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Executives

Scott Klein - Chief Executive Officer

Dee Jones - Chief Financial Officer

Analysts

Peter Salkowski - Goldman Sachs

Matt Chesler - Deutsche Bank

Obby Synder - JP Morgan

Andrew Finkelstein - Barclays Capital

Joe Stein - Wells Fargo

Aaron Watts - Deutsche Bank

Jack Kranefuss - Metlife

Howard Wireman - Evergreen Investment

Idearc, Inc. (IAR) Q3 2008 Earnings Call October 30, 2008 10:00 AM ET

Operator

Good morning and welcome to Idearc's Third Quarter 2008 Earnings Conference Call. With me today are Scott Klein, Chief Executive Officer, and Dee Jones, Chief Financial Officer.

Some statements made by the company today during this call are forward-looking statements. These statements include the company's beliefs and expectations as to future 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 the risk factors set forth in the reports filed by Idearc, Incorporated with the Securities and Exchange Commission.

The company has no obligation to update any forward-looking statements. Please note that an archived version of this call will be available on the website at idearc.com, under the Investor Relations section. Additionally, a replay of this teleconference for individuals within the United States will be available at 800-642-1687 and international callers can access replay by calling 706-645-9291. The replay pass code is 678-692-57. And will be available through November 13. At the end of the company's prepared remarks, there will be a question-and-answer session.

And now I'd like to turn the call over to Scott Klein, Idearc's CEO. Scott?

Scott Klein - Chief Executive Officer

Thank you, Jody, and thanks to all of you that you have joined us today. You have seen the results that we released earlier this morning and while Dee will get into more depth and detail on the numbers, here is the top line view.

Total revenues declined 7.1% in the third quarter and 5.7% year to date. Year to date, Internet revenues were up 6.2% and up 8.7% in the third quarter. Adjusted EBITDA declined 24.1% in the quarter and 15.7% year to date primarily driven by declining revenue and increased bad debt expense. Clearly, these results are disappointing but let me be clear, our recent financial performance and this is important to understand does not yet reflect most of the actions we have undertaken to address the significant challenges we are facing as a company, as our clients contend with difficult economic conditions across the nation. During this call, you will see and hear that we are taking a no-nonsense direct methodical attack and changing Idearc for the better, and we are making real progress. What has changed is our approach, our attitude, and the way we look at the business. And in that regard, we are well on the way.

Also included in changing Idearc for the better is addressing our capital structure challenges. As mentioned in the release this morning, we have retained Merrill Lynch and Company and Moelis and Company as financial advisors in connection with the review of alternatives related to our capital structure.

Our objective is to help ensure that Idearc has an appropriate capital structure to support our strategic business objectives. We intend to look closely at all available opportunities to strengthen our balance sheet and improve our risk profile.

In the earnings release, we noted that the company had cash and cash equivalents of 304 million as of September 30, 2008. In addition, on October 24, 2008, the company initiated borrowings of $247 million under our existing $250 million revolving credit facility. We do this to increase our cash position and preserve our financial flexibility during these challenging economic times. Fortunately, despite the challenging economic environment, we continue to generate a significant amount of cash. We intend to manage this cash prudently with a focus on maintaining sufficient liquidity and among other things flexibility in reinvesting in the business when it is appropriate to do so.

In the release we distributed this morning, we also mentioned that we received notice from the New York Stock Exchange that we along with an increasing number of other businesses across different sectors are not in compliance with New York Stock Exchange continued listing standards because the 30-day trading average closing price of the our common stock has fallen below $1 per share. As you all know, we have six months to remedy this and we are developing plans to do so.

Now last time we all met, I said my team and I are all committed to proving ourselves worthy of your trust, support and confidence. I said I was determined to succeed and I talked about significant changes that were already making a difference. Since that call, we worked swiftly and strategically on implementing more programs to secure a successful long term future for Idearc. As I mentioned before, we are seeing progress. I’ve also had the pleasure of meeting and talking with many of you to discuss Idearc’s new way of doing business.

When we all gathered last quarter, I talked about Idearc’s three key areas of focus. First, accelerating revenue growth. Second, improving margins and reducing expenses, and Dee will address these in a few minutes. And finally building a high performance culture. Everything Dee and I talk about this morning addresses at least one of these points as we continue to build a solid foundation for success.

As we review what we have done during the third quarter, please understand we are not only addressing shortcomings, we are bringing new and in some instances radical ideas and approaches to the table. We are positioning ourselves to redefine the industry. We are not and will not be your father’s yellow pages. I am confident that the relationships we are building with our clients and our improving value proposition that we are now creating will provide us with a competitive advantage that positions us to make progress in the current economic climate and thrive when business conditions improve.

I would be remiss if I didn’t point out a new study from TMP Directional Media and comScore that was released in October dispelling a common myth. A myth that’s probably safe to say is believed by some on this call. According to the study, the first sources used by consumers looking for local information on products and services are 1) search engines 31%, 2) print yellow pages or white pages 30%, 3) Internet yellow page sites 19% and 4) local search sites at 11%. A couple of points here.

Idearc Media has a substantial presence within all four categories. Obviously with the directories and internet yellow pages, but our clients are also appearing on the major search engines like Google and Yahoo! as a result of the search engine marketing and search engine optimization work that we do for them. In addition, of that remaining 9% of consumers in the other category, it is probably safe to say a majority of them are using their mobile phones and directory assistance to get their local information. Idearc has a real presence here as well through our relationships with various carries and companies allowing our clients to get in front of more qualified leads. So not only it is true to say that the yellow pages are still relevant and a major source of information for consumers, it is also true that Idearc Media is positioned and poised to grow even as consumer preferences evolve.

Here are a few of our third quarter initiatives that you will see directly relate to our three areas of our focus. Keep in mind that many of the ideas for these initiatives stem from my more than 100 in person meeting with key Idearc employees around the country. It was evidenced in those meeting and it is something that is reinforced every single day that there are a lot of talented people here with great ideas and the ability to execute them.

My leadership team heads up a new structure designed to tap into this talent effectively and rapidly grow sales by emphasizing training, coaching, account preparation and sales productivity. We now have three Executive Vice Presidents who report directly to me who will oversee sales operations and divisions defined as East, Central and West. Dave Bethea heads up the rest for us. Dave joined Idearc from PrimeSource Building Products. PrimeSource is the nation’s largest independent distributor of building products, and while at PrimeSource Dave was an instrumental member of that talented team in helping to grow annual revenues from 250 million to 1.3 billion. Dave joined Mike Pawlowski who heads up the East and Scott Laver who oversees the Central. Both Mike and Scott are seasoned industry veterans.

The new sales organization consists of 15 geographic regions plus a dedicated internet team, our Telephone Client Center known as the TCC, and our National Accounts Organization. As I am sure you all know, Dee Jones was promoted to Chief Financial Officer and Treasurer. Dee has the experience, knows the business and has been a critical partner with me in the design and execution of our recent efforts to take cost out of the organization and better support sales.

Cody Wilbanks was promoted to General Counsel and Corporate Secretary. Cody has served Idearc well and has already played a key role in helping to simplify our sales process making us an easier partner for clients to do business with. Sandy Henjum is our Executive Vice President of Transformation and Marketing. Sandy’s organization has been centralized and is aggressively addressing a wide range of business transformation initiatives that address sales productivity, new products, pricing programs and market and customer segmentation. Briggs Ferguson, a former city search executive, who joined Idearc in April, continues as President of our Internet Business. Briggs’ focus is on executing Idearc’s complete digital strategy as rapidly as possible. Georgia Scaife heads up our Human Resources and Employee Administration team. Geogia’s organization has been restructured to further centralize the department and improve its efficiency and focus. Finally, Frank Gatto continues in his role overseeing all of our operations. Frank’s organization is responsible for receivables management and billing, sales support and customer care, publishing and printing services, distribution, information technology and other operational functions.

The bottom line is this. I am very pleased with the leadership that is now in place. Everyday every member of this team is laser focused on our three areas of focus. We have asked sales, who we now refer to as Media Consultants to do what they do best, sell. What we did was provide them with the tools, strategy and wherewithal to get it done. We want our media consultants to be away from the office, away from the (technical difficulty) the bottom line is to increase efficiencies and take away needless time-wasting processes.

I mentioned during our last call that there are more than 12.5 million small and medium businesses in the US with thousands launched weekly. We have about 800,000 clients today, leaving a lot of room for higher levels of penetration. In addition of the 800,000 clients we have, over 90% of the existing clients are print clients, less than one-fourth are Internet clients, and slightly more than only 1% are currently direct mail clients. These are huge opportunities with new and existing clients. Our new way of selling will undoubtedly drive revenue.

I am already hearing great things from our media consultants as we continue to roll out new technology tools like the PC Tablet. PC Tablets with wireless access are allowing our folks to immediately present collateral, spec ads and contracts to our clients. Our media consultants are saying they are more confident, the clients and prospects are more engaged and we are seeing more clients renew their advertising and add new programs to their print products like search engine marketing and SM Local. We are also seeing clients broaden their existing print portfolio with the addition of our direct mail offerings. As of today, we have trained over 50% of our media consultants on using PC Tablet and expect to have the entire force up and running in the next 40 days, a great accomplishment by our team.

For our telesales reps, we are implementing wide web meetings allowing for more robust demonstrations on how we can best serve our clients. I am hearing similar stories here. The web meetings are helping us demonstrate our value to clients and prospects alike. We have rolled out the Idearc credit authorization network known as ICAN. This system provides instantaneous credit limits towards sales people for qualified clients. To date the number of credit applications process is more than doubled since implementation. We’ve expanded our national account team as well, increasing our focus on national CMR agencies, while at the same time finding new and creative ways to work with these important partners. He will talk specifics on the internet numbers from an operational standpoint though we continue to see many positives. Year-over-year and month-over-month the Superpages.com networks continues to outperform our competitors in terms of overall traffic.

Most recently according accounts the Superpages.com network received more unique visitors in September then Yellowpages.com networks and twice the traffic of yellow books network. We had also had more traffic that ESPN, Courier Builder, Banc of America and the Washington post. That said, we are still increasing our traffic and improving the overall user experience. Everything that we do is done with a eye to better monetize our online sales, whether it is expanding our adjusting existing traffic agreements or developing new ones we are making sure our clients are being seen by the right consumer, the consumer who is ready to buy.

We continue to see an increase in SM local momentum. To be clear, SM local is only one product offering within our suite our digital products, We have streamlined SM local processes to improve overall fulfillment. In the search engine optimization arena we have seen a 32% increase in SEO traffic to Superpages.com translating to 11 million new page views. We have optimized business profiles for search engines an increase unique visitors by 213%. We have also made it easier to do business with us. No longer that we have an eight page advertising agreement it is now a single page. Also clients can view and pay their bills online. We have also made it a better place to work. We are aligning our goals across the enterprise in implementing tools to track everyone’s performance. We have launched the Idearc CAN program that provides cash awards for submitting cost savings ideas that work. Our medial consultants and all of our employees appreciate all of the changes and the ability to really have an active stake in pushing the business a long. But before I turn this over to Dee, let me reiterate a few points.

We are in a very difficult economic environment that’s having a significant impact on our clients. We have acted and we will continue to act sweetly and strategically to address our challenges and I am pleased with our progress. As I said before we will not let the economy being excused. We are building the business that would be position to flourish I both good economic times and bad. Based on the dynamics of the industry this wont happen overnight but we are making progress every single day. We do have a ways to go before we see substantial results with the initiatives I have outlined. As you all know the nature of this and our annual sales cycle in each market is such that it will take time. That said, we are absolutely headed in the right direction where we energized, we focused and in the process of redefining who we are.

As I said on the last call, my team and I are all committed to proving ourselves worthing of your trust, support and confidence. And with that I would now like to turn the call over to our CFO, Dee Jones.

Dee Jones - Chief Financial Officer

Thank you Scott and good morning everyone. First, I need to mention that we report financial results on a GAAP basis and on an adjusted pro forma basis to eliminate the impact of transition and restructuring cost. The adjusted pro forma basis measures are described and are reconcile to the corresponding GAAP measures in the financial schedule accompanying the press release and posted in our website under the investor relations section.

Before I start with our pro forma results, with regard to the reconciliation of GAAP to pro forma I want to mention the restructuring charge of 11 million in our year-to-date results 4 million for the quarter. This charge is primarily severance cost and facility related charges associated with the cost cutting initiatives mentioned on our second quarter call. As we progressed with these activities through the next couple of quarters, I would anticipate additional charges of this type in the near term. I also want to provide a quick update relative to our cost reduction activities. As we spoke on our second quarter call, these initiatives are targeted to reduce headcount by approximately 20% from our expected 2008 year-end levels in conjunction with initiatives to reduce our total expense base by approximately 10%. We are well on our way to achieving these savings including realization of 2008 savings of approximately 50 million as communicated earlier.

With regard to the 20% headcount reduction underlying these activities we're over half way there and on track to achieve the targeted reductions within the time frames laid out. In addition, as part of the cost savings plan, we continue to consolidate our real estate locations. We have closed 19 offices since our last call and are still on track to reduce down to approximately 90 offices by year end. On June 2nd, we had 122. As Scott mentioned, it will take sometime to see the full annual effects of these improvements in our results.

Now let’s take a look at the overall financials, specifically pro forma results starting with the detail on multi-product revenues. On a year-to-date basis, we reported multi-product revenues of 2.264 billion, which is a 5.7% decrease compared to the same period in 2007.

Within those results, we reported year-to-date Internet revenue of 223 million, a 6.2% increase compared to the same period in 2007. We reported third quarter 2008 multi-product revenues of $735 million, which is a 7.1% decrease, compared to the same period in 2007. And we reported Internet revenue of 75 million in the third quarter, which is an 8.7% increase compared to the same period in 2007.

As we've talked before, clearly, we are not happy with our current revenue results. As Scott mentioned, as expected, cyclical economic conditions continues to impact our amortized results. As reported in the second quarter, these effects were felt to some degree across the board but certainly disproportionately in more economically challenged regions of the country.

With respect to Internet revenue, we indicated on our last call that we anticipated getting to double digit growth in the third quarter. With growth of about 9%, we didn’t quite get to that level as the transition from fixed-fee advertising to performance-based advertising products continued. The key remains for us to continue to build out and more effectively utilize our ad network to better monetize our sale.

We continue to be encouraged by the market demand for our performance-based products, including SM Local and our other pay-per-click products. We do still expect to ramp in our Internet growth rate as we look forward.

Moving on to EBITDA, as reflected in our reconciliation schedules, we reported year-to-date EBITDA of 956 million, a 12.9% decrease compared to the same period in 2007. Our reported year-to-date EBITDA margins were 42.2% compared to 45.7% in the same period in 2007.

On an adjusted pro forma basis, EBITDA was 985 million, which is a 15.7% decrease compared to the same period in 2007. Adjusted pro forma EBITDA margins were 43.5% compared to 48.6% in the same period in 2007.

As reflected in our reconciliation schedules for the third quarter, we reported EBITDA of 298 million, which is a 21.6% decrease compared to the same period in 2007. We reported EBITDA margins of 40.5% in the third quarter compared to 48% in the same period in 2007.

On an adjusted pro forma basis, third quarter EBITDA was 302 million, which is a 24.1% decrease compared to the same period in 2007. Adjusted pro forma EBITDA margins were 41.1% in the third quarter 2008 compared to 50.3% in the same period in 2007.

In addition to the revenue results previously discussed, the primary drivers in the EBITDA change, both for the quarter and on a year-to-date basis, included changes in our bad debt provision, the favorable impact of the sale of our LA printing plant in the third quarter of 2007, a one-time charges associated with the exit of national reseller sales contract, partially offset by the initial impacts of our expense reduction initiatives. With regard to bad debt, our provision in the third quarter was 8.2%. The year-to-date provision of 6.5% compares to the provision rate of 4.6% for the same period in 2007. This change draws the majority of change in the G&A expense line for the quarter and on a year-to-date basis.

Looking at our other financial results, on a GAAP basis, we reported year-to-date net income of 260 million, which is a 21% decrease compared to the same period in 2007. On an adjusted pro forma basis, year-to-date net income was 279 million, a 25.4% decrease compared to the same period in 2007. We reported net income of 73 million for the third quarter 2008, which is a decrease of 37.6% compared to the same period in 2007. On an adjusted pro forma basis, our third quarter net income was 76 million, a decrease of 40.6% versus the same period in 2007.

Our free cash flow for the nine months ended September 30, 2008 was 340 million, based on cash from operating activities of 377 million, less capital expenditures of 37 million. Within these results, we had cash interest paid of 432 million and cash taxes paid of 130 million in 2007.

Our revenue guidance for 2008 remains at mid single-digit percentage point declines in multi-product amortized revenue. While we haven’t previously been explicit with respect to margin guidance in citing some margin contraction, we are experiencing a little more pressure on margins due to the bad debt expense issue noted previously.

Now I would like to turn this call back to Scott.

Scott Klein - Chief Executive Officer

Thanks Dee. In a moment we will ask the operator to open up the call to take your questions. Before we do so however, I think its important to note two things, first, although I am sure you have many question about our review of strategic alternatives related to our capital structure, the fact of the matter is that we are early in this process and there really isn't much more to say at this point. So please save your questions, because we will not answer them in this regard. Please be assured that we intent to provide updates to you on this process on a timely and consistent basis as circumstance warrant. Second, because of the strategic review, we intend to enter into a quite period in which we will not participate in any investor conferences.

Now with that, I believe we are ready for your questions. Operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from the line of Peter Salkowski with Goldman Sachs.

Peter Salkowski

Good morning everybody. First of all, I would just like to start with the revolver, if you think of an idea of what you are reasoning was there to draw that down at this point? It seems like you have you know, a fair amount of cash at the end of the quarter and why you thought it was necessary to draw down the 247?

Dee Jones

Yeah, Peter good morning.

Peter Salkowski

Good morning

Dee Jones

With respect to revolver as we stated in the release, we drew down for general corporate purposes. Given the current market environment, and our current situation as well as the current status of the credit markets maximizing liquidity and flexibility about going ahead and drawing down the revolver, we believe it to be a prudent action.

Peter Salkowski

And what kind of rate you have been on?

Dee Jones

It’s the same as the term loan LABOR plus 150.

Peter Salkowski

Plus 150, okay. And then I was wondering, Scott, if you can give a sense of what you are hearing from your sales force with regards to sales you know, for books sort of again we delivered in the fourth quarter or even things are going to be delivered in first quarter of next year, has the environment changed at all, I know previously it’s about sort of first half falling into second half of '08, and I was just wondering if you are seeing third quarter following into fourth quarter even flowing in the next year? And also sort of how the quarter ended was there any sort of stabilization in your markets so the things continue to deteriorate?

Scott Klein

Yeah, let me take the second question first. Peter it’s all over the map you know, we are geographically diverse and the results market by market vary quite a bit. As far as what we are seeing on the market on a go forward basis, our sales organization on the one hand is quite energized by the revenue they are creating with new clients and increasing revenue from existing clients, what is slowing us down is our cramping down on credit and making sure that we are only selling clients that are actually 100% credit worthy. So as a result we have meaningful amount of revenue that we have on our own decided to an effect cancel out rather than take on the credit risk. So there is a balancing act going on between significant growth and at the same time meaningful revenue being canceled as a result of credit.

Peter Salkowski

Rather than, I guess, the question on that that would in terms of your rates and what you are doing with regards to the charting advertises, it sounds like you’re making it more difficult for new clients due to more difficult credit policies, is there any change on a rate size that it would more attractive to some of these credit worthy clients?

Scott Klein

Yeah, Peter, we haven’t changed credit policy as far this year, what we are seeing now in the marketplace is an increase number of customers that are being challenged by those credit criteria and the condition of their accounts with us. So for lack of a better term what we are seeing is more credit challenged customers in the marketplace. We certainly endeavor to work with them and get them into a position where we can move forward with their programs and with their activities, but to the degree we are unable to do so, those activities are impacting our results. There is not a change in credit policy this year, its simply a change of what we are seeing in that environment at this point.

Peter Salkowski

Got you. And then anything you are doing with rates with regards to thing advertisers?

Scott Klein

Yeah, its really not about rates Peter, that’s not the problem for us, what we are doing now is adjusting our pricing practices to make it easier for both our sales people and our clients to understand what we are doing as we continue to move up into a multi product sales organization, it was important that we simplify this entire process in both our clients and our media consultants who are responding to that activity well.

Peter Salkowski

Okay great. And then last question on the cost side Dee, I think you mentioned you are well on your way achieving a 50 million in cost savings that you expected during the second half. Could you give us a sense of how much of that actually sell?

Dee Jones

We initiated those activities during the third quarter. So we didn’t get quite as much as what we would see in the fourth quarter and in the third. You know it was in the mid teens as far the effects and benefits of those programs and we expect as I mentioned on the call to be close to that $50 million number and for the full year.

Peter Salkowski

Okay, great. Thanks.

Scott Klein

Thank you.

Operator

Your next question comes from the line of Matt Chesler with Deutsche Bank.

Matt Chesler

Good morning, thanks for taking my call. I wanted to followup on Peters question about the current trends. I recognized and appreciate that you’ve got a geographically diverse set of market, I think what the question I was trying to ask or go after was when you aggregate them altogether how is the business looking now and how our current sales can be as progressing. So I imagine that you have a good feel for that?

Dee Jones

Yeah, I mean as we said on the second quarter call we had anticipated results similar to what we saw in the second and thus far in the third and what we’ve reported in the third showing the effects of what we are dealing within the marketplace, and we’ve also indicated we didn’t see the effects of our programs coming into play until we got into 2009. So as I look into the fourth quarter I wouldn’t see dramatically different results with respect to that in the fourth quarter than what we’ve demonstrated in the third. As to 2009 and guidance around that at this point we are not prepared to guidance as we look into 2009.

Matt Chesler

So, Dee, what you are saying then is that in terms of fourth quarter ad sales if you use the numbers something around 13% we won these are off?

Dee Jones

I mean, I am not going to give exclusive quarterly guidance, but as I said I wouldn’t anticipate seeing significantly different results than what we have reported in the third.

Matt Chesler

Okay. What is your assessment or explanation for why the acceleration in Superpages has been continually delayed, what is that we need to see happening with – taking order to take place or some reason this is exactly happening?

Dee Jones

Yeah, Matt my temptation is to answer with the comment like slow and steady wins the race. We are adjusting our infrastructure getting our processes corrected so that we can fully monetize the great work that our sales organization is doing. We have number of people that are working almost round the clock to get all of this work done so that we can realize more of that good work. It's really more around processes than anything else and I am feeling very good that we are making excellent progress and that we will continue to build upon the growth that we saw in the third quarter as we move into the fourth quarter and beyond.

Matt Chesler

Thanks Scott. I mean to what extent does it have to do with the infrastructure and the algorithm?

Scott Klein

It’s a -- when you say infrastructure, it’s not a hardware issue. It's really more of a process issue and the way new clients are brought up, the amount of time it takes to bring them up, the processes that we have to go through to get them up and continue to optimize performance for them on a go forward basis.

Matt Chesler

Thanks Scott. Thanks Dee.

Scott Klein

Alright, thanks Matt.

Operator

Your next question comes from the line of Obby Synder with JP Morgan.

Obby Synder

Thank you. I have much questions here. Number one, can you just tell us what the cash balance is today?

Dee Jones

Well, the cash balance at the end of the quarter was 3 or 4 and we drew down the 2.47 of this revolver that’s been incidental cash activity in between but that essentially will give you the magnitude of the cash that we have.

Obby Synder

Okay, so that’s first thing that cash on hand, perfect. And did I hear you say to an earlier question that you got mid teens million of cost cuts in Q3? And if so, outside of bad debt, what's really going on, on some of these other line items on the cost side? I still don’t understand why we are not seeing some flow through from what you have done in Q3? And then a couple of follow up. Thank you.

Dee Jones

Yes, with respect to the cost changes in the quarter on a quarter-over-quarter basis what I cited, two or three issues there, one being the bad debt and part of that’s the provision rate and part of that is the activities and initiatives on the collection side and the investment we are making there to ensure we are fully colleting on activities so that is causing the cost impact. Secondly, I talked about a one time charge associated with the exit of a contract with the national reseller and that net charge hit in the third quarter and…

Obby Synder

I apologize for interrupting. How much was the charge again?

Dee Jones

Well I didn't isolate the specific amount.

Obby Synder

Could you tell us the specific amount?

Dee Jones

I am not going to – I am precluded from citing the specific amount with respect to that. On the additional item in 2007 in the third quarter, we had a favorable charge of -- excuse me, favorable income in the G&A line associated with the sale of our LA printing plant in that quarter so that’s an impact on the base that we are comparing against on a quarter over quarter. So those three elements were the primary drivers that offset the expense savings that I mentioned relative to cost initiatives we put in place.

Obby Synder

Okay. Let me take this in a slightly different direction. If I look at LTM EBITDA on my math count 1.335 billion or whatever it is give or take. Are you guys allowed add backs under the credit agreement, definitionally perhaps on a pro forma basis for some cost saves that when I look at leverage on a net basis and may be you guys calculate net leverage on -- your net leverage for the banks, there is a different number?

Scott Klein

Yeah, there are some pro forma provisions within those credit facilities that allow us to make some pro forma adjustments relative to activities on that LTM number that you cited and so there are few adjustments that would be made against that.

Obby Synder

Order of magnitude, is that something like 50 million or?

Scott Klein

Yeah, that’s the general range.

Obby Synder

Okay. Do you have exposure -- I believe you do in New York City and may be someone talked about this, I apologize. Can you just tell us how that’s going? How that market may be looks to you right now? And what your exposure is?

Scott Klein

We do have directory across in all of the boroughs up there is New York. When you say that New York more than Northeast has been acting significantly different than the other markets that we are in, we do see the challenges from the economy and know the aspects in the New York area. But we also see some good opportunity with respect to the dot.com and the digital aspect of our business in New York. Manhattan as an example is about 1% of our revenue there that we reflect in a total company basis. And then we have activities in all the other barrels up there.

Obby Synder

Okay, that’s helpful. And then last question. I am not going to ask about what you hired the advisors for et cetera, but should we understand from hiring advisors that perhaps you weren’t successful in getting a low level opinion from a nationally recognized law firm or perhaps that your discussions with the IRS maybe horizon has not gone according to plan. And with that I am done. Thank you.

Scott Klein

I wouldn’t make any such assumption.

Obby Synder

Okay. Thank you.

Operator

Your next question comes from the line of Andrew Finkelstein with Barclays Capital.

Andrew Finkelstein

Hi, guys. Thanks for taking the call. I guess, if you could just go through the -- I just want to come back to the expense, the selling expense line, because that line I think was down in the second quarter, and it looked like it came up here in the third quarter. So if you could just start with that?

Dee Jones

Yeah, with respect to the selling expense line, we did see a slight uptick on a quarter over quarter basis with respect to that. Most of it was associated with some benefits through that we had in the base in 2007 that didn’t recur in this period. Other than that for the most part, we were relatively flat on the selling expense line. As we have talked before around our initiatives, one of our objectives here is to preserve one of the strongest assets of this enterprise being the sales force. And the vast majority of the initiatives and cost reduction activity that we have undertaken are really more around the support side, relatively to that sale organization, as opposed to taking out sales representatives or folks in that organization. We see that as our key aspect and a key opportunity as we look forward in driving this business activity.

Andrew Finkelstein

Okay. And then just generally on expenses, to come back to it, I think on the last conference call you did say that margins would approach I think, at least from the first quarter for the back half of the year. And I hear you that you are saying, you are still unplanned for the cost saves. Is there is a change in sort of view on margins?

Dee Jones

Yeah, as I said when I was going through the early part of the call, we are feeling more pressure on the margins side relative to the bad debt issue and the bad debt activities that we are seeing. As I noted the provision rate for the third quarter was about 8.2% for bad debt, the year-to-date level is at 6.5. And so we are seeing additional pressure on margins as we look at through the remainder of the year, associated with that activity.

Andrew Finkelstein

Okay. And do you think that the 8.8% plus charge-off rate is going higher, as you look at in your fourth quarter and can you talk about payment collections activity there?

Dee Jones

Well I would say that you know, the 8.2% in the third quarter, we haven’t seen significant change as yet, it’s a little early to tell with respect to the fourth quarter and what the economics are that we end up dealing with. So we are feeling more pressure there. It’s just a little bit too early to tell exactly where it's going to head in the fourth quarter.

Andrew Finkelstein

Okay. And then, I don’t know, if you have more color on this, because you are really hearing from sales maybe the sort of the secular shift that’s going on as times are getting tougher and budgets are cut back, are people reducing their internet spend further or they are taking it out of the print and finding more value on the interest side. Can you talk about sort of what you are seeing in the secular mix between print and digital? Thanks.

Scott Klein

You know, Andrew, what I would tell you is that we are seeing very healthy growth dollars on the print side as well as the internet side. The challenge is that’s not enough to offset today for those companies that are no longer credit worthy and that we are willing to keep in our products as we go forward. So I don’t think that there is an overall trend of people moving out of one, moving out of one, moving into the other. We are just seeing a nice growth in the print sales. We are seeing nice growth in the internet sales side. But again it's offset by that credit challenge.

Andrew Finkelstein

When you are saying growth on the print, you say so for customer that are in businesses who can pay their bills, you are saying they are increasing their spend, is that what you are saying?

Scott Klein

We have some that are increasing their spend. We have many new businesses that come into the fold every single day that are spending first time dollars in the print product. We have long time clients that are increasing their investment in the print product. All of those customers or many of those customers are also spending on the online solutions that we have to offer as well as direct mail, but again much of that plus dollar growth is offset by clients that we are taking out as a result of their credit worthiness.

Andrew Finkelstein

Okay. Thanks.

Operator

Your next question comes from the line of Joe Stein with Wells Fargo.

Joe Stein

Hi guys. I know that you were asked a question on the revolver before. I was just hoping I can get a little more clarity if you are throwing off as much cash flow as you are throwing off. What the real rational and investments banks who are committed there are theoretically in good state at this point and there is no concern about them under and limiting your liquidity in that fashion. What the rational is for drawing down your entire revolver at this point? Thanks.

Scott Klein

Yes Joe. As we said in release, we talked about the fact that we drew down for general corporate purposes. There is really not a lot more to say than what I responded to with respect to the last question around that in that maximizing liquidity and flexibility in this environment was -- in our view the prudent thing to do and that’s basically the extend of the draw down.

Joe Stein

Okay. Thanks.

Operator

Your next question comes from the line of Aaron Watts with Deutsche Bank.

Aaron Watts

Hi guys. Couple of questions. I guess the first you are kind of in a unique position where you have a perspective on both the approach from independent and also on incumbent. And I was just curious if you are hearing differing things from your sales guys, and selling the independent books versus the incumbent and is there certain sensitivity, is price more important to you, small businesses now or is it getting in the more established book and anything you are drawing and contrasting the feedback from those two segments?

Scott Klein

Yeah, I would tell you is that it’s not really about price in our business, it’s really about the cost per lead and our clients look very closely to see what it is that they are spending and what they are getting back for as it relates to real business, how do we make their phones ring and how do make the business coming to them. And it really becomes incumbent upon us to be able to demonstrate whether it’s in our incumbent markets or our expansion markets, which by the way are just a very small percentage of our business that we can bring them that value. So it’s not – we don’t have clients that are trying to nickel and dime us on pricing. They just want to make sure that when they make an investment with us that they are getting a proper ROI and for the most part they are very excited about what we deliver to them.

Aaron Watts

Okay. And any updated thoughts in terms of your commitment to those expansion markets or your non incumbent with markets?

Scott Klein

Yeah. As you know we announced on the last earnings call that we had pulled out of a number of those markets where we didn’t see any way to profitability in any reasonable time frame. And we have re-doubled to our efforts in the other expansion markets to make sure that we are successful. We have added new leadership over those markets, real seasoned individual within the company, and he is just doing a very nice job and we're feeling good about the potential for future growth in those expansion markets.

Aaron Watts

Okay. And last question from me. I think a little over 30% of your employees are union and you do have a pension and there has been a little more focus given what the markets done this year, both the debt markets and the equity markets, I think last time I checked your pension sort of split evenly between them. But any update in terms of what the funding status of your pension is and whether we need to think about that in terms of a cash need, are you going to have to put cash into that to get up to any required levels over the next year?

Scott Klein

No, we are very comfortable with our position in those programs and don’t anticipate a need to be able to use -- do not anticipate a need to use cash to sure up any of those.

Aaron Watts

Okay. Thanks for taking question.

Scott Klein

Thank you.

Operator

Thank you. Our last question comes from the line of Jack Kranefuss with Metlife.

Jack Kranefuss

It’s related to the tax share agreement. Can you give us some color as to how that's moving along? You did mention that the hiring of the Merrill and the other company was not related to this or you wouldn’t go into any color, but can you give us some color on what’s happening with that?

Scott Klein

Jack, we talked before and we don’t think it’s appropriate to comment as to where we are, where we are not with respect to that process. It is absolutely a process that is a part of our overall activities and initiatives, but I don’t think it’s appropriate to comment as to where we are, where we are not with respect to that particular process.

Jack Kranefuss

Can you just explain what the process is that you are trying to get – trying to work with?

Scott Klein

As we said, we are looking at our capital structure and our risk profile and all of the aspects and looking at alternatives and assessing all of the alternatives available to us in the marketplace. To put in place a capital structure that has allowed us to support our strategic business objectives. Part of that activity and part of that process does involve or potentially could involve the tax sharing agreement and there is aspects of that tax-sharing agreement that are out there that we have to work through and be cognizant of and we are committed to working through those elements and getting to the right answer here

Jack Kranefuss

My question was more not what your general capital structure questions, but what the tax-share agreement issues are that you are trying to resolve and how you are going about resolving them?

Scott Klein

I don’t think it’s appropriate to comment at this point relative to those sorts of activities.

Jack Kranefuss

Unfortunately, the market doesn’t agree with you because we are having some significant down drop in your bond prices and I just trying to understand what you are doing to resolve the issues and speaking in generality isn’t making the market very happy.

Scott Klein

Well unfortunately at this point we are limited in what we can say and what we can share with you and as I said earlier the appropriate time, we will share as much as we possibly can in an effort to be as transparent as we possibly can. But right now, we are reviewing all of our strategic alternatives including the issues around the tax sharing agreement as well as many others and all we can do is ask you to be patient as we work through it and we will keep in touch and what's going on as it is appropriate to do so.

Jack Kranefuss

Thanks.

Operator

Our last question comes from the line of Howard Wireman with Evergreen Investment.

Howard Wireman

Thank you. Could you – Dee, can you share with us what the covenants are on your bank lending agreement, specifically the leverage maintenance?

Dee Jones

Yeah, there is net debt test within the bank lending agreement. There is a seven times dividends stopper and seven and a quarter default covenant.

Howard Wireman

And where are you right now on a trailing 12 month basis in regards to leverage?

Dee Jones

We are in the mid 6s on the surface of the calculation, you can calculate from the financials that are out there. And then as I said earlier, there is some adjustments against that with respect to the submission to the banks under that facility that are technical calculations but just on the surface of the financials that you can calculate we are in the mid 6s at the end of the third quarter.

Howard Wireman

Are the adjustments add backs material or significant?

Dee Jones

As we talked earlier there are some pro forma elements. It’s a function of identifying the forward looking activities that were allowed to pull into those calculations. And they would move the ratio in a favorable fashion to some extent.

Howard Wireman

Now that you are fully drawn and I apologize it’s sort of a naïve question. Now that you are fully drawn, what would happen if you triggered that maintenance covenant? Are you in default, what goes on now, how does that maintenance affect you going forward?

Dee Jones

It’s no change from the way it would have been two weeks ago or a year ago or at the time the loan was originally created. It has no impact on how any of these calculations are done. The drawn revolver didn’t change the aspects of the provisions around the seven and a quarter or the seven.

Scott Klein

Howard, thank you very much for your questions and to everyone else on the call. Thank you very much for joining us this morning. We appreciate your continued support and we are working everyday to earn your trust. And with that, let me wish everyone a good day.

Operator

Thank you. That does conclude today's teleconference. As a reminder, an archived version of this call will be available on the website at idearc.com under the Investor Relations section. You may disconnect your lines at this time. Have a great day.

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Source: Idearc, Inc. Q3 2008 Earnings Call Transcript.
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