Gannett Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 3, 2023

There are 6 speakers on the call.

Operator

Welcome to the Gannett Second 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, Matthew Esposito.

Operator

Thank you. You may begin.

Speaker 1

Thank you. Good morning, everyone, and thank you for joining our call today to discuss Gannett's Q2 2023 financial results. Presenting on today's call will be Mike Reed, Chairman and Chief Executive Officer Doug Horn, Chief Financial Officer Kristin Roberts, Gannett Media Chief Content Officer and Chris Cho, President of Digital Marketing Solutions. If you navigate to the Gannett website, you will find that we have posted an earnings supplement in addition to our earlier press release. We will be referencing it today on the call as it provides you with additional detail on this quarter's performance.

Speaker 1

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. Except as required by law, we undertake no obligation to publicly update or correct any of the forward looking statements made during this call.

Speaker 1

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. 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, With that, I would like to turn the call over to Mike Reed, Gannett's Chairman and CEO.

Speaker 2

Thanks, Matt. Good morning to everyone and thanks for joining us on our Q2 earnings call this morning. We are pleased to report a strong quarter of improving financial results for Gannett. In Q2, adjusted EBITDA reached $71,200,000 and grew by 40% year over year. We also generated $38,000,000 of free cash flow In the quarter, reflecting a significant increase of approximately 190% compared to Q2 of last year.

Speaker 2

We believe our strategic initiatives continue to play a crucial role in driving sequential improvements In same store revenue trends. As a result, our total digital revenues, which returned to growth in Q2, Now account for nearly 40% of total revenue, representing an all time high. Our cost controls remain strong and we continue to work diligently on our optimization efforts. All of these items, adjusted EBITDA growth, Sustained improvement in same store revenue trends, expansion of digital revenue and significant free cash flow generation are expected to continue in the second half of the year. And as a result, we are again raising our guidance for the fiscal year 2023.

Speaker 2

Importantly, on total digital revenues, we returned to growth in the 2nd quarter And importantly on that, with June specifically being our best month in the quarter, we further expect digital revenue growth trend improvement in the 3rd quarter. We also repaid $15,000,000 of debt in the quarter, which combined with our adjusted EBITDA growth Has materially reduced our 1st lien net leverage to 2.26 and we expect this figure to fall well below 2 times By the end of 2023, we believe we are making great progress on our strategy and our results signify a notable turning point We continue to build on the strong foundation we laid over the past year. Our focus on profitability, Digital revenue growth and strengthening our balance sheet persists and that focus is evident in our results. With that, I'd like to discuss the positive results achieved in the Q2. In Q2, our digital only subscription revenues showed continued growth increasing by 17% year over year on a same store basis and they grew sequentially 6 percent over the previous quarter.

Speaker 2

Our Q2 digital only subscription volumes, which grew 5% year over year As a result, in Q2, we achieved our highest ARPU level in 2 years. We believe we have continued upside with regard to ARPU and expect ongoing digital only subscription revenue growth as we continue to strategically focus on a smart customer acquisition, content and pricing strategy. Customer churn remains below industry standards and we continue to believe we have the significant opportunity to grow digital only subscriptions in the future our large organic audience of 185,000,000 average monthly unique visitors, of which 134,000,000 of those come from our USA TODAY network as measured by Comscore and $51,000,000 come from our UK digital properties. In addition to our digital subscriptions, we are hyper focused on the overall monetization of our user base with a bias towards recurring revenue. In fact, we believe the revenue opportunity is much bigger Through embracing and monetizing all the visitors to our platform beyond digital subscriptions.

Speaker 2

This monetization comes from leveraging affiliate We believe these strategic initiatives, coupled with our unwavering commitment to delivering relevant and essential content, Will allow us to better optimize all of our audience and improve our overall digital revenue growth. We are also excited to share that our partnerships in the gambling and financial services sectors with gambling.com and Forbes marketplace platforms are pacing ahead of expectations in their 1st year. The performance of these partnerships gives us great confidence And the potential growth from these relationships as well as other partnership opportunities that may arise To grow into material revenue and cash flow streams for Gannett. As previously mentioned, we are actively exploring additional partnerships in in major sectors such as home services and education, and we expect more partnership announcements to come over the next year. We believe this strategic expansion will enable us to reach a broader audience, increase our digital revenues and enhance the overall monetization of our platform.

Speaker 2

We believe our overall monetization strategy is rooted in the highly valued and unique content the USA TODAY network produces. As we move forward, we believe content will continue to be the growth engine for Gannett Media. We are so excited that Kristin Roberts joined our leadership team as Chief Content Officer and Kristin is already bolstering our efforts to drive that growth. Kristen and her team are executing on her strategy to rapidly expand our audience, amplify our journalism and drive diversified revenue streams. The content team is diligently focused on and page views.

Speaker 2

Even in the initial stages of this strategy, we are already seeing significantly improved results. For example, various initiatives implemented in June our consumers through our differentiated content, including local news That is important and vital to our communities. Through our reach, we are committed to helping local businesses cultivate new customers Through our media and marketing tools, technologies and services. We are encouraged by the early results of our increased Local efforts. While there's much to do, our leadership team knows there is a great opportunity to strengthen our local brands, which we believe will lead to increased revenues, engagement and profitability.

Speaker 2

In connection with our increased local market focus and optimization efforts, we recently appointed Jason Taylor as Chief Sales Officer of Gannett Media. In his prior role with Gannett, Jason ran USA TODAY Network Ventures, which we believe is the largest domestic media owned events business. Jason will oversee our B2B media and events teams as we prioritize securing new business And embedding events across the company as part of our advertising, sales and promotional strategy at both the local and national levels. Jason's energy and track record of revenue growth, combined with his expertise in local media and event management, We'll further propel our sales efforts and we are excited about the positive impact he will have on the company. As we focus on local communities and the importance of content, we believe nothing is more critical than the consumer and our strategy to be essential in their lives.

Speaker 2

With that in mind, we are thrilled to welcome MTS Patel As Chief Consumer Officer of Gannett Media, MTS recently joined us from the Baltimore banner where he was the CEO of the digital news site. He brings extensive experience from consumer news media organizations, where his focus has been on growth strategy and digital expansion. With a strong track record of delivering results, he is widely recognized as an incredibly collaborative leader. We are thrilled to have MTS on team Gannett and are confident he will make a great impact. We are also very pleased to have Chris Cho join us to lead the digital marketing solutions business, Local IQ.

Speaker 2

Chris is a proven product executive and visionary who spent over 2 decades building and scaling tech enabled businesses. Most recently, Chris was Chief Product Officer at Acxiom, A recruiting technology platform for legal talent resources. He oversaw product, platform technology and go to market strategy. In his capacity, Chris was instrumental in launching new features and expanding the product portfolio. We are very excited to have Chris' expertise and leadership and we look forward to the positive impact he will bring to Gannett.

Speaker 2

A key component of our digital revenue growth strategy is the aforementioned digital marketing solutions business. In the Q2, we achieved our highest core platform revenue in history of the segment, reaching 121,600,000 Growing 4.4% year over year and improving our growth trend from Q1 of this year by 0.5 point. We also continue to generate strong adjusted EBITDA margins. Year over year, we achieved significant growth In both core platform ARPU and budget retention, and we are particularly excited to see ARPU reach an all time high. We also witnessed strong sequential growth in customer count, surpassing 15,000 customers in Q2.

Speaker 2

We remain committed to running our digital marketing solutions business in a manner that appropriately balances revenue growth and profitability, while also enhancing our product offerings to target an expanded customer base through a premium experience, Combined with compelling do it yourself offerings and other technology enabled products. Our complementary model continues to drive impressive growth with daily registered users surpassing 140,000 in Q2. That compares to 7,000 in Q2 of last year. These 140,000 registered users are in addition to our 15,300 core platform customers. We are also actively developing our cross media optimization technology known as XMO.

Speaker 2

This AI powered technology facilitates goal based advertising by leveraging insights, optimizations and actions to deliver exceptional results. We are excited about this product line's potential as well as its expected ability to deliver strong growth And believe we will see continued strong performance over the back half of this year. We concluded the first half of twenty twenty three with significant momentum. And as we enter the second half of the year, our optimism continues to grow. Before I turn it over to Doug to talk about more detail of the quarter, I'd like to take a moment to let Kristen And Chris share a few remarks as they join Gannett since our last quarterly call.

Speaker 2

And I'm going to start with Kristen. Kristen, I'll kick it over to you.

Speaker 3

To have this extraordinary opportunity to work with a talented team serving communities nationwide. Throughout my career, I've been a part of content organizations that lead the way in creating innovative business models and in driving growth. I joined Gannett Because I believe the potential here is truly unparalleled. The net serves an engaged and expanding audience, which we believe offers us unlimited potential for diversified, 5 predictable and repeatable revenue growth. The exciting part about that growth is that it benefits our company and our shareholders While empowering us to make substantial investments in journalism that delivers on our purpose as a local news organization.

Speaker 3

Together, this allows us to better serve our communities. I've already seen remarkable progress in my brief time here. As Mike mentioned, We've created a notable increase in new audience views in June alone, and we've repurposed funds to make significant investments in Content by hiring more journalists with more to come. We're still in the early stages, but I'm excited about our potential to achieve profitable growth While sustaining and strengthening journalism, my passion for leading Gannett down this path is unwavering and I am confident in our success. Back to you, Mike.

Speaker 2

Thank you, Kristen. And now I'd like to pass it over to Chris Cho, who is now leading our LocalIQ business. Chris?

Speaker 4

Thank you, Mike. I am excited to join Gannett and LocalIQ. I'm deeply impressed by the collective talent and the innovative products and solutions offered. The passion to drive growth for our customers' businesses is truly inspiring and I look forward to leveraging my experience Building and nurturing tech enabled businesses to contribute to our continued success. In the upcoming quarters, our team will work to develop short and long term plans as we lay out comprehensive strategies for maximizing our freemium business and start developing new product offerings As we continually obsess over meeting their needs.

Speaker 4

Together, we will embark on a journey to develop new and creative solutions that cater to their evolving requirements and ensure their ongoing success. I believe the journey ahead is exciting and I'm eager to contribute my expertise to our collective growth and success. Mike?

Speaker 2

Thanks, Chris. And before I turn it over to Doug, just want to say how excited we are to have Chris, Kristen here as well as MTS and Jason and can't wait to see the impacts they make to our business, not only over the couple quarters but over the coming years. Now I'll turn it over to Doug for additional color around the Q2 of 2023.

Speaker 5

Thank you, Mike, and good morning, everyone. As Mike mentioned, we are very pleased with the strong performance and financial results in the 2nd quarter, which demonstrates solid progress against our strategic priorities. For Q2, total operating revenues $672,400,000 a decrease of 10.2% as compared to the prior year Or 8.6% on a same store basis. This represents a 70 basis point sequential improvement from Q1 revenue trends And we expect significant improvement in the year over year revenue trend during the second half of the year. Companywide, we continue And we continue to work strategically to implement transformative cost initiatives.

Speaker 5

Notably in Q2, 2, we outsource certain technology functions and we expect to see the benefit from these cost optimization efforts in the upcoming quarters. We will continue to exercise prudent cost management with an emphasis on optimizing those centralized costs in order to preserve our resources in the markets quarter of 2023, an increase of approximately 40% or $20,300,000 year over year. Adjusted EBITDA margin was 10.6% compared to 6.8% in the prior year quarter, representing an improvement of 380 basis points. The growth in adjusted EBITDA was fueled by the improving revenue trends, strategic cost controls and the continued operational progress against our goals. As a result of our performance in the first half of the year, we continue to expect meaningful adjusted EBITDA growth in 2023.

Speaker 5

Total digital revenues returned to overall growth in Q2 and were $262,100,000 Up 0.8% year over year on a same store basis. In the Q2, our total digital revenues accounted for 39% of our total revenues. Given the ongoing pressures and digital media monetization rates, our digital advertising revenues saw an 11.4% year over year same store decline, We are very encouraged by the significant 440 basis point improvement compared to 1st quarter's performance. Looking ahead, we expect a continued rebound in digital advertising due to more favorable comparisons and initiatives including increased sell through. In addition, we expect notable improvement in digital revenues For both Q3 and Q4 of this year, the performance in our digital only Subscription and digital marketing solutions businesses are key components of the company's strategic foundation for future growth.

Speaker 5

On a same store basis, our digital only subscription revenues increased nearly 17% year over year to $38,000,000 Digital only paid subscriptions grew 5% year over year and declined slightly from Q1. This reflects intentional actions to continue optimizing acquisition costs by prioritizing long term monetization versus short term volume. These deliberate actions are paying off, evidenced by the 6% year over year growth in digital only ARPU, which is the highest level in 2 years. ARPU is expected to continue to grow throughout the second half of twenty twenty three as we continue to focus on customer acquisition and retention efforts on those more profitable subscribers as well as the continued optimization of our pricing strategy. Despite secular headwinds, the decrease in print advertising revenue was limited to 8.9% year over year on a same store basis, marking the smallest decline observed in the past year.

Speaker 5

Our sequential trends also improved by 180 basis points compared to Q1 of 2020 3. The results in print subscription revenue continue to show promising improvements, driven by the we implemented to enhance the subscriber experience. We believe our investments in addressing open routes and distribution challenges are paying off With the percentage of open delivery routes declining over 44% versus the prior year. In Q2, our other revenues category, which includes commercial print and delivery, faced muted trends, which had a negative impact on the company's overall revenue. Despite 2 years of recent growth, this revenue stream experienced a 5.3% year over year decline on a same store basis.

Speaker 5

This decrease can be attributed to a reduction in commercial print volumes as well as lower digital media CPMs, Which negatively impacted the 3rd party monetization of our syndicated content. Moving to our digital marketing solutions business. Total revenue in the Q2 was $122,800,000 An increase of 4.6% year over year on a same store basis. Adjusted EBITDA for the segment was 15,500,000 representing a margin of 12.6 percent in the 2nd quarter and an increase of 50 basis points year over year. The average monthly customer count increased from Q1, but decreased 5.6% compared to the prior year period Due to higher churn across the lower margin customer segments.

Speaker 5

However, core platform ARPU reached a record high in Q2, growing 10% versus the prior year period. Additionally, budget retention saw an increase of 70 basis points year over year, Reaching 95.6 percent in Q2. We believe these positive trends reflect our continued emphasis on the product portfolio And are focused on delivering an outstanding client experience. Let's now shift to the balance sheet. At the end of the Q2, our cash balance stood at $106,600,000 translating to net debt of approximately $1,100,000,000 We generated free cash flow of $38,400,000 in the 2nd quarter, marking a substantial increase of $81,700,000 Compared to the prior year period.

Speaker 5

Looking ahead, we anticipate significant free cash flow generation in Q3 and Q4 of this year, With the full year expected to be between $90,000,000 to $110,000,000 We ended the 2nd quarter was approximately $1,200,000,000 of total debt. Our first lien net leverage decreased to 2.26 times, reflecting $15,100,000 of total debt pay down in the 2nd quarter and improved adjusted EBITDA performance. During July, we repaid an additional $8,200,000 of our term loan using the proceeds from recent real estate asset sales. Debt repayment remains a top priority for us and as a result, we expect our 1st lien net leverage to fall well below 2 times by the end of the year. 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 debt repayment for the remainder of the year.

Speaker 5

At the end of the Q2, Gannett took legal action by filing a lawsuit against Google in federal court. Overall, we felt this was an appropriate time to enter the litigation given the parallel lawsuits from the Department of Justice as well as additional actions at the state level. We believe that 1,000,000,000 of dollars of advertising revenue were negatively impacted over the timeframe in question. We feel confident in our position as outlined in the claim. And importantly, from a financial perspective, we do not expect this legal action to have any meaningful impact on the net operating expenses or cash flows during the course of the lawsuit.

Speaker 5

Turning 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. As a result of our Q2 performance, we are increasing our 2023 full year outlook for both adjusted EBITDA And free cash flow by $5,000,000 We now expect full year adjusted EBITDA between $290,000,000 to $310,000,000 which translates to expected year over year growth of nearly 20%. We expect significant growth year over year in Q3 due to improving same store revenue trends and the ramping of our cost management initiatives. Free cash flow is now expected to be in the range of $90,000,000 to $110,000,000 Representing a conversion rate of at least 30%.

Speaker 5

We also raised our 2023 full year outlook for both net income Attributable to Gannett to range from a net loss of $10,000,000 to a net income of $20,000,000 While cash provided by operating activities is expected to be in the range of $130,000,000 to $150,000,000 Before wrapping up, I just want to reiterate how excited we are about the progress we've made and the company's performance in Q2. The first half of twenty twenty three closed With remarkable momentum and we are entering the second half of the year with a great deal of optimism. Our unwavering focus is on sustaining these positive trends Throughout 2023 and into 2024 as we continue to transform Gannett and in turn create meaningful value for the company's stakeholders. I'll now hand it back to the operator for questions and then we will go back to Mike for some closing thoughts.

Operator

Thank you very much. Ladies and gentlemen, we will now conduct the question and answer session. It would appear that we have no questions. And I would like to hand the floor back to Mr. Mike Creed for closing comments.

Speaker 2

Okay, great. Thank you. So I'm incredibly proud of the strong performance we achieved in the Q2 and really the first half of the year. The unwavering focus and dedication of the team here at Gannett has led to a high level of operating performance this year, resulting in solid financial results. We believe we are in a favorable position as you've heard this morning as we move into the second half of the year, Backed by a number of catalysts.

Speaker 2

Let me do a quick review of a few of those catalysts. Achieving significant adjusted EBITDA and free cash flow growth, driving digital revenue growth, Now approximately 40% of our total revenue and that percentage will keep going up, improving same store revenue trends on a sequential basis, Sustaining growth in our digital only subscription revenues, while increasing digital only ARPU through a renewed content strategy and revitalized focus on local markets. Achieving record highs in DMS core platform revenue and ARPU, While sustaining strong adjusted EBITDA, rapid deleveraging through adjusted EBITDA growth and debt repayment, And finally, adding 4 dynamic leaders to our business in Kristen Roberts, MTS Patel, Jason Taylor and Chris Cho. With these catalysts driving us forward, we are excited and confident about the opportunities that lie ahead. The remarkable progress achieved during Q2 fills us with pride and we are determined to continue delivering solid results and unlocking significant Shareholder value throughout the remainder of 2023 and of course beyond.

Speaker 2

Thanks everyone for joining us today. We look forward to updating you again in 3 months on our progress in the Q3. Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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