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R.H. Donnelley Corp. (RHD)

Q3 2007 Earning Call

October 25, 2007 10:00 am ET

Executives

James Gruskin - Assistant Vice President ofFinance and Investor Relations

David Swanson - Chairman and Chief ExecutiveOfficer

Steven Blondy - Executive Vice President and ChiefFinancial Officer

Peter McDonald - President and Chief OperatingOfficer

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 investorteleconference. (Operator Instructions) Please note that the teleconference isbeing recorded, as well as webcast live over the company's website at www.rhd.com.

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

JamesGruskin

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

Certainstatements made today may be forward-looking within the meaning of the PrivateSecurities Litigation Reform Act. We call your attention to our press releasefor the quarter ended September 30th, 2007, and the company's Form 8-K furnished to the SECthis morning, both of which discuss third quarter results.

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

Thistransmission is the property of R.H. Donnelley Corporation. Any retransmissionor broadcast without the express consent of the company is strictly prohibited.

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

Also, today'sreferences to EBITDA are before FAS 123 expense. Some of the aforementioneditems are non-GAAP financial measures. Additional information about non-GAAPfinancial measures, as well as a reconciliation between these items and themost comparable GAAP measures, can be found in the press release and related 8-Kfurnished to the SEC this morning.

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

And now, Iwould like to turn the call over to Dave.

DavidSwanson

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

RHD generatednet revenues of $670 million, an operating EBITDA excluding FAS 123 andpurchase accounting expenses of $362 million during the third quarter, puttingus right on track to achieve our full year guidance.

Ad sales, aleading indicator for revenue, were down a little over 1%. These resultsreflect the positive impact of many ongoing initiatives, but also some of thenegative impacts on expense and productivity associated with our continuingintegration efforts, business process implementation, sales force training andinvestments in systems, digital products and brand.

We've alsoexperienced a more difficult ad environment in a few isolated markets. On onehand, our financial discipline and focus on cash flow is the best in ourindustry and continues to drive best in breed margins and free cash flowconversion. And our strategic efforts are driving significant growth anddevelopment of our online offerings. On the other hand, we faced a moderatelymore difficult ad environment, particularly in high growth markets impacted bythe slowdown in real estate.

We alsocontinued to experience some unavoidable productivity issues associated withour new systems implementation, as well as training our sales force on our newsuite of Internet solutions.

As Imentioned, overall ad sales were down 1.1% in the third quarter. Performance ofthe core business, without the effect of Business.com, was a decline of alittle over 2.2%. While AT&T and Qwest markets contributed modestly to thatdecline, 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 arelatively small quarter.

Now, severalof you had asked me for more quantification around this particular issue andhow widespread or not the impact is, so let me try to provide just a few moredetails.

While thesetwo states, Florida and Nevada, make up only about 12% of RHD's total annual adsales, they make up about 20% of the third quarter. These states havehistorically been strong contributors driven by very robust economies. Lastyear, these states contributed a little over 4% sales gain in the thirdquarter. This year, Florida and Nevada posted nearly a 7% decline for the quarter, or an11% swing.

Now the goodnews is that all of the other 26 states combined had better than a 2% swing theother way compared to prior year performance, reflecting all the improvementswe're making across the business. Both the Qwest markets and the AT&Tmarkets will finish the year right on plan. So, we see a regionally isolatedcorrection here that will eventually work its way through the system.

I'd also liketo point out that this is really a great example of how our scale, our businessmodel and diversified footprint and customer base create this tremendousstability for our business.

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

Thediversified nature of our business is what drives this stability and makes usunique compared to other local media. We serve over 500 local markets with morethan 600,000 small and medium-sized business advertisers across literallyhundreds of different industries.

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

We've alsotaken 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 ouroverall 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 thepercentage of broadband penetration is higher than the rest of the country, andthe appetite for Internet solutions by advertisers is also higher.

We completedtraining of all 2,000 marketing consultants on our digital products, includingour new SEM and DexKnows.com products. And we've installed Internet trainingmanagers in all regions to drive continued education and support. This has beena big undertaking and it has taken away selling time in 2007, but it's aninvestment we believe will make a big difference, particularly in the urbanareas.

We're investingin the Dex market brand, to help unify our product sweep and leverage our printcredibility across our online products. We enhanced our interactive group'sproducts and capabilities, with the acquisition of Business.com and theexpansion of our partnership with Yahoo.

And wecontinue to rollout and enhance our flagship DexKnows.com site with theaddition of ratings and reviews and other important features for consumers thatresult in a more relevant and personalized local search experience.DexKnows.com will also provide us a whole new set of products to sell in ourAT&T and Embarq markets in 2008.

So, insummary, we're progressing well on our plans. The Qwest and AT&T marketsare essentially performing and improving as expected. Embarq is off-plan, butwe see that as temporary. And we believe that the ongoing execution of ourstrategic plan and our operating plan position us well for further revenue andearnings growth.

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

StevenBlondy

Thanks, Dave.And good morning everyone. During the quarter we made substantial progress on anumber of financial initiatives. Here are the headlines. We delivered strong Q3EBITDA of $362 million, converting $132 million, or nearly 37%, to free cashflow.

Two, we successfullyrefinanced $2.7 billion of debt, thereby reducing our interest costs,simplifying our capital structure and increasing our operating and financialflexibility.

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

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

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

The net resultwas another strong EBITDA and free cash flow performance. Before, $4 million ofpurchase accounting and related expenses and $9 million of FAS 123, EBITDAmargin was 54%, even after these strategic investments. Q3 EBITDA of $362million brings year-to-date EBITDA to $1.09 billion, on track to achieve ourfull 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, incrementalinterest of $17 million and deferred financing cost amortization of $6 million.Capital expenditure of $24 million in Q3 was in line with Q2 CapEx, whileworking capital and other sources and uses contributed $11 million, reversing ourfirst-half trend.

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

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

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

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

On October2nd, we closed this transaction and launched a $500 million add-on, plus newDex East credit facilities of $1.2 billion; the add-on funded last week and thecredit facilities funded yesterday. Use of proceeds was to redeem $1.4 billionof outstanding bonds, with average rate of 10 7/8ths and to refinance $1billion of Dex East and RHD Inc. bank debt having the most restrictivecovenants.

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

One, weenhanced our operating and financial flexibility, while extending our debtmaturities. Two, we simplified our capital structure, reducing the number ofSEC registrants from five to three. And three, we lowered our average interestrates by nearly 30 basis points on $10 billion. This essentially completes ourcurrent refinancing program and is very good news for RHD investors, whichleads us to the last highlight for today's call, our dividend policyannouncement.

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

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

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

Question-and-AnswerSession

Operator

Thank you. Wewill now begin the question and answer session (Operator Instructions). Ourfirst question is from Michael Meltz - Bear Stearns.

MichaelMeltz - Bear Stearns

Thank you. Ithink 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 youtalk about how you got to the 25% figure in terms of a payout ratio and perhapsyour thinking longer term as to how or if that could increase? That's my firstquestion.

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

PeterMcDonald

National, weactually grew it in two of our businesses in Q3.

MichaelMeltz - Bear Stearns

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

DavidSwanson

Yes, I believethat 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 andAT&T had modest declines for the quarter. The Qwest markets andAT&T, sorry.

MichaelMeltz - Bear Stearns

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

StevenBlondy

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

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

MichaelMeltz - Bear Stearns

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

StevenBlondy

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

MichaelMeltz - Bear Stearns

I don't thinkI understand that.

StevenBlondy

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

MichaelMeltz - Bear Stearns

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

StevenBlondy

$11 million, versuslast year.

MichaelMeltz - Bear Stearns

What's that ona percentage basis?

StevenBlondy

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

Operator

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

Fred Searby- J.P. Morgan

Yes, thankyou. Mike took two of my questions, but a couple of questions. One, I knowwe've harped on you have given the standard response. But can you give us morethought on what is the real estate downturn in Vegas and Orlando and some ofthese markets, is this direct, or are you saying it's a just generalized knockon 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 shoulddo in '08? And then, finally, give us an update on the competitive dynamic. Iknow, we had Yao go in, I think two years ago, into Vegas. And isthat having any impact with the downturn, what their pricing strategy is insome of these markets that are starting to come off. Thanks.

DavidSwanson

Let me startand then I will let Steve and Peter chime in. Just a couple of thoughts on thereal 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 declinesin what were kind of overbuilt versus average headings associated with realestate and the umbrella of other types of headings associated with real estateand housing.

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

StevenBlondy

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

Fred Searby- J.P. Morgan

And can youguys just talk about the competitive dynamic in Vegas? I mean, I know, you wentin two years ago. It sounds like you are attributing it mostly to generalizedeconomic conditions and macro. But can you talk about what kind of pricingstrategy?

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

PeterMcDonald

I think thatwhen we think about independents or competitors coming into the market, whetherit's Vegas or other places, they're really not the issue today that we'refacing 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 keydirectory in the marketplace continues to be the one that's most used. Wherethat usage is, and we provide the leads, is really what business people arelooking for. So, I think the sales and the marketing efforts especially inthese markets have been very effective.

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

Fred Searby- J.P. Morgan

Okay, so nochange in their behavior from a pricing perspective.

PeterMcDonald

Not really.

Operator

Our nextquestion is from Paul Ginocchio - Deutsche Bank.

PaulGinocchio - Deutsche Bank

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

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

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

DavidSwanson

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

StevenBlondy

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

PaulGinocchio - Deutsche Bank

Right. And onthe free cash flow, I think your free cash flow numbers reached the first threequarters below a year ago but now it looks like the fourth quarter has to beabove it.

StevenBlondy

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

Operator

Our nextquestion is from Jeff Shelton - Natexis Bleichroeder..

JeffShelton - Natexis Bleichroeder

Thanks. I justwanted a little bit of further clarification on the ad sales numbers. ExcludingBusiness.com, it was down 2.2% year-over-year and that further broken down, 20%of the ad sales was from Nevadaand Florida, that was down 7%, and the rest of the 80% was up2%?

DavidSwanson

No, Jeff. It'snot up 2%. It was a 2% improvement over the other 26 states, like when I hadthe analysis done, showed just the relative experience between Florida andNevada and what they did versus last year, which was an 11 point swing to thenegative, from a plus 4 to a minus 7, I guess it was.

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

JeffShelton - Natexis Bleichroeder

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

Operator

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

MarkBacurin - Robert W. Baird and Company

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

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

DavidSwanson

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

MarkBacurin - Robert W. Baird and Company

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

StevenBlondy

Well, I thinkin most sort of professional services industries, they talk about an average of1,600 hours, like they bill on 1,600 hours, as a sort of a man year. So, 20,000days I mean, you can try and do the math.

MarkBacurin - Robert W. Baird and Company

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

StevenBlondy

No, we've got1,900 reps.

MarkBacurin - Robert W. Baird and Company

1,900 reps.I'm sorry. Okay. Right, I'll do that math. Second, on the dividend, just wantedto clarify, you were talking about 25% of free cash flow, is that against the600 guidance for this year? Or is this a rolling 25%; you're starting at $150million of dividends for '08, is that the right number?

DavidSwanson

We haven'tprovided '08 free cash flow guidance yet, but what I have told you is that freecash flow in '08 will be higher than in '07. So, that would seem to make sense.

MarkBacurin - Robert W. Baird and Company

So, it will be25% of your stated '08 free cash flow guidance when you give that number.

DavidSwanson

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

MarkBacurin - Robert W. Baird and Company

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

David Swanson

No, it's goingto be a constant dollar amount.

MarkBacurin - Robert W. Baird and Company

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

PeterMcDonald

I don't thinkwe're giving guidance yet for 2008, but I think that we all feel pretty goodthat 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 ouroptimism is looking for providing the solutions, which the reception we'regetting from the marketplace is terrific.

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

Operator

Our nextquestion is from Maurice McKenzie - Signal Hill.

JustinBrown - Signal Hill

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

DavidSwanson

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

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

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

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

StevenBlondy

If I couldjust jump in for a second, to clear up Jeff's question that he had someconfusion about in the Florida and Nevada markets versus the other markets, Ifound that data. And just to be clear, those Florida, Nevada we’re down 7 in the quarter. The other marketswere 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 questionis from Anthony DiClemente - Lehman Brothers.

GeorgeHawkey - Lehman Brothers

Hi, this isGeorge Hawkey standing in for Anthony. Just had a quick question on thedeferred 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 anindicator of print only sales? Could you give some clarity on that?

StevenBlondy

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

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

What you'reseeing in Q3 versus Q2 reflects a relatively lower total ad sales value for Q3based on the seasonality of our ad sales. You heard Dave say earlier that Q3 isthe smallest quarter in the year. And so the way that deferred revenue balance goesup and down has to do with the amount of ad sales in the quarter will raisethat balance. And then, as we amortize that balance through the revenue line,that balance declines.

Operator

Next call isfrom Karl Choi - Merrill Lynch.

Karl Choi -Merrill Lynch

Hi, goodmorning. Again, just want to go down a little bit deeper into the ad salesfigures. Sounds like fourth quarter will still be down quite a bit and youwon't have Vegas in the quarter.

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

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

Steven Blondy

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

So, there'sprobably 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 beway off, I don't see that's the case in Q4. But, we've given our guidance for2007 and so we should go right in that range.

Karl Choi -Merrill Lynch

And whatabout, just looking a little bit ahead into the first quarter, looking at yourpublication schedule?

StevenBlondy

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

DavidSwanson

Karl, put alittle finer point on it is, don't see it quite to the extent that we had inQ3. Florida and Nevada make up about a little less than 15% of Q1 versusthe 20% here. So, even though we don't feel don't feel like we're out of thewoods 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 lastquestion is from Peter Salkowski - Goldman Sachs.

PeterSalkowski - Goldman Sachs

Yes, goodmorning, everybody. Steve, with regard to all the debt refinancing, I waswondering, if you could talk a little bit about any of the costs that are goingto start flowing through with regard to premiums paid on debt refinance and/ordeferred 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 anindication of what the rates were on that?

StevenBlondy

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 isright where we aimed. And so, feeling pretty good about that, especiallyconsidering the amount of leverage we have in the ratings. So, I think that wedid a pretty great job with that.

As far as allthe 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. Butit's really a fourth quarter item and there's a lot of moving pieces and we'vegot 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 knowis that the fair value adjustments associated with the Dex East bonds that werecalled will go away and also the deferred financing costs associated with thedebt 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 tellyou, let me try to pull together a schedule and see what I can share with you overthe next week or two.

PeterSalkowski - Goldman Sachs

Got you. Anddefinitely, looking forward to there. With regard to the CapEx, what percentageof CapEx is related to the billing out of the Triple Play, versus likemaintenance CapEx?

DavidSwanson

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

But the Qwestmarkets are still operating on the old system. And over the course of the nexttwo or three quarters, we will end up being able to decommission the old Dexsystem. I mean, the majority of the CapEx relates to the softwarecapitalization associated with that development activity.

PeterSalkowski - Goldman Sachs

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

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

DavidSwanson

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

Peter Salkowski- Goldman Sachs

Any sort ofnumbers on fourth quarter and also on '08?

DavidSwanson

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

JamesGruskin

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

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

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