Harte Hanks, Inc. (HHS) Q3 2007 Earnings Report, Transcript and Summary

Good morning and welcome and thank you for joining us the Third Quarter 2007 Earnings Release Conference Call. At this time all participants are on a listen-only mode. [Operator Instructions]. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I would like to turn the conference over to Mr. Richard Hochhauser, President and CEO of Harte-Hanks. Sir, you may begin.

Thank you and good morning everyone. On the call with me today is Dean Blythe, our President and Chief Financial Officer; Jessica Huff, our Vice President, Finance and Controller and Bryan Pechersky, our Senior Vice President, General Counsel and Secretary. Before I begin my remarks, I would like Bryan to make a few statements.

Thanks Richard. The comments we make on this call include forward-looking statements. Examples may include statements about our strategies and initiatives, financial outlook, competitive factors, business and industry expectations and other statements that do not relate to historical facts. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected or implied in the forward-looking statements. A description of some of the risks and uncertainties potentially impacting our business and future performance can be found in all our most recent Form 10-K and other documents filed with the Securities and Exchange Commission and in the cautionary statement in today's earnings release. Our call may also include a discussion of certain non-GAAP financial measures. Please refer to today's earnings release for the required reconciliations and other related disclosures. Our earnings release is available on the Investor Relations section of our website at www.harte-hanks.com. I'll now turn the call back over to Richard.

Thanks Bryan. Our third quarter results reflect a continuation of the trends we have seen since the beginning of 2007, primarily the continued deterioration in Shopper revenues. Our overall performance was obviously below our expectations. As a result, we have taken and are continuing to take steps in both Shoppers and Direct Marketing to improve future revenue performance and reduce future expenses. Following this call last quarter, we announced the management succession and restructuring plan with Dean being named President and that he will become CEO in early 2008 and with Gary Skidmore being named President of our Direct Marketing business. Dean, Gary and Peter Gorman in Shoppers are deeply involved in the restructuring actions that are being taken and lots of progress is being made. You can see some of the results of this in our release and we'll hear more about this in Dean's remarks. I'll be letting Dean cover much of the materials I would have covered in the past and will be available to help answer questions. I believe the changes that are being made will not only improve short-term performance but serve us well in the future. Despite this difficult year, we really believe in the strength and durability of the targeted marketing businesses we operate and we continue to be a leader in both Direct Marketing and Shoppers. Dean, over to you.

Thank you Richard and good morning everyone. In this quarter what the numbers say at the bottom line is that our earnings per share declined by $0.05 over the prior year's third quarter period. This performance is certainly not of the type to which we are accustomed nor is it of the type that is acceptable to us or any of our stakeholders. Behind the numbers, what we saw this quarter was better performance from our Direct Marketing business with very solid bottom line growth and the continuing deterioration of revenues on our Shopper business. In addition in this quarter, as I will discuss in more detail later in my comments, we incurred $4.6 million of expenses as part of a continuing restructuring of our businesses, resulting in a $0.04 negative impact on earnings per share and had a tax rate that was 4% higher than this quarter... than the tax rate in the third quarter of last year which resulted in a further $0.02 negative impact on year-over-year earnings per share. Let's turn to some of the details starting with a companywide overview. Revenue was down 2.7% for the quarter with revenue for Direct Marketing up 4.1% and Shoppers down 12.6%. Operating income was down 10.3% with Direct Marketing up 9.2% and Shoppers down 19.2%. Free cash flow for the quarter was $25.6 million, down from $28.1 million in last year's third quarter, driven by lower net income in this year's quarter. Now looking at each of the businesses. In the third quarter, Direct Marketing revenue was up 4.1% with EBITDA up 8% and operating income up 9.2% with operating income margins up 70 basis points to 15.2%. Excluding the impact of the restructuring costs taken in the third quarter, which I'll discuss in more detail later, the operating income margin would have been 16.1% or a 160 basis point increase. This is the strongest quarter we have delivered in Direct Marketing this year in terms of positive operating leverage and we are both pleased by this and encouraged by this demonstrated ability for this business to drive profitable revenue. We are, however, still short of our revenue growth rate expectations and we will be coming up in the fourth quarter against our strongest growth quarter in 2006. For our vertical markets in the third quarter 2007, retail, the largest vertical, was 27% of Direct Marketing revenue, high tech/telecom 26%, select markets 18%, financial 16% and healthcare pharma 13%. Revenue in our high tech/telecom vertical had double-digit growth in the quarter, select showed continued solid growth with revenue increasing in the mid single digits over the prior year. And actually that revenue would have been up double digits absent the divestiture of a business that we did in 2006. The healthcare pharma vertical was up in the low single digits and the retail vertical was essentially flat. The only vertical showing a revenue decline was financial, which did show continuing troubles with double-digit decline. Our top 25 Direct Marketing customers represented 43% of Direct Marketing revenue for the third quarter. Our largest customer in the quarter represented 8% of our total Direct Marketing revenue. Turning to Shoppers. Shoppers had another difficult quarter. Revenue was down 12.6% to last year's third quarter with an EBITDA decline of 16.4% and an operating income decline of 19.2%. As result of expense actions we have taken this quarter, we were able to lessen the impact of the revenue decline on profit this quarter compared to the second quarter. In the third quarter, we lost $0.28 of profit for every dollar of revenue we lost compared to the second quarter where we lost $0.67 of profit for every dollar of lost revenue. The revenue environment continues to be difficult and the rate of decline accelerated in this quarter from both the prior quarter and the first half of the year, again, primarily attributable to the condition of the real estate and associated financing markets in the California and Florida geographies. As we did in the second quarter in shutting down 600,000 of circulation and reducing headcount, we took further action in the third quarter to reduce our operating costs. Included among these actions was restructuring our Shopper organization to move from six operating units: three in California, two in Florida and a digital operating unit to three units: a California unit, a Florida unit and a digital unit. Other advertising-related businesses that operate in these parts of the country have continued to report negative results out of these regions and negative results disproportionately to results out of other parts of the country. We do not know when these markets will stabilize. It will certainly not be before this calendar year is over. And with the accelerating rates of revenue decline throughout 2007, we know revenue comparisons in 2008, particularly the first half and three quarters will be difficult. But we also know that California and Florida are excellent long-term markets and that the effectiveness of our product for our advertisers will serve us well in these markets. In the press release, we mentioned that for the company as a whole we have incurred $4.6 million of expenses in the third quarter related to actions that will improve short-term performance and set the stage for longer term growth in revenue and profits. In Direct Marketing, actions in the third quarter were aimed at flattening the organization to improve our efficiency and bring our sales, marketing and operations closer to our customers. In Shoppers, as I discussed earlier, we also streamlined our organization, improving efficiency and reducing costs. year-to-date, we have incurred over $7 million of restructuring costs. These actions will generate future savings and will improve operating effectiveness. These expenses will exceed the savings that we will see from such actions in calendar year 2007. Taking into account the timing of all of these actions, we expect the result of these actions will be to reduce to our 2008 cost base by approximately $14 million. As I cautioned last quarter, however, these actions cannot be looked at in a vacuum. Our results will depend on lots of other things as well including our ability to control and reduce expenses through measures that do not have associated costs and the revenue performance we will able to deliver from our businesses. Excluding the impact of the $4.6 million in restructuring costs incurred in the third quarter 2007, EBITDA for the company would have been essentially flat as well as operating income would have been to last year's third quarter. This is on a 2.7% revenue decline. So we generated flat OI absent the restructuring cost on an $8 million revenue decline. Our third quarter net effective tax rate was 39.8%, up substantially 400 basis points from 35.8% in last year's third quarter. For the fourth quarter, we expect our tax rate to be similar to last year's forth quarter rate of 38.6, which would result in the full year 2007 tax rate being higher than what it was for the full year 2006. The effective tax rate for 2006 was 37.6 by over 100 basis points. As previously discussed, most of the difference is a result of the favorable tax resolution of a state tax matter in the third quarter of 2006, lowering our effective tax rate for the prior year's period. On the balance sheet at 9/30, we were showing a net debt balance of $193 million. Book equity at September 30 was $447.2 million. Net accounts receivable was $183.7 million with days sales outstanding at September 2007 of 59 days against 57 days in September of 06. Looking at our statement of cash flows, net cash provided by operating activities for the quarter was $37.6 million. In the quarter, we repurchased 1.9 million shares. Since January 1997, the company has acquired 55.4 million shares and spent almost $1.1 billion under our repurchase program, including close to 175 million over the last 12 months. As I mentioned at the beginning of my remarks, our third quarter performance is not acceptable to us or any of our stakeholders. But we do believe in and are excited about the businesses we are in despite this difficult year. These are fundamentally sound and strong businesses in attractive markets. Shoppers has a unique, high effective product that has delivered outstanding results for its advertisers for decades and continues to do so. We also remain confident that we have enormous opportunities to drive revenue in our Direct Marketing business given the cost effective and measurable result of programs we perform for our customers and the deep roster of blue-chip customers that we have in this business. We still have much to do and recovery will take time. But with the fundamental strength of each of our businesses, we are committed to delivering improved performance. With that, we will open up, operator, the call for questions. Question And Answer

Thank you. At this time, we are ready to begin the formal question and answer session. [Operator Instructions]. Our first question comes from Alexia Quadrani from Bear Stearns.

Hi, thanks. This is Jonathan Buckles [ph] for Alexia. A few questions on Shoppers. First, can you give us a sense of how much your volume may be impacted by the Southern California fires? And you mentioned that comparisons stayed tough for the first half of next year and maybe the first three quarters. And I can understand the first half has declined to single digits but with Q3 close to a 13% decline, do you mean to say that that's still a difficult comp? I just want to try to understand how weak Shopper revenue can get, and then I have a follow up. Thanks.

Okay, Jonathan, as far as the California situation, as you know, I mean it's still an ongoing situation, although it appears that the worst may be over. We were primarily impacted in the San Diego region. The impact... we were able to distribute all of our publications in San Diego, which is under 2 million circulation of our total of 13 to the post offices. We believe that a large majority of that was delivered and will be delivered. There was not a lot of sales activity this week. So we expect that the next week's publication will significantly light on revenue, but we are talking about a variance of well under $1 million. So while it's a tragic situation out there, we don't see any long-term impact or a short... or very much short-term impact to the business as a result of the fires. In terms of the comp, we have... what we talked about was we have seen a continuing decline, an acceleration of the revenue decline certainly in the first half and into the third quarter. I think we are... since we have not seen the end of that trend, I think what we are seeing that certainly the first half and it may leak into a little bit more than the first half that we will have difficult comparisons.

Okay. So in this quarter, you saw revenues continuing to decline as the quarter progressed?

Yes. We were down 7.1% last quarter in Q2 year-over-year and we were 12.6% this quarter.

Okay, thanks. And then finally, in the light of the very weak share performance in Q3, do you have any plans to become more aggressive in your buybacks?

Well we have brought $1.1 billion worth of stock over the last decade and I expect we will continue to be active buyers of our stock.

Okay, thanks.

Thank you. Our next question comes from Hester Chang from Merrill Lynch. Mr. Chang, your line is open. Mr. Chang, please check your mute button. Your line is open. We'll go on to the next question, Mark Bacurin from Robert W. Baird.

Hey Richard, hi Dean. A couple of questions. On the Shoppers revenue decline, is there any way... I know obviously took some circulation out. Is there a way to say how much of this quarter's revenue decline was self imposed, meaning its circulation that you took out? So, obviously, it was a profitability enhancer, but just wondering how much that 12% or so decline was because of your own actions.

The impact of the circulation shutdown was a little less than 2%... of the 12.6, it was a little less... a little less than 2 points of that.

Okay, great. And then you mentioned the fires, about a million bucks or so of revenue in the current quarter. I mean that's... I guess that's still to be determined. But will you strip out for us, I guess, in Q4 what the actual impact would be on that so we can get a sense of --

Will I?

Yes. Yes.

We obviously don't know yet. But our expectation is that it will not be significant.

Okay, great. On the Direct Marketing side, obviously, pretty good results there considering the environment that we are in. Can you talk about... I know you talked about the individual verticals, but in terms of the products or the solutions that some of these vertical are using, are you seeing more robust growth on the digital side, the direct mail side? Just trying to understand the kind of core demand drivers of that business.

Mark, I think we saw pretty steady performance across the various service line offerings. In... if you look at the verticals as a whole, however, we did have some good growth in our pharmaceutical business even though our even though the pharma healthcare market didn't show the growth, the pharma part of that was up very strong. And a lot of that was driven by some digital revenue and some digital projects that are new on a year-over-year basis. We continue to suffer in the financial services vertical. In that vertical, however, we are still coming against the loss of the large financial customer we talked about last year. We did the best of business last year that had a large financial services vertical revenue, and replaced with a business that had more hi tech business. So that also impacted financial. And we are seeing some softness in the credit card side of the business, and I think that's a spillover from the sub prime mortgage issues.

Great, that's helpful. And then just on PennySaverUSA.com, the digital platform, can you tell us any sort of metrics in terms of revenue contribution in the quarter? I know it's still a work in process in terms of trying to determine what the ultimate revenue models may be around that new service offering. But just looking for some more color there.

Yes, Mark, we don't... it's still not a material... does not have a material impact on the revenue side and it's still a business that is an investment; in other words, generating a loss at the bottom line. But we are making good progress even though when you talk about small numbers, percentages can pull... you can pull yourself with percentages. But we are relatively satisfied with the progress we are making and we hope that we can accelerate revenue growth from that side of the business in the coming year.

And I know I think Richard at one point talked about maybe 12 different potential revenue models out of that platform. What are the kind of... is it, I assume right now it's largely kind of a banner ad driven --

No, it's actually not banner ad driven; it's actually charges to people on the website to have an enhanced presence on our website. We have a lot of small businesses that don't have their own websites. And so when someone is doing a local search on Google, they are not going to show up. However, if they get on our website, we in essence will give them a surrogate URL so that will start showing up on Google-type searches, and we charge them for that.

And it's per click or it's just more on a [indiscernible] basis.

No, it's per week.

Okay. Great. And then just one final quick one. What was the actual dollar amount spent on share repurchase in the quarter?

Wait, let me grab that, Mark. $45.3 million.

Great. Thank you.

Thank you. Your next question comes from Karl Choi from Merrill Lynch.

Hi, good morning. I have a few questions here. The first one is in your conversations with direct marketers, I think early in the year you mentioned some hesitancy to commit spending. Has that gotten any better or any worse in your conversations with them? And the second question is I just want to clarify, the $7 million of cost savings that you have realized year-to-date, is that a run rate figure or the actual dollar amount?

Okay, Carl, first of all, the $7 million is not cost savings; those are one-time costs that we have incurred to take ongoing costs out of the system. In other words, as an example, we had a lease in Ireland that we terminated and there was a expense associated with that. But then that revenue expense goes away in the future. People, we have had reductions in headcount and we have had severance costs associated with that. It is those costs associated with taking the costs out that equal $7 million.

Sorry, I misread that. Then what would be the savings amount that you think you have sort of you will be realizing in 2007?

If you look at 2007 expenses and 2008 expenses, the dollar number actions to date would be $14 million less expense in 08 than we experienced in 07.

And that's incremental year-over-year?

That's correct.

Thank you. Our next question comes from David Clark from Deutsche Bank.

Thank you, good morning. Dean, of the $4.6 million of restructuring in the quarter, I think you said in the press release and on the call here that $1.6 million was in Direct Marketing. Was the balance in Shoppers or is some of that in corporate?

Some of that is in corporate as well.

Okay. And then the $14 million in savings, is the majority of that Shoppers or is it also sort of the split between --

You need to think of it as $14 million for Harte-Hanks.

Okay.

Some are corporate, some at Direct Marketing and some in Shoppers.

Okay. And then could we get the... for the third quarter, the year-over-year change in FTEs for all of Harte-Hanks?

For all of Harte-Hanks?

Yes.

The year-over-year change for al of Harte-Hanks is not significant. The year-over-year change in Shoppers is significant. I think it's down 9... almost 10% year-over-year.

Okay. And then one final question. I know both Florida and California are tough markets. Is one of the other... was one of the other weaker in the third quarter than the other?

They were about the same performance.

Okay, thank you.

Thank you. Our next question comes from Troy Mastin from William Blair & Company., Troy Mastin - William Blair & Company: Thanks, good morning. You mentioned that in the third quarter, you lost $0.28 of profit for every dollar of revenue lost in Shoppers. I am curious if this is a reasonable expectation going forward. I am sure it gets worse, the worse revenue declines that if we saw similar sorts of declines, would that be a reasonable expectation and how sensitive is this to the degree of declines in revenue?

Troy, it is sensitive to declines in revenue. I mean we obviously took action that made it less bad in the third quarter than it was in the second quarter. We are continuing to take actions because we are continuing to expect year-over-year revenue decline. So is that a... so I am just... I am trying to think here. I think in the near term that certainly we think we can deliver that. And the question is as how... as the longer it goes, the harder it's going to be keep that ratio in place. Troy Mastin - William Blair & Company: Okay. And based on what you see now, do you see the need for any additional restructuring activities? If not, I guess this would be more specific to Shoppers, what would have to happen in order to consider more reductions? And in terms of circulation, is that something that would be on the table?

I think we are continuing to review all facets of the organization. There will probably be additional costs on a going forward basis. They will not be of the magnitude they have been this quarter, or close to the magnitude they have been this quarter. I don't know if that answers part of your question, Troy. I guess the other part was what would have to happen to revenue for us to do more, is that... Troy Mastin - William Blair & Company: Yes. How much worse might things have to look in Shoppers for you to be willing to consider another drastic action and could that still include or could that include circulation, more circulation cuts?

We are going to review, and we review circulation almost on a continual basis. Certainly, if revenue gets worse, that's one additional action we could take. Today, we don't see the magnitude of the circulation that we took out in the second quarter that we could take out on a going forward basis given today's environment. Obviously, if the environment changes, that could change. But as of right now, that doesn't look like it's in the cards. Troy Mastin - William Blair & Company: Okay. And then is there any thing that you can point to or look at that might be a light at the end of the tunnel for Shoppers? Just curious. Are there any anecdotes you might be able to provide from the front line that can help illustrate the real challenges you are facing? And then is there something you can point to for us to provide evidence or at least some comfort that this is a temporary issue and not a long-term secular issue? I know there is a lot of questions in there, but --

Okay. Let me start then. Anecdotes from the front line. We present to an advertiser who is a furniture dealer in Florida a program to try to help them accelerate sales that we will give them preferred position, we'll give them some free stuff if they do this and if they commit to us for a year. The response is don't talk to me about a year; I don't know if I am going to be in business in six months. So those are anecdotes. The markets are very tough right now. This is a business that has worked for our advertisers and for a lot of our advertisers, it has been the primary advertising medium they have used and they have used it to drive traffic and drive leads. It is still performing well, but is it delivering as many leads in traffic as it did two years ago? The answer is no because the markets are down. In terms of you asked the question about why do we not think this is a permanent decline or a long-term decline? This business for a decade between 1997 through 2006 grew at a compounded annual growth rate at the top line of over 7%, and that was virtually all organic. During that same period of time, if you look at other media, certainly no one performed in those markets like we did. And it was also very volatile whereas ours was right 6%, 7%, 8% each and every year for a decade. We started declining, we started getting a little soft in the third quarter of 2006. If you look at other media, and they have been declining or rocky for a long number of years. The correlation between the softness in our business and what's happened in the housing market is 1 to 1. So it is not a coincidence. The Internet did not start on October 1s of 2006. Craigslist did not start on October 1s of 2006. We have a completely different business model than the newspapers, we have saturation delivery through the mail, we don't count on people buying the newspaper. People don't come to us; they come to us a directory for their local markets; they don't come to us for news, which is becoming increasingly irrelevant in the newspapers. I mean I think the only thing that our Shopper business and newspapers have in common is that we both use newsprint. It's a targeted vehicle, it's a highly efficient and effective advertising vehicle for our advertisers and it will continue to be. And when these markets stabilize and these are great long-term markets, we are going to come out of this stronger than when we this started going down. Troy Mastin - William Blair & Company: Okay. And then I had also asked if there is anything you can point to that might be a light at the end of the tunnel.

Didn't I just do that? Troy Mastin - William Blair & Company: Okay, enough said. Thank you.

Thank you. Our next question comes from Michael Kupinski from Noble Financial.

Thank you for taking the question. In the fourth quarter of 2006, Dean, I was just wondering did you have a net positive impact on revenues with the acquisition of Aberdeen netting out the divestiture. I was just wondering if, or was that that basically netted out each other.

In the fourth quarter of '06 --

Correct.

It was slightly... we had slightly more revenue from the acquisition than we would have had in the fourth quarter of 05 from the disposed company. But it was... total impact on Direct Marketing had been well under a percent.

Okay. And then just following up on the circulation question in Shoppers, can you tell me in terms of the added distribution that you had over the past 18 to 24 months, are those areas now... I would imagine they are not profitable right? But I was just curious on how they were trending. Were they trending well? Are they just trending sideways or can you just get any color on how the added distribution is kind of looking on the profitable standpoint? Thanks.

Yes. So you're talking about last two years of circulation --

Expansion.

Expansion other than obviously the ones that we shut down.

Correct.

Let me... if you can bear with me. They're certainly not performing... listen, our entire business was down and it's certainly impacting our new expansions as well. But generally, the expansions that we've done in the last 24 months are all profitable other than the ones that we shut down.

Okay, great. And then I was just wondering about the company's international plans. I was just wondering if you'd just highlight your strategy there in light of some recent news there.

I'm sorry, Mike.

The international expansion, what your thoughts are in terms of --

Are you referencing the option agreement that we entered into?

Correct. Correct.

We are continuing to look at international as an opportunity for us in the future. The options require a company that was to... it's a relatively small transaction that will provide a capability that we do not currently have on site in Europe.

Can you size the amount of... the potential there of the options? I mean are we talking like $10 million, $20 million --

It's below $10 million acquisition, option acquisition price. It's a formula-based option, so obviously it could grow, but the expectation is it will be below $10 million.

Okay, great. Terrific. Thank you.

Thank you. Our next question comes from Edward Atorino from Benchmark.

Have to do with this restructuring charge. Thanks for taking the question. I noticed your corporate jumped up a couple of million bucks. But would half of that be the restructuring allocation in corporate or something like that?

Yes, I think we filed an 8-K in August I believe that detailed some of those restructuring charges, and some of those were...

I'll go look that up. Second question, there have been some articles here and there in Ad Asia [ph] and other places about companies that have used traditional medias looking to direct to consumer media, which is sort of your business. Are you seeing any noticeable increases or new categories or CPGs moving to your business or anything that would suggest that there is sort of more of a movement toward the direct to consumer and away from the traditional media?

Well, that is a trend, the trend away from mass media to targeted media is a trend, secular trend that I think has been talked about over a number of years. I don't think, Ed, we have seen anything recently that we can point to as dollars moved from this budget to another budget.

Gotcha.

I think what you are gong to see is over time, you are going to look at growth in mass media versus growth in targeted media. And I think the growth in targeted media will exceed the mass media growth.

But no new guys showing up on the doorsteps here midway?

New categories?

Yes. Yes.

No, not particularly.

Okay. Thanks very much.

Thank you. Our next question comes from Hester Chang from Merrill Lynch.

Hi, thanks. Sorry about that earlier. Had some technical difficulty. Anyway, just wanted to ask a little bit about Shoppers again on that acceleration in decline and really what kind of magnitude we might see in the fourth quarter. Could be double-digit in the fourth quarter given that I mean you saw double digits here or the comparison last year fourth quarter is easier since the slowdown already started. Any sense of that at this point?

Well, Hester, I think you have, continue to have the impact of the circulation shutdown in the fourth quarter. So there is a couple of points of revenue out of there. We have seen an acceleration of the rate of decline throughout the first three quarters of the year. And we are not going to... comfortable sitting here giving you a fourth quarter Shopper revenue number, but we expect a continuing decline in that business in Q4.

All right, that's fine. I guess on the Direct Marketing side, comparisons like you mentioned, do you get tougher. I am wondering it's particular tough in the hi tech/telecom category. Can you really see some more wins there or is it existing client spending really increasing, which is why you saw the strength in Q3 as well?

Are you talking about a Q4 over Q4 comparison?

Yes.

Well I think some of the Q4 increase in hi tech/telecom was based on an acquisition we made at the end of the third quarter last year. In other words, we sold the business about the same time that had a heavy component of financial customers or services for financial customers. We brought a business that had a heavy component of services for hi tech customers. So a lot of the quarter-over-quarter growth was driven by the acquisition last year in 06. So I don't know if the hi tech/telecom comparison on that, and we still have that business going into the fourth quarter of 07.

Okay, all right. And pharma also benefited last year from some Medicare changes and plan sign ups. Can this category see double-digit growth or is it going to be more like the single digits that we are seeing now?

Well, remember, our category is healthcare pharma, and I think our healthcare business did have a lot of Medicare, Medicaid revenue last year. We will now see that this year or we won't see it to the magnitude. But the pharma part of the business has shown very nice growth and we expect that to continue. So it will certainly be dampened when you combine the two verticals together. But the pharma business is growing quite strongly and the healthcare business will have a very difficult comparison in the fourth quarter.

Okay. Great, thank you.

Thank you. Our next question comes from Mark Bacurin from Robert W. Baird.

Yes, just one quick follow up. Dean, on the $14 million of cost savings you are talking about coming out in '08, are you... is it set... are you basically saying it's obviously the $7 million of one-time charges in '07 don't occur in '08 is that half of the 14 that you are picking or is there an incremental 14 even excluding the 7 that you have... it's been a long time.

Let me run you though an example of the calculation. So that... to answer your question. If there was a person making $200,000 a year and their position was eliminated and that position was eliminated on June 30, 2007. We have paid that person $100,000 in salary and let's assume the severance charge was $50,000. So in 08 we will have $150,000 of cost less cost associated with that person even though there annualized run rate was $200,000. So with the $14 million take into account, the one time cost and the actual expense that we incurred for that person activity lease whatever in 2007. So the year-over-year cost including the one-time charges is $14 million. The annualized run rate, however, is probably a little greater than $14 million, but the net impact between 07 and 08 will be $14 million.

Yes, great, that's helpful. And then obviously there will be growth in other areas of the business, so it's not logical to assume that you would see an absolute reduction in expenses of $14 million or so in '08, is that fair?

That is correct.

Okay.

As I said, there are... obviously, you can't look at this in a vacuum.

Yes, great. Thank you.

Thank you. Our next question comes from Fred Searby from J.P. Morgan.

This is Jason for Fred. Just wondering what was your organic growth in the quarter.

Organic growth in the quarter? For the company?

For the company as a whole?

I mean basically what the reported number is.

Okay. Okay, there was an acquisition impact. Okay, thank you very much.

[Operator Instructions]. Our next question comes from Avi Steiner from KBC Financial.

Thanks for taking my question guys. Several here. First off, did I hear you correctly that San Diego is a one week impact and did I hear the number under a million bucks? And then I've got a couple of follow ups. Thank you.

Avi, the fires aren't out yet. To the best of our knowledge, we know that next week's revenue, because no one was doing this week expect evacuating their homes, will be significantly light of what the average week is and the variance we are expecting to be under $1 million.

Thank you. And a couple of other things here. Could you just talk about the financials and how we should think about that vertical going forward? And can you also talk about if you have that available, how you have performed or how the results were overall and maybe by the two silos in the last session, particularly in your latter... last average session. And then I've got one last follow up. Thanks a lot.

In the financial vertical, as we discussed earlier, this has been a vertical that has been challenging for us. In this quarter, we certainly had some kind of... we're still fighting against the year-over-year loss of a large financial customer that we had talked about last year. That will still happen in the fourth quarter as well. We'll be coming against that.

When does that cycle through? And I apologize.

That will cycle through at the end of this year, I believe.

Okay.

We also... we do not have revenue out of the... the acquisition... selling the customers... selling the business that had financial revenues, that goes away in the fourth quarter. But we are seeing some weakness in primarily right now the credit card business as a result of what's happened in the credit markets and the spillover from the sub prime is also now impacting credit cards.

Okay. And then the recession question?

Recession... the last recession was at least the one I remember was 2001, 2002 and 2003. Our Shopper business performed as if no one told them there was a recession. We grew top line over 6% during that period of time and bottom line even greater than. Our direct marketing business during the last recession, we did have revenue deterioration at the top line about 9% from up 2000, 2001 and another 4% from '01 to '02.

Okay, that's helpful. And then very last thing, somewhat bigger picture. So, you clearly don't have a ton of leverage and not a ton of debt even buying back shares, paying the dividend. I am wondering do you look at or potentially consider acquisitions maybe to grow scale in either one of your two silos? Thanks a lot.

Yes, we certainly as a company have a history of acquisitions. We certainly continue to look at acquisition. In terms of scale, our Shopper business is a local geographic business. We have scale in the geographic markets that we are in. So there really are no benefits of scale from acquisitions in the Shopper business.

How about moving into new markets or maybe looking at a part of a business out of valatance [ph] or something like that?

New markets, we would certainly look at acquisitions of shoppers and shopper-like properties in new markets if they were of a large enough size and they had enough of a franchise and a brand. We did buy Tampa about two and half years ago. So, yes, we'll look at those opportunities.

Okay. Thanks a lot guys.

Thank you. We have another question from Mr. Fred Searby from J.P. Morgan.

Thank you, Dean. A couple of questions. Just can you give us... I don't if this has been asked... but the interactive revenues for Shoppers and what the growth rate was there as a percent? And then secondly, just to drill down a little bit on the financial category, it wasn't great, but it probably wasn't as bad as some people might have thought it would be. Can you give us some sense as to what really... which verticals in financial you are serving and what the trends are there? Thank you.

Okay. Fred, on the digital revenue side, we have not reported what our digital revenue is. We are certainly tracking it internally. But there are all kinds of questions. If you buy a print ad in our publications, you get up on the website, some newspaper companies allocate the purchase price. We do not. We count it all as print revenue. And so the only revenue we are counting is incremental revenue from upsells. So we have not disclosed the digital revenue. It is... I said earlier in the call that percentage increases can fool you, so I won't tell you what's the percentage increase. But we have good traction, but they are very small numbers right now on this pure digital revenue. The second question, Fred, I think you asked about drilling down on the financial side of it?

Yes.

We had very little direct exposure to mortgage. So that really hasn't impacted us. I did... I have mentioned a couple of times now the loss of the customer, that continued impact in the quarter, the sale of the business that impacted in the quarter and weakness in the credit card side of the business. We have shown some pretty good results out of the insurance side of the business.

And just on the credit card, I mean everyone is talking about this. I think that there is kind of a freeze there. Can you give us a sense do you have any indication from any clients when they'll pick that up or is it like everyone else waiting for the dust to settle, no idea whether that's in a quarter or two or a year or two from now?

Yes, let me tell you a couple of things. First of all, credit... of our financial vertical, credit card is well below half of the revenue and it's actually below a quarter of the revenue in our financial vertical. So certainly, there is an impact, can be some impact there. But it's not one of our larger sub categories, if you will. But to answer to your question, I don't know about what's going to happen specifically in that market in terms of the future.

Okay, thank you.

Thank you. Our next question comes from Troy Mastin from William Blair & Company. Troy Mastin - William Blair & Company: Yes, hi. A couple of quick ones. Can you give us an update on the search for your replacement, Dean, as CFO?

It is still ongoing. Troy Mastin - William Blair & Company: Okay. And that being... do you have an expected timeline or anything or just stay tuned?

Stay tuned. Troy Mastin - William Blair & Company: Okay. And what's your feeling on the leverage level you are comfortable with? You are still pretty lightly levered. You did say you continue to buy back stock. I am just curious if that's changed at all. I have heard you talked about the numbers in the past. Do you care to comment there?

In terms of... we are certainly comfortable at our current leverage level and we would be comfortable at a higher one. We added about one turn of leverage over the past 18 months and we'd certainly be comfortable adding that amount over 18 months or less. Troy Mastin - William Blair & Company: Okay. And then finally, in terms of competition for Shoppers, have you seen any of the competitors in those markets falling... going out of business and what does that mean long term for the Shoppers business, if you have seen it?

There is a lot of churn in the competition. There are things that pop up, there are things that disappear. These are primarily rack products or mailed four colored glossy products. A lot of these are new businesses. We know the impact on us, the impact on new entrants is usually worse than that. We have got a business that delivered this quarter... we've still got a business that delivered $105 million of revenue this quarter and $20 million of EBITDA. So this is a big, good business. Some of our competitors are much more thinly capitalized and don't have that kind of scale. Troy Mastin - William Blair & Company: Has there been a mass exodus or even a minor exodus from the business from what you see?

I certainly wouldn't characterize it as a mass exodus right now. I think it's pretty confusing in the market right now. Troy Mastin - William Blair & Company: Okay. Thank you very much.

Thank you. And I would now like to turn the conference back over to Mr. Hochhauser for your closing comments. Sir?

Thank you. We appreciate all of your questions and Dean for those answers. Have a great day.

Thanks everyone.