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Executives

Scott Klein - CEO

Dee Jones - Acting CFO, Sr. VP IR

Analysts

Matt Chesler - Deutsche Bank

Jaime Neuman - Wachovia Securities

Peter Salkowski - Goldman Sachs

Idearc, Inc. (IAR) Q2 FY08 Earnings Call July 29, 2008 10:00 AM ET

Operator

Good morning and welcome to Idearc's Second Quarter 2008 Earnings Conference Call. With me today are Scott W. Klein, 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 beliefs and expectations as to future events and trends affecting the company's business, and are subject to risks and uncertainties. The company advises you not to place undue reliance on these forward-looking statements, and to consider them in light of the risk 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 Please note that an archived version of this call will be available on the website at idearc.com, under the Investor Relations section.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 August 12th by dialing 800-642-1687; international callers should dial 706-645-9291. The replay access code is 522-616-34. At the end of the company's prepared remarks, there will be a question-and-answer session.

And now I'd like to turn the call over to Scott W. Klein, Idearc's CEO. Scott?

Scott Klein - Chief Executive Officer

Elsa, thank you very much. Good morning everyone and thanks so much for joining us. Here Idearc ran a journey of transformation and we are making excellent progress. I have now been on the job for eight weeks and have taken the time to look, learn, listen and act very quickly. I want you all to know that I am delighted to be here. I am disappointed that the company got into the shape it was in when I arrived. But we have a team of committed leaders that are ready to do the things that need to be done to correct our situation. They're determined to succeed and have already made significant changes that are already making a difference.

My comments to all of you on these calls will always be direct, straightforward and focused on telling it like it is. This CEO will take responsibility for his actions and not look for excuses. I'm holding my leaders to the same standard, because our future is in our hands. We'll take credit when it is due and take the blame should it ever be required.

Many have asked me, what was I thinking about when I took the job here at Idearc. I want you all to know that I spend quite a bit of time doing a lot of due diligence, and it became clear to me that the need for small and medium businesses, connect with buyers is significant and Idearc is well positioned with current solutions and new opportunities. Today, there are over 12.5 million of these small and medium businesses in the United States and many thousands get launched every single week. At Idearc, even with about 800,000 customers, clearly we are still very much under penetrating this pool of opportunities.

Much has been made about the demise of the Yellow Pages, but even today there are numerous categories that are sharing good growth. In tough economic times like these, shoppers look for legal protection, ways to generate cash and even self help. The Yellow Pages offer a quick and easy way to find this kind of help. When the cost to move is high and mortgage money is tight, we always see homeowner's spending money to fix and repair their current home and their vehicles. These advertisers listed on the right side of the sheet that you're looking at, know how to get more than their fair share of this kind of work. The Yellow Pages continued to draw solid results for advertisers and that's why these particular sections are growing.

We are also seeing a trend that is playing out with baby boomers, as they have more disposable income to spend on themselves as they turn into empty nesters. All of these categories are growing nicely and are expected to continue to do so as boomers look for new ways to indulge themselves and take care of keeping themselves healthy and attractive. Boomers are average users of the Yellow Pages and will continue to do so over the next ten years. Their spending power is significant and growing and we are well positioned with this key demographic.

Usage of the print Yellow Pages is still high relative to other media, for consumers making a decision to buy according to Taylor Nelson in a study done just last year. Dennis Burnhole [ph] concluded that Yellow Pages are the most trusted source of advertising rated in today's market and by far continues to have the highest media in usage of all, beating T.V., radio, newspaper and all other ad vehicles. The Internet is gaining ground quickly and as you know we are well positioned online as well.

For advertisers, their return on investment in the Yellow Pages has remained high, well definitely down from five years ago, ROI at around $50 to 1, along with 85% of all advertisers at least breaking even most doing much better, according to CRM Associates. This makes the Yellow Pages a great value. While not as great as it once was, it is still second to none and very comparable to the Internet.

The downward trend in media has affected all parts of media, not just the Yellow Pages. This ROI is more than double newspapers, triple magazines, five times better than T.V. and nearly eight times better than radio, according to CRM Associates. Nearly half of all advertisers actually received more calls in 2007 than in 2006. These advertisers know how to fine tune their message to work in the book and in coordination with other media.

We know this because both Idearc and others actually measure call volumes and activity of a representative sample of advertisers. We even now can help our advertisers measure the volume of calls they receive from all types of media. Our plans call for growing this service.

I want to make it very clear at this point, that all of us on this call are not representative of all people in the United States. We all work in sophisticated businesses, we carry hand held devices, ready to grab them at the slightest blow in any conversation, the thought of getting on a plane without our laptops causes us to breakout into a cold sweat, heaven forbid the battery goes dead mid-flight, the good news is that most of the country is not like us. Nearly 50% of all households use the Yellow Pages over once per week, in fact about 65 times per year. Despite what many of you think, those Yellow Pages are definitely not dead. In fact, for many Americans it is the most trusted source for finding a solution to a buying challenge. For the rest of us, there are Superpages.com.

As you can see on this chart of the 25 top media properties in the United States, our traffic is significant at over 30 million unique visitors in the month of June alone, that's up from 23 million in December, a gain of more than one million unique users per month. Our content grows daily as more and more of our 800,000 or so clients become more aggressive about finding buyers online. We have multiple projects and partnerships in motion today that will serve us well, as we work towards being the dominant online search site for local needs. If you haven't already done so, give Superpages.com a try, 30 million unique users can't be all wrong.

I've been asked a number of questions about our fixed fee Internet offerings compared to our performance based products, and I want to make it very clear that fixed fee represents about two-thirds of our Internet revenue. Our performance based products today represent about a third. Those performance based products today are growing in a 30% range. The fixed fee business is flat to slightly down and that's what's dragging down our overall growth rate. We have to work through the transition from fixed fee built critical mass and effectively monetize traffic in these performance based products to drive long-term growth.

SM Local was launched this year as a product to bring search marketing services to small business. It offers proactive marketing of a customer's website on search engines to drive more customers to the business. SM Local includes the valuation of the competitive marketplace, implementation of the search marketing program and reporting of the results.

As you can see from this slide, our SM Local performance profile has changed in the past eight weeks as a result of steps, we've taken internally to drive online sales. This online solutions average weekly sales have increased by 76% and new customer counts per week have more than doubled. We've adjusted the way we focus on our online sales effort and the sales results have literally turned on a dime. This is just the beginning and we fully expect this business to realize even more significant growth as we move ahead.

With this kind of sales growth, we're now equally focused on execution and delivery of these services to make sure we monetize all of this great sales effort. We should be able to report solid progress over the balance of the year.

As I said at the beginning; I looked, I learned and I listen and back on June 2nd I kicked off a focused effort to understand our business, the industry and the competitive landscapes. These meetings were intense and held with many constituents included in my approach we're not only company leaders in all areas of the business but our sales people as well.

I was able to get out on the road and understand the challenges our sales people and our customers and clients face every single day. It quickly became clear that Idearc had not made the leap from operating as a division of Verizon to being a standalone public company. As a result, of these meetings and field visits much has changed here over the past eight weeks.

As I said earlier, I will always share as openly and honestly with you as I can without compromising any competitive advantage we create. Some of my observations over these past eight weeks are listed here on the screen, it was very clear to me that the company had turned a very simple business into brain surgery. We have lost sight of the fact that we sell advertising to small and medium businesses and deliver it online and primarily in the Yellow Pages.

Multiplication had become the organizational strategy instead of dealing with problems at the core level additional people were thrown at it, the company was segmented into various parts and pieces and as a result sharing was not in vogue throughout the organization. Expense reduction was driven by a short-term view instead of looking at the business holistically to understand where cross functional opportunities existed to take cost out.

It was clear that pricing decisions were not scientifically driven as we bode through all of the data on pricing and compared market-by-market, book-by-book and region-by-region. Actions were repeated expecting a different results, our execution was poor partially driven by the fact that our siloed mentality was not serving the company well. And of course most importantly is sales were not the primary of driver of our business, and what should be a totally sales driven organization.

As you can see here our sales productivity is poor related to the market. Well we've many of the tools and hand to fix this that were previously not deployed. Our outside reps or premise reps generate 27% less than the best industry benchmarks. While total sales compares more favorably it is still 14% off the best performance marks. It is clear here that by fixing this problem we'll either increase sales or reduce our selling expense further. I certainly hope our sales force is listening in.

As you can see our challenge is not only in productivity it's in span of control as well. We've been running much slow on span of control at our first level of sales management when compared to similar businesses. It also became clear that at the regional management level we had spans of control that were way too high rendering our regional VPs not nearly as effected as these talented individuals should be. Rest assured that we're taking the necessary steps required to fix these sales issues. The result would be a more effective, better trained sales team at a lower cost.

Since there are so much to do here at Idearc, I have organized our focus on three key transformational initiatives. The first is all about accelerating revenue growth, second is improving margins and reducing expenses and the third is all about building a high performance culture.

In the first area of accelerating revenue growth we're driving hard to simplify our sales process. Today, unfortunately, to much of our sales process is paper-based. Believe it or not, we actually have a very solid sales automation tool that the company owns that needs to be deployed throughout the organization. And our sales organization needs to be able to be trained to use it. We're acting very, very quickly on this front.

Today, the company does not have a solid CRM system. And most of our sales tracking for sales management initiatives is done again in a manual environment. Because of the way the company was organized in the past, our product management focus has not been properly set up. Today we're organizing product management around key products to make sure that we have the right level of focus on everything that we choose to sell.

While our sales support function has done a good job in the past, it has not been directly married to the sales organization we are making that very significant change. Training needs to change and we are already in the middle of doing so and as I mentioned before we need to get much more scientific in the way we create our pricing.

The second area of transformation is all around improving margins and reducing expenses. What you see here are some of the key initiatives that were already at work on. We are focused on centralizing as much as we possibly can. The company had evolved into a very decentralized environment where many expenses were duplicated more than once.

We will outsource whenever we possibly can and the good news on this front is the company has already had a good track record of offshoring some of our work. We need to increase our focus on accounts receivable because as you all know in these kinds of economic times, this becomes an important measure of performance for our company. We need to make sure that our credit policies are in place and we've already done that. We've also taken steps to step our collection efforts up.

In the area of real estate, if you go back to June 2nd, we had 122 physical locations around the United States. We've already driven that number down to 105, having closed 17 locations. More reductions will be taken and we expect to finish this year around 90 with many more following in 2009.

As we reported earlier, we've already shutdown some expansion markets where it did not look that we could get ourselves to a proper level of profitability, any time soon. These were tough decisions to make but in light of the economics they were sound decisions and these markets were primarily in parts of Florida, parts of Tennessee and in San Antonio, Texas.

At the same time we also made a decision to shutdown our Solutions at Home magazine which was not delivering proper levels of revenue or profitability and was too much of drag on the company to carry on. In order to fix our span in control problems in sales organization we are very quickly delayering that organization and restructuring our regions in order to get the best possible focus where we need it on our sales people. Also we have reduced our very rich or previously very, very rich severance programs.

In summary, here we have committed to expense savings that exceed 10% of our total expense base of $1.6 billion on a go forward basis. Over $50 million of this will be reflected on our results over the balance of the year since most of our plans are well underway. We are going to reduce headcount by about 20% as compared to the original plan for 2008, many of these reductions have already taken place and most will be complete by the end of the year.

The work force reductions have cut across all layers of the company from top to bottom and cut across all departments in operations. We are moving fast, and I am confident that these reductions will not only save money but reduce operating complexity as we get extra people out of the way. Many of these are good people but they are just no longer needed as we simplify the business.

We need to build the high performance culture, and we'll do so by making sure that our objectives are aligned throughout the entire organization. Our strategy will be clear to everyone and metrics will be narrowed to those that matter and unnecessary reporting will be eliminated. We will be monitoring these key metrics on a daily basis.

We will also be focused on the marketplace and not just ourselves. And, of course, at Idearc, great performance will be greatly rewarded.

In closing, I want you all to know the problems are clear and the solutions are in motion. Speed is everything, and we are committed to catching up quickly, very quickly.

Our organization, at the most senior level will be finalized this quarter. Our ability to deal with our debt obligations is absolutely secure. We are all committed to proving ourselves worthy of your trust, support and confidence.

I would now like to turn the call over to acting CFO, Dee Jones, whose made it... who has been a significant contributor to the plans I have just reviewed with you. Please recognize that the results, Dee will share, do not reflect most of the changes that I have just laid out, since the bulk of our implementation began in July. Dee?

Dee Jones - Acting Chief Financial Officer, Senior Vice President Investor Relations

Thank you, Scott and good morning. First, I need to mention that we report financial results on a GAAP basis and on an adjusted pro forma basis to eliminate the impact of transition 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 schedule accompanying the press release and posted on our website.

Before I start with our pro forma results, with regard to the reconciliation of GAAP to pro forma, I want to mention one new item identified in our second quarter results; the restructuring charge of $7 million, or approximately $0.03 per share. This charge, which is primarily severance costs, relates to the first phases of several initiatives Scott mentioned. As plans firm up through the remainder of the year, I would anticipate additional charges of this sort over the next couple of quarters.

Now, let's take a look at the pro forma results. First, let's start with detail on multi-product revenues. On a year-to-date basis, we reported multi-product revenues of $1.529 billion, which is a 5.1% decrease compared to the same period in 2007.

Within those results, we reported year-to-date Internet revenue of $148 million, a 5% increase compared to the same period in 2007. We reported second quarter 2008 multi-product revenues of $759 million, which is a 5.7% decrease, compared to the same period in 2007. And we reported Internet revenue of $75 million in the second quarter, which is a 2.7% increase, compared to the same period in 2007.

As we've talked about before, clearly, we are not happy with our revenue results. In assessing the second quarter, as expected, cyclical conditions continue to impact our amortized results. This effect were felt to some degree across the board but certainly disproportionately in more economically challenged regions of the country.

However, as Scott mentioned, numerous initiatives are underway to allow us the opportunity to sail out of this situation. And not all markets are in that same situation. In fact, close to a third of our books, representing a little over 20% of our revenue, had results that we would categorize as positive to only slightly down. These markets are not specific to any one region of the country or top of market. And leveraging the best practices from these markets into other regions should allow us to begin immediately impacting results.

With respect to Internet revenue, as Scott mentioned, the transition from fixed-fee advertising, the performance-based advertising products is continuing. The key is for us to continue to build out and more effectively utilize our ad network to better monetize these results.

We continue to be encouraged by the market demand for our performance-based products, including SM Local and our other pay-per-click products. In fact, sales in the marketplace are significantly higher than the level of revenue currently hitting the income statement.

The result of this transitioning is a flattening to slightly declining fixed fee revenue base and strong growth in performance-based advertising, resulting in the growth reflected here. It will take some time to ramp these performance-based products as we build critical mass and fully monetize sales of these products.

Moving on to EBITDA, we reported year-to-date EBITDA of $658 million, an 8.4% decrease compared to the same period in 2007. Our reported year-to-date EBITDA margins were 43% compared to 44.6% in the same period in 2007.

On an adjusted pro forma basis, EBITDA was $683 million, which is an 11.3% decrease compared to the same period in 2007. Adjusted pro forma EBITDA margins were 44.7% compared to 47.8% in the same period in 2007.

For the second quarter, we reported EBITDA of $299 million, which is a 17.9% decrease compared to the same period in 2007. We reported EBITDA margins of 39.4% in the second quarter, compared to 45.2% in the same period in 2007.

On an adjusted pro forma basis, second quarter EBITDA was $316 million, which is a 19.2% decrease, compared to the same period in 2007. Adjusted pro forma EBITDA margins were 41.6% in the second quarter 2008, compared to 48.6% in the same period in 2007.

In addition to the revenue declines previously discussed, the primary driver in the EBITDA change, both for the quarter and on a year-to-date basis, was changes in our bad debt provision. We talked about an increase in our bad debt provision in the first quarter to 5%.

Based on write-off experienced through the second quarter, we increased our provision to approximately 6.25% in the second quarter, resulting in a year-to-date provision rate of 5.7% versus bad debt provision rates of slightly over 4% in 2007. This change drove the majority of the variance in the G&A expense line for the quarter and on a year-to-date basis.

There was also some measure of expense timing impact in the second quarter, such that we believe our year-to-date results are more indicative of ongoing margin level.

Looking at our other financial results, on an adjusted pro forma basis, year-to-date net income was $203 million, a 17.5% decrease compared to the same period in 2007. On a GAAP basis, we reported year-to-date net income of $187 million, which is an 11.8% decrease compared to the same period in 2007.

On an adjusted pro forma basis, our second quarter net income was $87 million, a decrease of 31.5% versus the same period in 2007. On a reported basis, net income was $76 million for the second quarter 2008, which is a decrease of 30.3% compared to the same period in 2007.

Our free cash flow for the six months ended June 30th 2008 was $151 million, based on cash from operating activities of $176 million, less capital expenditures of $25 million, resulting in a end-of-period cash balance of $127 million. Within these results, we had cash interest of $327 million and cash taxes of $116 million.

As we have discussed before, we foresee no near-term liquidity issues and continue to be confident in our ability and capacity to service our debt.

Finally, our multi-product advertising sales for the second quarter declined 9.3% compared to 2007. On a year-to-date basis, multi-product ad sales were down 7.8%. These results were driven by the same elements, I mentioned in discussing amortized revenue.

Looking forward through the remainder of the year, as we previously communicated on May 6th, our view of 2008 is such that we anticipate mid single digit percentage point declines in multi-product amortized revenue. And we anticipate some operating margin contractions due to the shift in our mix of revenues.

Now, let's open the call to your questions.

Question And Answer

Operator

Thank you. The floor is now open for questions. [Operator Instructions]. Our first question is coming from Matt Chesler with Deutsche Bank. Please go ahead.

Matt Chesler - Deutsche Bank

Good morning and welcome Scott.

Scott Klein - Chief Executive Officer

Thanks.

Matt Chesler - Deutsche Bank

First question is, thank you for the detail, by the way, with regards to some of the reductions you are making. Can you explain, if there is any revenue attached to some of the sales people reduction that you are going to be making? And just in general, how do you address sales force and you'll get [ph] this company without having a corresponding negative impact on financial results?

Scott Klein - Chief Executive Officer

Well, first of all, Matt, I want you to know and I want to be perfectly clear that our restructuring of the sales force at this point does not include the elimination of sales people. It's all about getting our sales people doing the right things and helping them to get out of this paper work malaise that they've been in for so long. So, it's all about cleaning up the system, making it easy for them to operate, make it earlier for new sales people to learn the system, and understand what they have to do, so that they can increase their productivity.

I'll give you an example. We know for well that our sales people not only do they produce less in revenue but they actually are making less sales calls than not only our competitors but other companies that have sales organization that are similar to ours. So, we know that the changes we're making are going to have a significant impact by getting there, either their telesales call counts up or getting their physical in-person visits up, as well. At the same time, we're adjusting our leadership model in the field for our sales organization.

As I mentioned earlier, our regional Vice President had a span of control that was absolutely way too high. So what we are doing is we are increasing the number of regions and taking our very best people and putting them in charge of each one of these smaller regions today. So that our absolute best and brightest can be leading the charge in each one of these individual markets.

You've heard Dee talk about the fact that about a third of our books are actually either flat to growing. We need to take the best practices in those markets and make sure that we are following them everywhere.

Matt Chesler - Deutsche Bank

I mean how deep and prolonged you think that the current advertising downturn, we need to be before you'll need you revisit the amount of adjustments that you are currently contemplating, making?

Scott Klein - Chief Executive Officer

Matt, I think that the company has been its... all the more its [ph] enemy in this regard. As I mentioned, we have about 800,000 customers or clients today. There are more than 12.5 million out there. So figuring out how to better penetrate the total marketplace, instead of just the market that we've gone after in the past, is key to our success. At the same time, in markets where we are not actually publishing books, we have a very aggressive telesales force focused on Internet sales in an effort to grow and expand the business in those out-of-book markets as well. So I'm not really ready at this point to concede our issues and problems to the vagaries of a recessionary economy. As Dee mentioned, we can do a better job of selling and we will.

Matt Chesler - Deutsche Bank

And I have another follow-up if I could. And then I'll let somebody else jump in there. As you look at the July books that have closed, and I guess, we're... at the end of August some books there are going to be... August, probably starting to hit the street, are you seeing any signs that, as sales are improving, are they much... are they looking like the second quarter? Are they getting worse... will ad sales get worse before they get better or should we start to see an improvement from here?

Dee Jones - Acting Chief Financial Officer, Senior Vice President Investor Relations

Matt, as we have talked about before, the circumstance that we currently see for the first half of the year has... seems to be extending into the back half to some degree. But I will say we've got a lot of initiatives in place to out-sale that and start showing impacts. It will take some time for those to start to show through. And so we are probably looking at a couple of quarters here of the same type of revenue results but rest assured we are moving as quickly as possible to impact that. I would point you to the fact that we did reiterate our revenue forecast for the full year on an amortized basis at mid single digit percentage point decline.

Matt Chesler - Deutsche Bank

Thank you both very much.

Scott Klein - Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is coming from Golly Ramscheunski [ph] with Sumita Trust [ph]. Please go ahead.

Unidentified Analyst

Actually my questions were answered. Thank you.

Operator

Thank you. Our next question is coming from Jaime Neuman with Wachovia. Please go ahead.

Jaime Neuman - Wachovia Securities

yes, hi. I just wanted to ask a question on the guidance. On the last call, you had talked about your online revenue guidance that you expected 20%-ish quote in '08. Year-to-date it's obviously trending well below that and it sounded like, from your comments that you expect it to take sometime for that to ramp up. So can you give us an update on the online revenue guidance for the year? And if that guidance is lower, are you implying that this trend should actually be better in the back half of the year? Thanks.

Dee Jones - Acting Chief Financial Officer, Senior Vice President Investor Relations

Yes Jaime, again the multi-product guidance is mid single digit point... percentage point decline, and we have reiterated that today. With respect to the digital growth rate, we talked about in the first quarter that by the end of the year we saw ourselves getting into that 15 to 20% range. As we look into the next couple of quarters, we are confident that in the third quarter, we will move into the double-digit range with respect to growth and ramp from there into the fourth quarter.

One thing I do want to point out with respect to the second quarter, the base for 2007 is impacted by some timing elements within the quarters in 2007, such that normalized levels are closer to the 7 to 8% range for the quarter end on a year-to-date basis with respect to the digital growth rate. And we are comfortable and confident that we will be able to step into that double-digit realm in the third quarter and ramp from there.

I would also point out around that that we were extremely encouraged by the degree of sales results that we are seeing from the marketplace and from our sales force on the digital front. They are selling the performance-based products at an even faster and ever increasing rate of growth in the marketplace. It's up to us at this point to get those fulfilled and get them provisioned and get them effectively monetized by connecting the traffic that's in the marketplace with the content and the advertising programs that we are selling in the marketplace.

Jaime Neuman - Wachovia Securities

Okay. And just one quick follow-up, the forward-looking ad sales number, it looks like you restated the last year number. I know that you do that for timing differences. Would you see that revenue adjusts the third quarter higher because the second quarter was lower trends than you're playing [ph]?

Dee Jones - Acting Chief Financial Officer, Senior Vice President Investor Relations

There will be book movements, both in and out of the third quarter as we always foresee. I wouldn't say... I wouldn't expect that the third quarter is going to be disproportionately changed or dramatically changed. But there will be book moves into and out of on the third quarter as we always move in around publications based on the marketplace.

Jaime Neuman - Wachovia Securities

Okay, thank you. I let's someone else ask question, thanks.

Operator

Thank you. Our next question is coming Peter Salkowski with Goldman Sachs Please go ahead.

Peter Salkowski - Goldman Sachs

Yes. Good morning everybody. I guess just following up on the that ad sales question, the change in the second quarter of '07 was pretty dramatic in terms of... I think it was $70 million, more than 10% change from the ad sales that were previously reported, I'm just wondering what drove that?

Dee Jones - Acting Chief Financial Officer, Senior Vice President Investor Relations

There wasn't anything inordinate about the quarter. We did have several book moves amongst the... end of the first quarter and then also end of the third quarter, with respect to second quarter. But there wasn't anything of a substantial nature or that sort of be of concern with respect to the books that published in the second quarter but we did have some books that moved around.

Peter Salkowski - Goldman Sachs

Okay, just seemed like a pretty dramatic number in terms of going from 750 to 680 basically?

Dee Jones - Acting Chief Financial Officer, Senior Vice President Investor Relations

Yes I understand but I don't see as a sign of concern in any particular front, it's simply a function of moving books around based on the marketplace.

Peter Salkowski - Goldman Sachs

And then Scott, with regards to your cost cutting efforts and it was 10% on a $1.6 billion base, what's the thought in terms of the cost to achieve that? It sounds like you're going to put in some new systems as well, to help streamline and things what are your thoughts there in terms of costs?

Dee Jones - Acting Chief Financial Officer, Senior Vice President Investor Relations

Yup. Peter, this is Dee. With respect to the restructuring charge as I mentioned in my notes, we do anticipate restructuring charge in the third and fourth quarter, we took one of 7 million in the second quarter, we would have something along those lines as we look into the third and fourth quarter. And, but as you know at GAAP, the plans have to be pretty stringent and pretty well firmed up before you can take and isolate on that charge. At this point, we are still assessing what all those cost will be.

Scott Klein - Chief Executive Officer

Yes. And that's from an accounting perspective that's right on the money Pete but more specifically to your question, we have within our own hands and assets that we own today much of what we need to be able to fix these problems. Once upon a time the company made a significant commitment to some technology for the sales force. But unfortunately that technology was not deployed in an effective way to the organization.

So what we really need to do is get that technology deployed and at this point the primary part of that deployment will be more along the lines of training so that the organization knows what it is they have to do with these tools in order to make themselves that much more effective.

Peter Salkowski - Goldman Sachs

And what's about then in terms of the training you introduced in a very staged event I assume, my big concern there would be that distraction of the sales force as they ramp through the training that they won't be on the streets, targeting customers?

Scott Klein - Chief Executive Officer

The training believe it or not, will be very straightforward, not that all kind of complicated, we are not talking about taking people off the street for weeks of the time we're talking about taking them off the street for perhaps a day at a time. We will be doing it on a staged basis only because we will be doing this training with our own internal resources and clearly we can't be at every place at one time. However, we will be moving to do it as quickly as we possibly can.

Peter Salkowski - Goldman Sachs

And then Scott glad that you've only been there for eight weeks but just kind of wondering in terms of your thoughts on the independent books and the companion directories. These are products that came in over the last two years, as a way to grow sales I would assume in this economic slowdown that these maybe categories but some of your advertisers are pulling out of this. Certainly the companion directory and an incremental cost basis for them and just wondering what are your thoughts on independence in companion directories. Are these products that you're looking to continue or what are your thoughts there?

Scott Klein - Chief Executive Officer

Well, Pete I can't tell you categorically that your assumption on the companion directories is not correct. As a matter of fact, we have hard evidence documented by our sales call tracking ability that absolutely proves that for any one of our advertisers as they advertise in a main book and advertise in a companion directory as well that their results actually go up and our clients see that and they are taking advantage of it. As far as the independent books go, we will continually evaluate those on a book-by-book basis and we will act accordingly just as we did with the expansion markets and the solutions in hand product.

Peter Salkowski - Goldman Sachs

Great. And then lastly, before you shut [ph] up there is a decision to discontinue the dividend and allow the cash to build up on the balance sheet in sort of a near term basis as we sort of worked our way through this economic conditions, I am not really sure where its here at this point. But wondering what your thoughts are in terms of use of cash and then also where we are on the CFO search?

Scott Klein - Chief Executive Officer

Two excellent questions. It is our intent at this point to continue to accumulate cash and to keep our options as open and flexible as we possibly can to give ourselves the opportunity to perhaps take advantage of opportunities in the market or to consider other alternatives. We have been conducting a search for the permanent CFO and I would add that Dee is certainly very much part of that mix and it is my intention to have that search completed during the course of the third quarter.

Peter Salkowski - Goldman Sachs

Excellent. And then just one last sorry this is my last question. I know I said that earlier but this is a follow-up on the debt [ph] question and probably appropriate for Dee can you just remind me I think I forgot that basically your opportunity divide that back in the open market with regards to the issuance that you have out there can you... I think it was the traunches [ph] that you could buyback but could you just clarify that for me please.

Dee Jones - Acting Chief Financial Officer, Senior Vice President Investor Relations

Yes, with respect to the traunches [ph] we are not limited to step in into the open market by the tax sharing agreement but we are however limited by the debt agreements requiring a 100% consent across both term A and term B. So we would have to get a 100% consent in order to do it in an open market fashion.

The tax sharing agreement does limit our ability to some degree with respect to the bonds and in term B, bank debt. However, as we talked about in the past, there are some Safe Harbors and opportunities to work through that and maybe manage to do something in the marketplace at some point by stepping through some requirements around that.

We continue to assess that opportunity at the same time as we are assessing our overall capital allocation program and we will continue to look at it as we move forward.

Peter Salkowski - Goldman Sachs

Great, thank you very much.

Scott Klein - Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is coming from Obby Synder [ph] with J P Morgan. Please go ahead.

Unidentified Analyst

Thank you. Couple of things, here. Number one; just a follow-up on that last question on the Safe Harbors you were referring to in the general tax agreement. Is there any triggers that maybe advantageous to the company posted to your anniversary. And on that topic, have you had any substantive conversations regarding the tax issue with Verizon, and then I've got a couple of follow-ups. Thank you.

Dee Jones - Acting Chief Financial Officer, Senior Vice President Investor Relations

Yes, with respect to the debt side of things, there is not a hard line in the sand as to timing. The two year reference that you're making I believe relates to the equity aspect of the spin, on the debt aspect of the spin, there is not a hard line in the sand, in the tax sharing agreement with regard to that. As far as activities, all I'll say with regard to that is that we continue to assess the opportunity as we look forward.

Unidentified Analyst

Okay. Secondly, and this maybe a question for Briggs if Briggs is there on the call but Scott I know would love to hear this. AT&T has been putting up some Internet numbers that have been growing 40%, I don't know if you necessarily want to comment on what they are doing, but I'd like to understand, maybe what's the differential is. And it sounds like anecdotally that AT&T is providing their online offering in markets where they don't have a print wide presence and I'm just curious how you think about that and how you managed your own Superpages.com and then I've got one more for you? Thank you.

Scott Klein - Chief Executive Officer

Again this Scott, I'm very much aligned with and Briggs as well with AT&T's thinking, we have a telesales organization that is very much focused on the markets where we are not publishing books, that sales force is very aggressive and doing a reasonably good job of bringing in business. But the challenge that we have today is to deliver to our clients.

In this regard we do not have a sales problem our challenge is in delivery and rest assured that Briggs and his team is all over this issue because they recognized the upside opportunity and the lift that this is going to create for us. The sales force in general is doing a very nice job today really having gotten focused in the past eight weeks on and going after this business and as Dee mentioned we're going to see some meaningful lift in our Internet revenue numbers over the course of the balance of the year and of course hopefully well oft in the future.

Unidentified Analyst

Okay. And last question for you and I don't want to make I don't want a draw out a conclusion but I get asked often how the YP the print YP business is different than the newspaper segment and I think of function of customer base how you sell your product etcetera. Maybe and I know you've only been there two months Scott. But maybe you

can talk about that just how the YP business differs and how we should all think about as it relates to what we're seeing on the newspaper side? And I am done. Thank you.

Scott Klein - Chief Executive Officer

Obby [ph] that is an outstanding question thanks so much for asking it. We're nothing like the newspaper business what is different about the Yellow Pages business is when some one is going to buy, they pick up a Yellow Pages and they flip through the category that they are interested in and they look for people that are advertising, make a phone call with and contact to understand their services, their pricing and their offering.

Think of an ad is, in a newspapers, is just haphazard, now you put an ad in a newspaper and one day if you happen to be in the market to put a new roof on your house and you see that ad in the newspaper on that day, that roofer gets a phone call and there is a connection. But the Yellow Pages are out there 365 days a year, 24 hours a day, when some one is in a situation where they need to make a buying decision and that's why the ROI on the Yellow Pages is so much higher than any other form of media including and especially the newspapers. We are nothing like the newspapers. It's very disappointing for me that people track trends in the newspaper business and try to superimpose them on us. It is not appropriate. It's not comparable, it's apples and oranges.

Unidentified Analyst

Thanks.

Scott Klein - Chief Executive Officer

Operator, we've got time for two more calls.

Operator

Thank you. Our next question is coming from Bob Kessler with Credit Suisse.

Please go ahead.

Unidentified Analyst

Hi, I want to make sure I had a better understanding of the increase in expenses in the quarter on the G&A line. Is it... the increase in 20... of about 21 million or so for the quarter, is that almost exclusively bad debt related? Is that what you were saying before Dee?

Dee Jones - Acting Chief Financial Officer, Senior Vice President Investor Relations

Yes, as I said, the vast majority of it is the increase in the bad debt provision along with some collection costs and outside collection agency fees that we also incurred in showing up our crediting and collection activities. There was also some small amount of timing around the couple of items that we did incur in the second quarter but the vast majority of it was the bad debt.

Unidentified Analyst

Okay. And then secondly, at the end of that statement when you were talking about it during the call, you had said something along the lines that it was going to be... that we should think of it more in line with the year-to-date numbers. And I wasn't sure if you were referring there to be, that the margins year-to-date which is roughly I guess 43% versus 39% or were you referring to the bad debt level we should think of more as the year-to-date number for the full year? I was a little confused by the statement.

Dee Jones - Acting Chief Financial Officer, Senior Vice President Investor Relations

I was speaking to the overall margin level for the business. The pro forma basis margin for the year-to-date basis was 44.7 or so versus the quarter which was 41.7%. And the statement that I was making was that our view of the business as we look through the rest of the year and as we spoke about our guidance in reiterating our guidance around margins as well was that the year-to-date level is more indicative of what we are anticipating for the full year.

Unidentified Analyst

Okay. On the margins, great. And this rather dramatic increase in bad debt from a year ago, obviously there... the economy is not great out there. But is this partially your credit practices or are there many customers that were bad debt and how you're going to be able to grow your revenue if that many customers that are not paying, I guess, is sort of the other concern?

Scott Klein - Chief Executive Officer

Yes Bob, it's Scott. Quite simply, our credit practices a year ago were not what they should have been. The credit policy was not as tight as it needed to be. And as is the nature of our business, it will take some time for some of those mistakes that were made to work their way through the system. But rest assured our credit policy is appropriate today and is as tight as it should be. And our credit and collections team is all over this having put in place some very new and creative ways to perhaps collect money that much more quickly.

Unidentified Analyst

So do you perceive bad debt remaining in that 6% range for the balance of the year? Or is it... or should we start to see those improvements already in the second half of the year?

Dee Jones - Acting Chief Financial Officer, Senior Vice President Investor Relations

Yes, as you know with bad debt and that aspect of things, it does take time to impact things. I think the year-to-date rate at 5.7 will continue to assess and watch our write-off rates with respect to that. As I did mention, the second quarter did see a step-up in the write-off rates but in that range of the 5.7, 6.26 is what we're kind of looking at. We'll continue to assess as we look through the remainder of the year..

Scott Klein - Chief Executive Officer

Bob, I'd also mention that we will continue to monitor our credit policy closely. We also don't want to hamstring ourselves here. And we want to make sure that with long-term advertisers that are feeling some effects of the economy that we work with them to give them the fuel that they need to continue to propel their business into the future. We want to be a good partner and we also want to do the right thing for the company.

Unidentified Analyst

Great, thank you.

Operator

Thank you. Our final question is coming from Andrew Singlesen [ph] with Lehman Brothers. Please go ahead.

Unidentified Analyst

Hey guys, a few questions. First, you guys are talking about sort of the delivery part of online. I assume you mean sort of building traffic. Can you tell us, is that going to cost you more in thinking of spending more money there? Is that... and how that going to... is going to affect the margin on the online product?

Scott Klein - Chief Executive Officer

Yes Andrew, it's not just the function of building traffic. There is significant amount of traffic within our current ad network and then subsequently across the web, some of which you do have to buy and pay for and some of which you can get out in other fashion. It's really about matching up that traffic and the existing traffic that we have with the content and the advertiser programs that we have in place. And basically getting at and improving what I would term, the middleware between the traffic demand or the queries that come across through that traffic with the content and the advertising programs that we have in place, being more effective, more efficient at that and pacing and driving to fully utilize our advertiser programs is key.

Absolutely, we are going to continue to look for additional sources of traffic, both through traffic deals where there are economic turns around them and also around trying to work through the other sources of traffic with SCO [ph] type activities and that sort of thing.

Unidentified Analyst

Great. And then Scott, you mentioned, you believe there was a much bigger opportunity out there to continue to penetrate small businesses. Obviously the Yellow Pages has been around for a long time. Just wondering I don't know if you could tell for them more about what you have seen in your time there that gives you this confidence on expanding the penetration?

Scott Klein - Chief Executive Officer

It's really all about the way that we focus our sales organization, the way we assign counts and leads to our organization. We actually get about 1500 new installs a day. And clearly, based on the results so far, and probably historically we've not maximized the opportunity of all the quality leads that come our way. As we implement our CRM system, as we get our best senior regional people in charge of the sales organization across the United States, there is no question that our focus will increase, our sales people will be better directed. And as a result, it will be much easier to hold them accountable and improve their results.

We are also looking at our product offerings. As many of you know, it's not just about the Internet for us, and about the books. We're also one of the largest providers of direct mail in the United States. And that's an opportunity that's chilling great promise and very good growth for us, and we will continue to assess other opportunities and services that we can bring to our advertisers to help them be more effective in the marketplace.

Unidentified Analyst

Okay, great. Thanks.

Operator

Thank you. At this, I would like to turn the floor back over to Scott for any further or final remarks

Scott Klein - Chief Executive Officer

Yes, Elsa, thank you very much again. And again, thanks to all nearly 450 of you that were on call today. I apologize for the fact that we run out of time and we haven't had the opportunity to answer all of the many great questions that I am sure that you have. Dee and I will be working very hard to get out and spend time with more of you as quickly as we possibly can to give you a more in-depth understanding of about business and an understanding of what it is that we are up to.

As I said in the outset, there's a huge opportunity here at Idearc. We just need to make sure that we simplify the business, eliminate all the things that have been in our way of success and to make sure that we act on those process changes as quickly as we possibly can. There are so many great, great people here in this organization that have been burned in the past by the conventional wisdom of prior thinking is the division of Verizon.

Today, as a standalone company, our opportunities are great, and we're positioning ourselves well to take advantage of them. Again, thanks for joining us.

Operator

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.

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Source: Idearc, Inc. Q2 2008 Earnings Call
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