PRIMEDIA Q4 2007 Earnings Call Transcript

PRIMEDIA, Inc. (PRM)

Q4 2007 Earnings Call

March 5, 2008 10:00 am ET

Executives

Kate [Messmer] – Investor Relations

Dean B. Nelson Chairman of the Board

Robert C. Metz – President & Chief Executive Officer

Kim Payne - Chief Financial Officer

Analysts

Paul Ginocchio – Deutsche Bank Securities

Michael Meltz - Bear Stearns

David Rosen – SAC Capital Partners

Presentation

Operator

Good day and welcome to the PRIMEDIA, Inc. fourth quarter 2007 earnings conference call. Today’s conference is being recorded. At this time I would like to turn the conference to Ms. Kate Messmer, Investor Relations. Please go ahead.

Kate Messmer

Good morning and welcome to PRIMEDIA’s fourth quarter conference call. I’m pleased to be joined by Dean Nelson, our Chairman; Bob Metz, our CEO; and Kim Payne, our CFO along with other members of senior management. As always we refer to the section of our earnings release entitled Forward-Looking Statements for important factors that apply to and qualify an forward-looking statements made on this conference call. Also a reminder that any non-GAAP terms mentioned on this call are reconciled to GAAP in the earnings release.

Let me now turn the call over to the Chairman of PRIMEDIA, Dean Nelson.

Dean B. Nelson

Thanks everyone for joining us on today’s call. We had a number of major accomplishments in 2007 at PRIMEDIA including completing the sale of our largest business Enthusiast Media which enabled us to pay a sizable special dividend. We also significantly reduced our debt and are finishing the transition of the company’s headquarters from Yew York to Atlanta. To summarize, we have completed the downsizing of the PRIMEDIA portfolio and retained a business with the best near and long term fundamentals. Consumer Source is a strong cash flow generating business with considerable growth potential. Our broad geographic and product diversification provides a competitive advantage for the company and we believe by continuing to invest in our online and offline businesses we will enhance our competitive position within the industry. In summary, although we have a lot of work to do, the Board remains very excited about the prospects for this business and its potential to create meaningful shareholder value.

With that I’ll turn it over to Bob.

Robert C. Metz

Today I will be providing you with an overview of PRIMEDIA’s fourth quarter and fiscal year 2007 operating results and I will discuss the progress that we are making against our key strategies and initiatives. Kim Payne, our CFO, will then provide a more detailed discussion of our financial performance for the quarter and year and then we will open the line for questions.

In 2007 Consumer Source delivered another year of solid cash flow demonstrating the positive cash generating characteristics of our business as well as our disciplined working capital management and minimum capital needs. We made substantial progress in a number of operational areas, strengthened our balance sheet and launched new initiatives designed to create long term revenue growth. Nevertheless, we are disappointed in our results for the full year due to both a difficult economic environment that especially impacted new homes in some of our DistribuTech customers as well as cost containment and execution issues associated with Rentals.com. In light of these challenges, we are focusing our efforts on enhancing our leading market position in apartments aligning our cost structure to operate as efficiently as possible, particularly in New Homes and DistribuTech and implementing initiatives to drive growth in our online categories in order to maximize cash flow. We began implementing some of these changes in the fourth quarter and we believe they will lead to improved results over time.

Based on the company’s ability to generate meaningful cash flow among other things, our Board of Directors has declared the company’s first regular quarterly dividend of $0.07 per share. This action reflects our strong cash flow generation, the solid long term outlook for our business and our commitment to returning value to stockholders. During the fourth quarter we achieved modest revenue growth in each of our ongoing product categories, Apartments including Rentals.com, New Homes and DistribuTech. We have determined that the company will exit our Auto Guide business which I will discuss in more detail shortly and it is now classified as a discontinued operation.

I’ll now review the fourth quarter performance for each of our ongoing operations starting with our largest division, Apartments, along with some of our initiatives to improve our financial performance. Revenues grew 2.6% year-over-year in Apartments comprised of Apartment Guide, AparmentGuide.com and Rentals.com which together represented 80% of fourth quarter advertising revenues. As a reminder Apartment Guide and ApartmentGuide.com are sold as a blended medium utilizing traditional print combined with the power of the Internet. This quarter’s growth was primarily due to two major initiatives that we undertook for 2007. The first was a concerted effort to better service and address our largest clients’ needs. Our top clients represent just over 12% of our total Apartment Guide revenue and we were able to grow revenue with these customers by 16% year-over-year in the fourth quarter of 2007. Our second effort was a program to help our clients better track the results we generate for them, both online and offline. In the fourth quarter we more than doubled the number of our print clients using call tracking technology and confirmed to our clients that delivered millions of leads through this program. We also developed a state-of-the-art software program to aid apartment communities in better tracking our performance and that of our competitors.

Regarding Rentals.com, revenue growth continues to outpace our other product lines but slowed to 7.8% in the fourth quarter of 2007 compared to the prior year period on a pro forma basis as we experienced engineering and execution issues. We have made a number of changes including bringing in outside experienced leadership to help drive this business.

Next, New Homes which is comprised of New Home Guide and NewHomeGuide.com represented 20% of fourth quarter advertising revenue. Total revenue increased by 9% compared to the fourth quarter of 2006 as a 3.1% decline in our advertising revenue for markets that have been opened for more than one year was offset by revenue from the three new books that we launched in Richmond, Colorado Springs and Charlotte. The decrease in our same market advertising revenue was primarily a result of the challenging conditions for new home builders which was concentrated in the Midwest and Northeast during the third quarter. Due to the continuation of the difficult mortgage and real estate environment this spread to other markets in the fourth quarter. However this decline varied across the country depending on local real estate market conditions. More than 55% of our markets experienced revenue growth in the fourth quarter with our fastest growing New Home Guide market increasing by approximately 80% in the fourth quarter while our worst market fell by over 40%.

Moving on to our DistribuTech business, revenue increased by 6.6% year-over-year in the fourth quarter of 2007 and distribution expenses increased by 12.4% following the addition of over 2,000 retail locations during 2007. DistribuTech revenue growth was enabled in the fourth quarter due to the expansion of our network although this business continues to be negatively impacted by customers who are scaling back or ceasing operations, particularly those within the resale home sector, a sector for which we don’t publish guides. On an ongoing basis we are pursuing the addition of new categories of DistribuTech customers to diversify our client base. As of December 31, 2007 our network included approximately 19,000 exclusive retail locations.

Regarding our Auto Guide business, we have made the decision to exit all of our remaining markets. After experimenting with different formats, markets and business models we have concluded that it is in the best interest of the company and its stockholders to discontinue these operations. We do not have any pending sales transactions and we cannot be sure that any transaction will open or what the terms or planning of such a transaction would be but we will pursue a sale of the business and if nothing comes to fruition we will shut the business down at the end of the second quarter of this year. We have classified the Auto Guide business as a discontinued operation. In the fourth quarter we exited Southern California and in January, 2008 Charlotte and Orlando leaving us with four Auto Guide publications in three states as well as AutoGuide.com.

Looking ahead our focus for 2008 will be to drive additional traffics and leads for our online advertisers, concentrate on our core business, increase market share in each category and contain our costs particularly New Homes and DistribuTech divisions. I will now provide a little color on each of these initiatives. First, driving online traffic, an important initiative for apartments in 2008 is to improve our search engine optimization performance and continued enhancements of our ApartmentGuide.com. This includes redesigning the site, adding information and blogs to drive new traffic. We have also enhanced our custom coupons, featured communities per area of town, radius searches and launched a video spokesmodel service in January. Also within our apartments business we continue to see an opportunity to expand Rentals.com as we have low penetration in the highly fragmented market of page small unit rental listings on the Internet. As a reminder single unit rentals make up the majority of the total rental industry.

To better capitalize on our opportunity in Rentals.com and reinforce our leading market position we have made several strategic investments in the business in 2007 and early 2008. First is personnel and leadership. Rentals.com achieved full sales force staffing in the third quarter of 2007. In January of 2008 we added new leadership for this division, Jamie Clymer who formerly ran Homes.com brings substantial online and sales experience in the residential real estate arena. We expect that he will contribute meaningfully to the operations and strategy of Rentals.com.

Next is our focus on our core business and increasing market share. We are committed to improving and expanding our current product lines. In March we launched our newest Apartment Guide in Greenville, South Carolina and as I mentioned earlier we opened three new Home Guides in 2007. We provide the most economical and effective vehicle for our clients to get leads. At this time the difficulties in the home industry make it even more important that we focus on bringing the most cost effective results we can for our advertisers. Our broad geographic and product diversification provides a competitive advantage for consumer source. Continuing to invest in our online and offline business will enhance our competitive position.

Our final focus is on containing our costs. The volatility in the residential housing industry will make this another challenging year for our company. It is imperative that we are proactive in taking action to control our expenses in advance of potential revenue shortfalls. We have retained the cost saving measures we put into place at the end of 2007 and have taken additional action within specific divisions reflective in industry conditions.

In closing let me stress four points about our business. Number one, PRIMEDIA has been through a lot over the last year including the sale of its large business, transitioning of its headquarters and corporate functions to Atlanta and implementing a new streamlined management structure. A lot has been accomplished and with most of those distractions behind us we are focused on building our business in 2008. Number two, the national apartment industry has returned to a more normal state and we feel good about the short and long term future of this business. Number three, although the new home industry is going through a rough time thus far it is a manageable downturn for us and a chance to enhance our competitive position. And number four, as we demonstrated again in 2007 this company generates steady and considerable cash flow. We expect our strong cash position to continue. We have a positive long term outlook for our business and remain committed to returning value to our stockholders. We thank our team for their effort and our stockholders for their support as we reinvigorate the business and value of this company.

Thank you and let me pass the call to Kim.

Kim Payne

I wanted to start out with some of our P&L highlights. We delivered low single digit revenue growth for both the fourth quarter and full year of 2007 compared to 2006. Since our Auto Guide division has been classified as discontinued operations all of the results I will be discussing for the fourth quarter and full year exclude this business.

Our fourth quarter revenue increased 3% to $79.1 million compared to $76.8 million for the same quarter last year reflecting growth in each of our continuing operations, Apartment Guide, Rentals.com, New Home Guide and DistribuTech. However due to the various conditions that Bob reviewed earlier momentum shifted within each division as we finished 2007. First Apartment Guide continued its turnaround gaining ground each quarter during 2007 compared to the same quarter last year. We started the year with a revenue decline of 6.1% in the first quarter then turned positive mid-year and finished with a gain of 2.3% in the fourth quarter of 2007. This steady improvement was primarily related to higher sales of standard printernet advertising and premium online products. Next, while total revenue at our New Home Guide and DistribuTech businesses grew year-over-year for fourth quarter of 2007 compared to the fourth quarter of 2006, both of these divisions lost ground sequentially, compared to the third quarter of 2007. In New Homes this deceleration was primarily due to the challenges for home builders which spread to markets beyond the Northeast and Midwest in the fourth quarter. This resulted in a sequential quarterly revenue decline of 3.6% due primarily to premium printernet advertising. DistribuTech revenue fell sequentially for each of the last five months of 2007 as the out-of-business activity became increasingly difficult to offset. These monthly revenue declines ranged from down 0.2% to down 1.2% with the out-of-business losses declining at a faster rate. In other words, DistribuTech had monthly gains excluding the out-of-business activity.

Total adjusted EBITDA in the fourth quarter increased 7.8% to $18 million compared to $16.7 million for the same quarter last year. Cost containment initiatives such as headcount, delivery, retail distribution and selling expenses eliminated approximately $5 million of costs from the business. This helped offset our lower than expected revenue growth. We also achieved reductions in corporate overhead expenses as we continued to build our team in Atlanta and shift our corporate functions from New York.

For the full year end 2007 our revenue increased 2.2% to $314.8 million reflecting growth in New Home Guides, Rentals.com and DistribuTech. This was partially offset by modest declines in Apartment Guide. Total adjusted EBITDA increased 7.8% to $58.2 million primarily due to higher revenue and lower corporate overhead associated with the company’s transformation to a smaller operation after the sale of Enthusiast Media. This was partially offset by increased selling and distribution expenses.

For 2007 Auto Guide generated $11.7 million in revenues at an approximate loss of $5.7 million. We had substantial net operating losses although a confluence of events including major divestitures, tax deductions and the implementation of FIN 48 has made updating our balances a complicated calculation and we are continuing to work with our auditors to complete this work. We will provide a complete update on our NOLs in the upcoming filing of our annual report on Form 10-K. It is important to remember that this will not impact the operating cash flow of the company.

Moving on to the fourth quarter the strength of our balance sheet continued to improve. As of December 31 our net debt was $238.1 million down from $1.3 billion last year. Our leverage ration of net debt to reported EBITDA was approximately 4.1 times which is well within our bank credit facility’s agreement with a maximum allowable total leverage ratio of 5.25 times. The reduction in debt was driven by the repayment and redemption of our much of our outstanding debt in the third quarter of 2007. We still have approximately $2 million of our 8% notes outstanding which we intend to redeem when they become callable in the second quarter of 2008. During the quarter free cash flow which includes our discontinued operations until they are sold or shut down was negative $16.4 million compared to a negative $2.9 million in the fourth quarter of 2006. Cash flow in 2007 was impacted by non-recurring activities related to divestitures and discontinued operations including cash taxes, restructuring and transaction fees.

Consumer Source’s continuing operations generates strong cash flow with minimal capital expenditure requirements and manageable working capital requirements. With our strong balance sheet and solid cash flow generation this company is well positioned to capture opportunities as they arise. Consumer Source capital expenditures for the year were $14.5 million compared to $12.9 million in 2006. Consumer Source working capital generated cash of $3.4 million in 2007 compared to cash usage of $900,000 in 2006.

Our Board of Directors has determined that we will no longer provide guidance on specific financial metrics. However I would like to comment briefly on what we are currently seeing in our business in 2008. We are experiencing similar trends in the first quarter of 2008 compared to fourth quarter of 2007. The Apartment Guide division remains stable with continued momentum from 2007. We saw a very slight decrease in occupancy rates across the country from 94.2% at the end of 2006 to 93.1% at the end of 2007. As a reminder occupancy rates in the low to mid 90’s are the sweet spot for our company as this benefits our ability to sell advertising. At the end of 2006 less than 50% of our markets were operating in this ideal range versus 87% of our markets at the end of 2007. As these occupancy rates began to move towards more normal historical levels they began to influence our monthly sequentials game. We expect Rentals.com to benefit from this environment as well. While we anticipate strong online competition to persist for Rentals.com we expect our growth to continue as we focus on improving site engineering and performance while driving traffic through search engine optimization.

We anticipate that 2008 will be the most challenging for our New Homes division where we have limited visibility into the new home sector and we are seeing the deterioration in this industry spreading to more of our markets. We have already proactively made adjustments to our cost structure in anticipation of this and have additional plans in place which include headcount reductions, paper and printing modifications and distribution elimination. We may also suspend our publication in select markets if our ongoing analysis of each of our markets dictates that this is necessary. For example we have already taken steps to this end in Atlanta where we have suspended our professional edition and consolidated some of the revenue into the Atlantic consumer New Homes Guide. However, where we see opportunities for growth such as the Richmond New Home Guide we will continue to build our staff and marketing. It is important to note that at this point in the cycle the weakness we have been experiencing in this business has been heavily weighted towards advertisers pulling back on supplemental premium ads but keeping their standard placement. This is meaningful for us because it provides us the opportunity to continue to cultivate our client relationship to best position ourselves for when this sector turns.

In DistribuTech we are continuing to see steady losses in revenue from customers who publish free publications and we have limited visibility due to the last minute cancellations we received from these customers for distribution services. We continue to fill space on racks and are attempting to fill these empty spots with new customers to diversify our client base. We have signed a national deal with Yellow Book and are pursuing other. However in recent months we have been challenged to offset the out-of-business activity. During 2007 we began to eliminate retail distribution that was not effective and we continue to take a hard look in this area to ensure that we manage costs closely while maintaining our superior distribution network. Overall since we expect 2007 cost containment initiatives to flow into 2008 additional cost containment will be division specific to offset potential associated revenue shortfalls.

Finally we are confident in our business and our ability to generate cash. We have entered a new chapter in our company’s history with lower debt service. We have stable working capital requirements for the business which we have the ability to project. In the current environment our collections remain strong with key AR performance indicators such as DSO, bad debt expense and write offs remaining steady. We continue to have healthy operating margins and we require minimal capital expenditures to run the business. We expect this to remain approximately flat compared to 2007 and have the ability to immediately reduce spending if necessary.

With that I’d like to now open the line for questions.

Question-And-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Paul Ginocchio at Deutsche Bank.

Paul Ginocchio – Deutsche Bank Securities

First question, we’ve tried to estimate what the EBITDA losses in Auto Guides were in 06 and 07. Could you clarify that for us?

Kim Payne

In 07 the loss was approximately $5.7 million and it was just a little North of there for 2006 about $6 million.

Paul Ginocchio – Deutsche Bank Securities

Two questions about age due costs, when do you think you’re going to get down to a run rate of $4 million a quarter? Is that second or third quarter or is it year end?

Kim Payne

It will be mid-year. We’re expecting about $5 million that we’ll still have through the first half of 2008 and then once we get beyond that we will be at the run rate that we’ve talked about.

Paul Ginocchio – Deutsche Bank Securities

So the $5 million will those be charges are will it just be higher age due costs.

Kim Payne

It’s higher operating expenses because we still do have some activity in New York.

Paul Ginocchio – Deutsche Bank Securities

Is your dividend still 50% to 70% of free cash flows? Is that you still how you’ve set it? The [inaudible] in the quarter or is the formula changed?

Robert C. Metz

I don’t think that we have tied this directly to free cash flow. The Board made a decision that we would give a regular quarterly dividend at $0.07 and we believe in our ability to maintain it given our strong and steady cash flow and if we make any declarations in the future decisions that would be made by the Board.

Paul Ginocchio – Deutsche Bank Securities

I think back six months ago, nine months ago, it was going to be set at 50 to 70% of your cash flow and this doesn’t look like that number. If it’s not, I just – otherwise it implies your free cash flow would be much lower in 06 than I expected.

Robert C. Metz

I think the answer here is the Board is going to continue to evaluate our cash and what the best use of that and this was their decision at this time.

Dean B. Nelson

The one thing I would say is I think we’re going to step into this whole dividend policy over time as you can imagine and it is not our intention to accumulate cash on an ongoing basis, the company, nor is it our intention to create any kind of war fund to go out and do major acquisitions.

Paul Ginocchio – Deutsche Bank Securities

Last question about New Home Guides, is there any New Home Guides you’re thinking of shutting down, areas were particularly weak or is that even being considered? You had talked about cost containment in a revenue shortfall environment, is that one of the cost containment measures you’d think of taking?

Robert C. Metz

It would depend on if a market changes. We still feel we represent the most attractive advertising vehicle for these advertisers and generate the best leads and it’s really not shutting down for us, it’s just spending because we feel that these are solid market opportunities that just may be impacted currently by the economy and we certainly would want to come at a later date.

Operator

(Operator Instructions) We’ll take our next question from Michael Meltz at Bear Stearns.

Michael Meltz - Bear Stearns

On Paul’s question on the dividend, I think it was last July you did say dividend would be 50 to 70% of ongoing free cash flow and I think by my math this implies if you are still at the low end of that range it would be $25 million cash flow in 08, which I understood from your answer that’s not the calculation any more. I just want to make sure I understand though what is the $0.07 quarterly based on then? And then a follow up on the Auto Guides question, I would think you’ve closed the worst performing titles by now so of the four titles remaining what was their revenue and EBITDA performance in 07? And then I have two follow ups.

Dean B. Nelson

We believe this is a sustainable level of dividend, we’re going to enter this kind of with some level of caution and deport and so you shouldn’t be basing that calculation to generate a free cash flow expectation for 2008. But again it’s our intention to not hold cash over time at the company.

Michael Meltz - Bear Stearns

But, Dean, is it based on any type of target payout ratio?

Dean B. Nelson

It’s based on the belief of the Board that that’s the right thing to do for the balance sheet right now. It’s not based on any long term target.

Kim Payne

On the Auto question, the books that we remaining essentially we have shut down all the books at this stage of the game that contributed to that significant loss. What we have left is such a small number that it’s going to–

Robert C. Metz

The impact is minimal either way.

Kim Payne

Yeah.

Michael Meltz - Bear Stearns

So these four books are they break even?

Kim Payne

I don’t want to comment on that specifically. We haven’t broken that out but essentially if you look at the loss that we had in 2007 what we’re talking about for 2008 is substantially less.

Robert C. Metz

You know, Michael, the key point here is it’s a minimal impact and we feel like there’s significant growth opportunities in homes and apartments and that’s really what we want to concentrate. We want to move out of the auto business and concentrate on the rentals and the homes business.

Michael Meltz - Bear Stearns

I understand, I guess I was trying to calculate if you could get anything for these and I felt like if I backed into the numbers perhaps they might be break even or slightly profitable.

Robert C. Metz

We actually feel that they are saleable and the markets that we’re in are good markets so we’ll pursue that and see this quarter. Either way it’s a minimal impact on our income this year.

Michael Meltz - Bear Stearns

On the guidance, can you talk a little bit more about the lack of, certainly I’m not expecting preciseness but I guess some quantification around your guidance? I think you’ve given annual guidance every year for I think this decade and I’m just wondering –

Robert C. Metz

We believe that the underlying fundamentals of our core business and that the potential for us to continue to produce good solid cash flow in the medium and long term are still there and we did provide some color in both our release and some prepared remarks regarding the near prospects and we’re announcing a dividend which I think reflects our confidence in our cash flow.

Kim Payne

The Board has just made a decision not to provide guidance.

Michael Meltz - Bear Stearns

I disagree with that. Last question from me, Kim, can you size the restructuring liability that was still outstanding at the end of the year?

Kim Payne

Essentially what we’re looking at is that – hold on just a moment, let me grab that. That net impact, I think what we had talked about in the past we’re talking about in the $24 to $25 million range of restructuring and that’s going to be in the low millions each year from a cash flow impact.

Michael Meltz - Bear Stearns

And that’s inclusive of Auto Guides?

Kim Payne

That would have Auto Guides in there.

Operator

(Operator Instructions) We’ll go next to David Rosen at SAC Capital.

David Rosen – SAC Capital Partners

I want to reiterate what someone just earlier said, I’m a little bit surprised by your dividend announcement because it wasn’t made clear that you had changed the methodology for how you were going to do a dividend and I’m also surprised that you aren’t providing guidance especially maybe some type of free cash flow guidance considering your massive NOLs and your limited taxes and the fact that I look at your LIBOR based term loan I suspect that you’re interest rate is going down in the near term because of where LIBOR went so you put all those things together, there’s a free cash flow metric that I’m surprised is not being made public.

Kim Payne

I think what blows into that is really, overall we’re not giving revenue or EBITDA guidance which does impact cash flow. This is a decision that was made by the Board, but if you look at Consumer Source and the metrics that we’ve had historically we are a strong cash flow generator, we do expect this to continue and the dividends have forced that.

Robert C. Metz

And I think we have given some forward perspective in our earnings call and talked about the solid conditions that our apartment business is in.

David Rosen – SAC Capital Partners

Your stock has gone from $14 to $8 primarily because people don’t know what’s happening in your business and for you to come on this call and, I’m sorry I’m kind of agitated, but for you guys to come on this call and now provide less information than you’ve historically provided under that context, I think is not okay.

Dean B. Nelson

I think the issue here is we are a much smaller business today than we were and a much less diversified business today and I don’t think it’s [inaudible] for companies that are this size in revenue and EBITDA to not provide guidance. You look at the numbers overall, try to provide guidance that is just a couple of percentage in range for example on EBITDA you’re talking about plus or minus $1 million which we could easily have to move up or move down on a routine basis simply based on changes in your own guide.

David Rosen – SAC Capital Partners

I understand that and I’m a big believer in this business, don’t get me wrong, and I completely understand the issues with the smaller company, but you can and there are many, many companies that provide a range and this is not – in the overall scheme of things, yes this is a small company but it’s not a tiny company and even if a range is a $5 million range or even a $10 million EBITDA range that is reasonable and we can find a midpoint from that. But to provide no information and give the color that you gave in this presentation which I can’t make heads or tails from that. I don’t think that that’s okay.

Dean B. Nelson

Well we’ve heard you but we fundamentally disagree. We’re very optimistic about the business. This business given the realities of the new home market we’re going to go through some ups and downs here over the course of the next six to twelve months. But we’re very optimistic as a Board, as a management on the future and the potential of this business. We’re going to consolidate the category, regenerate the lowest cost lead as anybody out there for both sets of our customers, we don’t think people should be investing in the stock on a quarterly basis based upon trends in the New Home Guide and if we’re going to be changing guidance up and down, that’s what we’d be doing.

Robert C. Metz

Let me just reiterate something there which is that 80% of our advertising revenue is based on the apartment industry which we feel is a very solid business, it’s our largest business and the trends are improving there and the new home industry is 20% of our advertising revenue. As we stated last year over half those markets actually grew in 2007.

David Rosen – SAC Capital Partners

And I agree, I think there’s a very bullish story tell and that’s why we own your stock and we believe in the business and we believe in your management. I’m just very surprised in the lack of detail. I think that you’re doing a little bit of a disservice to your existing shareholders and unfortunately there are shareholders that have dealt with significant capital losses by not providing more color. I mean, you should be highlighting the fact that you have massive NOLs, you should be highlighting the fact that your Apartment Guide is getting better, you should be highlighting the fact that – you should provide some metrics to – you qualitative concepts that you guys are going to generate real free cash. What does that mean? How much could that be? And then to come out with a dividend policy now after having indicated one policy and never changing and then all of a sudden we get this, it’s just a little bit surprising. It doesn’t jive with what you’ve said historically. And there needs to be a real explanation of it and not a response to a number of shareholders concerned about what that means. I just don’t think that that was handled well. And then it’s surprising from this Board and this management team because historically you guys have done a great job in explaining things.

Dean B. Nelson

I apologize for the confusion on the dividend question. It is our intention over time to pay out at the levels we’ve described. I think it’s always prudent to start out at a conservative level and move that up over time and that’s the intention of the Board. But we have not fundamentally changed our philosophy on what we want to do with our free cash which is to distribute it back to our shareholders.

Operator

We did have a follow up question from Paul Ginocchio at Deutsche Bank.

Paul Ginocchio – Deutsche Bank Securities

Just have a question on Rentals.com, I think your growth rate dropped off pretty significantly from the third quarter to the fourth quarter, is that one of the reasons for the management change versus something in the market or was that more you decided to make some changes based on that acceleration in growth rate?

Robert C. Metz

We actually feel that the market is, if anything, slightly better because of all the homes that have now come on the rental market and the condominiums. It was an execution issue for us, we needed to bring in someone strong. We brought in someone from the outside, Jamie Clymer, and we feel he’s going to have a major impact on the business. So we feel good about that. Our site is easy to use and cost effective. We’ve added people to the sales force, so we feel like we’re positioned well for 2008 there.

Operator

And we’ll take our next question as a follow up from Michael Meltz at Bear Stearns.

Michael Meltz - Bear Stearns

I have one follow up based on, Bob, your comment, I think you said Apartments is a solid business and trends are improving. Generally you look for sequential improvement, that business builds throughout the year. Is that the expectation here in 08?

Robert C. Metz

We do feel that the national apartment situation has improved. As Kim said, it’s gone from 94 to 93%. As far as occupancy that’s a sweet spot for us. There are about 50% of that markets in that sweet spot a year ago and now it’s up to 87%. As you said we did have sequential monthly revenue gains throughout 2007 and so we do have a high level of confidence for 208 for this business. We feel we’re also positioned very well there.

Kim Payne

And as I did say the trends are continuing into early 2008 from 2007.

Michael Meltz - Bear Stearns

There’s a trend of sequential revenue improvement?

Kim Payne

That’s right.

Robert C. Metz

There’s not a lot of new construction there although we have seen some churn spots. What is happening because these rental homes and condominiums are coming on the market, that’s creating movement out of some of the apartment communities and that’s creating a churn where they need to advertise to keep their occupancy levels where they’re at. So although it’s not new apartment construction, we’re getting some churn just because of what’s going on in the home industry.

Operator

We did have another follow up question from Paul Ginocchio from Deutsche Bank

Paul Ginocchio – Deutsche Bank Securities

I tried to do a follow up on the rentals but I – is there something in the website that you’re missing that others in the marketplace have that a lot of them either gain share, if you’re saying the market was bad I guess you were losing share? What was the – was it again a management execution error is there something that you now need to bring to the site or change from the site or partner or whatever it may be to re-accelerate growth?

Robert C. Metz

That’s a good question. Nothing really with our site, we’re improving our engineering issues, we’re improving the site, but that’s a process all throughout the year. It really is just an execution issue, we had to get the right people in place and we definitely feel Jamie is the right leader for that division.

Operator

And with no further questions left in the queue I’d like to turn the conference back over to Mr. Metz for any additional or closing remarks.

Robert C. Metz

I would just like to say thank you to all of our shareholders and also for everyone on this call who had questions for their interest in our business and we hope to bring you a good return. Thank you very much.

Operator

This does conclude today’s presentation. We thank everyone for their participation. You may disconnect your lines at any time.

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