Hello, and welcome to DexYP's First Quarter 2018 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 future events and trends affecting the company's business and are subject to risks and uncertainties. Actual results may differ materially from these forward-looking statements. .

The company advises you not to place undue reliance on these forward-looking statements and to consider them in 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 April 30, 2018.

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

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 first quarter of 2018. I will highlight some key statements and then turn the call over to Paul to run through the detailed financials. .

We again delivered strong EBITDA margins, indicating continued robust operating performance. Our free cash flow continues to allow us to reduce debt aggressively. To offset the anticipated revenue headwinds we faced this quarter, we continue to look for efficiencies and cost-reduction opportunities.

Our flagship product, Thryv, seen on Slide 4, continues to be our key focus. We've built a powerful engine that allows small businesses across America to modernize essential business functions never performed or performed manually in the past. .

We recently launched a more robust version of the all-in-one management software, Thryv 3.0. On Slide 5 , you'll see Thryv offers more than 200 improvements, including things like custom CRM fields and updated world-class scheduling, which brings the benefits of big brand technology to small businesses.

In addition, we recently launched our newest lead platform, Thryv Leads, which allows clients to see new leads come in, know where they're coming from and track their lifetime value. .

Slide 6 shows we're on plan or ahead of plan, integrating the companies and positioning DexYP for the future. We've made significant progress on the DexYP integration by managing headcount and vendor cost. This is reflected in our EBITDA margin increase from 25% to 29% quarter-over-quarter.

We're moving forward, we're steadily driving client acquisition of Thryv, and delivering new levels of support for our existing clients and providing more channels for acquiring clients. Paul will share momentarily that we exceeded our EBITDA goals for the quarter.

This is a direct reflection of our ability to effectively manage our cost ahead of revenue decline. Now I want to turn the call over to Paul to take you through the financials in the past quarter.

Paul?.

Thank you, Jeff. We will now discuss, in more detail, our consolidated first quarter 2018 financial report, released on our website, as the operator previously mentioned. Our results are presented on a consolidated basis for DexYP, as if YP had been acquired on January 1, 2017.

I would like to point out that most of the financial measures presented and discussed this morning 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.

Adjustments made to our GAAP results remove the impact of fresh-start accounting entries required upon 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, including integration activities, business transformation and noncash expenses, associated with long-term stock-based incentive compensation and pension expense were removed from our non-GAAP adjusted pro forma results.

We expect to be able to issue our 2017 annual report, which will include our 2017, 2016 and 2015 financial statements by the end of the second quarter. I am pleased to report that EBITDA results for the first quarter of 2018 came in ahead of plan. Non-GAAP adjusted pro forma EBITDA for the first quarter of 2018 was $146 million.

This was a $9 million increase over the first quarter of 2017. We generated an EBITDA margin of 29% for the quarter. Needless to say, we are very pleased with our results for the quarter. Pro forma net revenue for the first quarter was $498 million, a decline of 19%, compared to the same quarter last year.

The decline in our total pro forma net revenue was primarily driven by reductions in our pro forma print revenue. Pro forma print net revenue for the first quarter was $243 million, a decline of 24% compared to the same quarter last year.

The decline in our pro forma print net revenue is consistent with the industry trends and in line with our guidance we provided earlier in the year. Total digital net revenue was $253 million in the first quarter, a decline of 15% compared to the same quarter last year. Thryv revenue and units continue to grow as expected.

As Joe mentioned, we launched Thryv 3.0, and expect it to drive continued growth. Already the product is producing $100 million in run rate revenues, and we are confident in our ability to hit the $121 million forecast in our guidance.

Adjusted pro forma EBITDA for the first quarter of 2018 was $146 million, an increase of 7% or $9 million, compared to the first quarter of 2017. Our EBITDA margin for the first quarter of 2018 was 29%, an increase of 4 percentage points compared to the fourth quarter of 2017. .

We continue to operate the business on a daily basis with laser focus on eliminating redundant and unnecessary costs in order to maintain and improve our EBITDA margins prospectively. Free cash flow for the first quarter of 2018 was $53 million, compared to free cash flow of $111 million in the first quarter of 2017.

The decline in free cash flow of $58 million was primarily attributable to planned YP integration activities and planned higher income tax payments in the first quarter of 2018, related to the fourth quarter of 2017. These were partially offset by reduced capital spending. .

Let's take a look now at net debt. As of March 31, 2018, our net debt was $759 million, which represents a reduction of $176 million over the 9-month period following the acquisition of YP on June 30, 2017. I am happy to report that we are reducing our net debt more quickly than anticipated at the time of acquisition.

As most of you are aware, the debt financing raise to fund the YP acquisition included a no-call provision for 1 year. Based on the number of calls received, interest is high to help us replace our current term loan with low-cost financing. We are evaluating a number of scenarios, and we'll provide additional updates when the time is right.

It is premature to discuss any details at this time. Now I would like to turn the call over to Joe for some closing remarks. .

Thank you, Paul. Overall, we're pleased with the first quarter results. We were successful and continuing to grow our EBITDA margins. Thryv is enabling small businesses to modernize their operations and better communicate with their customers. We're becoming a leader in the small business management software space.

With that, Lori, we can open the line up for questions. .

[Operator Instructions] Your first question comes from the line of Lance Vitanza of Cowen. .

So I guess the first is just -- it sounds like there's no change then to the guidance. I was just wondering if perhaps there might be some, given the strength of the numbers thus far. .

Right now we're reaffirming our present guidance and we will keep you updated as we move on but obviously, we're very happy with the first quarter. .

Okay.

And then on Thryv, just one specific question, and recognizing that it may be too early to really talk about this? But can you give me a feel for what kind of churn you're seeing there? I mean, we see essentially, like, the net adds but I'd love to get a better view into how many you guys are signing up or people sticking around? What impact -- is there any kind of promotional pricing period rolling off is that having on your base and so forth?.

So let me give you, I guess, a frame of reference. This obviously was -- we're coming from being a directory company. And as a directory company, one of the things that was great about Yellow Pages is that the average renewal rate was in the low 80% range, that's part of why it made such an incredible business.

But first-year customers tended to renew at around 50%, and then they renewed much higher than that in the later years and the average customer lasted about 8 years, so you ended up with this blended 82 kind of percent renewal rate. So it's with that kind of frame of reference that we look at Thryv and look at all the digital offerings.

And so I'll just say one more before I answer the Thryv question. When you look at, for example, selling keywords for Google, search engine marketing, that also sort of renews at a very low rate and has a high level of churn. It's kind of a lower, much, much lower renewal rate than we're looking at.

So having said all that, what we're seeing with Thryv is very strong renewals. We're seeing people stay with it and like it and the software's improving. We just, this week rolled out our 3.0 software. And that software has, as I mentioned in my opening remarks, more than 200 improvements.

So many of the things that the customers were working to do, the software's doing, maybe it's okay before, it's doing much, much better now. And so one of the strengths we think of Thryv is the stickiness and the fact that the customers are hanging around.

And that's probably all I can give you right now on it, but we'll probably be looking to give you some more detailed metrics later. .

No, that's helpful color.

Sticking with Thryv for a minute, I mean, what are you doing there for lead generation? Or is it really just really going after your existing print customers? There -- it seems to me that there's an opportunity to go after the rest of the small business community, but maybe that's not right? Could you comment on that a little bit?.

No, you're absolutely right. I mean, when we go out or went out in the past, trying to sell the various offerings of the company minus Thryv, before Thryv, they appeared as un-innovative, dusty old alternatives when we went to call and customers.

And now with Thryv, when we go to call on a new prospect, we're seen as fresh and innovative, and our various leads products sit behind that innovative phase. So it's made a big difference. In fact, the vast majority -- more than 80% of all the new accounts we're acquiring, are coming in with the Thryv.

Thryv is what they're buying and then they're buying the leads products behind Thryv. So we really have transformed the way we're acquiring customers and having a lot more success in picking up momentum at new account acquisition by using Thryv. Customers are actually curious about what Thryv does, they want to learn about it.

Whereas when we would go in and talk to them about phone books or search engine marketing, it was sort of a boring conversation that they felt they already knew all about. So we are opening up new channels to the market. We got our existing channel, our local point of sale channel, our inside sales channel and our national sales force.

Now we've added a buy-it-yourself inbound channel, where customers are coming in, untouched by human hands, buying Thryv, putting their credit card number in, just buying them on their own and heading out and beginning to use the software.

We actually have an upchannelling process, where when people come in through that channel, we follow back up with an agent and we've had a lot of success at upgrading them. They actually buy leads packages once they buy Thryv from us. So it's early days on that, but we're really encouraged.

We also have another channel that we call our inbound channel, where we've got people who have watched a video about Thryv, or seen a data graphic or learned something about it through our online marketing, but haven't quite come all the way through to buy.

And we reach out to them both through chat and directly with phone calls and that inbound channel is rapidly picking up speed in terms of being a new area of client acquisition. And yet another area that we're looking into and it's very, very early days, it's beginning to market Thryv through affiliates and resellers.

As the brand strengthens, it becomes really the category leader, we've had a lot of interest in people that they would like to be able to offer Thryv to their customers. And so those are some new channels that the company never had before to open up new accounts and to grow.

It's one of the ways that we think that eventually we can get back to growth with the company is through these new channels as well as the new account acquisition through the traditional channels. .

Okay. And then so despite the significant growth that Thryv digital revenues overall are continuing to fall, I think if I remember the release, they were down about 15% year-over-year in Q1.

I know in the past you've talked about some of the reasons involving pruning SEM and so forth, but could you elaborate on what -- how we should be thinking about that going forward and what those buckets are? And maybe help us get to -- help us model out when we might actually see that growth overall come?.

Yes, the question that you asked is excellent. You actually helped with the answer even in your question. One of the first pieces is search engine marketing.

The legacy company, Dex, had unprofitable search engine marketing activity, which we basically moved out of the business and we came -- eventually, found a base of customers that were profitable, moneymaking enterprise for us and the sort of big step-down in search engine marketing and the Dex side of the house is kind of over.

However, we just acquired YP, and YP had a tremendous number of search engine marketing accounts. And some of them, quite frankly, were loss-making activities. And so you're seeing us, basically, work our way through that SEM customer base on the YP side, and you're seeing a pretty significant step-down in revenue.

And that will go on for a few more quarters as we get through that. And then I think you'll see it stabilize. .

Additionally, in the IYP side, we've had a little bit of a step-down on the YP side, really a continuation of the trend that they were exhibiting before we acquired them with some IYP decline. Now on the Dex side of the house, we've been actually making progress with our IYP, was able to get some growth.

And we feel like that strategy once fully baked in on YP side will allow us to do the same there. But we're looking at several more quarters of revenue decline on the IYP.

But when you look at the big picture, we get through those next few quarters of getting through that softness, we don't think you'll see the kinds of declines in those areas that we have these last few quarters and when you combine that with the growth from Thryv, I think you'll see digital move from going backwards to going forwards. .

Or just if I could just slip one more in here, maybe more for Paul just on the free cash flow line. Could you help bridge us from the $54 million that you've put up in this quarter. I think you had a much higher number a year ago and yet everything seems to be working well. EBITDA was actually up.

I imagine that there was some maybe some tax payments that you made this year that you didn't make before, but any help on that bridge would be appreciated. .

Yes, there's also -- if you remember our press release, on Page 6, we have a reconciliation of adjusted EBITDA to free cash flow, which will be helpful for those on the line. But essentially, it is exactly that, we had a large tax payment related to 2017, that for the fourth quarter we paid in 2018, roughly about $25 million.

And as you know, and as we disclosed and as was planned, there's a cost to achieve to get at all the savings that you're seeing flow through our numbers right now, and about $29 million of our deduced cash flow. So we had adjusted pro forma EBITDA of $146 million.

You reduce for the $25 million in tax payments that we made and the cost to achieve is 29, plus we had an increase in working capital of about $12 million, it gets us to roughly about $80 million in cash from operations.

And then about $4 million reduction in free cash related to capital expenditures, to roughly about $76 million in free cash flow before debt service. And interest fee payments of $22 million, gets us to the $54 million. So that's the math. .

But it sounds like then if we take out the tax payment, which I gather won't be recurring over the balance of this year at least, that you're kind of on a 75-ish million-a-quarter run rate, which would work out to get to that -- your '18 guidance was about $300 million for the full year.

The tax payment, I think -- is your expectation that you actually can make up for that? Or should we really be thinking about, more like $270 million -- or $275 million of free cash flow for the full year 2018?.

Yes, we're reaffirming our cash flow, that was one-off -- that was a planned one-off. You want to be smart about how you spend your money, so we want to pay the government. We don't want to risk a penny before this. So that was a one-off '17. Our tax situation on '18, as you know, it's a decline in tax rate. It's a roughly 14% plus.

We had some credit related to A&P that we're carrying forward. So we have paid very little tax through this year, so we expect to make that up and to meet our projections for the full year. .

[Operator Instructions] Thank you. That does conclude DexYP's first quarter 2018 conference call. You may now disconnect your lines and have a wonderful day..