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Idearc, Inc. (IAR)

Q3 2007 Earnings Call

November 1, 2007, 11:00 AM ET

Executives

Samuel Jones - Sr. VP of IR

Katherine Harless - President and CEO

Andrew Coticchio - EVP CFO

Analysts

Peter Salkowski - Goldman Sachs

Anthony DiClemente - Lehman Brothers

James Boyle - CL King

Paul Ginocchio - Deutsche Bank Securities

Meridith Alin - Bear Stearns

Michael Meltz - Bear Stearns

Presentation

Operator

Good morning and welcome to Idearc's Third quarter 2007 Earnings Conference Call. After the company's prepared remarks there will be a question and answer session. Some statements made by the company today during this call are forward-looking statements. These statements include the company's beliefs and expectations as the future events and trends affecting the company's business and are subject to risks and uncertainties.

The company advices you not to place undue reliance on these forward-looking statements and to consider them in light of the risk factors set forth and the reports filed by Idearc, Inc. with the Securities and Exchange Commission. The company has no obligation to update any forward-looking statements.

At this time, I would like to turn the call over to Dee Jones, Senior Vice President of Investor Relations. Please go ahead Dee.

Samuel Jones - Senior Vice President of Investor Relations

Good morning everyone and thank you for joining us today. With me today are Kathy Harless, President and CEO; and Andy Coticchio, Executive Vice President and Chief Financial Officer.

We will refer to some non-GAAP measures that exclude one time costs related to the spin-off and other special items that are intended to present our quarterly financial result as if we had been a standalone entity at the beginning of the periods presented. Given that our spin-off has been occurred in November 2006, management believes these non-GAAP measures provide investor with a more meaningful view of our performance and a better benchmark to compare future performance.

We have provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures on our website at idearc.com under the Investor Relations tab. Please note that an archived version of this call will be available on our website at idearc.com under the Investor Relations section. Additionally, a replay of this conference call will be available through November 15th by dialing 877-519-4471. International callers should dial 973-341-3080. The replay access code is 9343136.

And now, I'd like to turn the call over to Kathy Harless, our President and Chief Executive Officer. Kathy?

Katherine Harless - President and Chief Executive Officer

Thank you Dee. Good morning everyone and thank you for joining us today. As we discuss our third quarter earnings result, I would like you to take away three important points from this call.

First, corporate cash flow were fund another dividend to our stockholders. Second, earlier arriving full year guidance noting posted flat multi-product revenues and only slight OIBITDA margin contraction from 2006 on an adjusted pro forma basis. Third, we are reporting here with our multi-platform strategy and beginning to capture new and non-traditional advertisers across all channels. Our local sales force which is a key asset is trying and investing in a multi-product sale.

Now we've completed an extremely difficult quarter. We're getting price to the end of the year and in fact will celebrate Idearc's first year as a publicly traded company in just two weeks. Throughout the year, we've talked about our strategy and our challenges and we have stayed consistent on what we told you we would deliver.

We are forging ahead with our multi-platform strategy and meeting industry challenges head on. We are ahead of other directory publishers when it comes to transforming the pool [ph] business to a multi-product business.

The steps we are taking along with our strong internet growth effectively positions us for the future. Now throughout the year we've discussed with you the three distinct components for internet local search that are required to succeed, content technology and traffic. We have consistently advanced on each of these areas with a way to focus on traffic. We're capitalizing an opportunities to increase traffic on superpages.com possibly organic traffic to monetize our growing demand of price for performance products.

Now these here are re-occurring team on today's call regarding our internet business it is traffic, traffic and more traffic. We take several significant steps in this area. Starting with our acquisition of Switchboard.com and other online directory assets for new page sites [ph] which closed yesterday October the 31st 2007.

As we have noted again that this acquisition is consistent with our multi-platform strategy if it's worth with our stated capital allocation program and would generate profitable revenue. Switchboard.com is a traffic play that will enhance our competitive position in the marketplace. The acquisition significantly increases our internet traffic as we distribute superpages.com advertisers for more and more end users.

Now also this past quarter we acquired the LocalSearch.com URL and made a strategic investment in their Contents.com. Again this is a traffic play that allows us to monetize local search even better than we have been. This investment also provides us with access to neighborhood based information that can easily integrate with many of our local search offerings.

Our superpages.com rapidly transforms from an internet Yellow Pages model to a local business model significantly the LocalSearch.com URL will be a critical asset moving forward.

Now I want to reinforce one other area where we continue to expand our traffic base and that is our distribution agreement with other internet sites. Distribution partnership an important part of our strategy because when you add them all together that is they have tremendous feasibility for our advertisers.

In the third quarter we signed additional distribution agreement. We also extended our relationship with Whitepages.com which allows us to get Superpages.com advertisers across a search platform. We distribute our advertiser's content across more than 250 internet charts and many of these distribution agreements price end users directly into the Superpages.com environment. For they can make bond decisions with which content application such as consumer reviews in a compared merchant feature.

Now also just two weeks ago we launched National. One of the most compelling internet advertising products. Superpages video, an online internet provider to also offer video products. We incorporate video clips into a type of performance environment.

But when our internet sales channels tested the video clips in Seattle, San Francisco and Los Angeles in the third quarter, we received immediate positive reception for the product. In the third quarter, we began training our entire sales force on the product.

Video clips are now being sold across the country by our local sales force on our dedicated internet sales channel. We are selling video clips at a very, very opportune time as more than 30% of the U.S. households have broadband access. We believe video clips will bridge the distance between consumers and the content they are looking for and performing a local storage.

Advertisers are adopting video clips because the product brings their businesses to life. Small and medium sized businesses that are not being able to afford broadcast advertisings are now very affordable, use online video advertising to showcase their products, brands, services and specialties and I want to encourage you to be as simplified... Superpages video offer at www.video.superpages.com. That's www.video.superpages.com.

Now on the technology side, we launched Superpages mobile for BlackBerry. Now we can deliver content from our performance based advertisers directly to business travelers and mobile users. This is another important application for us because it is difficult to predict where consumers are going to be when they search for local information.

We can however deliver content to multiple platforms including mobile devices for our advertisers appear wherever that one media is starting [ph]. You can view our mobile application at www.mobile.superpages.com.

Now I would like to spend a little time on our initiative in market expansion that will develop to capture new advertisers and retain current ones. We have once said that we select new markets to enter based on the ability to generate more advertising sales, enhance Superpages.com content and strengthen the appeal to large national advertisers.

Well up until now, we've entered the new market with a Yellow Pages print focus [ph] first. Print competition however is stabilizing and we are seeing an opportunity to capitalize on our high growth internet business.

So in the first quarter, our local sales force managed to let market such as Salt Lake City with internet ad sales as the lead offer. As market opportunity did take, we follow with the Yellow Pages print offer. They allows us to penetrate the market more quickly and as I mentioned capitalize on the growth part of our business.

We are evaluating potential new markets for 2008 and will announce them at the appropriate time. In the meantime, we are seeing early success with this initiative.

Now, with respect to our local sales force we continue to be pleased with our progress. Despite the difficult headwinds we are facing our performance at the local level continues to show improvement on a year-to-date basis. Now one area we face the challenge is in the national channel. We are experiencing some softness in our third party national channel with some certified marketing risk that as I mentioned earlier we are meeting industry challenges alone.

Given that we see tremendous demand for performance based products in the marketplace, we have initiated a type of performance model for select non-traditional Yellow Pages National advertisers in the Verizon Yellow Pages. We are moving aggressively on this initiative and it began offering this product to national advertisers through our sales force. With this model our in-house national sales force works directly with national advertisers.

Our new telephone number is placed in the Yellow Pages ad and advertisers pay us the latest feed [ph] and need by phone call. Simply said, we provide the lead and the national advertiser pays for it. With the current situation in this sales channel we believed the timing was appropriate to supplement those channels effort worthily program. With this program we have already seen new and return advertisers from industry such as consumer electronics, restaurant travel and entertainment.

Now in addition we continue to explore new channels and new ways of capturing national advertising dollars. For example the in-house national sales force we have also entered into an agreement to pre-sell future advertising inventory through a box-sale to a third party. With this program we received prepayment for advertising inventory that will be placed over the last of the agreement.

Firstly in this program by now we've reflected in our multi-product ad sales. As we will recognize published revenue may need ad sales or price [ph]. While we continue to see softness in the near term these powerful programs provide new opportunities in the national channel to improve performance as we move towards 2008 and beyond.

Now I would like to turn the call over to Andy Coticchio, our Executive Vice President and Chief Financial Officer, to give you financial details. Andy?

Andrew Coticchio - Executive Vice President Chief Financial Officer

Thank you Kathy and good morning every one. First I need to mention that we will refer to GAAP and non-GAAP results so that you can readily adjust third quarter 2007 for comparison to 2006 adjusted pro forma results.

Here are the financial headlines. One, we experienced strong OIBITDA and net income results. Two, we once again delivered double digit internet revenue growth, both on a quarterly and year-to-date basis. Three, we were prudent in managing our expenses which resulted in efficient cost control and contributed to our OIBITDA and net income performance. Four, our continued strong cash flow enabled us to declare dividend to be paid in the fourth quarter.

Let's start with detail on multi-product revenues. On an adjusted pro forma basis, third quarter multi-product revenues were $791 million or 1.7% decrease compared to that to the same period in 2006. We reported internet revenue of $69 million or an increase of 15% compared to the same period in 2006. On an adjusted pro forma basis year-to-date multi product revenues were $2.4 billion or a 0.5% decrease compared to the same period in 2006.

Year-to-date internet revenue was $210 million, a 25.7% increase compared to the same period in 2006. Let me say, we are very pleased with our multi-platform strategy and with our ability to manage through the transformation of our business. As we assess our revenue results, we should note a couple of items.

First, quarter-over-quarter internet results were affected by our acquisition of Inceptor assets in the third quarter of 2006. As we have noted before, third quarter 2007 is the first quarter in which revenue associated with our Inceptor assets was included in prior period results.

Second, our third quarter internet revenue was disproportionately affected by an adjustment of approximately $4 million related to operational issues associated with one of our reseller channels. Without these items, organic growth for the quarter or internet and multi-product is more inline with our year-to-date growth rates. A more proper view of our performance is reflected in our year-to-date growth rates.

Superpages.com remains a phenomenal story. Kathy summarized the outstanding quarter initiatives from our internet team such as the Switchboard.com acquisition and we expect to continue driving strong performance in this area.

Moving on to OIBITDA, in the third quarter 2007 we had OIBITDA of $380 million on an adjusted pro forma basis excluding nonrecurring costs. OIBTDA for the third quarter was $398 million or a 1.7% decrease compared to the same period in 2006. On a year-to-date basis we had OIBITDA of $1.1 billion.

On an adjusted pro forma basis year-to-date OIBITDA was $1.17 billion or 1.4% decrease compared to the same period in 2006. You will recall that we adopted a change in accounting methodology in the second quarter 2007 which is consistent with other directory publishers and is aligned with our revenue recognition policy. In course of the impact of this change on 2006 results I believe it is important to note that excluding the effect of this accounting change which is a non-cash event, our third quarter OIBITDA on an adjusted pro forma basis would have been $408 million or a decrease of $1 million over the same period in 2006. This reflects our focus on cost structure and our ability to manage expenses.

Equally important, year-to-date adjusted pro forma OIBITDA would have been $1.17 billion or flat compared to the same period in 2006. These are strong results in line with what we expected for the third quarter.

Now let's look at some of the components of our financial results. We recorded net income of $117 million or $0.80 per diluted share for the third quarter 2007. Adjusting for non-recurring costs as described in detail in the accompanying financial schedules, the company's adjusted pro forma net income for the third quarter was $128 million or $0.88 per diluted share.

Year-to-date reported net income was $329 million or $2.25 per diluted share. On an adjusted pro forma basis year-to-date net income was $374 million or $2.56 per diluted share, a decrease of $1 million $0.01 per diluted share over the same period in 2006.

Free cash flow for the nine months ended September 30, 2007 was $303 million based on cash from operating activities of $334 million that's capital expenditure of $31 million. Our strong cash flow again allowed us to declare a quarterly dividend.

Yesterday the Idearc Board of Directors declared a quarterly dividend of $34.25 per outstanding share to be paid on or about December 13, 2007 to our stockholders at record at the close of business on November 24, 2007.

Lastly multi-product ad sales for the third quarter were down 2.7% compared to the same period of 2006. On a year-to-date basis multi product advertising sales were down 1.1% as compared to the same period in 2006. As I mentioned earlier, our quarterly multi-product ad sales were affected by the reseller issue and the effect of the 2006 base revenues from the Inceptor acquisition in internet results.

Organically without these elements our quarterly results are much more in line with the year-to-date results. These results are consistent with our third quarter 2006 multi-product ad sales. On a year-to-date basis, we continue to see multi-product ad sales improvement. As Kathy mentioned, our local sales force is embracing a multi-product sale, in fact we continue to see improvement on a year-to-date basis.

However we saw disappointing results from some certified marketing reps in our national channel. We believe it was necessary to aggressively initiate programs to win back national advertisers as well as retain and attract new ones.

The performance base model is one initiative that already has earned us national clients who have never advertised in the Yellow Pages before. Our first national advertisers under the pay for performance model are now appearing in the Verizon Yellow Pages. We looking at other programs to supplement the CMR channel and ensure that national advertising remains a solid part of our customer set.

So we are working to mitigate the national advertising weakness in our multi-product ad sales with new opportunities and we remain entrenched in the multi-platform strategy. Kathy outlined a host of initiatives from which we will start seeing benefits as we move forward.

Looking ahead through the remainder of 2007, we are positioning to deliver on what we have projected for the full year 2007 and we are reiterating guidance noting close to flat multi-product revenues expected for the year and only slight OIBITDA margin contraction from 2006 on an adjusted pro forma basis because of continued changes in our revenue mix.

Now, let's take your questions. Operator will you please open up the call?

Question And Answer

Operator

Certainly. [Operator Instructions]. Thank you. Our first question is coming from Peter Salkowski of Goldman Sachs, please go ahead.

Peter Salkowski - Goldman Sachs

Thank you, good morning everybody. Kathy I was wondering if you could just talk about the sales on the print side in terms of what you're seeing there, I know that the print numbers were down, I guess on a comparable basis, 4.5% two things, one are you seeing weakness by market or by heading within all that and then two, if you can give us a sense of how growing forward the books and changing the third quarter number last year from 545 to 580. How that impacts on a going forward basis if at all, and then I have a follow-up.

Katherine Harless - President and Chief Executive Officer

Okay. Yes if you let me just start until, as I mentioned earlier we're continuing to see improvement in the local sales on a multi-product basis. The print sales are down some normally in the national channel. As I mentioned earlier, we are seeing some weakness or softness in the national channel. We've put in some initiatives... we have started some on... in-house national sales channel. First is relying on the CMRs and we are starting to see some... put some programs in place that the type of performance that we think is going to help improve that softness in the national side. As always on the... I know on the weakness that you are asking about on the local side from the market or heading perspective, because we are so diverse we are not seeing any one heading or market... we will see some softness periodically across our canvass but nothing that we don't certainly care for. So our softness has been in the national side and we are taking action to make that -- clear that up in effect.

Peter Salkowski - Goldman Sachs

Could you quantify what percentage of revenue was national and what kind of declines you are seeing and whether or not it's increased discounting by your CMRs or whether or not it's a number of advertisers -- decline on the number of advertisers?

Katherine Harless - President and Chief Executive Officer

Yes, our national is about 15% of our revenues.

Peter Salkowski - Goldman Sachs

All right.

Katherine Harless - President and Chief Executive Officer

And what was the second question Peter?

Peter Salkowski - Goldman Sachs

Are you seeing a decline in the number of advertisers or is it just the number of advertisers going away or is it just employee increased discounting by your third party sales channels just try to drive their numbers I guess?

Katherine Harless - President and Chief Executive Officer

Well, actually what we are seeing as you know in the CMR channel just in turmoil in that... in those channels at the moment and that about control. That's one reason for bringing that in-house, bringing some in-house sales, national -- and to sell to our advertisers and we're going back after advertisers in a time mean [ph] in the restaurant, in the travel industry. And we are seeing new advertisers come back and the old advertisers come back and we are seeing new advertisers we've never seen before some other dotcom. I would encourage you to go to one the Verizon Yellow Pages book and look at some of the ads there from a national perspective. But there is nothing happened on the process unless you are discounting and that our programs have been the same along those lines that the CMRs mostly no change.

I don't know -- Andy would you like to talk about going forward to the third quarter, the 545 and the 580 you were talking about? Peter you want to restate that?

Peter Salkowski - Goldman Sachs

Yes, I guess the real question I guess is when you talk about your multi-product ad sales guidance was flat '08... '07 versus '08, I assume the '06 number -- '07 versus '06. The '06 number is actually going to increase when I assume there's a fourth quarter impact there. So could give us a sense for what the base is for '06 that we're looking at with regards to multi-product ad sales?

Andrew Coticchio - Executive Vice President Chief Financial Officer

Well, first Peter... firstly the guidance we've provided is around amortized revenues not ad sales. As you know we don't provide exclusive guidance around that. So the thing what you are referring to is largely quarterly based, the 580 versus 545 and that sort of thing with respect to the print side is book changes and book moves amongst that. We always had that as we address markets. Let's see some of that again in the fourth quarter. Some of that was activity that moved out of already in the second... some of it was moving from the third and the fourth as far as individual books are concerned.

Peter Salkowski - Goldman Sachs

Okay.

Andrew Coticchio - Executive Vice President Chief Financial Officer

As we look forward into fourth quarter and we don't provide exclusive guidance on ad sales but what the world says that, we have reiterated the guidance with respect to amortized revenues on a multi-product basis. As Kathy mentioned several programs with respect to and we are seeing some of the softness we're seeing in marketplace, it will take some measure of time to -- for those to work through and flow through. The fourth quarter on an ad sales basis, we're not going to see that significant impact or change relative to where we are at in third quarter because of those programs, a little bit longer-term in nature.

Peter Salkowski - Goldman Sachs

Great.

Andrew Coticchio - Executive Vice President Chief Financial Officer

So with that I think you can...

Peter Salkowski - Goldman Sachs

Is that the...

Andrew Coticchio - Executive Vice President Chief Financial Officer

I think you will see, Peter, some improvement on the internet side because we will have that reseller issue behind us that cleared out in the third quarter. So we are expecting stronger growth quarter-over-quarter in the internet in the fourth quarter.

Peter Salkowski - Goldman Sachs

Yes, I know that's actually my next question. It's really on the internet side. It seems like things juristically flow down there from what you saw in the first of couple of quarters, I realized there is a year-over-year impact from [indiscernible] maybe you can share a little bit about how much of an impact that was so you can get a sense for maybe the growth rate in the fourth quarter and going forward on the... on this yellow pages side of the business?

Andrew Coticchio - Executive Vice President Chief Financial Officer

As I mentioned in my remarks on the reseller issue was of $4 million and it's a few million on the Inceptor. So, you back that out as well and look at organic growth. It's more in line with the mid twenties we are seeing year-to-date and so we believe that's where it'll be in the fourth quarter in that kind of range.

Peter Salkowski - Goldman Sachs

Okay and then,

Andrew Coticchio - Executive Vice President Chief Financial Officer

Fourth quarter and for the full year.

Peter Salkowski - Goldman Sachs

Got you. And then on cost, Andy, how much control do you have cost going fail... cost going forward with regards to being able to keep those under tighter ends, especially on the situation where maybe revenue on the print side is in decline. How much... give a 2% drop in print revenues, can you offset that in cutting your cost?

Andrew Coticchio - Executive Vice President Chief Financial Officer

I think Peter, we have real good cost controls in place. So the entire team is very focused on managing cost in line with revenue trends and clearly as the internet scales we are ready to put money into that to keep that growth moving as we work through some of our print issues where we will cut back in some areas, we will invest in other areas where we are seeing opportunities whether it be market opportunities or new product type opportunities. But I think the cost equation is one we've got our arms around and yes I am focused on it, I spend a lot of time talking to the team about it and I think I've got their commitment as well.

So, we think we can continue to manage that while we also work the issue of providing multi-product revenue growth as we move forward, how comfortable we can do that as well as the internet keeps growing and we manage through the print issue.

Peter Salkowski - Goldman Sachs

I will open up for others.

Andrew Coticchio - Executive Vice President Chief Financial Officer

Thanks Peter.

Operator

Thank you. Our next question is coming from Anthony DiClemente of Lehman Brothers. Please go ahead

Anthony DiClemente - Lehman Brothers

God morning. Thanks for taking the question. Just to take a bit of a step back more broadly, I think the concern, the concern from investors is that you are seeing a transformation of the business to electronic from print faster than expected and then given your positioning in electronic I think that's not necessarily the best thing heading into '08. But I think if margins on a blended basis are definitely going to see further compression in '08, it brings to bear the question of whether EBITDA dollars can grow in '08 and I think if that is probably a key concern from an investor standpoint. I guess our view here at Lehman has always been that Idearc could potentially grow those EBITDA dollars in '08 despite the margin compression. But my question is, and I apologize for being long-winded. My question is does the transformation to a electronic happening faster than expected. Does that preclude you from actually growing EBITDA dollars in '08, and how do you suggest that as analysts and investors think about that going into next year? Thank you.

Katherine Harless - President and Chief Executive Officer

Okay, Anthony, this is Kathy. Let me just first start to say... talk a little bit about the transformation of the business. I would say that it's not faster than we expected. We feel very comfortable with where we are, and our platform, and our multi product where we trained our sales people. And we are working... we are working through the balance of that. And being able to rollout all of our multi products whether or not it be the video products, whether or not it be the mobile, we were able to manage through this transformation. And we feel very comfortable where we are in that stage. I will let Andy talk about the margins and the 2008 question that you asked.

Andrew Coticchio - Executive Vice President Chief Financial Officer

Okay Anthony, we will be giving more on 2008 guidance before the end of the year, but I don't want to talk too much on that. But clearly, as you move print to internet there and you deal with some margin differential. As we look where we see our print trends growing, where we see our internet growth, we think the contraction you are going to see is going to be in the margin percent. We think we can manage through the margin dollars pretty effectively and grow the business. And we are not troubled by the rate of transformation. Well we think we got a great product set on the internet side to lead that charge. And we think given where we see 2008 shaping up, we will be able to manage through that in an effective manner. In a month, or so, we will have a little more information for you on where we see 2008 coming out.

Anthony DiClemente - Lehman Brothers

Okay. Thank you.

Operator

Thank you. Our next question is coming from Jim Boyle of CL King. Please go ahead.

James Boyle - CL King

Good morning. Would you characterize Q3 as a tough period in terms of print revenue and print sales or is Q4 and then Q1 pretty much more of the same?

Andrew Coticchio - Executive Vice President Chief Financial Officer

Okay, Jim, I think Dee mentioned some of the softness we are seeing on the print side in the national. That's going to continue. You are going to see some of that in the fourth quarter. The programs we talked about today that we are rolling out, they are going to take quite a little time to take hold and start reversing the trend. On a multi-product basis we think year-over-year growth on the internet side is going to improve because of those the one-time type items we saw in the reseller channel. So, I wouldn't say the fourth quarter is in the truck with the third quarter. I think we are still confident that as we move forward into '08, we can improve the multi-product trend. I don't want to be too firm as to when that current is going to occur, but clearly there are some things in the third quarter that make the numbers appear worse on the surface then we believe they are when you look at the underlying business fundamental. So, we see improvement in the future.

James Boyle - CL King

Okay. And did you see any dramatic difference in the state such as Florida, California, Arizona, Ohio due to the housing correction versus your other states.

Andrew Coticchio - Executive Vice President Chief Financial Officer

We have... one thing we are very pleased with is a geographic market diversity that is pretty strong and while we will see some softness in pocket, we are not seeing housing necessarily being an issue in Florida, or California that's driving all our results. I mean there is some softness there in those markets in that particular area, but we have got such a diverse base of customers that's not driving...that's not the driving factor in our print result

James Boyle - CL King

Okay. Can you kind of quantify those pockets of weakness even though if it doesn't materially impact the overall number?

Samuel Jones - Senior Vice President of Investor Relations

Well we don't actually... on individual results from individual markets. I think as Andy said that we have seen some... a measure of softness in individual markets at an individual level none of which constitute more than 2% of our revenues in an individual market level. When you look at our headings specific, and break those headings down that proportion of influence on our total revenues is even smaller at the individual heading level, so having said that certainly there is individual headings that we need to address, but they are always here. That distinctly varies across, which headings that is?

James Boyle - CL King

Okay, Kathy would the anecdotal feedback from your vast sales force and your thousands of advertising clients indicate that the brighter economy is headed to a recession or just a near recession?

Katherine Harless - President and Chief Executive Officer

Well probably just a near recession. And again it's going to vary by market, so we'll wait and see.

James Boyle - CL King

Okay. And in a tough economy would your kind of conservative goal in year-on-year print revenue or sales, would it be kind of down 3 down 2? What would the goal be in a tough economy?

Andrew Coticchio - Executive Vice President Chief Financial Officer

Jim at this time I don't think we are going to forecast around the hypotheticals with that story.

James Boyle - CL King

Okay, thank you

Operator

Thank you. Our next question is coming from Paul Ginocchio of Deutsche Bank. Please go ahead.

Paul Ginocchio - Deutsche Bank Securities

Hey thank you. Just a question of large versus small markets. Anyway I know there's a national local divergence. Can you break any divergence in large versus small markets than your top 5 or 10 markets versus the rest. And then where do we stand on the remaining one-time separation costs and the one time sort of stock comp cost? That's it. Thanks.

Samuel Jones - Senior Vice President of Investor Relations

Let me take the one-time cost issue first. We are pretty much on track. We see that program getting all that transition activity, getting that done early in 2008, some of which will probably spill over into the second quarter. But as look at the numbers we've disclosed we're still very comfortable that transition cost will be in that range... that $125 million range that we laid out. We've got some big cutovers coming at the beginning of the year to get off the Verizon platform. That work is all on schedule and all in line with our budget projection, so there's nothing really new to describe there. The status is moving along and coming in where we expect it to be.

Katherine Harless - President and Chief Executive Officer

Your other question was about large markets versus small. Paul if we are seeing any difference, or any different trend?

Paul Ginocchio - Deutsche Bank Securities

Correct.

Katherine Harless - President and Chief Executive Officer

Yes, I would say as I look daily at the canvassing, and whether or not we're in a small market or a larger market. We are not seeing any differences as far as... at the end of the day it boils down to how well you are executing out there, and you could have a bad small market based upon... you have three or four wet crutches [ph] in the middle of the canvas. You could have the same issue in a large market, but from approve this demand basis, we are not seeing any differences there.

Paul Ginocchio - Deutsche Bank Securities

Sorry if I break this... again speaking on a follow-up just on the 500 new sales people.

Katherine Harless - President and Chief Executive Officer

Yes.

Paul Ginocchio - Deutsche Bank Securities

Do you think they are operating now at sort of full capability or we've got a very little rule [ph] more of improvement to compare. I think your original estimate was 6 to 8 quarters, just trying to get a handle on that? Thanks.

Katherine Harless - President and Chief Executive Officer

No, I don't think they call at their potential yet Paul. We've thrown a lot of new products at them this year. It was then from the video to the direct mail products, all the things that we've talked about. So, I don't think they are yet. I think that we are starting... we are not seeing as much improvement as we saw this time last year, because that curve line and any curve line we hope to get up there quicker and then it levels off a little bit but we still see improvement. I would say I'm very pleased with everything that they are facing in the marketplace with the customer. Our training programs and our ability to train all of our wares and I would like to say we are probably excited in embracing the new products on video, and we think that's going to be a big seller for us as well.

Paul Ginocchio - Deutsche Bank Securities

Thank you. One follow up.

Katherine Harless - President and Chief Executive Officer

Did you want some numbers, Dee will give some numbers on that.

Samuel Jones - Senior Vice President of Investor Relations

Yes. Paul I think it is important to note that we don't get last in this... the national softness is in asking some of the continued improvement or spending in the local side of the business. On a multi-platform basis on a year-to-date basis we are in 150 basis points and more of improvement in aggregate. When we break that down and we look at the local level that's improvement because of the softness in the national that's masking there. We're seeing even greater improvement at the local level on a multi-platform basis. Even within the quarter itself, despite the super go headwinds that we are dealing with, the local sales force on a multi-platform basis did show improvement on a quarter-over-quarter basis at the local level. So, and I don't want us to lose sight of the fact that at the local level bad investment is continuing to show improvement and continuing to pay off for us and since Kathy mentioned in national softness the national headwinds that we are dealing with are the primary drivers of what you are seeing in the added results.

Paul Ginocchio - Deutsche Bank Securities

Thank you very much.

Operator

Thank you. Our next question is coming from Meridith Alin from Bear Stearns. Please go ahead.

Meridith Alin - Bear Stearns

Good morning. I was wondering if you could drill drive down a little bit more on the national versus local specific to the print side. I know you just gave us a sense for what's going on the multi-product basis and is there any way you could range for us perhaps what's happening just specific to print?

Andrew Coticchio - Executive Vice President Chief Financial Officer

Well Marie, as I mean, we believe the way to look at this business... proper way to look at this business is that a multi-platform level? In the various transformation occurring at the business level, I will say at the local level at the print... the individual print line items, we're still seeing a slight improvement in the print result at the local level. But the improvement is manifested itself even more so as in more of our product level which is what we expected out of the business as it transforms. On the national front... the national front is still for the most part more print driven than it is multi-platform. We get out our national clients on the internet side more with the dedicated channel than we do with a... with the CMRs. And so the issue and softness we are seeing on the national front because of some of the consolidations with some of the national clients some of the bankruptcy activity or some of the players in that space, that's where that softness is coming from and it's more so on the print side then it is on multi-platform activity.

Meridith Alin - Bear Stearns

Thank you, that's helpful. In terms of this quarter your margin was a little bit better than what we had expected. I don't know if there was some improved cost control this quarter and I am wondering what the implications are for the fourth quarter margins since your guidance is still intact and whether... how that perhaps might see more of a decline than what we have been anticipating?

Andrew Coticchio - Executive Vice President Chief Financial Officer

Meridith, I think we are still comfortable with the overall guidance of slight margin contraction year-over-year. I think some of that what we have seen in Q3 is timing related activity that... and I don't get overly excited or concerned with an individual quarter. I am looking at a full year and I am pretty much... my costs are in line with my revenue trends and driving to the margin range is that we've been talking about all year.

Meridith Alin - Bear Stearns

Okay, terrific. I have a last question just housekeeping item. Could you let us know what cash taxes were in the quarter?

Samuel Jones - Senior Vice President of Investor Relations

Net is that, I don't have a specific number I would say that we have seen a little bit of favorability in our affective tax rate mostly because of the first quarter implications but we also saw little bit of favorability in the effective tax rate. And the cash rate would have been in the 38% type range, very close in there. So a good tactic, cash tax rate and down significantly showing and that little bit favorable to what we originally expected.

Meridith Alin - Bear Stearns

In terms of the cash?

Samuel Jones - Senior Vice President of Investor Relations

Yes.

Meridith Alin - Bear Stearns

All right. Thanks very much Andy, Dee and Kathy. Bye, bye.

Operator

Thank you. Our next question is coming from Jason Mcdougal of Praneal [ph]. Please go ahead.

Unidentified Analyst

Yes, this is Chris Heinz for Jason. Thanks for taking my question. It looks like your reserve for bad debt as a percent of sales has come down this year, is that correct?

Andrew Coticchio - Executive Vice President Chief Financial Officer

Our reserve, bad debt this year, we are running in the mid four range. It's very similar to what we saw last year, year-to-date, just got a little over 4.5%.

Unidentified Analyst

Okay. I must have done some incorrect math. But I also have a question about the accounting change as I understand that you are now capitalizing sales commissions where as you used to expense some of the time sales, is that correct?

Andrew Coticchio - Executive Vice President Chief Financial Officer

That's correct.

Unidentified Analyst

Can you explain then why capitalizing sales commissions would result in a lower EBITDA I would have started would have been the opposite?

Samuel Jones - Senior Vice President of Investor Relations

Well I think, what you see is you got to look at the year-over-year... the impact... the Switch had a larger impact on '06 versus '07 when you look at the year-over-year changes '05 revenues versus '06, '06 versus '07, I think we saw a larger benefit of the accounting change in '06 compared to what we are seeing in '07. Your revenues are fairly flat '06 versus '07. So therefore the accounting change doesn't have as much impact.

Andrew Coticchio - Executive Vice President Chief Financial Officer

Within the end of the quarter because of the publication schedule in third quarter is a large publication schedule for us and so as a result of that the deferral in amortization message does result in an adjustment that takes with that direction because of the publication cycles and have the relative proportionate books that publish in third quarter versus the other quarters in the year.

Unidentified Analyst

But my question was specific to this quarter because under the new methodology EBITDA was 398 under the old methodology it was 408 and I would have expected --

Andrew Coticchio - Executive Vice President Chief Financial Officer

The third quarter is traditionally... is a live publication quarter and your national commission August pay that point of publication and so your third quarter on an average incurred basis would have been higher because you would have had lesser national commissions paid out than under the new accounting method.

Unidentified Analyst

Can you give us some sense for the amortization period that's being...

Andrew Coticchio - Executive Vice President Chief Financial Officer

Yes, they amortized over the last and the directory which is typically 12 month.

Unidentified Analyst

Okay. Finally is it possible on the acquisition front to give me a rough estimate of the dollars you've invested in internet acquisitions in the last 12 months or last 9 months or whatever period that you might have?

Andrew Coticchio - Executive Vice President Chief Financial Officer

Yes as far as acquisition activity we... the most significant one by far was the Switchboard acquisition which as you know is the $225 million acquisition. We spent... we bought Inceptor about a year-and-a-half ago which was approximately $20 million acquisition and then the remaining activity around LocalSearch.com in that first half or in a single digit.

Samuel Jones - Senior Vice President of Investor Relations

It's about $250 million when you add all of it up, over the past 12 to 14, 16 months.

Unidentified Analyst

Okay, and the $225 million that deal just closed. Correct?

Samuel Jones - Senior Vice President of Investor Relations

Yes it closed yesterday.

Unidentified Analyst

Okay, thank you very much.

Operator

Thank you. Our next question is coming from Thomas Singlehurst of Citigroup. Please go ahead.

Unidentified Analyst

Good afternoon. It's Thomson Erickson [ph] with Citigroup. I just have one question, I apologize if I missed it in the introduction remarks. It's about the new launch activity on the print side, but for ourselves, well generally what you observe in the market. And having kept up the level of launch activity in particular on the companion directory side and more generally from the Independence. Have you seen an increase or lessening of launch activity? Thanks.

Katherine Harless - President and Chief Executive Officer

On the launching of Independence, we continue to launch some titles there. We launched some stock in California of late, but one thing that I do talk about was the fact that one of the things we are seeing in the marketplace is that the demand for the internet and the pay-for performance and so we in the past in our market expansion model we led with print, and we are in a evolution now of leading with internet and then following with print. And we are starting to see some really nice results that we like, so we will continue to move forward with our marketing expansion strategy, tweaking it a bit by just leading with the electronic versus print and we'll as time still in 2008 we will tell you more of other titles who will be going there. On the companion side, we had about a 170 companion titles. And with that product, and other products, the way we look at that is we always test the product, the first two of second year we roll it out into the appropriate market. And then in the third year, we really work with penetration. And this year, we have been in the penetration mode if you will for companion and that's coming along very nicely for us.

Unidentified Analyst

That's great. Thank you.

Operator

Thank you. Our next question is coming from Michael Meltz of Bear Stearns. Please go ahead.

Michael Meltz - Bear Stearns

Hi. Thank you. I have two questions. I don't know, if you actually clarified this on the call. Of that 4.5% decline in print products, what was national actually down? Was it down over 10% and then I have a follow-up question?

Samuel Jones - Senior Vice President of Investor Relations

Michael as you know we don't break down the results to that degree of specificity, but it was in the magnitude of 10% that you are talking, but it was big drivers as far as those results.

Michael Meltz - Bear Stearns

Okay. And then can you clarify. You used the word turmoil in that channel. Typically those guys take their 20% and go on. What is the turmoil that you are seeing specifically regarding the third party marking re-sellers?

Katherine Harless - President and Chief Executive Officer

Yes on the third party CMRs, the print verses the electronic seems to be having quite a impact with them. So there we are trying to work through this transformation at being able to sell print and electronic. And there is still some difficulties there that's all I can say at this point. That tightening in those... in that marketplace.

Michael Meltz - Bear Stearns

Maybe another way of asking is, since you are dealing with national budgets that I would think have been made, had been in place for a while. Why would we've seen more of the decline in Q3 than prior quarters?

Samuel Jones - Senior Vice President of Investor Relations

We've been talking about national softness actually for a couple of quarters now. And this is not the first quarter that we've seen national be a driver of our print... print result or having a significant impact on our print results. So this is really not the first quarter, it's not a new event. There are a couple of CMRs that had a larger influence on the industry that are, I believe, facing some internal turmoil more so being focused on the marketplace that we're having to work through.

Michael Meltz - Bear Stearns

All right. Thank you.

Operator

: Thank you. We will now take one last question from Jeff Shelton of Natexis. Please go ahead.

: Jeffrey Shelton: Natexis Bleichroeder: Thanks. Most of my questions have been answered. I have follow-ups though. The bad debt expense, it seems to have shot up to about 6% of sales in the third quarter versus 4% in the first two. Is there anything specific to the quarter that would have resulted in the higher percentage?

Samuel Jones - Senior Vice President of Investor Relations

Yes Jeff, what we did is that was a one time adjustment. As we look at some of the activity around the branding switch, the coming off the Telco billing platform, working through all those issues and dealing with some level of customer confusion. I felt the need to make a one-time adjustment in the quarter to bring thing in line for the full year. So that was not an indication of falling off a cliff. It was more dealing with some stuff that I think is unique to this year because of the spin and some other activity around our system.

: Jeffrey Shelton: And towards your independent book strategy. Did that... how did that trend year-over-year in terms... was it a positive effect or a negative effect on the print ad sales during the quarter.

Katherine Harless - President and Chief Executive Officer

It was positive Jeff.

Andrew Coticchio - Executive Vice President Chief Financial Officer

Yeah within the quarter, there wasn't a lot of new launches, or much of a significant impact that are there, but it was continuing to grow in the independent space.

: Jeffrey Shelton: Okay and last question. Are you also reiterating your guidance for positive revenue growth in 2008?

Samuel Jones - Senior Vice President of Investor Relations

As Andy indicated, we will be talking about guidance for 2008 before the end of the year.

: Jeffrey Shelton: Okay. Thank you.

Operator

Thank you. Now I would like to turn the call back over to Kathy Harless for closing comments

Katherine Harless - President and Chief Executive Officer

: Well I would like to all of you know that I am still very, very bullish on our multi-product strategy. We see a few books in the world that some of this third party sales channel that we have made the plans to overcome them, and we are going to stay very focused on our strategy. Our long-term view of the business really doesn't waver at all. And I want to appreciate... I appreciate your continued interest in Idearc and I want to thank you for joining us today.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Idearc, Inc. Q3 2007 Earnings Call Transcript
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