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ADVO Reports Second Quarter Results
Hartford - WINDSOR -- ADVO, Inc. (NYSE: AD) today reported that revenue for its second fiscal quarter ended March 26, 2005 grew to $338.8 million, increasing $34.5 million, or 11.3%, over the prior year quarter. Diluted E.P.S. for the quarter were $0.33, down $0.05 versus the prior year period, and operating income was $18.5 million, down $0.5 million. The quarter included the expected additional distribution expense related to the Company's new advertising program expansion in Southern California.
The Company's 11.3% second quarter revenue growth was driven by continued strength in client demand, with total advertising pieces up 13.5% over the prior year quarter. Revenues and volumes were up in virtually all of the Company's top categories and across geographies. The Company also invested in the frequency and reach of its advertising programs in several markets earlier this fiscal year, which drove a year-over-year increase in shared advertising packages of 17.1% for the second quarter. The increase in packages diluted the Company's pieces per package statistic, which was down 3.1%, and revenue per piece was down 0.8%.
Scott Harding, ADVO's Chief Executive Officer, said, 'We continue to post results that demonstrate our ability to gain share in the marketplace. Our sales strategies are working, and we continue to generate revenue gains broadly across our business. However, it is important that we improve the profitability of our revenue growth and focus the organization on delivering against the Company's full potential.'
During the second quarter, the most significant driver of year-over-year margin declines was the Company's new Southern California weekend advertising program. In the Southern California market, revenues grew 15.5% over the prior year, with increased sales in both the mid-week and new weekend programs. The new weekend program continues to show positive sequential momentum, with the number of clients participating in the program tripling since November. However, given the new program's early stage of development, and fixed cost of postage, operating income in the Southern California market for the second quarter was down $8.3 million, or $0.16 in E.P.S. versus the prior year quarter.
'Although our investment in distribution costs for our new second in-home date in Southern California is significantly impacting our margins, we are making good progress with our revenue momentum and are strongly committed to the market,' Harding said. 'We set aggressive goals for the launch of our second in-home program, particularly in the second half of fiscal 2005. Southern California is the most competitive print market in the country, and we will be patient with our near-term expectations in order to ensure its long-term bottom-line success.'
Mr. Harding, who joined the Company in October, continued, 'During my first six months as CEO, we have assessed our cost structure and strategic growth opportunities. As a result of this assessment, in our third quarter we will realign the organization and focus our resources against our most significant business opportunities. The realignment will improve the overall productivity of the organization, and allow us to continue to invest in the areas of our business which will drive the greatest profitability in the future.' As a result of the realignment, the Company expects to save approximately $6-8 million on an annual basis (net of investments and reallocated costs), and will incur a charge in its third fiscal quarter of approximately $4 million, or $0.08 in E.P.S.
For the full fiscal year 2005, the Company expects total revenue growth versus prior year to be in the low-double digits, up slightly from previous guidance. These revenue gains are expected to continue to be generated broadly across geographies and categories. Revenues in the Company's new second in-home date in Southern California are expected to continue to increase, however, it is now expected that revenues will fall short of forecast for the year. Due to the fixed postage cost for the Southern California second in-home program (approximately $50 million in postage annually), profit contribution in Southern California is also expected to fall short of expectations for the fiscal year. As a result, the Company is revising its E.P.S. guidance for fiscal 2005 to be below prior year by a percentage in the low teens.
Mr. Harding stated, 'We are refocusing the organization on improving the profitability of our revenue across our business. We continue to demonstrate how the superiority of our targeting, in combination with consultative strategic sales teams, is increasing our share in an increasingly fragmented media marketplace. However, in order for our Company strategy to be successful, we must deliver profitable growth. While our core business is healthy, the organizational changes we are making, along with an increased bottom-line focus throughout the Company, prepare us to begin realizing the full profit potential of our business.'
The Company will hold an analyst conference call to discuss its second quarter earnings today at 5:15-6:00 p.m. ET. The call in number is 1-800-289-0528, and the replay number is 888-203-1112 (access code #5530747). The replay will be available until midnight May 26, 2005. The call will also be available via webcast through the Investor Relations section of ADVO's website at www.advo.com.
'Same Program Results' reflect ADVO's shared mail program revenue statistics for all geographies and frequencies except the new start-up programs in Southern California, Pittsburgh, Raleigh-Durham, and rural Shared Expansion Zone ('SEZ') program. % Underweight statistic excludes Southern California, Pittsburgh, and Raleigh-Durham only.
This report contains certain forward-looking statements regarding the Company's results of operations and financial position within the meaning of Sections 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based on current information and expectations and are subject to risks and uncertainties which could cause the Company's actual results to differ materially from those in the forward-looking statements. The Company's business is promotional in nature, and ADVO serves its clients on a 'just in time' basis. As a result, fluctuations in the amount, timing, pages, weight, and kinds of advertising pieces can vary significantly from week to week, depending on its customers' promotional needs, inventories, and other factors. In any particular quarter these transactional fluctuations are difficult to predict, and can materially affect the Company's revenue and profit results.
The Company's business contains additional risks and uncertainties which include, but are not limited to: general changes in customer demand and pricing; the possibility of consolidation in the retail sector; the impact of economic or political conditions on advertising spending and the Company's distribution system; postal and paper prices; possible governmental regulation or legislation affecting aspects of the Company's business; the efficiencies achieved with technology upgrades; the amount of shares the Company repurchases in the future under its buyback program; fluctuations in interest rates related to the outstanding debt; and other general economic factors.
ADVO is the largest home-delivered print advertising company in the U.S., with annual revenues of more than $1.2 billion. Serving 20,000 leading national, regional and local retailers, the company reaches 112 million mailboxes, or 90 per cent of the nation's households, with its ShopWise(R) shared mail advertising. At the same time, the company's industry-leading consumer database technologies, coupled with its unparalleled logistics capabilities, enable retailers seeking superior ROI to target, version and deliver their ADVO print ads directly to consumers most likely to respond.
Demonstrating ADVO's effectiveness as a print medium, the company's 'Have You Seen Me?(R)' missing child card, distributed with each ShopWise(R) package, is the most recognized mail in America. This signature public service program has been responsible for safely recovering 137 children, one out of every six featured. The program was created in partnership with the National Center for Missing & Exploited Children and the U.S. Postal Service in 1985.
ADVO employs 3,900 people at its 25 mail processing facilities, regional sales offices and headquarters in Windsor, CT. The company can be visited online at www.ADVO.com.
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