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Deep Value Investment in SPMD

May 12, 2011 12:33 AM ETTHRY, DEXO
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Junto's Blog
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SPMD is facing significant selling pressure and increasing short interest over the last several quarters after the exiting of Chapter 11 bankruptcy in January 2010. The market in my opinion is not reflecting the predictability of earnings behind the contract model. Stock closed today at $3.99.

Highly levered directory (yellowpages and local search) business. SuperMedia, Inc.

General Overview:
SuperMedia Inc. provides media advertising programs in the United States. It publishes SuperYellowPages, the print directories, which offer a range of paid advertising options, such as listing options, in-column advertising options, display advertising options, and specialty advertising, as well as white pages directories. The company also operates Superpages.com, an online local search site that provides advertisers fixed-fee and performance-based advertising options. In addition, it offers direct mailers under SuperpagesDirect name; and Superpages Mobile, an information source for wireless subscribers. Further, SuperMedia Inc. operates as an official publisher of print directories. The company was formerly known as Idearc Inc. and changed its name to SuperMedia Inc. in January 2010. SuperMedia Inc. is based in Dallas, Texas.

I am going to leave it to the posters to look at the earnings history and 10-k on the company's website: http://bit.ly/jTURAp

Comments on financials:

Consider that the average contract is a 12 month term. If you amortize the every GAAP reported earnings over a 4 quarter period, the 2010 revenues were predicted give or take 5% variation. The following is the net additions to revenues attributable to the individual quarter using this simplistic assumption:

2009 Q1: $123MM
2009 Q2: $122MM
2009 Q3: $103MM
2009 Q4: $92MM
2010 Q1: $154MM
2010 Q2: $93MM
2010 Q3: $102MM
2010 Q4: $77MM
2011 Q1: $166MM

2009 vs 2010 Q-Q Comparison
Q1: +25.20%
Q2: -23.77%
Q3: -0.97%
Q4: -16.30%

2010 vs 2011 Q-Q Comparison:
Q1: +7.79%

The largest drop offs were Q2 and Q4 in 2010. I anticipate that these will be the best quarters for improvement in 2011.

The 1st Quarter 2011 revenues and earnings far exceeded my expectations going into the quarter. The long-term debt reduction missed my expectations but this was driven primarily by the reduction in accounts payable quarter over quarter, so overall debt was reduced by roughly the same expectation.

The simplified indications above provide for a clearer vision of what the projected revenues should be in the upcoming quarters and I believe could be considered conservative. Dexo recently indicated on its most recent conference call an overview of how its revenues are spread (seekingalpha.com/article/267019-dex-one-...):


Jason Alper - BTIG, LLC

My question was regarding bookings. Obviously, it looks like from the slide that there is 200 basis points of impact from the CMR in the bookings. If I understand your bookings metric correctly, it's a very forward-looking metric and it looks like anywhere from 95% to 96% of your bookings convert into revenues. Is that an accurate way to look at it?

Steven Blondy

Well, it all converts to revenue eventually. I think the point here is that bookings represent the value of the contract signed in the period for our local customers, which is about 85% of revenue plus the published value of the national accounts, which is the other 15%. So during the quarter, the bookings number we reported is the actual customer contract signed during the quarter. And I think about 20%, 30% of that is -- refines its way into ad sales in the quarter when bookings is reported and then I think it's like 40% to 50% in the immediate subsequent quarter and then maybe another 30% in the following quarter and then there's a small bit that is in the fourth quarter following the reporting of bookings. So it kind of -- it peaks and then it kind of fades a little bit after the immediate quarter following reported bookings.

Jason Alper - BTIG, LLC

I see. So it's not solely a 12 months forward-looking type of net number, it filters in over time.

Steven Blondy

Yes. The vast majority of our contracts are still 12-month contracts. So it does represent predominantly 12 months kind of future orders. But remember, bookings is the value of the contracts signed in the quarter or in the period, whereas ad sales represents the published value of all the contracts signed in the directory which is actually published in that quarter.

The key take aways from this dialogue is that the revenues are be spread roughly 20% in the quarter the advertisement was booked, 40%, 30%, and 10% for each quarter following the quarter reported. 

DEXO is anticipating Revenue declines in the 14-15% range for Q2 2011. SPMD does not provide guidance but taking the upper end of the range at 15% provides for the following estimates:

Operating Revenues: $435MM
Operating Expenses (75%): $326MM
Operating Income: $109MM

Depreciation Estimate: $44MM

Interest and Taxes Estimate: $75MM
Net Income: $34MM

At 15.5MM shares outstanding, this projects earnings of $2.19/share of Q2 with Q1 and Q2 earnings exceeding the existing share price trading on the NASDAQ.

Overall, this projection for Q2 is higher than my estimates. I am conservatively looking for Revenues around $414MM, EBITDA of $149MM, and Debt reduction of $70MM. EPS of $1.86/share.

My 2011 projections provide a range of EBITDA of $477MM - $678MM and EPS of $5.45 - $10.77. Debt Reduction of $150MM - $278MM.

The company remains to experience headwinds, but at $3.99/share, there is ample residual value in the business and cash flow ability to service the debt obligations over the next several quarters to the point that refinancing the debt obligations in 2013-2015 is likely given the cash flows of the business.

A back of the napkin value of the company at 5X - 6X Cash flow would have an enterprise value of between $2,385MM to $3,390MM.  Less Long Term Debt of $2,171MM provides for value of $214MM to $1,219MM or $13.80 to $78.58/share with 15,511,925 shares outstanding. Clearly even a move to the lower end of the range provides significant value to the investor.

Disclosure: I am long SPMD, DEXO.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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