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Executives

Frank P. Gatto - Acting CEO

Samuel D. (Dee) Jones - Acting CFO and Sr. VP, IR

Analysts

Peter Salkowski - Goldman Sachs

Paul Ginocchio - Deutsche Bank

Jamie Neuman - Wachovia Capital Markets, Llc

Stephen J. Flynn - Morgan Stanley

James Boyle - C.L. King & Associates, Inc.

Colin Gillis - Canaccord Capital Inc.

Edward Steel - Morgan Stanley

Idearc, Inc. (IAR) Q1 FY08 Earnings Call May 6, 2008 10:00 AM ET

Operator

Good morning and welcome to Idearc's First Quarter 2008 Earnings Conference Call. With me today are Frank Gatto, Acting Chief Executive Officer, and Dee Jones, Acting Chief Financial Officer. Some statements made by the company today during this call are forward-looking statements, these statements include the company's believes and expectations as to future events and trend affecting the company's business, and are subject to risks and uncertainties. The company advises you do not place undue reliance on these forward-looking statements, and to consider them in light of the risks factors set forth in the reports filed by Idearc Inc. with the Securities and Exchange Commission. The company has no obligation to update any forward-looking statements. Please note that an archived version of this call will be available on the website at idearc.com, under the Investor Relations section. Additionally, a replay of this conference call will be available through May 20th by dialing 800-642-1687; international callers should dial 706-645-9291. The replay access code is 422-013-12. At the end of the company's prepared remarks, there would be a question-and-answer session.

And now I would like to turn the call over to Frank Gatto, Acting CEO. Frank?

Frank P. Gatto - Acting Chief Executive Officer

Good morning everyone and thank you for joining us. I would like to start today's call with a view from a total company perspective. First, we firmly believe in the set of assets that makes this business an attractive investment. Second, our business fundamentals are still sound and solid. Third, we have a strong multi product strategy that enables us to compete effectively in the current economic environment and at the same time drive the business into the future.

With regards to our first quarter results, the downturn in the U.S. economy as anticipated impact of our business. We knew the first quarter was going to be challenging and Dee will walk you through our financial results. But first, I want to make some brief comments relative to the state of the company.

Our customers expect a solid return on investment from their advertising and we remain focused on ensuring that the products we sell in the marketplace offer value and a solid return on investment. We are protecting our customer base with unique programs such as offline and online packages that help retain our advertisers and continue to attract new ones. The advertising we sell is very results oriented and in excellent value. That is the message we are carrying into our advertisers. While there are some change in consumer behavior and expansion in advertisers spending to include other media, the fact of the matter is the yellow pages continues to be a healthy medium with a high return on investment.

In the first quarter Knowledge Networks/Statistical Research completed its annual yellow pages study that shows the total annual yellow pages references across the industry in 2007 amounted to 13.4 billion or approximately 60 times per year per adult, the same number of references as in 2006. In addition 86% of those surveyed made a purchase or were likely to do so after referencing the yellow pages. Clearly yellow pages are still a strong stable medium with high usage and extremely good conversion rates. The print business which accounts for the majority of our revenue remains strong cash flow business. Despite the cyclical economic headwinds we faced in the first quarter we remain committed to our multi product strategy. We met customer demand by expanding our print offerings with initiatives including expanded content offers to our core books increased penetration in companion directories and new direct mail products.

On the Internet side, there is tremendous demand in the marketplace for our performance based Internet products. Capitalizing on this demand and monetizing those products are critical to the growth of the Internet business. To that end we have launched a new package, Search Marketing local, known as SM local. SM local an extension of current performance based offerings is an affordable advertising package. It provides an opportunity to increase local search traffic to our advertisers and an increased return on investment. SM local along with our recently launched search engine optimization service increases an advertiser's ranking in local search results. With these two new services, we are now able to better market and better optimize a customer's program, both on Superpages.com and Switchboard.com, as well as our major search engines including Google and Yahoo!. These are product our current advertises want and they bring new advertisers to us.

While the company responded to marketplace challenges in the first quarter, we also dealt with several changes in senior management. Idearc's Board of Directors is placing a top priority on securing a permanent Chief Executive Officer and a permanent Chief Financial Officer. We have engaged in out front executive search firm and the board is currently assessing candidates, both internally and externally.

As you all know, we recently brought onboard, one of the most talented individuals in the online local search industry. Briggs Ferguson, to lead our internet business. Briggs served from 2002 to 2007 as Chief Executive Officer for Citysearch, where he developed the first pay for performance local search model, world class search engine optimization and search engine marketing practices. In the short time Briggs has been onboard he has created a tremendous amount of energy and excitement within our internet business and across our entire organization. We are pleased to have someone of his caliber and ability to lead us forward in local search. I can assure you that Idearc's management team remains focused on responding in the marketplace, efficiently manage the business and driving our multiplatform strategy forward.

Our priorities are two fold. We are managing through the issues of the business in the current economic environment, and at the same time keeping the organization focused while remaining committed to our long-term strategy of maximizing value to our investors. Innovations such as the new products and services I mentioned coupled with having the right leaders in place will keep us moving forward. We stand strong in our commitment to the health of the business and we are keeping a sharp eye on initiatives and opportunities that best position us for success, both now and in the future.

So now I'm going to have Dee take you through some of the financial details. Dee?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

Thank you Frank and good morning everyone. Before I start, I need to mention that we report financial results on a GAAP basis as well as on an adjusted pro forma basis to eliminate the impact of transaction and certain other non recurring costs. The adjusted pro forma basis measures are described and are reconciled to the corresponding GAAP measures in the financial schedules accompanying the press release and posted on our website.

Now, first let's start with detail on multi-product revenues. We reported first quarter multi-product revenues as $770 million, a decrease of 4.5% compared to the same period in 2007. Within those results, we reported Internet revenue of $73 million, an increase of 7.4% compared to the same period in 2007.

As we assess our revenue results, we should note three specific items. First, as anticipated, the continued softness in the economy impacted our first quarter revenues. These effects were felt to some degree across the board but certainly disproportionately in our more economically challenged regions, for example Florida and California and in certain housing related categories.

Second, with respect to our Internet revenue results, as we've discussed before, there is an evolution taking place from fixed-fee advertising on Superpages.com to performance based advertising programs primarily pay per click. The result is a flattening of fixed-fee revenue and strong growth in performance based advertising. Transforming to a performance base model is a dominant trend in the Internet advertising because performance based advertising maximizes the potential return on investment to both the local advertisers and the company while allowing for a compelling user experience.

As Frank mentioned we continue seeing strong demand in the marketplace for these performance based products. In fact the growth in sales results we are announcing for this set of products is significantly higher than in the past year. It will take some time to ramp these performance base programs as we build critical mass and fully monetize sales. Based on the strong demand in sales results so far, we are confident in our ability to deliver Internet growth in 2008 consistent with our expectation. Initiatives such as SM local, as Frank described, are essential to our product set.

Lastly, with respect to Internet revenue, we are still in the relatively early stages of monetizing advertising programs in the Switchboard.com environment. You will recall that we acquired these assets this past fall. At that time certain contracts in place with Switchboard.com extended to December 31st, 2007. So, it was only as of January of this year that we begin placing both our fixed-fee and performance based advertiser on the Switchboard.com platform. We continue the integration process and we expect the activity and associated results to ramp as we move throughout the year.

Now lets move on to other financial results. Our EBITDA results for the quarter were relatively strong with a slight margin percent increase on an adjusted pro forma basis. This was due in part to some lower one time cost associated with employee and incentive compensation plan, as well as our ability to tightly manage spending.

In the first quarter we generated $359 million of EBITDA, up 1.4% compared to the same period in 2007. EBITDA margins for the first quarter were 46.6%, compared to 43.9% in the same period in 2007. On an adjusted pro forma basis, first quarter EBITDA was $367 million, which is a decrease of 3.2% compared to the same period in 2007, and as I mentioned, adjusted pro forma EBITDA margins reflected a slight increase at 47.7% in the first quarter 2008, compared to 47% in the same period in 2007.

We reported net income of $111 million or $0.76 per diluted share for the first quarter of 2008. This includes the effect of some favorability in interest expense and income tax rate. Our adjusted pro forma net income was $116 million, a decrease of 2.5% versus the same period in 2007. This equates to $0.79 per diluted share. Our free cash flow for the period was $193 million, based on cash from operations of $202 million less capital expenditures of $9 million.

Finally, our multi-product advertising sales for the first quarter declined 6.2% compared to the same period in 2007. As I just mentioned, relative to last year, the economy continues to impact us. While we are aggressively responding in the marketplace, we expect the current economic environment to continue impacting results somewhat in 2008. Looking forward through the reminder of the year, as we previously communicated on March 27th, our view of year 2008 is such that we anticipate mid single digit percentage point declines in multi-product amortized revenue and we anticipate some operating margin contraction due to the shift in our mix of revenues.

Now let's open the call to your questions.

Question And Answer

Operator

[Operator Instructions]. Thank you, your first question is coming from Peter Salkowski with Goldman Sachs. Please go ahead

Peter Salkowski - Goldman Sachs

Good morning, Frank and Dee.

Frank P. Gatto - Acting Chief Executive Officer

Good morning.

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

Good morning.

Peter Salkowski - Goldman Sachs

First question has to do with revenues. I was wondering if we could talk a little bit about advertising renewal rates, I guess on a percentage of advertisers from... relative to last year and if you could quantify that in terms of dollars, I'm just wondering if... as advertisers are sign up for new programs in 2008 if they are cutting back a little bit on their spending relative to last year?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

Peter, with respect to the first part of your question, regarding renewal rate, as we reported at the end of the year, in '07 our renewal rates were relatively stable, down slightly because of the cancels, we continue to see the continuation of some measure of cancellation of programs, a large portion of which is related to credit cancels, not people leaving the book because they want to because we had some credit issues in the marketplace with... given the economic environment. So that is influencing us a little bit but we do remain optimistic and positive that we are able to hold that advertising base and protect the customer set that we have with the total multi-products programs that we put out there. So we don't report explicit statistics surrounding customer accounts on a quarterly basis, but I will say that, while it's a little bit softer because of the economy than past years, we are hopeful that we will be able to hold that... those customer relationship.

Frank P. Gatto - Acting Chief Executive Officer

And Peter, this is Frank, just to add in one point there, we also see that we are adding new customers and increasing customers at the rate that was fairy consistent with what we have in the past as well.

Peter Salkowski - Goldman Sachs

I guess my question focuses around whether or not advertises are sort of pulling back on their spending a little bit just to... given the state of the economy at this point from their own cash flow perspective?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

Right, and with respect to the decrease side of the equation, Peter, we are seeing... that is influences, we've talked before in this environment, you see most of the influence are the impact on your results coming from people pulling back on the non-core portions of their program, we continue to feel that as we see some multi book reductions and reductions in the auxiliary programs that customers are seeing, the positive aspects to that is that we're able to retain the customers.

Peter Salkowski - Goldman Sachs

Excellent, and on bad debt side, you mentioned credit cancels and things like that, what was your bad debt as a percentage of revenue in the quarter?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

Yeah, in the quarter we accrue at a 5% rate, we had write-offs in the 4.25 range, but we're accruing a little bit higher than what the actual experience was, because we are a little bit cautious about... on the economic environment that we're dealing with, but as we've said before, we expect the full year in that 5% range and I think from what we're seeing at this point, we're still comfortable with that.

Peter Salkowski - Goldman Sachs

Excellent, and then two last questions, on the cost side, looks like you did the yellowmen [ph] work in the quarter with regards to some of the expanses, certainly the G&A, although, I think a lot of that is stock option base related, but also on the cost of sales on a year-over-year basis that being down, can you address what's... especially in the costs of sales what was holding that down and what should we expect for the rest of the year on those?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

Yeah, with respect to the G&A portion, first I do want to note and I think I noted in the script that there was some one time event associated with the stock compensation and incentive base compensation program, that will come out in the Q as far as the explicit numbers around that, but the stock based compensation expense impacting pro forma results was in the $8 million to $10 million range as far as the accruals through-ups with respect to that, and then our STI program, short-term incentive plan had some through-ups as well in the $5 million, $6 million type range, so that's the affect of that. Bad debt within the G&A line was up $7 million or so. With respect to the... but on the flipside of that some off setting and pluses and minuses, we did add some good cost control initiatives around employee related expenses and contract services and those sorts of things. They gave us some favorability in the quarter on G&A.

With respect to cost of sales, again we are managing tightly with respect to those expenses, both employee related as well as the outside cost associated with paper and ink and those sorts of things and we are encouraged by the ability of the organization to tighten the belts a little bit with respect to cost of sales. In addition in that particular line item we had some reduced costs associated with the traffic expense as you are seeing some of the programs of just purchasing traffic or searches versus revenue share around the performance based type programs shifting and that's been able to give us a little bit of cost rate favorability with ability with respect to traffic.

Peter Salkowski - Goldman Sachs

So should we expect the cost of sales line to be down year-over-year for the rest of the quarters? Or you think that'll tick up as we go through the year?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

Well, we talked before about our guidance, we are expecting some contraction overall at the margin line, we don't give guidance around explicit line items. But we are tightly trying to control those expenses, especially on the print side, and we will continue to invest as we drive the growth in the dot com side.

Peter Salkowski - Goldman Sachs

Okay. And last question. On the online revenues, slightly have been a lower expect... a lower number than that I was expecting. Just wondering if you can give us the year-over-year growth rate or even the dollar number of Superpages by itself, what did Switchboard contribute in the quarter, in the first quarter?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

We don't break those out because we view them as a combined or total part of our network, but I will say that we are continuing to integrate with respect to Switchboard. We are on a ramp rate, that we think we would get into the range of what we've held with regard to the Switchboard acquisition on the revenue side and be able to monetize those sales as we look forward.

I will say that with respect to dot com and I want to reiterate very much that, the PBAP sales and the performance based programs in the marketplace as you know we report ad sales and revenue on dot com, consistent with how it recognizes as it flows to the income statement. This is not as much of a leading indicator of what's happening in the marketplace and what will say, that we are very encouraged by the results of our local sales force and their ability to sell programs and drive strong growth.

The growth in the sales side of the house, which obviously we have to take the next step of getting that monetized and on to the income statement, but the growth in the sales slide of that is very encouraging relative to last year, and is a multiple of the performance that we experienced there. So, we do look forward to the dot com revenues to ramp as we move through the year.

Peter Salkowski - Goldman Sachs

Great. So, you expect the growth rates to improve a little bit although you did have higher growth rates last year in the first and second quarter, a little bit acquisition driven there as well?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

Right, what we have seen here... what we are seeing now is the effect of the fixed-fee growth rates flattening out and the dot com... the performance based programs in the dot com network driving the growth and as that transition continues we expect those growth rates to ramp as we move through the quarters.

Peter Salkowski - Goldman Sachs

I think in the past you said that fixed-fee was about 75% of revenues. How has that changed every time have? I haven't had an update in that in a while?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

Yeah, that may just be shifting to more of a... it's probably a one third, two third's type relationship now.

Peter Salkowski - Goldman Sachs

One third pay for performance?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

Yes.

Peter Salkowski - Goldman Sachs

Okay. Great. I will let others ask questions.

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

Thank you Peter.

Peter Salkowski - Goldman Sachs

Thank you.

Operator

Thank you. Your next question is coming from Michael Meltz [ph] with Bear Stearns, please go ahead

Unidentified Analyst

Great, thank you, I have three questions, one follow up on Peter's, on the expense side, the... you sorted out about $15 million of one time items that helped first quarter numbers, so are saying... should we be expecting a run rate going about of about $420 million of cash cost or before D&A cost going forward, could you just clarify your comments there?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

Again Michael [ph], we don't show explicit guidance regard to individual line items, our guidance for the year around EBITDA is that we will see slight contractions or some contractions, excuse me, with respect to the overall EBITDA margin or operating income, with regard to the G&A in the quarter, we did have against pro forma results about $15 million or so of one time items influencing those results to offset the bad debt increase and then we have some additional favorability that helped disburse employee related cost.

Unidentified Analyst

Okay. You said Internet growth should ramp throughout the year or be consistent with your expectations for the year, what are those expectations for full year growth?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

I think most folks have heard me talk about growth in the dot com side, in the 20-ish type range, we are not being terribly explicit with respect to that, but we expect it to be in that range for the full year.

Unidentified Analyst

Okay and then last question on the ad sales side or multi-products ad sales you were down about 6% for the first quarter, is there any change in tone as to what you are seeing thus far in the second quarter, can you give us more of an update there please?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

Michael [ph] again, we don't provide guidance on a quarterly basis with respect to that. But I think as we've talked about before, we expected the economic softness to continue to impact us through the first half of the year in 2008 at least and... Mike [ph], I wouldn't say that we are seeing anything terribly different than that.

Unidentified Analyst

And you expect Internet to improve.

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

Yes and we do expect the internet revenues to ramp as we move through the year.

Unidentified Analyst

Okay, thank you.

Operator

Thank you. Your next question is coming from Paul Ginocchio with Deutsche Bank. Please go ahead.

Paul Ginocchio - Deutsche Bank

Yes, thanks that you've taken the question. On... just on the MSN traffic deal, when did that roll off and is that... I guess it sounds like that's one of the big reasons for the decline in cost of sales. Could you just give us the date? Second, what's your sales force headcount look like at the end of the quarter versus a year ago? Is that one of the reasons your selling cost were down or is it more related to their salaries, about the headcount. And finally, other liabilities seems to be spiking, it's at $360 million of $137 million quarter-on-quarter and up significantly over the last few quarters, what is that line item? Thank you.

Frank P. Gatto - Acting Chief Executive Officer

Ok, Paul, you've got several questions in there so you may have to remind me of a couple if I've not taken a couple of answers. But, with respect to the MSN deal, it did roll off in the middle part of December, and so the quarter as far as traffic costs in those pieces was impacted by that. We had some traffic deals and relationships that are helping to offset that but structure of those are such that it did give us some favorability as to traffic costs with the roll off the MSN deal in the middle part of December.

Paul Ginocchio - Deutsche Bank

Is it safe to say that the traffic was costing more than you're going to loose in revenue?

Frank P. Gatto - Acting Chief Executive Officer

Yeah, I mean the structure of that deal was such, with us powering their IYP site, a lot of that was fixed-fee oriented, as you know that is not necessarily straight depended upon traffic or search activity and we have been able to structure some other deals including the acquisition of Switchboard.com that helped offset that and maintain the value preposition to the fixed-free customer such that you won't see a correlating revenue decline associated with the loss of those searches.

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

Paul, your second question was regarding the sales headcount? If I am...

Paul Ginocchio - Deutsche Bank

Right.

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

Our sales headcount has remained fairly stable since year end and really is not contributing a significant benefit to the cost line.

Frank P. Gatto - Acting Chief Executive Officer

Majority of that cost line impact is non employee related type costs. Some advertising or program pullbacks and those sorts of things influencing that selling expense line.

Paul Ginocchio - Deutsche Bank

Okay. Thank you. And just on the other liabilities line?

Frank P. Gatto - Acting Chief Executive Officer

Yeah, with respect to the other liabilities line, the accrued liabilities have... we had an increase in both income taxes accrual because you don't have a tax payment in the... of any significance in the first quarter, your actual first quarter payment comes in April, as well as we had interest experience accruals that increased in the first quarter as our bond payments or the interest on our bonds only occurs in the second quarter as well as the fourth quarter. So, first quarter you saw the ramp in the other liability... already accrued interest expense line.

Paul Ginocchio - Deutsche Bank

I am sorry. I was talking about the long term liabilities, long term other liabilities? It's like 237 [ph] from the end of the year.

Frank P. Gatto - Acting Chief Executive Officer

Yeah and that is the implementation of FIN 48 and FAS 157, and I should note that basically make shifts on the balance sheet.

Paul Ginocchio - Deutsche Bank

Okay. FIN 48 and FAS 47.

Frank P. Gatto - Acting Chief Executive Officer

157.

Paul Ginocchio - Deutsche Bank

157. Thank you.

Operator

Thank you. Your next question is coming from Jamie Neuman with Wachovia. Please go ahead.

Jamie Neuman - Wachovia Capital Markets, Llc

Yeah, Hi, thanks. Just one quick one. I just wanted to... wondering if you can comment on what you are seeing on the pricing front, particularly for prints.

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

As far as pricing goes, Jamie, there has been selected market test where we have been looking at our price. We have not seen a significant contraction in price across the board. And as much as our customers are feeling the pinch in the economy, they see the value in our product and are working with us.

Jamie Neuman - Wachovia Capital Markets, Llc

But I think in the past, may be you commented that you were delivering more for the same price though. Are you still seeing that, where you are giving may be extra on the companion directories or maybe a larger size print ads versus...

Frank P. Gatto - Acting Chief Executive Officer

Jamie, yes, we are using the power up of our model. Where a customer can double the size of there ad for a very small increment in price and we are rolling that out across the footprint.

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

We continue to roll out paper and ink to drive references across the board for... to maintain the value proposition to the advertisers and so just what you are referring to continues across our footprint.

Jamie Neuman - Wachovia Capital Markets, Llc

Okay. And then just one other quick one. On your independent strategy, do you have plans to move into any new markets with print?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

We don't talk about market expansion initiatives in a public forum, because of competitive reasons. We are looking at markets and assessing how best to possibly go in the markets or assessing our mix of options or offers in the various markets that we are in. So, have we precluded or excluding ourselves from doing that? No, by no means. But we continually asses what is the proposition that you take to a new market, both dot com and print.

Jamie Neuman - Wachovia Capital Markets, Llc

Okay, and then, can you just comment on what you seeing on the national side? A couple of quarters ago, with the biggest you in the quarter, and I am just wondering if that's changed at all or you're still seeing the same weakness?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

The national channel did... in first quarter did see about the same degree or level of results in first quarter versus what they had performed in fourth quarter. So, just like on the local side there is obviously work to do with respect to the print aspect of the business there, I will say the CMR community is working very closely with us and we continue to drive and get an opportunities in that space, it takes a while to move the needle with respect to national because of the way that sales channel works. But I will say the CMR community is working well with us and we expect to hopefully drive some improved performance as we get into the second half of the year with respect to that national channel.

Jamie Neuman - Wachovia Capital Markets, Llc

Okay, thank you.

Operator

Thank you. Your next question is coming from Steve Flynn with Morgan Stanley. Please go ahead.

Stephen J. Flynn - Morgan Stanley

Good morning, couple of questions. Number one, sorry to reiterate some issues on the cost side, but did you say there was a 15 million in one time costs benefits compared to the pro forma adjusted cash cost items?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

Yes, there's two items... two primary items that were driving there, between $8 million and $10 million of adjustment or to the accrual level associated with our stock based compensation expense and then six or so associated with accrual true ups on our short term incentive or cash related bonus program across the footprint, that was... and then amongst other pluses and minuses, the bad debt increase was reflected in that particular line item and we were able to offset some measure of that with other cost initiatives in our employee related and contract services expenses.

Stephen J. Flynn - Morgan Stanley

Okay. But sir, that eight to ten, that's not on a pro forma adjusted number, that's on the reported number, correct?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

No, that is on the... there is a portion of that... portion of our stock based compensation expenses in the pro forma results and a portion of it associated with the ownership grant that was done at the initial spend, that is adjusted out before you get to pro forma but there is a portion of long term incentive based compensation that is reflected in the pro forma result.

Stephen J. Flynn - Morgan Stanley

Okay, great, thanks that clarifies that. And then, some more questions, number one, with regard to the bad debt expense, it looks like you guys were accruing about 5.8, it looks like it was 4% for the first two quarter the last year, stepping up to 5.8 as the percentage of revenues and 6.4 in the fourth quarter. But now you backed down to 5.0, am I looking at that correct? Why... are the results better than expected? As in economic impact not having the impact that you thought it did. Can you talk about that trend and where you are seeing that going forward?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

Yeah, Steve, with respect to the back half of last year, some of those adjustments were made because of the transition to a direct billing relationship with the customers, oppose to using telco billing and what we were seeing with our day sales outstanding as move through the back half of '07. So, we adjusted the accrual rates to get to a... total year of about 5% on the accrual level in 2007. What we've seen with respect to day sales outstanding is a relatively flattening out of that as we move beyond that transition activity and we continue that 5% level in the first quarter, we had write-offs that were a little better than that, if you look at the cash flow statement you can derive that. But we're a little bit cautious with respect to the economic environment such that we maintain that 5% accrual level.

Stephen J. Flynn - Morgan Stanley

But, that sounds like most of the change to 5% was a change in systems absent any sort of economic changes and even a 5%, I think it's a pretty good rate even given some of the economic challenges?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

Yeah, I mean, as I said before, I think that 5% rate is where we should be parked right now, and we'll assess it as we move through the reminder of the year.

Stephen J. Flynn - Morgan Stanley

Okay, thanks. And then just one last question, in the past you'd talked about potential use of the cash into sort of asset repurchasing securities, just want to clarify with regard, you guys still believe that to the tax pre spent from drive [ph] on debt exchange that you're limited in your ability to repurchase bonds and I just want to make sure that's for the life of the bond or there is also certain limitations that drop after 2 years post spend, but... what are your thoughts on that is it true the life move on?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

Yeah, certainly. With respect to the bond aspect, the way the tax sharing agreement is explicitly written it does extend for the life of the debt, however certainly the passage of time --

Stephen J. Flynn - Morgan Stanley

Hello.

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

As of right now, I think we are still a little bit cautious with respect to that type of an opportunity. But we will continually assess it.

Stephen J. Flynn - Morgan Stanley

Okay. Thank you.

Operator

Thank you. Your next question is coming from Jim Boyle with C.L. King. Please go ahead.

James Boyle - C.L. King & Associates, Inc.

Do you see any signs for a second half rebound or is the recessionary situation going on for the foreseeable future and perhaps into 2009?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

Right now we don't... from where we sit right now and April, its still really too early based on our vantage point of seeing where our sales are coming in right now to give any indication to the second half of the year. So, it's just a little bit too early yet to answer that question.

James Boyle - C.L. King & Associates, Inc.

Okay. Is there a debt leverage target for year's end, either '08 or '09?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

We talked about you know debt leverage quit a bit and when we came out it's been... was sort of like 5 to 6 was an appropriate range for this business. Certainly in this environment and with the capital allocation program that the board basically has landed on in current times, we are focused on the risk profile of the business. I can't say that I got an explicit leverage target, but we are absolutely focused on you know maintain the flexibility and improving that risk profile as we move forward. But we will see what the reminder of the year brings.

James Boyle - C.L. King & Associates, Inc.

And what percentage revenue now comes from the independent books?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

It's slightly less than 3% coming from the independent books, that portion of the business especially on the print side is still relatively small relative to our total business.

James Boyle - C.L. King & Associates, Inc.

And do you have roughly an average size of an advertising client in print at this point for Q1 or historically?

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

We don't basically hold out those sort of matrix on a quarterly basis, Jim. The average value per order on the print side has remain relatively stable ticking up slightly as we sell bigger programs, but as we said we brought those bigger programs on it, some measure of a discount to improve the value proposition and our AVO is still fairly flat.

James Boyle - C.L. King & Associates, Inc.

Okay and even though you said that its too early to tell about the second half here, whether you are going to have the same sort of recessionary impact that you are seeing today than in the first half, what size typically do you look for, is it size by, length by, increase in new clients, less renewal all of that or is it just one or two things that you are looking for to improve that says to you the recessionary times are over.

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

I mean I will say that as of right now we are very encouraged by the fact that our increase dollars, what we refer to as our growth dollars, the opportunity to sell on the new and non advertisers as well as increasing programs, those two remain very strong, it tells us that the value proposition in the marketplace is still very effective and those two components of our sales aspect of it provide us with encouragement. What you got to deal with is the cancel rate and the decrease levels that you are dealing with in

the marketplace, and that's what's remains to be seen as we move through the back half of the year, as to how those two components move. We are also very encouraged by what we are seeing on the dot com front and we do expect that to ramp as we move through the back half of the year and we will see what happens with respect to the print and how that mix comes out as we move through second half.

James Boyle - C.L. King & Associates, Inc.

Thank you.

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

Thank you Jim.

Operator

Thank you, your next question is coming from Colin Gillis with Canaccord Capital. Please go ahead.

Colin Gillis - Canaccord Capital Inc.

Startups like ReachLocal and on the performance based dot com advertising, any comments on how partnerships are working out with partners like Local.com?

Frank P. Gatto - Acting Chief Executive Officer

I think... we feel like the partnerships we are assessing... how those are working within our overall network, I mean I will say that the Local.com have good traffic and good activities. We do feel like those partnerships are working pretty effectively. I am not sure I got the first part of your question; you broke up just a little bit.

Colin Gillis - Canaccord Capital Inc.

Oh sure, just... is the local sales force bumping into competition from startups like ReachLocal?

Frank P. Gatto - Acting Chief Executive Officer

We do see them in the marketplace, so I wouldn't say it's predominant. But we do see ReachLocal in the marketplace. I think we have somewhat of an advantage with respect to that and our proposition is a little bit broader, we have got our own site, we are not just reselling other things, we've got Superpages.com and Switchboard.com that offer a very good conversion and very good quality traffic, so that provides us with some advantage in the marketplace, as well we... when we are out there we're pitching the print as well and can provide some measure of advantage against ReachLocal. But we do see players of that sort, mostly small players, but we do see ReachLocal and the like in some of our markets.

Colin Gillis - Canaccord Capital Inc.

Well the market clearly likes your result today. So, congratulations.

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

Thank you.

Frank P. Gatto - Acting Chief Executive Officer

Thank you.

Operator

Thank you. Your next question is coming from Peter Gingold [ph] with Angelo Gordon. Please go ahead.

Unidentified Analyst

Hey guys, thanks for taking my call, I just want to dig in a little bit more to cost of goods sold and better understand sort of... how much of that is ultimately fixed versus sort of a variable cost basis, it looks like you've done great job, sort of maintaining the gross margins, I just want to better understand that, and as you see sort of revenue continue to go down the top line, is there a certain point where the compression really [indiscernible] or, I just want to get a feel for what's driving that number?

Frank P. Gatto - Acting Chief Executive Officer

We are after, and as I've talked before with respect to cost of goods, we're certainly after every opportunity to manage more affectively, our paper and ink costs and those sorts of activities, I wouldn't say those are automatically variable, you have to undertake initiatives to get out, there's certainly a portion of it, depending upon what's driving the revenue that's allow you to flow through, but that's relatively small, I think the initiative are necessary to get at the substantial amount of decrease, and we think we've fairly effective at that without exasperating revenue issues, and so we're encouraged by what we've seen as far. But you have to... it's a balancing act, you have to manage those programs and those elements on such that you maintain the value preposition in the marketplace, maintain your usage in your possessions... possession in your consumer appeal, at the same time being very efficient with the cost, we're encouraged thus far by our being able to do that.

Unidentified Analyst

Is the cost primarily the premium of ink... meaning that, as revenue go down, are you still printing the same number pages and delivering the same number of book or does that... is there sort of a function of revenue declining order, books get smaller, I am just trying to... as it relates to that?

Frank P. Gatto - Acting Chief Executive Officer

There's some pluses and minuses with respect to that, decreased programs, obviously decreased paper and ink, it doesn't necessarily decrease your quantities that are put out on the street. We're also introducing programs to get at customer retention and maintain programs and improve value proposition that actually increase paper and ink cost without an exact corresponding revenue impact. So you've got some pluses and minuses you have to manage within the overall cost structure there.

Unidentified Analyst

Okay, thanks.

Operator

Thank you. Your next question is coming from Brian Schinderle [ph] with Wolf Point Capital. Please go ahead.

Unidentified Analyst

Hello guys. Most of my questions have been answered. Just had a couple of things. Given your existing run rate and what appears to be very significant levels of free cash flow this year, curious as to the interplay of the amortization that's upcoming on the A loan versus the tax sharing agreement. And I thought I had it correct that on a prior conference call, you mentioned that effectively to the extent you want to pay down debt early, you will need to pay down A loan, is that... could you clarify that?

Unidentified Company Representative

Yeah, I mean term loan A, under the tax sharing agreement, term loan A is the only tranche of debt without going through a lot of other hoops and some tax... looking for tax Safe Harbors and those sorts of things and working with Verizon. Term loan A is the only one that we can pay down early.

Unidentified Analyst

Okay. So to the extent that you chose to go that route, that would be the avenue that you would most likely go down?

Unidentified Company Representative

At this point, I think that's where our heads at. But I will say that we certainly continue to evaluate other opportunities with respect to that capital structure. And as we move forward, we'll keep looking at those opportunities and what the economics mean to us relative to the positions with regard to the tax sharing arrangements and our opportunities to get at that safely.

Unidentified Analyst

What... can you talk about potentially the viewpoint on potentially tack-on acquisitions here? Obviously, last year you did a couple of things to bulk up on the Internet side. Is that a continuing focus or is that on hold or how do you view that in the current environment?

Unidentified Company Representative

We are always evaluating those types of opportunities to improve the business... fundamentals of the business. More of the opportunities that present themselves of that nature are on the dot com side, and we continually evaluate how is it best to improve our proposition in the marketplace and our position both with respect to our overall ad networks, content and our consumer and advertiser appeal with respect to the dot com. Is it best to acquire that or build it or drive it on your own with regards to economics or speed to market?

I will say the current environment, the current credit market environment, in the current... current situation make the economics more difficult than what they might be otherwise. But we'll continually assess that, and I think it's our responsibility and the management team to continually assess the means to improve the business fundamental. But we also have to be cognizant of the environment we are in.

Unidentified Analyst

Okay. Last question I have, any updates on the executive search process and sort of what the expectations should be there?

Frank P. Gatto - Acting Chief Executive Officer

Brian, the Board is actively conducting the searches, and I know it's a very top priority for them and they are working diligently at it and looking at candidates both internally and externally.

Unidentified Analyst

Great. Thanks guys.

Operator

Thank you. Your next question is coming from Kelly Burton [ph] with Wachovia. Please go ahead.

Unidentified Analyst

Hey guys. A quick question from an earlier question around the tax treatment rules with regard to repurchasing bonds. From our end, some of that answer got cut off, so all I heard was it does extend for the life of the debt, but then you started to stay overtime... I don't know if maybe you were saying something around we could maybe evaluate that and there is some way to maybe get around the rule of waiting for the life of the bonds for repurchases. Can you go over that again?

Frank P. Gatto - Acting Chief Executive Officer

Yeah. With respect to the tax sharing agreement around the bond, there is limitation as to being able to do anything early with regard to the tax sharing agreement between us and Verizon. And it does extend for the life of the debt. There are Safe Harbors that you can evaluate and try to step through that the passage of time helps you get comfortable around the potential opportunity to do that. However, given the magnitude of the implications and the potential tax implications of that sort of activity, right now we are looking at it with a very cautious and conservative eye. The passage of time might influence how you look at that and the circumstance you find yourself in. So there are Safe Harbors that you can step through, but it does... the passage of time would be... is helpful and beneficial with respect to that. So as of right now, I guess our position is we continue to evaluate it, but it's not necessarily the focus.

Unidentified Analyst

Okay. Thanks

Operator

Thank you. Your next question is coming from Edward Steel with Morgan Stanley. Please go ahead.

Edward Steel - Morgan Stanley

Hi there. I just wanted to ask you if you could comment on the competitive environment at the moment to the extent that have you seen that you've taken share or lost share to other independents in the first quarter, especially with regards perhaps to Yellowbook.

Frank P. Gatto - Acting Chief Executive Officer

During the first quarter, Edward, I would say that the... relative to our competitors, we have pretty much remained flat. We are both out there, we are both aggressively out there. But relative to Yellowbook or the other competitors who we meet in some of the other independent markets, it appears that we are basically flat.

Edward Steel - Morgan Stanley

Okay, that's helpful. Thanks very much.

Frank P. Gatto - Acting Chief Executive Officer

Okay.

Operator

Thank you. Your next question is coming from Avi Steiner [ph] with KBC Financial. Please go ahead

Unidentified Analyst

Thank you. I just want to be clear right now that A, you are building cash and nothing else; D, you are not contemplating to prepay the A at par other than scheduled amortizations. Thirdly, C, you had mentioned maybe talking with Verizon, are you talking with Verizon about the tax issue? And then on the cost side, is there an opportunity to shut down independent books? And lastly, can you remind us in aggregate whether these independent books are positive or negative on an EBITDA basis? Thank you.

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

With respect to capital allocation and the announcement we made at the end of... in March with respect to the dividend in that aspect of things, I think the focus is right now to improve the risk profile of the business and maintain flexibility by building cash on the balance sheet at this point. We certainly evaluate opportunities to economically and efficiently change the capital structure of the business. But building cash on the balance sheet effectively improves that risk profile, and we wanted to maintain flexibility with respect to how we actually utilize that cash as we get clearer on the economic picture in the credit market environment as we move forward. So I think you are reasonable accurate with respect to that. I don't want to preclude any opportunity with respect to capital structure activities, but I think you are generally reading the tea leaves accurately with respect to capital allocation.

With regard to independent markets in the aggregate, they are profitable and we do make money. We continually evaluate the effectiveness of those markets on an individual basis, whether it be print, dot com or on a combined basis. And so the independent markets and profitability of those books as well as all the other books that we put out there are certainly a focus and an area that we look at and evaluate. And so in aggregate, absolutely, they make money and we continue to look at individual markets to make sure we are on track with where those markets need to be.

Unidentified Analyst

Okay, circling back, are you talking with Verizon about the tax issue at all? Thank you.

Frank P. Gatto - Acting Chief Executive Officer

As far as those types of discussions, we're not going to comment on that.

Unidentified Analyst

Okay, thanks.

Operator

Thank you. Your next question is coming from Ken Silver [ph] with Royal Bank of Scotland. Please go ahead.

Unidentified Analyst

Two questions on the top line. First, first quarter multi-product ad sales declined 6.2%. Are you giving guidance for that data point for the rest of the year?

Frank P. Gatto - Acting Chief Executive Officer

No, we don't give guidance with respect to ad sales.

Unidentified Analyst

Okay. And then in terms of the Internet ad growth, it was 7.4% in the first quarter. But you mentioned earlier that you still think it's going be 20% growth for the whole year. So that would imply sort of growth for the remaining three quarters of the year I think in about the mid 20s. Is that... I mean are you seeing that in the second quarter? Can you just maybe clarify it a little bit more?

Frank P. Gatto - Acting Chief Executive Officer

I mean we do expect that to come about in a ramp fashion such that it will move up as we move through the year. The growth will drive as we move through the year. Both the Switchboard.com and our ability to monetize and integrate the recent sales activity that we're dealing with will both behave in a ramping fashion as opposed to immediately getting there and flattening out.

Samuel D. (Dee) Jones - Acting Chief Financial Officer and Senior Vice President, Investor Relations

And we have been very encouraged by the SM local package that we introduced within the last couple of months and it's taking a nice tick [ph] for us. So we are very encouraged by that.

Unidentified Analyst

Okay. Great. Thank you.

Operator

Thank you. And this concludes today's Idearc's first quarter 2008 earnings conference call. You may now disconnect your lines and have a pleasant day.

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