Reality Check on Yellow Pages
The sell-off of directory stocks that reached a crescendo yesterday is continuing today, with Idearc, R.H. Donnelley and Yell being hit the hardest. Each of the three has been downgraded by leading banks and has lost a substantial amount of its value.
As we noted in a post yesterday, given the sell-off, it’s critical to take a deep breath and understand the drivers of the directory business. The sell-off notwithstanding, the fundamentals of the directory business remain essentially unchanged.
- Directories, have been and will continue to be a leading source of new customers for small businesses, in the United States and worldwide. No doubt the media mix is becoming more complex, but directories remain a source of high-quality leads that many categories of small businesses would struggle to replace were they to eliminate or substantially reduce their directory spend.
- Search advertising is certainly a growing and increasingly important component of any advertising strategy for the small-business owner. However, today search is not a panacea for small businesses looking for an efficient, flexible source of new business leads. As more small businesses come online to advertise, they will find the cost of keywords to be increasing. And at the same time, there are clear differences in the quality of a search lead vs. a print or Internet Yellow Pages lead. Even in a period of declining directory usage, search cannot yet be considered a true alternative to directories, but rather an important complement to any advertising mix.
- We also note that based on recent TKG user research, we have seen a softening of usage (defined as reach and frequency) among both traditional and online media when compared with a year ago. We attribute this to a slowing overall economy.
Our point is simple, the precipitous decline in stock prices should not be read as a fundamental undoing of the underlying business model, but rather as a reaction to the increased awareness that the business is squarely in transition.
The main reason for these sell offs is the crippling debt loads on these companies’ balance sheets. Both RHD and IAR have ~10b in debt on the books and with the cash flow growth looking like it is going to stall — or even go negative — for the next few years, this really creates havoc on the LBO model that created these capital structures. The interesting thing now in my opinion is with these companies having very little equity value and borrowing capacity, how do they acquire the assets necessary to transition to a complex digital world where they no longer have a monopoly on smaller, local advertisers.