R.H. Donnelley Corp. Q3 2007 Earnings Call Transcript

R.H. Donnelley Corp. (RHD)

Q3 2007 Earning Call

October 25, 2007 10:00 am ET

Executives

James Gruskin - Assistant Vice President of Finance and Investor Relations

David Swanson - Chairman and Chief Executive Officer

Steven Blondy - Executive Vice President and Chief Financial Officer

Peter McDonald - President and Chief Operating Officer

Analysts

Michael Meltz - Bear Stearns

Fred Searby - J.P. Morgan

Paul Ginocchio - Deutsche Bank

Jeff Shelton - Natexis Bleichroeder

Mark Bacurin - Robert W. Baird and Company

Justin Brown - Signal Hill

George Hawkey - Lehman Brothers

Karl Choi - Merrill Lynch

Peter Salkowski - Goldman Sachs

Presentation

Operator

Good morning, ladies and gentlemen. Welcome to R.H. Donnelley's third quarter 2007 results investor teleconference. (Operator Instructions) Please note that the teleconference is being recorded, as well as webcast live over the company's website at www.rhd.com.

I would now like to turn the call over to Jim Gruskin, AVP of Finance.

James Gruskin

Thank you and good morning, everyone. I'm Jim Gruskin, AVP of Finance at R.H. Donnelley. Hosting the call today are David Swanson, Chairman and Chief Executive Officer of R.H. Donnelley, and Steven Blondy, Executive Vice President and Chief Financial Officer. Peter McDonald, President and Chief Operating Officer, is also on the call.

Certain statements made today may be forward-looking within the meaning of the Private Securities Litigation Reform Act. We call your attention to our press release for the quarter ended September 30th, 2007, and the company's Form 8-K furnished to the SEC this morning, both of which discuss third quarter results.

We also encourage you to review the Company's other periodic filings with the SEC, which set forth important factors that could cause actual results to differ materially from those contained in or suggested by any forward-looking statements. Copies of R.H. Donnelley's SEC filings may be obtained by contacting R.H. Donnelley, searching its website at rhd.com, or visiting the SEC website at sec.gov.

This transmission is the property of R.H. Donnelley Corporation. Any retransmission or broadcast without the express consent of the company is strictly prohibited.

During today's call we will focus on 2007 GAAP results, though we will be discussing some figures that exclude the impact of purchase accounting and related expenses.

Also, today's references to EBITDA are before FAS 123 expense. Some of the aforementioned items are non-GAAP financial measures. Additional information about non-GAAP financial measures, as well as a reconciliation between these items and the most comparable GAAP measures, can be found in the press release and related 8-K furnished to the SEC this morning.

The press release is available on our website and can be accessed by going to rhd.com and clicking on Press Releases. Please review the risk factors in the Safe Harbor language.

And now, I would like to turn the call over to Dave.

David Swanson

Thanks, Jim. Good morning, everyone. As you saw in the release this morning, the headlines are another strong quarter of earnings and cash flow; that we're now trained and ready to sell the full Triple Play product suite across the company; that we've completed $2.7 billion of debt refinancing and, as a result, we are announcing our intentions to initiate a dividend concurrent with the first quarter 2008 earnings release.

RHD generated net revenues of $670 million, an operating EBITDA excluding FAS 123 and purchase accounting expenses of $362 million during the third quarter, putting us right on track to achieve our full year guidance.

Ad sales, a leading indicator for revenue, were down a little over 1%. These results reflect the positive impact of many ongoing initiatives, but also some of the negative impacts on expense and productivity associated with our continuing integration efforts, business process implementation, sales force training and investments in systems, digital products and brand.

We've also experienced a more difficult ad environment in a few isolated markets. On one hand, our financial discipline and focus on cash flow is the best in our industry and continues to drive best in breed margins and free cash flow conversion. And our strategic efforts are driving significant growth and development of our online offerings. On the other hand, we faced a moderately more difficult ad environment, particularly in high growth markets impacted by the slowdown in real estate.

We also continued to experience some unavoidable productivity issues associated with our new systems implementation, as well as training our sales force on our new suite of Internet solutions.

As I mentioned, overall ad sales were down 1.1% in the third quarter. Performance of the core business, without the effect of Business.com, was a decline of a little over 2.2%. While AT&T and Qwest markets contributed modestly to that decline, both are on plan for the year. Embarq was the big contributor, primarily as a result of the economic environment in Florida and Nevada and the weight that these two states carry in a relatively small quarter.

Now, several of you had asked me for more quantification around this particular issue and how widespread or not the impact is, so let me try to provide just a few more details.

While these two states, Florida and Nevada, make up only about 12% of RHD's total annual ad sales, they make up about 20% of the third quarter. These states have historically been strong contributors driven by very robust economies. Last year, these states contributed a little over 4% sales gain in the third quarter. This year, Florida and Nevada posted nearly a 7% decline for the quarter, or an 11% swing.

Now the good news is that all of the other 26 states combined had better than a 2% swing the other way compared to prior year performance, reflecting all the improvements we're making across the business. Both the Qwest markets and the AT&T markets will finish the year right on plan. So, we see a regionally isolated correction here that will eventually work its way through the system.

I'd also like to point out that this is really a great example of how our scale, our business model and diversified footprint and customer base create this tremendous stability for our business.

Despite this Florida and Nevada issue, we still anticipate 2007 ad sales to be between flat and up 1% on a pro forma basis to include the full year impact of Business.com.

The diversified nature of our business is what drives this stability and makes us unique compared to other local media. We serve over 500 local markets with more than 600,000 small and medium-sized business advertisers across literally hundreds of different industries.

We have a lot to look forward to as we move beyond 2007. Over the last several months we have continued to improve the performance of our small and mid-sized markets, through the implementation of the RHD business process, and we expect that improvement to continue. National sales have also shown nice improvement year-over-year.

We've also taken significant steps to improve the future performance of our metro markets, which, while doing about what we expected in 2007, have been a drag on our overall goal of 2% to 4% top line growth.

By year's end, we will have deployed the Triple Play offering across every one of our markets. We think this will be particularly beneficial for the metro markets, where the percentage of broadband penetration is higher than the rest of the country, and the appetite for Internet solutions by advertisers is also higher.

We completed training of all 2,000 marketing consultants on our digital products, including our new SEM and DexKnows.com products. And we've installed Internet training managers in all regions to drive continued education and support. This has been a big undertaking and it has taken away selling time in 2007, but it's an investment we believe will make a big difference, particularly in the urban areas.

We're investing in the Dex market brand, to help unify our product sweep and leverage our print credibility across our online products. We enhanced our interactive group's products and capabilities, with the acquisition of Business.com and the expansion of our partnership with Yahoo.

And we continue to rollout and enhance our flagship DexKnows.com site with the addition of ratings and reviews and other important features for consumers that result in a more relevant and personalized local search experience. DexKnows.com will also provide us a whole new set of products to sell in our AT&T and Embarq markets in 2008.

So, in summary, we're progressing well on our plans. The Qwest and AT&T markets are essentially performing and improving as expected. Embarq is off-plan, but we see that as temporary. And we believe that the ongoing execution of our strategic plan and our operating plan position us well for further revenue and earnings growth.

With that, I'll turn the call over to Steve.

Steven Blondy

Thanks, Dave. And good morning everyone. During the quarter we made substantial progress on a number of financial initiatives. Here are the headlines. We delivered strong Q3 EBITDA of $362 million, converting $132 million, or nearly 37%, to free cash flow.

Two, we successfully refinanced $2.7 billion of debt, thereby reducing our interest costs, simplifying our capital structure and increasing our operating and financial flexibility.

And, three, reflecting our continued progress, this morning we announced our plan to initiate a quarterly dividend, representing 25% of free cash flow, or more than half the cash savings from our tax shield. This program will begin with Q1 '08 earnings. These highlights evidence another strong quarter of performance and continued progress of enhancing shareholder value.

Moving to the details, Q3 revenue of $670 million increased modestly on a sequential and year-over-year basis, primarily driven by lower advertiser claims and one month of Business.com operations. On the expense side, we invested aggressively in our digital operations, advertising and branding, companion directories and sales training.

For example, in Q3 we invested over 20,000 man hours training our marketing consultants on our Triple Play solutions alone; time out of the field when they would otherwise would have been generating ad sales. We funded these investments largely by delivering strong synergies in printing and IT costs during the quarter, in addition to our improved claims experience mentioned earlier.

The net result was another strong EBITDA and free cash flow performance. Before, $4 million of purchase accounting and related expenses and $9 million of FAS 123, EBITDA margin was 54%, even after these strategic investments. Q3 EBITDA of $362 million brings year-to-date EBITDA to $1.09 billion, on track to achieve our full year guidance of $1.44 billion.

In Q3, we paid $214 million of cash interest, while total interest accrued in the quarter was $201 million, including the purchase accounting credit of $8 million, incremental interest of $17 million and deferred financing cost amortization of $6 million. Capital expenditure of $24 million in Q3 was in line with Q2 CapEx, while working capital and other sources and uses contributed $11 million, reversing our first-half trend.

We also settled IRS audits of our 2003 and 2004 tax years during Q3, resulting in $2 million of cash taxes in the quarter, representing interest payments to the IRS related to the timing of certain deductions. We anticipate additional payments of $3 million in Q4 related to similar matters for 2004 and subsequent tax years.

Resulting free cash flow of $132 million represents a $1.83 per share in Q3. That brings year-to-date free cash flow to $409 million, or $5.69 per share. So, we're also on track to achieve full year free cash flow guidance of $600 million, or $8.28 per share, considering the relatively light cash interest payments in Q4.

Switching to capital structure, in Q3 we repaid $136 million in debt. However, net debt increased by $209 million in the quarter, including the Business.com financing. Net debt at September 30th was $10 billion, excluding the residual $173 million of purchase accounting fair value balance.

During the quarter, our weighted average cost of debt was approximately 8.2%. Turning to our recent financing activity, in September we reopened the high yield market with a billion dollar, ten-year notes offering by RHD Corp. priced at 8 7/8ths and upsized from $650 million, based on strong demand.

On October 2nd, we closed this transaction and launched a $500 million add-on, plus new Dex East credit facilities of $1.2 billion; the add-on funded last week and the credit facilities funded yesterday. Use of proceeds was to redeem $1.4 billion of outstanding bonds, with average rate of 10 7/8ths and to refinance $1 billion of Dex East and RHD Inc. bank debt having the most restrictive covenants.

We successfully achieved our three goals in this refinancing, sooner than expected and despite capital markets turmoil, thanks to our strong cash flow profile and our track record of delivering results for investors.

One, we enhanced our operating and financial flexibility, while extending our debt maturities. Two, we simplified our capital structure, reducing the number of SEC registrants from five to three. And three, we lowered our average interest rates by nearly 30 basis points on $10 billion. This essentially completes our current refinancing program and is very good news for RHD investors, which leads us to the last highlight for today's call, our dividend policy announcement.

As reported in our earnings release, we plan to share 25% of our strong and stable cash flow directly with investors through a regular quarterly dividend commencing with Q1 '08 earnings. This will enable us to continue investing aggressively in our strategic initiatives, while de-levering at a sufficient pace to achieve our target leverage of high fives in a reasonable time frame.

This initial dividend payout will deliver more than half of the annual cash value of our tax shield directly to shareholders, translating a valuable, but underappreciated, asset into a direct return of capital.

Thanks for your attention this morning. And, operator, we are now ready for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session (Operator Instructions). Our first question is from Michael Meltz - Bear Stearns.

Michael Meltz - Bear Stearns

Thank you. I think I have three questions. Can you talk a little bit about the dividend and obviously-- well, this is no surprise--you were going to announce something today. Can you talk about how you got to the 25% figure in terms of a payout ratio and perhaps your thinking longer term as to how or if that could increase? That's my first question.

Second question, Dave, did you think national was actually up in Q3 or is going to up for '07? Can you clarify that a little bit?

Peter McDonald

National, we actually grew it in two of our businesses in Q3.

Michael Meltz - Bear Stearns

Okay. And then that plus, Dave, you said a 200 basis point swing for Dex and AT&T. What was that comment? You think you were actually up in Q3; I didn't understand; or the 26 states, I'm sorry.

David Swanson

Yes, I believe that the other 26 states, we had a 200 basis point improvement year-over-year, Michael, versus last year's Q3 performance, but I also said, both Dex and AT&T had modest declines for the quarter. The Qwest markets and AT&T, sorry.

Michael Meltz - Bear Stearns

Okay. And then the dividend question, can you talk a little bit about the rationale there, please?

Steven Blondy

Yes, well, clearly we are listening to our investors and we know that our investors value a direct return of capital. We still have a significant amount of leverage and we believe that 25% is a responsible dividend payout ratio and, as I said, it shares more than half of the annual value of the tax shield with our investors.

As far as longer term, Michael, the second part of your question, clearly, as we delever, we'll have capacity to consider increasing the payout ratio.

Michael Meltz - Bear Stearns

Okay, and what's the current thinking? What about capacity for buy backs as well?

Steven Blondy

Should the payout ratio increase that would allow us the ability to consider that as well.

Michael Meltz - Bear Stearns

I don't think I understand that.

Steven Blondy

Well, a 25% payout ratio, we are planning to allocate all of that to dividends. So, as we consider increasing the payout ratio, some of that increased amount could be allocated toward share repurchases.

Michael Meltz - Bear Stearns

Okay. Also, can you quantify your advertising spend in the quarter versus a year ago? What was the delta?

Steven Blondy

$11 million, versus last year.

Michael Meltz - Bear Stearns

What's that on a percentage basis?

Steven Blondy

It's got to be a 100% increase, something like that. You'll see that, we're actually filing the 10-Q tomorrow. You will see the details tomorrow.

Operator

Thank you. Our next question is from Fred Searby - J.P. Morgan.

Fred Searby - J.P. Morgan

Yes, thank you. Mike took two of my questions, but a couple of questions. One, I know we've harped on you have given the standard response. But can you give us more thought on what is the real estate downturn in Vegas and Orlando and some of these markets, is this direct, or are you saying it's a just generalized knock on effect of the economy, or is it plumbers and things not being listed?

And, secondly, can you give us some thought as to what kind of growth rate Business.com should do in '08? And then, finally, give us an update on the competitive dynamic. I know, we had Yao go in, I think two years ago, into Vegas. And is that having any impact with the downturn, what their pricing strategy is in some of these markets that are starting to come off. Thanks.

David Swanson

Let me start and then I will let Steve and Peter chime in. Just a couple of thoughts on the real estate situation for Florida and Nevada. We're trying to be a little bit careful here, because clearly what we've seen early on here, the largest impacts are declines in what were kind of overbuilt versus average headings associated with real estate and the umbrella of other types of headings associated with real estate and housing.

But, you know, we're also being cautious because, generally, these kind of things, if it has a depressing effect upon the overall economy in those marketplaces, it will have some impact on us there as well. And so, that's kind of baked into our current thinking that it's not only going to be isolated to direct real estate related headings.

Steven Blondy

As far as the Business.com growth rate in '08, we're going to provide our '08 guidance in early December at the media conferences in New York. But, what I would tell you is we still believe that we're going to pick up 100 basis points overall growth rate on the entire company through the Business.com transaction. And I think that gives you some direction as to what would happen next year on Business.com alone.

Fred Searby - J.P. Morgan

And can you guys just talk about the competitive dynamic in Vegas? I mean, I know, you went in two years ago. It sounds like you are attributing it mostly to generalized economic conditions and macro. But can you talk about what kind of pricing strategy?

They've obviously had a little accident themselves and I'm just curious as to what they are doing now and what they are doing in some of these markets, the independents, as they start to seize clients.

Peter McDonald

I think that when we think about independents or competitors coming into the market, whether it's Vegas or other places, they're really not the issue today that we're facing in the significance that they were maybe a couple of years ago, because, as more and more have come in, they've somewhat diluted each other.

The key directory in the marketplace continues to be the one that's most used. Where that usage is, and we provide the leads, is really what business people are looking for. So, I think the sales and the marketing efforts especially in these markets have been very effective.

And, although price is one approach to competing, at the end of the day, small-, medium sized businesses are looking for leads and we continue to see the initiatives that we put in place across all markets being very powerful in keeping our position in the marketplace.

Fred Searby - J.P. Morgan

Okay, so no change in their behavior from a pricing perspective.

Peter McDonald

Not really.

Operator

Our next question is from Paul Ginocchio - Deutsche Bank.

Paul Ginocchio - Deutsche Bank

Thanks. Can you give us any color on the 4Q ad trends? I think you've said in the past they are going to be better than the third quarter. Can you just maybe give us a bit more granularity in there, a little bit more color?

And then, second, is there any risk to your ‘07 EBITDA and free cash flow forecast? I think with your visibility in the company, I thought that those numbers were basically in the bag. I just want to confirm that. And particularly on the free cash flow, I think you've done $409 year-to-date, you did $165 million in the fourth quarter.

So we have to do better than the fourth quarter of '06 to hit your guidance. Can you just talk about what's going to change in the fourth quarter for this year to hit your $600 million of free cash flow guidance?

David Swanson

Yes, Paul, just real quick on Q4, you know, at this stage of the game between guidance and where we're at, everybody kind of do the math right, and we expect Q4 to be moderately better than Q3.

Steven Blondy

As far as EBITDA and free cash flow, I'd never say never, but I’m pretty confident that we're going to hit those numbers. Otherwise, we wouldn't be reaffirming them.

Paul Ginocchio - Deutsche Bank

Right. And on the free cash flow, I think your free cash flow numbers reached the first three quarters below a year ago but now it looks like the fourth quarter has to be above it.

Steven Blondy

Yes, the fourth quarter is going to benefit in large part from the lower cash interest payments than the prior year, and certainly, than the prior quarters this year.

Operator

Our next question is from Jeff Shelton - Natexis Bleichroeder..

Jeff Shelton - Natexis Bleichroeder

Thanks. I just wanted a little bit of further clarification on the ad sales numbers. Excluding Business.com, it was down 2.2% year-over-year and that further broken down, 20% of the ad sales was from Nevada and Florida, that was down 7%, and the rest of the 80% was up 2%?

David Swanson

No, Jeff. It's not up 2%. It was a 2% improvement over the other 26 states, like when I had the analysis done, showed just the relative experience between Florida and Nevada and what they did versus last year, which was an 11 point swing to the negative, from a plus 4 to a minus 7, I guess it was.

And but when you look at the other 26 states, the improvement year-over-year was around 200 basis points. I don't have right in front of me what the actual performance was of those other 26 states.

Jeff Shelton - Natexis Bleichroeder

Okay. So, I can do the math. The numbers were a little confusing to me. Okay, that's all I have. Thank you.

Operator

Our next question is from Mark Bacurin - Robert W. Baird and Company.

Mark Bacurin - Robert W. Baird and Company

Good morning, gentlemen. Couple of things. On the ad sales follow-up this quarter, you talked about really a couple of items. Obviously, you were interested in the housing issues, but then you also talked about sales productivity issues and some of that sounds like it was self-imposed from more training versus some of it may have just been lack of productivity.

So, can you comment on maybe of the ad sales decline, if we strip out that Business.com down 2.2%, can you quantify at all how much of that you would estimate would have been kind of self-imposed due to these training issues?

David Swanson

Mark, it's hard to quantify, but I think what we're trying to share here is the amount of training that we've done that impacted Q3 was in far excess of really anything that we've done in the past, and it does impact productivity. And I think that's why we've highlighted it. I haven't done the math, but I mean, it has had an impact over our results, because you just can't take the number of days we've used in training and not have some impact. And we believe this well positions us with our new products going forward and we had to do it.

Mark Bacurin - Robert W. Baird and Company

The other way, I think, Steve, you said over 20,000 man-hours of training on Triple Play in the quarter. And what is that as a percentage of total man-hours that selling time; is there a quick, easy way of doing that math?

Steven Blondy

Well, I think in most sort of professional services industries, they talk about an average of 1,600 hours, like they bill on 1,600 hours, as a sort of a man year. So, 20,000 days I mean, you can try and do the math.

Mark Bacurin - Robert W. Baird and Company

Yes, 900 reps, though is the number to use?

Steven Blondy

No, we've got 1,900 reps.

Mark Bacurin - Robert W. Baird and Company

1,900 reps. I'm sorry. Okay. Right, I'll do that math. Second, on the dividend, just wanted to clarify, you were talking about 25% of free cash flow, is that against the 600 guidance for this year? Or is this a rolling 25%; you're starting at $150 million of dividends for '08, is that the right number?

David Swanson

We haven't provided '08 free cash flow guidance yet, but what I have told you is that free cash flow in '08 will be higher than in '07. So, that would seem to make sense.

Mark Bacurin - Robert W. Baird and Company

So, it will be 25% of your stated '08 free cash flow guidance when you give that number.

David Swanson

Well, but commencing with Q1 '08 results. So, I think in 2008, there will actually be three payments. So, it will be paid out of 2008 results.

Mark Bacurin - Robert W. Baird and Company

It's not going to be a rolling 25% of any given quarter's dividends. It's going to be a steady…?

David Swanson

No, it's going to be a constant dollar amount.

Mark Bacurin - Robert W. Baird and Company

Great. And then, just finally, with the sales force now trained, or at least by year-end trained on Triple Play, any early expectations in terms of when you'll start to see; I suppose in beginning of January we'll see the full impact of those guys out selling Triple Play solutions. And any comment you can give on expected sales lift you might get out of that?

Peter McDonald

I don't think we're giving guidance yet for 2008, but I think that we all feel pretty good that we've been through the training of all of this. We have the products out. Our early results, we're very pleased with, and I think that part of our optimism is looking for providing the solutions, which the reception we're getting from the marketplace is terrific.

Small-, medium-sized business people are looking for us to provide solutions. The sales force is thrilled to be able to do it. And I think that this is all part of the strategic plans, the operating plans, and we're looking for this to impact '08.

Operator

Our next question is from Maurice McKenzie - Signal Hill.

Justin Brown - Signal Hill

Thanks. Good morning. Justin Brown here for Maurice McKenzie, I have one question. Can you talk about your accounts receivable agents, in your hardest hit real estate markets, such as Nevada and Florida, and also if you could discuss headings related to durables, lending and other housing-related areas.

David Swanson

Okay. Well, I don't have precise numbers with respect to those data points, but what I can give you is the kind of overview or trending color, so that you can get a sense for that.

In the Embarq markets where we're experiencing some of those challenges that you're referring to, we are seeing a very modest increase in the bad debt rates. Typically we might be looking at 3% and maybe that's going to 4% or something like that in those isolated areas. It's something along those lines.

As far as the headings themselves go, one of the things that we looked at was that in Nevada and Florida that the specific headings for housing and housing-related had gotten to nearly double the average sort of revenue value in the rest of our markets.

And with what we're seeing now, it has actually come back to being more in line. So, and I forget what the numbers are. I think it's something like, it had gotten as high as maybe close to 4% of revenue in housing and housing-related, and the rest of our markets were close to 2%. And so, that 4% has come down to 2%. That's what we're seeing in current sales trends.

Steven Blondy

If I could just jump in for a second, to clear up Jeff's question that he had some confusion about in the Florida and Nevada markets versus the other markets, I found that data. And just to be clear, those Florida, Nevada we’re down 7 in the quarter. The other markets were down just over a point, and that's what with the makeup of that down 2.2% is like for the core business.

Operator

Next question is from Anthony DiClemente - Lehman Brothers.

George Hawkey - Lehman Brothers

Hi, this is George Hawkey standing in for Anthony. Just had a quick question on the deferred revenues line in the balance sheet. Looks like it's down about 10% sequentially, whereas over the past four quarters it's been up about 2% to 4%. Is that an indicator of print only sales? Could you give some clarity on that?

Steven Blondy

So, last year, after the Dex acquisition, remember we're not able to recognize the revenue associated with any directories, which published prior to our acquiring that business and neither were we permitted to book the deferred revenue balances.

And so, what we saw through 2006 and even into the first quarter this year was a ramping up of the deferred revenue balances back to a sort of a normalized level as we published a full cycle of those directories. That's what you saw last year and into the first quarter.

What you're seeing in Q3 versus Q2 reflects a relatively lower total ad sales value for Q3 based on the seasonality of our ad sales. You heard Dave say earlier that Q3 is the smallest quarter in the year. And so the way that deferred revenue balance goes up and down has to do with the amount of ad sales in the quarter will raise that balance. And then, as we amortize that balance through the revenue line, that balance declines.

Operator

Next call is from Karl Choi - Merrill Lynch.

Karl Choi - Merrill Lynch

Hi, good morning. Again, just want to go down a little bit deeper into the ad sales figures. Sounds like fourth quarter will still be down quite a bit and you won't have Vegas in the quarter.

I just want to focus on maybe, other than the Embarq markets, even if you just look at the Dex markets and the AT&T markets, looks like, even though they may be on plan for the year, maybe the second half trends are deteriorating compared to the first half. Just want to get a better sense?

And also, as we look into the first quarter of '08, we'll have Orlando, we'll have Vegas again. But, we have another quarter to go at least with a decline in comp sales.

Steven Blondy

I think, as we look into the fourth quarter, I mean, there's pretty good optimism out there about how we continually see ourselves improving, with the new portfolio of products. And I think, we have been impacted, at least in the AT&T and the Embarq side a little bit, not only with the training, but also with the two systems.

So, there's probably a little bit of an impact there from a productivity standpoint. But, we feel we're moving in the right direction. I think you said we're going to be way off, I don't see that's the case in Q4. But, we've given our guidance for 2007 and so we should go right in that range.

Karl Choi - Merrill Lynch

And what about, just looking a little bit ahead into the first quarter, looking at your publication schedule?

Steven Blondy

I think we've come straight out and said that we've got big Vegas again in January and we've got some big Florida markets there. And so, that will have an impact, because the housing situation hasn't really changed, the economic situation hasn't changed in those markets.

David Swanson

Karl, put a little finer point on it is, don't see it quite to the extent that we had in Q3. Florida and Nevada make up about a little less than 15% of Q1 versus the 20% here. So, even though we don't feel don't feel like we're out of the woods there, it doesn't have as much impact on the overall result. But, clearly, we haven't seen a turnaround in the environment in those two states, yet.

Operator

Our last question is from Peter Salkowski - Goldman Sachs.

Peter Salkowski - Goldman Sachs

Yes, good morning, everybody. Steve, with regard to all the debt refinancing, I was wondering, if you could talk a little bit about any of the costs that are going to start flowing through with regard to premiums paid on debt refinance and/or deferred costs of the debt that you have brought in.

And then also, I think you said that the $1.2 billion closed last night. Could you give an indication of what the rates were on that?

Steven Blondy

Okay. Well, the second question is the easy one, right? $1.2 billion, priced at LIBOR plus $175 for the term loan A, and LIBOR plus $200 for the term loan B, which is right where we aimed. And so, feeling pretty good about that, especially considering the amount of leverage we have in the ratings. So, I think that we did a pretty great job with that.

As far as all the moving pieces in terms of deferred financing costs and premiums, etcetera, we're providing some level of detail in our 10-Q. You'll see that tomorrow. But it's really a fourth quarter item and there's a lot of moving pieces and we've got technical accounting memos being written about, how do we treat it, etcetera. And so, I don't have all those details today.

What I do know is that the fair value adjustments associated with the Dex East bonds that were called will go away and also the deferred financing costs associated with the debt that was refinanced, that also is going to get written off. But then, we've got new financing costs associated with the new debt.

So, I'll tell you, let me try to pull together a schedule and see what I can share with you over the next week or two.

Peter Salkowski - Goldman Sachs

Got you. And definitely, looking forward to there. With regard to the CapEx, what percentage of CapEx is related to the billing out of the Triple Play, versus like maintenance CapEx?

David Swanson

Well, now, the majority of the CapEx is really going towards our IT modernization and integration process. We're still operating on two separate Amdocs platforms today. One that's the legacy Dex platform and one that's the Donnelley platform. Now, both the Embarq markets and the AT&T markets are now up on the new system.

But the Qwest markets are still operating on the old system. And over the course of the next two or three quarters, we will end up being able to decommission the old Dex system. I mean, the majority of the CapEx relates to the software capitalization associated with that development activity.

Peter Salkowski - Goldman Sachs

Great. Thank you. And then, last question, with regard to marketing expense, I know you said that delta was, I think, $11 million in the third quarter. Expectations for fourth quarter marketing, I see you're still out there heavily marketing DexKnows.com and the AT&T and the Embarq markets.

And then what are your thoughts with regard to the marketing expense? I think you said it was going to be coming down in '08. Do you still anticipate doing that?

David Swanson

Yes and yes. So, we expect to continue to invest heavily in branding and advertising, as we rollout the Dex brand into the AT&T and Embarq markets. And, yes, we do expect the overall advertising budget will be lower next year compared to this year.

Peter Salkowski - Goldman Sachs

Any sort of numbers on fourth quarter and also on '08?

David Swanson

Not on '08, yet. I mean, we're going to provide that to you guys here in a couple of weeks here in early December. On '07 Q4, I think it's probably going to be something like Q3.

James Gruskin

Okay. Well, thank you for your interest in R. H. Donnelley today and should you have any further questions, don't hesitate to call our Investor Relations group. That concludes our call. Have a great day.

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