Hello, and welcome to DexYP's Fourth Quarter and Full Year 2017 Conference Call. With me today are Joe Walsh, Chief Executive Officer and President; and Paul Rouse, Chief Financial Officer and Treasurer. .

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 the future events and trends affecting the company's business and are subject to risks and uncertainties. Actual results may vary materially from these forward-looking statements.

The company advise you not to place undue reliance on these forward-looking statements and to consider them in the light of the factors that could cause actual results to differ materially from those in the forward-looking statements. These factors can be found in our press release dated February 14, 2018.

The company has no obligation to update any forward-looking statements. Please reference dexyp.com/about/corporate/investors for a brief presentation to be used in today's comments. We will give you a few moments to reference to that. .

I would now like to turn the call over to Joe Walsh. .

Thank you. Today, Paul and I will review our financial results from the fourth quarter and the full year 2017. I will highlight some key items and then turn to Paul -- the call over to Paul, who will run through detailed financials and give you a look at what we see for 2018. .

We closed out the year with strong performance as our EBITDA results for the full year came in ahead of plan. We continue to reduce our debt as a result of our strong free cash flow. Our all-in-one small business management software tool, Thryv, as seen on Slide 4, continues to be a key focus to our go-forward business.

Growing the Thryv business from 0 revenue in 2015 to $121 million business forecast over 2018, we know we're on the right path to help small businesses work smarter. The desirable churn characteristics, we see a solid client base evolving as we continue to pivot DexYP toward this growing SaaS arena. .

Importantly, we've developed a platform, as seen on Slide 5 in our deck, for acquisition. We're finding that we're able to integrate companies effectively onto this new platform. By bringing on incremental revenue and customers, we can eliminate duplicate costs and create more efficiency. This allows us to focus on our flagship product, Thryv.

By continuing to operate as a lean and efficient company and variabilizing the cost of businesses by streamlining, we can deliver on our commitment and serve America small businesses. .

Finally, the integration of YP into the Dex organization continues to remain ahead of our plan, allowing us to lower cost. We expect to have most of our integration completed in 2018. Our new colleagues from YP are helping to launch incremental sales at Thryv. .

Now I want to turn the call over to Paul to take us through the financials and the full year.

Paul?.

Thank you, Joe. We will now discuss in more detail our consolidated fourth quarter and full year 2017 financial report released on our website, as the operator previously mentioned. .

Let's move to Slide 7. Our results are presented on a consolidated basis for DexYP, as if YP had been acquired on January 1, 2016. I would like to point out that most of the financial measures presented and discussed this afternoon were prepared on a non-GAAP adjusted pro forma basis.

We believe these non-GAAP results provide more meaningful information to management and investors relative to the underlying financial performance of the company. In addition, these non-GAAP financial measures are used internally by management for budgeting, forecasting and compensation. .

The adjustments made to our GAAP results remove the impact of fresh start accounting entries required upon the emergence from bankruptcy on July 29, 2016, as well as acquisition accounting entries required following the acquisition of YP on June 30, 2017. .

In addition, nonrecurring costs associated with the YP acquisition and integration, contingent lease obligations, capital restructuring and business transformation and noncash expenses associated with pensions, stock warrants and long-term stock-based incentive compensations were removed from our non-GAAP adjusted pro forma results. .

As discussed on prior earnings calls, we continue to work through the impact of an income tax accounting error related to 2010 tax year for Dex One, one of our predecessor companies. This error occurred prior to the merger of SuperMedia and Dex One and subsequent to the formation of Dex Media in 2013.

These complex historical income tax calculations have caused a delay in the issuing of our 2015 and 2016 financial statements. We expect to correct the prior period income tax accounting error and issue our 2017 annual report, which will include our 2017, 2016 and 2015 financial statements by April 30, 2018.

It is important to note that the correction in prior period income tax accounting error will not have an impact on non-GAAP adjusted pro forma EBITDA, free cash flow or net debt or any of the periods previously presented. .

I am pleased to report that EBITDA results for the full year 2017 came in ahead of plan. Non-GAAP adjusted pro forma EBITDA for the full year of 2017 was $563 million, reflecting an EBITDA margin of 24.4%. I would also point out that since the acquisition of YP, the combined company has generated an EBITDA margin of 25.6%. .

Pro forma net revenue for the fourth quarter was $537 million, a decline of 18.5% compared to the same quarter last year. For the full year of 2017, total pro forma net revenue was $2.3 billion, a 17.6% decline compared to the full year 2016. The decline in our total pro forma net revenue was primarily driven by reductions in pro forma print revenue. .

Pro forma print revenue for the fourth quarter was $253 million, a decline of 26.5% compared to the same quarter last year. For the full year 2017, pro forma print revenue was $1.1 billion, a 25.2% decline compared to the full year 2016. The decline in our pro forma print net revenue is consistent with industry trends. .

Digit -- total digital net revenue of $283 million in the fourth quarter declined 9.6% compared to the same quarter last year. For the full year 2017, total digital net revenue was $1.2 billion, an 8.5% decline compared to the full year 2016. .

While this trend was expected, it does mask one important positive trend. Thryv gross revenue of $77 million exceeded our December guidance of $75 million. The former Dex sales force continues to penetrate the existing client base while introducing new clients to our services through the product. .

Thryv was introduced to the former YP sales force at the beginning of Q4. The team has taken this software solution to new geographies and has sold more new units than our plan.

It is clear that small businesses are searching for this type of solution to help them run their day-to-day business, and we believe we are the right partner to meet their needs. .

We could not be more excited about the growth opportunity Thryv represents. With more than 35,000 live units at the end of 2017 and an addressable market in the millions, we see tremendous growth ahead for us. .

The remaining digital legacy products performed at or slightly below expectations. We continue to face headwinds on search engine, marketing campaigns as well as Internet Yellow Page sites. While these trends were expected, we are focusing on profitable digital revenue and foregoing unprofitable digital revenue, which I call reach revenue. .

We believe our owned and operated IYP search products offer the best value for our customers and provide valuable margins for our company and our investors. Our management team stemmed the decline and grew our owned and operated IYP products in the legacy Dex territories. We are following a similar playbook in our former YP territories. .

Adjusted pro forma EBITDA for the fourth quarter of 2017 was $136 million, a decline of 26% compared to the fourth quarter of 2016. For the full year 2017, adjusted pro forma EBITDA was $563 million, a 21.8% decline compared to the full year 2016. Our EBITDA margin for the full year 2017 was 24.4%. .

As we continue to integrate YP onto the Dex platform, we are laser-focused on eliminating redundant and unnecessary costs in order to improve our EBITDA margins prospectively. .

Free cash flow for the fourth quarter 2017 was $67 million compared to free cash flow of $97 million in the fourth quarter 2016. The decline in free cash flow of $30 million was primarily attributed to the spending related to YP integration activities. .

Free cash flow for the full year 2017 was $237 million compared to $350 million of free cash flow for the full year 2016. This decline in free cash flow of $113 million was primarily driven by higher income tax payments in 2017 and spending related to YP integration activities, partially offset by lower interest payments and reduced capital spending.

Additionally, in 2017, we were no longer making payments associated with our capital restructuring. .

Let's take a look now at net debt. As of December 31, 2017, our net debt was $810 million, which represents a reduction of $124 million over the 6-month period following the acquisition of YP on June 30. I am happy to report that we are reducing our net debt more quickly than anticipated at the time of the acquisition. .

Moving on to Slide 8, recast P&L. This slide reflects DexYP's net revenue and EBITDA on an adjusted pro forma basis for each quarter in 2016 and 2017.

Pro forma print and digital revenue has been adjusted for each quarter of 2016 and 2017 to align former YP sales contracts with multiple advertising products and services to be consistent with former Dex Media's accounting methodology. .

Adjusted pro forma EBITDA has been adjusted for each quarter in 2016 and 2017 to align expense recognition timing of various YP operating expenses to include components of sales compensation and product fulfillment cost, to be consistent with former Dex Media accounting methodology. .

Additionally, certain Q4 2017 adjustments associated with various YP approval and estimate true ups were realigned to the appropriate quarter in 2017 based on the period of origination.

We wanted to present this view to our investor community at a number of policy alignments were made in the fourth quarter that could have resulted in incorrect conclusions being drawn by our investors, had we not shown the full impact of these changes on a quarterly basis in 2016 and 2017.

We are using this view to run the business and thought it was best practice to update your understanding as well. You will note that under Dex management, the second half of 2017 margins have improved and stabilized. .

Let's move to Slide 9 where we compare lender plan and previous guidance to actual 2017 results. Let's start with net revenue. Net revenue of $2.31 billion was lower by $18 million, slightly off from both the lender plan and previous guidance. .

Next, EBITDA. EBITDA of $563 million improved $26 million from lender plan and $8 million from previous guidance due to tight expense management. EBITDA margins improved 130 basis points from 23.1% to 24.4% compared to the lender plan. .

On to free cash flow. Free cash flow of $237 million improved $99 million to the lender plan and $7 million from our previous guidance as a result of our tight focus on operational and integration cost management. .

Ending debt. Net debt of $810 million improved $122 million to lender plan and $14 million to previous guidance as a result of much improved free cash flow. .

Our net debt-to-EBITDA ratio improved from 1.74x in the lender plan to 1.44x. .

Moving to Slide 10. Our 2018 latest thinking forecast comparison to lender plan and previous guidance. We have revised net revenue $107 million lower from the lender plan and $87 million lower from previous guidance upon determining that certain legacy reach revenue was unprofitable.

We have decided to focus the company on profitable revenue and improve margins. Our new forecasted revenue for 2018 is $1 billion -- $1.86 billion. .

Regarding EBITDA. As a result of our focus on profitable revenue and improving margins, we are now forecasting that we can reduce expenses ahead of revenue decline, and we are adjusting up our EBITDA forecast to $541 million, a $21 million improvement to lender plan and a $6 million improvement to our previous guidance.

This allowed us to improve our EBITDA margins 260 basis points to lender plan from 26.5% to 29.1%, getting us close to our goal of returning the company to Dex pre-acquisition margins. .

Next, free cash flow. We have revised up our free cash flow projections to $299 million, a $103 million improvement to lender plan and a $50 million improvement to previous guidance. The improvement to previous guidance is a result of lower expected tax payments as a result of tax reform. .

Moving on to net debt. We have revised our ending net debt forecast to $510 million, a $225 million improvement to lender plan and a $64 million improvement to previous guidance. .

Finally, our net debt-to-EBITDA ratio. We are now forecasting a net debt-to-EBITDA ratio of 0.94x, less than 1x leverage as a result of our forecasted improved performance.

We remain committed to running our legacy business in the most profitable and cash-efficient way possible to deliver maximum EBITDA as we build our Thryv software business into the future. .

Now I would like to turn the call back over to Joe for some closing remarks. .

Thank you, Paul. We produced solid financial results in 2017. For 2018, we will continue to become a lean and efficient company with effective cost controls in place throughout the business to meet our commitments. We are creating better processes within DexYP to remove inefficiencies.

This allows us to build our future, enabling local independent businesses across the country to Thryv. .

With that, operator, we'll open it up for questions. .

[Operator Instructions] And your first question comes from the line of Lance Vitanza with Cowen. .

Can you hear me?.

Yes. .

Great. So let me start with, I guess, the quarterly EBITDA sequence over the past couple of years. If I'm looking at Slide 8 correctly, it appears that quarterly pro forma EBITDA legged down considerably from the fourth quarter of '16 to the first quarter of '17.

And I'm wondering, should we expect something similar to occur here as we think about the first quarter of '18? I mean, obviously, I can take the full year estimate and divide it by 4, but can you sort of help us think about what that sequence is going to look like out of the next couple of quarters?.

Yes. It's going to be flat. We're forecasted to be flat for the 4 quarters. .

Okay.

So is there an easy explanation to what happened from the fourth quarter of '16 to the first quarter of '17?.

Now, remember, that was YP. We just took possession of the company in the second half of the year, so that decline is a result of us merging our 2 EBITDAs and our performance together with YP. We actually had performance in the 30s under the Dex business.

And so -- and you noticed when we [take the] business together, that under our ownership, the EBITDA margins improved. .

Okay. I understand. Let me turn to Thryv. And this is an exciting opportunity, but it feels like a bit of a land grab and Dex appears to have a bit of an identity crisis.

On the one hand, you can run the business for cash, you can integrate YP, take out costs, no one does it better than you guys, and run a very nice, comfortable low vol return, stock in the low to mid-teens in relatively short order.

On the other hand, it occurs to me, you can invest some of the profits back into Thryv and really ramp up the subscriber count more quickly. If it works it's a home run, you're generating a couple of billion of SaaS revenue and the stock trades at a 5 to 7x multiple.

But aren't these 2 different paths, don't you need to choose one or the other right away? And how should we be thinking about that? Is this a value play or is this a growth play?.

That's a great question. It gets right to the heart of our business. And so I want to start by thanking and complementing our current investors because they are -- at their core, they're distressed investors, and they came into a distressed asset.

And this management team had what we thought was a really great idea to move beyond leads, to not necessarily just continue to fight Google and lose. We had sort of a different way to go. And they supported us and allowed enough investment for us to get Thryv off the ground, get it built up, to grow it by more than 50% year-over-year.

And as we mentioned, we have what we believe is going to be well north of $100 million recognized revenue business this year. And so I think they've done a good job of leaving enough money around for us to be able to do that.

Now you're looking forward and you're saying, "Hey, given the great results you've had so far, what if you could really hit the gas?" And one of the things that's happening here is that we're taking effectively a couple of old telephone company, Yellow Pages companies, and whipping them into becoming this local business automation powerhouse.

And so there's a process going on inside the company where we're bringing on new skills, training new people, the company is developing. So the punchline of all that, Lance, is that I feel like -- that our current arrangements haven't held us back at all.

We really wouldn't have -- couldn't have probably gone much faster in growing it than we have without spilling a lot of resources.

Looking out into the future, as this thing becomes bigger and the market shapes up more, I think there will be an opportunity potentially for us to accelerate growth, and that's something that we'll be looking at down the road. But it is an exciting opportunity. I like your style with the billions and billions in SaaS multiple. I like that stuff a lot.

That's great. Thanks. .

Well, can we -- getting back to the here and now, can we talk a little bit about the plan for marketing Thryv? Is it a question right now of your goal and really just directly or almost exclusively to your existing print customers? Or is there some marketing dollars going into looking outside that group that I'm -- that I should be aware of and the investors should be aware of?.

We -- last year, we began the process of doing some targeted marketing, pretty much all online digital stuff driving traffic to the site. We opened and developed a buy-it-yourself channel where we're beginning to have people just go self-provision and sign up for the software. That's early days, but we're having some success with that.

And we've been driving an inbound channel as well. And as we get a little deeper into this year, we're planning to take that up another notch. You're going to see a little bit more general promotion around elevating awareness of Thryv. So it's early days, and we're still kind of developing it.

But in the second half of this year, you can look to see us become a little bit more aggressive. And again, that's with the support of our current investors to go do that. .

Okay. And then, I guess, lastly on Thryv.

Have you determined what types of KPIs that you're going to be reporting going forward, I mean, obviously, in addition to the revenue number?.

No. Honestly, this is the first reveal today of even Thryv's size inside that big digital number. And so we're sort of -- we're not ready to say any more than the live subscriber count and the revenue today. But we realized as people seek to understand it going forward, we're going to need to reveal some more metrics.

So look for us to do some of that in the future. No, we haven't made a final decision as to what. .

Okay. If I could switch, can I -- do I have time for one more? I did want to ask you about the balance sheet. If memory serves, you have the -- the bank debt becomes callable at par, I think, around the middle of the year, maybe July 1. That's obviously a piece of paper that should -- that would trade at a much lower yield.

Are there any plans to refinance that? How much of a savings can we be looking forward to or should we be looking forward to? And how should we be thinking about that?.

Well, first of all, you have your finger on the timing exactly right. We've got that no call through June. Afterwards, we have a lot more flexibility, and we can take a look at what our options are. I mean, there's definitely opportunity to finance this at a lower number.

We're not ready to announce any kind of plan or anything to -- but that is an option going forward. .

Your next question comes from the line of John (sic) [ Josh ] Nahas with Foxhill Capital Partners. .

I just wanted to get a little bit of understanding on where you see the inflection point between -- I guess, our digital revenue is declining still, so we need that to grow. And, I guess, it needs to grow enough to exceed the decline in our print business.

If you're trying to manage the -- getting growth out of digital, which is sort of declining now, and I don't know where we see a plateau sort of in the print or how much we are converting to digital. But where do you see that? I mean, I know in the -- your '17 projections, you can see at some point the decline dramatically tails off in revenue.

But just in terms of more execution, where are you seeing that track come out now? And where do you think that -- when do you and where do you think that inflection point is going to begin? And how do we just stop digital from declining and start growing? Because that's sort of our growth business. .

That's a really good question. And inside of these big digital numbers, there's a bunch of different pieces I'd like you to think about. You've got search engine marketing, which is a business that -- is a service that we sort of need to provide in the marketplace, but you can get into a lot of trouble.

And remember, we just bought YP, and in doing so, we brought on a very big number. We brought on a bunch of what we would consider sort of soft or not profitable SEM revenue, which we're looking to try to take out as quickly as we can. There were a number of other pieces inside of that.

I bring you back and I ask you to kind of think a little bit about where we are right now with the Dex business. Inside the Dex, things are really beginning to stabilize and getting much stronger in terms of that foundation that you're wondering about.

And Thryv obviously is the area -- Thryv and the other owned and operated products are the ones that we're the most focused on because the margins that we have are strong on those and they're much stickier than SEM, which tends to churn out of the big number.

So basically, having just -- let me wrap this up by saying having just bought YP, they were on tippy toes trying to stretch for as much digital revenue as they could possibly, possibly reach for.

And so there was -- accordingly, there was a fair amount of fairly soft, squishy kind of digital revenue sitting on top, which we've sort of bottomed out here with this revised forecast that we've just given you. So we feel like going forward, we've got a more solid foundation to work off of. .

Okay.

And then not to -- I know you kind of addressed it, but just with Lance's question's somewhat more overall strategy about moving the company, I guess, to a lower cost of debt financing, which obviously would also -- do you think that there'd be an appetite, say, halfway through the year or year-end for -- in the debt markets for a piece of paper that would allow you guys to start paying out substantial dividends? Or is it going to be just a lower interest rate piece of paper but still owner is cash suites? Because I think, obviously, the market, through Dex, [ IDR ], all these things, would -- has been -- the debt market has been burned on these sort of harvest cash flow businesses before.

So I wonder, what are the opportunities do you think to create equity value through refinancing and perhaps getting some relief on cash flow dividend ability to equity holders?.

Like Joe mentioned, there's a lot of opportunity here. We think we can -- refinance at a lower rate. We're sort of locked in for the 6 months. So we'll be looking at everything when that time comes up, but it's early days. We haven't decided. .

And as you can imagine, we're pretty focused on running the business well, and the better we run the business, the more options we'll have within the capital structure. .

And your next question comes from the line of Jason Mudrick with Mudrick Capital Management. .

I have 3 quick questions for you. The first two are sort of picking up on some of the questions from prior callers. I guess, the first question is sort of half a statement, half a question, but it sounds like search engine marketing, which is one pocket of your digital revenue, is declining.

Paul mentioned it in his prepared remarks that it was intentionally declining, and then, Joe, you alluded to that in response to the prior caller's question.

Just giving us a little more detail, can you talk about how much search engine marketing contributes to the bottom line? Is that a profitable business?.

Yes. I mean, it -- we -- it historically has not been, but we've been going through a process, first, in Dex where we've swung it from a loss-making business to a positive business. And now we're going through that same exercise within YP.

And one of the necessary things to get that to happen is some of the kind of low fee operates, special arrangements need to go.

And some of the really hard push for more and more and more SEM needs to be reduced in order to sort of handpick through the potential accounts to come up with a base of business that we can run profitably and make a small profit on.

It's never going to have great margins, but we feel it can be profitable going forward after we go through this process. .

Okay. So search engine marketing is declining, but it's not a particularly profitable business. Thryv is growing rapidly, congratulations, by the way. It's incredible to see a business go from 0 to over $100 million of revenue in 2 years.

Obviously, that business is still scaling, but once it scaled, I'm sure you've analyzed the unit economics of selling an additional Thryv.

What is the contribution margin of a business like Thryv once it scaled?.

Well, thinking about contribution, we think it's probably somewhere in the 40s. And on a fully loaded basis, we think once it scaled, it's in the 30s. Kind of 30% to 35% is where we're aiming toward. That won't happen immediately, because as one of the prior callers pointed out, we're investing kind of hand over fist to grow it right now.

We're staffing up the service teams. Oh yes, by the way, we're integrating YP, which was just half a year ago we acquired, and there's a whole lot going on with that. So a little noise in the back-office service area. But we're aiming, to answer your question, to kind of a 30%, 35% fully loaded margin we think we can deliver over time.

That's kind of how we -- what we're aiming toward. .

That's very helpful. I mean, it's just -- I think it's probably hard for the financial community to understand just with these last reports. So you sort of have this like declining business that isn't very profitable, where you're really just a reseller of Google AdWords for Google.

And then you have this beyond leads, as you described it, this sort of business automation SaaS product that's growing really rapidly, that once scaled will contribute cash flow in a similar way to your historic businesses, which were monopolies.

And that's an interesting story that you sort of can't see from just looking at an 8.5% digital top line decline. So, look, my last question, just, I guess, for Paul.

Can you give us an estimate for your 2018 [ fourth ] EBITDA forecast of $541 million? Approximately, how much of that EBITDA comes from your digital products?.

About -- we're targeting, I guess, EBITDA probably around $200 million. .

[Operator Instructions] And at this time, there are no further questions. I would now like to turn the call back over to Joe Walsh for closing remarks. .

Thank you, operator, and thank you, everybody, for dialing into the call. We really are making good progress with Thryv.

This management team came in with a lot of director experience, enough director experience to know that, that business was somewhat doomed and that just trying to do that slightly better wasn't going to be a very big business strategy.

So we quietly set about pivoting the company to move beyond leads to get much more deeply into the business operations of the companies that we serve and use light cloud-based tools to help them bring modern tools to running their company.

The kind of things that big enterprises and national chains use to control their local operations and give consumers a better experience, we wanted to provide that to the mom-and-pop businesses so they could kind of be on a level playing field and fight back. And we didn't yell that from the rooftops, obviously, in the financial community.

We just went out and went to work on it. And we've managed to have live subscribers at the end of last year of 35,000 of these. It's sticky, it's a good margin business and it's growing nicely. And for us, it's a big part of the reason that we took this gig and that we're here. And we're really excited about Thryv and what it represents for the future.

And oh yes, by the way, we realize that our #1 job is to skillfully descale and variabilize the cost of the declining part of the business. And that's job 1, and we're doing that to make sure that we're able to meet all of our financial commitments. And so what you'll hear us talk about on each of these quarterly results is that [indiscernible].

You can be the judge of how we're doing. We cycle in progress. And we feel like the YP acquisition, we really appreciate all of your support to allow us to do it.

What a terrific way to give us, frankly, a bunch of body fat to feed on and give us runway to let us keep building out this future business as it becomes a larger and larger percentage of revenue and begins to emerge as a really valuable, independent entity over time. .

So thank you, everyone. We'll talk to you again soon. .

This concludes today's call. You may now disconnect..