As expected and elaborated in yesterday’ research, Dex One and Supermedia are finally merging. Absent ~$10mm of restructuring and merger-related expense, Dex One’s Q1 2013 EBITDA and margin were ~ $118mm and 41%, respectively, not a bad result, considering the new pricing plan providing sales upside for the second half of the year. We continue to find all tranches of Dex One bank debt attractive and recommend that distressed investors stop focusing on the perception of yellow pages books they throw into the trash box at home. The story is now about how efficiently the consolidated company will become revenue-driven, attracting new generation of small businesses. The synergies well elaborated by bankers in projections have cost-related connotation. We like the management, and we believe that the company will execute well and that the amended covenants of all silos are offering a relatively safe ride to 25%+ yield generation – something that you will unlikely through into your trash box.
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Q1 2013 Dex One
2013-04-29 18:54:21.18 GMT
Dex One has reported its Q1 2013 results. Since the company is going to emerge from the bankruptcy and to finalize the merger with SPMD any day now, the conference call has not been announced yet.
Key points:
1.Total sales declined by 16.4%, compared to 13.5% decline projected for the whole 2013. We spoke with the company this morning about this discrepancy.
According to management, Dex One offers customers a discounted deal (digital only or bundle) for the first half of the year. If the company manages to generate a certain number of leads/clicks, it will charge more effective the second half of the year, provided a customer agrees to extend the contract. As such, in case Dex One reaches the necessary minimum number of leads per customer, sales decline for the second half of 2013 is projected to be lower than during the first half;
2.Unadjusted EBITDA for the quarter was $107.9mm, compared to $149.9mm during Q1 2012, and margin has declined from 43.5% to 37.5%;
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Synergies offered by the merger with Supermedia have mostly cost efficiency connotation. We have been interviewing a dozen of small business owners during the last 6 years to find our more specific trends related to the sustainability of Dex One and SPMD business model. We have found that most of the business owners interviewed have had intentions to stop dealing with yellow pages advertisers for the last 3-4 years. The fact is that they still have not… Having said this, they have been diversifying their advertising budgets towards smaller regional advertisers, (see http://www.localsplash.com for instance). An appliance store manager has reduced his advertising budget with yellow pages from $3,000 per month 4 years to $400 per month, completely eliminating the print product). However, in rural communities, the penetration of print is still substantial. A potential challenge for Dex One that we can see today is related to the fact that the company has not yet developed a concept of personalized advertising per customer. The economy of scale and a relatively large sales force represent two biggest competitive advantages in the industry. However, unless Dex One develops the way to attract large base of small businesses and regain the market share from companies like Local Splash, sales decline may be more precipitous. We kind of are willing to give the company a benefit of a doubt at this point. In addition, the news of the merger finalized should create some positive sentiment for the price of securities. Main point, however, is
simple: the slightly improved economy sentiment creates an increase in the number of small business owners. However, these small businesses are really small now, and they are quite sensitive to the price of advertising services.
With the existing sales policies, Dex One is not going to be able to sign these businesses on; in fact, they will go elsewhere. This trend needs to be addressed
immediately…..
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Stan Manoukian
Founder of
Independent Credit Research
818-707-6060
818-614-7797
smanoukian@manoukianresearch.com