Q1 2021 Gannett Co Inc Earnings Call
Greetings and welcome to the Gannett <unk> earnings call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. That's on your own.
And should require operator assistance during the conference. Please press star zero on your telephone keypad.
He's not this conference is being recorded.
I'll now turn the conference over to your host Tricia Goster Mcgough you may begin.
Thank you Alex good morning, everyone and thank you for joining our call today to discuss gannett's first quarter 2020 one results.
Presenting on today's call will be and Mike Reed, Chairman and Chief Executive Officer, and Doug Horne, Chief Financial Officer.
During this call we will discuss gannett's financial results for the quarter. If you navigate too big and that website you will find that we have posted an earnings supplement and addition to our earlier press release.
And we'll 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 and addition statements made during this call with respect and future results and events are forward looking statements that are based upon current expectations.
Actual results and events could differ materially from those discussed today.
Courage you to read the forward looking statements disclaimer and the presentation as well as the risk factors described in gannett's filings made with the SEC.
In addition, we will be discussing some non-GAAP financial information during the call. Today, you can find reconciliations of our non-GAAP measures to the most comparable GAAP measure and net 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 and Gannett.
And on site and Audiocast are copyrighted material of Gannett and may not be duplicated reproduced or rebroadcast without our consent.
With that I would like to turn the call over to Mike Reed Gannett's, Chairman and CEO.
Thanks, Tricia and good morning, everyone. Thanks for joining us this morning other earnings call.
And I'm very pleased to report that our first quarter.
And highlights results and operations.
And with Mr Show significant progress against our stated strategy and almost all of our stocks.
First quarter financial results were ahead of internal expectations, showing continued year over year growth and adjusted EBITDA and.
After normalizing for some structural changes and our year over year comparisons and we also produced sequential improvement from Q4 to Q1 and same store revenue and adjusted EBITDA trends, we're pleased to see that.
March was our best month on the corridor and we.
Anticipate continued sequential trend improvement in Q2 and.
As we start to cycle the largest impacts of the COVID-19 pandemic in 2020.
We expect to post year over year total revenue growth of low to mid single digits and the second quarter, along with more than 30% adjusted EBITDA growth and the second quarter.
And that is expected to lead to significant adjusted EBITDA growth for full year 2021 as compared to 2020.
And that's why we've mentioned that and on our last couple of calls.
A little bit ahead of pace, so far on our internal targets.
Within the quarter. We also continued to improve the capital structure of the company and we significantly lowered the cost of debt and the first quarter for for those that have been following the company for a while now you know we refinanced our loving and that percent term loan b with a LIBOR plus 700 and term loan b and during the quarter and we also.
Got shareholder approval for our converts issuance, which we did in the Q4 time period and that was approved at the end of February.
And in the first quarter and the bird saw heavier on the rate at 6%. So we have lowered our overall cost of capital from 11.5% of about 7.17%.
Last point and on baked on our financial statements and then on Douglas of course, we'll go through them and much more detail.
We're showing a loss of $142 3 billion on our income statement and good day.
You need to put that and perspective, given the financial moves that we've made and though and the first quarter, which significantly lower our cash outflows.
That's part of the convert steel before shareholders approve it.
Accounting rules require changes and the value of converts to be mark to market and run through the income statement because our share price went up significantly from the beginning of the year to the shareholder approval date, we had to take a non cash charge of $126 6 million on the income statement.
And now that shareholders have approved that deal we won't have mark to market changes running through the income statement any longer.
Also in order to get the refinancing done we incurred $19 4 million of non cash charges related to the extinguishment of debt.
And in order to get all of those deals done we incurred $10 2 million and.
And cost associated with those.
And those transactions if you take those three charges into accounts.
Net loss actually goes from $142 3 million to a net gain before taxes on $13 9 billion, so and that gain of $13 9 billion and thought that was worth noting for for shareholder since that net losses, such a big headline number.
Now turning turning to operations.
Our digital subscribers surpassed $1 2 million and the quarter that was fantastic and then again outperformed our internal expectations, we grew over 37% versus the prior year and we had our single largest quarter for new paid digital subscribers, adding over 100.
And 20000.
Further our digital only circulation revenue grew by more than 45% year over year.
Overall in Q1, our digital revenues accounted for approximately 30% total revenue and <unk>.
Print advertising was less than 25% of total revenue.
And real progress towards our goal of being a digital technology company combined with having a a revenue streams, primarily made up of subscription revenues.
We're pleased with our execution on synergies as well going back to the to the acquisition of Gannett in November of 'twenty and 19, we've implemented a cumulative 300 million of annualized synergies now as of the end of the first quarter of this year well ahead of our original goal of $300 million by the end of 2021 and.
We are confident and our ability to implement additional synergies by the end of 2021, resulting in a total of approximately 325 million or more of annualized synergies.
When we spoke last on our Q4 earnings call in February we outlined our commitment to a subscription led digital business strategy that drives audience growth and engagement by delivering deeper content experiences to our consumers, while offering the products and marketing expertise our advertisers desire.
We delineated five key pillars to our strategy and I'd like to spend a few minutes updating you on the progress of each of those during the first quarter.
Our first pillar is accelerating digital subscriber growth.
As I mentioned digital only subscriptions surpassed 1.2 million and the quarter up 37% year over year, and importantly, we delivered our largest quarter over quarter growth.
Combined company with 120000 net new subscribers.
Our markets responded well to new and more consistent subscription offers and enhanced high performing and localized creative as well as well as well as the marketing of highly valued and unique content.
We anticipate that new subscription and product launches in the coming months, we will accelerate this growth on our path to reach a target of $10 million paid digital only subscriptions and the next five years.
The second pillar is driving digital marketing services growth by engaging more clients and they.
Recurring revenue relationship and aggressively expanding our digital marketing services business into our local markets, both domestically and internationally.
We continue to see progress with our local like to digital and marketing platform.
The platform enables subscription like opportunities through our core product set which we expect to drive higher recurring revenue more stable billing cycles improved client retention and stronger marketing performance for our clients.
Our core sales team continued with year over year growth and revenue returning to double digit growth and the quarter and achieving the highest productivity metrics.
Since 2016.
The significant growth and record productivity that our team drove in Q1 is a prime example of the superior results. We believe we can drive for all local businesses.
The third pillar is optimizing our traditional businesses across print subscriptions and print advertising.
We continued to drive the profitability of our traditional print operations through economies of scale process improvements and optimizations.
This includes maximizing the lifetime value of our print subscribers through newly implemented retention and loyalty programs and expanding on the content, we know our subscribers value most.
Our print subscriber base has been quite stable over the past year and while we do not expect print subscriptions to grow over time, we are highly focused on retaining our current subscriber base.
Sure.
The fourth pillar is prioritizing investments into growth businesses that have significant potential and.
Support for our vision.
By leveraging our unique footprint trusted brands and media reach we identify test and invest and opportunities for growth.
We highlighted a couple of examples and the last quarter.
And and we have a couple of new great. Examples to talk about this quarter, but going back to last quarter, we highlighted our USA today network ventures, which is already events and promotions business.
We've built this and continue to invest and.
We're slowly returning to live events, we had a few and the first quarter and while our events adventures revenue and activity was lighter than typical during the first quarter. It reflects and intentional delay of several events until later in the year when in person events are anticipated to be more widely aloud and widely used.
Got it.
Okay.
But I've mentioned, we have a couple of new areas to talk about that we're particularly excited about and there they.
Could represent very significant opportunities for us.
First is and the sports gaming.
<unk> sector and.
And we're exploring the sports gaming partnership that we actually expect to adults and the second quarter. So very soon on.
Online game is a sector that is poised to grow substantially and the U S. Over the next five to 10 years as it continues to legalize across the country at the state level.
We believe we are well positioned to grow our business in tandem with this sector by leveraging our unparalleled ability to reach consumers at both the local and national level and the U S with deep community reach content and brands, our sports readers or some of the most engaged audience and.
With our large network of dedicated and well known sports journalists, we believe we offer access and local perspectives that many of our national counterparts cannot and we plan to capitalize on that through a unique partnership.
The second area. We are exploring is leveraging our massive media archive to create non fungible tokens or N F Ts.
One of our most important assets is our concept.
We are excited about the N F T market, because we believe it creates several new opportunities for Gannett.
First it presents a new way for consumers to enjoy and experience Gannett's award winning coverage of historical events monumental moments and areas of passion or special interests, such as sports and events, the arts and pop culture.
And it presents a new business opportunity forgive that as we see how this space continues to develop and how.
Our incredible archives could be monetized and new marketplaces, we.
We are excited about this opportunity and we will be launching our first and F T and.
And the upcoming weeks.
Finally pillar number five we are committed to building upon our inclusive and diverse culture, just center around meaningful purpose individual growth and customer focus.
Inclusion and diversity and equity our core pillars of our organization.
We have previously shared our inclusion goals for 2025, and we just published our first workforce diversity report and March outlining the steps, we're taking to reach those schools.
During the quarter. We were also recognized for two awards that we are proud of.
First for the fourth year and overall, we received a score of 100 on the human rights campaign Foundation's corporate equality index.
And for the second year in a row and that has been recognized as one of America's best employers for diversity by Forbes.
And that is highly intense and focused on becoming a more inclusive diverse and equitable workplace and while we still have work to do we are very proud to be recognized for the steps we are taking to get there.
With that I'll turn it over to Doug for a more detailed discussion on our permit financial performance for the first quarter Doug.
Thank you, Mike and good morning, everybody.
For Q1 total operating revenues were $777.1 million, a decrease of 18, 1% as compared to the prior year quarter on.
On a same store basis operating revenues decreased 16, 5% as compared with the prior year quarter.
Due to the continued secular decline in print advertising and home delivery revenue as well as the continued economic slowdown and brought on by the pandemic.
First quarter revenue trends were also impacted by the cessation of certain industry wide digital marketing incentives and 2020.
The incentives generated through the digital marketing solutions segment totaled $13 million for all of 'twenty, and 'twenty with $9 $2 million of that and the first quarter last year.
It negatively impacts the Q1 same store trend by approximately 90 basis points.
And so on a comparable basis, the Q1 2021 same store trends improved slightly from the levels. We saw in Q4 of last year.
Adjusted EBITDA totaled $105 million, and a quarter, which is up $1.4 million or one 4% year over year.
This performance reflects the impact of lower revenues offset by cost reductions and synergy savings.
Adjusted EBITDA margin was 12, 9% growing 250 basis points over the prior year and.
The first quarter expenses were lower by 24%, reflecting permanent expense savings put in place and response to the pandemic.
Regular way cost reductions as well as the continued synergies from the merger and integration.
Now moving on to our segments. The publishing segment revenue and the first quarter was $699 $6 million.
Print advertising revenue decreased 24.9% and compared to the prior year on a same store basis, reflecting the continued secular pressures as well as the disruption from the pandemic. However, print advertising revenue continues to show improvement each quarter with 200 basis points of improvement in Q1 as compared with the Q4 trend.
And.
Digital advertising and marketing services revenues decreased 10, 4% on a same store basis, reflecting the ongoing impact of the pandemic as well as cycling against strong comparisons and the first quarter last year.
Digital media declined as compared to the prior year as we experienced record audience metrics in Q1 of 2020 tied to the onset of the pandemic and Q1 2020 also benefited from certain large national digital media campaigns that did not recur and the current period.
Additionally, we continue to see declines and digital classified reflecting both secular trends as well as the tough comparison against the prior year period, which still benefited from our historical relationship with cars Dot com.
Yeah.
Digital marketing services revenue and the segment continued to show improvement year over year on a same store basis, improving 460 basis points from the Q4 trends as a result of ARPA growth year over year.
Circulation revenues decreased 12, 9% compared to the prior year on a same store basis, which compares favorably with Q4 same store trend of down 13, 6%.
Home delivery trends declined slightly and the first quarter of 2021, reflecting the impact of more moderate pricing strategies.
Single copy, while still significantly impacted by the ongoing pressure on the pandemic as a result of lower travel and consumer activity started to show improvement and year over year trends and the first quarter.
Digital only subscribers grew 37, 2% year over year on a pro forma basis to approximately $1 219000 subscriptions and the digital only subscriber revenue grew 46, 3% on a same store basis as compared with the prior year.
Adjusted EBITDA for the publishing segment totaled $102 $2 million, representing a margin of 14, 6% and the first quarter and expansion of 170 basis points on a year over year basis.
For the digital marketing solutions segment total revenue and the first quarter was $102 $3 million a decrease year over year of 12, 7% on a same store basis.
The decline of 230 basis points from the Q4 trend can be attributed to the termination of the industry wide marketing and incentive programs mentioned earlier that was worth $9 $2 million and Q Q1 of 2020.
The otherwise improving trend quarter to quarter was driven by our core reach local business, where we saw double digit growth year over year with March yielding the best new client productivity months and over five years.
Despite these strong performance metrics client count declined slightly quarter over quarter, primarily driven by plant system conversions as clients are being migrated onto a single platform as well as the sunsetting of certain product offerings and long term, we expect our core product set to drive higher recurring revenue and client retention, while creating stronger performance for our.
Clients.
Adjusted EBITDA for the digital marketing solutions segment totaled $9 $2 million, representing a strong margin of 9% and the first quarter and inline with our fourth quarter results and well above margins in Q1, 2020 a six 5%.
Okay.
In terms of our Q1 net loss attributable to getting at it was $142.3 million, which reflects it.
And at $19.4 million noncash loss on the early extinguishment of debt in connection with our term loan refinancing and.
And $126 $6 million noncash loss on the derivative associated with the 6% convertible notes due 2027.
This non cash impact was driven by the increase and the fair value of the derivative liability as a result of the increase and the Companys stock price from year end levels and that's.
Mike mentioned, given the fact that we received shareholder approval in February of 2021, there will not be any future mark to market activity related to the convertible notes and our operating results.
Our net loss also reflected $58 1 million of depreciation and amortization.
The company's effective tax rate for the quarter was primarily driven by the impact of the.
Derivative loss, which is not deductible from a tax perspective, partially offset by valuation allowances associated with deferred tax assets related to interest expense.
Turning now to the balance sheet.
As we outlined at our last earnings call. The company has fully refinance our original 11, 5% term loan earlier this year, putting our blended rate of debt outstanding at just over 7%.
We ended the quarter with approximately 1 billion and $540 million of total debt and made a $41 $2 million of debt repayments and the quarter, including $8 $6 million of repayments post start refinancing.
These repayments were funded through cash on hand, and $10 $9 million of asset sales and the first quarter.
We expect to generate an incremental $90 million to $115 million of asset sales. This year with the intention to reach first lien net leverage below one times adjusted EBITDA by the end of 2020 two.
Our cash balance at the end of the quarter was $163 $5 million, resulting in net debt of approximately 1 billion and $374 million cash.
Capital expenditures totaled $7 6 million for the quarter, reflecting investments related to digital product development technology and operating infrastructure.
From a cash perspective, please keep in mind that we will expect to make our first interest and principal payment on the new term loan on September 30th and then we will be making payments quarterly thereafter.
Lastly, and connection but the cares act subsequent to March 31, 2021. The company has received approval for approximately $16 $2 million and PPP funding and support of certain of our locations that were meaningfully affected by the COVID-19 pandemic at the appropriate time, we intend to apply for forgiveness of the P. P P loans and accordance with the program.
Guidelines.
As Mike indicated earlier, we are pleased with our Q1 performance and believe that we're well positioned for Q2 as well as the second half of 2021.
With that operator, you can now open the line for questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is and the question queue. You May press star two if you'd like to and we will get questions on nickel for.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
Our first question is from Doug Arthur with Huber Research. Please proceed with your question.
Yeah good morning.
And so $23 2 million and digital circulation revenues in Q1, so roughly 100 million annualized.
On a if I do the quick math it looks like your average your ARPA was around $6.50 monthly and give or take.
And Mike and I'm wondering if you can just sort of expand on.
Kind of what's the how.
How do you execute the strategy on digital circulation I mean, you have so many different markets. Some are large some are small and some are rural summer urban I mean, what's sort of the what's the.
What's the game plan to to really Jack this number up.
Well, there's actually several.
That will.
And that we are undertaking that over the next five years, we believe will allow us to hit $10 million or more and paid digital subscribers on first of all the million. Two we have today are all local and so this is.
This is.
And those markets, you're referencing whether they're cities or rural and.
And we are developing best practices right now we've gone to more consistent metering, which I mentioned and where we're going to develop best practices based on size and market geography that well will allow us to optimize the continued growth and those markets based first of all our best practices for the when the meter.
Clicks, but also the type of content that goes behind the meter and the type of contact consumers are actually demanding so that's really a data driven approach.
Combined with the data will really drive our best practices to grow our local options. We also will lead our and the process of rolling out a paid strategy for the USA today and that just didnt its infancy stages and that we think will present significant upside too.
Our current $1 2 million paid digital subscriber number we have.
So our and implementing a paid digital suite strategy for our subscribers and the U K, it's part of our newest quest business and that's the and the first inning as well and.
And then and then finally, we are are going to rollout paid subscription offerings for more.
Category content and.
And those things are and development sports being one of the first ones were focused on so we.
And we see growth really coming from $1 2 million to $10 billion over the next five years through.
On the higher penetration locally.
Everything driven by data does but higher penetration and locally turning Oh, USA today, and do a paid product digitally growth and the U K and then growth and.
And other specific category specific areas.
I mean, obviously, it's early days, but if you look at the 1.2 million today is it more concentrated and your larger markets and your smaller markets is that a fair.
<unk> yeah.
Yeah, that's fair.
Okay.
Yeah, I'd say across our top 50 buckets and where the majority of that is it's not our biggest biggest its not like the top five and is that concentrated like that as well.
The top 50 or so markets.
Yeah.
Okay. That's helpful and then Doug on just on the balance sheet. I think you mentioned 90 to a $115 million of potential asset sales still to come this year.
In addition to that.
In terms of the free cash flow for 2020, one I mean kind of.
What what's your additional capacity you think looking ahead to pay off more debt from operations in 2021.
Yeah I think.
Given kind of our current outlook and kind of the.
Both between the mandatory amortization that will start, making and Q3 as well as kind of theirs and excess cash sweep at the end of the year in terms of all cash and excess of $100 million goes to amortization on the term loan I think between those two things as well as the asset sales we expect significant.
And really significant debt paydown by.
By the end of the year.
Okay, great. Thank you.
Okay.
Thank you ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Mike Reed for closing remarks.
Okay, Thank you and and closing.
And I'd like to reiterate the solid performance of the first quarter as I mentioned at the onset we did.
We exceeded our internal expectations and so we're well ahead of our plan for the year.
And we do expect our results for the year to be substantially better than 2020.
We're also pleased with our first quarter results and that our ability to expand our EBITDA margins, while also investing and our long term subscription led digital strategy.
We have clearly defined that strategy with five pillars, and we believe that will transform or evolve our company over the next few years and create sustainable long term revenue and cash flow growth.
We are leveraging our unparalleled reach and trusted media positioning and longstanding SMB relationships to drive our digital offerings and create growing recurring revenue streams with both consumers.
And businesses and we are already making great progress and executing on our strategy as demonstrated by our largest ever quarter for adding new digital subscriptions with our restructured balance sheet and performance momentum.
And we're well positioned to create meaningful shareholder value in 2021, and beyond and we are highly optimistic that our that our new business opportunities and the sports gaming and the NFC space will create additional significant value for shareholders over the years, so over and over the quarters and years to.
So we're quite excited and quite optimistic and we appreciate you joining us today and we look forward to updating you and three months on our Q2 earnings call. Thanks, everybody have a great weekend.
This concludes today's conference and you may disconnect your lines up with time. Thank you for your participation and have a great day.