Dex Media, the newly minted company that was once SuperMedia and Dex One, is counting on a strategy of serving as the “outsourced marketing partner for small-businesses” as they wade into the complex and confusing world of digital media.

That was a key message from this mornings investor call to reveal the Q1 results of predecessor companies, as well as talk about what the future holds for the new company.

The company’s CFO also suggested that the wave of consolidation in the North American directories industry may not yet be over.

In response to a question about any additional consolidation on the horizon, CFO Dee Jones replied, “We have always been an advocate for consolidation….This is a little premature. Right now we are focused on getting this one integrated, but we are always looking at opportunities.”

This statement may fuel speculation that some further combination may eventually be in the offing. In addition to Dex Media, possible players in any future M&A wave might include YP Holdings (majority owned by Cerberus), Yellow Media (Canada), Yellowbook (Hibu’s U.S. operation) and possibly smaller players like Berry.

Dex Media CEO Peter McDonald acknowledged that Q1 results were “below expectations.” The company reported the two predecessor results individually, with ad sales dropping by 17 percent and 16 percent at Super Media and Dex One respectively.

Looking ahead, McDonald sees Dex Media taking advantage of marketplace confusion, where SMBs need help wading through the myriad local media choices they face. Complexity drives outsourcing, McDonald contends, summarizing Dex Media’s opportunity. He added that Dex Media is “agnostic about how we drive leads” which he believes gives the media company credibility with local advertisers.

McDonald emphasized the need for Dex Media to sell more new products to existing customers (retention is much higher among customers buying more than one product), and to do more to bring in new clients. On the latter point, McDonald described three programs aimed at attracting new customers. The first, which he called “Get Started,” involves a team dedicated to converting inbound leads into new business. McDonald also cited “Encore,” the company’s pay per call initiative and text marketing as key drivers of new customer acquisition.

McDonald said 70 percent of Dex Media’s text marketing clients are new customers, all of which are offered additional Dex Media products. The company is in the process of rolling out text marketing in stages.

“We get more from add on products than from text marketing itself,” McDonald said.

During questions and answers, McDonald refused to bite when asked if his print business would still be around in five years. He countered that research (presumably from the Local Search Association) shows print usage is still significant among those 45 and older, suggesting there is longevity remaining in the traditional product.  He also noted the financial incentive to support print.

“Print is still a strong cash-flow machine for us.”

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SuperMedia and Dex One completed their merger today, creating Dex Media, a company with annual revenues of approximately $2.6 billion (based on combined 2012 revenues), with about $500 million in digital revenue. The combined company also has 2,700 sales reps and roughly 665,000 advertisers.

The combined company is the second largest directory publisher in the United States, following YP Holdings, which according to BIA/Kelsey estimates had roughly $2.8 billion in 2012 revenue.

The new company is being led by CEO Peter McDonald, who was CEO of SuperMedia and was previously president of Dex.

“We intend to seize the opportunity to create additional value for existing and new clients, employees and investors. I want to recognize the outstanding performance of Dex One and SuperMedia employees over the past few years to transform the companies and make the merger and creation of Dex Media possible,” McDonald said in a statement announcing the merger’s completion.

By joining forces, SuperMedia and Dex One will have more time to effect a successful business transformation than they would have as separate companies. The combined company will be stronger and better able to weather the storms on the changing local media landscape. The combined company will be both a tougher competitor and arguably more attractive strategic partner based on its expanded footprint and enhanced financial stability.

The merger’s approval coincides with the two companies’ emergence from pre-packaged Chapter 11 bankruptcies. A judge at the U.S. District Court in Delaware approved the two companies’ reorganization plans yesterday, paving the way to finalize the deal.

While the companies are formally merged, much work remains to combine the two organizations and realize the $150 million to $175 million in annual cost synergies the deal is expected to produce.

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Well, another shoe has dropped in the U.S. directories market. This morning Dex One and SuperMedia announced plans to merge, creating an an entity called Dex Media with roughly $3.1 billion in revenue, based on 2011 results. Dex shareholders will have 60 percent of the new company’s shares with SuperMedia shareholders getting the remaining 40 percent. According to the announcement, the companies estimate expense synergies at between $150 million and $175 million.

Peter McDonald, current CEO of SuperMedia will be CEO of the new organization. Dex One CEO Alfred Mockett will step down at the completion of the merger, which is expected sometime in the fourth quarter. Mockett will be a keynote speaker at BIA/Kelsey’s upcoming SMB Digital Marketing conference in Chicago.

BIA/Kelsey has long expected some form of combination to take place in the U.S. directories market, perhaps this year. It was only a matter of which companies would be involved. Cerberus Capital Management acquired AT&T Ad Solutions (now YP Holdings) earlier this year, leading to speculation that it may spearhead a roll up of the major U.S. players. That was not the case, at least for this deal.

For now, it looks like the U.S. Yellow Pages market will have three big players, YP Holdings, what will become Dex Media and Yellowbook (owned by Britain’s Hibu). We suspect down the road, there may be further activity on the merger front, as companies look for the most sustainable platform to transform from a traditional print to a digital business. The No. 4 company, Berry, is also a potential player in any future merger scenarios.

BIA/Kelsey will have more here after this morning’s conference call announcing the deal. We will also produce a more in depth advisory on the deal for its clients.

UPDATE: Several interesting nuggets from this morning’s call announcing the merger. Sitting on the call were the two respective board chairs, plus CEOs McDonald and Mockett and CFOs Dee Jones (SuperMedia) and Gregory Freiberg (Dex).

Here are some call highlights:

* Executives described the two companies as almost perfectly aligned for a combination, with similar strategies and very little market overlap.

* Dex Media will be the new corporate brand. Any decisions on changing or consolidating consumer-facing brands will be further down the line.

* SuperMedia CEO Peter McDonald described the new company’s big opportunity as helping small businesses “overwhelmed” with media choices sort through the confusion. McDonald said most SMBs don’t have the time to deal with the confusion, “even if they do have the expertise, which most do not.”

* The 60/40 split was a “hard fought negotiation” according to SuperMedia CFO Jones. Mockett said it really came down to how the market values the two companies. The transaction requires shareholder but not regulatory approval.

* The sources of the estimated $150 million to $175 million synergy will be reduced print, paper and distribution costs; duplicate activities (think HR, finance); general and administrative costs; and product rationalization.

* The companies plan to ask lenders for new terms on the combined debt, and Jones said he expected “100 percent approval” from the combined four lending groups. The combined debt of the two organizations is about $3.4 billion.

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Specifically for Dex, which works with more than 400,000 advertisers, Sharman talked about three challenges for the media company, includes evolving the culture of Dex. He mentioned that there will likely be turnover of about two-thirds of current staff, inclusive of the sales force. The sales force, as he descibed it, is transitioning from an order taker to solution provider. Another challenge is managing the fact that print is going down while not allowing print to pull down digital. Finally, he spoke about Dex’ debt and the fact that similar companies must manage their balance sheets.

Dex has continued to evolve its product set, making some pretty significant additions in the past year with more new adds coming in 2012. In particular, Dex is in the midst of rolling out SEO, display, social and mobile leads. Sharman is particularly excited about the prospects of social. Partnering is the path that Dex has decided to take, offering solutions from the likes fo Google, Jingle Networks, Yelp, Local Corp., xAD and others.

With the changes in the organization and product set, Dex has experienced sizable growth in its digital bookings since 4Q 2010 — from a 1 percent decline in Q4 2010 to a 37 percent increase in digital bookings in 3Q 2011 over the same quarter in 2010.

Lastly, Sharman commented on seeing “good” margins on the digital business and also noted that Dex is moving pretty heavily in the tele-sales approach in 2012. Outside sales reps are now using iPads for order taking and client communications.

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Last week several of the leading listed directory companies saw sizable spikes in their stock prices following their Q3 earnings announcements, though the surge seems to have died off today.

For example, Dex One announced its earnings on Nov. 3. On the call, CEO Alfred Mockett revealed that Dex will not achieve its previously stated goal of returning to growth and reaching 30 percent of revenues from digital in 2012. Yet the company’s share price doubled on Nov. 3 to 1.29 per share, up from the previous day’s close of 0.64.

SuperMedia also got a boost that day, though a less dramatic one. Its share price rose to 2.47 from 1.85 at the Nov. 2 close. Also Canada’s Yellow Media, which has experienced a dramatic fall in its share price in recent weeks, got a nice bump last week after its earnings announcement, also on Nov. 3.

So why the gains? It may be that there is increasing confidence that publishers have a chance to turn the corner with new digital products. Even though Dex announced it would not meet targets it made quite a big deal of at its February investor day meeting in New York, it did make a case that it is making real progress on the digital side of its business. The company announced on the call that digital revenues grew by 15 percent in Q3 and now represent 16 percent of revenues. Dex noted its SEM business in particular has hit its stride and grew by 30 percent.

It appears to be just a coincidence that all three companies are also at times mentioned in ongoing speculation about consolidation of the North American directory industry. At BIA/Kelsey’s recent DMS ’11 event in Denver, Joe Walsh, then the CEO of Yellowbook, said quite directly that consolidation will and should occur within the next one to two years. It’s important to note that Walsh mentioned no company by name in his remarks.

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What does digital transformation truly look like? And how far along the path to a new revenue model are directional publishers? Those questions were front and center at DMS ’11, as Dex One Chief Strategy Officer David Sharman, YP New Zealand CEO Scott Pomeroy and Local Search Association President Neg Norton debated “the future of Yellow Pages.”

Sharman was quick to clarify that his organization no longer views itself as a “publishing company,” instead transitioning to a broader marketing and solutions value proposition that is increasingly driven by a performance-based mobile product set. Ultimately, the core asset remains the same — not the print book, but the established brand and connected sales resources.

Pomeroy, who has aggressively accelerated digital initiatives at YP NZ since taking the reins in January, raised more radical notions of transformative change. Rather than squeezing the final revenue drops from a legacy channel and methodically marching toward digital, he volunteered that traditional media have a responsibility to at least consider running a digital-first business in which digital would be spun off as a separate entity. He reminded the audience that “the market awards value in a digitally based business that is growing.”

Naturally, that raises questions of innovation…if YPs, even with some new internal blood, are positioned culturally, operationally and financially to iterate at the speed that the digital environment requires?

Pomeroy asserted that YP NZ is not a technology company, but an “interpretive marketing services” specialist. For Sharman, it’s all about smart partnerships that fulfill client needs. Perhaps the sweet spot is thinking like a tech firm, even if it’s not a core competency.

The eternal challenge pushing back against these disruptive approaches is actual strategic implementation. As Norton summarized: “Where we’ve fallen down as a group is execution.”

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