Idearc Dresses Up for the Dance
Idearc held its coming-out party today. President and CEO Kathy Harless sounded positively giddy: “This is an exciting day for us. We’re off to a strong start as a publicly traded company. We have an established, value-generating portfolio, a resilient multi-platform business model and a national base of diverse markets.” The last sentence she could just as easily use when she describes the Yellow Pages business as she addresses the industry as chairman of YPA at its annual convention at the end of April.
EVP and CFO Andrew Coticchio and Internet President Eric Chandler did an excellent job of staying upbeat and focusing on Idearc’s mission of revenue growth and value for shareholders. Make no mistake, the company has accomplished a great deal in a short time. It completed the successful spin-off from Verizon, it has added 500 incremental salespeople, it has declared its first quarterly dividend of 34.25 cents per share, and it has produced financial results consistent with what it told investors during its road shows. On a daily basis, The New York Times prints the stocks held by the largest number of accounts at Merrill Lynch, “the favorites,” and Idearc is up 17.5 percent in 2007, by far the biggest increase of any company included in this blue chip list.
Unfortunately there was inconsistency between what Harless said and the numbers the company posted. She described Idearc as a “great company with a great future.” In referring to SuperPages’ revenue model, “it includes fixed fee and industry leading performance-based advertising products that enhance our basic listing content” as well as the company’s agreements with Google and Yahoo!. Ms. Harless said, “we are 18-24 months ahead of competition.” The Associated Press was not as positive about the company. Under the headline “Idearc 4Q Profit Slumps,” it pointed out that “sales slid 2 percent to $801 million from $821 million. For the full year, profit declined 25 percent.” However, Idearc’s results on a pro forma basis showed a decline in the revenue fall, i.e., a new stand-alone Yellow Pages business seems to have reduced the bleeding that came under Verizon.
A few other things caught my attention. Idearc’s margins at around 48 percent are good in any business, but lower than other major Yellow Pages publishers. Unlike R.H. Donnelley, Verizon does separate its SuperPages.com business from the print, and the percentage of revenues coming from the Internet has grown from 6.2 percent in 2005 to 7.7 percent in 2006. Still Internet revenues only grew 16.8 percent, despite an increase in usage “as measured by a 90 percent increase in IYP searches.” Further, 4Q Internet revenues were up 26 percent compared with 4Q 2005.
Everyone knows that the Yellow Pages industry like every other traditional media, faces significant challenges. RHD has faced analysts since it was spun off from Dun & Bradstreet well over a decade ago, and management is quick to emphasize the challenging environment while being positive about the future. Idearc management did a nice job in its first quarterly report as a public company, but I believe we will see the words and the numbers in closer harmony in the future.
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I’m surprised there was no mention of cost reduction given that they are not growing the top line in order to improve margins. I suspect it will be coming given that you can safely assumed that they have lots of "fat" from their Telco heritiage.