R for recovery plan? Yell plots digital future
With debts of £2.7bn and falling sales, does Yell have time to turn around?
Wednesday 18 May 2011
The Yellow Pages updated its much-loved advert featuring JR Hartley for the digital age this year, with former trance DJ Day V Lately searching for his record using the company's smartphone app. The iconic directory's parent Yell Group has had more difficulty bringing its own business into the digital age, and with a "critical" strategy announcement in July, the new chief executive admits the company is standing at the crossroads.
Yell released its full-year results yesterday, which served principally to underline the company's problems. Revenues fell 12.4 per cent over the year to £1.8bn as the growth in its online operations was unable to offset the plummeting revenues from its print business.
The world has moved on since the time of JR Hartley in the mid 1980s, when directories offered a secure revenue stream even during a downturn. The rise of internet alternatives – especially the advance of Google – and an expensive dealmaking spree that helped to saddle the group with debt has left it struggling to catch up.
The print division makes up 75 per cent of the company's revenues and the structural decline has been enormous. Last year revenues fell 18.6 per cent to £1.3bn. The market has made its feelings about Yell's precarious situation known. Shortly before the credit crunch its shares peaked over 600p. Since then they have lost 98 per cent of their value, with its place on the FTSE 100 index a distant memory.
Angry shareholders warned Michael Pocock, who joined as chief executive in January, that wholesale changes were needed and time was running out. Mr Pocock, the former general manager of Linksys, a part of Cisco Systems, has a reputation as a turnaround expert and he will need all his skill to bring Yell back to its glory days. Yesterday he was bullish about the group's prospects, although admitted much was riding on the success of the new strategy. "The industry is at a crossroads. We can either keep the blinders on and say we'll ride print into the sunset, or we'll invest and keep it profitable for as long as possible, and acknowledge that we need bolder decision-making."
The general plan is to manage the decline in print and build the digital business to provide 75 per cent of revenues within four years. The group brought in the technology consulting firm Booz Allen Hamilton, formed a "core management team" dedicated to working out the strategy and carried out months of focus groups to flesh out its plan.
"The digital marketplace is already twice the size of the total print market and some ten times larger than the segments of the print market Yell traditionally addressed," Mr Pocock said. "Small shares of this fast-growing and highly fragmented market can mean very significant, profitable growth."
One analyst said the new management "seems to understand the problem; the million-dollar question is whether they can turn it round".
Yell is to target further growth of services on smartphones and tablet computers, as well as increasing e-commerce and the use of social networking. It plans to provide new services that "both cement our place as a champion of small and medium- sized enterprises and provide material new value to the customer".
An analyst said the company was "lagging behind many of the internet groups who have been in the area for some time". The move further into digital was not too slow, the chief executive said yesterday, although added: "Would we have liked to do this a few years from now? Sure."
Mr Pocock continued: "The competitive landscape changes every day," adding that Yell's strength lay in its existing sales force with strong contacts among small and medium-sized businesses, and a "robust database" that it will exploit more heavily. "We have a good machine in place," he said. "We just have to redirect it."
Analysts at Numis see the way forward fraught with problems. "We continue to see both cyclical and structural pressures on Yell's business," the broker said. It pointed to the new wave of competitors, such as online discount firm Groupon, adding that execution risk was high for Yell's entrance into the market.
The management said it had "worked hard to reduce its costs" adding that there was more to do. Mr Pocock sees significant savings from bringing the company's divisions closer together and integrating them on to a single technology platform.
Yet, a core issue for Yell is its debts. While the group managed to cut the headline figure by £329.5m last year it remains at £2.7bn. Finance director Tony Bates admitted the debt position "is a pain" but the company believes it will meet its obligations, despite fears it could breach its banking covenants next financial year if earnings fall. The group's credit rating was downgraded by Standard & Poor's further into "junk" status in February, and the rating agency cut its outlook from stable to negative. Rumours have been rife in the market that the company may look to ease the pain with a debt-for-equity swap, another rights issue or possibly by divesting some of its businesses.
The market has the company marked down as "high risk". Ben Timms, head of sales at broker Prime Markets, said: "Yell is now engaged in a desperate race against time to grow digital revenues at a sufficient rate to offset this decline, while attempting to manage the debt pile. Salvation is seemingly as far away as ever, and up to the new strategy announcement in July.
"It seems amazing to say, but I could see Yell as a casualty of the digital age," he said, adding that distribution of the iconic Yellow Pages could finish in the future. Mr Pocock denied the group was considering shutting down its flagship product.
Yell may not be riding into the sunset quite yet, but many in the market are looking to July, feeling the group is drinking in last chance saloon.
The Yellow Pages telephone directory can trace its roots back to Cheyenne, Wyoming, in 1883, when a printer working on the regular directory ran out of white paper so used yellow. The first Yellow Pages directory was created three years later, and the oldest surviving business still operating in the US is the Yellowbook, founded in 1930.
The General Post Office launched the first Yellow Pages classified directory in the UK in 1966. The business was owned by British Telecom, which was formed in 1981 and remained part of the group when it was privatised four years later, the same time Business Pages was launched. In 1987, the group unveiled Talking Pages and the first electronic delivery of classified directory information. The group launched Yell.co.uk in 1996 and offered transactions on the site a year later. In 2001, private equity companies bought Yell for £2.1bn from BT. The group launched a new telephone service and brought the number of Yellow Pages published to 102. Last year it moved into the digital age with an augmented reality app for the iPhone.
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