Dex Media's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.13.14 | About: Dex Media (DXM)

Dex Media (NASDAQ:DXM)

Q4 2013 Earnings Conference Call

March 13, 2014, 10:00 AM ET

Executives

Peter McDonald - Chief Executive Officer

Dee Jones - Chief Financial Officer

Analysts

Mark Hetrick - Wells Fargo Advisors

Colin Wilson-Murphy - Bowery Management

Bob Konefal - Phoenix Investment Advisor

Seth Crystall - RW Pressprich

Phillip Pennell - Mariner Investment Group

Operator

Good morning, and welcome to Dex Media's Fourth Quarter and Full Year 2013 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 Dex Media and its predecessor companies with the Securities and Exchange Commission. The company has no obligation to update any forward-looking statement.

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 6349673. The replay will be available through March 27, 2014. In addition, a webcast will be available on Dex Media's website in the Investor Relations section at www.dexmedia.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 McDonald

Thank you, Laurie, and good morning and welcome to our fourth quarter and 2013 full year earnings call. It was a productive quarter and year. While we accomplished a lot, there's still more to do, and we're excited about 2014.

In 2013, the big highlight was the merger on April 30th of DexOne and SuperMedia to form Dex Media. This combination allowed us to create a new company that is more powerful in terms of scale and more effective as a result of the best practices from both legacy companies.

As a quick review, we have a presence in 43 states, a sales force of about 2,000 professionals who are 100% digitally trained and Google AdWords certified, more than 580,000 clients across the US. About 34% of our clients buy our digital solutions. And we retain about 80% of our clients from year-to-year. We generated over $2.1 billion in revenue. We retired more than $500 million in debt last year, while carefully managing the expenses. That diligence enabled us to achieve 39.7% margins and generate adjusted pro forma free cash flow of $421 million.

As you know, we are on a mission to be the trusted local marketing partner for small businesses. They need us and our services. By consolidating a variety of advertising approaches in one place and producing solid trackable results, we are a one-stop shop for local businesses. We offer a complete array of advertising solutions local businesses are looking for from search optimization to text, mobile, social, video, loyalty and reputation management to traditional media. We have created and continue to test various bundles of products to further simplify the process and create more value for our clients. We are passionate about helping local businesses, navigate the complex world of digital marketing and we are continually evolving to offer solutions that deliver results.

With our patented technologies and comprehensive partnering network, we believe we can deliver reach more cheaply than a local business could achieve on its own. This gives us a real competitive advantage.

In the fourth quarter, we saw digital ad sales growth of 5.1%. Digital results accounted for approximately 24% of our revenues in 2013 with an average value order in the range of $2,500 to $2,600. As I mentioned previously, about 34% of our clients purchase digital solutions from us.

We are proud of the progress over the last quarter. We believe we can do even better. We did a lot of testing in the last quarter to gauge our clients' impressions of various bundles and different offerings. We found approaches that worked well and places where we could improve. Going forward, we will continuously review and adjust our bundled solutions based on feedback from our markets and capitalize on those that performed well. Given our results during the trials, we look forward to rolling the most successful solutions out across the entire footprint over the next few months.

Let me give you an example. We launched the Start Smart bundle late last year, which is a very simple product that combines a number of solutions to help local businesses establish a presence on the internet at a low entry-level price. By bundling solutions such as listing planning, website, social media, reputation management and call tracking into one value priced product, we created strong momentum with this product. The feedback from clients and from our sales teams has been positive, which tells us with the right channels and training we can achieve strong results.

We also saw that when we combine our legacy print products with digital solutions, we improve overall results for our clients. Having their business information in a number of places means they have wider presence in all places consumers are searching. And as a result, local businesses receive more leads.

In the fourth quarter, we also saw slightly better print trends. Multi-product bundles create real value for our clients and help us deliver on our mission to help local businesses grow. In one example, our consultant was able to help a local body shop enhance their marketing program by talking to them about the Start Smart bundle. The combination of print and digital was appealing to the client as well as the affordable price. We helped the client create a consistent visible presence online and in print, so they appear in all the places their customers are looking for that. To date, the client has received more than 90 calls, a great beginning for a new business just starting out.

On the integration front, I'm pleased to report that we're on track or ahead in most of the areas of the business. Our leadership teams across sales and marketing, operations, technology, finance, HR and legal demonstrated outstanding initiative and flexibility, while reducing expenses and continuing to execute on all fronts. Systems consolidation always takes the longest, but our progress is on track as we focus hard on simplifying our processes and optimizing the business. To win in any business, it is important to have a quality leadership team and we definitely do.

In 2014, we are very focused on our growing digital business, creating the right digital solutions to attract new clients and retain existing ones profitably. We will continue managing our expenses and we will continue to deploy cash in order to pay down our debt. Lastly, we will be proactive in pursuing strategic partnerships that position us well in the marketplace and will enable us to improve our business and the marketing solutions we offer.

We are pleased with the progress that we made in 2013 and we're excited about the opportunities ahead for a number of reasons. First, we have a high-quality team in place that's dedicated to making this business a success. Next, we know we can create solutions and bundles that will attract and retain clients. Third, we have the right presence and scale in major markets across 43 states. Fourth, we offer marketing solutions and technology that is unique to driving results profitably. And last, we know local businesses need us. So we have a real opportunity to make this business a success.

Thank you. And now, let me turn it over to Dee.

Dee Jones

Thank you, Peter, and good morning, everyone. Before we get into the financial results, I want to make mention of a couple of accounting adjustments in the period. The fourth quarter GAAP presentation reflects a non-cash impairment charge of $458 million associated with the write-down of goodwill of $74 million and $385 million of intangible assets. This charge had no impact on the company's cash flow or compliance with debt covenants and was associated with our normal course annual review of intangibles.

In addition, in the fourth quarter of 2013, we corrected an error that was immaterial to all affected prior periods associated with the timing of revenue recognition for a former DexOne service offering called Dex Guaranteed Actions or DGA. The company recognized revenues for DGA as the guaranteed actions or leads were delivered. But we'd continue to provide service over the entire contract period even if the guaranteed actions have been delivered before the end of the contract term. The company now believes that DGA revenue should be recognized on a straight-line basis over the service period, similar to the way revenue from the majority of our other products are amortized over a 12-month period.

The prior periods affected were from January 1, 2012, through September 30, 2013. The error only impacted the timing of revenue recognition by an immaterial amount. It had absolutely no impact on cash flows or advertising sales. The financial information included in today's earnings release and in our 2013 annual report on Form 10-K have been corrected for all periods presented. Our Form 10-K will include disclosure to describe the error and its impact on each of the affected prior periods.

In closing my preliminary comments, I would remind you that some of the results I will speaking to this morning are non-GAAP numbers. We have provided a reconciliation of GAAP to non-GAAP results in the appendix of the presentation.

Now turning to fourth quarter and full year 2013 financial results. Total multi-platform ad sales for the fourth quarter declined 14% as compared to the same period last year. Print declined 19.1% and digital grew 5.1%. For full year 2013, multi-platform ad sales declined 15.4%. Print declined 21.1% and digital grew 5.9% compared to 2012. As we integrate more of the solution offerings across all Dex Media markets into 2014, we will continue to focus on sales performance improvement.

For the fourth quarter, Dex Media reported pro forma combined revenue of $513 million, a 16% decline compared to the same period last year. Adjusted pro forma expenses were $306 million and adjusted pro forma EBITDA was $207 million with a margin of 40.4%. For the full year, pro forma combined revenue was $2.184 billion, a 17% decline compared to the prior year. Full year pro forma adjusted expenses were $1.318 billion and adjusted pro forma EBITDA was $866 million with a margin of 39.7%. Adjusted pro forma EBITDA for the quarter excludes $13 million of merger integration cost and $55 million year-to-date.

As Peter mentioned, the entire organization worked diligently on system integration, contract renegotiation and overall management of expenses in achieving solid EBITDA and EBITDA margins for 2013. The same level of cost management focus continues into 2014.

For the fourth quarter, our total debt balance at par for all four silos was $2.963 billion. Payments made in Q4 were $220 million. This included an open market repurchase of $137 million, utilizing $101 million of cash. For the full year 2013, total bank debt obligations had been reduced by $541 million and net of $16 million payment in kind associated with the bonds. This resulted in an overall debt reduction of $525 million.

Adjusted pro forma free cash flow for 2013 was $421 million, representing adjusted pro forma cash from operations of $451 million less pro forma capital expenditures of $30 million. This includes merger integration cash cost of $47 million and excludes $36 million of cash merger transaction cost. Cash on hand as of December 31, 2013, was $156 million.

This concludes the Q4 and full year 2013 financial results. Operator, we're now ready for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of (inaudible) of Citigroup.

Unidentified Analyst

So throughout 2013, you actually slightly teased the EBITDA projection from the disclosure statement. Is that a good proxy to use for 2014 as well? I think it was $836 million. Is that still a good number to use?

Dee Jones

We've talked several times, I think, about not providing guidance and not making reference in affirming our distancing ourselves from the disclosure statements and the results put out last December. And we're continuing that position. The policy is not to provide guidance. Having said that, look, we continue to look to improve the topline results of the enterprise as we move forward, continue to manage expenses and maintain margins as we look to transform the business. But absent color of that sort, we're not looking to provide guidance at this point.

Unidentified Analyst

I looked on the website. I didn't see the silo level financials yet. When could we expect to see that stuff posted on the website?

Dee Jones

Yeah, we'll be posting the silo-specific statements late next week or the following week.

Operator

Your next question comes from the line of Mark Hetrick of Wells Fargo Advisors.

Mark Hetrick - Wells Fargo Advisors

Two quick questions for you. One, you talked a little bit about some potential joint ventures. Can you elaborate on that? And then also second question being your Superpages app, which I was an avid user and I think you guys have a fantastic app and I just use yours from here on now. Any way to maybe get the word out a little bit more on the mobile app?

Peter McDonald

Thanks for Superpages app. We think it's a terrific app and passed all the tests here and we'll continue to be very pleased with that. As far as announcing partnerships or other things, we are always looking for strategic partnerships, and I think that's the comment that we made. And so we have great relationships today with Google, for example, and Facebook and other companies out there and about 100 other strategic partners. And we're going to continue to look to do that and expand that and look for outside in 2014.

Mark Hetrick - Wells Fargo Advisors

And just anything on the any way to get the word out a little bit more on the mobile app?

Peter McDonald

I think we're going to keep working on that, but I don't want to release any plans at this point. We spent the last year (inaudible) together. We're very pleased with the app. As we've announced before, I did win awards for advertising and marketing in 2012 and we continue to look to promote this in 2014.

Operator

Your next question comes from the line of Colin Wilson-Murphy of Bowery Management.

Colin Wilson-Murphy - Bowery Management

My first question is what was actual free cash flow for the fourth quarter of this year and how did that compare to free cash flow for 20/31/2012, the quarter-ended?

Dee Jones

Pro forma adjusted free cash flow was $109 million on the quarter. I don't have the number off the top of my head, I apologize for that. We can get to that, Colin. It's been reported, but I'll have to get that for you.

Colin Wilson-Murphy - Bowery Management

And my follow-up question is are you currently rolling out out-of-market trials for your digital products? And if so, how are those trials going, specifically on the digital front?

Peter McDonald

Colin, we've done digital out-of-market trials in the past. Right now, covering 43 states, we're very pleased with the markets that we're in. And we're continuing to focus on kind of our key customers in our key markets first and really looking to grow and improve that, especially in the area of digital.

Operator

Your next question comes from the line of Bob Konefal of Phoenix Investment Advisor.

Bob Konefal - Phoenix Investment Advisor

I have two questions. One is it's good to see the recovery of growth in the fourth quarter on digital. And you in the past had sort of spoken of integration issues. Is it fair to say that the integration issues are largely behind you? And as you start to lap quarters in the period where you're still in the midst of your transaction with SuperMedia that you'll start to see a reacceleration of growth on the digital side?

Peter McDonald

2013 was really we got through most of the issues around integration and merger of the two companies. And with that behind us, our focus now is primarily on growing the existing business. And so that's correct.

Bob Konefal - Phoenix Investment Advisor

And then the second one is probably more for Dee. You have latitude in your various term loan to use a portion of your cash however you choose. Can you sort of speak to whether you would think to direct your discretionary cash for debt paydown or strategic investments or some combination of the two, can you give some color there?

Dee Jones

Yeah, sure. We will always evaluate the utilization of cash as investment opportunities may present themselves, dependent upon the return and the opportunity to enhance and improve the transformation and transformation opportunities relative to this business. And so finding a good strong investment opportunities is always on our radar. Having said that, we also recognize the value and economically deleveraging the business with open market repurchase and using that discretionary cash in that fashion as evidenced by the fourth quarter buyback where we put to use the $101 million. Some of that was required to be utilized. But some measure of that was also discretionary.

And as we move forward, that evaluation will continue with respect to either of those types of opportunity, either deploying the capital in the fashion that we did in the fourth quarter with open market repurchase or being opportunistic with respect to investment opportunities to help improve the business.

Operator

(Operator Instructions) Your next question comes from the line of (inaudible).

Unidentified Analyst

Just a couple on the digital front. You mentioned that the weakness in the last couple of quarters is due to integration issues, but then you're also saying that you're sort of rolling out some new digital programs and that was also part of the reason. Can we expect on a quarter-by-quarter a bit more lumpiness going forward on the digital revenue line?

Peter McDonald

With respect to digital, we're looking to continue to drive continued growth in that piece of the business. Improvement and transformation of this business is not going to be flash cut event. It's going to be a progression and all of the rollouts and the initiatives in the programs, new products that we deploy in the marketplace are intended to enhance the value proposition we put forward to our clients and to drive that growth. It can't predict specifically with respect to whether or not there will be seasonality or lumpiness in those trends, but there's always that possibility depending upon what transpires in the various marketplaces. I would say it's not a fairly seasonal business, albeit sometimes we're in different markets and it varies what markets we're in, but that's not a tremendous impact on the rates, especially on the digital front.

Suffice it to say, we're looking to drive growth and continued progress in that regard. Predicting exactly specific quarter to quarter to quarter movement in those numbers is not something that we're looking to do right now.

Unidentified Analyst

And then just maybe if you could talk a little bit about the competitive environment that you're seeing on the digital front and like maybe even just drilling down (inaudible) ad buying and like if you see there is an opportunity for like the SMB space?

Peter McDonald

On the competitive environment, it's an interesting environment, because we think that we have a real opportunity here, because in small and medium size business, it is a tough market to get to. And in each of the local markets, there are a lot of columns like VAT guys, and that's what we call it in the industry, where there is someone who can do search and then there's somebody who can do websites and there's somebody who can do SEO for local businesses. And so there's a lot of these smaller (inaudible) type competitors out there who are kind of very close to the clients who are having, well, I wouldn't say it's the main competitor. There is not one single competitor out there of any significance that we run into on a daily basis. And so it's really the small ones, which is why we believe we have an opportunity because of size and scale and because of the different technologies that we have to really make an impact and win share in this marketplace. So that's kind of the competitive front. I wish I could tell you there was one key one out there, because that would be easier to go against, but that's not really the case.

As far as other approaches program buying, there is not a lot of activity in this case at this point, so not much to report there.

Unidentified Analyst

I guess is it fair to say that like over the next coming years or so, there could be opportunities to potentially consolidate some of the smaller competitors that had different skill sets and different core functionalities?

Peter McDonald

When we look at those type of opportunities in marketplace, a roll-up or combining strengths with other players, large ones or small ones, we're always going to evaluate that type of opportunity. I think there's some folks out there that are providing good strong services to their client base. We've got a set of assets and a core set of products and services and a back-office engine that we think could match up with some of those folks. And as those opportunities present themselves, we're certainly going to look at them hard.

Unidentified Analyst

And then just one last one on the print side. Looks like sort of the rate decline there is accelerating. Is that something you think could potentially continue over the next coming quarters? And just kind of on that bane, has your sort of retention rate basically stayed in that sort of mid-80s type of range?

Dee Jones

Yeah, as to the retention rate, it has been fairly consistent, especially with respect to the print in regard to both clients and revenue base. There was some slight improvement in the fourth quarter with respect to the print side of that. Some measure of that is mix of markets that were worked in that quarter versus some of the other quarters, there is a little bit of that influence in that number. We were pleased to see that we at least got a tick of improvement in that regard, but I can't say that just using fourth quarter has an indication that is necessarily the approach to take, because there is a little bit of movement amongst the quarters dependent upon what markets are worth.

Operator

Your next question comes from the line of Seth Crystall of RW Pressprich.

Seth Crystall - RW Pressprich

I just wanted to quickly follow up on the print deceleration of that decline. I mean that's been going on throughout 2013. I mean looking at the fourth quarter, that was still a nice continuation. Not using the fourth quarter, but really looking throughout the whole trend of 2013, could we expect a potential continuation of that, not using just the fourth quarter, but just the trend? Or do you think it kind of stabilizes at this point? Just going back to the Bank of (inaudible), I think you had been using and I know you don't want to give guidance, but I think it was like 18%, 19% with your kind of guidance going forward. So just want to know if that's trending the way you kind of expected back then?

Dee Jones

Yeah, with respect to print specifically, we're not looking to provide guidance. I mean again we were pleased with the improvement there we saw in the fourth quarter and the full year in those low 20s, we were always looking to improve against that. And we do believe that some of the programs we're putting out will in the longer term help with respect to print and the way we're selling bundles and the multi-product approach and the value that ultimately does come from print in totality with respect to those products and bundles that we provide to the marketplace. And so we're always looking for improvement in those numbers, but I'm not looking to provide guidance to exclusive call out where we think that's going to go.

We're not where we would want to be, as you might imagine. But really we're looking to ultimately provide multi-product growth. We realize that really getting and driving new and then expect is going to be eccentric to more of the digital side of that. But in the meantime, we're looking to preserve print as much as we can.

Seth Crystall - RW Pressprich

Just a follow-up kind of on NOLs. I mean could you give us an idea of what that might be at this point, where they reside and how that affects cash taxes and maybe even tax sharing among the different silos?

Dee Jones

As you may recall from prior documents and disclosures, the NOLs sit primarily at the RHDi silo. There is basis in the west and the east and there's a small amount of tax asset on the SuperMedia side as well. As you can see from and will see from 10-K and the documentation, as a total enterprise, we expect that we're going to continue to move towards being a non-cash tax payer and being closer to zero as we anniversary around the merger and get past some of those integration or those activities where you can't fully utilize those tax assets across the whole base. But we are getting there and we're moving in that direction and I expect that as we move forward that cash tax payment for the total enterprise will be minimal.

There will continue to be a sharing aspect and movement between the silos. The primary movement within the silos is between SuperMedia and RHDi and the other silos as to utilization of first the basis and then secondly the NOL and we'll continue to see that tax sharing relationship. And then the SuperMedia silo, if you recall, is $0.75 on $1 or for those elements being used. And that will continue. We don't expect to see a change in that. And as to utilization and being able to utilize the assets, that's progressing as we had anticipated.

Seth Crystall - RW Pressprich

Any thoughts in terms of being able to try to do some sort of global refinancing and take out all the silos, so you don't have all the covenants and issues with them, just have one facility out there?

Dee Jones

There's always the assessment of the capital structure and getting to an optimal capital structure. And you're right, certainly administratively and management-wise with respect to those multiple silos, it will certainly provide freeze, but you can imagine the complexities in that regard in accomplishing that and executing against it. So I can't say that there is anything specifically on the radar right now with respect to accomplishing. We're focused on transforming the business, driving cash and deleveraging, paying down debt and deleveraging it in an efficient fashion when those opportunities present themselves.

Certainly, always looking to evaluate various opportunities to improve the profile and getting to a single tranche would be one of those things, but execution aspects and complexities around that, that's not specifically in the works at this point.

Operator

Your next question comes from the line of (inaudible).

Unidentified Analyst

Could you please discuss a little bit the difference in performance between the different silos?

Peter McDonald

The silo-specific financials are not going to be up for, like I said, the end of next week or the early part of the following day. There is some measure of variety across the respective silos in the markets and the areas. Some of that is just seasonal and moves. When you go back and you look historically across the silos, there has been slight differences in various periods. But over the longer term, they tend to and have tended to move in a fairly consistent fashion and sort of move back together, ups and downs, within the respective markets on occasion, but for the most part, movement in a consistent fashion.

We don't expect huge or major swings amongst those silos, but we continue to monitor that and we'll continue to drive for improvement in all of the market and managing those and trying to drive performance in each of the respective silos and in totality. Over the longer term if you look back historically, you don't see major swings that are permanent in any fashion with respect to any individual silos.

Unidentified Analyst

So said differently, would you say that the market environment and trends are broadly similar amongst all the silos?

Peter McDonald

Yeah, I think that's fair to say.

Unidentified Analyst

And how about any insight into variations you can give us on different geographies or even urban versus rural?

McDonald

Yeah, sure. I mean we've spoken in the past that with respect to the opportunities that are out there, I think you see the urban market is kind of moving more towards the digital side faster. And in some respects, that continues, but what we have seen is a little bit of stabilization with respect to the print side of that business relatively speaking. And in the more rural markets have been a little more stable, print market, a little slower to adopt the digital solution. I think some of the Start Smart and some of the lower end type bundles that we're rolling out will allow us to improve in the penetration levels with respect to that side of market in those clients and drive growth there.

Over time, I think marketplace is going to follow consumer behavior as it has in the past and always will. And I think generally, you're going to see those markets trend directionally in the same fashion. The speed at which they move one way or the other may vary, but I think directionally you're going to see those all move in the same fashion. And the solutions and activity in the marketplace that we put forward to drive value is going to be consistent across those markets, albeit with a little bit different flavor and a little bit different emphasis dependent upon where the marketplace is at the time.

Unidentified Analyst

And then just a more general question, which is something you have discussed in the past, but a refresher would be helpful. The revenues and cash flow that you report today were generated by sales at some point in the recent past. Roughly what's the lag there do you think?

Peter McDonald

When we report ad sales, we're reporting generally sales or publication and production of products in that particular quarter. And that will flow into the income statement. For example, fourth quarter results would flow into the income statement over the following on average 10-and-a-half months. And if you think about it, if you use a mid-quarter convention and you look forward with respect to on average a 12-month period over which revenues and ad sales flow into the income statement, it generally completes its cycle in that 10-and-a-half month.

So if you look back, revenues for 2013, were mathematically or theoretically generated half from activity and sales activity from 2012, half from sales and activity in 2013 to blend to the amortized results that flowed into the income statement.

Unidentified Analyst

I was a little bit surprised to hear you say when you were discussing competitors that you sort of weren't running against anyone consistently in all areas. And I was just curious if you could touch on AT&T or YP Holdings, I think it's also called, and perhaps Yelp which I recognize is a different product, but could you provide your thoughts on both of those?

Peter McDonald

As far as YP Holdings or former AT&T, their core footprint is actually in different markets for the most part than ours. So I think there is a real advantage of being incumbent in a marketplace where you've had long-term relationships with the local businesses. And so yes, they are a competitor in some of the markets, but for the market when they come into our markets, so to speak, or where we had the legacy footprint, what they're doing is they're out of there and they don't have those same relationships. And over the years, I think that having that relationship has been a real asset to us as we've leveraged that relationship and taking the customers that were print customers and sharing and keep again local businesses are looking for only one provider, they don't want to deal with two or three. So if we can provide the same services as YP could, then that works in our favor. We also have a relationship where we do sell in some of our markets, the YP products. So there is a good relationship we do have with them.

As far as Yelp, we don't really come across Yelp that much. And I go around the country and I look and talk to their sales forces. They really come up on the radar as a competitor. And I think it's a different thing. Usually, the rate, they reduce from Yelp and only information on Yelp, the content that's gathered is different from selling the advertising solutions and tracking the results like we do. So I think that in both cases, in one case we have a relationship and there's a difference in kind of markets; and the other one, it's a different type of a product that's being offered. So it's really the VAT guy that's in the marketplace that sees the impact of those.

Operator

Your next question comes from the line of Colin Wilson-Murphy of Bowery Management

Colin Wilson-Murphy - Bowery Management

How much was RHDi compensated in 2013 for the company's production and arrangement?

Dee Jones

Colin, I don't have that number off the top of my head. It'll appear, be evident in the silo-specific statements when we do get those filed. I do want to go back to the other question you had asked about the cash flow comparison, the fourth quarter versus fourth quarter of '12. And I do have that number now. The number for Q4 2013 was $109 million. The number in Q4 when you do the pro forma combined entities, they weren't merged at that point in time, but the combined entities fourth quarter cash flow last year $141 million.

Operator

Your next question comes from the line of Phillip Pennell of Mariner Investment Group.

Phillip Pennell - Mariner Investment Group

I guess a couple of things, one, is there a quarter which is higher in terms of your annual revenue that's received from your advertising customers, or is it pretty smooth across quarters throughout the year?

Dee Jones

It's relatively smooth. I mean when you look the four quarters, I mean they range probably anywhere from 23% of the base of sales versus up to say 26%, 27% of the base of sales in a particular quarter. So there's a little bit of variability, primarily driven more by print publish cycles than a digital front. As far as the income statement amortization effects, just the nature of the accounting that we do, it's going to be pretty straightforward and pretty smooth across the quarters. You're not going to see fluctuations in regard to amortized revenues as they move through the quarter because of seasonality of any sort.

If you look at the basic quarters, the only one that stands out a little bit, third quarter is a little bit lower publication quarter in an aggregate sense than the other three quarters, which are all somewhat consistent. But as a general view, I would say it's pretty consistent across how we cycle and handle the revenue and manage the flows and the canvas activity with the client base.

Phillip Pennell - Mariner Investment Group

And addressing the quarter VAT guy issue, has the market become less platform dynamic, and by that, I guess what I'm saying is are we closer to returning to an equilibrium where it really becomes more relationship-driven, more or less the way it has been historically speaking?

Peter McDonald

I think clearly relationships are important, but I think the fragmentation of VAT guys are good at one or two things. They might do a website or they can do SEO, search engine optimization. And I think that our full suite, the one-stop shop, is what local businesses are looking for. And all the research points to that. And if you think about the service that we can give because of our scale, I really do believe it gives us an advantage. It's a hard thing to put all of this together. And I think what you're seeing is we get better and better in execution. Last year was very much focused on integrating two pretty big sized companies. And we're pretty much past that. And now it's a form of execution and I think that the team is in place, has learned a lot. As I said in my remarks, we've got the best practices from each company, and I think that's turning out to be very positive thing for us. That's why we're excited about 2014.

So I think services are differentiator and the relationships are differentiator. And as the world becomes more fragmented, trying to get economically through that local businesses is more difficult and we're very fortunate to have thousands of people across the country in 43 states in key markets.

Phillip Pennell - Mariner Investment Group

I mean it would make sense. And if I kind of read between the lines, what you're saying is, what appeared to me that effectively what you're seeing across the last four quarters and hopefully obviously building into the fourth quarter and now we're well into the first quarter of 2014 and you've seen "equilibrium" more or less start to impose its will on the market. I would think it would be more and more typical for these one-off shops or single service providers to expand their footprint, given that they're probably going to be more relationship-driven within the markets that they have in a direct knowledge there as opposed to decks which once you get better at providing those text services can then expand your footprint within the people that you've historically done print with, which kind of makes sense in terms of you seeing the print burn, if you will, slow down some. I mean that's just me trying to read between the lines. Is that kind of reasonably what you're seeing? I mean do you feel like that that you're seeing this trend build going into the first quarter?

Peter McDonald

When we look at the marketplace in that regard, one of the difficulties in this business and it's even more difficult with the digital side is building scale and driving scale with continuing to provide the level of service necessary to satisfy the clients. We've got some measure of an advantage in that we already have a measure of scale, with over 200,000 clients in the digital space, over 580,000 clients to start with in totality. So that scale and managing that scale is something that we've done for years. Doing it effectively with a high level of service and executing against that as the marketplace moves and trying to be nimble and flexible is the key when you combine with that. And then as you mentioned, we do believe that there is a measure of leads and value that the print provides that comes along with our digital solutions in a multi-platform sale. That provides us an advantage that is unique to us relative to those smaller players that are in the marketplace.

So there is always going to be the small competitor out there that is looking to service individual and one-off type clients and service. But as far as being able to do it at scale and to do it in mass and doing it with the level of assets and value proposition that we do, we think we have an advantage in that regard.

Phillip Pennell - Mariner Investment Group

But I guess one measure that from an internal perspective that would give you some idea about what's going on we think would be employee turnover, meaning that you're seeing turnover slow down, which would suggest to me that the people that are addressing this have become more accomplished at what they're trying to do and you're seeing the results of that. I'm just curious about that.

Peter McDonald

From a turnover perspective, it's actually improved in the last year. And I think that it is driven, because I think the marketing consultants in the field believe in our product and the value propositions we're putting together. And as we've talked about the bundles, we really have a compelling value proposition, because at the end of the day if you think about local businesses, all they really want is leads, they don't really care where they come from and they really don't want to get involved in all the technology and all the different avenues, whether it's management reputation or it's SEO or SEM, they really don't care.

So if we can bring them leads and if you think about, I call it the secret weapon, the Yellow Pages, there are still people that use Yellow Pages and there's still value coming from those Yellow Pages. So if you think of lead term, what we can get from the print directories, possible we can get from all the search and digital products we have. We can put together a one-stop shop compelling value story at a price point that's attractive to local businesses. And I think that's why we saw some improvement here and that's why we see the sales force or the marketing consultants with a higher retention rate.

And I would say that if you look at today versus a year ago, I think we have a better quality group in the field representing the services that we provide.

Phillip Pennell - Mariner Investment Group

And that raises the big question, obviously it's going to trend with GDP in terms of ultimate sales, because like you said, your retailers they know sales, that's what they do and that's what they want to do. They don't want to sit around and click on computer and try to build a website or be their own web master of whatever. But I'm wondering if have you seen any noticeable slowdown in Q1 because of the weather? I mean has that had a big impact on the company?

Peter McDonald

We've looked at this. We've calculated the days, because we pose offices in the first month, but that's a temporary thing. Like all business, they're looking for good solid value proposition and we can bring that to them and we can bring results and we can bring conservatism. And when you keep doing that and you keep creating a good quality experience for the clients, good things will happen.

Operator

That does conclude the Q&A portion of today's call. We thank you for your participation. You may now disconnect your lines and have a wonderful day.

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