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Executives

James M. Gruskin - Assistant VP, Finance and IR

David C. Swanson - Chairman and CEO

Steven M. Blondy - EVP and CFO

Analysts

Paul Ginocchio - Deutsche Bank Securities Inc.

Peter Salkowski - Goldman, Sachs & Co.

Michael Meltz - Bear, Stearns & Co. Inc.

Jaime Neuman - Wachovia

Ken Silver - Royal Bank of Scotland

Jake Newman - CreditSights

R.H. Donnelley Corporation (RHD) Q1 FY08 Earnings Call May 8, 2008 10:00 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to the R.H. Donnelley's First Quarter 2008 Results Investor Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. Please note that today's call is being recorded, as well as webcast live over the company's website at www.rhd.com.

I would now like to turn the call over to Mr. Jim Gruskin. Mr. Gruskin, you may begin.

James M. Gruskin - Assistant Vice President, Finance and Investor Relations

Thank you and good morning everyone. I am Jim Gruskin, VP of Finance at R.H. Donnelley. Hosting the call today are Dave Swanson, Chairman Chief Executive Officer of R.H. Donnelley and Steve Blondy, Executive Vice President and Chief Financial Officer.

Certain statements made today may be forward-looking within the meaning of the Private Securities Litigation Reform Act. We call your attention to our press release for the quarter ended March 31, 2008, and the company's Form 8-K furnished to the SEC this morning, both of which discuss first quarter results. We also encourage you to review the company's other periodic filings with the SEC, which set forth important factors that could cause actual results to differ materially from those contained in or suggested by any forward-looking statements. Copies of R.H. Donnelley's SEC filings may be obtained by contacting R.H. Donnelley, searching its website at rhd.com, or visiting the SEC website at sec.gov.

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

During today's call, we will be making references to certain adjusted figures such as EBITDA, free cash flow, and net debt. For example, cost and EBITDA exclude FAS 123 expense as well as a goodwill impairment charge. In addition, expenses, EBITDA and free cash flow exclude the impact of certain compensation expense associated with the Business.com acquisition. Net debt also excludes the purchase accounting fair value adjustment. Some of the aforementioned items are non-GAAP financial measures and additional information about non-GAAP financial measures as well as the reconciliation between these items and the most comparable GAAP measures can be found in the press release and related 8-K furnished to the SEC this morning. The press release is available on our website and can be accessed by going to rhd.com, and clicking on Press Releases. Please review the risk factors described in the Safe Harbor language.

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

David C. Swanson - Chairman and Chief Executive Officer

Thank you, Jim. Good morning everyone Thanks for joining us. There is three key messages I want to convey today that sum up our activities in the quarter. First, we once again delivered strong revenue and EBITDA; second, the weak economy impacted ad sales as we expected; and third, we have been hard at work in response to the cyclical and operating challenges we face. These efforts in turn revolve around three activities.

First, we are launching a major refinancing today that will diminish near-term mandatory debt repayments, extend debt maturities and enhance our operating flexibility over the next few years. Steve will walk you through the details in a moment.

Second, we launched an enterprise-wide cost structure and process review. Our mission is to ensure that our cost structure reflects effective and efficient processes that support the operating environment we envision for the future. In addition, this effort will produce cost savings that will buffer the impact of 2008 ad sales on 2009 revenue.

And third, we continue to invest in our interactive products and strategy, sales force training and technology to ensure we can offer the highest value solutions to our advertisers, regardless of where or how consumers search for their product to service.

Before moving on to our operating results, I would also like to take just a moment to comment regarding the impairment charge that we recorded for the quarter. While investors and analysts understand these things and how they work and I don't believe we will be surprised or unduly concerned, others that listen to these calls and webcasts, including our employees, maybe less familiar with the accounting rules, so I want to make sure that they understand the context and don't overreact.

The impairment charge is nothing more than a non-cash adjustment to goodwill on our balance sheet that reflects the recent decline we have seen in the market value of our debt and equity securities and in no way impacts our debt covenants, tax attributes, cash flows or any other operating metrics of the company. It simply is the way that we are required under the accounting rules to mark down the goodwill associated with the acquisitions we've made on our balance sheet.

Okay, on to operating results. Net revenue in the quarter grew by 2% to $675 million, reflecting improvements in claims adjustments and the impact of Business.com. Without Business.com, revenue was flat.

EBITDA came in at $357 million, putting us right on track to achieve our full year guidance. Our keen focus on costs and cash flow continue to drive industry-leading margins and free cash flow conversion. Free cash flow of $92 million was below last year, but better than plan due to timing factors that Steve will explain in a little bit.

Ad sales, the leading indicator for revenues, were down 4.8% in the first quarter consistent with our full-year guidance of down mid single-digits, and reflecting an economic environment that has proven every bit is difficult as we anticipated. But began to emerge last year as only regional economics softness in markets highly affected by the housing prices has spread to include nearly all of the regions of the country that we do business. Ad sales were down across all of the brands and included both local and national segments.

Results were particularly softer on our large metro markets, but even many of our midsize markets are feeling the effect of this weak economy. As I mentioned on our last conference call, consumer spending in the health of local businesses in our markets is our single biggest key success factor. And although our portfolio of markets had historically exceeded national averages for growth in population, retail sales and employment, during the last few quarters, they have actually under performed the rest of the U.S.

Small and medium-size businesses are very cautious about increasing discretionary investments in advertising, because they are feeling the effects of weaker consumer demand for their products and services, and those businesses, being affected by high fuel prices, are feeling the pinch on the cost line, as well as the revenue line.

So what are we doing about it? First, we are aggressively managing down non-essential costs and reviewing our value chain and processes end to end. We have already identified over $30 million of cost savings for 2008, with additional '08 opportunities under evaluation. We are further evaluating opportunities for 2009 and beyond, seeking to operate as efficiently as possible without sacrificing the investments necessary to position the company for long-term growth. We are taking both a short-term and a long-term approach on this to right size our cost structure to match our business opportunities.

While we believe it is prudent to aggressively manage costs in this typical business cycle, we also realize that we cannot save our way to success. As such we are continuing to invest in and develop triple play in our interactive local search solutions. Now we are already the leading provider of not just print, but Internet Yellow Pages and search engine marketing solutions in nearly every market that we do business and we are only in the yearly earnings of that. But it's more than just these products. We are also working on our effectiveness in bringing those solutions to market. We are learning a tremendous amount about what works and what doesn't, what advertisers really value and what they don't. And we continue to use these learnings to refine our solutions, our pricing models and our marketing strategies.

One example to the work our Santa Monica team is doing on the next version of DexKnows.com. We are leveraging Business.com’s management and technology expertise to create a local consumer search site that delivers an even better experience to both users and advertisers, by delivering better search results, enhanced performance based pricing advertising features and robust analytics for advertisers, a scalable site architecture and a platform that will enable us to more efficiently distribute our advertisers’ content to the rest of the Internet. This will not only help us generate more leads for small and medium-size business people, but will improve our margins as well. We will begin beta testing the site later this year.

Another example is something we call PrepSmart, a new technology tool we have rolled out to our marketing consultants, designed to deliver a wide array of marketing information supporting both traditional and digital product lines. It allows us to deliver a more consultative approach for the advertisers by creating state-of-the-art media portfolio overviews for establishing the customers optimal product mix of print, Internet Yellow Pages and search engine marketing. The tool dramatically reduces the time it takes our sales consultants to prepare proposals that are customized for each of their advertisers, enabling them to spend more time with customers and less time in the office.

Another investment has been wireless cards for our marketing consultants, allowing them the ability to do real-time demonstrations with local businesses of their visibility on DexKnows.com and on the search engines and how our solutions help improve that visibility. The cards also allow them to access all of their advertiser data, sales collateral and other important information as well as the ability to process their orders without returning to the office, all designed to meet them more productive.

So to wrap up, while first quarter's sales results reflected some cyclical economic pressures, EBITDA and cash flow came in as planned. I remain confident that with the steps we are taking to prudently manage our cost structure and extending our debt maturities, while at the same time, investing in growth and our future, we will be well positioned as the environment improves.

With that let me turn the call over to Steve, who will talk about the quarter in greater detail and describe our upcoming refinancing.

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Thanks Dave, and good morning. We have been quite productive on the financial front this year. Let me highlight three of our most important accomplishments. First, we generated strong revenue, EBITDA and cash flow in the first quarter. Second, we're launching a major refinancing program that will effectively eliminate near-term debt amortizations, extend maturities and reduce debt principal outstanding. And third, we're making significant progress on our cost reduction program. As a result, we are confirming 2008 guidance.

Let's start with Q1 results. Q1 net revenue of $675 million increased $13 million or 2% versus Q1 ‘07, primarily driven by Business.com and improved claims performance. Excluding Business.com and bad debt, Q1 operating costs were down $8 million year-over-year, primarily driven by lower production, publication and distribution costs, reflecting our print optimization initiatives.

Total Q1 expense, including BDC and bad debt, of $380 million increased $21 million versus Q1 ‘07. Q1 expense also reflected aggressive investment in advertising and branding. Q1 EBITDA of $357 million was on plan and represented a healthy 52.9% margin.

At the end of Q1, we recorded a $2.5 billion non-cash goodwill impairment on accounting charge to reflect recent declines in the market price of our debt and equity securities. Again, this in no way impacts cash flow, compliance with any debt covenants or tax attributes or management's outlook for the business.

Turning to interest, in the first quarter, we paid $214 million of cash interest, while accrued interest expense of $196 million included $18 million of accretion on our discount bonds, $5 million of non-cash deferred financing fees and $4 million non-cash purchase accounting benefit. Now, just like 2007, our first quarter bears a disproportionate share of interest payments.

Our Q1 weighted average interest rate of 7.4% was down 25 bips from Q4 due to lower LIBOR and a benefit of last October's refinancing. Q1 free cash flow of $92 million also included $10 million of CapEx and $40 million use of cash from working capital. CapEx reflects the final stages of our comprehensive publishing systems integration that will complete this summer allowing the remainder of Dex synergies to be released later this year.

Q1 working capital investment primarily reflects the impact of four items. First, higher capitalized selling costs driven by seasonally high Q1 ad sales. Second, lower AP balances at the end of Q1 versus year-end due to disbursement timing. Third, higher AR balances at the end of Q1 due to slower payment patterns from advertisers, which is typical in weaker economies. And four, the transitioned in-house building billing from Qwest in that 14 state region, which will lower ongoing costs. Similar to last year, we expect working capital to release cash in the second half of the year.

During the first quarter, we applied free cash flow to reduce net debt by $74 million, resulting in net debt at the end of the quarter of $9.95 billion representing 6.9 times leverage. Our revolver availability remains a healthy $365 million.

This morning we are also launching a three-part refinancing with the leadership of J.P. Morgan and Banc of America. A summary of our refinancing plan follows. Number one, $1.1 billion of Dex West bank debt maturing next year is being refinanced with new Dex West credit facilities. This will extend maturities until 2015 and effectively eliminate all mandatory amortization over the next couple of years. Number two, we are also amending RHD Inc.’s credit agreement with outstanding borrowings of $1.5 billion to extend the maturity of the revolver and enhance covenant flexibility thereby accommodating additional unsecured debt. And three, as announced in a separate press release this morning, RHD Inc. is offering to exchange new senior unsecured notes for a portion of outstanding RHD Corp. notes. Though final details remain subject to market conditions, as a result of these transactions, we expect our total debt balance to decline. And while our average interest expense will increase, we have effectively eliminated all near-term maturities and covenant uncertainties.

Last, we are affirming guidance, excluding the impact of the refinancing. As we have said in the past, key to achieving your EBITDA and free cash flow targets is our ability to identify and implement aggressive cost reductions. To date, we have identified more than $30 million of expenses to be eliminated in 2008. We are reviewing our operations and cost structure, aligning people and processes, and enhancing efficiency and effectiveness. We expect do find significant additional and enduring cost opportunities that will further benefit 2008, while positioning the company for sustainable long-term growth, when the economy recovers.

That concludes our prepared remarks. Operator, we are now ready for questions.

Question and Answer

Operator

Thank you, sir. At this time, we would like to begin the question-and-answer session of the conference. [Operator Instructions] The first question comes from Paul Ginocchio with Deutsche Bank. Sir, you may ask your question.

Paul Ginocchio - Deutsche Bank Securities Inc.

Thanks for taking my question. Just is that 30 million of cost savings, is that new or incremental? I think you imply that you're actually spending more in advertising and marketing now than a year ago, I just want to confirm that?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Well, the 30 million cost savings… good morning, Paul. The 30 million in cost savings is versus our original guidance and is allowing us to get after expenses to be able to achieve our revised guidance that we’ve provided in February.

Paul Ginocchio - Deutsche Bank Securities Inc.

Okay.

Steven M. Blondy - Executive Vice President and Chief Financial Officer

The advertising investment is… we are continuing to advertise heavily I think in the first quarter. Advertising is around $17 million expense.

Paul Ginocchio - Deutsche Bank Securities Inc.

Okay. And then just wanted some clarification on the write-down, and so has no impact on the amortization of the tax asset?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Correct.

Paul Ginocchio - Deutsche Bank Securities Inc.

So, it’s in accounting versus sort of… Okay. Just want to be clear on that. Thank you.

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Thank you.

Operator

The next question comes from Mr. Peter Salkowski with Goldman Sachs. Sir, you may ask your question.

Peter Salkowski - Goldman, Sachs & Co.

Yes, good morning. David, I’m wondering if you can give us some sort of sense on how I think they are progressing in the second quarter, I know you guys showing [ph] and telling those once in a while and what you're seeing relative to how the first quarter came out? And then I have a follow-up.

David C. Swanson - Chairman and Chief Executive Officer

Yes, Peter, while we're reaffirming the outlook for the year, we're not providing quarterly guidance. As you know, while we have excellent revenue visibility, ad sales visibility, and you and I had this discussion a couple of months ago, is not what it used to be when we were in the print-only business. With the significantly higher percent of our sales that are digital sales that have these very short fulfillment cycles, they affect ad sales right up to the last day, so we just are not giving quarterly guidance on and sales.

Peter Salkowski - Goldman, Sachs & Co.

Any interest in letting us know what the percentage of revenue is coming from the digital side, Dave, being that you brought it out?

David C. Swanson - Chairman of the Board, Chief Executive Officer

We have... as you know, we don't look at the business that way, so are not disclosing that.

Peter Salkowski - Goldman, Sachs & Co.

Okay. And then on an accounting issue, I’m wondering if you help me out on that, on the D&A, what’s the trend line on that going forward? The number seems to bounce around a little bit from where it was. Fourth quarter it was a lot higher last year, it came back down. Is the 118 the number that’s going to kind of stick around?

David C. Swanson - Chairman and Chief Executive Officer

Yes, good question, Pete. The current quarter is more or like the trend line. Remember last year’s fourth quarter included a $20 million incremental amount from the trademarks in the Sprint markets change to Embarq. And so that was just a one-time item.

Peter Salkowski - Goldman, Sachs & Co.

Thank you. I forgot about that. And then just wondering if you could talk a little bit about Vegas, Dave. I know the book was published in the quarter, how did that turn out in the first quarter relative to how it was back in the third quarter?

David C. Swanson - Chairman and Chief Executive Officer

Well, as you know, we don't give results on specific directories, but what I will tell you is if you can find a worse business environment in the country than Las Vegas right now, I’d like to see it. Vegas is as difficult as I have ever seen a market in my entire career.

Peter Salkowski - Goldman, Sachs & Co.

So, you would say first quarter it was worse than it was in the third quarter?

David C. Swanson - Chairman and Chief Executive Officer

I don't have that right off the top of my head. I don't know if it was worse, but it certainly wasn't better.

Peter Salkowski - Goldman, Sachs & Co.

Got you. Got you. And then I had a final question for Steve. The cost-cutting, the $30 million I know you are talking about, there would be a possibility of being higher... you should see a pretty much saying… you should expect to get $30 million in the second half of the year then or is that going to... is that already… has any of that occurred I guess in the first quarter, or should we just expect at all in the out quarters? And then what’s expectation sort of as far as how much higher that could be as you look through other processes and plan to look at that?

David C. Swanson - Chairman and Chief Executive Officer

Yes, I don't... really none of it is reflected in the Q1 results yet. So that’s first part of your question. As far as how much higher it could be it's kind of hard to say.

Peter Salkowski - Goldman, Sachs & Co.

Okay. Where [inaudible] end a quarter versus end a year?

David C. Swanson - Chairman and Chief Executive Officer

Well, I don't have that number. I think the number is probably down now.

Peter Salkowski - Goldman, Sachs & Co.

Okay. Maybe 2, down a couple of percent.

David C. Swanson - Chairman and Chief Executive Officer

It’ll be… let us kind of come back to you about that.

Peter Salkowski - Goldman, Sachs & Co.

Okay.

David C. Swanson - Chairman and Chief Executive Officer

I don't have that number at hand.

Peter Salkowski - Goldman, Sachs & Co.

Sounds good. Thanks so much, guys.

David C. Swanson - Chairman and Chief Executive Officer

Yes.

Operator

The next question comes from Mr. Michael Meltz with Bear, Stearns. Sir, you may ask your question.

Michael Meltz - Bear, Stearns & Co. Inc.

Great. Thank you. Good morning. I think I have three questions. On the refis., can you give us more of a sense as to what your effective rates are now in the facilities and how... LIBOR has come down, but there is... just trying to get a sense of dilution here from the refinancing.

Steven M. Blondy - Executive Vice President and Chief Financial Officer

As I said, Michael, our rates are going to go up, our interest expense is going to go up as a result of this, but we're removing any uncertainty. As far as the specifics go, I really don't know the answer yet. I’ve got an indication that I think it's… could be 200 or 300 basis points on the bank debt that's being refinanced, something like that.

Michael Meltz - Bear, Stearns & Co. Inc.

From the effective swap rate right now, you are saying?

David C. Swanson - Chairman and Chief Executive Officer

Right.

Michael Meltz - Bear, Stearns & Co. Inc.

Okay. So you're saying $1.5 billion on RHD Inc., it could be 200 bips higher, and the $1 billion of Dex could be similar?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Something in that ballpark, yes.

Michael Meltz - Bear, Stearns & Co. Inc.

Okay. Dave, I know the question was kind of asked earlier. You're not giving quarterly guidance, but you did minus 48 ad sales in the quarter. Can you give us a sense, have things… as you look forward, do you think things have stabilized? And I know you would reiterate your full-year range, just give us a sense as to better, worse, the same as you look forward.

David C. Swanson - Chairman of the Board, Chief Executive Officer

Well, Michael, what I can tell you is I have not yet seen anything in our fundamentals that indicate to me that there has been any kind of positive turn to the north.

Michael Meltz - Bear, Stearns & Co. Inc.

Okay. Fair enough. Last question for me, Steve, on the working capital use in the quarter, what’s the guidance for the full year?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

I think it's a use of 40 or something like that. I think it’s something in that ballpark. I mean that’s published, Michael, I don't have it right in front of me. It's around that ballpark though. 42 or something like that. Yes.

Michael Meltz - Bear, Stearns & Co. Inc.

So you are saying your guidance is for 40, a use of 40 for the full year.

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Right.

Michael Meltz - Bear, Stearns & Co. Inc.

Okay. And last question from me, sorry, this is four questions. Is there... have you… I was a bit surprised on Idearc’s call earlier in the week. They started refer to more discounting or effective discounting just giving much bigger ads for the same price. Can you talk about... are you doing anything similarly in your markets?

David C. Swanson - Chairman and Chief Executive Officer

Yes, Michael. We do... I don't know exactly what Idearc does, but what we do, we don't take a general approach to that kind of thing, but we do take a market-by-market approach to those kind of things. And if we have areas where we think that we need to instill more value into the system, whether it be by a particular category or by a particular market, our marketing professionals will do an analysis of that particular market and, if necessary, use programs like that to help increase the advertiser value.

Michael Meltz - Bear, Stearns & Co. Inc.

Okay. But there hasn't been a dramatic shift in your activity, given weaker conditions?

David C. Swanson - Chairman and Chief Executive Officer

No. But the other thing that I will say is and we've about it before, our whole approach to pricing has really changed over the last couple of years, where we... our approach now is a price to value strategy by business category. So what we're doing is, we have some categories in our business that have significant pricing power, north of 5%. We have other business categories that have little or no pricing power, where we're not rating... where we're not increasing them at all. So this is a process that we've been going through for some time.

Michael Meltz - Bear, Stearns & Co. Inc.

Okay. Great. Thanks for your time.

David C. Swanson - Chairman and Chief Executive Officer

Okay.

Operator

The next question comes from Jaime Neuman with Wachovia. You may ask you question.

Jaime Neuman - Wachovia

Yes, hi. Thank you. Can you comment on how Business.com is doing versus your expectations when you bought the asset?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Yes.

David C. Swanson - Chairman and Chief Executive Officer

Jaime, they're doing great. That has turned out to be a great business in terms of their... Business.com, the business, it's actual performance is pretty much right on target with the business plan. And I would say, the skill sets that we acquired there in terms of engineering and Internet management have exceeded our expectations and they're doing a fabulous job.

Jaime Neuman - Wachovia

Have you seen any other departure since take-up of the company?

David C. Swanson - Chairman and Chief Executive Officer

Not any unexpected departures, and it's... quite honestly that team is... the turnover is extremely low in Business.com, in general, and we've got some very, very strong retention packages in place for those folks there. And all signs are that it's quite stable.

Jaime Neuman - Wachovia

Okay. Can you comment on what… in the past, you've commented on what Florida and Vegas combined did in the quarter, can you comment on what they did this quarter?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

I'm sorry, Jaime, what was that question?

Jaime Neuman - Wachovia

Florida and Vegas, what those two markets did versus in ad sales in the quarter, you've commented in the past, you’ve spoken out those markets how much worse they were than the rest of the country.

Steven M. Blondy - Executive Vice President and Chief Financial Officer

I didn't prepare that this time. Let me just see if I’ve got anything very quickly I could. Florida and Nevada in Q1 were the two worst performing states. That I can tell you for sure.

Jaime Neuman - Wachovia

Okay. Are you still looking for the number or is that it?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

No, I'm not going to give the exact, the specific number because I don't have it formatted the way that I have given it you in the past.

Jaime Neuman - Wachovia

Okay.

Steven M. Blondy - Executive Vice President and Chief Financial Officer

But what I can tell you is that those… Florida and Nevada in Q1 were the two worst performing regions of the 28 states we do business.

Jaime Neuman - Wachovia

Okay. And then one last one, as far as the $30 million in cost-cutting, can you just point out what areas those are if there is anything in particular that sticks out?

David C. Swanson - Chairman and Chief Executive Officer

It's predominantly employee-related stuff, head count incentive payments, stuff like that.

Jaime Neuman - Wachovia

Okay. Okay. Thank you very much.

Operator

The next question comes from Ken Silver with the Royal Bank of Scotland. You may ask your question.

Ken Silver - Royal Bank of Scotland

Hi. The decline in the ad sales in the first quarter, can you maybe give more detail on that in terms of was it customers employing back advertising, outright cancellations, decline in rate, maybe you could just give us a sense of what were the major contributing factors?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Okay, Ken. let me try to give it you this way and hopefully that makes sense. Maybe a good way to do is to compare it. If we compare it to Q1 '07, which was essentially a flat quarter, and just say how did Q1 '08 compare differently to Q1'07. And it would break down like this, so we started with about $755 million worth of ad sales in the quarter. And of that we would normally or in Q1 '07, we would have had about $166 million come out of that from decreases in cancels. What actually happened is we had about $174 million of decreases in cancels. So about $8 million worse than last year or 1% of the decline attributable to that. In terms of the advertiser increase, which last Q1 '07 would have got about a $113 million this quarter was only about $91 million, so we were $23 million less in advertisers buying more. Now they still bought $91 million more. But we expect $113 million, but 3% of the delta coming from that. And in terms of new business that we normally sell, we would have expected about $53 million in new business, that's what we would have had in Q1 '07. We got about $45 million of new business, so off about $8 million there, another 1%. So, if you think about the decline, we got a $38 million decline, $23 million of it is just less advertisers not increasing to the extent that they historically do and $8 million higher decreases in cancels and $8 million less new business.

Ken Silver - Royal Bank of Scotland

Okay, great. One other question about the bond exchange offer that you released this morning, what is the aggregate amount that you're offering to exchange? [inaudible] add up all the maximum amount or is there some other number?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

No, that's correct, Ken.

Ken Silver - Royal Bank of Scotland

Okay. All right. Thank you.

Operator

The next question comes from Jake Newman with CreditSights. You ask your question.

Jake Newman - CreditSights

Hello, can you hear me out there?

David C. Swanson - Chairman and Chief Executive Officer

Yes, you're a little soft, but speak up.

Jake Newman - CreditSights

I’ll pick up the handset. Can you talk more about the trends in Internet advertising here? How it's looking in the first quarter? And talk maybe about any changes in the kind of demand you've seen? Idearc was talking about fixed… just giving way to pay-per-performance as an example.

David C. Swanson - Chairman and Chief Executive Officer

All right. We don't break out... specifically break out Internet from print the way that Idearc does. We just have a philosophical difference in that that our job is to use whatever products that we have print and online to grow the wallet share from our advertisers. We have said obviously Internet is a much faster growing end of our product suite in terms of fixed price Internet sales versus performance based. In Business.com, it's 100% performance-based. So that doesn't change, they don't have fixed-price products. In our consumer site, DexKnows.com, it's a... we are currently 100% fixed fee or paid inclusion revenue there. However, one of the technologies that’s being developed in Santa Monica right now for our new site that we've spoke about is that we will have pay-per-performance capability included in that as well. So in terms of trends, we can't really speak to it because we only have that one pricing strategy available to us right now.

Jake Newman - CreditSights

But is it showing… is demand for DexKnows weakening at all as a result of having a fixed fee model instead of pay-per-performance available?

David C. Swanson - Chairman and Chief Executive Officer

No, we're not seeing that. We are not seeing that. At least our experience is that most small and medium-size local businesses are... they are perfectly content with fixed... with the fixed fee or paid inclusion models. As you move up the chain in terms of sophistication of advertisers, you will find more of a demand or an appetite for performance-based products.

Jake Newman - CreditSights

Okay. Thank you.

Operator

Our last question comes from the line of Mr. Stan Manuken [ph] with Libertas Partners. You may ask your question.

Unidentified Analyst

Good morning. Couple of questions. First, of 4.8 advertising sales down, could you please tell us what part of this just from the 100,000 feed point of view, what part of it was secular and has been expected as opposed to cyclical?

David C. Swanson - Chairman and Chief Executive Officer

Stan, that's a question obviously we get a lot. And we believe that it's predominantly cyclical. I mean it's pretty hard to deny that we are in a very, very difficult economic environment out there. And there is a lot of things that we look too that says that as well. When we look at our national sales channel, which is almost 100% print actually is performing better than the local channels. So that kind of is a strong indicator to us. The fact that we are seeing that the reason for the decline is more people being conservative about buying more rather than actually defecting from our products altogether, I think that’s another sign. But we also recognize that we're in an environment right now where there is just a wider array of choices out there that advertisers can run to. So, for instance, we have advertisers that are... they're getting behind on their bill for instance. The environment that we are in today, it's a little easier for them to make a choice to say, you know what I'm not going to... I'm not going to get caught up there, I'm going to go someplace else. And so is that cyclical or secular, I guess that could be argued either way.

Unidentified Analyst

It’s fair enough. I have also a question about this exchange offer. Currently, it appears that total savings, typically exchange offer goes through in the format that you just processed this morning. You're going to save about $212 million of principal and debt and obviously you have some carve out, rooms for carve outs under Dex Media instead of a conflict. I was wondering what is the total goal of sort of exchanging amount for the whole [inaudible]? Currently, you're sort of doing it for 700. What is the total goal that you have?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

We're really focused on what we’ve announced this morning, Stan, and don't have other plans at the moment.

Unidentified Analyst

Okay. And then last question that I had was about cost savings that you just announced in response to the sort of slowdown in the consumer demand. Do you believe that if slowdown continues looking forward? Obviously, you will have more visibility for 2009 later this summer or maybe in the beginning of fall after you sort of start preparing your books. But do you think that in the future, if revenue slows down, do you think that you would have room for more cost savings or not?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Absolutely. And we think that they are significant.

Unidentified Analyst

Okay. All right. Thanks a lot.

David C. Swanson - Chairman and Chief Executive Officer

Thank you. Operator, do we have any other questions?

Operator

[Operator Instructions] The next question comes from Todd Morgan [ph] with Oppenheimer. You may ask your question.

Unidentified Analyst

Good morning, thank you. I was just hoping you could clarify the exchange terms, there has been some confusion. If the exchange offer is fully subscribed, in other words, you issue the maximum anticipated number of the 11.75. How many bonds would you be taking out of the Dex or the RHD Corp. structure?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

I think the number is 700, Todd.

Unidentified Analyst

So in other words, you would be redeeming 700 million of bonds out of the Dex Corp. structure in exchange for a different number of 11.75?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

That bonds would be coming out of RHD Corp. structure, not Dex.

Unidentified Analyst

I'm sorry. Yes, yes. Okay. And I guess the second part of that is can you give us any sense of the thinking behind the various amounts, the maximum amounts you describe to the various bonds?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Really not able to comment about that, Todd, publicly, it's a private offering and what you see on the schedule there is what we're offering.

Unidentified Analyst

Okay, thanks then.

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Thank you.

Operator

This concludes today's conference. Thank you for your participation. You may disconnect at this time.

James M. Gruskin - Assistant Vice President, Finance and Investor Relations

Thank you everybody for your attention.

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Source: R.H. Donnelley Corp. Q1 2008 Earnings Call Transcript
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