Gannett Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 4, 2023

Key Takeaways

  • Gannett reported Q1 adjusted EBITDA of $62.9 M, down just 2% YoY (flat excluding FX), and net income of $10.3 M versus a $3 M loss last year, reflecting improving same-store revenue trends.
  • The company raised its 2023 guidance for adjusted EBITDA to $285–305 M and free cash flow to $85–105 M, now forecasting over 15% EBITDA growth and roughly $100 M FCF growth versus 2022.
  • Cost management initiatives are delivering annualized savings of at least $220 M, and strategic debt repayments of $37.3 M in Q1 have reduced first-lien net leverage to 2.59×, targeting below 2.0× by year-end.
  • Digital only subscriptions grew 15% YoY with digital circulation revenues up 20%, supported by 186 M average monthly unique visitors and 6.5 M registered users (63% YoY growth), underscoring a large addressable market.
  • The digital marketing solutions segment delivered $111.4 M in Q1 revenues (up 4% YoY) with strong adjusted EBITDA margins, over 100 K registered DMS users, and a SaaS-like 95% customer revenue retention rate.
AI Generated. May Contain Errors.
Earnings Conference Call
Gannett Q1 2023
00:00 / 00:00

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Gannett First Quarter Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Maceo Esposito, Investor Relations, you may begin, sir.

Speaker 1

Thank you. Good morning, everyone, and thank you for joining our call today to discuss Gannett's Q1 2023 results. Presenting on today's call will be Mike Reed, Chairman and Chief Executive Officer and Doug Horn, Chief Financial Officer. During this call, we will discuss Gannett's financial results for the quarter. If you navigate to the Gannett website, You will find that we have posted an earnings supplement in addition to our earlier press release.

Speaker 1

We will be referencing it today on the call as it provides you with additional detail on this quarter's performance. Before we begin, please let me remind you that this call is being recorded. In addition, certain statements made during this call are or may be deemed to be forward looking statements, including those with respect to future results and events and are based upon current expectations. These statements involve risks and uncertainties that may cause actual results and events to differ materially from those discussed today. We encourage you to read the cautionary statement regarding forward looking statements in the earnings supplement as well as the risk factors described in Gannett's filings made with the SEC.

Speaker 1

Except as required by law, we undertake no obligation to publicly update or correct any of the forward looking statements made during this call. In addition, we will be discussing non GAAP financial information during the call, including same store revenues, Free cash flow, adjusted EBITDA, adjusted EBITDA margin and adjusted net income attributable to Gannett. You can find reconciliations of our non GAAP measures to the most comparable U. S. GAAP measures in the earnings supplement.

Speaker 1

Lastly, I would like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase any interest in Gannett. The webcast and audio cast are copyrighted material of Gannett and may not be duplicated, reproduced or rebroadcasted without prior written consent. With that, I would like to turn the call over to Mike Reed, Gannett's Chairman and CEO.

Speaker 2

Thanks, Matt. Thanks, everyone, for joining our Q1 earnings call this morning. We are pleased to report that 2023 is off to a great start. Adjusted EBITDA was down only 2% in the Q1 compared to the prior year after being down 22% in the Q4 of 2022. And entering Q2, we believe our most challenging comparisons to prior year are behind us.

Speaker 2

Excluding the impact of foreign currency, adjusted EBITDA was actually flat to the prior year. Our same store revenue trends also improved sequentially in the Q1 and we expect this trend to continue into the Q2. Net income in the Q1 grew by $13,300,000 from the prior year to 10,300,000 That compares to a net loss of $3,000,000 in the Q1 of last year. As forecasted in our last earnings call, We expect to achieve year over year adjusted EBITDA growth in 2023 as we capture the benefits from our cost management initiatives, See improving revenue trends and cycle more favorable comparisons. And the solid performance And the Q1 of this year gives us the confidence to increase our 2023 full year outlook with respect to adjusted EBITDA, net income and free cash flow.

Speaker 2

To put it concisely, We believe that we are at an inflection point in the trajectory of our company. You'll hear this throughout the call this morning as we are moving nicely in the right direction with regard to most of our financial measures. We believe our results in the Q1 demonstrate the effectiveness of the actions we put in place in the later half of twenty twenty two to better position the company for long term success. We are operating more efficiently from these efforts, resulting in anticipated annualized savings of at least $220,000,000 in 2023 And our organizational structure changes have established a solid foundation for anticipated continued growth in our highly recurring digital businesses. We also remain committed to our aggressive debt repayment strategy evidenced by the $37,000,000 of debt repayment in the Q1, which reduced our leverage in the quarter as well and continues to improve our capital structure.

Speaker 2

As our digital revenue streams continue to grow, our cost structure comes down As inflationary pressures ease, we believe we will be able to generate significant free cash flow and year over year Adjusted EBITDA Growth in 2023. With that, I'd like to discuss the major highlights of the Q1. When we spoke last on our Q4 earnings call in February, we outlined a more balanced approach between increasing profitability and growing digital only paid subscriptions. We will continue to pursue paid digital subscriptions growth. However, we have become more targeted in our subscription acquisition strategy with an increased focus on profitability and ARPU.

Speaker 2

Our digital only subscription volume in the Q1 reflects this refined balance of volume versus profitability. In the Q1, digital only paid subscriptions increased 15% year over year and remained relatively unchanged from the Q4. This was in line with our expectations as we anticipated lower net adds in the Q1 as we focus on improving Product efficiency and refocusing our marketing and pricing strategies. We anticipate this to continue in the second quarter. However, we do expect to see an increase in our subscription acquisition volumes as we move into Q3 and Q4 of this year.

Speaker 2

Even with our shift in focus, our digital only circulation revenues had strong growth of 20% year over year on a same store basis in the Q1 and we expect this growth to continue throughout the year. We believe that over the medium and long term, we have a significant opportunity to grow our digital only subscriber base, given our large organic audience. For context, during the Q1, we had 186,000,000 average monthly unique visitors. We believe our current digital offerings have a significant addressable market for us to continue to attack And we are making further investments in our infrastructure to improve our penetration of this very sizable market and to further expand the audiences that visit our platform. Investments in this area include content, content creation, Product enhancement, product improvements and importantly data collection and analysis.

Speaker 2

Data remains The most significant driver for growth with regard to our content strategy, our product strategy, and our marketing and pricing strategies. Within this significant addressable market, we have an active and engaged set of consumers across our registered users And newsletter subscribers. In the U. S. Alone, at the end of the Q1, we had 6,500,000 registered users and that grew 63% year over year.

Speaker 2

We also had 8,700,000 newsletter subscribers growing 16% year over year, of which 6,200,000 of those were not yet registered users. So that's nearly 13,000,000 engaged consumers that are not yet subscribers, who we are interacting with on a regular basis. And we expect these registered user numbers to continue to grow. Our goal is to build on those relationships, activate those users and convert a portion of this highly engaged pool of users Now switching gears a bit, one of our big growth opportunities is Further monetization of this large audience in this content platform beyond subscriptions and beyond advertising. As previously announced, partnerships are a key focus of ours in order to leverage this growth opportunity.

Speaker 2

In addition to the partnerships previously announced in the sports gambling and financial services sectors, We have plans to establish additional partnerships covering big sectors such as home services and education. We anticipate these partnerships as well as others in the pipeline will allow us to expand our total addressable market and increase the overall monetization of our content platform. We'll have much more to come and much more to announce in this area of our business over the next few quarters. We are also excited about Kristin Roberts joining Gannett as our Chief Content Officer. Kristin brings over 2 decades of Most recently as Chief Content Officer of McClatchy.

Speaker 2

In her previous roles, Kristen has architected audience growth and engineered strategic and tactical changes to create new business categories for content, creating the fuel and investment needed to sustain high quality journalism. Kristin has a proven track record creating audience and we are energized that her expertise will help drive our digital transformation and content strategy across USA TODAY and our USA TODAY network. Her focus will be on leveraging data science To refine our content strategy that drives agile interactions with our consumers, ensuring our newsrooms deliver a dynamic digital model for journalism and monetizing Gannett's breadth of content at both the national and local levels. All of these efforts are expected to lead to additional opportunities to further monetize and expand our significant audience. We are really thrilled to have Kristen on the team and we look forward to her contributions toward driving our transformation.

Speaker 2

Now Turning to our digital marketing solutions business. We achieved core platform revenues of $111,400,000 in the Q1 of 2023, increasing approximately 4% year over year, while maintaining strong adjusted EBITDA margins. ARPU and budget retention both grew year over year as well. We continue to expand our DMS product offerings through our freemium experience, which contributed to our DMS registered users surpassing 100,000 in the Q1. Our registered user comp continues to show impressive growth as demonstrated by nearly doubling from 55,000 registered users at the end of the 4th quarter.

Speaker 2

These premium registered customers are in addition to our nearly 15,000 core platform customers. Our premium customer segment provides an interested and engaged base of businesses to introduce low ARPU, do it yourself or buy online products and we expect to start to more meaningfully monetize this business as we move forward. We continue to remain very optimistic about the DMS business and its growth potential. First, this business has many similarities to a subscription or SaaS model and that it generates high revenue and client retention. We have historically retained 95% of customer revenue comparable to that of a SaaS or subscription product.

Speaker 2

There are over 30,000,000 small businesses in the U. S. And those businesses are increasingly dependent on a digital strategy to grow their own business and importantly to generate and manage leads. We serve these businesses with our digital platform that helps our business partners establish and optimize their digital presence. We assist them with optimizing their marketing spend across an Increasingly complex online digital ecosystem, while optimizing their lead management process.

Speaker 2

Finally, given our long standing involvement and knowledge of the communities in which we operate, we believe that we have a true advantage at successfully reaching the small and medium sized business segment with a lower overall CAC. Let's talk about generative AI for a second, a very hot topic globally and in our industry. Generativeai while still in the early stages in terms of development Shows tremendous potential to help us improve our business, but of course has risks as well. Gannett is committed to being a leader in using AI effectively and innovatively, while maintaining unique in-depth and unparalleled content that only our journalists can produce. We continue to explore the possibilities of AI, but have already seen and implemented use Looking at where we can benefit most, one area that stands out is commoditized content such as weather and event listings.

Speaker 2

By utilizing generative AI, we can effectively provide basic content to our audience, while allowing our journalists to focus on creating more high quality non commoditized content and value added services. We can further leverage AI to improve the product experience in areas such as personalized content recommendations and curated page experiences. EndAI can help improve and quicken business decisions in areas such as pricing strategies or balance of premium content on our pages. The applications of AI are vast and by responsibly leveraging the technology, we can improve the customer experience and create efficiencies that allow our journalists to provide more rich local and national content, All the content that Gannett is known for. Now before turning the call over to Doug, I want to reiterate a few very important points.

Speaker 2

We had a solid Q1 with noticeable improvement in trends across a broad spectrum of our business. It was very encouraging and our confidence Enables us to raise our guidance in several key financial categories. With declining debt and lower leverage, Improving same store revenue trends with a greater portion of revenue coming from digital and a meaningfully lower cost structure, We are well positioned to grow adjusted EBITDA and free cash flow significantly this year over the prior year and we remain confident in our ability to reach our inflection point toward the end of next year. We believe we are well positioned to execute on our transformation while we delever the company, resulting in significant value enhancement for our shareholders. I'd like to now turn the call over to Doug to provide additional detail and color around our 2023 Q1 as well as the details on the increase to our full year 2023 guidance.

Speaker 2

Doug?

Speaker 3

Thank you, Mike, and good morning, everybody. As Mike mentioned, we are very excited by the progress we made in the Q1. Adjusted EBITDA remained relatively stable year over year despite facing the most challenging comparisons of the year. Last year's negative trends around revenue, inflationary impacts and currency All became more significant beginning in the Q2 of 2022. We also improved our adjusted EBITDA margin in Q1 by 80 basis points year over year.

Speaker 3

The stabilization in adjusted EBITDA reflects the successful execution of our cost management initiatives as well as the sustained execution of our strategy. We are optimistic about the ongoing trends, which we anticipate will continue to improve throughout the year, most notably in Q2 and Q3. We believe this puts us in a favorable position to achieve year over year adjusted EBITDA growth for 2023. For Q1, total operating revenues were $668,900,000 a decrease of 10.6% as compared to the prior year quarter or 9.3% on a same store basis. This represents a 100 basis point improvement from the 10.3% year over year same store revenue decreases in the Q4 of 2022, and we expect this trend improvement to continue for the balance of the year.

Speaker 3

Adjusted EBITDA totaled $62,900,000 in the Q1 2023, a slight decrease of 2% or $1,300,000 year over year due almost exclusively to the impact from foreign exchange rates. The adjusted EBITDA margin was 9.4% compared to 8.6% in the prior year quarter. The improvement in adjusted EBITDA margin was driven by the savings captured from our cost management initiatives, with expenses related to these initiatives down approximately 12% year over year. This is despite the lingering impacts of inflationary pressures. While we believe these costs peaked in late 2022, the flow through impact was still meaningful on a year over year basis in the Q1 of 2023.

Speaker 3

On the bottom line, we ended the Q1 with net income attributable to Gannett of $10,300,000 and $5,800,000 in adjusted net income. Our net income represents a on the sale of real estate and other assets and a $17,600,000 tax benefit. We continue to expect a full year tax provision to remain in line with our original guidance of $0 to $20,000,000 with the expected tax benefit in the first half of the year being offset by an expected tax provision in the second half of twenty twenty three. Total digital revenues in Q1 were $247,500,000 down 0.9% year over year on a same store basis. In the Q1, our total digital revenues accounted for 37% of our total revenues.

Speaker 3

Digital revenues decreased due to continued softness in digital advertising, which started in mid Q2 of 2022 and was down 15.8% in Q1 of 2023 on a same store basis year over year. The decrease in digital advertising revenue was primarily driven by lower monetization rates as compared to the prior year period. We expect to begin to cycle this impact midway through the Q2 of 2023 and return to digital revenue growth. This will help us reach our long term projection of total digital revenues accounting for more than 50% of our total revenue. The performance in our digital only circulation and digital marketing solutions businesses is expected to continue to provide the foundation for future growth.

Speaker 3

On a same store basis, our digital only circulation revenues of $35,800,000 increased nearly 20% over the prior year period. As we look ahead, we expect ARPU to gradually rise through the rest of the year as we continue to focus our customer acquisition efforts on more profitable subscribers. Advertising revenue decreased 10.7% compared to the prior year on a same store basis, reflecting a stabilization and improvement in trends despite the continued secular declines. There has been a significant improvement in Print advertising trends on a sequential basis with an increase of over 600 basis points compared to Q4 of 2022. We did experience some softness in the classifieds market, which includes obituaries and employment listings.

Speaker 3

However, we have implemented self-service order capabilities across both of those verticals and we are pleased to report that in the initial stages, The self-service functionality has led to an increase in both the order volume and average order size as well as an expanded customer base.

Operator

One moment please.

Speaker 2

I'm going to pick up for Doug here. Results in print circulation have also seen a sequential improvement compared to Q4 of 2022 As a result of the actions we implemented to improve the subscriber experience, we have started to see the results of our investments in addressing the open route situation and distribution challenges and we've successfully seen the percentage of open delivery routes decrease From 14% to 9% in the Q1 of 2023, that's helped us a lot. It's important to stress that we believe our traditional Print business remains a strong source of cash flow, which still has a long tail to it. This cash enables us to improve the balance sheet by repaying debt and of course it allows us to investigate invest in our digital growth opportunities. We are focusing on managing the tail and print as effectively as possible and have increased our efforts to reduce churn with our print subscribers.

Speaker 2

Revitalizing our local markets is a key objective for us in 2023. Our new Chief Content Officer, Kristin and her team are working to put our customers, readers, viewers and listeners at the forefront of every content decision. This will ensure that we remain vital to the communities we serve, while maintaining Sustainable business model for independent journalism. We recognize that investing in our local teams and our local brands It is vital to our success and we are thrilled to have Kristen as part of the Gannett team. In our digital marketing solutions business, Total revenue in the Q1 was $112,800,000 an increase of 3.4% year over year on a same store basis.

Speaker 2

Adjusted EBITDA for the segment was $11,700,000 representing a margin of 10.4% in the 1st quarter. Average monthly customer count decreased by approximately 4.5%. However, ARPU grew almost 9% versus the prior year. In terms of quarter over quarter results, customer count decreased slightly from 15,300 in Q4 to 14,700 in Q1 due to the inherent seasonality of our customer base. However, we believe our continued execution, especially with the freemium model, along with the development of additional products and features We'll increase our addressable market and mitigate at least in part the effect of seasonality on the DMS business.

Speaker 2

I'll turn it back over to Doug now to cover the balance sheet. Doug?

Speaker 3

Thank you, Mike. Apologies for the technical issues. So at the end of the Q1, we had a cash balance of $83,100,000 translating to net debt of approximately $1,150,000,000 In the Q1, free cash flow usage was $2,100,000 and included $18,200,000 in severance and restructuring costs, largely associated with our cost management program. In Q4 of 2022, we highlighted that we anticipate A year over year reduction of more than $60,000,000 in our 2023 cash obligations related to expenses such as pension and reorganization costs. In light of our Q1 results, we anticipate a significant improvement in our free cash flow and we are now targeting free cash flow of $85,000,000 to $105,000,000 for the full year of 2023.

Speaker 3

We ended the Q1 with approximately $1,230,000,000 Our first lien net leverage decreased to 2.59 times, reflecting $37,300,000 A total debt pay down in the Q1. During the Q1, we repurchased $6,100,000 of our 20 26 senior notes For approximately $5,000,000 we also repaid $31,300,000 of our term loan through real estate and other asset sales totaling $200,000 and our quarterly amortization payment of $15,100,000 In Q1, we completed 8 real estate and other asset sales totaling $29,300,000 For the full year of 2023, we continue to project $65,000,000 to $75,000,000 in real estate and other asset sales, including those we completed in the Q1. We continue to maintain a sizable real estate sales pipeline of approximately $50,000,000 to $60,000,000 which combined with our expected free cash flow improvement will contribute meaningfully to our aggressive debt pay down strategy. Moving now to guidance. We are reiterating our prior guidance as described in today's earnings release with respect to revenues, same store total revenues and 1st lien net leverage.

Speaker 3

We are increasing our 2023 full year outlook for both adjusted EBITDA and free cash flow by $5,000,000 As a result of the Q1 results, we now expect full year adjusted EBITDA between $285,000,000 to $305,000,000 which translates into expected year over year growth of over 15%. This growth is expected to be most significant in Q2 and Q3 of 2023 due to the cycling of the more significant revenue declines and the ramping of our cost management initiatives. Free cash flow is now expected to be in the range of $85,000,000 to $105,000,000 We also raised our full year outlook for both net income attributable to Gannett and cash provided by operating activities by $5,000,000 For the full year, we expect net income attributable to Gannett to range from a net loss of $15,000,000 to net income of $15,000,000 while cash provided by operating activities is expected to be in the range of $125,000,000 to $145,000,000 Just to recap, I am extremely pleased with our Q1 performance, the progress of our strategic initiatives, our ability to effectively reduce our overall cost Questions and then we can go to Mike for some closing thoughts.

Operator

Thank you. We'll now be conducting a question and answer Our first question comes from Courtney Baumann with Barclays. Please go ahead.

Speaker 4

Hi, good morning guys. Congrats on the results. Hopefully, I didn't miss this, but could you guys give a little bit Color on how we should think about the cadence of assets, the remaining asset sales and kind of how Depaydown ties to that? Any color would be great.

Speaker 2

Yes. Hey, Courtney. This is Mike. Thanks. So with regard to debt pay down, we have our normal quarterly amortization that's Obviously straightforward $15,100,000 a quarter and then the remaining $50,000,000 to $60,000,000 of asset sales will be a little bit more lumpy.

Speaker 2

There's a couple of decent sized ones in there. So I would say between now and Q4, we hope to complete most of that And we factored that into our overall forecast for debt repayment of $120,000,000 plus for the year. So real estate a little lumpy Because of a couple of sizable transactions, but really straightforward on the regular quarterly amort.

Speaker 4

That's great. Easy question from me. Thanks

Speaker 2

again. Thank you.

Operator

Our next question comes from Doug Arthur with Hubbard Research. Please go ahead.

Speaker 5

Yes, good morning. I got to be brief here because I got to jump But the digital I know you talked about slowing digital subscription subscribers down to maximize sort of approach it With a more profitable goal in mind, that looks like sequentially, it looks like it actually dropped From the Q4 in terms of number of subscribers, what sort of is your expectation for growth And the volume number for the balance of the year? Thanks.

Speaker 2

Doug, It was actually 6,000. So not much of a drop. I think we're at 2028 and then the end of the Q1 was 2022. We are focused on higher retention, higher paying, therefore, better ARPU and profitability on as I said with better retention. So we're focused on getting the right content in front of them, the right curation, the right personalization And then having the right marketing and pricing strategies in place.

Speaker 2

So we're playing with a few things here in Q1 and Q2 and Expect to see much more significant growth in Q3 and Q4. We haven't provided any guidance on that yet and I'd say that We'd like to be a little more comfortable with the success we see over the next few months to feel better about guiding to a The ability in ARPU per subscriber to return to growth of paid subscribers from a digital perspective and to be able to increase the current revenue Growth that we're seeing of 20%, return that to something higher as well. So I think there's definitely much more to come over the next couple of quarters on that, Doug.

Speaker 5

Okay. I mean, so in theory, you're probably seeing hopefully better stickiness among the existing subscribers because you're sort You're sort of parodying out the high churn ones?

Speaker 2

Yes, that's accurate.

Speaker 5

Okay. Makes sense. Thank you very much.

Speaker 2

Okay. Thanks, Doug.

Operator

There are no further questions at this time. I would like to turn the floor back over to Mike Reed, CEO for closing comments. Please sir, go ahead.

Speaker 2

Yes. Thank you. I'd like to close this morning by reiterating how pleased we are With the significant progress we made in the Q1, Q1 results were a little bit better than we had anticipated and we were glad to see that. We saw significant growth in net income over the prior year along with improving same store revenue trends and essentially flat adjusted EBITDA compared to the prior year, reversing a decline in trends seen over the previous 5 quarters. We also made continued good progress in reducing debt and we saw our net leverage decline in the quarter.

Speaker 2

We expect to see a lot more of that all of these things as the year goes on. We are very pleased that we are able to reiterate our full year revenue guidance along with increasing Our full year guidance for net income, adjusted EBITDA and cash flow. We expect to see continued improvement in revenue trends as 2023 progresses and we remain focused on achieving our revenue inflection point toward the end of 2024. Further, we expect to see significant adjusted EBITDA growth in 2023 versus the prior year, as well as about $100,000,000 in free cash flow growth this year. With our growth in adjusted EBITDA combined with our continued aggressive debt repayment, we expect 1st lien net leverage to be below 2 times as we end this year.

Speaker 2

With the changes in our org structure and our strategic focus on leveraging our content org to grow audience and revenue combined with our partnerships that will better monetize our significant audience on the platform And our improving strategy around digital subscriber and digital revenue growth, we are very optimistic about our continued improvement to revenue trends, not only the back half of this year, but in 2024 as well. So with low leverage, good liquidity, lower cost structure In improving same store revenue trends, we are very well positioned to return significant value to our shareholders as we move forward. Thanks for joining us on the call today and we look forward to updating you again at the end of the Q2. Thank you.

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