Donnelley plans belt-tightening

Cary company foresees falling ad sales

Faced with a bleak sales outlook, yellow pages publisher R.H. Donnelley announced a new round of cost-cutting that probably will include eliminating more jobs.

The Cary-based company, whose stock has nose-dived in the past year, said Wednesday that ad sales would fall more than expected this year -- 7 percent to 8 percent. Ad sales are a key indicator of future revenue.

"We know that as a result of weak ad sales this year we will have a challenging revenue line next year," CEO David Swanson said during a conference call with analysts. "We are taking action now to prepare for that."

Swanson said a team of as many 80 employees and consultants will focus on ways "to improve productivity and quality in every function of the company."

That restructuring includes the company's sales force, which represents about half its more than 4,000 employees nationwide.

Swanson said the company can reduce its sales force without hurting ad sales. Investments in technology have reduced sales agents' administrative tasks, and more efficient routing could enable fewer sales agents to cover the same territory. "It's likely that we will be operating with fewer salespeople," Swanson said.

Still, Goldman Sachs analyst Peter Salkowski expects job cuts to fall more heavily on the other half of Donnelley employees who aren't in sales. "They need an improving economy, and improving ad results, before they are out of the woods," he said. Donnelley is a Goldman Sachs client.

Donnelley shares closed Wednesday at $1.57, down 13 cents. A year ago, shares fetched more than $60.

Donnelley initiated a round of cuts earlier this year that eliminated at least 240 jobs, mostly through attrition but including some layoffs. The company has about 600 workers in the Triangle.

Restructuring charges for the latest initiative are expected to hit $40 million. "This is a very large, 40-to-60-week initiative," Swanson said. "We expect to generate significant savings from the initiative."

Donnelley reported Wednesday that second-quarter ad sales totaled $678 million, an 8.6 percent decline compared to a year ago.

Swanson said softness in ad sales, which a year ago was limited to areas such as Las Vegas and Florida that were hurt by the real estate meltdown, has spread across the company's markets.

Swanson said that he sees the downturn in ad sales as cyclical and that sales will recover when the economy does. He noted that advertisers that are prospering today, such as pawnbrokers and bankruptcy attorneys, are spending more money on yellow pages ads.

"What is different today than what we have seen in the past," Swanson said, "is there are just more challenged categories than growth categories."

In addition to being affected by the struggling economy, Donnelley, like other traditional media, is hurt by advertisers shifting their dollars to the Internet. Although it is beefing up its online business, Donnelley generates the bulk of its revenue from printed directories in 28 states.

On Wednesday, Donnelley reported a second-quarter loss of $339 million. A year ago, Donnelley posted a $25 million profit.

The company lowered its debt in the quarter by $230 million, leaving it with net debt of $9.7 billion.

After renegotiating its debt, Donnelley has "more than enough" cash flow to make the $150 million in debt payments it must make by the end of next year, Salkowski said. Salkowski estimates that Donnelley will generate a total of $600 million to $700 million in cash flow in 2008 and 2009.

In 2010, however, the company has to pay back $1.4 billion in debt. "They will most likely have to renegotiate or refinance their debt at that time," Salkowski said.