R.H. Donnelley announced today that President and COO Peter McDonald, a 35-year industry veteran, will retire in September. The company also announced that George Bednarz, its current senior vice president for enterprise operations, will take on the new role of executive vice president of enterprise sales and operations. Essentially, as McDonald retires, Bednarz will assume the sales leadership role that McDonald has held.

McDonald is an industry giant whose long experience in running successful directory organizations in all kinds of economies and against all sorts of competitors will be greatly missed. We won’t be surprised to see McDonald back working in the industry before too much time has passed.

Nonetheless, TKG see the elevation of Bednarz as a strong move for RHD. Why? The nature of directional media sales is changing, and the way sales reps are recruited, trained, managed and supported is changing as well. To put it simply, sales is becoming more data driven and it will be only more so as each year goes by and advertisers demand more transparency. Having a background in strategy and information technology, as Bednarz does, is arguably now at least as important as sales experience.

Like Idearc Media earlier this week, R.H. Donnelley received a boost in its share price today after unveiling first-quarter results that showed market conditions are about as bad as expected, but not any worse. The company also unveiled a refinancing plan that will increase interest expense while also extending the maturing of much of its debt and gaining more flexible terms. The refinancing seems to have contributed to improved confidence in RHD’s stability.

The company also maintained a strong EBITDA margin in Q1 and announced plans to cut about US$30 million in costs, much of it in head count and other employee-related expenses.

The market seemed to like the results. As of 4 p.m. Eastern Time, RHD shares were up 28.5 percent to 8.20. Idearc shares are up almost 8 percent. Following its Q1 announcement, Idearc shares rose significantly and RHD enjoyed a bump as well. Today, the situation was reversed and RHD returned the favor, so to speak.

While it was a good day for the company’s share price, the outlook for ad sales painted by RHD CEO Dave Swanson was anything but rosy. The publisher reported total first-quarter revenues of US$674.7 million, a 2 percent increase over 2007. Ad sales, however, dropped 4.8 percent, which RHD executives pointed out was in line with 2008 guidance of mid-single-digit declines. The company confirmed its 2008 guidance on today’s call.

In describing the current environment, Swanson was very careful not to raise hopes that a recovery was on the horizon.

Responding to a question from an analyst, Swanson emphasized that he “has not seen anything that would indicate any positive turn to the North” in sales results. Asked specifically about Las Vegas, one of RHD’s key markets, Swanson described it as the worst business environment he has seen in his career. While Florida and Nevada remain the worst markets, the pain of a slowing economy is being felt across all 28 states RHD operates in, according to Swanson.

So RHD is making it clear that while the economy will keep results down for a while (and executives maintain the downturn is cyclical rather than secular), the company has taken measures, cost cutting and refinancing, that will improve the stability of the business. RHD is also working on a new version of DexKnows.com, which will go into beta later this year.

On the eve of today’s announcement, Deutsche Bank upgraded RHD from sell to hold, a boost that reflects a view that RHD is less risky as an investment than it was just a few weeks ago.

Citing data from the latest Industry Usage Study, the Yellow Pages Association is trying to overcome some of the myths and misperceptions about who uses print Yellow Pages, how often and why. In a press release issued today, the YPA points out that the average Yellow Pages user is younger, more tech savvy and affluent than many might assume, and PYP use actually indexes higher in some cities known to be at the higher end of the high-tech scale, including Seattle; Portland, OR; Charlotte, NC; Denver; and Salt Lake City, among others.

At its recent convention, the association promised a more aggressive push to let the world know that Yellow Pages isn’t dead and much of the recent tsunami of bad press has been based on a poor understanding of the fundamentals of the business. In addition to the press release, YPA research honcho Larry Small had a piece on Search Engine Land that touts the finding that print plus online usage is growing.

We’ve been pretty clear in saying the industry, for all its problems (and it has plenty), has gotten a bad rap in the frenzy surrounding share price meltdowns at R.H. Donnelley and Idearc. We have also been clear in saying the industry needed to respond aggressively with data that restore a realistic view of Yellow Pages. We also think the industry still needs to steer the conversation away from aggregate usage and talk more about how the medium generates leads and ultimately transactions.

The leadership of the Yellow Pages Association came out swinging against its growing number of critics and doubters at yesterday’s kickoff of the group’s annual conference in Las Vegas.

Chairman Dave Swanson (also CEO of R.H. Donnelley) gave a passionate defense of the directory industry, making a strong case that much of the criticism it has received has tried to pass off assertion as fact, while the facts often paint a different picture.

“Don’t look at share prices as an indicator of the health of our industry,” Swanson said, taking on the idea that his own company’s steep fall is in effect a referendum on the viability of Yellow Pages. Swanson argued that RHD’s and rival Idearc’s losses in enterprise value measured as a multiple of EBITDA are similar to what other media have experienced, including Google. However, because RHD and Idearc both have such high debt loads, the brunt of that “multiple compression” was absorbed by the companies’ stock.

While acknowledging changes, including the emergence of search and the new dynamic of empowered consumers who demand choice and customization, Swanson said the print product remains sound and continues to drive value. He took aim at the widely held view that print and online have a zero-sum relationship, with gains in online coming at print’s expense, when in fact many consumers use both products.

“Usage is not binary,” Swanson said. “Print and online both play a role.”

To drive his point home, Swanson showed a front-page photo from a Chicago-area newspaper in which a woman was walking out of her flood damaged home carrying a copy of the Yellow Pages. His point was clear. Life events, good ones and bad ones, still drive usage.

“We need to set the record straight on print,” Swanson said, yet he acknowledged that the industry’s future can’t be tied to print.

“No one can argue that local search is fragmenting, and the dominance of any one [player] is fading,” he said. “We need to understand that and adjust to it.”

The solution, Swanson argued, is to “create value, not products.” And whatever is being offered, it has to be sold to small-business owners, who as Swanson noted, don’t wake up thinking about buying advertising. And of course, Yellow Pages organizations have enormous sales channels, which Swanson believes are being “grossly underestimated” as assets.

His final point was that the game is far from over and many players lauded today could easily be a pile of dust tomorrow.

“The future is just as uncertain for a social networking site as it is for the local newspaper,” he said. “They are just starting from different points.”

What we heard yesterday made it clear that at least some of the industry’s leadership believes it’s time to fight back. As in politics, any assertion by the opposition that goes unchallenged ends up being accepted as fact. It’s a good thing the industry sees this and plans to do something about it.

Our view on Yellow Pages is that print is and will remain a strong foundation for a multichannel business. We believe print revenues will decline gradually over the next several years. It is also true that investment, better sales training and belief in the product could alter this outlook in a positive way. Later today at the conference, executives of the Australian publisher Sensis will talk about how they turned around print sales with a focus on execution and selling value.

Since our founding, The Kelsey Group has been committed to delivering our unvarnished view of the dynamics of the ever changing and evolving local advertising market. We have been criticized by some in traditional media who suggested we have overstated the rise of the Internet. And we’ve taken shots from those pushing new media suggesting we are too sympathetic to traditional media. Being at the center of this rapidly changing interactive local media space is exhilarating and at times terrifying.

We remain committed to providing a forum through this blog for a spirited debate and exchange of ideas on local media. What we will not do, however, is offer a forum for personal attacks. Therefore, we made a decision this morning to remove our blog post from yesterday that pointed to a CNBC segment about the Yellow Pages. Please keep commenting on what you read here, and by all means be candid, contrary and controversial. If you wish to make a personal attack, however, find a different forum.

Since so many opinions these days seem to be based on anecdotal evidence, let me add another anecdote to the mix.

I am sitting in a coffee shop near where I live doing e-mail and so on. In walks a very stylish young woman, no older than 30. She gets a coffee, sits down and pulls out a Dex companion print Yellow Pages directory and begins flipping through it to make calls arranging some sort of project for her house.

So there you have it, print Yellow Pages is alive and well. No further evidence is required.

I’ve taken a quick look at the R.H. Donnelley earnings release before the company’s much-anticipated earnings call this morning. Here are a few quick highlights:

• The company posted ad sales of US$2,743 million, an increase of 0.4 percent. Net revenues were US$2,680 million, down from US$2,688 million in 2006.
• The company is giving a gloomier outlook for 2008 ad sales, laying out an expectation of “mid single digit” declines in ad sales, citing the weakening economy.
• Jake Winebaum, brought in to lead RHD’s digital efforts via its Business.com acquisition, is “stepping down from his day to day role as President of RHD Interactive (RHDi) to spend more time with his family.” Winebaum will be replaced by Brian Barnum, who came to RHD with Winebaum in the Business.com deal. RHD had hoped Winebaum, who spoke at our DDC conference last September, would bring a fresh perspective to the company’s digital strategy.
• Citing the decline in its stock price, RHD will forgo a dividend and focus all its cash flow on paying down its debt.

We will provide a more detailed write-up of its earnings call in a Client Inquiry Brief in the coming days.

Update: It’s been a rough day, to say the least, with RHD’s stock losing almost half its value today (down 46 percent at this writing). Among the key messages from the call this morning was that things have deteriorated sufficiently since the company issued guidance in December that it had to revise it considerably downward, and RHD executives were very reluctant to predict when things would improve. The softness in Florida and Nevada related to the housing crisis has deepened, and the company said Arizona is beginning to show the same signs of housing-related stress.

Executives said the company is suffering a combination of impacts, with existing accounts failing to increase, while others are dropping because they cannot afford to pay. Slower business creation rates are failing to provide a pipeline of prospects to replace the losses. CFO Steve Blondy said the company’s analysis shows that very few lost accounts go to other media, which indicated the causes are economic, rather than migration to alternatives.

RHD CEO Dave Swanson said Winebaum is walking away from some of the money he earned from the sale of Business.com, but he made more than enough money to give him the luxury of choosing not to work. Swanson said Winebaum had been working tirelessly more or less for the past seven years, and he missed spending time with his children. He was asked if others from the Business.com team were leaving and his answer was no.

Lost in all this was the fact that 2007 results weren’t that bad. While the Embarq markets were down 1.5 percent, things have improved substantially in the AT&T markets, where RHD said it has achieved 60 percent digital penetration with its new online offerings. Blondy also noted that national revenues grew in 2007. We were a little taken aback when he said revenues was almost all print, since RHD’s systems have not yet been configured to accept online ads from the national channel. The bright side of that revelation is that national support for print would appear to be strong, and if RHD can begin selling online to national, that suggests some headroom.

Still, all in all this was a sobering look at what the next 12 to 18 months likely have in store for the U.S. directory business. It is true (or it has been in the past) that Yellow Pages rides out these storms better than other traditional media. We will have to wait and see if the dynamics have changed this time around. As Swanson himself acknowledged, “There are more advertising options out there.”

Newspapers increasingly see an opportunity to sell SEO/SEM solutions to local advertisers. Such efforts probably began in earnest last year with members of the Yahoo! consortium using Yahoo!’s platforms. Others have been working with WebVisible and other resellers on a custom basis. But things seem to have been heating up, prior to the NAA Marketing conference in Orlando at the end of the month.

Some high-profile (and well-respected) industry execs have recently left their posts and are apparently consulting to the newspaper industry on local solutions. Scripps Interactive VP Bob Benz and former Belo Interactive President Wes Jackson have teamed up with former WebVisible employees Chris Tippie and Charity Huff to sell solutions via a recently formed company named Maroon Ventures. Tippie, 36, left WebVisible one-and-a-half years ago to move to Crested Butte, Colorado, a resort town that is now headquarters for the company.

Maroon already claims to provide “daily operational oversight” of the far-flung Yahoo! consortium to 21 of its members, including Hearst, E.W. Scripps, Philadelphia News Holdings, Media General, Lee Enterprises, MediaNews Group, Cox Newspapers, New York Times Regional Group, Belo, McClatchy and Morris Communications. It also claims a relationship with Metrix4Media, a little-known search firm in which Hearst has a financial stake.

In a press release, Maroon is described as “a professional services firm that connects emerging business opportunities with media companies to help them execute in local markets. Its members draw on extensive operational and strategic experience to drive innovation throughout the business lifecycle.”

Looking at the big picture, we’re pondering Yahoo!’s role in newspaper SEO/SEM. If the deal with Microsoft is consummated, is the consortium solid enough to convey? After all, it was mostly founded to partner with HotJobs, which accounts for the bulk of the deal’s revenue. But banner advertising, behavioral targeting and SEO/SEM are also being added on a tiered basis with some of the consortium members.

Basically, the Yahoo! consortium is entirely a pick-and-choose affair. And sometimes it won’t even end up with Yahoo!. Last year, for instance, in real estate, it chose to work with Zillow.

Theoretically, a combination between Yahoo! and Microsoft and its aQuantive properties would aid the display piece, which is highly coveted by newspapers – especially in building creative capabilities. But that will probably be treated separately from the search equation, where newspapers might want a more independent role.

WebVisible head Kirsten Mangers won’t comment on the development of Maroon Ventures. But she tells us her company has had some success with newspapers in selling SEO/SEM solutions, especially for new advertisers that haven’t previously worked with newspapers. WebVisible has ongoing relations with companies such as MediaNews Group, McClatchy and New York Times and some Gannett-owned properties.

Mangers says the company does best when substantial sales and marketing resources are provided to the partnership. Strong results are being recorded in markets such as Minneapolis, where a dedicated salesperson has been allocated to The Star Tribune. Traditional newspaper sales reps tend to have a hard time focusing on the new SEO/SEM opportunities, due to the fact they carry so many products in their bag, she notes.

Mangers adds that newspapers may be working with several different vendors … even at the same company. Freedom Interactive President Michael Mathieu notes that The Orange County Register, for instance, works with both RHDinteractive’s LocalLaunch and WebVisible. “There is no ‘approved’ vendor” for the industry or for the consortium, she says.

Ultimately, Mangers expresses confidence that her 64-person company has the software, know-how and commitment to be a strong contender in the space. Several newspapers and Yellow Pages companies have gone with other solutions only to come back to WebVisible, she notes.

Other newspaper execs have left their companies also to provide consulting, although they have not specified that they’ll zero in on SEO/SEM solutions. These include MediaNews Group VP Teresa Lawler and Maine Today President Joe Michaud. Similarly, longtime Tribune Interactive head Tim Landon has left Tribune — but that probably has more to do with the change in Tribune’s ownership.

Thursday was a very rough day for publicly traded directory companies. With Idearc and Yell announcing results that show more weakness in print directories, the two companies’ shares moved sharply downward.

As of this writing Thursday afternoon, Idearc shares had lost roughly a quarter of their value, while Yell had declined more than 15 percent. R.H. Donnelley, which did not announce results today, has been affected as well, losing more than 20 percent of its value. Other global directory stocks suffered to varying degrees, while Yellow Pages Income Fund (Canada) was only down about 1 percent.

Investors appear to have less confidence than they once did that directory publishers can stabilize their print product long enough to drive growth with their online businesses. Also, concern over the impact of a slowing economy on directories is another likely factor, and of course the general mood of the markets doesn’t help.

Idearc reported today that its full-year net print revenues were down 4.2 percent over 2006, and warned investors that 2008 would be a tough year. Yell reported that its U.K. print revenues declined 4.4 percent for the nine months ended Dec. 31, 2007. Both companies reported strong online growth.

Amid such a sharp sell-off, it’s worth reiterating some truths about the directory business. Yes, print revenues are declining, but directories are still a highly valuable source of leads for small, local businesses. The directory industry remains hugely profitable. It seems to us that many investors got into directories based on an oversimplified story (lots of cash, visible revenue, stable customer base). And they seem to be leaving based on similar reasoning (no one uses Yellow Pages anymore, Google has made the medium obsolete, it won’t exist in five years, and so on). While search is a growing factor in local, it cannot yet replace the volume of leads available from print directories, and it may be some time before it can. Drectories will be a major player in local media for quite some time to come.

The Kelsey Report will produce Client Inquiry Briefs summarizing financial results for Idearc, Yell and other companies as results become available. We will also blog in greater detail on the Idearc and Yell earnings announcements as soon as we can.

I was at SES Chicago yesterday moderating a couple of panels, sharing duty with my colleague Mike Boland on the local track presented by The Kelsey Group. My first opportunity of the day was to interview Charles Stubbs of Yellowpages.com. Those who were there benefited from a wide-ranging talk about how YPC is doing, why it bought Ingenio and what Stubbs’ long-range vision is for the Internet Yellow Pages platform.

One of my first questions was whether the operation sees itself primarily as a destination site or a sales channel selling access to a distribution network (my first impulse was to ask if YPC is a dessert topping or a floor wax but didn’t want to date myself with a mid-1970s’ “Saturday Night Live” reference). Stubbs’ response was essentially that he wants to deliver customers leads, and doing so requires both a branded presence and access to distribution on other platforms.

Stubbs also talked about how the YPC model is moving gradually toward one in which it sells access to leads (mostly phone calls) that are provisioned across multiple platforms and supported by call measurement. The Ingenio deal offers YPC a platform to fulfill this vision. Mike Boland will post more on the Stubbs interview later from his notes (I was too busy figuring out my next question to record much of what Stubbs had to say). RHD sings a similar song with its “triple play” strategy.

Later in the day, I moderated a session on how small businesses are being brought online and engaged in local online advertising. R.H. Donnelley, Marchex, Local.com and Website Pros were represented on the panel.

Justin Sanger from RHD (via its acquisition of Chicago-based LocalLaunch) had a number of compelling things to say. One was that despite all the investment in technology at the local level, it is contact with the local channel that drives the experience of small businesses with search engine marketing.

He also said the level of fragmentation in the local market today cries out for consolidation since there simply will not be enough margin to go around if too many parties take a piece of each dollar spent online by local advertisers.

What was clear from this session is that despite all the investment and energy going on in local, (bad sports metaphor alert) this game is at best in the bottom of the first inning. As Sanger put it, “innovation is ahead of SME adoption.”

Rather than being discouraged, the panelists agreed this signals tremendous opportunity.