facility, it would typically, there would be an origination fee and we would probably see a 2 to 3, 100 basis points uptick in the spread. So it would be LIBOR plus 5 maybe. So that’s we’re cognizant of that and so we are mindful of being a good steward of the debt and to preserve what the low interest rates we have and to make good business decisions that way.

Brett Buckley

I hear you. I have like just a few rather quick sundry questions. Do you want me to get back into the queue or could I ask them right here?

Stormy Dean

Pardon.

Lisa Olson

We’re going to try to wrap things up during the next couple of minutes, so and we’re more than happy to answer the questions off line if that’s what you want to do. I just want to be respectful of everybody’s time. So why don’t we go ahead and go on to the next couple questions and then Brett, we’ll try to get back to you.

Brett Buckley

Thank you.

Lisa Olson

Chanel, Next question.

Operator

Your next question comes for line of Gary Steiner of Huber Capital Management.

Gary Steiner

Hi Good morning. I wonder if you might be able to comment at all in terms of what you’re hearing from your sales force, just in terms of what they’re hearing from your customer base in terms of their spending plans. I mean obviously, we’ve heard a lot of companies talking about business basically drying up in the last month or so. You’ve commented generally about your outlook, but I wonder if you could maybe talk more specifically about what you’re hearing from your customer base.

Bill Fairfield

Gary, this is Bill. I’ll start to respond and then I’ll invite Stormy. You should also know that DJ Thayer is here with us, who runs our small business group, and if DJ has any comments to your question, I’d invite him to comment. From a high level again, I want to emphasize just as Stormy has in the past, that it really varies from business unit to business unit, if you look at our research group, they’ve had a good deal of optimism. And as has been indicated before, their backlogs are up across the board. So, in the kinds of services that they’re delivering, they are actually seeing pretty positive response from their customers whether that be business customers or government. In terms of what I’m going to call this isn’t a comment about our organization structure; it’s a comment about the kinds of customers we have. When we look at some of our larger customers, enterprise customers, if you will, the kinds of messages that we are hearing from them are kind of interesting. What they are encouraging us to do is to try to broaden our base within our relationships and provide more different services. In many cases, we might provide, for instance, Hewlett-Packard with one service. It might be e-mail or it might be some survey marketing. They’re asking us to take over a bigger percent of their marketing spend if we can and if we can be competitive. In return for that, we would obviously generate higher revenues for info. They’re expectation is as they consolidate vendors, that it’s going to be a better deal for them in terms of the spend they have going out. So there are some opportunities there. And we have to be astute at managing those relationships, but we view that as a positive. Similarly, as Stormy has mentioned, to the extent that we’re out there selling a digital service like Yes mail, we’re seeing positive feedback from folks. But there’s no question that the traditional kinds of businesses people are they’re not ceasing their spend, but they’re backing off on the breadth and depths of the services that they’re requiring from us. DJ, do you want to comment at all?

DJ Thayer

You bet.

Stormy L. Dean

Can you hear, DJ.

DJ Thayer

Gary, what we’re seeing is for those customers that maintain customer databases, do regular traditional marketing, they’re looking more and more for our analytic services, what can we do to help them be more efficient so they’re mailings to deliverable addresses, so that their database is clean and up to date. What you’re not seeing is for those customers that mail infrequently, mail a list of a couple thousand names every other year, that’s part of the business has going down. But what you’re seeing is you are seeing that increase in analytics, those customers that are wanting to become more efficient with their marketing and more targeted. So, there’s a shift in services, and there’s a shift in demand of what customers are looking for. That’s what our salespeople are sharing with us.

Gary Steiner

Okay, great. Just one other one. I believe that you guys are putting some efforts behind some international growth opportunities. Obviously, the UK, but I think it was expected to be much broader than that. Can you comment at all as to whether that is still going to be an area of priority? And if you spend a lot of dollars to kind of grow the international business or that will be less of a priority going forward? Thank you very much.

Bill Fairfield

I don’t think it will be less of a priority. I sort of look at it as being a bit of a pause here, frankly, as I get my feet on the ground. Having said that, we’ve got three business units that are making significant inroads, Stormy talked about our UK database. And while we are continuing to compile and verify, we’ve got a good, strong database in the UK and we’ve got full-scale sales and marketing going on in that arena.

We also have a good international footprint with respect to OneSource, and OneSource has a nice foothold if you will, in not only the UK, but in Western Europe. They have a good foothold in Asia. And, we’re expecting continued international growth from them. And then our market research organization, opinion research, has a nice strong presence of course in Australia, operations in Singapore and Hong Kong. And they’re exploring some opportunities in China. So, there’s --

Stormy L. Dean

Where we have an office already in Shanghai.

Bill Fairfield

In Shanghai, yes. And so, we are continuing to emphasize those three areas. But clearly, international will continue to be a growth area for us. I think, like I said, I sort of want to get my arms around it and then I think you’ll see increased focus in the future.

Gary Steiner

Thank you.

Lisa Olson

Gentlemen, why don’t we take one more question and I want to make sure that you guys have my e-mail and my phone number so that we make sure that we answer all your questions. Don’t hesitate to give me a call or e-mail me because we want to make sure we answer all your questions. So, Chanel how about one more question, please?

Operator

Yes. The final question comes from the line of Kyle Evans of Stephens.

Kyle Evans

Hi, thanks guys. Not to keep harping on that advertising dollar spend, but it’s a huge, huge number. And I was wondering what kind of infrastructure or processes or technology you have in place to measure the return bill so that you know which dollars to cut and which dollars to keep as you go forward? Thanks.

Bill Fairfield

Yes, I’ll give you a general comment and then DJ is responsible for a fair amount of that spend. So, I’ll let him comment on that. Actually, we’ve got pretty good metrics in terms of what our return is for the dollar spend at least in my observation of what we’re doing. So, I think we have the tools to make the right decisions as we ratchet that advertising spend down. DJ?

DJ Thayer

You bet, Kyle. What we’ve got, as you probably know, is we track our marketing not only through unique 800 numbers on our offers, but through unique landing pages, if it’s an e-mail campaign; space advertising of course, unique 800 numbers. So, we’re able to track ROI not only with a particular mail piece, whether it be a catalog, whether it be an e-mail, whether it be a first class letter. But in addition to that, we’re able to track unique campaigns and offers. So, we know exactly what works well, what doesn’t work well. And what we’re going to do, as Bill alluded to rationalizing our go to market, we’ve got an awful lot of divisions where there is duplicity in going after particular prospects. So, we’re going to rationalize who we market to and is it the right group to be marketing to. And I think we can gain some significant efficiency. There.

Kyle Evans

So I’m actually I’m looking at a DM News publication here and you guys have the back page, and I see a unique 66 number and even a unique URL for the SalesGenie.com because it’s got a slash suffix on it. But where does all that data flow to? What kind of platform is that sitting on? Is that you guys looking at that on an Excel spreadsheet? Or how does all that flow through the organization?

DJ Thayer

Yes, with Sales Genie in particular, we have an automated system that takes the human error out of it. And, we’re able to track within the system the number of hits on a landing page, the number of phone calls to a particular queue line. And then we’re able to attach that to the transaction and determine the ROI from there. So, in Sales Genie, it’s a very efficient process, and we have similar capabilities and other divisions across the Data Group as well,

Kyle Evans

Great. Thank you.

Bill Fairfield

Okay. I think we’ll call the Q&A to an end. We appreciate everybody’s participation. We intend to have similar kind of calls in the future at similar times of the day and during the week. And, we appreciate I invite you to get back to I invite you to get back to Lisa with any suggestions on how we can improve the call. So, thank you very much.

Lisa Olson

Have a good day

Operator

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have an excellent day.

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