DallasNews Q1 2025 Earnings Call Transcript

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May 1, 2025

There are 6 speakers on the call.

Operator

and welcome to the Dallas News Corporation First Quarter twenty twenty five Investor Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the conference over to Gary Vice President and Controller. You may begin.

Speaker 1

Good morning, everyone. This is Gary Cobbly, Vice President and Controller of Dallas News Corporation. Welcome to our first quarter twenty twenty five investor call. I'm joined by Kathy 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. Yesterday afternoon, we issued a press release announcing first quarter twenty twenty five results and filed our first quarter ten Q.

Speaker 1

Both of these are posted on our website, dallasnewscorporation.com, under the Investor Relations section. Unless otherwise specified, comparisons used on today's call measure first quarter twenty twenty five performance against first quarter twenty twenty four performance. Our discussion today will include forward looking statements, including statements concerning our transition of print operations and associated expense savings, our business outlook or future economic performance, revenues, expenses, cash balance, investments, business initiatives, working capital and other financial and non financial items that are not historical facts. Forward looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those statements, including those identified in the earnings release we issued yesterday. 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 present and publicly available filings with the SEC. Today's discussion will include non GAAP financial measures. We believe that 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 will 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 News Corporation reported net income of $28,300,000 or $5.28 per share and operating income of $34,200,000 which includes a net gain of $36,200,000 from the Plano printing facility sale. In the first quarter last year, we reported a net loss of $1,400,000 and an operating loss of $1,800,000 On a non GAAP basis for the quarter, we reported an adjusted operating loss of $1,200,000 a decrease of $400,000 when compared to an adjusted operating loss of 800,000 reported for the same period last year. The decline is primarily due to a total revenue decrease of $2,000,000 partially offset by expense savings of $1,200,000 in employee compensation and benefits. We reported total revenue of $29,100,000 compared to $31,100,000 reported for Q1 last year.

Speaker 2

Advertising and marketing services revenue was $800,000 a decrease of $800,000 or 7.2% compared to $11,600,000 reported last year and is primarily due to a print advertising revenue decline of $700,000 or 12.2%. Circulation revenue was $15,400,000 a decrease of 900,000 or 5.2% compared to the $16,300,000 reported last year. The decline is primarily due to a print circulation revenue decrease of $700,000 or 6%. Total membership, including both print and digital, was 125,972 as of March 31, compared to 126,973 as of December 31 and 129,857 as of March. Digital only subscriptions of 65,028 reflect an increase of 1.1% as of March 31 compared to December 31, and an increase of 4.2% compared to March of last year.

Speaker 2

Shortly, Grant will provide additional commentary on our digital strategy to drive additional membership volume. On a non GAAP basis, total adjusted operating expenses for the quarter improved $1,600,000 due to employee compensation and benefits expense savings of $1,200,000 As of March 31, total headcount was $4.61, down 70 compared to last year, primarily resulting from the transition to a smaller, more efficient printing facility requiring less staff. Consistent with interim periods, the company uses the estimated annual effective tax rate method and recorded $6,000,000 of tax expense for the quarter due to an estimated $600,000 for the Texas franchise tax and the $36,200,000 gain generated from the sale of the Plano property. However, the utilization of our net operating loss carryforwards will reduce our cash taxes to approximately $700,000 for federal and state purposes. The Plano property sales strengthened our balance sheet, and at the March, cash and cash equivalents were $44,200,000 And as of the April '25, following the pension funding, we had $36,000,000 in cash and cash equivalents.

Speaker 2

I will now turn the call over to Katie.

Speaker 3

Thank you, Kathy. Good morning, everyone, and thank you for joining today's call. We are pleased with the progress we've made so far in 2025 on two key initiatives that were significant milestones in our return to growth plan. As noted on our twenty twenty four year end call, the sale of the Plano property provided us the required capital to fully fund our pension plan. In April, we were able to utilize approximately $10,000,000 of company funds along with $132,000,000 in plan assets to purchase an annuity contract.

Speaker 3

The transition of the full administration of the plan is in process and will be completed by July 1. We are thrilled that we have been able to fully fund our pension obligations, which has been a priority for the board to secure the retirement benefits of former and current employees who have dedicated so many years of service to the company. As of the April, we have fully transitioned our print operations to our smaller more efficient lease facility. Starting in May, we will begin to recognize realized planned savings planned expense savings relating to this transition. Since this will be our first full month no longer operating in dual facilities.

Speaker 3

As Kathy noted, as of April 25, we had approximately $36,000,000 in cash on the balance sheet as a result of the sale of our last piece of real estate. As the board continues to discuss capital allocation strategies of one, investing back into the business to drive digital revenue growth and two, returning capital to shareholders, we also continually to carefully we are continuing to carefully monitor the economy to see how changes in economic policies and tariffs may impact not only our business, but also the advertising and marketing budgets of our clients as well as the impact of the cost savings we expect to realize as a result of the Plano sale. I am very pleased with the realization of these two important milestones within our Return to Growth plan and feel confident this puts us on a better trajectory moving forward. I will now turn the call over to Grant.

Speaker 4

Thanks, Katie, and good morning, everyone. As Katie mentioned, our commitment to fulfill our pension obligations has always been one of our top priorities, and we're proud that we were able to take care of these employees who gave so much to the company over their many years of service. Eliminating our pension obligation is also a benefit to our shareholders because it eliminates our last source of debt and the need for any future contributions. Eliminating this debt will give investors clear visibility on how to value our company as we continue to get closer to operating profitably. Turning to Medium Giant, the agency's contribution to the company continues to improve year over year with an operating income increase of $600,000 As we've discussed on prior calls, last year we introduced segment reporting, which was designed to break out the agency business separate from the traditional Dallas Morning News business.

Speaker 4

Segment reporting has given us better visibility into aligning costs with revenues. We believe there is additional opportunity for margin improvements, and we continue to focus on growing revenues with larger, more profitable accounts at Medium Giant. The expansion of the Medium Giant agency operating margin is a priority and its improvement is a result of two new large clients being added in a disciplined approach to expense management. In addition to the agency, Medium Giant did see softness in our print advertising related to The Dallas Morning News, which was down 12.2% on a year over year basis. I was happy to see this trend start to improve in April, but as Katie mentioned, we continue to monitor how our clients are responding to these uncertain economic conditions.

Speaker 4

The softness in the economy often presents itself in the print advertising line first because clients are able to stop this method of advertising more quickly than they are others. Turning to digital membership, while digital volume grew slightly quarter over quarter, the growth has been slower than we expected. We knew the transition to our new dynamic paywall that occurred in March would take time for the AI algorithms to learn the uniqueness of our audience, but it took a little bit longer than we expected. Now that the tool is established, we are seeing the results we expecting with a 16% lift in starts coming from the new paywall versus our former meter strategy. In addition to the paywall, we have also been rolling out our new video player and user commenting tools across the site.

Speaker 4

Both tools are intended to increase user engagement while adding a premium source of digital advertising revenue. The Board and I remain confident in our return to growth plan in the second quarter is an important milestone in our plan for this year to ensure the expense savings from our printing transition will materialize as planned. In addition to these expense savings, we are considering where we need to invest in the business to deliver sustainable revenue growth. The investments we plan to evaluate will likely range from portfolio expansion to the continued evolution of our digital products and features. However, the timing and ultimate investment decisions will be evaluated over the next ninety days.

Speaker 4

This work will continue over these months, and we will be able to provide further guidance on those initiatives and what it means for shareholders at the end of the second quarter. In closing, these first four months of 2025 have been significant in terms of accomplishments with our plan. And I'm optimistic about what that means for the company moving forward. So, Sarah, we are now ready for questions.

Operator

Thank you. If you would like to ask a question, please press star one on your telephone keypad. Your first question comes from Adam Ballantyne with Gondolin Capital. Your line is open.

Speaker 5

Hey, good morning, Thanks for taking the questions.

Speaker 3

Good morning, Adam.

Speaker 5

Hey, so on the profit improvement expectation that was kind of laid out at the end of twenty twenty four, I think it was around 5,000,000 year over year. And I was wondering if you guys were still on track for that in 2025. Think it does imply a couple million dollars in adjusted EBIT versus a year ago. Just kind of seeing where we're at there.

Speaker 3

Yeah, Adam. No, we still fully expect to realize the $5,000,000 of savings. As I made a comment in my prepared remarks, we won't start realizing those savings until May. Between January and April, we were running in both facilities and we had additional staff. So those savings you'll start to see realized in the month of May, but again, it's going to be an annualized number.

Speaker 3

So it's going to be over the months. It's not all going to happen in one specific quarter.

Speaker 5

Okay. So maybe that kind of gets moved about three months ahead of time. But is that like on a pro form a basis, kind of on a run rate, I should say? Is that expectation for on a run rate basis to kind of hit there this summer, this fall that those profitability levels?

Speaker 3

Yes, we're going to start seeing the expense savings coming through in May. So you're going to see a partial of that in the second quarter and then a full third quarter and fourth quarter.

Speaker 5

Okay, great. Thanks. And then on the digital revenue side, it's helpful color in terms of the change of strategy that you guys had for the algorithms kind of learning your audience. I guess the first question is what could you explain what you meant by the 16% lift in starts versus the former And then part two would just be how things are trending in April and if you're still seeing growth in subscribers so far in Q2?

Speaker 4

Yeah, Adam, it's a great question. So, let me clarify the 16%. So, the meter is our largest source of starts. We have other sources as well. For example, we have an email list of over a million people who take newsletters, but they don't they're not subscribing.

Speaker 4

So that's one where we have different methods of how we acquire subscribers, but the meter is the largest. So our former model, which was just set by I'll just try to simplify it it was a hard business rule of how often you came to the site or what you were reading. So the meter, which is our number one source of starts, we transitioned that to what's called a dynamic paywall, which is basically an AI driven algorithm which helps us understand what is the uniqueness of the person hitting the meter and what is their propensity to subscribe. And so using the AI for the meter, we are generating 16% more starts of people who are hitting our old business rules of a meter versus this new dynamic meter. So it's 16% more starts than they were in the trailing ninety days before we implemented really when the AI algorithm had at least four to five weeks to learn our audience.

Speaker 5

That's really helpful color. Thanks, Grant. And then just on that part two, I was just kind of curious how subscribers were trending if there was still growth there year over year, quarter over quarter?

Speaker 4

Yes, it's still growing, Adam. But I'll tell you, as I mentioned in my prepared remarks, it's not growing as fast as we would like. Actually today, we're testing a new, a little bit more aggressive offer. We were at a dollar for three months on starts. We went to a dollar for six months this We've studied other markets and we think that will help us galvanize and kind of get this volume up a bit more.

Speaker 4

So, again, we're just continuing with the sense of urgency this year. We are so focused on volume, and we're going to just keep staying on top of this with as many tactics as we have studied and feel like are going to be beneficial, not only to the volume, but obviously ultimately to the revenue.

Speaker 5

Okay. And then just kind of one more for me and I'll hop back in. But in terms of the kind of demand that you're seeing on the advertising front, I was wondering if you could kind of comment on maybe areas that were really weak in the first quarter, or areas that were stronger than others in terms of verticals. There are a number of businesses that are, especially in the Texas area, some homebuilders, D. R.

Speaker 5

Horan, LGI, AutoNation in Texas have significantly ramped up advertising, which would be local in nature. So I guess I was kind of surprised to see kind of some advertising weakness. Yes, so it would be kind of helpful to kind of maybe run through some of the verticals and where you're maybe over indexed or under indexed so far this year.

Speaker 4

Yeah, happy to do it. Let me talk about it on the both sides of the advertising business. Let's start with the Dallas Morning News, really, let's just say, and the digital advertising in our paper and on our site. Our category diversity, Adam, is very spread out. So we do not have a category or a vertical of business over 15% of that makeup.

Speaker 4

So it's very diversified. We have seen some softness. Interestingly, we don't have a lot of automotive business, Adam, so that did not affect us much. Our real estate business, though, just especially because the inventory has slowed down, especially on the high end real estate, which is where advertisers come to us, we saw the real estate start to soften. We also have seen a little bit of that in retail.

Speaker 4

I think retailers right now, just with the questions on tariffs, the questions on just the consumer demand. We saw a little bit of pullback there. And I would say the third, recruiting for us, is a meaningful category. Again, I don't think any of us are surprised by this, but obviously with the uncertainty in the economy, we saw some of the different methods people use with us to recruit talent slow down. Now, will say that is offset a bit by the financial services category at the Dallas Morning News, continues to be very robust.

Speaker 4

I think they're especially with people at CD rates, for example, Adam, people who are trying to move money to safer havens, we have definitely seen more there. On the agency side, we are very our two largest categories are tourism, and they are basically academics. We have a lot of charters a couple of very significant charter school clients. And that's been not as impacted. The tourism piece, especially for state tourism boards, would probably have a lag to that, where that probably, if the economy soft in '25, that probably wouldn't really be seen in the agency until '26.

Speaker 4

So the agency is definitely steadier than we're seeing on the print side. But as I mentioned in my prepared remarks, I've been in this business a long time and unfortunately it is easier for an advertiser to turn off a print ad campaign than it is something like an outdoor billboard campaign because of the complexity of getting those advertisements started and stopped. So I'll pause there.

Speaker 5

Really helpful for the color. Thanks, Grant. I'll hop back in.

Operator

And we have a follow-up question from Adam Ballantyne with Gondolin Capital. Your line is open.

Speaker 5

All right. I'll take the mic back. In terms of the metric tons that you guys used on the newspaper side, that was a bit of a drag to margins. I think there was a 32% increase in the tonnage there. And I was just curious, is that structurally going to be higher 30% for the rest of the year as you ramp up on the new printing facility?

Speaker 5

Or is that one time in terms of sort of working capital that got expensed through the income statement? Was kind of curious if we can get some color there because it did kind of drag on margins.

Speaker 3

Adam, it's a great question and it was specific to the quarter. As we were running both facilities and actually testing our new printing presses, we had to increase our newsprint purchasing and that's where you saw the newsprint usage increase in the first quarter, but it'll normalize going into the second quarter.

Speaker 5

Okay. And then when you say normalize, is that sort of back to 2024 levels, which were fairly consistent quarterly on a quarterly basis?

Speaker 3

Well, the usage will go back to the '24 levels, but remember the pricing could go up. We have not been hit with tariffs. So when you're thinking about the actual expense, we do first in first out. And so depending on the price, the pricing and the expense may move, but the tonnage that we're using will go back to the 24 levels.

Speaker 5

Okay, perfect. Thank you. And then just to kind of jump back to pension, I think you had noted that there was 14 to $16,000,000 to pay out to fulfill the obligations. And I was just wondering, that still the case? And then are we going to see that flow through the 2Q cash flow statement and balance sheet?

Speaker 3

Yes, Adam, it will be in Q2, but it was the $10,000,000 that I referenced in my remarks. So we spent $10,000,000 of company cash to fully fund the pension and that was less than the 14,000,000 to 16,000,000 that we had expected.

Speaker 5

Perfect. Apologies for missing that. Thank you. And then just kind of final question here. In terms of Medium Giant's profitability, it was interesting to see that given there was still a small year over year decline in the business, so with Marketing and Media Services.

Speaker 5

And I was just curious, that profitability level sort of go forward from here or kind of mid single digit range and profitable? Or is it going to be still pretty volatile throughout the year?

Speaker 4

So, Adam, first of all, it's a good pick up. Part of what we've done to get there is John Kiker, who leads our agency, has been very intentional about us basically stopping our relationships with smaller clients and really attracting larger clients to the agency. In a professional services business like Medium Giant, sometimes you can spend as much time on a small client as can on a big one, and that obviously impacts margins. He's done an exceptional job, and that whole team has, of really just kind of discontinuing those relationships with those small clients while focusing on the bigger ones. That's what's helping the margin.

Speaker 4

And I alluded to it in my prepared remarks, though, Adam. But no, I think the kind of margin that we've seen in the first quarter, we need to see that not only continue where it is, but I want it to improve. Now, how much bigger can that margin become? Time will tell, but I want to see that improve into the double digits. I just don't know how far into the double digits we will ultimately get.

Speaker 5

Great. Thanks for the color, Appreciate it.

Speaker 4

Sure thing. Thank you.

Operator

This concludes the question and answer session. I'll turn the call to Kathy Collins for closing remarks.

Speaker 2

Thank you, Sarah, for your assistance this morning. And to everyone who has joined, thank you again for listening to our first quarter twenty twenty five results. And we look forward to updating everyone on our second quarter twenty twenty five earnings call, which will be held in late July or early August.

Operator

Disconnect.

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