SPMD - SuperMedia Inc

[Junto]

On the eve of earnings, here are my estimates. I think the market is not reflecting the predictability of earnings behind the contract model. Stock closed today at $4.98.

 

Highly levered directory (yellowpages) business. SuperMedia, Inc.

 

General Overview:

SuperMedia Inc. provides media advertising programs in the United States. It publishes SuperYellowPages, the print directories, which offer a range of paid advertising options, such as listing options, in-column advertising options, display advertising options, and specialty advertising, as well as white pages directories. The company also operates Superpages.com, an online local search site that provides advertisers fixed-fee and performance-based advertising options. In addition, it offers direct mailers under SuperpagesDirect name; and Superpages Mobile, an information source for wireless subscribers. Further, SuperMedia Inc. operates as an official publisher of print directories. The company was formerly known as Idearc Inc. and changed its name to SuperMedia Inc. in January 2010. SuperMedia Inc. is based in Dallas, Texas.

 

I am going to leave it to the posters to look at the earnings history and 10-k on the company's website: http://bit.ly/jTURAp

 

Comments on financials:

 

Consider that the average contract is a 12 month term. If you amortize the every GAAP reported earnings over a 4 quarter period, the 2010 revenues were predicted give or take 5% variation. The following is the net additions to revenues attributable to the individual quarter using this simplistic assumption:

 

2009 Q1: $123MM

2009 Q2: $122MM

2009 Q3: $103MM

2009 Q4: $92MM

2010 Q1: $154MM

2010 Q2: $93MM

2010 Q3: $102MM

2010 Q4: $77MM

 

2009 vs 2010 Q-Q Comparison

Q1: +25.20%

Q2: -23.77%

Q3: -0.97%

Q4: -16.30%

 

The largest drop offs were Q2 and Q4 in 2010. I anticipate that these will be the best quarters for improvement in 2011. Either way, if you use the net additions for Q2-Q4 and take a 10% decrease in Q1 2010 sales, you come up with $411MM. However, DEXO reported revenues declines of 16.6% for Q1 this projection would reflect a drop of 23%. If a 16.6% decrease holds true for SPMD, this would reflect new sales add of $173MM for Q1 2010. This would be an increase of $20MM over Q1 2010 or 13%.

 

Historically operating expenses have averaged 71% of adjusted revenues. If you use it as a normalized expense line, you would show the following scenario:

 

Operating Renenues (Flat Q1 2010 + Net Adds Q2-Q4): $426MM

Operating Expenses (71%): $302MM

Operating Income: $124MM

 

Depreciation Estimate: $46MM

EBITDA: $170MM

 

Interest and Taxes Estimate: $83MM

Net Income: $41MM

 

I think this is an aggressive scenario. I just think it should be noted that all is not lost in this stock. I still look for low side revenues of $411MM, EBITDA of $121MM, and EPS of $0.72/share.

 

This provides a range of EBITDA projections of $477MM - $678MM and EPS of $2.82 - $10.77. Debt Reduction of $150MM - $278MM.

 

Any other critical thoughts out there?

 

[Junto]

I was having difficulty with finishing the last post.

 

The company at 5X - 6X Cash flow would have an enterprise value of between $2,385MM to $3,390MM.  Less Long Term Debt of $2,171MM provides for value of $214MM to $1,219MM or $13.81 to $78.69/share with 15,489,936 shares outstanding.

 

Looks like closely to fairly valued on the low end with strong potential upside.

 

[Junto]

Earnings out this morning:

 

Press Release Source: SuperMedia Inc. On Tuesday May 3, 2011, 8:01 am EDT

 

DALLAS--(BUSINESS WIRE)-- SuperMedia (NASDAQ:SPMD - News) today announced its financial results for first quarter 2011. http://yhoo.it/maQ0at

 

Results include:

 

First quarter 2011 advertising sales declined 17.8 percent¹, compared to a first quarter 2010 decline of 20.4 percent;

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were $154 million for first quarter 2011, a 5.5 percent decline compared to first quarter 2010 adjusted pro forma EBITDA of $163 million;

Continued cost management and expense reductions partially mitigated revenue declines, resulting in an improved adjusted EBITDA margin of 35.2 percent compared to an adjusted pro forma EBITDA margin of 30.6 percent in the first quarter of 2010.

 

“This was a productive quarter as our new leadership in sales and marketing introduced disciplined processes and practices to improve the business,” said SuperMedia CEO Peter McDonald. “Overall, we are pleased with the initial reception to our approach."

 

“Research continues to show there is value in core print and online directory businesses, as well as additional opportunities relative to other digital products,” McDonald said. “With the economy starting to show early signs of improvement, we remain encouraged.”

 

Financial Summary

 

SuperMedia reports financial results in accordance with United States generally accepted accounting principles (“GAAP”) and on a non-GAAP basis, referred to as “adjusted and adjusted pro forma”. The non-GAAP basis measures are described and reconciled to the corresponding GAAP measures in the accompanying financial schedules. These results were adjusted for the impact of fresh start accounting and certain unique costs including reorganization items, restructuring costs and certain other non-recurring costs.

 

Reported GAAP operating revenue for Q1 2011 was $438 million versus $154 million in Q1 2010. Adjusted operating revenue for Q1 2011 was $438 million, compared to adjusted pro forma operating revenue of $533 million for Q1 2010, a decline of 17.8 percent.

 

Reported Q1 2011 EBITDA, a non-GAAP measure, was $147 million compared to a loss of $96 million reported in Q1 2010. On an adjusted basis, Q1 2011 EBITDA was $154 million with an EBITDA margin of 35.2 percent, compared to adjusted pro forma Q1 2010 EBITDA of $163 million, an EBITDA margin of 30.6 percent.

 

Advertising sales in Q1 2011 declined 17.8 percent1, compared to a decline of 20.4 percent reported for the same period in 2010.

 

Free cash flow, a non-GAAP measure was negative $9 million for Q1 2011, representing cash used in operating activities of $6 million, and capital expenditures (including capitalized software) of $3 million. Q1 2011 free cash flow includes a federal tax payment of $72 million associated with 2010 tax obligations. Cash on hand as of March 31, 2011 was $165 million.

 

-------------------------------------

 

Key Note is that the Net Sales Adds based on my model was $166MM for Q1 2011. This is an increase of $12MM over Q1 2010 or 7.8%. The largest disappointment in the report was there was no principal reduction in debt for the quarter due to the previously disclosed tax payment and the reduction in payables from Q4 2010. I anticipate mgmt will look to drive a larger principal payment in Q2 2011 to compensate. EPS of $1.91 solidly beat.

[BargainValueHunter]

Market Cap: $28.85 million

 

Cash: $11.61 per share

 

Share Price: $1.86

 

TTM Earnings Per Share: $5.77

 

The problem of course is...

 

$2.1 Billion in DEBT!!!

 

In Prem Watsa's deflationary world-view perhaps they could refinance their debt at ever lower interest rates and let the cash flows over the next few years bring the balance down to more reasonable levels by 2015.

 

So is there any value in SPMD and, if so, where?

[Guest Hester]

So is there any value in SPMD and, if so, where?

 

I don't think refinancing is much of a possibility, and I know refinancing at a lower rate isn't a possibility. Maybe if they can find a bank run only by people that just woke up from a 15 year coma and haven't learned about technology yet. But I think 15YearComaPeople Bancorp folded during the recession :P

 

After all, their business model consists of killing a forest just to supply one yellow page book that can be replaced with one second on google search, and that's as search is becoming more accessible than ever. And that's not ad hominem, that's taken straight from the first page of their 10K.  :P

[beerbaron]

Yellow Media (YLO) got killed today, with a goodwill writedown of 2.9B$... what a surprise to know the goodwill is worthless. I'm not a buyer of the equity but I'm keeping an eye on the bonds, anybody looking at this?

 

BeerBaron

[given2invest]

So is there any value in SPMD and, if so, where?

 

I don't think refinancing is much of a possibility, and I know refinancing at a lower rate isn't a possibility. Maybe if they can find a bank run only by people that just woke up from a 15 year coma and haven't learned about technology yet. But I think 15YearComaPeople Bancorp folded during the recession :P

 

After all, their business model consists of killing a forest just to supply one yellow page book that can be replaced with one second on google search, and that's as search is becoming more accessible than ever. And that's not ad hominem, that's taken straight from the first page of their 10K.  :P

 

haha hester you're the best

[BargainValueHunter]

Yellow Media (YLO) got killed today, with a goodwill writedown of 2.9B$... what a surprise to know the goodwill is worthless. I'm not a buyer of the equity but I'm keeping an eye on the bonds, anybody looking at this?

 

BeerBaron

 

In a similar vein:

 

http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=dexo

 

-or-

 

http://bit.ly/quzKFD

 

and...

 

http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=spmd

 

 

[Junto]

So is there any value in SPMD and, if so, where?

I don't think refinancing is much of a possibility, and I know refinancing at a lower rate isn't a possibility. Maybe if they can find a bank run only by people that just woke up from a 15 year coma and haven't learned about technology yet. But I think 15YearComaPeople Bancorp folded during the recession :P

After all, their business model consists of killing a forest just to supply one yellow page book that can be replaced with one second on google search, and that's as search is becoming more accessible than ever. And that's not ad hominem, that's taken straight from the first page of their 10K.  :P

Certainly has been a terrible cigar thus far...

 

DEXO has also recently written off any remaining goodwill on its books in Q2 2011. I would not be surprised to see SPMD do the same this quarter. 

The business is dying but isn't extinct. It is surprising in rural and outstate markets how resilient the yellow pages still are to the general public. I have contacts that are actually showing year over year gains in their yellow pages business. Major metropolitan areas are slowing but also not dead.

 

Ultimately, it isn't so much the refinancing of the debt that will save the company, but more so the ability to tender the debt for less than face value. SPMD's debt trades at around 50% of par as of June 30, 2011 and likely has declined more in Q3. It still has significant available cash in excess of what general operations need as it provides significant cash flow. The debt does not mature nor require any unscheduled principal payments until March 2015. It does have a free cash flow sweep every quarter that provides for principal reduction.

 

An item that many seem to write off and not consider is that SPMD does have a very active internet website that is in the top 50 unique viewers every month (as measured by Comscore http://bit.ly/pIF7Tn). It also runs a deals website and the general business model is morphing into a small business marketing firm across print and internet.  Small businesses traditionally do not have time to manage and keep these items up-to-date and with a good appearance, SPMD and the others will serve this need.

 

Likely, I see a merger between DEXO and SPMD that would be a catalyst for upside on top of an early tender of debt. DEXO has recently decided to initiate is option to pay interest and PIK 50-50 on its mezzanine notes, which is an interesting strategy that I am waiting to see more on. It certainly is not a good sign…

 

I took a lot of my position off the table but still own some as a speculative play. This was and continues to be a terrible investment for me. It could be dead money, but I am taking the risk at this point given the information I am receiving from my contacts.  I certainly am not advocating others take the risk at this point. I am already in the game and am holding based on my analyssis which so far has been almost dead on with reported results.

 

In the interim, the business can support itself and meet its requirements based on my analysis easily until the debt nears maturity in 2015. The larger question that will make or break this deal is if it can start to turn revenues around by then and pay down debt to a level it can support long-term. There is a big event coming in the next month that my contact is going to gather more information for me at which I hope could shed some additional clarity.

 

[Junto]

Yellow Media (YLO) got killed today, with a goodwill writedown of 2.9B$... what a surprise to know the goodwill is worthless. I'm not a buyer of the equity but I'm keeping an eye on the bonds, anybody looking at this?

 

BeerBaron

 

In a similar vein:

 

http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=dexo

 

-or-

 

http://bit.ly/quzKFD

 

and...

 

http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=spmd

 

Bond figures for SPMD are incorrect...

 

Here is more information on the bonds from a seperate message board posting in May 2011:

 

It should also be noted that the debt provides for a maturity on March 31, 2015. No required principal reductions outside of the mandatory quarterly cash sweep remain after the voluntary prepayment and amendment made in late 2010. Leverage Ratio convenants are 7.50 to 1.00 and Interest Coverage Ratio of 1.10.

 

Whereas leverage ratio is defined: "means, on any date, the ratio of (a) Total Indebtedness as of such date to (b) Consolidated Adjusted EBITDA for the most recently ended period of four consecutive fiscal quarters of the Borrower."

 

Whereas interest coverage ratio is defined: "means, for any period, the ratio of (a) Consolidated Adjusted EBITDA for such period to (b) Interest Expense for such period."

 

Both covenants are reasonable assured to be covered over the next four years even with further deterioration in sales.

 

If debt is prepaid at the levels I project of roughly $150MM-$250MM over 2011, 2012, 2013, and 2014, by March 31, 2015, the Long-term debt should be reduced in a range between $637.5MM and $812.5MM. This leaves debt outstanding in March 2015 between $1,533.5MM and $1,358.5MM.

 

Loan document: http://sec.gov/Archives/edgar/data/1367396/000110465910000564/a09-37183_1ex10d1.htm

 

Amendment: http://sec.gov/Archives/edgar/data/1367396/000110465910062761/a10-23210_1ex10d1.htm

 

At existing cash flows, this provides huge opportunities for upside. Now realistically, EBITDA and cash flows will continue to decline although at a more minimal levels given a likely stronger economy in 2012 and especially 2013 and 2014. My baseline EBITDA range of $400MM to $500MM in 2015 would provide significant value to long-term shareholders at 5X and 6X EBITDA.

 

Furthermore, the debt's interest rate has a 11% floor, so the prepayments alone will additional income annually of around $16.5MM to $27.5MM.

 

Lastly, I am going to copy a poster on the dexo's board who makes a good comment on the residual value of the DEXO business which I believe is similiar to SPMD:

 

"You assume that because printed yellow page ad sales are in an obvious secular decline that DEXO must fail, regardless of how much cash the business throws off in the interim. Not necessarily. When was the last time anyone you know used a pager? Clearly, two-way paging has been in decline since the advent of text messaging on cell phones. Even so, a paging company called USA Mobility (USMO $15.40) has seen its stock price rise from $5.85 in June 2003 to $15.69 today, despite a sales decline from $597 mil. in 2003 to $233 mil. in 2010 (a -12.6% annual rate of decline on average over 7 years). How is that possible? Because at $5.85 in 2003 the market cap. of USMO was only $112 mil. -- far too pessimistic discount to the roughly $100 mil. per year in annual free cash flow that the business actually produced over each of the past seven years on average, despite the massive decline in sales.

 

Investing in a depleting asset can be very lucrative if you pay a low enough price. An oil well will eventually run out of oil, but it will produce a certain amount of cash before it does so."

[Junto]

DEXO was up 100% today for those of you watching this sector. SPMD had a nice bump as well. Sold out my small position in DEXO and still holding my SPMD position.

 

SPMD announced it was negotiating with its agent and bondholders on purchasing the bonds back on the open market. Fair value is at 44 cents on the dollar right now.

[Junto]

Quick numbers on recent 8-K filing(http://ir.supermedia.com/secfiling.cfm?filingID=1104659-11-64358):

 

"As previously announced, on November 8, 2011, SuperMedia Inc. (the “Company”) entered into the Second Amendment (the “Amendment”) to the Loan Agreement (as amended, the “Loan Agreement”), dated as of December 31, 2009, by and among the Company, lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as collateral agent and administrative agent for the lenders. The Amendment, among other things, allows the Company to repurchase and retire debt below par, subject to the procedures and conditions set forth in the Loan Agreement.

 

Under the terms and conditions of the Loan Agreement, the Company has commenced a tender offer to utilize up to approximately $117,000,000 to repurchase debt at a price of 43% to 46% of par. The tender offer will expire at 3:00 p.m., New York City time, on Monday, November 21, 2011.

 

This Current Report on Form 8-K does not constitute an offer to sell or the solicitation of an offer to buy the debt subject to the tender offer or any other securities, nor shall there be any offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale is unlawful."

 

9/30/11 Debt: 2.075 billion

$35 million principal to alllow tender

$254.34 million principal reduction

$30 million principal for Q4 sweep

$1.76 billion debt at end of 2011.

 

Adjusted EBITDA 2011 Through 9/30/11: $463MM, Annualized $617MM

 

Market Value: $36.59MM, 15.51MM shares outstanding

 

Seems like limited downside and some nice upside potential if they can succeed.

[Junto]

Just a follow up on the debt repayment. 8-K out after the close last night:

 

"As previously announced, on December 7, 2011, SuperMedia Inc. (the “Company”) commenced an offer to make prepayments of term loans at a rate of 43% to 50% of par, under the terms and conditions of the Company’s senior secured credit facility. The offer expired at 3:00 p.m., New York City time, on Tuesday, December 13, 2011. The Company will utilize $117,000,000 in cash to repay approximately $235,176,000 of the term loans at a rate of 49.75% of par. The Company expects to settle the prepayments on or about December 14, 2011."

 

They got a deal done at 49.75% of par. Great step in getting the balance sheet in order.

 

This will save the company $25.87 million in annual interest costs alone. A a nice return on their $117MM.

 

$270MM in debt reduction so far this quarter. Not sure what the quarterly sweep will tally out to, but SPMD could be looking at $300MM or more reduction in their debt this quarter. This would put their total debt at $1.77 billion or under 3X last 12 months EBITDA.

 

They just might pull through this ;)

 

 

[Junto]

Earnings were out yesterday. 10-K out today http://sec.gov/Archives/edgar/data/1367396/000110465912011865/a11-30217_110k.htm .  Making good progress.

 

new commencement for $31MM at 48 - 53% of par. http://sec.gov/Archives/edgar/data/1367396/000110465912011974/a12-5686_18k.htm

 

Shorts could be squeezed as float is continually decreasing as larger investors are adding to their positions. Thesis remains in place.

 

 

[Guest Hester]

Earnings were out yesterday. 10-K out today http://sec.gov/Archives/edgar/data/1367396/000110465912011865/a11-30217_110k.htm .  Making good progress.

 

new commencement for $31MM at 48 - 53% of par. http://sec.gov/Archives/edgar/data/1367396/000110465912011974/a12-5686_18k.htm

 

Shorts could be squeezed as float is continually decreasing as larger investors are adding to their positions. Thesis remains in place.

 

While they've done a good job of cutting expenses, if you adjust for the fresh start accounting and get to the core operating results, every quarter for the last two years (and probably way beyond) operating revenue has decreased. Not year over year but one quarter to the next. Cutting expenses can only go so far when every month you have less revenue than the last.

 

Yellow Pages don't have a reason to exist. This is a footrace between bankruptcy and short squeeze, with short squeeze in the lead for now but... we all die eventually. (I'm not short btw)

[Junto]

With debt not maturing until December 2015 and the ability to continue aggressively paying down debt while growing its online business presense and app portfolio, I am not as concerned about bankruptcy in the near-term.

 

It is a risky leverage play, this isn't for your grandpa or the weak at heart: http://www.businessbankertwincities.com/2012/01/spmd-risky-leveraged-play.html

 

Below Par tender to be completed March 2: http://sec.gov/Archives/edgar/data/1367396/000110465912014860/a12-6271_18k.htm

 

As previously announced, on February 23, 2012, SuperMedia Inc. (the “Company”) commenced an offer to make prepayments of term loans at a rate of 48% to 53% of par, under the terms and conditions of the Company’s senior secured credit facility. The offer expired at 5:00 p.m., New York City time, on Wednesday, February 29, 2012. The Company will utilize $31,000,000 in cash to repay approximately $59,600,000 of the term loans at a rate of 52% of par. The Company expects to settle the prepayments on or about March 2, 2012.

[Junto]

Supermedia and Dex One announced a merger today. Stocks bounced on the news.

 

Article: http://ir.supermedia.com/phoenix.zhtml?c=205085&p=irol-newsArticle&ID=1727142&highlight=

 

Highlights of the Combination

 

Over 3,100 marketing consultants serving more than 700,000 local businesses

Pro-forma combined 2011 revenue was $3.1 billion, with non-GAAP adjusted EBITDA of approximately $1.2 billion and non-GAAP free cash flow of $610 million

Combined companies estimate annual expense synergies of $150-$175 million by 2015

Preserves tax attributes of as much as $1.8 billion to benefit cash flow

Merged company better positioned to retire debt with amended and extended lender agreements

 

Equity trades at roughly a $100 million valuation pre-announcement for the combined entities. Debt at two companies will be $3.5 billion but expect the amend and extend proposal to allow them to pay that down and/or restructure it. Debt trades at a significant discount to par value.