Executives
Lisa Olson – Senior Vice President
Bill Fairfield – President, Chief Executive Officer
Thomas Oberdorf – Chief Financial Officer
Analysts
Carter Malloy – Stephens, Inc.
Amy Norfles – Pilot Advisors
Robert Kirkpatrick – Cardinal Capital
Abe Patton – Citadel
infoGROUP, Inc. (IUSA) Q4 2009 Earnings Call February 9, 2010 8:30 AM ET
Operator
Welcome to today’s infoGROUP fourth quarter and year end conference call. (Operator Instructions) At this time I would like to turn the call over to Miss Lisa Olson.
Lisa Olson
Good morning. Thank you for taking the time to join us. As you know, I manage the Investor Relations program for infoGROUP. Joining me this morning is Bill Fairfield, our Chief Executive Officer and Tom Oberdorf, our 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 facts that could cause actual results to differ materially from those in the forward-looking statements. We also ask you to refer to the documents the company files from time to time with the Securities and Exchange Commission. These documents contain and identify factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.
In addition to disclosing results determined in accordance with generally accepted accounting principals, or GAAP, infoGROUP also discloses non-GAAP financial measures including EBITDA, adjusted EBITDA, adjusted earnings per share, non-GAAP selling, general and administrative expense and non-GAAP operating income which exclude the effects of the restructuring, non recurring and non cash charges outlined in the press release.
With that being said, let’s now get starting on what you all called in for, our fourth quarter 2009 and year end earnings results. We will have a Q&A session at the conclusion of the remarks. It is now my pleasure to introduce our CEO, Bill Fairfield.
Bill Fairfield
Thank you Lisa and good morning everyone. I’m pleased to be able to give you a full year’s report and highlight the solid progress that we’ve made over the past several quarters.
Many of you have been with us for some time and are seeing the impact that we’ve made since we began this journey together in mid 2008. While it hasn’t been particularly easy, especially with the unforeseen economic downturn and the curve ball that we’ve been thrown, we have met our promises and we’re delivering on what we said we would do.
Let me highlight some of those deliverables we talked to you about so many months ago that we’ve delivered on. Communications and transparency; we indicated that we were going to implement new corporate governance policy per the settlement agreement and basically create a situation where we move this company from being a poster child for poor governance to being a poster child for good governance.
We committed to improving communications with shareholders and the investment community and I think we’ve accomplished that in grand fashion.
Secondly, we said we were going to improve our financial foundation. As you know, this was a loose confederation of 31 separate business units which created a great deal of inefficiencies. But under that improvement in financial foundation we divested the non core business of Macro. We reduced our debt level by approximately $120 million and we rationalized and we will continue to rationalize our infrastructure as we move forward.
We also said that we were going to concentrate on accelerating profitable organic growth. This is a company whose growth has been fueled by acquisitions and we needed to create an environment of organic growth, and I think we’re beginning to get traction on that.
We’re leveraging our world leading proprietary data. We’re generating new revenue from new products, and we’ve dramatically moved the company into the era of integrated digital activity.
While 2009 was challenging, we felt we made great progress in very uncertain times. Our employees found ways to look at how they had done business in the past and to rethink how better to serve our clients. I am confident that momentum will continue into 2010.
Let’s now review the numbers that support that recap, and for that I’ll turn it over to Tom Oberdorf, our Chief Financial Officer.
Tom Oberdorf
Thank you Bill. Let me start with the fourth quarter financial results and then I’ll move to the full year. After my comments, Bill will provide some additional commentary and then we’ll take questions.
The first thing I want to discuss relates to the fourth quarter non cash charge of $7.7 million, the impairment of goodwill in one of our reporting units Research Group. The goodwill impairment charge was a result of our annual goodwill testing. The impairment had a negative impact on EPS of about $0.13 for the quarter and the fiscal year results. The remaining goodwill balance for the Research Group is $20.8 million. As a reminder, the non cash expense does not affect any of our bank covenants.
In the fourth quarter, we saw modest sequential growth in revenue representing stability in our top line. In addition, our cost savings were able to largely offset the economic impact on revenue. As a result, our adjusted EBITDA margins for the quarter and for the full year were equal to prior year.
During the fourth quarter 2009, infoGROUP had revenue of $125.8 million compared to $141.9 million for the same period in 2008 representing a decline of 11%. On a country neutral basis, the company’s revenues declined 12%. Revenue increased by $800,000 versus Q3 of 2009 an increase of approximately 1%.
Revenue for the Data Group in the fourth quarter was $62.4 million as compared to $71.6 million for the same period last year, a decline of 13%.
Revenue for the Services Group in the fourth quarter was $38.7 million compared to $41.9 million for the same period last year, a decrease of 8%. Revenues increased by $1.8 million versus Q3 of 2009, an increase of 5%.
Revenue for the Market Research Group in the fourth quarter was $24.7 million as compared to $28.4 million for the same period last year, a decline of 13%. On a currency neutral basis, the decline was 17%. Revenue increased by $700,000 versus Q3 of 2009, an increase of 3%.
InfoGROUP’s operating income for the fourth quarter of 2009 was $7.5 million compared to an operating income of $9.9 million in the fourth quarter of 2008. During the fourth quarter of 2009, the company recorded $10.4 million in restructuring, non recurring, non cash charges primarily for the impairment and write down of assets including an impairment of goodwill of $7.7 million, severance costs, facility closures and charges related to the SEC investigation.
InfoGROUP had a net loss from continuing operations for the fourth quarter of $1.4 million or a loss per share from continuing operations of $0.02 as compared to net income from continuing operations of $1.3 million or earnings per share from continuing operations of $0.02 in 2008.
Non-GAAP adjusted earnings per share from continuing operations for the fourth quarter of 2009 was $0.14 compared to $0.17 for the fourth quarter of 2008.
In the fourth quarter of 2009, EBITDA was $15.6 million compared to $16.6 million in 2008. Adjusted EBITDA which eliminates certain restructuring, non recurring, non cash charges was $26 million in 2009 compared to $30.5 million in 2008. The reduction from last year relates to lower revenue, mostly offset by cost savings which puts us down by $1 million, a reduction in bonus accrual of about $1 million and investments made primarily in Yes Mail and the Research Group for around $1 million each.
The $10.4 million of restructuring non recurring, non cash charges were distributed within the segments as follows: $1.4 million in Corporate activities, $.5 million in the Data Group, $8.4 million in the Market Research Group and the remaining $100,000 in the Services Group.
Let me give you a little bit more detail on the profitability by segment. Operating income for the Data Group for the fourth quarter 2009 was $16.6 million or 27% compared to $13.7 million or 19% last year.
Operating income for the Services Group was $9.7 million or 25% of revenue compared to $8.2 million or 20% last year. In the fourth quarter, the Research Group had an operating loss of $7.7 million compared to an operating income of $3.5 million for the fourth quarter of 2008. Again, this loss relates to the goodwill impairment.
During the fourth quarter, we recorded a loss from discontinued operations of $1 million related to an adjustment for state income taxes for Macro International which was sold in the first quarter.
For the fiscal year, revenue was $499.9 million compared to $588.7 million in 2008 representing a decline of 15%. On a currency neutral basis, revenues declined 13%.
Revenue for the Data Group for fiscal 2009 was $255.8 million as compared to $309.5 million for 2008, a decline of 17%. Revenue for the Services Group for fiscal 2009 was $146.2 million compared to $163.3 million for 2008, a decrease of 10%. Revenue for the Market Research Group for fiscal 2009 was $97.9 million compared to $115.9 million for 2008, a decline of 16% and on a currency neutral basis, a decline of 11%.
InfoGROUP’s operating income for fiscal year 2009 was $20.5 million compared to an operating income of $17 million in 2008. During the fiscal year 2009 the company recorded $41.6 million in restructuring, non recurring and non cash charges primarily for the impairment and write down of assets, severance costs, facilities closures and charges related to the SEC investigation.
InfoGROUP’s net income from continuing operations for the fiscal year was $1.4 million or earnings per share from continuing operations of $0.02 as compared to a net loss from continuing operations of $1.4 million or a loss per share from continuing operations of $0.03 in 2008.
Non-GAAP adjusted earnings per share from continuing operations for fiscal 2009 was $0.51 compared to $0.56 in 2008.
For the fiscal year, EBITDA was $50.3 million compared to $51.3 million in 2008, a decrease of $1 million. Adjusted EBITDA was $91.8 million in 2009 compared to $105.7 million in 2008.
In total, the company recorded $41.6 million in costs during the year for restructuring, non recurring and non cash charges. These charges were distributed within the business segments as follows: $15.5 million within Corporate activities, $11.6 million with Data Group, $11.5 million within Market Research Group and the remaining $3 million was in the Service Group.
Fiscal year segment results are as follows: operating income for the Data Group for the fiscal year was $52.5 million or 21% of revenue compared to $65.2 million or 21% last year. Operating income for the Services Group for the fiscal year 2009 was $29 million or 20% of revenue compared to $29.6 million or 18% last year. The Research Group had an operating loss of $8.5 million for the fiscal year compared to an operating income of $4.5 million in 2008.
Total company capital expenditures for the fourth quarter was $6.4 million compared to $4.6 million for the fourth quarter of 2008. This results in full year capital expenditures of $18.6 million, a decrease of $9.4 million from $28 million last year.
Total company operating cash flow from continuing operations was $11.8 million for the fourth quarter and $41.2 million for the year ended December 31, 2009.
I’d like to make a couple of comments before I turn it over to Bill. The first is our revenue for the fourth quarter reflects an increase over the third quarter by $800,000. This is the second quarter in a row we’ve reported sequential revenue growth. Bill will discuss in further detail how we built a foundation in 2009 for organic growth in 2010 through new product introduction, expanding the small business penetration and increasing our enterprise sales.
Second, the cost reduction initiatives in 2009 have offset most of our top line pressure due to the economic downturn. During 2009 we achieved approximately $38 million worth of annualized savings which represents $27 million of cost reductions realized in 2009.
Now remember, these cost savings are in addition to the $16 million of annualized savings achieved in 2008. These cost savings continue to drive our SG&A run rate down.
Non-GAAP SG&A for the fourth quarter of 2009 was $53.1 million after eliminating one time costs compared to $62.8 million last year, resulting in a reduction of $9.7 million quarter over quarter.
Non-GAAP SG&A excluding one time costs was $223 million for 2009 compared to $282 million for 2008 a decline of $59 million or 21%.
We continue to focus on lowering our debt. During the quarter we reduced debt by an additional $5.4 million. At 2008 year end we had $300.6 million in debt and our leverage ratio, a key bank covenant was 2.51. With the proceeds from the sale of Macro and our cost savings initiatives, our debt now stands at $181.7 million and our leverage ratio at 1.98.
Financial discipline has been strengthened within the company and cost efficiencies have become a way of life here at infoGROUP. Already, in the first 40 days of 2010 we’ve eliminated a little over $7 million of annualized costs and we expect to achieve continued cost savings throughout the year.
I’ll now turn it back over to Bill Fairfield.
Bill Fairfield
Thanks Tom. Following a few remarks, we’ll be ready for Q&A but let me just share with you some thoughts on the business and where we think we’re going in 2010.
While 2009 was a challenging year, we continue to see improvements in our core operations. We had sequential quarterly revenue growth for the second quarter in a row and we continue to see positive cash flow. I’m also extremely pleased with the investments we’ve made in 2009 that position for organic growth going forward.
In a nutshell, I’m more bullish about the future than I’ve ever been before and here’s why. While I expect the recovery to be sluggish, I do believe marketing budgets have hit bottom. I think they’ve stabilized and there’s some evidence of improved spend. Keep in mind as you’ve all heard before, that on average, marketing expenditures throughout the business world were down 25% and that’s small business as well as enterprise business this past year.
Like I said, while we don’t expect them to roaring back or perhaps ever reach the level they were at, we do see some signs of life there. More importantly for us is the fact that the nature of that spend is changing.
CMO’s are demanding more efficiency in their spend. They’re being much more targeted and precise in their campaigns and that places a premium on the quality of data. The elements of that quality include the breadth of the records, the verification of that data, the currency of that data and no one does that better than infoGROUP, and when you combine that with our analytics capability to design and evaluate campaigns, we’re finding it provides a very valuable solution to our clients.
The marketing spend is moving more and more to multi-channel environments. New medial like SMS and social are combining with email to be combined with traditional marketing methods to give a multi-channel approach to marketing campaigns and infoGROUP is leader in providing multi-channel capability in all forms of media.
Internally we’ve invested in our sales and marketing capabilities in order to bring a highly focused solutions oriented deliverable to our clients. Among those changes have been rationalization of our business units into a few. I mentioned earlier this was a loose confederation of 31 business units and we’ve gone to great lengths to start to rationalize that.
We’ve organized around clients, not products. Our various business units addressing small businesses are now consolidated under one leadership and we believe the opportunities for growth in this small business group are significant and really twofold.
First of all, as we analyzed that marketplace we feel that we have a penetration rate in terms of the available market of about 3%. We feel there is significant growth opportunities to capture a bigger share of that market, and equally importantly, we think that from capturing a greater percent of clients’ marketing spend by packaging our digital and social products and services with our new data products.
It’s interesting that something on the order of 32% of small businesses use social media for marketing and if you look at businesses that have been formed less than a year, over 50% of them use social media.
The average small business spends something on the order of $700 a month on search engine marketing. These are all ripe areas for us to expand into. We have products being introduced this year to address those very spends on the part of small business.
We’ve been trying to create the same kind of situation in mid markets and large enterprise where we’re combining those business units that deal with those particular kinds of clients. Again, we believe that by presenting our full range of capabilities to our clients that we have a significant opportunity to capture an increasing percentage of our customers’ marketing spend.
We’ve invested in our client facing resources including sales professional and customer service support and we’ve invested in the processes and the tools to make them more effective.
On the product development size, we’ve embraced as a key driver of our growth the introduction of new products. You’ll recall the last time we talked we discussed in some detail a number of our key growth initiatives but let me just highlight those.
We’re repurposing our leading data assets to create more internal value add as it relates to many kinds of marketing channels including search engine marketing services. New and improved sales solutions and marketing campaign products are being introduced as we speak.
We’ve got a strong positioning in the utilization of social media for marketing. We’ve created an industry standard data platform for user generated content management through our Express update product, and we’re the leader in data as a service through our Info Connect product. In a nutshell, we’re positioning ourselves where our clients and their customers what to be.
On a different note, we’re also reenergizing our efforts in our international opportunities. We haven’t broken it out but international represents about 13% of our revenue and we think we’ve got significant opportunities to expand our foothold in those countries in which we operate.
And finally, we’re creating strategic alliances with leading partners to extend our reach and leverage our resources. We’ve spoken in the past about our strategic alliance with Experian. We’ve also formed; I think you’ll find this interesting, a strategic alliance with a company called [Xenga] who is the leader in social software services and analytics for business.
So in closing, let me say how pleased I am and how hard our employees have worked to move the company in the right direction. We’re taking the appropriate costs out of the business. We’re continuing to reduce debt, and we’re investing in new initiatives and aligning the business to be more customer focused, all to drive organic growth.
I like to think we’re doing exactly what we told you we were going to do when we had our first earnings call together just over a year ago. So in closing as I said at the beginning of the call, I’m more bullish about our future than ever. As a management organization we are pleased but we are neither finished nor satisfied.
So let’s begin the question and answer.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Carter Malloy – Stephens, Inc.
Carter Malloy – Stephens, Inc.
First, just looking out on the 2010 you said that you are expecting organic growth in 2010?
Bill Fairfield
We are.
Carter Malloy – Stephens, Inc.
Can you quantify that? Are we talking low single digits or should we stay away from that?
Bill Fairfield
I think we can talk in generic terms. I think low single digits is appropriate. Like I said, I don’t see the marketing spend in either small business or large business roaring back, but we do see signs of it increasing modestly. We think people feel like they’ve hit bottom. We think that they’re more comfortable in knowing what the can spend and where they can spend it. So I think low single digits for the industry for us is probably appropriate.
Carter Malloy – Stephens, Inc.
Tom you mentioned $7 million in cost saves already captured this year. Were those in your $38 million number or is that additional new?
Thomas Oberdorf
That’s new to 2010. That is not in the $38 million. The $38 million was annualized cost savings that we executed on within 2009. The $7 million I mentioned is new executions of cost savings in 2010.
Carter Malloy – Stephens, Inc.
Is that coming out of SG&A or data base?
Thomas Oberdorf
Primarily SG&A.
Carter Malloy – Stephens, Inc.
I’m just trying to get my model straight with you on 4Q. I was off on amort and taxes. You said there was just $1 million in one time taxes there and your tax rate should return back to your historical rate.
Thomas Oberdorf
The tax rate was high by about $1.8 million. The biggest two pieces of that were as you noticed in the fourth quarter we filed a couple of 10-KA’s, and that related to the former CEO’s compensation. As a result of that compensation being higher, there was higher tax expense because typically that executive would have incurred more than $1 million worth of salary expense and over that it’s not tax deductible.
So there’s a one time hit for that. And then there was a 2008 state income tax. As you do your returns and you finalize the rates, the rates were higher than we had accrued for.
Carter Malloy – Stephens, Inc.
What should we be looking for in 2010 for a tax rate?
Thomas Oberdorf
I think we’ve said before that we’re at about a 40% rate and that’s what we expect. I do think that this quarter you’re seeing some anomalies. When you look at the particular effective rate, of course its way out of whack because of the goodwill impairment has no tax benefit.
Carter Malloy – Stephens, Inc.
On the D&A side is an $8 million run rate fair there?
Thomas Oberdorf
No, it is not. Again kind of scrubbing through our capital expenditures and we looked through everything, there was some acceleration of depreciation of about $800,000 to $900,000 so you would take that down looking at a run rate basis.
Let me give you one example. I can only think of one example per se, in our London office we had to get out of our building. The government had requested that we move for whatever reason and so we got out of the building and we accelerated depreciation for the period for the remaining life of those leasehold assets. So it was really more of a one time event. There are three of those items.
I do want to caution you, again not giving guidance on anything, but we will have probably some accelerated amortization in intangibles for a couple of quarters as we look at some of writing of some intangibles, but they’re modest. So you may use the $8 million rate for the next three quarters and then get it down to where you see the third quarter rate is, the third quarter of 2009.
Carter Malloy – Stephens, Inc.
On 1Q, it’s tough for me to decipher seasonality in your model because there’s so much noise in previous years, but is typical seasonality for 1Q to be flat with 4Q or should that actually tick down a little bit just because of seasonality.
Carter Malloy – Stephens, Inc.
Seasonality is hard for us to predict too because I think there’s been so much marketing spend in this company in prior years, so much in the first quarter so typically I think the second quarter is typically weak for us. And I’m not saying weak, weak, but it’s a little weaker than the other ones.
Within our segments we certainly have segments that are stronger and weaker than others, in the Service segment, certainly one of our stronger segments. But if you look at 2009, the revenues were relatively flat Q1, Q3, Q4 with Q2 being our softer quarter which was a little bit lower.
One other thing that you mentioned about in your modeling, make sure you pay attention to the discontinued ops line because I think versus your projection that was a new item in the fourth quarter which is a one time cost.
Carter Malloy – Stephens, Inc.
On seasonality, I guess we’re not going to have a boost from Super Bowl ads this year?
Bill Fairfield
I didn’t see it. I don’t think anybody is going to get a boost.
Operator
Your next question comes from Amy Norfles – Pilot Advisors.
Amy Norfles – Pilot Advisors
Can you give us an update on the sales process of the company? A while back there were some press releases and we haven’t heard anything.
Bill Fairfield
As you might expect we’re limited in what we can say. We’ve publicly announced that the Board has been evaluating the strategic alternatives for the company. That process continues. I can’t give you any clarity in terms of where we are in the process of what the issues are, but as I think Roger our Chairman said, we’re evaluating all alternatives and we’re going to do what’s best for the shareholders.
Amy Norfles – Pilot Advisors
Is there any time that we might hear an update or are you going to forget about the process and we’re just going run the business ourselves?
Bill Fairfield
The process continues. I can’t give you any sense for when we might give a public update. Management is focused on running the business. The evaluation of strategic alternatives is really being conducted by the M&A committee of the Board.
Amy Norfles – Pilot Advisors
Can you tell us where some of the organic growth is going to come from, whether it be customers or segments or just give us a little bit more specifics. You seem to be a bit optimistic and just give us something to hold onto.
Bill Fairfield
Let me talk about the root of some of my optimism. Again you have to sort of go back in time and realize how the company was organized for better or worse, and we had a lot of individual business units who in many respects were competing for the same customer with largely the same products.
And so whether it was a small business or a large business, we ended up in a situation where we might be enjoying business in terms of selling to that customer, but we were only getting one piece of their marketing spend. We might be providing the data for instance, but we weren’t doing the data processing and we weren’t providing the marketing campaign tools, and we weren’t providing the sales tools.
And what we’ve discovered over the course of the last year and a half, the company infoGROUP has great products and solutions across the full breadth of the marketing spend, but we were only getting a small piece of it.
So we think there is a great opportunity with our existing customers to capture an ever increasing amount of their marketing spend. We think that’s going to be a most significant driver.
The other thing I would say is I think we’ve had a number of good products and solutions that were largely relegated to one particular business unit, and we’ve opened that up to the breadth of our organization so we’re getting a lot more feet on the street representing our full product line.
So I think a lot is going to come from our penetration of existing accounts. I mentioned earlier that we look at the small business area where we think that’s our birthright to be real honest with you. That’s where this company was founded. That’s where we started, and yet when we look at the relevant market, we think we’re capturing perhaps 3% of the potential.
Well if we do nothing more than increase that to 4% on a percentage basis, that’s a dramatic increase. We have to execute on all of this, but we think we’re starting to focus on organic growth. We think the organization is starting to focus on organic growth as opposed to growth by acquisition and we think that’s going to power us into the future.
Amy Norfles – Pilot Advisors
Can you expand on the Experian and [Xenga] partnership or alliance and what that means to the revenue stream?
Bill Fairfield
I can’t give you any specifics. As you know, in our arrangement with Experian we’ve basically acquired their business data base and in turn we’re providing our combined data base to some of their existing clients. In turn we have some relationships that allow us to joint sell their consumer credit file and we’re looking at some international opportunities with them.
We think it’s a relationship that has a lot of legs. Early indications are that it is in fact creating revenue, but I don’t think it’s appropriate for me to give you any specifics at this stage of the game.
The [Xenga] relationship is brand new. We do have a joint customer that I’m not at liberty to disclose. It’s a significant contract in which we and [Xenga] are creating a community with that organization that we think again is going to be a precursor to ongoing positives.
Amy Norfles – Pilot Advisors
How much visibility do you have into the revenue stream just in general with the whole process in all the business lines?
Bill Fairfield
That’s a question we get often, and it’s a tough one to answer. Let me give you the reason it’s tough. A good deal of our revenue comes from what I’ll call subscriptions or multi-year contracts. So you would think that would give you a little bit more clarity into the revenue stream.
The challenge is, while there are in some cases some minimums, in most cases there are not. So for instance, if we have a two or three year contract with a major corporation to provide them with data and data processing services and the like for their marketing campaigns, what we found in 2009 was that while we had the contract, many of those clients either reduced the number of campaigns they ran through the year. So for instance, instead of running one every other month they might have run three a year. And they also instead of running a campaign for five million targeted customers, they might ratchet it down to two million targeted customers.
So it really became a question of the breadth and depth of their campaigns and that negatively impacted our revenue in 2009.
Operator
Your next question comes from Robert Kirkpatrick – Cardinal Capital.
Robert Kirkpatrick – Cardinal Capital
Could you maybe link order the three divisions for 2010 in terms of your optimism for organic growth? Kind of give us a rank order because they’re probably not going to constant is my guess.
Bill Fairfield
No, they probably aren’t. This is going to be a bit of a hedge, and I’ll explain the hedge to you. First of all, I think the one that’s likely to have the lowest growth is Market Research. Market Research was impacted the most by the marketing spend. I think it’s been demonstrated over the last year that it is the most discretionary of the elements in marketing spend.
So I think if we can get that back on track a little, I do expect it to grow. We are seeing signs that people are starting to spend a little more money there, but if I were a betting man I would say that since that is the most discretionary of the spend, it’s still probably the one that’s going to be somewhat the most depressed.
It’s sort of expecting that Data and Services will be similar, but I need to break that down for you. As you know, Services really has two major components; it houses what we call info interactive which is our whole digital area, and we expect that to continue to grow. We think it’s going to be a changing market. We think that while email will continue to be good, we’re going to see more and more shift to alternate media, SMS and social media and the like, but we think that will grow.
We think on the other hand, there is going to continue to be pressure on the traditional direct mail as it relates to catalog and retail and the like. So I think those will balance out but I think it will be somewhat higher than the Research business.
The Data business I think will be equal to or better than Services and probably has the opportunity to have the most growth for a couple of reasons. One is, I think we’re going to see a bit of a return to more campaigns and more extensive campaigns by our clients. That’s where the biggest cut back came. It was not in the fact that they didn’t do business with us, but it was just lesser business.
I think we’ll see that come back. And I think we’re going to start to get leverage from the investments we’ve made over the last year in both our sales and marketing, go to market strategy as well as our products in both the small business and the enterprise business.
So a long winded way, if I had to rank order from the top, I’d say Data has the opportunity to have a little greater percentage growth, Services would be right in there at a strong second and Market Research just because it’s so discretionary probably has the toughest road.
Robert Kirkpatrick – Cardinal Capital
Tom, are there costs associated with the ongoing strategic review in terms of paying advisors and consultants, and if so, are they included in your one time items? If not, could you please break them out for us?
Thomas Oberdorf
They are included in the one time items, and there are costs. I would say they are not significant at this point. I don’t know whether they will be significant, but they’re insignificant at this point and they are included in our cost take out.
Robert Kirkpatrick – Cardinal Capital
And the depreciation that was accelerated, where did that get booking into? Is that booked into corporate or is that going to be in one of the segments or all of the segments?
Thomas Oberdorf
Actually, that could be in all the segments but I don’t have that breakout of which segment it was in.
Robert Kirkpatrick – Cardinal Capital
Bill do you want to share any further comments on the signs of life that you’re seeing among potential customers and clients? Can you expand a little bit more upon those remarks?
Bill Fairfield
I’ll try. I can’t be terribly factual, but as you know we’ve had a lot of distraction in the company. Having said that, we have been able to get back out and visit customers over the last couple of weeks and continuing to do that and the anecdotal kinds of things we hear from our existing clients is that they’re looking at more activity.
We’re seeing more things come across the transom in terms of activities that they want us to bid on, activities that they want us to give them a quote on. We’re seeing the same thing in the small business arena. There seems to be a bit more in terms of incoming calls inquiring about services.
And then I think the other thing that’s happening is, we are doing a better job as we go out to these clients of just presenting the full breadth and depth of what we have. So for instance, what we’re seeing in the small business area is we’re up selling more and more of our clients to not only to acquire a list or a subscription from us for a list, but also to incorporate our email activities into the offering.
So it’s that kind of traction that’s just starting to feel better. Like I said, I don’t view it at this stage as a ground swell. I don’t think this economy is going to explode in an upward direction, but there just seems to be a little more confidence out there.
Robert Kirkpatrick – Cardinal Capital
Tom you mentioned the $7 million in annualized costs have been taken out year to date in the first 40 days of calendar 2010. What’s your initial goal for the level of cost cuts that you execute on in 2010? Are they greater or less than the level you executed on in 2009?
Thomas Oberdorf
It’s greater than $7 million. We talked about what type of guidance we’d give on this number. The issue I want to be careful about as we look at our costs and SG&A run rate is certainly we’re going to have some increased costs.
We’ve gone for years where we haven’t had full bonuses because we haven’t met targets. We talk about in 2010 will be the year where people will get merit increases, basically increases in the inflation rate.
I think we’re off to a good start. I do not think, and we’ve said this before, 2009 was pretty dramatic as far as cost savings. We never gave a number of where we think we’re going to be in 2010, but I think it’s going to be a substantial amount of cost savings.
It’s just really ready to map out to you as we get clearer to this, is what costs are we going to reinvest back into the business and what costs naturally seep back in; like I said, raises and bonuses and that type of thing.
But I would say 40 days we’re over $7 million. I think you’re going to see a significant number in 2010.
Robert Kirkpatrick – Cardinal Capital
Could you talk about where you want to reinvest or where you are considering reinvesting some of the cost saves that you obtain in 2010 back into the business?
Bill Fairfield
I’ll classify it into three areas. The first area is an investment in what I call our go to market strategy. A lot of that investment took place in 2009 but there is still some investment in terms of the execution on our branding. The rebranding of the business has been very well received by our customers.
They’re appreciative that we’re far less confusing to deal with in terms of who we are and what we call ourselves and the number of different business cards our people are handing out. Most of that is done, but there is still some execution costs there.
We’re investing in our sales and marketing organization. Let me just give you a few examples, and none of these are giant investments, but they all add up. In terms of sales training, sales discipline and sales approach, as you might expect with 31 different business units, we had 31 different approaches, and everybody talked a different language and everybody had a different tracking mechanism for their prospects.
So we’ve gone to one what I’ll call sales system internally that we’re using so we get everybody speaking the same language, taking a similar approach to the customers. Tied directly into that, is we had eight or ten different versions of Salesforce.com in the organization, none of which would talk to each other. So we’re consolidating that into one version so that we can share information across business units on like clients and prospects.
We’ve also invested in a much more sophisticated RFP capability. We were very in my view lackadaisical and low in quality in terms of how we responded to customer inquiries.
And then just training and development of people, so that’s an investment on the sales and marketing side.
We’re also investing in product development. Again, we’ve had decent products in the company but they were isolated and siloed into particular business units. In many cases those business units had developed a nice product but didn’t have the money to upgrade them to a web 2.0 version. In many cases, that’s exactly what we’re doing, is bringing them into the modern era, and that’s requiring some investment.
And then the third area I would say is generally just the IT infrastructure. Again, I know I beat on this a lot, but when you have as many different business units as we have and they all have their own IT, you don’t have platform commonality. You’ve got a lot of duplicate spend.
Tom McAllister, our CIO did a great job of getting that under control and under our belt last year, but there’s still some things to do. In the small business area we have six or seven different invoices systems for instance. By the end of the year, that will be one. So that’s the third investment.
Thomas Oberdorf
We talk about a lot of our investments whether it’s investment as Bill just talked about that will flow through certain SG&A or whether it’s some capital expenditures, mostly product development. I think we’ve gone through most of this.
Operator
Your next question comes from Abe Patton – Citadel.
Abe Patton – Citadel
Can you talk to in Q4 the level of pricing competition in the marketplace and the overall level of competition? Where are we in terms of incrementally worse and incrementally better in terms of pricing?
Bill Fairfield
I’ll give you my observations then let Tom chime in. I think by and large in general, in the Data Group, I don’t think we saw very much inordinate pricing pressure there. We have the advantage of having the premium product and we try to price it accordingly and that’s on Data sales.
As it relates to data processing activities, merge, purge, append and that kind of stuff we probably saw a little pricing there. I couldn’t put a percentage on it for you but I’d say by and large in the Data Group, not a lot of significant pricing pressure.
I think as it relates to the Services Group, I’d sort of divide it there. On the list brokerage, list management I think we’re in a position where we’ve got such a good share of market and so much strength and so much of a unique offering that I don’t think we see a lot in that arena from a pricing pressure standpoint.
I think the one place where we have seen some pricing pressure is in email activity. A lot of capacity in that area, we’re investing a lot to differentiate our products and we think we’ll see some positive trends in that in 2010. But I think last year that was a pretty competitive arena.
The Market Research area just by virtue of the fact that you’ve got a lot of marketing research firms, there’s a lot of capacity out there given the depth of the decline in market research. I think they experienced some significant price pressures. Whether that’s going to last through 2010 I just don’t know. I don’t have a good enough crystal ball on that.
Thomas Oberdorf
I think that’s spot on. I think email again, there is some price pressure there. There’s competition. The way I typically think about this in the small business, I don’t think there’s really price pressure in the small business area.
In some of the big businesses, you’ve got to determine if it is really price pressure or was it the economy where people were cutting back and/or trying to reduce their spend. But typically, we didn’t lose clients and the spend may have been lower, but it wouldn’t be what you’d typically call price decreases as much as it was people just trying to cut back on their budgets.
Abe Patton – Citadel
When we think about 2010 and the informal guidance for maybe low single digit organic growth, are you expecting some of the momentum that you saw last quarter in small business marketing to continue? Is that a key cog in the 2010 growth story?
Bill Fairfield
I would say the answer is a qualified yes. And here’s the qualification. Not to hide behind it, but who knows what’s going to happen to government stimulus kind of activity as it relates to either taxes or job programs, etc.
So I think small business is highly dependant upon what happens there. Our hope is that people recognize that small business is the largest employee in this country. They spend well over half of the dollars that are spent in the new multi-media kinds of marketing activities. So hopefully there won’t be anything that depresses their opportunities.
That being the case, if there aren’t then we think that small business could be a significant driver.
Operator
We have no further questions. I’d like to turn the call back over to our presenters for any additional or closing remarks.
Lisa Olson
This is Lisa. I’d like to thank you all for joining us today. Many of you know how to reach me and for those of you that are new, my number is 402-593-4541 or you can email me. So thanks so much and we look forward to talking to you next time.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!