DallasNews Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 14, 2024

There are 7 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Dallas News Corporation Investor Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that time.

Operator

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Gary Cobley. Please go ahead.

Speaker 1

Good morning, everyone. This is Gary Cobley, Vice President and Controller of Dallas News Corporation. Welcome to our Q3 2024 Investor Call. I'm joined by Cathy Collins, Dallas News' Chief Financial Officer, who will be reviewing financial results Katie Murray, President of Dallas News and Grant Moise, Chief Executive Officer, who will provide brief business remarks. Tuesday afternoon, we issued a press release announcing Q3 2024 results, and we filed our Q3 10 Q.

Speaker 1

Both of these are posted on our website, dallascenewscorporation.com, under the Investor Relations section. Unless otherwise specified, comparisons used on today's call measure Q3 2024 performance against Q3 2023 performance. Our discussion today will include forward looking statements. Forward looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those statements. The company assumes no obligation to update the information in this communication, except as otherwise required by law.

Speaker 1

Additional information about these factors is detailed in the company's press releases and publicly available filings with the SEC. Today's discussion will include non GAAP financial measures. We believe non GAAP financial measures provide useful supplemental information to assist investors in determining performance comparisons to our peers. A reconciliation of GAAP to non GAAP financial measures is included with our press release. I'll now turn the call over to Kathy.

Speaker 2

Good morning, everyone, and thank you for joining today's call. On a GAAP basis, for the quarter, Dallas Municipal Corporation reported a net loss of $3,900,000 or $0.73 per share and an operating loss of 4,100,000 dollars In Q3 last year, we reported a net loss of $1,400,000 and an operating loss of $1,600,000 20.24 net loss includes $3,000,000 of severance expense due to the anticipated headcount reductions related to our transition to a smaller printing facility. On a non GAAP basis for the quarter, we reported an adjusted operating loss of $700,000 an improvement of $200,000 when compared to an adjusted operating loss of $900,000 reported for the same period last year. The improvement is due to expense savings of $1,900,000 in distribution, $1,200,000 in employee benefits and compensation and $1,100,000 in newsprint, partially offset by a total revenue decline of $3,400,000 that is primarily due to discontinuing the shared mail program and printing our niche publications. All other advertising and marketing services revenue, excluding the discontinued products I just mentioned, increased $400,000 or 3.3% when compared to the Q3 last year.

Speaker 2

While print advertising revenue was down, digital advertising revenue improved $48,000 primarily due to an increase in advertisements in the Dallas Morning News e epaper, partially offset by a decline in digital advertisements on dallascenews.com. In a moment, Grant will provide insight into the digital advertising trends we are seeing on our website. Marketing and Media Services revenue improved $900,000 primarily resulting from 2 new customer contracts focused on media services that began in

Speaker 3

the Q3 of the year.

Speaker 2

Circulation revenue decreased $100,000 or less than 1%. The digital circulation revenue increase of $400,000 mostly offset the print circulation revenue decline of $500,000 Digital only subscription rates increased approximately 13.5%,

Speaker 3

offsetting the decline of

Speaker 2

5,348 or 8% in digital subscribers. Total subscribers, including both home delivery and digital subscribers, was 124,000 886 as of September 30 compared to 132,694 as of December 31 and 137,493 as of September last year. Graham will also provide commentary on our digital pricing strategy. Other revenue decreased $500,000 primarily due to declines in commercial printing and distribution revenue and mailed advertisements to business customers. In the Q3, our partner for our program to distribute shared mails located in Tempe, Arizona gave their 6 month termination notice.

Speaker 2

This program has been experiencing revenue decline consistent with the overall industry trends. So ending this business relationship is consistent with the shared mail business in Dallas that we exited in 2023. We do not expect a significant financial impact from the termination of this agreement when production ends in April of 2025. On a non GAAP basis, total adjusted operating expenses for the quarter improved $3,500,000 driven by expense savings of $1,900,000 in distribution, dollars 1,200,000 in employee compensation and benefits and $1,100,000 in newsprint, primarily resulting from the discontinued product and the decline in the cost of newsprint, which was down 6.2% compared to prior year. As of September 30, headcount was 534, down 74 compared to last year, resulting from the voluntary severance program offered in the fall of 2023 and additional Q1 headcount reductions within Medium Giant.

Speaker 2

As we previously announced in May of this year, we expect additional headcount reductions in the Q1 of 2025 due to our transition to a smaller printing facility and less staff needed to operate a more modern press. Consistent with interim periods, the company used the estimated annual effective tax method and recorded $345,000 of tax expense in the quarter for the Texas franchise tax. We continue to have a strong balance sheet with no debt. At the end of September, cash and cash equivalents were $14,000,000 And as of November 8, we had $11,600,000 in cash and cash equivalents. As we look to the last quarter of the year, we will continue our disciplined expense management.

Speaker 2

The transition to the new printing facility requires incurring additional capital and operating costs this year, but once complete, will result in annual expense savings that is key to our return to growth plan. I will now turn the call over to Katie.

Speaker 3

Thank you, Kathy. Good morning, everyone. I'm going to be providing some updates on our pension plan funding status, our printing and distribution facility transition and the status on the marketing for the sale of our existing printing facility in Plano. As we have always stated, the funding of our pension plan is and continues to be a priority for management and for the Board of Directors. I am pleased to say that the plans are currently over 90% funded and that we do not have any mandatory contributions in the near term.

Speaker 3

We continue to look at any opportunities to derisk the plan. The transition of our printing and distribution operations from Plano to Carrollton continues to move forward, and we are in the process of installing the first of the 2 new presses. There is still considerable work to do, including the receipt and installation of the second press, but we remain optimistic that we will complete the transition of the operation from Plano to Carrollton in the Q1 of 2025. As part of this transition, we have worked with our national printing and distribution partners, and I'm happy to say that the partnership to print and distribute The Wall Street Journal, New York Times and USA TODAY will continue as part of this transition. The Fort Worth Star Telegram decided in the Q3 to cease their daily printing and distribution in October of this year and move to a 3 day a week print product distributed by mail and we are no longer printing their product.

Speaker 3

As we discussed on our last investor call, we engage brokers to assist us with the sale of the 28.8 Acres and 620,000 Square Foot facility in Plano. While I do not have a specific update on the status of the process, I can say that we are encouraged by the level of interest and activity we have seen from all types of buyers, including data centers, end users and industrial redevelopment. In terms of how the company thinks about the future use of any potential proceeds, we view this through 3 distinct lenses. 1st, the investments we need to build into first, the investments in the company, we need to build a sustainably profitable media company. 2nd, continuing to be responsible stewards of the company's pension plan and 3rd, returning capital to our shareholders.

Speaker 3

I will now turn the call over to Grant.

Speaker 4

Thanks, Katie. Good morning, everyone. In the Q2 investor call, discussed that while we have yet to reach sustainable profitability, we are making steady progress. The 3rd quarter reflected this progress with the $200,000 year over year improvement in the company's adjusted operating loss. At a more detailed level, the Q3 was the last quarter in which Medium Giant reported revenue comparisons, including our discontinued shared mail program, which as you all will remember ended in the Q3 of last year.

Speaker 4

Medium Giant has been focused on growing its revenue from continued operations and so I was very happy to see they grow that revenue by $400,000 On the digital side of The Dallas Morning News, we've been focused on referral traffic trends to our website. Referral traffic is significant because it generates advertising revenue and provides potential consumers with whom we can convert into digital members. Google has been our most significant source of referral traffic for many years Since the beginning of this year, we have witnessed a steady decline in the audience coming from Google. This decline in website traffic contributed to

Speaker 5

the

Speaker 4

slight decrease in our digital advertising revenue coming from dallascenews.com, which is down 1% through September of this year and has typically been a source of growth for the company. The newsroom and our audience team are creating new audience engagement strategies to offset this decline, but the power of search engines is difficult to overcome. Shifting to the digital subscription side of the business at the morning news, I noted in our last investor call that we were reviewing our strategy to find the optimal balance between subscription volume and pricing. This quarter, we modified our digital subscription strategy to be more volume centric by extending our introductory pricing window from 1 month to 3, while also testing the ongoing price the consumer is willing to pay for local digital news on an ongoing basis. This strategic decision successfully ended our 14 month digital member volume decline, and I'm pleased to say that the digital member growth has exceeded our early expectations since we implemented this new strategy.

Speaker 4

This decision will take time to be reflected in the revenue growth, but we are cautiously optimistic given how consumers have responded to the new pricing in its early stages. Greg, we are now ready to open it up for questions.

Operator

Okay. Your first question comes from Rohan Gilmore, a Private Investor. Please go ahead.

Speaker 5

Hey guys, good morning.

Speaker 3

Good morning. Good morning.

Speaker 5

I have a few questions for you, if that's okay. So number 1, what was the digital circulation volume growth since the change in pricing midway through the quarter?

Speaker 4

Yes, Rohan. So we have grown a little bit over 3,100 digital subscribers since we changed the strategy back in early September.

Speaker 5

Got it. And then in the one and a half months of the current quarter, would you say that, that trend has continued?

Speaker 4

Yes. It's gotten even a little bit better, Rohan, I would say in the Q4, if you're kind of referring to kind of where things have been since October 1. Out of that 3,100, about 2,500 of that has come from the beginning of Q4.

Speaker 5

Okay. So it's about 600 from the change in strategy in Q3 and then $2,500 in the quarter to date. Is that what you're saying?

Speaker 4

Correct.

Speaker 5

Okay, that's helpful.

Speaker 4

Where do you guys what do

Speaker 5

you guys think about the TAM for the digital news product at the current price point? I mean, I've done some kind of research and back of the Mac and Matt and I my estimate is it could be somewhere between $250,000 $500,000 but is that way off? Is that a ballpark figure? Or how do you guys think about that?

Speaker 4

So, Rohan, I guess from Tam, just to clarify for everyone on the call, I'm guessing you're just talking about the total addressable market for digital subscribers for dallasnews.comanddallasmorningnews. Is that what you're saying?

Speaker 5

Yes, that's correct.

Speaker 4

Yes. I mean the way we look at the total addressable market is you can take the 8,300,000 people in North Texas and then we narrow it down to how many our intelligence tells us are paying for news, which is about 600,000. So we think that the amount of people in North Texas who are paying for news is roughly 600,000. So if you look at where we are today, we're a little north of 10% of that. So the question is and that's also why on the heels of what we've just done on pricing, when we're thinking about volume, we're also trying to figure out at what price point ongoing is that volume going to be in place.

Speaker 4

So I think your number obviously would get closer to 50% of that addressable market. I don't know if that's attainable. Frankly, the way that we look at it strategically is just thinking through how do we get from roughly 10% of that market to 15% to 20% to 25%. And just say, if we can keep taking this up in 5% increments, as you can tell, every 10% would be 60,000 digital subscribers, if our addressable market size of people paying for news is accurate.

Speaker 5

That's great color. Thank you. On the advertising side, has there been any meaningful pickup in advertising revenue related to in the current quarter related to election spending?

Speaker 4

No. I think someone I believe may have asked that question at the end of last quarter. It's kind of the good news and the bad news, I guess, in our side of the industry. If you look at the television side of the business, obviously they just saw a significant lift in ad revenue. Ours is probably going to be a rounding error, Rohan, in the Q4.

Speaker 4

It's just not material in the kind of if you think about the newspaper side of it, they're just putting a lot of money into television and streaming. We got a little bit of video revenue or digital ad revenue, but not enough to matter.

Speaker 5

Okay. And then last question on digital is, is there any update on kind of release of new digital products or any news there?

Speaker 4

Yes. So I mean one of the things that we're always assessing and we think just clarify for everyone on the call, when I think of a new digital product, I'm thinking about standing something up with its own brand, most likely its own website and its own app. And so for us, we also look at we're also weighing the cost of launching a new product versus launching new features. And right now, Rohan,

Speaker 5

really

Speaker 4

a lot of the pro formas that we're running on the new products are not where Katie and I especially would like to see them. And so rather, we've just turned the team's attention in the short term to launching as many new features as possible to drive revenue and operating income. Let me give you a couple of examples of what I mean by that. We are in a beta test of an entirely new video platform on our website that is being tested in sports. It will roll out to the full website in the Q1.

Speaker 4

Now that's great because it adds to engagement and the advertising revenue that comes from video for us is more the advertisers willing to pay more for video than they are for a static ad. We are also we just updated our new app this week. If you've not updated that in the iTunes, iTunes is actually launched. We have not launched yet in the Android store. But that plus bringing in commenting to the website, which will launch in the Q1, all of our math is showing us, Rohan, that focusing in the short term on these features can provide more initial financial benefit to the company.

Speaker 4

But again, we are still going to keep looking for new products because that diversification in the long run is going to be valuable. But we've not seen something pencil out to where we are putting investment dollars behind it yet.

Speaker 5

Got it. Got it. Just two last questions, if that's okay. So on agency's strong revenue improvement quarter over quarter and year over year, I believe there was an associated expenses revenue related expenses for outside services. What was that?

Speaker 5

And is that something that's going to be kind of ongoing or is that one time in nature?

Speaker 4

Yes. So we think of that, Rohan, is what we call the revenue mix that's coming from the agency. So that revenue from mix, for example, of where you saw that in the most recent quarter comes from our media expense. So Medium Giant is the agency of record for these clients. And when these we actually place that media on their behalf and what you saw there in that was a quarter where we had higher outside expenses as we think of them as COGS for the media that we buy for clients.

Speaker 4

To your second question of should we see that on an ongoing basis, it just matters what type of clients we're winning. Some of these clients, if they are more doing more creative and strategy work for us, that is a very low COGS area for us. But if we are doing a bunch of the media buying on their behalf, you will see higher outside services expenses related to us placing that media with outside media companies.

Speaker 5

Got it. My last question is on target cash balances. Just for modeling purposes, wondering if you guys could provide some insight on how you think about where you would like to see cash balances upon a return to growth?

Speaker 3

Yes, Rohan, this is Katie. It's a great question. It's one that we think about a lot. As you know, we hit profitability in the Q2, we had said and Grant mentioned today. We're going to be bouncing that around a bit, as we continue this path on the return to growth.

Speaker 3

Right now, we're sitting at about, call it, dollars 12,000,000 of cash. We see ourselves getting back to profitability.

Speaker 4

Would that be enough? It just depends on what kind of investments we

Speaker 3

need to make into the business.

Speaker 2

Just depends on what kind of investments we

Speaker 3

need to make into the business, as Grant mentioned. We continue to look at that. So a little early for me to speculate kind

Operator

of on what that target

Speaker 3

cash balance is. But I think as we continue to get through 2025, obviously, if we see the sale of that building and the property, that will be an impact as well. But it's a great question, something that we're thinking about. But I think for right now, I feel good about our cash balance and where we're going and more to come as we think about investments in the business.

Speaker 5

Understood and it makes sense. Well, that's all my questions. So thank you for taking them.

Speaker 3

Thanks, Roman. Thank you.

Operator

Your next question comes from the line of Adam Valentine from Gondolin Capital. Please go ahead.

Speaker 6

Hey, everyone. Good morning.

Speaker 3

Good morning, Adam.

Speaker 6

Hey, it's really great to see the digital subs growing again. Your strategy makes a lot of sense. And I was kind of wondering, given that we've experienced, I believe, sort of an average of around 20% sort of pricing growth, just that we kind of see on the top line at least over the last 3 years. What are your sort of expectations that that becomes as you substantially regrow sort of the volumes? Does it for example, does it kind of slow down to flat as sort of subscription price increases offset higher levels of kind of the trials or maybe you could just kind of give us some color there?

Speaker 4

Yes. Adam, it's Grant. It's a really good question and it's something that we spend not only a considerable amount of time looking at internally of how our consumers are responding, but we're also checking in with our peers around the country almost all the time. I mean, it's trying to understand what's happening in different parts of the country with local media and subscription trends through a partner that we have called Mather, who has been a partner of ours that we launched a partnership with a couple of years ago. The important part let me just kind of say the important part of where we are on this phase is to also think through once they finish an introductory pricing window like we're in right now, the dollar for 3 months, is what percentage of them will take will do not churn and stick with us at the roll to price where we've been taking them.

Speaker 4

We're going to keep testing. We're going to AB test a couple of different price points to see kind of what is ideal of people sticking with us and reducing our churn. And that's really going to dictate where things go from a revenue standpoint, because the volume is meeting our expectations, but I will have a lot more for you really probably in the probably at the end of the Q1 because we're going to see a bunch of these new starts as Rohan was asking about. The most important part is how many stay with us because that's when they go from paying an introductory price to that ongoing price. But also, yes, we do see a short window here of where that digital subscription volume will be kind of leveling out to very light growth.

Speaker 4

But look, the volume is there for in the early stages to go see that growth improve as we get further into next year. But at the same time, we are keenly focused on how many people are taking the price increase and going with us outside of the introductory window.

Speaker 3

Hey, Adam, one clarifying point on that. And as Grant was talking, the volume, we are seeing the increases in the growth. He referenced, a slowdown that was on the revenue side in this brief window that there will be some revenue impact on that, but the volume is there and it's really going to be seeing how these subscribers take to the next increase in price and how long they stay with us. Good point.

Speaker 6

Great. That's all really helpful color guys. And just to kind of follow-up there. What have you guys noticed, as you've kind of meandered through the price versus volume push pull over the last 3 or 4 years and I'm understanding the digital side is still fairly nascent for your product. What have you guys noticed on churn levels?

Speaker 6

Like is there a broad trend over the last 4 or 5 years where you've noticed a reduction in churn? Understanding, of course, that various changes in trials and pricing may increase or decrease churn. But I'm just curious if there's sort of an apples to apples way to look at the long term reductions in potential churn or what color you might share there?

Speaker 4

Yes. It's also it's a very good question, Adam. When we're look when I'm looking at the industry, the you can see churn, I wish it was more of a straight line trend that we're seeing, but I will say it bounces around a little bit. Even the most recent political season, probably if I were if we were at a national publication, can be more impactful on churn. But what I will say is, how long you have an introductory window also impact can improve the churn.

Speaker 4

You will see some newspaper companies around the country doing a dollar for 6 months rather than a dollar for 3 months. Well, if someone's only paying a dollar your churn looks better as a percentage. So I guess my point of telling you is national trends are hard to find because there are some papers that we're doing a short window for us like $1 for a month versus $1 for 6 months. And as you can imagine, the churn from $1 6 months looks much better, especially in that 1st year, because you've got people who are basically getting the product for free to test it to understand do they want to do they see enough value in the product to become a fully paying consumer. So, it is hard to find trends and I guess my point of that is because many different media companies are testing very different introductory windows.

Speaker 4

I've seen some in the past couple of weeks of $1 for 52 weeks. So I mean, if you're doing $1 for a year, that's someone who's going to throw off the churn trends quite a bit.

Speaker 6

Okay. That's really helpful. Understood. And then in terms of the medium giant growth, which I believe is mostly housed in the marketing and media services segment is very, very strong growth, I think 26% year over year. And I was wondering if there's anything special to call out there, maybe one offs or big customer wins.

Speaker 6

I know you mentioned no big election impact. So it'd be great to kind of just break that one part. Yes.

Speaker 4

So the majority of that growth, Adam, is coming from the agency side of medium giant. And it's why we've it's split out into segments, because it's a distinctively different business, even to Rohan's question that on the COGS that are coming through that business as well. The focus of the agency has been to go win larger clients. So clients that will spend $250,000 a year or more with us. I've been really pleased that those bigger clients have improved and grown about 30% for us this year.

Speaker 4

And that is really helping drive this growth. But we're also doing that simultaneously while reducing our small clients because those small clients are less profitable and oftentimes take as much work, is the big ones. And so that's been the strategy and a big part of what you're seeing there. And John Kiker, who is the President of our agency, has just done a very nice job of attracting the bigger clients, simplifying the business, which is helping grow the top line and is improving the bottom line. But look, we've still got more room for improvement on that bottom line as well.

Speaker 6

That's great. Glad to see you guys find some more success there. And I guess just my final question, if I could. In terms of the operating structure changes that are sort of taking place, mostly in the Q1 of 2025, I was wondering if you could potentially give us a ballpark figure for your employee comp benefits or maybe it's more of the other products distribution line item, what that run rate would be pro form a kind of these changes that are taking place, so including the headcount reductions, they've averaged each about the same, about $15,000,000 or so. So I was just kind of curious what sort of that step down will be understanding that you probably have some investments as well back into the business?

Speaker 3

Adam, it's a great question. Look, we're still in the transition right now. I think when we have our first quarter I'm sorry, when we have our 2024 call in March, we'll have a better sense of being able to kind of give a little bit more color on where comp had been. It is going to come down, obviously, with the reduction in headcount still targeted in early Q1. One thing we did back in May, we did give a range that once this is up and operational, we did believe that annualized expense savings was going to be around $5,000,000 That's still something that I feel good about.

Speaker 3

And so really that's all I can give you right now. And I think again in the March call, we'll be able to give better insight into where we see the trends just given that it will have already been implemented and the transition will be complete.

Speaker 6

Okay, perfect. Thanks so much you guys. Great quarter.

Speaker 3

Thank you, Adam. Thank you.

Operator

And at this time, there are no further questions.

Speaker 2

All right. Thank you, Greg, for your assistance this morning. And to everyone who joined, thank you again for listening to our Q3 2024 results. And we look forward to updating everyone on our Q4 and full year 2024 earnings call, which will be held in March of 2025.

Operator

Ladies and gentlemen, that does conclude your conference for today.

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