Hello, and welcome to DexYP's Fourth Quarter and Full Year 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 risk and uncertainties. Actual results may vary 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 forward-looking statements. These factors can be found in our press release dated February 14, 2019.

The company has no obligation to update any forward-looking statements. Please refer our website 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 the deck..

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

Thank you, Felicia. Today, Paul and I will review our financial results from the fourth quarter and the full year 2018. I will highlight some key statements and then turn the call over to Paul to run through the detailed financials as well as discuss what we see for 2019..

We closed out the year with strong financial performance and continue to grow EBITDA and EBITDA margin and generate tremendous cash.

Our simple SaaS software and flagship product, Thryv, continues to lead the industry by helping small business owners manage their appointments, communicate with clients and get paid, so that they can take control of their business and be more successful. .

As Paul will detail soon, this year we increased recurring Thryv revenue to over $100 million. While we're thrilled with Thryv's growth, 2019 will serve as a year of engagement and nurturing. As we transition the company, we recognized our focus needs to shift to engagement rather than just adding numbers of subscribers.

We expect as a result of this increased emphasis on driving subscribers' engagement, this will likely lead to a slowdown in Thryv unit growth in 2019, but we expect growth in 2020 and beyond. .

We continue to focus on our leads platform, Thryv Leads, that allows small business owners to generate leads across multiple media through a single budget and see these new leads flow into their Thryv CRM.

This is a tremendous advance for small businesses to able to generate, track and communicate with new prospects and current customers, all in one place. .

Now I want to turn the call over to Paul to take you through the financials from this quarter and for the full year.

Paul?.

Thank you, Joe. We will now discuss in more detail our consolidated fourth quarter and full year 2018 financial results. .

Released on our website on February 14, 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 that will be presented and discussed this morning were prepared on a non-GAAP adjusted pro forma basis.

We believe these non-GAAP pro forma 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 accounting entries required following the acquisition of YP on June 30, 2017. .

In addition, nonrecurring costs associated with the acquisition of YP, including acquisition transaction fees, 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..

Non-GAAP adjusted pro forma EBITDA for the fourth quarter of 2018 was $144 million. That represents an $18 million increase over the fourth quarter of 2017. We generated an adjusted pro forma EBITDA margin of 34% for the quarter. Needless to say, we are very proud of our fourth quarter results..

Now I will discuss the results in more detail as seen on Slide 5. I would like to point out that we are providing more details on revenue streams and cost structure than we have before. We agreed to provide this level of detail in our new term loan agreement, and we believe all stakeholders of Dex will benefit from the additional disclosure. .

From past earning calls and discussions with investors, we believe that most of you understand the revenue items. Our grouping of operating expenses, though, may seem a bit foreign. Let's run through these quickly. .

Variable expenses are items that vary with each unit of revenue like sales commissions on all products or print and distribution costs for print revenue, traffic costs for search engine marketing, or current unit vendor costs for Thryv. Direct expenses are product costs that are more fixed in nature.

Think annual fee contracts that are specific to product or products. We account for base compensation of our sales force here along with certain vendor contracts that do not vary with [ you ] as well as our service organization that work with our clients on a daily basis. .

Indirect expenses are pretty simple to understand. They reflect the administrative expenses associated with running our business such as finance, legal and human resource teams among others. Now that we've set the base understanding on how we view the business, let's jump into the results. .

Total pro forma net revenue for the fourth quarter was $423 million, a decline of 19% compared to the same quarter last year. Pro forma net revenue for the fourth quarter was $199 million, a decline of 21% compared to the same quarter last year.

This decline in our pro forma print net revenue is consistent with the industry trend and is in line with guidance we provided earlier last year. .

Total Thryv and Thryv Leads revenue was up 35% to $31 million in the fourth quarter as compared to $23 million in the same quarter last year. Thryv revenue and units continue to grow. The product is producing over $100 million in run rate revenue, and we are optimistic in the continuing growth possibilities for this product for the years to come. .

Let me point out, as Joe discussed, we are not focusing on driving Thryv unit growth in 2019. We are focusing all efforts on increasing user engagement and building a strong user base that will propel us to future revenue growth. We will cover this a bit later as we discuss 2019 guidance..

Internet Yellow Pages or IYP revenue declined at 18% in the fourth quarter of 2017. We are focused on stemming this decline in the coming quarters, as this is a valuable digital asset that provides tremendous amounts of cash flow.

Presence products reflect some of our historical revenue streams such as websites, search engine optimization and display advertising, declined 25% compared to the fourth quarter of 2017. Search engine marketing, or SEM as we call it internally, declined 28% to the fourth quarter of 2017.

As we have discussed in many previous calls, this is not a strategic revenue line for Dex. We provide this service to our clients and are making a solid profit margin for the service. However, it's primarily a reseller business.

[Audio Gap].

we believe a focus on our owned and operated products provides the most value to our clients and shareholders..

Variable margins are constantly in the 70% range. We expect to continue to deliver variable profitability at these margins, even in the face of revenue decline..

Direct margins reflect our ability to manage our cost structure. We are very proud of the 48% margin delivered in the fourth quarter, especially compared to the 34% margin in the fourth quarter 2017. We have been able to continue to improve this margin as we approach completion of the YP integration.

We have some more work to do, but expect to complete the integration by late 2019..

Adjusted pro forma EBITDA for the fourth quarter of 2018 was $144 million. Our EBITDA margin for the fourth quarter was 34%, an increase of 10 percentage points over the same quarter of 2017. Free cash flow for the fourth quarter 2018 was $100 million compared to free cash flow of $67 million in the fourth quarter 2017.

The significant increase in our free cash flow of $33 million was primarily attributable to lower income tax payments and lower interest payments made in the fourth quarter of 2018 compared to the fourth quarter of 2017 as well as onetime YP acquisition fees and integration-related payments that were made in the fourth quarter of 2017..

For the full year of 2018 results, there are a couple of areas I'd like to highlight. Thryv revenue grew to $107 million. Not many software companies reach $100 million in annual revenue. We did it in a little over 3 years. .

EBITDA for 2018 was $587 million. We grew EBITDA year-over-year, even with a 20% revenue decline. That shows tremendous effort, hard work and rethinking of the business to drive this growth. We are quite proud of this accomplishment. .

We generated $320 million of free cash flow. This significantly reduced our net debt and allowed us to enter into a new credit agreement that will allow much more flexibility going forward, whether to make acquisitions or return cash to shareholders. Our results speak for themselves and are getting great support from the financial community..

Let's take a look now at our net debt. In December 2018, we amended and restated our term loan agreement. The terms of this new agreement provided for available borrowings of $825 million, consisting of 2 installments. The first of these 2 installments was executed on December 31, 2018, for $400 million and was used to pay down our existing term loan.

The second installment, which we executed on January 31, 2019, of $425 million, can be used to pay down our remaining line of credit, finance share buybacks or fund future acquisitions. This agreement also extends our maturity out to December 31, 2023..

As of December 31, 2018, our net debt was $512 million, which represents a reduction of $423 million over the 18-month period following the acquisition of YP. .

Based on the number of calls we have received, we know many of you are interested in learning more about what we will do with proceeds. We are finalizing the details and will make a public announcement when the time is right..

Moving to Slide 6, we recently posted our annual budget for 2019. There are a few items I'd like to highlight. .

Print revenue will continue to decline at industry and recent historical rates. We continue to manage the costs in this side of the business to generate strong cash flows, while providing a great product and experience for our clients and users of the directory. As I noted earlier, we will see a slower rate of growth in Thryv in 2019.

We are consciously slowing the new unit acquisition to focus efforts on improving client engagement. We will stabilize our base of customers and help to drive accelerated growth in 2020 and beyond. We are fully committed to being the -- we are fully committed to this being the path of the future..

I agree it's an exciting new product we launched in 2018. It simplifies both the client experience and the sales call for our reps, a big win-win. Instead of deciding on the advertising medium, the client simply sets a budget, and we deliver leads to that budgeted amount -- very clean, very easily used.

We are excited at the direction of the new product can take our business. We expect some legacy revenue items to be cannibalized into this product..

Moving to IYP. We continue to face headwinds in organic traffic. We are investing in this high-margin product to mitigate the organic traffic declines. We are also continuing to educate our clients on the tremendous value provided by this product, especially as it relates to cost per lead.

We believe these efforts will slow the decline rate in the second half of the year. .

We expect Presence product to continue to decline in the foreseeable future, as legacy products are cannibalized into Thryv and Thryv Leads. SEM continues to be a declining revenue stream. We are actively managing costs on this set of products to deliver positive contribution margins to the business.

Some of this revenue stream will be cannibalized into Thryv Leads..

As you can see on the rest of the guidance, we are focused on managing the cost structure of the business. We have a highly variable margin business, and we expect that to continue into 2019. We will manage direct costs to improve direct and EBITDA margins over 2018. .

Moving to free cash flow and related net debt. We expect to continue to deliver strong unlevered free cash flow in 2019, with only a slight decline in 2018. We will, however, pay more in interest expense related to the new term loan. We will also lose many of our tax yields from prior years.

These 2 items drive the majority of the free cash flow decline in year-over-year comparisons. We expect to deliver free cash flow of $224 million in 2019. .

While headwinds remain in our legacy business, we are making great progress of building our future Thryv SaaS business and modernizing our leads business with our Thryv Leads product. We are committed to removing costs from the business and retaining margins as we transition the business for 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 2018. In 2019, we expect continued strong financial results. We'll increase our focus on our SaaS business, particularly Thryv subscriber engagement.

We launched several partner integration programs to solidify partnerships with innovative and like-minded developers, designers, entrepreneurs, resellers and affiliates to further our mission of helping small businesses succeed..

With that, I will open the floor up for questions.

Felicia?.

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

Could we start with the interplay between Thryv and Thryv Leads? And I'm not sure that I appreciate the difference there.

And when we think about the revenues associated with Thryv, as you know, as a SaaS product, does that -- should we be thinking about that as one or both of the Thryv revenue lines?.

Well, Thryv Leads really is taking the traditional former leads business that we would sell on kind of a -- the traditional basis, and it's sort of repackaging it for people -- people are buying a monthly service at a fixed price, and we're out in the marketplace delivering those leads to them. And so it's more SaaS-like.

I mean, I don't know, it might be a stretch to say it is SaaS, but it's more -- we're selling it more on a Leads-as-a-Service basis. And we find that -- there are positives and negatives to it for the customer. The big positive is it doesn't require the customer to figure out which media products to buy or to emphasize.

It allows them to sort of buy on a cost per lead basis really. It's more of a black box. For some businesses that fancy themselves experts in this stuff and really want to fondle every little detail of it, they sometimes get frustrated by the black box part of it.

And we steer them back to buying some of our more traditional products when they have that view. So anyway, that's the way we think about it. It solves for us, Lance, a couple of big problems. The first is that we only get credit for a small portion of the leads that we deliver to customers.

People assume that because our legacy is Yellow Pages, that we must not be very good or something. And so there's -- we just don't get credit for all the leads that we deliver. And when we deliver Thryv Leads, we deliver it right into their CRM. They get a notification on their smartphone that says, you just got a Thryv Lead.

It's a little orange card that pops up. They click on it, it takes them right through to the customer's interest. And not only that, but it stays in the CRM database with the date and time and source.

So if they fix a hot water heater today and in 9 months the customer decides to remodel the whole kitchen, we get credit for the lifetime value of that customer. So the first problem it solves for us is getting credit for those leads, and that's just a big deal. Anyway, I'll stop there. .

Great. That's helpful.

So then -- so the big increase from '18 to '19, I mean, it's a $40-plus million increase, is that $40 million plus coming away from one of the other line items that you have? I mean, was that basically -- I guess, I'm trying to get a sense for the true sort of underlying growth versus sort of the reclassification or recharacterization, if you will?.

Without a doubt, there's cannibalization. We're not out on purpose trying to move stuff, but it's just a simpler, less friction way for us to try to sell our various lead products. And so we're finding that, that's working very well.

So yes, when you look at a lot of the various line items and you look at the fairly large declines in some of the digital line items, part of that is they are... .

They're moving to -- moving the leads. .

Yes. .

Okay. So just with respect to the -- to Thryv, I guess, I'm not clear why isn't it possible to improve engagement while continuing to grow overall users.

Is the initiative -- is this a response to an undesirable level of churn that you may be experiencing? And if it's possible, and I apologize if I missed this in some of the materials or on the call, but could you share with us any statistics around churn, gross or net adds and the number of subscribers that you had at the end of the year, average monthly billings, et cetera?.

Yes. So you all remember that for 134 years, we were a Yellow Pages publisher. And 4 years ago, we decided to make a big change and pivot to becoming a small business software company. And so there's a whole journey that's been taking place in that process.

What we found is that we had a super product market fit that when we went out to talk to our 0.5 million small business base of Yellow Pages advertisers, they really identified with the problem that we were describing, that Thryv was meant to solve. And so we found good strong sales growth, and we found that they were extremely sticky.

And one of the things that we were excited about with Thryv is just how sticky it is, that when customers buy it, they tend to keep it. And so that was something that we really felt great about.

And Lance, in all honesty, as we ventured outside our existing customer base and began to acquire customers untouched by human hands, buy yourself online or with the help of some agents buying online, we started using it as a new business acquisition tool, we started bringing in a different group of customers with different problems, different opportunities.

And we found that group was churning at a higher level than we wanted. And so we really have backed up a step and taken a hard look at the tools that we use to manage those customers at the onboarding process and mission, and there's kind of a whole rework. We really started in the middle of last year and are making great strides.

We've overhauled onboarding, we've overhauled the process of overhauling, the way we incent the reps, the way we pay them, when we pay them. We're not so much going to paying them to sell a Thryv, but more as they get their customers fully engaged on Thryv.

So it's so broad that it really is taking a lot of the resources, the focus, the heat and light that we have in the company to do that. And we feel like to try to scale on top of the little bit higher churn number we've seen in these new client acquisitions would be dumb.

We really need to make sure we have all the kind of software metrics where we want them, that our cost of acquisition, lifetime value, churn numbers, daily active user engagements, that those things are where we all want them to be as we kind of reaccelerate in 2020 and beyond. We want to make Thryv a very big business.

And we think there's an enormous opportunity based on product market fit. But we're just kind of tapping the brakes a little bit. I guess I'll call it the pause that refreshes to really get some of those things addressed. .

Great. I mean, I -- should I get back in queue? I've got a couple of more questions, but I'm happy to get back in the line if you'd prefer. .

Go ahead and ask your next question. .

Great. So -- okay. So the variable margin, and I like the way that you're presenting that now. My question is, when you break that -- it remains in the 70% to 75% range.

When you break that down by revenue line, aside from SEM, of course, how much variation do you see from line to line? Or are they fairly clustered kind of in that 70% to 75% kind of margin area?.

It's going to vary. The -- where you're going to have a discrepancy is around SEM just because of the traffic purchases. But other than that, the other products are pretty much in the 70% range. .

Great, all right. And then on the balance sheet, I know you are in the process of finalizing plans. So I'm not going to ask what you're going to do or what you might do, but rather what the terms of your new credit agreement would potentially allow you to do.

You mentioned potentially repaying the ABL, returning capital to shareholders, making acquisitions. Are there specific baskets that sort of say, with each of those 3 ideas, you can -- you're sort of limited, I mean, not the ABL repayment, I'm sure, you could pay that all down if you want to.

But is there a sort of a basket that would say, you could pay up to this much for acquisitions? Or issue a special dividend up to a certain amount? Or is that unlimited?.

It's unlimited. We could do whatever we want. .

Okay, great. And then last question from me is, recognizing that you're losing a lot of your tax shields, and therefore, cash taxes are going up quite a bit despite the expected declines in the print business.

But so to the extent that EBITDA ultimately comes in higher or lower than guidance, should we expect sort of just kind of a straight proportional 20 -- mid-20% variance in the cash taxes? Or are there sort of breakpoints that might protect you on the downside and maybe dampen a little bit on the upside?.

I guess, with a wide brush, I guess, you're right. But taxes isn't easy. And we do have some AMT credits remaining on the base. And it's a little bit more complicated than that, but with a big brush, yes. .

I'm sorry.

With a big brush, which? You mean it would be more or less just proportional to the increase?.

Correct. .

Your next question comes from the line of [ Rick Leach with Georgica ]. .

I was just wondering if you could kind of maybe prioritize for us your capital allocation. It's a little bit like the question Lance asked, but maybe more direct in terms of what do you see is making the most sense to you this year and whether you do see acquisition opportunities out there. .

Like we just said, we're still figuring that out. And when we do figure it out, we'll let everybody know. But we're not in a position to disclose that right now. .

Okay.

So the priority is figuring it out?.

We're working on the priorities. .

[Operator Instructions] Your next question comes from the line of Kurt Hoffman with Imperial Capital. .

Just had a question on the net debt in your 2019 budget. I guess if net debt was around $510 million at the end of the year, in theory, all else equal, it would still be around that level after the second drawdown. But the budget is projecting $765 million net debt at year-end.

It seems like it's not including most of the cash the company will receive from the second drawdown.

Just curious why you didn't include that cash or if I'm missing something?.

Well, we're assuming we'll do something with that money. .

Right, right.

But if you buy a business, obviously, the EBITDA would be hopefully higher?.

We had to build a budget and put it out there and we used some assumptions. I think you could figure out what that assumption was, but we're not prepared to disclose anything more about it right now. .

Okay. And I think last December, you provided some longer-term guidance kind of through 2021, which, if I recall correctly, kind of kept EBITDA around this 2019 level you're calling for today.

Do you think that still holds on a longer-term basis?.

We haven't [ announced ] our projections for the 5 years, so we're not prepared to comment on that right now. .

Your next question comes from the line of Jim Bennett with Bennett Management. .

I guess, this is along the same question lines. You've got, looks like, $224 million of free cash flow this year. And -- but your debt is going up by $250 million.

So what's the discrepancy there?.

Well, there's an assumption that we're going to use that cash for other purposes. .

Okay.

And I guess, if -- it's about a $475 million difference, and if I look at your shareholder equity going down by $420 million, I'm just asking, for your -- for the purposes of your assumptions that you're presenting, are you assuming a stock buyback? Is that the purpose of this presentation?.

That's what we assumed. But we haven't -- we didn't finalize anything. .

And at this time, there are no further questions. And we thank you for joining. This does conclude DexYP's Fourth Quarter and Full Year Conference Call. You may now disconnect, and have a wonderful day..