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Executives

Peter J. McDonald - Chief Executive Officer, President and Director

Samuel D. Jones - Chief Financial Officer, Executive Vice President, Principal Accounting Officer and Treasurer

Analysts

Chad Quinn

Colin Wilson Murphy

Brian Salvitti

SuperMedia (SPMD) Q4 2012 Earnings Call March 21, 2013 10:00 AM ET

Operator

Good morning, and welcome to SuperMedia's Fourth Quarter 2012 Earnings Conference Call. With me today are Peter McDonald, Chief Executive Officer; and Dee Jones, Chief Financial Officer.

Some statements made by the company today during this 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 light of the risk factors set forth in reports filed by SuperMedia with the Securities and Exchange Commission.

The company has no obligation to update any forward-looking statements. A replay of the teleconference will be available at (800) 585-8367. International callers can access the replay by calling (404) 537-3406. The replay passcode is 18576757. The replay will be available through April 4, 2013. In addition, a webcast will be available on SuperMedia's website in the Investor Relations section at www.supermedia.com.

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 Peter McDonald. Peter?

Peter J. McDonald

Thank you, Paula, and good morning, everyone. Welcome to our 2012 Year-End and Fourth Quarter Earnings Call. I will share some of my thoughts and then Dee will review the financials in detail, and we will take your questions.

2012 was a productive year as we continued our work to turn around and transform this business. We reduced expenses and improved our margins. We further reduced our debt obligations and strengthened our balance sheet. We added social and mobile services to expand the suite of digital marketing solutions we offer local businesses.

We trained all of our marketing consultants with a new approach to build relationships with customers across digital and print solutions, and equipped them with the new technology and applications to enhance their effectiveness and productivity.

They now walk into local businesses with confidence, carrying an iPad and special media evaluation applications, not a print yellow page directory and a price list.

What we did not do as effectively as we need to is improve the top line of our business. We are battling strong headwinds as our print revenues erode. While print revenue retention held steady at approximately 70% to 80%, we are not yet achieving customer growth and digital revenue growth necessary to more significantly offset print revenue attrition.

However, our transfer digital sales and customer loss both improved as we move through the year. And the experience that our people have gained with our improved digital solutions and go-to-market approach should help continue to move us in the right direction.

Our mission is to be the trusted local marketing partner for small- and medium-sized businesses. Millions of local businesses remain confused about the ever-increasing number of options they have across local, social and mobile media. And we have the solutions and skills to help simplify and manage these options for them.

There are now thousands of businesses for whom SuperMedia is providing and managing their search engine marketing; their social media, like Facebook; and their listings and reputations across dozens of major sites like Google, Yahoo!, Bing, Yelp, YP.com, Superpages and DexKnows.com. We provide tens of thousands of websites and mobile websites, and operate award-winning mobile local search applications with unique easy-to-use comprehensive information about local businesses, an integrated connection to movie reservations, gas prices, emergency services and popular applications like Foursquare, OpenTable and GrubHub.

We deliver measurable results for our clients, and they have full online access to the results to see the performance SuperMedia provides to them. Businesses can see how many calls and leads we deliver for them each day, how effectively invest their media budgets and how accurately we promote their business information through different media. We employ unique patented technology to evaluate thousands of local search sites across the Internet and place each of our clients where they will receive the most effective conversion rates at the best available cost in real time, 24 hours a day.

We believe the key to sustainable profitable revenue stream is, first, in the relationships we build with our customers, and then the results that we get for them. Our intense focus to proactively manage our customers' marketing programs has given our marketing consultants confidence, as well as our customers.

We monitor daily performance and make adjustments to help clients get the results they expect.

We learned in 2012 that when we have a relationship with a customer that includes print and digital media solutions, we see better revenue growth and better retention.

In today's world, every business requires digital marketing presence. For many business categories, print media continues to deliver great results and great value. We believe that we now have the right opportunity to help hundreds of thousands of print clients, add digital solutions to capture more leads and customers to grow their businesses.

From being in the field on many calls, I have seen that local business owners are confused. They tell me they don't have the time and don't want to learn or keep up with search optimization, find key word -- key AdWords, updating Facebook or monitoring their reputation online. We can help these businesses and we are doing it daily.

The other transformational area for SuperMedia in 2012 was the agreement we reached to merge with Dex One. We remain very excited about the benefits of this combination. As you know, there are significant financial benefits of the transaction. We will extend the maturities of our debt to the end of 2016, providing additional time to pay down our debt, and we realized significant cost synergies totaling hundreds of millions of dollars, as well as apply our combined tax assets over the next few years to help us reduce the debt more rapidly than either company could have alone.

We are well into integration and on schedule to have plans in place to start executing on an integrated basis beginning day 1 post close. We believe our plans will enable us to meet the new company's target for synergies, EBITDA and delivering the cash to continue to pay down our debt. We will start with revenue of over $2.5 billion, with digital revenues approaching $500 million, with over 650,000 customers and 3,100 marketing consultants and managers.

We already can see that combining the best talent, processes, business practices and technology from the 2 companies will help us move faster and better to execute on our strategy and accomplish our transformation.

In late February, we finished the series of 7 events in 7 cities to meet with all SuperMedia employees across the country. We reviewed 2012 accomplishments, recognized our best performance and described how all these pieces are in place for us to succeed as we combine with Dex One in being the trusted marketing partner to help local businesses grow.

I was impressed by the excitement our employees have about the future. Many said they were proud of what they learned over the past year, our digital solutions and of the results we are delivering for our customers. We know that if we don't get results for customers, we won't keep them. Our unique search management and bidding technology platform, we call it Merchant Platform, which was awarded a U.S. patent last summer, enables us to have quality and efficiency advantages in generating leads for our advertisers across our network. We believe that combining Merchant Platform's capabilities with some of the unique automation and algorithms from the Dex Net technology platform will take our merged company even stronger in delivering results for our clients and improving our operating cost ratios.

Merger approvals can become long processes, and ours has been no exception. As you can imagine, we are eager to close our merger and bring together the people from both companies to leverage best practices.

We are pleased that we received shareholder approval last week. And as we announced on Monday, we have filed for our prepackaged reorganization plans, which we expect the court to approve to keep us on schedule to close the merger before the end of June. With these milestones accomplished on Tuesday, we moved into the third phase of our merger integration planning. We also named 50 people who will comprise the initial leadership team for Dex Media. There is a balanced blend of leaders from both companies, which will expedite integration.

As someone who has spent 12 years working for SuperMedia predecessor company and over 16 years working at Dex One's predecessor company, in the past 2 years at SuperMedia, I believe that Dex Media will have the strongest group of executives and strongest senior leadership team in our industry. Their knowledge, experience and accomplishment at both companies, as well as at other organizations where they have filled leadership roles, will give us a competitive advantage in which we can all have confidence.

They will help guide our experienced outstanding local marketing and media experts from coast-to-coast to create the new Dex Media. We look forward to the rest of 2013, of the year of integration, turnaround and transformation, and we can't wait.

In closing, in addition to all the SuperMedia employees, I would like to thank a group of people who set the vision for our company before I arrived and have been great advisors and supporters throughout our journey, the SuperMedia board of directors. They put the concept of our merger together and they have participated in countless hours of meetings and phone calls at all hours of day and night to keep us moving closer and closer to our goal. We could not have gotten there without them. I want to express particular appreciation to our Board Chairman, Doug Wheat. His day-to-day advice, leadership and unfailing graciousness have made all the difference. And now to Dee.

Samuel D. Jones

Thank you, Peter, and good morning, everyone. As Peter mentioned, 2012 was a year of transformation, which will continue in 2013 with completion of the merger and continued execution of our strategy in helping local businesses with their marketing needs. The merger with Dex One will bring together the best of both companies to create a stronger, more viable business. Currently, we are reviewing all processes, including selling, operations and all support roles. This evaluation will result in implementing best practices across all aspects of the new company.

Before I get into specific 2012 results, I would like to mention that the December 6, the lender presentation, which was provided publicly, included forward-looking financials and related metrics, both for the standalone and combined entities. We are not looking to update that information at the present time.

Looking at 2012 performance relative to that plan of record, our overall results were in-line with that disclosure. I believe that held true for Dex One as well. With respect to earnings, we exceeded EBITDA by approximately $12 million, and Dex One reported $1 million of EBITDA favorability relative to that plan.

As we look forward, while individual line items may shift or change, we remain committed to achieving the earnings levels reflected in the plan of record. Upon the completion of the combination, we will obviously evaluate the various aspects of our financial forecast, and in conjunction with that, establish an initial policy with respect to future guidance.

Now turning back to 2012 financial performance. Q4 2012 reflected operating revenue of $312 million, an 18.8% decline for the quarter compared to the same period last year. Full year 2012 reported operating revenue was $1.354 billion, a 17.5% decline, compared to 2011.

With respect to ad sales, utilizing our traditional reporting methodology, a combination of published print and amortized digital, ad sales for the fourth quarter declined 19.1% and full year declined 18.9% compared to 15.9% and 16.5% for the same periods last year. This is reflective of continued negative trends in print and the transformation to our digital advertising solutions.

We are pleased with the success we've seen in the last few quarters with our new digital offerings and solutions in the marketplace. Not only are we transforming from print-centric to multi-platform, we are also transitioning the digital components of these overall solutions. We've seen increasing success with our new solutions in the marketplace, driven by solid underlying value proposition to the advertiser. We expect to see continued improvement in this area as we continue to evolve and refine our digital solutions.

While we are still utilizing our traditional metrics and reporting methodologies for year-end 2012 reporting, we recognized the increased focus on the components of our total revenue, both print and digital, as well as the timing implications in certain aspects of our methodologies.

As we work through the integration process with Dex One, from a financial reporting perspective, we expect to identify any differences in metrics reported calculations and methodologies, and develop a blended set of metrics and policies, so as to make our ongoing reporting as meaningful and clear as possible in the new entity. These adjustments in policy will be rolled out after completion of the combination.

Now, with respect to EBITDA. Fourth quarter 2012 adjusted EBITDA was $117 million, a 15.8% decline compared to the same period last year. Adjusted EBITDA margin was 37.5%, a 130 basis point improvement compared to 36.2% in the same period last year. 2012 full year adjusted EBITDA was $546 million, a 9.3% decline compared to last year. Adjusted EBITDA margin was 40.3%, a 360 basis point improvement compared to last year. The margin improvement trend is a result of continued diligence in lowering costs, which has allowed us to become more efficient in all areas of the business.

One item to note. Reflected in these results, in the fourth quarter, the company recorded a charge of approximately $3.5 million related to our Los Alamitos building -- land and building held for sale. The adjustment is relative to the fair value and estimated cost to sell the property, and impacted the EBITDA and margins for both the quarter and the full year.

Looking at full year 2012 adjusted expenses, a 22.3% decline compared to full year 2011 or a reduction of $232 million. Selling expense declined by 20.7%, cost of sales declined by 20.3%, and G&A expenses declined by 29.9%.

Our expense reductions are attributable to lower commissions and sales costs, lower volumes contributing to reductions in our print and distribution costs, headcount reduction and significant improvement in bad debt in comparison to last year. The bad debt expense provision rate for the quarter was 1.3% and 1.4% for full year 2012.

In the 2012 full year period, we reduced our total debt obligation to $1.442 billion from $1.745 billion at 12/31/11. The total principal reduction of $303 million consisted of $187 million repaid at par and $116 million in below par repurchases. Of the $187 million, $33 million was paid in the fourth quarter. Over the last 3 years, we have retired $1.3 billion in total debt.

2012 full year cash flow was $275 million, consisting of cash from operations of $288 million, less capital expenditures of $13 million. In the fourth quarter, free cash flow was $50 million. We made payments towards debt obligations of $33 million in the quarter and we incurred $6 million of merger transaction-related costs in the period, for a total of $8 million for full year 2012. Cash on hand at the end of 2012 was $105 million. And that concludes the 2012 financial results overview.

Before we go into the Q&A session, I would like to mention that the NASDAQ delisting notice received by the company is normal course of action when a reorganization of bankruptcy takes place. We intend to continue trading on the Exchange while NASDAQ evaluates the proposed combination and do not foresee a disruption to the company's trading.

Now, we're ready to take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] We have a question from the line of Chad Quinn of Bennett Management.

Chad Quinn

I was just wondering a couple of items. You mentioned the combined customer number, what's the current customer count at SuperMedia?

Samuel D. Jones

I think the 10-K is going to reflect that, and it's 330,000, I believe.

Chad Quinn

Okay, great. And as far as bundled sales go, can you give us -- can you tell us what percentage of your revenue is currently derived from bundled sales?

Samuel D. Jones

As we've talked about before, what we traditionally define as bundles, is more digital, primary digital. Only, there's a small component print in those bundles that we've rolled out over the course of the last year. I don't have the specific revenue number attached to that. But I would say that in addition to those bundles, we also have multi-product sales where we sell digital as well as print to the client, albeit not on a bundled basis, and we're not necessarily discounting print and digital on a combined basis. But multi-product sales, we probably got 25% to 30% of our clients with a multi-product relationship. We see that as a meaningful opportunity as we go forward with the combination as we take best practices. We believe we'll have opportunity to increase that penetration, increase the penetration with respect to the digital component of the business and build a stronger relationship with those clients as we roll out the best practices in combination of solutions to the advertisers. But with respect to multi-product solutions, we probably got about 25% to 30% of our advertisers in a multi-product relationship.

Chad Quinn

Great. And one final question, Dee, what were cash taxes for the year and for the quarter?

Samuel D. Jones

Full year was $90 million.

Operator

Your next question comes from Colin Wilson Murphy of Bowery.

Colin Wilson Murphy

Could you remind us quickly what the customer count was at the end of 2011?

Samuel D. Jones

I don't have that on the top of my head, Tom. It should be -- it would probably be reflected in the K, but I think we saw about a 15% decline in clients on the period.

Colin Wilson Murphy

Okay. And what were the planned amendments to the post-employment benefit package that warranted a $161 million pretax gain?

Samuel D. Jones

Back in June or in the second quarter, the company took action to eliminate the post-employment benefits, primarily around medical benefits, but there were other aspects to that, some insurance and other components of that with respect to retirees. At that point in time, we had a total liability of approximately $300 million or so. And with the adjustments we made to various groups in our retiree -- various retiree groups, we reduced that liability into the $30 million to $40 million range, as I recall. There was public disclosures around all of those actions at that point in time, but it was a second quarter event, if you want to look back as to more specifics in that regard, and then the calculation of that as it flows to the GAAP financials resulted in that gain.

Colin Wilson Murphy

Okay, that's helpful. So should we see that, an additional gain in Q1?

Samuel D. Jones

Yes, you'll see the ongoing amortization of that basic gain. The true -- the benefit of that to the enterprise is the ongoing, the elimination of that benefit -- of the benefit cost associated with that on an ongoing basis, as well as the cash flow -- cash outflows associated with the elimination of that liability, and that'll continue as we move over time.

Operator

Your next question comes from Brian Salvitti of Silvermine Capital.

Brian Salvitti

Of the 17.5% decline for the year, can you guys provide a breakout just what the print decline was and just digital as well?

Samuel D. Jones

Yes. As policies has been in the past, and we're evaluating this relative to the combination, but as our policies has been in the past, we do not segregate between print and digital in those revenue lines. However, I would point you to the plan of record that was posted and made public. And I think it was December 6 was the latest posting with respect to that plan of record, whereby we did break out what our expectation was for 2012, as well as future years in regard to those revenue components. And I would say that 2012 performance was in line with those results. Obviously, not exactly across all the line items, but we were in line with those results as I mentioned in the prepared remarks. I believe that held true for Dex as well. So as we start, and as Peter mentioned, the digital revenues as we start this year, this combination are approaching $500 million or so, with print of slightly over $2.2 million on a combined basis. And again, as we look forward, we'll be adjusting some of the policies around this. But for closing out the year right now, we're maintaining the policy of not specifically breaking that out. But I would point you to the plan of record as an indication of where the periods for both companies came in.

Brian Salvitti

Okay, great. But you would say is -- that it was largely in line with the plan of record?

Samuel D. Jones

Yes, it's in line with the plan of record.

Operator

[Operator Instructions] At this time, there are no further questions. I would now like to turn the floor back over to management for any closing remark.

Peter J. McDonald

Thanks, everybody, for joining us. We look forward to further communication as we move through the remaining steps in this merger. We're excited about getting through with the combination and getting on with driving the business forward, and we appreciate your time and attention this morning. Thank you very much.

Operator

Thank you, ladies and gentlemen. That concludes today's conference. You may now disconnect.

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