Harte Hanks, Inc. (HHS) Q1 2008 Earnings Report, Transcript and Summary

Welcome, and thank you for joining the Harte-Hanks Q1 2008 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. Now, I will turn the meeting over to Mr. Dean Blythe, President and CEO of Harte-Hanks. Sir, you may begin.

Good morning. On the call with me today is Doug Shepard, our Executive Vice President and Chief Financial Officer; Jessica Huff, our Vice President, Finance and Controller; and Bryan Pechersky, our Senior Vice President and General Counsel and Secretary. Before I begin with my remarks, Bryan will make a few brief statements.

Thanks, Dean. Our call will include forward-looking statements. Examples may include statements about our strategies, initiatives and business plans, financial outlook, competitive factors, business and industry expectations, and other statements that are not 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 these risks and uncertainties can be found in 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 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 Dean.

Thanks, Brian. Much like 2007, the first quarter of 2008 was a tale of two businesses for Harte-Hanks. Our Direct Marketing business continued its steady topline growth in the quarter and profits grew in line with this revenue growth. For anyone who can read, has an Internet connection, or owns a TV, it's no surprise that the external environment is confusing and give plenty of thoughts for caution. While we have maintained a very steady revenue growth rate in Direct Marketing for the last eight quarters, we're seeing certain customers, particularly in the retail and financial verticals, pull back on planned spending. Growth from other customers and in other categories however more than… has more than offset these reductions. We continue to view our Direct Marketing business as a market leading vibrant business with very positive long-term potential. Our Shoppers business continued to be under extreme pressure. It is well documented that California and Florida where we operate have been devastated by the collapse of the residential real estate market. Consumer spending in these markets has now slowed significantly impacting virtually every category of advertiser we have. This has been a long and steep decline for Shoppers, but with our unique highly effective product that has delivered outstanding results for advertisers for decades, we believe in the fundamental long-term strength and franchise value of this business and that this business will show its resiliency when the conditions in the California and Florida markets stabilize and subside. Given the deterioration in Shoppers results and the overall general uncertainty, we are continuing to focus on removing costs from our businesses. In Shoppers in the first quarter, we reduced the workforce by a further 5% for a total year-over-year headcount reduction of over 12%. We are also reviewing our cost structure in Direct Marketing and have already taken some actions and will continue to look for other places to reduce cost. The fundamental services we provide in each of our businesses are essential to customers in any economic environment and even more so in the uncertain economic times that we are facing. We will aggressively pursue market opportunities that we generate and discover and continue [inaudible] to anticipate and respond quickly to market conditions. While the external environment is nerve racking and our Shoppers business continues to decline in the face of terrible local market conditions, we believe that Direct Marketing and Shoppers are valuable, fundamentally sound businesses. Doug Shepard will now give you some more detail on our results. Doug?

Thank you, Dean, and good morning. Here is a company-wide overview of the first quarter. Revenue decreased 5.1% for the quarter with an increase in revenues for Direct Marketing and a decrease in Shoppers. Direct Marketing revenue increased 4.6% for the quarter compared to 4.2% in the first of 2007. Direct Marketing revenue has increased 16 over the last 17 quarters. Shoppers revenue decreased 20.1% for the quarter. Moving next to operating income, this decreased 28.5% for the quarter. For the quarter, Direct Marketing had an operating income growth of 4% while Shoppers declined 58.9%. In February, we incurred approximately $1.4 million severance costs within our Shoppers division as we removed over 100 associates. Shoppers operating income was 8.6% for the first quarter, and adjusted for severance costs, our operating margin would have been 10.2%. For the first quarter, our free cash flow was $16.7 million versus $23.7 million in the first quarter of 2007. We spent $6.7 million in capital expenditures compared to $7 million in the first quarter of 2007. Turning to our two businesses, for the first quarter 2008 our Direct Marketing revenue increased 4.6% and our operating income increased 4% resulting in an operating income margin of 11.9% for the first quarter of 2008, which was the same operating margin as the first quarter 2007. In the first quarter, our high-tech/telecom vertical market represented 30% of Direct Marketing revenues. Retail was 22%, select markets were 19%, financial was 17%, and healthcare/pharma was 12%. Our top 25 Direct Marketing customers represented approximately 42% of the Direct Marketing revenue in the first quarter. Our largest customer in the quarter represented almost 7% of our total Direct Marketing revenues. Turning to Shoppers, our first quarter revenue decreased by 20.1%, operating income for the… operating income margin for the quarter declined [ph] 8.6% as compared to 16.8% for the first quarter of 2007. Our first quarter effective tax rate was 36.8% compared to 38.7% in the first quarter of 2007. We recognized the state tax benefits, which reduced the effective tax rates compared to the first quarter 2007. We anticipate our effective tax rate for the remaining quarters of the year will be comparable to the 2007 quarterly effective tax rate. On the balance sheet, at March 31st, we were showing a debt balance of $321.3 million and cash balance of $27.6 million for a net debt balance of $293.7 million. Net accounts receivables were $171.5 million versus $199.2 million at December 31, 2007. Day sales outstanding at the end of March 2008 was 59 days, a slight increase over the 57 days outstanding at March 2007. Looking at our statement of cash flows, net cash provided by operating activities for the quarter was $37 million compared to $43.2 million in the first quarter of 2007. We repurchased 4.9 million shares for $76.6 million during the quarter, and we have approximately 10.5 million shares remaining from repurchase authorizations as of March 31st. In March, we now… we entered into a $100 million term-loan facility. Our new term-loan is a four-year facility that has all-in rate of LIBOR plus of range of 50 basis points to 100 basis points based on our leverage ratio. Upon issuance of this facility, we will retire 50 million bridge revolver dated since 2008. In summary, as of the end of March, our debt facilities consisted of $125 million revolver, a $185 million term-loan in the new $100 million term facility. As of March 31, we had approximately $89 million in available borrowing capacity under our revolver and a $100 million term-loan. With that, operator, we will turn the call over for questions. Question and Answer

Thank you. [Operator Instructions]. Troy Mastin of William Blair & Company, you may ask your question. Troy Mastin - William Blair & Company: Thank you. I'm curious why the high-tech/telecom vertical was so strong in the quarter in Direct Marketing, if there is particular customer there, a new business plan, or maybe a subcategory that was strong?

Troy, this is Dean. From a category prospective, it is in the high-tech sector that drover that… and high-tech sector is a larger part of that and there were probably about four to six big customers that had good growth. So it was more, it was widespread, it was existing customers spending growing in that vertical. Troy Mastin - William Blair & Company: Is this kind of that growth that can continue or do we have a tough comp coming up? I'm just thinking Direct Marketing growth going forward? If this vertical stays strong, maybe you can kind of fold in similar growth rates going forward, [inaudible] got a tough comp, is there a risk of deceleration there?

Are you talking about the vertical, Troy, or the overall? Troy Mastin - William Blair & Company: Well, it seems like that vertical drove most of the growth of your all business, and I don’t know if you've got a tough comp that we should be thinking about or if there is some reason [inaudible] grow as robustly to where it might face a deceleration in Direct Marketing business in the next few quarters?

Yes. Certainly, high-tech was the driver of the growth in this quarter. I don't anticipate that we have any particularly tough comp coming up, but obviously to generate growth longer-term we need to have more players contributing to that growth rate. So, we do need get some, or the other verticals growing in order to generate sustained growth over time. Troy Mastin - William Blair & Company: Okay, good. And then on the Shoppers business, it seems like others, maybe some newspaper companies and other media companies, had success with it. Things deteriorated a bit through the quarter. I'm curious if you saw the pace of business through the quarter get worse and how it looks thus far in April?

Well, Troy, the business is seasonal and first quarter and fourth quarter are the weaker quarters of the four. January particularly is always a very weak month. So there is seasonality within the business. We did… while our revenues were down in the quarter, the seasonality within the quarter did reflect what we have seen historically. I'm not suggesting that… meaning that we're trying the corner by any stretch of the imagination, but March… there was more revenue in March than that was in January, which typically is the case. Troy Mastin - William Blair & Company: In terms of year-over-year performance, if you think about it on a monthly basis was there much variation through the quarter?

No, there really was not… no any significant trend throughout the quarter. Troy Mastin - William Blair & Company: Okay, good. And then, as you think about circulation in Shoppers, I don't think you have announced any additional cuts following to the ones you did last year. Is that something… I'm sure it’s in the consideration set, but what might need to happen in order for you to consider or to actually act on another and what might that mean for margin if you were to do another cut?

I'm sorry. Troy, you said circulation? Troy Mastin - William Blair & Company: Right. You cut circulation last year in Shoppers. I'm sure you would consider it again if you needed to. I am just curious what would have to happen for you to consider another circulation cut and what that might mean for margins?

Well, we evaluate circulation on a continuous basis. You have to remember that there is... [inaudible] there is more profitable and less profitable circulation and we still have certain areas that are unprofitable in circulation. But you are not always going to have 100%… and we have over 1000 zones, you are not always going to have 100% of your circulation making money. So we are going to consider circulation, but I do not anticipate that we will take any further circulation reduction this year of the magnitude that we took last year. Troy Mastin - William Blair & Company: Okay. And then on your severance in Shoppers, it sounds like that all hit in the Shoppers units. I want to just confirm where it hit on your P&L as you reported, if it was all in payroll or some of it landed in SG&A?

It's all in the labor line. Troy Mastin - William Blair & Company: Okay. And what about cash versus non-cash?

I'm sorry cash versus non-cash? Troy Mastin - William Blair & Company: Was it all cash incurred in the quarter or were there some reserves that [inaudible] so did it all hit the cash flow statement?

Yes. Troy Mastin - William Blair & Company: And is the additional severance probable in the next couple of quarters in Shoppers? And how much further might you be able to go before you start to cut into the muscle and bone of the organization?

Troy, we are going to operate the business in the most efficient and effective manner we can. The revenue picture will determine some of that. So there may be additional severance as we move forward and performance will dictate that. The revenue performance will also dictate how much more we can operate. There is still things that we can do and still have a vibrant business. Troy Mastin - William Blair & Company: Okay, good. I will let someone else ask questions. Thanks.

Karl Choi of Merrill Lynch, you may ask your question.

Hi, good morning. I have a couple of questions, one, in Direct Marketing. I'm curious about the… something that you have in the press release talking about maybe having a better margin performance going forward. Just wondering if that is related to some of your cost reduction efforts that recently took and that should we… sort of similar to Troy's question, should we expect severance in the Direct Marketing business in the second quarter.

We have taken... we have looked at our business in Direct Marketing and we have taken some actions. Some actions were actually taken after quarter close and there are expenses associated with that in terms of severance. That… those the actions and others that we will review and take as we go forward, we anticipate will lead us to deliver greater profitability on our revenue. So, yes, I do think we will see improved margins based on specific actions we are taking.

Any way to size the amount of severance that will be coming?

Really at this point, no. I mean it will probably be of a magnitude in the vicinity of where we saw in the Shoppers business or less, I would guess.

In Q1?

Correct.

And in the Shoppers business, could you remind… refresh our memory how quickly you are going to be seeing the impact of the recent paper price increases? I seem to recall it hit your results. And also just want to confirm that postage will also rise by 3% for you?

Yes, postage does... is increasing May… end of the May I believe and in that range. And your other question about paper prices, yes, we do... some of our contracts with vendors there is somewhat of a lag in paper prices. So we do expect paper prices to begin impacting us in Q3 if not a little sooner.

Great, thank you.

Paul Ginocchio of Deutsche Bank, you may ask your question.

Thank you. I think [inaudible] said that they were looking for in the second quarter similar declines, in the first quarter there will be a lot of Florida and California exposure. Do you think that's possible with the Shoppers division or I guess what’s the outlook right now? Thank you.

Well, this is a business we have Friday deadlines, and so next Friday I'll tell you… I’ll know what the revenue is for this week or for next week this coming Friday. Visibility is difficult in the business and predicting revenue going forward basis is very difficult. I would certainly hope and expect that we can firm up some revenue as we move through the year at least on a comp basis as we face easier comps.

Okay, thank you.

Alexia Quadrani of Bear Stearns, you may ask your question.

Dean, just following up on that question right there. I guess what you have seen in just the first couple of weeks of April, we should assume then that the… what you have seen so far in Q1 is sort of tending into April, understanding that obviously we don't have that much data about Q2 yet.

Are you talking about on the Shoppers business, Alexia?

Yes, sorry, the question just now on the Shoppers business.

I mean, let's put it this way. We haven't seen anything that is a market change from what's gone on up through the first quarter.

And then on California versus Florida, are they trending pretty similarly or is there one market worse than the other?

From a revenue perspective, they are trending similarly.

And just changing gears, looking at Direct Marketing for a minute, you’ve obviously had some very good solid growth in that market… in that segment despite what is going on externally. Would you just give us a bit color whether the type of work you are doing for your clients in Direct Marketing hasn't changed at all over the last several quarters as the economies got worse or in terms of which elements of Direct Marketing can be using [inaudible]? I'm just trying to get a sense of whether or not your clients have sort of adjusted their marketing plans, but [inaudible] have not yet done so yet?

As I mentioned in my remarks, we clearly have seen some financial customers adjust their anticipated spending and what they are doing. I think a lot of the acquisition work is... has declined in that vertical. Retailers, again we're seeing a lot of… in the market a handful of bankruptcies already in 2008 and rumored or projected bankruptcies in that market. So I think those two we're seeing the most impact in terms… not impact, the most activity in terms of market adjusting to the environment.

But I guess the other core than more of the same, just maybe --.

Are you talking about service line?

Yes, I'm talking about service line.

We always have variations in service line revenue from quarter-to-quarter, but no market trends over the last two or three quarters.

Okay, thank you.

Edward Atorino of Benchmark. You may ask your question.

Hi, thank you. First, what were the shares at the end of the quarter… the average shares for the quarter, what were the shares at end of the quarter?

I am sorry, Ed, the actual share --.

Yes, both will be good.

Okay, 63… a little over 63 million.

Diluted?

Actual share.

Actual, and then fully diluted will be a couple more, I will figure it out. Second, it looks like the costs in the Direct Marketing were up about 5% for the quarter. Is that… a little bit higher than I would have thought I think. Is that a number that you can't bring down a little bit or can we hope to see a little better cost management going forward?

You will see better going forward. It was slightly… under 5% increase.

Okay. I guess my calculation was wrong, anyway.

It is about 4.6.

That’s right, 4.6. I was looking at the wrong one.

Some of that was… we also had an acquisition in there, which had just a little lower margin and that was a couple of tenths of a point, but yes. As I said, both in the press release and in prepared remarks and in response to a question, we are looking at all of our businesses, given the uncertainties. We have taken action and we do expect to give… drive improved profitability out of that business.

Okay. Thanks.

Dan Carmen [ph] of BMO Capital Markets. You may ask your question.

Thanks for taking my call. You guys have been very upfront about the lack of visibility in the Shoppers business and rightfully so. On the Direct Marketing side, not to say that there is necessarily a lot more visibility there, but are there any… certain catalysts that you point us to on how that business… all know that it has been doing quite well consistently, could perhaps move up even further? And then the second question, obviously strong share repurchase this quarter, how should think about where you start to max out on that in terms of leverage levels? Okay, thank you.

Okay, Dan, just to make sure that I got… the first question was… did you have Shoppers question or was it a Direct Marketing question?

No. On Direct Marketing, how… anything that you could point to for us to understand how that business would… not only to continue consistently well, but perhaps even perform a little bit better?

From a topline perspective?

Yes, mainly.

We do have better visibility in that business somewhat. I mean just the business itself has better visibility than our Shoppers business because of the business model. But the visibility is not based on conversations with our customers and plans that our customers have, which can change over time.

Right.

And that’s… as a matter of fact when we had some revenue declines in 2001, we have visibility in what we thought were customers changing plans as they moved forward. So our visibility today looks good, but we are obviously cautious given… when you pick up the paper every day, when Starbucks is saying coffee sales are down because of the housing market, as I said it gives cause for caution. We could certainly… our revenue growth is a combination of existing customer spending and new business that we bring in. I don't really know… and it would be a combination of those and particularly if we can get more… looking for more growth out of our existing customer base to drive performance above and beyond what we have been seeing.

Okay. And on share repurchases?

We did, we repurchased 4.9 million shares I believe in the quarter. Yes, we believe given the current prices that we're seeing in the market, there is probably no better use of our free cash flow. The financing markets are very difficult right now. But let's not… sometimes it's less a question of leverage than it's a question of credit availability out there in the market on terms that you want to sign up or for a longer-term period. But we do believe use for free cash flow to buy back shares is appropriate, given current prices.

Okay, thank you. That's very helpful.

Mike Kupinski of Noble Financial. You may ask your question.

Thank you for taking the question. Can you remind me how much of the revenue decreased in the first quarter in Shoppers with some circulation cuts last year?

I think it was about 2%, Mike.

Okay. And then Direct Marketing, I know that a lot of people have been trying to ask questions about what your thoughts are going into the second quarter. Direct Marketing faces an easier comp in the second quarter given the termination fee in 2006. Can you give us some color on how the business is pacing in the second quarter? Is it in line with the first quarter growth?

Mike, you’ve thrown me on the comp question. I am not sure I--.

Obviously, you’re saying that your… the second quarter is facing an easier comp. You posted like 4.6% revenue growth in the first quarter versus 4.2% a year earlier. And I was just wondering are you pacing at the level of the first quarter growth going into the second quarter, are you seeing stronger growth?

Well, we don’t… I’m not here to project revenue for Q2. I just want to caution though that after the termination fee in '06, which was two years ago, our revenue growth in Q2 was similar to the growth in '07. It's similar to the revenue growth in Q1. So I don't think...

I think I had it as a core, like 5.3% core growth.

Yes, I’d just say something in the 4% range, and we had 4%… I think it was… this is basically the same… '07 revenue growth adjusting for that one-time fee was the same in Q1 as it was in Q2. I am just saying I don’t… we don't necessarily do that as we got to an easier comp.

Okay. And there was a significant acceleration in the rate of growth in the first from… sequential growth from the fourth quarter, and typically I think that you guys do sell some software sales in the fourth quarter. Is that right, like the Trillium software sales, doesn't that usually follow the fourth quarter?

I am sorry, Mike. Again the percentage growth rate in Q4 was 4.1% and the percentage growth rate in Q1 was 4.6%. The absolute dollars declined by $25 million, that's seasonality.

You said it was seasonal… seasonality, right?

Yes, that's all seasonality because [inaudible] primarily was driven by retail in the fourth quarter versus Q1.

Right, I guess my question is were there any extraordinary items in the first quarter like software sales, things like that, that would have kind of accounted for a little bit of that boost in revenue growth in the first quarter?

Well, we had… we did have an acquisition that added about a point or so of growth in the quarter, but other than that, no.

Okay. All right, thank you very much.

[Operator Instructions]. Mark Bacurin of Robert W. Baird, you may ask your question.

Hi, good morning. Most of my questions have been answered, but I guess to dig in on the high tech/telecom vertical for a second, if I’m doing the math correctly, it looks like that business was up something north of 20%. I know you said it's pretty broad based with five or six customers, but I was hoping that maybe you could drill down on specific vertical, where the demand is coming from, is it wireless carriers, is it PC, and then the nature of the work in terms of is this occurring once a month type mailing that you're doing or is it more project based building database, etcetera?

Mark, as I said earlier, it’s more in the… it’s in the high-tech side as opposed to the telecom wireless side. There is… well, actually there is a little bit of both that we've got there. It's a mixture of work in terms of it’s related... there is some of wireless in there, there is some gaming in there, there is some infrastructure, B2B routers and things in there. So, there is a mixture of stuff from the type of business that we're doing within that vertical. And I am sorry, Mark, what--?

The other was just the nature of the types of project, is it kind of front-end project?

This is more recurring type of work as opposed to one-time work.

Okay, prefect. And then, within the healthcare/pharma vertical, obviously you've seen I guess a drop off there. Is that a nature of some tougher comps from last year or are you actually seeing contraction in spending among some of your bigger customers there?

No. Again, I think it's said in the release that it's driven by… the decline was primarily driven by the healthcare side of that. The work we primarily do in that relates to membership and enrollment work and that has taken a decline for a verity of reasons including some customer spending less, including some lost customers, including some declines in work. And on… the pharmaceutical side was better in the quarter and that was a mixture of customers up and down. Some impact of some recent news in terms of drugs has impacted some of the revenue in that vertical, but over time we still feel good about that vertical that it did have a difficult quarter.

Great, and then I guess just finally, I know you don’t give specific guidance, but I am just… as you are looking at the margin both in Direct Marketing and in Shoppers, are there specific levels at which… obviously the revenue side is a bit unclear at this point, but are there targeted margin levels that you are hoping to achieve or I guess thinking about taking more aggressive cost actions to get margins to a certain level with revenue trends continuing to deteriorate beyond where they are today?

I think I’ve made comments about Direct Marketing margins. If you look historically at our margins in Direct Marketing, Q1 historically has been the lowest level throughout the year given the revenue… the way the revenue lays out over the year and the seasonality of the business. The Shoppers business, obviously we’ve had a significant amount of margin deterioration and we are taking… we’ve taken actions that will… hope will alleviate some of that, but a lot of that will depend upon the rates of revenue declines and whether those start to lessen and eventually go to flat.

Is there any reason to think that business long term can't get back to a 20-ish percent type operating margin? I mean, obviously not over the next year or two probably, but --.

Yes. Fundamentally, yes. If we can get back to revenue levels, we think fundamentally we can get back to those margin levels and we can probably get back to those margin levels with less revenue as we move forward, but we could… we're going to have to see revenue stability first and then revenue growth in order to achieve those margins.

Okay, thanks.

Edward Atorino of Benchmark, you may ask your question.

Hi, if you look on further on a quarter-to-quarter basis, you've been taken out about kind of $11 million, $12 million, $13 million in cost per quarter now for the last three quarters in the Shoppers business. Are you getting sort of near what point where you've hit the… sort of a bottom in terms of your ability to pick up cost and running fourth quarter $83 million, first quarter $80 million, and if you’re just sort of in that $80 million range is there more room to take costs out of the Shoppers business, I presume there is, I'm trying to get how much more room?

Yes, there is certainly room to take more costs out and we're continuing to work on things both productivity enhancements as well as other variable costs that we have.

[inaudible] can you take out $12 million more per quarter.

$12 million more per quarter?

Yes, if you look at $80 million costs… actually, I think I took out the one-time bills [ph], there is roughly $80 million… you’ve got [inaudible] charge in there, to take the charge out it’s actually down about the first quarter of '08, $80 million in operating expenses versus $93 million a year ago and that included the 1.7. So it’s been remarkable and tremendous job in getting costs out, just wondering if that can go on?

Ed, obviously over time it gets more difficult, but we're still working on the problem. Some of the cost is variable associated with the revenue.

Oh, yes.

You have paper costs, you have some postage costs that's very long terms over a rate, like postage, and to the extent that we have less revenue then we publish fewer pages, which means we have less --.

You mention paper. Let me ask the question in a different way. If I look at the… can you run this business to a 10% margin even in dire topline circumstances?

Yes.

Okay. Thanks.

Troy Mastin with William Blair & Company, you may ask your question. Troy Mastin - William Blair & Company: You may've kind of answered this in the last question, but I'll ask it anyway. So, it looks like by my math you lost about… if you look at your revenue decline in Shoppers, year-over-year about 40% of the revenue decline you lost in operating profit. Is that a reasonable expectation, at least for the near term, that for every lost revenue dollar in Shoppers you’ll lose about $0.40 in operating profit, say, over the next year or so?

Yes. Just look at the last five quarters, and Q1 of '07 we lost $1.05 for every $1 of revenue. In Q2, we lost $0.68, in Q3 I think we got a down through about $0.30, in Q4 about $0.28, it bumped back up to about $0.43. So don't… it's going to bounce around and it's going to depend on the absolute rate of revenues differential, of revenue variance. Yes, I mean I would… our goal is to check down as low as possible and it's going to depend on the rate of revenue variants. Troy Mastin - William Blair & Company: But if you're in a similar range of revenue decline for the next few quarters, those are reasonable [inaudible] those are reasonable numbers that you just gave, fair statement.

Well, I just gave you a range between $1.05 and $0.28. Troy Mastin - William Blair & Company: I am ignoring the $1.05. How about between $0.68 and $0.28?

Yes. Troy Mastin - William Blair & Company: Okay. And then on Shoppers, how is pricing and how is the competitive landscape there?

Well, in a market where our competitors as best we can tell are not doing any better than we are and we know some of them are doing worse, you can imagine there is obviously… the competition for revenue is intense and we're seeing… we are having… part of the margin decline is related to pricing in Shoppers. We are… particularly in the Distribution side of the business where there are more direct competitors we are seeing pricing impacted on that level more than the ROP side, but yes, the competition is fierce. Troy Mastin - William Blair & Company: Can you give some order of magnitude maybe for the whole portfolio, how much price is down versus other factors?

In terms of… there is too much movement in variability within that. If the volumes, it's revenue volumes that are going down that’s impacting our performance much more than pricing, but there is an element of pricing in there. Troy Mastin - William Blair & Company: And I guess there is probably not precedent for this, but I'm curious how… as the environment gets better how easy it might be to get price back, how easy you think it might be?

Troy, that… we will worry about that when that happens and that will be a good problem for us to solve. There are too many variables to predict how that will happen in terms of pricing. But I suspect though there will be... when this is all over, and it will end, there will be fewer competitors out there than there are today, which may have a positive impact on pricing. Troy Mastin - William Blair & Company: Okay, and then a final one on the Direct Marketing business. You mentioned the retail, financial verticals pulling back, those two segments were flat in the quarter. I am curious if you can give some order of magnitude of how much of a pullback there is. So there must be some new business in there or there must be some organic growth among other competitors those that aren’t pulling back, some idea of how of a pullback we are seeing and some the others [ph] that are pulling back?

As you said those verticals were flat, while we have seen some customers change their spending we have seen others within those verticals grow and we have got some new business in both of those verticals and they’ve offset the decline. As I said, the acquisition people, primarily… the interesting thing about our financial vertical is that we've struggled in that vertical for a number of years I guess, and when we looked at... when everyone else in financial was doing really well, it was being driven by mortgage and credit card, and today… we never were big players in the mortgage and relatively not very big players in credit card as well and so as... those are the two hardest hit in the financial, so I guess we’re benefiting… we didn't participate in the upside of that and we are benefiting today that we don't have a lot that business that we are losing. Troy Mastin - William Blair & Company: Okay, thanks.

[inaudible], you may ask your question.

Going back to the margin question, can you tell us why the margin has been down year-on-year basis [inaudible] marketing?

It didn't, it was 11.9% in Q1, 11.9% in Q1 of last year.

Was that within the EBITDA margin?

Yes.

For the charges?

Yes.

What's the EBITDA in Q1 of '07?

It was higher than it was in Q1 of '08.

So, you're saying the margin’s actually up --.

[inaudible] margins.

EBITDA margins.

I'm sorry?

The EBITDA margins.

Right.

It seems like they went from 16.2 to 15.7.

Yes, they did.

And why… and how [inaudible] margins going... why didn’t that happen and what… how should we think about it going forward?

As I talked earlier, think about it on a going forward basis. We're looking to drive in terms of profitability in that business. We're taking action and anticipate more leverage out of the revenue we're seeing on a going-forward basis.

Right. And why the margins were down again on an EBITDA basis?

Well, because we had more expense that we… we had more expenses than we should have.

Okay, thanks.

Karl Choi of Merrill Lynch. You may ask your question.

Hi, I just want to follow up on the question on share buyback knowing you intent to use, if not all, but most of your free cash flow towards buyback at this point given where the stock prices are. But should we expect [inaudible] buyback at least in near terms to be similar to the first quarter, given the… where your stock price is?

Karl, I mentioned about the financing side of the equation as opposed to the leverage side of the equation, and I think thus gave you a recap of where our financing is. So you probably… on a forward basis until the credit markets stabilize, I’d probably… we probably won't see the level of repurchase that we've seen over the last few quarters. So, I did mention kind of our use to free cash flow now as the way for us to buy back shares, whereas over the past several quarters we view that free cash flow and some increased leverage to do that.

Right. So we should expect you would not be necessarily borrowing to buy back shares, but just using your free cash basically.

I think so, yes, at least be near term.

Okay. Great, thanks.

I would now like to turn the call back over to Mr. Blythe for closing comments.

That's all. Thank you all everyone.