SuperMedia's CEO Discusses Q3 2011 Results - Earnings Call Transcript

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SuperMedia (SPMD) Q3 2011 Earnings Call November 2, 2011 10:00 AM ET


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

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


Unknown Analyst -

Shagun Singh - BMO Capital Markets


Good morning, and welcome to SuperMedia's Third Quarter 2011 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 the 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 the 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 19969176. The replay will be available through November 18, 2011. In addition, a live webcast will be available on SuperMedia's website in the Investor Relations section at

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, Jackie, and welcome, everyone to our third quarter earnings call. I appreciate your time and your interest in SuperMedia. This morning, I will give you a brief overview of the third quarter, and then Dee will review the financials. We will then be happy to take your questions.

As I look at the third quarter, there are 3 key headlines. First, we have continued to address the expense side of the business, and our margins for the third quarter were 39.3% versus 35.2% on an adjusted basis Q3 year-over-year. Next, ad sales continue to be in the mid-teen decline year-over-year. And finally, we are excited about our new approach to the marketplace and are encouraged by some of the early results we are seeing in our trials.

Now looking at expenses. I'm encouraged that across the business, in all departments, we are seeing our teams find efficiencies. In real estate, we consolidated locations and negotiated better deals. In marketing, we've improved our distribution and exited markets that were not meeting our standards for profitability. Our digital group has found ways to improve the cost for acquiring traffic, and our sales departments have found smarter ways to service our customers by restructuring to a closer, more geocoded approach. The list goes on as we continue to find opportunities to improve our cost structure by challenging everything we do.

Regarding ad sales, the top line, we continue to see declines in the mid-teen range. Part of this is related to economic issues facing small and medium-sized businesses. Another part is related to the proliferation of options in the marketplace and the confusion small businesses face as they try to reach and influence their customers. On average, a small business may be contacted over 30x a month from someone who has a new deal or a product to sell. I believe we were in a period where business owners are trying many of these options. Our Yellow Pages advertisers, who still represent our largest segment of business, continue to see value from their advertising. As we monitor each month with our local call tracking lines. Last, our new approach was tested over the summer in numerous pilots and multiple markets. We have worked hard to understand our customers, and how we can help them grow. We have learned a lot and are continually refining our approach to these markets. Our end-to-end service approach is being well received, and we just started rolling this out in October.

So at the end of Q3, we're pleased with our progress relative to expense control. We are focused on improving the top line, and we are excited about our new approach. Now let me turn over to our CFO, Dee Jones.

Samuel D. Jones

Thank you, Peter, and good morning, everyone. To begin the call, I would like to mention that our 2011 third quarter and year-to-date reported results are provided in GAAP and non-GAAP format. Due to fresh start accounting in 2010, GAAP results for that period did not provide comparability with the 2011 GAAP results. As a result, I will be speaking primarily to non-GAAP numbers. Reconciliations of the GAAP and non-GAAP results are included in the presentation appendix.

Before we get into the results, I want to note that the third quarter GAAP presentation reflects a noncash write-down of goodwill in the amount of $1.003 billion, it was determined that impairment of goodwill was required under GAAP, due in part to the market declines and the company's equity securities and bank debt.

Now on to the quarterly results. Third quarter revenues were $399 million, a decline of 18.4% compared to 2010. EBITDA was $157 million, compared to $172 million in 2010. Our third quarter 2011 EBITDA margins were 39.3%, compared to 35.2% for the same period in 2010. As disclosed in the third quarter of 2010, we had a favorable noncash state operating tax impact of $24 million, which reduced our expenses contributing to the $172 million of EBITDA in that period.

Year-to-date revenues were $1.258 billion, a decline of 18% compared to year-to-date 2010. EBITDA was $463 million compared to $500 million. Our EBITDA margins were 36.8% compared to 32.6%, which is an improvement of 420 basis points. Year-to-date, 2010 results were favorably impacted by $40 million of state operating tax claim resolutions.

Looking at ad sales for the third quarter. Ad sales declined 15.9%, compared to a decline of 15.4% in 2010. On a year-to-date basis, advertising sales declined 17% in comparison to 17.5% decline in 2010. Advertising sales for the 9 months ended September 2011 include negative adjustments of $11 million or 0.8% related to a single certified marketing representative mentioned in our 2 prior quarterly calls. Without the related impact, ad sales would have been a decline of 16.2% for 9 months ended September 2011. As of now, the accounts impacted by the single CMR have been transitioned to other firms.

Turning to our EBITDA performance. Year-to-date EBITDA margin of 36.8% trended favorably versus 2010 as a result of our overall cost reductions associated with volume declines in the business and our continued commitment to cost management.

Total operating expense on a year-to-date basis, excluding depreciation and amortization, was favorable to last year by $239 million, or 23.1% driven by cost reductions across all operating expenses. Again, our 2010 results included a $40 million expense reduction related to favorable state operating tax claim resolutions.

Selling expense reflected a reduction of 24.4% or $108 million, primarily driven by sales efficiencies and lower related sales costs, including some advertising. Cost of sales was favorable to last year by 22% or $88 million. This was primarily driven by lower print and distribution volumes and efficiencies in the operations area. Our G&A expenses are favorable over 2010 by 22.4% or $43 million. This was driven by lower bad debt expense and continued efficiencies from our G&A functions. Year-to-date bad debt expense was 4% compared to our 2010 full year provision rate of 5.2%.

Our cost initiatives have continued to impact our headcount. On a year-to-date view, we have lowered our headcount by over 20% in both sales and support and in non-sales staff relative to year-end 2010. Year-to-date free cash flow was $129 million, consisting of operating cash flow of $140 million and $11 million of capital expenditures. Our ending cash balance was $267 million.

A $60 million mandatory principal payment was made October 13, 2011, relative to the third quarter requirements. In addition, we have reached an agreement with our agent bank regarding terms to a proposed amendment to our credit agreement which, with certain restrictions and requirements, will provide the company with more flexibility and utilizing its cash to make open market repurchases of its debt to retain the process. The proposed amendment was posted for vote yesterday.

With that, operator, Peter and I are now ready to address questions.

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Shagun Singh with CRT Capital Group.

Shagun Singh - BMO Capital Markets

It looks like if you adjust for nonrecurring noncash item. Third quarter EBITDA was actually up, $157 million versus $148 million last year. Firstly, is that accurate and is that the correct way to look at it? And then I was wondering if you could touch on the number of books in the markets where EBITDA was positive and where you are seeing disproportionate strength versus weakness coming from? And then, I'll follow up with another one.

Samuel D. Jones

Okay. With respect to the EBITDA on the quarter, the $157 million versus, as you mentioned, an adjusted basis of $148 million, that is the correct mathematics. I mentioned that we had a $24 million favorable state operating tax adjustment that was positive to last year's EBITDA. When you take that out, we did see growth in EBITDA driven primarily by our expense opportunities and efficiencies that we've been able to get to.

On a sequential quarter basis, we also had slight growth in EBITDA, $157 million versus $152 million, when you look at the second quarter versus the third. With respect to the various markets, as we've said before, there are pockets where we see better performance than others. We still continue to be disappointed in top line, but we're looking to address that, as Peter mentioned, with our approach in the marketplace. But yes, there's continued pockets where the economics of the environment continue to be more challenging than in others.

Shagun Singh - BMO Capital Markets

Any detail you can provide there in terms of the markets?

Samuel D. Jones

It continues to be the typical ones. Florida continues to be a challenge. We've continued to see some measure of challenge out in California. And those are our primary markets where we see challenges. But from an improved performance perspective, we continue to see improvement in numerous markets through the Northeast and the Midwest.

Shagun Singh - BMO Capital Markets

Great. And then also it looks like cash OpEx was down about 30% year-on-year. I was just wondering if you could address the sustainability of those cuts going forward? Maybe in the next one year.

Samuel D. Jones

We said before that with respect to expenses, we'll continue to look to get additional efficiencies. As far as the level of margins that we're looking at, the year-to-date margins in the mid-30s, above 36, those are -- we feel very good about those and being able to get to that level. Certainly, as the expense base continues to decline, it will be more challenging to keep up with expense, and that's where we have to address the top line issues. But we will continue to drive for additional efficiencies. As far as the expense reductions and favorability that we've seen thus far this year, I would say that there's not any major or significant one-timers there. Those are truly driven by efficiencies and cost reductions, and you can see that just from the headcount reductions that are noted through the year with over 20% reduction in headcount since year-end 2010.


[Operator Instructions] Your next question comes from the line of Chad Quinn [ph] with the Bennett Management.

Unknown Analyst -

Just a quick item. What was the cash taxes paid in the quarter?

Samuel D. Jones

Cash taxes was $22 million in the third quarter.

Peter J. McDonald

Okay. Operator, it looks like that was the last question. We appreciate everyone's interest and attention, and we look forward to speaking again next quarter.


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

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